Financing tools

What development funding mechanisms are used, and how do they impact the ability of development actors to support crisis-affected populations?

Globally, development partners have scaled up finance targeting fragile and conflict settings over the last decade and have established a range of crisis-focused financing instruments. These largely relate to sudden-onset crises such as extreme weather events and, more recently, instruments have also been established related to migration and displacement. However, these are niche and, overall, financial instruments for protracted crises are scarce. While developmental ODA to countries with protracted humanitarian crises^[2] more than doubled from US$19 billion in 2010 to US$41 billion in 2019, the extent to which this is allocated to programmes that benefit crisis-affected regions at the subnational level is unclear and difficult to track. Across the three contexts, interviewees expressed the view that most development finance is allocated to the central government, and that centrally driven national and sectoral development programmes are not reaching crisis-affected communities at the subnational level at sufficient scale. Nonetheless, there are examples of development finance, through both nationwide programmes and crisis-focused financial instruments, deliberately targeting protracted crisis contexts. It is vital to improve the tracking and mapping of development assistance in crisis contexts, especially at subnational levels, not only to monitor HDP collaboration but also to address perceptions that have the potential to generate mistrust or fuel resentment. For example, in Bangladesh, the UN has made a concerted effort to map out development programming targeting Cox’s Bazar district, in part to respond to host community perceptions that their needs are not being addressed, which is a source of tension between refugees and host communities.

The volume of finance is a core challenge in many protracted crisis contexts^[3] and set to worsen as the impacts of the Covid-19 pandemic are felt even further.^[4] But, alongside this, equally important is whether the types of finance and the modes of delivery are well suited to the financing needs in these challenging environments, and specifically to addressing long-term challenges in protracted crisis areas at the subnational level. For example, in Bangladesh the AsDB and World Bank adapted their approach in light of the protracted refugee crisis and provided the government with grants rather than loans to address this, even though Bangladesh is normally ineligible for grants from the Asian Development Fund.^[5] However, in Cameroon in 2018 just over half of total ODA was provided in the form of loans,^[6] despite the International Monetary Fund finding the country to be at high risk of a debt crisis.^[7] The Jubilee Debt Campaign now considers Cameroon to be in debt distress.^[8]

Development partners have committed to move towards the ‘use of country systems’ for delivery in fragile settings, however this has been slow in practice.^[9] ‘Use of country systems’ includes, but is not limited to, budget support.^[10] For the 31 protracted crisis countries analysed, between 2010 and 2019 general budget support represented between 3% and 8% of total ODA. The use of country systems in fragile contexts is often challenging due to weaknesses in public financial management systems and the policy and institutional environment. For example, the World Bank has historically had difficulty disbursing increased allocations to fragile states due to countries’ limited ‘absorptive capacity,’ and the time it takes for donor-supported efforts to strengthen public financial management systems has often been longer than anticipated. This has led them to approach other development partners such as UN agencies to disburse funds on their behalf. In Somalia, the World Bank’s Multi-Partner Fund was established as a vehicle to prepare the government to manage external finance, and has incrementally channelled finance to the federal government. With the clearing of its arrears and resumption of relations with international financial institutions (IFIs) in 2020, development partners are increasingly working with and through government systems.

Development partners have established a number of financing vehicles tailored to crisis, fragile and conflict contexts that are playing an important role and helping to fill gaps in the three country contexts, although they could be better integrated in a broader strategic approach. Examples include the World Bank window for host communities and refugees in Bangladesh and Cameroon (mentioned above) and the Crisis Response Window (in Somalia), and the EU Emergency Trust Fund for Africa in Somalia. In Cameroon, the EU Emergency Trust Fund for Africa and France’s Minka fund are funding resilience and recovery activities in northern Cameroon, which had not been prioritised within bilateral partnership frameworks. However, these headquarter-managed instruments support largely isolated projects that do not in the long run facilitate strategic and collaborative approaches in country.^[11] These crisis-specific financing modalities have often proved better at targeting crisis-affected populations than assistance provided through multi-year partnership frameworks with governments. However, many new financial instruments are poorly understood by the humanitarian and peace communities, which is also a challenge to better coherence and joint working. Some donors, such as the UK, are increasingly thinking about ‘blended funding’ rather than the dichotomy of humanitarian and development finance, through a single mechanism that focuses on stability, flexibility and humanitarian aims.

The new UN-led INFFs present an opportunity to bring HDP actors together around shared financing priorities and outcomes. INFF processes are being trialled in over 60 countries with participation and support from the EU and MDBs, and initial phases were completed in Bangladesh and Cameroon after this research took place. These processes could foster greater collaboration across the HDP nexus by drawing on the expertise of humanitarian and peace actors in the financing needs phase and the financing landscape assessment phase, and build in risk assessment. INFF processes could also help to build humanitarian and peace actors’ capacities on broader financing approaches and instruments, which could also support longer term collaborations with the development community where new financial instruments are increasingly being used. The oversight and coordination mechanisms established to guide and monitor the INFF process could also encourage a more coherent government approach, helping to address weak cross-government coordination that has been a challenge in contexts such as Cameroon, although these have yet to be tested at the country level.

In recent years, some governments have established ‘stability’-focused units and facilities at a global level, such as the EU Instrument contributing to Stability and Peace, the EU Trust Funds and the UK’s Conflict, Stability and Security Fund, to increase cross-government coherence at the security−development nexus in fragile settings. While these are not a major focus of this study, they offer learnings for strengthening the joining up within governments across the HDP nexus. However, they also highlight a point of contention and the concerns of humanitarian actors about the politicisation of aid and the need to preserve humanitarian space. Critiques have also been raised on the development side about such stability-related funds being overly focused on national security interests at the expense of good development practice.^[12]

How are development actors using flexible financing approaches, and how have these enabled development actors to support crisis-affected populations?

The need for donor flexibility and quicker approval processes in fragile or crisis settings is well recognised.^[13] Across all three countries, donors have shown a high-level of flexibility to re-programme funds or adapt existing programmes where initial plans could not be implemented due to the Covid-19 pandemic. Donors have also rapidly approved, disbursed and programmed billions in additional finance to respond to the Covid-19 pandemic. IFIs are estimated to have approved US$29.9 billion, mostly in loans, to protracted crisis countries to support the Covid-19 response and have already disbursed about 59% of this.^[14] The three case study countries have so far received a combined total of US$3.6 billion from select IFIs, once again mostly in loans, of which almost 80% has been disbursed.

In the three country studies, the potential for in-country pooled funds as flexible instruments to incentivise greater collaboration across the HDP nexus was highlighted, but to be effective these need to come with strong and dedicated management, analytical capacity, strategic focus and learning systems. The Somalia Stability Fund, while small, is an example of a flexible, multi-donor fund, supported by strong in-country analysis, management and decision-making, which has enabled it to engage flexibly with Somali political and state-building processes. Financing through siloed channels or mechanisms for development and humanitarian programming is a recurring issue, leaving funding gaps for programmes that straddle the HDP nexus and hindering a rapid shift in gears when the situation changes from a relatively stable one to crisis, or vice-versa. In Somalia, the UN Multi-Partner Trust Fund has funded joint programmes encouraging the UN system to ‘deliver as one’. However, until recently it has lacked dedicated capacity to play a strategic role and faced waning donor confidence due to perceived inflexibility and high overhead costs. Despite these challenges, in both Cameroon and Bangladesh interviewees recommended the establishment of pooled funds that explicitly link humanitarian and development approaches as a way to strengthen coordination among donors and implementing agencies, with Cameroon developing a model that would enable ringfencing humanitarian funding within a UN Multi-Partner Trust Fund with an HDP nexus focus.

Dedicated contingency financing tools to scale up support in response to shocks are increasingly mainstream and have recently been scaled up in connection with the Covid-19 response. Central donor and reserve pooled funds are widely used within humanitarian finance to respond rapidly to unforeseen crises, and risk financing tools such as contingency budgets are often embedded in humanitarian planning. Similar mechanisms exist on the development side, such as the World Bank’s Crisis Response Window, which can be used to respond to disasters, economic or health crises.^[15] World Bank projects also incorporate contingency crisis response components, which can be activated at the request of governments to modify existing projects to respond to unforeseen crises. These are intended to enable a rapid response to economic shocks, disasters or health crises, and are limited as tools in conflict, displacement or political crises where government may be reluctant to request them for political reasons. The MDBs have recently scaled up these contingent financing facilities to ensure they are able to disburse funds at scale in sudden-onset crisis situations. In some cases, these have been disbursed through UN humanitarian and development actors with a presence on the ground, indicating a greater role for MDBs in crisis response alongside and in direct partnership with humanitarian actors. Some resilience programmes in contexts with recurring climate-related vulnerability have incorporated ‘crisis modifiers’, which allow development agencies with a presence on the ground to respond to spikes in need, such as the BRCiS programme in Somalia, which can draw on the UK’s former Department for International development’s (now the Foreign, Commonwealth and Development Office) Internal Risk Facility to scale up community safety nets in response to spikes in need. However, beyond financing instruments with a sudden-onset disaster focus, development actors have found it challenging to develop a wider range of financing instruments for protracted crisis contexts.

In Somalia and Bangladesh, anticipatory action pilots have shown the value in convening development and humanitarian partners around specific crisis risks and to put in place pre-approved funding and plans triggered once thresholds are reached. However, investment by development donors is crucial given the risk of diverting limited humanitarian funds from existing needs. Building on years of testing and developing forecast-based financing in Bangladesh, the anticipatory action pilot funded by the UN’s Central Emergency Response Fund in response to the 2020 monsoon floods is credited with enabling a humanitarian response that reached people earlier and faster and at less cost than previous responses.^[16] Bringing development donors on board is necessary for the longer term engagement with governments required to support co-ownership, sustained technical support and investment in preparedness and readiness actions before disaster hits that humanitarian funds cannot provide. For scaling and sustainability, anticipatory action frameworks could be embedded within national safety net systems, as is being trialled in Somalia.

• How can development actors ensure that sufficient resources reach crisis-affected regions and that their SDG commitments to ‘leave no one behind’ are fulfilled? This can be a challenge where support is channelled through national budgets and systems but central government-led programmes do not provide resources equitably to marginalised regions. In order to track this commitment, greater investment and transparency is needed in subnational data, alongside greater investment in planning and mutual accountability processes with governments, to map out the needs of crisis-affected populations and how they can be supported through national budgets complemented by donor resources.
• How can development actors build on new UN-led efforts to develop INFFs at the country level to ensure crisis financing is coherent with broader development financing strategies? Engaging humanitarian and peace actors and integrating finance provided through global and regionally managed crisis financing instruments (such as the EU Trust Funds) could ensure complementarity and coherence amongst different funding sources.
• How can development donors and implementers standardise the use of crisis reserves and risk financing tools, such as crisis modifiers^[17] and internal contingency budgets or funds, to enable flexible programming and early action in response to recurring crises? As is already increasingly common practice in humanitarian funding, the design phase of all development programmes in fragile and recurring crisis contexts could include a greater focus on risk planning.
• For greater sustainability and impact in the longer term, national government systems need to be able to absorb and respond to shocks. How can development partners strengthen national government’s capacity for anticipatory or risk financing in preparation for natural disasters, health or economic crises, and to address recovery needs? A key aspect of this is designing national social protection and safety net programmes to be shock responsive and embedding contingency financing within them.