Financing Development After the Financial Crisis
Author: Jürgen Carls
Originally Published at Peace and Conflict Monitor on: 05/04/2012
The world financial crisis is a major setback to socioeconomic progress in large parts of the world. The economic consequences are being felt especially by less industrialized countries in the southern hemisphere which are highly dependent on foreign capital flows.
Although it has become clear that financial resources on their own are of little help in the absence of strong institutions, good governance, sensible policies, and the capacity to generate knowledge and use it accordingly, access to foreign capital remains an essential factor in development policy.
The vast array of existing financial instruments suggests a rather broad agenda to choose from.
Efforts are underway to address the creation of performance-oriented funds, debt cancellation, instruments to catalyze private flows, specific strategic alliances and the provision of direct budget support, as well as mechanisms of emission trading, the application of the international financial transaction tax (Tobey Tax), among other initiatives. However, these efforts have not reached, as yet, a required critical mass to move from discussion into implementation.
In this situation, a change in the international development financing system may be brought about by making use of specific strategic arrangements and funding instruments. The essence of my argument is that there is a need to catalyze financial flows and special partnerships between public and private entities.
This article refers to the mobilization of external sources as a complement to domestic savings and deals with the potential instruments and external funding sources that could be applied towards a more effective financing system for economic development.
There is still a lot of money in the north, and there is a culture of giving, but there is also an increasing number of causes competing for funds, particularly during the present international crisis.
In general, donors are looking for projects that have low risks, high potential returns and a reasonable budget, therefore, the following issues should be kept in mind trying to mobilize funds for projects:
- What is new about the project?
- As a result of the project, who is better off and in what way?
An important factor to consider in raising funds from any potential donor is the intense competition for Potential donors are continuously bombarded with e-mail messages, and newspaper, magazine, and television appeals for funds.
Depending on the first feedback of a potential donor and the amount of funds that are involved, a personal contact should be established, presenting the institution that is asking for funds and the objects of the project.
Given that donors often prefer to share participation and risks in major projects, a “matching funds” approach should be given priority.
When carrying out, for example, a research project, the goal is to achieve results, but donors are usually less interested in research results than in the impact those results may have on improving the living conditions of the target groups. So, to sell a project to a donor, it is decisive to demonstrate how the results and outputs of the project will lead to positive development impacts in the long run.
Common development approaches of donors are, for example, ”basic needs”, “sustainable livelihoods” or “rights-based development”. For agencies such as Canada’s CIDA, Denmark’s DANIDA, UK’s DFID, Germany’s GIZ, Japan’s JICA, Norway’s NORAD, Sweden’s SIDA and US – USAID, these terms are household names used in development projects and should be used when asking for funds.
As government agencies, they shift policies according to the government of day, which often results in marked changes in both the quantity and quality of development assistance. From a southern perspective these changes of direction lead to discontinuities and inconsistencies incompatible with sustained development. For example, neoliberal policies have had a marked impact on the types of funding, with an increasing emphasis on “Trade rather than Aid”.
The total sum of international official development assistance now tops $100 billion per year. But the effectiveness of development assistance is reduced by donors’ fragmentation into small and often disconnected projects and by significant volatility over time. Efforts to harmonize international cooperation can help, if agencies become more specialized and efficient.
The World Bank, the United Nation Agencies such as UNDP, FAO, UNESCO, UNEP, and the EU, all receive funds from member governments. They channel most of these funds through governments,but NGOs and the private sector increasingly receive funds for their projects. For example, the World Bank had little involvement with civil society organizations in the past, but the situation is changing and more and more private initiatives are now supported.
Certainly, the World Bank must become better geared to serve its customers and their needs. Due to the recent financial crisis, dramatic changes in international cooperation are evident and the Bank must act accordingly. Provided the political will of its members, the Bank should also develop specific financial instruments for regional and global public goods such as climate and natural resources management.Furthermore, it must improve internal governance as well as cooperation with other donors.
UN-Agencies such as UNICEF operate as de facto NGOs and often raise funds from the public as well. The EU, for example, like other international agencies, have a dedicated budget-line to cooperate with NGOs and engage the private sector through Public –Private – Partnerships (PPP).
European governments contribute to the EU’s development budget as well its own. Current efforts by the EU to decentralize funding decisions away from Brussels to in-country offices, referred to as “regionalization”, are currently underway. The site of funding decision-making has changed also, although policies are still made in Brussels as in other headquarters of multilateral agencies.
Funding from the EU and other multilateral agencies is still quite bureaucratic. In the case of the EU, changes take place slowly due to consensus-seeking procedures among the 28 member countries, and as a consequence of their quite often contradicting national priorities. Application forms and decision making procedures are complicated and must slot into existing, predetermined criteria. Decision-making procedures for approving funding take a rather long time due to inadequate monitoring capacity.
A clear trend that has emerged over the past years is that the funds available for disbursement by international development agencies are diminishing. At the same time, however, governments are supporting fewer organizations in an effort to reduce “transaction costs”. The only way of doing this is by disbursing larger amounts of money to fewer organizations, which might support the trend in favor of multilateral agencies.
Furthermore, with the establishment of the “Millennium Development Goals”, governments are increasingly seeing multilateral support for projects as the chief instrument of development. This changing of targets runs contrary to the more participatory approaches to supporting NGOs and private initiatives.
The tremendous impact of international support on sustainable development is complicated by changing donor fashions with the trend of moving from one type of funding to the next. As a result, there are cyclical processes in which bilateral and multilateral funding in one decade is followed by project-based funding in the next.
During the past years, specified project funding quite often had priority, but this might change again if support is not producing the expected results.
PRIVATE SECTOR: FOUNDATIONS, PHILANTHROPIC SOCIETIES, COMPANIES
Due to a lack of public funds, private funding of sustainable development projects is becoming more and more important, and the government’s role in financing projects continues to decrease. The most important private funding sources are: Wealthy individuals, Foundations, Companies, Banks and Philanthropic Societies. “Philanthropy” represents an important possibility for individuals to influence the development of societies.
In past years, changing financial circumstances have led to the creation of a so-called “Third Sector”, a combination of public and private funds in so-called Public-Private-Partnerships” (PPP), which will be dealt with in detail later on.
The private funding scenario of foundations in comparison to earlier approaches has changed quite a bit and is today:
- more ambitious
- more strategic
- more global and
- demands results, measurable effects and long-term impacts.
Funds are allocated in the same way as they have been earned, with clear and measurable goals and objectives, in a results-oriented management culture that learns from experience and is open to changes on feedback received.
Trusts, as they are called in England, and Foundations elsewhere, are also relatively quick in disbursing funds. Each has its own organizational style and favorite causes. Decision-making can vary from the idiosyncratic to the highly systematized. Foundations do not have to account to the taxpayer or to the donating public, since they are private rather than public bodies, but their grants must remain within the “charitable” realm.
By and large they have the freedom to take risks which are sometimes reflected in the type of organizations and projects they fund – often seeking innovative approaches more actively. The bigger Foundations employ professionals to manage administrative matters. Some of them, particularly the large American ones, may have offices in the regions or countries they are supporting. Others do not, and rely on regular monitoring visits.
Smaller Foundations seldom visit the projects they support, relying instead on feedback through intermediary organizations. They make decisions on the basis of a written proposal usually submitted by a NGO, from which they receive feedback on progress. With smaller budgets, such as many European Foundations, they tend to support short – term projects.
Most Foundations have endowment funds in which only the returns on investments are used to fund projects and programmers. This means that, although Foundations have a secure source of funds, the amounts available as grants fluctuate in relation to prevailing interest rates. Therefore, the tendency of Foundations to be engaged on a long-term basis is rather low.
There has been a tremendous increase in the number of Foundations set up by wealthy philanthropists that are potential sources of funding for projects in sustainable development and should be made use of. In the US there are more than 100,000 registered foundations and philanthropic societies. In Germany alone there are more than 20,000 foundations registered and the number is increasing steadily from year to year. However, there is also a lot of competition for this funding and securing it requires specific knowledge, experience and skills, all of which have to be acquired through learning by doing.
INTERNATIONAL NGOs AS FUNDING SOURCES
Some northern “funding” NGOs raise funds from the general public and fund projects through NGOs based in the south. These organizations in general do no get involved in the implementation side of projects. However, in some countries, northern NGOs are working directly with communities in the south.
Examples of a few of the bigger organizations in this category include:
- Oxfam and Action Aid – UK
- Terre des Hommes – France
- Brot fuer die Welt – Germany
- Miserior and Dienste in Uebersee – Germany
- Novib and Hivos – Netherlands
- Christian Cordaid – Netherlands
- Aid – UK
None of these fund governments. They are the main source of funds for NGOs in the south and are increasingly important for international cooperation projects.
The bigger ones such as “OXFAM” and “Brot fuer die Welt” have offices in the countries where they are working. Others rely on regular visits by external personnel or they cooperate with local consultants.
Other NGOs in the north are specialized in fundraising and then channel funds directly to cooperation partners in the south. Two examples in the UK are:
- Community Fund
- Comic Relief
The Community Fund raises funds through a national lottery. Comic Relief appeals directly to the public and has been highly successful in doing so. It enlists the support of well-known individuals from the entertainment industry and media personalities also raise funds on its behalf. Fundraising events get considerable television coverage as a result. The advantage of working with these organizations, as compared with government agencies, is that they respond rather quickly and generally they are quite efficient.
PUBLIC PRIVATE PARTNERSHIPS (PPP) AS POTENTIAL FUNDING SOURCES
Public-Private Partnerships are arrangements between public organizations and private sector entities such as business associations and farmer’s organizations. These partnerships are well known and represent an increasing opportunity to indirectly mobilize funds for development projects. Partners share authority, responsibility, and risks; jointly contribute know-how and funding sources; and mutually benefit from the goods as well as services provided.
Public-private partnerships also provide capital to co-finance government programs in areas in which social benefits can be achieved. These partnerships for innovation and development are particularly useful in the context of production chains characterized by a deficiency of knowledge and technology as well as limited research capacities and funding.
Partnerships between firms and public research organizations or universities are strong, additional funds are mobilized; more benefits are derived from quicker information diffusion and product development.
Conditions for successful partnerships are:
- The common interest condition
- The cost-benefit condition (partners expect benefits to outweigh costs)
- The synergy-through-collaboration condition
- The no-conflict condition
So far, partners’ perceptions of the degree to which the partnerships have responded to the objectives established have been generally positive. Overall, the goals of the partnerships in which public agents are involved also seem to coincide with public goals. On the other hand, the private sector continues to dominate and the pubic sector often does not push partnerships strongly enough to achieve more social benefits. Finally, there is a lack of strategic planning or priority setting by either public or private sector entities with regard to where partnerships are urgently needed and where they can have the greatest positive impact.
CONCLUSIONS AND RECOMMENDATIONS
Development needs to have a more focused, longer-term perspective that remains resolute in the face of changing development fashions. Good development practice should be based first of all on its own financial sources in monetary terms, making use of its own natural resources base and other in-kind resources. In addition to these, reliable external funding should be mobilized, but always taking into account that these funding modalities are limited in both time and quantity.
The standard approach to the mobilization of resources for development is to plan a project, turn this into a set of goals and objectives, calculate a budget, and then approach potential donors to support the proposed project. This is a successful formula, but only to a certain extent.
Organizations and institutions need to be more strategic in their mobilization of resources for development. Mobilization of financial resources should not be an add-on-activity, but a necessary task to support the work. It increasingly needs to be integrated into the full spectrum of activities that the organization undertakes.
The mobilization of resources for development needs objectives and activities just like other areas of areas of operation. This implies ongoing efforts to strengthen fundraising capacities. It needs an understanding of the funding environment, a clear message to communicate, and mechanisms by which it take place. It requires identifying comparative advantages, looking for opportunities, identifying them when they arise, and choosing a path of action.
Part of the fundraising capacity means getting to know individual donors and different types of donors, and knowing what kind of communication works best with whom. It means seeking out possibilities and developing the art of building relationships. One indirect route to mobilizing funds in the north is to develop a partnership with a NGO in the north. The point is to find common interests and maintain a good relationship on a long-term basis.
An integral part of funding differently is the way in which funding policy comes about. Policy is decided by those organizations that control or have funds and, to a lesser degree, by those who have to raise funds first before disbursing them. In other words, implementers rarely decide on funding policy.
There is an urgent need to increase core funds in relation to non-core funds in order to restore a reasonable degree of autonomy to entities in the South with binding pledges for donors. Mechanisms are needed for a more inclusive, negotiated decision-making process around funding policy to strike a balance between donor’s wishes and community needs. Therefore, development cooperation is calling for a change, for more innovation, and for greater creativity. But this must start with a fundamental change in the nature of relationships between donors (funders) and implementers (recipients). The current situation, where donors define what is going to happen and implementers play a rather passive role, has to change.
Donors need to be demonstrated that there will be a positive impact from their investment, which is understandable. They want to show that the money has been used to help a certain number of people in a particular way, but this does not mean that funders (either from the North or the South) decide what is needed to achieve goals under specific project conditions. In this direction, a paradigm shift in the financing of development is called for.
Organizations must find creative spaces in which they can find their identity. They must be strategic in finding the right donors and establishing networks with other like-minded groups, and they must start the long and difficult journey towards achieving development in terms of their own definitions and in accordance with their own aspirations.
The change needs to be away from the simple transfer on funds, to an engagement that recognizes development as an incremental, iterative process that is underlined by mutual trust, openness, honesty and commitment.
Openness from a donor implies a readiness to recognize that a plan is not a blueprint but a flexible guide to action. From the receiving organization side an acceptance that planning a development process does not obviate the need for a rigorous project formulation.
Honesty means that a donor is willing to tolerate mistakes, for implementers it means a preparedness to admit failure and a determination to learn during the project process. Quite often there is still a culture of blame; this must be transformed into a culture of reciprocal learning with the need to move forward.
Commitment from a donor demands an agreement to fund for an extended period of time; from the partner the persistence to go on, against all odds, until the goal has been met.
In this sense, the future of financing development cooperation lies in establishing long–term partnerships and strategic alliances between south-north and south-south partnerships, in which all of them have common interests and successes.
Carls, Jürgen, 2003 – 2012: Practice of Fundraising for Sustainable Development – University for Peace, Costa Rica
Carls, Jürgen, 2008: CD-ROM on Funding Sources for Sustainable Development – University for Peace, Costa Rica
Debiel, Tobias et al., 2010 : Global Trends in the Shadow of the World Financial Crisis – Development and Peace Foundation, Bonn, Germany
The Economist, 2006: The Business of Giving, February 2006
Council, Simon, 2004: Conservation Funding: Helping or Hurting Indigenous People? – The Rainforest Foundation, London, UK
Dowie, Mark, 2002: American Foundation: An investigative History – MIT Press, Cambridge, USA
Sagasti, Francisco et al., 2005: The Future of Development Financing: Challenges, Scenarios and Strategic Choices(Unedited Version) – Institute of Development Studies, Sussex, UK
Bio: Jürgen Carls, Ph.D., MSc., International Rural Development, Sustainable Development, Humboldt University, Berlin. Dr Carls has over 70 publications on development and international cooperation issues including “Conflict Resolution of the Boruca Project, Costa Rica” published by Continuum International Publication Group, New York, p.217, 2010. He currently serves as associate professor in the department of Environment, Peace, and Security at the University for Peace.