Does the World Bank have too many trust funds?

Alongside its core work of lending to low- and middle-income countries, the World Bank has a significant off-balance sheet side hustle — trust funds. The multilateral development bank currently administers some 360 such funds, which, in 2022, accounted for approximately $14 billion. The biggest and most well-known are Financial Intermediary Funds, or FIFs, and include the Global Environment Facility, the Climate Investment Funds, and the Global Fund to Fight Aids, Tuberculosis and Malaria. But they come in all shapes and sizes. The bank also administers a more significant number of smaller, single-donor trust funds. The model allows donor governments to bypass traditional multilateral aid channels and earmark money for specific activities or countries. The bank gets paid to manage the funds, often acts as the host, and frequently implements the activities being financed. But while the bank’s biggest trust funds are well-resourced and actively disbursing cash, many are sitting idle, wasting time and resources. And despite the bank’s recent efforts to streamline the portfolio, the number of funds, especially on climate, remains bloated. Further, with the World Bank being tasked by U.S. Treasury Secretary Janet Yellen to “evolve” beyond its current focus on country lending to work more on tackling global challenges, or so-called public goods, trust funds could come to play a bigger role, experts say. This is because they offer the bank a way to do cross-border development projects, which its current lending model is less well equipped to address. They expand the available financing options and sources for multilateral development banks. However, opinion is divided over the value of the trust fund model. For proponents, they offer a flexible way of financing countries or causes neglected by traditional aid donors, while also offering efficiency by piggybacking off the bank’s technical expertise and back-office functions. For detractors, trust funds invite donors to earmark funding and pursue pet projects, are expensive and take money away from multilaterally agreed aid priorities, and lead to fragmentation and duplication within the aid sector. Trust funds also place additional reporting burdens on recipient countries, they say. So are there too many funds? Devex delves into the details. First, what exactly are these funds? The term “trust fund” encompasses a variety of different structures. But at their heart, trust funds are specialized pots of money — provided by single or multiple donors, including but not limited to sovereign governments — which are administered by a trustee organization such as the World Bank. They are set up to disburse funding for specific programs, activities, and geographies. The bank is involved with two kinds of trust funds. The vast majority are smaller, usually single-donor trust funds for which the World Bank will supervise and implement the funded activities. The bank currently numbers 337 of these “traditional” trust funds, according to a spokesperson. The bank also administers 27 FIFs — a kind of trust fund on steroids. They tend to have much more money, multiple donors, and more complex governance structures. The largest and most well-known include the Global Environment Facility, the Climate Investment Funds, and the Global Fund to Fight Aids, Tuberculosis and Malaria. With FIFs, the bank often plays a more administrative role: holding, investing, and disbursing funds without managing the activities. FIFs usually have their own governance structure and tend to disburse through multiple implementing agencies, often including, but not limited to, the World Bank. They are often used to support global public goods such as health, education, and climate change. Trust funds are a vital source of funding for the MDB, paying for, on average, two-thirds of the bank’s technical assistance and analytical work, a spokesperson told Devex. “If we didn’t have trust funds, the bank’s cutting-edge knowledge work would be severely curtailed,” Maitreyi Bordia Das, who heads the bank’s trust fund portfolio, told Devex. Are they just a ‘quick fix’? One of the biggest risks with trust funds is that they tend to bypass the recipient countries, according to Annalisa Prizzon, a principal research fellow at the Overseas Development Institute. This is in contrast to IBRD and IDA country lending programs. “The evidence shows that recipient countries have little involvement in the design of programs [funded by trust funds], and that trust fund use of country systems is limited,” Prizzon told Devex. This criticism isn’t new: A 2011 evaluation by the bank’s internal watchdog raised major concerns about the trust fund portfolio, including that “many trust funds of global scope involve insufficient recipient participation.” The watchdog also said many funds “lack clear outcome objectives,” and that financing is not additional — meaning that donors are using money from their existing aid budgets to finance trust funds as opposed to providing new, additional capital. By doing so, donors sidestep bilateral and multilateral aid channels and earmark funding for causes or countries aligned with their specific priorities as opposed to the country’s. But some of these risks are exactly the things that make the funds so attractive to donors, Prizzon said. In addition, trust funds can fund projects in countries where the World Bank’s traditional lending arms cannot. For example, Sudan, which has been cut off from World Bank funding since a coup in 2021. Furthermore, while the bank can only lend to member governments, trust funds can give money to nonmember countries and even nonsovereign institutions, explained Prizzon. Trust funds are also appealing to donors as a “quick fix” to a development challenge, she said. “When facing a new challenge, a first step is often to create a new trust fund, but it’s not necessarily the best response,” Prizzon said. What’s the problem with earmarking? For Philippe Le Houérou, former head of the International Finance Corporation, the World Bank’s private sector arm, earmarking is the biggest problem with trust funds of any shape or size. “A little bit of earmarking is okay, but if you earmark too much then you lose all flexibility to allocate where funds are most needed. Budget flexibility is key for better allocative efficiency,” he told Devex. “Earmarking also makes development totally supply driven, meaning donors decide what to finance,” Le Houérou added. Clemence Landers, senior policy fellow at the Center for Global Development (CGD), agreed that funds set up in response to donor fads can be problematic. Many end up being expensive to set up but short-lived. The MENA Transition Fund, launched in 2012 to help Arab countries transition from authoritarian regimes in the wake of the Arab Spring, is a good example, Landers said. The fund struggled to raise capital, garnering contributions of around $250 million, and as a result, could only fund small technical assistance projects, she said. The lesson is that trust funds set up in response to political whims “can raise expectations which don’t get met,” Landers told Devex. Has the bank tried to change things? The World Bank has taken its watchdog’s criticisms on board and streamlined its trust fund portfolio. The most recent reform effort started in 2020, and attempted to consolidate the existing funds, although not FIFs, into fewer and larger “Umbrella 2.0 Programs.” The bank had 486 trust funds in 2019 which have been combined into 62 “umbrella programs” and 275 standalone funds, a bank spokesperson told Devex. The bank’s Das said the lender is increasingly saying “no” to donors hoping to set up new trust funds. “The reform started because there were something like 500 to 700 trust funds floating around at the bank … [and] one of the challenges was that it was difficult implementing these things and keeping track,” Das told Devex. The sheer number of funds also made it difficult to draw a “broad strategic picture” of what the bank was doing on topics such as climate, Das said, due to all the “fragmented” pieces. The bank, therefore, decided to consolidate the portfolio under thematic or geographic “umbrellas.” “Consolidation is painful, but we did it,” Das said. Regarding the remaining 275 standalone funds, Das explained that some donors may have resisted joining a multidonor umbrella fund. In addition, closing trust funds can be a slow process, Das said, especially when there is still some budget left but the fund hasn’t yet reached its closing date. In this case the fund will run its course, Das said, since the bank is required to spend the money according to the fund’s agreement with the donor, and it is administratively difficult for the donor to take the funds back. But lingering funds represent a “tiny fraction” of the World Bank’s trust fund portfolio, according to Das. What’s more, traditional trust funds are usually small — worth between $500,000 and $1 million — and used to pilot new ideas and initiatives. The successful ones can then be mainstreamed into a country program or something else, Das explained. “In the grand scheme of things, trust funds are a drop in the ocean but a very important one, Das said, before going on to add: “The major part of the money is located in FIFs.” Are FIFs a better model? While the bank is trying to limit the number of small, single-donor trust funds, its FIF portfolio has been expanding in recent years, partly in response to the growing recognition of the need to fund large global public goods. The bank’s current funding model, which focuses on lending to member governments, does not support the kind of global and regional financing that global public goods need, hence the appeal of FIFs. FIFs can bring together a range of sovereign and nonsovereign donors, work through multiple implementing partners, focus on specific themes, and disburse to country, regional or global projects. They are also relatively quick and easy to set up since the World Bank acts as the trustee, offering its own financial, investment, legal, accounting, and administrative management services. These characteristics are what made the FIF model the logical choice when the Group of 20 major economies, or G20, governments agreed to create a dedicated source of financing to support pandemic preparedness in the wake of COVID-19, according to Carolyn Reynolds, co-founder of the Pandemic Action Network. The network was a leading advocate for the creation of the Pandemic Fund — the latest FIF to be established at the World Bank — and has been tracking pledges. “In my view, the FIF was the best option given the urgency of the issue,” Reynolds told Devex before going on to add: “Doing it this way avoided building a whole new entity from the ground up while also leveraging the capacity of World Bank and existing international organizations and forging a stronger global coalition for pandemic preparedness.” It was officially launched in record time in 2022 in response to anger among low- and middle-income countries over richer countries hoarding vaccines and other resources. Since then, the fund has already raised $2 billion in pledges and awarded its first round of funding to help countries with pandemic prevention, preparedness, and response. The Pandemic Fund also offers a good example of the flexibility of the FIF model, according to Priya Basu, who leads the Pandemic Fund Secretariat at the World Bank, which manages the day-to-day operations of the fund. The new fund draws on lessons learned from preceding FIFs, demonstrating the model’s evolution, she explained. Firstly, it works through a broader mix of implementing agencies compared to other FIFs. It funds 13 in total, including seven multilateral development banks but also United Nations agencies and other FIFs including the Global Fund and GAVI, the Vaccine Alliance. “It’s a new way of doing things. We are financing both single and multicountry projects involving a range of entities working together, all bringing their different expertise as well as financial resources,” Basu told Devex. “Every dollar of grant funding awarded to projects under our first round has mobilized an additional $6 from other sources,” she added. Unlike most other FIFs, the Pandemic Fund’s donor base includes nonstate donors, such as the Bill & Melinda Gates Foundation. Further, whereas most FIFs are funded by Western countries, the Pandemic Fund counts China, South Africa, and India as donors. It also has a “unique” governance structure, she said, with equal representation on its governing board from the global north and global south, along with participation of governments as well as nonstate actors, including philanthropies and civil society. According to Basu, FIFs such as the Pandemic Fund can play an important role in the World Bank and wider MDB reform agenda and support global public goods by providing grants “that complement what MDBs do through their core funding.” Are there too many climate funds? There are already too many climate funds and serious concerns about their efficacy, experts say. But with the increasing urgency to act globally on climate change, the trend looks likely to continue. The World Bank is a trustee of the three largest climate funds: the Global Environment Facility, Climate Investment Funds, and Green Climate Fund, or GCF, which combined, are worth more than $50 billion. But there are dozens more at the bank and elsewhere, according to a recent Devex opinion piece by Le Houérou. His research identified more than 80 active climate funds and said “It is unclear how much they commit and disburse, to whom, for what purpose, and with which impact.” He describes this climate aid architecture as “messy” and “fragmented” and calls for the number of funds to be “drastically” reduced by consolidating existing funds and harmonizing definitions and standards. This needs to happen before new funds are set up, Le Houérou argues. This is echoed in a 2023 paper by the CGD, which finds that the bank’s traditional lending arms, IDA and IBRD, offer better value for money than the trust funds. “The climate funds have gotten an enormous amount of attention as the World Bank moves to work more on climate but there is so much inefficiency. They have raised $50 billion since inception, but when we went through what they leverage, it’s less than the sum of its parts,” according to CGD’s Landers, who co-authored the paper. IBRD has leveraged $800 billion off of $20 billion by comparison, and this makes climate trust funds look like a “huge opportunity cost,” she added. Are trust funds overpriced? Cost is another potential issue with the plethora of trust funds. While some argue that the model benefits donors since it avoids the costs of establishing a whole new entity, some think the bank charges too much for its services. Board members at the Global Partnership for Education, or GPE, a World Bank-hosted FIF, were so unhappy about the cost, alongside other concerns, that they have considered setting up GPE as an independent entity, according to notes from a 2017 board meeting. The outcry came after the bank upped the amount it charges on top of salary costs to cover nonsalary benefits from 50% to 75%, resulting in an additional $2.5 million in staff expenses for GPE. Later meeting notes show that the bank agreed to cap its cost recovery fee.