Flat ODA and blended finance: What it means for aid implementers

If 2015 was the year for setting goals and signing on to global commitments, 2016 could be the year of figuring out how to pay for it. Financing to support the Sustainable Development Goals and the Paris climate change accord will have a distinctly different feel than that of the era of Millennium Development Goals. The development finance picture today bears little resemblance to that of only a decade ago. At that time, official development assistance, public funds given by donor governments through concessional loans and grants, had risen sharply from $85 billion given by Development Assistance Committee countries in 1990 to $128 billion in 2005. The wall between public spending and private investment in developing countries was also more intact. Debates centered on the differences between official development assistance and foreign direct investment and their relative effectiveness at creating results like job growth and reducing inequality, but not on how one could complement the other. Now the picture is dramatically different. While official development assistance has remained relatively flat, increasing by $6 billion between 2005 and 2014 across DAC countries — and not at all from the largest donor country, the United States — private investment in developing countries has accelerated. In 2010, for the first time, foreign direct investment in developing countries surpassed foreign direct investment in rich countries. Developing countries have also seen the value of remittances from international migrants increase to roughly half a trillion dollars per year; and the international community has placed greater emphasis on the importance of domestic tax revenues to fund national development priorities. The influence of the standard-issue foreign aid dollar in developing countries, while still significant, has morphed into a different kind of influence. Today the most highly-touted development initiatives work to bring different financing spheres together, to break down the wall between public and private and tap as many financing pools as possible in pursuit of development outcomes. President Obama’s Power Africa initiative and the U.S. Agency for International Development’s Development Credit Authority come to mind. Power Africa draws on a range of U.S. government capabilities to attract direct investments in Africa’s energy sector. The Development Credit Authority offers risk-reducing loan guarantees for companies willing to invest in pro-poor projects. It’s open to debate whether the shift towards these kinds of public investments has resulted from an intentional strategic pivot aimed at greater aid effectiveness, or from a more organic tendency to follow the money. Either way, many aid donors now envision their resources as complementary to, not competitive with, private sector investment and domestic tax resources. Finding linkages between those funding pools is one of the hottest topics in this field. The term “blended finance” has come to encapsulate the many examples of development programs, which blend private investments and public finance to push investments towards greater development impact. These arrangements operate on the basis of partnership, and on the premise that “traditional” development organizations and private investors can both advance their causes by identifying areas of mutual interest or concern and directing resources towards them. At times that model, as a break from the status quo, has been seen as a threat to traditional development organizations that bid on grants and contracts with donor agencies and function somewhat comfortably within a system built up over several decades. This is the community of development consulting firms and NGOs. But where some may see cause for concern in development’s shifting - or dispersing - center of gravity, others have sought new opportunity. Organizations that have typically relied on one, or maybe two, large donor agencies to supply them with a pipeline of projects have started to think more creatively about where those opportunities might come from in the future, and that pressure to adapt might have some positive implications. “For organizations like ours I think it’s going to become an economic imperative for us to look to new platforms; but I think it’s also healthy for us to look to new platforms,” said Christopher Lockett, senior vice president and managing director of DAI Europe. “Some of the donor work is perhaps more formulaic now, and I think there is some creativity to be had in working with the private sector,” he said. If official development assistance continues along its flattened trajectory and “nontraditional” investors set the next agenda, how can consulting firms and NGOs reinvent themselves to play a different, bigger role? The local knowledge, comparative experience, and interpersonal connections these organizations have accumulated are invaluable assets. Some of them are working to make sure those assets continue to appreciate as global development enters a new era. When you’re talking to someone who isn’t a donor Implementing organizations, for the most part, are following directions. They bid to deliver a project, which donors have designed. That design includes a tight structure for what successful implementation looks like and how progress towards it should be reported. The donor creates metrics for success, and the implementing partner’s obligation is to move steadily towards their fulfillment. The project proceeds according to a “logical framework,” and donors, at least in theory, evaluate implementers by their consistency in meeting predetermined metrics at the agreed price. As “development investors” have come to include a wider range of actors, from corporations, to developing country governments, to migrants sending remittances to their home communities, the industry standard logical framework no longer represents the same kind of common currency value proposition that it did for a more narrowly defined “development sector.” Companies don’t determine the value of their investments based on whether they proceed as planned, but on their contribution to the realization of a strategic goal, be it profit, expansion, brand identity, or something else. In order for those companies to see value in what development implementers can offer them, implementers need to describe what they’re capable of doing in ways that make sense from a business perspective, not just a donor perspective. “As we move into the world of blended finance, we’re quite often talking to a different audience, and they’re not the audience that have gone away and done the research and put together a [logical framework] and a theory of change,” said Lockett. This is not a new distinction for development professionals who have long sought and struggled to move away from equating success with inputs and outputs - money spent and services procured - and towards outcomes - the broader, more-difficult-to-quantify results of a project or strategy. But where in the past would-be reformers have run up against the inertia of existing reporting structures, accountability concerns, and the simple weight of the way things have always been done, now there seems to be emerging a business imperative to recast value and success in terms that will make sense to a new kind of client and partner. What is the difference then between these ways of talking about success, and how can an implementing organization adapt its value proposition to appeal to new clients? The new packaging might not look like the metrics donor agency reports typically call for, Lockett said. “It moves away from being a standard, statistically-significant analysis and starts to come down to having some really decent case studies … There is a different approach when you’re talking to somebody who isn’t a donor.” Some firms might find they need to return to the places where they’ve implemented projects in the past, to look inside communities and households for stories of progress and transformation they can attribute to the work they’ve done. But, Lockett said, in many cases the opportunity to collect those stories - even though donors don’t typically ask for them - has been there all along. “A lot of the data that could really help us we could pick up along the life of the project,” Lockett said. “We probably need to put a little bit more thought around what we’re doing and go beyond the current time horizon that most donors have for projects,” he added. Putting your tax dollars to work At the Financing for Development Summit in Addis Ababa, Ethiopia, last summer one unlikely development buzz-phrase stole the show: “domestic resource mobilization.” Simply put, taxes, but specifically those tax revenues raised in developing countries that can finance their own development priorities. Private corporations aren’t the only ones bringing new money to the global development table. Middle-class populations are growing in low and middle-income countries, and government bureaucracies are getting more sophisticated in their ability to register taxpayers, collect taxes from them, and deploy those resources for development gains. The Sustainable Development Goals forged in September and the Paris climate agreement brokered last month represent trillions of dollars in additional demand for investment in infrastructure, health services, education, research, agriculture, and the list goes on. Both global agendas acknowledge the central role domestic resources must play in achieving them, and some development implementers see opportunity in that challenge. Development consulting firms have long-standing competencies in supporting public financial management, but as these domestic resources take on even greater importance, they will demand even more “comprehensive” attention, said Eileen Hoffman, director for economic growth and trade at Chemonics. “It needs to be cross-sectoral. It needs to be more than what we have in the past traditionally regarded as fiscal programs, improving tax administration and tax revenue programs. We need to be looking at DRM in a broader, more comprehensive way,” Hoffman said. Development implementers can help governments draw data-driven connections between what gets spent and what it achieves, Hoffman said. That can be a challenge when public financial management is seen as one silo and the health, or education, or infrastructure investments those public finances might pay for are seen as entirely different silos. There is an opportunity, Hoffman said, to help governments make those links by demonstrating the causal connections between better revenue administration and better development outcomes. “With that kind of information in hand, that’s really a powerful incentive to increase domestic resource mobilization, both for citizens and businesses to pay their taxes and pay fees … a really great tool for governments themselves to be able to use for their own budgeting purposes,” Hoffman said. It is not always about raising more tax revenue, she noted, but often about putting the revenue already received to better — and better understood — work. “Raising the revenue is half the battle. How it’s used is the other half. In development we do both. We’re skilled in doing both pieces of that. What the future holds is an opportunity to bring those pieces together. As we look at the changing landscape of financing and the sustainable development goals, it will become really imperative that we’re able to do that, that we’re able to calculate the impact of that additional tax revenue … to better inform decision making across the board," Hoffman said. The link between here and there Global development organizations don’t work alone. They draw on networks of local partners, forged over the course of years spent working with communities, built on hard won trust, and critical to implementing projects that don’t end up on the list of ill-advised, wasteful misadventures. Those networks are a huge asset. Some of these community groups deliver vital services, and they would be natural target for social impact investment — if social impact investors only knew they existed. That’s where the global development organization can play a role. Washington, D.C.-based Pact employs 1,700 people in Myanmar. The NGO has also supported 2,500 village groups, through which people raise capital to invest in village development projects, create some basic health insurance schemes, and offer loan products. “Those are platforms that we can — I don’t like the word monetize — but that we can propose for new investors to come and do additional things,” said Christian Loucq, Pact’s chief strategy and global engagement officer. “How do we make the link between here, where you have a lot of impact investors, and there, where we know the ground, where we know very well those social enterprise, where we know ... a large number of partners, having a very good understanding on the ground,” he said. Last month Pact launched a new business unit, “Pact Ventures,” which will lead the organization’s engagement with social and impact investors. The unit is tasked with building a new portfolio of programs to complement the donor-funded work that has constituted the bulk of Pact’s portfolio so far. “We need to be relentlessly creative about how we approach our work. The international NGO of the future needs to have a diversified resourcing model that blends philanthropic capital from donor governments, foundations, and individuals, with revenue from businesses aligned with our mission,” said Pact President and CEO Mark Viso in a launch statement. Connecting would-be impact investors with local investment-ready platforms is one part of that opportunity. Another is employing the skills development implementers have in measuring impacts that don’t fit squarely into quarterly reports. “Quite often impact investors don’t have those tools. The tools that they have are the classical tools — return, growth. But measuring the impact that you have at the level of the civil society and at the level of people in the country is a bit more difficult to assess, a bit softer,” Loucq said. The common thread is impact. Outside the confines of a donor report how are organizations talking about the things they and their partners are able to achieve? How can they talk about those possibilities in ways that are translatable to a new audience, to a general audience, while still being rigorous and avoiding grand generalizations? It turns out the secret to success in the future is the same question your mother’s been asking you for years: “What is it you do, exactly?” Check out more funding trends analyses online, and subscribe to Money Matters to receive the latest contract award and shortlist announcements, and procurement and fundraising news.