How dependent are multilaterals on earmarked funding?

The multilateral aid landscape is seeing a subtle, but significant, shift. In 2013, the latest year for which detailed aid figures from the Organization of Economic Cooperation and Development are available, core resources channeled to multilateral organizations amounted to $41 billion, while earmarked funding reached an all-time high of $18.2 billion. But while core funding — contributions from donors that are not allocated for a specific purpose — still exceeds noncore resources, the rise of earmarked funding in the past decade has prompted a rethink of resource mobilization for many multilateral groups, which expect core contributions to further decline in the future. According to a 2013 survey on multilateral aid allocations conducted by the OECD’s Development Assistance Committee, DAC members choose to earmark the funds they direct to multilateral organizations for two main reasons: to shape a multilateral organization’s development agenda and to raise a higher profile for their resources. Earmarked funding, according to survey respondents, is also viewed as “an effective way to better oversee implementation and results, as these resources come with special clauses or management arrangements, including for monitoring and reporting.” Donors that perceive a multilateral organization’s quality assurance systems as not being particularly robust tend to feel more comfortable with this setup. Meanwhile, smaller and newer donors turn to earmarking largely to reduce delivery constraints, learn from the expertise of multilateral organizations, and scale up their own bilateral programs. But the costs that accompany earmarked funding often outweigh these benefits — at least for now. Usually depicted as a lesser alternative to core resources, earmarked contributions are seen as unpredictable sources of funding. It’s not hard to see why. Earmarked contributions require more financial and human resources from multilateral organizations, incurring higher transaction costs. In some cases, core contributions even end up subsidizing activities funded by earmarked resources. While the practice of making multiannual commitments for noncore resources could translate to more secure funding — and even make them more predictable than core resources, according to a 2015 OECD report on multilateral aid — the increase in earmarked contributions points to a more volatile funding base for many multilateral organizations. That only a few DAC members — Belgium, France, Austria, Finland and the Netherlands — have explicit policies in place to guide the decision behind the balance of their core and noncore contributions isn’t too encouraging. The solution, according to Jürgen Zattler, deputy director general of the German Federal Ministry for Economic Cooperation and Development, or BMZ, whose views on the shift toward earmarked funding are included in the OECD report, isn’t to return to an unrealistic model that leans heavily toward core contributions. For Zattler, the proper question to ask is: “How can we ensure better quality and management of earmarked contributions?” More limited additional reporting or evaluation requirements and a clear strategy for the provision of earmarked funding, according to Zattler, are some of the ways that noncore resources could be less costly and more effective in the long run. Among multilaterals, U.N. funds and programs have the highest earmarked funding dependency rate — or noncore resources as a share of total funding — at 75 percent. The European Union, which receives mostly core contributions from its members, has the lowest earmarked funding dependency rate, at a mere 1.5 percent. In 2013, more than 60 percent of core and noncore contributions from DAC members went to the World Bank Group (22 percent), the EU (21 percent) and the United Nations (20 percent). However, the distribution of core and earmarked resources for these multilaterals varies. Below, we take a closer look at the funding patterns for these three multilateral organizations as well as regional development banks and other multilaterals. European Union Through its members’ contributions to its development budget and the European Development Fund, the EU relies almost solely on core funding. Not surprisingly, core contributions as a share of official development assistance are on average significantly higher for EU member countries — 42 percent, according to an OECD policy report — than for non-EU members (22 percent). Earmarked funding for the EU, meanwhile, has seen big fluctuations in recent years: In 2011, noncore contributions amounted to $330 million, but in 2008, it reached a low of $17 million. But recent regulations have authorized the European Commission to establish and administer trust funds that can mobilize resources from members and nonmembers alike. For example, the first EU Trust Fund, which was set up by the European Commission, Germany, France and the Netherlands, aims to aid in the stabilization and reconstruction of the Central African Republic. U.N. system Noncore contributions have enabled the U.N. to expand its development and humanitarian efforts. But the complexity of the U.N. system makes the management of earmarked funding for the nearly 40 entities within it equally complicated — a problem the U.N. itself has recognized and attempted to address through what the OECD has called “an ambitious agenda.” The 2012 Quadrennial Comprehensive Policy Review, for example, calls for donors providing earmarked funding to improve the quality of such resources and define the principles that underpin the concept of “critical mass of core resources.” By the end of 2013, 11 U.N. agencies, including the U.N. Development Program, the U.N. Population Fund and UNICEF, had “harmonized cost recovery frameworks to improve the transparency and consistency of development project costing,” according to the OECD. With no independent source of funds, the World Food Program has the highest earmarked funding dependency rate (89 percent). Meanwhile, the U.N. Relief and Works Agency for Palestine Refugees in the Near East, which was subjected to budget cuts earlier this month, has the lowest contributions. That its earmarked funding dependency rate is 66 percent points to its vulnerability to wavering funds. Both the U.N. Office for the Coordination of Humanitarian Affairs and the U.N. Economic Commission for Europe have completely earmarked funding. Since only 5 percent of UNOCHA’s budget comes from the U.N. regular budget, the rest is funded by voluntary contributions from member states and the European Commission — mostly through strategic response plans and humanitarian appeals. UNECE’s portfolio consists of technical cooperation projects, financed by certain sections of the U.N. regular budget as well as extra-budgetary resources that come from UNECE member states, the European Commission, the private sector and intergovernmental and nongovernmental organizations. While not fully dependent on noncore resources, the World Health Organization also tilts heavily toward earmarked contributions. Currently, it is implementing what it calls an “extensive reform” partly to diminish its sensitivity to changes in funding. Meanwhile, with just a 5 percent earmarked funding dependency rate, the U.N. Department of Peacekeeping relies mostly on core resources. In accordance with Article 17 of the U.N. charter, each UNDPKO member state is legally obligated to contribute their share to finance peacekeeping. World Bank While it hosts more than 1,000 trust funds supported by over 200 donors, the World Bank, which has a 28 percent earmarked funding dependency rate, still has a larger share of core funding. Trust funds have allowed the World Bank to finance operations where its lending instruments are not present, “such as in cases where the borrower is not a World Bank member country or, in the case of the International Development Association, has allowed higher levels of funding in fragile situations,” according to the OECD report on multilateral aid. By streamlining its trust funds with its core operations, the World Bank is better able to handle earmarked funding. For example, through what it calls “umbrella facilities,” which were created following the 2011 recommendations by the Independent Evaluation Group, the World Bank can more easily pair donors’ interests with its own priorities without letting these donors earmark specific activities. These funds have been used to support capacity building and education activities, among others. Regional development banks At almost 16 percent, the combined earmarked funding dependency rate of these regional banks is relatively low. The African Development Bank, the Asian Development Bank and the Inter-American Development Bank have a combined earmarked funding dependency rate of nearly 16 percent — the lowest among tiers of multilateral organizations, excluding the EU. While the AfDB has more noncore contributions than the IDB, it is the least dependent on earmarked funding. The ADB, meanwhile, is the most dependent on noncore contributions, with its earmarked funding making up 20 percent of its total resources. Other multilaterals Since the funding model of the Global Fund to Fight AIDS, Tuberculosis and Malaria is determined by its board — 50 percent of resources goes to HIV and AIDS, 32 percent goes to malaria and 18 percent goes to TB — only a measly share of its total funding is earmarked and it has an almost negligible earmarked funding dependency rate: 0.5 percent. Gavi, the Vaccine Alliance, also has more core resources than earmarked contributions. Its singular focus — to increase immunization coverage in poor countries and to make new vaccines more accessible — perhaps explains its relatively low earmarked funding dependency rate (11 percent). 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.