How should USAID fund differently to hit its localization targets?

Donors have gotten serious about localization in recent years. The U.S. Agency for International Development, in particular, has pledged to give 25% of eligible funds to local partners by 2025. But there is a long way to go for the agency to reach its goal. Many experts are pressing the institution to change not just who it funds, but how it funds. Currently, USAID tends to award large grants and contracts with strict compliance and reporting requirements. It says that as a result of a well-publicized staffing crisis, it cannot make smaller awards because these are more labor-intensive. Often, the only organizations that can compete are international intermediaries with sophisticated management systems, such as international NGOs and United Nations agencies. The agency is working to build capacity among local organizations to bid for its funds. But many local groups typically need much smaller amounts than USAID can award — potentially $5,000 or $10,000 grants, according to Gunjan Veda, director of collaborative research, policy, and practice for the Movement for Community Led Development, or MCLD. And even large local organizations may struggle to reach the scale USAID needs. In the past, USAID has relied on INGOs and other intermediaries to subaward funds to small local organizations, or community benefit organizations, or CBOs. But this can be frustrating for those organizations, said Francis Oyat Otoo, project team leader for Family Harvest Foundation, a livelihoods and vocational skills training organization based in northern Uganda. His CBO has received small amounts of funding from several international NGOs operating in the area. But this year, Family Harvest Foundation has raised only $3,000 of its $50,000 proposed annual budget. He highlights a lack of trust as part of the reason. “If we are given $200,000 … they may think we can become crazy,” he said. So, how does USAID fund in a way that makes sense for local organizations? One way is to use intermediaries which are set up to receive large grants and make small grants. Intermediaries that can meet USAID’s rigorous compliance requirements can disburse funding in amounts and structures that are appropriate for small organizations, and that understand the needs of local groups and communities. So, do these intermediaries exist? Devex spoke with several innovative finance champions, who said there are already some promising candidates. Pooled funds Pooled funds — sometimes also called multidonor trust funds — involve multiple donors putting cash into a single pot with one administrator. That administrator can then grant the money in the pot to smaller organizations. Often, these funds operate at a country level, as with the 19 country-based pooled funds, or CBPFs, administered by the U.N. Office for the Coordination of Humanitarian Affairs, which operate in complex contexts around the world. Various types of pooled funds exist, including those focused on development and peacebuilding. In particular, the tool has proven useful in funding local organizations in fragile contexts where there are few alternative funding sources. “The idea is that the fund is at the service of the collective humanitarian community in the country,” said David Throp, chief of the country-based pooled funds section at UNOCHA. Money contributed to CBPFs is often allocated to U.N. agencies, national and international NGOs, and the International Federation of Red Cross and Red Crescent Societies. But in 2022, $435 million, or 36% of the total $1.23 billion allocated, went to local and national organizations, of which $335 million went directly (28% of the total) and $100 million was sub-granted (8% of the total). CBPFs are an example of an intermediary capable of meeting the compliance and monitoring needs of the largest donors. They have “quite a good system” for effective resource stewardship, Throp said, with a series of capacity assessments and standards that must be met for a local organization to receive funding from a CBPF. “I think that is what has generated the confidence of the donors to give us the go-ahead and to allow their funding to be used extensively for the local and national partners,” Throp said. The United States, for example, has increased its CBPF contributions over the past five years. In 2018, the U.S. contributed $34 million across four CBPFs. In 2023, it has so far contributed $89 million across seven CBPFs in Syria, Sudan, Yemen, Venezuela, Ukraine, and the Central African Republic. Other top funders include the Netherlands, Germany, and Norway. Pooled fund money doesn’t just come with lower overhead costs than cash from a U.N. agency or international NGO. It also brings support and representation, said Narciso Rosa-Berlanga, head of the effective programming and partnerships unit for CBPFs at UNOCHA. He said local and national partners are equally represented alongside international partners on CBPF advisory boards and project review committees, and their expertise and community engagement are deeply valued. “We don't allocate funding because you are a local partner,” Rosa-Berlanga said. “You're receiving funding because you are the best partner.” Not every pooled fund has been created with ease of grantmaking to local partners in mind. The U.N. secretary-general's Peacebuilding Fund, a global financial instrument used to sustain peace in countries affected by violent conflict, was not created to give out small grants to small groups, according to Marcus Lenzen, the fund’s senior advisor and deputy chief. Still, pooled funds have tended to be more locally focused than other entities. And even the U.N. Peacebuilding Fund is currently testing ways to incentivize U.N. agencies to meaningfully engage local partners. The fund’s Gender Promotion Initiative, for example, now requires U.N. agencies to commit to a co-creation process alongside local groups. However, while pooled funds potentially present a useful model, not all is perfect. Pooled funds, too, would like to see bilateral donors fund a bit differently, in particular by having more tolerance for risk, and more flexibility over the need to change direction. “I think it's very early days, not just for us, but in the sector as a whole, on this idea of risk sharing,” Throp said. Networks Networks provide a promising alternative to the traditional intermediary, according to Veda, whose Movement for Community Led Development is a network of over 2,000 CBOs and local organizations around the world. Networks are collections of organizations united by shared values. Unlike pooled funds, which are still often administered by a U.N. agency or other international institution, networks consist of representatives of local organizations in particular geographies or shared areas of work. While the MCLD network was not originally created to receive and disburse funds, Veda said networks can serve as more balanced intermediaries than the international NGOs currently in the role because they are built and managed by members, not outsiders. “It is their network,” Veda said. “So power is shared and the resources are shared.” Networks, like pooled funds, can manage larger grants and handle compliance burdens, but they keep power local because they are accountable to members. They also allow members receiving grants to share best practice and understand how best to make use of the money. Veda said that channeling money through a network allows donors to adopt a model closer to trust-based philanthropy, which emphasizes a commitment to relationship building and power sharing, and often means progressively increasing funding amounts as an organization is able to absorb it. USAID, which is already experimenting in local-led development with its Local Works program, must be diligent in understanding where power sits within a network when looking to fund. In short, a network should be locally led, inclusive, and not created solely to receive funds. Veda offered several questions for donors to consider before partnering: “Is a network getting funding because it is ready to get funding? Or is a network getting funding because a funder wants to provide funding? Who is creating these networks? Who are members of these networks, and what is the leadership and decision-making structure of these networks?” Traditional pooled funds still transfer a significant amount of funding power to international NGO intermediaries as prime grantees, but the use of networks could push donors toward emergent mechanisms that allow for greater responsiveness to local partners, according to Jenny Hodgson, executive director of Johannesburg-based Global Fund for Community Foundations. “I think we're starting to see through the emergence of networks — whether it's women's funds, socio-environmental funds, our network, which includes all of those — that alternative infrastructure starts to become visible,” she told Devex. Global Fund for Community Foundations, for example, is a network dedicated to growing community philanthropy as a pillar of people-led development. But the network can also direct grants to organizations beyond the radar of most donors, as it does for Giving for Change, a program funded by the Dutch Ministry of Foreign Affairs that encourages civil society organizations to adopt local resource mobilization as a form of constituency building. “Although we play an ‘intermediary’ role, we see ourselves as part of and accountable to — and sometimes smaller than — the movements [and] organizations that we serve,” Hodgson said. Financing structures It’s not just how the money is given away that needs to change, however. It’s also about the terms. Funding needs to be multiyear, with low costs of application, and cover local organizations’ core costs, not just the cost of projects. Joanna Mbakulo, the Uganda country coordinator for MCLD, recently submitted an application to an embassy “where it says they don't want [to fund] salaries, no utilities, they don't want benefits. It has to go to the actual activities.” Trying to fund without covering core costs is ineffective, Mbakulo believes. If funders with “authentic intentions” want to build trust with local organizations, they should leave room to negotiate so that both parties feel their objectives can be met, she said. Hybrid funding models have surfaced as a way to put the needs and capacities of local organizations first, said Moulaye Camara, technical director of funding and financial systems at Humentum. A blended structure that offers core funding alongside results-based financing is one option to link funding to a specific outcome or impact rather than a project, which “encourages organizations to focus on achieving a tangible result instead of satisfying the funder,” Camara said. Another useful change would be for USAID to fund the process of co-creation. Right now, USAID will often seek feedback on how it should design projects, but small organizations with small budgets have much less capacity to contribute. Riva Kantowitz, founder of the Radical Flexibility Fund, helps funders find new financing mechanisms to support local organizations. Recently RFF worked with migrant- and refugee-focused organizations and partners Latimpacto and Innpactia in Barranquilla, Colombia, to design the Community-Led Refugee Investment Vehicle. Local organizations in Barranquilla will be able to directly access flexible, results-based financing, catalytic small grants, and technical assistance to develop business plans and resourcing strategies. RFF methodology begins with exploratory and partnership phases, then asks questions such as: What are the resourcing needs and priorities of local organizations? What new resourcing strategies can we collaboratively develop to fill the gaps? “There is no funding tool that is inherently equitable,” Kantowitz said. “It’s the process by which a resourcing mechanism is designed — and how closely it aligns with what civil society says they need — that reflects whether it will actually empower CBOs to do their work effectively.”