DevExplains: An inside look at the UNOPS scandal

A once-sleepy agency has become the center of a scandal that has upended what seemed to be a successful enterprise within the United Nations bureaucracy. The U.N. Office for Project Services has long acted as a general contractor, but in the past few years, it has doubled in size to $1.2 billion in revenue and begun behaving more like an investment firm, amassing a significant — and controversial — portfolio.

That portfolio is now on ice, and questions are swirling about the future of UNOPS.

In April, Devex revealed that a UNOPS initiative called Sustainable Investments in Infrastructure and Innovation, or S3i, had made multiple investments in affordable housing projects with the company Sustainable Housing Solutions Holdings, or SHS Holdings.

Those investments triggered an avalanche of events, including an internal investigation, the resignation of UNOPS Executive Director Grete Faremo, efforts to recoup at least $20 million in potentially bad debt, and a series of reforms to address long-standing criticism that UNOPS was overcharging its customers and building up excessive reserves.

To build a picture of what happened inside UNOPS, Devex spoke to transparency campaigners, U.N. insiders, and current and former UNOPS employees — most of whom spoke on condition of anonymity because they were concerned that providing information publicly would be detrimental to their careers.

What is UNOPS, and what does it do?

UNOPS is a general contractor to its fellow agencies and to national governments. It says that it “provides infrastructure, procurement and project management services for a sustainable world.” In other words, it buys equipment such as phones and computers; it builds roads, bridges, and other infrastructure; and it provides a range of services — from cooking and cleaning in U.N. missions to clearing mines in conflict zones.

But it has an unusual business model for a U.N. agency. Instead of receiving funding from member states, its income depends on fees. Its customers are largely U.N. agencies that can call UNOPS when they need a practical service done.

Two profitable activities for UNOPS, for example, have historically been the provision of human resources services and mine clearance services on behalf of U.N. peacekeepers. Mine clearance alone has previously been worth more than $200 million a year, and U.N. insiders say UNOPS has effectively cornered the market in providing these services to its sister agencies.

UNOPS also provides goods and services for governments. In 2019, Faremo wrote in Harvard Business Review that these government contracts represented over one-third of UNOPS’ work.

UNOPS also receives funding to host independent campaigns that work under the U.N. umbrella, such as the Stop TB Partnership and RBM Partnership to End Malaria.

Other customers include international financial institutions, multilaterals, foundations, NGOs, and the private sector.

Over the past decade, this has been a successful model. UNOPS has grown to have a portfolio of $3.4 billion. Meanwhile its revenue is $1.2 billion, and reserves of $287 million, according to its most recent financial report, which covers the period ending December 2020.

Its revenue nearly doubled and reserves increased fourfold between its earliest annual financial report in 2012 and the most recent report in 2020.

But for years, reserves have been far higher than they were supposed to be. The minimum operational reserves requirement was listed at just $22 million in 2020, UNOPS documents show — less than one-tenth of the amount currently held by the agency. UNOPS audit documents contain as much criticism of the high level of reserves as of the difficulties with S3i.

U.N. auditors and member states have been lobbying for years for UNOPS to reduce fees, return money to stakeholders, or invest the money — to no avail.

Crucially, UNOPS can resist such pressure because it sets its own budget. If another U.N. agency records a surplus, donors would expect it to be rolled into the next year’s expenditure. But UNOPS relies on its customers, not donors.

When UNOPS did decide to spend the money, it was not on any of the things that auditors and member states had suggested. Instead, it plowed millions into S3i.

How did the current scandal come to light?

Alarm bells have been ringing for some time within the U.N. about S3i. Auditors have been questioning the decision-making process behind the investments, and the man leading S3i, Vitaly Vanshelboim, has been on administrative leave since December. UNOPS has conducted an internal investigation, while the Office of Internal Oversight Services, or OIOS — a U.N. watchdog — has finished a probe into misconduct by Vanshelboim, although no findings have been made public.

A British businessman and his daughter have also come under scrutiny. S3i signed agreements with SHS Holdings, owned by David Kendrick, to help build more than 1 million homes in six countries — which have yet to materialize.

Meanwhile, UNOPS gave We Are the Oceans, or WATO — an initiative spearheaded by Daisy Kendrick, the daughter of David Kendrick — over $3 million for an ocean conservation effort that produced a pop song and a video game.

Weeks after Devex’s story, The New York Times published an article that revealed more background on the deals with SHS and WATO. On May 8, U.N. Secretary-General António Guterres announced that Faremo, UNOPS’ executive director since 2014, had handed in her resignation.

Just over a month later, the UNOPS executive board launched a series of reforms to rehabilitate the battered agency.

All new S3i investments have been frozen, UNOPS has been ordered to recover existing funds, and a series of processes will look at “root causes and institutional vulnerabilities” within the organization, according to internal documents seen by Devex.

Among other things, the board is calling for the swift implementation of a third-party review to examine UNOPS’ business model, including its oversight of S3i investments and of its wider portfolio. A working group will try to decide what happens next with its reserves and will look at UNOPS’ fee structure to see whether it can avoid building up more reserves in the future.

Whether that will satisfy critics remains to be seen. Christopher Lu, the U.S. ambassador for U.N. management and reform, has been vocal about the need for reforms.

“For months, the U.S. has pushed for greater transparency and accountability regarding financial mismanagement at UNOPS,” Lu said in a statement to Devex. “We are pleased that the UNOPS executive board has taken swift and decisive action by including U.S. proposals to impose strict limitations on UNOPS’ reserves; strengthen internal governance, ethics and audit functions; re-evaluate UNOPS’ business model with respect to its fee structure and impact investments; and press for the recovery of all lost funds.”

How did UNOPS grow so fast?

Senior figures who have worked closely with UNOPS say it was aggressive in acquiring new business. Vanshelboim in particular was described by two individuals who knew him — one inside and one outside the organization — as well networked and effective at winning contracts from other agencies.

Those individuals also said UNOPS occupies a vital niche. Many U.N. agencies are primarily policy-led organizations, whereas UNOPS focuses more on practical skills.

Two U.N. employees who have contracted with UNOPS said it is very efficient at delivering services. But they also said UNOPS is hired not just for its efficiency, but because it is seen as a good way to get around U.N. rules. They said agencies in a hurry will often call on UNOPS’ services rather than doing the work themselves, since this is quicker and does not come with the same compliance requirements.

In some cases, they said, this is a positive. Perhaps, one former contractor said, a U.N. leader in West Africa needs personal protective equipment for their workers in a short time, and UNOPS could deliver it more quickly, for example, than an internal competitive tendering process.

But UNOPS’ services could also be used to get around safeguards, the former contractor said. Have a consultant working for you and want to move them onto the payroll? U.N. rules require a cool-down period to avoid accusations of favoritism and nepotism. But what if you simply move that individual’s contract to UNOPS for that period? The individual remains at the same desk, doing the same work, drawing the same pay. UNOPS collects a fee, and the nepotism rules are circumvented.

Supporters of UNOPS counter that the agency grew quickly because it works in necessary areas and delivers high-quality services. UNOPS says it follows all the rules of service delivery and asks others to do the same.

“UNOPS refutes any suggestion of this nature and would request any individual with evidence to the contrary to report this to independent channels,” a spokesperson for the agency told Devex.

Some question whether UNOPS took its drive for efficiency too far. One such person is Mukesh Kapila, a transparency campaigner and professor emeritus at the University of Manchester, who says he lost his U.N. job for whistleblowing around the Darfur genocide in Sudan. Kapila has spent months writing about UNOPS online, questioning the agency’s activities. Kapila's primary focus has been on S3i and the UNOPS leadership, but he has also questioned whether UNOPS was too aggressive in its growth model.

Kapila is now being sued by the Kendricks for libel over his writings about the S3i investments.

Why does UNOPS hold so much money in reserve?

Primarily, because it thinks it needs to. A 2020 document acts as a defense of its practices and implies that UNOPS fiercely guards its reserves because it almost ran out of cash several times in the early 2000s.

The UNOPS view was that it should be capitalized more like an NGO or private commercial service delivery firm rather than a typical U.N. agency. To this end, it commissioned an independent analysis by Deloitte, which concluded that “UNOPS was considered to be very safe with a likelihood of default of less than 1 per cent with a minimum operational reserve of $ 122 million,” according to a summary.

UNOPS said it consistently reduced fees and pocketed only a surplus of around 1% each year. But even 1% surpluses mount up over time.

The agency also cited decisions taken in 2021 that were intended to map a path to lowering fees and setting more realistic reserves targets.

But that is not what happened previously. Instead of lowering fees, or returning money back to member states and customers, the former leaders decided on another use for the cash: They would try to tackle the Sustainable Development Goals themselves and operate more like an investment bank. As a result, half the excess reserves were designated a special “growth and innovation reserve,” and S3i was set up to invest that money.

What’s next?

It is not yet clear why S3i chose to make the investments it did. Former officials who worked with Faremo and Vanshelboim speculate that an executive team of highly capable and confident individuals failed to recognize that they had gone beyond the limits of their competence.

Whatever the reasons, the problem of what to do with the reserves has not been resolved. S3i is still technically running. UNOPS still has a significant surplus, and it is not yet clear that new proposals will bring prices and reserves in line with member states’ expectations. Former U.N. officials also say now that Faremo has resigned, it will be much more difficult to hold her to account.

Member states, especially the U.S., have made it clear that this process will remain under scrutiny, as outlined by Lu, the ambassador.

“Going forward, the U.S. will closely monitor the implementation of these reforms, press for appropriate law enforcement action against any and all wrongdoers, and work to strengthen oversight of all UN agencies,” Lu said.

Devex will continue to follow the investigations surrounding UNOPS and whether the lessons learned from this and previous scandals could lead to meaningful change at the U.N.

Shabtai Gold contributed reporting.