Dieser Beitrag ist der erste Teil unseres neuen Schwerpunkts, der Themen und Papiere des 4. Forschungskolloquiums aufnimmt.
This guest post by Bernhard Reinsberg first appeared on his blog.
Multi-bi financing has frequently been accused of fuelling the fragmentation of foreign aid. No doubt trust funds at international development organizations and special-purpose global funds have massively proliferated over the last two decades – but these trends may appear in a different light if donors would have sought to address the emerging development challenges with a myriad of bilateral aid activities. For this reason, any judgment on multi-bi financing may be misleading because it is not clear what alternative financing instruments would have been used in its absence.
To avoid this drawback, I take a different approach. I take the perspective of international development organizations, since these agencies arguably are most affected by the rise of multi-bi financing. I conducted more than 80 interviews at the World Bank, yielding nuanced assessments for different types of trust funds and different staff perspectives. These nuanced findings are developed in the full paper. For the purpose of this short article, I highlight some key findings and compare them with the experience of the United Nations agencies from earlier work based on document analysis. Before that, I briefly review what multi-bi financing is.
What is multi-bi financing?
Multi-bi financing represents a new type of funding for international development organizations. As opposed to traditional multilateral aid, multi-bi financing provides voluntary resources earmarked for specific development purposes, notably sectors, themes, countries, or modalities (OECD 2011: 54). It may even support activities outside the mandate of these organizations. It does not need approval by the formal governing bodies of multilateral organizations. No wonder why multi-bi financing has tremendously grown over the last two decades.
Currently, the portfolio of trust funds wandering through the coffers of the World Bank exceeds USD 30 billion, including trust funds for which the Bank only serves as financial intermediary. The entire trust fund portfolio has been outgrowing core contributions to the International Development Association since FY03. Over the last decade, the number of trust funds skyrocketed to over a thousands accounts. To support its own operations, the World Bank receives annual cash contributions of about USD 4 billion – a fourfold increase since the turn of the millennium (World Bank 2013).
Similarly, the United Nations witnessed a non-core resource growth by more than 350 percent between 1995 and 2011. Annual contributions having reached USD 18 billion, non-core resources support 70 percent of UN activities for development; some entities rely on these funds to an even larger extent (UN 2012). It would be surprising if these money flows had no real consequences.
Implications of multi-bi financing
Trust funds have become politicized. On the one hand, skeptics deplore the proliferation of poorly coordinated donor-sponsored activities at the expense of collective burden-sharing through multilateral core contributions (Isenman and Schakow 2010; Severino and Ray 2010; Graham 2012). On the other hand, advocates praise the potential to reduce burdens for recipients by harmonizing aid, especially in fragile states that do not have the capacity to manage multiple donors (Guder 2009; Barakat, Rzeszut, and Martin 2012). Surprisingly, neither fragmentation nor harominzation actually belong to the most important concerns for international development organizations. What does really matter for multilateral agencies? Read on to find out the seven most pressing issues.
Potential for realignment
Do trust funds support different activities than core funding through the International Development Association? Figure 1 compares the aggregate allocations from both types of funding by region. The figure illustrates a key rationale for trust funds, notably the support for global thematic activities. Also, as suggested by interviewees, trust funds are more relevant for regions that apparently do not obtain enough core funding to meet development needs, notably middle-income regions.
Figure 1: Regional allocation by source of funding
Figure 2 repeats this comparison for sectors. Core funding has traditionally been more important in the transportation sector. Conversely, trust funds tend to give more weight to governance and education. Otherwise the respective allocations by sector are fairly similar. In addition, narrative evidence suggests that trust funds does not necessarily support the same types of activities as core funding. Some funds are used to pilot innovative development approaches, and even when they merely reinforce existing operations, trust funds rebalance the portfolio of activities by supporting selected Bank initiatives.
Figure 2: Sector allocation by source of funding.
Similar analyses for UN agencies yield similar results. Both types of resources have different priority countries. The largest beneficiaries of non-core resources are Afghanistan, Sudan, and Pakistan, whereas the three core-funded darlings are India, Bangladesh, and DR Congo (UN 2012). The low rank correlation coefficient (R=0.30) reflects the country dissimilarity. Furthermore, non-core resources are more important for global activities.
Relevance for development needs
A large share of trust funds merely co-finance existing Bank activities, and where they do not, there are oftentimes limited possibilities to rely on core funding. For example, the Bank cannot legally interfere in the domestic affairs of recipient countries, which poses a problem for institutional capacity-building in fragile states. Multi-donor trust funds therefore seem to be the only viable choice to assist fragile states (Guder 2009; Barakat 2009). In a recent paper co-authored with Steve Knack and Katja Michaelowa, I exemplify why it is so difficult to change the rules of the game of World Bank assistance.
The UN virtually does not have any blind spots in its mandate. It hence uses its trust funds rather to scale up existing activities and to initiate new partnerships. For instance, UNDP said its collaboration with global funds helped “develop country-specific technical expertise in specialized areas” and to promote “innovative work that would not easily be possible through the use of core funds” (UNDP 2012: xiv).
Donor involvement in trust-funded operations
The first dividing line among different hierarchy levels pops up as regards operational involvement of donors. Bank staff from operational units usually consider the local collaboration with donors mutually beneficial, notably since bilateral donors sometimes have critical expertise. Corporate managers are more concerned that donors sometimes want to become “part of the kitchen”. Especially in the early days, donors had the prerogative to vet proposals, or to send own staff to project missions. More recently, donor audit offices have become interested in the operational details of trust funds.
UN agencies are more skeptical, complaining that “[trust funds are distorting program priorities by limiting the proportion of funding that is directly regulated by intergovernmental governing bodies and processes“ (UN 2012: 12). The UN Secretariat fears an erosion of capacities to “create, collate, and disseminate information“ (UN 2012: 12). Others have warned that trust funds are an „[…] implementing tool of donors, enhancing the patronage function […], further diluting the principles of independent multilateralism” (Browne & Weiss 2012: 13).
Hollowing out core funding
Over the last decades, the Bank has developed a sophisticated fee structure. Trust fund managers assert that management fees cover the costs of trust fund secretariats. From a corporate perspective, however, it seems entirely plausible that the fees do not cover the true costs of trust funds, because there are unaccounted costs for activities beyond immediate program support, notably fundraising and learning. An internal Bank evaluation finds that “it costs more to manage trust-funded activities than trust funds typically provide for this purpose” (IEG 2011: 75).
The UN Secretariat takes a similar view. In the early 1990s, fees were too low and frequent exemptions were granted, notably “to attract funding” and “to secure market share” (UNDP 2001: 35). While fees have gradually increased over the last decade, the Secretariat still asserts that core resources cross-subsidize the support costs of non-core activities (UN 2012: 24). This may unleash a dangerous dynamic whereby donors crowd into non-core resources as these funds appear to be administratively cheaper (Mahn 2012: 3).
Replacing core funding
There is virtually no evidence that donors intentionally reallocate money from World Bank core funding to trust funds, at the possible exception of large sector funds. From a Bank perspective, trust funds are always financially incremental if they support issues outside the core mandate and when there is evidence that donors replaced their core-bilateral aid by trust funds. The Bank also has been a winner of the overall growth of multi-bi aid because it makes a stable profit from the fees collected from financial management of global partnerships.
According to UN Secretariat, core resources “continue to be the bedrock of the operational activities for development of the United Nations system” (UN 2012). The Secretariat fears that non-core resources ultimately replace core contributions, thereby threatening to erode the “critical mass” of the organization (UN 2012: 13). Whether or not such direct substitution occurs is debatable — donors argue they could not have mobilized additional resources without earmarking (IDRC 2007: 10). However, the issue of lacking critical mass indeed is serious.
Costs of donor relations and administrative procedures
There are administrative costs related to negotiating trust funds, monitoring and reporting, and maintaining donor relations. Administrative burdens are due to donor exigencies as well as Bank-internal rules and clearance procedures. Excessive audits by some donors have become the greatest burden according to World Bank staff.
A UN budget report summarizes the administrative impact of trust funds: “Negotiating individual funding agreements and separate program and financial reporting for hundreds or even thousands of individual projects according to widely varying sets of requirements add significant costs […]” (UN 2012: 24). To some degree, these additional burdens are unavoidable when donors want attribution of their funding to tangible results and when they schedule audits every three months. However, the burden can be eased considerably by aligning reporting schedules and limiting possibilities for idiosyncratic donor requests, as envisaged in the umbrella funds by the World Bank.
Bureaucratic politics and institutional fragmentation
Trust funds can challenge the organizational integrity of the Bank by creating wedges between heterogeneous organizational units. Goal conflicts exist between corporate management and operational staff, as well as between networks and regions as the two types of operational units. Notably, trust funds with strong cross-linkages between the two types of operational units bear the risk of fuelling institutional fragmentation inside the Bank.
Similar lessons apply to the UN system. UN agencies compete with each other for implementing mandates. Competition prevents system-wide cooperation. According to UNDP, “competition and rivalry between agencies over non-core funds“ keeps the agency away from “meet[ing] its coordinating role in the UN system” (UNDP 2012: 71). Hence, the dark side of multi-bi financing may be duplication induced by competition.
In the early days, trust funds threatened to undermine the risk culture inside the Bank. Fiduciary controls were lenient. Nowadays, after a corruption scandal in the early 2000s, the Bank has made trust funds subject to even higher controls than its own resources, according to corporate managers interviewed. This does not make trust funds equal to core resources: Specific types of funds in which the trustee does not have implementing stakes carry reputational risks. In addition, the Bank has a “hat problem” when managing multi-bi aid, as conflicts of interests may emerge when the Bank serves many different roles (Smyth 2011).
These additional problems are somewhat less relevant for UN agencies. UNDP may be an exception, as the organization traditionally served as the clearing house of the UN system, later developing into an implementing agency, and most recently becoming trustee of UN-wide basket funds through the Multi-Partner Trust Fund Office (UNDP 2013).
In conclusion, I have discussed seven hypotheses on the implications of multi-bi financing from the perspective of international development organizations. In a nutshell, my findings on these hypotheses are as follows:
- Multi-bi financing and core funding support different aid activities –> True
As compared to core funding, multi-bi financing supports activities that are less aligned with actual development needs –> Not necessarily true, as multi-bi financing sometimes addresses gaps in the core budget
Multi-bi financing opens the door for undue donor influence on multilateral aid operations –> Maybe, but opinion on its effects varies across agency staff and it is not always harmful
Fees collected on multi-bi financing do not cover its maintenance costs –> Direct maintenance costs tend to be covered, but externalities most likely not
Multi-bi financing eventually replaces core funding –> Difficult to assess, but no evidence yet
Multi-bi financing increases transaction costs due to donor exigencies and bureaucratic procedures –> True, but unavoidable if aid is to be more targeted
Multi-bi financing spurs institutional fragmentation within multilateral agencies –> A negative externality from the agency perspective
My analysis on the World Bank has shown pros and cons of multi-bi financing. In times of stagnant core budgets, agency staff are tempted to expand their business through trust funds, even though they face higher administrative burdens induced by earmarking. This tradeoff may be moderated by organizational characteristics. Corporate management at the World Bank has been able to manage the proliferation of funds. Conversely, decentralized agencies like the United Nations tend to be more affected by the adverse implications of multi-bi financing.
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