Abnormal and unforeseen events happen regularly around the world. This year, floods in New York, the wettest spring since 1797 in England, and the hottest summer in Scandinavia in 150 years. The implications of natural crises in the developing world are usually, however, of a different order than those in developed countries. Recall the devastation last year in the Philippines of Typhoon Haiyan—the lives shattered and up to 10,000 dead—or the 2010 earthquake in Haiti that killed 300,000; or the 2004 tsunami which killed 250,000.
In all instances, developed countries and their private actors mobilized to help. But as Akash Kapur noted while writing about the tsunami, “it was clear that much of the outside world’s largesse was utterly removed from the needs and priorities of aid recipients”. Similarly, in a hard hitting article published on the third anniversary of the Haiti Earthquake in the Guardian, a report by the Centre for Global Development, drawing from the reports of the UN Office of the Special Envoy, tersely noted:
“Official bilateral and multilateral donors pledged $13bn and… 50 percent of these disbursed. Private donations are estimated at $3 billion (together the equivalent of Haiti’s GNP). Where has all the money gone? Three years after the quake, we do not really know how the money was spent, how many Haitians were reached, or whether the desired outcomes were achieved.“
It goes on:
“We found that about 94 percent of humanitarian funding went to donors’ own civilian and military entities, UN agencies, international NGOs and private contractors. In addition, 36 percent of recovery grants went to international NGOs and private contractors. Yet this is where the trail goes cold… it is almost impossible to track the money further to identify the final recipients and the outcomes of projects.“
Sadly, this is the reality, and not just related to disasters, that although we all mouth “multi stakeholder collaborations,” we have created a system where aid is allocated bilaterally, creating gross inefficiency through incentivising ineffective collaboration, a lack of transparency, and accountability.
On the funding side it is also equally fragmented as you can see in the Haiti example above stovepiped often by country—each funder of course with their own agenda. As Clara Miller’s (now CEO of the Heron Foundation) noted in her brilliant article, “The Looking-Glass World of Nonprofit Money: Managing in For-Profits’ Shadow Universe,” it’s as if:
“You’re the owner of a restaurant. Your paying guest comes to pay the bill, offers a credit card, and prepares to sign the charge slip. But before signing, the guest says, ‘I’m going to restrict my payment to the chef’s salary. He’s great, and I just want to make sure I’m paying for the one thing that makes the real difference here. I don’t want any of this payment to go for light, or heat, or your accounting department, or other overhead. They’re just not that important. The chef is where you should be spending your money!’“
Over all this “disaster” in both meanings stands the very dedicated folk at UN OCHA attempting to coordinate in disaster situations operating in 65 countries. They had a 2013 budget of just $285m provided by 44 donors—of which to the earlier point is 95 percent voluntary funding. I was recently told they have just started the process of strengthening the IT infrastructure to increase coordination. Now anyone who has ever managed an IT budget will recognise the scope of the challenge, in this case even if the whole budget was allocated to IT coordination, which it is clearly not. UN budgets are notoriously difficult to decipher to outsiders, but the 2012 allocation to information management for OCHA was $12.4 million. Those same IT staff will tell you that you need about three-to-five percent of total budget on IT systems in a system that has collaborative scale, so they hit that target; but relative to the expenditure, parties, or issues they’re trying to co-ordinate? As my teenage son would say, go figure.
If this is the status quo, what can be done to improve it and what is the role of impact investing? At Total Impact Advisors we have just completed some work for The Rockefeller Foundation on resilience as part of a new $100 million programme recently approved by their board. Our requested role was to identify the financial tools and solutions that could be applied to the issue of resilience, including strengthening critical infrastructure prior to disaster.
At a systemic level, we deduced that a lack of resilience can be seen through five key market failures:
- Lack of savings/resources—Many poor individuals and communities lack access to financial resources, which inhibits their ability to save and invest in activities to promote their livelihoods, including spending on health and education. This is exacerbated in times of macroeconomic crisis.
- Lack of risk mitigation tools—Limited or no access to insurance or other risk mitigation tools, including forecasting, manifests at the micro-level as a lack of insurance options for the poor and at the macro-level as a dearth of larger-scale, more sophisticated insurance tools for key sectors of the economy, including financial services, agriculture, healthcare, and others.
- Lack of functioning domestic capital markets—Limited credit (at customer level and bank level) and liquidity in many rural and developing markets inhibits the ability to mobilize resources. Inability to align domestic capital markets in developing countries ($2+ trillion) with national development needs.
- Lack of economic activity—Limited access to financial or other resources creates a vicious cycle that inhibits the development of a commercial value chain and a functioning economy. The target populations are not integrated into the economic landscape.
- Lack of incentives to collaborate and scale—Lack of large-scale system of incentives for multi stakeholder collaboration. This prevents otherwise innovative tools from scaling and an inability to look at problems at a systemic level where the incentives are aligned for tangible, auditable social outcomes.
Further, using this framework we highlighted the clear lack of risk mitigation tools for households, communities, and countries reflected in:
- Limited Private Sector Engagement: the private sector, while often engaged in disaster response from a philanthropic and business perspective, does not invest at the nexus of development and humanitarian efforts to prevent disaster;
- Inadequate Use of Big Data: developing countries utilize outmoded methods to access, integrate, and use crucial data and information to reduce vulnerability and risk—if they use data at all;
- Lack of Evidence–Based Methodology: Few players active in the field use rigorous methodologies to determine the resilience investments that matter most;
- Insufficient Collaboration: Humanitarian and development actors rarely work together in a holistic manner.
Looking at these issues holistically, we see our recommendations as part of a broader trend in the market, a systems issue concerning the challenges of coordination and collaboration. We are trying to lead a larger conversation on how a range of tools can be applied towards this cause, in particular, the range of financial and social entrepreneurial innovation that can and should be applied. This is not a single asset class.
The report also identifies what bankers would call alpha, or what normal people call the “hidden value” in impact investing, which we christen “ICE”: Innovation (social entrepreneurial and social financial innovation), Collaboration, and Economies of Scale. The latter two are often under-attended, but critical to ensuring the social sector receives an equitable margin.
It is here one also needs to look carefully at one of the shibboleths of impact investing, that we need metrics (do we just measure the best of the current inefficient market?) because as soon as light follows day, the argument will soon follow that once we have a social metric (to the economists a segmentation of indifference curves), then government should provide a subsidy.
However, if that metric is based purely on today’s inefficient market, what happens to the alpha of financial innovation? The alpha of economies of scale and the alpha of collaboration? This is potentially large. For example, the GAVI framework, a $3 billion+ collaborative structure in vaccinations, dropped the unit cost of vaccinations from $50 to $5. If we are to believe the Centre for Global Development, the benefits of collaboration, transparency, and scale are probably even larger for resilience.
For the foundation world this raises challenges as well. On the capital side, this is the transition from a 19th century banking system with foundations controlling $1 trillion in assets globally, to a modern one, aligning those assets with social mission and injecting a range of market tools with social purpose, like modern impact investing tools with social mission hard-wired, ultimately driving innovation, collaboration, and scale to the benefit of a much larger philanthropic sector, freed from its current self-imposed capital crisis.
Resilience and disaster recovery mask a broader crisis of management of large scale philanthropic/aid projects—the report to Congress on Afghanistan aid (August 2014) again further underlined the point. Siloed bilateral aid in too many cases simply does not work. Money is an incentive structure and these incentives need to be aligned with collaboration, scale, and the delivery of financial structures that foster transparent, systemic, and auditable social outcomes. This is the real promise of impact investing.
Now some will say that these words threaten the flow of aid to orphans, but in moral terms and indeed realpolitik terms, our current stance is like offering a child a sticky plaster (or a ski jacket and Viagra, as were infamously delivered after the tsunami in Indonesia—a country with one of the fastest growing populations and no snow) and failing to invest in the tools that can create real change for their children. The report—and it is only a first step—is about identifying the tools in the toolbox. The real question is do we have the will to implement and use them?
Perhaps the fault, dear Brutus, is not in our stars, but in ourselves.
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