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Theo worked with Owen Barder and the CGD Europe team. His work focuses on finance for development, with an emphasis on novel contracts and financing structures that enable development actors to deliver social returns by collaborating effectively with the private sector. Theo grew up in India and Ethiopia and has a Bachelor’s in economics, finance, and politics and an MSc and PhD in economics. During his PhD, he was an Overseas Development Institute (ODI) Fellow in the Pacific, where he worked as an economist for the Government of Vanuatu. Before joining CGD, he worked at the Ministry of Planning and Investment in Hanoi.
What do you picture when you hear ‘humanitarian aid’?
Most of us imagine temporary shelter to help people get back on their feet after a natural disaster, or food supplies and clothing to help refugees for a few weeks after they’ve fled a conflict. Those images are increasingly out of touch with what’s happening on the ground.
Emergencies are more protracted: a girl born in Kenya’s Dadaab refugee camp the year it was founded would be well over 20 years old today and could still be living there. Last year, two-thirds of official humanitarian assistance went to long-term recipients. That’s putting humanitarian budgets under strain. According to the UN, the number of people in need of help has doubled in the last decade; humanitarian aid grew by less than half.
There’s a growing consensus that humanitarian cash transfers can help to bridge the widening gap between needs and resources, empowering people affected by disaster and using local markets to deliver the goods and services we previously thought only aid agencies could provide.
What we know about humanitarian cash transfers
The Cash Atlas, a platform to help track how and where cash transfers are being deployed, can add some context to our understanding of the current state of cash transfers. The data are self-reported by agencies and so not a comprehensive record. Nevertheless, focusing on the years 2005 to 2014, the Cash Atlas includes nearly 800 programs implemented by 49 different organisations.
We combine information about transfers with financing data from OCHA’s financial tracking service, convert figures to today’s prices, and allocate budgets equally over each project’s duration to estimate spending per year. The resulting data represents $2.8 billion worth of cash transfer programming. (Click here to download the data appendix, .do file, and a note on methodology).
What did we learn?
1. Humanitarian needs are outstripping funding
Humanitarian agencies set out the financing they need to tackle crises using the humanitarian programme cycle (previously called the consolidated appeals process). Adding what agencies asserted they needed and comparing it to what donors funded paints a stark picture of a growing deficit between needs and resources. (Click off ‘Funding’ and ‘Requirements’ to zoom in on this growing shortfall).
It’s plausible that agencies overstate their needs. But with a deficit of over $7.3 billion last year, dissembling by humanitarians, if present, probably isn’t the main story.
2. Agencies are scaling up ‘cash-type’ transfers, but most come with conditions
Cash transfers are the Rorschach test of humanitarian aid— agencies see what they want in it. It can mean putting $60 a month on a debit card so that a family can decide what to buy (and where to get it cheaply), but is also used to describe everything from vouchers for work to cash for training.
We translate the Cash Atlas’ tags into something more intuitive by calling a transfer conditional if it requires the recipient to do something (‘cash for training’, ‘cash for work’, and ‘conditional grants’), unconditional if it’s described as such (‘unconditional grant’), and a voucher if people can only spend it in specific ways (‘vouchers’, or ‘vouchers for work’).
Breaking the data down like this shows that organisations have mainly used programs that come with strings attached for beneficiaries. However, this buries an interesting lead: unconditional transfers are growing quickly, reaching about one-fifth of the total estimated budget for cash programs last year.
3. Cash is still a tiny share of humanitarian aid
What does this rise in cash programming look like in context? A reasonable comparator is how much donors spend on humanitarian aid more broadly (appeals, together with various kinds of emergency funding and bilateral aid).
OCHA’s data indicate that donors spent $23 billion on humanitarian aid last year. On a purely fiscal basis, then, cash-type interventions remain the unloved country cousins of humanitarian response, accounting for less than $1 billion of this. (Zoom in by clicking on the legend to see how cash programming has grown over time but remains a very small share humanitarian spending).
4. Most programs haven’t been (only) about transferring cash.
Our data show very few examples of ‘pure form’ programs: a budget line that only pays for beneficiaries to receive modest payments and lets them decide how to spend them. Leaving out reports that don’t flag which of these types of budget it was or which ‘modality’ was used leaves 368 programs. Of these, just 22 — less than six in every hundred — fit this description.
Type of transferUnconditional ConditionalVoucherType of programCash only225154Cash / in-kind889657
A more inclusive definition could include programs that gave unconditional grants irrespective of whether their budgets included in-kind aid. That brings the total up to 110, just under one-third of the total.
5. Most budgets haven’t been (only) about transferring cash.
A head count of programs based only on whether they include in-kind aid is instructive, but isn’t weighted by how much agencies actually spend. It might be, for example, that a small number of unrestricted transfers actually represents a very large share of humanitarian cash programming.
The 368 programs about which we know both the type of budget and how the cash transfer was made represent $750 million (of the $2.8 billion) worth of programs included in the Cash Atlas. Of this, less than 5 percent, nearly $37 million, is for ‘cash only’ programs that delivered unconditional transfers.
However restrictive the definition, and regardless of whether we’re looking at the number of programs or weighting them by spending on each, it seems that agencies haven’t comprehensively moved to large-scale, unconditional programs, or separated those programs from traditional, in-kind aid.
6. Most beneficiaries don’t (only) experience cash.
Though it’s easy to focus on top-line budgets, what ultimately matters is the number of people a program benefits. Combining information about the total budgets with the number of ‘beneficiaries’ that agencies purport to reach picks up some interesting trends.
Most importantly, this shows that larger budgets aren’t coupled to coverage. The size of the spheres indicates that voucher-based programs reach the most people, but have consistently received a smaller share of total budgets. Similarly, in the last few years fewer people benefited from conditional than unconditional programs (1.48 million vs. 1.54 million), but the graph shows that conditional transfers had larger budgets: $234 million more in 2014.
What we don’t know, but should
7. Budgets per person vary a lot, and we don’t really know what that means.
Comparing budgets to the number of beneficiaries begs the question of what this looks like on a per-person basis. Since our data are in current (2015) terms, we get a ‘budget per capita’ by adding up cash programming budgets over the last decade and dividing by the number of beneficiaries that aid agencies report assisting.
The concept of ‘budgets per capita’ highlights a fundamental gap in what we know about HCTs.
People who are skeptical about ‘cash for training’ can point out how expensive those programs are. But organizations delivering training programs might point to the same number and argue that, no, this actually shows much value they transfer to beneficiaries. In short, budgets aren’t the same as costs. If these different modes of transfer cost the same to make, ‘cash for training’ might well pass on the most to those we’re focused on helping.
But even if we took these numbers at face value, and even if we assumed (without basis) that they cost the same, we still couldn’t make a value judgment about what donors should focus on. Transferring $60 dollars to a family, for example, might help them get what they most need by making tough choices between heating, school fees, or clothing. That could ultimately be much more ‘valuable’ than other interventions that cost as much, or much more
* * *
CGD has been working with the Overseas Development Institute to look into humanitarian cash transfers, supporting a High-Level Panel on Humanitarian Cash Transfers chaired by my colleague Owen Barder. The panel will launch its report on September 14. Its findings reflect decades of hard-won, front-line experience, opportunities arising from new ways to transfer money safely and securely, and insights from a fast-growing evidence base.
Data-driven initiatives like the Cash Atlas are an important start to understanding the role that HCTs can play. But we won’t be able to get a fix on the value added by different kinds of aid without better information, not only about budgets but also on costs and, more importantly, what those we have a duty to assist actually need, want, and can use.
This, ultimately, is why the high-level panel has been convened: to help us weigh the evidence that we have on cash transfers, and to chart a path forward for humanitarian aid that strikes an informed balance between the thorny yet critical issues of cost, value, and growing need.
On Monday, Grant Shapps, the UK's Minister of State at the Department for International Development, kicked off DFID’s Energy Africa campaign at an event hosted by the Shell Foundation designed to help his team figure out how the UK government can invest its political clout and an initial £30 million ($46 million) to tackle rural energy poverty in Africa.
Energy Africa’s inspiration came from the Minister’s trip to Tanzania. There he saw a range of off-grid small-scale solar panels targeted at poor homes like ones set up by Off Grid Electric, a slick social enterprise delivering basic energy access — enough to power LED lights and a phone charger — to poor homes with rooftop solar panels and pre-paid metering. Minister Shapps wants solar power to be a big part of how we get energy access to “millions” of homes.
As my colleagues Todd Moss and Madeleine Gleave eloquently argue in seven persuasive infographics, we know that small-scale solar might meet a few basic needs but won’t catalyse economic growth. And there’s an inglorious history of private interests capturing our aid budgets to secure subsidies.
Given solar’s limitations and these risks, how can we make sure that Energy Africa fulfils Minister Shapps’s ambitious brief?
Three fast facts
Small-scale, off-grid solar is actually pretty expensive
The numbers for the Off Grid Electric installation that impressed Minister Shapps tell an interesting story.
A day’s access to OGE’s most basic service costs $0.19. This beats the $0.25 a day poor Tanzanian homes spend on kerosene (other sources put this at about $0.16 a day), but if all a household does is run a couple of lights and charge a phone, small-scale solar power is actually more expensive than electricity from Tanzania’s grid . Many communities simply can’t access that grid because of obscenely high connection charges. In some places, then, the catalytic investments are “under the grid”, connecting communities to modern levels of energy access. And off-grid solutions do not scale up — better energy access creates wealth, and wealthier people need better energy access.
Small-scale solar works for small-scale problems
About 600 million Africans are energy poor– a stranglehold on development. Poor homes, for example, rely on biomass (coal, dung, or wood) for cooking. The WHO estimates that exposure to the resulting smoke causes 4.3 million premature deaths a year in developing countries — more than malaria, TB, or HIV/AIDS. Replacing these cooking technologies would be a public health victory, but a simple electric stovetop usesover 500 kWh a year for a household cooking twice a day, which is far out of household solar’s range. Other transformational interventions suffer under the same constraint: for example,60% of refrigerators used in African health clinics suffer from unreliable electricity connections, breaking the cold chains that keep vaccines safe and effective.
Building a modern economy means building modern levels of energy access
Energy poverty chokes off whole economies because businesses struggle to grow when they can’t get access to reliable, reasonably-priced electricity. According to CGD’s analysis of the World Bank’s enterprise surveys, energy access is amongst the most serious problems facing developing Africa’s private sector, where firms estimate that losses from outages alone eat up 10% of their sales. As Aleem Walji of the World Bank put it: "Today, countries like Uganda are still 90% unserved by electricity. Can you imagine not having power in 90% of any country and still trying to grow the economy?"
A bad idea
With £30 million of funding on the table and an impressive guest list that was heavy on impact investors like Sunfunder and innovators looking to expand access to their products, it’s little surprise that the most popular breakout session during Monday’s event was the one on financing.
Many of the smart ideas in the room came down to directly supporting businesses. For example, DFID could use the money to lend to firms, guarantee their debt, help them manage local currency risks, or invest directly.
Though this makes for a compelling narrative, spending aid money directly on firms is risky. If we try to spend £30 million across a landscape of “innovative” financial instruments, we’ll be left with a mishmash of small-scale equity stakes and various loans or contracts to reduce risks, ultimately giving a vanishingly small leg up to a small coterie of (handpicked) favourites. Worse yet, issuing loans or making investments means picking winners. One of the toughest lessons from the aid industry’s love affair with microcredit has been that handpicking firms for our attention and resources risks creating flabby incumbents that stifle competition — not so much the healthy commercial ecosystem that Minster Shapps envisages as a toxic monoculture.
We can look at the paucity of early-stage financing for solar energy start-ups in frontier markets and believe that either (a) other investors have gotten it wrong, or (b) that the risk-adjusted returns are too low . It’s unlikely that DFID will find deals that investors, including impact funds and philanthropies willing to suffer low returns, have ignored. And it's not surprising that investors and innovators would tell us that it’s a great idea for us to use taxpayers’ money to do exactly that.
One way forward…
Let’s agree that small-scale, off-grid solar is just a small part of the energy poverty puzzle. And let’s agree that it’s a band-aid-not-a-cure that belongs in communities that are the least likely access the grid any time soon. How could we spend £30 million in a way that builds, rather than distorts, this market?
For many rural solar firms, a key problem seems to be access to the working capital to scale up, pay suppliers, or invest in new products. For low-income consumers, the problem is the fixed cost: solar panel prices have tumbled, but the upfront and installation costs of a setup like the one in Tanzania are still too high.
Some firms have responded by opting for a pay-as-you-go business model, installing panels at a loss and recouping their costs (and generating a profit) by selling daily access to the electricity they produce. This effectively turns firms like Off Grid Electric into creditors with sidelines in solar hardware. But though demand is high, it takes operators a long time to turn these tiny cash flows into sizable chunks of retained earnings they can use to, for example, expand into new markets.
What could DFID do? It could use its financial clout to bring this financing forward, capitalising a small fund dedicated to buying packages of a share of future payments from firms supplying customers in specific markets. This gives rural solar providers working capital today in exchange for payments over time. This is hardly original: it’s basically how our mortgages work, and has been used successfully to finance firms like SolarCity in the US.
Set out like this, the small cash flows are a feature, not a bug: even a £10 million fund could buy many more of those receivables, spreading our impact much farther. By only buying a share of the receivables from each firm for given market, DFID doesn’t accept all of the risk, keeping private firms’ shoulders to the wheel to pick good projects in areas with healthy, long term consumer demand — precisely the places the grid is least likely to be viable soon and so where solar solutions are most needed.
Most importantly, the offer could be made open to any solar operator that passes a minimum hurdle for accounting and labour standards, obviating a need to pick winners.
* * *
It’s tempting to think that putting solar panels in the hands of poor consumers will deliver fast gains in welfare and prosperity. In reality, we can’t leapfrog the dull but important longer-term infrastructure investments in better, more reliable, cheaper, and cleaner utility-scale grid connections like those that Power Africa is building out.
Minister Shapps brings impressive momentum and enthusiasm to the Energy Africa campaign. More than once during Monday’s event, attendees like Christine Eibs-Singer who have worked on rural electrification for decades said how exciting it is to get buy-in from someone of his stature. Energy Africa’s ambition should be lauded. The challenge is to harness this momentum, our aid financing, and the Minister’s political insight to scale up rural solar in places that the grid cannot reach without distorting the market or subsidizing inefficient incumbents.
The Center for Global Development in Europe has moved, here:
Ali, Theo, Matt and Petra arriving for work. Photo: Alex Cobham.
Many of you will recognize this iconic London landmark, Somerset House, which nicely positions us somewhere between the London School of Economics and Whitehall.
Somerset House was built in 1776, so it is exactly as old as the United States. It has been in continuous use ever since, including for many years by the Admiralty – in other words, it was the headquarters of the British Empire. It is now managed by a charitable trust that has injected new life into the space by developing it into a hub for small companies, start-ups, events and - as of this week - the CGD Europe team. We are hotdesking here temporarily while we finalize a more permanent new home.
We are immensely grateful to the Bill & Melinda Gates Foundation who have hosted us for more than a year, and wish them luck with their own office move in the coming days. During what we hope will be a long, hot summer in London, we look forward to seeing many of our partners at Somerset House, whether its for a coffee in the courtyard, or on the terrace overlooking the Thames, or to hash out the next great idea in one of our new meeting rooms.
Our fragile egos notwithstanding, one of the privileges of working at CGD is learning from our mistakes. We dug into some humble pie last week when Megan Rapp, Africa regional team lead for the Development Credit Authority, set the record straight about a USAID-backed credit guarantee.
We argued in a recent paper that guarantees always have some expected cost, and that expected cost could be spent more effectively if we linked the subsidy to success rather than failure.
We pointed to a USAID-backed guarantee in Kenya as an illustration. The guarantee covers loans made by Kenya Commercial Bank to clinics to buy new medical equipment exported by GE (things like MRI machines are pricey, so it makes sense to get a loan to buy them).
We said two things about it.
Guarantees are financial seatbelts that protect the holder from the costs of getting things wrong. And just as seatbelts tend to cause riskier driving, Kenya Commercial Bank makes loans to riskier clients because USAID’s guarantee offsets those risks.
It’s difficult to “see” this because we can’t compare a lender’s book with loans it would have made without the guarantee: we don’t have a control group or counterfactual. When we do, like in a nice paper using data from German banks, we see that guarantees induce worse lending to riskier clients.
In this Kenyan case, it looked as if USAID was paying for a guarantee so that Kenyan clinics could buy American exports. That would effectively have been a form of tied aid, since American taxpayers would have been subsidising exports from a US firm.
Megan rightly flagged that we got this second part wrong. In fact, this deal was one of a handful in DCA’s portfolio in which the firm itself transfers money to the Treasury — GE, rather than taxpayers, is on the hook if loans go sour. We’ve edited the description of this guarantee in our paper and added a footnote to explain the change.
More generally, Megan pointed out, DCA’s $4.3 billion portfolio is distinct in America’s aid ecosystem. It uses guarantees to pursue development outcomes, rather than support US exports (like ExIm) or American-owned firms (like OPIC, which can only work with companies that are at least one-fourth US-owned).
Along with its unique mandate, DCA practices good fiscal policy by lodging capital against potential losses. We think this is good: as we say in our paper, in the absence of this kind of accounting, guarantees can become a way for policymakers to spend freely and kick the fiscal can down the road.
How much to provision against losses is a tough question: DCA’s argued that they’re required to use an overly conservative model of potential losses, having historically locked away 10 times what’s been called in defaults. Of course, this could also be symptomatic of partnering with local lenders who skim cream by only lending to the very best clients, or of DCA or USAID being overly conservative in setting their target populations. Or it might be that widespread defaults are relatively rare, but expensive when they happen, and they are rightly priced but haven’t yet occurred. In any case, making guarantees reflect the expected cost to the taxpayer, and budgeting for them appropriately, at the time they are issued is smart public policy that should be widely adopted.
Not tied but “tied”?
This is a relatively novel deal, moving GE financing through USAID’s pipes to facilitate targeted lending in Kenya. It’s attractive because it fulfills DCA’s mission without locking away financing. In an era of stretched budgets, this model might become much more popular.
Yet it’s important that we remember that financing isn’t the only scarce resource — bureaucratic bandwidth is finite. If DCA were to greatly increase guarantees backed by firms to support their own exports, it would tilt the organisation’s portfolio towards export promotion, rather than its mandate of expanding access to credit for development impact. To the extent those exports were from American firms, the realignment would recreate some of development finance’s bad old days.
In reality, of course, we’re a long way away from that. This was an interesting pilot for DCA that should be written up and learnt from, not the organisation’s new normal. (Of course, many other governments do use development finance to support their own exports, including through export credits and guarantees).
As development agencies tackle the new agenda of working with firms to deliver on the ambitious Sustainable Development Goals, however, we should keep in mind that the risks of capture, distortion, or crowding out also apply to the agencies themselves.
Financing for humanitarian aid is broken. The costs of rapid- (like cyclones) and slow- (like drought) onset disasters are concentrated in poor, vulnerable countries, with a bill to donors of more than $19 billion last year. But far too often, we wait until crises develop before funding the response—what experts at CGD’s recent panel event (recording available at the link) described as a medieval approach of passing around begging bowls and relying on benefactors. The delays make crises worse. And since money shows up, however imperfectly, when things go wrong, it undermines incentives to build resilience, relegating vulnerable people to depending on fickle goodwill.
Our panel brought together three experts to discuss why emergency aid is failing, and how we can do better. Rajesh Mirchandani and I were joined by Stefan Dercon and Daniel Clarke, respectively the chief economist of DFID and a senior financial sector specialist at the World Bank, and Lena Heron, a senior rural development advisor at USAID. Clarke and Dercon are co-authors of Dull Disasters? How Planning Ahead Will Make a Difference, a remarkable new book (they coined the ‘begging bowls and benefactors’ phrase) setting out how the global public sector can respond better to perils by shifting from aid thinking to insurance thinking—not so much seeing like a state as seeing like State Farm.
Fix the financing, fix the response: Somalia vs. Ethiopia
What are the costs of the old way of doing business? Given Dercon, Clarke and Heron’s experience working in sub-Saharan Africa, it’s no surprise that examples of drought and famine came up. One teeth-grinding example amongst many is a recent famine in Somalia: “Between August 2010 and the declaration [of famine], the Famine Early Warning Systems Network...produced 78 bulletins and undertook over 50 briefings to agencies and donors.” We saw the crisis coming but wasted precious months, a delay that contributed to the onset of a famine which ultimately killed “...tens of thousands of people, most of them children.” What’s the point of an early warning system if we ignore the warning?
This year’s drought in nearby Ethiopia hints at what a better future could look like. Rather than waiting for donors to pay into a response fund, the Ethiopian government tackled growing hunger due to crop failures by ramping up food aid and cash transfers to vulnerable homes through its productive safety net programme. But the authorities could only do this because the price of oil had slipped to an unexpected six-year low, freeing up cash from a national fund earmarked to stabilise local oil prices (recently supplemented with a $100 million World Bank loan). Insurance thinking makes windfalls like this predictable.
Insurance thinking to save lives
Donors do their best—for example, USAID has introduced crisis modifiers, which allow programmes to get more funding or redirect existing funding in response to conditions on the ground. But aid thinking can still fail to get money in place, in time. And since money arrives when the situation is most dire, it undermines incentives to do better. Clarke and Dercon argue that to insure ourselves—either by using actual insurance contracts or, more simply, rules governing when we can spend savings—we need to understand the risks we face, put a price on them, and set out who does what when the insurance pays out.
And as Heron pointed out, considering these costs also prompts us to invest more in resilience, generating a healthy development dividend: for example, insurance can catalyse investments in things like drought-resistant crop varieties because it raises the returns to lowering future costs (“My insurance is cheaper when I need less cover”). And safety nets like Ethiopia’s are also an entry point for development programmes, potentially improving financial access, and gradually scaling up from the poorest and most vulnerable people to better-off but still vulnerable, rural homes.
New CGD Working Group on Scaling Disaster Insurance Up & Across
CGD’s newest work programme is focused on delivering some of these wins. Our Payouts for Perils working group brings together senior figures from the global insurance sector, humanitarian agencies, governments in frontline countries, and donors. The exam question is simple: programmes that help governments insure themselves in the Pacific (PCRAFI), the Caribbean (CCRIF), and sub-Saharan Africa (ARC) all demonstrate that insurance thinking lowers the costs of disasters by getting the financing right. It also pays off: for example, a recent evaluation of Mexico’s federal disaster insurance programme finds that local GDP is 2-4 percent higher in areas covered by post-disaster payouts. So how can we take advantage of new tools—like parametric insurance contracts—to scale these successes up and across, making them available to many more governments and many more frontline agencies?
The shift to insurance thinking won’t be frictionless. As Dercon pointed out, it requires governments and donors to acknowledge the risks that they implicitly carry, and be willing to cover them. That may be uncomfortable for donors accustomed to the freedom of choosing what to fund, and when.
But we all agreed that donors and vulnerable governments are already spending billions tackling these risks. The challenge, then, is how we can use more of this financing to prepare ahead of time, not merely react. Dull Disasters teaches us that we can’t eliminate these risks—but planning ahead and knowing that we can pay for them will make these perils far less deadly.
The roundtable event, to be held in Brussels, Belgium, and organised by ECDPM with the Center for Global Development in Europe, will bring together analysts, development finance practitioners, stakeholders from a spectrum of development finance institutions, and policymakers with a durable public and private finance experience for a series of brief, focused presentations and a constructive, curated discussion.