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14 Feb 19

Is blended finance the answer to the humanitarian financing gap?

Is blended finance the answer to the humanitarian financing gap?

A central topic at this year’s World Economic Forum in Davos was the future of humanitarian assistance; specifically, the need for longer-term and more scalable action. More than 136 million people are affected by humanitarian crises and up to two-thirds of the world’s poor are predicted to be living in conflict-affected countries by 2030. People living in conflict-affected settings are particularly vulnerable to a host of development challenges including poverty, food insecurity, and violence. With the costs of humanitarian assistance predicted to rise to $50 billion per year by 2030, the need for additional sources of capital is growing rapidly.

Humanitarian financing Source: OCHA/ Global Humanitarian Overview 2018

In response, there has been a collective call for greater innovation in the financing and delivery of humanitarian assistance. Innovative financing for development has gained significant momentum over the last several years – so it is a natural extension to consider its potential to address the humanitarian financing gap. It’s important to clarify that humanitarian finance and development finance are distinct; humanitarian assistance aims to alleviate suffering in crisis situations whereas development finance supports social and economic development to reduce poverty and inequality.

The call for innovative financing is compounded by a changing landscape. The complexity of today’s humanitarian crises demands more nuanced approaches and long-term commitments. The ICRC reports the average length of time it has been present in the countries hosting its ten largest operations is more than 36 years. While traditional humanitarian assistance will and should continue to be the dominant form of funding for acute crises, there is simply insufficient resources to meet the needs of short-, medium-, and long-term humanitarian assistance.

Humanitarian finance: No one size fits all solutions

Blended finance has been raised as one potential mode of innovative humanitarian financing. By allocating the risks and returns among public, philanthropic, and private organizations, blended finance mobilizes more financing to relevant projects. However, there have only been a few blended finance solutions focused on humanitarian assistance (and disaster relief) to date.

The majority of these blended finance solutions have focused on disaster risk insurance, which can reduce the need for emergency humanitarian relief by providing a predictable flow of financing following a catastrophic event, such as an extreme weather event or an epidemic. For example, the Africa and Asian Resilience Disaster Insurance Scheme (ARDIS) is a climate insurance programme that aims to help smallholder farmers – especially women – and their families recover after a disaster (i.e., drought) by providing access to small loans on special terms. ARDIS is co-funded by UK’s Department for International Development (DFID), the Rockefeller Foundation, and FMO.

Another example is the African Risk Capacity (ARC), which blends grant-funded early warning and contingency planning with a subsidized insurance mechanism to provide liquidity to governments after a catastrophic weather event. While both ARDIS and ARC have unlocked timely financing for climate-related crisis, these vehicles focus primarily on improving the efficiency of humanitarian relief rather than mobilizing additional private sector capital.

Development impact bonds are another blended finance solution that could be employed to address humanitarian financing. Convergence is currently supporting Kois Invest and the International Committee of the Red Cross (ICRC) to conduct a feasibility study for a development impact bond that would provide skills training and entrepreneurship support to 12,000 Syrian refugees in Jordan and Lebanon. This impact bond would leverage upfront funding from socially-motivated investors, who would then be repaid by outcome funders based on the achievement of certain results. However, while impact bonds have garnered a lot of interest in recent years, they are arguably “costly, cumbersome—and good”, and have not yet demonstrated the potential to mobilize additional sources of capital at scale.

A square peg in a round hole?

There are a number of potential stumbling blocks for the use of blended finance to fill the humanitarian financing gap. In terms of risk, countries affected by humanitarian crises suffer from a weak enabling environment and lack the underlying economic opportunities to provide investable returns. Mobilizing private sector investment through blended finance requires (i) underlying activities that generate cashflows and (ii) risk and returns that are comparable to the alternative traditional investment opportunities.

Official development assistance (ODA), international philanthropy, and even remittances remain critical sources of financing for humanitarian relief. Blended finance may be able to play a small role in the humanitarian financing landscape – but only for specific initiatives that are aligned to private sector investment (e.g., financial inclusion for refugees). However, the unfortunate long-term nature of humanitarian crises could open up additional opportunities for blended finance. In times of protracted crises, longer-term financing initiatives, particularly those aimed at economic resilience, are needed. In the short-term, it may be most worthwhile to focus on deploying blended finance in areas where concessional funding can be most catalytic.

By Justice Johnston, former Manager at Convergence