Multilateral organisations rely on the financial contributions of their members, shareholders and other stakeholders to function and carry out their operations. The volume and quality of funding they receive have crucial implications for their capacity to deliver. This chapter presents four key trends in recent funding to the multilateral development system. It also proposes an analytical framework to map the broader implications of the individual funding decisions made by Development Assistance Committee (DAC) members and other multilateral stakeholders. The DAC, whose members remain the largest shareholders and funders of the multilateral development system, retains a central role in multilateral development finance. It needs to make strategic and effective use of its multilateral contributions. The chapter analyses official providers’ multilateral portfolio strategies, and explores how the funding base of multilateral organisations can affect their independence and the sustainability of their programmes.
Multilateral Development Finance 2020
Abstract
Multilateral contributions from Development Assistance Committee (DAC) and other official providers amounted to USD 71.9 billion in 2018, representing 38% of gross official development assistance (ODA). This represents a 3% increase in real terms over 2017 and a 32.4% increase over the period 2011-2018 (Figure 2.1). DAC members’ funding to multilateral organisations amounted to USD 69 billion in 2018 (Figure 2.1, left-hand graph). The 2018 increase was largely driven by rising contributions from some of the largest donors to the multilateral system, such as France (10.7%), the United Kingdom (1.5%), and Germany (0.8%). The increase in their multilateral contributions was strong enough to offset the decline in the contributions of 11 other DAC countries since 2017.
Note: Core contributions are funds added to multilateral organisations’ general budgets, while earmarked contributions are tied to projects for specific regions, countries, themes or sectors.
Source: Authors’ calculations based on (OECD, 2020[1]), “Creditor Reporting System”, https://stats.oecd.org/Index.aspx?DataSetCode=crs1.
The multilateral development system is gaining in importance as a channel of official development assistance. Funding to the multilateral system has followed a steady upwards trend since 2012, with the exception of a brief slowdown between 2014 and 2015. In 2016, the year the 2030 Agenda, the Addis Ababa Action Agenda (AAAA) and the Paris Agreement came into effect, inflows to the multilateral development system grew by 16% (from USD 59.7 billion to USD 69.3 billion). In 2018, the sustained rise of multilateral ODA contrasted with a slight, yet tangible, decrease in bilateral ODA.1 As a consequence, multilateral ODA accounts for a growing share of development co-operation: while the share of total ODA channelled through multilateral organisations amounted to less than 34% in 2008, it had risen to 38% in 2018. In the case of DAC members specifically, multilateral contributions accounted for 42% of their development co-operation in 2018 (Figure 2.1, right-hand graph).
Funding earmarked through the multilateral system seems to have grown at the expense of pure bilateral ODA. Between 2011 and 2018, the share of earmarked funding to multilateral organisations in DAC members’ total ODA rose from just 11% to 15%, while the share of bilateral ODA receded from 62% to 58% over the same period (Figure 2.1, right-hand graph). The share of core contributions, on the other hand, remained stable, at around 27%. This suggests that DAC members’ earmarked funding may not be at the expense of core contributions to the multilateral development system, and instead may be additional funding used by DAC members to substitute bilateral aid in areas where multilateral aid can have more impact (e.g. humanitarian response).
The United Nations and the World Bank Group are the two main pillars of the multilateral development system, receiving more than three-quarters of multilateral funding. In 2018, they received respectively 49.5% and 28.3% of total funding to multilateral development organisations (Figure 2.2). The various entities that make up the United Nations Development System have experienced a steady increase of multilateral funding contributions since 2012: this is likely driven by their role in addressing recent humanitarian crises, such as the Syrian civil war and the recent refugee crises. Funding to the World Bank Group (WBG), which had been stable since 2012, saw an increase in 2018, due in part to the 2018 International Bank for Reconstruction and Development (IBRD) capital increase.2 Although they still receive a large share of the funding to the multilateral system, these institutions are increasingly competing for resources with other types of entities.
Regional development banks and vertical funds are slowly gaining ground in the multilateral development finance landscape. Funding to regional development banks grew by 12.2% between 2011 and 2018 (from USD 4.3 billion to USD 6.4 billion), driven by increased contributions to the concessional lending arms of the African Development Bank and Asian Development Bank (the African Development Fund and the Asian Development Fund), and the capital subscriptions to the new Asian Infrastructure Investment Bank (AIIB). Despite the predominant position of the UN and multilateral development banks, vertical funds have also experienced a considerable rise in their volume of funding in recent years, securing an important role in the multilateral development finance space. Between 2012 and 2017, the growth of multilateral contributions to vertical funds was mainly driven by additional funding provided to health and climate-related organisations, such as the Global Fund to Fight AIDS, Tuberculosis and Malaria, the Vaccine Alliance (Gavi), and the recently created Green Climate Fund (GCF).
Note: Core contributions are funds added to multilateral organisations’ general budgets, while earmarked contributions are tied to projects for specific regions, countries, themes or sectors. UN F&P: United Nations Funds and Programmes; WBG: World Bank Group; MDBs: multilateral development banks.
Source: Authors’ calculations based on (OECD, 2020[1]), “Creditor Reporting System”, https://stats.oecd.org/Index.aspx?DataSetCode=crs1,
DAC providers are still the majority shareholders of the multilateral development system. In 2018, DAC donors’ contributions made up more than three-quarters of total multilateral funding to the UN Development System. In addition, the share of their core contributions (assessed and voluntary) was considerably higher than that of non-DAC donors, making DAC members a reliable funding source for UN entities.
Although DAC donors retain a central role, emerging economies are becoming increasingly important funders of the multilateral development finance system. This is most apparent in the declining share of DAC funding to the UN system, which decreased from 78% to 71% between 2008 and 2017, despite a rebound to 76% in 2018. Growing contributions from the BRICS to the UN system, coupled with their establishment of new multilateral organisations of which they are main shareholders, such as the AIIB and the New Development Bank, attest to their rise in influence. Their share of total multilateral contributions to the UN system, while still relatively low at around 4% in 2018, has increased steadily over the past decade (Figure 2.3).
Volume and share of DAC and non-DAC multilateral contributions to the UNDS, 2008-2017 (USD million, 2018 prices)
Source: Authors’ calculations based on (UNDESA, 2018[2]), unpublished dataset provided by the United Nations Department of Economic and Social Affairs (UNDESA).
Philanthropic foundations and other private actors represent a sizeable source of multilateral finance in some sectors. Despite the record-setting contributions of DAC donors to the multilateral system in 2018, multilateral organisations are gradually broadening their donor base beyond sovereign states, towards the private sector and philanthropic funding (Graham, 2017[3]). The increasing involvement of non-state actors in funding the multilateral system gives these emerging stakeholders influence in multilateral organisations’ priorities. Although the level of funding from non-state actors varies across multilateral organisations, the weight of private funders is generally increasing. In aggregate, private actors provided USD 1.97 billion in contributions to the UN system in 2018 (nearly 6% of total contributions to the UN), making them the sixth overall contributor to UN entities (Figure 2.4).
Top 25 contributors to the United Nations Development System in 2018
Note: Disbursements in USD billion, 2018 prices.
Source: Authors’ calculations based on (UNDESA, 2018[2]), unpublished dataset provided by the United Nations Department of Economic and Social Affairs.
Both core and earmarked contributions to the multilateral system have increased over the 2011-2018 period. Core contributions rose from USD 37.9 billion to USD 46.4 billion, while earmarked contributions grew from USD 16.4 billion to USD 25.5 billion over the same period. However, the analysis reveals that earmarked funding has been growing at a faster pace (+7.8%) than multilateral core contributions (+3.8%), and now represents 35% of multilateral contributions (up from 30% in 2011).
The growth of multilateral funding is primarily driven by the rise of earmarked aid channelled through the multilateral system. Although historical data on earmarked flows are scarce, recent research suggests that earmarked aid has quadrupled since the early 2000s (Eichenauer and Reinsberg, 2017[4]). In parallel, multilateral organisations have witnessed a surge in the number of trust funds created to channel and manage the rising flows of earmarked funding: the World Bank is a textbook case, seeing the number of active trust funds it manages skyrocket to reach more than 1 000 by the early 2010s (OECD, 2015[5]; Reinsberg, 2017[6]).3 However, similar trends can be observed for other multilateral organisations.
The rise of earmarked contributions spurs concerns over a growing “bilateralisation” of multilateral aid. Several studies have pointed out that continued growth of earmarked aid could undermine multilateral effectiveness, especially if it is not accompanied by an increase in core resources. Possible negative implications mentioned in recent research include: (i) a mismatch between the allocation of earmarked flows and the strategic priorities of multilateral organisations (OECD, 2018[7]); (ii) the use of earmarked funding to steer multilateral programmes towards donors’ geopolitical interests – a trend labelled as “Trojan multilateralism” by Sridhar and Woods (2013[8]); (iii) reduced partner country ownership, in particular for non-country-specific earmarked funding (Reinsberg, 2017[9]); and (iv) lack of donor co-ordination and accountability (Weinlich et al., 2020[10]).
The rise of earmarking is mainly attributable to the spike in humanitarian interventions of the past decade. Humanitarian interventions account for a large share of the funding earmarked by DAC members through the multilateral development system. In 2018, humanitarian aid made up 44% of DAC members’ total earmarked funding, followed by social (17%) and governance interventions (13%). Taken together, these three sectors accounted for almost 75% of the earmarked contributions received by the multilateral development system in 2018. Figure 2.5 shows that earmarked funding for humanitarian purposes has accelerated since 2013, and peaked at USD 10.6 billion in 2017.
Evolution of earmarked contributions by sector
Note: Disbursements, in USD billion, 2018 prices.
Source: Authors’ calculations based on (OECD, 2020[1]), “Creditor Reporting System”, https://stats.oecd.org/Index.aspx?DataSetCode=crs1.
DAC members’ multilateral contributions are vital to the multilateral development system. They provide the financial resources necessary to allow multilateral organisations to function and to carry out their operational activities. Some multilateral organisations are also able to use the ODA received from their members and shareholders as a financial lever to raise additional resources. For example, multilateral development banks use their balance sheets for financial leverage.
The quantity and quality of DAC multilateral funding have strategic implications for the performance of the multilateral development system. The funding modalities used by multilateral donors affect the governance of multilateral organisations, influence their strategic priorities and their allocations of funds, and condition their operational capacities (Figure 2.6). This, in turn, has implications for the level of ambition and agility of the multilateral development system, and its ability to respond effectively to global development challenges. As the largest funders and shareholders of the multilateral development system, DAC members hold a responsibility to ensure the system is adequately equipped to deliver global development solutions. It is, therefore, necessary for DAC members to develop funding approaches that support the DAC’s collective vision, and expectations, of the multilateral development system. Figure 2.6 depicts the impact that some key parameters of multilateral ODA – the volume of funding and the relative level of core contributions – can have on the multilateral development system. While the characteristics of multilateral funding go well beyond these two parameters, this simple framework depicts the implications of DAC members’ funding decisions for the system.
Source: Authors’ design, adapted from (Grimm and Weinlich, 2020[11]), “Multilateralism without future – or the future of multilateralism?”, https://blogs.die-gdi.de/2020/01/08/multilateralism-without-future-or-the-future-of-multilateralism/.
The quadrant presents four possible funding models for the multilateral development system based on the two parameters mentioned above:
Quadrant 1: Deep multilateralism:
Funding characteristics: multilateral donors provide large volumes of funding to the multilateral development system, mostly as core contributions.
Implications: the multilateral development system has significant financial firepower to address global development challenges. Strategic decisions are taken based on consensus among members or shareholders in the governing boards of multilateral organisations, while multilateral organisations retain significant programmatic and operational control, and agility, in the design of their operations and the allocation of funds.
Quadrant 2 : Multilateralism “à la carte”:
Funding characteristics: multilateral donors provide large volumes of funding to the multilateral development system but earmark a large share of these contributions.
Implications: the multilateral development system has significant financial firepower to address global development challenges, but its shareholders retain significant control over the design of operations and the allocation of funds. This funding model could favour the formation of coalitions whereby donors pool resources with like-minded peers and channel them through the multilateral development system to address specific development challenges.
Quadrant 3: Basic multilateralism:
Funding characteristics: multilateral donors provide limited volumes of funding to the multilateral development system, mostly as core contributions.
Implications: the multilateral development system has limited financial firepower to respond to global development challenges. Decisions are taken by its members or shareholders based on consensus reflecting the least common denominator. This funding model entails a focus on a narrower set of strategic priorities that enjoy consensual support from the majority shareholders or funders of the multilateral development system.
Quadrant 4: Shallow multilateralism:
Funding characteristics: multilateral donors provide limited volumes of funding to the multilateral development system, with a relatively low share of core funding.
Implications: this limits the multilateral development system’s financial firepower to respond to global development challenges, and its shareholders earmark a relatively high share of their contributions to retain control over the design of operations and the allocation of funds. This results in a multilateral development system with minimal ability to contribute to global development challenges, and whose agenda is largely driven, and possibly influenced, by ad-hoc funding decisions by a few large donors.
Though the past two decades have seen a significant rise in the total volume of funding provided to multilateral organisations, the share of core funding has decreased. Between 2000 and 2018, multilateral funding more than doubled, from USD 33 billion to USD 71.9 billion. Due to the increased use of earmarking modalities, the share of earmarked (non-core) contributions in total multilateral ODA rose by 29 percentage points, from 6% to 35%.
The analysis suggests that the system is evolving towards an approach increasingly based on ad-hoc coalitions. The growing use of earmarked funding shows that multilateral donors are progressively forsaking the search for consensus, and increasingly choosing to join forces on an ad hoc basis with a narrower set of donors to address specific development challenges. Recent research points to the risk of seeing the emergence of a hollow and less inclusive multilateral development system, where decision making and accountability are transferred from the wider collective (e.g. governing boards) to contracting relationships between bilateral donors and multilateral agencies (Barder, Ritchie and Rogerson, 2019[12]).
This trend towards “à la carte” approaches largely reflects the growing divide among the main funders of the multilateral development system. As long as donors to the multilateral system share a common vision of the system, they are more inclined to provide core (unearmarked) contributions since they are confident that the strategic priorities of multilateral organisations reflect this broad consensus. Yet in recent years, the shareholders and funders of the multilateral development system have expressed increasingly diverging views on the roles, strategic priorities and performance of multilateral organisations.4 This is likely to influence their funding decisions and in particular their choice of funding modalities. This divergence may also in part explain the growing use of funding modalities that allow them to retain control over funding allocations (such as contributions tightly earmarked for specific projects or locations), thus bypassing the strategic directions set by the governing boards of multilateral organisations.
Yet the sustained rise of DAC members’ multilateral contributions attests to the continued relevance of multilateral organisations in the global development landscape. The volume of ODA that donors choose to provide to, or channel through, the multilateral development system is in part conditioned by their trust in the relevance and effectiveness of multilateral organisations. Donors are more likely to increase their funding to multilateral organisations if they consider that they deliver effectively and provide good value for money. Deeper multilateralism can therefore only be achieved if multilateral stakeholders trust in and share a common vision for the multilateral development system.5
Evolution of the funding received by the multilateral development system as share of core funding (vertical axis) and changes in multilateral contributions since 2000 (horizontal axis)
Note: The changes in the volume of multilateral contributions (horizontal axis) are calculated as a five-year moving average.
Source: Authors’ calculations based on 2000-2010 data from (Eichenauer and Reinsberg, 2017[4]), ”What determines earmarked funding to international development organizations? Evidence from the new multi-bi aid data”, https://www.ipz.uzh.ch/de/forschung/lehrstuehle/ep/research/internationaldevelopment/multi-bi-aid/data.html, and on 2011-2018 data from (OECD, 2020[1]), “Creditor Reporting System”, https://stats.oecd.org/Index.aspx?DataSetCode=crs1.
UN funds and programmes are high-profile institutions that tend to receive large volumes of multilateral ODA. For example, this is the case for the World Food Programme, which received contributions amounting to USD 10 795 million between 2017 and 2018, and to a lesser extent UNICEF (USD 7 057 million) and UNHCR (USD 6 310 million). However, these organisations receive a large part of their funding as earmarked contributions, providing them with little funding stability or flexibility, and limiting their control over the allocation of funds or the design of their operations, meaning they fall into the “à la carte” category (Figure 2.7 and Figure 2.8). Other UN entities (outside of the UN funds and programmes) present a more varied profile, both in terms of the volume and quality of their funding (Figure 2.8).
Owing to their particular business model, the concessional arms of multilateral development banks receive large volumes of funding, a significant share of which are core (unearmarked) contributions. The World Bank’s IDA, for instance, received a total of USD 18 296 million between 2017 and 2018, 99% of which was provided as core contributions. The concessional arms of the African Development Bank and the Asian Development Bank follow the same pattern: the African Development Fund (ADF) received USD 4 088 million in 2017-2018, of which 99% corresponded to core contributions, and the Asian Development Fund (AsDF) received USD 1 299 million and a similar share of core funding.
Vertical funds receive most of their funding as core contributions, but the amounts involved vary largely according to the profile of the organisation. For example, the Global Fund received USD 6 455 million over the period 2017-2018, compared to less than USD 208 million in the case of the Adaptation Fund. Although many vertical funds fall within the quadrant of “deep multilateralism”, these results should be interpreted with caution since core funding to vertical funds is sometimes viewed as an implicit way for development partners to earmark their multilateral contributions to specific development themes or challenges.
Share of core contributions in total multilateral funding (vertical axis) and 2017-2018 volume of multilateral funding, disbursements in USD million, 2018 prices (horizontal axis)
Note: The analysis excludes the non-concessional windows of multilateral development banks, as these entities finance a significant share of their operations from other sources of financing (e.g. by leveraging their balance sheets and borrowing from the international capital markets).
Source: Authors’ calculations based on (OECD, 2020[1]), “Creditor Reporting System”, https://stats.oecd.org/Index.aspx?DataSetCode=crs1.
Funding patterns depend largely on the mandate and governance structure of multilateral organisations. The funding model and governance of the multilateral development banks’ concessional windows (e.g. IDA, ADF and AsDF), for example, explains in large part their position in the quadrant: these entities are replenished on a multiannual basis following the negotiation of financing and policy packages that determine the volume of funding committed by their members and define a set of strategic priorities for the windows in a spirit of consensus. On the other hand, the fact that UN entities receive a relatively large share of their funding as earmarked contributions owes in part to their traditional role in crisis and emergency response, which by nature is more contingent and less predictable (even though the UN also makes available to development partners contingency funds accepting core funding to counter the growing use of earmarked funding).
In recent years, the growing concerns over the quality of donors’ contributions have prompted multilateral organisations to launch a set of institutional reforms. Most prominent among these initiatives is the UN Funding Compact launched by the United Nations Secretary General in 2019, and the World Bank Trust Fund reform, which is currently in its fourth phase (Box 2.1).
The UN Funding Compact is an initiative proposed in July 2017 by the UN Secretary-General, Mr Antonio Guterres, to address the deteriorating quality of the funding received by UN entities, and the growing fragmentation of the UN system. The Funding Compact is a pact between the UN Development System – UNDS – (also known as UN Sustainable Development Group) and its member states, whereby the latter commit to increasing the predictability and flexibility of their funding in return for increased transparency and accountability from UNDS entities on their spending and results.
More specifically, UN members commit to increase the share of their core contributions to at least 30% by 2023 and to double their contributions to interagency pooled funds (to a total of USD 3.4 billion) and entity-specific thematic funds (to USD 800 million) over the same period.
The UNDS, for its part, commits to provide annual reporting on system-wide results by 2021; to enhance the visibility of member states’ core contributions; to enhance the transparency of financial information for all entities; to undergo evaluations of results; to further harmonise cost recovery; and to allocate at least 15% of non-core resources for development joint activities.
As part of ongoing efforts to improve its business model and development impact, the World Bank Group (WBG) has engaged since 2001 in a series of reforms of its management of trust funds. These reforms aimed to respond to the rapid growth of the WBG trust fund portfolio in the early 2000s, which saw the number of active trust funds and financial intermediary funds (FIFs) skyrocket.
The first three phases of the reform process focused respectively on: strengthening financial controls and oversight (phase I: 2001-2007); mainstreaming trust funds in WBG processes and procedures (phase II: 2007-2013); and improving the strategic oversight and management of the entire trust fund life cycle (phase III: 2013-2017). In addition, the second and third phases also tried to reduce the inefficiencies caused by the proliferation of small trust funds by progressively raising the minimum threshold to establish new trust funds to USD 1 million first (phase II), and USD 2 million (phase III).
Phase IV of the trust funds reform process, which was launched in 2017 and is still ongoing, aims to align the World Bank Groups’ portfolio of trust fund and FIFs with the organisation’s priorities. It also aims to further reduce the fragmentation of its portfolio, which still counts a large number of small trust funds representing relatively small financial amounts: at the end of FY18, for example, 90% of WBG trust funds accounted for less than 26% of the organisation’s total portfolio value).
The current reforms revolve around three key pillars: (i) the creation of “Umbrella 2.0” Programs that can include multiple “associated” trust funds to reduce fragmentation; (ii) the strengthening of trust funds’ integration into World Bank strategy, planning and budgeting processes; and (iii) the implementation of efficiency measures to streamline internal processes for the management of trust funds.
Source: (UN, 2019[13]), “Funding Compact: Report of the Secretary-General”, https://www.un.org/ecosoc/sites/www.un.org.ecosoc/files/files/en/qcpr/SGR2019-Add%201%20-%20Funding%20Compact%20-%2018%20April%202019.pdf, and (World Bank Group, 2019[14]), “2018-2019 Trust Fund Annual Report: Value proposition of World Bank Group trust funds”, http://documents.worldbank.org/curated/en/461611570786898020/Trust-Fund-Annual-Report-for-2018-2019.
In 2018, the United Kingdom surpassed the United States as the largest donor to the multilateral development system in absolute terms, owing both to the growth of its multilateral contributions from USD 10.7 billion in 2017 to USD 10.9 billion in 2018 (+3.3%) and to the concurrent drop of US multilateral funding over the same period, from USD 11.4 billion to USD 10.2 billion (-11%). In comparison, the 2018 DAC average stood at USD 2.4 billion (+2% compared to 2017), and Iceland remained the smallest DAC multilateral donor, at USD 39 million (Figure 2.9).
Multilateral contributions of the eight largest funders of the multilateral development system (2011-2018)
Note: Note: Disbursements, in USD billion, 2018 prices.
Source: Authors’ calculations based on (OECD, 2020[1]), “Creditor Reporting System”, https://stats.oecd.org/Index.aspx?DataSetCode=crs1.
Large providers of multilateral aid tend to have large and diversified portfolios, reflecting their search for influence in the global development landscape. This is the case for the United Kingdom, the United States, Germany, France and Japan, for example. (Figure 2.10) shows the volume of DAC members’ multilateral ODA and the level of concentration of their multilateral portfolio, measured as a Herfindahl-Hirschman Index (HHI). The high level of diversification observed in the multilateral portfolios of the main ODA providers attests to their willingness to weigh in on a wide range of issues and development challenges in order to position themselves as major actors on the multilateral stage.
Small providers, on the other hand, present more diverse portfolio strategies. For small ODA providers, concentrated portfolios reduce the transaction costs involved in maintaining a large number of multilateral partnerships. This is the case for many small European countries, which tend to have highly concentrated portfolios as they channel a large share of their multilateral ODA through the European Union. Other small multilateral funders, however, choose to maintain diversified multilateral portfolios: for example, Denmark, Ireland, Finland, Korea, New Zealand and Switzerland all have portfolio concentration indices inferior to 10.
Concentration of DAC providers’ multilateral portfolio: scale from 0 (less concentrated) to 100 (most concentrated) and volume of multilateral contributions 2017-2018 (disbursements in USD million, 2018 prices)
Note: The concentration index (vertical axis) is calculated as a Herfindahl-Hirschman Index (HHI), a commonly accepted measure of market concentration. The index takes into consideration both (i) the number of multilateral organisations that each donor contributes to; and (ii) the relative weight of each organisation in its portfolio. Multilateral contributions (horizontal axis) include both core and earmarked funding.
Source: Authors’ calculations based on (OECD, 2020[1]), “Creditor Reporting System”, https://stats.oecd.org/Index.aspx?DataSetCode=crs1.
Multilateral contributions also reflect DAC providers’ varying levels of effort to support the multilateral development system. Considering DAC providers’ total support to the multilateral system in light of their share of the DAC gross national income (GNI) helps to distinguish countries that punch above their weight and those that provide less than their equal share of multilateral ODA. The Nordic countries, the United Kingdom, Switzerland, Luxembourg and the Netherlands perform well on this measure. Sweden, Norway and Luxembourg stand out in particular, contributing more than three times their share of multilateral funding (Figure 2.11). This analysis shows, among other things, that the largest multilateral donors are not necessarily the most generous in their support for the multilateral development system.
Annual funding to multilateral organisations relative to countries’ share in overall DAC GNI (2016-2018 average)
Note: The top 10 DAC multilateral donors are shown in light blue, while all other DAC countries are shown in dark blue. The calculations include both core and earmarked contributions.
Source: Authors’ calculations, adapted from (McArthur and Rasmussen, 2017[15]), “Who funds which multilateral organizations?”, https://www.brookings.edu/research/who-funds-which-multilateral-organizations/ and based on data from (OECD, 2020[1]), “Creditor Reporting System”, https://stats.oecd.org/Index.aspx?DataSetCode=crs1.
Donors use different funding modalities in their engagement with multilateral organisations. While multilateral funding has traditionally been provided as core contributions, recent decades have seen a surge in the use of earmarked contributions (also known as non-core or multi-bi contributions). Earmarked multilateral funding is often presented as a “third way”, combining the advantages and shortcomings of bilateral and multilateral approaches. However, recent research has emphasised that, far from being a monolithic bloc, multilateral earmarked contributions span a wide range of funding modalities (Eichenauer and Reinsberg, 2017[4]; Weinlich et al., 2020[10]). The policy brief on DAC members’ earmarking practices that accompanies this report provides some insights into the different types of earmarking modalities used by DAC members (OECD, 2020[16]). It also includes a set of interactive data visualisations to explore the earmarking practices of individual DAC countries, and a decision tree to guide donors in their choice of funding modalities, drawing on recent research and evidence gathered through OECD development co-operation peer reviews (OECD, 2020[17]).
Core and earmarked contributions to the multilateral development system have different purposes and sectoral targets. An analysis of the multilateral activities funded from core and earmarked contributions reveals that DAC providers often use earmarked contributions to carry out urgent and highly specialised interventions, such as humanitarian aid (emergency response, reconstruction, relief and rehabilitation). Figure 2.12 shows that humanitarian aid accounts for 37% of DAC members’ portfolio of earmarked contributions, compared with 17% for social sectors, 14% for governance-related interventions, 11% for production and only 8% for infrastructure (Figure 2.12, left-hand graph).
Activities funded from multilateral organisations’ core resources seem to focus overwhelmingly on sectors requiring longer-term interventions, such as infrastructure (28% of core resources), social sectors (23%), and production (19%). Governance is the only sector that is equally targeted by core and earmarked resources (14%), although this is likely related to the mixed nature of activities falling within this category, which include both crisis response activities (conflict prevention, peace-building, human rights) and longer-term ones (public financial management, domestic resource mobilisation, macroeconomic policy). On the other hand, the activities funded by multilateral organisations’ core resources appear to be largely aligned with DAC members’ direct bilateral aid (Figure 2.12, right-hand graph).
Note: These charts show the 2016-2018 share of DAC multilateral core funding (horizontal axis), multilateral earmarked funding (left-hand graph, vertical axis) and bilateral funding (right-hand graph, vertical axis) devoted to each sector. The line of equality corresponds to cases where the sector represents the same share of DAC bilateral and earmarking portfolios.
Source: Authors’ calculations based on (OECD, 2020[1]), “Creditor Reporting System”, https://stats.oecd.org/Index.aspx?DataSetCode=crs1.
Multilateral organisations tend to have highly concentrated funding bases. In 2018, for example, the United Nations Development System received USD 34.3 billion in funding, more than one-third of which (36%, or USD 12.3 billion) was provided by only three of the UN’s 195 members: the United States, the United Kingdom and Germany. This suggests that, despite the progressive diversification of multilateral funding sources observed in recent years, the funding of traditional multilateral organisations remains dependent on a “vital few”. This also means that some donors to the multilateral system (whether public or private) may find themselves in a position to influence the thematic or geographical priorities of specific multilateral entities, either directly (e.g. by earmarking their funding to specific topics, regions or projects) or indirectly (e.g. by using the threat of funding cuts like a sword of Damocles).
Entities with highly concentrated donor bases and poor funding quality are more vulnerable to the influence of individual donors. Figure 2.13 uses a Herfindahl-Hirschman Index (HHI) as a measure of donor concentration, and the ratio of core funding received by multilateral organisations as a proxy for funding quality. Multilateral entities with a highly concentrated donor base and a large share of funding as earmarked contributions appear particularly vulnerable to the influence of their funders (upper right-hand quadrant). The WHO is a case in point (Box 2.2). Conversely, entities with a diversified donor base and a substantial portion of their funding provided as core contributions are likely to receive funding flows that are both more stable over time and more predictable, and should also be less easily diverted from the strategic priorities set by their governing boards (lower left-hand quadrant).
Concentration of multilateral organisations’ donor base - scale from 0 (less concentrated) to 100 (most concentrated) 2016-2018 share of earmarked funding
Note: The analysis focuses on multilateral organisations that are largely reliant on donors’ multilateral contributions to finance their core functions and their operational activities. For this reason, the analysis excludes the non-concessional arms of multilateral development banks, which derive a significant share of their financing from other sources (e.g. by borrowing from the market).
Source: Authors’ calculations based on (OECD, 2020[1]), “Creditor Reporting System”, https://stats.oecd.org/Index.aspx?DataSetCode=crs1.
The multilateral organisations’ funding bases vary largely according to their governance model. Figure 2.13 shows that multilateral development banks tend to have diversified donor bases, owing to their relatively large membership base. The Development Bank of Latin America (CAF) is an exception, as it counts only 19 country shareholders. UN entities also have, on average, a relatively diversified funding base, although those UN entities are known to receive a high share of earmarked funding (e.g. IOM, WHO, UNHCR and WFP) seem to lose in financial independence what they gain in volume of operations by accepting large quantities of earmarked funding. Finally, vertical and thematic funds appear to have relatively concentrated funding sources. While this may be in part explained by their narrower thematic focus, it also raises questions regarding their potential vulnerability to the influence of their funders (including non-state actors, which have become significant funders, and influencers, of the multilateral development system).
These findings call for increased attention from the DAC and other multilateral stakeholders to ensure that multilateral organisations retain sufficient independence. The funding vulnerability of multilateral organisations also warrants more in-depth research: future analyses should explore how the governance and business models of the different multilateral organisations affect their funding vulnerability. For instance, the fact that some institutions are able to leverage their balance sheets and borrow from the market is likely to provide them with a higher degree of independence.
The World Health Organisation (WHO), a specialised agency of the United Nations system with the mandate to direct and co-ordinate international public health, has attracted a lot of public attention since the outbreak of the COVID-19 crisis. The organisation has been criticised by several countries for its handling of the pandemic. It has also been at the centre of a controversy after being charged by its top funder, the United States, for being slow to respond to the threat and for being biased in favour of the People’s Republic of China (“China”).
As a result, the United States announced in July 2020 its intent to withdraw from the WHO – a decision that should come into effect on 6 July 2021 – and declared that the US government would cut all funding to the organisation. This announcement has spurred concerns from policy makers and development practitioners over the potential financial and operational implications of a funding cut in the middle of a major pandemic.
The WHO’s biannual budget is funded from two main sources: (i) the assessed contributions of its members (equivalent to countries’ membership fees); and (ii) the voluntary contributions received from WHO member states and other stakeholders (such as philanthropies, the private sector, or other multilateral organisations). In 2018-2019, the United States was the top funder of the WHO, with total contributions amounting to USD 893 million (about 15% of the WHO’s biennial budget). Of this total, USD 237 million, or 27%, were assessed contributions, while the remaining 73% were voluntary contributions. While the UN has stated that the procedure to withdraw from the WHO requires the United States to complete the payment of its assessed financial obligations, a substantial degree of uncertainty remains surrounding the impact the withdrawal could have on the country’s voluntary contributions.
In the medium to long term, the US withdrawal would undoubtedly result in a significant reduction of the WHO’s budget. Several countries have announced their intention to increase their own contributions in response to the US funding cut: for example, China pledged an additional USD 30 million in funding, Finland announced an additional USD 5.5 million, and Ireland promised to quadruple its contribution. However, these additional commitments are unlikely to fill the gap left by the US contributions. Since a large share of US funding was provided as tightly earmarked voluntary contributions, the programmes most affected by the withdrawal are likely to be those that constituted strategic priorities for the US in recent years, such as polio eradication, crisis-response, vaccine-preventable disease, HIV, hepatitis and tuberculosis. In addition, the US withdrawal could also profoundly change the funding base of the global health agency: the Bill & Melinda Gates Foundation, a non-state stakeholder, would, for example, become the agency’s largest contributor.
While previous research has already pointed to the funding vulnerability of the WHO (OECD, 2018[7]), this case is a perfect illustration of the funding vulnerability analysis presented in this section. It shows how the concentration of multilateral organisations’ donor base (e.g. their high degree of reliance on a few large donors) and the quality of their funding (e.g. the large share of funding received as voluntary non-core contributions) can ultimately affect their financial exposure and the sustainability of their programmes.
As the majority shareholders and funders of the multilateral development system, DAC members’ funding decisions have strategic implications for its performance and governance. DAC members thus need to develop funding policies and practices that support the DAC’s collective vision, and expectations, of the multilateral development system. The following basic recommendations could help ensure a more strategic and effective use of DAC members’ multilateral contributions:
Use the momentum generated by the COVID-19 crisis to increase DAC members’ multilateral funding levels, in particular their total support to the multilateral development system. While it is too early for a full assessment of the multilateral response to the COVID-19 crisis, early observations indicate that multilateral organisations have responded with unprecedented scale and speed. However, there are also indications that the current financial capacity of multilateral organisations will be insufficient to respond to the needs and demands of developing countries in the medium to long term. The current international context thus calls for an unprecedented financial effort, and display of global solidarity, from the main shareholders and funders of the multilateral development system. While the economic and financial consequences of the crisis may make it hard for DAC members to safeguard their multilateral aid budgets, now is also the moment where their multilateral contributions are most needed and can have the most transformative impact.
Assess multilateral funding decisions based on multilateral effectiveness and good practice. Given the important implications of funding quality on the performance and governance of the multilateral development system, DAC members should ensure that their funding decisions are aligned with principles of aid effectiveness and good practice. This implies, among other things, avoiding the default use of earmarked funding modalities, employing them only when they are the best option to achieve the intended development impact. The policy brief on DAC members’ earmarked funding that accompanies this report provides initial pointers to determine the most appropriate funding modalities according to the specific development objectives that are pursued.
Ensure that DAC members’ financial contributions provide multilateral organisations with sufficient independence and flexibility to carry out their activities. This calls for increased attention from the DAC to the volume and quality of funding provided to multilateral organisations, as well as the degree of concentration of their funding base, to ensure that they are not vulnerable to excessive influence by specific members.
Improve the data collection on multilateral contributions from non-DAC members. As the multilateral funding provided by non-DAC countries or other stakeholders (such as private actors) continues to grow, both in absolute and relative terms, it becomes increasingly important to ensure that these contributions are adequately captured in existing ODA data collection mechanisms, such as the OECD Creditor Reporting System and the forthcoming TOSSD6 framework. Failure to tackle this problem would result in a growing blind spot in multilateral stakeholders’ vision and understanding of the multilateral development system. A first step for the OECD DAC could be to map and quantify the existing data gaps in multilateral development finance, which would allow for prioritising and planning the improvements required in data collection.
References
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← 1. Excluding bilateral flows earmarked through multilateral organisations.
← 2. While the IDA18 replenishment round may also have played a role, partner contributions received for IDA18 were less than for IDA17. However, the total IDA18 envelope was larger and set a record high in the 56-year history of the organisation due to the leveraging of equity (World Bank Group, 2016[18]).
← 3. The World Bank Group has since engaged in a wide set of reforms to consolidate its trust fund portfolio (Box 2.1 in this chapter).
← 4. The Alliance for Multilateralism, for example, was created in 2017 by Germany and France, in reaction to a wave of criticism emanating from several governments against the rules-based international order.
← 5. Initiatives such as the Multilateral Organisation Performance Assessment Network (MOPAN), which provide an independent view of multilateral organisations’ performance, are a positive development towards achieving this common vision. A follow-on challenge is the uptake and co-ordinated use of this performance data to inform engagement and funding decisions; evidence of progress here remains anecdotal.
← 6. TOSSD (total official support for sustainable development) is a new international statistical framework for monitoring official resources and private finance mobilised by official interventions for sustainable development. TOSSD is being developed by an International Task Force of experts; the OECD serves as the Secretariat to the Task Force.