This blog is part of a series responding to the MFAN Co-Chairs’ and other aid architecture proposals. Join the conversation! #RedesignReaction
On July 10th, the co-chairs of the Modernizing Foreign Assistance Network (MFAN) published a proposal for structural aid reforms, A Foreign Aid Architecture Fit for Purpose. These thoughtful and ambitious recommendations show a concrete path for streamlining our foreign aid institutions and increasing their effectiveness to preserve the essential role of global development as a core pillar of U.S. foreign policy. A robust development policy framework, including aid, trade, and other policy elements will make America and the world both safer and more prosperous.
Given that the current U.S. aid framework was established in 1961 under the Kennedy Administration with the last significant amendments in 1985, it should come as no surprise that bureaucratic hurdles and inefficiencies have accumulated across programs and agencies. Unclear and overlapping mandates hamper both day-to-day execution and the agility to respond to new challenges and opportunities. A fresh look is urgently needed. The MFAN co-chairs examine U.S. foreign aid priorities today, and the optimal institutions needed to fulfill our goals. They propose a streamlined structure that will deliver greater impact at lower cost. We applaud some of these recommendations as a great start at a reform discussion, and argue that we should consider going even further to tackle the changed realities under which development assistance operates.
For the U.S. aid architecture to be truly “fit for purpose”, we must grapple with the accelerating trend of traditional aid being dwarfed by other financial flows. While foreign aid was a significant source of investment in developing countries 30 years ago, estimates are that private funding is now 10 times greater, and domestic expenditure within developing countries perhaps 40 times more. At a mere 2% of overall financing, the role of foreign aid must necessarily change, and change significantly. Development assistance is clearly too small a piece of the puzzle to reach the necessary scale in delivering services or financing infrastructure investments.
The raison d’etre for development assistance has changed, but our programs and architecture have not yet caught up to this reality. The best use of aid is not to fill capital or service delivery gaps in poor, but stable countries. Instead, it should play the critical but oft overlooked role of catalyzing better solutions to problems that lie at the root of global development – then get out of the way. Rather than funding programs, aid should increasingly shift to a more leveraged role and provide risk capital to seed new solutions (e.g., USAID’s Development Innovation Ventures, DIV, and the Global Innovation Fund, GIF), catalyze infrastructure and policy investments to jump-start economies (e.g., Millennium Challenge Corporation, MCC and Power Africa), and incentivize programs that could work at scale through different types of pay-for-outcomes funding mechanisms, including cash-on-delivery and social impact bonds. In short, aid should emphasize innovation to solve problems, enabling scale through the private sector and/or local governments. Although there have been increasing discussions of such approaches, currently a relatively small amount of aid monies are actually administered and deployed in a manner where aid plays this role.
For example, this new role will require a more flexible, blended approach to development financing. Rather than using only grants to deliver services, hybrid funding can drive scale through the private sector where viable markets exist, and through public financing in other places. This means coordinated deployment of the full range of funding tools, from pure grants to concessional financing to those that expect market rate returns. Take Off-Grid: Electric, which sells home-solar systems to provide electricity to rural households in Tanzania. USAID’s DIV invested early seed funding in the form of a $100,000 grant to test out an innovative pay-as-you-go leasing model. Based on their demonstrated success, DIV invested two subsequent tranches of $1 million, then $5 million. This grant funding effectively de-risked their new business model, enabling Off-Grid to raise almost $100 million in debt and equity to date, including from the U.S. Overseas Private Investment Corporation (OPIC).
So, what does this imply for a truly “fit for purpose” aid architecture? We recommend going beyond the streamlining and creation of the Development Finance Corporation (DFC) that MFAN has proposed, to change the financing mechanisms we use to achieve our long-term development goals.
First, deploy most long-term development assistance in the manner described above: as risk capital through (i) increased use of DIV- and GIF-style tiered funding, (ii) an expansion of catalytic investments along the lines of MCC and Power Africa across more applications and sectors, and (iii) pay-for-outcomes funding to encourage interventions that work. Second, facilitate a closer coupling between the proposed DFC and the non-humanitarian, long-term development activities of the proposed Global Development Agency (GDA) to encourage a continuum of blended financing that will better deliver sustainable solutions.
Of course, many critical activities in humanitarian relief, stabilization operations, pandemic crisis response (e.g., Ebola), and certain types of health programs (e.g., PEPFAR) will continue to necessitate more conventional aid approaches, particularly in fragile states. We will leave for another discussion what greater efficiencies might be achieved in these areas.
The MFAN reform proposal is a great start. We’d love to take the opportunity to go further to optimize the tools and structure for foreign aid towards the new modalities that will be crucial to take our development architecture fully into the 21st century.
Ann Mei Chang is the former Chief Innovation Officer and Executive Director of USAID’s Global Development Lab.
Smita Singh is the Founding Director of the Global Development Program at the William and Flora Hewlett Foundation (retired) and former Member of President Obama’s Global Development Council.