30 June 2023
By Katja Hemmerich
This week, the WFP Executive Board holds its annual session, during which it receives an update on WFP's utilization of its strategic financing mechanisms. Our spotlight explores how these strategic financing mechanisms work, their impact on WFP’s responsiveness, and factors for other organizations to consider when establishing similar mechanisms.
What are WFP’s strategic financing mechanisms?
WFP’s strategic financing mechanisms consist of a variety of different tools that allow for advance financing of programmes, anticipatory procurement of food to shorten procurement timelines, and advance financing for efficient corporate services. We outline how each of these work below:
A. Internal Project Lending (IPL) is essentially a loan from HQ to a country office to enable it to incur financial commitments and expenditures for programmes before contributions to those programmes are confirmed. The loans are expected to paid back, so a reasonable forecast of donor contributions is required to access IPL funds. IPL funds can be allocated based on either a specific forecast contribution, referred to as "specific forecast advance financing," or projected total funding for a programme, known as "macro advance financing" (MAF). If forecasted contributions do not materialize, the operational reserve can be used to cover the loss (which has only been needed on two occasions to date). In 2022, WFP advanced a record US$2.574 billion. By comparison, OCHA’s Central Emergency Revolving Fund (CERF) has US$30 million available for advance loans.
B. The Immediate Response Account (IRA) enables WFP to provide immediate assistance through the allocation of flexible, replenishable funds to critical life-saving activities in the absence of forecasted contributions. It is advanced as a loan with the expectation of repayment, which helps maintain sustainability of the IRA. Direct donor contributions to the IRA and transfers from other internal account or reserves are also used to replenish funds. As a result, if donor funds have not been forthcoming by the end of the Country Strategic Plan period, then the IRA loan can be converted to a grant for that country office. In 2022, the IRA disbursed US$385 million in advance funding, as compared to US$485 million in rapid response grants issued by CERF.
C. The Global Commodity Management Facility (GCMF) allows WFP to use corporate funds to purchase food in anticipation of country office operational needs and confirmed contributions, with the objective of reducing lead times for food deliveries, purchasing food when market conditions are most favourable, enabling economies of scale and facilitating local and regional procurement. The food is released to country offices when they have funding confirmed from donors or other advance funding. In 2022 the GCMF delivered 2.9 million metric tons of food worth US$ 2.3 billion to 53 country offices.
D. Corporate Services Financing are tools to facilitate flexible and efficient management of operations, in accordance with the WFP Management Plan that is approved by the Executive Board. Repayment of these advances are also expected, and in 2022 all repayments were made. The three corporate services financing tools are:
the Capital Budgeting Facility which provides upfront financing for capital projects that can demonstrate quantifiable economic benefits and efficiency gains;
the Fleet Centre Financing Facility which provides advances to the Global Vehicle Leasing Programme to cover the capital and operational costs of fleet services, the special account for vehicle insurance and the global truck fleet. These costs are subsequently recovered through vehicle leasing fees charged to country offices and other users of the services provided; and,
the Fee-for-Service Financing Facility, which provides advances to cover the costs of internal services provided centrally, such as IT services. Advances are repaid throughout the year from fees collected for services rendered.
What are the benefits of these Strategic Financing Mechanisms?
"A significant benefit of using the IPL, IRA and GCMF in combination is that it enables WFP to anticipate its interventions by providing assistance and food for operations before contributions to those operations are confirmed by donors." – Report on the utilization of of WFP’s strategic financing mechanisms, pg. 11
The strategic financing mechanisms strengthen WFP’s capacity for timely response in emergency or start up phases, and also allow country offices to undertake anticipatory and preventive interventions. In 2022, for example, forty-five country offices were able to purchase specialized nutritious foods from the GCMF receiving it in an average of 39 days as opposed to the average of 150 days for conventional procurement methods. Similarly, Internal Project Lending in 2022 gave country offices access to funds an average of 75 days before contributions were confirmed for a variety of activities in 60 Country Strategic Plans.
Advance financing mechanisms do more than strengthen an office's ability for a speedy response. A recent study of similar financing mechanisms for Red Cross and Red Crescent societies showed that they strengthened National Society's ability to manage multiple crises concurrently.
"Overall, ex-ante funding and a focus on prepositioning goods as locally as possible offer strategies for navigating multi-hazard scenarios where stable, global, or national supply chains cannot be assured." – Managing multiple hazards: lessons from anticipatory humanitarian action for climate disasters during COVID-19, Climate and Development (2022), pg. 385
The same study also demonstrated that using advance financing for anticipatory actions required greater engagement of local offices with “some surprising and tangible secondary benefits of anticipation, such as the transfer of skills and capacity to local actors so that they can respond to multiple hazards and a willingness to anticipate emergent hazards and modify plans accordingly.” (pg. 385)
WFP’s Global Commodity Management Facility has similar secondary benefits, lauded by the ACABQ (para. 28) because it promotes local purchases and supports the creation of income-generating opportunities. In 2022, 37% (or US$722 million) of GCMF food purchases were sourced from local and regional markets, with US$55.8 million worth of food purchased from smallholder farmers (a 13% increase over 2021).
Corporate services financing allows for greater efficiency gains while making planning easier for country offices. The Fleet Centre Financing Facility, for instance, “enables WFP to optimize centralized procurement through the bulk purchase of vehicles; meanwhile a transparent leasing service mechanism and five-year light vehicle and eight-year armoured vehicle lifecycles enable WFP offices to plan their funding effectively.”
Overall, these types of internal strategic financing mechanisms have strong potential to strengthen the responsiveness and performance of international organizations, particularly those dealing with crises and emergency situations requiring high levels of organizational agility.
What is needed for such flexible funding instruments?
The most obvious requirement for flexible funding mechanisms is the agreement of the organization's governance body. What is particularly interesting in the case of WFP is the extent of engagement between the senior management and the Executive Board on management and financing issues. This is illustrated, for instance, by the fact that the Strategic Plan consistently has a related Management Plan. The Board receives regular updates, not only in the annual performance report but also through utilization reports currently, which includes clear and easy to understand data disaggregated by funding source, allocations, countries receiving allocations, repayments and outstanding balances all within consistent timeframes. Few other international organizations have separate management plans, and many struggle to provide expenditure data disaggregated by criteria other than their standard budget lines.
Beyond management plans and transparent reporting, multiple studies and reviews of innovative financing mechanisms stress the importance of competence at headquarters and field level in: cash flow analysis and forecasting, risk management and effective communication. The lack of repayment problems in WFP demonstrates their ability to realistically forecast donations and effectively manage risks throughout the process. Risk management was a key focus of KPMG's review of UNICEF’s innovative financing instrument with the World Bank (see our 12 June newsletter), noting that UNICEF's rigorous review of country office's applications for funding and their cash flow analysis were an important risk mitigation measure. KPMG also highlighted the importance of clear two-way communication with the field on the use of innovative financing, approval criteria, repayment obligations and risk management, as most staff were unfamiliar with this type of financing. Where effective communication took place, it helped to mitigate execution risks throughout the process - a point also made in the study of advance financing mechanisms for Red Cross and Red Crescent Societies.
While strong management processes, effective reporting capacity and transparency are important for gaining buy-in of member states for innovative financing, broader political considerations also need to be taken into account. In 2020, WFP's Strategic Evaluation of Funding WFP’s Work found that some member states had concerns about the greater capacity resulting from strategic financing mechanisms:
"Some donors are supportive of WFP work in anticipatory action, preparedness, resilience building and addressing the root causes of hunger and malnutrition; others see it as a distraction from the “core strength” of WFP within emergency response. A number of donors at global level are particularly resistant to what they saw as WFP “overstretching” into the development space; less so at country level, particularly in contexts where WFP already has a demonstrated track record through its resilience and root-cause-oriented programmes. Resistance has been particularly strong from donors that are limited by their own mandates and restrictions in terms of funding activities beyond the immediate scope of humanitarian assistance." – para. 123
Nevertheless, developing a strategy for member state approval of advance financing mechanisms, like those in WFP, is likely to be easier than for approval of a debt issuance like the UNICEF-IBRD financing instrument - at least in the UN. UN financial rules, to which WFP and OCHA are both subject, already allow for advance financing options (albeit both WFP and CERF exclusively use voluntary funding exclusively). Debt issuances, like that piloted by UNICEF and the World Bank, require more explicit authority to be delegated to the UN entity involved and therefore require General Assembly approval for replication.
In summary, for those exploring innovative financing mechanisms, advance financing like those of WFP offer potential for organizations to enhance their responsiveness and capacity to anticipate and manage multiple crises. Organizational readiness factors for implementing such mechanisms includes:
Strong management capacities, able to plan, implement, monitor and report transparently on interventions;
Realistic financial forecasting capabilities;
Effective communication channels between headquarters and the field on how to use innovative financing and manage new processes; and
Member state support, within governance mechanisms and among donors.
Comments