VERTICAL FUNDS: LESSONS for MULTILATERALISM and the UN Stephen Browne and Roberto Cordon

Briefing 25 January 2015

VERTICAL FUNDS: LESSONS FOR MULTILATERALISM AND THE UN Stephen Browne and Roberto Cordon

The World Health Organization (WHO) has been criticized for its slow response to the Ebola epidemic. Were the new funding mechanisms for health created to compensate for the shortcomings of UN organizations in the health field? Are vertical funds effective channels for assistance or distortions of multilateralism? Can the UN learn from them?

“Vertical funds” are development financing mechanisms confined from sources that also provide a large proportion of the UN’s to single development domains with mixed funding sources.1 An operational budgets—have been channelled into these new early example was the Global Environment Facility (GEF); organizations. Between them, GAVI and the GF have attracted established in 1991 under World Bank management, it had the UN more than $40 billion in 15 years. Development Programme (UNDP) and the UN Environment Programme (UNEP) as original implementing partners. More So, why were these new funding mechanisms for development recently, two more vertical funds were created in the field of health: assistance created in preference to expanding existing UN the Global Alliance for Vaccines and Immunization (GAVI) and organizations? Have they been effective? What can the UN learn? the Global Fund for AIDS, Tuberculosis and Malaria (GF). This briefing looks at the lessons for the UN development system from FUNDING RATIONALE these two health funds, which were created in parallel with existing Vertical funds are a scaling up of the growing practice among UN organizations to work on some of the same functions. major donors of earmarking non-core resources for specific purposes. In the UN system as a whole, programs tied specifically The GAVI Alliance and the GF were both conceived in 2000. to a development domain or to a region have increased rapidly Inspired by UN experience, the GF, designed to tackle the world’s while core resources have stagnated. Non-core resources now most prevalent infectious diseases was first mooted in the World account for two-thirds of total operational resources (Figure 1).3 Health Organization (WHO); and the idea gained momentum at Earmarking is favored by donors because it funds distinctive and a G8 summit in Japan. Established soon after, it was not to be narrowly defined programs. managed by the WHO, nor by the World Bank as some donors would have preferred, but as an independent entity in Geneva with WHO is a typical UN organization with almost three-quarters of a governing body including public and private partners.2 its 2012-13 funding earmarked and provided by relatively few donors. Although WHO’s earmarked contributions in 2013 were The GAVI Alliance sought to give a boost to the vaccination provided by 120 member-states and more than 300 additional campaigns that had been conducted for many years in developing sources (public entities, universities, foundations, private countries by WHO and UNICEF; it was launched with a donation companies, UN and other multilateral organizations), no less than of $750 million from the Bill and Melinda Gates Foundation 40 percent of total earmarked resources were provided by three (BMGF). The founding members of GAVI were WHO, UNICEF, governments (the United Kingdom, the United States, and Canada) the World Bank, and the BMGF; like the GF, its governance and by BMGF, the single largest contributor of voluntary funding system is mixed. for several successive years (Figure 2).4 Such earmarking has been called “Trojan multilateralism” because it creates “the illusion of While GAVI and the GF were built on UN foundations, they rival multilateral intent” while “covertly introducing bilateral goals.”5 the world organization with programs that fall squarely in the domain of UN organizations. At a time when the system’s The two vertical health funds have even more concentrated funding development organizations have come under increasing resource patterns. From its inception in 2000 to 2015, GAVI has been constraints, moreover, substantial amounts of new donor money— pledged a total of $12.1 billion.6 Of that amount, the four largest

Future UN Development System supports and helps accelerate change in the UN development system to increase effective responses to global development challenges—especially after 2015, the target date for the Millennium Development Goals. Recognizing the many frustrations that have accompanied UN reform efforts, FUNDS envisages a multi-year process designed to help build consensus around necessary changes. Financial support currently comes from the governments of Denmark, Norway, Sweden, and Switzerland.

Funding rationale

Vertical funds are a scaling up of the growing practice among major donors of earmarking non-‐core resources for specific purposes. In the UN system as a whole, programs tied specifically to a development domain or to a region have increased rapidly while core resources have stagnated. Non-‐core resources now account for two-‐thirds of total operational resources (Figure 1).3 Earmarking is favored by donors because it funds distinctive and narrowly defined programs.

WHO is a typical UN organization with almost three-‐quarters of its 2012-‐13 funding earmarked and provided by relatively few donors. Although WHO’s earmarked contributions in 2013 were provided by 120 -‐ member states and more than 300 additional sources (public entities, universities, foundations, private companies, UN and other multilateral organizations), no less than 40 percent of total earmarked resources were provided by three governments (the United Kingdom, the United States, and Canada) and by BMGF, the single largest contributor of voluntary funding for several successive years (Figure 2).4 London and Washington have also been instrumental in seeking to limit the overall size of WHO’s budget, thereby further underlining their funding dominance. Such earmarking has been called “Trojan multilateralism” because it creates “the illusion of multilateral intent” while “covertly introducing bilateral goals.”5

Figure 1: Core and non-core funding of development and humanitarian Figure 1: Core and non-‐core funding of development and humanitarian assistance through assistance through the UN system, 1992-2012 the UN system, 1992-‐2012

+97% non-‐core Humanitarian-‐ 20 assistance related +65% -‐3% core

15 Total + 92%

+358% non-‐core 10 Development related +108%

$US billion (2011 constant) 5

-‐2% core

0 1992 1997 2002 2007 2012

Development core Development non-‐core Humanitarian core Humanitarian non-‐core

contributors—the United Kingdom ($3.2 billion), the BMGF ($2.5 funds have borrowed business-sector funding strategies to achieve billion), Norway ($1.3 billion), and the United States ($1.2 billion)— fund-raising objectives. accounted for over two-thirds of total funding (Figure 3). 2 FOCUS ON RESULTS

Since 2001, contributions to GF had reached over $29 billion by the For health, the two vertical funds have facilitated the growing end of 2013, almost two years’ development expenditure by the dominance of traditional rich-country donors, with the addition entire UN development system. The largest donor by far has of the BMGF. Th ese donors focus on visibility and results, and the been the United States with over $9 billion, 31 percent of the two funds provide both. GAVI and GF can also point to statistics total (Figure 4). The top seven country donors contribute 75 of reduced morbidity and numbers of lives saved. GAVI is narrowly percent. Th us both GAVI and GF are in important respects typical focused on the purchase and distribution of ten vaccines.⁸ GF of earlier multilateral funding patterns dominated by a small targets the three most prevalent infectious diseases in developing number of the richest donors. countries. Both funds can justly claim to have contributed directly to saving lives. For donors, and especially governments that need INNOVATIVE FUNDING to justify aid before parliaments and public, the funds provide hard Continuity in funding has always been a challenge for multilateral evidence of identifi able results. development agencies, which have become increasingly dependent on voluntary contributions. GAVI provides examples of innovative Yet because GAVI and GF programs are so narrowly targeted, their long-term funding schemes. Th e Advance Market Commitment managements maintain no earmarking by any donors. Neither (AMC) launched in 2007, is designed to fund the research and governments nor other funders are able to prescribe specific development of new vaccines by private pharmaceutical companies. activities, in contrast with the WHO that has a much broader The funds are a guarantee against market failure and act as health mandate but has become increasingly supply-driven by the an incentive to produce new vaccines for pneumococcal disease interests of individual donors. To that extent, the vertical funds are (a major cause of meningitis and pneumonia) by compensating less of a “Trojan horse” than the WHO. companies for the absence of a proven market demand in poorer countries. Th e International Finance Facility for Immunisation IMPACT ON PROGRAMMING (IFFIm) began in 2006 and is a mechanism that also helps to Th e vertical funds represent innovative multilateralism. In addition guarantee long-term fi nancial security for GAVI. Th e purpose of to the limited number of donors, their governance systems are the mechanism is to front-load assistance and provide long-term mixed and selective. Given the growing importance of partnerships fi nancial security. Th e IFFIm issues “vaccine bonds” on global in development, the inclusion of civil society and for-profi t interests capital markets, which are backed by guarantees from participating on their boards is to be welcomed. Experience shows that governments to maintain future aid fl ows that can be used to buy consensual decision-making is sometimes hard-fought but is more back the bonds on maturity. By the end of 2013, the mechanism expeditious than in the UN’s inter-governmental forums. Lacking had attracted $4.5 billion from investors. full representation of developing countries, moreover, does not make them unresponsive to needs. Both funds clearly respond to Another innovative funding source is UNITAID, which raises outstanding global challenges of immunization and disease two-thirds of its funding through a small levy on airline tickets. eradication in which they have had a decisive impact. WHO hosts UNITAID and already benefits, as does the GF. Another non-traditional source that benefi ts the GF for AIDS However, distortions arise from their sheer size and the top-down eradication in Africa is Product RED. When consumers buy nature of their operations. Th e substantial donor resources are from one or other of several well-known brands,⁷ half of the matched by domestic human and fi nancial counterpart resources proceeds go to the fund. It is important to note that vertical in recipient countries but can draw funding away from other areas

2 of health. A frequent criticism has been the neglect of capacity- the vertical funds. The earlier abandonment of an Ebola program building.9 Lacking a local presence, vertical funds should also rely and overall slowness in reacting to the pandemic in West Africa in more on UN organizations that are based in program countries. 2014 may be symptomatic of such a distortion and have led to criticism of Director-General Margaret Chan.10 WHO has Extensive earmarking in WHO, however, also creates distortions attempted to adjust to the mismatch between demand and supply and is problematic for multilateral principles and practice. While by drawing up a consolidated program budget that provides the organization—like the rest of the UN—has the merit of information on all core and non-core programs. universal membership and affords every country a voice in the World Health Assembly, the donor domination of its program A further concern is more practical. WHO’s project managers have

increases the risk that WHO is even more supply-driven than told the authors that a major proportion of their time is spent on Figure 2: Earmarked (non-‐core) funding the of WHO, 2013 managing the relationships with over 400 donors, which is directly Figure 2: Earmarked (non-core) funding of the WHO, 2013 deducted from their availability for professional health work. Soliciting donations is only part of the task; most donors also UK require separate reports to be written on the use of their funds, 12% Others adding substantially to the administrative burden. When it comes 23% United to transparency and accountability, more can mean less.11 States UNITAID 9% 1% Canada EC 5% The vertical funds are not similarly burdened by donor solicitation. 2% Rotary Germany They have a reputation for rapid delivery and have maintained 2% GAVI Norway 2% solid reputations for transparency and accountability. Indeed, 7% 2% their reporting and monitoring of funds provide examples Other UN Australia that UN organizations should emulate. Most UN organizations 9% France 2% BMGF 1% operate on the basis of automatic eligibility for assistance, using 15% Japan Other governments 1% criteria of apparent need rather than performance. The rationale 9% for the UN’s designation of “least developed countries” (LDCs) is Source: WHO database, 2013. Source: WHO database, 2013. emblematic: irrespective of development performance—only 4 developing countries out of 52 have graduated in the last 40 years— Figure Figure 3: Contributions 3: Contributions to GAVI to GAVI Alliance Alliance,, 2000-‐2015 2000-2015 The two vertical health funds have even more concentrated funding patterns. From its the LDCs remain as primary targets of assistance from the inception in 2000 to 2015, GAVI has Private been pledged a total of $12.1 billion.6 Of that amount, Other commercial UN and bilateral donors. the four largest contributors—the United philanthropic Kingdom ($3.2 neg.% billion), the BMGF ($2.5 billion), Norway ($1.3 billion), and the United States 1% ($1.2 billion)—accounted for over two-‐thirds of total funding (Figure 3). BMGF Vertical funds are not as constrained by political and diplomatic UK 21% 26% imperatives as the UN, and their approach is very different since performance and the use of funds is a major determinant of eligibility. There is a much stronger correlation between recipient Other oﬃcial 7% performance and additional funds. While graduation is Sweden Norway encouraged, poor performance can lead to reduced funding 3% 11% Canada and even cancellation of future projects, irrespective of the income 4% level and development status of the country. The GF is—by the Netherlands US 4% Italy France 10% standards of most multilateral organizations—unusually 6% 7% transparent. Its discovery of misuse of funds in four African Source: GAVI, Investing Together for a Healthy Future (Geneva: GAVI, 2014). countries in 2010, for instance, led to revamping its already

Source: GAVI, Investing Together for a Healthy Future (Geneva: GAVI, 2014). comprehensive oversight and auditing capacity. Figure 4: Contributions to the GF, 2001-2013 Since 2001, contributions BMGF Other to GF had reached Private over sector $29 billion by the end of 2013, almost Universality two is a fundamental UN principle, but how well years’ development 4% philanthropic expenditure by the neg% entire system. UN development The largest donor by far has been the 1% United States with over $9 billion, 31 percent of the total (Figure has 4). it The served development when applied to its operational top seven country Spain donors contribute 75 percent. Thus both functions? GAVI and GF are in important Hitherto, eligibility for UN assistance has left 2% Other respects typical of earlier multilateral oﬃcial funding patterns dominated by a small performance number of the criteria almost entirely out of account, with the richest Netherlands donors. 3 3% 8% consequence that UN organizations continue to channel resources

Figure 4: Contributions Sweden to the GF, 2001-‐2013 United States to countries that make poor use of aid. The repetition over 3% 31% Italy many years, even decades, of “capacity-building” in the same 4% Canada countries and development domains is symptomatic of poor 5% uptake. UN organizations should examine the experience of the EC vertical funds. While not precisely the same performance 6% criteria, more consideration should be given to less supply-driven Japan France 6% 13% “cash-on-delivery” approaches, which compensate for outcomes, Germany UK rather than pre-paying inputs, and which permit program 7% 7% countries greater freedom in choosing their own goals.12 Source: Global Fund, “Core Pledges/Contributions,” 2013.

Source: Global Fund, “Core Pledges/Contributions,” 2013.

Innovative funding 3

Continuity in funding has always been a challenge for multilateral development agencies, which have become increasingly dependent on voluntary contributions. GAVI provides examples of innovative long-‐term funding schemes: the Advance Market Commitment (AMC) and the International Finance 4 Facility for Immunization (IFFIm). The funding data in Figure 3 include the pledges to these two schemes through 2015.

The AMC, launched in 2007, is designed to fund the research and development of new vaccines by private pharmaceutical companies. The funds are a guarantee against market failure. They act as an incentive to produce new vaccines for pneumococcal disease (a major cause of meningitis and pneumonia) by compensating companies for the absence of a proven market demand in poorer countries. The IFFIm began in 2006 and is a mechanism that also helps to guarantee long-‐term financial security for GAVI. The purpose of the mechanism is to front-‐load assistance and provide long-‐term financial security. The IFFIm issues “vaccine bonds” on global capital markets, which are backed by guarantees from participating governments to maintain future aid flows that can be used to buy back the bonds on maturity. By the end of 2013, the mechanism had attracted $4.5 billion from investors.

Another innovative funding source is UNITAID. Created in 2006 by five governments (Brazil, Chile, France, Norway and the United Kingdom) as the International Drug Purchasing Facility, it thus far has attracted $1.6 billion in funding, two-‐thirds through a small levy on airline tickets applied in some countries. WHO hosts UNITAID and already benefits ($19 million for its 2012-‐13 biennium). GF has received a total of $239 million from the same source, most

CONCLUSIONS: CAN THE UN AND THE VERTICAL innovative multi-year and multi-donor funding mechanisms to FUNDS LEARN FROM EACH OTHER? provide more programming continuity and security, while diluting UN development organizations have several functions, including the influence of individual donors. norm-setting, information dissemination, advocacy, humanitarian response, and country operations. Their universality is the basis of Program performance and transparency: While the narrower their legitimacy, but in its operations, the UN’s universal inter- operational mandates of the vertical funds are more amenable to governmental structures have contributed to bureaucratic and establishing clear performance metrics, UN organizations should cumbersome performance. Moreover, UN operations increasingly nonetheless elaborate better criteria for success in creating longer- compete with other sources and mechanisms of technical term sustainable capacity in developing countries. These criteria assistance; and the creation of the vertical funds was in part a should be drawn up—or at least agreed to—by program countries response to the UN’s widely perceived operational shortcomings, themselves; and they should determine program success or failure which successive FUNDS surveys have confirmed.13 There is even as determined by independent evaluations. Because they are a case to be made for the UN to abandon its operations entirely.14 present in all program countries and well connected to local counterparts, UN organizations could be used more extensively by Inertia makes this outcome unlikely, and so it may be more vertical funds for implementation and oversight. instructive to summarize four learning opportunities. Program orientation: There are serious distortions in both vertical Governance: The vertical funds have boards of limited and rotating funds and UN organizations. The former divert substantial membership, including civil society and private sector funds into narrow, albeit critical, fields of health-care, drawing representatives. While formal approval and oversight of their resources and personnel in program countries away from other operations continues to be the responsibility of member states, areas. The operations of the WHO and other UN organizations UN organizations should consider establishing advisory boards are driven in directions that reflect as much the priorities of of limited size with mixed state and non-state membership. donors as recipients. Correcting these distortions requires closer collaboration between vertical funds and UN organizations Innovative funding: UN organizations have been successful in in country programming, and strengthening the capacity of enlarging the range of funding sources, although the traditional recipient countries in strategic sector planning. donors remain dominant. They should endeavor to attract more

Stephen Browne is Co-director of the Future of the UN Development System 3. Silke Weinlich, “Funding the UN System” in Post-2015 UN Development: Making Change (FUNDS) and Senior Fellow of the Ralph Bunche Institute for International Studies, Happen? ed. Stephen Browne and Thomas G. Weiss, (London: Routledge, 2014), 75-94. The Graduate Center, The City University of New York and former Deputy Executive 4. BMGF reduced its funding to the WHO in 2014.

Director of the International Trade Centre. He is the author of several books on 5. Devi Sridhar and Ngaire Woods, “Trojan Multilateralism: Global Cooperation in Health,” development, including United Nations Industrial Development Organization (2012) Global Policy 4, no. 4 (2013): 326. and The United Nations Development Programme and System (2011). He is co- 6. The figures are paid-in contributions up through December 2012, plus pledges for 2013- editor with Thomas G. Weiss of Post-2015 UN Development: Making Change 2015. Approvals for country programs (excluding HQ costs) up to the end of 2015 were Happen? (2014). $6.7 billion.

7. American Express, Apple, Bugaboo International, Converse, Dell + Windows, GAP, Roberto Cordon is Professor of Management and International Relations at Giorgio Armani, Hallmark, Motorola Foundation, Motorola Inc. & Partners, Starbucks Franklin University Switzerland. Previously he served as manager of training Coffee, Media Partners and (RED) Supporters, and Motsepe. programs in market analysis at the International Trade Centre and worked as a 8. Pneumococcal, Pentavalenta, Rotavirus, HPV, Measles-Rubella, Yellow Fever, Typhoid, senior consultant in the development practice of PricewaterhouseCoopers in Cholera, Meningitis A, and Japanese encephalitis. Washington DC. He has also taught at the Pontificia Universidad Católica de Chile 9. Keith Bezanson, Paul Isenman and Alex Shakow, “Scaling Up in Agriculture, Rural and at The Wharton School. His academic interests focus on the institutional Development, and Nutrition: Learning form the experience of Vertical Funds,” International efficiency of international organizations and their relationship to the private sector. Food Policy Research Institute Brief 18 (Washington DC: June 2012); P. Isenman and A. Shakow, “Donor Schizophrenia and Aid Effectiveness: The Role of Global Funds,” IDS This briefing draws in part on research undertaken by both authors during 2013 Practice Paper 5 (Brighton, UK: Institute for Development Studies, 2010). and 2014 as part of a Swiss Network for International Studies (SNIS)-supported 10. Somini Sengupta, “Effort on Ebola Hurt WHO Chief,” New York Times, 7 January 2015. multidisciplinary project on non-traditional financing of public health programmes 11. Richard Golding, “Making the UN system more transparent and accountable,” in Africa. FUNDS Briefing 19, July 2014, http://www.futureun.org/media/archive1/briefings/ FUNDSBriefing19-Transparency-Golding.pdf.

NOTES 12. Nancy Birdsall et al., Cash on Delivery: A New Approach to Foreign Aid (Washington 1. J. Sherry, S. Mukherji, and L. Ryan, The Five-Year Evaluation of the Global Fund to Fight DC: Center for Global Development, 2011). AIDS, Tuberculosis, and Malaria (Geneva: The Global Fund, 2009); S. Lister et al., Mid-Term 13. See http://www.futureun.org/Surveys. Evaluation of the EFA Fast Track Initiative (Washington, DC: Global Partnership for Education, 2010); D. Hulls et al., GAVI Second Evaluation Report (Geneva: GAVI Alliance, 14. Robert Picciotto, “The UN Has Lost The Aid-Effectiveness Race: What Is To Be Done?” 2010); Busan Partnership for Effective Development Cooperation, “4th High Level Forum FUNDS Briefing 14, February 2014, http://www.futureun.org/media/archive1/briefings/ on Aid Effectiveness,” Busan, Republic of Korea, 29 November - 1 December 2011. FUNDS_Brief14_Feb2014_D5.pdf.

2. The first private contribution to the Global Fund was made by Kofi Annan in 2001, then UN secretary-general. He donated $100,000 as the recipient of the 2001 Philadelphia Liberty Medal.

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