Humanitarian crises cost more than ever. But businesses can help

Humanitarian crises are becoming more frequent and more complex. They last longer and affect more people. The global humanitarian appeal for 2017 was a record $23.5 billion, targeting 93 million people in need of assistance. This is five times what it was a decade earlier, for more than three times as many people. Humanitarian assistance costs are predicted to rise to $50bn per year by 2030, on the basis of current trends. By then, two-thirds of the world’s poor could be living in conflict-affected countries.

Some argue that more aid money is the simple answer. But the assumption that business as usual will be enough to meet humanitarian need is dangerous. Certainly, increasing official donor funding through the UN system, targeting available public funding better and using it more efficiently can help close this gap. More multi-year funding, less earmarking and simpler reporting requirements are important.

Yet none of this will be enough. It is time to look at crisis financing differently and to consider the full range of resources going into crisis countries.

International humanitarian assistance is a significant source of support during crises, but it is a relatively small part of a much wider financial pool. For example, in 2015, international humanitarian assistance accounted for just under $14 billion of all international resources delivered to the 20 largest recipients of humanitarian funding. This is a fraction of the estimated $85 billion from remittances, the $41 billion from foreign direct investment and the $33 billion from development assistance. Overall, humanitarian assistance represented five per cent of the total. Harnessing even a tiny fraction of the other 95% could have a significant impact on the funding available for crisis response.

Private sector investors and implementers can play a much larger role in countries in humanitarian crisis. Besides funding, private sector expertise can drive innovative programming. Consider Google’s Person Finder, which allows disaster survivors to check on the wellbeing of friends and relatives; the IKEA Foundation’s partnership with UNHCR to develop new shelter options; micro-insurance schemes; and the involvement of banks and mobile phone companies in humanitarian cash transfer programmes.

As both investors and insurers seek new markets for return on capital, now is the time to collaborate. Where it works well, it will attract further funding from the private sector, frontloading investment in projects that would otherwise be funded by less reliable short-term grants and transferring risk to insurance mechanisms.

The scope for expanding the private sector’s involvement in crisis response is enormous. But this is a cultural challenge as much as a technical or organisational one. For many in the aid world, the idea of making a profit from people’s suffering is deeply uncomfortable. There are risks that humanitarian values could be compromised if handled badly.

This is not a new conversation. Several pilots are already attempting to harness the best of the private sector while preserving the principles that underpin humanitarian action. Now is the time to experiment with different models and build partnerships, investigating how to reach scale in different contexts.

Investors must understand the risk profile of humanitarian crises from an investment point of view. Bilateral and philanthropic donors need to be able to make the case for why this is a good use of public or philanthropic money. Neither is simple. But the ICRC’s humanitarian impact bonds, launched in September 2017, show how this can happen, while also illustrating how difficult and time-consuming it can be to design new products.

Advance market commitments (AMCs) have shown how to accelerate the development of new priority vaccines. They front-load aid finance by converting future official development assistance (ODA) commitments into bonds. These commitments subsidise the future purchase of vaccines that are currently unavailable, for a pre-agreed price. After a pneumococcal AMC was launched in June 2009 as a pilot, children in more than 25 countries were immunised against the main cause of pneumonia. Current AMCs by the GAVI Vaccine Alliance include a $300 million bond for an Ebola vaccine.

Other instruments include disaster risk insurance. This ensures that adequate funds are available to meet financial needs, should a disaster occur, rather than appealing for funds once a disaster has struck. The African Risk Capacity (ARC) is one such example of sovereign risk insurance. Established in 2014, ARC offers insurance against severe drought for member states of the African Union. Pay-outs are triggered by a satellite weather system when rainfall deviation and estimated response costs cross pre-defined thresholds. International donors provided funding to support the design of the facility.

Enabling access to financial services, including cash transfers and digital money, also presents a number of opportunities for private actor collaboration. Cash and vouchers accounted for about $1.9 billion of international humanitarian assistance in 2015, or seven per cent of the total. This is a rapid increase from a decade ago. The use of digital payments in humanitarian responses makes disbursing and receiving transfers cheaper; improves transparency and traceability; increases security for recipients; and can give people an entry-point into other formal financial systems. This launches a large number of potential customers into the private sector.

Harnessing the potential of blended finance to support initiatives that may not otherwise attract solely private investment will be key to bringing in private sector players. It lowers the risk of entry to markets and rewards results, innovation and operational efficiency. Despite being increasingly common in long-term development aid projects, blended finance remains limited in the humanitarian sector.

We need momentum to harness these connections. We must develop more experience of what works and what can scale up. Market-based solutions will not be the silver bullet to address the world’s ever-increasing humanitarian needs. But they offer precious potential that we cannot squander.