Is Fragmentation a solution or a problem?
One of the main reasons the donor community pushes for reform in the humanitarian aid sector is the fragmentation
of the services. As an antidote for fragmentation, coordination is proposed. The conventional narrative says that small interventions and fragmented approaches are inefficient. If this is the case, a market approach to the allocation of funds, where efficiency is rewarded, would create incentives to consolidate, as it would be more efficient to have less actors. Currently the system seems to fragment even further, even while high level declarations are signed to vowing to stop the fragmented service delivery.Making the system work as a market
, with incentives
to make it more responsive to efficiency gains would improving the results of the system as a whole. Self regulating systems of incentives normally work better for complex systems than crude top down regulation by decree.
In this blog I will try to determine whether the current humanitarian system can be defined as a market geared towards better results, and identify possible incentives to make it respond better.
Competitive markets and market concentration
A normal market has a few market leaders and a long tail. The redundancy of the market (more providers providing the same service) is not seen as a problem, but as an assurance for getting best value for money. The long tail is for practical purposes irrelevant, but it guarantees that special niches can be covered, and the big actors are kept on their toes, because the small firms could always challenge them if they manage to innovate or produce better.
An example of such a market is the one for PCs: The top 4 manufacturers produce 60 % of the PCs, the 6th a meagre 5.3 %, and all the thousands of others combined master 1/3rd of the market.
Computers are of a decent quality, and there is innovation leading to better, and cheaper computers.
Preliminary Worldwide PC Vendor Unit Shipment Estimates for 3Q10 (Units)
||3Q10 Market Share (%)
||3Q09 Market Share (%)
||3Q09-3Q10 Growth (%)
Note: Data includes desk-based PCs and mobile PCs.
Source: Gartner (October 2010)
However, fragmentation in the development world seems not to deliver this kind of expected results. Why?
The humanitarian market: perceptions of fragmentation and of competition
Looking at Humanitarian Assistance funding , which is (imperfectly) documented through the FTS system managed by OCHA, we find for 2010 a total funding of USD 7 billion.
||Funding 2010 (million USD)
||% of total funding
|All others (636 organisations)
Data: FTS, Summary of requirements and contributions – per Appealing Organisation in 2010, dd. 9/02/2011. Note: the data don’t show all the contributions to MSF nor ICRC, 2 important actors in the field. It is possible that some NGO-funding is not reported through FTS, however, at least donor government contributions are well reported, as donors want all their contributions to show for international forums.
On first sight, this distribution looks wrongly like a normal market, with some market leaders and a long tail. There would be some risks for monopoly abuse by WF. The top 7 organisations deliver 78 % of the assistance. The Herfindahl-Index (HHI) is 26.2, which hints to an extremely concentrated market. The PC-market has only a HHI of about 8.
- A HHI index below 10 % indicates a highly competitive index.
- A HHI index between 10 to 18 % (or 1,000 to 1,800) indicates moderate concentration.
- A HHI index above 18 % indicates high concentration
On closer inspection however, the humanitarian system is not one market at all.
Indeed, WFP is dealing only with food security and logistics. UNICEF with water and Children, UNHCR with refugee camps. The next organisation dealing with food security (as only one of its activities) would be Oxfam UK recieving only 0.8 % of the total contributions. Less than 1/50th of WFP. The top 7 organisations are all UN-entities focusing on a UN-given mandate, in theory not competing with each other. For execution those UN-entities rely partly on the other actors at the bottom of the pile.
Fragmentation within the sector: on what basis are NGOs selected by donors?
Humanitarian aid is organised per sector, with a UN-agency (sometimes assisted by an NGO) as “cluster lead”. The cluster lead has “only” the power of its mandate, its financial means and capacity.
Within the main sectors dominated by the UN-agencies, there is little fragmentation. There is domination by the big players and not enough competition to have a real market. The humanitarian field the cluster leads, such as UNICEF, WFP and UNHCR, receive five to ten times the amount of funding of the main NGOs competing in the same field. In the food sector this phenomenon is the most striking, with 3/4 of the funding through WFP, and an extremely concentrated market with an HHI of 70. In the Water and Sanitation sector were actors in essence do the same job, there were 162 actors in 2010 (data of 09/02/2011), the cluster lead, UNICEF, gets 39% of the resources, followed on a distance by Oxfam GB (6.7%), Solidarités (2.9 %). This leads to a HHI of 16.4, still highly concentrated.
However, the cluster cannot be seen as one market: The UN-agencies get often their funding through core resources or separate funds. This means we should split the data in 2: The UN-agencies are a separate market from “the others”.
When excluding UNICEF from this health sector analysis, the HHI drops to an unheard of 2.98. This means the market is splintered. This is a sign of little return to size. The market does not reward any possible economies of scale. For the other sectors (health, protection, shelter, coordination) the relative weight of the UN-cluster lead is lower, but the NGO-field is as fragmented.
More analysis is needed to explain this phenomenon, as it is evident that there are economies of scale in the sector, but apparently they are not rewarded by the market.
Looking at the water-data per donor, the level where the market operates seems to be the donor level. For most donors, 4 sets of partners can be identified:
- the UN-agencies and the Red cross
- Some international NGOs probably with a local presence in the donor country.
- Donor country specific NGOs
- Possibly, some crisis specific NGOs.
Each donor has its own specific funding pattern. Sometimes there is a high weight of UN-agencies and i-NGOs, sometimes the sectors with most needs prevail, more often than not, at least part of the money is spread over donor country NGOs.
The water market for NGOs apparently is not a single market, but a set of unrelated markets per donor and per set of partners.
This means that the market push towards more quality and efficiency work only within the small donor specific markets. However, at this level, the “partnership” approach could lead to an approach where the allocation is rather spread on basis of negotiation than on selection. The market model would be a cartel.
The role of the UN-cluster leads
From the data, it seems that the NGO-funding and the UN must be considered as separate markets, even with different funding sources. Indeed, there is little evidence that the donors in general (except perhaps for some exceptions, like the CRF, or ECHO) have the wherewithal to allocate funds on basis of quality and results alone.
One hypothesis that the donor governments de facto consider the services delivered by the main UN-entities as a “utility”, a service that is part of “global governance”, a near natural monopoly. The reasons why they continue to fund the small fry are unclear from the data. It could be that they need the visibility possibly through national NGOs for internal reasons, or they might want to keep the UN-entities on their toes by providing some competition and variety of actors. If they want to deliver competition for results, the system does not seem to reward the better organisations by letting them grow. If they want to keep variety of actors, they would strengthen the hand of the NGOs better if they did not fragment them so much.
With the overwhelming part of the funding for the crucial sectors going to the UN-cluster leads, it is notable that coördination, the elimination of overlaps and filling of gaps, is still perceived as a major problem. The impact of other players in areas dominated by the big entities should be limited at best. Especially in the “life saving”sectors.
However, it is possible that the small outfits are many times as efficient as the UN-entities, showing an impact that is way more important than their share of the funding. It might also be possible that there is a perceived lack of coördination, as the visibility of the small NGOs tends to be bigger than the visibility per unit of funding of the juggernauts.
The selection of NGOs by the donors
A visit to the website of ECHO (the Humanitarian Office of the European Commission) on their partnerships is revealing. On the 8th of February 2011, ECHO worked with 191 partners. On first sight, this looks like a crowded field. However, looking per member state, there are only on average 7 partners per member state. The UK alone fields some 40 NGOs, but most member states have only a few ECHO-accredited NGOs.
Within the NGO-group a hopeful tendency shows up: Most national NGOs are local branches of international outfits, with a good reputation and internal quality control systems. This means that the perceived field fragmentation might be partly a ploy from the NGOs to deliver their quality work as one, while authorizing the individual donors to shine. They “game” the system by obtaining funds thanks to their national identity and results through their global organisation.
We conclude from the FTS data that the donors don’t base their selection procedures for NGOs only on the GHD indicators (needs based, capacity of executing agency, effectiveness), but add to it, sometimes even as a prerequisite, the nationality of the provider. Different choices of partners could be acceptable if each donor would focus on a different market: a sub-sector where it takes on its responsibility in the framework of division of labour. This seems not to be the case: donor nationality is not a result area in humanitarian assistance.
The fragmentation per nationality is a concern for the quality of the humanitarian assistance. Donors don’t play their role in the oversight of the funding, as they observe only a narrow slice of the market. If the prerequisite for the allocation of resources is the geographic location of the branch in the north, the importance of other parameters, such as services to the beneficiaries, quality, transparency and efficiency goes down.
The pressure for consolidation in order to get to optimum scale is stopped in favour of the pressure to stay fragmented to maximize national donor resources. Maintaining the status quo on the division of funding is an act of survival for the individual splinters: people can lose their job. In this environment a small NGO will rather seek rents and single sourced funding rather than risk its own survival by moving to a more competitive global environment. Results focus is not in the interest of most of the NGO-players in the sector.
When donors reserve 20 % to the NGO-sector, but every donor finances a different set of NGOs, while they finance the same group of UN-entities, Red cross and MSF, the NGO-sector will be too fragmented to play a relevant political role as it is difficult to project power as a splintered group.
The way forward
To improve the humanitarian results for the beneficiaries, the problem area is the NGO-sector.
The selection of NGOs should be aimed at the general principles for government spending: best value for money and transparency through competition. Selection should be rigorous on basis of criteria that are relevant for the beneficiaries. The market for NGOs must be widened, preferably to the global level, to make it possible for NGOs to reap economies of scale. The needs for national “visibility” could be addressed through the active promotion of national chapters of international NGOs. Such a system would not eliminate small, effective or specialized NGOs, but would lead to more consolidation where this would lead to more efficiency.
Some possible action points:
- Assure that the funding to NGOs is based on criteria of efficiency, quality and value for money.
- Make projects, reports, data, evaluations comparable across donors by using standard forms and data.
- Consider support to national NGOs without competition from iNGOs as tied aid for OCDE/DAC
- Fund only interventions you can actually monitor as a donor. with a minimal size, and leave it to flexible funds, or strong actors to fill the gaps. (Correction: some small interventions by niche specialists are crucial. I would not want to cause them to lose funding).
- Abandon direct funding to NGOs by donor governments, and fund them only through needs based allocation systems, such as thematic funds, CERF or ERF.
In the short term, dealing with the UN-system seems to need rather an evolutionary approach than a revolutionary approach. In the long run, if NGOs become more competitive, the system will have to be reformed completely.
Possible ways forward for UN-funding :
- Accept the role of the UN-entities as humanitarian utilities and regulate them as such. Allocate them the near monopoly they already enjoy now, but assure the drive for more efficiency by e.g. a outcome and impact evaluation, outsourcing functions for more results at a lower cost.
- Separate the UN-monopoly from their operations outside of their UN-monopoly; fund the monopoly as an utility, and open the rest to global competition with the NGOs.
- Introduce competition on basis of quality and efficiency of the organisations. This should lead to a more diverse market, with less monopoly power of the UN-entities. Levers for maintaining coördination should be build in this system.
- Continue the same system, with a near monopoly of the cluster lead and limited direct funding to NGOs, but assure that the choice of the NGOs is based on criteria of efficiency and quality. This would lead to more innovation while keeping a good overall coördination through the UN.
In general, when funding a specific crisis, the best results for the beneficiaries should be obtained by considering the 4 sets of partners as one market. In the light of the limited donor capacity in most countries, it can be argued that the direct funding of local partners is not feasible for each donor.
Conclusion : the collapse of complex systems
The organisation of humanitarian assistance is for the moment not based on a global market. the market is fragmented on the donor level and per set of partners: UN-system, national NGOs, International NGOs, crisis specific partners.
Within sectors calls for better regulation and a recognition of the role of the UN-entity as a “utility”delivering humanitarian assistance.
The funding of NGOs is problematic. There is a place for a competent NGO-sector, but the donor incentives create a lot of dead wood in this sector. The current system stands in the way of an evolution towards better learning, quality and efficiency. It is the funding by the donors, that leads to the current fragmentation in NGO-resources. The donors will have to reassess their funding model completely to work towards more efficiency and better results instead of against it. Otherwise the fragmentation of the NGO-sector can only increase, while the efficiency of the NGO-sector will diminish. The legitimacy of humanitarian aid itself will be under fire. Funding outside the UN-coordinated system, for ICRC and MSF as a more accountable option, could counterbalance this trend.
In order to move away from the current equilibrium, Donors should select their partners on basis of their results and not on basis of their nationality. They should be able to compare different actors with the same yardstick. A first step would be to introduce a level playing field for accepting, assessing, monitoring and evaluating interventions.