Overseas taxpayers and other funders of international aid can make big savings – and reduce corruption risks
FINANCIAL AID CAN BE SIGNIFICANTLY CHEAPER TO DELIVER THAN IN-KIND AID ▾
- Numerous studies have found that financial aid can be much cheaper to deliver than in-kind aid, provided local markets are functioning properly, which they usually are in crises. The lower cost is mainly due to avoiding the logistical costs associated with storing and distributing in-kind aid.
- A study of humanitarian assistance programmes in four countries – Ecuador, Niger, Uganda and Yemen – revealed that financial aid was 13% to 23% more cost-efficient to deliver than in-kind aid. In Ethiopia, the WFP found that it was 25% to 30% cheaper. Providing money is also usually more cost-efficient than vouchers. In a Concern Worldwide programme in the DRC, it was 27% cheaper to deliver money via microfinance institutes than vouchers, and if the one-off cost of opening an account was removed from the equation, it became nearly 50% cheaper.
- If financial aid was provided at the same scale as in-kind aid, the costs per transfer could be even lower due to economies of scale. On average, financial aid programmes are about 10 times smaller than in-kind programmes. This is because financial aid projects tend to be run by small NGOs, while in-kind initiatives are generally managed by large multilaterals.
- An evaluation of EU humanitarian assistance noted: “When used in comparable contexts, cash transfers are typically more cost efficient than either vouchers, in-kind transfers or the use of combined modalities. In-kind transfers generally have higher distribution costs (storage and delivery) and there are larger administrative costs associated with managing voucher transfers.”
- The greater cost-efficiency of cash relative to in-kind aid means that more of the aid goes to the beneficiaries than to administrative, transport and other overheads. In Somalia, 85% of money spent on financial aid went to the beneficiaries compared to just 35% of the money spent on food aid.
- As financial aid is usually more cost-efficient to deliver, more people can be reached for each dollar spent. The four-country study mentioned above calculated that an additional 18% of people (more than 40,000 in total) could have been helped if they’d been given money instead of food.
- It is also worth noting that importing in-kind aid can inflate costs dramatically. In the Philippines, for instance, it was 27% cheaper to buy food locally than to bring it in from overseas. In the DRC, it was 15 times cheaper: $1.11 to buy locally produced food versus $15 to import it. In 2007, the US government estimated that transportation and business costs accounted for 65% of its emergency food aid expenditure.
DIGITAL TECHNOLOGY SUCH AS MOBILE MONEY AND BIOMETRICS CAN CUT COSTS FURTHER ▾
- Delivering money direct to beneficiaries via their mobile phones can produce substantial savings, relative to distributing the money via banks or by hand. Currently, nearly 7 of 10 people in the bottom fifth of the population in developing countries own a mobile phone, enabling a large proportion of people to receive money via their phones, provided the necessary systems and regulations are in place. In Kenya, the cost of sending remittances dropped by as much as 90% after the introduction of M-Pesa, a digital, phone-based payment system. A study in Niger found that mobile money delivery reduced the variable distribution costs by 30%, relative to delivering the money manually.
- Biometrics can also be used to verify claimants’ identities, making the process quicker and more cost-effective, as helping to reduce fraud. Jordan, which houses 1 million Syrian refugees, was the first country to use iris-recognition devices to ensure aid goes to the intended recipients. India and Indonesia have also introduced biometrics as a national identification The Center for Global Development has estimated that switching to biometrics for a typical financial aid scheme that gives a million people $20 a month would pay for itself in a year. After five years the savings would reach $64m.
FINANCIAL AID CAN ALSO LOWER THE RISK OF THEFT, LARGELY THANKS TO DIGITAL DELIVERY CHANNELS ▾
- Virtually all financial and commercial transactions in the public and private sector, in developing and developed economies, are vulnerable to some form of theft. Although it’s important to minimize this risk, it’s also necessary to be pragmatic and accept that it will never be fully eliminated.
- There are few reported instances of financial aid being lost through corruption. Those that have occurred estimate the losses at around 2%. This compares to 2.1% of social welfare benefits in the UK lost through fraud and administrative error, and about 1.5% of supermarket revenue in industrialised economies lost through shoplifting, breakages and other forms of ‘shrinkage’.
- For example, one study of a direct cash-transfer programme to address food insecurity in communities affected by post-election violence in Kenya reported that less than 2% of funds were diverted (Henderson 2008) Other studies have found similar levels of corruption in cash transfer programmes as with in-kind assistance (Campbell, 2014; Dunn, 2013; Hedlund, 2013).
- The biggest case of a fraudulent cash transfer programme was not in a developing country but in the USA. According to the US Government Accounting Office, approximately 15% of the $6 billion aid targeted at the victims of Hurricanes Katrina and Rita – roughly £1 billion – was fraudulently claimed.
- In-kind aid is also not immune to corruption. Indeed, it’s physical visibility and the fact that it has to be transported through numerous intermediaries can make it particularly vulnerable to theft. The World Bank estimates that about 58% of the food under India’s PDS program did not reach its intended beneficiaries in the early 1990s, while in Somalia up to 50 per cent food aid provided by the World Food Programme (WFP) was diverted (UN Security Council 2010).
- E-payments can significantly cut the risks of corruption with financial assistance. Using mobile-phone-based money, ATM cards and other digital channels, donors can not only ensure the money goes straight to the people intended but also trace its progress and avoid the need to transport cash to beneficiaries. The amounts paid can also be varied rapidly. After the 2010 floods in Pakistan, money was provided digitally to 1.7 million people via debit cards.
- In 2011, the UK National Audit Office released a report supporting cash transfers and saying: “Electronic payments are accessible, reduce direct and hidden transaction costs, improve financial control and reduce risks of fraud or theft of funds.”
- “Overall, studies show that ways can be found to deliver and distribute cash safely and securely in all contexts, and that the financial risks presented by cash-based assistance programmes are no greater than those associated with any other form of humanitarian assistance.”
30%
Financial aid has been found to be up 30% cheaper to deliver than in-kind in some cases, and sometimes much more cost-efficient.
“Findings from around the world suggest that giving cash over goods or in-kind transfers is cheaper and more cost-effective”
–Bloomberg