What role for intermediaries?

Andrew Kingman

For those of us who aim to encourage international giving, it is a depressing fact that overall levels of giving to international causes remain stubbornly low in most ‘donor’ countries. One reason for this is a reluctance on the part of some donors to give via a regranting intermediary, whether based in the donor’s own country or in the recipient country – largely because of unwillingness to pay the intermediary’s costs.

This article looks at what different types of intermediary can offer the donor and at the challenge for donors who want to ‘miss out the middleman’ or do something other than simply fund a northern-based international NGO.

The largest proportion of so-called international giving is routed via international relief and development NGOs based in the same country as the donor. These NGOs often offer specialist knowledge of a sector and country/region, skilled staff at home and in the field, a track record of project and programme delivery, and excellent communication strategies illustrating impact or effectiveness. The best international NGOs offer an effective mechanism for any donor wishing to invest in international development. However, for some donors, a constant question mark hanging over international NGO intermediaries is that of their costs. We have to be careful here: donors must recognize the added value of an effective support operation and the legitimate costs of fundraising and marketing. Nevertheless, they rightly expect value for money.

Questions about the benefits and costs of intermediaries have been stimulated by the emergence, particularly in the US, of ‘new philanthropists’. Epitomized and perhaps stimulated by the likes of George Soros, Ted Turner and Bill Gates, many wealthy individuals and families have taken a very ‘hands-on’ approach to philanthropy. There is interest in international giving, often because people can see how much more their money might achieve, but there is less enthusiasm for the traditional approach of giving via intermediaries. This is partly about cost but also about culture – many of the new philanthropists are entrepreneurs used to forging their own path.

Direct engagement

In fact, the only way to avoid using an intermediary is the ‘DIY’ approach – funding or undertaking research directly. This involves visiting countries in which the donor is interested, meeting organizations there, carrying out assessment and monitoring visits. It is easy to see the strengths of such an approach in terms of building the donor’s knowledge and level of engagement, but it’s hard to believe that the costs are any lower than those of even the most profligate intermediary. The effectiveness of the approach will also depend greatly on the skills or knowledge of the foundation representative involved, the capacity of local interlocutors, and even the honesty of translators (if needed). In this issue of Alliance we hear from two smaller foundations – McConnell and Global Catalyst – with slightly differing experiences of this direct approach to international giving.

Project portfolios and the internet

Several variations on a theme of market-based approaches, many utilizing internet technology, have emerged in recent years, among them Acumen Fund and DevelopmentSpace, both of which are featured in this issue of Alliance. Acumen provides philanthropists with a portfolio of carefully researched initiatives in which they may choose to ‘invest’, taking the due diligence tasks away from the donor and establishing a relationship akin to that between a private investor and a trusted fund manager. DevelopmentSpace is the most established of the internet-based ‘marketplaces’ that seek to facilitate a direct relationship between the donor and recipient while also reducing intermediary costs. However, while it is easy to see how such models – particularly Acumen – can work well for relatively large initiatives (justifying high-cost research and validation), it is less easy to imagine tens of thousands of small projects in different countries being funded through such a mechanism without seriously undermining due diligence.

Regranting intermediaries

Although these online and market-based models represent some of the most innovative and challenging developments in international giving, the proportion of funds going through them is dwarfed not only by that going to NGOs in the donor’s own country but also by funding going through regranting institutions.

Reduced to its essential elements, regranting is the process through which a fund is provided to an intermediary organization for onward grantmaking, often in the form of smaller grants. It is an increasingly important strategy for many institutions funding civil society around the world, particularly for bilateral institutions such as USAID and the UK’s Department for International Development, and multilateral funders such as the World Bank, the European Commission and some of the UN agencies. It is easy to see the attraction from their point of view: how else could such funding giants make modest-sized grants at community level? For larger foundations with an international programme, the rationale for using a regranting intermediary is also usually quite clear: to handle smaller grants, to help select in-country grantees, to provide technical support as part of the grantmaking process, and to increase reach. For individual donors or smaller foundations, regranting offers a pooling mechanism, maximizing the effectiveness of often quite modest grants or gifts.

The greater the distance from the funder to the intended end recipient, the more significant is the ability of the regranting organization to distribute the fund as small grants. Linked to this is the assumption that the intermediary, especially if based in the target community or country, will have much greater knowledge than the original funder of the needs of the target group.

Emergence of domestic regranting institutions in low and middle-income countries

An important feature of civil society development in the last decade or so has been the rapid growth of domestic grantmaking institutions in low and middle-income countries. These include community foundations, specialist intermediaries such as the Foundation for the Development of Agriculture in Poland, and regional funds such as the Trust for Civil Society in Central and Eastern Europe or the African Women’s Development Fund. The increasing numbers of such institutions mean that funders can now consider regranting through an intermediary in the country they wish to target.

While such developments should be widely welcomed, we need to be concerned at the number of service-provider NGOs that, seeing the opportunity to access grant funds, quickly build up capacity (or claim capacity) as regranting agencies.

Regranting or regrating?

One important source of concern about intermediary grantmakers is cost. There is a tendency to regard regranting as a modified form of regrating – ie buying up commodities (grants funds) in order to sell again (regrant) at a profit (the intermediary’s fee). The costs of a regranting intermediary are thus seen as less of a value-add than those of an operational NGO.

But such criticism is fair only if we regard regranting as the basic technical process of passing on money. At best, however, this is but a small element of the added value provided by the regranting organization. I can make no good argument for any funder using an intermediary simply to pass on money to third parties – not because there aren’t times when such a simple process is all that’s needed but because no conscientious intermediary grantmaker would accept such an arrangement.

Having made the decision to use a regranting strategy, the next question for the funder is whether to invest in the existing grants programme of an intermediary or to find one that is willing and able to manage the funder’s own programme. This decision is often a matter of scale.

The most important choice for the original funder is between different models or mechanisms. For most funders, the easiest model is probably to make the fund available to an organization in their own country that has grants programmes in other countries; two excellent examples are Global Greengrants and the Global Fund for Women (see p00).[1] Another option is to work through an organization based in the same country that works in turn through other intermediary organizations based in another country. Allavida’s partnership with the Kenya Community Development Foundation is an example of this approach. Allavida has secured funding from a number of British foundations for a small grants programme in Kibera, an informal settlement in Nairobi. KCDF will manage the fund and administer the grants programme, with Allavida playing a limited role in the assessment process. The aim of the initiative is not only to make effective small grants in a very challenging environment, but to facilitate relations between KCDF and the British foundations that could, in future, fund through KCDF directly.

Issues to consider in deciding between different models or mechanisms for international giving include transaction costs, risk and impact (and how to measure or monitor impact). These are core concerns for any donor. I want also to consider the issue of empowerment. This is because regranting (in fact, any giving) should not be seen in the limiting terms of a financial transaction but rather as a more or less significant added-value investment in the development of civil society.

It’s probably fair to say that many, if not most, boards of trustees would like a combination of low transaction costs, low risk and high impact (I’m leaving empowerment out of the equation for now). If pressed, cost and risk would in practice be given priority. How does this play out in the case of international regranting and other models considered above?

Transaction costs

Choosing to give through an organization based in the donor’s own country, especially if it is well known, is likely overall to mean lower transaction costs (costs incurred by the funder in the life of a grant/gift). But potentially quite a high proportion of any grant will go to cover the costs of the intermediary themselves, and these costs may not be totally transparent. Initially, there’s no need for time-consuming and expensive research or extensive meetings, no legal requirements for equivalency checks, and limited if any travel. Communication throughout the contract is easy and low cost, as is monitoring – as long as the funder is content to trust the reports of the intermediary and not require direct contact with end recipients.

All these transaction costs will be considerably greater when using an intermediary in a different country. The costs of the actual regranting process, ie the services of the intermediary, will depend on the degree of input beyond administering application, assessment and grant-management processes, so it is not possible to say that an intermediary based say in the US would necessarily have lower or higher process or administration costs than an intermediary in say Kenya or Russia. It will also depend on whether the original funder is paying for marginal costs ie additional costs incurred by the intermediary in taking on the grant contract (such as a new member of staff) or average costs ie a share of the intermediary’s overheads, usually expressed as a percentage charge on the grants fund. Many programmes of bilateral or multilateral funders cover marginal costs but only provide a modest contribution to overheads or indirect costs. This can often mean that the grant contract proves to be a loss-maker for the regranting organization. Looking at other models, transaction costs are obviously highest in the ‘DIY approach’ and probably lowest in some of the internet-based mechanisms, though start-up grant funding may hide some of their true costs.

Risk

It is easy to assume that risk will be lower if using a well-known intermediary based in the same country as the funder rather than a domestic institution in the country in which the grants will be made. This may be the case, but funders should be wary of assessing risk in this way. Risk in regranting rises or falls according to the quality of the grantmaking process, not the nationality or location of the grantmaker. Failure to assess an intermediary’s capacity properly, or to engage closely in monitoring outputs, outcomes and impact, will increase risk dramatically, regardless of how local or well-known the chosen intermediary might be. Ironically, while foundations might be tempted to rely on ‘track record’ or profile in assessing a known local organization, they will be much more likely to assess in depth the capacity of a foreign organization, which may actually mean lower risk.

It is reasonable to assume (though risky not to test the assumption) that the closer an intermediary is to the original funder’s intended beneficiaries, the greater their knowledge will be. If this is indeed the case, then the risk of grants not being as effective as they might be is likely to be greater where an intermediary has less in-depth knowledge. Again, though, this comes down to assessment of the quality and capacity of the grantmaking process. For instance, can the intermediary communicate with likely applicants in their own language? An important, though costly, feature of the Global Fund for Women is that groups can apply in any language – an effective way of dealing with their location in San Francisco while being a truly global funder.

Impact

All grantmakers are (or should be) concerned about impact. Unfortunately, few donors of any type stay around long enough to judge impact seriously. Instead, too often the focus is on outputs – how many wells were sunk? How many people were trained? Leaving this general point aside, I am not sure that the choice of intermediary necessarily affects impact.

Where it might make a difference is in the possibility of judging impact over time. One advantage of a DIY approach, especially one that focuses on a very limited number of communities or projects, is that the funder is directly connected over time and can thus genuinely judge long-term impact. At the other extreme, judging the impact of funding through international NGOs relies entirely on the efficiency and even the honesty of the NGO in its reporting. Moreover, how many funders ask the NGO to report over sufficient time to judge anything other than outputs? In theory, domestic grantmaking intermediaries, by virtue of their location, should have an advantage over their international peers in terms of judging impact. However, again this comes back to capacity: is the grantmaker committed to learning through a continuing process of review and impact evaluation?

Empowerment

The issue of empowerment or – more challengingly, of power relations – is  I believe, the missing element in most discussions about the use of intermediaries in general and international regranting in particular. Speaking personally, I cannot see any long-term rationale for Allavida being an international regranting institution. Allavida tries to facilitate the development of effective community development processes and institutions. In our view, local grantmaking and other resource organizations are an essential part of a pluralist civil society. If a local grantmaker exists and has the capacity to make effective, targeted grants at community level, it would be undermining our very mission for Allavida to continue regranting – provided the original funder could be convinced to fund through the local grantmaker. And there’s the rub: the sad fact is that too many funders continue to prefer the familiar, often tried and tested intermediaries they have known for years. The challenge for organizations such as Allavida is to facilitate contact between domestic grantmakers and funders in our own countries, help build trust and confidence in the capacity of the domestic grantmakers, contribute as required to building that capacity, and in time back out ourselves from direct involvement.

In terms of contributing to the development of civil society in any given country, it has to be more empowering for funders to work with and through domestic grantmakers.

How empowering are other intermediary models? The direct interventionist approach aims to identify specific projects and fund directly. While there is no reason to believe that such an approach is more or less empowering for the funded group than if a regranting intermediary had handled the grant, it is clear that there is limited investment at a sector or civil society level.

Initiatives such as DevelopmentSpace and GIVE Foundation attempt to significantly reduce the role of intermediaries. Linked up to some set of standard criteria for accreditation – ACCESS (see p00) is an attempt to develop a common reporting standard for development organizations – the long-term vision for such initiatives has at its heart a web of direct relationships between philanthropists and civil society groups of all types and sizes anywhere in the world. Such a system could potentially play an important role in building the capacity of civil society groups that are keen to meet the standards set for accreditation. It could also dramatically increase fundraising opportunities, particularly for the more innovative and effective NGOs. On the other hand, at least in the immediate term, there is a real risk that such systems will play into the hands of existing elites – ie the larger, internationally connected NGOs that know about these mechanisms and have good internet access – and further widen the gap between them and grassroots institutions. There is also a risk that internet-based models, necessarily lacking any coherent strategy for a geographic or issue area, will deliver funding to projects in a ‘scattergun’ way that fails to add up to real change.

The future

Two trends are likely to grow in the next ten years, and in some ways they pull in different directions. First, though there remain legitimate questions about these strategies, and so far none has become sustainable on the basis of earned income, the number of initiatives using the internet and market-based approaches looks set to grow significantly. These are aimed particularly at individual philanthropists and could seriously affect fundraising by international NGOs.

Second, the growth in domestic grantmaking institutions in low and middle-income countries will continue to gather pace. Such institutions are more likely to attract large foundations and other institutional funders, but an effective intermediary can add significant value to the ability of an individual donor or small foundation to achieve impact with their grant or gift. Use of an intermediary can also have a much wider impact beyond the sum of the value of funding provided. So while the development of internet and market-based mechanisms should be welcomed in terms of increasing the overall scale of international giving, the development of domestic grantmakers should be supported not only as an effective means of making smaller, targeted grants, but as a significant investment in the development of national civil societies.

1 Both featured in past issues of Alliance. See Vol 5, No 4, pp28–29; Vol 5, No 4, p30.

Andrew Kingman is Director of Allavida. He can be contacted at Andrew@ACKconsulting.com or andrewk@allavida.org


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