We all know what it’s like to be hungry. But have you ever felt real hunger? When you’ve not eaten for days and you don’t know where your next meal is coming from?
This remains the grim reality for more than 800 million women, men and children around the world. Rooted in complex factors such as climate change, high food prices and, often, the invidious legacy of civil conflict and natural disasters, hunger and malnutrition continue to echo across borders, scarring communities both large and small.
The United Nations World Food Programme (WFP) exists to combat these forces. By seeking to get food to where it is most needed, WFP helps more than 80 million people in 75 countries each year. But the challenges it faces do not just exist on the frontline.
It may be the world’s largest humanitarian agency that is fighting against hunger, but it is entirely voluntarily funded. Most of its donors are governments, which provided more than USD 5.4 billion in 2014. While these resources allow WFP to respond to crises as required, they can also lead to delays as even the most agile donors usually require several weeks to approve a new contribution. In addition, shipping food to the affected areas, which are often remote and with poor transport infrastructure, can take several months – especially in the rainy season when many roads become impassable.
These factors can result in an average food delivery lead time of over 100 days but, for the beneficiaries, every day counts. How can impact be accelerated without undermining WFP’s voluntary funding model?
A smarter approach to finance at WFP
WFP faces two types of financing need that are familiar to every organisation. First, it would like to spend money today that it expects to receive in the future – a classic cash flow problem. Second, it makes sense to purchase and position food in advance rather than waiting until a need materialises – a working capital requirement.
In 2004, The Boston Consulting Group (BCG) worked with WFP to pilot a cash flow financing facility that allowed its projects to commence, or continue, even before a contribution to a project had been confirmed. This enabled projects with a reasonable expectation of receiving donations in the future to use these ‘forecasted contributions’ as collateral against immediate cash transfers worth up to 80% of the anticipated donation. Once contributions are confirmed, the loans are then repaid and the cash is effectively ‘recycled’. Thanks to this facility, food can be procured and other assistance can commence as soon as a need is identified, saving vital weeks.
In 2008, BCG helped WFP to establish a global commodity management facility that would provide essential working capital. This mechanism currently provides up to USD 350 million to purchase and pre-position food stocks globally. It ensures that the food distribution pipeline is prefilled, and minimises the time taken from a project’s request for food to its being delivered. Stocks are replenished based on aggregate demand and resource projections. Again, the cash is recycled as soon as food is paid for using confirmed contributions or loans from the project lending facility.
Taken together, the project lending and global commodity management facilities reduce the average food distribution lead time by 85% – from well over three months to three weeks, and often much less. However, these mechanisms have grown in popularity over time and, in recent years, the number of loans and the total amount advanced has rapidly increased, putting additional strain on the system.
Although convinced of these mechanisms’ merits, WFP’s board remained wary about extending them further. A BCG analysis in early 2014 of the default rates on the project lending portfolio led to a proposal to extend the collateral base and increase the leverage ratio. In parallel, its review of the global commodity management facility recommended improvements that released valuable collateral.
By taking a slightly more structured approach to risk management, much like a bank, WFP recognised that it could significantly extend project lending and make available an additional USD 370 million of finance. The WFP board approved this extension of the financing mechanisms in June 2014, and new loans were immediately released. The impact was instantaneous. Before board approval, WFP was having to turn some finance requests down because it had reached the ceiling on its facility. Now it can support all the requests that meet its lending criteria, enabling it to extend more help to many thousands, if not millions, of people much sooner than before.
WFP has been in existence since 1961. Sadly, history tells us that its services will continue to be much in demand in the years to come. From deploying emergency aid to starving victims of wars or natural disasters to addressing the long-term undernourishment affecting communities in remote and emerging countries, the pressure to maximise its investment has never been greater. But with better back-office financing leading directly to more food at the frontline, that is exactly what WFP is doing.
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