30/11/2017

How can we get cash out to the field when banking becomes difficult?


If the world were a perfect place and humanitarian aid were no longer needed, Steve would be an artist. After witnessing the Ethiopia famine on TV in 1984, Steve always wanted to work for an NGO. After over two decades of working in finance, Steve finally got his chance.

He joined Save the Children International in 2008 and developed a treasury function to combat foreign exchange volatility and counterparty risk caused by the global economic crash. His current role at SCI focuses on treasury risk mitigation, financial planning and cash controls.

We had a coffee with Steve in the margins of a workshop about treasury management for international NGOs organised by Mango/Humentum and hosted by the CHS Alliance. We asked him how he addresses challenges such as bank de-risking, extended due diligence, international sanctions, terrorist financing and money laundering legislation.

What are the biggest challenges facing international NGOs in getting the cash they need out to the field?

We face some really big challenges as a sector. As we transition more towards cash programming we find it harder and harder to maintain the confidence of banks. With their de-risking strategy, it is quite a problem. As a sector we need to start to think smarter on how we fund programmes. We also have to learn to manage the financial consequences of foreign exchange (FX) movements, liquidity etc. 

Donors are transitioning more and more toward contract-based agreements, so you have to hit certain milestones or objectives to be able to be paid, so you need to provide capital and finance for that project. That’s an issue. We’ve got all these kinds of commercial elements for our sector becoming quite real, and I think it’s the smarter NGOs that can manage all those different issues that will start to gain more traction with donors. It feels like we are at the crossroads of so many things, both the political turmoil that has a massive impact on FX volatility, donors becoming more aggressive, wanting result-based agreements. Where we work, in conflict zones and isolated regions, we have political elements and issues with infrastructure where we cannot move cash around.

What practical tips would you give to someone who is running an NGO nowadays?

It all points to having a clear vision of how you want to do something, being transparent with the donor in how you are going to deliver a project. What that means is to ensure that any challenges that donors experience with other NGOs aren’t going to happen with you. If I started an NGO tomorrow I’d be looking at true innovation. If I can’t bank effectively, then how am I going to get Euro 1 million into Syria safely? I would be going to fintech companies, looking at ways to piggyback new technologies that can provide that answer. What that means is taking out the cash element of programming, so you make direct payment to suppliers, to people who provide infrastructure, merchants etc. That way you take out a lot of the noise of the banking system. You provide the donor with far more accurate reporting because you know where the money is going and what is used for.  At the moment we are so dependent on cash programming, we are handing over cash to beneficiaries without really knowing how they’re spending it, so we don’t know what help they need.

Why are banks so scared of NGOs?

They are not scared. They are wary of NGOs because they have to do a lot of background work if they want to transact safely with NGOs. That’s costly. It’s about a perceived high risk and low profit. If we start their buy-in by providing them with a compelling story, by being transparent, you may get more traction and a more robust relationship. Without that, the relationship may die and you won’t be able to programme.

So it’s not only about figures…

There’s always that philanthropic element of "we help that charity to do that". It’s a commercial decision to be able to support civil society. It is a marketing tool. You need to invest in that with them.

Aren’t we talking about some sort of CSR here?

Yes, there’s always that with most banks. They have got such a bad reputation that they want to be seen as doing good and we can help them do that. I feel that I’m not giving you a definite answer…

Maybe there isn’t one?

Without being creative, doing stuff that is so different we won’t be able to really preserve what we do in the field. Regulation, banking and the commercial side of EC funding is making it harder and harder. The other option is looking at development impact bonds, I don’t know if you know about that. In essence, what it means is that you look at programming opportunities and where you can invite donors to pay on a result-based system and therefore it become more cost-efficient for the donor.

Does the donor literally buy a bond?

Donors agree to pay you on certain results. That way they don’t risk anything. The risk is completely with the NGO to deliver. We haven’t got the money as an NGO to finance a project like that so we go to an investor and say we want to do this in the field, we will pay you back this amount of capital plus some interest that we get from the donor, and therefore we shift the risk to the investor. The investor, what’s in it for them, well they have a sustainable way of giving to the sector. If they invest USD 5 million they know they will get it back with interest and then they can reinvest, so it’s sustainable but the risk sits with them and therefore if the NGO fails to deliver they are not getting their investment back. So it ticks many boxes. It satisfies the civil society contribution that a foundation can make, for instance, the NGO gets to do the work and the donor is only paying for a result-based system without any risk.

From a future perspective, if I were starting an NGO tomorrow I’d be looking at that. As a new NGO I’d be thinking that the investor is going to want their money back, they are therefore going to want for us to monitor very closely and maybe offer some form of performance management system to be able to enhance what we do in the programme. Therefore it gives us the tools to be able to programme, in that environment and give us not only the investment but also the tools to programme in other countries too, it gives us the expertise. They would provide us with learning as well and the systems in place to perform better and make us more efficient to get their investment back.

The CHS puts people at the centre. We have been talking a lot about donor accountability. I’m also thinking about accountability to affected people and communities. Is that something that could resonate with the banking system too?

The travesty of our sector is the fact that since 2014 we have under-delivered by hundreds of millions of dollars of programming, purely because we have been complacent or we haven’t been allowed to manage the falling Euro, the falling Sterling etc. Pushing all that risk onto beneficiaries has been an absolute travesty. Going forward, we should look at donors and banks providing the infrastructure and the finance to be able to protect our beneficiaries from that sort of volatility. What that means is having some form of derivative hedge, maybe financed by the donor, maybe financed by the bank, to give us the ability to protect the beneficiaries from that volatility.

And being able to be accountable to them…

Yeah, because essentially we look at our financial statements and budgets and it all looks rosy and fine, we have ticked, but what the numbers aren’t saying is that we could have under-delivered programming by say 20 percent. Why should we be going to donors saying we vaccinated 20 percent fewer kids because we didn’t have the tools in place to be able to protect them? From my point of view, I think we need to look at more commercial tools to be able to protect the most vulnerable from the financial impact of the markets because they are so volatile.

It comes back to the issue of building the school. If you run out of donor cash because it’s devalued and you cannot put a roof on the school what do you do then.  And those kinds of situations are always happening and there’s nothing you can do about it because we haven’t got the resources to be able to fund those gaps.

This is what you do at STC, managing risks?

We were doing some financial modeling in 2016. I said let’s come up with a crazy scenario to really test our modeling:  let’s think of Brexit and something really mad like, say, Trump becoming president. Even with our warning systems and even though we knew risk was coming we didn’t do anything about it because we weren’t allowed to. Government donors expect you to be more commercial on the one hand, but when it comes to charging them for maybe a credit facility or a hedge of some sort, then they say no. I don’t know why because all you’re trying to do is buy budget certainty. From that point of view there are limitations. Banks, donors and NGOs have to work together, but at the moment it’s very fragmented. You can only fix that if you have leverage and scale. As a small NGO it is extremely difficult.

As a smaller NGO you are very quickly going to find a two-tier system, with the bigger NGOs that are ‘allowed’ to work in Syria, South Sudan etc. They will be the ones that the banks will accommodate and for whom they will facilitate payments to. The smaller NGOs will be pushed out and just becoming fundraisers, smaller partners for bigger NGOs on which to piggyback and that would be so wrong.

Is that one of the main stumbling stones on the way to enhanced ‘localisation’?

Absolutely and if you’ve got a clear due diligence system that everyone can buy into and is cheap you don’t need a big global NGO and big legions of lawyers and compliance officers.  We need to somehow automate that and until this comes along, and it looks pretty doubtful, I cannot imagine a world without some form of two-tier system.  It’s going to be almost impossible. The bigger NGOs get government funding, hence far more leverage with the banks. Banks know where the money is coming from. If you are raising public funds in Munich or Birmingham and try to transfer it to a Syrian school that would be very difficult.

That’s why partnership is so important…

We are light years away from that at the moment. That’s where you need the bigger players, the World Bank and the governments, to start creating those micro-economies, that infrastructure locally to make that kind of tradable commodity.I can’t see a solution for small, new NGOs at the moment. You need big backers to make it work. You need a commercial partner that believes in your mission, in your compelling story.

After a career in accountancy practice and local government, Steve Harvey joined Save the Children in 2008 and developed a treasury function to combat foreign exchange volatility and counterparty risk caused by the global economic crash. Qualified in international treasury management, Steve's current role at SCI focuses on treasury risk mitigation, financial planning and cash controls. Steve sits on several professional panels working closely with the UK Government and the banking sector to address NGO challenges such as bank de-risking, extended due diligence, international sanctions, terrorist financing and money laundering legislation.

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