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Finding common ground for financing multilateral institutions: assessing options for mobilising core finance

Expert comment

Written by Nilima Gulrajani, Erik Lundsgaarde

Image credit:United Nations Geneva headquarters. Image license:Falcon Photography

It is much easier to announce the creation of a new multilateral institution than it is to adequately resource its operations.

This is one of the many lessons emerging from the challenging negotiations on the Loss and Damage Fund, a multilateral financing window created at COP27 to assist vulnerable countries bearing the brunt of a changing climate. Negotiators rejected the allocation of financial responsibilities based on a 'polluter pay principle', opting for a fund that will be based on voluntary contributions.

It is also easier to call for reform of the multilateral system than it is to provide it with the financing that enables real transformation.

While the 2019 United Nations (UN) Funding Compact proposed reforming the UN Development System in exchange for more unrestricted funding, a more diversified funder base and improved funding predictability, only 48% of states have met their commitments (in contrast to UN agencies, which achieved 83% of their reform targets). Put simply, the Compact has ‘lost steam’.

If we want a global system capable of dealing with the global challenges we collectively face, we need stronger commitments to resource it adequately. Our multilateral system in particular needs a greater share of unrestricted or ‘core’ resources to allow institutions to operate and plan effectively, hire qualified staff, respond swiftly to crises and invest for the future. Our new ODI report analyses three possible models for growing core resources.

The core 'dilemma' in multilateralism

Core resources are a high-quality form of finance as they provide organisations with greater flexibility and can be a more stable revenue stream. While non-core resources can be a pragmatic way to expand organisational resources and fund agendas that might otherwise be contested, they can be highly unpredictable. They can also weaken formal governance and oversight as well as incentivise short-termism, hampering delivery and performance.

However, over the last decade non-core – or ‘earmarked’ – multilateral resources have grown significantly while flexible core funding at the UN has stagnated, in what is largely viewed as a step backwards for quality multilateral finance. On average, more than $80 billion a year in official development assistance (ODA) was channelled through the multilateral system in 2019–2021, with earmarked funding to UN entities accounting for an especially large share (Figure 1). For example, in 2019 UN Women received less than 10% of its budget from assessed contributions, forcing it to fundraise for voluntary sources of revenues – the bulk of which is earmarked.

How do we get more core finance?

Efforts to better finance one part of the multilateral system can create financial pressures for other parts. Some suggest that current efforts to increase the resource base of multilateral development banks are likely to have negative knock-on effects for efforts to fund the UN. Avoiding unintended revenue asymmetries requires a compelling vision of what states want from all 240 multilateral entities, not just certain sub-sections, including how global tasks and functions should be divided and core financing targets set.

In the absence of systemic clarity on core resource requirements to meet an agreed list of global priorities, understanding the relative merits of different financing options is helpful as institutions advocate for greater core resources. Our recent ODI paper compares the three primary core revenue models utilised by the multilateral system:

  • Assessed contributions: core revenues raised according to a formula based on capacity to pay. This model is used among entities within the UN Secretariat and UN Specialized Agencies.
  • Voluntary core contributions: revenues provided according to member states’ willingness to pay. They are a common source of finance for UN Funds and Programmes.
  • Replenishments: voluntary core contributions provided at regular intervals following dialogue on organisational performance and strategies. This model is employed by international financial institutions and global vertical funds.

Many organisations combine one or more of these core revenue models, though more often one of these models is a dominant core revenue stream complemented by voluntary non-core resources. Growing core revenues is a heightened preoccupation of revenue mobilisation teams embedded in the multilateral system. The World Health Organization’s success in increasing the share of resources coming from assessed dues from 16% to 50% by 2028 and the introduction of a replenishment facility (by 2024) have partly emboldened this interest.

A major takeaway from our work is that not all core revenue models are equal, and their strengths and weaknesses cannot be divorced from the underlying interests of funders and organisational stakeholders. Knowing this can help funders better understand the comparative merits of these revenue models and improve organisational strategies for mobilising core resources for both new and existing multilateral entities.

Choosing the right core revenue model

We find replenishment and voluntary core models are likely to be more attractive to funders than assessed contributions because they satisfy their need to accrue influence, visibility and accountability from their multilateral investments (Table 1). However, for multilateral organisations these models come with the risk of greater funding unpredictability, higher dependence on Development Assistance Committee (DAC) donors and a smaller pool of contributors.

Conversely, while assessed contributions satisfy organisational needs for a diverse funding base in line with their inter-governmental mandates and offer resource predictability to plan, they do not provide sufficient volumes of flexible funding to achieve operational viability.

Table 1: Comparing core revenue models by organisational and funder interests

No revenue model for core financing can perfectly satisfy both sets of stakeholder interests, and compromises and tradeoffs are inevitable. For example, assessed contribution models that privilege predictability will leave contributors’ need for influence and fiscal accountability unmet, while the reverse is more likely to be the case with core voluntary approaches. In this regard, replenishments represent a middle ground, offering some predictability over a multi-year allocation cycle while potentially giving funders the power to enter into direct dialogue with entities and influence organisational priorities.

Revenue mobilisation strategies will need to be attuned to these funder interests. At the same time, multilateral entities have unique starting points that influence their access to certain types of financing. For example, unlike the normative and advocacy roles of UN Specialized Agencies, UN Funds and Programmes do not have access to regular assessed contributions because they were always intended as operational entities in service of member states.

Foundational mandates and historic priorities will also inform the approach or mix of approaches that work best to grow core revenues. For example, UNICEF was created as a fund with a mandate to operationally work on behalf of the world's children. It was never provided with assessed contributions, relying instead on a network of national fundraising committees through which it raises almost a third of its income from private voluntary sources. Strategies for growing core funding at UNICEF would be better served by exploring options for a multi-annual replenishment, rather than engaging with the complex governance and legal changes required to introduce a formal scale of assessment.

Fixing the multilateral 'core' dilemma

Choosing the right revenue model does not happen in a political vacuum. It requires finance ministries to work with foreign ministries and political leaders to better articulate multilateral priorities and coordinate multilateral investment strategies. It also depends on the international community better understanding and resolving the financing dilemmas facing the UN system.

This is especially the case with the growing number of calls on concessional multilateral ODA from all quarters of the system, including forthcoming replenishments of the International Development Association (IDA21), the Global Alliance on Vaccines and Immunizations (GAVI) and the International Fund on Agriculture and Development (IFAD13).

The UN Secretary General’s Summit of the Future next year should be used as an opportunity to examine the role scarce international public finance can play in strengthening the UN as a multilateral actor. However, this must be linked to a much wider conversation on international architecture within the G20/G7, who increasingly lead the charge on global governance reforms.

If we truly want our multilateral system to deliver solutions to an ever-expanding list of global challenges, it needs to balance organisational imperatives for more flexible and stable finance against funder desires for visibility, influence and accountability. A global plan for the future necessitates first finding such common ground.