Six things INGOs must do to fund local partners fairly

It is becoming increasingly clear that the failure of INGOs to share overheads and other indirect costs with partners is unjust and devastating.

Without this “indirect cost recovery (ICR)”, local organisations are starved of funds, undermining the quality and effectiveness of their work, and putting their very survival at risk.

Hero Anwar of REACH, an Oxfam partner in Iraq, explains: “People often describe ICR as the money that enables organisations to pay the rent and keep the lights on, and that’s true. But it represents so much more… Organisations that are limping from grant to grant without money for overhead expenses must lay off key staff after every project is complete.” (Read more about why ICR matters in Hero’s blog.)

So how should INGOs and donors go about tackling this injustice? At a recent Bond webinar, donors, INGOs and policy advisors came together to share their top tips.

Here are six key things we learned:

1. Begin a conversation with local partners looking at the true nature of partnerships

Rajan Khosla, Oxfam’s Country Director in Myanmar, explained that the decision to share ICR with partners for the last seven years arose naturally from discussions with them about what true equitable partnership means. Rajan explained that the demand from partners to share ICR gave Oxfam Myanmar confidence to resist pressure not to share it, whether that pressure came from donors, other INGOs, or elsewhere in Oxfam. In fact, in some funding applications, local partners have replaced those INGOs not prepared to share ICR with ones that do!

2. Talk to auditors and accountants and find out the rules!

Helena Sandesjö, Programme Manager and Humanitarian Localisation Lead from Sweden’s development agency SIDA talked about a key regulatory obstacle it faced when setting up a pilot with Oxfam to share ICR with Oxfam country offices and partners. The conventional definition for ICR is that it is flexible, unaudited and can be spent any time, even after the end of the project. However, SIDA’s internal auditors pointed out they couldn’t sign off on this level of flexibility and needed more oversight.

That meant a hard conversation that led to a compromise recognising SIDA’s statutory and financial obligations as well as trying to share a form of ICR with partners. In the pilot, 100% ICR is indeed passed to country offices and partners proportionate to their funding. However, for the moment these funds are still allocated to approved budget lines; the money must be spent during the project timeline; and both Oxfam and the partner’s expenditure is subject to external audit. This doesn’t meet the standard definition of ICR. But this is a first step towards an approach that might be more fully flexible in the future while engaging and reassuring SIDA’s auditors.

3. Take advantage of the fact that donors now agree that this is important and talk to them about ICR

Fran Girling-Morris, Senior Policy Advisor at Development Initiatives, has produced a report with UNICEF which maps donor policies and perspectives on partner overheads. She found that donors now agree on the importance of paying partner overheads and indeed want to play their part in effecting change. We heard from Helena at SIDA about how it is talking to all partners, including the UN, about how to enter equitable partnerships with local organisations. There is a real opportunity for donors to create maximum impact by collectively pressing their UN partners to provide overheads to local partners, and for INGOs to remind donors of their commitments to funding local organisations in the Grand Bargain.

4. Think creatively about how to share ICR in a funding squeeze

The reason INGOs should be talking to donors is that sharing ICR means accepting reductions in their own unrestricted income, or donors being asked to increase aid when budgets are tight. To boost ICR funding, some governmental donors have increased their overall ICR rate, while others have added a local partner ICR budget line.

Fran also suggests a model being trialled by Dutch INGOs with their government to rethink the role of intermediaries. This involves switching costs normally associated with overheads into the direct budget so that they can be shared more easily with local organisations.

And Fran would say, while talking to governmental donors don’t forget to tell them about private foundations that either fund local organisations’ true costs (Hewlett, IKEA), have increased their fixed rate (MacArthur up to 29%), or offer multiyear core funding (Ford)!

5. Reframe partner ‘overheads’ as an investment in making localisation effective

As donors can see higher overheads as a sign of inefficiency or a black hole, talking about “additional partner overheads” can be unhelpful. Instead pointing out that these costs, rightly, are about making localisation work can be much more persuasive. Robert Hurt, Deputy Director of Strategic Planning and Results, at UNHCR, said that its introduction of an additional 4% ICR for national partners was framed as a way to help partners provide greater assurance in terms of safeguarding and other issues. He pointed out that they had very little pushback from donors or auditors to this ICR funding boost. Similarly, the UK’s Foreign, Commonwealth and Development Office talks about “localisation support” for partners in its humanitarian funding guidelines.

6. Recognise providing ICR is a matter of justice

Rajan Khosla has had to secure extra funding to make up the difference when donors or other INGOs have refused to share ICR. Such organisations should listen to partners who have said: “We don’t want charity: we want a just share of the ICR to which we are entitled.” As Rob Hurt says, none of the work on sharing ICR or reducing compliance burdens would be necessary if donors and INGOs held themselves mutually accountable to local organisations on partnership principles based on equality, transparency and justice.