World Vision case: currency risk in a multi-partner and multi-country project

We have been working with World Vision, analyzing one of their projects with a special focus on financial predictability. Together we looked at the currency risk in the project, both in funding and costs. With implementation in several countries, and with multiple partners it was a rewarding challenge! In this post we hope to summarize (briefly!) some of the lessons learned (so far, as the project is ongoing!).

The project is funded by the EU and focuses on improving the situation for youths in targeted communities in Lebanon, Jordan and Iraq. Its is a two year project, that started late 2017 and runs until 2019. Besides World Vision (the project lead), there are a number of both international NGOs and local organisations involved as partners. The total project budget is about EUR 14 million.

Implementation counties in the project.

Our main objective in this case was to provide a better understanding of the financial risk exposure in the project, with the aim of supporting a predicable implementation of the project. The main challenges in the analysis was:

• The number of countries and currencies involved. While World Vision Germany was lead, there were partners in two European countries and the three implementation countries. The result was that funding was received in EUR, budgeting made in USD and costs in EUR (Germany, Switzerland), USD, GBP (UK), IQD (Iraq), LBP (Lebanon) and JOD (Jordania).
• The number of partners. As the project is regional, with both international and local partners the number of agreements and different budgets was quite significant. With slight differences in partner agreements and budgets came quite substantial differences in the analysis of the financial risk exposure.
• Donor requirements. The EU has a set of requirements on funding that while well structured is quite voluminous. With a large project like this, with many partners, the analysis of how EU requirements could affect project finances became important.

An illustration of the funding flow in the project consortium, showing countries and partners.

The overall result of the analysis was an understanding of how exchange rate risks developed over time in the project. Interesting was also the different amount of risk that partners were exposed to, and the connection between financial risk and donor requirements.

Financial uncertainty receiving funds and budgeting costs

Exchange rate risk contributes to financial uncertainty when there is a period of time between an agreement and actual transactions in any budget involving two or more currencies.

In this project exchange rate risk developed both for incoming funds and in projects costs.

1. Incoming funds

Firstly, the EU funded the project in EUR. As the consortium budget currency was USD, a first uncertainty started to grow as soon as the budget in USD was decided.

How much would the disbursements in EUR be valued at in USD, when disbursed from the EU?

• As negotiations between the EU and the consortium took about a year, the rates in the budget were already out of date when the project started. The first disbursement thus differed substantially from the budget even before the project started!
• It is two years between the second disbursement of funding and the initial budget. This is a significant time period in the currency market. The calculated uncertainty (or risk) for EUR to USD is about (+/-) 10 percent in one year, and close to (+/-) 15 percent over two years. That means that the received amount could diverge from budget up or down within a 30 percent range.
• The changes in rates (from when the budget was decided until the contract was actually signed and the first disbursement completed) were positive, in this case. World Vision decided to take advantage of this to lower the financial uncertainty for the first project year. By exchanging a substantial part of the received EUR into USD, a significant buffer was created for the entire consortium of project partners.
• One important thing in the risk assessment was the fact that the several of the parters had used internally set budgeting rates for their parts of the initial budgeting. This meant that almost all the involved organisations had used different EUR/USD rates. The result was that the partners had different financial risk exposures, something that had to be managed in a consortium agreement.

An example of a risk analysis: During the project, a detailed analysis was made for the entire project and each individual partner. The focus was to understand how rates affected the predictability of rates and costs.

2. Project costs

Secondly, partners had costs in currencies other than USD. This meant that a risk developed in the period until funds were exchanged into those currencies. This was of course also analysed, to understand how this could affect the implementation of the project.

• The main conclusion however was that the additional exchange rate risks were limited. The reason is that non-USD costs are mainly in the local currencies in the implementation countries (Lebanon, Jordan and Iraq). All these countries have some type of currency regime that ties their currency closely to the USD. Therefore the rate fluctuations could be expected to be limited.

3. Donor requirements

Finally, an interesting result of the analysis was how exchange rate risks and EU requirements combined to more complex uncertainties.

• The EU funds in EUR, and the contract budget and all reporting is in EUR. As the actual working currency in this case is USD, a new risk develops. Any funds that have been exchanged into USD, but that has not been spent by the end of the project will have to be paid back to the EU. However, if there is a depreciation of the USD in the meantime, World Vision as lead will have a problem: they will have to cover the difference, as exchange rate losses of this kind are non-eligible costs.
• Another, rates bizarre problem also arose in this case. As the USD depreciated against the EUR during negotiations World Vision ended up with a gain when they made their first currency exchange. They have more USD than budgeted, at a lower than budgeted EUR cost. However, they need to spend 70 percent or more of funding in the first year to receive the full funding for the second year. As this is calculated in EUR, they suddenly have a major challenge!
• The consortium has to increase the implementation rate in USD, to reach the budget in EUR. So while the gain in USD rates made the overall exchange rate risk decrease, the pressure will now move the financial department to the project staff.

Youth in Amman, Jordan. “boys will be boys”, Davidlohr Bueso, licence: CC BY 2.0 (These kids have nothing to do with the project.)

Conclusion

This was a really interesting analysis for us. Most project have one or two currencies, and the similar amount of partner organisations involved. In this case World Vision is managing a really complex project! Our main lessons learned from this case, looking at exchange rate risks, have been:

• How the complexity grows with each additional partner. Different organisations have different working practices when it comes to budgeting and rates, something that had a huge impact on the risk exposures.
• Having a good understanding of your financial options is crucial for risk management. In this case, World Vision could substantially lower risk by exchanging a significant amount early on in the project.
• Financial requirements from donors are sometimes very rigid, and should really be analysed in depth to ensure that no unnecessary risks are developing as the project is being implemented.

What risks are your organisation or project exposed to? How do you manage unpredictable funding? Get in touch!