It is a bit of a cliche to point out that technology has been disrupting every sector and niche out there. Indeed, every sector relevant today has been reinvented around tech-driven principles. Whoever did not adapt has been obliterated.
Yet there is one sector that has been stubbornly resisting change. And this is not some small or insignificant sector. Weighing in at ca.150B USD/ year this is the one sector that defines our desire to improve the world as we know it and, more practically, it affects significant parts of economies of numerous low-income countries.
The aid/ development sector has fundamentally remained unchanged for the last 40 years or so, pretty much oblivious to the several changes of paradigm that happened everywhere else. Of course, technology has penetrated here and there — everyone is on social media and fundraising has become slicker — but fundamentally, things happen as they always had:
- A donor starts looking for specific results;
- The donor bids out a “project” and eventually hands out the cash to an organization whose core business is raising and managing donor funding — let’s call them “Primary Recipients”. This organization is often set up in the same country as the donor (fun fact: many of the US based ones are affectionately referred to as “Beltway bandits”).
- The Primary Recipient uses a significant amount of that money to cover their own costs and hands out out part of it to a regional/ local organization in the country where the impact is intended to happen. This regional/ local organization’s core business is to mediate between principal aid recipients and “target communities”. Let’s call them “Sub-Recipients”.
- The Sub-Recipient proceeds to oversee the delivery of impact — either directly or, more commonly, through an additional layer of community-based organizations, which are chosen primarily on account of their ability to handle donor requirements — compliance as well as reporting.
- Meanwhile, a separate organization gets contracted (ususlly by the Primary Recipient, but sometimes by the Donor directly) to do the monitoring & evaluation of this project. The results of the evaluation will be known at the end of the project (5–6 years later); ,
Obviously, there are loads of problems with this state of affairs. The distance between money and impact is unacceptably long and mediated by way too many middle-men. By the time impact gets delivered, there is very little money left to associate with that impact delivery as far as the community where the impact happens is concerned.
Essentially, there is a massive asymmetry between the cost of the impact and its value, as perceived by the communities in question.
While it looks like the nature of transaction is impact (i.e. a donor purchases impact), the nature of the transaction is strictly related to trust. The role of the organizations-in-the middle is to provide the donor with reassurance that the money will be spent well and the delivery will happen and as planned.
Why does the donor need reassurance?
Because Impact delivery is a Black Box. No-one truly knows if and how impact gets delivered and what exactly is going on. The only way around this fact is relying on “trusted” organizations-in-the middle, mixed with creating highly restrictive/ taxing environments where spending decisions are micro-managed and performance is measured by mostly spurious indicators that restrict innovation and favor the same old vanilla activities that are easy to forecast & measure and very hard to correlate with actual outcomes (favorite among these, of course, is “capacity building”).
There are significant consequences. To everyone’s shock, people on the ground distrust — sometimes even despise — the aid community. They resent the fancy cars and slick reports that fail to reflect as far as they are concerned in significant improvements in their own lives.
Most importantly, this approach doesn’t do anything to change the fundamental economics that make delivering impact so difficult.
Let’s take a concrete example:
Donor X wants to prevent the cutting of forest in Zambia. They understand that protecting a piece of forest takes a multi-sector approach. So they set up a few projects to include:
- Planting new trees;
- Educating local communities on the importance of healthy forest;
- Vocational training, job creation, education
- “Capacity building”;
They bid these projects to a consortium that includes 3 or 4 sector specialists. This consortium sets up local partnerships. People get hired to plant trees. Other people get hired to reach out into communities to create awareness. Trainings get set up, maybe a micro-finance scheme. Consultants are flown in to help set up “systems”.
All of this costs a lot of money. And while it will all probably have some impact, they will do nothing to change the fundamental economics there: to the typical local farmer, that forest remains more valuable dead than alive. By cutting the forest, this farmer can plant some crop and out of the wood he can make charcoal which he can sell right away. This will help feed his children. Sure, the odd jobs facilitated by our consortium (plus the involvement of the local law enforcement) will somehow mitigate this but the hard economic reality remains unchallenged. The moment this project slows down — and/ or the moment no-one is looking — that forest will be cut. This will force the donor to continuously renew that project (even while lamenting the lack of “sustainability”), and it will deepen the community’s dependency on aid.
Incidentally, all of this will keep the organizations-in-the-middle busy.
These organizations are part of the problem. Their business model depends on the preservation of this state of affairs*. In fact, many of them are designed to thrive in this environment. They will embrace technology to the extent that it doesn’t challenge the fundamentals that justify their existence: to survive, they need to maintain their man-in-the-middle usefulness. They need to continue to provide reassurance, in exchange for funding.
This needs to change. What we need is a model in which the distance/ time between resources and the desired impact is zero, or close to zero. We need distributed impact delivery without the need of trust.
We need to redefine the economics of impact vs. no impact in such a way that the impact choice is always more profitable for all relevant participants than the alternative. And we need to do this at scale, across the world.
For the first time ever, this is possible.
Let’s go back to our farmer in Zambia. We agreed that the forest we want to protect (as donors/ investors) is currently more valuable to this farmer dead than alive. By cutting it, they can earn a basic living and feed their family (in the short term). What if we find a way to pay that farmer — and everyone in that community — as long as that forest stays alive? To create a situation in which the forest is more valuable to the community alive than dead. A situation in which the forest has immediate, real value.
This is not a new concept and the logic is not controversial at all. But there are two operational reasons why schemes like this are not more common at the moment. First, it is hard/ expensive to verify weather that forest is healthy at any given point; and second, it is hard to price/ manage the underwriting of the funding required, with traditional funding mechanisms and it is a nightmare to manage the operation required to release payments, at scale.
This is where the blockchain comes in. Imagine the farmer has a wallet on their phone (yes, they will have phones). Inside this wallet, there is a camera. Once a month (week/ year), they take a picture of the forest in question using this camera. Different people in the community do the same. These pictures get distributed on a network where they get analyzed — by mix of machine intelligence and human intelligence. The conclusion of this analysis gets written on the blockchain. If the forest is verified as healthy, smart contracts on the network release tokens to the community members who submitted verification as well as to the verifiers (miners). If the verification fails, there is no transaction. If the forest dies, the value is gone. Investors in this scheme are essentially investors in a natural capital fund (natural capital tokens). As long as the forest remains healthy they can trade or hold this token in their portfolio, just like any other liquid asset. This aligns everyone’s interests in keeping the forest healthy.
We can apply this logic to loads of impact delivery events. Teacher verifies school attention. Mother verifies vaccination of child. Someone verifies recycling their garbage.
Impact becomes a store of value. Verification is distributed. No more middle men.
Now imagine that this distributed network that becomes global. Everyone who has a wallet is connected to this super-network. This verification logic can transform and redefine entire new categories of products:
- Insurance without claims — farmer insures crop, crop gets destroyed by hail. Farmer submits pictures of destroyed crop for verification. Verification unlocks payment through smart contract. No claims. No Backoffice. Instant payment. Same logic for car/ accident insurance, hospital bills insurance, etc.
- Downstream payment for commodity producers — You buy a cup of coffee in Soho/ London. This purchase triggers a smart contract that releases a small payment in the grower’s wallet all the way in Guatemala. Essentially, the farmer receives royalties for every cup of coffee sold. And maybe the etiquette will require that you tip this farmer? Easy: a tap in the wallet will do that.
Every wallet owner can choose to participate in verification — either by submitting an event to be verified (i.e. submitting a transaction) or by verifying events in the submission queue (i.e. mining).
This is proof of impact. Let’s make it happen!
Want to be part of this? Put your name down already!
*One day after I published this article, this came out. Here is the most important part: Less than 3% of the money spent on British aid contracts goes to suppliers in poor countries. Nearly all of this 3%, went to a single business: the Ethiopian branch of McKinsey & Co. True fact.