With the frequency of extreme weather events increasing and causing severe economic hardship for affected people and communities, new mechanisms are required to help those at risk alleviate the impact. One such mechanism is the anticipatory cash transfer. In this article, we explore what they are, how they work, some case studies and data, and the future outlook.

What are anticipatory cash transfers?

The anticipatory cash transfer (ACT) is a mechanism meant to provide financial assistance to vulnerable individuals and communities in advance of shocks and crises. They are designed to help these people prepare for and mitigate the impact of events like extreme weather, natural disasters, and economic downturns.

In the case of an imminent drought, ACTs can be made to those affected so that they can do things such as buy livestock feed. The idea is that making a transfer in advance of the event as opposed to after it will result in better resilience, less loss, and more stable communities.

A big part of the logic of ACTs, especially in the context of climate change, is that they help affected people deal with an existential "now" problem. Much of the developed world, in contrast, is focused on mitigating a "later" problem without taking into account the impact of what's already happening and will continue to happen for years in spite of mitigation efforts.

And yet, according to the International Rescue Foundation, despite 20% of natural disasters being "highly predictable", less than 1% of overseas development assistance is earmarked for anticipatory transfers.

Benefits

ACTs have a number of benefits beyond a simple cash transfer:

  • Poverty reduction - ACTs enable those with the most to lose to meet basic needs, such as food, housing, and healthcare, but also to retain their revenue-generating agricultural assets such as livestock.
  • Social inclusion - ACTs promote social inclusion, allowing individuals who were previously marginalised to participate more fully in their communities and society.
  • Economic stimulus - ACTs can have a broader impact on the economy by increasing the financial capacity of individuals to support local businesses and, therefore, create jobs.
  • Disaster and crisis response - ACTs serve as a flexible and rapid response mechanism during emergencies, providing affected individuals and communities with the means to cope with the immediate aftermath and facilitate the recovery process.

Challenges

Despite their many benefits, ACTs do face challenges that can affect their efficacy:

  • Accuracy of early warning systems - ACTs rely heavily on the accuracy and reliability of early warning systems. If an extreme weather event isn't correctly predicted, for example, then funds won't be distributed and the affected people will be left to fend for themselves.
  • Funding constraints - As the ACT concept can still be considered underutilised, there is the question of who should fund their use. This has resulted in funding constraints which limit the reach of ACT programs.
  • Logistical complexities - Reaching remote or marginalised populations can be logistically complex, especially in disaster-prone areas with limited infrastructure.
  • Bias - There will always be the question of whether the right people are getting the right amount of funding at the right time. The inherent bias embedded in predictive algorithms, datasets, and conditions needs to be understood in order to be mitigated.

How do ACTs work?

The vast majority of ACTs include the following key steps:

1) Crisis identification

Crisis identification involves accurately predicting potential crises or disasters that could lead to humanitarian emergencies. Advances in artificial intelligence and sensor technology are making these predictions more accurate and efficient.

2) Conditions

Conditions are an important part of ACTs. They specify the criteria that an individual or community needs to meet in order to become eligible to receive funds once a crisis has been identified. Such conditions include:

  • Geographic location relative to the crisis area
  • Severity of the crisis
  • Risk of economic ruin as a result of the crisis
  • Family or community size

3) Delivery

Once a crisis is identified and a community or individual meets the criteria for an ACT, the transfer is delivered via the selected channel.

  • Mobile money - In Africa in particular, mobile payment networks are readily used and offer the most efficient and accessible way to get money to recipients.
  • Bank transfers - While potentially slower and more expensive, bank transfers are a tried and tested solution.
  • Cash - Not very efficient but considered by some to the most accessible because the cash is tangible and can be used immediately without the need for a charged phone.
  • Vouchers - Have been tested as a means to ensure that the assistance is in fact used to mitigate the impact of the crisis.

4) Evaluation

After each distribution, conducting an evaluation process is critical to understanding the overall success of the program and improving data collection, predictive algorithms, conditions, and delivery channels. The evaluation process typically assesses the following:

  • Impact - Determines the overall effectiveness of the program and whether it was able to meet the needs of those affected by the crisis.
  • Cost-effectiveness - A comparison of the program costs versus the benefit achieved. Benefits aren't always calculated purely in economic terms. Intangible metrics such as resilience and well-being are also considered.
  • Responsiveness - Evaluates whether the right people got the right funding at the right time. Deficiencies in this assessment leads to improvements in data collection and predictive algorithms. Delivery channels may also be reviewed if the money did not reach recipients in time.
  • Feedback - Recipients are surveyed to get a sense of how beneficial the ACTs were to them.

Case Studies

There have been a number of successful ACT implementations in recent years:

  • Bangladesh - In 2020, Bangladesh experienced extensive flooding, affecting millions. The World Food Programme (WFP) used mobile money transfers to provide assistance to 23,000 households in flood-prone areas before and during the flood.
  • Somalia - In preparation for the 2021 rainy season in the Somali region of Somalia, WFP and partners implemented anticipatory cash assistance and early warning information measures.
  • Kenya - In January 2019, both FEWSNET and NDMA warned of food security stress in Kenya due to poor rains. The Kenya Red Cross Society used these warnings to proactively address the issue by pre-registering vulnerable households in drought-prone areas and providing cash transfers to 25,000 households during the critical phase of the drought.

ReFi Example

Mercy Corps Ventures, Fortune Credit, Shamba Network, and DIVA Technologies are currently running a pilot to get ACTs to pastoralists affected by drought. Funds are held in a smart contract and then distributed via an existing mobile payment network called M-PESA. This means that the pastoralists get the transfers in their local fiat currency.

Read Shamba Network CEO Kennedy Ng'ang'a's explanation of the pilot here.

Future outlook

Anticipatory cash transfers have proved themselves at small scale. The next step is to test a large-scale implementation across a wide geographical area to see whether ACTs can have the same, or even greater, level of impact. The primary question that remains, however, is who is going to fund these schemes. Governments should play this role, but have appeared reticent so far.

ReFi may offer a solution, both in terms of a source of funds and the technological foundation for automation and tracing. Pools can be set up to hold funds collected from the community, open source algorithms can be inspected to improve their accuracy, and delivery can be automated through external payment channel integration.