Cash on Delivery Aid: Frequently Asked Questions about the Progress-Based approach and its Application To Education

What is Cash on Delivery aid and why is it “hands-off”?

Cash on Delivery aid is an idea developed at the Center of Global Development to improve the impact of foreign aid on developing countries by pioneering a new approach. The CGD initiative proposes to test this idea first in education. Instead of the traditional approach of conditioning aid on specific policies, negotiated action plans, and the purchase of inputs, donors would offer an open contract in which they agree to pay for progress, such as the number of students who complete primary school and take a competency test; any eligible recipient country could then sign on to the contract. The foreign assistance would not be tied to specific purchases or policies, allowing the recipient country to use the funds flexibly and innovatively. The pilot would be accompanied by a research program to evaluate whether it is successful in promoting national achievements in education and whether the “hands-off” approach strengthens local institutions. (For more detail, see “Cash on Delivery aid for Education: A Hands-Off Approach.”)

What are the targets for progress and who chooses them?

This pilot would contribute to the widely accepted goal of assuring that all children complete good quality primary schooling – a goal which most countries have formally adopted as a part of the Millennium Development Goals. The specifics of the Cash on Delivery aid contract would be chosen to be closely aligned with this goal. Any modifications are aimed at assuring that the contract provides appropriate incentives (e.g. focusing on marginal increases rather than existing capacity).

What if a country doesn’t meet the goal of universal primary education?

The Cash on Delivery aid contract is not an “all-or-nothing” form of assistance. A country would be paid a set amount for each additional student that completes primary schooling, regardless of the level of coverage it reached. If the country failed to increase completion, then it would not receive any payment from this form of assistance, though it might continue to get support for educational programs through other sources.

What could countries spend the Cash on Delivery aid payment on?

Anything. There would be no restrictions on the use of the funds. This is the essence of the “hands off” nature of the payment. The funds could be used for traditional educational inputs (e.g. textbooks, teacher training, school construction) but the true bottlenecks to making progress might be of a different nature. For example, the funds could be used to construct roads or provide bus transportation if travel costs are a key obstacle for certain students. Alternatively, the funds could be used to improve disbursement procedures if they are hindering educational progress. Ultimately, the Cash on Delivery aid payment would provide the flexibility to address whatever particular obstacle is most problematic in the given country.

Wouldn’t Cash on Delivery encourage countries to push children through the schooling system at the expense of school quality?

This could be a problem without additional measures to offset this negative incentive. Fortunately, a number of alternative measures are possible for avoiding this problem, though each has its advantages and disadvantages. One approach would be to condition payments on whether or not a minimum share of students takes standardized competency tests whose results must be made public. This would allow donors and, more importantly, the country’s own citizens to judge whether quality is being neglected and to pressure the government to pursue a different strategy. An alternative approach would be to link all or part of the payments to student performance on standardized competency tests. The challenges for this approach would be to design accurate relevant tests and to perform robust audits, as well as to avoid distorting the educational process by encouraging teachers to “teach to the test.” In either case, donors would have an interest in financing the direct costs of introducing and applying tests, both to improve assessment of schooling quality and to improve the possibility of effective management of the education system with better information. These are just two of the possible approaches that demonstrate it is possible to address the basic concern in the contract. The specific approach that is chosen will have to balance competing interests and be feasible in the given context.

For more information on these options, please see Marlaine Lockheed, “Measuring Progress with Tests of Learning: Pros and Cons for ‘Cash on Delivery aid’ in Education,” draft available on request from kvyborny@cgdev.org.

Which countries could benefit from Cash on Delivery aid?

Cash on Delivery aid would be most attractive to countries for which US$100 per student is a significant sum, completion rates are low, the current rate of increase is low, and school cohorts are increasing or large relative to existing school capacity. However, Cash on Delivery aid could also be useful in countries with higher primary completion rates, if it were oriented toward increasing educational attainment among excluded groups, or to expand secondary schooling. The principle of hands-off progress-based payments could also be used within large federated countries. Progress-based transfers could be used by the national government to encourage states or districts responsible for social programs to make faster progress.

Should there be a selection process to choose Cash on Delivery recipients?

Preferably not. The ideal program would be to offer Cash on Delivery aid to any country that is willing and committed to accelerate educational progress. However, if donors are unwilling to make such an offer, then it would be preferable to determine eligibility on the basis of an existing selection process in order to reduce administrative costs, increase transparency, and establish legitimacy. For example, donors could offer Cash on Delivery aid to any country that has qualified for Fast Track Initiative funding, or the U.S. Congress could authorize using Cash on Delivery with any MCC-eligible country.

Who gets the money?

The recipient country would decide who receives the funds, including the finance ministry, the education ministry, subnational governments, school committees, communities, or even teachers. The country itself would decide the best use of the funds. Countries would ask for funds to be directed to whichever agency or organization they choose for increasing the likelihood of success.

Wouldn’t corrupt officials just pocket the money?

Cash on Delivery aid would be no more susceptible to unlawful diversion than other forms of foreign aid to developing country governments. The key difference is that the Cash on Delivery aid funds would only be disbursed if goals have been achieved; whereas normal project spending is disbursed against the purchase of inputs whether or not the project’s goals are achieved. The Cash on Delivery aid contract could also require public disclosure of the funds received to improve transparency and accountability.

Countries apply different definitions of “completion” - what definition would be used to grant the progress-based payment?

A recipient country could use its own definition of primary completion, as long as the definition remained consistent throughout the contract. The audit process would need to address this issue of consistency.

What keeps countries, local officials or teachers from inflating achievements to increase their payment?

The recipient country would report progress annually from its administrative data on education; this annual progress report would be audited by an agent from a list of auditors agreed ahead of time by the donor and recipient. The cost of the audit would be paid by the donor. The character of the audit would depend on the quality of information in the country and the nature of the particular unit of measurement. A number of options are possible including random audits of administrative data or conducting a household survey.

Won’t it be difficult and expensive for the country to gather detailed information required for the report and audit?

Possibly, but this is a necessary investment for obtaining detailed and good quality information about educational outcomes regardless of how the educational program is financed. Useful information about learning outcomes would be of great use to recipient country policymakers, and of greater utility for management decisions than the information generally gathered to monitor and evaluate traditional project aid. The audits paid for by donors are not necessarily any more expensive than the monitoring and evaluation that is typically done for other kinds of foreign assistance.

Wouldn’t all the funding just go to better-off areas, where it’s easier to make progress?

Some countries have chosen educational expansion plans that seek to maximize the number of students completing primary schooling as fast as possible within their limited resources. In such cases, resources may go to relatively better-off areas where it is easier to make progress. Other countries have chosen educational expansion plans that seek to assure that gains are more widely spread across geographic, gender, income, and ethnic differences, but this may come at the cost of reaching more children. This is a tradeoff that can only be resolved through public debate at a national level.

In countries that have chosen to focus on reaching the most children, the Cash on Delivery aid contract would pay for each additional student completing primary school regardless of whom or where they are. In countries that seek more widely spread educational gains, the Cash on Delivery aid contract could include an extra bonus payment for girls, minority or rural children, or other categories to promote equity.

Governments only control a fraction of the factors that affect primary completion. How does Cash on Delivery aid account for this? What if a drought or other unforeseen shock causes schooling attainment to drop, for example?

Sharp changes in international interest rates or terms of trade and natural disasters such as droughts often reduce enrollment. The Cash on Delivery aid contract contains a contingency for adverse shocks that are beyond the government's control. It offsets the impact of the adverse shock by resetting the baseline to a lower level, proportional to the magnitude of the shock.

How can the country be expected to make progress if it does not receive payments until it has already achieved some of the goals?

Countries that enter the Cash on Delivery aid contract are not starting from a blank slate. They already have their own educational expansion plans financed with domestic or foreign resources. The Cash on Delivery aid funds provide an incentive to make existing technical assistance and educational investments “pay off” in terms of improved outcomes. Once the Cash on Delivery aid payments start flowing, these funds can be used to sustain and further accelerate progress.

What about countries where national statistical systems are weak?

The contract could also designate an allowance paid by the donor to which the country could charge the upfront costs of developing testing and statistical systems.

What’s the difference between Cash on Delivery aid and output-based aid?

Output-based aid programs generally pay for units that are easily measured but not necessarily identical to the true goal of the program. For example, output-based water projects may contract with a water services agency to pay for the number of water connections that are completed but not for the delivery of potable water; an output-based health program might pay for the number of children who are screened for malnutrition, but not for the number of children who reach appropriate weight for height. By contrast, Cash on Delivery aid is associated more closely with the program’s ultimate aim – in this case, children completing primary school with attention to the quality of schooling.

A second difference is that most output-based aid programs contract directly with service providers or require detailed implementation plans and justification of expenditures. Cash on Delivery aid is “hands off,” in the sense that the government only has to demonstrate what it has achieved. It does not have to document to donors how it used the money.

What is the right amount for the payment?

The UN Millennium Project estimates the annual cost of primary schooling in a range of potential recipient countries at between $50 and $100. The sample formula in the draft contract grants countries a one-time $100 per additional child upon completion of primary school above a baseline set five years earlier, implicitly covering the total cost of primary schooling for each additional student completion. However, continuing to expand primary schooling to populations that are harder to reach for economic, geographical or cultural reasons is likely to require more resources per child than an expansion from a lower base. The real issue is whether the payment is large enough to give the government leverage to make the changes needed to achieve this.

Isn’t Cash on Delivery aid just like Budget Support?

Budget Support programs have similarities with Cash on Delivery aid: they are disbursed without being attached to specific expenditures or projects and they are conditional on achieving certain targets. However, the two approaches differ significantly in other respects that have significant implications. Most Budget Support programs are conditional on meeting a number of targets set in national plans or sector strategies and the country is judged to succeed or fail relative to each of these targets. In contrast, Cash on Delivery aid for Education is linked to one concrete, specific outcome – primary school completion - and the payments are made for every increment of progress. This avoids “setting the bar too high or too low,” instead creating a clear payoff for each unit of progress. In contrast to Budget Support, Cash on Delivery aid also makes it easier to make support predictable: even if political or governance challenges arise in the recipient country, aid is still linked to getting children in school. Progress-based payments would also automatically phase out as the recipient country builds capacity and reaches 100% completion and testing, so spending would end with the achievement of development objectives, rather than at a point determined by the donor.

Why would Cash on Delivery aid work when so many other approaches have failed?

Other approaches have not completely failed. Many countries are making dramatic improvements in schooling, often at rates that exceed those that were experienced by today’s wealthiest countries. Nevertheless, progress could be faster if a new foreign assistance instrument were available to tackle the constraints on progress that are not addressed by traditional approaches that focus on providing more and better schooling inputs. Cash on Delivery aid differs from traditional approaches by being “hands off,” which allows the government greater flexibility in how it uses the funds; by paying against progress, it aligns the incentives of the whole government (not just the Education Ministry) more strongly with the ultimate goal of the program; and by focusing on results it creates a powerful incentive to improve information systems and testing that traditional programs have only approached from the supply side.

How could Cash on Delivery aid be evaluated?

The appropriate way to evaluate a Cash on Delivery aid contract would be a case study that compares outcomes before and after the program is introduced while documenting the institutional, managerial and policy changes that are implemented during the course of the program. While it may not be possible to contrast the country’s progress against a real counterfactual, it should still be possible to assess whether it is plausible to attribute changes in outcomes, policies and behavior to the program. In this regard, evaluating Cash on Delivery aid would be easier than evaluating sector-wide approaches and budget-support programs which tend to have a large number of targets, making it more difficult to draw plausible links between the programs and outcomes.

Where feasible, the recipient country can also be encouraged to implement its programs in ways that permit rigorous evaluation. For example, if a large country sought to accelerate progress through building rural roads, training teachers, or establishing performance incentives for schools, data could be collected to compare the changes in outcomes between areas that participate in earlier and later phases of a rollout. Promoting this kind of impact evaluation by the country itself would have further benefits by increasing ownership of the results and contributing toward building a culture of evaluation.

Wouldn’t the country get a windfall when completion rates increase for reasons that have nothing to do with its own actions?

Yes, countries would receive funding for each unit of progress regardless of how it was achieved. The only way to avoid this would be to create intrusive and expensive methods for attributing success to specific actions by the government. We are not concerned with such windfalls, however, for at least two reasons. First, even if the success is not directly attributable to the government’s actions, the fact remains that the goal of accelerating educational progress has been attained. Contrast this with the large number of projects that fully disburse their funds without achieving their goals, a much more wasteful risk. Second, it is unlikely that the government has not contributed in some way to the success, if only through supporting the basic administrative infrastructure necessary for the system to function.

Wouldn’t this money just replace money the government would have used for education anyway?

It is impossible to be certain that any foreign assistance is “additional” to recipient government spending. However, Cash on Delivery aid can be said to be “additional” in a way that other forms of funding are not – because it only pays for success, it is the only funding that is conditional upon success. All other forms of funding, whether domestic revenues or traditional project finance, even if tied to particular expenditures, may in fact simply relieve the ministry or the government of paying for those particular items.

Wouldn’t this money just replace money donors would have disbursed through other aid mechanisms? How can the contract ensure additionality?

Cash on Delivery aid represents a way to spend additional funds that donors have already pledged for poor countries as a part of commitments to “scale up aid.” Donors would agree as a part of the contract to treat the progress-based funds as additional, and to abide by all existing commitments. More importantly, however, this issue would only arise if the country were very successful in improving educational outcomes, in which case donors are likely to want to give a country more money, not less, anyway.

What is the right time frame for the contract?

The longer the term of the contract, the better – this would help increase predictability, encourage long-term investments and allow wise spending on recurrent costs. In our judgment, a five-year contract with the strong expectation of at least one renewal would be the most feasible given the political and legal context.

What if countries start to become dependent on these funds?

Cash on Delivery aid funds do not continue indefinitely. They phase out as the country reaches universal completion rates. The “sample contract” shows how this would work: the number of additional children is calculated as the number of children completing school in the current year minus the number completing five years earlier.

Wouldn’t there be a big lag between investment and the payoff to the country?

This depends on the appropriate time frame. Most educational programs have to be thinking of 5 to 10-year horizons, and any program aimed at making substantial changes in institutions or behaviors also has to consider long time frames. The lag in payments is likely to make the contract seem unattractive to short-sighted leaders, but very attractive to those who have longer-term visions. This is, then, another attraction of this approach since it is most likely to be taken up by leaders who are most likely to use it well.

How could countries be sure that donors will fulfill their commitment to have funds available when payments are due? How can donors pledge money up front without knowing how long it would take to spend it?

The credibility of the donor’s commitment could be most easily achieved if the contract required donors to place sufficient funds in escrow to cover anticipated payments, say, in the subsequent two years. Funds would then be paid out and replenished upon completion of the audit. Depending upon the donor government’s particular budgeting and disbursement procedures and procedures, alternative arrangements may be necessary, such as requiring that the bilateral donor posts a bond, identifies an alternative use for undisbursed money, or pays into a fund (perhaps an account at a multilateral institution) that would be available to many countries, thereby reducing the risk of unspent funds due to failures by any particular country.

Wouldn’t rewarding a specific outcome like primary education mean that domestic resources will be diverted to education and away from other priorities (such as AIDS prevention) ?

If the payment were large enough to cover the cost of progress – the marginal cost of ensuring an additional child completes primary school – then funding for other priorities would not be affected. With a smaller payment, this is an issue that donors and recipient countries would have to consider seriously. If the approach were successful, donors could potentially offer a range of contracts for the full range of development objectives that they share with developing countries.

Could private funds be used for Cash on Delivery aid?

Yes, with the same principles that apply to public donors.

Could Cash on Delivery aid fund private schools?

This would be up to the country to decide based on its preferred strategy for increasing primary completion. Because the funds would go to the government for use in any sector, a country could certainly choose to fund public and private schools through domestic programs (e.g. vouchers).

Could Cash on Delivery aid be directed to state or local governments?

Yes. A country receiving Cash on Delivery aid at the national level could decide to channel progress-based funds to the state or local level. Donors could also consider making arrangements for Cash on Delivery aid with governments at the sub-sovereign level, such as state governments. However, this latter approach would require careful assessment of the impact on national level policies, interregional equity, fiscal responsibility and population movements.

Is lack of money really the problem? What about insufficient demand, political obstacles, or weak technical capacity and coordination?

Lack of money is not necessarily the problem. The funds disbursed under Cash on Delivery aid provide an incentive for the country to undertake the right diagnosis and design effective strategies, whether or not those strategies require additional funding. For example, if the only obstacle is political will to enact a particular law or enforce specific management practices, Cash on Delivery aid would provide leaders with an incentive to take those measures. In such a case, the funds that the government receives for successfully improving educational outcomes could then be applied to other public priorities. In most cases, however, some funding is still necessary though not sufficient for improving educational outcomes – whether those funds are necessary for additional training, teachers, incentives, infrastructure, supplies, textbooks, education research, information systems, or testing.