Is COD Aid on the Horizon for the Millennium Challenge Corporation?

The President’s Budget Request for FY 2015 proposes flat funding for international affairs but it contains priorities and policy reversals that have led at least one observer to describe it as edgy! And indeed, it is edgy on a number of fronts, including a proposal by the Millennium Challenge Corporation (MCC) to pilot Cash on Delivery Aid (COD Aid).

If the budget proposal for MCC is approved, it will receive $1 billion in base funding, a significant increase over last year and the highest amount since FY2010. As Sarah Rose has explained, this could mean more money for eligible countries; assure that MCC will play a role in the administration’s flagship Power Africa initiative; and encourage experimentation with innovative financing arrangements. On this last point, the executive summary of MCC’s Congressional Budget Justification states:

MCC also plans to explore creative financing mechanisms in new MCC compacts to link payments more directly to development results. Such mechanisms could include pay-for- performance, cash-on-delivery or other outcome-based payment approaches that fit within MCC’s operational model. [emphasis added].

“Cash-on-Delivery” refers to COD Aid which is a foreign aid approach proposed by the Center to untangle the mixed accountability relationships of current aid modalities. Funders pay for independently verified outcomes in a hands-off fashion – say $100 for every additional 12-year-old who can read and write or $25 for every additional household with regular and reliable access to electricity. Britain’s Department for International Development (DFID) is already piloting some COD Aid programs. While COD Aid has been discussed within the US government’s foreign aid agencies and on Capitol Hill, this is the first time it has been explicitly proposed in Washington, placing it clearly on the horizon … but how far away is that horizon?

The President’s Budget Request is only the first step of a long budget process that involves dozens of Congressional committees during a year in which midterm elections will be on politicians’ minds. But that may only be a small part of the distance that needs to be covered. One way or another, MCC is likely to have enough funds to explore these innovative funding mechanisms. The real question is whether these pay-for-performance proposals will simply repackage existing grant mechanisms or truly pioneer new approaches.

The key test will come when these programs are designed.

•          Will they pay for outcomes or will they pay for outputs or policy changes? Most aid programs pay for inputs, outputs or policy changes. While they sometimes rename these, calling them “results,” the truth is that most initiatives link disbursements to things that are only weakly related to program goals – paying for textbooks when the goal is students with skills or paying for electricity connections when the goal is access to reliable electrical power. Linking payments to progress on the real goals, can avoid the perverse incentives that arise from trying “to complete the plan” and align incentives toward problem-solving that is focused on what everyone really wants to achieve. Focusing on measuring and responding to changes in outcomes opens space for experimentation and for developing approaches that are more consistent with context.
•          Will they give recipients flexibility to experiment and adapt or will they require rigid plans?   Most aid programs insist on elaborate plans in the hope of ensuring  that the recipient can achieve success. Yet, when such plans impose external perspectives, resist adaptation in the face of changing circumstances, or keep recipients from learning through experimentation, they are much less likely to work. For these performance programs to be different from traditional approaches and really be innovative, they need to experiment with giving recipients primary responsibility, valuing recipients’ initiative, and giving recipients full discretion.
•          Will they demand detailed accounting of how funds are applied or will they recognize the delivery of outcomes as sufficient evidence that money was used well? Frequently, aid agencies introduce results-based approaches by adding new demands – tracking outputs in addition to all the existing reporting required for procurement, use of funds, and auditing. While these functions are important in any public system, the demands that recipient countries follow procedures and report in ways that conform with aid agencies’ needs can be a burden. By contrast, paying for appropriately defined and independently verified outcomes actually lessens the need for tracking money.
•          Will they learn from other agencies who have been exploring results-based aid approaches?  Britain’s Department for International Development (DFID) has programs in Ethiopia and Rwanda; the Inter-American Development Bank has a regional health program in Central America; Norway and Brazil have the Amazon Fund;and the World Bank has some interesting initiatives under its Program for Results. The different institutional arrangements, methods of verification, approaches to negotiation, and relationships demonstrate that many fears about results-based aid are unwarranted but also demonstrate a number of pitfalls and challenges for the concept. By listening to other organizations, new results-based aid initiatives can avoid old mistakes.

MCC has really broken the mold on US foreign assistance in terms of selectivity of recipients, long-term funding commitments, transparency, and one of the most comprehensive approaches to impact evaluation by any aid agency in the world. This gives me good reason to think that the horizon for creative financing mechanisms in this US agency, and a pilot of COD Aid in particular, may not be so far off.

Thanks to Erin Collinson for her inputs to this blog.