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In the world of international aid, performance payments are a hot topic. But when it comes to signing performance payment agreements, most funders have been reticent. One of the reasons is a fear of “Double Counting” – paying once for investments to achieve outcomes and a second time when the outcomes are delivered. This concern ignores the complexity of achieving development goals and the intangible assets invested by recipient countries. When funders do agree to performance agreements, they end up ignoring the burden on recipients of “Double Demanding” – disbursing when outcomes are achieved and then setting restrictions on the use of those funds. All this confusion gets in the way of designing effective aid programs.

“I’d rather pay twice and get the result I’m after than pay once and get nothing”

That was my reply at a conference in Oslo when asked whether performance payments lead funders to end up paying twice for an outcome – once for the technical assistance and investments and a second time when the outcomes are achieved. While I stand by that answer, I also recognize that it is an unsatisfying answer to people who believe you actually can pay once and get something.

But those who think you can pay once and get something are only thinking about small projects with relatively simple (not complex) solutions. Most performance agreements to governments are aimed at complex problems which require much more than Technical Assistance (TA) and investments that fit in a Gantt Chart. They also require the recipients to apply a lot of political, managerial and financial inputs of their own in ways that are not recognized by most project designs except as “risks” to be managed. The funder’s payments for achieving outcomes should be based on the funder’s own willingness to pay for the outcome and is better conceived as a bonus to solve political and managerial problems than something that reimburses technical assistance and investments.

Essentially Funders need to be more humble about the contribution of their investments of time and money, recognizing that the recipient country brings a lot of intangible assets to the solution. And funders need to be bolder at asserting how much they value the actual deliverable – which includes not disbursing the performance payment when there’s no performance.

So much for Double Counting. But what about Double Demanding?

Though Double Counting is a false concern, Double Demanding by funders is a real one. The new crop of performance programs which pay governments for improved outcomes should liberate funders and recipients alike from the transaction costs and design rigidities that arise when you insist on tracking exactly how money is spent.

The irony is that funders who are innovating by paying for outcomes frequently undermine this advantage by requiring that recipients track how the performance disbursements are used. Essentially they are demanding the recipient work twice as hard for each Dollar, Euro, or Pound – a Double Demand. It doesn’t look like Double Demanding because funders are so habituated to tracking the uses of funds. But performance payments are ex post, and the demand to track uses of performance payments after the outcome is achieved ignores the upfront political, managerial and financial resources that the recipient had to apply in order to deliver the outcomes.

In practice, most performance agreements that we’ve analyzed have tried to make the second demand – tracking disbursements – less onerous. DFID and the IDB achieved this in their programs by treating performance payments like sector budget support – still restricted but easier to justify and report. Norway’s agreement with Brazil for emissions reductions contributes to a fund established by the Brazilians themselves which is dedicated to rain forest projects – tied but at least tied in a form that is governed and managed by the recipient. By contrast, the Norwegian agreement with Guyana faltered in part because the institutions they needed to control and manage the use of funds were unable to satisfy typical overseas development aid restrictions. Arguably, those restrictions shouldn’t have been applied because they are Double Demanding.

Performance programs are not the solution to everything but funders will never do enough of them if they worry about problems that aren’t real – like Double Counting. Once they get past such hurdles, the performance agreements need to be designed to pay on the basis of the funder’s willingness to pay and without restrictions on the uses of funds – otherwise they’re Double Demanding.

Disclaimer

CGD blog posts reflect the views of the authors, drawing on prior research and experience in their areas of expertise. CGD is a nonpartisan, independent organization and does not take institutional positions.