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Cash on Delivery is an approach to foreign aid that focuses on results, encourages innovation, and strengthens government accountability to citizens rather than donors. Under COD Aid, donors would pay for measurable and verifiable progress on specific outcomes, such as $100 dollars for every child above baseline expectations who completes primary school and takes a test. CGD is working with technical experts and potential donors and partner countries to design COD Aid pilots and research programs.
Cash on Delivery Aid is designed to overcome the problems of traditional aid, which often focuses more on disbursements and verifying expenditures than on results, undermines a government’s accountability to its citizens, and undervalues local experimentation and learning. COD Aid’s advantage is in linking payments directly to a single specific outcome, allowing the recipient to reach the outcome however it sees fit, and assuring that progress is transparent and visible to the recipient’s own citizens. These features rebalance accountability, reduce transaction costs, and encourage innovation.
COD Aid can be applied to any sector in which donors and recipients can agree upon measurable, verifiable outcomes and commit to making progress toward those shared goals. The approach is fully explained in Cash on Delivery: A New Approach to Foreign Aid (CGD, 2010). Listen to more about COD Aid in these Wonkcasts. Explore the links to the right for more information on specific sectors and countries.
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Aid agencies are investing more in energy projects than ever before, but will they succeed?
Not if they ignore the key obstacle to progress: governments that choose the status quo over serious reforms. If external assistance for energy access is to be strategic and effective, then it should try paying Cash on Delivery for Energy—as I describe in a new CGD policy paper. This approach offers funds to countries in proportion to their success at expanding energy access. Accordingly, foreign aid would reward countries that overcome political obstacles to financially sustaining and expanding their own energy systems.
Ironically, this has little to do with lack of money. People are more than willing to pay for electricity, even the poorest. However, establishing a functional system to generate, distribute, and bill for electricity is not easy. Here’s a description of the current energy crisis in Nigeria from The Economist:
Power plants are … owed colossal sums by the agencies that act as middlemen between generation companies and the distributors. … The intermediaries, in turn, blame distributors, saying they have not been collecting cash from their customers. As for the distributors, they say that the tariffs they are allowed to charge are too low to cover their costs and that, in any case, Nigerians do not pay their bills. Depressingly, the biggest offender is the government, whose various departments and agencies owe almost $300m.
Still, this problem has been solved time and again. It took Thailand 25 years and Vietnam only 15 years to increase per capita electricity consumption from less than 100 kWh per year to over 1,000 kWh per year. By contrast, electricity consumption in Kenya and Nigeria barely grew from 1970 until 2013 (latest available data). (See Figure 1).
The main reason that overseas development assistance in the energy sector fails is a lack of domestic ownership of energy sector strategies. Prior to approving an aid program, agencies have to guess whether governments are committed to solving energy problems. If instead agencies paid for delivering outcomes, they would not have to predict the future. Rather, this approach—what we here at CGD call Cash on Delivery Aid, or COD—would reveal which governments are truly committed to reform based on actual performance. COD is not necessarily easy to design—and this is particularly the case in the energy sector. But conventional programs are also complex and tend to neglect the fundamental political obstacles.
Figure 1: Success and Failure in Expanding the Electric Sector
The key to a successful COD proposal for energy requires identifying an indicator which is closely linked to the desired objective (e.g., affordable energy services or expanded energy access); is independently verifiable; and which does not encourage waste, inefficiency, or environmental damage. My paper offers three proposals which might fit these requirements:
A program that prioritizes overall expansion of electricity consumption compatible with a sustainable environment could pay governments (1) $0.01 for each additional kilowatt-hour consumed and (2) $15 for each ton of CO2 emissions averted, relative to a predefined reference level.
A program that prioritizes the financial sustainability of utilities could pay governments $1 for every additional $10 in appropriately billed and collected revenues.
A program that prioritizes distributional goals, giving all households access to reliable and adequate electricity services, could pay governments $100 for each additional household consuming 300 kWh per person per year, defined as basic energy access.
This final alternative may be easiest to envision. For example, a country with 20 million people might have 5 million households, of which only half (2.5 million households) have basic energy access. If the government enacted policies to reduce commercial losses and channel these funds into broader access for another 200,000 households each year, it would receive annual payments of $20 million. The paper provides more details and examples for each of these alternatives, and also addresses a series of concerns about COD from the perspective of funders and governments, such as social and environmental risks, implementing such arrangements in poorly governed countries, and a lack of up front financing.
Improving access to energy in the world’s low- and middle-income countries is a central challenge to improving lives and expanding economic opportunities. Conventional approaches have supported progress in some countries, but in many places, they are failing. The COD approach offers a different way to assist developing countries because it works with, rather than against, the political process needed to sustain energy systems—financially, environmentally, and equitably.
Energy is critical to human welfare, yet energy consumption in developing countries is extremely low relative to modern living standards. Conventional aid programs have invested in energy production with some success but also with many notable failures. This paper discusses how a distinctive approach to development aid—disbursing funds against improved outcomes—could make aid more effective in the energy sector. In particular, it explores the use of Cash on Delivery Aid (COD Aid) to resolve perennial difficulties encountered by conventional aid programs in energy sector development.
I’ve been working on the idea of Cash on Delivery (COD) for some years under the hypothesis that if we could define good outcome indicators, someone would step forward to buy them. Two core features of COD are that funders pay for outcomes and give recipients flexibility in how they achieve those results. Programs around the world approach this model in different ways, but the indicators they use tend to be negotiated between funders and recipients—which doesn’t really test my hypothesis. However, I recently came across a result looking for a buyer—a safe water initiative which is already set up to receive payment after achieving a desired outcome: “households utilizing safe water.” If in the next few years, a philanthropy or aid agency steps up to buy this approach, I’ll have some (anecdotal) evidence to support my hypothesis. If not, it will be time for a rethink.
Outcome indicators are a critical feature of COD. Understandably, no funder is going to sign up for a contract to deliver results if they don’t trust the measurement to reflect true progress. So an indicator has to be objectively measured and precise enough to satisfy both funders and recipients.
Another feature of COD that funders find difficult to swallow is the idea that payments are made after outcomes are achieved. Funders typically ask how the organization or country can produce results without upfront financing, or question whether their funding was necessary in the first place. They find it difficult to envision their funding as a reimbursement for actual achievements rather than an upfront investment to carry out a plan that may or may not bear fruit.
So what would happen if an organization came forward with a plan to supply a verified outcome in return for a set unit payment after delivery?
In a sense, this is what Dispensers for Safe Water is currently doing. According to Andy Narracott, a deputy director at Evidence Action, Dispensers for Safe Water has demonstrated that it can install and operate chlorine dispensers in rural African contexts. Numerous studies have found that similar interventions to provide safe water reduce the prevalence of diarrhea and other water-borne diseases. Each month, Dispensers for Safe Water verifies how many households properly chlorinate the water collected from standpipes or rivers by testing samples in randomly selected households.
Narracott told me that, initially, about 25 percent of households will chlorinate their water. The program applies a number of strategies to encourage greater use of the dispensers and finds that it can increase the share of households in a given catchment area with safe water to as high as 60 percent. As of today, the program’s 27 thousand dispensers have brought safe water to more than 4.6 million people in Uganda, Kenya, and Malawi with no associated user fees (according to their public dashboard).
And here’s the kicker: Dispensers for Safe Water’s financing model recovers about 40 percent of its costs two to three years after dispensers are installed by selling carbon credits. (Compared to boiling water with firewood, decontamination with chlorine avoids greenhouse gas emissions … a fascinating part of the story if you want further reading.) The ability to sell carbon credits suggests that the actual verification process must be pretty robust.
So here is the test: Will a funder step forward to conduct due diligence on the quality and validity of the outcome measure, establish a baseline, and agree to pay for results? Dispensers for Safe Water estimates that it could increase the number of households using clean water in other parts of rural Africa at a cost of about US $6 per household per year. The mechanism it offers has a well-defined independently verifiable indicator that measures how many households are using chlorinated water. The mechanism also lets funders pay only after the outcome is delivered. This should ring all the right bells at agencies like DFID, MCC, Sida, Norad, and the World Bank that regularly talk about paying for results, cost-effectiveness, and value for money. It should also be attractive to philanthropies that care about public health and expanding a promising initiative. And if it were structured as a matching grant for funds provided by a developing country government, it could even encourage sustainability beyond the involvement of external funders and implementers.
So the experiment has started. Will this well-measured worthy outcome find a buyer?
Last year, our colleague, Jonah Busch revealed that India surpassed Norway as the largest results-based funder of forest conservation. Now, India has become the single largest payer for outcomes in a nationwide sanitation initiative.
For years, conventional aid programs have tried to improve sanitation by building infrastructure for potable water and latrines. Successive failures led them to refocus on improving maintenance systems or trying to change social norms, but usually by prejudging the “right” plan of action and paying for inputs. India has had its share of these failures, as discussed in the press (here and here) and documented by researchers.
Now the Government of India and the World Bank have adopted an approach using principles we describe as Cash on Delivery (COD). The program follows three of these principles by linking payments to outcomes, not inputs; independently verifying outcomes; and allowing recipients to take the lead (in other words, the program is “hands off”).
How does it work? India and the World Bank recently signed a US$1.5 billion loan that will finance incentives to states that succeed in reducing open defecation while implementing the Swachh Bharat Abhiyan (or Clean India Mission)—a five-year, US$22 billion national government program. The World Bank loan is structured as a Program for Results (PforR) operation and has two parts. The first part involves payments from the World Bank to the central government based on verified outcomes. The central government in turn releases incentive grants to the states, also based on declines in open defecation. In addition to its sheer scale, the program is distinctive because:
It pays against outcomes—the ultimate development goals, far along the “results chain,” that we care about. For example, 50 percent of the US$1.5 billion loan is tied to reductions in open defecation and an additional 30 percent to sustaining open defecation-free status in villages.
Annual national surveys conducted by a third party will independently verify the level of progress achieved against these indicators.
As it gives states the flexibility to decide how best to reduce open defecation, this results-based approach is "hands-off." States can decide where to allocate funds and adopt strategies that take the local context into account.
These three features set the new India program apart from conventional aid, and even from 34 other PforR operations in the World Bank’s portfolio. PforR loans disburse funds in relation to indicators that are chosen to reflect an operation’s goals and context. This flexible instrument allows operations to pay for outcomes along the lines of a COD agreement, though most of them focus on institutional changes, activities, and outputs.
A new CGD policy paper reviews the World Bank’s first 35 PforR operations and shows that, unlike the India program, most of them link payments to outputs and actions. These are measured by such indicators as the availability of anti-retroviral drugs in Mozambique, the number of telephone calls received by Citizen Contact Centers in Pakistan, and the creation of a monitoring system for technical and vocational training programs in Brazil. About one-third of the PforR loans link a portion of the disbursements to an outcome, like the number of children who can read in Tanzania or increases in crop yields in Rwanda. India’s sanitation program stands at one end of the spectrum by allocating 90 percent of the loan to three outcomes. In addition, the results in the India sanitation program are independently verified, in contrast to some operations that rely on self-reported progress.
As this largest of all COD programs launches, we can expect challenges in implementation. For example, the first annual survey will establish baseline levels against which progress will be measured and set targets; project managers will develop procedures that could overly complicate or facilitate state autonomy; and it may take time for the actors involved to fully understand they have autonomy and then respond to the incentives. Nevertheless, this is a tremendously exciting opportunity to see if this paying for outcomes approach will succeed at improving the health of millions of rural Indians better and faster than efforts of the past.
We would like to thank Alan Gelb and Anit Mukherjee for feedback and input on this blog.
For some time, we’ve been cheering MCC’s interest in pursuing approaches that pay for outcomes and encouraging the agency’s stakeholders to get onboard (here and here). Now we can applaud an important step forward. The agency’s new compact with Morocco, which both partners celebrated at an event last Thursday in Rabat, spells out the potential for a results-based financing component—a welcome development.
A substantial portion of the new Morocco compact will seek to increase employment through improvements in education and training as well as a project to support the replication and expansion of successful integrated job placement services. According to the compact agreement, a key component of the latter will involve the use of results-based financing “to catalyze a market for improved employment outcomes.” In contrast with conventional employment programs, which often define results in terms of “number of people trained”, MCC and Morocco are looking to pay for beneficiaries actually placed in jobs.
MCC investments will support and strengthen the Government of Morocco’s existing efforts to link payment to the achievement of independently verified outcomes and strengthen service providers to deliver and manage for results. Results-based financing models shift program risk and align incentives, prioritize evidence, allow for adaptation to keep pace with changing circumstance, and have shown promise in improving service delivery. As we’ve often noted, the idea of paying for success fits well with MCC’s model. Approaches that disburse on the basis of results necessarily require robust measurement of results, and results measurement is an area where MCC has often been ahead of the curve. Moreover, the approach dovetails nicely with MCC’s focus on country ownership since results-based programs provide partner governments and project implementers with increased flexibility to find the best ways, within a specific local context, to reach agreed-upon targets.
Of course, with the compact just getting started, there’s still plenty of work left to do to determine project details. The agency is exploring a range of results-based financing tools, including—as mentioned in the compact agreement—the possibility of a Social Impact Bond (the inspiration for Development Impact Bonds). Ultimately, the devil will be in the details. Many of the advantages expected from pay-for-performance programs fail to materialize if they are simply better-implemented conventional programs. Focusing on paying for measurableoutcomes (including specifying from the outset the desired outcome(s), how it will be measured, and what will be paid per unit achieved) is key to unleashing the innovation and adaptation results-based financing tools promise.
As the compact unfolds, we’ll be watching intently from the sidelines. Among US agencies, MCC has positioned itself on the cutting edge of thinking about results and country ownership. Its exploration of an approach that would pay for outcomes in Morocco demonstrates its interest in staying there.
In addition to the initiatives you hope to institutionalize in the next 10 months, we hope you’ll also seize the opportunity to put USAID in the forefront of testing a new approach to delivering aid.
The approach reconciles the view, taken for example by Michael Gerson and Rajiv Shah in the second edition of Moneyball for Government, that US foreign assistance should focus on measurably improving people’s lives in the short term with the view, espoused for example by John Norris of the Center for American Progress, that development is also about the long, slow slog of institution building.
The two approaches look to be at odds. Focusing on securing easily measurable results, for example in health and education, would seem to distract USAID experts and recipient country actors from the nitty gritty of building sound and effective country programs and institutions, for example in tax revenue capacity needed to fund government services.
But in fact development as institution building is a long, complex process; and the reality of complexity provides a powerful reason for pursuing short-term results. Aid programs that focus on the first approach are likely to help local actors achieve the second.
That’s the idea of Cash on Delivery Aid. USAID would pay recipient governments on the basis of a reported and verified outcome. Other bilateral donors are trying it. (The hard work is defining an appropriate outcome and a “price” for a unit of outcome.) USAID has financing tools and know-how; it already pays host governments for outputs through Fixed Amount Reimbursement Agreements (FARAs) and disburses funds to local NGOs for achievement of specified milestones through Fixed Obligation Grants. Moving from those programs to paying governments for a single outcome is a small step.
Cash on Delivery Aid builds in the critical benefit of putting development progress firmly in the hands of recipient governments, encouraging system reform and innovation on the part of local actors, who can take the lead in iterating toward locally efficient solutions. The role of USAID field staff is then to work closely with counterparts (when asked), bringing technical ideas and expertise as well as knowledge of the country context (exploiting well the autonomy their field positions encourage).
Finally, paying for measurable and verified outcomes is likely to encourage accountability of governments to their own citizens — a possible democracy bonus.
Pursuing locally efficient solutions will ensure more sustainable, long-run systems. We think paying for outcomes in health and education will help build local systems and institutions for the long term while improving lives in the short term. USAID should try it.
Teenage years are often described as difficult. Does that hold true for organizations too?
A dozen years since it was set up with a remit to reduce global poverty through economic growth, the US government’s Millennium Challenge Corporation recently revealed a new Strategic Plan. Deputy CEO Nancy Lee joined me on the CGD Podcast to discuss how the new plan responds to a very different development landscape: fewer poor countries but large numbers of poor people within countries, especially fragile and conflict-afflicted states; greater urbanization; the development challenges of climate change; the growing role for the private sector; and increased reliance on developing countries’ own resources, to list a few.
“How can we create greater leverage, use these very scarce grant resources to catalyze more private finance?” Lee ponders in the podcast. One question MCC is also asking more now, she says, is “How can we really strengthen reform incentives?”
Joining Lee in the studio is CGD Senior Policy Analyst and MCC expert Sarah Rose, who highlights the strategy’s greater emphasis on policy reform and on paying for outcomes rather than inputs, in line with CGD’s work on cash on delivery (COD) aid. These aspects of the strategy aren’t entirely new, but, Rose says, they mark a clear “refocus of MCC.”
After more than a decade of operations, MCC has made the shift from innovative start-up to established donor agency. “MCC NEXT,” the agency’s new, much-anticipated strategic plan, takes a hard look at how the poverty and development landscape has evolved over the past decade and stakes out the position a more mature MCC should take in this new context.
“MCC NEXT” is big—really big: 5 goals, 20 new strategic directions, 38 priority actions! It’s bold, too—it changes the way it talks about the agency’s goals and takes on nearly every priority the field of development currently embraces. MCC should be applauded for its vision, and indeed there are a number of things to like about the plan. But the new strategy also raises questions, including some deeply fundamental questions about how key parts of the new vision fit with MCC’s core model.
Here are just a few of the things I like about MCC NEXT:
The mission still matters. It restates the importance of the singular mission (poverty reduction through economic growth) and the key principles that underpin the model: good governance matters for poverty-reducing growth; country ownership is critical for program success; and achieving results requires rigorous, data-driven analysis throughout the life of the project—to inform project selection and design, to track progress, and to measure impact.
CGD work is represented. It reflects ideas CGD has promoted, like paying for outcomes (e.g., COD Aid, Development Impact Bonds), using new technologies to solicit input/feedback from beneficiaries, and exploring alternatives to GNI to better assess development need and create a better pool of candidate countries.
It highlights complexity. Poverty reduction through growth may be a simple tagline, but it’s not a simple prospect. The plan helps stakeholders understand a sample of the important issues MCC and its partner countries have to grapple with when trying to identify and implement growth strategies—vulnerability, gender inequality, climactic risk, weak governance, etc.—and raises MCC’s profile as a source of knowledge and learning in these areas.
Information sharing is emphasized. MCC is already a true leader in transparency, but the plan commits to greater sharing—of data, analyses, project due diligence, project design lessons learned, etc.—to the benefit of country partners, other donors, and private sector investors.
But the plan does raise a number of fairly fundamental questions about the future direction of MCC.
How will MCC prioritize priorities? With less than a year left in the current administration, it’s interesting timing for a strategic plan, especially one with 20 new directions and nearly 40 priority actions. Some of these reflect shifts already underway, but others are more nascent, and clearly not all of them can truly be a priority. What is most important to this leadership team? What will they emphasize in their remaining 10 months?
Where do partner priorities fit? Imagine being a finance minister of a newly eligible country. You’ve been tasked with proposing a package of investments for MCC to finance and want to craft something the agency is likely to accept. Of course the constraints to growth analysis helps to narrow down the sectoral focus, but it should be your country’s priorities—informed by deeper analysis of what’s contributing to growth constraints in key sectors—that should frame what the program looks like. But then you see this incredibly broad plan—urbanization, domestic resource mobilization, local governance reform, anticorruption programming, public private partnerships (PPPs), oh my! And all priorities for MCC. Do you sense a risk that analytical findings will be steered according to MCC priorities? Do you try to work in as many of these priorities as you can? What about your own? MCC reiterates its commitment to country ownership in the plan, but by listing so many of its own priorities, it’s harder to see how country priorities fit in.
Where does cost-efficiency fit? MCC attempts to define and value the benefit streams for the vast majority of its portfolio. But will MCC be more inclined to favor projects even if the cost-benefit ratio is unknown or unfavorable as long as they align with MCC NEXT priorities?
How does “systemic impact” fit with a focus on results? One of MCC’s clear strengths has been its focused mission and relatively clear identification of the goal it is trying to achieve: poverty reduction through economic growth, as measured by increases in household income. With barely a mention of household income in the strategic plan, there seems to be a shift away from this definition. The new focus revolves around “systemic impact,” which sounds good, but lacks a lot of the detail important for an agency focused on results. Namely, what does “systemic impact” mean? How does MCC define it? How does it measure it? What does success look like? To date, it has been hard to definitively answer the fundamental question of the MCC experiment: does foreign assistance delivered according to foreign aid best practices get better results (i.e., actually reduce poverty)? It’s a hard question to answer, not least because it’s hard to establish a counterfactual. However, my fear is that without a clearer plan for measuring progress toward an imprecisely-defined new goal of “systemic impact,” we may be getting further from an answer.