Cash on Delivery – worth a try?

May 18, 2010

     By Duncan Green     

You’ve got to hand it to the policy entrepreneurs at the Center for Global Development – they sure know how to get new ideas onto the tables and into the minds of decision makers. One of their biggest and most interesting new(ish) ideas is ‘Cash on Delivery’ (CoD), and I’ve COD_Aid-coverjust been reading their new book on it. The concept’s been around for a while, but in the UK, is going to zoom up the agenda with the new government, since last year’s Conservative ‘Green Paper’ on International Development included an explicit commitment to introducing CoD.

CoD tries to solve the ‘principal-agent problem’ in foreign aid, which arises when donors and recipients want to do different things with the money. It does this by introducing what is essentially a bonus system, adding a tier of aid that is only paid on results (kids in school, maternal deaths reduced etc). The logic is similar to tying corporate executives’ pay packets to a company’s share price to align their actions with the desires of shareholders. CGD contrasts this with aid’s traditional system of ‘cost reimbursement’ (build the dam, and we’ll pick up the bills, however inflated).

In CGD’s eyes the shift to budget support and policy conditionality loans (sorry about all the aid jargon) are a step forward, in that “programmes, funders and recipients negotiate targets in advance, and funders agree to make payments if targets are met. However such contracts have been undermined by a lack of clarity over targets and too great an openness to renegotiation.”

The core of CoD aid is a contract between funders and recipients that agrees an outcome and a fixed payment for each unit of confirmed progress, and the book even offers some draft contracts for different sectors. The most detailed treatment is for its application to universal primary education, but the book sets out suggestions for applying the concept to HIV/AIDS prevention, clean water, reducing carbon emissions, improving domestic statistical systems and increasing citizens’ use of public data.

How does it work? Key features of the contract are:
– Payment for outcomes, not inputs
– Funders keep their distance – how recipients achieve the outcomes, eg improve education, is entirely in their hands. No results, no bonus.
– Independent verification – key to avoiding either donors or recipients inflating their success or otherwise gaming the system
– Transparency through public dissemination of contracts and results
– Complementarity with other aid programmes

What do I like about this? Getting aid donors out of micro-management via conditions, insistence on governments hiring expensive expat consultants etc etc is a great idea, as is the investment in decent data collection, without which CoD cannot function. It’s a scandal that we have so little idea how many women die in childbirth, for example. I also like the emphasis on this being complementary to all the other kinds of aid instrument – the bonus idea (although this is my characterization, not the authors’ – bonuses aren’t very popular at the moment). If it works, it will certainly strengthen the case for aid at a time when both fiscal pressures and the volume of criticism are rising. All that CGD is proposing is some pilots to trial the idea, and it’s hard to see any objection to that.

But objections there are. The best summary of them that I’ve seen is a paper by Amy Pollard at CAFOD, written in response to the Conservative Green Paper. She highlights the following concerns:

How would recipient countries be expected to fund development initiatives up-front?

The CoD approach might impose a double-penalty on poor performers

CoD would incentivise governments to cherry-pick the easiest districts

CoD governments would not gain from the unanticipated benefits that can result from development initiatives. Particularly with governance work, it is not always possible to predict the outcome of a development initiative and there may be valuable outcomes that were not anticipated in advance.

The difficulty of measuring impacts

CoD is likely to bring unpredictable aid flows

It is not determined under CoD how the rewards of success would be distributed

Owen  Barder, who with Nancy  Birdsall has done much of the work in developing the CoD concept, responded to these concerns on his blog. All I would add is that a) many of the concerns apply equally to other forms of aid and b) that’s why we need some pilots.

In fact, as Amy points out, a lot of CoD aid is already happening: ‘The Global Partnership on Output Based Aid has identified 123 OBA

What if the bonuses were for ending poverty?

What if the bonuses were for ending poverty?

schemes within the World Bank, and a further 23 schemes in other agencies. World Bank OBA schemes comprise $3.7 billion, with the majority of schemes in the infrastructure and health sectors, with some in education.’ And as I pointed out previously,  the EU’s MDG contracts look remarkably like CoD. OK, ‘outputs’ (number of vaccinations) are not the same as ‘outcomes’ (reduction in infant mortality), but the dividing line is pretty blurred (is school graduation on output or an outcome?). Given all that experience out there in the aid world, I was surprised that the CGD book didn’t pull together the evidence to date, rather than talking about CoD as if it’s some entirely new idea. Has anyone reviewed the evidence so far?

A couple of further points raised by my colleague Jasmine Burnley (more on her new paper on aid later this week): the model seems to work better if the proportion of aid money spent on CoD is small. If CoD gets too big and becomes the latest aid bandwagon, it could start to cause problems, for example dragging money away from upfront payments that enable governments to invest in education or health in the first place. Secondly, it would be much better to tie CoD to internationally agreed priorities such as the MDGs, to prevent it becoming a vehicle for the latest aid fad. 

One final, nagging concern. A lot of aspects of well-being are very hard to measure, let alone package up into contracts. Empowerment, freedom from fear and shame, for example. Now I realize that the Codistas are not suggesting that CoD should become the only channel for aid, but it is part of the inexorable pressure to only value what can be measured. That leaves out an awful lot – including partnership and solidarity. What would the bean counters of an entirely measurement-based, cash on delivery system have made of the struggle against apartheid, I wonder? Cue the customary quote from Einstein.