Mobilizing Private Capital: Pay-for-Performance Approaches
First, some bad news. If we are going to reach the ambitious targets set in the Sustainable Development Goals, we are going to need $2.5 trillion more than what we now spend on Official Development Assistance. That’s a daunting gap.
But there’s good news too. There is a lot of private equity sitting on the sidelines, waiting for the right investment opportunities in Africa. The big question is whether we can mobilize these pools of private capital in a way that supports development objectives.
It could make a big difference if we get it right. So, if you haven’t read it already, check out Lawrence Camp’s great blog series on how to do just that.
In the meantime, here are the key takeaways from our seminar last week on pay-for-performance approaches – an innovative way to engage the private sector.
Pay-for-performance is not a new idea in development. But recently, there have been some notable successes using this approach to catalyze finance in developing markets.
For example, the FinGAP project in Ghana used performance-based incentives to encourage private financial institutions to lend to the underserved ag sector. A USAID grant of about $2 million mobilized $60 million in financing from the private sector – an impressive 30:1 leverage.
Perhaps the best part about the pay-for-performance approach is that donors only pay for the outcomes they are interested in. For example, if you wanted to increase school enrollment in Kenya, you could provide technical assistance, partial grants or partial loan guarantees – but these would subsidize all of a school’s activities.
Another option would be to offer private schools in Kenya a direct payment for every new child they enrolled. Theo Talbot of the Centre for Global Development explored this idea in a working paper available here.
In short, conditional subsidies carry the same costs to donors but they have unique benefits:
- They are targeted and cost-effective, letting donors hone in on the metrics they care about.
- They are data-driven and provide faster feedback for decision-making.
- Donors set the metric they want grantees to hit, and then rely on grantees’ expertise to figure out how to get there, usually with better results—as long as donors can resist the temptation to mandate the “how.”
As Talbot put it in our seminar, “If we want to stay in business, paying for performance is the business we need to be in."
If you want to learn more about pay-for-performance, you can find resources from our seminar here.