An Introduction to Pay-for-Results in Development
This post is part one of a two-part blog series exploring pay-for-results. Stay tuned for the second installment!
“Pay-for-results” is trending! There is a swelling chorus in the development community about the potential of pay-for-results (PforR) to increase accountability, foster innovation, and stretch scarce development dollars. With the growing need to “do more with less” and demonstrate results when using development dollars, PforR is a compelling solution — one which USAID and other donors will inevitably want to see more of.
But from a practical perspective, how does it really operate, and how can it be incorporated into project designs and proposals from implementers? We know that it entails payment based upon results rather than efforts to accomplish those results, but beyond this there are significant knowledge gaps about how to apply it.
USAID’s Office of Private Capital and Microenterprise (PCM) has teamed up with Palladium to advance PforR awareness and understanding and has recently issued Pay-for-Results: A Primer for Practitioners. This blog post will introduce the Primer and is intended to be the first of a series of posts on PforR over the next several months.
The Primer is a beginner’s guide to PforR. It provides a taxonomy of the different modes of PforR, includes a number of examples, addresses the advantages and disadvantages, and notes the promising application of PforR in initiatives focused on catalyzing financing for investment/access to finance.
The Case of Haiti
Affordable housing is a critical challenge in Haiti, where household incomes are low, and the cost of construction is high. With the understanding that solving this challenge needed a market-based solution, the Haiti Mission launched the Haiti HOME project which uses a pay-for-results approach to encouraging housing developers to build affordable units. Covering some of the developers’ costs (but as construction is completed rather than upfront) encourages developers to innovate in design and construction techniques. In a sense, it uses blended finance but applied based on the outcome rather than the proposed outcome.
What is Pay-for-Results, and What is Its Appeal?
In the final blog post wrapping up the Oregon Trail series on Mobilizing Private Capital, PforR was defined as “a contracting approach which sets a metric and then allows the implementer to figure out how to reach it. The interesting part is that payment to the implementer is based on their results against the goal.” And that is still a fair encapsulation of PforR. It is an approach which pays against results rather than best efforts to achieve those results. Its appeal is:
- Aid effectiveness: PforR disrupts the traditional model; rather than paying for time and materials, it pays based on results.
- Encourages innovation: In general, PforR solicitations define a desired outcome or end result and largely leave the means to accomplish that end to the implementer (or “service provider” in PforR language).
- Fosters evidence-based development: PforR initiatives are usually more stringent in defining expected metrics and measuring the accomplishment thereof.
- Attracts new implementers and funding sources: Appears to be bringing in new and nontraditional implementers and funders.
- Helps align interest between funders and implementers: Agreement on the metrics means a higher likelihood of alignment.
But it also presents challenges:
- More demanding in project design and monitoring: Defining, setting, and pricing the performance metrics requires a considerable amount of time and effort, and monitoring performance on accomplishment of those metrics is a heavier lift.
- Unintended consequences: If improperly structured, PforR projects have more potential to push implementers towards the low-hanging fruit rather than bigger challenges and/or to “teach to the test.”
- Potentially less attractive to implementers: Because more of the performance and payment risk is being shifted away from the funder, some implementers may be unable or unwilling to absorb the higher risk and/or bear the upfront costs of PforR initiatives.
What is the suite of PforR applications? The idea paying for results is not new at USAID, and there is a long history of using Performance Award Fees and Fixed Price Contracts. But in the pay-for-results world, there are five main applications:
- Performance-Based Contracts (PCBs): Contracts or grants in which a significant portion of payments are made upon accomplishment of pre-agreed results. PBCs can be structured between the funder/donor and the implementer and/or can also be structured as to allow the implementer to use PBCs through sub-contracts or sub-grants within the project.
- Prizes: Contests designed to attract fresh and/or promising solutions to development challenges.
- Development and Social Impact Bonds: Not a “bond” as such but arrangements that attract private sector investment to fund an innovative program, which is repaid (and in many cases a premium provided) by governments or donors based upon the accomplishment of intended results. USAID working in conjunction with Palladium, and UBS Optimus Foundation recently launched the Utkrisht Impact Bond, which is focused on newborn and maternal health in the Indian state or Rajasthan.
- Advance Market Commitments: An agreement to purchase a product or service at an agreed price some future time, which mitigates the downside risk of the producer or service provider. This approach is useful when there is uncertainty about future demand (for example, for a vaccine which potentially could not be required).
- Conditional Cash Transfers: Social programs in which payments are made to individuals and/or families in return for meeting human capital investments requirements (school attendance, health care check-ups, etc.).
Summing it all up, PforR is in vogue — and for good reason. There will be increasing interest and even pressure to scale up its use in USAID programming. Much as we traveled together, braving the challenges of the Oregon Trail in the Mobilizing Finance for Development blog series, we invite your company as we embark upon the journey of mastering pay-for-results.
Our next post will address the challenges of scaling up PforR and discuss its potential in mobilizing finance for development.
For those seeking more examples of how PforR has been successfully used, check out the two examples in the Vignettes Handbook of how incentive-based payments were used to catalyze financing for investment. The QBFC program is on page four and the Colombia Rural Finance Initiative is on page 42.