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Global Health blog: Realizing the Vision of Swasth Bharat through Fiscal Federalism in India

Related Research

In his early days as India’s new prime minister, Narendra Modi has shown remarkable leadership in all sectors, including health, for which he’s articulated his vision to create a Swasth Bharat, a Healthy India. Combined with two major policy windows—the proposed restructuring of the Planning Commission and the report of the 14th Finance Commission expected by the end of the year—the policy reforms under the ruling National Democratic Alliance (NDA)’s mandate of “Universal Health Assurance for All” have the potential to be a game-changer for India’s neglected public health system.

India’s health system has many problems but perhaps the most obvious is its persistently low levels of public financing for health, with often limited health outcomes. With only 1.7 percent of its GDP being spent on health expenditures (including sanitation and nutrition), India spends roughly $15 per person for health each year. As a result, up to 75 percent of health care expenses are borne out of pocket by patients. And given the lack of any mechanism to insure against health risks, much of India’s low-income population has to forego necessary healthcare or is forced into bankruptcy because of the inability to pay when confronted with a severe medical condition.

One critical policy lever that could have an impact on Indian public health expenditure and its effects on health outcomes is the financial flows and incentives from central government to states. India’s center-to-state fiscal transfers have occurred through three channels—Finance Commission; Planning Commission; and Centrally Sponsored Schemes—with at least three crucial characteristics (see figure 1):

  1. Are the allocations based on a formula and objective criteria or not?
  2. Are there conditionalities associated with those transfers?
  3. Who does the money go to?

While health is a ‘state’ subject, the central government has exerted significant influence on health financing through the flagship scheme known as the National Rural Health Mission (NRHM) from 2006–07 onwards. NRHM has now been extended to cover urban areas under the National Health Mission (NHM) umbrella. However, a systematic assessment of the impact of the three channels of transfers at the state level has not been attempted until now.

Over the past year, the Center for Global Development and the Center for Policy Research’s Accountability Initiative (in Delhi) have conducted research on intergovernmental fiscal transfers to improve health in India. As an early step we commissioned a background paper that describes and analyzes the myriad of channels and mechanisms of center-to-state fiscal transfers that could affect health outcomes. See a draft of the background paper here.

Source: Budget Documents, Government of India, 2014–15

Building on this background paper, Accountability Initiative and CGD have jointly pursued several areas of research to better assess the consequences and effectiveness of these different channels of funding—between Planning Commission and Finance Commission, within the Finance Commission, and the ‘Centrally Sponsored Schemes’ for health. In December, we are convening a working group to discuss some of our early findings and policy recommendations.

Authors: Victoria Fan View Profile Anit Mukherjee View Profile Rifaiyat Mahbub View Profile

Development blog: Should Sovereign Wealth Funds Finance Domestic Investment?

Countries have traditionally invested their sovereign wealth in securities of major markets able to provide dependable returns and macroeconomic stability, but some are now investing more sovereign wealth domestically because of diminished returns in major markets and new investment opportunities at home. This opens up some potential opportunities but also a number of serious risks, including undermining hard-earned efforts to sustain macroeconomic stability and providing a vehicle for politically driven “investments” that fail to add to national wealth.  Resource-rich countries are prone to this; the quality of their public investment management is substantially lower than that of non-resource countries.

Related Research

In a policy paper, my co-authors (Silvana Tordo, Havard Halland, Noora Arfaa, and Gregory Smith) and I propose a set of checks and balances to mitigate the risks of putting sovereign wealth into domestic investments.  Here I present a summary of that work.

Why the Trend toward Domestic Investments?

Sovereign wealth funds amount to more than $6 trillion in assets, and about half of that belongs to resource-exporting countries.  Several resource-rich developing countries have established or are establishing sovereign wealth finds with an expanded role as a national investor, including in “strategic” projects. Angola, Nigeria, Papua New Guinea, and Mongolia are among the most recent examples. More are in the making, including Colombia, Morocco, Tanzania, Uganda, Mozambique, and Sierra Leone.

With needs in such countries high, popular sentiment may push governments to spend part of their accumulated financial wealth at home. And given constrained access to finance since the global financial crisis and the significant management and governance challenges facing public investment in resource-rich countries, governments may see the sovereign wealth fund as a means to improve the quality of public spending and attract private investors to strengthen investment discipline.  

A Risky Proposition

If a sovereign wealth fund has, or engages, the necessary expertise it could act as a specialized investor, helping to attract private investors through well-designed private-public partnerships, but opening the door to domestic investment introduces very serious risks. With domestic investments, the investor—the government, on behalf of the nation—is also the promoter of the investments. The quality of the fund’s portfolio can then be undermined by politically driven decisions, with “investments” contributing neither to growth nor to increasing the wealth of the nation. Since the fund could be used to bypass parliamentary scrutiny of spending, the result could be even more inefficient and fragmented public investment programs. Sovereign wealth funds are particularly vulnerable to these risks because, unlike pension funds or development banks, they have no creditors able to exert due diligence in an independent manner.

How to Mitigate the Risks?

The basic conflict of interest posed by state ownership cannot be eliminated, but it can be mitigated by good policies. 

Coordinate strategic investments. Domestic investments by sovereign wealth funds need to be considered part of a public investment program and the implementation of macroeconomic policy.  As such, especially if large they should be considered in the context of overall investment levels to avoid damaging “boom-bust” cycles. 

Finance the right investments.  An infrastructure project, for example, may provide indirect benefits such as the stimulation of private investments and jobs that are not fully captured by its financial return. While such social and economic returns should be high, wealth fund investments must also yield “acceptable” financial returns.

Invest for competitive returns. Allocations to domestic investment should not be in the form of a mandated share but determined on the basis of competition with the returns on foreign assets.  When domestic returns are low or there are indications of asset bubbles, investment should be channeled abroad. 

Pool investments.   Investing with private investors, pooling with other funds, and co-financing with the regional development banks could help sovereign wealth funds reduce risk, bring in additional expertise, and enhance the credibility of the investment decision. Some funds, such as Nigeria’s, have signed cooperation agreements with major international investors. Limiting investments to minority shares would serve to reduce risks of politically motivated allocations.

Strengthen corporate governance.   There is a large body of knowledge on effective external governance (between the state and sovereign wealth funds) and internal governance (the composition and functioning of the board of directors or trustees and the management processes of the fund). It is especially important that sovereign wealth funds mandated to invest domestically have independent boards, professional staffing, independent auditing, and transparent reporting, especially on strategic investments. 

What Lies Ahead?

Sovereign wealth funds as strategic domestic investors can inject a degree of discipline into the use of natural resource revenue and help countries avoid the “resource curse.”  However, they also have the potential to exacerbate the mismanagement of resources that has plagued so many oil and mineral-exporting countries.  Although domestic investment by sovereign wealth funds is a new issue, some funds such as Temasek (Singapore) have been active investors in large projects, including in developing countries.  We see no sign that the trend will go away, except possibly in the event that a commodity price collapse creates a financing crisis in the resource countries that causes the funds to be tapped to provide massive assistance to budgets.  A second stage of this research is looking in more detail at the practices of a number of funds that could provide useful lessons.   

Authors: Alan Gelb View Profile

Global Health blog: World AIDS Day 2014: UNAIDS Shifts Its Emphasis toward Reducing New Infections

On World AIDS Day in 2003, WHO and UNAIDS launched a campaign called the “3 by 5 initiative,” with the objective to “treat three million people with HIV by 2005.” At that time, AIDS treatment was still prohibitively expensive for poor countries, where only a few thousand people had access to treatment. Thanks to President Bush’s creation of the President's Emergency Plan for AIDS Relief (PEPFAR) program that same year, the number of people on antiretroviral therapy (ART) began to rise dramatically. While the total number of people on ART reached only one million in 2005, the objective to reach three million people was attained in 2007, and the numbers have continued to climb. The numbers have now surpassed 11 million in low- and middle-income countries and 13 million worldwide. (See bottom trend line in figure 1.)

Figure 1. Impressive growth in the number of people on antiretroviral treatment has not yet led to a decrease in the total number of people living with HIV/AIDS

Because treatment extends lives and new infections have persistently outpaced AIDS-related deaths, the number of people living with HIV/AIDS has consequently continued to grow (top line in figure 1). I argued in my 2011 book, Achieving an AIDS Transition, that a unique focus on expanding access to treatment would make recipient countries increasingly dependent on rich ones and would generate unsustainably growing demands for donor resources. The alternative, I proposed, was to focus even more attention and effort on reducing the rate of new infections to below the mortality rate so that the number of people living with AIDS, and eventually the number needing treatment, would begin to decline.

This year, in their annual World AIDS Day plea for more resources, UNAIDS is for the first time focusing more on the need to reduce new infections than on treatment expansion. In figure 2 below, we have assembled into one chart the projections UNAIDS shows in figures 6a and 6b of their new “Fast Track” report. Under their “constant coverage” scenario, new HIV infections will exceed AIDS-related deaths by about half a million persons a year through 2030, causing the number of people living with HIV/AIDS to increase by about 8 million, or to a total of about 43 million (not shown; imagine the top line in figure 1 continuing to climb).

This scenario is a dismal one for the AIDS epidemic. With the need for treatment continually climbing and donor commitments for AIDS remaining flat or declining since 2008, AIDS advocates are concerned that the days of unlimited budgets are over.

But UNAIDS is urging the world to make one last push. Instead of hoping only for constant coverage, or perhaps failing to sustain even that modest goal, UNAIDS is proposing instead that the world adopt “ambitious targets” by aiming for “zero,” which they define as reducing new HIV infections and AIDS deaths by at least 90 percent by 2030. As figure 2 shows, the ambitious targets would bend both the new infections and the annual deaths dramatically downwards. The “AIDS transition,” a key milestone defined in my book, is passed in 2019 when new infections will for the first time be fewer than deaths and the total number of persons living with HIV/AIDS will begin to decline.

Figure 2. With UNAIDS ambitious targets, the world will reach an AIDS transition after 2019

Source: UNAIDS, Fast-Track, November, 2014

Of course, it’s one thing to find a set of assumptions that predict new infections and deaths to go down instead of up (the Futures Institute helped UNAIDS with this meticulous and heroic task). It’s another thing to achieve these ambitious targets. UNAIDS is depending on increased funding of existing interventions to get us to the AIDS transition and beyond. Suppressing mortality to this degree requires greatly expanding treatment to 81% of all infected people, and suppressing new infections requires that 90 percent of people on treatment have suppressed viral load.  So increased funding will certainly be necessary to reach the AIDS transition. However, as I argue in my book, countries that have been receiving aid to finance their AIDS epidemic will also have to dramatically change their attitudes towards HIV prevention. In addition to deploying the array of available preventive medical technology, including treatment-as-prevention, male circumcision, and needle sharing, affected countries must find new ways to incentivize their citizens to assiduously adhere to AIDS treatment guidelines and to adopt safer sexual practices. Cash transfers to schoolgirls and their families show promise but have not yet been widely adopted. More important might be regional and district-level cash-on-delivery rewards for verified evidence of reductions in new HIV infections.

Bravo to UNAIDS for setting a course towards a future when it will no longer be needed—a future without AIDS. Now it must convince donors and recipient countries that this future is realistic and attainable. And that allocating resources towards achieving the AIDS transition is consistent with other sustainable development goals, like universal health coverage and protection from Ebola and other disease outbreaks. The hard work is still ahead.

Authors: Mead Over View Profile

CGD Event: Winners and Losers of Globalization: Political Implications of Inequality

Winners and Losers of Globalization: Political Implications of Inequality12/9/14

The last quarter century of globalization has witnessed the largest reshuffle of global incomes since the Industrial Revolution. Branko Milanovic finds that the main factor behind the reshuffle was the rise of China and, to a slightly lesser extent, all of Asia. By tracking the evolution of individual country-deciles through a new panel database of 100 country-deciles and deriving the global Growth Incidence Curve, Milanovic and co-authors are able to show the underlying elements that drove the changes.

They find that three changes stand out, and those changes open up discussion on the following political issues: how to manage rising expectations of political participations in emerging countries like China, how to “placate” rich countries’ globalization losers so that they do not begin supporting populist anti-immigrant policies, and how to constrain the rising economic and political power of the global top 1 percent.

*The CIRF series is an academic research seminar that brings some of the world's leading development scholars to discuss their new research and ideas. The presentations are at times technical, but retain a focus on a mixed audience of researchers and policymakers. There’s more about the series here.

Development blog: All Technology Leapfrogging Is Not the Same (Why Phones ≠ Energy)

In the debates over how best to bring electricity to the billion-plus poor people who live every day without it, a common refrain is that we can replicate the telecommunications leapfrog with energy too. It’s an attractive notion. Instead of building telephone landlines, billions of poor people jumped right to mobile phones. Why not just do the same with electricity and, instead of building a grid and big dirty power plants, just go right to off-grid solar? 

Yet “the supposed analogy between cell phones and distributed solar is misplaced” argues UC Berkeley’s Catherine Wolfram because of (1) cost, (2) benefits of centralized networks, (3) actual development goals, and (4) quality. She concludes:

I worry that the idea of energy leapfrogging lulls us into ignoring the difficult development versus environment tradeoffs involved with bringing electricity and other improved energy services, like motorized vehicles, to people who do not currently have them... .

Modern energy can transform people’s lives, so it’s unfair to insist that households who do not currently have electricity use the high cost, zero-carbon alternative...let’s stop talking about energy leapfrogging and keep our eyes on the goal of achieving cost-effective, low-carbon solutions.

Read the full post here

Authors: Todd Moss View Profile

Development blog: ‘Taxing across Borders’: An Academic Milestone

Originally posted on Richard Murphy's Tax Research UK.org blog on November 21st. 

A new paper from Gabriel Zucman (of London School of Economics, and erstwhile co-author of Thomas Piketty) in the (free-to-view) Journal of Economic Perspectives represents a milestone in the academic economics literature. As far as I’m aware, it is the first major journal paper that aims to put a specific scale to both corporate tax distortions via ‘tax havens’, and the evasion of individual income and wealth taxes through offshore ownership. This post sets out the main findings of the paper and briefly discusses its policy proposals.

Cross-border corporate tax avoidance

The bulk of the paper deals with corporate tax avoidance, and contains substantial new analysis of profit-shifting by US-headquartered multinationals. The story is built up in five figures. First, Zucman shows that the share of all US corporate profits declared as earned outside the US has risen steadily in the post-war period.

Second, Zucman shows that the share of those foreign-earned profits declared as earned in a group of jurisdictions he labels ‘tax havens’ has grown especially sharply – to over half by 2013 (or from around 2% of all US corporate profits in the mid-1980s, to over 20% at its 2008 peak).

The share of US MNE profits retained in’ ‘tax havens’ has also risen: nearly four-fold since the 1980s, towards 40%.

Zucman then shows that the effective tax rates on US corporate profits has fallen consistently in the post-war period, but with an important change.

From the 1960s to the 1990s, the nominal tax rate was also falling – so a falling effective rate may be broadly consistent with the policy intention. From the 1990s onwards the nominal rate has been stable, but the effective rate paid has continued to drop steadily – so this is less obviously a deliberate policy choice.

Offshore tax evasion

The other element of the analysis deals with tax evasion through offshore wealth holdings, and draws on earlier work. There are two main points here. First, Zucman shows that the share of US equities held by individuals or through firms based in a group of ‘tax haven’ jurisdictions has risen from 2% or less in the 1980s, to exceed 8% now (with no discernible change due to the financial crisis).

The second part of the analysis is a global estimate of the total offshore holding of wealth (in this case, not in a particular group of ‘tax havens’, but in all jurisdictions other than the home country). [Of course, holding assets ‘onshore’ also allows in many cases – not least the US – for great opacity and tax manipulation too. See e.g. this new paper from Jason Sharman and co-authors that continues his great work of showing the extent to which OECD economies lag the ‘usual suspect’ havens in, for example, the risk attitude of company formation agents when unknown parties seek to breach beneficial ownership identity requirements.]

The identified offshore wealth holdings are estimated at $7.6 trillion. Data from the Swiss authorities, as presented in earlier work by Zucman and Niels Johannesen (see Fig.7 here), is then used as the basis for an assumption that 80% of offshore assets are undeclared, which in turn gives rise to an estimated tax loss of c.$190bn.

Policy proposals

Zucman makes two main policy proposals: corporate tax reform, and a world financial register. On the former, he considers and dismisses OECD BEPS attempts to fix current system, along with formulary apportionment options. Instead, Zucman argues for (re)integration of corporate and individual income taxation, within the more complex reality of globalisation – even although attempts at integration were largely dropped over time as this complexity developed.

The way that Zucman proposes to make this work is through a major shift in information provision and use, through the creation of a world financial register – Piketty’s major proposal in Capital (which I’ve enthused about before, for its spirit of democratic and financial transparency). Zucman here calls it “a transparent way to enforce a fair distribution of corporate tax revenue globally and thus make an imputation system work in a globalized world.” He then considers and dismisses counter-arguments around cost, complexity and obstructive financial secrecy. (On cost, by the way, my limited cost-benefit analysis of national registers established globally may be of interest.)

Each of these proposals deserve – and I hope, will receive – substantial attention.

Last word, not the last word

The paper itself is a great contribution, pulling together elements of Zucman’s work into a single, powerful argument. In doing so, it also confirms the difficulties of attributing anything more than approximate scale on the basis of current data. By that I mean that the approaches taken are either somewhat partial (what of other jurisdictions’ multinationals?), and/or rely necessarily on extrapolations (for example from Swiss data on asset declarations to the global level); and in addition, inevitably, on assumptions about returns and implicitly about counterfactuals. To be clear, these points are not meant as criticisms; rather, they are additional confirmation that this kind of work requires such steps – as various recent pieces have argued. Researchers simply need to be clear, and open to criticism (as Zucman is), about the steps being taken.

So while it certainly isn’t the last word about the scale of either corporate tax avoidance or offshore tax evasion (and I may write a more critical review of some technical points later), Zucman’s paper marks an important milestone in the development of rigorous academic research in these areas.

Authors: Alex Cobham View Profile

Development blog: Trade Growth Is Slowing; Is Protectionism to Blame?

When the financial crisis hit in 2008, many people feared that countries would respond as they had during the Great Depression and restrict imports. And as shown in the chart below, trade plunged even more deeply than economic output, but then it rebounded just as quickly. It seemed the system built after World War II to avoid beggar-thy-neighbor trade policies had worked pretty well. Certainly there was nothing like the Smoot-Hawley tariff bill of 1930 that raised the average US tariff by a third — to almost 60 percent! But more recently, trade growth slowed dramatically again and the question is why?

Protectionist measures are creeping up…

Simon Evenett, founder and coordinator of the Global Trade Alert (GTA) project, thinks we should not be too sanguine that the world avoided broad, new across-the-board trade barriers. The project monitors and reports on trade measures around the world, classifying them into those that are liberalizing and those that are discriminatory (and likely to harm other countries). In the project’s latest report, titled “The Global Trade Disorder,” Evenett points to disturbing trends in the data. He concludes that there have been three phases since the early days of the economic crisis. There was an initial upsurge in protectionist measures during the crisis, followed by a modest decline as economies recovered in 2010-11. But more recently, as economic growth has slowed in many parts of the world, the number of new protectionist measures ticked up again. 

And, because many of the previous measures have not gone away, the cumulative number of beggar-thy-neighbor measures in place is higher now than at the peak of the crisis. The European Union and India have imposed the most measures affecting the greatest number of trading partners, while China is the most frequent target (pp. 4, 66 of the report). The most recent data indicate that metals and chemicals are the sectors most frequently hit, surpassing agriculture. 

Most of the measures identified in the GTA are ad hoc duties imposed against allegedly unfair (dumped or subsidized) imports, or bailouts and other financial incentives for domestic industries, and not increases in old-fashioned tariffs. In that sense, the international trade rules are working; it’s just that the rules have weak spots. And trade growth, which was outpacing output growth before the crisis, slowed dramatically during Evenett’s third phase of crisis-era protectionism.

But how much do these protectionist policies really matter for trade?

Of course, some of the decline in trade growth is due to the lack of growth in key parts of the world. A recent VoxEU article concluded that about half the slowdown was due to cyclical factors, particularly economic stagnation in the European Union. The other half they concluded was due to structural factors, including modest increases in protection around the world. However, the article suggests this is only a small part of the problem, citing data from the World Trade Organization which shows that just over 1 percent of global imports are covered by restrictive measures:

Figure 8. Trade covered by new import restrictive measures

Source: WTO.

While Chapter 4 of the new Global Trade Alert report argues that the WTO count of new restrictive measures is too low, it is hard to believe that the “murky” protection measures captured by the GTA would change the order of magnitude of trade affected.

What are other explanations for slower trade growth?

Paul Krugman argued on his New York Times blog last year that the rapid growth of trade in the post-World War II era was due to sharply declining costs of trade. In his story, both sources of declining trade costs—post-war trade policy liberalization and the spread of shipping container technology—have largely run their course and a slowdown in trade growth is not surprising.

In an intriguing new analysis, Cristina Constantinescu and Michele Ruta, and Aaditya Mattoo, economists at the IMF and World Bank, respectively, argue that changes in supply chain trade in China and the United States are the key factors explaining the slowdown in trade growth. Notably, as China’s industrial sector matured, the share of imported inputs in China’s total exports was nearly halved from its peak of 60 percent in the mid-1990s. And in the United States, the authors conclude that the pace of offshoring and supply chain fragmentation by US companies seems to be declining.

Should developing countries be concerned?

Even if the pace of supply chain fragmentation is slowing, we are unlikely to see it reverse. So, if the slowdown in China’s trade is paired with economic reforms that shift the focus in China to domestic consumption and public goods, such as clean air, and improved health and other services, new trade opportunities could open up for other developing countries. But the growth in discriminatory trade measures documented in the Global Trade Alert is worrying. Even if the trade impact is not yet large, it comes in addition to the proliferation of regional trade arrangements that contribute to erosion in the international rules-based trade system.

So, having read the latest GTA report, I’m even more grateful that US and Indian negotiators were able to work out a compromise on food security that will let the WTO get back to work. It should never have gotten to this point, and the road ahead is by no means smooth, but willingness to reach a deal at least indicates that these two major players still do value the multilateral system. 

Authors: Kimberly Ann Elliott View Profile

Development blog: Giddy Optimism on 2015

Three big conferences next year could affect the next two decades of global development.  The first will bring world leaders to Addis Ababa in July for the Third International Conference on Financing for Development.  Next up, presidents and other assorted potentates will gather in New York at the United Nations to agree on Sustainable Development Goals for 2015–2030.  Finally, the UN Framework Convention on Climate Change will meet in Paris in December to negotiate what will follow the Kyoto treaty.  I’m increasingly optimistic about two out of three of these events, to the extent that the rather grim prospects for the third are beginning to appear a little less apocalyptic.

Going in reverse chronological order, I share the excitement over the recent US-China climate deal and what it might mean for the UNFCCC in Paris.  In my Business Week blog this week I suggest the deal gives hope that the conference could line up ambitious national targets into a global target on the year that greenhouse gas emissions will start to decline (Nigel Purvis believes it could be 2025).

When it comes to the post-2015 development agenda, I still hope the secretary-general pulls a rabbit out of the hat with his upcoming report and that it provides a compelling narrative of what the Sustainable Development Goals are meant to be for.  If he manages that, and it provokes member countries to edit and sharpen goals, there’s still the chance that the New York meetings could celebrate a powerful and useful outcome document.  But at this point, I’m not terribly optimistic.  According to this report, the UN permanent representatives from Ireland and Kenya, who are the co-facilitators of the plenary on the organization and modalities of intergovernmental negotiations and remaining issues related to the summit for the adoption of the post-2015 development agenda (a job title that is 55 characters too long to tweet) suggest that, from governments’ point of view, “the targets—but not goals—proposed by [the Open Working Group] may require ‘tweaking’” before they are adopted.  It would be nice to think that the goals are to be excluded from the tweaking because they need more than tweaking, which is itself diplomat-speak for “hacking mercilessly.” But I’m not sure that’s what they meant.

That leaves Addis.  Perhaps it will prove fortuitous that it comes before New York and won’t be infected by a sense of disappointment if the SDGs remain a bit of a mess.  There are a lot of ideas on the table at the moment, including better aid targeting; building up nonconcessional financial flows and guarantees to invest in infrastructure; using the momentum out of the G-20 on issues like tax, transparency, and illicit financial flows; getting rid of harmful subsidies and redeploying the money to more development-friendly uses; perhaps even dealing with bits of the international elements of a range of nonfinancial issues from technology though trade and the environment.  If just some of these ideas come to fruition, the Addis event will be well worth the cost of the business class airfares and conference canapés.

Overall, the US-China climate agreement and the news that the United States and India appear to have reached a compromise on customs streamlining and agricultural subsidies, meaning a WTO deal might be in the cards, suggest the environment for global deal-making going into 2015 is markedly improved.  The US administration deserves credit for its considerable part in taking poison out of the well.  Next year is a big opportunity to improve long-term global development prospects. It is nice to think world leaders might actually grasp it—or, at least, most of it.

Authors: Charles Kenny View Profile

Development blog: Payment by Results: One Size Doesn't Fit All

In recent years, donors have been making greater use of performance-based payment approaches to fund development programs. The UK Department for International Development, using the broader term being used across the UK government, has added “Payment by Results” (PbR) to the development lexicon. DFID has also stimulated the interest of its partners and contractors in PbR - whereby disbursements are made only after the achievement of agreed results - and it is signaling that it will be increasing its use of PbR programs.

Bond, the UK network of international development NGOs, is investigating what PbR means from an NGO perspective and last week released a report, Payment by Results: What it Means for NGOs .  The report makes a good contribution to the literature on results-based approaches because it looks at one subset of PbR approaches – contracts between development agencies and NGO service providers – and offers specific lessons from past experiences and guidelines for NGOs, as well as recommendations for donor agencies.

Because the Center for Global Development is viewed as an indefatigable advocate of PbR I wanted to highlight a few key points that the Bond report draws attention to, and clarify our point of view based on our work on approaches that fall under the large umbrella of Payment by Results such as Cash on Delivery Aid and Development Impact Bonds.  

All Payment by Results programs are not created equal.

Far from it. DFID’s PbR Strategy document, published last summer, acknowledges that there is no international definition of PbR and lots of different ways that programs can be designed within (at least) three broad categories of programs that fall under PbR: results-based financing or RBF (payments from funders or government to service providers), results-based aid or RBA (payments from funders to partner governments), and Development Impact Bonds, DIBs (programs that pay investors for the delivery of results). 

It is easy to think of PbR as one kind of aid program, or to confuse the alphabet soup of variations of PbR (RBA, RBF, COD, OBA, and P4R, to name a few). But the underlying theories, key features, lessons, and experiences of one approach can’t always be transferred to another. As Bill Savedoff says here, we often hear about approaches that are likened to COD Aid without paying attention to the difference between paying for activities or for outcomes. In this regard, the Bond paper does a good job of focusing on one particular category of PbR – payments from governments to NGOs for services – and of teasing out the implications of different kinds of payment triggers, shares of funding put “at risk,” and levels of the results chain at which results are defined. A PbR approach applied to NGOs is unlikely to share much in common with PbR programs focused on households or national governments. Similarly, programs in which 100 percent of funding is proportional to outputs are going to be very different from ones in which only a small portion of funding is linked to results. Each approach will have its own challenges, but, in trying to understand how and when PbR should be applied, it is not useful to treat all PbR approaches as though they are the same. 

PbR encompasses many theories of change. 

The Bond paper discusses how these design choices should affect an NGO’s decision whether to participate in a PbR program. What we have found is that the design features of a PbR program also reveal something else. They show that funders are confused about the theories of change embedded in their PbR programs. In a forthcoming paper, we distinguish four theories of change that are used by funders to justify and design their programs: (1) that the offer of a financial incentive will lead to some behavior change by the recipient; (2) that the performance funding makes results visible in a way that improves management; (3) that the focus on results will improve accountability to constituents or beneficiaries; or (4) that the agreement gives recipients more discretion and autonomy to innovate and adapt their activities. It is our sense that PbR programs are frequently criticized for relying on the financial incentive to change recipient behavior when most are actually designed to work through one of the other three channels.   

“Innovation” is not an automatic benefit of PbR.

At CGD, we have tended to focus on the fourth of these theories of change. We argue that giving ownership and responsibility to recipient countries creates space for learning, innovation, and long-term impact. The Bond paper makes a similar point about the value of flexibility in PbR contracts for NGOs … but the contract has to make that flexibility real. Our observation is that if funders pay for results instead of inputs, implementers can turn their attention to problem solving with their local knowledge and modify programs as needed to get the desired results – rather than focusing on satisfying the funder’s reporting requirements or sticking to an inflexible plan.   We have taken special interest in two forms of Payment by Results –  Cash on Delivery Aid and Development Impact Bonds – which both involve a funder paying for something at the highest possible level of the results chain (typically, a development outcome).  This matters because linking funds to the ultimate desired outcome, as opposed to specifically defined activities or even outputs, is what is expected to open up space for flexibility and innovation. (The Peterborough Social Impact Bond in the UK is one example of where we see this happening; the UK government is paying for the outcome of reduced instances of prisoner reoffending.)

But if funders think that providing discretion to the recipient is an important part of their PbR programs, we aren’t seeing much of it. Too often, funders are offering contracts that pay for results while simultaneously specifying the activities and approaches that must be used by the recipient. As the Bond report says, the risk is that implementers are attracted to PbR because of the expectation that it will give them flexibility and then become frustrated when the program’s design precludes this. Our research finds that very few programs are really testing the theory that PbR can improve results by creating greater scope for innovation because their designs continue to constrain recipient discretion. If flexibility, innovation, local ownership, and reduced administrative burdens are essential to the argument for PbR, then you can’t design PbR programs that simply add results payments on top of the requirements and restrictions of an input-funded program.

The point of any new financing approach is to try and get better results than the approaches used today. The question for CGD has always been, what kind of funding mechanism would actually make possible the kind of learning, adaptation, country ownership, accountability, and results focus that we know are important for development? Like the authors of the Bond paper, we believe that PbR “has a place in the portfolio of funding mechanisms available to tackle development problems,” and we think the cautions they present should be heeded and considered. But in terms of building evidence on the effectiveness of such programs, we will have to see PbR programs that actually make space for innovation before we will have experiences to assess and from which to learn.  

Authors: Rita Perakis View Profile William Savedoff View Profile

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