USAID is taking steps to ensure we make the most out of our investments, and one way we are doing so is by experimenting with a range of “pay-for-results” models.
“Pay for results” is an umbrella term for initiatives that pay out only after specified results have been achieved, rather than paying for the efforts to work toward those results.
It is seen as a disruptor that encourages innovation and attracts new funding sources. It can align interests and risk sharing among funders and implementers toward achieving evidence-based outcomes.
Interest in using these strategies in development has risen sharply in recent years, in line with growing attention to aid effectiveness and the need to use scarce resources efficiently.
But how exactly does this work? Let’s take the story of Joseph Ebwalu as an example.
Joseph, a farmer in Maaga village, Uganda, used to only grow enough cassava, millet and ground nuts to feed his eight children. Aside from the few extra cups he sold for profit, Joseph relied on local government support to provide for his family and lacked the financial history necessary to take out loans for a business of his own.
A few years later, things look quite different for Joseph and his family, thanks to a skills building course offered by the nonprofit Village Enterprise. The organization’s one-year poverty graduation program provided Joseph and fellow entrepreneurs with the business skills, economic stability and starting capital to not only get on their feet, but to stay standing.
Joseph now runs his own goat-rearing business with his two Village Enterprise group members. The profits he’s earned allowed him to move beyond subsistence farming to providing his family with three meals a day and sending all of his children to school. He’s now a role model for others in his community.
USAID provides support to the organization Instiglio to develop, with Village Enterprise and other donors, a development impact bond to scale Village Enterprise’s poverty graduation model in Kenya and Uganda. In this specific example, USAID and other donors agreed to pay a certain rate for rigorously verified outcomes from Village Enterprise—like increases in Joseph’s net assets and the number of meals his family eats.
Village Enterprise gets funding upfront from socially-motivated investors and free reign to deliver services as they see fit. This way, if the poverty graduation model doesn’t work in Kenya and Uganda, the donors wouldn’t have to pay. However, if Village Enterprise does meet its target and successfully helps more people like Joseph, then the nonprofit unlocks more funding from USAID and its partners.
USAID uses a few other pay-for-results structures, as well. Outcomes-based grants and contracts are agreements between a funder and a partner. In these relationships, after an initial transfer of money to launch or improve a project, the partner must meet agreed upon outcomes-based milestones or forfeit further payment.
An example is the Development Innovation Ventures program, under which grants are based on outcomes milestones, ensuring that both the funder and the grantee are incentivized by the same goals around results.
USAID also uses results-based incentive prizes to create open competitions that incentivize a wide range of organizations and individuals to accelerate a solution or achieve a specific outcome, while remaining open to innovation and out-of-the-box ideas on how to get there.
USAID has used results-based incentive prizes to award cash to competition winners that best achieve the specific outcomes or hit predetermined targets, stimulating the market to develop or improve solutions as diverse as small-scale desalination technologies, household refrigerators that function with off-grid energy systems and data solutions to enable decision making for smallholder farmers.
In lean financial times, USAID needs to continue to increase cost-effectiveness while also encouraging innovation. By integrating these practices into our everyday work, we have the potential to cut costs, make smart decisions, and transform international development.
Together with our partners, we are taking a step toward a future where our funding is more directly linked to results. And we do not expect the trend toward outcomes-based programs to slow.
About the Author: Seema Patel is the Division Chief of the Innovation Design and Advisory Team in the U.S. Global Development Lab, Anne Healy is the Division Chief for the Source and Test Team in the U.S. Global Development Lab.
Editor's Note: This entry originally appeared on USAID's blog.
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