‘Pay by Results’ in International Aid Sparks Questions about Private Sector Compliance

Photo Credit: Peter Linke (via Flickr)

There is an ongoing debate regarding ‘pay by results’ in the international aid community. The pay by results (PbR) model is one in which aid recipient governments only receive donor funds upon achieving an agreed upon outcome – number of schools built, children inoculated, etc. For example, if the goal is to build sustainable road infrastructure, then the donor funds will only be released upon completion of the project, following an independent audit that the road meets all necessary standards. The idea is that this would shift incentives away from corruption – a government official is less likely to select the cheapest contractor offering a kick back if a poorly constructed road will not lead to payment by the donor aid agency.

This potentially sector-altering shift in development aid is largely in response to the perception that much of aid funding is lost to corruption. A new book, Results not Receipts by Charles Kenny at the Center for Global Development, argues that investment in financial monitoring and management places too much emphasis on financial input rather than the output or results. He criticizes “zero tolerance” towards corruption because it conflates receipt mismanagement with illicit behavior – resulting in overly-cautious funding allocation generally and the closure of impactful programs. While Kenny makes a compelling argument for changes to how bilateral aid from the World Bank, USAID and DFID should be evaluated (by results), the potential impact of this shift on the broader local economy, specifically the private sector, remains unclear.

If recipient governments want to ensure that they receive donor funds and bureaucrats are known for being risk averse, will a smaller and smaller number of multinationals and western NGOs start winning government contracts? Local firms may be viewed as higher risk by government officials, undermining recent gains in procurement and contracting transparency. Local firms are likely to face higher barriers to information regarding donor standards and audit procedures. Small and medium sized enterprises (SMEs) are the least immune to risk factors such as weather calamity, theft, illness, political instability, etc. that have nothing to do with corruption, but can disproportionately disrupt ability to remain solvent, competitive, and meet government and donor standards.

There are ongoing private sector-led economic initiatives occurring simultaneously to any aid-financed projects. Local firms operating in global supply chains and working on government contracts need consistent compliance standards. Otherwise, a local contractor ‘misplacing’ a few receipts on a World Bank-financed project with satisfactory results may be viewed as allowable, whereas the exact same behavior while working on a commercially financed project may lead to public outrage over inadequate third-party anti-corruption compliance, an expensive FCPA investigation, or even criminal liability. Who is the arbiter of the cost-benefit of corruption, fraud, and waste versus results in economic development? Global compliance standards are meant to eliminate the subjectivity of answers to this question.

Before major shifts in development aid policy towards pay by results can occur, the development community must also consider the impact on private industry in low and middle income countries.

Louisa Tomar is a Program Officer for Global Programs at CIPE