I want to share something puzzling that has troubled me for some time: Why don’t development agencies use results-based financing more consistently as a way of supporting stronger governance in developing countries? Let me explain the source of this puzzle and give you my personal take on the issue.
The traditional way in which international agencies finance development projects is by paying for inputs (materials, construction, and services). Typically, a set of activities is identified as critical to achieving results, costs are established, and funds provided accordingly. Heavy emphasis is placed on monitoring how inputs are used, based on technical standards. Measuring the project’s results (the outputs produced with those inputs and the associated outcomes derived from the use of those outputs) is often included as a parallel activity that does not influence the amount of funding or the rate of disbursements.
I can see this type of arrangement being justified when close control over inputs (e.g. construction, technology, etc.) is essential to the achievement of results. This is typically the case when technical design (and the associated implementation challenges) is a critical bottleneck. Without these, results cannot be achieved –and to the extent technical challenges (at both the design and implementation phase) are addressed, the probability that results will be achieved is very high. Often such situations involve discrete, one-off, activities, such as the construction of a large infrastructure project or the purchase of expensive and technically sensitive equipment.
Many of the development challenges faced by developing countries, however, cannot be addressed just through discrete policy actions or through the proper technical implementation of a project. For example, improving service delivery (e.g. better maintained roads, functioning schools and health clinics, effective agricultural extension services) may well require policy actions (e.g. a decentralization law) and will typically involve some discrete investment activity (e.g. constructing new schools or purchasing new equipment for the road maintenance agency). But these are seldom sufficient for the achievement of results: schools can be built but teachers may remain absent; health clinics may have new equipment but essential drugs may not be available at the point of service; rural roads may remain un-maintained in spite of the existence of idle equipment.
Addressing such bottlenecks involves changes in management practices and behaviors by service providers and users alike. Improved policy frameworks may be necessary and more or better inputs may be essential–but without stronger incentives and accountability mechanisms, improved policy frameworks and inputs are unlikely to yield results. In other words, stronger governance is fundamental –and without it more resources are unlikely to yield the desired results.
Interest in so-called results-based financing arrangements has increased substantially among development agencies. But resistance remains to making this central to development work. What is the problem? After all, If the goal is to support better governance, what better way than rewarding good performance? One argument is that results based financing is mainly workable in high capacity, strong governance settings. Well, almost everything works in those settings. The key intuition, however, is that paying for results can, in fact, be a powerful instrument to change incentives and thus contribute to improving governance. Seen from this perspective, results based financing is not a luxury for well-performing countries but an instrument to support better governance.
Hence my puzzlement: what is the source of resistance?