What do discussions about aid modalities and institutional change have in common?
A lot, very little, would you expect them to? Clarifying these somewhat nebulous terms may be a first step to address this question.
An aid modality (or aid instrument), describes a way of delivering ODA. Different modalities are defined according to how funds are managed and disbursed: Is the funding ‘on budget’? Who signs off on the funding releases? The concept says nothing about the content of a given aid programme; it is purely concerned with the process used to transfer the funds. While budget support and project aid are the most common types of aid modality, the term also encompasses a host of other funding mechanisms, including funding for skills transfer.
On the other hand, institutional change refers to the reengineering of the ‘rules of the game’ that govern individual behaviour and structure social interaction. Such reengineering leads to new forms of political, economic and social arrangements which determine the nature of development outcomes.
Have I lost you? I hope not.
So would you expect these concepts to cross-fertilise? Well, if aid modalities describe the way we give aid and institutional change describes the anticipated outcome of any governance programme, as long as aid has a governance objective we should expect the concepts to interact. And if upcoming global agendas are anything to go by – the presidency’s priorities for the G8  and the post-2015 debate around governance  – the interaction is likely to be of enduring importance.
ODI’s Centre for Aid and Public Expenditure  has for some time carried out research on aid modalities and the relative merits of different approaches, while ODI’s Politics and Governance team  continues to explore the patterns, drivers and impacts of institutional change in developing countries. Over the last 12 months we have been working together to marry these two disciplines to investigate the interaction between aid modalities and institutional change.
We wanted to examine which types of aid modalities  are best suited to address a fairly common set of governance constraints to the delivery of public services in the developing countries. We chose three specific constraints that appear to undermine the adequate delivery of public services : i) weak alignment of institutional mandates and policies; ii) Poor top-down performance disciplines and bottom-up accountability mechanisms; and iii) limited scope for local problem-solving and collective action solutions.
We quickly realised that the way aid modalities are currently defined – informed by the broader literature on aid effectiveness – has little to say about these constraints and their determinants. Aid modalities have primarily been distinguished according to the technical arrangements governing the disbursement and management of funds . These include: i) type and terms of finance; ii) disbursement channels; iii) procurement conditions; and iv) targeting and tracking of donor resources . And the choice of these features has been informed by the priorities of the aid effectiveness agenda.
This is not to say these features are not important – whether funding is a grant or loan, or uses country systems or not, has significant economic and capacity implications for a country. However, viewing the effectiveness of aid in this way is too narrow if we want to consider institutional change. It gives insufficient attention to factors influencing incentives for performance, especially for state organisations and those charged with managing and delivering public services. 
For instance, it’s largely unclear whether the degree of earmarking of aid has any meaningful impact on the extent of performance disciplines in a sector. Similarly, whether funding is a grant or loan seems to be largely irrelevant for the space for local problem solving and collective action solutions in country.
Policy conditionality was supposed to be one way of providing the glue between the financial arrangements of aid modalities and policy outcomes, and led to a blossoming of policy conditions related to institutional reform. However, all too often such conditions failed strengthen governance. Beyond the dubious success of policy conditionality, discussions of aid modalities have very little in common with discussions of institutional change; and neither adequately answers what’s required for improved service delivery in developing countries.
So what is required? We need to start defining the way we deliver ODA differently; in a way that is meaningful for work on institutional change. Features used to define the delivery of aid should not only be relevant to the mechanics of institutional change, but should also be borne out of evidence on what positively effects institutional development.
Our research points to six factors  that provide a starting point for a new way to conceptualise aid delivery. These factors appear to be instrumental in facilitating a government’s own efforts to address governance constraints. Some confirm what many experienced development practitioners have long thought; others present fresh ideas on how external agents can support development change. Briefly, aid should be delivered in ways that:
- Identify and seize windows of opportunity by discerningly and effectively exploiting a country-led imperative for change.
- Focus on reforms with tangible political payoffs by supporting the delivery of goods and services that politicians can capitalise on in their campaigns.
- Build on what exists to implement legal mandates, working with the political grain by supporting the implementation of existing mandates in a way that builds on existing systems to do so.
- Move beyond policy dialogue by focusing on making existing systems deliver, albeit imperfectly, rather than creating better strategic frameworks for delivery.
- Facilitate problem solving and local collective action solutions by bearing the transaction costs, providing direct operational support and/or coaching to facilitate a greater degree of local problem solving and, in doing so, bringing people together to solve collective action problems.
- Adapt and learn, allowing implementing agencies adequate flexibility to regularly adjust programmes to accommodate new knowledge and changes in the local context.
Unblocking results  will be launched in London on 3 June 2013, sign-up to attend in person of participate online .