Cash on delivery: linking aid to results

By Nancy Birdsall, William D. Savedoff and Ayah Mahgoub, Center for Global Development, Washington

Nancy Birdsall, president of the Center for Global Development (Photo: CGD)

Cash-on-delivery aid is a proposed new approach under which donors would commit to pay a specific amount for a specific measure of progress. Recent endorsements of the approach by interested governments and the release of our book on the subject have generated considerable discussion. We were pleased to see the concern with improving aid effectiveness in the 2010 Education for All Global Monitoring Report, but were disappointed that the report failed to recognize how cash-on-delivery aid could achieve this aim. The report’s criticisms seemed to be based on misunderstandings of the cash-on-delivery aid proposal and relied on outdated background papers that we commissioned in the process of developing our proposal.

Here are some responses to the main criticisms in the report:

Penalizing governments for outcomes they do not control

The 2010 GMR correctly notes that external events such as natural disasters affect school enrolment and completion rates. Nevertheless, it is wrong to assert that cash-on-delivery aid penalizes governments when these adverse events occur. When external events intrude, it is better to respond with appropriate instruments, such as emergency financing. Using funds aimed at improving schooling to compensate for adverse events like natural disasters undermines both the aid mechanism and the educational institutions that it seeks to support.

Shifting the risk

The 2010 GMR criticizes cash-on-delivery aid for shifting risk from donors to recipients. However, the biggest risk currently borne by highly aid-dependent countries is capricious donor behavior and priorities.  That risk is currently borne entirely by the recipient country, which has to cope with variations in aid revenues that are significantly higher than volatility in its own domestic revenues and entirely out of its control. Cash-on-delivery aid takes the risk of volatility in donor policies off the developing country and replaces it with a clear enforceable contract under which the developing country only assumes the risk of failing at delivering services – a task which is its primary responsibility and also more clearly in its sphere of control.

Diverting attention from the strengthening of systems

The GMR asserts that cash-on-delivery aid would undermine education systems. Actually, the cash-on-delivery aid proposal provides resources and incentives to improve education information systems while empowering countries to choose their own strategies to accelerate their educational progress.  Rather than undermining systems, cash-on-delivery aid is explicitly structured to strengthen government efforts to improve the policies and institutions that are necessary for effective schooling systems.

Creating incentives for misreporting

In the case of accelerating progress toward universal primary schooling, we commissioned technical work and adopted the recommendation of paying for “additional assessed completers” precisely because it is a good proxy measure for the desired outcome and it is relatively easy to measure and verify. The cash-on-delivery aid payments would be made based on the country’s report after it has been independently verified and validated. This process of verification makes the agreement more credible for the donor and recipient, gives the recipient incentives to report accurately, and improves the reliability of the country’s own education information systems.

Bypassing “underperformers”

The GMR argues that cash-on-delivery aid doubly penalizes the poor because only better-performing countries will receive payments. This argument is quite confused. Under cash-on-delivery aid, if a government is unable or unwilling to provide schooling to its citizens, those people are not penalized again if donors then provide less money to the government.  The children in those countries can only be deprived of their education once, there is no second penalty if the government is not paid for services which it failed to deliver.

By contrast, most other forms of aid actually do impose a double penalty on the poor.  If donors lend money (or offer grants) to a government for education which is not provided, then two groups of poor people lose out – the children who didn’t get educated and the citizens who have to repay the ineffective loan through their taxes (or the people who could have benefited from that aid if it had been applied elsewhere).

The most problematic aspect of paying governments who fail to deliver services, though, is that it interrupts accountability to its citizens.

While we have no illusions that our proposal is perfect, we are confident that it is promising enough to be worth a try and look forward to constructive debate about it.

This entry was posted in Aid, Developing countries, Donors, Finance, Governance, Innovative financing. Bookmark the permalink.

3 Responses to Cash on delivery: linking aid to results

  1. Pingback: The problem with cash-on-delivery aid « World Education Blog

  2. Pingback: Global Economic Governance Programme | Summer aid debates: Cash-on-Delivery and Crisis over Prevention

  3. Pingback: Beyond Busan 3: What management, for which results? « World Education Blog

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