1. What is COD Aid and why is it “hands-off”?
COD Aid is an idea developed at the Center of Global Development to improve the impact of foreign aid on developing countries by pioneering a new approach. Instead of the traditional approach of conditioning aid on specific policies, negotiated action plans, and the purchase of inputs, funders and recipients would develop an open contract in which funders agree to pay eligible countries for progress, such as the number of students who complete primary school and take a competency test. As an open offer, any eligible recipient country could then sign on to the contract. The foreign assistance would not be tied to specific purchases or policies, allowing the recipient country to use the funds flexibly and innovatively. The pilot would be accompanied by a research program to evaluate whether it is successful in promoting national achievements in education and whether the “hands-off” approach strengthens local institutions.
2. What are the goals of a COD Aid program and who chooses them?
COD Aid could be applied to any goal for which a verifiable incremental measure of progress can be identified and which is agreeable to a funder and recipient. The Millennium Development Goals present a menu of such objectives, including universal primary school completion, reducing child and maternal mortality, and preventing the spread of HIV and malaria. Funders and recipients could negotiate the progress measures for a COD Aid contract. Alternatively, funders could choose a goal and offer it to countries that could then assess whether they think it would serve their interests to participate.
3. What could countries spend the COD Aid payment on?
Anything. There would be no restrictions on the use of the funds. This is the essence of the “hands off” nature of the payment. The funds could be used for traditional inputs but the true bottlenecks to making progress might be of a different nature. For example, achieving universal primary schooling might require building schools and training teachers, but it might also require investments outside the education sector, e.g. constructing roads improving disbursement procedures, or providing poor families with income support. Ultimately, the COD Aid payment would provide the flexibility for the given country to address whatever particular obstacle is most problematic for them.
4. Should there be a selection process to choose COD Aid recipients?
Preferably not. The ideal program would be to offer COD Aid to any country that is willing and committed to accelerate progress toward some widely-accepted goal. However, if funders are unwilling to make such an offer, then it would be preferable to determine eligibility on the basis of an existing selection process in order to reduce administrative costs, increase transparency, and establish legitimacy. For example, funders could offer COD Aid to any country that has qualified for Fast Track Initiative funding, or the U.S. Congress could authorize using COD Aid with any MCC-eligible country.
5. Who gets the money?
The recipient country would decide who receives the funds. This could be the finance ministry, a line ministry, subnational governments, district-level committees, communities, specific service providers or even individuals. The country itself would decide the best use of the funds. Countries would ask for funds to be directed to whichever agency or organization they choose for increasing the likelihood of success.
6. What is the right amount for the payment?
The amount of the COD Aid payment should be large enough to attract the attention of high-level policymakers in the recipient country and give the government leverage to make the changes needed to achieve progress. It should also reflect the value of the outcome to the funder.
7. What is the right time frame for the contract?
The longer the term of the contract, the better – this would help increase predictability, encourage long-term investments and allow wise spending on recurrent costs. In our judgment, a five-year contract with the strong expectation of at least one renewal would be the most feasible given the political and legal context.
8. Is lack of money really the problem? What about insufficient demand, political obstacles, or weak technical capacity and coordination?
Lack of money is not necessarily the problem. The funds disbursed under COD Aid provide an incentive for the country to undertake the right diagnosis and design effective strategies, whether or not those strategies require additional funding. For example, if the only obstacle is political will to enact a particular law or enforce specific management practices, COD Aid would provide leaders with an incentive to take those measures. In such a case, the funds that the government receives for successfully improving educational outcomes could then be applied to other public priorities. In most cases, however, some funding is still necessary though not sufficient for improving outcomes – whether those funds go to additional training, more staff, infrastructure, supplies, research, information systems, administrative reforms, supply incentives, or demand incentives.
Concerns: Too Little Too Late
9. How can the country be expected to make progress if it does not receive payments until it has already achieved some of the goals?
Countries that enter the COD Aid contract are not starting from a blank slate. They already have their own programs financed with domestic and foreign resources. The COD Aid funds provide an incentive to make existing technical assistance and educational investments “pay off” in improved outcomes. Once the COD Aid payments start flowing, these funds can be used to sustain and further accelerate progress.
10. What about countries where national information systems are weak?
Reliable and precise information about the outcome measure is critical to the COD Aid approach. For this reason, the only up-front money that the COD Aid agreement would provide would be funds for the direct costs of improving national information systems. If a country cannot produce reliable results in the first few years of the program, then payments could be made using the third-party agent’s verification reports, which are likely to use survey samples.
11. Wouldn’t there be a big lag between investment and the payoff to the country?
This depends on the appropriate time frame. Most development programs have to be thinking of 5 to 10-year horizons, and any program aimed at making substantial changes in institutions or behaviors also has to consider long time frames. The lag in payments is likely to make the contract seem unattractive to short-sighted leaders, but very attractive to those who have longer-term visions. This is, then, another attraction of this approach since it is most likely to be taken up by the same leaders who are most likely to use it well.
Concerns: Unintended Consequences
12. Don’t incentive payments have unintended consequences, like rewarding quantity over quality?
This is a potential problem that can be addressed by choosing appropriate outcome measures and encouraging alternative forms of accountability. For example, in an educational program, payments could be made against the number of students who take a standardized competency test and whose results must be made public. This would allow funders and the country’s own citizens to judge whether quality is being neglected and to pressure the government to pay sufficient attention to the quality of instruction. The specific approach that is chosen will have to balance competing interests and be feasible in the given context.
13. Wouldn’t all the funding just go to better-off areas, where it’s easier to make progress?
In traditional aid projects, where funds are directed to inputs, the concern over where a country focuses resources is a legitimate distributive concern. For a COD Aid agreement that pays for each additional student who completes school or for each averted death, the resources continue to flow so long as anyone in the country lacks access or faces undue health risks. Countries would have an incentive to choose a strategy that makes the most rapid progress. This will depend both on the relative costs and effectiveness of programs for serving different populations. Sometimes this will lead to tradeoffs that can only be resolved through public debate at a national level.
14. Wouldn’t rewarding a specific outcome divert domestic resources from other priorities?
If the payment were large enough to cover the cost of progress then funding for other priorities would not be affected. With a smaller payment, this is an issue that funders and recipient countries would have to consider seriously. If the approach were successful, funders could potentially offer a range of contracts for the full range of development objectives that they share with developing countries.
Concerns: Waste and Corruption
15. Wouldn’t corrupt officials just pocket the money?
COD Aid would be no more susceptible to unlawful diversion than other forms of foreign aid to developing country governments. The key difference is that the COD Aid funds would only be disbursed if goals have been achieved; whereas normal project spending is disbursed against the purchase of inputs whether or not the project’s goals are achieved. The COD Aid contract could only be offered to countries that had demonstrated good governance (e.g. through the World Bank and IMF public expenditure and financing indicators) or require public disclosure of the funds received to improve transparency and public scrutiny.
16. Wouldn’t the country get a windfall when outcomes improve for reasons that have nothing to do with its own actions?
Yes, countries would receive funding for each unit of progress regardless of how it was achieved. The only way to avoid this would be to create intrusive and expensive methods for attributing success to specific actions by the government. We are not concerned with such windfalls, however, for at least two reasons. First, the transparency and improvement of data quality that countries must achieve to make the COD contract pay is an important objective in and of itself. Second, it is unlikely that the government has not contributed in some way to the success, if only through supporting the basic administrative infrastructure necessary for the system to function. The worst that can happen is that a country that is doing well, making progress and supporting transparency, receives some additional funds – not much of a problem considering that the aid system routinely seeks to reward “good performers” anyway.
17. Wouldn’t this money just replace money the government would have used anyway?
It is impossible to be certain that any foreign assistance is “additional” to recipient government spending. However, COD Aid can be said to be “additional” in a way that other forms of funding are not. Because it only pays for success, it is the only funding that is conditional upon success. All other forms of funding, whether domestic revenues or traditional project finance, even if tied to particular expenditures, give the ministry or government an opportunity to take funds that would otherwise have been used for those expenses and divert them to other purposes.
18. Wouldn’t this money just replace money funders would have disbursed through other aid mechanisms?
COD Aid represents a way to spend additional money that funders have already pledged for poor countries as a part of commitments to “scale up aid.” Funders would agree as a part of the contract to treat the progress-based funds as additional, and to abide by all existing commitments. More importantly, however, this issue would only arise if the country were very successful in improving outcomes, in which case funders are likely to want to give a country more money, not less, anyway.
Concerns: Difficulty Measuring Outcomes
19. Won’t it be difficult and expensive for the country to gather detailed information required for the reporting and verifying progress?
Possibly, but this is a necessary investment for obtaining detailed and good quality information about outcomes regardless of how the program is financed. Information about outcomes would be of great use to recipient country policymakers and of greater utility for management decisions than the information currently gathered to monitor and evaluate traditional project aid. The verification process paid for by funders is not necessarily any more expensive than the monitoring and evaluation that is typically done for other kinds of foreign assistance.
20. What keeps countries or local officials from inflating achievements to increase their payment?
The recipient country would report progress annually from its administrative data. This annual progress report would be verified by an agent that is selected from a previously agreed upon list of agents and contracted by the funder. The cost of the verification process would be paid by the funder. The verification process would depend on the quality of information in the country. For example, in order to verify official reports, the agent might need to do performance audits, gather data at service facilities or conduct household surveys.
Concerns: No Progress Means No Payment
21. What if a country doesn’t meet the goal?
The COD Aid contract is not an “all-or-nothing” form of assistance. A country would be paid a set amount for each additional unit of progress. So, rather than “passing” or “failing,” the recipient is rewarded in proportion to the amount of progress achieved.
22. Governments only control a fraction of the factors that affect outcomes. How does COD Aid account for this?
While it is true that governments do not have full control of all the factors that affect outcomes, there would be no reason to provide aid if funders didn’t believe that governments can influence those outcomes. The outcomes chosen for COD Aid agreements should be outcomes that funders care about and over which governments can have significant impact. The funder may end up paying for progress that is not directly attributable to government action but we view this ‘risk’ as more acceptable than the ‘risk’ of paying for inputs that may have no effect on outcomes at all.
23. What if a drought or other unforeseen shock keeps the government from achieving progress?
Sharp changes in international interest rates or terms of trade and natural disasters such as droughts can interfere with development programs. The COD Aid contract should contain contingencies for adverse shocks that interfere with measuring and verifying the outcome indicator. However, COD Aid funds should never be disbursed except against progress measures. If emergency programs are necessary to assist a government, they should use a different aid mechanism rather than compromise the credibility of the COD Aid agreement.
COD Aid Compared to Other Forms of Aid
24. Why would COD Aid work when so many other approaches have failed?
Other approaches have not completely failed. Many countries are making dramatic improvements in economic and social conditions, often at rates that exceed those that were experienced by today’s wealthiest countries. Nevertheless, progress could be faster if a new foreign assistance instrument were available to tackle the constraints on progress that are not addressed by traditional approaches. COD Aid differs from traditional approaches by being “hands off,” which allows the government greater flexibility in how it uses the funds; by paying against progress, it aligns the incentives of the whole government (not just a particular line Ministry) more strongly with the ultimate goal of the program; and by focusing on results it creates a powerful incentive to improve information systems that traditional programs have only approached from the supply side.
25. Isn’t COD Aid just like Budget Support?
Budget Support programs have similarities with COD Aid: they are disbursed without being attached to specific expenditures or projects and they are conditional on achieving certain targets. However, the two approaches differ significantly in other ways. Most Budget Support programs are conditional on meeting a number of targets set in national plans or sector strategies and the country is judged to succeed or fail relative to each of these targets. In contrast, COD Aid is linked to one or very few concrete, specific outcomes and the payments are made for every increment of progress. This avoids “setting the bar too high or too low,” instead creating a clear payoff for each unit of progress. In contrast to Budget Support, COD Aid will probably be more predictable because payments depend on factors that are in the recipient government’s hands rather than responding to the internal politics and budget processes of the funder country. COD Aid payments would also automatically phase out as the recipient country builds capacity and reaches 100% coverage, so spending would end with the achievement of development objectives, rather than at a point determined by the funder.
26. What’s the difference between COD Aid and output-based aid?
Output-based aid programs generally pay for units that are easily measured but not necessarily identical to the true goal of the program. For example, output-based water projects may contract with a water services agency to pay for the number of water connections that are completed but not for the delivery of potable water; an output-based health program might pay for the number of children who are screened for malnutrition, but not for the number of children who reach appropriate weight for height. By contrast, COD Aid is associated more closely with the program’s ultimate aim. A second difference is that most output-based aid programs contract directly with service providers while COD Aid is conceived primarily for engaging national or subnational governments.
COD Aid and Other Actors
27. Could private funds be used for COD Aid?
Yes, with the same principles that apply to public funders.
28. Could COD Aid fund private service providers?
This would be up to the country to decide based on its preferred strategy for reaching the program’s goals. Because the funds would go to the government for use in any sector, a country could certainly choose to fund public and private service providers through domestic programs (e.g. school vouchers, health insurance).
29. Could COD Aid be directed to state or local governments?
Yes. A country receiving COD Aid at the national level could decide to channel progress-based funds to the state or local level. Funders could also consider making arrangements for COD Aid with governments at the sub-sovereign level, such as state governments. However, this latter approach would require careful assessment of the impact on national level policies, interregional equity, fiscal responsibility and population movements, as well as the contract’s feasibility in terms of progress measures and audits.
Other Issues
30. How could COD Aid be evaluated?
The appropriate way to evaluate a COD Aid contract would be a case study that compares outcomes before and after the program is introduced while documenting the institutional, managerial and policy changes that are implemented during the course of the program. While it may not be possible to contrast the country’s progress against a real counterfactual, it should still be possible to assess whether it is plausible to attribute changes in outcomes, policies and behavior to the program. In this regard, evaluating COD Aid would be easier than evaluating sector-wide approaches and budget-support programs which tend to have a large number of targets, making it more difficult to draw plausible links between the programs and outcomes.
Where feasible, the recipient country can also be encouraged to implement its programs in ways that permit rigorous evaluation. For example, if a large country sought to achieve universal completion of primary schooling through building rural roads, training teachers, or establishing performance incentives for schools, data could be collected to compare the changes in outcomes between areas that participate in earlier and later phases of a rollout. Alternatively, a country could pilot different approaches in different places. Promoting this kind of impact evaluation by the country itself would have further benefits by increasing ownership of the results and contributing toward building a culture of evaluation.
31. What if countries start to become dependent on these funds?
COD Aid funds do not have to continue indefinitely. For example, an education program aiming at universal completion would phase out funding once this goal is achieved.
32. How could countries be sure that funders will fulfill their commitment to have funds available when payments are due? How can funders pledge money up-front without knowing how long it would take to spend it?
The credibility of the funder’s commitment could be most easily achieved if the contract required funders to place sufficient funds in escrow to cover anticipated payments, say, in the subsequent two years. Funds would then be paid out and replenished once the progress measure was verified. Depending upon the funder government’s particular budgeting and disbursement procedures, alternative arrangements may be necessary, such as requiring that the bilateral funder posts a bond, identifies an alternative use for undisbursed money, or pays into a fund (perhaps an account at a multilateral institution) that would be available to many countries, thereby reducing the risk of unspent funds due to failures by any particular country.