International development practitioners have been increasing their use of Pay for Results (PfR) strategies within development projects in recent years. Donors are pushing this trend, investing an estimated $3.3 billion in PfR strategies within development projects in 2016. If current trends continue, we can expect that $6-7 billion of development aid will be structured as pay-for-results by 2020.

Pilots using PfR within development programming in the maternal and child health, financial services and agricultural development fields have led to project implementers finding new efficiencies in service provision, and business models that are able to be scaled and implemented on a commercial basis. Supporters see PfR within international development as a “disruptor”, providing an alternative to traditional development service models which pay for inputs (processes, activities) versus paying for outcomes (results). PfR practitioners have attracted new funding from the private sector, and are required to collect data to demonstrate evidence-based development amongst target populations and communities.

Palladium has been innovating with PfR strategies for decades as a way to achieve Positive Impact - the creation of enduring social and/or economic value. As Managing Partner Santiago Sedaca says, “We've been working to improve our pay for results methodologies for two decades. We strongly believe that this approach leads to stronger outcomes and sustainability, and are eager to share our lessons with the development community."

USAID provided seed funding for most of these Palladium-managed PfR experiments. From areas suffering from conflict in Colombia, to the Balkans following the wars of the 1990s, to the breadbasket of Africa, all of these tests have led to impressive outcomes and uncovered new business models to address market failures that keep many communities in poverty.

PfR does have its detractors, however. Some believe that PfR approaches are not fully proven because the quality of studies on the effectiveness of PfR in development is mixed. They contest that the expansion of PfR strategies can lead to unintended consequences like gaming, higher design, monitoring and verification costs, increased performance risk, greater challenges in defining and pricing performance metrics, and disincentives for development providers to share learnings with the broader development field.

USAID and Palladium: Shared Experience

To share some of this insight, USAID’s Office of Private Capital and Microenterprise and Palladium have developed a primer on PfR. This publication (available here for free download), highlights what PfR is, reviews its pros and cons, shares how a number of PfR projects are structured, provides some short case studies of PfR examples, and demonstrates how these projects and business models can be scaled.

The primer covers five PfR strategies that development practitioners can study, pilot and scale; including prizes, advanced market commitments, performance-based contracts, conditional cash transfers and development/social impact bonds.

"With growing interest in output-based aid, the Pay for Results in Development primer is an invaluable resource for those seeking to scale up the use of Pay for Results in development programming. It provides a clear explanation (along with examples) of the different ways in which Pay for Results can be applied, outlines the challenges in scaling up its usage, and sets an 'agenda for action' to overcome those challenges." Agnes Dasewicz, Director, USAID Private Capital and Microenterprise Office.

Some of Palladium’s most impactful work in recent years has emerged from donor-funded development programs incorporating PfR approaches. We have established a commercial export business and nucleus farm in Guyana supporting Guyana’s smaller farmers, and built financial sector ecosystems that actively support SME exporters in Macedonia, and created a competitive market and ecosystem for agricultural finance in Ghana.

The PfR primer is just one of many tools being developed by Palladium and USAID to support the broader development community in solving some of the world’s most intractable development challenges. PfR should not be seen as a “magic bullet”, but an option for those who are looking to innovate in service delivery, and are being asked to “do more with less”.