Key USAID Pay for Results Models and Case Studies

Key USAID Pay for Results Models and Case Studies is a compendium of examples of the innovative work that USAID has done with various pay-for-results approaches, including advance market commitments, prizes, development impact bonds, and performance-based contracts. The paper is designed to serve as a resource to build a foundational understanding amongst USAID’s Acquisition and Assistance workforce of pay-for-results approaches to the design, development, and financing of USAID awards. 

Background

Pay-for-results approaches have been increasingly used in international development over the past decade, as donors seek new ways to incentivize private capital flows to solve development challenges, overcome market failures, increase private sector engagement, spur higher leverage of donor investments, and shift more implementation risk to activity implementers and local actors. While nascent in their usage, there is a growing effort by USAID and others to compile a body of evidence of the effectiveness of pay-for-results approaches, as well as a greater understanding of how and when to deploy them.1 This compendium includes four categories of pay-for-results approaches: advance market commitments, prizes, development impact bonds, and other performance-based contracts. The fifth major category of pay-for-results approaches – conditional cash transfers – are not covered here as they fall outside the scope of most USAID activities. These categories are broadly defined as follows:

Advance Market Commitment (AMC)

In these commitments, funders pledge to guarantee a price or market for a specific product once it is developed. This guarantee is intended to serve as an incentive for the private sector to develop a product that may be risky to develop in terms of unknown research and development (R&D) costs, lacks clarity on end consumers’ ability or willingness to pay, and generally has an uncertain return on investment for the private sector entity. AMCs were first used as an incentive to offset the development costs of vaccines for diseases primarily affecting the developing world, where it was unclear there was a market that would offset those development costs. 

Prizes

Prizes use open competition to incentivize competitors to achieve a specific outcome, while remaining agnostic about how to fulfill that outcome. Prize competitions pay for results by making onetime cash awards when approaches are proven to have achieved the designated outcome. Prizes involve significant effort to gather and analyze information and data to ensure evidence drives the design, including a deep understanding of the barriers to achieving the desired result. Prizes engage actors from a wide range of backgrounds and capabilities and use incentives that appeal to and motivate multiple actors to use their capacity, expertise, and resources to achieve a specific outcome for a tough issue they may not tackle under normal circumstances. 

Development Impact Bond (DIB)

A DIB is a pay-for-results approach in which private up-front funders (which can include social investors) provide service providers with pre-financing for development programs, and donors pay service providers if, and only if, these programs succeed in delivering development outcomes. In some cases, donors may repay up-front funders their principal plus a return directly; in others, including the Village Enterprise DIB, donors repay service providers, who manage their own social investment streams. Unlike Social Impact Bonds (SIBs), in which governments pay for outcomes, DIBs involve non-governmental donors, which might be donor agencies or charitable foundations, either as full or joint funders of outcomes in lieu of local governments. Because repayment to private up-front funders is contingent upon the achievement of specified outcomes, DIBs are not bonds in the conventional sense. For example, the first DIB intended to reduce the gender gap in school attendance in India. UBS Optimus Foundation (UBS) provided the upfront investment to an NGO, Educate India, which provided services to increase girls’ school attendance, with private philanthropic foundation Children’s Investment Fund Foundation providing an additional return on UBS’ capital investment once certain milestones were met. This model is intended to bring new sources of capital to the financing of development activities. 

Performance Based Award (PBA)

In broad terms, performance-based awards tie some or all of the payment for an activity to the achievement of certain milestones or results. At USAID, performance-based awards can be designed under both acquisition and assistance and can be structured so that a portion of the implementing partner’s payment is dependent on achieving certain outputs and/or outcomes. Further, the implementing partner can require similar performance from its subgrantees, subcontractors, or partners.