5 recommendations for designing Payment by Results programmes
17 February 2017
We recently undertook research into the effect of Payment by Results (PbR) contracts on the Girls’ Education Challenge (GEC), a £355million DFID programme involving 37 projects in 18 countries. The full research report can be read here.
There was a PbR mechanism in place for 15 of the projects linked to performance targets measured by literacy and numeracy tests. If projects achieved their targets they would receive what they spent, while over-achievement and under-achievement would lead to bonuses (the "upside") or losing money (the "downside") respectively.
Although PbR programmes are intended to encourage adaptation and reward innovation we found that in many cases it may have actually limited it, as organisations were more concerned about not losing money than in innovating to potentially gain the bonus. Some respondents even suggested that PbR could potentially lead to perverse short-term incentives, such as working with less disadvantaged children to meet targets.
However, we did find that PbR was a key factor causing donor investment in stronger evaluation for all projects on the programme, not just those with a PbR mechanism. The result is clearer evidence of whether interventions are genuinely leading to the core programme goals.
Based on our research we have five recommendations for donors thinking of implementing a PbR mechanism in programmes:
- It is critical to consider whether a PbR downside will have more negative than positive consequences. As well as financial risks, particularly for smaller organisations, there is the potential that PbR downside may actively discourage innovation.
- Maintaining a PbR mechanism can provide strong incentives for rigorous results measurement. By having a section of contracts with service providers linked directly to outcomes, programme managers and the donor have a clear priority to ensure rigour and robust measurement.
- A smaller PbR upside could be used in order to maintain the incentive for rigorous results measurement without having the costs and risks associated with PbR downside. Allowing the PbR upside to be channelled to unrestricted reserves can provide a strong motivation for smaller NGOs.
- It is critical to ensure the bureaucracy and time associated with changing project design during implementation is minimised to enable adaptive management to focus on outcomes, particularly in hybrid PbR models (where payments are both linked to outcomes and outputs/activities).
- A PbR incentive payment which is structured around longer term outcomes (measured after the end of intervention funding) could reward projects which are more genuinely sustainable, and encourage more long-term and systemic interventions.