Leveraging Nobel Prize Economics for Improved Global Fund Grant Performance

Those who follow the Center for Global Development will be familiar with our branded meme: “Cash on Delivery” aid, or COD. As early as 2006, Owen Barder and Nancy Birdsall authored a working paper on the COD approach to foreign assistance, which was distinguished from “input-financing” and proposed as a mode of payment that would enhance efficiency and, by revealing government performance to local populations, improve the recipient government’s accountability to its own citizens. Subsequent work from CGD includes a book by Savedoff and Birdsall and most recently a paper by Savedoff and Perakis. Many are enthusiastic about COD’s potential to revolutionize aid effectiveness. Yet within some global development organizations, leadership and staff alike express common concerns: is COD practical in the real world? Have you thought about this problem, or that constraint? How would this work in the context of our organization? And if we decided to move forward, how would we design a COD grant?

To help answer these questions, our new report Aligning Incentives, Accelerating Impact differs from CGD’s past efforts in two important ways. First, due to the Global Fund’s engagement with our working group over many months, this report reflects and responds to the concerns raised by the staff of a single donor institution about the ways that cash on delivery could fail to improve results or could even create perverse incentives within their specific institutional context. As a result, the report avoids promoting COD as a panacea applicable to all of the Global Fund’s financing. Instead, it stresses the need for contractible, externally verifiable indicators and for a willing grant recipient that is able to pre-finance some aspects of service delivery in order to successfully implement a COD strategy. We therefore hope the report will prevent those with a more distal view of Global Fund activities, such as outside observers, board members, and even higher management within the fund, from pushing Global Fund staff to implement COD in situations where it is doomed to fail.

Second, more than any of its predecessors, this report explicitly adopts the “principal-agent” framework for understanding the relationship between the Global Fund (“principal”) and its counterpart in the recipient country called the Principal Recipient (“agent”). This framework comes from the fields of contract theory and mechanism design—which were recognized by the Swedish Nobel Prize committee in 2014 when they awarded the prize in economics to Jean Tirole, one of their most important contributors. (For a more technical presentation see here.) Importantly, the framework allows us to acknowledge that the Global Fund will always have less information than the Principal Recipient about the cost of service delivery—and especially about alternative ways personnel could be managed to reduce costs. Our report, therefore, proposes contract designs that will better align the Principal Recipient’s financial interests with its efficient expansion of health service delivery. In addition, forthcoming background papers by Liam Wren-Lewis and Han Ye suggest how specific examples of efficient contracts, drawn from the extensive literature and practice on industrial regulation and contracting, can be adapted to improve the efficiency of Global Fund expenditure. For instance, a particularly promising contract, the “Fixed Price/Cost Reimbursement” design, allows the Principal Recipient to choose the most advantageous option from a menu of contracts. This clever design could improve health service output per dollar of Global Fund financing.

We hope our new report will be useful not only to the Global Fund, but also to other donors in the global health arena. (PEPFAR, are you listening?) However, we caution that any other donor’s application of COD deserves the same detailed attention to their own institutional capabilities and constraints as the Global Fund received for this report. The last sentence of the Nobel Committee’s summary of Jean Tirole’s contributions warns that "desirable [mechanism designs] are different from market to market.” Similarly, we warn that desirable results-based contract designs differ from donor to donor—and, for any given donor, from recipient to recipient. Worst case scenario: failure from an inappropriate application of a COD approach could lead critics to reject incentives altogether, simply because a poorly designed project proved unworkable.

So please: say no to a cookie-cutter approach! And say yes to the careful, thoughtful, and tailored application of incentives as a strategy to improve the efficiency and effectiveness of global health investments.