Could a payment-by-results approach put local organizations in charge?

Innovative financing models have long been a topic of discussion within the development community as tools to help projects find ways to deliver better results. But now the payments-by-results, or PBR, approach is also getting attention for its potential to advance the localization agenda — in part because it offers a way for local organizations to become prime contractors, rather than serving as subcontractors on projects led by big international NGOs and international development companies. There is widespread consensus that local organizations are best placed to deliver the programs needed to tackle global challenges, but oftentimes these groups lack the resources they need to deliver programs at scale. Some believe that flexible funding that removes the need to adhere to specific activities and instead focuses on results could give local organizations the autonomy they need. In a recent project where INGO Educate Girls took a back seat and local partners led the way, the impact was far greater than expected. In an in-depth analysis published earlier this month, those behind the project attribute the success to a PBR approach that centered on local expertise. “In order to make the most of what locally-based organizations can offer in terms of their knowledge of the local community and their presence on the ground … you need to give them flexibility to use their community knowledge [and] relationships and to determine how to deliver programs,” said Louise Savell, co-founder and director of the international team at Social Finance, which helps develop new forms of finance to tackle social problems. This is where PBR could help. This is a method that sees donor funding determined and delivered in line with a pre-agreed set of outcomes of a project rather than financing specific activities. Funding is given at different stages of a project depending on the results and an emphasis put on impact. Traditionally, a prime contractor, often an INGO, is put in charge of delivering a service. They take a sizable overhead to cover their costs, and then assign tasks to local organizations, who often have limited autonomy. But under the PBR model, a group of expert local organizations are given the autonomy to decide the tasks needed to deliver the specified outcomes. Those local groups receive up-front grant funding to cover initial costs. They are given the freedom to deliver whatever services they believe will achieve their goals, and they receive top-up payments whenever particular targets are reached. Rather than leading the project and determining the activities of any subcontractors, the INGO offers practical support in areas such as data collection and reporting. “It's paying for the outcomes rather than the inputs to achieve the outcomes, but either way a provider is being paid for the service,” said Amanda Fernandez, executive director of The Palladium Group’s CATALYZE project for USAID, a blended finance innovation platform which has issued around 1,500 subcontracts principally to local partners. The benefit of PBR for localization, said Savell, is that it sees INGOs, typically those selected by donors to be the prime contractors, become more of “a fiscal sponsor as opposed to a delivery organization.” A case study Several organizations are taking such an approach. Palladium, for example, began using PBR as far back as 2000 in a bid to increase jobs in conflict zones of Columbia. Business training consultants were paid by the United States government only when the job market grew; Village Enterprise is currently fundraising for a program to use an outcomes-based approach to contract local partners in Rwanda around poverty graduation; and Educate Girls US acted as a grant-maker in a PBR pilot launched in 2022 called Project Maitri, which aimed to gather data on the number of out-of-school girls in Bihar, India, and improve attendance. Educate Girls US provided the funding and Educate Girls India acted as the technical partner while seven community-based organizations determined the ways in which data would be gathered and girls encouraged to attend school. After an initial tranche of funding to establish the project, Educate Girls, which also recently listed on the Social Stock Exchange, committed to providing more at various stages of the project, depending on the number of out-of-school girls who then enrolled. “It was very much flipping the traditional prime-sub roles and instead putting this much larger organization almost in service to the CBOs,” said Savell. One CBO leveraged its self-help group members and another mobilized its health volunteers, explained Safeena Husain, founder of Educate Girls US. “You're giving them the flexibility to leverage whatever they have on the ground and how they want to do it,” she said. “Because these guys are so proximate and they have such deep relationships in the community, they're able to deliver outcomes much faster and much better.” The collective aim was to get 28,000 girls enrolled in school but a report produced by Social Finance found that over 39,000 girls were enrolled over a 23-month period. “What they've been able to do in 12 months would have taken us 24 to 30 months to be able to achieve,” said Husain. In the report, which was produced to share lessons learned, Educate Girls lists a number of benefits of PBR including the cost-effectiveness of leveraging existing local expertise and resources to reduce overhead and operational costs; the strengthening of CBOs’ long-term position by making them more attractive to donors; and the ability of an INGO to scale its impact despite streamlining operations. “The proof of the pudding was that the feedback from the local partners themselves was really strong, that they felt that not only had that approach enabled them to deliver effectively during the program but … that they felt it was a much more sustainable way of working [and] had left a legacy for them in terms of strengthened data and financial skills, increased confidence around how to do adaptive delivery in practice, and an increased confidence around their ability to approach other funders,” said Savell. Not a silver bullet But Paul Clist, associate professor in development economics at the University of East Anglia, explained that while a PBR approach is often envisaged as a way of giving more autonomy to organizations, the terms of a contract determine whether this is possible. “For example, if the contract is only for three years, and the incentives [are] only 5% of the total contract, then there is little reason to innovate. The upside of finding a new way of working is fairly limited, whereas the extra costs of searching for new methods outweigh the risks,” he said in an email. As such, he believes the initial hype around the PBR approach “has settled down.” Fernandez, however, believes PBR is the future of development financing. “It's no longer a question of can you structure things as pay for results, it's just how,” she said. “But it does require you to take a leap of faith.” The next step, Savell said, is for more organizations to make the transition and continue to demonstrate the opportunities and potential limits of PBR in other sectors and countries. Christian Meyer zu Natrup, founder and director of social enterprise MzN International, describes PBR as part of a suite of financing solutions but warns that “it is not a silver bullet,” especially as it can lead to a focus on short-term, achievable rather than sustainable results. Instead, he believes that in order to “go local,” the best approach would be to “have a look at a problem and then design the perfect financing for it, not the other way around.” “What we still often do as NGOs … is look at what's available in terms of funding [and] apply for that,” he said, when in fact there is “a whole toolkit of financial instruments that you can deploy based on the locality and the issue.”