World Vision International
Blog • Monday, April 24th 2017

Are perverse incentives in cash based programming delaying critical reform?

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In Zimbabwe, DFID funded cash transfer projects enabled a community in the Umguza district to start a chicken project aimed to support families through the current drought and protect against future shocks. Photo credit: Tawanda Makawa World Vision 2017

 

Delays in releasing donor funds allocated to supporting Syrian refugees through cash-programmes have sparked a ‘who is to blame’ debate for hindering progress.  Some blame UN agencies for blocking reforms by focusing on increasing their income through overheads. Others make operational agencies – NGOs and UN - responsible for missing meaningful opportunities to fully implement an agenda driven by efficiency and effectiveness created by the recommendations of the High Level Panel on Humanitarian Cash transfers. The overall message seems to be that donors have good intentions for reform that are being thwarted by operational agencies who are unwilling to collaborate.  But while commitment and desire to improve from all parties is needed, there is a bigger issue at play. The problem lies in understanding who is the real agent of change and how that power is going to be used.

Perverse Incentives inherent in traditional donor funding models

Donor funding models can and have had negative effects on the way operational agencies define success and value their activities.

Funding is an important incentive, and incentives matter because they play an important role in defining what is valuable and what is not. Economics tells us that if you set the right incentives, you can influence people’s and organisations' behaviours to do almost anything. The right incentives can also influence markets to assign higher values to certain behaviours and activities. But we also know that if those incentives are designed incorrectly they can have perverse consequences, in some cases causing people to work against the goal you are trying to achieve.

Economic theory tells us that when agents (someone commissioned to act in someone else’s interest) must focus on a multitude of competing tasks, they will concentrate on the tasks most rewarded by the principal (the entity being represented). The way the principal rewards certain behaviours plays a key role in determining the agent’s actions. But at times, the principal can set a reward system that incentivises the opposite behaviour  it ultimately seeks. Think of the perverse incentives created by payment schemes for bankers before the 2008 financial crisis.

Our principal (donors) have set a rewards system for the agents (operational agencies) that has incentivised an opposite behaviour to what was intended. This is not particular to cash programming, but the perverse effects of the incentives are particularly obvious in this modality because it is being used by donors as a vehicle to reform the system.

In a resource deprived environment, donors have opted for short term approaches to funding cash based programming that privileges scale. Efficiency has also played a role, but it has been mostly defined by what would bring a reduction in cost to donors, not to operational agencies, or most importantly, to beneficiaries.

The incentives generated through such funding models for cash based programmes have anchored two key beliefs in the system:

(1)    agencies can’t achieve scale or substantial efficiencies if they are small; and

(2)     income equals  growth.

Funding models based on short-termism, stringent donor visibility requirements and a focus on the volume of outputs (not outcomes) have also skewed the way individuals and organisations value the different stages of a cash program. There is a marked imbalance between the way the system values the output (the actual cash grant) versus the work that happens before and after its delivery. This poses a significant threat to the scale up and effectiveness of cash based programmes because the before (targeting and selection) and after (monitoring and learning) of a cash grant are where the real risk of cash programming (diversion, misuse, etc.) must be understood and managed.

In this system, the perverse effects of the funding incentives have resulted in operational agencies focusing on what is valued and will therefore allow them to succeed, which is contradicting both humanitarian donors and operational agencies founding intent. This has merited some to question the role of NGOs and the UN in cash programming, calling for a redefinition of their collective identity by focusing on their ‘core business’ of strengthening the links with communities. While there is value in this call for change, it is important to understand that operational agencies have defined their respective identities based on the what the market values. Seeking growth and models that are conducive to that is not a purely selfish drive for survival – it is capitalism.  As long as the activities before and after the disbursal of cash grants remain undervalued it will be difficult for operational agencies to shift their focus back to the engagement with the people we aim to serve.

The future of cash programming must be about upstream and downstream collaboration

Donors – both established and emerging - are primed to be the most influential change agents for cash based programming.   It is their funding models for cash based programming that can and must correct the perverse incentives. So far, the emphasis for radical change has been placed in the ability of operational agencies to collaborate under one card, one lead agency, assuming important efficiency gains as a result. A recent study has shown that even if there are potential effectiveness gains from collaboration between operational agencies, ‘higher degrees of collaboration and levels of formalisation within structures do not necessarily correlate with improved efficiency and effectiveness.’ So maybe it’s time to seriously explore a model of collaboration for the most influential change agents – donors.

Imagine the efficiency gains of a single financial instrument for financial aid – cash based programming for development programming and humanitarian response.

This idea goes beyond less paper more aid, the Grand Bargain, the Start Fund or a humanitarian impact bond for a single agency. Imagine a world where donors coordinate with Governments, international banks and private sector to develop a single high level financial instrument to fund all financial aid activities in every country. Operational agencies, Government and private sector would have just one national contracting process to access funding and report against. Imagine the cost efficiencies if operational agencies wouldn’t need to have an army of fundraisers to access resources to serve vulnerable people. Imagine the increased transparency in relation to decisions behind funding awards, tracking of expenditure and the overall attribution of the change humanitarians achieved in a single context. Imagine the potential for closer relationships between stakeholders. Imagine the efficiency gains if all donors could collaborate for financial aid at the same level operational agencies do – donor consortia, donor working groups, a single donor lead model.

Funding is an important incentive. As we’ve seen incentives can change the world. Let’s make sure they are well designed to achieve the radical transformation we all want to see.

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