Philanthropy suffers from an inherent asymmetry problem; there is a lack of feedback between the recipient of assistance and the source of funds, compounded by information obscurity.
In the private sector, this problem is much less severe. If I run a restaurant, for example, and the food is no good, people may come once but not return and I go out of business. Meanwhile, packs of professional and amateur reviewers publish their views, there are official inspections from the department of health and so on. There is substantial direct feedback as to whether I am doing a good job in the proper way at a reasonable price.
In the non-profit sector, however, if I am a donor and want to help large numbers of poor people in some far-away place, I give the funds to an intermediary, an NGO like East Meets West. East Meets then takes the money, implements the program, and writes up a nice report to send me. But how do I know whether what they say is true?
In most cases, I have no direct contact with the beneficiaries, and even site visits are arranged and controlled by the intermediary. There are no independent agencies that visit and verify that things were done in the right way, and that the recipients were pleased with the service they received. I don’t speak the local language, I have no idea if some other agency could have done the same job for less money, or if the people really wanted the project in the first place.
One way around this problem is through the use of independently-verified output-based aid, or OBA. This is an innovation in development finance that has been tried in numerous places over the past few decades, with a substantial increase in interest in the past ten years or so. (It is also called results-based financing, or performance-based aid.) The World Bank, for example, manages an OBA fund that has moved $3 billion or so in six sectors over the past ten years, including four grants to EMW (two are pending).
The basic idea is that financing comes after the results are delivered, not before. In our case, what we were required to for our clean water program (recipient of a grant of $4.5 million, see http://www.gpoba.org/gpoba/node/599) was to implement the water-supply program by building systems and connecting households. We borrowed the funds from a commercial bank and then build the water systems.
Under our agreement with the World Bank, we had to meet a large number of criteria for water quality, environmental review, open bidding from contractors, and so on. Everything is written down, reported on, and made available to the donor. The next step, once the projects were complete, was for the World Bank to send out an “independent verification agency” who conducted a random audit of our water systems to ensure that what we reported was actually true. They spent weeks in the field visiting rural villages and writing their own reports.
Once the World Bank was satisfied that we had met the terms of the agreement, they reimbursed us for the costs of the system at a level that had been previously negotiated to ensure that we covered our actual expenses, but at maximum efficiency. If we failed to deliver what we promised, we would not be reimbursed (thankfully, this has not happened). In other words, we as the intermediary agency had to take on the performance risk – no performance, no grant. Using this funding mechanism, EMW has brought clean water to 250,000 people in Vietnam over the past five years, and we are actively supporting the government of Vietnam to use this model on a larger scale.
OBA gets around some of the biggest problems in doing good international development work. It provides incentives for efficiency and innovation, it significantly increases transparency, it has a built-in mechanism for tracking results much more closely, and the result reports can be trusted because they are independently audited. In addition, the OBA only delivers 80% of the grant after the first verification visit; the rest comes only after another visit six months later, to see if the system is still working. So another benefit of OBA is that it provided an incentive to do programs that are durable and sustainable.
OBA makes the intermediary agency accountable for outcomes, not just for disbursement. It short-circuits the asymmetry problem and creates incentives to do the proper thing, at the right price, in a way that satisfies the beneficiaries. It’s not a panacea for all the problems of international development assistance, but we have found it to be a powerful mechanism for improving our programs and increasing our organizational capacity.