March 8, 2018
Pull mechanisms, also referred to as pay-for-results or results-based mechanisms, are innovative finance instruments currently being tested through the AgResults program. In contrast to traditional grant funding ‘push’ approaches, ‘pulls’ catalyse investment among businesses competing to achieve a pre-defined development impact, and only pay once results are delivered.
After four years of designing, implementing, and testing the efficacy of pulls and the role they could play in international development, we are starting to see some exciting results. Nevertheless, as results roll in, we face new challenges: how do we take our learnings and inform future programs wanting to explore the potential of pull mechanisms? This was the core of a recent discussion hosted by the Australian Department of Foreign Affairs and Trade’s (DFAT) innovationXchange on February 15.
The focus of the event was a presentation from Dr. Tulika Narayan, the External Evaluation Lead for the AgResults program, on lessons learned from implementation and design of AgResults’ pilots, based on the lessons learned brief she co-authored with Denise Mainville. Drawing on early lessons from the AgResults’ experience to date, and specifically, the AgResults Kenya On-Farm Storage Pilot, Dr. Narayan discussed ways in which development practitioners can incorporate pull mechanisms in their own work.
A key lesson is that pull mechanisms are best designed for development problems that can be resolved by large-scale adoption of a technology that has already been proven in the field. The users of the technology – smallholders– should realize a clear economic benefit from adopting the technology. We have seen this in two of our pilots: the Kenya On-Farm Storage Pilot, which incentivizes private sector companies to develop, market and sell new or redesigned on-farm devices, and the Nigeria Aflasafe™ Pilot, which provides monetary incentives to private sector maize aggregators to promote the adoption of Aflasafe™, an agricultural input that protects farmers’ crops from aflatoxin infestations. In the Nigeria Pilot, AgResults has been the biggest test to date for Aflasafe as an effective agricultural input and the results have been impressive. Farmers, who are usually risk adverse, are realising benefits through both improvements in the quality of their maize, as well as through achieving a significant price premium when they sell their product. Because we have seen that smallholder farmers are willing to utilize the technology in order to improve their crop quality, the product use is now being scaled to 11 countries throughout Africa.
The discussion was not without debate however, specifically on how to correctly size a prize so to not provide the private sector a short-term infusion of cash that does not have a long-term impact. By conducting a full value chain analysis in the early design phase of a pull mechanism, donors can understand the private sector’s underlying interest in the market and the types of investments they might undertake to stay engaged in the market in the long term. Organizations can do this in two ways: first, the design of a pull should incorporate in-depth value chain analyses to assess whether a cash prize is applicable, and if so, what level of remuneration is likely to be effective in catalysing investment while minimizing the degree of market distortion. Secondly, in regards to AgResults, the external evaluator can qualitatively evaluate the effectiveness of a prize in stimulating sustainable market development, and where necessary, suggest interventions to adjust the incentives offered to competing businesses.
Pull mechanisms are one of the many different private sector engagement approaches DFAT is testing across a variety of development sectors and geographies, and they stand out in key ways. First, we have seen that they can effectively engage multiple actors and elicit their individual creativity and ingenuity since they have to compete to out-do each other. Second, this competition between actors ultimately increases investments into markets that would have otherwise been underserved. Despite these lessons, we still are learning exactly when a pull is relevant and when traditional push financing is more appropriate. AgResults continues to test these questions through its pilots and the evaluation of the program as a whole.