October 11, 2016
The world of international development as we have known it for the past 50 years is evolving. No longer do we face a world in which the post war model for international development - where large sums of public finance flowed into smaller economies to build infrastructure, markets, and healthcare, amongst others - works. Wealthy western countries are no longer the only actors able to provide the capital needed to create lasting change. Instead, in many of developing countries, we are seeing enormous flows of private investment and capital flows that far outweigh any amount public finance can offer. This flow of capital is building better healthcare systems, building infrastructure, and improving access to sustainable incomes.
Despite this incredible increase in private sector funds, and subsequent sustainable growth in developing countries, we are still seeing that a gap service delivery to the world’s poorest populations. This is often due to the high barriers of entry associated with these markets as well as the immense risk involved that comes from weak political systems, uncertain demand from consumers, and low to zero profit margins. Because of the incredible uncertainty and risk involved, these populations end up going underserved.
Given this, donor organizations are in the position to work with the private sector to provide solutions to challenges that affect the poorest populations. By incentivizing private sector actors through economic prizes, donors can work with the private sector to ensure a proportion of this influx of private funding flows to predetermined outcome. This new model of development funding, known as pull mechanisms, provides donor organizations an innovative model to collaborate with the private sector, develop and scale new solutions, and reach the world’s poorest populations.
Pull mechanisms, also referred to as prizes, prize competitions, pay-for-success, or pay-for-results, offer donors a model in which they can harness the private sector’s innovation and ingenuity to find solutions to societal challenges. Donors offer a prize, or prizes in certain cases, to companies to solve a particular problem. The method used to solve the problems at hand is entirely up to the participating companies, as long as they reach the predetermined goal(s).
The pull mechanism model allows donors to efficiently use their funds. By incentivizing the private sector to enter into these markets, donors are able to partner with the private sector to enter into markets they usually would deem unattractive. Additionally, because prizes are only given once the desired goal is reached, donors can make sure funds are only used in service to finding solutions. If no solution is found, the funds can be allocated to something else.
These financing mechanisms are not new, as competitions as such as the XPRIZE show us; though they are new to development finance. The pull mechanism approach to development is what AgResults, a US $118 million multi-donor initiative, is testing through six pilots currently being implemented throughout the world. While only in the fourth year, the initiative is seeing some interesting results on the efficacy pull mechanisms have in influencing the way in which the private sector serves low-income communities.
The donor community has had incredible impact on development, but we still need to do more to reach all people living in poverty. Pull mechanisms offer a new model for donors to use to achieve development outcomes. AgResults is currently collecting lessons learned from its six pilots to determine where these mechanisms can be most effective to make impact. By embracing this innovation and collaboration, we hope that we can affect real change in the changing world.