Current literature on aid effectiveness describes increasing use of a more contractual approach to the relationship between donor and recipient government in which a system of rewards and penalties for good and bad performance operates. The purpose of this case study of the Ugandan health sector was to understand the extent to which this approach is influencing processes and effectiveness. This qualitative study used a conceptual framework based on agency theory and 'realistic evaluation'. Our results showed that the main official mechanism to assess and reward performance established through the Sector Wide Approach lacked objective criteria and was based on an unstructured system of discussions and agreements among donors. The achievement of a satisfactory performance rating was facilitated by the agreeing to undertakings that were under-demanding, vaguely formulated and lacking quantitative benchmarks against which progress could be measured. However, even when poor performance was readily observable, penalties failed to be applied by donors. This was always the case in relation to health sector performance and mostly so in relation to general governance and accountability. Funds continued to be disbursed despite the lack of progress made in achieving targets and undertakings and other evident performance problems (e.g. in the area of governance). A series of explanations of the failure to penalise were put forward by donor representatives in relation to this behaviour including the need to maintain long-term relationships based on trust and not to undermine health sector performance by withdrawing aid. Thus there are likely to be incentives to disburse funds and report success, irrespective of the realities of aid programmes in the context of large foreign aid volumes associated with increased political visibility of aid in donor countries. © 2010 Elsevier Ltd
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