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Background: Prompted by the need to achieve progress in health outcomes, payment for performance (P4P) schemes are becoming popular policy options in the health systems in many low income countries. This paper describes the policy process behind the introduction of a payment for performance scheme in the health sector of Tanzania illuminating in particular the interests of and roles played by the Government of Norway, the Government of Tanzania and the other development partners. Methods: The study employed a qualitative research design using in-depth interviews (IDIs), observations and document reviews. Thirteen IDIs with key-informants representing the views of ten donor agencies and government departments influential in the process of introducing the P4P scheme in Tanzania were conducted in Dar es Salaam, Tanzania and Oslo, Norway. Data was collected on the main trends and thematic priorities in development aid policy, countries and actors perceived to be proponents and opponents to the P4P scheme, and P4P agenda setting in Tanzania. Results: The initial introduction of P4P in the health sector of Tanzania was controversial. The actors involved including the bilateral donors in the Health Basket Fund, the World Bank, the Tanzanian Government and high level politicians outside the Health Basket Fund fought for their values and interests and formed alliances that shifted in the course of the process. The process was characterized by high political pressure, conflicts, changing alliances, and, as it evolved, consensus building. Conclusion: The P4P policy process was highly political with external actors playing a significant role in influencing the agenda in Tanzania, leaving less space for the Government of Tanzania to provide leadership in the process. Norway in particular, took a leading role in setting the agenda. The process of introducing P4P became long and frustrating causing mistrust among partners in the Health Basket Fund. [ABSTRACT FROM AUTHOR]