Results-based financing: a coming of age story

Biodigester near hut

Fifteen years ago, some mavericks started the Global Partnership on Outputs-Based Aid while I was working at the World Bank. They explained to us the advantages of paying aid money only upon delivery of agreed results. Back then, I dismissed outputs-based aid – or results-based financing, as it was referred to by others – as the newest development fad.

[A 15-year journey narrated by Meike van Ginneken, SNV CEO]

Fifteen years later I am on my way to speak at the global Results-Based Financing Forum 2019, hosted by the World Bank in Addis Ababa. The forum celebrates the 15th year anniversary of GPOBA (now renamed as Global Partnership for Results-Based Approaches or GPRBA). Results-Based Financing (RBF) is now proven to be an important way to improve the targeting, efficiency, and effectiveness of overseas development assistance.

The sales pitch for RBF is that it maximises value for money for international donors and governments by paying for services, only upon delivery of agreed results. This shifts the delivery risk from the financier to the service provider.

In the past fifteen years, I’ve worked on results-based financing in water supply, sanitation, and energy. I’ve designed, implemented, and evaluated projects. The role that my teams have played has varied from financing RBF schemes to assuming the responsibility of service provider (and being paid incentives), as well as to serving as RBF project manager (us paying incentives to others after results are verified).

I often use results-based financing examples in marketing the use of limited public funds for development aid in donor countries. Nowadays, development aid is out of fashion and marketing sometimes feels more like defending what we are doing. Donors like the ‘no- cure no-pay’ story of RBF. Results are tangible, tax payers know what they get for their money. Verification of results reduces the risk for fraud.

As a service provider, the emphasis on results (as opposed to how those results are achieved) provides our expert teams with the freedom to customise approaches to local circumstances. At SNV, RBF has enabled us to apply our local know-how, and to spend more time on what we consider most important: delivering and measuring results, and less time spent on burdensome input controls.

Being an RBF service provider

Since 2014, SNV has been implementing the Sustainable Sanitation and Hygiene for All Results Programme in eight countries in Africa and Asia. SNV is paid by DFID for results at outcome and impact level. Initially, we found the financial risk of ‘no-cure no-pay’ quite daunting. Fortunately, we had the working capital to pre-finance our investments. Five years later, we exceeded our targets, and provided sanitation access for an additional 2.5 million people. Our teams have learned a lot from the project – we are more focused on the communities we work in. Our monitoring protocols have been applied, and more results are verified by a third party before payment is released.

Being an RBF donor

Processes for defining incentives and verification protocols, and carrying out verifications require considerable resources. I found this out first hand, when I was part of the World Bank team supervising the Swachh Bharat Mission Support Operation in India. This US$ 1.5 billion World Bank Loan was being paid out to Indian states that were successful in eliminating open defecation in rural areas. We helped the Government of India to design a large-scale independent household survey to verify the data reported by state and district governments. Many government officials told me that they felt under of pressure to reach targets set by the national government, given the visible and ambitious political goal to stop open defecation in India. The survey was thus followed closely, as we could not afford any gaff. This underlined the need to agree on verification processes upfront to minimise the scope for disagreement on the level of incentives to be paid. We used some of the world’s top statisticians to develop a sampling methodology. The focus on sustainanble use of toilets rather than construction of toilets required surveying people on their behavior – which is hard.

Managing an RBF scheme and verifying results

Investing in protocols ascertains good value for money, especially in engaging in additional project phases, or scaling up approaches in new geographies. SNV is managing several RBF energy projects in Africa and Asia in which we disburse incentives to companies upon verification of new off-grid electricity, biodigestors, and cookstoves. In this case, SNV does not carry the delivery risk, as this task lies with the service providers. Instead, SNV designs the programme, and verifies the results of service providers before paying incentives. These projects have been successful in kick-starting markets by providing a temporary financial incentive to companies to deliver products and services to areas where they are not yet present.

As RBF does not predefine how results are to be achieved, the private sector can bring value added innovation. A good example is the EnDev-financed solar RBF facility in Tanzania, which has increased energy access for more than 320,000 people through incentivising sales of solar lanterns, phone chargers, and solar home systems. While incentives were paid for units of sales, the facility has also indirectly established a market for solar products in hard to reach areas in Tanzania. To date, 14 solar companies participated in the facility, and 780 new jobs have been created along the supply chain, with distributors and retailers dealing in 27 high-quality, affordable solar products.

One of the challenges of RBF is to determine the level of incentive to be paid against each ‘unit’ of result or product. If the incentive is too high, an RBF scheme could distort the market. If it is too low, it might not persuade service providers to enter new markets. Markets change constantly, and often require dynamic incentive-setting mechanisms. In the Tanzania solar RBF facility, incentives were reduced by 25% each year due to the maturing market.

The EnDev-financed Mekong biogas project in Cambodia, Laos, and Vietnam applies an innovative reverse auctioning scheme for RBF incentives. The firm that bids the lowest incentive for each cookstove sold, wins the auction and eventually gets paid for each cookstove, once sales are verified. We are now using a similar reverse auctioning approach in the Kenya Off-grid Power Project financed by the World Bank.

RBF is a powerful instrument to accelerate market development for basic services. Over the past years, SNV gained insights in the design of RBF incentive schemes, including verification modalities. Our track record on RBF also builds on our deep know-how of country contexts and delivery realities, our extensive experience in market-based approaches, as well as our sectoral expertise.

I look forward to sharing our experience in the coming days and to learning from others.

Photo: Woman from Ethiopia demonstrates how gas is released from her bio-digester straight into her home, giving her access to energy (SNV/ Meseret Kebede).