Several international donors such as USAID, the World Bank, as well as developing country governments are facing significant challenges in identifying which programs deliver the best results at the best prices. Cost Effectiveness has become a major issue for donors. To that extent, many have embraced the exploration of innovative funding models that incentivize improved results for instance Results Based Financing.
What is Results Based Financing?
The RBF models, contrary to traditional financing approaches, link payment to results (output/ outcome) of the social program implemented. The concept is very simple and is conditioned by the following:
1) Payment is based on achieved results
2) The relationship between payment and results is pre-defined.
There is a variety of Results Based Financing mechanisms such as Cash on Delivery Aid, Program-for-Results, Conditional Cash Transfers, Advance Market Commitment, Social and Development Impact Bonds … The most common ones are Social and Development Impact Bonds. We will therefore focus on further exploring these instruments and their application in development programs.
How is the model constructed? And Who are the stakeholders? Social Impact Bonds (SIBs) and Development Impact Bonds (DIBs) are the same concept applied in different contexts. For Social Impact Bonds (SIBs) Investors pay for the project at the start, and non-profit or private sector service delivery organizations deliver the outcomes. If successful, the investors get remunerated by the government based on the results achieved by the project. As of DIBs, the only difference is that the process involves an additional stakeholder that can serve as guarantors for payments, the guarantor is usually a donor.
The model usually involves the following stakeholders:
- Outcome funder: The Government or any other outcome funder(s) is responsible for paying back the principal and interest if the pre-determined outcomes are achieved. In a DIB, it is a donor;
- Intermediary: Receives the loan from the investor(s) and allocates the same to the service provider for project execution, determines the project’s outcome metric and monitor the delivery of results;
- Investor(s): pay upfront capital to the intermediary. Investors include foundations, investment funds banks, private sector CSR programs, or individuals;
- Service provider(s): government entity, NGO or private enterprise that executes the interventions required to achieve the desired outcomes.
- Evaluator: entity that validates the achievement of the outcomes Beneficiary: the population that benefits from the project financed by the SIB.
- Beneficiary
In some cases, a guarantor might contribute to the partnership by offering a loan guarantee—often as a grant to reduce the investor’s risks.
Why RBF is interesting?
- Improve cost effectiveness by highlighting the importance of achieving outcomes
- Catalyze partnerships through a multitude of stakeholders (e.g., government, donors, private sector partners, service providers, validators)
- Build rigorous evidence and inform on policies
- Boost innovation and ownership since its provides flexibility to service providers to decide which type of services / activities they would like to implement.
Challenges related to RBF?
- Legal challenges especially in structuring the legal relationship among the participating entities.
- RBF requires verifiable quantitative metrics, which are difficult to derive for a number of projects and might take several years to develop
- Include a high risk especially for investors
The social and development impact bond mechanism
Source: The Potential and Limitations of Impact Bonds- Brooking Report