Results-Based Financing

Overview

Results-based financing (RBF) is form of Payment by Results and refers to funding approaches, where the payment is made only after the achievement of predefined results.

RBF is used by developing country governments (national or local), state agencies, or donor agencies to incentivize the provision of goods or services, create or expand markets, or stimulate innovation. Contractual partners are usually market actors, for example manufacturers, retailers, importers or micro-finance institutions. Possible target outputs for RBF in the energy sector might include the number of new electricity connections that are provided in a defined area, or the number of advanced cookstoves that are sold.

Most RBF approaches financially reward progress in an incremental way. For example, the number of electricity connections or tons of CO₂ saved can be rewarded proportionally as progress is made.

Results-based financing is distinct from results-based aid, which applies at a level above and is concerned with outcomes (such as number of households using electricity) rather than outputs (such as electricity connections). Here, agreement partners are governments and state entities.

Types of Results-based Financing (RBF)

Results-Based Financing (RBF) is a very broad term, with a wide range of instruments being piloted or implemented. While it usually benefits companies that have achieved a predefined sales goal, it can also be used to subsidize energy products and services. These RBF approaches are usually provided and paid for by international or national funds, aid or development organisations and implemented in cooperation with local NGOs or companies.

Examples of results-based financing instruments include:

• Advance market commitments, whereby a fixed quantity or price is offered for a product or service over a relatively short period of time in order to stimulate a market response;
• Conditional cash transfers (CCTs), an instrument that been used primarily to transfer cash to poor households on the condition that they “make prespecified investments in the human capital of their children”, but which could potentially be used outside the social development sector to encourage certain social behaviors, such as adoption and use of an improved cookstove;
• Inducement prizes, which are usually ‘ex-ante’, one-off incentives that are awarded against pre-determined criteria in order to spur innovation towards a pre-defined technological, commercial or social goal;
• Output-based aid (OBA), an innovative approach to increasing access to basic services – such as infrastructure, healthcare, and education – for the poor in developing countries. OBA links the payment of public funding to the delivery of 'outputs' like connection to electricity grids or the provision of solar home systems. Service delivery is contracted out to a third party, which receives a subsidy to complement the portion of user fees that poor households are not be able to afford. The outputs are verified independently after the services have been delivered, and before payment;
• Performance-orientated transfers (also called ‘output-based grants’), which are used by governments to drive the delivery of results by state or local governments, or by public utilities through transfers that “place conditions on the results to be achieved while providing full flexibility in the design of programs and associated spending levels to achieve those objectives”;
• Vouchers, which are an alternative way of providing capital or revenue incentives for a particular product or service by directly stimulating consumer demand.

This list is by no means exhaustive, but the underlying principles of results-based financing apply to all the modalities described above. However, there is significant potential to broaden the application of results-based financing in the energy sector, in particular by experimenting with market-focused instruments that aim to catalyze private sector delivery and self-sustaining business models, as opposed to capital support for public service delivery (i.e. OBA). Further work is required to determine which situations, from an economic perspective, might benefit most from the use of results-based financing, but it has the potential to encourage a move away from a traditional focus on inputs and spending, towards a results culture that better articulates the value-for-money of one intervention over another.

Benefits

• When the benefits are payed to the consumers, it can trigger deployment of off-grid technologies which were previously not affordable.
• RBF can beneift a range of companies (from start-up to full growth) for deploying the off-grid technology
• Flexible source of funding for off-grid companies as they are attached to the delivery of outcomes and not to how the funds are used to achieve it. This increases liquidity of off-grid companies.
• RBF can be used to target certain market, technoloiges, geographical regions or consumer groups.

Limitations

Results-based financing should not be seen as a 'silver bullet', but as a potentially useful addition to the range of measures that developing country governments and their development partners might deploy to promote energy sector development. Commonly cited limitations of RBF include the need for agents to secure pre-financing, higher data collection and auditing costs, and the challenge of accurately setting the incentive to avoid rent-seeking whilst achieving the desired results.

Other challenges include: certain companies can make fraud outcomes (i.e installign the technologies but not delivering the adequate energy), can be expensive for the funding agencies in case of high demand for it, RBF that pays only after the service has been deliverd may not be suitable for earlier stage companies.

Opportunities

Aside from OBA there is limited experience with RBF in the energy sector. In part to build up this experience a number of programs and initiatives are actively exploring ways to pilot and mainstream RBF into their activities. These include:

• Energising Development (EnDev) program managed by GIZ, which is building on its results-based allocation methodology to include a new window to support the piloting of results-based financing across its portfolio, with funding from the UK Department for International Development
  
• Energy+ partnership, which is proposing a coordinated adoption of results-based aid and results-based financing through their country programs
• Scaling-up Renewable Energy Program (SREP), part of the Climate Investment Funds (CIF), which is actively encouraging RBF as one of the financing modalities that recipient countries could choose to adopt
• Energy Sector Management Assistance Program (ESMAP), which is undertaking analytical work, facilitating knowledge exchange, and providing operational support to encourage the piloting and scale-up of results-based funding in the energy sector
  
• Global Partnership on Output-Based Aid (GPOBA), which continues to provide grant funding to OBA projects in the energy sector
  
• Energy and Environment Partnership with the Mekong Region (EEP Mekong), a MFA Finland-funded and NIRAS-managed programme which supports projects in the Mekong region on a results-based financing basis to scale-up or pilot sustainable energy activities.

Experiences with RBF

• First Lessons Learnt From Results-based Financing in EnDev
• Dissemination Of Solar Lantern (PicoPV) In Bangladesh Through EnDev’s Result Based Financing (RBF) Mechanism For Improving Access To Clean Energy: Achievements And Challenges

DFID/EnDev RBF Programme old Call for proposals

Under the DFID-funded RBF country pilot, EnDev has launched the following calls for proposals, to trigger market development for off-grid energy access:

Country	Programme	Date	'*Download* 'Call for Proposals
Tanzania	Lake Zone PicoPV	2014 (March)	English version (Round 1)
		2015 (February)	English version (Round 2)
Vietnam	Biogas Programme	2014 (March)	English version Vietnamese version
Benin	Off-grid Energy Access	2014 (May)	French version
Rwanda	Sale of Solar Lighting Products to end-Users	2014 (August)	English version Urwego Opportunity Bank
Rwanda	Village Grids	2014 (November)	English version Urwego Opportunity Bank

RBF - Case studies for Off-grid Solar

EnDev - Tanzania

Result-based Financing program for Solar Products in Tanzania

Energising Development (EnDev) is a program that supports development through energy access. In 2013, with the support of UK aid and the SNV Netherlands Development Organisation (SNV), it began a five-year RBF project in the Lake and Central Zone of Tanzania. The RBF was structured to provide retailers and distributors with incentives for verified proof of sales of solar products in the target regions. There were two forms of the incentive: a product bonus installment to retailers and a capital bonus installment to suppliers, linked to retail sales volumes. The RBF was structured so that neither party could earn the incentive without the verified performance of the other party; the incentive was therefore dependent on cooperation between suppliers and retailers. Incentives are paid on Lighting Global–verified solar products and are linked to product performance. They range from €1 ($1.12) to €40 ($45); they are capped to limit oversubsidization. By the end of 2017, more than 60,000 Lighting Global–verified solar products had been sold under the RBF, and more than €1.3 million ($1.46 million) of the RBF fund had been disbursed as incentives.

World Bank - Kenya

World Bank facility for solar home systems under the Kenya Off-Grid Solar Access Project (KOSAP)

KOSAP is a World Bank–funded project, implemented by the government of Kenya, that aims to expand electricity access through off-grid solar products and solar mini-grids in Kenya’s underserved counties—the poorer and more remote regions in north and northeast Kenya. It includes an off-grid solar component of $42 million, made up of a $12 million RBF facility and a $30 million debt facility. SNV and SunFunder were chosen as implementation partners by the government of Kenya, following a competitive selection process. The facilities were launched in June 2019. This facility competitively awards financial incentives to companies to compensate them for the up-front, ongoing, and opportunity costs associated with expanding into underserved counties. Counties are divided into service territories, and tenders are held for each service territory. Companies bid based on a financing amount per household that they estimate would be required to electrify the household and a sales target they estimate they can reach. The companies with the lowest financing requirements win, assuming they meet eligibility criteria, have proven track records, and can reasonably be expected to stay in the underserved county once the subsidy period comes to an end. For each tender, there is a percent cap for the maximum amount any individual company can receive, in order to ensure that there are multiple, competing companies in each service territory and customers have a meaningful choice of products and suppliers.

United Kingdom

The Renewable Heat Initiative

The U.K. government instituted the Renewable Heat Incentive in 2011, in order to encourage a switch away from fossil fuel–based heating systems. The program subsidized each unit of heat produced from renewable energy. It encouraged commercial, industrial, and residential users to install renewable energy technologies, including biomass boilers, solar water heaters, and heat pumps. Payments were made to domestic and nondomestic installers on the basis of each kilowatt hour (kWh) their product produced. The initial subsidy was £0.09 ($0.12) per kWh for heat and £0.10 ($0.13) per kWh for hot water. The annual subsidy for installers was to last 20 years for commercial installations and 7 years for home installations. On this basis, installers could expect to recover the costs of installation within five to eight years from the incentive. Payments received were tax free. In 2017 the scheme came under intense scrutiny for overspending, and a public inquiry was launched. During the inquiry, allegations were made that some users installed heating systems to profit from the scheme rather than to meet genuine heating needs. In 2017 the subsidy was reduced, highlighting the risk to installers where payments are made over a long period, during which there is potential for policy change.

RBF - Case studies for Improved Cookstoves

• Please refer to this article: Result Based Monitoring of Cookstove Projects

Further Information

• ESMAP work program on results-based approaches
• First Lessons Learnt From Results-based Financing in EnDev
• Find more documents on RBF at the collaborative platform for RBF/OBA practitioners by World Bank/GPOBA: https://collaboration.worldbank.org/groups/output-based-aid-cop-oba-cop
• All articles on RBF on energypedia
• Portal:Financing and Funding