Results-Based Financing

Overview

Results-based financing (RBF) is form of Payment by Results and generally refers to the delivery of national or sub-national outcomes and outputs. RBF could be 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. Possible target outputs might include the number of new electricity connections that are provided in a defined area, or advanced cookstoves that are sold.

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).

Definition

RBF instruments can be characterised by the following principles:

1. Disbursement of funds is contingent on the delivery of pre-determined results (outcomes or closely related outputs).
2. As far as possible, recipients have discretion over how results are achieved - this allows for product or service innovation.
3. Independent verification acts as the trigger for disbursement.
4. Incentives are non-discriminatory, in that all eligible service providers are able to participate on a competitive basis.

Types of results-based financing (RBF)

RBF is a very broad term, with a wide range of nomenclature already in existance. Despite this, while there are a number of examples of different types of RBF mechanism being piloted or mainstreamed in other sectors, energy sector experience is limited mainly to output-based aid (OBA).

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.

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.

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
  

Further Information

• ESMAP work program on results-based approaches
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