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Results-Based Financing
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.
Definition
RBF instruments can be characterised by the following principles:
- Disbursement of funds is contingent on the delivery of pre-determined results (outcomes or closely related outputs).
- As far as possible, recipients have discretion over how results are achieved - this allows for product or service innovation.
- Independent verification acts as the trigger for disbursement.
- Incentives are non-discriminatory, in that all eligible service providers are able to participate on a competitive basis.
Types of RBF
RBF is a very broad term, with many specific examples still to be developed and piloted. While there is some good experience from 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[1];
- 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”[2], 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[3];
- Output-based aid (OBA), which is an attempt to improve the efficiency of capital subsidy schemes by providing one-off capital incentives for the verified commissioning or provision of physical assets such as electricity meters or solar home systems[4];
- 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”[5];
- 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.
References
- ↑ Vivic Economics. 2010. Advance Market Commitments for low-carbon development: an economic assessment. Department for International Development, London
- ↑ Ariel Fiszbein and Schady Norbert. 2009. Conditional Cash Transfers: Reducing present and future poverty. The World Bank, Washington DC
- ↑ DEW Point. 2011. Evidence Review – Environmental Innovation Prizes for Development.Department for International Development, London
- ↑ Yogita Mumssen, Lars Johannes, and Geeta Kumar. 2010. Output-Based Aid: Lessons learned and best practices. The World Bank, Washington DC
- ↑ Anwar Shah. 2006. A Practitioner’s Guide to Intergovernmental Fiscal Transfers. The World Bank, Washington DC
