First Lessons Learnt From Results-based Financing in EnDev
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Energising Development (EnDev) is piloting a set of 17 ‘results-based financing’ (RBF) projects across 14 countries worldwide. The aim is to incentivize provision of energy access by paying private sector service providers based on performance. By doing so, EnDev’s objective is to take energy access markets to the next level across a variety of contexts where private sector actors currently face certain market barriers. However, EnDev also aims to learn (and share) important lessons about the potential effectiveness of RBF schemes to support the development of energy access markets.
Stakeholders in EnDev's Results-Based Financing Projects
EnDev’s RBF projects back a wide variety of products and technologies including cookstoves, solar lanterns, appliances, streetlights, water pumps and water heaters, biogas, grid densification and mini grids. The key actors commonly involved in an EnDev RBF projects are the following:
- EnDev as the main project implementer and provider of incentives;
- A financial institution, supporting the management of the RBF mechanism and responsible for the administration of the incentive disbursement procedures;
- An independent verification agent, who will verify claimed results by the private sector to trigger disbursements;
- The private sector as provider of the clean energy product or service and recipient of the RBF incentives.
The primary aim of including financial institutions is to provide an opportunity for these institutions to gain experience of, and become better acquainted with, the energy access sector. This helps to address a crucial need in the development of the sector at large which is the aspect of financing.
First Lessons Learnt
The Importance of Thorough Preliminary Market Research
A number of lessons have already been drawn from the first three years of EnDev’s RBF facility. The first one is not to underestimate the complexity of energy access markets. Significant market research of the specific context is essential to see if the market is actually ready for an RBF approach and to design a successful RBF scheme. This requires time and resources. The approach is new, hence it is important to invest the required time to bring all stakeholders involved on board in understanding how it operates. The inclusion of such comprehensive, and sometimes even repetitive loops through research, consultations and bringing financial institutions on board actually caused delays in implementing some of the schemes for Endev. However, ensuring that all stakeholders understand the scope of the approach as well as the participation of the financial sector can be crucial to a successful outcome, and so such delays were worth the trouble.
Close Consultation with Private Sector in Design and Implementation
Another lesson is the importance of working closely with the private sector when designing and implementing RBF schemes. RBF puts the risk on the shoulders of the companies by only releasing funding for achieved results. This means high up-front investment costs for the private sector. Hence, in order to make RBF an attractive source of financing to companies, rules and expectations of the schemes should be straightforward for them to be able to assess the risk they are entering. Incentives must reflect what these actors see as both achievable and attractive. Donors therefore need to adopt the perspective of the private sector in order to develop effective RBF schemes at the outset.
Tailor Incentives to Country-Specific Circumstances and Market Barriers
The incentive structure itself also deserves careful consideration: who gets it, when, how much and based on which results. Incentivizing the direct delivery of energy access products to consumers may seem like the most obvious way. However, barriers to energy access are often down to market failures across the supply chain. In the end, an incentive structure that targets one or more points in the supply chain may contribute more to the objective of developing the market. In this regard, it is also critical to understand how the incentives fit within a country’s broader technical assistance framework and ensure co-ordination between donors and policy actors operating in the same markets. For example, by the time that the EnDev RBF scheme for pico-PV systems in Rwanda was launched, a World Bank incentive program that provided up-front funding was already in place, making the RBF a redundant double incentive (and was hence postponed until the WB program terminated).
An Efficient Verification System is Crucial to Make an RBF Scheme Attractive
A further crucial lesson has to do with the verification process. Before payment is made to the service providers, independent verifiers provide third-party monitoring of RBF results. This can be another time and resource-intensive measure, largely because of the dispersed and remote nature of the markets being served and especially if it comes to portable technologies like solar lanterns. Verification generally involves contacting individual customers by phone to check if they received service as claimed. The process does not benefit from economies of scale, and puts an added burden on companies: they must collect the required personal information from all of their customers. The efficiency of the verification process is crucial to the success of RBF schemes because companies need to be confident that their claims will be processed quickly and payment for their services made. If that goes awry too often, the incentive becomes less attractive and can fail to bring the private sector on board.
Examples of Successful Interventions Using RBF
Despite these challenges, the EnDev RBF facility has proven successful across a variety of contexts. One functioning strategy has been to build on a service provider’s success and pushing them into underserved markets by the incentive offered. In Tanzania for example, a number of solar companies had already found a comfortable position serving urban and peri-urban customers. These actors were not serving the surrounding rural areas, particularly in Tanzania’s Lake Zone, however. The RBF scheme incentivized them to move into the rural Lake Zone, resulting in a significant shift into this area from Mobisol, Off-Grid Electric and other major players already operating in Tanzania.
By providing companies with a ‘guarantee of payment’ contingent on performance, RBFs can also de-risk outside investments in service providers. This is especially reassuring for investments in BOP markets where customer payment reliability is in question. In Benin, for example, the RBF project that guaranteed future results-based revenues enabled a triad of pico-PV companies to attract up-front financing from banks.
Outlook, Potential, Limitations and Complementary Measures
After three years of trial and error, the EnDev RBF program is showing promising outlooks and has developed critical insights into the effectiveness of RBF as a means for spurring energy provision in underserved markets. The most important lesson learned so far, however, is that RBF can work, but it should be considered as one out of several tools to develop energy access markets. In the majority of underserved energy markets in the developing world, there are multiple barriers to entry. To unlock these requires that RBF schemes are implemented in concert with a larger set of technical assistance programs. These include reforms of tariff and regulatory structures, local skills and supply chain development initiatives, consumer awareness campaigns, support for development of investment-worthy mini-grid business plans, certifications and product standard development, and others, depending on context.
The original version of this article was published in 2017 as a “Solution Spotlight” in the OpenAccess Energy Blueprint'