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Results-Based Financing

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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.[1]

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.[1]


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:

  • Output-based aid (OBA), which 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;[1]
  • Conditional cash transfers (CCTs), which target individuals or households by paying them a predefined amount of money against complying with specific requirements. CCTs are thus instruments which can be used to encourage certain social behavior, such as the adoption and use of improved cookstoves;[1]
  • Voucher schemes, which are an alternative way of providing capital or revenue incentives for a particular product or service. Free or subsidized-fee vouchers are offered to households, which can use the voucher for accredited retailers or service providers. These companies are then reimbursed for products and services delivered. This way, vouchers are stimulating both supply and demand side.
  • 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[2];[1]
  • 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];
  • 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”[4];


While there is a number of examples of different types of RBF mechanism being piloted or mainstreamed in other sectors, energy sector experience is still limited mainly to output-based aid (OBA), and to some extent, to CCTs and voucher schemes, which are being used in humanitarian contexts.


Key Principles

The list above is by no means exhaustive, but the following characteristics apply to all the RBF modalities described above.

  • Disbursement of funds is contingent on the delivery of pre-determined results
  • As far as possible, implementing partners have flexibility on how results are achieved - this allows for product or service innovation and creates a higher degree of ownership.
  • Independent verification of results is needed and acts as the trigger for disbursement.
  • Shifting part of the risk from the donor to the implementing partner.
  • Ensuring transparency and clear lines of accountability

RBF is thus fundamentally different from traditional upfront financing approaches in development cooperation, where funding is provided in advance to finance inputs and activities.[1] [5]


Benefits of RBF Approaches

There are a couple of benefits of RBF approaches:[6][1][7]

  • RBF can be a flexible source of funding for off-grid companies as it is attached to the delivery of outputs and not to how the funds are used to achieve it. This increases the liquidity of off-grid companies.
  • RBF can be used to target certain markets, technologies, geographical regions or consumer groups.
  • RBF has the potential to create competition among recipients, i.e. by reward­ing the fastest movers. It thereby can increase efficiency and effectiveness compared to tra­ditional development approaches.
  • By tying funding to results, the focus of recipients shifts from processes towards results. This re-focus requires the recipient to address the bottlenecks and challenges that hinder the achievement of results, allowing structural change to emerge. Therefore, results-based approaches can help to address typical market failures such as exter­nalities, information asymmetry, market power concentration, coordination failures and the failure to produce public goods.
  • Since risks are shifted to private sector stakeholders, RBF can be a risk mitigation tool for the public sector and donors.[8]
  • RBF attracts additional private sector funding.[8]


RBRBF can be a flexible source of funding for off-grid companies as it is attached to the delivery of outputs and not to how the funds are used to achieve it. This increases the liquidity of off-grid companies.F can address some typical market barriers, for example:[6]

  • On the supply side, there may be bottle­necks in importing energy access products on a scale that allows for price reductions. Appropriate products are available from international manufacturers, but local dis­tributors might only order small volumes and thus face high prices. A RBF payment on every successful import can motivate companies to order in bulk and receive better pricing due to economies of scale, eventually increasing their turnover.
  • On the demand side, a low ability or willingness to pay is a major challenge especially for rural households that tend to have lower incomes. In addi­tion, lacking rural distribution channels, consumer financing options, and specific business models for remote and poor cus­tomers discourage local companies from serving last-mile and Bottom-of-the-Pyramid customers. An RBF incentive tar­geting lower-income customers and remote areas can help to overcome the risk adversity of suppliers.
  • Even if products are available, there may be a mismatch between the products on offer and customer demand: available products sometimes do not match demand due to quality issues, inappropriateness of design, or non-conformance with national standards. Local manufacturers may avoid the neces­sary innovation to close this gap due to the high risk of return on investments in research and development. RBF can help to mitigate these risks by offering payments upon successful product innovations.


Limitations and Challenges of RBF Approaches

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.

Challenges of RBF include: [8][7][6]

  • The need for companies/agents to secure pre-financing. Access to finance is an important topic as RBF requires companies to be able to finance all their interventions upfront until the RBF incentives are paid. If companies do not yet have access to finance, it is essen­tial to bring in or set-up complementary loan facilities of national financial institutions, development banks or other donor financed programs to close that gap.
  • The companies’ exposure to risk if the project fails or if the market changes
  • Tracking, validation, disbursement, and reporting can be challenging for both companies and funders.
  • Higher data collection and auditing costs for independent and complex verification of results  
  • The challenge of accurately setting the incentive to avoid rent-seeking whilst achieving the desired results
  • RBF that pays only after the service has been delivered may not be suitable for earlier stage companies
  • RBF mechanisms are not suitable for smaller products that are sold for cash in high volumes, such as small lighting devices, as the efforts for collecting costumer data is prohibitive for over the counter products
  • Local actors may have difficulties to meet high requirements to be eligible for RBF. These can be met more easily by international companies
  • RBF mechanisms are not strengthening local capacities, complimentary technical assistance is necessary
  • Sometimes, RBF are too complex for companies. They need to be as simple as possible designed to make them successful
  • RBF projects need establish regular feedback mechanisms with companies; Flexibility and adaptiveness are required to adapt to market changes

Other challenges include:

  • certain companies can make fraud outcomes (i.e installing the technologies but not delivering the adequate energy)
  • can be expensive for the funding agencies in case of high demand for it
  • Improving the enabling environment, which cannot be tackled by RBF alone


Results-based Financing Programs

RBF is a rather new approach in the energy sector. A number of programs and initiatives are actively exploring ways to pilot and mainstream RBF into their activities. These include, for example:

  • Energising Development (EnDev) is a strategic partnership, which is managed by GIZ and RVO. With funding provided by UK Aid / DFID, EnDev’s RBF Facility piloted 17 projects across 14 countries in Africa, Asia and Latin America from 2013 to 2020. Projects covered a wide range of mod­ern energy technologies to enhance energy access markets. Implementing agencies were GIZ, CLASP, HIVOS, Practical Action, and SNV.
  • Universal Energy Facility (UEF), which is a multi-donor results-based financing facility managed by Sustainable Energy for All (SEforALL). Launched in 2020, the UEF provides incentive payments to eligible organizations deploying renewable energy solutions and providing verified end-user energy connections (including mini-grids and solar home systems) and clean cooking solutions based on pre-determined standards. The UEF is already operational in three countries – Madagascar, Sierra Leone, and Benin – supporting the deployment of renewable energy mini-grids. 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 for Results-based Approaches  (GPRBA), which provides innovative financing solutions that link funding to achieved results in the sectors of energy, water and sanitation, health and education.
  • Energy and Environment Partnership with the Mekong Region (EEP Mekong), a 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.
  • Clean Cooking Fund, an initiative of World Bank's Energy Sector Management Assistance Program (ESMAP) and launched in 2019, aims to leverage at least US$2 billion in investments to help 200 million people gain access to clean cooking while supporting development of the clean cooking market. Results-based financing (RBF) is used to pay for the verified results of interventions to incentivize supply-chain players, spur market development, and pay for the public co-benefits (health, gender equality, and climate) of interventions. It's focus is on Burundi, Ghana, Horn of Africa, Rwanda, Uganda, Mozambique, Myanmar, and Niger.
  • Modern Cooking Facility for Africa (MCFA), which has been launched in 2021 and aims to scale-up access to higher tier clean cooking solutions by using RBF mechanisms. Initially the MCFA will operate in following countries; the Democratic Republic of the Congo, Kenya, Mozambique, Tanzania, Zambia and Zimbabwe.
  • Beyond the Grid Fund for Africa (BGFA), which aims to build markets for off-grid energy to bring access to clean, affordable off-grid energy to reach at least 6 million people by 2025. Countries of Intervention are: Burkina Faso, Liberia, Mozambique, Uganda and Zambia. Read more about the program here.
  • Faser (Fund for Sustainable Access to Renewable Energy/Fundo de Acesso Sustentável às Energias Renováveis) is a results-based financing fund, which finances the dissemination of modern, renewable energy technologies (e.g. PV systems, solar irrigation pumps, improved cookstoves) in peri-urban and rural off-grid areas of Mozambique. Read more about FASER here.


RBF - Case studies

There are a couple of country specific case studies available. Please check especially the two following reports for recent case studies:


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. [9]

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.[9]

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.[9]


Further Information


References

  1. 1.0 1.1 1.2 1.3 1.4 1.5 1.6 SIDA 2015: Results Based Financing Approaches (RBFA) – what are they?
  2. Vivid Economics. 2009. Advance Market Commitments for low-carbon development: an economic assessment.
  3. DEW Point. 2011. Evidence Review – Environmental Innovation Prizes for Development.Department for International Development, London
  4. Anwar Shah. 2006. A Practitioner’s Guide to Intergovernmental Fiscal Transfers. The World Bank, Washington DC
  5. EnDev 2019: Call for pre-qualification: Solar products of EnDev Tanzania’s Results-Based Financing Fund
  6. 6.0 6.1 6.2 Deutsche Gesellschaft für Internationale Zusammenarbeit (GIZ) GmbH (2021): Transforming energy access markets with Results-based Financing. Lessons from 7 years of implementation under EnDev’s RBF Facility financed by UK Aid
  7. 7.0 7.1 Energy Sector Management Assistance Program (ESMAP). 2022. Designing Public Funding Mechanisms in the Off-Grid Solar Sector. Washington, DC: World Bank. Energy Sector Management Assistance Program (ESMAP).
  8. 8.0 8.1 8.2 Results-based Financing: Transforming Energy Access Markets. Panel discussion at SEforAll Forum 2022; 18th May 2022.
  9. 9.0 9.1 9.2 ESMAP (2020): Funding the Sun. New Paradigms for Financing Off-Grid Solar Companies. World Bank. https://www.esmap.org/Funding_the_Sun