Executive Summary
Results-based financing (RBF) is used to provide incentives for the enterprise in exchange for the delivery of pre-agreed and verified results. It has initially been used as a way to improve the effectiveness and cost-efficiency of aid projects. RBF can take many forms and aims to create development outcomes and drive innovation by mobilizing additional financing from investors. Traditional investors would otherwise not consider investing in the social sector, due to low perceived return, but the framework and backing provided by results-based financing mechanisms may significantly increase an investor’s appetite (Uba, et al., 2020).
When is results-based finance a suitable investment option?
Results-based financing is becoming increasingly popular, especially for governmental and development actors to finance impact-related projects for the common good, including in the water and environmental sector. Tying outcome payments to the convincing delivery of pre-defined outcomes, and potentially even providing incentives to exceed these outcomes, makes it crucial for service providers to focus on the big picture, rather than getting hung up on details or losing track of objectives. It also allows you as a service provider a certain freedom when it comes to how those results are achieved: if a course of action turns out to be futile, you have the liberty to pivot, (usually) without needing to justify that choice to the outcome payer.
What is further interesting is that many RBF mechanisms are open to earlier-stage enterprises, as long as these manage to demonstrate the ability to deliver impact. Even without a substantial track-record, young enterprises could join consortia or partner up with a more experienced company or NGO and fulfil a very specific kind of service within a larger project.
In many RBF models, there is room for additional investors to join forces with the outcome payer and the service provider. In fact, this is often strongly encouraged if not a pre-requisite. For example, the investor may provide an up-front investment allowing the service provider to take up work and will get repaid with a potential premium by the outcome payer upon delivery of results.
The following (non-comprehensive) characteristics and implications provide you with an overview to analyse the pros and cons for this investment instruments:
| Enterprise Lifecycle | All stages |
| Amount | Varies depending on project size |
| Pay-back period (Maturity) | Upon delivery of pre-defined outcomes and contractual terms |
| Use of funds | Sometimes restricted |
Source: Based on (Roots of Impact, 2020) and (UBA et al., 2020)
The following table summarises some key characteristics of results-based financing and implications you should consider:
| Characteristics | What does this mean for your enterprise? |
| Results-based financing is outcome-oriented. | Funding is only disbursed if the pre-agreed outcomes are verified and achieved. This helps to focus your intervention on results, rather than specified inputs. This helps outcome payers such as governments or other public sector actors increase the efficiency and effectiveness of their interventions (World Bank). However, if you do not manage to deliver the desired outcomes, you may not get paid. |
| There is room for innovation ahead of and throughout project implementation. | The shift from inputs-based to results-based intervention allows you to adapt to changing circumstances and find innovative solutions in addressing social or environmental challenges. As long as the results are achieved, there is room to pivot the solution. This allows an intervention to be structured bottom-up, rather than top-down. |
| Additional financing can be mobilized. | RBF aims to help mobilize additional financing from external parties that would normally not have invested. Many RBFs exist in sectors that are deemed unprofitable (e.g., healthcare, education, WASH) and by paying for impact, public capital can improve the profitability of enterprises in the sector and attract private investors. |
| RBF incentivizes private sector actors are to work towards public services and the common good. Projects are often prevention-oriented. | Results-based financing is open to many types of service providers, including both NGOs as well as commercial enterprises. What matters is that you have the ability to deliver impact while also not exercising any harm on people or the planet. RBF projects are often designed to prevent severe societal or environmental events later on through targeted, preventative interventions (Uba, et al., 2020). |
| You should expect extensive monitoring and scrutiny. | As established, what matters most with RBF is meeting certain outcomes and delivering impact. While you should have a firm grasp on your ability and execution, your observations alone will not be enough for the outcome payer, who will assign the task of monitoring and evaluating your work to an external and independent entity. |
| RBF has the potential to reestablish trust in the public sector. | By engaging local stakeholders, designing projects based on beneficiaries’ real needs and priorities, and putting a focus on whether the results work for them, RBF may fix accountability and trust issues between the public sector, institutions and governments (Cordaid, 2015). |
Key features
- Output over input: While some contracts may still foresee an up-front payment to allow you to take up activities, in most cases disbursements are structured around the achievement of pre-defined outputs or outcomes which are highly likely to lead to a certain impact. For example, rather than paying you for a training for a municipality on monitoring water use, your outcome funder will pay you per liter of water saved. How you get there is up to you – this opens up plenty of room for innovation and allows you to thoroughly involve your stakeholders and beneficiaries in finding solutions that truly work for them.
- Indicators: You have already learned that your intervention will be subjected to intensive scrutiny in order to prove to the outcome payer that you have reached the desired results. Given that impact usually only occurs visibly after a certain time, bulletproof indicators need to be developed and agreed upon between you and your outcome payer that can quantify the results you are delivering. According to the World Bank, “results-based indicators must strike a balance between cost, effort, feasibility, and ambition” (WORLD BANK). While the assessment is done by an external and independent party, you must make sure to constantly keep track of your indicators to be able to pivot if you are drifting off course.
- Framework and model: While it has plenty of potential to make the public sector more efficient or increase the impact of aid, RBF is not a silver bullet, and not every RFB model works equally in every context and for every party. It needs to be aligned with the local policy context, and must take into account potential barriers to success. Both outcome funder(s) as well as later on the service provider(s) must thus conduct thorough diagnostics and analyses of the context to avoid unpleasant and costly surprises (GPOBA, 2018).
Results-Based Financing in the Water Sector
Water related businesses solutions often have close links to a range of Sustainable Development Goals (SDGs) and/or to challenges that keep sector institutions from effectively providing basic services to everybody under their jurisdiction or service area. Both contributions to SGD targets and solutions for challenges of service providers are a good starting point to establish results that could be financed through RBF.
Explore the following RBF instruments with specific water-related examples:
RBF: Impact Bond
RBF: Performance-based Contract
RBF: Carbon Credit
RBF: Performance-based loan
