Photo: Dominic Chavez / World Bank

Most of development assistance today is delivered through input finance with no guarantee of successful achievement of results. Now imagine that a government could commission for increased employability among a targeted population, narrowed learning gap between boys and girls, more affordable housing in urban settings, or increased connectivity to economic opportunities. Imagine that the service providers have the flexibility to deliver on the contract and that the government is paying based on the program’s success. This is outcome-based financing.

Over the past few decades, we’ve seen a shift in the focus of development finance from input activities and short-term outputs to longer term outcomes. This trend follows an increase in demand for greater accountability, transparency and the need to maximize financing sources to address development challenges. It is in this context that the World Bank introduced a new results-based lending instrument in 2012: Program for Results.

When we shift the focus to results, an important change occurs at a fundamental level. By emphasizing outcomes, payment metrics become more closely aligned with the ultimate development objective of a project. This alignment is key to providing greater benefits to both project beneficiaries as well as service providers, who are given the flexibility to innovate, learn, and adapt their interventions to achieve the ultimate results.  

Outcome-based financing isn’t a silver bullet, because these projects require upfront funding to deliver the intervention before the outcome funder (e.g., government, donor, IFI) pays. To help bridge the gap, impact bonds, a type of outcome-based financing, emerged as a solution. In an impact bond, investors—traditionally impact investors—fund the service provider’s operation and are repaid upon the achievement of pre-agreed results, typically at a premium. For example, the world’s first impact bond reduced recidivism among offenders in Peterborough, UK by nine percent, exceeding the target of 7.5 percent, and repaid private investors in full, with a return of 3 percent per annum. 

Despite nearly 200 impact bonds in 33 countries, this market is growing slower than its promise. If we are to encourage private capital and service providers to alter their business models and invest in outcome-based initiatives, more and larger transactions are needed.

Why an Outcomes Fund at the World Bank?

To address some of the barriers that impede funding, information and knowledge flows, skills and capacity building around outcome-based financing, the World Bank, with an initial contribution from the Foreign, Commonwealth and Development Office of the United Kingdom, established the Outcomes Fund Multi-Donor Trust Fund,  housed at the Global Partnership for Results-Based Approach (GPRBA).  

Over the past 17 years, GPRBA has been testing RBF approaches that link funding to actual results achieved. Through a diverse portfolio of projects, GPRBA has built a compelling case for the ability of RBF to buttress public resources by mobilizing private finance and results-based grants and to deliver basic services to low-income communities.

With the Outcomes Fund, GPRBA is building on what it already knows: strategically designed, results-based blended finance approaches can unlock resources for development projects while ensuring the poorest and most vulnerable benefit from these investments through careful targeting.

The Outcomes Fund may be new, but the World Bank has experience working with impact bonds before. After the first impact bond of the World Bank—which targeted youth and female unemployment outcomes in the West Bank and Gaza—GPRBA launched an impact bond to increase access to quality preschool education in the urban areas of Uzbekistan and is harnessing outcome-based financing to help out-of-school children in Ghana reintegrate into the formal education system and improve their learning outcomes. In all three of these impact bonds, the investors are funding the delivery of the intervention by the service provider before they are paid back based on performance, i.e. the degree to which the results are achieved.

With the establishment of the Outcomes Fund, GPRBA will continue to innovate in the RBF space. The Fund will help build the capacity of local markets to use outcome-based financing and other results-based blended finance solutions to drive improved social, infrastructure, and environmental outcomes for poor and vulnerable populations. Its sector focus will include climate, resilience and environment, urban upgrading and provision of basic services, water, sanitation and hygiene, education, employment, and poverty graduation.

This effort is an exciting new endeavor for GPRBA. But looking at the bigger picture, it serves an important role as part of the World Bank’s agenda on mobilizing finance for development to systematically leverage all sources of finance, expertise, and solutions to support developing countries’ sustainable growth. 

The experience gained and lessons learned through the Outcomes Fund will enable the World Bank to advise its client countries and become a thought leader in applying outcome-based financing to achieve the sustainable development goals.

(This post originally appeared on the World Bank's Sustainable Cities blog)

Photo: Natalia Cieslik / World Bank

As much of the world develops at an increasingly rapid pace, some regions are lagging. Poverty is increasingly concentrated in places affected by fragility, conflict and violence. Developing resilient infrastructure in fragile regions like these supports peace and stability and provides opportunities for their residents to rise out of poverty. However, government budgets are often stretched too thin or lack the capacity to deliver essential services, and—due in part to the perception of risk—projects struggle to attract private financing that could bridge those gaps. 

The challenge of unlocking the power of the private sector in fragile regions is not new. However, in recent years a series of remarkably successful collaborations between the International Finance Corporation (IFC) and the Global Partnership for Results-Based Approaches (GPRBA) is challenging the skeptics about private sector financing in fragile settings. 

Combining the power of public-private partnerships and results-based financing.

The IFC and GPRBA are natural partners with strengths and focuses that complement each other’s work. Both institutions recognize that while the public sector is in the lead, the private sector has a critical role to play in putting an end to extreme poverty. By combining the IFC’s financial clout and private sector expertise and GPRBA’s innovative approaches and pro-poor focus, remarkable results have been achieved. A solid waste management project in the West Bank provides an excellent example. 

At the start of the last decade, the West Bank had a trash problem. Decades of conflict left solid waste management programs critically underfunded. The result in the governates of Hebron and Bethlehem was a system unable to handle the 500 tons of waste generated daily. Recognizing the threat to public health and the environment, the governates sought funding from the World Bank to expand and improve their waste management systems. However, the local governments lacked the capacity to operate an expanded system, so the IFC came in to join hands with the World Bank to find a solution through the private sector. 

Drawing on decades of experience and its core mandate, the IFC was well suited to find a private company that had the necessary track record and to develop the public-private partnership (PPP) transaction structure. Convincing a private company to invest in a fragile region and ensuring those in the greatest need benefited from the project were, however, another set of challenges. 

This is where the innovative structure of results-based financing (RBF) came in. The GPRBA designed a grant scheme that tied disbursements to results on the ground. In this case, a set of measurable goals were aimed at expanding and improving the service. This structure both incentivized service improvements and reassured the private companies that the IFC supported this model and that they could rely on regular payments. 

The result was a resounding success. With the help of GPRBA’s RBF grant and technical assistance, the IFC helped the government identify a private firm to operate the new landfill. The project, which ended in 2017, improved solid waste management services for an estimated 840,000 people. All the targets for measuring improvements in service delivery and financial sustainability were achieved and, in some cases, exceeded. 

Building on success

The success of the West Bank solid waste project is not anomalous but rather, just one of many when the IFC and GPRBA work together. Since 2005, IFC has contributed to nearly half of all GPRBA projects totaling $76.7 million in direct contributions. Today, the GPRBA is on track to benefit over 11 million people though all its projects combined, an accomplishment made possible by the support of the IFC, and this partnership isn’t finished yet.

In Liberia, a $3.3 million waste management project is underway to provide half a million people in Monrovia—many of whom are from low-income households—with waste collection services. In Myanmar, an RBF project seeks to provide access to reliable, clean energy to 450,000 people in rural and urban areas. And in Gaza, a project to improve solid waste management for nearly 1 million people is expected to be signed later this year. With each project, new lessons are learned and applied to future endeavors, building on the partnership’s successes. 

But there’s more work to be done. Spurring development and private investment in fragile regions remain a significant challenge, but as the IFC and GPRBA’s work demonstrates, that challenge is not as intractable as we might think.

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(This item originally was published as a blog in the World Bank's "Sustainable Communities" blogsite.)