Maximizing Impact with Results-Based Financing: 9 Learnings from a New Report

Global challenges and overlapping crises, such as the climate crisis, wars, consequences of the pandemic and economic shocks are forcing governments, civil society and the private sector to rethink development cooperation. How can we make it more effective and innovative?

One powerful approach to increase effectiveness and maximize impact is results-based financing (RBF). RBF is a shift in how donors have traditionally approached aid. Instead of financing inputs and activities, RBF provides payments after agreed-upon results are achieved and verified. For example, in a vocational education setting, training providers would be provided 25% of the payment upfront to cover supplies and startup costs. Additional payments would be awarded at milestones such as completion of the training, trainees passing skills tests, and graduates achieving gainful employment.

The approach can be applied in any sector, ranging from climate to WASH to governance. Helvetas has longstanding experience applying RBF in employment promotion projects, particularly in Ethiopia and Nepal. Although it’s not a “silver bullet” for solving all the challenges faced by development cooperation, it has proven time and again to be an effective approach for keeping the focus on achieving results.

Analysis of results-based financing experiences

The Swiss Agency for Development and Cooperation (SDC) and Switzerland’s State Secretariat for Economic Affairs (SECO) recently commissioned a review of existing experience on RBF. The review found RBF to be a “powerful financing mechanism to drive impact.” Below, we summarize key lessons learned for development practitioners – and how these findings align with Helvetas’ experience implementing this approach.

• Interest in RBF is growing in the development community. Over the past two decades, RBF has grown from $1 billion in 2007 to over $26.5 billion in 2017. SDC and Helvetas were among the pioneers of RBF in the TVET sector with the implementation of the Employment Fund in Nepal, which led to the gainful employment of 90,000 people. The use of RBF in development cooperation is expected to continue to grow and is currently considered an "underutilized aid effectiveness tool."
• Getting fit for RBF. RBF has become the core lending model for several organizations, and implementers need to be ready to adopt this approach. RBF defines 15% of all development lending for the World Bank. Others, such as the Millennium Challenge Corporation, have fully adopted RBF as their funding model. This conditional payment model supports a “performance culture” in development cooperation and improves quality and cost-effectiveness.
• RBF can be applied broadly. At present, RBF is mainly applied in the health, education, employment, energy and WASH sectors. Helvetas was the implementor for half of the RBF employment projects mentioned in the SDC/SECO review, but sees the potential for this approach to be applied in numerous other sectors where it can spur meaningful progress, such as climate initiatives.
• RBF promotes accountability and transparency to the public and stakeholders. Good data and monitoring are essential for data-driven decision-making, which is why Helvetas invests heavily in capacity development in these areas.
• RBF provides flexibility to implementers. It is the results that count, while the activities can be continuously adapted to the context. It is not a rigid set of measures, but a flexible practice. It also encourages innovation by finding new and creative ways to achieve results. RBF needs to be carefully planned and adapted to the local context. A proper design and capacity strengthening of all stakeholders involved are important. Helvetas has experienced this on a comprehensive learning journey, using the experience from Nepal and adapting it, for example, to Myanmar, Eastern European countries, Bangladesh, Mozambique, Ethiopia, Tanzania and Madagascar.
• Buy-in of local governments is key. In the case of Ethiopia, the regional government in the Amhara region worked with Helvetas to adopt RBF in its trainings and recognizes it as an effective, participatory and transparent approach to achieve outcomes. It also endorsed a policy to include RBF in its TVET system based on the Helvetas experience. Project ownership by governments supports institutionalization, scale and sustainability of this setup and shifts the mindset towards more performance-driven interventions.
• RBF models can foster social inclusion of disadvantaged groups. In many employment projects where Helvetas applies an RBF approach, a differential pricing model supports the inclusion of youth from remote areas, ethnic or religious minorities, school dropouts, displaced people, people with special needs or single mothers. Training providers get a financial incentive if they place people from these predefined categories in the job market.
• RBF has pitfalls and risks that should be mitigated carefully with partners and stakeholders. One risk is that partners are just seen as service providers. It is important to invest in relationships and trust-building as well as capacity strengthening
• Good results don’t necessarily mean the training was optimal. Gainful employment following training is seen as a key achievement, but this does not automatically mean that participants experienced good training modalities, quality content and conducive conditions for vulnerable groups. Therefore, the incentives for results need to be complemented by other elements that ensure quality and inclusiveness.

The way forward

Despite some challenges, the RBF approach provides valuable guidance for strengthening projects’ effectiveness. Helvetas currently applies an RBF approach mainly in employment projects, but plans to expand this experience to other sectors. Helvetas also tries, wherever possible, to advocate for this approach with local governments. We also share our experiences with partners (e.g., from academia) to strengthen research on this topic (see this NORRAG study).

The global discussions on budget cuts of overseas development assistance (ODA) and the massive gap in reaching the Sustainable Development Goals require innovative finance mechanisms to leverage additional funding and to apply traditional ODA funding more effectively. Helvetas will continue focusing more on private sector engagement, including impact finance. Here, our experience with RBF will also play a key role with impact-linked finance initiatives that reward social enterprises based on verified (social or environmental) results. Impact-linked finance can come in the form of a blended finance approach that incorporates the advantages of an RBF approach (paying mainly for results, not inputs) while helping to leverage private sector investments. It can therefore catalyze private investments in underserved markets, joining RBF as another effective aid tool that should be increasingly used.