Results Based Financing
What is Results-Based Financing?
Results-Based Financing in the Energy Sector An Analytical Guide This report identifies the circumstances when results-based financing (RBF) approaches might be an appropriate energy sector intervention in developing countries, especially to promote energy access and energy efficiency. Results-Based Financing Results-based financing includes a range of financing mechanisms where financing is linked and provided after the delivery of pre-agreed and verified results. RBF approaches can play a big role in the delivery of infrastructure and services. What is Results-Based Financing? Results-based funding refers to development assistance that is provided in response to verified results (for example, households provided with a working electricity connection), rather than providing funding. What is Results-Based Financing? The Results-Based Financing (RBF) investment programme is a commercial financing facility that became operational in WSTF in December 2014 after the Government of Kenya signed a Grant Subsidiary Agreement with the German Development Bank (KfW) and the World Bank.
Results-based financing sharpens the focus of development financing on critical elements: measuring and demonstrating results and improving service delivery.
The Results-Based Financing (RBF) investment programme is a commercial financing facility that became operational in WSTF in December 2014 after the Government of Kenya signed a Grant Subsidiary Agreement with the German Development Bank (KfW) and the World Bank. The grants are provided by the Swedish International Development Agency (SIDA) through the KfW via the Aid on Delivery (AoD) programme for 1.36 million EUR and the World Bank Output-Based Aid (OBA) programme for 11.835 million USD.
In recognition of the need to reduce grant financing for commercially viable water utilities and in order to introduce a new business model to water financing, the RBF programme is supporting water utilities that are investing in water supply and sanitation improvement projects in the low-income and underserved rural and urban areas in Kenya. The WSPs are able to leverage loans from local financing institutions, which are then subsidised at a percentage of the project cost on attainment of agreed deliverables.
Target clients of the Results-Based Financing
The primary beneficiaries of the projects under the RBF programme that have been reached out of the targeted 150,000 (until 2018) as of June 2016 are a total of 3,645 households or 21,650 people. These are broken down as 16,940 people accessing individual water connections, 4,290 people accessing water kiosks, and 420 people accessing yard taps.
How the Results-Based Financing works
The projects to be implemented by the water utilities are pre-financed with commercial loans from domestic lenders in Kenya on market terms. The loans will support investments linked to the following:
Performance Based Payment Sample
- Construction/expansion of water and sewer networks to reach unserved consumers,
- Rehabilitation/improvement of existing networks e.g. the non-revenue water reduction programme,
- Water and/or sewer connections to households and public points,
- Water and sewer treatment facilities.
After completion of their projects, the water utilities are incentivised through applying one-off subsidies provided under the RBF sub-programmes for up to 60% under the OBA and up to 50% under the AoD programmes.
To facilitate the uptake of the RBF subsidies, the water utilities’ projects are prefinanced with commercial loans from local lenders. The RBF programme is currently working with three commercial banks, namely Sidian Bank, Kenya Commercial Bank (KCB) and Housing Finance, which have access to a 50% guarantee provided by USAID. Other banks, including Equity Bank, Family Bank, GT Bank and Coop Bank, have also been approached by the Water Fund and have shown interest in financing the water utilities under the programme.
Achievements of the Result-Based Financing
RBF commercial loans by local banks
As of June 2016, the RBF programme has facilitated the financing of five projects and reaching cumulative loan disbursements of KES 338.18 million since its creation in December 2014. The commercial facilities are loaned out to interested water utilities at the prevailing market rates. Of the total disbursements to date, the Sidian Bank has contributed 76.5%, followed by Housing Finance (23.5%), while KCB is yet to make a disbursement under the RBF programme.
RBF subsidies by WSTF
The RBF programme has so far disbursed subsidies valued at KES 69.48 million to four projects since inception (Table 12). The AoD programme contributed 62% of the total subsidies while 38% came from the OBA programme.
The 11.835 million UBA grant for the OBA facility consists of 9.5 million USD (KES 950 million) and 2.335 million USD (KES 233.5 million) for implementation support activities while the AoD grant facility for 1.36 million EUR (KES 150 million) is available for AoD subsidies.
Partners
As mentioned before, two categories of partners facilitate the work of the RBF programme:
- Local banks that pre-finance projects with commercial loans: Sidian Bank, KCB and Housing Finance (which have access to a 50% guarantee provided by USAID). Other banks including Equity Bank, Family Bank, GT Bank and Coop Bank have shown interest in financing the water utilities under the programme.
- Partnerships for financing subsidies after the projects are implemented: Government of Kenya, KfW, World Bank, SIDA.
Key elements of the Results-Based Financing success
- The programme is contributing to SDG 6 and Kenya‘s Vision 2030 by ensuring the availability and the sustainable management of water and sanitation for all. It is receiving favourable support from the Government of Kenya through the Ministry of Water and Irrigation, the county governments, water services boards and WASREB who are the stakeholders mandated to provide water supply and sanitation services in low-income and underserved areas of Kenya.
- The ownership of the water and sanitation infrastructure by both the water utilities and the county governments is increasing under the programme.
- The beneficiary water utilities are now fully registered companies under the Kenyan Companies Act and have the capacity to service commercial loans, which can be subsidised under the RBF programme.
Challenges and future perspectives
Challenges
- Lack of viable project proposals: To assist WSPs in developing viable project proposals, the WSTF is providing technical assistance (TA) funding under the RBF programme. The WSPs will procure consultancy services for developing project technical designs, project cash-flows, environmental and social management plans and social connection policies, which are prerequisites for eligibility under the RBF subsidy programme.
- Failure to raise connection fees by household beneficiaries: The failure to raise funds for connections by household beneficiaries is being addressed through the inclusion of at least 60% of the total cost of connections in the commercial loan to be borrowed by the WSPs. The households will then contribute at least 40% of the costs. The beneficiaries are expected to repay the 60% of connection costs borrowed by the WSP through monthly instalments included in their tariffs over an agreed period.
- Increased demand for commercial financing facilities: The RBF programme is noting an increasing demand for the introduction and improvement of water and sanitation services in all 47 counties. This is attributed to population growth, dilapidated infrastructure and physical and commercial non-revenue water. This is resulting in increased demand for commercial financing facilities by water utilities while banks are beginning to understand the water sector.
- Lack of coordination between water utilities and county governments: A number of water utilities are failing to meet the eligibility criteria under the RBF programme due to poor relationships with their county governments. It is a strict requirement that projects to be undertaken by the water utilities are approved by and will receive support from the county governments. Some water utilities are not applying for the RBF subsidies due to this irregularity.
- Slow uptake of commercial financing as an option for WSPs: The majority of water service providers in Kenya are not aware of the terms and conditions of the RBF subsidy programme. To increase awareness of the RBF programme, the WSTF have been undertaking workshops, seminars and open days to reach out to all WSPs in Kenya. The WSTF intends to launch a Call for Proposal under the AoD programme in July 2016 to invite WSP applications under the RBF programme.
Targets
The RBF programme pipeline as of June 2016 has a total of 17 projects with an estimated commercial loans requirement of KES 2.304 billion and a potential subsidy demand of KES 1.241 billion (Figure 8). The target beneficiaries for the OBA are 150,000 by June 2018.
Future perspectives
The RBF programme is a short-term programme that is aiming to achieve the following after its implementation phase.
The TA funding are short term facilities where external consultants are working with water utilities staff and building capacity in developing project proposals and in supervising the projects. It is expected in the near future that the water utilities will be able to undertake these tasks internally, thus becoming autonomous and consequently reducing their over-reliance on external assistance.
The RBF subsidies are meant to stimulate initial financing for the water sector by commercial lenders in Kenya. The subsidies are meant to assist the water utilities to repay their loans while at the same time improving revenue collection from the established projects. It is therefore envisaged that the established projects will result in increased revenue inflows enabling future loan borrowing by the water utilities, which will be repaid using company revenues.
The RBF facilitation in linking water utilities to commercial lenders sets in as an opportunity for commercial lenders to better understand the water sector while, at the same time, the water utilities are now considering borrowing from commercial banks as a future sustainability strategy and moving away from overdependence on traditional grants.
The RBF programme is therefore building confidence in the financial sector to consider the water sector as a viable business sector, where commercial financing can be applied and fully utilised for the advancement of the people of Kenya.
Payment by Results (PbR) is a type of public policy instrument whereby payments are contingent on the independent verification of results. It is being actively promoted by a number of governments[which?] for more effective implementation of domestic policy.[1][2]
There is also increasing interest in the field of international development, where PBR is often referred to either as 'results-based aid' (where the funding relationship is between a donor and a recipient country) or 'results-based financing' (where the funding relationship is between a developing country government or a development agency, and public or private sector providers). There are also a number of other terms in use which can often lead to confusion and a lack of clarity.[3]
PbR instruments have three key features:
- Payments for pre-agreed results
- Recipient discretion over how the results are achieved
- Independent verification as the trigger for disbursement
Domestic policy[edit]
There are many cases of PbR models being used to achieve domestic policy goals, in particular the delivery of social or community services, with payments linked to the results a provider achieves, rather than its inputs and processes. The use of PbR models is often promoted as a way to drive service improvements and achieve increased value for money by aligning incentives to desired outcomes.
In practice, a diverse range of PbR models have been implemented by Governments, varying by the degree to which:
- payments can be based on the achievement of pure outcomes; and
- risk can be transferred away from Government and towards providers.
The purest form of PbR is Payment by Outcomes, which seeks to maximise payments linked to outcomes. This is where the commissioner (central or local Government) is fully able to contract in terms of the outcomes it wants and to transfer the financial risk of non-delivery to providers. However, commissioners may face a number of challenges that may make a pure Payment by Outcomes approach either impractical or sub-optimal in terms of achieving the aims of PbR models. These challenges largely stem from commissioners’ ability to manage different risks and responsibilities, especially in relation to their understanding of desired outcomes and their measurement.
Challenges can include outcomes only being delivered beyond the provider or investor’s return horizon, meaning an earlier payment or proxy outcome must be used; having sufficient confidence that the cash savings used to fund the payment of outcomes will ultimately be realised (e.g. that a reduction in re-offending translates to a reduction in prison capacity); finding a contractual solution that ensures transactional costs are reasonable; and determining how far the delivery of outcomes is attributable to the actual intervention rather than other services or background factors. Commissioners may also find providers are reluctant to accept all of the delivery risk (e.g. where there is a dependency on future Government actions or policies) or where Government cannot truly transfer all of the delivery risk.
There are no known cases where all Government services are commissioned out. Furthermore, PbR will not always be the optimal contracting model, especially where in-house delivery is more appropriate, or where greater control is required over the service to be delivered.
Education[edit]
Payment by results was introduced in the management of British schools in June 1862. [4][5] National funding for individual schools, eventually rising to about half, depended in part on the outcomes of examinations of the pupils conducted by school inspectors. The system was deeply unpopular with teachers and led to increased unionisation. The system was abandoned in 1890.[6]
National Health Service[edit]
A national tariff was introduced to the British NHS in 1990 and operated in the English NHS until 2020, prescribed in the National Health Service Commissioning Board and Clinical Commissioning Groups (Responsibilities and Standing Rules) Regulations 2012.[7]Clinical Commissioning Groups, and NHS England are required to enter into standard “Payment by Results” contracts with providers. Such a contract between an NHS commissioner and a hospital trust is compulsory for all services provided to NHS patients. NHS Improvement is required by section 116 of the Health and Social Care Act 2012 to produce a National Tariff, which trusts must be paid for all the specified services. There is provision for an increase to the tariff. University Hospitals of Morecambe Bay NHS Foundation Trust was the first, and so far only one, in July 2015, to get an increase for its services agreed by Monitor (NHS) because of its 'increased costs associated with this trust running health services across multiple sites in rural locations'. It is paid more per episode for accident and emergency, surgery, trauma and orthopaedics, paediatrics, women’s health, and non-elective medical conditions. This is expected to increase the trust's income by more than £20 million per year.[8]
In 2019-20 a new blended tariff with a fixed payment based on expected activity plus a risk share element was introduced for emergency care, and will be rolled out to other areas.[9]
International development[edit]
A range of different instruments in the field of international development can be characterized as Payment by Results, many of which seek to provide incentives for the achievement of both outcomes and outputs by developing country governments, public agencies, commercial operators and civil society organizations. By linking disbursement to results PBR is an alternative to the majority official development assistance (ODA), which is generally provided as grants, loans and guarantees, and is therefore disbursed in advance of delivery.
Proponents of PbR argue that this approach is more likely to deliver the desired development objective, with less scope for waste and greater freedom and incentive for the beneficiary to innovate or achieve the desired objective at least cost. Possible criticisms include the need for recipients to obtain pre-financing, the risk of unintended consequences, higher monitoring and verification costs, and the difficulty of setting the incentive at the optimum level (thereby leading to the risk of rent-seeking behavior).
Results-based aid is concerned with incentivizing national-level outcomes and involves the linking of ODA (e.g. from bilateral or multilateral development agencies to developing country governments) to verifiable results, such as performance against one or more outcome indicators, or the successful implementation of a government program. Possible outcomes might include number of children passing an exam, an improvement in the infant mortality rate, or the number of people with a defined improvement in access to energy.
Results-based financing is concerned with the delivery of national or sub-national outputs, and could be used by developing country governments (national or local), public agencies, or development agencies as incentive for the provision of goods or services, create or expand markets, or stimulate innovation. Possible target outputs might include the number of vaccines administered, the number of teachers that are trained, the number of new electricity connections that are provided in a defined area. Results-based financing includes approaches such as Output-Based Aid (OBA).
Existing examples of PbR programs include the Global Partnership on Output-Based Aid and Results-Based Financing for Health. However, interest in PBR in the international development sector is growing.[3] The UK Department for International Development is piloting Cash on Delivery Aid[10] (a form of results-based aid) and results-based financing programs in a number of countries,[11] the World Bank has recently launched Program-for-Results (PforR),[12] a new results-based lending instrument, and the EU is exploring results-based approaches for the aid component of the multi-annual financial framework from 2014.
Results Based Financing World Bank
References[edit]
- ^UK Cabinet Office, 'Open Public Services - White Paper'
- ^White House Office of Management and Budget, 'Paying for Success'Archived 2012-01-04 at the Wayback Machine
- ^ abESMAP (2013).'Results-Based Financing in the Energy Sector: An Analytical Guide', p.45. The World Bank, Washington, DC
- ^Berry, George (1970). Discovering Schools. Tring: Shire Publications. ISBN0-85263-091-3.
- ^'Leader'. The Times (24364). London. 1862-09-30. p. 6.
- ^'Payment by results: what a great Victorian idea!'. Times Educational Supplement. 16 April 2010. Retrieved 4 May 2016.
- ^'The National Health Service Commissioning Board and Clinical Commissioning Groups (Responsibilities and Standing Rules) Regulations 2012'. Legislation. gov UK. HMG. Retrieved 4 January 2017.
- ^'First ever tariff hike agreed for troubled trust'. Health Service Journal. 23 July 2015. Retrieved 24 September 2015.
- ^'Tipping point for the tariff'. Health Service Journal. 18 November 2019. Retrieved 8 January 2020.
- ^Center for Global Development, 'Cash on Delivery: A New Approach to Foreign Aid'
- ^DFID, 'DFID Pilots on Payment by Results'
- ^World Bank, 'A new instrument to advance development effectiveness: program-for-results financing'