Leverage Results-Based Financing (RBF)

Many organizations around the world are starting to experiment with results-based financing (RBF), where a payer (a foundation, international donor, or government) conditions its payment to a service provider (an NGO or private company) on desired outcomes. Results-based financing is often seen by ventures as a tool to unlock private and/or public capital and provide flexibility to achieve outcomes. These structures incentivize service providers to drive toward cost-effective impact and funders — including governments — to recognize the full costs of achieving targeted outcomes.

An RBF tool that is gaining popularity is Social Impact Bonds (SIBs, also known as Pay for Success contracts or Social Benefit Bonds). SIBs are unique in that they involve an investor who provides the capital up front with the promise of repayment with some level of financial return if outcomes are achieved.

The basic structure of a SIB is that an investor provides up-front financing to the service provider(s), often through an intermediary (1 and 2). The service provider uses this working capital to deliver its programs to populations in need with the flexibility to adapt and adjust as it drives towards specific outcomes (3). Once outcomes are achieved (4) and verified by a third-party evaluator (5), an outcome payer (often a government entity) pays the intermediary (6), who pays the private investor the principal plus an additional return on investment based on the level of outcomes achieved (7). (See Gustafsson-Wright et al, The Potential and Limitations for Impact Bonds.)

A Development Impact Bond (DIB) is a SIB that occurs in the typically riskier environments of low to middle income countries and has a broader range of possible outcome payers, including donors, foundations, multilaterals, bilaterals or intergovernmental financial institutions, nonprofits, corporations, or government.

As of early 2018, there were just over 100 contracted SIBs and DIBs, with only 6 DIBs located in low to middle income countries. Two of the organizations in our sample were ready to share lessons from their experience with RBF and DIBs to unlock new private sector capital. Living Goods had done some development work on a DIB and ended up with a pay for performance agreement, and Educate Girls had created one of the six DIBs in the world (in 2018) which is now in the implementation phase and set to conclude in June 2018. A third organization in our sample, mothers2mothers (m2m), had published information on two DIBs in later stage development in South Africa, but was not yet ready to share its perspective. Despite the very small sample size, there are already important lessons from the enterprise perspective on the pros and cons of using results-based financing as a strategy for external financing.

Lesson 1: Clarify your overall purpose in pursuing RBF

Living Goods on why impact bonds can be too complicated as an initial engagement strategy for governments. According to Lisa McCandless, Chief Development Officer of Living Goods, “Since our goal [in exploring RBF] was to attract more sustainable funding — bilateral and multilateral funding and ultimately local government funding — into the community health space, we decided that above all the structure needed to be simple, and easily replicable.” At this early stage, they decided to forgo an impact bond, and entered instead into a pay for performance contract with a philanthropic funder to pilot an RBF mechanism in Uganda, that the Ugandan government could eventually integrate into the public sector health system. The mechanism includes payment metrics that are aligned with government interest, and an independent evaluator to verify results, but does not depend on the involvement of outside investors to provide upfront funding in exchange for earning a return. When the mechanism is adopted by government after the pilot, LG might consider working with the Ugandan government to set up an impact bond to take their impact to scale. (To learn more about Living Goods’ approach to scaling, read their scaling snapshot.)

Educate Girls (EG) on exploring a DIB to diversify revenue, and realizing it is also an opportunity to incentivize local service partners to focus on outcomes. The Educate Girls DIB aims to enroll out-of-school girls and improve both girls’ and boys’ literacy in English, Hindi, and math by funding Educate Girls’ intervention in Bhilwara district of Rajasthan, India. It used the impact bond structure to unlock new funding streams but also to establish an “unprecedented razor-sharp focus on impact. The ultimate aim is for the DIB to serve as a proof-of-concept of the idea that introducing incentives, giving service providers discretion, and encouraging them to innovate (among other features) can drive greater impact, opening the door for a new development practice focused on results.” (See Gustafsson-Wright et al, Impact Bonds in Developing Countries: Early Learnings from the Field.)

mothers2mothers (m2m) on exploring two DIBs to enable efficient government support of scalable interventions. According to a recent Brookings Institution report, two federal government departments in South Africa worked together with the University of Cape Town’s Bertha Centre to develop two simultaneous tenders for new DIBs in the Western Cape region — one focused on child development and another on child health. The proposed DIBs include social venture m2m as an intermediary. Both DIBs aim to identify and strengthen intervention models that can be further scaled. (See Impact Bonds in Developing Countries.) Stakeholders view the DIB as an opportunity to assess the true cost of achieving the intended outcomes and to more efficiently invest in these outcomes at scale. (See Mannion, Will South Africa’s First Social Impact Bond get Over the Line?)

Lesson 2: Align your SIB/DIB role with your purpose

Educate Girls on deciding to lead its own DIB as sole service provider. EG initially thought about RBF as part of a grant proposal, but the grant didn’t come through and EG was unable to engender much interest from others — until an executive at Warburg Pincus’s India division (WP) got excited by the RBF idea. He, along with WP, gave EG a grant to create an RBF model, which EG used to design and test an outcomes-focused pilot in one defined area of Rajasthan. EG saw faster change when it started focusing on outcomes instead of outputs, which it had been using to track performance for over a decade. It was the pilot’s results which prompted EG to lead the development of larger DIBs and start pitching to investors and donors in the UK and US. Soon EG met UBS Optimus Foundation (UBSOF), which became its investor, and found Instiglio, which helped it identify CIFF as the outcome payer. “We didn’t really strategize for this. We came across it, pilot tested it, then, once we saw the potential, pursued it wholeheartedly,” said Maharshi Vaishnav, Global Development Director. The resulting structure was designed around their collective needs: EG is the sole service provider, CIFF is the outcome payer, UBS Optimus Foundation is the investor, and ID Insight and Instiglio are outcome evaluators and project managers/intermediaries. This DIB was the first in education in a developing market, and took over 3 years to close.

m2m on taking the role of an intermediary partner rather than a service provider. Social enterprise m2m took the role of an intermediary (as opposed to a service provider) in order to expand its reach and capacity in working with other service groups. (See Mannion, Will South Africa’s First Social Impact Bond get Over the Line?) According to the Brookings report, in this capacity m2m became qualified as the performance intermediary for the offer and set the terms for engagement with all of the other service providers. The m2m team and their partners also created a new legal entity — a nonprofit special purpose vehicle (SPV) — that would become a holding organization for both of the Western Cape bonds so that they could service future bonds with the same structure.

Lesson 3: Recognize RBF’s potential to significantly affect organizational culture and strategy.

Educate Girls on how the DIB has changed its organization’s overall performance systems. Prior to the DIB, EG was focused on activities and outputs: how many life skills sessions were held, how many girls were attending school, etc. Funders had required EG to report these metrics, and were satisfied as such. According to Vaishnav, “But now we’re outcomes-focused. Our two outcomes in the DIB contract are enrollment of girls and learning outcomes of children. There are activities that drive each outcome. This has also shortened our self-correction time. We used to gather 25 district-level indicators on mobile phones, and it took two to three months to clean and analyze the data. By the time the management decided on a red flag and course correction, it was taking six months. With the DIB, we’ve institutionalized online and offline performance management systems (PMS). Now, we can course correct in two months. This has changed the performance focus of our entire organization.”

Educate Girls on how DIBs can unlock new pathways for scaled impact. After two-thirds of the full DIB term had elapsed, results showed that the program had enrolled 87% of all out-of-school girls identified in year one and two, and had achieved 50% of the total target for learning progress. Based on this progress, UBSOF would have already recouped approximately 72% of the initial investment in year two. According to Maharshi Vaishnav, “Our current DIB is a proof of concept, but the sheer number of beneficiaries — 15,000 kids — means it IS at scale. But we do intend to scale it further.” Based on the success of its DIB, EG engaged in advanced talks with a consortium of funders to lead a new multi-service provider outcome-based initiative to target learning outcomes for about 60,000 children — five times the scale of the current DIB. This was possible because of the performance management systems and increased capacity for stakeholder management EG built through the DIB.

Advice from the Field on Pursuing RBF

If you’re just considering…

• Do some hard introspection at the team level about why RBF is right for you. Don’t pursue it because it’s a fad. Do it only if you are genuinely convinced it’s strategic and aligned with your goals.
• RBFs take more time and money than you will project. Be ready for that.

If you’re just getting started…

• Start with a grant-funded pilot so that you are in a better position to negotiate contracts around what it will take to deliver outcomes. Be proactive and accept only partners who are right for you, who align with your purpose, and with whom you can learn.
• Be wary of building a model based on secondary data, and, especially, on government data: ask how recent and how trustworthy it is (is it self-reported?), and how often it will be updated. Wherever possible, conduct a baseline or use a third party evaluator to conduct one.
• Be very careful on pricing of outcomes delivery since you will be accountable to that price for the remainder of the contract. A strong experimental study can convince stakeholders of your efficacy and help you arrive at a more accurate price point; however, an RCT may be an unnecessarily high bar.

If you’re ready to dig deeper…

• For RBF offerings, look carefully at the funding envelope. Governments may underestimate the true cost of implementing service. For example, the cost models in government offerings rarely include full legal, administrative, and pre-launch costs. You should double or triple your estimates, and spend the time to fundraise around these items up front.
• Look at everyone’s costs, not just your own. If the third-party evaluator is receiving more money than the service provider, the DIB arrangement may not be scalable.
• Don’t assume that pro-bono legal help will suffice.
• If you are taking the role of an implementing organization, you will likely have to expand your team to get this done. You’ll need to have the best impact assessment and analytics you can afford. And it can take years to find the right people with specialized skill sets.

Read next: Reduce Costs, Use Data to Power Scale, or return to see all articles in Money Matters.

This article was written by Catherine Clark, Erin Worsham, Kimberly Langsam, and Ellen Martin and released in March 2018.