Imagine if you could bring private sector resources and skills to social projects. Impact Bonds (IBs) are an innovative Results-Based Financing (RBF) mechanism that tie financial returns and payments to specific results incentivizing investors and service providers.
This World Bank-supported and multilateral donor funded unit is now the Global Partnership for Results-based Approaches. After 15 years of development experience using results-based financing, this name change reflects a wider emphasis beyond the original focus on output-based aid.
Indonesia: New World Bank Loan is an Opportunity to Apply Output-Based Aid Principles on a Larger Scale
The aim of the project is to increase the accountability of local governments in their use of Specific Purpose Grants, known as DAK, from the national budget. These grants will give participating local governments in regions with limited fiscal capacity an incentive to invest in infrastructure for basic services such as roads, water, sanitation, and irrigation.
Output-based aid (OBA), or performance-based grants, can be used to help target services to the poor. Under OBA schemes, service providers are compensated only after delivery of a specified output, such as water connections, to a targeted beneficiary. In most cases that targeted beneficiary would be a poor household or community.
Long-term commitments to make output-based payments for infrastructure can encourage private investors to provide socially valuable services. Making good decisions about such commitments is difficult, however, unless the government understands the fiscal costs and risks of possible commitments.