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RBF APPROACHES
Output-Based Aid (OBA)
Output-based Aid is a form of RBF designed to deliver access to infrastructure and social services for the poor. Service delivery is contracted out to a third party—public or private—that receives a subsidy to complement or replace the required user contribution. The service provider is responsible for pre-financing the project, and is reimbursed after the services have been delivered and independently verified.
OBA has been successfully demonstrated in most infrastructure sectors, as well as socials sectors. A key task in an OBA program is appropriately defining outputs that balance results with reasonable transfer of performance risk, which include the ability of households to pay for a service over time and the ability of the utility to provide consistent services. For an example of an OBA project, click on the Dig Deeper icon.
OBA programs:
- Deliver access to basic infrastructure or social services for low-income areas or poor communities.
- Offer payments to cover the difference between what users can afford and what is required.
- Make the service provider responsible for pre-financing the project.
- Include independent verification to verify results.
- Have been successfully demonstrated in most infrastructure sectors as well as social sectors.
Examples and Resources
Impact Bonds (IBs)
Impact Bonds include social impact bonds and development impact bonds. They focus the allocation of funding to social programs that yield effective results.
The difference between impact bonds and traditional results-based financing is the role of the funding, which is typically from the private sector and/or philanthropic institutions. Financing is provided up-front to the service providers with the promise of a return once results are achieved and verified.
The difference between a social impact bond or “SIB” and a development impact bond or “DIB” depends on who pays for the outcomes. In a SIB, the outcome payer is a government, while in a DIB, the outcome payer is a donor. SIBs and DIBs have been implemented in education, global health, and work force development.
Impact Bonds (IBs):
- Focus allocation of funds to social programs or development issues;
- Unlike other forms of RBF use funding from private sector for up-front financing with the promise of a return;
- Address social issues such as providing high-quality preschool education, reducing prison recidivism, avoiding foster care placement, and increasing youth employment.
Examples and Resources
Program for Results (PFORR)
The World Bank introduced a lending instrument called the Program for Results Financing (PforR), in 2012. In PforR projects, disbursements to client country governments are linked to their achievement of particular milestones or disbursement-linked indicators (DLIs) that are tangible, transparent, and verifiable.
DLIs play a critical role in PforR operations, providing the government incentives to achieve key program milestones and improve performance. Each DLI is defined and agreed upon by the country in consultation with the World Bank, and has a verification protocol that sets out how it will be measured and verified. Disbursements are specified for each DLI and will be made according to DLIs achieved.
World Bank’s PforR instrument:
- Links disbursements to achievement of particular milestones or disbursement linked indicators
- Requires robust verification prior to disbursement
- Helps countries strengthen institutions, build capacity, and enhance partnerships
Examples and Resources
Results-Based Climate Financing
Results-Based Climate Financing (RBCF) is type of RBF, wherein payments are made for climate mitigation or adaptation results after they have been achieved and independently verified.
A popular RBCF instrument is carbon finance, which makes payments upon the achievement of a specific climate mitigation action. Carbon finance projects involve contracts to purchase greenhouse gas emission reductions like a commercial transaction, paying for them annually or periodically once they have been verified by a third-party auditor. Carbon financing projects have proven results in decreasing greenhouse gas emissions and increasing energy efficiency. In projects that have an energy efficiency component, municipalities receive revenues from the sale of Certified Emission Reductions from the reduction of CO2 emissions representing the pre-defined outputs.
Carbon Financing:
- Makes payments upon achievement of a specific climate mitigation action;
- Involves contracts to purchase emission reductions;
- and Pays annually or periodically once emission reductions have been verified by third-party.
Examples and Resources
Output-Based Disbursement (OBD)
Output-based disbursement is a form of RBF approach where a payment is made to a service provider or a contractor for improvements in the efficiency of a service-related asset, system, or recurrent government activity.
Some of these programs link service outputs with associated unit costs, and disbursements reflect the actual cost of service. These types of programs typically secure pre-finance from their local government since the activities are in line with the national development plans, and the RBF strengthens incentives to realize them.
OBD programs:
- Make payments for improvements in the efficiency of a service-related asset, system, or recurrent government activity.
- Link service outputs with actual cost of service.
- Typically, secure pre-finance from local government.
Examples and Resources
Cash-On-Delivery Aid (COD)
Cash-on-delivery aid involves a fixed payment to the government for each unit of result delivered. The unit is specified in a contract between the development partner, such as the World Bank and a government and is disseminated publicly for transparency. COD aid gives recipients full responsibility and discretion in using the funds.
For example, a fixed amount is paid for every student that takes a standardized competency test in their last year of primary school, or for each additional child over an enrollment baseline who takes the standardized competency. In this case, payment is proportionate to the number of pre-defined “results” delivered.
COD programs:
- Involve fixed payment to the government for each unit of results;
- Disseminate payment publicly for transparency;
- and Give recipients full responsibility and discretion in using the funds.
Examples and Resources
Conditional Cash Transfers (CCT)
Conditional Cash Transfers (CCT) provide cash payments to program beneficiaries, typically poor households, which meet certain desired behavior, generally related to the use of services such as children’s healthcare (vaccinations) or school enrollment.
Similar to OBA projects, CCT payments are made only after the target result has been achieved, which must be independently verified by a third party. CCT payments are “all or nothing payments” focused entirely on the demand side of services. They entail no performance risk for the service provider delivering the services. At the same time, these cash incentives are often combined with increased services to respond to increased demand. The supplier has therefore incentives to strengthen the quality of their service delivery.
CCT payments:
- Provide cash to program beneficiaries which meet desired behavior;
- Are “all or nothing” payments;
- Entail no performance risk for service provider;
Examples and Resources
Performance-Based Financing (PBF)
Another set of financing instruments are related to performance-based indicators. The term “performance” tends to be used when it is easy to quantify the degree to which results have been achieved. Under this type, the recipient is the project implementer or service provider.
Payment is made against the performance of service providers, measured by meeting a range of quality-based output indicators.
PBF is inherent in most public-private partnerships (PPP), wherein a private party enters into a long-term contract with a government entity for the purpose of providing a public asset or service. In a PPP, the private party bears the performance risk and reimbursement is linked to performance.
PBF programs:
- Used when it is easy to quantify the degree to which results have been achieved;
- Make recipient the project implementer or service provider;
- and Disburse payment based on verified performance, rather than unit of results delivered.