Home > Blogs > Rethinking Performance-based financing

Monday, 19th February 2018

By Nita Colaco, Associate Director at Social Finance

There is currently a vibrant debate around performance-based financing in middle- and low-income countries. Questions have been raised around its ability to sit alongside long-term, sustainable impact, with some authors cautioning that it’s more “donor fad” than driven by country governments or national priorities and, at worst, can cause harm by diverting valuable resources away from real reforms.

We at Social Finance are interested in contributing to this conversation. For example, Emilie Dussauge has written previously about the key features of successful PBF programmes — namely a focus on outcomes (rather than project activities or outputs, which may naturally change over time), metrics that create the right incentives, flexibility for implementers to deliver interventions, adaptation of organisational structures and decision-making processes, government’s crucial role, and independent verification of outcomes.

Development Impact Bonds (DIBs) are another important input into this debate. DIBs are promising new multi-stakeholder models to deliver outcomes more efficiently and effectively. In a DIB, private investors pay upfront for services and work, typically through a DIB Manager, with delivery organisations to achieve results. Outcomes funders (typically country governments and / or multilateral donors or foundations), repay the investors — plus a financial return — if the programme successfully achieves pre-agreed outcomes. If the programme achieves more results than expected, investors can receive a higher financial return — up to a sensible cap.

DIBs are still a new instrument. Since 2015, four have been launched targeting health, education, and economic empowerment outcomes, and many more are in development in a variety of issue areas, including the World Bank’s first DIB under design by Social Finance.

The advantages of impact investment

A key difference between DIBs and traditional PBF is the introduction of external impact investment. This is beneficial in two ways — firstly, it can lead to more flexibility, innovation, and rigour in development programmes and secondly, it can enable a broader range of organisations to take part in programme delivery.

Flexibility, innovation and rigour

In any successful PBF programme, operations should be able to be adapted in a flexible way, such that implementation can be tailored to a specific country context, rather than just trying to scale up a mainstream, donor-driven approach that might or might not be suited to the country’s circumstances. But how can one imbed flexibility and innovation into programmes themselves, particularly when trialling new interventions or scaling up interventions that have proved successful only in limited settings?

At Social Finance, we’ve seen that the introduction of external impact investment, alongside a focus on outcomes, is critical to ensuring operations can be adapted in a flexible way. Private investors generally expect that programmes need to be continuously adjusted based on learnings about what works and what doesn’t. Accordingly, investors often give a DIB Manager the latitude to make necessary changes quickly and efficiently. Bespoke data collection tools may be necessary, but they should always be designed to enable adaptive performance management and independent verification of outputs and outcomes.

Broadening the range of delivery partners

Because upfront financing is provided by investors rather than delivery bodies, DIBs allow smaller or community-based organisations, who are often more attuned to the local context, to deliver big projects without having to take on working capital risk. DFID’s recently commissioned report on PBF cites pre-financing, or the funding delivery organisations need to operate before being paid for results, as a key challenge to PBF which means that “organisations with large unrestricted reserves” or “private companies with financial track record” are more likely to bid for PBF programmes, whereas “small organisations” and “those from the charitable sector” are likely to be left out.

In addition, because investors are putting in the upfront financing, the financial incentives in a DIB are targeted towards them (in the form of a potential return on investment), not at delivery organisations. This means that DIBs can also help to reduce perverse incentives that might unintentionally be created when cash-strapped delivery organisations are paid back only upon success.

Focusing on priorities

DIBs will only be successful in as much as they address real country priorities and involve national and regional actors in the design and development process. As much as possible, we encourage country governments to be involved as outcomes funders to increase their ownership of the programmes. In the Cameroon Newborn DIB we have been designing with our partners at MaRS Centre for Impact Investing and Grand Challenges Canada, the Government of Cameroon (drawing upon the World Bank-managed Global Financing Facility), has committed to pay for key health and nutrition outcomes for low birth weight and pre-term infants alongside Nutrition International and Grand Challenges Canada.

DIBs tend to have a multitude of partners, and identifying and aligning operational models to address different priorities can take time, but bringing different types of stakeholders together and guiding them through the DIB design process is a key component of what we at Social Finance do. As Dominique Carrie writes, in reference to our work designing the Cameroon Newborn DIB, “it’s all about bringing people together”.

Enabling sustainable change

What about providing for long-term change and systemic reforms? Sustainability is a key focus of DIBs, and should be for any development programme. Capacity building of implementing partners and other key stakeholders is critical, and a main function of the DIB Manager. There are often other ways to build sustainability into DIBs. In the Cameroon Newborn DIB, for example, we are working to scale an evidence-based neonatal intervention — Kangaroo Mother Care (KMC) — to low birth weight and pre-term infants in public hospitals. We are in discussions with the Cameroon Ministry of Public Health to provide the base salary for KMC staff in the hospitals we are working in, to ensure buy-in from the beginning and make it as financially sustainable as possible after the DIB.

Conclusion

In conclusion, a DIB is surely not the right solution for every issue, but it can provide for tailored, innovative solutions to meet pressing needs and can add to the important debate about what makes an effective, sustainable programme.



Rethinking Performance-based financing was originally published in Social Finance UK on Medium, where people are continuing the conversation by highlighting and responding to this story.