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Results-based Financing for Energy Access. Lessons from the field

Since 2013, EnDev is piloting results-based financing (RBF) approaches to enhance energy access mar-kets with funding provided by UK’s Department for International Development (DFID). 

What is results-based financing?

Results-based financing (RBF) is a mechanism whereby a donor disburses funds to a recipient once a pre-agreed set of results has been achieved. This approach involves three key principles: firstly, payments are made only after the results have been achieved; secondly, the recipient may independently choose how to achieve these results; and lastly, independent verification of results is the trigger for disbursement. RBF is therefore fundamentally different from more traditional approaches in development where funding is provided in advance to finance inputs and ac-tivities. It allows to increase the accountability of both the donor and the recipient by providing verifiable evidence that the agreed results have been achieved.

RBF, like any other results-based approach in develop-ment, is motivated by the assumption that it will incentiv-ise the recipient to align its actions more closely with the objectives of the programme funded by the donor. It aims to address what economists term the ‘principal-agent’ problem deriving from asymmetric information. A principal (in the development context most commonly a donor) delegates a certain task to an agent who receives payment from the principal for fulfilling that task. The agent, be it a partner government, implementer or the private sector, often has more information about the specific task and can use this asymmetry to further its own interest to the detriment of the principal’s interest. That is – the agent may be doing the defined task, but may not necessarily achieve the desired results. Due to their relative lack of informa-tion, principals have very few means of ensuring that their agents always act in their interest. If, however, the princi-pal aligns the reward an agent receives with the principal’s desired results, he will overcome the problems caused by information asymmetry.(1) By tying funding to results, the focus and efforts of the agent shifts away from processes and towards results. This shift in focus requires the agent to address the bottlenecks and challenges that hinder the achievement of results and will thereby allow structural change to occur.

Meanwhile, also the financial risk associated with the non-delivery of results shifts from the donor to the recipi-ent. The recipient, in return, is given flexibility in how to achieve the desired results, which can encourage innova-tion. Recipients’ autonomy may also prompt them to improve their existing delivery infrastructure, which makes sustainable, long-term change more likely.

In line with that logic, results-based approaches can help to address typical market failures such as externalities, information asymmetry, market power concentration, coor-dination failures and the failure to produce public goods.(2) In the last 10 years, such approaches have become increas-ingly common in fields as diverse as health, education, forestry and energy, as is the case with EnDev’s RBF Facil-ity. Results-based approaches can target governments or public institutions for the delivery of public goods (mostly referred to as results- or output-based aid – RBA or OBA). However, it can also target the private sector or civil soci-ety organisations. In such contexts, the term RBF is more commonly used.

Depending on the degree of risk-sharing between the funder and recipient, payments can be made for final outcomes, intermediate outcomes or outputs. Most RBF approaches financially reward progress in an incremental way. For example, the number of electricity connections or tonnes of CO2 saved can be rewarded proportionally as progress is made.(3) This approach to financing results means that RBF has the potential to create competition among recipients, i.e. by rewarding the fastest movers. It thereby increases efficiency and effectiveness compared to traditional development approaches. EnDev’s RBF Facility aims to bring energy access markets to scale by building on this approach.

 

Summary of the most important recommendations

The 17 RBF projects implemented under the EnDev programme have produced valuable lessons. These cover each stage of a project, from planning, budgeting and designing incentive structures to recruiting companies and outside support as well as verifying results. Energy access markets vary from country to country, as do the economic and poli-cy context and the level of economic development activity underway alongside RBF projects. Hence, there is no single ‘blueprint’ for a perfect project – but there are ways to increase the likelihood of success.

1.         Be clear about what you want to achieve
RBF project design will vary depending on the project’s focus, i.e. whether you aim to support overall market development or to improve access to energy services and technologies for a very specific – possibly vulnerable – cus-tomer group. While the two objectives are not exclusive, the latter one requires special attention and targeting.

2.         Tune in to the market and the economy
The more a project understands the market and its con-text, the better it is at anticipating how a market might develop and what effect an RBF project could have. That, in turn, makes it more likely that a project will set the incen-tives rightly to stimulate and sustain the market.

3.         Be aware of existing or planned programmes in the sector and try aligning your project
It is not unlikely that the targeted sector is also supported by other national or international programmes. A sound RBF project should complement these and identify which market barriers remain unaddressed or where it can improve present outcomes.

4.         Incentives: ‘What’ and ‘who’ matters more than ‘how much’
Setting the right incentives is one of the most crucial parts of RBF projects. Be clear about the bottlenecks you want to address and offer the incentives to the right actors (‘who’) for the right result in the supply chain (‘what’). Be thor-ough when setting the incentive value, but know you can adjust it if needed. It is more important to capture compa-nies’ interest through attractive incentives in the beginning and subsequently reduce them stepwise than starting too low and thereby losing the opportunity to get companies to participate.

5.         Take the time to find a fund manager
A good fund manager can be the bridge between the RBF project and a long-term, sustainable market. Finding one might not be easy but it may be worth taking the time to search for a financial institution or another actor with a genuine interest in energy access markets.

6.         Be willing to invest in technical assistance if needed
Experience has shown that technical assistance and capac-ity building often need to complement incentive payments to ensure companies’ participation, to enable their expan-sion and to trigger lasting market transformation. Make sure to allow for sufficient resources for technical assis-tance from the beginning to get the project going.

7.         Be pragmatic about verifying and clear about paying
Results matter. Projects – as much as companies – need to have a verification system that is reliable and cost efficient. That means balancing phone and field verification as much as sampling according to scientific standards and costs. It is essential to make criteria unambiguous and to be straight-forward about how companies will receive their payments. Using digital media can greatly simplify the process by improving data management and quality.

 

 

(1) World Bank Group; Frankfurt School of Finance and Management. 2017. Results-Based Climate Finance in Practice: Delivering Climate Finance for Low-Carbon Development. World Bank, Wash-ington, DC.

(2) Vivid Economics. 2013. Results-based Financing in the Energy Sec-tor: An Analytical Guide. Energy Management Assistance Program (ESMAP); Technical Report 004/13, World Bank, Washington D.C.

(3) SIDA 2015. Results Based Financing Approaches (RBFA) – what are they?

 

Excerpt of: Results-based Financing for Energy Access. How to design and implement projects: essons from the field, Published by Deutsche Gesellschaft für Internationale Zusammenarbeit (GIZ) GmbH, 2018

 

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