All aid is supposed to deliver results, but that is not always how things work out. Results-based financing (RBF) is a direct response to this universal challenge.
Recognised as one way of linking funding more closely to results, RBF defines the desired outcomes upfront and payment is released by the funder only upon achieving these results.
This approach of adapting the nonprofit’s activities to achieve results, contrasts with traditional funding arrangements that pay for a wide range of inputs and activities (“fee-for-service” models). In essence, RBF shifts the focus to paying for outputs and outcomes, rather than just inputs. The strategic and operational choices involved in RBF raise a number of critical questions for non-profits as well as funders.RBF shifts the focus to paying for outputs and outcomes, rather than just inputs.
1. What results and indicators should you start with?
The nonprofit and funder may well agree on high-level development outcomes that a project seeks to influence: outcomes that are long term or are close to globally-agreed development goals such as empowering women, improving adolescent health, etc.
However, promising these types of outcomes as results is not always practical or measurable in the context of nonprofits or specific projects. Hence, focusing the dialogue on intermediate outcomes in the results causality chain, on which agreement can be reached, is a more feasible place to start. For instance, the focus could be on increasing enrollment of girls aged 7-14 years in schools, and improving school attendance and test scores.
2. Are the results quantifiable and measurable?
Typically, for organisations that have yet to establish proof of outcomes (their inputs and outputs actually achieve measurable outcomes), RBF is a leap they may not be ready for.
For example, reducing the incidence of domestic violence is an outcome that is difficult to measure. Sectors such as healthcare, education and livelihoods might be more suitable for measurable outcomes such as increased income for women, greater usage of sanitary napkins by young girls, increased job placements, increase in earning power, and so on.
3. Are the results achievable over a 3-6 year horizon?
Defining realistic time periods for achieving results can be tricky, especially since certain sectors may take longer to show results.
Outcomes such as improved education test scores or mothers’ health take a long time to achieve in response to inputs such as better-trained teachers or better-staffed health clinics, respectively. However, if some improvement cannot be shown over a 3-6-year project life-cycle, questions may be raised about how results-focused the programme is in the short term.
4. Are the results verifiable?
RBF depends crucially on whether or not results are verifiable in an open and transparent manner by an independent third party.
Take, for example, an education project that looks at pre and post-test scores to evaluate score improvement. Proving that this improvement can be attributed primarily to the programme intervention requires comparison against a control group. So results not only need to be verifiable by a third party, but in some cases they also need to be compared against a control group to demonstrate that the improvement is attributable to the specific project.
5. Are you willing to allocate large amounts of money to run RBF?
RBF is expensive. For nonprofits, it entails not just high set-up and implementation costs, but also investment of substantial leadership time in managing projects. It costs funders substantially to pay for a project manager and a third-party monitoring and evaluation (M&E) partner.
Some RBF models require the nonprofit to bear the start-up expenses for the programme before they are reimbursed by the donor upon achieving agreed results. That money might be better used to expand your programmes or invest in organisational growth.
For nonprofits, it therefore only makes sense to run an RBF if it opens up a new category of funders who would otherwise not have funded nonprofit programming. For funders, it makes sense to champion RBF if you have the bandwidth to pay for additional expenses such as a project manager and a third-party evaluator.
6. Do you have the people expertise?
RBF requires people who are flexible, performance-oriented and skilled in adapting the programme on the field and within the project. Since nonprofits tend to be staffed with people who have traditional programme experience, this might impede the execution of the RBF.
This challenge can be addressed, in part, if the RBF’s execution includes specific support from capacity building or technical assistance partners such as project management and monitoring. Still, this support cannot compensate entirely for limitations in staff capacity and aptitude.
7. Do you have good data?
Secondary government data (e.g. household surveys) are often a key resource used in setting result targets to be achieved in RBF or to support independent monitoring of results.
However, the use of this data can be challenging if government data systems are unreliable and prone to errors. An alternative to this is not relying on government data, factoring this into the set-up costs of RBF, and including a baseline study before the start of the programme to improve data effectiveness.
None of these considerations are insurmountable. However, given the excitement around RBF and impact bonds, nonprofit leaders need to be well aware of the operational dimensions and trade-offs of implementing RBF. For funders, it is important to note that given the robust measuring, monitoring and verifying of results, not all nonprofits or projects are amenable to such aid, and to be mindful of these concerns during due diligence.