Transforming Economic Inclusion: Government Innovations through Outcomes-Based Financing

This paper offers a practical framework for understanding OBF and its application to economic inclusion programs. It addresses three central questions:

• What is OBF, and how does it work in practice?
• How can OBF support the goals of economic inclusion programs?
• What are the limitations, risks, and enabling conditions that determine
• whether OBF is an appropriate tool for government-led economic inclusion
• efforts?

To answer these questions, the paper draws on global experience. The first section defines OBF and its principles. The second section overviews the OBF landscape and describes Impact Bonds (outcomes-based financial instruments that incorporate third-party funding to cover the upfront capital required

for a provider to set up and deliver a service). The third section presents case studies of OBF projects in Colombia (the Empleando Futuro Social Impact Bond), India (the Skill Impact Bond), and East Africa (Village Enterprise’s Development Impact Bond). The fourth section critically examines the limitations and contextual challenges that must be considered when determining whether OBF is the right approach for government-led economic inclusion programs. It also offers practical guidance on addressing these risks and challenges, based on implementation experience. The fifth section concludes with observations on scaling outcomes-based finance initiatives and the additional research required.