Outcomes-based contracting/results-based financing

1. Alternative ways of contracting services
2. Making money from social impact
3. Helping work towards the UN Sustainable Development Goals (SDGs)  

For the purposes of this note we will use the term ‘Results-Based Finance’ (RBF) as the umbrella term for the results/outcomes-based contracting and financing mechanisms described. This is because it is considered to be the most inclusive concept by the World Bank.

Governments and donors would like to achieve better results and lower the costs of goods and services that have social and environmental goals. One way of doing this that has been given a lot of attention recently is outcome-based contracting (OBC), which is also known as results-based financing (RBF). This is where the payment is based on the outcomes achieved. 

To paraphrase Perakis & Savedoff, the theory of change shows that through appealing to the interests of the service users, drawing attention of politicians and policymakers to performance, generating accountability to constituents, and creating opportunities for parties to adapt and learn, RBF can be a cost-effective way of achieving outcomes.     

The most significant difference between impact bonds and other tools is the inclusion of an investor (and an intermediary although this stakeholder is not essential to the transaction) (Drew & Clist, 2015). With impact bonds the financing arrangement enables the contracting arrangement. This is because the financial risk is shifted away from the outcome payer or implementer. 

The trends associated with Results-Based Finance (RBF) are well documented. Multi-lateral organisations such as the World Bank Group, UNICEF and the WHO and other development agencies have been driving the trend due to pressure by donor countries to demonstrate value for money. 

Most recently, the RBF Database developed by the Global Partnership on Results-Based Approaches (GPRBA) of the World Bank in partnership with Instiglio, contains details of 300 projects across developing countries. It is worth noting that the World Bank has almost doubled the figure indicated in the accompanying report from $19 billion in 2016 (Instiglio & GPOBA, 2018) to $40 billion in 2019 so this is a moving and burgeoning target. The application of RBF has moved from largely health to all sectors. 

In the figure below you can see lots of different financing instruments and the number of projects using them. You can learn more about different financing instruments by exploring the GPRBA RBF Database mentioned above. 

The terms themselves usually contain the objective, reward or mechanism. Here is an explanation of each: 

• The objective – may be referred to as “performance”, “results”, “outputs”, “outcomes” or “success”. Performance and results are neutral terms referring to either outputs or outcomes even though performance sounds like it pertains to what the provider does and results to what the provider achieves (M. Eldridge & Tekolste, 2016). 
• The reward – may be referred to as “Finance”, “Payment Aid”, “Loan”, “Debt buy-down”, “Pay”. The term finance does not promote a particular form of payment. 
• The mechanism – may be referred to as “Contract”, a legal agreement between the parties which expresses any results-based incentive. 

Here’s a snapshot of the evaluations that have been completed around the world:

Evaluation by multi-lateral organisations – In 2016 the World Bank’s Program for Results Evaluation was published. This assesses the early experience with the design and implementation of Program for Results (PforR) operations. It identifies lessons and recommendations to strengthen the new instrument. Early process evaluations in 2015/16 looked at design and implementation and indicate positive government participation and ownership, similar project preparation costs and higher implementation costs and timely payments made. Initial recommendations focus on strengthening the results framework, and monitoring and reporting systems. 

Evaluation by national government in developed country – In 2015 the National Audit Office reviewed the largest payment by results (PbR) schemes in the UK. These were the Work Programme with the Department for Work and Pensions (DWP), Family Support programmes with the Department for Communities and Local Government (DCLG) Family Support, the Offender Rehabilitation programme with the Ministry of Justice (MoJ), as well as how PbR is used in international development. Thus far such evaluations have focused on implementation rather than effectiveness or value for money as many programmes are still mid-delivery. 

• The Work Programme - Although the report states it is not yet clear how the programme has performed over and above business as usual they also boldly estimate that that the department is likely to make a £41 million saving on what would have spent between 2011 and 2020 for similar levels of performance on previous welfare-to-work programmes.
• Offender Rehabilitation - Results indicate a degree of success with caveats 
• 20 DFID projects - Value for Money and sustainability case is too complex to argue with wide variation between how this is calculated

Evaluations on health sector contracts in predominantly developing countries – The Working Group on Performance Based Incentives was commissioned by the Centre for Global Development (CGD) from 2006. This was to evaluate a number of performance-based contracts and make policy recommendations for health programmes in low- and middle-income countries (LMICs). They found significant improvements in key health indicators even when only a modest sum within the contract was used as reward or punishment. Additionally, the Norwegian Knowledge Centre for Health Services found lack of evidence of effectiveness of RBF in analyses of 10 systematic reviews and 4 direct evaluations in LMICs.

Social impact bonds in developed countries – In July 2018, the GO Lab published a report on the evidence around impact bonds to date – Building the tools for public services to secure better outcomes: collaboration, prevention, innovation. This report found that social impact bonds had the potential to overcome perennial challenges in the public sector through improving collaboration, encouraging prevention and innovation. It also found four dimensions that unlock this potential. However, it also recognised the lack of evaluations and data available and found that many SIBs looked at the intervention rather than looking at the SIB as a mechanism. 

Some argue when considering improvement of government and donor contracting there is a continuum of practice along which improvements can be made. Some payments should be made on outcomes and others should be fixed. The table below is from the Results-Driven Contracting: An Overview by the Harvard Kennedy School. It sets out what the different stages of the continuum of results-based contracts and best practice could look like. View the overview for an explanation of each stage. 

Impact bonds attract private and philanthropic investment and may hence be seen as ‘market instruments’. In their critique of social impact bonds, Sinclair, McHugh and Roy (2019) argue that this could lead to the commodification of social services where revenue streams become associated with service users. The argument has similar roots to the ideological argument against privatisation of government services where the poor and working class run the risk of being denied access to services if they cannot afford them through the private market.  

Nevertheless, RBF and impact bonds provide an important testing ground for the how to put a price on outputs, outcomes and ultimately impact. There are a number of market trends, as outlined below that are following a similar pattern.

Negative externalities – These are the costs suffered by a third party as a result of an economic transaction. The most advanced example of pricing negative externalities can be seen in carbon pricing approaches including carbon tax and emissions trading. As of 2017, 42 countries and 25 subnational jurisdictions were applying or had implemented such a scheme with total market value reaching $52bn and prices ranging from $1 to US$140 per ton of CO2.

Positive externalities – These are the benefits enjoyed by a third party as a result of an economic transaction. An example of this is when services are subsidised. A subsidy is when there is a lack of information in the market and the additional funding has the chance of creating a demonstration effect, or when the market is unlikely to pay for non-financial impact. Through a subsidy, actors may wish to incentivise behaviour change. They can also help value non-financial impacts that are created over and above what would have already happened.  

For example, government may finance small business growth which adds capital and has social-economic impact. Mechanisms such as Social Success Notes, Social Impact Incentives, and tariff-based payments are tools used to incentivise investors.

The trend towards the making money from social impact enables funders to see the value and impact they care about. Catalytic approaches as noted above, combined with market mechanisms and ongoing analysis of data can accelerate the scale and impact of these mechanisms.   

There has long been an argument regarding the trade-off between financial and social return on investment. Investors are developing sophisticated approaches to deploy capital at different points along the spectrum (Omidyar Network, 2019). 

The newer concept of impact weighted accounts relies on robust, credible impact measurement systems to determine the cost of net impact and price all goods and services accordingly. In other words, the additional costs or savings created in the system that are currently not accounted for and thus it is unclear who needs to pay for them (Cohen, 2018). 

The contribution that impact bonds make to these concepts is that they sit on one side of the investment spectrum where not only are outcomes fully paid for, but financial returns are proportionate with social returns – the opposite of the trade-off. You can read more about this in our introductory guide on social impact investing. 

This does necessarily mean that this investment is contributing to solutions associated with the SDGs but includes negative and norms-based screened portfolios as well as environmental, social and corporate governance (ESG) and themed investment. You can read more about this in the Global Sustainable Investment Review, 2018.  

This type of investment first seeks to do no harm and benefit stakeholders. The amount that has been calculated to contribute to solutions is estimated at less than 1% of this or approximately $502 billion AUM. This figure has been determined by the collation of self-reported data from 1300 impact investors worldwide. Most RBF would not be considered for inclusion in this figure because financing of contracts is done by recipient governments or service providers off their balance sheets. Impact bond investment could be considered as part of this figure as private investment is used to finance working capital and currently makes up approximately $431 million across developed and developing markets (as of July 2019). This is not an insignificant portion of this total although one needs to consider that most of this funding will be repaid out of government or donor sources and so does not contribute to the overall funding gap. 

However, the finance mobilised by impact bond and other outcome-based instrument can be additional in a couple of ways. 

• Firstly, if the risk of service delivery and the achievement of outcomes is meaningfully shifted to the private sector, then governments and donors can use this capital to test more cost-effective solutions to intractable problems. Ultimately this will lead to a reduction in the cost of service delivery through more effective and accountable implementation. The market has not, however, reached sufficient maturity and the evidence is still being collected to make any overarching claim on the cost effectiveness of these new instruments. (Gustafsson-Wright, Gardiner, & Putcha, 2015).
• Secondly, in principle if governments and donors were able to use the mechanism to free up capital to spend on other services, they could achieve outputs and outcomes in other parts of their portfolios in advance of needing to pay out impact bond commitments. In other words, were commissioners able to budget taking the bridging finance aspect of impact bonds into account then provided they were not otherwise required to set funds aside to meet future commitments, they could use the capital that was freed up to spend on other impactful initiatives. 

A range of sources were used to compile this introductory guide to innovative partnerships. They are useful further resources for you to read: 

Benink, E., & Winters, R. (2016). New perspectives on financing small cap SME’s in emerging markets: The case for mezzanine finance, (May).

Boston Consulting Group and Roots of Impact (2019). Accelerating Impact-Linked Finance.

Carter, E., Fitzgerald, C., Dixon, R., Economy, C., & Hameed, T. (2018). Evidence report – Building the tools for public services to secure better outcomes: Collaboration, Prevention, Innovation (July).

Cattell, J. (2018). Probation performance: Fewer reoffenders committing more crimes.

Clist, P. (2015). What works for Payment by Results Mechanisms in DFID Programmes.

Cohen, R. (2018). On Impact: A Guide to the Impact Revolution.

Drew, R., & Clist, P. (2015). Evaluating Development Impact Bonds.

Eichler, R., & Levine, R. (2009). Performance Incentives for Global Health.

Eldridge, C., & Palmer, N. (2009). Performance-based payment: some reflections on the discourse, evidence and unanswered questions, 265 (February), 160–166.

Eldridge, M., & Tekolste, R. (2016). Results-Based Financing Approaches Observations for Pay for Success from International Experiences

https://www.urban.org/sites/default/files/publication/85601/results-based-financing-approaches_0.pdf

GIIN. (2011). Impact-Based Incentive Structures (December).

Global Impact Investing Network. (2019). Sizing the Impact Investing Market.

Global Sustainable Investment Alliance. (2018). Global sustainable investment review 2018.

Gustafsson-Wright, E., Gardiner, S., & Putcha, V. (2015). The Potential and Limitations of Impact Bonds.

Harvard Kennedy School. (2016). Results-Driven Contracting: An Overview.

Instiglio, & GPOBA. (2018). Effective results-based financing strategies.

Musgrove, P. (2011). Financial and Other Rewards for Good Performance or Results: A Guided Tour of Concepts and Terms and a Short Glossary.

Omidyar Network. (2019). Beyond Trade-offs.

Oxman, A., & Fretheim, A. (2008). An overview of research on the effects of results-based financing.

Perakis, R., & Savedoff, W. (2015). Does Results-Based Aid Change Anything? Pecuniary Interests, Attention, Accountability and Discretion in Four Case Studies.

Sinclair, S., McHugh, N., & Roy, M. J. (2019). Social innovation, financialisation and commodification: a critique of social impact bonds. Journal of Economic Policy Reform. 

Social Finance UK. (2019). Impact Bond Global Database.

Transform Finance. (2017). Innovations in Financing Structures for Impact Enterprises: Spotlight on Latin America Summary. 

UK National Audit Office. (2014). The Work Programme (July).

UK National Audit Office. (2015). Outcome-based payment schemes: government’s use of payment by results.

World Bank. (2019). Carbon Pricing Dashboard.

World Bank Group. (2016). Program-for-Results – Early stage assessment.

World Bank Group. (2018). Monetizing Green Impact Lessons from Africa’s First Green Outcomes Fund.

We are grateful to Sue de Witt (Bertha Centre, South Africa) for putting together this guide. Thanks to Jane Newman (Social Finance) for reviewing this and for the GO Lab team to contributing to this guide. 

We have designated this and other guides as ‘beta’ documents and we warmly welcome any comments or suggestions. We will regularly review and update our material in response. Please email your feedback to golab@bsg.ox.ac.uk.