Maximizing Finance for Development through RBF

Blended.Finance.AdobeStock

Given the significant financing gap to meet the needs of developing countries and achieve the United Nations’ Sustainable Development Goals*, governments, multilaterals and other development partners are increasingly looking to the private sector to help fill this gap. This means applying innovative financing instruments which address investor risks to help crowd in private capital, optimizing the use of scarce public resources to advance development objectives. However, this leads to another challenge—how do we achieve inclusive development while remaining attractive to the private sector?

Results-based financing (RBF) approaches provide innovative financing solutions that link funding to actual results. By shifting the focus to results, RBF enables stronger service provider and/or implementing agency accountability and provides flexibility for innovation and thus efficiency in the means to achieve those results. While a variety of RBF instruments exist to achieve a multitude of objectives, these core features make RBF an important tool for addressing specific investment barriers and strengthening blended finance approaches.

RBF adds value to blended finance investments through:

  • Reduction of repayment risk: RBF can leverage private investment by reducing the risk to lenders through performance/results-based grants paid to project implementers against pre-agreed results.
  • Inclusion of the poor: As private capital providers have been reluctant to lend to projects primarily targeting low-income consumers, RBF can provide the incentive for them to do so. 
  • Complementing other de-risking financial instruments: RBF has successfully been used alongside other risk-mitigating instruments such as partial credit guarantees.

Over the past 15 years, the Global Partnership on Output-Based Aid (GPOBA) has been building evidence on the ability of RBF to mobilize additional resources through a diverse portfolio of projects involving a mix of private finance, results-based grants and guarantees to deliver basic services to low-income communities. The following examples provide lessons on how these projects can be replicated in other countries.

Blended Finance Overview

Kenya water and sanitation

Bangladesh Renewable Energy

Bangladesh Sanitation

Ghana Renewable Energy 

Ghana Sanitation  

 

*Based on current estimates, it could cost as much as US$4.5 trillion a year to meet the SDGs.