The Future of Results-Based Funding, Part One: Adapting to a New Normal

The world, and the international development sector, are facing more uncertainty and volatility than it has in living memory. This state of ongoing fragility — stemming from the pandemic, climate change, the war in Ukraine, and related humanitarian emergencies — appears to be the new normal.  At the same time, the economic fallout from these crises is putting pressure on aid budgets, and progress on reducing poverty has come to a halt, according to recent data from the World Bank. How should the international development sector adapt, and specifically, how should funders ensure program effectiveness in this new context of volatility and budget constraints?

As leaders at organizations that have been involved in results-based funding from different vantage points — design and management (Instiglio), evaluation (IDinsight), and as an implementer and co-designer (Village Enterprise) — we believe funding based on results offers an opportunity to do more with less. Yet, the approach needs to be adapted for this new, less predictable context.

In part one of this two-part post, we put forth recommendations on adapting results-based funding for crisis and uncertainty. These recommendations come down to a couple of basic principles: first, recognizing crisis is inherently risky, be sure to carefully balance risk and reward to service providers. Second, expect the unexpected by having emergency funding available and preparing to verify results remotely. In part two, we discuss what should not be lost along the way as funders and their partners adapt results-based funding models. But first, we address the underlying need for adaptation.

Results-Based Funding: Why Adapt?

Over the last decade, we have seen the gradual growth of development impact bonds in developing countries. Since 2014, according to the Brookings Institution, 226 social and development impact bonds have been launched globally, 16 of these development impact bonds in low and middle income countries. The latest data show that overall impact bonds have been successful in achieving outcomes and paying out returns, yet in the international development sector, they remain a small fraction of funding.

The pandemic was a stress test for development impact bonds, and overall, the model withstood the shock. According to a survey of social and development impact bonds in low and middle income countries published in a December 2021 paper, all projects but one (11 out of 12) remained operational amidst COVID-19. Still, about half (five) of the impact bonds surveyed had to make contractual changes to outcomes or outcome metrics due to the pandemic.

Our organizations participated in one of these projects: the Village Enterprise Development Impact Bond. The three authors of this article each work at organizations involved in the project and two of our organizations led different sides of the pilot: Village Enterprise co-designed and delivered the program in Africa, and Instiglio co-designed and managed the development impact bond. IDinsight acted as the independent external evaluator.

We came away from this project excited about the results and the power of results-based funding to transform service providers and the sector at large. IDinsight’s evaluation found Village Enterprise’s program was successful — it exceeded its consumption and asset targets and shielded 95,000 households from the worst of the pandemic. (Read the full report.)

Like others, we faced challenges working with a development impact bond during a crisis. Ultimately, we think the standard development impact bond models implemented to date may not be the answer in volatile or unpredictable contexts. Instead, we believe the sector should continue to innovate and test new results-based models while retaining the key elements of the approach that drive impact.

How to Adapt: Results-Based Funding for Complex and Volatile Environments

Our recommendations for how results-based funding should adapt in the face of future crises, volatility, and overall uncertainty comes down to two main ideas: make sure risk and reward are fairly balanced and plan for unexpected costs and verification challenges.

Balance Risk and Reward to Service Providers

When designing a results-based funding project, whether with investors or not, it’s important to balance risk and reward. When all funding is tied to results, service providers and investors take on a lot of risks that are grossly amplified during a crisis. We don’t think it’s fair — nor, importantly, does it incentivize investment or involvement in these instruments — if implementers or even small impact investors must absorb all the risk. In our case, since all payments were strictly tied to outcomes, the interruptions caused by the pandemic put significant pressure on Village Enterprise.

One way to reduce the risk for the service provider in an uncertain context is not to base all payments on a single endline target. Instead, a results-based funding instrument could have multiple intermediate targets with corresponding payments and a relatively larger payment based on the final results. This would require various intermediate data collection points, not just an endline survey, allowing for quicker feedback and payment loops. Such a setup would reduce the risk to implementers, enabling them to learn along the way and adapt to the reality of the moment.

In particularly volatile contexts and for projects that have already demonstrated impact, it may make more sense for funders to use more straightforward performance-based contracts where they pay for a mix of activities, outputs, and outcomes along the theory of change, which would reduce the need for an investor and further simplify the structure. For example, under such a scheme, Village Enterprise could receive funding to provide seed grants to businesses (activities), when participants set up successful businesses (outputs), and (if and) when this translates, households experience improvements in key measures of poverty (outcomes). The exact mix would depend on the circumstances, but a combination would keep service providers focused on results, but not excessively penalize them when the project doesn’t work as planned in a crisis. In other words, in holding service providers’ feet to the fire, you don’t want them to get burned.

Expect the Unexpected

Crisis is costly, and it’s essential to plan for unexpected costs. Many funding arrangements and funders have no way of recognizing and supporting unplanned costs. In our case, Village Enterprise and IDinsight incurred significant unbudgeted expenses to adapt and adjust programming and evaluation when the pandemic hit. Yet one should expect such changes in a crisis. Putting in place precautions to limit the spread of COVID and keep program participants and enumeration teams safe was critical but required unplanned expenditures. We would advocate for a budgeting process that captures these uncertainties and provides a “side-car” of funding in the event of major roadblocks. (See the great work Open Road Alliance does to tackle this precise problem.)

You also need to plan for unforeseen events in the evaluation. In a May 2020 Brookings article, Emily Gustafsson-Wright recommended investing in digital data collection systems and having “shorter-term proxies for success” (think, an early indicator) for a crisis like the pandemic, which is related to the above point on having more feedback loops.

Smart funding and philanthropy need to design funding models that are particularly effective and suited to the new normal of crisis and volatility. This necessarily includes results-based funding models that will keep service providers accountable but not let them get burned while preparing for unexpected scenarios. By scaling these results-based funding models, we can drive impact and cost-effectively improve the lives of more people in poverty.

It is worth noting, however, that even as these adaptations are made, there are crucial elements of past models of results-based funding that should be carefully and thoughtfully retained — more on that in part two of this post.

Dianne Calvi is president and CEO at Village Enterprise, Avnish Gungadurdoss is the co-founder and managing partner of Instiglio, and Jeff McManus is a senior economist at IDinsight.