The Future of Results-Based Funding, Part Two: What to Keep

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?

In part one of this post, we shared two key principles for funders to keep in mind as they adapt results-based funding models to the volatile and rapidly shifting “new normal” of international development funding. These insights are based on the authors’ own experiences with results-based funding from various vantage points. If you haven’t yet read that post, we suggest you start there.

However, even as the need for adaptation is clear, we believe users of these models should be sure to retain three critical elements that not only work, but work well in a crisis: flexibility, accountability, and rigorous measurement.

What to Keep: Accountability, Flexibility, and Rigorous Measurement

In making adaptations and getting creative with results-based funding, it’s critical that projects not lose sight of crucial elements that make results-based funding instruments effective vehicles for social impact. For one, results-based funding commits funders and implementers to participant welfare and ensures it is at the heart of the problem-solving process as stakeholders navigate and adapt to the crisis. Second, implementers need the flexibility to chart their course when plans change. Last but not least, rigorous measurement is the only way to know whether a program is making an impact in a context where everyone may be negatively impacted, making it particularly critical in a volatile context.  We explain these points in more detail below.

Accountability to program participants

Accountability to the program participants is the most critical part of any results-based funding project, especially in times of crisis when those most impacted are the most vulnerable. This setup is unique to results-based funding models as desired outcomes for participants are enshrined in the contracts, formalizing a collective focus on and drive for success as the decisions of all parties are in pursuit of this end.

The key factor that enabled our project to withstand the changes brought on by the pandemic, and to ensure the program participants benefited, was that the implementing and funding partners were laser-focused on the outcomes during the storm. This level of alignment ensured any renegotiation or decision was first driven by ‘what is best for the program participant?’ versus for any other project stakeholder. It also created more flexibility driven by our shared primary concern for the communities with whom we work.

Flexibility

Flexibility means the ability to chart your own course when plans change, which isn’t how pay-for-service contracts work, but this feature is a key part of development impact bonds and is very suitable for volatile contexts when conditions and plans change quickly.

The data suggest the same. According to the survey of impact bonds that took place during the pandemic, the majority of stakeholders (nine out of 12) thought “the impact bond structure gave more flexibility to adapt service delivery compared to traditional funding.” They also reported developing new service delivery components in response to the pandemic. For example, Cali Progresa Con Empleo, an employment-focused project, “added several new elements, including health coverage and nutrition, transportation, and psychological support lines.” Another project launched a “design challenge” to develop digital solutions for issues in project implementation. In another instance, a service provider in the Cambodia Rural Sanitation Development impact bond integrated COVID-19 safety campaigns into the project’s existing work, training over 400 local government officials on COVID-19 prevention.

This was undoubtedly true for Village Enterprise, which could chart its own course to decide which services to deliver, how to provide them, and when. After initially pausing activities, Village Enterprise quickly pivoted to offering mobile cash transfers and virtual mentoring to its entrepreneurs.

At Village Enterprise, the flexibility also incentivized improvements in performance management practices that allowed the organization to make data-driven and rapid adaptations when the pandemic hit. At the onset of the development impact bond, the NGO enhanced its performance management system by providing tablets and dashboards to frontline staff to allow for improved mentoring and case management. Both flexibility and performance management are properties of development impact bonds and were critical to making the ‘right’ course corrections to achieve the target results despite the many obstacles encountered during the pandemic.

Rigorous impact measurement

As discussed in SSIR, development impact bonds should always be grounded in strong measurement. But never was this more true than during a crisis when everyone weathered the economic repercussions of the pandemic. The investors, Village Enterprise, and outcome payers felt it was worth continuing the project because they trusted the randomized control trial would detect impact even in a pandemic, even if the only impact of Village Enterprise was to mitigate the loss of income and assets compared to the control group. Had the researchers relied on a before and after comparison, in contrast to a randomized control trial, the research team likely wouldn’t have been able to detect that the program increased the resilience of participating households compared to those not in the program.

While it is crucial that funders adapt and design funding models that are particularly effective and suited to the new normal of crisis and volatility, they also must ensure they retain key elements supporting program effectiveness: accountability, flexibility, and rigorous measurement.

In short, the mechanism and how it’s designed really matters. But what matters more is that the sector continues to transform its funding models to focus on results, not compliance and receipts, especially when anticipating future crises. By scaling results-based funding models — keeping what already works and adapting where needed — we can drive impact and cost-effectively improve the lives of more people in poverty.

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.