BLENDED June 2018 FINANCE Maximizing Finance for Development for the Poor DEVELOPMENT CHALLENGE 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 mobilize 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? The case studies in this brief highlight a financial tool to unlock additional resources for development projects while ensuring that the poorest targeted communities benefit from these investments. RESULTS-BASED BLENDED FINANCE Results-based financing (RBF) can be broadly defined as a financing arrangement in which payments are them to do so. Specific RBF instruments, such as contingent upon the achievement of pre-defined output-based aid (OBA), link payments to pro- and verified results. By shifting the focus to results, poor investments, improving the financial viability RBF enables stronger service provider and/or of serving low-income communities. implementing agency accountability and provides flexibility for innovation and thus efficiency in the • Complementing other de-risking financial means to achieve those results. While a variety of RBF instruments: RBF has successfully been used instruments exist to achieve a multitude of objectives, alongside other risk-mitigating instruments such these core features make RBF an important tool for as partial credit guarantees, further providing strengthening blended finance investments. incentives to the private sector to lend to projects with high development impact. This is The added value of RBF to blended finance demonstrated in the examples provided further approaches can be summarized by three key points: in this brief. • Reduction of repayment risk: RBF can make strategic use of private investment by reducing GPOBA EXPERIENCE the risk to lenders through performance/results- During the past 15 years , the Global Partnership based grants paid to project implementers on Output-Based Aid (GPOBA) has been building against pre-agreed results. This payment evidence on RBF’s ability to mobilize additional reduces the debt burden on the client (utility resources through a diverse portfolio of pilot projects company, household, or other) while also involving a mix of private finance, results-based reinforcing accountability for performance and grants and guarantees to deliver basic services to assurance of results. the poor low-income communities. • Inclusion of poor low-income communities: As In Kenya, RBF is a key part of a commercial bank private capital providers have been reluctant to lending to water utilities to extend service for low- lend to projects primarily targeting low-income income communities, supported by a 50 percent consumers, RBF can provide the incentive for USAID partial credit guarantee. Technical assistance This learning note is part of a series developed by the Global Partnership on Output- Based Aid (GPOBA) to analyze and showcase experiences where results-based finance (RBF) has been used to leverage private finance through a blended finance approach. through borrower and lender toolkits, support FIGURE 1. Service Provider Financing Structure for negotiations and loan perfection, and utility Partial Credit Guarantee (50%) creditworthiness assessments helped to unblock some of the obstacles in the road to accessing commercial finance by the water utilities. Finance In Bangladesh, an RBF grant is blended with household loan finance from local microfinance P&I Subsidy on Achievement institutions to increase access to hygienic latrines in Loan Payments of Outputs (90%) low-income rural areas. The project has facilitated Provision over $1 million in small business loans to local Service Contract construction firms responsible for installing the latrines. RBF grants are supporting pro-poor renewable energy projects in rural Bangladesh Service User Service Fees Installation and Ghana, where World Bank (IDA) on-lending Delivery Consumption to domestic financial institutions helps to facilitate Service household investments in low-cost solar home systems and other sources of clean energy. Another project in Ghana used an RBF grant to stimulate demand for urban household sanitation, attracting larger contractors to supply toilets to low- FIGURE 2. Household Financing Structure income communities as well as financial institutions to enter the market. Case studies developed on these projects provide additional detail on the individual blended finance approaches. In addition to the sectors mentioned above, Wholesale P&I Lending Payments GPOBA grants have funded projects in solid waste (as needed) Small management, education, health, and telecoms, Business Loans supporting downstream infrastructure and access to basic services. GPOBA funding is also provided for technical assistance to identify and overcome P&I Household Loan Payments Payment Construction constraints to commercial lending, including feasibility of Works studies, market and cost assessments, and capacity building. While originally established to focus exclusively on OBA, GPOBA’s mandate has since expanded to include more flexible RBF solutions. This has opened opportunities to work in new spaces, such as impact bonds, a type of RBF which leverages private investments for social outcomes, and with cities and municipalities interested in raising Figure 1 shows a service provider financing commercial finance for investment in better service model, where RBF is blended with a partial credit delivery and revenue generating activities. guarantee and commercial lending to finance pro-poor investments in downstream water EXAMPLES OF RESULTS-BASED BLENDED and sanitation infrastructure. Figure 2 shows a FINANCE STRUCTURES household financing model, where RBF is blended The diagrams below depict two approaches to with household microfinance loans to increase blending RBF with private finance, tailored for the provision of sanitation facilities in low-income GPOBA-funded projects in Kenya and Bangladesh. communities. ABOUT Part of the World Bank Group, the Global Partnership on Output-based Aid (GPOBA) provides innovative financing solutions that link funding to actual results achieved. Our results-based financing GPOBA (RBF) approaches provide access to basic services like water and sanitation, energy, health and education for low-income families and communities that might otherwise go unserved. By bringing together public and private sector funders to maximize resources, and designing effective incentives for service providers to reach underserved low-income communities, we give people the chance for a better life. Visit www.gpoba.org to learn more.