Results Based Financing: Framework for Promoting Clean Stoves November 2012 E A P C L E A N S T O V E I N I T I AT I V E K N O W L E D G E E X C H A N G E S E R I E S Key Messages What Is Results-Based Financing? 74156 Results-Based Financing (RBF) is a concept comprising a range of public pol- • Results-based financing disburses public icy instruments, whereby incentives, rewards, or subsidies are linked to the verified resources against demonstrated, inde- delivery of pre-defined results. RBF is often used to enhance access to and delivery pendently verified outputs or outcomes of basic infrastructure and social services, such as water and sanitation, energy, and health care. In most cases, the funding entity—typically a government, development instead of project inputs. This distinguishing agency, or other agent—deals directly with the service provider (e.g., private firm, feature can mean more effective and efficient public utility, civil society organization, or financial institution). Some of the better- use of public funds and improved support of known RBF approaches include output-based aid (OBA) (GPOBA 2011), condi- tional cash transfers, carbon finance, and advance market commitments (AMCs). market interventions. Unlike traditional public procurement, which uses public resources to purchase • Applying this approach to programs that the inputs and contract service providers to deliver them to users, the RBF approach uses private-sector resources to finance the inputs and service delivery and public promote clean stoves offers suppliers the resources to reimburse the service provider upon delivery of the pre-defined results. flexibility to innovate, which is critical for This key difference gives RBF the potential to improve the efficiency and effec- market development. To succeed, they must tiveness of disbursing public resources and support of market-based interventions design stoves that fit local conditions and (figure 1). meet certification criteria. • The building blocks of a framework using Figure 1. Distinguishing RBF from Traditional Public Procurement this approach could include defined clean stoves, results-based incentives, and moni- Traditional Approach RBF Approach toring and verification, supported by insti- Inputs Inputs (stoves) Private (stoves) tutional strengthening/capacity building Finance and awareness raising campaigns. Plans are under way to pilot this framework in country Service Provider Service Provider (e.g., stove distributor) Public (e.g., stove distributor) programs as part of the Clean Stove Initiative. Finance Reimbursement for results delivered Service Recipient Service Recipient (stove user) (stove user) Source: Adapted from Brook and Petrie 2011. Photo credit: Ashden Awards. Can RBF Be Used To Promote What Is the Chain of Results? Clean Stoves? Promoting clean stoves can contribute to the broader devel- Past stove programs have followed public procurement proce- opment objectives of reducing poverty, improving health and dures, meaning that public entities have been responsible for gender equality, and mitigating climate change (figure 2). making stove technical specifications and identifying eligible Replacing fuel-inefficient, polluting stoves with those that have service providers, delivery methods, and end users to receive better energy-combustion properties can help poor house- subsidized stoves. Payments have been made against the stoves holds climb out of poverty by reducing their fuel expenses. purchased and associated delivery service. Under the RBF The health of family members who spend long hours in the approach, public entities would specify the intended results, household cooking environment—primarily women and their verification methods, and associated subsidies, and payments young children—benefit from reduced indoor air pollution. would be made to the service provider against verified delivery Women’s freed-up time from walking to collect fuelwood of the stoves and their operational performance. and preparing meals with traditional cookstoves can be spent The RBF approach focuses on results that the public sector on more productive activities. The local ecosystem and global cares about and rewards the private-sector suppliers who can environment also benefit from fewer particulate and carbon deliver them. Investment and performance risks shift from the emissions and less black carbon due to the burning of solid public to the private sector. In turn, private-sector suppliers fuels. have the flexibility to innovate in designing, producing, and To achieve these impacts, the RBF incentive would be selling defined clean stoves that are eligible for targeted incen- linked to the verifiable output: certified clean stoves sold to and tives.This flexibility is vital to stoves market development since used by households. Also critical to success would be technical stoves must fit local conditions, including customary cooking assistance activities for strategy and policy development, capac- practices, affordability, and availability of local resources and ity building, institutional strengthening, and awareness raising after-sales service. The success of stove suppliers depends on campaigns (figure 2). understanding such local conditions. Figure 2. Sample Results Chain for Clean Stoves Promotion Program Results level Objectives Funding Impact Poverty Improved health and Climate change reduction gender equality mitigation Increase access to modern energy Reduce carbon/particulate emissions Outcome Improve fuel efficiency Increase use of renewable energy Certified clean stoves sold to and used by households Results-based Output financing Strategy/policy development Capacity building Technical Activities Institutional strengthening assistance Awareness raising campaign Domestic public funding Inputs Concessional lending Grants Source: Authors. 2 Results Based Financing: Framework for Promoting Clean Stoves Figure 3. RBF Framework with Three Building Blocks and Two Supporting Pillars Results-Based Incentives • Clean stove • Number of stoves standards/rating • Level of incentive delivered system established linked to stove • Number of stoves • Testing and certification performance used protocols established • Disbursement of • Performance • Testing centers incentive linked verification of stoves established to evaluation and used verification results Defined Clean Monitoring and Stoves Verification System Institutional Strengthening Awareness Raising and Campaign Capacity Building Source: Authors. RBF Framework for Promoting Results-based incentives. The level of incentive should be linked to stove performance and its disbursement to evalu- Clean Stoves ation and verification of results. Eligibility criteria should be The conceptual framework for using RBF in programs to pro- clearly outlined and the amount adjusted according to the mote clean stoves could include three key building blocks— level of stove performance and geographic preferences. Those defined clean stoves, results-based incentives, and a monitoring who apply for incentives (the market aggregators) are those and verification (M&V) system—supported by the pillars of willing to take investment and performance risks. These may institutional strengthening/capacity building and awareness include producers, wholesalers, retailers, and project sponsors. raising campaigns (figure 3). To receive payment, they must produce stoves that can be cer- tified as “clean,� design according to customer preferences, and Building Blocks convince customers to buy and use the stoves. Design of an incentive payment system requires a thorough Defined clean stoves. Defining a clean stove requires estab- understanding of the cost structure and profit margin (supply lishing a standards/rating system, testing and certification pro- side) and consumers’ willingness to pay (demand side), as well tocols, and testing centers. The standards/rating system should as the economic benefits of the incentive provided. Advance consider compatibility with the rating framework provided by disbursements could be designed to help finance stove sup- the International Workshop Agreement, which includes four pliers. The incentives could be implemented through a finan- performance indicators (efficiency, indoor emissions, emis- cial institution to leverage the existing network and traditional sions, and safety) and five tiers (0–4). Laboratory and field test- financing instruments. ing might be included, and the certification process should be Monitoring and verification system. A critical part of the transparent and fair. A research center or university with mul- RBF design is monitoring and verification (M&V), which triggers tiple functions (e.g., testing, education, research and develop- payments. The M&V system could combine self-reporting and ment, and advisory service for design development) could host third-party verification, using sampling methods to balance the the testing centers to ensure their sustainability. Competitions trade-offs between accuracy and costs. To incentivize efforts could also be organized to identify top-performance stoves. to achieve sustainable clean cooking, results-based incentives Results Based Financing: Framework for Promoting Clean Stoves 3 EAP Clean Stove Initiative The East Asia and Pacific (EAP) Clean Stove Initiative is a follow-up regional program to the Flagship Energy Report, One Goal, Two Paths: Achieving Universal Access to Modern Energy in East Asia and the Pacific (1G2P). The EAP CSI focuses on achieving access to modern cooking and heating solutions in the EAP region, particularly through scaled-up access to advanced cooking and heating stoves for poor, primarily rural households, who are likely to continue using solid fuels to meet their cooking and heating needs beyond 2030. The EAP CSI is a multicountry, multiphase program, with funding support provided by the Australian Agency for International Development (AusAID). The initiative includes four country-specific programs (China, Indonesia, Mongolia, and Laos) and a regional forum to promote collaboration, learning, and knowledge-sharing on access to modern energy at the household level. A three-pronged approach is used, focusing on (i) strengthening institutional capacity and creating an enabling policy and regulatory environment for scaling up access to clean stoves, (ii) supporting supply-side market and business development, and (iii) stimulating demand for clean and efficient stoves. Figure 4. Example of Linking Results-Based Incentives to Monitoring and Verification Stages • Sales report/installation record (user details, stove details, date of installation, Stove Installation and baseline stove/fuel) • Third-party verification of the sales report using simple random samples $$ Results-Based • After-sales service report (1st–6th month) (whether stove is being used Incentives Stove Operation and functions well) • Third-party verification of the after-sales service report using simple random samples $$ • Third-party verification through on-site tests and surveys using simple random samples Stove Performance • Feedback also sent to the testing and certification system $$ Source: Authors. could be linked to specific stages of M&V results, including pollution linked to biomass cooking smoke. Using a celeb- stove installation, operation, and performance (figure 4). rity ambassador could be an effective way to raise such public awareness. Supporting Pillars Institutional strengthening and capacity building. Institu- Next Steps tionalizing clean stoves would be an important step toward pro- In the summer of 2012, the conceptual framework described in viding an enabling environment. Key elements could include this note was presented and discussed at national consultation an institutional champion; a cross-sector coordination mecha- workshops held in China and Indonesia, as part of the East Asia nism; and a platform for communication, learning, and coop- and Pacific (EAP) Clean Stove Initiative (CSI). In both coun- eration. Technical assistance in capacity building is also needed tries, the public and private sectors expressed great interest in to improve the performance of all market players, ranging from the framework and agreed to pilot it. The next step is to plan designers and producers to market aggregators, financiers/ the design of these pilot programs in more detail to operation- investors, testing professionals, and monitoring and verification alize the approach. specialists. Awareness raising campaigns. To motivate both supply References Brook, Penelope J., and Murray Petrie. 2001. “Output-Based Aid: and demand, awareness raising campaigns should be conducted Precedents, Promises, and Challenges.� In Contracting for Public at all relevant levels. Campaigns could focus on informing Services: Output-Based Aid and Its Applications, eds. Penelope J. the public about the program and the availability of results- Brook and Suzanne M. Smith, 3–11. Washington, DC: World Bank. based subsidies and other associated program benefits and rais- GPOBA (Global Partnership on Output-Based Aid). 2011. “Output-Based Aid in the Results-Based Financing Universe.� http://www.gpoba.org. ing awareness about the negative health impacts of indoor air This note was written by Yabei Zhang (EASWE) and Oliver Knight (ESMAP) and edited by Norma Adams. The findings, interpretations,and conclusions are those of the authors and do not necessarily reflect the views of the World Bank or funding agencies.