In Practice Transforming Economic Inclusion: Government Innovations through Outcomes-Based Financing By Mara Aroldi, Celeste Brubaker, Sebastian Osorio, and Juliana Outes Velarde 12 © 2025 International Bank for Reconstruction and Development / The World Bank 1818 H Street NW Washington DC 20433 Telephone: 202-473-1000 Internet: www.worldbank.org This work is a product of the staff of The World Bank with external contributions. The findings, interpretations, and conclusions expressed in this work do not necessarily reflect the views of The World Bank, its Board of Executive Directors, or the governments they represent. The World Bank does not guarantee the accuracy, completeness, or currency of the data included in this work and does not assume responsibility for any errors, omissions, or discrepancies in the information, or liability with respect to the use of or failure to use the information, methods, processes, or conclusions set forth. 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Cover photo: Village Enterprise Volume 12 June 12, 2025 In Practice The Partnership for Economic Inclusion | In Practice | Transforming Economic Inclusion: Government Innovations through Outcomes-Based Financing Contents Acknowledgments iv About the In Practice series v Abbreviations viii Introduction 9 Interactive Table of Contents Understanding Outcomes-Based Financing 11 Click to navigate Defining outcomes-based financing and its key principles 11 Defining stakeholders’ roles 13 The role of governments in outcomes-based financing 14 Overview of the Results-Based Financing Landscape 16 Global initiatives 16 Impact bonds 17 Case Studies: Lessons from Colombia, India, and East Africa 19 Colombia 19 India 22 East Africa 24 Limitations of Outcomes-Based Financing and Tips for Mitigating Risks 30 Political cycles, the political agenda, and lack of buy-in from program champions 31 The regulatory environment 32 Program design 34 Service providers 36 Operational elements 37 Conclusion 39 Scaling outcomes-based financing 39 Conducting further research and exploration 39 Annex. Principles of and Framework for Implementing Outcomes-Based Financing 40 Measurability 40 Accountability 43 Incentivization 44 Flexibility 44 Notes 46 References 48 The Partnership for Economic Inclusion | In Practice | Transforming Economic Inclusion: Government Innovations through Outcomes-Based Financing Contents, continued Figures 2.1 | Typology of results-based and outcomes-based financing 12 3.1 | Number of results-based financing projects, by type, 2018 16 3.2 | Distribution of impact bond projects by policy sector, 2025 18 4.1 | Structure of Colombia’s Empleando Futuro Social Impact Bond 20 4.2 | Structure of India’s Skill Impact Bond 23 4.3 | Structure of the Village Enterprise Development Impact Bond 26 A.1 | Theory of change of outcomes-based financing 40 Boxes 1 | Navigating the World Bank’s procurement processes for OBF 33 A.1 | Checklist for identifying outcomes 41 A.2 | Checklist for measuring outcomes 43 A.3 | Checklist for setting outcome targets 43 The Partnership for Economic Inclusion | In Practice | Transforming Economic Inclusion: Government Innovations through Outcomes-Based Financing Acknowledgements This report was written by Mara Aroldi (Government Outcomes Lab, Oxford University), Celeste Brubaker (Village Enterprise), Sebastian Osorio (Instiglio), and Juliana Outes Velarde (Government Outcomes Lab, Oxford University). It was prepared under the guidance of Victoria Strokova and Janet Heisey (Partnership for Economic Inclusion [PEI], World Bank). The report greatly benefited from thoughtful input, insights, and comments shared by Nitya Daryani (British Asian Trust), Richard Johnson (Healthy Brains Global Initiative), Santiago Ospina (Instiglio), Gabriela Vargas (Instiglio), Laura Diaz (Instiglio), and Puja Datta (World Bank) as well as from comments from peer reviewers Abla Safir (World Bank), Paul Hamlin (USAID), and the team led by Abed Khatib, including Marinella Ariano and Xinyu Xie (World Bank). It also benefited from editing by Barbara Karni (World Bank) and Joelle Swarner (Village Enterprise). The Partnership for Economic Inclusion | In Practice | Transforming Economic Inclusion: Government Innovations through Outcomes-Based Financing iv About the In Practice Series The Partnership for Economic Inclusion publishes the In Practice series featuring accessible, practitioner-focused publications that highlight learning, good practice, and emerging innovations for scaling up economic inclusion programs. Guide to navigation The In Practice series is interactive and provides built-in technical features to assist readers as they progress, including a navigation bar, progress bar, and the ability to jump to endnotes and back to the text throughout. Introduction Understanding Overview of the Case Studies: Limitations of Conclusion Annex. Principles Outcomes-Based RBF Landscape Lessons from Outcomes- of and Framework Financing Based Financing for Implementing Colombia, India, and Tips for Outcomes-Based and East Africa Mitigating Risks Financing Chapter navigation Progress bar Jump notes1 The navigation bar at the The progress bar tracks your 1. Notes throughout the text are linked top of each page allows easy progress through each chapter to allow easy navigation between navigation with a simple click. and throughout the document. endnotes and the main text. The Partnership for Economic Inclusion | In Practice | Transforming Economic Inclusion: Government Innovations through Outcomes-Based Financing v Abbreviations DIB Development Impact Bond DPS Department for Social Prosperity (Colombia) IRR Internal Rate of Return J-PAL Abdul Latif Jameel Poverty Action Lab M&E Monitoring and Evaluation NSDC National Skill Development Corporation OBF Outcomes-Based Financing PEI Partnership for Economic Inclusion RBF Results-Based Financing RCT Randomized Controlled Trial SEI State of Economic Inclusion VE Village Enterprise The Partnership for Economic Inclusion | In Practice | Transforming Economic Inclusion: Government Innovations through Outcomes-Based Financing viii Introduction Understanding Overview of the Case Studies: Limitations of Conclusion Annex. Principles Outcomes-Based RBF Landscape Lessons from Outcomes- of and Framework Financing Based Financing for Implementing Colombia, India, and Tips for Outcomes-Based and East Africa Mitigating Risks Financing Introduction Well-designed economic inclusion programs—bundles of coordinated interventions that help individuals, households, and communities sustainably increase their incomes and assets (Arévalo-Sánchez et al. 2024)—are crucial for reducing poverty and fostering inclusive growth in low- and middle-income countries. These programs often integrate social safety nets, financial services, skills training, and livelihood support to empower poor and marginalized groups to participate more effectively in the economy. Adoption of economic inclusion programs The complexity and scale of the challenges is expanding rapidly. The State of Economic faced in these contexts require ongoing Inclusion Report (SEI) 2024, released by innovation and strong accountability the World Bank’s Partnership for Economic mechanisms to ensure that these programs are Inclusion (PEI), documents a global increase effective, sustainable, and equitable. Social, of more than 50 percent in the reach of such economic, and environmental conditions programs since 2021. By 2024, these programs in developing countries change rapidly. were supporting over 15 million households, Climate change, urbanization, and the digital benefiting more than 70 million people revolution are reshaping the landscapes in directly and indirectly (Arévalo-Sánchez et al. which these programs operate. Economic 2024). inclusion initiatives must therefore be highly adaptable and tailored to the contexts Governments are increasingly leading of regions and communities. Innovation these scale-up efforts. About 43 percent in program design, implementation, and of 405 surveyed programs are government monitoring can help interventions stay led, accounting for about 74 percent of all relevant and effective. participants (Arévalo-Sánchez et al. 2024). These initiatives often involve collaboration Accountability mechanisms are crucial to by multiple government agencies, in ensure that economic inclusion programs partnership with nongovernmental and are implemented effectively and resources international organizations. They also used efficiently. They include transparent frequently layer their economic inclusion procurement and payment processes, regular measures atop existing social protection audits, and monitoring and evaluation programs, typically integrating four or more frameworks. Without strong accountability, components on top of cash transfers or in- there is a risk of misallocation of resources, kind support (Arévalo-Sánchez et al. 2024). corruption, ineffectiveness, and inefficiency. The Partnership for Economic Inclusion | In Practice | Transforming Economic Inclusion: Government Innovations through Outcomes-Based Financing 9 Introduction Understanding Overview of the Case Studies: Limitations of Conclusion Annex. Principles Outcomes-Based RBF Landscape Lessons from Outcomes- of and Framework Financing Based Financing for Implementing Colombia, India, and Tips for Outcomes-Based and East Africa Mitigating Risks Financing Outcomes-based financing (OBF) is an service providers will use evidence to guide approach to results-based funding in which funding and implementation decisions, payments are at least partially linked directing more resources toward the most to the achievement of outcomes. It can impactful interventions. potentially transform government-led economic inclusion programs by aligning This paper offers a practical framework for stakeholder interests with the interests of understanding OBF and its application to the communities the programs are meant to economic inclusion programs. It addresses serve and creating space and incentive for three central questions: innovation. OBF can lead to more impactful • What is OBF, and how does it work in and sustainable outcomes for beneficiaries practice? by fostering a culture of accountability for results and continuous improvement. • How can OBF support the goals of economic inclusion programs? Recent years have seen growing recognition • What are the limitations, risks, and that the way in which services are enabling conditions that determine commissioned can affect innovation and whether OBF is an appropriate tool for accountability in aid programs. Traditional government-led economic inclusion funding models often focus on financing efforts? inputs or activities, leading to inefficiencies and a lack of transparency about how To answer these questions, the paper draws successful resources are in achieving project on global experience. The first section defines outcomes. Disappointment in these models OBF and its principles. The second section caused some stakeholders to turn to OBF. overviews the OBF landscape and describes By shifting the focus from what goes into a Impact Bonds (outcomes-based financial program to what comes out of it, OBF can instruments that incorporate third-party offer a more strategic and results-driven funding to cover the upfront capital required approach to program implementation. for a provider to set up and deliver a service). The third section presents case studies of OBF By aligning financial incentives with projects in Colombia (the Empleando Futuro the achievement of specific, measurable Social Impact Bond), India (the Skill Impact results, OBF can encourage governments, Bond), and East Africa (Village Enterprise’s service providers, and other stakeholders Development Impact Bond). The fourth to prioritize outcomes that have a tangible section critically examines the limitations impact on economic inclusion, such as higher and contextual challenges that must be employment rates and household incomes considered when determining whether OBF and better access to essential services. By is the right approach for government-led focusing on these measurable outcomes, OBF economic inclusion programs. It also offers can foster innovation in program design practical guidance on addressing these risks and delivery, as stakeholders are motivated and challenges, based on implementation and empowered to develop and implement experience. The fifth section concludes with more effective strategies to achieve desired observations on scaling outcomes-based results. OBF emphasizes accountability by finance initiatives and the additional research holding parties responsible for delivery on required. The annex provides practical their commitments. Greater accountability guidance on implementing OBF. increases the likelihood that funders and The Partnership for Economic Inclusion | In Practice | Transforming Economic Inclusion: Government Innovations through Outcomes-Based Financing 10 Introduction Understanding Overview of the Case Studies: Limitations of Conclusion Annex. Principles Outcomes- RBF Landscape Lessons from Outcomes- of and Framework Based Financing Based Financing for Implementing Colombia, India, and Tips for Outcomes-Based and East Africa Mitigating Risks Financing Understanding Outcomes- Based Financing OBF is an evolving practice in international development that shifts the focus from funding inputs, activities, and outputs to financing specific, measurable outcomes (Government Outcomes Lab n.d.d.). It is based on the principle that funding should be linked to the achievement of clearly defined targets rather than the mere execution of tasks or allocation of resources. By tying payments to performance, OBF creates a direct link between funding and results, encouraging stakeholders to prioritize effectiveness and efficiency in their interventions. DEFINING OUTCOMES-BASED FINANCING AND ITS KEY PRINCIPLES OBF falls under the broader umbrella sustainable changes. By emphasizing results of results-based financing (RBF), which over processes, it promotes accountability and encompasses various funding models that incentivizes the development of innovative link payments to the achievement of specific solutions that address the complex challenges of metrics. There are various forms of RBF economic inclusion. and OBF, each with unique characteristics and applications. Differentiators include OBF contracts typically take three forms (figure who is incentivized (government agencies, 2.1): private sector partners [such as investors or • Performance-based contracts are a guarantors], service providers, or beneficiaries) form of RBF in which payments from and the types of results that are tied to funders to service providers are based at payment. RBF focuses on both immediate least partially on performance. Funders outputs (such as service delivery milestones) shift some performance risk to service and final results. In contrast, OBF zeroes in providers, thereby incentivizing them to on the achievement of mid- to long-term perform. strategic outcomes with significant societal impacts, such as increased employment rates or • Impact bonds are a type of RBF that higher incomes of people in the bottom wealth incorporates private funding (investment) quantile. OBF is a subset of RBF that prioritizes to cover the upfront capital a provider high-impact outcomes that align financial needs to set up and deliver a service incentives with the achievement of broader, (Government Outcomes Lab n.d.c.). As The Partnership for Economic Inclusion | In Practice | Transforming Economic Inclusion: Government Innovations through Outcomes-Based Financing 11 Introduction Understanding Overview of the Case Studies: Limitations of Conclusion Annex. Principles Outcomes- RBF Landscape Lessons from Outcomes- of and Framework Based Financing Based Financing for Implementing Colombia, India, and Tips for Outcomes-Based and East Africa Mitigating Risks Financing investors take on some performance risk, donor or reallocate the funding to other they are considered the incentivized agent. programs to achieve the impact (Tri-Sector Impact bonds are often referred to as a Associates n.d.). As the guarantor assumes social impact bond or development impact performance risk, it is considered the bond. incentivized agent. • Social impact guarantees are a type of RBF that functions like a money-back Not all projects within these categories are guarantee. If the social impact sought is outcomes-based. Whether a project is outcomes- not achieved, the provider is required to based depends on the nature of the results being return a portion of the funding to the incentivized and whether funding is tied, at least in part, to the achievement of outcomes. Figure 2.1 Typology of results-based and outcomes-based financing National Performance- Government based aid Local Performance- Government based transfer Service Performance- providers based contract Outcomes-based Investors Impact bonds contracts historically limited to these three categeries Guarantors Social impact guarantee Beneficiaries Conditional cash transfers Source: Adapted from Global Partnership for Results-Based Approaches (GPRBA) 2018 and 2021. The Partnership for Economic Inclusion | In Practice | Transforming Economic Inclusion: Government Innovations through Outcomes-Based Financing 12 Introduction Understanding Overview of the Case Studies: Limitations of Conclusion Annex. Principles Outcomes- RBF Landscape Lessons from Outcomes- of and Framework Based Financing Based Financing for Implementing Colombia, India, and Tips for Outcomes-Based and East Africa Mitigating Risks Financing Several principles underpin OBF:1 be achieved across settings, these results • Measurability: Outcomes are specific, highlight the transformative potential of this quantifiable, and objectively verifiable, so approach in achieving meaningful economic that progress can be tracked and evaluated. inclusion. By requiring clear measurement and tracking of progress toward agreed-upon DEFINING STAKEHOLDERS’ ROLES outcomes, OBF can help identify whether a program has achieved its objectives. At its simplest, OBF involves an organization (or group of organizations) that seek to produce • Accountability: Service providers are held social outcomes and another organization (or accountable for delivering agreed-upon group of organizations) that pays to achieve results, fostering a culture of responsibility those outcomes (herein referred to as the OBF and transparency. Performance-based organization). Intermediary organizations, incentives promote accountability by technical service providers, or third-party holding parties responsible for delivering risk-takers often support the contracting and on their commitments. Service providers implementation program phases. Stakeholders are required to demonstrate achievement or agents can include the following: of desired outcomes, and funders are responsible for facilitating payment as • Local or international outcome payers targets are met. (entities that pay for a desired, measurable, verified result) • Incentivization: Financial incentives are aligned with the achievement of desired • Service providers outcomes, motivating stakeholders to focus • Donors on achieving impactful results. Ultimately, • Commercial banks the role of performance-based incentives in OBF is to align the interests of all • Impact investors stakeholders with the desired results of • Impact guarantors (entities that commit social programs. to covering part or all of the outcome • Flexibility: Implementing agencies payments or capital recovery if a project are given the freedom to innovate and does not meet its pre-agreed upon adapt their approaches to meet targets, performance targets) encouraging creative problem-solving • Intermediaries and efficiency. By shifting from inputs • Performance managers and evaluators. and activities to outcomes, OBF provides implementing agencies with the flexibility These agents fall into four main categories: to experiment with new approaches and adapt their strategies to changing • Payers/funders: People or institutions that circumstances. This flexibility can foster pay for the desired, measurable, verified a culture of learning and continuous outcomes. improvement, allowing organizations to • Service providers: People or institutions refine their interventions and achieve that deliver a program on the ground. better outcomes over time. • Investors and guarantors: Investors (people or institutions) that provide risk capital In the United Kingdom—a pioneer and market for the delivery of a program or guarantors leader in OBF—contracting based on results (people or institutions) that provide a delivered more than a 10-fold social return on money-back guarantee if outcomes are not investment (Stanworth and Hickman 2022). achieved. Although similar results would not necessarily The Partnership for Economic Inclusion | In Practice | Transforming Economic Inclusion: Government Innovations through Outcomes-Based Financing 13 Introduction Understanding Overview of the Case Studies: Limitations of Conclusion Annex. Principles Outcomes- RBF Landscape Lessons from Outcomes- of and Framework Based Financing Based Financing for Implementing Colombia, India, and Tips for Outcomes-Based and East Africa Mitigating Risks Financing • Program designers and evaluators: People termination clauses for service providers who or institutions that support the design of a underperform and reserve the right to replace program, the contract, and the governance them. arrangements and people monitoring and supporting performance management, THE ROLE OF GOVERNMENTS IN verifying outcomes, and sustaining learning OUTCOMES-BASED FINANCING during a program and after it ends. Governments have served as outcome All agents are expected to contribute to the payers; service providers; and intermediary OBF program; incentivized agents bear the organizations, technical assistance providers, financial costs of the program if the program and investors: fails to deliver the outcomes. In a performance- • Governments as outcome payers: The based contract, service providers bear this most common role for governments in risk. Paying service providers only if results OBF is that of outcome payer (also known are achieved incentivizes them to deliver as outcome funder or commissioner). outcomes. It also implicitly incentivizes them to Governments contract providers to monitor and manage their performance, course- deliver a public service and agree to pay correcting and improving the program during the provider only if specific outcomes implementation if needed. In theory, service are achieved. The INDIGO Impact Bond providers who are paid entirely based on results Dataset (Government Outcomes Lab have the freedom to completely change what n.d.b.) provides a comprehensive overview and how they deliver on the ground, to ensure of impact bond projects around the world. that what they do leads to the desired outcomes. According to the Impact Bond Dataset, A limitation of a performance-based contract a local or central government was an is that not all service providers have the ability outcome payer in 78 percent of all impact to access finance for the upfront capital to run bond projects. Some donor countries have the program until the outcomes have been experimented with providing foreign aid verified or to absorb the loss if outcomes are not in the form of OBF, in order to increase achieved. accountability and focus on outcomes while giving providers on the ground more In impact bonds, an impact investor providing flexibility around service delivery. 2 upfront risk capital bears the financial risk associated with underperformance and is thus • Governments as service providers: the main agent incentivized to mitigate against According to the Impact Bond Dataset, a performance risk. In a social impact guarantee, local government or a public sector entity the guarantor committing the payback bears the was a service provider in just 3 percent of financial risk associated with underperformance Social Impact Bonds. In these cases, an and is the main incentivized agent. In practice, outcome funder (which could be another impact investors often share some of this government or a different unit in the same financial risk with service providers and/or government) pays for outcomes generated establish mechanisms to monitor performance by a government entity. This type of and intervene to help the service provider initiative seeks to support governments improve it. Investors may even put in place to improve the performance of certain services.3 The Partnership for Economic Inclusion | In Practice | Transforming Economic Inclusion: Government Innovations through Outcomes-Based Financing 14 Introduction Understanding Overview of the Case Studies: Limitations of Conclusion Annex. Principles Outcomes- RBF Landscape Lessons from Outcomes- of and Framework Based Financing Based Financing for Implementing Colombia, India, and Tips for Outcomes-Based and East Africa Mitigating Risks Financing • Governments as intermediary organizations, being part of this nascent market. According technical assistance providers, and investors: to the Impact Bond Dataset, a government Governments have searched for ways to agency provided technical assistance or promote the creation or growth of social intermediated between stakeholders in investment markets and incentivize the about 8 percent of Social Impact Bonds. increase in the number of organizations In some cases, government agencies have that provide services under an outcomes- played more than one role. 4 In at least one based model. They have provided technical instance, a government participated in an assistance and intermediary services to impact bond as an investor. 5 organizations that express an interest in The Partnership for Economic Inclusion | In Practice | Transforming Economic Inclusion: Government Innovations through Outcomes-Based Financing 15 Introduction Understanding Overview of the Case Studies: Limitations of Conclusion Annex. Principles Outcomes-Based RBF Landscape Lessons from Outcomes- of and Framework Financing Based Financing for Implementing Colombia, India, and Tips for Outcomes-Based and East Africa Mitigating Risks Financing Overview of the RBF Landscape The Instiglio RBF Database (Instiglio 2018a) is an RBF database established by Instiglio with World Bank support. Last updated in January 2018, it provides the most comprehensive industry overview of the state of the world’s RBF initiatives (of which OBF are a subset). The lack of more recent data and the paucity of evidence on OBF performance in lower-middle-income countries and across sectors are significant limitations. GLOBAL INITIATIVES According to the database, RBF projects based aid projects, and 24 impact bonds (16 implemented between 1993 and 2018 included Development Impact Bonds and 8 Social 76 World Bank Programs-for-Results, 71 Impact Bonds) (figure 3.1). Other types of cash-on-delivery programs, 57 other types of performance-based loans, transfers, and performance-based contracts, 48 output- financing projects accounted for a small share of RBF contracts. Figure 3.1 Number of results-based financing projects, by type, 2018 Source: Instiglio RBF Database, last updated January 2018; accessed September 2024. The Partnership for Economic Inclusion | In Practice | Transforming Economic Inclusion: Government Innovations through Outcomes-Based Financing 16 Introduction Understanding Overview of the Case Studies: Limitations of Conclusion Annex. Principles Outcomes-Based RBF Landscape Lessons from Outcomes- of and Framework Financing Based Financing for Implementing Colombia, India, and Tips for Outcomes-Based and East Africa Mitigating Risks Financing IMPACT BONDS Girls 18,000 students. The Utkrisht Impact Bond supported 13,000 new mothers. LiftEd Impact bonds have been closely tracked since aims to benefit 1 million students by training they were first launched in 2010. 6 Impact teachers and school facilitators in India. The bonds are a type of OBF that includes a Skill Impact Bond offered an employability contractual relationship in which payment program for 50,000 job seekers (see Case is attached to outcome achievements and Studies: Lessons from Colombia, India, and upfront capital is provided by a third party, East Africa). often called an investor. Impact bonds help address a common market failure in East Africa has fewer impact bonds, but they public service delivery: the fact that funders cover a large number of beneficiaries. The typically bear all, or a significant share, of three impact bond projects implemented the performance risk. Performance-based in Kenya have affected 800,000 people. contracts shift some of that risk to service (Government Outcomes Lab n.d.b.) In providers, but they are often unable or 2017, Village Enterprise—an Africa-based unwilling to assume all of the risk. Impact organization focused on poverty graduation— bonds introduce third-party investors to take delivered a poverty graduation program for on this risk. 14,000 service users in Kenya and Uganda (see Case Studies: Lessons from Colombia, India, The INDIGO Impact Bond Dataset, and East Africa).9 maintained by the University of Oxford’s Government Outcomes Lab, (Government Impact bonds have been used to tackle various Outcomes Lab n.d.b.) provides a challenges (figure 3.2). Employment and comprehensive overview of impact bond training is the dominant policy sector, with projects around the world. 7 As of April 93 projects.10,11 Another three projects aim to 2025, it included 315 impact bond projects, reduce poverty. Many of the projects under including 199 in Europe, 38 in North America, the employment and training category have 35 in Asia, 18 in Oceania, 16 in Africa, and the same objectives as economic inclusion 9 in South America. Together, these bonds programs: raised more than $800 million as upfront • The Youth Social Mobility Social Impact capital and engaged with more than 3 million Bond in Nuevo Leon, Mexico, is a social beneficiaries. program that combines training for job seekers, school reintegration services, The list of countries at the forefront of impact and family support for at-risk youth. The bond projects varies depending on the criteria project aims to increase access to more used. The number of projects in low- and economic opportunities, in order to middle-income countries is small (36), but promote social mobility (Catholic Relief these projects tend to be larger (in terms Services 2024). of both upfront investment and number of beneficiaries) than projects in high-income • A Development Impact Bond structured countries. 8 as part of the Finance for Jobs program in the West Bank and Gaza sought to train India has the largest number of people using young job seekers in employer-demanded services delivered under impact bond models. skills. It enrolled 1,380 beneficiaries, 1,087 Projects include Educate Girls, Quality of whom completed training (550 of them Education India, the Utkrisht Impact Bond, women), and facilitated the creation of the Skill Impact Bond, and LiftEd. Quality 658 jobs (270 for women) (World Bank Education India targeted 200,000 and Educate n.d.b.). The Partnership for Economic Inclusion | In Practice | Transforming Economic Inclusion: Government Innovations through Outcomes-Based Financing 17 Introduction Understanding Overview of the Case Studies: Limitations of Conclusion Annex. Principles Outcomes-Based RBF Landscape Lessons from Outcomes- of and Framework Financing Based Financing for Implementing Colombia, India, and Tips for Outcomes-Based and East Africa Mitigating Risks Financing • The Refugee Impact Bond provides households to meet their basic needs. training opportunities and vocational, • The Empleando Futuro Social Impact entrepreneurship, and resilience- Bond in Colombia tackles social inclusion building services for refugees in Jordan challenges across various sectors, including and Lebanon.12 Delivered by the Near specialized employment upskilling East Foundation, it has supported 4,380 programs and healthcare (see Case Studies: refugees and host population trainees and Lessons from Colombia, India, and East provided 3,400 business start-up grants Africa). in Jordan. Women and youth, who are disproportionately affected by migration • The Village Enterprise Development crises, take priority in the selection of Impact Bond in Kenya and Uganda is the participants. The program aims to improve first impact bond to directly support a business survival and the ability of poverty graduation program. Figure 3.2 Distribution of impact bond projects by policy sector, 2025 Source: Government Outcomes Lab n.d.b., accessed April 23, 2025 A key factor limiting the implementation guides on best practices are publicly available, and scale-up of impact bond projects is the but they are often conceptual and not always lack of data on their cost-effectiveness. As based on real-world examples (Elsby et al. these projects are relatively new in developing 2022). countries, understanding of when they are most appropriate, how they should be designed, and under what conditions they produce better results is still limited. Some The Partnership for Economic Inclusion | In Practice | Transforming Economic Inclusion: Government Innovations through Outcomes-Based Financing 18 Introduction Understanding Overview of the Case Studies: Limitations of Conclusion Annex. Principles Outcomes-Based RBF Landscape Lessons from Outcomes- of and Framework Financing Based Financing for Implementing Colombia, India, and Tips for Outcomes-Based and East Africa Mitigating Risks Financing Case Studies: Lessons from Colombia, India, and East Africa The case studies described in this section illustrate the use of impact bonds and performance-based contracts in economic inclusion programs. The case studies from Colombia and India making hindered effectiveness. In 2016, 28 were chosen because of those countries’ percent of the population was poor, and the pioneering roles in OBF and the wealth of level of inequality (a Gini Index of 51.7) was lessons generated from their early adoption of one of the highest in the world (DANE 2017). OBF for employment. The Village Enterprise The government recognized the need for Development Impact Bond in East Africa innovation in public procurement systems was included because it is the first impact and took action. It designed and implemented bond to directly target poverty alleviation; a Social Impact Bond to pilot OBF for it provides a unique perspective on applying inclusive employment in three cities. Based OBF to economic inclusion programs. In on the positive results of the pilot, both the both Colombia and East Africa, stakeholders national and local governments in Colombia initially piloted impact bonds as a learning have since widely adopted the approach. tool before adopting impact bonds and more The government scaled up its use of OBF, streamlined performance-based programs. The which is recognized in Colombia as an case studies highlight lessons on, challenges in, effective strategy for tackling social inclusion and opportunities for leveraging OBF to drive challenges across various sectors, including innovations in economic inclusion at scale. specialized employment upskilling programs and healthcare. COLOMBIA In 2017, the Department for Social Prosperity The government of Colombia has been (DPS)—the national entity responsible for a pioneer and leader in advancing and implementing policies to overcome poverty institutionalizing OBF in Latin America and achieve social equality—sought to and the Caribbean. It has demonstrated innovate with OBF mechanisms to develop the effectiveness of OBF in enhancing the an employment model that would reduce the efficiency of public spending on economic unemployment duration among unemployed inclusion programs. people in poverty and victims of conflict. The programs the DPS was running to improve Colombia invested heavily in employment and employment conditions for these groups of poverty alleviation programs, but challenges people involved multiple public and private such as decentralized service provider service providers, which operated in an incentives and a lack of data-driven decision- uncoordinated manner, using different job The Partnership for Economic Inclusion | In Practice | Transforming Economic Inclusion: Government Innovations through Outcomes-Based Financing 19 Introduction Understanding Overview of the Case Studies: Limitations of Conclusion Annex. Principles Outcomes-Based RBF Landscape Lessons from Outcomes- of and Framework Financing Based Financing for Implementing Colombia, India, and Tips for Outcomes-Based and East Africa Mitigating Risks Financing training practices without accountability for through a strategic alliance with various employment outcomes. public and private stakeholders (SIBs.CO 2023a). Through an intermediary, investors The DPS saw an opportunity to transform provided working capital to service providers its employment procurement practices by (figure 4.1). The outcome payer (a government implementing OBF. It was reluctant to entity) reimbursed this capital, along with an assume the risk of providing the working additional return, contingent upon meeting capital needed to achieve the results, however. the pre-agreed results of placing program For this reason, it decided to implement a participants in a job and having them hold it Social Impact Bond—Empleando Futuro— for at least three months. Figure 4.1 Structure of Colombia’s Empleando Futuro Social Impact Bond Investors 2. Investment 7. Performance-based return 1. Sign OBC contract 6. Payment for results to service providers GoC, IDB Lab, SECO 5. Outcome payments Corporación Inversor Service providers Outcome payers to intermediary Intermediary 4. Verification of results 3. Service provision to Economically vulnerable beneficiaries population Beneficiaries Source: Instiglio’s own elaboration. Note: GoC= government of Colombia; IDB Lab = Inter-American Development Bank Lab; SECO = State Secretariat for Economic Affairs of Switzerland; OBC = outcomes-based contract. The DPS served as an outcome payer alongside Inversor, a nonprofit impact asset manager the Inter-American Development Bank established by the Colombian Stock Exchange, Lab (IDB Lab) and the State Secretariat for acted as the intermediary between investors, Economic Affairs of Switzerland (SECO), service providers, and outcome payers, leveraging both public and private funding managing financial flows and performance to drive innovation. The main investors risk. Multiple service providers were open were Colombian philanthropic foundations to testing a new contracting model. Instiglio (Fundación Corona, Fundación Santo provided expertise in OBF design, and Domingo, and Fundación Bolívar Davivienda), Fundación Corona advised on employment which contributed working capital to programs for vulnerable populations. finance service delivery upfront. Corporación The Partnership for Economic Inclusion | In Practice | Transforming Economic Inclusion: Government Innovations through Outcomes-Based Financing 20 Introduction Understanding Overview of the Case Studies: Limitations of Conclusion Annex. Principles Outcomes-Based RBF Landscape Lessons from Outcomes- of and Framework Financing Based Financing for Implementing Colombia, India, and Tips for Outcomes-Based and East Africa Mitigating Risks Financing The program had two financial resource These experiences convinced the government flows. The first was from outcome payers to of Colombia of the value of OBF, leading investors/intermediaries. All of these resources it to scale its use and develop frameworks were linked to the achievement of job to institutionalize an outcomes-focused placement and retention outcomes. The second approach across public institutions. OBF was was from investors/intermediaries to service included in the 2018–22 and 2022–26 National providers. Part of these payments was tied to Development Plans, and a framework focused the completion of activities, such as capacity- on these mechanisms was published in the building sessions to strengthen technical public policy document CONPES 4067. These skills, and part to job placement and retention policy documents facilitated the creation of results. a public Outcomes Fund, through which the DPS launched two additional Social Impact The Empleando Futuro Social Impact Bond Bonds, both between 2021 and 2023, as well as was implemented between 2017 and 2018. two performance-based contracts to accelerate It delivered impressive results. Of its 2,032 employment outcomes and address challenges participants, 899 secured employment, with related to the Covid-19 pandemic. More than 677 maintaining their jobs for at least three 4,500 of the 11,000 participants secured formal months and 309 for at least six months. An jobs, with over 3,000 of them retaining them impact evaluation, a process evaluation, and for at least three months. a cost-effectiveness analysis found that the program increased participants’ probability The local governments of Bogotá, Cali, and of accessing and holding a formal sector job Bucaramanga have incorporated the logic of (EAFIT University 2020) and was more cost- OBF into their 2024–27 development plans. effective and profitable from a social point of The Mayor’s Office of Bogotá launched an OBF view than traditional employment programs program to improve its employment programs; (SIBs.CO 2023b). The benefits outweighed the the program has facilitated over 28,000 job costs of the program just nine months after the placements. start of the intervention. The program achieved better employment outcomes at a lower cost Use of OBF has also expanded to other sectors. per result and revealed the cost-effectiveness Two programs in Barranquilla seek to improve of the government’s workforce development maternal health outcomes among migrant spending for the first time. These results are women and improve employment results and particularly impressive given that this was skills in the technology sector for vulnerable the first time a new OBF model was tested in populations (Instiglio 2022). Colombia. Cali Progresa con Empleo, a second Social Impact Bond, implemented in Cali between 2019 and 2020, delivered even stronger outcomes, placing 1,030 out of 2,600 participants in jobs, 774 of whom retained the jobs after three months. With an investment comparable to the first Social Impact Bond, it demonstrated that greater cost‑effectiveness could be achieved using the same intervention model. The Partnership for Economic Inclusion | In Practice | Transforming Economic Inclusion: Government Innovations through Outcomes-Based Financing 21 Introduction Understanding Overview of the Case Studies: Limitations of Conclusion Annex. Principles Outcomes-Based RBF Landscape Lessons from Outcomes- of and Framework Financing Based Financing for Implementing Colombia, India, and Tips for Outcomes-Based and East Africa Mitigating Risks Financing INDIA raised upfront risk investment of $4 million; total outcomes funding was $14.4 million Millions of workers in India lost their jobs (Government Outcomes Lab n.d.b.). Three during the Covid-19 pandemic, with youth to six training partners—a mix of nonprofits and women hit hardest (Oxford Policy and for-profits— delivered a range of training Management 2024), in a labor market that courses. The British Asian Trust acted as the already had a significant gender gap. India has transaction manager and convener; the UK’s one of the lowest rates of female participation Foreign, Commonwealth and Development in South Asia as well as a wide gender-based Office was a technical partner. Oxford Policy skills gap (IFC n.d.). Out of every 100 women Management, an independent third-party enrolled in training courses, only about 10 stay assessor, evaluated the agreed-upon outcomes. in post-skilling jobs for three months or more. NSDC and Dalberg Advisors participated Several initiatives and efforts to develop skills as performance managers, regularly assisting and create employment have failed, because training providers with monitoring and of barriers such as low training capacity and capacity building to help them improve and the shortage of skilled workers (Oxford Policy adapt. Management 2024). Launched in 2021, the Skill Impact Bond aimed In response to this challenge, a coalition to reach 50,000 people in India between the of partners came together to launch a ages of 18 and 40 over four years (figure 4.2). It Development Impact Bond that would focused on first time jobseekers with relatively focus not just on the quality of the training low levels of formal education earning less than activities but also on the outcomes of job ₹15,000/month (~$202 estimated exchange rate creation and job retention. As risk investors, in 2021) per person or ₹25,000/month (~$336 the Michael & Susan Dell Foundation and estimated exchange rate in 2021) per household. the National Skill Development Corporation The main goal was for at least 30,150 of the (NSDC) provided upfront working capital. 50,000 participants to retain their jobs for at The Children’s Investment Fund Foundation, least three months, with at least 62 percent of the JSW Foundation, HSBC India, and Dubai them women. Cares were outcome funders. The impact bond The Partnership for Economic Inclusion | In Practice | Transforming Economic Inclusion: Government Innovations through Outcomes-Based Financing 22 Introduction Understanding Overview of the Case Studies: Limitations of Conclusion Annex. Principles Outcomes-Based RBF Landscape Lessons from Outcomes- of and Framework Financing Based Financing for Implementing Colombia, India, and Tips for Outcomes-Based and East Africa Mitigating Risks Financing Figure 4.2 Structure of India’s Skill Impact Bond Launched in November 2021, the Skill Impact Bond brings together a wide range of partners with deep expertise in outcome-based finance, skilling, and gender. Source: British Asian Trust’s elaboration. Provided by Nitya Daryani, British Asian Trust, email message to author, May 31, 2025 Payments were tied to the achievement of the funders for each participant who was certified, following outcomes: placed, and retained. • Participants complete training and become certified as skilled in their trade The project was implemented over eight by third-party assessors in sectors such as cohorts. Each cohort included 4,000–7,000 manufacturing, retail, apparel, and health trainees and ran for six months, during which care. candidates were recruited, counselled, enrolled, trained, and certified by a third party. Once • Participants find a job in the sector of outcomes were verified by a third-party their training within two months of evaluator, the investors paid for the outcomes being certified (to establish attribution of achieved within a cohort. training in securing the job). • Participants retain the job for at least three The targets for each outcome metric in any months after joining. given cohort were determined jointly by the investors, outcome funders, and transaction Payments were based on individual manager at the start of the cohort. Investors participant’s outcomes, in accordance with a did not get paid for participants who did not sliding scale that made progressively higher achieve the outcomes. A series of caps was put payments for higher placement and retention in place to ensure that the program focused on among cohorts. Investors paid the outcome incentivizing retention in jobs and discouraged The Partnership for Economic Inclusion | In Practice | Transforming Economic Inclusion: Government Innovations through Outcomes-Based Financing 23 Introduction Understanding Overview of the Case Studies: Limitations of Conclusion Annex. Principles Outcomes-Based RBF Landscape Lessons from Outcomes- of and Framework Financing Based Financing for Implementing Colombia, India, and Tips for Outcomes-Based and East Africa Mitigating Risks Financing providers from simply enrolling a larger pool of the skilling sector. The fit-for-purpose of candidates, certification of which is also an methodology used statistically significant outcome milestone, to recoup costs without sample surveys with trainees to verify the trying to ensure that they were placed and outcomes and triangulated them with retained. documentary proof, such as hiring letters and salary slips. As of October 2024, the Skill Impact Bond had India is now implementing its seventh fully verified data for four cohorts. Results for the 17,177 women and 6,589 men enrolled in cohort and introducing a tech-based pilot these cohorts included the following: to reduce the costs of monitoring, verifying, • About 89 percent of women and 92 percent and evaluating the project by creating digital of men were certified by a third-party verification mechanisms that interface directly agency in their sector of training. with employers and trainees. This pilot builds on the existing government tech stack, • About 73 percent of women and 81 percent aiming to enhance and integrate with current of men were placed in a job within no systems as a pathway to future mainstream more than 60 days of their certification. adoption. The platform aims to offer end-to- • About 58 percent of women and 63 percent end functionality, including candidate-to- of men were retained in employment for placement mapping, employer verification at least 90 of 120 days from the date they workflows, and tracking of post-placement started the job. outcomes like retention. Along with the three main outcome metrics, EAST AFRICA the project also tracked six-month retention rates. Data for the three that have been verified As traditional development aid approaches to date cohorts show that 43 percent of have struggled to achieve sustainable and women and 61 percent of men were retained scalable poverty reduction in East Africa, in employment for at least 6 out of 12 months several countries have turned to OBF. This case from the date they began their jobs. study explores the implementation of OBF for graduation programs in Kenya, Rwanda, and The government of India did not play the Uganda. role of outcomes funder. The NSDC, a quasi- government entity, was an investor and Graduation programming is designed contributed to the initial working capital. to provide ultra-poor people with a As the apex body that sets quality standards comprehensive set of tools and support to and norms for national skilling programs, it help them “graduate” out of extreme poverty has deep expertise in the sector. Its role as (BRAC 2021). The approach typically involves investor and performance manager allowed a sequenced combination of interventions, it to be closer to the implementation of the including consumption support, livelihood project, create relevant frameworks and tools training, asset transfers, financial literacy, for performance management, and champion financial services, and ongoing mentoring that an outcomes-based framework within the empower participants to achieve sustained self- government. sufficiency and resilience. The evaluation methodology was revised after Graduation programs may be hindered by the first cohort, which acted as a learning weak implementation and contextual factors. cohort, to account for the ground realities By focusing on outcomes such as increased The Partnership for Economic Inclusion | In Practice | Transforming Economic Inclusion: Government Innovations through Outcomes-Based Financing 24 Introduction Understanding Overview of the Case Studies: Limitations of Conclusion Annex. Principles Outcomes-Based RBF Landscape Lessons from Outcomes- of and Framework Financing Based Financing for Implementing Colombia, India, and Tips for Outcomes-Based and East Africa Mitigating Risks Financing household income, improved food security, increases in income. It used a social value and successful business establishment, OBF approach to pricing outcomes, ensuring that increases the chance that graduation programs the price paid for an outcome did not exceed achieve their intended impact. the social benefits generated: $1 of outcome payment was made for every $1 of incremental Village Enterprise (VE) has been a pioneer impact on household income. in implementing OBF in East Africa. Its graduation initiative is designed to Two types of outcome payments were made. empower ultra-poor households through The first was reimbursement of the income a comprehensive package of support that injection that occurred after VE transferred includes training in entrepreneurship and seed capital to households. It was capped at $1.2 financial literacy, financial services, business million (28 percent of total outcome funding) seed capital, and continuous mentorship. VE’s and $150 per household. Funding not used experience reveals the potential of OBF for as seed funding was transferable for use as graduation and economic inclusion programs. outcome payments. It offers valuable lessons for future programs, particularly in rural and marginalized The second type of payment was for sustained communities, where poverty remains additional benefits to households, as verified entrenched. through a third-party RCT for which data collection was scheduled 6–18 months after In 2017, in partnership with international the end of programming, depending on the donors, impact investors, and other experts, VE cohort. The Covid-19 pandemic delayed data launched the VE Development Impact Bond collection, which were collected 6 months to (VE DIB), the first impact bond to directly 2.5 years after the end of programming. A per- target poverty alleviation. A large-scale, household payment cap of $265 was established independent, three-year randomized controlled to motivate extending programming to more trial (RCT) completed in 2017 played an households and to protect outcome payers important role in selecting VE as the service from overpayment because of measurement provider for the DIB. The RCT compared the error. A payment floor of $0 meant that even impact of the VE graduation model with the if the evaluation showed negative impact the impact of delivering cash alone and compared service provider would not owe funds to the each to a control group. The graduation model outcome funders. This provision ensured that outperformed cash-only interventions in both the service provider would not incur debt income and consumption, with a benefit- because of unintended negative consequences cost ratio comparable to the best-performing of programming. graduation pilots run by other organizations (Sedlmayr, Shah, and Sulaiman 2020). VE was responsible for raising the upfront working capital. It raised $2.3 million from nine The program was implemented across seven investors, with individual investments ranging cohorts over a three-year period, with each from $250,000 to $1 million. The lead investors cohort launching four months after the were the Delta Fund and the Bridges Impact previous one. Three donors committed $5.28 Foundation; most remaining investment came million, $4.28 million of which was reserved from family foundations and individuals. to pay for outcomes. VE was obligated to According to the term sheets, an internal rate reach at least 12,660 Kenyan and Ugandan of return (IRR) of more than 7 percent would households directly between November 2017 be evenly split between investors and VE. At and November 2020, with final evaluation the start of the DIB, projections indicated conducted in 2021. The DIB aimed to reward that investors could earn up to 10 percent The Partnership for Economic Inclusion | In Practice | Transforming Economic Inclusion: Government Innovations through Outcomes-Based Financing 25 Introduction Understanding Overview of the Case Studies: Limitations of Conclusion Annex. Principles Outcomes-Based RBF Landscape Lessons from Outcomes- of and Framework Financing Based Financing for Implementing Colombia, India, and Tips for Outcomes-Based and East Africa Mitigating Risks Financing if performance was excellent and payment 5. A third-party evaluator assessed and ceilings were reached. The expected IRR verified the program results and reported was 2–6 percent, depending on whether VE back to the DIB design group for approval replicated its previous RCT results (lower end) before submission to the trustee. or exceeded them by 15 percent (upper end). 6. The trustee paid the service provider in alignment with the reported results and the The VE DIB included nine principal flows and terms of the outcome payment agreement. components: 7. The trustee reported to the outcome payers 1. Outcome payers transferred project funds on the use of funds. to the trustee.13 8. VE repaid the upfront working capital to 2. The trustee signed an outcomes contract its investors, in line with the terms of the with VE. agreements. 3. VE contracted directly with investors for 9. The project manager provided ongoing the working capital needed to implement general project oversight, led the advisory the program. group, and completed a process evaluation. 4. VE delivered its intervention. Development Impact Bond Project Structure Figure 4.3 Structure of the Village Enterprise Development Impact Bond Advisory group Group of outside experts 9 Project manager & process evaluator: Instiglio Outcome payers: Pre-financiers (investors Wellspring, USAID-DIV, and other funders): DFID 1 Provision of Provision of 3 Delta Fund and others funds 2 working capital Regular Signature of Outcome Conditional reporting 7 8 payments Payments Agreement Trustee: Fulfilled conditions Service provider: GDI trigger payments Village Enterprise 6 Evaluated Intervention impact 5 4 outcomes Project oversight and advice Capital providers Outcomes evaluator: Capital recipients IDinsight Verifier Source: Instiglio 2018b. Note: USAID-DIV = United States Agency for International Development–Development Innovation Ventures; DFID = Department for International Development (UK); GDI = Global Development Incubator The Partnership for Economic Inclusion | In Practice | Transforming Economic Inclusion: Government Innovations through Outcomes-Based Financing 26 Introduction Understanding Overview of the Case Studies: Limitations of Conclusion Annex. Principles Outcomes-Based RBF Landscape Lessons from Outcomes- of and Framework Financing Based Financing for Implementing Colombia, India, and Tips for Outcomes-Based and East Africa Mitigating Risks Financing The project exceeded its targets, sustainably Evaluation eventually moved forward by improving the livelihoods of 95,000 East subcontracting data collection to a local Africans and shielding them from the worst institution. economic impacts of the Covid-19 pandemic. • Include provisions for force majeure, The RCT demonstrated positive and sustained or unforeseeable circumstances, in increases in household spending and net worth, contracts. The contracts included standard projecting an increase in lifetime household force majeure clauses and provisions for income of over $21 million—more than four nonevaluation in the context of evaluator times the cost of the project (Njogu-Ndongwe noncompliance; they did not envision et al. 2022). a scenario in which implementation occurred, but evaluation could not be The outbreak of Covid-19 during the project safely completed. Nonevaluation delayed disrupted and delayed the planned evaluations. the negotiation process, as stakeholders The project planned to evaluate and release first had to agree on which parties bore the payment for sustained impact on income risk of delayed or missing payment in the twice. A first endline survey planned for spring context of nonevaluation caused by force 2020 was meant to validate impact among majeure. households that participated in the first four cohorts of implementation; a second endline Other practices can also be helpful: in 2021 was meant to evaluate the other three cohorts. Because of the global shutdowns in • Evaluate success within each context when response to the pandemic, the first evaluation estimating payouts. Outcome payments round had to be delayed; a single combined were maximized and payment ceilings hit, survey was conducted in 2021. yielding an 8.3 percent IRR for investors— more than twice the IRR projected in Several practices can help avoid the disruption initial models based on Ugandan data. This to evaluation that occurred during the higher return was driven by strong results pandemic emerged from the experience: in Kenya, where impact was greater than in Uganda.14 If payments had been calculated • Include more evaluation points separately for each country, investors throughout the project to reduce the would have received the maximum payout impact of disruption to a single evaluation for programming in Kenya, and Uganda point. Increasing the number of evaluation payments would have aligned with initial points can be expensive. Instead, audited projections. These differences underscore administrative data, Big Data, and other the importance of evaluating success innovative approaches to validating impact within each context, to ensure that funders could be used to increase the number of pay appropriately for results, neither evaluation points. For example, projects overpaying nor underpaying. might consider whether administrative data collected by project implementers • Link payment to intermediate rather than could be validated and used for program final results. Where solid links between evaluation purposes. Increasing the project intermediate results and the ultimate size could facilitate larger evaluation impact funders want to achieve exists, budgets. payments should be tied to intermediate results. Graduation programs have been • Partner with local evaluation and/or data significantly researched (J-PAL 2023). collection firms. The lack of a team on Research shows a positive correlation the ground in Uganda delayed evaluation. between business health outcomes and The Partnership for Economic Inclusion | In Practice | Transforming Economic Inclusion: Government Innovations through Outcomes-Based Financing 27 Introduction Understanding Overview of the Case Studies: Limitations of Conclusion Annex. Principles Outcomes-Based RBF Landscape Lessons from Outcomes- of and Framework Financing Based Financing for Implementing Colombia, India, and Tips for Outcomes-Based and East Africa Mitigating Risks Financing increased household income (Njogu- • Ensure that there is clarity on the value Ndongwe et al. 2022). Linking payment added by each stakeholder, to help reduce to business outcomes, which are easier costs. Project costs rose by $772,662 because to attribute to program activities, could of payments to the outcomes evaluator reduce the need for impact evaluation ($478,162), the project manager ($118,585), methods such as RCTs, thereby reducing the trustee ($105,000), and the process the costs of evaluation, and facilitate more evaluator ($70,915) (Village Enterprise rapid feedback loops, which could be used 2022). These payments increased costs by to improve programming. Doing so would $23 per household, causing the total cost also shorten the time it takes for investors to run the full DIB program ($290 per to recoup their funds and/or increase household) to exceed Village Enterprise’s the ability to recycle investment capital, implementation costs ($267 per household). reducing the total amount of investment With an estimated lifetime impact of $1,425 needed and the cost of outcomes for per household, the full DIB program had funders. Similar strategies could be a benefit-cost ratio of 4.92, slightly lower used with outcomes-based employment than the 5.34 for direct implementation. programs that incentivize job placement Reducing intermediary involvement and and retention outcomes, with the ensuring clarity on the value added by each underlying assumption that job retention stakeholder could lower costs (ECORYS leads to higher incomes and improved and FCDO 2022). A comparative analysis livelihoods. against traditional project implementation • Explore alternative approaches to OBF models is needed, as traditional project in developing countries. The idea of the implementation models also often private sector profiting on aid work has incur high overhead costs. Stakeholders been better received in high-income might also consider the potential role of countries, where impact bonds often create technology in reducing costs, as India did documented savings on social spending, in its Skill Impact Bond. than in developing countries. Under the Social Impact Partnerships to Pay for A performance-based project, commissioned Results Act (SIPPRA), for example, the using a milestone-based award, launched in US government allocated $100 million in September 2024 in Rwanda was designed to federal funds to pay for programs only pay VE for successfully collaborating with the after they achieve predetermined outcomes government of Rwanda to scale graduation (US Department of the Treasury 2024). programming. The award was terminated In developing countries, the connection with the dismantling of the U.S. Agency for between aid and social spending savings International Development (USAID). Project is typically less clear, making it more funding had been enabling VE to expand its difficult to justify payment premiums operations into three new districts and train as being offset by government savings. government staff to independently implement Potential alternatives include partnering and scale the program. The project eliminated with investors willing to accept lower or the need for third-party investment by tying no returns or linking some payments to payment to a mix of process, activity, and meaningful process and activity milestones outcome milestones. The commissioner to help reduce reliance on third-party (USAID) developed in-house OBF expertise, working capital. eliminating the need to bring in intermediaries to support commissioning and project The Partnership for Economic Inclusion | In Practice | Transforming Economic Inclusion: Government Innovations through Outcomes-Based Financing 28 Introduction Understanding Overview of the Case Studies: Limitations of Conclusion Annex. Principles Outcomes-Based RBF Landscape Lessons from Outcomes- of and Framework Financing Based Financing for Implementing Colombia, India, and Tips for Outcomes-Based and East Africa Mitigating Risks Financing management. Early payments did not fully while allowing flexibility to adapt activities cover the costs VE would incur to implement as needed. For a financial literacy program, the project; VE was to have used institutional for example, a milestone could be participant reserves to cover some implementation costs. comprehension of the training material. This VE was also required to raise $15 million for milestone is measurable and likely essential full-scale implementation of the project, with to driving behavior change. Incentivizing a combined $750,000 across five milestone attendance may be less meaningful, because payments at risk if it did not raise this some participants may grasp content quickly additional funding. and need less training while others may benefit from additional support. Focusing on This model may not work for nongovernmental milestones that reflect meaningful progress organizations that lack the reserves to fund toward outcomes, rather than mere delivery or upfront program costs and potentially fully participation, strengthens both accountability absorb them if results are not achieved and and flexibility to achieve impact. payments not received. In these contexts, philanthropic bridging grants may be needed. These cases demonstrate OBF’s potential and In setting up such contracts, selecting variety of applications, but they also reveal appropriate milestones is critical. Ideally, a challenges and contextual factors that affect milestone should be measurable and directly success. The next section examines such linked to achieving the intended outcomes limitations and ways to mitigate risks. The Partnership for Economic Inclusion | In Practice | Transforming Economic Inclusion: Government Innovations through Outcomes-Based Financing 29 Introduction Understanding Overview of the Case Studies: Limitations Conclusion Annex. Principles Outcomes-Based RBF Landscape Lessons from of Outcomes- of and Framework Financing Based Financing for Implementing Colombia, India, and Tips for Outcomes-Based and East Africa Mitigating Risks Financing Limitations of Outcomes- Based Financing and Tips for Mitigating Risks OBF can improve accountability, efficiency, and impact in economic inclusion programs. But OBF is not a one-size-fits-all solution: Its effectiveness depends on the enabling environment, institutional capacity, and nature of services being funded. Careful assessment of needs and limitations can help policy makers and funders determine when OBF is the right tool and when alternative mechanisms may be better suited. The following limitations and contextual political transitions, momentum for challenges must be considered when an OBF project may flag. In politically determining whether OBF is the right unstable environments or environments approach for government-led economic in which public finance controls are weak, inclusion programs: traditional grant funding may be better 1. The complexity and rigidity of suited. government systems: Rigid government 3. Regulatory and legal barriers: Countries frameworks can make it difficult to with stringent public financial integrate OBF. The complexity of management rules may face difficulties public contracts, procurement rules, structuring OBF contracts, particularly and financial management systems can when it comes to paying for outcomes result in prolonged negotiations, high retrospectively. OBF may not work for transaction costs, and difficulties adapting governments with limited flexibility to financial models to evolving needs. Where commit to contingent liabilities or make regulatory environments are highly payments conditional on results verified restrictive or administrative capacity is after service delivery. low, OBF may be impractical. 4. Challenges in designing effective payment 2. Political and institutional instability: metrics: OBF requires well-designed OBF mechanisms rely on long-term payment metrics that accurately reflect commitments and institutions. Short results. Poorly defined metrics, overly political cycles and shifting policy complex verification requirements, and priorities therefore pose significant risks. misaligned incentives can undermine Changes in leadership or governance effectiveness. If outcome indicators are structures can deprioritize agreed- too difficult to measure or fail to capture upon initiatives, leaving OBF programs meaningful change, service providers may vulnerable to discontinuation. If be discouraged from participating. Where government champions are lost during data infrastructure is weak, verification The Partnership for Economic Inclusion | In Practice | Transforming Economic Inclusion: Government Innovations through Outcomes-Based Financing 30 Introduction Understanding Overview of the Case Studies: Limitations Conclusion Annex. Principles Outcomes-Based RBF Landscape Lessons from of Outcomes- of and Framework Financing Based Financing for Implementing Colombia, India, and Tips for Outcomes-Based and East Africa Mitigating Risks Financing costs can be prohibitively high, negating POLITICAL CYCLES, THE POLITICAL the efficiency gains OBF seeks to achieve. AGENDA, AND LACK OF BUY-IN FROM 5. Limited readiness of service providers: PROGRAM CHAMPIONS OBF requires service providers that can operate within a results-driven framework. Building coalitions is crucial to sustaining Organizations may lack the ability to programs and increasing their impact. Effective pre-finance service delivery, manage coalitions work at different levels (political, performance-based contracts, or absorb technical, and administrative). Risks emerge financial loss if specified results are not when teams at different levels do not align. achieved. Financial analysis of the service Without strong internal champions to navigate provider is important when defining political cycles and effective technical and a payment function and structure. If administrative teams that understand how the provider market is underdeveloped to navigate the OBF design throughout the or lacks competition, OBF may not be organizational processes, programs can falter. feasible without additional investments in capacity-building and financial support. Three main risks can arise from weak coalitions: 6. High transaction and administrative costs: The involvement of multiple 1. Difficulty adapting to political and intermediaries—outcome evaluators, administrative cycles and changes in performance managers, project managers, the political agenda: All actors involved a trustee—can drive up project costs, in the decision-making process need to possibly offsetting the efficiency gains understand the timeline, budgetary, and OBF aims to achieve. Complex contract administrative constraints that can limit negotiations, legal structuring, and impact their actions. Election cycles, procurement verification processes require significant process timelines, and changes in the upfront investment, which may not be political agenda (among other factors) can justified for smaller-scale projects. Where all affect the quality of program design or transaction costs outweigh potential the achievement of program objectives. benefits, simpler financing mechanisms 2. Lack of political champions: Government- may be more appropriate. led OBF programs must function within the guidelines of public institutions. Public Risks to output-based financing in public servants who procure and guide OBF contracts fall into five categories: programs may not have strong incentives to • Political cycles, the political agenda, and try new approaches; they may tend toward lack of buy-in from program champions the status quo unless they are guided by leadership at the highest possible level of • The regulatory environment the OBF organization. Political champions • Program design at the administrative and technical levels • Service providers are important for program success, but effective adaptation of an OBF mechanism • Operational elements must align with the procurement process of the agency. The presence of strong political This section describes them and proposes champions can counteract the natural strategies for mitigating them. tendency to resist change. The Partnership for Economic Inclusion | In Practice | Transforming Economic Inclusion: Government Innovations through Outcomes-Based Financing 31 Introduction Understanding Overview of the Case Studies: Limitations Conclusion Annex. Principles Outcomes-Based RBF Landscape Lessons from of Outcomes- of and Framework Financing Based Financing for Implementing Colombia, India, and Tips for Outcomes-Based and East Africa Mitigating Risks Financing 3. Failure to identify stakeholders and final THE REGULATORY ENVIRONMENT decision makers: During the program design and the procurement process, it is All interventions must align with both the crucial to identify all stakeholders (internal external regulatory framework at the national and external) that influence the decision- and subnational levels and the internal making process during the program design processes and guidelines of the organization. and the procurement process. Procurement When government budgets are funded by processes are often characterized by the external institutions, those institutions’ intervention of multiple actors at different regulatory requirements must also be met. levels; external actors may authorize multiyear resources that support program The program team must ensure that the OBF implementation. The inclusion of new design respects the regulations of the public actors at advanced steps of the design sector—and, when relevant, funders of the process may result in disruptive changes public sector—and push for the internal of plans. Mapping all stakeholders allows adjustments each organization needs to the technical and administrative teams to develop to maximize the potential of OBF. identify the best time to include actors in This category of risks can be divided into two the design process. groups: macro-regulatory level (external to the organization) and micro-regulatory level (self- Two mitigation strategies can help reduce the imposed by the organization and that can be likelihood and impact of these risks: modified) risks. The main risks at both levels 1. Incorporate political and administrative include the following: cycles into the project and organizational 1. The OBF design does not reflect planning. Every OBF organization has procurement and budget regulations. two levels of planning processes: (a) the Procurement and budget regulations shape organizational level, which sets budgets what can and cannot be done during the and timelines for each program of the design, selection, and implementation agency, and (b) the program level, which phases. An OBF project must take these determines the technical design and the regulations into account. Consider, procurement strategy. Program leads for example, a workforce development should define clear strategies to design program that must be implemented and implement the OBF mechanisms within the fiscal year but plans to issue at the most favorable time for each the last payment in the last month of level of planning (avoiding initiating implementation. This structure could projects toward the end of a government create problems for both the service administration, for example). provider (which may not have sufficient 2. Invest in building relationships and, if time to achieve all the job placement possible, develop a network of political targets) and the public agency, which champions. Building the coalition at both commonly face penalties if it does not the political and administrative levels expend its entire budget by the end of is critical, but the process of developing the fiscal year. If the OBF design focuses the case for OBF may be costly in terms only on ensuring that targets are met of time and effort. Program leads should (participants are placed in jobs), the public leverage results and lessons learned from agency’s high-level regulations that are prior programs and build networks of outside the outcome payer’s manageable advocates from successful programs to control will be overlooked. Payment build buy-in. metrics may need to be adapted so that the The Partnership for Economic Inclusion | In Practice | Transforming Economic Inclusion: Government Innovations through Outcomes-Based Financing 32 Introduction Understanding Overview of the Case Studies: Limitations Conclusion Annex. Principles Outcomes-Based RBF Landscape Lessons from of Outcomes- of and Framework Financing Based Financing for Implementing Colombia, India, and Tips for Outcomes-Based and East Africa Mitigating Risks Financing verification method is developed within be conducive to the use of OBF. See Box the fiscal year or the payment schedule 1 for a discussion of how these challenges adapted to allow for budget reallocations have been navigated within the World if results are not achieved. Identifying the Bank’s procurement processes. For regulatory limits of the agency is essential example, poverty alleviation programs are to defining the limits of the OBF design. usually procured as a fixed set of activities 2. The institutional process is rigid. The the service provider needs to deliver to internal regulatory frameworks that affect achieve the contract objective. Public the procurement and implementation agencies tend to create cost structures that processes need to be identified. In many can be disaggregated by activity, leading to situations, the public agency can adapt rigid structures when procuring programs. its internal procedures to maximize The organization can bring flexibility to the potential of the OBF mechanism. the cost structure in a program so that Additional complications may arise service providers are free to innovate with when using financing from multilateral the best strategy to accomplish the results or regional development banks, as their and the risk of not taking advantage of the procurement frameworks may not always OBF principles because of organizational rigidity does not materialize. Box 1 Navigating the World Bank’s procurement processes for OBF Governments using World Bank funds must follow the procurement regulations and principles, in accordance with the World Bank’s Procurement Framework. The World Bank does not currently provide standardized tools for outcomes-based procurement. The ability to commission services using outcomes-based approaches often depends on the willingness and capacity of local procurement teams to find solutions. Local World Bank procurement teams must also ensure that the government has sufficient procurement capacity and that strong environmental and social safeguards are in place. Commissioning economic inclusion services generally falls under “nonconsulting procurement,” which historically prioritizes price competition for inputs. This emphasis can make local procurement teams hesitate to adapt the process to focus on outcomes. Demonstrating World Bank precedent in using outcomes-based approaches can be helpful. For example, the procurement process adapted for performance-based contracting in the Sehatmandi Project in Afghanistan set a precedent that can be applied in other countries and offers valuable lessons learned (World Bank 2022). In some cases, it is possible to work around traditional procurement processes. In the Finance for Jobs Project in the West Bank and Gaza, which funded a Development Impact Bond (DIB) for skills development and employment, the procurement officer determined that the service commissioning did not qualify as a traditional procurement activity because it was not based on the cost of inputs. This decision allowed the project to operate under grant guidelines rather than procurement rules. As an impact bond, the project also had to navigate investment project financing requirements. Stakeholders looking to use outcomes contracts may face the additional challenge of securing working capital. In the West Bank and Gaza DIB, the outcome funding came through a trust fund that did not restrict the use of other loans, allowing the project to leverage investment project financing and to have investors lend the capital. The Partnership for Economic Inclusion | In Practice | Transforming Economic Inclusion: Government Innovations through Outcomes-Based Financing 33 Introduction Understanding Overview of the Case Studies: Limitations Conclusion Annex. Principles Outcomes-Based RBF Landscape Lessons from of Outcomes- of and Framework Financing Based Financing for Implementing Colombia, India, and Tips for Outcomes-Based and East Africa Mitigating Risks Financing Box 1, continued Certain types of World Bank funding may not allow additional loans. In such cases, a performance-based contract or a social impact guarantee may be more appropriate than an impact bond. These projects may still need working capital. In Ethiopia, the design of a performance-based pilot under an employment project included an “mobilization allowance,” which was to inject early funds that the contractors/providers would repay as they started to achieve outcomes. (The project was ultimately not implemented.) Public agencies could consider the following mechanism would identify the critical mitigation strategies to align the OBF design points that need to be updated. with regulations: 4. Explore multiple contracting options for 1. Seek alternatives to overcome macro-level outcomes-based procurement. Programs barriers. Many countries require annual should consider a range of options for budget execution and incentivize the OBF. Procurement teams may have some spending of all budgets within the fiscal discretion to employ flexible procurement year. To overcome this challenge in the interpretations. Upfront external financing short term, the organization can design is a key feature of impact bonds. Other OBF mechanisms that anticipate results options, such as performance-based within the fiscal year and set payment contracts and social impact guarantees, can structures that allow the verification also address the need for working capital. method to end within a timeframe that allows for budget reallocation if the results PROGRAM DESIGN are not met completely. Projects can also be implemented sequentially, providing Some of the main elements that should be a small amount of funding in the first considered in every design are the payment phase to set up the project followed by metrics, targets, payment structure, implementation funding. verification methods and timelines, and 2. Invest in long-term solutions to lower governance structure. All of these design macro-level barriers. In the long term, the components should be based on the context public sector could create mechanisms and characteristics of each program, including that allow multiyear programs. Countries the available systems and the capacities of both that allow multiyear procurement have the governmental entity and service providers. improved their results. Public organizations can request multiyear budgets. Main sources of risk include the following: 3. Advocate for changes in micro-level 1. Lack of data: Data are the foundation for elements. Organizations can revise their establishing a coherent intervention model, internal procurement and budgetary setting realistic targets, aligning prices with processes to adapt to OBF. Updating market conditions, and informing other internal guidelines and manuals could components. Many OBF mechanisms are allow technical teams to incentivize implemented in data-scarce environments. flexibility for the service providers. They therefore often rely on assumptions Mapping all of the internal procedures or imperfectly gathered data. In such cases, involved in the procurement and it is advisable to conduct pilot studies implementation processes of an OBF to collect more accurate data and gain experience with the interventions, in order The Partnership for Economic Inclusion | In Practice | Transforming Economic Inclusion: Government Innovations through Outcomes-Based Financing 34 Introduction Understanding Overview of the Case Studies: Limitations Conclusion Annex. Principles Outcomes-Based RBF Landscape Lessons from of Outcomes- of and Framework Financing Based Financing for Implementing Colombia, India, and Tips for Outcomes-Based and East Africa Mitigating Risks Financing to refine the design before scaling up. This higher in an OBF because of the dearth approach can be supported by creating of data and evidence on costs related performance management systems that to achieving results rather than merely allow for program adjustments during performing activities. If the percentage implementation. tied to results or the disbursement 2. Misalignment of design components: conditions do not align with the service provider’s financial capacities, service • Payment metrics: Payment metrics providers could run out of cash and, are the main driving factor in an OBF, in a worst-case scenario, have to stop signaling to service providers what is implementing the program. In this most crucial for the project’s success. case, the program would have to either They influence the adjustment of the change service providers or alter the intervention model and the allocation initial conditions of the contracts. In of resources. Selecting incorrect metrics either case, the risk of not achieving creates the wrong incentives, potentially the expected results would rise, the leading to undesirable results or harmful administrative burden would increase, perverse incentives for the project and and the program would suffer a loss of stakeholders. To avoid this problem, it reputation. is crucial to develop a theory of change that captures the intervention model • Verification methods: Some of the and assumptions at each stage. Metrics greatest verification risks are related should be selected by considering their to the reliability, simplicity, and ability alignment with the desired impact, the to attribute results to program efforts. risks they pose for service providers, the To ensure reliability, results should time required to achieve them, and their be verified by unbiased and reliable measurability. sources, such as third-party or official databases and systems. When these • Targets: Targets should be realistic, sources are not available, programs taking into account the capacities sometimes rely on self-reported data, of stakeholders as well as market which can increase the likelihood of conditions. If targets are set too low, errors or fraud. Third-party validation service providers may not need to do audits can help reduce these risks. more than they were already doing. Complicated data collection could lead If targets are set too high, results to administrative overload, increasing may not be achieved, leading to costs for the implementing entity or nondisbursement of resources. delaying disbursements to service • Payment structure: The payment providers. Ensuring clear attribution structure includes all elements related of results is critical. To avoid over- or to the budget, prices, percentage tied underestimating the impact of the to results, and disbursement conditions intervention, verification methods and timelines. One way in which a should account for external factors that misalignment can occur is by setting may have contributed to the outcomes. prices above or below market rates. If Using robust evaluation designs, such prices are too high, public resources as comparison groups or contribution will be misused; if they are set low, analysis, can help strengthen the claims service providers will not respond to of attribution and provide stakeholders the request for proposals. This risk with confidence in the validity of exists in traditional models; it may be results. The Partnership for Economic Inclusion | In Practice | Transforming Economic Inclusion: Government Innovations through Outcomes-Based Financing 35 Introduction Understanding Overview of the Case Studies: Limitations Conclusion Annex. Principles Outcomes-Based RBF Landscape Lessons from of Outcomes- of and Framework Financing Based Financing for Implementing Colombia, India, and Tips for Outcomes-Based and East Africa Mitigating Risks Financing Two cross-cutting mitigation strategies should Risks associated with service providers come from several also be considered: sources: 1. Ensure technical expertise. Programs 1. Inadequate market analysis of service can be designed by engaging external providers: Failure to conduct a thorough experts or developing internal capacity. market analysis can lead to the selection For the former, organizations that of providers that lack the necessary combine OBF technical knowledge, qualifications or experience, leading to sector expertise, and familiarity with substandard service delivery. Relying the country’s context should be selected. on outdated information or incomplete For the latter, an external expert can assessments can create unrealistic provide training and ongoing support to expectations regarding provider address specific challenges during either capabilities, resulting in service disruptions the design or implementation phases. and increased costs. Inadequate analysis of Following implementation of the initial providers can also lead to the contracting design, mechanisms should be established of providers at suboptimal rates or with to transfer this knowledge to future excessive overhead costs, leading to cost teams within the organization to ensure overruns. sustainability. This internal capacity will 2. Lack of capacity: Even if service providers enable the organization to make necessary have experience with the target population adjustments and launch new project and the intervention, they may lack clarity iterations with minimal reliance on on how to track and report results and external expertise. leverage the benefits offered by OBF, 2. Include flexibility clauses in contracts, hindering the achievement of results. and troubleshoot during implementation. 3. Lack of service provider buy-in: A well- Clauses should be included that enable established market of operators ready to modifications in response to unforeseen participate in a call for proposals for an events, such as pandemics or situations OBF program may not exist, because of where the initial assumptions used to lack of knowledge about, experience with, design the OBF prove invalid. They should or even ideological opposition to OBF. facilitate effective course corrections when Operators accustomed to activity-based circumstances threaten the project’s success approaches may resist such models. It may but not be so flexible that they incentivize be necessary to build buy-in at this stage by lower performance from service providers. understanding their views on these types of models, addressing their concerns, and SERVICE PROVIDERS ensuring that they understand the benefits of these models to get their buy-in for The government entity overseeing the OBF implementation. program should conduct a market analysis to assess the number, capacity, capabilities, Mitigation strategies include the following: costs, and track records of potential service 1. Conduct a robust market analysis. A providers, so that realistic expectations for the thorough market analysis can identify the program’s scope and reach can be set. Ideally, most suitable service providers and ensure service providers should possess a fundamental that the OBF program is grounded in its understanding of OBF schemes and have scope and scale to the market conditions demonstrated effectiveness in implementing and the capabilities of the service an OBF project. providers. The analysis should include the following steps: The Partnership for Economic Inclusion | In Practice | Transforming Economic Inclusion: Government Innovations through Outcomes-Based Financing 36 Introduction Understanding Overview of the Case Studies: Limitations Conclusion Annex. Principles Outcomes-Based RBF Landscape Lessons from of Outcomes- of and Framework Financing Based Financing for Implementing Colombia, India, and Tips for Outcomes-Based and East Africa Mitigating Risks Financing • Gather detailed information about questions, address problems or bottlenecks, market operators, including their and adjust the design if necessary. experience, expertise, and track records Providing support fosters a smoother, in relevant areas. trust-based relationship between service • Evaluate potential providers based on providers and the government, facilitating their ability to achieve desired outcomes problem-solving and setting a program up rather than focusing solely on how for success. much they charge. OPERATIONAL ELEMENTS • Assess the costs associated with contracting different providers and For an OBF project to operate effectively, compare them with the potential the governmental entity responsible for benefits they can bring to the program. implementation must exhibit a high level of • Evaluate providers’ capacity and preparation and engagement. An external capabilities to deliver the required organization is typically contracted to design services effectively and efficiently. the project. The government should dedicate 2. Engage with service providers during a team with adequate capacity to engage in the design process. During the design the design process and subsequently manage of the OBF program, the government is the implementation, develop the skills within strongly advised to engage with potential the team to understand and actively engage service providers to gather insights on with the mechanism, and invest in developing their perspective on potential design or adapting data systems to facilitate results components. Doing so provides valuable verification and tracking, thereby reducing feedback throughout the design process. administrative burden. Soliciting feedback also helps familiarize service providers with OBF design and Main risks include the following: implementation and increases buy-in from 1. Lack of capacity and capability by the them before soliciting proposals. government team: Projects often require a 3. Conduct capacity-building sessions for team that includes a mix of technical, legal, service providers. Before and during and financial experts. Such a team is rarely implementation, the government available. A weak team can lead to delays could conduct capacity-building in design, verification, and disbursement workshops and trainings, to ensure that and limit the support provided to service providers understand the OBF operators. Teams may lack the specialized implementation scheme, its components, OBF knowledge required to fully engage and their responsibilities for successful in the design or implementation of the implementation. Doing so helps ensure mechanism. This deficiency can adversely that service providers include robust data- affect decision making and increase the driven reporting and management systems likelihood of errors at various stages to ensure they stay on track for successful of the process. It is not uncommon for implementation. changes to occur between the design phase and contracting because of insufficient 4. Support service providers throughout understanding by the team. program implementation. The government agency overseeing the program should 2. Lack of robust information systems: One establish clear communication channels of the primary functions of data systems through which it can resolve day-to-day in an OBF is to enhance verification by improving reporting efficiency, centralizing The Partnership for Economic Inclusion | In Practice | Transforming Economic Inclusion: Government Innovations through Outcomes-Based Financing 37 Introduction Understanding Overview of the Case Studies: Limitations Conclusion Annex. Principles Outcomes-Based RBF Landscape Lessons from of Outcomes- of and Framework Financing Based Financing for Implementing Colombia, India, and Tips for Outcomes-Based and East Africa Mitigating Risks Financing information, and incorporating internal and evaluation phases. This support will controls to ensure data quality—by, help address questions, facilitate necessary for example, linking to other official design adjustments, and gather insights databases such as the national census. In that will improve future iterations of the the absence of robust data systems capable mechanism. of automating verification processes, 2. Invest in robust information systems. the administrative burden on teams can OBF initiatives should leverage existing become significant. information systems or invest in developing new ones designed for these Mitigation strategies include the following: projects. Establishing or modifying these 1. Integrate capacity building for the team as systems may be expensive, but doing so a pillar of the project. Capacity building would reduce the need for additional should encompass not only the technical personnel during implementation and team directly responsible for design and significantly enhance the program’s implementation but all stakeholders accountability and sustainability. As within the entity who will serve as an alternative to building complex and advisors and decision makers, including costly systems when existing options legal and monitoring teams. Even with are unavailable, programs could seek to these efforts, learning curves may affect automate some processes. For example, the schedule, because of inefficiencies teams could use online files, upload and setbacks during the early stages. It evidence to a shared cloud, and develop is crucial to provide ongoing support relationships with other entities to access throughout the project lifecycle, including necessary data. the design, contracting, implementation, The Partnership for Economic Inclusion | In Practice | Transforming Economic Inclusion: Government Innovations through Outcomes-Based Financing 38 Introduction Understanding Overview of the Case Studies: Limitations of Conclusion Annex. Principles Outcomes-Based RBF Landscape Lessons from Outcomes- of and Framework Financing Based Financing for Implementing Colombia, India, and Tips for Outcomes-Based and East Africa Mitigating Risks Financing Conclusion Outcomes-based financing (OBF) offers a structured approach to linking funding to measurable results. By shifting the focus from inputs to results, it can help drive more effective service delivery, encourage innovation among implementers, and ensure that public resources are directed toward proven interventions. OBF is not a universal solution, however. OBF is most effective when applied Implementation requires strong governance, selectively—by targeting programs with clearly reliable data systems, and an enabling measurable outcomes. In some cases, alternate policy environment—conditions that are funding mechanisms, such as direct grants, often not met. Challenges such as high may be more appropriate. Policy makers transaction costs, the complexity of designing must also guard against the risk of inequity, contracts, and the need for robust outcome ensuring that performance incentives do not verification mechanisms can hinder scalability, inadvertently exclude vulnerable populations. particularly in low-capacity settings. Unintended consequences—such as providers CONDUCTING FURTHER RESEARCH prioritizing easier-to-serve populations or AND EXPLORATION easily achievable outcomes over meaningful results—must be managed. The suitability of There is still much to learn about the OBF depends on outcome funder interest and long-term effectiveness of OBF and best capacity, enabling regulatory frameworks, practices for implementing it. More rigorous stable economic and political contexts, data evaluations are needed to assess the cost- availability, and service provider capacity effectiveness of OBF compared with (Social Finance n.d.). traditional funding models and to identify the conditions under which OBF delivers SCALING OUTCOMES-BASED the greatest value. Further research should FINANCING also explore ways to reduce transaction costs, improve impact measurement, and align OBF For governments and international with broader systems change efforts. development agencies seeking to expand the use of OBF in economic inclusion programs, As governments and development partners strategic policy making is essential. Where continue to explore OBF as a tool for needed, legal and regulatory frameworks expanding economic inclusion, an evidence- should be adapted to facilitate performance- driven approach is critical. Fostering dialogue, based contracting. Capacity-building learning from both successes and failures, and investments are needed to strengthen refining implementation models can make government ability to structure, manage, and OBF a more effective and scalable mechanism evaluate OBF initiatives. Collaboration with for achieving inclusive and sustainable development partners, investors, and civil economic inclusion. society can help create a learning ecosystem for continuous improvement. The Partnership for Economic Inclusion | In Practice | Transforming Economic Inclusion: Government Innovations through Outcomes-Based Financing 39 Introduction Understanding Overview of the Case Studies: Limitations of Conclusion Annex. Principles Outcomes-Based RBF Landscape Lessons from Outcomes- of and Framework Financing Based Financing for Implementing Colombia, India, and Tips for Outcomes-Based and East Africa Mitigating Risks Financing Annex. Principles of and Framework for Implementing Outcomes-Based Financing Four core principles—measurability, accountability, incentivization, and flexibility—are key to designing and implementing OBF mechanisms. This annex provides practical guidance on how to incorporate these principles in the design and implementation of OBF instruments. MEASURABILITY performance management and monitoring strategies (figure A.1). Articulating the At the heart of OBF is the need to define assumptions generates clarity about who and measure outcomes in a meaningful and is expected to do what; identifies possible reliable way. The theory of change, or logic enablers of and barriers to moving toward framework, plays a critical role in this process the outcomes; and indicates who should be by articulating how resources (inputs) will incentivized, which metrics and indicators be used to produce outputs that ultimately should be considered, and how a strong drive desired outcomes. A well-designed performance management and monitoring theory of change clarifies key assumptions, and evaluation system should be designed. identifies enablers and barriers, and informs Figure A.1 Theory of change of outcomes-based financing Inputs Activities Outputs Outcomes To ensure measurability, outcome participants in the program. The aim is to specifications should consider the following: minimize inclusion of only easy-to-help • Definition of eligible participants/ participants. beneficiaries: Practitioners should identify • Alignment of outcomes with policy participant characteristics, especially objectives: Timelines for tracking how far participants are from the desired outcomes need to be set. Even when it is outcomes and whether it makes sense to necessary to work with shorter-term proxy be specific about the “distance to travel” indicators, practitioners need to reflect on to achieve the outcomes. It is useful to the logical links between activity, outputs, consider an independent referral or and outcomes. identification mechanism to include The Partnership for Economic Inclusion | In Practice | Transforming Economic Inclusion: Government Innovations through Outcomes-Based Financing 40 Introduction Understanding Overview of the Case Studies: Limitations of Conclusion Annex. Principles Outcomes-Based RBF Landscape Lessons from Outcomes- of and Framework Financing Based Financing for Implementing Colombia, India, and Tips for Outcomes-Based and East Africa Mitigating Risks Financing • Accurate price-setting of attributable • Outcomes metrics or targets indicate the outcomes: It is critical to include a level of achievement that will trigger an sufficiently long outcome tracking period outcome payment (e.g., an improvement of and ensure that outcomes would not have five points in a test score over a semester). occurred anyway. Outcome payers should engage with all parties throughout the In practice, outcomes contracts often include process of pricing outcomes, to strike a a mix of outcomes and outputs, as linking balance between the value to the outcome all payments solely to outcomes may not be payer, the cost of delivering the service to feasible or affordable, because of either the providers, and the distribution of financial long period required to achieve outcomes or risk (Fitzgerald et al. 2019). the challenge of reliably measuring output. Where it is not practical to align all aspects In many cases, proxy measures are used. of the outcomes specification framework, it is High-quality proxies align closely with the useful for the outcome payer in particular to desired outcome but are easier to measure. For identify the strengths and weakness of each example, where measuring household income is outcome to ensure that potential unintended difficult, researchers often approximate income effects or opportunistic behaviors are by measuring consumption and assets, two identified and measures established to avoid indicators of household-level income use. Lead, them. or progression, measures—outputs or outcomes that show progress toward long-term desired The articulation of outcomes and indicators is outcomes—are often used when outcomes often referred to as the outcomes framework. It take time to materialize. The key risk of using consists of three elements: progression measures is the potential reduction • Outcomes are the desired change for an in incentives to achieve the primary outcomes individual or group as a result of a service if they trigger significant payments. or intervention (e.g., improved learning). Checklists can help practitioners address some • Outcome measures or indicators reveal of these challenges (boxes A.1, A.2, and A.3). whether an outcome has been achieved (e.g., test scores). Box A.1 Checklist for identifying outcomes • Can you narrow the focus to identify one primary outcome and several secondary outcomes? • Do these outcomes reflect the priorities of service users? Has this connection been validated? • Do the outcomes align with the policy objectives and overall goals of the project, including the social problem the contract aims to address as well as the financial benefits it will bring? • If the outcomes are difficult to measure directly, can proxy outcomes be used? • Do outcomes need to be set for which progression can be shown, or will a binary (yes/no) measure suffice? • Are the outcomes achievable through social interventions? • Are the outcomes acceptable to all stakeholders? The Partnership for Economic Inclusion | In Practice | Transforming Economic Inclusion: Government Innovations through Outcomes-Based Financing 41 Introduction Understanding Overview of the Case Studies: Limitations of Conclusion Annex. Principles Outcomes-Based RBF Landscape Lessons from Outcomes- of and Framework Financing Based Financing for Implementing Colombia, India, and Tips for Outcomes-Based and East Africa Mitigating Risks Financing Choosing or developing outcome measures often not affordable. Other parties may collect requires a plan for collecting data. It may be data but may be unable or unwilling to share burdensome for service providers to gather them. data, and a good data management system is Box A.2 Checklist for measuring outcomes • What data will be used to measure outcomes? Are data available from other sources (e.g., internal performance management data, school attendance registers) that can be used to measure outcomes? • If data are not available, is significant investment needed to create new collection processes and systems? • Who will be responsible for collecting the data? Does that entity have the capacity to do so? • If a third party is collecting data, do the data need to be independently checked and validated? • Will outcomes be measured for the individual or across the program? Outcome metrics and rate cards (the list of initially designed the outcome metrics to pay outcome metrics with the associated payment for a reduction in unintended pregnancies schedule) should be developed taking into among adolescents. However, the duration account existing metrics used in the same of the Development Impact Bond was only sector and/or country and that are well 18 months, making it difficult to track such understood by all stakeholders. This shared a long-term outcome. Stakeholders therefore understanding and ability to link data to decided to pay for the uptake of contraceptive existing datasets will facilitate learning across methods, which they considered a good the local and broader OBF ecosystem. proxy for a long-term reduction in teenage pregnancies (Velardi, Outes, and Airoldi 2022). The work done by the In Their Hands team in Kenya to set up an outcome framework When setting outcome targets in an OBF illustrates these tensions. In Their Hands model, it is important to balance ambition issued the world’s first Development Impact with feasibility, ensuring that targets drive Bond to fund sexual and reproductive health meaningful impact without creating perverse services for adolescent girls. Stakeholders incentives (box A.3). Box A.3 Checklist for setting outcome targets • Is there evidence about the level of performance that can be reasonably achieved? • Would stretch targets be appropriate? • Have providers and social investors been involved in the decision-making process? • Do the outcome measures avoid or mitigate perverse incentives? • Have you considered any uncontrolled external factors that have the potential to impact the outcomes measurement? The Partnership for Economic Inclusion | In Practice | Transforming Economic Inclusion: Government Innovations through Outcomes-Based Financing 42 Introduction Understanding Overview of the Case Studies: Limitations of Conclusion Annex. Principles Outcomes-Based RBF Landscape Lessons from Outcomes- of and Framework Financing Based Financing for Implementing Colombia, India, and Tips for Outcomes-Based and East Africa Mitigating Risks Financing ACCOUNTABILITY made, the monitoring system may also need to change. Stakeholders involved in performance OBF aims to enhance accountability by tying management should regularly assess whether financial payments to verified results, fostering the monitoring system is providing useful a culture of responsibility and transparency. insights and consider how it could be Stakeholders often rely on monitoring and improved. evaluation (M&E) systems to monitor progress and inform implementation. M&E systems For payment triggers, the key data collected are must balance the need for rigorous outcome the outcome metrics discussed above. Although measurement with practical considerations these metrics are clearly specified in the OBF of data collection, cost, and operational contract, they may be subject to adjustment. feasibility. Establishing a robust and transparent process for handling these changes is essential to Collecting data can serve multiple purposes: maintain the integrity of the contract. • It can help practitioners manage performance during implementation and A good example of effective program course-correct if necessary. monitoring and management is the Kirklees Better Outcomes Partnership, in the United • It can trigger payments once the desired Kingdom, which aims to improve outcomes outcomes have been generated and for adults with housing-related support validated. needs in education, training, employment, • It can generate learning during and after accommodation, health, and well-being. An the program. initial rate card was developed before the launch of the Social Impact Bond in 2019 As data gathering is costly and time and used until September 2020. Early in its consuming, it is good practice to reflect on the implementation, stakeholders decided to create use of the data before investing in its collection a new rate card for outcome metrics. To ensure and, whenever possible, prioritize data that can an inclusive redesign process, the project be used for more than one purpose. directors hosted “change panels” with provider managers and frontline staff, allowing them A strong starting point for designing an M&E to fully understand the challenges providers mechanism is the theory of change, along with faced with the original rate card (Rosenbach a clear, shared understanding of the expected et al. 2023). This example showed the value outcomes. Teams should then work backward of flexibility in the M&E process, which can through the theory of change to consider the acknowledge upfront the need to improve and inputs required, bearing in mind not only the amend the rate card over time, if necessary, anticipated changes in activities and outputs through a transparent due process. but, more importantly, the behavioral changes underpinning the theory of change. To generate lessons throughout a program and after it ends, it can be helpful to work with For effective performance monitoring and learning partners who are appointed to support management, data must be timely and the learning process across stakeholders, and sufficiently sensitive to changes in practice independent evaluators. Evaluations can be on the ground. In OBF, significant changes formative, supporting improvements during in the services delivered can occur during the implementation or a future replication and contract. Adaptability is one of the appealing adaptation. Formative evaluations take a step features of OBF. If changes to a program are back from daily activities to identify broader The Partnership for Economic Inclusion | In Practice | Transforming Economic Inclusion: Government Innovations through Outcomes-Based Financing 43 Introduction Understanding Overview of the Case Studies: Limitations of Conclusion Annex. Principles Outcomes-Based RBF Landscape Lessons from Outcomes- of and Framework Financing Based Financing for Implementing Colombia, India, and Tips for Outcomes-Based and East Africa Mitigating Risks Financing patterns. To maximize their effectiveness, it is in need. A large body of evidence documents essential to involve both the parties delivering the unintended effects of welfare-to-work the program and any other actors that might programs in several countries in which support benefit from the insights gained. was offered to people who were easier to place in a job. The literature identifies strategies to Evaluations can also be summative, focused counteract unintended consequences through on proving what worked and what did not the careful design of incentives. In the case of after a project or program ends. Summative welfare-to-work programs, for instance, higher evaluations often assess a program’s impact, OBF payments could be paid for participants demonstrating that observed changes are who travelled farther. attributable to the program and would not have occurred otherwise. They require the Designing incentives requires specifying identification of a counterfactual (a credible desired outcomes for the incentivized agent estimate of what would have happened and putting in place risk-sharing arrangements to participants had the program not been in the event of underperformance.15 offered). The gold standard for impact Considerations for incentive structures include evaluation is the randomized controlled trial the following: (RCT), or experimental impact evaluation, • Risk-sharing arrangements should ensure in which participants are randomly assigned that service providers; outcome payers; to either the program or a standard practice and, where applicable, investors, share group. When random allocation is not feasible responsibility for program success. or ethically acceptable, statistical techniques can be used to estimate a counterfactual. • Independent referral mechanisms or Evaluations that estimate a counterfactual tiered payment structures should be used are known as quasi-experimental impact to encourage inclusive participation and evaluations. prevent gaming or adverse selection. • All involved parties should be involved Impact evaluations aim to determine whether a in outcome pricing discussions, to ensure program worked, for whom, and at what cost; fairness and sustainability. they do not explain why a program worked (or did not). Process evaluations address this FLEXIBILITY question by focusing on “why, how, when, and for whom” the program had (or did not have) One of the strengths of OBF is its ability an impact. They rely heavily on the theory of to support adaptation over time. Unlike change and its assumption to explore what traditional funding models, where activities actually happens on the ground and identify and inputs are predefined, OBF grants the behaviors that drive change. providers the flexibility to innovate and adjust their approach based on real-time learning and INCENTIVIZATION data. Designing the incentive structure is an iterative Flexibility features in OBF include the process and a balancing act. The aim is to put following: in place incentives to change behavior in the • Adaptive management allows program desired direction without distorting it. Poorly implementers to refine their strategies designed incentives may lead to unintended based on performance data and contextual effects and opportunistic behaviors, such as shifts. including only participants that would easily achieve the outcomes and excluding those most • Outcomes-focused delivery enables The Partnership for Economic Inclusion | In Practice | Transforming Economic Inclusion: Government Innovations through Outcomes-Based Financing 44 Introduction Understanding Overview of the Case Studies: Limitations of Conclusion Annex. Principles Outcomes-Based RBF Landscape Lessons from Outcomes- of and Framework Financing Based Financing for Implementing Colombia, India, and Tips for Outcomes-Based and East Africa Mitigating Risks Financing providers to determine the most effective • Local conditions, economic shifts, and interventions to achieve results, fostering unforeseen disruptions (within reason) can innovation and efficiency. be integrated into program adjustments. • Continuous M&E creates opportunities • Ongoing dialogue among funders, for course correction, helping ensure that implementers, and beneficiaries creates programs remain responsive to emerging a feedback loop that enhances the challenges and participant needs. effectiveness of service delivery. The Partnership for Economic Inclusion | In Practice | Transforming Economic Inclusion: Government Innovations through Outcomes-Based Financing 45 Notes 1. The annex provides a detailed explanation of these principles. 2. In 2017, the International Committee of the Red Cross Programme for Humanitarian Im- pact Investment sought to expand and improve the efficiency of physical rehabilitation services by providing high-quality, well-targeted services for people with physical disabilities in Mali, Nigeria, and the Democratic Republic of Congo. The outcome payers for the program were the UK government (through the Foreign, Commonwealth and Development Office [FCDO]); the governments of Switzerland, Belgium, and Italy; and the La Caixa Foundation (a not-for-profit banking foundation based in Spain). 3. A partnership in Holbæk Municipality in Denmark delivers services for people with mental health issues trying to find jobs. The outcome payer for this project is Holbaek Municipality while the services are provided by another unit within Holbaek Municipality. Investment comes from Den Sociale Investeringsfond (The Danish Social Investment Fund) (Government Out- comes Lab. n.d.a.). This type of arrangement has not been tried in developing countries. 4. Portugal’s Cuidar de quem cuida (Taking Care of Those Who Care) was funded by a social impact bond in which the Central Administration for the Health System played two roles at the same time. It paid for outcomes and provided intermediary services to ensure the proper imple- mentation of a support intervention by informal caregivers for people with dementia. 5. In the Skill Impact Bond in India (see case study), the National Skill Development Corpora- tion (NSDC) provided upfront capital. The NSDC is a not-for-profit public limited company, in which the Indian government holds 49 percent of its shared capital and the private sector holds the remaining 51 percent. It often adopts public-private partnership models under the Ministry of Skill Development & Entrepreneurship. 6. This focus on impact bonds reflects strong stakeholder interest in studying the model; it does not necessarily represent industry or author perspectives on their relative importance compared with other outcomes-based approaches to paying for public service delivery 7. The Government Outcomes Lab co-created this dataset with practitioners, who were invited to share data and learnings from their own projects. The community of practice keeps the data- set up to date, making it the world’s most comprehensive source of information on impact bond projects (Carter et al. 2024). 8. The project with the largest upfront investment is the Wildlife Conservation Bond. Pulling $150 million from impact investors, this project aims to enhance conservation activities to max- imize net rhino growth rates in South Africa. The project with the largest number of beneficia- ries is the LiftEd project in India, which seeks to improve the lives of 1 million students. LiftEd supports education providers who train state governments and school facilitators, building their capacity to improve foundational learning levels for children in grades 1–3. 9. In 2020, Tiko, a nongovernmental organization that provides access to sexual and reproduc- tive health services, developed a digital platform to increase the uptake of sexual and repro- The Partnership for Economic Inclusion | In Practice | Transforming Economic Inclusion: Government Innovations through Outcomes-Based Financing 46 Notes, continued ductive health services by adolescent girls in Kenya. Three years later, it scaled up the original project into a larger intervention that included access to sexual and reproductive health services and mental health services. The first pilot offered the intervention to 362,000 girls; the scaled-up version is being offered to 425,000 girls. 10. This distribution is consistent with the distribution of RBF projects more generally. Between 2006 and 2017, at least 20 active labor market programs in low-income countries used RBF and/ or OBF, at a total cost of $7.6 billion (Instiglio 2018a; GPRBA 2021). 11. Other projects operate across a range of policy areas. They include 53 in health, 51 in educa- tion, 47 in child and family welfare, 38 in homelessness, 19 in criminal justice, 11 in agriculture and environment, and 3 in poverty reduction (Government Outcomes Lab n.d.b., accessed April 2025). 12. For more information on the Refugee Impact Bond, see https://www.refugeeimpactbond. org/. 13. The United States Agency for International Development–Development Innovation Ventures award was technically to Instiglio, the project manager. DIV transferred its funding to Instiglio, which then transferred it to the trustee. 14. There were several hypothesized reasons for the larger treatment effects observed in Kenya. The Kenyan study sample was wealthier at baseline compared to Uganda’s. COVID-19 lock- downs were more severe in Uganda, and data collection there was interrupted, with households surveyed after the lockdown showing lower average consumption effects than those surveyed before. Additionally, Kenyan participants may have had better access to markets than their Ugandan counterparts (Njogu-Ndongwe et al. 2022). 15. Financial risk is not the only risk. The biggest risk is borne by program participants who do not achieve the desired outcomes. Outcome payers and service providers also bear a reputational risk for failing to effect change. 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Washington, D.C.: World Bank Group. https://documentsinternal.worldbank.org/search/34031402. The Partnership for Economic Inclusion | In Practice | Transforming Economic Inclusion: Government Innovations through Outcomes-Based Financing 51 The Partnership for Economic Inclusion (PEI) is a global partnership with a mission to support the adoption of national economic inclusion programs that increase the earnings and assets of extremely poor and vulnerable households. PEI brings together global stakeholders to catalyze country-level innovation, advance innovation and learning, and share global knowledge. PEI is hosted by the Social Protection Global Practice of the World Bank. In Practice The Partnership for Economic Inclusion | In Practice | Transforming Economic Inclusion: Government Innovations through Outcomes-Based Financing