What is Outcomes Based Finance ?

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What is Outcomes Based Finance and Why is it important?

On its current course, the world will not come close to achieving the Sustainable Development Goals (“SDGs) by 2030. Even before the pandemic, global development finance, philanthropic and public spending fell short of the SDGs, with an estimated USD 2.5 trillion funding gap per annum in developing countries alone.

With public budgets facing even increasing pressure amid an unprecedented health, economic and social crisis, there is a growing focus on financial innovations to help mobilize new sources of funding, stimulate innovation, forge new partnerships between the public and private and sector.

Emerging financing instruments that tie funding to results – “outcomes-based finance” - are playing a growing role in efforts to improve the impact of development programs targeting hard-to-reach SDGs. They enable governments and donors to pay based on outcomes and pull in private investors to share in the financing risk of delivering development results – driving accountability and innovation in sectors where governments have deep knowledge and capacity to commission services but have struggled to achieve SDG impact.

Outcomes Based Finance

Key reasons for their efficacy include the results and accountability that accrue when development objectives are grounded on robust data and empirics, as well as a virtuous circle of learning-by-doing and continuous improvement.

Increased Focus on Outcomes

Drive Performance Management

Stimulate Investment

Incentivize Collaboration

Increased Flexibility & Innovation

Reduces Risk for Donors & Governments

Outcomes-based contracts - like any other contract - are only as good as their terms.

There are many types of outcomes-based financing and contracting mechanisms used by governments and the private sector. In all instances, these mechanisms pay some or all of program funding against the achievement of pre-defined results. These types of contracts can vary significantly in terms of:

The amount of funding tied to results

Contracts will differ based on how much funding is contingent on meeting outcomes-based criteria.

The specific outcomes paid for

Contracts may focus on results from end beneficiary outcomes, or alternatively, on service provider and government outputs.

Who is incentivized

Most outcomes based finance contracts pay ex-post for results, which creates important incentives to ensure results are achieved. Some contracts incentivize partner governments while others focus incentives on private sector stakeholders, including service providers and investors.

Examples of Private Sector Focused Outcomes Based Finance Models

Payment-by-Results

Donors incentivize partner governments and service providers to deliver effective programs by making payments after the achievement of pre-agreed results

Impact-linked Finance

Financial solutions for market-based organizations that provide a financial reward for social impact, from incentive payments to reduced interest rates, such as Social Success Notes and Social Impact Incentives

Impact Bonds

A form of a Payments-by-Results contract which involves external capital – investors finance projects and are paid back by donors or governments for outcomes that service providers achieve

Outcomes Funds

Structure used to contract or fund a broader series of interventions and services, in parallel or consecutively – a programmatic approach

See the Table

For more information on active projects, see www.levoca.org

About Levoca
Levoca is a leading global advisory firm and impact intermediary focused on catalyzing innovative finance for sustainable development and the realization of human potential. Levoca has extensive expertise across the spectrum of transaction design, impact verification, technical assistance for enhancing the impact and investment readiness of social enterprises. Levoca is also a center for excellence and a knowledge sharing platform and has actively played a role in establishing and managing market-building platforms and collaborative initiatives, such as the Outcomes Finance Alliance and the Outcomes Accelerator.

What is Outcomes Based Finance ?

Table Of Content