The Power of Results-Based Funding for Poverty Alleviation: What We Learned from Africa’s First-Ever Development Impact Bond – and What’s Next
Several years ago, before the pandemic, we wrote in NextBillion about the potential for an innovative financing model – development impact bonds – to reduce poverty and make aid more effective. We asked that critics give these bonds a chance to walk before they run. Now, the results from the first development impact bond (DIB) in Africa are in – and despite disruptions from the pandemic, they are positive. In this article, we will talk about the results, what they mean for the sector, and how we see outcomes-based financing evolving to enable funders, investors, implementers and governments to make greater progress in reaching Sustainable Development Goal 1 of eradicating extreme poverty by 2030.
‘Poverty Graduation’: An Evidence-Based Approach To Addressing Extreme Poverty
Village Enterprise implements an evidence-based “poverty graduation” program that is recognized as a cost-effective way to alleviate poverty for rural households. The program offers training, mentoring and a cash grant to start a small business – as well as access to a business saving group – to first-time entrepreneurs living on less than US $1.90 a day. To date, Village Enterprise has supported entrepreneurs in starting over 66,000 businesses, trained over 240,000 first-time entrepreneurs (over 80% of them women), and transformed the lives of over 1,413,000 people in rural Africa, including over 1,018,000 women and children.
A 2013-2015 randomized evaluation of the model conducted by Innovations for Poverty Action in rural Uganda found that it reduced poverty, improved subjective well-being and had an impressive cost-benefit ratio, particularly compared to other poverty-graduation programs evaluated at scale. Based on the results of the evaluation, Village Enterprise was selected to participate in the first-ever development impact bond for poverty alleviation in Africa.
Paying for Results
Village Enterprise and Instiglio, a pioneer in results-based financing (RBF), partnered with the world’s two largest development agencies, the U.S. Agency For International Development’s Development Innovation Ventures (USAID DIV) and the U.K. Foreign, Commonwealth & Development Office (FCDO) to launch the Village Enterprise Development Impact Bond. Nine philanthropic investors, including the Delta Fund, a donor-advised fund focused on poverty alleviation and justice reform (where Brian is co-founder), put up $2.3 million as working capital for the project and took on the performance risk. Through the DIB, Village Enterprise aimed to finance a poverty graduation program that would launch 4,200+ sustainable microenterprises over two years, and reduce poverty for 13,800+ households in rural Kenya and Uganda.
In this payment-for-results model, USAID DIV and FCDO, along with an anonymous funder, agreed to pay back Village Enterprise and its investors the original investment plus a return, if they achieved the agreed-upon outcomes of increased income, savings and assets. The evaluator, IDinsight, measured impact with a randomized controlled trial (RCT), Instiglio acted as the project manager and process evaluator, and the Global Development Incubator, as the trustee of the outcome fund, oversaw the contracting and financial management.
Problem-Solving to Address Pandemic Challenges
The DIB and its program implementation launched in November 2017. A total of over 14,100 ultra-poor households were divided into seven cohorts, which were offered the one-year program at different times, with the last cohort starting in January 2020. The first round of data collection to measure the program’s impact on the first four cohorts was scheduled for April-May 2020. However, in March of 2020, when the world locked down in the face of the pandemic, Village Enterprise had to temporarily suspend its in-person work with communities. At that point, it was unclear if the project could move forward – both with data collection on the first four cohorts, and with program implementation for the remaining three.
Fortunately, the program’s team and participants were able to adapt. Over a period of months, Village Enterprise innovated and pivoted to deliver its programming remotely, finding ways to keep up the relationships it had built with the entrepreneurs. For example, business mentors like David Eseru provided regular mentorship to entrepreneurs by phone. Together, the program’s staff and its participating entrepreneurs brainstormed ideas to continue their efforts, despite the circumstances.
By mid-2021, six months to two and a half years after the program implementation had ended for the seven separate cohorts, IDinsight was able to make it into the field, using COVID-safe protocols to collect high-quality data.
Key Findings: Fostering Resilience for the Most Vulnerable During the Pandemic
Despite multiple interruptions to the program due to the pandemic, the Village Enterprise team significantly surpassed the goals of the project and supported the launch of 4,766 small businesses, trained over 14,100 first-time entrepreneurs and formed 481 business savings groups. The program generated sustained increases in spending, assets and savings for participating households, improving the livelihoods of an estimated 95,000 people living in extreme poverty, including 70,000 women and children.
The RCT results, released by IDinsight in March 2022, revealed that the program shielded extremely poor households from the worst of the pandemic and led to sustained positive impact on the two key measures of poverty – i.e., consumption and assets. These results exceeded the program’s targets. Importantly, these increases in consumption and assets were sustained (for over 30 months for the first cohort households) and, according to IDInsight, will result in $21 million in estimated lifetime benefits for participating households – more than four times the cost of the project.
As impressive as these program-wide benefits are, the individual stories behind this impact are even more inspiring. One program participant, Agnes Alepo, went from having no economic means before the program, to owning not one but multiple businesses in just one year. With the support of her Village Enterprise business mentor, she was able to pivot during the pandemic into making a popular form of fried bread, giving her an income of UGX 200,000 (US $57) per month. She was also able to put away more than UGX 31,000 (US $9) per week into her local business savings group. One year later, she had saved up UGX 1.4M (US $400). With the savings she accumulated, she was able to purchase a cow – something a woman rarely does in her village – as well as chickens and turkeys.
While the extent of Alepo’s formal education stops at the primary school level, her four children now talk of going to university one day. In spite of the ongoing COVID-19 pandemic, she feels confident that her newfound skills and resilience will allow her to handle whatever life throws at her and her family.
The Transformational Impact of a Results-Based Approach
In addition to the quantitative findings, Village Enterprise witnessed and experienced a united focus on results and a commitment to the project that was unlike anything they’d seen before, because of the powerful way it incentivized all parties towards impact.
Village Enterprise staff called the project “transformational,” and talked about how it enhanced their motivation and teamwork as everyone worked together to get the targeted results. Nancy Chumo, Kenya Country Director, explained that the project motivated and energized her team and led to the introduction of new technologies for training, digital cash transfers and mentoring. “We became intentional in our program delivery and aware of what was expected of us in every step of the program implementation, while all departments’ interest was rallied towards DIB success,” Chumo said. “It led to improvement of techniques, equipment, resources and systems.”
The focus on results also kept funders and investors engaged with the program despite the unprecedented challenges and uncertainties of the pandemic.
A Model for the Future: Bringing Results-Based Funding to Scale
Extreme poverty causes immense human suffering, but it is at risk of getting overlooked in the face of other acute and attention-grabbing global crises. The World Bank estimates that the combined crises of the last two years – the pandemic, rising prices and now the war in Ukraine – will lead to an additional 75 to 95 million people in extreme poverty in 2022. Meanwhile, progress in reaching the Sustainable Development Goals has fallen short, with developing countries facing an estimated $4.2 trillion annual financing gap. Results-based funding – including DIBs and other models – offers a way to ensure that limited aid dollars make a real impact on the lives of the poorest.
Does this mean the DIB model is perfect? No. But as DIBs and other RBF instruments evolve, they can become easier to use, and eventually – we hope – ubiquitous. The questions we are asking, and the design features we are exploring, involve simplifying, streamlining and scaling the model. For instance, we’re asking and starting to answer the following questions:
- How can we learn more quickly if services are working? What can we do to create faster, yet still reliable, feedback – and repayment – loops? When a program like Village Enterprise’s has already demonstrated impact in a rigorous trial (in this case, twice), we propose using “proxy” indicators of impact (for example, business outcomes) to provide quicker feedback loops and cheaper outcomes measurement.
- What is the right balance of power and risk between implementing partners, funders and investors? How do we ensure that certain partners aren’t taking on too much risk when unexpected events cause disruptions? In the case of the Village Enterprise DIB, the service provider took on a large portion of the risk and administrative burden when the pandemic hit. Going forward, we recommend a governance structure with a balanced representation of stakeholders involved, including pre-financiers (investors or grantors), outcome payers, implementers and other intermediaries.
- How can we increase the scalability and replicability of these projects? Can RBF be integrated into government programs to ensure impact at scale? The most obvious way to bring these projects to scale is by partnering closely with national governments. Integrating RBF into government-led efforts can drive accountability and increase cost-effectiveness. And economies of scale can be realized by templatizing and streamlining procurement processes and by simplifying contracting, significantly decreasing the administrative burden relative to the size of the outcomes fund.
- What project designs would reduce the number of parties involved while still retaining the incentives for impact? By accelerating feedback loops and the quick recycling of outcome payments into the project, we could significantly reduce the number of pre-financiers involved, which could help streamline decision-making and simplify administration.
As we and our peers in the sector work to answer these and other questions, we are excited by the potential of RBF to catalyze a transformation in international development. We don’t believe this model should be replicated and scaled without additional changes. But we hope that this successful proof-of-concept can inspire the whole sector to further invest in, iterate on and support the scale-up of pay-for-success funding models, with the goal of continuing to cost-effectively improve the lives of people living in extreme poverty. At the end of the day, they are the ones who we serve.
Photo courtesy of Rod Waddington.