Identifying the Potential for Results-Based Financing for Sanitation

Results-based financing (RBF) covers a number of financial tools in which funding is contingent on achieving specified outcomes. RBF has been used across various sectors of international development to some success and this paper explores the potential for applying it to sanitation. In doing so, the author considers the presence of misaligned incentives in the sanitation sector, and then walks us through various points along the value chain at which RBF could be employed. Design and implementation of such strategies requires careful consideration of potential challenges, including how to avoid creating perverse incentives.

• Financing of sanitation has been low, due in part to a lack of clarity over which sector actors should be funded and how. Payments for performance may be able realign incentives to foster more efficient and equitable service delivery. Tweet
• Market failures can arise at all points of the sanitation value chain. For example, low awareness of the benefits of sanitation causes depressed demand for collection services; poorly regulated latrine emptying leads to little waste reaching treatment sites; and subsidized chemical fertilizers deter certain reuses of waste. Tweet
• With cash on deliver aid, external donors would transfer funds to a country proportionally to progress toward sanitation goals. Achievement could be defined based on coverage and an indicator such as volume of sludge disposed or treated to adequate standards. Local level rewards could complement other aid, with the government reallocating funding it received to well-performing communities. Tweet
• Output-based aid (OBA) incentivizes suppliers to serve the poor. If carefully designed, OBA incentives can be such that contractors will not just build latrines but maintain them over time. Tweet
• Advanced market commitments incentivize suppliers to develop new products by guaranteeing a market for them. For example, a municipality may encourage the development of public toilet blocks by hosting a design competition where the winner gains an exclusive service area or license. Tweet
• With conditional cash transfers (CCTs), governments transfer cash to individuals only if they adopt certain behaviors. There is potential for designing CCT programs where using improved sanitation facilities is defined as a target behavior. Tweet
• Encouraging adoption of RBF in sanitation may require supporting a multi-donor trust fund and strengthening promotion and research. Tweet