We Made It to Oregon! Wrapping up the “Mobilizing Private Capital” Journey

It was with great jubilation that we entered Oregon City. Many of the party knelt in prayer to thank the Almighty for safe passage, though several of the men led by Old Man Forsythe chose to celebrate instead at the Mother Lode saloon. 

While I look forward to a hot bath, a cold beer and a soft bed tonight, I confess that I will miss the trail and the party. We are as a family now — our travails have brought us close. As Wagon Master, I am grateful to have been given the opportunity to shepherd them to this green and fertile valley. Hopefully they (and you the reader) have gained insights and tools on this journey that you can use to cultivate your own initiatives to finance growth by mobilizing capital. And with that, we will close our journey and this series with a final blog on pay-for-results in mobilizing financing. 

To begin – what is “pay-for-results” and why is it important?

What is pay-for-results? Pay-for-Results or Output-Based Aid is in essence a procurement approach which sets a metric and then allows the implementer to figure out how to reach it. The interesting part is that payment to the implementer is based on their results against the goal.

It has been around since the 1980s, but largely in areas such as health where outcomes (for example, vaccines administered) are more easily quantified. But we are now seeing some exceptionally strong results through a project in Ghana using pay-for-results to mobilize private sector financing.

Why is pay-for-results important? USAID and other donors have always understood the importance of attracting private financing into development. Development requires investment and investment requires financing for that investment. Billions have been invested in financial sector development, with remarkable results such as healthy and flush banking sectors in the developing world and growing pools of institutional capital.

Still, too little capital seems to go to our development priorities — agriculture, health care, clean energy, etc. We want to increase the flow. A key development question then is how we can most efficiently accomplish that? We covered the ways in which capital can be mobilized earlier in this series, but a recent paper by the Center for Global Development indicates that one of the most effective ways may be pay-for-results. And this is borne out by results from the Financing Ghanaian Agriculture Project (FinGAP), implemented by CARANA Corporation.

Stimulating Finance for Agriculture in Ghana

The challenge which the USAID Mission in Ghana faced was how to ensure that investments in targeted value chains were made in order to absorb a projected increase in production levels arising from Feed the Future initiatives in the north of Ghana. Banks and investors had stayed away from the north and from agriculture in general, expressing that they had other, easier and less risky ways to lend or invest their funds. The Ghana Mission needed to figure out how to solve this problem.  

When project design commenced, the focus was initially on traditional remedies to stimulate access to finance for agriculture — for example, training for banks on agricultural lending, partial grants to microfinance institutions and impact investors, warehouse receipt programs, supplier or offtake financing schemes, etc.

Generating Interest

But in meetings with Ghanaian banks, it became clear that the problem was not that they didn’t know how to lend to the agricultural sector. The problem was that they weren’t interested. They simply had other lending opportunities that were less risky and generally required less effort.

So the project designers decided to make it attractive. The logic was that if Ghanaian financial institutions decided this could be an attractive financing opportunity for them, they would figure out how to provide financing successfully. FinGAP might provide some small level of coaching and help tee up financing requests — but financial institutions who wanted to participate were expected to do the heavy lifting.

The project design included a $5 million financing facility to be used for pay-for-results. The facility had two tracks — one track for financial institutions and one for business advisory services providers. But both tracks were built on one principle — payments were made against results – in this case, the disbursement of agricultural loans and financing.

30:1 Results in Ghana through FinGAP

It took time and effort to get the program structured correctly, because it was a new model for the implementer as well as for USAID. But once in place, it produced eye-popping results — over $60 million in financing mobilized within one year at a cost of around $2 million.

Why does it work? "Show me the money” is always a good motivator, but there is a more complex answer. We explained earlier how finance works and how an otherwise viable transaction (like cash flow sufficient to cover debt service) that would get financing in the US might not in the developing world. This is a function of the higher transaction costs and higher exogenous (non-transaction-related) risks that prevail in the developing world.

Faster, more cost-effective results

So in short, the incentive payments through FinGAP covered some of those transaction costs and higher risks (and perhaps added a little sweetener to the deal as well). Thus, the project’s designers decided not to try and solve the problem of why financing was not flowing to agriculture, but rather to leave it up to market actors (in this case financial intermediaries and BAS providers) to solve the problem. The role of the project was to pay them for accomplishing this.

We can draw two conclusions from the results:

1. The desired outcomes have been achieved significantly faster than they would have through a traditional approach.
2. Use of pay-for-results has been significantly more cost-effective in achieving those outcomes.

In summary, the designers could have designed the “solution” to the problem, but instead structured the FinGAP project to simply set the metric (loans disbursed) and let BAS providers and financial intermediaries figure out how to get there.

Using Competition to Get the Most Bang for Your Buck

In order to ensure that performance payments were minimized, the project issued a Request for Comment to Ghanaian financial intermediaries (e.g. banks, impact investors and microfinance institutions). The request asked the financial institutions to bid on the size of the incentive they would need to finance the value chain investments FinGAP hoped to spur.

Once the bids were received, FinGAP set an incentive fee rate at the lower end of the bid range, and created a pool of incentives which participating institutions could access based upon evidence of disbursement of eligible loans. 

The mechanism for disbursement was simple — grants under contract disbursed when specific milestones were passed (again in this case — disbursement of financing). The key challenge was setting the incentive rate — figuring out how to make it attractive enough for financial intermediaries, but low enough so that the subsidy provided was minimized.

A Promising Approach to Facilitating Private Capital

And that takes us back to one of the main questions posed at the start of this blog series – we know that we can facilitate private capital, but how can we do it most cost-effectively? We are not ready to declare a winner yet, but the 30:1 results from the FinGAP pay-for-results approach seem very promising — and we expect that the results and leverage will only continue to get better.

And with that, the party disbands and the blog series ends. I hope the journey has been fun and informative. And I know some of you will not be surprised that Jake and Caroline will soon be seeking the Preacher, but who would have believed that that scamp Tucker and the curmudgeon old Forsythe would decide to partner up and start an orchard! And the rest will soon be off to their homesteads to begin their new lives in this second Eden — God be with them all.