# **B. Results-based lending**

The past several years have witnessed an evolution of the instruments by which multilateral organizations provide their financial assistance. Traditionally World Bank (and other donor) financing has been delivered either through Investment Lending (IL) operations that finance specific inputs or through Development Policy Lending (DPLs)/Budget Support which directly finances the government’s budget in “exchange” for policy reforms. Previous experience (IEG 2008) suggests that the IL instrument is not ideally suited for institutional reforms as it finances inputs, focuses attention on mechanistic processes and transactions and thus has limited control over outcomes, especially when outcomes are difficult to quantify and measure. Furthermore, IL operations do not offer cashstrapped governments with fungible resources as all resources are tied to specific inputs. While DPL operations are appropriate for supporting reforms in the policy environment, they are inadequate for supporting changes in how government actors actually _behave_ and how systems _perform_ . This is largely due to the nature of “prior actions” and “triggers”, which are typically at the _de jure/_ policy level – so-called “stroke of the pen” reforms – and do not include concrete _de facto_ actions necessary to affect real institutional change.<sup>11</sup> Further, it is difficult to tranche DPLs such that they financially reward step-by-step change in a government’s reform program The Bank’s new results-based lending instrument (Program for Results (PforR)) as well as the results-based IL (RBIL) approach ties disbursements to the achievement of pre-identified and well specified indicators referred to as Disbursement Linked Indicators (DLIs). The instrument is designed to finance a well-defined government Program with disbursements based on the achievement of the DLIs<sup>12</sup> . Since it does not finance inputs, it provides recipient governments with relative flexibility in the use of the financial support and is less transaction-intensive as, once a recipient’s financial management and procurement systems have been assessed, the recipient does not have to refer back to the Bank for “no objections” and clearances for each transaction. The use of this instrument has the additional benefit of strengthening a client country’s public management systems by working with them rather than around them.<sup>13</sup> The PforR was conceived as an instrument for financing projects in the infrastructure and social sectors but can be adapted for public sector reform projects. RBIL is a suitable alternative for most PSM projects.

> 11 A recent review of 178 World Bank DPLs (active during 2010-2012) showed that less than 10% of the prior actions meet the behavioral test.

> 12 According to the Program for Results Policy Paper (2011), “These programs, comprising expenditures and activities, can be ongoing or new, sectoral or sub-sectoral, and national or sub-national programs, as well as community development programs” (pp. iv).

> 13 This approach is consistent with the principles of the Paris Declaration on Aid Effectiveness and the subsequent fora in Accra and Busan. See: http://www.oecd.org/development/aideffectiveness/34428351.pdf

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