s Pakistan confronts a youth bulge and a growing mismatch between workforce skills and labour market demand, there is an urgent need to rethink how government and development partners fund skills development programmes. Traditional input-based financing mechanisms have fallen short in delivering sustained employment outcomes. Outcome-based financing models—particularly those linking disbursements to clear metrics such as formal employment and job retention—are gaining traction globally for their ability to drive accountability, efficiency and impact.

Outcome-based financing (OBF) links disbursement of funds to the achievement of predefined outcomes. The desired outcomes can include job placement, income growth or job retention. This shift from inputs (e.g. number of enrolled/passing out students) to outcomes aligns financial incentives with programme success, requiring that the service providers focus on quality and relevance rather than mere delivery. This enhances accountability by imposing a results-oriented culture where service providers are responsible not only for delivering training but also for ensuring that the beneficiaries are meaningfully employed.

This promotes efficiency, as funds are disbursed only after outcomes have been verified, reducing the risk of waste and promoting cost-effective interventions. It also fosters a demand-driven approach by incentivising service providers to tailor training to labour market needs and encourages innovation in pedagogy, employer engagement and support services like job matching.

Traditional financing disburses funds based on projected budgets and completion of inputs, sometimes leading to underwhelming results in employment outcomes. In contrast, OBF structures focus on actual success. Although the upfront investment in design, monitoring and evaluation may be higher, the cost per successful outcome is typically lower.

A comparative study between OBF and conventional skills training programmes in developing economies shows that while OBF may increase per-trainee costs by 10-20 percent, the employment placement rate improves by 30-50 percent. For example, in a traditional model, if $500 is spent per trainee with a 40 percent employment rate, the cost per job placement is $1,250. Under an OBF model, the cost may rise to $600 per trainee but the placement rate rises to 70 percent. The cost per placement therefore drops to around $857—a significantly better return on investment.

Evidence continues to build globally in favor of outcome-based financing tools like impact bonds launched in over 35 countries. These bonds have supported initiatives in education, employment, health and social services, directly benefiting over 2 million individuals worldwide. One such success is the Skill India Impact Bond, launched in 2021, which aimed to place 50,000 young Indians into employment and has reported placement rates exceeding 70 percent in the initial implementation phase. In Colombia, a workforce development Social Impact Bond targeting vulnerable populations achieved employment rates nearly double those of the control group, while delivering cost savings to the government.

Pakistan faces a critical funding gap in the development sector. According to the Ministry of Planning, Pakistan requires more than $2 billion annually to meet its skills development targets. Less than 30 percent of this amount is currently financed. 

These examples reinforce the case for OBF being not just an innovative financing mechanism but also a cost-effective one. In traditional models used in Annual Development Plans, disbursements are often based on projected spending and physical targets like number of trainees enrolled or centers established. This model lacks the accountability for employment outcomes, leading to high levels of inefficiency and low return on investment. Besides, public audits frequently flag under-utilisation or misallocation of funds in conventional schemes.

In contrast, OBF ensures that payment is made only upon the verification of success. This creates an inherent check on spending. It encourages better performance management, timely delivery and outcome orientation in training provision. This reallocation of risk to service providers and investors—rather than taxpayers—makes it fiscally prudent and socially responsible. Governments can thus stretch limited fiscal resources further while achieving more meaningful results.

To mainstream OBF, it is essential to integrate it in the formal planning and budgeting frameworks of the government—specifically the Annual Development Plans. Institutionalisation ensures sustained political and financial commitment, standardised monitoring systems and a scalable framework across departments and provinces. Aligning OBF with national policies such as Vision 2025 and the National Skills Strategy will reinforce coherence.

Institutional frameworks should include capacity development for public sector officials in designing and managing OBF contracts. Robust data collection and third-party verification systems must be embedded in the ADPs. Once institutionalised, OBF can be adapted for other sectors e.g. health and education, leveraging the shared administrative infrastructure.

International development agencies are increasingly championing outcome-based financing models as a tool for enhancing aid effectiveness. Organisations such as the United Nations, Foreign, Commonwealth & Development Office of the UK government and the World Bank have been piloting and funding OBF initiatives. The UNICEF has launched Development Impact Bonds to improve education and health outcomes in Africa and South Asia. The UK’s FCDO has invested in multiple Social and Development Impact Bonds to tackle unemployment in Africa and Asia. The World Bank’s Global Financing Facility incorporates results-based financing in reproductive and maternal health. According to the Brookings Institution, over 200 outcome-based contracts have been initiated globally since 2010, mobilising more than $500 million in outcome payments and reaching millions of beneficiaries.

Pakistan faces a critical funding gap in the development sector. According to the Ministry of Planning, Pakistan requires over $2 billion annually to meet its skills development targets. Less than 30 percent of this is currently financed. The Global Youth Development Index ranks Pakistan at 154 out of 181 countries, highlighting the urgency of focused investment in youth employment. With over 2 million young people entering the labor market annually, the cost of inaction is severe—unemployment, social unrest and economic stagnation. OBF can help leverage private and donor capital by de-risking public funds and creating partnerships that align public interest with private execution.

Outcome-based financing represents a transformative approach to skills development—shifting focus from quantity to quality, from spending to impact. The model aligns incentives, improves accountability and ensures that scarce public funds are used effectively to generate real, measurable outcomes. As global evidence and domestic experiments show, OBF is not just a financial tool but a governance innovation that can significantly enhance the effectiveness of development programmes. Institutionalising this approach in Pakistan’s Annual Development Plans is essential to scale its benefits. It is time for policymakers to re-imagine how we invest in our human capital—by financing what works and holding all actors accountable for results.

The writer is Punjab Skills Development Fund’s manager (research). He has over a decade of experience in innovative financing and skills development and was instrumental in designing Pakistan’s first Skills Impact Bond.