International Water Conference Dushanbe 2010Roundtable on Sustainable Financing

Output Based Aid: A Financing Tool for Access to Water Service

Pier Francesco Mantovani, Lead Water Supply and Sanitation Specialist,

Europe and Central Asia Region, The World Bank1

Sustainable .

“Need for more public expenditure in water”

• Meeting water supply & sanitation (WSS) access goals calls for increased public expenditure.

• The WSS infrastructure gap particularly affects low-income and marginal areas, where cost-recovery is weak and investment subsidies are required.

• Efficient, targeted subsidy mechanisms are needed for sustainable public financing of WSS access.

2

The Output-Based Aid (OBA) Approach

• An emerging public finance approach by which disbursements are linked to the verification of effective service delivery to targeted beneficiaries.

• Well-suited to promote access to services:

– Shifts the risk to service providers.

– Bridges gap between cost of service and beneficiary’s ability to pay

– Can target poor areas or households

– Leverages commercial finance

3

Mongolia: Access to telecom services

Uganda: Access to health services

Armenia: Access to energy services

Public Financing of Services DevelopmentInput-based vs. Output-based Aid

INPUTMaterials, equipment,

infrastructure, etc.

OBA Public Finance

INPUTMaterials, equipment,

infrastructure, etc.

Service Provider

Service Provider

Commercial Pre-Finance

OUTPUTServices Expected to

Reach End Users

OUTPUTSServices Effectively

Delivered to Targeted End Users

OUTPUT-BASED AIDTraditional

INPUT-BASED AID

4

Public Finance

OBA reimburses providers only after services are verified

OBA Core Concepts

• Targeting : Using incentives to serve low-income communities

• Accountability : Providers must deliver compliant service in order to be paid.

• Monitoring : Output verification is systematic, ensures transparency.

• Leverage: OBA leverages beneficiary contributions and private finance.

• Efficiency : Implicit result and cost guarantee.

5

Bangladesh: Electrification forPoor Rural Households

Where applicable, OBA enables better use of public funds.

Snapshot 1 : Morocco WSS connections in poor periurban areas

• Middle-income country, with large informal settlements around cities.

• No WSS service in periurban settlements, due to cost and challenges of extending networks in informal habitat areas

• No affordable option for households to access utility service.

Key design features:

1. Pilots by public & private operators in Casablanca, Meknes & Tangiers.

2. Upfront assessment of standard WSS connection price in targeted poor areas.

3. Works pre-financed by operators with loans or municipal funds.

4. Elegible households commit to a standard connection fee payable over 7 years.

5. Unit OBA subsidy bridges the gap between the standard connection price and household connection fee (25-50%).

6. Unit subsidy paid after connection (60%) and after 3 months of service (40%).

Snapshot 1 : MoroccoWSS connections in poor periurban areas

Snapshot 1 : Morocco WSS connections in poor periurban areas

8

Main results:

• Pilots successful, after slow start, for both water supply & sewerage service.

• Strong stakeholder mobilization to overcome implementation obstacles.

• Simplification of OBA documentation requirements.

National scale-up strategy in preparation

Snapshot 2: KenyaSmall-scale rural water service development

9

• Rural communities around Nairobi want piped water service.

• Small water operators access microfinance loans supported by GPOBA and Athi Water Services Board.

• OBA subsidy paid upon completed development of simplified water systems.

Snapshot 2: KenyaSmall-scale rural water service development

10

Growing experience with OBA Projects

Education5%

Energy6%

Health24%

Telecom2%

Transport58%

Water & Sanitation

5%

WBG OBA Portfolio by Sector(Total = US$ 3.5 billion)

11

In 2002: 32 projects identified,

$1.5 bn of World Bank funding

In 2009: 131 projects identified

for $3.5 bn of WB Group funding,

+$2.8 bn government funding

+ 66 projects outside WBG

Growing evidence base : 34

projects closed, 78 on-going, in

low and middle income countries

Comparison of Performance: OBA vs. Traditional Projects

0%

10%

20%

30%

40%

50%

60%

70%

80%

Ove

r-ac

hie

ved

Ach

ieve

d

No

t (f

ully

) ac

hie

ved

Un

clea

r

Un

der

ru

n

In B

ud

get

Ove

rru

n

Results Budget

OBA

Non-OBA

12

Lessons Learned: Benefits of OBA Approach

• Explicit identification of outputs promotes targeting

• OBA shifts risk to providers

• Achieve efficiency gains through competitive processes

• So far, $1 of subsidy leverages ~$2 of private finance.

• Forces accurate monitoring by paying on outputs

• Encourages careful subsidy

13

Vietnam: Access to simplified piped rural water supply

Lessons Learned: Challenges of the OBA Approach

• Access to commercial finance or microfinance is essential.

• Capacity to implement and monitor can be an issue.

• Demand risk requires prudent upfront investment by provider

• OBA requires a supportive regulatory environment for sustainability

14

Argentina: Public transportation improvements

OBA remains one component of a wider set of policy instruments, does not substitute good planning & regulation policies.

Moving Forward

• Scale-up OBA approaches where they make sense

• Fund technical assistance for new initiatives and further analysis and evaluation of OBA projects

• Address challenges such as:

– Limited access to commercial pre-finance,

– Documentation and verification capacity

– Contractual flexibility for changed conditions

• Share lessons

15

Thank You

Special thanks to :

• The Global Partnership on Output-Based Aid (GPOBA) , a partnership of donors and international organizations working together to support output-based (OBA) approaches.

www.gpoba.org

16Uganda: Access to Sustainable Water Services for the Poor in Selected Small Towns

Targeting

0%

10%

20%

30%

40%

50%

60%

70%

80%

Geographic Targeting Means Testing Self Selection Targeting No Targeting Identified