output-based aid: introduction, lessons and challenges

Output-Based Aid:

Introduction, Lessons and Challenges

Yogita Mumssen

Senior Infrastructure Economist

Global Partnership on Output-Based Aid, The World Bank

African International Water Congress, Kampala, March 15 -18, 2010

Outline

What is OBA?

How does OBA work?

What are the lessons and best

practices emerging from application of

OBA in the water sector?

Defining OBA

OBA = Performance-based grants to help cover gap

between what user can afford and the actual cost of

providing service.

OBA “subsidies” (or “payments” to service providers)

channeled most often as supply-side subsidies after

agreed outputs have been delivered.

OBA mostly “one-off” capital subsidies to help defray

costs of initial access for the poor.

OBA part of a broader results framework: other results-

based mechanisms (e.g. CCT, COD etc)

OBA in the Context of

Development Assistance

DesignDevelopment

Impacts

(Intermediate)

OutcomesOutputs

Build, Operate

•Output specification

•Service provider selection

OBA “Outputs” include

•Water connection made & service provided

•Solar Home System installed & maintained

•Medical treatment provided

OBA “Outputs”Independently verified

Inputs

Output-based vs. Input-based

Inputs(such as materials)

Public

Finance

Inputs(such as materials)

Service

Provider

Service

Provider

Commercially

Structured

Finance

Outputs(Services for End Users)

Outputs(Services for End Users)OBA reimburses the service provider after

the delivery of outputs.

Government purchases specific

“inputs”, builds assets and contracts

out or provides services itself

Output-Based

Approach

Traditional

Approach

Typical OBA Structure

Targeted poor communities

not yet connected

State/Municipality

(contracting

authority)

Service

Provider

Subsidy FundFinancial

Intermediary

Subsidy

(4)

Pre-finance(1) Output Delivered =

Connections installed,

service delivered

(2)

Independent

Verification

Agent

(3)

Donor or Government

OBA Core Concepts

Targeting of subsidies

Accountability

Innovation and efficiency

Using incentives to serve the poor

Output verification and monitoring

Sustainability

OBA Portfolio

Includes 51 GPOBA projects, mainly in water, health and energy, of

US$153 m value (committed).

AFR33%

EAP3%

ECA2%

LCR52%

MENA1%

SAR9%

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

Education5%

Energy6%

Health24%

Telecom2%

Transport58%

Water & Sanitation

5%

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

• Objective: Access to piped water services to poor HHs. Initial target of ~400,000 people

• Project implementation: Urban Pro-poor Branch, NWSC Kampala

• Total cost : US$ 4million, of which US$ 2.5 million provided by GPOBA to help defray

cost for user and incentivize NWSC to serve poorest, many who consume at social tariff

• HHs in OBA project areas contribute equivalent of $25 towards connection cost (compared to

$50 in non-OBA areas); GPOBA provides a subsidy of $104; NWSC covers remainder

• Pro-poor solutions: focus on poor slum and peri-urban areas; subsidize yard taps and

PWPs; pilot pre-paid meters in some cases. But targeting still a challenge. Demand

creation through social mobilization is a critical component and takes time. More effort

required

• Output-based: 90% disbursed after connection verified; 10% after 12 months of service

• 1,679 Yard taps benefiting ~30,000 people have been verified as of Oct 09; therefore roll-

out underway, but slower than expected

Kampala Water

Connections for the

Poor, NWSC Uganda

OBA Project Examples - 1

10

• Objective: increase access to water services through individual HH connections

for low-income communities in the Manila Metro region; 100,000 beneficiaries.

• Total cost: US$15.5 million, of which US$1 million provided by GPOBA.

• Project administered by Manila Water Company.

• Subsidy paid in installments after independent verification of outputs and three

months of operational water service.

• At the time of the GPOBA pilot, households contributed $36 towards the $167

user connection fee and GPOBA provided a $131 subsidy for the remainder

• 10,642 connections benefiting 50,024 people have been verified as of Oct 09

Manila Water

Supply Project,

The Philippines

OBA Project Examples - 2

Output-Based Aid:

Lessons Learned

and Best Practices

World Bank

Publication

Coming soon!

Lessons Learned Benefits of an OBA Approach

Explicit identification of outputs promotes targeting (e.g. indoor

connections vs. stand-posts). Targeting criteria part of verification

OBA shifts performance risk (construction, operational & demand)

to providers and helps ensure “you get what you pay for”. But, how

much risk is shifted to the provider depends on context…

Efficiency gains through competitive processes, e.g. lowest-subsidy

required auctions => 20-30% reduction of subsidy needed. Focus on

output delivery => innovative behavior, such as pro-poor products,

sensitization campaigns (but, also a challenge…)

So far $2 of private finance leveraged for $1 of subsidy; varies by

sector and region

“Internalizing monitoring” by paying on outputs.

Too early to judge performance on sustainability, but, encourages

careful subsidy design

Access to finance determines how “output-based”.

Capacity to implement and monitor can be an issue; may be

difficult to find qualified and independent verification agents.

Demand risk requires more “soft” up-front investment by service

provider to ensure uptake, especially in relation to poor

consumers (e.g. less “familiar” services, payment schemes, etc).

OBA one component of a wider set of policy instruments, and

requires a supportive enabling environment for sustainability.

Development partner/donor co-ordination: incentives for line

ministry to undertake a new accountability instrument.

Lessons Learned Challenges of an OBA Approach

GPOBA is a partnership of donors and international organizations

working together to support OBA approaches to improving service

delivery for the poor.

GPOBA was established in 2003 by the UK (DFID) and World Bank.

Its donors are the World Bank, the UK (DFID), the Netherlands

(DGIS), Australia (AusAID), Sweden (Sida) and the IFC

GPOBA provides three types of support: technical assistance of

OBA schemes, dissemination of experiences and best practices in

OBA, and less so, grants for OBA subsidy funding

The program’s focus sectors are water and sanitation, energy,

telecommunication, transport, health and education

About GPOBA

For more information on OBA or

GPOBA, visit the GPOBA website:

www.gpoba.org