Innovative funding for Innovative funding for infrastructure services: the infrastructure services: the use of Output Based Aid in use of Output Based Aid in the Honduras water sectorthe Honduras water sector

Cledan Mandri-PerrottInfrastructure, Economics and Finance DepartmentWorld Bank

IPWA, Washington 29 March 2007

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ContentsContents

• Context

• What is Output Based Aid

• How can this be used to create innovative mechanisms for funding infrastructure service

• Global Partnership on Output Based Aid

• Some innovative features in the use of OBA: Honduras example

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ContextContext

• How to attract more investment in the infrastructure and social service sectors so that the poor have access and so MDGs can be reached by 2015?

• Total cost recovery of services through user fees difficult.

• How to ensure greater efficiency and sustainability of infrastructure and social service provision?

• How to ensure that operators are accountable, and rewarded for actually reaching the intended beneficiaries?

• How can aid / financing to the infrastructure sector be more effective?

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What is Output-Based Aid?What is Output-Based Aid?

Output-Based Aid (OBA) is one method for improving the delivery of basic services – such as water and electricity– when the inability of users to pay full cost would justify performance-based subsidies to complement or replace user fees.

Under OBA, service providers are for the most part paid after delivery of the agreed output.

Therefore the disbursement of the subsidy is linked to the delivery of a specified output.

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OBA Core ConceptsOBA Core Concepts

• Explicit subsidies: Ensures transparency -- who provides subsidies for what. Lends easily to targeting the poor.

• Payment on output delivery: Shifts performance risk to provider by making him accountable.

• Innovation and efficiency: Predetermined subsidy paid on agreed outputs instead of inputs provides incentives for innovation and efficiency; competition or bench-marking could lead to value-for-money

• Mobilizing the private sector: Encourages private sector to serve targeted (usually poor) customers; opportunity to leverage private finance and expertise for non-subsidized customers as well.

• Monitoring: Internalizes tracking of results• Sustainability: Subsidies that minimize distortions in

consumption; stresses final results and source of future funding

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GPOBAGPOBA

• Established in January, 2003 by DFID and World Bank.• Current donors: DFID, IFC, Bank, DGIS, and AusAID.

SIDA expected to join soon.• About $120m, mainly for subsidies, but also TA• Purpose: fund, demonstrate and document OBA

approaches to support the sustainable delivery of basic services to targeted households in developing countries.

• Current sectors: water and sanitation, energy, telecommunications, transport, health and education

• Project size = US$1m to 10 million in GPOBA subsidies• Co-financing encouraged

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Creating innovative financing Creating innovative financing structuresstructures

• Output Based means that:• Is clearly definable• Is easy to verify and measure• Is as close to the desired outcome as is feasible

I ncreased household access

to electricity services I ncreased household access

to water services

Type 2 Payments linked to supply of 100kWh of electricity to each household per month

Type 2 Payments linked to supply of X m3 of water to each household per month

Desired outcome

Type 1 Payments linked to connection of new customers to grid

Type 1 Payments linked to connection of new customers to network

Possible contractual outputs

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Honduras National OBA FacilityHonduras National OBA Facility

• National OBA Facility aimed at improving access to water and sanitation services to low income households (hh).

• Targeted approach to project portfolio• Municipalities have to develop project(s) to

help meet MDG• Government intention to scale up to all

sector investments

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How does the National OBA How does the National OBA Facility work?Facility work?

• Funding of up to 80% of total investment cost (excluding labour provided by communities)

• Remaining 10% contributed through municipality but recovered through tariffs

• Sustainability of proposed project is through tariff structure (range of US$0.18/m3 to 0.55/m3 depending on project) to cover O&M plus Municipal contribution of 10%

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Implications of the structurteImplications of the structurte

• Output Based Payments:– Municipalities will receive ten percent (10%)

upon signing of contract to execute the proposed works.

– A further sixty five percent (65%) will be paid upon a verified connection

– A final twenty five (25%) percent will be paid after six months of bills being sent and paid by each new connection

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Implications of the structure - 2Implications of the structure - 2

• Municipality takes on pre-financing risk:– obtains 10% / 20% from OBA Fund upon contract

signature with contractors – means that the bridge loan would be for 80% of

total amount

• Bridge loan guaranteed ultimately by FHIS (but part of the development Agreement)

• Financing costs (bridge loan) are embedded in the tariff structure

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Implications of the structure - 3Implications of the structure - 3

• Projects evaluated on six monthly period. Sub projects evaluated and ranked as they are received for that corresponding period

• OBA Facility has dedicated staff • OBA Facility has TA funds available for

refinement of sub projects• GPOBA per capita subsidy ceiling based on

percentage of WHO ref US$140 water & US$160 WW:– US$90 (64%) per capita for water services and – US$96 (60%) per capita for wastewater services

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ConclusionsConclusions

• Facility approach can be used to target sector transfers

• Need for selection methodology:– Definition of what makes a project eligible – Basic financial and economic criteria needed at

the outset

• Independent Audit function critical to success• Funding gap needs to be covered especially

for public sector• Dedicated staff / need for training

Thank you.Thank you.

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