Procurement Issues in Structuring OBA Projects: Guidance Note for Staff Procurement Issues in Structuring OBA Projects: Guidance Note for Staff Xavier Chauvot de Beauchêne Global Partnership on Output-Based Aid Finance, Economics and Urban Department Luis Tineo Procurement Unit (LCSPT) LAC Operations Services Department Fiduciary Forum National Conference Center, Lansdowne, Virginia, March 25, 2008

Agenda 1. Designing and Implementing an Output-Based Aid (OBA) Project “What is OBA”; Core Concepts; experience to date; how OBA has evolved in the Bank; Design trends; GPOBA; Case Study: Morocco Urban Water Pilots. Xavier Chauvot de Beauchêne, Infrastructure Specialist, GPOBA 2. Understanding the Procurement Process and Tools for Procurement Staff Due Diligence; Procurement Issues; Guidance Note; Checklist for Assessments under 3.13 of the Procurement Guidelines. Luis Tineo, Senior Procurement Specialist, LSCPT

3 What is Output-Based Aid? Output-Based Aid (OBA) is an application of performance-based contracts used for improving the delivery of basic services – such as water and electricity– when the inability of users to pay full cost would justify subsidies to complement or replace user fees. Service providers are generally paid after the delivery of the agreed performing output.

4 OBA 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.

5 OBA Experience to Date (as of December 31, 2007) OBA Projects by Sector Water 32% Transport 14% Energy 22% Telecom 19% Social 13%

6 Profile of Some Initial Projects CriteriaPilot Results Targeting- Mostly geographic targeting to poor communities Accountability- Mostly ex post connection payment tied to service contract Innovation & efficiency - Providers paid bid price but free to design (meeting quality specs) - Competitive bidding on lowest subsidy required, or, benchmarking, when incumbents service providers Mobilizing private sector - Local private sector playing a larger role - Extent of “leveraging” dependent on sector and country/region Sustainability- Most projects involve a one-time connection subsidy (but part of payment with-held until several months of service delivered)

7 GPOBA Established in January 2003 by DFID and World Bank. Additional Donors as of to date: IFC, DGIS, AusAid, SIDA. Mandate: To fund, design, demonstrate and document (via grants, TA or dissemination) OBA approaches to support the sustainable delivery of basic services (infrastructure and health and education) to targeted households in developing countries. Fall 2007 – positive MTR of GPOBA by Ernst and Young 2008 – Target Replenishment from IFC, DFID, AusAid, and Sida of at least US$180 million. Vision – mainstream OBA with development partners within next 3-5 years through assisting development partners, including governments setting up OBA facilities and disburse own program funds on an output-based basis.

8 To become part of the “DNA of development” finance? Scale-up/replication of on-going pilots TA to structure OBA funds with Government and/or other Donor funds Center of expertise: GPOBA advisory services to development partners Mainstreaming OBA in Bank processing: –Guidance note to staff on how to structure OBA in Bank operations –Guidance notes on procurement and financial management aspects Mainstreaming OBA in the Bank

OBA An example: Morocco OBA Subsidies to Water & Sanitation Connections in Poor Areas The Casablanca, Meknes, Tangiers pilots A GPOBA Initiative

10 Project Background Growing informal peri-urban settlements, with no water and sanitation service. Unaffordable service connections, priced to cover network expansion. National Human Development Initiative (INDH) to promotes basic services in poor communities. Broad water sector reform program, supported by a Bank DPL. Output-based aid as potential tool to promote access to service. Morocco: A lower MIC, 11 km from the EU

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13 A Sample OBA Project: Morocco Urban WS&S Pilots Project ID: , GA signed January 2007 (3 years) Objective: Test OBA to enable WS&S service connections in poor peri-urban areas of Casablanca, Meknes and Tangiers. Outputs: Household water & sewerage connections. OBA subsidy: Gap between optimized connection costs and estimated maximum affordable household contribution.

14 Project Contractual Flow Municipality Operators: Casablanca (LYDEC) Meknes (RADEM) Tangiers (Amendis) Poor peri-urban communities not yet connected OBA Fund Subsidy payment (4) Output Delivered = Connection to piped water supply and sanitation services installed, service delivered (2) Incumbent Providers (private & public) Water and Sanitation Service areas Concession contract or other form of Legal mandate Verification Agent (3) One-off connection subsidy Pre-finance (1) GPOBA World Bank supervisionGov. monitoring (Ministries of Interior and Finance)

15 GPOBA Subsidy Levels Subsidy disbursement in two tranches: - 60% of subsidy amount upon verified working connection; and - Remaining 40% upon satisfactory service provision for six months.

16 Specific Procurement Issues Specific Procurement Issues Non-simultaneous opening of technical and financial envelopes for NCB affected project progress: –Operators moved away from framework contracts to procure works and goods through separate contracts. Uneasy identification of contracts to be subject to GA provisions on procurement, as connection cost include a portion of upstream infrastructure.

Due Diligence Challenges Procurement Issues and Arrangements under 3.13 of the Guidelines

18 PS/PAS Issues at Design & Supervision Meeting the principles of economy, efficiency, transparency and fair competition Linking Payments to Output Controls Due Diligence Challenges

19 Scenario 1 Competitive selection of service provider: Using ICB or NCB under WB procurement guidelines Scenario 2 Direct negotiation with incumbent service provider: Using incumbent’s procurement methods OPCS, 11/05 Challenge # 1 How are the unit costs meeting the principles of economy, efficiency, transparency and fair competition determined?

20 Linking Payments to Output Determine Output Define type of OBA subsidy Define subsidy amount and disbursement arrangements. Develop measurable compliance indicators. Develop output verification mechanisms: IVA hiring. Challenge # 2 Challenge # 2

21 Challenge # 3 Legal Documents Contract & Ancillary Fiduciary Arrangements Clear Rules: Operational Manual (FM, Procurement & Contract Management) Procurement Plan Controls: Financial Audit Fraud and Corruption provisions PPR/Misprocurement Independent Output Verification TORs for IVA acceptable to the Bank, or hired by the Bank

Tools Available for PS/PAS Draft Guidance Note & Assessment Checklist

23 Common Procurement Concerns Identification of contracts to be subject to procurement plans or/and prior review can be difficult; Freedom of service provider to apply efficient and innovative structuring of procurement to optimized unit costs of service; Distinction here between post-reviews of an incumbent operator's capacity to procure versus post-review of individual contracts procured by incumbent operators. Bank procurement review of contracts when there is suspected corruption by contractor or sub-contractor. Learning curve by PAS from input-based to output-based procurement and contracts.

24 Tools for Procurement Staff: Guidance Note Developed jointly by GPOBA, FEU & OPCPR. Follows up on an November 2005 OPCS Memo on the Application of Para on acceptable procurement procedures by incumbent service providers. Incorporates lessons learned from procurement assessments conducted under OBA pilot regional operations & peer reviewer comments. Provides guidance to PS/PAS on how to ensure compliance with the Procurement Guidelines. Provides a checklist for procurement capacity assessment of incumbent service providers. Includes flowchart to facilitate different scenarios and actions required by PS/PAS.

25 Scope of Guidance Note Scenario 1: No existing service provider. Para (a) of Guidelines: SP to be selected under “an ICB process acceptable to the Bank” (meeting procurement principles; not necessarily Bank ICB process and may include NCB if conditions grant it) SP so selected is free to use own procedures to procure inputs (goods, works & services) required to produce the outputs on which basis the OBA disbursement will be made.

26 Scope of Guidance Note Scenario 2: There is already an existing (incumbent) service provider. Para (b) of Guidelines.  If SP selected under an ICB process acceptable to the Bank, SP free to use own procedures to procure inputs required to produce outputs  If SP not selected under an ICB process acceptable to the Bank, SP shall procure inputs using Bank ICB procedures  If SP not selected under an ICB process acceptable to the Bank but 1.Incumbent SP is privately- or independent government-owned, 2.Incumbent SP is engaged in expansion of an existing system, and 3.Upon assessment, SP procurement systems & capacity are deemed acceptable and adequate, then Incumbent SP free to use its own procedures to procure inputs required to produce outputs, and Bank may conduct post-reviews to ensure assessed conditions remain unchanged (per OPCS OM of November 2005).

Flowchart on Procurement Guidance for a proposed OBA scheme Is the project involving an existing service provider (SP) ? YES PROJECT PREPARATION Are procurement procedures and SP capacity, as determined through PCA, acceptable to the WB? (see GN, Section and Section 6) The Bank may finance contracts procured by the SP, in compliance with the agreement reached. SP free to procure, from eligible sources, goods, works and consultants services using own procedures. No other assessment by PS/PAS required. PS/PAS to review project-related documentation to ensure that they specify the type of expenditures towards which Bank financing will be subsidizing. As under any Bank operation, PS/PAS assists in the review of project related documentation (PAD and Legal documents). (GN, Section 4.3) Independent from the procurement aspects, an independent technical review of the unit costs has to be carried out under the responsibility of the TTL to determine (1) the optimal unit cost, (2) subsidy levels, and (3) review compliance with acceptable technical standards and specifications. (See GN, Section ) * GN: Guidance Note. Sections indicated in this flowchart are cross-referenced with the Guidance Note. ** The procedure does not have to be identical to WB ICB or NCB procurement procedure, but should meet the principles of economy, efficiency, transparency and fair competition. The PS/PAS should ascertain such broad compliance. PROJECTSUPERVISION PS/PAS conducts post reviews to check that SP’s procurement capacity has not diminished and that the procurement actions carried out by the SP have followed procedures agreed during preparation. Are the conditions stated in the section 3 of the OM dated Nov. 7, 2006 met? (See GN Sections a & b and ). SP to use Bank ICB procedures to procure inputs required to produce the outputs; otherwise, the WB or GPOBA cannot get involved. Adequate technical monitoring of unit costs should be carried out by task team, in addition to regular reviews of the agreed outputs by an Independent Verification Agent, reporting to the TTL prior to disbursing. Is the SP to be procured in accordance with ICB/ NCB acceptable to the WB** (see GN, Section 4.1 and 4.2) Is the SP to be competitively selected under the OBA project? (possible award criteria in GN, Section 2.1.1) Was the incumbent SP selected under an ICB / NCB acceptable to the WB? (GN*, Sect. 5.1) SP free to procure, from eligible sources, goods, works and consultants services using own procurement procedures. (see GN, Section ) As under any Bank operation, PS/PAS reviews procurement plan and determines prior review, post review and monitoring arrangements for implementation - minimizing prior review - and assists in the review of the project related documentation (PAD and Legal documents). (see GN, Sections and ) NO Can an agreement be reached to improve proc. procedures and/or SP capacity to a level acceptable to the WB? YES Contracts procured by the SP are not subject to post review. No need for a procurement plan. YES The result of a competitive selection under procedures acceptable to the WB is deemed to reflect a unit price for the desired outputs that is a reasonable, economic, and efficient. (See GN, Section 4.3) PS/PAS should ensure that the contract entered with the SP includes both the requirement (1) for Bank-acceptable independent verification of outputs and the Bank’s right to audit; and (2) to include the Bank’s right to audit in all SP downstream procurement, i.e. of inputs required to produce the outputs. NO YES NO YES

Thank you.