Designing and Implementing an Output- Based Aid (OBA) Project in the Bank Patricia Veevers-Carter, Program Manager Global Partnership on Output-Based Aid Finance, Economics and Urban Department World Bank SDN Week Washington, DC February 27, 2008

2 Agenda 1. Introduction“What is OBA”; experience to date; how OBA has evolved in the Bank; Lessons Learned Patricia Veevers-Carter, GPOBA 2. Bank Processes and OBA Procurement, Financial Management, Disbursement (incumbents vs. greenfields, flow of funds/fiduciary agents, etc) Procurement: Patricia de Baquero, OPCPR LEG: Edith Ruguru Mwenda, LEGAF LOA: Junxue Chu, LOAFC FM: TBD 3. OBA Case Study Senegal On-Site SanitationSylvie Debomy, AFTU2 4. GPOBA and Concluding Remarks GPOBA and ConclusionsPatricia Veevers-Carter

3 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.

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 Example of a typical OBA Project Municipality Provider Poor Communities not yet connected OBA Fund Financial Intermediary Subsidy (4) Output Delivered = Connections Installed, service delivered (2) Greenfield or Incumbent Provider (private or public) Water or Sanitation Services, for example Concession contract or other form of Legal mandate Verification Agent (3) One-off connection subsidy Consumption Transitional subsidy Consumption subsidy Pre-finance (1)

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

7 Analysis Of Some Initial Projects Evaluation Criteria Pilot 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 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)

8 Key Emerging Issues/Challenges Who has the incentive to deliver outputs? Is the sector amenable to OBA? Access to finance to pre-finance outputs key constraint Need a supportive regulatory framework Minimizing subsidy payment risk once outputs delivered is critical Method/accuracy targeting beneficiaries Monitoring of outputs -- local capacity, corruption A new way of working, and initial start-up costs –Initial transactions costs due to “learning” –mostly pilots (small by definition)

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