Performance- or Output-Based Procurement (PBP): Basics and Applications in Bank Projects

1. Performance- or Output-Based Procurement (PBP): Basics and Applications in Bank Projects Patricia Baquero pbaquero@worldbank.org The National Conference Center Lansdowne, Virginia March 25, 2008

2. What is PBP? • Addressed in para. 3.14 of Procurement Guidelines • Procurement process resulting in contractual relationship with private service provider where • Technical specifications • Describe requirements in terms of functionality, quality & standards • Define desired results (i.e., CuM of water, KWh, reliability results, etc.), outputs to be measured, and way to measure • Do not prescribe inputs nor work methods • Bidders free to propose innovative solutions through cost-effective ways to improve outputs • Payments tied to measurable outputs meeting pre-set performance standards • Payment reductions made or premiums paid, respectively, for achievement of lower or higher quality levels • Contractor bears commercial and performance risk

3. Use of PBP in Bank-financed projects • Non-consultant services paid on the basis of outputs (i.e., primary health care) • Facilities where contractor is responsible for design, supply, construction (or rehab), & commissioning, & where • Employer takes O&M after commissioning, or • Contractor takes O&M for some years after commissioning • Borrowers’ use of PBP decided after analysis of available options and agreed in advance with the Bank

4. Full payment upon commissioning/ acceptance (Turn-key approach) Alt. 1 Scenario 1– O&M by Employer Selection Award based on lowest lump sum price for facility Alt. 2 Prequalification of interested bidders Advance/milestones payments against substantial security* Two-Stage Bidding based on functional requirements (one-stage for simpler projects) Final payment upon commissioning/ acceptance PBP processes for Bank-financed installations Payment Award Scenario 2– O&M by Contractor Award based on lowest total life cycle cost (NPV of facility + O&M costs) Final facility payment upon commissioning/ acceptance * 30% Service Performance Security suggested Advance/milestones payments against substantial security* Performance-based O&M payments

5. Application of PBP basic concepts • Although PBP firstly referenced in May 2004, Guidelines historically encouraged borrower’s use of performance requirements and allowed results-linked payments • Other Bank approaches using PBP concepts: • Management contracts • Roads rehabilitation, maintenance & management contracts (OPRC) • Design-Build-Operate (DBO) contracts • Concessions with Output-Based Aid (OBA) schemes • Investment lending projects with Output-Based Disbursement (OBD) mechanisms

6. Similarities between OBA and OBD • Aimed to make more efficient use of resources in providing infrastructure and other basic services • Bank-financed funds are disbursed/paid against delivered outputs • Disbursement/payment associated with the promised outputs based in efficient & reliable unit price/costs • Procurement methods for procuring the services or inputs needed to generate the outputs must be fully acceptable to the Bank

7. Differences between OBA and OBD • Payments: • Made by a government entity to a third party service provider (SP) upon delivery of outputs promised under a service provision contract • Consist of pre-agreed subsidy amounts to cover gap in investment or recurrent cost incurred by SP that user fees cannot recoup due to beneficiary constraints • Disbursements: • Go to the government upon delivery of pre-agreed outputs • May involve more than one underlying supply contract or direct government-supplied services; and • Need not be linked to a government subsidy element under a contract executed by a third party Use of Bank-financed funds Target countries All countries MICs and select IDA countries with reliable implementation capacity Unit price/cost associated with outputs on which basis payment or disbursement is made • If SP selected under Bank-acceptable procurement procedures, unit price associated with the output deemed reasonable, economic & efficient • If SP not selected competitively, efficient & reliable unit costs to be determined Efficient & reliable unit costs to be determined for disbursements Procurement of inputs required to produce outputs • SP’s own procedures if SP selected under a Bank-acceptable procedure • SP not selected competitively required to use Bank ICB but if certain conditions are met*, Bank may approve SP’s own procedures Bank–approved government procedures * See OPCS OM of Nov. 7, 2005

8. THANK YOU!