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Cledan Mandri-Perrott Infrastructure, Economics and Finance Department World Bank IPWA,

Innovative funding for infrastructure services: the use of Output Based Aid in the Honduras water sector. Cledan Mandri-Perrott Infrastructure, Economics and Finance Department World Bank IPWA, Washington 29 March 2007. Contents. Context What is Output Based Aid

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Cledan Mandri-Perrott Infrastructure, Economics and Finance Department World Bank IPWA,

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  1. Innovative funding for infrastructure services: the use of Output Based Aid in the Honduras water sector Cledan Mandri-Perrott Infrastructure, Economics and Finance Department World Bank IPWA, Washington 29 March 2007

  2. Contents • 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 2

  3. Context • 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? 3

  4. What is Output-Based Aid? Output-Based Aid (OBA) is one method for improving the deliveryof 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

  5. 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

  6. GPOBA • 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 6

  7. Creating innovative financing structures • Output Based means that: • Is clearly definable • Is easy to verify and measure • Is as close to the desired outcome as is feasible 7

  8. Honduras 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 8

  9. How does the National OBA 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% 9

  10. Implications 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 10

  11. Implications 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 11

  12. Implications 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 12

  13. Conclusions • 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 13

  14. Thank you. Please visit us at www.gpoba.org

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