Designing Output-Based Aid Projects

Designing OBA and SIB Projects Basic Elements

A. Determining the output: What service is to be provided?

B. Reaching target population and selecting targeting methodology

C. Choosing an appropriate subsidy form

D. Determining the value of the subsidy

E. Linking outputs to subsidy disbursement

F. Organizing the institutional framework

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A. Determining the Output: Spectrum of Contracting out Service

Delivery

Source: Castalia, 2009

OBA Objective: Contract for an output as closely related to desired outcome as possible.

OBA Objective: Contract for an output as closely related to desired outcome as possible.

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InputAsset

Creation Output

Medicine ClinicPeople

Vaccinated

EquipmentICT

InfrastructureUniversalAccess

Concrete RoadServiceable

Road

Examples

Health

ICT

Roads

Outcome

Polio-freePopulation

Everyone ableto

communicate

Easier movement

of people and goods

Self-selection targeting Higher subsidies for more

basic/less complex solutions. Solar home systems (SHS) with

less capacity Risk that smaller solutions are

less efficient Provide subsidies only some

time after service has become available (so wealthier households are already connected)

Geographic targeting Easiest way to reach the

intended beneficiaries Useful in areas where intended

beneficiaries are concentrated and few people are outside targeted group. Excluding unintended

beneficiaries can be more costly than including them.

B. Selecting Targeting Methodology (1)

Geographic targeting Outputs available in poor

areas

Multiple targeting mechanisms can be combined

Income-based targeting Relies on existing social

targeting mechanisms Means-testing involves

measuring a beneficiary’s wealth to assess if subsidy is warranted

Self-selection targeting Subsidize very basic services

demanded exclusively by the poor and which are less attractive to wealthier population

Income-based targeting If using existing social targeting

mechanisms: Review quality of existing

system Check when classifications

have been updated Note potential trend of

systematic underreporting of income

National statistics may not take informal income into account

If using proxy means testing tools (e.g., questionnaire, observations):

Can be done at low cost Need reasonably high

administrative capacity in implementing agency

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C. Choosing a Subsidy Form (1)Principle and Definition

Principle: Subsidy must be targeted, linked to outputs and provide sustainable service.

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Subsidy value Unit

cost

User’s willingness

and ability to pay

Subsidy value is the “gap” between the total cost of providing a service to a user and the user’s ability to pay the cost.

One-off subsidies: Used to expand access or services to targeted households, most common form

Transitional subsidies: Used to support  tariff  reform; subsidy could fill gap between what user is deemed able and/or willing to pay and cost recovery level of tariff

Ongoing subsidies: May be required where continuous gap between affordability and cost recovery exists, such as life-line tariffs

C. Choosing a Subsidy Form (2)

Consider factors such as:

Capacity for administering subsidy scheme

Type of service to be subsidized

Extent to which service providers are willing and able to be paid over time

Availability of subsidy funding

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D. Determining the Value of the Subsidy

Principle: Subsidy must be targeted, linked to outputs and provide sustainable service.

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Subsidy value Unit

cost

User’s willingness

and ability to pay

Determining the right unit cost is essential to the project’s success

D. Determining Appropriate Unit Costs for Specified Outputs

Actual cost of service often unknown at project design stage

Mechanisms to establish unit costs: Approximation: Draw on benchmarks from incumbent

suppliers Competitive process: To reduce costs and provide market

test of unit cost amount or payment required

Use more than one source to avoid unique source bias (e.g., technical and market-based sources)

Verify unit costs independently if service provider is incumbent

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D. Determining the Value of the Subsidy

For a given output:

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Subsidy value Unit

cost

User’s willingness

and ability to pay

Assessment of willingness to pay: • Can be done through surveys, for which

there are established techniques • Look at actual expenditure on substitute

services

Competitive selection: establish winning bidding variable as:

Greatest number of outputs for given subsidy amount Least connection cost per given amount of subsidy; or Minimum subsidy required to reach a number of outputs

D. Determining the Value of the Subsidy

No competitive selection, establish value of subsidy through:

Benchmarking; and/or Review of unit costs to provide service to specified standard

In a tender for a rural electrification project (off-grid energy) in Bolivia, the winning bidder proposed 25% more beneficiaries for the fixed subsidy than the minimum required and a 40% reduction in the cost of solar home systems than an earlier UNDP project.

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E. Linking Outputs to Subsidy Disbursement

Disbursements are made on output delivery, in contrast to disbursements for input milestones

Considerations in setting disbursement schedules:Ability of service provider to “pre-finance” outputs

Timeframe to deliver outputs includes demonstrating service sustainability

Uganda Rural Electrification ProjectOutputs:

A working electricity connectionSubsidy Disbursements:

50% after customer has working connection; and, 50% after 3 successful billing cycles

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F. Organizing the Institutional Framework

Role of Service Provider (SP)

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Service Provid

er

Can be public or private

entity, an NGO, or Community-

Based Organization

Takes performance, demand and

financing risks of delivering

service

Contracted to provide a

certain service directly to targeted

beneficiaries

Innovator of service

“solutions” to maximize efficiency,

based on set standards

F. Organizing the Institutional Framework:

Selection of the Service ProviderMarket Structure: SP serves a single market

(concessionaire) or multiple entities?

Is there an incumbent?Is it a public or private entity?

Limited pool of SP:Use capacity building to

expand potential providersRequires greater outreach and “demand” marketing

Accountability for providing quality services: Through contract provision or

accreditation

Capacity to Perform: Technical expertise to deliver

service?Financial to implement and

“pre-finance” outputs?

Service Provider

Design considerations:

Consider SP’s capability and sources early in project design – flexibility required for small local SPs

Identification of financial sources and design of credit schemes: limited availability and often must be developed

Impact of financing cost and terms on tariffs or SP willingness to provide service

Need for capacity building and funding support: local banks, local operators

The use of “intermediate” outputs for subsidy disbursement or guarantees to support loans or credit schemes

F. Organizing the Institutional Framework:

Does the SP have Access to Finance?

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Principle: Financial risk transferred to SP who must provide capital up front to finance outputs

F. Organizing the Institutional Framework:

Role of Government and Regulators

1. Support commercial viability: tariffs must cover cost of operations and maintenance

2. Provide clearly defined regulatory process and adjustment mechanisms

3. Agreed procedures for dispute resolution to manage impact on scheme viability

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F. Organizing the Institutional Framework

The Role of the Independent Verification Agent

Independent output verification is the key control and reporting mechanism. It involves an Independent Verification Agent (IVA).

Desk review of all outputs Are the claims submitted correctly?

Physical review of sample Output/service delivered + quality standards Optimal sample size for verification (trade off size and

accuracy) Assess compliance with:

Design (targeting) Fiduciary or safeguard policy

Timely reporting on progress & delivery compliance for disbursement

F. Organizing the Institutional Framework

Selection of the IVAPrinciple: Transparency and no undue influenceVerification is outsourced to: Specialized consultancy firm (i.e. consultants, engineers,

etc.) (Local) Government NGO/CBO or other local community representatives

Key design issues: Independence Ease of measuring and verifying delivery Training/skills required based on complexity of output to

be verified Needs to be hired in time

Recruitment of IVA is responsibility of implementing agency

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Average IVA cost against Average Total Grant (sample of GPOBA Pilot Projects)

Sector Average Total Grant

Average %IVA/Tot Grant

Health and Other Social Services  

6,125,000 2.1%

Energy  

4,878,333

2.8%

ICT  

2,185,000

3.0%

Water Supply and Sanitation  

3,068,889

3.6%

Note: data refer to 19 out of 36 GPOBA projects

F. Organizing the Institutional Framework

Cost of the IVA

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Clinic #2: Design Elements

Assignment: Continue working on project initiatives and develop their design elements using the standard forms from binders.

Time: 1h 20 min – work in teams40 min – team presentations