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