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THE WORLD BANK GROUP
Output Based Aid A Compilation of Lessons Learned and
Best Practice Guidance
Final Draft
September 2009
GPOBA and IDA-IFC Secretariat
2
Acknowledgments
This paper has been prepared by a team led by Yogita Mumssen (FEU), comprising Lars Jo-
hannes and Geeta Kumar (GPOBA) and Vyjayanti Desai (IDA-IFC Secretariat), with the support
of Inga Murariu, Daniel Coila, and Mark Njore (GPOBA), under the supervision of GPOBA
Program Manager Patricia Veevers-Carter and IDA-IFC Secretariat Director Nigel Twose.
GPOBA and the IDA/IFC Secretariat would like to extend special thanks to the peer reviewers:
Amie Batson (MDW), Andreas Schliessler (ECSSD), Dana Rysankova (AFTEG), Juan-Navas
Sabater (CITPO), Logan Brenzel (HDNHE), and Luiz Claudio Martins Tavares (AFTU1).
Additional comments and contributions were provided by the following OBA practitioners:
Carmen Nonay, Catherine Russell, and Esther Loening (GPOBA), Cledan Mandri-Perrot, Iain
Menzies and Mustafa Hussain (FEU), Xavier Chauvot de Beauchene (MNSSD), Dirk Sommer
(CIADR), and Martin Schmidt (KfW).
Special thanks to the comments and guidance provided by the OBA Advisory Committee that
met in February 2009, comprising: Alejandro Jadresic and Irving Kuczynski (GPOBA Indepen-
dent Panel of Experts), Adriana Aguinaga (CINPW), Amie Batson (MDW), Doyle Gallegos
(CITPO), Gaiv Tata (CFP), Hartwig Schafer (SDNVP), Magda Lovei (EASOP), Marc Juhel
(ETWTR), Neil Gregory (FPDVP), Penelope Brook (GIADR), Tjaarda Storm Van Leeuwen
(AFTEG), and, Vijay Jagannathan (EASIN).
3
Acronyms and Abbreviations
ACGF Africa Catalytic Grown Fund
AFR Sub-Saharan Africa Region
AusAID Australian Agency for International Development
BPHS Basic Package of Health Services
CBO Community-Based Organization
CCT Conditional Cash Transfers
CGDEV Center for Global Development
CITPO Policy Division (IBRD Telecommunications and Informatics)
COD Cash-on-delivery Aid
CREMA Contrato de Recuperación y Mantenimiento
DFID UK Department for International Development
DPL Development Policy Lending
DPO Development Policy Operation
DRC Democratic Republic of the Congo
EAP East Asia and Pacific Region
ECA Europe and Central Asia Region
ECLAC United Nations Economic Commission for Latin America and the Caribbean
EMW East-Meets West
ESCO Energy Service Company
ESMAP Energy Sector Management Assistance Program
EU European Union
FDT Fund for the Telecommunications Development
FDT Telecommunications Development Fund
FITEL Peru‘s Fund for Telecommunications Investment
FONDETEL Fund for the Telephony Development
FPD Finance and Private Sector Development
FSSAP Bangladesh Female Secondary School Assistance Project
GEF Global Environment Facility
GPOBA Global Partnership on Output-Based Aid
HH Household
IADB Inter-American Development Bank
IBRD International Bank for Reconstruction and Development
ICB International Competitive Bidding
ICR Implementation Completion Report
ICT Information and Communication Technology
IDA International Development Association
IDB Islamic Development Bank
IDCOL Infrastructure Development Company Limited
IDTR Decentralized Infrastructure for Rural Transformation
IFC International Finance Corporation
IMF International Monetary Fund
INDH National Initiative for Human Development
JHU Johns Hopkins University
KfW Kreditanstalt für Wiederaufbau
LCR Latin America and Caribbean Region
MCC Millennium Development Corporation
MDG Millennium Development Goal
MENA Middle East and North Africa Region
MFI Microfinance Institution
4
MIGA Multilateral Investment Guarantee Agency
MMR Manila Metropolitan Region
MPOH Ministry of Public Health
MSC Medium-Term Service Contract
MTR Mid-Term Review
MWC Manila Water Company
NGO Non-governmental organization
NHAI National Highways Authority of India
NHDP National Highways Development Project
NHSPT National Health Services Purchasing Team
NPV Net Present Value
NWDP National Water Development Project
O&M Operating and Maintaining
OBA Output Based Aid
OECD Organization for Economic Cooperation and Development
OPCS Operations Policy and Country Services
PBS Rural Electric Cooperatives
PER Guatemala Rural Electrification Scheme
PERMER Renewable Energy for Rural Markets Project (Argentina)
PHSPT Provincial Health Services Purchasing Team
PMMR Performance-Based Maintenance and Management of Roads
PNFP Private Not-For-Profit
PPA Performance-Based Partnership Agreements
PPER Senegal Rural Electrification Priority Programs
PPIAF Public Private Infrastructure Advisory Facility
PPP Public Private Partnership
PRSC Poverty Reduction Support Credit
PSD Private Sector Development
PV Photo-Voltaic
QEII Queen Elizabeth II Hospital
RBF Results-Based Financing
REB Rural Electrification Board
REF Rural Electrification Funds
SANRAL South African National Road Agency
SAR South Asia Region
SDN Sustainable Development Network
SHS Solar Home Systems
SIAS Guatemala‘s Integrated Healthcare System
SIDA Swedish International Development Cooperation Agency
SMME Small, Medium, and Micro Enterprises
SOE State Owned Enterprises
SPUG Small Power Utility Group
STD Sexually Transmitted Disease
SWAp Sector Wide Approach
UAF Universal Access Funds
UNDP United Nations Development Program
USAID United States Agency for International Development
USF Universal Service Funds
WASIS Water Services and Institutional Support Project
WBG World Bank Group
WSP Water and Sanitation Program
5
Table of Contents
Executive Summary ...................................................................................................................................... 8 1. Introduction ............................................................................................................................................. 14
1.1 Background .................................................................................................................. 14 1.2 Objective and Audience ............................................................................................... 14
1.3 Execution of Review/Methodology .............................................................................. 14 1.4 Structure of Report ....................................................................................................... 16
2. Context ................................................................................................................................................... 17 2.1 Definitions .................................................................................................................... 17
2.2 Traditional vs. OBA approaches .................................................................................. 17 2.3 Contracting out service delivery: the spectrum ............................................................ 19 2.4 Applications of the OBA approach .............................................................................. 20
2.5 OBA as part of the Results-Based Agenda .................................................................. 21 3. Snapshot of OBA in the WBG and Beyond ........................................................................................... 22
3.1 Universe of OBA under review .................................................................................... 22 3.2 Funding OBA ............................................................................................................... 24
3.3 Sector focus .................................................................................................................. 26 4. Lessons Learned: Cross-cutting Challenges and Best Practice .............................................................. 27
4.1 Transparency: Explicit targeting of subsidies for the poor .......................................... 29 4.2 Accountability: Shifting performance risk to providers ............................................... 33
4.3 Private sector capital and expertise .............................................................................. 42 4.4 Innovation and efficiency ............................................................................................. 46 4.5 Sustainability, Tariffs and the Enabling Environment ................................................. 50
4.6 Monitoring of results .................................................................................................... 55 5. Key Considerations and Next Steps ....................................................................................................... 57
5.1 ―External‖ challenges and possible responses by the WBG ........................................ 57 5.2 ―Internal‖ challenges and possible responses by WBG ............................................... 60
Annex 1: Table of OBA projects in the WBG (as of April 30, 2009) .......................................... 62
Annex II: Sector Specific Lessons ............................................................................................... 68 A. ICT ................................................................................................................................ 68
B. Roads ............................................................................................................................ 77 C. Energy .......................................................................................................................... 87 D. Water ............................................................................................................................ 98 E. Health ......................................................................................................................... 107 F. Education .................................................................................................................... 117
Annex III: Comparison of OBA portfolio to total WBG portfolio FY 2000 – 2009 .................. 123
6
Figures, Tables, and Boxes
Figures
Figure 1: Volume of OBA Subsidy by Sector and Region in the WBG ....................................................... 9 Figure 2: Number of Projects by Project Status ............................................................................................ 9 Figure 3: Contrast of a Traditional Input-based Approach to an Output-based Approach ......................... 18 Figure 4: Contracting Spectrum .................................................................................................................. 19 Figure 5: Volume of OBA Subsidy by Sector and Region in the WBG ..................................................... 22 Figure 6: Comparison of WBG OBA Portfolio to Total WBG Portfolio ................................................... 23 Figure 7: Comparison Portfolio vs. Number of Projects in IDA, IBRD and Blend Countries ................... 24 Figure 8: Distribution of Subsidy for All GPOBA Projects (Including Design Stage) .............................. 25 Figure 9: Distribution of OBA Portfolio by Sector and Region ................................................................. 26 Figure 10: Number of Projects by Project Status ........................................................................................ 27 Figure 11: Comparison of Performance of OBA and Traditional Projects ................................................. 35 Figure 12: Distribution of OBA ICT Projects ............................................................................................. 69 Figure 13: Global Application of Performance-Based Contracting for Roads ........................................... 78 Figure 14: Distribution of WBG OBA Projects in Transport ..................................................................... 79 Figure 15: Distribution of WBG OBA Energy Projects ............................................................................. 87 Figure 16: Distribution of WBG OBA Schemes in Water and Sanitation .................................................. 98 Figure 17: The Universe of Results-Based Financing .............................................................................. 108 Figure 18: Distribution of WBG OBA Projects in Health ........................................................................ 109
Tables
Table 1: Benchmarks/Criteria and Cross-cutting Lessons from OBA Portfolio ......................................... 11 Table 2: Distribution of OBA Projects ....................................................................................................... 23 Table 3: Distribution of OBA Portfolio by Sector and Region ................................................................... 26 Table 4: Cost and Effectiveness of Targeting Mechanisms ........................................................................ 33 Table 5: Universe of Output-Based Aid in ICT .......................................................................................... 69 Table 6: Defining ―Performance‖ in the Provision of ICT Services ........................................................... 74 Table 7: Performance Indicators for Transport Projects ............................................................................. 83 Table 8: Health Service Providers in Contracts to Provide Health Services ............................................ 113 Table 9: Parties Responsible for M&E in Contracts to Provide Health Services ..................................... 115
Boxes Box 1: Applications of OBA – Subsidy Design Mechanisms .................................................................... 20 Box 2: Nepal Biogas Support Program—Geographic Plus Self-selection Targeting ................................. 31 Box 3: CREMA – Phases I and II ............................................................................................................... 38 Box 4: Limitations to Shifting Risks to Service Providers ......................................................................... 41 Box 5: Colombia Natural Gas Distribution for Low Income Families in the Caribbean Coast – OBA and
the Private Sector ................................................................................................................................... 43 Box 6: Bank Procurement in OBA Projects ............................................................................................... 49 Box 7: Fund for Telephony Development in Chile ..................................................................................... 71 Box 8: Development of Telephony Fund in Guatemala ............................................................................. 76 Box 9: Argentina: Pilot Project for Performance-Based Maintenance: Roads Maintenance and Sector
Rehabilitation Project ............................................................................................................................. 80 Box 10: Successful Performance Based Rehabilitation and Maintenance Contracts in Chad .................... 81 Box 11: Annuity Concessions in India ....................................................................................................... 85 Box 12: Bangladesh -- Rural Electrification and Renewable Energy Development Project (2002-2009) . 89 Box 13: The ESCO Model: Argentina PERMER Concession ................................................................... 95 Box 14: Senegal Rural Electrification Priority Programs (PPER) .............................................................. 96
7
Box 15: Mozambique Water: OBA and IDA ............................................................................................ 100 Box 16: Manila Water Supply Project ...................................................................................................... 102 Box 17: Phasing in Payments Due to Access-to-finance Constraints in Uganda‘s Water Sector ............. 103 Box 18: Kenya Microfinance for Small Water Schemes .......................................................................... 104 Box 19: Expansion of Water Services in Low-income Areas of Jakarta .................................................. 105 Box 20: Morocco Urban Water and Sanitation Project ............................................................................ 106 Box 21: New Hospital Public-Private Partnership in Lesotho .................................................................. 114 Box 22: Cash-on-delivery Aid (COD) ...................................................................................................... 117 Box 23: Bangladesh Female Secondary School Assistance Project ......................................................... 118 Box 24: Conditional Cash Transfers in Education and OBA ................................................................... 120 Box 25: The Impact of PSP in the Concession Schools Program in Bogota ............................................ 121
8
Executive Summary
Objectives and Execution: The objective of this review is to provide a more definitive and prac-
tical understanding of lessons and best practice related to output-based aid (―OBA‖), a results
based financing (RBF) instrument that uses public-private partnerships and aims to more effec-
tively target access to basic services.1 The audience for this review will primarily be task teams
and managers working on project design and supervision in the relevant sectors, as well as do-
nors and governments who are interested in lessons in light of potential scale-up and main-
streaming of OBA approaches. The review has been undertaken jointly by the Global Partnership
on Output-Based Aid (GPOBA) and the IDA-IFC Secretariat.
What is OBA? OBA ties the disbursement of public funding in the form of subsidies to the
achievement of clearly specified results that directly support improved access to basic services.
Basic services include improved water supply, energy access, health care and education, com-
munications services (ICT), and transport (mainly roads). In the case of OBA, ―outputs‖ are de-
fined as close to the desired outcome or impact as is contractually feasible. For example, an out-
put might be the installation of a functioning household connection to the electricity network. In
some cases, an ―output‖ might also include a specified period of electricity delivery demonstrat-
ed through billing or collection records. ―Subsidies‖ in OBA schemes are defined as public
funding used to fill the gap between the total cost of providing a service to a user and the user
fees charged for that service, justified by the need to improve basic living conditions or the exis-
tence of positive externalities.2
Universe of OBA. When OBA was launched in the WBG with the 2002 PSD Strategy, 22 OBA
projects with a total estimated value of about $100 million had been identified. Now, nearly 130
OBA projects with a total subsidy value of about $3.3 billion have been identified in the WBG3
(figure 1).
1 Results-Based Financing (RBF) refers to a range of mechanisms designed to enhance the performance of aid through incentive-
based payments. RBF has been used most extensively in the area of health systems. RBF is an umbrella term that includes inter
alia output-based aid, performance-based inter-fiscal transfers, and conditional cash transfers. What these mechanisms have in
common is that a principal entity provides a financial or in-kind reward, conditional on the recipient undertaking a set of pre-
determined actions or achieving a pre-determined performance goal (http://go.worldbank.org/04UNXY1MS0). 2 In some cases, for example for public goods such as roads, user fees may be zero. 3 The $3.3 billion figure is skewed upwards by a few large health and road projects. This excludes related government subsidy
co-financing of $2.7 billion. Therefore the total value of WBG OBA schemes including co-financing is $4.9 billion. All dollar
values are US dollars unless designated otherwise and figures are as of April 2009. (Note: Since the PSD Strategy, some addi-
tional projects of fairly large subsidy value have been identified that were approved before 2002, while some of the other projects
identified at the time did not materialize or the OBA component was dropped.)
9
Figure 1: Volume of OBA Subsidy by Sector and Region in the WBG
Of those projects, 29 have closed, 83 are under implementation and for the most part delivering
outputs, and 16 are in design stage (figure 2). Another 66 OBA schemes have been identified
outside the WBG – mostly in the rural energy, ICT and roads sectors4.
Figure 2: Number of Projects by Project Status
Funding for OBA has come from IBRD, IDA, GPOBA, other donors such as KfW, and govern-
ments themselves through, for example, tax revenue and the collection of explicit (including
cross) subsidies from users. Those OBA schemes in developing countries that do not involve
donor support are mainly found in middle-income (IBRD) countries.
4 GPOBA continues to identify OBA projects within and outside of the Bank; the figures here reflect projects identified up to
April 30, 2009.
AFR29%
EAP3%
ECA2%
LCR56%
MENA1%
SAR9%
WBG OBA Portfolio by Region(Total = US$ 3.3 bn)
Education5%
Energy6%
Health20%
Telecom2%
Transport61%
Water & Sanitation
6%
WBG OBA Portfolio by Sector(Total = US $ 3.3 bn)
Closed23%
Design12%Implementation
65%
Number of Projects by Project Status(Total = 128)
10
Piloting and mainstreaming. The piloting phase of OBA has provided a wide array of lessons
and in many cases has been a success. The 128 OBA projects that have been implemented or are
underway in the WBG reach at least 58.9 million beneficiaries worldwide5. The first OBA pilots
were launched in the ICT and roads sectors in the 1990s in Latin America (LCR). These pilots
were replicated and scaled-up first in that region, and eventually lessons learned were transferred
from IBRD countries to IDA countries. It could be reasonably claimed that OBA has become
―mainstreamed‖ as one of the mechanisms used to expand access in these two sectors in many
parts of the world – and in fact many non-WBG OBA projects identified are in ICT and roads.
In the health and off-grid energy sectors, OBA has become an important results-based financing
instrument enabling improved access for the poor, and OBA schemes are increasingly found out-
side the WBG as well. OBA is still at pilot stage in the water, education, and grid-based energy
sectors, although lessons for scale-up in some cases are now starting to become available.
Although OBA is increasingly being used as a tool to increase access for basic services, the per-
centage of the OBA portfolio as compared to overall IBRD and IDA activities is small. About
2.7% of the World Bank project portfolio in the transport, ICT, health, water & sanitation, ener-
gy and education sectors, approved between fiscal year 2000 and 2009 used an OBA approach6.
ICT was the sector using OBA most commonly7, with 11% its portfolio using OBA, followed by
health (5.7%) and transport (3.7%). So, although OBA is gaining ground and recognition, there
is still some ways to go in terms of scaling-up so that real strides can be made toward improving
access to basic services for the poor.
Enabling environment. The reasons for OBA‘s predominance in some sectors, as well as origi-
nation in Latin America in the 1990s, are to a large extent related to sector and country circums-
tances. More specifically, in order for an OBA approach to be viable, service providers must be
able to take on performance risk, and in particular, ―pre-finance‖ investments until subsidies are
disbursed based on output verification. Although there are several cases of OBA with public
sector providers, private sector operators traditionally are better structured to respond to perfor-
mance-based incentives8 and are usually better able to pre-finance outputs. Thus there appears to
be a correlation with the prevalence of OBA and the sector and regional experience with public-
private partnerships (PPP). This would imply that OBA will take stronger root where contractual
and regulatory practices are traditionally more supportive of the private sector taking risks. At
the same time, OBA can be an important mechanism through which efficiency gains from sector
5 Data on the number of beneficiaries is not readily available for public access ICT and transport projects. Beneficiary informa-
tion is particularly limited in the case of transport sector (available only in two of the 23 World Bank implemented projects) due
to the difficulty in identifying number of beneficiaries for non-exclusive road projects. 6 There are several contributing factors to this low percentage besides that OBA has not been fully mainstreamed. While the
WBG OBA portfolio only includes projects that aim at increasing household access to basic services, the overall WBG portfolio
also includes projects financing large upstream investments, wider sector reform programs, AAA, etc and the overall WBG port-
folio obtained from the WBG Business Warehouse includes sub-sectors such as mining, railways, ports or nutrition for which no
OBA projects have been identified. 7 However, the overall ICT portfolio is relatively small ($657 million), compared for example to transport (over $30 billion),
which helps explain the small percentage of OBA subsidies in ICT even though OBA is most mainstreamed in that sector. Addi-
tionally, OBA subsidies in the ICT sector mainly was financed through levies on service providers, not donor funds, so that the
exact subsidy amounts depend on service provider revenues and are unknown at the start of the project. The review identified at
least $6.2 billion in levies that were used to fund universal access funds. 8 As a consequence of ownership change from public to private, increases in labor productivity, service quality and investment
have been reported in competitive markets . Gains in productivity and profitability associated with privatization have for example
been demonstrated by Megginson, Nash, and van Randenborgh (1994), Frydman et al (1997); La Porta and Lopez-de-Silanes
(1999), and Brown et al (2006) (Gassner et al, June 2007, p.3, footnote 6).
11
reform are shared with users through improved access, and thereby can help underscore the ben-
efits of PPP.
Cross-cutting lessons. The OBA portfolio as a whole has been analyzed against the bench-
marks/criteria that were set out at the early stages of piloting as purported advantages of OBA
compared to traditional approaches. These benchmarks/criteria and the cross-cutting lessons in
relation to best practices and challenges are provided below. These lessons are gleaned from the
194 Bank and non-Bank OBA projects reviewed. Most of the lessons are taken from the projects
that have closed or are under implementation, although in some cases there were important and
interesting lessons to be learned from projects at design stage (table 1).
Table 1: Benchmarks/Criteria and Cross-cutting Lessons from OBA Portfolio
Benchmarks/
criteria
Cross-cutting lessons from OBA portfolio
Increased trans-
parency through
the explicit tar-
geting of subsi-
dies
OBA provides a good platform for targeting infrastructure and social
services subsidies. The focus on subsidies for access is inherently pro-
poor: the poorest segments of the population often cannot afford initial
access (e.g. cost of connection, health insurance) and therefore often do
not benefit from subsidies for on-going service provision. Further, by ex-
plicitly defining outputs, targeting can be made more precise. The process
of output verification can also provide an additional check on the targeting
of subsidies, and is helping provide early evidence that OBA schemes are
reaching the poor.9
Increased ac-
countability by
shifting perfor-
mance risk to
service providers
Compared to similar input-based schemes, OBA shifts performance risk
to service providers by virtue of the fact that payments to providers are
made after delivery of verifiable access and service. But the degree of
performance risk shifted depends on the ability of the service provider to
―pre-finance‖ investments/services until output-based payments are dis-
bursed. Ultimately access to finance will determine how much perfor-
mance risk is reasonably shifted to the provider.
Increased en-
gagement of pri-
vate sector capi-
tal and expertise
OBA does leverage private funding, but because of its generally pro-poor
nature, private financing leveraged will be limited by the extent user fees
(e.g., tariffs) can incorporate investment costs while remaining affordable.
What is particularly noteworthy is the ability, through relatively small
amounts of OBA subsidy, to mobilize private sector expertise to serve
customer segments the private sector might otherwise not serve. Ulti-
mately, the effective use of private sector participation is dependent on the
enabling environment, for example the depth and quality of experience
with PPP contracts, regulation, and access to finance.
9 Explicit targeting of subsidies for specific users and uses is common across all the sectors where OBA is prevalent, except for
the roads sector (and a limited extent ICT), where the ―public goods‖ (access for all) nature makes it difficult to exclusively target
specific beneficiaries.
12
Benchmarks/
criteria
Cross-cutting lessons from OBA portfolio
Encouraging in-
novation and ef-
ficiency
There is some evidence that output-based payments have led to improve-
ments in operational efficiency and the delivery of innovative (often pro-
poor) access to service solutions. Further, OBA has demonstrated effi-
ciency gains through competition in most sectors when competitive pres-
sures have been applied in the selection of the OBA service provider (noting that competitive tendering processes can take time). The focus on
outputs as opposed to inputs should lead to innovations which translate
into future efficiency gains, as has been seen in ICT and to some extent in
roads.
Increased sustai-
nability of public
funding
It is too early to analyze whether OBA schemes have provided long-term
sustainable solutions. There is no evidence to date to suggest that
schemes that involve OBA subsidies are less sustainable than their in-
put-based counterparts, and in fact, the design of OBA schemes (for ex-
ample, greater degree of demand risk shifted to service providers given the
link between outputs and uptake, which in turn incentivizes efforts at
stakeholder participation and education through community organizations,
NGOs, etc) can enhance longer-term sustainability.
Enhancing moni-
toring of results
By paying on verified outputs, OBA internalizes the monitoring of re-
sults. Best practice would also use the monitoring platform of OBA
beyond just the verification of outputs to also check other aspects of ser-
vice delivery. With OBA schemes, accountability also increases for do-
nors and governments: public funding is linked to the fact that pre-
identified outputs are (were) delivered and therefore waste or inappro-
priate allocation of such funding should be minimized.
Next steps. OBA is not a panacea. It is one mechanism within the spectrum of results-based fi-
nancing mechanisms which is showing clear promise. But cross-cutting challenges for success-
ful OBA schemes remain – even for the sectors where OBA is mainstreamed. Although some of
these challenges are not specific to OBA, they must be addressed in order for OBA to continue to
make a mark on aid effectiveness, especially in light of new challenges brought forth with the on-going financial crisis:
access to finance to pre-finance outputs/secure and sustainable sources of subsidy
funding;
capacity of implementing agencies and service providers;
donor coordination and harmonization; and,
limitations to the use of geographic targeting as scale increases.
Further, as most OBA schemes involve PPP arrangements, the most basic aspects for the relevant
enabling environment should be in place. Not all these elements may be required at the time of
piloting, but attempting to short-cut key issues related to, for example, tariff setting and adjust-
ment, quality of service standards, and contract adjustment and monitoring, may lead to delays
for the pilot and will need to be addressed in detail for scaling-up. Understanding the basis for
13
an enabling environment for OBA schemes in any given sector is a prerequisite for sustainable
OBA programs.
The WBG, including its multi-donor programs, has a large role to play in addressing these chal-
lenges in terms of financial support and technical assistance (e.g., transaction advisory, capacity
building, tariff/subsidy reform). The importance of WBG co-ordination can also demonstrated
here. OBA is a platform that can effectively bring together the range of instruments across IDA
and IFC in scaling up targeted infrastructure and social services. For example, while IFC in-
vestments can play a role in supporting the project with financing and bringing in other private
capital, the IDA financing may be used for the OBA payment.
Some strategic guidance has been provided through the Sustainable Infrastructure Action Plan
(2008), Innovating Development Finance (Girishankar, 2009), the PSD Strategy Update, and the
2007 World Bank Strategy for Health, Nutrition and Population, to name a few. Efforts to inte-
grate OBA within country assistance strategies and broader sector programs are underway, but
more needs to be done. More work is needed to ensure OBA projects are able to maintain their
―output‖ driven nature while continuing to meet Bank procurement and financial management
requirements. The Investment Lending Reform (Concept Note, January 26, 2009) currently
being considered by OPCS will be attempting to tackle these very issues, and OBA will provide
some important lessons for this initiative as well.
The ultimate decision on the success of OBA or of any other aid effectiveness tool rests with the
WBG client governments and their interest, ownership, and commitment to design and sustain
such approaches. The WBG has a key role to play in working with the broader develop-
ment/donor community to demonstrate that OBA is an important mechanism to help improve
access to basic services and reach the MDGs. The existing information and expertise on OBA,
including this review, provide a solid underpinning for the successful design of pilots or pro-
grams that respond to client needs.
14
1. Introduction
1.1 Background
Output-based aid (OBA) is being used as an innovative mechanism to deliver basic infrastructure
and social services to the poor. The concept was introduced in the WBG in 2002 through the
Private Sector Development (PSD) Strategy and more formally in January 2003 when the Global
Partnership on Output-Based Aid (GPOBA) was launched as a World Bank-administered donor-
funded pilot program to test the approach with a view to mainstreaming it within IDA as well as
with other development partners.
The IDA14 Mid Term Review (MTR) in November 2006 was an early opportunity to present the
emerging lessons and preliminary findings of the OBA approach. The IDA14 MTR discussion
highlighted that although it was too early to draw definitive conclusions, the emerging findings
were encouraging. One of the recommendations of the IDA14 MTR discussion was that there
should be focused scaling-up of OBA within IDA operations, as well more collaboration across
the WBG, and that the results of the scaling-up would be reported at the IDA15 MTR. This has
therefore been the focus of OBA within the WBG over the last two years, led by GPOBA of
which IFC is a major funding contributor.
In early 2008, the IDA-IFC Secretariat was created to foster greater collaboration between IDA
and IFC. OBA has been identified as one of the instruments that could be used in joint IDA-IFC
operations. Therefore, in preparation of the Secretariat‘s first Annual Report for May 2009 (IDA-
IFC, 2009), and as a precursor to the IDA15 MTR in the fall of 2009, GPOBA together with the
IDA-IFC Secretariat has conducted this review of lessons learned and best practice.
1.2 Objective and Audience
The objective of this review is to provide a more definitive and practical understanding of les-
sons and best practice related to OBA, and the use of OBA as one approach to enhance the effec-
tiveness of donor funds, including through promoting public-private partnerships. The audience
for this review will primarily be task teams and managers working on project design and super-
vision in the relevant sectors as well as donors and governments who are interested in lessons in
light of potential scale-up and mainstreaming of OBA approaches. The guiding principles will be
to better articulate the lessons learned from the various applications of OBA and best practices
by sectors.
1.3 Execution of Review/Methodology
The review has been conducted by GPOBA and the IDA-IFC Secretariat. Much of the work has
been conducted in-house by the GPOBA monitoring and evaluation team (M&E team), which is
tasked with documenting and disseminating lessons learned – both best practice and challenges –
from OBA schemes in and outside the WBG. Guidance and peer review has been provided by
sector experts who have worked on both OBA and non-OBA projects in the Bank.
The methodology broadly involved the following:
a) Identify the universe of OBA projects including projects funded outside of GPOBA and
the WBG.
15
b) Gather information on project design, implementation and results.
c) Compile sector specific lessons learned and best practices of OBA as well as lessons
from the various applications of OBA such as one-off subsidies, transitional subsidies
and ongoing subsidies.
For this review, 194 OBA projects were identified and analyzed. They are classified as follows
based on the OBA funding source (a few of which involve co-financing and some of which are
now under consideration for scaling-up):
GPOBA projects – This includes 48 projects that have received either technical assis-
tance and/or investment subsidy funding (or are in the process of receiving funding) from
GPOBA.
World Bank projects – This includes 80 OBA projects that are funded by the World
Bank Group, independent of GPOBA.
Non-Bank Projects – This includes 66 OBA projects that are funded either by other do-
nors such as KfW and GtZ, or by governments themselves such as the OBA scheme for
water and sanitation services in Chile. This also includes OBA projects in developed
countries such as the special education voucher scheme in the United States. It is not
possible to conduct an exhaustive search, but the review attempts to capture a representa-
tive sample. Further, the review has largely focused on developing countries.
For each project, the following information was sought:
Project design: Design elements captured include output definitions, payment triggers,
financial sustainability/tariffs, targeting, total costs, funding source, role of private sector,
transfer of performance risk to service providers, and administration and monitoring of
the OBA scheme.
Project implementation and results: This includes results of bidding (where applica-
ble), efficiency gains, delivery of outputs and disbursement of funding, lessons learned
and problems encountered during project preparation and implementation. Where possi-
ble, direct comparisons was made with input-based projects.
OBA projects were identified with the help of OBA practitioners and experts both within and
outside the WBG (e.g. the consulting firm Castalia for additional ICT and transport projects).
The team also relied on several in-depth studies separate from this review exercise, such as the
extensive Regulatel study (Stern and Townsend) undertaken by the WBG‘s Global ICT practice.
For WBG (including GPOBA) projects, information on project design and results was obtained
from the following standard documents. The review team also contacted task managers and other
team members for any additional information and clarifications.
Project Appraisal Document (PAD)
Project Information Document (PID)
Operations Manual (OM)
Implementation Status Report (ISR)
Unaudited Interim Financial Reports (IFR)
16
Implementation Completion and Results Report (ICR)
In addition, the following documents that are specific to GPOBA were analyzed:
GPOBA semi-annual Reports
Independent Verification Agent Reports
Post Project Report
For non-Bank projects, information is typically limited. The M&E team relied heavily on inter-
net searches and discussions with sector experts to gather information on these projects.
1.4 Structure of Report
Section 2 of this report starts by providing a clear definition of OBA, and then puts OBA in the
context of other results-based arrangements and subsidy mechanisms. This section also provides
a description of the various applications of OBA: one-off, transitional or ongoing subsidies.
Section 3 of the report provides an overview of where OBA approaches are being implemented.
Section 4 provides a cross-sector review of lessons learned from implementing OBA. The OBA
schemes identified are analyzed against certain benchmarks/criteria which had been set out as
purported advantages of OBA at the early stages of piloting. Challenges and best practices are
analyzed across sector lines where appropriate, in particular if implementation in sectors where
OBA is less prevalent can benefit from lessons where OBA is more mainstreamed.
Section 5 of the report summarizes challenges to be addressed by the WBG and ends with a view
to next steps.
Annex I presents a table of all OBA projects identified in the WBG as of April 30, 2009.
Annex II provides greater detail on the use of OBA in each of the sectors analyzed, on a sector-
by-sector basis.
Annex III provides data on the WBG OBA portfolio in context of the overall WBG portfolio for
the relevant sectors for the same time period.
17
2. Context
2.1 Definitions
OBA ties the disbursement of public funding in the form of subsidies to the achievement of
clearly specified results that directly support improved access to basic services. Basic services
include improved water supply, energy access, health care, education, communications services,
and transport.
In the case of OBA, ―outputs‖ are defined as close to the desired outcome or impact as is con-
tractually feasible. For example, an output might be the installation of a functioning household
connection to the electricity network. In some cases, an ―output‖ might also include a specified
period of electricity delivery demonstrated through billing and collection records. The intended
outcome of such an output-based scheme would be to improve the basic living conditions of the
poor household, reducing indoor household pollution, increasing opportunities for education
through better lighting or through information passed through radio and television, and the like.
The intended development impact could include for example a reduction in morbidity or in-
creased lifetime earnings.
―Subsidies‖ are defined as public funding used to fill the ―gap‖ between the total cost of provid-
ing a service to a user and the user fees charged for that service.10
Policy concerns such as im-
proving basic living conditions for the poor or the existence of positive externalities from a re-
duction in disease may justify the use of subsidies. Both the definition of outputs and the design
of subsidy mechanisms are discussed in greater detail below.
2.2 Traditional vs. OBA approaches
Neither performance arrangements nor subsidies are new to the developing world or the WBG.
Performance contracts have been implemented for several decades, using both public and private
operators. But ―outputs‖ in OBA schemes are generally more narrowly defined than benchmarks
in traditional performance arrangements, which in some cases may be more input-oriented. Sub-
sidies have also existed in infrastructure and social services sectors. But OBA refines the target-
ing of subsidies by bringing together performance-based arrangements and subsidies through the
explicit linking of the disbursement of subsidies to the achievement of agreed outputs.
Figure 3 below provides a simple contrast of a traditional input-based approach to an output-
based approach.
10 In some cases, for example for public goods such as roads, user fees may be zero.
18
Because of the clear link between pre-identified outputs and ex post payment (or, ―subsidies‖),
the following advantages of OBA over traditional approaches are assumed:
1) Increased transparency through the explicit targeting of subsidies, tying these subsi-
dies to defined outputs
2) Increased accountability by shifting performance risk to service providers by paying
them only after they have delivered an agreed output
3) Increased engagement of private sector capital and expertise by encouraging the pri-
vate sector to serve customers (usually the poor) they might otherwise disregard
4) Encouraging innovation and efficiency by leaving the service ―solutions‖ partly up to
the service provider and through least cost determination of subsidy required
5) Increased sustainability of public funding through the use of one-off subsidies and
linking ongoing subsidies to sustainable service
6) Enhancing monitoring of results since payments are made against agreed outputs.
Some of these advantages were postulated in the PSD Strategy of 2002 and were also the basis of
analysis in the IDA14 MTR discussion paper on OBA. These are also the criteria/benchmarks
Inputs (such as materials)
Service Recipient
Inputs (such as materials)
Service Recipient
Private Finance
Public Finance
Service Pro-vider
Service Pro-vider
Traditional (input-based) Approach
Output-Based Approach
Private financing mobilized by ser-vice provider
Reimbursement for out-puts delivered
Source: Brook and Petrie, 2001
Figure 3: Contrast of a Traditional Input-based Approach to an Output-based Approach
19
against which the current portfolio of OBA projects identified in the WBG and outside is ana-
lyzed in this review.
2.3 Contracting out service delivery: the spectrum
Under OBA schemes, services are contracted out to a third party provider, and that contract or
other official arrangement is the mechanism through which the output-based disbursement crite-
ria are established. The ―third party‖ in OBA schemes is typically a private enterprise, but could
also be a public utility, NGO, community-based organization, or even a separate branch or insti-
tution of government from that entity providing the official public funds.
Over the last two decades, schemes that harness private financing to deliver infrastructure servic-
es have expanded considerably. Under traditional procurement, private infrastructure services are
contracted at the ―input‖ end of the spectrum, with the government purchasing specific ―inputs‖
and using these to build assets and provide services itself (figure 4).
Contracting ‗closer to the input end‘ (e.g. the construction of water treatment plants) does not
guarantee that the inputs the government purchases actually lead to the outcomes (e.g. a reduc-
tion in waterborne diseases) or impacts (e.g. decreased morbidity) that the government actually
wants. But because outcomes and impacts are a combined product of what the provider can in-
fluence and other factors outside the service provider‘s control, either governments seeking to
pay on outcomes and impacts will not find a willing, credible service provider or the provider
will charge a substantial premium for making its payment contingent on factors that it cannot
control.
What can be done, however, is to contract for an output that is as closely related as possible to
the desired development outcome or impact, while performance risk is still largely under the ser-
vice provider‘s control. This is the rationale behind ―output-based aid‖. Outputs would include,
for example, contracting for functioning yard taps as part of a water supply program, a specified
number of people to be vaccinated in the case of health programs or working public payphones
or solar home systems to be installed in villages in the case of ICT or energy. But in order to en-
sure sustainability and for service providers to take on appropriate demand risk, OBA usually
involves a mixture of payment on outputs and outcomes – e.g. use of electricity or ICT services.
However, the farther one goes along the output/outcome/impact spectrum, the greater the risk
Design Development
Impacts
(Intermediate)
Outcomes Outputs Build,
Operate
-Output specification
-Service provider selection
OBA “Outputs” include
-Water connection made & service provided
-Solar Home System installed & maintained
-Medical treatment provided
OBA “Outputs” Independently verified
Inputs
Figure 4: Contracting Spectrum
20
borne by the service provider, and consideration must be given as to whether the provider is rea-
sonably able to bear that risk, and at what cost.
2.4 Applications of the OBA approach
OBA schemes can provide subsidies in three ways: one-off subsidies such as connection subsi-
dies; transitional tariff subsidies which taper off as user contributions increase; or ongoing subsi-
dies. The subsidy design chosen will depend on factors such as the sustainability of the funding
source, the capacity for administering the subsidy scheme, the type of service to be subsidized,
and the extent to which the service provider is willing and able to be paid over time (box 1).
Box 1: Applications of OBA – Subsidy Design Mechanisms
One-off subsidies are the most common application of OBA approaches and usually involve capital subsidies
for access to a given service. An example is when a large portion of the subsidy is paid after the targeted
beneficiaries are connected to a network and connections are verified. Given that in OBA approaches the
emphasis is on service delivery rather than on physical connections, even in the case of one-off subsidies a
portion of the subsidy may be withheld and paid only after verification of a certain number of months of sa-
tisfactory service delivery (hence a mixture of ―outputs‖ and ―intermediate outcomes‖ against which one-off
subsidies are disbursed to provide a measure of improved access).
Transitional subsidies can be used to support tariff reforms, where a subsidy is used to fill the gap between
what the user is deemed able and/or willing to pay and the cost-recovery level (e.g., long-run marginal cost)
of the tariff. The subsidy is transitioned out after a specified period of time (e.g., months or years) as the user
contribution increases (and possibly as tariff levels required for cost recovery decrease with efficiency gains).
In these cases, the output against which the subsidy is paid is the service delivered and billed by the provider.
The review identified only a handful of transitional OBA schemes and very few of those are still in place.
Ongoing subsidies may be required in cases where there is a continuous gap between affordability and cost
recovery – including for consumption costs. As in the case of transitional schemes, ongoing subsidies should
be paid out against pre-determined targeted outputs in order to be considered OBA.
For utility services, most OBA schemes in water, energy, and telecommunications rely on one-
off subsidies enabling initial access, partly because OBA is targeted to the poor and the poor are
usually not connected to network services in the first place so often cannot benefit from ongoing
or transitional tariff subsidies. A one-off OBA subsidy may be used, for example, to help connect
a poor household to the water or electricity network or to reduce a community‘s contribution for
provision of pay phones or internet points of presence.
Ongoing output-based subsidies in the utility sectors are seen more often in countries with
higher rates of access. For example, in Chile an income-based targeting scheme channels an on-
going output-based subsidy through service providers to poor urban households for a life-line
(minimum acceptable) amount of water consumed.11
11 Most other commonly used quantity-based tariff subsidies such as increasing block tariffs, however, are not OBA. Such
schemes usually charge tariffs below cost for low-consumption, because it is assumed that poor households consume small
amounts. These subsidies are usually intended to be financed by cross-subsidies from higher-consuming customers (who are
charged higher tariffs). However, the amount of cross-subsidy received by the operator is not related to the amount of subsidy
provided to the low-consuming households, but rather, the subsidy collected from the high-consuming households. Therefore,
the operator ―earns‖ the subsidy from the high-consuming households whether he serves the targeted households or not. These
issues are discussed in greater detail in Section 4.
21
Ongoing output-based subsidies normally fund the provision of basic services or maintenance in
OBA projects in roads, health, and education. OBA road maintenance schemes require ongoing
subsidies for the life of the road, often funded through road funds. OBA health schemes, to en-
sure continued access to care for the poor, often channel subsidies in an ongoing manner through
health care providers as they deliver agreed services, such as well-child visits, over a period of
time – although some health projects may focus on interventions of a one-off nature such as safe-
child delivery.
2.5 OBA as part of the Results-Based Agenda
OBA is an important part of the WBG‘s spectrum of results-based solutions of development
finance. For example, OBA is one key element of a broader universe of results-based financing
(RBF) in the health and education sectors, where RBF is ―a payment made to a provider, payer
or consumer when measurable actions are taken or defined performance targets are achieved‖
(Brenzel et al., 2009) Other RBF mechanisms include conditional cash transfers and cash on de-
livery (see health section in Annex II). This paper will not cover parts of the results-based spec-
trum that are not OBA.
However, it is worth noting that some of different results-based mechanisms can play comple-
mentary roles. For example, conditional cash transfers (CCT) described in greater detail in the
health and education annexes may be enhanced through the use of OBA-type mechanisms.
CCTs can provide incentives for users to partake in health, education and other schemes (e.g.
sanitation) that exhibit positive externalities when they otherwise might not choose to; OBA can
help incentivize providers to ensure that the services are available when users demand such a
service. This is an area to be explored further.
22
3. Snapshot of OBA in the WBG and Beyond
3.1 Universe of OBA under review
At the time of the PSD Strategy Implementation Progress Report in 2003, 22 OBA projects with
a total estimated value of about $100 million12
had been identified – although since then the
number of projects identified that were approved before 2003 has risen to 33, with a total fund-
ing amount of $1.3 billion.
Now, about 128 OBA projects with a total subsidy value of about $3.3 billion (excluding the
$2.7 billion subsidy funded by recipient governments) have been identified in the WBG 13
(fig-
ure 5). Of those 128 projects identified in the WBG, 29 are closed, 83 are under implementation
and for the most part delivering outputs, and 16 are in design stage. This review draws mostly
from the closed projects and those under implementation, although there are also some important
lessons to be learned from project design.
Another 66 OBA schemes have been identified outside the WBG, mostly in the ICT, transport
(mainly roads), and energy sectors. There may be more OBA schemes that were not discovered
by this review.
Figure 5: Volume of OBA Subsidy by Sector and Region in the WBG
To put this in context, OBA is only a small share of the World Bank portfolio, at 3% in total.
Since 2000 between 0.56% and 7.9% of project volume approved each year used OBA. The
largest share of OBA projects was 13.1% of funding volume in the ICT sector, followed by
health (6.3%) and Transport (4.2%) (figure 6).
There are several contributing factors to this low percentage, aside the fact that OBA has not yet
been fully mainstreamed. While the WBG OBA portfolio only includes projects that aim at in-
12 All $ in this review represent US dollars unless designated otherwise. 13 GPOBA continues to identify OBA projects within and outside of the Bank; the figures here reflect projects identified up to
April 30, 2009.
AFR29%
EAP3%
ECA2%
LCR56%
MENA1%
SAR9%
WBG OBA Portfolio by Region(Total = US$ 3.3 bn)
Education5%
Energy6%
Health20%
Telecom2%
Transport61%
Water & Sanitation
6%
WBG OBA Portfolio by Sector(Total = US $ 3.3 bn)
23
creasing household access to basic services, the overall portfolio also includes projects financing
large upstream investments, wider sector reform programs, AAA, etc and the overall WBG port-
folio obtained from the WBG Business Warehouse includes sub-sectors such as mining, railways,
ports or nutrition for which no OBA projects have been identified. For a breakdown by sector,
please refer to Annex III.
Figure 6: Comparison of WBG OBA Portfolio to Total WBG Portfolio
The regional and sector breakdown of these OBA projects is provided in table 2. As the table
shows, most of the projects in the WBG are currently in AFR (due to recent piloting efforts by
GPOBA) and LCR (which is where the first OBA pilots in each sector reviewed began).
Projects outside of the WBG were overwhelmingly in the ICT and transport (i.e. roads) sector,
and predominantly in LCR.
Table 2: Distribution of OBA Projects
AFR LCR EAP SAR ECA MENA Grand
Total
Water & Sanitation 12 7 7 3 0 3 32
Energy 7 6 6 5 3 0 27
Transport 9 11 0 1 1 1 23
Health 11 3 3 4 0 1 22
Telecom 6 6 5 2 1 0 20
Education 0 1 0 3 0 0 4
Grand Total 45 34 21 18 5 5 128
The nearly four-fold increase in the number of OBA projects in the WBG within a period of five
years is due to a variety of factors, in particular:
2000 2001 2002 2003 2004 2005 2006 2007 2008
Total $5,539 $6,705 $6,831 $7,333 $9,400 $8,214 $8,608 $11,136 $10,635
OBA $31 $83 $133 $68 $743 $247 $382 $132 $403
$-
$2,000
$4,000
$6,000
$8,000
$10,000
$12,000
Total WBG funding approved(FY 2000-2009 in m)
24
an increased emphasis on results and accountability by donors and governments, includ-
ing the WBG results agenda;
an explicit recognition that well-designed subsidy schemes are an integral part of a pro-
poor infrastructure and social services delivery strategy; and,
a recognition that in order for PPP to be successful, specific attention needs to be paid to
pro-poor service delivery.
This explicit acknowledgment that subsidies are sometimes necessary, coupled with new evi-
dence that many existing subsidy schemes such as quantity-based subsidies embedded in tariffs
often have a regressive targeting incidence, have contributed to the appeal of more targeted sub-
sidy schemes such as OBA (Komives et al., 2005).
3.2 Funding OBA
Funding for OBA schemes has come from IBRD, IDA, GPOBA, other donors such as KfW, and
governments themselves through, for example, tax revenue and the collection of cross-subsidies
from users. The WBG is the biggest donor with over $3.3 billion committed to fund subsi-
dies to approximately 80 projects14
. Many of the WBG‘s original OBA projects were in the
Latin America region and in the roads and ICT sectors. Subsequent roads and ICT schemes have
built on the lessons from these schemes – with varying degrees of success – and expanded into
other regions so that there are now a substantial number of roads and ICT schemes in regions
such as AFR. This is discussed in the sector sub-sections in Annex II as well as in Section 4. Of
the $3.3 billion WBG portfolio, the majority of the projects (59%) are in IDA countries
compared to 29% percent in IBRD countries. In terms of subsidy volume, IBRD countries
account for the largest share at 56% of the total WBG subsidy portfolio compared to IDA’s
39%. About 12% of projects, accounting for 5% of the subsidy volume, are located in
IDA/IBRD blend countries (figure 7).
Figure 7: Comparison Portfolio vs. Number of Projects in IDA, IBRD and Blend Countries
14 Excludes projects with GPOBA subsidy funding or technical assistance.
BLEND5%
IBRD56%
IDA39%
Distribution of OBA subsidy(Total = US$3.3 bn)
BLEND12%
IBRD29%
IDA59%
Distribution of OBA projects(Total = 128 projects)
25
It is worth noting that some of the WBG projects have received substantial amounts of comple-
mentary subsidy funding from the recipient governments worth a total of $2.7 billion. The bulk
of this government funding has been in the transport and health sectors, accounting for 64% and
30% respectively. More than 76% of this funding came from IBRD governments, though they
accounted for only 48% of the projects that received complementary subsidy funding from gov-
ernment. Therefore the total OBA subsidy portfolio for WBG projects (including government
co-financing) is $6 billion.
In addition to the 80 projects described above, another 48 projects have either received funding
or are in the process of being funded by the World Bank-administered program, GPOBA. GPO-
BA was created in 2003 by the UK‘s DFID and the World Bank. GPOBA was originally in-
tended to help assist in the preparation of OBA projects and document and disseminate the les-
sons learned. In 2005, through an additional DFID contribution, GPOBA also became able to
help fund actual subsidy schemes. This galvanized the development of over 28 GPOBA-funded
projects, most of which are under implementation or for which grant agreements are imminent.
New donors have since joined GPOBA, including the Netherlands government (DGIS), AusAID,
Sida, and the IFC.
GPOBA has to some extent focused on designing and developing OBA schemes in areas where
OBA has been less tested, in particular the water and sanitation sector. Over 60% of the GPOBA
projects are in IDA countries and they account for 72% of GPOBA funding volume. A majority
of GPOBA projects are in the water and sanitation sectors (52%), followed by energy (25%), and
together they account for over 80% of the GPOBA subsidy volume (figure 8). Further, as de-
scribed in greater detail below, although OBA was originally envisioned as a tool to enhance pri-
vate sector participation, GPOBA has also attempted to pilot OBA with commercially-viable
state-owned enterprises (SOEs) in sectors where public utilities have continued to play a domi-
nant role in service provision.
Figure 8: Distribution of Subsidy for All GPOBA Projects (Including Design Stage)
BLEND8%
IBRD20%
IDA72%
GPOBA Subsidy Distribution(Total = US$ 145 m)
Energy30%
Health16%
Telecom3%
Water & Sanitation
51%
GPOBA Subsidy Distribution(Total = US$ 145 m)
26
OBA schemes have also been identified outside the WBG – both in developed and developing
countries. In some cases donors are playing an active role, such as KfW in the health and renew-
able energy sector or DGIS with the Energising Development program, implemented by GTZ in
energy. More generally, for developing countries, OBA schemes that do not involve donor sup-
port are mainly found in middle-income (IBRD) countries which are able to fund subsidy
schemes largely from cross-subsidies or tax revenue.
3.3 Sector focus
Since OBA approaches can vary a great deal depending on the sector context, best practice and
challenges encountered are easier to delineate by sector. Some of these lessons can be trans-
ferred across sectors, and where this is the case, such lessons are discussed in Section 4 of this
review. But what is clear is that in order for OBA or any innovative mechanism to become rele-
vant, it must be able to adapt to regional and sector circumstances and constraints. Figure 9
shows the key sectors under review and provides the amount of subsidy of OBA projects by sec-
tor and region identified in the WBG; table 3 shows the distribution of the OBA portfolio by sec-
tor and region. Annex II provides a more detailed description of lessons learned on a sector-by-
sector basis.
Figure 9: Distribution of OBA Portfolio by Sector and Region
Table 3: Distribution of OBA Portfolio by Sector and Region
$-
$200
$400
$600
$800
$1,000
$1,200
$1,400
$1,600
$1,800
$2,000
AFR EAP ECA LCR MENA SAR
Mill
ion
s
Distribution of OBA Portfolio by Sector and Region
Telecom
Water & Sanitation
Energy
Education
Health
Transport
Transport Health Education Energy
Water &
Sanitation Telecom Grand Total
AFR 635,588,000$ 144,815,164$ -$ 58,350,000$ 97,861,433$ 21,490,705$ 958,105,302$
EAP -$ 32,140,000$ -$ 40,600,000$ 23,275,640$ 10,076,630$ 106,092,270$
ECA 55,000,000$ -$ -$ 10,100,000$ -$ -$ 65,100,000$
LCR 1,303,026,000$ 375,104,000$ 41,140,000$ 59,560,000$ 47,380,880$ 29,950,000$ 1,856,160,880$
MENA 40,000,000$ 6,232,100$ -$ -$ 8,400,000$ -$ 54,632,100$
SAR -$ 119,000,000$ 138,007,143$ 24,370,000$ 2,264,743$ 11,900,000$ 295,541,886$
Grand Total 2,033,614,000$ 677,291,264$ 179,147,143$ 192,980,000$ 179,182,696$ 73,417,335$ 3,335,632,438$
27
4. Lessons Learned: Cross-cutting Challenges and Best Practice
In this section, the OBA portfolio as a whole is analyzed against the benchmarks/criteria which
were set out as purported advantages of OBA at the early stages of piloting. These bench-
marks/criteria include:
1) Increased transparency through the explicit targeting of subsidies, tying these
subsidies to defined outputs
2) Increased accountability by shifting performance risk to service providers by
paying them after they have delivered an agreed output
3) Increased engagement of private sector capital and expertise by encouraging the
private sector to serve customers (usually the poor) they might otherwise disregard
4) Encouraging innovation and efficiency by leaving the service ―solutions‖ partly up
to the service provider and through least cost determination of subsidy required
5) Increased sustainability of public funding by allowing one-off subsidies, and link-
ing ongoing subsidies to sustainable service
6) Enhancing monitoring of results since payments are made against agreed outputs.
Challenges and best practice are analyzed across sector lines where possible, in particular so that
implementation in sectors where OBA is less prevalent can benefit from lessons where OBA is
more mainstreamed. Most lessons are drawn from the WBG portfolio of 29 closed projects and
83 projects under implementation – most of which are delivering outputs. Lessons are also
drawn to some extent from the 16 projects at design stage and from non-WBG projects where
sufficient information is available (figure 10).
Figure 10: Number of Projects by Project Status
Closed23%
Design12%
Implementation65%
Number of Projects by Project Status(Total = 128)
28
To judge the merits of OBA, this review aims to answer the following two questions: (i) to what
extent do OBA projects meet the six criteria listed above, and, (ii) does OBA address these crite-
ria better than traditional aid approaches?
To answer the first question, the review mainly relies on information and lessons gathered on
GPOBA projects that are under implementation and from Bank and GPOBA projects that have
closed. Information from evaluation studies and other publications is used to the extent available.
With regards to the second question, the main challenge is establishing a valid counterfactual. To
allow conclusions as to the relative effectiveness of OBA, OBA projects need to be compared to
projects with similar objectives, using other approaches. However, in reality no two projects are
totally alike. For example, two water supply projects providing poor households with access to
clean water may result in vastly different unit costs, depending on how much distribution infra-
structure they involve, whether they involve water treatment infrastructure, etc15
.
Nevertheless, some studies were found that can help put OBA in the context of other aid modali-
ties. For example, on the targeting incidence of utility subsidies and the pro-poor benefits of
connection subsidies such as those that are predominant with OBA, most notable is a 2005
World Bank publication by Kristin Komives et al on ―Water, Electricity and the Poor: Who Ben-
efits from Utility Subsidies‖. And, a number of studies16
have demonstrated cost savings/quality
improvements, resulting from competitive selection of service providers in roads, health projects
and ICT, compared to previous traditional provision of service.
In summary, when reviewing the lessons learned for each of the six criteria listed above, the sec-
tion draws both on the record of the OBA portfolio against these criteria, and also on general or
specific comparisons with input-based schemes. Altogether, cross-cutting lessons and best prac-
tice guidance can be confidently derived. In future, this analysis will be supplemented with re-
sults from on-going impact evaluations or other studies, which will add to the increasing body of
knowledge on results-based financing in general, and output-based aid approaches more specifi-
cally.
Examples of OBA schemes are illustrated to help provide a clearer picture on how lessons are
drawn. However, most detail on the OBA portfolio is provided in the annex – both the table in
Annex I, as well as the sector sections in Annex II for ICT, transport (namely roads), energy, wa-
ter, health and education.
15 The GPOBA M&E team has also explored the option of using unit cost data from the World Bank Africa Infrastructure Coun-
try Diagnostic Study. However, the Country Diagnostic Study uses a disaggregated concept of unit costs that does not allow a
systematic comparison. The country diagnostic study includes outputs such as meters of pipe of a certain quality and diameter
laid or stand-posts installed, whereas the output definition for OBA includes necessary network extension and installation of final
connections. 16 Add roads, health, etc. where this was confirmed
29
4.1 Transparency: Explicit targeting of subsidies for the poor
4.1.1. Traditional approaches to subsidies versus OBA subsidies
Traditional input-based schemes which subsidize specific investment projects such as power
plants or more general budget support for utilities are often equivalent to across-the-board subsi-
dies, as they decrease the tariffs needed to cover costs. Wealthier households tend to consume
more utility services than poorer households so that the bulk of such subsidies benefit non-poor
households. Further, a large percentage of the poor who are often not connected in the first place
cannot benefit from these across-the-board subsidies.
Quantity-based tariff subsidies that charge lower tariffs for lower quantities of water or electrici-
ty are a common way of attempting to target utility subsidies to the poor.17
However, empirical
evidence from the water and electricity sectors shows that such subsidies usually have a regres-
sive targeting effect in that larger proportions of subsidies benefit richer households. This is
largely because many of the poorest households do not have access to these services in the first
place, but also because of inherent regressive characteristics of quantity-based tariffs such as:
- fixed charges that negate subsidy benefits if they increase effective average tariffs of low
consumption households
- increasing block tariffs subsidizing first units consumed of all income strata alike whether
rich or poor and regardless of total consumption behavior
- in some cases, low ―social‖ tariffs that result in incentives to actually increase the up-
front connection costs for users as compensation for lost revenue through the tariff subsi-
dy (Komives et al 2005, p 79ff)
- the lack of clear correlation between income and consumption in the case of water (Ko-
mives et al 2005, p 82ff, p 167).
The seminal study by Komives et al has demonstrated (largely through simulations given the
lack of data) that ―connection subsidies‖ to provide initial access to households in the first place
are inherently more pro-poor than quantity-based tariff subsidies that are linked to the amount of
service used.
OBA in the infrastructure sectors mainly relies on one-off capital subsidies for increased access –
usually through connection, in the case of the network industries. These OBA subsidies aim to
increase access to poor households in the first instance. Then, if there are quantity-based subsi-
dies implicit in the system, poor households can also benefit from them – if the quantity-based
subsidies are properly designed to actually benefit the poor.
Well designed OBA schemes in the utility sectors usually rely on the target population being
able to afford sustainable tariffs that cover ongoing costs of service provision – in other words,
although access may be subsidized, tariffs or running/operations costs may not be. But this is
often not a major hurdle: the poor usually are paying more for alternative services (HDR 2006, p.
52, p. 83). 18
In some cases, additional pro-poor mechanisms are required to ensure effective tar-
geting. For example, tariff affordability issues for the very poorest can be partially mitigated by
17 Quantity-based subsidies through tariffs in ICT are less common as the sector has moved toward collecting explicit subsidies
through universal access funds, but are still in place in some former Soviet bloc countries.
30
subsidizing pro-poor access (such as public water points) which have lower running costs per
capita, and also by ensuring appropriate schemes which fit the payment patterns of the poor.
In the social sectors, traditional funding mechanisms may not primarily benefit the poorer seg-
ments of the population. ―…while governments devote about a third of their budgets to health
and education, they spend very little of it on poor people—that is, on the services poor people
need to improve their health and education. Public spending on health and education is typically
enjoyed by the non-poor‖ (WDR 2004, p.3). For example, the poor frequently live in areas with
little or no access to health care services such as rural areas and poor neighborhoods. They are
less able to wield political influence to direct health care spending to the areas they live in and
the basic services they need most urgently. Also, the usual form of funding hospitals and health
centers benefits all patients and all types of interventions. When buildings, drugs, machines and
salaries are subsidized, all users benefit, regardless of whether they require basic emergency care
or less urgent up-scale procedures.
OBA subsidies, on the other hand, often through on-going subsidy mechanisms, target the ser-
vices the poor are more likely to use (see below). Several OBA schemes in the health and educa-
tion sectors help mitigate the cost of ―access‖ to poor households as well – such as the quasi-
insurance schemes in Latin America (see health sub-section in Annex II).
4.1.2. Sharpening traditional forms of targeting with OBA
All OBA schemes by definition must specify the outputs against which subsidies will be dis-
bursed, and consequently beneficiaries can be identified more clearly than in traditional input-
based schemes. An analysis of the OBA portfolio to date describes the following forms of target-
ing used in OBA schemes.
Most OBA projects use geographic targeting. This form of targeting is useful when in-
tended beneficiaries are concentrated in certain areas and where few people outside the
target group live. For projects in such areas, excluding unintended beneficiaries can be
costlier than including them. For example, an OBA water project is channeling subsidies
for connections in slum areas of Kampala, where most households are very poor and ex-
cluding the few non-poor households would be too costly. Geographic targeting is more
complicated and less effective in cases where the poor and the non-poor live relatively in-
terspersed.
Self-selection targeting involves designing projects so that outputs chosen by poorer be-
neficiaries receive a higher share of subsidies. Subsidies can be targeted progressively by
providing higher subsidies for more basic services—for example, smaller solar home sys-
tems, as in a rural electrification project in Bolivia—or by subsidizing services less at-
tractive to the rich—such as external yard taps in urban Mozambique. Self-selection tar-
geting is also widely used in the health sector. Because wealthier patients tend to favor
more sophisticated up-market facilities, OBA projects usually finance more basic health
care services. Many OBA projects have used self-selection to complement geographic
targeting (box 2).
18 Based on extensive research on the patterns of service delivery to and consumption by the poor, the poor are on the whole pay-
ing more per unit of service consumed – and often of inferior quality. This indicates that tariffs that cover the ongoing cost of
service delivery are likely not a major hurdle for the poor (Bardasi and Wodon, 2008).
31
Box 2: Nepal Biogas Support Program—Geographic Plus Self-selection Targeting
The Biogas Support Program in rural Nepal provides household-size biogas plants to families. Biogas plants
use decomposition of organic waste, such as cow manure, to produce a flammable gas that can be used for
cooking and lighting. The subsidies vary according to the plant‘s size and location. Smaller plants, used by
poorer families, receive relatively higher subsidies than larger plants. Wealthier families, with more livestock
to provide input, prefer larger plants with greater gas output. Plants in remote mountainous regions, where the
population is poorer, receive a higher subsidy than plants in the Terai lowlands, where the population is rich-
er. The higher subsidy for remote mountainous regions is also meant to offset their higher construction costs.
The Biogas Support Program has successfully installed over 150,000 biogas plants funded by DGIS, KfW
and the Community Development Carbon Fund. As of April 2009, 4,772 biogas plants have been installed
and verified under a GPOBA-funded component.
Means-tested targeting is used in several OBA schemes in middle-income countries.
Means testing involves measuring a beneficiary‘s wealth to assess whether a subsidy is
warranted. Such schemes require more advanced administrative systems. For this reason,
OBA schemes that rely on means-testing usually piggyback on broader welfare programs
that identify poor households for a variety of public services. This is being done in an ur-
ban gas service project in the Armenia Access to Gas and Heat Supply for Poor Urban
Households project funded by IDA/GPOBA, for example. One approach used by some
OBA projects includes proxy means testing, in which easily observable characteristics
such as possession of indicative assets, for example a dwelling of a certain size, is used as
a proxy for income. Marie Stopes International, an NGO that serves as management
agency in the Reproductive Health Vouchers in Western Uganda, jointly funded by KfW
and GPOBA, uses a simple questionnaire assessing assets owned, number and quality of
meals per day, and other indicators of potential beneficiaries to determine eligibility.
Community-based targeting relies on collaboration with the local community or its rep-
resentatives to help identify the community members most in need of the service. Com-
munity involvement can increase ownership and reduce the risk of targeting criteria being
rejected by the population in the service area. But community-based targeting may have
drawbacks, such as the risk of being hijacked by special interests. Moreover, this form of
targeting can be time consuming, as evidenced by the Water Access with Small-Scale
Providers project in Cambodia (Navarro 2008).
4.1.3. Role of output verification for targeting
Eligibility criteria for beneficiary households are usually clearly defined and made a precondition
for subsidy disbursements. The third-party verification that triggers disbursement of OBA funds
can sometimes include verification that the poverty targeting criteria have been met. For exam-
ple:
One of the outputs in an IDA/GPOBA urban gas project in Armenia is defined as an indi-
vidual gas-heater based solution for households living on an average per capita income of
approximately $0.5 per day. Using the existing social protection program supporting
32
low-income households in Armenia, the output verification ensures that the output is de-
livered to eligible households.
One of the primary output criteria in the Colombia Natural Gas Distribution for Low In-
come Families in the Caribbean Coast project is proof that each newly connected house-
hold belongs to one of Colombia‘s two poorest economic strata as officially classified
with an average per capita income of less than $1 per day. To avoid excluding the poor-
est from benefiting from the service, the project also includes the provision of a basic gas
stove.
Voucher schemes (as used in health and education) can be used to market services specif-
ically to the poor, for example by selling them in poor areas or targeting social marketing
campaigns to high risk groups. Verification of targeting can be included in voucher
schemes by making vouchers non-transferable, for example by registering biometric data
of voucher recipients.
In projects using geographic targeting, output verification –and therefore subsidy disbursement –
only takes place in pre-identified low income areas. For projects using self-selection targeting,
verification that the correct outputs are delivered (e.g., outdoor yard taps versus indoor water
connections) usually implies verification of targeting. This does not imply that the output ve-
rification process inherent in OBA schemes leads to fool-proof targeting, but if verification
is reliable and robust, it can enhance targeting substantially (see Section 4.6 on monitoring).
4.1.4. Conclusions on explicit targeting of subsidies for the poor
The review conducted to date concludes that OBA provides a stronger platform from which to
target infrastructure and social services subsidies than traditional forms of subsidies in these
sectors. Firstly, the access focus of OBA schemes can help ensure limited subsidies are reaching
those who need them most. Secondly, explicit targeting linking subsidies to specific users and
uses is common across all the sectors where OBA is prevalent, except for the roads sector, where
the ―public goods‖ (access for all) nature of roads makes it difficult to specifically or exclusively
target the poor, and to some extent in the ICT sector, when the target is expanding ―coverage‖.
Thirdly, the process of output verification also inherent to OBA schemes provides an additional
check on the accurate targeting of subsidies, and is helping provide early evidence that OBA
schemes are reaching the poor.
Ultimately, the choice of targeting mechanism for any OBA scheme will depend on several fac-
tors, in particular: the nature of service delivery in the sector; cost-benefit (table 4); and the ex-
isting enabling environment, in particular the type of social welfare mechanisms already in place
and the ability to appropriately monitor them.
33
Table 4: Cost and Effectiveness of Targeting Mechanisms
Targeting approach Cost / admin. complexity Targeting effectiveness
Geographic Low Low-Moderate
Self-selection Low High
Means testing High High
Proxy means testing Moderate Moderate
Community- based Moderate - High Moderate Source: GPOBA and Grosch et al.
A combination of geographic and self-selection targeting seems to be the most promising metho-
dology for OBA in lower income countries, while income and means-testing targeting seem
more appropriate in the middle-income or lower-middle income (IBRD/blend) countries within
which the WBG operates.
4.2 Accountability: Shifting performance risk to providers19
By paying service providers on the delivery of pre-specified outputs, OBA schemes should shift
performance risk to the service provider, the entity technically best able to bear and manage that
risk. More specifically, the components of performance risk that are shifted to the service pro-
vider through OBA mechanisms to a greater extent than traditional input-based schemes include
the following:
Construction risk related to infrastructure and other investments made under the
project, particularly the risk of cost overruns or benefit shortfalls due to non-delivery
of outputs or delivery of inappropriate or insufficient outputs;
Operational risk related to ongoing service delivery; and,
Demand risk related to whether the intended beneficiaries request the service pro-
vided (at the price provided) in the first place (also known as ―uptake risk‖).
While shifting performance risk to service providers, OBA can raise some additional unintended
risks, in particular, the payment risk that once outputs have been pre-financed and delivered as
agreed, subsidy disbursements (or, payments to the provider) are substantially delayed or not
made. OBA design must incorporate measures to mitigate for this potential risk.
4.2.1. Construction risk and one-off subsidies
There are a large number of sources providing anecdotal evidence that cost overruns and benefit
shortfalls occur fairly frequently in international aid projects and infrastructure projects in gener-
al. But very few systematic studies exist that can be used to compare results with the sample of
OBA projects that are under implementation or already completed. A series of papers by Flyvb-
jerg et al, some of which were published by the World Bank, showed consistent cost overruns in
transport projects. In his 2002 article ―Underestimating Costs in Public Works Projects: Error or
19 The enhanced accountability in the use of public funds and potential reduction in corruption is discussed in the section on mon-
itoring in 4.6.
34
Lie‖ (Flyvbjerg 2002) the authors find that of 258 transport projects, 86% exceeded cost expecta-
tions with an average overrun of 28%. The authors also ―reject with overwhelming significance
the thesis that the error of overestimating costs is as common as the error of underestimating
costs‖ (Flyvbjerg 2002, p. 282).
OBA can help mitigate some of the risk of cost overruns (or benefit shortfalls) related to project
investments through one-off OBA subsidies for access. OBA subsidies are fixed before project
implementation but paid only after outputs have been delivered. This presents a credible cap on
public funding available so that service providers are aware that they have to bear any cost over-
runs. Further, the explicit nature of output and subsidy design should clearly identify the risks
being taken. And, OBA disbursements are usually not tied to the completion of project input
milestones, such as the completion of a telecom tower, but rather to fund connections such as pay
phones and tele-centers up and running. The service provider only gets paid for the parts of the
system that are actually being used. Thus there is a disincentive for creating excess capacity, and
instead an incentive for increasing access. However, it is important that relevant running costs
will be covered by tariffs or fees paid by the new customer (although this is not usually the con-
straining factor for access for poor households – see Section 4.1 on targeting above).
Given the lack of a comprehensive body of literature on benefit shortfalls/cost overruns in devel-
opment projects, this review compares the results of closed OBA projects with comparable
closed World Bank projects. The GPOBA M&E team analyzed a sample of all 37 available ICRs
for World Bank-funded water, energy and health projects closed in fiscal year 2007. This sample
was reviewed to identify all projects that have quantifiable outputs as project development objec-
tives (PDOs).20
This sample was compared with 13 completed OBA projects in water, energy and health for
which results information was available21
. The review showed that a total of 85% of OBA
projects achieved or over achieved the desired results within or below budget, compared to 49%
of traditional projects. Nearly 70% of OBA projects were completed under budget, compared to
slightly more than half of the traditional projects. While some of the traditional projects recorded
cost overruns, none of the OBA projects did. Similarly, only two OBA projects (15% of sample)
did not achieve the intended results, compared to at least 30% of the traditional projects reviewed.
The two OBA projects that did not deliver all outputs projected disbursed only a small propor-
tion of the funds related to outputs actually delivered.22
This provides some indication that OBA
can help mitigating risks to the project sponsor of disbursing substantial amounts of funding for
projects that do not produce the desired outputs (figure 11).
20 Projects with PDOs relating to policy formulation/institutional strengthening or consisting of PDOs with higher level project
impacts not exclusively under the control of the project implementer were excluded from the analysis due to the inability to com-
pare against OBA. 21 The analysis is based on information from ICRs for IDA/IBRD-funded projects and on information from the GEF website for
projects funded but the GEF. 22 Funds disbursed included some fixed costs related to setting up the project.
35
Figure 11: Comparison of Performance of OBA and Traditional Projects
These results are consistent with the presupposition that OBA shifts performance risk to service
providers and helps to counteract cost overruns and benefit short falls.
4.2.2. Operational risk transfer through on-going and one-off OBA subsidies
Are service providers bearing sufficient risk for on-going service provision, after construction is
complete? In many PPP contracts – whether OBA or not – service providers do bear operational
risk. With the addition of an OBA mechanism whereby payments for investments made are ac-
tually with-held until pre-identified outputs are delivered, OBA schemes can provide an addi-
tional hard incentive for performance.
With ongoing OBA subsidy schemes, particularly those in health and roads, performance-based
payments to service providers are based on continuous service delivery of a stipulated quality.
Performance contracts can define the minimum level of service to be delivered at an agreed
payment. This shifts the performance risk of the project entirely to the service provider who is to
some extent free to decide how to reach performance targets, and can therefore probably better
manage operational risks related to service delivery. As discussed in more detail in Annex II,
performance-based roads contracts have shifted more ongoing service delivery risk to roads con-
tractors as compared to traditional forced accounts or contracting. Such contracts have, for ex-
ample, reduced the share of roads in a poor condition in Argentina from 25% to 5% and in-
creased the average road maintenance rating in Florida, USA, from 51 to 87, well above the
agreed minimum standard defined in the performance contract, while at the same time allowing
the government funding agency to save money (Segal et al 2003) (FHWA 2005).
0%
10%
20%
30%
40%
50%
60%
70%
80%
Ove
r-ac
hie
ved
Ach
ieve
d
No
t (f
ully
) ac
hie
ved
Un
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r
Un
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ru
n
Wit
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Bu
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t
Ove
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n
Results Budget
Comparison of Performance of OBA and traditional Projects
OBA
Non-OBA
36
On the other hand, one-off subsidies for access do not necessarily shift performance risk to ser-
vice providers for the entire duration of their service contracts, unless the project involves signif-
icant investment by the service provider to be recouped through the tariff. In order to ensure
more sustainable services, OBA projects involving one-off subsidies should take into account the
nature of the longer-term service contract, including clear standards of performance, related pe-
nalties, and regulatory rules and practices under which the OBA scheme is operating. The link
between sustainability, subsidy levels and tariffs is discussed in more detail in section 4.5 below.
For example, although most of the ICT contracts identified do not disburse OBA subsi-
dies based upon the provision of ongoing service throughout the duration of the contract,
the contracts do include longer-term service provision requirements for about 5 to 10
years. Service providers that are in breach of their contracts can also lose their operating
licenses, which tend to be for 15 years or more. Although they do not make reference to
the OBA scheme, the ICT licenses provide additional incentive for meeting service quali-
ty obligations.
In contrast, in the case of the dealer model for off-grid energy solutions, there are no
long-term contracts for service provision. Therefore the issue of sufficient performance
risk transfer – and sustainability – comes into question. To address this issue of long term
sustainability, recent projects involve capacity building to train users and local techni-
cians to fix non-functioning units, to develop product standardization and certification,
and to negotiate longer term warranty schemes from manufacturers. The creation of the
medium-term service contract as in the Bolivia IDTR project and the phased subsidy
payments in the case of the Ghana dealer model to ensure proper maintenance in the first
few years after installation are some mitigating steps that have been taken to help shift
performance risk further out to service providers.
4.2.3. Managing demand risk in OBA schemes
When payments (for investments made) to service providers are made on outputs delivered, and
those outputs involve user applications and down payments, the service provider bears the risk of
uptake. Although this risk can be partially mitigated through willingness/ability to pay studies
and is not completely new to PPP schemes, for example concession arrangements which involve
expansion of services, low-uptake is particularly relevant for infrastructure and social services to
the poor since the poor are often neither familiar with the services (e.g., sanitation or medical
interventions) nor are certain aspects of the services (e.g., payment schemes).
The demand risk component of OBA schemes is substantial. This can prolong the time required
for project roll-out. But it is important for demand risk to be shifted to the service provider, both
to help address the issue of low uptake and because the service provider should manage invest-
ments and operations most efficiently to meet required demand.
Both the Rural Community Water Project in Andhra Pradesh (GPOBA) and the Senegal
On-Site Sanitation Project (IDA and GPOBA) utilize NGOs to promote community par-
ticipation to improve uptake.
The implementing agency of the Colombia Natural Gas Distribution for Low Income
Families project reports that natural gas is the first utility service that some of the poorest
beneficiaries will receive. Some households were reluctant to access the subsidy, even if
37
the use of gas resulted in a saving compared to traditionally used fuels such as wood and
kerosene, because they were reluctant to commit to paying a monthly bill. To mitigate
this, the implementing agency started outreach campaigns and gave beneficiaries savings
boxes to create a habit of saving up for the gas bills, and in some cases distribution com-
panies even initially ―over-subscribed‖ the program given the degree of attrition between
customer registration and actual service delivery.23
4.2.4. Definition of ―outputs‖ and access to finance determine nature of performance risk
The degree of performance risk shifted to the service provider through OBA schemes is depen-
dent on how ―outputs‖ on which subsidies are disbursed are actually defined. As discussed in
Section 2 of the review, traditional procurement of private infrastructure services that contract at
the ―input‖ end of the spectrum, whereby the government may purchase specific inputs or even
assets, often does not guarantee that the government purchases actually will lead to desired out-
comes. What OBA attempts to do, therefore, is contract for an output that is as closely related as
possible to the desired outcome, while performance risk is still largely under the provider‘s con-
trol.
For example, compared to traditional schemes in the health sector where public funding
would be disbursed along with the building of a hospital or the procurement of special
medical equipment, with OBA, payments to service providers would be dependent on the
delivery of well-child visits or the administration of vaccinations.
In energy projects, instead of payment for the delivery of transmission lines, an OBA
scheme will disburse payment for working connections made and/or actual electricity de-
livered.
The definition of outputs has often evolved as OBA has taken root in a sector and the de-
gree of performance risk that providers are able to bear has in some cases increased. For
example, OBA in the ICT sector often used construction or installation milestones as out-
puts. Through time, outputs have been refined. For example, some of the more effective
contracts disburse a portion of subsidies upon installation of the phones and disburse the
rest on a regular basis provided the phones are maintained to standard.
But there can be wide differences in shifting performance risk based on output definition from
sector to sector, and even within projects themselves. The contrast between the small-town
component and the green-field component of the Uganda Water Supply in Small Towns project
is explained in more detail in Annex II, and is such an example. In short, a more ―pure‖ OBA
approach is used where a sub-project mainly involves extensions from existing systems. But for
the green-field operations, output-based payments are phased such that 60% of the subsidies are
disbursed during construction and only 40% of the subsidies are disbursed with final connections
and water delivery. The difference is attributed to the perception of the private operators‘ ability
to reasonably pre-finance the larger construction costs of the green-field schemes.
In order to effectively shift performance risk to service providers through OBA, service provid-
ers need to be able to ―pre-finance‖ investments and services. This pre-financing can be funded
by the service provider through own cash flow, supplier credit and other aspects of working capi-
tal, and/or equity and debt financing. This finance must be available at reasonable cost in order
23 Colombia Natural Gas Project, Implementation Completion and Results Report, April, 2009
38
to be affordable for the provider and to minimize the impact of financing costs on the tariff
charged to the household. Access to finance has been a major issue in the design of OBA
schemes, particularly when involving small and local providers, as well as when considering
OBA for public providers. For example, even though ICT has moved closer to an ―ideal‖ OBA
model, a portion of OBA subsidies are still often paid up-front, given the cost of capital for pre-
financing outputs.
An interesting example of how OBA design has attempted to adapt to the access to finance con-
straint is provided in box 3 in relation to the CREMA road contracts in Argentina, which were
among the first performance-based rehabilitation and maintenance contracts outside the OECD.
Box 3: CREMA – Phases I and II
Based on positive experience with performance-based routine maintenance contracts (see Box 9:), in 1997
Argentina introduced a new contract combining rehabilitation and maintenance. The CREMA (Contrato de
Recuperación y Mantenimiento) requires the Contractor to rehabilitate and subsequently maintain a sub-
network of roads for five years for a lump sum contract. Payments are made when a specified level of service
has been achieved. The CREMA contracts implemented between 1997 and 1999 specified that rehabilitation
works should be carried out during the first year of the contract. The Contractor received 5-10 percent of the
contract price as an advance payment, and additional payments at the end of the first year when rehabilitation
works have been completed. But the largest percentage of the contract price, about 50 percent, was paid in 48
equal monthly installments spread over the remaining 4-year contract period. This front-loading of rehabilita-
tion and delayed payment schedule resulted in contractors having to finance much of the rehabilitation them-
selves. The rehabilitation costs sometimes exceeded 50 percent of the contract value.
In the new generation of Phase II CREMA contracts, the contractor now receives full payment for rehabilita-
tion works executed, proportionately to the outputs achieved during the first eighteen months of execution.
While this approach has helped resolve contractors‘ financing difficulties, it has given rise to another prob-
lem. With some contractors receiving up to 80 percent of the contract value for rehabilitation works in the
early years of the contract, contractors‘ incentive to perform their ongoing maintenance obligations across the
multi-year life of the contract is reduced. Some contractors have tried to renege on their contracts once they
have completed rehabilitation and not fulfill their maintenance obligations.
Nevertheless, the first two phases of Argentina‘s CREMA program, covering nearly 14,000 km, resulted
in significant improvement in the proportion of roads in good condition from 70% in 1998 to 85% in
2005. Further, the percentage of roads in poor condition decreased from 8% in 1998 to 4.2% in 2005
(Implementation completion report of National Highways Rehabilitation and Maintenance project in
Argentina 2006, p.4).
Source: Liautaud 2001; Highways Toolkit; Cabana 1999; Transport Note TN 27
The access to finance constraint seems most binding for sectors or sub-sectors that rely on small
and local/regional providers – as in the case of the off-grid energy schemes. But these con-
straints may impact the public sector as well. The predominance of public utilities in the water
sector may be one explanation of the limited number of OBA schemes identified/implemented.
Many of these public utilities or local municipalities are not in the position to pre-finance output
delivery. However, there are exceptions. For example, in Morocco, the public utility of Meknes
has taken on commercial debt in order to pre-finance output delivery and allow households to
pay their connection costs in installments over time. In the health sector, projects such as the
Yemen Safe Motherhood Program or the Lesotho New Hospital PPP (see Annex II) work with
up-market service providers, which may be less constrained by access to finance, to reach out to
39
the poor. Access to finance can become more of an issue for projects that involve contracting out
exclusive service provision in a poor area, particularly if this requires significant investments. As
a result, most of these projects include some element of up-front grants.
4.2.5. Payment risk mitigation
OBA may shift performance risk to the entity best able to manage that risk, but OBA can also
lead to additional unintended risks. A further consideration in OBA schemes is payment risk.
Even if outputs are delivered, what assurance is there that service providers will be paid, and
paid on time, even after verification of output delivery? The structure of the funds flow for an
OBA scheme can determine if (in the case of competitive schemes) the transaction can attract
bidders, or in any scheme, whether financial institutions will be comfortable lending to the pro-
viders. In some GPOBA-funded schemes, private fiduciary agents such as banks or well-known
multi-service accounting firms have been used for transparent funds flow. But when funds are
channeled through the finance ministries and/or the national (central) banks, this may add time
and therefore cost. One OBA scheme involving a privatized electricity company in Guatemala
used the privatization proceeds to fund an OBA facility. The payment risk was guaranteed by a
breach of contract coverage from the Multilateral Investment Guarantee Agency (MIGA), which
is part of the WBG.
In the roads sector, funding from and involvement of bilateral and multilateral development insti-
tutions in the CREMA contracts has provided greater assurance to contractors that they will be
paid: ―By making the long-term payment obligation legally binding on the government, the
CREMA has deterred the Treasury from failing to provide funding for road maintenance; and
experience during implementation showed that at time of fiscal constraints, the budget process
respected the CREMA contracts and funds were allocated to them in priority, as if they were
considered as non-discretionary expenditures.‖24
4.2.6. Conclusion on performance risk
OBA does shift more performance risk to providers of infrastructure and social services as
compared to similar input-based schemes by virtue of the fact that payments to providers are
made after delivery of measureable and verifiable access and service. How much performance
risk is borne by the OBA service provider depends on the extent that the output-based subsidy is
with-held (and, like other PPP schemes, to the extent the service provider invests money to be
recouped through tariffs or fees) (box 4). One-off subsidies for access do not necessarily guaran-
tee the degree of performance risk shifted to service providers in future years; this would depend
on factors such as the enabling environment, for example contractual and regulatory arrange-
ments that are in place (see below). Also, how much performance risk is shifted to the provider
depends on the definition of ―outputs‖ and the extent of phasing-in of payments. This in turn
depends on the ability of the service provider to ―pre-finance‖ the investments and services until
output-based payments are disbursed to it. Therefore, access to finance will to a large extent
determine how much performance risk is reasonably shifted to the provider, and is an impor-
tant area for donor and government co-ordination.
24 Performance Based Contracting for Preservation and Improvement of Road Assets. Resource Guide. Updated April 2008.
World Bank. Available at: http://www.worldbank.org/transport/roads/resource-guide/Case-Argentina.htm)
40
To date, there is limited experience on mitigating the access to finance constraint with formal
financial instruments such as guarantees. More work needs to be done in order to work with
small and local providers, as these are the most likely providers of services in rural and peri-
urban areas where access to services are often most in need. Some examples to date are de-
scribed below – and are relevant not only for pre-financing, but also for project financing in gen-
eral, since access to affordable finance will impact the cost of the entire project and affect the
level of required subsidy (see next section on leveraging private sector finance).
Provision of guarantees to banks lending to output-based service providers. For example,
K-Rep Bank in the Kenya water project has purchased a USAID Development Credit Au-
thority partial credit guarantee to reduce the collateral required from borrowers. In many
of the countries where OBA is operating, central banks discourage unsecured lending and
so where banks are pre-financing works that will be subsidized with output based grants
they still require the borrower to post collateral for the subsidized asset (or portion of as-
set).
In Honduras for example, the issue of access to finance is being dealt with in two ways:
a) for private providers including NGOs, limited commercial debt is possible (albeit with
very short tenors/debt repayment periods), ultimately secured against municipal assets
but with commercial lenders drawing comfort from a grant mechanism payable by the
World Bank; and b) for public implementers, ‗bridge loans‘ are possible, i.e. government
loans (issued effectively at zero interest) secured against future sector transfers from cen-
tral to municipal governments. In the event of default by a public operator, the Munici-
pality would lose its central government transfer.
41
Box 4: Limitations to Shifting Risks to Service Providers
Although OBA in general can mitigate the risks to governments/donors/users of cost over-run and benefit
short-falls as described in the review, there is still a need to take into account factors outside the control of the
service provider – as in the case of any well-designed intervention.
In the case of the GPOBA-funded Morocco Urban Water and Sanitation with unit subsidies fixed in
Moroccan Dirhams, the output projections were lowered by 14% in the first quarter of 2008 as a re-
sult of a 14% depreciation of the US dollar against the Dirham.
The East-Meets West Foundation, an NGO providing output-based connections in the GPOBA-
funded Vietnam water scheme, has received an increase in unit subsidy as a result of unit cost in-
creases partially due to the recent increase in commodity prices. This is especially relevant for
projects implemented by small and medium service providers who do not have means to hedge
against price increases.
In the Colombia Natural Gas project, the Grant Agreement specified the unit cost of $141 to be pay-
able in Colombian pesos. Given the depreciation of the US dollar against the Colombian peso, this
meant that the actual subsidy payable to the distribution companies was reduced significantly. At the
time of grant agreement signing, the exchange rate was 2300 Colombian pesos to the US dollar,
while in 2008 it was 1705 pesos to the US dollar. In the case of the project, the distribution compa-
nies effectively absorbed the depreciation.
With the onset of the global financial and economic crisis in late 2008, it is difficult to predict which way
projects will be affected on the whole. By October, 2008, the global economic landscape changed dramati-
cally with the unraveling of the credit markets, yet inflationary pressures have eased considerably due to a
crash in commodity and energy prices, with the dollar strengthening against most developing country curren-
cies. It is important to take these issues into account when structuring an OBA project and have some flexibil-
ity to adjust subsidy amounts if the sustainability of the project is at risk.
42
4.3 Private sector capital and expertise
4.3.1. Leveraging private sector debt and equity
The ratio for leveraging private sector debt and equity in OBA projects is about 1 to 1.66, i.e. for
every dollar of subsidy raised, about $1.66 of private sector financing was mobilized25
. These
estimates only refer to longer-term private investments made in addition to any investment pre-
financed and reimbursed through the OBA subsidy. The possibility of mobilizing private finance
varies from sector to sector, with ICT and energy mobilizing more than health and water.
For example, in Guatemala‘s FONDETEL projects, each $1 of subsidy leveraged be-
tween $2 and $4 of private investment. In Peru‘s FITEL projects, an average of $2 of pri-
vate capital was raised for each $1 of subsidy.
In off-grid energy, the average private sector financing leveraged is about 1 to 1.4. Deal-
ers are typically small and medium operators with limited capacity to take credit risk for
extending loans to rural households and also lack experience in credit-facility manage-
ment.
On the contrary, for the Senegal rural electrification concession, the winning bidder has
proposed to more than double the minimum number of connections set in the tender—
from 8,500 to 21,800 – by bringing in $9.6 million in private financing. This constitutes
about 60 percent of the total financing, compared to the 20 percent minimum private fi-
nancing requirement under the tender. IFC has recently been requested to participate,
possibly with an equity stake (see energy sub-section in Annex II).
For subsidies that partially finance ongoing service provision, the amount of private capital mo-
bilized is difficult to identify, because the amount of subsidy is not determined as a share of the
investment cost. In such projects, the service provider also has to pre-finance investments for a
much longer period of time.
One lesson is that for network/utility services, private finance leveraging is wholly related
to tariff reform: ultimately, the service provider must be able to recoup these costs through
the tariff. If the aim is to have a smaller amount of subsidy with more of the investment re-
couped through private financing, the tariff would need to be able to absorb these costs. Often
this would be feasible only if contracts were of a longer nature than is normally accepted. Be-
cause OBA schemes target the poor, who often are charged social tariffs or who consume small
amounts, the possibilities of leveraging in the traditional sense are limited compared to non-OBA
schemes which do not target the poor.
The link between tariffs and output-based subsidies is critical not only for the issue of leveraging
private finance, but also for ensuring that service providers are not over-compensated through
OBA subsidies yet at the same time are incentivized to make the output-based connections. This
is discussed in Section 4.5 Sustainability and Enabling Environment.
25 The ratio is derived from 33 private sector projects for which the amount of private financing could be identified.
43
4.3.2. Mobilizing private sector expertise
Another aspect of mobilizing the private sector is encouraging private service providers to con-
nect and serve poor customers who the private operator would otherwise not serve. This is
achieved by OBA schemes extending existing or newly created assets by providing relatively
small amounts of subsidy to incentivize the private operator to reach these customers. For ex-
ample, previous infrastructure investments may have been made and have excess capacity, but
there is no real incentive to serve additional mainly poor customers. This is the case in several
urban water projects including those in Manila and Jakarta (described in boxes 16 and 19 respec-
tively, in Annex II).
OBA interventions in these cases lead to very efficient subsidy per capita results, whereby small
dollar amounts can connect poor households to a network otherwise unreachable. For example,
in the case of the Manila Water project, the Manila Water Company (MWC) is investing some
$14 million in new water supply infrastructure in these areas, but the low-income households
cannot afford the connection charges set by MWC and the Regulator. Under the proposed OBA
scheme, the household would contribute PhP 1,620 ($36) towards the connection charge and
GPOBA would provide a subsidy for the remainder (PhP 5,911.73 or $131). This results in a
subsidy per capita of $29.6.
Box 5 presents private sector mobilization in the Colombia natural gas project.
Box 5: Colombia Natural Gas Distribution for Low Income Families in the Caribbean Coast –
OBA and the Private Sector
In 2006 GPOBA signed a grant agreement with Fundacion Promigas, a charitable foundation established by
the Colombian gas transportation and distribution company Promigas S.A. The project has connected 35,000
poor households from the two lowest of five socioeconomic strata. Gas connection prices in Colombia are
regulated by the national regulator and in order to ensure equity gas companies are not allowed to offer con-
nection below the regulated price. This precludes many of the poorest Colombians from accessing natural
gas.
The subsidized connections were made by regional gas companies owned by Promigas, who marketed the
project to the poor target groups, provided payment plans to beneficiaries that allowed them to pay the re-
maining connection fees over a time of up to 5 years and documented connections and consumption of bene-
ficiaries for verification by an independent auditing firm. Subsidies were disbursed only for connections
made to households in strata 1 and 2 who also were provided with a basic stove and who had completed three
months of successful billing of services.
The project successfully achieved its target of connecting 35,000 poor households within the estimated time.
Promigas and the gas companies absorbed shortfalls resulting from USD depreciations during the project.
Fundacion Promigas conducted a successful community outreach campaign, creating demand for the subsi-
dized connections. This campaign included measures to convince beneficiaries for many of whom natural gas
is the first utility service that they receive, to commit to paying monthly bills.
Private sector expertise and discipline brought through OBA schemes can bring benefits to the
delivery of social services as well, as described in more detail in the health and education sector
annexes. In the Bogota Concession Schools scheme, the freedom to choose the teaching and
administrative staff led to a better quality of education than in the public schools where the
44
teachers‘ union made it difficult to implement staff changes. On average, 55 percent of the sub-
sidy amount was allocated to human resources, well below the 90 percent in the public school
system, freeing up 33 percent for nutritional support and education materials. Also, the private
sector providers took the initiative to partner with parents and the community, which helped re-
duce the dropout rates and improve educational attainment, compared with regular public
schools (Barrera-Osorio 2007). More examples of efficiency gains through OBA schemes –
usually involving the private sector – are provided in section 4.4 below.
However, working with the private sector is not always a panacea in and of itself and does re-
quire consideration of a host of issues, for example in relation to information asymmetry and
principle-agent problems that have been analyzed through a vast array of studies on PPP in infra-
structure and social services for the last couple of decades. Capacity can also be an issue when
working with the private sector in OBA schemes. That is clearly the case with small and local
private providers as seen with off-grid energy or rural water projects, and even in the roads and
ICT sectors where OBA is more mainstreamed. Successful projects tend to involve capacity
building elements for the private sector, including learning how to bid for a contract, how much
to bid, how to self-monitor against outputs, how to mitigate against payment risk, and so on.
4.3.3. Conclusion on private sector involvement
This OBA review analyzes several forms of “leveraging”, and the record of OBA varies de-
pending on the type of leveraging considered. Private financing requires recouping costs
through tariffs in the case of network industries, and it is often not possible for tariffs to incorpo-
rate a large element of investment costs while remaining affordable for the poor. Further, in sec-
tors with even clearer positive externalities such as health, education and sanitation, user charges
should not be set at levels that discourage participation.
But the real success of OBA is the ability of relatively small amounts of OBA subsidy to mobil-
ize private sector expertise to poor areas where the private sector would otherwise not go. There are success stories here from all sectors. Where private sector experience is bringing effi-
ciency gains and market discipline to sectors, such as in the health and energy sectors, more
needs to be done to encourage and strengthen potential private sector providers, especially small
and local ones. For example, increased capacity building including on billing, marketing etc, as
well as greater partnerships with local organizations can enhance PPP with OBA further.
Key to enhancing private sector finance and expertise will be tackling the access to finance con-
straints for medium to long-term financing which would enable greater participation of the pri-
vate sector – not only in OBA, but in PPP in general. OBA schemes can provide some lessons,
especially from the rural energy sector where tackling access to finance seems to have been a
priority over the last few years:
In poor, off-grid areas, rural affordability increases substantially with micro-credit and
longer term fee-for-service arrangements. Typically 2-3 % of residents can afford cash
payment for the service, but with microcredit the customer base can increase up to 20-30
percent of residents. Longer term, fee for service arrangements could increase the cus-
tomer base even further (Terrado 2008). To address the limited liquidity of MFIs which
45
hampers the more widespread adoption of SHS, an IDA line of credit worth $11.4 mil-
lion is made available for the Bangladesh RERED project to provide long-term credit re-
finance to eligible MFIs to finance households' or individuals' purchases of SHS. With
time, the private operators have reduced the interest charged to consumers and already
the largest volume supplier (Gramen Shakti) has reduced the interest to 6% flat. (Source:
RERED case study from RE toolkit website). An IDA line of credit is also being used in
Ghana SHS to provide long-term liquidity to participating private rural banks. Repay-
ment of the line-of-credit will be retained in a revolving fund to provide consumer credit
to additional customers to purchase Solar-PV systems.
Guarantees to mitigate risk and increase loan tenure are being used in a Papua New
Guinea rural electrification scheme. The program allows credit terms to be extended from
three to five years (REtoolkit note, Nov 2008).
46
4.4 Innovation and efficiency
4.4.1. Fiscal benefits: Efficiency gains from OBA
Using competition to determine the amount of subsidy required is one of the more tested ways to
ensure maximum value for money – as long as transaction costs do not prove prohibitive, and if
there is not already an existing provider that can reap clear economies of scale. OBA lends itself
readily and transparently to competitive processes, since the bidding variable is often set at ―the
lowest subsidy required‖ to meet expected outputs given fixed user charges.26
Here are some
examples (all described in greater detail in the sector sub-sections in Annex II) of how OBA
projects have resulted in efficiency gains, usually using competitive tendering processes based
on lowest subsidy required or greatest numbers of beneficiaries reached:
In a Mongolia ICT project, competition resulted in 28% savings in the total subsidy re-
quired for the original areas/beneficiaries to be served. The savings were used to fund the
Chulut Soum wireless center, which is estimated to have expanded the project to 1,000
more beneficiaries.
The IDA-funded Bolivia IDTR project for rural electrification led to 25% more beneficia-
ries for the fixed subsidy than the minimum required under the tender; and a 40% reduc-
tion in SHS prices compared with the Bolivia UNDP (2004) project. As of February 2009,
the IDTR has installed 6,154 individual systems, benefiting over 30,000 people in rural
Bolivia. In addition, 87 social systems were installed in schools and clinics.
In the case of the Sri Lankan rural electrification OBA, one dealer introduced 15-percent
price discounting and its own consumer finance, seeking to capture market share.
Most recently, the competitive bidding process in Water Supply in Uganda‘s Small
Towns project has resulted in an average efficiency gain in the ten towns of about 20% --
although the project is still in early stages of implementation.
Demonstration effects have also led to leveraging.
The bidding for the GPOBA-funded OBA scheme expanding mobile phone services in
Mongolian towns has demonstrated that mobile phone services can be provided on a
commercial basis without subsidies in some cases – although not for internet services nor
for facilities such as schools. Many other examples of ―zero subsidy‖ bids exist in the
ICT sector, for example in Chile and recently in Nicaragua where the incumbent offered
to pay rather than receive monies from the Universal Access/Service Fund (UASF) in or-
der to gain market share.
Similarly, the bidding for piped water supply in Uganda‘s Small Towns has demonstrated
that in some cases, extensions can be made on a commercial basis, with the private sector
estimating that it can recoup cost related to new connections through the tariff: at least
two towns received ―zero subsidies‖ requirements through competitive tendering.
26 Based on experience, including from the Paraguay water OBA which attempted both forms of bidding, it is recommended that
it would be better to fix tariff levels ex ante and bid on the minimum subsidy per connection (or maximum beneficiaries served,
given a set subsidy). This would prevent any resentment from the regulator/users about inequity of tariffs across the country and
would also allow for inclusion of a lifeline tariff if the national policy requires it.
47
However, competitive processes take time and can require extensive capacity building, including
in relation to bidding or in obtaining access to finance. The transaction process can be costly
both in terms of administrative costs and in terms of time required for the process, especially if
capacity is low or the situation is highly political. Further, there is a risk of under-bidding during
the tender process, followed by financial problems down the line, especially if the growth in de-
mand does not materialize as expected. And in particular for small-scale projects, over-
sophisticated (often donor-led) systems with a wide array of checks and balances may prove
costly, cumbersome and lead to inaction. These costs should be weighed against the many ob-
vious advantages of competition to drive down costs through efficiency gains.
4.4.2. Improvements in operational efficiency
Other demonstrations of efficiency gains, which may not be as easily quantified, are for example
quality enhancements or improvement in service delivery. The disbursement of funds after ser-
vice delivery can create strong incentives to deliver outputs in a timely manner.
For the Armenian Access to Gas and Heat Supply for Poor Households, there is evidence
that timeliness of service delivery and quality of work has led to increased customer satis-
faction.
The provision of telecommunications services to nomadic herder communities in Mongo-
lia required innovative solutions related to difficulties with determining the adequate size
of solar cells and the prediction of mobility patterns of beneficiaries. These difficulties
were overcome within the first six months of project operations – and output-based pay-
ments most likely helped trigger such a speedy resolution.
The health sector in post-conflict countries, for example in the Democratic Republic of
Congo and Afghanistan, has shown that contracting out services to NGOs can lead to
quicker and more comprehensive coverage than building up an input-based health system.
Other examples of ongoing output-based subsidies that perform better than comparable input-
based approaches are performance-based roads management contracts. In Argentina ―the CRE-
MA [Contrato de Recuperación y Mantenimiento] program has substantially improved the con-
dition of the network, reducing the share of roads in poor condition from 25 percent to less than
5 percent by the end of 1999. As a result, road users‘ costs have been reduced by more than 10
percent‖ (Liautaud 2004). Similar positive experiences of cost savings and increased quality
have been reported in the United States. In Florida, Virginia, the District of Columbia and Texas
the use of maintenance contracts resulted in cost reductions and significant improvements in the
quality scores of maintained roads (Segal et al 2005).
4.4.3. Output-based innovations
OBA is clearly an innovative mechanism which enables a variety of service solutions to reach
the poor. The portfolio of OBA schemes analyzed shows a wide array of service providers and a
variety of technical solutions used. Further, one assumption when OBA was initiated was that
the focus on outputs would itself enable increased innovation. This has certainly been the case in
the ICT sector, where service providers have to some extent been free to provide the most appro-
priate and affordable technology to respond to demand. The general trend in ICT – with or with-
out OBA – is a clear reduction in costs. What OBA has brought in addition is the recognition
48
that there are other markets to be tapped, and that more pro-poor models of technology such as
prepaid services can help reach these markets. In the energy sectors, many OBA schemes are
bid out as ―technology neutral‖, although additional subsidies (e.g., from GEF) might be pro-
vided for renewable energy technologies. In the off-grid Bolivia IDTR project, service providers
were required to provide credit to users, leaving the terms up to them. Different solutions and
arrangements for example with micro-finance institutions were developed, based on the technol-
ogies, customers, etc – which could not have been presumed by the project team ex ante.
The achievement of cost reduction through OBA relies on the flexibility allowed to service pro-
viders to bring their commercial and operational practices into the structuring of OBA schemes.
However, service quality and delivery requirements are often affected by the weight of the pro-
curement policies and procedures of governments and donor agencies imposed on the service
providers. These requirements and procedures – rightly aimed at ensuring transparency and
competition in the award of public-funded subsidies, are generally designed for structuring input-
based projects. This may create bias on how the service providers procure the inputs necessary to
deliver the outputs, and limit freedom to proceed as innovatively as they would wish. This is
especially true for smaller service providers, and may translate into higher cost. Lessons learned
have demonstrated that the key is to specify those essential inputs that cannot be left out, but to
leave some degree of discretion beyond that. This is critical in the infrastructure sectors where
outputs should be supported by long-lived assets, but also in the health care sector where poor
quality can have a detrimental impact. Finding a balance between specifying key input require-
ments to ensure long-term sustainability with providing space to innovate and lower costs can be
difficult.
Finally, considerations related to the scope and scale of the project must be taken into account.
Competitive processes take time and can require extensive capacity building, including in rela-
tion to bidding and access to finance concerns. Lessons from ICT indicate that determining the
appropriate level of subsidy often requires projections of demand and necessary investments –
particularly difficult in dynamic sectors such as ICT and energy. While large projects may justify
this expense, smaller projects may not. In the case of off-grid projects, finding bidders can be
difficult as these projects are perceived as risky and there is often a lack of technical capacity to
undertake these projects in remote locations. There is a clear need for road shows, awareness
programs, workshops and capacity building exercises including business development services,
technical training, market surveys, databases on renewable energy resource availability and insti-
tutional building.
4.4.4. Conclusions on innovation and efficiency
OBA has demonstrated efficiency gains through competition in most sectors when competitive
pressures have been applied in the selection of the OBA service provider. There is also anec-
dotal evidence that the output-based nature of payments has led to improvements in operation-
al efficiency. Further, although evidence as to a direct correlation is not available, it is possi-
ble that the use of output-based arrangements over a period of time in the ICT and roads sec-
tors has led to increased innovation and a reduction in costs.
OBA‘s impact on improving efficiency and encouraging innovation is largely driven by the abili-
ty to procure service provision competitively, and, a balance is required between specifying key
input requirements to ensure long-term sustainability while providing space to innovate and low-
49
er costs from which future users can benefit. A Guidance Note to procurement staff has been is-
sued (box 6), but more is needed to be done, including individual training and a general shift of
mind-set. This may fit well within the broader push in the Bank to streamline procedures to meet
client‘s needs more effectively and efficiently, as is proposed in the recent concept note on In-
vestment Lending (IL) reform by OPCS dated January 26, 2009. The concept note describes the
current ―disconnect between results focus and inputs-based ‗wiring‘ of IL‖ and mentions that the
Bank ―needs flexible and agile instruments that can easily adapt and respond to changes in the
global development business‖ (OPCS, 2009, pp 5 and 9).
Box 6: Bank Procurement in OBA Projects
27
A Guidance Note to Procurement Staff on Procurement Issues in Structuring Output-Based Aid (OBA) Oper-
ations Financed by the World Bank was issued on April 11, 2008. The note, a joint effort by staff from the
GPOBA unit of the Finance, Economics and Urban Development Department (FEU) and the Procurement
Policy and Services Department (OPCPR), follows up on the November 17, 2005, ―Guidance Note for Staff
on Structuring Output-Based Aid (OBA) Approaches in World Bank Group Operations‖ and the OPCS No-
vember 7, 2005, ―Operational Memorandum on the Application of Paragraph 3.13 of the Procurement Guide-
lines.‖ It identifies different scenarios and actions required by specialists to facilitate compliance with the
Procurement Guidelines in the design of procurement arrangements for the two types of OBA schemes,
namely: Projects where there is no existing service provider; or projects where there is already an existing
service provider (incumbent concessionaire or equivalent arrangement). The Guidance Note provides illustr-
ative practices and incorporates the lessons learned from procurement assessments conducted under OBA
pilot operations across Bank regions.
27 The note is available in the OPCPR intranet website.
50
4.5 Sustainability, Tariffs and the Enabling Environment
4.5.1. OBA design and sustainability
Sustainability of infrastructure and social services schemes implies that an intervention has a
long-lasting positive impact rather than having short-lived and easily reversible results. Some
OBA schemes have been running for many years – in ICT and roads in particular – and have
been scaled-up and replicated elsewhere in the respective regions and even into other regions.
This is to some extent a testament of the sustainability (and of course replicability) of the model
in these sectors. The evidence on long term sustainability for off-grid energy projects is limited
to a few projects such as Sri Lanka and Bangladesh RERED, which have been operational for
over a decade. The results are encouraging. In Sri Lanka for example, as of June 2008, some
120,000 HH were using SHSs, with 750 installations occurring monthly (Terrado, 2008). The
results in Bangladesh are similar where by mid 2008, the SHS sales reached 8,000 units per
month with total sales of about 180,000 (REtoolkit issue note, June 2008, pp. 132, 135). Both
projects continue to use grants, but increasingly to reach the poorest segments of the population.
Two characteristics of OBA in particular help address the issue of sustainability: a) nature of the
subsidy design, and b) performance risk shifted to the providers.
Nature of subsidy design: As already discussed in detail, OBA schemes are predominantly subsi-
dies for access, which are by nature one-off capital subsidies. One-off subsidies do not rely on
an ongoing source of subsidy funding: once a household receives the subsidy to connect to a
network, for example, there is no longer a subsidy requirement in relation to access for that
household.28
Output-based performance risk: As discussed in Section 4.2, by shifting performance-risk to
service providers, OBA requires service providers to plan and implement schemes to ensure that
performance expectations are met in order to be fully compensated. More careful planning in
terms of capacity (given lack of incentives to over-size with OBA) and final output delivery help
enhance sustainability. Further, because demand risk of uptake is to a large extent shifted to ser-
vice providers, service providers are taking more care in providing appropriate solutions to the
targeted customers. By involving households and communities in the service expansion process,
a greater sense of ownership can be developed, which in turn enhances sustainability. For exam-
ple, the IDA-funded Senegal On-site Sanitation Project involves an extensive network of NGOs
and community-based organizations (CBOs) working together to ensure not only demand for the
on-site sanitation systems, but also proper use and maintenance. The project resulted in 63,000
household sanitation facilities built between 2003 and 2005 against the initial target of 60,000 and was
two years ahead of schedule (OBA learning event presentation, June 21, 2007).
28 However, to enhance the sustainability of services, one-off OBA schemes may with-hold a portion of the subsidy disbursement
after, for example, several months of bills paid and/or collected. Also, it is important to note that this assumes that the household
can afford ongoing operations and maintenance costs – for example in the form of tariffs. This is on the whole not a major hurdle.
See targeting section above for more related discussion.
51
4.5.2. Setting tariffs and subsidy amounts
The sustainability of any OBA scheme – most specifically for network industries – is dependent
on the relationship between the subsidy provided and the tariff charged to consumers for on-
going service provision.
For example, when the poor who are being connected through OBA schemes benefit from subsi-
dized social tariffs, this can create an additional burden on providers, who will in turn need to be
able to cross-subsidize these new poor users with consumers that are not benefiting from social
tariffs schemes. This has been the experience with connecting the urban poor to the water net-
work in Morocco, and will likely be the experience with any scheme that connects many new
customers benefiting from social tariff schemes.
On the other hand, it is important to differentiate between costs that are covered by the tariff re-
gime and those that are not. At the given tariff levels (including regulated connection charges),
even if the utility is not recovering costs for the specific low income connections under consider-
ation, it may be covering its costs for its regulated jurisdiction as a whole - i.e. the tariff as a
whole may be set to ensure that the utility recovers efficient cost of serving its entire area includ-
ing the low income area. Design of OBA project should consider this and – in this instance – not
over-compensate the utility as a whole by providing an additional subsidy for this low income
area. There are likely to also be costs associated with the connection that are not covered by the
tariff, and these may be most appropriate for the OBA subsidy to focus on -- depending on con-
sumer's ability and willingness to pay.
These issues were encountered in the case of the OBA design for an electricity scheme for slum
areas of Mumbai (see Annex II for more details). The distribution company in this case is obli-
gated to provide a metered working connection to anyone that applies. The regulated connection
charge covers these costs (and upstream costs of providing the connection). The costs of connec-
tions from the meter to the house and internal wiring are not addressed by the utility or the regu-
lator and need to be faced fully by the slum dweller and thus are creating the bottleneck to take
up. Once a subsidy is provided here, the distribution company had the incentive to carry out up-
stream investment without any need for subsidy support (as this is compensated for by the tariff
regime).
Further, the utility may already have made certain performance promises to the regulator (e.g.
connecting low income communities) as part of the last tariff review, and it is important that the
OBA design takes account of such regulatory obligations that the utility may have. The OBA
project should not be helping the utility if it is already being compensated by the regulator to
meet these obligations. The OBA design should consider what barriers may be affecting take up
even after the regulator's/policymaker's efforts have been taken into account.
For example, in the case of a multi-year tariffs regime set by the regulator, the utility may be in a
position to earn extra returns from reducing technical and commercial losses (as the tariffs are set
for the multi-year regulatory period and include the cost of losses). In such an instance, connec-
tions for low income consumers that help to reduce theft - and therefore reduce commercial
losses - may increase returns to the utility. The utility may therefore have adequate commercial
52
incentive (and returns) to undertake a certain amount of connection activity in low income areas
without subsidy support. Designers of an OBA project for supporting connections would need to
be cognizant of this and the level of incentive the utility already faces to ensure that the subsidy
payments to the utility do not over compensate it for connections made in order to design more
economic and politically sustainable solutions.
4.5.3. Sustainability of funding source
The sustainability of the funding source needs to be considered based on the subsidy design me-
chanism. For example, in the case of roads and health which rely on ongoing subsidy streams,
the sustainability of any given scheme is dependent on a constant flow of subsidies. Road main-
tenance funds in developed countries may provide a certain degree of security and sustainability,
but road maintenance funds in developing countries have a more mixed record. The health sec-
tor often does not have such an ear-marked subsidy pool and therefore relies mainly on budget
made available by the government. This makes it more difficult to ring-fence the health budget
allocated to performance-based schemes – although this is a risk that also applies to traditional
ways of providing health care.
The ICT sector seems to have a more robust form of subsidy funding. In ICT, all of the methods
– levies, auctions, government budgets -- for funding USF have been reliable in providing the
required funding. Levies on telecommunications operators‘ revenues may be preferable since
they may be seen as more reliable and sustainable from a private sector perspective, in contrast
to government budget funding or spectrum auctions. However, although the funding source has
generally been reliable in ICT, the problem has been with the ―political‖ sustainability of the ap-
proach due to large sums being accumulated but not being disbursed in a timely manner. (See
Annex II for more details.) Some of the solutions proposed for improving the efficiency of the
UASF include appointing private entities to manage the UASF, as in the USA and Pakistan.
Other solutions include ―Pay or Play‖ there is usually no tendering, but rather an allocation of
―obligations‖ among the service providers. ―Players‖ are free to contract each other to fulfill
their share of obligations, if paying someone else to do so makes economic sense. Another op-
tion considered is the Virtual Fund. No country has ever implemented a virtual UASF. The ad-
vantage seen in virtual funds is mainly that the actual money of operator levies does not need to
move into - and then later out of - a fund to the recipient, eliminating the need for actual fund
management, but this would simply be an accounting system that records each operator‘s annual
UASF levy.
Further, a scheme is only sustainable in terms of subsidy required if the subsidy amounts are rea-
sonable, reflecting the cost and benefit to society. Efficiency gains through innovation and com-
petition therefore contribute to sustainability. Nevertheless, subsidy per capita can vary signifi-
cantly between regions and sectors, also depending on the scope of service to be subsidized.
Connecting the poor to grid-based infrastructure services can be relatively cheap, where trunk
infrastructure exists and only the connection itself needs to be subsidized. The same service in a
similar geographic area can require much higher subsidies if distribution and production infra-
structure needs to be subsidized.
For example the subsidy for natural gas connections (including a gas heater), in Armenia is $160,
while the connection subsidy to the electricity grid in densely populated rural Ethiopia with its
relatively larger families is $6.25. Those figures compare to $115 per capita for the installation
53
of a solar home system in very remote areas of rural Bolivia. Similarly per capita subsidies for
water projects range from $125 in Morocco, where subsidies include sanitation connections, to
$6.2 in a project in Kampala that makes extensive use of public water points and shared yard taps.
Those numbers, while different due to different project contexts, have all showed sufficient eco-
nomic rate of returns – in cases where economic rates of return information was analyzed for this
review (where funding is coming from GPOBA).
4.5.4. Enabling environment
Any OBA scheme is only as sustainable as the environment within which it operates. A pilot, by
definition, may seem to some extent to be isolated from broader sector reform issues in the short-
term, but for greater impact with scaling-up and mainstreaming, a supportive enabling environ-
ment is critical. The following aspects of an enabling environment seem to play a particularly
important role in the success of OBA in any given region or sector, most of which are inter-
related and many of which are common requirements for successful PPP in the sector:
Extent of experience with the private sector in service provision.
Market structure and experience with competitive processes to encourage efficiency.
Regulatory or legal/contractual framework for the sector, including tariff setting and ad-
justment policies.
Capacity of implementing agencies (e.g. to handle procurement and transaction processes,
monitoring and verification, funds flow – but also in relation to understanding and wil-
lingness to work with performance-based arrangements.).
For example, output based grid and mini-grid projects cannot bypass the need for a strong regu-
latory regime or at least robust contractual (and supporting legal) arrangements. This could par-
tially explain the limited use of OBA in grid and mini-grids as many of the developing countries
have weak regulatory capacity to enforce/oversee provider performance and added to it, the costs
of regulation in remote areas is very high (Reiche). At the same time, a light-handed approach to
regulation may be required with respect to service standards: in order to provide services that the
poor can afford, and for example to more effectively utilize self-selection targeting methods, ser-
vice standards may sometimes need to be relaxed – although always meeting a minimum stan-
dard (Baker and Tremolet).
The importance of an appropriate legal and regulatory environment is also demonstrated through
the discussion of tariff and regulation above. Without proper regulatory accounting, or at the
minimum capacity to understand the issues at hand, tariff and subsidy policies could lead to mi-
salignment of incentives and/or waste of limited resources. Less optimal and sustainable solu-
tions are likely to result.
4.5.5. Conclusions on sustainability, tariffs and enabling environment
It is too early to analyze whether OBA schemes have proven sustainable on the whole. There is
no evidence to date to suggest that schemes that involve OBA subsidies are less sustainable than
their input-based counterparts, and on the contrary, the nature of OBA subsidy design and shift-
54
ing of performance-risk to service providers provide the platform for relatively sustainable inter-
ventions.
Evidence from ICT and some other sectors demonstrate that OBA can provide sustainable
results if OBA schemes are linked to contracts with adequate provisions for ongoing service
delivery and if sources of funding are both reliable and available.
One-off subsidies provide a clear and discrete one-time (although possibly phased) subsidy
requirement for access. But to be designed well, costs for use and maintenance (or in the
case of utilities – tariffs) should be affordable to the poor, and, tariffs charged by the service
provider should cover all reasonable and efficient running costs. In the case where tariffs are
lower than running costs, connecting new customers will result in operators incurring losses
and having insufficient funds to maintain the system. In such cases, there would be no in-
centive for the service provider to serve customers that are charged below running costs, and
thus service provision to these customers will not be sustainable. Unfortunately, given the
lack of political will to raise tariffs to sustainable levels (even though the poorest segments
of the population are often paying more for alternative services), one-off OBA subsidies
can be sustainably applied in limited circumstances. Transition tariffs to help raise tariffs
to cover running costs could be considered, but the political will to raise tariffs often comes
into question, putting the “transitional” nature of the subsidy at risk. Thus the scale-up
and mainstreaming of OBA in certain sectors such as grid-based water and energy would
need to go hand in hand with tariff reform. In some cases, OBA schemes have brought
these issues to the fore, as in the Uganda and Kenya water projects.
Subsidy amounts, especially in the case of network industries, should be set in line with (re-
gulated) tariff levels to ensure proper alignment of incentives as well as to ensure that ser-
vice providers are not over-compensated. For example, due consideration should be given
to costs already incorporated into the regulatory asset base.
Ongoing subsidies help shift performance risk out further into the future – as in the case of
the roads schemes described in more detail in Annex II – and therefore ensure a relatively
more sustainable service of a specified quality. But ongoing subsidies require a clear source
of continuous future funding.
Road maintenance funds and ICT UASFs provide a relatively transparent and predictable
source of funding. Both types of schemes have experienced difficulties, but lessons are be-
ing learned in each sector – for example, to possibly short-cut the problems related to slow
disbursement from current UASFs. The energy sector is also in some places moving to uni-
versal access type funds through rural energy funds.
In all OBA schemes, capacity of the government to regulate and monitor will be decisive in
the sustainability of the scheme. Realistic programs based on existing enabling environment
should be considered in sectors or regions where there is less experience with OBA. For ex-
ample, complex long-term concession contracts in the water sector (where there have been
few if any PPP concessions since the early part of this decade) may be less realistic, and the
55
focus should be on interventions that transfer less risk to service providers or require less so-
phisticated regulatory and institutional arrangements.
4.6 Monitoring of results
A forthcoming review by the World Bank‘s Independent Evaluation Group (IEG) highlights re-
sults monitoring as an area of concern (The World Bank, forthcoming): ―IEG‘s assessment of
M&E quality, which started in 2006, rates the quality over the past two years as modest in three
fifths of cases…‖. Issues cited are indicators that are not clearly defined or not measurable. At
the same time the review shows a clear correlation between the quality of M&E systems and
overall project outcomes.
The main reasons identified for the poor performance of M&E systems of many projects is a lack
of staff incentives to focus on M&E and a ―culture of approval‖ resulting from a ―drive to get
projects launched‖. OBA schemes can help toward mitigating this as they require output verifi-
cation prior to disbursement of subsidies. This helps internalize monitoring and makes it a key
element in the project design process. However, the degree and quality of monitoring and veri-
fication varies from scheme to scheme, rather than from sector to sector. The effectiveness of
monitoring is related to several factors:
The definition of the output to be monitored, and the ease of measuring and verifying the
delivery of the output.
The availability of trained local consultants and engineers to effectively monitor the deli-
very of outputs: capacity becomes a greater issue the more complicated the outputs to be
verified.
The chance of ―capture‖ of monitoring agents by service providers: capture is greater the
―smaller‖ the verification agent and the ―more powerful‖ the service provider. In some
cases, projects may have to look outside of the country for a viable verification agent.
The capacity of the local government institutions to accept and interpret the monitoring
results and to use the results for intended purposes. Even if the verification agent does
his job correctly and on time, is the government (if involved) able and appropriately in-
centivized to quickly and effectively process that information for timely subsidy dis-
bursement?
However, whether or not an OBA scheme will result in the appropriate output and disbursement
information being provided for broader monitoring and evaluation purposes is dependent on the
recording and information dissemination process. In the case of Bank OBA projects, this is de-
pendent on the feedback loop between the governments or project implementation units on the
ground and their relevant Bank task teams, who in turn would need to systematically record the
data where it could be shared and evaluated.
The experience through this review demonstrated that although GPOBA-funded projects re-
quired an output-oriented monitoring and information sharing system, many Bank-funded OBA
projects did not involve such a feedback loop, sometimes because the OBA component of a
Bank-funded project was only a small component of a much larger input-based program.
56
Best practice would also use the monitoring platform of OBA beyond the verification of out-
puts to check how outcomes and other aspects of service delivery are faring. But this is often
the weakest link in the feedback loop between OBA planning, design and implementation. Al-
though OBA internalizes the monitoring of outputs, the monitoring framework established is
rarely used for purposes other than payment of subsidies; hence the benefit of the information
collected – for example to improve on quality of service – is not always exploited in full. Or, in
some cases, additional information is not collected for long-term gain due to short-term costs. All
sectors might be able to draw some lessons from some performance-based roads schemes that are
attempting to enable even users to report and monitor performance by making performance crite-
ria easily measurable or discernable. Impact evaluations are a good way to supplement verifica-
tion activities. Further, impact evaluations comparing output-based and input-based approaches
should also be considered; a few such impact evaluations are being attempted.
These enhancements to monitoring and verification under OBA schemes require capacity and
resources. Verification agents must be appropriately trained, and also incentivized. GPOBA
uses for the most part ―third party‖ verification agents to help enhance transparency and also im-
prove on effectiveness so that outputs can be verified relatively quickly and the disbursements
can be made. The key is to balance the independence of output verification with the broader sec-
tor monitoring needs, as well as ensure ownership on the part of the regulatory or relevant gov-
ernment agency. A recent case of over-reporting of outputs achieved and resulting in excess per-
formance payments under performance contracts between GAVI and several recipient countries
provides an example that without proper monitoring, the advantages of results-based schemes are
lost. An emphasis should be placed on independent verification agents, who are also experts in
the sector.
With OBA schemes, accountability also increases for donors and governments: public fund-
ing is linked to the fact that pre-identified outputs are (were) delivered, and therefore waste or
inappropriate allocation should be minimized. Thus OBA can play an important role in the
fight to improve governance and reduce corruption. OBA projects should make full use of the
requirement to monitor for outputs, through physical audit, surveys of beneficiaries, and over-
sight by civil society. And to support broad monitoring, OBA projects should include an active
communication strategy that advertises what services are to be delivered to whom and at what
price – as is currently being done in Morocco‘s urban water sector. But it is noted that while
project-specific outputs may be easy to monitor, compliance with general regulations or laws go-
verning the sector may be less transparent. Detecting poor construction or below-standard deli-
very can be difficult. This requires resources and capacity, and to some extent a relaxation of the
completely ―pure OBA‖ since some key inputs will need to be specified, and the ability to moni-
tor them will be required.
57
5. Key Considerations and Next Steps
The section summarizes the challenges that OBA faces in terms of scaling-up or mainstreaming,
and recommends possible responses. The first section focuses on challenges ―external‖ to the
WBG, and the second focuses on internal challenges.
5.1 ―External‖ challenges and possible responses by the WBG
The piloting phase of OBA has in general been a success. About 128 OBA projects have been
implemented or are underway in the WBG. These projects are expected to reach at a minimum
almost 60 million beneficiaries worldwide.29
The pilots in the Chilean ICT sector and the Argen-
tine roads sector in the 1990s led to scale-up in their respective countries and eventual replication
worldwide. It is now safe to say that OBA has become mainstreamed as one of the key modus
operandi for interventions in these two sectors in most parts of the world30
. In the health and
off-grid energy sectors, OBA is recognized as one of the key financing mechanisms to expand
targeted access to the poor and is being widely used. In the water, education, and grid-based
energy sectors, OBA is still in the pilot stage.
The lessons learned regarding the use of OBA compared to traditional approaches to contracting
have demonstrated that there are clear advantages of an OBA approach in regards to efficiently
targeting subsidies and mobilizing the private sector to serve poor households that would other-
wise go without an improved service. OBA has also demonstrated that monitoring for results is
possible – if appropriate systems for capturing and transmitting systems are put in place.
At the same time, the review recognizes that OBA is not a substitute for sector reform. The ex-
perience of government contracting with the private sector, and to some extent the existence of
legal or regulatory practices that are more supportive of private sector risk-taking, are part of the
environment that enables OBA to be more successful in some contexts than others. In turn, OBA
is one of the main mechanisms through which efficiency gains from sector reform have been
shared with users through improved access and improved standards of service. OBA therefore
not only relies on a supporting enabling environment but can itself help underscore the benefits.
Cross-cutting challenges for successful OBA schemes remain – even for the sectors where OBA
is mainstreamed. Although some of these challenges are not specific to OBA, in order for OBA
to continue to have an impact, they must be addressed.
29 Data on the number of beneficiaries is not readily available for public access ICT and transport projects. Beneficiary informa-
tion is particularly limited in the case of transport sector (available only in two of the 23 World Bank implemented projects) due
to the non-exclusivity of roads projects. 30 Although the recent Regulatel study demonstrates that ICT technology evolves so fast, there is a constant need for innovation
to keep up with the market (Stern and Townsend).
58
Access to
finance:
Access to finance can be a hurdle for OBA schemes in all sectors –
even in ICT. The current financial crisis is likely to exacerbate this
problem. Access to finance can present a hurdle for both providers
and users, resulting in the following challenges: a) difficulty in shift-
ing sufficient performance risk to service providers under an OBA
arrangement if the cost of pre-financing the outputs would put an un-
due burden on the provider and/or if the resulting fees to users (e.g.,
tariffs) would be unaffordable; b) limitations on the development of
a vibrant private sector that can afford to take risks and invest in
business expansion, even with the availability of targeted subsidies to
help defray the costs. A few guarantees and lines of credit to the
banking sector are being tested. Where such financing instruments
are not as readily available, OBA schemes may need to phase-in
payments against reasonable milestones – as long as performance
risk for output delivery for the most part remains with the service
provider.
Security and
sustainability of
funding:
A secure source of funding and an administrative framework that al-
lows for swift disbursement when outputs have been achieved are re-
quired. Further, for the sustainability of OBA in any given sector, the
source of funding also needs to be reliable and consistent. Lessons
are being learned – benefits and challenges – from on-going funds
(e.g. ICT, roads, energy).
Capacity Capacity to implement and monitor OBA schemes is limited, particu-
larly in those countries/sectors where OBA is needed most – although
some limitations are not OBA-specific. Capacity limitations are most
obvious in regards to transaction design and implementation, output
monitoring and verification implementation, and demand manage-
ment. Targeted training, hiring of independent verification agents,
involvement of NGOs, and private administrators to manage univer-
sal access funds are all part of solutions being implemented to miti-
gate capacity constraints.
Enabling envi-
ronment:
As with most PPP arrangements, in order for OBA schemes to be sus-
tainable and of scale, there should be basic elements of an environ-
ment that supports the development, monitoring and adjustment of
contracts, which often is demonstrated by a successful track record of
private sector participation. Relatively transparent legal or regulato-
ry arrangements for example for tariff setting and adjustment would
be amongst such enabling factors, and ultimately aim to reduce per-
ceived risk to providers and to some extent the cost to final users.
59
Targeting: As the size of pilots and programs increases, and as technologies
change, more refined targeting mechanisms will be required. These
can be costly to administer and require additional capacity, but these
costs may outweigh the ―leakage‖ from large geographically targeted
schemes. A blend of targeting mechanisms is proving effective.
Competing in-
terests:
Ultimately, all else being equal, service providers will opt for input-
based schemes because they transfer less risk to the provider. But
donors and governments should want the contrary, i.e. to transfer risk
to the provider to hold them accountable (as long as providers are
equipped to take on that risk). If OBA is to be the mechanism chosen
for a given intervention, donor/government coordination is required.
There is clearly a role for the WBG in enhancing the effectiveness of OBA schemes to improve
the reach of basic services to the poor.
For example, the Bank and IFC should work together to provide financial solutions to
help mitigate the access-to-finance constraint by encouraging banks to improve lending
conditions to service providers both for pre-financing of outputs and for longer-term
project finance.
Capacity building and technical assistance (e.g., for transaction support, tariff design and
subsidy policy, monitoring and evaluation) can be provided by the WBG and the multi-
donor programs such as GPOBA, PPIAF, ESMAP, and WSP.
Donor funding and discipline are key to secure and sustain sources of funding for OBA.
The Bank is well placed to transfer lessons from county to country and between sectors –
for example between universal access and service funds in ICT, road maintenance funds,
and rural electrification funds. This will help OBA practitioners across sectors and re-
gions to benefit from the lessons learned over the past decade, while tailoring them to
specific contexts.
The Bank should continue its important work on regulatory reform – for example,
through the newly created Regulatory Thematic Group – and on pushing the agenda for
sustainable tariffs and subsidy policies that are pro-poor. OBA can help provide the start-
ing point for these discussions in some cases.
The WBG also plays a pivotal role in donor coordination through its work on sector-wide
approaches (SWAPs) and development policy lending (DPL). Mainstreaming OBA
would require working closely with WBG clients to better understand how performance-
based arrangements such as OBA could best work in their specific context, and would al-
so require close co-ordination with other donor initiatives to ensure additionality and
harmonization.
Finally, GPOBA needs to step up its efforts to facilitate sharing of experiences and best
practices in OBA, and to provide WBG staff and other development partners with the
60
practical knowledge they need to assess when OBA is suitable and to design and imple-
ment OBA schemes. This is in line with GPOBA‘s strategy to evolve within the coming
two to four years from providing subsidy funding to acting primarily as a center of OBA
expertise, which includes activities such as training events for WBG staff, development
of online resources and an E-learning course on OBA, and development of a diagnostic
tool which would provide more guidance to projects teams on issues such as project de-
sign and relevant characteristics of an enabling environment for OBA schemes.
By taking these steps, the WBG can help make OBA more effective where it is already being
used more regularly – i.e. the ICT, roads, health, and off-grid energy sectors. These actions can
also help provide a stronger platform in those sectors such as grid-based energy, water, and edu-
cation where OBA is still in the pilot phase – but in some cases ready for scale-up as important
lessons for improved design and implementation are already available.
5.2 ―Internal‖ challenges and possible responses by WBG
Although mainstreaming implies that OBA is one of the key modus operandi for interventions in
the sector, effective mainstreaming in the WBG would imply that policy decisions in the WBG
have been made and/or that operational guidelines have been in place to help and encourage
Bank staff to actively design and develop OBA schemes in the sector. In order for Bank staff to
seriously consider and implement OBA schemes on a larger scale, policy and strategy decisions
need to be taken by senior management. Some steps have already been taken:
The SDN Sustainable Infrastructure Action Plan, which has been endorsed by the Board,
states that the WBG should ―pilot and ramp up innovative financing options for the private
sector, including OBA…‖ (SIAP, 2008).
The CFP-led Innovating Development Finance paper (Girishankar, 2009) discusses the role
of OBA within the context of results-based financing, and endorses mainstreaming OBA in
the WBG.
The forthcoming PSD Strategy Update, 2009, put together by FPD, endorses mainstreaming
OBA in the WBG.
The 2007 World Bank strategy for Health Nutrition and Population calls for an increase in
the "proportion of output-based lending in health.‖
But more needs to be done to translate these strategies into policies on the ground, for example
by incorporating OBA into Country Assistance Strategies. Further, although OBA is used exten-
sively within Standard Investment Loans (SIL), there is limited experience of OBA as part of
other instruments.
For example, the Morocco Urban Water OBA project (funded by GPOBA) and the first sec-
tor reform DPL funded by IBRD together helped galvanize the government to reach for
OBA-type approaches: the Government of Morocco has expressed interest in requesting a
Bank loan to scale-up OBA in the sector.
Output-based schemes that involve performance-based intergovernmental transfers are being
piloted in Latin America with the support of IBRD loans (e.g., Guanajuato, Mexico) and an
61
OBA facility is being piloted in the water sector in Honduras. These are important steps to
take OBA from project intervention to wider sector programs.
The nexus between OBA and Bank fiduciary operations and policies needs to be considered fur-
ther. Here too important steps have been taken. For example, in 2003 the Bank adopted a Sam-
ple Bidding Document for OBA road contracts and in 2008, GPOBA and OPCS released a joint
Guidance Note to staff on procurement procedures and OBA31
. But more needs to be done.
Bank staff should be given incentives to innovate and greater emphasis should be placed on dis-
bursing for outputs as opposed to inputs, including more amenable fiduciary procedures. The In-
vestment Lending Reform currently being considered by OPCS will be tackling these very issues
(OPCS, 2009). OBA will provide important lessons for this initiative as well.
The ultimate decision on the success of OBA or any other aid effectiveness tool to improve
access to the poor and enhance accountability rests with the WBG client governments, and their
interest, ownership and commitment to design and sustain such approaches. The WBG has a key
role to play in demonstrating that OBA, a key part of the results-based financing approach,
can help improve access to basic services and reach the MDGs. The WBG also has a role in
ensuring that the donor community speaks with one common voice on these issues related
transparency and efficient use of resources to reach the poorest. The existing information
and expertise on OBA, including this review, provide a solid underpinning for the successful de-
sign of pilots or programs that respond to client needs.
31 http://intresources.worldbank.org/INTPROCUREMENT/Resources/GuidanceNote.PR.OBA.pdf
62
Annex 1: Table of OBA Projects in the WBG (as of April 30, 2009)
Project Name (P0 Number)
Country (Region)
Funding Source
Type of output World Bank Subsidy
amount includ-ing GPOBA32
Planned Number of
beneficiaries
Project Status (Latest information on actual # Benefi-
ciaries) 33
Telecommunications
1 OBA Telecommunications. (P081250)
Azerbaijan (ECA) TBC TBC TBC TBC Design
2 Competitiveness & Enterprise Development Project (P071443)
Burkina Faso (AFR)
IDA Payphones and POPs
$1,039,724 485,146 Implementation
3 Rural Telecommunication Access Project (P102475)
Cambodia (EAP) GPOBA Beneficiaries $2,500,957 261,000 Implementation
4 Infrastructure for Territorial Development (P076807)
Chile (LCR)
TBC Public Phones TBC TBC Implementation
5 Power and Communications Sectors Modernization and Rural Services Project PROMEC (P063644)
Ecuador (LCR)
IBRD Payphones and Internet Stations
$4,150,000 TBC Closed (034)
6 OBA and Regulatory Frame-works for Rural and Peri-Urban Telecommunications (P094321)
Guatemala (LCR) IBRD Public Phones $16,000,000 3,500,000 Implementation
7 Rural Telecommunications Development (P093925)
India (SAR)
IDA Public Phones & Internet
TBC TBC Design
8 Extending Telecommunications in Rural Indonesia (P102476)
Indonesia (EAP) GPOBA Direct Users $1,868,338 500,000 Implementation
9 Rural Infrastructure Services Project (P057761)
Malawi (AFR)
IDA Pay phones, tele-centers, and Internet Stations
$1,500,000 TBC Implementation
10 OBA Pilot Project of Universal Access Strategy (P102488)
Mongolia (EAP)
GPOBA Pay phones, tele-centers, and Internet Stations
$257,335 21,312 Closed (22,315)35
11 Information and Communica-tions Infrastructure Develop-ment Project (P092965)
Mongolia (EAP)
IDA Pay phones, tele-centers, and Internet Stations
$5,450,000 45,000 Implementation
12 Mozambique Communication Sector Reform Project (P073479)
Mozambique (AFR)
IDA Payphones and Internet PoPs
$3,000,000 2,600,000 Implementation
13 Telecommunications Sector Reform Project (P050671)
Nepal (SAR)
IDA Access lines $11,900,000 4,000,000 Implementation
14 Telecommunications Reform Project (P055853)
Nicaragua (LCR) IDA Payphones $900,000 323,000 Closed
15 Rural Telecommunications project (P089989)
Nicaragua (LCR) IDA Payphones and Internet PoPs
$7,900,000 376,000 Implementation
16 Privatization Support Project (ICT) (P070293)
Nigeria (AFR)
IDA Payphones and Internet Stations
$6,130,000 2,657,422 Implementation
17 Telecommunications and Postal Sector Reform Project (P075739)
Samoa (EAP)
TBC Payphones and Internet Stations
TBC TBC Implementation
18 Telecommunications and ICT Development Project (P088448)
St Lucia (LCR)
IDA/ IBRD
Access lines & Internet
$1,000,000 TBC Implementation
19 Energy for Rural Transformation Project (P069996)
Uganda (AFR)
IDA Internet POPs and Public phones
$6,695,981 3,600,000 Implementation
20 Increased Access to Electricity and ICT Services Project (P077452)
Zambia (AFR)
IDA Public telephones, POPs, Access Center, IXP
$3,125,000 TBC Implementation
32 This amount does not include government subsidy contribution, which sums up to nearly $1.7 billion. 33 Latest information on actual # of beneficiaries are only available for the projects that have received either technical assistance
and/or investment subsidy funding from GPOBA, as well as for a few other WBG projects. 34 According to the implementation completion reports (ICR), the OBA component of the project was cancelled in June 2008.
The operator failed to meet the technical specifications and comply with the deadlines for installation of the telecenters. The
Project had paid $1 million of the $4.15 million committed as advances and for the reported installation of half of the telecenters.
None of telecenters are in operation. 35 For Mongolia Telecom, the number of final beneficiaries increased due to competitive bidding.
63
Project Name (P0 Number)
Country (Region)
Funding Source
Type of output World Bank Subsidy
amount includ-ing GPOBA32
Planned Number of
beneficiaries
Project Status (Latest information on actual # Benefi-
ciaries) 33
Transport
1 Road Maintenance and Sector Rehabilitation Project (P006003)
Argentina (LCR) IBRD & Govt
11,667 km $248,300,000 N/A Closed
2 National Highway Asset man-agement (P088153)
Argentina (LCR) IBRD & Govt
8,188 km $182,800,000 N/A Implementation
3 Provincial Road Infrastructure Project (P070628)
Argentina (LCR) IBRD & Govt
2,204 km $96,400,000 N/A Implementation
4 National Highway Rehabilitation and Maintenance (P052590)
Argentina (LCR) IBRD & Govt
19,885 km $295,775,000 N/A Closed
5 Federal Highways Project (P006532)
Brazil (LCR)
TBC 3,500 km36 $247,700,000 N/A Closed
6 Rio Grande Do Sul Highway Management Project (P034578)
Brazil (LCR)
IBRD & Govt
2,200 km $70,000,000 N/A Closed
7 Transport Sector Project (P074030)
Burkina Faso (AFR)
IDA 1,021 km TBC N/A Implementation
8 OBA in Road Network Manage-ment and Maintenance 2 (P087004)
Cape Verde (AFR)
IDA 225 km $6,900,000 N/A Implementation
9 Chad - National Transport Pro-gram Support Project (P035672)
Chad (AFR)
IDA 440 km $11,088,000 N/A Closed
10 Chad - Road Network Manage-ment & Maintenance (P079736)
Chad (AFR)
IDA 600 km $24,000,000 N/A Implementation
11 India - Annuity Road Projects (TBC)
India (SAR)
TBC TBC TBC N/A Implementation
12 Kenya Northern Corridor Im-provement Project (P082615)
Kenya (AFR)
IDA,NDF, Govt
300 km $207,000,000 N/A Implementation
13 Madagascar - Transport Infra-structure Investment Project (P082806)
Madagascar (AFR)
IDA TBC $27,600,000 N/A Implementation
14 Nigeria - Federal Roads Devel-opment Project (P090135)
Nigeria (AFR)
IDA 1,800 km $330,000,000 N/A Implementation
15 Paraguay - Road Maintenance Project (P082026)
Paraguay (LCR) IBRD 968 km $39,270,000 N/A Implementation
16 Uruguay - Transport Project II (P049267)
Uruguay (LCR)
IBRD & Govt
856 km $42,237,000 N/A Closed
17 Second Rural Access Project (P085231)
Yemen (MNA)
IDA & Govt
950 km $40,000,000 250,000 Implementation
18 Transport Sector Support Pro-gram (P055120)
Tanzania (AFR)
IDA $708 $3,000,000 TBC Design
19 Tanzania - Road Network Man-agement & Maintenance P088645 (GPOBA); P078387 (Bank)
Tanzania (AFR)
IDA 850 km $26,000,000 TBC Implementation
20 Peru - Regional Transport Infrastructure Decentralization Project (Provias Descentralizado) (P078813)
Peru (LCR)
IBRD & IADB & Govt
4,906 km $50,000,000 TBC Implementation
21 Peru - Second Rural Roads Project (P044601)
Peru (LCR)
IBRD & IADB & Govt
14,950 km $23,154,000 3,500,000 Closed (3,500,000)
22 Peru - Rural Road Rehabilitation and Maintenance Project (P037047)
Peru (LCR)
IBRD & IADB & Govt
10,881 km $7,390,000 1,500,000 Closed (3,500,000)
23 Serbia & Montenegro - Trans-port Rehabilitation Project (P075207)
Serbia & Monte-negro (ECA)
IDA & Govt
1,200 km $55,000,000 TBC Implementation
36 In effect, over the 1998-2005 period, about 4,000 km of rehabilitation works on the federal road network were undertaken un-
der the World Bank funding, out of which about 3,500 km with a result-based approach. Additional 3,000 km of rehabilitation
works were financed by the IADB loans, and about 1,300 by the Federal Government itself.
64
Project Name (P0 Number)
Country (Region)
Funding Source
Type of output World Bank Subsidy
amount includ-ing GPOBA32
Planned Number of
beneficiaries
Project Status (Latest information on actual # Benefi-
ciaries) 33
Energy
1 Renewable Energy in the Rural Market Project (P006043)
Argentina (LCR) IBRD Household Con-nections
$30,600,000 180,000 Implementation (48,000)
2 Access to Gas & Heat Supply for Poor Urban Households (P103071)
Armenia (ECA) GPOBA Individual Gas connections
$3,100,000 18,676 Implementation (11,120)
3 Heating and Gas (IDA Project) (P095329)
Armenia (ECA) IDA, Govt.
Individual Gas connections
$3,000,000 21,924 Implementation (7,000)
4 Rural Electrification and Re-newable Energy Development (IDCOL SHS) (P071794)
Bangladesh (SAR)
GEF, IDA, ADB, IDB, KfW, GTZ
SHS installations $8,200,000 843,960 Implementation (1,800,000)
5 Decentralized Infrastructure for Rural Transformation (P073367)
Bolivia (LCR)
IDA SHS installations $10,000,000 106,746 Implementation (30,776)
6 Bolivia Rural Access with Small-Scale Providers (P102479)
Bolivia (LCR)
GPOBA SHS and Pico PV systems
$5,175,000 45,000 Implementation
7 Rural Electrification and Transmission (P071591, P064844)
Cambodia (EAP) GEF Household Con-nections
$5,600,000 316,200 Implementation
8 Renewable Energy Develop-ment (P046829)
China (EAP)
GEF Photovoltaic SHS $27,000,000 1,600,000 Closed (1,600,000)
9 Natural Gas Distribution for Low Income Families in the Carib-bean Coast (P102095)
Colombia (LCR) GPOBA Household gas connection and a gas stove
$5,085,000 210,00037 Closed (210,000)38
10 Rural Energy Access (P105651) Ethiopia (AFR) GPOBA Household Con-nections
$8,000,000 1,142,857 Implementation
11 Solar PV Systems to Increase Access to Electricity Services in Ghana (P105617)
Ghana (AFR)
GPOBA SHS installations $4,350,000 90,000 Implementation
12 Rural Electrification Program (P112651)
Guatemala (LCR)
GPOBA Individual House-hold connections
$6,850,000 117,195 Design
13 Improved Electricity Access for Indian Slum Dwellers (P104649)
India (SAR)
GPOBA Household Con-nections
$1,570,000 110,000 Design
14 Home Solar Systems Project (P035544)
Indonesia (EAP) GEF SHS installations 5,200,000 35,438 Closed
15 Southern Provinces Rural Elec-trification Project (P044973)
Lao PDR (EAP) IDA Household Con-nections
$1,000,000 50,000 Closed (51,805)
16 Liberia Electricity Access (P110723)
Liberia (AFR)
GPOBA Household Con-nections
$5,000,000 91,241 Design
17 Household Energy and Universal Access Project (P073036)
Mali (AFR)
IDA, GEF
Household Con-nections and SHS installations
$19,300,000 178,700 Implementation (178,685)
18 Biogas Support Programme (P103979)
Nepal (SAR)
DGIS , KfW, GPOBA
Biogas plants $5,000,000 261,000 Implementation (33,404)
19 Off-grid Rural Electrification (Perza) (P073246)
Nicaragua (LCR) IDA Household Con-nections
$1,850,000 42,000 Implementation (46,445)
20 Rural Power Project (P066397) Philippines (EAP)
GEF SHS installations $1,800,000 50,000 Implementation
21 Rural non-Grid Power Supply (P090238)
Philippines (EAP)
Local Govt. TA from GPOBA
Electricity sup-plied (kWh)
N/A 360,000 Implementation
37 The verified connections in Colombia serve 204,852 beneficiaries. The remaining 5,000 beneficiaries were connected but the
connections were not verified as they were made after the deadline. 38 Includes beneficiaries from unverified connections
65
Project Name (P0 Number)
Country (Region)
Funding Source
Type of output World Bank Subsidy
amount includ-ing GPOBA32
Planned Number of
beneficiaries
Project Status (Latest information on actual # Benefi-
ciaries) 33
Energy
22 Electricity Services for Rural Areas Project (P085708)
Senegal (AFR)
IDA, GEF, AfDB, KfW
Household con-nections
$18,000,000 377,622 Implementation
23 Renewable Energy for Rural Economic Development (P076702)
Sri Lanka (SAR) GEF SHS installations $3,900,000 425,000 Implementation (500,000)
24 Energy Services Delivery Project (P010498)
Sri Lanka (SAR) IDA SHS installations $5,700,000 75,000 Closed (104,765)
25 Pamir Private Power Project (P075256)
Tajikistan (ECA) IDA Electricity con-sumed (in kWh)
$4,000,000 178,126 Implementation (178,126)
26 Energy Development and Access project (TEDAP) (P101645)
Tanzania (AFR) GEF Rural Household Connections
$2,300,000 75,000 Implementation
27 Energy for Rural Transformation Phase I (P069996)
Uganda (AFR)
GEF SHS Installations & Institutional systems
$1,400,000 37,500 Implementation (18,330)
Water and Sanitation
1 Multi-sector Project for Basic Services in Rural Areas (P053578)
Bangladesh (SAR)
IDA Water connec-tions
$314,743 26,000 Implementation (5,510)
2 Design of Innovative OBD Schemes for Water Supply and Sanitation Projects in Two Brazilian States (P114151)
Brazil (LCR)
TBC Water connec-tions
TBC TBC Design
3 Water Affermage contract - OBA for coverage expansion (P104526)
Cameroon (AFR) GPOBA Water connec-tions
$5,250,000 240,000 Implementation (4,302)39
4 Access to Water for low income communities (P109102)
Ethiopia (AFR)
GPOBA Water connec-tions
$8,400,000 420,000 Design
5 Second Water Supply Project (P001044)
Guinea (AFR)
IDA Water connec-tions
$16,900,000 138,000 Closed (138,000)
6 Extension of Water Services (P102474)
Honduras (LCR) GPOBA Water connec-tions
$4,440,000 240,000 Implementation
7 Improved Rural Community water in Andhra Pradesh (P102472)
India (SAR)
GPOBA HH Water Con-nections
$850,000 75,000 Implementation (43,422)40
8 Jakarta PT Thames/Suez (P102529)
Indonesia (EAP) GPOBA Household water connections
$2,573,140 55,824 Implementation (15,955)41
9 Expanding Piped Water Supply to Surabaya’s Urban Poor (P105590)
Indonesia (EAP) GPOBA Water connec-tions and Master Meter installation
$2,407,500 77,500 Implementation
10 Micro-finance for small water schemes (P104075)
Kenya (AFR)
GPOBA, EU
HH Water Con-nections
$1,151,300 60,000 Implementation (2,232)42
11 Extension of Water and Sanita-tion in Low Income Areas in Kisumu (P098285)
Kenya (AFR)
GPOBA Water Connec-tions
$350,000 72,000 Design
12 Small Towns Water Supply (P099575)
Lao PDR (EAP)
GPOBA Water Connec-tions
$2,350,000 124,000 Design
Water and Sanitation
13 Guanajuato Water Project (TBC)
Mexico (LCR)
IBRD water Connec-tions
$38,006,000 90,640 5.3
14 National OBA Facility for Wastewater Sector (P111610)
Mexico (LCR)
TBC Water Connec-tions
TBC TBC Design
39 Includes beneficiaries from unverified connections 40 Includes beneficiaries from unverified connections 41 Includes beneficiaries from unverified connections 42 Includes beneficiaries from unverified connections
66
Project Name (P0 Number)
Country (Region)
Funding Source
Type of output World Bank Subsidy
amount includ-ing GPOBA32
Planned Number of
beneficiaries
Project Status (Latest information on actual # Benefi-
ciaries) 33
Water and Sanitation
15 Rural Water Supply and Sanita-tion Project (P086877)
Morocco (MNA)
TA from GPOBA
Water Connec-tions and Flush Latrines
N/A 51,840 Design
16 Urban Water and Sanitation (P102527)
Morocco (MNA)
GPOBA Water Connec-tions
$7,000,000 55,704 Implementation (14,475)43
17 Water Private Sector Contracts - OBA for coverage expansion (P104945)
Mozambique (AFR)
GPOBA Household yard taps
$6,000,000 468,000 Implementation
18 Second National Urban Water Sector Reform Project (P071391)
Nigeria (AFR)
IDA Household Water Connections
$13,350,000 300,000 Implementation
19 Fourth Rural Water Supply and Sanitation Project (P039983)
Paraguay (LCR) IBRD Household Water Connections
$834,880 27,625 Closed
20 National Project for Rural Water and Sanitation (P065256)
Peru (LCR)
IBRD Household Water Connections
$2,500,000 TBC Implementation
21 LGU Urban Water and Sanita-tion Project APL2 (P069491)
Philippines (EAP) IBRD Household Water Connections
$2,300,000 TBC Closed
22 Manila Water (P106775) Philippines (EAP) GPOBA Water Connec-tions
$2,900,000 100,463 Implementation (26,372)
23 On-Site Sanitation Project (P095587)
Senegal (AFR)
GPOBA DP, Septic Tank, TCM, BALP
$5,764,032 135,900 Implementation (3,267)44
24 On-Site Sanitation Project (IDA Project) (P041528)
Senegal (AFR)
IDA Household sanita-tion connections
$28,000,000 540,000 Implementation (567,000)
25 Colombo Wastewater (P111161)
Sri Lanka (SAR) GPOBA sewer connec-tions
$1,100,000 35,000 Design
26 National Water Sector Fund (P104335)
St. Lucia (LCR)
GPOBA Sanitation con-nections
$1,600,000 25,600 Design
27 Water Supply in Secondary Towns (P097290)
Tanzania (AFR)
GPOBA Household Water Connections
$7,000,000 100,000 Design
28 OBA in Water Supply in Ugan-da's Small Towns and Rural Growth Centers (P102462)
Uganda (AFR)
GPOBA Public Water Points and HH Yard Taps
$3,169,001 55,511 Implementation
29 Kampala - Water Connections for the Poor (P104943)
Uganda (AFR)
GPOBA Public Water Points and Yard Taps
$2,527,100 409,050 Implementation (9,150)45
30 Rural Water (EMW) (P104528) Vietnam (EAP)
GPOBA Working House connection to network
$3,000,000 150,000 Implementation (10,904)
31 Service Expansion and Water Loss Reduction (P106450)
Vietnam (EAP)
GPOBA Individual House-hold water Con-nections
$7,745,000 249,561 Implementation
32 Al Qabel Village Water Supply (P111757)
Yemen (MNA)
GPOBA Household sanita-tion connections
$1,400,000 15,000 Implementation
Health
1 Health System Emergency Reconstruction and Develop-ment - Supplement (P098358)
Afghanistan (SAR)
IDA Medical treat-ments
$30,000,000 2,250,000 Implementation
2 Provincial Maternal-Child Health Invest (P072637)
Argentina (LCR) IBRD, Govt
Medical treat-ments for moth-ers and children
$90,400,000 582,292 Closed (527,305)
3 Provincial Maternal-Child Health Invest. Loan - Phase II (P095515)
Argentina (LCR) IBRD, Govt
Medical treat-ments for moth-ers and children
$277,400,000 1,700,000 Implementation (388,188)
4 Contractual Approaches for Improving Health Services Delivery (P088751)
Congo, DR (AFR) IDA Medical treat-ments
$5,000,000 1,500,000 Implementation
43 Includes beneficiaries from unverified connections 44 Includes beneficiaries from unverified connections 45 Includes beneficiaries from unverified connections
67
Project Name (P0 Number)
Country (Region)
Funding Source
Type of output World Bank Subsidy
amount includ-ing GPOBA32
Planned Number of
beneficiaries
Project Status (Latest information on actual # Benefi-
ciaries) 33
Health
5 Health Zone Project: Health Zone Administration and Facili-ties Contracting Component (P057296)
Congo, DR (AFR) IDA Immunization coverage
$5,000,000 10,000,000 Implementation
6 Rajasthan Health Systems De-velopment Project (P050655)
India (SAR)
IDA, Govt
Medical treat-ments
$89,000,000 3,034,000 Implementation
7 Lesotho New Hospital PPP (P104403)
Lesotho (AFR)
GPOBA Medical treat-ments
$6,250,000 500,000 Implementation
8 Pre-paid Health Scheme Pilot in Nigeria (P104405)
Nigeria (AFR)
GPOBA Medical treat-ments
$6,015,165 22,500 Implementation
9 Poverty Reduction Support Credit - PRSC (P078806)
Pakistan (SAR)
IDA Medical treat-ments
TBC TBC Closed
10 Poverty Reduction Support Credit - PRSC II (P090690)
Pakistan (SAR)
IDA Medical treat-ments
TBC TBC Closed
11 Mother and Child Basic Health Insurance Project (P082056)
Paraguay (LCR) IBRD Mother-Baby Treatment Pack-age
$7,304,000 737,000 Implementation
12 Comparison of OBA Health Schemes (P092944)
Rwanda (AFR)
IDA, Govt
Medical treat-ments
$3,600,000 1,070,000 Closed
13 Poverty Reduction Support Credit I (P085192)
Rwanda (AFR)
IDA. Govt
Medical treat-ments
$13,000,000 TBC Closed
14 Poverty Reduction Support Credit III (P098129)
Rwanda (AFR)
IDA, Govt
Medical treat-ments
$8,250,000 TBC Closed
15 Poverty Reduction Support Credit IV (P104990)
Rwanda (AFR)
IDA, Govt
Medical treat-ments
$8,400,000 TBC Closed
16 Health Sector Development Program (P058627)
Tanzania (AFR)
IDA Medical treat-ments for mater-nal and childhood illnesses
$20,000,000 TBC Closed
17 Health Sector Development Project II - HSDP II (P105093)
Tanzania (AFR)
IDA Medical treat-ments to prevent Malaria
$65,000,000 TBC Implementation
18 Reproductive Health Vouchers in Western Uganda (P104527)
Uganda (AFR)
GPOBA, KfW
STD and Safe Delivery Vouchers
$4,300,000 135,912 Implementation (65)**
19 Mekong Regional Health Sup-port Project (P079663)
Vietnam (EAP)
IDA Health Insurance $8,000,000 TBC Implementation
20 Northern Upland Health Sup-port Project (P082672)
Vietnam (EAP)
IDA Medical treat-ments
$10,000,000 TBC Implementation
21 Health Support to the Poor of the Northern Upland (P110251)
Vietnam (EAP)
IDA Medical treat-ments
$14,140,000 TBC Implementation
22 Safe Motherhood Program (P104946)
Yemen (MNA)
GPOBA Mother-Baby Treatment Pack-age
$6,232,100 80,000 Implementation
Education
1 Female Secondary School Assis-tance Project - FSSAP I (P009555)
Bangladesh (SAR)
IDA, Govt
Female Students Enrolled
$68,100,000 1,600,000 Closed (1,540,000)
2 Female Secondary School Assis-tance Project - FSSAP II (P044876)
Bangladesh (SAR)
IDA, Govt
Female Students Enrolled
$67,807,143 1,450,000 Closed (1,200,000
3 Lifelong Learning and Training Project (P068271)
Chile (LCR)
IBRD, Govt
Students Enrolled $41,140,000 177,874 Implementation
4 Balochistan Education Support Project (P094086)
Pakistan (SAR)
IDA, Govt
Students Enrolled $2,100,000 34,500 Implementation
68
Annex II: Sector Specific Lessons
This Annex provides a detailed description of OBA in the following sectors:
A. ICT
B. Transport (mainly Roads sub-sector)
C. Energy
D. Water
E. Health
F. Education
A. ICT
OBA is largely mainstreamed in the information and communication technology (ICT) sector,
where universal access and service funds rely on explicit subsidies from wealthier largely urban
populations to help extend access to less wealthy and more costly to serve (usually) rural popula-
tions on a performance-basis. The subsidy is often determined by having private companies bid
for roll-out of infrastructure and services on the ―lowest subsidy required‖. The subsidy is dis-
bursed on outputs, or ―milestones‖, such as the installation of functioning hardware (pay
phones, tele-centers or internet points of presence, amongst others), and in some cases con-
tinued service provision for a specified period of time.
A.1. Universe of OBA in ICT
Before countries liberalized their ICT sectors, public (monopoly) utilities generally had limited
success in expanding ICT services. Cross-subsidy schemes were usually not successful, in part
because state-owned enterprises were often not able to charge high enough tariffs to wealthier or
less-costly to serve customers to help finance the cost of extension to more costly areas. There-
fore access to the poor was limited.
But since the mid-1990s, a substantial change has taken place in the sector. The sector went
from largely monopolistic service provision to competition, which had a major impact on ex-
panding access. In this time, output-based contracts for the provision of ICT services became an
effective means of expanding ICT services to the poor (Stern and Townsend 2007). The first of
these contracts was funded by Chile‘s Fund for the Telecommunications Development (FDT) in
1995. FDT has since funded the installation of more than 25,000 payphones in about 8,000 rural
centers benefiting close to 2.7 million people. It is estimated that there are less than 150,000
people (1% of the population) without access to a basic telephone in Chile (Stern and Townsend
2007, p. 92).
Chile‘s FDT was followed by other similar schemes throughout Latin America. In 2001, Peru
was the first country to develop contracts for the provision of private internet connections. As in
the case of OBA in roads (see next sub-section), the Latin America & Caribbean (LCR) region
has been the forerunner in contracts for all ICT technologies that are represented and has contin-
ued using such contracts. Sub-Saharan Africa implemented its first ICT OBA contracts in 2002,
South Asia in 2004 and East Asia & Pacific in 2006. Table 5 below presents the universe of
OBA in the ICT sector.
69
Table 5: Universe of Output-Based Aid in ICT
Common ―Outputs‖: Serviceable Asset
Public phones Provision of public phone connections (examples: Chile, In-
donesia, Guatemala, Mongolia, Uganda, Cambodia, India,
Malawi, Nepal, Nigeria, Zambia)
Tele-centers (facilities that offer use of
ICTs in a publicly shared manner, with
or without a fee)
Provision of tele-centers (examples: Brazil, Chile, Indonesia,
Mongolia)
Internet Internet coverage through points of presence (PoPs) and pri-
vate connections (examples: Uganda, Organization of Eastern
Caribbean States)
Cellular network Provision of cellular networks (examples: Bolivia, Mongolia)
Private phone connections Provision of private phone connections (examples: Uganda,
Pakistan)
The review has identified about 20 World Bank projects46
and 19 projects outside the World
Bank that can be considered OBA in the ICT sector. The 16 projects for which there is informa-
tion on contract value, all of which are World Bank-funded, have a total value of $73.4 million
(figure 12). The 12 projects for which information on the number of expected beneficiaries is
available (total volume $63.6 million) are expected to reach more than 17.3 million beneficiaries.
The OBA projects involve a number of different ICT services, including: public phones, tele-
centers, private phone connections, internet service including private connections as well as
wholesale facilities known as ―points of presence‖ (PoPs), and cellular networks. OBA for pub-
lic phones is the most common type of OBA identified, with tele-centers second. This is partly
because of the more ―public‖ and therefore pro-poor nature of these two services, although as
discussed below, this is changing.
Figure 12: Distribution of OBA ICT Projects
46 Many of these projects involve more than one contract.
AFR29%
EAP14%
ECA0%
LCR41%
SAR16%
Regional Distribution of WBG OBA Projects in ICTTotal: US$ 73m
AFR30%
EAP25%
ECA5%
LCR30%
SAR10%
Regional Distribution of WBG OBA Projects in ICT
Total: 20 projects
70
The volume of OBA projects is relatively small, both in absolute terms ($73 million) and relative
to the World Bank ICT portfolio (11% of portfolio). This is due to a combination of factors. ICT
Universal Access projects are mainly funded through universal access funds that usually receive
their funds from other sources than development aid. As a result donors, such as the World Bank,
focus on different aspects of ICT development, such as setting up regulatory regimes or financ-
ing international infrastructure to ensure interconnection.
Most of the contracts for ICT services identified as OBA are funded through universal access
funds (UAFs) and universal service funds (USFs). UAFs and USFs (―UASFs‖ for short) are
funded from one or a combination of the following three sources:
Levies on telecommunications operators—The most common method for funding uni-
versal access/services are governments‘ levies on a percentage of telecommunications
operators‘ revenues. Levies identified range between one and four percent, and aver-
age about two percent.
Spectrum auctions—Governments or sector regulators hold auctions to distribute
ICT/radio spectrum in order to raise funding for the country‘s UASF (e.g., Guatema-
la‘s Fund for the Development of Telephony).
Government budgets—In a limited number of cases, governments fund the UASFs out
of their own budgets. This is the case in Chile‘s Fund for Telephony Development
(box 7).
The scale of subsidies varies between projects. Subsidies for the provision of public phone con-
nections were lowest in Chile, where they averaged $996 per phone. Such subsidies were highest
in Nigeria, where they averaged $5,511 per phone. The average subsidies per phone in projects
for which we have information were $2,848.
UASFs have proven an effective mechanism for mobilizing investment into challenging rural
areas. In 1994, the Fund for the Telephony Development (FONDETEL) in Chile became the first
to make finance available competitively under a reverse auction (lowest subsidy demanded wins)
and generate new licenses for rural operators.
Maximum subsidies to be paid by UASFs are typically calculated at the amount required to make
projects commercially viable. In most countries, ―commercial viability‖ is defined as a net
present value of zero. For instance, in Bolivia‘s SITTEL project, SITTEL determined the maxi-
mum subsidy required to make the net present value of each public phone connection zero
through projections of necessary investment and demand.
71
Box 7: Fund for Telephony Development in Chile
The Government of Chile established the Fund for Telephony Development (FDT) in 1995 to attract private
investment in payphone services for rural and urban areas with low incomes and telephone density. FDT has
since funded the installation of more than 25,000 payphones in about 8,000 rural population centers be-
nefiting close to 2.7 million people. It is estimated that there are less than 150,000 people (1% of the
population) without access to a basic telephone. The subsidies awarded cost the government less than 0.3
percent of total telecommunications sector revenue during the funding period, and administering the FDT
cost about three percent of the monies granted. Between 1995 and 2000, rural telecommunications operators
invested $161 million in universal access projects. Of this amount, $22 million (13.6%) was provided by the
FDT.
The FDT succeeded because of: a highly competitive market prior to the launch of the FDT and therefore the
ability to rely extensively on market forces to determine and allocate subsidies; less regulatory discretion;
simple and relatively expeditious processing; and effective government leadership.
Competition between existing and new operators for the rural market substantially reduced the cost of tele-
phone services to Government (especially compared to earlier public sector investments in similar facilities).
Some concerns remain, however, about the long-term sustainability of the services, the small residual rural
population still excluded, and some urban areas.
Source: Wellenius 2002, Stern and Townsend 2007 (pg 92) and Nuevos Modelos Para el Acceso Universal de Los
Servicios de Telecomunicaciones en América Latina: Informe de Países e Informe Completo
However, although the funding source in ICT OBA has become explicit and is considered sus-
tainable, another problem has arisen: UASFs have been good at collecting revenue from explicit
subsidy contributions, but they have not been successful at disbursing. A total of 15 funds in
developing markets that are operational, had collected a total of approximately $6.2 billion from
operators, beginning in the late 1990s (but mostly since 2001 and 2002). 78% of the total collec-
tions ($4.8 billion) came from two countries - India and Brazil. By 2006, these 15 funds redistri-
buted approximately $1.62 billion to the sector for universal access and service (UAS) projects,
which represents just 26% of the total collected.47
Some of the reasons set forth as to why in-
clude the following (Stern and Townsend 2007):
1. Defining eligible programs too narrowly – accepting only those proposals linked to pub-
lic payphones and community Internet;
2. Overestimating the amount of subsidy that operators would request;
3. Requiring that programs be approved by two or more ministries, that they must comply
with all public expenditure review and monitoring procedures, or that they must conclu-
sively demonstrate that the subsidies are well designed;
4. Imposing significant legal, administrative and financial burdens that act as a barrier on
operators‘ participation in tenders, especially for smaller operators.
47 InfoDev and ITU. ICT Regulation Toolkit. http://www.ictregulationtoolkit.org/en/Section.3180.html
72
Alternative models which would allow for the more efficient and effective management of
UASFs are being considered, such as ―pay or play‖ or virtual funds (with no actual physical
fund). Private management of UASFs is also a possibility, such as the one in the USA, and a new
privately managed UASF in Pakistan. These are discussed in Section 4 and 5 of the review.
A.2. Targeting
Targeting for output-based contracts for the provision of ICT access is largely geographic. Gov-
ernment target areas are defined based on level of telephony coverage. Some projects target
smaller communities on the basis that they are likely to be the least economic to provide service
to or areas with a low income level. Most OBA schemes target ―public‖ (shared or community)
access to maximize use by the poor, but as the nature and cost of technology is rapidly changing,
private (household) access through OBA UASFs are increasing.
Uganda‘s Energy for Rural Transformation project48
aims to provide at least one public
telephone connection per 2,500 inhabitants throughout Uganda (equating to an average
distance of about 3 kilometers). Another targeting objective is to provide rural multipur-
pose tele-centers at schools, hospital, associations of farmers and micro-entrepreneurs
outside of district capitals in selected districts.
Bolivia‘s SITTEL project targeted 4,160 rural communities with 10,000 or fewer inhabi-
tants that did not have access to public phone connections, and went further to define
―access‖ as ―at least one public phone within two kilometers (or a 24 minute walk) of
each household (Stern and Townsend 2007, p25).
Many UASFs set national targets for tele-center coverage. In these schemes, tele-centers
will reach poor areas, but are not targeted specifically to poor people. For example, Mex-
ico‘s universal access fund aims to provide at least one tele-center (called a ―Community
Digital Center‖) per municipality in the country. Seventy-one percent of the tele-centers
established to date have been in schools and libraries (accessible to poor and staffed to
help people learn to use the computers). Part of the tele-center program is aimed at devel-
oping local educational, health, economic, and government content (Stern and Townsend
2007).
The Mongolia Information and Communications Infrastructure Development Project
(ICIDP) targets poor, underserved areas. It is a follow-up to the three GPOBA funded pi-
lots that are successfully operational since 2007, bringing phone service to about 20,000
beneficiaries in remote herder communities, and both mobile phone and Internet services
to 2,315 people in rural villages. A user survey showed that the pilots have cut by more
than half the distance herders must travel to reach a phone and more than doubled the
frequency with which they use the telephone service (Dymond et al. 2008, p. 3).
A.3. Performance-risk
Contracts for the provision of public phone connections most commonly define performance as
installation of working public phone connections, with subsidies disbursed when public phone
connections have been provided and determined to be in good working order. Some of the more
effective contracts disburse a portion of subsidies upon installation of the phones and disburse
the rest on a regular basis provided the phones are maintained to standard. This was the case in
48 (P069996)
73
Peru‘s Fund for Telephony Investment (FITEL), which has been considered to be largely suc-
cessful (table 6). Since 2000, Peru‘s FITEL has increased the access to public telephony for near-
ly 6.7 million people, reducing the average distance to reach a public payphone from 56 km to
5.7 km (Stern and Townsend 2007, p. 95).
In the 39 projects identified, there are three main ways of defining performance:
Construction completion milestones: Contracts that define performance as construction
completion milestones disburse some subsidies prior to the delivery of a serviceable as-
set.
Provision of serviceable assets: Contracts that define performance as provision of servi-
ceable assets disburse all subsidies at the delivery of the serviceable asset.
Provision of serviceable assets and continued service: Contracts that define performance
as provision of serviceable assets and continued service disburse some subsidies upon the
delivery of the asset and some upon the successful continuation of service.
Table 6 below gives examples of OBA projects that use each type of scheme for defining per-
formance.
74
Table 6: Defining ―Performance‖ in the Provision of ICT Services
Indicator Example
Construction and Installation
completion milestones
In Nigeria‘s Privatization Support Project (Sub-Project 2), perfor-
mance is defined by construction completion milestones over a 16
month period. Nigeria‘s Privatization Support Project (Sub-Project 2),
subsidy paid in 6 tranches over 16 month period (10%, 20%, 25%,
25%, 10%, 10%). First payment of 10% paid upon contract signature,
provision of certificates and guarantees. Remaining tranches paid
based on installation goals
Serviceable assets Chile‘s Fund for Telecommunications Development (FDT) pays sub-
sidies in a lump sum once the phones have been installed
Serviceable asset and continued
service
In contracts funded by Peru‘s FITEL, 40 percent of the subsidies are
delivered based on continued service provision over the course of
five years.
In the Mongolia ICIDP disbursed 20% of the subsidies on contract
signature, 60% on reaching several output targets, such as providing
service in a number of herder communities or reaching a number of
mobile phone subscribers and 20% after 9 months of successful oper-
ation.
For the ICT component of Uganda‘s Energy for Rural Transformation
Project49
, 10% of the subsidy is disbursed upon signature of the ser-
vice agreement, followed by 30% upon completion of 50% of the
public access objective in year 1 and another 30% when the remain-
ing 50% public access objectives have been achieved, in year 2.
Another 20% is paid upon completion of the individual private access
objectives in year 2 and the remaining 10% is paid in year 3 upon
verification of satisfactory continuous service operation. A perfor-
mance bond is required at contract signature, and its amount is re-
duced at every milestone in proportion to the percentage of the subsi-
dy paid50
It is also important to note that, although most of the contracts identified do not disburse
OBA subsidies based upon the provision of continued service, the contracts do include
longer-term service provision requirements. These contracts are commonly for 5 to 10 years.
Contractors are sometimes required to post performance bonds in order to incentivize continuing
service provision. However, most ICT companies will have other incentives to continue service
provision. For example, ICT companies are sometimes granted operating licenses for up to 15
years, some of which allow the use radio frequencies, and can be revoked in the case of a breach
of contract.
A.4. Private sector capital and expertise
In all of the cases identified, private sector companies were contracted for the provision of ICT
networks. Usually, government agencies or a UASF defined the area to be served and the mini-
mum number of people to be served. Contracted companies were able to decide the technology
that would most efficiently allow the provision of coverage. Companies were also able to decide
49 (P069996) 50 There is also a private access component to this project. Source: Navas-Sabater et al. (2007), p. 1
75
if they would serve more than the target community using the infrastructure installed under the
UASF contract, giving a potential for economies of scale and thereby increasing private sector
incentives.
Leveraging of private sector capital varied in the contracts that were identified. In Guatemala‘s
FONDETEL projects, each $1 of subsidy leveraged between $2 and $4 of private investment. In
Peru‘s FITEL projects, an average of $2 of private capital was raised for each $1 of subsidy.
Most of the universal access funds aimed to provide subsidies that would make the net present
value (NPV) of providing ICT services equal to zero – in other words, it was the expectation that
without subsidies, the NPV would likely be less than zero and the project would not be commer-
cially viable. The intensity of competition between bidders for ICT contracts can greatly affect
the amount of private sector leveraging. For example, the Chilean Telecommunications Compa-
ny bid 100 percent of the maximum available subsidy in localities close to its existing network
where there were no other established local operating companies, and zero subsidy in areas
where its competitors had a strong presence.
OBA was originally piloted to mobilize private sector expertise to serve segments of the popula-
tion that without a subsidy would most likely go un-served. For example in Uganda, when two
commercial operators declared they could not serve almost 20 percent of sub-counties on a
commercial basis, OBA contracts were designed to specifically target these un-served sub-
counties. In order to mitigate demand risk under the OBA contracts including the risk of ―sur-
prise substitutes‖, these areas were taken out of the license obligations of the non-OBA providers
and awarded exclusively to the OBA providers. But because the ICT sector is very dynamic,
there are also instances where operators have started to provide services in areas originally
thought to be un-commercial. This has led to the redesign of an OBA scheme in Cambodia –
prior to grant signing – to ensure that only those areas which are not attractive without a subsidy
fall within the OBA grant agreement.
A.5. Monitoring
The sub-sections above describe in detail the outputs that are normally designated for OBA
projects in the ICT sector: a) construction completion milestones for example for the roll-out of
network; b) installation of serviceable assets such as working pay phones; and, c) completion of
public access objectives and continued service, for example provision of a working asset plus
demonstration of service over a course of several months or years. In this sub-section, we de-
scribe the processes, lessons and challenges of monitoring output provision in OBA schemes in
the ICT sector.
Under most contracts except Chile and recently Peru, most UASFs are managed by the regulato-
ry authority for the sector. In some cases, the UASF performs monitoring and evaluation of the
specific contracts as well.
In projects funded by Peru‘s Fund for Telephony Investment, for instance, the regulator Osiptel
uses a network management system to oversee system operations (traffic levels, continuity of
service) in real time. Ospitel‘s monitoring and evaluation scheme also requires a dedicated data
circuit in the operator‘s headquarters to monitor billing, failure reports, and the calls placed and
received by the rural pay phones. In a semiannual report Osiptel assesses compliance with per-
formance targets and indicators and makes recommendations on FITEL payments.
76
Box 8 provides an example from Guatemala where a lack of monitoring and evaluation meant
providers were not held accountable to the outputs prescribed by their contract. Currently, the
Bank is working with the government on new implementing measures to address some of the
failures of the past.
Box 8: Development of Telephony Fund in Guatemala
The Government of Guatemala (the Government) established the Fund for the Development of Telepho-
ny (FONDETEL). The FONDETEL sought to expand the coverage of public and private phone lines to
about 5,000 rural localities that represented more than half of all households without access to telephone
services. The FONDETEL was funded by spectrum auctions. FONDETEL contracted private firms for
the provision of public phones in or near localities with the least access to ICT services were targeted
Since 1998, FONDETEL has subsidized the construction of more than 5,500 public phones benefiting
about 1.49 million people. However, a World Bank-funded inspection of 220 public phones found that
only 28 phones were ―adequately functioning‖. It is estimated that only 20 percent of targeted localities
had ―adequate service.‖ The Regulatel study commented that FONDETEL‘s methodology for selecting
these underserved communities was flawed, as it did not consider cell phone coverage and usage. Disre-
gard of these factors made urban areas with high cellular tele-density eligible for subsidized public
phones.
The delivery of serviceable public phones was hampered by two factors: i) payment was not sufficiently
linked to performance (with all subsidies disbursed directly after the installation of the phones, but before
a period of service was provided); and, ii) nearly no monitoring and evaluation was performed of the in-
stallation of the phones.
Revisions to the FONDETEL arrangements are expected to improve on linking payments to performance
as well as enhancing monitoring and evaluation measures.
Source: Nuevos Modelos Para el Acceso Universal de Los Servicios de Telecomunicaciones en América
Latina: Informe de Países e Informe Completo and Stern and Townsend 2007 (p.XVII, 94)
77
B. Roads
OBA is becoming mainstreamed in the roads sector through various types of performance-based
maintenance and rehabilitation contracts. For example, in 2003 the World Bank formally
adopted (and since then improved) a Sample Bidding Document for ―Output and Performance
Based Road Contracts (OPRC)‖ which can be found on the Bank‘s procurement website. Under
OBA schemes in the roads sector, private contractors enter into agreements of a longer nature
than traditional roads contracts, and the ―outputs‖ on which they are paid (for example
monthly) relate to the quality of road ―service‖ provided based on clearly identifiable and
measurable parameters such as average speed obtainable. The nature of OBA in roads main-
tenance and rehabilitation is quite different than the nature of OBA in other infrastructure sectors
in a variety of ways: the ongoing nature of ―service‖ delivery and the related ongoing subsidy
requirement; in relation, the subsidy (or payment to the service provider) is disbursed on a con-
tinuing service – i.e. management and maintenance of roads – as opposed to investments; and,
the ―public goods‖ aspect of roads whereby there is no user fee and the entire cost to the user is
subsidized through public funding, as discussed below.51
B.1. Universe of OBA in Roads
Governments and donors alike recognized the drawbacks of managing roads ―in house‖ and
hence for many years have relied on outsourcing through various contractual arrangements for
road maintenance works. Under such arrangements, private contractors are responsible for carry-
ing out physical works defined by the government and are paid on the basis of the quantity of
civil works executed. But contractors often have a vested interest in executing large, lumpy
works and little or no incentive to carry out the many small activities needed to ensure that roads
are in good condition over a long period. Also, governments usually have an incentive to allocate
scarce public funds on projects that convey clearly visible benefits to their constituents instead of
less visible maintenance expenditures, which tend to be the first budget items to be cut. This con-
tracting approach and the general tendency of governments to neglect maintenance have generat-
ed a vicious circle of heavy rehabilitation works followed by long periods of neglect and thus
rapid deterioration. It is estimated that $1 spent on timely maintenance can save more than $3
that would be required for road reconstruction (Queiroz 2008). Adding to the problem has been
the limited institutional capacity to consistently plan and supervise effective road maintenance.
In an attempt to counteract these limitations, road agencies have begun to adopt performance-
based contracting for rehabilitation and maintenance. Performance-based contracts expressly link
payments the contractor to clearly defined performance standards.52
Using performance-based
contracts offers several potential advantages to road agencies over more traditional approaches,
including better road conditions with limited funding available through incentives to the private
sector for innovation and higher productivity, and, greater certainty about road expenditures to
allow for better sector-wide planning.
51 All OBA schemes in developing countries indentified in the transport sector were in the roads sub-sector. A few transport
services schemes have been considered, but are not far along enough in design or implementation to be included in this review. 52 Performance based contracting is also known as Performance-based Management and Maintenance Contract, Output Based
service contract, Performance Specified Maintenance Contract. These names are used interchangeably though they often describe
different types of road contracts.
78
Figure 13 below shows the widespread use of performance-based contracts in the roads sector.
First appearing in Canada in the late 1980s, this approach is now used in many countries and is
being considered by others, particularly in Asia.
Figure 13: Global Application of Performance-Based Contracting for Roads
Source: World Bank Resource Guide (2008): Performance-based Contracting for Preservation and Improvement of
Road Assets.,
The review has identified 23 projects that involve OBA road contracts within the World Bank53
,
for a total value of $2 billion (excluding over $1.7 billion in government subsidy co-financing),
and 11 projects outside the Bank (predominantly in developing countries and majority in Latin
America) (see figure 14). These are grouped mainly into two archetypes: 1) performance-based
contracts for road maintenance, which are maintained to a specified level of service; 2) perfor-
mance-based contracts for rehabilitation and maintenance, which are rehabilitated and then main-
tained to a specified level of service.
53 The term ―OBA‖ is rarely used for these contracts other than in the case of ―Output and Performance-Based Road Contracts‖,
but more commonly ―performance-based‖ alone is used.
79
Figure 14: Distribution of WBG OBA Projects in Transport
There are grey areas between the archetypes. For instance, it can be difficult to identify if works
to significantly improve a road should be considered ―rehabilitation‖ or ―construction‖. Whether
a contract is purely performance-based or a ―hybrid‖ (that is, it contains input-based payments)
can also be difficult to determine, particularly for rehabilitation. Of the OBA roads contracts
identified, only a minority were such hybrid contracts.
The performance-based maintenance contracts identified by the review involve either ―tradition-
al‖ private sector contractors (local or international), or contracts involving micro-enterprises.
The key characteristics of performance-based road maintenance contracts performed by ‗tradi-
tional‘ contractors involve routine maintenance and periodic maintenance, and the primary ob-
jective of the performance-based maintenance contract is to maintain the road asset according to
pre-defined performance standards (Zietlow 2004). In contrast, contracts that engage micro-
enterprises usually only cover routine maintenance and do not involve bidding. Box 9 discusses a
successful example of a ―traditional‖ performance-based maintenance contract.
AFR31%
ECA3%
LCR64%
MENA2%
SAR0%
Regional Distribution of WBG OBA Projects in Road Transport
Total: US$ 2 bn
AFR39%
ECA5%
LCR48%
MENA4%
SAR4%
Regional Distribution of WBG OBA Projects in Road Transport
Total: 23 projects
80
Box 9: Argentina: Pilot Project for Performance-Based Maintenance: Roads Maintenance and
Sector Rehabilitation Project
Argentina was the first non-OECD country to pilot and implement performance-based contracting in the
roads sector. A nationwide road survey estimated traffic, defined the minimum (rather than optimum) road
standards, defined the rehabilitation and maintenance required, and identified the size and shape of the sub-
networks for contracting out. On the basis of the survey information, the Government set uniform national
output indicators for the contracts.
In 1995, 11 contracts were awarded, covering a network of about 3,845 kilometers of paved roads in good to
fair condition. Contracts were awarded to the lowest lump sum bidder. Contractors were paid equal monthly
installments based on the kilometers of roads maintained (―kilometer per month‖ contracts). If the contrac-
tor‘s output did not comply with standards (based on deficiencies noted during monthly inspections), daily
penalties were imposed (and subtracted from future payments) until the necessary repairs were carried out.
Inspections were normally carried out on a sample basis, the minimum length to be inspected weekly
representing 5 percent of the total length of the contracted network (or 10 percent if the inspection is for the
purpose of establishing payment certificates). The contractor is also required to carry out self-inspections on a
daily basis, and to report any abnormality—such as traffic overloading— that may have an impact on the con-
tract or on the processes by which the maintenance works are carried out.
The success of the first performance-based contracts in Argentina led to the adoption of a series of CREMA
contracts (see main text) which were subsequently replicated throughout Latin America and now worldwide.
Source: Liautaud (2001)
Performance-based rehabilitation and maintenance contracts are based on the performance-based
maintenance contract model, but with an added component for ―rehabilitation‖. By ―rehabilita-
tion‖, these contracts typically mean bringing a road back to its original serviceable standard.
However, there does not appear to be an agreed definition of ―rehabilitation‖.
The CREMA projects in Argentina were among the first performance-based rehabilitation and
maintenance contracts outside the OECD. The first two phases of Argentina‘s CREMA program,
covering nearly 14,000 km, resulted in significant improvement in the proportion of roads in
good condition from 70% in 1998 to 85% in 2005. Further, the percentage of roads in poor con-
dition decreased from 8% in 1998 to 4.2% in 2005 (Implementation completion report of Na-
tional Highways Rehabilitation and Maintenance project in Argentina 2006, p.4). Many other
countries in Latin America have based their performance-based contracts on the CREMA model.
While generally successful, the evolution of the CREMA contracts highlight the fine-tuning ne-
cessary to ensure contract design gives contractors the right incentives to perform, and demon-
strates the balance between shifting performance risk to providers and the issue of access to
finance. The CREMA contracts example is provided in more detail in Section 4.2 above.
Performance-based rehabilitation and maintenance contracts are generally used on roads that are
in at least fair condition. As was learnt in the Chad roads case (box 10), roads in extremely bad
condition are generally not suitable for performance-based contracts for rehabilitation and main-
tenance because of greater uncertainty for both government and contractors about the nature and
extent of works required to bring road to maintainable standard. Also, the greater the proportion
81
of rehabilitation costs to maintenance costs, the greater the contractor‘s incentive to renege on
the contract after rehabilitation is completed.
Box 10: Successful Performance Based Rehabilitation and Maintenance Contracts in Chad
Given the poor results with traditional road maintenance contracts, Chad‘s government decided to pilot a per-
formance-based contract for the maintenance and management of roads: National Transport Program Support
Project. In late 2000, the Government of Chad launched a competitive international tender for a contract cov-
ering 441 kilometers of continuous unpaved main roads (seven percent of the primary network). After prequa-
lification three bidders each presented an offer. The government awarded a four-year PMMR contract to DTP,
a subsidiary of the French firm Bouygues, in early 2001.
The bids were evaluated on the basis of the monthly lump-sum fee required. The winning bid came in around
seven percent lower than had been predicted. As long as DTP complies with the service quality levels, it
would receive a monthly fee of $480 per kilometer. This fee covers, among other things, fully rehabilitating
the road at the outset, managing and maintaining the road for four years, monitoring compliance with the per-
formance criteria, and providing basic aid in road accidents. DTP received an advance payment of 20 percent
of the contract value, for which it had to provide a guarantee. DTP also had to come up with a performance
guarantee of 10 percent of the contract value.
DTP had 22 months to bring service quality up to the required levels. DTP complied with and in many cases
exceeded the service quality level requirements. The roads were maintained to excellent condition and the
road users were highly satisfied. In fact, one criticism of the scheme is that the quality of the roads is ―too
high‖: the roads are now amongst the best in the region, and one may question whether costs could have been
lowered with less ambitious targets.
With the roads in such good condition, only ongoing maintenance was required. Chad‘s government split the
441 km of road in two sections and bid both sections out under performance-based contracts. Different local
contractors won, and still hold, these contracts. Performance-based contracting has now been extended to
Chad‘s rural roads. Eight local contractors have partially rehabilitated and now maintain Chad‘s most impor-
tant rural roads through the dry season.
Sources: Hartwig et al. (2005) and discussion with Andreas Schliessler, 10/08.
B.2. Funding
For most of the roads projects identified, funds from international donors form a significant
component of overall funding. These donors largely include: IDA, IBRD, and bilateral aid agen-
cies (for instance, USAID). Other funding sources include other international agencies, such as
the United Nations Development Program and the United Nations Economic Commission for
Latin America and Caribbean.
Government also contributes funding, increasingly through dedicated road maintenance funds
funded for example by fuel taxes. Road maintenance funds can help bring further stability to the
government end of the contract by ensuring a sustainable source of funding for road maintenance
that is independent of a government‘s other fiscal constraints and obligations.54
However, dedi-
54 Though the CREMA contracts did not involve a road fund, the long-term payment obligations were made legally binding on
the Government, which helped deter the Treasury from reneging on road maintenance funding at times of fiscal constraint (for
instance, in 1998–1999 and at the end of 2001). The budget process respected that CREMA contracts and funds were a priority
and considered them non-discretionary expenditures (source: http://www.worldbank.org/transport/roads/resource-guide/Case-
Argentina.htm)
82
cated road funds are more widely used in OECD countries. There is limited evidence of road
funds being used in the OBA roads context in developing countries to date – for example, even
Argentina and Brazil do not use road funds to support their OBA schemes.
Road Maintenance Funds
Through the 1970s governments tended to earmark general tax revenues for road maintenance.
This allocation depended on the annual political budget, and so these conventional or ―first-
generation‖ road funds were often unsuccessful in securing stable and reliable funding. The IMF
and many Finance Ministries also opposed this approach as it earmarked revenues unrelated to
road use.
Many countries have since established ―second generation‖ road funds (ADB 2003). These funds
operate under a ―user-pay‖ model, collecting fees through a two-part tariff consisting primarily
of an access fee (vehicle license fees and a supplementary heavy vehicle fee) and a user fee (a
fuel levy, international transit fees, and fines for overloading). To ensure an efficient use of re-
sources, ―second generation‖ road funds are sometimes created at an arm‘s length from govern-
ment, with a public-private board managing the fund.
By providing long-term sustainable funding of road maintenance, road maintenance funds can
increase government‘s ability to pursue performance-based road maintenance contracts. Unlike
performance-based contracts for capital works, performance-based maintenance contracts require
governments to make payments to contractors on a regular basis. Road maintenance funds bring
assurance to contractors that governments will meet contractual commitments to pay by ensuring
a sustainable source of funding that is independent of Government‘s other fiscal constraints and
obligations.
B.3. Targeting
The public good characteristics of roads make it difficult to target road subsidies to specifically
benefit any particular group of beneficiaries. As long as road use is un-rivaled, excluding users
would decrease economic welfare. Where road uses is rivaled (roads are congested), an OBA
scheme could consist of a toll road, where the co-payment (toll) varies by income. No examples
were found in developing countries in the sample reviewed.
That OBA road projects do not tend to specifically target the poor is not to suggest that the poor
do not benefit significantly from these projects. In the Chad projects, for example, upgrading the
national road network was selected because it would benefit poor rural communities more than
upgrading the local roads used by these communities (Hartwig et al, 2005). However, all other
users of the national network would have also benefited from the project.
B.4. Performance-risk
Under OBA roads contracts, the road agency specifies performance standards that the contractor
is required to meet when delivering maintenance services. Payments are generally based on
whether the contractor manages to comply with the performance standards, and not on the
amount of works and services executed. For example, the contractor is not paid for the number of
potholes he has patched, but for the output of his work: no pothole remaining open (or 100 per-
cent patched). Failure to comply with the performance indicators or to promptly rectify deficien-
83
cies adversely affects the contractor's payment through a series of clearly defined penalties. The
choice and application of technology and the pursuit of innovative materials, processes and man-
agement are up to the contractor, rather than being specified by the agency.
When these criteria are upheld, the contractor bears much of the risk for failure of their manage-
ment and innovation. Such failures can include errors in predicting deterioration of contracted
assets, determining appropriate design, specifications and materials, and planning needed main-
tenance interventions55
. The contractor also has the opportunities to increase his margins where
improved efficiencies and effectiveness of design, process, technology or management are able
to reduce the cost of achieving the specified performance standards.
Maintenance
Performance-based contracts for maintenance typically specify performance standards, also
called ―service quality outputs,‖ that the contractors must meet to get paid. The contractor‘s per-
formance is then measured against these outputs. Performance standards vary from contract to
contract and from country to country (table 7).
Table 7: Performance Indicators for Transport Projects
Contracts Performance indicators
CREMA (examples: Argenti-
na, Brazil)
Potholes, cracking and rutting, condition of shoulders, culverts and
drains; roadside environment, guardrails, and vertical and horizontal
signs
Chad, Tanzania, Madagascar,
Cape Verde
Passability (the road must be open), average speed attainable, user
comfort (often measured by an ―International Roughness Index‖),
durability (a measure of the long-term sustainability of the road)
South Africa‘s Routine Road
Maintenance Project
Clean and visible road signs, grass cutting
There are a variety of ways that road contracts have linked payment to performance:
Advance payment: For instance, in Argentina this was 20 percent and in Ser-
bia/Montenegro, 10 percent
Fixed monthly payment: In Argentina, the contractor is paid in terms of $/month/km; and
micro-enterprise contractors receive a fixed monthly fee in equal installments
Penalties for non-compliance are deducted from monthly payments. For instance, in Argen-
tina micro-enterprises receive penalties on a scale of five to ten percent or using ―deme-
rit‖ points.
There will generally be fewer—and simpler—performance standards for routine maintenance by
micro-enterprises than in contracts performed by ―traditional‖ contractors. Very few co-op mi-
55 TN-27
84
cro-enterprises have been terminated due to non-compliance. There tends to be strong incentives
to comply because of the need to be paid on time as they do not have capital to survive an ex-
tended period of time.
Rehabilitation
In rehabilitation and maintenance contracts in Argentina and Brazil, the contract specifies the
sections of the road that need rehabilitation and the ―minimum solution required to ensure a posi-
tive net present value for the investment‖. The contractor is then free to propose any rehabilita-
tion solution above the ―minimum solution‖ (Liautaud 2001). The rehabilitation solution pro-
posed by the contractor is then used as the contracted ―output‖ standard. Performance indicators
for rehabilitation normally include that rehabilitation works must (1) meet or exceed the mini-
mum thickness of overlay, and (2) not exceed the maximum level of roughness, rut depth, crack-
ing or raveling (Liautaud 2001).
A different approach was taken in the Chad pilot. Rather than requiring rehabilitation for the full
length of the road before maintenance began, and setting separate performance standards for that
period, the Chad contract simply set performance standards and a timetable for the contractor to
reach those standards. The contractor‘s obligations to bring the road up to standard increased
gradually (for instance, by the twelfth month, 50 percent of the roads had to meet the set stan-
dard). A similar approach was taken in the pilots in Tanzania, Cape Verde, and Madagascar, and
the subsequent performance-based contracts in Chad.
B.5. Private sector capital and expertise
For the performance-based projects reviewed, services were contracted to private firms. The
types of private firm varied by project, including:
Local firm (example: Argentina pilot)
International firm (examples: Chad pilot, and Serbia and Montenegro, where international
firm hired local staff to execute works and administer contract)
Single owner micro-enterprise (examples: Guatemala, Peru)
Cooperative micro-enterprises (examples: Colombia, Nicaragua, Venezuela, Honduras,
Ecuador, Bolivia, South Africa)
Many of the maintenance contracts reviewed were contracted to micro-enterprises. Micro-
enterprises need considerable training and support—it takes about a year for the micro-enterprise
to be up and running. And when local contractors are involved, there is often a partnership ap-
proach between the World Bank, the Roads Department, and local contractors, since the gov-
ernment and local contractors need to up-skill and adjust to this new approach.
Another innovative approach that exhibits OBA characteristics is the annuity road contract ar-
rangement being implemented throughout India. The India Roads Annuity Project involves a
performance-based contract to build and maintain a road (box 11).
85
Box 11: Annuity Concessions in India
Transport sector spending in India has been declining steadily over the years and there is a severe shortage of
public funds available for road construction and maintenance. To address this problem, private sector partici-
pation has been introduced by allowing private operators to collect tolls on public and private roads. The Na-
tional Highways Authority of India (NHAI) developed the Annuity Concession model for roads where reve-
nue from tolling is uncertain or insufficient to attract BOT operators. Approximately 8 percent of the length
of roadways subject to NHDP funding has been commissioned using the Annuity Concession model.
In Annuity Concessions, the private operator is remunerated via a fixed, periodic annuity payment from
NHAI and is responsible for constructing the road and also operating and maintaining the road for a fixed
period. The annuity payment will be determined by the Government based on the total cost of the project, the
likely annual maintenance expenses, contract period, the prevailing interest rate, amongst other criteria. This
payment only begins when construction has been completed to specified quality standards.
The annuity model rewards early completion and provides the private operator with a built-in incentive to
ensure that the road is constructed in a way which minimizes long term operation and maintenance costs
while meeting quality standards. The focus on performance has reduced the cost of monitoring required of
Government during the construction period and has resulted in construction costs that are on average 12 to 35
percent lower than NHAI‘s estimates. The Annuity Concession model is now a widely employed form of PPP
in India and has been particularly successful at attracting domestic private investors. By April 2007, 24
projects, totalling 1,340 Km, are being implemented on an annuity basis.
Sources: Booth (2006) and http://india.gov.in/sectors/transport/public_private.php
B.6. Monitoring
The sub-sections above describe in detail the outputs that are normally designated for OBA
projects in the roads sector: conditions of the road and road shoulder, for example the number of
potholes for a given distance of road monitored; passability and average speed attainable on the
road; visibility of road signs, etc. The indicators together provide a picture of the usability of
the road, and thus demonstrate the degree of improved access provided for intended users. In
this sub-section, we describe the processes, lessons and challenges of monitoring output provi-
sion in OBA schemes in the ICT sector.
A range of schemes are used for monitoring and evaluating performance-based road contracts:
self-monitoring; government; and, independent consultant (used especially when a road agency
is short-staffed or might need extra support for innovative contracting mechanisms). Often,
projects use a combination of these mechanisms. For example:
CREMA: Monthly onsite inspections are conducted by government engineers. In-
spections are normally carried out on a sample basis, the minimum length to be in-
spected weekly representing 5% of the total length of the contracted network (or 10%
if the inspection is for the purpose of establishing payment certificates). The mini-
mum elementary length of inspection is 2 km. The Contractor is also required to
make his own inspection on a daily basis, and to report any abnormality to the Engi-
neer (such as traffic overloading) that may have an impact on the contract or on the
processes by which the maintenance works are carried out. Likewise, accidents attri-
butable to users are to be reported, especially when they involve damages to the infra-
structure itself.
86
Chad: First, the contractor performs self-monitoring, submitting a report to the gov-
ernment with each monthly invoice. Second, a consultant verifies the self-monitoring
reports through monthly inspections. (The government appointed SADEG, an engi-
neering consulting firm in Cameroon, to this monitoring role.) If the contractor fails
to comply with any of the service criteria in any one month, its fee is reduced. If it
fails repeatedly to comply, its contract can be suspended.
Monitoring and evaluation can also involve road users. For example, in some CREMA con-
tracts, representatives of the user community periodically are allowed to participate in inspec-
tions.
87
C. Energy
Although OBA got a later start in the energy sector than in ICT and roads, the sector has gained
much ground. OBA has been most prevalent in rural energy. In fact, OBA is becoming one of
the main tools used for expanding off-grid access where ―outputs‖ are often defined as the in-
stallation of a functioning off-grid unit, such as solar home systems (SHS). OBA is also be-
ing used in the case of grid and mini-grid schemes, where ―outputs‖ are usually defined as
working connections to the network, although as a proportion of total grid and mini-grid
schemes, OBA has yet to make as strong a mark. But the creation and expansion of rural energy
funds to increase access in rural areas may be a platform from which to scale-up and mainstream
OBA in the energy sector. Lessons can also be used to expand the role of OBA in urban energy.
C.1. Universe of OBA in Energy
Traditionally, expansion of energy access in many developing countries has involved public
utilities preparing technical feasibility studies for conventional grid extension, and then procur-
ing equipment and works. Customers have to pay high connection fees and internal installation
costs. This approach has often failed because of public utilities‘ lack of financial capacity, ineffi-
ciency of providers that leads to increased costs, and customers‘ limited ability to pay.
OBA is one approach being implemented in the energy sector to improve on access and targeting
for the poor. In the WBG, 27 OBA schemes in the energy sector have been identified. Figure 15
presents the regional breakdown of WBG OBA energy projects by number of projects and by
total size of OBA subsidy.
Figure 15: Distribution of WBG OBA Energy Projects
Several additional schemes have been identified outside of the World Bank, among them a num-
ber of projects funded by the Dutch Directorate-General of Development Cooperation (DGIS)
through the Energizing Africa Initiative. This initiative has provided funding for 24 projects ex-
pected to provide energy, mostly through off-grid solutions, to over 5 million poor beneficiaries
in Africa.
AFR30%
EAP21%
ECA5%
LCR31%
SAR13%
Regional Distribution of WBG OBA Projects in EnergyTotal: US$193 mn
AFR26%
EAP22%
ECA11%
LCR22%
SAR19%
Regional Distribution of WBG OBA Projects in EnergyTotal: 27 projects
88
OBA-type arrangements are most common in the case of rural energy. Some of the reasons for
this include:
rural electrification rates are below urban electrification rates, hence a greater relative
need for expanded access exists in rural areas;
costs of expansion are greater in rural areas and the need for subsidies greater than in ur-
ban areas where providers have relatively greater incentives for expansion;
rural energy schemes allow for new entrants and greater competition, hence potential pri-
vate sector participation;
many urban infrastructure access schemes can become complicated by the issue of illegal
settlements, land titles and other related issues which are politically sensitive and there-
fore may lead to a reluctance to target these areas with subsidies; and,
the characteristics of rural off-grid technologies are well suited for one-off subsidy design,
as the service provision is provided by individual systems with high upfront costs and
relatively low operations and maintenance requirements..
The review of OBA in energy is segmented into off-grid, mini-grid and grid-based components.
Off-grid systems
The use of output based subsidies in the energy sector is most widespread in the case of individ-
ual systems for rural electrification. The predominant technology used for individual systems in
off-grid projects is photo-voltaic (PV), mainly solar home systems (SHS) (Terrado 2008). Over
15 SHS OBA projects alone have been identified. Other available technologies to power indi-
vidual systems include (but are not limited to) wind, pico-hydro, battery and biogas. The ―out-
puts‖ on which subsidies are disbursed usually include the installation of a functioning off-grid
unit, i.e. SHS.
There are two main business models that are currently being used to deliver/distribute SHS in
rural areas, and OBA has been used in most of these cases to increase affordability and hence
improve access. The choice of a business model depends on existing government policy and reg-
ulatory capacity, availability of potential suppliers/service providers, user affordability, and the
availability of credit/access to finance, to name a few criteria.
a) Dealer model: Under this model, consumers own the stand-alone systems, and private
dealers sell systems on cash or credit basis in the open market56
. The customer is respon-
sible for maintenance following the warranty period provided by the deal-
ers/manufacturers. Dealers could be private companies or NGOs. The dealer model is the
relatively easier model to launch, requiring the accreditation of several participating deal-
ers and establishment of a microfinance support system, as needed (Terrado 2008). Some
dealers themselves extend credit to purchasers of PV systems (―the dealer credit model‖).
In either case, the OBA subsidy is generally used to buy down the capital cost and is paid
56Renewable Energy Toolkit website.
89
once installation is verified. See box 12 on Bangladesh Rural Electrification and Renew-
able Energy Development Project.
b) Fee-for-service model: Under this model, public or private organizations retain owner-
ship of the systems but provide electricity services for a fee. This includes the leasing or
hire-purchase model and Energy Service Company (ESCO) model. Under a concession
model, an ESCO is usually selected by a competitive process and given the exclusive ob-
ligation to provide electricity services in a defined service area. The OBA subsidy is gen-
erally used to buy down the capital cost and make the monthly payment in line with the
affordability of the users.
In the dealer model, OBA subsidies are one-off, whereas in the fee-for service model, the OBA
subsidy can have both a one-off component and an ongoing component.
Box 12: Bangladesh -- Rural Electrification and Renewable Energy Development Project (2002-
2009)
The Bangladesh RERED was launched in 2002 with the objective to increase access to electricity in rural
areas. The SHS component, financed by a GEF grant in amount of $8.2 million for capital cost buy-down,
was implemented as an OBA. The SHSs are supplied and serviced by private companies in partnership with
microfinance institutions (MFI) and NGOs. IDCOL, the service provider, administers a credit program that
enables participating NGOs and MFI to obtain refinance for loans made to households for purchase of SHS.
The GEF grants are contingent on actual consumer installation of systems, and are drawn and disbursed by
IDCOL against claims made by MFIs and suppliers on prescribed documentation and evidence that solar sys-
tems have been installed and accepted. The cost of the SHS system (on average $500) is met by a GEF grant
of about $40-$50 per system, customer‘s down payment, and a microfiance loan covering the balance.
Results: The project successfully installed its target of 50,000 SHSs by September 2005, three years ahead of
schedule and $2.0 million below estimated project cost. Following the success, IDCOL has received funding from
KfW, GTZ, Asian Development Bank (ADB) and Islamic Development Bank (IDB) to fund a total of approx-
imately 500,000 SHSs. As of March 2008, over 285,000 SHSs have been installed. As of June 2009, World Bank
is considering additional $91 million credit under RERED Phase II with a potential $7 million grant funding from
GPOBA to fund a total of 440,000 SHS.
References – Concept note for GPOBA funding of RERED project, April 2009, Table 2, p.3.
A third model that is starting to emerge is a hybrid between the dealer model and the fee-for ser-
vice model, and is known as the ―medium-term service contract‖ (MSC). The MSC is a new
model for PV market development that balances providers‘ wish to minimize risk exposure with
the government‘s desire to maximize control. In all service areas, exclusive access to project
subsidies ends three to four years after installation, at which time users and suppliers may ―grad-
uate‖ to open competition. The MSC design for the contracts between government and service
provider goes well beyond the typical connection (and sometimes service) targets of comparable
energy projects, by disbursing a portion of subsidies against activities promoting market devel-
opment on the local micro-level in each area –to ensure long term sustainability of service and
market growth. IDA‘s Bolivia IDTR is an example of such a scheme.
90
Mini-grid Systems
The use of OBA schemes for expanding rural electrification through mini-grids has been limited
– about 5 projects have been identified. Mini-grids involve a centrally located generating system
that serves tens or hundreds of users. A mini-grid is an attractive option when customers are con-
centrated enough to be economically interconnected, but are not feasibly connected to the main
grid. Most of the projects identified involve mini-hydro or diesel. The ―output‖ on which subsi-
dies are disbursed in mini-grid systems are diverse, and can range from construction milestones
to installed capacity to connection of new customers. Most projects identified include a mix of
these outputs, but most rely on one-off subsidies for access. In terms of market model, public-
private partnerships in the form of concession contracts are the most common. Under conces-
sions, the service provider has exclusive rights to generate, distribute and sell electricity in the
concession area.
Grid-based systems
OBA is being used in several instances to expand access to the urban and peri-urban poor
through grid-based extensions. For example, the Armenia Heating and Gas project provides heat-
ing solutions to eligible households in multi-apartment buildings. The project funds both indi-
vidual gas heater solutions for apartments and building level gas boiler solutions that connect
several apartments. As of December 2008, over 50% of the target households (2,738) have re-
ceived heating solutions that have been independently verified. A slum electrification scheme for
Mumbai is under implementation. GPOBA will pay a portion of the slum dwellers‘ costs to li-
censed contractors for installing new or upgraded electricity connections from the meter to the
house and for internal wiring using an OBA approach. Reliance Energy (the privately-owned
local distribution company) will carry out upstream investment to improve supply to the slum as
part of the project.
The ―output‖ on which subsidies are typically disbursed in the case of the rural grid-based
schemes are usually verified working connections. More specialized output indicators are added
wherever possible to reflect the project‘s main objectives. For example, in the GPOBA/IDA
EAREP II project in Ethiopia, a portion of the grant is disbursed after verification that house-
holds receive two energy-saving compact fluorescent lamps.
In addition to one-off subsidies, transitional and ongoing output-based subsidies have also
been used in grid based schemes. The Pamir Private Power Project in Tajikistan uses a combi-
nation of both transitional and ongoing consumption subsidies to ensure that tariffs remain af-
fordable for the 28,000 households in Gorno-Badakshan region. The Pamir social protection
scheme uses a very low lifeline block tariff aimed at ensuring that the poorest can afford a mi-
nimal (lifeline) amount of electricity, and for consumption over the lifeline amount, the tariff
gradually rises to full cost levels. In contrast, the Philippines Non-Grid Power Supply project
(SPUG) uses ongoing output based subsidies to improve electricity supply in remote areas. The
ongoing subsidies ($0.028 per kWh for the first pilot) are paid on the basis of the energy supplied
to the rural energy distribution cooperatives (not on the basis of the electricity produced) by the
competitively selected private generators. The first SPUG transaction, currently under construc-
91
tion and expected to be fully operational by the end of 2009, will improve electricity service for
nearly 60,000 households and result in $7.0 million subsidy savings in the first year of operation.
C.2. Funding
The major sources of funding for output-based energy projects are international and bilateral do-
nors, government co-financing, user contributions and private sector investment. The level of
funding from each of these sources depends on project specific factors which include location of
the project, technology used, users' ability to pay, and local credit markets, among others.
Mini-grid projects are highly capital intensive and are typically funded by the govern-
ment and/or donors. Grid-based projects vary: grid intensification in urban areas is less
capital intensive than grid extension in peri-urban or rural areas. In the case of the Ethi-
opia EAREP II, 90% of the total project cost of $203 million was funded by various do-
nors including IDA, which provided $130 million credit and the Ethiopian Government
through the public utility EEPCo ($44.4 million). The remaining 10% is expected to
come from user payments.
In the case of off-grid projects, donors such as IDA and GEF provided initial funding for
subsidizing these technologies in order to make them more competitive and commercially
viable. GEF funding is also provided for the critical business and market development ac-
tivities such as feasibility studies, consumer awareness, credit delivery, etc. Private sector
financing is also leveraged – see discussion below.
Many projects such as Guatemala PER and Senegal PPER have dedicated Rural Electri-
fication Funds (REF) to ensure that the rural electrification goals are met without com-
peting with other social and infrastructure needs. In the case of Guatemala PER, the rural
electrification fund raised $100 million through the sale of the distribution companies to
private operators and $50 million from sale of government bonds (Harris, June 2002, p.2).
Additional funding of $180 million was being sought from other donors. These REFs are
also financed through other sources such as a surcharge on all existing users as in the case
of Philippines SPUG project.
C.3. Targeting
Most OBA energy projects use a blend of geographic targeting (selecting poorer locations where
subsidies should be channeled) and self-selection targeting (subsidizes outputs which the non-
poor are less likely to use).
Off-grid projects, initially primarily used geographic targeting.. But the traditional ap-
proach to subsidy was sometimes regressive in that it typically used constant relative sub-
sidies ($ per Wp) which penalized the poor who would end up paying relatively higher li-
fecycle costs due to size-independent fixed costs (Reiche et al. 2006, p. 31). Later
projects have addressed this issue by using self selection targeting. For example in the
Bolivia Decentralized Infrastructure for Rural Transformation (IDTR), although the abso-
lute subsidy per system is constant, this implies that the subsidy per Wp increases the
smaller the system, which the poor are more likely to use. As of February 2009, 6,154 in-
92
dividual systems have been installed under IDTR, benefiting over 30,000 people in re-
mote rural areas of Bolivia. In addition, 87 social systems have been installed in schools
and clinics
The poorest households, who are unable to afford the subsidized SHS, can benefit from
the electrification of rural schools and health clinics as well as the multiplier effects ex-
pected from rural productive uses. And the GPOBA replication of IDTR also plans to in-
troduce low end ―pico-PV‖ solutions specifically targeted to the poorest. These systems
will provide basic lighting, ICT, and dry cell charging for less than $100 per household.
The grid-based rural electrification project in Guatemala involves two distribution com-
panies that were sold to a private operator, the proceeds of which were used to fund an
OBA scheme based on geographic targeting. Households that live more than 200 meters
from the existing network receive the connection subsidy, based on the assumption that
those households are more likely to be poor. Although the coverage results have been
good (over 80% of the initially targeted population has been connected) there have been
some problems with the implementation of the scheme.
A delayed phase-in of subsidies can be used as a form self-selection targeting, since
households that can afford an unsubsidized connection fee will connect to a service when
the service is initially available, if the benefits of connecting outweigh the cost. This me-
chanism is being piloted in an IDA/GPOBA-funded energy project in Ethiopia that subsi-
dizes grid connection in rural areas.
Further, it is not just the connection costs but the costs of internal wiring can be a significant
hurdle and could lead to low uptake. To overcome this affordability barrier, projects such as Se-
negal PPER include a ―payment facility‖ for spreading out the capital costs of connection, inter-
nal wiring, and efficient fluorescent lamps—making these far more affordable for even the poor-
est. How this will work is yet to be seen as the project has not yet begun to deliver outputs.
C.4. Performance-risk
The degree of performance risk shifted to the service provider largely depends on the ability of
potential service providers to bear the performance risk and access short-term finance prior to the
disbursement of output-based subsidies. The output-based performance risk, alongside other re-
lated performance risks, is described below for the three sub-sectors.
Off-grid
Outputs in off-grid energy projects are mostly defined as the installation of the off-grid technolo-
gy to provide electrification: for example, SHS, bio-gas digesters, etc. The most common prac-
tice has been to pay the entire subsidy on successful verification of eligible installation irrespec-
tive of the service delivery model. There are not many instances where subsidy disbursements
are linked to service delivery and maintenance. Current exceptions include the Bolivia IDTR and
the Ghana SHS projects recently under implementation.
93
In Bolivia, 3% of the subsidies are paid after each of the three yearly service visits and
the final 5% are paid at the end of the contract agreement (3-year medium term service
contract) and upon compliance with all obligations. Note that the service contracts were
originally set at four years, but after the pre-bidding road shows, the market clearly indi-
cated that a 4-year contract would attract fewer bidders.
In Ghana, 80% is paid after installation; 5% against completion of maintenance services
at the end of Years 1 and 2; and 10% final payment against one battery replacement and
satisfactory maintenance services at the end of Year 3.
In the case of the dealer cash sales model, the dealer takes the technical risk for the equipment
until warranty expires – and in the case of Ghana, also for the maintenance services for the first
three years. In the case where the dealer provides credit, the dealer takes on additional credit risk
as well. Lessons from early experience suggest that credit risk is a serious concern of both finan-
ciers and dealers and makes credit sales particularly challenging. Dealers are reluctant to extend
credit to rural customers with little credit history, and credit administration and collections may
be costly. Dealer-extended credit was tried early on in the Sri Lanka project but soon rejected.
Dealers found collections too difficult and time consuming (Issue Note of the REToolkit, June
2008, p.137). As a result, they formed partnerships with microfinance organizations for extend-
ing consumer credit. Similarly, the IDA line of credit extended to the rural banks in Ghana is ex-
pected to help mitigate some of the access to finance/credit constraints faced by dealers and/or
purchasers of SHS.
The performance risks are higher for the ESCO by virtue of the concession model – not only as a
consequence of the OBA design. The service provider takes on commercial, technical and in-
vestment risk as he gets paid for all the investments over time from the monthly fees paid by us-
ers. The service provider collects monthly payments from its customers and provides mainten-
ance service as needed. In some cases, some of this monthly payment relates to the subsidy ―buy
down‖ of the capital costs. For example, in the South African Concession for Rural Electrifica-
tion project, the ongoing subsidy for free basic electricity for grid-connected households equiva-
lent to 50 kWh per month was introduced to encourage electricity consumption among the grid
connected rural households, while SHS users in the concession areas received an equivalent
monthly subsidy of R40, reducing the fee charged for maintaining and servicing the system to R
20 (from R 60) per month for each household. However, not all municipalities within a conces-
sion honored the ongoing SHS subsidy, creating distortions between consumers (Lemaire 2007,
p. 6).
Grid and Mini-grid
Outputs in grid and mini-grid OBA schemes are usually working connections to the network, but
may involve a wider variety of milestones. Upfront capital expenditures as a percentage of total
costs are very high in the case of mini-grids and the providers are typically small. Therefore, a
larger fraction of the subsidy has to be paid upfront to avoid increasing the financing costs and
hence the subsidy levels. In the case of Nicaragua offgrid rural electrification project (PERZA),
up to 70% of the output-based subsidies are disbursed early on (against installation of turbines
and grid) while only a smaller subsidy fraction (20-30%) is disbursed against new connections
and service quality (Reiche et al, 2006, p.26). As of December 2008, 2,426 households have
94
been successfully connected to three mini-grids under the PERZA project, benefiting over
12,000 people. Additionally, the PERZA project had also funded the installation of 6,863 solar
home systems reaching over 34,000 beneficiaries.
The performance risk taken by service providers related to the OBA element of grid-based elec-
trification schemes varies. In some cases, the OBA performance risk relates to payment of sub-
sidy after the connection is fully installed and working as verified by an independent agent. In
the case where providers have long-term contracts, performance risk also relates to longer-term
service provision – although this is not necessarily specifically related to the OBA scheme.
In the case of the Senegal Rural Electrification Priority project, the average cost of connection is
estimated at $725 and the average subsidy at around $286. The difference, accounting for 60%
of the project costs or a total of $10 million, is entirely borne by the competitively selected pri-
vate operator, ONE of Morocco. ONE is undertaking significant investment and performance
risks as these investments will be recovered by monthly payments over the concession term of 25
years. Further, the subsidy is disbursed in tranches with the final 40% made only after rural elec-
trification agency has verified the number of customers connected and certified that minimum
technical standards as stipulated in the concession have been met (see box 14 below for more
details).
In contrast, the $26 million investments under the Pamir Private Power Project was made to re-
store reliable electricity supply to 250,000 poor and isolated residents of Tajikistan‘s Gorno-
Badakshan region. Right from the start, it was clear that the project was not feasible on a com-
mercial basis. As mentioned above, the project uses a combination of both transitional and ongo-
ing consumption subsidies to ensure that tariffs paid by households remain affordable. The sub-
sidies (difference between full cost and subsidized tariff) are paid only upon delivery of the elec-
tricity service.
C.5. Private sector capital and expertise
Dealers for off-grid energy schemes are typically small and medium operators with limited ca-
pacity to take credit risk for extending loans to rural households and also lack experience in cre-
dit-facility management. Yet, small scale private providers are taking risks in OBA schemes. For
example, in Sri Lanka RERED, three SHS dealers have each made investments estimated at
$1.0-$1.5 million to develop the systems, physical infrastructure and human resources for a
commercial distribution network of 50 sales and service outlets with motivated sales forces,
trained technicians, and good product and brand awareness.57
Although the amounts are small in
absolute terms, from the perspective of the small private dealers, the relative risks are substantial.
This effort seems to be paying off. By June 2008, some 120,000 households were using SHSs in
Sri Lanka (Terrado, p.5). In Bangladesh, sales of SHS systems are financed by customer‘s initial
contribution (about 15 percent), a GEF grant and the credit purchase loan of which 80 percent is
refinanced by IDCOL. Part of the project success is owed to helping NGO/MFI operators in rural
Bangladesh to operate as SHS vendors. In parallel, assistance during the start-up phase (approx-
57 Project Appraisal Document. 2002. Sri Lanka Rural Electrification and Renewable Energy Development Project. World Bank.
Available at:
http://web.worldbank.org/external/projects/main?pagePK=64283627&piPK=73230&theSitePK=40941&menuPK=228424&Proj
ectid=P076702
95
imately January to December 2002) enabled the POs to quickly gain proficiency in the SHS
business.
In the case of ESCOs, it can be difficult to obtain commercial loans on reasonable terms as these
projects require large upfront investments but the returns are reaped in the longer term. Expe-
rience to date indicates that pre-financing until output delivery is funded by the ESCOs (by defi-
nition of OBA), but longer-term ESCO financing has come from either government or multila-
teral sources (Issue Note of the REtoolkit, June 2008). In both Argentina (box 13) and South
Africa, the ESCO concessions received financing from provincial and federal government
sources.
Box 13: The ESCO Model: Argentina PERMER Concession
The ESCO model demonstrates how OBA can mobilize private sector expertise to provide services to poor
households they might not otherwise reach. In the case of Argentina PERMER, concessions were awarded
competitively for a period of 15 years. Concessionaires are required to provide electricity services to rural
off-grid customers anywhere in the province for a period of 15 years, upon request. Customers who cannot be
reached by the grid are served with SHS, with GEF grants subsidizing these installations. The concessionaire
is responsible for all necessary maintenance, repairs or replacement of components. They are also responsible
for billing, collection and claim handling. Note that the fees/tariffs are reviewed/ renegotiated by the provin-
cial government and provincial utility regulatory agency every 2 years. As of 2008, the Argentina PERMER
had installed 6500 households with individual SHS (50 to 400Wp), 1,800 public facilities with solar PV sys-
tems, and installed 115 wind home systems.
Source: Reiche et al. WorldPower (2000); and Issue Note of the REToolkit (June 2008).
Grid connection projects leverage private capital mainly by working with private concessionaires.
Leveraging can mean that private companies invest money complementary to OBA subsidies and
user contributions. Such investments are only viable if tariffs for poor beneficiaries are sufficient
to cover ongoing costs and to pay back investments. Additionally OBA can help to mobilize up-
stream infrastructure by increasing the pool of customers being serviced. A PPER program in
Senegal uses two-stage ICB to select the concessionaire who offers to provide the most connec-
tions for a predetermined subsidy (box 14).
96
Box 14: Senegal Rural Electrification Priority Programs (PPER)
The Government of Senegal, with assistance from the World Bank, adopted the Rural Electrification Priority
Program (PPER) in 2003. PPER combines privately operated concessions with output-based subsidies to le-
verage private financial resources and overcome the barrier of high up-front connection costs respectively.
Under the PPER, the country was divided into 13 (updated from the original 18) concessions.
The bidding process for the first concession, Dagana-Podor, was launched successfully in June 2006, with
eight firms (local, regional, and international) participating in the prequalification and two final bids, ONE
from Morocco and a consortium of EDF, Total, and Senegal‘s CSI-Matforce. The winning bidder, ONE, has
proposed to more than double the minimum number of connections set in the tender—from 8,500 to 21,800 –
by bringing in $9.6 million in private financing. This constitutes about 60 percent of the total financing,
compared to the 20 percent minimum private financing requirement under the tender. The average cost for a
connection is estimated at $725 and the average subsidy at around $286. The winning bidder has proposed to
increase both the overall number of connections and the proportion of connections using renewables, which
means the benefits of both the IDA and the GEF subsidies will be maximized. IFC is expected to decide on a
potential equity investment (up to 19.99%) in the project company, Comasel de Saint Louis S.A., in June
2009. If the investment gets approved by the IFC board, it would be the IFC's first venture in rural electrifica-
tion.
Traditionally private utilities have had little incentive to connect poor households in remote areas as their
concession contracts limit their service obligation to HHs located a relatively short distance from the grid.
The Senegal PPER concession explicitly addresses this by requiring the concessionaire to make a minimum
number of connections beyond 20 kilometers from the grid.
The Dagana-Podor concession with ONE was officially signed in June 2008. The concession has not reported any outputs yet.
Sources: De Gouvello and Kumar (2007) and IFC website
C.6. Monitoring
The sub-sections above describe in detail the outputs that are normally designated for OBA
projects in the energy sector, such as the installation (and sometime maintenance of) solar home
systems or solar lanterns, and in the case of grid-based technology, working connections to the
energy network. In some cases ―outputs‖ include the provision of service over a period of
months to ensure greater sustainability and demand. In this sub-section, we describe the
processes, lessons and challenges of monitoring output provision in OBA schemes in the ICT
sector.
Some examples of monitoring systems in OBA schemes follow:
In the case of the IDA-financed Bangladesh Rural Electrification and Renewable Energy De-
velopment off-grid project, Infrastructure Development Company Limited (IDCOL), the
implementing agency, is responsible for ensuring verification of installations by dealers
and to maintain a complete data base on all SHS installations. Local officials such as
school teachers are co-opted to undertake the initial checking of installations which is fol-
lowed up by inspections from a pool of inspectors and rechecking on a sample basis by
97
IDCOLs own staff. IDCOL is also supported by a technical group which handles certifi-
cation of equipment that is eligible to be used in the program.
In the case of Guatemala PER, the technical committee comprising of representatives
from both the Ministry of Energy and the concession companies hires independent super-
visors to verify that the connections made by the private distribution companies are eligi-
ble for reimbursement under the PER. The supervisors visit communities to check wheth-
er the new connections are outside the 200-meter zone and are in residential dwellings.
They report to Ministry of Energy, which sometimes performs additional checks. The
Ministry then submits a final report to the technical committee, which authorizes pay-
ment. As of May 2007, 189,383 connections have been completed and certified as opera-
tional compared with the target of 280,000 connections. Funding for the remaining con-
nections is uncertain with government‘s budgetary restrictions and delays in securing ex-
ternal funding.
For GPOBA projects, separate funding is provided to contract out verification of outputs
to independent agencies. These agencies conduct random audits of connections installed
and make sure they meet the standards specified in the contract. In some cases, the veri-
fication agent is part of a government agency.
What is clear is that full advantage of the monitoring and verification required for OBA schemes
is not being utilized. OBA is an opportunity for improved monitoring and evaluation, in particu-
lar for off-grid schemes where this can otherwise be very costly. In the two Bolivia off-grid
schemes, given that the providers and the verification agent are required to visit customers and
report on the systems, the project implementation unit will receive information on the function-
ing of the systems, usage, etc.
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D. Water
There are a limited number of OBA projects in the water sector, and only a handful in waste wa-
ter. OBA was originally set up as a PPP mechanism and the role of the private sector in formal
water supply has been limited – especially after the retreat of international private water compa-
nies from developing countries over the last decade. But given a concerted effort to test OBA
approaches in the water sector, including with public providers, as well as the emergence of an
increasing number of regional and local private providers, there are some initial lessons to be
shared.
D.1. Universe of OBA in Water
There are currently 32 OBA projects with World Bank participation in the water and sanitation
sectors: 23 are water supply schemes, 3 are sanitation schemes, and 6 are providing both water
and sanitation. There is one additional OBA scheme identified in the water sector outside of the
WBG. In terms of both volume and number of projects, about half are in AFR, partly because of
the concerted efforts of GPOBA to pilot projects in AFR (figure 16).
Figure 16: Distribution of WBG OBA Schemes in Water and Sanitation
The majority of projects identified involve one-off subsidies for access. The majority of projects
involve piped-water schemes, and access is usually defined as the delivery of working connec-
tions as demonstrated through billing or collections. One project under implementation and
another under design also involve waste water connections, and two projects involve on-site sa-
nitation facilities.
One project identified outside of the WBG for the Chilean urban water sector involves ongoing
life-line subsidies, and one closed IDA-funded project in Guinea, Second Water Supply Project,
involved transitional subsidies.
AFR55%
EAP13%
LCR26%
MENA5%
SAR1%
Regional Distribution of WBG OBA Projects in Water and Sanitation
Total: US$ 179 m
AFR38%
EAP22%
LCR22%
MENA9%
SAR9%
Regional Distribution of WBG OBA Projects in Water and Sanitation
Total: 32 projects
99
D.2. Funding
Of the 33 projects identified in the water and sanitation sectors together, 7 include OBA
subsidies funded by IDA and IBRD, for a total OBA subsidy funding for the water sector
of $101.9 million. These included small town schemes in Paraguay (Fourth Rural Water
Supply and Sanitation Project) and Cambodia (Water Access with Small Scale Provider,
prematurely closed) as well as a transitional OBA scheme in Guinea.
A total of 21 projects include GPOBA subsidy funding for a total subsidy funding of
$73.5 million. Some of the GPOBA-funded schemes are part of a larger IDA or IBRD in-
itiative (see box 15 on the Mozambique water project).
Co-financing was also provided in some cases by the government, the private sector (see
section on private sector participation), and in a few cases by the public sector utility, as
in the case of the National Water and Sewerage Corporation in Kampala.
A particularly innovative scheme in Honduras involves the setting up of an OBA Fund
targeting small and medium sized schemes including greenfield and brownfield projects
in peri-urban and rural areas of the country. Funding sources include a contribution by
central government of $1.0 million to provide ‗bridge financing‘ for subprojects being
implemented by public operators with little or no access to commercial credit. GPOBA
has provided $4 million in grant funding. Other funding will come from the private oper-
ators, user contributions by a mixture of in-kind contributions and up-front payments
(this varies depending on the type of project), through tariffs, standard sector contribu-
tions from the central government, and/or municipalities. In August 2008, the first sub-
project under the Honduran OBA facility was signed to implement a clean water project
for 16 poor neighborhoods in Tegucigalpa with a total population of over 47,000 ex-
pected to benefit.
In the case of the ongoing means-tested consumption subsidies in Chile‘s urban water
sector, the subsidy scheme is funded entirely from the central government‘s budget. The
subsidy scheme had a total cost of $33.6 million in the year 1998 and helped subsidize
the consumption of 450,000 households (Gomez-Lobo 2001).
100
Box 15: Mozambique Water: OBA and IDA
Access to water in urban areas, currently estimated at 37 percent, has significantly improved through two
consecutive national water projects funded by IDA: the National Water Development Project I (NWDP I)
and the National Water Development Project II (NWDPII). These projects represent a total IDA allocation of
about $126 million between 1999 and 2007. They have increased access to water in the five major cities of
Maputo, Beira, Nampula, Quelimane, and Pemba, strengthened sector institutions and the regulatory frame-
work, and successfully piloted the delegated management framework. This framework separates assets from
operations, contracts out operations management to private sector operators, and has oversight by a regulatory
body. The urban water strategy not only provides for increased coverage, it also aims to secure full cost re-
covery through tariffs for larger cities – but this will not include connection costs. IDA is currently imple-
menting an operation, the Water Services and Institutional Support Project (WASIS), which leverages funds
from the Millennium Development Corporation (MCC), the Africa Catalytic Growth Fund (ACGF), and
GPOBA to scale up this model.
The OBA component, Water Private Sector Contracts ($6 million funded by GPOBA), is targeted to poor
households (with expenditures equal to or below $1 per day) who cannot afford to pay connection costs
which currently are wholly funded by users and not recovered through the tariff. Connection fees range from
about $160 per connection to well over $240 per connection. While most middle and high income house-
holds, industries, and commercial establishments can afford such connection charges, it is often very difficult
for low income households. The output-based subsidy is funded by GPOBA and expected to encourage up-
take by poor households, and is therefore a critical component to achieve the desired outcomes of the IDA-
funded scheme.
The OBA grant was signed in April 2008 and became effective in July 2008. Competitive bidding for the four
northern cities is expected to be completed in the third quarter (Q3) of 2009. Several domestic and interna-
tional firms are prequalified. For Maputo, the private sector incumbent, AdM, is expected to start making
OBA connections in Q2 2009. The independent verification process is underway for Maputo.
D.3. Targeting
With a focus on access subsidies, OBA schemes in the water sector are inherently pro-poor since
the poor are the most likely to be un-connected to the supply network. However, other tradition-
al forms of targeting are also used to ensure more effective targeting. Almost all of the water
projects identified use geographic targeting as the primary mechanism. These water projects are
usually small scale and located in geographic areas where the poorest are concentrated and hence
there is little risk of including beneficiaries who are not considered low income. In addition, a
number of these projects use self selection and/ or means tested targeting, which in turn increases
their targeting effectiveness.
The OBA in Kampala-Water Connections for the Poor uses both geographic targeting
and self selection to provide access to piped water services to poor households living in
slum areas of Kampala. According to project preparation documents, the income level of
the target population is less than $1 per day per person. First outputs were delivered in
March 2009, and as of end April, almost 10,000 beneficiaries in the poorest areas of
Kampala have been reached (although connections not yet independently verified)
through 580 yard taps and three public water points (PWP).
The Manila Water Supply project uses a combination of geographic targeting and means
tested targeting. The project targets communities that are officially certified as ―indigent‖
101
as per standardized means proxy tests indicating a majority of households fall under the
national poverty line. The approximate per capita income of the target population is less
than $1 per day (box 16).
The Improved Rural Community Water in Andhra Pradesh (India) project successfully
combines the three major targeting mechanisms – geographic, means tested and self- se-
lection. The project aims to provide safe and affordable drinking water to about 12,500
households in 25 villages. These households purchase water in jerry cans from the com-
munity water distribution points. To target individual beneficiaries in the villages, the
project uses the government‘s ‗white ration card,‘ a system that entitles low-income indi-
viduals to obtain basic commodities (e.g., rice, flour) at a reduced price (Mandri-Perrott
2008). As of March 2009, water treatment plants have been installed and independently
verified in 16 villages serving over 7,200 households that are below poverty line.
Chile has been successfully using an individual means-tested water consumption subsidy
(mentioned earlier) since the early 1990s. Under the scheme, only means tested house-
holds (based on a scoring system implemented by the government) are eligible to the
lower priced initial consumption block (15 cubic meters a month). This scheme has re-
sulted in lower costs than the previous universal subsidy scheme and higher targeting ef-
ficiency (Gomez-Lobo 2001).
D.4. Performance-risk
As in other sectors, in the water sector the service provider under an OBA scheme bears the risk
of non-performance: not getting reimbursed for costs incurred unless an output is verified. Out-
puts in the sector for the most part are defined as working connections, often demonstrated
through billing or collections records. In most projects funded by GPOBA, a portion of the out-
put-based payment is with-held until several months of service delivery to enhance the sustaina-
bility of the scheme.
In the Vietnam Rural Water project involving the East Meets West Foundation, an inter-
national NGO, 80% of the subsidy is disbursed from GPOBA to EMW upon realization
of the connection and the remaining 20% after proof of six months of satisfactory service
provision. By February 2009, ten water schemes were operational with 2,726 verified
household connections.
In the Kenya Microfinance for Community Water Schemes project, the community water
associations are bearing performance risk as they will not get paid until evidence of out-
puts in the form or working connections, several months of service delivery, and in some
cases after demonstration of increased sales (box 18).
In the case of the Jakarta water project, outputs were both connections to the network and
three months of billed consumption, with a minimum average consumption of 360 liters
per day. The private operator Palyja is reimbursed on a sliding scale, depending on the
proportion of targeted connections actually implemented to incentivize the operator to go
beyond the ―low hanging fruit‖ (box 19).
Further, it is recommended that OBA water schemes being piloted should take place within a
more robust service contract to ensure quality service provision and to provide appropriate
102
checks and balances should problems arise – see box 16 below on the Manila Water Supply
project.
Box 16: Manila Water Supply Project
The objective of the project is to increase access to water services through individual household connections
to target low income communities in the Manila Metropolitan Region (MMR). The project is being imple-
mented by Manila Water Company (MWC), the private Philippine company which provides water supply and
sanitation services to approximately five million people in the East Zone of Metro Manila under a 25-year
concession that began in 1997. The concession has been operating successfully over a decade - remarkable
turnaround in service access (number of connections increased by over 100%) and reliability (24 hour availa-
bility increased from 26% to over 98% of customers), water loss reductions (by over 50%) and overall opera-
tional efficiency.
The OBA scheme is building on MWC‘s considerable experience of working with low income communities
through its flagship ―Tubig Para Sa Barangay (TPSB)‖ or ―Water for the Community‖ program. The pro-
gram, started in 1998, has provided access to over one million low income customers. MWC is investing
some $14 million in new water supply infrastructure in these areas, but the low income households cannot
afford the connection charges set by MWC and the Regulator, which currently total PhP 7,531.73 ($167).
Under the OBA scheme, households contribute PhP 1,620 ($36) towards the connection charge and GPOBA
provide a subsidy for the remainder (PhP 5,911.73 or $131). This unit subsidy is subject to annual indexation
as specified in the terms of the concession contract. In order to make the household contribution more afford-
able, MWC has proposed an installment scheme over 12 months. The GPOBA subsidy is paid directly to
MWC as a single payment, conditional on the independent verification of 6 months satisfactory service deli-
very. The grant agreement was signed in October 2007. As of December 2008, 5,611 water connections had
been independently verified for satisfactory service provision for three months but no subsidy payments have
been made as of April 2009 due to incomplete documentation submitted by MWC.
However, as with other sectors, but possibly more acutely in the water sector given the reliance
on small and local providers, NGOs and community organizations for service delivery, access to
finance is a binding constraint on the ability of service providers to pre-finance outputs. This
puts limitations on the performance risk that can be shifted to providers in these cases. See box
17 on the Water Supply in Uganda‘s Small Towns project currently under implementation.
103
Box 17: Phasing in Payments Due to Access-to-finance Constraints in Uganda’s Water Sector
In the GPOBA-funded Water Supply in Uganda‘s Small Towns scheme involving small local private opera-
tors, two different output-based disbursement profiles were used: in small towns where mainly extensions
from the existing system were required, a relatively ―pure‖ OBA is used whereby private operators will be
paid after connections and water service delivery. But in the green-field rural growth centers, output-based
payments are phased such that 60% of the subsidies are disbursed during construction. Only 40% of the sub-
sidies are disbursed with final connections and water delivery. It was estimated that the availability and cost
of financing until delivery of output, as well as the newness of the approach, would result in either very high
bids which the poor could not afford (since a portion of the costs would be borne through the tariff) or result
in no bids. It is expected that in subsequent batches, the output-based disbursement profile could be made
more aggressive in the rural growth centers, but this will have to await the results of output delivery in the
current pilot.
Ten initial lots have all been bid out resulting in at least 20% efficiency gains overall. Three out of ten towns
did not require subsidies. Contracts were signed in October 2008 and output delivery began in Q4 2008. As of
April 2009, 310 yard taps and two PWPs are operational serving over 6,000 beneficiaries. Independent verifi-
cation of outputs is underway.
D.5. Private sector capital and expertise
The leveraging of private capital in the water sector is limited by the tariff charged to the tar-
geted users. For example, in the Water Supply in Uganda‘s Small Towns case cited above, the
intention is to recoup 10-20% of the investments required for the scheme through the tariff. A
larger amount would make tariffs unaffordable to the very households the OBA was intended to
target. But in higher income countries, leveraging might be higher: for example, $10.5 million
is expected to be leveraged in Honduras and $14 million in Manila.
104
Box 18: Kenya Microfinance for Small Water Schemes
The Kenya Microfinance for Small Water Schemes Project innovatively uses output based aid subsidies to
leverage commercial finance for up to 21 small rural and peri urban piped water systems in the country.
Projects were selected from a wide pool that expressed interest through a district level awareness campaign
led by the Athi Water Services Board (regional asset holding government agency). To qualify for the private
micro-finance bank‘s loans and the OBA subsidies, community projects must pass through K-Rep Bank's
existing credit approval processes. The communities (organized into community associations) need to present
their loan applications with considerable detail. In order to assist this process, the GPOBA funded project has
provided up-front technical assistance to communities, with considerable support from the multi-donor Water
and Sanitation Program (WSP). Once the loan is approved, K-Rep Bank is responsible for loan (and thus
project) monitoring. The involvement of a private lender with funds at risk increases oversight during project
implementation and then ensures that systems are in place during operation, positively impacting the sustai-
nability of the sub-projects.
Individual sub-projects are financed through community equity (20%) and a loan provided by K-Rep Bank
(80%). If the sub-project meets the output targets – number of new connections and revenue collection – the
output based subsidy is released. The OBA subsidy covers 50% of the micro-finance loan. The remainder of
the loan is repaid through tariff revenue collection. The loan provided by K-Rep is priced on a commercial
basis and has a maximum tenor of 5 years. It is believed that the OBA subsidy provides a degree of comfort
to the bank, and hence collateral requirements were less strenuous than usual, and the tenor was extended to 5
years over the normal 1-2 years. To provide additional security, K-Rep has arranged a USAID DCA credit
guarantee for the life of the loan (see main text, Section 4).
A grant provided by the Public Private Infrastructure Advisory Facility (PPIAF) is being used to develop a
project development facility to assist communities in the preparation of loan applications. Further, funding
from the EU Water Facility is being used to increase the scale and scope of the project to a national level. As
of April 2009, construction is underway for eight of the 11 subprojects approved by K-Rep. One subproject
was completed and verified, and two sub-projects are about to be verified. The first verified subproject has
delivered 62 connections (24% over the output target) and the revenue from water sales was 27% more than
the target.
But OBA schemes do allow the mobilization of private sector expertise to poor areas that the
service provider might otherwise not have served. OBA schemes provide incentives for the ex-
tension of existing assets to make best use to serve the poor – assuming that the system has spare
production capacity. For example, in the Mozambique Water Private Sector Contracts (see box
15 above), the OBA contribution will reach poor households with relatively small amounts of
subsidy – approximately $12 per capita –by leveraging off of existing infrastructure assets such
as donor-funded water production and treatment facilities as well as new IDA/EIB investments
to extend the secondary and tertiary networks. Box 19 below provides an example of how a large
international private operator is extending its services to poor areas in Jakarta through an OBA
subsidy.
105
Box 19: Expansion of Water Services in Low-income Areas of Jakarta
The objective of the project is to increase piped-water access to poor urban and slum households in Jakarta
through the incumbent operator, PT Pam Lyonnaise Jaya (PALYJA). PALYJA, majority owned by interna-
tional water management group Suez, has a 25 year water supply concession contract for western Jakarta and
has been operational since 1997. The project uses output-based connection subsidies to connect low income
households that are located within larger areas that are already served (i.e. areas that are in the proximity of a
secondary main). The project is able to provide services to urban poor households that would not be served
due to their inability to afford the upfront connection charge. The OBA subsidy is successfully able to trans-
fer the performance risk to PALYJA by paying 75% of subsidy upon successful independent verification of
the connection. The remaining 25% is paid after three months of satisfactory service delivery. Construction
began in mid-April 2008. A total of 3,324 household connections have been made as of Feb 2009 but have
not been independently verified yet.
D.6. Monitoring
―Outputs‖ in the water sector mainly include functioning household, yard tap or kiosk connec-
tions to the network. In theory, the monitoring of outputs in the water sector is not dissimilar to
other sectors. But in practice, because the majority of water OBA schemes identified are funded
by GPOBA, and GPOBA tends to fund the hiring of independent verification agents, most water
projects identified involve independent verification engineers.
Key to successful monitoring to learn lessons for future scale-up, government entities should also
be involved. For example, in the Water Supply in Uganda‘s Small Towns project, the indepen-
dent verification agent reports to the Directorate for Water Development of the Ministry of Wa-
ter and Environment. But because of capacity issues in some cases, donor agencies may play a
larger role in projects involving small and local providers.
The Morocco Urban Water and Sanitation project provides a good example of a more elaborate
monitoring and verification system for an OBA scheme. It must be noted that Morocco is a
DAC3 country with significant capacity, and that the service providers in two of the three sub-
projects are major international players (box 20).
106
Box 20: Morocco Urban Water and Sanitation Project
The Kingdom of Morocco obtained a $7 million grant from GPOBA to demonstrate OBA mechanisms to
target sector funds and potential donor monies in support of the Government of Morocco‘s challenge to ex-
tend water supply & sewerage service in recently legalized informal settlements in peri-urban areas, as part of
King‘s National Initiative for Human Development. Two international private sector incumbents (Amendis in
Tangiers and Lydec in Casablanca), and a public sector incumbent (the Régie Autonome de Distribution
d‘Eau et d‘Électricité de Meknès) are the service providers in their respective municipalities.
There are two levels of monitoring for this OBA scheme. A quarterly monitoring report is to be provided by
each operator as part of their progress reports with information on: number of connections made; total num-
ber of beneficiary households; uptake ratio of beneficiary households in each eligible area; average monthly
consumption per beneficiary household; average expenditure on service by beneficiary households; and the
collection ratio for water bills and of connection fees.
A broader range of indicators are monitored on a yearly basis. Some are static indicators, some require regu-
lar monitoring. Examples include: average residential tariff for beneficiary households; project unit costs of
house connection operator and targeted area as per actual incurred expenditure; and, discrepancies with esti-
mated project costs. Additionally, service providers are encouraged to carrying out yearly service satisfaction
surveys on a representative sample of about 10% of final beneficiaries.
As of April 2009, a total of 2,895 water connections and 2,846 sewerage connections (a little over 25% of the
output targets) have been verified as delivered to pre-specification.
107
E. Health
OBA is part of a larger universe of results-based financing (RBF) in the social sectors (figure
17). As described in Section 2, RBF involves payments to a provider, payer (e.g., government
entity) or consumer when measurable actions are taken or defined performance targets are
achieved. While all OBA health contracts are RBF, not all RBF contracts are OBA. In order for a
RBF scheme to be considered OBA, it must meet three criteria:
Involve a subsidy that covers a funding gap
Contract service delivery and tie payments to outputs
Contractor to bear at least a part of the performance risk of the intervention.
Results-based mechanisms that pay a fee for a service provided or that provide coverage similar
to a health insurance58
to beneficiaries, meet this definition of OBA. Other OBA designs involve
results-based contracts for the provision of service, mostly by NGOs that provide service in an
underserved region, or the management of public facilities that usually include block grants and
payments conditional on achieving pre-defined performance indicators. Performance contracts
between donors and governments or different levels of government can be OBA, if they involve
bridging a funding gap, paying for the provision of outputs and transferring performance risks in
a meaningful manner. Cash on Delivery Aid (COD), a new form of results-based aid in educa-
tion proposed by the Center for Global Development, might fall in this category, but COD is
very new and therefore where COD fits in the OBA/RBF universe is not clear (see box 22 in sec-
tion F below).
RBF projects involving performance-bonuses that are usually not considered OBA include inter-
ventions that pay bonuses to individual employees or to community organizations. Conditional
Cash Transfers (CCTs) are RBF schemes that make social transfer payments based on beneficia-
ries taking actions such as ensuring that children go to school and receive medical care. CCTs do
not meet the definition of OBA because they do not involve contracts with providers that transfer
a performance risk to those providers (see box 24 in section F below).
58 This includes schemes where public institutions provide coverage similar to an insurance mechanism. They differ from tradi-
tional insurance schemes in that they usually are publicly managed and cannot decline to enroll individuals. In some cases partic-
ipation in such schemes is compulsory.
108
Projects can combine various results-based and output-based design elements. For example,
the Argentine Maternal Child Health Insurance Program (MCHIP) provides health insurance to
mothers and children in northern Argentina. The project is funded by the Government of Argen-
tina and the World Bank that pay per capita premiums to provincial insurance management
agencies. A part of these payments is based on performance indicators and the provincial agen-
cies contract out service delivery to independent providers on a fee-for-service basis. As of Janu-
ary 2009, MCHIP has funded 115,000 deliveries and 1.5 million child medical consultancies –
benefiting over 527,000 people, almost 80% of coverage of the eligible population of 2008. A
scale-up of the MCHIP (Phase II) began in 2007 to extend coverage to the rest of the country and
has successfully reached 388,118 beneficiaries as of February 2009. It is possible to combine
OBA projects that strengthen the supply of social services with CCTs that stimulate demand for
such services.
E.1. Universe of OBA in the Health Sector
Many traditional health schemes in developing countries work through a centralized government
health system. As a result, there is a risk that decisions are made on a centralized level with little
information on local conditions (decisions on, for example, construction, equipment, and staffing
of clinics as well as procurement and distribution of medicine and other inputs). This system is
complex; poorly aligned incentives and lack of information on local needs can result in a dearth
of inputs, inadequate and poorly maintained infrastructure and absenteeism of personnel. Using
OBA
CCT
COD
Performance Bonuses
RBF
Fee for service
(Quasi) insurance
Figure 17: The Universe of Results-Based Financing
109
input-based health care systems also decreases transparency on who benefits from public fund-
ing. The World Development Report 2004 highlights how the relatively wealthy benefit more
from public spending than the poor do (WDR 2004, p. 38ff).
Most countries have publicly funded health care systems and systems that exclusively rely on
out-of-pockets are rare59
. As a result most health care systems already involve ongoing funding
of service delivery. In many cases the use of OBA in health has not so much the aim of making
additional subsidy funding available but rather to increase the efficiency of existing health care
spending by better aligning incentives.
The earliest output-based health schemes in developing countries were schemes to increase
access to family planning in Korea and Taiwan in the early 1960s. The growth in OBA schemes
in the health sector in the WBG over the last few years is an important example of the sector‘s
drive for results. The portfolio of OBA health projects has grown from $230 million in 2004 to
$1.3 billion in 2008. The majority of these projects, both in number and in value, are in LCR
(figure 18). The 2007 World Bank strategy for Health Nutrition and Population calls for an in-
crease in the "proportion of output-based lending in health‖.
Figure 18: Distribution of WBG OBA Projects in Health
Three principal ―archetypes‖ of OBA contracts in the health sector have been identified:
1. Performance-based contracts to provide health services
2. Performance-based contracts to provide health ‗insurance‘ coverage
3. Performance-based contracts to build and maintain facilities and provide health ser-
vices.
Projects that directly provide health services to poor target groups, mainly by contracting out
services to independent service providers such as NGOs or local clinics, are the most common
59 However, in reality a lack of adequate public service in many poor countries, means that large parts of the population ( includ-
ing the poor) have to pay a substantial share of their health expenditures out-of-pocket.
AFR21%
EAP5%
LCR55%
MENA1%
SAR18%
Regional Distribution of WBG OBA Projects in HealthTotal: US$ 179 m
AFR50%
EAP14%
LCR14%
MENA4%
SAR18%
Regional Distribution of WBG OBA Projects in HealthTotal: 22 Projects
110
form of OBA in health. Projects providing beneficiaries with quasi insurance60
are increasingly
being used, mainly in Latin America. Performance-based contracts with NGOs are mostly being
used when services have to be rolled out in areas without an existing infrastructure or service
providers (e.g., in post-conflict areas) or where contractors take over service delivery from the
public sector. Schemes working with multiple service providers, such as insurance or voucher
projects, usually have a two tier structure, where a project administrator (e.g., voucher manage-
ment agency) has a performance contract with the project sponsor and individual service provid-
ers have performance contracts with the project administrator. In this case service providers
usually compete for patients and are reimbursed with a fixed fee for each intervention covered by
the project. The only scheme identified in which a concessionaire rehabilitates and builds facili-
ties to provide health care service is a hospital PPP in Lesotho involving GPOBA subsidies (and
where IFC were transaction advisors) (box 21).
E.2. Funding
Most health systems require ongoing subsidies for poor beneficiaries so that projects rely on con-
tinued public support. The projects identified were mainly funded through government funds and
international aid. Government funds can be either raised trough general taxes or through health
care contributions (although the latter was not used for any of the identified projects). Interna-
tional aid can be provided by bilateral donors or multilateral development banks.
Contributions to the health care system, for example a fixed percentage of salary, are a common
way of funding health care systems in developed countries. While these schemes have been tried
in developing countries, they are not yet in widespread use. For example, the Ugandan Ministry
of Health has proposed the creation of a National Health Insurance Fund that would be funded
through a tax on salaries, but has not been able to successfully implement it amid opposition by
the Federation of Uganda Employers61
.
Some projects require beneficiaries to make co-payments, depending on their ability to pay.
These contributions can be significant; for instance, in the GPOBA Nigeria Prepaid Health
Scheme beneficiaries pay a share of their insurance premium that increases over time, in total
approximately one-third of the cost of service. User contributions are frequently used as a way to
gauge actual demand by the poor users, even if they are too small to significantly contribute to
the funding of the project (for instance, the GPOBA Reproductive Health Voucher Project in
Western Uganda charges $1.71 for a safe delivery package with an average cost of $72).
E.3. Targeting
The identified projects use a number of different targeting instruments:
At inception, most projects do not have sufficient resources to cover an entire country so that
they use geographic targeting where subsidies are channeled to first reach the poorest loca-
tions
60 Quasi-insurance projects involving per-capita transfers (capitations) from donors or central governments to an implementer are
sometimes referred to as capitation projects.
61 ―Uganda: Employers reject health insurance scheme‖. August 2007. Africa News Update. The Norwegian Council for Africa.
http://www.afrika.no/Detailed/14807.html.
111
Most services offered by the identified projects are basic and usually involve basic health
care facilities that are not attractive to the wealthier population (―self-selection targeting‖)
Some projects focus on marketing of services particularly to poor target groups. For ex-
ample the sale of health vouchers can be focused on poor geographic areas
Projects providing (quasi) insurance can make eligibility contingent on the beneficiaries not
being covered by other (for example employment related) health insurance
The most effective way of targeting, but also the most expensive to implement is by assess-
ing household income (means testing) or by using indicators to estimate household wealth
(proxy means testing).
The identified projects either rely primarily on one targeting mechanism or combine several me-
chanisms to improve targeting efficiency.
The first component of the DRC‘s Health Centre Rehabilitation Support project targets 67 of
the DRC‘s 513 Health Zones62
. The second component of the project targets 89 Health Zones
(16.4% of the DRC‘s population) that have the worst health indicators and little or no donor
and government support.
The Reproductive Health Voucher in Western Uganda Project, which builds on a KfW-
funded pilot project and is co-funded by KfW, works with very basic midwife-operated pri-
vate health centers in rural areas in the greater Mbarara region. Eligibility for participating in
the voucher scheme is determined by mobile voucher sales agents using a proxy means test-
ing questionnaire to determine living conditions as a proxy for household income. The first
OBA healthy baby was delivered in February 28, 2009 and so far, over 60 anti-natal visits
and 5 deliveries have been conducted.
As in Argentina anybody working for the formal sector is already covered by health insur-
ance, the Maternal Child Health Insurance Program is targeted exclusively to women and
children who do not have access to formal insurance.
E.4. Performance-risk
The identified health projects transfer varying degrees of risks to service providers. When service
providers are paid a fee for services performed, they have to invest in infrastructure and equip-
ment to perform services first. Service providers have to purchase inputs such as medicine and
staff their health centers to be able to provide services. If they are not able to provide services at
a cost below the defined reimbursement, they stand to lose money. At the same time they have to
provide services at a level to meet pre-agreed quality standards and attract patients (the latter is
particularly important in projects with multiple service providers that compete for patients). In-
dividual service providers may be able to mitigate part of the pre-financing risk by first using
spare capacity in existing facilities and gradually expanding capacity. Contractors with a conces-
sion to roll-out services in previously under- or un-served areas typically incur a larger up-front
investment and can thus be at greater risk. This risk is typically mitigated by providing part of
62 Project Information Document. 2005. The Democratic Republic of Congo Health Centre Rehabilitation Support Project
(P088751). World Bank. Available at:
http://intranet.worldbank.org/servlet/main?pagePK=250315&piPK=250383&theSitePK=84829&menuPK=250337&Projectid=P
088751
112
the subsidy as block grant, complemented by an output-based bonus for meeting pre-agreed tar-
gets.
Another set of OBA projects tie disbursement of funds to reaching a number of pre-agreed ser-
vice quality, -level or outcome indicators. Such projects can be combined with block grants the
recipient receives up-front to fund part of the operation so that the output-based payment has the
character of a performance-bonus.
One project identified pays a service provider to build and maintain facilities (under a PPP
contract) and to provide service (both under the PPP contract and under a separate OBA con-
tract (for a description of this project, see box 21 on ―New Hospital Public-Private Partnership in
Lesotho‖).
In Rwanda under the PRSC II, health centers are reimbursed for the quantity of services pro-
vided according to a standardized fee structure for 14 services, adjusted by a composite
quality score. Hospital budgets are based on an average annual value per bed. Participating
service providers are at risk of not being reimbursed if they are not able to attract patients and
of losing money if they are unable to provide services of the required quality at a cost below
scheduled reimbursement.
In 2003, two years after the U.S.-led invasion of Afghanistan, the World Bank began the
Health System Emergency Reconstruction and Development (Supplement) project63
. Part of
this was the Extension and Expansion of the Basic Package of Health Services (BPHS)
project, the Ministry of Public Health (MPOH) signs performance-based partnership agree-
ments (PPAs) with NGOs that are competitively selected. The NGOs receive performance
bonuses worth 10% of their contracts if they perform satisfactorily on 10 health indicators.
The MOPH contracted Johns Hopkins University (JHU) to evaluate the performance of the
NGOs.
The original KfW-funded voucher project treating sexually transmitted diseases in rural
Uganda that mainly worked with small health posts and clinics run and operated by nurses
and midwives. A well-designed billing and reimbursement system helped service providers
mitigating access to finance issues by gradually expanding facilities and the range of services
provided. GPOBA and KfW are collaborating on a scale-up.
E.5. Private sector capital and expertise
Table 8 describes the three main types of health service providers in the contracts that were iden-
tified:
63 (P098358)
113
Table 8: Health Service Providers in Contracts to Provide Health Services
Health Service Provider Example
Private sector provider—Private sec-
tor company is contracted to provide
health services
In Uganda‘s Reproductive Health Vouchers program, doctors diag-
nose and treat sexually transmitted diseases (STDs) as well as pro-
viding pre-natal and childbirth services
Publicly owned service providers The Argentina MCHIP project works partially with existing public
sector health care providers that under the new project are being
reimbursed for services rendered instead of an input-based way.
NGO—NGOs are contracted to pro-
vide health services
In Guatemala‘s Integrated Healthcare System (SIAS), NGO are
contracted in two ways:
To deliver services themselves
To manage health districts and contract out health service provision
to other NGOs or the private sector.
In the Extension and Expansion of the Basic Package of Health
Services (BPHS) project64
, the Ministry of Public Health (MPOH)
signs performance-based partnership agreements (PPAs) with
NGOs that are competitively selected.
The amount of up-front capital investment varies drastically for different service levels to be
provided. Projects involving secondary and tertiary care that require specialized facilities and
equipment are more capital intensive than such that concentrate on primary care delivery. An
example for a project with a significant amount of up-front private investment is the Lesotho
Hospital PPP described in box 21. A number of highly effective primary care interventions can
be delivered without the need for specialized facilities or other up-front investments and primary
care interventions can more easily rely on existing basic medical infrastructure and spare capaci-
ty in existing private service providers.
64 Part of the World Bank began the Health System Emergency Reconstruction and Development (Supplement) (P098358)
114
Box 21: New Hospital Public-Private Partnership in Lesotho
Lesotho‘s main public hospital and most advanced medical institution in the country—Queen Elizabeth II
hospital (QEII)—is over 100 years old and performing poorly. The World Bank supports the design and im-
plementation of a Public Private Partnership (PPP) for the replacement of the Queen Elizabeth II hospital and,
including an OBA component. IFC were transaction advisors for this deal.
The project supports the design, construction, financing, and full operation of a hospital by a private partner
for a contract period of 15 years. The project includes improvements to, and support for, the operation of two
outpatient clinics associated to the hospital. A consortium led by Netcare, a South African health services
company, was selected as the private operator. The hospital is expected to be fully operational in the fourth
quarter of 2009.
Total construction costs are expected to reach $72.5 million. Capital costs will be financed 20 percent by the
private sector and 80 percent by the Government of Lesotho. GPOBA will contribute a grant of $6.25 million,
payable over the first five years of the project, which will augment the Government‘s payments.
The GPOBA subsidy aims to allow:
More patients to be seen at a higher level of service at the filter clinics
More patients to be seen at the new hospital, also at a higher level of service.
Payments will be linked to volume and quality of service delivery. Performance monitoring will be conducted
by the Ministry of Health. The GPOBA grant was signed in February 2009.
Sources: Ramatlapeng (2007) and Lesotho New Hospital PPP Project Information Document65
Discipline can be imposed by reimbursing service providers for outputs delivered. This fee-for-
service approach emulates a private delivery model, as patients can freely chose service provid-
ers. The only difference is that payments are made out of public funds and not by the beneficia-
ries‘ themselves. This is observable with the voucher approach where patients can use vouchers
to access the service provider of their choice.
There is some evidence that a combination of freedom to allocate funds under a block grant in
combination with close monitoring of results (and the implicit threat of discontinuing contracts)
imposes discipline on contractors. A controlled study of three groups of service providers in
Uganda, receiving input-based funding, block grants and block grants with performance bonuses,
showed significantly poorer performance of service providers under input-based financing, but
no significant difference between the two groups of service providers that were at liberty to use
block grants how they deemed best (Johannes et al, 2008). The implications of these findings are
not clear. There are several factors that may be contributing to the explanation: an intrinsic moti-
vation to deliver good results, insufficient amount of bonuses or the fact that NGOs were aware
that their performance was to be scrutinized under the study and feared that poor performance
could affect their future ability to raise funds.
Other projects use different forms of paying for outputs or desired results:
65 Project Information Document. 2007. Lesotho New Hospital PPP. World Bank. Available at:
http://intranet.worldbank.org/servlet/main?pagePK=64032287&piPK=64029851&theSitePK=355934&menuPK=355979&Projec
tid=P104403
115
Some projects, such as the Afghanistan Health System Emergency Reconstruction and De-
velopment project, contract service delivery to NGOs. This is usually done by a combination
of a lump-sum contract for service delivery or block grant and a performance bonus. In the
Afghanistan example the performance bonus was 10% of the contract amount, contingent on
meeting 10 indicators
Under Congo‘s Health Center Rehabilitation Support Project, NGOs enter into performance-
based contracts with individual Health Zone administrations and facilities. Such contracts
usually set out performance indicators, such as immunization coverage or outpatient consul-
tation targets. Health worker incentives are tied to performance on a list of indicators, often
summarized by a single score. The health indicators include numbers of outpatient visits, ma-
laria treatments given to children, child immunizations, antenatal visits, and attended births
E.6. Monitoring
As described in the sub-sections above, ―outputs‖ for OBA schemes in the health sector vary
greatly, from ―insurance‖ schemes to actual in-hospital deliveries, immunizations, HIV testing,
and the like. In this section, we describe the processes related to monitoring and verification of
OBA in health.
In the projects that we identified, monitoring and evaluation was performed by government
agencies, NGOs, the private sector, or through self-reporting. Table 9 gives examples of projects
that use each of these groups to perform M&E.
Table 9: Parties Responsible for M&E in Contracts to Provide Health Services
Party Example
Government Agency—M&E is per-
formed by a government agency
In Argentina‘s two Provincial Maternal-Child Health projects, the Nation-
al Health Services Purchasing Team (NHSPT) is responsible for monitor-
ing project coverage. Data on provinces and provider performance is col-
lected by service providers as they record the service deliveries which
form the basis for their payments. NHSPT consolidates the data and eva-
luates it against the tracer goals from the Annual Performance Agree-
ments. The NHSPT and the Provincial Health Services Purchasing Team
(PHSPT) also conduct periodic independent audits of the data, including
surveys of beneficiary participation and satisfaction
NGO—M&E is performed by an
NGO
In Congo‘s Health Zone Project, health service providers self-report on
the services they deliver. These services are then verified by the NGOs
with which the service providers contract
Private Sector—M&E is performed
by a private sector contractor
A large portion of monitoring and evaluation in the DRC‘s Health Centre
Rehabilitation Support project66
is contracted out to a private sector firm
Self reporting Self-reporting is used in a number of projects, but self-reported results are
always verified or audited by third parties. Projects in which self-
reporting is used include Congo‘s Health Zone Project, Argentina‘s two
Provincial Maternal-Child Health projects, and Paraguay‘s Mother and
Child Basic Health Insurance project
66 World Bank project number: P088751
116
In many cases, projects use a combination of different monitoring and evaluation mechanisms.
For example, in the DRC‘s Health Care Rehabilitation Support Project67
, monitoring and evalua-
tion functions are contracted out to the private sector, and carried out by government agencies
and NGOs.
Some health OBA projects used of demographic and health surveys to monitor and evaluate
project success, usually when projects target a large portion of a country or region‘s population.
For example, in Argentina‘s first Provincial Maternal-Child Health projects, data on baseline
tracer coverage was generated by the baseline study being implemented nationwide. It included
both data gathered from provider-based information systems as well as household panel surveys
that include biological impact markers.
A recent article in The Lancet reports that a research team found significant differences between
vaccination figures reported by beneficiaries of the Global Alliance on Vaccines and Immuniza-
tion (GAVI) and such determined through independent surveys (Stephen et al 2008). This differ-
ence ―suggests that […] GAVI may have paid out twice as much in performance rewards as it
should have: $290 million instead of $150 million.‖68
Even if, as suggested by CGDEV69
, part
of this difference can be explained by statistical biases such a tendency of surveys to underreport
vaccination data, this incident highlight the necessity of a combination of a robust monitoring
and evaluation system and independent verification of outputs.
67 World Bank project number: P088751 68 Brown, David. ―Number of Children Immunized Has Been Inflated for Years‖ , Washington Post, Friday, December 12, 2008;
A03 69 http://blogs.cgdev.org/globalhealth/2008/12/new_lancet_article_a.php
117
F. Education
Only a small number of OBA schemes have been identified in the education sector. The chal-
lenge of introducing OBA in education has often been defining the appropriate ―output‖ which
balances achievement of results with reasonable performance risk transfer. Nevertheless, several
schemes have transferred OBA risk to service providers, and these are described below. Further,
an array of results-based schemes such as conditional cash transfers and cash-on-delivery (box
22) have been identified, which are not OBA but can be complementary to OBA.
F.1. Universe of OBA in Education
OBA approaches in the education sector are limited in number. This review identified only four
OBA schemes in the WBG that provide performance-based grants for the actual delivery of edu-
cation services. These include two Female Secondary Assistance Programs in Bangladesh
(FSSAP), Lifelong Learning and Training Project in Chile (LLTP), the Balochistan Education
Support Project (ESP) in Pakistan. The scale of subsidy disbursements ranged from $2.1 million
for the scheme in Balochistan, Pakistan, to over $100 million in Chile, and over $130 million for
the two phases of the Bangladesh FSSAP. Two of the schemes aimed at improving student
enrollment, attendance and quality of education, and one of them provided learning opportunity
for adults. All schemes employed extensive government co-funding.
The review also identified several OBA schemes in education outside of the WBG in middle and
high income countries. These include a scheme for low-income populations in Colombia, Special
Education Vouchers in the United States, and the entire education system of Denmark.
Box 22: Cash-on-delivery Aid (COD)
COD is a results-based approach proposed by the Center for Global Development (CGDEV) as a hands-off
approach to improve results in the education sector. CGDEV proposes to pay the recipient government ―$20
for every student that takes a standardized competency test in their last year of primary school and $200 for
each additional child over an enrollment baseline who takes the standardized competency test‖ (Birdsall et
al 2008).
The concepts of COD and OBA are very similar and as there are no COD projects in advanced stage of
preparation or implementation it is difficult to assess how the two concepts are different. Based on the initial
proposal it appears that the main difference between OBA and COD is that the recipients on COD would be
on the governments and that COD contracts would not specify how funds are passed on to service providers.
It is also proposed not to tie COD subsidies to a specific and existing funding gap, but see them as pure in-
centive payments to governments. However, in practice this may turn out to be an artificial difference given
that government funding is fungible.
OBA projects on the other hand usually either disburses funds directly to service providers or passes money
through national governments based on an existing contract between governments and service providers.
Also, OBA usually is explicitly used to bridge a pre-existing funding gap that prevents the poor from ac-
cessing basic services.
OBA in education usually involves output-based payments to schools for the enrollment and at-
tendance of specified school-age children, and will often include school achievement as a per-
formance indicator. For example, female students in Bangladesh were required to score at least
45 percent in tests (box 23). In addition to demonstrating increased attendance, in the Pakistani
118
ESP, Balochistan schools had to demonstrate an annual increase in learning achievement in lan-
guage and mathematics to qualify for subsidies.
Box 23: Bangladesh Female Secondary School Assistance Project
The two phases of the Bangladesh Female Secondary School Assistance Project (FSSAP) aimed at increasing
school enrollment and attendance of girls, and improving the quality of secondary education. FSSAP I pro-
vided stipends to female students in grades 6-10 attending at least 75 percent of the time and obtaining annual
examination marks of at least 45 percent. Originally, stipends amounted to $18-$45 per student per year, but
were reduced to $5-$16 by 2001 to accommodate more students. The stipends and tuition were to cover full
tuition and Board examination costs and an increasing proportion of school fees, textbooks, stationery, uni-
forms, shoes and transport. The tuition fees were disbursed to schools, while the stipends were paid to girls.
Over the life of the FSSAP I project, enrollment of girls in supported schools more than doubled, and overall
about 1.6 million girls received stipends (the program funded 4.9 million girl-years compared to a planned
3.32 million girl-years). FSSAPII largely followed the OBA approach of its predecessor. It funded 6.9 million
girl-years of education (compared to a planned number of 6.3 million girl-years).
Source: ICRs
F.2. Funding
The funding for the identified OBA schemes in education comes from a variety of sources: IDA
or IBRD, Government revenues, parent contributions and private investments.
In the Pakistani ESP scheme, private schools receive annual subsidies for operational
costs and monthly subsidies linked to student enrollment and attendance in the first three
to four years, after which they will operate on a combination of governmental subsidy
and student enrollment fee. In the case of public schools, the project funds the recurrent
costs of the first two years of operation, linked to student enrollment and attendance, and
the government will take over in the third year.
In the Bank-funded Bangladeshi FSSAP scheme, total project funding amounted to $88
million for FSSAP I and $144.6 million for FSSAP II and is a combination of IDA and
Government money in which the latter provided 27 percent and 16 percent respectively
of the total. FSSAP II also succeeded in involving the community which offered in-kind
contribution estimated at about $200,000.
In the Lifelong Learning and Training Project, IBRD is matching the $75 million contri-
bution of the Government of Chile – a demonstration of strong commitment to the project
- with a $75 million loan.
Schemes where ‗money follows student‘, usually referred to as voucher schemes, are a common
method of funding targeted education programs. The scheme in Colombia targets a specific pop-
ulation: children from the lowest two socio-economic strata. The Special Education Vouchers
programs in four states of the U.S. – Arizona, Florida, Utah and Ohio, and the targeted voucher
scheme in Colombia were designed to reach a limited number of beneficiaries70
. On the other
hand, Denmark‘s voucher system is nationwide and covers all school-aged children.
70 Voucher schemes are generally controversial, particularly in the US, where teachers unions claim that they erode the public
education system and libertarians fear public domination of private schools. Other critics claim that public funding of religious
119
F.3. Targeting
The OBA educational schemes in developing countries mostly aim to target services to low in-
come households. Geographic targeting is common, particularly where projects are small and
thus confined to a specific geographic area. In countries where the literacy gap between male
and female students is significant, the OBA schemes can target girls in particular. For example,
the districts for FSSAP in Bangladesh were identified based on their economic level of develop-
ment, low female literacy rates and low female attendance levels. The ESP in Balochistan, Pakis-
tan required schools to enroll at least 40 percent girls. Other examples of targeted subsidies are
the Special Education Vouchers program in the U.S. which is designed for children with disabili-
ties.
Some schemes make use of existing means testing or proxy means testing system, in order to
avoid subsidizing wealthier students already enrolled in private schools. For example two OBA
education schemes in Colombia make use of the existing social stratification mechanism that is
also used to allocate subsidies for infrastructure services. The education voucher project led to
considerable enrollment among the poor, as well as lower costs to the government due to compe-
tition, and improved achievement results.
The Lifelong Learning and Training Project in Chile relies on self-selection and targeted market-
ing to provide vocational training to adults between 15 and 65 years of age. It is considered that
vocational training is only attractive to the three lowest income deciles, as most people in higher
income deciles have higher degrees of education and the income gains expected to result from
vocational training are not sufficient to make the program attractive to higher income deciles.
F.4. Performance-risk
The challenge of introducing OBA in education has often been defining the appropriate ―output‖
which balances achievement of results with reasonable performance risk transfer. This is com-
plicated by the fact that academic achievement of targeted students is often not fully under the
control of the service provider, but also of the household and the child him/herself -- see box 24
on Conditional Cash Transfers. Further, since the provision of education services is often the re-
sponsibility of local public institutions, there remains the question of whether the service provid-
er is properly incentivized to manage performance risk. These may be amongst the reasons why
so few OBA schemes in the education sector were identified.
Nevertheless, schemes have transferred OBA risk to service providers, although the degree of
success clearly varies. The Balochistan ESP tasked the Balochistan Education Foundation, a
semi-autonomous apex financing institution, with the project implementation. Another example
of performance risk transfer is the Concession Schools program in Bogota where private school
operators are responsible for meeting the pre-established targets on standardized tests and drop-
out rates for two consecutive years in the public schools managed by them in order to qualify for
state funding. In the case of the Lifelong Learning and Training Project, the performance risk is
born by the Government of Chile that pre-finances all project expenditures and submits to the
schools violate the separation of state and church. As a result some voucher schemes in the US were subject to litigation and
ballot initiatives to introduce or maintain voucher schemes were unsuccessful.
120
Bank the expenditure support documentation of those expenditures to be financed under the pro-
posed Loan for reimbursement purposes.
Box 24: Conditional Cash Transfers in Education and OBA
There are a variety of other results-based schemes ongoing in the education sector, such as Conditional Cash
Transfer (CCT) schemes. CCT schemes in education are not OBA in that there is no performance risk for the
supplier of education services (private schools, public schools, municipalities): the subsidy is not channeled
to the service provider for costs incurred ex ante (e.g., building the school, providing materials, or paying the
teachers). CCT schemes instead focus on the demand-side of education services by providing incentives for
families to send their children to school and thus choosing to invest in an education, which may have an op-
portunity cost for the family (e.g., work on the family farm).
While CCT schemes are not OBA, OBA and CCT schemes are complements: CCT provides an incentive for
the demand for education, while OBA provides the incentive for the supply of education – both of which are
needed, particularly in social services sectors where the benefits of services such as education (and health) are
not always apparent to poor households, or, hold a high opportunity cost in terms of perceived income for-
gone.
In the Bangladesh FSSAP, the tuition transfers to schools were combined with a stipend payable to girls to
provide families with an incentive to send their girls to school. Not only has this resulted in unpredicted in-
crease in demand for education of female students in Bangladesh – nationwide female participation grew
from 44.7 percent in 1994 to 58.68 percent in 2000 – but it is also hypothesized that the scheme has prevented
a large number of early marriages.
F.5. Private sector capital and expertise
Education is largely provided and financed by governments through ongoing subsidies. The use
of private sector capital and expertise can be split into two main categories: building and main-
taining infrastructure, and, providing education services (teaching). Private sector capital is
mainly leveraged to build and operate and maintain education infrastructure. Projects can also to
some extent rely on existing infrastructure, where for example vouchers pay for additional stu-
dents in existing private schools.
In the case of provision of education services, the private sector has the advantage of being able
to more effectively manage teacher performance and remuneration. Public schools usually do not
have authority to hire and dismiss teachers, so that it is difficult to increase staff if the work load
requires this or to hold non-performing staff accountable. The Bogotá Concession Schools pro-
gram explicitly intends to mobilize private expertise in managing publicly provided school infra-
structure. The Concession Schools program specifically targeted marginalized, low income
areas in need of school spaces. Rather than providing vouchers to children to choose a public
school outside the community (which would entail transportation costs and overcrowded classes),
the Government built new schools and employed private service providers to manage them. Each
of the 25 newly-built schools accommodates between 800 and 1,200 students, and invests a larg-
er share of its budget in nutrition, textbooks and educational materials than regular public
schools (box 25).
In addition, unmet demand for education coupled with limited government budgets is obliging
the public sector to develop innovative partnerships with the private sector. In developing coun-
tries where scarce government resources cannot provide education for all, partnering with the
121
private sector may be a solution. The inclusion of low-fee private schools in the Balochistan
Educational Support Project was based on the successful implementation of a pilot phase in
which private schools supplied low-cost, high quality education for girls from very poor urban
areas of the province. The private schools selected by the project receive annual per-student sub-
sidy for facilities and material cost, and a monthly subsidy linked to student enrollment and at-
tendance.
Box 25: The Impact of PSP in the Concession Schools Program in Bogota
The public-private partnership in Bogota has been created to provide education to 45,000 students from low-
income neighborhoods and serves as evidence of the positive impact the private sector involvement has on
attendance and school attainment. The program is based on a bidding process in which the applicant must
demonstrate previous experience in the education sector. The winning private school operators are responsi-
ble for meeting pre-established targets on standardized tests and drop-out rates for two consecutive years in
the public schools managed by them in order to qualify for state funding. The following encompasses the im-
pact of the program:
First, the private participation model applied an already proven pedagogic model. It made the con-
cession schools financially stable since the state paid a fixed sum per student, and more focused on
academic achievement as the selected private operators had a history of high test scores.
Second, the freedom to choose the teaching and administrative staff led to a better quality of educa-
tion than in the public schools where the teachers‘ union made it difficult to implement staff changes.
On average, 55 percent of the subsidy amount was allocated to human resources, well below the 90
percent in the public school system, freeing up 33 percent for nutritional support and education mate-
rials.
Third, the eligibility of private operators for continued support depends on meeting pre-established
standardized test scores, which emphasizes the importance of higher quality of education rather than
mere good school operation.
Finally, private sector providers are interested in partnering with parents and the community, which
helped reduce the dropout rates and improve educational attainment, compared with regular public
schools.
Source: Barrera-Osorio (2007)
F.6. Monitoring
The main difficulty of output monitoring in education is to find a definition of an output that is
meaningful, measurable and does not distort incentives. Voucher schemes deal with this by as-
suming that parents chose the ‗best‘ school for their kids, given they have a number of schools to
chose from. As a result voucher schemes only need to monitor school enrollment and possibly
attendance. Other models that retain third parties to provide services but do not involve school
choice, such as school concessions, need to monitor more sophisticated output indicators. One
possible way of doing that is through standardized tests. Standardized tests, however, have the
disadvantage that they may provide an incentive for ‗teaching to the test‘71
and for cheating in
order to secure funding. To mitigate this, the Center for Global Development‘s (CGDEV) con-
71 Questions in a standardized test can only be an imperfect proxy for the skills they are supposed to measure. ‗Teaching to the
test‘ means that teachers focus on teaching a narrow skill set they may deem is needed to solve questions they anticipate could be
asked in a test. The result could be deteriorating standards of education, even if test scores improve. This one of the criticisms of
standard-based reform such as the No Child Left Behind Act in the US.
122
cept of Cash on Delivery proposes to tie incentive payments to standardized test taken and re-
sults published.
Examples of monitoring in OBA projects in education include the following:
In the Balochistan ESP, monitoring of schools is carried out by the Field Supervisors of
BEF and Implementation Partners, while Parent Education Committees regularly collect
data on enrollment, attendance and completion rates.
To qualify for IDA funding, the Directorate for Secondary and Higher Education in Ban-
gladesh had to submit annual project reviews and recommendations. Weak monitoring
capacities can lead to project shortcomings. Acknowledging that, FSSAP II decided to
dedicate funds to establishing a uniform management information system to avoid over-
or under-reporting of data, established a monitoring and evaluation team and developed
an integrated database.
On the other hand, the US Special Education Voucher schemes do not seem to include an
element of academic/quality assessment, and therefore although the disabled children are
receiving an education, the quality of this education does not appear to be assessed as part
of the monitoring/voucher system.
123
Annex III: Comparison of OBA portfolio to total WBG portfolio FY 2000 – 200972
72 The proportion of OBA funding for the year 2004 are unusually high as in this year a few relatively large transport projects and a couple of relatively large health projects were
approved.
2000 2001 2002 20 03 2004 2005 2006 2007 20 08 Grand Total
OBA 31.0 9 82 .58 1 32.55 67.50 742.96 247.4 6 381.59 1 31.58 403.42 2,220.72
Education - - 108.95 - - - 2.10 - - 111.05
Energy and Mining - 1.40 16.10 38.55 18.00 6 .10 5.09 12.48 12.35 110.06
Global Information/Communications Technology - 27.73 - 1.04 20.15 8 .90 10.33 1.87 2.50 72.52
Health, Nutrition and Population 20 .00 - 5.00 - 196.00 12 .30 323.65 69.30 44.79 671.04
Transport 11 .09 23.15 - 27.60 470.80 193 .30 39.27 24.00 330.00 1,119.21
Water - 30.30 2.50 0.31 38.01 26 .86 1.15 23.93 13.78 136.84
Total 5,538.6 0 6,704 .69 6,8 31.31 7,333.36 9,400.19 8,214.1 1 8,608.02 11,1 35.82 1 0,635.11 74,401.20
Education 702 .34 838.98 1,249.24 1,651.41 1,435.80 1,246 .46 1, 428.53 1,452.40 1,321.87 11,327.02
Energy and Mining 1,102 .69 965.72 1,573.18 810.86 1,094.02 1,865 .87 2, 766.33 1,320.01 3,587.05 15,085.72
Global Information/Communications Technology 109 .35 65.00 37.46 13.60 22.00 68 .78 15.00 214.50 7.20 552.89
Health, Nutrition and Population 1,035 .85 1, 015.73 1,139.99 1,378.64 1,829.32 894 .17 1, 010.80 1,814.33 604.70 10,723.52
Transport 1,668 .77 2, 880.30 2,417.31 2,852.75 3,920.96 2,473 .19 2, 572.37 3,919.70 3,783.76 26,489.11
Water 919 .60 938.96 414.13 626.10 1,098.10 1,665 .64 814.99 2,414.88 1,330.53 10,222.93
Grand Total 5,569.6 8 6,787 .27 6,9 63.86 7,400.86 10,143.15 8,461.5 7 8,989.61 11,2 67.40 1 1,038.52 76,621.92
OBA as % of total portfolio 2000 2001 2002 20 03 2004 2005 2006 2007 20 08 Grand Total
Education 0.00% 0.00% 8.72% 0.00% 0.00% 0.00% 0.15 % 0 .00% 0.00% 0.98%
Energy and Mining 0.00% 0.14% 1.02% 4.75% 1.65% 0.33% 0.18 % 0 .95% 0.34% 0.73%
Global Information/Communications Technology 0.00% 42.66% 0.00% 7.65% 91.59% 12.94% 68.88 % 0 .87% 34.74% 13.12%
Health, Nutrition and Population 1.93% 0.00% 0.44% 0.00% 10.71% 1.38% 32.02 % 3 .82% 7.41% 6.26%
Transport 0.66% 0.80% 0.00% 0.97% 12.01% 7.82% 1.53 % 0 .61% 8.72% 4.23%
Water 0.00% 3.23% 0.60% 0.05% 3.46% 1.61% 0.14 % 0 .99% 1.04% 1.34%
Total 0.56% 1.23% 1.94% 0 .92% 7.90% 3.01% 4.43% 1.1 8% 3 .79% 2.98%
124
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