56308 July 2010 Note Number 34 Subsidizing Water Connections in Cameroon How to Apply Output-Based Aid to an Affermage | Philippe Marin, Esther Loening, and Jan Drozdz T he Cameroon water connection scheme that started in 2008 is the first GPOBA project to be implement- ed under an affermage contract. It is also the first subsidized water connection program in West Africa to be implemented through an output-based aid (OBA) mecha- nism. This note highlights the emerging lessons learned from the design of the project, summarizing the challenges and opportunities in applying OBA to the affermage model and how they were dealt with. A second note will share les- sons from the project's implementation. Cameroon lags well behind other African countries in improved water supply. Network coverage is estimated Photo by Arne Hoel (World Bank) at less than a third of the urban population, and water rationing is widespread as a result of insufficient pro- company created in 2006, Camwater, which signed a duction capacity and years of poor maintenance of the concession agreement with the government. After an network. In 2007, with the support of the World Bank international tender, a 10-year affermage contract was and other agencies, the government embarked on a ma- awarded in August 2007 to a consortium led by Office jor institutional reform of the urban water sector. At its National de l'Eau Potable (ONEP), the largest public core is delegation of service provision to an international water utility in Morocco. The private operator took over private operator, following a public-private partnership in May 2008 under a newly established local company, (PPP) approach. Camerounaise des Eaux (CdE). Coupled with the PPP is a major investment program Introducing a private operator-- funded by lenders, most of it to be executed by Cam- and output-based aid water. The exception is a US$10.5 million emergency rehabilitation program, funded by the International The PPP scheme follows the affermage model successfully Development Association (IDA), which was delegated to used in Senegal for more than a decade, and replicated in the operator. Niger since 2001, which transfers operation of the utility The project also includes an output-based aid (OBA) to a private operator while investment remains a govern- scheme to subsidize water connections, which is clearly ment responsibility. The assets of the former national justified. Before, new customers had paid a connec- water utility were transferred to a public asset-holding tion fee of US$200­300, depending on the connec- tion length, along with a guarantee deposit (for future consumption) of about US$50. This up-front cost, Philippe Marin is a Senior Water and Sanitation Specialist in the World Bank's Middle East and North Africa Region. Esther Loening equivalent to five months of income for households in is an Infrastructure Specialist at the Global Partnership on Output- the third income quintile and nine months for those in Based Aid. Jan Drozdz is a Senior Water and Sanitation Specialist in the fifth, was prohibitive for low- and middle-income the World Bank's Africa Region. households. Supporting the delivery of basic services in developing countries Subsidized connection schemes have been very contractually responsible for installing new con- successful in expanding access in several other West nections. Yet it is the public asset-holding company African countries, especially under affermage con- that decides whether, where, and when to expand tracts in Côte d'Ivoire, Senegal, and Niger. Families the distribution network. Lack of funds, delays in living in urban neighborhoods identified by the civil works, or problems of coordination could all government as poor were eligible for a free connec- adversely affect the implementation of an OBA tion and required to pay only the guarantee deposit. scheme. Cameroon's government approached the Global Partnership on Output-Based Aid (GPOBA) during Yet incentives for the private operator to expand the early design phase for the affermage contract to access are stronger under an affermage than under a discuss options for replicating such an approach with concession. As in a concession, the operator's remu- support from a GPOBA grant. neration is based on revenue from water sales, giving it a strong incentive to increase the number of connected The affermage environment households. But unlike in a concession, the operator does not invest its own money in system expansion, so The Cameroon program does not merely replicate the it has every interest in pushing for more coverage. subsidized water connection programs implemented under affermage contracts in Côte d'Ivoire, Senegal, and Adapting output-based aid Niger, all of which were based on a traditional, input- based disbursement approach. Indeed, it is the first such The design of the OBA scheme follows the broad logic program designed around output-based principles. of an affermage PPP arrangement, in which the asset- It is also the first to be implemented by GPOBA holding company is the concessionaire of the services under an affermage arrangement. All subsidized water and delegates their management and delivery to a connection programs previously implemented by private operator. Thus Camwater is the contractual GPOBA involved a concession (as in Manila, Philip- counterpart of GPOBA and de facto recipient of the pines, or Casablanca, Morocco), small-scale providers grant, while a special clause in the affermage con- owning the infrastructure (as in Uganda), or a public tract specifies that it delegates implementation of the utility (as in Meknès, Morocco). In all such cases the GPOBA program to the private operator. An annex to service provider responsible for implementing the the contract outlines the OBA scheme, clarifying the OBA project was also responsible for operating the allocation of risks and responsibilities. utility and funding and carrying out investment. De- The project partners decided that Camwater, not ciding which entity should be in charge of implement- the private operator, would take the prefinancing risk ing the OBA program and take the prefinancing risk for new connections. Having the operator, as service was therefore straightforward. provider, directly bear the up-front prefinancing risk This is not so under an affermage PPP arrange- would have been more in line with the traditional ment, which splits the responsibilities for operation OBA approach. But it would have departed from the and investment between two main actors. In an OBA spirit of an affermage, where most financing risks scheme this has important consequences for the de- remain with the public partner. The more typical OBA sign of the subsidy scheme and for the framework of option was abandoned after consultation with poten- risks and incentives. tial bidders, which were reluctant to take additional financial risks in Cameroon. · The contractual arrangement for the OBA scheme Financial incentives for expanding access to poor must accommodate the presence of two players households were enhanced. Under an affermage the rather than just one: the private operator, which private operator normally has a financial incentive to has the direct relationship with customers, and the expand access, since its remuneration is directly linked public asset-holding company, which is responsible to sales volume. But poor households often have very for financing investment and carries the infrastruc- low water consumption (one to three cubic meters a ture assets on its books. That requires answering month), which may make them unprofitable custom- such key questions as who should be in charge of ers. The Cameroon affermage introduced a new fea- implementing the program and who should take ture: in addition to the volumetric fee (about US$0.36 the prefinancing risk. per cubic meter), the operator is entitled to receive · The separation of operation and investment cre- the fixed monthly subscription paid by each customer ates potential risks. The private operator is the one (about US$3), which in the affermages in Senegal and July 2010 Note Number 34 Niger goes instead to the asset-holding company. This cioeconomic profile of beneficiaries. Two factors drove greatly increases the operator's revenue from provid- this decision: the difficulty of applying such criteria ob- ing services to newly connected poor households. jectively in Cameroon and the de facto social segrega- tion resulting from the lack of network expansion over Structuring the subsidy scheme many years, with well-off households concentrated in neighborhoods already covered by the network. Only The project partners agreed that responsibility for two "ring-fencing" eligibility criteria were established: funding the subsidy would be broadly shared between the connection should be of small diameter (up to 15 Camwater and GPOBA and that beneficiaries would millimeters) and the beneficiary households should not have to pay at least 10 percent of the remaining connec- be in newly developed residential areas. tion cost (depending on connection length) in addi- To complement this approach, the project team de- tion to a guarantee deposit covering three months of cided that detailed socioeconomic data on beneficiary consumption. This means a slightly higher connection households would be collected during the quarterly cost for beneficiaries than in other subsidized connec- audits and that the project could include enhanced tion schemes in West Africa. But the larger contribution targeting criteria after the midterm review if the data from beneficiaries in Cameroon, where the very low show that a significant share of beneficiary house- initial coverage was expected to lead to strong demand holds are not poor. Most households lacking connec- for connections, would mean that more households-- tions can hardly be considered rich, however, as even hopefully, more poor households--could be funded households in the third income quintile live on only through the program than would otherwise be possible. about US$2 a day.1 GPOBA approved a grant of US$5 million to Disbursement. Camwater is responsible for estab- fund the project over four years. With the counter- lishing a dedicated account, the subsidized connec- part funding to come from Camwater, the subsidy tion fund, with an initial deposit of US$0.8 million. amounts to about US$10 million over four years, The private operator draws from this fund to finance enough to install about 40,000 new water connections. the installation of eligible new connections. Follow- This is expected to translate into an increase of about ing quarterly audits by the independent verification 5 percentage points in national urban water coverage. agent confirming that the physical installation of Targeting or no targeting? The project partners new connections charged to the fund complies with decided that during the early phase the project would project rules, the account must be replenished by both not establish specific targeting criteria based on the so- Camwater and GPOBA (figure 1). Figure 1. Flow of funds and sequence of actions under the Cameroon OBA water scheme Concession contract Camwater GPOBA (asset-holding company) 1. Initial SCF funding by 5. Periodic replenishment Camwater by both GPOBA and Camwater Subsidized connection fund (SCF) 3. CdE withdraws funds to install connection Affermage contract CdE (private operator) 2. Household pays 10% fee 4. CdE installs new contribution and initial deposit connection Beneficiary household the existing network theoretically can request a con- Early progress and lessons nection of more than 50 meters. But in most cases it is more efficient to install a tertiary network, reducing The experience in Cameroon shows that the OBA the connection length while allowing more house- approach can be successfully adapted to an affermage holds in the same street to connect. The need to install scheme, despite the complications and additional risks tertiary networks is testing Camwater's capacity to created by the separation of operation and invest- rapidly execute the civil works necessary to expand ment responsibilities and the presence of a public the distribution system. asset-holding company. Given the market context and significant country risk, the project partners opted for The future a two-layer structure, with the asset-holding company being the nominal recipient of the GPOBA grant and It is still too early to predict whether the OBA project bearing the operational risk. This was essential for the will succeed. Its outcome rests almost entirely on the successful tender of the PPP. success of the PPP scheme. The scope of the institu- The private operator has rapidly put in place what tional reform being implemented makes achieving is needed for sustained expansion. Before the start of that success a challenge. Yet the PPP approach chosen the affermage, the national utility was able to install has worked well in other West African countries, and only a few hundred new connections a year (essen- Camwater and the private operator have from the tially benefiting a few developers in rich neighbor- outset collaborated closely in finding practical solu- hoods of Yaoundé and Douala). That left a backlog of tions to critical issues (such as network extensions). 8,000 connections, already paid for by households, to The two partners are now carrying out an extensive be installed. The first task of the new operator was to communication campaign to inform the public about import the parts and equipment for installing con- the scheme. In the future Camwater may consider nections and put in place teams to carry out the work. disbursing the project's IDA funds, earmarked for the The operator decided to rely on local subcontractors, installation of 20,000 social connections, through the which were identified and trained. In the first three subsidized connection fund put in place for the OBA months the operator cleared 60 percent of the back- project rather than using a traditional input-based log, confirming its strong commitment to expanding mechanism. access. Having won the contract through a very com- petitive offer, the operator needs to greatly expand access so as to recover its costs over the life of the PPP. Coordination for network extension is an urgent 1 To learn more about targeting methodologies used in OBA projects, see Yogita Mumssen, Geeta Kumar, and Lars Johannes, priority. As the population has become aware that a "Targeting Subsidies through Output-Based Aid," OBApproaches credible operator is in place and a subsidy program 22 (GPOBA, Washington, DC, 2008), http://www.gpoba.org/ exists, demand for new connections is increasing. gpoba/node/118. Under the current arrangement, households far from About OBApproaches OBApproaches is a forum for discussing and disseminating The case studies have been chosen and presented by the au- recent experiences and innovations in supporting the delivery thors in agreement with the GPOBA management team and are of basic services to the poor. The series focuses on the provi- not to be attributed to GPOBA's donors, the World Bank, or any sion of water, energy, telecommunications, transport, health, other affiliated organizations. Nor do any of the conclusions rep- and education in developing countries, in particular through resent official policy of GPOBA, the World Bank, or the countries output-, or performance-, based approaches. they represent. To find out more, visit www.gpoba.org e Global Partnership on Output-Based Aid e Global Partnership on Output-Based Aid Supporting the delivery of basic services in developing countries