June 2017 Note Number 54 OBA in Infrastructure: The Experience So Far Introduction people in accessing services and to strengthen institutional capacities and financial markets in-country. For every dol- Increasing access to basic infrastructure services is critical lar of infrastructure financing, GPOBA has leveraged $2.4 to reducing poverty and enabling poor and marginal- in additional financing from development partners, the ized people to participate in and benefit from economic public and private sectors, and user contributions. development. Too often, however, the gap between the cost of the initial service connection and a user’s ability to pay How OBA Reaches the Poor for that connection prevents the poor from availing of basic services. Output-based aid (OBA), a form of results- Although subsidized services are common in a number based financing (RBF), addresses this gap, supporting poor of infrastructure sectors, they don’t always benefit poor people in accessing services such as household connec- households, which are often not connected to networks in tions to the water supply or electricity grid, renewable the first place. Moreover, large infrastructure projects of- energy systems, or solid waste management. By promoting ten don’t extend services to poor communities due to lack the inclusion of people who may otherwise be left out of of financial incentives for operators—users may be unable development gains, as well as encouraging utility sector to pay the cost of connection, for instance, or populations reform, OBA supports the goal of universal access to basic are too geographically dispersed. In fragile and conflict- services, one of the aims of the Sustainable Development affected situations (FCS), this marginalization is exacer- Goals. This paper highlights the OBA experience in infra- bated, as the poor suffer the effects of fragility dispropor- structure so far and the results achieved. tionately, and have little or no resources to fall back on. Because OBA specifically targets poor populations, it How OBA Works ensures that the benefits of large infrastructure investment reach those most in need. Connection subsidies create For more than a decade, the Global Partnership on Output- the financial incentives necessary for providers to extend based Aid (GPOBA) has been piloting OBA projects and ex- affordable services to low-income consumers. While most ploring RBF approaches to service delivery. GPOBA works OBA subsidies cover capital costs, projects have also been with implementing partners, public and private, who receive piloted that support access in other ways. For instance, the a payment to partially defray the cost of setting up a connec- OBA payment in an electricity project in Ethiopia covered tion. The service provider pre-finances outputs and services, interest on five-year loans extended to customers by the and OBA payments are made only upon the delivery and utility to pay for connection charges. verification of agreed-upon outputs. Independent verifica- To ensure that aid reaches the desired populations, tion agents (IVAs) are a core component of every OBA OBA carefully tailors targeting methodologies to the project; though they ultimately focus on outputs, they moni- project, country, and context. Methodologies include tor implementation throughout the project cycle, so that geographic, means-tested, self-selection, poverty mapping, obstacles can be identified and adjustments made before the or a blend of these. Geographic targeting can be combined point of final verification. By linking OBA payments with with criteria based on housing characteristics in order to verified outputs, OBA passes the performance and financial better direct subsidies to low-income households. In the risk to the service provider, thus ensuring quality and ac- solid waste management sector, OBA subsidies are better countability and keeping the focus on measurable results. targeted at municipalities with low average incomes than Since GPOBA began implementing access projects at individual households, as waste management is a com- in 2006, it has reached more than nine million people munity-based activity involving shared service provision. through 48 projects in six sectors. Of GPOBA’s total portfolio of $239 million, $199 million is allocated for Leveraging Private and Domestic Finance infrastructure projects, primarily in the energy and water/ sanitation sectors, but also in solid waste management and Innovative financing mechanisms that can unlock private telecoms; $123.2 million of this allocation has so far been capital critical for infrastructure development are becom- disbursed, enabling OBA projects to support 7.5 million ing increasingly important. OBA projects have mobilized Supporting the delivery of basic services in developing countries Table 1. Leveraged Finance in OBA Infrastructure Projects Infrastructure Total GPOBA share Other sources Project Status projects leverage of financing beneficiaries Closed 24 Projects $271m 12% Low-Income Users 5,343,257 $79.4m 29% GPOBA 30% Private Sector 63% Energy Leverage ratio 2.4m 7% Public Sector 28% Water/San 23% Development Partners 9% ICT Ongoing 17 Projects $348 9% Low-Income Users 2,208,510 $100.3m 29% GPOBA 16% Private Sector 63% SWM Leverage ratio 2.5m 20% Public Sector 34% Energy 25% Development Partners 3% Water/San Total 41 Projects $619m 10% Low-Income Users 7,551,767 $179.7m 29% GPOBA 22% Private Sector 55% Energy Leverage ratio 2.4m 14% Public Sector 20% Water/San 24% Development Partners 18% SWM 7% ICT domestic resources, leveraging commercial financing additional GPOBA grant of $15 million under RERED II (e.g., through PPPs, commercial lending, or community helped to mobilize additional financing, including significant equity) to make pro-poor investments viable, and leveraged contributions from development partners and private spon- contributions from development partners, governments, sors, as well as $14 million from the implementing agency and local service users. For every dollar of infrastructure Infrastructure Development Company Limited (IDCOL). investment, GPOBA has leveraged $2.4 in additional financing. The breakdown of leveraged finance is available Building Institutional and Technical Capacity in Table 1. A microfinance pilot in Kenya to increase access to OBA infrastructure projects build capacity at the local lev- water through investments in 35 community subprojects el, partnering with institutions, governments, semi-state was particularly successful at catalyzing private sector bodies, NGOs, public and private utilities, microfinance lending, generating a demand for commercial loans to banks, and local consultants to create more efficient prac- finance small piped-water systems and mobilizing com- tices and operations that can extend beyond the lifespan munity investment. Leveraging financial resources of a of the project. One means of building capacity is through $2.6m grant, the project enabled commercial borrowing of technical assistance (TA). In some cases—such as a gas $3.4 million from K-Rep Bank and mobilized $1.2 million and heating project in Armenia or a rural electricity access in equity from communities for investment. The financing project in Bolivia—TA has preceded and led directly to the mechanism is being scaled up through two water and sani- design and implementation of a subsidy project. But TA is tation projects in Kenya; the water and sanitation project also often embedded in OBA subsidy projects, enhancing in Nairobi has leveraged considerable financial resources, the capacities of clients and service providers. Examples of including a $6 million local commercial loan obtained by strong capacity building in OBA projects are: Nairobi City Water and Sewerage Company. Three other utilities have borrowed $1.5 million, and a pipeline of • Kenya. Collaboration between implementing the part- $12 million is being appraised by commercial banks. In a ner KPLC and the World Bank/GPOBA accelerated water project in Honduras, OBA subsidies of $4 million a surge in connections during the Kenya Electricity leveraged $3 million from additional donors, municipali- Expansion Project. GPOBA supported KPLC during ties, implementers, service providers, and communities, a reorganization that saw management become fully while in Morocco, a water and sanitation project leveraged engaged in tracking project progress, which helped $30 million from public and private sources from an initial improve performance and built trust between slum $7 million grant. residents and KPLC staff. In a solar home system (SHS) project in Ghana, $1.6 • Mali. A PPP involving the Rural Electrification and million in consumer loans was accessed through 12 ru- Household Energy Services Agency (AMADER) sup- ral banks, while an OBA scheme in Bangladesh—part of ported access to mini-grids and SHSs in rural areas. the larger Rural Electrification and Renewable Energy During the recent conflict in Mali, AMADER lost in- Development (RERED) project—leveraged the capacities of house expertise, and GPOBA/World Bank worked with microfinance institutions and the private sector, installing them to enhance technical, procurement, and monitor- almost 500,000 SHSs benefiting over 2.2 million people. An ing capacities. June 2017 Note Number 54 • Nepal. An OBA project expanding access to solid waste management services is building technical ca- pacity in municipalities through careful design of veri- fication processes. Strong TA is supporting preparation of municipalities’ service improvement plans, along with related waste management systems. • Bangladesh. In a PPP for renewable energy, TA in- cluded support for developing sub-project proposals, technical quality assurance, training, and outreach. Subsequently, the implementing partner, IDCOL, trained government technical staff from ten countries in project development. • Liberia. Prior to the Willingness-to-Pay Analysis in Liberia, there was little information on uses of grid elec- tricity in Liberia. The study increased understanding of the Liberia Electricity Corporation’s potential for expan- sion, and provided background documentation for the Government’s Least Cost Power Development Plan. Cross-cutting Impacts Several co-benefits result from OBA projects, such as contri- Developing Local Markets and SMEs butions to climate change mitigation, improvements in qual- ity of life and social welfare for the poor, and positive out- While OBA projects focus on helping the poor to access comes for women. Renewable energy solutions such as SHSs basic infrastructure, they have spin-off effects of strength- not only reduce environmental degradation and strengthen ening local markets, improving the quality of products natural resource management, but—as is true of grid electri- available, and supporting jobs and the development of fication—particularly benefit women and children. small- and medium-sized enterprises (SMEs). A sanitation The electrification project in Ethiopia and the SHS project in Senegal, for example, supported employment project in Bangladesh both reported health improvements for artisans and local workers and saw firms boost their and labor savings. Women spent less time gathering wood capacity to deliver work compliant with project standards, fuels, freeing up time for educational activities, recreation, an improvement likely to attract additional private invest- and productive work. The replacement of kerosene and ment in the sector. other smoke-emitting fuels with grid or renewable energy IDCOL, in Bangladesh, has been particularly effective reduced indoor pollution and improved lighting, resulting in expanding its activities and the SHS market following in lower incidence of respiratory illnesses and improved the initial SHS project. The implementation since 2003 of study conditions for children. RERED led to the growth of local renewable energy engi- Piped water projects can significantly reduce the neering expertise. IDCOL collaborated with local tech- time women spend collecting water, as was reported in a nical universities that customized training programs to project in Andhra Pradesh (India), which also saw an 85 align with market developments. This new local expertise percent drop in water-borne diseases. has been instrumental in piloting other renewable energy technologies, thus expanding the domestic commercial Looking Ahead market for clean energy in Bangladesh. In Ghana, the solar photovoltaic (PV) market was OBA has proven itself strategically relevant for infrastruc- nascent. Because providers did not have standardized ture sectors and economic development in poor communi- products, installations were exorbitantly priced, and the ties. OBA approaches have been scaled up and/or applied industry remained undeveloped. OBA subsidies contribut- across multiple sectors in several countries, and projects ed to rapid development of the market for PV systems and have catalyzed the mainstreaming of OBA into broader sec- increased the interest of PV vendors in rural markets. tor frameworks. With demand for OBA and other results- In Kenya, every dollar spent on a community water based approaches strong, GPOBA is developing projects project realized $3 to $6 of economic benefits, including that include other finance instruments, and leveraging promotion of small-scale enterprises. Water was used for more private sector equity and expertise. GPOBA will productive purposes like small animal husbandry and continue strategic engagements advising government, com- vegetable gardening for profit. Energy projects have also munity, bilateral, multilateral, and development-partner supported household income-generation, as people are initiatives on RBF approaches, so that poor and marginal- able to keep their shops open in the evenings or continue ized communities can access the basic services they need to activities, such as sewing, after dark. improve their livelihoods, health, and quality of life. OBA in Infrastructure: The Results So Far Water & Sanitation Piped solutions   Honduras Water and Sanitation 14,642 yard taps Indonesia Water (Jakarta/Surabaya) 18,515 house/yard connections Kenya Microfinance for Community Water 17,500 connections Morocco Sanitation 12,426 toilets (and water taps) Uganda Small Towns 2,416 yard taps Cameroon Water Affermage 25,254 household connections Mozambique Coverage Expansion 33,407 household connections Philippines Metro Manila 28,562 household connections Vietnam Service Expansion 35,344 household connections At-source and on-site solutions   India UV Filtered Water (Andhra Pradesh) 25 distribution centers Senegal Sanitation 11,495 toilets Uganda (Kampala) 7,524 (yard taps/public water points) Energy Grid-based   Colombia Gas 34,138 household connections Armenia Heating 5,847 household connections Ethiopia Electrification 60,000 household connections India Mumbai Slums Electrification 15 household connections Uganda OBA Facility 36,864 household connections Liberia Improved Access 16,739 household connections Off-grid/on-site solutions   Bangladesh Rural Mini Grid 2,184 (mini-grid/solar water pumps) Bangladesh SHS 497,613 Solar Home Systems Bolivia Decentralized Electricity 11,755 (SHSs/Pico-PV systems) Ghana Rural Energy Access 16,822 (SHSs/solar lanterns) Nepal Biogas 26,363 bio-digesters Telecoms Indonesia Expanding Telecommunications 222 internet access locations Mongolia Universal Access 3 telephone networks (1 public access/2 wireless) About OBApproaches have been chosen and presented by the authors in agreement OBApproaches is a forum for discussing and disseminating with the GPOBA management team and are not to be attribut- recent experiences and innovations in supporting the delivery ed to GPOBA’s donors, the World Bank, or any other affiliated of basic services to the poor. The series focuses on the provi- organizations. Nor do any of the conclusions represent official sion of water, energy, telecommunications, transport, health, policy of GPOBA, the World Bank, or the countries they and education in developing countries, in particular through represent. output- or performance-based approaches. The case studies To learn more, visit www.gpoba.org e Global e Partnership on Global Partnership Output-Based Aid on Output-Based Aid Supporting the delivery of basic services in developing countries