pproaches N o v e m b e r 2 0 0 4 N o t e N u m b e r 0 1 Output-based aid in Cambodia Private operators and local communities help deliver water to the poor By Yogita Mumssen After decades of war and social disruption in Cambodia, ties have had to rely on self-provisioning. Many have publicly run water and sanitation services are scarce and made long-term arrangements with unregulated and limited mainly to urban areas. Most communities have often unlicensed private water vendors. While many of had to rely on self-provisioning, and this has increasingly these vendors are small, some have invested thousands meant turning to unlicensed and unregulated private pro- of dollars to deliver piped water service to customers. viders. But while private providers offer relatively good Customers of the private utilities, some of which service, their high one-time connection charges put that have recently been licensed by the Government, are service out of reach for all but the more affluent. Explor- happier with the service received due to better avail- ing how best to reach unserved areas and poor people, the ability and quality than that provided by publicly-run government of Cambodia is piloting an output-based ap- utilities. But much of the population cannot afford the proach in four towns. In these pilot schemes the private service the private companies offer, because of the high operator will be paid on the basis of performance--in large tariffs and, even more important, because of the high part only after it has made a connection to a customer. one-time connection fees (Garn, Isham, and Kahkonen Where the connection is made to a poor household deemed 2000). Moreover, the bidding processes for the con- unable to pay, the operator will receive an IDA-funded tracts these companies won were not always transpar- subsidy. The communities themselves decided which house- ent or competitive, and regulatory monitoring, if it holds would be eligible for the connection subsidy. The exists at all, tends to be weak. contracts for the pilot schemes were won by a joint ven- ture between a Cambodian and a Singaporean company, which bid a connection charge 22­28 percent lower than Testing the water with the cost under public provision. A second batch of four output-based aid towns is being developed for bidding. As part of an initiative to deliver water and sanitation services throughout Cambodia, the government is seeking ways to bring the benefits of privately run C ambodia is among the world's poorest coun- water services to unserved areas and especially to poor tries, with per capita income of only $321 a people. Using funds from an International Develop- year and 41 percent of its population below the ment Association (IDA) credit, it aims to provide water poverty line in 2002. Only a third of Cambodians have and sanitation facilities in about 23 towns through access to a safe water supply, and the record tends to different forms of public-private partnership. Four of be worse in rural and periurban areas. The result is one these towns will use an output-based aid (OBA) of the world's highest rate of infant mortality and morbidity caused by water-related diseases. Publicly owned and operated water utilities provide Yogita Mumssen is an economist in the Global Partnership service in Phnom Penh as well as more rudimentary on Output-based Aid. service in several provincial towns. But because of Special thanks to Luiz Tavares, Task Team Leader, Cambodia decades of war and social disruption most communi- Provincial and Peri-Urban Water and Sanitation Project. Supporting the delivery of basic services in developing countries gpoba cambodia 11.8.04 1 11/8/04, 3:32 PM pproaches mechanism through design-build-and-operate con- and poor. So the OBA schemes may be a relatively tracts, while the other 19 will use design-build-and- efficient use of subsidies, depending on the costs lease (DBL) contracts. (The exact number of towns will associated with targeting. depend on the government's final investment plans The main implementing agency for the IDA-funded and on bidding results.) All the contracts will cover 15 water supply projects is the Ministry of Industry, years. Mines, and Energy, which, along with its Contract Administration Unit, has overall responsibility for Designing the contracts controlling quality, scheduling activities, and monitor- The four OBA contracts differ in design and implemen- ing performance. As regulator, the Contract Adminis- tation from the DBL contracts for one reason: to target tration Unit will ultimately verify the quality of service connection subsidies to poor households. The provider provided, though here again initial verification will be will receive a subsidy payment for connecting each undertaken by an independent engineer. Connection targeted poor household, while it will charge all other prices and tariffs are detailed in the contracts, and customers directly. Payment under the OBA contracts tariff adjustments will be made as needed by the will be based on performance: the operator will receive Contract Administration Unit. More detailed monitor- most of its payment only after connecting poor ing and regulatory arrangements are being developed households. But to reduce payment and prefinancing alongside a more comprehensive regulatory frame- risk, the government will pay 5 percent of the total work. contract amount after the operator completes the initial drilling for deep wells and another 5 percent Awarding the contracts after it completes the detailed design and engineering An open tender was held for the OBA contracts, with of the system. The government will pay 80 percent of private service providers bidding on the basis of the the subsidy per connection for all connections invoiced lowest subsidy required to provide a connection to after receiving certification for each connection from households in each of the four pilot towns. Of the an independent engineer. It will pay the last 10 percent eight firms preselected to bid, two made offers--a (a "functional guarantee") after water quality and Cambodian company and a joint venture between a hydraulic testing are done for each system. Late Cambodian and a Singaporean company. The joint payments will include a modest interest penalty. venture, SINCAM, won all four OBA contracts (and Because the operator will be paid the amount it eventually a few DBL contracts as well). SINCAM bid bid, regardless of how much providing each connection 22­28 percent less for the contracts than the public actually costs, it has an incentive to make the connec- sector comparator price of $500 per connection--the tions as efficiently as possible. While the contracts detail technical specifications to some extent, they allow enough flexibility so that the operator can use the most efficient and effective means of meeting the service standards and requirements. A new regulatory Figure 1. Winning bids for the output-based aid entity--the Contract Administration Unit in the Minis- contracts, by service area try of Industry, Mines, and Energy--has been created to 600 verify that operators do not reduce the costs of connections by lowering standards. An independent 500 500 engineer will perform the verifications initially, until the dollars) regulator develops sufficient capacity to do so itself. 400 385 385 356 356 In contrast with the OBA contracts, the DBL (U.S. contracts are not performance based. Instead, the 300 private operator is paid on the basis of inputs. The 200 operator must provide a connection to anyone within connection its initial service area without charging a connection per 100 fee. The costs of connection are covered by the IDA Cost credit. As a result, the implicit capital expenditure 0 subsidy under the DBL contracts is both higher than in Public Suong Skun Chrey Peam Chi sector Vien Kang the OBA schemes and spread over all customers, rich comparator Supporting the delivery of basic services in developing countries gpoba cambodia 11.8.04 2 11/8/04, 3:32 PM pproaches total capital expenditure per household incurred by the Table 1. Households eligible for the connection government for similar donor-funded water projects in subsidy, by service area the past (figure 1). The OBA contracts were signed in Service area Total Households eligible March 2004. households for subsidya The government believes that future OBA schemes will generate even more interest once greater efforts are Suong 4,408 990 made to disseminate information about such schemes Skun 2,578 1,004 and once their benefits for the poor and the private Chrey Vien 2,682 354 operators become clearer. The presence of an interna- Peam Chi Kang 3,456 660 tional agency like the World Bank--through the IDA aThese are the initial numbers of households determined eligible for the grant funding of the subsidies--to backstop the flow of subsidy. In some cases the numbers have been revised slightly, usually payments to the private operator has helped reduce upward. the risk and attract small and local players. Source: O'Leary 2004 Community participation: targeting groups. These village consultations involved more than 1,600 household members, most of them women subsidies and building capacity (O'Leary 2004). Two criteria were used to select the four OBA towns. Community consultations, including discussions First, the proximity of the town areas to one another to relating to ability and willingness to pay, were also used provide possibilities for some economies of scale and to determine appropriate tariffs and connection fees perhaps scope that could generate interest among for middle- and high-income households. And consul- private providers. And second, location along the route tations about appropriate payment methods--such as between Phnom Penh and Ho Chi Minh City, a dy- installments or one-time payments--led to a decision namic area with relatively strong economic growth that to include different options in the service contract could attract private operators because it includes not between the provider and each customer (O'Leary only low-income customers eligible for subsidies but 2004). also a large and growing population of middle- and high-income customers able to pay for service.1 Progress so far--and After the pilot towns were selected, the next step was to determine which households would receive the next steps connection subsidy. Communities played a big part in Although the OBA schemes are still at a very early this. A household survey was developed within the stage, the Cambodian government has so far generally communities to collect data, and village representa- considered them a success. Implementation has gone tives and commune council members together deter- well, perhaps because the communities made the main mined poverty criteria. Based on these criteria and the decisions about who receives the connection subsidy results of the survey, the communities themselves and were also consulted about fees and payment identified the poor households that would receive the options. Participation has also been key in building subsidy (table 1). An independent consultant later capacity and disseminating information within com- randomly verified the selection of households (O'Leary munities--and all this has led to a broad sense of 2004). The survey also provided a way to inform ownership in the outcome of the OBA schemes. The households about the reforms being undertaken in the private operator has also made clear progress. water and sanitation sector. SINCAM has identified and tested potential water After the poor households were identified, a series sources and will soon undertake an environmental of consultations were held in about 50 villages within impact assessment. Construction is under way, and the four pilot towns. These consultations provided connections should be made in 2005. another opportunity to inform households about the project. They also allowed an opportunity for introduc- ing the concept of water user groups to represent 1Compared with the OBA pilot towns, those chosen for DBL contracts villages and towns--eventually called Clean Water generally have lower growth potential, which should mitigate the less Groups--and identifying likely candidates for the pro-poor subsidy targeting implicit in those contracts. Supporting the delivery of basic services in developing countries gpoba cambodia 11.8.04 3 11/8/04, 3:33 PM pproaches While the OBA mechanism enables the poor to gain framework not only would help protect customers access to service through the connection subsidy, it from abuse by private operators but also should does not tackle the problem of affordability of con- provide operators with greater certainty. sumption, since all water users pay the same rate per The initial success of the project has prompted cubic meter of water consumed. So far, tariffs for more such schemes in Cambodia, and a second batch private network providers have been set so as to allow of four towns is being prepared for a similar OBA them to recover their costs. Whether any detailed mechanism. More than 1,660 poor households have formula is used in practice is unclear. (O'Leary 2004). been identified as eligible for a connection subsidy, With tariffs for the OBA pilot towns ranging from and more are being considered, depending on available 1,800 to 2,000 riels (around $0.50) per cubic meter, financing. Bidding for these towns should take place in households will spend an average of about 4.1­6.4 early 2005. percent of their income on water (based on data from O'Leary 2002). Because these are average figures, poorer households--those eligible for connection References subsidies--can be expected to spend a larger share of their income on water bills, perhaps even if (as is likely) Garn, M., Jonathan Isham, and Satu Kahkonen. 2000. they use other sources for some activities. A rough rule "Should We Bet on Private or Public Water Utilities of thumb for the acceptable level of spending on water in Cambodia? Evidence on Incentives and Perfor- is around 5 percent of household income. Tariff-level mance from Seven Provincial Towns." World Bank, affordability is an important issue being discussed by Washington, D.C. the Cambodian Government, the World Bank, and the O'Leary, Declan. 2002. "Output-Based Aid Report: communities themselves. Socioeconomic Profiles and Processes for Four Pilot As part of the initiative to increase private partici- Towns." Report prepared for the World Bank, pation in water and sanitation, the World Bank and Washington, D.C. other donors are advising the government on the _____. 2004. "Experiences of an Output-Based Aid (OBA) introduction of a new water act to strengthen the Approach for Water Supply in Cambodia." Report regulatory framework. A clearer, more transparent prepared for the World Bank, Washington, D.C. About OBApproaches OBApproaches is a forum for discussing and The case studies have been chosen and presented disseminating recent experiences and innovations for by the authors in agreement with the GPOBA supporting the delivery of basic services to the poor. management team, and are not to be attributed to The series will focus on the provision of water, GPOBA's donors, the World Bank or any other energy, telecommunications, transport, health and affiliated organizations. Nor do any of the conclu- education in developing countries, in particular sions represent official policy of the GPOBA, World through output, or performance,-based approaches. Bank, or the countries they represent. Global Partnership on Output Based Aid World Bank Mailstop: H2-202 600 19th Street, NW Washington, DC 20433, USA To find out more, visit www.gpoba.org The Global Partnership on Output-Based Aid Supporting the delivery of basic services in developing countries gpoba cambodia 11.8.04 4 11/8/04, 3:33 PM