pproaches33160 A p r i l 2 0 0 5 N o t e N u m b e r 0 6 Output-based aid in Chad Using performance-based contracts to improve roads Tim Hartwig, Yogita Mumssen, and Andreas Schliessler D espite Chad's recent debut as an oil exporter, its people rank among the world's poorest. Large parts of the country are left in extreme isolation by the lack of a backbone road network that is passable year-round. To tackle the poor internal integration, the government formulated the National Transport Program in 1999. And to address the need for sustainable road maintenance, it started a pilot project that moves from traditional input-based planning and contract- ing of maintenance to the more output-based approach known as performance-based maintenance and management of roads (PMMR). The International Development Association has pro- vided funding for the project as part of its efforts to support an Before PMMR efficient and sustainable transport infrastructure--essential for promoting economic growth and development and for achieving the Millennium Development Goals. A private operator has been contracted to provide road services. Results so far are encourag- ing, and the government plans to expand the share of the road network covered by PMMR contracts. The PMMR arrangement is being replicated elsewhere in Sub-Saharan Africa, including Burkina Faso, Cape Verde, Madagascar, and Tanzania. Chad ranks among the world's poorest countries, with annual per capita income of $250 and four-fifths of its population living on less than a dollar a day in 2004. The high poverty levels are related in part to After PMMR Chad's often harsh environment and to the scattering of its population among regional enclaves. In some Chad has been contracting out all road mainte- seasons traveling to markets to sell or purchase food nance to private contractors since 1994. While this has and other necessities becomes nearly impossible. The brought some improvements over the previous force Salamat region, for example, known as the potential account arrangements, the results are still less than breadbasket of Chad, remains mostly unreachable for satisfactory. One reason is the use of traditional civil larger vehicles for up to half the year. Transport costs works contractual arrangements for road mainte- can sometimes represent well over half the price of nance. Contractors are responsible for carrying out goods sold in the market. physical works defined by the government and are paid Of Chad's primary road network, consisting of around 6,200 kilometers of roads, only about 10 per- Tim Hartwig is a consultant in the World Bank's Africa Transport cent are paved. The rest are mostly earth roads that are Department. Yogita Mumssen works at the Global Partnership on largely impassable for several months of the year. In ad- Output-Based Aid. Andreas Schliessler is a senior transport dition, 30,000 kilometers of more rudimentary tracks economist at the World Bank and the task team leader of the Chad link villages and provide access to the primary network. National Transport Support Project. Supporting the delivery of basic services in developing countries pproaches on the basis of the "inputs"--that is, the execution of works. So they have a vested interest in executing large, Box 1 Defining output-based aid: Chad's PMMR lumpy works and little or no incentive to carry out the Output-based aid (OBA) is a mechanism for provid- many small activities needed to ensure that roads are ing explicit performance-based subsidies to support the in good condition over a long period. This contracting delivery of basic services where policy concerns-- approach has generated a vicious circle of heavy reha- such as limited affordability for some consumers, a bilitation works followed by long periods of neglect desire to capture positive externalities, or the infea- and thus rapid deterioration. Adding to the problem sibility of imposing direct user fees--justify public has been the limited institutional capacity to consis- funding to complement or replace user fees. At the tently plan and supervise effective road maintenance. heart of the OBA approach is the contracting out of Another reason for the poor condition of roads has service delivery to a third party that will operate been insufficient mobilization of domestic funding for within a strong performance regime linking payments maintenance. A road maintenance fund, financed in to results. This approach can sharpen the focus on part from a share of fuel taxes, has been in place since objectives, improve efficiency and innovation, en- 2001. But because of low traffic volumes, the fund cov- hance accountability for the use of public resources, ered only about 60 percent of road maintenance and create opportunities for engaging private sector needs. A recent increase in 2005 of the share of fuel know-how and in some cases financing. taxes going to the road maintenance fund has brought The Chad PMMR channels subsidies explicitly to this up to about 80 percent of maintenance needs. the delivery of defined services--rehabilitating, maintaining, and managing specific roads. Through How PMMR contracts work this means it aims to reach the poor; much work has recently highlighted the strong link between ac- Given the poor results with traditional road mainte- cess to roads, particularly primary trunk roads, and nance contracts, Chad's government decided to pilot a poverty reduction. The subsidies are supplementing performance-based contract for the maintenance and the resources of a road fund (which is financed management of roads (PMMR). PMMR contracts are mostly by a share of fuel taxes) because of the infea- aimed at ensuring that the condition of roads ad- sibility of charging individual users, such as through equately meets users' needs over a period of several tolls, on most roads but particularly in Africa. years by expanding the private sector's role from simply executing works to managing and maintaining road as- The contract makes payments largely contingent sets. Australia, New Zealand, the United States, and on the delivery of defined outputs, thus transferring several Latin American countries--most notably Argen- performance risk to the service provider. The com- tina, Brazil, and Uruguay--have in place PMMR or simi- petitive bidding for the contract has already led to lar contracts covering thousands of kilometers of roads. efficiency gains, with the winning bidder requiring a And many countries in Africa, Asia, and Europe have lower fee than the government and its advisers had now started to introduce PMMR contracts, often with estimated. crucial support from donor agencies that have recog- nized the benefits of output-based approaches for pov- ceive a fixed monthly payment, regardless of the works erty reduction and sustainable development (box 1). carried out, as long as the road is in the required con- PMMR contracts are awarded through competitive dition. So PMMR contracts create incentives for effi- bidding, with potential service providers proposing a ciency and allow technological innovation, possibly monthly lump-sum fee per kilometer of road to be resulting in long-term cost savings. managed and maintained. The contractors are not paid directly for "inputs"--the physical works ex- ecuted--but for the final "output" or outcome--the Getting started in Chad achievement of predefined levels of service quality on Both Chad's National Transport Program and the re- the road sections under contract. lated pilot PMMR contract, supported by the Interna- Since the contractors bear all responsibility for de- tional Development Association (IDA), are aimed at signing, scheduling, and carrying out works, they can reducing poverty and rural isolation--by providing a decide what activities to undertake--and how, when, well-maintained, reliable, basic backbone road net- and where--to meet the required service levels and work connecting regions and linking rural and urban other performance specifications. The contractors re- areas. Supporting the delivery of basic services in developing countries pproaches Targeting the poor The World Bank's 1997 Poverty Assessment for Chad provides empirical evidence that improving access to roads plays a key part in boosting agricultural income and enhancing the quality of life in poor rural commu- nities. More broadly, recent research papers show that investing in primary roads is critical in reducing poverty and in achieving several of the Millennium Develop- ment Goals. Evidence from participatory consultations in rural and urban areas of Chad supports this viewpoint. Most village populations can reach primary roads and other villages by using the extensive network of paths, and while this access is sometimes interrupted, the in- terruptions are usually relatively short-lived. What af- fects people much more severely are long interruptions in access to the primary road network during and after performance criteria, and providing basic aid in road the rainy season. The lack of year-round access to mar- accidents. DTP received an advance payment of 20 per- kets has several serious consequences: cent of the contract value, for which it had to provide a · It constrains the development of agriculture, guarantee. DTP also had to come up with a perfor- industry, and commerce, resulting in higher con- mance guarantee of 10 percent of the contract value. sumer prices and lower producer prices. The contract designates four service quality crite- · It undermines food security, posing higher risk of ria, or "outputs": passability (the road must be open), famines. average speed attainable, user comfort, and durability · It weakens the effectiveness of social services such (a measure of the long-term sustainability of the as education and health care. road). Two mechanisms are used to monitor compli- ance with these criteria. First, the contractor performs The primary network will no doubt have to be self-monitoring, submitting a report to the govern- complemented by improved rural and feeder roads. But ment with each monthly invoice. Second, a consultant providing a good primary network is the critical first step. verifies the self-monitoring reports through monthly inspections. (The government appointed SADEG, an Awarding and executing the contract engineering consulting firm in Cameroon, to this monitoring role.) If the contractor fails to comply with In late 2000 the Chad government launched a com- any of the service criteria in any one month, its fee is petitive international tender for a contract covering reduced. If it fails repeatedly to comply, its contract 441 kilometers of unpaved main roads (7 percent of can be suspended. the primary network) stretching from Bokoro through Mongo and Mangalme to Oum Hadjer--sections previ- ously passable only during the dry season (see map). Progress to date and After prequalification three bidders each presented an offer. The government awarded a four-year PMMR lessons learned contract to DTP, a subsidiary of the French firm DTP started contract execution in July 2001, three Bouygues, in early 2001. The bids were evaluated on months after signing the contract. It had 22 months to the basis of the monthly lump-sum fee required. The bring service quality up to the required levels. winning bid came in around 7 percent lower than had The contractor has complied with and in many been predicted. cases exceeded the service quality level requirements. As long as DTP complies with the service quality The roads are in excellent condition and the road users levels, it receives a monthly fee of $480 per kilometer. are highly satisfied. In fact, one criticism of the scheme This fee covers, among other things, fully rehabilitating is that the quality of the roads is "too high": the roads the road at the outset, managing and maintaining the are now amongst the best in the region, and one may road for four years, monitoring compliance with the question whether costs could have been lowered with Supporting the delivery of basic services in developing countries pproaches less ambitious targets. The Chad PMMR contract was success. PMMR should not be used for roads in well designed on several counts: extremely bad condition. If initial rehabilitation · Although no detailed assessments have been made costs exceed 40­45 percent of the total cost of the yet, the PMMR contract is expected to result in contract, rehabilitating the roads through a long-term capital cost savings. In Australia, New traditional works contract and then applying Zealand, and the United States PMMR contracts PMMR is a better way to go. have led to cost savings of 10­20 percent and · The bidding process included prequalification, higher maintenance standards for road assets than ensuring that final bid evaluation was not over- under traditional contracts (Zietlow 2004). And whelmed by poor-quality providers. PMMR-type contracts in Argentina have been estimated to reduce capital investment needs by 30 Encouraged by the success, the government plans percent (Liautaud 2001). to extend the contract when it expires in June 2005 or · The PMMR contracts in Chad provide the possibil- to rebid the contract for another four years. Renewal ity for long-term sustainability. The fact that would be based on a lower price, since the contractor PMMR-type contracts in general have demon- has completed the initial rehabilitation requiring large strated large reductions in required long-term up-front investments. The Government is also planning capital expenditure itself demonstrates a more for a new PMMR contract covering around 650 kilo- sustainable road maintenance and management meters of paved roads, to link key centers in Chad and system than those that came before it. The benefits Cameroon. of improved management and maintenance have The PMMR arrangement is being replicated else- motivated the Government to gradually increase where in Sub-Saharan Africa, including Burkina Faso, the funding for its Road Maintenance Fund, for Cape Verde, Madagascar, and Tanzania. example through the recent larger allocation of fuel taxes to it. Although continued donor support may be required in the immediate future, Chad may References eventually move to a more self-sustaining system Liautaud, Gerard. 2001. "Maintaining Roads: Experi- for management and maintenance, especially if it is ence with Output-Based Contracts in Argentina." able to use some of its resources from oil exports Contracting for Public Services: Output-Based Aid and Its for the Road Maintenance Fund. Applications. Washington, D.C.: World Bank. · The existence of donor involvement has given the Zietlow, Gunter. 2004. "Cutting Costs and Improving private contractors more confidence that the Quality through Performance-Based Management output-based payments will actually get paid. and Maintenance Contracts: The Latin American · The PMMR contract covers roads that were not so and OECD Experiences." GTZ, Frankfurt. badly deteriorated as to undermine its chances of About OBApproaches OBApproaches is a forum for discussing and dis- The case studies have been chosen and presented seminating recent experiences and innovations for by the authors in agreement with the GPOBA man- supporting the delivery of basic services to the poor. agement team, and are not to be attributed to The series will focus on the provision of water, en- GPOBA's donors, the World Bank or any other af- ergy, telecommunications, transport, health and filiated organizations. Nor do any of the conclusions education in developing countries, in particular represent official policy of the GPOBA, World Bank, through output, or performance,-based approaches. or the countries they represent. Global Partnership on Output Based Aid World Bank To find out more, visit Washington, DC 20433, USA www.gpoba.org Supporting the delivery of basic services in developing countries