Designing Output-Based Aid Projects

Designing OBA and SIB Projects Basic Elements A. A.Determining the output: What service is to be provided? B. B.Reaching target population and selecting targeting methodology C. C.Choosing an appropriate subsidy form D. D.Determining the value of the subsidy E. E.Linking outputs to subsidy disbursement F. F.Organizing the institutional framework 2

A. Determining the Output: Spectrum of Contracting out Service Delivery Source: Castalia, 2009 OBA Objective:Contract for an output as closely related to desired outcome as possible. 3 Input Asset Creation Output MedicineClinic People Vaccinated Equipment ICT Infrastructure Universal Access ConcreteRoad Serviceable Road Examples Health ICT Roads Outcome Polio-free Population Everyone able to communicate Easier movement of people and goods

Self-selection targeting  Higher subsidies for more basic/less complex solutions. Higher subsidies for more basic/less complex solutions.  Solar home systems (SHS) with less capacity Solar home systems (SHS) with less capacity  Risk that smaller solutions are less efficient Risk that smaller solutions are less efficient  Provide subsidies only some time after service has become available (so wealthier households are already connected) Provide subsidies only some time after service has become available (so wealthier households are already connected) Self-selection targeting  Higher subsidies for more basic/less complex solutions. Higher subsidies for more basic/less complex solutions.  Solar home systems (SHS) with less capacity Solar home systems (SHS) with less capacity  Risk that smaller solutions are less efficient Risk that smaller solutions are less efficient  Provide subsidies only some time after service has become available (so wealthier households are already connected) Provide subsidies only some time after service has become available (so wealthier households are already connected) Geographic targeting  Easiest way to reach the intended beneficiaries  Useful in areas where intended beneficiaries are concentrated and few people are outside targeted group.  Excluding unintended beneficiaries can be more costly than including them. Geographic targeting  Easiest way to reach the intended beneficiaries  Useful in areas where intended beneficiaries are concentrated and few people are outside targeted group.  Excluding unintended beneficiaries can be more costly than including them. B. Selecting Targeting Methodology (1) Geographic targeting  Outputs available in poor areas Multiple targeting mechanisms can be combined Income-based targeting  Relies on existing social targeting mechanisms  Means-testing involves measuring a beneficiary’s wealth to assess if subsidy is warranted Self-selection targeting  Subsidize very basic services demanded exclusively by the poor and which are less attractive to wealthier population Income-based targeting If using existing social targeting mechanisms:  Review quality of existing system Review quality of existing system  Check when classifications have been updated Check when classifications have been updated  Note potential trend of systematic underreporting of income Note potential trend of systematic underreporting of income  National statistics may not take informal income into account National statistics may not take informal income into account If using proxy means testing tools (e.g., questionnaire, observations):  Can be done at low cost Can be done at low cost  Need reasonably high administrative capacity in implementing agency Need reasonably high administrative capacity in implementing agency Income-based targeting If using existing social targeting mechanisms:  Review quality of existing system Review quality of existing system  Check when classifications have been updated Check when classifications have been updated  Note potential trend of systematic underreporting of income Note potential trend of systematic underreporting of income  National statistics may not take informal income into account National statistics may not take informal income into account If using proxy means testing tools (e.g., questionnaire, observations):  Can be done at low cost Can be done at low cost  Need reasonably high administrative capacity in implementing agency Need reasonably high administrative capacity in implementing agency 4

C. Choosing a Subsidy Form (1) Principle and Definition Principle: Subsidy must be targeted, linked to outputs and provide sustainable service. 5 Subsidy value Unit cost User’s willingness and ability to pay Subsidy value is the “gap” between the total cost of providing a service to a user and the user’s ability to pay the cost.

 One-off subsidies: Used to expand access or services to targeted households, most common form  Transitional subsidies: Used to support tariff reform; subsidy could fill gap between what user is deemed able and/or willing to pay and cost recovery level of tariff  Ongoing subsidies: May be required where continuous gap between affordability and cost recovery exists, such as life-line tariffs C. Choosing a Subsidy Form (2) Consider factors such as:  Capacity for administering subsidy scheme  Type of service to be subsidized  Extent to which service providers are willing and able to be paid over time  Availability of subsidy funding 6

D. Determining the Value of the Subsidy Principle: Subsidy must be targeted, linked to outputs and provide sustainable service. 7 Subsidy value Unit cost User’s willingness and ability to pay Determining the right unit cost is essential to the project’s success

D. Determining Appropriate Unit Costs for Specified Outputs   Actual cost of service often unknown at project design stage   Mechanisms to establish unit costs:   Approximation: Draw on benchmarks from incumbent suppliers   Competitive process: To reduce costs and provide market test of unit cost amount or payment required   Use more than one source to avoid unique source bias (e.g., technical and market-based sources)   Verify unit costs independently if service provider is incumbent 8

D. Determining the Value of the Subsidy For a given output: 9 Subsidy value Unit cost User’s willingness and ability to pay Assessment of willingness to pay: Can be done through surveys, for which there are established techniques Look at actual expenditure on substitute services

C ompetitive selection: establish winning bidding variable as:  Greatest number of outputs for given subsidy amount  Least connection cost per given amount of subsidy; or  Minimum subsidy required to reach a number of outputs D. Determining the Value of the Subsidy No competitive selection, establish value of subsidy through:  Benchmarking; and/or  Review of unit costs to provide service to specified standard In a tender for a rural electrification project (off-grid energy) in Bolivia, the winning bidder proposed 25% more beneficiaries for the fixed subsidy than the minimum required and a 40% reduction in the cost of solar home systems than an earlier UNDP project. 10

E. Linking Outputs to Subsidy Disbursement  Disbursements are made on output delivery, in contrast to disbursements for input milestones  Considerations in setting disbursement schedules:  Ability of service provider to “pre-finance” outputs  Timeframe to deliver outputs includes demonstrating service sustainability Uganda Rural Electrification Project Outputs:  A working electricity connection Subsidy Disbursements:  50% after customer has working connection; and,  50% after 3 successful billing cycles 11

F. Organizing the Institutional Framework Role of Service Provider (SP) 12 Service Provider Can be public or private entity, an NGO, or Community- Based Organization Takes performance, demand and financing risks of delivering service Contracted to provide a certain service directly to targeted beneficiaries Innovator of service “solutions” to maximize efficiency, based on set standards

F. Organizing the Institutional Framework: Selection of the Service Provider Market Structure: SP serves a single market (concessionaire) or multiple entities? Is there an incumbent? Is it a public or private entity? Limited pool of SP: Use capacity building to expand potential providers Requires greater outreach and “demand” marketing Accountability for providing quality services: Through contract provision or accreditation Capacity to Perform: Technical expertise to deliver service? Financial to implement and “pre- finance” outputs? Service Provider

Design considerations:  Consider SP’s capability and sources early in project design – flexibility required for small local SPs  Identification of financial sources and design of credit schemes: limited availability and often must be developed  Impact of financing cost and terms on tariffs or SP willingness to provide service  Need for capacity building and funding support: local banks, local operators  The use of “intermediate” outputs for subsidy disbursement or guarantees to support loans or credit schemes F. Organizing the Institutional Framework: Does the SP have Access to Finance? 14 Principle: Financial risk transferred to SP who must provide capital up front to finance outputs

F. Organizing the Institutional Framework: Role of Government and Regulators 1. Support commercial viability: tariffs must cover cost of operations and maintenance 2. Provide clearly defined regulatory process and adjustment mechanisms 3. Agreed procedures for dispute resolution to manage impact on scheme viability 15

F. Organizing the Institutional Framework The Role of the Independent Verification Agent Independent output verification is the key control and reporting mechanism. It involves an Independent Verification Agent (IVA). Desk review of all outputs   Are the claims submitted correctly? Physical review of sample   Output/service delivered + quality standards   Optimal sample size for verification (trade off size and accuracy) Assess compliance with:   Design (targeting)   Fiduciary or safeguard policy Timely reporting on progress & delivery compliance for disbursement

F. Organizing the Institutional Framework Selection of the IVA Principle: Transparency and no undue influence Verification is outsourced to:  Specialized consultancy firm (i.e. consultants, engineers, etc.)  (Local) Government  NGO/CBO or other local community representatives Key design issues:  Independence  Ease of measuring and verifying delivery  Training/skills required based on complexity of output to be verified  Needs to be hired in time Recruitment of IVA is responsibility of implementing agency 17

Average IVA cost against Average Total Grant (sample of GPOBA Pilot Projects) SectorAverage Total Grant Average % IVA/Tot Grant Health and Other Social Services 6,125, % Energy 4,878, % ICT 2,185, % Water Supply and Sanitation 3,068, % Note: data refer to 19 out of 36 GPOBA projects F. Organizing the Institutional Framework Cost of the IVA 18

Clinic #2: Design Elements Assignment: Continue working on project initiatives and develop their design elements using the standard forms from binders. Time: 1h 20 min – work in teams 40 min – team presentations