Legal Issues in design, preparation and implementation of projects involving Output-based Aid Legal Issues in design, preparation and implementation of projects involving Output-based Aid Edith Mwenda LEGAF SDN Week Washington, DC February 27, 2008

2 Which lending instruments for OBA projects? 1. Use of Bank lending Instruments – investment and policy lending. OBA Approaches entail greenfield projects, or expansion of existing service networks, use of subsidies Normal Bank Project cycle Compliance with Bank policy requirements Subsidy disbursement does not translate differently in legal OBA operation could use SWAP/Pooled fund mechanism – (e.g, the financing mechanism being considered for a proposed GPOBA financed pilot in Tanzania) Guidance Notes: (a) Structuring OBA approaches in WBG Operations (November 17,2005) (b) Implementing OBD Mechanisms for Investment Operations (April 2, 2007)

3 Ensuring Consistency with the Articles of Agreement 2. Requirements under Article II, Section 5 are: (i)use for proceeds of a loan for the purpose granted; (ii) due attention to considerations of economy and efficiency. Policy requirement: OP (Investment Lending) – consistency with Bank’s Articles of Agreement (para. 3). Criteria links investment lending proceeds to specific expenditures (i.e. all Project expenditures are costed).

4 OBA projects ensure compliance w/ Article of Agreement (i)Loan proceeds are used as a partial reimbursement of pre- financed outputs – expenditure items are associated with a final output, and output is costed to determine the disbursement. In most cases subsidy is disbursed as a reimbursement to the service provider upon independent verification of the outputs. For example, if an expected output is x number of water connections to low income homes, it is imperative that a unit price for each connection is determined and optimized. OBA subsidy finances x% of the reasonable price for installation of the units. The unit cost price would usually be monitored, e.g. each year and could lead to revisions to avoid under/over financing. (i)Economy and Efficiency is determined either as part of procurement process, or through independent analysis of unit cost ex ante, with the purpose of optimizing them, to ensure that they satisfy the principles of economy and efficiency.

5 Bank Policy considerations (1) All Bank Fiduciary and Safeguard policies required under investment lending apply to OBA operations: Financial Management/Reports, Audit, Disbursement (OP 10.02), expenditure eligibility (OP 6.00) Disbursement – question of expenditure-based vs OBA approach performance-based – definition of eligible expenditures/allocation Procurement standards (OP 11.00) - OBA Projects are not exempt from Bank Procurement requirements –- distinguishing: (a) OBA through competitive selection of service providers; and (b) OBA through direct arrangements with incumbent service providers.

6 Environmental and Social Safeguards – usual requirements. Note: - for GPOBA transactions, refer to FEU and QACU issued Announcement: “Application of Bank Safeguard Policies to GPOBA Transactions”, Revised April 2007 Sanctions Regime – Requirement as for Bank operations. Except: for the time being there is a disconnect as to application of the sanctions regime to grants. However, it is expected that when the new Op is issued the sanctions regime will apply to grants. Monitoring and Evaluation – tangible and measurable outputs – link to cost (results framework) Supervision (OP 13.05) Bank Policy considerations (2)

7 Processing Stand-Alone GPOBA-financed Projects (a) Bank administered Trust Funds – Bank policies apply to TFs (OP under revision) (b) Standard Conditions (SC) applicable to all recipient- executed TFs (c) Approval – different project processing - no Board presentation for stand-alone GPOBA projects. Independent Panel of Expert/Decision-making body (re. GPOBA principles) (d) Grant Agreements – modeled along the lines of IDA grant model. Incorporates Standard Conditions. Alongside Disbursement Letter, Recipient’s Procurement Plan/Bank Procurement Guidelines (f) no formal negotiations requirement.

8 Processing Stand-Alone GPOBA-financed Projects Recipient/host government commitment to project Determine who the Recipient is: sovereign or non-sovereign; private/fiduciary entity/public institution; eligible expenditures – contractor vs service provider Remedies/conditions – specific/SC-based/project/program execution – whether additional legal documents/MoUs /other agreements

9 Samples of GPOBA-financed projects: Uganda Small Towns Water Supply and Rural Growth Centers Project (re. competitive selection of service provider, procurement function by Government Department – legal arrangements) Kampala Water Connections for the Poor Projects (re. direct arrangements with incumbent service provider) – same as Reproductive Health Vouchers in Western Uganda Project Armenia Renewable Resources and Energy Efficiency Fund (IDA co-financing)