49570 June 2009 Note Number 26 Output-Based Aid in Morocco (Part 2): Expanding Water Supply Service in Rural Areas | Xavier Chauvot de Beauchêne S ince the mid-1990s, Morocco has made big strides in developing access to potable water in rural areas. The National Water Supply Company, ONEP, has devel- oped an important network of standpipes in rural commu- nities and over 87 percent of the rural population has access to a source of drinking water. Many households are now asking for domestic connections, but ONEP's fixed costs make service provision to smaller communities through the development of domestic connections a loss-making busi- ness. To serve these populations better, ONEP is piloting Morocco's first public-private partnership to subcontract water service provision and management in rural areas, Photo courtesy of the World Bank Photo Library using an affermage-type contract1. During the first years of the ten-year contract, the private operator will receive performance-based subsidies from ONEP under an output- based aid (OBA) approach. This will allow the operator to cities and 2.8 million people in rural areas). ONEP is a break even early enough to develop a profitable business profit-making autonomous public corporation. How- within the existing tariff structure. If successful, this model ever, its organizational structure and internal procedures for rural water supply could be scaled up in other small translate into fixed costs that are too high to make service towns and surrounding rural areas, thus presenting busi- provision in rural areas profitable. ness opportunities for the Moroccan private sector while In recent years, ONEP has tested different models of enhancing access to piped water services for the poor. private sector involvement, from established standpipe- managers to more comprehensive performance-based service contracts. Learning from these experiences, Background ONEP is now ready to take private sector involvement in water service distribution in rural areas one step further. In Morocco, local authorities are responsible for water supply and sanitation services. Major cities have del- Public-private partnership egated water and sanitation services either to the private ONEP is piloting the first public-private partnership for sector or to financially independent municipal utilities. extended subcontracting of its water distribution respon- ONEP is the national utility in charge of potable water sibilities. The aim of the pilot is to provide sustainable production and transmission in bulk to large urban dis- water supply services and service expansion in rural ar- tribution utilities. As small cities and rural areas lack ca- eas served by ONEP. The new public-private partnership pacity, they increasingly are requesting ONEP's assistance approach will include technical and--for the first time-- to manage their water distribution services. As a result, commercial management. The private sector would be its mandate was broadened over time to include the expected to develop technically and financially efficient provision of water supply services--and, more recently, management of water distribution in rural areas. It would sanitation services--to small towns and rural areas. At the end of 2008, ONEP covered 80 percent of national water needs and provided water to 28 percent of the Mo- Xavier Chauvot de Beauchene is a Water and Sanitation roccan population (5.6 million people in medium-sized Specialist in the World Bank's Middle East and North Africa Region Supporting the delivery of basic services in developing countries GPOBA approaches morocco rural 6-10-09.indd 1 6/16/09 6:37:36 PM also be encouraged to develop access to piped water funding available for the pilot, so ONEP decided to supply services through household connections and finance the approach out of its own funds. to expand the service area to other rural localities, The main idea for ONEP is that the subcontracted called douars. This approach should enable ONEP to private operator that takes on the management of significantly reduce its operating and maintenance small-scale operations for a ten-year period is able to (O&M) costs for water provision, while maintaining reduce O&M costs to a level allowing it to break even its current staffing level. early enough to develop a profitable business within For the pilot area, ONEP selected the Sidi Kacem the existing government-set tariff structure. The area, located in northwest Morocco. By bundling private operator will not receive a management fee, small towns and surrounding rural areas, the pilot but will be remunerated through the revenue collected area represents a population of 130,000 inhabitants from customers. It will also receive a subsidy from or 20,300 households, of which about half are poor ONEP, based on the delivery of three pre-identified or vulnerable2. ONEP is currently providing services outputs, each designed to encourage the private op- to about 7,800 households at a loss, and thus has no erator to develop the critical mass of customers and incentive to connect additional families. water sales needed to make its business financially Output-based aid approach sustainable. As an incentive to perform, the subsidies will be time-bound. The outputs and associated sub- sidy are presented in table 1. Demand for household connections in the pilot area is high, but is limited by the connection fee, which at US$577 equivalent is too expensive for poor or vul- Determining the subsidy level nerable households to pay. This represented a direct The amount of subsidy, and hence the unit cost per risk to the pilot's financial sustainability and therefore connection, will be determined by a competitive bid- to the interest of the private sector. ONEP decided, ding process on the basis of targets clearly set in the therefore, to introduce an output-based aid (OBA) bidding documents. The bidder requiring the lowest approach that would reduce the connection fee and amount of combined subsidy wins the bid. The allow- subsidize household connections made by the private able subsidy may be capped. operator. The innovation is that the private operator The OBA subsidy for household connection will must prefinance the "outputs" (here "working connec- represent the difference between a set discounted tions to piped water supply service") and receives the connection fee for the household and the actual cost subsidy only after such outputs have been delivered of connection. ONEP has proposed MAD 2,500 and verified by ONEP. (US$289 equivalent) as a countrywide set discounted ONEP requested support from the World Bank connection fee3 in ONEP-managed rural areas. and the Global Partnership on Output-Based Aid However, the private operator will decide if it wants (GPOBA) and obtained a technical assistance grant to to develop similar conditions or new ones that would help design the OBA approach. GPOBA did not have better serve its interests to promote household con- Table 1. Outputs and performance targets used to design the pilot Subsidy available Contract objective Output Measuring unit Targets for the first: Minimize initial Water sales Cubic meter sold 3 million m3 3 years of operational deficit in the pilot area operation Expand service area to New douars reached Linear meter of Initial estimates 4 years of 14 new douars network expansion of 40,000 lm operation Increase the customer Working household Household 8,500 5 years of base through new connection to piped connection household operation household connections water supply connections Source: ONEP GPOBA approaches morocco rural 6-10-09.indd 2 6/16/09 6:37:37 PM June 2009 Note Number 26 nections. Surveys carried out in the pilot area have income-generating activities for adults and improved demonstrated that 80 percent of households would be education for children; improved hygiene practices, willing to connect at the MAD 2,500 price. Payment resulting in decreased morbidity and mortality rates, for water consumption is affordable, as demonstrated especially among children under 5; reduced medi- by the 100 percent collection rate experienced by cal expenditures; and improved labor productivity. ONEP nationwide. Broader outcomes of the pilot will include the intro- To be eligible for an OBA subsidy, households need duction of demand-driven service provision in rural to express interest in a household connection and areas, where investments by ONEP to develop access provide a down payment of MAD 1,000. Households to water through standpipes generate little income, as that fail to do so before the completion of service populations increasingly disregard them. It will also extension works in their area will later be charged demonstrate and document a possible way to re- the full connection fee. Under ONEP management, duce ONEP's fixed and variable O&M costs which, if poor and vulnerable households that meet the "social replicated, could improve ONEP's long-term financial connections" criteria (monthly revenues lower than sustainability. MAD 3,000) may pay the remainder in installments over three years, at a 5 percent interest rate (compared to the usual 18 percent microcredit rate). The subcon- Innovative aspects tracted private operator may decide to propose the This pilot is very innovative and will pave the way for same arrangement, although it is not a contractual water reform in rural Morocco: requirement. Project arrangements are presented in First, the project will bring a new dimension of figure 1. risk sharing, with the first public-private partnership Expected benefits in water supply distribution in small towns and sur- rounding rural areas in Morocco. The pilot structure creates the right incentives, by providing targeted sup- Household connections are expected to provide af- port until a critical mass of customers is achieved in fordable access to a safe and reliable supply of wa- order to ensure financial sustainability for the opera- ter at home, of suitable quality and quantity. Other tor. ONEP will retain legal responsibility and the final benefits include time savings that can be used for beneficiaries will remain ONEP's clients. The private Figure 1. Project arrangements ONEP Competitively Verifies outputs selects the Reports on against contract private operator outputs to and makes on the basis of ONEP subsidy payment lowest subsidy Private Operator Requests Connect s Sells safe Extends service to new douars connection household to and reliable water OUTPUT 3 and pays water supply OUTPUT 2 discounted OUTPUT 1 connection fee Poor household in service area without Service area Douar Douar domestic connection without without service service Key: Fund flow Information flow Contractual relationship GPOBA approaches morocco rural 6-10-09.indd 3 6/16/09 6:37:39 PM operator will bear technical, financial, and commer- Because of the innovative nature of the pilot, ONEP cial risk. The approach will provide both ONEP and organized a first workshop to gather prospective bid- the private operator with the highest incentives to ders, present the pilot, and answer questions; and a perform: the private operator risks losing the subsidy second workshop with the prequalified bidders to ex- funds if the outputs are not delivered; ONEP risks plain the bidding documents and the financial model. having to take over if the private operator does not The World Bank financed consultants to help ONEP perform. organize and moderate each of these workshops, and Second, the pilot will result in a win-win situation. World Bank staff participated in them. Given the sig- It will test a possible way to ensure ONEP's long-term nificant private sector interest, ONEP is confident that financial sustainability, while encouraging the creation all shortlisted bidders will submit a qualifying bid. of a new set of local operators who could later bid for If successful, this model for rural water supply full delegation of service and/or manage sanitation. could be scaled up in other bundles of small towns Third, the pilot could also involve a local com- and surrounding rural areas in Morocco, thus pre- mercial bank to handle and channel the subsidy. senting business opportunities for the Moroccan This could create favorable conditions for ONEP, the private sector while enhancing access to piped water private operator, and the bank to develop integrated services in rural areas. This is a pivotal operation financial packages for households, through small, that could provide the Moroccan private sector with short-term loans corresponding to their connection unique opportunities to enter the market in the rural fee. Such an arrangement would allow each party to water sector and potentially in large urban centers. concentrate on its respective core business and would give the private operator more assurance that it would be paid promptly after the independent verification 1 Affermage: type of leasing arrangement under which an opera- agent recommends the payment. tor takes over and runs public infrastructure (here water services) Fourth, the pilot presents a window of opportunity and collects revenue from customers, but does not undertake and for small and medium private sector firms in Morocco finance new investment. Under an affermage, the operator usually to develop new expertise in the water sector. Large, in- shares revenues according to a predetermined formula, stated in the contract. The contract described in this document differs from an ternational private operators manage the water service affermage in that the responsibility for service provision, delegated provision in large cities. This rural operation gives by municipalities to ONEP, remains with ONEP and customers smaller firms a chance to enter the water business on a remain ONEP customers. scale they can handle. 2 In Morocco, the poverty line is at US$1 per capita per day (MAD1,745 per household per month) and the vulnerability line is Results so far 150 percent of the poverty line (US$1.50 per capita per day). 3 This amount is to be confirmed and may increase. An analysis is on- going with support from the World Bank to update the information The pilot is at an advanced stage of procurement and that led to the proposal of this discounted fee, as it refers to 2005 has generated considerable private sector interest. prices. About OBApproaches OBApproaches is a forum for discussing and disseminating The case studies have been chosen and presented by the au- recent experiences and innovations in supporting the delivery thors in agreement with the GPOBA management team and are of basic services to the poor. The series focuses on the provi- not to be attributed to GPOBA's donors, the World Bank, or any sion of water, energy, telecommunications, transport, health, other affiliated organizations. Nor do any of the conclusions rep- and education in developing countries, in particular through resent official policy of GPOBA, the World Bank, or the countries output-, or performance-, based approaches. they represent. To find out more, visit www.gpoba.org eeGlobal Partnership on Output-Based Aid Global Partnership on Output-Based Aid Supporting the delivery of basic services in developing countries GPOBA approaches morocco rural 6-10-09.indd 4 6/16/09 6:37:41 PM