49569 June 2009 Note Number 25 Output-Based Aid in Morocco (Part 1): Extending Water Services to the Poor in Urban Areas | Xavier Chauvot de Beauchêne M orocco is a middle-income country with good water infrastructure that provides access to safe drinking water and sanitation to the majority of the urban population. In 2005, Morocco made it a prior- ity to extend service to poor peri-urban settlements, and encouraged operators and local governments to reduce con- nection fees for their inhabitants. These connection fees had been priced at marginal cost, which represented a major obstacle for poor populations to connect to piped service. The government and the operators of water utilities in Casablanca, Meknès, and Tangiers consequently requested a grant from the Global Partnership on Output-Based Aid Photo courtesy of the World Bank (GPOBA) to pilot the introduction of performance-based subsidies to encourage service expansion under an innova- tive output-based aid (OBA) approach. Initial results show larly those in urban and peri-urban settlements previous- that this approach is helping to refocus service provision ly considered illegal, and therefore ineligible for services. on household demand, which has increased accountability, strengthened partnerships between local authorities and Nature of the service deficit operators, and made monitoring of service delivery a prior- ity. The World Bank is now working with the government Currently, about 2 million Moroccans remain without to plan a scale-up program. access to water supply and sanitation services in peri- urban areas of Morocco’s main cities.1 In the Casablanca metropolitan area alone, an estimated 145,000 house- Sector context holds (or 900,000 inhabitants) do not receive adequate water supply and sanitation (WS&S) services. These By regional standards Morocco already has good water residents get water from contaminated shallow wells, infrastructure assets: 90 percent of accessible resources water providers who charge a relatively high unit price, are stored in 116 large dams; irrigation is developed over or standpipes which often require women or children to 1.4 million hectares; and potable water supply reaches queue for several hours. Access to basic sanitation is even almost all urban dwellers (with individual connections more deficient: a majority of households use cesspits and and continuous service for 83 percent of households, one poorly designed septic tanks, which risk increasing con- of the best rates in the region). Infrastructure is lagging, tamination of shallow groundwater. Many of the poorest however, for water supply in poor urban and peri-urban people remain without any form of sanitation. areas, and for wastewater management (70 percent of These deficiencies directly affect people’s health and urban households are connected to a collection system, their ability to engage in income-generating activities—or, but only 5 percent of discharges are treated). for children, to attend school. They also harm the finances Today, the country faces two challenges: it must adapt of water utilities, which usually attain very low cost recov- water usage to levels compatible with natural resources ery from these public standpipes (the municipalities or and improve service access and efficiency while reducing communes responsible rarely pay the bills). the burden on the state and on poor consumers. Reforms Several factors have contributed to this situation: have been initiated to address these challenges, including the National Initiative for Human Development (INDH). Launched by the King of Morocco in May 2005, INDH Xavier Chauvot de Beauchene is a Water and Sanitation Spe- includes expansion of basic services to the poor, particu- cialist in the World Bank’s Middle East and North Africa Region Supporting the delivery of basic services in developing countries • Unplanned growth of peri-urban areas has sys- network; a lack of it may generate delays in the tematically left them out of the service areas of establishment of household connections. water and sanitation operators. • Technical and administrative hurdles make it diffi- INDH’s Urban OBA pilots cult for operators to intervene in illegal settlements, mostly because basic access roads are lacking. In an effort to facilitate affordable connection to water • Operators have difficulty financing infrastructure and sanitation services and to support water utilities in for households perceived to consume in the loss- their efforts to improve access in low-income commu- making “social tranche� of existing water tariffs. nities, the government and the operators of water utili- ties in Casablanca, Meknès, and Tangiers requested a Connection fees are charged to the beneficiaries at grant from GPOBA to pilot the introduction of perfor- mance-based subsidies to encourage service expansion their marginal costs,2 topped with a “first settlement under an innovative output-based aid (OBA) approach. fee,� thereby driving costs of access to unaffordable Launched in 2007, Morocco’s Urban OBA pilots aim to levels for most households living in the city outskirts, connect 11,300 households to piped water and sanita- even when the option of payment by installments is tion service in poor peri-urban neighborhoods of these available through “social connection� programs.3 three cities. The pilots are funded through a US$7 mil- lion grant from GPOBA and are implemented by the Mobilization through the INDH incumbent service providers in each city. Amendis in Tangiers and LYDEC in Casablanca are international Since 2005, the INDH and the Government’s Cities private concessionaires. The Régie Autonome de Dis- Without Slums program (VSB) have mobilized stake- tribution d’Eau et d’Électricité de Meknès (RADEM) is holders to upgrade poor urban and peri-urban areas. a public utility. The Government of Morocco also plays INDH removed a critical obstacle by recognizing infor- an oversight and monitoring role. mal settlements. VSB promoted their inhabitants’ reset- The project breaks new ground, as it is the first: tlement to either housing units in apartment buildings or serviced plots. It also encompassed “restructuring • OBA project in Morocco and in the World Bank’s and upgrading housing on site� through strengthen- Middle East and North Africa region. ing basic infrastructure. INDH also promotes service • Project involving multiple incumbent operators, coverage expansion through agreements among rel- piloting the same approach with terms adapted to evant stakeholders, including specific arrangements for the specific situation of each city. discounted household contributions for connections to water supply and/or sanitation services. These arrange- • Project involving a public operator. Although ments include a waiver of the “first settlement fee� and initially designed to work with private sector op- of the 10 percent design and supervision fee otherwise erators, GPOBA has broadened its scope to work charged by the operators. In addition, building on the with any commercially viable entity. “social connection program,� eligible households are • World Bank-administered OBA involving con- allowed to pay their contribution over time (terms vary nection to piped sanitation, aiming at developing by operator). In Meknès, for example, households can simultaneous connection to maximize efficiency pay their contribution of MAD 9,240 for water and gains and health impacts. sanitation services in 84 monthly payments of MAD • World Bank-administered OBA project in local cur- 110 (MAD are Moroccan dirhams). rency, to avoid adding a foreign exchange risk to the Despite significant progress, INDH/VSB has con- technical and financial risk taken by the operator. tinued to face challenges, including: Figure 1 summarizes the project arrangements. • Lack of financing to develop connections for on- While the details of the schemes vary by operator, site upgrading in certain areas. For example, in they have a common objective: to test an OBA sub- metropolitan Casablanca, the 65,000 households sidy mechanism, specifically targeted to households to be resettled will be connected to water and in designated predominantly poor peri-urban neigh- sanitation services. However, no service expan- borhoods, with a recognized right to access services sion solution is proposed for the 80,000 house- through the INDH program. holds (over 500,000 inhabitants) targeted by the The built-in incentives of this OBA approach are on-site upgrading approach. designed to mitigate traditional impediments of ser- • The need for coordination among various stake- vice expansion programs in marginal neighborhoods, holders. INDH/VSB implementation requires such as households’ inability to afford connection good coordination of activities to expand the costs; operators’ unsustainable financing for service June 2009 Note Number 25 expansion programs to poor areas; complex techni- work with local authorities and partners during imple- cal and administrative obstacles to infrastructure mentation to raise awareness and promote the pro- development in poor unzoned areas; and reticence by gram. Operators also developed new means of reach- national and local governments to fund subsidy pro- ing potential customers by sending dedicated teams grams with no accountability or guarantee for results. to marketplaces or to the heart of targeted neighbor- The outputs for which OBA subsidies are disbursed hoods to record demand from beneficiaries who might not easily travel to one of the operator’s agencies. are simultaneous network connections to water supply The pilots experienced a slow start, with about 2,000 and sewerage services for individual households. In connections (15 percent of the program’s three-year ob- Meknès, the output is the connection to either service, jective) in the first year, but connection rates doubled in as RADEM had already expanded networks to some of the second year. An independent midterm review of the the pilot areas. All households located in selected areas pilots showed that the delay was due to implementation are eligible for a subsidized connection fee, in addition difficulties unrelated to the OBA approach: World Bank to the fee waivers granted for INDH areas and payment procurement procedures, upstream investment delays, facilities offered by “social connection� programs. The and lack of clarity over land tenure. pre-agreed subsidy is set to bridge the gap between The project midterm review4 confirmed important capacity to pay and a competitive cost of connection. direct benefits5 to households and recorded the high The operators first are required to complete the satisfaction of beneficiary households with the ser- pipe and connection works. The subsidy, which is op- vice provided. There is also evidence of a significant erator- and service-specific, is paid in local currency increase in uptake after works started, and collection in two steps: 60 percent upon verification by an Inde- rates equal or superior to the average in each opera- pendent Technical Reviewer (ITR) of a working water tor’s service area. and sewerage connection to an eligible household; Operators and the government are generally satis- and 40 percent upon verification by the ITR of at least fied and appreciate the flexibility allowed by the pilot. six months’ sustained service. Table 1 summarizes the The OBA approach is seen as helping to improve unit subsidy amounts per connection. processes, overcome financing blockages, and mobi- Lessons learned lize stakeholders. The quarterly inspections by the ITR have also helped to improve the operators’ progress reporting requirements and implementation methods. Participation is strictly demand-driven. This creates an The demand-driven approach is helping to refo- incentive for the operators to carefully assess demand from targeted beneficiaries during preparation and to cus service provision on the households, which has increased accountability, strengthened partnerships Figure 1. Project arrangements Ministry of Interior/Ministry of Finance Grant agreement with GPOBA operators and government 5. Makes Municipalities or delegating authority subsidy 3. Reports to payment per Operational responsibility authorities connection to and GPOBA prefinancing operator Operator (Amendis Tanger, LYDEC, RADEM) 2. Prefinances 1. Requests connection to connection requested water and provides supply and/or 4. Verifies outputs discounted sanitation and reached and makes contribution provides service recommendation on subsidy payment Poor household living in periruban Independent technical areas without access to service reviewer Key: Fund flow Information flow Contractual relationship Table 1. Operator- and service-specific unit subsidy amounts per connection Subsidy levels per connection Minimum house-hold (MAD/US$ eq.) Subsidy levels monthly per connection installment for City Operator To water supply To sanitation (MAD/US$ eq.) connection fee* Casablanca LYDEC MAD 1,458 (US$170) MAD 3,609 (US$421) 28% MAD 60 (US$7) Tangiers Amendis MAD 1,467 (US$171) MAD 4,158 (US$485) 24% MAD 100 (US$11.7) Meknès urban areas RADEM MAD 1,422 (US$166) MAD 7,821 (US$913) 53% MAD 110 (US$12.8) (Ouislane, Meknès) Meknès rural areas RADEM MAD 5,319 (US$621) Ineligible to OBA 74% MAD 55 (US$6.4) (Dkhissa, Ait Ouallal, funding etc.) MAD–Moroccan dirhams (U.S. dollar equivalent in parentheses), exchange rate of as March 2009 * For households choosing to pay their connections fees in installments over time. Source: GPOBA/Infrastructure Développement Consultants between local authorities and operators, and made tariff and connection fee structures, so as to prevent monitoring of service delivery a priority. an expansion of unserved peri-urban neighborhoods. Next steps 1 Here, the word “peri-urban� includes all settlements located at the cities’ outskirts—whether structured in city quarters or hamlets, All parties acknowledge that conventional financing legal or not—and encompasses hamlets in urban communes pre- would have resulted in fewer connections than OBA senting characteristics of rural areas. in the same circumstances. OBA is seen as strategi- 2 In Morocco, connection fees include a portion of the upstream cally relevant to Morocco, given the lack of targeted infrastructure necessary to deliver service to that connection, hence driving the cost even higher for people living in peri-urban areas subsidy mechanisms for poor households, especially not served by the existing network—who, in general, are the poor. in informal urban settings. The Government of 3 Through “social connection� programs, service providers give Morocco, which is seeking new ways to deliver on households the possibility of paying the full connection cost in in- INDH’s promise, has expressed interest in replicating stallments. Households take out a loan for a period varying from 3 the OBA approach on a citywide or nationwide scale, to 10 years to access basic services and service providers diversify adapting it as necessary. As part of GPOBA-supported from their core business to include financial services. supervision of the pilots, the World Bank is working 4 The review is a World Bank requirement. The project design is with the government to plan a scale-up program that reviewed and the need to restructure is evaluated in case significant would address the needs of several large municipali- issues arise. 5 Benefits are essentially time savings, but also reduced health costs ties. Such a program would also aim to strengthen and improved hygiene practices. Further study would be necessary coordination between institutions in charge of the dif- to quantify such benefits. ferent aspects of peri-urban utility service, and reform 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 e Global Partnership on Output-Based Aid e Global Partnership on Output-Based Aid Supporting the delivery of basic services in developing countries