72609 June 2012 Note Number 44 Using Output-Based Aid in Urban Projects | Wajiha Ahmed and Iain Menzies   Photo courtesy of GPOBA able to keep up with the demand for urban infrastructure A gainst the backdrop of rapidly rising urbanization and social services such as electricity, water and sanita- in the developing world and the growing demand tion, transport, solid waste management, education, and for basic services such as water and power, there is health care. The people most affected by the lack of access an increasing need to improve service delivery, particularly to basic services in urban areas are the poor. Often they in low-income urban settlements. Output-based aid (OBA) obtain essential services, like drinking water or electric- approaches, with their pro-poor targeting, have been piloted ity, from informal vendors at substandard quality and at a in cities around the world. This note discusses the benefits high premium. Without access to reliable electricity, poor and challenges of using an OBA approach in urban projects urban households lose valuable hours of productivity, or for low-income residents, provides examples of successful compromise on safety with illegal electricity connections. innovations, and highlights features that will improve the Given the growing demand for basic services, there is an likelihood of success. increasing need to improve service delivery in low-income urban settlements. One way to help the urban poor gain access to ba- sic services is output-based aid (OBA), a results-based By 2020, half the population of the developing world is likely to live in cities; by mid-century, the number of urban dwellers in developing countries may reach 5.2 bil- Wajiha Ahmed is a Consultant and Iain Menzies is a Senior åInfrastructure Specialist with the Global Partnership on Output- lion (United Nations, 2011). With a rapid migration from Based Aid rural to urban areas, many governments have not been Supporting the delivery of basic services in developing countries financing (RBF) mechanism. OBA links the payment of Risk transfer and access to finance public funds or subsidies to the achievement of specified outputs and actual service performance, as opposed to In OBA schemes, payment on delivery of specific outputs traditional inputs. Output definitions are designed to be as shifts performance risk to the service provider. Service pro- close to the desired development outcomes as is practica- viders can be public, private or nongovernmental organiza- ble, and within the scope of the service provider to deliver. tions (NGOs). Since service providers are not paid the sub- Most urban OBA projects also require that a portion of the sidy in full until they deliver outputs, they must have access subsidy payment be withheld until sustainable service de- to sufficient finance for the initial investments. The financ- livery has been demonstrated. Satisfactory service delivery ing of this initial investment is a significant risk for service is assessed by an Independent Verification Agent (IVA) providers, and is one of the biggest constraints to develop- through beneficiary household surveys, and by checking ing output- or results-based projects. This constraint has the quality of the installation of the connection, the quality proved particularly challenging when working with NGOs of service, and billing records (see OBApproaches Note and small-scale service providers, but can also provide the Number 43). opportunity to partner with other approaches. Partnering with other urban initiatives opens new Targeting the urban poor financing opportunities. For example, linking OBA with the Cities Alliance1 Country Programmes opens the op- A core component of an OBA scheme design is explicit portunity to engage with larger planning processes and targeting of low-income households. For the urban poor, a to work closely with both national and local governments major hurdle to obtaining basic services is the high initial as well as with slum dwellers organizations. In Ghana the cost of access, such as a connection fee for water supply. World Bank, GPOBA and Cities Alliance are cooperating OBA can help reduce this barrier by paying a subsidy to on the emerging Greater Accra environmental sanitation bridge the gap between the actual cost of access and what strategy, with a potential mix of funds from sources such users are willing and able to pay. as community savings and World Bank loans, to improve Geographic targeting can be effective in cities where service access. poor households tend to be concentrated in slums and In cases where the service provider cannot afford to informal communities. Where communities are more finance the whole project in advance, phased subsidy diverse economically, some OBA schemes use alternative payments against intermediate outputs have been used. targeting strategies, such as subsidizing only those ser- On rare occasions, small advance payments have been re- vices that the non-poor are less likely to use. In Maputo, quired by service providers for expenses like start-up costs Mozambique, for example, an OBA scheme subsidized and awareness campaigns. In Armenia, for example, where only yard taps, each typically shared by three households, winters are long and severe, low-income households ex- as opposed to more expensive individual household pend a large share of their budgets on heating costs using connections. traditional fuels because they could not afford the connec- Other OBA schemes target beneficiaries based on tion fee to access cleaner and cheaper gas heating. In the their income, or poverty level. In the Indonesian city of Armenia Heating and Gas OBA project, service providers Surabaya, the government utility plans to use an OBA received 20 percent of the subsidy in advance, then 70 approach to deliver about 15,000 individual household percent once the household was connected to gas heating, water supply connections through the piped network. The and a final payment of 10 percent after they had demon- project initially utilizes geographic targeting, but refines strated adequate service provision. The private operators the targeting using household characteristics as a proxy provided 5,847 poor households (about 23,738 people) to determine poverty levels. Only households with a very in urban apartments with gas-based heating services. low electricity supply capacity (less than 1,300 VA) or no These households represented a large proportion of those formal electricity connection at all will be eligible under targeted, those meeting the eligibility threshold score of 34 the scheme. under the national social protection program (the Poverty Similarly, an OBA scheme to connect poor households Family Benefit Program). More typically, service providers to the electricity grid in the Liberian capital of Monrovia have met pre-financing needs from internal cash flows or uses a combination of targeting mechanisms. Since Liberia externally sourced funds, or both. has one of the lowest electrification rates in the world, less than 1%, even relatively better-off urban dwellers in poor areas might not have access to electricity. While 21 Services demand risk low-income areas are targeted, connections will only be Demand (or up-take) risk occurs where the service provided to households living in one-story dwellings with provider has miscalculated or over-estimated consumer sub-standard structures. demand for the service. June 2012 Note Number 44 Progress in the Mumbai Improved Electricity Access increase the provision of public water points and intro- for Indian Slum Dwellers OBA project has been slow, in duce pre-paid meters. part due to weak up-take from potential beneficiaries. A slum electrification OBA project in Kenya tackled Emerging findings from a baseline study of the project the issue of illegal connections, which were leading to (Mimmi, 2012) highlight the importance of undertaking losses for the Kenya Power & Lighting Company (KPLC), a robust willingness-to-pay (WTP) study among target posing a public safety risk, and encouraging extortion and beneficiaries early on in OBA project preparation. Results gang behavior. The OBA scheme introduced design inno- from the study indicate that slum dwellers pay signifi- vations to improve sustainability and decrease the threat cantly less for illegal connections (access fee, internal of theft and tampering, including: switching to concrete wiring, and tariffs) than for legal connections. Although poles, which cannot be climbed as easily; using a me- there are service quality and safety concerns around such dium voltage line that is difficult to access illegally as the connections, the lower cost has undermined the demand main feeder line across the communities, and using small for formal OBA based connections. The study noted the transformers on each pole to step down the voltage to importance of early engagement with local community distribution levels for a small number of households; using leaders to help manage political economy issues in the split pre-paid meters so most of the equipment is on the targeted slum communities. pole instead of in the household; and limiting the need for Two successful OBA projects in the water sector house wiring through the use of ready-boards. KPLC will mitigated this demand or up-take risk in different ways, also pilot a program in electricity credit sales by mobile based on the service providers experience on working in phone so that residents do not need to leave their houses low income communities. In the Manila Water project the to top up their accounts. service provider waited for a minimum number of formal In addition, experience has shown that for OBA schemes connection applications before starting network invest- to succeed, they must have buy-in and commitment from ments. In the Jakarta Water project a target connection local governments. In the Armenia Heating and Gas OBA rate of 46.5 percent was agreed with the service provider project, for example, it was noted that early and active based on willingness-to-connect assessments from com- involvement with local authorities would be critical for any munity surveys. If this target was met then all pre-agreed future scale-up since they can efficiently promote aware- tertiary network extension costs would be fully reim- ness among the urban poor about the benefits of the OBA bursed. Failure to meet the target, however, would result approach. The government agency should have the adminis- in partial reimbursement of such costs on a pro rata basis, trative capacity to manage OBA contracts and subsidies. thus incentivizing the service provider to maximize the speed and rate of connection. Lessons learned and prospects for scaling-up or replication Designing OBA projects for the urban poor Although OBA is not the solution for all urban service problems, it is a tool that decision-makers can consider to Service provision in informal or slum settings presents help increase the access of urban poor households to basic some unique challenges. A major obstacle is the often services, in particular where the cost of service access is precarious tenure status of slum dwellers; many are ineli- unaffordable, and where service access needs to be built gible for formal household connections by law. Residents into urban project design. To succeed, however, project also have no guarantee that their dwellings will be safe design should be tailored to the specific characteristics of from demolition. Service providers may lack legal or urban households and their physical and social environ- regulatory authority to serve these informal areas. They ment. Land tenure issues must be addressed early on in are also likely to lack incentives to serve such areas for the design stage. Active outreach and engagement with fear of low uptake or because they see it as a high risk community-based organizations, and political and com- investment. munity leaders, has also proved key for successful project To overcome such challenges, in a scheme in Kampala, design and implementation. Uganda, the National Water & Sewerage Corporation Incorporating OBA schemes, with their pro-poor (NWSC) targeted communities where the chance of targeting mechanisms, into broader urban reform and reclamation by developers or eviction was low. It was slum upgrading programs can also be effective. OBA ap- also proposed that new developers should compensate proaches and mechanisms can bring multiple stakeholders residents when they clear an area, even if the settlement together, acting as a resource convener, and potentially is illegal. NWSC also realized that yard tap connections play an important role in shaping the policy framework were impractical and too expensive in many of the densely for urban development in terms of service provision and populated informal settlements. Thus NWSC decided to service access for the urban poor. References Web-based sources Assessing the demand for improved electricity in urban See http://oba-data.org: slums: findings from a baseline household survey in Access to Gas & Heat Supply for Poor Urban Households Mumbai (Draft). L M Mimmi, 2012. (Armenia). GPOBA Working Paper Number 11: Access to Finance in OBA in Kampala – Water Connections for the Poor. Output-Based Aid. 2010. Kenya Electricity Expansion Project. OBApproaches Note Number 23: Output Based Aid in Manila Water Supply. Armenia – Connecting Poor Urban households to Gas GPOBA W3 – Expanding Piped Water Supply to Sura- Service. 2009. baya’s Urban Poor. OBApproaches Note Number 28: Output Based Aid in the Yemen Water for Urban Centers. Philippines – Improved Access to Water Services for Poor Households in Metro Manila. 2009. OBApproaches Note Number 31: Connecting Colombia’s Poor to Natural Gas Services – Lessons Learned from a Completed Output-Based Aid Project. 2010. 1 The Cities Alliance is a global partnership for urban poverty OBApproaches Note Number 38: Output Based Aid in In- reduction and the promotion of the role of cities in sustainable donesia – Improved Access to Water Services for Poor development. The Cities Alliance was created in 1999 when 10 donor governments joined the World Bank, UN-HABITAT and Households in Western Jakarta. 2010. the major international associations of local authorities to form a OBApproaches Note Number 43: Independent Verifica- new partnership aimed at focusing on two key issues: the growth tion in Results-Based Financing. 2012. of slums and the management of cities where slum growth was World Urbanization Prospects, the 2011 Revision. United taking place. Nations: Office of Economic and Social Affairs. About OBApproaches OBApproaches is a forum for discussing and disseminating have been chosen and presented by the authors in agreement recent experiences and innovations in supporting the delivery with the GPOBA management team and are not to be attribut- of basic services to the poor. The series focuses on the provi- ed to GPOBA’s donors, the World Bank, or any other affiliated sion of water, energy, telecommunications, transport, health, organizations. Nor do any of the conclusions represent official and education in developing countries, in particular through policy of GPOBA, the World Bank, or the countries they output- or performance-based approaches. The case studies represent. To find out more, visit www.gpoba.org e Global e Partnership on Global Partnership Output-Based Aid on Output-Based Aid Supporting the delivery of basic services in developing countries