57815 November 2010 Note Number 37 Output-Based Aid and Sustainable Sanitation1 | Sophie Trémolet and Barbara Evans O utput-Based Aid (OBA) ties the disbursement of public funding to the achievement of clearly speci- ed results that directly support improved access to basic services. OBA has emerged as an important way to nance access to basic services, but experience with OBA approaches in the sanitation sector has remained limited and there have been mixed results. Evidence from exist- ing projects suggests that OBA could improve the targeting and e ciency of subsidy delivery, and help to develop and strengthen sanitation providers. OBA subsidies could be packaged to support services along the "sanitation value chain," from demand promotion to collection/access, trans- port, treatment, and disposal/re-use. OBA approaches for sanitation are no panacea, however, and they need to go Water and Sanitation Program (www.wsp.org) hand-in-hand with broader reforms in the sanitation sector. of these approaches has remained limited in the sanita- tion sector, however. According to a recent review led by Sanitation (i.e. the safe and sustainable management of the Global Partnership on Output-Based Aid (GPOBA), human waste) is highly bene cial to communities, with water and sanitation accounted for only 5 percent of important public bene ts in terms of health and the en- the total OBA portfolio for the World Bank Group as of vironment. Public nancing is important to stimulate the 2009.2 e water and sanitation sector accounted for 26 provision of sanitation services, but there are serious issues percent of GPOBA's portfolio, the largest share attribut- with the way public subsidies for sanitation have been de- able to a single sector. However, although GPOBA has livered. It seems increasingly unlikely that the MDG target initiated a number of sanitation projects, only two are for sanitation will be met unless better ways of structuring currently under implementation: an onsite sanitation public nance can be found. project in Senegal and a water and sanitation project in e sanitation sector appears to be "lagging" for a Morocco (see Box 1). A few governments have adopted number of reasons, including the taboo element attached output-based approaches for sanitation. For example, the to sanitation, low levels of awareness, lack of political will PLM (Programa de Letrinas Melhoradas) which started and attention, institutional fragmentation, and insuf- in Mozambique in the late 1980s helped develop a net- cient or inadequately targeted nancing. Conventional work of latrine-building workshops in the country's main nancial tools for sanitation, such as household subsidies cities via subsidies based on latrine sales. In India, the for toilets, infrastructure subsidies for new wastewater Total Sanitation Campaign (TSC) introduced incentive- treatment capacity or operational subsidies for water and based subsidies to poor households who build their own sewerage authorities have shown limited e ectiveness latrines and rewards to communities for convincing their and ability to reach the poor. ey o en do not respond members to stop open defecation, referred to as the NGP to demand and there is ample evidence of "wasted" hard- (Nirmal Gram Puraskar) awards.3 ware subsidies which result in ine cient investments. In recent years, results-based nancing (of which Sophie Trémolet is an independent consultant in the water and output-based aid is a subset) has emerged as an impor- sanitation sector focusing on financing, institutional, and regulatory tant new way of nancing basic services (especially in issues. Barbara Evans is a Senior Lecturer at the School of Civil telecommunications, energy, and health). Application Engineering, University of Leeds, UK. Supporting the delivery of basic services in developing countries Box 1. OBA for connections to water and sewerage in unplanned urban settlements Key lessons in Morocco e study analysed the sanitation services that need In Morocco, GPOBA provided a US$7 million grant to be provided along the "sanitation value chain," to three service providers (public and private) to ranging from demand promotion, collection/access, extend water and sewerage services into unplanned transport, and treatment to safe disposal and/or re- urban settlements which were formerly excluded use. Table 1 presents examples of sanitation services from regular service provision. Launched in 2007, that could be supported via OBA subsidies. the project aims to connect 11,300 households to The main focus of any intervention will be deter- piped water and sewerage. The output is a simul- mined by identifying which funding gaps need to be taneous connection to piped water and sewerage filled, i.e. where market failures or affordability con- for poor households. The subsidy is paid in two installments: 60 percent on completion of the straints mean that a sanitation service is being under- connection and 40 percent upon verification of provided. For example, if networked sewerage exists at least 6 months of sustained service. Verifica- but people are not connected, the principle focus for tion is carried out by an independent third party. subsidies will be on collection/access. If households Unit subsidies for sewerage connections vary from have on-site sanitation facilities but the pit waste is US$421 in Casablanca to US$913 in Meknès, due being indiscriminately dumped in the environment, to differing unit costs and differing ability to pay the focus may be on transport and safe disposal. on the part of households in different cities. Initial progress under the scheme was slow, largely due The design of individual OBA schemes will to a lack of familiarity with this type of scheme, depend on the most appropriate way to package the investment delays upstream and lack of clarity over provision of sustainable sanitation services, so that land tenure. The pace of investment has picked up each OBA scheme is likely to include a combination in subsequent years, with Amendis in Tangiers hav- of results-based subsidies. Some indicative options ing delivered the expected number of connections for packaging OBA support are shown in Figure ahead of schedule. The Government of Morocco is 1, with examples of existing or potential programs now exploring options for scaling up the scheme at national level. cited. e further down the chain the subsidy is pro- Source: Based on Chauvot de Beauchêne, X., 2009, vided, the more likely it will be possible to implicitly "OBA in Morocco (Part 1): Extending Service to the Poor subsidize previous steps of the chain. For example, in Urban Areas," OBApproaches 25, and personal com- in Sri Lanka, GPOBA proposes to create incentives munication with X. Chauvot de Beauchêne. for better operation of on-site sanitation by combin- ing a payment for operation of on-site systems with a subsidy for rehabilitation and construction of new The study facilities. is will create incentives for contractors to enter the market as "sanitation operators" in charge GPOBA, in association with the Water and Sanitation not only of building latrines but also of maintenance Program (WSP), initiated a study to examine whether and operation. In the PRODES (Programa Despolu- OBA has the potential to enhance the delivery of public ição de Bacias Hidrográ cas) program in Brazil, the nancing to the sanitation sector and improve access utilities get a subsidy if wastewater gets treated; this to sustainable sanitation services.4 e rst phase of gives them incentives to connect new customers to the the study led to the publication of a GPOBA Working network, as this would increase the overall amount of Paper5 reviewing experience with OBA for sanitation wastewater that arrives in the treatment plant. and examining the potential for its application. During Phase 2, concept notes are being prepared to identify Key challenges how OBA approaches could be introduced in sanita- tion projects or programs that are ongoing or under A number of challenges have limited the use of OBA design. Key questions raised in the study included: for sanitation so far. However, evidence from existing a) what explains such limited use of OBA- nancing projects suggests that these constraints can be allevi- approaches for sanitation? b) how can OBA subsidies ated through careful project design. be delivered to providers of sanitation services? and First, households tend to be unaware of the ben- c) what other components may be required to improve e ts from sanitation, so willingness-to-pay for sanita- chances of success of OBA schemes for sanitation? tion services may be low and demand unpredictable. November 2010 Note Number 37 Table 1. Examples of output indicators to trigger payment for OBA subsidies Value chain Services Output indicators Demand promotion Sanitation marketing Number of households who build/rehabilitate a latrine following demand promotion Social mobilisation, triggering Number of villages/communities becoming Open- Defecation Free (ODF) Collection/access Build on-site sanitation facilities Number of facilities built and still operating x-months down the line Build and operate community or Number of toilet blocks in disadvantaged areas (used/ public toilets paid for) Transport Transport pit waste to designated Volume of waste transported to and disposed in desig- points nated locations Build and operate waste transfer sta- Number of waste transfer stations built and function- tions ing x-years down the line Treatment Build, maintain and operate wastewa- Volume of waste collected and treated to required ter treatment plants standard Disposal/re-use Build and maintain facilities which con- Volume of productive agricultural input generated and vert waste to agricultural inputs or biogas sold to farmers or gas created (and sold) Figure 1. Potential packaging of OBA financing across the sanitation value chain Promote sanitation, create demand, Demand creation community organisation MDG focus NGP awards (India) PLM (Mozambique) On-site with Sewer reuse On-site w/o connections Collection reuse Partial on-site treatment PRODES (Brazil) Gharbeya (Egypt) Transport Payments to pit latrine emptiers Sri Lanka Environmental focus Decentralised Treatment Treatment treatment facilities plants Re-use sludge Payments for re-use (energy, agriculture) Disposal/Re-use Environment ese obstacles can be partially addressed by demand · Help extend access to sanitation in a sustainable assessment studies in the design phase, coupled with and more e cient manner; demand promotion activities. · Help target subsidies for sustainable sanitation Second, a common challenge is that sanitation to disadvantaged households and deliver track- service providers may be unable to mobilise pre- able results from subsidies invested in the sector, nancing (a common precondition for OBA) to invest ensuring minimum leakage (as long as the subsidy in the services prior to receiving the subsidies upon source is clearly identi ed and secured); and delivery of pre-identi ed outputs. is challenge can · Support the development and strengthening of be addressed by combining OBA schemes with micro sanitation service providers, while giving them lending or by splitting the service providers' remunera- incentives to serve areas of greatest need, includ- tion between an upfront payment ("block grant") and ing rural and peri-urban areas and urban slums via a performance-based payment. Packaging services to a range of services, such as well-run public toilet the poor with other revenue-generating services, such blocks or pit-latrine emptying. as solid waste, may also help generate cash- ow for the service providers to enable them to pre- nance Although introducing OBA schemes for sanitation the investments. will only be one part of a larger set of necessary high- level sanitation sector reforms, their introduction Finally, pilot OBA schemes are likely to remain re- could go some way towards improving access through main limited in scope without a nancing mechanism greater targeting and better incentives for service that provides regular and transparent subsidy ows to provision. sanitation service providers throughout a given country. is can take the form of a "challenge fund", as cur- rently tested in Honduras with an OBA facility housed 1 This paper is also published as a Water and Sanitation Program in the Honduran Fund for Social Investment (FHIS).6 Learning Note. e Facility will provide US$4 million in subsidies for 2 Mumssen, Y., L. Johannes and G. Kumar. 2010. Output-Based the nancing of eligible water and sanitation infrastruc- Aid: Lessons Learned and Best Practices. Washington, DC: World ture projects, including pre- nancing for those project Bank. Available at: http://www.gpoba.org/gpoba/ebook. implementers that need it, although the payment of 3 . Trémolet, S., with P Kolsky and E. Perez. 2010. "Financing On- Site Sanitation for the Poor: A Six Country Comparative Review the subsidy will remain linked to the output. e ap- and Analysis." Technical Paper. Water and Sanitation Program, proach is showing promise, but it is too early to evaluate Washington, DC. whether such "mainstreaming" of OBA approaches can 4 The study was co-managed by WSP Regional Team Leader for be successful. East Asia and the Pacific Almud Weitz and World Bank Senior Infrastructure Economist Yogita Mumssen. Conclusion Trémolet, S., and B. Evans, with inputs from D. Schaub-Jones. 5 2010. "Output-Based Aid for Sustainable Sanitation." OBA Working Paper 10. Global Partnership on Output-Based Aid, From existing experiences in sanitation and results Washington, DC. achieved in other sectors, it appears that OBA has the 6 Mandri-Perrott, C., Schiffler, M. and Aguilera, A. 2009. "Output- Based Aid in Honduras: An OBA Facility for the Water and potential to: Sanitation Sector." OBApproaches 29. About OBApproaches OBApproaches is a forum for discussing and disseminating e 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. e 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 a liated organizations. Nor do any of the conclusions rep- and education in developing countries, in particular through resent o cial 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