Extending Water Supply and Sanitation Services to the Poor through Output-Based Aid (OBA) - a case in Nepal by Norio Saito

8/6/2019 Extending Water Supply and Sanitation Services to the Poor through Output-Based Aid (OBA) - a case in Nepal by Norio Saito

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Extending Water Supply andExtending Water Supply and

Sanitation Services to theSanitation Services to thePoor through OutputPoor through Output--BasedBased

Aid (OBA) Aid (OBA)-- a case in Nepala case in Nepal --

16 June 201116 June 2011

Norio SaitoNorio SaitoSenior Urban Development Specialist Senior Urban Development Specialist

Urban Development and Water Division, South Asia Department Urban Development and Water Division, South Asia Department



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Presentation OutlinePresentation Outline

1.1. Project Project

2. Output 2. Output--Based Aid (OBA) MechanismBased Aid (OBA) Mechanism

3.3. Introducing the OBA mechanism toIntroducing the OBA mechanism towater supplywater supply

4.4. Introducing the OBA mechanism toIntroducing the OBA mechanism to

sanitation (private latrine construction)sanitation (private latrine construction)5.5. DiscussionsDiscussions



Nepal: Second Small Towns Water Supplyand Sanitation Sector Project

1. Salient Features of the Project

Support development of safe, accessible, and adequate watersupply and sanitation facilities in about 20 small towns(population of about 20,000-30,000) in Nepal.

Water Users and Sanitation Committees (WUSCs) are the owner

of each project, with necessary support from the government. WUSCs receive 50% of the investment cost as grant from the

government, and contribute the remaining 50%, partly as cashcontribution (5-15%), and partly by taking a loan (35-45%)from the Town Development Fund (TDF).

Project cost is $71.7 million, including a grant of $45.1 million

from ADB. (OBA component: $1.3 million) ADB Board approval in September 2009.

Detailed design work is mostly complete for 12 towns underbatch 1.



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2. Discussions during the Project processing

Lessons from Phase I (completed in 2008)

a) The poors connection to the water supply system was not high.

b) High connection fee ($50-$400 per household), charged ontop of connection costs ($60-$70 per household), wasconsidered a major deterrent to the poors connection.

c) Subsidy (not OBA) was provided for private latrineconstruction for the poor, and the target was mostly achieved.

However, awareness programs (only) did not work well toencourage the latrine construction by non-poor.

Agreed to link the subsidy to outputs, not inputs.

Framework of OBA developed and included in the RRP.



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3. Governments policy on OBA3. Governments policy on OBA

The Government of Nepal adopted the Urban Water Supply andSanitation Sector Policy in August 2009. (This was assisted by an

ADBs PPTA.)

The Policy specifically addresses OBA:a) All urban water and sanitation projects will be required toprepare social maps to adequately identify urban poor andvulnerable groups requiring special assistance to avail of theservices. Adequate strategic measures, like OBA, will beimplemented to ensure that such groups are not systematicallydevoid from benefiting from the services.

b) On-site sanitation will be the primary responsibility of individualhouseholds. Subsidies may be available from central and localgovernments for poor and marginalized settlements, preferablyunder the OBA model.



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Nepal: Second Small Towns Water Supply andSanitation Sector Project

4. Formulation of OBA mechanism

The project is (probably) the first ADB-financedproject explicitly adopting the OBA.

Obtained $75,000 from WFPF to engage consultants(one international and one national) to formulate aconcrete OBA mechanism for water supply andsanitation.

Consultants were mobilized in May 2010 and finalizedthe mechanism in January 2011.



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What is OBA?

OBA is a strategy for using explicit performance-based grants(subsidies) to support delivery of basic services to underprivilegedand poor households where policy concerns justify public funding tosubsidize connection costs and complement or replace usercharges.

Subsidies are provided only when the delivery of specific services or outputs (e.g. piped household connection for water supply andaccess to improved sanitation) have been confirmed by anindependent verification agent.

Service providers need to pre-finance expenditures for the

provision of agreed service delivery this provides strongincentives to achieve agreed outputs in an efficient manner.

One tool among results-based financing



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Basic Elements of Designing OBA Projects

1. Determining the output

2. Selecting target population

3. Choosing an appropriate subsidy form

4. Determining the value of the subsidy

5. Linking outputs to subsidy payment

6. Organizing institutional framework

7. Evaluating and mitigating project risks8. Monitoring for results



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Water Supply (1)

(1) Outputs: Household pipe connection (fully plumbed or yardconnection)

(2) Target population: Income-based targeting Households withmonthly income of less than $60, with priority given to thosewith income of less than $40, identified through householdsurveys. Other eligibility criteria (e.g. area of land holding, foodsufficiency, materials used on house, female-headed or not) arealso applied.

WUSC and local NGO will consult with other community leadersfor confirmation. The Town Project Coordination Committee

(local governments, WUSC, WSSDO, representatives of education and health units) will finally endorse the list.

The maximum percentage of households eligible for OBA is thedistrict level poverty incidence.



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Water Supply (2)

(3) Subsidy form: One-off subsidy

(4) Value of subsidy:

Principle:

The difference between the unit cost of providing a service to auser and the users ability to pay.

75% of the connection cost (about $78) at maximum.

Commitment fee of $7 is required upfront. Remaining amount of the connection cost (about $19) will be paid over a period of 3years. Subsidy could be variable, 25%, 50%, and 75%, based onaffordability.

With the subsidy, the monthly cost ($3.6, of which 85% is watertariff) to an OBA beneficiary is between 5.8% and 8.6% of the

household income. Financial analysis is being reviewed to seek the possibility of

lowering tariff (lifeline rate, which should be lower than theproposed level of about $0.3 per cubic meter) while maintainingthe financial sustainability. If tariff is lowered by 20%, themonthly cost would be 4.6%-6.9% of the household income.



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Water Supply (3)

(5) Subsidy disbursement:

80% released to WUSCs upon confirmation of connection (done by civil work contractor) no needfor pre-finance by WUSC, except for the initial

contribution (5-15%) Household connections will be verified jointly by DSC

and local NGO.

Remaining 20% released to WUSCs upon

confirmation of functionality after 6 months, jointlyverified by DSC and local NGO



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Water Supply (4)

(6) Institutional framework:

WUSC is the service provider.

WUSC has incentive to deliver services to the poor

after connection (to recover the remaining 20% OBAsubsidy).

The contractor is responsible for the first-year systemoperation.

Capacity building of WUSCs essential.

DSC and local NGO jointly work as independent verification agent (IVA).



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Water Supply (5)

(7) Risk mitigation:

Targeting risk: Non-poor may be included, and some poor maynot be included from OBA beneficiaries (medium risk) LocalNGO involvement, information disclosure, validation process

Collection risk: the poor cannot pay the monthly charges (watertariff and installments) (medium risk) Affordability check,confirm commitment upfront (commitment fee)

Performance risk: output is not provided or is of poor quality(low risk) civil work contractor is responsible for the output

Operation risk: water not supplied as designed (medium-lowrisk) provide capacity building support to WUSC, contractor isresponsible for first-year operation



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Water Supply (6)

(8) Monitoring:

OBA makes results-monitoring a part of the integralprocess, and helps reporting on outputs andevaluation.

IVA will verify the output and service delivery.



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Sanitation (1)

(1) Outputs: household latrine (Pour flush toilet with pit(s) iscommon in small towns in Nepal.)

(2) Target population: Income-based Targeting (same as watersupply, but threshold could be higher to meet non-poorsdemands)

(3) Subsidy-form: one-off subsidy

(4) Value of subsidy: 75% of substructure cost (about $126),excluding unskilled labor cost, and additional $14 forsuperstructure (total subsidy $140)

Commitment fee of $7 required upfront. OBA beneficiaries stillneed to contribute $35 more and unskilled labor (worth $55) forsubstructure alone. Construction for superstructure may cost ashigh as $230. A part of this may be financed as a low (or zero)interest loan from WUSC.



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Sanitation (2)

(5) Subsidy disbursement:

Subsidy for substructure ($126) is given tobeneficiaries by WUSC in the form of voucher.

Beneficiaries will receive material from suppliers and

have the latrine substructure constructed.

Suppliers bring vouchers to WUSCs for payment.

WUSCs, by using the initial contribution from users(amounting to 5-15% of water supply project cost,

consisting of connection costs from non-poor andcommitment fee from the poor), make payment (pre-finance) to suppliers upon receipt of vouchers.



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Sanitation (3)

(5) Subsidy disbursement (continued) Upon completion of the substructure construction,

WUSCs will receive 60% of OBA subsidy (= $84).(payment to intermediate output)

Beneficiaries will be given additional $14 subsidy forthe construction of superstructure in the form of voucher.

In the same manner, upon completion of thesuperstructure, WUSCs will receive 20% of OBA

subsidy ($28). Remaining 20% ($28) will be paid to WUSCs upon

confirmation of latrine use 6 months after thecompletion of the connection.



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Sanitation (4)

(6) Institutional framework:

WUSC is the service provider.

WUSC has incentive to ensure timely construction of

latrine (both sub- and superstructure) as well as useof the latrine.

Capacity building of WUSCs essential.

Demand creation (sanitation marketing) programs

such as CLTS/SLTS implemented in parallel. DSC and local NGO jointly work as independent

verification agent (IVA)



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Sanitation (5)

(7) Risk mitigation:

Performance risk: Latrine construction may not be completed(medium-high risk) Marketing program (participation is a must for beneficiaries), integration with national program (Sanitationand Hygiene Master Plan adopted in 2010), soft-loan to

beneficiaries (for own contribution portion)

Pre-finance risk: WUSCs do not have enough fund for pre-financing (medium-high risk) implementation in batches,prompt verification and payment of subsidy, collaboration withlocal governments for the seed fund

Operation risk: Beneficiaries continue open defecation (mediumrisk) Marketing and awareness program, beneficiaries choosemodels/design, close supervision of construction to ensurequality



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Sanitation (6)

(7) Risk mitigation (continued):

Operation risk: Pits not emptied (medium risk) Capacity building of WUSCs, collaboration with localgovernments

(8) Monitoring

IVA will verify the output and service delivery.



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Other issues

1. Timing of Intervention

Latrine program starts first (mid 2011-).

Civil work contract for water supply system development isexpected in 3Q-4Q 2011, and construction will continue until

2013. Household connection work will be made in 2013. This would be optimal as expenditures by the poor and WUSCs

may be phased.

2. Pilot use of the OBA mechanism

After testing the mechanism in batch 1 towns of the project,necessary adjustments will be made. The government intendsto develop national OBA guidelines thereafter.



Discussions (1)Discussions (1)

(1) Needs for subsidy(1) Needs for subsidy

Can CLTS/SLTS alone be effective for private latrineCan CLTS/SLTS alone be effective for private latrineconstruction?construction?

Will subsidies create dependence in the communities?Will subsidies create dependence in the communities?

-- Depend on the affordability, which needs to take intoDepend on the affordability, which needs to take intoaccount both water supply and sanitationaccount both water supply and sanitation

(2) Cost/Quality of toilets(2) Cost/Quality of toilets

Is the cost of latrines too high?Is the cost of latrines too high?

-- Basic pit latrines can be constructed with less costs,Basic pit latrines can be constructed with less costs,but do we want to promote them?but do we want to promote them?

-- More consideration is needed to reduce costs (e.g.More consideration is needed to reduce costs (e.g.bulk purchase from suppliers)bulk purchase from suppliers)

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Discussions (2)Discussions (2)

(3) Objective of the project (3) Objective of the project

Private latrine construction is just an output, not thePrivate latrine construction is just an output, not theoutcome/impact.outcome/impact.

-- The project will coordinate with open defecationThe project will coordinate with open defecation--freefree(ODF) programs implemented by the government.(ODF) programs implemented by the government.

(4) Sustainability vs. Affordability(4) Sustainability vs. Affordability

Increasing subsidies and reducing tariff mayIncreasing subsidies and reducing tariff may

jeopardize the financial sustainability of the system. jeopardize the financial sustainability of the system.-- Required contribution of WUSC for capital investment Required contribution of WUSC for capital investment

(50%) may be too high.(50%) may be too high.

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Thank you!Thank you!

For more information contact [email protected]

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Extending Water Supply and Sanitation Services to the Poor through Output-Based Aid (OBA) - a case in Nepal by Norio Saito