Output Based Fund for Output Based Fund for improved infrastructure improved infrastructure investmentinvestment

Cledan Mandri-Perrott

Fiduciary Forum (March 25-28)

A strategy for targeted, A strategy for targeted, transparent and sustainable transparent and sustainable investment in the water and investment in the water and wastewater in Honduraswastewater in Honduras

2

Sector Background & current Sector Background & current challengeschallenges

GoH has massive shortfall in investment for water sector

Problem is:o Money is being spent in the sector but not effectively o Disparate approach to investment not linked to overall

strategy

Output Based Aid vs Output Based Disbursement:o Aid = non-reimbursable o Link to output usually as a proxy to a serviceo finance or subsidize a portion of the investment or required

user fees which cannot be covered by users on their own (hence the “aid” component of OBA)

o OBA the payment based on outputs delivered is explicitly linked to a contract with a firm that invests or operates the infrastructure investment or service

Bank strategy for country includes:o Use ‘Plan Nacional’ to further dialogueo Piloting an output based strategy

3

Proposed solution: use of an OB FundProposed solution: use of an OB Fund

Output Based (OB) Fund for infrastructure development (targeting rural and peri-urban communities - greenfield and brownfield projects)

Outputs: pre-agreed outputs for example connections to water or sewerage network (average is 6 people per hh connection or water kiosk) but linked also to service obligations and sustainability

Targeting: geographical, poor communities and households whose income is $46 per month or US$2 per day

OB Fund: Targeted approach to project portfolio Municipalities have to develop project(s) to help meet MDG Government intention to scale up to all sector investments

4

Mainstreaming Output Based Mainstreaming Output Based ApproachesApproaches Where are we today? Where are we today?

Output Based (OB) Fund created

12 preliminary projects identifiedo 2 to 3 fully eligible (first disbursement in two weeks)o 5 to 7 in next two months

OBA: Output Based approach to subsidies to the sector

OBD: Output Based approach to loan instruments or sector disbursements/transfers

5

Characteristics of the Output Based Characteristics of the Output Based Fund - 1Fund - 1

Fund has:o Specialized technical, financial and management staff under

the Ministry for Development (FHIS)

o Funds specially designated for water and wastewater

Funding provided through:o Global Partnership of Output Based Aid (GPOBA) = US$ 4.4

M for subsidy)o GoH = US$1 M (for bridge funds)

OB Fund has TA funds available for refinement of sub projects

6

Characteristics of the Output Based Characteristics of the Output Based Fund - 2Fund - 2

Projects evaluated on six monthly period. Sub projects evaluated and ranked as they are received for that corresponding period

Targeting: geographical, poor communities and households whose income is $46 per month or US$2 per day

Payments by OB Fund are:o Complementary i.e. leverage Municipal, public, donor, IFI

fundingo Will never exceed 60% of total capital cost

GPOBA per capita subsidy ceiling based on percentage of WHO ref US$140 water & US$160 WW:

o US$90 (64%) per capita for water services, and o US$96 (60%) per capita for wastewater services

7

Functioning of the FundFunctioning of the Fund

OBA FacilityFHIS Designated Account

(housed in FHIS)

OBA FacilityFHIS Designated Account

(housed in FHIS)

Fondo Hondureño de Inversion Social

Fondo Hondureño de Inversion Social

Upfront capital

contribution

Public Implementer

Public Implementer

GPOBAGPOBA

Independent Verification

Agent

Independent Verification

Agent

Upfront funds for ‘bridge loans’ to Public Implementers

Dedicated Staff

Dedicated Staff

Technical consultan

ts & suppliers

Technical consultan

ts & suppliers

2. (b) Funds to support project preparation

Private Implemente

r

Private Implemente

r

3. Subsidy payment

Loan re payment

Verifies and issues

opinion on outputs reached

4. Disbursement application (including initial application)

1. Disbursement

2 (a). Payments to third parties

Key of flow of funds:Subsidy paymentOther funds

8

How to choose what projects to finance -How to choose what projects to finance -11

1: Pre-Identification:

2: Sub-Project Assessment/ Applications

3: Project Appraisal & Ranking

Using per capita Subsidy Amount,

ENPV

Using per capita Subsidy Amount,

ENPV

Ranking 3: Investment Efficiency Index

Ranking 3: Investment Efficiency Index

Index is based on relating financial NPV of cash flows to total investment

Index is based on relating financial NPV of cash flows to total investment

Ranking 2: Unit Cost Efficiency Index

Ranking 2: Unit Cost Efficiency Index

Index is based on a comparison of investment, operation and subsidy per capita against maximum ceiling of US$90 for water and US$96 for wastewater

Index is based on a comparison of investment, operation and subsidy per capita against maximum ceiling of US$90 for water and US$96 for wastewater

Ranking 1: US$ subsidy per number of

people benefiting

Ranking 1: US$ subsidy per number of

people benefiting

9

Operationalising the Fund - 1Operationalising the Fund - 1

Output-Based Payments:o Municipalities will receive ten percent (10%) upon signing of

Performance Agreement o A further sixty-five percent (65%) will be paid upon a verified

working connection o A final twenty-five (25%) percent will be paid after six months

of bills being sent and paid by each new connection

10

Operationalising the Fund - 2Operationalising the Fund - 2

Performance Agreement regulates roles and responsibilities of sub project implementers and OBA Facility

Private operators provide own bridge funds (directly or through commercial credit)

Bridge loan provided by FHIS for sub project implementers with low/no credit

Municipality takes on pre-financing risk:o Obtains 10% from OB Fund upon signature of Performance

Agreemento Can obtain additional funds required through a bridge loan from

FHISo Repays loan through OB Fund payment or if in default as a

retention to FHIS sector transfers

Regulator, through an Independent Consultant, provides verification of outputs

11

Challenges in developing an Challenges in developing an Output Based FundOutput Based Fund

Challenge:

1. Pre-financing risk i.e. money needs to be spent prior to output being verified and paid

Possible solution:

1. Pre-financing options: A contribution by FHIS of US$1

M as bridge loan to assist with pre-finance to project implementers with low financial capacity

Public operators – soft loan guaranteed against future sector transfers

Private operators – self funding or commercial bank guaranteed through a pledge of Performance Agreement or step in rights for banks

Public operators – commercial loan guaranteed by Municipality or State

12

Challenges in developing an Challenges in developing an Output Based FundOutput Based Fund

Challenge:

2. Implementers capacity to bring ‘good’ projects to OB Fund

3. Incentive to maximise connections with lowest subsidy

Possible solution:

2. TA for Municipal Capacity Building and to be used at the discretion of the OB Fund

3. Ranking methodology must: ENPV (-) and FNPV (+)

as initial filter i.e. not eligible

Incorporates max ceiling (ceiling still deemed necessary given peri urban and rural schemes being developed)

13

Concluding remarksConcluding remarks

Setting up a fund takes time and challenges include:o Implementation capacity eg training of suitable staffo Shift in paradigm from input to outputo Initial sub projects need to be identified and test ranking methodologyo Design and structure needs to ensure sustainability

Significant effort needs to go into developing the implementing rules for the Fund

Need to assess readiness of financial management reporting of unit costs and outputs delivered

Under OBA / OBD few prior review decisions, thus need to ensure project’s underlying fiduciary systems are strong and auditable subsequently

OB Fund can become the catalyst for:o Uniform funding approach to the sector (ideal for donors which want to

see results and have little implementation capacity)o Possible scale-up in the future

Not all projects will be eligible therefore need a special strategy to deal with these

Output Based Fund for Output Based Fund for improved infrastructure improved infrastructure investmentinvestment

A strategy for targeted, transparent and A strategy for targeted, transparent and sustainable investment in the water and sustainable investment in the water and wastewater in Honduraswastewater in Honduras