June 2016 Note Number 51 Output-Based Aid at Work in Public-Private Partnerships D evelopment agendas and spending are now strongly efforts of all parties, including more efficient investments guided by the Sustainable Development Goals by governments and donors, as well as significant private (SDGs), which are a universal agenda designed sector finance and expertise. A number of mechanisms exist to tackle the challenges of extreme poverty and the eco- for leveraging private financing and know-how to deliver nomic, social and environmental dimensions of sustainable development solutions—including public-private partner- development. Delivering basic infrastructure and services ships (PPPs) and output-based aid (OBA). This note details is a fundamental part of these challenges, especially for how OBA’s emphasis on pro-poor targeting and account- underserved communities. While the public sector will ability can add value to a PPP by ensuring that finance continue to play a crucial role in delivering infrastructure flowing from the private sector reaches those most in need, services, the public sector alone cannot meet the grow- and offers three case studies in which OBA and PPPs have ing needs. Achieving the SDGs will require the combined worked together. Supporting the delivery of basic services in developing countries PPPs and Development generally designed to complement or replace access fees. This arrangement makes the service more affordable for PPPs are long-term contractual arrangements that can be the consumer, while the verification process (which can used to help governments make the most of scarce public extend beyond the point of the initial connection to verify funding by leveraging additional private finance for in- continued service) helps to ensure accountability and vestment in infrastructure, and enabling them to harness quality, meaning that users are more likely to continue private-sector innovation and efficiency for quality service paying for these higher quality services. delivery. The use of PPPs has steadily increased in the last From the government’s point-of-view, OBA can be two decades.1 used to leverage investment in infrastructure to provide The links between infrastructure and development are services to reach all consumers. From the private sector well established, including the impact of infrastructure on provider’s point-of-view, the incorporation of OBA within poverty alleviation, equality growth, job creation, health a PPP can enable access to new markets, mitigating the and education. Private investment underpins economic risk of expanding to serve low-income consumers. From growth, with functioning, self-sustaining and responsive a community perspective, OBA can help to provide the private-sector markets a critical part of the sustainability critical connection in accessing safe and reliable basic of development gains. services. The motivations of private finance, however, are dis- One of the chief criticisms of PPP arrangements the tinctly different from those of domestic public finance or belief that large infrastructure projects cannot help the of development actors, with private firms seeking invest- poor or bring local benefits. It is therefore critical to un- ment opportunities based on risk-return considerations. derstand that OBA is, by design, aimed at bringing basic Nevertheless, private business is becoming more aware of services to the poor and marginalized at the local level and the interdependence of profits and development impact, that it uses careful targeting to ensure that services reach and the idea that business solutions can deliver the two these populations. A blend of government investment, pri- simultaneously has gained traction in recent years. As vate sector finance, and OBA can be one effective way of companies face a more complex array of trade-offs and achieving equitable and sustainable basic service provision risks, they are recognizing that their environment, society in particular PPP contexts. and governance responsibilities are integral to their long- GPOBA’s portfolio currently includes 29 PPP projects term financial success, and are increasingly including in in the energy, water, sanitation, solid waste management, their long-term strategies considerations. health, and ICT sectors; these projects are in 21 countries, PPPs are rarely specifically designed to reach the poor, including fragile and conflict-affected situations. GPOBA nor are they by definition aimed at supporting develop- has worked with International Finance Corporation (IFC)2 ment or social inclusion. In fact, because the private sector on five PPPs—in Lesotho, Liberia, Philippines, Uganda continues to look for revenue from its activities, it is often and the West Bank. less likely to be interested in servicing poor populations due to the perceived limited ability to pay for services. Case Studies Governments wishing to attract the private sector as a development partner therefore still need to either lower Bangladesh Rural Electrification and Renewable perceived risks or increase potential returns. Energy Project (RERED) How OBA can add value to a PPP Through the use of subsidies, OBA can encourage private sector interest, including through PPPs, in what have OBA is a form of results-based financing (RBF) that facili- traditionally been less attractive markets, helping to build tates access to basic services for the poor through the pay- markets for products and services that private providers ment of subsidies that are disbursed against independently might not have been aware of or not ventured into due verified results. This innovative financing mechanism has to potential risk of financial losses. This was the case in been used to increasing access to basic services for poor Bangladesh, where two OBA projects supported access populations. GPOBA projects have served over 9 million to renewable energy technology for poor households in people in seven sectors. In an OBA project, service deliv- remote, rural areas of the countries. ery is contracted out to a provider, either public or private. A US$13.953 million grant supported installation of The provider pre-finances the service provision—for 497,608 solar home systems (SHSs), benefitting over 2.2 example, connection to a water-supply network or energy million people, and a US$1.1 million project supported grid, a voucher-funded health service in a hospital, or provision of 41 solar irrigation pumps (SIPs), benefitting waste collection. Once the service has been delivered and 1,356 poor farmers, as well as a 100 kW mini-grid, supply- verified by an independent agent, OBA pays a subsidy, ing energy to 253 poor rural households. These successful June 2016 Note Number 51 PPPs were scaled up, and a US$15 million grant is now a management contract with an international private op- supporting installation of 225,000 SHSs, two mini-grids erator, Manitoba Hydro International. This project faced with 500 connections, 330 solar irrigation pumps, and implementation challenges, including those brought on by 6,000 biogas plants. the Ebola crisis, but is continuing to connect households These projects are part of a larger renewable energy to the grid, and to date 14,033 households have been con- program begun in 2003 with support from the World nected, benefitting 70,165 people. Bank under the Rural Electrification and Renewable Energy Development Project (RERED). They have helped Improved access to water services in Metro to develop a commercial market for SHSs and other Manila renewable energy solutions through leveraging the capaci- ties of microfinance institutions and the private sector. In the mid-1990s, metropolitan Manila was facing a water The OBA projects have been implemented by the crisis, with poor piped supply, dilapidated infrastruc- Infrastructure Development Company Limited (IDCOL), ture, and a rising population. To address this crisis, the a government-owned finance company, in partnership Government of the Philippines (GoP) passed legislation with participating organizations (NGOs with a strong base that led to private sector involvement in water and sewer- in microfinance and private sponsors). IDCOL extended age service provision. A PPP was formed in which the a credit line to the participating organizations and capital private entity Manila Water Company (MWC) took over subsidies for the renewable energy technologies. The the operation of the East Zone of Manila in a conces- post-subsidy costs incurred by the participating organiza- sion arrangement with the state-owned Metropolitan tions and project sponsors were recovered from customers Waterworks and Sewerage System. MWC increased 24- under micro-credit schemes for SHSs and biogas plants or hour water service coverage to 98 percent of its network through tariffs in the case of mini-grids and SIPs. area and provided new connections to poor households Making renewable energy affordable to poor con- through a special program in which the company paid for sumers through this combination of consumer credit, investment in the network and households paid for the subsidies, and product choice opened the way to their service connection by installment. In time, however, it widespread adoption. By leveraging the capacities of mi- became clear that poorer households were unable to pay crofinance institutions and the private sector, these three the connection fee in full. projects that combine the PPP and OBA approaches have A US$2,850,000 GPOBA project was embedded in all supported the continued development of a commercial the existing PPP concession arrangement and in the market for renewable energy solutions in Bangladesh. larger network expansion effort by MWC, building on MWC’s service expansion to low-income communities Improved Electricity Access for Liberia through the use of OBA subsidies to fund water connec- tion charges. The GPOBA subsidy was paid directly to the Liberia is among the most impoverished countries in MWC as a single payment, conditional on the indepen- the world. Fifteen years of armed conflict devastated the dent verification of three months of satisfactory service country’s institutions and infrastructure, with key electric- delivery. During project implementation, revised tariffs ity assets almost entirely destroyed. Today, access to grid resulted in lower connection fees, and when the project power is around 10 percent and the majority of Liberians closed in 2013, 28,563 OBA-subsidized connections had rely on costly and polluting alternatives to meet their been achieved, exceeding the project’s initial target of electricity needs. 21,000, and benefitting 142,810 residents. In 2011, GPOBA approved a US$10 million grant to partly offset capital investment costs associated with Conclusion building transmission and distribution networks for 21 low-income neighborhoods in Monrovia, and to subsi- In the coming years, the huge potential of the private dize the cost of connecting 16,806 poor households to the sector will have to be mobilized in order to meet the grid in those neighborhoods. The GPOBA project is part growing needs for services and infrastructure, which the of the World Bank-financed Liberia Electricity System public sector alone cannot meet. In a well-designed PPP, Enhancement Project (LESEP), which supports network the goals of the public and private sector can be accom- expansion in Monrovia and the enhancement of power modated and balanced, addressing and improving upon generation facilities, and complements funding provided inadequate infrastructure that hampers economic growth. by IDA and the Government of Norway for the recon- OBA, with its focus on social inclusiveness, can play an struction of Monrovia’s grid. The GPOBA grant recipient important role in PPPs. Through pro-poor targeting and and service provider is the Liberia Electricity Corporation emphasizing accountability in service delivery, OBA can (LEC), a public power company, which is operating under help to ensure that services and the economic growth benefits that result from improved PPP infrastructure can How to Engage with the Private Sector in Public-Private reach poor and vulnerable populations. Partnerships in Emerging Markets, PPIAF, IBRD, The World Bank, 2011 (https://www.gpoba.org/sites/gpoba/ Sources files/How-to-engage-with-private-sector.pdf). PPP Knowledge Lab, The World Bank Group (https:// pppknowledgelab.org/). 1 PPPs are now used in more than 139 developing countries, con- From Billions to Trillions: Transforming Development tributing about 15–20 percent of total infrastructure investment. Finance (Discussion note prepared by Multilateral 2 IFC, a member of the World Bank Group, is the largest global Development Banks), July 2015. development institution focused exclusively on the private sector World Bank Group Support to Public-Private Partner- in developing countries. ships: Lessons from Experience in Client Countries, Independent Evaluation Group (http://ieg.worldbank. org/evaluations/world-bank-group-support-ppp). Note: All monetary amounts are in US$ unless stated otherwise. 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 learn 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