June 2015 Note Number 47 Output-Based Aid in Fragile and Conflict Situations Photo courtesy of Chris Warham The Challenges of Service Provision in T FCS hroughout the world, poverty is increasingly concen- trated in countries and regions affected by fragility and conflict, which intensify already acute challenges to development. Fragility and conflict can range from persis- There are now 33 situations on the World Bank Group list tent domestic or cross-border violence to vulnerability in the of FCS, and it is estimated that the share of global poor face of natural disasters or extreme weather events related to living in FCS will at least double by 2030*. Numerous climate change, such as flooding or droughts. Where develop- pockets of insecurity and violence, such as large slum ment has taken place, conflict and environmental disaster areas, exist around the world in places not officially con- can strip years off these gains, and recovery is hampered sidered FCS but which are beset by many of same prob- by political instability, low government capacity, and the lems. Newly fragile areas may emerge with little warning destruction of assets and infrastructure. The provision of due to conflict, natural or manmade disasters, or other basic services can support stabilization and lessen the impact factors, and countries or regions can experience succes- of fragility and conflict on people’s lives. Output-based aid sive shocks. Liberia, for example, was recovering from a (OBA), which ties subsidy payments to the achievement of fifteen-year civil war when it was hit by the Ebola crisis. agreed upon outputs, improves access to basic services for the The Philippines h1ad suffered decades of civil conflict poor. This note discusses the challenges of service delivery in when the country was struck by Typhoon Yolanda in 2013, fragile and conflict-affected situations (FCS), and considers which killed thousands of people. how OBA approaches can be most effectively utilized in FCS. Service provision in FCS faces particular challenges. Systems for identifying and targeting those most in need Supporting the delivery of basic services in developing countries are usually non-existent. Populations are often displaced bodies. Engaging with donors from the beginning of the from their homes or on the move. Capital funding, tech- design process enables benefiting from lessons learned nology, equipment, and skilled management tend to be and ensures that new interventions complement, rather lacking, while poor infrastructure and weak governance than duplicate, existing work. result in an absence of quality control and accountability. An often high risk of corruption distorts incentives for Targeting: FCS are likely to have few or no existing service delivery. Service providers are reluctant to take mechanisms, such as reliable registration or tax systems, risks in such unstable and volatile environments, and few that can function as tools to target specific populations, providers will have the resources or incentives to reach including poor households. Therefore, straight geographic poor communities. Where some level of services are avail- targeting for OBA projects in FCS is often the simplest and able, tensions and violence between conflicting groups can best approach, especially for reaching the poor. Specific hamper their equitable provision. groups can be identified within these populations where OBA is a results-based financing (RBF) mechanism relevant (eg, within health schemes, women and children for improving basic infrastructure and service provision may be targeted). Any targeting mechanism should take that can be used effectively to reach poor populations. into account the fluid context, being realistic about what To date, grants totaling $14o.8 million have been made is achievable and providing for a greater-than-normal to 14 OBA projects in FCS; many other FCS projects that margin of error. Careful monitoring should be ongoing, blend instruments have used OBA principles in project along with a willingness to adapt targeting mechanisms as components. needed. Designing OBA projects for FCS Risk Transfer: A key component of OBA is the transfer of performance risk to the service provider. Inputs are Experience has shown that OBA approaches in FCS work pre-financed by service providers and OBA subsidies are best in countries or regions that have begun to show not paid out until pre-specified outputs are delivered. signs of recovery, in which a level of stable governance However, service providers in FCS are sometimes unable exists and government institutions are gradually increas- to carry the full pre-financing risk, and flexibility may ing in legitimacy. It is key that authorities have commit- be required in order to ease this burden, particularly for ted to broader investment or reforms for the sector. The small operators. Solutions for partial risk transfer include presence of a trusted local entity is crucial—within the phasing subsidy payments over time by linking them to government, or in a semi-autonomous body, NGO or intermediary milestones, and providing micro-credit to other institution—to manage implementation, even if ad- small-scale providers. In Liberia, a project to subsidize ditional capacity building is needed. The broader the base the connection of 80,000 of Monrovia’s poorest people to of local support, the better chance the project will have to the electricity grid required no pre-financing from Liberia succeed in the event of changes in personnel or circum- Electricity Corporation, the grant recipient and service stances, a probable occurrence in FCS. Finally, though provider. Instead, the corporation is operating under a there may be dire needs in every sector, focusing on the management contract with an international private opera- most basic services, rather than on higher value infra- tor, Manitoba Hydro International. structure services, will help to ensure that even if there are changes in the political or security situation, the need for Implementation: OBA projects in FCS are usually re- the service is likely to remain. stricted in the choice of service providers. Any existing In complicated, volatile and unpredictable environ- service delivery tends to be fragmented and inequitable. ments, simplicity and flexibility are critical in all compo- International providers may have a limited presence and nents of project design, from targeting to implementation be reluctant to engage, while NGOs or local providers may to verification. Not every potential situation or roadblock be present but unprepared to take on OBA contracts or re- in FCS can be foreseen, but a thorough political economy spond to incentives. It is therefore essential to be innova- analysis, conducted as a first step to determine a coun- tive and creative in identifying service providers, and OBA try’s suitability for an OBA project, lays the foundation projects in FCS have relied on a variety of service provid- for design. Such a study analyzes the political situation ers, including NGOs, government institutions, municipali- and the particular effects of conflict and violence, and ties, and local private sector actors filling the gap left by assesses local priorities, current sector policy and the weak or non-existent public sectors. legislative context. It can identify reliable project partners Where capacities or institutions do not exist, an OBA and appropriate funding channels, and estimate risks and scheme can facilitate their establishment. In Cambodia, risk-tolerance levels for implementers and service provid- the Rural Electrification Fund was set up for the purpose ers. In FCS, where personnel change frequently, donors of the OBA project in order to channel financing to private sometimes have longer institutional memory than local energy providers. The establishment of the fund was seen June 2015 Note Number 47 as critical in avoiding corruption; having demonstrated Photo courtesy of Curt Carnemark/World Bank. success, it is now used to channel other types of financing as well. Flexibility is also possible in relation to service provid- ers meeting targets. A pilot project in solid waste manage- ment is underway in the West Bank, where fluctuating tensions and periodic, unpredictable restrictions on move- ment result in variations in the ability to move goods and deliver services. A catch-up mechanism is built into the project design, so that if municipalities fail to meet their targets during one period, they can make up the deficit in a succeeding period. Even with flexibility built in, however, restructuring in FCS is sometimes necessary. Institutional weakness, economic vulnerability, insecurity, and political instabil- ity have all played a part in the need to restructure OBA projects for positive results. An energy project to provide biogas plants in Nepal began in 2007 in the wake of a and that agreed standards of service are being achieved. decade-long civil war. But continuing instability, rising While verification mechanisms in FCS should be kept as fuel prices, and a weak private sector meant that targets simple as possible, it may be necessary to complement the had not been met by the project’s initial closing date in use of IVAs with multi-layered verification systems involv- 2010. However, a significant improvement in the political ing different stakeholders, particularly where risk of cor- situation had occurred by then, and the project was re- ruption is high and accountability is low. An OBA health structured—subsidies adjusted, difficulties faced by service sector project in Burundi—a country wracked by decades providers addressed, and the closing date extended. The of conflict—utilized a multi-faceted verification system in- revised project resulted in the installation of 27,139 biogas volving civil servants; personnel contracted by NGOs; pro- plants, an achievement of 98 percent of its revised target. vincial and national committees composed of members of government and civil society; external agencies; and local Technical assistance: As institutional capacity in FCS community organizations. This relatively complex system tends to be low, sustained technical assistance (TA) should yielded positive results, and Burundi’s Ministry of Health be employed throughout the project cycle and targeted is making performance-based financing an official policy. at key fragilities. While TA is normally financed in an Although verification is focused on results, close and input-based manner (entities are paid to deliver capacity- ongoing monitoring throughout the project cycle means building services), there are innovative ways of employing that necessary correctives can be made before the point of TA in FCS. In Liberia, Manitoba Hydro International is final verification. It is worth noting that because IVAs tend providing TA to Liberia Electricity Corporation in a partly to be less willing to work in high-risk areas, more time output-based manner: the electricity company will forfeit than usual may be needed to source qualified and commit- success fees and incur non-compliance penalties if certain ted IVAs and, if feasible, to develop capacity with existing performance results, such as connection targets, are not entities to reliably and affordably serve this key function. achieved. In an OBA project in Kenya supporting microfinance for Strong TA can help to discourage corruption. A project community-managed water systems, close work with the in Cambodia to expand access to basic water and sanita- IVA built in-house capacity to manage a supervisory role tion services was halted and restructured following a case within the project. Where there is a scarcity of qualified of corruption involving a private water operator. The rede- local firms to serve the IVA function, a qualified consul- signed project included measures to minimize the risk of tant can fill the IVA gap temporarily; if no suitable local corruption (addressing areas such as procurement, finan- firm exists, a consultant can act as IVA throughout the cial management, ethical conduct for staff, and sanctions). project. It was determined that stronger TA for local operators in World Bank procurement procedures and bid prepara- tion from the project’s inception could have reduced the Scaling up: The sustainability and scaling up of projects potential for corruption. in FCS depend on the capacities of governments and other authorities, and the presence of institutions and Verification: The use of an independent verification agent regulatory frameworks able to support a results-based ap- (IVA) is a core component of OBA projects. IVAs certify proach. Projects that rely heavily on government systems that service providers are delivering contractual outputs can be relatively difficult and move more slowly, but any impacts achieved will be embedded in local structures and project cycle have proved stronger predictors. Projects therefore more likely to last, as local capacity is increased have been successfully implemented in situations where and governments see better results for the money they there was ongoing violence or unrest, while corruption, spend. OBA schemes have been extended or scaled up, or lack of rule of law, and institutional weakness have worked have led to the adoption of results-based management of against project success. OBA is most likely to be effective services, in Liberia, Nepal, Yemen, Chad, and Burundi. in countries or regions showing signs of recovery, where government institutions are relatively stable and gradually Conclusion increasing in legitimacy. When such an enabling environ- ment exists, OBA is one mechanism that can contribute to Basic service provision in FCS can support stabilization broader efforts at breaking cycles of fragility and violence and conflict-mitigation by strengthening civic engage- through providing basic services to the poor and increas- ment, rebuilding public trust in government institutions, ing accountability among providers. and reducing tensions and grievances between groups over services. References Experience with OBA in FCS has shown that fragility factors are not necessarily the best indicators of a project’s World Bank Policy Research Working Paper 7002 eventual success. Quality of design and flexibility, along http://documents.worldbank.org/curated/ with solid, targeted technical assistance throughout the en/2014/08/20040315/eradicating-poverty-fragile- states-prospects-reaching-high-hanging-fruit-2030 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