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Results and lessons learned from a pilot Output-Based Aid (OBA) facility are presented in a new note by the Global Partnership on Output-Based Aid (GPOBA).
Honduras has achieved a reasonable level of access to water supply and sanitation, but gaps in coverage remain, especially in rural and peri-urban areas, and service quality for those with access is often poor. To help the Government of Honduras achieve universal coverage and improve service quality, the Global Partnership on Output-Based Aid (GPOBA) is funding a project to test the viability of an innovative output-based aid mechanism for financing water and sanitation services. Housed within the Honduran Social Investment Fund, this “OBA Facility”—the first such facility funded by GPOBA—aims to improve access to water and sanitation services for about 15,000 low-income households, and to increase efficiency and transparency in sector investment funding. To be eligible for funding from the OBA Facility, projects must meet specific criteria and payments are made against verifiable results.
Results and Lessons Learned
The establishment of an OBA Facility is not without challenges. Unlike a traditional OBA project, the OBA Facility funds a number of projects with many characteristics. Some lessons learned from the implementation
include the following:
• The original structure envisaged that the regulatory agency ERSAPS would act as the OBA Facility’s independent verifier of outputs. However, the regulator’s actual capacity (both technical and financial) is very weak. Accordingly, it was necessary to hire consultants to act as verification agents.
• The use of technical assistance funds is crucial for enhancing implementers’ capacity to execute projects, particularly in the case of poor municipalities or communities.
• The eligibility methodology, as currently devised, gives an advantage to projects that are able to supplement funding from other donors or other sources. Furthermore, the ranking methodology tends to favour areas with high population density and flat topography. Giving a high weight to the greatest number of beneficiary households for every dollar of subsidy spent means that small communities are less likely to benefit from the scheme. Water service provision is more expensive for projects that require pumping; thus those projects may not be deemed eligible or may be assigned a lower ranking score.
• The increase in construction prices has made it necessary to lower physical targets and to adjust benchmark costs used to determine eligibility and rank projects. Cost increases between the time the contract is signed and the work is executed pose a significant risk to implementers.
• Establishing a more efficient and accountable way to use public money for investments in the sector will take time. In particular, donors in Honduras use input-based funding mechanisms (which do not require implementers to assume any prefinancing risk) and provide a higher subsidy for capital costs. It is hoped that through the results of the pilot OBA Facility, stakeholders—notably donors that are willing to fund investments—will progressively adopt the OBA approach to channel funds in the sector, in order to improve access and increase the service level to underserved or unserved communities on a wider scale. Using the mechanism already established by the OBA Facility for all projects in the sector would also reduce transaction costs for the government.
• It is too early to tell whether using an OBA approach as opposed to a traditional approach to funding sector investments reduces the time needed for implementation. However, this experience does suggest that setting up an OBA Facility takes time.
• The actual needs on the ground are somewhat different from what had been expected at project design. For example, the project assumed that there would be a demand for yard taps, while users actually want and are willing to pay for house connections.
A number of challenges have been identified when using an OBA Facility. To a certain extent, the jury is still out as to whether an OBA Facility is right for Honduras. FHIS is considering applying an OBA approach to all its funding for the sector if the pilot facility is successful; it could even be extended to all publicly funded water and sanitation projects in Honduras.
The benefits of using an OBA Facility approach for water and wastewater sector investments include the following:
• The process by which projects are chosen may become fairer and more transparent, as projects are evaluated according to their respective merits and compared against one another.
• The fact that payments are linked to outputs sharpens the implementers’ focus on results and improves the quality of monitoring and evaluation, since all results must be validated through independent verification agents.
• Tariffs for each project must cover at least operation and maintenance costs, in contrast to the current situation in Honduras, where many service providers barely cover their operating costs and defer maintenance.
• For public implementers, prefinancing is available through bridge loans. While this type of financing involves complex arrangements between the loan recipient (the implementer) and the government, it places responsibility on the implementer to achieve or meet the agreed results. This enhances accountability for the use of such funds.
• For private implementers, prefinancing can be arranged by tapping their own revenues or through local commercial banks.
• Some of the projects funded by the OBA Facility complement upstream investments supported by other donors. OBA Facility-supported projects filled in a critical gap in these efforts. Cases include SANAA and San Agustin, where the European Union and USAID respectively have funded water distribution trunks, but water connections have not been installed for all beneficiaries and sanitation infrastructure is still missing.
The OBA Facility also builds upon and strengthens good practices in the sector, such as the contribución por mejoras initiative, under which municipal governments negotiate the cost-sharing and payment arrangement with community residents for the installation of new public works; as well as community work in-kind, local government involvement, and community participation in decision making.
Mandri-Perrott, C., Schiffler, M. and Aguilera, A.S. (2009). Output-based aid in Honduras : an OBA Facility for the water and sanitation sector in Honduras. (OBApproaches note ; no. 29). Washington, DC, USA, Global Partnership on Output-Based Aid (GPOBA). 6 p.
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