Results-based financing to deliver urban sanitation services Planning & Design of Sanitation Systems and Technologies Inga Afanasieva, World Bank – Global Partnership for Output-Based Aid Welcome. This module introduces the role that results-based financing approaches can play in meeting growing infrastructure and service challenges in the provision of urban sanitation. My name is Inga Afanasieva and I am an Infrastructure Specialist with the Global Partnership for Output-Based Aid of the World Bank, a partnership of donors working together to support communities to access basic services using results-based financing and output-based aid approaches. In this module, we will introduce the role that results-based financing and output-based aid can have to improve the delivery of urban sanitation services to the poor and explain how these innovative financing approaches can deliver verified results. Results-based financing (RBF) is a term for a range of financing mechanisms that provide payments after verified results have been delivered. It is becoming increasingly important, as delivering public services and basic services requires policymakers to consider innovative financing methods to improve service delivery and outcomes and increase cost recovery levels. Results-based financing has emerged as an important, innovative tool for financing basic services because it switches the emphasis from inputs - funding given in advance for expected results (such as planning and buying construction materials) - to outputs, such as electricity connections, or new or improved latrines. Payments from funders or government to service providers happen only when the agreed results have been achieved. The service provider takes the risk that if the results aren’t achieved, they are not paid. By moving the focus from activities and plans, to the monitoring of results, governments and donors can ensure money is spent on the intended purpose. They can also give service providers the latitude to focus on the activities and methods that they think are best to achieve the desired outcomes, and can be used to leverage private sector financing. This approach thus enhances the focus on learning about what actually works, and creates scope for ownership and innovation. Results-based financing approaches can be applied in various sectors and contexts with a variety of partners and purposes. Different instruments can be used to incentivize the demand or the supply side of the service. On the demand-side, instruments such as conditional cash transfers offer rewards for consuming a service that can improve their health or well-being and benefit society as a whole. For example, families can receive a cash transfer as long as their children attend school or if they go to clinics regularly for medical check-ups. On the supply-side, service providers can be incentivized to deliver the desired services or results by output-based aid, where service providers are rewarded for the improved performance or for extending quality services, such as certified sanitation facilities, to target poor consumers. Other results-based financing instruments link disbursements to the achievement of specific government program results or measurable progress in a country. Which type of approach, or combination of approaches to use in a given situation, is highly dependent on context. For the remainder of this module we will focus on output-based aid approaches, which have been used in every region of the world and in numerous sectors. For more information about other types of results-based financing, please refer to the recommended reading for this module. Output-based aid is designed to increase access to basic services for the poor. It is used in situations where poor people are excluded from receiving basic services, such as urban sanitation, because they cannot afford to pay the connection fee. In the example shown on the screen, the cost of a connection to a sewerage network is $100. However, the household can only afford to pay $15. A service provider or third party financier, like a commercial bank may invest additional capital into the connection cost—in this example, $25, which can be recovered though a user tariff or a government subsidy. That means that the gap for the poor household that prevents them from receiving the service is $60. The output-based aid subsidy for the poor household – which is paid only after measurable results have been verified - fills the $60 gap between the affordable level that the households can pay and the real cost of extending the service to these households. By definition, the output-based aid subsidy is disbursed after the connection is made, so it is important that the service provider is able to pre-finance the cost until the output-based aid payment is received. Results-based financing and output-based aid can be designed to deliver innovative solutions in different environments, working with both public and private operators. They provide incentives for innovation and efficiency through competition or benchmarking, and by leaving the technological solutions largely to the service provider who gets paid the agreed amount if the outputs meet the quality standards. In Nairobi, for example, dense populations in informal settlements and water rationing posed a challenge to the original project design of household sewerage connections. Under the output-based scheme, the service provider was given the flexibility to implement multi-faceted technical solution more appropriate to the context. This involved both individual household water connections for the flushing of the toilets and compound solutions, with water storage tanks for toilet flushing which also included an option to use greywater from handwashing for flushing. Another example where output-based aid is used is the greater metropolitan Accra area in Ghana. There are 4 million people living in the area and the population is expected to reach 5 million by 2020. Half of the households reside in single rooms of compound houses and only 1 in 5 households say that they used their own household toilets. Public funding in the sanitation sector cannot keep up with the demand and there is considerable room for the private sector to play a role in the provision of sanitation. The poorest suffer the most because of the high cost of building their own facilities, and the high cost of borrowing to do so. To address this challenge, the Government of Ghana chose output-based aid with the following project design: Households finance 50% of the cost of the facility either though a microfinancing loan or their own savings, after that service providers are contracted to build the toilets to required standards. Once the construction is complete, the service provider receives the remaining 50% - the output-based aid subsidy - in two installments: 2/3 upon verification of the physical construction, and 1/3 after 3 months of successful use. The project was designed to target low-income communities and to fund an awareness campaign through the metropolitan assemblies and the Environment and Health Offices. The project was designed to develop the full cycle of sanitation services by also subsidizing the desludging of toilet facilities. The purpose of the desludging subsidy was to incentivize the service delivery and to ensure that households understand how to properly dispose of fecal matter. The subsidy was designed to cover half the cost of the desludging service and to be payable to the provider upon verification of successful service delivery and proper disposal of the fecal sludge. The total cost of the program was $5million , which was expected to incentivize the construction of over 7,000 household facilities and 200 desludging operations. Results-based financing plays an important role in meeting the world’s development challenges. Output-based aid is a form of results-based financing that can provide service providers the incentives to extend inclusive urban sanitation services to poor and marginalized beneficiaries that would otherwise not be reached. Output-based aid can be effectively designed into an urban sanitation investment program only after considering multiple variables, such as the need for the subsidy, which needs to be assessed on the basis of the demand, the costs and the social benefits.
