Tag: Sector Performance

“Financial Innovations for Rural Water Supply in Low-Resource Settings” Innovation 4: Performance-based Funding

This blog post is part of a series that summarizes the REAL-Water report, “Financial Innovations for Rural Water Supply in Low-Resource Settings,” which was developed by The Aquaya Institute and REAL-Water consortium members with support from the United States Agency for International Development (USAID). The report specifically focuses on identifying innovative financing mechanisms to tackle the significant challenge of providing safe and sustainable water supply in low-resource rural communities. These communities are characterized by smaller populations, dispersed settlements, and economic disadvantages, which create obstacles for cost recovery and hinder the realization of economies of scale.

Financial innovations have emerged as viable solutions to improve access to water supply services in low-resource settings. The REAL-Water report identifies seven financing or funding concepts that have the potential to address water supply challenges in rural communities:

  1. Village Savings for Water
  2. Digital Financial Services
  3.  Water Quality Assurance Funds
  4. Performance-Based Funding
  5. Development Impact Bonds
  6. Standardized Life-Cycle Costing
  7. Blending Public/Private Finance

Understanding Performance-based Funding

Many water supply development projects fail due to well-meaning but poorly-executed investments (McNicholl et al. 2019). Repayable water supply investments often risk losses, due to the pervasive challenges of serving low- and middle-income rural settings. Development aid recipients, including governments and water service providers, may face challenges such as limited capacity, oversight, victims of corrupt schemes, or weak governance. These factors can affect the incentives to achieve optimal outcomes. From the funder’s perspective, poor outcomes reinforce high-risk perceptions and may steer resources away from water supply investments. The potential beneficiaries, rural water consumers, suffer the consequences with little opportunity for recourse. As a way to create greater accountability, conditioning financing on verified service delivery has gained increasing attention since the mid-2000s.

How does it work?

Performance-based funding is designed to maximize accountability,  transparency, and efficiency of the service provider. Its elements generally include: (a) targets and/or ceilings of repayment, (b) an agreed per-unit payment amount for each output and/or outcome (e.g., new household water connection), and (c) independent verification of results prior to payment disbursement. 

Specific performance-based financing instruments include development impact bonds and conditional cash transfers. With conditional cash transfers, cash payments are made directly to needy households to stimulate investment in “human capital” (i.e., the knowledge, skills, and health that people invest in and accumulate throughout their lives to become productive members of society) if they meet predetermined conditions (e.g., periodic health checks or school attendance). Payments can also be structured to incentivize entire communities to achieve a public health or water access goal (Nguyen, Ljung, and Nguyen 2014).

Examples

Encouraging water-related examples have emerged on a limited scale in Asia, Africa, and Latin America, although this approach may not offer advantages under all circumstances

The World Bank established its Global Partnership on Output-based Aid in 2003, renamed in 2019 to the Global Partnership for Results-Based Approaches (World Bank 2022). As of 2022, the Global Partnership portfolio includes 58 individual projects in 30 countries, with more than 12 million verified beneficiaries as well as an array of technical assistance and knowledge activities (World Bank 2022). In Kenya, for example, the national government, World Bank, USAID Development Credit Authority, and Dutch development bank KfW’s Aid on Delivery program support the Water Services Trust Fund of Kenya (Advani 2016). It offers water service providers access to results-based finance to invest in pro-poor water infrastructure, such as urban household connections and public water kiosks. Service providers agree to meet targets for higher consumer consumptions, increased revenue, and reduced water losses.

The UK’s Foreign, Commonwealth, and Development Office (formerly called the Department for International Development) has long led performance-based funding approaches, having supported the Global Partnership since its inception while building its own results-based funding portfolio with more than $2.7 billion invested across 19 programs as of 2016 (Clist 2019). An approximately $135 million performance-based “WASH Results Programme” has been implemented in South Asia from 2013 to 2022 by Plan International, the Sustainable WASH in Fragile  Contexts consortium led by Oxfam, and the Sustainable Sanitation and Hygiene for All program led by SNV (Howard and White 2020).

The Uptime Catalyst Facility, created in 2020, piloted a results-based funding approach for post-construction rural water maintenance services. Its design built upon three metrics (reliable waterpoints, water volume, and local revenue) and eventually arrived at a “revenue matching” contract design, with supplementation of user payments and matching for a portion of locally-generated revenue. Service providers implement water services up front and are remunerated for results achieved, using a payment formula. Standardized contracts and performance metrics make the model easily scalable. Expansion to serve several million people is ongoing in African, Asia, and Latin America (McNicholl et al. 2021)

The UK government and USAID support the National Rural Water Supply and Sanitation Programme in Mozambique (Rudge 2019). It links 40% of a nearly $40 million grant to the government of Mozambique to  eight performance indicators, including the number of people in rural areas with access to new improved drinking water infrastructure and the percentage of contracts (works and services) procured at district level. The performance-based approach is being tested in 20 districts in two provinces of Mozambique (Nampula and Zambezia). Initial evaluation found key enablers: alignment with government priorities and effective transfer of responsibility and accountability for implementation by the sub-national government. Key challenges included ensuring domestic increases in financing for capital and operational expenses.

The international NGO, East Meets West (aka Thrive Networks), implemented output-based aid programs in Vietnam. With support from the Global Partnership, they carried out a rural water program in Central Vietnam and a separate activity in the Mekong Delta region (Nguyen, Ljung, and Nguyen, 2014).

Various management models were employed, involving private enterprises, provincial authorities, and East Meets West as the service provider. Supported by the Vietnamese National Target Program for Rural Water Supply and Sanitation since 2013, the program successfully achieved its target for new household water connections. It accomplished this by leveraging local investment through partial subsidies to low-income beneficiaries. Customer satisfaction surveys highlighted the benefits of introducing private water operators, including improved performance with fewer water losses and breakdowns.

While performance-based approaches may not be universally superior financing options,  they hold promise when targeted outcomes are well defined, service providers have experience and interest in achieving efficiencies, reliable data sources and monitoring systems are in place, funders allow room for innovation to service providers, and costs can be reliably priced to increase cost effectiveness for donors and enhance operating efficiencies by the implementer.

To access further information on financial innovations for rural water supply in low-resource settings, you can download the complete report HERE.

The information provided on this website is not official U.S. government information and does not represent the views or positions of the U.S. Agency for International Development or the U.S. Government.

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Getting the basics right

I’ve just returned from Liberia, where Kerstin Danert and I, together with Caesar Hall and Jenny Schmitzer are coaching, training and mentoring staff across from government agencies to prepare the first a Sector Performance Report (SPR) for Liberia. Ultimately, this this could become an annual report for the whole WASH sector across the country. It pulls together data from different sources and provides the evidence base for making decisions decisions and prioritising at the second annual Joint Sector Review (JSR) – a two day workshop of around 200 stakeholders that will happen at the beginning of May.

Monrovia Water Point
An Afridev handpump in central Monrovia, behind the Ministry of Education (photo: S. G. Furey, Skat, 2014)

The approach, in this form, was pioneered by the Ministry of Water & Environment in Uganda ten years ago. A decade later, it is the primary mechanism for coordinating WASH actors across government, NGOs and Development Partners, and for reporting activities, outcomes and priorities for the coming year in Uganda.

This is not an easy. It has been a challenging, but rewarding, process and it has been a long journey for Uganda, and Kerstin was there, coaching and cajoling for the first seven SPRs (SSOZI, D. and DANERT, K.,2012). For this reason, the Water and Sanitation Program (WSP) invited us to Liberia to support the government as they start on this long journey.

Similar to Uganda when it started, Liberia is now a decade clear of a long and often brutal civil war. The physical and government infrastructure, which was weak to begin with, was largely destroyed and the social scars still have a rawness. Liberia has a unique history in that it was founded by American freed slaves, but resentment between Americo-Liberians and those of indigenous descent added fuel to the fire of the brutal wars that took place between 1989-96 and 1999-2003.

The current president, H. E. Ellen Johnson Sirleaf, was the first woman to be elected as a head of state in Africa and she has been a unifying voice both at home and abroad. She is also the UN Goodwill Ambassador for Water, Sanitation and Hygiene (WASH) so the sector has a champion at the highest level.

However, responsibility and scarce resources for WASH are split between around nine different ministries and government agencies. Policy and strategy has been established, thanks to strong support from UNICEF, WSP and bi-laterals such as IrishAid,and USAID. There are also several other development partners in the country . However, implementation through government has been slow, for example the rural water division of the Ministry of Public Works has no budget for implementation for the current year. Stuff is happening: water and sanitations systems are being built and hygiene and CLTS is going on at quite a large scale, but it is NGOs, not government who are doing the spade work.

Is this a problem? Short term maybe not, because the needs of the people are great, but without a strong, capable government there can be no end to dependence on international aid funding international NGOs, neither of whom are directly accountable to the people or leadership of Liberia. We shouldn’t expect the private sector to ride the rescue either: where there is social and environmental responsibility, a fair, strong Government regulator is essential.

So what is needed? The basics done well.

  • Data: collection, quality control, storage, access, analysis, presentation
  • Information flows: so that stakeholders really know who is doing what, and where so that collaboration is improved and duplication avoided.
  • Writing: literacy, touch-typing, analytical thinking; articulating persuasive and logical arguments; self-critical review and proof reading.
  • Presentation: structure, content and timing, voice and body language, listening and responding.

These, and many other communication and analytical skills, seem so obvious that surely to consider them in the context of experienced, national government staff could be considered patronising. However, during the war they would have been less worried about using PowerpointPowerPoint and more worried about avoiding the likes of ‘General Butt Naked’ (CNN report). Fragile States are exactly that.

Mapping information flows in the Liberia WASH Sector with the NWSHPC
Mapping information flows in the Liberia WASH Sector with the National Water, Sanitation and Hygiene Promotion Committee (NWSHPC) – Abdul, Watara, Joseph, Kerstin (photo: S G Furey, Skat 2014)

While many of the staff we have met are knowledgeable and committed, there is need to build morale and confidence; so even they not only improve their reporting and analytical skills but also have the confidence to really commit them to paper.

So what’s the answer? Perhaps hire some international consultants to come in and write a thick report “for government”. WSP didn’t want us to do that and there was no way we going accept the task if that had been the case. The 2014 Liberia SPR will be written (mostly, though not entirely) by Liberians.

To achieve that, where capacities are low, and experience lacking we ran a four day writing course then followed up remotely, and in person, with each team of writers who were charged with creating thematic mini-reports on rural water, sanitation, hygiene, gender, urban water and sewerage, solid waste management and water resources.

This is a tough process for all involved. For the ministry staff, they have been chasing around bringing together the data and activity reports that are often scattered around their organisations or guarded. In certain cases, the process uncovered new data sources from Government officials – in particular the data collected through surveys and publishes by Liberia Institute of Statistics and Geo-Information Services (LSGIS).

For us it has been tough to resist the temptation to dive in and write it all for them. On occasion I give in where it was clear that the data analysis and presentation would take much more time than we had available and I couldn’t leave it. But as I write this, the writers were spending two days to review the entire report; and decide what to change.

However, the pleasure came from seeing the final product start to emerge and the shared sense of accomplishment.

So have we strengthened the capacity of the WASH sector to go it alone? No. Clearly not, and as I write this I still don’t know whether this approach will work, but the process so far as proved to be as valuable as, hopefully, the final report will be. The international community will still have a crucial role in tackling the chronic poverty found across Liberia, but that role needs to diminish with time as Liberian institutions take over.

From what I experienced, I saw the importance of education and mentoring to develop skills and confidence to discharge duties effectively, but that alone is not enough. Karwee Govego, Director of Rural Water, complained that their best staff get poached by NGOs. That ‘brain drain’ is inevitable as long as salaries and morale are low, management and mandates are disorganised, and career paths are determined by more than than merit.

Love it or hate it, government is essential; to build a strong, competent one in Liberia is going to take a lot of teamwork, hard graft and getting the basics right.

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Liberia is an active member of the Sanitation, Water for All (SWA) Partnership and will be presenting a new set of commitments at the High Level Meeting in Washington DC this month