World Bank

Legal Issues in design,preparation andimplementation of projectsinvolving Output-based Aid Legal Issues in design,preparation andimplementation of projectsinvolving Output-based Aid

Edith Mwenda

LEGAF

SDN Week

Washington, DC

February 27, 2008

Which lending instruments for OBA projects?Which lending instruments for OBA projects?

1. Use of Bank lending Instruments –1. Use of Bank lending Instruments –

investment and policy lending.investment and policy lending.

•OBA Approaches entail greenfield projects, or expansion ofexisting service networks, use of subsidies

•Normal Bank Project cycle

•Compliance with Bank policy requirements

•Subsidy disbursement does not translate differently in legal

•OBA operation could use SWAP/Pooled fund mechanism– (e.g, the financing mechanism being considered for a proposedGPOBA financed pilot in Tanzania)

•Guidance Notes: (a) Structuring OBA approaches in WBGOperations (November 17,2005) (b) Implementing OBDMechanisms for Investment Operations (April 2, 2007)

Ensuring Consistency with the Articles of AgreementEnsuring Consistency with the Articles of Agreement

2. Requirements under Article II, Section 5 are:

(i)use for proceeds of a loan for the purpose granted;

(ii) due attention to considerations of economy andefficiency.

Policy requirement: OP 10.00 (Investment Lending) –consistency with Bank’s Articles of Agreement (para. 3).Criteria links investment lending proceeds to specificexpenditures (i.e. all Project expenditures are costed).

OBA projects ensure compliance w/ Article of AgreementOBA projects ensure compliance w/ Article of Agreement

(i)Loan proceeds are used as a partial reimbursement of pre-financed outputs – expenditure items are associated with a finaloutput, and output is costed to determine the disbursement. Inmost cases subsidy is disbursed as a reimbursement to the serviceprovider upon independent verification of the outputs.

For example, if an expected output is x number of water connections tolow income homes, it is imperative that a unit price for each connectionis determined and optimized. OBA subsidy finances x% of thereasonable price for installation of the units. The unit cost price wouldusually be monitored, e.g. each year and could lead to revisions toavoid under/over financing.

(i)Economy and Efficiency is determined either as part ofprocurement process, or through independent analysis of unitcost ex ante, with the purpose of optimizing them, to ensure thatthey satisfy the principles of economy and efficiency.

Bank Policy considerations (1)Bank Policy considerations (1)

All Bank Fiduciary and Safeguard policies required underinvestment lending apply to OBA operations:

•Financial Management/Reports, Audit, Disbursement (OP 10.02),expenditure eligibility (OP 6.00)

•Disbursement – question of expenditure-based vs OBA approachperformance-based – definition of eligible expenditures/allocation

•Procurement standards (OP 11.00) - OBA Projects are not exemptfrom Bank Procurement requirements –- distinguishing:(a) OBA through competitive selection of service providers; and(b) OBA through direct arrangements with incumbent serviceproviders.

•Environmental and Social Safeguards – usual requirements.

Note: - for GPOBA transactions, refer to FEU and QACU issuedAnnouncement: “Application of Bank Safeguard Policies to GPOBATransactions”, Revised April 2007

•Sanctions Regime – Requirement as for Bank operations.Except: for the time being there is a disconnect as to application of thesanctions regime to grants. However, it is expected that when the newOp 14.40 is issued the sanctions regime will apply to grants.

•Monitoring and Evaluation – tangible and measurable outputs –link to cost (results framework)

•Supervision (OP 13.05)

Bank Policy considerations (2)Bank Policy considerations (2)

Processing Stand-Alone GPOBA-financed ProjectsProcessing Stand-Alone GPOBA-financed Projects

•(a) Bank administered Trust Funds – Bank policies apply toTFs (OP 14.40 under revision)

•(b) Standard Conditions (SC) applicable to all recipient-executed TFs

•(c) Approval – different project processing - no Boardpresentation for stand-alone GPOBA projects. IndependentPanel of Expert/Decision-making body (re. GPOBAprinciples)

•(d) Grant Agreements – modeled along the lines of IDAgrant model. Incorporates Standard Conditions. AlongsideDisbursement Letter, Recipient’s Procurement Plan/BankProcurement Guidelines

•(f) no formal negotiations requirement.

Processing Stand-Alone GPOBA-financed ProjectsProcessing Stand-Alone GPOBA-financed Projects

•Recipient/host government commitment to project

•Determine who the Recipient is:sovereign or non-sovereign;private/fiduciary entity/public institution;eligible expenditures – contractor vs serviceprovider

•Remedies/conditions– specific/SC-based/project/program execution– whether additional legal documents/MoUs /otheragreements

Samples of GPOBA-financed projects:Samples of GPOBA-financed projects:

•Uganda Small Towns Water Supply and Rural GrowthCenters Project (re. competitive selection of service provider,procurement function by Government Department – legalarrangements)

•Kampala Water Connections for the Poor Projects (re. directarrangements with incumbent service provider) – same asReproductive Health Vouchers in Western Uganda Project

•Armenia Renewable Resources and Energy Efficiency Fund(IDA co-financing)