Credit Enhancing Output-based Aid

This working paper presents options for using World Bank guarantee instruments to enhance the creditworthiness of government output-based aid (OBA) OBA payments to an infrastructure service provider. OBA payments are targeted, performance-based subsidies provided when full cost recovery through direct user fees is not justified due to externalities, not possible due to affordability con straints, or not practical due to the high costs of levying such fees. The main focus of the paper is not on the policy aspects of subsidy provision, but on the use of OBA payments as one element of a cash flow for project financing, the other element being user fee payments. Structured in the right way, OBA payments can be made creditworthy and can make infrastructure transactions financeable in the market place.
 
In many countries, government payments are not considered reliable and are assigned a low credit rating by financial markets and investors. In these cases, the quality of OBA payments needs to be enhanced, i.e. lifted to a higher level, if they are to become a creditworthy component of a project's cash flow. World Bank guarantee instruments can be used to achieve this objective. The two principal options are partial risk guarantees to mitigate government payment risks for individual projects, and partial credit guarantees to enable governments to mobilize funding for a subsidy pool that would provide OBA payments to multiple projects.
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