Mexico to Pilot Output-Based Efficiency Investments in Water Utilities
A new World Bank loan to strengthen water operators in Mexico will include a pilot program aimed at improving the efficiency of the more sophisticated utilities by basing payments on results.
The US$5 million output-based disbursement (OBD) component, which builds on technical assistance provided by the World Bank in past years, will be the first pure OBD program both for the National Water Commission (CONAGUA) and for the World Bank in Mexico.
The Mexico Water Utilities Efficiency Improvement Project (PROME), supported by a US$100 million World Bank loan approved in November 2010, seeks to improve the efficiency of participating water utilities through the provision of technical assistance and financing. Eligible utilities will be able to provide efficient, reliable water and sanitation services to their users, who will be the ultimate beneficiaries from the project.
The main financing window under this project will focus on classical efficiency investments such as establishment of District Metering Areas, leak reductions, macro- and micro-metering installation, and commercial system installations. The organization responsible for the implementation of this loan is CONAGUA.
Basing disbursements on outputs
The pilot OBD window under PROME (US$5 million) will finance similar activities to the main investment window, but using outputs, rather than inputs, as the basis for disbursement. CONAGUA will finance 60 percent of the cost of these activities, while the participating water utilities will finance the rest.
Under the OBD window, the project will reimburse the capital cost of investments, represented in unit reference costs, required by the participating water utilities to deliver the agreed outputs. Three indicators will be used as the basis for disbursements (relative to a given baseline in each case):
1. Physical efficiency improvements: cubic meter of water saved per month (m3/month)
2. Energy efficiency improvements: kilowatt of electricity saved per cubic meter produced per month (kWh/m3/month)
3. Commercial efficiency improvements: additional cubic meters billed on the basis of metered volume (m3/month)
Given the large variation in prices expected between different regions of the country and utilities’ situations, CONAGUA and the Bank have agreed that the unit reference costs will be defined individually for each participating utility.
Both the baseline and the actual outputs achieved by the participating water operators will be audited to ensure that the Bank disbursements are based on sound, independently verified outputs. Documentation of funds will be based on the independent technical verification of outputs, rather than actual expenditures receipts as is the case under the main PROME financing window.
All sub-projects financed under the OBD window will include a “sustainability” period (typically six months) to ensure not only that the activities were completed to satisfaction, but also that the output achieved corresponds to a sustainable efficiency improvement.
The details of how the OBD window will work will be presented in an operating manual, expected to be completed during the first six months of implementation and requiring World Bank approval.
The Global Partnership on Output-Based Aid (GPOBA) has been supporting this effort and will fund the technical work for the operating manual.
Given its pilot nature, CONAGUA has decided that the OBD window will initially be limited to those utilities that participated in the Bank’s earlier technical assistance program and showed solid results.
Around two to three utilities are expected to participate in the first stage of the pilot. This initial number could increase at a later stage, once the feasibility and potential of the OBD approach has been demonstrated.
Experience in Guanajuato
Previous experience with OBD in Mexico’s water sector includes a project in the state of Guanajuato in which the disbursements, from pooled government and World Bank loan funds, were made against connections to safe and reliable water service and improvements in utilities’ efficiency and wastewater treatment. The scheme succeeded in shifting the focus from inputs to performance standards and ensuring accountability by municipal utilities.