Microfinance Equity Funds and Output-based Aid Experts Launch Consultative Process on Access to Finance
Members of the Council of Microfinance Equity Funds (CMEF) and World Bank staff met on October 29 in Washington, DC to launch a consultative process on access to finance and output-based aid.
The meeting was convened by the Global Partnership on Output-Based Aid (GPOBA) and facilitated by Dr. Ira Lieberman, Chairman and CEO of LIPAM International, Inc., and a former head of the Consultative Group to Assist the Poorest (CGAP).
Participants included Acción, the Calvert Foundation, the Center for Financial Inclusion, CGAP, Omtrix, Opportunity International, Triodos, Triple Jump, USAID’s Development Credit Authority, and Women’s World Banking.
In his opening remarks, Dr. Lieberman, who is advising GPOBA on access to finance, stressed the importance of “linking output-based aid and access to finance to serve the poorest people.”
“This consultative process should help raise awareness of the output-based aid (OBA) approach among potential financiers, and help consider solutions so that OBA and other results-based financing mechanisms can be brought to scale and integrated into broader sector policy,” explained Yogita Mumssen, Senior Infrastructure Economist in the World Bank’s Finance, Economics, and Urban Development Department.
Access to finance in OBA schemes
OBA and other results-based financing mechanisms are gaining popularity in the development context for many reasons, in particular, the desire to link scarce public funding with actual results on the ground.
Under an OBA scheme, public funding is only disbursed once the service provider has delivered the pre-agreed services or “outputs,” such as connection of poor households to electricity or water networks, or delivery of basic healthcare services.
Experience with OBA has shown that it can help ensure that the poor effectively receive the services, and increase transparency and accountability. However, the service providers delivering the results must have A2F to pay for the initial “inputs,” and such finance is not always available or affordable.
“OBA projects in principle require a mix of finance including project, consumer, and trade financing, but what OBA specifically adds to the equation is a greater working capital requirement,” explained Mumssen. “Experience has shown this can be a serious constraint.”
Different types of service provider
GPOBA recently published a working paper which outlines some key issues related to OBA and A2F, based on experience with OBA schemes in the energy, health, and water sectors.
The research shows that the financing requirements for OBA interventions vary depending on the size and type of service provider, and the nature of the output or service.
For instance, in OBA projects with large private or public-private partnership arrangements making extensions from an existing network, the providers have tended to fund their OBA operations from their own working capital or arranged own bank financing.
An example is a GPOBA-funded project to expand water services in low-income areas of Jakarta in which the service provider, PALYJA (a subsidiary of international water management group Suez), fully pre-financed the OBA subsidy with internal cash.
Smaller service providers, however, often have limited credit history, collateral, and capacity, so they find it more difficult to access the finance they need.
For instance, in a solar homes system (SHS) project in Ghana, an IDA credit line supports rural bank lending to households for SHS purchase, but the dealers still face working capital and trade finance constraints.
“Access to finance is clearly a more binding constraint for small service providers,” explained Geeta Kumar, a consultant with GPOBA. “But when OBA and other results-based financing projects move to scale, it could be an issue for larger service providers as well.”
Ways to mitigate the A2F constraints
The participants discussed methods used to ease the A2F constraints in OBA projects, such as minimizing payment delays, phasing OBA subsidies, and use of partial credit guarantees.
An example of the latter is the Kenya Microfinance for Small Water Schemes project which combines an output-based subsidy with commercial finance from a local microfinance bank, K-Rep Bank. K-Rep purchased a partial credit guarantee from USAID’s Development Credit Authority which covers 50 percent of the loan principal, thus providing extra security.
The CMEF members suggested various ideas for consideration, including factoring (of receivables) and securitization (of expected output-based payments).
“The OBA subsidy scheme provides an ‘order book’ so there should be a way to get a discount,” said Lieberman. “We need to educate the microfinance institutions as this is not very complex financing.”
He emphasized that as OBA schemes move to scale, the financing requirements will go beyond the capacity of local microfinance institutions, which is why the microfinance equity funds have an important role to play.
The OBA and A2F experts plan to hold bilateral meetings to explore these options further and identify potential pilot projects.
Update: Since this news item was written, the CMEF is now the Financial Inclusion Equity Council (FIEC).