This working paper presents options for using World Bank guarantee instruments to enhance the creditworthiness of government 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.

Increasing access to basic infrastructure and social services is critical to reducing poverty and achieving the Millennium Development Goals. However, this is a challenge because of the gap between what it costs to deliver a desired level of service and what can be funded through user charges. Subsidies have often played a role in funding this gap because of, for example, limited ability to pay by the poor. However, given the political commitment by a number of countries to increase aid flows, but at the same time the mounting concern of aid effectiveness, it is critical that subsidies be linked to the actual delivery of services, or "outputs." Output-based aid (OBA) is a strategy for using explicit performance-based subsidies to deliver basic services where policy concerns would justify public funding to complement or replace user fees.

Long-term commitments to make output-based payments for infrastructure can encourage private investors to provide socially valuable services. Making good decisions about such commitments is difficult, however, unless the government understands the fiscal costs and risks of possible commitments. Considering voucher schemes, shadow tolls, availability payments, and access, connection, and consumption subsidies, this paper considers measures of the fiscal risks of such commitments, including the excess-payment probability and cash-flow-at-risk. Then it illustrates techniques, based on modern finance theory, for valuing payment commitments by taking account of the timing of payments and their risk-characteristics. Although the paper is inevitably mathematical, it focuses on practical applications and shows how the techniques can be implemented in spreadsheets.

A key measure of the effectiveness of public spending on infrastructure is the extent to which it benefits poor people. In recent years policymakers and development practitioners have increasingly sought to understand why earlier approaches to infrastructure development often bypassed the poor or proved unsustainable. That work has led to revisions in policies, programs, and processes within the World Bank Group and in the countries it serves, aimed at doing more to extend the reach of infrastructure services to poor households and small enterprises. Read more from the working paper series, Lessons Learned in Infrastructure Services Provision: Reaching the Poor.

The natural gas market has changed considerably in Egypt the country has evolved as a major international gas exporter. Industrial customers in the domestic market are increasingly relying on natural gas to meet their energy needs. Natural gas is already used as a major source of energy and feedstock in the power, fertilizer, and petrochemicals sectors. The country now has a well-developed high-pressure transmission network in Nile Delta to supply industrial load. This paper aims to analyze the overall macro- and micro-economic costs and benefits of switching residential households to natural gas.

OBA approaches to improving water and sanitation service can work in a varietyof circumstances. Such OBA schemes require an understanding of the impact ofexisting regulatory arrangements have on water services to poor customers. Thedesign of OBA schemes should therefore include an evaluation of the existingregulatory arrangement in order to identify what changes could potentially bemade in order to get better services to poor people.