Output-Based Disbursements in Mexico: Transforming the Water Sector in Guanajuato

A project in the Mexican state of Guanajuato shows how tying disbursements to specific outputs can provide incentives for effective implementation of a water sector strategy. The disbursements, from pooled government and World Bank loan funds, are made against connections to safe and reliable water service and improvements in utilities’ efficiency and wastewater treatment.

This scheme has shifted the focus from inputs to performance standards. And it has put the burden of good design on the state government, requiring it to develop a clear strategy for the sector and a system for measuring results. The scheme has proved to be effective in improving sector performance, ensuring accountability by municipal utilities, and supporting medium- to long-term planning for better water and environmental management. This paper includes an explanation of the difference between output-based disbursements and output-based aid.