A project in the Mexican state ofGuanajuato shows how tying disbursements to specific outputscan provide incentives for effective implementation of awater sector strategy. The disbursements, from pooledgovernment and World Bank loan funds, are made againstconnections to safe and reliable water service andimprovements in utilities' efficiency and wastewatertreatment. This scheme has shifted the focus from inputs toperformance standards. And it has put the burden of gooddesign on the state government, requiring it to develop aclear strategy for the sector and a system for measuringresults. The scheme has proved to be effective in improvingsector performance, ensuring accountability by municipalutilities, and supporting medium to long-term planning forbetter water and environmental management.