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Published on: 25/08/2010

Output-based aid (OBA) is [a] results-based approach, intended to provide access to basic services – such as infrastructure, healthcare, and education – for the poor in developing countries. The approach is innovative and the logic simple – unlike traditional approaches, OBA links the payment of aid to the delivery of specific services or “outputs” like connection of poor households to electricity grids or water and sanitation systems. The service delivery is contracted out to a third party, usually a private firm, which receives a subsidy to complement or replace the user fees once delivery of the pre-agreed output is independently verified.In his previous job at DFID, Johnson was involved in the early discussions of OBA. This new approach impressed him because it "introduced a clarity of purpose and transparent accountability mechanisms that were noticeably absent from mainstream Official Development Assistance".

So, five years on, has OBA lived up to those heady expectations? The book Output-Based Aid: Lessons Learned and Best Practices shows that OBA pilots have worked. Projects that meet output-based criteria (i.e. transfer performance risk to the service provider) have proliferated both within the World Bank Group and beyond, performing better than non-OBA projects. However, OBA projects are still less than 10% of the Bank portfolio overall. So what are the barriers that prevent this potentially transformational approach from becoming the “new normal” of the aid industry? Is it lack of awareness or an information failure amongst aid industry decision makers? Or are the barriers more systemic? Are there specific regulatory and operational issues e.g., procurement and disbursement rules that are hard to change? Are there systemic constraints in developing countries? Looking ahead, what does OBA have to offer in relation to new challenges such as climate change? While OBA projects are often associated with the "access" agenda in relation to infrastructure and basic services, the approach could also be used in other areas. In short, can we fulfill the early potential of OBA by broadening the challenges we address with the approach?

Several respondents have tried to provide answers to Johnson's queries. Jackie Coolidge wrote:

Part of the problem for the WBG [World Bank Group] is that not all programs are conducive to this kind of approach. For example, macro-economic reforms, fiscal reforms, and regulatory reforms supported by the WBG would be hard (if not impossible) to treat in this way, and these will always form a large proportion of our portfolio. However, many of the concepts can be put to use even in those kinds of projects.

Doug Hadden commented:

OBA in concert with aid harmonization appears to be the future. There is so much anti-aid sensationalism in developed countries these days. The problem is that we have little objective evidence of aid effectiveness. The International Aid Transparency Initiative may also help to link aid to outputs even when OBA isn't used. There remains significant debate on the importance of outputs relative to outcomes.

Finally, Luis Tineo puts the under-representation of OBA projects into perspective with his comments:

The World Bank's overall portfolio includes interventions and assistance in many areas and sectors that may not be suitable for OBA, so a more realistic measure is the share of OBA in the portfolio of projects aimed at targeting pro-poor access to basic services. These projects, where financing of "pro-poor subsidies" is at the core, still represent a relatively small share of total portfolio; however, within this share, OBA is certainly gaining increased attention and applicability.

To this Tineo adds:

It may be advisable to bear in mind that OBA techniques were initially designed to furthering opportunities for private participation in the delivery of basic services. Hence, key concepts of OBA such as transfer of investment and operational risks (chiefly represented in access to independent commercial financing sources) to service providers might become a challenge when designing results-based projects within the framework of public providers and public financing. [...] On the issue of systemic constraints in developing countries, the discussion should be on the value of subsidies, not the merits of OBA. Once governments agree on the need to provide pro-poor subsidies for basic service access, then the application of OBA, as a performance-based mechanism to deliver private sector-led services, would become a clearly attractive option as has been demonstrated by the experience in GPOBA [Global Partnership on Output-Based Aid]

Source: Alan Johnson, Private Sector Development Blog, 04 Aug 2010

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