Output-based aid (OBA) (or results-based aid) refers to development aid strategies that link the delivery of public services in developing countries to targeted performance-related subsidies. OBA subsidies are offered in transport construction, education, water and sanitation systems, and healthcare among other sectors where positive externalities exceed cost recovery exclusively from private markets. OBA is a form of results-based financing, with similar principles as performance-based contracting.
Interest in OBA and results-based financing in the international development sector is growing.ESMAP (2013)."Results-Based Financing in the Energy Sector: An Analytical Guide", p.45. The World Bank, Washington, DC In healthcare, OBA is often implemented by contracting providers in either the public or private sector, sometimes both, and issuing vouchers to people considered at higher risk of disease or in greater need of the health services. OBA (in the form of results-based contracts) is also used for rural water supply in Africa.McNicholl, D., Hope, R., Money, A., Lane, A., Armstrong, A., Dupuis, M., Harvey, A., Nyaga, C., Womble, S., Allen, J., Katuva., J., Barbotte, T., Lambert, L., Staub, M., Thomson, P., and Koehler, J. (2021). Delivering Global Rural Water Services through Results-Based Contracts. Uptime consortium, Working Paper 3.
One of the origins and drivers of the OBA concept was in 2002, when the World Bank Group launched its Private Sector Development Strategy (PSD), of which OBA was a key component. The World Bank has been the most active participant in OBA. In 2003, along with the UK's Department for International Development (DFID), they launched the "Global Partnership on Output-Based Aid" (GPOBA), later renamed to "Global Partnership for Results-Based Approaches" (GPRBA). The reason for the change of name was because the partnership "broadened its mandate in 2019 to incorporate more flexible financing solutions beyond OBA".
Definition and terminology According to the World Bank Group, Output-based Aid (OBA) is defined as follows: "Output-based Aid is a form of RBF (results-based financing) designed to deliver access to infrastructure and social services for the poor. Service delivery is contracted out to a third party—public or private—that receives a subsidy to complement or replace the required user contribution."
As part of the process of OBA, "the service provider is responsible for pre-financing the project, and is reimbursed after the services have been delivered and independently verified."
Related terms A similar term is payment by results (PbR) which is also used to describe the principles of OBA. In general terms, PbR is a type of public policy instrument whereby payments are contingent on the independent verification of results.
Results-based aid is concerned with incentivizing national-level outcomes and involves the linking of ODA (e.g. from bilateral or multilateral development agencies to developing country governments) to verifiable results, such as performance against one or more outcome indicators, or the successful implementation of a government program. Possible outcomes might include number of children passing an exam, an improvement in the infant mortality rate, or the number of people with a defined improvement in access to energy.
Results-based financing is concerned with the delivery of national or sub-national outputs, and could be used by developing country governments (national or local), public agencies, or development agencies as incentive for the provision of goods or services, create or expand markets, or stimulate innovation. Possible target outputs might include the number of vaccines administered, the number of teachers that are trained, the number of new electricity connections that are provided in a defined area. Results-based financing includes approaches such as output-based aid (OBA).
Overview OBA is specifically targeted for individuals in developing countries who lack the financial means to pay for basic services. The service provider will receive subsidies to replace costs associated with providing the service to people, such as user fees. Individual agents will verify that the service is being delivered and based on the performance of the service-provider, a subsidy will be granted. That is how it is "performance-based".Brooks, P.J., and Smith, S.M. (2001) Contracting for public services: Output-based aid and its applications. World Bank. Available from <http://rru.worldbank.org/Features/OBABook.aspx >Global Partnership for Output-Based Aid. (2009) "OUTPUT-BASED AID – FACT SHEET" Available from < http://www.gpoba.org/gpoba/sites/gpoba.org/files/GPOBA_fact_sheet_english_0.pdf >.
OBA links disbursement to results. It is an alternative to the majority official development assistance (ODA), which is generally provided as grants, loans and guarantees, and is therefore disbursed in advance of delivery. OBA seek to provide incentives for the achievement of both outcomes and outputs by developing country governments, public agencies, commercial operators and civil society organizations.
OBA generally works through a private firm, or another third party, acting as the service provider. The service provider is responsible for the initial financing of the project and, only after results have been verified, will the firm receive subsidies from a donor. In such schemes, it is the provider who bears the risk of loss, rather than the aid donor, and output-based schemes allow for the tracking of results because of the way they function. Integration of the private sector into aid schemes is common with OBA, since they often provide the initial financing. The World Bank sees OBA as a way to improve aid effectiveness. This differs from traditional aid schemes that will usually focus on the inputs to service providers rather than the outputs. The donor is usually the World Bank, a government or an international organization or philanthropist that is part of the OBA scheme. Subsidies from a donor will generally serve to complement or reduce user fees. The subsidy is paid only after the particular service has been delivered to a community. The subsidies are targeted to poorer individuals, since OBA initiatives are carried out in regions with significant amounts of poverty.Brooks, P.J., and Smith, S.M. (2001) Contracting for public services: Output-based aid and its applications. World Bank.Global Partnership for Output-Based Aid. (2009) "OUTPUT-BASED AID – FACT SHEET"
In healthcare, vouchers are granted to patients who require medical attention and cannot afford or access it. These vouchers can be taken to hospitals or clinics, whether private or public, and they will be provided with the medical attention they require. The clinic or healthcare professional that provided the medical service will be subsidized for the delivery of the service by a donor.KFW Entwicklungsbank "Output-Based Aid." Available from http://www.kfw-entwicklungsbank.de/EN_Home/Topics/Health/Output-Based_Aid.jsp.
Advantages
According to the GPOBA, OBA improves upon other forms of aid in a number of ways. The first is by creating transparency since the provider and receiver of any subsidy will be known to each other and the public. Performance risk is shifted to the providers in OBA schemes since they are accountable for what they deliver. OBA schemes are said to provide incentives for innovation in projects as well as a means for mobilizing expertise and finance from the private sector. Finally, OBA provides internal tracking of results.Global Partnership for Output-Based Aid. (2009) "OUTPUT-BASED AID – FACT SHEET"
Malcolm Potts of the University of California, Berkeley believes OBA schemes to be more effective than traditional aid projects because they invest in extant infrastructure. OBA schemes can provide poor consumers with the leverage to determine the quality of the service they are provided with. For example, in a health-care project, individuals receiving OBA will gain choice in where they want to go for their health care needs, essentially a choice between options in the public and private sector. With OBA, existing service providers are granted subsidies based on the number of people who use their services. In this way an individual can choose between multiple service providers, whether public, private or non-governmental, and only after the service has been provided do they receive the subsidy.KFW Entwicklungsbank, "Interview with Prof. Dr. Malcolm Potts with respect to Output-Based-Aid (OBA) voucher schemes as a means of promoting public health in developing countries."
Compared to other aid schemes where projects were pre-funded by a donor, OBA uses explicit funding; if service providers fail to deliver, they and their investors, rather than taxpayers, who bear the brunt of financial loss.International Development Association. (2006). "A Review of the Use of Output-Based Aid Approaches" International Development Network Sustainable Development Network (October 2006). Available From < http://siteresources.worldbank.org/IDA/Resources/Seminar%20PDFs/73449-1164920192653/IDANETOBA.pdf>.
Proponents of OBA argue that this approach is more likely to deliver the desired development objective, with less scope for waste and greater freedom and incentive for the beneficiary to innovate or achieve the desired objective at least cost.
Problem areas
OBA schemes have been criticized for their high administrative costs which exist for a number of reasons. The printing and distribution of vouchers can be costly.KFW Entwicklungsbank, "Interview with Prof. Dr. Malcolm Potts with respect to Output-Based-Aid (OBA) voucher schemes as a means of promoting public health in developing countries Also, there is significant cost in effectively monitoring outcomes of OBA schemes, and maintaining a process of transparency in OBA. Voucher theft or counterfeiting could be a serious issue for OBA projects. The sale on vouchers on the black market could easily disrupt the knowledge of where vouchers are distributed.Sandiford Peter, Gorter Anna and Salvetto Micol. "Public Policy for the Private Sector: Vouchers for Health." Viewpoint. (April 2002). Available From < http://rru.worldbank.org/Documents/PapersLinks/OBA_Vouchers.pdf >
Possible criticisms include the need for recipients to obtain pre-financing, the risk of unintended consequences, higher monitoring and verification costs, and the difficulty of setting the incentive at the optimum level.
Performance-based conditionality has come under criticism for producing intermediate indicators which often distort the achievements of particular projects. These indicators, which only convey the success of certain actors and which are susceptible to manipulation, do not provide accurate indication of long-term changes of benefit to a region. Progress should be measured in more long-term objectives which encompass many sectors that contribute to the well-being of a population. For example, reducing child mortality requires many areas—health care, family planning and clean water—to be targeted, and even though intermediate indicators of an OBA scheme in one sector may appear positive, this does not necessarily identify progress in reducing child mortality.