There is an ongoing conversation in the development community, certainly amongst donors, about the need to make sure that aid is well spent and reaches the people it is intended to help. Most recently the UK shared its vision for international development, highlighting Value for Money and the use of results-based approaches. Output-based aid (OBA) is one such results-based approach, intended to provide access to basic services – such as infrastructure, healthcare, and education – for the poor in developing countries.
Over 77,000 people from 25 villages have gained access to a clean water supply from the Improved Rural Community Water project in Andhra Pradesh, India.
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.
I was involved (as part of a team from DFID) in some of the early discussions of OBA, and I remember a lot of buzz around the topic at the time. The phrase that stuck in my mind was how OBA was “potentially transformational”. We talked about a dramatic shift away from a preoccupation with aid volumes (“inputs”) to a new aid relationship which provided incentives for improved performance, delivery and results (“outputs”). The new approach, based on the transfer of performance risk to service providers and independent results verification, introduced a clarity of purpose and transparent accountability mechanisms that were noticeably absent from mainstream Official Development Assistance. OBA, through “buy” side or ”smart” subsidies, provided market-based incentives to reach the poor that were “market building” because domestic private firms could enter markets as service providers. OBA provided revenue adequacy as well as the freedom to deliver outputs in innovative ways.
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?
Water collection after project implementation. Click here for more photos of the GPOBA Improved Rural Community Water Project.