Whatever happened to output-based aid? Ctd

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Editor’s Note: Lars Johannes is an Infrastructure Specialist in the World Bank’s Sustainable Development Network, working for the Global Partnership on Output-Based Aid (GPOBA). He is task team leader and advises projects in health, education, and energy.

Following up on Ryan’s recent post (Whatever happened to OBA?), I wanted to give readers of the PSD blog a flavor of what the book is about. In the last few years GPOBA has been focusing on getting pilot projects going, with 28 projects currently under implementation and four more projects about to be signed. Additionally, we have been exploring the lessons of some 80 additional projects in the World Bank that have been found to meet the definition of OBA (i.e. shifting performance risk to a service provider by paying on pre-defined outputs).

Output-Based Aid: Lessons Learned and Best Practices is based on a review of these projects that has resulted in a number of lessons, some confirming our initial assumptions of what OBA would accomplish and some of them making us review our expectations. As the figure in Ryan’s post shows, the projects we have information for were rated better than comparable input-based projects.

Along similar lines, if we look at the number of outputs delivered by projects and the frequency of cost overruns, OBA projects achieved or over-achieved targets more often than comparable input-based projects, and in nearly 70% of cases came in under budget. This appears to corroborate the expectation that the transfer of operational risk to service providers associated with OBA projects indeed helps improve accountability.

Other aspects, such as the use of independent (often private) service providers as a driver of innovation, are more difficult to aggregate, but there is an abundance of cases where service providers have used their freedom to deliver outputs in innovative ways. Examples for this are technology-neutral concessions in rural energy projects, where service providers are free to choose the most appropriate technology to serve remote poor households.

Other examples are more anecdotal in nature, for example the case of a natural gas distribution company that embarked on an outreach campaign to target poor customers who were reluctant to sign up for a subsidized gas connection, because the poor were uncertain whether they would be able to afford monthly bills. The gas company chose to distribute piggy banks to potential beneficiaries to show that they indeed were able to sign up for a gas connection; and the gas connection delivered an energy source that actually turned out to be more affordable than their previous energy sources.

Results regarding the ability of OBA projects to mobilize private funding are more mixed. While infrastructure projects with private sector involvement on average mobilize $2 for every $1 subsidy provided, the possibility for such leverage depends on the tariff level (i.e. the regular payments for service that are in addition to any up-front connection costs). Many of the target beneficiaries pay tariffs that barely cover the cost of on-going service provision, so the amount of money available to recoup investment is relatively low. Still, using OBA to expand service to the poorest can help to achieve scale or put excess production capacity to use. Other sectors such as health and education mostly use on-going subsidies, with investments being used to provide services to regular customers as well as subsidized beneficiaries, so it is difficult to estimate the amount of investment due to a project.

Ryan also addressed another challenge, access to finance, in his post. The ability of service providers to mobilize up-front financing that is reimbursed only after output delivery can be a serious issue, particularly for small, local service providers. Some innovative solutions are being piloted, for example working with micro finance institutions, but it remains to be seen whether they can be implemented at scale.

Another issue we have found is the need for capacity building, which tends to be most urgent in poorer areas and can include the need to help local service providers create an enabling environment, but also often requires working with poor beneficiaries.

So on balance, we believe that the experience so far is positive and that there is a case for use of OBA more often. That said, there is obviously a need to continue monitoring lessons, gathering experiences, piloting OBA in new sectors and working to address challenges identified. For those interested in learning more, there is obviously our recent book, but we are also happy to address any questions you may have, email gpoba@worldbank.org with subject line ‘OBA Review’.  We are working on a public database of OBA projects that we hope to have online in May. This will allow anybody interested in OBA to do their own analysis and we would be happy to include any OBA projects that readers can share with us.

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