Increasing access to basic infrastructure and social services is critical to reducing poverty and achieving the Millennium Development Goals (MDGs). However, increasing access is a challenge because of the gap between what it costs to deliver a desired level of service and what can be funded through user charges.

Carbon finance is an output-based approach to mitigating climate change. Under the Kyoto Protocol’s project-based mechanisms—the Clean Development Mechanism and Joint Implementation— projects in developing and transition economies that reduce greenhouse gas emissions can receive “carbon credits." Carbon revenues can help project sponsors close the financing gap between climate-friendly projects and conventional projects, and can help industrial countries reduce their cost of compliance with the Kyoto Protocol.

To fight infant mortality in the poorest provinces of Argentina, local authorities and the World Bank set up the Maternal-Child Health Insurance Program in 2004. The program is administered by provincial governments, which receive funding on the basis of the numbers of mothers and children enrolled and the performance on results-based “tracers”—sets of indicators measuring service delivery and quality. The services are provided by existing health care facilities, which receive a standard payment per patient and per service provided.

Corruption in infrastructure leads to big losses. Estimates of the share of construction spending lost to bribe payments around the world range from 5 percent to more than 20 percent. It is important to reduce the financial cost of corruption by limiting bribe payments. But even more important is to ensure that corruption does not reduce the quantity and quality of infrastructure provision. Output-based aid (OBA) is a tool that can help achieve these goals.

Output-based aid (OBA), or performance-based grants, can be used to help target services to the poor. Under OBA schemes, service providers are compensated only after delivery of a specified output, such as water connections, to a targeted beneficiary. In most cases that targeted beneficiary would be a poor household or community. Subsidies are provided in the form of payments for the provision of service to targeted groups to help cover the gap between the cost of provision and the user’s ability to pay.

This working paper aims to provide practical guidance to Government officials and others who are asked to design Output Based Aid (OBA) projects in situations in which there is an existing supplier. The focus is on water and electricity projects where there is a request for development of an OBA subsidy, and there is an existing Private Sector Participation (PSP) contract involving supply of the service in (or near) the area in question.
 

During the 1990s many Latin American countries developed universal access programs, financed through universal service funds, to increase telecommunications access in rural and low-income areas. The mechanism most often used to allocate the funds was the minimum subsidy tender, with subsidy payments linked to predefined performance criteria (such as installation of telephones in rural areas) under an output-based aid (OBA) approach.

The paper attempts to put the observations made within Mozambique into a broader context, reflecting a wider range of payment mechanisms that have either been employed, or else could be considered, to transfer output-based aid (OBA) subsidies. It hopes to advance the understanding of the different means by which OBA approaches can be operationalised, given its increasing importance within the World Bank’s Private Sector Development Strategy.