Output Based Aid

Demand-side Subsidies: Ensuring Funding Reaches the People

Output based aid (OBA) is a recent innovation in the disbursement of philanthropic aid. Donors want to ensure that aid is used efficiently and can show measurable results. As the name suggests, OBA ties subsidies to performance. Private sector providers are reimbursed based on their ability to provide basic social services, including water, sanitation, electricity, transport, telecommunication, education, and, of course, healthcare. In this manner, OBA is playing an increasingly important role in ensuring access to social services and building infrastructure in developing countries.

OBA interventions have the advantage of facilitating transparency regarding who is receiving the subsidy, what outputs are being subsidized, how much is being subsidized, and why subsidies are occurring. With OBA interventions, the provider largely self-finances the service and assumes the performance risk; if the service is not successfully delivered, the provider is not reimbursed.

Private Sector and Output Based Aid

The extent to which OBA interventions are effective depends on the details of the contracts, provider competition, and regulatory oversight. Poorly defined performance indicators can lead to counterproductive or biased service provision. Good contracts help align provider incentives with consumer needs and donor priorities. Competitive OBA awards encourage providers to offer the greatest value for lesser costs, thereby promoting efficient use of resources and innovation. Provider eligibility guidelines can be used to stimulate provider competition (e.g., opening eligibility to all private providers in a geographic area) or to modulate quality of services (e.g., limiting eligibility to accredited providers). As with any subsidized service, providers must be monitored for corruption.

Strengths

  • Improved provider accountability
  • Increased transparency of subsidy flows
  • Competitive award encourages quality service
  • Encourages efficient use of resources
  • Subsidies may be targeted to those most in need
  • Can result in improved infrastructure
  • Increased availability of basic services

Weaknesses

  • Ensuring provider competition
  • Defining appropriate performance indicators
  • Tradeoffs between price and quality
  • Designing cheap and effective administration
  • Independent verification of service delivery
  • Preventing leakage of subsidies

Output Based Aid Today

Output based aid is becoming increasingly popular in development settings, in addition to traditional supply-side schemes. OBA interventions make use of existing health services, avoiding duplication of health infrastructure in resource-poor areas while encouraging new entrants to the health market.

Global partnership for OBA is a multi-donor trust funding 65 OBA programs worldwide. The partnership is the combined effort of The World Bank, IFC, SIDA, AusAid, the Netherlands, and DFID to push forward OBA interventions to increase access of basic services to the most needy.

An increasing variety of basic services are funded via OBA. In addition, OBA schemes are utilized to promote accountability in public sector service provision.

Another Point of View

Diluted Impact

Demand-side subsidies can be distributed a number of ways. They may directed towards consumers or providers, and may be distributed before or after service delivery.

In the absence of targeting subsidies to the consumer, the impact of subsidized health expenditures is greatly diluted. The poorest groups still end up paying more than they can afford, while middle socioeconomic groups benefit the most. Output-based-aid, by its nature, is apt to measure outputs rather than outcomes, and to drive implementers (government, NGO, or private) to focus on ‘low-hanging-fruit’: the easy to reach urban populations least in need to begin with. Measurement leads to a chimeric belief that the things measured are the critical deliverables when often that is not the case.

Current Programs and Resources - Output Based Aid