54852 April 2010 Note Number 33 A Snapshot of the OBA Universe | Lars Johannes, Luisa Mimmi, and Yogita Mumssen D evelopment practitioners are acutely aware of the need to find more effective ways to improve basic living conditions for the poor, as traditional ap- proaches of delivering public support have not always led to the results intended. Output-Based Aid (OBA) is a results- based instrument that is being used to improve the delivery of basic infrastructure and social services to the poor, often through public-private partnerships. This note provides an overview of the use and performance of OBA based on the World Bank study "Output-Based Aid: Lessons Learned and Best Practices" (Mumssen, Johannes and Kumar 2010). What is OBA? Photo courtesy of the World Bank Output-Based Aid (OBA) is a results-based mechanism also include a specified period of electricity delivery that is increasingly being used to deliver basic infrastruc- demonstrated through billing and collection records. ture and social services to the poor. The concept was in- Additionally, OBA ties the disbursement of public troduced in the World Bank Group in 2002 through the funding in the form of subsidies to the achievement Private Sector Development Strategy and more formally of clearly specified results that directly support im- in January 2003. At that time, the Global Partnership on proved access to basic services. Neither performance Output-Based Aid (GPOBA) was established by the UK's contracts nor subsidies are new. However, outputs in Department for International Development (DFID) and OBA schemes are generally more narrowly defined than launched as a World Bank­administered pilot program benchmarks in traditional performance arrangements, to test the OBA approach. which in some cases may be input oriented. OBA refines the targeting of subsidies by bringing them together with How does OBA fit with other performance-based arrangements through the explicit results-based mechanisms? linking of subsidy disbursement to the achievement of agreed outputs. Figure 1 provides a broad depiction of some instru- The OBA spectrum encompasses diverse schemes (or ments that may be categorized as results-based financing combination of them) such as performance-based con- (RBF) approaches, which includes OBA among others. tracting (as in road projects) or voucher schemes (espe- A distinctive feature of the OBA approach is that outputs cially in health and education). Vouchers, paid either to are defined as closely to the desired outcome or impact as users or to competing service providers, are typically tied is contractually feasible. For example, an output might be to the provision of health care or education to beneficia- the installation of a functioning household connection to ries who are disadvantaged or live in under-served areas. the electricity network. In some cases, an output might Conversely, some other RBF mechanisms, for example conditional cash transfers, and possibly cash on delivery, do not meet the definition of OBA. In the case of CCTs, despite the link to specific social development goals, Lars Johannes is an Infrastructure Specialist and Luisa Mimmi is a Consultant with the Global Partnership on Output-Based Aid. the subsidy design does not involve the service provid- Yogita Mumssen is a Senior Infrastructure Economist in the World ers through binding contracts that transfer some of the Bank's Finance, Economics, and Urban Development Department. performance risk to them. Supporting the delivery of basic services in developing countries Figure 1. RBF Mechanisms Figure 2. Volume of OBA Subsidy (in Terms of US$ Value) by Sector and Region in the WBG a) By region WBG OBA Portfolio by Region Performance (Total = US$ 3.5 bn) bonuses OBA SAR, 9% COD MENA, 1% Results-based Financing PBC AFR, 33% CCT LCR, 52% EAP, 3% ECA, 2% CCT = Conditional Cash Transfers; COD = Cash on Delivery; OBA = Output Based Aid; b) By sector PBC = Performance­Based Contracting (for example, for roads) WBG OBA Portfolio by Sector Source: Authors' representation (Total = US$ 3.5 bn) Water & Education, Sanitation, 5% 5% Energy, Increase in use of OBA 6% There has been a nearly fourfold increase in the Health, number of OBA projects in the World Bank Group 24% (WBG)--from approximately 32 at the time of the official launch of OBA in 2002­03, totaling US$1.5 billion in funding,1 to about 131 projects with a total Transport, Telecom, value of about US$3.5 billion in subsidies (excluding 2% 58% the US$2.8 billion subsidy funded by recipient gov- ernments). See Figure 2.2 Source: GPOBA database Several factors appear to be contributing to this increase, including the following: GPOBA, and in Latin America and the Caribbean, · An increased emphasis on results and account- where the first OBA pilots in almost each sector were ability by donors and governments, including the initiated. WBG results agenda Although the OBA portfolio has been growing · An explicit recognition that well-designed subsidy substantially, to put this growth in context, at about schemes are an integral part of a pro-poor infra- 3 percent in total, OBA is only a small share of the structure and social services delivery strategy World Bank portfolio. The largest share of OBA · A recognition that for public-private partnerships projects was 9.1 percent of funding volume in the ICT to be successful, specific attention needs to be paid sector, followed by health (7.1 percent) and transport to pro-poor service delivery (3.6 percent). This relatively low percentage is partially explained Projects identified outside the WBG were over- by the fact that OBA is not fully mainstreamed yet, whelmingly in the ICT, transport, and off-grid energy but there are also other contributing factors. Whereas sectors and predominantly in Latin America and the the WBG's OBA portfolio includes only projects that Caribbean. Most WBG OBA projects are currently aim at increasing household access to basic services, in Africa, in part because of recent piloting efforts by the overall portfolio includes projects financing large April 2010 Note Number 33 upstream investments, wider sector-reform programs, and disseminate the lessons learned. In 2005, through and analytic and advisory activities. Moreover, the an additional contribution from DFID, GPOBA became overall WBG portfolio obtained from the WBG Busi- able to fund actual subsidy schemes. These funds galva- ness Warehouse database includes subsectors such as nized the development of more than 40 projects, which mining, railways, ports, or nutrition--for which no are mostly being implemented or awaiting imminent OBA projects have been identified. agreements for grants. An additional 11 projects have It is worth highlighting also that most OBA projects received or are receiving GPOBA technical assistance identified within the ICT sector are funded through funding. New donors have since joined GPOBA, Universal Access and Service Funds (UASFs) raised including the Netherlands' Directorate-General for In- by local governments rather than by donors like the ternational Cooperation (DGIS), the Australian Agency WBG. Therefore the corresponding funds do not add for International Development, the Swedish Interna- up to the total WBG funding for OBA projects (begin- tional Development Cooperation Agency, and the IFC ning in the late 1990s, but mainly since 2001 and 2002, (International Finance Corporation). 15 operational funds in developing markets collected a GPOBA has to some extent focused on designing total of approximately US$6.2 billion from operators). and developing OBA schemes in areas where OBA has been less tested, for example in IDA countries and, in Funding OBA particular, the water and sanitation sector. Two-thirds of the GPOBA projects are in IDA countries, and they Funding for OBA schemes has come from the World account for over three-quarters of GPOBA funding Bank, GPOBA, other donors such as the German volume. development bank KfW (Kreditanstalt für Wiede- raufbau), and governments themselves using, for Applications of OBA subsidy design example, tax revenues and cross-subsidies collected mechanisms from users. The World Bank is the biggest donor with over US$3.3 billion committed to fund subsidies to 80 OBA schemes normally apply performance-based projects.3 Many of the first projects were in the Latin subsidies in three ways: one-off subsidies such as American region and in the roads and ICT sectors. connection subsidies, transitional tariff subsidies that Subsequent roads and ICT schemes have built on the taper off as user contributions increase, or ongoing lessons from these schemes (with varying degrees of subsidies. The subsidy design chosen will depend success) and expanded into other regions so that a on factors such as the sustainability of the funding substantial number of roads and ICT schemes now source, the capacity for administering the subsidy exist in regions such as Sub-Saharan Africa. scheme, the type of service to be subsidized, and the Projects in countries eligible for funding from the extent to which the service provider is willing and International Bank for Reconstruction and Develop- able to be paid over time. ment (IBRD) tend to be larger than those in countries One-off subsidies are the most common applica- that are clients of the International Development tion of OBA approaches and usually involve capital Association (IDA), with the 29 percent of projects subsidies for access to a given service. Most OBA located in IBRD countries accounting for more than schemes in water, energy, and telecommunications half of OBA subsidies. A number of projects have also rely on one-off subsidies enabling initial access, partly received substantial amounts of complementary sub- because OBA is targeted to the poor, and the poor are sidy funding from the recipient governments worth a usually not connected to network services in the first total of US$2.8 billion. Nearly 8 of every 10 dollars of place so often cannot benefit from ongoing or transi- this complementary funding came from IBRD gov- tional tariff subsidies. ernments. The bulk of this government funding has Transitional subsidies can be used to support tariff been in the transport and health sectors, accounting reforms, where a subsidy is used to fill the gap be- together for 88 percent of funding. Including govern- tween what the user is deemed able or willing to pay ment co-financing, the total OBA subsidy portfolio and the cost-recovery level (for example, the long-run for WBG projects is about US$6 billion.4 marginal cost) of the tariff. The subsidy is transitioned The remaining 51 projects of the WBG portfolio ei- out after a specified time (for example, months or ther have received funding or are in the process of being years) as the user contribution increases (and possibly funded by GPOBA. GPOBA was originally intended to as tariff levels required for cost recovery decrease with help assist in preparing OBA projects and to document efficiency gains). Ongoing subsidies normally fund the provision Conclusion of basic services or maintenance in OBA projects in roads, health, and education. OBA road maintenance OBA, like other RBF instruments, aims to enhance schemes require ongoing subsidies for the life of the the effectiveness of public funding. As the demand road, often funded through road funds. OBA health for development to be more accountable grows, it is schemes, to ensure continued access to care for the probable that OBA will become more relevant as an poor, often channel subsidies in an ongoing manner approach to improving the delivery of basic services through health care providers as they deliver agreed to the poor. Although the use of OBA is not yet fully services, such as well-child visits, over a defined mainstreamed, the WBG is considering reforms to its period. investment lending products which could allow wider and more effective use of RBF instruments. Further, in Initial evidence on success of OBA countries such as the Philippines and Uganda, GPOBA is exploring the possibility of scaling up OBA in the OBA projects are delivering results: water and sanitation sector, based on lessons and best practices from existing pilot schemes. Practitioners · The 89 projects for which data is available5 are ex- can also build on the success of OBA projects to date pected to reach 61 million planned beneficiaries. by continuing to monitor the existing portfolio, shar- · So far, 17.4 million people are verified to have ben- ing lessons across RBF initiatives, and gathering results efited from OBA projects. from impact evaluations currently underway. · The closed projects for which information is avail- able have reached 16 percent more beneficiaries References than planned. · In OBA, transport projects have rehabilitated and Mumssen, Yogita, Lars Johannes, and Geeta Kumar. maintained 87,591 kilometers of roads or are in the 2010.Output-Based Aid: Lessons Learned and Best process of doing so. Practices. Washington, DC: World Bank In both the overall outcome ratings of the World 1 At the time of the Private Sector Development Strategy and the Bank Implementation Completion and Results creation of GPOBA, only 22 OBA projects of a total value about Reports (ICRs) and the Bank's Independent Evalua- US$100 million were identified, but further research has identi- tion Group outcome ratings, OBA projects with ICRs fied 11 more projects and substantially more OBA funding. 2 The figures used reflect projects identified through September 30, available at the time of the review score, on average, 2009. higher than traditional projects. Results are similar for 3 This total excludes projects with GPOBA subsidy funding or tech- ratings of the quality at entry and quality of supervi- nical assistance. sion of projects that are assessed by IEG. For OBA 4 This sum does not include the approximately US$6 billion identi- projects, quality at entry is rated highly successful or fied as collected through universal access and service funds, as discussed in chapter 3 of Mumssen, Johannes and Kumar 2010. successful in 77 percent of cases, and quality of super- 5 Data on the number of beneficiaries are not readily available for vision is rated highly successful or successful in 100 public access projects that provide service to an entire population percent of cases. and whose use is not exclusive. Such projects are mainly found in the ICT and transport sectors. About OBApproaches OBApproaches is a forum for discussing and disseminating The case studies have been chosen and presented by the au- recent experiences and innovations in supporting the delivery thors in agreement with the GPOBA management team and are of basic services to the poor. The series focuses on the provi- not to be attributed to GPOBA's donors, the World Bank, or any sion of water, energy, telecommunications, transport, health, other affiliated organizations. Nor do any of the conclusions rep- and education in developing countries, in particular through resent official policy of GPOBA, the World Bank, or the countries output-, or performance-, based approaches. they represent. To find out more, visit www.gpoba.org e Global Partnership on Output-Based Aid e Global Partnership on Output-Based Aid Supporting the delivery of basic services in developing countries