OBA provides a way in which international financial institutions (such as the Asian Development Bank) can directly structure its financing to benefit poor people, even when the service provider is a private company.
OBA is the use of explicit, performance-based subsidies funded by the donor to complement or replace user fees.8 It involves the contracting out of basic service provision to a third party-such as private companies, NGOs, CBOs, and even public service providers-with subsidy payment tied to the delivery of previously specified outputs. This means that targeted and valuable subsidies to disadvantaged populations are funded through donor funds. The private partner, meanwhile, can only recover this funding by achieving specific performance outcomes. A global multi-trust fund was created in 2003, the Global Partnership for Output Based Aid, to provide increased access to reliable basic infrastructure and social services to the poor in developing countries through the wider use of OBA approaches (see Box 18 for information).
Generally, OBA schemes finance three types of subsidies:
• One time. These would include subsidies for connections with the collected user fees covering longer-term operation and maintenance costs. These have been the most common under OBA schemes to date.
• Transitional. Transitional subsidies are used to ease the transition to full cost recovery tariffs.
• Ongoing. Ongoing subsidies are linked to a sustainable source of funding such as general tax revenues, earmarked tax revenues, or explicit cross-subsidies. These subsidies are used to complement the existing funding source. This has been less used and requires longer disbursement periods.
OBA also transfers risk to the operator in several ways. First, OBA links payment of the subsidy to performance outcomes, maintaining pressure on the operator to reach agreed upon service and commercial targets. Second, OBA schemes determine and pay the total level of subsidy ex post. Thus, the operator runs some risk that payment will not be made by government as agreed.
Typically, OBA payments relevant to pro-poor service would be linked to outcomes related to consumption and coverage expansion, but OBA schemes are also applied to BOT projects that might have an indirect, positive impact on the poor.
For OBA to work, there has to be a process for monitoring and verifying delivery of the specified outputs, to pay out an accurate subsidy.
Box 18: The Global Partnership for Output-Based Aid |
The Global Partnership on Output-Based Aid (GPOBA) is a multi-donor trust fund created in 2003 and administered by the World Bank, with funding support from the World Bank, the United Kingdom's Department for International Development, the International Finance Corporation, and the Netherlands Government. The goal of GPOBA is to provide increased access to reliable basic infrastructure and social services to the poor in developing countries through the wider use of OBA approaches. GPOBA will demonstrate and document OBA methods of supporting the sustainable delivery of basic services (water, sanitation, electricity, telecommunications, transportation, health, and education) to those least able to afford them and to those currently without access. Currently, GPOBA funds are eligible to support the following: • Funding of output-based payments under OBA schemes to facilitate the piloting of innovative, small-scale projects; • Studies and other inputs to assist in the design, implementation, and evaluation of particular schemes intended to pilot the application of OBA approaches to the delivery of eligible services; and • Publications, workshops, and conferences to help identify and disseminate emerging knowledge on issues relating to the role and application of OBA approaches. |
For more information on OBA, visit the GPOBA website at www.gpoba.org. |