Output-based aid (OBA) is one of a range of results-based financing approaches which aims to improve development outcomes by linking the disbursement of aid money to achievement of specified outputs by service delivery partners.
There is considerable experience with OBA in the transport sector and in Latin America, but very little experience and evidence in the water and sanitation sector. Most OBA projects in water and sanitation are relatively small pilot projects which are still in their early stages, and the sector makes up only 3% of all World Bank OBA.
The principal challenges facing output-based aid projects in water and sanitation in fragile states are:
- Specifying outputs
- Monitoring and evaluation
- Weak public and private sector capacity
- Access to private sector funding
- Transaction costs and scaling up
- Performance risk
Because there is little experience in using OBA in water and sanitation, there is limited evidence of effectiveness in the sector. The World Bank reports that OBA projects in general are more successful than other aid projects, but there is also evidence from the health sector that while OBA can successfully achieve short-term objectives, it has not demonstrated long-term sustainability. Long-term sustainability of OBA in the water and sanitation sector appears doubtful, primarily because user fees appear unlikely to be able to cover operating costs. OBA does appear to be quite effective in targeting aid to the intended beneficiaries.