Any discussion about designing output-based aid schemes must begin with an understanding of the underlying strategy—in particular, how it differs from traditional ways of funding and delivering public services.
Traditional approaches to providing health, education, infrastructure, and other public services channel public funding (whether sourced from domestic taxpayers or international development assistance) to the labor, materials, and other inputs consumed by state-owned monopolies, with at best indirect links between funding and the delivery of services. In the developing world especially, results have often been disappointing. Incentives for efficiency and innovation have been weak. Accountability for performance has been dismal. And opportunities for leveraging scarce public resources through private financing have been limited.
Output-based aid seeks to address these weaknesses by delegating service delivery to a third party under contracts that link payment to the outputs or results delivered. It thus has the potential to improve incentives and accountability
while also expanding opportunities for mobilizing private financing. The focus shifts not only from inputs to outputs, but also toward the Holy Grail of development outcomes.