Increasing access to basic infrastructure and social services is critical to reducing poverty and achieving the Millennium Development Goals. However, this is a challenge because of the gap between what it costs to deliver a desired level of service and what can be funded through user charges. Subsidies have often played a role in funding this gap because of, for example, limited ability to pay by the poor. However, given the political commitment by a number of countries to increase aid flows, but at the same time the mounting concern of aid effectiveness, it is critical that subsidies be linked to the actual delivery of services, or “outputs.”
Output-based aid (OBA) is a strategy for using explicit performance-based subsidies to deliver basic services where policy concerns would justify public funding to complement or replace user fees.