February 2017 Note Number 53 Output-based Aid for Urban Transport Image: Michael Foley. U rban transport systems are crucial to economic and The urban transport sector social development, and are particularly important for connecting poor populations to jobs, education, Urban systems are complex, and the uniqueness of each and health services. As the developing world rapidly urban- urban environment and population make the design and izes, there is an opportunity to build safer, cleaner, and more provision of urban transport services a challenging task. inclusive transport systems. In order to better understand the For sound social and economic reasons, urban transport urban transport landscape and how output-based aid (OBA) is usually subsidized through one or more means: infra- might be applied most effectively in the sector, the Global structure investment, subsidies to operators, or subsidies Partnership on Output-Based Aid (GPOBA) undertook an to users. urban transport study.1 Completed in 2016, the study devel- Whichever means is used, subsidy projects must take oped OBA pilot concepts and presented recommendations for careful account of the need to balance the affordability of the identification and preparation of OBA urban transport services, their density and frequency, and their financial projects. This note discusses the study’s main findings. sustainability for governments. Subsidies enabling lower fares, for example, are key to improving access for the Supporting the delivery of basic services in developing countries poor, but they don’t address underlying system prob- especially in cities where their transport needs may not lems: being able to afford the bus is of limited benefit if be a priority for authorities. bus routes and stops remain too far from where users live. Alternatively, near-guaranteed support for operators Targeting low-income users in the absence of obligations to produce additional or better services can disincentivize operators to improve OBA uses pro-poor targeting, which would be highly profitability or take risks. Subsidies should be designed, beneficial in the transport sector, where subsidies do not therefore, to encourage efficiency and improved perfor- always translate into pro-poor impacts—particularly mance, while making services as inclusive and accessible when they are paid directly to operators, resulting in a as possible. high rate of inclusion errors. Pro-poor targeting aims to reduce the main access-related barriers (e.g., affordabil- The role of OBA ity, supply, physical access) affecting low-income people, while supporting long-term transport sector improve- OBA is a form of results-based financing (RBF) that uses ments. Specific targeting methods should be assessed performance-based subsidies to improve access to and against the estimated cost of inclusion and exclusion delivery of basic services for poor populations. By linking errors. For instance, the cost of narrow individual target- the disbursement of funds to verified services or outputs, ing can be very high relative to the projected individual OBA can help to improve service quality, transparency, subsidy, and may be preferable to ‘indirect’ geographic or and accountability. modal targeting only if a system already exists that allows According to the recent study, many common short- for easy identification of the poor. However, even when comings of subsidy systems in urban transport can be a project’s targeting criteria is modal and/or geographic, addressed by designing or reforming them according to impact can still be carefully aimed at particular groups; OBA principles. The aim of OBA transport projects—to subsidizing services at specific times on selected routes, improve access of poor populations to economic opportu- for example, may benefit low-income women who travel nities and services—may be approached in various ways, daily to markets. such as the upgrade of regulated transport services; the regulation and improvement of unregulated services; mak- Subsidizing infrastructure and networks ing transport more affordable for the poor; or improving transport infrastructure. OBA subsidies are not long-term arrangements, but OBA projects should be part of sector-wide, long- well-designed projects can support financially sustain- term strategies aimed at improving access and mobility, able, positive changes that continue after OBA disburse- aligned with the authorities’ vision for the sector but ments have concluded. Because many transport systems focused on addressing access constraints facing the poor, are already subsidized, the focus of an OBA project may OBA in Urban Transport: Key findings • OBA uses pro-poor targeting, but even when individual targeting is not feasible, impact can be aimed at particular groups through modal and/or geographic targeting by, for example, subsidizing services at peak times on selected routes. • Subsidies should support a balanced approach to affordability, density/frequency of services, and financial sustain- ability: lower fares alone, for example, may significantly improve access only if bus stops are near users and adequate numbers of buses run when most needed. • OBA subsidies are not long-term, but projects can support long-term improvements. Such support might take the form of funding infrastructure investment, incentivizing sector reforms, or providing transitional funds during net- work improvements. • OBA improves accountability by shifting performance risk to providers. But pre-financing and risk-bearing capac- ity vary among operators, and not all risks are under operators’ control. OBA projects should avoid shifting excessive risk—for example, by transferring risk to the authorities, while ensuring that operators are adequately incentivized. • Even when OBA projects support physical assets, indicators should be service-based: purchasing more buses does not guarantee improved service, so focus should be on how effectively the buses are put to use. June 2016 Note Number 52 be less often on the ‘classic’ OBA model of subsidizing user fees and instead, for example, on providing tran- sitional support to operators during network improve- ments, or incentivizing reforms that increase the finan- cial autonomy of the transport service, such as through contractualizing subsidies against public service obliga- tions. Contractualization is key to financial sustainability and to supporting institutional arrangements that ensure that improved performance can continue. OBA proj- ects could fund one-off investments in infrastructure or equipment (taking care to ensure that operation and maintenance will be funded); incentivize stakeholders to improve an existing subsidy scheme; implement new monitoring technologies; or demonstrate the feasibility of a new subsidy scheme or approach through a repli- cable pilot supporting broad sector transformation that other financing instruments can build on. OBA could also help to leverage additional funding in the sector through co-financing arrangements. Compared to other infrastructure sectors, the urban transport sector can be highly fragmented and tends to include many informal services and micro-enterprises, to provide an adequate performance incentive. In some which complicates the implementation of subsidy cases, it may be more realistic to transfer risk not to the schemes. It is worth noting that while expansion of operators, but to the authorities, provided that operators the formal transport sector is often seen as a desir- are still adequately incentivized. able outcome regardless of the developmental impact, unregulated operators constitute the bulk of supply in Measuring impact many cities, and there may be greater value in leverag- ing their energy and resources, and improving and regu- The impact of urban transport subsidies can be hard lating their services, than in subsidizing less efficient to measure. Baseline values for factors such as noise or competitors. greenhouse-gas emissions are often not available in devel- oping countries, while a key positive outcome of transport Performance risk projects—the economic benefits of population density—is complex to assess, due both to a lack of statistical data and Because OBA subsidies are transferred to the service the large presence of informal economies. provider only when outputs have been achieved, perfor- OBA projects are designed with clear, pre-agreed mance risk is shifted to the provider, thereby improving indicators for assessing the achievement of outputs. These accountability. In urban transport projects, risks may indicators and outputs are independently monitored and be tied to costs of infrastructure investment (which can verified throughout the project cycle. Output categories, fluctuate unpredictably), operations related to service and the indicators linked to them, could include: invest- delivery, and levels of demand. The transport sector con- ment (e.g., buses or improved bus stops), production tains multiple actors whose pre-financing capacities and that reduces access barriers (e.g., number of additional willingness to bear these risks varies widely, along with vehicle/km or available seats/km during peak hour), or their ability to withstand unexpected results of risk, such fare incentives, reflected in the payment of a subsidy per as cash shortfalls. Project design must take variations in passenger paid to the operator. Capacity-strengthening is risk-bearing capacity into account. For example, bas- not itself an output but it can support performance that ing subsidy disbursements on passenger usage rewards triggers disbursement. efficiency, but it could also create unintended risk for the OBA in the urban transport sector should focus on operator: if a targeted subsidy results in a large increase service-based indicators rather than investment indica- in ridership, the operator will have to purchase more tors, even if the project supports physical assets. For vehicles, bearing the risk that additional riders may not example, although vehicles are an easy investment to materialize at the needed level. The structure of subsi- verify, they could remain unused or inefficiently used, dies should avoid shifting more risk than is necessary so it is better to measure service provided. Monitoring service outputs may require rolling out ICT systems, potential to address many of their common shortcom- which have the added benefit of helping operators to ings. OBA projects can create an enabling environment better manage transport networks. OBA projects offer for better performance and service delivery by, for a good opportunity to foster the development of these instance, contractualizing service standards for opera- technologies. tors, strengthening transport policies, and building the It is important to be aware, when choosing project capacity of transport actors. As OBA projects are limited indicators, of systemic or external issues that can nega- in time, and public transport typically benefits from tively impact operator efficiency; these include exces- permanent subsidies, OBA will be most effective in the sive regulation (e.g., fares that are too low, or mandated, sector if projects are designed to ensure that changes unprofitable routes), unreliable fuel supply, or unpre- incentivized by OBA can be sustained beyond the life of dictable congestion. Other efficiency-related factors are the project through such means as project replication, within operator control, such as competition for clients. the leveraging of additional financing, or the conversion OBA projects must ensure that in incentivizing opera- of a ‘traditional’ subsidy scheme into one based on OBA tors to serve more clients, drivers are also incentivized principles. to maintain safe driving practices. This may be done, for example, by mandating that operators pay drivers minimum fixed wages, or by contractual agreement that a certain amount of operator revenue goes toward vehicle maintenance. Conclusion 1 Analysing the use of Output Based Aid (OBA) in Urban Designing or reforming public urban transport sub- Transport, May 2016. sidy systems according to OBA core principles has the About OBApproaches OBApproaches is a forum for discussing and disseminating have been chosen and presented by the authors in agreement recent experiences and innovations in supporting the delivery with the GPOBA management team and are not to be attribut- of basic services to the poor. The series focuses on the provi- ed to GPOBA’s donors, the World Bank, or any other affiliated sion of water, energy, telecommunications, transport, health, organizations. Nor do any of the conclusions represent official and education in developing countries, in particular through policy of GPOBA, the World Bank, or the countries they output- or performance-based approaches. The case studies represent. To learn more, visit www.gpoba.org e Global e Partnership on Global Partnership Output-Based Aid on Output-Based Aid Supporting the delivery of basic services in developing countries