Output-Based Aid for Urban Transport

credit: World Bank

Efficient urban transport systems are vital for economic development, connecting poor and underserved communities to jobs, education, and health services. With rapid urbanization and increasing numbers of urban poor living in informal settlements, a well-connected and affordable transport system can have a transformative effect, reducing poverty, boosting prosperity, and contributing to the achievement of the Sustainable Development Goals.  

Over the last decade there has been increased interest in public investment in urban mass transit, with implementation of urban rail and bus rapid-transit projects in cities around the world. However, there is little indication of the extent to which the poor are benefiting from these interventions due to the affordability of the service.

The complexity of urban transport systems makes it challenging to design and deliver one that is affordable to a range of users. As a result, the urban transport sector is usually subsidized to cover either infrastructure investment needs, operator costs, or user’s fees. Whatever subsidy option is used, careful consideration should be given to balancing the affordability of the service to the poor, the quality and quantity of service availability, and the financial sustainability for the government.

The Global Partnership on Output-Based Aid (GPOBA) has championed Output-Based Aid (OBA), a form of Results-Based Financing (RBF), as an innovative financing tool that can bridge the gap between what low-income households can afford and the cost of the service. Many of the short comings of the subsidy systems in urban transport can be addressed by designing or reforming them per OBA principles.  OBA uses pro-poor targeting, which aims to reduce the main access-related barriers that affect low-income populations disproportionally, such as affordability, supply, and physical access to service. Pro-poor targeting can be particularly beneficial in the transport sector where subsidies do not always translate into pro-poor impacts—particularly when they are paid directly to operators, resulting in more low- income customers being left out of the system.

When used in transport projects, OBA aims to improve access of low-income populations to economic opportunities and services. OBA financing could be used to upgrade regulated transport services; regulate and improve unregulated services; make transport more affordable for low-income populations; or improve transport infrastructure, which in turn improves the enabling environment for better performance and service delivery making the sector more effective. 

In 2017, GPOBA conducted an Urban Transport Study which analyzed how OBA approaches can help address the urban transport access challenge for low-income populations in sub-Saharan Africa and South Asia. Pilot OBA concepts were developed with recommendations on how to identify and prepare projects, as well as to evaluate options for an integrated public transport fare and subsidy policy to make transport more affordable.  OBA can be sustained beyond the life of a project through project replication, leveraging of additional financing, or the conversion of a ‘traditional’ subsidy scheme into one based on OBA principles.

Related Resources
Analyzing the Use of Output-Based Aid (OBA) in Urban Transport
Output-based Aid for Urban Transport
Webinar on The Application of Results-Based Financing for Urban Transport