Output-based aid in the urban water sector - Insights from New Institutional Economics

Sammanfattning: This essay examines if and how output-based aid (OBA) in the urban water sector contributes to long-term and pro-poor development. OBA is a results-based method where contractual agreements stipulate subsidy payments on delivery of outputs, rather than subsidies towards project inputs. To study the characteristics and effects of OBA, the essay adopts a New Institutional Economics perspective, and puts this theoretical framework in relation to the contemporary debate and practice within the international development cooperation community. Two Indonesian cities, Jakarta and Surabaya, and their respective OBA projects are used for a comparative case study. The essay concludes that OBA solves basic but important principal-agent problems, targets relatively poor people and manages to provide more people access to network water service. This is pro-poor, as is the fact the OBA targets network connections costs. However, analysis displays the diverse and difficult institutional set-up that governs the developing country urban water sector, and thus emphasises several institutional aspects that need attention and effort in order to achieve pro-poor services and the accompanying institutional change necessary. It is shown that OBA has not paid enough attention to the institutional context to ensure long-term, sustainable pro-poor results and the reduction of multidimensional poverty.