Estimating the Fiscal Risks and Costs of Output-Based Payments

Output-based payments are an important tool of government policy. Sometimes governments offer “output-based aid” to subsidize services sold to households. Guatemala and Mozambique, for example, subsidize new electricity connections, while Paraguay is piloting a program to subsidize new water connections. At other times governments are the sole source of revenue for a private infrastructure firm. Many governments enter into “public-private partnerships” in which they pay a private firm for making available such facilities as roads, schools, prisons, or hospitals. Dozens of developing countries buy wholesale electricity from independent power providers under similar arrangements. A few countries, such as Portugal and the United Kingdom, pay “shadow tolls” to privately financed roads. In all cases the government pays only when the firm delivers a service (such as when a connection is made, a car uses a road, or power is made available).