Sanitation services are beneficial for communities at large. They generate strong positive health and environmental benefits to society ('externalities'). Public financing is an important way to stimulate the provision of these services, but there are serious issues with the way public subsidies for sanitation have been delivered up to now. Recent estimates show that the sanitation millennium development goals (MDGs) will simply not be met in a number of countries if 'business-as-usual' continues. The study looks at how such Output-Based Aid (OBA) schemes might be designed by analyzing the sanitation value-chain, and what institutional, financing and risk mitigation measures would be required for each type of OBA scheme. Questions discussed include 'what' outputs should be subsidized and 'who' are the most likely candidates to provide output-based sanitation services.