Performance Based Grant Systems (PBGS) – Using Grants as Incentives

1. Performance Based Grant Systems (PBGS) – Using Grants as Incentives Concept and International Experience By Jesper Steffensen js@dege.biz March 22, 2010 – WUF

2. Overview of the Presentation • Background • Objectives and Concept of Performance-Based Grant Systems (PBGS) • Experiences and lessons learned • Design issues, future prospects and challenges

3. Background and Introduction • Intergovernmental fiscal transfers is the most important element in the funding of LG expenditures in developing countries (>60 % of overall funding) • The design is a great challenge in any country • Transfers without consideration on the incentive systems and performance have often created unintended problems • Lack of LG incentives to improve performance, • To strengthen financial management, • Own LG tax collection – crowding out impact • Accountability and good governance • Wish to avoid sending more money into a “black box”

4. Background and Introduction • Inefficient capacity building support • No incentives for LGs to utilise it efficiently • Fragmented and weak impact of previous support modalities on LG institutional performance (projects) • Many failed PFM reforms – Why is it not working? • Muted downward accountability • Wish to move towards on-budget funding

5. Overall Objective of Performance-Based Grants (PBGs) • Performance-based grants (PBGs) provide incentives for LGs to improve their performance by linking the access to and size of the release of grants with their performance in pre-determined areas: • They supplement other grant objectives • They supplement other incentive frameworks, e.g. salaries • The incentives are primary monetary

6. Specific Objectives of PBGS • Provide more funds for local priorities and ensure that spending is where there is a clear absorption capacity – basic safeguard against misuse of funds • Promote strong incentives for LGs (as corporate bodies) to improve in key performance areas and adhere to standards • Supplement CBneeds assessment and Monitoring and Evaluation systems • Strengthen the capacity development efforts (focus and incentives) – New approach towards demand-driven CB • Improve management and organisational learning • Improve accountability (up/down), participation and citizens’ access to information on key issues • A strong tool to bring funds on-budget and streamline/harmonise and align donor support

7. PBGS Influence on Accountability Mechanisms PGBS Central Government Local Council Own staff Sector Dept. Staff Citizens, Voters, Tax payers and Users

8. PBGS Typology - Focus

9. Mutually Strengthening Components of the System • 1. CAPITAL/DEV. GRANT • Clear formula-based distribution • Performance-based award • Significant local discretion • 3. CAPACITY BUILDING • GRANT (Demand Driven) • More easily available than capital grant • Combination of local discretion • and supply-side constraints/inputs Institutional Set-Up • 2. ASSESSMENT PROCESS/INCENTIVES • Assessment manual with clear indicators • Annual assessment process (contracted out) LG LG LG LGs use capacity-building resources to improve performance in response to incentives!

10. Component 1 - Development Grant • Size and utilization • Sufficient to create incentives, sometimes undermined by easy access to alternative flows (e.g. Social funds) • Often minimum 20 % of the total development grants • Most countries about 1-4 USD per capita • Ideally, it should be sufficient to be of interest for the sectors • Use formula-based basic allocation formula • Expenditure needs, revenue capacity and cost variations or proxies • + adjustment against performance • Clear investment menu – positive and negative list • Capital versus recurrent

11. Component 2 - Assessments Overall issues • Most countries use annual assessments • Use of a set of defined indicators (defined in due time) • The specification of indicators is important – a ”special science” • Use of elaborated manual – most countries • Various methods for assessments • Internal versus contracting out – combined teams • High credibility in the assessment in pertinent (neutral + validation)

12. Principles for the Indicators and Assessment – A Special ”Science” • SMART: Specific, Measurable, Achievable, Realistic and Time-bound (not ambiguous) • Not overlapping • Within the LG control (attribution) • Derived from existing legal and institutional framework (i.e. not parallel systems) and where supported • Focus on core weaknesses in the LG performance (e.g. PFM, transparency, project implementation efficiency etc.) • Balanced and provide clear “signals” for areas, which should be improved • May be gradually refined, but keep it relatively stable and simple • Weighting (score from e.g. 0-100, balanced performance) • Progressive performance of each LG versus benchmarking with other LGs? • Special considerations for the poor LGs? (indicators, “handicap”)

13. Component 2. Assessments - Tools to Adjust Allocation • Minimum conditions • Basis safeguards to ensure capacity to handle funds • On-off-triggers • Not too many as it may deprive incentives and blur focus • Realistic in scope, but should reduce fiduciary risks to an acceptable level • Example: ”Final accounts submitted on time” • Performance Measures • More qualitative • Can vary in scope and content • Example: ” development plan developed with involvement of citizens through open meetings”

14. Examples of Typical Minimum Conditions – Basic Safeguards • Medium term up-dated development plan approved on time • Linkage between the development plan and budget (medium term forecast) • Core staff in place and functional committees • Accounts for previous FY produced, cash books and bank reconciliations up-to-date • Internal audit function in place and working • Capacity building plan developed and approved by council • Co-funding requirements from LGs adhered with • No adverse audit report and/or all previous audit queries addressed

15. Examples of Typical Performance Areas Areas have to be under the LG control, clearly defined, and measurable! • Organisational performance (e.g. structures and processes) • Planning (e.g. quality of plan and level of citizens’ participation) • Budgeting performance (e.g. outturns against budget) • Fiscal performance, (e.g. local revenue performance) • Financial management (e.g. books of accounts, bank-reconciliation up-to-date, commitment control systems) • Accountability and transparency (e.g. publication of budgets, accounts and audit reports and involvement of citizens) • Cross cutting issues (e.g. environment, poverty focus, gender)

16. Component 3: Capacity Buidling • PBGSs often encompass a strong element of Capacity Building (CB) support • Combined supply and demand driven (CB grants) • To help the LG to improve performance • To respond to the weaknesses identified in assessments • Often easier access to this support (lower MCs) – e.g.: ”a CB/HR development plan is in place” • Broad and generic focus

17. International Experiences • Positive and expanding experiences • Relatively new phenomenon - examples • Uganda (1997, full scale from 2003) • Kenya (2001/02) • Tanzania (2004, full scale from 2005) • Nepal (2004 pilot, full scale 2008/09) • Bangladesh (2003 pilot, roll-out 2007-), • Indonesia and Pakistan (2005-) – area based • Sierra Leone (2006/07) • Solomon Islands (2008) • Ghana 2009 • Preparatory work in other countries e.g. India, China, Zambia and the Philippines • Most experiences from multi-sectoral – systems focusing on basic generic LG performance (“first and second generation”)

19. Lessons Learned on Impact from Asia and Africa • Improved focus on performance, competition and dialogue on how to improve performance amongst LGs • Improved planning, budgeting and financial management • Funds spent on core service delivery areas • Strengthened legal adherence, e.g. procurement • Supported reform minded “drivers of change” • Improved accountability in all directions • Improved efficiency in capacity building support as linked to assessments and clear benchmarks for improvement • Provides room for more LG decision-making as performance improves and reduces need for detailed regulations/tight control • Supported a move from project to programs to entire budget support systems- improved harmonisation and alignment

20. Key Issues in Design and Implementation Arrangements – Conditions for Impact Institutional Arrangements • Government commitment, leadership and capacity • Strong oversight and quality assurance (integrity) • Certain level of autonomy for LGs required (attribution) • Harmonised approaches to assessment and coordination of CB support • Need to be aligned with overall grant system • Should be well linked to the budget cycle (size and timing) Funding Arrangements • Size of the PBGS pool of funds must be “meaningful” relative to other revenues • Predictability important (volume, proper information flows, timely releases, formula-based) • It can be undermined by other “easy”/conflicting resource flows

21. Design Issues – Conditions and Impact • A PBGS is potentially a strong tool in the overall fiscal system (offers great potential), but the design is important • Requires resource intensive preparations • May tend to be overly complicated – keep in simple and robust • Some extra costs related to the management of the system, assessments etc. • Requires intense dialogue and coordination in preparation and implementation • Neutral, professional and robust assessments • Cannot stand alone! • The overall environment (legal, institutional, fiscal factors) matters • A PBGS addresses the institutional (corporate) incentives, but the individual performance incentives (salary, conditions etc.) are equally important

22. End of Presentation THANK YOU