Exploring the Impact of Social Funds on Decentralization and Local Governance

1. Exploring the Impact of Social Funds on Decentralization and Local Governance

2. What is the Study About? • Starting point: concern that SF and decentralization reforms may work at cross-purposes. • Despite tensions b/w policy frameworks, Social Funds and Decentralization are compatible and can reinforce each other. • Main area of conflict: LG role in planning, financing and management of investments.

3. Study (cont.) • Objective: explore the extent to which SFs have helped or hindered efforts to improve decentralization and local governance processes. • Methodology: • exploratory, initial assessment of issues • based on short field trips and deskwork • 7 country cases, at different stages of decentralization

4. Study (cont.) • Focus on 5 areas central for improved local governance

5. Participatory Planning • Goal of demand-driven project selection: achieve allocative efficiency • 2 approaches: Individual communities vs. Local Planning Process (LPP). • Allocative efficiency is greater in LPP: • all communities express preferences instead of only a few, • assessments and funding decisions made locally instead of centrally.

6. Planning (cont.) • For LPP to work well: • Open menu, part of which funded through SF. • Safeguards to prevent preference distortions: • sponsor of LPP should not have a sectoral focus; • mechanisms to reduce local elite capture. • SF’s challenge: balance respect for local autonomy in driving the LPP with provisions of a fair process.

7. Planning (cont.) • Good LP should be not only responsive but also strategic (technically sound): • risk of distributing resources in politically neutral way, spreading resources thin. • Possible solution: multi-year planning • hard-budget constraint to introduce rationality in decision-making.

8. Financing • Situate SF financing in the context of system of intergovernmental and local development financing: • a system of grants, taxes and borrowing that allows funding for local and national preferences • incentives for local resource mobilization

9. Financing (cont.) • SFs have been operating in the context of an unbalanced financing system • too much earmarked funding, too little untied. • Important community needs go unmet • more problematic in LG with scarce own-revenues • Not SF fault. Lack of decentralization framework.

10. Financing (cont.) • SF have encouraged local resource mobilization: • mainly through community contributions • 25% in Zambia and Malawi to 10% in Peru • only in Bolivia from LG • contributed 35% of investment costs • rate varies by sector and type of municipality, • counterpart rates should reflect CG preferences.

11. Implementation • 3 basic approaches: • centralized (Honduras) • local government (El Salvador) • community contracting (Malawi, Zambia, Peru) • Decentralized contracting: • higher production efficiency (or higher local counterparts?). Need for systematic study. • better supervision and accountability.

12. Implementation (cont.) • How to manage projects? • Bigger LG have management capacities. • Smaller LG need to contract-out. • For certain investments community contracting. • SF role in decentralized contracting: • license authorized project managers, and prescribe use by weaker LG • TA on demand.

13. Sustainability • SF have progressed significantly in their treatment of sustainability • Similar trajectory: LM---> communities---> LG • Line Ministries: more positive in Operations than in Maintenance. • Community Contributions: helped but did not address the problem. • Local Governments involvement partly motivated by limitations of LM, Comm.

14. Sustainability (cont.) • SF require LG to include O&M in their budgets • Financing depends partly on the country’s IGF

15. Sustainability (cont.) • Conditions for effective LG role • LG involved in planning and provision • strengthening LG financial viability • monitoring mechanisms. • SF Challenge: relying on other actors.

16. Capacity Building • Creating local capacities becoming a central goal in many SF. In others, marginal. • SF have helped build capacities in: • communities (financial management) • LG (participatory planning, project supervision) • As SF decentralize responsibilities to LG, need for a strategy to build capacities.

17. Capacity Building (cont.) • Elements of the strategy: • gradual in scale and scope • Need for objective indicators of capabilities. • SF: instrumental approach to capacity building (adoption of SF project cycle) • Should be complemented with more systemic effort to build broader LG capacities • Challenge for SF: reengineer their organizations to adopt new roles.

18. Accountability • SFs that fostered local accountability have: • established transparent rules of the game (objective formula for resource allocation) • given voice to local population • transfer project management to LG • SF that bypassed LG eroded LG credibility and thus undermined prospects for building accountable LG.

19. Conclusions • SF will maximize impact on local governance when: • key decentralization policy reforms in place • SF is aligned with them • investments come from a LPP • SF financing part of a Local Development Finance Framework • A strategy to transfer responsibilities to LG

20. Conclusions (cont.) • In the absence of decentralization framework, SF contribute to jump-start process • demonstrating potential for local institutions in local development (Bolivia’s FIS before 1994) • Need for a medium-term vision that articulates decentralization and social funds agendas in different decentralization contexts.