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Exploring the Impact of Social Funds on Decentralization and

Local Governance

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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.

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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

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Study (cont.)

1. Effectivefinancing

mechanisms

2. Participatoryplanningsystems

3. Localcapacity

4.Accountability 5. Sustainability

Improved delivery of infrastructure and services

Sustainable local development

Policy and program interventions designedto improve local governance

• Focus on 5 areas central for improved local governance

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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.

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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.

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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.

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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

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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.

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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.

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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.

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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.

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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.

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Sustainability (cont.)

• SF require LG to include O&M in their budgets• Financing depends partly on the country’s IGF

LG responsibility LG hasresources

SF Financing

Bolivia Yes (preventiveand correctivemaintenance)

Yes No

Honduras Legally unclear,tacit understandingthat preventivemaintenance is.

Yes (thoughless thanLawindicates)

Incentives Fund to rewardLG that fulfillcommittments

Nicaragua No No Yes- AdministersMaintenance Fund (CGbudget transfer; with LGand comm. counterpart)

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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.

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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.

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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.

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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.

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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

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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.