1 Performance Based Grant Systems (PBGS) – Using Grants as Incentives Concept and International Experience By Jesper Steffensen [email protected] March 22, 2010.

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

Concept and International Experience

By Jesper Steffensen

[email protected]

March 22, 2010 – WUF

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Overview of the Presentation

1. Background2. Objectives and Concept of Performance-

Based Grant Systems (PBGS)3. Experiences and lessons learned4. Design issues, future prospects and

challenges

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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 countryTransfers 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”

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Background and Introduction

Inefficient capacity building support No incentives for LGs to utilise it efficientlyFragmented and weak impact of previous support modalities on LG institutional performance (projects)Many failed PFM reforms – Why is it not working?

Muted downward accountabilityWish to move towards on-budget funding

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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 objectivesThey supplement other incentive frameworks, e.g. salariesThe incentives are primary monetary

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Specific Objectives of PBGS 1. Provide more funds for local priorities and ensure

that spending is where there is a clear absorption capacity – basic safeguard against misuse of funds

2. Promote strong incentives for LGs (as corporate bodies) to improve in key performance areas and adhere to standards

3. Supplement CB needs assessment and Monitoring and Evaluation systems

4. Strengthen the capacity development efforts (focus and incentives) – New approach towards demand-driven CB

5. Improve management and organisational learning6. Improve accountability (up/down), participation and

citizens’ access to information on key issues7. A strong tool to bring funds on-budget and

streamline/harmonise and align donor support

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PBGS Influence on Accountability Mechanisms

Central Government

Local Council

Citizens, Voters, Tax payers and Users

Own staff

SectorDept.Staff

PGBS

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PBGS Typology - Focus

Type of Performance A B Service Delivery

Multi-Sector Usage Service Delivery Focus

(Rwanda)

Sector Specific Usage Service-Delivery Focus

(SEG-Uganda, selected

OECD Countries) C D Institutional

Multi-Sector Usage Institutional Focus

(e.g., Uganda, Tanzania, Nepal, Bangladesh – pipeline: Solomon Islands, Philippines

and Ghana)

Sector-Specific Usage Institutional Focus

(Philippines, Tanzania)

Multi-Sector Sector-Specific Use of Funds

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Mutually Strengthening Components of the System

3. CAPACITY BUILDING GRANT (Demand Driven)•More easily available than capital grant•Combination of local discretion and supply-side constraints/inputs

1. CAPITAL/DEV. GRANT•Clear formula-based distribution

•Performance-based award•Significant local discretion

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!

Institutional Set-Up

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Component 1 - Development Grant

Size and utilizationSufficient to create incentives, sometimes undermined by easy access to alternative flows (e.g. Social funds)Often minimum 20 % of the total development grantsMost countries about 1-4 USD per capitaIdeally, it should be sufficient to be of interest for the sectorsUse formula-based basic allocation formula

• Expenditure needs, revenue capacity and cost variations or proxies

• + adjustment against performanceClear investment menu – positive and negative listCapital versus recurrent

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Component 2 - AssessmentsOverall issues

Most countries use annual assessmentsUse of a set of defined indicators (defined in due time)The specification of indicators is important – a ”special science”Use of elaborated manual – most countriesVarious methods for assessments

Internal versus contracting out – combined teams

High credibility in the assessment in pertinent (neutral + validation)

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Principles for the Indicators and Assessment – A Special ”Science”

SMART: Specific, Measurable, Achievable, Realistic and Time-bound (not ambiguous) Not overlappingWithin the LG control (attribution)Derived from existing legal and institutional framework (i.e. not parallel systems) and where supportedFocus 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 improvedMay be gradually refined, but keep it relatively stable and simpleWeighting (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”)

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Component 2. Assessments - Tools to Adjust Allocation

Minimum conditionsBasis safeguards to ensure capacity to handle fundsOn-off-triggersNot too many as it may deprive incentives and blur focusRealistic in scope, but should reduce fiduciary risks to an acceptable levelExample: ”Final accounts submitted on time”

Performance MeasuresMore qualitativeCan vary in scope and contentExample: ” development plan developed with involvement of citizens through open meetings”

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Examples of Typical Minimum Conditions – Basic Safeguards

1. Medium term up-dated development plan approved on time

2. Linkage between the development plan and budget (medium term forecast)

3. Core staff in place and functional committees4. Accounts for previous FY produced, cash books and

bank reconciliations up-to-date5. Internal audit function in place and working6. Capacity building plan developed and approved by

council7. Co-funding requirements from LGs adhered with8. No adverse audit report and/or all previous audit

queries addressed

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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)

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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 performanceTo respond to the weaknesses identified in assessmentsOften easier access to this support (lower MCs) – e.g.: ”a CB/HR development plan is in place”Broad and generic focus

International ExperiencesPositive and expanding experiencesRelatively 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 basedSierra Leone (2006/07)Solomon Islands (2008)Ghana 2009Preparatory 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”)

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Feature Uganda (2008)

Ghana (2009)

Nepal (2009)

Indonesia (2006)

Bangladesh (2008)

SoI (2009)

Minimum conditions

8 9 13 6 + 30 for various stages

Pilot 9 8

Performance measures

121 60 57 NA Pilot 42 64

Assessment

Combined Ministry + QA

Contracted out

Countracted out

Submission of documents to project office

External audit contracted

Contracted out/ audit

Scoring Fixed scoring

Relative performance

Fixed scoring

Phasing of reform levels

Fixedscoring

Relative perform.

Formula Population., poverty land + performan-ce

Population, land, equal share + performance

Population, HDI, equal share, cost indes and performance

Selection based on reform-mindness and poverty

Population + performance adjustments

Population, equal share + performan-ce

Coverage Nationwide

Nationwide Nationwide

Piloting Roll-out Nationwide

Funding GOU + DP GOG+DP GON + DP GOI +DP GoB+ DP Gov + DP

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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 managementFunds spent on core service delivery areasStrengthened legal adherence, e.g. procurementSupported reform minded “drivers of change”Improved accountability in all directionsImproved 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 controlSupported a move from project to programs to entire budget support systems- improved harmonisation and alignment

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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

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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 preparationsMay tend to be overly complicated – keep in simple and robustSome extra costs related to the management of the system, assessments etc. Requires intense dialogue and coordination in preparation and implementationNeutral, professional and robust assessments

Cannot stand alone!The overall environment (legal, institutional, fiscal factors) mattersA PBGS addresses the institutional (corporate) incentives, but the individual performance incentives (salary, conditions etc.) are equally important

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End of Presentation THANK YOU