UNCDF (2010), Performance-based grant systems: concept and international experience

This paper from the United Nations Capital Development Fund provides an overview of lessons learned from the design and implementation of performance-based grant systems (PBGSs) for local governments in 15 developing countries.  This paper is particularly valuable for central and local government practitioners, development agencies, consultants and researchers interested in intergovernmental fiscal transfers.

The paper argues that the PGBS approach has made a positive contribution to local governance and decentralised service delivery. PBGSs have led to improvements in local governments’ performance in the areas of administrative functioning, public financial management, local resource mobilisation, transparency and accountability, cross-cutting issues (gender, social inclusion, poverty targeting and the environment), capacity-building, coordination between development partners, infrastructure and service delivery.

However, ‘’getting things’’ right is crucial to make the most of the PBGS’ potential. Based on UNCDF’s experience, PBGSs are likely to be more effective in environments with the following ‘pre-requisites’:

• A strong policy support for performance incentives and the political will to cope with pressure from local governments that perform poorly;
• Documentation of strengths and weaknesses of previous approaches, based on solid analytical work;
• A robust and carefully designed PBGS with significant involvement and buy-in from key stakeholders (core ministries, development partners, local governments, etc.)
• A conducive local government framework, in particular: HR management (local government staff accountable to local political bodies and incentives to pay attention to the assessment results); local government finance arrangements, the legal framework and the overall coordination of decentralisation; local government with a certain level of autonomy to improve their performance;
• Appropriate capacity-building arrangements linked to performance assessments and allowing for a sensible mix of supply- and demand-driven approaches;
• Transparency of PBGS operations, measures and outcomes, particularly with respect to the results of regular local government performance assessments;
• Stable, timely, long-term, predictable and well-coordinated central government and donor support to local governments.