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Performance Based Grant Systems (PBGS) – Using Grants as Incentives. Concept and International Experience By Jesper Steffensen js@dege.biz. March 22, 2010 – WUF. Overview of the Presentation. Background Objectives and Concept of Performance-Based Grant Systems (PBGS)

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performance based grant systems pbgs using grants as incentives
Performance Based Grant Systems (PBGS) – Using Grants as Incentives

Concept and International Experience

By Jesper Steffensen

js@dege.biz

March 22, 2010 – WUF

overview of the presentation
Overview of the Presentation
  • Background
  • Objectives and Concept of Performance-Based Grant Systems (PBGS)
  • Experiences and lessons learned
  • Design issues, future prospects and challenges
background and introduction
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”
background and introduction1
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
overall objective of performance based grants pbgs
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
specific objectives of pbgs
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
pbgs influence on accountability mechanisms
PBGS Influence on Accountability Mechanisms

PGBS

Central Government

Local Council

Own

staff

Sector

Dept.

Staff

Citizens, Voters, Tax payers and Users

mutually strengthening components of the system
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!

component 1 development grant
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
component 2 assessments
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)
principles for the indicators and assessment a special science
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”)
component 2 assessments tools to adjust allocation
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”
examples of typical minimum conditions basic safeguards
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
examples of typical performance areas
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)
component 3 capacity buidling
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
international experiences
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”)
lessons learned on impact from asia and africa
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
key issues in design and implementation arrangements conditions for impact
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
design issues conditions and impact
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