GOVERNANCE E Q U I TA B L E G R O W T H , F I N A N C E & I N S T I T U T I O N S N OT E S The World Bank’s support for subnational governance through conditional grants: Lessons learned from Brazil, Indonesia, and Tanzania Samuel Ruben Alexander Garoni Petar Georgiev Stoykov Serdar Yilmaz 1818 H Street NW Washington DC 20433 Telephone: 202-473-1000 Internet: www.worldbank.org This work is a product of the staff of The World Bank with external contributions. The findings, interpretations, and conclusions expressed in this work do not necessarily reflect the views of The World Bank, its Board of Executive Directors, or the governments they represent. The World Bank does not guarantee the accuracy, completeness, or currency of the data included in this work and does not assume responsibility for any errors, omissions, or discrepancies in the information, or liability with respect to the use of or failure to use the information, methods, processes, or conclusions set forth. 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Cover photo: The World Bank’s support for subnational governance through conditional grants: Lessons learned from Brazil, Indonesia, and Tanzania This note presents lessons learned from three ongoing World Bank PforR projects in - Brazil, Indonesia, and Tanzania - which were highlighted in the Primer Conditional Grants in ‘Principle, in Practice and in Operations’ developed by the Decentralization GSG. The primer can be found here. This note is aimed to complement the theory presented in the primer and targets Task Team Leaders designing WB projects with a decentralization component or that wish to include conditional grant schemes to enhance results at the local level. The projects were all launched in the past few years and reflect current understanding of the challenges and opportunities of conditional grants (see Table 1 for project summary and Table 2 for full project details). The note synthesizes the main evaluation findings from the World Bank’s Mid-Term Reviews of two projects, technical note of one project and in the case of the Tanzania project the draft Implementation Completion and Results Report (ICR). Two projects were ongoing at the time of writing this report while one had recently closed. And the recommendations and learning lessons derived in this note should be seen in this light. >>> Table 1: Projects Summary Fiscal transfers for upper Indonesia - Supporting Tanzania Education Program Project name secondary education reforms Primary Health Care Reform for Results (P147486) in Brazil (P163868) (P164277) Country Brazil Indonesia Tanzania Health, Nutrition and Lead Global Practice Education Education Population Instrument PforR PforR PforR Original Commitment (in $250 $150 $202 Mio.) Board Approval 26/10/2017 17/07/2018 10/07/2014 Estimated Closing Date 31/12/2023 30/04/2024 31/01/2022 Progress toward Moderately Moderately achievement of PDOs as of Substantial Satisfactory Satisfactory June 2022 EQUITABLE GROWTH, FINANCE & INSTITUTIONS INSIGHT <<< 3 Introduction Decentralization requires a long-term commitment by both governments and development partners to gradually transform long held dysfunctional governance arrangements. Time and absorptive capacity of recipient institutions are important factors to consider when designing progressive interventions such as predictable and transparent intergovernmental transfer programs like performance-based grants. The combination of capacity building and conditional grants can provide powerful support to achieve meaningful decentralization if a focus is placed on the so called 3 F’s - functions, funds, and functionaries. When using performance-based grants, a well-functioning monitoring and evaluation system is key to achieve the relevant information within the attributed timeframe. This requires ample coordination between the independent evaluator, the central government agency in charge of overall project implementation and local governments on the ground. When seeking ultimate results, it might be crucial to have a mechanism to get to the facility level. The three projects studied in this note exhibit certain similarities and differences. In terms of similarities, all countries are big exporters of natural resources and have a relatively large population. Operationally, all projects used Program-for-Results Financing using a country’s local institutions and processes and linking disbursement of funds directly to the achievement of specific program results through disbursement linked indicators (DLIs). All three focus on enhancing public service delivery either in the education or health sector through investments and capacity building activities, working with the relevant national ministries to roll out activities with local governments. The countries also illustrate several differences, while Brazil is a federal country, both Indonesia and Tanzania are unitary. However, the former introduced big-bang decentralization approach with the adoption of a new constitution in 1998.1 Given their different geographic settings and former colonial history they also face uniquely different institutional and legal contexts. The countries have large GDP per capita differences. Brazil’s ($6,800) is 6 times that of Tanzania ($1,100) and Indonesia ($3,900) is located in between.2 In terms of level of democracy at the local government Brazil (0.82) scores considerably better than both Indonesia (0.66) and Tanzania (0.62) in terms of offering free and fair elections at the local level.3 The lessons learned from these projects will help in the design of future subnational governance projects, particularly those that use performance-based grants (PBGs). This note summarizes initial learning lessons from the mid-term reports in two cases and the ICR in one case. The lessons are thematically grouped and may in some cases apply to more than one project. The second part of the note contains a table outlining the PDOs and main components of each project in detail. Recommendations and lessons learned The following section discusses some of the lessons from the projects or observations that the mid-term review and technical notes made. The three projects illustrate that performance-based grants can be effective at achieving results at the local government level. The needed technical assistance will help improve the quality of those results. In the case of Indonesia, a workshop on “Verification Arrangements for Performance-Based Transfers: International Experiences and Implications for Indonesia’s BOK Kinerja” was held to inform the ministry of health how to enhance its performance-based transfers to local communes. In Tanzania school performance began to be measured against a set of criteria and despite falling public resources performance- based grants allocated to schools actually increased. DLIs should ideally be formulated in a way that they also take into consideration institutional changes that cement grant transfers beyond the project lifetime. 1. https://www.forest-trends.org/publications/%C2%93quasi-federalism%C2%94-in-indonesia/ 2. World Bank Data. https://datacommons.org/place/country/BRA?utm_medium=explore&mprop=amount&popt=EconomicActivity&cpv=activitySource%2CGrossDomesticProduction&hl=en 3. GovData360. Subnational elections free and fair EQUITABLE GROWTH, FINANCE & INSTITUTIONS INSIGHT <<< 4 Effective development partner coordination can lead to improved results. In Tanzania the PforR counted upon strong donor support, including for technical assistance financed by DFID (FCDO). Given the close collaboration between donors and the complementarity of their funding, government transaction costs were significantly reduced. The program provided a framework that allowed some flexibility for donors to focus their support on specific aspects aligned with their own strategic priorities. It contributed greatly to achievement of the foundational DLRs which ensured that the program had a solid basis for its implementation and monitoring. This holds true for the ongoing Uganda Intergovernmental Fiscal Transfer (UgIFT) PforR as well. This was seen as particularly useful for improving greater decentralization which requires donor harmonization around systems and institutional change with results often taking a lot of time to materialize. A results-based financing mechanism can be designed in a way which allows it to be assigned to different government levels--- national level (Ministries), local government authorities, and schools, to ensure that incentives are provided to those that truly have control over specific results. In the case of Brazil issues such as the municipal level of education, prevailing learning inequality across school districts, children’s socioeconomic conditions, and the fiscal conditions of the municipalities were decisive for delimiting the indicators that compose the performance index, the weights of the components of this index and the reward levels necessary to generate the right set of incentives for results. If done right, then assessment process becomes very straight forward. This is an ongoing challenge with the Uganda PforR and is part of the reason for the proposed restructuring. The Brazil project observed that school districts with worse performance sought to adopt better practices, so their results converged to the level of top performance school systems. If entities are tasked to accomplish something they have no control over, it can lead to consternation. In Tanzania local governments were incentivized to improve the distribution of teachers within their districts. Although they were able to make progress on this mandate, they felt powerless to affect teacher numbers overall since that responsibility lies with the Ministry of Finance and the Civil Service Commission. This also holds true for the Uganda PforR. Beyond just the right choice of indicators, another issue to consider is the definition of the DLRs and DLIs and the frequency with which they are assessed. Pro-Active Research and knowledge management on decentralization. In Tanzania the technical assistance support financed instruments were critical to achieve results; among them were the technical assistance support (TAS), the independent verification agency (IVA), improvements in the Education Management System (EMIS). The IVA proved to be of exceptional value in that not only did it verify achievement of results for disbursement purposes, it also provided recommendations that significantly helped improve the EMIS and contributed to policy areas such as on textbooks, capitation grants, etc., providing insightful recommendations for follow-up. In Indonesia the World Bank team is providing technical support to BOK Kinjera4 and Litbangkes5 to study how DAK transfers are being used by districts in 2021, other areas of technical assistance include verification arrangements, improved planning and budgeting at the local level and helping with data analytics of performance indicators. Ensuring resources end up going to local governments or public entities such as schools as a means of reward for accomplishments. Performance based grants do not always reach those entities responsible for the success. In the case of World Bank funded projects DLIs may be disbursed to the central government which in turn commits to use the funds to related activities. However, this can cause frustration among the local government entities that contributed to achieving the DLR. The Tanzania Education Program for Results assigned DLIs/DLRs to different entities and funds disbursed for certain DLRs were passed directly to Local Governments according to disbursement arrangements outlined in the Program Operational Manual. In Indonesia, domestic funds are used to reward local governments- while the IBRD DLI disbursement to the national government were used to help with improvements in design and implementation of the program. DLR 2.3 supported the operationalization of this strategy by incentivizing improvements in the provision of textbooks to public primary schools. The DLR incentivized improvements in both distribution and monitoring of textbooks by rewarding the presentation of detailed evidence of textbook receipt by schools, specifying the textbook grade and subject. Ensuring a stable evaluation monitoring environment. In Brazil the criteria of the Education Quota-Part methodology have to be sufficiently stable to encourage the continuity of good local policies beyond the project lifetime, since constant 4. UHealth operational assistance fund a sub-fund of Indonesia’s Special Allocation Health Fund 5. Indonesia’s Health Research and Development agency EQUITABLE GROWTH, FINANCE & INSTITUTIONS INSIGHT <<< 5 changes in rules compromise the long-term planning of municipalities and may cause them to eventually abandon attempts to participate in the scheme. On the other hand, the policy design requires sufficient flexibility to allow for course corrections that prove necessary or that may help align it with new strategic priorities of the state. Language could be provided in the POM to cater for this. For example, adjustment of the MTP if Macro fiscal challenges affect revenues and subsequently the transfers overall. Conclusion As the benefits of decentralization and greater flexibility at the local government level are being recognized by an increasing number of countries, conditional grants can help clients achieve better development outcomes if the conditional grant system is well embedded in the program design. Such as through a consistent incentive structure to achieve sustained transfers, targeted capacity building to institutions both at the national and local level and the use of tailored DLRs. By analyzing three recent projects, we present key transferable lessons that were synthesized, and which can be widely applied across future Bank operations. In short, these lessons include: The importance supplementing conditional grants with technical assistance, effective and continuous development partner collaboration, designing a results-based financing mechanism in a way which allows it to be assigned to different government levels, ensuring resources end up going to local governments and facilities as a means of reward for accomplishments, and ensuring a stable evaluation monitoring environment, among others. Employing the recommendations outlined in this note can enhance the Bank’s operational effectiveness and will allow the institution to deliver better outcomes for its clients. >>> Table 2: Detailed information on the selected decentralization projects Fiscal transfers for upper Indonesia - Supporting Primary Tanzania Education Program Project Name secondary education reforms in Health Care Reform (P164277) for Results (P147486) Brazil (P163868) Health, Nutrition and Lead GP Education Education Population Instrument PforR PforR PforR Original Commitment $250 $150 $575 (in Mio.) Actual Cost (in Mio.) TBD TBD $1,272 Board Approval 26/10/2017 17/07/2018 10/07/2014 Estimated Closing Date 31/12/2023 TBD 31/01/2022 EQUITABLE GROWTH, FINANCE & INSTITUTIONS INSIGHT <<< 6 To strengthen the capacity of the state secretariats of education to implement the upper secondary reform, Strengthening performance of Improve education quality Project Development prioritizing vulnerable schools, Indonesia’s primary health care in Tanzanian primary and Objective and to increase the system secondary schools. Index of Basic Education Development in targeted full- time upper secondary schools in Brazil’s territory. Component 1: Supporting Results area 1: strengthening the New Upper Secondary performance monitoring for Education. By complementing increased local government the MEC and facility accountability programs and resources, is to improve performance Component 1 will support monitoring and benchmarking Results Area 1: Ensuring that a activities nationwide through a of health care delivery (both robust system-level framework PforR lending primary and referral care), for a results-based financing instrument. It will be including developing and model has been established implemented by the SEB, publishing district level (DLI 1) with support of the FNDE, in “performance dashboards.” accordance with the current Results Area 2: Ensuring that arrangements for the execution Results area 2: improving resources flow in an adequate of activities under the budget implementation of national and timely fashion to schools lines included in the operation. standards for greater local (DLI 2) At the SEB, government and facility the General Coordination performance will support the Results Area 3: Improved of Secondary Education strengthened implementation results monitoring and data (Coordenação-Geral de Ensino of a quality assurance management at different levels Project Components Médio, COEM), under program and accreditation of of service delivery (DLI 3) DICEI, will be the main puskesmas. This will involve interlocutor for the technical supporting puskesmas to reach Results Area 4: Ensuring aspects of the operation and higher levels of accreditation, equitable teacher deployment operation coordinator. which are associated with across and within districts (DLI more stringent clinical quality 4) Component 2: Technical and managerial performance Assistance to Implement standards that are difficult to Results Area 5: Ensuring the New Upper Secondary achieve. effective implementation of key Education. This BRNEd interventions (DLI 5) component will follow the Results area 3: enhancing traditional operational and performance orientation of Results Area 6: Incentivizing fiduciary arrangements for an health financing for better local PDO achievement in terms of IPF. The unit at the service deliverysupports the 3R assessment results (DLI 6) SEB responsible for introduction of incentives for implementing improved primary health care Component 2 is the COEM. readiness and availability This component includes of front line health services several through supply side inter- governmental fiscal transfers EQUITABLE GROWTH, FINANCE & INSTITUTIONS INSIGHT <<< 7 consultancies (firms and (DAK non-fisik) as well as individuals) and studies, through improved demand side including evaluations and purchasing of primary care diagnoses, to be carried out (JKN). The proposed financing mainly during the first half of indicators are described later in the operation implementation this section. period. A substantial and critical Project part of this Components component is to support the states in the implementation of the new upper secondary education, which will be conducted regionally with the assistance of consulting services (firms). >>> Table 3: Project Documents References 1) Fiscal transfers for upper secondary education reforms in 2) Indonesia - Supporting Primary Health Care Reform Brazil (P163868) (P164277) - Project Appraisal Document (PAD) - Project Appraisal Document (PAD) - Mid-Term Review Report - Mid-Term Review Report - Technical Note 3) Tanzania Education Program for Results (P147486) - Project Appraisal Document (PAD) - Draft Implementation Completion and Results Report EQUITABLE GROWTH, FINANCE & INSTITUTIONS INSIGHT <<< 8