The World Bank JANUARY 2001 NUMBER 51 PUBLIC SECTOR Promoting good governance with social funds and decentralization Social funds and decentralization processes must work together if they are to strengthen services and reduce poverty through improved local governance. Bad governance undermines development. tion, implementation, and operation and Corruption, lack of transparency and maintenance of development projects. Such accountability, poorly designed decentral- funds provide direct financing for commu- ization, inadequate service delivery, and nity projects designed to quickly improve Social funds and social exclusion can all direct resources away basic services and reduce poverty. Since 1987 from the poor, needy, and powerless to the the Bank has approved about 100 social fund decentralization rich, replete, and dominant. Development projects worth $3.4 billion in more than 60 initiatives by governments and their part- countries. Though a variety of institutional efforts should ners seek to redress these imbalances by models have been used, social funds have supporting activities designed to improve usually been established as specialized units complement governance. Two important types of World separate from traditional government line Bank support for local governance are ministries. To promote timely support, social one another social funds and broadly based support for funds typically use procedures that are not governments committed to decentralizing subject to standard government procure- responsibility and power to local govern- ment and other regulations. ments and other local institutions. In contrast, decentralization focuses on But there are concerns that these two formal government institutions, both polit- approaches, which address different elements ical and administrative. Decentralization is of governance, sometimes work at cross-pur- complex and encompasses a wide range of poses. A study was therefore commissioned elements (see Parker 1995). Still, evidence to examine the interaction between social from many countries suggests that three con- funds and decentralization in Bolivia and ditions must be met if decentralization is Honduras (advanced decentralization), Peru to improve governance (see Manor 1999): and Zimbabwe (some decentralization), and * Significant responsibilities and powers for Cambodia, Malawi, and Zambia (little or no local service delivery should be devolved decentralization). Funding for the study was to local authorities in line with their capac- provided by the Bank's thematic groups on ities (political decentralization). decentralization, municipal finance, and * Sufficient resources-through a com- social funds; by the government of Switzer- bination of local taxes and grants land; and by the United Nations Capital Devel- from higher-level governments-are opment Fund. This note is based on the needed to enable local governments to findings of the study. meet responsibilities (fiscal decentral- ization). Aims and models Proper channels are needed to encour- Social funds aim to empower communities age strong accountability between by enabling them to participate in the selec- bureaucrats and elected representatives FROM THE DEVELOPMENT ECONOMICS VICE PRESIDENCY AND POVERTY REDUCTION AND ECONOMIC MANAGEMENT NETWORK ÿþand between elected representatives and Local planning their electorates (institutional decen- Social funds have shifted decisionmaking tralization). away from government bureaucrats toward communities that previously had little or The need for mutual support no opportunity to influence decisions, Social funds and decentralization have sup- especially in countries without decentral- ported each other in important ways. For ized local planning-such as Cambodia, example, social funds have encouraged Malawi, and Zambia. But the social fund decentralization where it has not advanced approach to local planning is limited: it far. In Cambodia, Malawi, and Zambia usually focuses on a community's selection central governments were slow to decen- of one project from a menu supported by tralize functions and resources, so local gov- each fund. In Malawi and Zambia about Local governments ernments could not be relied on to deliver three-quarters of social fund investments basic services. By channeling resources to were for primary school projects. While are learning from community groups, social funds in all three these project choices undoubtedly countries demonstrated the feasibility of reflected the poor state of school social fund and potential for participatory planning. In infrastructure, had communities been free Zimbabwe local governments have been to select any type of development operations . . . assigned service delivery responsibilities but intervention it is not clear that they would often lack sufficient resources. Thus the always have selected a school. Thus the recently created social fund is intended to social fund approach is participatory but strengthen decentralization processes and restricted, and is no substitute for a local operationalize participatory planning. planning process that elucidates the full In Bolivia and Honduras decentralization range of community development needs. has advanced rapidly and local governments Implementing a complete system of are taking on more responsibilities for deliv- decentralized local planning is much more ering services. Social funds in both coun- challenging because decentralization ulti- tries have responded by integrating their mately involves the complete transfer of resources with local budget procedures as service delivery responsibilities to local gov- part of broader intergovernmental fiscal ernments. These governments must then reforms designed to improve funding for try to prepare annual development plans local development. Using decentralized for basic services covering all theirjurisdic- local institutions, such as local governments, tions in a strategic and coordinated fashion. to manage social fund operations holds out Local plans are often not prepared in a par- the opportunity for scaling up activities that ticipatory way, so the preferences of poor social funds might finance. communities may not be reflected. But local governments are learning from social fund Contrasting ap proaches operations-especially ways of interacting Despite efforts at working together, the dif- with communities-and are adopting more ferent objectives and focuses of social funds participatory approaches. and decentralization efforts have raised ques- tions about how best they can work together Financing to improve poor people's standard of living. Social funds are one of the few central pro- As central governments reallocate respon- grams that are national in scope and pro- sibilities for providing basic services to sub- vide direct funding for community-driven national governments, the potential increases development. Where there are few alter- for the community-oriented social fund native sources of funding for community approach to conflict with constitutionally development-especially in poor, central- mandated changes in local responsibilities. ized countries like Cambodia, Malawi, and Different aspects of governance were stud- Zambia-social funds provide an important ied to examine the nature of this conflict. source of direct funding. PREMNOTE 51 JANUARY 2001 But as decentralization reforms establish anisms is therefore important to assess the fiscal systems that incorporate central grants feasibility of having local governments man- and local taxes, social funds can end up pro- age social fund resources. viding a parallel source of funding outside official channels. This may help speed pro- Sustainability ject implementation, but it can conflict with Real development impact comes only from the objective of building accountable local the sustained provision of basic services governments. This happened in Peru, where over many years. But factors outside the the central government was not fully com- immediate control of social funds and local mitted to empowering local governments, governments often determine whether so the social fund ended up bypassing elected social fund investments have a lasting local governments. impact. For effective financing of local develop- In some cases social funds have effectively but social ment, the challenge is to find ways for social used community institutions to operate and funds to work with local government insti- maintain services. In Zambia more the 60 funds must adapt tutions while ensuring that poor communities percent of parents pay fees to school com- still benefit directly. In Bolivia and Honduras mittees to cover the cost of routine main- to changing social funds work directly with the political tenance of investments supported by the and administrative branches of local gov- social fund. But as responsibilities for ser- decentralization ernments to increase awareness, provide tech- vice delivery are increasingly decentralized, nical assistance, and coordinate activities. local governments are expected to take on arrangements a more significant role in the funding and Accountability institutional arrangements needed to ensure An important feature of social funds is the sustainability. Yet local governments are promotion of open operations. Communi- often constrained by limited capacity and ties make their own choices about many ele- resources, so social funds in Bolivia and ments of the project cycle, including project Honduras have gone one step further and selection, procurement, and contracting. now require that local governments include Many evaluations of beneficiary satisfaction the operation and maintenance expenses with social fund projects have indicated that of their social fund projects in annual devel- this openness has helped restore commu- opment plans and budgets. Such integra- nity faith in the ability of public institutions tion will increase the chances of effective to provide essential services, and has helped operation and maintenance-though much communities appreciate their own roles and still hinges on the technical capacity of local responsibilities in these activities. governments to provide staff and undertake Accountability is also an essential part of routine maintenance. decentralization. Successful decentralization requires mechanisms that hold local gov- Conclusion ernments accountable to their electorates. It Decentralization and social funds are closely also requires that local bureaucrats, whether related. As more countries decentralize, local local officers of central line ministries or local governments are tapping into the lessons technical staff, are accountable to elected learned through social funds, and many are local governments. But mechanisms for local seeking ways to adopt more participatory accountability are often weak: they can be planning approaches, more sustainable overridden by political forces and are subject financing of recurrent costs, and better mech- to subversion by powerful elites. In Peru social anisms for accountability In countries with fund spending rose significantly just before weak local governments, such as Cambodia, two recent presidential elections, and pro- Malawi, and Zambia, social funds are not jects were funded in provinces where the polit- incorporated in local political decisionmak- ical impact was likely to be greatest (Schady ing. Nevertheless, coordination between social 1998). Close scrutiny of accountability mech- funds and local governments is improving in PREMNOTE 51 JANUARY 2001 all three countries. For example, in Zambia funds will face the challenge of trans- a window of financing for district council pro- forming themselves from agencies that jects is being designed as part of the next manage the direct implementation of social fund project. projects to agencies that support local Honduras, Peru, and Zimbabwe have capacity building for project implemen- varyingdegreesofdecentralizationandvary tation. Similarly, local governments face ing degrees of involvement by elected local the challenge of learning from social fund governments in social fund operations. In procedures that have empowered poor 1998 Honduras incorporated decisionmak- communities. ing on social fund projects into its system of town hall meetings, though recent events Further reading have highlighted the difficulty of maintain- ManorJames. 1999. The PoliticalEconomy of As more countries ing such a broad approach to popular par- Democratic Decentralization. A Directions ticipation, and it is too early to evaluate the in Development book. Washington, D.C.: decentralize, social impact of these changes on development World Bank. outcomes. In Zimbabwe rural governments Parker, Andrew. 1995. "Decentralization: funds need to are slowly becoming more assertive, and the The Way Forward for Rural Develop- social fund is providing resources to address ment?" Policy Research Working Paper integrate their shortages in local finding. In Peru, however, 1475. World Bank, Washington, D.C. the lack of decentralization has restricted Parker, Andrew, and Rodrigo Serrano. operations with opportunities for the social fund to work 2000. "Promoting Good Local Gover- with local governments. nance through Social Funds and Decen- local planning Bolivia's social fund has come the closest tralization." Social Protection Discussion to complete integration with the operations Paper 0022. World Bank, Washington, and budgeting of elected local governments. Sweeping leg- D.C. islative reform, especially the 1994 Law on Schady, Norbert. 1998. "Seeking Votes: The Popular Participation, established impor- Political Economy of Expenditures by the tant requirements for community involve- Peruvian Social Fund (FONCODES), ment and conferred new responsibilities on 1991-1995." Policy Research Working local governments. The social fund is an Paper 2166. World Bank, Washington, important part of these arrangements, and D.C. has promoted closer integration between communities and local governments by This note was written by Andrew Parker (Senior financing only projects that have been iden- Learning Specialist, Office of the Vice President, tiPoed through participatory municipal devel- PREM Network) based on Parker and Serrano opment plans. (2000). All the social funds studied are investi- Ifyou are interested in similar topics, consider gating ways to increase the involvement of joining one ofthe Bank thematic groups on decen- local governments. Some funds are begin- tralization (PREM Network), municipalfinance ning to transfer more project responsibil- (Finance, Private Sector, and Infrastructure Net- ities to local governments, especially in work), orsocialfunds (Human Development Net- Bolivia, Honduras, and Zimbabwe. Such work). te tThis note series is intended to summarize good practice and key policy find- Ihings on PREM-related topics. The views expressed in these notes are those of the authors and do not necessarily reflect the views of the World Bank. PREM- PRF gnotes are distributed widely to Bank staff and are also available on the PREM website (http://prem). If you are interested in writing a PREMnote, email your idea to Sarah Nedolast. For additional copies of this PREMnote please contact PovemReductionand[onicManaemenm the PgEM Advisory Service at x87736. Prepared for World Bank staff