There are a lot of studies doing the rounds that highlight a major problem with development financing – it takes ages to actually spend the money that is donated. This is particularly true for financing that is channelled through government public financial management systems to support public serivce delivery such as health care, education, infrastructure and climate change adaptation.
There are two reasons for this. First, according to Water Aid, developed countries pledged USD 38 billion for climate change adaptation (CCA) between 2003 and 2014. However, only 15% of the USD 21 billion in climate finance approved between 2003 and 2014 has been spent (read more here). Shocking. The problem stems from the fact that capacity to spend is at the heart of the problem. Second, there is a theoretical and practical hiccup. Development finance theory AND practice hold to providing money to central governments even though serivce delivery takes place at the sub-national or local government level.
In response to the first challenge – getting money from donors and climate trust funds to governments to begin with is a long and bureaucratic process. Government systems and accountability mechanisms which meet exacting donor expectations need to be in place before contracts can be signed. And the contracts are for significant amounts of money, from tens of millions to hundreds of millions of dollars. Imagine that you are the director of a government department in a ministry in a least developed country (LDC), used to an annual operating and programming budget of a few million dollars. How overwhelming would it be to all of a sudden have a budget of 10 times what you are used to, and feel comfortable with, forced upon you? How worried would you be about making a mistake – this money is tied to stringent international accountability and transparency standards that are far more complex than anything that you have worked with to date. And finally, alongside the money comes international advisers to help you deliver the money, but they don’t understand the context you are working in – cultural norms and practices to planning, varying understanding of what different services mean and actually do at the community level – and are trying to ‘upgrade’ your system that already works but may not be wholly efficient (efficiency also being a culturally relative concept). In this scenario, of course you would proceed slowly, very slowly, for fear of making mistake and being accused of corruption or mismanagemet.
In response to the second issue, in theory, governments transfer money to decentralized or sub-national governments to implement their service delivery mandates. But this often doesn’t happen in practice for a number of reasons: mandates of local or sub-national governmens are unclear or overlapping so there is a propensity to retain money in central government accounts; there is a lack of capacity at the local or sub-national level to plan for service delivery, particularly the more tricky areas of climate change adaptation which are new and require more scientific knowledge; as well as capacity of local and sub-national governments to actually deliver the money – to disburse, monitor and account for it.
These are two massive challenges to overcome, particularly for least developed countries and countries with small populations and consequent small operating budgets, such as small island developing states (SIDS). However, all hope is not lost – there are approaches to development finance that see money delivered quickly and in full. First, start out by giving less. Yes, really. Particularly if the money is for climate adaptation (or any service, actually) at the local level. A few hundred thousand dollars per year initially allows central AND local governments build up their capacity to plan and deliver budgets using more strict criteria, and it also builds up their confidence to handle larger sums of money. Second, while the money is delivered through the government’s own public financial management system, the local or sub-national governments receiving it have to meet minimum public financial management conditions (overseen by the central government). If they do, the next year that local or sub-national government gets slightly more funds, and so on. Those that don’t meet the minimum conditions have their funds put on hold and receive extra support to build up their capacity in areas where they were weak. And then the financial flows resume, and the local govenrment is monitored by the central govenrment as usual.
The concept is referred to as a ‘performance-based grant’ and has been implemented by the UN Capital Development Fund (UNCDF) for a number of years in LDCs with impressive results. In Solomon Islands, the Ministry of Provincial Government and Institutional Strengthening and UNCDF implemented the Provincial Government Strenthening Programme aimed at supporting provinvial governments with capital investments that would support development, such as building roads to connect villages to markets, building schools, as well as building markets to support local economic development. The programme was so successful in demonstrating how performance-based grants can improve transparency and accountability as well as improve capapcity of sub-national governments to deliver donor funds that by the completion of the first phase of the project (five years) the central government channelled its own funds for provincial government capital investments through the system, ensuring the sustainability of not only the system but also the investments that had been made as there was a guarantee of funds for on-going operations and maintenance.
UNCDF has since replicated this model into a global initiative to support LDCs (and others, in particular SIDS) to implement climate adaptation financing, the Local Climate Adaptive Living Facility (LoCAL). Rather than expect local or sub-national governments to deliver millions all at once, grants of USD 100,000 are given on an annual basis to facilitate the ‘climate-proofing’ of local infrastructure, such as bridges or water drainage systems. In some cases, because climate change has impacted local communities in ways that see them unable to solve problems that didn’t exist before, such as protecting villages from flooding, outside technical support is provided. The performance-based grants are piloted with two to three local governments and then the system is rolled out to other local governments on an annual basis. This allows kinks in the system to be worked out based on country contexts, as well as allows central government to start small and then increase the scale of the programme, thereby allowing them to adjust and adapt without having to deal with all local governments from Day 1. As an example, Cambodia piloted the initiative in 2011, with four local governments and a budget of USD 300,000. Today, eight local governments are involved with an annual budget of USD 800,000. The government also now has experience successfully implementing donor funds for local level CCA, and can demonstrate transparency and accountability which will make it far easier to access and implement much larger amounts of funds from global climate trust funds such as the Green Climate Fund.
The point of all of the above is to say that part of the reason that so little climate finance has actually been delivered on the ground – at the local level – is because the immense sums of money given to countries is met with a lack of confidence to meet stringent and often complicated criterial, and simply overwhelms. Given that so little progress has been made anyway, why not try starting small and scaling up? Try performance-based rather than all or nothing approaches. A little money can go a long way, and development dollars will finally be delivered.
