United Nations Capital Development Fund

Corporate Policy Papers

Briefing Note on the United Nations Capital Development Fund (UNCDF)

February 2002

Note: this briefing note was prepared as an internal document, to brief donors on the activities of UNCDF. It is placed here on the organization's website as an information resource for the broader public.

This paper also is available as a pdf file.

1. What is UNCDF?

Established in 1966 by the United Nations General Assembly as a special purpose organization primarily for small-scale investment in the poorest countries, UNCDF has come in recent years through intense and far-reaching changes.
As a result, today, UNCDF works to help reduce poverty by piloting small-scale investments in two areas of concentration: local governance and microfinance. While the UNCDF investment portfolio is concentrated on a selected number of Least Developed Countries(1), its technical advisory services can be accessed universally on a cost recovery basis. UNCDF is a member of the UNDP Group, is represented at the country level by the UNDP Resident Representative and reports to the UNDP/UNFPA Executive Board.
UNCDF's capacities in microfinance were strengthened in 1999 by the UNDP Administrator's decision to locate the Special Unit for Microfinance (SUM) within UNCDF. Prior to September 1999, SUM was a joint partnership between the Bureau for Development Policy (BDP) in UNDP and UNCDF. SUM continues to support UNDP's microfinance portfolio, including those countries outside of UNCDF's geographic focus. In December 2001, a Memorandum of Understanding was signed between UNCDF and UNDP's Bureau for Development Policy, spelling out the advisory support services that UNCDF provides to UNDP country offices and programme countries worldwide.
With regard to UNCDF's partnerships with UNDP in local governance and decentralization, discussions are now underway to formalize the complementarity between UNCDF and UNDP in this area in the form of a Memorandum of Understanding, similar to that recently signed in the area of Microfinance.
The role of UNCDF in these two areas of concentration was praised in a report prepared in 1999 by a team of external evaluators (from donor countries) and endorsed by its Executive Board in 1999. In 2001, the Board commended UNCDF for:
- its energetic follow-up to all the recommendations made by the external evaluators, as articulated in UNCDF's Action Plan 2000;
- its overall performance;
- its focused approach: thematic and geographic;
- its concrete results on the ground;
- its flat and effective management structure;
- its compliance with its operational policies;
- its straight-foreword and candid presentation of the its evaluation and monitoring findings;
- its commitment to partnerships;
- its participatory approach; and
- its cost-effectiveness.

2. What does UNCDF do?

Local Governance

UNCDF local development programmes promote a decentralized, participatory approach to the provision of basic infrastructure (health, education, transportation, markets, water systems) and the management of natural resources. The development of partnerships with programme country governments, local authorities and communities is emphasized to ensure that local investments match local needs, are managed efficiently, and are sustainable. The Fund uses seed capital to develop local institutional capacities in planning and financial management by coupling real resource management responsibilities with capacity-building support services. Annex 1 provides examples of concrete results achieved and replicated in various countries.

Microfinance

UNCDF microfinance operations support the growth of microfinance institutions that have the transparent track records and solid institutional and financial performance needed to enable them to reach poor clients, particularly women, on a sustainable basis. The Fund also performs a technical advisory role by fostering an understanding of microfinance best practices and assisting programme countries, UNDP and other development partners to incorporate those elements into their programmes. Annex 2 provides examples of concrete results achieved and replicated in various countries.

3. How does UNCDF work?

Producing concrete results on the ground: As a small-scale investor, UNCDF knows that its impact at the country level will not emanate from the power of its purse or from the scale of the programmes and projects it supports, but rather from its ability to provide stakeholders with concrete, high-quality operational results on the ground that can pave the way for replication on a larger scale.
Promoting innovation, policy impact and replication: As a piloting organization, UNCDF has to produce concrete results that can promote policy changes and provide a viable, tried and tested model for replication by national governments and their development partners. This explains why UNCDF operational policies endorsed by its Executive Board attach a high priority to: national and local ownership, capacity development, participation, gender mainstreaming, innovation, subsidiarity, cost effectiveness and sustainability.
Building partnerships: UNCDF's work has greater potential for impact and sustainability when partners are engaged from the outset. Accordingly, UNCDF has built strong partnerships to improve outcomes in all aspects of its work: partnerships with the programme countries themselves, UNDP, other UN organizations, the donor community, the World Bank and the Regional Development Banks, the European Commission, NGOs, the private sector - national and international - and Centers of Excellence in both the North and South.
Managing for results: UNCDF reports annually to its Executive Board on the results it is achieving. UNCDF is pursuing three strategic objectives: 1) to improve the organization's way of working by managing for results exemplified by its use of the following tools: Business Plan, Work Plans, performance indicators, Results-oriented Annual Report; 2) to retain, develop and attract qualified and motivated staff; and 3) to move towards a more results-based financial management approach, including through the introduction of performance budgeting.
Learning from experience: Among the truisms that hold for risk-taking, piloting organizations is that they will not always get it right the first time. UNCDF is no exception. UNCDF learns from its mistakes, capturing lessons and making them the basis for further policy and operational refinement to improve the design and implementation of its operations and the quality of its technical advisory services. In this way, UNCDF investments and technical advisory services become more responsive to beneficiaries' requests and have greater potential for policy impact and replication. This continual improvement process will remain the foundation for UNCDF work in both local governance and microfinance. This is the reason why monitoring and evaluation are given such a high priority in UNCDF.

4. How is UNCDF funded?

UNCDF derives its resources from voluntary contributions made by member states and from co-financing by governments, international organizations and the private sector.
UNCDF finances its own administrative budget ($6 million/year) out of its own resources. When compared to its annual level of programme expenditures in recent years ($35 million/year), the administrative budget represents approximately 17%. However, when excluding the technical support services from the administrative budget, this ratio goes down to roughly 10%.
UNCDF outsources administrative support services to UNDP and pays for them.
In recent years, UNCDF core resources expressed in $US have declined despite an increase in its number of contributors. The main reason has been the strength of the US dollar in comparison to the national currencies in which voluntary contributions are being made to UNCDF. As a result, the Fund is unable to adequately respond to the demand for its support by programme countries. It is imperative that the Fund reverse this situation by mobilizing additional core and non-core resources. The resource mobilization strategy developed in the UNCDF 2001-2002 Business Plan is presented in Annex 3.
In 2001, this negative trend was reversed with a slight increase by one per cent to US $24.3 million. Five OECD/DAC donors increased their contributions in local currencies, and the Fund enlarged its support base with two new OECD/DAC core donors.

Annex 1:
Examples of UNCDF Operational Activities in Local Governance

The following cases-in-point exemplify UNCDF's impact in the field in the area of local governance. For more examples, please visit UNCDF's website at www.uncdf.org.

UNCDF was invited by the Government of Uganda to pilot the implementation of its 1997 Local Government Act, in 5 Districts. The innovations which have been successfully developed there with the support of the UNCDF/Local Governance Unit (LGU)- in local participatory planning, in performance-based financing, and in approaches to capacity building at local government level - have now been adopted as national standards by Government for all 45 Districts.
Since 1998, together with UNDP and the Government of the Netherlands, UNCDF has been piloting a decentralized planning, local capacity-building and investment programme in Mozambique's Nampula province. Intense monitoring and evaluation activities have allowed the government to adjust the pilot programme and turn it into a model for replication in the other provinces. The Government of Norway has now decided to support the replication of the programme in the Cabo Delgado province whilst the World Bank is putting together an overall framework for its replication on a national basis.
In Tanzania, UNCDF has provided support at two levels: (a) support to the national local government reform programme which is setting up the framework for procedures and systems for local government in Tanzania and (b) support to district development and feeder roads in the Mwanza province, where planning and financing systems are being tested and developed. The upstream and downstream support has strengthened the impact on the overall national system, providing concrete lessons in the implementation of the Local Government Act.
In partnership with UNDP, UNCDF has been supporting decentralization and local governance in Malawi since 1994 when a multi party system of government was restored. UNCDF's intervention has provided capital grants to the emerging local governments to facilitate the development of systems, planning procedures and actual investments in support of local development. Significant policy impact has been achieved with the passing of the 1998 Local Government Act and the implementation of a fiscal decentralization policy. The piloting by UNCDF of the District Development Fund has helped national authorities to develop and adopt a national policy for channeling resources to districts and sub districts. Current support continues to facilitate the deepening of the system to sub district levels and to institutionalize practices that have been tested.
Since 1994, with the support of the Belgian Survival Fund, UNCDF has helped one of the poorest areas in Mali (Seno Gondo in the Mopti region) to implement local investments that could address local challenges such as food security, the need for basic social and economic infrastructure and improved management of natural resources needed for poverty reduction. In 1999, in collaboration with UNDP and with the support of the Belgian Survival Fund, UNCDF began to pilot a decentralization programme in the Timbuktu Region (27 communes). The programme will help strengthen the capacity of local authorities in various areas: communication, consultation and empowerment of local populations in the identification of local public investments that can match their most pressing needs; planning and budgeting of local public investments; their implementation and maintenance; transparent and accountable management of civic assets in the common interest.
Also in Mali, a similar programme has been launched in 2000 in the Mopti Region (107 communes). The implementation of the programme relies on a large network of international and national NGOs and local service providers. In 2002, with additional resources provided by the Government of Luxembourg, more emphasis will be given to support local environmental governance and decentralized management of natural resources. At the national level, together with the Government of Mali, the Agence Française de Développement (AFD), the European Commission and other development partners, UNCDF has contributed to the creation of the new Agence Nationale des Investissements des Collectivités Territoriales (ANICT), a semi-autonomous governmental body responsible for managing the transfer of investment funds to local governments.
UNCDF has been working with Commune authorities in central Viet Nam since 1998 to develop a more participatory and transparent planning system for basic infrastructure and services, with important co-financing from the Government. This planning pilot experience has been largely adopted in the National Programme in Support of the Poorest Communes, and is also being replicated by Australia, the World Bank and the Asian Development Bank.
UNCDF helped develop a system of local planning and financing in Cambodia. Working within the framework of the Cambodia Area Rehabilitation and Regeneration Project (Carere), and supported by UNDP and a wide range of donors, UNCDF's programme experience has now been institutionalized by the Government of Cambodia into: a) a national mechanism for general purpose transfers; and b) a standard procedure adopted by the newly elected councils to produce Commune Development Plans as reflected in the Commune Administration Law.
UNCDF is promoting South?South exchange between policy makers and practitioners. To this end, UNCDF organized two regional workshops (Bangkok in 1999, and Cape town in 2001), bringing together senior policy makers, local government and civil society representatives, and academics to discuss issues of Decentralization and Local Governance. Proceedings from both events have been published. Building on this experience, and under the leadership of the UNDP Regional Bureau for Africa, UNCDF is participating in the organization of the Africa Governance Forum V to be held in Mozambique, in May 2002. The Forum will focus on Local Governance and Poverty Reduction in Africa.

The above examples capture positive results achieved with the support of UNCDF in terms of capacity-building and concrete investments with the poor - men and women - at the local level, policy impact at the national level and replication by other development partners. As reported in the 2000 Results-oriented Annual Report, through UNCDF's Local Governance / Development Programmes, 3,637 villages and/or communes participated in needs assessments, and 555 local development plans were prepared. Independent evaluations have found consistently that UNCDF interventions enhance the well-being of the poor.

However, as indicated in Section 2 above, UNCDF's experience has shown that positive results are not easy to obtain. The main challenges UNCDF has been confronted with are analyzed in its annual reports on evaluation results as well as in its various management and technical review reports. What UNCDF has learned is that in the area of decentralization, there can be no quick fix. Continuity is a must, national and local ownership is imperative and partnership with other development partners is indispensable.

Annex 2
Examples of UNCDF
Operational Activities In Microfinance

The following cases-in-point exemplify UNCDF's impact in the field in the area of microfinance. For more examples, please visit UNCDF's website at www.uncdf.org.

In Nicaragua, the final evaluation of a UNCDF-supported microfinance project concluded that it was successful in achieving its objectives of creating financially sustainable microfinance institutions in the northern department of Nicaragua and providing them with access to financial resources. One organization in particular, Fundenuse, became an efficient and sustainable microfinance institution with operational costs at 16.5% and operational self-sufficiency at 165%.
In Malawi, UNCDF helped establish a microfinance institution through capacity building and logistical support, and a US$3 million grant. After just one year, the institution, Pride Africa Malawi (PAM) had more than 9,100 clients, and is on track to exceed the target of 18,800 active clients and operational self-sufficiency by the end of year four.
UNCDF/Special Unit for Microfinance (SUM), as the lead technical unit for microfinance in the UNDP group, is responsible for mainstreaming best practices into UNDP policy and programming, with the MicroStart programme serving as a key tool. UNCDF/SUM seeks to support 'breakthrough' microfinance institutions, defined as an organization that becomes a major service provider in its geographic area, attaining substantial independence from donors through financial viability and influencing other providers. In Morocco, Zakoura has gone from serving 2,000 clients to serving 36,830 clients while achieving financial self-sufficiency. In Mongolia, XAC has gone from startup [zero clients] to serving 5,466 clients while also achieving financial self-sufficiency. MicroStart assisted the Mongolian Central Bank in developing legislation on non-bank financial institutions that opened up the entirely new sector of micro finance. XAC, having already registered as Mongolia's first private finance company, recently gained its banking license. Other breakthroughs include Benin, where FENACREP has gone from 5,033 to 27,655 clients and achieved 72% operational self-sufficiency in less than three years; while in Kenya, Equity Building Society has increased from 9,053 to 21,730 active clients in just nine months.
UNCDF/SUM is responsible for launching and technically supporting the MicroSave Africa programme in Tanzania, Uganda, and Kenya. MicroSave has assisted its partner microfinance institutions in East Africa to add 32,432 new clients. The mid-term evaluation of this programme noted that 'MicroSave-Africa has made a significant impact on the microfinance community, both in East Africa and beyond. It is likely that MicroSave-Africa, together with several other people and projects working along similar lines, will have a profound effect on the field, changing the way microfinance institutions think about and interact with their clients. The task in which MicroSave-Africa is engaged is long overdue in microfinance. Although its initial aim was focused on promotion of savings services for the poor, the review team found that MicroSave-Africa's actual core contribution is in raising awareness of the necessity of understanding the client's perspective in microfinance and to begin disseminating tools that enable microfinance institutions to find out what their clients needs, opinions, and preferences are. While the emphasis on savings services is strong, MicroSave-Africa's work is equally relevant for credit.'

Annex 3
UNCDF Resource Mobilization Targets and Strategy

UNCDF is aware that producing high-quality work does not always translate into the kind of financial support it requires. Right now, due to resource constraints, the Fund is falling short in responding adequately to the demands of programme countries for its investments and services. Thus, as part of its effort to close that gap, the organization will work to achieve the following strategic objectives by 2003:

To reverse the downward trend in core resources and assure growth;
To increase non-core resources and assure growth;
To mobilize adequate parallel funding;
To increase the Special Unit for Microfinance's volume of business in the areas of advisory services, distance learning, and support to programme development and management; and
To promote the wider replication of UNCDF-supported pilot operations.

Table 1: UNCDF Resource Targets for 2003(US$ million)
Resource Category		Actual 2000	Target 2003
Core:
	Voluntary contributions	24.8	30
	Miscellaneous income	5.3	4*
Non-core		2.9	10
Parallel funding		40	40
Advisory & other services		15	25
Replication		Not tracked	40
Total			149

* With estimated future reduction in liquidities.

For each of these objectives, UNCDF has set specific financial targets (See Table 1) to be met by 2003, the year following the period covered by its 2001-2002 Business Plan.

Indications are that UNCDF should be able to generate activities in the magnitude of US$ 150 million in local governance programmes and microfinance operations if it receives US$ 44 million in combined core, non-core and miscellaneous income annually by 2003.

Annex 4
UNCDF Countries of Operation

UNCDF Investment Portfolio

Concentration Countries

Africa	Benin, Burkina Faso, Ethiopia, Guinea, Malawi, Mali, Mozambique, Senegal, Tanzania, and Uganda.
Latin America and the Caribbean	Haiti.
Asia and the Pacific	Bangladesh, Bhutan, Cambodia, and Nepal.

Other Countries

Africa	Burundi, Cape Verde, Central African Republic, Comoros, Eritrea, Gambia, Guinea-Bissau, Madagascar, Niger, Mauritania, Sudan, Togo, and Zambia.
Arab States and the Middle East	Yemen.
Asia and the Pacific	Lao PDR and Viet Nam.
Latin America and the Caribbean	Nicaragua.

UNCDF Technical Advisory Services

UNCDF's technical advisory services are accessed worldwide on a cost recovery basis by UNDP, the World Bank, and other UN and bilateral development organizations.