Over the period 2008-2010, LGDP will provide comprehensive support to decentralized governance, local service delivery and community empowerment in Nepal, and will constitute the basis for a national programme framework for all such assistance by development partners. It will be a flexible programme, initially providing support for an interim 3-year period with a longer-term horizon.

The programme, which will build on the positive accomplishments of UN and other local governance support activities undertaken in recent years, will focus on two complementary strategic areas:

1. Building the capacities and procedures of local bodies, and their financing arrangements, to promote more effective delivery of basic infrastructure and services ("supply"); and

2. Promoting more active and effective interaction by communities - and especially of the more marginalised segments - with their local governments, in order to better articulate community voice and to hold their local governments to account for the services they are supposed to deliver ("demand").

The programme will include substantial funding for local public and community infrastructure and services, to be channeled as grants through local governments, in a manner so as to promote local capacity, performance and accountability to communities with a focus on the most deprived. The immediate geographic focus of the programme will be on the Mid & Far West districts, with focus on selected Terai districts too insofar as feasible and funds available, and expanding as quickly as additional partner resources are made available to the programme; at the same time, certain key activities (civic education, local government capacity building, support to local government performance assessments, and support to national government for policy coordination & development) will have a national focus from the outset.

Through its activities, LGDP will also seek to establish the platform for a joint GoN/multi-donor local governance "sector" programme, including a harmonized donor financing arrangement for local service delivery and community support.

• The political settlement in Nepal, fragile as it is, provides an opportunity to address issues of governance at local level, and to help build legitimate and capable local state structures, the absence of which has fuelled discontent and revolt. However, it is unlikely that the new national government will have formulated a policy and legislation for future sub-national state structures (federalist or otherwise) for at least 2-3 years, since there are diverging views on the way forward.

• LGDP will therefore adopt a flexible strategy for an interim period (3 years or so), working to reform systems and procedures and build capacities and accountabilities within current local government structures and local service delivery arrangements, without pre-empting any future policy options.

• At upstream policy level it will feed lessons into the national debate on decentralisation and local development, and also help the Government of Nepal to develop a national "sector framework", and common basket funding arrangements for future donor support to local government, which can be implemented once a policy and legal framework is in place (probably in 3+ years time).

• LGDP will build on the elements of success of its two ongoing programmes: DFDP and DLGSP.

• Overall, LGDP offers a major platform to begin building UNDP/UNCDF collaboration with other UN agencies (UNICEF, UNV, UNFPA), major bilateral development partners (DFID, Norway, GTZ, possibly Danida), and hopefully with the World Bank, once the latter has clarified its own ambivalence (community development or local governance?).

• Ministry of Local Development, Ministry of Finance, National Planning Commission, Local Bodies Fiscal Commission.

• District Development Committees, Village Development Committees, Municipalities & their national associations.

• National capacity building focus.

• Initial intensive grant funding focus on 25 Districts (Mid and Far West, poorest areas in Nepal, most heavily affected by the conflict and Government's priority) and 10-16 Districts in Terai, but modular expansion to national coverage as funds become available.

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• Adapting to volatile political & policy context, and the federalist debate;

• The possible instability of local interim councils;

• Other Parallel funding arrangements for recovery and reconstruction;

• Reconciling possible differing objectives of an ambitious programme and also partner interests;

• Unclarity as to World Bank position and willingness to support Local Government.

Finalise prodoc and secure Governement's and partner approval, Agree cost-sharing for DFID and NORWAY, Recruit team.

The "Building Inclusive Financial Sectors in Nepal" programme results from a joint formulation exercise between UNCDF, UNDP and the World Bank. It proposes interlinked results to support a dramatic improvement in the access by the poor and low-income earners of Nepal to demand-driven, high-quality and sustainable financial services over the coming five years. It would have the following components:

1. Reform of the microfinance legal/regulatory framework and supervisory regime;

2. Reforming state owned microfinance institutions;

3. Implementation of the Secured transaction law;

4. Small business lending;

5. Microfinance Sector Technical Assistance and Innovation Fund.

• The poor and low-income earners ["Bottom of Pyramid" (BOP)] in Nepal make up around 90% of the economically active population. While a significant number of potentially bankable clients among BOP have been mobilized by community development projects, they remain largely excluded from access to sustainable financial services, and thus form the core target group for the development of an inclusive financial sector.

• The financial sector in Nepal is quite diversified, with a large number of varied institutions offering a relatively wide array of financial services, but the outreach by the Financial Service Providers (FSPs) to BOP remains limited.

• Financial services to BOP have been driven by quantitative 'coverage' targets supported by generous provision of subsidized loan capital facilities. Comparatively less attention has been paid to the quality of the financial services provided, the sustainability of the institutions providing the service, and - in particular for the very poor in remote areas - the ability of borrowers to utilize credit for gainful enterprise, earn a profit and repay loans rather than increasing their debt.

• With coherent and focused institutional capacity building support, the financial sector should be able to increase its outreach to BOP by 20-25% per year, reaching a total of 1 million BOP clients at the end of the programme.

The Nepal Rastra Bank (NRB - Central Bank) will be the Government counter-part of the programme. The programme will establish a Fund for Inclusive Finance led by an Investment Committee to coordinate funding to FSPs serving the lower-segments of the financial sector, networks, and business service providers in order to make efficient use of public resources, avoiding duplication and over-subscription. The Nepal Rastra Bank (NRB, Central Bank) will serve as Chair of the Investment Committee to ensure that investments at the retail level are within the Government's policy and regulatory framework. The Ministry of Finance will also serve as a Government appointed representative to the FIF/Investment Committee.

While financial intermediation will clearly and always occur more in the central region and in urban areas, where there is more economic activity, the programme will try to ensure that the benefits of the TA go beyond the valley by conducting an extensive information campaign also amongst smaller MFIs and by earmarking some funds for MFIs that operate or intend to operate outside of the valley.

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• Political risk: With the Maoists joining the government, the new counterparts might not be amenable to idea of sustainable microfinance. To ensure that the key Maoist government representatives fully understand what the programme is about and are brought on board, the programme has carried out an initial dissemination campaign of the Access to Financial Services Report. This will be followed up with continuing dialogue among key stakeholders.

• Weak institutional capacity both of the implementing agencies and of the industry participants (both banks and MFIs). To ensure that industry participants have enough capacity to bid, the microfinance fund working rules will be designed in cooperation with a cross segment of the microfinance industry.

Finalise prodoc and secure Government's and partner approval, Focus on Resource Mobilization, Recruit team.