The objectives of Decentralized Financing and Development Programme (DFDP), which is supported by UNCDF and DfID, are to reduce poverty through the implementation of small-scale infrastructure projects and to support the local governments to provide services in accordance with the Local Self Governance Act (LSGA) in an efficient, accountable and transparent manner. Furthermore, the programme is expected to:

• Have a direct local impact on socio-economic development and poverty reduction;
• Strengthen the capacities and legitimacy of local bodies and other local institutions; and
• Contribute to evolving procedures, practices and policies of wider relevance for the decentralization process in Nepal.

The DFDP aims at piloting new mechanisms and policies for local planning, financing and implementation that support the decentralization reform in Nepal.

The micro infrastructure projects are proposed on the basis of a participatory planning process by socially mobilized community organizations. The social mobilization is done by “Decentralized Local Governance Support Programme” (DLGSP) supported by UNDP and DfID.

DFDP designed in order to complement ongoing UNDP project DLGSP focused on local planning & capacity building by providing investment support.

Ministry of Local Development; Ministry of Finance; Local Bodies Fiscal Commission; District Development Committees.

• 20 Districts (scattered nation-wide) of total 75;
• 5 million persons.

The Final evaluation held in October 2006 was largely positive. It noted that the project has achieved its overall objectives, outcomes and results and the lessons learned from the past implementation should continue to be applied to the new project. There is an obvious trend toward poverty reduction support as a result of the DFDP project implementation. The DFDP has made a substantial and substantive impact on many levels of government programmes and decision-making. The DFDP is well known and respected throughout institutions, government departments, line agencies, NGOs, Districts, Villages and communities. The DFDP has had a demonstrated impact on a widespread recognition of the importance of a transparent decentralized Public Expenditure Management System for infrastructure and service delivery to communities. This includes formula based block grants, etc.

An effective Fiscal Transfer Mechanism has been established and is operational under the DFDP. There is a consistent accounting system across districts and internal auditors are in place. Use of block grant funding as an instrument to raise District Development Committees performance (through Minimum Conditions & Performance Measures) has been effective. Though the DFDP grant amount constitutes a relatively small share of District funding, the processes and procedures have been generally efficient, effective and instrumental in policy considerations for replication of the DFDP process nationwide.

• Government recognition that DFDP is sole programme to keep local government on the policy and development agenda in a period when this abandoned by others.
• The Ministry of Finance has adopted nationally the performance-based funding of District Development Committee and associated assessment methodology, as piloted by DFDP (Budget Speech, June 2006). Formal request to support the Government of Nepal in developing SWAp for Local Government funding.
• The Ministry of Local Development indicates that LGDP will be the future national programme framework. The partnership with DFID has been excellent: DfID commitments initial cost-sharing in the future programme and indicates possible increased future funding. Norad poised to co-fund. UNICEF intention to partner.
• An independent donor review recently cited DFDP as the model for harmonising future donor support to local government.

• The prolonged political crisis from 2002 to 2006, the suspension of local councils, the closure of Village Development Committee, and the virtual suspension of any policy move on decentralisation, together greatly compromised DFDP activities and impact. Even after conflict has ended, parallel Maoist and the Government of Nepal administrations still act as constraint.
• The existence of DLGSP has greatly limited scope for DFDP to engage with local Public Expenditure Management and capacity building. Parallel funding (DLGSP, Poverty Action Fund) also limit scope for concerted work on fiscal decentralisation.
• Problems in supporting 20 far flung districts.
• Prolonged problems in estimating DFDP budget balance.

• Closure of DFDP and disposal/transfer of assets;
• Finalisation of design of successor programme and transition for key staff.

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.