Local Development Funds Promoting decentralized, participatory planning and financing UNCDF Policy Series Published in hard copy in December 1996; second printing in April 1998. Leonardo Romeo Senior Technical Advisor United Nations Capital Development Fund

Table of Contents

• Introduction
• Chapter 1: Policy Dimensions
• Chapter 2: Features of LDF Programmes
• Chapter 3: LDF Programme Analysis and Design Issues
• Chapter 4: Conclusions

 

INTRODUCTION

The United Nations Capital Development Fund (UNCDF) has gone through a critical reassessment of its identity and role during the last three years, eventually leading to its redefinition as a "fund for local and community development." This focus on local development and on direct partnership with collective actors in the local space — first and foremost with local governments —reflects two considerations: on the one hand, it responds to emerging local demands, and donor support, for political and administrative decentralization in developing countries and for people's increased participation in development planning and management; on the other, it appears as the logical evolution of extensive UNCDF experience with small-scale capital grants for the provision of local infrastructure and services and for the promotion of local economic development in least developed countries (LDCs).

It was in the context of such re-focusing of the Fund on the local space that local development fund (LDF) programmes were developed as a distinct line of UNCDF assistance. Through such programmes, UNCDF directly assists LDC subnational authorities at the regional and local levels, mostly in rural areas. It provides financial resources and technical support to local authorities to introduce decentralized, participatory planning and management of local infrastructure and services and to promote local economic development.

Such programmes are still in their infancy. As of the end of 1995, LDF programmes have been designed or are being designed in ten countries (Equatorial Guinea, Ethiopia, Malawi, Mozambique, Uganda, United Republic of Tanzania and Zambia in Africa; Cambodia and Viet Nam in Asia; the Palestine Territories in the Middle East). Most are at different stages of the appraisal and approval process: the programmes in Malawi, Mozambique and Viet Nam have just started to operate and only the one in Palestine has been operational for more than one year.

The scope of this document

This document clarifies the underlying assumptions and policy objectives that constitute the overall rationale of the LDF programmes. These assumptions and objectives relate to poverty eradication policies and to policies that promote decentralization and participation as keys to improving the efficiency and equity of public investment programmes for rural development. In addition, it outlines the basic features of LDF programmes and compares them to other programmes that share some of the LDF objectives. These are programmes that support small-scale local investments for poverty alleviation (e.g., micro-projects or social funds) or finance local government provision of infrastructure and services (e.g., municipal development funds).

Furthermore, this document reviews the design of a typical LDF programme and attempts to map out the technical and institutional issues that must be dealt with in such a design. This is in consideration that at this point in time, any attempt at a thorough evaluation of the effectiveness of such projects would be premature, since most LDF programmes have recently left, or are still on, the drawing board.

CHAPTER 1: POLICY DIMENSIONS

LDF programmes as policy experiments

UNCDF? supported LDF programmes can be described as mechanisms to channel financial and technical assistance to local governments mostly in rural areas of LDCs to enable them to: (a) assume primary responsibility for local development and poverty alleviation programmes and (b) associate a wide range of organized elements of local civil society with the planning, financing and management of such programmes.

LDF programmes are explicitly conceived as policy experiments in the field of local governance since they link the achievement of local development and poverty alleviation goals to the implementation of government decentralization and people's participation policies. In this sense, LDF programmes belong to the growing family of donor?supported programmes that reflect the Development Assistance Committee (DAC) orientations on participatory development and good governance published by the Organization for Economic Cooperation and Development (OECD) in 1994 and are based on the now?widespread assumption that there is a direct positive relationship between good governance and development.

However, LDF programmes are based on a specific, if limited, view of the governance/development relationship. The programmes focus on the potential role of local governments in the process of development and are meant to set up pilot working models of decentralized governance systems based on the following three key elements:

1. Devolution of responsibilities and resources for capital spending to local authorities. Here the financial facility is seen as a pilot for a system of governmental fiscal transfers (IGFTs) for finance local development and poverty alleviation;
   
2. Simultaneous adoption of local participatory planning procedures and local?local dialogue among multiple actors in the local space. The LDF resources are seen in this function as the catalyst for people's participation and innovative local institutional arrangements for the provision of local services;
   
3. Transfer of ownership of local development initiatives to local authorities and community groups, which would then assume owner responsibility the management of project implementation. The LDF financing of new owners in this domain is seen as a critical factor for reorienting the loyalty of local bureaucrats and creating among them a sense of local service and related accountability.

Taking into consideration the above parameters the purpose of the LDF policy experiments is to demonstrate that these three dimensions of local governance have a critical and direct positive effect on sustainable local development and poverty alleviation

Focusing on local governments

A distinctive feature of LDF programmes is their focus on local governments. All LDF programmes explicitly aim to put these governments back at the centre of the local development effort, a role from which they have been largely excluded by the past, often parallel adoption of centralist and grass?roots approaches to development. Contributing to this trend was the related channeling of national resources and development aid through either central sect oral agencies or NGOs. In contrast to such approaches, LDF programmes recognize that local governments have a major role to play in providing local infrastructure and services and promoting local economic development and that they have a strategic comparative advantage over both central line agencies and NGOs in delivering a range of infrastructure and economic development programmes that are both connected to local demand and sustainable over time (J. Bruegman, 1994).

The LDF focus on local governments, however, is far from being exclusive. Stronger, better-funded local governments are seen as key enabling factors for increased participation of organized civil society groups in local development. LDF programmes could conceivably generate opportunities for, and directly promote, a multi-actor local-local dialogue, involving de-concentrated line agencies, NGOs and the local civil society at large. This is essential for fuller community participation, wider resource mobilization and sustainable delivery of local services. In addition, there is a presumption behind LDF programmes that channeling resources to and through local rural governments may bring about the integration of development activities as well as the sustainable delivery of public services in rural areas that integrated rural development (IRD) projects of the past tried to achieve through ad hoc, short-lived programme implementation units. LDF programmes thus belong to a new generation of funding activities that see decentralization and devolution of resources to local government as the new strategy for rural development destined to fill the strategic void that resulted from the "failure" of the IRD approach (Parker 1995).

Recently there has been a resurgence of interest in decentralization throughout much of the developing world. In some countries, national governments are sincerely committed to democratic local governments and the related devolution of resources and responsibilities. In such countries, LDF programmes may provide additional flexibility and much needed external support for internal reform. However, even in countries that have not gone much further than the rhetoric of decentralization and where local authorities remain particularly weak and under funded, experimental LDF programmes could receive genuine support from provincial or regional authorities and sectors of the national government because of the pedagogic role that such programmes could play in the process of national policy formulation.

Nevertheless, it is clear that ultimately the value of the LDF experiment depends on the strength of the national commitment in each country to the governance principles that the LDF supports. In addition, leveraging the lessons learned in LDF programme implementation will require a policy dialogue between donors and recipient governments, a relationship that is made particularly difficult by the very political nature of the governance agenda.

It is unrealistic to expect that a single donor, and particularly a very small one like UNCDF, can play a major role in such policy dialogue. However, should the emerging paradigm of rural development through decentralization gain further acceptance and form the basis for assistance by multiple donors and the large multilateral lending agencies, the practical experience gained by UNCDF in the design and early implementation of pilot LDF programmes could provide some valuable lessons for the design of a new generation of aid programmes for rural development.

CHAPTER 2: FEATURES OF LDF PROGRAMMES

Components

UNCDF-supported LDF programmes typically consist of two components: (a) a financial facility (the LDF itself), set up usually at the regional level or, exceptionally, at the national level, to channel small-scale capital grants to lower levels of local government for the financing of rural development and poverty alleviation and (b) a capacity-building programme, designed to introduce or improve decentralized, participatory planning procedures and to build the capacity of local governments and others local institutions to design and manage local projects.

There is a strict complementarity's between the two components: the allocation of LDF resources to local authorities takes the form of a multi-year planning ceiling (MYPC). This creates both the need and the opportunity for a local planning process based on intensive consultations and joint action among multiple actors in the local space: Local governments, de-concentrated line agencies, community groups, etc.

In contrast, while LDF resources may play a catalytic role in the introduction of a local planning process, such a process will also quickly point to the importance of further mobilization of resources - first from the community itself and then from other internally or externally financed programmes at the regional or national level. This in turn requires the opening of bottom-up communication channels and the integration of the local planning exercises into regional and national planning systems.

The two components of the LDF programmes also suggest the two most fundamental challenges to the design of such programmes, namely, transparency in the allocation of resources from the LDF facility and the participatory character of the local planning process. Transparent allocation of resources, in a typical LDF programme design, calls for the setting-up and management of a simplified population/income/ infrastructure regional database that allows for the development of indicators and of an appropriate formula for the geographic targeting of LDF resources as an alternative to the widespread practice of ad hoc allocations of capital, a practice that is often driven by politics. Also, to the extent that managers of the LDF facility retain the authority to approve the individual investments selected for LDF financing through local planning exercises, very simple, transparent criteria for investment appraisal and approval must be introduced.

As for the participatory nature of the local planning process (introduced within the framework of a typical LDF programme), this is embodies in three main features: First, the management of the local planning process itself is entrusted to an intermediary body (a local planning council or development committee) in which both local government and civil society elements are represented; second, participatory planning techniques are adapted and extended to such bodies to secure the maximum feasible degree of popular consultation and participation in decision-making; third, individual projects, locally identified and selected, become the responsibility of local project holders, either local governments or community groups which will assume the owner's functions and manage their design and implementation, including the necessary procurement of goods, services and works.

LDF programmes as one of several lines of UNCDF assistance

LDFs are not the only line of assistance offered by UNCDF to local governments and communities. Three other such lines are worth mentioning in this context because they contribute to the definition of the boundaries of LDF programmes and demonstrate the need and potential for complementary initiatives within the framework of a wider area-based approach to local development. They are: (a) relatively larger, free-standing local infrastructure programmes, (b) local eco-development programmes that assist communities in the conservation and management of natural resources and (c) credit programmes that support private income-generating initiatives.

While LDF programmes support the development of small-scale social and economic infrastructure at the local, local development may be constrained by infrastructure bottleneck at the broader (provincial or regional) level. Because of the size of the investments involved, the level of technical complexity and the related institutional provision responsibilities must be handled through larger-scale, sect oral programmes that are managed by provincial or regional agencies. In addition, where the degradation of natural resources, managed by community groups as common-pool resources, is the central problem of local development (as in some resource-fragile environments in LDCs), it may be necessary to assist such communities directly with programmes that, because of their size, experimental nature and intensive technical assistance requirements, may exceed the responsibility of local authorities and the scope of LDF financing. Finally, when the issue is the promotion of private income-generating activities, loans from local financial institutions and not grants from a public-sector facility, such as the LDF, are applicable.

Figure 1 shows the complementarities that may exist with regard to different lines of assistance. In principle, LDF resources empower local governments to assume a broad range of responsibilities for local development. These are to provide local public infrastructure and services as well as to support community initiatives for the provision of community goods and the management of common-pool resources.

Additionally, whenever necessary and appropriate, LDF resources might also be used by local governments to finance local economic development programmes (LEDPs) managed by local NGOs. They also may be used to provide technical assistance and, whenever applicable, start-up subsidies to private economic actors to facilitate their access to local financial institutions.

LDFs and other donors-supported facilities for local development

The LDF is neither the first, nor the only, donor-supported financial facility for local development. A number of programmes with similar objectives and/or partnership arrangements have been developed. These programmes are briefly described here to illuminate, by comparison, some key aspects of the LDF approach. Such programmes can be classified in two categories: First, there are programmes that are set up to support locally generated and managed small-scale investments — the older family of community development funds and the more recent social investment funds (SIFs) as well as micro-project programmes; the second are programmes to provide financing to local governments (mostly urban) for infrastructure and services — such as municipal development funds (MDFs) or decentralized urban development programmes. Important differences and equally important complementarities exist between LDFs and both SIF- and MDF-type programmes.

Both LDFs and SIFs are concerned primarily with poverty eradication. Both target their resources according to poverty indicators and share a demand-led approach to social investment, responding to formal requests of beneficiary groups as projects sponsors. Also, the nature and scale of local investments financed by the two programmes (e.g, rural health and education facilities, roads and other small-scale rural infrastructure, and income-generating community projects) are similar.

The key difference between LDFs and SIFs is with the process of generating and selecting individual investment projects. Under SIF programmes, project sponsors (community groups, NGOs, local government, etc.) individually access the resources through a direct relationship (sometimes mediated by the "technical clearance" of a government agency) with the SIF management unit (centrally located or de-concentrated at the provincial level). In contrast, the LDF programmes provide an entire local community with a fixed amount of resources, which accrue to their local government as an MYPC. The LDFs also introduce a local planning process as the mechanism for identifying and selecting individual projects prior to the submission of the requests for funding to the LDF management unit. The provision of an up-front MYPC acts as a budgetary constraint and as an incentive for community participation because of the need for collective consultation and decision-making to prioritize the uses of limited funds as well as the need to complement such funds with additional local resource mobilization. It is this lDF emphasis on local planning and the nature of LDF resources as grants to local governments that are the key differences between LDFs and SIFs.

The two mechanisms do not necessarily contradict or exclude each other, however. In practice, the planning process introduced within the framework of LDF programmes can also benefit SIF programmes where they are simultaneously implemented by improving the relevant and quality of all project proposals locally generated and selected, submit for SIF financing.

Both LDFs and MDFs aim to decentralize the financing of local governments and the improvement of their administrative capacity. Both may provide financial resources for investment in local infrastructure and services and technical assistance for improved local administration, including planning, budgeting and local tax administration. They differ fundamentally, however, in that LDFs extend grants to local governments as part of an existing or prospective system of intergovernmental fiscal transfers whereas MDFs offer to local governments access to credit through local financial institutions.

The use of grants or credit also largely predetermines the beneficiaries and kinds of investments supported by the two types of funds. In general, MDFs do not assume any poverty-related targeting mechanism in the distribution of their resources; they tend to finance larger investments in infrastructure projects that have a good potential for cost recovery (water supply, waste disposal, markets, etc.) and to assist those local governments (mostly urban municipalities) that are most likely to meet financial performance targets. In contrast, LDFs explicitly target their resources to poverty areas; they finance smaller projects that either by their nature, size or the poverty of the population they serve do not allow for the local recovery of their capital costs; and they assist relatively weaker, poorer, mostly rural, local governments. LDF programmes seem to address some of the most problematic aspects pointed out by analysts of the MDF experience: (a) the applicability of credit for financing local public investments in a large number of poor, institutionally weak local governments in LDCs and (b) the lack of connection with demand in the selection of investments, owing to the little incentive for local consultation and community participation that is built into MDF programmes.

Once again, the two mechanisms are not mutually exclusive but rather require policy and management coordination. In fact, even in relatively poor communities, some local infrastructure projects may recover at least part of their capital cost from user charges and lend themselves to a mix of grant and credit financing which would require the simultaneous access by local governments to both LDF and MDF resources.

CHAPTER 3: LDF PROGRAMME ANALYSIS AND DESIGN ISSUES

Selecting levels of local government for LDF implementation

The setting-up of LDF programmes necessitates decisions regarding the most appropriate levels of local government and institutions where the basic functions of the programme are to be carried out.

The most critical decisions are:

1. Where the LDF resource allocation and funds management functions should be located;
   
2. To which level of government should the multi-year planning ceiling and related planning responsibilities be attributed;
   
3. Which local institutions should assume project management and procurement responsibilities (the client responsibilities);
   
4. Where should the responsibility for disbursement and accounting of LDF resources be located.

Since LDFs are mechanisms for channeling resources from "higher" to "lower" levels of government and communities, there are always at least two levels of government involved in the implementation of LDF programmes. These are the national, regional or provincial authorities on the one hand and district, commune or village authorities on the other. However, while the higher level of government always retains the responsibility for allocating LDF resources (as MYPCs) to the lower level, the degree to which it also retains funds management responsibilities may vary considerably.

At one extreme, national, regional or provincial authorities may retain the power to approve ex ante all projects selected through the local-level planning process as well as the authority to disburse directly to the suppliers, consultants or contractors engaged by the local "clients." This is how the LDF programmes in Cambodia, Mozambique and Viet Nam are designed, for example, Provincial authorities are expected to allocate LDF resources, approve projects and disburse funds while district authorities should prepare local plans and select, design and manage the implementation of projects.

At the other extreme, the authority to approve individual projects and disburse funds may be fully transferred to the level of government receiving the MYPC allocation. Higher-level controls may be exerted ex post facto through regular inspection and auditing procedures. This would be the case regarding the LDF in countries like the United Republic of Tanzania, where regional governments allocate resources to districts, which are then responsible for the planning, selection and approval of projects, the management of project implementation and disbursements of funds.

Several criteria may guide the selection of the "lower" level (s) of local government to which MYPCs should be allocated and improved planning procedures introduced. The basic trade-off is between the need for the area and population they cover to be small enough to facilitate forms of direct popular participation and interaction between local authorities and communities, and the need to be viable planning units. Here viability is defined as the combination of a size (in terms of population served) and a capacity (in term of local human resources and appropriate organization and procedures) that enables them to make planning decisions and assume full or joint responsibility for providing a reasonably wide range of local infrastructure and services.

The size of the area and population covered by a local government unit is associated with the range of its actual (legally sanctioned) or potential (applicable through decentralization legislation) responsibilities for the provision of services. This relates not only to the nature of the difference services and the economies of scale in their production but also to the degree to which a particular service lends itself to joint provision, that is, to the sharing of responsibility for its provision among different levels of government and community-level institutions.

The setting-up of an LDF as a mechanism to promote decentralization and local institutional development thus requires a sect oral analysis of the actual distribution of responsibilities for public and community infrastructure and services. In addition, it requires and analysis of the potential limitations that exist for lower levels of government and community groups to assume full or partial responsibility for their provision. In practice, the capacity of lower-level local authorities is primarily and issue of the number and quality of executive staff working at the local level as well as of organizational incentives and appropriate procedures.

An assessment of existing capacity and a strategy for capacity building are essential to determine both the target local government level for MYPC allocation and the distribution of funds management functions among the levels involved. For example, at the level of a rural commune (population 5,000-10,000), ideally, at least one planning and one public works technician should help to discharge the responsibilities of commune authorities within the framework of LDF programmes. In practice, resources of the LDF programmes themselves should often be used to build a minimum local capacity. This may mean the recruitment and intensive training of a multi-purpose local planning technician (e.g., in Cambodia and Mozambique) or the "promotion" of existing local staff to a local planning/development agent position, as in the case of the village council administrative secretary in Palestine.

However, in assessing the capacity and capacity-building requirements of various levels of local government, the basic assumption underlying LDF programmes is that the emphasis should be on the capacity to "provide" (to plan, finance, and procure construction, operation and maintenance services), not to "produce" (to actually design, build, operate and maintain). LDF resources are meant to enable local clients to seek and obtain the services of both public technical agencies and private-sector firms to produce the infrastructure and services whose provision responsibility they have fully or partially assumed. As a consequence, capacity should be built for local planning and public-sector project management rather than for design, construction and other technical areas.

It should also be noted that when responsibilities are assigned to local institutions, there is not only a need for qualified local staff to help discharge such responsibilities but also a need to cover the costs associated with the client's obligations in the preparation and implementation of specific projects. These costs are related to the preparation of feasibility studies, negotiations of project financing, awarding and monitoring of contracts, etc. In most LDF programmes, such costs are covered by a percentage (up to 5 per cent) of the total MYPC.

In practice, the LDFs supported by UNCDF to date have focused on either (a) communes (population 5,000-10,000) as MYPC beneficiaries and provinces as LDF facilities managers or (b) districts (population 50,000-5000,000) as both MYPC recipients and managers of the LDF facilities. Table 1 shows the distribution of funds management and planning functions among levels of government in some of the UNCDF-supported LDF programmes.

The choice of communes or districts as the primary recipients of MYPC allocations has implications in terms of planning process that can be adopted at these two levels of local government. Here, however, it is important to note that, when the MYPC recipient institutions are small rural communes, it is often necessary for individual's communes to find a "higher" level for consultation and joint action. This level may or may not coincide with the immediately higher administrative level (usually the district). In Palestine, for example, 12 village councils (the equivalent of communes elsewhere) jointly created a micro-regional planning forum for the compatibilization of their plans and the pooling of resources for join projects. Even before that, intercommune consortia had been created to manage a multi-village road project and a solid waste collection and disposal project jointly benefiting three village council jurisdictions.

 

Size of the LDF: budgetary and capacity constraints

The design of LDFs must be replicable if they are to serve as efficient pilot mechanisms for intergovernmental fiscal transfers. This consideration raises a number of questions about the compatibility of the LDF programme design with two orders of constraints. The level of resources allocated through LDF programmes, per capita and per year, for example, should be compatible with some realistic assumptions about the evolution of the national/regional gross domestic product (GDP) as well as the share of the budget that may be decentralized (devolved) at the level where the LDF is established. Table 2 presents the range of MYPC allocations per capita in some of the LDF programmes designed to date.

For most of the countries in the lowest income bracket (GDP/c =$100 to $200), the MYPC allocation in the experimental LDF programmes ranges between $0.50 and $1/capita/year. In all LDF programmes, the annual per capita MYPC allocation is at, or below, 1 per cent of the GDP/capita.

The number of local government units and communities that may receive MYPC allocations and related support for local planning in a given year should be compatible with the expected capacity of the local planning unit (LPU) (a capacity-building unit itself), which is established at the "same" or a "higher" level to extend the planning methodology and support its application. The pace at which capacity can be built in the LPU and then extended to MYPC-recipient local governments is doubtless the major constraint on the amount of LDF resources that can be allocated in any given year.

These two considerations determine the scope of the LDF experiment and the scale of the annual operations of the LPU. They also influence the duration of the local planning cycle and the periodicity of MYPC allocations and local planning exercises. In general, the LDF design experience shows that it is difficult to allocate MYPCs to all participating local authorities simultaneously without overloading the capacity of the LPU. In most cases, then, the participation of local authorities concerned with LDF programmes should be staggered and, as previously indicated, the funds allocated to them should be conceived as multi-year planning ceilings. This would limit the number of local planning exercises that must be supported annually by the LPUs and would allow for more meaningful periodic planning exercise. In regards to actual release of funds or spending authorization to the local clients, this could be done on an annual basis provided that there is a degree of flexibility to carry over unspent amounts from one fiscal year to the next or "borrow" from next year's entitlement.

Objects of financing

The LDF programmes are meant to provide financial resources to match a wide range of responsibilities that are, or may be, attributed to local rural governments within the framework of decentralization. Such responsibilities fall into three broad categories (figure 2):

1. The provision of local public infrastructure and services, which may include the provision of roads and bridges, public markets, small piped water supply schemes, rural water supply, rural electrification, education facilities, primary health care facilities, agriculture extension, irrigation, other water-works for agriculture and livestock, dip tanks, etc.;
   
2. The protection of the environment and management of natural resources, which may include reforestation schemes, soil and water conservation works, management of fisheries and grazing lands, wildlife protection, etc.;
   
3. The promotion of local economic development, which may include support to programmes provided technical assistance and start-up grants to small-scale enterprises, support to private producers of services of interest to the local community at large (e.g., grain mills, rice banks, nurseries, input stores, boutiques, etc.).

One common thread of the LDF objects of financing is that they are all components of local development whose full financing through credit is either not feasible or inappropriate (Y. Fournier and D. Gentil, 1994) and which thereby require some grant support from local authorities. However, while the LDFs provide resources to local authorities to contribute to the financing of a wide range of local development activities, this does not mean that local authorities are always the most appropriate local institutions to manage those activities.

Community-based organizations (CBOs) varying in nature and scope may not only be associated with the management of most public infrastructure but have often proven to be the most appropriate institutions to assume full responsibility for the provision of some community services (water-user associations for irrigation, village water committees for tube wells, etc.) and for the management of natural resources (fisheries, grazing lands, etc.). Similarly, specialized NGOs are the local income-generating activities in order to ensure transparency and adherence to professional standards. Interesting examples of such local NGOs are the local economic development agencies (ADEL in Central America, ACLEDA in Cambodia, etc.).

The distinction between local government financing and local government direct management of all local development activities is a critical one. As already mentioned, the LDF programmes aim to promote a local-local dialogue between local authorities and other institutional actors in the local space. In practice, this should result (wherever appropriate) in the use of LDF resources by local authorities to finance or co-finance the provision of local infrastructure and services, the management of natural resources and the promotion of income generating of natural resources and the promotion of income-generating activities by CBOs and NGOs.

There are many difficulties, both governmental and non-governmental, in putting such local-local dialogue into practice. It is also too early to assess whether making LDF resources available to local authorities and introducing the associated local planning and project management procedures have created strong incentives for such dialogue. However, the available anecdotal evidence seems to be positive. In Palestine, for example, where LDF resources accrue to village councils, the LDF programme required that a local project-holder institution be identified at the level appropriate for each type of LDF-financed investment. For an agricultural land reclamation (improved access) project, a farmers committee was created to take responsibility for project design and the management of construction contracts. The project's responsibility had previously been assumed directly by village council leaders. The change in responsibility resulted in a completely redesigned project that was then implemented at a much lower cost. It also provided a more equitable distribution of benefits.

In another LDF programme being designed for some pilot municipalities in Equatorial Guinea, the delivery of primary health services at the village level is based on the joint action and co-financing of three local institutions: the village council (the beneficiary of LDF allocations), a community-based health committee and a locally established international NGO. Figure 3 illustrates the proposed institutional arrangements as an example of the local-local dialogue fostered by LDF programmes.

Terms of financing of various objects

The type of intergovernmental fiscal transfer (IGFT) that LDF programmes are meant to pilot can be defined as a matching rant for capital spending (A. Shah, 1994). LDFs provide external resources to a local community against an internal contribution that may vary from 10 % to 50 % of the total cost of any specific project.

Also, varying degrees of conditionality have been introduced into different LDF programmes to date. In some cases, the LDF programmes have predetermined the investment sector or type that may be undertaken by local communities and supported by the LDF. In Ethiopia, for example, communities must choose from a menu of investments supported by the LDF; in Cambodia the LDF supports investments in four basic sectors only (water supply, irrigation, rural roads, education). In other cases, the only restriction is that LDF resources must be applied to development spending as opposed to recurrent expenditures. In this respect, adjustments and changes are expected to take place in the design of the LDF programmes as lessons are learned during their implementation.

As for local co-financing, contributions can be made in cash (from local governments' own resources or community effort) or in kind (mostly local materials and labour). For projects that may generate financial resources in excess of what is necessary to cover operation and maintenance (O&M) costs, LDF grants can be structured to provide only the portion of capital costs that cannot be covered either from the managing local institution's own resources or through a loan from a local bank. In most of the current LDF programmes, it is the task of the LDF management unit in the provincial or regional government to identify a co-financing typology of the most common local investment. Management must then determine the co-financing arrangements and minimum amount of required local contribution applicable to each type. Again, it is too early to assess to what extent and through which specific mechanisms LDF programmes provide incentives for local resource mobilization or how well they facilitate the access of local institutions to credit.

An important point to note is that, although prompted by the availability of a multi-year planning ceiling, the local planning process promoted by LDF programmes is likely to result in the identification of a number of projects exceeding the available MYPC.

Under these circumstances, the participating local authorities and communities may decide to use some of the MYPC and their own related contribution as co-financing to access resources from other special purpose matching grant programmes. Examples of externally funded programmes of this type are the World Bank-supported social investment funds or the European Union-supported micro-project schemes.

Theoretically, other government programmes managed by sect oral agencies could also be accessed, but they would require more complex negotiations on innovative project implementation arrangements to safeguard the principle of local ownership and management of the investment process.

Another possibility for the use of MYPC resources for structuring the financing of specific projects is MYPC beneficiary institutions recognize the opportunity for joint action and co-financing of projects of common interest. Examples of such cooperative efforts can be found in the implementation of the LDF programme in Palestine. However, additional experience and analysis are needed as strong incentives for inter-jurisdictional cooperation and the creation of special local government consortia can be systematically introduced into LDF programme design.

Capacity-building

The implementation of LDF programmes demands a relatively large-scale capacity-building effort in local planning and local public-sector project management. The fact that such a capacity-building effort is conducted in conjunction with the provision of financial resources for the implementation of local plans is a key feature of the LDF programmes and separates them from other freestanding technical assistance efforts directed at local institutions. However, it also narrows the scope of local capacity building, limiting it to what directly enables local institutions to access and use decentralized financing for local economic development and poverty alleviation.

To be sure, this in itself is not a small task since it calls for the introduction of a considerable range of practices and skills. In this light, a more focused capacity-building effort may be considered a positive feature in the design of LDFs. However, LDF programmes are not a substitute for more comprehensive efforts at local institutional capacity building, particularly those targeting the re-deployment and re-training of civil service personnel, within the framework of national and local administration reform.

In general, there are two types of capacity-building efforts and related institutional targets under the LDF programmes. Both correspond to the two main components of such programmes. First, capacity must be built to manage the financial facility (the LDF itself) set up under LDF programmes. This activity requires capacity in four basic areas: (a) resource allocation; (b) appraisal and approval of projects; (c) disbursement of funds; and (d) programme monitoring and evaluation. Primary responsibility for these four functions may be assumed by a single body (the LDF model, unit), as in the commune/province LDF model, or it may be distributed among different local administrative and governmental units, as in the district LDF model.

Second, capacity must be build to assist the local governmental units and communities that receive the MYPC allocations from the LDF in preparing local plans and managing the implementation of projects. This requires setting up a local planning system extension team, composed of planners and community development and other technical specialists from multiple technical agencies and NGOs, to provide training and technical assistance to MYPC recipient in four other basic areas: (a) participatory planning process and techniques; (b) management of project preparation and feasibility studies; (c) institutional arrangements for construction, operation and management; and (d) management of project implementation and procurement of inputs, Figure 4 shows the targets and areas of capacity-building as they relate to the two basic components of a typical LDF programme.

A key issue in the design of LDF programmes is the institutional location of the capabilities to be built. Answers are required concerning where to build the capacity to manage the LDF facility and which local institutions should be responsible for extending participatory planning and project management skills to the MYPC recipients. A related question is whether the functions related to the LDF management and the extension of the planning, system can be assigned to existing local government and administration units or whether the setting-up and staffing of entirely new administrative and technical bodies are required.

In this respect, the picture emerging from the LDF design experience is quite varied. Where and LDF management unit has been set up at the provincial level to allocate resources as well as to appraise and approve projects and disburse funds (the LDF commune/province model), such a unit has been located either in the provincial Governor's office (e.g., Cambodia) or in the Provincial Planning Department (e.g., Viet Nam)

Where the LDF district model applies, the resource allocation responsibilities are usually assumed by a higher level of government, such as the provincial/regional Governor's offices (e.g., United Republic of Tanzania). Responsibilities for investment appraisal and approval and final funds disbursement are assumed by district planning councils, which are statutory organs of the elected district councils (e.g., United Republic of Tanzania) or mixed bodies, including members of the district administration and representatives of the local civil society (e.g., Malawi).

The location of LDF management functions in the offices of the heads of the territorial administration (governors, commissioners, provincial chairmen, etc.) or in de-concentrated planning departments may reflect different views of local autonomy and commitment to decentralized planning and financing of local development, or simply be the result of immediate political considerations. In any event, only after further experience with LDF programme implementation will it be possible to make a comparative assessment of the advantages and disadvantages of these alternative arrangements.

As for the institutional location of the capacity to extend and support an improved local planning system, several alternatives emerge from the LDF programmes designed to date. In some cases, the vehicle for building the capacity of lower-level local authorities and communities is a regional, provincial or district department of planning (e.g., Mozambique, Viet Nam). This arrangements recognizes the mandate and central role of the planning departments in the coordination of all public-sector planning activities. In such cases, the external technical assistance provided within the framework of the LDF programmes aims at strengthening the planning department through training-of-trainers activities often based on the non-governmental sector's experience with participatory planning and project preparation and appraisal methods.

The emphasis in other cases is on the coordinating role of the heads of the decentralized state administration and on the need for the involvement of multiple line agencies and other institutional actors in the capacity building of lower-level local authorities to access and manage LDF resources (e.g., Cambodia). Depending on the specific institutional landscape of a country, the de-concentrated departments or planning, social affairs, women's affairs, community development, rural development, etc., may share responsibility for the extension of participatory planning techniques and procedures to local authorities and communities. Most importantly, local NGOs may often play a critical role in the same process. Technical departments (i.e., education, health, water, irrigation, public works) must also help build the capacity of local authorities and communities to manage project preparation and implementation. It is essential that they build their own capacity to be accountable to newly empowered local authorities and communities to which they provide technical services. In these cases, it is critical to secure strong coordination of the capacity-building effort by having (often creating) a lead agency responsible for it. In Cambodia, for example, a local planning unit (LPU) will be established within the Secretariat of the Provincial Rural Development Committee (PRDC), attached to the provincial Governor's Office. The LPU will assemble and manage a multi-agency extension team, and will include agent assigned by several provincial departments and local NGOs to extend a local planning system to the communes.

A third model for creating an organized structure for capacity-building is one that might evolve within the framework of the LDF in Palestine once the new Palestine political and administrative institutions are fully established. Such a model would, in fact, be a self-help arrangement since the capacity to help local authorities to adopt participatory planning and improve project management procedures would be built within the National Association of the Palestinian Local Authorities (NAPLA), an organization to be created by the local authorities themselves. A technical unit of NAPLA, with the support of the Ministries of Planning and Local Government, could then be an effective, efficient channel for the required technical assistance and training to access decentralized financing for local development.

Regardless of which institution assumes the primary responsibility for local-capacity building, the implementation of LDF programmes will require considerable external technical assistance. This raises the question of how such technical assistance should be provided. Many analysts have recently questioned the efficiency and effectiveness of traditional modes of delivery of technical assistance (short-term inputs of free-standing consultants and resident experts) and suggested that the long-term twinning of germane institutions might be a more appropriate alternative. Given the beneficiaries of the LDF capacity-building effort (local authorities) and the nature of the skills to be transferred (local planning and project management) as well as the emerging trend of decentralized cooperation, it would seem particularly relevant and appropriate to the LDF programmes to involve the local authorities of the North and their national and international associations in the delivery of long-term technical assistance under new types of twinning arrangements. LDF programmes could be the catalysts of such arrangements as exemplified by UNCDF experiences (e.g., by involving the Dutch Association of Municipalities in support of the Palestine, Viet Nam and Zambia LDF) s.

Many obstacles remain to be overcome, however, before such alternative modes of technical assistance delivery can be generalized. In the context of the LDF experiments, the greatest one is perhaps the overwhelmingly urban orientation of local government association both in the North and in the South, dominated as they are by large cities and their related problems. These urban scenarios are quite different from the specific needs of rural jurisdictions in developing countries.

Allocation of LDF resources

As indicated above, the LDF programmes are meant to pilot a system of IGFT's to finance local rural development. To be genuinely supportive of a decentralization process, the basic characteristics of such a system have been summarized as (a) transparency of allocation, (b) predictability of the amount available to local institution and (c) local autonomy of decision-making on resource utilization (A. Parker, 1995). All three characteristics are supported by the multi-year planning ceiling (MYPC) concept, which is central to the LDF programme design.

The allocation of MYPC to participating local government is based on a transparent formula in contrast with the widespread practice of ad hoc grants driven by politics. Also, unlike the typical unpredictability of most central-to-local transfer mechanisms prevailing in developing countries, the MYPC provides local institutions with an up-front indication of how much money will be available to finance local projects in the next multi-year planning cycle. This enables local strategic planning to take place and provides a financial ceiling that makes such planning a meaningful exercise and an opportunity for local communities to debate and take informed, autonomous decisions on the use of limited resources.

The potential of the MYPC to promote greater community participation in local planning and decision-making is a key assumption in the design of LDF projects. It also is a discriminating feature of such programmes with respect to the micro-project or social investment fund approach to the financing local project. UNCDF's own experience points in this direction. For example, a review of a UNCDF-supported village infrastructure programme in Palestine, which originally did not support the allocation of MYPCs to participating village councils, noted that a great obstacle to genuine local participation was the popular feeling that external resources available to the community were unknown and that the key to their access remained essentially the ability of local traditional leaders to lobby on behalf of their community. This reinforced the paternalistic attitude of local leaders and depressed the active debate and participatory decision-making that the project was trying to promote. The review concluded that "…the role of local leaders in obtaining the allocation of external funds to specific projects should be de-emphasized, through a mechanism of rather 'automatic' or 'formula-based' allocations. Such a mechanism would shift the focus from the interface between local leaders and external donors to that between local leader and their communities. The issue will no longer (or not only) be how to get the greatest possible number of local projects financed by external donors…, but rather how to make the best use, in the interest of the entire community, of pre-determined external resources" (L. Romeo, 1994).

What kind of formula should be developed? The formula used for allocating LDF resources to participating local governments is meant to allow a geographic targeting of such resources, i.e., to favour poorer communities, which are often the ones located in more remote areas and less endowed with public infrastructure and services (Grosh and Baker, 1993). Such a formula must be simple enough to be constructed based on available, or readily obtainable. Disaggregated data and to be understood and accepted by local political authorities as a relatively uncontroversial basis for resources allocation. Yet it must also be sophisticated enough to capture differences between localities levels of infrastructure and services that are relevant to poverty alleviation. For example, in the Cambodia and Viet Nam LDF programmes, the formula for the allocation of LDF resources from the province to the communes is based on three key weighted variables: population, income and a composite infrastructure development index (IDI). While data on the first two variables, disaggregated at the commune level, may be obtained from census and provincial statistics or other published sources, the construction of the IDI requires a rapid survey at the commune level. This survey should be conducted full community participation.

To support the construction of the formula and the monitoring and evaluation of the LDF programmes, a simple computerized local planning information system (LPIS) must then be set up and maintained at the level where the LDF management unit is established and resources allocation decisions are made. In Cambodia and Viet Nam, for example, the LDF management units were established at the provincial level. Manual data collection and maintenance take place at the commune and district levels. A critical issue in the setting-up of this system is the balance between the specificity of the LDF-related database and its possible integration with pre-existing and larger provincial or regional planning information systems. Another technical issue that deserves further study is whether, or at which stage, the introduction of simple geographic information system (GIS) techniques is warranted to allow for more powerful manipulations of the LDF database for both descriptive and analytical purposes in support of the LDF resources allocation and local planning processes.

Local planning process

As already indicated, the availability of LDF resources as pilot IGFT's in the form of multi-year planning ceiling is meant to create an opportunity for a meaningful, local strategic planning exercise. Conversely, such local planning is also seen as a condition for access by local institutions to the LDF resources.

The local planning methodology introduced in conjunction with LDF resources must therefore satisfy two basic criteria. It must be clearly structured and consistent with the overall national/provincial planning process in order to be replicable and to lend itself to institutionalization as a procedure for planning public investments at the local level. It must also introduce participatory method of project identification, selection, preparation and implementation. This will require both institutional and technical adjustments in existing planning practices.

On the institutional side, the LDF programmes assign the responsibility for overall coordination of the local planning process to a local planning council conceived as an intermediary body with joint representation of three types of local institutions: the local government, the local administration and the local civil society. The actual composition and modalities for the formation of such intermediary bodies vary substantially from one country to another, depending on (a) whether or not elected local authorities with statutory planning organs are in place, (b) the local presence of de-concentrated administration officers, and (c) the degree of articulation and organization of the local civil society. In some countries, the LDF programme could rely on existing intermediary bodies with varying degrees of representation of the three above-mentioned institutional components to assume the local planning council functions (e.g., the village and commune development committees of Cambodia, the commune development boards of Viet Nam, the district planning councils in Malawi and the United Republic of Tanzania, etc.). In other situations, the LDF programme itself is promoting the formation of such councils (e.g., the local and micro-regional planning councils in Palestine or the district planning councils in Mozambique).

On the technical side, the LDF programmes promote the introduction and gradual fine-tuning of simple local planning procedures, including several standard components: (a) a local planning information system and MYPC allocation; (b) participatory problem analysis and project formulation; (d) appraisal and approval of projects; (e) project implementation; and (f) monitoring and evaluation.

For each component, appropriate simple techniques and documentation formats must be developed and extended, as appropriate, to the LDF management unit and to participating local governments, community groups, NGOs and supporting de-concentrated technical agencies. Figure 5 (from the design of the pilot phase of the Cambodia LDF) illustrates the typical steps of a local planning process in and LDF programme of the province/commune type.

Figure 5 illustrates the distribution of activities and responsibilities across the four levels at which the main institutional actors involved operate:

1. The provincial level (provincial rural development committee) where the LDF management unit is located, the LPI is set up and maintained, individual projects are appraised and approved, funds are disbursed and LDF operations are monitored and evaluated;
2. The commune level (commune development committees) where MYPCs are allocated, village proposals are collated and assessed, local plans are prepared, responsibility is assumed for formulation and implementation of commune-level projects and monitoring of LDF-financed projects is carried out;
3. The village level (village development committees) where basic data are collected, participatory problem analysis and project identification are carried out using adapted rapid rural appraisal (RRA) techniques, and village-level projects are formulated and implemented;
   
4. The community level, where CBOs and NGOs participate in the problem and project identification exercises and assumes responsibility for specific project formulation and implementation.

Another example of a local (district-level) planning process, from the design of the LDF in Mozambique, shows the effort to integrate such exercises within the process of provincial/national planning of public-sector investments (the preparation of a three -year, rolling "Plano Trienal de Investimento Público" (PTIP). It also shows the parallel effort to introduce participatory planning techniques into a changing political/administrative context, characterized by the re-emergence of traditional socio-spatial organizations and leadership structures.

The LDF programme in the Nampula province of Mozambique promotes the creation, in each of three target districts, of a districts planning council (PDC) with joint representation of local authorities, district-level personnel of line agencies and the local civil society (traditional leaders, representatives of the local business community, NGOs, CBOs and religious organizations). The DPC will assist the District Administrator throughout the local planning process and will review and recommend projects for inclusion in the annual district plan. The district-planning officer (DPO) will assume the functions of DPC executive secretary. Annual district plans will be submitted to the Provincial Planning Department for approval. The Provincial Planning Department will develop an adapted district-planning manual, which will stress consistency with the national/provincial PTIP preparation process and will introduce RRA techniques for local planning exercises. The manual will be extended to DPOs and to members of sub district teams (SDTs).

The SDTs are composed of active members of the local communities and sub district staff of line agencies (e.g., health agents, teachers, agricultural extension agents). They will facilitate the RRA exercises with the coordination and logistic support of the DPOs.

Given the extension of the district territory, the DPC will decide where the SDT should be based according to (a) the presence of sub district staff of the line agencies, (b) population density, and (c) sub district areas needing special attention. The area covered by the SDT is flexible and the team does not have to cover the entire area every year but could select a limited number of communities where specific problems exist or which are particularly motivated:

While further studies are necessary to delineate the social and spatial contours of communities that could be adopted as the unit for the implementation of RRA exercises, these may coincide with headmen areas, e.i., areas corresponding to the traditional authority of "chefes" or "cabos" within the sub districts or "regulados". Individual RRA exercises should be completed in three to five days of fieldwork and result in the preparation of participatory planning reports (PPRs) for the DPO and DPC. The PPRs will include, among other things, a number of prioritized community proposals for investments, with basic qualitative and quantitative information (identification stage). All PPRs should be completed before the month of July to allow for analysis of capital project proposals and their inclusion in the district PTIP.

Other techniques (e.g., Log Frame) will be introduced for project selection and preparation, DPOs, and district-level line agency staff will be trained in their application. The annual district planning process, including selection and preliminary costing for all project proposals, should be completed by the month of September to allow for the provincial review process in October.

Investment appraisal and approval

A critical step in the LDF-related planning process is the appraisal of individual project proposals for small-or very small-scale investments. This requires that in designing LDF programmes, attention be given to the development of (a) appropriate appraisal boards and procedures and (b) simplified project formulation and appraisal tools.

In most LDF programmes designed to date, only the basic principles regarding the scope of the appraisal process and related institutional responsibilities have been clearly established. For example, to safeguard the principle of local autonomy where community-generated projects must be appraised/approved at the provincial level, the LDF programmes require that the appraisal process be limited to verification that the proposal fits within the general criteria of eligibility for LDF funding and to the review of the project's technical design by the concerned provincial technical agencies.

The details definition of the procedures and tools to be adopted in the appraisal process have usually been left to the work of the LDF management unit in the early stages of implementation. It is therefore too early for a comprehensive review of the simplified appraisal tools for small investments that are being developed. In fact, in most LDF programmes, the range of investments eligible for financing is largely left open, which makes it difficult to develop in advance a full rage of project preparation templates and appraisal forms. In contrast, when the objects of financing are limited, at least in the LDF start-up phase, to a number of pre-identified specific projects, as in the case of the Cambodia LDF, project preparation templates and appraisal forms are developed prior to the start of the LDF implementation.

Procurement responsibilities

As already mentioned, the owner of an LDF-financing project is the local institution that, through the participatory planning process, has been recognized as the most appropriate one to manage that specific project. It could be a local authority, a CBO or a local NGO.

Whatever the case, such a local institution will have to assume owner responsibilities, including the steering of the project through the formulation and approval phase, and the procurement of all goods, services or works that are required for project design and implementation.

A key point is that under the LDF programmes, the owner commands the financial resources earmarked for the project and is the only party that can enter into financial obligations (even if, in some cases, it uses a different cashier to disburse and account for funds).

A major implication of channeling resources for rural development through local governments instead of through sect oral agencies is the transformation of former beneficiaries into a new category of owners: local institutions that now have the resources to demand services and that are no longer at the more or less passive end of the service delivery chain. This also corresponds to an opportunity for re-orientation - in the sense of an increased service mentality - of the central and de-concentrated line agencies, to the extent that they may be induced to fund their own operations through the provision of services under contracts with the newly empowered local institutions (J. Tendler, 1993).

It is worth noting in this connection that re-directing some of the resources for development spending from line agencies to local owners was one of the recommendation of an in-depth review of the World Bank-supported IRD experience in Brazil. The review stated that: "Executing agencies should be subjected to demand 'shocks' by channeling a part of their funds through the 'users' of their services - not just beneficiary groups, but other public agencies, development banks, municipal governments… The demanders would 'contract' the supplier agencies through users would bring to the project environment the traits of the successful cases: narrowly specified tasks, measurable and conspicuous standards for performance and clear penalties for not performing" (J. Tendler, 1993).

There are several modalities that owners may adopt for procurement of project inputs under the LDF programmes. They range from self-help approaches with some local purchases of materials and/or equipment to relatively elaborate contracting of services and works, depending on the size and mature of the projects. To complicate matters, the amount and nature of the community contribution (cc) (cash or labour and materials) or the presence of a food-for work component in the structure of specific project financing also influences the overall project procurement arrangements. Within the framework of LDF programmes, an attempt is made to identify the procurement approaches applicable to the range of the most common projects and situations in the local area and to develop guidelines and forms that ensure the greatest possible transparency of the process and accountability of all parties involved.

Whenever appropriate to the size and nature of the project, local owners, and particularly local governments, are encouraged by LDF programmes to prefer the contracting-out of services and works over force-account modalities. This is consistent with the overall LDF programme effort to build local capacity for project management and monitoring rather than for the actual production of infrastructure and services. Under this approach, for all but the smallest projects, the owners contract out technical services, including feasibility studies, engineering and constructions supervision, to local private consultants or de-concentrated public, technical agencies. Delivery and installation of equipment and construction of civil works are contracted out to local or national enterprises (private or public) through competitive bidding procedures. These contractual relations are illustrated in figure 6.

Alternatively, for relatively major projects and when local capacity is particularly low (no technical staff yet working for the local authority), the local owners may decide to delegate the project management functions to a local technical agency or a specialized NGO. Under these arrangements, the owners enter into a project management agreement with a local procurement agent, who in turn coordinates and administers the contracts for delivery of the project inputs. This arrangement is illustrated in figure 7.

In conclusion, the restructuring of procurement responsibilities introduced by the LDF programmes has great potential to increase the autonomy and capacity of local institutions and to re-orient and increase the efficiency of the local bureaucracy. It should be noted, however, that the mentality and practices that would be subject to change are deeply ingrained in the public sector of most developing countries.

There are numerous bureaucracy obstacles to the adoption of genuine contractual arrangements for the provision of technical services by de-concentrated line agencies to local institutions. The answer to the question of whether or not the LDF programmes will provide the strong organizational incentives and the related capacity development that are required for such adoption hinges on many local circumstances thus the question remain entirely open at this stage.

Disbursement arrangements and financial controls

Arrangements to disburse LDF resources vary from one country to another to reflect the specific distribution of LDF management functions among different levels of government and other local institutions.

They also indicate the experimental nature of the LDF programmes and the greater flexibility that national governments are willing to allow for their pilot implementation. This includes the direct channeling of UNDF grants into regional/provincial accounts, the adoption of a double-signature system (UNCDF and government representatives) to disburse funds from such accounts, and other programme-specific procedures for the accounting of funds and periodic auditing. Such arrangements are possible, in part, because of the grant nature of UNCDF assistance and may be necessary and may e necessary to carry out an experiment. However, they are no substitute for fully institutionalize disbursement and financial control mechanisms, which must be developed to transfer LDF resources from the central to the regional/provincial level. Much work remains to be done on the development of such mechanisms in LDF programmes design.

Either a direct disbursement or a sub-imp rest account method may be used for the transfer of funds that, following the approval of specific projects, must be effected from the decentralized (regional/provincial) LDF management unit to the local institutions, which are the actual owners of such projects. Under the direct disbursement method, the project owner, who is the only party with authority to enter into financial commitments, refers all invoices from suppliers and contractors to the LDF management unit for direct payment. The unit therefore acts as cashier on behalf of the project owner. Under the sub-imprest account method, the project owner opens a sub-imprest account from which the owner effects all project -related payments. The account is periodically replenished by the LDF management unit on the basis of requests submitted by the owner with the required accompanying document.

In practice, the adoption of either of the two modalities, and sometimes their combination, depends on a number of local factors, among which the most important are the nature and size of the project, the applicable project procurement modalities, the availability of convenient banking facilities in the project area and the capacity of the owner to maintain simple financial accounts.

CONCLUSIONS

As we enter the second half of the 1990s and developing countries and donors alike continue to search for a way to tackle the challenge of rural poverty, there seems to be a renewed and widespread interest in decentralization as a key to rural development and poverty alleviation. The reasons for this are compelling. Decentralization has the potential to make the supply of public infrastructure and services and public action to promote local economic development closer and more responsive to local planning and decision-making and promote dialogue and cooperation among a wide range of government and non-governmental local institutions. It may also result in innovative, efficient re-distribution of provision responsibilities among central and local government and public and private sectors. Finally, decentralization may be the key to greater local resource mobilization in times of central fiscal crisis and may promote a stronger sense of community ownership of public facilities and secure the sustainability of local investments.

However, the way towards the adoption of rural development policies based on the devolution of responsibilities and resources to local institutions is fraught with difficulties. First, decentralization, which has deep (political, institutional, fiscal) policy to design and implement. The actual ability and commitment of donor agencies to enter into a coordinated policy dialogue with recipient government to provide advice and influence the implementation of decentralization policies have yet to demonstrated.

Moreover, the operational implications of the decentralization approach to rural development are still being assessed; such an approach remains very much "an ideology in search of a technology". There continues to be a great need for basic research on the fundamental assumptions of this approach and on the practical conditions of their validity. Very few programmes exist that have been designed on the basis of those assumptions.

The UNCDF-supported local development funds belong to the emerging family of such programmes. Their pilot implementation is expected to contribute practical lessons towards the design of national systems for decentralized planning and financing of rural development and of related efforts to build the capacity of local institutions to plan and manage local rural development.