Performance-based grant systems are playing an increasingly important role in supporting local  government efforts to meet the Millennium Development Goals. UNCDF has since the 1990s pioneered the grants’ use in 15 African and Asian least-developed countries, often focusing on targeted projects addressing health, education, agriculture and sanitation.

The grants provide a means for central authorities to reward solid local government business practices, without interfering with municipal authorities’ unique advantage to define area development priorities and MDG-oriented projects.

For example, a local government may be rewarded for increasing local revenue, transparent budgeting and solid procurement processes. The grants can also be expanded to include programmes that embrace gender equality or environmentally sensitive planning.

Local authorities remain responsible for decision-making in all performance-based grant system programmes. This is in keeping with one of the guiding principles of block grants, that the level of government closest to the people can best understand community needs and draft effective strategies.

The performance-based grants are conceived, in part, to ensure that as their financing increases, local governments’ capacity to deliver programmes and services are also enhanced. Once municipalities have shown tangible improvements in their institutional and organizational performance, they are eligible to access earmarked money from the central government. The terms of the grant are absolute, but incremental. Authorities do not receive money for “almost” achieving the goals, but can qualify for partial payments as benchmarks are met.

The grants are also suited to the complexities of development efforts, which are often interrelated and overlapping and can rarely be resolved through a central government agency. They can complement performance budgeting and credit-rating systems, but operate in different ways.

In 2010 UNCDF experts distilled their experience in designing and implementing performance-based block grant systems in the book Performance Based Grants Systems – Concept and International  Experience. The book was introduced the World Urban Forum in Rio de Janeiro in March 2010.