Strengthening Urban Management and Service Delivery through Performance-Based Fiscal Transfers

Overview

When planned and managed well, urbanization contributes to economic growth and poverty alleviation, as well as to climate change mitigation and adaptation. The world is rapidly urbanizing and in the near future most people will live in urban areas such as cities and towns. Some 56 percent of the world’s population – or about 4.4 billion inhabitants – live in urban areas today. By 2050, this number will double, with nearly 7 out of 10 people in the world calling cities and towns their home. The ability of cities to deliver infrastructure and services effectively, and to manage built environments and local economies productively, depends on their institutional capabilities, the quality of local governance, and the financial and other resources at their disposal.

Across the developing world, substantial deficits in these areas hamper well-managed, inclusive, and resilient urban development. Thus, a core priority for cities in developing countries is to strengthen the financing and institutional systems which underpin effective city planning and management as well as urban infrastructure investment and service delivery. The World Bank, its client countries, and other development partners, have long recognized this critical challenge and placed it at the center of their urban development activities.

World Bank Strategy

One key instrument the World Bank has utilized to meet this challenge is performance-based fiscal transfers to cities and municipalities, a type of financing mechanism designed to improve their institutional and service delivery performance through a set of financial incentives combined with capacity-building support activities. Generally known as Urban Performance Grants (UPGs), these are fiscal transfers from a higher level of government (for example, the central government or -- in the case of federal countries -- state and provincial governments) to cities and other local governments conditioned on achieving performance in predetermined areas. Cities use these additional funds to invest in infrastructure and service delivery requirements that fall within their mandate.

The World Bank has established an extensive portfolio of UPG programs around the world over the past two decades.  The Bank’s Global Practice for Urban, Disaster Risk Management, Resilience, and Land has overseen over $ 8 billion in World Bank-approved financing for such programs in this period, covering a few thousand local governments across sub-Saharan Africa, South and East Asia, and the Middle East and North Africa regions. Eighteen such programs are currently under implementation, with several more in various stages of preparation. Other Global Practices of the World Bank, including the Governance Global Practice, and the Social Sustainability and Inclusion (SSI) Global Practice, also support similar performance-based grant programs, further highlighting the suitability of this modality to support development objectives at the local level. UPG programs are also supported by other development partner organizations through financial and analytical aid, such as the United Nations Capital Development Fund (UNCDF), which has been financing such programs since the 1990s, as well as the European Union, UNDP, OECD, and several sector-specific programs within high-income countries targeted to their local governments.

Urban Performance Grants programs generally have the following key design features (also see Figure 1 for a typical structure for UPG programs):

• They use performance-based grant financing to provide incentives to cities and local governments to improve their institutional performance and service delivery outcomes in their jurisdictions.
• They rely on a robust, credible, and transparent common performance assessment system to evaluate local government performance, with the results of these assessments determining fiscal transfer (grant) allocations.
• Capacity building support is provided by the higher tier of government to the participating cities and local governments to achieve the required performance criteria and improve their systems.

These programs generally cover multiple cities and municipalities. In some cases, peri-urban and rural local governments can also be included in the program, depending on program objectives and the local political, administrative, and institutional context.

Figure 1: Stylized Typical Structure of Urban Performance Grant Programs

UPG programs represent a sizeable share of the World Bank’s urban development financing portfolio. Between FY 2013-2020, these programs accounted for 41 percent of the urban sector portfolio in financing volume, amounting to over $5 billion in total. The average World Bank financing for a UPG program is $275 million, over twice as high as the average financing for other urban development projects.

Selected Country Examples

Ethiopia: The World Bank has supported the institutional strengthening of urban local governments in Ethiopia since the early 2000s, through a series of UPG projects and programs. Urban local governments were set up in the country after 2000 and have the primary mandate to provide municipal services and in enhancing local economic development. However, they faced substantial deficits in institutional and technical capacity as well as financial resources to adequately exercise their mandate and deliver infrastructure and services and jobs.

The World Bank has supported the government of Ethiopia through a series of UPG programs targeting urban local governments which have been gradually scaled-up over time. The first such program, started in 2008, focused on 18 local governments, while the second program was scaled up to 44 in 2014. This has now been further increased to 117 urban local governments in the third iteration since 2018, supporting the government’s intention to roll out performance-based fiscal transfers as a country-wide system to all urban local governments having more than 20,000 people by 2025.

These UPG programs have had a substantial share of co-financing from the government. About one-third of the total program financing has been co-financed through the central government and contributions by the participating local governments. The World Bank continues to support this agenda of strengthening urban local governments in the country.

Kenya: Constitutional reforms in the country in the early 2010s introduced a new structure of devolved local governments, with county governments being set up to replace local authorities. These newly-created county governments were assigned frontline service delivery functions, including urban services and local infrastructure. However, they lacked basic systems and capacity to perform these assigned functions. To facilitate their capacity building in a structurer manner, the government of Kenya developed a national capacity building framework which identified medium-term interventions.

The World Bank supported the implementation of these governments initiatives by financing the Kenya Devolution Support Program, which provided performance-based fiscal transfers to county institutions to strengthen their capacity and improve the delivery of devolved services at the local level. It also supported central government institutions in strengthening their institutional systems and delivering capacity building support to the local governments. About one-quarter of the total program financing was provided through the central government.

The UPGs under this program successfully incentivized the participating local governments to achieve improvements in institutional performance and service delivery. To sustain and scale up the impacts of this program, a subsequent UPG program was developed and is currently under implementation, focusing on establishing and strengthening urban institutions to deliver improved infrastructure and services in selected counties.

Results

A recent review of this global portfolio of UPG programs has found that these programs have generally proven to be successful in delivering solid results in line with their development objectives of improving the institutional performance of cities and local governments and the delivery of urban services. This review looked at results and lessons from nine Bank-financed UPG programs as case studies, across seven countries

Improvement in institutional performance of local governments:

• UPG programs have helped enhance urban institutional and management systems, mainly by improving own-source revenue performance, public financial management, transparency, accountability and citizen engagement, operation and maintenance of capital infrastructure investments, and human resource (HR) management and local staffing. Key enablers of such improvements have been a combination of strong financial incentives and targeted capacity-building support, both before and during the implementation.  For example:
  • Own-source revenues have significantly increased in seven out of the nine UPG programs reviewed. Six cases, where data were available, showed an absolute increase in OSR collection, ranging from a 48 percent increase in Ethiopia to 163 percent in Tanzania over the program period.

Figure 2: Percentage Increase in Own-Source Revenue over Program Period

• Improvement in urban service delivery and infrastructure benefiting citizens and local businesses:
  • UPG programs have financed the development and rehabilitation of substantial capital infrastructure investments for improved service delivery for citizens and local businesses.
  • Employment opportunities: UPG programs have financed a large volume of labor-intensive public works, providing a large number of temporary employment opportunities. Labor-intensive public works financed by UPGs provided employment opportunities to an estimated one million people for the duration of these programs.
  • Mobility and transportation: 7,000 km of roads, 160 km of bicycle or pedestrian ways and 28 transit facilities such as bus terminals were developed or rehabilitated, along with 8,700 streetlights.
  • Public and green spaces: 350 hectares of parks, 90 local markets, and 15 social facilities such as community centers were developed or rehabilitated.
  • Solid waste management and drainage: 1,270 km of storm water and wastewater drainage, 290 waste collection points, three dumpsites and 1,300 trashcans were developed or rehabilitated.
  • Education and health facilities: 2,000 classrooms and 28 community health planning and service compounds were developed or rehabilitated, with an additional emphasis on this especially after COVID-19.
  • Beneficiaries: The nine reviewed UPG programs collectively reached almost 150 million target beneficiaries across 4,300 local governments. Of these, over 80 percent benefited from two UPG programs that targeted all local governments in a state or a country: 67 million in West Bengal state, in India, and 54 million in Kenya. Other UPG programs targeted specific geographical areas and served fewer beneficiaries, ranging from 9.6 million in Ghana to 3 million in Tanzania.
  • Investments in urban infrastructure were well executed in these UPG programs, with a high efficiency of public spending. On average, the participating local governments completed 88 percent of planned infrastructure investments every year across all the programs reviewed. In Uganda the number of local governments that completed investment projects financed by the program gradually rose over the life of the program, from 42 at the start to 125 out of 150 at the end, showing an increase in the ability of local governments to spend funds in a timely manner and pointing to improvement in public investment management.
  • Value-for-Money assessments conducted for selected programs found UPG-funded capital infrastructure investments to be cost effective. In Uganda, these audits showed that 91 percent of infrastructure projects financed by the first UPG program were rated as high quality, pointing to improved efficiency and quality of capital expenditure, and that the central government had expanded the use of this audit tool outside the program. Ongoing investments under the second-generation program recorded higher Value-for-Money scores and were more cost efficient than similar non-UPG-funded infrastructure projects in the country. 
  • Transparency, accountability, and citizen engagement have also improved in all of the reviewed UPG programs. It was reported that UPGs have contributed to increased use of citizen charters and public disclosure of previously undisclosed information on the functioning of local governments, as well as development of innovative information-sharing tools. For example, in Kenya 80 percent of participating local governments publicly disclosed budget and audit documents online, which was not done prior to the program. They also established forums for engaging communities in participatory planning and budgeting and set up civic education units which were used by communities to demand better services and raise issues with skewed budget allocations. Similarly, in Ghana all participating local governments regularly conducted town hall meetings with citizens to discuss budget priorities and plans.

• Asset management of urban infrastructure and services has improved in almost all the reviewed programs. The relevant performance metrics showed a positive trend in all but one case out of nine, where this metric was not monitored during implementation.
• Public financial management has been enhanced substantially in all of the reviewed UPG programs. The metrics included timely financial reporting, clean financial audit statements, improved internal controls and cash flow management, among others. In Ethiopia, the number of local governments with clean financial audits increased from 25 to 56 out of the 117 participating in the program during the first two years of its implementation. All of the participating local governments conducted timely audits.

Analytical work

• These results are documented in a new portfolio review report published by the World Bank, which also identifies key lessons for the design and implementation of the next generation of UPG programs. The report shows that UPG operations generally perform as well as, or even better, than other types of urban development projects and have been responsible for generating significant positive impacts on the ground.
• UPG programs are a fairly recent phenomenon in relative terms, as the first program financed by the World Bank was in 2000. In addition to this report, another recent World Bank study has shown positive impacts of UPG program. An impact evaluation of a UPG project in Mozambique found that the provision of performance-based fiscal transfers to municipalities, combined with capacity building inputs provided by the central government under the program, were successful in providing adequate incentives to these municipalities leading to significant increase in local own-source revenue collection during the project period relative to non-targeted municipalities. (Erman et al 2021).
• One study done to evaluate the impact of a UPG program in Tanzania was less positive in its assessment, but this has since been criticized for a flawed evaluation methodology. (See the critique of this study here, and the original study here).
• Other studies done by development partners on the impact of UPG-style financing programs targeting local governments have shown similar positive results in achieving development objectives in a sustained manner, such as three reports done by UNCDF in 2010 , 2020 and 2021.

Contact: Sohaib Athar, Senior Urban Development Specialist, Global Practice for Urban, Disaster Risk Management, Resilience and Land

sathar@worldbank.org