Incentivizing Municipal Performance for Better Service Delivery

“Is silver enough?”. This was the rhetorical title of an article written by the mayor of Peja after his municipality won a second-best place at the annual award ceremony of the Municipal Performance Grant in Kosovo in 2016. In the article the mayor shared his thoughts on how to further improve the performance of his organization. In the years after he put his thoughts into practice: Peja became the best performing municipality in Kosovo in 2020.

Several countries in South Eastern Europe operate Performance Based Grants Schemes. Why are such schemes developed? How are they designed? Do they improve good governance and service delivery? 

What is a PBGS?

Performance Based Grants Schemes (PBGSs) consist of financial incentives that are designed to steer municipalities to perform better. They measure, rank and award municipalities based on their performance.

Why use a PBGS?

A PBGS is used to develop local governance firstly, because it appeals to competition. Gerhard van ‘t Land, expert on performance-based grant schemes, explains that the ‘financial carrot’ is an important aspect of a PBGS, but the essential element is selection of the performance indicators: “The most important part comprises the performance indicators on the basis of which local governments compete for the best score (and hence a larger share of the grant). If chosen smartly, the indicators address key weaknesses in local government performance, and by competing for a better score, the local governments change behavior and start performing better on the selected indicators. It is competition for a better score and for the money that drives the process. The money incentivizes behavioral change”.

According to van ‘t Land, a PBGS is important for the central government, too, as a mechanism to steer development in local governments, notably in the area of good governance which is expected to contribute to better service delivery. “It allows central governments to steer and influence behavior in local governments, whilst respecting the autonomy of the latter,” he adds. Central governments only need to provide the funds and set the rules. Municipalities decide themselves if they want to participate in the competition.

For international development partners, a PBGS is interesting because it encourages initiative, ownership and sustainability of development.

How is a PBGS designed?

A PBGS often has minimum conditions and performance indicators.

The minimum conditions function as ‘gate-keepers’. They consist of criteria that are a sine qua non for participating in the competition. The Municipal Performance Grant (MPG) in Kosovo requires for instance a sufficiently good annual audit report and at least 75% expenditure of the previous year’s budget for capital investments. Saranda Cana, national program officer at the Swiss Cooperation Office in Kosovo explains why minimum conditions are important for donors: “We want to be sure that municipalities that receive our funds have sufficiently good financial management. In addition, we think that only municipalities that have spent most of their own funds deserve to get additional donor funds.”

The selection and definition of the performance indicators is the most important stage in designing a PBGS. Indicators need to comply with several criteria. “Out of 115 indicators in the Performance Management System of the Ministry of Local Government Administration (MLGA), we selected 30 indicators, clustered in three main themes, for the MPG. All performance indicators selected for the MPG can be fulfilled by all municipalities in Kosovo, big or small, rich or poor, provided they make an effort”, explains Majlinda Jupolli, deputy manager of DEMOS, a project of the Swiss Agency for Development and Cooperation (SDC) implemented by Helvetas, which operates the MPG together with MLGA in Kosovo.

Donor involvement

International donors that co-finance a PBGS often advocate for the inclusion of specific indicators. Nasrin Pourghazian, Head of Development Cooperation of the Embassy of Sweden in Kosovo explains how this played a role when designing the MPG: “An important Swedish value in our international cooperation is our feminist foreign policy which is partly about supporting political emancipation of women. When we decided to co-finance the MPG in Kosovo, we wanted to include indicators that measure political participation of women in Kosovo. We were very pleased that we easily found common ground on this topic with the other donors and the Kosovo Government.”

International involvement in designing and managing a PBGS also assures beneficiaries that the ranking is not politicized. The Regional Governance Adviser for SDC, Sascha Müller says, “SDC recognizes the importance of local ownership, both in terms of effectiveness and sustainability of such systems. The governmental partners recognize the leverage and legitimacy that comes with the involvement of an international actor and the ‘Swiss brand’ on the grant scheme. This effect can even be increased when joining forces with other donors.” 

From off-system to on-system

While the involvement of international development partners is appreciated, it comes with a risk that the PBGS ceases to exist once the donor funds phase out. This is an important question of sustainability. That is why a PBGS is often designed to become part of a government system. Once a PBGS is sufficiently anchored in a legal framework and funded with government budget, it can be active for several years. Rozafa Ukimeraj, secretary general of the MLGA in Kosovo elaborates: “In the Spring of 2020, we plan to enshrine the MPG in a sub-legal act that defines the minimum conditions, indicators, information sources, the rules for the assessment and those for using the awarded grants. A vast majority of the budget for capital investments of the MLGA goes into the donor basket that funds the MPG already. This makes the MLGA one of the few ministries in Kosovo that spends its capital investments fully transparent, rule based and fair. That is being noticed and increasingly other ministries are interested to join the MPG or to copy design features.”

Publishing rankings

Broad communication of the annual ranking is important to increase the impact of the competition. In Kosovo, the best performing municipalities receive a grant in a national award ceremony which is widely covered by national media. “I think publishing performance results and their ranking is of enormous political importance for mayors, since electoral concerns appear to be the most important driver for mayors to improve their performance results, especially if this performance is assessed by more external, independent and credible organizations. This is also confirmed in our research where we found ample evidence that successful municipalities actively inform their public about the results of the annual performance assessment,” explains Levent Koro who researched the effectiveness of the performance grant.

Do PBGSs lead to improvements in service delivery?

Since a few years, the various PBGSs in South Eastern Europe have started showing results.

In Kosovo, the Clean Environment Race and its successor the Performance Grant Clean Environment, implemented by GIZ and the Ministry of Environment and Spatial Planning, offered municipalities a financial incentive for improving their performance in waste management. According to Alexandra Linden, project manager, the improvement is particularly visible in the indicator that measures what part of the municipal territory is covered by a regular waste collection service. “The increase in the country average of the ‘percentage of municipal territory covered by a regular waste collection service’ indicator between 2016 to 2018 was 20%, reaching 75.6% in 2018,” she says.

In Serbia, within the SDC Property Tax Reform Program implemented by Helvetas, a performance grant for property tax collection contributed to a 12% increase in the collection rate after the first year already. Alexander Grunauer, project director, explains how these additional funds were spent on improving services: “Municipalities invested their additional own source revenues into social and infrastructure projects. Some of them decided to fund playgrounds, others invested in the procurement of an x-ray scanner, an ultrasound scanner or into the renovation of a school for children with disabilities.”

In Kosovo, the MPG showed an increase in indicators measuring the oversight role of the municipal assembly. Indicators where the municipal assembly is required to discuss reports, such as quarterly expenditure reports and the annual audit reports, are improving.

Levent Koro found that mayors are important change agents who perform a critical role in changing the behavior of their municipalities. “Mayors usually review the status of indicators, identify ways in which they can improve indicators that are lagging behind, mobilize their personnel to act, keep them accountable for improved performance and use the results of improved performance for their electorate,” he says.

Because the various PBGSs in South Eastern Europe are increasingly showing results, there is growing interest among governments and development partners to further develop such schemes. In addition, they fit well in the long-term development agenda of the region, the EU accession, where rule-based, transparent and fair disbursement of public funds is an important topic.

This article appeared in the March 2020 issue of Helvetas Mosaic.   

Norbert Pijls is project director of the Decentralization and Municipal Support project in Kosovo (DEMOS) which is financed by Switzerland, Sweden, Norway and the Kosovo government and implemented by Helvetas.