Improving Kosovan Institutions Through a Performance-Based Grant Scheme
Kosovo faces challenges in good governance and quality service provision. One of the problems is the inadequate performance of the administration, which is mainly caused by political economy issues. Yet projects that provide capacity development support rarely target political economy aspects. The Decentralisation and Municipal Support (DEMOS) project seeks to change the focus.
This blog post documents how DEMOS addresses challenges faced by the Kosovan institutions through a Performance-Based Grant Scheme (PBGS) which is complemented with demand-based technical assistance interventions. The PBGS has been operational since 2014. The long-term vision is that other funding from donors and line ministries joins the PBGS as part of the intergovernmental transfer system, by which the general grant of municipalities is topped-up with a performance grant.
Here is how a Performance-Based Grant Scheme works
The logic behind PBGS is to affect the political economy considerations of the municipal executive by incentivising municipal performance in the fields of local democratic governance and good municipal management. The focus is not on the scheme, but on how the scheme enables better performance in public service plans. This clearly shows that appropriate incentives and capacities are central to efficient and more inclusive public services.
Good analysis, using different tools and sources to assess the performance of municipalities, was the starting point. Among the municipalities that qualify, the better-performing ones would get a higher grant, whereas poorer performing ones would get a lower grant. All parties agreed with the approach because the PBGS was designed to be a win-win solution – a municipality could have a higher budget by increasing own revenues (incentivised improved performance) and increasing capital investments budget with a grant based on its performance.
Capital budgets were supposed to be invested in tangible services for citizens. Due to better services, satisfied citizens would be willing to pay more taxes. This gives higher revenues for the municipality. From the political economy perspective, it is a simple math: with a little extra effort, the municipality gets more funds leading to more investments and better services, which are assumed to make citizens happier and vote for another mandate of current local government leadership.
The PBGS relies on on-system data sources: administrative data of local governments published in an annual Performance Management System (PMS) report by the Ministry of Local Government Administration; the financial data of the Ministry of Finance as well as the National Audit Office. To improve the reliability of the administrative data, DEMOS supported the revision of the PMS by restructuring the whole chain of quality control processes. Local governments do not always and fully follow the instruction for implementation of the revised PMS. Reliability of data, therefore, was an issue even though data quality has not risked the credibility of PBGS. The external audit function attached to the PMS is expected to provide necessary reassurance.
What has the scheme achieved?
So far, results show that PBGS has stimulated a sense of competition between municipalities and triggered their more interest and action. Two of the seventeen partner municipalities of the project never qualified for a grant. Fifteen qualifying municipalities have improved their average performance from 31% in 2014 to 40% in 2017. Three of municipalities have doubled or more than doubled their performance during this period and others made significant improvements. However, a couple municipalities have slightly fallen back.
The technical assistance has enabled municipalities to better plan and deliver services in the areas of public spaces, mobility and waste management. The public service plans were developed in an innovative way for partner municipalities and were sometimes appreciated more than the grants. The plans were budgeted and started being implemented in a large number of partners: services are procured according to those plans, structures are established for the provision of services, regulations are enacted, etc.
Municipalities have used the performance-based grants to invest in over 200 different locations targeting specific needs of their communities. Infrastructure nearby schools provides higher safety for children; there are more and better regulated green areas in urban centres; public spaces are adjusted for people with disabilities and better maintained, municipalities planned and built more walking paths and cycling lanes etc. All these visible changes have a potential to motivate public officials to invest further efforts in such processes.
Not all positive changes are due to Performance-Based Grant Scheme
Is it credible to attribute the positive changes to the PBGS? Unfortunately, it is not. Not yet! Mayors, especially the better-performing ones, saw the PBGS as an important promotional tool during the local elections last October. Yet the elections revealed interesting results. Some good performing municipalities have not had their leadership re-elected, while others were re-elected despite their poor results in the PBGS! This proves that performance grants shall be treated cautiously, because it is a single instrument with lots of assumptions and risks, operating in a highly complex and sensitive socio-political environment.
The initiative by DEMOS targeted some municipalities. An important question that we should ask is: how can the incentive, created through the PBGS, stimulate the political interests of authorities and be a significant driver of change of behaviour? While the PBGS seems to work, there is insufficient evidence to conclude that it has triggered a clear influence!
We have learnt so far that other financial and political incentives are much stronger than the PBGS incentive. In other words, the leverage of the performance grant is not big enough. While the PBGS is about 1 million Swiss Franc a year, a ministry’s study shows that line ministries invest every year over 50 million Euros in municipalities mostly according to party affiliation.
Based on the lessons gained, in 2017, DEMOS reached an agreement with the Ministry of Local Government Administration to co-finance the PBGS, double the annual budget for the PBGS and extend the coverage to all 38 municipalities in Kosovo. This is intended to ensure sustainability – that is institutional ownership of the scheme by local actors. In concrete terms, this means the responsibilities for PBGS management and administration are gradually being transferred from the DEMOS team to the Ministry of Local Government Administration. This is a good first step; however, the leverage of the performance grant is still low. The project will have to rely more on the public relations potential of the PBGS, which seems to matter to local authorities as much as the performance grants.
The PBGS got high attention within Kosovo but also beyond. Some donors and line ministries have seen the potential of the PBGS and expressed interest to join, but bureaucratic processes make this very difficult to materialise. The project will try to make this a reality in three to four years while slowly handing over more responsibilities to the government of Kosovo for managing the PBGS.