The architecture of aid

How decentralised finance can drive sustainable development

Most development finance is highly centralised. It flows internationally from donors to recipient governments and then through various intermediaries until a small fraction of the original sum reaches the intended beneficiaries – poor communities. But this model does not work for reducing urban poverty. Too little finance reaches the poor and, too often, the money fails to address these people’s priorities. We need an alternative approach, in which finance flows directly to funds that low-income communities can access and influence – shaping how priorities are set and money is spent. Experiences from across the global South prove that this can work and show how to make it happen.

The challenge: urban poverty remains entrenched

In urban and rural communities across the world, low income families lack the shelter and services they need to live with dignity, security, health and prosperity. One in seven of the world’s population live in informal settlements in urban areas, with inadequate or no provision for water, sanitation, drainage, electricity, health care and other needs. In cities and in villages, low-income communities are vulnerable to natural disasters and climate change, both of which can exacerbate the root causes of poverty and inequality.

The opportunity: a global push for sustainable development

The post-2015 Sustainable Development Goals (SDGs) are bringing a new commitment to eradicate poverty and strive for the achievement of sustainable development goals. Discussions around the post-2015 agenda provide an opportunity to reflect on the potential for development finance to promote inclusive development.

While the current system of aid delivery may be an effective way to fund some development interventions led by national ministries, it is usually unresponsive to the needs of the lowest-income and most marginalised communities. Consequently it is not conducive to achieving SDG ambitions of ‘leaving no-one behind’. The SDG process creates an opportunity to change the status quo.

Local governments and civil society actors have a central role to play in addressing development challenges as a critical issue for post-2015 planning. National governments can maximize their effectiveness by supporting local processes, including local government, and enabling organised civil society groups to participate through inclusive governance.

Why development aid struggles to serve the poor

Low-income groups have little say

Much development finance supports national programmes and projects, but these may not reflect the needs of municipalities, city governments and rural districts. These programmes and projects are often shaped by the objectives of donors, national governments and implementing agencies (including NGOs). This leaves little scope for the intended beneficiaries to ensure that the intervention reflects their needs. Rigid project timetables prevent local engagement and associated involvement in decision making.

Too little money reaches the poor

Before international development finance reaches projects on the ground, various rungs of government, consultants, NGOs and project contractors all take a share. This means the sum that reaches the intended beneficiaries is very small.

There is limited capacity for local development

All development is local. However, local governments – such as city municipalities or rural provinces – often lack resources and autonomy. Meanwhile, organised civil society groups that can play an effective role in local governance structures are not always present in the lowest-income and most marginalised communities.

An alternative approach to development finance

In the absence of adequate support from both development assistance and national government, organized groups of the urban poor have developed an alternative finance system based around local savings schemes. Savings schemes come together to pool funds at the district, city and national scale. This prevents their isolation and builds their collective capacity.

Some development assistance agencies and governments have recognised their potential. External finance has been blended with savings to enable more sizeable investments. Their demonstrated impacts – and their ability to apply political pressure – have seen support grow.

Community led funds have been established at the international scale – these are challenging development assistance practices, and demanded greater access to development finance.

IIED partners in many low- and middle-income countries have documented these histories – showing how decentralized finance can augment the established architecture of aid. This research shows that funds can:

  • Empower communities
  • Reduce the costs of interventions through better designs
  • Leverage additional finance from multiple sources including the state
  • Support partnerships between local governments and savings groups
  • Reform policies and regulation

Two examples of decentralised funds that benefit the urban poor

Two major decentralised funds established to address urban poverty have enabled organised urban poor groups to improve access to housing and basic services.

The Urban Poor Fund International

Shack/Slum Dwellers International (SDI) is an alliance of federations of slum/shack and urban poor groups in 33 countries in Africa, Asia and Latin America. In 2001, SDI created an international fund to help the federations scale-up their work, which includes mapping, enumerating and upgrading low-income neighbourhoods to improve access to housing and access to basic services.

The fund provided finance to each of the federations’ own national funds, and these blend community level savings with funding from nongovernmental organisations such as Homeless International and Misereor and which leverage additional finance from national governments.

In 2007 the fund was redesigned and launched as the Urban Poor Fund International (UPFI), with support from the Bill and Melinda Gates Foundation. In the three years to 2010 UPFI had:

  • Supported a network of 1.1 million savers and 16,000 savings groups
  • Funded the building of over 4,000 homes,
  • Secured tenure for 30,000 families,
  • Supported local improvements by savings groups in 464 cities
  • Secured over 100 pledges of support in the form of memorandums of understanding with city authorities to work with federations of the urban poor
  • Achieved pro-poor policy and legislative change around building regulations or land tenure in India, Malawi, Kenya, Namibia, the Philippines, South Africa, Tanzania, Zimbabwe, India, Zambia, and Zimbabwe

Transforming urban poor communities with a decentralised fund in Uganda

In Jinja, Uganda, the local government and urban poor groups co-manage a community upgrading fund, which enables slum dwellers and their organisations to access grants to finance initiatives that meet community needs.

The fund was established as part of the World Bank’s Transforming Settlements of the Urban Poor in Uganda programme, and capitalised with approximately US$700,000 from Cities Alliance. It was created to demonstrate the efficiency of community-conceived and implemented slum upgrading, and also aims to raise the profile of urban poor organisations. Read more in “Building partnerships between urban poor communities and local governments: The case of the National Slum Dwellers Federation of Uganda in Jinja”.

The Asian Coalition for Community Action (ACCA) Programme

In 2010, the Asian Coalition for Housing Rights set up the ACCA fund. It blends US$11 million of donor finance with savings from local groups and some state funding to provide small scale loans and grants to address urban poverty and encourage pro-poor upgrading of informal settlements, often in partnership with local governments.

By November 2013 the revolving fund’s achievements included:

  • Supporting 1,000 local groups to upgrade low-income neighbourhoods in 187 urban centres in 19 Asian countries
  • 130 big housing projects either finished or well underway
  • 1,368 small upgrading projects either completed or in process
  • US$75.7 million worth of land, infrastructure and cash leveraged primarily from government
  • Community savings groups in 167 ACCA cities, drawing in 274,000 savers and US$22.5 million
  • City-based community development funds active in 121 cities.

The ACCA programme’s success came because it provided flexible finance for communities who understood local development needs and could experiment with solutions. Its small, quick grants not only catalyse communities into action, but also show local governments that communities can engage in upgrading programmes. This results in practical, strategic partnerships between communities and local governments. The approach has been extended for disaster rehabilitation in cities affected by typhoons, cyclones and floods. Read more.

Local funds for pro-poor upgrading

The city government of Lautoka, Fiji, threatened to evict 400 households in five fishing communities. The communities used a city-wide survey to support their negotiations with the government, which agreed to upgrade 200 households in-situ and to relocate the other 200 to a 10 hectare plot of fully serviced land nearby. In 2012 the ACCA fund provided US$40,000 for housing loans, and the government allocated the land to the communities on a long-term lease. This case demonstrates how small amounts of decentralised development finance can generate further resources and encourage local governments to pursue a more pro-poor approach that focuses on upgrading or nearby relocation.

Four reasons decentralised finance works

1. Funds are locally managed and owned. Local management enables local groups to identify low-cost ways of making investments, which means project costs often fall substantially. Local people feel a sense of ownership when they can take part in planning processes and when investments come from their own community savings groups. Local ownership is not only empowering. It also promotes sustainability as local groups have a greater interest in maintaining investments.

2. Decentralised funds suit local timetables. When international and national funds capitalize local funds that provide small sums of flexible, fast cash, local groups can use this money to develop projects and programmes that address collective needs according to their own timetables (see Box 2). External timetables, by contrast, often make the community hostage to local power brokers.

3. Small funds build big bridges between communities and government. Communities can use decentralised funds to nurture partnerships with local government. Such collaboration results in a more democratic planning process and helps to leverage state funding and other resources to deepen and extend local development initiatives (see Box 3).

4. Networked communities can make spend shared finance efficiently. Individual communities often form networks at the city level to manage their collective finance more effectively. As development finance is decentralized downward, if community groups network and aggregate upward this enables them to be more effective in multiple ways. It also increases the accountability of local and district government.

In Zimbabwe, a local fund promotes partnerships between the urban poor and local government

In 1999, the Zimbabwe Homeless People’s Federation created the Gungano urban poor fund to pool community savings and provide accessible finance to urban poor groups that are excluded from more formal finance. The fund’s name comes from the Shona word for gathering, and it has gathered more than just the community’s savings. It has also played a strategic role in enabling the urban poor to engage with local governments. Through such engagement, urban poor groups have been able to:

  • Access development finance
  • Gain more secure land tenure
  • Reform city planning policies
  • Address eviction practices
  • Secure upgrades for housing and basic services

In 2002, when the city of Harare planned to evict backyard shack dwellers in the Mbare settlement, the federation was able to halt the eviction by presenting extensive Gungano savings records alongside detailed community enumerations it had developed. Gungano helped to support shack dwellers to recover from Operation Murambatsvina and identify ways to secure homes. The community’s willingness to save for housing and the federation’s understanding of Mbare convinced the city government to grant land and create a platform for engagement with the urban poor for upgrading projects, planning and even policy reforms.

This continued engagement has built a partnership in which the federation’s enumerations of informal settlements act as a stimulus for action through the Harare Slum Upgrading Programme financed in part by The Bill and Melinda Gates Foundation and the Rockefeller Foundation, and community savings. This new partnership between the urban poor and local government has greatly reduced the number of evictions. See “Partnerships for progressive pro-poor city planning” for more information.

How to decentralise development finance

Decentralising development finance does not require an overhaul of the current aid system. Development finance is often distributed via a ‘few large cheques’, yet similar sums can be decentralised to flow through international conduits such as UPFI or ACCA, which then manage the money and ensure that smaller sums are accessible to local actors.

Donors and national governments can facilitate decentralisation if they approach finance with more flexible terms and timelines, and without too much predetermination of the physical outputs and outcomes. This could be accompanied by some commitment from donors to dedicate a small proportion of their funds beyond national ministries.

National and city governments can facilitate this process by investing in community-led activities and funds that extend beyond specific departmental priorities such as water and sanitation, land or housing.

National government investment in decentralised community funds in Thailand

National government commitment to innovative finance is demonstrated in Thailand where, in 2003, (building on a similar approach housed in the Urban Community Development Organisation), the government launched a revolving fund to support community-led upgrading work in informal settlements. The ambitious programme is implemented through the Community Organizations Development Institute. It provides low-income communities with infrastructure subsidies and housing loans to support community-led upgrading and, where this is not possible, to develop new homes close by.

As well as supporting projects, the fund also supports networks, enabling urban poor communities to work with city authorities and other local actors and with national agencies on city-wide upgrading programmes. It seeks to “go to scale“by supporting thousands of community-driven initiatives within citywide programmes that are designed and managed by urban poor savings networks working in partnership with local actors.