While working on one of research topics entitled “Leveraging Federalism: Fiscal Consideration for Federal Nepal,” the issue of grant designs have come up widely. Though our paper does not address designing grants, we agree that it would add significant value nevertheless to share it with our readers.
Principles of Effective Grant Design [Anwar Shah, Intergovernmental Transfers Designs, 2007]
1. Clarity in grant objectives. Grant objectives should be clearly and precisely specified to guide grant design.
2. Autonomy. Subnational governments should have complete independ- ence and flexibility in setting priorities. They should not be constrained by the categorical structure of programs and uncertainty associated with decision making at the center. Tax-base sharing—allowing subna- tional governments to introduce their own tax rates on central bases, formula-based revenue sharing, or block grants—is consistent with this objective.
3. Revenue adequacy. Subnational governments should have adequate revenues to discharge designated responsibilities.
4. Responsiveness. The grant program should be flexible enough to accommodate unforeseen changes in the fiscal situation of the recipients.
5. Equity (fairness). Allocated funds should vary directly with fiscal need
factors and inversely with the tax capacity of each jurisdiction.
6. Predictability. The grant mechanism should ensure predictability of sub- national governments’ shares by publishing five-year projections of funding availability. The grant formula should specify ceilings and floors for yearly fluctuations. Any major changes in the formula should be
accompanied by hold harmless or grandfathering provisions.
7. Transparency. Both the formula and the allocations should be dissemi- nated widely, in order to achieve as broad a consensus as possible on the objectives and operation of the program.
8. Efficiency. The grant design should be neutral with respect to subna- tional governments’ choices of resource allocation to different sectors or types of activity.
9. Simplicity. Grant allocation should be based on objective factors over which individual units have little control. The formula should be easy to understand, in order not to reward grantsmanship.
10. Incentive. The design should provide incentives for sound fiscal man- agement and discourage inefficient practices. Specific transfers to finance subnational government deficits should not be made.
11. Reach. All grant-financed programs create winners and losers. Consid- eration must be given to identifying beneficiaries and those who will be adversely affected to determine the overall usefulness and sustainability of the program.
12. Safeguarding of grantor’s objectives. Grantor’s objectives are best safeguarded by having grant conditions specify the results to be achieved (output-based grants) and by giving the recipient flexibility in the use of funds.
13. Affordability. The grant program must recognize donors’ budget con- straints. This suggests that matching programs should be closed-ended.
14. Singular focus. Each grant program should focus on a single objective.
15. Accountability for results. The grantor must be accountable for the design and operation of the program. The recipient must be accountable to the grantor and its citizens for financial integrity and results—that is, improve- ments in service delivery performance. Citizens’ voice and exit options in
grant design can help advance bottom-up accountability objectives.