The Design of Municipal Development Funds

Abstract

Municipal Development Funds (MDFs) have become the preferred means of many donors and, increasingly, national governments for the finance of urban infrastructure. This article assesses their performance and design based on extensive data collection on ten MDFs and recommends changes. MDFs have two overall goals: credit and development. The greatest appeal of MDFs as credit providers is that they can wholesale funds for a wide variety of small urban infrastructure project to many local governments. However, they have largely failed to move toward market principles, and, too often, have succeeded in buiIding infrastructure without strategically promoting local development. In this context, donors have focussed on gearing MDFs to promoting local developmentimproving project appraisal, rationalizing the inter-governmental transfer system, establishing capital budgeting and fiscal planning, distributing funds among regions and municipalsize categories, and promoting community participation. But MDFs have also produced uneven results in achieving these goals. At bottom, MDFs have failed to connect with local demand. Local governments often have little idea what local peopleparticularly poor communitieswant and need. Not surprisingly, they often fail to accept or repay charges for MDF projects. The best hope for improving MDFs lies in relating these funds closer to local people's preferences. Means to this end include: involving neighborhood associations and households in project selection; relying on project revenues rather than transfers as the main guarantee and source for loan repayment; using commercial financial institutions to underwrite, disburse, and collect loans; and hiring community development staff at the MDF.who had participated in an MDF--RAM--and many staff of the implementing agency.

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