NGLS HANDBOOK

UNCDF

UNITED NATIONS CAPITAL DEVELOPMENT FUND

ORIGINS AND BACKGROUND

The United Nations Capital Development Fund (UNCDF) was established in 1966 by the UN General Assembly as a special purpose fund within the United Nations system in association with and under the administration of the United Nations Development Programme (UNDP).

Its original objective, as stated in General Assembly resolution 2186 (XX), was “to assist developing countries in the development of their economies by supplementing existing sources of capital assistance by means of grants and loans, particularly long-term loans made free of interest or at a low interest rates. Such assistance shall be directed towards the achievement of accelerated and self-sustained growth of the economies of those countries and shall be oriented towards the diversification of their economies, with due regard to the need for industrial development as a basis for economic and social progress.”

In 1973, General Assembly resolution 3122 reoriented the fund’s activities. It was decided that the fund should serve as “a capital-providing fund first and foremost for the Least Developed Countries (LDCs) in support of those development and investment activities that would build and strengthen the economic and social infrastructure of these countries, including in particular, the field of integrated rural development and small-scale industries.”

As a project development and finance institution specialized in small-scale investment projects in the poorest countries, the fund plays an important role in the multilateral financing system. Analyzing UNCDF’s past and its situation in relation to other UN agencies, former Executive Secretary Reinhart Helmke noted that the fund “has found and occupied its niche as the capital investment arm of UNDP, with a presence in all LDCs across the regions. UNCDF has become a capital investment fund with a social conscience, accumulating specialized experience in such areas as poverty alleviation, participatory development and small-scale productive credit.”

At the 1991 Tokyo Forum on Development Strategies for the Least Developed Countries in the 1990s, organized jointly by Japan and UNCDF, several countries reaffirmed the relevance of UNCDF’s mandate and of the fund’s poverty reduction policies.

The fund, based in New York, draws on UNDP headquarters and field representatives for technical and logistical support. UNDP resident representatives serve as UNCDF representatives in the field and are involved in all phases of the project cycle. In countries where UNCDF’s activities are extensive, staff may be assigned directly to country offices to oversee fund programmes. UNCDF has 26 programme officers in the field.

The fund gets most of its resources from voluntary government contributions. During the Pledging Conference for Development Activities convened by the UN Secretary General, Member States announce their financial support to UNCDF. Pledges for 1998 amounted to US$30 million. The fund can also accept contributions from NGOs, multilateral and bilateral agencies, and other funding institutions. In addition to general contributions, donors have supported UNCDF projects through various co-financing arrangements, such as cost-sharing and trust fund arrangements. They can select a specific project, group of projects, country, region or programme theme for support through UNCDF. An example of this is the 1998 expansion of the UNCDF Vietnam programme through bilateral support from the Australian government.

UNCDF ACTIVITIES

UNCDF’s orientation fits into UNDP’s focus on the creation of human capital, and as such is very much a part of UNDP’s overall Sustainable Human Development paradigm with its emphases on equity, the environment, gender equality, and employment. UNCDF’s presence in UNDP, especially at the country level, enhances the resonance of UNCDF’s “lessons learned” at the policy level through UNDP’s ongoing dialogue with central governments, with other development agencies, and at UNDP headquarters. These connections as well as its myriad programme partnerships at the county level can raise the probability that UNCDF’s successes can be replicated, “upscaled” by larger bilateral and multilateral agencies such as the World Bank, and “downscaled” by smaller ones, especially within the NGO community.

The 1990 Second United Nations Conference on the Least Developed Countries in Paris singled out UNCDF as one of the most effective vehicles of assistance to LDCs, and consensus was reached on a 20% annual growth target until the end of the decade. This target was adjusted upwards by the 1992 UNCTAD VIII Conference in order to take into account the growing number of countries in the LDC category. Unfortunately, due to the global recession and decreasing levels of donor contributions for development assistance, these targets have not been met.

Eligibility

The fund’s “first and foremost” assistance goes to LDCs, as directed by the UN General Assembly in 1973. By 1999, 55 countries had received financial assistance from UNCDF: 32 in Africa, 15 in Asia and the Pacific, five in the Arab states and three in Latin America and the Caribbean. In an effort to increase the impact of its programmes, however, the fund decided in 1998 to concentrate its future programme in 15 “Concentration Countries:” Bangladesh, Benin, Bhutan, Burkina Faso, Cambodia, Ethiopia, Guinea, Haiti, Malawi, Mali, Mozambique, Nepal, Senegal, Tanzania and Uganda. In 1998, 57% of the fund’s new programming was in Africa, 14% in Latin America/Caribbean and 29% collectively in Asia/Pacific and the Arab states.

UNCDF provides the bulk of its assistance through grants to recipient countries, although it does have the power to provide concessional loans. Concessional loans may also be considered for those projects that help generate foreign exchange or replace imports. Lending is an extremely rare option, however--since the beginning the fund has approved only four loans totalling some US$11 million.

UNCDF finances projects range in cost from US$200,000 to US$15 million. Current annual approval targets average US$40 million (1996-1998).

Local Development Funds

UNCDF’s approach has evolved dramatically since its early days. Initially the fund provided physical equipment in support of project activities, which were generally in favour of the rural poor. Over time and especially in recent years the ways in which UNCDF applies its capital have become more sophisticated. Now for example, its programmes are marked by geographic concentration, with a region within a programme country selected based on an analysis of needs and potential, and on the understanding that UNCDF’s resources are necessarily limited. The fund seeks to focus its efforts where it can have a maximum positive impact on such needs through its multifaceted and interlinked project investments, while at the same time attempting to minimize the costs of implementation.

While concentrating most of its programming on the African subcontinent, the content of its programmes has changed in response to the vast, growing and wide ranging needs of the groups with which UNCDF works in partnership. UNCDF has noted the recent trend in many regions in favour of decentralization of authority from central to local levels. As described in the 1995 policy paper Poverty Reduction, Participation & Local Governance: The Role for UNCDF (UNCDF, August 1995), the fund is increasingly involved in the provision of a form of infrastructure that favours the development of civil society and the formation of social capital.

In the course of decentralization, there has been a marked shift of responsibility for the provision of basic infrastructure (even smaller scale than above) to local authorities. In the interest of supporting this activity and in helping vital and new governance relationships between the governed and governing, UNCDF has introduced its unique Local Development Funds (LDFs) in many of its recent programmes over the past few years. In fact in 1998, the percentage of funding allocated to Local Development Funds and/or eco-development projects rose to 84% of the fund’s annual portfolio (up from just over 50% in 1997 and 38% in 1996). Conversely, UNCDF allocated 12% to what it calls “blueprint infrastructure” and 4% to microfinance projects in 1998.

LDFs assist least developed countries in three critical areas: capital investment funds for rural infrastructure, strengthening the governance institutions necessary to sustain such infrastructure, and capacity building to produce the skills required to sustain the institutions. LDFs are demand-driven capital funding mechanisms that are given to and managed by local governments to be used in conjunction with local contributions. After an extensive participatory formulation process that involves all stakeholders in the project, LDFs are used for investments in small-scale rural infrastructure such as village-level rural access roads, schools and small irrigation projects, and in support of improved natural resource management. All microprojects supported by UNCDF local funds must be determined through a participatory planning process involving all sectors of the local community. Currently, LDF programmes are operational in 12 countries in Africa, Latin America, Arab states and Asia.

LDF projects are executed by local communities or the private sector on a competitive basis. The community is required to contribute a percentage of the overall cost of the project (financial and/or labour). This practice helps to ensure a sense of “ownership” that increases the likelihood that the public works will continue to be maintained long after the UNCDF project has ended.

While LDFs embody common principles of encouraging participation through the decentralized management of resources, the exact design varies from country to country, depending on the local situation and context. Whether local government authorities or community groups manage the funds depends primarily on the existence and structure of formal decentralized institutions.

UNCDF is aware that LDFs are inherently risky--their success is constrained if central government does not empower local authorities through an appropriate assignment of responsibilities and resources.

Microfinance

UNCDF, through its microfinance programme, supports institutions that provide financial services to the poor. UNCDF’s initiatives in this sector include both credit to micro-entrepreneurs and savings instruments. Approximately 70% of UNCDF microfinance interventions are in sub-Saharan African, 20% are in Asia and 10% in Latin America.

Since UNCDF concentrates most of its microfinance interventions in rural regions of Africa, the fund primarily assists those microfinance institutions (MFIs) that are exploring this new “frontier” in microfinance, helping them to bring financial services, on a sustainable basis, to remote areas that hitherto lacked credit and savings opportunities.

UNCDF carried out a peer review exercise with the Consultative Group to Assist the Poorest in 1998, which led to a major re-orientation of its microfinance policy. Whereas UNCDF had previously focused on setting up refinancing and guarantee funds, the fund is now re-focusing its support to help strengthen the institutional capacity of carefully selected MFIs, helping them to become financially self sufficient.

One of UNCDF’s comparative advantages is its flexibility in supporting MFIs: the fund can finance technical assistance, cover start-up and operational costs and provide loanable capital to them. The fund can also capitalize those MFIs through grants at the project level, helping them to graduate into formal institutions or comply with national prudential regulations.

To facilitate coordination between the different microfinance initiatives at the UN, a joint unit between UNDP and UNCDF was established in 1997; it is called the Special Unit for Microfinance (SUM). In 1999 SUM was integrated fully into UNCDF and is now considered the leading technical unit on all matters pertaining to microfinance at the UN. SUM supports the growth of microfinance institutions that have transparent track records and solid institutional and financial performance in reaching poor clients, particularly women, on a sustainable basis.

NGO RELATIONS

UNCDF is working to promote collaboration with NGOs and to involve them more in its operations, in line with new policy directives on NGOs and grassroots development being prepared and adopted by UNDP. Collaboration with NGOs is not determined by overall policy but on a project-by-project or country-by-country basis, depending on circumstances. UNCDF tends to work either with international NGOs (such as CARE, Développement International Desjardins and the World Wild Fund for Nature) that have a local presence, or with appropriate national NGOs (such as the Grameen Agricultural Foundation in Bangladesh and the Foundation for Micro-Enterprise Development in Bolivia).

Most often, NGOs cooperate with UNCDF by providing technical assistance through subcontracting arrangements. However, cooperation with NGOs can vary according to country needs and NGO expertise. Recent initiatives have included projects co-financed with NGOs, and use of NGOs as intermediaries to identify individuals and/or groups to receive credits or loans in communities involved in credit projects. For example, UNCDF worked with NGOs as intermediaries to set up a financing mechanism in Benin for microprojects designed to create or upgrade the country’s infrastructure.

UNCDF supports a range of NGO projects designed to stimulate grassroots community development and self-help activities, such as a partnership with WWF in Madagascar to develop sustainable livelihoods near the fragile ecosystems of a national park. The fund also supports projects carried out by NGOs. Occasionally, NGOs also contribute to the evaluation of UNCDF projects and programmes. Furthermore, the fund has provided financial inputs into UNDP’s Partners in Development NGO financing scheme.

Contact

Laura Kullenberg, Deputy Director and Head of the Policy, Planning and Evaluation Unit, UNCDF, 2 UN Plaza, New York NY 10017, United States, telephone +1-212/906 6221, fax +1-212/906 6479.