1. AID Modalities and the challenge of external support to DLGD

2. Aid to policy and institutional change : a controversial issue
Aid to DLGD is mostly aid to policy and institutional change. The need for system-wide capacity development of multiple actors often overshadows the still critical need for adequate financing of sub-national authorities
Effectiveness of aid to policy and institutional change, remains a controversial issue. In particular, the effectiveness of budget support (BS : the preferred modality for financial assistance), in supporting policy and institutional change is being increasingly questioned,
Two strands of criticism:
the limitations of the policy dialogue and disbursement conditionality associated with BS operations, to induce policy reform (you cannot ‘buy’ reforms)
the ‘missing middle’ problem, i.e. the fact that BS may not provide sufficient attention to the middle of the delivery chain, that is to the institutions that translate policy into results.

3. Aid Modalities vs. Complex Aid Instruments
When it comes to supporting DLGD, the use of any single/simple aid modality is particularly problematic.
for DLGD operations, as for other programs of similar complexity, “the task for any donor is not simply to choose (simple) aid modalities, but to design (complex) aid instruments” (DCI, 2005)
Supporting DLGD will then require to think beyond ‘aid modalities’ defined by disbursement procedures, and to devise more comprehensive ‘aid instruments’ in which “other ways of using aid”, including project-type interventions, may be critical to complement financial assistance through the BS modality.

4. Assessing the context
Assessing the relative importance for development results of: (i) channeling financial resources to local authorities and other frontline delivery agents, vs. (ii) financing a systemic capacity development effort and (iii) resourcing a strategic policy dialogue
Defining the exact nature of the capacity development problems, assessing their policy, institutional and individual dimensions, going beyond concerns with fiduciary risks and PFM and looking more broadly at the multiple institutional constraints affecting the services delivery chain.
Defining the scope and modalities of the policy dialogue to be established with the partner government, and managing the difference between (i) addressing issues of policy implementation and (ii) developing a consensus on forward-looking policy development
Determining whether, and to which extent, capacity development efforts and strategic policy dialogue (i) may also be funded through BS-type transfers and incentivized by the related disbursement conditionality or (ii) require more flexible, issue-driven, policy and institutional experimentation as ‘complementary measures’ funded through project aid or other program-based modalities
Achieving this balance is a sensitive issue. For example, the 2015 evaluation of Germany-funded BS operations noted that “In order to prevent undermining the instrument of general budget support through a gradual return to project aid in the form of accompanying measures, it is necessary to maintain an adequate ratio of accompanying measures to budget support.” (Krisch, 2015)

5. Combining aid modalities into effective ‘aid instruments’ to support of DLGD reforms