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Results BriefsNovember 16, 2022

Working Toward a Sound Local Government Finance System and Better Services for Village Councils in Rural Areas

West Bank and Gaza

Jacques Chirac Road in Ramallah. Credit: Ahed Izhiman.

Palestinian local authorities continue to fulfill a critical role in the context of fragility and conflict, even as local governments remain overburdened by economic and fiscal constraints. The Local Governance and Service Improvement Program (LGSIP) strengthened the financing system of local governments as well as expanded public services at the village level. Hence, the program supported local communities and ensured inclusive growth by reforming the financing mechanism to improve service delivery in villages. The program used systematic incentive mechanisms for result-based financing. The improved services delivery in villages supported by the program has benefited around 466,704 people. A total of 533 subprojects were successfully implemented by eligible village councils (VCs) over four annual investment cycles.


There are 437 local government units in the West Bank and Gaza (WB&G) out of which 159 are municipalities and 278 are village councils (VCs). Despite the differences in these two layers of administration, the Local Government Law did not distinguish between their different functional responsibilities and assigned the same set of tasks to municipalities and VCs. This has resulted in a challenging situation for the VCs, which are the lowest tier of the Local Government Units (LGUs). Population size is the main determining factor that distinguishes VCs from municipalities. VCs, which are small in population and geographical size and which have limited potential for their own revenue generation, faced a particular challenge to reach acceptable levels of service delivery at a reasonable cost. Hence, they were encouraged to join with adjacent municipalities and VCs to establish Joint Service Councils (JSCs) to jointly provide certain services, such as solid waste collection, water and sanitation and planning. The financial sustainability of local service provision continues to be a critical issue that affects the ability of LGUs to provide services in an accountable and efficient manner –a challenge that hits VCs harder, given their limited size, revenue base, and institutional capacity.


The LGSIP was the first World Bank Program for Results (PforR) financing instrument in the local government sector in the West Bank and Gaza. The approach helped to integrate VCs into a sector-wide approach to local government reform. Adopting a clear, predictable, and transparent formula for VCs and making their eligibility subject to meeting basic criteria of LGU functioning, have been important steps in overcoming the distinction between VCs and municipalities.

The approach also helped leverage financial incentives to achieve results and mainstream reforms into the Palestinian Authority (PA) systems. The Ministry of Local Government (MoLG) and the Municipal Development Lending Fund (MDLF)[1] jointly implemented the LGSIP program and helped rally multiple donors behind LGSIP investments while applying the same methodology, thereby contributing significantly to a consistent, incentive-based reform approach in the local government sector.

The project helped overcome several challenges by:

Strengthening the local government financing system: the program ensures timely communication to VCs about the formula-based Annual Capital Investment Grant (ACIG) allocations and the timely transfer of ACIGs to eligible VCs. Annual Capital Grants, allocated based on a simple and clearly defined formula and disbursed within a specific time period, are expected to result in making the resource allocation system from the PA to VCs more transparent, timely and predictable. This would enable VCs to plan and budget realistically and enhance their accountability to citizens.

Improving transparency and predictability in the allocation of the Transportation Fee adopted by Ministry of Local Government (MoLG).  The transportation fee is the only shared revenue that applies equally for all LGUs (including VCs and municipalities). Reforming the Transportation Fee allocation mechanism along the lines of the Annual Capital Grants, resulted in establishing a sustainable financing source for VCs with greater clarity and predictability. Intermediate results included formulating a directive to allocate the Transportation Fee based on a formula following the Annual Capital Grants Program disbursement pattern.

Providing conditional additional capital grants for joint investment projects that lead to economies of scale: The program encourages village councils to execute joint larger infrastructure projects that provide greater general benefit to the community.

Supporting capacity building and institutional strengthening for improved service delivery.  The capacity support focuses on strengthening the institutional systems of VCs and JSCs so that they can fulfill their mandated responsibilities and achieve the program’s results. It also focuses on strengthening the MoLG at the central and district levels to provide LGUs with the necessary oversight and to improve its sectorial approaches.


  • The LGSIP helped improve the financing system for local government and reformed the existing financing model to make it transparent and predictable. 76 percent of villages received transparent and predictable Annual Capital Investment Grants within the agreed timeframe. This enabled the resource allocation system from the PA to village councils s to be more transparent, timely and predictable.
  • The improved service delivery in program villages has benefitted around 466,704 people (exceeding the original target of 350,000); program beneficiaries were the residents of VCs, including women and marginalized groups as the village councils were able to realistically plan their budgets and enhance their accountability to citizens.
  • The LGSIP strengthened the institutional capacity of village councils to plan and implement their Annual Capital Investment Grant (ACIG) in an efficient and accountable manner. For many years VCs had suffered from a shortage of funds; however, the LGSIP became the only meaningful source for servicing their community needs and providing local services for their communities.
  • A total of 533 subprojects were successfully implemented by eligible village councils over four annual investment cycles, consisting mainly of infrastructure investments, which accounted for 64 percent of the subprojects, including roads, water and sewage networks, and retaining walls. 25 percent of the subprojects supporting social development were implemented, including schools, community halls, and youth clubs. The remaining 11 percent of subprojects supported by the program include those focused on the local economy and good governance objectives (one percent helped construct agricultural roads and 10 percent focused on good governance by equipping VCs).
  • Village councils were encouraged to work together and implement 21 joint projects as a result of the LGSIP‘s Conditional Capital Grants for joint investments.

Bank Group Contribution:

The program benefited from a $5 million grant from the World Bank, and $13 million from the World Bank administered Partnership for Infrastructure Development Multi-Donor Trust Fund (PID MDTF) that consists of multiple development partners; Sweden, Norway, Denmark, Australia, Finland, France, Italy, Netherlands, Portugal, and the United Kingdom.


ThePA received a grant from the World Bank in the amount of US$5 million towards the LGSIP, using the World Bank Program for Results (PforR) financing instrument. Additional Program commitments were co-financed using the PforR instrument in the amount of US$15 million, including US$13 million financed by the Government of Sweden through the Multi-Donor Trust Fund-Program for Infrastructure Development (PIDMDTF), administered by the World Bank, and a US$ 2 million equivalent commitment from the PA. Ministry of Local Government and the Municipal Development and Lending Fund were the implementing agencies.

Donors of the PID MDTF are:  Sweden, France, Norway, UK, Australia, Denmark, Finland, Italy, Netherlands, Protugal

Beneficiary quotes:

A school for vocational training is one of the joint projects built by the village councils in the Northwest of Nablus under the LGSIP.

Israa Asma, a teacher in the Sabastia Technical and Vocational School for Smartphones Apps training said: “The presence of the school near our village was of great importance. It helped convince parents to send their children, especially their daughters, as the school is not far. The presence of the specialization in smartphone applications, which I teach, helps prepare the students to enroll in computer engineering in the future and study this specialty.”

She added, “The mission of the school is the development of national human resources, through the process of education and technical training to meet the needs of the labor market for qualified manpower. The country badly needs access to a technical education system characterized by high efficiency, effectiveness, linkages to the needs of the labor market, flexibility, and sustainability. We need various fields that benefit both male and female students, and a training schools that can be a nucleus capable of expansion and increasing the specializations offered.”

Looking Ahead

The LGSIP was formed as a result of the achievements of the multi-phased Municipal Development Project. The World Bank has played a crucial role in supporting LG sector reforms in WB&G by contributing to the goal of strengthening municipal governance and enabling municipalities to become creditworthy and access market resources for municipal infrastructure. The PforR instrument strengthens the government’s ownership and drive for institutional reforms through performance incentives. The LGSIP has demonstrated that institutional reforms can be better prompted by linking reforms to financing. The program has proved that even if it is modestly funded, a well-designed PforR can achieve multiple objectives in improving local government, including finance enhancements, capacity building, and service delivery.