Decentralization can expand access to schools, clinics, and clean water—but only if local governments have clear rules, funding, and skills. Well‑designed policy‑based lending can help close these gaps.
Across Asia and the Pacific, development is often delivered far from national capitals. It is subnational governments in states, provinces, and municipalities that run schools and clinics, maintain roads, manage water and sanitation systems, and respond when disasters strike. They are also playing a growing role in shaping local economies and jobs.
But there is a mismatch at the heart of this system. Responsibilities have been pushed down to subnational governments faster than the resources and capabilities needed to deliver them. They often depend on transfers from central governments while their own revenue sources—such as property taxes—remain weak, and their systems are not built for the scale or complexity of their tasks. Their public financial management systems are often fragmented, with limited medium term planning and weak oversight of finances. Slow adoption of digital systems that can talk to each other and gaps in skills among officials further strain their ability to respond to new needs.
These are not just technical challenges. They stem from structural rules, incentives, and institutions, which constrain subnational governments and require reforms at a larger scale that infrastructure alone cannot deliver.
One approach that has gained traction among international financial institutions is policy based lending to subnational governments, in which reforms are implemented by those governments through changes to laws, regulations, institutions, and digital platforms.
The Asian Development Bank’s experience shows that policy-based lending works best when it targets the main systems constraints that are behind weak delivery of services—addressing financial and institutional bottlenecks, aligning national and local incentives, and supporting politically difficult reforms through sequenced steps. When combined with investment and results-based approaches, it can help turn policy commitments into better outcomes.
In South Asia, reforms in West Bengal, India, strengthened fiscal discipline through an integrated financial management system covering budgeting, payments, accounting, and reporting. This improved budget credibility, cash and debt management, and transparency. Digital pension systems and stronger medium term expenditure plans reinforced these gains. In Nepal, as federalism took hold, reforms laid the foundation for devolved service delivery, including property tax reforms, digital revenue systems, performance linked transfers, and the rollout of financial management systems at the subnational level.
Policy-based lending works best when it targets the main systems constraints that are behind weak delivery of services.
In Southeast Asia, reforms to decentralize government in Indonesia aligned incentives across levels of administration by strengthening transfer systems, harmonizing planning and budgeting, modernizing local revenue administration, and introducing digital budgeting and tax systems. Clearer rules enabled responsible borrowing and partnerships with the private sector.
In the Philippines, a multiyear disaster financing program that could be quickly triggered in emergencies strengthened preparedness by clarifying the roles of national and local governments, integrating climate risk into local public financial management, and ensuring more predictable funding after disasters.
In Cambodia, reforms were built into a national framework for public finances, with selected revenue and procurement responsibilities devolved, financial systems extended to local levels, digital services rolled out, and merit based staffing supported by incentives linked to performance.
In Central and West Asia, reforms in Kazakhstan strengthened oversight of fiscal risks at the subnational level—particularly those linked to public–private partnerships (PPP) and state-owned enterprises (SOEs)—through better reporting, disclosure of potential liabilities, and more centralized monitoring of subnational debt and quasi-fiscal activities.
In Pakistan, results based approaches showed how provinces can deliver social protection reforms when supported by clear roles across levels of government, digital systems that can share data across agencies, predictable financing, and incentives linked to performance—helping expand education, health, and nutrition services for women and vulnerable households.
Looking ahead, experience points to several priority reforms under subnational policy-based lending:
- Intergovernmental fiscal systems: Clearer spending and revenue responsibilities, with transfers that follow clear formulas and, where appropriate, are linked to performance.
- Public financial management: More credible budgets, stronger medium term planning, transparent reporting, and better integration of subnational data into national accounts.
- Debt, PPP, and SOE risk management: Clear rules for borrowing and stronger monitoring of fiscal risks.
- Digital governance: Systems that connect national and local platforms for budgeting, procurement, revenue collection, performance tracking, and feedback.
- Local revenue mobilization: Stronger property taxes and user charges, supported by reliable and transparent systems.
- Capability and inclusion: Merit based public administration, budget and staffing decisions that take account of the needs of women and girls, and stronger citizen engagement.
- Resilience: Integrating disaster risks and climate impacts into planning, budgeting, and financing.
Decentralization can significantly improve development impact—but only when subnational governments have the rules, resources, systems, and skills to deliver. Policy based lending offers a practical way to tackle these system‑wide constraints and can help turn decentralization into better services and more resilient, inclusive local growth.
This blog post was written by Çiğdem Akın, Director of the Public Sector Management and Governance Sector Office at the Asian Development Bank (ADB). This article was originally published under the title Loans Tied to Reform Milestones Can Help Local Governments Deliver Better Services on ADB’s Asian Development Blog on July 17, 2026, and was republished with permission. Further links to ADB’s experiences with policy lending in support of strengthening decentralized systems in Asia are provided in the original blog.
