Co-funding as a risk-sharing mechanism in grant financed LED programmes : a case study of the Gijima KwaZulu-Natal Local Competitiveness Fund Implementation (LCFI) programme.
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The promotion of Local Economic Development (LED) increasingly involves the allocation of grant finance for project implementation. This finance is often provided on condition that the grant recipient commits a certain level of co-funding to the project. These co-funding requirements are essentially a risk-sharing mechanism used to avert the agency problems, namely adverse selection and moral hazard, which occur in the relationship between the funding programme and the grant beneficiaries. The purpose of this study is to examine whether these requirements are effective at achieving this aim and to determine their impact on the LED outcomes of various types of projects. This is undertaken through the comparative analysis of projects funded through the Gijima KwaZulu-Natal Local Competitiveness Fund Implementation Programme (LCFI), which provided grant funding for projects implemented by the private sector, Non-Governmental Organisations (NGOs) and local government. The findings indicate that co-funding has a positive impact on internally co-funded private sector projects and in this scenario is necessary to achieve optimal outcomes. Inversely, co-funding has a detrimental impact on projects implemented by non-profit groups in that it requires the attraction of funding from additional organisations whose finance conditions may not align to those of the principal donor. Finally, co-funding is ineffective when provided by government for the implementation of community projects due to the lack of risk it assumes. These findings have implications for the design of LED grant programmes and support the assertion that grant programme should be designed to efficiently reflect the objectives and risk preferences of the institutions they support.
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