Direct financing of communities is a process by which a funding agency (e.g., social fund, sector line agency, or local government) provides funds directly to communities responsible for managing the implementation of subprojects. 

A community includes groups of individuals living in close proximity to each other and/or other social groups, grassroots entrepreneurs, or associations able to identify a need and come together to access project funds.  The size of the community varies depending on the type of subproject and includes people from all areas that make direct use of the subproject.

The community is usually represented by some form of community-based organization or local project committee.  Therefore, it is not the “community” per se that enters into a contract with the funding agency, but the group representing that community.

Participatory, demand-responsive projects aim to achieve sustainability of services at the local level by incorporating institutional mechanisms that ensure community control of decisions and resources during all stages of the subproject cycle.  These projects can be broadly classified as local infrastructure (e.g., schools, health centers, water supply and sanitation, electrification, local roads, small bridges), social services (e.g., day care centers, orphanages, schools, health posts) and productive subprojects (e.g., small-scale community agro-processing, communal tractors, minor irrigation schemes).

The typical activities and institutions involved at each stage of the project cycle for Social Funds that channel project funds directly to communities are detailed here. The table describes one particular set of arrangements – those where the responsibilities for managing financial resources and contracting service providers is vested in community organizations.

Community Contracting and Procurement

There are two levels of procurement arrangements in social funds and other projects involving community participation:

1. procurement undertaken at the central level by the social fund management unit; and
2. procurement by or on behalf of communities (beneficiary subprojects)
   Since the bulk of disbursements in social funds are for demand-driven community projects, it is not possible to determine ex-ante what will be procured. Community Project Management Committees take primary responsibility for procuring goods, services and civil works, guided by the social fund management unit.  World Bank guidelines are flexible regarding the design of financial management and procurement procedures for community-based projects.  Therefore, it is important to design a project that takes into account the realities on the ground and, at the same time, permits accountability through a clear system of verification and control.  The goal is to establish flexible and simple procurement and disbursement rules while achieving accountability.