The objective of this policy note, is toprovide advice to the Government of Nepal on the bestapproach to adopt for the proposed Poverty Alleviation Fund(PAF) to adequately address the problems related to povertyreduction, and service improvement in remote areas. Thereport first presents an overview of the conceptualframework for analysis, focusing attention on theparticularly important aspects of poverty - risk andvulnerability - to then provide insights on theunderstanding of the nature of poverty in the country, andhow to address it. It specifies that risk management, ifproperly implemented, can induce economic growth, leading toa longer term sustained reduction in poverty, whiledecentralization empowers local communities, by addressinggovernment's failures in delivering services in areascritical to poverty reduction. The report further reviewsthe experience of development projects in Nepal, through asector wide approach, where findings suggest thatcommunity-based models of investment, and service delivery,perform better than central agency models, underlining highlevels of community participation and good costeffectiveness. Nonetheless, upon examining micro-finance,and despite the country's vibrant micro-finance sector,the report questions its outreach, and coverage to the ruralpoor, which has remained low. The successful implementationof the PAF lies in its potential to assist in Nepal'sdecentralization program, and, its effectiveness inaddressing risk, vulnerability, and poverty. But withoutexternal support, PAF is not likely to materialize due tofinancing, and management constraints.
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