22972 WORLD BANK OPERATIONS EVALUATION DEPARTMENT SPRING 1999 NUMBER 178 M unici a p al1 DeC veC l o pnment PiDject: Building Intitutions and Fncing cal Development f"iIXTY-THREE OF 75 COUNTRIES WITH POPULATIONS greater than 5 million are now pursuing decentralization policies that devolve functions and responsibilities to local governments. But the decentralization process is severely constrained by a lack of institutional capacity among local governments, limited local resource mobilization, and limited access to long-term financing for investment programs. Municipal development projects (MDPs) are designed to remedy some of these problems while preparing local governrments to borrow in capital markets. Since the early 1980s, 16 World Bank-fi- nanced MDPs have been completed in 11 countries, and 19 additional projects are currently being implemented in 15 countries, with total lending of US$2 billion. How well are these projects doing the job they were intended to do? The Operations Evaluation Department had clear impacts on municipal finance. It (OED) has addressed this question with demonstrates-for the first time-that an impact evaluation study of MDP MDPs can be effective in building local projects in Brazil and the Philippines. institutions. Earlier, performance audits of the projects found they had significant impacts on the Design of the Study living conditions and productivity of resi- The impact evaluation assessed the effects dents in participating municipalities, as of MDPs on the capacity of local govern- ,- well as significant unintended positive ef- ment institutions in the areas of fiscal and fects on the local economy. The impact financial management and planning and evaluation report, which builds on those implementation of investment programs. findings, concludes that the projects have It also assessed direct impacts on the ben- 2 World Bank Operations Evaluation Department . eficiaries as anticipated by the projects and indirect FIGURE 1: MDP Impact on Financial Autonomy side-effects on the development of local economies, fo- Own revenues' share cusing on employment and income generation. The Percent change, 1990-96 study evaluated the impacts of four successful MDPs: 11.6 the first and second MDPs in the Philippines and MDPs 1. in the states of Parani and Rio Grande do Sul in Brazil. U Participants Three sets of data were collected and analyzed: mu- 6 (Parant) nicipal finance data of local governments, a sample sur- 1.9 7LParticipants vey of mayors in Brazil on capacity building, and a sur- 1 (Rio Grande do Sul) vey in the Philippines of stall-holders in public markets. _ Nonparticipants The study benefited from an unusually complete data set 4 (Rio Grande do Sul) that allowed both " with-without " project and " before-af- -54 ter" project comparisons. At both the municipal and the 9 beneficiary levels, the study compared impacts on the Brazil participating municipalities with conditions prevailing .. . .. ~~~~~~~~~~~Own revenues' share in the nonparticipating municipalities. It also contrasted Percent change, 1990-96 initial conditions with the conditions after project imple- 0 mentation. To supplement the data, the study reviewed and analyzed project implementation records; inter- -10 - Participants ' . _ (Xk (0)y;EW; 2 ^f;4;jy Py *~~ Participants viewed government officials, nongovernmental organi- -11.5 (Bulacan) zations, and beneficiaries; and visited project sites. -20 -20.2 LiParticipants 30l; j; Xi i$0t(Laguna) Reform First, Investment Second -30 CNonparticipants The Brazil and Philippines MDPs were almost identical 40 -36.9 (Laguna) in their objectives and design, but had different imple- mentation strategies. In Brazil, a statewide "wholesale -50 approach" encouraged as many municipalities as pos- Philippines sible to participate in the fiscal reform program financ- Source: MDP impact evaluation study database. ing technically simple projects such as street paving. In the Philippines, a more selective approach allowed a Financial autonomy is the degree to which municipali- smaller number of eligible municipalities to finance rev- ties are able to generate, through local taxes and better- enue-generating projects such as public markets. In both ment charges, revenue they can directly control. The IMDP countries, the programs had two main instruments: fis- projects were designed to increase this "own revenue." cal reform and investment programs. Analyses of the municipal finance data found that MDP- The design of the Brazilian projects specified that to participating municipalities in Brazil and the Philippines apply for a subloan, a municipal government had to outperformed nonparticipants in financial autonomy. In submit a financial action plan and a comprehensive re- Brazil, the own revenues of participants rose as a share of form package. Reforms had to include plans for training total revenues, while those of nonparticipants declined. In and technical assistance to aid institutional develop- the Philippines, all municipalities saw a decline in the ment. The Philippines projects required a similar finan- share of own revenues against total revenues (resulting cial action plan. The preparation and implementation of from an increase in revenue sharing after a 1991 change in investment subprojects, therefore, enhanced institutional government policy), but the shares of participant munici- capacity by offering experience in every phase of a palities declined less sharply than those of nonparticipants project cycle, from the feasibility study to construction (figure 1). Moreover, the study found that participant mu- work. The sequencing of the projects-reform before nicipalities relied on their own revenues to a greater extent lending-proved critical to their success. than nonparticipants, and that they succeeded in mobilizing more of these revenues. Improving Fiscal and Financial Management Since property taxes constitute a large portion of The extensive municipal finance data point to significant own revenues, municipal performance in their collection MDP impact on the strengthening of municipal fiscal and was viewed in the OED study as an indicator of munici- financial management. The OED study examined five di- pal effort to enhance autonomy and improve creditwor- mensions of this issue: financial autonomy, local revenue thiness. In both countries property tax collection per generation, cost recovery, budget balance, and financial capita generally increased more rapidly in participating leverage. than in nonparticipating municipalities (figure 2). Precis 3 0 In Brazil, participating municipalities in Rio Grande contrast between participants and nonparticipants is do Sul did much better than those in Parand and nonpar- even sharper. Participants generally moved into surplus, ticipating municipalities in direct cost recovery through while nonparticipants remained in deficit. levying and collecting betterment charges. The weaker Finally, the study found a correlation between a performance in Parand was brought about by less rigor- municipality's MDP investment (as a share of total invest- ous control of tax collection performance in the finan- ments) and the degree of impact the project had on policy. cial action plans and project leverage. In the Philip- This suggests that the more closely a municipality is en- pines, MDP operations approached direct cost recovery gaged in its MDP projects (that is, the greater the MDP by allowing municipalities to borrow and invest in rev- project leverage), the greater the impact will be. enue-generating services such as local public markets. The success of direct cost recovery, the study found, de- Building Local Government Capacity pends on making the activity an explicit condition for The results of the survey of mayors in Rio Grande do investment and on close monitoring by the MDP project Sul highlight their awareness of the improvements made team during implementation. under the MDP project. Participant municipalities val- ued most highly the institutional development interven- FIGURE 2: MDP Impact on Property Tax tions designed to increase the efficiency of resource Collection management and to improve the management of invest- ment subprojects, including better procurement proce- Property tax per capita dures. Professional training, information technology, Percent change, 1990-96 and community participation were also highly valued. 600 547.1 Awareness of these advances in the municipality had an soo 5 important side-effect: successful participants openly pro- 400 _ 434.7 M Participants moted the MDP project and its principles among mu- 0-400 (Parana) nicipalities still not involved. 300 - 259.4 7Participants The survey identified several areas in which local (Rio Grande do Sul) government capacity was improved by the MDP project: 200 - _Nonparticipants (Rio Grande do Sul) * Fiscal adjustment improved and municipal own rev- 100 enues increased. 0 m Contacts among municipalities, private companies, Brazil and the community became more intense. Property tax per capita * Municipal administrations became more efficient and Percent change, 1990-96 entrepreneurial. 12 * Municipal employees became more highly valued as 9 _ 86.8 staff. 6 _ C More attention was given to the environment. _ I * Participants 3 - 48.1 (Bulacan) The project achieved these capacity improvements 0 OlParticipants at a time of major change and difficulty for municipali- -3 - 31.9 (Laguna) ties in the State of Rio Grande do Sul. It appears that by -6 N piants helping municipalities to stabilize, the MDP project con- _ (Laguna) tributed to a more balanced approach to economic -12 development at all levels. Philippines Source: MDP impact evaluation study database. Developing Local Economies Most of the subprojects financed by MDP in the Philip- As an indicator of creditworthiness, the OED study pines-such as public markets, bus terminals, and examined changes in budget balance for participating slaughterhouses-were revenue-generating enterprises. 0 and nonparticipating municipalities. The data show that The local economic effects of these projects were signifi- MDP participants performed better in their attempts to cant. Pulilan, for example, was in a low income class of balance the budget than nonparticipants. In Brazil, as a municipalities before it financed a public market result of economic difficulties at the macro level, the fi- through MDP. By 1995, when the MDP project was nancial balance of all municipalities deteriorated, but completed, the municipality had moved up to the second less so among MDP participants. In the Philippines, the income class, the living standard of its 60,000 people 4 World Bank Operations Evaluation Department had risen significantly, and municipal own revenues Brazil show such progress. This catalytic role of the mu- rose from 7 million to 25 million pesos. nicipal development projects is analogous to that of the A case study that compared economic impacts of the World Bank in helping developing countries until they MDP-financed public market in Pulilan with the condi- "graduate" from the Bank. tions in a nonparticipating municipality, Guiguinto, de- tailed the project's impacts on local economic develop- Conclusions and Lessons ment. The market not only had a positive effect on em- The municipal development projects in Brazil and the ployment and income generation through its operations, Philippines examined in the OED impact evaluation it also triggered the development of a new business cen- study achieved what they set out to do. They promoted ter, because more than 40 new small enterprises opened municipal government reforms and improved fiscal per- near the public market, including restaurants, drug formance. In doing so, they enhanced the managerial ca- stores, a gas station, banks, and gift shops. All this ac- pacity of local institutions and stimulated a more entre- tivity also had significant side-effects: expansion of mar- preneurial view among mayors of their administrations, ket linkages to other municipalities and regions, indirect which ensures continued development. employment effects, and stimulation of the local real es- To sustain and build upon this record of achieve- tate market. ment, the study makes several recommendations: Agenda for the Future m MDP policy reform instruments should be diversified The financing needs of municipalities vary, depending to broaden project impacts, replicating the success on their size and stage of socioeconomic development. with improved property tax collection in other com- In the Philippines MDP program, small, resource-poor ponents of own revenues (such as local service taxes municipalities tend to finance rather simple, low-risk, in Brazil) and the success of revenue-generating revenue-generating projects first, such as public markets. projects (such as in the Philippines). By successfully completing such a project and generat- . Good project design at the outset is essential. Initial0 ing increased revenues, they enhance their creditworthi- misconceptions on the part of a municipality are diffi- ness. They can then expand their investments to public cult to reverse later. The clearer the conditions and infrastructure projects such as roads and drainage. As requirements, the more likely it is that success will they continue to grow, municipalities need to finance follow. economic infrastructure for manufacturing and com- * Competition among municipalities should be pro- merce and social infrastructure for household consump- moted through disseminating success stories. Success- tion. Eventually they are ready to "graduate" from the ful MDP participants are the best promoters of effec- MDP program and start borrowing from the private tive practices. capital market. Experiences in both the Philippines and recls Pri6is Performance Audit Reports: Brazil: Municipal Development Project Please address comments and inquiries to the Editor-in-Chief, in the State of Parand and Municipal Development Project in the Elizabeth Campbell-Page, tel: 1-202/458-5365, State of Rio Grande do Sul, by Kyu Sik Lee, Report No. 18011, fax: 1-202/522-3125, e-mail: ecampbellpage@worldbank.org June 12, 1998; and Philippines: Municipal Development Project and Please address publication requests and inquiries to OED, Second Municipal Development Project, by Kyu Sik Lee, Report tel: 1-202/458-4497, fax: 1-202/522-3200, No. 16800, June 12, 1997. Impact Evaluation Report: Building In- e-mail: OED Help Desk@worldbank.org stitutions and Financing Local Development: Lessons from Brazil and the Philippines, by Kyu Sik Lee and Roy Gilbert, Report No. This and other OED publications can be found on the Internet, 18727, December 11, 1998. Available to Bank Executive Directors at http://www.worldbank.org/html/oed and staff from the Internal Documents Unit and from regional infor- mation service centers, and to the public from the World Bank InfoShop: 1-202/458-5454 fax 1-202/522-1500 e-mail pic@worldbank.org. DISCLAIMER OED Pr&is are produced by the Operations Evaluation Department, Partnerships and Knowledge (OEDPK), of the World Bank. The views here are those of the Operations Evaluation staff and should not be attributed to the World Bank or its affiliated organizations. OED Publications 1999 1998 Annual Review of Development Effectiveness Appreciation de l'efficacite du d6veloppement: L'evaluation a la Banque mondiale et a la Soci6t6 financiere internationale Determinar la eficacia de las actividades de desarrollo: La evaluaci6 en el Banco Mundial y la Corporaci6n Financiera Internacional Evaluation Capacity Development in Africa Lessons from Urban Transport Lessons of Fiscal Adjustment Nongovernmental Organizations in World Bank-Supported Projects: A Review Philippines: From Crisis to Opportunity The World Bank, the Grant Program, and the CGIAR: A Retrospective Review 1998 1997 Annual Review of Development Effectiveness Assessing Development Effectiveness: Evaluation in the World Bank and the International Finance Corporation Evaluation and Development: The Institutional Dimension (Transaction Publishers) Financial Sector Reform: A Review of World Bank Assistance India: The Dairy Revolution Rebuilding the Mozambique Economy: Assessment of a Development Partnership Public Sector Performance-The Critical Role of Evaluation The World Bank's Experience with Post-Conflict Reconstruction 1997 1995 Evaluation Results Agricultural Extension and Research: Achievements and Problems in National Systems Fiscal Management in Adjustment Lending Mainstreaming Gender in World Bank Lending: An Update Paddy Irrigation and Water Management in Southeast Asia Poland Country Assistance Review: Partnership in a Transition Economy Reforming Agriculture: The World Bank Goes to Market Zambia Country Assistance Review: Turning an Economy Around 1996 1994 Evaluation Results Industrial Restructuring: World Bank Experience, Future Challenges Lending for Electric Power in Sub-Saharan Africa Social Dimensions of Adjustment: World Bank Experience, 1980-93 The Aga Khan Support Program: A Third Evaluation Book sales available from: The World Bank PO Box 960 Herndon, VA 20172-0960 USA Fax: (703) 661-1501 Tel: (703) 661-1580 Internet: http://www.worldbank.org From the World Bank homepage, select publications. 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E-mail address: ecampbellpage@worldbank.org QUANTITY TITLE PRECIS # PLEASE PRINT CLEARLY Name_ Address City State_ Postal Code Country Telephone Recent OED Precis NUMBER 177 Nongovermental Organizations in World Bank-Supported Projects: A Review 176 Meeting the Health Care Challenge in Zimbabwe 175 Development Effectiveness, 1998: Opportunities in a Volatile Environment 174 Disaster Assistance 173 Support for Smaller Enterprises 172 PCR: El Salvador 171 PCR: Uganda 170 PCR: Bosnia & Herzegovinia 169 Post-Conflict Reconstruction (PCR) 168 India's Dairy Revolution 167 Philippines: From Crisis to Opportunity 166 Financial Sector Reform 165 A Borrower's View of the World Bank 164 Rebuilding the Mozambique Economy 163 1997 Annual Review of Development Effectiveness (ARDE) 162 Kenya's Geothermal Development Program 161 C6te D'Ivoire: Devaluation's Benefits 160 Feeder Roads in Brazil 159 Transport in Thailand: Lessons for Institutional Development 158 Agriculture in Hungary 157 Reducing Flood Hazards and Traffic Congestion in Tunisia 156 Best Practices in Urban Development: Learning from Brazil 155 Two Projects in One: Lessons from Jamaica 154 Sustaining Rural Water Systems: The Case of Mali