! RLD BANK OPERATIONS EVALUATION D E P A R T M E N T 19619 July 1999 Developing Towns and Cities: Lessons from Brazil and the Philippines ~~-A- 101 ät je2 1-II-.- -A/ OPERATIONS EVALUATION DEPARTMENT ENHANCING DEVELOPMENT EFFECTIVENESS THROUGH EXCELLENCE AND INDEPENDENCE IN EVALUATION The Operations Evaluation Department (OED) is an independent unit within the World Bank; it reports directly to the Bank's Board of Executive Directors. OED assesses what works, and what does not; how a borrower plans to run and maintain a project; and the lasting contribution of the Bank to a country's overall development. The goals of evaluation are to learn from experience, to provide an objective basis for assessing the results of the Bank's work, and to provide accountability in the achievement of its objectives. It also improves Bank work by identifying and disseminating the lessons learned from experience and by framing recommendations drawn from evaluation findings. WORLD BANK OPERATIONS EVALUATION DEPARTMENT Developing Towns and Cities: Lessons from Brazil and the Philippines Kyu Sik Lee Roy Gilbert 1999 The World Bank www.worldbank.org/html/oed Washington, D.C. Copyright 0 1999 The International Bank for Reconstruction and Development/THE WORLD BANK 1818 H Street, N.W. Washington, D.C. 20433, U.S.A. All rights reserved Manufactured in the United States of America First edition July 1999 The opinions expressed in this report do not necessarily represent the views of the World Bank or its member governments. The World Bank does not guarantee the accuracy of the data included in this publication and accepts no responsibility whatsoever for any consequence of their use. The boundaries, colors, denominations, and other information shown on any map in this volume do not imply on the part of the World Bank Group any judgment on the legal status of any territory or the endorsement or acceptance of such boundaries. 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ISBN 0-8213-4532-X Library of Congress Cataloging-in-Publication Data Lee, Kyu Sik. Developing towns and cities : lessons from Brazil and the Philippines by Kyu Sik Lee and Roy Gilbert. p. cm. Includes bibliographical references. ISBN 0-8213-4532-X 1. Municipal finance-Brazil. 2. Municipal finance-Philippines. 3. Infrastructure (Economics)- Brazil-Finance. 4. Infrastructure (Economics)-Philippines-Finance. S. Economic development projects-Brazil. 6. Economic development projects-Philippines. I. Gilbert, Roy. II. Title. HJ9386.L44 1999 336'.014599-dc2l 99-35072 CIP Printed on recycled paper. Contents v Acknowledgments vii Foreword, Prefacio, Prdface ix Executive Summary, Resumen, Rdsumi Analytique xv Abbreviations and Acronyms 1 1. Introduction 1 Rationale for the Study 2 Municipal Development Projects in Urban Lending 2 Objectives, Scope, and Approaches to the Study 3 Methods and Data 5 2. Evaluation Logic: Instruments and Expected Impacts 6 Main Project Instruments and Expected Impacts 7 3. Impacts on Municipal Fiscal and Financial Management 8 Municipal Financial Autonomy versus Revenue Sharing 10 Own Revenue Generation Through Property Taxes 11 Direct Cost Recovery 12 Budget Surplus and Deficit 13 Financial Deepening 15 4. Impacts on Local Government Capacity Building 15 Field Surveys 16 Direct and Indirect Cost Recovery 17 Local Financial Management 18 Project Management and Implementation 18 Information Technology, Training, and Community Participation 21 5. Impacts on Local Economic Development 21 The Public Market in Pulilan 22 Survey Results 23 Indirect Impacts 25 6. Agenda for Future Operations 25 MDPs in Paran6 25 MDPs in Rio Grande do Sul 26 MDPs in the Philippines 27 7. Conclusions and Lessons 27 Conclusions 28 Lessons for Future Operations Annexes 29 Annex 1. Data and Methodology 31 Annex 2. Additional Data Analysis of Municipalities by Population Size 35 Annex 3. Performance Audit of the Brazil MDPs: Lessons and Recommendations 37 Annex 4. Performance Audit of the Philippines MDPs: Lessons and Recommendations 39 Annex 5. Public Market Survey Questionnaire of Stallholders and Small Enterprises 111 Developing Towns and Cities: Lessons from Brazil and the Philippines 43 Endnotes 45 Bibliography Tables 1 Table 1.1 Basic Loan Data 7 Table 3.1 MDP Project States and Provinces: Selected Indicators 8 Table 3.2 Impacts on Financial Autonomy 9 Table 3.3 Impacts on Own Revenue Mobilization 10 Table 3.4 Impacts on Property Tax Collection 11 Table 3.5 Impacts on Direct Cost Recovery in Brazil 12 Table 3.6 Impacts on Municipal Budget Surplus or Deficit 14 Table 3.7 Impacts on Own Revenues by Degree of Financial Deepening in Brazil 16 Table 4.1 MDP-Sponsored Institutional Development Interventions 17 Table 4.2 Impacts on Municipal Cost Recovery 18 Table 4.3 Impacts on Municipal Financial Planning and Management 18 Table 4.4 Impacts on Municipal Management of Investment Projects 19 Table 4.5 Impacts on Computerization and Training 22 Table 5.1 Length of Time in Business at Two Philippine Markets, by Year Started 22 Table 5.2 Characteristics of Stallholders 23 Table 5.3 Changes in Sales and Income 23 Table 5.4 Commuting Distance and Travel Time 24 Table 5.5 Quality of Services at the Market 24 Table 5.6 Origin of Goods Sold at the Market 24 Table 5.7 Origin of Customers at the Market 29 Table A1.1 Municipalities Evaluated 31 Table A2.1 Impacts of Projects on Municipal Financial Autonomy 32 Table A2.2 Impacts of Projects on Own Revenue Mobilization 32 Table A2.3 Impacts of Projects on Property Tax Collection 33 Table A2.4 Impacts on Direct Cost Recovery in Brazil 33 Table A2.5 Impacts on Municipal Budget Surplus or Deficit 34 Table A2.6 Impacts on Own Revenues by Degree of Financial Deepening in Brazil Figures 8 Figure 3.1 Impacts on Financial Autonomy 9 Figure 3.2 Impacts on Own Revenue Mobilization 10 Figure 3.3 Impacts on Property Tax Collection 11 Figure 3.4 Impacts on Direct Cost Recovery in Brazil 13 Figure 3.5 Impacts on Municipal Budget Surplus or Deficit 14 Figure 3.6 Impacts on Own Revenues by Degree of Financial Deepening in Brazil 16 Figure 4.1 PIMES Institutional Development Interventions 17 Figure 4.2 Impacts on Municipal Cost Recovery 17 Figure 4.3 Impacts on Municipal Planning and Management 19 Figure 4.4 Impacts on Municipal Management of Investment Projects 20 Figure 4.5 Impacts on Computerization and Training iv Acknowledgments This report was prepared by Kyu Sik Lee, task manager the municipal development projects in Brazil and the when he was principal evaluation officer in the World Philippines, respectively, provided advice and support Bank's Operations Evaluation Department, and Roy for the study. Robert Buckley reviewed earlier drafts of Gilbert, then consultant, currently principal evaluation the report. William B. Hurlbut edited the report. officer. Romayne Pereira provided administrative assistance. Much of the analysis was based on a close This study was published in the Partnerships and collaboration between the authors and project teams in Knowledge Group (OEDPK) by the Outreach and Brazil and the Philippines. In particular, the authors Dissemination Unit. The task team includes Elizabeth would like to thank, from Brazil, Aurelio Simon, Campbell-Pag6 (task team leader), Caroline McEuen Jeanette Lontra, and Sextilio Giacomini, who con- and Deborah Davis (editors), Kathy Strauss and Lunn ducted the study on capacity building. And from the Lestia (graphic designers), and Juicy Qureishi-Huq Philippines, Jose Ong, Millie Villar, and Vic Ignacio, (administrative assistant). who pretested the questionnaire and provided logistical support for the study; and Elizabeth Legazpi, who prepared the municipal finance data. The survey of Director-General, Operations Evaluation: Robert Picciotto public markets in the Philippines was conducted by Director, Operations Evaluation Department: Elizabeth McAllister Cirrus Research and Software in Manila under the direction of Mari-jo Luciano. From the World Bank, Manager, Sector and Thematic Evaluations: Gregory Ingram Braz Menezes and Thomas Zearley, task managers of Task Manager: Kyn Sik Lee v  Foreword FOREWORD PREFACIO PREFACE The World Bank has been El Banco Mundial ha La Banque mondiale financing projects aimed at support- venido financiando proyectos finance depuis une vingtaine d'années ing municipal development for destinados a respaldar el desarrollo des projets visant à soutenir le some 20 years. This book presents municipal desde hace 20 afios. En este développement municipal dans les and analyzes the concrete results of libro se presentan y analizan los pays où l'administration est four successful projects in Brazil resultados concretos de cuatro décentralisée. Le présent ouvrage and the Philippines. This is the first proyectos satisfactorios en Brasil y expose et analyse les résultats concrets time the Bank has disseminated an Filipinas. Esta es la primera vez que el de quatre projets réussis au Brésil et assessment of the medium-term im- Banco ha distribuido una evaluación aux Philippines. C'est la première fois pacts of these operations to a wider del impacto a mediano plazo de estas que la Banque diffuse à l'intention readership. operaciones a un número más amplio d'un vaste public une évaluation des The study grew out of recently de lectores. effets à moyen terme de ces completed performance audits of El estudio se basó en las opérations. municipal development projects in evaluaciones ex post terminadas hace L'étude s'inscrit dans le Brazil and the Philippines, and drew poco de proyectos municipales de prolongement de récentes évaluations its data from many sources. The desarrollo correspondientes a Brasil y rétrospectives de projets de analysis was based on selected indi- Filipinas y en datos provenientes de développement municipal exécutés au cators drawn from a very large muchas fuentes. El anàlisis se valió de Brésil et aux Philippines, et elle a utilisé municipal finance database cover- indicadores seleccionados extraidos de des données provenant de nombreuses ing more than 800 municipalities una base de datos muy grande de sources. L'analyse est fondée sur un over a period of seven years, and a financia-mientos municipales que certain nombre d'indicateurs établis à survey of public markets in the abarca a màs de 800 municipalidades partir d'une très vaste base de données Philippines. In addition, the study en un periodo de siete afños, y de una sur les finances municipales couvrant teams conducted fieldwork in Brazil encuesta de los mercados públicos de plus de 800 municipalités sur une and the Philippines during 1997-98. Filipinas. Ademàs, los grupos de période de sept ans, ainsi que sur une An OED workshop held in Decem- estudio Ilevaron a cabo trabajos en el enquête relative aux marchés aux Phil- ber 1998 to discuss the study's pre- terreno en Brasil y Filipinas durante ippines. En outre, les équipes chargées liminary findings was well attended 1997-98. Expertos en desarrollo mu- de l'étude ont effectué en 1997-98 des by municipal development experts nicipal de todo el Banco asistieron en travaux sur le terrain au Brésil et aux from across the Bank. These experts gran número a un seminario del DEO Philippines. Des experts du contributed further insights, which celebrado en diciembre de 1998 para développement municipal représentant are reflected here. discutir las conclusiones preliminares les services les plus divers de la Banque With evidence drawn from a del estudio. Dichos expertos ont participé, en décembre 1998, à un very broad universe of municipali- aportaron sus ideas, las que se atelier de l'OED au cours duquel ont ties, the study concludes that mu- incorporaron en este libro. été examinées les conclusions nicipal development projects in Bra- Teniendo en cuenta pruebas préliminaires de l'étude. Ces experts zil and the Philippines helped to recogidas de una amplia gama de ont fait eux aussi des constatations stimulate and facilitate municipal municipalidades, en el estudio se Ilega intéressantes, qui sont indiquées ici. reform. Municipalities that partici- a la conclusión de que los proyectos Sur la base de données provenant pated in municipal development de desarrollo municipal de Brasil y des municipalités les plus diverses, projects consistently outperformed Filipinas ayudaron a estimular y l'étude conclut que les projets de nonparticipants on the fiscal front, promover la reforma municipal. Las développement municipal exécutés au vii Developing Towris and Cities: Lessons from Brazil and the Philippines the more so the deeper their municipalidades que Brésil et aux engagement. Also, partici- - participaron en proyectos de Philippines ont stimulé et facilité pating municipalities signifi- desarrollo municipal siempre la réforme municipale. Les cantly improved their obtuvieron mejores resultados municipalités qui ont participé à institutional capacity to fi- fiscales que aquellas que no des projets de ce type ont nance and manage invest- participaron, y dichos constamment obtenu de ment programs. The lessons resultados fueron tanto mejores meilleurs résultats que les autres drawn from this study should be cuanto mayor fue su grado de sur le front budgétaire, et ce en pro- useful for future policy and opera- participación. Asimismo, las portion de leur degré d'engagement. tions. municipalidades participantes De plus, les municipalités participantes mejoraron considerablemente su sont devenues nettement mieux à capacidad institucional para financiar même, au niveau institutionnel, de y administrar programas de inversiôn. financer et de gérer des programmes Las enseñanzas plasmadas en este d'investisse-ment. Les leçons tirées de estudio deberían ser ùtiles para las cette étude devraient être utiles à politicas y operaciones en el futuro. l'avenir du point de vue de la politique générale et des opérations. Robert Picciotto Director-General, Operations Evaluation Department viii Executive Summary EXECUTIVE RESUMEN RESUME SUMMARY AINALYTIQUE Of the 75 developing countries De los 75 paises en Sur les 75 pays en with more than 5 million people, 63 desarrollo con una poblaciôn de màs développement comptant plus de are now pursuing decentralization de cinco millones de personas, 63 5 millions d'habitants, 63 suivent policies that devolve functions and estàn aplicando en estos momentos actuellement des politiques de responsibilities to local governments. politicas de descentralizaciôn que décentralisation caractérisées par la This process is severely constrained atribuyen a los gobiernos locales dévolution de fonctions et de in many countries, however, by a funciones y responsabilidades que responsabilités aux autorités locales. lack of institutional capacity among antes se cumplian a niveles superiores Mais, dans beaucoup de pays, ce local governments, limited resource de gobierno. Sin embargo, este processus est sérieusement entravé par la faible capacité institutionnelle de ces autorités, la mobilisation limitée de - ïressources au niveau local, et l'accès insuffisant à des sources de financement à long terme pour les programmes d'investissement. Les ¯ projets de développement municipal (PDM) visent à atténuer ces Mau& contraintes. Depuis le début des années 80, 16 PDM financés par la Banque ont été exécutés dans 11 pays et 19 autres sont actuellement mis en oeuvre dans 15 pays, le volume total des prêts au titre de l'ensemble des PDM atteignant 2 milliards de dollars. Le rapport d'évaluation d'impact mobilization at the local level, and proceso se ve sumamente limitado en évalue l'effet des PDM sur la capacité limited access to long-term financing muchos paises por la falta de de gestion budgétaire et financière des for investment programs. Municipal capacidad institucional de los autorités locales, ainsi que sur leur development projects (MDPs) aim at gobiernos locales, la escasa aptitude à planifier et à exécuter des mitigating these constraints. Since the movilización de recursos a nivel local y programmes d'investissement. Il tente early 1980s, 16 Bank-financed MDPs el limitado acceso a financiamiento a également de déterminer si les projets have been completed in 1i countries, largo plazo para los programas de ont eu les effets directs prévus (au and 19 more in 15 countries are inversión. Los proyectos de stade de l'évaluation des projets) sur currently being implemented, with desarrollo municipal (PDM) tienen les bénéficiaires, et les effets indirects total lending for all MDPs reaching por objeto atenuar estas limitaciones. attendus sur le développement des US$2 billion. Desde principios de la década de économies locales, en particulier sur This impact evaluation report 1980, se han terminado 16 PDM l'emploi et la création de revenu. Cette assesses the effect of MDPs on the correspondientes a 11 paises, y en la étude évalue l'impact de quatre PDM fiscal and financial management actualidad se estàn ejecutando otros réussis - deux aux Philippines et capacity of local governments, as 19 en 15 paises; el total de deux au Bresil - dont on peut tirer de well as on their capacity to plan and financiamiento para PMD asciende a precieux enseignements pour les implement investment programs. It US$2.000 millones. projets actuels et futurs dans ces pays ix Developing Towns and Cities: Lessons from Brazil and the Philippines also assesses whether the En este informe de et ailleurs. Dans le cadre de projects had the direct effects Z evaluación del impacto se l'étude, on a recueilli et analysé on beneficiaries and the indi- estudian los efectos de los PDM trois séries de données : 1) des rect effects on the develop- en la capacidad de gestión fiscal données sur les finances ment of local economies, y financiera de los gobiernos municipales provenant des particularly employment and locales, así como su capacidad autorités locales ; 2) les données income generation, that were para planificar y ejecutar d'une enquête par sondage anticipated at project appraisal. programas de inversión. También se effectuée auprès des maires sur le The study evaluates the impact of analiza si los proyectos han tenido los renforcement des capacités ; et 3) les four successful MDPs, two in the efectos que se habian previsto en su données d'une enquête auprès des Philippines and two in Brazil- evaluación inicial, directos en los marchands sur les marchés publics. cases that provide valuable lessons beneficiarios e indirectos en el Au niveau aussi bien des municipalités for ongoing and future projects in desarrollo de las economias locales, que des bénéficiaires, l'étude a those countries and elsewhere. The sobre todo en la creación de empleo y comparé la situation des municipalités study collected and analyzed three la generación de ingresos. En el participantes avant et après sets of data: (1) municipal finance estudio se evalia el impacto de cuatro l'exécution du projet à celle des autres data from local governments, (2) a PDM eficaces, dos de Filipinas y dos municipalités durant la même période. sample survey of mayors on capac- de Brasil, que permiten extraer Les PDM du Brésil et des ity building, and (3) a survey of valiosas enseianzas para los Philippines étaient pratiquement stallholders in public markets. At proyectos, en marcha y futuros, en identiques par leurs objectifs et leur both the municipal and the benefi- esos y otros paises. Para el estudio se conception, mais différaient par leurs ciary levels, the study compared the recopilaron y analizaron tres stratégies d'exécution. Au Brésil, une conditions in the participating mu- conjuntos de datos: 1) datos sobre el approche à l'échelon des États a nicipalities before and after project financiamiento municipal de los permis au plus grand nombre possible implementation with conditions in gobiernos locales, 2) una encuesta de municipalités de participer au nonparticipating municipalities dur- muestra de intendentes acerca del programme de réforme budgétaire, ing the same period. fortalecimiento de la capacidad y 3) parallèlement à l'octroi d'un The Brazil and Philippines una encuesta de vendedores que tenían financement pour des projets MDPs were almost identical in their puestos en mercados públicos. Tanto techniquement simples tel que le objectives and design but had differ- a nivel municipal como de los revêtement des rues. Aux Philippines, ent implementation strategies. In beneficiarios, en el estudio se ha une approche plus sélective a permis à Brazil, a statewide approach al- comparado la situación de las un plus petit nombre de municipalités lowed many municipalities to par- municipalidades participantes, antes y admissibles de financer des projets ticipate in the fiscal reform pro- después de la ejecución del proyecto, générateurs de recettes tels que gram, packaged together with con la reinante en las municipalidades l'aménagement de marchés publics. funding for technically simple no participantes en el mismo período. Dans les deux pays, les programmes projects such as street paving. In the Los objetivos y el disefño de los ont utilisé essentiellement deux Philippines, a more selective ap- PDM de Brasil y Filipinas eran casi instruments : 1) une réforme proach allowed a smaller number of idénticos, pero sus estrategias eran budgétaire et financière ; et 2) des eligible municipalities to finance distintas. En Brasil, un enfoque de projets d'investissement dans les revenue-generating projects such as alcance estadual permitió la infrastructures. Pour solliciter un prêt public markets. In both countries, participación del mayor número posible dans le cadre du projet, les autorités the programs had two main instru- de municipalidades en el programa de des municipalités devaient tout ments: (1) fiscal and financial reforma fiscal, que se aplicó junto con d'abord soumettre un plan d'action reform and (2) infrastructure invest- un paquete de financiamiento para financière ainsi qu'un programme de ment projects. To apply for a loan proyectos técnicamente sencillos, como réformes détaillé, et préparer ensuite under the project, a municipal gov- la pavimentación de calles. En Filipinas, un projet d'investissement. La ernment had to first submit a finan- gracias a un enfoque màs selectivo, un préparation et - une fois le prêt cial action plan, along with a com- numero màs reducido de approuvé - l'exécution du projet x Executive Summary prehensive reform package, municipalidades elegibles pudo d'investissement ont aidé à and then prepare an invest- e financiar proyectos generadores renforcer la capacité ment project. The prepara- de ingresos, como mercados institutionnelle en permettant tion and-once the loan was públicos. En ambos paises, los d'acquérir une expérience à approved-implementation PDM tenían dos instrumentos chaque phase du cycle du of the investment project principales, a saber: 1) reforma projet, depuis l'étude de helped to enhance institu- fiscal y financiera y 2) proyectos faisabilité jusqu'aux travaux de tional capacity by offering experi- de inversiones en infraestructura. Para construction. ence in every phase of the project solicitar un préstamo en virtud del Des analyses des données cycle, from the feasibility study to proyecto, el gobierno municipal primero montrent que les municipalités the construction work. tenia que presentar un plan de acción participant à des PDM au Brésil et aux Analyses of the data show that financiera, junto con un paquete integral Philippines ont obtenu de meilleurs municipalities participating in MDPs de reformas, y luego preparar un résultats que les autres du point de in Brazil and the Philippines outper- proyecto de inversión. La preparaciôn vue de l'autonomie financière. En formed nonparticipants in the area of y, una vez aprobado el préstamo, la outre, elles se sont appuyées financial autonomy. Furthermore, ejecución del proyecto de inversión davantage que les autres sur leurs participating municipalities relied ayudô a fortalecer la capacidad propres recettes, et sont même more on their own revenues than institucional al permitir acumular parvenues à en mobiliser pour des nonparticipants, and even succeeded experiencia en cada etapa del ciclo del investissements d'infrastructure in mobilizing revenues for additional proyecto, desde el estudio de viabilidad supplémentaires. C'est ainsi que le infrastructure investments. For ex- hasta las tareas de construcción. projet a eu un effet positif sur le ample, the project had a positive El análisis de los datos revela que recouvrement des impôts fonciers et impact on property tax collection and las municipalidades que participaron en sur le recouvrement direct des coûts on direct cost recovery through the los PDM de Brasil y Filipinas obtuvieron grâce à la perception de taxes levying and collection of betterment mejores resultados que las no d'amélioration. Pour rester solvables, charges. To remain creditworthy, par- participantes, en la esfera de autonomia les municipalités participantes sont ticipating municipalities were more financiera. Asimismo, las parvenues mieux que les autres à successful than others in balancing municipalidades participantes podian équilibrer leur budget. C'est ainsi que their budgets. Thus, the extensive valerse màs de sus propios ingresos que les données détaillées sur les finances municipal finance data point to sig- las no participantes, e incluso lograron municipales indiquent que les PDM nificant impact of MDPs on the movilizar ingresos para inversiones ont largement contribué au strengthening of municipal fiscal and adicionales en infraestructura. Por renforcement de la gestion budgétaire financial management. ejemplo, el proyecto tuvo efectos et financière des municipalités. The survey of mayors in the state positivos en la recaudaciôn de L'enquête auprès des maires de of Rio Grande do Sul, Brazil, con- impuestos inmobiliarios y en la l'État du Rio Grande do Sul, au Brésil, firms the importance of such im- recuperación de los costos directos confirme l'importance de ces progrès. provements. The mayors said their gracias a la aplicación y el cobro de Les maires ont fait savoir que leurs municipalities most highly valued the contribuciones por mejoras. Las municipalités se félicitaient tout institutional development interven- municipalidades participantes, que particulièrement des interventions au tions aimed at improving resource estaban interesadas en mantener su titre du développement institutionnel management and the management of capacidad crediticia, fueron más eficaces qui visaient à améliorer la gestion des investment projects, including better que otras en el logro del equilibrio ressources et celle des projets procurement procedures. They also presupuestario. En consecuencia, los d'investissement et, notamment, les valued professional training, infor- numerosos datos sobre financiamiento procédures de passation des marchés. mation technology, and community municipal revelan el impacto importante Ils ont également apprécié la participation. The municipalities' de los PDM en el fortalecimiento de la formation professionnelle, la awareness of these advances had an gestión fiscal y financiera municipal. technologie de l'information et la important side effect: successful par- La encuesta de intendentes del participation communautaire. Le fait ticipants openly promoted the project estado de Rio Grande do Sul, en Brasil, que les municipalités soient xi Developing Towns and Cities: Lessons from Brazil and the Philippines and its principles among mu- confirma la importancia de conscientes de ces progrès a eu nicipalities still not involved. - dichas mejoras. Los intendentes un important effet secondaire, For the Philippines, the afirmaron que sus en ce sens que celles qui ont case of the MDP-financed - municipalidades atribuían gran participé avec succès à des public market in Pulilan valor a las intervenciones de projets ont ouvertement vanté shows that the project had desarrollo institucional les avantages de ceux-ci et les significant impact on the de- destinadas a mejorar la gestión de principes sur lesquels ils velopment of the local economy. los recursos y de los proyectos de reposaient auprès des municipalités The project not only stimulated inversión, incluidos los procedimientos qui n'y avaient pas encore participé. employment and income genera- mejorados de contratación. También Aux Philippines, l'étude de cas sur tion, but also triggered the develop- valoraban la capacitación profesional, la le marché financé par un PDM à ment of a new business center near tecnologia de la información y la Pulilan montre que ce projet a eu un the public market, which had sig- participación de la comunidad. El impact considérable sur le nificant spillover effects. reconocimiento de estos adelantos por développement de l'économie locale. Il The study concludes that MDP parte de las municipalidades tuvo un a non seulement stimulé l'emploi et la operations in both countries helped importante efecto secundario: los formation de revenu, mais aussi to facilitate municipal reform. Par- participantes que obtuvieron buenos contribué à l'aménagement d'un ticipating municipalities learned resultados promovieron abiertamente el nouveau centre commercial près du that (1) participation in the program proyecto y sus principios entre las marché, avec de nombreuses triggers the reform process; (2) im- municipalidades que aún no retombées positives. proved fiscal performance is neces- participaban. L'étude conclut que les opérations sary for better management (thus En el caso de Filipinas, el estudio del PDM menées dans les deux pays ont giving mayors a more entrepreneur- caso del mercado público financiado en facilité la réforme municipale. Les ial view of their administration); virtud del PDM en Pulilán revela que el municipalités participantes ont appris and (3) the sensitivity to MDP im- proyecto tuvo considerable impacto en que : 1) la participation au pacts is greater with deeper MDP el desarrollo de la economia local. El programme déclenche le processus de funding. Based on these findings, proyecto no sólo estimuló el empleo y la réforme ; 2) de meilleurs résultats the study offers four main recom- generación de ingresos, sino que budgétaires sont nécessaires pour mendations: (1) MDP policy reform también impulsó el desarrollo de un assurer une meilleure gestion (ce qui instruments should be diversified to nuevo centro comercial cerca del permet aux maires d'envisager leur broaden project impacts; (2) mercado público, que tuvo importantes administration davantage à la façon projects should be well designed at efectos secundarios. d'un chef d'entreprise) ; et 3) les PDM the beginning, since later correc- En el estudio se Ilega a la conclusión ont des effets plus visibles si l'on tions are difficult; (3) competition de que las operaciones de los PDM en élargit leurs circuits de financement. among municipalities should be ambos paises contribuyeron a Sur la base de ces conclusions, l'étude promoted through the dissemination promover la reforma municipal. Las formule essentiellement quatre of success stories; and (4) to achieve municipalidades participantes se dieron recommandations: 1) les instruments the long-term sustainability of cuenta de que: 1) la participaciôn en la PDM de réforme des politiques MDPs, borrowers should establish a reforma impulsa el proceso de reforma; devraient être diversifiés de façon à sound policy and fiscal decentrali- 2) para una mejora de la gestión es élargir l'impact des projets ; 2) les zation framework. preciso obtener mejores resultados projets devraient être bien conçus The financing needs of munici- fiscales (Io que permite a los intendentes initialement du fait qu'il est difficile de palities vary depending on their size enfocar su administración con una les rectifier par la suite ; 3) il and stage of socioeconomic devel- visión màs empresarial), y 3) la conviendrait d'encourager la opment. In the MDP programs in sensibilidad a los efectos de los PDM es concurrence entre les municipalités en both Brazil and the Philippines, mayor cuando se cuenta con un nivel faisant connaître les exemples de resource-poor municipalities tend to alto de financiamiento en virtud de réussite ; et 4) pour assurer la viabilité gain experience and enhance their éstos. Teniendo en cuenta estas à long terme des projets de creditworthiness by first financing conclusiones, en el estudio se formulan développement municipal, les xii Executive Summary simple, low-risk projects such cuatro recomendaciones: 1) los emprunteurs devraient mettre as street paving (in Brazil) or instrumentos de reforma en place un cadre d'action public markets (in the Philip- normativa de los PDM deben réglementaire et de pines). As they continue to diversificarse para que el impacto décentralisation budgétaire grow and develop, they use del proyecto tenga mâs alcance; approprié. the program to finance larger- 2) los proyectos deben diseñarse Les besoins de financement scale economic infrastructure bien al principio, puesto que más des municipalités varient en for manufacturing and commerce, adelante es dificil corregirlos; 3) se debe fonction de leur taille et de leur stade and more complex social infrastruc- promover la competencia entre las de développement socio-économique. ture for the urban population. Even- municipalidades mediante la difusiôn de Dans le cas des programmes PDM du tually they become ready to leave los éxitos alcanzados; y 4) para lograr la Brésil comme des Philippines, les the program and borrow from the sostenibilidad a largo plazo de los municipalités aux ressources limitées private capital market. While such proyectos de desarrollo municipal, los ont tendance à acquérir de l'expérience an outcome also depends on the prestatarios deben contar con un et à améliorer leur crédit en speed of capital market develop- marco acertado de descentralización commençant par financer des projets ment in individual countries, the normativa y fiscal. simples comportant peu de risques, experiences in Brazil and the Philip- Las necesidades financieras de las tels que le revêtement des rues (au pines show progress in helping mu- municipalidades varian según su Brésil) ou la construction de marchés nicipalities prepare for access to the tamafño y la etapa de desarrollo (aux capital market. This catalytic role socioeconôniico en que se encuentren. Philippines). À mesure qu'elles se of the MDP program for local gov- Los PDM de Brasil y Filipinas revelan développent, les municipalités utilisent ernments is analogous to the role of que las municipalidades carentes de ensuite le programme pour financer the World Bank in assisting devel- recursos por bo general acumulan des infrastructures économiques à oping countries until they graduate experiencia y mejoran su capacidad plus grande échelle pour des activités from the Bank. crediticia cuando financian, en primer manufacturières et commerciales, ainsi lugar, proyectos de poco riesgo, como la que des infrastructures sociales plus pavimentación de calles (en Brasil) o complexes destinées à la population mercados públicos (en Filipinas). A urbaine. À la longue, elles sont prêtes medida que crecen y se desarrollan màs, à se passer du programme PDM et à ellas se valen de los PDM para financiar contracter des emprunts sur les infraestructura econômica de gran marchés financiers privés. Une telle escala para la actividad manufacturera y issue dépend également du rythme el comercio, asi como infraestructura so- auquel se développent les marchés cial màs compleja para la población ur- financiers dans les différents pays, bana. Con el tiempo estàn en mais les expériences du Brésil et des condiciones de prescindir de los PDM y Philippines montrent que les tomar préstamos del mercado privado municipalités sont maintenant mieux de capital. Mientras que ese resultado préparées à accéder au marché también depende de la velocidad de financier. Ce rôle de catalyseur du desarrollo del mercado de capital en los programme PDM pour les autorités distintos paises, en los casos de Brasil y locales est analogue à celui que joue la Filipinas las municipalidades avanzaron Banque mondiale en aidant les pays en en los preparativos para poder tener développement jusqu'à ce qu'ils acceso al mercado de capital. Esta puissent se passer de son assistance. función catalizadora de los PDM para los gobiernos locales es anàloga a la función que cumple el Banco Mundial de ayuda a los paises en desarrollo para que puedan graduarse del Banco. xiii  ABBREVIATIONS AND ACRONYMS MDP - Municipal Development Project OED - Operations Evaluation Department PAR - Performance Audit Report FOR BRAZIL: BANRISUL - State Commercial Bank in Rio Grande do Sul FAMEPAR - Parand Municipal Assistance Foundation FUNDOPIMES - State Urban Development Fund in Rio Grande do Sul FDU - State Urban Development Fund in Parani ParandCidade - Parani State Urban Development Fund (under the InterAmerican Development Bank) PEDU - MDP in Parang PIMES - MDP in Rio Grande do Sul RGS - Rio Grande do Sul FOR THE PHILIPPINES: BLGF - Bureau of Local Government Finance CPO - Central Project Office DOF - Department of Finance DPWH - Department of Public Works and Highways IRA - Internal Revenue Allotment LGA - Local Government Academy LOGOFIND - Local Government Finance and Development Project RPTA - Real Property Tax Administration XV  Acknowledgments This report was prepared by Kyu Sik Lee, task manager, the municipal development projects in Brazil and the when he was principal evaluation officer in the World Philippines, respectively, provided advice and support Bank's Operations Evaluation Department, and Roy for the study. Robert Buckley reviewed earlier drafts of Gilbert, then consultant, currently principal evaluation the report. William B. Hurlbut edited the report. officer. Romayne Pereira provided administrative assistance. Much of the analysis was based on a close This study was published in the Partnerships and collaboration between the authors and project teams in Knowledge Gtoup (OEDPK) by the Outreach and Brazil and the Philippines. In particular, the authors Dissemination Unit. The task team includes Elizabeth would like to thank, from Brazil, Aurelio Simon, Campbell-Pag6 (task team leader), Caroline McEuen Jeanette Lontra, and Sextilio Giacomini, who con- and Deborah Davis (editors), Kathy Sttauss and Lunn ducted the study on capacity building. And from the Lestina (graphic designers), and Juicy Qureishi-Huq Philippines, Jose Ong, Millie Villar, and Vic Ignacio, (administrative assistant). who pretested the questionnaire and provided logistical support for the study; and Elizabeth Legazpi, who prepared the municipal finance data. The survey of Director-General, Operations Evaluation: Robert Picciotto public markets in the Philippines was conducted by Director, Operations Evaluation Department: Elizabeth McAllister Cirrus Research and Software in Manila under the direction of Mari-jo Luciano. From the World Bank, Manager Sector and Thematic Evaluations: Gregory Ingram Braz Menezes and Thomas Zearley, task managers of Task Manager: Kyu Sik Lee V  Foreword FOREWORD PREFACIO PRÉFACE The World Bank has been El Banco Mundial ha La Banque mondiale financing projects aimed at support- venido financiando proyectos finance depuis une vingtaine d'années ing municipal development for destinados a respaldar el desarrollo des projets visant à soutenir le some 20 years. This book presents municipal desde hace 20 años. En este développement municipal dans les and analyzes the concrete results of libro se presentan y analizan los pays où l'administration est four successful projects in Brazil resultados concretos de cuatro décentralisée. Le présent ouvrage and the Philippines. This is the first proyectos satisfactorios en Brasil y expose et analyse les résultats concrets time the Bank has disseminated an Filipinas. Esta es la primera vez que el de quatre projets réussis au Brésil et assessment of the medium-term im- Banco ha distribuido una evaluación aux Philippines. C'est la première fois pacts of these operations to a wider del impacto a mediano plazo de estas que la Banque diffuse à l'intention readership. operaciones a un número màs amplio d'un vaste public une évaluation des The study grew out of recently de lectores. effets à moyen terme de ces completed performance audits of El estudio se basô en las opérations. municipal development projects in evaluaciones ex post terminadas hace L'étude s'inscrit dans le Brazil and the Philippines, and drew poco de proyectos municipales de prolongement de récentes évaluations its data from many sources. The desarrollo correspondientes a Brasil y rétrospectives de projets de analysis was based on selected indi- Filipinas y en datos provenientes de développement municipal exécutés au cators drawn from a very large muchas fuentes. El anàlisis se valiô de Brésil et aux Philippines, et elle a utilisé municipal finance database cover- indicadores seleccionados extraidos de des données provenant de nombreuses ing more than 800 municipalities una base de datos muy grande de sources. 'analyse est fondée sur un over a period of seven years, and a financia-mientos municipales que certain nombre d'indicateurs établis à survey of public markets in the abarca a màs de 800 municipalidades partir d'une très vaste base de données Philippines. In addition, the study en un periodo de siete años, y de una sur les finances municipales couvrant teams conducted fieldwork in Brazil encuesta de los mercados pùblicos de plus de 800 municipalités sur une and the Philippines during 1997-98. Filipinas. Ademàs, los grupos de période de sept ans, ainsi que sur une An OED workshop held in Decem- estudio Ilevaron a cabo trabajos en el enquête relative aux marchés aux Phil- ber 1998 to discuss the study's pre- terreno en Brasil y Filipinas durante ippines. En outre, les équipes chargées liminary findings was well attended 1997-98. Expertos en desarrollo mu- de l'étude ont effectué en 1997-98 des by municipal development experts nicipal de todo el Banco asistieron en travaux sur le terrain au Brésil et aux from across the Bank. These experts gran número a un seminario del DEO Philippines. Des experts du contributed further insights, which celebrado en diciembre de 1998 para développement municipal représentant are reflected here. discutir las conclusiones preliminares les services les plus divers de la Banque With evidence drawn from a del estudio. Dichos expertos ont participé, en décembre 1998, à un very broad universe of municipali- aportaron sus ideas, las que se atelier de l'OED au cours duquel ont ties, the study concludes that mu- incorporaron en este libro. été examinées les conclusions nicipal development projects in Bra- Teniendo en cuenta pruebas préliminaires de l'étude. Ces experts zil and the Philippines helped to recogidas de una amplia gama de ont fait eux aussi des constatations stimulate and facilitate municipal municipalidades, en el estudio se Ilega intéressantes, qui sont indiquées ici. reform. Municipalities that partici- a la conclusión de que los proyectos Sur la base de données provenant pated in municipal development de desarrollo municipal de Brasil y des municipalités les plus diverses, projects consistently outperformed Filipinas ayudaron a estimular y l'étude conclut que les projets de nonparticipants on the fiscal front, promover la reforma municipal. Las développement municipal exécutés au vii Developing Towns and Cities: Lessons from Brazil and the Philippines the more so the deeper their municipalidades que Brésil et aux engagement. Also, partici- participaron en proyectos de Philippines ont stimulé et facilité pating municipalities signifi- desarrollo municipal siempre la réforme municipale. Les cantly improved their obtuvieron mejores resultados municipalités qui ont participé à institutional capacity to fi- fiscales que aquellas que no des projets de ce type ont nance and manage invest- participaron, y dichos constamment obtenu de ment programs. The lessons resultados fueron tanto mejores meilleurs résultats que les autres drawn from this study should be cuanto mayor fue su grado de sur le front budgétaire, et ce en pro- useful for future policy and opera- participación. Asimismo, las portion de leur degré d'engagement. tions. municipalidades participantes De plus, les municipalités participantes mejoraron considerablemente su sont devenues nettement mieux à capacidad institucional para financiar même, au niveau institutionnel, de y administrar programas de inversión. financer et de gérer des programmes Las ensefianzas plasmadas en este d'investisse-ment. Les leçons tirées de estudio deberian ser útiles para las cette étude devraient être utiles à politicas y operaciones en el futuro. l'avenir du point de vue de la politique générale et des opérations. Robert Picciotto Director-General, Operations Evaluation Department viii Executive Summary EXECUTIVE RESUMEN RESUMÉ SUMMARY ANALYTIQUE Of the 75 developing countries De los 75 paises en Sur les 75 pays en with more than 5 million people, 63 desarrollo con una poblaciôn de màs développement comptant plus de are now pursuing decentralization de cinco millones de personas, 63 5 millions d'habitants, 63 suivent policies that devolve functions and están aplicando en estos momentos actuellement des politiques de responsibilities to local governments. politicas de descentralización que décentralisation caractérisées par la This process is severely constrained atribuyen a los gobiernos locales dévolution de fonctions et de in many countries, however, by a funciones y responsabilidades que responsabilités aux autorités locales. lack of institutional capacity among antes se cumplian a niveles superiores Mais, dans beaucoup de pays, ce local governments, limited resource de gobierno. Sin embargo, este processus est sérieusement entravé par la faible capacité institutionnelle de ces autorités, la mobilisation limitée de ressources au niveau local, et l'accès insuffisant à des sources de financement à long terme pour les programmes d'investissement. Les projets de développement municipal (PDM) visent à atténuer ces Pol 'contraintes. Depuis le début des années 80, 16 PDM financés par la I Banque ont été exécutés dans 11 pays et 19 autres sont actuellement mis en oeuvre dans 15 pays, le volume total des prêts au titre de l'ensemble des PDM atteignant 2 milliards de dollars. Le rapport d'évaluation d'impact mobilization at the local level, and proceso se ve sumamente limitado en évalue l'effet des PDM sur la capacité limited access to long-term financing muchos paises por la falta de de gestion budgétaire et financière des for investment programs. Municipal capacidad institucional de los autorités locales, ainsi que sur leur development projects (MDPs) aim at gobiernos locales, la escasa aptitude à planifier et à exécuter des mitigating these constraints. Since the movilización de recursos a nivel local y programmes d'investissement. Il tente early 1980s, 16 Bank-financed MDPs el limitado acceso a financiamiento a également de déterminer si les projets have been completed in Il countries, largo plazo para los programas de ont eu les effets directs prévus (au and 19 more in 15 countries are inversiôn. Los proyectos de stade de l'évaluation des projets) sur currently being implemented, with desarrollo municipal (PDM) tienen les bénéficiaires, et les effets indirects total lending for all MDPs reaching por objeto atenuar estas limitaciones. attendus sur le développement des US$2 billion. Desde principios de la década de économies locales, en particulier sur This impact evaluation report 1980, se han terminado 16 PDM l'emploi et la création de revenu. Cette assesses the effect of MDPs on the correspondientes a 11 paises, y en la étude évalue l'impact de quatre PDM fiscal and financial management actualidad se estàn ejecutando otros réussis - deux aux Philippines et capacity of local governments, as 19 en 15 paises; el total de deux au Bresil - dont on peut tirer de well as on their capacity to plan and financiamiento para PMD asciende a precieux enseignements pour les implement investment programs. It US$2.000 millones. projets actuels et futurs dans ces pays ix Developing Towns and Cities: Lessons from Brazil and the Philippines also assesses whether the En este informe de et ailleurs. Dans le cadre de projects had the direct effects evaluación del impacto se l'étude, on a recueilli et analysé on beneficiaries and the indi- estudian los efectos de los PDM trois séries de données : 1) des rect effects on the develop- en la capacidad de gestión fiscal données sur les finances ment of local economies, y financiera de los gobiernos municipales provenant des particularly employment and locales, asi como su capacidad autorités locales ; 2) les données income generation, that were para planificar y ejecutar d'une enquête par sondage anticipated at project appraisal. programas de inversiôn. También se effectuée auprès des maires sur le The study evaluates the impact of analiza si los proyectos han tenido los renforcement des capacités ; et 3) les four successful MDPs, two in the efectos que se habian previsto en su données d'une enquête auprès des Philippines and two in Brazil- evaluación inicial, directos en los marchands sur les marchés publics. cases that provide valuable lessons beneficiarios e indirectos en el Au niveau aussi bien des municipalités for ongoing and future projects in desarrollo de las economias locales, que des bénéficiaires, l'étude a those countries and elsewhere. The sobre todo en la creaciôn de empleo y comparé la situation des municipalités study collected and analyzed three la generación de ingresos. En el participantes avant et après sets of data: (1) municipal finance estudio se evalùa el impacto de cuatro l'exécution du projet à celle des autres data from local governments, (2) a PDM eficaces, dos de Filipinas y dos municipalités durant la même période. sample survey of mayors on capac- de Brasil, que permiten extraer Les PDM du Brésil et des ity building, and (3) a survey of valiosas ensefñanzas para los Philippines étaient pratiquement stallholders in public markets. At proyectos, en marcha y futuros, en identiques par leurs objectifs et leur both the municipal and the benefi- esos y otros paises. Para el estudio se conception, mais différaient par leurs ciary levels, the study compared the recopilaron y analizaron tres stratégies d'exécution. Au Brésil, une conditions in the participating mu- conjuntos de datos: 1) datos sobre el approche à l'échelon des États a nicipalities before and after project financiamiento municipal de los permis au plus grand nombre possible implementation with conditions in gobiernos locales, 2) una encuesta de municipalités de participer au nonparticipating municipalities dur- muestra de intendentes acerca del programme de réforme budgétaire, ing the same period. fortalecimiento de la capacidad y 3) parallèlement à l'octroi d'un The Brazil and Philippines una encuesta de vendedores que tenían financement pour des projets MDPs were almost identical in their puestos en mercados públicos. Tanto techniquement simples tel que le objectives and design but had differ- a nivel municipal como de los revêtement des rues. Aux Philippines, ent implementation strategies. In beneficiarios, en el estudio se ha une approche plus sélective a permis à Brazil, a statewide approach al- comparado la situaciôn de las un plus petit nombre de municipalités lowed many municipalities to par- municipalidades participantes, antes y admissibles de financer des projets ticipate in the fiscal reform pro- después de la ejecución del proyecto, générateurs de recettes tels que gram, packaged together with con la reinante en las municipalidades l'aménagement de marchés publics. funding for technically simple no participantes en el mismo periodo. Dans les deux pays, les programmes projects such as street paving. In the Los objetivos y el disefño de los ont utilisé essentiellement deux Philippines, a more selective ap- PDM de Brasil y Filipinas eran casi instruments : 1) une réforme proach allowed a smaller number of idénticos, pero sus estrategias eran budgétaire et financière ; et 2) des eligible municipalities to finance distintas. En Brasil, un enfoque de projets d'investissement dans les revenue-generating projects such as alcance estadual permitiô la infrastructures. Pour solliciter un prêt public markets. In both countries, participaciôn del mayor número posible dans le cadre du projet, les autorités the programs had two main instru- de municipalidades en el programa de des municipalités devaient tout ments: (1) fiscal and financial reforma fiscal, que se aplicó junto con d'abord soumettre un plan d'action reform and (2) infrastructure invest- un paquete de financiamiento para financière ainsi qu'un programme de ment projects. To apply for a loan proyectos técnicamente sencillos, como réformes détaillé, et préparer ensuite under the project, a municipal gov- la pavimentación de calles. En Filipinas, un projet d'investissement. La ernment had to first submit a finan- gracias a un enfoque màs selectivo, un préparation et - une fois le prêt cial action plan, along with a com- número màs reducido de approuvé - l'exécution du projet X Executive Sunmary prehensive reform package, municipalidades elegibles pudo d'investissement ont aidé à and then prepare an invest- financiar proyectos generadores renforcer la capacité ment project. The prepara- de ingresos, como mercados institutionnelle en permettant tion and-once the loan was públicos. En ambos paises, los d'acquérir une expérience à approved-implementation PDM tenian dos instrumentos chaque phase du cycle du of the investment project principales, a saber: 1) reforma projet, depuis l'étude de helped to enhance institu- fiscal y financiera y 2) proyectos faisabilité jusqu'aux travaux de tional capacity by offering experi- de inversiones en infraestructura. Para construction. ence in every phase of the project solicitar un préstamo en virtud del Des analyses des données cycle, from the feasibility study to proyecto, el gobierno municipal primero montrent que les municipalités the construction work. tenia que presentar un plan de acción participant à des PDM au Brésil et aux Analyses of the data show that financiera, junto con un paquete integral Philippines ont obtenu de meilleurs municipalities participating in MDPs de reformas, y luego preparar un résultats que les autres du point de in Brazil and the Philippines outper- proyecto de inversión. La preparación vue de l'autonomie financière. En formed nonparticipants in the area of y, una vez aprobado el préstamo, la outre, elles se sont appuyées financial autonomy. Furthermore, ejecución del proyecto de inversión davantage que les autres sur leurs participating municipalities relied ayudô a fortalecer la capacidad propres recettes, et sont même more on their own revenues than institucional al permitir acumular parvenues à en mobiliser pour des nonparticipants, and even succeeded experiencia en cada etapa del ciclo del investissements d'infrastructure in mobilizing revenues for additional proyecto, desde el estudio de viabilidad supplémentaires. C'est ainsi que le infrastructure investments. For ex- hasta las tareas de construcción. projet a eu un effet positif sur le ample, the project had a positive El análisis de los datos revela que recouvrement des impôts fonciers et impact on property tax collection and las municipalidades que participaron en sur le recouvrement direct des coûts on direct cost recovery through the los PDM de Brasil y Filipinas obtuvieron grâce à la perception de taxes levying and collection of betterment mejores resultados que las no d'amélioration. Pour rester solvables, charges. To remain creditworthy, par- participantes, en la esfera de autonomia les municipalités participantes sont ticipating municipalities were more financiera. Asimismo, las parvenues mieux que les autres à successful than others in balancing municipalidades participantes podian équilibrer leur budget. C'est ainsi que their budgets. Thus, the extensive valerse más de sus propios ingresos que les données détaillées sur les finances municipal finance data point to sig- las no participantes, e incluso lograron municipales indiquent que les PDM nificant impact of MDPs on the movilizar ingresos para inversiones ont largement contribué au strengthening of municipal fiscal and adicionales en infraestructura. Pot renforcement de la gestion budgétaire financial management. ejemplo, el proyecto tuvo efectos et financière des municipalités. The survey of mayors in the state positivos en la recaudación de L'enquête auprès des maires de of Rio Grande do Sul, Brazil, con- impuestos inmobiliarios y en la l'État du Rio Grande do Sul, au Brésil, firms the importance of such im- recuperaciôn de los costos directos confirme l'importance de ces progrès. provements. The mayors said their gracias a la aplicación y el cobro de Les maires ont fait savoir que leurs municipalities most highly valued the contribuciones por mejoras. Las municipalités se félicitaient tout institutional development interven- municipalidades participantes, que particulièrement des interventions au tions aimed at improving resource estaban interesadas en mantener su titre du développement institutionnel management and the management of capacidad crediticia, fueron más eficaces qui visaient à améliorer la gestion des investment projects, including better que otras en el logro del equilibrio ressources et celle des projets procurement procedures. They also presupuestario. En consecuencia, los d'investissement et, notamment, les valued professional training, infor- numerosos datos sobre financiamiento procédures de passation des marchés. mation technology, and community municipal revelan el impacto importante Ils ont également apprécié la participation. The municipalities' de los PDM en el fortalecimiento de la formation professionnelle, la awareness of these advances had an gestión fiscal y financiera municipal. technologie de l'information et la important side effect: successful par- La encuesta de intendentes del participation communautaire. Le fait ticipants openly promoted the project estado de Rio Grande do Sul, en Brasil, que les municipalités soient xi Developing Towns and Cities. Lessons from Brazil and the Philippines and its principles among mu- confirma la importancia de conscientes de ces progrès a eu nicipalities still not involved. dichas mejoras. Los intendentes un important effet secondaire, For the Philippines, the afirmaron que sus en ce sens que celles qui ont case of the MDP-financed municipalidades atribuian gran participé avec succès à des public market in Pulilan valor a las intervenciones de projets ont ouvertement vanté shows that the project had desarrollo institucional les avantages de ceux-ci et les significant impact on the de- destinadas a mejorar la gestiôn de principes sur lesquels ils velopment of the local economy. los recursos y de los proyectos de reposaient auprès des municipalités The project not only stimulated inversiôn, incluidos los procedimientos qui n'y avaient pas encore participé. employment and income genera- mejorados de contratación. También Aux Philippines, l'étude de cas sur tion, but also triggered the develop- valoraban la capacitaciôn profesional, la le marché financé par un PDM à ment of a new business center near tecnologia de la información y la Pulilan montre que ce projet a eu un the public market, which had sig- participaciôn de la comunidad. El impact considérable sur le nificant spillover effects. reconocimiento de estos adelantos por développement de l'économie locale. Il The study concludes that MDP parte de las municipalidades tuvo un a non seulement stimulé l'emploi et la operations in both countries helped importante efecto secundario: los formation de revenu, mais aussi to facilitate municipal reform. Par- participantes que obtuvieron buenos contribué à l'aménagement d'un ticipating municipalities learned resultados promovieron abiertamente el nouveau centre commercial près du that (1) participation in the program proyecto y sus principios entre las marché, avec de nombreuses triggers the reform process; (2) im- municipalidades que aún no retombées positives. proved fiscal performance is neces- participaban. L'étude conclut que les opérations sary for better management (thus En el caso de Filipinas, el estudio del PDM menées dans les deux pays ont giving mayors a more entrepreneur- caso del mercado público financiado en facilité la réforme municipale. Les ial view of their administration); virtud del PDM en Pulilàn revela que el municipalités participantes ont appris and (3) the sensitivity to MDP im- proyecto tuvo considerable impacto en que : 1> la participation au pacts is greater with deeper MDP el desarrollo de la economía local. El programme déclenche le processus de funding. Based on these findings, proyecto no sôlo estimulô el empleo y la réforme ; 2) de meilleurs résultats the study offers four main recom- generaciôn de ingresos, sino que budgétaires sont nécessaires pour mendations: (1) MDP policy reform también impulsô el desarrollo de un assurer une meilleure gestion (ce qui instruments should be diversified to nuevo centro comercial cerca del permet aux maires d'envisager leur broaden project impacts; (2) mercado piblico, que tuvo importantes administration davantage à la façon projects should be well designed at efectos secundarios. d'un chef d'entreprise) ; et 3) les PDM the beginning, since later correc- En el estudio se Ilega a la conclusión ont des effets plus visibles si l'on tions are difficult; (3) competition de que las operaciones de los PDM en élargit leurs circuits de financement. among municipalities should be ambos paises contribuyeron a Sur la base de ces conclusions, l'étude promoted through the dissemination promover la reforma municipal. Las formule essentiellement quatre of success stories; and (4) to achieve municipalidades participantes se dieron recommandations : 1) les instruments the long-term sustainability of cuenta de que: 1) la participación en la PDM de réforme des politiques MDPs, borrowers should establish a reforma impulsa el proceso de reforma; devraient être diversifiés de façon à sound policy and fiscal decentrali- 2) para una mejora de la gestiôn es élargir l'impact des projets ; 2) les zation framework. preciso obtener mejores resultados projets devraient être bien conçus The financing needs of munici- fiscales (Io que permite a los intendentes initialement du fait qu'il est difficile de palities vary depending on their size enfocar su administración con una les rectifier par la suite ; 3) il and stage of socioeconomic devel- visión màs empresarial), y 3) la conviendrait d'encourager la opment. In the MDP programs in sensibilidad a los efectos de los PDM es concurrence entre les municipalités en both Brazil and the Philippines, mayor cuando se cuenta con un nivel faisant connaître les exemples de resource-poor municipalities tend to alto de financiamiento en virtud de réussite ; et 4) pour assurer la viabilité gain experience and enhance their éstos. Teniendo en cuenta estas à long terme des projets de creditworthiness by first financing conclusiones, en el estudio se formulan développement municipal, les xii Executive Su mmary simple, low-risk projects such cuatro recomendaciones: 1) los emprunteurs devraient mettre as street paving (in Brazil) or instrumentos de reforma en place un cadre d'action public markets (in the Philip- normativa de los PDM deben réglementaire et de pines). As they continue to diversificarse para que el impacto décentralisation budgétaire grow and develop, they use del proyecto tenga más alcance; approprié. the program to finance larger- 2) los proyectos deben diseiarse Les besoins de financement scale economic infrastructure bien al principio, puesto que más des municipalités varient en for manufacturing and commerce, adelante es dificil corregirlos; 3) se debe fonction de leur taille et de leur stade and more complex social infrastruc- promover la competencia entre las de développement socio-économique. ture for the urban population. Even- municipalidades mediante la difusión de Dans le cas des programmes PDM du tually they become ready to leave los éxitos alcanzados; y 4) para lograr la Brésil comme des Philippines, les the program and borrow from the sostenibilidad a largo plazo de los municipalités aux ressources limitées private capital market. While such proyectos de desarrollo municipal, los ont tendance à acquérir de l'expérience an outcome also depends on the prestatarios deben contar con un et à améliorer leur crédit en speed of capital market develop- marco acertado de descentralización commençant par financer des projets ment in individual countries, the normativa y fiscal. simples comportant peu de risques, experiences in Brazil and the Philip- Las necesidades financieras de las tels que le revêtement des rues (au pines show progress in helping mu- municipalidades varian según su Brésil) ou la construction de marchés nicipalities prepare for access to the tamafño y la etapa de desarrollo (aux capital market. This catalytic role socioeconómico en que se encuentren. Philippines). À mesure qu'elles se of the MDP program for local gov- Los PDM de Brasil y Filipinas revelan développent, les municipalités utilisent ernments is analogous to the role of que las municipalidades carentes de ensuite le programme pour financer the World Bank in assisting devel- recursos pot bo general acumulan des infrastructures économiques à oping countries until they graduate experiencia y mejoran su capacidad plus grande échelle pour des activités from the Bank. crediticia cuando financian, en primer manufacturières et commerciales, ainsi lugar, proyectos de poco riesgo, como la que des infrastructures sociales plus pavimentaciôn de calles (en Brasil) o complexes destinées à la population mercados públicos (en Filipinas). A urbaine. À la longue, elles sont prêtes medida que crecen y se desarrollan màs, à se passer du programme PDM et à ellas se valen de los PDM para financiar contracter des emprunts sur les infraestructura económica de gran marchés financiers privés. Une telle escala para la actividad manufacturera y issue dépend également du rythme el comercio, asi como infraestructura so- auquel se développent les marchés cial màs compleja para la población ur- financiers dans les différents pays, bana. Con el tiempo están en mais les expériences du Brésil et des condiciones de prescindir de los PDM y Philippines montrent que les tomar préstamos del mercado privado municipalités sont maintenant mieux de capital. Mientras que ese resultado préparées à accéder au marché también depende de la velocidad de financier. Ce rôle de catalyseur du desarrollo del mercado de capital en los programme PDM pour les autorités distintos paises, en los casos de Brasil y locales est analogue à celui que joue la Filipinas las municipalidades avanzaron Banque mondiale en aidant les pays en en los preparativos para poder tener développement jusqu'à ce qu'ils acceso al mercado de capital. Esta puissent se passer de son assistance. función catalizadora de los PDM para los gobiernos locales es anàloga a la funciôn que cumple el Banco Mundial de ayuda a los paises en desarrollo para que puedan graduarse del Banco. xiii  ABBREVIATIONS AND ACRONYMS MDP - Municipal Development Project OED - Operations Evaluation Department PAR - Performance Audit Report FOR BRAZIL: BANRISUL - State Commercial Bank in Rio Grande do Sul FAMEPAR - Parani Municipal Assistance Foundation FUNDOPIMES - State Urban Development Fund in Rio Grande do Sul FDU - State Urban Development Fund in Parand ParanACidade - Parana State Urban Development Fund (under the InterAmerican Development Bank) PEDU - MDP in Parand PIMES - MDP in Rio Grande do Sul RGS - Rio Grande do Sul FOR THE PHILIPPINES: BLGF - Bureau of Local Government Finance CPO - Central Project Office DOF - Department of Finance DPWH - Department of Public Works and Highways IRA - Internal Revenue Allotment LGA - Local Government Academy LOGOFIND - Local Government Finance and Development Project RPTA - Real Property Tax Administration XV Introduction f the 75 developing countries with more than 5 million people, 63 are now pursuing decentralization policies that devolve functions and responsibilities to subnational gov- ernments (Davoodi and Zou 1998). Such decentralization is severely constrained, however, by (1) a lack of institutional capacity among these governments, especially a lack of technical personnel to prepare and implement projects; (2) limited ability to mobilize resources at the local level; and (3) limited access to long-term finance for investment programs. Municipal development projects (MDPs) are intended to mitigate mented. Total lending for all projects has reached these constraints. Typically, MDPs consist of two US$2 billion. The lending instrument within ML)Ps has components: (1) a line of credit to fund municipal become popular in the Bank's urban sector because its investments in infrastructure and services (municipal project concept is consistent with the current emphasis development fund);' and (2) technical assistance to on demand-driven, bottom-up approaches that include encourage-among other things-a greater fiscal effort strong ownership and local participation, as exempli- at the municipal level. This study evaluates the extent fied by the four projects in Brazil and the Philippines. to which MDPs have achieved these objectives, based This study grew out of recently completed perfor- on two cases in Brazil and two in the Philippines, as mance audits of those four projects. The performance shown in table 1.1. audit reports (PARs) covered implementation experi- ences and remaining issues. The agenda that was Rationale for the Study identified regarding future policy and operational Since the early 1980s, 16 Bank-financed MDPs have direction is summarized in Chapter 6, and the lessons been completed in 11 countries, including Brazil, the drawn and recommendations provided in the PARs Philippines, Jordan, and C6te d'Ivoire. Nineteen more appear as Annexes 3 and 4. MDPs in 15 countries, including Georgia, Tunisia, and The PARs found that the projects in Brazil and the the West Bank and Gaza, are currently being imple- Philippines had significant impacts on improving the TABLE 1.1: BASIC LOAN DATA Loan number ProjeLt name USSmiion di.burTeld Board approuam Compi ion 3100 NIDP in the thee t Par.in.i Iuorba 0n22 12s/ecoc its 3129 NpDP in the State or o1ec (ronncp Js onsste 1 W2i4th9 th c .3 epai 2435 NIDP in the Pdiemiapnddiv 3b5ottom-u ap c th3 in 3146 Second byDP in fhe ouhiroppij 1i 214BIln 1 1.lip Developing Towns and Cities: Lessons from Brazil and the Philippines living conditions and productivity of the residents in (Loan 3455, approved in 1992) to meet the strong participating municipalities. Moreover, their indirect demand for financing among the municipalities in that impacts on the local economy have been significant. country. A fourth project, the Local Government The performance audits of MDP I and II in the Finance and Development Project (LOGOFIND), was Philippines showed that small, resource-poor munici- approved in 1999, with a proposed loan amount of palities could successfully complete a small revenue- US$100 million. generating project such as a public market, and later, after they had become more creditworthy and techni- Objectives, Scope, and Approaches to the Study cally capable, could come back to the MDP to finance Objectives more complex infrastructure projects. This experience The objectives of this study are to assess (1) the impacts shows the importance of sequencing projec compo1 shos te iporanc ofseqencng roect compo- of MDPs on the institutional capacity of local govern- nents according to the borrower's speed of institutional ments for fiscal and financial management, and for learning. As the Brazil PAR points out, participating planning and implementation of investment programs; municipalities should eventually graduate from the (2) whether the direct impacts on the beneficiaries were MDP program, which is a transitory institutional as anticipated by the projects; and (3) the indirect mechanism, and begin to borrow from the capital (longer-term) impacts on the development of local market. economies, focusing on employment and income gen- eration in the participating municipalities. Municipal Development Projects in Urban Lending The legacy of the World Bank's urban lending operations Scope over the past two decades can be characterized as a series The study evaluates the impacts of the first and second of paradigm shifts from (1) sites and services and slum MDPs in the Philippines (loans 2435 and 3146), and the upgrading projects for low-income areas, to (2) citywide MDPs in the states of Parand and Rio Grande do Sul infrastructure projects for selected cities, to (3) MDPs to (loans 3100 and 3129). These four successful projects reach numerous municipalities by encouraging competi- provide a rich basis for study and a rare opportunity to tion among them. In the 1980s, the MDPs shifted urban extract lessons about the institutional learning process project design from a complex supply-driven (top-down) over an extended period of time. approach to a demand-driven (bottom-up) approach that provides a large number of municipalities with access to Approaches credit they can use to finance their own investment The study assesses impacts at two levels: the municipal projects. level and the beneficiary (firm and household) level. At The Parand Market Towns Development Project in the municipal level, it analyzes municipal finance data Brazil (Loan 2343, approved in 1983) and the First collected in Brazil and the Philippines and a sample Municipal Development Project in the Philippines survey of mayors in Rio Grande do Sul. It documents (Loan 2435, approved in 1984) were the first MDPs impacts on financial autonomy; local revenue genera- approved in the early 1980s. In Brazil, the Bank tion; cost recovery; creditworthiness; planning, budget- subsequently undertook an MDP for the state of Santa ing, and accounting practices; project preparation and Catarina (Loan 2623, approved in 1985), and contin- implementation; and technical skills of staff. The ued its operations in Parana with a second MDP in that historical data allow for comparison of conditions state (Loan 3100, approved in 1989) and an MDP in before and after the project. The cross-sectional data the state of Rio Grande do Sul (Loan 3129, approved in for both participating and nonparticipating municipali- 1989). Three more states, Minas Gerais (Loan 3639), ties also allow for comparison of fiscal and financial CearA (Loan 3789), and Bahia (Loan 4140), are now performance with and without the projects. implementing MDPs with loan amounts ranging from At the beneficiary level, the study analyzes survey US$100 million to US$150 million. More than 2,100 data from the two case study municipalities in the municipalities come under the purview of these five Philippines in order to assess the impacts of MDP- MDPs in Brazil. financed public markets (the project choice of most In the Philippines, a second MDP (Loan 3146) was participating municipalities) on employment creation approved in 1989 and was followed by a third MDP and income generation, and evaluate their indirect 2 Introductio n impacts on local economic development. The data visits; (4) municipal finance data collected for all allow comparison of the conditions before and after the municipalities in the two states in Brazil and two projects, and of the impacts with and without the provinces in the Philippines; (5) a survey of mayors of projects. The documented impacts of the projects 26 municipalities in Rio Grande do Sul regarding the include job creation; income generation; increases in project's impact on local capacity building; and land and real property values; changes in the quality of (6) sample surveys of stallholders and shopowners in life as a result of basic services such as street paving, two municipalities in the Philippines, constituting an water supply, and garbage collection; time savings experimental and a control group. (More details on from efficient commuting; and better access to infra- data collection are in Annex 1.) structure services. At both the municipal and beneficiary levels, the study was designed to contrast and compare project Methods and Data impacts on the participating municipalities (experimental The study uses six evaluation instruments: (1) review group) with the nonparticipating municipalities (control and analysis of project implementation data in the group)-a with versus without project evaluation ap- municipalities and implementation agencies; (2) inter- proach. In addition, the data document the initial condi- views with government officials and nongovernmental tions and the outcomes and impacts after project imple- organizations; (3) interviews with beneficiaries and site mentation-a before versus after project approach .2 3  Evaluation Logic: Instruments and Expected Impacts n Brazil, the second MDP in Parani and the first MDP in Rio Grande do Sul were prepared concurrently by the same project team, using identical project objectives and design. The projects had four objectives: (1) to increase the institutional capacity of municipalities and state urban development agencies to plan, finance, and execute investment programs; (2) to im- prove the fiscal and financial management capacity of municipalities; (3) to provide basic eco- nomic and social infrastructure in urban areas; and (4) to improve targeting of urban programs to lower-income populations. These objectives were to development fund to provide local governments with be achieved through three components: (1) creation of direct access to long-term development finance; (2) an urban development fund providing a long-term line establish a national-level technical intermediary, the of credit to municipalities; (2) establishment of strict Central Project Office; (3) strengthen local technical municipal creditworthiness and management improve- and financial capacity for project implementaticn and ment standards as conditions for allowing local gov- service management through a training program; and ernments to participate in the fund; and (3) on-lending (4) improve local fiscal performance through the Real to municipalities to finance infrastructure investments Property Tax Administration (RPTA) program. The such as street improvements, and community facilities project had five components: (1) improvement of basic such as health posts and daycare centers. infrastructure services such as water supply, sanitation, In Parand, the state government's Secretariat of roads, drainage, and public markets; (2) upgrading of Urban Development had overall project responsibility various maintenance activities; (3) upgrading of real for Parand MDP II (known locally as the PEDU project, property tax records to improve tax collecticn; (4) the name used in the rest of this volume). The Parana training of local government staff; and (5) technical Municipal Assistance Foundation handled day-to-day assistance for project implementation and for local project management. In Rio Grande do Sul, the MDP budgeting and fiscal administration. (known locally as the PIMES project, the name used in In the Philippines, the Department of Public Works the remainder of this volume) was executed by the State and Highways (DPWH) was the lead agency for the Development Bank, which later merged with the State projects. The Central Project Office carried out project Commercial Bank. implementation under the DPWH. The Department of In the Philippines, the Second Municipal Develop- Finance managed the municipal development fund, ment Project (MDP II) was an extension of MDP I to and the department's Bureau of Local Government different regions, using identical project objectives and Finance administered the RPTA programs. The Local design. Its objectives were to (1) establish a municipal Government Academy implemented the municipal Cental rojet Ofice (3 strngten lcaltechica Developing Towns and Cities: Lessons from Brazil and the Philippines training program under the Department of the Interior In the Philippines, as well, OED's performance and Local Government. audits confirmed that the participating municipalities improved their fiscal and financial performance signifi- Main Project Instruments and Expected Impacts canty. The projects in the Philippines also required an The MDPs in Brazil and the Philippines were almost explicit financial reform package similar to the finan- identical in their objectives and design, with some cial action plan in Brazil. In the Philippines, however, variations in implementation strategy. In Brazil, imple- the RPTA program was implemented by a unit in the mentation took a wholesale, statewide approach to the Department of Finance. financial reform program to cover as many municipali- ties as possible, using tech- Capacity Building Through Investment Programs Implementing nically simple investment In both Brazil and the Philippines, the preparation and Implmening projects such as street pay- implementation of investment projects financed by the investment projects ing, which served as the Municipal Development Fund served as a second financed by the entr6 for participation in the major instrument for enhancing the institutional capac- Municipal reform program. In the Phil- ity of local governments. OED's performance audits Development Fund ippines, implementation confirmed that the projects in both countries achieved took a more selective ap- their objecrive of increasing the institutional capacity enhanced the proach, focusing on the of municipalities and the government's urban develop- institutional smaller number of munici- ment agencies to plan, finance, and execute investment capacity of local palities that were eligible to programs. The projects gave officials of participating governments, participate in the program, municipalities the opportunity to learn by doing in all and allowing revenue-gen- phases of project preparation and implementation- erating investment projects from identification, to appraisal, to completion. In such as public markers. In both countries, the programs addition to improving their fiscal and financial man- had two main instruments: fiscal and financial reform, agement through the reform package, the municipali- and investment programs. ties learned by experience in every phase of the project cycle: the feasibility study; economic and financial Fiscal and Financial Reform Package analysis for cost recovery; and technical analysis for In both Brazilian states, OED's performance audits engineering design, procurement, and construction confirmed that the projects improved the fiscal and work. Furthermore, by using computers funded under financial management capacity of participating mu- the project, many municipalities were able to stream- nicipalities. The project design required strict munici- line payroll, cadastre, accounting, and budget opera- pal creditworthiness and management improvement tions and improve overall administrative efficiency. standards as conditions for allowing local governments to participate in the program. To apply for a loan, a Expected Development Impacts municipal government had to submit a reform package The study documents empirically the impacts of MD)Ps consisting of a financial action plan analyzing the in the following areas: municipality's debt servicing capacity (with revenue and expenditure projections) and demonstrating the Fiscal and financial performance of local gov- project's eligibility for financing, based on required ernmens, focusing on fiscal autonomy, local technical standards. The package also had to present a revenue generation, cost recovery, and budget plan for institutional development, including training balance (Chapter 3) and technical assistance needs. The financial action * Local governments' institutional capacity for plan served, in this way, as the key instrument for investment planning, budgeting, accounting, financial and fiscal reform. In addition, the require- and project preparation and implementation ment that institutional reform be carried out before (Chapter 4) physical investments has been an effective way of Local economic development, focusing on in- minimizing possible implementation delays and cost- come and employment generation and the qual- recovery problems. ity of urban services (Chapter 5). 6 Impacts on Municipal Fiscal and Financial Management DP participant municipalities in Brazil and the Philippines outperformed nonpartici- pants in municipal financial autonomy, direct and indirect cost recovery, and bal- ancing their budgets. Furthermore, the deeper the MDP finance, the greater the im- pact on participants. As a result of the project, participant municipalities came to rely on their own revenues to a greater extent than nonparticipants, and succeeded in mobilizing more of these revenues to finance additional projects. Property tax collection-a focus of MDP instruments and technical assistance-responded well to the project. their creditworthiness. Thus, extensive municipal finance Participant municipalities also did much better in direct data point to significant MDP impact on the strengthen- cost recovery through the levying and collection of ing of municipal fiscal and financial management. betterment charges. They were also more successful than This chapter presents findings on the impacts of the others in balancing their budgets, which helped increase MDP financial reform programs on municipal finance. TABLE 3.1: MDP PROJECT STATES AND PROVINCES: SELECTED INDICATORS Brazil Philippine-, Rio Grande Indicator Parana do Sul National Bulacan Laeuna National Total population 1996 (millions) 9.0 - S - 1.8 1.5 - Urban population as share of total (per,nr, 77.9 N 4 69.-? i.4 i-4. GDP per capita PPP 1991 (US$) S,l3 5.1 S i.142 - -3. All municipalities, 1996 Total 371 4-1 -14 24 2b Lul Pop. >250,000 4 4 - 0 0 -- Pop. 50,000-250,000 25 to - 19 Pop. 10,000-50,000 162 I2 - .- Pop. 2,000-10,000 17 244 - 0 0 -- Pop. <2,000 3 1 - 0 ' - MDP project municipalitieSb 364 4 Average pop. per municipality 14,269 12,9 3 L1 6~,549 52.1 44. Note: PPP = purchasing power parity. a. Aggregate of cities (82) plus municipalities (1,528). b. Project municipalities are defined as those that participated fully in both MDP investment and technical assistance components. Source: MDP Impact Evaluation Study database; Brazil census 1996; World Development Indicators 1998, CD-ROM:; Philippines MDP study team. 7 Developirng Towns and Cities: Lessons from Brazil and the Philippines FIGURE 3.1: IMPACTS ON FINANCIAL AUTONOMY Own revenues' share in total revenues Percent change, 1990-96 Percent change, 1990-96 0- 11.6 11 -1 U Participants U Participants 6 - (Parand) -20 - (Bulacan) 1.9 0 Participants -20.2 O Participants 1 __ (Rio Grande do Sul) -30 (Laguna) * Nonparticipants El Nonparticipants -4 ;- (Rio Grande do Sul) -40 -36.9 (Laguna) -5.4 9 1-50 Brazil Philippines Source: MDP Impact Evaluation Study database. Table 3.1 summarizes key characteristics of the four latter, 1990 is the before-project benchmark, and 1996 project areas and their composite municipalities. is the after-project year. Altogether, the projects involved 537 municipali- To evaluate the impact of MDPs on financial ties. Then, as now, municipalities in Brazil were much autonomy, the study team examined the collection of smaller, more varied in population size, and much current revenues from sources under the control of more numerous than their Philippine counterparts. municipalities. These own revenues come from levying Both states in Brazil are as urbanized as the country and collecting local taxes and charges that municipalities itself, while the Philippine provinces included in the can control, independent of higher levels of government. study are more urbanized than the country as a whole This evaluation compares a municipality's own revenues because of their proximity to Manila. While the with its total current revenues, the latter made up of own Brazilian states enjoy levels of GDP per capita similar revenues plus current transfers from higher levels of to the national average, levels in the Philippine government in the form of revenue sharing. Because total provinces are above the national average. The lower current revenues have only these two elements, conclu- levels of income in the Philippines, nevertheless, have sions about increased own revenues automatically imply implications for municipal finance. declining current transfers, and vice versa. Using the share of municipalities' own revenues in Municipal Financial Autonomy versus Revenue Sharing total current revenues as an indicator of financial au- This section and those that follow focus on two ronomy, the analysis shows evidence that MDP munici- perspectives of impact evaluation. First, the perfor- palities in both countries performed better than their mance of participant municipalities is compared with nonparticipating counterparts (figure 3.1 and table 3.2). that of nonparticipant municipalities. Second, perfor- In Brazil, participants' own revenue shares rose, while mance is reviewed before and after the projects. For the nonpartricipants saw their shares decline. In the Philip- TABLE 3.2: IMPACTS ON FINANCIAL AUTONOMY Share of own revenues in all current municipal revenues (percentu Brami 1990 199ow Phrienpineu 1990 196 Participants (Parand) 12lc 14.4 taIrx an['arestihmmu 56.i 44 Participants (RGS) Ih. 2 16. i I.irri,iP i'ir4 I01 1 1 6S 61.m NonparTicipants (RGS) 14cm 3.9 , municipality's ownre Note: RGS = Rio Grande do Sul. For details of participant and nonparticipant municipalities, see Annex table Al.1I. Own (current) revenues = municipalities' own taxes, charges, and sales. All current revenues = own revenues plus current transfers from higher levels of government. Source: MnDP Impact Evaluation Study database. 8 Impacts on Municipal Fiscal and Financial Management FIGURE 3.2: IMPACTS ON OWN REVENUE MOBILIZATION Own revenue per capita Percent change, 1990-96 Percent change, 1990-96 90 120 80 - 71.3 69.4 100 - 95.8 101.2 70 - 60 -UE Participants 80 77.8 U Participants (Parana) (Bulacan) 50 - O Participants 60 _ O Participants 40 - 30.3 (Rio Grande do Sul) (Laguna) 30 Fl Nonparticipants 40 - O Nonparticipants 20 (Rio Grande do Sul) 20 (Laguna) 10- 0 Brazil Philippines Source: MDP Impact Evaluation Study database. pines, all municipalities' shares declined as a direct result * Before the projects in 1990, and in both coun- of government policy-the 1991 Local Government tries, participant and nonparticipant municipali- Code-which increased revenue sharing from 20 to 40 ties had similar levels of own revenue per capita. percent. Nevertheless, participant municipalities in the By project completion in 1996, participant mu- Philippines saw their shares erode less than nonpartici- nicipalities had higher levels than nonpartici- pants over the life of the projects. As a corollary, pants (table 3.3). Be- participant municipalities became less dependent on sides confirming project The data point to fiscal transfers after the projects, unlike nonparticipants. impacts, this points to a Another indicator, municipal own revenues per fairly even playing field significant project capita, offers additional evidence that greater munici- for municipalities at the impacts on the pal financial autonomy can be achieved through outset, a feature par- ability of municipal development projects (figure 3.2 and table ticularly striking in Rio participant 3.3). These data show that: Grande do Sul. It pre- cludes the notion that muniCipalities to * In both Brazil and the Philippines, MDP partici- self-selection might achieve greater pants succeeded in increasing municipal own have induced only bet- fiscal autonomy. revenues per capita more rapidly than did nonpar- ter-performing munici- ticipants. Project impact was greater in the Philip- palities to participate in pines, where these revenues grew faster than in the projects. But the results for Laguna may not Brazil. Nevertheless, the level of own revenues per be reliable, since that province had only four capita in the Philippines-with its lower level of participants. income-is still below that of Brazil. TABLE 3.3: IMPACTS ON OWN REVENUE MOBILIZATION Own revenues per capita (constant 1996 US$) Brazil 1990 199o Phih!ppine 1990 1996 Participants (Paran:i) . 1 42.iti P.rricpiar1 J'1.lio 1! i 4.i1 s.x3 Participants (RGS) i .S 64.6S 13.p.nu .i.ii b.SJ. Nonparticipants (RGS) 3r,.'P 4S.] itn!unop on ii .1une 49. n Note: See table 3.2. RGS = Rio Grande do Sul. Source: MDP Impact Evaluation Study database. 9 Developing Towns and Cities: Lessons from Brazil and the Philippines FIGURE 3.3: IMPACTS ON PROPERTY TAX COLLECTION Property tax per capita Percent change, 1990-96 Percent change, 1990-96 600 547.1 12 9 86.8 500 - 434.7 400 - 1 Participants 6 - Participants (Paran6) 3 (Bulacan) 300 25 -4 0 Participants 0 _ 48.1 0 Participants (Rio Grande do Sul) (Laguna) -3 -31.9 Nopripat 200 - 0 Nonparticipants E Nonparticipants (Rio Grande do Sul) -6 - (Laguna) 100 -9 0 -12 Brazil Philippines Source: MDP Impact Evaluation Study database. Thus, the data point to significant MDP impacts in itly on improving property tax collection, and provided helping participant municipalities to achieve greater technical support for local administrations to improve fiscal autonomy. Evidence of this includes rising shares property tax administration. of municipal income from municipal own revenues and We therefore looked at the performance of property from municipal efforts to raise more of their own tax collection as an indicator of municipal effort to revenues from citizens. MDP projects provided impor- enhance fiscal autonomy and improve creditworthi- tant incentives for municipalities to move in this ness.' Through this indicator, per capita collection in direction. Mayors understood that more municipal both Brazil and the Philippines was found to respond revenue meant greater access to MDP (and other) positively to MDP project interventions. While prop- credit and greater ease in paying off loans. MDP erty tax per capita increased for all municipalities in project design included requirements that mayors both countries during the 1990-96 period, it increased make efforts in this direction in order to qualify for more rapidly in MDP participant municipalities- loans and technical assistance, to encourage munici- except for Parand-than in nonparticipants (figure 3.3 palities develop and strengthen instruments to raise and table 3.4). more tax revenues (see Chapter 4). A review of property tax per capita as an impact indicator highlighted the following issues: Own Revenue Generation Through Property Taxes One of the main sources of municipal own revenues in e Participant municipalities in both countries- both countries is taxes levied on residential, commercial, except those in Parand-improved property tax and industrial properties in urban areas. For the munici- collection during 1990-96 more than nonpartici- palities in Brazil, such property tax collections typically pants did (figure 3.3). In Rio Grande do Sul, accounted for 15 to 25 percent of all own revenues. In the where property tax per capita increased more Philippines, the range was 26 to 33 percent. MDP project than fivefold over the life of the MDP, the design in both countries focused specifically and explic- performance of participants was outstanding. TABLE 3.41: IMPACTS ON PROPERTY TAX COLLECTION Property tax per capita (constant 1996 US$t Brazil 1B90 19rl6 Philippint 1990 19 s Participants 1.Sm o 1.t[re L r l in Mri muicp aies Participants i P t in nopa r tic i pan tsp 11 2.4(g 4. 34 Nonparticir. ii 1.0p, 1- .p r1. 4 s 1.1h ].5; Note: See tables 3.2 and 3.3. RGS = Rio Grande do Sul. Source: MDP Impact Evaluation Study database. 10 Impacts on Municipal Fiscal and Financial Management These results reflect work done through MDP FIGURE 3.4: IMPACTS ON DIRECT COST RECOVERY IN financial action plans in Brazil that consistently BRAZIL emphasized improvements in property tax col- Betterment charge per capita lection as a key to municipal eligibility to participate in the project. Similarly, in the Percent change, 1990-96 Philippines, the favorable results reflect the 126.3 successful Real Property Tax Administration 110 (RPTA) program supported by MDP. E Participants * The weaker performance of Parana compared with 60 -ParanA) Rio Grande do Sul had three causes: (1) less 24.8 GraParticipant rigorous control of project conditionalities that 10 0 Nonparticipants required improved tax performance through finan- 40 (Rio Grande do Sul) cial action plans; (2) participants in Parand were -52 second-time MDP participants, and property tax -90 conditions that the previous MDP did not require Brazil may have lacked credibility; and (3) MDP project Source: MDP Impact Evaluation Study database. leverage in Paran was weaker-the 100 percent coverage of municipalities precluded the possibility Ing in the project. For participant municipalities in of excluding municipalities that did not comply Paran6, in contrast, direct cost recovery performance with conditions of the financial action plan. weakened (figure 3.4 and table 3.5). Highlights from the evidence are as follows: Study findings thus point to significant MDP impacts on property tax performance at the municipal In levying and collecting betterment charges on, level. This result was expected, since it went to the and from, beneficiaries, MDP participants in Rio heart of the original project designs. In both countries, Grande do Sul significantly outperformed non- the projects focused on property tax as the principal participants (figure 3.4). Per capita betterment instrument for raising local revenue and increasing the charges were at a similar level for both partici- financial autonomy of municipalities. A challenge for pants and nonparticipants in 1990, before the the future will be to replicate this impact with other key project. By 1996, Rio Grande do Sul participants revenue items, such as the municipal service tax in were collecting twice the amount of betterment Brazil. charges as nonparticipants. This outcome was helped by the enforcement of financial action Direct Cost Recovery plan conditions requiring municipalities to levy In addition to indirect cost recovery through stimulating betterment charges, where possible, on projects and assisting the collection of local taxes, MDPs also financed through the municipal development encouraged municipalities to pursue direct cost recovery fund. from program investments. In Brazil, this was done by MDP participants in Parand, in contrast, bad levying betterment charges on families that directly weaker performance. After the project, betterment benefited from the investments. In the Philippines, MDP charges per capita were only half the level ob- operations aimed at direct cost recovery by allowing municipalities to borrow and invest in revenue-generating TABLE 3.5: IMPACTS ON DIRECT COST RECOVERY services such as local public markets. This section of the report discusses the Brazilian case. To evaluate MDP BrIL project impacts in Brazil, the study team examined the performance of per capita betterment charges levied and 1996 collected at the municipal level. 1.2 0.o I The team found that cost recovery performance of 1.2 participant municipalities in Rio Grande do Sul was Note: See tables 3.2 and 3.3. RGS = Rio Grande do Sul. much better than that of municipalities not participat- Source: MDP Impact Evaluation Study database. 11011 Developing Towns and Cities: Lessons from Brazil and the Philippines served before the project. The causes highlighted Budget Surplus and Deficit above for the weaker performance of Parand Given that municipalities were required to remain municipalities also apply here. Since it was the creditworthy to have continued access to MDP funding, second operation in Parand, MDP II could not have a key hypothesis of the study was that participant the same demonstration effect on municipalities as municipalities would be more creditworthy than non- did the first-time MDP project in Rio Grande do participants. The study team therefore looked for Sul, especially when the first MDP project in underlying evidence of the municipalities' changing ParanA did not have the same cost-recovery condi- debt capacity, since this would affect their access to tionalities.2 Among the specific results: 28 partici- credit not only from the MDP, hut also from other pant municipalities in Parand that had collected sources. It was not possible to construct a precise betterment charges in 1990 had stopped collecting indicator of creditworthiness-such as a municipality's them altogether by 1996.1 net savings or primary surplus-since separate data on periodic debt service payments were not available for This evidence points to significant MDP impacts all municipalities in the study population. For this on increased direct cost recovery through betterment reason, the study used a simpler proxy indicator, charges. A necessary condition for such an achievement looking at municipal budget surplus or deficit data is for access to MDP funding to be explicitly condi- over time to capture the general direction of changes in tioned on a municipality's progress toward adopting the budget situation. This was defined as total munici- and implementing direct cost recovery. The fulfillment pal current revenues minus total municipal current of this condition also needs to be closely monitored by expenditures, which included debt service payments. the project team during implementation. The varying Although not a complete and accurate indicator of performance of participant municipalities in Parana creditworthiness-especially for municipalities with a and Rio Grande do Sul points to the need to have these previous history of borrowing-this budget surplus or conditions correctly in place at the time of a deficit indicator nevertheless points to some evidence of municipality's first contact with a project. municipalities trying to balance their books as a result In leveraging improvements to direct cost recovery of MDPs. through MDP operations, project designers need to The indicator shows clearly, for instance, that consider, in particular, the political aspects of better- participants performed hetter in attempting to balance ment charges. Local mayors often complain that these their budgets than did nonparticipants (figure 3.5 and charges are unpopular and difficult to administer table 3.6). fairly. Local councils must also formally approve them The study highlighted two main findings concern- case by case, a process that can involve lengthy ing municipal budget surpluses and deficits: political negotiations with opposition councilors. Even when betterment charges are approved and Despite deterioration of the financial balance of levied effectively, however, they still account for only a all municipalities in Brazil, there is evidence that very small proportion of own revenues, not more than 5 the MDPs helped to slow the decline. Partici- percent on average. Yet such charges can help recover pants in Rio Grande do Sul did not suffer the 70 to 80 percent of the initial outlay for an investment serious setbacks experienced by nonparticipants; project, with the remaining costs covered indirectly neither did Paran participants, although the through property taxes. effect of the project was smaller. Thus, MDPs TABLE 3.6: IMPACTS ON MUNICIPAL BUDGET SURPLUS OR DEFICIT Budget surplus(+) or deficit(-) as share of total revenues (percent) Brazil 1990 1996 P~hiIippirle, 1990 1996 Participants (Parar, i .11.1 -~ .ivrr np iii tha m iae + r . e Participants (RGSw o.ul -6. i c.reI rditwoyIT L - i + no4. n Nonparticipants 1 +2.S Ninpirtpii . Ir h su t .e.a + Note: Budget surplus or deficit = total current revenues minus total current expenditures (including debt service payments). Source: MDP Impact Evaluation Study database. 12 Impacts on Municipal Fiscal and Financial Management FIGURE 3.5: IMPACTS ON MUNICIPAL BUDGET SURPLUS OR DEFICIT Surplus as share of revenues Percentage point change, 1990-96 Percentage point change, 1990-96 0 12 -2 9 7.3 U Participants 6 U Participants - (Parani) 3 (Bulacan) -6 E Participants 0 0 Participants (Rio Grande do Sul) -3 -0.8 (Laguna) -8 - -7.3 1 Nonparticipants l Nonparticipants (Rio Grande do Sul) -6 - (Laguna) -10 - -9.4 -9 -7.3 -10.5 -12 -12 Brazil Philippines Source: MDP Impact Evaluation Study database. helped participant municipalities to slow the To measure the degree of municipal participation negative trend toward increased deficits. in the MDP, a financial depth indicator was con- In the Philippines, the contrasting trends of structed. This indicator measured MDP investment participant and nonparticipant municipalities funding at the municipal level as a share of a are even clearer. While Bulacan participants municipality's total 1990-92 investment (funded from actually moved out of deficit and into surplus all sources, including MDP and own revenues). From between 1990 and 1996, the large surplus of empirical estimates of this nonparticipating municipalities in Laguna was indicator, participant mu- almost completely wiped out by 1996. These nicipalities were grouped results reflect efforts by participant municipali- into three categories of fi- greater project ties to remain creditworthy in order to gain nancial depth: deep, greater impacts where access to further MDP and other funding. than 50 percent; medium, 25 participant to 50 percent; and shallow, municipalities are We therefore find that participating in an MDP can less than 25 percent. help a municipality to reduce its deficit, if not develop In search of possible more closely a fiscal surplus, and that MDPs provide an important project impacts, the study engaged in the incentive in this direction. team examined the own rev- projects. enue performance of munici- Financial Deepening palities by degree of finan- For municipalities in Brazil, the study examined how cial depth. With one important caveat, discussed different levels of MDP capital investment in relation below, participants with greater financial depth per- to total municipal investment at the initial phase of formed better than participants with more shallow project implementation affected the financial perfor- participation in the projects (figure 3.6 and table 3.7). mance of participating municipalities. A lack of data In financial deepening, therefore, the study found on total investment prevented a similar analysis for the that: Philippine municipalities. Applying a simple concept of project leverage to the case of Brazil, it was hypoth- As measured by the increase in the average level of esized that the degree of project impact would rise with municipal own revenues per capita, deep partici- the share of MDP funding in a municipality's total pant municipalities in both Parand and Rio Grande investment program. Thus, a municipality more depen- do Sul performed better than those classed as dent on MDP funding would be expected to be more medium. This is because deep participant mumci- responsive to the requirements of the MDP reform palities were more subject to the policy influence of program and show stronger impacts, and vice versa, the projects and more likely to play according to 13 Developing Towns and Cities: Lessons from Brazil and the Philippines TABLE 3.7: IMPACTS ON OWN REVENUES BY DEGREE OF FINANCIAL DEEPENING IN BRAZIL Own revenues per capita (constant 1996 US$) Pa-mna 1990 1996 Rio Grande do Sul 1990 1996 De .20.-4I4 42.82 I t1 32.04I 52.51 MEJ 1,m -6.61 43.3 1\.J1In1 42.-0 48.03 Shall..-.-.- 26.28 4 -. 1 N Nlu.1..0 36.36 - 86.-5 Note: See tables 3.2 and 3.3. Financial depth is defined as the share of total 1990-92 municipal investment accounted for by MDP funding. The financial depth categories are: deep > 50 percent; medium 25-50 percent; shallow <25 percent. Source: MDP Impact Evaluation Study database. the rules than were medium or shallow partici- Evidence gathered by the study team, therefore, pants. This outcome is a product of the leverage points to greater project impacts where participant that a project can exercise over a municipality that municipalities are more closely engaged in the is greatly dependent on the project as its main projects. This finding coincides with a notion held source of funding. across many lending sectors in the Bank: that greater The contradictory outcome for shallow partici- project leverage can lead to more significant impacts pant municipalities in Rio Grande do Sul, which on project outcomes. The observed result is consistent appear to have outperformed all others, results with the hypothesis that the more a municipality is from a skewed distribution in which a few small involved with and dependent on an MDP, the greater its municipalities reported very high levels of own chances of responding to and adopting MDP precepts. revenues per capita in 1996, thus significantly It is worth noting that the federal government of Brazil raising the mean observation for that year. Own provided no subsidies to participating municipalities. revenues per capita is, nevertheless, a particu- In the Philippines, the property tax improvement larly important impact indicator in this analysis, component (RPTA) was part of the assistance program given its demonstrated robustness in the earlier implemented by the Department of Finance. with/without project evaluation. FIGURE 3.6: IMPACTS ON OWN REVENUES BY DEGREE OF FINANCIAL DEEPENING IN BRAZIL Own revenue per capita Percent change, 1990-96 Percent change, 1990-96 160 120 - 109.5 138.6 140 - - 100 - 120 - 80 U Deep 100 - U Deep 63 60.5 0 Medium o 2 O Medium 60 63.9 4 Shallow 60 - 10 Shallow 40 - 20 20 - 12.5 0 0J Parand Rio Grande do Sul Source: MDP Impact Evaluation Study database. 14 Impacts on Local Government Capacity Building irect observation of selected municipalities highlights their awareness of the improvements made under the projects. Nearly half the institutional development interventions in Rio Grande do Sul were to strengthen local tax administration. Among the different kinds of interventions, participant municipalities valued most highly those aimed at making resource management more efficient and improving the management of investment projects, including procure- ment. Professional training was also highly valued. In techniques and procedures, municipalities reported that the project helped them to better handle MDP's institutional development component, but were information technology and community participation. also representative of municipalities throughout Rio Their awareness of these advances had an important Grande do Sul. Twenty-six was the maximum number side effect: successful participants openly promoted the that could be visited in the field, given the study's project and its principles among municipalities still not budget. involved. This chapter reports the impact evaluation findings Field Surveys for municipalities participating in the MDP known as Members of the study team made one- or two-day visits PIMES in Rio Grande do Sul.' The evaluation was to each municipality to meet with local officials and implemented in two stages: (1) field visits by team collect basic data on (1) municipal administration; (2) members to 26 municipalities during August-Decem- urban planning; (3) local taxes; and (4) municipal ber 1997;2 and (2) a follow-up telephone/fax survey of infrastructure. To compile the data, the team used the same municipalities during January-March 1998. standard checklists to apply to all municipalities. In The municipalities did not constitute a random sample; addition, they interviewed municipal officials using a they were selected from those that had fulfilled all questionnaire with 70 open-ended questions on the aspects of their loan agreements. following topics: The PIMES team selected municipalities for these studies by taking into account the following factors: a Profile of the city (1) different population-size groups; (2) the wide range * Real estate cadastre of MDP institutional development actions undertaken; * Computerization and (3) broad geographical coverage across the state of * Municipal tax code Rio Grande do Sul. The aim was to evaluate a group of e Urban master plan municipalities that had participated effectively in the c Training and technical assistance. 15 Developing Towns and Cities: Lessons frorn Brazil and the Philippines FIGURE 4.1: PIMES INSTITUTIONAL To update information from the field surveys and DEVELOPMENT INTERVENTIONS (PERCENT) assess project impacts from the point of view of municipal officials, the PIMES team followed up during January- Administrative March 1998 with a simple questionnaire faxed to each of St: ditrentheine the 26 municipalities. To compleme .nt the earlier open- Ot_____.____Strengthening 13 16% ended questions, the fax questionnaire, prepared jointly with the December 1997 audit mission, asked municipal respondents to rate the quality-ranging from highly satisfactory to very poor-of MDP impacts in 13 areas. These included local tax collection, betterment charges, Urh'' procurement practices, computerization, and community Mi Taxation participation. 23 48% The remainder of this chapter summarizes the impacts of MDPs as seen from the perspective of Source: PIMES Impact Evaluation Survey of 26 MDP participant municipalities. Each section focuses on a municipalities. distinct area of intervention. Altogether, the study identified 126 institutional Direct and Indirect Cost Recovery development interventions sponsored by PIMES in these The survey asked participant municipalities to give municipalities. Figure 4.1 and table 4.1 summarize these their opinions about the impacts of the MDP on (1) interventions by category (administrative strengthening, their ability to mobilize their own revenues more taxation, urban management, and other). efficiently; (2) the effectiveness of levying betterment The survey identified taxation as the single most charges for direct cost recovery; and (3) the effective- common type of institutional development interven- ness of property taxation as an indirect means of tion, most often delivered by means of technical recovering the cost of projects. The results, summa- assistance. These interventions were: rized in figure 4.2 and table 4.2, included these important findings: * Administrative strengthening (human resource training, internal regulations, payroll, organiza- Municipal officials were in nearly unanimous tion chart) agreement that the impacts of the project were * Taxation (accounting, cadastre, control of assets, positive. tax reform, tax collection, tax legislation, tax 9 The majority thought the project had a very inspection) positive impact (highly satisfactory or satisfac- * Urban management (land use legislation, limits of tory rating) on own revenue mobilization and urban area, building codes, land use zoning, aerial property tax collection. photography, mapping, database management) * Most thought the project had a positive but slightly t Other (mainly computer hardware and software). more modest impact on betterment charges. TABLE 4.1: MDP-SPONSORED INSTITUTIONAL DEVELOPMENT INTERVENTIONS Means of delivery Technical Computer hardnore pL .I Iiicvrgtlhe Tocal Training assistance and soft, ar dc -p tivicr%L11J-1n Number Perccit Number Percent Number Perce~nt Number Percent Adrizer inn figur 4.2 and'taibe42icud 9 Ihs 4 I r -,1 0 4. 16 4 i.N 20 41).1 2-1 -1- 1 11-1i.1..L!On 1-if _Q 6 V I 21 41.11 24. ( rh-.. r I - ;.i I-AI - - I1I Source: PIMpES Impact Evaluation Survey of 26 MDP municipalities. 16 Impacts on Local Government Capacity Building TABLE 4.2: IMPACTS ON MUNICIPAL COST RECOVERY Municipal respondents (percent of total) Activit% Highi% sar. Sat. Nodest Fair Poor No opinion Ownre r isLi iL bil 7 '["1 11. 5 .' 23.1 - 3.8 -. Levyin4 Kccro-vLIa 3.,, 3a N. t; 46.2 .93.,13% -Raisint: Ir* [ A-4 I i.4 .42.4 3II 3.. .S Source: PIMES Impact Evaluation Survey of 26 MDP municipalities. Overall, these results indicate a satisfactory project These results point to municipalities changing from impact on cost recovery in the view of municipal mere public service provision to modern administration participants. This finding applies to municipalities of that seeks to promote and leverage local economic all sizes, although small and medium municipalities development. As examples of steps toward better man- were more likely to report highly satisfactory impacts agement, municipalities most often mentioned: than larger ones. These results are particularly signifi- cant given that the MDPs were implemented during a More reliable man- period of intensive financial change as monetary agement reports, re- stabilization took hold in Brazil. Within this difficult suiting in better inter- Successful context, MDP municipalities made successful efforts to nal controls participants increase their own revenues. Streamlining of infor- openly promoted mation flow through the project and its Local Financial Management management informa- MDP municipalities were asked to rate project impact tion systems, enabling on their capacity to (1) undertake financial planning; better-informed man- municipalities still (2) mobilize funding from sources other than the MDP agement decisions not involved. itself; and (3) manage their own resources more Better understanding efficiently (figure 4.3 and table 4.3). A large majority of of tax laws and regu- municipal officials reported that: lations, and hence better relationships with regulators * MDP projects had a positive impact on munici- Greater emphasis on municipal planning pal financial planning and management. Rigorous control over revenue collection. * Management of municipal resources improved the most, with 84.7 percent of officials reporting highly satisfactory or satisfactory outcomes. FIGURE 4.3: IMPACTS ON MUNICIPAL PLANNING FIGURE 4.2: IMPACTS ON MUNICIPAL COST RECOVERY AND MANAGEMENT 65.4 ru Own revenue 69.2 l Financial mobilization s planning d Levying bettermentex 9.2 osp o beter 42.4~~ More reial manlzngote charges resources 578n Raising property conrl Efficient resource taxes management 0 20 40 60 80 0 s0 100 Percent highly satisfactory and satisfactnry Percent highly satisfacrory and satisfactnry Source: PIMES Impact Evaluation Survey of 26 MDP Source: PIMES Impact Evaluation Survey of 26 MDP' municipalities, municipalities. 17 Developing Towns and Cities: Lessons from Brazil and the Philippines TABLE 4.3: IMPACTS ON MUNICIPAL FINANCIAL PLANNING AND MANAGEMENT Municipal respondents (percent of total) Acti i HighI1 ..ar. Sat. Modest Fair Poor No opinion Fir ir - I , 1 .. 34.hi 34.h 3o.,S - - M 0e11'iI1CL1 -1110 1 .2 50.L) 31-.8 - - Eff,o,nra r.... I ' I II x.5~ Xflll 4b.2 11I.S 3.14- Source: PIMES Impact Evaluation Survey of 26 MDP municipalities. Project Management and Implementation tion. All participant municipalities, small ones in particu- Concerning their ability to manage investment projects, lar, underwent a major on-the-job learning experience as participant municipalities rated the impacts of MDP they received advice directly from PIMES staff or worked technical assistance on (1) the implementation of manage- with consultants who helped them manage their invest- ment control routines and (2) modernizing and streamlin- ment projects more effectively. The MDP strategy in this ing of municipal management. Municipalities were also regard was to provide municipalities with as much asked to rate the impact of MDP requirements and information as possible, including model procedures and conditionalities on (3) procurement procedures; and (4) techniques that they could use to help overcome their supervision of contractors. Figure 4.4 and table 4.4 shortcomings. summarize the findings. Regarding the specific issue of procurement proce- Among the highlights: dures, evidence of favorable MDP impacts also comes from routine reports of the municipalities' controllers, * Most municipalities gave high ratings (highly tribunals de contas. Tribunal reports over the 1990-96 satisfactory or satisfactory) to the impact of the period indicate that the incidence of errors by munici- technical assistance on the management of in- palities in procurement practices diminished signifi- vestment projects. cantly among MDP participants. * The strongest impact was on the control of project implementation. Through the MDP, Information Technology, Training, and Community many municipalities learned to apply control Participation systems to monitor the physical and financial The survey also sought the opinions of municipal progress of their investment projects. officials on the impacts of three MDP instruments: * Municipalities reported favorable impacts on (1) the use of information technology in the municipal- their ability to supervise the work undertaken by ity; (2) professional training provided under the project; private contractors. and (3) community participation in decisionmaking * The impact was not as great on procurement about investment projects. Their answers are summa- procedures; 73 percent of respondents reported that rized in figure 4.5 and table 4.5. MDP impact on procurement was modest or less. The key findings are as follows: These results confirm what the PIMES team observed Municipal officials were very enthusiastic about during its day-to-day management of MDP implementa- innovations in information technology provided TABLE 4.4: IMPACTS ON MUNICIPAL MANAGEMENT OF INVESTMENT PROJECTS Municipal respondents (percent of total) Activity High]%. sat. Sat. Modest Fair Poor No opinion Control -t If I -~.[ m.-- -I. 85 1 Streamlirinor mation 38a, 46.2 11. and ProcurenRegarding the speificb I if c e Supervisidr. es, e vidrenco fa l M4.v MD m1.pat as c Source: PINfES Impact Evaluation Survey of 26 MDP municipalities. 18 Impacts on Local Government Capacity Building TABLE 4.5: IMPACTS ON COMPUTERIZATION AND TRAINING Municipal respondents (percent of total) Acu%io Highl, sat. Sal. Nodesi Fair Poor No opinion I>*Il[ i , chn-1-0 4L -1.) 33(1i.8%"2t - - - Pr- tcr.-i-wi rIr 4 iiiS 2-A 3.R I Li. E(Iis,inmrs,ri pliticir1Fi.-F I i.4 2 .--- Source: PIMES Impact Evaluation Survey of 26 MDP municipalities. through the MDP; nearly half of them rated projects such as street paving, daycare centers, and MDP impacts in this area highly satisfactory. health posts were implemented in poor communities, * They also rated MDP training impacts posi- and their impacts on the welfare of the inhabitants were tively, but not in the highest category. significant. These conclusions were confirmed at the * In regard to community participation, officials participatory audit workshops. from all municipalities held positive, but more Thus, the study confirms varied, views about MDP impacts. that the PIMES project had a major impact on the promo- Mncplte r With rapid innovation in computer hardware and tion of sustainable institu- changing from software, the PIMES team encountered strong demand tional development in the mere public for assistance in this area. In many cases, the introduc- municipalities of Rio service provision tion of information technology even led to behavioral Grande do Sul. The project to modern changes among municipal staff. Accustomed to obso- became a major develop- lete procedures and routines, many of them were ment partner of municipali- obliged to upgrade their skills to retain a valid ties during the 1990-96 pe- seeks to promote professional role within the administration. This, in nod. It also became their and leverage local turn, led to increased demand for training programs, only reliable source of fund- economic many of them provided under the MDP. The project ing; the survey identified the offered a wide range of courses and programs, which virtual drying up of ad hoc were greatly appreciated by municipal administrators transfers from the federal and their employees. and state governments. The positive results achieved in community partici- The following advances were made in strengthen- pation took various forms. Some participation was ing participating municipalities: through local community associations, and some through nongovernmental organizations. In cases of community facilities-daycare centers and health posts, FIGURE 4.4: IMPACTS ON MUNICIPAL MANAGEMENT for instance-financed through the MDP, a project OF INVESTMENT PROJECTS requirement called for stakeholders to set up committees to help manage these facilities. For other projects, consultation more often took the form of merely keeping 8 Control citizens informed of works planned and in progress. of implementation More still has to be done in the area of community 8 Streamlining participation, but the PIMES team believes that impor- omnement tant first steps were taken under the MDP OED's procedures performance audit in December 1997 was conducted as 84.6 U Supervision a participatory audit, which provided opportunities for of contractors the beneficiaries, including community representatives, to discuss project experiences with representatives from Percent highly satisfactory and satisfactory state and local government agencies in Parani and Rio Source: PIMES Impact Evaluation Survey of 26 MDP Grande do Sul. As documented in the performance audit, municipalities. 19 Developing Towns and Cities Lessons from Brazil and the Philippines * Fiscal adjustment and increasing own revenues the State of Rio Grande do Sul. The logical conclusion is at the municipal level that by helping municipalities to become economically * More intense contacts among municipalities, stable, PIMES contributed to a more balanced approach private companies, and the community to economic development at all levels. * More efficient and entrepreneurial municipal As a development program, the PIMES project in administrations Rio Grande do Sul has reached maturity, and today * More highly valued municipal employees constitutes a reliable source of funding for municipal * More attention to the environment. development. Moreover, the project has become a model for similar programs elsewhere in Brazil-the Apart from these favorable results, the survey States of Minas Gerais and Bahia-and in other demonstrated that municipalities were aware of the countries. progress made as a result of the project. More gener- ally, increased capacity at Increased capacity the municipal level helped FIGURE 4.5: IMPACTS ON COMPUTERIZATION helped local local administrations to seek AND TRAINING administrations to new initiatives and success- fully carry out additional seek new projects. This finding was initiatives and true, regardless of city size 7 Information successfully carry or location within the state. technology Municipal awareness it- M09 E3 Professional out additional self had an important side local aministationstonsee projeect. Thisfd Community true,trlSuccessful participant participation municipalities, whose offi- cials were conscious of the progress being made under PIMES, became staunch promoters of the project 65 70 75 80 85 concept among municipalities that had yet to sign on. Percent highly satisfactory and satisfactory The achievements of the PIMES project came at a Source: PIMES Impact Evaluation Survey of 26 MDP time of major change and difficulties for municipalities in municipalities. 20 Impacts on Local Economic Development DPs in the Philippines have financed numerous revenue-generating projects, such as public markets. The case study of the MDP-financed public market in Pulilan shows that the project had significant impact on the development of the local economy. The project not only stimulated employment and income generation, but also trig- gered the development of a new business center near the public market, which had significant spillover effects. Most of the municipal development projects in the (control group). Each sample included stalls selling Philippines were revenue-generating enterprises such as meat, poultry, and fish; fruits, vegetables, and grains; public markets, bus terminals, and slaughterhouses. and manufactured goods. A comprehensive but simple Under MDP I, 36 out of 42 participating municipalities questionnaire (Annex 5) was also used to gather financed a public market; under MDP II, 30 out of 35 did information about location history, extent of markets, so. OED's performance audits have confirmed that the employment characteristics, commuting, sales, ex- impacts of such projects on local economies were signifi- penses, income, and the quality of infrastructure cant, especially for small and poor municipalities. For services at the market. The questionnaire was designed example, Pulilan, a municipality in Bulacan Province, to capture changes over time, from 1993 when the was in the lowest income class before it financed a public market opened to 1998 when the survey was con- market through MDP. By 1995, when the project was ducted. The survey also included the owners of 15 completed, the municipality had moved up to the second- shops near the market, to capture the project's indirect highest income class, and the living standard of its 60,000 impacts on the development of the local economy. The people had risen significantly. During 1991-95, the findings reported below highlight the differences be- income of the municipal government rose almost fourfold, tween Pulilan's experience and that of Guiguinto. Also from 7 million to 25 million pesos. reported are the results of statistical tests showing the This chapter reports the results of a study that differences between the municipalities regarding in- compared the impacts of an MDP-financed public creases in sales and income and improvements in the market in Pulilan with conditions in Guiguinto, a quality of infrastructure services at the market. municipality in the same province that did not partici- pate in the MDP program.' The survey compared a The Public Market in Pulilan random sample of 60 stallholders in the Pulilan public Until the MDP-financed public market was established in market (experimental group) with a random sample of 1992, Pulilan had a traditional market (talipapa) near the 60 stallholders from several locations in Guiguinto municipal hall with about 20 vendors. When the public 21 Developing Towns and Cities: Lessons from Brazil and the Philippines market opened in the Cutcot area in 1993, local entrepre- neurs quickly occupied its 170 stalls. Most of the vendors in the old market also moved there. Only two years later, using its own resources, the municipal government added 32 stalls to the market to meet increasing demand. In 1997, a second MDP loan financed 92 more stalls.2 As of August 1998, when the survey was conducted, the market had a total of 294 stalls. In addition to these fixed a stallholders, on Saturdays about 300 transient vendors z come to the market to conduct business. The public market area has rapidly become a new business center in Pulilan. More than 40 new small enterprises have opened near the market, including large restaurants, drug stores, a gas station, rural banks, and gift shops. The market's adjacent lot has Vendors at a private market in Guiguinto, which did not par become a busy transport center with a large fleet of ticipate in a municipal developmenr project. tricycles for shoppers, and other types of vehicles. The Photo by Kyu Sik Lee. market has had not only a direct impact on the welfare of the stallholders and Pulilan's inhabitants, but also a significant indirect economic impact, creating trans- Pulilan project triggered changes in location that port and commercial linkages with the rest of the otherwise may not have occurred. The stallholders in province and other parts of the country. The survey Pulilan were comparable to those in Guiguinto in findings reported below support this conclusion. number of employees, number of female workers, hours Guiguinto, which never participated in an MDP, worked, and monthly income (table 5.2). On average, has no markets comparable to the one in Pulilan. The at each stall about two people (one female) worked for municipality has one privately established market and 11 hours a day, and the owner's monthly income was several small, informal markets. Conditions in the about 18,000 pesos (about US$430). municipality today are similar to those of Pulilan before the project was implemented. Change in Sales and Income Table 5.3 shows that monthly sales and net income (after Survey Results expenses) of stallholders in Pulilan have more than Of the 60 stallholders in each sample, 16 (27 percent) doubled since they started business in the public market. relocated to the public market in Pulilan, while only 5 The stallholders in Guiguito, in small, informal markets (8 percent) moved in GuiguinVo, indicating that the with poor infrastructure, had only a slight increase in TABLE 5.1: LENGTH OF TIME IN BUSINESS AT TWO PHILIPPINE MARKETS, BY YEAR STARTED (NUMBER OF STALLHOLDERS) Market Befojre 199' 1993 1994 199i 1996 199- Pulilan 11 1 r 8c Guiguiro r.t 4 o l i Source: MDP Impact Evaluation Study database. TABLE 5.2: CHARACTERISTICS OF STALLHOLDERS (AVERAGE VALUE) Pulilan Guiguinto All Number of 1.9 epoes l s h atbe each stall, abu1w.poloe eae-wre o Hours 11 hud aL r Jday, andlthe o im a Owner', P:r ia.bu1i80 I0 pe ( abou US$43302 Source: MDP Impact Evaluation Study market survey. 22 Impacts on Local Economic Development TABLE 5.3: CHANGES IN SALES AND INCOME Pulilan taverage) Guiguinto Iaveragel Percenr Perceni First year 1998 change First year 1998 change Monthl. 'ilS PL -I 4.5.08.3 Q3,551 lII.i 82,458 8-,()5 . Monthh i.ct rir. ,-ic 10.921 23,-S 11. 382 2173.t 31 - Source: MDP Impact Evaluation Study market survey. sales and net income. This large disparity could reflect the 5.5, at the time of the survey (1998), compared with the length of time in business of the two groups (table 5.1). first year the stallholder started business at the market. Twenty stallholders in Guiguinto started their businesses Four quality criteria were used: excellent, good, fair in 1997 without fixed business locations. and poor Table 5.5 shows, for each type of service, the To statistically test this difference without such a bias, proportion of respondents who rated its quality excel- the average value of sales and average net income for lent or good. For all items but telephone, the quality of each group (by length of time in business) was calculated, services in the first year at the market was better in and the average annual increase in sales and net income Putilan than in Guiguinto. In the case of the Pulilan was estimated. Based on this constructed data, the null public market, all services improved substantially over hypothesis-that the average annual increases in sales time except for public toilets. Any improvements in and net income (in real terms) were the same between the facilities in Guiguinto were small, and the quality of stallholders in Pulilan and those in Guiguinto-can be water supply, public toilets, ventilation, storage, and rejected. The t values were 2.7 and 2.0, respectively, at a parking space declined during the period. 5 percent level of significance. We tested the differences between proportions and For those 16 stallholders in the Pulilan sample who rejected the null hypothesis that the proportions of quality moved to the public market from another location, the ratings in Pilan are the same as those of Guiguinto. The difference between their mean income at the previous t values range from 2.8 to 8.6, at the 5 percent level of location and that at the present location was statistically significance (excluding 1.5 for telephone service, which tested. The null hypothesis-that the mean income level was equally poor in both municipalities). was the same at the two locations-was rejected. The t value was 2.4, at a 5 percent level of significance. Indirect Impacts Therefore, the impact of the MDP-financed public Market Linkages with Other Areas market in Pulilan on the sales and income of the To evaluate the impact of the public market on the stallholders was significant and positive compared creation of transport and commercial linkages with with the sales and income in Guiguinto, and also other municipalities and regions, the survey asked compared with the level of income at the previous where the goods sold by stallholders had originated location for stallholders who came to the market from and where their customers come from. Tables 5.6 and another location. 5.7 report the origins of goods and customers by three categories: from the municipality, from the province, Commuting and from outside the province. Table 5.4 shows the median commuting distance from About half the goods sold in the Pulilan public home to the market and the median travel time for market come from outside the province, while a little stallholders in Pulilan and Guiguinto. Although the travel distance in Pulilan is twice that in Guiguinto, the TABLE 5.4: COMMUTING DISTANCE travel time is about the same for the two groups. This AND TRAVEL TIME results from more efficient transport in Pulilan than in Pulilan Guiguinto All Guiguinto, including a large fleet of tricycles. Median commuting distance Quality of Infrastructure Services (kiomte t on way The survey asked respondents to rate the quality of 12 (minutes) infrastructure and municipal services, listed in table Source: MDP Impact Evaluation Study market survey. 23 Developing Towns and Cities: Lessons from Brazil and the Philippines TABLE 5.5: QUALITY OF SERVICES AT THE MARKET (PERCENTAGE OF RESPONDENTS ANSWERING EXCELLENT OR GOOD) Pulilan Guiguinto First year 199.r First year 199 Electricity 58 So 49 ii Water suppl 0 30 Telephone 27 -1 7 1 Police prot,.r. 65 38 42 Fire protect!.co 70 82 30 32 Garbage coI ue1 87 32 Sewerage and Jr lit, 80 28 34 Public toile[ 73 6 22 Ventilation 80 82 45 42 Storage 38 43 22 2 Parking spu. 85 C1I 3Q Driveway 88 y 1 38 42 Note: The response rate was 100 percent for the sample of 60 in both municipalities. Source: MDP Impact Evaluation Study market survey. more than half the goods sold in Guiguinto come from Emerging Real Estate Market within the province. More than 90 percent of the According to the municipal government staff in Pulilan, customers in the informal Guiguinto markets are from the land price in the public market area was 55 pesos per the municipality, while in Pulilan 15 percent come square meter in 1992, before the market was established. from the province and 5 percent from outside the Land in the residential area was selling for more than province. The findings show that the public market in 12,000 pesos per square meter in 1998. The survey found Pulilan established wider transport and commercial that 10 of the 15 small enterprises interviewed in Pulilan linkages with locations outside the province than did were renters with an average floor space of 76 square the markets in Guiguinto. meters, indicating an active real estate market emerging in the public market area. The average floor space of the Employment Side Effects small enterprise owners interviewed in Guiguinto was Twenty-eight percent of stallholders in Pulilan and 17 much less, only 41 square meters. percent in Guiguinto said that they hired a housemaid after they started business at the market and pay 1,500 pesos per month for the service. This shows that the TABLE 56OIN OFNGD D public market in Pulilan has had a greater indirect MARKET (MEAN PC A effect on employment generation in addition to the jobs created at the market. Fnaii 22.3 14.3 I1.3 To capture indirect impacts, the survey included 15 2.4 5 .N small business enterprises near the public market in S Pulilan and 15 near the informal markets in Guiguinto. In Pulilan, 14 out of 15 enterprises were established since TABLE 5.: ORIGIN OF CUSTOMERS AT THE 1995, indicating rapid expansion of economic activities in MARKET (MEAN PERCENTAGE) the public market area. The types of businesses included Palilin Guiguinto Al car services (gas station), banking, tile making, restau- From municipality rants, clothing, electronics, and drug stores. The average From province 15.3 11.2 size of employment at these enterprises was 3.3 persons in From outside province 5.1 2.I Pulilan and 2.3 in Guiguinto. Source: MDP Impact Evaluation Study market survey. 24 Agenda for Future Operations nternational experience shows that municipalities have different financing needs, depending on their size and their stage of socioeconomic development. In the Philippines MDP pro- gram, which is demand driven without any restriction, small and resource-poor municipali- ties tend first to finance rather simple, low-risk, revenue-generating projects such as a public market. After successfully completing such a project, their creditworthiness is enhanced, and they can then expand their investments in public infrastructure projects such as roads and drainage. As municipalities grow, they have an increasing need for selected municipalities, introducing risk guarantee to finance economic infrastructure for productive ac- functions, and developing mechanisms for private tivities such as manufacturing and commerce, as well sector participation through build-operate-transfer as social infrastructure for the population. When they schemes, concessions, and management contracts for eventually graduate from the MDP program, they specific services such as maintenance functions. As begin to borrow from the private capital market. a good practice case, ParaniCidade is ready to meet Experiences in both the Philippines and Brazil show these challenges and is pushing the frontier of the such progress. This catalytic role is analogous to the World Bank's MDP program. It will continue to role of the World Bank in helping developing countries provide useful lessons for MDPs in Brazil and else- until they graduate from the Bank. where. MOPs in Paranp MDPs in Rio Grande do Sul ParanACidade (the ongoing Urban Development Fund This MDP program regained its momentum with the project financed by the InterAmerican Development return of its original advocate to the state government Bank) has been expanding its operations as a self- in 1995. In 1998, the operations of the municipal financing, private financial intermediary, and has now development fund expanded in response to high de- entered a new phase of providing more diversified mand and strengthened its financial position. Contin- financial services and types of loans. Diversification of ued state government protection of the organizational the loan mix to include revenue-generating projects integrity of PIMES will be crucial for the sustainability (with positive externalities such as public markets) of the state urban development fund, FUNDOPIMES, could come sooner than diversification of financial as it pursues further institutional growth. As in Paran, services, since the latter will depend on the speed of the future will require diversification of the loan overall capital market development in Brazil. New product mix to include revenue-generating projects financial services could include managing bond issues and, eventually, diversification of financial services. 25 Deveioping Towns and Cities Lessons fron Brazil and the Philippines MDPs in the Philippines A fourth follow-on project, LOGOFIND, was ap- To meet the strong demand for MDP financing from proved in 1999. Within a broad policy reform framework local governments, the Central Project Office in the (Llanto and others 1996), LOGOFIND will address the Philippines prepared a follow-on project, MDP 111, negative aspects of the bottom-up, demand-driven project which was approved by the design. The self-selection process tends to generate com- Growing Board in March 1992. MDP petition among municipalities, and only the most credit- municipalities III was a continuation of the worthy and the most capable of making necessary policy needefforts of MDP I and MDP changes are able to participate in the MDP and access nee inreaing to strengthen the institu- credit. Many that are poor and noncreditworthy have financing for tional development process been left out, thus widening interregional income dispari- both economic and expand development as- ties. LOGORND intends to implement a policy frame- and social sistance to more municipali- work aimed at graduating more successful local govern- infrastructure, ties. MDP III was also very ments to the private financial markets while providing timely, as it helped the na- assistance to weaker municipalities. tional government to de- velop and carry out its decentralization program after the Local Government Code was revised in 1991. The design and components of MDP III were similar to those of MDP I and 1, but it did not target any particular regions. 26 Conclusions and Lessons he study draws four main conclusions in regard to MDP operations: (1) MDPs help reform at the local level; (2) municipalities are aware that participation is a commitment to reform and that improved fiscal performance goes hand-in-hand with management strengthening, which gives mayors a more entrepreneurial view of their administrations; and (3) municipalities are more sensitive to MDP impacts the deeper MDP funding goes. Based on these findings, the study recommends that (1) MDP policy reform instruments should be diversified to broaden project impacts; (2) for successful impacts, the project authorities at the state or provincial level project must be well designed from the beginning, since see the MDP as an instrument of reform. Its later course correction is difficult; (3) competition effectiveness is ensured when there are no com- among municipalities should be promoted through the peting sources of finance for municipalities with dissemination of success stories; (4) MDPs can be easier terms. Detailed design of MDP projects is implemented even during times of macroeconomic and crucial to determine the direction of impacts. political change, since they have been shown to have The projects studied here focused on improve- favorable impacts in such circumstances; and (5) the ments in the property tax-precisely the area of most important element for success is a sound policy municipal finance where the project impacts and fiscal decentralization framework. were strongly felt. * Municipalities consciously perceive MDP par- Conclusions ticipation as a process of reform. Municipalities The principal findings of this study are as follows: are not simply passive agents of MDP, but consciously buy into the MDP reform program. MDP operations help reform at the level of local Municipalities of all sizes are acutely aware of government. Participant municipalities increase the improvements planned, conditions attached, their fiscal autonomy by collecting more of their what they have to do to take part, and the final own revenues-especially property taxes-than achievements. They associate successful MDP nonparticipants. In a fiscal sense, autonomy participation with innovations in their own helps municipalities to gain access to further administrations and their ability to plan and MDP funds and other loans. It also helps them implement successful investment projects. pay off existing obligations. In a political sense, * Improved fiscal performance goes hand-in-hand more autonomy gives municipalities a greater with management strengthening. The MDPs role in decentralized decisionmaking. Local evaluated here began with a level playing field 27 Developing Towns and Cities: Lessons from Brazil and the Philippines in relation to nonparticipants in the areas of municipal own income in both Brazil and the fiscal autonomy, own revenues per capita, and Philippines. In the case of Brazil, for instance, budget balances, and improved in these areas future MDPs might focus on the widespread local more than nonparticipants. service tax, an increasingly important source of Sustainable MDPs Technical assistance pro- municipal revenue. In the Philippines, MDP financ- oud vided through MDP opera- ing of revenue-generating projects such as public tions helped municipalities markets can play a catalytic role in the develop- policy and fiscal become more entrepreneur- ment of local economies. decentralization ial, think more about fiscal * Good design at the outset is crucial to satisfac- frameworks. adjustment, value their staff tory MDP outcomes. A municipality's first en- more highly, interact more counter with an MDP program is crucial to closely with private compa- setting the tone for future participation. Condi- nies and local communities, and be more envi- tions and requirements for present and future ronmentally conscious. MDP operations should be very transparent and * MDP impacts are sensitive to project leverage. easily understood by new municipal partici- The more closely involved municipalities were pants. Experience shows that an initial miscon- in MDP projects, as measured by the share of all ception by a municipality-that direct cost re- their investments funded by the MDP, the greater covery is not a project requirement, for the project impacts on municipal own revenue instance-can prove very difficult to correct later generation. Being more closely bound up with- in a follow-on operation. and dependent on-an MDP operation makes a * It is important to promote competition through municipality more likely to follow project policy the dissemination of success stories. Good prac- prescriptions, and to be successful in doing so. tice municipal participants are an MDP * MDPs in the Philippines attracted revenue- operation's best promoters. Project managers generating projects. Because of the strictly de- should take advantage of this by disseminating mand-driven approach followed in the Philip- the experiences of these municipalities, espe- pines, MDPs first financed revenue-generating cially among nonparticipants. projects such as public markets. These presented * MDP projects can have satisfactory impacts even minimum risks in implementation delays and under conditions of political change and economic cost recovery. With the revenues from such volatility. For the long-term sustainability of projects, participating municipalities were able MDPs, however, borrowers should establish sound to enhance their financial base, and thus their policy and fiscal decentralization frameworks. The creditworthiness. This, in turn, enabled them to experience of the municipal development projects expand their investments to infrastructure in both Brazil and the Philippines-implemented at projects such as roads, drainage, water supply, a time of major macroeconomic adjustment and and sanitation. political change-demonstrates that such projects can succeed even when macro conditions have yet Lessons for Future Operations to stabilize. MDPs were implemented during the The MDP project experience offers many lessons. Most period of severe macro instability in the early important: 1990s in Brazil and after the People's Revolution of 1986 in the Philippines. Any progress made in * MDP policy reform instruments should be diversi- institutional reform at the local level during times fied. It is important to extend the success in such as these should be helpful to a subsequent improving property taxes to the other revenue reform effort at the national level. items that make up the remaining three-quarters of 28 ANNEXES ANNEX 1: DATA AND METHODOLOGY Data Collection on impacts were used to help select key variables for Local Finance Data: Brazil and the Philippines evaluation from among the vast array of data avail- The study designed and developed a database using able. detailed unpublished data on the finances of 427 municipalities in the state of Rio Grande do Sul and Survey of Mayors: Rio Grande do Sul 323 municipalities in the state of Parand in Brazil, and A survey of mayors and their administrations was 53 municipalities in the provinces of Bulacan and conducted for 26 municipalities in Rio Grande do Sul Laguna in the Philippines. The database design focused to evaluate the project's impacts on municipal capacity on 15 selected variables of municipal revenues and building in the areas of financial management and expenditures for each state in Brazil and each province administration, including planning, budgeting, and in the Philippines. A very large body of data was accounting practices; investment project preparation available for each country's municipalities, covering and implementation; and technical capability of staff. up to 75 detailed variables at the municipal level for The questionnaire was drafted jointly with the Bank's every year during 1990-96, the period of project audit mission, and the study was coordinated by a Bank implementation. consultant. For this reason, the study had to be selective and use only data immediately relevant to measuring the Impact Evaluation Study Market Survey: Philippines impacts of these projects. More than 300 analytical To evaluate the impacts of an MDP-financed public tables were produced to obtain the results reported in market on the development of the local economy, this study. The availability of the data for all munici- Pulilan in Bulacan Province was selected as the project palities in individual states and provinces made it municipality. A random sample of 60 stallholders in unnecessary to draw samples, since the analysis could the Putilan public market was selected as the experi- include the entire population of municipalities. Very mental group. They were asked about their location small (population <2,000) and very large (population history; employment characteristics; commutin pat- >250,000) municipalities were excluded from the data rns; the extent of the markets; changes in sales, analysis to keep possible outliers from distorting expenses, and income during 1993-98; improvements observations of the average performance of municipali- in services; and the potential for further growth of their ties. At the design stage of the study, specific hypotheses businesses. In addition, 15 small shopowners (retail, TABLE ASR.1: MUNICIPALITIES EVALUATED Number outudf munuipalities p r RhoGrt State eaar Prhe prject' All Large Medium' Smallc Braz iI Parta t inl uPrding .3p1 ln 24 1 bgi3n,a aNonc p crritci nsrtm p pp Part%ip.mo~i,R 1321 - 5 t NonT.hre enrisrt a w(,adf 1jn5 12 01th a Totcal 633 60 25 PhilIppinmSr Partm~pwt, IL1!c~i 1.4 INonpr ri-.1.111. --. c' Part,- r. ii I t -lltt 4 .4 Total u Is is o- Note: RGS = Rio Grande do Sul. Outlying very large (pop. >250,000) and very small (pop. <2,000) municipalities were eliminated from the study. a. Population of 50,000-250,000. b. Population of 10,000-50,000. c. Population of 2,000-10,000w Source: MDP Impact Evaluation Study database. 29 I)eveloping Towns and Cities: Lessons from Brazil and the Philippines services, finance, and manufacturing located near the similar control group, since MDPs covered 100 percent public market) were interviewed to document the of the municipalities. A second-best solution to evalu- project's indirect effects on the development of the area, ate the performance of Parand participant municipali- including employment creation, land price changes, ties was to compare them with the control group of and the emerging business district. To contrast and nonparticipants in Rio Grande do Sul. A similar design compare with the experimental group, Guiguinto was was used for the Philippines, where Laguna province selected as the nonproject municipality, and a random offered the best control group, since MDP coverage in sample of 60 stallholders in several privately organized Butacan, as in Parand, had been nearly 100 percent. informal markets and 15 shopowners in Guiguinto was Comparisons were made using a series of indicators selected as a control group. The questionnaire used in of municipal fiscal performance. Empirical observation of Pulilan was also used in Guiguinto to collect data on a the values of these indicators permitted identification of total of 120 stallholders and 30 shopowners in the study two kinds of differences: (1) those between MDP partici- sample. (The questionnaire is reproduced as Annex 5.) pants and nonparticipants; and (2) those between the performance of MDP participants before the project and Additional Points of Methodology for Chapter 3 the same participants after the project. The values of all Because of the rigorous reporting requirements of official indicators were tabulated by estimating mean values controllers of local governments in both countries, a very across groups of municipalities. For property tax per large body of information on the finances of municipali- capita, for example, the mean value of all municipalities ties was available. This allowed for the gathering of was estimated across analytical categories (all partici- detailed time series and cross-sectional data on all pants in Rio Grande do Sul, large nonparticipants in municipalities in all four states and provinces where the Laguna). In other words, the estimates were mean values municipal development projects were implemented. Table for the indicators of each municipality within the car- Al.1 details the universe of the study at the level of groups egory; the estimates did not represent the mean value for of municipalities. the category as a whole. By focusing on estimates of Thus, the finances of 669 municipalities, 78.7 percent average values of these indicators across individual of the total, were reviewed. Excluded from the study were municipalities, the evaluation could more effectively meet 140 newly created (and mostly small) municipalities in its objective of highlighting the effects of MDP impacts at Brazil, for which time series data did not go back to the level of individual municipalities. 1990.1 The Brazilian sample was also truncated by Strictly speaking, data analysis should be limited to excluding 8 very large municipalities with more than comparisons among 132 participating municipalities (the 250,000 inhabitants each and 16 very small ones with experimental group) versus 185 nonparticipating munici- fewer than 2,000 inhabitants each. Besides eliminating palities (the control group) in the state of Rio Grande do outliers from the study, this also gave each country's Sul (see table Al.1), since the policy environment and the group of municipalities a similar demographic distribu- implementation strategy were different between Parand tion, helping to make comparative observations across and Rio Grande do Sul. Nevertheless, the study team countries more robust. Finally, 17 municipalities that had decided to report the results of the Paran6 data together participated only in MDP technical assistance without with those of Rio Grande do Sul to evaluate the general borrowing under the program were excluded from the patterns of project impacts across states, because the Philippines analysis; they qualified neither as MDP project design was identical in the two states. In the participants nor as members of a control group of Philippines, all municipalities in the province of Bulacan nonparticipants. participated in MDPs, so Laguna, where a large number A central feature of the evaluation design was a of municipalities did not participate in MDPs, was chosen comparison of the performance of MDP municipalities to provide a control group. Therefore, in the empirical with the performance of a control group of similar results reported in this document, the focus of analysis municipalities that did not participate in an MDP. In should be the comparison between the control and Rio Grande do Sul, 185 municipalities-represented in experimental groups in Rio Grande do Sul, and other all three population cohorts-did not participate and results should be viewed as supplementary. provided a natural control group. Paranc had no 30 Annexes ANNEX 2: ADDITIONAL DATA ANALYSIS OF MUNICIPALITIES BY POPULATION SIZE This annex presents additional details of the evaluation of while small participants did much better. This MDP impacts on municipal fiscal and financial manage- finding is consistent with the idea that MDPs can ment, as reported in Chapter 3. Here the same indicators be beneficial in stalling the erosion of fiscal are analyzed, but disaggregated by municipal size ac- autonomy, especially of small municipalities. cording to population cohorts. In this annex, the cohorts are defined as follows: (1) large municipalities are those Table A2.2 presents data pertaining to the second with 50,000-250,000 inhabitants; (2) medium munici- indicator of municipal financial autonomy: the amount of palities have 10,000-50,000 inhabitants; and (3) small own revenues collected per capita. municipalities have 2,000-10,000 inhabitants. The highlights: Municipal Financial Autonomy versus Revenue Sharing As in Chapter 3, the analysis here looks at two indicators The best performance among large municipali- of financial autonomy at the municipal level: (1) munici- ties in Brazil was that of Parand participants. pal own revenues as a share of all current revenues and (2) Large participants in Rio Grande do Sul also did municipal own revenues per capita. Table A2.1 summa- better than nonparticipants in that state. Since rizes the data regarding the first indicator by population large municipalities in both states share strong size of municipality. administrative capabilities to improve own rev- enue mobilization, the study team looked for Among the highlights: different project impacts to explain the contrast. As second-timers in MDP projects, Paran mu- * In Brazil, MDP participants in all size categories nicipalities had more time than their Rio Grande outperformed nonparticipants, except for large do Sul counterparts to learn that access to credit participants in Rio Grande do Sul. Participants' is helped by own resource mobilization. For this financial autonomy improved over the 1990-96 reason, large Parand municipalities may have period. been quicker to respond to MDP incentives. * Among all size categories in Brazil, small non- The less favorable performance by small munici- participants reported the poorest performance, palities in Parant reflects the difficulty of mom- TABLE A2.1: IMPACTS OF PROJECTS ON MUNICIPAL FINANCIAL AUTONOMY-OWN REVENUES' SHARE OF ALL CURRENT REVENUES (PERCENT) Pficnendt Percent Br.uil 1990 1996 chbnee Philippnn e l 199fs t 9he chan c Larga muniuopalinem eipopulation 50.00o-250,000) P.irncip.int-; iParina 2 . a b2.4 + Ipen Participana r ItBaLican 4 5 s.4 e P irticipim in IRG4i 24. N 3 -4.4 11.rticipant, iL. elui.i, f, 1 1. N.pacc a ~~ (~.I i.2 I . -. N4_%np.irt1L1p3n[' i LagUii -- iMedium munofipalities mpopulation 10,000-50,000) h'rticipa nts W .ira na i 1-4.1 . +I2. I P.IrtI,1p31It% 111111 111) 4n i. .4.1 - (".2 I'.Irtic!pait Ri , I +6 1 _ I. i Parcipan[% [1_3gLuJ)- Nonparcicpanic, ilGs I i. I 16. 1I . i,~- N. np.rrip.int ii agLini 4 -(2.,Y U Small municipalities Tpopulation 2,000-10,000) Pnrri,tipieis iiwranai is.s BaiwsP.iarrp.n p pBalacann ParticipanLa pRGac t 11.2 11.1 inorGcipriarn dSLuglnal Non p.1rt,ip.rs RG1ib I e.te I 1.ta n14.os Nnatnpiatnsparir in thiasIt S Ii Note: See tables 3.2 and 3.3. RGS cRio Grande do Sul. Source: MDP Impact Evaluation Study database. 31 Developing Towns and Cities: Lessons from Brazil and the Philippines TABLE A2.2: IMPACTS OF PROJECTS ON OWN REVENUE MOBILIZATION-OWN REVENUES PER CAPITA (CONSTANT 1996 US$) Percent Percent Brazil 1990 1996 change Philippines 1990 1996 change 1.41 'B' (B/A' (D) F E/ED, Large municipalities (population 50,000-250,000) .irtricipant;I i'arinil - 4.51i s1. 12 3. Participants iBulac ini 4.48 s.. Paricipains iRGS1 41.,ii ih.64 + 14.2 Pari p.inrs iLagtna 6.S) 11.5S +l1.1.2 NonparricipantS Ril 3'.3fl 2.v2 .. Nonparipants ILigunai - - - Medium municipalities (population 10,000-50.000) Pirrmi pantN iPar-in l 24.35 4 i .2 +8 . articipant IBuilacani 4.0. +11l. Pari,pant-, iRGi 41.AS iS. 3 -44.1 PartipanEN iLAUn.1i - - - N_npirricipant, RGSI 3 1.5 1 3 1. .Q +4. 3 Nornparricipanrs i Iagunai 1.24 5. *t. Small municipalities (populauion 2.000-10,000) P rart ipari 'P rina 1 q1. 0 1.4 +44., Participaits (Bulacari - irri,pirir; iR(isi 1.'1 4.2 +13 .2 Participants ilagunal - Noinparnapa nrs ' ROi - Si'.n2 2.r+ Ntnparticpants Iiagunai - Note: See tables 3.2 and 3.3. RGS = Rio Grande do Sul. Source: MDP Impact Evaluation Study database. TABLE A2.3: IMPACTS OF PROJECTS ON PROPERTY TAX COLLECTION-PROPERTY TAX PER CAPITA (CONSTANT 1996 US$) Percent Percent Brazil 1990 1996 change Philippines 1990 1906 change iA' 1 B/A) (DI IL) I/D) Large municipalities (population .50,000-250.000) ['arucipit' I' arana) I.x2 1 .8 + 14." Participant, IPulacan 1.31 1.4 .4 .3 iruc parir iRGS ;.1! 15.52 + i6u.tI Participants ILagunalC 2.44 4 f).8 N..npunti ipaurs IRG5i '.1 '., *l h4. NLnpart.ipants i Laguna - - Medium municipalities (population 10,000-50,000) Parricipant; Par.irii 2.11 +. '5-1.1 Parucipants 1Bacin 1'1'4 1).ql -*4.2 iarticipats IRGhi 3.'< 1 S. + 5." Parn'rpanti iLagunai - - - Ni.npartcip.nn. RRC..( 2.1.t_ 11.5 +461. Nonparnmapants (Lagunar3 1.16 1.5 + 31.0 Small municipalities ipopulation 2,000-10,000) Pirtic1pants Carana 1. 2.5 i.4.2 Participants IBulacan - - Parric!pantb (G. l.C in 43 .1.316.4 P.irrnpanr [ta.na - - N nip.irts.'pants IRL.: 1 ." I t.N9 + 4 .4 Nonpa rrLlpanr (LaIV0u 1 - - Note: See tables 3.2 and 3.3. RGS = Rio Grande do Sul. Source: MDP Impact Evaluation Study database. toring (by means of a financial action plan) the long run only if municipalities succeed in perma- reform process for a large number of participat- nently consolidating their administrative capacity. ing municipalities, as confirmed by the perfor- * Data for the Philippines reveal that participating mance audit. municipalities in Bulacan did better than nonpar- * Smaller municipalities in Rio Grande do Sul were ticipants in Laguna in the medium-size category. more sensitive to the initial shock caused by gaining access to MDP credit for the first time. Here, the project effects will be sustainable in the 32 Annexes Own Revenue Generation Through Property Taxes cates that larger municipalities are able to Table A2.3 presents data on the performance of respond more effectively to MDP incentives and municipalities of different sizes in mobilizing property to undertake the complex and politically un- tax revenues per capita. popular business of raising more property taxes Among the highlights: from their citizens. * In the Philippines, as well, larger participants * In the large population cohort in Brazil, both report the strongest property tax performance. Parana and Rio Grande do Sul participants * The ability of small participants to improve improved property tax collections per capita property tax collection in Brazil was varied. much more than did nonparticipants. This re- Small participants in Rio Grande do Sul did flects the willingness and administrative capabil- substantially better than nonparticipants, sup- ity of larger municipalities to respond to MDP ported by intense MDP project supervision and requirements and technical assistance to collect the credibility of a program in which they were more property taxes. participating for the first time. Small partici- * This finding reflects the earlier conclusion in this pants in Parand, in contrast, were less supervised annex about own revenue generation, and indi- because of the larger number of participants. TABLE A2.4: IMPACTS ON DIRECT COST RECOVERY IN BRAZIL Betterment charge per capita (constant 1996 US$) Atunicipalities b) population cohort Large Nledium Small Percent Percent PXrcent 1990 1996 change 1990 1996 changc 1990 1996 thange (C) 1D' l (I (E) F) F.L' (G) Hi H CI Participica 'P.irin ii 1.84 1.63 -11 4 1.36 i1.1,2 -54.4 0.34 0.4' -i2.4 Participlti ' 0.88 0.) . 1.62 2.46 + i 1. 1.34 4.t- +244.> NonpariIp t..iu 1-is 0.36 0.11 -11 " 4 0.98 1.44 +-t - 1.53 1.81 -1, 3 Note: See tables 3.2 and 3.3. Behind the weaker performance of Paran6 is that 26 participant municipalities stopped collect- ing betterment charges by 1996, so that by project completion, 58.2 percent of all participants did not collect betterment charges. In contrast, in Rio Grande do Sul, an additional 14 participant municipalities were collecting betterment charges by 1996, so that by project completion, only 16.7 percent of participants were not collecting betterment charges. Source: MDP Impact Evaluation Study database. TABLE A2.5: IMPACTS ON MUNICIPAL BUDGET SURPLUS OR DEFICIT Budget surplus(+) or deficit(-) as share of total revenues (percent) Municipalities bv population cohort Large Medium Small -1990 1996 Change 1990 1996 Change 1990 1996 Chanue (C Di ID-( (E.1 F F-L fG1 (Il ll- C' Brazil Participants (Parn.iri -0.6 -.8 -.2 -0.5 -0.4 1 +0.4 -9.4 . Participants (RC.S' +2.3 - 2 -0.4 -5.2 -4.s +1.2 .-A - Nonparticipants 1k .' +2.3 -15.3 -1I." +1.i -. -.1 +3.6 -.S -11.1 Philippines Participants (Bul-mi -6.1 +2.o +8.1 -2.6 +1.5 +-.I - - - Participants (La4,in' +5.3 +4.i -II - - - - - - Nonparticipants 11 i I - - - +8.9 ±1.6 - .3 - - - Note: See table 3.2. Budget surplus or deficit = total current revenues minus total current expenditures (including debt service payments). RGS = Rio Grande do Sul. Source: MDP Impact Evaluation Study database. 33 Developing Towns and Cities: Lessons from Brazil and the Philippines Direct Cost Recovery moved out of deficit into surplus. These find- Table A2.4 reports, for Brazil only, municipal direct ings demonstrate that the administrative cost recovery through the levying and collection of strength of larger municipalities in the Philip- betterment charges on investment projects. pines is similar to that reported earlier for the case of Brazil. Among the highlights: a Medium-size participants in Rio Grande do Sul also performed better than nonparticipants, as did In Rio Grande do Sul, participants did much medium-size participants in the Philippines. better than nonparticipants in all categories. The - For small municipalities, the differences in perfor- best relative performance of participant over mance of participants and nonparticipants were nonparticipant municipalities was in the small not very large. category. Small participant municipalities there responded strongly and positively to MDP condi- Financial Deepening tionalities and technical assistance provided un- For the case of Brazil only, the data in table A2.6 report der the project. This evidence is consistent with municipal-level performance by degree of involvement the shock effect and leverage of first-time contact in the MDP projects. with an MDP project, as discussed earlier in this report. Among the results: Budget Surplus or Deficit Project leverage can affect MDP impacts in all Table A2.p presents municipal budget surplus and three size categories. deficit data by population-size category. * Apparently, there are two exceptions: (1) unexpect- edly, medium-size shallow participants in Paran Among the highlights: performed, as well as deep participants; and (2) small, shallow participants outperformed all others * Large participants in both Paranm and Rio within their size category in Rio Grande do Sul. Grande do Sul outperformed nonparticipants. Both results are the consequence of the exceptional Large participants in Bulacan reported a sig- performance of a few municipalities, creating bias nificant improvement as, on average, they in the category means reported here. TABLE A2.6: IMPACTS ON OWN REVENUES BY DEGREE OF FINANCIAL DEEPENING IN BRAZIL Own revenues per capita (constant 1996 US$) NDP participant municipal-iiev b populanion cohort Large Medium Small Percent Perccru Percc 1990 1996 chAamo 1990 199 change 1990 1996 ehsane edlymed(iu Lms i) shallow ri i- Paran Po. DLI'36.42 S_.:1 1 41 4 19.61 3k.6 1~ 18.06 19.-" 1 -: M r Ji.... 43.91 -6. i4 *-4 2-179 43 .- .i. 19.92 3 2.A k r,ii Si Im.. 49.29 te hg hl 2i6.g15 h:.r 3 23.70 wl s. d2 4 ad( D.p28.05 4. 15 i-'I 39.95 C' .e,' . Q 20.-5 3-.52 ~ . M..J.''M 63.91 .S 4 33.49 4s. 6 i, t4 i. 4 1. 39 3 8.32 - 4 Shsm.. 5a.2 s hal o 36pt3 4i. outf o.r 30.00 1a 14 ot I Note: See tables 3.2 and 3.3. Financial depth is defined as the share of total 1990-92 municipal investment accounted for by MDP funding. The three groups are: (a) deep O> 50 percent; (b) medium = 25-50 percent; and (c) shallow $)25 percent. Source: MDP Impact Evaluation Study database. 34 Annexes ANNEX 3: PERFORMANCE AUDIT OF THE BRAZIL MOPs: LESSONS AND RECOMMENDATIONS This annex presents the lessons and recommendations turned to power in 1995. Continued po[itical from the performance audit report for the Brazil MDPs. support over time is crucial for successful project In April 1997, a policy seminar was held in implementation. Curitiba, Parand, to draw lessons from past urban The dynamics of municipal development. The operations. The lessons were succinctly summarized as MDP program was most effective in assisting follows: "Current trends in political, fiscal, administra- smaller, less creditworthy municipalities in remote tive, and operational decentralization entrust the provi- regions of the states. Large cities had access to sion of typically local services to local authorities. The alternative sources of financing and better techni- Municipal Development Program of Parand has cal capacity. As in the Philippines, the Municipal greatly reduced local dependence on state grants Development Fund in Brazil was catalytic in through a mechanism that is increasingly self-financ- helping smaller, resource-poor municipalities be- ing. This relieves the state of some responsibilities and come more creditworthy and financially strong, helps reduce social tensions by offering a direct with the expectation that they will eventually response to local needs. It also stimulates municipal tax participate in the capital market. But international collection as a means to improve creditworthiness" experience has shown that direct participation of (Secretariat of Urban Development 1997, p. 41). The municipalities in the capital market has been slow overall findings of the audit support this statement. in most developing countries. More specific lessons follow. MDP as an instrument for rural development. The project's financial and institutional impacts * Demand side. The financial action plan, with its were most significant for small and medium-size stringent conditions for loans, was an effective municipalities in remote regions. Enhancing the incentive for municipal reform. This design, with efficiency and productivity of these market follow-up monitoring at the time of subsequent towns should contribute significantly to the loan applications, enabled a wholesale approach economic and social development process in that covered a large number of municipalities. rural regions. As an important side effect, this * Supply side. The MDP program in Parand process would reduce regional income dispari- demonstrated the institutional evolution of an ties between large urban centers and rural areas. urban development fund from a government- operated disbursement mechanism to an indepen- Recommendations dent, self-financing, private financial intermedi- ary for providing long-term credit to Diversify the types of subprojects to be financed. municipalities. ParanaCidade is a good practice Both ParandCidade and the state urban develop- case for the MDP program; it can be replicated ment fund, FUNDOPIMES, should expand the in other states in Brazil and in other countries. scope of the lending program by allowing revenue- * Sequencing of project components. The project generating projects with positive externalities in design, which aimed at setting the institutional which the private sector can participate. framework right and putting financial reform in Diversify financial services. ParandCidade has place before physical investments were under- reached a phase where it could consider diversi- taken, reduced the risk of implementation delays fying its financial services to include credit and helped ensure cost recovery. guarantee service and debt financing. It could * Champions and political support. During imple- also play a catalytic role in build-operate- mentation, the MDP program in Parand was not transfer schemes, concessions, contract manage- affected by government changes. The MDP ment, and other forms of private sector partici- program in Rio Grande do Sul did suffer from pation. FUNDOPIMES could soon follow such changes and was on the verge of collapse ParandCidade's path. until the original preparers of the project re- * Emphasize training. The MDP program in Brazil 35 Developing Towns and Cities: Lessons from Brazil and the Philippines lacks continuing training in association with a than high-income households and large firms formal training institute. Since the Brazil MDP is (Lee, Anas, and Oh, 1999; Lee and Anas, 1992). implemented in a wholesale manner for numerous Therefore, this tax measure could be an effective municipalities, it may be useful to explore the means of direct cost recovery if the government feasibility of establishing a training institute (possi- commits to its implementation. bly jointly by several states) to build municipal * Protect PIMES and FUND OPIMES from politi- capacity. This would enhance local capacity to cal interference. With a healthy cash position generate high-quality investment projects and and the high demand for loans, the PIMES lessen the need for close supervision by the state's program is entering a critical phase for institu- implementation agencies. tional growth and financial stability. It is impor- * Streamline municipal administration and manage- tant to protect its organizational integrity, finan- ment. Computerizing the accounting and budget- cial independence, and highly dedicated staff ing systems and updating financial data would during the period of ongoing state reform. enhance the efficiency of municipal administration * Monitor the creditworthiness of municipalities in and management. It would also make it easier for Paran6i. Ninety-nine percent of municipalities are ParanACidade and FUNDOPIMES to continuously participating in Parani. For such a large number of monitor the financial health of participating mu- participants, more stringent monitoring of the nicipalities by sharing a common database. financial action plans will be desirable to maintain ParaniCidade is heading in this direction by healthy financial conditions of both the municipali- adopting sophisticated data management and op- ties and the Municipal Development Fund. erations simulation systems. * Disseminate lessons learned. The evaluation * Use the betterment tax effectively for direct cost coordinator of Brazil's Federal Ministry of Plan- recovery. This tax for a new infrastructure ning participated in the audit mission. He sug- service is generally a one-time connection fee. gested that, on completion of OED's ongoing Studies show that low-income households and impact evaluation study, a dissemination semi- small enterprises tend to have a greater willing- nar be held in Brasilia for local government ness to pay at the margin for reliable services officials involved in MDPs. 36 Ann exe ANNEX 4: PERFORMANCE AUDIT OF THE PHILIPPINES MOPs: LESSONS AND RECOMMENDATIONS This annex presents the lessons and recommendations tures. These experiences suggest that segmenting from the performance audit report for the Philippines the demand side of the market-that is, targeting MDPs. particular types of municipalities for particular types of projects-should be avoided. Even under * Demand-driven approach, participation, and LOGOFIND, the credit window for first-time ownership. A bottom-up, demand-driven pro- (poor and less experienced) borrowers should gram approach to project financing is more continue to be open for simple revenue-generat- efficient and effective for project implementation ing projects, while the loan product mix with than a top-down, preselected, project-specific more complex projects should be offered to more approach. Beneficiary local governments per- mature local governments. form better and show greater commitment to the * Expand the role of the Local Government Acad- project when they have primary responsibility emy. The role of the Local Government Acad- for project preparation, management, and imple- emy in training municipal officials should be mentation. expanded from training at the project level * Sequencing of project components. The institu- (preparation, financing, and implementation) to tional framework for project financing (the Mu- building capacity to plan and implement a nicipal Development Fund) was put in place citywide infrastructure investment program and before physical investments were undertaken. manage rapidly expanding urban areas. For Because of the demand-driven approach, the example, Santa Rosa faces a tremendous chal- MDP program financed revenue-generating lenge to meet the sharp increase in demand for projects that presented minimum risks for cost residential and nonresidential land and all types recovery. This outcome showed that sequencing of infrastructure services resulting from large of project components in response to the needs of multinational firms moving into the area. The beneficiaries can prevent the implementation academy should also expand its dissemination delays and cost-recovery problems that often program, whereby the experiences accumulated occur in a complex urban development project by local governments graduating from MDPs prepared in a top-down manner. can be shared with newcomers. Mayors and * Piloting to mainstreaming analogy. After the senior officials of Bauan and Pulilan, for ex- participating municipalities complete a rather ample, are already serving as lecturers in acad- simple, low-risk, revenue-generating project emy seminars, but a more proactive program such as a public market, their creditworthiness is such as twinning could be effective. enhanced because of a stronger financial base, * Reduce disincentives for local revenue genera- and they tend to expand their investments to tion. The increase in the revenue sharing ratio to infrastructure projects such as roads, drainage, 40 percent, as part of the revised Local Govern- water supply, and sanitation. The logic of the ment Code, has dampened the incentive to new project cycle (Picciotto and Weaving 1994) generate local revenues. To reduce this disincen- is supported by the experiences of the MDP tive, the audit recommends (1) the introduction program. of matching grants, above the standard budget allocation, tied to the level of local revenue Recommendations collection or successful cost recovery; (2) continued support of the RPTA program to * Reform government finance and the changing capture tax revenues from the rapidly rising role of the Municipal Development Fund. The property values, in particular from the expand- program financed mainly revenue-generating ing nonresidential tax base in fast-growing projects with minimum risk. Local governments municipalities; and (3) the introduction of a were initially reluctant to finance social or presidential award system according to the level infrastructure projects with cost-recovery fea- of financial autonomy, measured by the ratio of 37 Developing Towns and Cities: Lessons fron Brazil and the Philippines intergovernmental transfers (revenue sharing) to ing out maintenance activities to private firms, total municipal revenues. For the four cities possibly based on user fees. Contract management visited by the audit mission, this ratio was: or other forms of private sector participation could Bauan, 16 percent; Santa Rosa, 23; Pulilan, 49; also be adopted to protect the financial viability of and Butuan City, 79. MDP-financed economic enterprises such as public * Private sector participation in maintenance and markets, bus terminals, and slaughterhouses. contract management. To make the project Mandaluyong City in metropolitan Manila has achievements sustainable in the absence of recur- been using a management contract arrangement rent budget funds for maintenance and technical for its public market, and Santa Rosa is considering personnel, municipalities should consider contract- such an arrangement for its market. 38 Annexes ANNEX 5: PUBLIC MARKET SURVEY QUESTIONNAIRE OF STALLHOLDERS AND SMALL ENTERPRISES Time and Date: C. Products and Services Name of Interviewer: C1. For stallbolders: what goods do you sell? A. Classifications For business enterprise: what kind Al. Identification Number: of business is your enterprise [first number is for municipality, engaged in? [For example, gas followed by the serial numbers] station, bank, restaurant, taxi 1. Pulilan company, pharmacy, etc.] 2. Guiguinto A2. Classification by business type: C2. If you sell goods, where do your goods [first three categories are for stallholders] come from? [please give a rough 1. Meat, poultry, and fish percentage distribution] 2. Fruits, vegetables, and grains (rice, 1. From this municipality E= corn, etc.) 2. From this province E= 3. Manufactured goods (clothing, 3. From outside this province 11 toys, kitchen wares, etc.) Total 100 4. Business enterprises outside the market C3. Who are your customers? [please give a rough percentage distribution] A3. Name of stallholder or business 1. Residents of this municipality E= enterprise: 2. Residents of this province E= Stall number: 3. People from outside this province Telephone number, if any: Total 100 Name of respondent: Position of respondent, if not owner: D. Employment Dl. How many people are working B. Location Choice here, including yourself? persons Bl. When did you start conducting your business at this location? 19 D2. How many are members of the owner's family? L Dpersons B2. Did you move here from another location? 1. Yes E] D3. How many are female workers? persons 2. No L] D4. How many hours do they work per day? B3. If yes, where was your Owners hours previous business located? Helpers hours Name of the subdivision (neighborhood): D5. On average, how much do you pay per month? B4. Why did you choose this location? LI 1. For manager/caretaker pesos/month [pick the most important reason] 2. For helper pesos/month 1. Availability of space 2. Accessibility to customers D6. How much do you spend in kind 3. Close to your residence [meals, transportation, and other] 4. Good transport access per person per month? 5. Safety 1. For manager/caretaker= pesos/month 6. Others, please specify: 2. For helper Lpesos/onth 39 Developing Towns and Cities: Lessons from Brazil and the Philippines E. Commuting F. Sales and Expenses El. Where do you live? Fl. Please give your best estimated amounts for the Name of your subdivision: following items without looking at your account- ing books. Please convert all items into monthly E2. How do you come to work? L values in pesos per month. [note: the first year 1. Walk 4. Tricycle should be the same as the answer to question B1 2. jeepney 5. Private car above] 3. Bus 6. Other, please specify First Year 1998 E3. How far is your residence from your a. Monthly sales workplace? [I] kilometers h. Purchases of goods and materials c. Wages and other benefits E4. How much fare do you pay? (transportation, meals, etc.) One way? [=I]pesos paid for all employees Two ways? I ]pesos d. Rent paid for stall or shop e. Property taxes E5. How long does it take to come to (for enterprise only) work one way? L[L] minutes f. Interest payments on loans g. Electricity________ E6. Has the traffic condition improved h. Water or become worse since you moved here? L . Garbage collection 1. Improved j. Communication expenses 2. Remained the same k. Delivery costs 3. Became worse (both buying and selling) 1. Any other expenses; please specify - E7. Do you have a plan to move your m. Total expenses (in 1,000 pesos) residence near your workplace? L 1. Yes F2. Roughly how much monthly income 2. No do you (stallholder or business 3. Already near enterprise) make per month after If yes, is it easy or difficult to find paying all expenses? a place near hereL First year:II I I IJ pesos per month 1. Easy 1998: 111 1 11lpesospermonth 2. Difficult If B2 is "yes," monthly income at previous location: InIII I pesos per month Note: Sections G, H, and I are for stallbolders only. G. Public Market Facilities G1. How much was the goodwill payment when you moved in? ZL LI pesos G2. How did you pay your goodwill money? [pick the most important source] 1. Your savings 2. Borrowed from a bank 3. Borrowed from relatives and friends 40 Anne xes 4. Private money lenders H3. Are you the main income earner? 5. Other, please specify 1.Yes E 2. NoD G3. How many stalls do you use now? 1. When did you start using the H4. Have your family's living conditions second stall? 19 Tj improved since you started business here? D 2. When did you start using the 1. Significantly third stall? 19 Fj 2. Moderately 3. If you have one now, when do you 3. No change expect to have a second stall? 19 FLI 4. Became worse G4. Do you have a plan to establish your H5. Did you begin to have a maid and/or own business place outside the public househelpers since you started business here? market? 1. Yes or hired additional house helpers D 1. Yes O 2.No Fi N2. No H6. If yes, how many? j- persons G5. If yes, when do you expect to move to the new place? 19 [] H7. How much do you pay her/him per month? pesos/person G6. How was the quality of the following services in the market when you 1. Opinions about the Public Market moved here and now? ct. Are you satisfied with the marketplace? [note: the first year should be the same Very satisfied =1; Satisfied =-2 as the answer to question B1 above] Not satisfied 3 Excellent = 1; Good = 2; Fair = 3; Poor 4; No Applicable = 5 12. What are some of the problems that First year 1998 could be improved in the market? a. Electricity D- D- [list three in order of importance] b.Water .__1_ c. Telephone F 2 No b. d. Police protection t_ _ to mo e. Fire protection 19 [ f. Garbage collection 13. Is there a need to expand the market? g. Sewerage and drainage 1.Yes E] h. Public toilets 1F12. No FD i. Ventilation FD - J. Storage F 14. Do you belong to a market vendor's k. Parking space association? 1. Yes a. Driveway 2.No D H. Household I5. How much in fees do you pay to the H1. How many people are in your family? association per month? ILpesos/mionth b. persons 16. What services does it provide for you H2. How many members of your family work? [list three in order of importance.] ELpersons a.____________________ be.___Fire_____protection_______ 41 Developing Towns and Cities: Lessons fron Brazil and the Philippines Note: Section J is for business enterprises outside the J7. Do you have a plan to expand your market. business at this location? J. Capital Investment 1.Yes JI. How large is their total floor space? 2.No E I square meters squae meers J8. W hat is the price of land at this location J2. Do you own this place or rent? now (1998)? 1. Own pesos per square meter 2. Rent J9. How much was the land price when J3. If you own the place, how much did you moved here? [the year in question B1] you pay for this space when you pesos per square meter moved here?[the year in question B1] K. Other general comments on problems, and sugges- IIILI \1,000 pesos per square meter 1,00 pes s pe squ re m ter lions for improvements regarding any aspects of your J4. How much will you get if you sell business conditions or surrounding areas. it now? ~Jjj~1,000 pesos per square meter J5. If you rent, how much do you payyo per month? spesos per month per square meter K. Comments by interviewers on any problems en- J6. How much did you spend to set up your countered or any unusual information to be noted. business and improvements (i.e.,n investment for facilities, equipment, etc.) since you moved here? |EIZIZE 1,000 pesos 42 ENDNOTES Chapter 1 audit mission in Novo Hamburgo and Sao Jose dos Pinbais, 1. This study looks at only MDPs that included a municipal (or respectively. urban) development fund component. 2. The municipalities were: Alegrere, Arroio dos Raros, 2. For more on evaluation design, see United States General Bento Gonqalves, Boa Vista do Burici, Buti , Cacique Loble, Accounting Office (1990, 1991, and 1992). Campinas do Sul, Candido Godoy, Caseiros, CaraZinho, Chapada, Constantina, Dois Irmaos, Dom Feliciano, Doutor Mauricio Cardoso, Erebango, Erechim, Farroupitha, Chapter 3 Independncia, Jacutinga, Nova Hartz, Novo Hamburgo, 1. Evidence of improved property tax collection resulting Parob6, Santa Rosa, S5o Borja, and S5o Jodo da Urtiga. from MDP improvements to property cadastres in Brazil was also examined, but little was found to support this link. Cadastral Chapter 5 improvement rarely went beyond modernizing the register in city 1. This chapter is based on the results of a survey of public hall; much of it failed to lead to effective broadening or deepening markets conducted by Cirrus Research and Software under the of collections. More comprehensive packages of technical assis- tance-notably those including direct efforts to improve collec- dieti fa - and uner the oel super s tion-were found to be more effective. 2.administered the field survey, prepared the data, and produced the local mayors in Rio Grande do Sul were more ready to embrace joitl b estud T esinainn n Mala. betterment charges, which for many of them constituted an unfamiliar financial instrument, although one that gave them 2. The first MDP loan for the public market was for 6.7 easier access to project finance. million pesos; the second was for 4.5 million. The public market 3. By contrast, all MDP participants in Rio Grande do Sul project has been self-financing and has a perfect record for that collected betterment charges in 1990 still collected them in meeting its loan repayment schedule. The mayor would like to 1996 and were joined by 14 more municipalities by the latter year. net an iceafte expene o e tha lnesos Thus, by project completion in 1996, 83.3 percent of participants ne1 an d ha tribute o m revn in 1997, in Rio Grande do Sul were collecting betterment charges. The the publicnmrket opeationthd a budget rplus f 3 9ilo equivalent share for Parana was 41.8 percent.thpulcmreoeainhdabdgtspusf3mlin equialet sareforPara6 ws 4.8 ercnt.pesos (total revenues of 6 million, less total expenditures of 3 million). According to estimates produced by the Central Project Chapter 4 Office, as of 1995 its financial rate of return was 27 percent and 1. This chapter is based on a report prepared by Jeanette its economic rare of return was 29 percent. The latter would have Lontra in March 1998 as part of this study, under the supervision been higher had the indirect benefits to the stallholders been taken of Aurelio Simon (PIMES 1998). The terms of reference for the into account. telephone/fax survey were prepared during the audit mission in December 1997. Roy Gilbert coordinated the survey work and Annex 1 did translation and editing. Sextilio Giacomini, Aldino Dick, 1. Most new municipalities were ver small. There were 48 Janise Benneet, and Neusa Cunha of the PIMES team partici-y Janie Bnnet, nd NusaCuna o th PIMS tam artci- new municipalities in ParanA (average population 8,090). In Rio pated in earlier stages of the work. This task was undertaken fully Grande do Sul, 20 participated in the project (average population by the PIMES team, without any financial support from the Bank. Marco and Rodrigo Gonzalez and Hector Hernan Osorio conducted participatory evaluation workshops as part of the 43  BIBLIOGRAPHY Davoodi, Hamid, and Heng-fu Zou. 1998. "Fiscal in the State of Parand: Lessons of Experience, Decentralization and Economic Growth: A Cross Coun- Challenge and Opinions for the Future. International try Study." Journal of Urban Economics 43: 244-57. Roundtable Meetings. State of Parand. Lee, Kyu Sik, and Alex Anas. 1992. "Costs of Deficient PIMES. 1998. Avaliacao de Impacto do FUNDOPIMES. Infrastructure: The Case of Nigerian Manufactur- Rio Grande do Sul State Development Bank ing." Urban Studies 29: 1071-92. (BANRISUL). Lee, Kyu Sik, Alex Anas, and Gi-Taik Oh. 1999. "Costs U.S. General Accounting Office. 1990. Case Study of Infrastructure Deficiencies in Manufacturing in Evaluations. Transfer Paper 10.1.9. Program Evalu- Indonesia, Nigeria, and Thailand." Urban Studies ation and Methodology Division. Washington, D.C.: (forthcoming). (Also available as World Bank Policy U.S. Government Printing Office. Research Working Paper No. 1604, 1996.) . 1991. Designing Evaluations. GAOIPEMD- Llanto, G. M., and others. 1996. Local Government 10.1.4. Program Evaluation and Methodology Divi- Units' Access to the Private Capital Markets. Philip- sion. Washington, D.C.: U.S. Government Printing pines Institute for Development Studies. Office. Picciotto, Robert, and Rachel Weaving. 1994. "New . 1992. The Evaluation Synthesis. GAO/PEMD- Project Cycle for the World Bank?" Finance and 10.1.2. Program Evaluation and Methodology Divi- Development. World Bank, Washington, D.C. sion. Washington, D.C.: U.S. Government Printing Secretariat of Urban Development. 1997. Urban Policy Office. 45  OPERATIONS EVALUATION DEPARTMENT PUBLICATIONS The Operations Evaluation Department (OED), an in- Documents listed with a stock number and price dependent evaluation unit reporting to the World code may be obtained through the World Bank's mail Bank's Executive Directors, rates the development order service or from its InfoShop in downtown impact and performance of all the Bank's completed Washington, DC. For information on all other docu- lending operations. 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