Leonardo G. RomeoLeonardo G. RomeoUnited Nations Capital Development FundUnited Nations Capital Development FundLocal Development Unit (LDU)Local Development Unit (LDU)

Workshop on Workshop on Decentralization and Poverty Reduction: Decentralization and Poverty Reduction: From Lessons Learned to Policy Action, From Lessons Learned to Policy Action,

Paris, 29-30 September 2004Paris, 29-30 September 2004

NicaraguaNicaraguaDecentralization reforms: driven by politics and Decentralization reforms: driven by politics and

constrained by a weak inter-governmental systemconstrained by a weak inter-governmental system

Surface = 121,428 sq. Kmlargest country in C.A.

Population (2003)Total = 5,482,340Urban = 3,191, 670 (58%)Rural = 2,290,670 (42%)

The Economy (2002) GDP = US$ 2.5 Billion (Nicaragua has the smallest economy in Central America- Biggest is Guatemala). GDP/capita = US$ 472(Nicaragua has the lowest per capita income in Central America-Highest in Costa Rica)HDI = 0.667(Latin America average = 0.777)

Basic Facts

Administrative divisions

National

Local

Intermediate

Country

152 Municipalities (Managua + 151)

15 Departments Autonomous

Region

RAAN

Autonomous

Region

RAAS

Elected Municipal Councils

Elected RegionalCouncils

National Assembly

Administrative structures

Nicaragua is divided into:

15 “Departments” (administrative structures)

2 Autonomous Regions (elected Councils)

152 Municipalities(elected Councils)

The territory of a Municipality includes both urban areas (“casco urbano”) and rural areas (“comarcas”). Such arrangement, common in Latin America, represents both an opportunity and a risk for the voice of the rural poor.

Size of Nicaraguan Municipalities

48% of the population is poorpoor (< 402$/c/yr)

17% of the population is extremely poorextremely poor (<212$/c/yr)

Poverty is mostly rural• 68.5% of the poor live in

rural areas and• 75% of the extremely

poor live in rural areasMost of the poor, whether

urban or rural are heavily involved in agricultural employment

The extremely poor are geographically concentrated in the municipalities of the central and Atlantic regions.

Poverty by municipality

Three milestones: 1. The Constitution of 199519952. The Revised Municipal Law of 199719973. The Fiscal Transfers Law of 20032003

1. The 19951995 Constitution – Affirms the political, administrative and financial autonomy of LGs – Recognizes the broad responsibility of LG to promote the

development of their municipalities and the welfare of its citizens– Stipulates that, by law, the State will transfer a percentage of its

fiscal revenue to municipal governments. – Limits LG autonomy by granting to the National Assembly the

authority to create or abolish taxes and approve the LG yearly budget revenues.

Decentralization reforms : the legal framework

2. The Municipal Law (n.40/261 of June 19971997 )– Reaffirms that the municipalities have a general responsibility for

“all matters concerning their economic development and the protection of their environment”.

– Assigns to LG a long list of specific responsibilities including • the delivery of traditional local government servicestraditional local government services (water, solid

waste, slaughterhouses, markets, urban planning and building permits, etc.)

• the co-provision, “in coordination” with responsible central agencies of other servicesother services (primary health, rural roads and bridges, environmental protection, etc.)

– But remains vague in defining:• which responsibilities are mandatorymandatory and which are permissivepermissive and

• what constitutes a minimum setminimum set of LG services delivery obligations.

Decentralization reforms : the legal framework

3. The Fiscal Transfers Law (n.466 of August 20032003 )– Implements the Constitutional mandateConstitutional mandate to transfer a share of

domestic fiscal income (mainly for equalization purposes), and sets the share at 4%4% in FY2004, growing to 10%10% in FY 2010.

– Distributes the resources according to a formula based on 4 criteria of equal weight :(i) fiscal equalizationfiscal equalization, (ii) populationpopulation, (iii) fiscal effortfiscal effort, (iv) spending ratespending rate

– Sets some “conditions of accessconditions of access” (mainly procedural), but does not elaborate on their administration

– Foresees the possibility of external fundingexternal funding to the national fiscal transfers, but only as “additionaladditional” to the budgetary transfers

– Allows the use of transfers for both capital and recurrent capital and recurrent expendituresexpenditures in varying proportions depending on the municipal classification in categories of fiscal revenue .

Decentralization reforms : the legal framework

1. Decentralization has been driven by national politicsnational politics rather than by national policynational policy, , and a strong “municipal movementmunicipal movement” plays a key political role.

2. The State has not invested in a robust system for support and supervisionsystem for support and supervision of local authorities, leading to systemic failures of inter-governmental accountability .

3.3. The The “local choice”“local choice” and “agency” functions“agency” functions of LG are not clearly articulated. LG services delivery responsibilities are ill-defined and the role of municipalities in role of municipalities in implementing the PRSimplementing the PRS is not developed

4. Fiscal transfers have addressed a pre-existing unfunded mandateunfunded mandate problem but have raised new issues of macro-level fiscal imbalancefiscal imbalance.

5. The design of the transfers system (formula and administration) has been• Rather effective for equalizationequalization purposes • Less effective as incentive to local performanceincentive to local performance and • Less effective to mobilize external aidexternal aid for municipal-level budget support.

6. Improved PEM procedures have been introduced and opportunities for popular participationparticipation have been expanded

7. The use of increased municipal resources for poverty reductionpoverty reduction has been constrained by reluctance to devolvedevolve pro-poor infrastructure and services delivery responsibilities and strengthenstrengthen municipal accountability

Lessons learned and critical issues

• Everywhere, decentralization reforms are politically drivenpolitically driven. In most developing countries reforms are initiatedinitiated by the party party in powerin power , which expects from decentralization (usually “political” rather than “administrative” or “fiscal”) strategic political advantages.

• Nicaragua and other Latin American countries offer a a variation of such patternvariation of such pattern: political elites that are “centralist” when in power, turn to “decentralist” when out of power, where they can “ride the tiger” of a historically strong “municipal movement”.“municipal movement”.

• Decentralization reforms therefore proceed (or retreat) in response to the immediate demands of politics politics rather than to a central policypolicy initiative.

(1) Decentralization and Politics

• Lacking a strategic initiative, the State has not invested in its own has not invested in its own structurestructure for support and supervision of the LG sector (INIFOM = Nicaraguan Institute of Municipal Development).

• INIFOM, does not have the mandate and legal statusdoes not have the mandate and legal status of what elsewhere are (i) Ministries of Local Governments (British system) or (ii) Dept. of Local Authorities in Min. of Interior (French system).

• INIFOM has been historically used as government's vehicle for politically-motivated financial support to municipalities (often becoming simply an instrument of the electoral campaigninstrument of the electoral campaign of the party in power).

• Recent donor-supported attempts to raise the profile of INIFOMraise the profile of INIFOM and link its capacity building mandate with the monitoring of municipal performance and the certification of municipal compliance with performance-based conditions of access to the general transfers have have been frustratedbeen frustrated so far by lack of State investment in INIFOM and fierce resistance by the municipal movement.

(2) Weak State support & supervision of LG

• Central Government : – Has been mainly concerned with how LG could help implement its its

own (central) poverty reduction policiesown (central) poverty reduction policies, bringing to bear their potential allocative and productive efficiency (LG as “agents” of the State)

– Has been slow in recognizing and appropriately support the LG exercise of “local choice” to develop effective “local” policies for “local” policies for poverty reductionpoverty reduction (both growth promotion and safety nets)

– Has long insisted on the Social Fundthe Social Fund and other central agenciesother central agencies as the main conduits for local investments financing and as a de facto “alternative” to fiscal transfers.

– Now needs to clarify the scope for devolutiondevolution and delegationdelegation arrangements for services delivery in sectors critical for poverty services delivery in sectors critical for poverty reductionreduction (agriculture, health, education, rural infrastructure) in order to effectively bring municipalities to play a role in the implementation of the PRS.

(3-a) “local choice” vs. “agency” functions

(3-b) National priorities and local demand : the view from San Miguelito

• Fiscal transfers were enacted in 2003 to enable municipalities to fulfill the to fulfill the extensive responsibilitiesextensive responsibilities assigned by the Municipal Law of 1997

• However, given (i) the nature of the responsibilities (strictly municipal) or (ii) the lack of definition of how shared responsibilities could be co-financed, no no corresponding cutscorresponding cuts in central spending were foreseen, leading to potentially serious fiscal imbalances fiscal imbalances (a common problem in the region)

• WB and IMF are now proposing to “re-capture” part of the transferred resourcesto “re-capture” part of the transferred resources through a system of “matching grants” managed by central agencies that finance investments in local development (FISE , IDR, INIFOM)

• This proposal may result in increased inter-governmental cooperationinter-governmental cooperation in the interest of effective national policies implementation, but : – Downplays the scope for funding the transfers through broader policy changesbroader policy changes

and central budget restructuring– Substantially reduces the scope for “local choice”reduces the scope for “local choice” in developing pro-poor

policies and programs – Continues to privilege funding of anti-poverty programs through central funding of anti-poverty programs through central

agenciesagencies rather than to empower local governments and simultaneously strengthen their accountability to the State.

(5) “finance follows function”…or the other way around ?

• Since 2000, an attempt has been made to measure the fiscal income potential of municipalities and transfer resources to fill the gap with an equalization standard. The transfers have then effectively contributed to fiscal equalizationfiscal equalization among municipalities (see next slide)

• According to the 2003 FT Law, one quarter of the transfers is to be distributed in proportion to the effort of individual municipalities to collect property taxes. It’s too early to assess whether this is an effective performance incentive on the revenue side.incentive on the revenue side.

• “Conditions of access” to the transfers (adoption of participatory planning, proper budgeting and accounting), have been set, but their administration is weak and they are unlikely to provide an effective performance incentive on the expenditure sideincentive on the expenditure side.

• The FT Law foresees the possibility of external financing of the transferable pool, but barsbars the government from using project aid or project aid or “basket funds”“basket funds” to substitute for its own funds in the achievement of the annual target of transfers as a % of domestic tax income.

(5-a) FT: equalization but not incentives to performance

Municipalities grouped by fiscal income category

0

50

100

150

200

250

B C D E F G H

Categories of Municipalities

C$/

cap

ita

TransfersOwn Source

(5-b) the equalization effect of fiscal transfers (2002)

(6) Improved local public expenditures management

MunicipalCouncil

Mayor

MunicipalAdministration

Program Program Program Program

Assistant

COPLAM

MunicipalTechnical/

Planning Unit Staff

MunicipalTechnical /

Planning Unit Staff

Micro-Regional

Committes

SettlementCommittee

SettlementCommittee

SettlementCommittee

SettlementCommittee

Micro-Regional

Committes

Settlement-level Assemblies

Participatory Statutory PlanningCommission

CDM(Municipal DevelopmentCommittee) Community Representatives

LocalGovernement

Sectoral Agencies

ReligiousOrganizations

Private Firms

NGO

Professional,Trade and

Producers Org.

CommunityRepresentatives

CommunityRepresentatives

TechnicalSecretariat

Multi-Stakeholders Strategic PlanningPlatform

Substantial progress has been made to:• Introduce strategic municipal planningstrategic municipal planning• develop statutory participatory planning/programming and statutory participatory planning/programming and

budgetingbudgeting institutions• Introduce program-based local budget formats program-based local budget formats and

restructure accordingly the municipal administration• Enhance own-source revenue mobilization through improved

property registration and taxationproperty registration and taxation

• Local development for poverty reduction is still mainly a national responsibilitymainly a national responsibility and it is carried out through national agencies and programs (FISE, IDR, INIFOM)

• Through improved local planning institutions Municipalities have increased their increased their capacity to influencecapacity to influence the allocation of resources and the implementation of activities under these programs.

• The Central Govt. is currently more concerned about how to increase municipal how to increase municipal co-financingco-financing of nationally managed pro-poor programs, than about how to how to devolve responsibilities and strengthen local accountability devolve responsibilities and strengthen local accountability for pro-poor services delivery

• Undefined responsibilities for infrastructure and services delivery in critical sectors (health, education, water and sanitation, rural infrastructure) continue to limit the scope of local pro-poor actionlimit the scope of local pro-poor action. Municipalities also hesitate to engage in promotion of local economic development, in spite of strong local demand.

• Therefore the bulk of municipal resources (from own source or transfers) is still used for a limited range of traditional municipal investmentsa limited range of traditional municipal investments (intra-urban streets, parks, solid waste management, etc.). Nevertheless, municipalities are also often a source of emergency social assistanceemergency social assistance to the poorest and destitute.

(7) The scope for municipal pro-poor action remains limited