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Sixty-three of 75 countries with populations greater than 5 million are now pursuing decentralization policies that devolve functions and responsibilities to local governments. But the decentralization process is severely constrained by a lack of institutional capacity among local governments, limited local resource mobilization, and limited access to long-term financing for investment programs. Municipal development projects (MDPs) are designed to remedy some of these problems while preparing local governments to borrow in capital markets. Since the early 1980s, 16 World Bank-financed MDPs have been completed in 11 countries, and 19 additional projects are currently being implemented in 15 countries, with total lending of US$2 billion. How well are these projects doing the job they were intended to do? The Operations Evaluation Department (OED) has addressed this question with an impact evaluation study of MDP projects in Brazil and the Philippines. Earlier, per- formance audits of the projects found they had significant impacts
on the living conditions and productivity of residents in participating
municipalities, as well as significant unintended positive effects
on the local economy. The impact evaluation report, which builds
on those findings, concludes that the projects have had clear impacts
on municipal finance. It demonstrates-for the first time-that MDP
scan be effective in building local institutions. Design of the Study The impact evaluation assessed the effects of MDPs on the capacity
of local government institutions in the areas of fiscal and financial
management and planning and implementation of investment programs.
It also assessed direct impacts on the beneficiaries as anticipated
by the projects and indirect side-effects on the development of
local economies, focusing on employment and income generation. The
study evaluated the impacts of four successful MDPs: the first and
second MDPs in the Philippines and MDPs in the states of Parana
and Rio Grande do SuI in Brazil. Three sets of data were collected and analyzed: municipal finance
data of local governments, a sample survey of mayors in Brazil On
capacity building, and a survey in the Philippines of stall-holders
in public markets. The study benefited from an unusually complete
data set that allowed both "with-without" project and"
before-after" project comparisons. At both the municipal and
the beneficiary levels", the study compared impacts on the
participating municipalities with conditions prevailing in the nonparticipating
municipalities. It also contrasted initial conditions with the conditions
after project implementation. To supplement the data, the study
reviewed and analyzed project implementation records; interviewed
government officials, nongovernmental organizations, and beneficiaries;
and visited project sites. Reform First, Investment Second The Brazil and Philippines MDPs were almost identical in their
objectives and design, but had different implementation strategies.
In Brazil, a statewide "wholesale approach" encouraged
as many municipalities as possible to participate in the fiscal
reform program financing technically simple projects such as street
paving. In the Philippines, a more selective approach allowed a
smaller number of eligible municipalities to finance revenue-generating
projects such as public markets. In both countries, the programs
had two main instruments: fiscal reform and investment programs.
The design of the Brazilian projects specified that to apply for
a subloan, a municipal government had to submit a financial action
plan and a comprehensive reform package. Reforms had to include
plans for training and technical assistance to aid institutional
development. The Philippines projects required a similar financial action plan.
The preparation and implementation of investment subprojects, therefore,
enhanced institutional capacity by offering experience in every
phase of a project cycle, from the feasibility study to construction
work. The sequencing of the projects-reform before lending proved
critical to their success. Improving Fiscal and Financial Management The extensive municipal finance data point to significant MDP impact
on the strengthening of municipal fiscal and financial management.
The OED study examined five dimensions of this issue: financial
autonomy, local revenue generation, cost recovery, budget balance,
and financial leverage. Financial autonomy is the degree to which municipalities are able
to generate, through local taxes and betterment charges, revenue
they can directly control. The MDP projects were designed to increase
this own revenue. Analyses of the municipal finance data found that
MDP participating municipalities in Brazil and the Philippines outperformed
nonparticipants in financial autonomy. In Brazil, the own revenues
of participants rose as a share of total revenues, while those of
nonparticipants declined. In the Philippines, all municipalities
saw a decline in the share of own revenues against total revenues
(resulting from an increase in revenue sharing after a 1991 change
in government policy), but the shares of participant municipalities
declined less sharply than those of nonparticipants. Moreover, the
study found that participant municipalities relied on their own
revenues to a greater extent than nonparticipants, and that they
succeeded in mobilizing more of these revenues. Since property taxes constitute a large portion of own revenues,
municipal performance in their collection was viewed in the OED
study as an indicator of municipal effort to enhance autonomy and
improve creditworthiness. In both countries property tax collection
per capita generally increased more rapidly in participating than
in nonparticipating municipalities . In Brazil, participating municipalities in Rio Grande do Sul did
much better than those in Parana and nonparticipating municipalities
in direct cost recovery through levying and collecting betterment
charges. The weaker performance in Parana was brought about by less
rigorous control of tax collection performance in the financial
action plans and project leverage. In the Philippines, MDP operations
approached direct cost recovery by allowing municipalities to borrow
and invest in revenue-generating services such as local public markets.
The success of direct cost recovery, the study found, depends on
making the activity an explicit condition for investment and on
close monitoring by the-MDP project team during implementation.
As an indicator of creditworthiness, the OED study examined changes
in budget balance for participating and nonparticipating municipalities.
The data show that MDP participants performed better in their attempts
to balance the budget than nonparticipants. In Brazil, as a result
of economic difficulties at the macro level, the financial balance
of all municipalities deteriorated, but less so among MDP participants.
In the Philippines, the contrast between participants and nonparticipants
is even sharper. Participants generally moved into surplus, while
nonparticipants remained in deficit. Finally, the study found a correlation between a municipality's
MDP investment {as a share of total investments) and the degree
of impact the project had on policy. This suggests that the more
closely a municipality is engaged in its MDP projects {that is,
the greater the MDP project leverage), the greater the impact will
be. Building local Government Capacity The results of the survey of mayors in Rio Grande do Sul highlight their awareness of the improvements made under the MDP project. Participant municipalities
valued most highly the institutional development interventions designed
to increase the efficiency of resource management and to improve
the management of investment subprojects, including better procurement
procedures. Professional training, information technology, and community
participation were also highly valued. Awareness of these advances
in the municipality had an important side-effect: successful participants
openly promoted the MDP project and its principles among municipalities
still not involved. The survey identified several areas in which local government capacity
was improved by the MDP project:
The project achieved these capacity improvements at a time of major
change and difficulty for municipalities in the State of Rio Grande
do Sul. It appears that by helping municipalities to stabilize,
the MDP project contributed to a more balanced approach to economic
development at all levels. Developing local Economies Most of the subprojects financed by MDP in the Philip-pines-such
as public markets, bus terminals, and slaughterhouses-were revenue-generating
enterprises. The local economic effects of these projects were significant.
Pulilan, for example, was in a low income class of municipalities
before it financed a public market through MDP. By 1995, when the
MDP project was completed, the municipality had moved up to the
second income class, the living standard of its 60,000 people had
risen significantly, and municipal own revenues rose from 7 million
to 25 million pesos. A case study that compared economic impacts of the MDP-financed
public market in Pulilan with the conditions in a nonparticipating
municipality, Guiguinto, detailed the project's impacts on local
economic development. The market not only had a positive effect
on employment and income generation through its operations, it also
triggered the development of a new business center, because more
than 40 new small enterprises opened near the public market, including
restaurants, drug stores, a gas station, banks, and gift shops.
All this activity also had significant side-effects: expansion of
market linkages to other municipalities and regions, indirect employment
effects, and stimulation of the local real estate market. Agenda for the Future The financing needs of municipalities vary, depending on their
size and stage of socioeconomic development, In the Philippines
MDP program, small, resource-poor municipalities tend to finance
rather simple, low-risk, revenue-generating projects first, such
as public markets. By successfully completing such a project and
generating increased revenues, they enhance their creditworthiness.
They can then expand their investments to public infrastructure
projects such as roads and drainage. As they continue to grow, municipalities
need to finance economic infrastructure for manufacturing and commerce
and social infrastructure for household consumption. Eventually they are ready to "graduate" from the MDP
program and start borrowing from the private capital market. Experiences
in both the Philippines and Brazil show such progress. This catalytic
role of the municipal development projects is analogous to that
of the World Bank in helping developing countries until they graduate
from the Bank. Conclusions and lessons The municipal development projects in Brazil and the Philippines
examined in the OED impact evaluation study achieved what they set
out to do. They promoted municipal government reforms and improved
fiscal performance. In doing so, they enhanced the managerial capacity
of local institutions and stimulated a more entrepreneurial view
among mayors of their administrations, which ensures continued development.
To sustain and build upon this record of achievement, the study
makes several recommendations:
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