Developing Towns and Cities: Lessons from Brazil and the ... · This report was prepared by Kyu Sik Lee, task manager, when he was principal evaluation officer in the World Bank’s

1999

The World Bank

www.worldbank.org/html/oed Washington, D.C.

W O R L D B A N K O P E R A T I O N S E V A L U A T I O N D E P A R T M E N T

Developing Townsand Cities:

Lessons from Braziland the Philippines

Kyu Sik LeeRoy Gilbert

Copyright © 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

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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 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. 5. Economic developmentprojects—Brazil. 6. Economic development projects—Philippines.

I. Gilbert, Roy. II. Title.

HJ9386.L44 1999

336’.014599—dc21 99-35072

CIP

Printed on recycled paper.

iii

5 Acknowledgments7 Foreword, Prefacio, Préface9 Executive Summary, Resumen, Résumé Analytique15 Abbreviations and Acronyms

1 1. Introduction1 Rationale for the Study2 Municipal Development Projects in Urban Lending2 Objectives, Scope, and Approaches to the Study3 Methods and Data

5 2. Evaluation Logic: Instruments and Expected Impacts6 Main Project Instruments and Expected Impacts

7 3. Impacts on Municipal Fiscal and Financial Management8 Municipal Financial Autonomy versus Revenue Sharing10 Own Revenue Generation Through Property Taxes11 Direct Cost Recovery12 Budget Surplus and Deficit13 Financial Deepening

15 4. Impacts on Local Government Capacity Building15 Field Surveys16 Direct and Indirect Cost Recovery17 Local Financial Management18 Project Management and Implementation18 Information Technology, Training, and Community Participation

21 5. Impacts on Local Economic Development21 The Public Market in Pulilan22 Survey Results23 Indirect Impacts

25 6. Agenda for Future Operations25 MDPs in Paraná25 MDPs in Rio Grande do Sul26 MDPs in the Philippines

27 7. Conclusions and Lessons27 Conclusions28 Lessons for Future Operations

Annexes29 Annex 1. Data and Methodology31 Annex 2. Additional Data Analysis of Municipalities by Population Size35 Annex 3. Performance Audit of the Brazil MDPs: Lessons and

Recommendations37 Annex 4. Performance Audit of the Philippines MDPs: Lessons and

Recommendations39 Annex 5. Public Market Survey Questionnaire of Stallholders and Small

Enterprises

C o n t e n t s

D e v e l o p i n g To w n s a n d C i t i e s : L e s s o n s f r o m B r a z i l a n d t h e P h i l i p p i n e s

iv

43 Endnotes

45 Bibliography

Tables1 Table 1.1 Basic Loan Data7 Table 3.1 MDP Project States and Provinces: Selected Indicators8 Table 3.2 Impacts on Financial Autonomy9 Table 3.3 Impacts on Own Revenue Mobilization10 Table 3.4 Impacts on Property Tax Collection11 Table 3.5 Impacts on Direct Cost Recovery in Brazil12 Table 3.6 Impacts on Municipal Budget Surplus or Deficit14 Table 3.7 Impacts on Own Revenues by Degree of Financial Deepening

in Brazil16 Table 4.1 MDP-Sponsored Institutional Development Interventions17 Table 4.2 Impacts on Municipal Cost Recovery18 Table 4.3 Impacts on Municipal Financial Planning and Management18 Table 4.4 Impacts on Municipal Management of Investment Projects19 Table 4.5 Impacts on Computerization and Training22 Table 5.1 Length of Time in Business at Two Philippine Markets,

by Year Started22 Table 5.2 Characteristics of Stallholders23 Table 5.3 Changes in Sales and Income23 Table 5.4 Commuting Distance and Travel Time24 Table 5.5 Quality of Services at the Market24 Table 5.6 Origin of Goods Sold at the Market24 Table 5.7 Origin of Customers at the Market29 Table A1.1 Municipalities Evaluated31 Table A2.1 Impacts of Projects on Municipal Financial Autonomy32 Table A2.2 Impacts of Projects on Own Revenue Mobilization32 Table A2.3 Impacts of Projects on Property Tax Collection33 Table A2.4 Impacts on Direct Cost Recovery in Brazil33 Table A2.5 Impacts on Municipal Budget Surplus or Deficit34 Table A2.6 Impacts on Own Revenues by Degree of Financial Deepening

in Brazil

Figures8 Figure 3.1 Impacts on Financial Autonomy9 Figure 3.2 Impacts on Own Revenue Mobilization10 Figure 3.3 Impacts on Property Tax Collection11 Figure 3.4 Impacts on Direct Cost Recovery in Brazil13 Figure 3.5 Impacts on Municipal Budget Surplus or Deficit14 Figure 3.6 Impacts on Own Revenues by Degree of Financial Deepening

in Brazil16 Figure 4.1 PIMES Institutional Development Interventions17 Figure 4.2 Impacts on Municipal Cost Recovery17 Figure 4.3 Impacts on Municipal Planning and Management19 Figure 4.4 Impacts on Municipal Management of Investment Projects20 Figure 4.5 Impacts on Computerization and Training

v

Acknowledgments

This report was prepared by Kyu Sik Lee, task manager,when he was principal evaluation officer in the WorldBank’s Operations Evaluation Department, and RoyGilbert, then consultant, currently principal evaluationofficer.

Much of the analysis was based on a closecollaboration between the authors and project teams inBrazil and the Philippines. In particular, the authorswould like to thank, from Brazil, Aurelio Simon,Jeanette Lontra, and Sextilio Giacomini, who con-ducted the study on capacity building. And from thePhilippines, Jose Ong, Millie Villar, and Vic Ignacio,who pretested the questionnaire and provided logisticalsupport for the study; and Elizabeth Legazpi, whoprepared the municipal finance data. The survey ofpublic markets in the Philippines was conducted byCirrus Research and Software in Manila under thedirection of Mari-jo Luciano. From the World Bank,Braz Menezes and Thomas Zearley, task managers of

the municipal development projects in Brazil and thePhilippines, respectively, provided advice and supportfor the study. Robert Buckley reviewed earlier drafts ofthe report. William B. Hurlbut edited the report.Romayne Pereira provided administrative assistance.

This study was published in the Partnerships andKnowledge Group (OEDPK) by the Outreach andDissemination Unit. The task team includes ElizabethCampbell-Pagé (task team leader), Caroline McEuenand Deborah Davis (editors), Kathy Strauss and LunnLestina (graphic designers), and Juicy Qureishi-Huq(administrative assistant).

Director-General, Operations Evaluation: Robert Picciotto

Director, Operations Evaluation Department: Elizabeth McAllister

Manager, Sector and Thematic Evaluations: Gregory Ingram

Task Manager: Kyu Sik Lee

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ISPREFACIO PRÉFACEFOREWORD

F o r e w o r d

The World Bank has beenfinancing projects aimed at support-ing municipal development forsome 20 years. This book presentsand analyzes the concrete results offour successful projects in Braziland the Philippines. This is the firsttime the Bank has disseminated anassessment of the medium-term im-pacts of these operations to a widerreadership.

The study grew out of recentlycompleted performance audits ofmunicipal development projects inBrazil and the Philippines, and drewits data from many sources. Theanalysis was based on selected indi-cators drawn from a very largemunicipal finance database cover-ing more than 800 municipalitiesover a period of seven years, and asurvey of public markets in thePhilippines. In addition, the studyteams conducted fieldwork in Braziland the Philippines during 1997–98.An OED workshop held in Decem-ber 1998 to discuss the study’s pre-liminary findings was well attendedby municipal development expertsfrom across the Bank. These expertscontributed further insights, whichare reflected here.

With evidence drawn from avery broad universe of municipali-ties, the study concludes that mu-nicipal development projects in Bra-zil and the Philippines helped tostimulate and facilitate municipalreform. Municipalities that partici-pated in municipal developmentprojects consistently outperformednonparticipants on the fiscal front,

La Banque mondialefinance depuis une vingtaine d’annéesdes projets visant à soutenir le

développement municipal dans lespays où l’administration estdécentralisée. Le présent ouvrageexpose et analyse les résultats concretsde quatre projets réussis au Brésil etaux Philippines. C’est la première fois

que la Banque diffuse à l’intentiond’un vaste public une évaluation deseffets à moyen terme de cesopérations.

L’étude s’inscrit dans leprolongement de récentes évaluations

rétrospectives de projets dedéveloppement municipal exécutés auBrésil et aux Philippines, et elle a utilisédes données provenant de nombreusessources. L’analyse est fondée sur uncertain nombre d’indicateurs établis à

partir d’une très vaste base de donnéessur les finances municipales couvrantplus de 800 municipalités sur unepériode de sept ans, ainsi que sur uneenquête relative aux marchés aux Phil-ippines. En outre, les équipes chargées

de l’étude ont effectué en 1997–98 destravaux sur le terrain au Brésil et auxPhilippines. Des experts dudéveloppement municipal représentantles services les plus divers de la Banqueont participé, en décembre 1998, à un

atelier de l’OED au cours duquel ontété examinées les conclusionspréliminaires de l’étude. Ces expertsont fait eux aussi des constatationsintéressantes, qui sont indiquées ici.

Sur la base de données provenant

des municipalités les plus diverses,l’étude conclut que les projets dedéveloppement municipal exécutés au

El Banco Mundial havenido financiando proyectosdestinados a respaldar el desarrollo

municipal desde hace 20 años. En estelibro se presentan y analizan losresultados concretos de cuatroproyectos satisfactorios en Brasil yFilipinas. Esta es la primera vez que elBanco ha distribuido una evaluación

del impacto a mediano plazo de estasoperaciones a un número más ampliode lectores.

El estudio se basó en lasevaluaciones ex post terminadas hacepoco de proyectos municipales de

desarrollo correspondientes a Brasil yFilipinas y en datos provenientes demuchas fuentes. El análisis se valió deindicadores seleccionados extraídos deuna base de datos muy grande definancia-mientos municipales que

abarca a más de 800 municipalidadesen un período de siete años, y de unaencuesta de los mercados públicos deFilipinas. Además, los grupos deestudio llevaron a cabo trabajos en elterreno en Brasil y Filipinas durante

1997–98. Expertos en desarrollo mu-nicipal de todo el Banco asistieron engran número a un seminario del DEOcelebrado en diciembre de 1998 paradiscutir las conclusiones preliminaresdel estudio. Dichos expertos

aportaron sus ideas, las que seincorporaron en este libro.

Teniendo en cuenta pruebasrecogidas de una amplia gama demunicipalidades, en el estudio se llegaa la conclusión de que los proyectos

de desarrollo municipal de Brasil yFilipinas ayudaron a estimular ypromover la reforma municipal. Las


viii

the more so the deeper theirengagement. Also, partici-pating municipalities signifi-cantly improved theirinstitutional capacity to fi-nance and manage invest-ment programs. The lessons

drawn from this study should beuseful for future policy and opera-tions.

Robert Picciotto

Director-General, Operations Evaluation Department

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Philippines ont stimulé et facilitéla réforme municipale. Lesmunicipalités qui ont participé àdes projets de ce type ontconstamment obtenu demeilleurs résultats que les autres

sur le front budgétaire, et ce en pro-portion de leur degré d’engagement.De plus, les municipalités participantessont devenues nettement mieux àmême, au niveau institutionnel, definancer et de gérer des programmes

d’investisse-ment. Les leçons tirées decette étude devraient être utiles àl’avenir du point de vue de la politiquegénérale et des opérations.

municipalidades queparticiparon en proyectos dedesarrollo municipal siempreobtuvieron mejores resultadosfiscales que aquellas que noparticiparon, y dichos

resultados fueron tanto mejorescuanto mayor fue su grado departicipación. Asimismo, lasmunicipalidades participantesmejoraron considerablemente sucapacidad institucional para financiar

y administrar programas de inversión.Las enseñanzas plasmadas en esteestudio deberían ser útiles para laspolíticas y operaciones en el futuro.

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RESUMEN RÉSUMÉANALYTIQUE

EXECUTIVESUMMARY

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Of the 75 developing countrieswith more than 5 million people, 63are now pursuing decentralizationpolicies that devolve functions andresponsibilities to local governments.This process is severely constrainedin many countries, however, by alack of institutional capacity amonglocal governments, limited resource

E x e c u t i v e S u m m a r y

mobilization at the local level, andlimited access to long-term financingfor investment programs. Municipaldevelopment projects (MDPs) aim atmitigating these constraints. Since theearly 1980s, 16 Bank-financed MDPshave been completed in 11 countries,and 19 more in 15 countries arecurrently being implemented, withtotal lending for all MDPs reachingUS$2 billion.

This impact evaluation reportassesses the effect of MDPs on thefiscal and financial managementcapacity of local governments, aswell as on their capacity to plan andimplement investment programs. It

Sur les 75 pays endéveloppement comptant plus de5 millions d’habitants, 63 suiventactuellement des politiques dedécentralisation caractérisées par ladévolution de fonctions et de

responsabilités aux autorités locales.Mais, dans beaucoup de pays, ceprocessus est sérieusement entravé parla faible capacité institutionnelle de cesautorités, la mobilisation limitée deressources au niveau local, et l’accès

insuffisant à des sources definancement à long terme pour lesprogrammes d’investissement. Lesprojets de développement municipal(PDM) visent à atténuer cescontraintes. Depuis le début des

années 80, 16 PDM financés par laBanque ont été exécutés dans 11 payset 19 autres sont actuellement mis enœuvre dans 15 pays, le volume totaldes prêts au titre de l’ensemble desPDM atteignant 2 milliards de dollars.

Le rapport d’évaluation d’impactévalue l’effet des PDM sur la capacitéde gestion budgétaire et financière desautorités locales, ainsi que sur leuraptitude à planifier et à exécuter desprogrammes d’investissement. Il tente

également de déterminer si les projetsont eu les effets directs prévus (austade de l’évaluation des projets) surles bénéficiaires, et les effets indirectsattendus sur le développement deséconomies locales, en particulier sur

l’emploi et la création de revenu. Cetteétude évalue l’impact de quatre PDMréussis — deux aux Philippines etdeux au Bresil — dont on peut tirer deprecieux enseignements pour lesprojets actuels et futurs dans ces pays

De los 75 países endesarrollo con una población de másde cinco millones de personas, 63están aplicando en estos momentospolíticas de descentralización queatribuyen a los gobiernos locales

funciones y responsabilidades queantes se cumplían a niveles superioresde gobierno. Sin embargo, este

proceso se ve sumamente limitado enmuchos países por la falta decapacidad institucional de losgobiernos locales, la escasamovilización de recursos a nivel local yel limitado acceso a financiamiento a

largo plazo para los programas deinversión. Los proyectos dedesarrollo municipal (PDM) tienenpor objeto atenuar estas limitaciones.Desde principios de la década de1980, se han terminado 16 PDM

correspondientes a 11 países, y en laactualidad se están ejecutando otros19 en 15 países; el total definanciamiento para PMD asciende aUS$2.000 millones.


x

also assesses whether theprojects had the direct effectson beneficiaries and the indi-rect effects on the develop-ment of local economies,particularly employment andincome generation, that were

anticipated at project appraisal.The study evaluates the impact offour successful MDPs, two in thePhilippines and two in Brazil—cases that provide valuable lessonsfor ongoing and future projects inthose countries and elsewhere. Thestudy collected and analyzed threesets of data: (1) municipal financedata from local governments, (2) asample survey of mayors on capac-ity building, and (3) a survey ofstallholders in public markets. Atboth the municipal and the benefi-ciary levels, the study compared theconditions in the participating mu-nicipalities before and after projectimplementation with conditions innonparticipating municipalities dur-ing the same period.

The Brazil and PhilippinesMDPs were almost identical in theirobjectives and design but had differ-ent implementation strategies. InBrazil, a statewide approach al-lowed many municipalities to par-ticipate in the fiscal reform pro-gram, packaged together withfunding for technically simpleprojects such as street paving. In thePhilippines, a more selective ap-proach allowed a smaller number ofeligible municipalities to financerevenue-generating projects such aspublic markets. In both countries,the programs had two main instru-ments: (1) fiscal and financialreform and (2) infrastructure invest-ment projects. To apply for a loanunder the project, a municipal gov-ernment had to first submit a finan-cial action plan, along with a com-

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IS et ailleurs. Dans le cadre de

l’étude, on a recueilli et analysétrois séries de données : 1) desdonnées sur les financesmunicipales provenant desautorités locales ; 2) les données

d’une enquête par sondageeffectuée auprès des maires sur lerenforcement des capacités ; et 3) lesdonnées d’une enquête auprès desmarchands sur les marchés publics.Au niveau aussi bien des municipalités

que des bénéficiaires, l’étude acomparé la situation des municipalitésparticipantes avant et aprèsl’exécution du projet à celle des autresmunicipalités durant la même période.

Les PDM du Brésil et des

Philippines étaient pratiquementidentiques par leurs objectifs et leurconception, mais différaient par leursstratégies d’exécution. Au Brésil, uneapproche à l’échelon des États apermis au plus grand nombre possible

de municipalités de participer auprogramme de réforme budgétaire,parallèlement à l’octroi d’unfinancement pour des projetstechniquement simples tel que lerevêtement des rues. Aux Philippines,

une approche plus sélective a permis àun plus petit nombre de municipalitésadmissibles de financer des projetsgénérateurs de recettes tels quel’aménagement de marchés publics.Dans les deux pays, les programmes

ont utilisé essentiellement deuxinstruments : 1) une réformebudgétaire et financière ; et 2) desprojets d’investissement dans lesinfrastructures. Pour solliciter un prêtdans le cadre du projet, les autorités

des municipalités devaient toutd’abord soumettre un plan d’actionfinancière ainsi qu’un programme deréformes détaillé, et préparer ensuiteun projet d’investissement. Lapréparation et — une fois le prêt

approuvé — l’exécution du projet

En este informe deevaluación del impacto seestudian los efectos de los PDMen la capacidad de gestión fiscaly financiera de los gobiernoslocales, así como su capacidad

para planificar y ejecutarprogramas de inversión. También seanaliza si los proyectos han tenido losefectos que se habían previsto en suevaluación inicial, directos en losbeneficiarios e indirectos en el

desarrollo de las economías locales,sobre todo en la creación de empleo yla generación de ingresos. En elestudio se evalúa el impacto de cuatroPDM eficaces, dos de Filipinas y dosde Brasil, que permiten extraer

valiosas enseñanzas para losproyectos, en marcha y futuros, enesos y otros países. Para el estudio serecopilaron y analizaron tresconjuntos de datos: 1) datos sobre elfinanciamiento municipal de los

gobiernos locales, 2) una encuestamuestra de intendentes acerca delfortalecimiento de la capacidad y 3)una encuesta de vendedores que teníanpuestos en mercados públicos. Tantoa nivel municipal como de los

beneficiarios, en el estudio se hacomparado la situación de lasmunicipalidades participantes, antes ydespués de la ejecución del proyecto,con la reinante en las municipalidadesno participantes en el mismo período.

Los objetivos y el diseño de losPDM de Brasil y Filipinas eran casiidénticos, pero sus estrategias erandistintas. En Brasil, un enfoque dealcance estadual permitió laparticipación del mayor número posible

de municipalidades en el programa dereforma fiscal, que se aplicó junto conun paquete de financiamiento paraproyectos técnicamente sencillos, comola pavimentación de calles. En Filipinas,gracias a un enfoque más selectivo, un

número más reducido de

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prehensive reform package,and then prepare an invest-ment project. The prepara-tion and—once the loan wasapproved—implementationof the investment projecthelped to enhance institu-

tional capacity by offering experi-ence in every phase of the projectcycle, from the feasibility study tothe construction work.

Analyses of the data show thatmunicipalities participating in MDPsin Brazil and the Philippines outper-formed nonparticipants in the area offinancial autonomy. Furthermore,participating municipalities reliedmore on their own revenues thannonparticipants, and even succeededin mobilizing revenues for additionalinfrastructure investments. For ex-ample, the project had a positiveimpact on property tax collection andon direct cost recovery through thelevying and collection of bettermentcharges. To remain creditworthy, par-ticipating municipalities were moresuccessful than others in balancingtheir budgets. Thus, the extensivemunicipal finance data point to sig-nificant impact of MDPs on thestrengthening of municipal fiscal andfinancial management.

The survey of mayors in the stateof Rio Grande do Sul, Brazil, con-firms the importance of such im-provements. The mayors said theirmunicipalities most highly valued theinstitutional development interven-tions aimed at improving resourcemanagement and the management ofinvestment projects, including betterprocurement procedures. They alsovalued professional training, infor-mation technology, and communityparticipation. The municipalities’awareness of these advances had animportant side effect: successful par-ticipants openly promoted the project

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d’investissement ont aidé àrenforcer la capacitéinstitutionnelle en permettantd’acquérir une expérience àchaque phase du cycle duprojet, depuis l’étude de

faisabilité jusqu’aux travaux deconstruction.

Des analyses des donnéesmontrent que les municipalitésparticipant à des PDM au Brésil et auxPhilippines ont obtenu de meilleurs

résultats que les autres du point devue de l’autonomie financière. Enoutre, elles se sont appuyéesdavantage que les autres sur leurspropres recettes, et sont mêmeparvenues à en mobiliser pour des

investissements d’infrastructuresupplémentaires. C’est ainsi que leprojet a eu un effet positif sur lerecouvrement des impôts fonciers etsur le recouvrement direct des coûtsgrâce à la perception de taxes

d’amélioration. Pour rester solvables,les municipalités participantes sontparvenues mieux que les autres àéquilibrer leur budget. C’est ainsi queles données détaillées sur les financesmunicipales indiquent que les PDM

ont largement contribué aurenforcement de la gestion budgétaireet financière des municipalités.

L’enquête auprès des maires del’État du Rio Grande do Sul, au Brésil,confirme l’importance de ces progrès.

Les maires ont fait savoir que leursmunicipalités se félicitaient toutparticulièrement des interventions autitre du développement institutionnelqui visaient à améliorer la gestion desressources et celle des projets

d’investissement et, notamment, lesprocédures de passation des marchés.Ils ont également apprécié laformation professionnelle, latechnologie de l’information et laparticipation communautaire. Le fait

que les municipalités soient

municipalidades elegibles pudofinanciar proyectos generadoresde ingresos, como mercadospúblicos. En ambos países, losPDM tenían dos instrumentosprincipales, a saber: 1) reforma

fiscal y financiera y 2) proyectosde inversiones en infraestructura. Parasolicitar un en virtud del proyecto, elgobierno municipal primero tenía quepresentar un plan de acción financiera,junto con un paquete integral de

reformas, y luego preparar un proyectode inversión. La preparación y, una vezaprobado el préstamo, la ejecución delproyecto de inversión ayudó a fortalecerla capacidad institucional al permitiracumular experiencia en cada etapa del

ciclo del proyecto, desde el estudio deviabilidad hasta las tareas deconstrucción.

El análisis de los datos revela quelas municipalidades que participaron enlos PDM de Brasil y Filipinas obtuvieron

mejores resultados que las noparticipantes, en la esfera de autonomíafinanciera. Asimismo, lasmunicipalidades participantes podíanvalerse más de sus propios ingresos quelas no participantes, e incluso lograron

movilizar ingresos para inversionesadicionales en infraestructura. Porejemplo, el proyecto tuvo efectospositivos en la recaudación deimpuestos inmobiliarios y en larecuperación de los costos directos

gracias a la aplicación y el cobro decontribuciones por mejoras. Lasmunicipalidades participantes, queestaban interesadas en mantener sucapacidad crediticia, fueron más eficacesque otras en el logro del equilibrio

presupuestario. En consecuencia, losnumerosos datos sobre financiamientomunicipal revelan el impacto importantede los PDM en el fortalecimiento de lagestión fiscal y financiera municipal.

La encuesta de intendentes del

estado de Rio Grande do Sul, en Brasil,


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nicipalities still not involved.For the Philippines, the

case of the MDP-financedpublic market in Pulilanshows that the project hadsignificant impact on the de-

velopment of the local economy.The project not only stimulatedemployment and income genera-tion, but also triggered the develop-ment of a new business center nearthe public market, which had sig-nificant spillover effects.

The study concludes that MDPoperations in both countries helpedto facilitate municipal reform. Par-ticipating municipalities learnedthat (1) participation in the programtriggers the reform process; (2) im-proved fiscal performance is neces-sary for better management (thusgiving mayors a more entrepreneur-ial view of their administration);and (3) the sensitivity to MDP im-pacts is greater with deeper MDPfunding. Based on these findings,the study offers four main recom-mendations: (1) MDP policy reforminstruments should be diversified tobroaden project impacts; (2)projects should be well designed atthe beginning, since later correc-tions are difficult; (3) competitionamong municipalities should bepromoted through the disseminationof success stories; and (4) to achievethe long-term sustainability ofMDPs, borrowers should establish asound policy and fiscal decentrali-zation framework.

The financing needs of munici-palities vary depending on their sizeand stage of socioeconomic devel-opment. In the MDP programs inboth Brazil and the Philippines,resource-poor municipalities tend togain experience and enhance theircreditworthiness by first financing

conscientes de ces progrès a euun important effet secondaire,en ce sens que celles qui ontparticipé avec succès à desprojets ont ouvertement vantéles avantages de ceux-ci et les

principes sur lesquels ilsreposaient auprès des municipalitésqui n’y avaient pas encore participé.

Aux Philippines, l’étude de cas surle marché financé par un PDM àPulilan montre que ce projet a eu un

impact considérable sur ledéveloppement de l’économie locale. Ila non seulement stimulé l’emploi et laformation de revenu, mais aussicontribué à l’aménagement d’unnouveau centre commercial près du

marché, avec de nombreusesretombées positives.

L’étude conclut que les opérationsPDM menées dans les deux pays ontfacilité la réforme municipale. Lesmunicipalités participantes ont appris

que : 1) la participation auprogramme déclenche le processus deréforme ; 2) de meilleurs résultatsbudgétaires sont nécessaires pourassurer une meilleure gestion (ce quipermet aux maires d’envisager leur

administration davantage à la façond’un chef d’entreprise) ; et 3) les PDMont des effets plus visibles si l’onélargit leurs circuits de financement.Sur la base de ces conclusions, l’étudeformule essentiellement quatre

recommandations : 1) les instrumentsPDM de réforme des politiquesdevraient être diversifiés de façon àélargir l’impact des projets ; 2) lesprojets devraient être bien conçusinitialement du fait qu’il est difficile de

les rectifier par la suite ; 3) ilconviendrait d’encourager laconcurrence entre les municipalités enfaisant connaître les exemples deréussite ; et 4) pour assurer la viabilitéà long terme des projets de

développement municipal, les

confirma la importancia dedichas mejoras. Los intendentesafirmaron que susmunicipalidades atribuían granvalor a las intervenciones dedesarrollo institucional

destinadas a mejorar la gestión delos recursos y de los proyectos deinversión, incluidos los procedimientosmejorados de contratación. Tambiénvaloraban la capacitación profesional, latecnología de la información y la

participación de la comunidad. Elreconocimiento de estos adelantos porparte de las municipalidades tuvo unimportante efecto secundario: losparticipantes que obtuvieron buenosresultados promovieron abiertamente el

proyecto y sus principios entre lasmunicipalidades que aún noparticipaban.

En el caso de Filipinas, el estudio delcaso del mercado público financiado envirtud del PDM en Pulilán revela que el

proyecto tuvo considerable impacto enel desarrollo de la economía local. Elproyecto no sólo estimuló el empleo y lageneración de ingresos, sino quetambién impulsó el desarrollo de unnuevo centro comercial cerca del

mercado público, que tuvo importantesefectos secundarios.

En el estudio se llega a la conclusiónde que las operaciones de los PDM enambos países contribuyeron apromover la reforma municipal. Las

municipalidades participantes se dieroncuenta de que: 1) la participación en lareforma impulsa el proceso de reforma;2) para una mejora de la gestión espreciso obtener mejores resultadosfiscales (lo que permite a los intendentes

enfocar su administración con unavisión más empresarial), y 3) lasensibilidad a los efectos de los PDM esmayor cuando se cuenta con un nivelalto de financiamiento en virtud deéstos. Teniendo en cuenta estas

conclusiones, en el estudio se formulan

xiii

EN

GL

IS

H

ES

PA

NO

L

FR

AN

CA

IS


simple, low-risk projects suchas street paving (in Brazil) orpublic markets (in the Philip-pines). As they continue togrow and develop, they usethe program to finance larger-scale economic infrastructure

for manufacturing and commerce,and more complex social infrastruc-ture for the urban population. Even-tually they become ready to leavethe program and borrow from theprivate capital market. While suchan outcome also depends on thespeed of capital market develop-ment in individual countries, theexperiences in Brazil and the Philip-pines show progress in helping mu-nicipalities prepare for access to thecapital market. This catalytic roleof the MDP program for local gov-ernments is analogous to the role ofthe World Bank in assisting devel-oping countries until they graduatefrom the Bank.

emprunteurs devraient mettreen place un cadre d’actionréglementaire et dedécentralisation budgétaireapproprié.

Les besoins de financement

des municipalités varient enfonction de leur taille et de leur stadede développement socio-économique.Dans le cas des programmes PDM duBrésil comme des Philippines, lesmunicipalités aux ressources limitées

ont tendance à acquérir de l’expérienceet à améliorer leur crédit encommençant par financer des projetssimples comportant peu de risques,tels que le revêtement des rues (auBrésil) ou la construction de marchés

(auxPhilippines). À mesure qu’elles sedéveloppent, les municipalités utilisentensuite le programme pour financerdes infrastructures économiques àplus grande échelle pour des activités

manufacturières et commerciales, ainsique des infrastructures sociales pluscomplexes destinées à la populationurbaine. À la longue, elles sont prêtesà se passer du programme PDM et àcontracter des emprunts sur les

marchés financiers privés. Une telleissue dépend également du rythmeauquel se développent les marchésfinanciers dans les différents pays,mais les expériences du Brésil et desPhilippines montrent que les

municipalités sont maintenant mieuxpréparées à accéder au marchéfinancier. Ce rôle de catalyseur duprogramme PDM pour les autoritéslocales est analogue à celui que joue laBanque mondiale en aidant les pays en

développement jusqu’à ce qu’ilspuissent se passer de son assistance.

cuatro recomendaciones: 1) losinstrumentos de reformanormativa de los PDM debendiversificarse para que el impactodel proyecto tenga más alcance;2) los proyectos deben diseñarse

bien al principio, puesto que másadelante es difícil corregirlos; 3) se debepromover la competencia entre lasmunicipalidades mediante la difusión delos éxitos alcanzados; y 4) para lograr lasostenibilidad a largo plazo de los

proyectos de desarrollo municipal, losprestatarios deben contar con unmarco acertado de descentralizaciónnormativa y fiscal.

Las necesidades financieras de lasmunicipalidades varían según su

tamaño y la etapa de desarrollosocioeconómico en que se encuentren.Los PDM de Brasil y Filipinas revelanque las municipalidades carentes derecursos por lo general acumulanexperiencia y mejoran su capacidad

crediticia cuando financian, en primerlugar, proyectos de poco riesgo, como lapavimentación de calles (en Brasil) omercados públicos (en Filipinas). Amedida que crecen y se desarrollan más,ellas se valen de los PDM para financiar

infraestructura económica de granescala para la actividad manufacturera yel comercio, así como infraestructura so-cial más compleja para la población ur-bana. Con el tiempo están encondiciones de prescindir de los PDM y

tomar préstamos del mercado privadode capital. Mientras que ese resultadotambién depende de la velocidad dedesarrollo del mercado de capital en losdistintos países, en los casos de Brasil yFilipinas las municipalidades avanzaron

en los preparativos para poder teneracceso al mercado de capital. Estafunción catalizadora de los PDM paralos gobiernos locales es análoga a lafunción que cumple el Banco Mundialde ayuda a los países en desarrollo para

que puedan graduarse del Banco.

xv

MDP - Municipal Development ProjectOED - Operations Evaluation DepartmentPAR - Performance Audit Report

FOR BRAZIL:

BANRISUL - State Commercial Bank in Rio Grande do SulFAMEPAR - Paraná Municipal Assistance FoundationFUNDOPIMES - State Urban Development Fund in Rio Grande do SulFDU - State Urban Development Fund in ParanáParanáCidade - Paraná State Urban Development Fund (under the InterAmerican Development Bank)PEDU - MDP in ParanáPIMES - MDP in Rio Grande do SulRGS - Rio Grande do Sul

FOR THE PHILIPPINES:

BLGF - Bureau of Local Government FinanceCPO - Central Project OfficeDOF - Department of FinanceDPWH - Department of Public Works and HighwaysIRA - Internal Revenue AllotmentLGA - Local Government AcademyLOGOFIND - Local Government Finance and Development ProjectRPTA - Real Property Tax Administration

ABBREVIATIONS AND ACRONYMS

1

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,

development projects (MDPs) are intended to mitigatethese constraints. Typically, MDPs consist of twocomponents: (1) a line of credit to fund municipalinvestments in infrastructure and services (municipaldevelopment fund);1 and (2) technical assistance toencourage—among other things—a greater fiscal effortat the municipal level. This study evaluates the extentto which MDPs have achieved these objectives, basedon two cases in Brazil and two in the Philippines, asshown in table 1.1.

Rationale for the StudySince the early 1980s, 16 Bank-financed MDPs havebeen completed in 11 countries, including Brazil, thePhilippines, Jordan, and Côte d’Ivoire. Nineteen moreMDPs in 15 countries, including Georgia, Tunisia, andthe West Bank and Gaza, are currently being imple-

mented. Total lending for all projects has reachedUS$2 billion. The lending instrument within MDPs hasbecome popular in the Bank’s urban sector because itsproject concept is consistent with the current emphasison demand-driven, bottom-up approaches that includestrong ownership and local participation, as exempli-fied by the four projects in Brazil and the Philippines.

This study grew out of recently completed perfor-mance audits of those four projects. The performanceaudit reports (PARs) covered implementation experi-ences and remaining issues. The agenda that wasidentified regarding future policy and operationaldirection is summarized in Chapter 6, and the lessonsdrawn and recommendations provided in the PARsappear as Annexes 3 and 4.

The PARs found that the projects in Brazil and thePhilippines had significant impacts on improving the

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

O

11

Loan number Project name US$million disbursed Board approval Completion

3100 MDP in the State of Paraná 100.0 06/22/89 12/31/953129 MDP in the State of Rio Grande do Sul 80.0 10/24/89 12/31/952435 MDP in the Philippines 35.9 06/05/84 06/30/933146 Second MDP in the Philippines 37.7 12/14/89 12/31/96

TABLE 1.1: BASIC LOAN DATA

living conditions and productivity of the residents inparticipating municipalities. Moreover, their indirectimpacts on the local economy have been significant.The performance audits of MDP I and II in thePhilippines showed that small, resource-poor munici-palities could successfully complete a small revenue-generating project such as a public market, and later,after they had become more creditworthy and techni-cally capable, could come back to the MDP to financemore complex infrastructure projects. This experienceshows the importance of sequencing project compo-nents according to the borrower’s speed of institutionallearning. As the Brazil PAR points out, participatingmunicipalities should eventually graduate from theMDP program, which is a transitory institutionalmechanism, and begin to borrow from the capitalmarket.

Municipal Development Projects in Urban LendingThe legacy of the World Bank’s urban lending operationsover the past two decades can be characterized as a seriesof paradigm shifts from (1) sites and services and slumupgrading projects for low-income areas, to (2) citywideinfrastructure projects for selected cities, to (3) MDPs toreach numerous municipalities by encouraging competi-tion among them. In the 1980s, the MDPs shifted urbanproject design from a complex supply-driven (top-down)approach to a demand-driven (bottom-up) approach thatprovides a large number of municipalities with access tocredit they can use to finance their own investmentprojects.

The Paraná Market Towns Development Project inBrazil (Loan 2343, approved in 1983) and the FirstMunicipal Development Project in the Philippines(Loan 2435, approved in 1984) were the first MDPsapproved in the early 1980s. In Brazil, the Banksubsequently undertook an MDP for the state of SantaCatarina (Loan 2623, approved in 1985), and contin-ued its operations in Paraná with a second MDP in thatstate (Loan 3100, approved in 1989) and an MDP inthe state of Rio Grande do Sul (Loan 3129, approved in1989). Three more states, Minas Gerais (Loan 3639),Ceará (Loan 3789), and Bahia (Loan 4140), are nowimplementing MDPs with loan amounts ranging fromUS$100 million to US$150 million. More than 2,100municipalities come under the purview of these fiveMDPs in Brazil.

In the Philippines, a second MDP (Loan 3146) wasapproved in 1989 and was followed by a third MDP

(Loan 3455, approved in 1992) to meet the strongdemand for financing among the municipalities in thatcountry. A fourth project, the Local GovernmentFinance and Development Project (LOGOFIND), wasapproved in 1999, with a proposed loan amount ofUS$100 million.

Objectives, Scope, and Approaches to the StudyObjectivesThe objectives of this study are to assess (1) the impactsof MDPs on the institutional capacity of local govern-ments for fiscal and financial management, and forplanning and implementation of investment programs;(2) whether the direct impacts on the beneficiaries wereas anticipated by the projects; and (3) the indirect(longer-term) impacts on the development of localeconomies, focusing on employment and income gen-eration in the participating municipalities.

ScopeThe study evaluates the impacts of the first and secondMDPs in the Philippines (loans 2435 and 3146), and theMDPs in the states of Paraná and Rio Grande do Sul(loans 3100 and 3129). These four successful projectsprovide a rich basis for study and a rare opportunity toextract lessons about the institutional learning processover an extended period of time.

ApproachesThe study assesses impacts at two levels: the municipallevel and the beneficiary (firm and household) level. Atthe municipal level, it analyzes municipal finance datacollected in Brazil and the Philippines and a samplesurvey of mayors in Rio Grande do Sul. It documentsimpacts on financial autonomy; local revenue genera-tion; cost recovery; creditworthiness; planning, budget-ing, and accounting practices; project preparation andimplementation; and technical skills of staff. Thehistorical data allow for comparison of conditionsbefore and after the project. The cross-sectional datafor both participating and nonparticipating municipali-ties also allow for comparison of fiscal and financialperformance with and without the projects.

At the beneficiary level, the study analyzes surveydata from the two case study municipalities in thePhilippines in order to assess the impacts of MDP-financed public markets (the project choice of mostparticipating municipalities) on employment creationand income generation, and evaluate their indirect

2


impacts on local economic development. The dataallow comparison of the conditions before and after theprojects, and of the impacts with and without theprojects. The documented impacts of the projectsinclude job creation; income generation; increases inland and real property values; changes in the quality oflife as a result of basic services such as street paving,water supply, and garbage collection; time savingsfrom efficient commuting; and better access to infra-structure services.

Methods and DataThe study uses six evaluation instruments: (1) reviewand analysis of project implementation data in themunicipalities and implementation agencies; (2) inter-views with government officials and nongovernmentalorganizations; (3) interviews with beneficiaries and site

3

visits; (4) municipal finance data collected for allmunicipalities in the two states in Brazil and twoprovinces in the Philippines; (5) a survey of mayors of26 municipalities in Rio Grande do Sul regarding theproject’s impact on local capacity building; and(6) sample surveys of stallholders and shopowners intwo municipalities in the Philippines, constituting anexperimental and a control group. (More details ondata collection are in Annex 1.)

At both the municipal and beneficiary levels, thestudy was designed to contrast and compare projectimpacts on the participating municipalities (experimentalgroup) with the nonparticipating municipalities (controlgroup)—a with versus without project evaluation ap-proach. In addition, the data document the initial condi-tions and the outcomes and impacts after project imple-mentation—a before versus after project approach.2

I n t r o d u c t i o n

5

Evaluation Logic: Instrumentsand Expected Impacts

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 tobe achieved through three components: (1) creation ofan urban development fund providing a long-term lineof credit to municipalities; (2) establishment of strictmunicipal creditworthiness and management improve-ment standards as conditions for allowing local gov-ernments to participate in the fund; and (3) on-lendingto municipalities to finance infrastructure investmentssuch as street improvements, and community facilitiessuch as health posts and daycare centers.

In Paraná, the state government’s Secretariat ofUrban Development had overall project responsibilityfor Paraná MDP II (known locally as the PEDU project,the name used in the rest of this volume). The ParanáMunicipal Assistance Foundation handled day-to-dayproject management. In Rio Grande do Sul, the MDP(known locally as the PIMES project, the name used inthe remainder of this volume) was executed by the StateDevelopment Bank, which later merged with the StateCommercial Bank.

In the Philippines, the Second Municipal Develop-ment Project (MDP II) was an extension of MDP I todifferent regions, using identical project objectives anddesign. Its objectives were to (1) establish a municipal

development fund to provide local governments withdirect access to long-term development finance; (2)establish a national-level technical intermediary, theCentral Project Office; (3) strengthen local technicaland financial capacity for project implementation andservice management through a training program; and(4) improve local fiscal performance through the RealProperty Tax Administration (RPTA) program. Theproject had five components: (1) improvement of basicinfrastructure services such as water supply, sanitation,roads, drainage, and public markets; (2) upgrading ofvarious maintenance activities; (3) upgrading of realproperty tax records to improve tax collection; (4)training of local government staff; and (5) technicalassistance for project implementation and for localbudgeting and fiscal administration.

In the Philippines, the Department of Public Worksand Highways (DPWH) was the lead agency for theprojects. The Central Project Office carried out projectimplementation under the DPWH. The Department ofFinance managed the municipal development fund,and the department’s Bureau of Local GovernmentFinance administered the RPTA programs. The LocalGovernment Academy implemented the municipal

n Brazil, the second MDP in Paraná 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 andI

22


6

training program under the Department of the Interiorand Local Government.

Main Project Instruments and Expected ImpactsThe MDPs in Brazil and the Philippines were almostidentical in their objectives and design, with somevariations in implementation strategy. In Brazil, imple-mentation took a wholesale, statewide approach to thefinancial reform program to cover as many municipali-

ties as possible, using tech-nically simple investmentprojects such as street pav-ing, which served as theentré for participation in thereform program. In the Phil-ippines, implementationtook a more selective ap-proach, focusing on thesmaller number of munici-palities that were eligible toparticipate in the program,and allowing revenue-gen-erating investment projects

such as public markets. In both countries, the programshad two main instruments: fiscal and financial reform,and investment programs.

Fiscal and Financial Reform PackageIn both Brazilian states, OED’s performance auditsconfirmed that the projects improved the fiscal andfinancial management capacity of participating mu-nicipalities. The project design required strict munici-pal creditworthiness and management improvementstandards as conditions for allowing local governmentsto participate in the program. To apply for a loan, amunicipal government had to submit a reform packageconsisting of a financial action plan analyzing themunicipality’s debt servicing capacity (with revenueand expenditure projections) and demonstrating theproject’s eligibility for financing, based on requiredtechnical standards. The package also had to present aplan for institutional development, including trainingand technical assistance needs. The financial actionplan served, in this way, as the key instrument forfinancial and fiscal reform. In addition, the require-ment that institutional reform be carried out beforephysical investments has been an effective way ofminimizing possible implementation delays and cost-recovery problems.

In the Philippines, as well, OED’s performanceaudits confirmed that the participating municipalitiesimproved their fiscal and financial performance signifi-cantly. The projects in the Philippines also required anexplicit financial reform package similar to the finan-cial action plan in Brazil. In the Philippines, however,the RPTA program was implemented by a unit in theDepartment of Finance.

Capacity Building Through Investment ProgramsIn both Brazil and the Philippines, the preparation andimplementation of investment projects financed by theMunicipal Development Fund served as a secondmajor instrument for enhancing the institutional capac-ity of local governments. OED’s performance auditsconfirmed that the projects in both countries achievedtheir objective of increasing the institutional capacityof municipalities and the government’s urban develop-ment agencies to plan, finance, and execute investmentprograms. The projects gave officials of participatingmunicipalities the opportunity to learn by doing in allphases of project preparation and implementation—from identification, to appraisal, to completion. Inaddition to improving their fiscal and financial man-agement through the reform package, the municipali-ties learned by experience in every phase of the projectcycle: the feasibility study; economic and financialanalysis for cost recovery; and technical analysis forengineering design, procurement, and constructionwork. Furthermore, by using computers funded underthe project, many municipalities were able to stream-line payroll, cadastre, accounting, and budget opera-tions and improve overall administrative efficiency.

Expected Development ImpactsThe study documents empirically the impacts of MDPsin the following areas:

• Fiscal and financial performance of local gov-ernments, focusing on fiscal autonomy, localrevenue generation, cost recovery, and budgetbalance (Chapter 3)

• Local governments’ institutional capacity forinvestment planning, budgeting, accounting,and project preparation and implementation(Chapter 4)

• Local economic development, focusing on in-come and employment generation and the qual-ity of urban services (Chapter 5).

Implementinginvestment projects

financed by theMunicipal

Development Fundenhanced the

institutionalcapacity of local

governments.

7

TABLE 3.1: MDP PROJECT STATES AND PROVINCES: SELECTED INDICATORSBrazil Philippines

Rio GrandeIndicator Paraná do Sul National Bulacan Laguna National

Total population 1996 (millions) 9.0 9.6 157.1 1.8 1.5 71.9Urban population as share of total (percent) 77.9 78.6 78.4 69.7 75.4 54.9GDP per capita PPP 1991 (US$) 5,138 5,168 5,142 – – 3,550All municipalities, 1996

Total 371 426 4,974 24 29 1,610a

Pop. >250,000 4 4 – 0 0 –Pop. 50,000–250,000 25 36 – 19 7 –Pop. 10,000–50,000 162 125 – 5 22 –Pop. 2,000–10,000 177 248 – 0 0 –Pop. <2,000 3 13 – 0 0 –

MDP project municipalitiesb 364 152 – 17 4 –Average pop. per municipality 24,269 22,597 31,584 67,549 52,138 44,658

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.

Impacts on Municipal Fiscaland Financial Management

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.Participant municipalities also did much better in directcost recovery through the levying and collection ofbetterment charges. They were also more successful thanothers in balancing their budgets, which helped increase

their creditworthiness. Thus, extensive municipal financedata point to significant MDP impact on the strengthen-ing of municipal fiscal and financial management.

This chapter presents findings on the impacts of theMDP financial reform programs on municipal finance.

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-M

33


8

Table 3.1 summarizes key characteristics of the fourproject areas and their composite municipalities.

Altogether, the projects involved 537 municipali-ties. Then, as now, municipalities in Brazil were muchsmaller, more varied in population size, and muchmore numerous than their Philippine counterparts.Both states in Brazil are as urbanized as the countryitself, while the Philippine provinces included in thestudy are more urbanized than the country as a wholebecause of their proximity to Manila. While theBrazilian states enjoy levels of GDP per capita similarto the national average, levels in the Philippineprovinces are above the national average. The lowerlevels of income in the Philippines, nevertheless, haveimplications for municipal finance.

Municipal Financial Autonomy versus Revenue SharingThis section and those that follow focus on twoperspectives of impact evaluation. First, the perfor-mance of participant municipalities is compared withthat of nonparticipant municipalities. Second, perfor-mance is reviewed before and after the projects. For the

FIGURE 3.1: IMPACTS ON FINANCIAL AUTONOMY

Source: MDP Impact Evaluation Study database.

TABLE 3.2: IMPACTS ON FINANCIAL AUTONOMYShare of own revenues in all current municipal revenues (percent)

Brazil 1990 1996 Philippines 1990 1996

Participants (Paraná) 12.9 14.4 Participants (Bulacan) 56.0 44.7Participants (RGS) 16.2 16.5 Participants (Laguna) 68.9 61.0Nonparticipants (RGS) 14.7 13.9 Nonparticipants (Laguna) 42.8 27.0

latter, 1990 is the before-project benchmark, and 1996is the after-project year.

To evaluate the impact of MDPs on financialautonomy, the study team examined the collection ofcurrent revenues from sources under the control ofmunicipalities. These own revenues come from levyingand collecting local taxes and charges that municipalitiescan control, independent of higher levels of government.This evaluation compares a municipality's own revenueswith its total current revenues, the latter made up of ownrevenues plus current transfers from higher levels ofgovernment in the form of revenue sharing. Because totalcurrent revenues have only these two elements, conclu-sions about increased own revenues automatically implydeclining current transfers, and vice versa.

Using the share of municipalities' own revenues intotal current revenues as an indicator of financial au-tonomy, the analysis shows evidence that MDP munici-palities in both countries performed better than theirnonparticipating counterparts (figure 3.1 and table 3.2).In Brazil, participants' own revenue shares rose, whilenonparticipants saw their shares decline. In the Philip-

Note: RGS = Rio Grande do Sul. For details of participant and nonparticipant municipalities, see Annex table A1.1. Own(current) revenues = municipalities' own taxes, charges, and sales. All current revenues = own revenues plus current transfersfrom higher levels of government.Source: MDP Impact Evaluation Study database.

Percent change, 1990–96 Percent change, 1990–96

Participants(Paraná)

Participants( )Rio Grande do SulNonparticipants( )Rio Grande do Sul

11

6

1

-4

-9

11.6

1.9

-5.4

Brazil

Participants(Bulacan)

Participants(Laguna)Nonparticipants(Laguna)

Philippines

0

-10

-20

-30

-40

-50

-20.2

-11.5

-36.9

Own revenues’ share in total revenues

9

pines, all municipalities' shares declined as a direct resultof government policy—the 1991 Local GovernmentCode—which increased revenue sharing from 20 to 40percent. Nevertheless, participant municipalities in thePhilippines saw their shares erode less than nonpartici-pants over the life of the projects. As a corollary,participant municipalities became less dependent onfiscal transfers after the projects, unlike nonparticipants.

Another indicator, municipal own revenues percapita, offers additional evidence that greater munici-pal financial autonomy can be achieved throughmunicipal development projects (figure 3.2 and table3.3). These data show that:

• In both Brazil and the Philippines, MDP partici-pants succeeded in increasing municipal ownrevenues per capita more rapidly than did nonpar-ticipants. Project impact was greater in the Philip-pines, where these revenues grew faster than inBrazil. Nevertheless, the level of own revenues percapita in the Philippines—with its lower level ofincome—is still below that of Brazil.

I m p a c t s o n M u n i c i p a l F i s c a l a n d F i n a n c i a l M a n a g e m e n t

• Before the projects in 1990, and in both coun-tries, participant and nonparticipant municipali-ties had similar levels of own revenue per capita.By project completion in 1996, participant mu-nicipalities had higher levels than nonpartici-pants (table 3.3). Be-sides confirming projectimpacts, this points to afairly even playing fieldfor municipalities at theoutset, a feature par-ticularly striking in RioGrande do Sul. It pre-cludes the notion thatself-selection mighthave induced only bet-ter-performing munici-palities to participate inthe projects. But the results for Laguna may notbe reliable, since that province had only fourparticipants.

The data point tosignificant projectimpacts on theability ofparticipantmunicipalities toachieve greaterfiscal autonomy.

TABLE 3.3: IMPACTS ON OWN REVENUE MOBILIZATIONOwn revenues per capita (constant 1996 US$)



Note: See table 3.2. RGS = Rio Grande do Sul.Source: MDP Impact Evaluation Study database.

FIGURE 3.2: IMPACTS ON OWN REVENUE MOBILIZATION


Own revenue per capita

120

100

80

60

40

20

0Philippines

95.8101.2

77.8

90

80

70

60

50

40

0Brazil

71.3 69.4

30.330

20

10







10

Thus, the data point to significant MDP impacts inhelping participant municipalities to achieve greaterfiscal autonomy. Evidence of this includes rising sharesof municipal income from municipal own revenues andfrom municipal efforts to raise more of their ownrevenues from citizens. MDP projects provided impor-tant incentives for municipalities to move in thisdirection. Mayors understood that more municipalrevenue meant greater access to MDP (and other)credit and greater ease in paying off loans. MDPproject design included requirements that mayorsmake efforts in this direction in order to qualify forloans and technical assistance, to encourage munici-palities develop and strengthen instruments to raisemore tax revenues (see Chapter 4).

Own Revenue Generation Through Property TaxesOne of the main sources of municipal own revenues inboth countries is taxes levied on residential, commercial,and industrial properties in urban areas. For the munici-palities in Brazil, such property tax collections typicallyaccounted for 15 to 25 percent of all own revenues. In thePhilippines, the range was 26 to 33 percent. MDP projectdesign in both countries focused specifically and explic-

FIGURE 3.3: IMPACTS ON PROPERTY TAX COLLECTION


TABLE 3.4: IMPACTS ON PROPERTY TAX COLLECTIONProperty tax per capita (constant 1996 US$)



Note: See tables 3.2 and 3.3. RGS = Rio Grande do Sul.Source: MDP Impact Evaluation Study database.

itly on improving property tax collection, and providedtechnical support for local administrations to improveproperty tax administration.

We therefore looked at the performance of propertytax collection as an indicator of municipal effort toenhance fiscal autonomy and improve creditworthi-ness.1 Through this indicator, per capita collection inboth Brazil and the Philippines was found to respondpositively to MDP project interventions. While prop-erty tax per capita increased for all municipalities inboth countries during the 1990–96 period, it increasedmore rapidly in MDP participant municipalities—except for Paraná—than in nonparticipants (figure 3.3and table 3.4).

A review of property tax per capita as an impactindicator highlighted the following issues:

• Participant municipalities in both countries—except those in Paraná—improved property taxcollection during 1990–96 more than nonpartici-pants did (figure 3.3). In Rio Grande do Sul,where property tax per capita increased morethan fivefold over the life of the MDP, theperformance of participants was outstanding.

Property tax per capita

Nonparticipants(Laguna)





Participants(Laguna)

600

500

400

300

200

100

0Brazil

259.4

547.1

434.7

12

9

6

3

0

-3

-6

-9

-12Philippines

48.1

86.8

31.9

11

These results reflect work done through MDPfinancial action plans in Brazil that consistentlyemphasized improvements in property tax col-lection as a key to municipal eligibility toparticipate in the project. Similarly, in thePhilippines, the favorable results reflect thesuccessful Real Property Tax Administration(RPTA) program supported by MDP.

• The weaker performance of Paraná compared withRio Grande do Sul had three causes: (1) lessrigorous control of project conditionalities thatrequired improved tax performance through finan-cial action plans; (2) participants in Paraná weresecond-time MDP participants, and property taxconditions that the previous MDP did not requiremay have lacked credibility; and (3) MDP projectleverage in Paraná was weaker—the 100 percentcoverage of municipalities precluded the possibilityof excluding municipalities that did not complywith conditions of the financial action plan.

Study findings thus point to significant MDPimpacts on property tax performance at the municipallevel. This result was expected, since it went to theheart of the original project designs. In both countries,the projects focused on property tax as the principalinstrument for raising local revenue and increasing thefinancial autonomy of municipalities. A challenge forthe future will be to replicate this impact with other keyrevenue items, such as the municipal service tax inBrazil.

Direct Cost RecoveryIn addition to indirect cost recovery through stimulatingand assisting the collection of local taxes, MDPs alsoencouraged municipalities to pursue direct cost recoveryfrom program investments. In Brazil, this was done bylevying betterment charges on families that directlybenefited from the investments. In the Philippines, MDPoperations aimed at direct cost recovery by allowingmunicipalities to borrow and invest in revenue-generatingservices such as local public markets. This section of thereport discusses the Brazilian case. To evaluate MDPproject impacts in Brazil, the study team examined theperformance of per capita betterment charges levied andcollected at the municipal level.

The team found that cost recovery performance ofparticipant municipalities in Rio Grande do Sul wasmuch better than that of municipalities not participat-


FIGURE 3.4: IMPACTS ON DIRECT COST RECOVERY INBRAZIL


TABLE 3.5: IMPACTS ON DIRECT COST RECOVERYIN BRAZIL

Betterment charge per capita (constant 1996 US$)

1990 1996

Participants (Paraná) 1.27 0.61Participants (RGS) 1.37 3.10Nonparticipants (RGS) 1.25 1.56


ing in the project. For participant municipalities inParaná, in contrast, direct cost recovery performanceweakened (figure 3.4 and table 3.5).

Highlights from the evidence are as follows:

• In levying and collecting betterment charges on,and from, beneficiaries, MDP participants in RioGrande do Sul significantly outperformed non-participants (figure 3.4). Per capita bettermentcharges were at a similar level for both partici-pants and nonparticipants in 1990, before theproject. By 1996, Rio Grande do Sul participantswere collecting twice the amount of bettermentcharges as nonparticipants. This outcome washelped by the enforcement of financial actionplan conditions requiring municipalities to levybetterment charges, where possible, on projectsfinanced through the municipal developmentfund.

• MDP participants in Paraná, in contrast, hadweaker performance. After the project, bettermentcharges per capita were only half the level ob-



110

60

10

-40

-90-52

126.3

24.8

Brazil

160Percent change, 1990–96

Betterment charge per capita


12

served before the project. The causes highlightedabove for the weaker performance of Paranámunicipalities also apply here. Since it was thesecond operation in Paraná, MDP II could not havethe same demonstration effect on municipalities asdid the first-time MDP project in Rio Grande doSul, especially when the first MDP project inParaná did not have the same cost-recovery condi-tionalities.2 Among the specific results: 28 partici-pant municipalities in Paraná that had collectedbetterment charges in 1990 had stopped collectingthem altogether by 1996.3

This evidence points to significant MDP impactson increased direct cost recovery through bettermentcharges. A necessary condition for such an achievementis for access to MDP funding to be explicitly condi-tioned on a municipality's progress toward adoptingand implementing direct cost recovery. The fulfillmentof this condition also needs to be closely monitored bythe project team during implementation. The varyingperformance of participant municipalities in Paranáand Rio Grande do Sul points to the need to have theseconditions correctly in place at the time of amunicipality's first contact with a project.

In leveraging improvements to direct cost recoverythrough MDP operations, project designers need toconsider, in particular, the political aspects of better-ment charges. Local mayors often complain that thesecharges are unpopular and difficult to administerfairly. Local councils must also formally approve themcase by case, a process that can involve lengthypolitical negotiations with opposition councilors.

Even when betterment charges are approved andlevied effectively, however, they still account for only avery small proportion of own revenues, not more than 5percent on average. Yet such charges can help recover70 to 80 percent of the initial outlay for an investmentproject, with the remaining costs covered indirectlythrough property taxes.

Budget Surplus and DeficitGiven that municipalities were required to remaincreditworthy to have continued access to MDP funding,a key hypothesis of the study was that participantmunicipalities would be more creditworthy than non-participants. The study team therefore looked forunderlying evidence of the municipalities’ changingdebt capacity, since this would affect their access tocredit not only from the MDP, but also from othersources. It was not possible to construct a preciseindicator of creditworthiness—such as a municipality'snet savings or primary surplus—since separate data onperiodic debt service payments were not available forall municipalities in the study population. For thisreason, the study used a simpler proxy indicator,looking at municipal budget surplus or deficit dataover time to capture the general direction of changes inthe budget situation. This was defined as total munici-pal current revenues minus total municipal currentexpenditures, which included debt service payments.Although not a complete and accurate indicator ofcreditworthiness—especially for municipalities with aprevious history of borrowing—this budget surplus ordeficit indicator nevertheless points to some evidence ofmunicipalities trying to balance their books as a resultof MDPs.

The indicator shows clearly, for instance, thatparticipants performed better in attempting to balancetheir budgets than did nonparticipants (figure 3.5 andtable 3.6).

The study highlighted two main findings concern-ing municipal budget surpluses and deficits:

• Despite deterioration of the financial balance ofall municipalities in Brazil, there is evidence thatthe MDPs helped to slow the decline. Partici-pants in Rio Grande do Sul did not suffer theserious setbacks experienced by nonparticipants;neither did Paraná participants, although theeffect of the project was smaller. Thus, MDPs

TABLE 3.6: IMPACTS ON MUNICIPAL BUDGET SURPLUS OR DEFICITBudget surplus(+) or deficit(-) as share of total revenues (percent)


Participants (Paraná) +0.1 -9.3 Participants (Bulacan) -5.5 +1.8Participants (RGS) +0.8 -6.5 Participants (Laguna) +5.3 +4.5Nonparticipants (RGS) +2.8 -7.7 Nonparticipants (Laguna) +8.9 +1.6

Note: Budget surplus or deficit = total current revenues minus total current expenditures (including debt service payments).Source: MDP Impact Evaluation Study database.

13

helped participant municipalities to slow thenegative trend toward increased deficits.

• In the Philippines, the contrasting trends ofparticipant and nonparticipant municipalitiesare even clearer. While Bulacan participantsactually moved out of deficit and into surplusbetween 1990 and 1996, the large surplus ofnonparticipating municipalities in Laguna wasalmost completely wiped out by 1996. Theseresults reflect efforts by participant municipali-ties to remain creditworthy in order to gainaccess to further MDP and other funding.

We therefore find that participating in an MDP canhelp a municipality to reduce its deficit, if not developa fiscal surplus, and that MDPs provide an importantincentive in this direction.

Financial DeepeningFor municipalities in Brazil, the study examined howdifferent levels of MDP capital investment in relationto total municipal investment at the initial phase ofproject implementation affected the financial perfor-mance of participating municipalities. A lack of dataon total investment prevented a similar analysis for thePhilippine municipalities. Applying a simple concept ofproject leverage to the case of Brazil, it was hypoth-esized that the degree of project impact would rise withthe share of MDP funding in a municipality's totalinvestment program. Thus, a municipality more depen-dent on MDP funding would be expected to be moreresponsive to the requirements of the MDP reformprogram and show stronger impacts, and vice versa.

To measure the degree of municipal participationin the MDP, a financial depth indicator was con-structed. This indicator measured MDP investmentfunding at the municipal level as a share of amunicipality's total 1990–92 investment (funded fromall sources, including MDP and own revenues). Fromempirical estimates of thisindicator, participant mu-nicipalities were groupedinto three categories of fi-nancial depth: deep, greaterthan 50 percent; medium, 25to 50 percent; and shallow,less than 25 percent.

In search of possibleproject impacts, the studyteam examined the own rev-enue performance of munici-palities by degree of finan-cial depth. With one important caveat, discussedbelow, participants with greater financial depth per-formed better than participants with more shallowparticipation in the projects (figure 3.6 and table 3.7).

In financial deepening, therefore, the study foundthat:

• As measured by the increase in the average level ofmunicipal own revenues per capita, deep partici-pant municipalities in both Paraná and Rio Grandedo Sul performed better than those classed asmedium. This is because deep participant munici-palities were more subject to the policy influence ofthe projects and more likely to play according to


FIGURE 3.5: IMPACTS ON MUNICIPAL BUDGET SURPLUS OR DEFICIT


Evidence points togreater projectimpacts whereparticipantmunicipalities aremore closelyengaged in theprojects.

Surplus as share of revenues



-4

-6

-8

-10

-12

-9.4

-7.3

-10.5

Brazil

-2

0



Philippines

6

3

0

-6

-9

-12

7.3

-0.8

-7.3

-3

9

12

Percentage point change, 1990–96 Percentage point change, 1990–96


14

FIGURE 3.6: IMPACTS ON OWN REVENUES BY DEGREE OF FINANCIAL DEEPENING IN BRAZIL


TABLE 3.7: IMPACTS ON OWN REVENUES BY DEGREE OF FINANCIAL DEEPENING IN BRAZILOwn revenues per capita (constant 1996 US$)

Paraná 1990 1996 Rio Grande do Sul 1990 1996

Deep 20.44 42.82 Deep 32.04 52.51Medium 26.61 43.38 Medium 42.70 48.03Shallow 26.28 42.18 Shallow 36.36 86.75

Note: See tables 3.2 and 3.3. Financial depth is defined as the share of total 1990–92 municipal investment accounted for byMDP 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-pants. This outcome is a product of the leveragethat a project can exercise over a municipality thatis greatly dependent on the project as its mainsource of funding.

• The contradictory outcome for shallow partici-pant municipalities in Rio Grande do Sul, whichappear to have outperformed all others, resultsfrom a skewed distribution in which a few smallmunicipalities reported very high levels of ownrevenues per capita in 1996, thus significantlyraising the mean observation for that year. Ownrevenues per capita is, nevertheless, a particu-larly important impact indicator in this analysis,given its demonstrated robustness in the earlierwith/without project evaluation.

Evidence gathered by the study team, therefore,points to greater project impacts where participantmunicipalities are more closely engaged in theprojects. This finding coincides with a notion heldacross many lending sectors in the Bank: that greaterproject leverage can lead to more significant impactson project outcomes. The observed result is consistentwith the hypothesis that the more a municipality isinvolved with and dependent on an MDP, the greater itschances of responding to and adopting MDP precepts.It is worth noting that the federal government of Brazilprovided no subsidies to participating municipalities.In the Philippines, the property tax improvementcomponent (RPTA) was part of the assistance programimplemented by the Department of Finance.

Deep Deep

Medium Medium

Shallow Shallow

120

100

80

60

0Paraná

109.5

63 60.5

40

20

160

140

120

60

40

20

0Rio Grande do Sul

63.9

12.5

138.6

100

80

Own revenue per capita


15

Impacts on Local GovernmentCapacity Building

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 handleinformation technology and community participation.Their awareness of these advances had an importantside effect: successful participants openly promoted theproject and its principles among municipalities still notinvolved.

This chapter reports the impact evaluation findingsfor municipalities participating in the MDP known asPIMES in Rio Grande do Sul.1 The evaluation wasimplemented in two stages: (1) field visits by teammembers to 26 municipalities during August–Decem-ber 1997;2 and (2) a follow-up telephone/fax survey ofthe same municipalities during January–March 1998.The municipalities did not constitute a random sample;they were selected from those that had fulfilled allaspects of their loan agreements.

The PIMES team selected municipalities for thesestudies by taking into account the following factors:(1) different population-size groups; (2) the wide rangeof MDP institutional development actions undertaken;and (3) broad geographical coverage across the state ofRio Grande do Sul. The aim was to evaluate a group ofmunicipalities that had participated effectively in the

MDP's institutional development component, but werealso representative of municipalities throughout RioGrande do Sul. Twenty-six was the maximum numberthat could be visited in the field, given the study'sbudget.

Field SurveysMembers of the study team made one- or two-day visitsto each municipality to meet with local officials andcollect basic data on (1) municipal administration; (2)urban planning; (3) local taxes; and (4) municipalinfrastructure. To compile the data, the team usedstandard checklists to apply to all municipalities. Inaddition, they interviewed municipal officials using aquestionnaire with 70 open-ended questions on thefollowing topics:

• Profile of the city• Real estate cadastre• Computerization• Municipal tax code• Urban master plan• Training and technical assistance.

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 differentD

44


16

TABLE 4.1: MDP-SPONSORED INSTITUTIONAL DEVELOPMENT INTERVENTIONSMeans of delivery

Technical Computer hardwareType of institutional Total Training assistance and softwaredevelopment intervention Number Percent Number Percent Number Percent Number PercentAdministrative strengthening 20 15.8 7 20.0 9 18.0 4 9.7Taxation 60 47.5 16 45.8 20 40.0 24 58.6Urban management 29 23.2 6 17.1 21 42.0 2 4.9Other 17 13.5 6 17.1 – – 11 26.8Total 126 100.0 35 100.0 50 100.0 41 100.0

Source: PIMES Impact Evaluation Survey of 26 MDP municipalities.

Altogether, the study identified 126 institutionaldevelopment interventions sponsored by PIMES in thesemunicipalities. Figure 4.1 and table 4.1 summarize theseinterventions by category (administrative strengthening,taxation, urban management, and other).

The survey identified taxation as the single mostcommon type of institutional development interven-tion, most often delivered by means of technicalassistance. These interventions were:

• Administrative strengthening (human resourcetraining, internal regulations, payroll, organiza-tion chart)

• Taxation (accounting, cadastre, control of assets,tax reform, tax collection, tax legislation, taxinspection)

• Urban management (land use legislation, limits ofurban area, building codes, land use zoning, aerialphotography, mapping, database management)

• Other (mainly computer hardware and software).

To update information from the field surveys andassess project impacts from the point of view of municipalofficials, the PIMES team followed up during January–March 1998 with a simple questionnaire faxed to each ofthe 26 municipalities. To complement the earlier open-ended questions, the fax questionnaire, prepared jointlywith the December 1997 audit mission, asked municipalrespondents to rate the quality—ranging from highlysatisfactory to very poor—of MDP impacts in 13 areas.These included local tax collection, betterment charges,procurement practices, computerization, and communityparticipation.

The remainder of this chapter summarizes theimpacts of MDPs as seen from the perspective ofparticipant municipalities. Each section focuses on adistinct area of intervention.

Direct and Indirect Cost RecoveryThe survey asked participant municipalities to givetheir opinions about the impacts of the MDP on (1)their ability to mobilize their own revenues moreefficiently; (2) the effectiveness of levying bettermentcharges for direct cost recovery; and (3) the effective-ness of property taxation as an indirect means ofrecovering the cost of projects. The results, summa-rized in figure 4.2 and table 4.2, included theseimportant findings:

• Municipal officials were in nearly unanimousagreement that the impacts of the project werepositive.

• The majority thought the project had a verypositive impact (highly satisfactory or satisfac-tory rating) on own revenue mobilization andproperty tax collection.

• Most thought the project had a positive but slightlymore modest impact on betterment charges.

FIGURE 4.1: PIMES INSTITUTIONALDEVELOPMENT INTERVENTIONS (PERCENT)

Source: PIMES Impact Evaluation Survey of 26 MDPmunicipalities.

AdministrativeStrengthening16%

Taxation48%

Other13%

UrbanManagement23%

• •

• •

17

Overall, these results indicate a satisfactory projectimpact on cost recovery in the view of municipalparticipants. This finding applies to municipalities ofall sizes, although small and medium municipalitieswere more likely to report highly satisfactory impactsthan larger ones. These results are particularly signifi-cant given that the MDPs were implemented during aperiod of intensive financial change as monetarystabilization took hold in Brazil. Within this difficultcontext, MDP municipalities made successful efforts toincrease their own revenues.

Local Financial ManagementMDP municipalities were asked to rate project impacton their capacity to (1) undertake financial planning;(2) mobilize funding from sources other than the MDPitself; and (3) manage their own resources moreefficiently (figure 4.3 and table 4.3). A large majority ofmunicipal officials reported that:

• MDP projects had a positive impact on munici-pal financial planning and management.

• Management of municipal resources improvedthe most, with 84.7 percent of officials reportinghighly satisfactory or satisfactory outcomes.

These results point to municipalities changing frommere public service provision to modern administrationthat seeks to promote and leverage local economicdevelopment. As examples of steps toward better man-agement, municipalities most often mentioned:

• More reliable man-agement reports, re-sulting in better inter-nal controls

• Streamlining of infor-mation flow throughmanagement informa-tion systems, enablingbetter-informed man-agement decisions

• Better understandingof tax laws and regu-lations, and hence better relationships withregulators

• Greater emphasis on municipal planning• Rigorous control over revenue collection.

I m p a c t s o n L o c a l G o v e r n m e n t C a p a c i t y B u i l d i n g

FIGURE 4.2: IMPACTS ON MUNICIPAL COST RECOVERY


TABLE 4.2: IMPACTS ON MUNICIPAL COST RECOVERYMunicipal respondents (percent of total)

Activity Highly sat. Sat. Modest Fair Poor No opinion

Own revenue mobilization 11.5 53.9 23.1 – 3.8 7.7Levying betterment charges 3.8 38.6 46.2 3.8 3.8 3.8Raising property taxes 15.4 42.4 30.8 3.8 3.8 3.8


69.2

Percent highly satisfactory and satisfactory

FinancialplanningMobilizing otherresources

Efficient resourcemanagement

0 50 100

69.2

84.7

65.4


Own revenuemobilizationLevying bettermentcharges

Raising propertytaxes

0 20 40 60 80

42.4

57.8

FIGURE 4.3: IMPACTS ON MUNICIPAL PLANNINGAND MANAGEMENT


Successfulparticipantsopenly promotedthe project and itsprinciples amongmunicipalities stillnot involved.


18

Project Management and ImplementationConcerning their ability to manage investment projects,participant municipalities rated the impacts of MDPtechnical assistance on (1) the implementation of manage-ment control routines and (2) modernizing and streamlin-ing of municipal management. Municipalities were alsoasked to rate the impact of MDP requirements andconditionalities on (3) procurement procedures; and (4)supervision of contractors. Figure 4.4 and table 4.4summarize the findings.

Among the highlights:

• Most municipalities gave high ratings (highlysatisfactory or satisfactory) to the impact of thetechnical assistance on the management of in-vestment projects.

• The strongest impact was on the control ofproject implementation. Through the MDP,many municipalities learned to apply controlsystems to monitor the physical and financialprogress of their investment projects.

• Municipalities reported favorable impacts ontheir ability to supervise the work undertaken byprivate contractors.

• The impact was not as great on procurementprocedures; 73 percent of respondents reported thatMDP impact on procurement was modest or less.

These results confirm what the PIMES team observedduring its day-to-day management of MDP implementa-

tion. All participant municipalities, small ones in particu-lar, underwent a major on-the-job learning experience asthey received advice directly from PIMES staff or workedwith consultants who helped them manage their invest-ment projects more effectively. The MDP strategy in thisregard was to provide municipalities with as muchinformation as possible, including model procedures andtechniques that they could use to help overcome theirshortcomings.

Regarding the specific issue of procurement proce-dures, evidence of favorable MDP impacts also comesfrom routine reports of the municipalities' controllers,tribunals de contas. Tribunal reports over the 1990–96period indicate that the incidence of errors by munici-palities in procurement practices diminished signifi-cantly among MDP participants.

Information Technology, Training, and CommunityParticipationThe survey also sought the opinions of municipalofficials on the impacts of three MDP instruments:(1) the use of information technology in the municipal-ity; (2) professional training provided under the project;and (3) community participation in decisionmakingabout investment projects. Their answers are summa-rized in figure 4.5 and table 4.5.

The key findings are as follows:

• Municipal officials were very enthusiastic aboutinnovations in information technology provided

TABLE 4.4: IMPACTS ON MUNICIPAL MANAGEMENT OF INVESTMENT PROJECTSMunicipal respondents (percent of total)


Control of implementation 46.2 38.5 11.5 – – 3.8Streamlining of management 38.5 46.2 11.5 – – 3.8Procurement procedures 26.9 61.6 11.5 – – –Supervision of contractors 34.6 50.0 15.4 – – –


TABLE 4.3: IMPACTS ON MUNICIPAL FINANCIAL PLANNING AND MANAGEMENTMunicipal respondents (percent of total)


Financial planning 34.6 34.6 30.8 – – –Mobilizing other resources 19.2 50.0 30.8 – – –Efficient resource management 38.5 46.2 11.5 3.8 – –


19

through the MDP; nearly half of them ratedMDP impacts in this area highly satisfactory.

• They also rated MDP training impacts posi-tively, but not in the highest category.

• In regard to community participation, officialsfrom all municipalities held positive, but morevaried, views about MDP impacts.

With rapid innovation in computer hardware andsoftware, the PIMES team encountered strong demandfor assistance in this area. In many cases, the introduc-tion of information technology even led to behavioralchanges among municipal staff. Accustomed to obso-lete procedures and routines, many of them wereobliged to upgrade their skills to retain a validprofessional role within the administration. This, inturn, led to increased demand for training programs,many of them provided under the MDP. The projectoffered a wide range of courses and programs, whichwere greatly appreciated by municipal administratorsand their employees.

The positive results achieved in community partici-pation took various forms. Some participation wasthrough local community associations, and somethrough nongovernmental organizations. In cases ofcommunity facilities—daycare centers and health posts,for instance—financed through the MDP, a projectrequirement called for stakeholders to set up committeesto help manage these facilities. For other projects,consultation more often took the form of merely keepingcitizens informed of works planned and in progress.More still has to be done in the area of communityparticipation, but the PIMES team believes that impor-tant first steps were taken under the MDP. OED'sperformance audit in December 1997 was conducted asa participatory audit, which provided opportunities forthe beneficiaries, including community representatives,to discuss project experiences with representatives fromstate and local government agencies in Paraná and RioGrande do Sul. As documented in the performance audit,

projects such as street paving, daycare centers, andhealth posts were implemented in poor communities,and their impacts on the welfare of the inhabitants weresignificant. These conclusions were confirmed at theparticipatory audit workshops.

Thus, the study confirmsthat the PIMES project had amajor impact on the promo-tion of sustainable institu-tional development in themunicipalities of RioGrande do Sul. The projectbecame a major develop-ment partner of municipali-ties during the 1990–96 pe-riod. It also became theironly reliable source of fund-ing; the survey identified thevirtual drying up of ad hoctransfers from the federaland state governments.

The following advances were made in strengthen-ing participating municipalities:

I m p a c t s o n L o c a l G o v e r n m e n t C a p a c i t y B u i l d i n g

Municipalities arechanging frommere publicservice provisionto modernadministration thatseeks to promoteand leverage localeconomicdevelopment.


FIGURE 4.4: IMPACTS ON MUNICIPAL MANAGEMENTOF INVESTMENT PROJECTS

TABLE 4.5: IMPACTS ON COMPUTERIZATION AND TRAININGMunicipal respondents (percent of total)


Information technology 42.3 30.8 26.9 – – –Professional training 27.0 53.9 3.8 3.8 – 11.5Community participation 15.4 57.7 23.1 – – –



Streamliningof management

ProcurementproceduresSupervisionof contractors

82 86 90

Controlof implementation

84 88

84.7

88.5

84.6

84.7


20

• Fiscal adjustment and increasing own revenuesat the municipal level

• More intense contacts among municipalities,private companies, and the community

• More efficient and entrepreneurial municipaladministrations

• More highly valued municipal employees• More attention to the environment.

Apart from these favorable results, the surveydemonstrated that municipalities were aware of theprogress made as a result of the project. More gener-

ally, increased capacity atthe municipal level helpedlocal administrations to seeknew initiatives and success-fully carry out additionalprojects. This finding wastrue, regardless of city sizeor location within the state.

Municipal awareness it-self had an important sideeffect. Successful participantmunicipalities, whose offi-

cials were conscious of the progress being made underPIMES, became staunch promoters of the projectconcept among municipalities that had yet to sign on.

The achievements of the PIMES project came at atime of major change and difficulties for municipalities in

the State of Rio Grande do Sul. The logical conclusion isthat by helping municipalities to become economicallystable, PIMES contributed to a more balanced approachto economic development at all levels.

As a development program, the PIMES project inRio Grande do Sul has reached maturity, and todayconstitutes a reliable source of funding for municipaldevelopment. Moreover, the project has become amodel for similar programs elsewhere in Brazil—theStates of Minas Gerais and Bahia—and in othercountries.

Increased capacityhelped local

administrations toseek new

initiatives andsuccessfully carry

out additionalprojects.

FIGURE 4.5: IMPACTS ON COMPUTERIZATIONAND TRAINING



InformationtechnologyProfessionaltraining

Communityparticipation

65 75 85

73.1

80.9

73.1

70 80

21

Most of the municipal development projects in thePhilippines were revenue-generating enterprises such aspublic markets, bus terminals, and slaughterhouses.Under MDP I, 36 out of 42 participating municipalitiesfinanced a public market; under MDP II, 30 out of 35 didso. OED’s performance audits have confirmed that theimpacts of such projects on local economies were signifi-cant, especially for small and poor municipalities. Forexample, Pulilan, a municipality in Bulacan Province,was in the lowest income class before it financed a publicmarket through MDP. By 1995, when the project wascompleted, the municipality had moved up to the second-highest income class, and the living standard of its 60,000people had risen significantly. During 1991–95, theincome of the municipal government rose almost fourfold,from 7 million to 25 million pesos.

This chapter reports the results of a study thatcompared the impacts of an MDP-financed publicmarket in Pulilan with conditions in Guiguinto, amunicipality in the same province that did not partici-pate in the MDP program.1 The survey compared arandom sample of 60 stallholders in the Pulilan publicmarket (experimental group) with a random sample of60 stallholders from several locations in Guiguinto

(control group). Each sample included stalls sellingmeat, poultry, and fish; fruits, vegetables, and grains;and manufactured goods. A comprehensive but simplequestionnaire (Annex 5) was also used to gatherinformation about location history, extent of markets,employment characteristics, commuting, sales, ex-penses, income, and the quality of infrastructureservices at the market. The questionnaire was designedto capture changes over time, from 1993 when themarket opened to 1998 when the survey was con-ducted. The survey also included the owners of 15shops near the market, to capture the project’s indirectimpacts on the development of the local economy. Thefindings reported below highlight the differences be-tween Pulilan’s experience and that of Guiguinto. Alsoreported are the results of statistical tests showing thedifferences between the municipalities regarding in-creases in sales and income and improvements in thequality of infrastructure services at the market.

The Public Market in PulilanUntil the MDP-financed public market was established in1992, Pulilan had a traditional market (talipapa) near themunicipal hall with about 20 vendors. When the public

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 localeconomy. 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.

M

55Impacts on Local EconomicDevelopment


22

market opened in the Cutcot area in 1993, local entrepre-neurs quickly occupied its 170 stalls. Most of the vendorsin the old market also moved there. Only two years later,using its own resources, the municipal government added32 stalls to the market to meet increasing demand. In1997, a second MDP loanfinanced 92 more stalls.2 As ofAugust 1998, when the survey was conducted, the markethad a total of 294 stalls. In addition to these fixedstallholders, on Saturdays about 300 transient vendorscome to the market to conduct business.

The public market area has rapidly become a newbusiness center in Pulilan. More than 40 new smallenterprises have opened near the market, includinglarge restaurants, drug stores, a gas station, ruralbanks, and gift shops. The market’s adjacent lot hasbecome a busy transport center with a large fleet oftricycles for shoppers, and other types of vehicles. Themarket has had not only a direct impact on the welfareof the stallholders and Pulilan’s inhabitants, but also asignificant indirect economic impact, creating trans-port and commercial linkages with the rest of theprovince and other parts of the country. The surveyfindings reported below support this conclusion.

Guiguinto, which never participated in an MDP,has no markets comparable to the one in Pulilan. Themunicipality has one privately established market andseveral small, informal markets. Conditions in themunicipality today are similar to those of Pulilanbefore the project was implemented.

Survey ResultsOf the 60 stallholders in each sample, 16 (27 percent)relocated to the public market in Pulilan, while only 5(8 percent) moved in Guiguinto, indicating that the

TABLE 5.2: CHARACTERISTICS OF STALLHOLDERS (AVERAGE VALUE)Pulilan Guiguinto All

Number of workers 1.97 1.70 1.83Number of female workers 1.17 1.20 1.18Hours worked per day 11.30 10.60 10.95Owner’s income per month (pesos) 18,138 17,525 17,832

Source: MDP Impact Evaluation Study market survey.

TABLE 5.1: LENGTH OF TIME IN BUSINESS AT TWO PHILIPPINE MARKETS, BY YEAR STARTED(NUMBER OF STALLHOLDERS)Market Before 1993 1993 1994 1995 1996 1997

Pulilan 11 17 7 8 10 7Guiguinto 16 4 4 5 11 20


Pulilan project triggered changes in location thatotherwise may not have occurred. The stallholders inPulilan were comparable to those in Guiguinto innumber of employees, number of female workers, hoursworked, and monthly income (table 5.2). On average,at each stall about two people (one female) worked for11 hours a day, and the owner’s monthly income wasabout 18,000 pesos (about US$430).

Change in Sales and IncomeTable 5.3 shows that monthly sales and net income (afterexpenses) of stallholders in Pulilan have more thandoubled since they started business in the public market.The stallholders in Guiguinto, in small, informal marketswith poor infrastructure, had only a slight increase in

Vendors at a private market in Guiguinto, which did not par-ticipate in a municipal development project.Photo by Kyu Sik Lee.

23

sales and net income. This large disparity could reflect thelength of time in business of the two groups (table 5.1).Twenty stallholders in Guiguinto started their businessesin 1997 without fixed business locations.

To statistically test this difference without such a bias,the average value of sales and average net income foreach group (by length of time in business) was calculated,and the average annual increase in sales and net incomewas estimated. Based on this constructed data, the nullhypothesis—that the average annual increases in salesand net income (in real terms) were the same between thestallholders in Pulilan and those in Guiguinto—can berejected. The t values were 2.7 and 2.0, respectively, at a5 percent level of significance.

For those 16 stallholders in the Pulilan sample whomoved to the public market from another location, thedifference between their mean income at the previouslocation and that at the present location was statisticallytested. The null hypothesis—that the mean income levelwas the same at the two locations—was rejected. The tvalue was 2.4, at a 5 percent level of significance.

Therefore, the impact of the MDP-financed publicmarket in Pulilan on the sales and income of thestallholders was significant and positive comparedwith the sales and income in Guiguinto, and alsocompared with the level of income at the previouslocation for stallholders who came to the market fromanother location.

CommutingTable 5.4 shows the median commuting distance fromhome to the market and the median travel time forstallholders in Pulilan and Guiguinto. Although thetravel distance in Pulilan is twice that in Guiguinto, thetravel time is about the same for the two groups. Thisresults from more efficient transport in Pulilan than inGuiguinto, including a large fleet of tricycles.

Quality of Infrastructure ServicesThe survey asked respondents to rate the quality of 12infrastructure and municipal services, listed in table

5.5, at the time of the survey (1998), compared with thefirst year the stallholder started business at the market.Four quality criteria were used: excellent, good, fair,and poor. Table 5.5 shows, for each type of service, theproportion of respondents who rated its quality excel-lent or good. For all items but telephone, the quality ofservices in the first year at the market was better inPulilan than in Guiguinto. In the case of the Pulilanpublic market, all services improved substantially overtime except for public toilets. Any improvements infacilities in Guiguinto were small, and the quality ofwater supply, public toilets, ventilation, storage, andparking space declined during the period.

We tested the differences between proportions andrejected the null hypothesis that the proportions of qualityratings in Pulilan are the same as those of Guiguinto. Thet values range from 2.8 to 8.6, at the 5 percent level ofsignificance (excluding 1.5 for telephone service, whichwas equally poor in both municipalities).

Indirect ImpactsMarket Linkages with Other AreasTo evaluate the impact of the public market on thecreation of transport and commercial linkages withother municipalities and regions, the survey askedwhere the goods sold by stallholders had originatedand where their customers come from. Tables 5.6 and5.7 report the origins of goods and customers by threecategories: from the municipality, from the province,and from outside the province.

About half the goods sold in the Pulilan publicmarket come from outside the province, while a little

I m p a c t s o n L o c a l E c o n o m i c D e v e l o p m e n t

TABLE 5.3: CHANGES IN SALES AND INCOMEPulilan (average) Guiguinto (average)

Percent PercentFirst year 1998 change First year 1998 change

Monthly sales (pesos) 45,083 93,551 107.5 82,458 87,075 5.6Monthly net income (pesos) 10,921 23,783 117.8 17,382 22,726 30.7


TABLE 5.4: COMMUTING DISTANCEAND TRAVEL TIME

Pulilan Guiguinto All

Median commuting distance (kilometers) 3.0 1.5 2.4Median travel time, one way (minutes) 12 12 12



24

more than half the goods sold in Guiguinto come fromwithin the province. More than 90 percent of thecustomers in the informal Guiguinto markets are fromthe municipality, while in Pulilan 15 percent comefrom the province and 5 percent from outside theprovince. The findings show that the public market inPulilan established wider transport and commerciallinkages with locations outside the province than didthe markets in Guiguinto.

Employment Side EffectsTwenty-eight percent of stallholders in Pulilan and 17percent in Guiguinto said that they hired a housemaidafter they started business at the market and pay 1,500pesos per month for the service. This shows that thepublic market in Pulilan has had a greater indirecteffect on employment generation in addition to the jobscreated at the market.

To capture indirect impacts, the survey included 15small business enterprises near the public market inPulilan and 15 near the informal markets in Guiguinto. InPulilan, 14 out of 15 enterprises were established since1995, indicating rapid expansion of economic activities inthe public market area. The types of businesses includedcar services (gas station), banking, tile making, restau-rants, clothing, electronics, and drug stores. The averagesize of employment at these enterprises was 3.3 persons inPulilan and 2.3 in Guiguinto.

Emerging Real Estate MarketAccording to the municipal government staff in Pulilan,the land price in the public market area was 55 pesos persquare meter in 1992, before the market was established.Land in the residential area was selling for more than12,000 pesos per square meter in 1998. The survey foundthat 10 of the 15 small enterprises interviewed in Pulilanwere renters with an average floor space of 76 squaremeters, indicating an active real estate market emergingin the public market area. The average floor space of thesmall enterprise owners interviewed in Guiguinto wasmuch less, only 41 square meters.

TABLE 5.5: QUALITY OF SERVICES AT THE MARKET(PERCENTAGE OF RESPONDENTS ANSWERING EXCELLENT OR GOOD)

Pulilan Guiguinto

First year 1998 First year 1998

Electricity 58 80 49 55Water supply 70 87 30 28Telephone 27 48 27 35Police protection 65 75 38 42Fire protection 70 82 30 32Garbage collection 87 91 32 32Sewerage and drainage 80 83 28 34Public toilet 73 65 22 20Ventilation 80 82 45 42Storage 38 43 22 20Parking space 85 90 39 35Driveway 88 91 38 42

Note: The response rate was 100 percent for the sample of 60 in both municipalities.Source: MDP Impact Evaluation Study market survey.

TABLE 5.7: ORIGIN OF CUSTOMERS AT THEMARKET (MEAN PERCENTAGE)


From municipality 79.6 90.9 85.2From province 15.3 7.0 11.2From outside province 5.1 2.1 3.6


TABLE 5.6: ORIGIN OF GOODS SOLD AT THEMARKET (MEAN PERCENTAGE)


From municipality 22.3 14.3 18.3From province 28.4 55.1 41.8From outside province 49.3 30.6 39.9


25

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 needto finance economic infrastructure for productive ac-tivities such as manufacturing and commerce, as wellas social infrastructure for the population. When theyeventually graduate from the MDP program, theybegin to borrow from the private capital market.Experiences in both the Philippines and Brazil showsuch progress. This catalytic role is analogous to therole of the World Bank in helping developing countriesuntil they graduate from the Bank.

MDPs in ParanáParanáCidade (the ongoing Urban Development Fundproject financed by the InterAmerican DevelopmentBank) has been expanding its operations as a self-financing, private financial intermediary, and has nowentered a new phase of providing more diversifiedfinancial services and types of loans. Diversification ofthe loan mix to include revenue-generating projects(with positive externalities such as public markets)could come sooner than diversification of financialservices, since the latter will depend on the speed ofoverall capital market development in Brazil. Newfinancial services could include managing bond issues

for selected municipalities, introducing risk guaranteefunctions, and developing mechanisms for privatesector participation through build-operate-transferschemes, concessions, and management contracts forspecific services such as maintenance functions. Asa good practice case, ParanáCidade is ready to meetthese challenges and is pushing the frontier of theWorld Bank’s MDP program. It will continue toprovide useful lessons for MDPs in Brazil and else-where.

MDPs in Rio Grande do SulThis MDP program regained its momentum with thereturn of its original advocate to the state governmentin 1995. In 1998, the operations of the municipaldevelopment fund expanded in response to high de-mand and strengthened its financial position. Contin-ued state government protection of the organizationalintegrity of PIMES will be crucial for the sustainabilityof the state urban development fund, FUNDOPIMES,as it pursues further institutional growth. As in Paraná,the future will require diversification of the loanproduct mix to include revenue-generating projectsand, eventually, diversification of financial services.

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-I

66Agenda for Future Operations


26

MDPs in the PhilippinesTo meet the strong demand for MDP financing fromlocal governments, the Central Project Office in thePhilippines prepared a follow-on project, MDP III,

which was approved by theBoard in March 1992. MDPIII was a continuation of theefforts of MDP I and MDP IIto strengthen the institu-tional development processand expand development as-sistance to more municipali-ties. MDP III was also verytimely, as it helped the na-tional government to de-

velop and carry out its decentralization program afterthe Local Government Code was revised in 1991. Thedesign and components of MDP III were similar tothose of MDP I and II, but it did not target anyparticular regions.

A fourth follow-on project, LOGOFIND, was ap-proved in 1999. Within a broad policy reform framework(Llanto and others 1996), LOGOFIND will address thenegative aspects of the bottom-up, demand-driven projectdesign. The self-selection process tends to generate com-petition among municipalities, and only the most credit-worthy and the most capable of making necessary policychanges are able to participate in the MDP and accesscredit. Many that are poor and noncreditworthy havebeen left out, thus widening interregional income dispari-ties. LOGOFIND intends to implement a policy frame-work aimed at graduating more successful local govern-ments to the private financial markets while providingassistance to weaker municipalities.

Growingmunicipalities

need increasingfinancing for

both economicand social

infrastructure.

27

77

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, theproject must be well designed from the beginning, sincelater course correction is difficult; (3) competitionamong municipalities should be promoted through thedissemination of success stories; (4) MDPs can beimplemented even during times of macroeconomic andpolitical change, since they have been shown to havefavorable impacts in such circumstances; and (5) themost important element for success is a sound policyand fiscal decentralization framework.

ConclusionsThe principal findings of this study are as follows:

• MDP operations help reform at the level of localgovernment. Participant municipalities increasetheir fiscal autonomy by collecting more of theirown revenues—especially property taxes—thannonparticipants. In a fiscal sense, autonomyhelps municipalities to gain access to furtherMDP funds and other loans. It also helps thempay off existing obligations. In a political sense,more autonomy gives municipalities a greaterrole in decentralized decisionmaking. Local

project authorities at the state or provincial levelsee the MDP as an instrument of reform. Itseffectiveness is ensured when there are no com-peting sources of finance for municipalities witheasier terms. Detailed design of MDP projects iscrucial to determine the direction of impacts.The projects studied here focused on improve-ments in the property tax—precisely the area ofmunicipal finance where the project impactswere strongly felt.

• Municipalities consciously perceive MDP par-ticipation as a process of reform. Municipalitiesare not simply passive agents of MDP, butconsciously buy into the MDP reform program.Municipalities of all sizes are acutely aware ofthe improvements planned, conditions attached,what they have to do to take part, and the finalachievements. They associate successful MDPparticipation with innovations in their ownadministrations and their ability to plan andimplement successful investment projects.

• Improved fiscal performance goes hand-in-handwith management strengthening. The MDPsevaluated here began with a level playing field

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 managementT

Conclusions and Lessons


28

in relation to nonparticipants in the areas offiscal autonomy, own revenues per capita, andbudget balances, and improved in these areas

more than nonparticipants.Technical assistance pro-vided through MDP opera-tions helped municipalitiesbecome more entrepreneur-ial, think more about fiscaladjustment, value their staffmore highly, interact moreclosely with private compa-

nies and local communities, and be more envi-ronmentally conscious.

• MDP impacts are sensitive to project leverage.The more closely involved municipalities werein MDP projects, as measured by the share of alltheir investments funded by the MDP, the greaterthe project impacts on municipal own revenuegeneration. Being more closely bound up with—and dependent on—an MDP operation makes amunicipality more likely to follow project policyprescriptions, and to be successful in doing so.

• MDPs in the Philippines attracted revenue-generating projects. Because of the strictly de-mand-driven approach followed in the Philip-pines, MDPs first financed revenue-generatingprojects such as public markets. These presentedminimum risks in implementation delays andcost recovery. With the revenues from suchprojects, participating municipalities were ableto enhance their financial base, and thus theircreditworthiness. This, in turn, enabled them toexpand their investments to infrastructureprojects such as roads, drainage, water supply,and sanitation.

Lessons for Future OperationsThe MDP project experience offers many lessons. Mostimportant:

• MDP policy reform instruments should be diversi-fied. It is important to extend the success inimproving property taxes to the other revenueitems that make up the remaining three-quarters of

municipal own income in both Brazil and thePhilippines. In the case of Brazil, for instance,future MDPs might focus on the widespread localservice tax, an increasingly important source ofmunicipal revenue. In the Philippines, MDP financ-ing of revenue-generating projects such as publicmarkets can play a catalytic role in the develop-ment of local economies.

• Good design at the outset is crucial to satisfac-tory MDP outcomes. A municipality’s first en-counter with an MDP program is crucial tosetting the tone for future participation. Condi-tions and requirements for present and futureMDP operations should be very transparent andeasily understood by new municipal partici-pants. Experience shows that an initial miscon-ception by a municipality—that direct cost re-covery is not a project requirement, forinstance—can prove very difficult to correct laterin a follow-on operation.

• It is important to promote competition throughthe dissemination of success stories. Good prac-tice municipal participants are an MDPoperation’s best promoters. Project managersshould take advantage of this by disseminatingthe experiences of these municipalities, espe-cially among nonparticipants.

• MDP projects can have satisfactory impacts evenunder conditions of political change and economicvolatility. For the long-term sustainability ofMDPs, however, borrowers should establish soundpolicy and fiscal decentralization frameworks. Theexperience of the municipal development projectsin both Brazil and the Philippines—implemented ata time of major macroeconomic adjustment andpolitical change—demonstrates that such projectscan succeed even when macro conditions have yetto stabilize. MDPs were implemented during theperiod of severe macro instability in the early1990s in Brazil and after the People’s Revolution of1986 in the Philippines. Any progress made ininstitutional reform at the local level during timessuch as these should be helpful to a subsequentreform effort at the national level.

Sustainable MDPsrequire sound

policy and fiscaldecentralization

frameworks.

ANNEXES

29

ANNEX 1: DATA AND METHODOLOGY

Data CollectionLocal Finance Data: Brazil and the PhilippinesThe study designed and developed a database usingdetailed unpublished data on the finances of 427municipalities in the state of Rio Grande do Sul and323 municipalities in the state of Paraná in Brazil, and53 municipalities in the provinces of Bulacan andLaguna in the Philippines. The database design focusedon 15 selected variables of municipal revenues andexpenditures for each state in Brazil and each provincein the Philippines. A very large body of data wasavailable for each country’s municipalities, coveringup to 75 detailed variables at the municipal level forevery year during 1990–96, the period of projectimplementation.

For this reason, the study had to be selective anduse only data immediately relevant to measuring theimpacts of these projects. More than 300 analyticaltables were produced to obtain the results reported inthis study. The availability of the data for all munici-palities in individual states and provinces made itunnecessary to draw samples, since the analysis couldinclude the entire population of municipalities. Verysmall (population <2,000) and very large (population>250,000) municipalities were excluded from the dataanalysis to keep possible outliers from distortingobservations of the average performance of municipali-ties. At the design stage of the study, specific hypotheses

on impacts were used to help select key variables forevaluation from among the vast array of data avail-able.

Survey of Mayors: Rio Grande do SulA survey of mayors and their administrations wasconducted for 26 municipalities in Rio Grande do Sulto evaluate the project’s impacts on municipal capacitybuilding in the areas of financial management andadministration, including planning, budgeting, andaccounting practices; investment project preparationand implementation; and technical capability of staff.The questionnaire was drafted jointly with the Bank’saudit mission, and the study was coordinated by a Bankconsultant.

Impact Evaluation Study Market Survey: PhilippinesTo evaluate the impacts of an MDP-financed publicmarket on the development of the local economy,Pulilan in Bulacan Province was selected as the projectmunicipality. A random sample of 60 stallholders inthe Pulilan public market was selected as the experi-mental group. They were asked about their locationhistory; employment characteristics; commuting pat-terns; the extent of the markets; changes in sales,expenses, and income during 1993–98; improvementsin services; and the potential for further growth of theirbusinesses. In addition, 15 small shopowners (retail,

TABLE A1.1: MUNICIPALITIES EVALUATEDNumber of study municipalities per cohort

State or province All Largea Mediumb Smallc

BrazilParticipants (Paraná) 316 24 156 136Nonparticipants (Paraná) – – – –Participants (RGS) 132 24 52 56Nonparticipants (RGS) 185 12 67 106 Total 633 60 275 298

PhilippinesParticipants (Bulacan) 17 14 3 –Nonparticipants (Bulacan) – – – –Participants (Laguna) 4 4 – –Nonparticipants (Laguna) 15 – 15 – Total 36 18 18 –

Note: RGS = Rio Grande do Sul. Outlying very large (pop. >250,000) and very small (pop. <2,000) municipalities wereeliminated from the study.a. Population of 50,000–250,000.b. Population of 10,000–50,000.c. Population of 2,000–10,000.Source: MDP Impact Evaluation Study database.


30

services, finance, and manufacturing located near thepublic market) were interviewed to document theproject’s indirect effects on the development of the area,including employment creation, land price changes,and the emerging business district. To contrast andcompare with the experimental group, Guiguinto wasselected as the nonproject municipality, and a randomsample of 60 stallholders in several privately organizedinformal markets and 15 shopowners in Guiguinto wasselected as a control group. The questionnaire used inPulilan was also used in Guiguinto to collect data on atotal of 120 stallholders and 30 shopowners in the studysample. (The questionnaire is reproduced as Annex 5.)

Additional Points of Methodology for Chapter 3Because of the rigorous reporting requirements of officialcontrollers of local governments in both countries, a verylarge body of information on the finances of municipali-ties was available. This allowed for the gathering ofdetailed time series and cross-sectional data on allmunicipalities in all four states and provinces where themunicipal development projects were implemented. TableA1.1 details the universe of the study at the level of groupsof municipalities.

Thus, the finances of 669 municipalities, 78.7 percentof the total, were reviewed. Excluded from the study were140 newly created (and mostly small) municipalities inBrazil, for which time series data did not go back to1990.1 The Brazilian sample was also truncated byexcluding 8 very large municipalities with more than250,000 inhabitants each and 16 very small ones withfewer than 2,000 inhabitants each. Besides eliminatingoutliers from the study, this also gave each country’sgroup of municipalities a similar demographic distribu-tion, helping to make comparative observations acrosscountries more robust. Finally, 17 municipalities that hadparticipated only in MDP technical assistance withoutborrowing under the program were excluded from thePhilippines analysis; they qualified neither as MDPparticipants nor as members of a control group ofnonparticipants.

A central feature of the evaluation design was acomparison of the performance of MDP municipalitieswith the performance of a control group of similarmunicipalities that did not participate in an MDP. InRio Grande do Sul, 185 municipalities—represented inall three population cohorts—did not participate andprovided a natural control group. Paraná had no

similar control group, since MDPs covered 100 percentof the municipalities. A second-best solution to evalu-ate the performance of Paraná participant municipali-ties was to compare them with the control group ofnonparticipants in Rio Grande do Sul. A similar designwas used for the Philippines, where Laguna provinceoffered the best control group, since MDP coverage inBulacan, as in Paraná, had been nearly 100 percent.

Comparisons were made using a series of indicatorsof municipal fiscal performance. Empirical observation ofthe values of these indicators permitted identification oftwo kinds of differences: (1) those between MDP partici-pants and nonparticipants; and (2) those between theperformance of MDP participants before the project andthe same participants after the project. The values of allindicators were tabulated by estimating mean valuesacross groups of municipalities. For property tax percapita, for example, the mean value of all municipalitieswas estimated across analytical categories (all partici-pants in Rio Grande do Sul, large nonparticipants inLaguna). In other words, the estimates were mean valuesfor the indicators of each municipality within the cat-egory; the estimates did not represent the mean value forthe category as a whole. By focusing on estimates ofaverage values of these indicators across individualmunicipalities, the evaluation could more effectively meetits objective of highlighting the effects of MDP impacts atthe level of individual municipalities.

Strictly speaking, data analysis should be limited tocomparisons among 132 participating municipalities (theexperimental group) versus 185 nonparticipating munici-palities (the control group) in the state of Rio Grande doSul (see table A1.1), since the policy environment and theimplementation strategy were different between Paranáand Rio Grande do Sul. Nevertheless, the study teamdecided to report the results of the Paraná data togetherwith those of Rio Grande do Sul to evaluate the generalpatterns of project impacts across states, because theproject design was identical in the two states. In thePhilippines, all municipalities in the province of Bulacanparticipated in MDPs, so Laguna, where a large numberof municipalities did not participate in MDPs, was chosento provide a control group. Therefore, in the empiricalresults reported in this document, the focus of analysisshould be the comparison between the control andexperimental groups in Rio Grande do Sul, and otherresults should be viewed as supplementary.

31

This annex presents additional details of the evaluation ofMDP impacts on municipal fiscal and financial manage-ment, as reported in Chapter 3. Here the same indicatorsare analyzed, but disaggregated by municipal size ac-cording to population cohorts. In this annex, the cohortsare defined as follows: (1) large municipalities are thosewith 50,000–250,000 inhabitants; (2) medium munici-palities have 10,000–50,000 inhabitants; and (3) smallmunicipalities have 2,000–10,000 inhabitants.

Municipal Financial Autonomy versus Revenue SharingAs in Chapter 3, the analysis here looks at two indicatorsof financial autonomy at the municipal level: (1) munici-pal own revenues as a share of all current revenues and (2)municipal own revenues per capita. Table A2.1 summa-rizes the data regarding the first indicator by populationsize of municipality.


• In Brazil, MDP participants in all size categoriesoutperformed nonparticipants, except for largeparticipants in Rio Grande do Sul. Participants’financial autonomy improved over the 1990–96period.

• Among all size categories in Brazil, small non-participants reported the poorest performance,

while small participants did much better. Thisfinding is consistent with the idea that MDPs canbe beneficial in stalling the erosion of fiscalautonomy, especially of small municipalities.

Table A2.2 presents data pertaining to the secondindicator of municipal financial autonomy: the amount ofown revenues collected per capita.

The highlights:

• The best performance among large municipali-ties in Brazil was that of Paraná participants.Large participants in Rio Grande do Sul also didbetter than nonparticipants in that state. Sincelarge municipalities in both states share strongadministrative capabilities to improve own rev-enue mobilization, the study team looked fordifferent project impacts to explain the contrast.As second-timers in MDP projects, Paraná mu-nicipalities had more time than their Rio Grandedo Sul counterparts to learn that access to creditis helped by own resource mobilization. For thisreason, large Paraná municipalities may havebeen quicker to respond to MDP incentives.

• The less favorable performance by small munici-palities in Paraná reflects the difficulty of moni-

ANNEX 2: ADDITIONAL DATA ANALYSIS OF MUNICIPALITIES BY POPULATION SIZE

A n n e x e s

TABLE A2.1: IMPACTS OF PROJECTS ON MUNICIPAL FINANCIAL AUTONOMY—OWN REVENUES’ SHAREOF ALL CURRENT REVENUES (PERCENT)

Percent PercentBrazil 1990 1996 change Philippines 1990 1996 change

(A) (B) (B/A) (D) (E) (E/D)

Large municipalities (population 50,000–250,000)

Participants (Paraná) 27.5 32.4 +17.8 Participants (Bulacan) 43.9 55.4 +26.2Participants (RGS) 24.8 23.7 -4.4 Participants (Laguna) 68.9 61.0 -11.5Nonparticipants (RGS) 20.2 19.7 -2.5 Nonparticipants (Laguna) – – –

Medium municipalities (population 10,000–50,000)

Participants (Paraná) 14.1 15.8 +12.1 Participants (Bulacan) 55.8 45.1 -19.2Participants (RGS) 17.6 19.1 +8.5 Participants (Laguna) – – –Nonparticipants (RGS) 15.1 16.1 +6.6 Nonparticipants (Laguna) 42.8 27.0 -36.9

Small municipalities (population 2,000–10,000)

Participants (Paraná) 8.8 9.3 +5.7 Participants (Bulacan) – – –Participants (RGS) 11.2 11.1 -0.9 Participants (Laguna) – – –Nonparticipants (RGS) 13.8 11.8 -14.5 Nonparticipants (Laguna) – – –



32

TABLE A2.3: IMPACTS OF PROJECTS ON PROPERTY TAX COLLECTION—PROPERTY TAX PER CAPITA(CONSTANT 1996 US$)


(A) (B) (B/A) (D) (E) (E/D)


Participants (Paraná) 3.82 15.85 +314.9 Participants (Bulacan) 1.31 1.93 +47.3Participants (RGS) 3.11 15.52 +399.0 Participants (Laguna) 2.43 4.54 +86.8Nonparticipants (RGS) 3.61 9.56 +164.8 Nonparticipants (Laguna) – – –


Participants (Paraná) 2.20 7.79 +254.1 Participants (Bulacan) 0.95 0.91 -4.2Participants (RGS) 3.99 18.35 +359.9 Participants (Laguna) – – –Nonparticipants (RGS) 2.06 11.57 +461.7 Nonparticipants (Laguna) 1.16 1.53 +31.9


Participants (Paraná) 1.08 3.75 +247.2 Participants (Bulacan) – – –Participants (RGS) 1.16 16.43 +1,316.4 Participants (Laguna) – – –Nonparticipants (RGS) 1.71 9.89 +478.4 Nonparticipants (Laguna) – – –


TABLE A2.2: IMPACTS OF PROJECTS ON OWN REVENUE MOBILIZATION—OWN REVENUES PER CAPITA(CONSTANT 1996 US$)


(A) (B) (B/A) (D) (E) (E/D)


Participants (Paraná) 44.05 80.92 +83.7 Participants (Bulacan) 4.48 8.63 +92.6Participants (RGS) 49.60 56.64 +14.2 Participants (Laguna) 6.80 13.68 +101.2Nonparticipants (RGS) 30.30 32.92 +8.6 Nonparticipants (Laguna) – – –


Participants (Paraná) 24.38 45.82 +87.9 Participants (Bulacan) 4.65 9.79 +110.5Participants (RGS) 40.48 58.33 +44.1 Participants (Laguna) – – –Nonparticipants (RGS) 31.81 51.93 +63.3 Nonparticipants (Laguna) 3.24 5.76 +77.8


Participants (Paraná) 21.80 31.45 +44.3 Participants (Bulacan) – – –Participants (RGS) 31.31 74.27 +137.2 Participants (Laguna) – – –Nonparticipants (RGS) 40.97 50.62 +23.6 Nonparticipants (Laguna) – – –


toring (by means of a financial action plan) thereform process for a large number of participat-ing municipalities, as confirmed by the perfor-mance audit.

• Smaller municipalities in Rio Grande do Sul weremore sensitive to the initial shock caused bygaining access to MDP credit for the first time.Here, the project effects will be sustainable in the

long run only if municipalities succeed in perma-nently consolidating their administrative capacity.

• Data for the Philippines reveal that participatingmunicipalities in Bulacan did better than nonpar-ticipants in Laguna in the medium-size category.

33

Own Revenue Generation Through Property TaxesTable A2.3 presents data on the performance ofmunicipalities of different sizes in mobilizing propertytax revenues per capita.


• In the large population cohort in Brazil, bothParaná and Rio Grande do Sul participantsimproved property tax collections per capitamuch more than did nonparticipants. This re-flects the willingness and administrative capabil-ity of larger municipalities to respond to MDPrequirements and technical assistance to collectmore property taxes.

• This finding reflects the earlier conclusion in thisannex about own revenue generation, and indi-

cates that larger municipalities are able torespond more effectively to MDP incentives andto undertake the complex and politically un-popular business of raising more property taxesfrom their citizens.

• In the Philippines, as well, larger participantsreport the strongest property tax performance.

• The ability of small participants to improveproperty tax collection in Brazil was varied.Small participants in Rio Grande do Sul didsubstantially better than nonparticipants, sup-ported by intense MDP project supervision andthe credibility of a program in which they wereparticipating for the first time. Small partici-pants in Paraná, in contrast, were less supervisedbecause of the larger number of participants.

TABLE A2.4: IMPACTS ON DIRECT COST RECOVERY IN BRAZILBetterment charge per capita (constant 1996 US$)

Municipalities by population cohort

Large Medium Small

Percent Percent Percent1990 1996 change 1990 1996 change 1990 1996 change

(C) (D) (D/C) (E) (F) (F/E) (G) (H) (H/G)

Participants (Paraná) 1.84 1.63 -11.4 1.36 0.62 -54.4 0.84 0.40 -52.4Participants (RGS) 0.88 0.95 +8.0 1.62 2.46 +51.9 1.34 4.62 +244.8Nonparticipants (RGS) 0.36 0.11 -69.4 0.98 1.44 +46.9 1.53 1.81 +18.3

Note: See tables 3.2 and 3.3. Behind the weaker performance of Paraná 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 bettermentcharges. In contrast, in Rio Grande do Sul, an additional 14 participant municipalities were collecting betterment charges by1996, 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 DEFICITBudget surplus(+) or deficit(-) as share of total revenues (percent)

Municipalities by population cohort

Large Medium Small

1990 1996 Change 1990 1996 Change 1990 1996 Change

(C) (D) (D-C) (E) (F) (F-E) (G) (H) (H-G)

BrazilParticipants (Paraná) -0.6 -7.8 -7.2 -0.5 -9.4 -8.9 +0.4 -9.4 -9.8Participants (RGS) +2.3 -7.2 -9.5 -0.4 -5.2 -4.8 +1.2 -7.4 -8.6Nonparticipants (RGS) +2.3 -15.3 -17.6 +1.5 -6.6 -8.1 +3.6 -7.5 -11.1

PhilippinesParticipants (Bulacan) -6.1 +2.0 +8.1 -2.6 +0.5 +3.1 – – –Participants (Laguna) +5.3 +4.5 -0.8 – – – – – –Nonparticipants (Laguna) – – – +8.9 +1.6 -7.3 – – –

Note: See table 3.2. Budget surplus or deficit = total current revenues minus total current expenditures (including debt servicepayments). RGS = Rio Grande do Sul.Source: MDP Impact Evaluation Study database.

A n n e x e s


34

TABLE A2.6: IMPACTS ON OWN REVENUES BY DEGREE OF FINANCIAL DEEPENING IN BRAZILOwn revenues per capita (constant 1996 US$)

MDP participant municipalities by population cohort

Large Medium Small

Percent Percent Percent1990 1996 change 1990 1996 change 1990 1996 change

(C) (D) (D/C) (E) (F) (F/E) (G) (H) (H/G)

ParanáDeep 36.42 87.91 +141.4 19.61 38.65 +97.1 18.06 39.72 +119.9Medium 43.91 76.54 +74.3 27.79 43.75 +57.4 19.92 32.96 +65.5Shallow 49.29 80.63 +63.6 26.15 52.83 +102.0 23.70 28.24 +19.2

Rio Grande do SulDeep 28.65 46.35 +61.8 39.95 63.60 +59.2 20.75 37.52 +80.8Medium 63.91 67.39 +5.4 33.49 48.66 +45.3 41.39 38.32 -7.4Shallow 56.25 56.18 -0.1 36.83 46.77 +27.0 30.00 116.14 +287.1

Note: See tables 3.2 and 3.3. Financial depth is defined as the share of total 1990–92 municipal investment accounted for byMDP funding. The three groups are: (a) deep = > 50 percent; (b) medium = 25–50 percent; and (c) shallow = <25 percent.Source: MDP Impact Evaluation Study database.

Direct Cost RecoveryTable A2.4 reports, for Brazil only, municipal directcost recovery through the levying and collection ofbetterment charges on investment projects.


• In Rio Grande do Sul, participants did muchbetter than nonparticipants in all categories. Thebest relative performance of participant overnonparticipant municipalities was in the smallcategory. Small participant municipalities thereresponded strongly and positively to MDP condi-tionalities and technical assistance provided un-der the project. This evidence is consistent withthe shock effect and leverage of first-time contactwith an MDP project, as discussed earlier in thisreport.

Budget Surplus or DeficitTable A2.5 presents municipal budget surplus anddeficit data by population-size category.


• Large participants in both Paraná and RioGrande do Sul outperformed nonparticipants.Large participants in Bulacan reported a sig-nificant improvement as, on average, they

moved out of deficit into surplus. These find-ings demonstrate that the administrativestrength of larger municipalities in the Philip-pines is similar to that reported earlier for thecase of Brazil.

• Medium-size participants in Rio Grande do Sulalso performed better than nonparticipants, as didmedium-size participants in the Philippines.

• For small municipalities, the differences in perfor-mance of participants and nonparticipants werenot very large.

Financial DeepeningFor the case of Brazil only, the data in table A2.6 reportmunicipal-level performance by degree of involvementin the MDP projects.

Among the results:

• Project leverage can affect MDP impacts in allthree size categories.

• Apparently, there are two exceptions: (1) unexpect-edly, medium-size shallow participants in Paranáperformed, as well as deep participants; and (2)small, shallow participants outperformed all otherswithin their size category in Rio Grande do Sul.

• Both results are the consequence of the exceptionalperformance of a few municipalities, creating biasin the category means reported here.

35

This annex presents the lessons and recommendationsfrom the performance audit report for the Brazil MDPs.

In April 1997, a policy seminar was held inCuritiba, Paraná, to draw lessons from past urbanoperations. The lessons were succinctly summarized asfollows: “Current trends in political, fiscal, administra-tive, and operational decentralization entrust the provi-sion of typically local services to local authorities. TheMunicipal Development Program of Paraná hasgreatly reduced local dependence on state grantsthrough a mechanism that is increasingly self-financ-ing. This relieves the state of some responsibilities andhelps reduce social tensions by offering a directresponse to local needs. It also stimulates municipal taxcollection as a means to improve creditworthiness”(Secretariat of Urban Development 1997, p. 41). Theoverall findings of the audit support this statement.More specific lessons follow.

• Demand side. The financial action plan, with itsstringent conditions for loans, was an effectiveincentive for municipal reform. This design, withfollow-up monitoring at the time of subsequentloan applications, enabled a wholesale approachthat covered a large number of municipalities.

• Supply side. The MDP program in Paranádemonstrated the institutional evolution of anurban development fund from a government-operated disbursement mechanism to an indepen-dent, self-financing, private financial intermedi-ary for providing long-term credit tomunicipalities. ParanáCidade is a good practicecase for the MDP program; it can be replicatedin other states in Brazil and in other countries.

• Sequencing of project components. The projectdesign, which aimed at setting the institutionalframework right and putting financial reform inplace before physical investments were under-taken, reduced the risk of implementation delaysand helped ensure cost recovery.

• Champions and political support. During imple-mentation, the MDP program in Paraná was notaffected by government changes. The MDPprogram in Rio Grande do Sul did suffer fromsuch changes and was on the verge of collapseuntil the original preparers of the project re-

ANNEX 3: PERFORMANCE AUDIT OF THE BRAZIL MDPs: LESSONS AND RECOMMENDATIONS

turned to power in 1995. Continued politicalsupport over time is crucial for successful projectimplementation.

• The dynamics of municipal development. TheMDP program was most effective in assistingsmaller, less creditworthy municipalities in remoteregions of the states. Large cities had access toalternative sources of financing and better techni-cal capacity. As in the Philippines, the MunicipalDevelopment Fund in Brazil was catalytic inhelping smaller, resource-poor municipalities be-come more creditworthy and financially strong,with the expectation that they will eventuallyparticipate in the capital market. But internationalexperience has shown that direct participation ofmunicipalities in the capital market has been slowin most developing countries.

• MDP as an instrument for rural development.The project’s financial and institutional impactswere most significant for small and medium-sizemunicipalities in remote regions. Enhancing theefficiency and productivity of these markettowns should contribute significantly to theeconomic and social development process inrural regions. As an important side effect, thisprocess would reduce regional income dispari-ties between large urban centers and rural areas.

Recommendations

• Diversify the types of subprojects to be financed.Both ParanáCidade and the state urban develop-ment fund, FUNDOPIMES, should expand thescope of the lending program by allowing revenue-generating projects with positive externalities inwhich the private sector can participate.

• Diversify financial services. ParanáCidade hasreached a phase where it could consider diversi-fying its financial services to include creditguarantee service and debt financing. It couldalso play a catalytic role in build-operate-transfer schemes, concessions, contract manage-ment, and other forms of private sector partici-pation. FUNDOPIMES could soon followParanáCidade’s path.

• Emphasize training. The MDP program in Brazil

A n n e x e s


36

lacks continuing training in association with aformal training institute. Since the Brazil MDP isimplemented in a wholesale manner for numerousmunicipalities, it may be useful to explore thefeasibility of establishing a training institute (possi-bly jointly by several states) to build municipalcapacity. This would enhance local capacity togenerate high-quality investment projects andlessen the need for close supervision by the state’simplementation agencies.

• Streamline municipal administration and manage-ment. Computerizing the accounting and budget-ing systems and updating financial data wouldenhance the efficiency of municipal administrationand management. It would also make it easier forParanáCidade and FUNDOPIMES to continuouslymonitor the financial health of participating mu-nicipalities by sharing a common database.ParanáCidade is heading in this direction byadopting sophisticated data management and op-erations simulation systems.

• Use the betterment tax effectively for direct costrecovery. This tax for a new infrastructureservice is generally a one-time connection fee.Studies show that low-income households andsmall enterprises tend to have a greater willing-ness to pay at the margin for reliable services

than high-income households and large firms(Lee, Anas, and Oh, 1999; Lee and Anas, 1992).Therefore, this tax measure could be an effectivemeans of direct cost recovery if the governmentcommits to its implementation.

• Protect PIMES and FUNDOPIMES from politi-cal interference. With a healthy cash positionand the high demand for loans, the PIMESprogram is entering a critical phase for institu-tional growth and financial stability. It is impor-tant to protect its organizational integrity, finan-cial independence, and highly dedicated staffduring the period of ongoing state reform.

• Monitor the creditworthiness of municipalities inParaná. Ninety-nine percent of municipalities areparticipating in Paraná. For such a large number ofparticipants, more stringent monitoring of thefinancial action plans will be desirable to maintainhealthy financial conditions of both the municipali-ties and the Municipal Development Fund.

• Disseminate lessons learned. The evaluationcoordinator of Brazil’s Federal Ministry of Plan-ning participated in the audit mission. He sug-gested that, on completion of OED’s ongoingimpact evaluation study, a dissemination semi-nar be held in Brasilia for local governmentofficials involved in MDPs.

37

ANNEX 4: PERFORMANCE AUDIT OF THE PHILIPPINES MDPs: LESSONS AND RECOMMENDATIONS

This annex presents the lessons and recommendationsfrom the performance audit report for the PhilippinesMDPs.

• Demand-driven approach, participation, andownership. A bottom-up, demand-driven pro-gram approach to project financing is moreefficient and effective for project implementationthan a top-down, preselected, project-specificapproach. Beneficiary local governments per-form better and show greater commitment to theproject when they have primary responsibilityfor project preparation, management, and imple-mentation.

• Sequencing of project components. The institu-tional framework for project financing (the Mu-nicipal Development Fund) was put in placebefore physical investments were undertaken.Because of the demand-driven approach, theMDP program financed revenue-generatingprojects that presented minimum risks for costrecovery. This outcome showed that sequencingof project components in response to the needs ofbeneficiaries can prevent the implementationdelays and cost-recovery problems that oftenoccur in a complex urban development projectprepared in a top-down manner.

• Piloting to mainstreaming analogy. After theparticipating municipalities complete a rathersimple, low-risk, revenue-generating projectsuch as a public market, their creditworthiness isenhanced because of a stronger financial base,and they tend to expand their investments toinfrastructure projects such as roads, drainage,water supply, and sanitation. The logic of thenew project cycle (Picciotto and Weaving 1994)is supported by the experiences of the MDPprogram.

Recommendations

• Reform government finance and the changingrole of the Municipal Development Fund. Theprogram financed mainly revenue-generatingprojects with minimum risk. Local governmentswere initially reluctant to finance social orinfrastructure projects with cost-recovery fea-

tures. These experiences suggest that segmentingthe demand side of the market—that is, targetingparticular types of municipalities for particulartypes of projects—should be avoided. Even underLOGOFIND, the credit window for first-time(poor and less experienced) borrowers shouldcontinue to be open for simple revenue-generat-ing projects, while the loan product mix withmore complex projects should be offered to moremature local governments.

• Expand the role of the Local Government Acad-emy. The role of the Local Government Acad-emy in training municipal officials should beexpanded from training at the project level(preparation, financing, and implementation) tobuilding capacity to plan and implement acitywide infrastructure investment program andmanage rapidly expanding urban areas. Forexample, Santa Rosa faces a tremendous chal-lenge to meet the sharp increase in demand forresidential and nonresidential land and all typesof infrastructure services resulting from largemultinational firms moving into the area. Theacademy should also expand its disseminationprogram, whereby the experiences accumulatedby local governments graduating from MDPscan be shared with newcomers. Mayors andsenior officials of Bauan and Pulilan, for ex-ample, are already serving as lecturers in acad-emy seminars, but a more proactive programsuch as twinning could be effective.

• Reduce disincentives for local revenue genera-tion. The increase in the revenue sharing ratio to40 percent, as part of the revised Local Govern-ment Code, has dampened the incentive togenerate local revenues. To reduce this disincen-tive, the audit recommends (1) the introductionof matching grants, above the standard budgetallocation, tied to the level of local revenuecollection or successful cost recovery;(2) continued support of the RPTA program tocapture tax revenues from the rapidly risingproperty values, in particular from the expand-ing nonresidential tax base in fast-growingmunicipalities; and (3) the introduction of apresidential award system according to the levelof financial autonomy, measured by the ratio of

A n n e x e s


38

intergovernmental transfers (revenue sharing) tototal municipal revenues. For the four citiesvisited by the audit mission, this ratio was:Bauan, 16 percent; Santa Rosa, 23; Pulilan, 49;and Butuan City, 79.

• Private sector participation in maintenance andcontract management. To make the projectachievements sustainable in the absence of recur-rent budget funds for maintenance and technicalpersonnel, municipalities should consider contract-

ing out maintenance activities to private firms,possibly based on user fees. Contract managementor other forms of private sector participation couldalso be adopted to protect the financial viability ofMDP-financed economic enterprises such as publicmarkets, bus terminals, and slaughterhouses.Mandaluyong City in metropolitan Manila hasbeen using a management contract arrangementfor its public market, and Santa Rosa is consideringsuch an arrangement for its market.

39

Time and Date:Name of Interviewer:

A. ClassificationsA1. Identification Number:

[first number is for municipality,followed by the serial numbers]1. Pulilan2. Guiguinto

A2. Classification by business type:[first three categories are for stallholders]

1. Meat, poultry, and fish2. Fruits, vegetables, and grains (rice,

corn, etc.)3. Manufactured goods (clothing,

toys, kitchen wares, etc.)4. Business enterprises outside the

market

A3. Name of stallholder or businessenterprise:Stall number:Telephone number, if any:Name of respondent:Position of respondent, if not owner:

B. Location ChoiceB1. When did you start conducting

your business at this location? 19

B2. Did you move here from anotherlocation? 1. Yes

2. No

B3. If yes, where was yourprevious business located?Name of the subdivision (neighborhood):

B4. Why did you choose this location?[pick the most important reason]1. Availability of space2. Accessibility to customers3. Close to your residence4. Good transport access5. Safety6. Others, please specify:

ANNEX 5: PUBLIC MARKET SURVEY QUESTIONNAIRE OF STALLHOLDERS AND SMALL ENTERPRISES

A n n e x e s

C. Products and ServicesC1. For stallholders: what goods do

you sell?For business enterprise: what kindof business is your enterpriseengaged in? [For example, gasstation, bank, restaurant, taxicompany, pharmacy, etc.]

C2. If you sell goods, where do your goodscome from? [please give a roughpercentage distribution]1. From this municipality2. From this province3. From outside this province

Total 1 0 0

C3. Who are your customers? [pleasegive a rough percentage distribution]1. Residents of this municipality2. Residents of this province3. People from outside this province

Total 1 0 0

D. EmploymentD1. How many people are working

here, including yourself? persons

D2. How many are members of theowner’s family? persons

D3. How many are female workers? persons

D4. How many hours do they work per day?Owners hoursHelpers hours

D5. On average, how much do you pay per month?

1. For manager/caretaker pesos/month2. For helper pesos/month

D6. How much do you spend in kind[meals, transportation, and other] per person per month?

1. For manager/caretaker pesos/month2. For helper pesos/month


40

E. CommutingE1. Where do you live?

Name of your subdivision:

E2. How do you come to work?1. Walk 4. Tricycle2. Jeepney 5. Private car3. Bus 6. Other, please specify

E3. How far is your residence from yourworkplace? kilometers

E4. How much fare do you pay?One way? pesosTwo ways? pesos

E5. How long does it take to come towork one way? minutes

E6. Has the traffic condition improvedor become worse since you moved here?

1. Improved2. Remained the same3. Became worse

E7. Do you have a plan to move yourresidence near your workplace?

1. Yes2. No3. Already near

If yes, is it easy or difficult to finda place near here?

1. Easy2. Difficult

F. Sales and ExpensesF1. Please give your best estimated amounts for the

following items without looking at your account-ing books. Please convert all items into monthlyvalues in pesos per month. [note: the first yearshould be the same as the answer to question B1above]

FirstYear 1998

a. Monthly salesb. Purchases of goods and materialsc. Wages and other benefits

(transportation, meals, etc.)paid for all employees

d. Rent paid for stall or shope. Property taxes

(for enterprise only)f. Interest payments on loansg. Electricityh. Wateri. Garbage collectionj. Communication expensesk. Delivery costs

(both buying and selling)l. Any other expenses; please specifym. Total expenses (in 1,000 pesos)

F2. Roughly how much monthly incomedo you (stallholder or businessenterprise) make per month afterpaying all expenses?

First year: pesos per month1998: pesos per month

If B2 is “yes,” monthly incomeat previous location:

pesos per month

Note: Sections G, H, and I are for stallholders only.

G. Public Market FacilitiesG1. How much was the goodwill

payment when you moved in? pesos

G2. How did you pay your goodwill money?[pick the most important source]1. Your savings2. Borrowed from a bank3. Borrowed from relatives and friends

41

4. Private money lenders5. Other, please specify

G3. How many stalls do you use now?1. When did you start using the

second stall? 192. When did you start using the

third stall? 193. If you have one now, when do you

expect to have a second stall? 19

G4. Do you have a plan to establish yourown business place outside the publicmarket?

1. Yes2. No

G5. If yes, when do you expect to moveto the new place? 19

G6. How was the quality of the followingservices in the market when youmoved here and now?[note: the first year should be the sameas the answer to question B1 above]Excellent = 1; Good = 2; Fair = 3; Poor = 4;Not Applicable = 5

First year 1998a. Electricityb. Waterc. Telephoned. Police protectione. Fire protectionf. Garbage collectiong. Sewerage and drainageh. Public toiletsi. Ventilationj. Storagek. Parking spacel. Driveway

H. HouseholdH1. How many people are in your family?

persons

H2. How many members of your family work?persons

A n n e x e s

H3. Are you the main income earner?1. Yes2. No

H4. Have your family’s living conditionsimproved since you started business here?

1. Significantly2. Moderately3. No change4. Became worse

H5. Did you begin to have a maid and/orhousehelpers since you started business here?

1. Yes or hired additional househelpers2. No

H6. If yes, how many? persons

H7. How much do you pay her/him permonth? pesos/person

I. Opinions about the Public MarketI1. Are you satisfied with the marketplace?

Very satisfied = 1; Satisfied = 2;Not satisfied = 3

I2. What are some of the problems thatcould be improved in the market?[list three in order of importance]a.b.c.

I3. Is there a need to expand the market?1. Yes2. No

I4. Do you belong to a market vendor’sassociation? 1. Yes

2. No

I5. How much in fees do you pay to theassociation per month? pesos/month

I6. What services does it provide for you ?[list three in order of importance.]a.b.c.


42

Note: Section J is for business enterprises outside themarket.

J. Capital InvestmentJ1. How large is their total floor space?

square meters

J2. Do you own this place or rent?1. Own2. Rent

J3. If you own the place, how much didyou pay for this space when youmoved here?[the year in question B1]

1,000 pesos per square meter

J4. How much will you get if you sell it now?

1,000 pesos per square meter

J5. If you rent, how much do you pay per month?

pesos per month per square meter

J6. How much did you spend to set up yourbusiness and improvements (i.e.,investment for facilities, equipment,etc.) since you moved here?

1,000 pesos

J7. Do you have a plan to expand yourbusiness at this location?

1. Yes2. No

J8. What is the price of land at this location now (1998)?

pesos per square meter

J9. How much was the land price whenyou moved here? [the year in question B1]

pesos per square meter

K. Other general comments on problems, and sugges-tions for improvements regarding any aspects of yourbusiness conditions or surrounding areas.

K. Comments by interviewers on any problems en-countered or any unusual information to be noted.

ENDNOTES

43

Chapter 11. This study looks at only MDPs that included a municipal (or

urban) development fund component.

2. For more on evaluation design, see United States GeneralAccounting Office (1990, 1991, and 1992).

Chapter 31. Evidence of improved property tax collection resulting

from MDP improvements to property cadastres in Brazil was alsoexamined, but little was found to support this link. Cadastralimprovement rarely went beyond modernizing the register in cityhall; much of it failed to lead to effective broadening or deepeningof collections. More comprehensive packages of technical assis-tance—notably those including direct efforts to improve collec-tion—were found to be more effective.

2. Through the initial shock of contact with an MDP project,local mayors in Rio Grande do Sul were more ready to embracebetterment charges, which for many of them constituted anunfamiliar financial instrument, although one that gave themeasier access to project finance.

3. By contrast, all MDP participants in Rio Grande do Sulthat collected betterment charges in 1990 still collected them in1996 and were joined by 14 more municipalities by the latter year.Thus, by project completion in 1996, 83.3 percent of participantsin Rio Grande do Sul were collecting betterment charges. Theequivalent share for Paraná was 41.8 percent.

Chapter 41. This chapter is based on a report prepared by Jeanette

Lontra in March 1998 as part of this study, under the supervisionof Aurelio Simon (PIMES 1998). The terms of reference for thetelephone/fax survey were prepared during the audit mission inDecember 1997. Roy Gilbert coordinated the survey work anddid translation and editing. Sextilio Giacomini, Aldino Dick,Janise Benneet, and Neusa Cunha of the PIMES team partici-pated in earlier stages of the work. This task was undertaken fullyby the PIMES team, without any financial support from theBank. Marco and Rodrigo Gonzalez and Hector Hernan Osorioconducted participatory evaluation workshops as part of the

audit mission in Novo Hamburgo and Sao Jose dos Pinhais,respectively.

2. The municipalities were: Alegrete, Arroio dos Ratos,Bento Gonçalves, Boa Vista do Buricá, Butiá, Cacique Doble,Campinas do Sul, Candido Godoy, Caseiros, Carazinho,Chapada, Constantina, Dois Irmãos, Dom Feliciano, DoutorMauricio Cardoso, Erebango, Erechim, Farroupilha,Independência, Jacutinga, Nova Hartz, Novo Hamburgo,Parobé, Santa Rosa, São Borja, and São João da Urtiga.

Chapter 51. This chapter is based on the results of a survey of public

markets conducted by Cirrus Research and Software under thedirection of Mari-jo Luciano and under the overall supervision ofMillie Villar and Vic Ignacio of the Central Project Office. Cirrusadministered the field survey, prepared the data, and produced thestatistical results. The questionnaire (Annex 5) was designedjointly by the study teams in Washington and Manila.

2. The first MDP loan for the public market was for 6.7million pesos; the second was for 4.5 million. The public marketproject has been self-financing and has a perfect record formeeting its loan repayment schedule. The mayor would like topay off the loan balance in advance. The market has generatednet annual income (after expenses) of more than 2 million pesossince 1994 and has contributed to municipal revenues. In 1997,the public market operation had a budget surplus of 3 millionpesos (total revenues of 6 million, less total expenditures of 3million). According to estimates produced by the Central ProjectOffice, as of 1995 its financial rate of return was 27 percent andits economic rate of return was 29 percent. The latter would havebeen higher had the indirect benefits to the stallholders been takeninto account.

Annex 11. Most new municipalities were very small. There were 48

new municipalities in Paraná (average population 8,090). In RioGrande do Sul, 20 participated in the project (average population5,545) and another 72 did not (average population 3,929).

BIBLIOGRAPHY

45

Davoodi, Hamid, and Heng-fu Zou. 1998. “FiscalDecentralization and Economic Growth: A Cross Coun-try Study.” Journal of Urban Economics 43: 244–57.

Lee, Kyu Sik, and Alex Anas. 1992. “Costs of DeficientInfrastructure: The Case of Nigerian Manufactur-ing.” Urban Studies 29: 1071–92.

Lee, Kyu Sik, Alex Anas, and Gi-Taik Oh. 1999. “Costsof Infrastructure Deficiencies in Manufacturing inIndonesia, Nigeria, and Thailand.” Urban Studies(forthcoming). (Also available as World Bank PolicyResearch Working Paper No. 1604, 1996.)

Llanto, G. M., and others. 1996. Local GovernmentUnits’ Access to the Private Capital Markets. Philip-pines Institute for Development Studies.

Picciotto, Robert, and Rachel Weaving. 1994. “NewProject Cycle for the World Bank?” Finance andDevelopment. World Bank, Washington, D.C.

Secretariat of Urban Development. 1997. Urban Policy

in the State of Paraná: Lessons of Experience,Challenge and Opinions for the Future. InternationalRoundtable Meetings. State of Paraná.

PIMES. 1998. Avaliacao de Impacto do FUNDOPIMES.Rio Grande do Sul State Development Bank(BANRISUL).

U.S. General Accounting Office. 1990. Case StudyEvaluations. Transfer Paper 10.1.9. Program Evalu-ation and Methodology Division. Washington, D.C.:U.S. Government Printing Office.

———. 1991. Designing Evaluations. GAO/PEMD–10.1.4. Program Evaluation and Methodology Divi-sion. Washington, D.C.: U.S. Government PrintingOffice.

———. 1992. The Evaluation Synthesis. GAO/PEMD–10.1.2. Program Evaluation and Methodology Divi-sion. Washington, D.C.: U.S. Government PrintingOffice.

47

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Poland Country Assistance Review: Partnership in a Transition Economy

Reforming Agriculture: The World Bank Goes to Market

The World Bank’s Experience with Post-Conflict Reconstruction

Zambia Country Assistance Review: Turning an Economy Around

Multilingual Editions

Assessing Development Effectiveness: Evaluation in the World Bank and the International Finance Corporation

Appréciation de l’efficacité du développement :L’évaluation à la Banque mondiale et à la Société financière internationale

Determinar la eficacia de las actividades de desarrollo:La evaluación en el Banco Mundial y la Corporación Financiera Internacional

Côte d’Ivoire : Revue de l’aide de la Banque mondiale au pays

Philippines: From Crisis to Opportunity

Filipinas: Crisis y oportunidades

Rebuilding the Mozambique Economy: Assessment of a Development Partnership

Reconstruir a Economia de Moçambique

Proceedings

Lessons of Fiscal Adjustment

Lessons from Urban Transport

Evaluation and Development: The Institutional Dimension (Transaction Publishers)

Monitoring & Evaluation Capacity Development in Africa

Public Sector Performance — The Critical Role of Evaluation

OED SERIES

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 theBank’s Board of Executive Directors. OED assesses what works, and what does not; how a borrower plans to run andmaintain a project; and the lasting contribution of the Bank to a country’s overall development. The goals of evaluationare to learn from experience, to provide an objective basis for assessing the results of the Bank’s work, and to provideaccountability in the achievement of its objectives. It also improves Bank work by identifying and disseminating thelessons learned from experience and by framing recommendations drawn from evaluation findings.