Leonardo G. Romeo United Nations Capital Development Fund Local Development Unit (LDU)

1. Leonardo G. RomeoUnited Nations Capital Development FundLocal Development Unit (LDU) Nicaragua Decentralization reforms: driven by politics and constrained by a weak inter-governmental system Workshop on Decentralization and Poverty Reduction: From Lessons Learned to Policy Action, Paris, 29-30 September 2004

2. Basic Facts Surface = 121,428 sq. Kmlargest country in C.A.Population(2003)Total = 5,482,340Urban = 3,191, 670 (58%)Rural = 2,290,670 (42%)The Economy(2002)GDP = US$ 2.5 Billion(Nicaragua has the smallest economyin Central America- Biggest is Guatemala). GDP/capita = US$ 472(Nicaragua has the lowest per capita income in Central America-Highest in Costa Rica)HDI = 0.667(Latin America average = 0.777)

3. Administrative divisions Nicaragua is divided into: 15 “Departments”(administrative structures)2 Autonomous Regions(elected Councils)152 Municipalities(elected Councils) The territory of a Municipality includes both urban areas (“casco urbano”) and rural areas (“comarcas”). Such arrangement, common in Latin America, represents both an opportunity and a risk for the voice of the rural poor.

4. Size of Nicaraguan Municipalities

5. Poverty by municipality 48% of the population is poor (< 402$/c/yr) 17% of the population is extremely poor (<212$/c/yr) Poverty is mostly rural • 68.5% of the poor live in rural areas and • 75% of the extremely poor live in rural areas Most of the poor, whether urban or rural are heavily involved in agricultural employment The extremely poor are geographically concentrated in the municipalities of the central and Atlantic regions.

6. Decentralization reforms : the legal framework Three milestones: • The Constitution of 1995 • The Revised Municipal Law of 1997 • The Fiscal Transfers Law of 2003 • The 1995Constitution • Affirms the political, administrative and financial autonomy of LGs • Recognizes the broad responsibilityof LG to promote the development of their municipalities and the welfare of its citizens • Stipulates that, by law, the State will transfer a percentage of its fiscal revenue to municipal governments. • Limits LG autonomy by granting to the National Assembly the authority to create or abolish taxes and approve the LG yearly budget revenues.

7. Decentralization reforms : the legal framework • The Municipal Law (n.40/261 of June 1997) • Reaffirms that the municipalities have a general responsibility for “all matters concerning their economic development and the protection of their environment”. • Assigns to LG a long list of specific responsibilities including • the delivery of traditional local government services (water, solid waste, slaughterhouses, markets, urban planning and building permits, etc.) • the co-provision, “in coordination” with responsible central agencies of other services (primary health, rural roads and bridges, environmental protection, etc.) • But remains vague in defining: • which responsibilities are mandatory and which are permissive and • what constitutes a minimum set of LG services delivery obligations.

8. Decentralization reforms : the legal framework • The Fiscal Transfers Law (n.466 of August 2003) • Implements the Constitutional mandate to transfer a share of domestic fiscal income (mainly for equalization purposes), and sets the share at 4% in FY2004, growing to 10% in FY 2010. • Distributes the resources according to a formula based on 4 criteria of equal weight :(i) fiscal equalization, (ii) population, (iii) fiscal effort, (iv) spending rate • Sets some “conditions of access” (mainly procedural), but does not elaborate on their administration • Foresees the possibility of external funding to the national fiscal transfers, but only as “additional” to the budgetary transfers • Allows the use of transfers for both capital and recurrent expenditures in varying proportions depending on the municipal classification in categories of fiscal revenue .

9. Lessons learned and critical issues • Decentralization has been driven by national politics rather than by national policy, and a strong “municipal movement” plays a key political role. • The State has not invested in a robust system for support and supervision of local authorities, leading to systemic failures of inter-governmental accountability . • The “local choice” and “agency” functions of LG are not clearly articulated. LG services delivery responsibilities are ill-defined and the role of municipalities in implementing the PRS is not developed • Fiscal transfers have addressed a pre-existing unfunded mandate problem but have raised new issues of macro-level fiscal imbalance. • The design of the transfers system (formula and administration) has been • Rather effective for equalization purposes • Less effective as incentive to local performance and • Less effective to mobilize external aid for municipal-level budget support. • Improved PEM procedures have been introduced and opportunities for popular participation have been expanded • The use of increased municipal resources for poverty reduction has been constrained by reluctance to devolve pro-poor infrastructure and services delivery responsibilities and strengthen municipal accountability

10. (1) Decentralization and Politics • Everywhere, decentralization reforms are politically driven. In most developing countries reforms are initiated by the party in power , which expects from decentralization (usually “political” rather than “administrative” or “fiscal”) strategic political advantages. • Nicaragua and other Latin American countries offer a variation of such pattern: political elites that are “centralist” when in power, turn to “decentralist” when out of power, where they can “ride the tiger” of a historically strong “municipal movement”. • Decentralization reforms therefore proceed (or retreat) in response to the immediate demands of politics rather than to a central policy initiative.

11. (2) Weak State support & supervision of LG • Lacking a strategic initiative, the State has not invested in its own structure for support and supervision of the LG sector (INIFOM = Nicaraguan Institute of Municipal Development). • INIFOM, does not have the mandate and legal status of what elsewhere are (i) Ministries of Local Governments (British system) or (ii) Dept. of Local Authorities in Min. of Interior (French system). • INIFOM has been historically used as government's vehicle for politically-motivated financial support to municipalities (often becoming simply an instrument of the electoral campaign of the party in power). • Recent donor-supported attempts to raise the profile of INIFOM and link its capacity building mandate with the monitoring of municipal performance and the certification of municipal compliance with performance-based conditions of access to the general transfers have been frustrated so far by lack of State investment in INIFOM and fierce resistance by the municipal movement.

12. (3-a) “local choice” vs. “agency” functions • Central Government : • Has been mainly concerned with how LG could help implement its own (central) poverty reduction policies, bringing to bear their potential allocative and productive efficiency (LG as “agents” of the State) • Has been slow in recognizing and appropriately support the LG exercise of “local choice” to develop effective “local” policies for poverty reduction (both growth promotion and safety nets) • Has long insisted on the Social Fund and other central agencies as the main conduits for local investments financing and as a de facto “alternative” to fiscal transfers. • Now needs to clarify the scope for devolution and delegation arrangements for services delivery in sectors critical for poverty reduction (agriculture, health, education, rural infrastructure) in order to effectively bring municipalities to play a role in the implementation of the PRS.

13. (3-b) National priorities and local demand : the view from San Miguelito

14. (5) “finance follows function”…or the other way around ? • Fiscal transfers were enacted in 2003 to enable municipalities to fulfill the extensive responsibilities assigned by the Municipal Law of 1997 • However, given (i) the nature of the responsibilities (strictly municipal) or (ii) the lack of definition of how shared responsibilities could be co-financed,no corresponding cuts in central spending were foreseen, leading to potentially serious fiscal imbalances (a common problem in the region) • WB and IMF are now proposing to “re-capture” part of the transferred resources through a system of “matching grants” managed by central agencies that finance investments in local development (FISE , IDR, INIFOM) • This proposal may result in increased inter-governmental cooperation in the interest of effective national policies implementation, but : • Downplays the scope for funding the transfers through broader policy changes and central budget restructuring • Substantially reduces the scope for “local choice” in developing pro-poor policies and programs • Continues to privilege funding of anti-poverty programs through central agencies rather than to empower local governments and simultaneously strengthen their accountability to the State.

15. (5-a) FT: equalization but not incentives to performance • Since 2000, an attempt has been made to measure the fiscal income potential of municipalities and transfer resources to fill the gap with an equalization standard. The transfers have then effectively contributed to fiscal equalization among municipalities (see next slide) • According to the 2003 FT Law, one quarter of the transfers is to be distributed in proportion to the effort of individual municipalities to collect property taxes. It’s too early to assess whether this is an effective performance incentive on the revenue side. • “Conditions of access” to the transfers (adoption of participatory planning, proper budgeting and accounting), have been set, but their administration is weak and they are unlikely to provide an effective performance incentive on the expenditure side. • The FT Law foresees the possibility of external financing of the transferable pool, butbars the government from using project aid or “basket funds” to substitute for its own funds in the achievement of the annual target of transfers as a % of domestic tax income.

16. (5-b) the equalization effect of fiscal transfers (2002)

17. (6) Improved local public expenditures management Substantial progress has been made to: • Introduce strategic municipal planning • develop statutory participatory planning/programming and budgeting institutions • Introduce program-based local budget formats and restructure accordingly the municipal administration • Enhance own-source revenue mobilization through improved property registration and taxation

18. (7) The scope for municipal pro-poor action remains limited • Local development for poverty reduction is still mainly a national responsibility and it is carried out through national agencies and programs (FISE, IDR, INIFOM) • Through improved local planning institutions Municipalities have increased their capacity to influence the allocation of resources and the implementation of activities under these programs. • The Central Govt. is currently more concerned about how to increase municipal co-financing of nationally managed pro-poor programs, than about how to devolve responsibilities and strengthen local accountability for pro-poor services delivery • Undefined responsibilities for infrastructure and services delivery in critical sectors (health, education, water and sanitation, rural infrastructure) continue to limit the scope of local pro-poor action. Municipalities also hesitate to engage in promotion of local economic development, in spite of strong local demand. • Therefore the bulk of municipal resources (from own source or transfers) is still used for a limited range of traditional municipal investments (intra-urban streets, parks, solid waste management, etc.). Nevertheless, municipalities are also often a source of emergency social assistance to the poorest and destitute.