"reconstruction must not be at the expense of transformation"

The Roles and Relationships of the Social Investment Funds, Local Governments and Communities in Central America
Patricia Durán de Jager
Executive Director, Federación de Municipios del Istmo Centroamericano (FEMICA)
Guatemala, May 1997

Introduction

The Central American municipality has evolved during the last decade. We have today a municipal government that is the product of popular elections. Local democracy demands perfection and in this sense, it is necessary to complement the representative democracy with participative democracy. Thus, citizen participation is indispensable for the strengthening of the municipal government. This is the great challenge of Central American democracy.

Presently, citizen participation is opening up, within the existing legal framework and with new legal reforms, so the community can channel its demands and actively participate in its own development.

The social investment funds (SIFs) can contribute to the strengthening of local democracy by linking local government with the community. In this way they are also guaranteeing a municipality with a capacity to respond and citizens with the will to pay the costs of social investment.

From the point of view of efficiency, SIFs should coordinate actions with the institutions of the central government and with the municipalities. This will contribute to the efficiency of the local government, mainly in the generation of resources: to improve the cadastre (official land register) and the collection capacity, to modernize the collection capacity, to modernize taxes and to improve the efficiency of the service rates. In other words, to reorganize the extremely low local taxation system in Central America. Additionally, measures should be taken to complement the municipal administrative, technical and management training.

Based on this point of view, FEMICA has insisted that the modernization of the Central American state requires the integration of the municipal government within an overall view of nation/municipality/community, whereby the municipal government takes the responsibility for its community development. One of the greatest challenges of this local government is the generation of local employment.

Despite the evolution of the Central American municipalities, they are characterized by their atomization and the majority of them are rural and have high poverty indexes. Therefore, any development strategy should consider the 70 per cent of the population of our region that is poor.

The only partner of the central government that can generate its own resources for investment is the local Government. And this fact has not been taken into account in approaching the struggle against poverty. Nevertheless, this also requires everyone's commitment and responsibility. One of the important issues that we have to deal with is that the local tax system in the region is one of the lowest in relation to the Gross National Product. Guatemala and El Salvador register a rate of 0.1% and 0.2%; Costa Rica, Panama and Honduras, 0.4%, 0.5% and 0.8% respectively. Nicaragua presents an extraordinary situation; this country has a tax pressure of 2.08%. This presents us with another great challenge, which is to generate a new local tax ordering, to increase local revenues that will strengthen the internal saving in order to capitalize social investment.

If we improve the tax collection, if we modernize taxes and if local governments are given the capacity to revalue properties in the frame of the territorial tax, the resources would be higher. This strengthened local government will then be able to cofinance SIF projects and allow it to have a qualitative change, transforming itself into a cofinancing institution and avoiding the practice of most other countries where Social investment funds finance almost the totality of the projects because the contributions of the community are only symbolic.

It is important to emphasize that transfers from the central to the local government should be direct, punctual and automatic. This would allow the local Government to take into account these resources in planning their investment projects. The poorest municipalities that depend on these rapid transfers would benefit most.

It must be clear that the biggest problem facing the operation and the sustainibility of the SIF projects is the lack of resources. This responsibility does not lie exclusively on the community.

We share the fact that not all the municipalities have the capacity to assume the dynamics of development. There will be many municipalities that do not have a suitable environment for an economic development, and, therefore, for a tax collection that encourages that development. We also will find communities that do not have payment capacity for a fair rate (based on cost/benefit) so that their services have to be subsidized.

Any strategy promoted by the governments should be mainly directed to support those municipalities with the potential for development, so that later they would induce development in those less favored and contribute to its replicability.

The former does not mean to leave the poor communities to one side. On the contrary, it is necessary to establish appropriate mechanisms according to their situation, which contribute to the redistribution of revenues. A typical example of this is the territorial tax that, because of its own nature, benefits a few and affects the poorest people. In Costa Rica, 8 percent of the money collected by this tax is distributed among the poorest municipalities.

We can be very creative trying different formulas to help to avoid the widening of the gap among municipalities. There is another mechanism that can help to compensate the imbalances among them, that is, the collaboration among a combination of poor and less poor municipalities to supply some necessities, interacting jointly. Examples of this could be the sharing of drinking water supply systems, the handling of solid waste and even administrative systems, when there is no management capacity to handle them.

Another important issue to touch on is the viability to incorporate the SIFs in productive projects. For FEMICA these kinds of projects should be implemented mainly in the poorest counties. There, the emphasis should be on the people in order for them to generate agricultural production for their sustenance, and if it were possible, to produce some excess that would allow them to improve their economic situation. In some cases the manufacture of typical crafts could be exploited; in other cases, the creation of microenterprises could be encouraged.

In those municipalities with higher capacities, investment ideas for new enterprises that utilize local raw materials and that promote new entrepreneurs should be stimulated. One of the challenges of the SIFs should be the investment in the productive area since it will generate permanent employment.

Finally, we should be clear that in order to achieve the participation of the local government and the community, there must be incentives. The biggest incentive is not to leave them aside from the actions of the SIFs, and in this sense we are presenting the following proposal:

A Proposal from FEMICA to Link the Social Investment Funds with the Local Government and the Communities

In Central America, a series of forums have taken place in order to evaluate the SIFs performance and to discuss some future actions. One of these forums took place in El Salvador from April 14 to 17; some of the conclusions of these forums have a special meaning for FEMICA:

The participants underlined that environment affects the performance of the SIFs, and consequently each SIF is different. However, they have the following characteristics in common:

• The relation of the SIFs with the municipalities and the communities is still vertical.
• The emphasis is on the quantity of actions instead of their quality.
• Citizen participation usually takes place on the identification of projects, but not during their design, follow-up and evaluation.
• There is little investment in training the beneficiaries on how to improve and maintain the infrastructure projects.
• The municipalities are the institutions with the greatest legitimacy, the greatest possibilities for consensus and governing, but they need more resources and technical capacity for the implementation of development actions.
• One of the ways to strengthen citizen participation is to facilitate (to make easier) the transition from financing processes to the management and execution of the resources by the community.
• The fundamental cornerstone to motivate community participation is the local government's interest in training programs and participation.

Some of the most important conclusions are:

• Criteria should be used for the allocation of resources instead of menus.
• Manuals should be simplified.
• Give the resources to the municipal governments and to the communities for the hiring, thus reinforcing supervision and technical assistance.
• The request for financing should come directly from the community, supported by the municipal governments.
• Strengthen the preinvestment phase of the projects, through the allocation of financial and technical resources, in order to integrate the community as part of the project.
• Ensure the functional autonomy of the SIF by transforming them into autonomous and decentralized organizations.

In analyzing SIFs performance in the region and taking into consideration the way that mayors and specialists feel and visualize it, FEMICA has structured a practical proposal to link local government, the community and the Funds respecting their nature, objectives and the particular characteristics of the country where they are placed.

Some elements of the proposal are theoretically considered from the experience in Honduras. The Honduran Social Investment Fund is the only SIF that has been working with the local government, resulting in a rich experience.

The basis for the proposal is that the transfer of prioritization, execution and supervision will be done gradually, taking into consideration the capacity of the municipality and the interest of the community in this new role. Therefore, the following conditions should be present to execute the work jointly:

• The functions and responsibilities of the SIFs should be transferred with their respective resources and training to those local governments with a suitable environment and with the potential to increase their own resources.

• In order to formalize the combined work of actors and facilitate the coordination of actions at the local level a general framework agreement and specific agreements among them should be carried out.

• The representation of the community that will benefit from the project should be formally structured before, during and after the conclusion of the work in order to ensure its sustainability.

• The local government and the citizens should make the prioritization of the projects the responsibility of the municipality.

• In the project cycle, the municipal government and the community should manage the resources and the contracts for the execution of the projects.

• The SIFs should support institutional development of the local governments.

• The local governments should form a social municipal fund with their own resources in order to help finance social investment.

In order to achieve an effective transition of the resources and roles of the Social Funds, a series of actions and commitments should be made by the different actors. This transition should be made gradually depending on the evolution of the capacity of the municipalities to absorb the functions, responsibilities and resources of the SIFs.

As management, technical and financial capacity increases, the functions and responsibilities could be transfer from the SIFs to the municipalities.

The actions, mechanisms and basic commitments among the actors can be summarized as follows:

• There should be a willingness by the municipal government to receive new functions and responsibilities and to transfer others that can be executed by the communities or the NGO's with greater efficiency and lower cost. This disposition can be achieved by giving incentives to the municipality such as the involvement of the local government and community in the prioritization of projects; the availability of resources to make pre-investment studies; the transfer of the works to the municipal government when it is feasible according to the nature of the project; and especially fundamental, the institutional development of the municipal government.

• There should be political will by the SIFs and of course from the Executive level for the transfer of functions and responsibilities to the local governments and their communities, in order to keep Social investment funds from having only a marginal impact the community. On the contrary, they should participate actively on the promotion of municipal development, guided by the municipal governments and the trend of decentralization that is taking place in the region.

• There should be conscious participation on the part of the community, and social accountability should be introduced as one of the best ways to give transparency to the use of the resources and to the quality and subsequent protection of the works.

• In the health and education areas, in those countries where these functions have not been decentralized, the agreement should include a commitment by the central government institutions, represented by its respective line ministries, to equip the infrastructure works and ensure their operation.

• Civil Society, represented by the NGOs or other kinds of organizations, should participate, assuming the role of trainer, contractor of the works or resource provider, in their areas of interest when they have the capacity to execute these functions.

In order to achieve an effective coordination between the SIF and the municipal government on joint work, the National Association of Municipalities and the SIF would endorse a General Agreement. In this agreement, the municipalities are classified in three categories according to the index of poverty; this classification will also be the basis to establish the counterpart requirement of the different actors for the execution of the projects.

This agreement would define the general commitments of both entities to guarantee the execution of the projects and their agreements to support the process of strengthening of the local government and the community.

The second step would be the signing of a Memorandum of Understanding among the SIF, the municipal government and the respective line ministries. This is a declaration of good will, and therefore does not identify the works that will be realized. Nevertheless, the agreement should establish the contribution and responsibilities of each actor. The "social financing basket" would continue to be structured on the base of the index of poverty, in such a way that the less poor would contribute on an equal basis with the Fund; the moderately poor would contribute one-third part and the Fund the other two-thirds; and in the poorest municipalities the contribution of the municipal government would be a fourth of the total and the rest of the resources would come from the Fund.

The agreement would establish a commitment by the respective line ministries, to ensure the operation of the works under construction with resources of the Fund and also to equip them with personal, furniture and general supplies. This is especially important on those countries where these sectors have not been decentralized.

There will be stipulated technical and administrative commitments of the municipal government, as well as those of the SIFs, like the training, preinvestment, and the commitment to support the municipal government's investment plan, elaborated and prioritized by consensus with the community.

The third step is the signature of an agreement between the municipality and the SIF for each project to be executed.

The specific agreement will include at least the following elements:

• The identification of the project with the investment amount and the declaration that if the project exceeds the agreed amount, the increment of the investment would be financed in the same proportion as in the original amount.

• The commitment from the municipal government to elaborate the preinvestment studies (eligibility studies, technical memory and final project designs); this would imply the transfers of resources from the SIF to the municipal governments, so the latter could be able to take the projects to completion.

• The form of cost recovery the projects (rates, contributions for the improvement of the infrastructure works, or other, depending on the nature of the project.)

• The basis for the establishment of the rates or contributions (which items will be recovered by the rates: operation, maintenance, depreciation, etc.); which mechanism or combination of them will be used to fix the contributions or taxes (contribution for the improvement of the infrastructure work by the owners of the real estates benefited, contributions by the project users, etc.). Additionally, the municipal government 's commitment should be specified to inform the users of the estimated rates that they should pay in order to use the services that have been improved.

• The obligation of the municipal government to arrange the project with the community by mechanisms determined by the legal framework of the country, before the signature of the agreement.

• The obligation of the community and the municipal government to create a Support Committee for the project, which should be structured previous to the construction of the works and should remain in place after their conclusion, to ensure their adequate operation and maintenance and also to ensure the payment of rates and contributions from the users.

• The obligation of the municipalities to maintain a management structure with adequate personnel to operate and maintain the services (public services unit) that will work in coordination with the Support Committee.

• The obligation of the municipal government to provide its counterpart according to a payment calendar prepared by the SIF.

Even though the community starts to pay for the project only when they start receiving the services, their commitment to pay the fair rates is established prior to the execution of the project, during the public review process.

The representation of the community in the project will be ensured by the Support Committee, structured with representatives of the project beneficiaries and the municipal government, during the same public review process or mechanism for the participation of the community where the project was approved by consensus.

The principal functions of the Support Committee will be the identification of all the direct beneficiaries of the project by a census; there will be also an identification of the labor force available for the project.

Something of special importance is that the Support Committee should exercise the function of Social Auditorship in the construction and supervision of the projects. This function would be expanded, if the municipality handle the resources for social investment.

After the construction of the work, the Committee would continue its leadership in order to stimulate and coordinate the payments from the users of the services and to follow up the appropriate operation and upkeep of the infrastructure works. They will also contribute to its protection.

In order to promote development, it is necessary for the local governments to define strategies that will give dynamism to this process. On this sense, we believe that the identification of projects to be financed with social resources should not be improvised. Instead, this should be the product of participative planing by the local government and the communities.

The municipal governments are the ideal entities to conduct the participative planning; they can structure investment plans by consensus with the community, taking into consideration the available resources. This investment plan should be incorporated in the annual budget that, according with the law, the municipalities have to produce.

This model of planning will help to overcome the short-term vision that affects most local governments. It will encourage the establishment of a vision of the future of the municipality that will be appreciated by its own residents.

When there are no concerted and prioritized municipal investment plans, the municipal government should convene a public council, a public audience or other available mechanism according to its legal framework, to explain the project; if the community approves the idea, the project should continue. On the other hand, if the community objects to the project, the municipal government should respect the peoples’ will; it should take ideas for projects proposed by the community, and evaluate them to see if they are strategically correct for the community.

Once the beneficiary community has approved a project, the municipal government should arrange for the proper preinvestment studies (eligibility studies, technical studies and final design of the project). If the municipal government carries out these tasks, the SIF should include a component for financing and training in order to support the preparation of these studies.

This model will make viable the execution of the projects and will also leave installed capacity in the municipalities to formulate and evaluate projects. In order to implement it, it will be necessary for the social investment funds to widen their menu of preinvestment and training activities.

Mayors and councils often prefer to execute the projects, nevertheless we believe that this is advisable only if there is nobody else in the community that will take on this function.

The objectives of generating jobs in the community and strengthening the private sector should be primary, giving local contractors or non-governmental organizations the opportunity to execute the projects. Thus, the use of local materials and labor force would be guarantied, contributing to lower costs and community participation.

Once the infrastructure work is finished, the responsibility for management and operation will be absorbed by the department of municipal public works and services in coordination with the Support Committee defined on the specific Agreement.

The transfer of the execution of the projects to the local governments and its communities should be accompanied by the transfer of the respective resources, to expose them to a transparent administration. This represents an incentive for the municipal government and the community to contribute with a counterpart and to take the responsibility for the sustainability of the works.

The key question is how to handle these resources transparently. The answer is with the intervention of the community implementing Social Auditorship.

In this sense, the transfer of the cycle of the project to the local government and its communities should imply giving them the necessary training and instruction, not only to have an efficient and transparent management of the resources but also for the technical management of the project. In this way, the SIF should contribute to a transfer of know-how and technology. This will be achieved by a process of "learning by doing" and not only by an interchange of personnel.

Even though, this plan is oriented to the municipalities with potential for development, the less favored would not be excluded from the different phases of the projects, depending on their complexity.

The central government may have many arguments against the participation of the municipal governments in SIF projects, such as, potential politicization and corruption. However, it will be emphasized that local governments do not have a monopoly on these occurrences. For example, the fact that the Funds can only use private contractors for the execution of the projects can generate corruption. This sort of procedure has provoked clientelism whereby friends and relatives obtain benefits from these Funds.

The actions of the SIFs, because they respond to the Executive level of government and because they attend to the urgent needs of the community, are highly prone to becoming politicized. It is also not uncommon for presidents of the SIFs to have their own political agendas.

Contrary to the position of the central government, we believe there is more potential for avoiding the possibility of corruption and other such risks at the local level. The local government is nearest to the community and therefore more subject to its control. This situation makes it easier to create mechanisms to guarantee the transparent and efficient handling of resources, such as social auditorship, and also to make more transparent the contracting and control of the projects.

This focus deserves a strong element of technical assistance and training for the local government, because they will be responsible for operating, managing and sustaining the works that will be carried out with the Social Fund resources.

Supporting this objective does not imply that the SIF should increase its administrative structure to attend simultaneously to all of the municipal governments of a country. On the contrary, we believe that the SIFs should reduce to a minimum their administrative structure and should lower the costs of the works, transferring to some other local organizations, such as the NGOs, the functions of technical assistance and training, as long as they have the capacity to do it.

The SIF can coordinate this training with different institutions of the central government that have representation at the local level, such as the Institutes of Municipal Development (in the countries that have one ) ministries and Secretaries for planning, etc. In Central America, the role of these Institutes is being evaluated. This will be an appropriate opportunity to identify the cooperation in the area of training and technical assistance that they will provide, to support the social investment of the SIFs and the municipal government.

We agree that it is indispensable for the municipality to generate its own resources, therefore areas such as municipal finance, municipal cadastre, tax collection, rates and mechanisms for charging should be emphasized. It is also obvious that it is necessary to strengthen the local government in municipal management, as well as in mechanisms of participation.

Other new intermediate entities of public administration (such as the Development Councils in Guatemala, Departmental Councils of mayors in El Salvador, District Councils in Costa Rica, etc) can be useful in the decentralization process, in order to succeed in putting approval of projects nearer to the beneficiaries and to facilitate the responses to their demands.

The possibility of transferring to these entities of public administration some phases of the project that can't be executed by the poorest municipalities should also be evaluated.

It will be necessary for local governments to capitalize their own social investment funds within the municipality in order to accomplish the role assigned to them through this model. This fund would be useful to improve the feasibility of the works or to help support the execution of important projects that can’t be financed entirely by the SIFs.

In order to achieve its objective, the municipal social fund should be constituted with resources from the municipality and the beneficiary community and its operation should be overseen and controlled through social auditing.

The municipal government contribution would come from their current savings account, from government transfers, or from any other contribution that the municipality receives; the resources of the community could be generated by contributions from the beneficiaries, the availability from the neighborhood organizations that are benefited or from other sources.

The percentages of participation will be determined depending on the municipal and beneficiaries’ capacity, but it is considered that at least the beneficiaries should cover a third of the amount of the Fund.

Based on the former arguments, it can be said that the institutional development of the community will be the best way to assure that the projects developed with the social funds will have the desired impact, and at the same time leave an installed capacity at a local level for the time when the SIF presence is no longer possible.

For more information on the workshop, contact
Mr. Lionel Nicol (lioneln@iadb.org)
Inter-American Development Bank
(202) 623-1079

Nicaragua, May 2000   -   Honduras, February 2000   -   Stockholm, May 1999