Report No. PID10210 Project Name Mexico-Municipal Development in Rural (@) Areas Region Latin America and Caribbean Region Sector Decentralization;Institutional Development; Other Environment Project ID MXPE60686 Borrower(s) UNITED STATES OF MEXICO Implementing Agency Address CEDEMUN (NATIONAL CENTER FOR MUNICIPAL DEVELOPMENT) CEDEMUN Environment Category B Date PID Prepared April 10, 2002 Auth Appr/Negs Date April 17, 2002 Bank Approval Date July 9, 2002 1. Country and Sector Background The Bank and the Government of Mexico have collaborated on developing decentralized approaches to reducing rural poverty in Mexico since the early 1990s. Beginning in 1991, the Decentralization and Regional Development Program (DRD) tested and subsequently mainstreamed mechanisms which have strengthened the authority and capacity of state and local governments to manage public finance, establish investment priorities and provide basic small-scale social and productive infrastructure. Following the success of the first project, DRD I (loan 3310-ME), the Government requested a follow-on operation to further accelerate the decentralization process, improve the targeting and quality of state and municipal investment programs, and strengthen state-level institutions involved in rural development and rural poverty alleviation. The second project -DRD II (loan 3790-ME)- began implementation in 1995, continuing through 2000. The financing of decentralized development in Mexico has also evolved over the past decade. From 1990 through 1997, Federal budget support for investments in small-scale municipal infrastructure was executed by a Federal agency -the present SEDESOL- under the umbrella of the poverty alleviation strategy. In 1998, a decentralization reform made these funds available directly to municipalities. While these changes were designed to better link local-level investment demands with the necessary finance, they required a level of administrative and managerial expertise which tested the capacity of municipal governments. To address this, a small percentage of this funding was made available for municipal institutional development. Under DRD II, some US$1.7 billion were channeled through municipal development councils across eight states. These resources were applied under a community-driven development (CDD) methodology, with local communities reaching decisions about their investment priorities and taking part in the implementation of these investments with the support of Municipal Planning and Development Councils (COPLADEMUN). From 1998 through June 2000, over 107,000 subprojects were implemented at an average cost of US$15,000.The proposed Municipal Development in Rural Areas project (DRD III), builds on the successful experiences of the previous projects. The project will specifically target rural municipalities in the participating states, as identified by their level of rural population, current access to basic infrastructure and other socio-demographic indicators (see Annex 3 for more details). In line with lessons learned from the previous projects, DRD III will work to consolidate the participatory processes already in place for identifying and executing local-level investments in rural infrastructure, strengthening administrative, technical and managerial capacity of municipal governments in pursuit of these investments, and working with Federal and State levels of government to construct a framework for accelerating municipal development. 2. Objectives The proposed project aims to reduce the incidence of rural poverty in rural areas of participating states by (i) supporting investments in basic small-scale social and productive infrastructure, utilizing a proven effective community-driven development (CDD) approach, (ii) strengthening municipal administrative and technical capacity to increase the efficiency of municipal investments, and (iii) deepening the ongoing decentralization from Federal to the State and Municipal levels. 3. Rationale for Bank's Involvement The value added of Bank support in this Project is three pronged: (i) to deepen the CDD approach to stimulate municipal development, based on a blend of recent Latin American and Mexican experiences; (ii) to capitalize on the field experience accumulated through the DRD I and II Projects since the beginning of the 90's with respect to basic infrastructure development at the municipal level; and (iii) to play a decisive role towards the coordination of municipal institutional development programs.Besides its knowledge of relevant experiences, the Bank is already involved in a direct dialogue with stakeholders that could facilitate coordination with other Bank- financed programs. In particular, important synergies could be pursued with the on-going Rural Development in Marginal Areas Project, where the performance of the Regional Councils also depend on the active and knowledgeable participation of municipalities and their capacity to contribute to regional development with own resources, and with the Urban Upgrading Project (in preparation), where Municipal Development is a common field of interest. 4. Description The total project cost is US$642.875 million, of which the Bank will finance US$54.35400.0 million. Component One (Municipal Subprojects, US$545.5 million or 85 percent of total project cost) would provide matching grants to rural municipalities to support some 35,000 demand-driven subproject investments in small-scale social and productive infrastructure. Types of investments would include, inter alia: water supply and sanitation, construction of schools, health centers and community development facilities, waste disposal, rural electrification and rural road improvement. Under this component, rural communities would determine their investment priorities and, along with other communities in their respective municipalities and following a given annual budget envelope, take part in COPLADEMUNs to select a set of investments for execution. These Councils would then carry out these subprojects, to which local communities would also contribute (in cash or in-kind) a minimum of 10 percent toward total subproject cost. Subprojects would be subject to -2 - a cost ceiling of US$50,000 in most cases. Following completion of the subproject, communities would be responsible for operation and maintenance. Component Two (Municipal development and support for decentralization, US$57.0 million or 9 percent of total project cost) would offer technical assistance to strengthen the process of decentralization and build a framework to enhance municipal development. The component would develop a coordinated approach among the Federal, State and Municipal governments to foster better managerial practices in dealing with small-scale infrastructure investment and delivery of services, and better management of municipal human resources. Among the activities under this component are: (i) diagnostic studies of existing Federal, State and Municipal programs and their institutional capacities, (ii) technical assistance to develop new programs or to improve existing ones, (iii) development of monitoring capacities, (iv) establishment of coordination agreements between Federal, State and Municipal entities, (v) pilot studies before implementation of programs or agreements, (vi) technical assistance to prepare amendments to laws and regulations referring to municipal issues, (vii) training of key personnel of the Municipalities, (viii) social communication, training and social participation promotion to widely disseminate the objectives and activities under the project; and (ix) surveys about municipal issues.Component Three (Project supervision, monitoring and evaluation, US$40.3 million or 6 percent of total project cost) would finance incremental costs (excluding salaries) of project administration and coordination including supervision, monitoring and impact evaluation. Given the decentralized nature of the project, its success will depend on frequent and intense supervision. 5. Financing Total ( US$m) BORROWER $242.80 IBRD $400.00 IDA Total Project Cost $642.80 6. Implementation Implementation period: Four yearsExecuting Entities:Community Associations are citizen groups with a common interest from the same community which organize to identify their local investment priorities for basic social and productive infrastructure. Having identified these priorities, each community association voices these priorities, as subproject proposals, in the COPLADEMUNs, where municipal-level decisions on investments are made. COPLADEMUNs are representative bodies comprised of primarily delegates from each respective community association within the given municipality. Approximately 70 percent of those participating are representatives of potential project beneficiaries. The remainder (30 percent) are key municipal-level government officials, selected public sector agencies and other representatives of civil society organizations. Operating under an annual budget envelope of available funding, the COPLADEMUN prioritizes (via consensus and a participatory process) those subprojects to be financed in the given year. State Technical Unit (STU) in each of the participating states, will coordinate with the targeted municipalities to provide them with technical support and supervision to more effectively carry out their role in local-level development activities. Specifically, the STU will assist municipalities in - 3 - assessing the technical viability of subprojects selected for implementation. Once subprojects are approved, the STU authorizes the liberation of funds by COPLADEMUN for subproject implementation. The National Project Coordination Unit (NCPU), will coordinate overall project activities in the participating states. This unit will be the existing National Center for Municipal Development (CEDEMUN), a decentralized unit within the Federal Secretaria de Gobernaci6n,.Subproject Cycle: n Community Associations determine their local investment priorities for social and productive infrastructure and voice these priorities to their respective COPLADEMUN;n Working under an annual budget envelope, COPLADEMUN, through a participatory process involving active representation from all municipal community associations, prioritizes subproject investments and establishes an annual subproject investment plan;n The STU conducts a technical assessment of the proposed subprojects and authorizes the liberation of funds by the COPLADEMUN for subproject implementation;n COPLADEMUN then implements the annual subproject investment plan, to which community associations contribute (in cash or in-kind);ft Following completion of the subproject investments, Community Associations take ownership of the subprojects and are responsible for their operation and maintenance.Project Oversight: CEDEMUN will undertake project oversight and overall coordination of project activities in the participating states. CEDEMUN will approve the Annual Operating Plans for the Project and supervise the application of project resources to the participating states. Project Coordination: The State Company for Regional Action (CAR)PRODERALSTUs in the participating states will be charged with the following specific duties: (a) review community subproject proposals for compliance with project guidelines and eligibility criteria in the project Operational Manual; (b) supervise the COPLADEMUNs to ensure they are adequately managing quality of subproject implementation and providing sufficient training support to communities; (c) implement introductory training and technical assistance programs for all COPLADEMUNs (including training on subproject implementation, contracting options, O&M and financial management); (f) monitor performance through the Management Information System (MIS) and periodically report progress to CEDEMUN; (g) prepare annual implementation and physical performance reviews; and (h) submit required subproject documentation to CEDEMUN for preparation of SOEs to be submitted to the Bank. Finally, the STUs will conduct statewide information campaigns to continuously disseminate information about the project and its guidelines to all potential beneficiary communities, thereby increasing awareness, transparency and participation in the program. Project operational procedures: The proposed project would be implemented according to detailed procedures defined in its Operational Manual. This Manual draws on content used under the previous project (DRD II), but has been improved and updated, based on lessons learned from its implementation experience. The Operational Manual consolidates the objectives, mechanisms and procedures under the project for ready reference by the participating states. A user-friendly manual will also be made available to the COPLADEMUNs for their use in training communities about the project. Monitoring and evaluation arrangements: Analysis of project implementation will depend on a database drawn from the project Management Information System (MIS). The MIS used under the previous DRD II is being updated to incorporate international best-practices for use in the proposed project. The MIS consists of three components: (a) a subproject information module, which contains pertinent physical and financial information for each subproject executed by the -4 - COPLADEMUNs; (b) a financial management module, maintained by CEDEMUN, from which Statements of Expenditure (SOEs) are generated, using data provided by the participating states; and (c) a project management module, from which all project reports are generated. The project would also undertake evaluation studies to assess the impact from the subproject investments and the activities surrounding institutional development at the Federal, State and Municipal level. These evaluations would also provide feedback to improve future project operations. These evaluations would entail: (i) annual physical performance reviews to assess the quality and sustainability of common types of financed subprojects, including reviews of municipal-based procurement; (ii) an evaluation/implementation review, carried out at mid-term, to include beneficiary consultations to evaluate project performance and impact as perceived by its beneficiaries; and (iii) a rigorous and comprehensive impact evaluation. Accounting, financial reporting and auditing arrangements: The financial management systemsof CAR PRODERALto be used by CEDEMUN and the participating states were reviewed by a Bank Financial Management Specialist during project preparation for compliance with OP/BP 10.02. Based on this review, the project was certified as a "B". Under the proposed project, CEDEMUN will implement an action plan within the first six months of project implementation (agreed with the Bank). The annual financial audit of the project accounts will also include a separate opinion on the eligibility of expenditures disbursed on the basis of SOEs. According to arrangements for Bank-financed projects in Mexico, the annual financial audit of the project accounts for the period January 1 to December 31 of the year will be carried out by an Independent Auditor,, which is acceptable to the Bank. The audit report will be submitted to the Bank no later than June 30 in the year following the yearthat for which the project accounts are audited. The Auditor's TOR will include the issuance of a management letter on internal controls six months after effectiveness. 7. Sustainability Institutional sustainability: The sustainability of investments in human and organizational capital depends on the success of the efforts to professionalize services in municipal governments. These efforts will be supported by the project through a focus of the institutional development component on improving different managerial practices, including human resources management policies for recruiting, training and retaining personnel. The possibility to extend the period of the municipal administration beyond the present mandate of three years (still under informal discussion) may have a very positive effect on the sustainability of these investments.Physical sustainability: the sustainability of the infrastructure investments has been an issue of concern in past projects. Supervision reports and evaluations by consultants showed poor preventive maintenance and repair practices, causing a shortening of the useful life of facilities. The situation has changed for the better in a limited way when all decision making was transferred to local and community consideration. This transfer of responsibilities should improve the concern for maintenance, repair and full use of the facilities vis-a-vis investments in construction of new works. As practical support to better maintenance, the project proposes both (i) to include rehabilitation and major repairs of existing facilities as eligible items for the investment programs; and (ii) include indicators of quality of service as part of M and E. -5- 8. Lessons learned from past operations in the country/sector Decentralization of fiscal and investment decision-making and implementation from Federal to Municipal governments increases efficiency and leads to superior outcomes. Experience in Mexico and other countries shows that decentralized approaches reduce bureaucracy and administrative bottlenecks and strengthen accountability by placing resources and decision-making in the hands of intended beneficiaries. The COPLADEMUN is a strong example of such an approach. The proposed project will work with these municipal-level organizations to further strengthen their capacity to implement, monitor and supervise local investments.Participation by intended beneficiaries in the determination and prioritization of subproject insures that these investments meet their genuine needs, thereby leading to an increased sense of ownership and greater sustainability. A participatory approach - as followed under the DRD II - will be continued under the proposed project.The municipal role in anti-poverty and development programs has increased steadily since 1998in the last two years and will expand in the future, as a result of continuing decentralization. The project proposes more intense attention to municipal institutional development, considering it as a component, and introduces as an innovation, the consolidation of an institutional framework that would support municipal development. Adopting a Rural Space approach creates the opportunity to forge necessary linkages between more rural and urban localities within the municipal context. The proposed project operationalizes this concept by targeting rural municipalities based on their level of rural inhabitants. There is increasing concern about the weak management capacity of local governments in view of the increased transfer of responsibilities. At the same time, programs that address institutional development of municipal governments are uncoordinated, have low budgets, and lack a clear strategy. The Project directly addresses this concern.Continuity in Municipal governance, made possible through retention of technical and administrative staff, makes for a longer-term planning horizon for municipal investments. The project, through its second component, supports the study of reforms to professionalize municipal servants as a strategy to diminish erosion of human capital and reduction of the present extremely highe turnover of key personnel.Decentralization of resources for rural development, in the absence of careful supervision and strengthening of the entities responsible for project planning and implementation, may compromise the returns on community investments and result in uneven coverage and quality of the infrastructure services being delivered. The Project directly addresses this concern through its second and third components and through intense strong supervission directly in the participating states.A user-friendly monitoring and evaluation system, coordinated at the Federal level, facilitates the subproject evaluation process, provides feedback and necessary information to improve targeting and efficiency, and is an essential management and planning tool. Federal coordination of this function assists in mainstreaming individual state-level experiences. The proposed Pproject, with includes CEDEMUN as the globalcoordinator, would forcing in this way, facilitate the coordination of already existing M and E arrangementsthe flow of information from municipalities to states and from there to a federal agencyities at the level of the participating states.maintains features (i) and (ii), while the other two are imbedded in the implementation design.Poverty targeting mechanisms that are simple, verifiable and based on objective criteria, can foster transparency, minimize political - 6 - interference in project resource allocation and ensure that project resources reach the poorest areas. The proposed project targets resources based on a widely-disseminated formula and opens project benefits to rural municipalities where poverty is most acute.International best practice with CDD indicates that Aa system of checks and balances, clearly-defined and well-disseminated, is essential to ensure proper use of funds and sound targeting of resources. Rules and procedures for such a system, including guidelines for performance incentives and penalties, have beenwill be developed reviewed and updated and are detailed in the project Operational Manual. 9. Program of Targeted Intervention (PTI) Y 10. Environment Aspects (including any public consultation) Issues The proposed project has been assigned a "B" environmental classification. All subprojects would be small-scale basic infrastructure works in rural areas (in most cases, less than US$50,000) and would not pose any adverse environmental impacts. Under the DRD II, under which the same cost ceiling applied, the average cost of subprojects was US$15,000. Environmental guidelines for the DRD II were agreed with the Government and set forth in the project Operational Manual. These procedures worked well for the DRD II and are by law, since 1998, of municipal and communities domain (they are issued by law in all the state regulations that have connection with Ramo 33). Environmental procedures, as well as other aspects of the Operational Manual, have now become Federal law and are applicable not only in the participating states but also throughout Mexico. The States of Puebla, Veracruz and Zacatecas participated in the DRD II, collaborated in the detailing of environmental guidelines for the project, and widely disseminated these guidelines throughout the project area in their respective states. The remaining state - Guanajauto - is following similar guidelines as those established in the other three participating states. Manuals and brochures will be published and made available to potential beneficiaries, through the COPLADEMUNs, to raise their environmental awareness and engage them proactively on environmental issues. The project Operational Manual summarizes all environmental laws and legislation applicable in all the participating states. It also contains an Environmental Checklist for the purposes of screening subprojects in order to ensure that environmental consequences and impacts are properly identified and adequate measures are included in the subproject design. The Operational Manual also contains a negative list, updated where necessary from that list used under the DRD II, specifying those subprojects which would be ineligible for financing. Additionally, for subprojects with any need for environmental mitigation, standard project designs have been developed (e.g., sanitation). 11. Contact Point: Task Manager Julio Cordoba The World Bank 1818 H Street, NW Washington D.C. 20433 Telephone: 202-458-2249 Fax: 202-522-3132 7- 12. For information on other project related documents contact: The InfoShop The World Bank 1818 H Street, NW Washington, D.C. 20433 Telephone: (202) 458-5454 Fax: (202) 522-1500 Web: http:// www.worldbank.org/infoshop Note: This is information on an evolving project. Certain components may not be necessarily included in the final project. This PID was processed by the InfoShop during the week ending April 19, 2002. -8-