Document Of

The World Bank

FOR OFFCLAL USE ONLY

Report No. 12198-CR

STAFF APPRAISAL REPORT

CHILE

MUNICIPAL DEVELOPMENT PILOT PROJECT

NOVEMBER 5, 1993

MICROGRAPHICS

Report No: 12198 CHType: SAR

Infrastructure and Energy DivisionCountry Department IVLatin America and the Caribbean Regional Office

This document has resticted distribution and may be used by recipients oldy in jte performance oftheir official duties. Its contents may not oterwise be disclosed without Wold Bank authorization.

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CURRENCY EQUIVALENTS

Currency Unit = Chilean Peso (Ch$)

Exchange &tW(Year-Average, Observed)

1987 Ch$219.41 = US$11988 Ch$245.01 = US$11989 Ch$266.95 = US$11990 Ch$304.90 = US$11991 Ch$349.22 = US$11992 Ch$362.60 US$1

VVEIGHTS AND MEASURES

Metric System

PRINCIPAL ABBREVIATIONS AND ACRONYMS USED

FNDR - Fondo Nacional de Desarrollo RegionalFY = Fiscal YearGDP Gross Domestic ProductIBRD International Bank for Reconstruction and Development

ICB = International Competitive BiddingLCB - Local Competitive BiddingMISP = Municipal Institutional Strengthening Plan

PEU = Project Executing UnitPM - Project ManualPPU = Project Preparation UnitSOE = Statement of ExpendituresSUBDERE = Ministry of Interior's Subsecretariat of Regional

Development and Administration (Subsecretar(a de

Desarrollo Regional y Administrativo)

FISCAL YEAR

January 1 - December 31

FOR OMCIAL USE ONLY

CONTEN'

LOAN AND PROJECT SVMMARY ....................... Hi

1. H S R .................................The Subnational Public Sector and Its Reform 1. Sector Strtegy 3Rationale for Bankl Involvement . . 4Lessons Leamed from Other Bank Inmvlvement . . 5

2. THE PROJECT ......... ....................... 6Project Ongn .......... ...................... 6Project Objectives ........ ..................... 6Project Components ....... ..................... 6Selection of Muip es........................ 8Project Costs ................................ 8Financing Plan ......... ...................... 9

3. PROJECr INIPLEMENTATION ...................... 11Implementation Arrngements ...................... 11Status of Project Preparation and Inplementation Schedule .... 12Procurement ................... ............. 13Disbursement and Accounts ............... iSAudits ..................................... 16Reporting and Monitoring ........... .............. 16

4. PROJECT JUSTIFCATION AND RISKS ................ 18Project Benefits ........... .................... 18Progmm Objecive Cate ries ...... ................ 18Risks and Safeguards ........ .................... 18

S. AGREEMENS REACHED ....... .................. 20General Conditions ......... .................... 20Conditions of Effectiveness ....... ................. 21

ANNEXES ...................................... 22

A. SELECrION OF THE MUNICIPALMES AND THEIRCHARACIERISTICS ........ ................... 23

I/ This report is based on the findings of an araisa mIissOn that visited Chile betweenJuan 22 and July 2, 1993. Mission members included David Vetter (task menager, LA41E),Mario Rothschild (LA4IE), and Susannh Hoplans (coundt_). Mts Anderan, RobertAsfrd, and Roberto Samayoa (consultant financed via Swedish bilateral asisac)participated in the mission dwing different periods. Omer Hayat provided assise in theprduction of the tables. Superving Manage icluded Aonso Sanchez (Chief, LA4DE)and Ping-Cheung Loh (Director, LA4). The peer revier was WiWliam DiZlinger(TWURD).

This document has a resticted distribution and may be used by recipirats only in the performanceof their official duties. Its contents may not otherwise be disclic-'eI .vi* aout World Bank authorization.

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R LESSONS OF EXPERIENCE FROM PREVIOUS BANKPROJECTS ...................................... 30

C PROJECr DESCRIPTON .......................... 33

a PROJECTSUPERVISION AND MONnDR DNG ..... ......... 38

B. ORGANIZATION OFPROJECreMPLEMENTAINON ......... 40

F. MONfltRINNGtNDEVALUA1ONSTRAMIUY ... .. . . ..... 43

G. PROJECrALA.AL ................................ 48

H. ESTIMATEDSCHEDULE OFDISBURSEMENTS ........... 50

I. SELECTED DOCUMINTSINPROJECTFILE .. ........... 51

J. MAP ........................................ 6

Tables In Ibt

hMble 2.1 Poject Cost Summary ...................... 9Table 2.2 Financing Plan ........................... 10Mible 3.1 Piowcureient Anangements ................... 13ibble 3.2 Edti,mated Disbursements ..................... 15

Tables and Charts In Annexes

Ilble A. 1 Number and Population of Municipalities By PbpultionRange . ............... 27

ibble A.2 Breakdown of Pilot Municipalities By Pbpulaion ...... 28Table A.3 Chamcteristics of Pilot Municipalities By Region ...... 29'Ible D. 1 Supervision PHan .......................... 39Cbart E.1 Ornizaion of the Mnistry of Intrior .... ........ 42lkbleH.l DisburmentSchedule... . 50

CHLEMUNICIPAL DEVELOPrM PILOT PROJECT

WAN AND PROJECr SUMMARY

Bormower: Republic of Chile

Agencies: Ministry of hiterior and Municipalities

Amount: UTS$10.0 million, equivalent

Tenus: Repayment in 17 years, including 5 years of gace, withintrest at the Bankes sandard viable rate and commintmentcharges.

PrqjecObjectives: he Tpecific objectives of this pilot project iwuld be to:

(a) Increase the insfitutional and technical capacity ofMUcipai gav=Mn^.ents to assume their greaterrsonsibilities by:

(i) Enhancing their capacity to generte own-sourcerenues, including user fees.

(ii) lreasing their instdtutional capacity to plan,program, finance, execute, operate, maintain,and monitor eapenditure progams that areeconomica1ly and financially sound.

(b) Impove the naonal gent's capacity to attain itsmain macroeconomic goals at the municipal level,especally through the design of incentives for increasedefficiency and fiscal discipline in the national/municipaltrasfer system.

ProjectDescrption: The pilot project wuld consist of the following components:

(a) Municipal utional Development Component.This component would include the followingsubcomponents for the municipalities in the pilotptject:

(i) General M-icipa Manua=eetmreetincluding the prepation of MunicipalInstitutional Strengthening Plans (MISPs) and

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the improvement of the overall organizationalstructure, service to the public, municipalplanning procedures including human-resourcesplanning and sector-specific planning, pre-Investment studies, and managenient andimplementation of physical investment projects.

(ii) Financil Mangemet S=gfhtning, includingthe improvement of financial planning andrecord-keeping, revenue collection, expensecontrol, and cost recovery staties, as well asthe design and implementation of multi-purposeproperty cadastres.

(iii) M11 icament InPormnation Sy mst ,including the establishment of management-oriented and sector-specific information systems.

(b) National IstutIonal Development Component,including the following subcomponents:

«i) National Infnation Syste for MncEaiisincluding the upgading of the existing nationalinformation systm, the identification ofmunicipal management peformance indicators tobe incorporated into a municipal rating system,and the development of a project evaluation andmonitoring system.

(ii) Analysis of Policy Alternatives for ImprovlnNationalSubn tional Fiscal Relations, includingthe analysis of policy alternatives for improvingnational, regional, and municipal fiscal relations,mainly in the areas of the resource transferytem to municipalities, municipal management

performance, and municipal multi-year financialplnning.

(iii) Evaluation of the Impact of RegionaL and SectItmntM on Municipal inancs, includinganalysis of the impact of municipal investmentsin the areas of health, education, housing, andinfrastructure on other current expenditures, andof the need for coordinaton of these investmentsto prevent negative effects on local development.

(iv) Proec Executing Unit, including mementand operation of the project.

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Training of municipal staff, including the dmelopment ofcourses and seminars, is included in the epective componentsand subcomponents of the MISPs

Benefits: The pilot project would conuibute to tlhe Government's overallmaacoecouomic efficiency, equity, and stability goals. Itwould improve the efficiency of the municipal public sector.It would also increase intersonal equity by augmentingadministrative efficiency in the provision of health andeducation services and in the local administation of nationalpoverty programs. Finally, the project would contributedirectly to the maintenance of fiscal discipline in theconsolidated public sector by helping to establish moreadequate incentives for imprved fiscal perfornunce at themunicipal level, as well as by increasing the capacity ofmunicpailities to respond effectively to these incentives.

RlsI6 andSafeguards: Among the risks of the project are the chance that the recently

enacted legal reforms would not be properly implemented orthat there would not be continuity in the reform process afterthe upcoming presidential elections in December 1993. Thelatter risk seems quite low because the next goanment willmost likely be of the same coalition and stress continuity withthe successfiul policies of the current governmet. Becu ofthese ris4 it was deemed advisable to make this a pilot,rather than a full-fledged, project. There is also a risk thatsome municipalities would not be interested in implementingthe type of management imprvements proposed by theproject. lb reduce this risk, only those municipalities with ademonsated interest in and potential for effectiveimplementation of reforms have been chosen to participate inthe project (see para. 14). As an added incentive, the MlSPsof the participating municipalities will be financed by nationalgovernment grants, except for some equipment. In addition,the national and regional govemments plan to apply newperformance criteiia to part of the allocation prcess fornational/municipal trnsfers, which would strengthen theincentives for participation in reform. Another risk is thatspiralling municipal expenditures on education and healthwould consume the resources necessary to deal vith morebasic reform issues. lb reduce this risk, specific actions toimproe overall fiscl performance in the supply of educationand health semrices will be identified in the MISPs required ofall participating municipalities. Fmally, there is a risk ofdeficiencies in the ability of the project's executing unit (thePEU) to carry out the coordination and m mn_t funcionsrequired for the pilot project's execution. lb minimize this

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risk, the Government has allocated significant staff resourcesto this unit, and has confirmed that it will prmide all thefunds, fcilities, staff and resources required by the PEU tocarry out its functions and responsibilities in an efficient andtimely manner. An executive coordinator (i.e., projectmanager) and an experienced implementation specalist havebeen assigned to it.

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TAble 1: Fstnated Project Cos(millions of US dollars)

compolen Lcl rwig TOTAL reign

Munidpal Uttonul Deeopment 9.0 4.0 13.0 31

Nationa Insituiona Devlopment 2.4 1.4 38 37

Con dsi~encleu 2.2 1.0 3.2 31

TOrAL PROJECr COST 13.6 6.4 20.0 32

lAble 2: Fluanuig Plan(millions of US dols)

Souce as % ofSorce Lal Foreign TOTAL total

RD 3.6 6.4 10.0 50

Gorunient of Chile 9.2 - 9.2 46

MunIcipalities 0.8 - 0.8 4

TOTAL PROJECr COSI 13.6 6.4 20.0 100

lIable 3: Estimated Disbursements(milions of US dollars)

Bank FiscalYar 1994 199S 199C 1997

AnnuA 0.4 3.1 3.0 1.5

Coinuladve 0.4 3.5 8.5 10.0

1. THE SECTOR

The Subnational Public Sector and Its Reform

Badcground

1.1 Since 199), Chile bas enacted far-reaching legislative andconstitutional reforms that have dramatically increased the responsibilities,own-source revenues, and resources being transfenred to both municipalitiesand regions (hereafter, subnational govemments) in Chile's public sector. Asanalyzed in Chile: Subnational Government Finance (Report No. 10580-CH),these reforms pxsent both opportunities and risks. Opportunities include thepotential gains from more efficient assignment of responsibilities andreveues between the national and subnational governments, and greateraccountability of local officials. Among the potential risks are: thepossibility that the central government will have difficulty in implementingthe rebrms effectively; the possibility that subnational governments will notbe technically and institutionally able to carry out their new responsibilitiesefficiently; and reduced fiscal discipline due to political pressure of the newlyelected subnational government officials on the central government forimcreased national/subnational trmnsfer The establishment of adequateincentives for efficiency and fiscal discipline in the nationallsubnationaltransfer system is particularly important.

1.2 The stakes in these reforms are high because the subnational publicsector is increasingly important in Chies consolidated public sector. In1990, municipal on-budget expenditures were 2.3% of GDP (US$648million, or 13% of total public sector expendiums). Including off-budgetexpendituresV (most of which are channeled through regional governments)wuld raise this total to 5.3% of GDP (or US$1.5 billion). Municipalitiesplay a key role in the provision of social services that benefit lower incomegroups (e.g., prmary health care, and prmary and secondary education).Municipal governments also have primary responsibility for the delivery andmaintennce of urban infrastructure and services upon which economicgrwth and enironmental quality depend, including: (a) street paving andlighting; (b) solid waste collection, disposal and treatment; (c) drainage; (d)open space and recreation; and (e) cemeteries. Municipalities also play animportant role in assuring equity in Chiles development, since theyadminister six of the country's main poverty alleviation prograns whichmnolve direct tansfers to low income individuals and fmiles.

The Reforms

1.3 Following a constitutional amendment in November 1991, a basicmunicipal law (Lei No. 18695 Orgdca Constintional de MuniCalldades3

ZI Expendites controlled wholly or in part by the municipalities but which do notappear in the muicipal accouns. For example, the expenditures of municipal coapoaonson health and education do not appear in the municipal accounts, as these ae *puivatecorporaton. In other cases, the mnicipalities propose and execute investment projects thatae paid for by entities of the national govemnment.

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was promulgated in March 1992. These changes allowed democraticelections for mayos and local councilors in July 1992 for the first time sincethe return to democratic rule. The constitutional amendment increased theimpotance of regional goveanments (which were first set up in 1974) bygiving them an independent legal status (personaldadjurdlfca) and the rightto own prperty. In addition, a new law regulating regional govemments,promulgated in March 1993 ( NA lx L75 Qr C&kg cm La &ua sreGoblerno y , increases the resources transferredfrom the national to regional governments (which in turn are oftentransfrred to municipal gove-mments). This law also provides for theallocation of the resources of the national sectcoal ministries by the regionalgovernments. For example, the national government's 1993 budget allocatesa total of US$144 million for the Fondo Nacional de Desarrollo Regional(FNDR) and US$114 million for the regionally assigned national resources (atotal of US$258 million). Furthermore, the regional law proides that thisamount will increase at a rate 25 e n-highr than total national inmestmentnot in this category for the next two years

1.4 Currendy, an extensive reforn of the municipal revenue bill (Bouidev Lade Rentas MwIcialer) is before Congress. Among its key provisionsis the enhancement of municipal fiscal autonomy by allowing municipalgoments more flexibility in setting tax rates and collecfing user charges.

1.5 The new subnational government legislation is only the first step inwhat will inevitably be a long process of political and institutional change. Itnevetheless provides a very firm legal basis for reforms. The immediatechallenge for the central government, as well as for the municipalities, is tostrengthen municipal institutions by improving management techniques,information sytems, and fiacial planning, as well as by fine tuningnational and local legislation and administrative regulations.

FbLotlc Subdivision Scheme

1.6 Chile's unitary government structure has three levels of subnationalgovernment:

Regional: The 13 regional govenments were created by decree in1974. They are headed by intendentes who are appointed directly bythe President.

Ptovincial: The 51 provinces lost most of their functions with thecreation of regional governments, but still exist.

Municipal: There are 334 municipalities in Chile.

1.7 All municipal govenments have a central administration or gesidnmunWal. Mwuicipalities normally charge either a decentralizdadministration (de)memo) or a privant corpotion (corpomncimw*lpao with providing services for health, education, and cemeteies.

?.

Municipal and regional corpoations (e.g., the regional water and sewercorporations) are DriYat entities over which the public entides exercisevarying degrees of control.

Municipal and Regional Dlversity

1.8 Of the 334 municipalities, 200 (60%) have fewer than 20,000 people,and together hold only 15% of the country's total population. Of these 200,55 municipalities have fewer than 5,000 inhabitants and many haveconsiderably fewer than 1,000. Only 40 municipalities (12% of the total)have more than 100,000 inhabitants each; together they contain 57% of thetotal population. Almost half of the municipalities with more than 100,000inhabitants are in the Metropolitan Region of Santiago, contaning 26.8% ofChils total population.

1.9 Pbpulation density varies enormously among the regions. Forexample, Region X has a population density of only 0.7 person per squarekilometer, whereas the Metropolitan Region of Santiago has a density of 335inhabitants per square kilometer.

Sector Strategy

1.10 The sector strategy to support improvements in subnationalgovernment in Chile was outlined in the Chile: Subnational Government~inanc sector paper. The Bank's country assistance strategy for Chileincludes key elements of this strategy. Institutional stengthening is crucialto succeu decentralization, particularly after the recent democratization atthe municipal level. The Chile: Infrastructure Strategy No' also reflectsthe main policy recommendations of the sector paper for subnationalgoverments: "The challenge is to transform the theoretical benefits ofdecentraztion into real ones, while avoidi undue loss of efficiency andquality of services" (pam. xi).

1.11 As the principal focus of Chile's democratic reforms at thesubnational level, municipalities will also inevitably be the principal agents ofchange, provided that the momentum for reform is sustained. For thisreason, sector stegy calls for Bank support of the central government'sefforts to strengtben municipalities and improve its own intections withthem. The three key points of the stategy are to:

(a) Facilitate a clear definition of functions and responsibilities forservice prvision among municipal, regional and centralgovernments.

(b) Propose incentives for subnational govrnments to fulfil theirresponsibilities (relative to point (a)) in an efficient, equitableand fiscally prudent manner.

3I Ropoft No. 11234-C, Novmber 19, 1992.

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(c) Strengthen the institutional capacity of subnational govemnmentsto carry out their functions (relative to point (a)) by improvingtheir oranization and methods, providing them withmanagement tools, and training officials in the application ofnew methods and in the use of the tools provided.

1.12 The proposed project would support this strategy by providing acontext for the continuation of a policy dialogue with the central governmentconcerning policy decisions in connection with points (a) and (b). Theproject would also directly introduce organizational changes and newmangement techniques under point (c) to municipalities willing and able toimprove their institutional performance substantially.

1.13 The main objective of a longer term program would be to assist theGovenment in enhancing efficiency, equity, and fiscal discipline in thesubnational public sector during the implementation of the recently enactedsubnational govenment reforms. While action is urgently needed to assureeffective implementation of these reforms, a full scale program would taketoo long to prepar and would be too risky during this transition period (bothin terms of the implementation of the reforms and because of the upcomingpresidential elections in December 1993). Thus, to initiate some of the moreurgently needed steps while controlling the risks, the proposed intventionwould be a pilot Mect (hereafter refered to as the project). The projectstrategy would be to concentrate on those issues identified in the sector paper(see pam. 2.3) that can be addressed effectively in the short run, whiledefining strategies for future reform in those areas that cannot now beaddressed for lack of knowledge or resources.

1.14 This project would be the first of one or more stages needed toimplement the main reforms discussed in the sector report. At the uaLiwiallevel, the project will focus on identifying concrete policy options forstrengtening existing incentives and identifying new incentives forsubnational govemments to follow macroeconomically sound fiscal practices.In addition, the project would focus on improving the existing infDrmationsystem for policy analysis and monitoring of subnational fiscal performance.At the municipal level, the project would focus on improving themanagement tools that wuld enable municipalities to respond to the newlyidentified and strengthened incentives.

Rationale for Bank Involvement

1.15 A top Govenment priority for Bank support is to obtain assistance intaking full advantage of the opportunities presented by the recent subnationalgovenment reforms, while avoiding or reducing the risks involved in theirimplementation (see pam. 1.1). The Bank would primarily provide continuedtechnial assistance and policy advice, as Chile's fiscal surplus and favorablebalance of payments have reduced the need for major resource transferThe Bank can fcilitate cross frtilization based on the acperiences of similarprqects in other countries of the region. The proposed project would also

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help the Government in onizing future bilawal and mulilatral assistanceto subnational governments.

lessons Learned from Other Bank Involvement

1.16 The principal lessons learned from over a decade of Bank experiei ein lending for municipal development, both in the LAC region andworldwide, include the importance of: (a) strong and consistent centralgovemment support for the principles of financially sound municipaldevlopment; (b) intensive project supetvision; (c) project design that issimple and that, at the subproject level, reflects the needs and desires ofparticipadng municipalities; (d) reasonable criteria for the deterinaon ofmunicipalitie~ eligibility for project funding and/or participation; and (e)adequate cental assistance to the municipalities in the identification andpreparation of subprojects; and (f) simple and efficient procedures forsubproject review and approval. See Annex B for more details on lessonsearned from Bank inwolvement.

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2. THE PROJECr

Project Origin

2.1 The proposed project is a direct result of the policy dialogue initiatedby the sector work. The Government has given high priority to obtainingassistance for the implementation of the reforms at the subnationalgovernment level (see para. 1.15).

Project Objectives

2.2 This project will contribute to the objectives of the longer termprogram (see pam. 1.13). The specific objectives of this project are to:

(a) Increase the institutional and technical capacity of mInidialgrnments to assume their greater responsibilities by:

(i) Enhancing their capacity to generate own-sourcerevenues, including user fees.

(ii) Increasing their institutional capacity to plan, program,finance, execute, operate, maintain, and monitorexpenditure prgrams that are economically andfinancially sound.

(b) Improve the national government's capacity to accomplish itsmain macroeconomic goals at the municipal level, especiallythrough the design of incentives for increased efficiency andfiscal discipline in the national/municipal transfer system.

Project Components

2.3 The project would consist of two institutional developmentcomponents, one focussed on improvmng municipal management and the otheron strengthening the central government's capacity to implement effectivelythe decentaliation reforms underwa ksee Annex C for details). Projectcomponents and subcomponents are as follows:1'

(a) Municipal Institutional Development Component (US$15.5million).5' This component would include the followingsubcomponents for the municipalities in the pilot project

4/ The municipal/national classification in this section refers to the fmus of the actionsdescribed (i.e., on the municipal or national level), but not necesarily to which level woudactualy execute the activities of ffie given component For example, especialy in the initialpbase of project implementation, the central project executing entity might contct most orall of the activities involved.

I/ All dollar amounts include allocations for contingencies (shown in detail in Table2.1).

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(i) Genend Municipal MnaMent lmpvment (US$3.7million), including preparation of MunicipalInstitutionai Strengthening Plans (MISPs) and theimprovement of the overall oiganiational structure,service to the public, municipal planning proceduresincluding human-resources planning and sector-specificplanning, pre-investment studies, and management andimplementation of physical investment projects.

(ii) Financial MWagementStrengthening (US$8.4 million),including the improvement of financial planning andrecord-keeping, revenue collection, expense control,and cost recovery strategies, as well as the design andimplementation of multi-purpose property cadastres.

(liii) Municj Magent Information Systems (US$3.4million), including the establishment of management-oriented and sector-specific information systems.

(b) National lnstitutional Development Component (US$4.5million), including the following subcomponents:

(i) National Infonmat!on System for Municipalities (US$2.2million), including the upgrading of the existingnational information system, the identification ofmunicipal management performance indicators to beincorporated into a municipal rating system, and thedevelopment of a project evaluation and monitoringSystem.

(ii) Analysis of Policy Alternatives for ImprovingNationallSubnational Fiscal Relations (US$1.1 million),including the analysis of policy alternatives forimproving national, regional, and municipal fiscalrlations, mainly in the areas of the resource transfersystem to municipalities, municipal managementperformance, and municipal multi-year financialplanning.

(iii) Evaluation of the Impact of Regional and SectorInvestments on Municipal Finances (US$0.5 million),including the analysis of the impact of municipalinvestments in the areas of health, education, housing,and infrstrucure on other current expenditures, and ofthe need for coordination of these investments toprevent negative effects on local development.

(iv) PrEject Executing Unit (US$0.7 million), includingmanagement and operation of the project.

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Tmining of municipal staff, including the development of courses andsemiars, is included in the respective components and subcomponents of theMISPs.

Selection of MunIcIpalItIes

2.4 The main objective of the selection process was to selectmunicipalities that are representative and have a high probability ofsucully generating and implementing useful innovations and reforms thatcould be transferable to other municipalities. 'Ib this end, the selectioncrteria included: (a) signifcant coverage of total population; (b)repesentativeness in terms of populadon size, percentage of rural population,and administrative capacity; (c) demonstrated capacity to implement refirm;and (d) a high degree of commitment to institutional reform. See Annex Afor details.

Project Costs

2.5 The total project cost is estimated at US$20.0 million equivalent,including taxes and duties. The foragn exchange component is estmated atUS$6.4 million, or 32% of total project costs. Costs estimates (see Abble2.1) are based on a sample of typical subprojects prepared by themunicipalities and reviwed during appraisal. Physical and pricecontingencies are estimated at 10% of total base cost each.

2.6 Locally procured goods are subject to a value-added tax (VAT) of 18percent. Imported goods such as vehicles and computers are subject to an 11percent customs tax and an 18 pecent VAT. The total project cost includesapproximately US$1.0 million equivalent in local taxes and duties.

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lible 2.1 Project Cost Summary(millions of US dollars)

Pkqjt Componw_ Lal Foreign TOTAL Foregn

A. Munid Inditltonal Develpment 9.0 4.0 13.0 31

Gener Municipal Management 1.9 1.2 3.1 39hnpnwement

Financial Manopment Strnthening 5.0 2.1 7.1 30

Municipal Management Inrimation 2.1 0.7 2.8 25

Systems

B. National hutitutional Deveopment 2.4 1.4 3.8 37

National Inimtion System an 0.9 0.9 1.8 50Municipalities, PNrbmanceIndica, and Design of Evaluationand Monitoring System

Analysis of Policy Altmatives for 0.6 0.4 1.0 40mpvig Nati

Fiscal Reolatins

Bvaluation of the Impte of Regional 0.3 0.1 0.4 25and Sector Inestments on MunicipalFinaces

Ptoject Executing Unit0.6 0.0 0.6 0

Total Base Cost 11.4 5.4 16.8 32

Pkycal Contingencies 1.1 0.5 1.6 32

Price Contingcies 1.1 0.5 1.6 32

Totl Project Cost 13.6 6.4 20.0 32

Fianciag Plan

2.7 The total project cost of US$20 million would be financed in equalparts by the Bank and the Government, with a relatively small participationby the municipalities. The Bank's share of US$10 million (50% of totalproject cost) would finance US$6.4 million in foreign costs, plus aboutUS$3.6 million in local costs (about 26% of total local costs). The Borrowerwould be the Republic of Chile. The Bank loan, together with the nationalgovernment funds, wouwld be passed on as budgetary transfirs to the PEU tofinance all subprojects contracted at the central level. Funds to financesubprojects executed directly by the municipalities would be passed on tothem, also in the form of budgetary transfers, except that in the case ofgoods (eg., computer hardware and software), municipalities would

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contribute 25% of costs from their own funds. lbble 2.2 summarizes thefinancing plan.

Table 2.2 Fiancing Phau(millions of US dollars)

Source as % ofSouree Ial Foreign TlrAL otal

IBRD 3.6 6.4 10.0 50chile:

Government of Chile 9.2 - 9.2 46Mumeipalit. Q0.8 - 0.8 4

TUrAL PROJECr coSr 13.6 6.4 20.0 100

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3. lPROJECr lMPLEMENTATION

Imuplementathon Aangements

3.1 The project would be aexcuted by a Project Executing Unit (PEU) inthe Subsecretwra de Desarrollo Regional y Adminisrndw, (SUBDERE) ofthe Ministry of Intior. The PEU would be linked directly to the MunicipalDivision of SUBDERE (see Annex E for the orgnizational arrangements andthe functional rsponsibilities of the PEU). Linking the PEU to this divisionwill assure sustainability of the municipal institutional developmentsubprojects, as this division is directly responsible for improving the fiscalperformance of municipal governments. The Municipal Division is alsoresponsible for the exising National Information System on Municipalitiesthat will be improved as a subproject of the project. Given the primarilyfiscal objectives of the project, an ad-hoc Special Council would beestablished with repesentatives of SUBDERE and the Direccidn de

wueto of the Ministry of Fmance to guide and coordinate the mainpolicies and opetonal decisions affecting the project. The Special Councilwould meet periodically as required.

3.2 The Project Manual (PM) (see Annex G for a description of its mainelements) wuld cover all regulations concerning relationships between thePEU and the municipalities (including eligibility criteia for subprojects,operational procedures, institutional arrangements within the municipality,supevision, and monitoring and evaluation procedures). The PEU wouldadminister the project in accordance with the PM which would not beamended without prior Bank consent.

3.3 The selected municipalities (see para. 2.4) would each develop aMISP with the assistance of the PEU to identify their main managementproblems as well as the actions and subprojects needed to resolve them. Thedevelopment of the MISP would be done in two stages: a) selection of thoseareas which require strengthening in the municipality (cvering with specialemphasis the prwvision of health and education services); and b) preparationof final detailed Tlms of Refrence (MORs) for the chosen sWbprojects,including their components, costs, benefits, and financing and implementationschedule when required. The terms of reference for the MISP would bedefined in the PM. The PEU and the Bank would review all MISPs (formore details see para. 10 of Annex A). The preparation of an acceptableMISP would be a condition of municipal eligibility for subproject financing.Each municipality would enter into an agreement with the PEU to execute itsMISP. The MISP would also serve as an instrument to follow up on thesuccess of the municipal govemment in resolving the problems identified,thereby increasing municipal accountability.

3.4 At negotiations, assuances irm the Government were obtained that itwiL:

12

(a) Maintain the PEU in SUBDERE of the Ministry of Interiorwith staffing, responsibilities and functions satisfactory to theBank.

(b) Provide all the funds, facilites, staff and wesources required bythe PEU to carry out its functions and responsibilites in anefficient and timely manner.

(c) Hold a mid-term review of the project by not later thanDecember 31, 1995, follonwing which changes wwuld beintroduced if necessary.

3.5 Assurances fom the Government were also obtained for the followingconditions of effectiveness:

(a) That the PEU has been staffed in a manner satisctory to theBank.

(b) That the PEU has entered into Wreements with at least fivemunicipalities.

(c) That the Bank has approved terms of reference for contwacts inconnection with MISPs, or municipal or national levelsubprojects estimated to cost, in the aggregate, not less thanUS$500,000 equivalent.

(d) That the Project Manual has been put into effect in termssatisctory to the Bank.

3.6 The municipalities would be primarily invlved in the preparation andimplemenlation of their respective MISPs and subprojects in danc withthe Project Manual (see para. 3.2). They would also actively participate asrequired in the execution of those national subprojects affecting municipalfunctions (e.g., management information systems or monitoring andeWaluation systems), or of those subprojects at the municipal level which maybe executed centrally for technical or efficiency reasons. The mayor of eachmunicipality would appoint a project coordinator for the municipality andwould assign the necessry staff and resources to assist him.

Staus of Project Preparation and Implementation Schedule

3.7 The project is in an advanced stage of preparation. The PrqectExecuting Unit (PEU) has been established, and an expernced executivecoordnator (project manager) and an implementation specialist have beenassigned to it. lb speed implementation after loan effectiveness, the PEU iscurrently: (a) preparing the final bidding documents to contact theconsultants to do the central subprojects; (b) finalizing the Project Manual;and (c) adjusting the estng procurement documents for use in this project.

13

Funds for countepart have been included in the 1994 budget currently underconsideration by Congress.

Procurement

3.8 The PEU would review all procurement activities to ensure efficiencyand compliance with Bank Prcurement Guidelines and standard documents.It would also carry out all institutional strengthening subprojects at thenational level, as wel as subprojects at the municipal level which eitherrequire a common approach, or which may be carried out more efficiently bymunicipalities. It was ageed that only municipalities which demonstate tothe satisfction of the PEU and the Bank that they have the necessarycapabilities would be permitted to procure directly. Procurement would becarried out in accorance with the Bank Guidelines for Procurement ofGoods and Wrks (May 1992). Since there are no specific procurement lawsin Chile, the bidding documents relevant to each type of procurementregulate the process. Bank standard bidding documents would be used forthe procurement of goods under ICB Where no relevant standard biddingdocuments have been issued by the Bank, documents based on otherinteraionally recognized standard forms satisfctory tD the Bank will beused. Standard bidding documents for LCB would be set forth in the ProjectManual. Consultants will be contracted in accordance with Bank Guidelinesfor Use of Consultants (August 1981) and, in the case of complex, time-based asgnments, using the Bank's Standard Form of Contract (March1989).

Table 3.1 Procurement Arrang es(millions of US dollars)

ftocurauent Mtodw

P!ject EBsent ICB LCB Shopping Other Cost

Goods 0.4 2.0 0.6 - 3.0k'(0.4)2' (2.0) (0.6) (3.0)

Cosuting Servie - - - 16.8 16.84(7.0) (7.0)

Project - - - 0.2 0.2(0.0) (0.0)

TOTAL 0.4 2.0 0.6 17.0 20.0(0.4) (2.0) (0.6) (7.0) (10.0)

ILI FIgre in pmams haeldieat allcatons of Bank LOan proceedLd ihncue duties and odhrtaeg/ inculud Aees. vehicles moateias equipment, prpaution of docunen. trve ad sNbsistene coatsgit it is assumed that coaaultk firms aNd indVidual onaultent Will Oat cru salW Oax (VAI for sericeprovidedS! Inludes salaries offU aff and o opeb g cOsts (e.g.. OE spplie rn, utlities etc.) not eliib fOrntnumeat underw h Loan.

14

3.9 G The bulk of goods to be procured under the project would becomputer hardware, software and peripheral equipment, as well as someoffice equipment and supplies for the PEU. Because of Chile's open marketconditions, most reputable foreign suppliers of required equipment arerepresented in the country, assuring a fair amount of competition and on-sitecapacity for maintenance services. Purchases of similar types of equipmentwould be packaged in contracts as large as possible. Managementinformation and other systems based on computer equipment and softwarewould mostly be procured using a two-stage process satisfactory to the Bank.Bank-financed goods contracts Walued at US$350,000 or more per contractwould be awarded following ICB procedures in accordance with BankGuidelines (May 1992). Bank-financed contracts valued at less thanUS$350,000 but more than US$100,000 per contract, totling up to US$2.0million equivalent, may be awarded follownng LCB procedures satisfactory tothe Bank. Local shopping procedures satisfactory to the Bank would be usedfor contracts alued at less than US$100,000 per contract, totalling up toUS$0.6 million equivalent.

3.10 Consultanes All consultant services for the PEU, institutionaldevelopment studies for municipalities, studies at the national level, andtaning would be contracted following Bank Guidelines for the Use ofConsultants (August 1981). The use of standard Lets of Invitation andevaluation criteria would be encouraged. Tob the extent possible,consuancies for similar activities in various mnicipalities would be groupedto ahieve consistency and economies of scale.

3.11 Tho Reew The Bank's prior review of documentation for theprocurement of goods and contracting of consultants would cover all majorprocurement steps (advetsing, bidding documents, evaluation reports, awardrecommendation and contacts, etc.) and would apply to: (a) all contractsunder ICB; (b) the frst three contracts contced by the PEU under LCB forgoo7s, and aU those costing US$150,000 equivlent or more; (c) the firstthree consulting contracts contracted by the PEU below US$100,000; (d) atleast the first three contracts for goods contracted by each of the first threemunicipalitie; and (e) all further contracts for consulting services contractedby the PEU or municipalities and valued at US$100,000 equivalent or more.However, all terms of reference for consulting assignments (regardless oftheir estimated cost), as wel as all single-source contrts, consultancies of acritical nature, and consulting contract with individuals would be submittedfor prior review by the Bank. It is estimated that Bank prior eview wouldcover about 60% of Bank-financed contrct Contra not subject to pnorreview would be reviewed cc-post on a sample basis. The sample would besuggested by the PEU and aproved by the Bankl

15

Disbusement and Accounts

3.12 The proposed project is expected to be completed by June 30, 1996,and te loan fuily disbursed by December 31, 1996 (the pmposed ClosingDate). This period of ftree years is necessary to test fully the many differentrefMs. b fte extent possible, implementation of the broader pragawould begin simultaneously with the pilot project Wa dissemination of t'esuccessul institutional development solutions.

3.13 The PELT willd directly disburse the necessary loan funds under thenaional development component and the contracts centrally contracted by it,and would manage the channeling of loan funds for contract contracted bymwuncipalities. 'b expedite the flow of funds, a Special Account would beestablished at the Centmal Bank. The PEU would draw from this Account,and would keep all records and supportng papers required for eachexpenditure to icilitae the necessary e-post reviews, audits and requests forreplenishment of the Special Account (see para. 3.14). Except for contractsrequiing pior review, disbursements would be made against certifiedtatements of expenditures, for which detailed documentation as evidence of

expenditures would be kept by the PEU and made available for the requiredaudits and for review by the Bank. It is expected that by negotiations, theBank would receive for its review the final version of the accounting anddisbursement procedures to be prepared by the PEU. The estimated loandisbursement distribution is shown in %i3ble 3.2; the quarterly disbursementprofle is shown in Annex H.

Thble 3.2 EstImated Disbursement(millions of US dollars)

Catoay Amount of Loan % of Epedturs to beAfocated Finaned

Goods 3.0 100% of ieigpendi ULMand 100% of local

epnt (ex-fackwy cost)

Co_uulin Servic 7.0 50%

Tbtal 10.0

Bank Fiscal Year 199 1995 199 15

Annual 0.4 3.1 5.0 1.5

Cunulatne 0.4 3.5 8.5 10.0

16

3.14 S'l Ib facilitate timely project implemenlation, theGovemment would establish, maintain, and operate (under terms andconditions satisfctory to the Bank) a Special Account in US dollars at theCential Bank of Chile. Upon being requested by the Government, the Bankwould make an initial deposit of up to US$0.67 million, equivalent to theaverage four months' project financing requirement, to the Special Account.The PEU wwuld monitor aU project expenditures and would requestreplenishment of the Special Account on the basis of standard disbursementprocedures.

3.15 Retroactive financing of up to US$1 million(10% of the proposed loan) may be provided for eligible expendituresincurred up to 12 months before loan signatue, but after the beginning of thepreapaisal mission on March 1, 1993. Retroactive financing would be usedprincipally to finance preparatory activities required to facilitate projectimplerientation that have already been initiated.

Audits

3.16 The project loan account, Statements of Expenditures (SOEs), and theSpecial Account would be audited by an independent auditor acceptable to theBank. The Bank would require the auditor to apply auditing standards andprocedures satisory to the Bank and to carry out its work in a timelymanner (i.e., an annual report would be presented no later than six monthsafter the end of each calendar year). The PEU wwld have the annual audit:(i) eamine compliance with aU Loan Agreement covenants, includingimplementation of eligibility critexia established in the Project Manual; and(ii) include a management letter identifying major deficiencies and makingrecommendations for their improvement.

Reporting and Monitoring

3.17 Because the proposed project is to become the basis for a muchbroader program, its reporting and monitoring procedures assume much moreimportance than they would in a regular operation. Thus, a continuousevaluation and reporting process ,s being designed. This process willproduce not only key indicators to monitor project execution, but also awider set of indicators intended to evaluate the impact of the project on theperformance and management of municipalities. These indicators would becomplemented, in the respective reports, by specific comments on the actionsrequired to correct any weaknesses or problems detected.

3.18 Thus, there wold be three sets of interrelated indicators to monitorand evaluate: (a) indicators of the pace and quality of project execution; (b)indictors of the impact of the project on the participatng municipalities; and(c) indicators of the experiences and lessons of the project to facilitate thedesign of a program that will include all municipalities. The first set ofindicatrs would help analyze the smoothness and timeliness of projecteecution. The second set would show how well the project strengthens the

17

performance of the participating municipalities. The last set would helpdevelop the main product of the project: a blueprint for a full prgram ofassistance to all municipalities (see Annexes D and F for an analysis of theseindicators).

3.19 During project execudon the PEU would prepare: (i) quarterlyimpementation progress reports based on the lint set of indicators; and (ii)annual reports analyzing the impact of the project on the municipalities. ThePEU should circuate the annual reports widely to disseminate thisinformation to municipalities and other entities that may be intrested in it.On completion of dte project, but not later than six months after the date ofLoan Closing, the PEU would prepare a drft Project Completion Reportwith a detailed description of the lessons learned in the project, and itsrecommendations for the expansion of this program to other municipalities byJune 3, 1997.

3.20 The Bank would supervise project execution very closely and, inparcular, would review on a continuous basis the various programs of thepicipating municipalities and national entities. For this purpose, the Bankwuld have a intensive supervision program (see Annex D) based on bi-annual missions to Chile, complemented by the planned prgress reports andby periodic visits (at least once a year) to ashington by key officials fromthe PEU. The first Bank supervision mission wwuld be a "project launchworkshop'. In addition, the Bank and the Government would hold an in-depth mid-tm review of the project not later than December 31, 1995S,following which changes could be introduced if necessary.

18

4. PROJECT JUSTIFICATION AND RISKS

Prqject Benefts

4.1 The project would contribute to the Government's erallmacreconomic efficiency, equity, and stability goals. It would improve theefficincyof the municipal public sector. It would also increase inupersonalequity by augmentng administative efficiency in the prmision of health andeducation services and in the local administation of national povrtyprograms. Finally, the project would contribute direcdy to the maintenanceof fiscal discipline of the consolidated public sector by helping to establishmore adequate incentives for improved fiscal performance at the municipallevel, as well as by inceasing the capacity of municipalities to respondeffectively to these incentives.

Progam Objective Categories

4.2 Municipalities play a key role in the provision of social services thatbenefit lower income groups (e.g., primary healh care, and primary andsecondary education). They also administer the main poerty alleviationprograms involving direct tansfers to individuals and amilies. Furthermore,municipal governments in Chile are responsible for infrstrucure that is vitalto efficiency and environmental quality (e.g., urban streets, rural feederroads, and solid waste collection and disposal). Thus, increasing municipalmanagerial capacity would contribute to the improvement of all programcategories involving these issues (i.e., poety alleviation, health, education,eironmenl quality, and infrastructure).

Risks and Safeguards

4.3 Among the risks of the project are the chance that the recently enactedlegal reroms would not be properly implemented or that there would not becontinuity in the reform process after the upcoming presidential elections inDecember 1993. The latter risk seems quite low because the nextgovenment will most likely be of the same coalition and stess continuitywith the successful policies of the current government. Because of theserisks, it was deemed advisable to mabe this a pilot, rather than a full-fledged,project. There is also a risk that some municipalities would not be interestedin implementing the type of management improvements proposed by theproject. lb reduce this risk, only those municipalities with a demonstratedinterest in and potential for effective implementation of reforms have beenchosen to participate in the project (see para. 14). As an added incentive,the MISPs of the participating municipalities will be financed by nationalgovenment grants, except for some equipment. In addition, the national andregional governments plan to apply new performance criteria to part of theallcation process for national/municipal trsfers, which would stregthenthe incentives fr pacipaton in reform. Another risk is that spirallingmunicipal expenditurs on education and health would consume the resourcesnecessary to deal with more basic reform issues. b reduce this d*s

19

specific actions to improve overall fiscal performance in the supply ofeducation and health services will be idenitified in the MISF's required of allparticipating municipalities. Finally, there is a risk of deficiencies in theability of the project's eecuting unit (the PEU) to canry out the coordinatonand management functions required for the pilot project's execution. lbminimize this risk, the Government has allocated significant staff resources tothis unit, and has confirmed that it will provide all the funds, facilities, staffand resources required by the PEU to carry out its functions andresponsibilities in an efficient and timely manner. An executiv coordinator(i.e., project manager) and an experienced implementation speciist havebeen assigned to it.

20

S. AGREEMS REACHED

5.1 During negotiations, assurances were obtained fom the Governmenton the general conditions of the loan and on the conditions of itseffectiveness.

General Conditions

5.2 The Borrower will (see para. 3.4):

(a) Maintain a Project Execution Unit (PEU) in the Secretariat ofRegional Development and Administrative Modenization(SUBDERE) of the Ministry of Interior with staffing,responsibilities and functions satisfactory to the Bank.

(b) Provide all the funds, facilties, staff and resources required bythe PEU to carry out its functions and responsibilities in aneffilcient and timely manner.

(c) Hold a mid-tern reriew of the project by December 31, 1995,following which changes could be introduced if necessary.

5.3 The PEU (the implementing agency) will:

(a) Administer the project in accordance with the Project Manualwhich will not be amended without prior Bank consent (seepar. 3.2).

(b) Have the project loan account, SOEs, and the Special Accountaudited by an independent auditor acceptable to the Bank. TheBank wil require the auditor to apply auditing standards andpocedures satisfictory to the Bank and to carry out its work ina timely manner (i.e., an annual report would be presentd nolater than six months after the end of each calendar year) (seepam. 3.16, 5, 11).

(c) Have the annual audit: (i) examine compliance with all LoanAgreement covenants, including implemenion of eligibilitycriteria established in the Project Manual; and (ii) include amanagement letter identifying major deficiencies and makingrecommendations for their improvement (see para.3.16, 5, 11).

(d) Prepare: (i) quarterly implementation progress reports; and (ii)annual eports analyzing the impact of the project on themunicipalities, to be dciulated widely to municipalities andother entities that may be intrested in them. In addition, oncompletion of the project, but not later than six months afterthe date of Loan Closing, the PEU will prepare (i) a dmft

21

Project Completion Report with a detailed description of thelessons learned in the project, and recommendations for theexpansion of this program to other municipalities (see para.3.19).

Conditions of Effectiveness

5.4 Conditions of loan effectiveness will be (see para. 3.5):

(a) That the PEU has been staffed in a manner satisactory to theBank

(b) That the PEU has entred into agreements with at least fivemunicipalities.

(c) That the Bantk has approved terms of reference for contracts inconnection with MISPs, or municipal or national levelsubprojects estimated to cost, in the agate, not less thanUS$500,000 equivalent.

(d) That the Project Manual has been put into effect in termssatisfactr to the Bank.

ANNEXES

23 Ane= A

A. SELEION OF THE MUNICIPALITIESAND THEI CHARACTERITCS

1. The main objective of the selection process was to selectmunicipalites that are representaive and have a high probability ofsuccesfully genating and implemenng useful innovations and reforms thatcould be transfrable to other municipalitie& lb this end, the selectioncriteria included:

(a) significant coverage of total population.

(b) representofiveness in rms of population size, percentage ofrural population and administrative capacity.

(c) demonstrated capacity to implement reform.

(d) a high degee of commitment to institutional reform.

Methodology

2. A tw-stage methodology was used in the selection process. The firstsage asred adequate diversity of the municipalities in the sample so thatthe results of the project will be replicable in a wide rnge of municipalitieaThe second stge is to assure that those municipalities and municipalassiations selected do in fact have sufflcient commitment to managementreFrm. The first stage has already been completed and the second is inproces.

3. The procedures in the two stages are:

(a) First st. Selection of a sample of 25 municipalities Fifty-nine other municipalies were selected as potentialreplacements if any of the municipalities in the initial samplefail to qualify for the project.

(b) Sond 9W. Each municipality selected in the first stage willhave to demonstate its commitment to municipal managementreform by meetig a sequence of progressively more eactingcriteria (e.g., signing of a letter agreeing to reforms,preparation of a diagnosis of its main management problems,prepation of a Municipal Institutional Strngthening Plan)(see paras. 3.16, 5, 11-3.16, 5, 11).

Procedurs i the Fist Stage

4. There were three steps in the first stage:

24 Annex A

(a) All 334 municipalities were statified into 21 groups based on:(a) the percentage of rural population (seven groups rangingfrom highly nru to completely urban); and (b) the totalpopulion size group (small, medium and laWge).

(b) Within each of these 21 groups, four municipalimes weselected based on their financial performance (two with lowand two with high performance), creating a list of 84municipalities. The average of the last three years (1990 -1992) of following quantitative financial onindicators were used in selecting these municipalities:

(i) Per capita permanent revenue (tUaes, fes, andautomatic revenue sharing, but excluding discretionarygrants).

.ii) Expendiuhres on personnel and goods as a percentage ofown-source revenues (taxes and fees).

(iii) Expenditures on municipal services as a percentage ofown-source revenues

(iv) Municipal transfers for health and education as aprcentage of own-source revenues.

(v) Tbtal investment as a percentage own-source revenues.

(vi) Expenditures on preinvestment studies as a percentageof own-source revenues.

(c) the selection committee (composed of representatives of thePEU and the Ministries of Firnance and Interior) chose 25 ofthese 84 municipalities to participate in the project. Thecommittee made this selection considering adequaterepresentation of municipalities from each of the regions of thecountry. The remaining fifty-nine municipalities in the list arepotential replacements if any of the municipalities in the initialsample fail to qualify for participation in the project in thesecond stage of the selection process.

Procedes in the Second Stage

5. The purpose of the second stage of the selection process formunicipalities is to ensure that those municipalities chosen in the first stagehave a sufflcient degree of commitment to management eforim. Each of the25 municipalities will demonstrate its commitment to management reform bycompleting a sequence of four steps, beginning with the conclusion of afomal agteement with the Project Executing Unit (PEU) atsting to the

25 Annex A

municipality's wilirgnes to pardtipate in the project, and ending with theexecution, monitofing, and evaluation of a fully developed MunicipalInstitutional Str hening Plan (MISP) (see para. 10). While the specificdesign of the MISP will differ in each municipalit,; the objectives andsequence of steps to be akn wiUl not change.

6. Step 1: Pre-Dlagnols The objectives of this step are, first, tofamiliarize the chosen municipalities with the projet; second, to define theareas in which consultants will work during step 2 (see para. 8); and third, toconclude agmeements between the PEU and individual municipaitiesformaliing their relatonships within the project.

7. Step 2: Diagnosis The purpose of this step is to diagnose thesituation of individual muicipalities in terms of their capacity formanagement, examining their strengths, weaknesses, needs, objectives, andavailable resources.

8. First, the management situation of each municipality will bedescribed, emphaing needs and problems related to finances,Iministration, and se,vices provision, as well as the identiication of

possible solutions. In this st, management perfonce indicawrs will beidentifed. Second, actions which could be underan without additionalrsources, and which would yield immediate improvements in finances,aministaion, and/or services provision, would be identified. Third,potential subprojects wuld be identifed and prioritized. Fmially, a plan forthe execution of step 3 wuld be designed, including the identification ofhuman, data, and other resources that the muncipalites woutd be responsiblefor contributing. The outcome of this step wiU be a diagnostic report toserve as the basis for the design of individual MISPs

9. Step 3: Development of the MISP The objective of this step is todesign a MISP, selectng those areas which require strengthening in themunicipality, and preparing final Tlerms of PRference (ORs) for the chosensubprojects, including their components, costs, benefits, and financing andimplementaion schedules when required. Events wiU be held to encouragethe community to participate in the identification and priortizaton of itsproblems and their possible solutions, and to enable municipal staff and otherauthorities to participe in the definition of the MISP. It will be thereWonsibility of the municipality to ensure the participation of these officials.

10. The final MISP will include a diagnosis of the municipal situation,including municipal management objectives and performance indicators; asummary of subprojects and other activities to be implemented; a descriptionof mechanisms for coordination. monitoring, evaluation, and eation of tneMISP; estimates of the resources needed and proposed implementaionschedules; and a description of the risk and external factors that should betaken into account.

26 Annex A

11. In additon, monitoring and evaluation of progress in the execution ofactions recommended in step 2 will be carried out, as will necessary tining.Rpot on the progress and results of the project monitorng and evaluationytem will be prepared.

12. Step 4: Excutlon, Monitoring, and Evaluation The purpose Of thisstep is to implement the chosen subproject, including the contactng ofconsultants for technical assistance; to monitor and evaluate progress, andreadjust the MISP accordingly; to evaluate subproject results by obtainingand anayzing the information made awailable in previous steps, especially themanagement indicators defined in step 2; to hold events to encourage thecontinued participation of muimcipal staff, other officials, and the localcommunity in analyzing proges and in recommending expansion and/orreadjustment of the MISP; and to reorient the project as necessary to improvethe likelihood of achieving project objectives.

Chaacteristics of the Municipalites Slected

13. For a summary of the distribution of population and number Ofmunicpalities by population mange, see 1ible A. 1. For a breakdown of pilotmunicipslities by population, and a summary of characteristics of pilotmunicipalities by region, see Mibles A.2 and A.3.

27 Annex A

lTbb A.1 Number and opulatIon of Muncpalities By bpulation Range

Nubw of ipaitu Popuaton (tusands)

Population aU inunldpaltius pilot munddpalities au lul ipalitie pilot munl dpatietsRa (m0) (1992) (1") (19)

TOTAL 324 25 13,200.0 1,792.2(100%)p (100%) (100%) (100%)

ess than 198 7 1,953.6 95.620,000 (61.2%) (28.0%) (14.8%) (5.3%)

20,000 - 70 5 2,349.6 165.849,99 (21.5%) (20.0%) (17.8%) (9.3%)50,000 - 16 S 1,346.4 351.199,999 (4.9%) (20.0%) (10.2%) (19.6%)

100,000+ 40 8 7,550.4 1,179.7(12.3%) (32.0%) (57.2%) (65.8%)

i Jnidual immlcapdtIea Municipal aa s0 td.k/ Numbes in pawh*s. lodaw p.uof totfl added ooubwwi.

28 Annex A

MIble A.2 Breakdown of Pilot Municipalities By Populaton

1fItIaa or NfW Muici.alitlPopdain8ou RiiS I'ItM unldpilhi Riglm

l Tabo 4,25 VPi_qu l1,30 MRI

Carl-_a 11,698 VCbaoa" 14,007 1IColbd 16,941 vn

Santa BDbam 17,707 vmIda de Maino 19.720 MRV

20.000-0 4999 3

lA Lig 27,378 VMow at. Nti 28,206 IV

C;asbv 30,275 XNm Impea 36,841 ix

Caflavue 43.139 la-0.000 - 35199

Leta 50,173 vmsm Fuuma4. 56,32 VI

carih 72,137 MRIS; Andoa 77,719 VIA Cbkan 94.732 MRV

loom"+ ,1.1,9

Co" 103,919 VIson Joaquh 112.353 MRW

Cama 120,602 IOuom 128,709 XPsiero Mou 130,730 XLi Thtm 1#,586 MRWN aso 172,338 MEWMmS 2S7.4t6 MRf

TOTAL 1.792.216

A/ Meuopoitan Rion of S

I i 1 o I I t | IF I I f I If

2g FWF| g j tig T

30 Am= B

L LESSONS OF EXERINCE FROM PREVIOUS BANK PROJECIS

1. The prposed ptoject will benefit from the many lessons leaned overmore than a decade of Bank experience in municipal development, both inthe LAC region and worldwide. From the earliest Bank-financed municipaldeelopment projects,Y' the Operaons Evaluadon Deparmt (OED) foiundthat a strong commitment from the central govemment to the principles offinancially sound municipal development, and to ongoing reforms, is essentialfor project success.2 ' Supervision, intensive during poject start-up, andconsistt throughout project implementaton, was also found to increase thelielihood of success.

2. From the Brazil: Paranl Market Towns Project (Ln 2343-BR), theOED identified several key factors contributing to project success, including:

(a) Local govenment support for the project's local leveoperations.

(b) Small subprojects of relatively simple design, for which localcommunites themselves had expressed a desire.

(c) A competent, motivated team in charge of project managementat the local level.

(d) Risk management by simultaneous initiation of subprojects in anumber of towns, thus reducing the all aveage risks ofdelayed project execution as well as providing additionalpolitical support.

3. The ongoing BzilL: Muncp Dement &rWa in Paran andRio Grande do Sul States (Ln 3100-BR and Ln 3129-BR, despectvely) haveshown that eligibility criteria (such as the preparation of detailed financialand instiutional action plans) for participation in municipal developmentprojects should be clear and not excessively rigid. Clear and flexibleeligibility critena foster increased participation and, at the same time, preventdelays in projects start-up and disbursements.

4. In addition to the lessons learned from completed Bank projects inmunicipal development, several Bank reviews provide lessons from bothcompleted and ongoing project germane to the proposed prqject A recentifrstructure and Urban Development Deparment (INURD) review of Bank

{I Jordn: Cities sad Villages Deveonmt Bank roject (La 1826-JO), appowved in1981, and Jordan: Second Cities and ViYIag;s ULeveon Bank Prject (La 2614-JO).

1! V,w, Annual ieview: 199.

31 Annex B

lending for municipal finance operationsl' emphasizes that the primaryobjective of municipal finance should not be simply the increased extactionof tax rewenues for municipal use. Insted, municipal finance opertonsmust be designed as part of a broader effort to increase the accountability ofthe public sector, thuough decentralization of control to the local level, andthrough the creation of means and incentives that both allow and encouragelocal governments to respond to local priorities. Thus, successful municipalfinance reform must start, not with increasing muncipal revenues, but withimpming the effectiveness and efficiency of municipal service delivery. Inconjuncdon with this objective, a Europe, Middle East and North AfricaRegional Office (EMENA) study2' identified direct user charges andbetrment taxes as the pred sources of municipal finance, as theseconfront final beneficiaries direcdy with the costs of municipal services, aswell as promoting accountability in resource allocation.

5. The INURD review recommends that:

(a) The primary interlocutors for municipal finance reformoperations be at the nadtonal level, as the impact andsusinability of any local level reform depend on theincentives provided by the national government to themunicipal governments.

(b) Technical assistance for municipal finance projects beexplicitly action-oriented.

in the past, technical assistance often served as a substitute for reform; policyconfrontaions were avoided by defining the policy contat of projects solelyin terms of abstwact studies. In addition, the EMENA study (see para. 4)notes that a strong central agency in charge of the decentralization processhas been key to the success of past refbrms.

6. The review points out that in the context of municipal finance form,the Bank strves to fost accountability and tansparency, to encourwage theclear identification of responsibilities at each level of government, and toconfront consumers with the real costs of the services they enjoy. All suchactons usually have clear short-tenn political costs and only longer-term,intangible benefits. Because of the resulting political difficulties inherent inmunicipal finance reform the Bank must:

(a) Plan for long term, multiple project investments and sustainedpolicy dialogue with the central government.

8 The Aneual ReOgt of INURD, Report No. 10832, 1992.

2/ Decetralizaton and Reform of the State: Issues and Options for Bank Assisegr. EMENA Technical Deprtment Regional Discussion Paper, The World Bank,September 1992.

32 Annex B

(b) Concentrate its reources on countnies where indtutionaldevelopment and decent aon are ady underway.

(c) Devote more staff resources to municipal dvelopmentopaations than it has in the past.

7. Finally, a review of Bank experence in the prwvision of technicalassiancew makes the following recommendations:

(a) Document successul approaches to institutional deivelopmentand sbare them through seminars and an easily accesible,rduarly updatd database.

(b) Support expanded upstream institutional development wrk inselected municip es or regions

(c) UndaWe periodic instiutional assessments to develop anorgantional memory within the country, xami thefunctions, strengt, and weakmesses of, and linkages among,

levant institutions, as wdl as their legl and regulatoryfzamewrrs and pmance incentives.

(d) Asss the absorptive capaity of entities involved ininsttutional development to mimize the risk of over-ambitious project design.

(e) Carry out a mid-term review, followed by project design ifneeded.

(O) Promote multiple approaches to and instruments for thesupport of complex institutional development mefom

(g) Establish mechanim for project eview to emphasize theimportance of sustanable lending.

/I Magnaun Techoical ein= Ihe 1990s: Repot of the TchnicAiReview Ti Fo4 (woring daft), WashnSton, D.C.: TIe Wodd Bank Aust 1991.

33 Annex C

C. IPROJECr DESCRIION

1. The project would consist of two institutional developmentcomponents, one focuLed on improving municipal management and the otheron stenghen ie central governmenes capaity to implement effectvelythe de-etraliion reoms under. The municipal/nadonal classicadonin this section ree to th focus of he acdons described (i.e., on themunicipal or nadona lee), but not naril* to which level would acallyexeute the acivitie of the g ce. For example, epecially in theinidal phase of proect ipementation, the centra project executng entitymight contc most or all of the activities imolved.

2. The project would consist of the folUowing components andsubcomponents:

(a) Munipal stitutional Deelopment Componet (US$15.Smilion)j.l This component would include the followingsubcomponents for the municipalities in the pilot project:

(i) nrea MIcidal MW=n Dt I cmment (US$3.7million), including:

a. Preparation of Municipal InsitutionalStengheig Pas (MISPs) for a11 25muncipalites partcipating in the project

b. Oranization and mangment improvement,includig imprvemt of services to the public,the development of simplified Iministrativerocedures, and the implemention of methods

for increased pariipation by the public inmunicipal affaims

c. Strengthening municipal planning predures,including procedures for the Plan de DesarnloConwna.

d. Human resowue planning, including thedevelopment of a career and incentive strucurewitiin municipalities, the definition of tainingneeds, and the s ing of prsonneldepamets.

C Physical invstmt project implementationm_anageent, including the desig of aninvestnt project management sstem at the

If Al dolla aats iclu& Aliot for contingeu (m% in deA in Tale2.1).

34 Annex C

municipal level and technical assistance to helpmunicipalities maintain and operate theinfrastructure under their control.

f. Sector-specific planning, for example, regrdingsocial programs, the administration of subsidies,community services (e.g., street lighting,garbage collection, park maintenance), healthservices, and environmental protection. Thissubcomponent would include the development ofstrtegies to enable municipalities to assumemore effectively responsibilities in sectors thathave been or will be transferred to them.

g. Pre-investment studies, including feasibilitystudies for investment projects that ranscend asingle municipal jurisdiction, or that wouldproduce particularly good results in terms ofcost recovery, or that define other innovativeinvestments that would help municipalitiesimprove their overall performance.

(ii) Financial Managiment Strengthening (US$8.4 million),including:

a. Improved financial planning, including theintroduction of new financial planningtechniques and assistance to help municipalitieslink capital and multi-annual budgets with theirdevelopment plans.

b. Improved financial record-keeping, including theintroduction of expanded municipal accounts toimprove financial control and managementaccountability.

c. Design and implementation of multi-purposeproperty cadastres, including the consolidationof complete and current infbrmation aboutownership of land in the municipalities into amunicipal land register, to permit efficientcollection of the real estate tax and also forland-use plhnning.

d. Improved revenue collection, expense control,and cost recovery strategies, including theimplementation of new procedures to enabletimely and complete collection of revenue, andthe identification of potential sources and

35 Annex C

methods of cost recovery in the selectedmunicipalities.

(iii) UMwiiDn ManagmM Infrmation Systeua (US$3.4million), including:

a. Management-oriented inbrmation systems.These systems wwuld integrate infonnation fromthe various sectors of a municipality (e.g.,financial record-keeping and cadastres), andwould become the basis for a cohesivemanagement reporting system.

b. Sector-specific information systems. The projectwould support the specification, acquisition andimplementation of infbrmation systems needed toaddress the management needs of specificmunicipal sectors.

(b) Nationdal tional vlopment Component (US$4.5million)

(i) National Infomation System on Munipa1itiu (US$2.2million), including:

a. National infrmation system. Thissubcomponent would involve the design andimplementation of inmrements in the existingnationwide information system on Chileanmiunicipalities, which would enable thecomparative evaluation of municipalities. Thefeasibility of creating consolidated municipalaccounts (a complete and consistent set ofaccounts for the municipal, regional and nationallevels of government) woud be evaluated.General guidelines for the development andacquisition of information systems at themunicipal level would also be provided throughthis subcomponent to ensure effective andefficient information exchange.

b. Municipal management prformance indicatorsto be incorporated into a municipal ratingsystem. These performance indicators would beused to rate municipalities by such criteria asoverall efficiency, fiscal discipline, costrecovey, debt-carrying capacity, etc.

36 Annex C

c. Evaluation and monitoring system. Thissubcomponent includes the definiton andimplementation of a methodology for eWluatingthe impact of the project in terms of itsobjectives as well as provwiding a continuousassessment of the effectiveness of the projectexecution process.

(ii) Analysis of Policy Aftematives for Ipail/alas iia Eckils (US$1.1 million),

including:

a. Analysis of policy altenatives for impvinig theincentives in the nadonal/municipal trsfersystem for more efficient management at themunicipal level. This subcomponent wouldanalyze existing criteria for atlnational/municipal revenue tansfers (FNDR,heath, education, recreation, etc.). It woudseek to identify and analyze the efftiveness ofalternatives for imprving the incentives in thesetansfers for efficient management at themunicipal level. The feasibility of andappropriate timing for the introduction ofchanges would also be assessed. This studywould incluide an analysis of the causes of theincrease in municipal tnsfers for health andeducation, and would mabe specificrecommendations on when and how to adjustthem.

b. Analysis of policy altematives for improving theperformance of municipal emplcyees andinternal municipal oizatiOnal units.Recommendations would be developed onchoices for possible system changes, and on theappropriate process for their implemenlation.This subcomponent would be done inconjunction or close coordination with thecorresponding municipal subcomponent (seepars. 2.a.i.d above).

c. Multi-year financial plaming. Thissubcomponent would examine national andintenational experiences in multi-year financialplanning to produce a simple manual for use atthe municipal level. This subcomponent wouldbe done in conjunction or close coordination

37 Annex C

with the corresponding municipal subcomponent(see para. 2.a.ii.a above).

(iii) Ebaluation of the Impact of Rgional and Storlovettns Muipal Finanee (US$0.5 million),including the analysis of:

a. Impact of municipal investments in the areas ofhealth, education, housing, and infrastructure onother current expenditures.

b. Need for further coordination of theseinvestments within the public sector to preventnegative effects on local development.

(iv) Poect E&wutng Unit (US$0.7 million), includingmanagement and operational strengthening. lbchnicalassistance would be required by the PEU related to itsresponsibilities for project evaluation and review,progress monitorng, procurement of consultants, goodsand services, and for certain subject areas (e.g.,financial management and information technology).

Tuining of municipal staff, including the development of courses andseminars is included in the respective components and subcomponentsof the MlSPs. Ihe PEU would be responsible for identifying the bestmanagement and optional practices, both within Chileanmunicipalities and interationally, and for facilitating thedissemination of these praces to municipalities and other appropriateorganizations.

38 Annex D

IX PROJECI SUPERVISION AND MONIIORING

1. Monitoring and evaluation are particularly important to this project asit is a pilot opeation. This annex describes the reporting requirements forsupervising and monitoring the progress of project implementation. For adescription of the system for monitoring and evauating municipalmanagement performance and general project impact, to be carried out by theProject Executing Unit (PEU), see Annex F.

Reportng

2. Routine monitoring of the progress of project implementaion requiresthe issuing of a number of reports in compliance with Bank regulations.These include: (i) quarterly progress reports; (ii) a mid-term evaluation of theproject; (iii) a Project Completion Report; and (iv) an analysis of the resultsand impact of the project ("Pilot Evaluation") (see Annex F). The prgressreports to be submitted to the Bank will be based on the same information asthe reports prepared by the PEU for its own needs. Following the mid-termevaluation, to be done jointly by the Bank and the Goernment at the middleof the second year of project implementation, any necessary changes inproject implementation would be introduced.

3. All reports should examine progress in implementing: (i) theMunicipal Institutional Development component, including improements inmunicipal management and municipal finance, establishment of municipalinformaion systems, and training of municipal staff; and (ii) the NationalInstitutional Development component, including improvements in the nationalinformation system on municipalities, improvements in incentives in thenationalmunicipal transfer system, and evaluation of the impact of regionaland sector imvestments on muncipal finances. The reports should alsoexamine (iii) the management of the PEU, including its administration andfinancial management, the procurement and contracting of consultingservices, the management and coordination of training progams, the processof disseminating best practices, and municipal perfomance evaluations. Inaddition, the reports should comment on (iv) compliance with all legalcovenants.

4. As an aid to supervision and monitoring, and as a basis for thequalitative evaluation sections, reports may include matrices with thefollowing data (i) the number of prediagnostics, diagnostics, and MISPsinitiated and completed to date; (ii) the number of subprojects andcorresponding consulting assignments initiated and completed by eachmunicipality to date; and (iin) the number of consulting assignments fornational actions and studies initiated and completed to date

39 Annex D

Supervislon

5. In addition to reportng requirements, the progress of projectimplementation ould be monitored through bi-annual missions to Chile,complemented by the quarterly proess reports and by periodic visits (atleast once a year) to WAshington by lky officials from the PEU. The firstBank supervision mission would be a wproject launch wrkshop'. For atentative Supervision Plan of Bank missions, see ¶Ibble D. 1.

Table I1 Supervion P1a

nDa hudanb Min O*di

ApuMq 1994 Th*k MAnr (aa Lmoh Seminalr

OpettOn Spiadapw_mSpwkDsbuewi Offlcer

ssIoet 15 Vby PbUym sff Detil vw of t- dffultIes

:ow/Dec 1995 Ta Man Revie sabe of WUnefpmn ofprucnnOpestLcs Specialist pucedu," of acmatg pnedums, and ofMusICs AdmW"iuh on Putn Rs. f

iAWAjV 1995 hk Mn Dtae evie of pwSam in ;W iun as w

MuidMAdnidtios

JmiJ* 1995 Vsi by MU staff to asanu Revi; of po an dUficu o data; d&nOnof equired actiom

SepOct 1995 TkM& Manae Md-s Reim(06e s reurd

PtAw 196 Ihk MAar Supevisio ash as rqutd(odhs as requited

JJ* 1996 Vis by PMU stff to Vsbton Deaed rviw of imp_em

SqOt996 ITAM _nager Genl supeiso aN dicso of Pea(othe as equied) C RUIKRP (

40 Annex E

E ORGANIZATION OF PROJECT IMPLENMNTATION

ResponshiItIe of the PEU

1. A Project Executing Unit (PEU) has been established to maageprqect implemenion. The PEU reports within the Municipal Division ofSUB3DERE (see Chart E.1).

2. The PEU will have the folowing responibilities:

(a) Tb assist municipalites in the fomulaon and implemenlatonof the MIPs.

(b) lb review and approve the MISPS, agreements with themwuncipelites and specific municipal insdtutional dedopmentsubpMroects.

(c) To implement the national instituonal developmentsubprject.

(d) Tb monitor and evaluate all prqect elements and the project'simpact on the municipalis pefoirmance and, if requird, toformlate and implement adjustments

(e) lb monitor, eWaluate and consolidate all penent prectepeiences and ecomndations for use in expanding thispilot project to al of Chile's mic ev

(t) lb prepare periodic progress reports for the GCvnment andthe Bank based on moniting and valuation carried outaccording to points (d) and (e).

(g) lb procre goods and services for all national institutionaldevelopment subprojectL

(h) lb coordinate with the concerned govenment agencies,partidcularly the Ministry of Finance.

(i) lb coordinate within the SUBDERE conceing mattersaffecting the municipalities' management and finances.

Oj) lb identify and disseminate the most scesful pactices.

bIternal Orgaon of the PEU

3. A tentaive org tion structwe and saffling have been proposed forthe PEUJ. Te PBU will have a total of 15 staff. Genera managment willbe pnwided by the Genera Coordhiat and an opeations manae, to whomthree groups will repor

41 Amnex E

4. The Project Adinis on urop wil be responsible for genesaladmidstMve suport, offce services, cretai support, and the financialaspect of proec mnpoets and subprojec (eg., rord-kig adfinancial control and reporting). The goup will include to accountants,two secretre, and an offilce clerk.

S. A group of ix institutional development cordinato will assist themunicipaliies assined to them to dvelop their Municipal InstitutionalStrengtheing Plans (MlSPs) and to COOdinat the vious activities of theprqct that flow from the planL Assignment of municipaliies ill occuready on in the prqect. It is anticipated ta each coordinator wil beassigned 4 to S of the 25 pilot municialite

6. A grop of two secialists will be responSible for supevsing allaspects of the national studies and sub-projec

42 Annex E

Chart E.1 Organoaton of the M istry of Interior

Ministry ofInterior

f I ~~~~~~~~~Secretary ofSeretary of *RegioaalInterior DOvolopmnt and

A..ulistratlon

modernizatlon and RegonalAdminist ratilon Deve lopmntDllsloReform Division Division Ion

Project Execution

-

43 Annex F

F. MONITORING AND EVALUATION STRATEGY

1. Monitoring and evaluation are particularly important to this prject asit is being undertan on a pilot basis. Specifically, monitoring andevaluation information ftom the pilot project is required to:

(a) Measure the prgress of the project, including progress on thelegal covenants regading project execution monitoring.

(b) Satisfy the Bank's project supervision needs.

(c) Assess the impact of the project. This information will ensurethat future expansion of the project concentrates on itemswhich have been shown to provide the greatest benefits

(d) Establish a base of experience on the strengths and weaknessesof pilot execution so that the project may, in the future, beexpanded in the most efficient and effective manner.

This annex addrsses only points (c) and (d). For a discussion of points (a)and (b), see Annex D.

2. In addition to monitoring the progress of project implementation, asxplained in Annex D, the Project Executing Unit (PEU) will work with

cosltants to design and implement an evluaton system to measuremunicipal perfmace mmagement and to ayze project impact. Themonitoring and evaluation tasks will provide the PEU with importantperience for future projects of a similar kdnd. Monitoring and eWaluation

activities to be undertaken, and data to be produced by the evaluation systm,will be recorded in the Monitoing and Ewaluation section of the ProjectManual, the maintenance of which will be one of the responsibilities of thePEU.

3. The principal users of the evaluation results will be: (a) the mayors ofthe participating municipalities; (b) the Prqject Executing Unit; (c) theGwvenment of Chile (the Borrower), including the Ministry of Hacienda(DireccOn de Presupuesto) and the Ministry of the Interior (SUBDERE); (d)inmes and consejos regionaes; and (e) the Bank. Data provided by theevaluation system will enable these users to answer questions from the pointof view of both project impact and execution, such as: "What went well, andwhy?" and "What did not go well, and why?".

Scope of the Pilot Evaluation

4. The scope of the pilot evaluation includes:

(a) Evaluation of Project Inpact and Result, an asmet ofthe outcomes of various stages of project implementation, i.e.,evaluating the impact of the project on municipal and national

44 Annex F

institutional development in support of the goals of Chile'sdecentralization reforms. The information provided by thisevaluation will be critical for management decisions on suchissues as whether to extend the project to all remainingmunicipalities, or which components of the project should becurtailed or expanded.

(b) Evaluation of the Project Execution lProess Periodicevaluations of the project execution process, as outlined inAnnex D, will assist the PEU and the Chilean government inadjusting the execution arrangements as required.

5. The stategy for evaluating project imlpac will include the definitionof management objectives and related peformance indicator Evaluationwill focus on a variety of organization levels at which project impact may befelt, including the level of an individual project component in an individualmunicipality; of an individual project component in most or aU of the pilotmunicipalities; of all components within one municipality or within a subsetof municipalities with similar characteristics; and of the pilot prqect as awhole (all components in all participating municinalities). Evaluation willfocus on different pkazai of the project, including the project start-up phase,and on phases during which project components are being implemented. Inaddition, evaluation will focus on different levels of within eachmunicipality, including the level of the municipal director and the mayr, aswell as on the national level of management.

6. The process of evaluation will use different kinds of indicators tomeasure project impact, including cfalnesand quaIlt measures (e.g.,the percentage of applicants satisfied with the service of the building pernitapplication process); engr measures (e.g., the average processing costfor building permit applications); and and demand measures (e.g.,the number of building permit applications handled or building inspectionsundertakn).

7. Subject to detiled design by consultants in conjunction with the PEU,it is expected that the Monitoring and EWaluation section of the ProectManual will include definitions of:

(a) Management objectives.

(b) Performance indicators.

(c) Control group(s) and how they will be used.

(d) Ifrmation required and its source(s).

(e) How to obtain the required information.

45 Annex F

(t) Other implementation requirements (e.g., training, and formscompletion).

(g) Considerations on how to interpret the evaluation results.

8. Evaluation of the project execution =sS will require informationon the progress of individual project components (e.g., against planned timeframes and cost estimates), on the progress being achieved in theprocurement and contracting of consulting services, on the number of trainingproms run and the number and sources of attendees, and on how many"best practices3 have been identified and disseminated.

The Design of the Evaluation System

9. The PEU will contract consulting services for both the design and theimplementation of the ewaluation system. Terms of reference for such anasignment have been developed, encompassing three stages:

(a) Design of the evaluation system to address the identified needsfor impact and project execution monitoring and evaluation.

(b) Undertaking initial ('benchmark") measurements to understandthe current situation in:

(i) Participating municipalities.

(ii) A control group of municipalities (all remainingmunicipalities or a selected group of comparablemunicipalities).

(c) Undertaing actual evaluation activities during and after theexecution of components of the project.

10. In addition to its main purpose of providing a basis for decisionsregrding epanded project activities, the eWluation information to becollcted and analyzed may have fiurther uses in such tasks as:

(a) Clarification of accountability.

(b) Resource allocation.

(c) Budget formulation and justification.

(d) Progrm/project evaluation, analysis, and selection.

(e) Employee motivation (feedback).

(f) Contactng of services based on performance criteria (e.g.,minimum quality levels, financial incentives).

46 Annex F

(g) Ensuring proper relationships between effectiveness andefficiency (e.g., service quality and unit cost data).

(O) Management decisions on individual municipal progrms.

() Communication between cidzens and local governmentofficials

The performance Indicators may eventally be used to assess municipalentitlement to cetmin central govenment funding, allocated as a rward foroutstaig performance. The indtrs will also provide input for thecraon of a rating system for the purpose of assessing municipal debtcapacy, should it be decided to introduce such a policy in the fut.

11. The success of the evaluation system will be demonstated by:

(a) Its immediate applicability by the PEU.

(b) Its reliability (i.e., it measures what it is supposed tomeasure).

(c) The unambiguity of the information it provides.

(d) Its applicability in different phases of the project (e.g., shortlyafter the completion of an individual component, or afte thecompletion of all components in one muncity, or after thecompletion of the pilot project itselO.

(e) Its feasibility from a cost/benefit point of view.

(f) Its objectivity.

12. The following will need to be taken into account when designing theevaluation system:

(a) The need to distinguish consequences due to differentvariables, such as:

(i) The degree of particpation and commitment of themunicipal staff.

(ii) The effectiveness of the consultants.

(iii) Unforeseen events (e.g., a change of key personnel, oran emergency in the municpality).

(iv) The impact of other initiatives (e.g., a naional prijectin a particular area, or own municipal initiatives beingcaried out during the same period of time).

47 Annex F

(b) The diffeint degrees of management impwement ptm1ia1 indifferent municipalities, due to different municipal conditionsat the saof the poject.

(c) Participation in the project at different levels of inten indifferent municipalitia (they may execute many or only a fewpnject cogmonents, depending upon their current capacity ordesire tD prepare for and to implement change).

48 Anne O

G. PROJECT AMANUAL

1. It was agreed Pr the Projet Manual would be divided into tmainparts, the first covering the internal procedures of the PEU, and the secondcoeing everytbing that those at the municipal level (e.g., mayors andmuncipal offtcials, etc.) would need to know for effective participation in theproject.

2. Following are the elements that should be included In the ProjectManual.

(a) Introduction

(b) Brief Description of the Project(i) Introduction(ii) Objectives

(iii) Componentsa. Municipal Institutional Developmentb. National Institutional Development

(tv) Participating Entities and Beneficiaries(v) Costs(vi) Financing(vii) Global Execution Schedule

(c) Project Operation(i) Handling and Tlnsfer of Resources

a. Special Account for the Projectb. Municipal Accountsc. Direct Payments by Bankd. Bank Disbursements

(ii) Participating Municipalitiesa. Irvitation, Confirmation and Basic Infomnationb. Participadon Agreement

(iii) Institutional Development Processa. Municipal Counterpartb. Diagnosisc. Agreement on Conditionsd. Evaluation of Compliance on Conditionse. Municipal Institutional Stregtfhening Plan and

Subprojectsf. Implementation and/or Execution Agrmenftsg. Municipal Istitutional Strengthening Plan

Implementation and Subproject Execution(iv) Municipal Institutional Stngtheing Pln

a. Typical Contentb. Execution Arrangements and Stagec. Evaluation and Approvald. Monitoring and Supervision

49 Annex G

(v) Municipal Subcomponentsa. Sectors and lypical Objectivesb. Execution Format and Stagesc. Evluation and Approvald. Monitoring and Supervision

(vi) National Subcomponentsa. National Actions and Studiesb. Proposals with General Application to the

Municipalities

(d) Contracting and Procurement(i) Selection and Contracting of Consultants

(ii) Contracting and Procurement of Goods

(e) Monitorng, Evaluation and Audiing(i) Monitoring and Evaluation

a. Progress Monitoringb. Impact Evaluation

(ii) Auditinga. Supervisionb. External Audits

(f) Project Executing Unit(i) Responsibilities

(ii) Duties and lssOii) Oipnization(iv) PNsonnel(v) Equipment(vi) Goods and Sevices

SO Annex H

H. ESTIMTED SCHEDULE OF DISBURSEIENMS

Table H.1 Disburseent Schedule(miUions of US dollars)

Calendar rawul CiUntiVW Yea Quate EAdig Quart r FY TWtd % of Total

1224 1994 Mar 31, 1994 0.20 0.40 0.20 21994 1994 Jun 30, 1994 0.20 0.40 4

1994 Sep 30, 1994 0.S5 3.10 0.90 91994 199 Dec31, 1994 0.60 1.50 IS

19S 1995 Msr 31,1995 1.00 2.S0 251995 199S Jun 30,1995 1.00 3.50 35

1995 Sep 30, 1995 1.20 S.00 4.70 47199 1996 Doc31, 199S 1.20 5.90 S92991i 1996 Mar 31, 1996 1.40 7.30 731996 1996 Jun 30, 1996 1.20 8.50 8S1996 1997 Sep 30, 1996 0.90 1.50 9.40 941996 1997 Dec 31, 1996 0.60 10.00 100

51 Annex I

L SELECIED DOCUMENN IN PROJECT FILE

Project Executing Unit (PEU)

(a) "El Prestario y el Ejecwor" (prepared by the PEU, June1993)

(b) Summary documents (prepared by the PPU, July 1993) andplanning documents (prepared by Roberto Samayoa,consultant)

(i) 'Conclwiones y recomendaciones para la etapa deejecucidn del proyecto piloto de fortilecimnucidpal" (prepared by the PPU, June 1993)

(ii) 'Tareas realizadas por la Unidad de Preparaci6n dePryecto pama el Progrma de FvralecimienoInstitucional Mumcipalw (pWpare by the PPU, June1993)

(iii) "P?yecto de Fortalecimiento instiuciona Munkipal(PFIM). Notas para la preparacion del pmyecto"Iwepared by the PPU and Roberto Samayoa,consultant)

(iv) "Notas parm la inplementacidn del progrwna'(prepared by Roberto Samayoa, consultant, March1993)

(c) Ayuda Memoria, Mayo 1993 (Subsecretario GonzaloMartner y el Ministerio de Hacienda)

(d) "Fonnto de Convenio entre la Mumcipalidad y la UnidadEjecutora del Programa" (prpared by the PPU and RobertoSamayoa, consultant)

(e) Mal on project methodology

(i) "Piepuesia de metodolog(a pemnanente" (documentprepared by the Ministry of Finance, May 1993)

(ii) "Avw,ce metodoldgico" (March 1993)

(iii) "Fstado de Avance- Desarrollo Metodoldgicou

(iv) "Metodolog(a de Diagn6stko' (January 1993)

52 Annex I

(f) Schematic on Central Coordination and Planning (prpared byconsultants Mat Andersson and Bob Ashford)

2. Municipalities

(a) Selecci4n de comuws e indicadores de gesinnfinanciera"(prepred by the PPU)

(b) Outines on municipal contacts

(i) Introduction of the pilot project to the mayors (onepage) (suggested contents by Mats Andesson)

(li) Examples of elibility criteria (one page) (suggestionsby Mats Andersson)

(iii) Schematics of municipal institutional development(prepared by consultants Mats Andersson and BobAshford)

3. lbrms of Refmrence (MR)

(a) Initial Municipal Development Actions (Draft TOR)

(1) Deelopment of Municipal Institutional StrengtheningPlans (Mls) ('TUndnnos T&cnvos de Rpencla-Plan de Desarrollo Insdtudonaipara Muwcipaldades)

(ii) National Information System on MunicipalitiesProject

(iii) Staff Thining and Development (Draft TOR and Letterof Invitation)

0) Project Evaluation and Monitoring System (Draft IOR andLetter of Invitation))

4. Diagnostics

(a) Reuntones en Mudciplos Reglonares" (Ma 1993) (Pte-dlagndcos reazados en 6mniclpalade por PPUfuem dela ReglIn Metropolia Roncagua, Lolol, mnilla,Cartagena, El Tabo, Mb del Mar, Lora)

(b) Case materl from the Municipality of Conchalf

(1) "Pka de finaleckmeno Mwucipal" (drft)

53 Annex I

ii) "Subproyeao Sistema Inegrado dePrsupuesto/Contabilidaf (draft TOR)

(iii) 'Subproyecto Sistema de Ifonnaci6n Sodal"(draft TOR)

(c) *Dlagndsacos en Co Mwdcpalidas: La Pinta, ElBosque, Maipg, Isla de Malpo" (pdpre by the PPU,February/March 1993)

(d) "Dagid.co en la Mwiucpaidad de San Jaqu" (preparedby tie PPU, Januay 1993)

5. Project Components

(a) "Plan de Desarrollo bIsd*ulonal- Subproyectos Muwddpales.Perles y Tbmdnos de referencia tpo pam subproyedos(seprate blue book)

a. Relacldn entre subproyectos e indicadores degestd6n

b. Trndnnos de wrnrencla para el Plan deDesarrollo

C. Instucnal

d. Trnmnos de refermnda dpo para subpryectos(prepared by the PPU and Swedish consiltants,June 1993)

(b) Fxtudos- Acfvdades GlobaWs, Subproyects mwdcpaks"PeRfles y T6nnlnos de Rferenda dpo (repared by the PPUand Swedish consultants, June 1993)

(c) "Oferta del Programa a los Mwuddpios"; "CapadW n ydoij n del progrma" (proposal prepared by the PPU)

(d) Subproject descrptions on infbrmation Wstems designs

(i) ISlma de rnformadn inandera mwucipal- Diselow(prepared by K. Thamstrom, June 10, 1993)

(i) "Lneamlentos generaes paM la gest6nJnanlemnicipal (pepared by I. Umansky, June 7, 1993)

(ifi) "Sistema de informacidn socil nuaidpal- Disefto(prepared by K. Tharnstrom, June 10, 1993)

54 Annex I

(iv) 'Sistema de ifjomtcidn gerencal muwipal- Diseflo"(prepared by K. Tharnstrom, June 10, 1993)

(e) Summary reerence material relative to project component(prepared by Mats Andersson, consultant)

(i) "Project Components and Subprojects" (one page)(cross-reference to other lists of subprojects)

(ii) "Notes on subproject evaluation ex ante' (two pages)

(iui) -Nols sobre el Plan Insttuclonarw (six pages)

(iv) "Diagndsdcos- Acciones Potencials" (two pages)(matnz de subproyectos y acciones potecals)

(v) National training subproject" (fbur pages)

(t) Tmuwos de Werenaa par estiios generaes (pred bythe PPU)

a. Diseflo del manual de acceso a fondospablicos"

b. sCooinaci6n inwrmunicpal`

c. -Sistema de firnf acl6n nunicipda

6. National Information System

(a) 'Prigruam (SISAU)J: Sistema de Segumiento de AccionarMunicipal (developed by Sandro Raggi, consultant to thePPU, May 1993)

(b) "0omne de Lars-Olof Andersson, Consultor" (rabajorealirdo en Chile del 27 de abzil al 12 de mayo 1993)"

(c) Departamento de iormarizacidn (document developed by thesystems department within SUBDERE)

(d) "Lista de mddulos municipales potenciales de iVonimdca"(two pages) (by Mats Andersson, consultant)

7. Ewaluation System

(a) "Efiaencia y poducvidad del secor piblico: Alguas notassobre Indicadores de gesd6n y medidas de productividad"(prepared by Sra. Carmen Celeddn, Ministerio de Eacienda)

55 Annex I

(b) "Municipal Government: Program Performance EvaluationMethodology" (material prepared by Robert Ashford,consultant)

(c) Draft material for TOR: "Design of an Evaluation System forthe Pilot Project: Fortalecimiento Municipal" (pepared byMats Andersson, consultant)

8. Other

(a) Organigrama- Subsecretar(a de Desarrollo Regional yAdministntivo

(b) "Plan Comunl - Conceptos y Lineamientos" (draft) (mateialprepared by Swedish consultants)

(c) "Alteniwvas bdsicas para elfinadamtento y administiucidn dela inversidn municipal (prepared by Sm. Carmen Celed6n,Ministerio de Hacienda)

>mo ~~~~~~~~~~~Z

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