Decentralization and urban poverty reduction in Nicaragua: The Experience of the Local Development Programme (prodel)

PRODEL’s infrastructure and community work’s component
The component aims to improve, repair and expand basic infrastructure and services of squatter and poor areas of the five municipalities where PRODEL operates. The component also aims to improve the capacities of local authorities to work with poor neighborhoods through participative approaches.
Funds given by PRODEL are not refundable neither by the local authorities or by the families. The idea is to have a clear focused subsidy component targeted to poor and extreme poor families. In spite of being non-refundable, local authorities and beneficiary communities have to contribute with more than 35% of the value of each project.
PRODEL finances a maximum of US$25,000 per project or 65% of the value of a single project. This means that if a project cost is US$35,000, PRODEL will only finance US$22,750. The remaining funds have to be contributed by the municipal authorities and the communities both with speciallized or unskilled labour force, machinery, money and other in-kind resources.
The Mayor and the Town Council are directly responsible for the administration of funds. PRODEL encourages the formation of Municipal Commissions, with representation of each of the main actors participating in the execution of the Programme (the Bank, representative of the communities, the Mayor, the technical unit of the municipality, representatives of other key governmental institutions, and PRODEL’s Local Coordinator). The Commission is presided by the Mayor. Its main responsibility is to identify the barrios based on the selection criteria prepared by PRODEL and to supervise the execution of the programme.
The commission is also responsible for broadly defining the activities in each municipality and the annual budget needed to cost-share the different upgrading projects. The technical work is carried out by a Technical Unit set up explicitly for the programme. Usually it is composed of an engineer, a social promoter and an accountant. These persons are part of the municipal staff and are paid with local authorities’ resources. PRODEL only compensates a small amount of their salary.
In the identified ‘barrios’, the three components are introduced on a gradual basis. In the infrastructure component, the planning of the public works is based on the results of a micro-planning exercise carried out between municipal authorities and the target population. The beneficiaries participate with the Technical Unit, in needs identification and definition of a strategy of solutions to the agreed problems⁹. In the process, both actors negotiate and agree on a plan of action to solve some of the main problems of the ‘barrios’. One of these actions is the project to be financed with funds of PRODEL.
In addition a Community Commission is formed for organisational aspects; they organize community labour and oversee the use of the funds. Community participation has increased accountability as the community is increasingly involved in, and committed to, the success of the project and also how the money is used.
Table No. 3

Results of the Infrastructure component (1994-1996)

Type of Work	Leon	Chinandega	Esteli	Somoto	Ocotal	Total	%
Roads, streets & walking pathways	15	9	21	3	8	56	34.6
Percentage	22.8	29.6	17.9	15.4	14.2	100.0

Source: PRODEL’s October 1996 Progress Report.

It should be highlighted that one of the most important features of PRODEL’s model is the search for increased decision-making and new forms of participation of the beneficiaries. Progressively the Programme has successfully been moving towards greater community participation in the management of the infrastructure projects, especially in the execution stage, although the post project management of maintenance is still incipient.
The priority setting exercise of microplanning with the community and the budget-balancing exercises has meant that the municipalities have incorporated the budget constraint in their daily operations. In some cases, municipal tax revenues have increased substantially after making this exercise. This has helped authorities to fulfill their commitment to the programme.
The infrastructure component started its operations on April, 1994. Over two and a half years, a wide variety of infrastructure projects have been completed in the five municipalities (35% of these projects are street and side-walks improvements; 23% are introduction of potable water, sewage and storm water systems; 16% introduction of public electricity, 13% building of sport and green areas; and 13%, school and health clinic repairs) (see Table No. 3). It is possible to see that the type of agreed project varied from one city to the other. Chinandega was the municipality that made use of the widest variety of projects.
According to the project document (INIFOM, 1994) the physical target for the three years was to built 64 projects in 40 neighbourhoods with a total investment of US$ 1.66 million. Up to October, 1996, about 89% of this sum had been spent on 162 projects in more than 80 neighbourhoods benefiting more than 20,000 families. Investment per capita of among the poor population with PRODEL’s funds is about US$ 11.17.
The total investment of the component done by PRODEL, the local authorities and communities totaled more than US$ 2.6 Million. Average cost of each project has been US$ 16,000 in which PRODEL’s contribution has been in some cases 56% (less than programmed) while the Town Councils and the communities have contributed more than originally planned. It is estimated that the communities have put more than 25,000 working days of voluntary labour for the execution of projects. The type of projects also reflect the variety of needs and negotiations that took place in the different impoverished communities where the programme works.
According to a recent external evaluation of PRODEL (Vance & Vargas, 1996) some of the main problems affecting the component are the following:
The majority of infrastructure projects have good quality with some problems in road repairs in Leon and Estelí. The maintenance of projects is also becoming a problem since its taken for granted that the community will take responsibility once the project is finished.
Another issue is the lack of consciousness within the local authorities about some environmental problems that can be overcome with the projects. Mayors have argued that the introduction of water and sewage system is a responsibility (according to existing laws) of central institutions and not local authorities. They insist that investments on water systems is recovered in the long term by central and not local authorities when people pay for the services.
The environmental issue of course is not only a financial matter. It illustrates for example, how the lack of a good system of garbage collection and disposal can create not only environmental hazards but deteriorate the infrastructure.¹⁰
To face some of these environmental problems, joint initiatives have been promoted between the Ministry of Health, local authorities and PRODEL to set on several primary environmental health actions with the population of the ‘barrios’.
In any case, the issue of maintenance has been highlighted as a matter that needs more thorough research and proposals.

PRODEL’s housing improvement component
PRODEL’s housing improvement loans are given to those families living in poor squatter areas identified as the target of the programme. The aim of the loan programme is to assist the families to carry out small-scale upgrading and repairs to their homes (changing roofs, improving floors, building new rooms and kitchens, changing the wall materials, etc.).
The housing improvement component complements the funding of loans for small scale enterprises and the subsidy for the infrastructure projects. Housing loans have to be repaid fully back by the beneficiary families to the bank.
INIFOM established a trust fund with the Popular Credit Bank for the administration of a revolving fund for the housing and microenterprise loans. The Bank is responsible for analyzing the housing loan requests according to a series of criteria in which affordability (monthly family income and expenditures and possible percentage of monthly family income destined to repay back the housing credit) becomes a key element of analysis but not the only one used.
It has been established that monthly payments to repay the loan by a household should be between 15% to 20% of its monthly family income. The majority of cases take the 15% as a limit and only if a family has a relative high level of income, the 20% is considered.
The general procedure used for the implementation of the component is the following: PRODEL and the local authority convenes the interested population of a ‘barrio’ to meetings held in community centres or schools of the targeted areas where the programme is working. A member of the bank and a technician of the municipality explain the objectives of the loans and the technical, financial, legal and administrative procedures to access to funds.
The Bank does a short affordability assessment to those interested families. A indicative figure of the maximum amount of funds a household can actually have as a credit is established taking into consideration the financial conditions of the loan and the income and expenses of each household. The family compromises to bring the necessary guarantees and collateral, as well as other evidence the bank requests (for example, sources of income, identity card and name of referees).
Afterwards, the municipality gives technical assistance to the family to determine jointly the type of improvement needed, the amount of funds required and the type of counterparts the family has to contribute (via labour force, in-kind counterparts or money wise). The result of this process is a detailed budget and a rough blue-print of the improvements to be done. Later, the bank approves the credit and disburses the funds (with a check) directly to the beneficiary. The average time it takes for a family since it receives the first talk by the bank until it starts the building process is 22 days. Each municipality and bank’s branch is able to allocate about 20-24 credits a month.
According to the loan contract signed, the family has 5 days to start building from the moment the check is given. The bank with the help of the municipality supervises that the building materials are bought and that there is no deviation of the funds. Technical assistance is also given during the building process (at least once a month) to verify the quality of the improvements.
In the housing analysis, extra points are given to families that are able to present real collateral. Extra points are also given to requests coming from female headed households¹¹. Loans range from US$ 200 to US$1,200 and an average of US$600. The repayment period is four years and interest rates are 12% per annum plus maintenance of value (which accrues to another 12% per annum). A family can ask up to 15% of the value of the loan to pay labour force.
Macroeconomic conditions require that all loans in Nicaragua have to be repaid back as if they were given in US Dollars. This means that in each monthly payment, the debtor pays an extra fee that equates the outstanding balance of the loan in Cordobas to US Dollars according to the monthly devaluation of the national currency. Thus, interest rates add to about 24% per annum. This level of interest rates ensures the capitalization of the fund however, it is much lower than the rates offered by the conventional financial system for individual credits.
The type of collateral and guarantees that the Bank accept are flexible and range from land titles to the building materials themselves. This implies that in some cases, guarantees are not real and can imply a grater risk for cost recovery. Experience however, shows that the problem is more related to the real cost of engaging in cost recovery and the internal disposition of the institution responsible of closing the loan.
In a two years period (from October 1994 to September, 1996) PRODEL has given a total of 1,687 loans for housing improvements in the five municipalities where it operates. More than 68% of the credits go to women headed households. Of the total amount (see Table No. 1), 20% were allocated to households with a monthly family income between US$ 50 and US$ 100; 48% to households with a monthly income between US$101 and US$ 200; about 26% between US$ 201 and US$ 300 and 6%, to families with incomes between US$301 y US$350¹².
Arrears and defaults are below all national programmes. Net exposure of the portfolio is about 15% (about 85% of the arrears cases are families that lag one month payment).

Table No. 4
PRODEL’s housing loan scheme: distribution according to income bracket

Income Bracket (in US$)	Number cases	% of cases	% Coverage of Poverty Line
50.00-100.00	337	20	50-80
Total	1,687	100

Based on PRODEL (1996)
This means that about 68% of the loans were allocated to households with family monthly incomes equal or less than US$200. Average family size in the five municipalities is about 5.6 members.
According to a World Bank’s Poverty Assessment Document (1995), the poverty line in Nicaragua stands at around US$ 430 per year per capita and the extreme poverty line at US$ 202 per year per capita. Therefore, for a family of 5.6 members, the poverty line is approximately US$ 1,505 per year (or US$ 125 per month) and the extreme poverty line at (US$ 59 per month).
The figures were determined under the following assumptions: A five member family (two adults and three children) has a caloric requirement equivalent to three and a half adults. Thus the poverty line for a five member family is equal to US$430x3.5 or US$ 1,505 per annum or US$ 125 per month and the extreme poverty line for a five member family in one month is equal to US$202x3.5/12= US$ 59 or US$708 per annum.
The above figures indicate that at least 20% of the beneficiary households of PRODEL’s programme have enough income to cover between 50% to 80% of the poverty line expenditure requirements; 48% of the beneficiaries, between 81% to 160%; about 26% to cover between 161% and 240% of the poverty line and 6% to cover between 241% and 280% (see Table No. 4).
Another figure that can help understand the type of beneficiary families the programme is attending is the average monthly wage of a public worker which in June 1996 was about US$ 85.00 (among the lowest of the market) (Banco Central, 1996). This means that PRODEL is serving families with monthly incomes that range between 0.6 and 4 times the average monthly wage of a public worker. About 68% of the families cover between 0.6 and 2.3 times the average monthly wage of a public worker.
Yet, it is important to take into consideration that for urban households, the costs of basic necessities to avoid poverty are usually higher than in rural areas (Satterthwaite, 1996). Thus, it is possible to conclude that the majority of PRODEL’s beneficiaries are poor families. About 58% can be considered poor and only about 10% belong to the extreme poor.

This was corroborated by the external consultants that assessed the programme in May 1995 (see Vance and Vargas, 1996). Does this imply that PRODEL is unable to target to the poorest sectors of society? By no means. It was never the intention of PRODEL to target its housing loan scheme to extreme poor families. The main idea of the programme was to demonstrate that it was possible to establish a non-conventional housing improvement loan scheme amid a context lacking a housing policy and financial support for the poor.

Contrary to the Chilean, Salvadorian and Costa Rican experiences, Nicaragua lacks a state subsidy scheme that enables extreme poor families access to funding for low-income housing. In this situation, PRODEL established a full cost recovery policy as the only possible way to sustain the housing revolving fund formed with Sida’s resources.
Therefore, the affordability criteria together with the request for real collateral became necessary to identify those families that can participate in the scheme. This does not imply that the beneficiary families are living in suitable conditions. The majority of families benefited with the loan schemes live in wood shacks and in settlements with a huge deficit of basic services and infrastructure. However, it certainly precludes the possibility of getting to extreme poor families.
If seen separate from the other two components (infrastructure and microenterprises) the conclusion regarding the housing loan scheme can be misleading. The infrastructure component is the way to subsidize the extreme poor families and thus, it makes the programme affordable to the totality of the population living in squatter areas. This has to be taken into consideration to analyze the programme as a whole.
Thus, the main achievement of the programme is its ability to successfully introduced access to housing credit for the poor within the conventional banking system. PRODEL is the only programme where a conventional Bank is lending to low-income families for housing improvements and where the Bank is working closely with municipalities in social programmes.
The programme has introduced a major shift in the strategy for tackling the housing problems in marginal neighbourhoods away from new built solutions to home improvements and upgrading. The programme has also increased the municipality’s role in the provision of housing through delivery of technical assistance.
An interesting feature is that the goals of the progamme were 2,000 loans in a period of three years. In two years, the programme has allocated 84% of the loans. The amount invested totals US$1.105 million (US$0.6 million are PRODEL transfers of fresh funds to the Bank, the remaining US$ 0.505 million comes from reinvesting the recoveries of the loans).

The microenterprise component
The component seeks to establish a credit system to support the economic activities of microenterprises operating in the areas of action of the programme. It also seeks to provide technical assistance in order to facilitate a sustainable development of the economic activities of existing microenterprises and to create new ones. Loans are given to microenterprises mainly from the informal sector. According to the definition agreed between the Bank and PRODEL, a microenterprise is considered a business that has a maximum of five workers including the owner and active assets which values, excluding the site and buildings, do not exceed U$ 5,000.
The programme has also stimulated the creation of new microenterprises together with INATEC. The microenterprise component complements the activities developed by the infrastructure projects and housing improvement loans.
Coverage of microenterprises in each neighbourhood attended by the programmes is high. According to an inventory of existing microenterprises done in 1995 in the neighbourhoods were PRODEL works, the programme has been able to reach more than 50% of these small scale income generating units.
Regarding financial targets, the aim was to allocate US$ 1.6 million in the five municipalities. Physical and financial performance has been satisfactory. To September 1996, the accumulated global performance was 72% of the financial goals, that is, funds including fresh fund transfers and revolving resources, and 115.59% in terms of absolute number of credits allocated. (see Table No. 5). The average of each credit is about US$400.00.
The majority of economic activities relate to trade. To a lesser extend to service and small scale industry. Loans can be given to solidarity groups (where the collateral consists in the solidarity signature of the whole group) or to individuals. Nevertheless, the Bank prefers to allocate loans to individuals.
The implementation of the component is done by the Banco de Credito Popular. The bank is responsible for the promotion of credits, technical-financial analysis and loan allocation, follow-up and cost recovery. The borrowers commits to use the loans according to a plan of investment, and to keep records of their activities. PRODEL provides assistance and training on small scale business administration and marketing issues in order to strengthen the capacities of the microenterpreneurs.
After two years and three months of operation, a total of 5,189 loans (more than US$ 2,08 Millions of investment) have been allocated. About 1,300 microenterprises have benefited from the programme. This represents a high turnover of loans per capita (about 4 per microenterprise).
Women headed households are also the majority of loan recipients. About 74% of the beneficiaries are women which confirms that PRODEL is accomplishing one of its main gender strategic goals.
Although there is no complete data on female-headed households, figures from Chinandega show that 61.7% of the beneficiaries with family incomes between 1.000 - 2.000 córdobas a month (US$ 120 - US$ 240), 28% are female heads of household. This also indicates that the Programme is achieving one of its strategic goals that of reaching vulnerable groups which otherwise may fall into extreme poverty. Additionally, PRODEL works in the neighbourhoods on the periphery of the cities unlike other microenterprise programmes which operate in town centres, especially in the markets.
The programme’s territorial approach, working directly in the neighbourhoods has been particularly supportive of women who work in home-based enterprises. Having been able to convince the Bank to enter to work in the barrios has been crucial to this achievement.
In this component, interest rates are higher (36% flat per annum plus maintenance of value) and periods of repayment shorter (four months to six months). Thus, real interest accrue to about 60% per annum. Defaults do not go beyond the 8% of portfolio exposure. Currently delinquency rates in both the housing and microenterprise funds do not threaten the capitalization of the revolving funds. They are low compared to other non-conventional programmes which operate in Nicaragua.
The programme also promotes the creation of new microenterprises. INATEC provides training and technical assistance for the formulation of the projects that are afterwards presented to the bank The bank approves also the loans and recovers the investment. A total of 40 new microenterprises have been created. Nevertheless, about 10% of this microenterprises are facing serious economic problems.
After two and a half years, the main achievements of the component are the following:
* The Programme has created an efficient system for financing microenterprises, especially targeted to poor women.
* The Programme has concentrated in neighbourhoods in the urban periphery, unlike the majority of microenterprise programmes which work in the markets
* The Programme has reached an important number of microenterprises in the selected neighbourhoods (about 1,300 in the five municipalities).
In this sense, the programme has enhanced individual and family participation by fostering a culture of willingness to repay the loan, breaking with assistentialist and donation-based models which are not replicable. Finally, the programme has created an efficient system for financing poor women. About 70% of the loans for microenterprises and housing are targeted to women headed households.
The differences between PRODEL and other programmes operating in the five cities are few, but nonetheless important. Increased competition however might mean that these differences could change in the near future. The most important are the following:
* The Bank does not charge the beneficiary the opening and closing costs which are subsidised by PRODEL. This is mentioned by clients as one of the advantages of PRODEL vis-a-vis other programmes.

* The Bank requires obligatory savings (Clause 6.8 of the Operational Rules for the Rotating Funds). A portion of the monthly payment is assigned to personal savings which accrues interest. Since it is not a visible savings, there are a number of restrictions on the withdrawal of funds. Only if the beneficiary abandons the Programme will the Bank return the total amount of money. In other instances, the client can make partial withdrawals. In practice, the Bank views the savings as an additional guarantee to the loan.

Are the terms of PRODEL’s microenterprise finance system reasonable? The external evaluators think it is so. The interest rates and loan term are favourable for the beneficiaries, competitive in the local financial market and highly profitable for PRODEL. The credit limits are reasonable for the majority of microenterprises, except for those which are in rapid expansion. In these cases, the microentrepreneur requires more working capital at the same time as an increase in fixed assets is required. The level of finance required can exceed PRODEL’s maximum (US$ 1,500 per loan).
The evaluation identified some problems regarding information provided by the Bank to clients:
* The microentrepreneurs are not clear how the bank calculates the interests accrued as shown in the bank receipts;
* The microentrepreneurs lack information about savings. Some think that saving is a Programme requirement and many are unclear about when savings can be withdrawn. Some feel that savings is an advantage, while others complain that they are unable to withdraw at any time to cover unexpected needs.
* Finally, the microentrepreneurs are unclear why some clients repayment on a weekly basis and others bi-weekly. Some would prefer to pay monthly.
In spite of the problems, the combined activities of housing, infrastructure and microenterprises together with institutional strengthening tackle a number of the serious problems facing the country, specially among the poor.