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

Financial and administrative aspects
PRODEL’s Central Unit actions have concentrated on setting up credible and functioning non-conventional credit systems which enjoys a good reputation among the Programme’s target group in both housing improvements and micro-enterprises. The system is also praised by the executing agencies of the programme and other funding agencies operating in Nicaragua. The Central Unit has also concentrated in setting the inter-institutional arrangements that allows the infrastructure component to operate.
These steps are important in terms of the funds' financial and institutional sustainability which depends in the last analysis on the quality of financial services provided to the target population by the Bank and by the local authorities.
In this sense, PRODEL has made important efforts towards achieving proper management of the revolving funds which has permitted the growth of its operation. This work has been critical in terms of equipping the Programme with the capacity to expand in the future without confronting serious organizational problems or affecting the quality of services to the public.
This has not been easy because PRODEL had to establish administrative norms and accounting procedures, analysis of credit, recuperation mechanisms, technical assistance and promotion in the Bank. The Executive Director of the Bank as well as many of the Mayors admit that none of the international cooperation programmes with which the Bank or the Municipalities deal have the level of requirements and supervision as PRODEL and that this has benefited the institutional development of the Bank and the Municipalities.
The main administrative procedures that PRODEL has set up vis-à-vis the Bank are the following
* Clear norms and procedures for the administration of housing and micro-enterprise funds (Operating Rules for the Revolving Fund 1995, Norms and Procedures for the Housing improvement component 1995). This normative framework covers several topics such as financial conditions of the loan, management of liquid assets, evaluation of the Bank’s performance, reporting systems, etc.
* A constant field observation by PRODEL over the Bank’s lending activities. Although this supervision is not systematic and varies significantly from place to place it has been instrumental in solving operational problems and in increasing Bank’s institutional capabilities at the local level.
* PRODEL's external audits have helped to correct serious problems in Bank’s accounting statements and reports to the Central Unit;
* A permanent system of meetings between PRODEL’s Central Unit and the Bank’s managers has helped to keep a close track of the way the programme operates.
Regarding the work with Municipalities the following norms and procedures have been established:
* A Handbook for the handling of the infrastructure component, which includes the whole process of accountability needed for the programme and the way budgets should be prepared;
* Guidelines for giving technical assistance to the beneficiary families of the housing improvement loans;
* Guidelines for community participation and microplanning workshops;
An effective administration and supervision of the Programme is reflected in good results of the revolving funds’ operations as well as municipal accountability.

The design of the Trust Fund between the Bank and PRODEL is based on the following clauses and assumptions: the Bank is responsible for the whole process of loan allocation and recovery. The Programme does not interfere in the selection of a client. For its services, the Bank is paid 6 points of the interest rate of each loan repayment (6 points out of 12 per cent in the case of housing and 6 out of 36 in the case of microenterprises). Besides, the Banks gets another fee equivalent to 0.04% of the net portfolio if arrears do not go beyond 5% of the total amount of monthly or weekly payments that are supposed to be recovered. This arrangement has allowed the Bank to break even in a short period of time and also to have net gains and to capitalize the fund.

At the end of September 1996, delinquency rates on PRODEL's were under control. The combined delinquency rate on both components was 14% calculated as the percentage of loans with one or more payments in arrears in loan portfolio.
Given PRODEL's institutional, political and social context this is quite an accomplishment. Overall, PRODEL's has had the ability to convince a formal bank to work with non-conventional credit systems and to accept the Programme's inter-institutional coordination model.
Still, there are crucial operational problems which require immediate attention:
* The bank has been slow in submitting financial records for the administrative contract for the month just ended and this impedes the preparation of the necessary bank conciliation.
* A high turnover in Bank’s personnel and inadequate allocation of human resources in some of the Bank’s branch offices has affected loan portfolio performance especially in León and Estelí, where delinquency is much higher than in Chinandega.
* There is a lack of clarity in the standards and weakness in the procedures related to administrative and judicial charges. BP’s personnel are unsure about how to proceed in cases of PRODEL loans which are in critical delinquency. Paradoxically, it has been PRODEL and not the bank that has urged for a tougher posture towards irresponsible non-payers
* It has not been easy to explain to clients the issue of maintenance of value. PRODEL had to design a new way to explain loan uses how interest amortization components, capital and value maintenance is accounted.
In general, it is possible to conclude that PRODEL’s important administrative and institutional achievements relate to the light operational structure that has been set up. The streamlined structure however is also its main weakness. Such a small and decentralised structure is very sensitive to the performance of each of its members, and requires very efficient working and supervising systems. The external evaluation (Vance & Vargas, 1996) revealed the existence of critical weaknesses within the local co-ordinators.
The type of professional needed for this type of programmes is one with managerial capacities, experience in community-based housing projects and minimum financial knowledge on how to handle credits and also situations of crisis. The lack of a sound method of staff evaluation has impeded the adoption of disciplinary procedures in cases where instructions from the central office are not carried out. Moreover, situations which adversely affected the quality of the Programme have been tolerated.
Another problem has been the lack of a sound managerial information system. Unlike many other programmes where no reliable data may be at hand, in PRODEL data exists but is not processed. Credit files at Bank local branches are kept in good order and contain vital but unprocessed information. Bank branch offices also have detailed information on delinquency for example, lapsed portfolio which is not sent to PRODEL. Municipalities keep separate accounts for PRODEL projects. For the most part, however, all this information is not totally used for managerial purposes.
In spite of these problems, the efficiency and effectiveness of the administration of the programme is clear. A total amount of US$ 0.4 Million have been used to cover PRODEL’s administrative costs during three years¹³. This means that for every dollar of Swedish funds spent to finance direct investments in the target cities (infrastructure, housing and microenterprise loans), 18 cents were used for PRODEL’s administrative costs. However, when compared to the total amount of investment done by the programme (including reinvestments of recovered funds in the revolving scheme and the local counterparts in the infrastructure component), the amount is 8 cents per dollar invested.
PRODEL’s future
Sida’s external evaluation of the programme suggested that a second phase of Swedish cooperation should be given to PRODEL starting in 1998. The remaining and un-used funds of the first phase will enable the programme to operate in the coming year¹⁴. During 1997, the main goal will be to consolidate the Programme's institutional and operational model.
According to the evaluators, despite the accomplishments, the Programme's model is far from achieving institutional sustainability. They insist that local capacity-building is a long-term process and that political and economic conditions, both national and local, may threaten the Programme's ability to become a permanent model based on inter-institutional co-ordination.
Beside external factors such as an increase in economic adversities, there are also internal reasons that may hinder PRODEL's consolidation, in particular, the management, administrative and technical problems.
In this context, PRODEL must adopt determined actions to address the Programme's current weaknesses. The evaluators recommend not to change the present modus operandi of the programme (i.e., the type of components and cities where it operates). The evaluators recommended not to expand into new municipalities but to concentrate on improving its quality within the existing institutional, organisational and territorial framework before engaging in new endeavours.
The main tasks for the coming year are to amend the Programme's current managerial and technical weaknesses; to minimise the risks posed by Nicaragua's political transition; to carry out an orderly closure of the first phase including searching for new ways in which the issue of property of the revolving funds has to be resolved.
The insistence on consolidation during the remainder of the first phase in part stems from the Programme's nature. The evaluators insisted that in many ways PRODEL is unique. Unlike most externally supported programmes, two of its components include revolving funds. Unless SIDA allows fundamental change in the Programme, the revolving funds will continue well beyond the Project's first phase, or even that of a second phase. Thus, the basis for sound management of the funds' assets must definitely be in place before SIDA's support ends. In addition PRODEL works through different institutions, such as local authorities, a bank and community-based organisations. Its reliance on these institutions' willingness and capacities underscores the need for effective and efficient rules and procedures, and adherence to these by each actor. It should be borne in mind that PRODEL can only be efficient to the extent that its partner institutions are, thus institutional development is primordial for the Programme.

Conclusions and recommendations
Evidence suggests that PRODEL has been able to fulfill three main objectives that a urban poverty reduction strategy requires to be effective: to reach the poor, to maintain and sustain the benefits of development and to scale up the impact of its components (Schusterman, 1996).
In a relative short period of time the programme has been able to reach more than 33% of the total population living in the five municipalities where it operates with the infrastructure component. There is enough evidence to sustain the assumption that majority of the population living in these ‘barrios’ can be considered poor or persons living in extreme poverty.
PRODEL has also been able to install a functioning credit system that allocated credits to more than 5% of the existing households in five cities, the majority of them being women living in poor or even extreme poor conditions. All this has been achieved with a relative small amount of funds invested per person (about US$ 19 per capita).
For small or mid-size municipalities that have infrequent and scarce sources for public investment, the possibility of investing about US$1.4 million in a three year period was not only attractive, but also capable of generating a vigorous process of mobilization of internal savings and resources both from local authorities and the target population.
The experience shows that low-income groups require different approaches to satisfy their basic needs. PRODEL has adopted an integral territorial approach for poverty reduction combining infrastructure and community services projects, housing improvements and income generation activities in those defined areas of a city that are in great need. The search for quantitative outputs together with qualitative goals of cost-effectiveness and efficiency have guided the actions of the programme amid a social context which is relatively not used to this type of approaches.
PRODEL also shows that a complex progamme (operating in five different municipalities of different sizes in which different political parties are in control of local government, three different components and three diverse executing agencies) may be managed through simple and lean organisational structures. Despite the number of actors, the organisation of PRODEL is simple which keeps it cost effective. A clear working division of roles and responsibilities among institutions exists and is a pre-condition for success.
The programme has been able to effectively engage both local governments and a commercial bank in a participatory working model with the low-income families and which is reaching the poor. New technical and accounting procedures are installed in the municipalities. PRODEL assistance has helped to overcome some of the technical limitations that the generality of municipalities of Nicaragua face. Technical assistance in microplanning and promoting local development permitted the municipality to increase its levy basis so it could be used as a counterpart for PRODEL’s funding. More instrumental and effective political relations have emerged between local authorities and communities.
Moreover, the programme has also invested to install procedures and effective implementation mechanisms within the Bank as a way to secure institutionalization of the credit systems once the programme’s funds are finished.
PRODEL’s is also trying to address some of the main reasons and obstacles that revolving funds usually face (Milligan, 1996) in these type of programmes:
* credits end being highly subsidized. There is nothing wrong with subsidies but these should clearly be made transparent to the recipients. In the case of PRODEL, the subsidy is given through the infrastructure component, not through the loan activities;
* it is not clear who has to assume the risk of the credit. Although PRODEL assumes the risk, the bank is paid a fee according to its performance in the management of the portfolio. Therefore, the Bank is complied to recover the loans from the clients as a means to charge the fee from PRODEL.;
* small portfolios require high administrative costs that makes the operation non-attractive. The PRODEL system has become financially attractive to the Bank. The Bank has been able to break even six months after its started its operation and is now having net profits of more than US$ 8,000 per month (US$ 96,000 per annum);
* rates of interests are low or almost un-existing. This is not the case of PRODEL, where interest rates are positive and in some cases, market ones;
* there is no real preoccupation for the collateral and guarantees and foreclosing procedures. PRODEL and the Bank have designed a flexible but strong system of guarantees and collateral to protect the investments;
* the property of the revolving fund is not totally clear. The fact that the funds are given as a grant, should not be an obstacle to clearly define who is responsible for its final use and administration;
* the revolving fund is just another activity within a wide variety of activities done by the implementing agency. Therefore, non-specialized institutions end doing financial activities that are not prepare for. Moreover, the possibilities of specializing are minimal.

INIFOM’s general experience in Nicaragua and PRODEL’s particular one shows that a decentralization and transparent governance process is first of all a process geared to address the problem of the poor. Moreover, this process has to be accompanied by a real transfer of resources, responsibilities, skills and opportunities from central to local governments and from these levels to low-income communities.

It is within this interaction and participatory methodology that the State can meet more seriously the needs and demands of the poor population. Decentralization also means setting up transparent methods, norms and procedures of programme implementation. It shows that the process can also be sustainable both financially and institutionally if the resources are used in a correct and accountable way. All agencies, and specially the funding agency is entitled to demand this transparency up-front.
It is still premature to forecast if a programme like PRODEL can be replicated in other urban areas of Nicaragua. Probably, during the proposed second phase, the programme will be able to increase its impact in other mid-size and small scale cities. In doing this, the programme should always take into consideration that a single programme will not solve the majority of the problems this type of societies face. Its main purpose is to be able to show new ways to address the problems of the poor.

In this sense, for a funding agency like Sida, the Programme has already showed positive elements and lessons that can inspire replication in other countries. Indeed, PRODEL was able to capitalize part of its experience from a previous Sida financed low-income housing programme in Costa Rica (FUPROVI). And now, the PRODEL and FUPROVI models have been able to animate possible new programmes to be implemented under different conditions in mid-size cities of South Africa.

For INIFOM, PRODEL is a model that has motivated other programmes that have external cooperation.
In this sense, it has fulfilled the main objectives of the programme: to improve the living conditions of the poor, to promote local governments and community organizations as a means for development based on the principles of democracy, reconciliation and social participation. This has been done, through a vigorous process of creating conditions and conciliating new ways to address the problems of the poor from a wider perspective of sustainable development (not only in terms of environmental, but also financial and institutional issues alike).

Bibliography
Banco Central (1996) “Salarios Promedios Nominal y Real”, Banco Central de Nicaragua, http://www.bcn.gob.ni/indeco/c11.html.
FISE (1996) “El nuevo mapa de pobreza en Nicaragua”, FISE, Managua.
Goethert, Reinhard, Hamdi, Nabeel, et.al (1992) “La Microplanificación. Un proceso de programación y desarrollo con base en la Comunidad”, IDE del Banco Mundial, FICONG, Washington.
INEC (1996) “Resultados del Censo de 1995”, INEC, Managua.
INIFOM (1994) “Programa de Desarrollo Local en las Regiones de Las Segovias y Occidente (Documento de Proyecto)”, mimeo, Managua.
_______ (1996) “Documento Base para Evaluación Externa”, mimeo, Managua.
Martínez Cuenca, Alejandro (1994) “Comportamiento inversionista en Nicaragua” in El Observador Económico, FIDEG, No.26.
Milligan, Walter (1996) “Once razones para el posible fracaso de un Fondo Rotativo”, Ediciones El Güacal, No. 23.
Morales, Carlos Manuel and Alfredo Stein (1995) “Pobreza Urbana y Descentralización en Nicaragua”, Centro de Análisis de Políticas Públicas, Programa de Estudios sobre Pobreza y Descentralización en América Latina, Santiago.
PRODEL (1996) “Evaluación de resultados de los componentes de crédito”, internal document, mimeo.
Satterthwaite, David (1996) “Urban Poverty: Reconsidering its Scale and Nature” Background Paper to the Workshop on Poverty Reduction in Urban Areas, IIED, London.
Schusterman, Ricardo (1996) “Targeted approaches: for poverty reduction or reproduction?”, Dissertation presented to the DPU.
Vance, Irene and Jorge Vargas (1996) “Final Report of External Evaluation of the Local Development Programme (PRODEL) in Nicaragua”, mimeo.
Villalta, Luis (1996) “Reforma del Estado y Modernización de la Administración Pública en Nicaragua”, UCRESEP/CERAP, Managua.
World Bank (1995) “Republic of Nicaragua. Poverty Assessment. Main Report”, Volume I, Washington, Report No. 14038-NI, April 14, 1995.

Table 5: PRODEL’s target population per municipality, number of infrastructure works, housing loans, microenterprise loans and total investment and investment per capita (1994-1996).

City	Total Urban Population	# House­holds	Urban Poor Population(a)	Infrastruc­ture Works	Investment US$ Real Cost (b)	Number Housing loans	Investment US$ (c)	Micro­enterprise loans (d)	Investment US$ (e)	Total Investment US$ (f)	Investment per capita (poor population)
Leon	123,865	21,906	37,235	37	494,118	424	242,563	1,069	392,290	1,128,971	30.32
Investment PRODEL/ Total In­vestment					65%		54%		20%	46%

Source: INEC, 1996 & PRODEL’s different progress reports
Notes:
(a) For León and Chinandega is estimated around 30% of the total population, and for Estelí, Somoto and Ocotal, about 59%

(b) Includes investment done by PRODEL, the municipalities and the communities

(c) Includes fresh funds and reinvestments in new housing loans from the revolving fund

(d) It is estimated that every microenterprise has received about 4 loans.

(e Includes fresh funds and reinvestments in microenterprise loans from the revolving fund

(f) Investment done by the programme, local authorities and the communities

1 The World Bank (1995) measures poverty according to a defined poverty line that represents the level of total per capital monthly expenditures at which an individual adult obtains the minimum caloric requirement. The extreme poverty line is defined as the level of per capital monthly food expenditures required to obtain the daily minimum caloric requirements.

2 Net public and private investment in Nicaragua during the period 1960-1993 was of US$10,741.5 million. During the same period, desinvestment totaled US$9,745 million of which, 59% are consequence of the armed conflict, 23% to massive withdrawl of local capital and 18% to natural disasters (Martínez Cuenca, 1994).

3 Between 1990 and 1995 the Government reduced the number of public workers from 284,800 to about 95,600, including 84,000 members of the armed forces.

4 Inflation was lowered from 30,000% per annum in 1989 to 12% per annum in 1995. In 1995, the GDP per capita was US$ 418, while in 1979 it was equivalent to US$739 and in 1970 it stood at US$979 (Villalta, 1996).

5 It is important to remember that untill 1979, Nicaragua was governed by the Somoza family which did not had participative, democratic and municipal strengthening mechanisms. From 1979 to 1990 the country was ruled by the Sandinista Government which advanced in areas such as health and education, but faced enormous economic and political problems that made political democratization and decentralization very difficult.

6 The governments of Germany, Finnland, Denmark, Holland and UNDP financed several of these initiatives in different parts of Nicaragua.

7 This part is based on Vance & Vargas, 1996; INIFOM, 1994 & 1996 and Schusterman, 1996.

8 INIFOM was created in 1990 as the main governmental institution in charge of strengthening, training and giving financial resources and technical assitance to all local governments of Nicaragua. INIFOM is a unique institution in Latin America as its President and Executive Director have the ranks of Ministers but are elected by a Directive Committee conformed in its majority by the mayors of Nicaragua’s main cities.

9 PRODEL has adapted to the Nicaraguan context, the methodology exposed by Goethert, Hamdi et.al, 1992.

10 Some of the streets repaired with PRODEL’s funds show maintenance problems when families in the communities throw their garbage into the street. When it rains, garbage accumulates in storm water system openings it produces floodings that deteriorate the improved cobblestones and pavement.

11 After negotiations, the Bank accepted the notion that from a financial point of view, women have a better track record for loan repayments, thus they are favoured with special points in the loan assessement process.

12 PRODEL established that families earning more than US$350 per month are not entitled to a loan.

13 This costs do not include the administrative costs of the Bank and of the local authorities.

14 It is estimated that for 1998, the programme will have about SEK 17.4 Million (about US$ 2.5 Million according to current exchange rate).