Bolivia - La Paz Municipal Development Project

Document of The World Bank FOR OFFICIAL USE ONLY Report No. P-4609-BO MEMORANDUM AND RECOMWENDATION OF THE PRESIDENT OF THE INTERNATIONAL DEVELOPMENT ASSOCIATION TO THE EXECUTIVE DIRECTORS ON A PROPOSED CREDIT IN AN AMOUNT TO SDR 1.7 MILLION TO THE REPUBLIC OF BOLIVIA FOR THE LA PAZ MUNICIPAL DEVELOPMENT PROJECT July 14, 1987 This document has a restricted distribution and may be used by recipients only in the performance of their official duties. Its contents may not otherwise be disclosed without World Bank authorization.  TURRENCY EOTTIVALENTS Ctirrencv TTnit = 1oliviano ($B) 1 Rolifv1ano = Us$0.50 US$1.00 = 2.00 Bolivianos SDRI.00 = 1TS$1.286 TrsSI,00 = SDR 0.777 FISCAL YEAR January 1 - December 31 ABBRFVIATIONS F.E.V.V. - Municipal Enterprise for krban Services of Medellin, Colombia GTZ - German Technical Cooperation Agency MLP - Municipality of LA Paz IMP - Investment and Modernization Program of the Municipality of La Paz  FaOR OMCIAL USE ONLY BOLIVIA LA PAZ MUNICIPAL DFVELOPMENT PROJECT CREDIT AND PROJECT SUMMARY Borrower: Republic of Bolivla Beneficiary: Municipality of La Paz Amount: SDR11.7 million (US$15 million equivalent) Terms: Applicable IDA terms. Relending Terms: The Borrower wvould onlend about 75% of the proceeds of the credit, denoidnated in ITS dollars, to the Municipality of La Paz at a fixed interest rate of 8-1/2% per annum. The amounts onlent would be repaid In national currency at the official rate of exchange on the payment date. Repayment would be made over 20 vears, from the date of on-lending, with no grace period. The other 25% of the credit proceeds (US$3.8 million enuivalent) would be provided to the Municipality as a grant. Financing Plan: US$ million Municipality of La Paz 3.3 IDA 15.0 German Technical Cooperation Agency 1.4 French Government 0.6 Spanish Government 0.4 Netherlands Government 0.6 21.3 Economic Rate of Return Ranging from 13% to 48%. Staff Appraisal Report No. 6769-Bo This document has a restricted distribution and may be used by recipients only in the performance of their official duties. Its contents may not otherwise be disclosed without World Bank authotisation.  MEMORANDUM AND RECOMMENDATION OF THE PRESIDENT" OF THE INTERNATIONAL DEVELOPMENT ASSOCIATION TO THE EXECUTIVE DIRECTORS ON A PROPOSED CREDIT OF SDR11.7 MILLION TO THE REPUBLIC OF BOLIVIA FOR THE LA PAZ MUNICIPAL DEVELOPMENT PROJECT 1. The following report on a proposed development credit to the Republic of Bolivia for SDR11.7 million (US$15.0 million equivalent) is submitted for approval. The proposed credit would be made for 35 years, including 10 years' grace, with repayment in semi-annual installments of 1-1/4Z of the principal amount from the eleventh year through the twentieth year, and of 2-1/2% from the twenty-first year until final maturity. About 75% of the proceeds of the credit, denominated in US dollars, would be on-lent to the Municipality of La Paz at a fixed interest rate of 8-1/2% per annum, and repaid to the Government in national currency at the official rate of exchange on the payment date. The amounts on-lent would be amortized over 20 years from the date of on-lending. The other 25% of the credit proceeds would be passed on to the Municipality as a grant. Parallel cofinancing, in the form of grants, has been obtained from the German Technical Cooperation A0ency, and will be obtained from the Governments of France, Spain and The Netherlands, to meet part of the cost of technical assistance and institutional improvements. 2. Background. La Paz is a city of 1.2 million, or about 20% of Bolivia's population. Most of the country's commercial, financial and administrative activities, and a very large proportion of the nation's health, education and social facilities, are concentrated there. The city generates about half of Bolivia's internal fiscal revenues. During the last decade, the number of inhabitants has roughly doubled in -ize, mainly because of immigrat on from rural areas and the depressed mining centers. Although this growth is not unusual by Latin American standards, it represents a challenge because of the city's unusually difficult physical environment and its strained capacity to absorb more migrants in a productive manner. In particular, lower income neighborhoods, comprising about half of the population, are spread on the unstable steep slopes of the La Paz valley, where lack of erosion control and drainage results in destructive mud flows and landslides. In addition, the shortage of urban transport and the deficient sanitation conditions represent serious constraints to the efficient and harmonious development of the city. 3. The National Government that took office in August 1985 inherited an economy beset by rampant inflation, contracted revenues, a large public sector deficit, lack of confidence both internally and abroad, a weak administration, and increasing urban poverty. These problems have had a particularly acute impact on the Municipality of La Paz. In line with the Government's new economic policy, incorporating a national tax reform, the Municipality has given priority to concerted measures, which aim at transforming the autonomous local government into an equitable, efficient, and financially viable provider of urban services. An Investment and Modernization Program (IMP) has been worked out, focusing on urban upgrading and landslide control, primarily in low income areas, on better transport and sanitation conditions, streamlined municipal organization,  - 2 - modern administrative pracedures, and sound financial mnagement. The bloated municipal staff has been reduced by about one-third, from 5,200 in the fall of 1985 to 3,500 at present, with a view to raising wages and salaries, by about 20% in real terms, without expenditure on Personnel exceeding the legally authorized limit of 50% of municipal revenues, and thus enhancing the efficiency of the administration. A 10-vear backlog in infrastructure maintenance began to be tackled. A Municipal Training Institute was created in early 1987 to assist in strengthening the various departments of the Nunicipality, Contacts were established with two South-American cities, known for their high standards of administration and effective management of urban services; and steps were taken to secure technical asslstance from several European Governments in preventing floods and landslides, reorranizing municipal departments and training personnel, improving planning and accounting, and appropriately registering and assessing urban property. 4. The Bank became active in the urban sector of Bolivia's economy in the mid-seventies. Its first loan for an Urban Development Project was made in 1977 (Loan 1489-BO). The loan helped finance urban upgrading works in low-income neighborhoods of La Paz, the provision of sites and services to the inhabitants of the El Alto area of La Paz, and a line of credit for craftsmen and small enterprises located in these parts of the capital. After delays due to difficult political and economic circumstances, the project wes successfully completed in 1986. It benefitted about 30,000 families and proved to be a sound way to approach complex urban problems. The staff of an administrative unit, established within the Municipality of La Paz in the context of the project, has been instrumental in preparing the proposed project with the help of two advanc.es, totalling TTS$1.5 million, bv IDA's Project Preparation Facllity. 5. Project Objectives. The proposed project is designed to assist the Municipality of La Paz in strengthening its institutional capacity to discharge service, administrative and fiscal functions, while redressing some critical shortcomings in the city's infrastructure. It would help alleviate the impact of the current economic adjustment process on the population of the capital, by providing temporary employment opportunities througl public works needed to prevent furtber deterioration of municipal services and to maintain basic urban Infrastructure in working order. Other major obiectives are to restructure the organization of the Municipality, improve financial and investment planning, raise current revenues by updating the cadastre, carry out a program of civil works and undertake an adequate maintenance program. 6. Project Description. The project, which would incorporate certain components of the IMP, would consist of: municipal management improvement, including (i) administrative reorganization, creation of autonomous entities in charge of certain municipal activities, computerization of accounts and purchase of office equipment; (ii) setting up an efficient personnel management system and training program; (iii) financial management improvement, budgetting and investment planning, and management information and control; and (iv) modernization of the municipal cadastre to increase tax revenue from urban property, through correct assessment, appropriate tax rates, prompt billing and efficient collection; urban transport improvement, including rehabilitation of hasic infrastructure, construction of bus terminals, better traffic management,  and adeonate eouipment raintenance capaeitv; and urban development, including (i) upgrading of urban infrastructure with community participation in nineteen neighborhoods in marginal areas; (ii) construction of flood and erosion control works along drainage basins, construction of landslide prevention works, and build-up of capacity for handling emergencies; (iii) setting up a decentralized solid waste collection and disposal system, and street cleaning system, and repair and maintenance of the necessary equipment; and (iv) implementation of a community education program to support, and to participate in, municipal actions. 7. The cost of the proposed project is estimated at ITS521.3 million ecuivalent. The foreign exchange comnonent amounts to TS$6.3 million, or 30%. IDA would meet 70% of total cost, 52% of the foreign exchange cost and 78% of the local cost. Parallel cofinancing by European Governments would provide the balance of the foreign exchange cost and the Mutnicipalitv of La Paz the remainder of the local cost. The Municipality would be responsible for the execution of the project. A prolect office within the Planning Office of the Municipality wo-ld monitor and coordinate progress, A Project Coordinator, acceptable to IDA, is at present the bead of the Project Office, and several ranking managers and technicians (Project Specialists), acceptable to TDA and required to carry oujt the project, are, and will be, emploved by the municipality until its completion. A twinning agreement, to he concluded shortlv with the Municipal Enterprise for Urban Service- (E.E.V.V.) of Medellin, Colombia, will provide for assistance in setting up a solid waste management svstem. The project is expected to be completed by December 31, 1994. A breakdown of estimated costs and the financing plan are shown in Schedule A. Amounts and methods of procurement and disbursement, as well as the disbursement schedule, are given in Schedule B. A Timetable of key processing events and the status of Bank Group operations in Bolivia are given in Schedules C and D. Maps showing population distribution and principal cities, income and project areas, and landslide risk locations are attachee. The staff appraisal report, No. 6769-BO, dated July 8, 1987, is being distributed separately. 8. Rationale for IDA Involvement. The objectives of the proposed project are consistent with the lending strategy of IDA and the public investment policies of the Government. Thev are also closely related to the objectives of the recently approved IDA credits for the Public Financial Management Project (PFMP) and the Emergency Social Fnnd (FSF). In fact, certain institutional reforms being undertaken within the financial sector of Bolivia's economy under the PFMP, are similar to those which would he initiated ky the Municipalitv of La Paz in the context of the proposed project; while certain urban upgrading works of employment- and-income-generating nature, to be carried out in La Paz by the ESF (with provision for cost recovery), will he coordinated with civil works included in the proposed project. In the urban sector specifically, the proposed project is oriented toward3 consolidating ongoing efforts, aiming at strengthening economic and social services; in view of the preeminence of La Paz, its importance to the economv of the couintry, and its largp population of urban poor, the improvement of municipal nmnagentent, services  - 4s - and infrastructure is a first order priority within the framework of Bolivia's recovery, Moreover, the civil works to be executed as physical elements of the urban transport and urban development parts of the proposed project should provide temporary employment for some inhabitants of La Paz and thus help to defuse the opposition to the Government's economic adjustment program, stemming from its social impact. 9. Actions Agreed Upon. In view of the significance for the financial condition of the Bolivian municipalities of the Tax Leform Law of 1986, the Government has agreed to review annually with IDA, during the execution of the proposed project, the revenue sharing provisions of the Law and take, if so requested, measures to improve or accelerate revenue shar-itg arrangements affecting the municipalities. Furthermore, the Government has agreed to assist the Municipality ef La Paz, if necessary, in carrying out the IMP, and to take all actions necessary to help meet the cost recovery provisions agreed upon between IDA and the Municipality. 10. The Municipality has agreed to: (i) carry out the IMP in accordance with specified target dates and annually review its progress with IDA; (ii) implement a personnel policy, satisfactory to IDA, which - irrespective of regular attrition - would further streamline the municipal staff, thereby making possible better compensation and higher efficiency; (iii) replace the Project Coordinator only if IDA has raised no objection to the qualifications and terms of employment of the proposed replacement; (iv) furnish to IDA by the end of 1987 and promptly put into effect a program, which would, inter-alia, de^entralize selected municipal services and create autonomous enterprises for performing them; (v) undertake a program, satisfactory to IDA, to adequately maintain municipdl infrastructure and equipment; (vi) assume new debt only if this did not affect the agreed ratio of municipal revenues to debt service of at least 2.8:1 in 1987 and 1988, and at least 3.3:1 beginning in 1989; (vii) finance from self-generated funds not less than 28% of municipal investment in 1988 and 1989, and not less than 35% in 1990 and thereafter; and (viii) ensure, through user charges, betterment levies and other municipal revenues, the recovery of the full investment, maintenance and operation costs of specified municipal infrastructure and services. Among the conditions for making the proposed credit effective are the issuance by the Municipality of a procurement manual satisfactory to IDA and the opening by the Municipality of a Project Account with an initial deposit of at least US$125,000 equivalent.  -5- 11. Justification. A broad range of benefits would accrtue from the project. It would help improve the efficiency of urban service deliverv and of resource management, with a positive fiscal and flnancial ilroact on the Municipality. It would alleviate the unemplovment conditions in the capital by generating 30,000 man-vears equivalent of temporary jobs. About 50% of expenditure on the project would benefit the pooret segments of the population. The transport comnonent would shorten by more than one hour the current commuting time for 95,000 daily passengers between the largest popular neiahborhood and the city center, and redtuce vehicle operating costs. Better maintenance of infrastructure would have a positive impact on the citY, particu'arly on the condition of the urban noor. About 60,000 people in marginal areas, where average income is helow the poverty threshold, would directlv benefit from better water supplv and/or sewerage. Project works for prevention and control of landslides would redtce loss of life and damage to private and public property. Finally, the project would serve as a model for other Bolivian cities. 'ne economic rate of return of the project (weighted average TRR of all project components) is 32%. 12. Risks. Given Bolivia's history, the main risk is pol-tical: changes in Government and municipal adndnistration, strikes and social disruptions may lead to delays in the achievement of project objectives or even jeopardize them. This risk has been countered by simplifying the design and limiting the size of the proposed Project, and by ensuring the full commitment of the Municipality to its obiectives by way of institutional reforms put into effect during project preparation. Another risk involved is the shortage of counterpart funds; however, no Government contribution would be required to carry out the project and, given the fiscal and financial improvements achieved during project preparation, the Municipality should he able to raise the funds needed for the project th-ough stricter tax collection and more efficient use of resources. 13. Recommendation. I am satisfied that the proposed credit would comply with the Articles of Agreement of the Association and recommend that the Executive Directors approve the proposed credit. Rarber B. Conable President by Ernest Stern Attachments Washington, D.C. Juily 14, 1987  -6- Schedule A Estimated Costs Local Foreign Total