Document of The World Bank

FOR OFFICIAL USE ONLY Public Disclosure Authorized

Report No: 53980-SV

PROJECT APPRAISAL DOCUMENT

ON A Public Disclosure Authorized

PROPOSED LOAN

IN THE AMOUNT OF US$SO MILLION TO THE

REPUBLIC OF EL SALVADOR

FOR A

LOCAL GOVERNMENT STRENGTHENING PROJECT Public Disclosure Authorized

April 29,2010

Sustainable Development Department Central America Country Management Unit Latin America and the Caribbean Region

Public Disclosure Authorized 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. CURRENCY EQUIVALENTS Exchange Rate Effective - April 12,2010 Currency Unit = US$1 = US$1

FISCAL YEAR January 1 - December 31

ABBREVIATIONS AND ACRONYMS

ADESCO Community Association AECID Spanish Development Agency ANDA National Aqueduct and Sewerage Administration BCR Central Reserve Bank CI Inter-institutional Project Committee CFAA Country Financial Accountability Assessment CNE National Energy Council COMURES Municipalities Corporation of El Salvador CONADEL National Commission of Local Development CPS Country Partnership Strategy DA Designated Account DC Decentralization Committee DGT General Treasury Directorate DPL Development Policy Loan DRM Disaster Risk Management EA Environmental Assessment ECLAC Economic Commission for Latin America and the Caribbean ES Environmental Services EU European Union FIS Social Investment Fund FISDL Social and Local Development Investment Fund FM Financial Management FMA Financial Management Assessment FODES Economic and Social Development Fund (Official transfer mechanism from National Government to Municipalities) FONASA Environmental Services Fund FOVIAL Highway Maintenance Fund FUNDAUNGO Dr. Guillermo Manuel Ungo Foundation

-. . GOES.-._. _.__.__ Government of-El Salvador __._ . . _.- .--. GTZ German Technical Cooperation IBRD International Bank for Reconstruction and Development ICB International Competitive Bidding IDA International Development Association IDB Inter-American Development Bank IFR Interim Financial Report IMF International Monetary Fund INBI Index of Unsatisfied Basic Needs IPPF Indigenous Peoples Planning Framework i FOR OFFICIAL USE ONLY

ISDEM Salvadoran Institute for Municipal Development KfW German Promotion Bank LACAP Public Administration Procurement and Contracting Law LG Local Government MA Municipal Adviser M&E Monitoring and Evaluation MAG Ministry of Agriculture MARN Ministry of the Environment and Natural Resources MDP Muni ci p a1 D eve1opmen t P 1an MFA Municipal Framework Agreement MFF Municipal Fiduciary Framework MH Ministry of Finance MOP Ministry of Public Works NCB National Competitive Bidding NGO Non-Governmental Organization OM Operational Manual PDNA Post Disaster Needs Assessment PDO Project Development Objective PFM Public Financial Management PIP Project Implementation Plan POA Annual Operating Plan PROMUDE-GTZ Decentralization and Local Development Program of the German Agency of Technical Cooperation RECODEL Network of Donors for Local Development in El Salvador RP Resettlement Plans RPF Resettlement Policy Framework SAE Secretariat of the Presidency for Strategic Affairs SAFI Government’s Integrated Financial Management System SAFIMU Municipal Finance System SBD Standard Bidding Documents SEPA Procurement Plan Execution System SIL Specific Investment Loan SOE Statements of Expenditure SRfP Standard Request for Proposals SSDT Subsecretariat for Territorial Development and Decentralization ST Technical Secretary of the Presidency TA Technical Assistance TOR Terms of Reference UACI Institutional Procurement and Contracting Unit UFI Institutional Financial Unit UNDP United Nations Development Programme USAID United States Development Agency VIP Ventilated Improved Pits WB World Bank W&S Water and Sanitation

This document has a restricted distribution and may be used by recipients only in the performance of their official duties. Its contents may not be otherwise disclosed without World Bank authorization. Vice President: Pamela Cox Country Director: Laura Frigenti Country Manager Albert0 Leyton Sector Manager: Ethel Sennhauser Task Team Leader: Mark Austin

... 111 EL SALVADOR Local Government Strengthening Project

CONTENTS Page I . STRATEGIC CONTEXT AND RATIONALE ...... 1 A . Country and sector issues ...... 1 B . Rationale for Bank involvement ...... 3 C . Higher level objectives to which the Project contributes ...... 3 I1 . PROJECT DESCRIPTION ...... 4 A . Lending instrument ...... 4 B . Project development objective and key indicators ...... 4 C . Project Components ...... 10 D . Lessons learned and reflected in the Project design ...... 11 E . Alternatives considered and reasons for rejection ...... 14 I11 . IMPLEMENTATION ...... 15 A . Institutional and implementation arrangements ...... 15 B . Monitoring and evaluation of outcomeshesults ...... 16 ... C . Sustainability ...... 17 D . Critical risks and possible controversial aspects ...... 18 E . Loadcredit conditions and covenants ...... 20 IV . APPRAISAL SUMMARY ...... 21 A . Economic and financial analyses ...... 21 B . Technical ...... 22 C . Fiduciary ...... 22 D . Social ...... 23 E . Environment ...... 23 F . Safeguard policies ...... ;...... 24 G . Policy Exceptions and Readiness ...... 25

iv Annex 1: Country and Sector or Program Background ...... 27 Annex 2: Major Related Projects Financed by the Bank and/or other Agencies ...... 33 Annex 3: Results Framework and Monitoring ...... 36 Annex 4: Detailed Project Description ...... 42 Annex 4A: Distribution of Investment Amount Assigned to Municipalities ...... 59 Annex 4B: Municipal Diagnostic ...... 64 Annex 5: Project Costs ...... 71 Annex 6: Implementation Arrangements ...... 72 Annex 7: Financial Management and Disbursement Arrangements ...... 83 Annex 8: Procurement Arrangements ...... 93 Annex 9: Economic and Financial Analysis ...... 99 Annex 10: Safeguard Policy Issues ...... 102 Annex 11: Project Preparation and Supervision ...... 116 Annex 12: Documents in the Project File ...... 118 Annex 13: Statement of Loans and Credits ...... 120 Annex 14: Country at a Glance ...... 121 Annex 15: Map No . IBRD ELS37765 ...... 123

-. ... ._ ......

V EL SALVADOR

LOCAL GOVERNMENT STRENGTHENING PROJECT

PROJECT APPRAISAL DOCUMENT

LATIN AMERICA AND CARIBBEAN

LCSAR

Date: April 29,2010 Team Leader: Mark A. Austin Country Director: Laura Frigenti Sectors: Public administration- Finance Sector ManagedDirector: Ethel Sennhauser (50%); Sub-national government administration (50%) Themes: Decentralization (30%); Municipal finance (25%); Municipal governance and institution building (25%); Other public sector governance (20%) Project ID: P118026 Environmental category: Partial Assessment Lending Instrument: Specific Investment Loan Joint IFC: Project Financing Data [XI Loan [ ] Credit [ 3 Grant [ ] Guarantee [ 3 Other:

Source Local Foreign Total Borrower 4.23 0.00 4.23 International Bank for Reconstruction and 78.00 2.00 80.00 Development Local Govts. (Prov., District, City) of 2.53 0.00 2.53 Borrowing Country Total: 84.76 2.00 86.76

Borrower: Secretariat of the Presidency for Strategic Affairs (SAE) El Salvador

Responsible Agency: Subsecretariat for Territorial Development and Decentralization Secretaria de Asuntos EstratCgicos Alameda Manuel Enrique Araujo 5500 El Salvador Tel: (503) 224-9178 po.galvan.bonilla@gmail .corn vi Estimated disbursements (Bank FY/US$m) FY I 2011 I 2012 I 2013 I 2014 I 2015 I I I I Annual I 42.29 I 18.98 I 14.08 I 4.06 I 0.59 I I I I Cumulative1 42.29 I 61.27 I 75.35 I 79.41 I 80.00 I Project implementation period: Start July 30,2010 End: July 30,2015 Expected effectiveness date: July 30,2010 Expected closing date: November 30,2015 Does the Project depart from the CAS in content or other significant respects? No Ref:PAD I. C. [ Does the Project require any exceptions from Bank policies? Re$ PAD IKG. [ ]Yes [XINO Have these been approved by Bank management? [ ]Yes [ IN0 Is approval for any policy exception sought from the Board? [ ]Yes [XINO Does the Project include any critical risks rated “substantial” or “high”? [XIYes [ ]No Re$ PAD III.E. Does the Project meet the Regional criteria for readiness for implementation? [XIYes [ ]No Re$ PAD IKG. Project development objective Re$ PAD II. C., Technical Annex 3 The Project development objective is to improve the administrative, financial and technical processes, systems and capacity of local governments to deliver basic services, as prioritized by local communities, in the medium and long-term.

Project description [one-sentence summary of each component] Re$ PAD ILD., Technical Annex 4 Component 1 - Promote Decentralized Service Delivery through investments in key basic services areas identified by Municipalities through a participatory planning process with communities to ‘identify and prioritize investments.

Component 2 - Strengthen of Municipal Governments and key national support entities like ISDEM and SSDT.

Component 3 - Decentralization Strategy Support would assist the Government of El Salvador (GOES) to design a national decentralization policy.

Component 4 - Project Management would support the overall project coordination and implementation of the Project.

. __ . .. - ~ __ ~ - Which safeguard policies are triggered, if any? Re$ PAD IKF., Technical Annex 10 Environmental Assessment (OP/BP 4.01) Natural Habitats (OP/BP 4.04) Pest Management (OP 4.09) Indigenous Peoples (OP/BP 4.10) Physical Cultural Resources (OP/BP 4.1 1) Involuntary Resettlement (OP/BP 4.12) Significant, non-standard conditions, if any, for: Re$ PAD III.F.

vii Loadcredit effectiveness: The Government shall furnish to the Bank an opinion or opinions satisfactory to the Bank, showing that the Implementation Agreement has been duly executed by the Borrower, through SAE, ISDEM and FISDL and is legally binding upon the Borrower, ISDEM and FISDL in accordance with its terms.

Covenants applicable to project implementation: 1. The Borrower, through SAE, shall enter into a set of institutional agreements for the execution of the Project, namely: (i) an a Implementation Agreement with FISDL and ISDEM; and (ii) a Municipal Framework Agreement with each Municipality for the implementation of one or more Municipal Subprojects.

2. The Borrower, through SAE, shall ensure, and cause the Municipalities, FISDL and ISDEM to ensure, that the Project activities under their responsibility are carried out in accordance with the Environmental Management Framework, the Resettlement Policy Framework, and the Indigenous Peoples Planning Framework (IPPF).

3. With respect to the assistance to be provided to Municipalities to prepare their municipal development plans under Part B.3 of the Project, the Borrower, through SAE, shall, and shall cause ISDEM to ensure, that the terms of reference for said Project activities include a provision, satisfactory to the Bank, mandating that the Municipalities incorporate and/or cause to be incorporated the applicable Bank Safeguard Policies to said plans.

4. Upon approval of a Municipal Subproject, and prior to the carry out of said Municipal Subproject, the Municipalities: (a) carry out an environmental assessment of said Municipal Subproject, and prepare an environmental management plan (or similar environmental instrument), all acceptable to the Bank; and (b) thereafter, to carry out or cause to be carried out said plan in accordance with its terms.

viii

I. STRATEGIC CONTEXT AND RATIONALE

A. Country and sector issues

Short-term challenges for local government development.

1. In recent years El Salvador’s economic performance has remained stable, enabling significant macroeconomic and social achievements. During the period of 2005-2008, El Salvador registered an’average growth rate of 3.68 percent compared with 2.05 percent during 2001-2004. However, the global crisis starting in 2008 is showing effects on the country performance mainly caused by a decline in total exports, domestic investment and remittances income. In 2008, the GDP growth rate declined from 4.7 percent in 2007 to 2.5 percent and in 2009,2.6 percent lower. On the fiscal front, in 2009, the tax revenues declined by I1 percent and the fiscal deficit increased by 5 percent of GDP, in contrast with the 3.1 percent deficit level registered in 2008.

2. The economic slowdown caused by the global crisis has started to reverse many of past year’s achievements in terms of poverty reduction. Between 2001 and 2007, poverty sustainably declined from levels of 43.6 to 35.5 percent. By 2008, overall poverty increased to 42.3 percent, close to the levels observed in 2001.

3. The impact of the financial crisis has particularly affected municipalities. Government revenues have decreased because of the financial crisis that has affected the global economy in the second half of 2008 and 2009. Municipal governments lost 15 percent of income in 2009. The municipalities primarily responded to this revenue shortfall by reducing investments in public service delivery infrastructure by 20 percent. Municipalities have limited revenue powers and most of their income comes from central government transfers and borrowing. Many of the municipalities are in debt and a large portion of central transfers are being used for debt servicing.

4. Decentralization service delivery needs remain significant. Half of the country’s houses do not have water connections and a million families (two thirds of the population) are not connected to sewage systems. Most of these families live in poverty. Distance to paved roads for the poorest people living in rural areas exceeds 5 km, which is double the distance for poor versus non-poor families.’ In a Municipal diagnostic carried out for the preparation of the proposed Project, a representative sample OfMunicipalities Wd communities identified their top investment priorities- as improving access to potable water, rural roads, electricity and the installation of local sewer systems.

5. Country Disaster Risk Profile. According to the World Bank Natural Disaster Hotspot study, El Salvador has the second highest economic risk exposure to two or more hazards in the world. The number of natural disasters in El Salvador has dramatically increased during

Recent Economic Developments in Infrastructure - Strategy Report (REDI-SR) Infrastructure Service Provision in El Salvador: Fighting Poverty, Resuming Growth. October 10,2006. Report No. 37689-SV. Jordan Schwartz. 1 the period of 1997-20072. A total of 21 events were recorded, representing 53 percent of all natural disasters of the last 100 years in El Salvador. Five events (23 percent) had a geophysical origin, while the remaining 16 (76 percent) were hydro-meteorological. According to the Ministry of the Environment and Natural Resources (MARN)’s Division of National Service of Territorial Studies (D-SNET), economic losses directly linked to catastrophic events during the last 30 years amounted to almost US$4 billion. About 41 percent of the Salvadoran population resides in Municipalities exposed to high risk of natural disasters (i.e. those Municipalities that were affected during the period of 1980 to 2007 by three or more natural hazards: earthquakes, floods, storms, and droughts). These Municipalities also account for 74 percent of disaster- related fatalities. During this period, there was an average of 1.5 disasters per year. Most Municipalities are ill equipped to deal with natural disasters and do not have the capacity, tools and mechanisms for disaster risk management.

Medium-term challenges for local government development.

6. Historically in El Salvador, most public services, investments and resources have been highly centralized. From 1998, local governments started to have a more important role, but insufficient, to cover the needs of local populations in terms of investment and local service provision.

7. Municipalities are diverse both in terms of overall characteristics and institutional capacity. Based on a broadly accepted typology3 El Salvador’s 262 Municipalities are grouped into five types. Type 1 with the largest population, highest rate of urbanization and the lowest level of Unsatisfied Basic Needs down to type 5 which includes Municipalities of small size, with rural population and the highest level of Unsatisfied Basic Needs. In general, Municipalities’ type 1 and 2 are stronger in terms of administrative and technical capacities, whereas Municipalities’ types 3 to 5 are deficient mainly in relation to procurement, financial management and technical capacities required to prepare and execute investments.

8. In a Municipal diagnostic of 10 representative Municipalities from types 1 to 5 Municipalities conducted as part of the preparation of this operation, the areas of greatest deficiency in Municipal public management were: participatory planning; procurement and contract management; financial management; functional organization structure, stability and continuity of Municipal staff, transparency and internal processes and procedures; and capacity in designing, preparing and executing Municipal development investments (See Annex 1 and 4B).

Long-term challenges for local government development.

9. In the last 10 years, El Salvador has made important attempts to reform the public sector focusing on the modernization of the state. The new Government is in the process of preparing a public sector and a decentralization strategy. Some of the current challenges to be

World Bank, Natural Disaster Hotspots, A Global Risk Analysis (Washington, DC: Disaster Risk Management Series, 2005), table 7.2. Tipologia de Municipios El Salvador 2007 - Herramienta de apoyo para la planificacibn del Desarrollo Local y la Descentralizacih, GTZ y FUNDAUNGO, Marzo 2009 2 considered by these strategies are: (a) the existing lack of clarity in the administrative functions and responsibilities of the different levels of central and Municipal governments in the Municipal and sectoral laws; (b) the lack of clarity on expenditure assignations; (c) the lack of information of the efficiency of the services provided by the national and Municipal governments at the local level; (d) the appropriate distribution formula of transfers to the local governments; and (e) the difficulty to guarantee that the national objectives are compatible at the sub-national level.

10. Municipal fiscal dependency and weak revenue autonomy. There is a lack of revenue autonomy at the Municipal level and a large dependency on transfers. The current system of transfers is characterized by the dominance of FODES, the Government’s revenue sharing mechanism. Currently the funding rule for FODES is 7 percent of central government’s current revenues and the funds are distributed according to a formula with four variables: population (50 percent), equal share4 (25 percent), poverty measure (20 percent), and land area (5 percent). The population and poverty variables are weighted and so the formula is heavily biased in favor of smaller Municipalities. A more efficient, accountable, and fiscally responsible decentralization system will need local governments (particularly in larger urban areas) with reliable revenue streams, such as the property tax (impuesto predial). El Salvador is among the very few countries in Latin America where this tax has not been assigned to local governments.

B. Rationale for Bank involvement

1 1. The rationale for Bank involvement is based on the following Project related aspects: (a) The Project builds on the Bank’s knowledge and experience with regional and international good practices. The Bank has brought to bear on Project design its knowledge and experience regarding local government strengthening including participatory planning, disaster response and mitigation, and decentralization, from its analytical and project work in Latin America (Dominican Republic, Nicaragua, Mexico, Bolivia, Peru, Brazil, Chile), in Asia (India, Philippines), and Africa (Ethiopia, Senegal, Rwanda and Guinea). (b) The Project compliments and expands upon efforts by the donor community to assist the Government in the decentralization process. Initiatives supported by other donors, including the Spanish, German and United States Governments have encouraged reform in local government management processes. The Project builds on these lessons and processes, and provides an opportunity for the GoES to broaden the scope and scale up those initiatives. The Project builds on these lessons and processes, and provides an opportunity for the Government of El Salvador (GoES) to consolidate the various methodologies previously used, refine approaches, broaden the scope and scale up those initiatives.

~ ~

C. Higher level objectives to which the Project contributes

12. The proposed Project is fully consistent with The World Bank Group’s Country Partnership Strategy (CPS) FY 2010-2012 (Report #50642-SV) discussed by the Executive Directors on October 29, 2009. The Project specifically contributes to two of the strategic objectives of the

Equal share means twenty-five percent of the fund, relating to equity, is distributed to 262 Municipalities on an equitable basis (i.e. an amount equal to all) by dividing the 25% of the total annual allocation to Municipalities (the resulting value is not is proportional to any variable).

3 CPS: (a) strengthen fundamentals for economic recovery by addressing macro and institutional vulnerabilities; and (b) increase economic opportunities, particularly for the poor. The Project will support these objectives by: promoting investment in key basic services areas identified and prioritized by communities via a Municipal participatory planning process for local development; and improving local government core processes, systems and capacity to improve service delivery in the medium and long term and improve disaster risk management.

13. The Project supports the new administration’s focus on public sector and institutional development by strengthening local government’s public financial management and increasing the transparency of local government spending.

11. PROJECT DESCRIPTION

A. Lending instrument

14. The lending instrument to be used for this Project is a Specific Investment Loan (SIL).

B. Project development objective and key indicators

15. The Project development objective is to improve the administrative, financial and technical processes, systems and capacity of local governments to deliver basic services, as prioritized by local communities, in the medium and long-term.

16. Project Development Objective (PDO) Indicators. Annex 3 presents the Project results framework, including the indicators for the Project. For participating local governments, the expected outcomes at the end of the Project are:

(a) All locally defined and prioritized Municipal Subprojects of 262 Municipalities, which are financed by the Project, are implemented in accordance with fiduciary and safeguards policies as well as national standards; (b) Municipalities receiving additional TA progress by at least one capacity category on areas for which they received TA; and (c) Local governments are regularly requesting Municipal administration and planning support from ISDEM, and ISDEM has been budgeted sufficient resources to respond and has a system to prioritize and meet requests in a timely manner.

17. The Project will finance Municipal Subprojects in all 262 Municipalities within the country, defined and prioritized by communities and Municipal leaders, which would contribute to improving access of the population to needed basic public services. GOES is responding to a request from Municipal authorities to compensate for the financial gap of the 262 Municipalities caused by the financial crisis. The Project will finance, through Municipal Subprojects, an equivalent amount of about two percent of the current revenues of the national budget that the central government provides to Municipalities. The Grants would be distributed using the existing FODES formula for distribution, which is already widely accepted and well known by local authorities.

4 18. In response to Government’s request, the Project focuses on providing Municipal Subproject Grants to Municipalities as a one-time increase in revenues for Municipalities (not a long-term liability on central resources). Government has indicated that any future increase in the 7 percent fiscal transfer would be based on clarification of local and national government responsibilities/ competencies as defined in the Municipal Code and Sectoral Laws and budget envelopes , established for local service provisions. The Project will support Government’s interest to define and identify more precisely the responsibilities assigned to Municipalities under the decentralization process which has evolved over the last eight years.

19. Allocation of Municipal Subproject Grant resources equates to a range of US$52,000 to US$736,000 available to Municipalities for basic service provision investments. The distribution means that 6 percent of Municipalities (1 7) would receive above US$400,000, 29 percent (76) would receive between US$200,000 and US$399,000, 44 percent (1 15) would receive between US$lOO,OOO - US$200,000 and 21 percent (54) would receive less than US$99,000 (see Appendix 1 of Annex 1 for a detailed listing of amounts allocated to each Municipality),

20. Transfer of loan resources for Municipal Subproject Grants. Upon receipt of a request for an advance to the Social and Local Development Investment Fund (FISDL) Designated Account (DA), the Bank will transfer an initial advance of a maximum of US$32,000,000. From the FISDL DA, Ministry of Hacienda’s (MH) General Treasury Directorate (DGT) will make two disbursements to Municipal Project restricted bank accounts (which each Municipality will establish for the Project) that will require a third signature from FISDL to access the funds. The first disbursement from the FISDL DA by DGT would be 50 percent of the assigned transfer to Municipalities (see Annex 1, Appendix 1) along with an amount for pre-investment. The pre- investment would be equal to 5 percent of the total grant amount to be received from the Project by Municipalities receiving more than US$lOO,OOO and a ten percent of the transfer to those Municipalities receiving less than US$lOo,OOO. The total of the first transfer from DGT would be US$27.75 million (US$25 million for grants and US$2.75 million for pre-investment). The second transfer from DGT to the Municipal Project restricted bank accounts would be for the remaining 50 percent of the entire amount assigned to each Municipality (US$25 million in total) and would be made based on the implementation of Municipal Subproject Grants by each Municipality. Once a Municipality documents that they have executed at least 50 percent of the first transfer from DGT, they can request to FIDSL the remaining 50 percent of the assigned amount to the Municipality for Municipal Subproject Grants. FISDL validates these expenditures and authorizes the request to DGT.

2 1. Criteria for Receiving and Accessing Pre-investments funds. Specific fiduciary, safeguards and technical criteria would need to be met for all expenditures by Municipalities. The criteria are included in the Operations Manual’ and would be confirmed by FISDL. In order for the Municipalities to receive the first transfer and access the pre-investment resources, they need to meet the following criteria: (a) open a separate Municipal Project restricted (third signature) bank account; (b) take the mandatory procurement, financial management,

The criteria may be revised and adjusted as needed during the implementation of the Project in order help ensure smooth implementation and achievement of the PDO. Such changes would be included in the Operations Manual and be agreed upon by the Bank. 5 environmental and social safeguards training (30 training sessions will be held in four regions over a two month eriod before Project effectiveness); (c) show evidence that a citizen consultative process 2 was used by Municipal authorities with communities to identify and prioritize the proposed Municipal Subprojects and if not, carryout such consultative process; and (d) sign a Municipal Framework Agreement with an initial estimate of Municipal Subprojects to be financed by the Project and commit to maintain and operate the investments.

22. To access the pre-investment resources the Municipalities need to7: (a) have an approved list of Municipal Subprojects by FISDL; (b) prepared terms of reference for the work; (c) selected a consultant to carry-out the pre-investment work; (c) have a signed contract; and (d) validation of FISDL for the selection and contracting process. FISDL will provide the long-list of pre- qualified consultants for service provisions, formats for terms of reference and standard contract, accompany and validate the selection process for consultant to do the work, validate the final design and then authorize payment.

23. Criteria for Receiving and Accessing Investment Resources. In order for the Municipalities to receive and access the money in their Municipal Project restricted bank account for Project financed investments (the first disbursement from MH for fifty percent of their assigned investment amount), they need to meet the following criteria' as certified by FISDL: (a) have a technically viable Municipal Subproject proposal which includes an operations and maintenance plan for the sustainability of the investment; (b) have complied with safeguards related to the specific investment (environmental, indigenous peoples and resettlement frameworks) in the proposal preparation; and (c) formed a Citizens Control Committee, with members from existing community associations (ADESCOs) to provide civil society oversight to the entire investment process, i.e. the contracting and execution of investments and supervision of such investments.

24. For each Municipal Subproject investment, Municipalities are responsible to9: (a) prepare terms of reference for the investment work and supervision; (b) select a consultant to carry-out the investment and supervision; and (c) prepare and sign a contract. Each investment will have three withdrawals from the Municipal Project restricted bank account based on the proposed

~~~~ ~ As part of the Municipal Framework Agreement, a format for the categorization of citizen participation in the identification and prioritization of investment proposals will be completed. Information to validate would be: (a) are the investments requested and prioritized by communities defined in the investment plan? (b) what mechanisms were used for securing wide community participation in investment planning? (c) were all communities in the Municipality represented and participated equally? If the Municipality confirms compliance with the participatory planning process, then the proposed Municipal Subproject Grant list can be submitted with the Municipal Framework Agreement. If not, ISDEM will work with the Municipality to facilitate a participatory consultative process with the communities so they can define and prioritize Municipal Subproject Grants for Project financing. The criteria may be revised and adjusted as needed during the implementation of the Project in order help ensure smooth implementation and achievement of the PDO. Such changes would be included in the Operations Manual and be agreed upon by the Bank. The criteria may be revised and adjusted as needed during the implementation of the Project in order help ensure smooth implementation and achievement of the PDO. Such changes would be included in the Operations Manual and be agreed upon by the Bank. 'The criteria may be revised and adjusted as needed during the implementation of the Project in order help ensure smooth implementation and achievement of the PDO. Such changes would be included in the Operations Manual and be agreed upon by the Bank. 6 disbursement schedule of the investment (33%, 33% and 34%). FISDL will certify the advances in the execution of the Municipal Subproject Grant confirm compliance with fiduciary and safeguard policies and technical standards and then authorize payment to service providers. The second and third withdrawal from the Municipal Project restricted bank account for a given investment will be based on Municipalities showing evidence of a minimum of 70 percent financial execution, based on an approved work plan, of the previous disbursement for the investment. If for any reason an investment is not completed within the life of the Project, only the parts of the investment completed prior to the closing date will still be considered as an eligible expenditure.

25. Criteria for Receiving and Accessing Second Disbursement. Once Municipalities can show advances of fifty percent in the execution of the initial fifty percent of their assignment investment amount, they can request the last transfer of fifty percent to FISDL. FISDL will send a request authorizing the transfer from MH’s DGT for the second fifty percent of the assign allocation to the Municipality for investments. See Annex 4, Component 1 for detailed flow of funds criteria.

26. Projection of potential Municipal Subproject investments. Based on the Municipal diagnostic conducted in ten sample and representative Municipalities in the country, as part of project preparation, initial demand for Municipal Subproject investments centers around four key areas: rural and access roads; potable water systems, sanitation and waste services; and access to electricity. The specific types of investments requested were: (a) the repair and improvement of local roads and streets with works to improve the tread, and for drainage and protection; (b) the expansion and/or improvement of drinking water systems with construction, extension and/or improvement of drinking water catchments, water supply lines, distribution systems, collection tanks, and the purchase and/or repair of pumping equipment and/or electricity provision to expand the service coverage; (c) sanitation investments such as drainage works, extension of sanitation lines to process sewage and waste disposal according to the standards set by the industry; (d) alternative management of solid waste like composting, recycling, treatment and/or closure of open disposal sites, cleaning and decontamination of public spaces and major Municipal tributaries; and (e) expansion of electricity service through the construction of primary and secondary lines, installation of renewable energy systems, purchase of transformers and other accessories involved in expanding service coverage (including residential connections).

27. The investments identified by the Municipal diagnostic are in line with the national priorities as articulated in the “Government Plan from 2009-2014” to increase investments in rural and access roads, potable water systems, sanitation and waste services and access to electricity. ._ 28. If Municipalities have prioritized other investments through the participatory planning process that are outside of these four main sectors, they can be eligible for financing after”: (a) the sector’s national standards have been reviewed and a no objection from the Bank has been received; (b) they have been included in the Project’s Operations Manual; and (c) verification has been made of FISDL capacity to provide technical supervision for the entire investment life

lo The criteria may be revised and adjusted as needed during the implementation of the Project in order help ensure smooth implementation and achievement of the PDO. Such changes would be included in the Operations Manual and be agreed upon by the Bank. 7 cycle (pre-investment, investment and supervision). The Project will not finance any investments identified on the negative list as presented in the Project?s Operations Manual.

29. Because the investments are demand driven, as defined and prioritized by the communities and Municipal authorities, it is not possible to know ex-ante the number and exact type of investments to be financed by the Project. Based on initial demand, Bank technical staff has reviewed the national technical standards and potential types of investments in each of four sectors mentioned above and found them acceptable. Recommendations for improvement were made when needed. The national technical standards for the key sectors form part of the Project?s Operations Manual. A review was conducted on FISDL?s capacity to provide technical supervision for rural and access roads, potable water systems, sanitation and waste services, and access to electricity types of investments.

30. Sectoral Issues. Because the Project is responding to locally defined and prioritized needs, specific sectoral issues will not be addressed by the Project. However, the Project Municipal Subproject investments will be expected to be technically and financially viable and to be compatible with sector policy and procedures. It will be the task of FISDL to confirm that the investments conform to these requirements before approving investment proposals. Please see Annex 4, Component 1, for information on sectoral issues related to potential Project investments and Annex 6 for Implementation Arrangements.

3 1. Fiduciary and Safeguards Management. The Bank?s has appraised FISDL?s capacity to provide fiduciary and safeguard compliance oversight of Municipalities when preparing, executing and supervising investments financed by the Project and considers it acceptable. The Government has committed to initiate, after the appraisal mission, mandatory training to all Municipalities, ISDEM, COMURES and all TA service providers in 30 workshops (24 for Municipalities and 6 for service providers and national entities) presented in four regions and the national capital on applying sound environmental and social safeguards (applying the environmental, indigenous peoples and resettlement frameworks), financial management and procurement policies as well as technical standards for Municipal Subproject preparation and execution. Follow-up annual fiduciary and safeguards training will be provided to all Municipalities so as to facilitate adoption of best practices that ISDEM/FISDL would identify * and disseminate during Project implementation. Also, the Project would finance two annual external operational audits (technical, safeguards and administrative) of a sample of Municipalities. These audits would be reviewed during supervision missions by the technical, safeguards and fiduciary Bank specialists. Additionally, during supervision missions an additional sampling of Municipalities would be done to evaluate fiduciary, safeguard and technical standards compliance.

32. Non-eligible expenditures. If any non-eligible expenditure from Municipal Subproject investments financed by the Project is identified during Project execution, disbursements from Component 1 to the Municipality would be suspended and repayment of resources will be made by the Municipality to MH. If the Municipality defaults on this repayment, MH would repay the ineligible expenditure to the Bank. The Municipality would only be permitted to reengage and utilize the remaining investment assigned to it, once it has refbnded the expenditures in question and demonstrated compliance with relevant fiduciary and safeguard policies.

8 33. Key activities that will be carried out before Project effectiveness include: (a) the amount that each Municipality will receive using FODES formula would be communicated to each Municipality; and (b) a handbook on the rules of the program would be prepared or updated, and disseminated to all the Municipalities. This handbook will cover processes of procurement, financial and safeguard management, reporting, participatory planning, design of technical proposals, and options for technical assistance that Municipalities can access; (c) mandatory training and capacity building would be provided to Municipalities on the Project's handbook in a phased manner to ensure that Municipalities meet the eligibility criteria for accessing Project resources; and (d) confirmation that Municipal planning process reflects expenditure priority as validated by a citizen consultative process which was carried out to identify investments.

34. Additional Technical Assistance (TA) will be provided to an initial pilot group of 66 Municipalities. Later this TA can be expanded to other Municipalities based on: (a) eligibility criteria defined in the Project's Operations Manual; (b) and capacity of ISDEM to oversee the TA. Key areas for TA would be in strengthening capacity: to implement the Municipal Civil Service Law; to improve participatory planning; and for administrative management. The objective is to help each participating Municipality to progress from at least one capacity category to another in each of the four capacity areas as a result of receiving TA from the Project. The initial 66 Municipalities will be selected once the Municipal diagnostic is completed for all 262 Municipalities, most likely before Project effectiveness. The criteria' I that will be used to select these Municipalities are: (a) major deficiency in implementing the Municipal Civil Service Law, participatory planning and procurement and financial management; (b) not benefiting from other national programs or international cooperation in these areas; (c) Municipalities are classified in the typology 2, 3, 4 and 5 to allow Municipalities to increase capacity to move to a higher capacity ranking; and (d) Municipalities are willing and are available to participate in the process and make changes required by the Municipal Civil Service Law. Municipalities that receive additional TA and demonstrate increased capacity, by progressing from one capacity category to another, will qualify to participate in the pilot of the new fiscal arrangements that will be defined as part of the Decentralization Strategy Support Component.

35. Strengthening in disaster risk management. All Municipalities would receive TA to strengthen local processes, systems and capacity for disaster risk management. Execution would begin in phases starting with 20 percent of Municipalities the first year and extending each year to an additional 20 percent until the end of the Project. The selection and timing of TA to local governments will be based on the Municipal diagnostic results starting with the local governments with greatest need first. Additionally, local governments from each of the five capacity category will be selected to design appropriate TA modules for each type of Municipality. A specialized Disaster Risk Management Unit will be established in ISDEM to implement the disaster prevention and mitigation TA. This unit will be staffed with 3 specialists in disaster management.

" The criteria may be revised and adjusted as needed during the implementation of the Project in order help ensure smooth implementation and achievement of the PDO. Such changes would be included in the Operations Manual and be agreed upon by the Bank. 9 36. Key national local government support institutions, ISDEM and SSDT will be strengthened to be able to respond to local government needs for capacity building and local development.

37. The Project would also support the GOES defining a decentralization policy which would strengthen the current system of inter-governmental administrative and fiscal relations. The TA would assist to clarify and redefine distribution of responsibilities between national and local governments; conduct sectoral diagnostics of ideal model for service provision; facilitate consensus building events around responsibility assignments and sectoral models; definition of fiscal implications and potential fiscal decentralization policies; and the preparation of a decentralization policy and implementation plan.

C. Project Components

38. The proposed Bank operation would have four components: (i) decentralized service delivery; (ii) strengthening local governments; (iii) decentralization strategy support; and (iv) project management. The Project consists of the following components (see Annex 4 for Detailed Project Description): 39. Component 1 : Promotion of Decentralized Service Delivery (US$52.75 million, IBRD) Provision of Subproject Grants to Municipalities. 40. Component 2: Strengthening of Municipal Governments (US$19.72 million, IBRD) (a) Strengthening of Municipalities’ institutional and technical capacity to design and implement Municipal Subprojects, through, inter alia, the provision of technical assistance and training to Municipalities’ personnel to prepare, implement and supervise Municipal Subprojects. (b) Support for the implementation of the Municipal Administrative Career Law, through, inter alia: (i) the development or update (as the case may be), and implementation of Municipal rules, processes and procedures; (ii) the support of the Municipal Training Center in ISDEM, and the establishment of regional offices of the center in selected sites; and (iii) the creation of a national registry for the Municipal administrative career, including the carrying out of a periodic update of the information contained in said registry. (c) Strengthening of the participatory planning capacity of Municipalities, through, inter alia, the provision of technical assistance and training to improve the processes and systems for the preparation of strategic plans and participatory Municipal development plans. (d) Strengthening of the procurement and financial management capacity of Municipalities, through, inter alia, (i) the provision of technical assistance and training to improve procurement practices, policies and procedures; and (ii) the acquisition and utilization of equipment, including hardware and software. (e) Strengthening of the disaster risk management capacity of Municipalities, through, inter alia: (i) the evaluation of current risk management practices; (ii) support the development of a national risk management policy, in coordination with the competent national authorities; and (iii) the provision of technical assistance to Municipalities in disaster risk reduction activities.

10 Strengthening of the institutional capacity of ISDEM and SSDT, through, inter alia, the design(0 and implementation of strategies, plans, programs, institutional structures, rules, and procedures to respond to local needs and development. 41. Component 3: Decentralization Strategy Support (US$1.63 million, IBRD) Support for a national decentralization strategy for service provision, through, inter alia: (a) the evaluation of current rules, processes and procedures for said service provision; (b) support for the development of a national decentralization strategy and plan to implement said strategy. 42. Component 4: Project Management (US$5.10 million, IBRD) (a) Support to FISDL and ISDEM in the coordination and implementation of the Project, through, inter alia, the provision of technical assistance and training, and the acquisition and utilization of goods. (b) Design and implementation of a Project communications strategy to support Project implementation. (c) Provision of technical assistance for the establishment of a Project monitoring and evaluation system. (d) (i) Carrying out of technical studies to develop training models to support local public sector management, all as approved by the Bank; and (ii) provision of technical assistance to carry out the audits referred to in Sections II.B.3 and V of Schedule 2 to the Legal Agreement, all under terms of reference acceptable to the Bank. D. Lessons learned and reflected in the Project design

43. Lessons learned on participatory processes, institutional strengthening, and democratic local governance. The Project design benefits lessons learned from the implementation of a number of projects financed by the German Development Agency (GTZ), Spanish Development Agency (AECID) and the United States Development Agency (USAID) in El Salvador over the last ten years. The Project also builds on key lessons learned of similar experiences in Latin America, particularly from the Dominican Republic, Nicaragua, Brazil, Colombia, Mexico and Peru. These recommendations mainly focus on the design and implementation issues of civil society engagement, institutional capacity building, transparent financial management and procurement and monitoring and evaluation.

44. Civil society engagement. Participatory planning schemes in El Salvador have contributed to empowering communities to engage more actively in the development of their communities, strengthened the quality and focus of Municipal development plans, strengthened the capacities of civil society actors and communities to plan investment activities that were more relevant to their needs and to monitor public expenditures of the local authorities. The Project incorporates these lessons by institutionalizing and mainstreaming the successful participatory mechanisms for local development as the methodology employed by the Project. The specific elements incorporated into Project design and implementation are: (a) Municipal Development Plans (MDPs) that actually finance relevant community prioritized investments. Existing US AID and GTZ financed projects supporting Municipalities highlighted the need to clarify how Community Development Plans (CDPs) 11 are translated into MDPs and how MDPs can translate into financing relevant investments. Many times CDPs are not utilized to form the bases of the MDP and when used, this has not guaranteed that the prioritized community defined investments are being financed. The successful approaches have given the communities a voice and vote to approving the Municipal Investment Plan. This has been formalized by creating a Municipal level citizen committee which is responsible for representing the communities’ interest, approving of investment plans and providing citizen supervision of investments under execution. Incorporating a Municipal level citizens committee from the beginning of the Project is key and thus roles, responsibilities and procedures should be clearly articulated in an operations manual. Some Municipalities found useful to incorporate an external negotiator and facilitator to reduce conflicts of interest and insure that all communities’ interests are presented and respected. (b) Cost ofparticipation: Experience in a number of past projects in El Salvador showed that attending participatory planning meetings can generate a high transaction cost for participants. Participants from local universities and academic institutions as well as representatives from poor rural areas were often poorly represented in participatory planning meetings because of the time and locations of meetings. A key lesson is that more flexible meeting times need to be offered for convenience of all community participants. The Project is incorporating into the participatory planning methodology the good practice of being more .. inclusive, taking into account the participants’ constraints and adapting schedule of meetings around participants’ preferences.

45. Institutional capacity building. Strengthening the institutional capacity at local level should focus on promoting the professionalization of Municipal civil service and strengthening national support entities to strengthen timely and relevant TA to local governments: (a) Ensuring sustainable Municipal administrative capacity: USAID experience in El Salvador shows that changes in local government elected leaders traditionally present a high level of staff rotation. This has highlighted the need to implement fully the Law on Municipal Administrative Career (May 2006) which professionalizes most Municipal functions and posts. It also highlights the need to change the few remaining positions which are “positions of confidence” which can be changed at will by Municipal authorities. Additionally, quite frequently, Municipal staff is not hired based on defined job descriptions and relevant experience. There is also the need to standardize by Municipal categories the level of capacity and competency as well as the measurements of performance that each Municipal post should have. The Project would provide technical assistance to Municipalities to implement the new Law on Municipal Administrative Careers. This Law defines the framework to hire, train and measure the performance of Municipal staff, Also, specific capacity building programs related to specific posts and Municipal capacity levels will be developed and training programs to help Municipal staff progress in capacity levels. The Project also supports the newly created Municipal Training Center in ISDEM and the creation and support for three regional offices of the center which has the mandate to provide the capacity building programs to support the implementation of the Municipal Administrative Career Law. (b) National level support to local governments: El Salvador’s experience shows that implementing Municipal development plans has benefited when national support entities,

12 like FISDL and ISDEM, provide TA to build investment &d administrative capacity. There has also been some initial positive experience by ISDEM with the USAID and GTZ financed initiative to produce and assist Municipalities to apply the tool for the Municipal auto- assessment of capacities. Moreover, FISDL has significant experience in providing technical oversight to the preparation and execution of investment projects along with supporting Municipal administrative capacity building. The Project incorporates these lessons by relying heavily on FIDSL to build administrative capacity in all Municipalities to: carry out the procurement and financial management functions related to Municipal Subproject investments financed by the Project; and to prepare and execute investments as well. The Project also focuses on strengthening ISDEM’s capacity to provide ongoing focused advanced TA in professionalizing the Municipal civil service, mainstreaming participatory planning mechanisms for local governments and creating capacity programs to help Municipalities to gradual progress in key capacity areas to higher capacity levels.

46. Transparent financial management and procurement practices have shown to contribute to strengthen Municipal public systems using principles of transparency, open and fair competition, equal access, and non-discrimination. (a) Transparent and up-to-date sectoral information: The GTZ PROMUDE project activities, to improve transparent Municipal investment management, highlighted the importance of generating up-to-date, well organized and available data on existing sectoral conditions and impacts of investments under consideration. When more information was available, and civil society was more involved, investments were more relevant in addressing gaps in services. The Project will strengthen the technical capacity of Municipalities to make informed investment decisions by using organized and timely sectoral data via FISDL to inform the participatory planning process. (b) E-Government. International experience with e-governance has shown that the use of web-based facilities increases business access and competition for government expenditure. Additionally, e-government integrates many workflow processes for transactions and other supply chain management activities improving efficiency and reducing processing costs. It also opens greater and easier access to real time and historic information for management and auditing purposes. The Project will support the upgrading and implementation of e-governance web based tool within FISDL for processing of all pre-investment, investment and supervision of investments for the Project.

47.Monitoring and Evaluation is key for building awareness of capacity levels and for timely decision making. (a) Municipal Performance Index: GTZ’s experience with Municipal auto-evaluation tools such as a Municipal performance index focused on measuring procurement and financial capacity of Municipalities in pilot areas. This experience demonstrated that the dissemination of Municipalities’ auto-evaluation results stimulates competition and improves performance. The Project plans to scale up auto-evaluation, maintain an open accessible database on Municipal capacities and disseminate current Municipal capacity levels. Quarterly progress reports and more detailed annual reports will be elaborated and sent to local governments on the progress in improving Municipal capacity. These reports will be accessible for public

13 consultation and used as a basis for participatory budget planning for institutional strengthening. (b) M&E units: The Bank’s experience in El Salvador highlights that the success of a project partly relies on the creation and maintenance of a well-staffed and managed M&E unit within the sponsoring institution. This M&E unit is crucial to data-gathering for day to day management decision making and to preparation and publication of effective communication on project outcomes and results throughout project implementation. The Project will have an M&E unit in ISDEM, which will have full-time staff dedicated to M&E activities and will be equipped with necessary systems and tools. FISDL will utilize its existing monitoring system for all Component 1 activities and provide data inputs to ISDEM for Project reporting.

48. Further, lessons learned from other local government strengthening projects in Latin America, Asia and Africa which are being incorporated into the Project are: (a) Keeping Municipal participation criteria at a minimum is key to reducing project complexity and making the Project implementable; (b) It is important to have minimum Municipal staff hired before technical assistance activities begin; (c) Signing of local government contracts which clearly define the commitments of both the Municipalities and the implementing agency is key to reduce implementation delays; (d) Learning by doing approach which mixes institutional capacity building and technical assistance with investment support produces more sustainable outcomes; (e) Committing Municipalities to a maintenance budget scheme for existing, project supported and future investments is key to sustainability and upkeep of the Municipal infrastructure stock; and (f) Assisting Municipalities to define, adopt and implement a Municipal procedures manual with functions and responsibilities for Municipal administration strengthens the Municipal administration.

E. Alternatives considered and reasons for rejection

49. One option that was initially considered was to design a DPL operation that would provide budget support to transfer investment resources directly to Municipalities. This option was rejected because there was not any fiscal space for an additional DPL. Also, there existed the opportunity to pursue the local government strengthening agenda by focusing on processes, systems and capacity of local governments and national support entities to improve service delivery in the medium and long-term which was more appropriated supported by an investment operation.

50. Another approach that was considered was to support a wider sectoral approach in water and sanitation investments and work on the significant institutional reform agenda related to water sector tariffs, water law and institutional arrangements. This approach was rejected because the GOES’Sdesire to focus more on the local government strengthening and decentralization policy preparation. Additionally, GOES has requested support from IDB for the wider water sectoral reform agenda.

14 51. Focusing on smaller group of Municipalities for investment component was considered to focus both investment and TA. This was rejected as the investment component is meant to cover all Municipalities to partially make up for the short-fall in Municipal revenues as a result of the global financial crisis.

111. IMPLEMENTATION

A. Institutional and implementation arrangements.

52. The Secretariat of the Presidency for Strategic Affairs (SAJ3) is responsible for overall Project coordination and will sign individual Municipal Framework Agreements with all 262 participating Municipalities. SAE will also enter into an Implementation Agreement with FISDL and ISDEM for carrying out their respective responsibilities in the Project. The Sub- Secretariat of Territorial Development and Decentralization (SSTD) of SAE is assigned the responsibility for establishing and maintaining the Inter-institutional Committee (CI). SSDT oversees the executing institutions, FISDL and ISDEM and chairs the CI. CI members include SAE, SSDT, Technical Secretary of the Presidency (ST), FISDL, COMURES, ISDEM and MH. The committee facilitates overall Project coordination.

53. Municipalities, FISDL and ISDEM would be responsible for the specific outcomes under each of the four Project components. Municipalities would be responsible for Component 1, and FISDL would provide technical supervision to Municipalities in preparing, implementing and supervising local investments. Transfers to the Municipalities would be made directly by the Ministry of Finance (MH) based on requests from FISDL. FISDL would oversee the management of the funds by the Municipalities for Component 1, and would supervise procurement for the Component in a decentralized modality through the 262 Municipalities. ISDEM would be responsible for Components 2, 3 and 4. An executing unit would be created within ISDEM to manage Project resources for these three Components.

Table 1 Overview of imdementing arrangements for each Comnonent Component Name Responsible Participating Procurement Institution Entities and FM Component 1 - Promotion of Municipalities FISDL, ISDEM, Municipalities Decentralized Service Delivery MH, SAE WEISDL support Component 2 - Strengthening of Municipal ISDEM ISDEM, FISDL ISDEM Governments Component 3 - Decentralization Strategy ISDEM SAE,SSDT,.ST, ISDEM support COMURES, MH Component 4 - Project Management ISDEM ISDEM, FISDL ISDEM 54. All Municipalities in El Salvador have been carrying out procurement functions for over 10 years, although they don’t have previous experience with application of Bank’s Procurement Guidelines. Even though Municipalities have no previous experience with Bank’s procurement, all of them had, at some point, received funds from FISDL, and therefore have experience using SBD, evaluation formats, etc.; they also have experience in procurement planning.

15 55. FISDL’s operational capacity to implement interventions in close coordination with local governments makes it a qualified implementing agency. FISDL is a governmental entity, which depends on the Presidency and the Technical Secretary of the Presidency. It was appraised by World Bank to have sufficient safeguard, fiduciary and technical capacity to provide technical assistance, oversight and supervision of Municipalities in preparing and implementing local investments related to Component 1.

56. ISDEM has no prior experience with managing Bank financed projects, however has some experience with bilateral financing. Created in 1987, its main goal is to provide technical, administrative, financial and planning assistance to Municipalities to help them achieve their objectives as defined in the Municipal Code.’* Given its limited experience using Bank’s procurement and financial management guidelines, procedures or standard documents, it is recommended to establish a project unit. Within such a Unit, a well seasoned Procurement Specialist with previous experience applying Bank’s Procurement and Consulting Guidelines will be hired. 57. Implementation of Component 1 - It is anticipated that the Municipal Subproject investments in this Component would be executed by all 262 Municipalities over a 1-4 year time period. The main institutions involved with the implementation of this component are: Municipalities, Ministry of Finance (MH), SAE, FISDL, ISDEM, specialized service providers (administrative and technical), Citizen Control Committees and sectoral agencies. 58. Implementation of Component 2 - This Component will be executed by ISDEM with a fully integrated project unit within ISDEM, created with technical and administrative staff from ISDEM, and with the support of FISDL. Technical assistance would be provided to all Municipalities in basic procurement and contracting, basic financial management, environmental and social policies and screening procedures and technical oversight for local investments before accessing resources available for Component 1 investments. It will also strengthen all Municipalities in disaster risk management. It will provide additional strengthening to 66 local governments in participatory planning, professionalization of Municipal civil service and procurement/contract management and financial management to those Municipalities with greatest needs as determined by the Municipal diagnostic.

59. Implementation of Component 3 - ISDEM would manage the resources for this Component and the SSDT of SAE would be responsible for the implementation of the activities of the Component. A Decentralization Commission has been formed with the MH, SAE, ST and SSDT.

B. Monitoring and evaluation of outcomeshesults

60, Project implementation will be guided by the Results Framework. ISDEM, as part of its fully integrated project executing unit, will assign and/or contract two specialists who will have overall responsibility for the M&E of Project activities and manage data inputs from FISDL for Component 1.

’’ISDEM has separate legal personality. 16 61. FISDL will compile financial statements for Component 1 and send them to ISDEM which . will compile Project financial statements for all Components and send to the Bank. FISDL will record financial transactions using its existing integrated information system, which includes budgeting, treasury, and accounting. ISDEM will record financial transactions directly into the Government’s Integrated Financial Management System (SAFI), as well as a set of subsidiary ledgers to prepare project financial statements. The M&E process would hnction as both a day- to-day management tool and a mechanism for assessing Project outputs and outcomes as well as for quarterly, semi-annual and annual implementation review by the SSDT and the Bank supervision team. It would ensure that baseline and follow-up data for the key performance indicators is collected and made available on an ongoing basis, including Project start-up (before Loan effectiveness), mid-term review (MTR) and Project closing.

62. Information from the monitoring system would be analyzed by ISDEM and disseminated according to the Project’s communication strategy to local governments and other appropriate stakeholders. ISDEM would provide Quarterly Project Progress Reports and more detailed Annual Project Reports which include a review of the Annual Operating Plan for the period covered including: (a) a description of the key activities executed; (b) an update on the implementation schedule (physical progress of activities) with a percent complete of each activity and explanation for various according to plan; (c) report on the budget executed compared to plan; (d) update on indicators in the Results Matrix of the Project; (e) update and review of key risks confronting the Project; (f)key lessons learned during the reporting period; and (g) review of technical, safeguards, and fiduciary audits conducted during the report period. ISDEM will also facilitate semi-annual workshops on best practices and lessons learned.

63. Baseline data would come from four sources: (i) approved Municipal Subproject investment proposals; (ii) Municipal diagnostic and Municipal auto diagnostic/assessment; (iii) ISDEM’s institutional capacity assessment; and, (iv) report on state of decentralization in El Salvador.

64. A thorough Mid-term Review (MTR) would be conducted no later than 2 1/2 years after the first disbursement and would: (i) assess the degree of advancement in achieving Project outcomes; (ii) evaluate the institutional arrangements for Project implementation; (iii) determine updates to the Project Operational Manual; and, (iv) review the progress on implementation of the Project Implementation Plan (PIP). A final evaluation would be conducted in the last semester of Project execution to assess overall achievement of expected Project results. In addition to reporting on Project outcomes, ISDEM will report on: (i) the lessons arising from investment implementation based on case studies and good practices that have been identified which can be replicated by other local governments; and (ii) the results of the baseline survey, mid-term evaluation, and final Project evaluation.

65. Bank supervision is critical for this project and a minimum of two supervision missions will be conducted per year. Field visits will be necessary to carry-out ex post evaluations.

C. Sustainability

66. The first area of focus for Project sustainability is the professionalization of the Municipal civil service and securing a more stable and regular Municipal cadre of Municipal employees. The second area is strengthening of key processes, systems and Municipal capacities to carry out

17 basic core administrative functions related to participatory planning, procurement, and financial management. A third area is the operations and maintenance of investments financed under Component 1.

67. An additional key aspect of the Project sustainability is the establishment, functioning and

’ strengthening of the institutional structure within the ISDEM for supporting Municipal governments’ civil service professionalization via a Center for Municipal Professional Training. Loan funding to support the additional key specialists in ISDEM would gradually decline over the life of the Project with ISDEM gradually assuming financial responsibility for the Project coordination hnction. ISDEM would be responsible for financing 20% the second year, 40% the third year, 60% the fourth year, and 80% the final year.

D. Critical risks and possible controversial aspects

68. The following table details the potential technical and safeguards risks as well as mitigation measures that would be taken under the Project. For detailed financial management and procurement risks, see Annexes 7 and 8 respectively.

Risk Factors Residual Description of Risk Mitigation measures risk

Fiscal pressures are likely to emerge from the The Bank team has maintained a continuous dialogue with the Moderate sharp decline in current revenues associated with Government on potential responses to the crisis, and is the economic slowdown and the rising public providing advice on a range of areas, including tax reform wage bill. The fiscal deficit is expected to reach legislation that was approved in December 2009. In March 2009 5.1 percent by the end of 2009. the IMF approved a new three year Standby Program setting specific macroeconomic and fiscal related targets until 20 12.

The Government and the Bank have engaged in a dialogue and Substantial required majority to approve Bank loans in consensus-building processes, including the involvement of the Congress. The approval process involves two opposition in defining fiscal priorities and providing the votes by the Congress, requiring a simple opportunity to comment on project design. In addition, this loan majority in the first vote and a two-thirds benefits to 262 Municipalities currently ruled by all political majority in the second vote to approve the loan. parties represented in the National Assembly. Multi-party During the previous CPS period, an impasse in organizations representing the Municipalities have also been the National Assembly on several domestic involved in the preparation of this operation and, according to issues led the opposition to block US$500 initial consultations in the Assembly, this operation will get a million in new foreign borrowing requiring a broad support from both the ruling and opposition parties to get sovereign guarantee, including five Bank its prompt approval and ratification. operations as well as financing from other multilaterals.

There might be very strong political pressure to The Project is designed so all resources for Municipal disburse the funding quickly, as the Municipal Subproject Grants in Component 1 could be transferred before election will take place in 2012. July 201 2 to each Municipality’s Project restricted bank account (this would include pre-investment funds equivalent to 5% of the amount Municipalities will be eligible to receive for investment activities along with the entire amount that would be allocated to Municipalities for the Municipal Subproject Grants).

Currently, there is limited capacity and In project design, efforts have focused on key TA needed and Substantial experience in policy setting related to establishing the sufficient incentives to define a decentralization

18 Risk Factors Residual Description of Risk Maigatwn measures risk intergovernmental relationships including fiscal strategy and appropriate implementation plan. decentralized and Municipal capacity building.

Municipalities may have little incentive to A key incentive includes being in a priority position to implement the current Municipal Administrative participate in the new fiscal decentralization policy pilot as a Career Law which is important to building result of demonstration of interest by increasing Municipal capacity. capacity and implementing the Municipal civil service law.

The project is trying to build capacity in all 262 Included in the Project design is strengthening of both FISDL Municipalities at the same time, instead of and ISDEM regional staff to be able to attend to all 262 focusing on those who may have stronger Municipalities in initial capacity building and to respond to leadership or interest in building their capacity at administrative and technical assistance needs. this time.

Limited capacity at the Municipal level to design Opportunities have been sought to expose counterparts to and implement investment activities (Subproject successful Municipal Subproject Grant programs and lessons Grants). One significant reason capacity remains learned from these experiences. weak is that Municipality’s lack a functional career administrative structure. Instead, under The project seeks to strengthen ISDEM to be able to assist the “winner takes all system”, with the election Municipalities implement the Municipal Civil Service Law and of a new mayor, he/she brings in new promote improvements to the same. administrative and technical staff. Sectoral ministries and other entities with experience in Technical feasibility and sustainability of Municipal infrastructure investments, Le. FISDL, etc. have been waterhanitation, solid waste and road incorporated into project design and execution. infrastructure. Technical specialists from the Bank have validated the existing Balancing the need for local flexibility with design standards for each of the sector, which have been sector technical quality. The project could included in the Projects operations manual. achieve its results in terms of improving capacity but have unintended consequences of creating infrastructure that is of poor quality, i.e. Not only the Municipal Law on Administrative Careers is part worsening of service quality for existing of the TA component, but it is also a condition for all households (Le. reducing pressure, hours of Municipalities to receive additional project support TA. availability, worsening water quality) by expanding the network. One of FISDL’s key responsibilities is to confirm that all national standards have been complied with on all Municipal Subproject Grants investments.

Under no circumstance will urban or rural water systems be approved and financed which network expansion would worsen service quality for existing households: Institutional Risk: Lack of permanent administrative staff for See comment above. Moderate Municipalities. After every election, the winning party brings its own staff. Given that Municipal elections will take place during the implementation of the Project, a strong focus is placed on Local political influence on Project activities, helping Municipalities implement the Municipal Administrative including the selection of the investment activity Career Law so as to reduce Municipal staff turnover when new and also on selection of service Municipal administrations take office. providerdvendors for canyout the project. A participatory process of project selection will be confirmed before funds are awarded for a given investment activity. In addition, the implementation of each investment will be overseen by a citizen control committee. Finally, the project design includes operational audits which cover fiduciary, safeguards including social and national technical standards

Implementation Risk: FISDL capacity to fulfill the responsibility 1 The project will rely on existing in country capacity for I Substantial

19 Risk Factors Residual Description of Risk Mitigatwn measures risk Municipal Subproject Grant program (planning, managing the subproject investment lifecycle. During appraisal, monitoring, Bank safeguards and preparation, environmental, social and fiduciary specialists have fiduciary requirements) for diverse sectors and been involved in the preparation of the environmental, social, varying levels of Municipal capacities, plus all and fiduciary frameworks and assessed FISDL to have the Bank Safeguard and Fiduciary requirements. sufficient capacity to implement its role in the Project with the augmentation of human resources in the regions.

Municipal govemment’s capacity to canyout The whole of the design is focused on strengthening Municipal Municipal Subproject Grant program with all its governments to increase their basic administrative and technical conditionality. capacities. The best possible institutional arrangements that could be designed in El Salvador have been employed, i.e. FISDL’s technical supervision for investment component and ISDEM’s focus on increasing Municipal capacities in planning, administration and implementation of the Municipal Administrative Career Law. Fiduciary Risk: Implementation of investment Component by The project is designed to strengthening Municipal fiduciary Moderate 262 Municipalities which may have weak capacity and controls by implementing the national Integrated controls and may have established practices of Financial Management System and by providing significant political patronage which are not consistent with training and TA in FM and Procurement and Contract Bank requirements for competitive procurement. management. Also, a strong Municipal Fiduciary Framework has been designed to ensure the correct use of funds and achievement of development objectives will be implemented. Also, if any expenditures are declared ineligible ex-post, these funds will be repaid directly by Municipalities andor by MH by taxing future transfers to the Municipality. The Project will also employ the use of e-governance tool within FISDL for processing of all pre-investment, investment and supervision of investments for the Project. All Municipalities in additional to the general public will have access to the website. Environmental Risk: Municipalities have weak capacity to assess The project is designed to provide specific guidance on Moderate environmental risks and design and include potential environmental issues and mitigation measures for mitigation measures in investment proposals. types of investments that will be funded via mandatory environmental safeguards training and ongoing supervision of application of environmental policies to Subproject Grant preparation and implementation. The Environmental Management Framework provides for detailed screening procedures for all Subproject Grant proposals. Only those that have applied the Environmental Management Framework and included mitigating measures in the Subproject Grant design will be approved by FISDL. In addition, the project will strengthen local government environmental screening capacity more generally. Social Risk: The implementation of investment activities Resettlement Policy Framework has been established and Moderate under component 1 may result in Involuntary screening for resettlement issues will be applied to all Resettlement Municipal Subproject Grants and thus requires appropriate responses to resettlement issues for the Subproject to be approved. Overall Risk (including Reputational Risk) Substantial

E. Loadcredit conditions and covenants

Effectiveness Conditions 69. The Government shall furnish to the Bank an opinion or opinions satisfactory to the Bank,

20 showing that the Implementation Agreement has been duly executed by the Borrower, through SAE, ISDEM and FISDL and is legally binding upon the Borrower, ISDEM and FISDL in accordance with its terms.

Other Relevant Covenants after Effectiveness Conditions 70. The Borrower, through SAE, shall enter into a set of institutional agreements for the execution of the Project, namely: (i) an a Implementation Agreement with FISDL and ISDEM; and (ii) a Municipal Framework Agreement with each Municipality for the implementation of one or more Municipal Subprojects.

71, The Borrower, through SAE,shall ensure, and cause the Municipalities, FISDL and ISDEM to ensure, that the Project activities under their responsibility are carried out in accordance with the Environmental Management Framework, the Resettlement Policy Framework, and the Indigenous Peoples Planning Framework (IPPF).

72. With respect to the assistance to be provided to Municipalities to prepare their municipal development plans under Part B.3 of the Project, the Borrower, through SAE, shall, and shall cause ISDEM to ensure, that the terms of reference for said Project activities include a provision, satisfactory to the Bank, mandating that the Municipalities incorporate and/or cause to be incorporated the applicable Bank Safeguard Policies to said plans.

73. Upon approval of a Municipal Subproject, and prior to the carry out of said Municipal Subproject, the Municipalities: (a) carry out an environmental assessment of said Municipal Subproject, and prepare an environmental management plan (or similar environmental instrument), all acceptable to the Bank; and (b) thereafter, to carry out or cause to be carried out said plan in accordance with its terms.

IV. APPRAISAL SUMMARY

A. Economic and financial analyses

74. The financial analysis assesses the capacity of local governments to allocate incremental resources for maintenance and operation of Project-funded Municipal Subproject investments. The economic analysis assesses the minimum benefit required from Project-funded investments, to cover both investment and recurrent costs (See Annex 9 for further details).

75. Regarding financial feasibility, the relative distribution of Municipal funds by cost categories clearly show that local governments spend more than half of available resources on recurrent costs, including personnel, infrastructure maintenance and operation expenses. However, direct transfers from the national government (FODES) are largely insufficient to cover current expenditures on personnel, infrastructure maintenance and service operations. Around 25% of recurrent costs are financed with resources directly collected by local government. Investment costs per beneficiary household range from US$130 to 1,200, whereas operation and maintenance costs tend be around US$30 per household. Therefore, local taxes or service tariffs needed to cover future recurrent costs (operation and maintenance) seem to be affordable - less than US$3 per month, or 8 cents per day.

21 76. Regarding economic feasibility, Project funded investments need to generate tangible benefits such as savings on household expenditures, or intangible benefits such as improved quality of life, of at least: 5 1 cents per household/day on electricity provision, which represents 35% of average expenditures on electricity and illumination; 45 cents per household/day on water provision which represents 87% of average expenditures on water and sanitation; 35 cents per household/day on sanitation which represents 68% of average expenditures on water and sanitation; 82 cents per household/day on roads and streets which represents 27% of average expenditures on operation of private transportation facilities and household cleaning; and 14 cents per household/day on solid waste disposal which represents 8% of average expenditures on household cleaning. Investments on the above mentioned sectors are likely to generate savings for the households, compared to what they used to spend before the investment, greater than the minimum savings or expected benefits described above13. Therefore, investment in these sectors can be economically justified.

B. Technical

77. Resources for preparing and implementing Municipal Subproject investments will be transferred to Municipal Project restricted bank accounts following established criteria. Technical assistance for the preparation and implementation of the investments would be contracted by Municipalities under guidance and supervision of FISDL. Investments proposals would: (a) respond to the priority and demand of communities of the Municipalities identified through participatory planning processes; (b) be appropriate for the financial capacity of the Municipality; (c) be economically justified or cost effective; and (d) adopt corrective measures to limit or compensate its environmental impact. Sustainability of investments will be assured by the participation of local governments and communities in the process of investment identification, and the mandatory provision of adequate Municipal budget support for maintenance purposes. Institutional strengthening actions include key areas identified by Municipal assessments.

C. Fiduciary

78. Financial Management. A Financial Management Assessment (FMA) was carried out on site in January and February 2010. It concluded that: i) FISDL would carry out, with relative ease, the financial management tasks associated with the technical supervision of Municipalities in Component 1 activities, while ISDEM would require additional assistance during implementation; ii) in FISDL, staff capacity, administrative structure and systems are adequate for project FM purposes, while in ISDEM, FM staff with appropriate skills and experience will be assigned to manage the FM aspects; and iii) the implementation of the Municipal Subproject Grants by the Municipalities will be governed by a Municipal Fiduciary Framework (MFF), which is part of the Municipal Framework Agreement (MFA). The Project will have three main implementing entities responsible for fiduciary activities (Municipalities, FISDL and ISDEM) with SSDT providing strategic direction for the Project. The pre-mitigated FM risk for this Project has been assessed as Substantial and would be rated moderate once there is evidence that the mitigating measures have been implemented and are working as intended.

l3 Current spending by households in each of these sectors has been estimated based on CPI data, 22 79. Procurement. A Procurement Assessment on the capacity to implement procurement actions for the Project has been carried out in FISDL and ISDEM in January and February 2010. It concludes that: i) FISDL has previous experience using Bank’s procurement guidelines, procedures and standard documents, and has an Institutional Procurement and Contracting Department with vast previous experience applying Bank’s Guidelines. FISDL’s Municipal Advisors will have to accompany all procurement process carried out at the Municipal level; and ii) ISDEM has no previous experience using Bank’s procurement guidelines. An assessment of the capacity at the Municipal level confirms that all Municipalities have been carrying out the procurement function for over 10 years and by Law, each Municipality has to have an Institutional Procurement and Contracting Unit (UACI) in place. The overall project risk for procurement in Component 1 at appraisal is Moderate, and for Components 2, 3 and 4 is Substantial. If mitigation actions are properly implemented, the risk would be lowered to Moderate. External operational audits for Component 1 would be performed twice a year and Procurement Post Review exercises carried out by the Bank would be in the order of 1 out of every 20 contracts. For Components 2, 3 and 4, semi-annual supervision missions are recommended to visit the field and one out of every 10 contract should be post-reviewed when applicable. Procurement for the proposed project would be carried out in accordance with the World Bank’s “Guidelines: Procurement under IBRD Loans and IDA Credits’’ dated May 2004, revised October 2006; and “Guidelines: Selection and Employment of Consultants by World Bank Borrowers” dated May 2004, revised October 2006, and the provisions stipulated in the Legal Agreement.

D. Social

80. A Social Assessment has been conducted during Project preparation between January and March 2010. The main social objective of the Local Government Strengthening Project is to strengthen institutional arrangements between the Municipal governments and civil society for sustainable management of Municipal public investments. To achieve this, the following social objectives must be achieved: (a) strengthened transparency of Municipal governments and project implementing entities (including mancomunidades and local community organizations); and (b) greater intra-Municipal communication and collaboration.

8 1. Since Municipal governments have not outlined policies or actions with a gender equality approach, the proposed Project will support the inclusion of women into the processes of political and economical decision making. For this, the Project will: (a) promote the participation of women’s organizations in local development planning; (b) ensure that in the formulation of Municipal Subproject investments, that specific benefits for women will be targeted and risks to women will be assessed; (iii) in the institutional strengthening component, specific methodologies for training women council members, women mayors, and women community leaders will be incorporated.

E. Environment

82. Environmental impacts. An Environmental Assessment (EA), including an Environmental Management Framework was completed and reviewed by the Bank. It was disclosed in country and in the World Bank’s InfoShop on April 16,2010.’

23 83. The Municipal Subproject investments under Component 1 are expected to be relatively small-scale given that the average range of funding is between US$lOO,OOO to US$300,000. No large-scale, significant or irreversible impacts are expected from the proposed investments, Long term direct impacts are expected to be positive. Most Subprojects would be focused on improving environmental conditions in Municipalities. It is expected that the Project’s impacts would primarily involve short-term, small-scale, and reversible impacts during construction phase.

84. A strategic analysis of the environmental context of Municipalities and assessment of potential impacts of the sub-project typologies was prepared through FISDL. ISDEM has little technical and operational capacity for environmental management and is therefore being supported by FISDL that would be charged with the oversight of safeguards. Other technical support will be provided through the Ministry of Public Works and other government agencies including the Ministry of Environment and Natural Resources (MARN). The Environmental Law requires environmental impact assessment of investment proposals that may have potential negative impacts on the environment. MARN has developed a classification for projects based on their potential impacts. Furthermore, MARN is preparing a new Guide/Manual to further clarify and simplify existing procedures for social-interest projects, including water and sanitation investments. The Project will only be financing those investments that fall within the national A and B1 categories of lower risk.

85. Environmental Management Framework. The Environmental Management Framework includes the necessary procedures to avoid, minimize or mitigate the potential negative environmental impacts of the Project in accordance with Bank policies and national legislation regarding the categorization of projects.

F. Safeguard policies

86. The following safeguards apply to the Project: Safeguard Policies Triggered by the Project Yes No Environmental Assessment (OP/BP 4.01) Natural Habitats (OP/BP 4.04) Pest Management (OP 4.09) Indigenous Peoples (OP/BP 4.10) Physical Cultural Resources (OP/BP 4.1 1) Involuntary Resettlement (OP/BP 4.12) Forests (OP/BP 4.36) Safety of Dams (OP/BP 4.37) Projects on International Waterways (OP/BP 7.50) Projects in Disputed Areas (OP/BP 7.60)

87. Environmental Assessment (OP/BP 4.01). The Project is classified as Category By the appropriate classification for projects whose potential adverse environmental impacts on human populations or environmentally important areas are site-specific, reversible, and can be readily mitigated (OP 4.01, paragraph 8). In addition, all projects would fall within the lower category projects as considered by national environmental legislation and regulations. An Environmental

24 Assessment (EA), including an Environmental Management Framework was completed and reviewed by the Bank. It was disclosed in country and in the World Bank’s InfoShop on April 16, 2010.

88. Natural Habitats (OP/BP 4.04) policy is triggered. Although it is not possible to identify important and critical natural habitats for the specific works to be included under the Project, the EA will include a list of the most important natural habitats fiom a national and regional perspective, while the framework will ensure that investments with potential’ impacts are screened-out or mitigation is provided for including compensatory areas as appropriate under national law and Bank safeguard policy.

89. Pest Management (OP 4.09) policy is triggered. No agricultural investments will be included under the Project. However, roads management and power lines may entail the use of herbicides. Therefore the safeguard has been triggered and the Environmental Management Framework includes appropriate measures to be included in the ongoing management of these works.

90. Indigenous Peoples (OP/BP 4.10) policy is triggered. Indigenous peoples are believed to account for anywhere fkom 80,000 to 800,000 (1.6 to 12%) of El Salvador’s population. Given that the Project area encompasses all 262 Municipalities in the country, an unknown number of indigenous peoples may potentially be affected. On the basis of the Social Assessment and in consultation with indigenous peoples, an Indigenous Peoples Planning Framework (IPPF) was prepared. It was disclosed in country and in the World Bank’s InfoShop on April 16,2010.

91. Physical Cultural Resources (OP/BP 4.11) policy is triggered. It is possible that the civil works under Component 1 might directly and/or indirectly affect cultural property in some locations such as sites of historic or culturally importance. The Project screening and EA process during project implementation will ensure that such sites will be identified and appropriate actions taken if necessary. In addition, all construction contracts will include chance find procedures which will define specific measures to be taken in the event that Physical Cultural Resources are found during construction.

92. Involuntary Resettlement (OP/BP 4.12) policy is triggered, because it may prove necessary to acquire minor amounts of land or other assets. However, it is unlikely to require physical relocation of populations. Because the location, timing and technical features of the specific infrastructure investments to be financed will be determined during loan implementation, a Resettlement Policy Framework (RPF) was prepared. It was disclosed in country and in the World Bank’s InfoShop on April 16,2010.

G. Policy Exceptions and Readiness

93. The Project does not require any policy exceptions and is ready to be implemented. Specific readiness criteria for the Project are: (a) Counterpart funds for the first year of operation and been secured and budgeted; (b) Results assessment arrangements completed, M&E institutional obligations spelled out, M&E capacity in place, and indicators specified; (c) Key Project staff and consultants have been assigned and mobilized;

25 (d) Project Operations Manual and Implementation Plan are finalized and have the no objection of the Bank; (e) Disclosure requirements in country and in the World Bank’s InfoShop for the EA, EF, SA, RFP, and IPPF were met on April 16,2010; and (f) Fiduciary (financial management and procurement) arrangements in place.

26 Annex 1: Country and Sector or Program Background EL SALVADOR: Local Government Strengthening Project

A. Country and sector issues

Short-run challenges for local government development.

1. Over the last years the economic performance of El Salvador has remained stable, enabling significant macroeconomic and social achievements. During the period of 2005- 2008, El Salvador registered an average growth rate of 3.68 percent compared with 2.05 percent during 2001-2004. However, the global crisis starting in 2008 is showing effects on the country performance mainly caused by a decline in total exports, domestic investment and remittances income. In 2008, the GDP growth rate declined from 4.7 percent in 2007 to 2.5 percent and in 2009,2.6 percent lower. On the fiscal front, in 2009, the tax revenues declined by 11 percent and the fiscal deficit increased by 5 percent of GDP, in contrast with the 3.1 percent deficit level registered in 2008.

2. The economic deceleration caused by the global crisis, has started to revert many of past year’s achievements in terms of poverty reduction. Between 2001 and 2007 poverty sustainably declined from levels of 43.6 to 35.5 percent. By 2008, overall poverty increased to 42.3 percent, close to the levels observed in 2001, Both urban and rural population are being hurt by the decline in remittances (more than 10 percent in 2009) and reduction in employment (at least 30,000 formal jobs).

3. In response to the crisis, the new Salvadoran administration of President Mauricio Funes that took office in June 2009, designed and launched an Anti-Crisis-Plan with actions focused on mitigating the effects of the economic crisis on the most vulnerable while preparing the conditions for economic recovery. The Anti-crisis Plan covers the following components: (i) income protection and employment generation program, (ii) creation of a universal social protection system, (iii) strengthening of public finances, and (iv) implementation of a comprehensive consultative process to prepare a National Development Plan.

4. The financial crisis has also showed its effects at the Municipal level. Government revenues have decreased because of the financial crisis that has affected the global economy the . second half of 2008 and 2009. The current transfer system from central government allocates 7 percent of central revenues to Municipalities, and as central government revenues have declined, so have the amounts allocated to Municipal governments. Municipal governments have registered a loss in income of more than 15 percent in 2009. The MunkTpalities responded to this shortfall in revenues by primarily reducing investments in service delivery infrastructure by 20 percent. Municipalities have limited revenue powers and most of their income is from central transfers and borrowing. Many of the Municipalities are in debt and a large portion of central transfers are being used for debt service. These factors combined mean that Municipalities have less money to spend on service delivery investments.

5. Decentralization service delivery needs continue to be significant. Half of the country’s houses do not have water connection and a million families (two thirds of the population) do not

27 have sewer systems. Most of these families live in poverty. On the other hand, distance to paved ways for the poorest people living in rural areas exceeds 5 km,which doubles the distance for noon-poor fa mi lie^.'^ In a Municipal diagnostic of a representative sample of Municipalities in the country carried out for the preparation of the proposed Project, the top priorities identified by communities and Municipal leaders was in improving access to potable water, improving rural roads, installation of local sewer systems and access to household electricity. Given the local priorities, the Government is facilitating access to resources through the proposed Project to address some of the needs. These resources would be used for the locally defined priority basic infrastructure in order to improve access to basic services (clean water, local roads, electricity, etc).

6. Country Disaster Risk Profile. El Salvador has the second highest economic risk exposure to two or more hazards, according to the Natural Disaster Hotspot study by the World Bankls. The number of natural disasters in El Salvador has dramatically increased during the period of 1997-2007. A total of 21 events were recorded, representing 53 percent of all natural disasters of the last 100 years. Five events (23 percent) had a geophysical origin, while the remaining 16 (76 percent) were hydro-meteorological. According to the Ministry of the ’ Environment and Natural Resources (MARN)’s Division of National Service of Territorial Studies (D-SNET), economic losses directly linked to catastrophic events during the last 30 years amounted to almost US$4 billion. About 41 percent of the Salvadoran population resides in Municipalities exposed to high risk of natural disasters (Le. those Municipalities that were affected during the period of 1980 to 2007 by three or more natural hazards: earthquakes, floods, storms, and droughts). These Municipalities also concentrate 74 percent of disaster-related fatalities. During this period there was an average of 1.5 disasters per year. This highlights the continuous impact that natural events have on the national development process and their impact on society and the Salvadoran economy.

7. Tropical Depression and Hurricane Ida began on November 4, 2009, in the Atlantic Coast of Nicaragua, near Bluefields. The following day, Thursday, November 5,2009 it had reached hurricane strength (1 on the Saffir-Simpson scale). On Friday, November 6’ 2009, Hurricane Ida hit El Salvador with strong winds and rainfall that reached 355 mm in a 5-hour period, for a total precipitation of 450 mm during the event, surpassing the total rainfall dropped in a week by Hurricane Mitch in 1998. During this short period of November 7-9, 2009, at least 108 landslides, 13 major floods and 12 overflowing rivers were counted in seven of the country fourteen Departments. Floods and landslides destroyed or damaged 5,000 homes, a total of 61 bridges were damaged and 38 collapsed, and 210 paved roads and 135 non paved roads were damaged. The excessive rain saturated the ground and the walls of the San Vicente Volcano triggering several laharsI6. The lahars increased the vulnerability of the affected populations to flooding as a result of the accumulation of large amounts of solidified debris that drastically reduced the natural drainage that before the event protected the nearby towns and agricultural lands. A total of 199 event-related deaths were reported.

l4 Recent Economic Developments in Infrastructure - Strategy Report (REDI-SR) Infrastructure Service Provision in El Salvador: Fighting Poverty, Resuming Growth. October 10,2006. Report No. 37689-SV. Jordan Schwartz. World Bank, Natural Disaster Hotspots, A Global Risk Analysis (Washington, DC: Disaster Risk Management Series, 2005), table 7.2. Lahars are volcanic mudflows that can be deadly due to their size, energy and speed. 28 8. Post Disaster Needs Assessment.” The Post Disaster Needs Assessment (PDNA) concluded that the country needs to adopt an explicit risk reduction strategy, given the recurrence of these phenomena and the historical experience. The Ida event presented an opportunity to make major changes in the current pattern of development, both on its spatial components as well as the economic and social services sectors, which should get greater attention given their potential and real vulnerability. The country will need to strengthen its institutional capacity to address this sectoral development challenge. Specifically, the PDNA recommended a more strategic framework for risk management that combines lessons learned from the international experience and the country context. The principles underlying this framework are: (i) the human toll and economic impact of, disasters can be reduced through pre-disaster planning and investment in prevention at the national and local levels, and (ii) the strategic framework and action plan are efficient in terms of cost and implementation.

9. The Government has requested assistance to’ strengthen local government capacity for disaster risk management from the proposed Project.

Medium-term challenges for local government development.

10. Historically in El Salvador, most of the public services, investments and resources have been highly centralized. From 1998 local governments started to have a more important role but not sufficient to cover the needs of their local populations in terms of investment and local service provision. In many cases, local governments used to serve as “compensation agents” to the deficiencies of the central institutions and sectors. Local governments can and do intervene to provide lacking basic services, but often do so in a fragmentary, discretionary and inefficient way.

1 1. Municipalities are diverse both in terms of overall characteristics and institutional capacities. Based on a broadly accepted typology (PROMUDE-GTZ, 2007), El- Salvador’s 262 Municipalities are grouped into five types. Type 1 includes 11 Municipalities with the largest population, the highest rate of urbanization and the lowest level of Unsatisfied Basic Needs. Type 2 includes 14 Municipalities of intermediate to large size, with a mix of urban and rural population but with a greater proportion of urban population, and intermediate/low level of Unsatisfied Basic Needs. Type 3 includes 65 Municipalities of intermediate size, with a mix of urban and rural population but with a greater proportion of rural population, and intermediate level of Unsatisfied Basic Needs. Type 4 includes 103 Municipalities of small to intermediate size, with mostly rural population and high level of Unsatisfied Basic Needs. Finally, Type 5 includes 66 Municipalities of small size, with rural population and the highest level of Unsatisfied Basic Needs. There is a general perception that Municipalities’ type 1 and 2 are stronger in terms of administrative and technical capacities, whereas Municipalities type 3 to 5 are deficient mainly in terms of technical capacities required to prepare and execute investments.

l7 At the request of the GOES the World Bank participated in a Joint ECLAC/UNDP/World BanWEU post disaster needs assessment (PDNA) on November 18-30,2009. The assessment was meant to provide: (i) comprehensive information on the impact of Hurricane Ida, and (ii) help identify recovery and reconstruction needs.

29 12. Participatory Planning. The Municipalities still have to strengthen their capacity to implement participatory planning. Indeed, Municipalities currently do not follow standardized mechanisms to insure that the identification and categorization of small investment projects have been prioritized to support the implementation of Community Development Plan. Nor do they make these plans and result indicators available to public consultation. Additionally, infrastructure projects prioritized as a response to communities’ demands are generally isolated from a broader development plan.

13. Procurement Management. Nine out of the ten Municipalities analyzed in the Municipal diagnostic have a Procurement and Contracting Institutional Unit (Unidud de Adquisiciones y Contrutaciones Institucional - UACI) and apply some of the criteria’s defined in the Procurement and Contracting Law. Nevertheless the UACI’s capacity to apply rigorous procurement criteria’s when contracting goods and services in a transparent and competitive way as well as its capacity to prepare bidding documents is highly limited. For instance, the Municipality diagnosis pointed out that 77% of the projects implemented were supervised directly by the Municipalities and 23% contracted. However, no criterion was defined to make decision on the type of supervision (direct implementation by the Municipality or sub- contracting) according to the sector technical aspects or the size of the investment. This has been influenced by the lack of complete and up to date data collection on investment location (urban versus rural), size, and technical specificities, sources of financing.

14. Financial Management. According to the Municipal Code (Sections 106 and 107) and the Law of the Court of Auditors (Section 21), Municipalities are required to undertake internal and external audits. In general, most of the Municipalities in the sample hire a part-time internal auditor (usually 2 days per week) and in some cases, such as the case of the Municipalities of San Carlos and Tonacatepeque, Municipalities had no internal auditor despite the requirements of the Court of Auditors of the Republic. Larger Municipalities such as Santa Ana and San Vicente have audit units and internal auditor appointed permanently. With regard to external audit, only one of the 10 Municipalities analyzed presented a report by external auditors. Additionally, problems in bidding and contracting processes could be observed: differences between what had been supposedly paid and what had been verified, differences between the technical specifications of the design of a project and what actually implemented, expenses made without being eligible under different legal provisions and payments made with funds other than those listed in the respective budgets. The Project will strengthen the Municipalities financial management capacity with TA which should translate into the implementation of good practices such as the implementation of the Municipal Procurement and Contracting Law in all recruitment and bidding processes, the use of work plans to plan investment projects, the development of control and management tools, the establishment of a cash fund to pay minor expenses or the elaboration of a physical inventory of Municipally owned property.

15. Municipal Civil Career Law. Municipalities, specially the small ones, do not have a functional organizational structure. More than 25 percent of Municipalities have staff without defined functional responsibilities. Key units and positions do not exist. This is often the case with accounting and revenues management functions. Furthermore, even though mayors and local councils are democratically elected, the current system of “winner gets all” deprives local councils of any presence of political opposition, and as a result there may be issues of

30 accountability at the local level. After every election, the winning party brings its own staff which undermines the results of Municipal capacity building. Assistance in implementing the new Law on Municipal Administrative Careers, published in May 2006, is needed to: i) clarify specific organizational functions; ii) promote the use of merit-based selection criteria by establishing minimum technical criteria to be hired as a Municipal staff and by creating a Municipal Training Center; and, to iii) establish a framework for performance monitoring and evaluation and iv) ensure continuity from one administration to another. The Municipal Law on Administrative Service Career establishes that Municipal civil servants should be selected on a competitive basis, will have to go through a test period during which he/she will be assessed. If successful, he/she will be registered in the National Registry of Municipal administrative career, managed by ISDEM. The creation of that Registry and the creation of a Municipal Training Center which should train on permanent basis civil servants at local level, which should ensure the sustainability of the capacity building efforts. The Project will support both short term and long term capacity building. It will do it through specialized technical workshops, focused mainly on procurement and financial management to respond to short term needs, but it will also address long term needs by developing curricula covering not only procurement and financial management, but also project management related tools, monitoring and evaluation ' and participatory planning.

Long-term challenges for local government development.

16. In the last 10 years, El Salvador has made important attempts to reform the public sector focusing on the modernization of the state. One of the policy objectives of the new administration is to transform the public sector into a modern and efficient provider of public services. The new government is in the process of preparing a public sector and a decentralization strategy. Some of the current challenges to be considered by these strategies are: (a) the existing confusion in the administrative functions and responsibilities of the different levels of central and Municipal governments in the Municipal Law and sectoral laws; (b) lack of clarity on expenditures assignations; (c) lack of information of the efficiency of the services provided by the national and Municipal governments at the local level; (d) appropriate distribution formula of transfers to the local governments (taking into account that the transfers to local governments have increased from less than 1 percent in 1997 to 7 percent in 2009); and (e) the difficulty to guarantee that the national objectives are compatible at the sub-national level.

17. Clarity and transparency of expenditure assignments. The current legislation provides for assignment of expenditure responsibilities between the center and the Municipalities. But the assignments lack clarity and transparency. To a large extent, this is due to the predominance of concurrent or overlapping responsibilities (29 in the Municipal Law) between the center and local governments and the lack of clear assignment for financing, regulation or implementation between different tiers of government.

18. Municipal fiscal dependency and weak revenue autonomy. There is a lack of significant revenue autonomy at the Municipal level and large dependency on transfers. The current system of transfers is characterized by the dominance of FODES, the revenue sharing mechanism of the Government. As stated above, the funding rule for FODES is 7 percent of central government current revenues and the funds are distributed according to a formula with four variables:

31 population (50 percent), equal share (25 percent), poverty measure (20 percent), and land area (5 percent). The population and poverty variables are weighted by an index that decreases in value (from 5 to 0.5) with the size of population, so the formula is heavily biased in favor of smaller Municipalities. The entire transfer system, including the level of funding for FODES , would also be a good candidate for reform as a part of the overall design of a decentralization policy. A more efficient, accountable, and fiscally responsible decentralization system will need local governments (particularly in larger urban areas) with sources of own revenues such as the property tax (impuesto predial). El Salvador is among the very few countries in Latin America where this tax has not been assigned to local governments. This reform would also fit well in the plans of the Ministry of Finance (MH) to carry out a tax policy reform by 2012.

19. Gaps on legal framework for Municipal borrowing. This is an area that has been gaining importance because of increasing lending by private banks to Municipalities with the guarantee of FODES funds administered under intercept arrangements by ISDEM. The process is regulated by the recent Law on Local Borrowing. The law lacks specific regulations about important issues such as total debt and debt service limits.

32 Annex 2: Major Related Projects Financed by the Bank andor other Agencies Name ’inancier Closing Date Sector Issue

Income WB December Provides temporary income support to the urban Support and million Employability Project

Fiscal WB December Management million 2014 and Public Sector Performance Technical Assistance Loan impact the quality of public expenditures, and increase overall accountability and transparency. El Salvador: WB October 201 1 Improves El Salvador’s fiscal management capacity, Strengthening while also promoting public sector transparency and Fiscal accountability. The Grant will build the country’s Management capacity to implement a results-based budgeting and Public framework (RBB), estimate fiscal pressures from Sector public pensions and promote transparency and policy Transparency dialogue on key fiscal issues. El Salvador WB June 201 1 Helps El Salvador strengthen medium-term fiscal Public Finance sustainability; support good governance and and Social transparency in the use of public resources; and Sector DPL maintain steady improvements in social protection and education. Sustaining WB December Supports the government’s Anti-Crisis Plan to protect Social Gains 2010 the social gains made in the past decade and reinforce for Economic the framework for economic recovery. Recovery Local IDB December Contributes to improve the life conditions in the poor Development 2008 and vulnerable Municipalities and communities of El Program I1 Salvador. The project financed social and economic infrastructure, strengthened the management capacities of local public and private agents, and strengthened FISDL. Monitoring and [DB 2009 Develops an electronic tool in order to monitor and Control System oversee Municipal investments with the aim to have Project for Europea more efficient use of their funds. Public n Union Investments million PROCOMUNI KFW March 201 0 Generate empowerment and sustainability of DAD million Municipalities with the aim to improve conditions of life, strengthen social capital and foster Municipalities

~ own development. Decentralizatio GTZ US$29.5 December This Project has the objective to achieve that the 1 and Local million 201 1 Development Program PROMUDE

33 GTZ I US$10.7 I December The objective of PRAO is that the Municipalities lead Temt onal 2010 the temtorial development in a participatory way. Development La Paz Tool for the 2007 Methodology and implementation of a tool that allows auto evaluation local governments to know how they are realizing their of the work of Municipal management. It also orients them Municipal on how to improve and create capacities in the management members of the Municipal council. Creation of a 2007 Strengthening of the technical staff in the area of solid perman en t waste and solid waste management space for the promotion of Municipal capacities TA Cycle 201 1 TA through ISDEM to the Municipalities CATYC El Salvador 2009 Competitiveness Index of the 100 most populated Municipal Municipalities of El Salvador, which analyzes how Competi tivenes favorable the climate of doing business in each s Index Project Municipality is. It takes into consideration inter alia the transparency, Municipal services, the pro-activity of the mayor, access to information and crime. By ranking Municipalities against each other, the project aims to create a beneficial spirit of competition to remove the identified impediments. A supportive business environment will enable local governments to attract and retain local and foreign investment, promote trade, take advantage of opportunities from free-trade agreements, and increase economic growth and local employment. Citizen USAID US$15 2003 Promotes a more inclusive and effective democratic Participation million processes. This project worked with 42 Municipalities: and Financial and administrative strengthening of local Governance governments Citizen participation. Municipal services. Project Local USAID US$7 2005 Based on the “Citizen Participation and Governance Development million Project”. Works with other 28 Municipalities and and focuses in a participatory manner on the medium and Governability long term strategic planning of local governments. Community USAID US$7 September This project works with the 7 Municipalities with the based violence million 201 1 highest crime rate of El Salvador. In a participatory and crime manner, prevention plans are elaborated and prevention recreational facilities and public centers are constructed project in order to promote sport or cultural activities. Additionally a National Prevention Plan is elaborated. COMURES 201 1 Promotes local governance with social equity and project better temtonal distribution. Focuses on Municipal service delivery and public policies of local development. AECID US1.7 201 1 This project includes the Metropolitan Area (14 project million Municipalities around San Salvador) and focuses on social cohesion, prevention of violence, decentralization and Municipal modernization, the local development and the citizen participation. AECID US$82.8 201 1 This initiative supports the decentralization process Water and million and the social participation and its objective is to Basic increase the coverage of access to water and sanitation, Sanitation beside of making use of water in a more efficient manner. The financing is provided by the Water and I Sanitation Cooperation Fund, FCAS; and the initiative

34 forms part of the Comunidades Rurales y Urbanas Solidarias program and complements the AECID Sector Budget Support mechanism. Solid Waste JICA US$1.7 2009 Landfill construction, environmental education, Project at million environmental management and strengthening of Municipal Municipal technical capacities for the Integrated Solid Level in El Waste Management for the Association of Salvador Municipalities in the north of La Union department. (PROMADE) Ahuachapan AECID US$3.9 2009 Institutional strengthening of the associations of the Central and million micro regions in the area of finance and administration, Southern Micro fiscal policies or environment. Promotion of basic Region Project services in Municipalities and the local economic development. Comunidades AECID us34 201 1 This initiative supports the Fight Against Poverty Rurales million policy of the government trough a Sector Budget Solidarias Support mechanism. The Comunidades Rurales Program Solidarias program consists of three main axis. AECID canalizes its financial support to the second one, intended to improve social infrastructure and deliver basic services as water/ sanitation, energy and small infrastructures. The financial support to this initiative is approved until 201 1. New agreements will be reached during 2010 after negotiation of the “Marco de Asociacibn entre El Salvador y Espaiia” for the 20 10- 2014 period.

AECID US$15.4 201 1 This initiative supports the Comunidades Rurales million Solidarias Program, channeling funds for the improvement of social infrastructure and the generation and development of local productive initiatives.

...

35 Annex 3: Results Framework and Monitoring EL SALVADOR: Local Government Strengthening Project

A. Results Framework Matrix

PDO Project Outcome Indicators Use of Project Outcome Information

The Project development objective All locally defmed and prioritized is to improve the administrative, Municipal Subproject investments of financial and technical processes, 262 Municipalities, which are systems and capacity of local financed by the Project, are governments to deliver basic implemented in accordance with services, as prioritized by local fiduciary and safeguards policies as communities, in the medium and well as national standards. long-term. Municipalities receiving additional TA progress by at least one capacity category on areas for which they received TA.

Local governments are regularly requesting Municipal administration and planning support from ISDEM, and ISDEM has been budgeted sufficient resources to respond and has a system to prioritize and meet requests in a timely manner.

Intermediate Outcomes Intermediate Outcome Use of Intermediate Indicators Outcome Monitoring

Result 1 -Investments for improved Result 1 - Demonstrates that citizen basic services have been 80% of investments, as defined in involvement in definition and implemented by Local the local government contracts, prioritization of local investment and Governments. satisfactorily completed according to institutional strengthening has technical specifications. increased and investments are being properly maintained and operated.

80% of facilities built /rehabilitated effectively used at end of project.

80% of Citizen Control Committees provide supervision to construction and functioning of Project financed investments.

5% of budget allocated for, and satisfactory utilization of, operations and maintenance for Project financed investments.

36 Result 2 - Local governments’ Result 2 - Annual information will be used to development plans and institutional 80% of at least 66 pilot local measure progress of the Project and strengthening action plans to be governments have implemented the specifically the effectiveness of TA supported by the Project, have been action plan: from ISDEW FISDL and local implemented. i. ISDEM receives quarterly service providers to local reports on executed budget and governments. progress in a timely fashion; 11. Local government management handbook (technical, procurement, FM, safeguards, administrative,) prepared, adopted and being implemented by participating local governments; ... 111. New hiring is based on post description and Law on Municipal Civil Career; iv. 5-year Municipal development plans produced with ample civil society engagement.

National risk management policy.

Result 3 - Institutional structure Result 3 - To assess if the desired institutional within SAE/SSDT, MH, and MH has established and staffed a conditions have been created, are COMURES for analyzing and fiscal decentralization unit. functioning and maintained to designing decentralization policies analyze and define decentralization established. SAEISSDT and COMURES have policies. staff dedicated to researching, analyzing and preparing decentralization policy papers.

Decentralization strategy established.

Result 4 -The institutional structure Result 4 - To assess if the desired institutional within the ISDEM for supporting ISDEM has developed contractual conditions have been created and local governments’ institutional mechanisms and institutional maintained to improve local strengthening needs established and capacity for supporting local government processes and systems fimc tioning. governments’ development. to provide Municipal services.

ISDEM has set up and maintains data base to monitor local governments’ development (current level of management capacity).

37 B. Arrangements for results monitoring

1. Project implementation will be guided by the Results Framework. ISDEM, as part of its fully integrated project executing unit, will assign and/or contract two specialists who will have overall responsibility for the M&E of Project activities and manage data inputs from FISDL for Component 1.

2. FISDL will compile financial statements for Component 1 and send them to ISDEM which will compile Project’s financial statements for all Components for submission to the Bank. FISDL will record financial transactions using its existing integrated information system, which includes budgeting, treasury, and’ accounting. It will be adapted to extract data from the accounting system so as to prepare project financial statements. ISDEM will record financial transactions directly into the Government’s Integrated Financial Management System (SAFI), as well as a set of subsidiary ledgers to prepare project financial statements. The systems would have the ability to classify financial information by Project component, categories of disbursement and sources of financing; and produce the corresponding financial reports (such as Interim Financial Reports ,and Statement of Expenses). The M&E process would function as both a day-to-day management tool and a mechanism for assessing Project outputs and outcomes as well as quarterly, semi-annual and annual implementation review by the SSDT and the Bank supervision team. It would support Project supervision by ensuring that baseline and follow-up data for the key performance indicators is collected and made available on an ongoing basis, including Project start-up (before Loan effectiveness), mid-term review (MTR) and Project closing.

3. The physical implementation outcomes, as defined in the Results Framework, will be monitored for each Project Component. Results monitoring will focus on answering three questions: (i) what change has there been in the local government institutional capacity? (ii) what advances have been made to strengthen local processes and systems for local government development? and (iii) how have Municipalities complied with fiduciary and safeguard policies and investment technical standards?

4. For the first question, ISDEM’s project coordination and M&E specialists will assess the status of each Project Municipality on a few basic Municipal capacity measures on an annual basis, starting at the time in which the local government contract is signed with a given Municipality (based on the Municipal diagnostic). The measures to be assessed include, but may not be limited to: (i) Municipal organizational structure; (ii) consistency of Municipal staffing; (iii) presence and status of a Municipal financial management system for budgeting and accounting; (iv) presence of a local government development plan and completeness of that plan; (v) completion of annual audits; (vi) extent to which the local government development plan compliments Municipal expenditures; (vii) existence and status of the Citizen Control Committee; and (viii) implementation of transparency and participation measures. All measures would be defined in detail in the Operations Manual.

5. For the second question, ISDEM’s project coordination and M&E specialists will monitor the implementation of the Municipal Civil Career Law, functioning of the ISDEM’s Municipal Training Center and regional offices and Disaster Risk Management Unit, effectiveness of administrative and participatory TA and training models.

38 6. ISDEM will compile Municipal finance data on a yearly basis and establish simple financial ratios. Additionally, a data base of completed investments will be maintained by FISDL and copies provided to ISDEM. On an annual basis, beginning at the end of the second year, a table will be completed in which the status of implementation of each investment is assessed. Information presented regarding the functioning, effectiveness, likely sustainability and likely achievement of objectives stated in the investment proposal will also be assessed for those completed subprojects.

7. For the third question, FISDL will provide to ISDEM, on a semi-annual bases, a report on fiduciary, safeguard and investment technical standards compliance by Municipalities. The report format is included in the Operations Manual. Additionally, ISDEM will contract external semi-annual operational audits that will review a sample of Municipalities for compliance with safeguards and fiduciary policies, adherence to technical standards for investments, review of ISDEM’s and FISDL’s effectiveness in carrying out their respective roles of the Project at the national and local levels. During supervision missions, the Bank team will review the most recent operational audit and conduct its own audit of a sample of Municipalities to confirm fiduciary, safeguards and technical compliance of investments.

8. Information from the monitoring system would be analyzed by ISDEM and disseminated according to the Project’s communication strategy to local governments and other appropriate stakeholders. ISDEM would provide Quarterly Project Progress Reports and more detailed Annual Project Reports which include a review of the Annual Operating Plan for the period covered including: (a) a description of the key activities executed; (b) an update on the implementation schedule (physical progress of activities) with a percent complete of each activity and explanation for various according to plan; (c) report on the budget executed compared to plan; (d) update on indicators in the Results Matrix of the Project; (e) update and review of key risks confronting the Project; (f) key lessons learned during the reporting period; and (g) review of technical, safeguards, and fiduciary audits conducted during the report period.

9. As part of the TA in Component 2, ISDEM will also facilitate semi-annual workshops on best practices, lessons learned and sharing of information horizontally between Municipalities.

10. Baseline data would come from four sources: (a) approved investment proposals; (b) Municipal diagnostic and Municipal auto diagnostidassessment; (c) ISDEM’s institutional capacity assessment; and (d) report on the status of decentralization in El Salvador.

11I A thorough MTR would be conducted no later than 2 1/2 years after the first disbursement and would: (a) assess the degree of advancement in achieving Project outcomes; (b) evaluate the institutional arrangements for Project implementation; (c) determine updates, as needed, to the Project Operational Manual; and (d) review the progress on implementation of the Project Implementation Plan (PIP). A final evaluation would be conducted in the last semester of Project execution to assess overall achievement of expected Project results and to use these results to design a strategy for future replication.

12. In addition to reporting on Project outcomes, ISDEM will report on: (a) the lessons arising from case studies on investment implementation and good practices identified which can be

39 replicated by other local governments; and (b) the results of the baseline survey, mid-tern evaluation, and final Project evaluation.

13. Bank supervision is critical for this project and a minimum of two supervision missions will be conducted per year. Many field visits will be necessary to carry out ex-post evaluations of compliance with technical, safeguard and fiduciary guidelines and policies as well as validating external bi-annual technical, safeguard and fiduciary audits.

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t .Ce t .Ic: e ! U rc E U L b: e i :E S nL L 4 c Annex 4: Detailed Project Description EL SALVADOR: Local Government Strengthening Project

1. The proposed Bank operation would have four components: (i) promotion of decentralized service delivery; (ii) strengthening of municipal governments; (iii) decentralization strategy support; and (iv) project management.

Component 1 - Promotion of Decentralized Service Delivery (US$52.75 million).

2. The Government has requested a US$52.75 million loan for this component and would like all the resources to focus on Municipal investments (versus covering recurring costs) which have been defined and prioritized by communities and Municipal leaders that would contribute to improving access to needed basic public services. GOES is responding to a request from Municipal authorities to compensate for the financial gap of the 262 Municipalities caused by the financial crisis and restoring the investment capacity for service provision of Municipal governments. This component will finance, through Municipal Subproject Grants, an equivalent amount of about two percent of the current revenues of the national budget that the central government provides to Municipalities. These resources would be channeled through a separate budget line item using the FODES formula for distribution and specific fiduciary, safeguards and technical criteria would need to be met for all expenditures. These resources will be directly transferred from the Ministry of Finance (MH) to the Municipalities. The direct transfer would serve as a pilot for MH to analyze transferring future FODES transfers directly to Municipalities instead of using the existing mechanism through which transfers are made to ISDEM which then make transfers to Municipalities.

3. The Municipal Subproject Grant mechanism would allow the local governments to use Project funds for decentralized service delivery that would be identified and prioritized through participatory local planning processes already carried out and verified or that will be carried out. This will avoid the perception among Municipalities that the increased funding will be sustainable and permanent. The Project responds to Government’s intentions to make the resources provided for Municipal Subproject Grants a one-time increase in revenues for Municipalities (not a long-term liability on central resources) and has indicated that any future increase in the 7 percent fiscal transfer would be based on clarification of local and national government responsibilities/competencies as defined in the Municipal Code and Sectoral Laws and budget envelopes established for local service provisions. The Project responds to Government’s intentions to define and identify more precisely the responsibilities assigned to Municipalities under the decentralization process that has been evolving over the last eight years,

4. These resources would be transferred to all Municipalities as Municipal Subproject Grants for investments. The Grants would be distributed to all 262 Municipalities using the existing FODES formula for distribution, which is already widely accepted and well known by local authorities and which has four variables: population (50 percent), equal share (25 percent), poverty measure (20 percent), and land area (5 percent). All Municipalities would know upfront what their budget envelope will be for the two to four fiscal years which would be necessary to execute all investments. Important to note is that only the formula for distribution from FODES

42 will be used, leaving out any other aspect of the law and regulation associated with FODES transfers to Municipalities. Other criteria will be used as stated below.

5. Allocation of Municipal Subproject Grant resources via FODES runs between US$52,000 to US$736,000 made available to Municipalities for service provision investments. The distribution means that 6 percent of Municipalities (1 7) would receive more than US$400,000, 29 percent (76) would receive between US$200,000 and US$399,000, 44 percent (115) would receive between US$lOO,OOO and US$200,000 and 21 percent (54) would receive less than US$99,000 (see table below and Appendix 1 of Annex 1 for a detailed listing of amounts allocated to each Municipality).

6. Transfer of loan resources for Municipal Subproject Grants. Upon receipt of a request for an advance to the Social and Local Development Investment Fund (FISDL) Designated Account (DA), the Bank will transfer an initial advance of a maximum of US$32,000,000. From the FISDL DA, Ministry of Finance's (MH) General Treasury Directorate (DGT) will make two disbursements to Municipal Project restricted bank accounts (which each Municipality will establish for the Project) that will require a third signature from FISDL to access the funds. The first disbursement from the FISDL DA by DGT would be 50 percent of the assigned transfer to Municipalities (see Annex 1, Appendix 1) along with an amount for pre-investment. The pre- investment would be equal to 5 percent of the total grant amount to be received from the Project by Municipalities receiving more than US$lOO,OOO and a ten percent of the transfer to those Municipalities receiving less than US$lOO,OOO. The total of the first transfer from DGT would be US$27.75 million (US$25 million for grants and US$2.75 for pre-investment). The second transfer from DGT to the Municipal Project restricted bank accounts would be for the remaining 50 percent of the entire amount assigned to each Municipality (US$25 million in total) and would be made based on the implementation of Municipal Subproject Grants by each Municipality. Once a Municipality documents that they have executed at least 50 percent of the first transfer from DGT, they can request to FIDSL the remaining 50 percent of the assigned amount to the Municipality-for Municipal Subproject Grants. FISDL validates tliese expenditures and authorizes the request to DGT.

7. Criteria for Receiving and Accessing Pre-investments funds. Specific fiduciary, safeguards and technical criteria would need to be met for all expenditures by Municipalities. The criteria are included in the Operations Manual'* and would be confirmed by FISDL. In order

The criteria may be revised and adjusted as needed during the implementation of the Project in order help ensure smooth implementation and achievement of the PDO. Such changes would be included in the Operations Manual and be agreed upon by the Bank.

43 for the Municipalities to receive the first transfer and access the pre-investment resources, they need to meet the following criteria: (a) open a separate Municipal Project restricted (third signature) bank account; (b) take the mandatory procurement, financial management, environmental and social safeguards training (30 training sessions will be held in four regions over a two month eriod before Project effectiveness); (c) show evidence that a citizen consultative process IF was used by Municipal authorities with communities to identify and prioritize the proposed Municipal Subproject Grants and if not, carryout such consultative process; and (d) sign a Municipal Framework Agreement with an initial estimate of Municipal Subproject Grants to be financed by the Project and commit to maintain and operate the investments.

8. To access the pre-investment resources the Municipalities need to2': (a) have an approved list of Municipal Subproject Grants by FISDL; (b) 'prepared terms of reference for the work; (c) selected a consultant to carry-out the pre-investment work; (c) have a signed contract; and (d) validation of FISDL for the selection and contracting process. FISDL will provide the long- list of pre-qualified consultants for service provisions, formats for terms of reference and standard contract, accompany and validate the selection process for consultant to do the work, validate the final design and then authorize payment.

9. Criteria for Receiving and Accessing Investment Resources. In order for the Municipalities to receive and access the money in their Municipal Project restricted bank account for Project financed investments (the first disbursement from MH for fifty percent of their assigned investment amount), they need to meet the following criteria*' as certified by FISDL: (a) have a technically viable Municipal Subproject proposal which includes an operations and maintenance plan for the sustainability of the investment; (b) have complied with safeguards related to the specific investment (environmental, indigenous peoples and resettlement frameworks) in the proposal preparation; and (c) formed a Citizens Control Committee, with members from existing community associations (ADESCOs) to provide civil society oversight to the entire investment process, i.e. the contracting and execution of investments and supervision of such investments.

As part of the Municipal Framework Agreement, a format for the categorization of citizen participation in the identification and prioritization of investment proposals will be completed. Information to validate would be: (a) are the investments requested and prioritized by communities defined in the investment plan? (b) what mechanisms were used for securing wide community participation in investment planning? (c) were all communities in the Municipality represented and participated equally? If the Municipality confirms compliance with the participatory planning process, then the proposed Municipal Subproject Grant list can be submitted with the Municipal Framework Agreement. If not, ISDEM will work with the Municipality to facilitate a participatory consultative process with the communities so they can define and prioritize Municipal Subproject Grants for Project financing. 2o The criteria may be revised and adjusted as needed during the implementation of the Project in order help ensure smooth implementation and achievement of the PDO. Such changes would be included in the Operations Manual and be agreed upon by the Bank. 2' The criteria may be revised and adjusted as needed during the implementation of the Project in order help ensure smooth implementation and achievement of the PDO. Such changes would be included in the Operations Manual and be agreed upon by the Bank.

44 10. Municipalities are responsible to22: (a) prepare terms of reference for the investment work and supervision; (b) select a consultant to carry-out the investment and supervision; and (c) prepare and sign contract. Each investment will have three withdrawals from the Municipal Project restricted bank account based on the proposed disbursement schedule of the investment (33%, 33% and 34%). FISDL will certify the advances in the execution of the Municipal Subproject Grant confirm compliance with fiduciary and safeguard policies and technical standards and then authorize payment to service providers. The second and third withdrawal from the Municipal Project restricted bank account for a given investment will be based on Municipalities showing evidence of a minimum of 70 percent financial execution, based on an approved work plan, of the previous disbursement for the investment. If for any reason an investment is not completed within the life of the Project, only the parts of the investment completed prior to the closing date will still be considered as an eligible expenditure.

1 1. Criteria for Receiving and Accessing Second Disbursement. Once Municipalities can show advances of fifty percent in the execution of the initial fifty percent of their assignment investment amount, they can request the last transfer of fifty percent to FISDL. FISDL will send a request authorizing the transfer from MH's DGT for the second fifty percent of the assign allocation to the Municipality for investments. See Annex 4, Component 1 for detailed, flow of funds criteria. Flow of Funds Criteria

Criteria that has to be met by the Municipalities for funds to flow: from_---_---______the Designated----______------Account to the Municipal...... Restricted Account (a) open a separate and restricted (third signature) Municipal Project Municipalities FISDL FISDL bank account - MH designated bank I I ~ ____ ~ (b) take the mandatory procurement, financial management, environmental and social safeguards training ...... ----__-_------______~ (c) undertake a participatory planning process to identify and prioritize Municipalities FISDL ISDEM ------the proposed ---_ investment. I I (d) sign a Municipal Agreement Framework with an initial estimate of Municipalities FISDL investments to be financed by the Project and commitment to maintain FISDL SAE 1 1 and operate the investments. from the Municipal Restricted Account to Service Providers andor the Munickpal Operational Account (a) have a technically viable proposal in accordance with the criteria and procedures set forth in the Project Operational Manual with Municipalities 1 FISDL operations and maintenance plan for the sustainability of the investment I FISDL (b) comply with safeguard issues for the investment related to the ' Municipalities FISDL ISDEM environmental, indigenous peoples and resettlement frameworks. ~ ~ . . . (c) form a Municipal citizens supervisiodmonitoring committee, with members from existing community associations (ADESCOs)to provide civil society oversight to the entire investment process, i.e. the Municipalities FISDL ISDEM contracting and execution of pre-investment studies, investments and .__-_supervision...... of investments. ------_---- (d) second and third withdrawal from the Project account for a given Municipalities I FISDL I

**The criteria may be revised and adjusted as needed during the implementation of the Project in order help ensure smooth implementation and achievement of the PDO. Such changes would be included in the Operations Manual and be agreed upon by the Bank.

45 investment will be based on Municipalities showing evidence of a minimum of 70 percent financial execution (e) any contract for the preparation, implementation, and supervision of any Municipal Subproject complies with the procurement provisions and procedures and the provisions of the Municipal Fiduciary Municipalities FISDL ISDEM Framework and applies the Environmental Management Framework, the Resettlement Policy Framework, and the Indigenous Peoples

1______: Planning______Framework ~ ...... ~

23 The criteria may be revised and adjusted as needed during the implementation of the Project in order help ensure smooth implementation and achievement of the PDO. Such changes would be included in the Operations Manual and be agreed upon by the Bank.

46 15. Because the investments are demand driven, as defined and prioritized by the communities and Municipal authorities, it is not possible to know ex-ante the number and exact type of investments to be financed by the Project. Based on initial demand, Bank technical staff has reviewed the national technical standards and potential types of investments in each of four sectors mentioned above and found them acceptable. Recommendations for improvement where made when needed. The national technical standards for the key sectors form part of the Project’s Operations Manual. A review was conducted on FISDL’s capacity to provide technical supervision for rural and access roads, potable water systems, sanitation and waste services, and access to electricity types of investments. 16. Sectoral Issues. Because the Project is responding to locally defined and prioritized needs, specific sectoral issues will not be addressed by the Project. However, the Project investments will be expected to be technically and financially viable and avoid contradictions with sector policy or procedures. It will be the task of FISDL to confirm that the investments conform to these requirements before approval investment proposals. The following sectoral issues will apply for investments in these four sectors: 17. Roads. The Ministry of Public Works (MOP) is responsible for all matters related to policy, regulation and planning in the roads sector. It does not undertake any construction or major road projects other than those contracted with the private sector. A semi-autonomous agency of the ministry - FOVIAL - is responsible for the management of the maintenance of the national road network and of some Municipal roads (in the priority network) for which it carries out works on its own account or via sub-contracts. This priority network comprises about 6,000 kilometers and excludes a further 4,500 kilometers of urban and rural roads. The selection of roads for the Project will come from the latter group. Apart from the above, national institutions do not have much involvement in the management of Municipal roads, nor in the prioritization or financing of their maintenance. These matters are handled directly by the Municipalities, the owners of the infrastructure. Nevertheless, there is a considerable degree of dependence on external sources of technical assistance, notably from FISDL, when it comes to design, contracting and supervision of works. FISDL has an extensive operational manual which covers adequately, inter alia, the requirements for the road sector which are likely to be faced by Municipalities under the Project. 18. The Municipal diagnostic suggests that a high priority under the Project is likely to be the road sector. About one third of investment projects in the sample of Municipalities are currently devoted to roads and ancillary infrastructure, including drainage. About 50% of investment expenditure is typically focused on roads. The most typical projects involve the improvement of the pavement of selected streets and rural roads, with emphasis on pavement such as empedrado or adoquinado, which increases durability and facilitates access for both vehicular and non- vehicular traffic. The works are expected to be labor-intensive with the advantage of minimizing the need for mechanical equipment and skilled labor. Particular attention will need to be paid to the following: (i) drainage, ensuring the capacity and placement of whatever structures required are appropriate and dimensioned on the basis of current hydrological information; and (ii) safety, including in the design of any road improvements provisions to allow for the safe passage of vehicles and the design of managed interfaces with pedestrian traffic particularly in high population areas including appropriate attention to signage. 19. Water and Sanitation. As a result of the interviews with sector institutions, including FISDL, the Ministry of Health, Ministry of the Environment, and the National Aqueduct and Sewerage Administration (ANDA), it was determined that the country and sector institutions can undertake

47 new investments in water and sanitation within the Municipalities. This is based on their technical capacity, their norms (laws, by-laws, special institutional provisions) and their overall past performance in assuring sustainable infrastructure development and service provision. 20. Efforts will be taken to encourage new investments in in situ basic sanitation. It is recognized that latrines in the past have contributed significantly in improving basic health indicators, especially in rural communities, and may continue to do so if demanded by the Municipalities and local communities. In this case, the latrines will be constructed under the VIP concept (ventilated improved pits), which have proven to mitigate successfully bad odors and insect proliferation. In all cases, a health and environment education component will be developed alongside the local community developing the new infrastructure. 21. It is expected that most demand for water investments will come from Municipally-run systems and rural areas. Although the Project cannot rule out investments where the Municipalities seek to improve the performance of an ANDA managed system for a specific area, under no circumstances will the Project invest in expanding water coverage if this translates into a reduction in service quality to existing clients. Indeed, this may occur due to various reasons, including additional pressure to the existing watershedh or underground sources, affected storage facilities or network pressures. When the proposed investment involves an ANDA-run system, an independent opinion will be sought from a qualified expert to determine if there is a potential reduction in service quality. 22. In order for FISDL to provide technical oversight to additional water and sanitation investments, central office coordinating capacity needs to be strengthened with 2 professional staff and with an environmental liaison between FISDL and MARN to handle the documentation that needs to be filed and/or approved. 23, Electricity. The recently organized National Energy Council (Consejo Nacional de Energia- CNE) within the Ministry of the Economy (MINEC) is in charge of overall policy orientation for power sector investments. Prior to the organization of CNE, the Ministry provided guidelines for rural electrification through a national plan. In past years, it supported electrification through programs such as a geographic information system (Sisternu de Inforrnacidn Geogvbjca para Electrificacidn Rural-SIGER). Electricity distribution in the country is the responsibility of five privately held distribution companies. Population not served by the companies lies outside their regulated service area and cannot be economically connected. FISDL is the Government's principal channel for executing electrification projects in association with Municipalities to provide resources to connect communities to the grid, which are subsequently taken over by the local distribution company. 24. FISDL has substantial experience in managing rural electrification projects. Funding for a project conducted by FISDL includes FISDL resources which may come from a variety of sources, funds provided by the Municipality, and funds provided by the local distribution company. An illustrative distribution from projects executed some years ago was FISDL 25%, Municipality 40%, and distribution company 35% (these figures may vary widely from project to project according to FISDL and Municipal resources). The project cycle of FISDL includes: (a) demand from communities which lack service through an application from the pertinent Municipality to FISDL, (b) a feasibility study by FISDL which assesses the subsidy required by the project to yield an acceptable return to the distribution company that develops the project, (c) a competitive bidding process administered by FISDL or the Municipalities is carried out for

48 the construction of works for grid extension, and any interested parties can participate in the process, (d) execution under the supervision of the distribution company, and (e) a final settlement between FISDL and the distribution company. FISDL has successfully applied this scheme to numerous projects involving grid extension, which are now operating well. 25.Solid Waste. Solid waste is considered a high priority investment by Municipalities as reflected both in the Municipal diagnostic carried-out as well as the environmental assessment workshops with Municipal stakeholders. Currently there are 27 authorized sites by the MARN distributed throughout the country with capacities ranging from 5 to 110 tons per day.24 The metropolitan area of San Salvador produces approximately half the solid wastes of the country while most other departments produce less than 400 tons per day in aggregate. At the last census prepared by MARN in 2006, 210 Municipalities provided waste collection while 52 (or 20%) were not providing the service.

26. The Ministry of Environment and Natural Resources has passed legislation and regulations for the closure of open disposal sites in all Municipalities and transfer of wastes to authorized facilities throughout the country, both private and publically managed. In some cases Municipalities have joined together to establish landfill sites, at significant cost to the Municipal budgets. The current costs of solid waste management are high because of long transportation distances to authorized facilities while poor roads make adequate collection services difficult. Most Municipalities are not charging specific tariffs for the collection service, therefore subsidizing the collection systems through other fees and taxes they collect. The Municipal diagnostic has indicated that fees for waste collection are only 2% of all Municipal income while expenditures in health and sanitation comprise up to 20% of the annual Municipal investment budget.

27. FISDL has been the implementing agency under a recent IDB project (Descontaminacibn de Areas Criticas) in coordination with MARN for technical closure of open landfills. Therefore, they have direct and ongoing experience in the solid waste sector with MARN standards. No new landfills or expansion of existing ones will be financed. No incineration projects would be supported as these also require more complex EA’S. Most projects would fall under the lower national EA categories, A and B1 and could include the following:25Categorv A (lowest risk, no documentation required by MARN): Compositing: 1) Systems that receive source separated organic wastes consisting of at least 80% organic matter. Capacities up to 1 ton per day and an area not larger than 1000m2. Rejected or non-organic material should not be discarded on-site. 2) Home composting. 3) Temporary storage of recyclable material (no washing facilities). Solid Waste: 1) Temporary solid waste storage facilities with residence time of no longer than 48 hours and less than 0.5 tons per day for wastes to be disposed of in MARN authorized facilities. 2) Transportation of non-hazardous Municipal solid wastes following the guidelines established for transport to authorized facilities. Category B1 (moderate risk, only MARN checklists and environmental documentation required): Composting: Up to 5 tons/day with adequately sited and designed facilities including runoff management and closure plans. Solid Waste: 1) Transfer stations up to 25 tondday with residence time less than 12 hours to transport to MARN . authorized facilities and smaller than 1 mz.

24 httu:l/www.marn.gob.sv/?fath=l6&cate~oria=207,accessed 7 April 2010 25 MARN-CCAD-SIC-USAID.2009. Categorizacibn de actividades, obras o proyectos conforme a la Ley del Medio Ambiente.

49 28. Non-eligible expenditures. If any non-eligible expenditure from Municipal investments financed by the Project is identified during project execution, disbursements from this component to the Municipality would be suspended and repayment of resources will be made by the Municipality to MH. If the Municipality defaults on this repayment, the MH would still need to repay the ineligible expenditure to the Bank. Nevertheless, the Municipality would only be permitted to reengage and utilize the remaining investment it has been assigned once it has refunded the expenditure in question and demonstrated compliance with fiduciary and safeguard policies. 29. Key activities that will be carried out after project appraisal and before project effectiveness include: (a) the amount that each would receive using FODES formula communicated to each Municipality; (b) handbook on the rules of the program prepared or updated, and disseminated to all the Municipalities. This handbook will cover processes of procurement, financial and safeguard management, reporting, participatory planning, design of technical proposals, options for technical assistance that Municipalities can access; (c) training and capacity building for Municipalities on the Project’s handbook in a phased manner to ensure that Municipalities meet the eligibility criteria for accessing Project resources; and, (d) confirmation that Municipal planning processes reflects expenditure priorities as validated by a citizen consultative process.

30. Citizen consultative process. As part of the Municipal Framework Agreement, a format for the categorization of citizen participation in the identification and prioritization of investment proposals will be completed. Information to validate would be: (a) are the investments requested and prioritized by communities defined in the investment plan? (b) what mechanisms were used for securing wide community participation in investment planning? (c) were all communities in the Municipality represented and participated equally? If the Municipality confirms compliance with the participatory planning process, then the proposed Municipal Subproject Grant list can be submitted with the Municipal Framework Agreement. If not, ISDEM will work with the Municipality to facilitate a participatory consultative process with the communities so they can define and prioritize Municipal Subprojects for Project financing.

3 1. The proposed key outputs of the component would be: (a) increased resources for all 262 Municipalities for basic service investments; (b) improved financial management and procurement processes for Municipalities; and (c) established environmental and social frameworks for regulating Municipal investments. Component 2 - Strengthening of Municipal Governments (US$19.72 million), 32. The main objectives of this component are the following: (a) provide assistance to local governments for the preparation and implementation of Municipal Subproject investments under Component 1 ; (b) assist in the implementation of the Municipal Administrative Career Law; (c) strengthen processes and systems for increasing local government capacity for participatory planning for local development; (d) strengthen administrative systems to support transparent procurement and financial management of local governments (access to public information, a system of monitoring and accountability), (e) strengthen processes related to local government capacity for disaster risk management; and (f) strengthen key institutions to be able to respond to local government needs for capacity building and local development (ISDEM, COMURES, SSDT).

50 33. This component will be executed by ISDEM with a fully integrated project unit within ISDEM created with technical and administrative staff from ISDEM. This component would strengthen all Municipalities in procurement and contracting, financial management, environmental and social screening procedures and technical oversight for local investments before accessing resources available for Component 1 investments.

34. The component will first develop capacity building modules or improve the existing programs that ISDEM and COMURES have developed. The topic of these modules would cover Municipal Civil Service Law implementation, participatory planning, procurement, and financial management. In order to strengthen the capacity building programs that ISDEM and COMURES already have the component will carry out a diagnosis to take a stock of the existing capacity building programs and determine the scope and effectiveness of the existing modules. Past experience showed that a lack of standardized processes and tools failed to ensure sustainable implementation of participatory planning, disaster and risk management, procurement and financial management, among other key Municipal functions. Therefore, standardized processes will be defined and incorporated into the Project operation manual. Tools will be developed to implement these standardized processes in each Municipality, while adapting them according to local needs.

35. Selection of Municipalities for additional technical assistance in participatory planning and procurement and financial management. Additional Technical Assistance (TA) will be provided to an initial pilot group of 66 Municipalities. Later this TA can be expanded to other Municipalities based on: (a) eligibility criteria defined in the Project’s Operations Manual; (b) and capacity of ISDEM to oversee the TA. Key areas for TA would be in strengthening capacity: to implement the Municipal Civil Service Law; to improve participatory planning; and for administrative management. The objective is to help each participating Municipality to progress from at least one capacity category to another in each of the four capacity areas as a result of receiving TA from the Project. The initial 66 Municipalities will be selected once the Municipal diagnostic is completed for all 262 Municipalities, most likely before Project effectiveness. The criteria26 that will be used to select these Municipalities are: (a) major deficiency in implementing the Municipal Civil Service Law, participatory planning and procurement and financial management; (b) not benefiting from other national programs or international cooperation in these areas; (c) Municipalities are classified in the typology 2, 3, 4 and 5 to allow Municipalities to increase capacity to move to a higher capacity ranking; and (d) Municipalities are willing and are available to participate in the process and make changes required by the Municipal Civil Service Law. Municipalities that receive additional TA and demonstrate increased capacity, by progressing from one capacity category to another, will qualify to participate in the pilot of the new fiscal arrangements that will be defined as part of the Decentralization Strategy Support Component.

36. Disaster risk management Municipalities. All Municipalities would receive TA to strengthen local processes, systems and capacity for disaster risk management. Execution would

26 The criteria may be revised and adjusted as needed during the implementation of the Project in order help ensure smooth implementation and achievement of the PDO. Such changes would be included in the Operations Manual and be agreed upon by the Bank.

51 begin in phases starting with 20 percent of Municipalities the first year and extending each year to an additional 20 percent until the end of the Project. The selection and timing of TA to local governments will be based on the Municipal diagnostic results starting with the local governments with greatest need first. Additionally, local governments from each of the five capacity category will be selected to design appropriate TA modules for each type of Municipality. A specialized Disaster Risk Management Unit will be established in ISDEM to implement the disaster prevention and mitigation TA. This unit will be staffed with 3 specialists in disaster management.

37. Subcomponent 2.1: Assistance to the Municipalities for the preparation and implementation of Municipal Subproject investments under Component 1 (US$1.28 million): The subcomponent will provide key training to all Municipalities in 27 workshops to be held in 4-regions and the capital and 3 workshops for service providers and institutions involved in procurement and financial management, environmental and social safeguards including the application of the environmental, indigenous peoples and resettlement frameworks, participatory investment planning, and Project guides. The roles of each institutional actor will be clearly explained and included in the Project handbook.

38. This subcomponent will also provide technical assistance and support to the Municipalities and local service providers during the preparation and implementation of investments under Component 1. The subcomponent will support comprehensive training on: applying the investment project cycle, the technical standards that apply to each type of investments, preparing investment proposal including detailed technical and engineering design, financial and economic analysis, implementation arrangement, safeguards and fiduciary management in compliance with the Bank’s safeguards and fiduciary requirements, evaluation and supervision plan and the appraisal and approval process.

39, Once investments have been approved, training will be provided by ISDEM with support of FISDL to train and provide technical assistance in 67 workshops in 4 regions to the Citizens Control Committees to familiarize them with the investment life-cycle and the role they play in guaranteeing that the investments are prepared and executed according to the technical specifications. ISDEM will also train the Citizens Control Committees to administer resources in an open and transparent way and holding the local governments accountable for delivering a quality investment.

40. All the Municipalities will receive TA for investment-related procurement, financial management, participatory planning, environmental and social safeguards, investment lifecycle processing/evaluation and approval processes and civil society engagement in the investment cycle. The Project will finance technical specialists, through a competitive bidding process, consisting of engineers, specialists in financial management, procurement, and environmental and social specialists, which would provide TA and training. Detailed terms of reference have been prepared for these consultancies. ISDEM will oversee and supervise overall implementation of this subcomponent. On-site supervisions will be conducted on a random sample of investment proposals. Investments designed to benefit two or more Municipalities will be encouraged by a proportionally larger assignment of resources for pre-investment related technical assistance,

52 41. Subcomponent 2.2: Support for Professionalization of Municipal Civil Service (USS2.25 million). Municipalities will be strengthened to implement the Municipal Administrative Career Law including: (a) preparation and/or updating of Municipal basic functions manuals for key positions, i.e. Municipal clerk, treasurer, budget and financial management, procurement and contracting unit (UACI) and general Municipal management based on the different types of Municipalities and different levels of staff needs, i.e. larger and more urban Municipalities versus smaller and rural Municipalities with limited staff; (b) training and capacity building for each Municipal staff position, including both comprehensive programs aimed to certify trained staff and training courses to address specific needs; (c) in-situ technical assistance to complement training provided and to guide Municipal staff in applying acquired knowledge while performing their duties; (d) educating Municipal authorities on the implementation of Municipal Administrative Career Law; (e) definition of a plan needed to strengthen and implement the Municipal Administrative Career Law in local government; (0 supporting the recently created Municipal Training Center in ISDEM and establishment and supporting of three regional offices of the center to support the permanent application of the Municipal Civil Career Law as required by Article 47 of the Law; and (g) creation, maintenance and dissemination of the National Registry of the Municipal Administrative Career. This Registry will provide information on the availability and qualifications of registered professionals for Municipal civil service.

42. This subcomponent will finance the contracting of individual consultants, firms and/or NGOs by ISDEM: to prepare and update manuals; to design and implement training programs and courses; and to provide in-situ follow-up technical assistance. Operating costs for dissemination workshops will also be financed.

43. Subcomponent 2.3: Strengthening Participatory Planning Capacity (US$4.28 million). This subcomponent will assist selected Municipalities and mancomunidudes in promoting participatory processes for local development. It will improve the processes and systems for strategic planning and preparing participatory Municipal development plans (MDPs) with a Municipal/territorial view, for the short, medium and long term. The MDPs will focus on local economic development and articulate it within the regional and national economic context.

44. The MDPs will allow Municipal governments, together with other local actors, to identify, measure and prioritize problems as well as to find solutions within their communities and Municipalities. These participatory plans intend to overcome the deficiencies observed in: i) consultation workshops where lists of community preferences are simply recorded without any implementation strategy and ii) Municipal diagnostics conducted for each Municipality. Processes will be strengthened to confirm the participation of relevant local actors (communities, community organizations, civil society and Municipal authorities) during the planning process. Investment plans are part of the MDP and include key investments that both communities and Municipal leaders have identified and have agreed upon as priority investments. Institutional strengthening action plans are also part of the MDP. They include specific institutional reforms and capacity building actions that Municipal governments are committed to implement related to: i) basic administrative functions; ii) Municipal service provision; and, iii) actions and support needed for the implementation of the Municipal Civil Career Law.

53 45. This subcomponent will finance the contracting of firms and/or NGOs by ISDEM to systematize planning methodologies and instruments, and support Municipalities in developing their MDPs and strengthening their participatory planning processes. Municipalities will facilitate the participation of communities, community organizations, civil society and Municipal authorities in the MDP preparation.

46. Subcomponent 2.4: Strengthening Procurement and Financial Management Capacity (US$1.79 million). This subcomponent would strengthen Municipal administration including the budgeting and financial administration system in each participating Municipality and improve procurement management policies. Training will be provided to strengthen the financial administration system in order to improve budget execution and reporting to oversight agencies, including the installation and implementation of Municipal Finance System (SAFIMU). Additionally, TA will be provided to improve procurement practices, policies and procedures necessary for proper procurement and acquisition of Municipal goods, services, and civil works as mandated in the Procurement and Contracting Law for Public Agencies (LACAP), Municipal Career Service Law and Municipal Code, so as to contribute to more efficient spending and improved Municipal services.

47. This subcomponent will finance the contracting of firms and/or NGOs by ISDEM to support Municipalities in strengthening their procurement and financial management processes. Agreements will also be made between ISDEM and other governmental entities to implement the Municipal finance system. Equipment, including hardware and software, will be procured for local governments.

48. Subcomponent 2.5: Strengthening Municipal Capacity for Disaster Risk Management (US$8.19 million). The subcomponent is to enhance national and local government capacity to carry out integrated disaster risk management. This subcomponent will include activities on disaster risk prevention, mitigation, preparedness and response including the development of a national risk management policy that takes into account an ex-ante approach (prevention), strengthens early warning systems, enhance the national institutional capacity for emergency response, and support local disaster risk management. Additionally, TA would be provided to Municipalities in disaster risk reduction activities including land planning, risk maps, inventory of public assets, and building codes. Under this subcomponent, current local practices will be reviewed in order to adequately design and properly reflect local demands and interests.

49. The ISDEM executing unit will include a Disaster Risk Management (DRM) team to carry out specialized technical assistance (TA). The core team to implement this TA should be formed by at least three professionals with no less than 3 years of relevant experience and academic background on disaster risk management, economics, engineering, geography, geology, urban planning or equivalent. Based on an agreed work plan and to strengthen the core team, 2 or 3 more professionals could be hired in those areas with special skills such as GIs, seismic codes, early warning systems, etc. The need for this technical capacity was identified in the Ida Post Disaster Needs Assessment carried out by the GOES between November and December 2009 with the support of UNDP, ECLAC, EU and the Bank. The DRM team will work with Municipalities to establish local disaster risk management guidelines, processes and systems to enhance their DRM capacity. Although the DRM team will work with all Municipalities, the TA

54 will focus on highest need for strengthening disaster risk management systems. The DRM team?s activities will include for example disaster risk prevention, mitigation, preparedness and response. The DRM team will coordinate, support and collaborate with: (i) the National Directorate of Civil Protection, Disaster Prevention and Mitigation (Civil Pr~tection)~~,and with the National Service of Territorial Studies (Servicio Nacional de Estudios Territoriales - SNET28), in coordination with the Ministry of Environment and Natural Resources (MARN). The DRM team work will strengthen the Civil Protection technical and scientific capacity and support its coordination with the National Service of Territorial Studies (SNET).

50. This subcomponent will finance individual consultants, firms, NGOs to prepare draft national risk management policies, risk management maps and plans, land planning, inventories and review of construction codes. Personnel for the Disaster Risk Management Unit within ISDEM will be financed on a declining base with GoES assuming full cost of the unit by the end of the Project.

5 1. Subcomponent 2.6: Strengthening National Municipal Support Entities (US1.94 million). The subcomponent will support strengthening of institutional capacity of ISDEM and SSDT. It will assist ISDEM in: their organizational restructuring, staff performance evaluation, staff training and in-service mentoring, and preparation of a strategy for the creation and operation of the above-mentioned Municipal Training Center. Support will also be provided to ISDEM to create a Disaster Risk Management Unit to support Municipalities long-term risk management needs.

52. This subcomponent will strengthen a few SSDT functions. Specifically, support will be provided for: a) coordinating actions, among national and local governments, their associations and civil society, in the implementation of the national strategy Municipios Libres de Riesgos; b) the design of strategies for Territorios Verdes, Limpios y Saludables and Territorios Productivos; c) the design and implementation of a National Geographic Information System (GIS) with participation of Municipalities; and e) secretarial functions of the Inter-Institutional Executive Committee.

53. This subcomponent will finance individual consultants, firms and/or NGOs for: the restructuring and performance assessment support for ISDEM; the design and implementation of training programs for ISDEM?s staff; and the design and implementation of SSDT of above- mentioned strategies and national GIs. Personnel for this Center and for SSDT coordination and secretarial activities will be financed on a declining basis, with GoES assuming the full cost of the unit by the end of the Project.

27 The Civil Protection System (the System) comprises the National Commission of Civil Protection, Disaster Prevention and Mitigation (the National Commission), the National Directorate of Civil Protection, Disaster Prevention and Mitigation (Civil Protection), and the Departmental, Municipal, and Community Commissions of Civil Protection, Disaster Prevention and Mitigation (Law No. 777, art. IO). 28 SNET?s objective is to contribute with natural disasters risk prevention and reduction efforts. They provide with meteorological, hydrological, geological, oceanographic and risk management services.

55 Component 3 - Decentralization Strategy Support (US$1.63 million).

54. In the long-term the Government is interested in defining a decentralization policy which would strengthen the current system of inter-governmental administrative and fiscal relations. The Project would provide assistance and technical support towards this objective. This request comes from the highest level of policy makers including the President, the Secretary of Strategic Affairs (SAE), the Technical Secretary of the Presidency (ST) and the Minister of Finance. Strong political commitment has been expressed to initiate and define a decentralization policy for the country. In defining a decentralization strategy, the GOES is requesting support for a set of activities to: (a) clarify and redefine distribution of responsibilities between national and local governments; (b) conduct sectoral diagnostics of and define ideal models for service provision; (c) build consensus around responsibility assignments and sectoral models; (d) define fiscal implications and potential fiscal decentralization policies; and (e) prepare a decentralization policy and implementation plan.

55. ISDEM would manage the resources for this component and the SSDT would be responsible for the implementation of the activities of the component. A Decentralization Commission has been formed with MH, SAE, ST and SSDT. The Ministry of Finance is augmenting its staff to include two decentralization specialists that will participate actively in the activities of the component,

56. Distribution of responsibilities. The current legislation provides for an assignment of expenditure responsibilities between the center and the Municipalities in the Municipal Code which defines 29 specific competencies. But the assignments lack clarity and transparency. To a large extent, this is due to the predominance of concurrent or overlapping responsibilities between the center and local governments and lack of clear assignment for financing, regulation and implementation between different tiers. This component will finance consultancies to review the existing Municipal Code (See Annex 16), the actual modus operandi of the sectors and Municipalities related to the Municipal Code and define a base-line of what services are being provided by the sectors and local governments. These consultancies will also review existing studies and information on the subject, and coordinate with other donors who can contribute to this knowledge base.

57. Sectoral diagnostics. Key sectors like water and sanitation, transport, health, education, and others will be analyzed to define what opportunities exist to improve service delivery whether at the local or national level. Studies like Public Expenditure Reviews by sectors to define what is the most cost effective and efficient way to provide key services will be financed by this component. Ideal models will be prepared for each sector for policy discussion and decision making.

58. Consensus building. With a base-line defined on actual distribution of responsibilities between national and local govemments and potential sectoral models analyzed and prepared, the component will finance various consensus building activities involving Municipal authorities, COMURES, sectoral authorities, congress, executive branch, and NGOs to present findings and seek consensus on a potential decentralization policy.

56 59. Definition of fiscal implications. The system of fiscal transfers to Municipalities (FODES) currently transfers 7 percent of central government current revenues with the only condition that a maximum of 25 percent can be used for recurring costs. The 7 percent is not based on the amount of money needed to fulfill specific functions and service provision. Based on the analysis by sector and consensus that is generated for a new decentralization policy, costs assignment for service provision can be adequately defined and a fiscally neutral approach can be proposed. Additionally, a per capita analysis will be undertaken in order to ensure that FODES transfers in the future do not lead to sub-optimally high levels of investment in the smallest and poorest Municipalities. Finally, the issues of local revenue autonomy and local borrowing can be addressed in a holistic manner along with the fiscal transfer.

60. Preparation of a decentralization policy and implementation plan. Based on the inputs from the previous activities, a coherent decentralization policy based on consensus can be prepared with an implementation plan that can be gradually executed over the medium to long- term.

61. In carrying out the activities of this component, a variety of instruments, such as policy forums within the Government, policy forums with the participation of policy makers from other countries that may be comparable to El Salvador in history and political economy. By bringing together some of the leading thinkers on decentralization they can discuss and lay out options on various aspects of the inter-governmental relations such as expenditure assignments, transfers, taxation, local borrowing, mechanisms of accountability, etc.

Component 4: Project Management (US$5.10 million)

62. The objectives of this component are: (a) the efficient and effective coordination of the Project and an M&E system which measures progress in achieving Project objectives; (b) provision of consultants, goods, and incremental operating costs which will support the operation of Project coordination integrated within ISDEM’s and FISDL’s structure; (c) establishment of institutional mechanisms, administrative systems, management information system, communications strategy, personnel, equipment and other elements needed for the implementation of the Project; (d) effective fiduciary arrangements in place during implementation ’ and safeguards policies complied with and coordinated by FISDL’s for Component 1 and FISDL and ISDEM for Components 2-4.

63. The component will finance the establishment of institutional mechanisms, administrative systems, management information system, personnel, equipment and other elements needed for the implementation of the Project. The component will also ensure that effective fiduciary arrangements are in place in ISDEM and FISDL during implementation. The component will be coordinated by ISDEM. The component has the following subcomponents: (a) project implementation and management; (b) communications strategy; (c) planning, monitoring and evaluation activities; and (d) support for the preparation of studies.

64. Subcomponent 4.1: Project implementation and management (US3.17 million). This subcomponent provides support for Project coordination of ISDEM and FISDL through the provision of technical assistance (including financial, safeguards and technical audits), training,

57 goods and equipment, as well as incremental operating costs required for Project administration and monitoring. It will finance the incremental administrative and technical cost of FISDL to implement Component 1. The Project will support the upgrading and. implementation of e- governance tool within FISDL for processing of all preinvestment, investment and supervision of investments for the Project. The component will also finance the operation of the executing unit in ISDEM, which will be responsible for Component 2 and 4 and overall coordination. Any incremental staff needed will be contracted for the executing unit. Given the lack of experience of the ISDEM in managing Bank supported projects, technical assistance in project management will be recruited at the outset of the Project.

65. ISDEM will be responsible for monitoring and reporting on Project activities, including achievements in each Project Municipality. A mid-term evaluation of the Project will be contracted by ISDEM immediately following the second year of the Project and a final evaluation just prior to Project closing.

66. The subcomponent will ensure the establishment of a functional, transparent, accountable and efficient financial management system for the Project in ISDEM, including carrying out of external and independent bi-annual technical, administrative and safeguard audits. Additionally, annual financial audits will be financed by the component.

67. Subcomponent 4.2: Communications strategy to support Project implementation (US$0.47 million). This subcomponent will be designed and carried out by ISDEM. Its objective is to ensure that there is informed participation of the Municipalities and end beneficiaries of the Project. Its outcome is a communications strategy to support Project implementation, and will include the production and dissemination of audio-visual and printed materials.

68. Subcomponent 4.3: Carrying out of planning, monitoring and evaluation activities that provide inputs to continuously guide Project management decisions to ensure the achievement of Project objectives (US$0.96 million). This subcomponent ensures that transparency of Project activities and its outcomes are the establishment of a hnctional, transparent, participatory and efficient M&E system. ISDEM will compile Municipal data on a yearly basis and establish simple financial ratios. Additionally, a data base of completed investments will be maintained by FISDL and reports provided to ISDEM. Evaluations of subproject results and impacts will be conducted periodically, specifically for the Mid-Term Review (MTR) and at the end of the Project. These evaluations will measure indicators and base- line criteria defined during subproject preparation. ISDEM will conduct internal Project evaluations, but will also contract independent external evaluations for the MTR (two years after Project start) and an end of Project evaluation (six months before the end of the Project).

69. Subcomponent 4.4: Provision of support for the preparation of studies relevant to Project objectives, including social and institutional assessments necessary to analyze the administrative capacity of Municipalities (US$0.5 million). The subcomponent will support technical studies relevant to Project objectives and activities during implementation, including social, environmental and institutional assessments.

58 2 I LAUNION I SANTA ROSA DE LIMA $293,905 51 I

59 60 SAN JOSE GUAYABAL

A ISABEL ISHUATAN

172 19 SANTA ANA SANTA ROSA GUACHIPILM $125,659.57 173 80 SONSONATE SANTO WMMGO DE GUZMAN $125,421.8 1 174 81 CHALATENANGO CONCEPCION QUEZALTEPEQUE $123,913.19 175 82 LA LIBERTAD TALNIQUE $122,395.22 I76 83 SAN VICENTE SAN LORENZO $120,914 81

61 197 104 LA PA2 SAN MIGUEL TEPEZONTES $106,388 38 198 105 SAN MIGUEL QUELEPA $106,176 01 199 106 CHALATENANGO SANTA RITA $105,817 93

62 63 Annex 4B: Municipal Diagnostic EL SALVADOR: Local Government Strengthening Project

Scope of the Municipal Diagnosis

1. For the preparation of the proposed Project, SSDT carried out a diagnostic work for 10 representative Municipal governments in El Salvador which would provide key input for the design of the proposed Project and also establish an analytical framework to facilitate technical assistance for the Municipalities. The main objectives for the diagnostic work were i) identify key support areas for the Municipalities in designing, preparing and executing Municipal development projects; ii) undertake diagnosis of current management capacity of Municipal governments with emphasis on financial and administrative management as well as accounting and project executions; iii) compile and analyze financial management of Municipal governments - Municipal accounting system, revenue and expenditure management- in the last two years; iv) compile and analyze information related to the capacity of administrative management in the Municipalities with regards to planning, mechanism to ensure local participation and representation, and transparency; and v) analyze existing key infrastructure sector including water, sanitation, roads, solid waste management and electricity.

2. Ten Municipalities were selected taking into account a typology of Municipalities of common reference which Comisidn Nacional de Desarrollo Local (CONADEL), ST, ISDEM, FISDL, COMURES and GTZ established’’. The typology aims to provide a tool for local development planning and decentralization and to assist in developing a strategy for each Municipality type, reflecting a wide variation and segmentation of Municipalities in El Salvador. Main variables for this typology are: a) number of population; b) economic dimension in terms of number, of Value Added Tax (VAT) contributors per every 10,000 residents; and c) social dimension in terms of Unsatisfied Basic Needs Index-INBI (indice de necesidades busicas insatisfechas) containing indicators to measure the level of social infrastructure and services. The following table summarizes the typology.

Table 1. Typology of Municipalities based on demographic and economic characteristics

’ StructuralCharacteristics . -- 1 Type1 I Type2 I Type3 I Type4 I Type5 I c Average value Population 188,240 72,964 28,114 14,027 8,221 Urbanization Rate (%) 92 91 65 40 19 # of VAT contribution per 10,000 habitants 526 127 86 45 28 INBI (%) * 12.7 15.5 28.6 41.6 58.5 Ahsolute value Total population in each type 1,317,681 1,021,502 1,265,142 1,276,489 863,299 Total areas (km2) 1,249.73 801.68 3,592.61 6,710.81 8,329.13 Number of Municipalities 7 14 45 91 105

29 PROMURES-GTZ and national counterparts. Tipologia de Municipios El Salvador 2007. Updated in 2008.

64 3. Ten selected Municipalities for the diagnostic work were: a) Santa Ana (Type 1); b) Tonacatepeque (Type 2); c) San Vicente y San Antonio del Monte (Type 3); d) Tejutla, San Luis Herradura y San Jose Guayabal (Type 4); and e) San Carlos, Dolores y Chapeltique (Type 5), as shown in Table 2. The following section summarizes key findings of the assessment.

Basic Information for 10 Municipalities

4. Table 2 shows wide variations among the Municipalities in terms of population, Human Development Index, as well as the level of access to basic infrastructure. The population of the selected Municipalities ranges from 4,172 in San Carlos to 245,421 habitants in Santa Ana with average populations in Tonacatepeque (90.896) and San Vicente (53.21 3). In particular, the current level of service provision in the Municipalities calls for a great need to invest in infrastructure and to increase its coverage in the short to medium term. In case of access to water, the percentage of households with access to water connections in Type 4 and 5 Municipalities (San Luis Herradura, Tejutla, San Carlos) is much lower than the rest of Municipalities, with coverage ratio of 42%, 45% and 52% respectively, while in rural areas, access to water is generally much lower, even in the Type 2 Municipality such as Tonacatepeque with 14% coverage ratio. As for sanitation, the ratio of service coverage varies widely: in case of Chapeltique, there is practically no garbage collection service and in other Municipalities, the collection ratio in rural areas is extremely low, only at about 2%. Access to sewerage service is equally deficient in some Municipalities such as San Jose Guayabal (12%), Dolores (1 1.6%) as well as in rural areas varying from 8.2%to less than 20%.

Table 2: Basic Indicators and Access Data for the Municipalities

Humn Population Develop Households with access to Households with access to Households with access io Households OTZ sanitation and sewage cnt hde: water (W electricity solid waste services Typology disposals

Source, Elaborated based on the 2007 Census-and based on DIGESTYC and Almanaque 262. Estado del Desarrollo Humano en /os municipios de El Salvador. 2009. PNUD-FUh'DAUKGO-Subsecretaria de desarrollo territorial y descentralizacion.

Administrative Organization of the Municipalities

5. As summarized in Table 3, none of the Municipalities have a planning unit or department within their administrative organization to direct and coordinate planning activities in a more systematic and integrated manner. On the other hand, six Municipalities do formulate and maintain participative strategic plans. These plans have been prepared either by Municipalities themselves (in case San Jost Guayabal) or with the help of external consultancy. In general,

65 these strategic plans are well developed and elaborated using the participatory methodology which has helped to prioritize and identify a list of projects to implement in the short, medium and long term. However, there is no clear evidence or explanation on how these strategic development Plans have been utilized to guide and develop Municipal government’s program or how they have been taken into account during the process of budget formation for annual investment.

Table 3: Administrative Organization for Project Management

Source Elaborated based on information collected at Municipal level, 2010. 6. As for the institutional capacity to manage Municipal government’s projects, the Municipalities except Santa Ana and San Vicente do not have a formal project management unit but an individual is put in charge of the identification and supervision of a project often directed by the Mayor’s office in close coordination with the procurement and contract unit (la unidad de adquisiciones y contrataciones institutional) (See Table 3). While it is difficult to generalize the characteristics of Municipalities solely based on the analysis of the ten Municipalities, the professionals in charge of project management tend to lack technical qualification and professional training. In recent years, Municipalities have tried to recruit more professional and experienced staff for their project management.

7. In 2009, about three quarters of the projects (76%) were executed directly by the Municipalities, while the rest were done through contracting (See Table 4). These projects implemented directly by the Municipalities tended to be relatively small scale, up to US$50,000, and the larger scale investments were contracted out. The largest investment, about 37% of the total infrastructure investment, was made in the road sector (construction of new roads, maintenance and improvement of tertiary roads, reconstruction of urban roads, passages, etc); followed by water, environmental sanitation, and solid waste such as expanding the coverage of drainage and sewerage, land-fill site for garbage disposal, embankments and river bed improvement, garbage collection, etc (20%); other urban infrastructure (1 8%); education and recreation facilities (1 7%); and electrification and communications (8%). In most cases, financing these investments was done through FODES (92%) and the Municipalities, given their lack of budget resources, raised about 8% of total investment financing through their internal credit.

66 Table 4: Implemented Projects in the Municipalities, 2009 (YO)

ELECTRIFICATION and COMMUNICATIONS 8 3 3 3 3 92 8 OTHER* 18 19 3 22 6 0 100 0 TOTAL 100 14 26 I1 23 25 15 92 8

8. For 2010, road sector continues to remain as a priority sector for Municipal investment programs (about 26% of the total prioritized projects) followed by investment in other infrastructure (Table 5). However, data on the actual amount of investment shows that only 16% of the total investment has been allocated to the road sector, while education and recreation and other infrastructure works comprise over 50% of the total investment. In particular, education and recreation sector rates relatively low in terms of priority only at 17%. However, the amount of investment allocated consists of 28% of the total investment, about US$ 2.4 million, which reflects the importance of the education and recreation sector for the Municipalities. Investment in education and recreation includes maintenance and creation of public space, public sporis, and recreation and cultural sites, which are also seen as important mitigation measures against urban crime and violence.

Table 5: Prioritized Projects for the Municipalities, 2010

INVESTMENT

TION, SOLID

RECREATION

FLETRIFICATION and 39 - $ 1.472.416 17 17 COMMUNICATIONS OTHER* 55 $2.120.544 24 24 TOTAL 229 $8.689.222 100 100

Internal Control and Auditing

9. The study found that a majority of the Municipalities maintain an internal auditor on a part-time basis (generally two days a week) and in some cases, such as in San Carlos and Tonacatepeque, there was no internal auditor although this is required by the national regulation

67 (la Corte de Cuentas). In some larger Municipalities such as Santa Ana and San Vicente, an auditing unit and internal unit are maintained on a permanent basis. Based on the analysis, the following recommendations are proposed: 1) to implement internal control system in all areas; 2) not to issue checks in the name of the Treasury (Tesoreria) and to update daily remittance and opening of accounts for each project; 3) to prepare institutional activities and work plan; and 4) to apply normative LACAP in all contracting process. 10. While the Municipalities maintain internal, external audits as well as audit by the Corte of Accounts (Corte de Cuentas or Supreme Audit Institution) depending on the level of Municipal budget, the analysis shows that there is much room to improve internal control with regards to administration, planning, and execution of Municipal management. In addition, it is not clear whether local authorities of the Municipalities adequately comply with the recommendations set forth by auditor either.

Municipal Finance

1 1. The analysis shows that the budget position of the ten Municipalities during the period of 2007 - 2009 varies considerably (See Table 6). One Municipality had budget deficit for three consecutive years (Chapeltique), while five Municipalities ran a deficit in the last year of analysis. In general, one can observe that in the year 2007, only one Municipality ran a budget deficit, while in contrast in 2008, six of ten Municipalities and in 2008 five out of ten Municipalities ran a deficit. Similarly, due to the limited sources of own revenue, none of the Municipalities have the capacity to save.

Table 6: Budget Balance in Ten Municipalities

MUNICIPALITIES DEFICIT/SUPERAVIT DEFICIT/SUPERAVIT DEFICIT/SUPERAVIT 2007 2008 2009 CHAPELTIQUE -$110,784.66 -$35,969.88 -$44,954.37 CIUDAD DOLORES $227,245.06 $485,194.52 -$266,536.52 SAN ANTONIO DEL $425,330.02 -$338,854.43 $9 1,689.24 MONTE SAN CARLOS $53,236.43 $2,459.02 $65.050.17 MORAZAN SAN JOSE GUAYABAL $974.42 $21,355.46 -$29,460.10 SAN LUIS LA $1604,665.00 -$667,120.92 $234,809.91 HERRADURA SAN VICENTE $436,213.55 -$92,039.13 -$480,184.35 SANTA ANA $1,438.56 -$398,281.96 -$1822,652.29 TEJUTLA $1 16,772.42 -$168,368.57 $457,073.39 TONAC ATEPEQUE $34,018.08 -$79,29 1.40 $90,908.79

12. On the revenue side, the analysis shows that annual budget in the Municipalities highly depends on the budget transfer, FODES, and the high dependency on budget transfer is of course translated into a lack of financial autonomy. This is true for most of the Municipalities which

68 cannot generate sufficient revenues and whose annual budget mostly relies on fiscal transfer from the central government. On average, about two thirds of Municipal revenue comes from budget transfer and the rest is raised within the Municipalities. Most of revenue sources come from taxes, tariffs, fees, and customs (See Table 7 and Figure 1). Tax revenue only consists of 20% of total revenue and leaves much room for improvement. Furthermore, the analysis shows that the tax rate is relatively low or was determined arbitrarily some fifty years ago and has not been reviewed since then.

Table 7: Total Revenue Sources in 10 Municipalities (YO) Concept 2007 2008 2009 AVERAGE Own resources 28 25 25 26 TOTAL TRANSFER . 72 75 75 74

80 IMPUESTOS 60 MUNICIPALES 40 20 :iA TASAS Y 0 DERECHOS

13. On the expenditure side, operating costs, on average, consist of 72% of total expenditures of the Municipalities and it has been on an increasing trend, from 69% in 2007 to 76% in 2009 (Figure 2). Without much increase in revenue side, an increase in operating costs means reassignment of expenditure in favor of operating cost while decreasing expenditure in something else such as investment. Expenditure in public investment consists of 17% of the total spending, which is no doubt very low and has significant implication on improving the quality of life for the people.

Graph 3: Composition of Total Expenditure in 10 Municipalities (Oh)

80 60 40 OPERATIVOS 20 0 -&. INVERSION EN ACTIVOS FIJOS

69 Table No 13 Composition of the operation costs of the sample Municipalities (YO)

2007 2008 2009 AVERAGE OPERATIONS 100 100 100 SALARIES 55 53 55 54 PROCUREMENT OF GOODS AND 37 37 37 37 SERVICES TRANSFERS 2 2 2 2 FINANCIAL and OTHERS 6 8 7 7

14. Based on the analysis above, the following policy recommendations can be considered:

1) Institutional capacity for project management: a. Update and elaborate strategic development plans; monitor on a regular basis the implementation of the plans. b. Strengthen the capacity of project management unit to ensure the quality of technical, economical, operating aspects during the project preparation and implementation c. Enhance the process of pre-investment stage (e.g. project evaluation and selection process), in order to guarantee successful implementation of the projects. For this, it is necessary to bring more rigors in technical evaluation process, d. Design and execute in a short term capacity building plan, especially for LACAP, the project cycle and financial and budget management.

2) Municipal Finance a. Strengthen budgeting process geared towards technical instrument that would take into account realistic revenue and expenditure management, consistent with economic conditions of the Municipalities and institutional capacity to collect revenue or reduce expenditure. b. Implement a strategy to enhance revenue collection within the Municipalities accompanied by rationing policy for operating cost, and also introduce fiscal austerity to free some resources for physical investment. c. In the short to medium term, design and apply financial management policy in these Municipalities to introduce technical instruments of management such as financial plan or medium-tern fiscal framework. d. Design and implement a short-term capacity building plan to improve the capacity of financial management including, among others, budgeting, financial plan, medium-term fiscal framework, annual budgeting plan, etc.

70 Annex 5: Project Costs EL SALVADOR: Local Government Strengthening Project

Component Cost Summary (US$ millions) Component andlor Activity GOES IBRD Total

1. Promote Decentralization Service Delivery 2.50 52.75 55.25 2. Strengthening of Municipal Governments 1.03 19.72 20.75 3. Decentralization Strategy Support 0.00 1.63 1.63 4. Project Management 3.16 5.10 8.26 Front End Fee 0.00 0.20 0.20

Unallocated 0.07 0.60 0.67

Total 6.76 80.00 86.76

71 Annex 6: Implementation Arrangements EL SALVADOR: Local Government Strengthening Project

1. The Secretariat of the Presidency for Strategic Affairs (SAE) is responsible for overall Project coordination and will sign individual Municipal Framework Agreements with all 262 participating Municipalities. SAE will also inter into an Implementation Agreement with FISDL and ISDEM for carrying out their respective responsibilities in the Project. The Sub- Secretariat of Territorial Development and Decentralization (SSTD) of SAE is assigned the responsibility for establishing and maintaining the Inter-institutional Committee (CI). SSDT oversees the executing institutions, FISDL and ISDEM and chairs the CI. CI members include SAE, SSDT, ST, FISDL, COMURES, ISDEM and MH. The committee facilitates overall Project coordination.

2. The SSTD would have general supervision of the Project and of the executing institutions, FISDL and ISDEM. It will ensure that at the end of the Project: i) ISDEM has adequate operating budget from treasury, has a functioning Municipal Training Center, Disaster Management Unit and has integrated all staff and functions of the Project executing unit into the institutional structure; ii) the ,Ministry of Finance has established and staffed a fiscal decentralization unit; iii) the SSDT and COMURES have staff dedicated to research, analyzing and preparing decentralization policy papers; and iv) a national risk management policy and decentralization strategy are established.

3. Municipalities, FISDL and ISDEM would be responsible for the specific outcomes under each of the four Project Components. Municipalities would be responsible for Component 1 and will sign a Municipal Framework Agreement which specifies the rules and obligations for accessing and utilizing resources for Municipal Subprojects.

4. FISDL providing technical supervision to Municipalities in preparing, implementing and supervising local investments. Transfers to the Municipalities would be made directly by the Ministry of Hacienda based on requests from FISDL. FISDL would provide oversight and supervision to Municipalities in managing the funds for Component 1, and would supervise procurement and financial management for this first Component in a decentralized modality through the 262 Municipalities, as FISDL’s Municipal Advisers would have to validate all procurement processes carried out at the Municipal level. Moreover FISDL would be in charge of the supervising compliance of Municipalities with social and environmental safeguards,

5. ISDEM would be responsible for Components 2, 3 and 4. An executing unit would be created within ISDEM to manage project resources for these three Components. This unit would have technical, financial and procurement specialists assigned from within the institution or contracted if needed. A Designated Account (DA) will be opened for ISDEM, which will manage the funds and be responsible for procurement associated with the execution of Component 2, 3 and 4. ISDEM will also coordinate the monitoring and evaluation of the Project’s progress, consolidating intermediate and final indicators of M&E and reporting them directly to the CI and the World Bank.

72 Table 1 Overview of implementing arrangements for each Component

Component Name Responsible Participating Procurement Institution Entities and FM Component 1 Promote Decentralized Service Municipalities FISDL, ISDEM, Municipalities Delivery MH, SAE w/FISDL support Component 2 Strengthen Municipal Governments ISDEM ISDEM, FISDL ISDEM Component 3 Decentralization Strategy Support ISDEM SAE, SSDT, ST, ISDEM COMURES, ISDEM, MH Component 4 Project Management ISDEM , ISDEM ISDEM

6. Municipalities will confirm that they meet the eligibility criteria to access the resources under Component 1. They will identify and prioritize investments through a participatory planning process with wide participation from local communities and send the prioritized projects to FISDL for a technical review. They will contract technical assistance for proposal preparatiodpre-investment studies, investment execution and investment supervision. Some Municipalities will have the capacity to carry out some of these functions without external assistance. Procurement activities of works, goods and services will be carried out by the 262 participating Municipalities, under a decentralized modality that FISDL has been using for the past 12 years. This is to facilitate the maximum opportunity for Municipalities to develop administrative capacities. Municipalities will manage investment and supervision contracts and be responsible for operating and maintaining investments. FISDL would ensure that investments are eligible, conform to acceptable technical standards, and are managed according to the fiduciary and safeguard policies and provisions of the Loan Agreement and the Project’s Operational Manual.

7. All Municipalities in El Salvador have been carrying out the procurement function for over 10 years, although they don’t have previous experience with Bank’s procurement. By Law, each Municipality has to have an Institutional Procurement and Contracting Unit (UACI) in place, staffed with at least one professional: this was verified in the ten sample Municipalities, although, it was observed that on the smaller ones, the procurement officer had also to perform other functions (accountant, treasurer, etc.) All procurement staff at the Municipal level has easy access to training in the LACAP procedures given by the Public Administration Procurement and Contracting Ruling Unit (UNAC) within the Ministry of Finance, having also access to particular assistance given by such Unit and by ISDEM. Therefore, all of the procurement officers in the sample Municipalities were found to be well acquainted with the LACAP rules and procedures. The downside is that, recently, the Central Government approved a Law that allows the Mayors to directly appoint the procurement officer, not recognizing this position within the Municipal Administrative Career Law and, therefore, introducing the risk of losing the trained professionals. Even though Municipalities have no previous experience with Bank’s procurement, all of them had, at some point, received funds from FISDL, and therefore have experience using standard bidding documents (SBD), evaluation formats, etc. They also have experience in procurement planning.

8. Municipalities will sign a Municipal Framework Agreement (MFA) which defines the obligations and rights of MH through SAE and Municipalities obligations related to Component 1.

73 9. The obligations of MH through SAE are:

(a) upon compliance by the Municipality with the conditions set forth in the Project Operational Manual, which conditions include, inter alia: (i) the participation in a Municipal Training; (ii) the presentation to the Borrower, through SAE, of a list of potential Municipal Subprojects and its corresponding investment plan, acceptable to the Bank (which list and plan constitute an integral part of each Municipal Framework Agreement); and (iii) the opening of a Restricted Account, make available, in coordination with MH, on a grant basis, a Subproject Grant to the corresponding Municipality in a manner satisfactory to the Bank, and in accordance with the criteria and procedures set forth in the Project Operational Manual;

(b) comply with its obligations referred to in the Loan Agreement, as applicable to Component 1 of the Project; and

(c) not to assign, amend, terminate, abrogate, repeal, waive or fail to enforce the pertinent Municipal Framework Agreement or any provision thereof, unless previously agreed by the Bank.

10. The right of MH, through SAE, to take remedial actions against the corresponding Municipality in case it shall have failed to comply with any of its obligations under the Municipal Framework Agreement (which actions shall previously be agreed with the Bank).

1 1. Municipalities obligations as the following:

(a) use the Subproject Grant as provided in the Loan Agreement;

(b) prioritize Municipal Subprojects through a participatory planning process, according to the criteria and procedures set forth in the Project Operational Manual;

(c) upon approval of a given Municipal Subproject, establish and thereafter maintain throughout the Municipal Subproject implementation, a Citizen Control Committee with a structure, functions and responsibilities acceptable to the Bank, including, inter alia, the responsibility to oversee the implementation of said Municipal Subproject, all as set forth in the Project Operational Manual;

(d) upon approval of any given Municipal Subproject, according to the criteria and procedures set forth in the Project Operational Manual, carry out said Municipal Subproject with due diligence and efficiency, and in conformity with appropriate administrative, technical, financial, economic, environmental and social standards and practices, and in accordance with the applicable provisions of the Loan Agreement, the Environmental Management Framework, the Resettlement Policy Framework, and/or the Indigenous Peoples Planning Framework;

(e) upon approval of a Municipal Subproject, and prior to the carry out of said Municipal Subproject: (a) carry out an environmental assessment of said Municipal Subproject, and prepare an environmental management plan (or similar environmental instrument), all acceptable to the Bank; and (b) thereafter, to carry out or cause to be carried out said plan in accordance with its terms.

74 (0 procure the goods, works, consultants’ services and/or Operating Costs in connection with the preparation and implementation of any given Municipal Subproject in accordance with the provisions set forth in Section I11 of Schedule 2 to the Loan Agreement, and under the supervision of FISDL;

(g) ensure that the activities under Component 1 of the Project are carried out in accordance with the provisions of the Anti-Corruption Guidelines;

(h) provide FISDL with the necessary information to prepare the interim unaudited financial reports for Component 1 of the Project;

(i) provide the necessary information for the carrying out of the operational audits referred to in Section V of Schedule 2 to the Loan Agreement;

(j)maintain, at all times during Project implementation, a financial management system in accordance with the provisions of Section 5.09 (a) of the General Conditions;

(k) once the pertinent Municipal Subproject has been carried out in a manner acceptable to the Bank, operate and maintain the investments supported under said Municipal Subproject, with due diligence and efficiency, and in conformity with appropriate administrative, technical, financial, economic, environmental and social standards and practices, and the applicable provisions of this Agreement;

(1) not to assign, amend, terminate, abrogate, repeal, waive or fail to enforce the pertinent Municipal Framework Agreement or any provision thereof, unless previously agreed by the Bank; and

(m) to take or permit to be taken all actions to enable the Borrower, through SAE, FISDL and ISDEM to comply with their respective obligations referred to in this Agreement and/or in the Implementation Agreement, as the case may be.

12. FISDLs operational capacity to implement interventions in close coordination with local governments makes it a qualified implementing agency. FISDL has had a long-standing relationship with local governments in major construction and social infrastructure projects. FISDL is a non-autonomous entity, which depends on the Presidency and the Technical Secretary of the Presidency. It was assessed by World Bank specialists to have sufficient safeguard, fiduciary and technical capacity to provide sufficient oversight to Municipalities in preparing and implementing local investments related to Component 1. FISDL has (i) significant previous experience using Bank’s procurement guidelines, procedures and standard documents, (ii) developed integrated systems that link effectively the planning, procurement and financial functions, (iii) an Institutional Procurement and Contracting Department (ACI) that is staffed with one manager and seven well seasoned procurement specialists, who have vast previous experience applying Bank’s Guidelines, (iv) developed manuals, guidelines and related instruments to manage the procurement function in an adequate manner, (v) made a customarily and adequate use of Procurement Plans, and (vi) has an extensive network of Municipal Advisors stationed throughout the country. FISDL will exercise its procurement and FM responsibility for Component 1 in a decentralized modality through the 262 participating Municipalities. Although the Municipalities will remain fully in charge of the fiduciary responsibility, FISDL’s Municipal 75 Advisors will have to accompany and validate all procurement processes carried out at the Municipal level.

13. ISDEM has no prior experience with managing Bank financing, but has some experience with bilateral financing. Created in 1987, its main goal is to provide technical, administrative, financial and planning assistance to Municipalities to help them achieve their objectives. ISDEM has: (a) no previous experience using Bank’s procurement guidelines, procedures or standard documents; (b) an Institutional Procurement and Contracting Unit (UACI) that is staffed with one manager and one assistant, although, none of them have previous experience using Bank’s Guidelines; (c) developed manuals, guidelines and related instruments to manage the procurement function, although, such instruments ‘apply only under the Public Administration Procurement and Contracting Law (LACAP); (d) not made a customarily and adequate use of Procurement Plans and (e) has an extensive network of technical specialist throughout the country. Given the aforementioned situation, and the lack of an overall capacity to adequately implement the Project, ISDEM will establish a project unit; within such Unit, a well seasoned Procurement Specialist will be hired under terms of reference previously agreed with the Bank. This professional should have previous experience applying Bank’s Procurement and Consulting Guidelines, especially the latter, given that most of the processes that ISDEM will carry-out are foreseen to comprise selecting and contracting consulting firms and individual consultants.

14. SAE, FISDL and ISDEM will sign an Implementation Agreement that defines the obligations and rights of MH through SAE and the obligations of both FISDL and ISDEM.

15. The obligation of MH through SAE are:

(a) to promptly disburse to ISDEM the proceeds of the Loan allocated to finance the carrying out of Components B, C, and D of the Project;

(b) with respect to the implementation of Component C of the Project, through SSDT, to assist ISDEM in the carrying out said Component C of the Project;

(c) to take or permit to be taken all actions to enable FISDL and ISDEM to comply with their respective obligations under the Project as referred to.in Section 1I.C and 1I.D of Schedule 4 of the Loan Agreement, respectively; and

(d) not to assign, amend, terminate, abrogate, repeal, waive or fail to enforce the Implementation Agreement or any provision thereof, unless previously agreed by the Bank.

16. The right of the MH through SAE is to take remedial actions against FISDL and/or ISDEM in case FISDL and/or ISDEM shall have failed to comply with any of their obligations under the Implementation Agreement (which actions shall previously be agreed with the Bank);

17. FISDL obligations are to:

(a) (i) carry out activities under Component D.l of the Project pertaining to FISDL; (ii) provide the necessary technical support to: (I) the Borrower, through SAE, in order to carry out Component 1 of the Project; (11) ISDEM, in order to enable ISDEM to carry out Components B 76 and D.2, D.3, and D.4 of the Project, all in accordance with the provisions of this Agreement and those set forth in the Project Operational Manual;

(b) with respect to the implementation of Component 1 of the Project: (i) support ISDEM in the development of a handbook to prepare, implement and 'supervise Municipal Subprojects; (ii) support ISDEM in providing the Municipal Training; (iii) certify compliance of conditions by any given Municipality to become eligible to receive a Subproject Grant, under terms and conditions set forth in the Project Operational Manual; (iv) assist the Municipalities in the preparation of Municipal Subprojects; (v) confirm the participatory planning process carried out by the Municipalities to prioritize Municipal Subprojects; (vi) certify the establishment of Citizen Control Committees; (vii) evaluate and approve Municipal Subprojects, in accordance with the criteria and procedures set forth in the Project Operational Manual; (viii) approve the procurement plans for each Municipality; (ix) for the implementation of any Municipal Subproject, validate that procurement provisions and procedures comply with the provisions of the Municipal Fiduciary Framework; (x) authorize any given Municipality to withdraw the proceeds of the Subproject Grant pursuant to the terms and conditions set forth in the Project Operational Manual; (xi) assist the Municipalities in the implementation and supervision of Municipal Subprojects, including in the procurement and financial management requirements related to said Municipal Subprojects; (xii) supervise the application of the Environmental Management Framework, the Resettlement Policy Framework, and the Indigenous Peoples Planning Framework during Municipal Subprojects' preparation and implementation; and (xiii) prepare and furnish to ISDEM the consolidated interim unaudited financial reports for Municipalities; (xiv) coordinate with ISDEM the preparation of the terms of reference for the contracting of the operational audits referred to in Section V.A.l of Schedule 2 of this Agreement; and (xv) carry out its financial management obligations as referred to in Section 1I.B. of Schedule 2 to the Loan Agreement;

(c) to comply with the provisions of the Anti-Corruption Guidelines in connection with the activities of the Project under its responsibility;

(d) maintain, at all times during Project implementation, a financial management system in accordance with the provisions of Section 5.09 (a) of the General Conditions;

(e) have Financial Statements audited by independent auditors acceptable to the Bank, in accordance with consistently applied auditing standards acceptable to the Bank, and promptly thereafter furnish said statements as so audited to ISDEM;

(f) with respect to the implementation of the activities under Component D.l of the Project pertaining to FISDL, comply with its financial management and reporting obligations pursuant to Section I1 of Schedule 2 to the Loan Agreement;

(g) not to assign, amend, terminate, abrogate, repeal, waive, terminate, or fail to enforce the Implementation Agreement or any provision thereof unless previously agreed with the Bank; and

(h) to take or permit to be taken all actions to enable the Borrower, through SAE, ISDEM and the Municipalities to comply with their respective obligations referred to in the Loan Agreement, the Municipal Framework Agreements, and/or the Implementation Agreement, as the case may be.

77 18. The obligation of ISDEMare to:

(a) (i) carry out Components B, C, D.2, D.3, D.4 and the activities under Component D.l of the Project pertaining ISDEM; and (ii) provide the necessary technical support to the Borrower, through SAE, in order to carry out Component 1 of the Project, all in accordance with the provisions of this Agreement and those set forth in the Project Operational Manual;

(b) with respect to the implementation of Component 1 of the Project, to: (i) develop a handbook to prepare, implement and supervise Municipal Subprojects; (ii) provide the Municipal Training, with the assistance of FISDL; and (iii) support the establishment and functioning of the Citizen Control Committees.

(c) transfer part of the proceeds of the Loan to FISDL to finance Operating Costs, for purposes of participating in the carrying out of Component D.l of the Project;

(d) (i) establish, and thereafter operate and maintain, at all times during Project implementation, an executing unit with a structure, functions and responsibilities acceptable to the Bank, as set forth in the Project Operational Manual; and (ii) ensure that said unit is, at all times during Project implementation, assisted by professional staff (including, inter alia, a financial management specialist and a procurement specialist) and administrative staff, all in numbers and with terms of reference, and qualifications and experience, acceptable to the Bank;

(e) coordinate the monitoring and evaluation of the Project;

(f) with respect to the implementation of Component 2, 3, and 4 of the Project, to carry out the procurement in accordance with Section I11 of Schedule 2 to the Loan Agreement;

(8) with respect to the implementation of Component 2, 3, 4.2, 4.3, 4.4 of the Project, and the activities under Component 4.1 of the Project pertaining ISDEM, to comply with its financial management and reporting obligations pursuant to Section I1 of Schedule 2 to the Loan Agreement

(h) for purposes of enabling the Borrower, through SAE, to comply with the obligation set forth in Section V of Schedule 2 of the Loan Agreement: (i) coordinate with FISDL the preparation of the terms of reference for said audits; and (ii) hire an independent auditor, acceptable to the Bank, according to the criteria and procedures set forth in the Project Operational Manual;

(i) comply with the provisions of the Anti-Conuption Guidelines in connection with the activities of the Project under its responsibility;

(j)ensure that any activity under Components 2, 3, 4.2, 4.3, 4.4 of the Project, and the activities under Component 4.1 of the Project pertaining ISDEM is carried out in accordance with the pertinent provisions of Schedule 2 to the Loan Agreement, including the Project Operational Manual, the Indigenous Peoples Planning Framework (IPPF), the Environmental Management Framework, and the Resettlement Policy Framework;

(k) not to assign, amend, terminate, abrogate, repeal, waive, terminate, or fail to enforce the Implementation Agreement or any provision thereof unless previously agreed by the Bank; and 78 (1) take or permit to be taken all actions to enable the Borrower, through SAE, FISDL and the Municipalities to comply with their respective obligations referred to in the Loan Agreement, the Municipal Framework Agreements and/or the Implementation Agreement, as the case may be.

Additional implementing arrangements for Component 1 : Decentralized Service Delivery

19. All investments would be executed by the Municipalities, while FISDL would be responsible to provide technical supervision to all Component activities. In addition to the Municipalities, other important institutions involved with the implementation of this component are specialized service providers, Citizen Control Committees, the Ministry of Finance (MH) and sectoral agencies. It is anticipated that the investments in this Component would be executed by all 262 Municipalities over a 1-3 year time period.

20. Within FISDL, the Operations Manager, will be the responsible person for the Project. FISDL works through its Program Officers and its five Regional Officers. The Municipal Advisers (MA), which depend on the Regional Officers, coordinate, advise, accompany and execute the different actions and investments for all the projects that the FISDL has in the different Municipalities (See Graph 1). The MAS are the direct contact person for the Municipalities and they are responsible for a maximum six Municipalities and maximum ten projects.

21. The FISDL was initially founded in 1990 as a Social Investment Fund (FIS) on a temporary basis with the aim to counteract the negative effects of structural adjustments. In 1997, with legislative decree 826, FISDL was established as a permanent governmental autonomous entity responsible for the local development in El Salvador and leading the eradication’ of extreme poverty. It has been rated as having the most institutional capacity of all Central America FIS institutions. In their 19 years of existence, they have managed over US$674 million in more than 18,000 basic social infrastructure and technical assistance projects. Most of their technical expertise is in roads, water systems and sanitation including solid waste and electrification. FISDL currently manages over a US$lOO million annual budget. FISDL has implemented World Bank and IDB funded projects in the past and was recently assessed by World Bank specialists to have sufficient safeguard, fiduciary and technical capacity to provide sufficient oversight to Municipalities in preparing and implementing local investments related to Component 1.

79 Graph 1: Organizational structure of FISDL relevant for the LGS Project

Regional Officer Program Officer

- Municipal Adviser

22. Specialized Service providers (firms, NGO, consultants) will be contracted to provide pre-investmenu preparation, investment execution and supervision support, when needed. FISDL will be responsible for maintaining an updated list of local service providers.

23. Citizen Control Committees will be formed in each Municipality with representatives from each of the Municipalities’ communities Community Associations (ADESCO’s) to confirm the identification and prioritization of investments and provide supervision in the preparation, contracting and execution of the investments. These committees need to be formed before an investment proposal is submitted for approval. Their members will be elected democratically at community level.

24. Ministry of Finance will be responsible for transferring two disbursements to the Municipalities, based on the allocation made to each Municipality for Municipal Subproject investments financed by the Project and authorized and requested by FISDL. The first transfer will be made once the eligibility criteria’s are met by Municipalities. The second transfer will be made once Municipalities demonstrate 50 percent execution of the first disbursement.

25. Sectoral Agencies. ANDA has to issue a “declaration de no afectacibn” to project developers for all water sector investments, saying water sources or existing infrastructure will not be compromised. Additionally, if the system will be operated and maintained by ANDA, it will review studies and designs. Municipalities, through FISDL, will seek ANDA’s authorization for any Municipal water investments. Other sectoral investments just require national legal standards to be incorporated in the design and implementation of the investment projects.

Implementation of Component 2: Strengthening of Local Governments

26. The second component will be executed by ISDEM with a fully integrated project unit created with technical and administrative staff from the institution. Other important institutions involved with the implementation of this component are FISDL, Municipalities, specialized service providers, and SSDT. All Municipalities would receive key basic training and TA in procurement and financial management, safeguards compliance, applicable sectoral technical standards and investment life-cycle processing. In addition, 66 Municipalities with 80 additional needs in implementing the Municipal Civil Service Law, participatory planning, procurement and financial management will receive advanced TA in these areas.

27. ISDEM will be responsible for the specific outcomes of this component and responsible for specific obligations as stated in the Implementation Agreement above.

28. FISDL, will be responsible for specific obligations as stated in the Implementation Agreement above.

29. Municipalities will actively participate in the self evaluation process and receive technical assistance from FISDL on fiduciary and safeguards policies and instruments. Initially, sixty-six Municipalities will receive additional TA on the implementation of the Municipal Administrative Career Law, participatory planning, procurement and financial management. The local governments will be selected based on key criteria defined in the Operations Manual and based on the capacity assessment conducted in the Municipal diagnostic of all 262 Municipalities which will be concluded before project effectiveness.

30. Specialized Service providers (firms, NGO, consultants) will be contracted to design and implement the capacity building modules which translate, whenever possible, into cooperation agreements with institutions and/or projects of development partners. However, such activities will be generally conducted by qualified firms or individuals, contracted according to the procurement procedures established for the Project.

3 1. SSDT and COMURES will receive training programs and capacity building in the areas of decentralization, fiscal planning and territorial development. In addition there are proposals to modernize the ISDEM, improve organizational structure and strengthen overall management and institutional capacity.

Component 3 Decentralization Strategy Support

32. ISDEM would manage the resources for the third component (Jlecentralization Strategy Support), while the Secretary of Strategic Affairs (SAE), as head of the Decentralization Commission, would take the lead for the implementation. The Decentralization Commission has been formed during project preparation whose members consist of the Minister of Finance, Secretary of Strategic Affairs and Technical Secretary of the Presidency and the Subsecretariat for Territorial Development and Decentralization as the Commissions secretary.

33. Secretariat of Strategic Affairs of the Presidency (SAE). When the new president of El Salvador, Mauricio Funes, took office on 1 June 2009, one of his first acts was to create the Secretariat of Strategic Affairs of the Presidency (SAE),which directly reports to the President. The SAE is responsible for strategic issues of the new government and is in charge of generating and improving the conditions in the territories and improving the quality of life of the population. The SAE is specifically tasked with modernizing and transforming the State making it less centrally concentrated and developing a decentralized policy, harmonizing and connecting national policies with local ones, changing the traditional framework between national and local government, and strengthening local government management. The Secretary of SAE is the chair of the Decentralization Committee. It will guide the definition of a baseline establishing where 81 El Salvador stands on the decentralization continuum, sectoral assessments, local government competencies and responsibilities, on the review of the Municipal Code and the preparation of a widely consulted decentralization strategy.

34. Sub-secretariat for Territorial Development and Decentralization (SSDT). SDDT is responsible for: (a) elaborating policies and strategies which boost territorial development and the decentralization process; (b) strengthening of local government capacities, civil participation and Municipal associations; (c) organization of coordinated strategic actions related to territory development; and (d) attention and follow-up to other territorial issues. The Sub-secretary of SSDT is the secretary of the Decentralization Committee, and elaborates together with MH a decentralization strategy.

35. The Ministry of Finance will strengthen its capacity for defining and implementing fiscal decentralization policies. It will augment its staff to include two decentralization fiscal specialists that will participate actively in the activities of the component and specifically analyze and present options for fiscal decentralization to respond to the overall governmental decentralization policy.

36. ISDEM will carry out all the procurement activities for Component 3.

Component 4 Project Management

37. Component 4 will be coordinated and its funds managed by ISDEM. Together with ' FISDL, ISDEM will receive support for Project coordination and management and will also finance the administrative and technical services of FISDL, as well as the operation of the executing unit in ISDEM. FISDL payments will be made based on upon service standards for assisting Municipalities in a timely way with TA and validation of fiduciary, safeguards and technical standards compliance. The criteria and performance evaluation process are detailed in the Project's Operations Manual. The monitoring and reporting on Project activities, including achievements in each Project Municipality will be done by ISDEM, which will also be responsible for the mid-term evaluation of the Project and the final evaluation. The establishment of a functional, transparent, accountable and efficient financial management system for the Project in ISDEM will be ensured, including carrying out of external and independent bi-annual technical, administrative and safeguard audits, as well as annual financial audits. ISDEM is also in charge of designing and carrying out a communication strategy to support project implementation. A fhctional, transparent, participatory and efficient M&E system will be established by ISDEM, which will compile Municipal data on a yearly basis and establish simple financial ratios. Additionally, a data base of completed investments will be maintained by FISDL and reports provided to ISDEM.

82 Annex 7: Financial Management and Disbursement Arrangements EL SALVADOR: Local Government Strengthening Project

Summary Conclusion of Financial Management Assessment

1. As part of the preparation of the Project a Financial Management Assessment (FMA) for the Local Government Strengthening Project was carried out on site fiom January 25 to 29, 2010 and fiom February 11 to 12, 2010. The FMA was accomplished in accordance with OP/BP 10.02 and the FM Manual “Financial Management Practices in World Bank Financed Investment Operations” approved by the Financial Management Sector Board and published on November 3,2005.

2. The Local Governmental Strengthening Project will have three main implementing agencies (Municipalities, FISDL and ISDEM) with the participating Municipalities in El Salvador responsible for fiduciary activities, with SAE (Secretaria de Asuntos Estrategico) providing strategic direction and coordination for the proposed project. Component 1, which will finance grants to Municipalities for the implementation of capital investment subprojects, will be implemented by Municipalities and FISDL. Components 2.3, and 4,which will finance activities to strengthen Municipalities, ISDEM, SSDT and MH, will be implemented by ISDEM.

3. On the basis of the assessments performed, the financial management team presents the following conclusions:

(i) The fact that FISDL has experience managing projects financed by the World Bank, for which they have implemented suitable administrative structures and iystems, as well as experience working with grants to Municipalities, puts it in an advantageous position to carry out, with relative ease, the financial management tasks associated with the proposed Project in Component 1. ISDEM, however, has relatively little experience with processes and procedures applicable to projects financed by the World Bank and therefore has required additional assistance during preparation and additional support during implementation.

(ii) In FISDL, staff capacity, administrative structure and systems are adequate for project FM purposes. In ISDEM, FM staff with appropriate skills and experience will be identified, assigned and/or contracted to manage the FM aspects specifically associated with the project.

(iii) The implementation of the Subproject Grants by the Municipalities will be governed by a Municipal Fiduciary Framework (MFF), which is part of the Municipal Framework Agreement (MFA), compri~ing~~:(i) specific types of capital investment and expenditures eligible under the program; (ii) directives instructing Municipalities on how to access, spend and account for the use of program funds; (iii) appropriate approval procedures to ensure that the proposed uses of funds are appropriate and qualify under the program; and (iv) assurance on the use of funds. The primary responsibility for monitoring that Subproject Grants are disbursed and accounted for in accordance to the

30 The composition of the MFF may be revised and adjusted as needed during the implementation of the Project in order help ensure smooth implementation and achievement of the PDO. 83 MFF will be with FISDL, while the Bank will also monitor the overall use of Project financing and the achievement of the Project development objectives through Project audits.

Country Issues

4. The Country Financial Accountability Assessment (CFAA) and most recently the Public Expenditure Financial Assessment mention that the government of El Salvador has built strong foundations for a well-functioning budget management system and that the Integrated Financial Management System (SAFI) has helped the production of timely, reliable and fairly complete information on government spending and audit trails. External funding has been effectively incorporated into the budget management system, but executing entities usually still maintain separate subsidiary accounts for loan and grant funds (mainly to meet specific reporting requirements of donors).

5. As reported in the CFAA, the existence of separate bank accounts is allowed in El Salvador for internationally funded projects, but the Treasury is generally assigned the responsibility of managing these accounts. Therefore, while executing entities generally maintain separate subsidiary accounts for loan and grant funds, the transfers from General Treasury Directorate (DGT) follow the same mechanism used for local funds. In terms of financial administration, the arrangements generally differ from entity to entity, and from project to project. For some projects, the Institutional Financial Unit (UFI) plays a major role in the administration of project funds, while for others, the administration of project funds is performed by the project implementation unit.

Risk Assessment Summary

Risk Risk Risk Mitigating Measures Incorporated into Project Condition of Rating Design NegotiationsIBoard or Effectiveness (Y/N)?

Level Entity M FISDL has ongoing experience managing projects financed Level by the World Bank, for which it has implemented suitable administrative structures and systems. This puts it in an advantageous position to carry out, with relative ease, the financial management tasks associated with the proposed Project. Staff capacity, administrative structure and systems are adequate for Project FM purposes. I ISDEM, on the other hand, has relatively little experience I 84 Risk Risk Risk Mitigating Measures Incorporated into Project Condition of Rating Design NegotiationsIBoard or Effectiveness (Y/N)? with Bank processes and procedures and has required additional assistance during preparation and will need support during implementation. FM staff with appropriate skills and experience will be identified and/or contracted to manage the FM aspects of the project and facilitate project implementation. Project S Given the Municipal Subproject Grants components and the Negotiations: Draft Level participation of Municipalities in the implementation of the Operational Manual, Project, a strong Municipal Fiduciary Framework to ensure Municipal Fiduciary the correct use of funds and achievement of development Framework for Municipal objectives has been designed and will be implemented. implementation and TORS for annual financial, procurement It is important to note that FISDL has ongoing experience and technical audits at the with Conditional Cash Transfer program, as well as Municipal level. experience in working with grants to Municipalities. Control ris Budgeting S It is important to note that both FISDL and ISDEM have in Negotiations: Draft Accounting place strong budgeting and accounting policies. However, Operational Manual reviewed Internal the internal control system at the Municipal level is weak by and acceptable to the Bank Control with little oversight from central entities.

Specific FM processes and procedures have been designed in order to guarantee that Project funds are used economically and efficiently. These processes and procedures are reflected in the Operational Manual and the Municipal Fiduciary Framework.

The Project will use the established processes and procedures in FISDL for monitoring the activities at the Municipal level. Funds Flow M A customized SOE format for Municipal grants has been Negotiations: design of developed. customized SOE format for transfers to Municipalities To facilitate the flow of funds, two separate Designated Accounts (DAs) will be opened (one for FISDL and the other for ISDEM). In addition, for Component 1, Municipal Subproject Grants will be made directly by DGT upon request from FISDL. Financial M The format of the IFR has been developed. Each entity will Negotiations: Agreed format Reporting, prepare its respective IFR. for the IFR Auditing External audits for the project and at the Municipal level Negotiations: Audit TORS will be contracted. agreed with the Bank and included in Operational Manual

An acceptable audit fm selected four month after - effectiveness FM Risk S

85 Weaknesses and Action Plans 7. Key actions have been defined and agreed with each of the participating entities to strengthen FM arrangements and are detailed below. FM processes and procedures have been reviewed in the Operational Manual.

I Action I Responsible Entity I Completion Date3' I

ISDEM 1. Preparation of Operational Manual ISDEM Done 2. Finalization of the format for unaudited financial ISDEM Done reports (IFRs) 3. Finalization of the TORS for the annual financial ISDEWISDL Done audit for the Project in coordination with FISDL 4. Providing training in FM and disbursement WB By effectiveness 5. Fiduciary training provided to the Municipalities ISDEMFISDL After effectiveness

Implementing Entity, Organizational Arrangements and Staffing

FISDL

8. FISDL was created in 1990 in an effort to eradicate extreme poverty in El Salvador, through the implementation of social and productive investments, as well as the promotion of sustainable local development. FISDL is currently implementing the Program Comunidades Solidarias Rurales formerly Red Solidaria) and has extensive experience with project implementation and management of donor-financed projects - it had been selected to implement the Social Protection Project, and has successfully implemented WB and IDB projects in the past. It has an established structure, which includes an institutional Financial Unit (UFI). The UFI is fully staffed and has experience managing fiduciary aspects of donor-financed projects. For Component 1 of the Project, the UFI will be directly responsible for: (i) budget formulation and monitoring; (ii) cash flow management (including requesting transfer of funds to Municipalities from DGT and submitting loan withdrawal applications to the Bank); (iii) maintenance of accounting records (iv) supervision of Project implementation at the Municipal level; (v) preparation of in-year and year-end financial reports, (vi) administration of underlying information systems; and (vii) arranging for execution of Municipal audits, in coordination with ISDEM. The UFI's capacity is adequate for managing the FM aspects of the proposed Project and no additional staff is expected to be needed for the proposed Project.

3' This column solely presents the estimated completion date, not necessarily an indication of legal conditions. 86 MuniciPalities

9. The implementation of Municipal Subproject Grants will be governed by a Municipal Fiduciary Framework compri~ing:~~(i) specific types of capital investment and expenditures eligible under the program; (ii) directives instructing Municipalities on how to access, spend and account for the use of program funds; (iii) appropriate approval procedures to ensure that the proposed uses of hnds are appropriate and qualify under the program; and (iv) assurance on the use of funds. The primary responsibility for monitoring that Municipal Subproject Grants are disbursed and accounted for in accordance to the Municipal Fiduciary Framework will be with FISDL. The initial Municipal Subproject Grant transfer to the Municipalities (estimated to be 50% of the total assigned amount to each Municipality) will be conditioned on the Municipality achieving minimum administrative capacity, which will include: (i) mandatory fiduciary training

' received by the Municipalities before disbursement of Component 1; (ii) signing an agreement with FISDL for participation in the program; (iii) opening a separate restricted Municipal project bank account for the program in a commercial bank; and (iv) submission of an initial investment plan. The subsequent disbursement to Municipalities for Municipal Subproject Grants (estimated to be second 50% of the total assigned amount) will be based on the implementation of the approved investment plan and specific subprojects as measured by 50% expenditure of first transfer to restricted Municipal project account. FISDL will be responsible for ensuring compliance by Municipalities. Non-compliance by Municipalities to the Municipal Fiduciary Framework will result in penal action wherein the defaulting Municipality will be ineligible for receipt of program hnds until the issue is resolved and any ineligible expenditure amounts refunded to the Bank by the Municipality or MH.

10. At the Municipal level, the Accountant within the Municipal UFI, who is routinely responsible for all the financial and administrative matters will also account for program funds. All program funds will be accounted for within the existing accounting and reporting framework of the Municipalities, which allows for segregation of information by sources of financing.

ISDEM

11, ISDEM was created in 1987 to provide assistance in the area of Municipal planning, administration, and development. Its main goal is to provide technical, administrative, financial and planning assistance to Municipalities to help them achieve their objectives. It has no prior experience with managing Bank financing, but has some experience with bilateral financing. As is the custom in ISDEM, a unit will be set up to coordinate the technical and administrative aspects of the Project. FM staff with appropriate skills and experience will be identified and/or contracted for the unit and will coordinate with the UFI for the financial aspects of the Project. For Components 2, 3, and 4 of the Project, ISDEM, with the help of the Project Unit and the UFI, will be directly responsible for: (i) budget formulation and monitoring; (ii) cash flow management (including payments to contractors and consultants, and submitting loan withdrawal applications to the Bank); (iii) maintenance of accounting records; (iv) preparation of in-year and year-end financial reports; (v) administration of underlying information systems; and (vi) arranging for execution of annual Project financial audits and semi-annual Project operational audits.

32 The composition of the MFF may be revised and adjusted as needed during the implementation of the Project in order help ensure smooth implementation and achievement of the PDO. 87 Planning, Budgeting and Financial Reporting

Planning and Budgeting

12. The preparation of the annual program and budget will follow local regulations established by the Ministry of Finance, and specific regulations and instructions that may be issued by the implementing institutions. During the second quarter of each year, each implementing entity will prepare its tentative investment program for the next year. The program will be incorporated into the public investment information system and once approved will be reflected in the annual budget proposals for each implementing agency. These budgets, in turn, will be incorporated into the national budget for the President’s submittal to the National Assembly in September.

13. The Loan Agreement and detailed project cost tables will be the main inputs for project budgets and counterpart funding estimates.

14. On the basis of the approved budget, each implementing entity will adjust as needed its project annual work plan (POA) and procurement plan, which will be reviewed by the WB.

Accounting Policies and Procedures

15. The main FM regulatory framework for the Project will ‘consist of (i) the Financial Management Law (Ley AFI) which governs the formulation, approval, execution and monitoring of the budget, the treasury system operations, the government accounting system and the investment and public credit functions; (ii) the annual Law of the General Budget of the State; (iii) the Ministry of Finance regulations and manuals; (iv) FISDL’s manual of financial procedures and practices; and (v) ISDEM’s financial manual.

16. Project-specific FM arrangements that are not contemplated in the documents cited have been documented in a concise FM section of the Project’s Operational Manual. Among others, specific references are made to: (i) the internal controls appropriate for the Project; (ii) the formats of Project financial reports; (iii) auditing arrangements; and (iv) the Municipal Fiduciary Framework to be implemented at the Municipal level.

Information Systems

17. FISDL will record financial transactions using its integrated information system, which includes budgeting, treasury, and accounting. It will be adapted to extract data from the accounting system so as to prepare project financial statements.

18. ISDEM will record financial transactions directly into the Government’s Integrated Financial Management System (SAFI), as well as a set of subsidiary ledgers to prepare Project financial statements.

Financial Reports

19. On a semi-annual basis, for monitoring purposes only, FISDL and ISDEM will prepare for its respective component an unaudited interim financial report (IFR) containing at least: (i) a statement of sources and uses of funds and cash balances (with expenditures classified by 88 subcomponent); (ii) a statement of budget execution per subcomponent (with expenditures classified by the major budgetary accounts); and (iii) a reconciliation of the advance to the Designated Account. ISDEM will be responsible for consolidating the information into a single report and submitting it to the Bank not later than 45 days after the end of each semester.

20. On an annual basis, FISDL and ISDEM will prepare for its respective Components, Project financial statements including cumulative figures, for the year and as of the end of that year, of the financial statements cited in the previous paragraph. The financial statements will also include explanatory notes in accordance with the Cash Basis International Public Sector Accounting Standard, and the entity’s assertion that loan funds were used in accordance with the intended purposes as specified in the Loan Agreement. These financial statements, once audited, will be submitted to the WB not later than six months after the end of the Government’s fiscal year (which equals the calendar year).

21. Working papers for the preparation of the semi-annual and annual financial statements will be maintained in the Unit’s premises, and made easily accessible to WB supervision missions and to external auditors.

Flow of Funds - Disbursement

22. Two Designated Accounts (DAs) will be opened in US Dollar by the DGT for the project. The first DA will be for the implementation of Component 1 (FISDL) and the other for the implementation of Components 2, 3 and 4 (ISDEM). Component 1 - FISDL

23. WB Disbursement Methods. Considering the results of the assessments, the following disbursement methods may be used by FISDL to withdraw funds from the loan: (a) reimbursement, (b) advance, and (c) direct payment method.

24. WB Designated Account. Under the advance method and to facilitate project implementation, FISDL will have access to a Designated Account (DA) in US dollars which will be opened by the General Treasury Directorate (DGT) in the Central Reserve Bank (BCR) to be used exclusively for deposits and withdrawals of loan proceeds for eligible expenditure. Funds deposited into the DA as advances will follow Bank’s disbursement policies and procedures, as described in the Disbursement Letter and Disbursement Guidelines.

25. As needed, FISDL will request DGT to make transfers to Municipalities to finance the implementation of Municipal Subproject Grants.

26. The ceiling for advances to be made into the FISDL DA would be US$32,‘000,000. The reporting period to document eligible expenditures paid out of the DA is expected to be on a semi-annual basis.

27. Supporting documentation for documenting Project expenditures under advances and reimbursement methods would be Statements of Expenditures (SOEs). A customized SOE, in the format included as an attachment to the Disbursement Letter, will be used for Municipal Subproject Grants to eligible participants (Le., Municipalities).

89 28. All consolidated SOEs documentation will be maintained for post review and audit purpose for up to three years after the closing date of the project or for 18 months after receipt by the Bank of an acceptable final financial audit, whichever is later.

Transfers to Municipalities

29. Criteria, noms and procedures governing the use of funds transferred to the Municipalities will be included in the MFF which will be presented to the Municipalities before the first disbursement takes place and included in the Operational Manual of the Project. In short, based on a formula currently utilized for the existing government transfer program FODES, each Municipality has been assigned an amount (see Annex 4, Appendix 1). Two transfers of 50% each will be made to a Municipal Project restricted bank account jointly held by the Municipalities and FISDL. The first disbursement will be conditioned on the Municipality obtaining minimum capacity, which includes: the Municipality receiving the fiduciary training; signing a Municipal Framework Agreement with SAE (Secretaria de Asuntos Estrategico); opening the Municipal Project restricted bank account; and providing the plan for the use of the assigned amount. The second disbursement will be based on demonstration of 50 percent execution of the first disbursement as determined by the expenditures from the Municipal Project restricted bank account. Transfers to the Municipal Project restricted bank account will be made directly fiom Ministry of Finance (Hacienda) upon FISDL’s request. Upon approval of each Municipal Subproject Grant by FISDL, FISDL will approve direct payments from the account and/or three transfers from the Municipal Project restricted bank account to the Municipal Project Operational Account, maintained by the Municipality for Subproject Grant payments.

30. As part of the MFF, a Municipal audit will be contracted to verify the use of funds and the completion of development objectives at the Municipal level. The MFF also includes the supervision of Municipal activities by FISDL using its existing mechanisms, as well as a reinforced social audit process, which will include publication of assigned amounts. Component 2,3 and 4 - ISDEM

3 1. WB Disbursement Methods. Considering the results of the assessments, the following disbursement methods may be used by ISDEM to withdraw funds from the loan: (a) reimbursement, (b) advance, and (c) direct payment.

32. WB Designated Account. Under the advance method and to facilitate project implementation, ISDEM will have access to a Designated Account (DA) in US dollars which will be opened by the DGT in the BCR to be used exclusively for deposits and withdrawals of loan proceeds for eligible expenditures. Funds deposited into the DA as advances will follow Bank’s disbursement policies and procedures, as described in the Disbursement Letter and Disbursement Guidelines.

33. As needed, ISDEM will send periodic requirements to the DGT for transfers from the DA to the Project’s operational account maintained by ISDEM in a commercial bank. ISDEM will issue checks or make deposits to providers for eligible expenditures fiom this account.

34. The ceiling for advances to be made into the ISDEM DA would be US$1,500,000. The reporting period to document eligible expenditures paid out of the DA is expected to be on a quarterly basis. 90 35. Supporting documentation for documenting project expenditures under advances and reimbursement methods would be records evidencing eligible expenditures (e.g. copies of receipts, invoices) for payments for consultant services against contracts valued at US$50,000 or more for firms, and US$20,000 or more for individuals; for payments for goods against contracts valued at US$l 00,000. For all other expenditures below these thresholds, supporting documentation for documenting Project expenditures will be Statements of Expenditures (SOEs).

36. All consolidated SOEs documentation will be maintained for post review and audit purpose for up to three years after the closing date of the project or for 18 months after receipt by the Bank of an acceptable final financial audit, whichever is later.

37. Direct Payments supporting documentation will consist of records (e.g., copies of receipts, supplier/ contractors invoices). The minimum value for applications for direct payments and reimbursements will be US$200,000.

38. Disbursement Deadline Date. Four months after the closing date specified in the Loan Agreement.

39. Retroactive Financing. The Bank would finance up to a maximum of US$3,000,000 for eligible expenditures incurred after April 21,2010, but no more than one year from signing.

Disbursement Table 40. The following table, as reflected in the loan agreement, represents the categories of eligible expenditures that may be financed out of the proceeds of the Loan.

Amount of the Loan Percentage of Expenditures Category Allocated to be financed (expressed in Dollars) (inclusive of Taxes) (1) Municipal Subproject Grants under Part A of the Project 52,750,000 100% (2) Goods, Non-Consultant Services, consultants’ services, Operating Costs, and Training under Part B of the Project 19,720,000 100% services, Operating Costs, and Training under Part C of the Project 1,630,000 100% (4) Goods, Non-Consultant Services, consultants’ services, Operating Costs, and Training under Part D of the Project 5,100,000 100% (5) Front-end Fee* 200,000 100% (6) Unallocated 600,000 100% TOTAL AMOUNT 80,000,000

Audit Arrangements

41. Internal Audit. In the course of its regular internal audit activities vis-A-vis the institutional budget, internal auditors from the implementing entities may include project activities in their annual work plans. If such audits occur, the implementing entity will provide the Bank with copies of internal audit reports covering project activities and financial transactions. 91 42. External Audit. FISDL and ISDEM will prepare the annual Project financial statements for its respective Components, which will be audited following International Standards on Auditing, by an independent firm and in accordance with terms of reference (TORS), both acceptable to the Bank. The audit opinion covering Project financial statements will contain a reference to the eligibility of expenditures. A single audit firm will be hired which will audit each component of the Project and provide a single report. The annual financial audit report will be required to include a section on the state of the internal control in each of the implementing entities. ISDEM will submit the annual financial audit report to the Bank no later than 6 months after the end of the fiscal year.

43. The audit work described above can be financed with loan proceeds. ISDEM will arrange for the contracting of the first external audit within four months after Loan Effectiveness. The first external audit contract would be expected to cover at least two years.

44. In addition to the annual financial audit, ISDEM, in coordination with FISDL will contract a semi-annual operational audit on the preparation, payment and clearance of Municipal Subproject Grants.

Audit Report Due Date 1) Project specific financial statements (including June 30 on the Designated Account statement) 2) SOE June 30 3) Semi-annual Operational Audit December 3 1/June 30

45. WB FM Supervision Plan. A World Bank Financial Management (FM) Specialist may perform a supervision mission prior to effectiveness to verify the implementation of FM arrangements. After effectiveness, the FM Specialist must review the annual audit reports, should review the financial sections of the semi-annual IFRs, and should perform at least two to three supervision missions per year.

92 Annex 8: Procurement Arrangements EL SALVADOR: Local Government Strengthening Project

A. General

1. Procurement for the proposed project would be carried out in accordance with the World Bank’s “Guidelines: Procurement under IBRD Loans and IDA Credits” dated May 2004, revised October 2006; and “Guidelines: Selection and Employment of Consultants by World Bank Borrowers” dated May 2004, revised October 2006, and the provisions stipulated in the Legal Agreement. The general description of various items under different expenditure categories are described below. For each contract to be financed by the Loan, the different procurement methods or consultant selection methods, the need for prequalification, estimated costs, prior review requirements, and time frame are agreed between the Borrower and the Bank project team in the Procurement Plan. The Procurement Plan will be updated at least annually or as required to reflect the actual project implementation needs and improvements in institutional capacity.

2. Procurement of Works: Works to be procured under this project would include investment subprojects financed under Component 1 (anticipated investments include water and sanitation, road repair and maintenance, solid waste disposal, electrification). Eligibility of such subprojects would be verified against all the conditions set in Annex 4. Given the transfer amounts that each participating Municipality will receive, no International Competitive Bidding (ICB) processes are foreseen during implementation of the Project, although, if needed, procurement shall be done using Bank’s Standard Bidding Documents (SBD) for all ICB processes. Procurement of works under National Competitive Bidding (NCB) and Shopping procedures shall be done using simplified SBD agreed with, or satisfactory, to the Bank. Such SBD will be included as annexes in the Project’s Operational Manual and in the Municipal Administrative Guidelines.

3. Procurement of Goods: Goods to be procured under this Project would include IT equipment and furniture included for institutional strengthening of the Salvadoran Institute for Municipal Development (ISDEM). Procurement of goods will be done using Bank’s SBD for all ICB processes; procurement of goods under NCB and Shopping procedures shall be done using SBD agreed with, or satisfactory, to the Bank. Such SBD will be included as annexes in the Project’s Operational Manual,

4. Procurement of non-consulting services: Non-consulting services for the Project would include logistics for capacity-building events, printing of training materials, media campaigns, and related services for institutional strengthening components. Procurement of non- consulting services will be done using SBD and simplified formats agreed with or satisfactory to the Bank for ICB, NCB and Shopping procedures, respectively. Said SBD and simplified formats will be part of the Project’s Operational Manual.

5. Selection of Consultants: Selection and employment of consultant firms and individual consultants will be needed to (i) provide capacity building activities to administrative staff in Municipalities, (ii) provide technical and administrative assistance to Municipalities to help them achieve project objectives; (iii) consultancies related with institutional strengthening of ISDEM, and (iv) design and development of relevant systems. If deemed necessary, and after competitive 93 selection processes, ISDEM would retain services of consulting firms/NGOs through Indefinite Delivery Contracts (Price Agreements) to provide technical and administrative assistance to Municipalities. Short lists of consultants for services estimated to cost less than $200,000 equivalent per contract may be composed entirely of national consultants in accordance with the provisions of paragraph 2.7 of the Consultant Guidelines. Regardless of the method used or the estimated cost of the contracts, selection and contracting of consultant firms will be done using the Bank’s Standard Request for Proposals (SRfP). Selection and contracting of Individual Consultants will be done using a simplified request for curriculum vitae and a contract model agreed with, or acceptable, to the Bank; if feasible, processes for the selection of Individual Consultants shall be made public. Such documents shall be part of the Project’s Operational Manual.

6. Operational Costs: Operating costs refer to reasonable recurrent expenditures that would not have been incurred by the implementing agencies in the absence of the Project. They may include operation and maintenance of office equipment purchased under the Project, as well as nondurable/consumable office materials, as needed for the implementation of the Project. All these activities would be procured using the implementation agencies’ administrative procedures, which were reviewed and found acceptable to the Bank.

B. Assessment of the agency’s capacity to implement procurement

7. . Procurement activities for Component 1 of the proposed Project will be carried out by the 262 participating Municipalities, under a decentralized modality that the Social Investment Fund for Local Development (FISDL) has been using for the past 12 years. ISDEM will carry out all the procurement activities for Components 2, 3 and 4 through a Project Implementation Unit (PIU) to be established within the institution.

8. Assessments on the capacity to implement procurement actions for the Project have been carried out in FISDL and ISDEM by the Bank in January and February 2010. In addition, assessments of the capacity at the Municipal level were carried out on a sample of 10 Municipalities.

9. FISDL (i) has previous experience using Bank’s procurement guidelines, procedures and standard documents, (ii) has developed integrated systems that link effectively the planning, procurement and financial functions, (iii) has an Institutional Procurement and Contracting Unit (UACI) that is staffed with one manager and seven well seasoned procurement specialists, who have vast previous experience applying Bank’s Guidelines, (iv) has developed manuals, guidelines and related instruments to manage the procurement function in an adequate manner, and (v) makes a customarily and adequate use of Procurement Plans. FISDL will exercise its procurement responsibility for Component 1 in a decentralized modality through the 262 participating Municipalities, although, it will remain fully responsible for fiduciary aspects. FISDL’s Municipal Advisors will accompany and approve all procurement processes carried out at the Municipal level.

10. ISDEM (i) has no previous experience using Bank’s procurement guidelines, procedures or standard documents, (ii) has an Institutional Procurement and Contracting Unit (UACI) that is staffed with one manager and one assistant, although, none of them have previous experience using Bank’s Guidelines, (iii) has developed manuals, guidelines and related instruments to 94 manage the procurement function, although, said instruments apply only under the Public Administration Procurement and Contracting Law (LACAP), and (iv) does not make a customarily and adequate use of Procurement Plans. Given the aforementioned situation, and the lack of an overall capacity to adequately implement the Project, it is recommended to establish a fully integrated PIU within ISDEM; within said Unit, and among other professionals, a well seasoned Procurement Specialist should be hired under Terms of Reference previously agreed with the Bank. This professional should have previous experience applying Bank’s Procurement and Consulting Guidelines, especially the latter, given that most of the processes that ISDEM will carry-out are foreseen to comprise selecting and contracting consulting firms and individual consultants.

11. A capacity assessment of a sample of 10 Municipalities was also carried out while preparing the Project. This sample included the following Municipalities: Santa Ana; Tonocatepeque; San Vicente and San Antonio del Monte; San Jose Guayabal, Tejutla and San Luis La Herradura; and Ciudad Dolores, San Carlos and Chapeltique, corresponding each of the above mentioned groups to categories 1, 2, 3, 4 and 5 respectively, according to a study denominated “Typology of Municipalities in El Salvador”, done in 2007 by the Municipal Development and Decentralization Program (PROMUDE) and financed by the German Technical Cooperation (GTZ)33. Although such Typology does not take into account the administrative capacity of the Municipalities, the sample served to assess a good range of different types and dimension of entities at the Municipal level.

12. All Municipalities in El Salvador have been carrying out the procurement function for over 10 years. By Law, each Municipality has to have an Institutional Procurement and Contracting Unit (UACI) in place, staffed with at least one professional. This was verified in all the sample Municipalities, although, it was observed that on the smaller ones, the procurement officer has also to perform other functions (accountant, treasurer, etc.). All procurement staff at ’ the Municipal level have easy access to training in LACAP procedures given by the Public Administration Procurement and Contracting Ruling Unit (UNAC) within the Ministry of Finance, having also access to particular assistance given by such Unit and by ISDEM. Therefore, all of the procurement officers in the sample Municipalities were found to be well acquainted with the LACAP rules and procedures. The downside that was assessed is that, recently, the Central Government approved a Law that allows the Majors to directly appoint the procurement officer, not recognizing this position within the Civil Service Law and, therefore, introducing the risk of losing the trained professionals.

13. Even though Municipalities have no previous experience with Bank’s procurement, all of them had, at some point, received funds from FISDL, and therefore have experience using SBD, evaluation formats, etc.; they also have experience in procurement planning.

33 Study done in 2007 by the Dr. Guillermo Manuel Ungo Foundation (FUNbAUNGO), with the participation of the Presidency’s Technical Secretariat (ST), the Salvadoran Institute for Municipal Development (ISDEM), the Social Investment Fund for Local Development (FISDL), and financed by the German Technical Cooperation (GTZ). Based on the criteria of (i) population, (ii) urban degree, (iii) basic unsatisfied needs index, and (iv) number of tax payers, all 262 Municipalities were ranked in categories 1 through 5; ending up with 7 Municipalities in Category 1, 14 Municipalities in Category 2, 45 Municipalities in Category 3, 91 Municipalities in Category 4 and 105 Municipalities in Category 5. 95 14. A dedicated procurement section is part of the Project’s Operational Manual. Said section includes general procurement procedures, as well as detailed procedures for every method for the procurement of works, goods and non-consulting services, and for the selection and employment of consulting firms and individual consultants. Acceptable SBD and simplified formats for (i) the procurement of works, goods and non-consulting services using NCB and Shopping procedures, and (ii) for the selection and employment of individual consultants; and a formal guideline for record-keeping and filing, are included as Annexes of the aforementioned Manual. A Municipal Administrative Guideline should be drawn fiom such Manual, which shall include all the detailed procedures for performing procurement at the Municipal level.

15. As a condition for first disbursement of transfers to Municipalities in Component 1, participation of all Municipal procurement officers in a capacity building activity organized by ISDEM shall be mandatory. To this end, ISDEM shall select and hire a consulting fiduniversity, under terms of reference acceptable to the Bank34. Such terms of reference shall be agreed with the Bank prior negotiations of the Loan Agreement, and shall include precise outputs and outcomes expected from the training sessions.

16. It was agreed with ISDEM that the Bank’s Procurement Plan Execution System (SEPA), should be implemented for Components 2, 3 and 4 of the proposed project. The Bank will organize and carry out Procurement and SEPA workshops to strengthen the PIU’s procurement staff capacity in specialized issues (procurement of goods and non-consulting services, selection and employment of consulting firms and individual consultants and SEPA).

17. Given (i) the overall experience of FISDL on decentralized projects, and (ii) the size of the amount of fund planned to be transferred to Municipalities, the overall project risk for procurement in Component 1 at appraisal, is established as MODERATE. On the other hand, given (i) the lack of experience of ISDEM applying Bank’s procurement Guidelines and procedures, (ii) the type and size of processes -mostly selection of consulting firms-that will be needed in Components 2, 3 and 4, the overall project risk in said Components at appraisal is established as SUBSTANTIAL. It is expected that after mitigation actions are properly taken, the aforementioned risk is lowered to MODERATE.

C. Procurement Plan

18. ISDEM will develop detailed Procurement Plan for the first 18 months for the implementation of Components 2, 3 and 4 of the Project. Said Plan will provide the basis for the use of different procurement methods, and for the Bank’s review process. This plan has been agreed between the Borrower and the World Bank on April 21, 2010. As soon as the Project is effective, the Procurement Plan will be available at the SEPA’s portal. The Plan will also be available in the Project’s database and on the Bank’s external website. The Procurement Plan will be updated in agreement with the Project Team annually, or as required to reflect the actual project implementation needs and improvements in institutional capacity.

34 As for procurement, training shall at least include (i) general procurement principles, including prevention of fraud and corruption practices, (ii) procurement of works using NCB, shopping and force account methods, (iii) practical use of standard bidding documents, simplified formats of invitation to provide quotations, evaluation formats, etc. 96 19. As for Component 1, FISDL shall validate a detailed Procurement Plan for each Municipality before authorizing a second disbursement of transfer finds. Such Plan shall include all the proposed subprojects, each contract estimate amount, the related method of procurement as well as an estimate of the main dates of the process. The Bank can review such Procurement Plan as to assure the eligibility of sub-projects.

D. Frequency of Procurement Supervision

20. For Components 2, 3 and 4 of the Project, and in addition to the prior review supervision to be carried out from Bank offices, the capacity assessment of the Implementing Agency has recommended semi-annual supervision missions to visit the field to carry out post-review of procurement actions. One out of every 10 contracts should be post-reviewed when applicable.

2 1. For Component 1, detailed provisions that include specialized review of procurement processes will be included in the Terms of Reference to be used for selecting and contracting the external audit for this Component. Such audit exercise shall be performed twice a year, and shall include the review of processes followed by each participating Municipality at least once a year. Procurement Post Review exercises carried out by the Bank shall include a sample of processes reviewed by the external auditor. Such sample shall be in the order of 1 out of every 20 contracts, but could be larger if the conclusions of the auditor are proven wrong. The aforementioned Terms of Reference shall be agreed with the Bank prior to negotiations of the Loan Agreement.

E. Details of the Procurement Arrangements Involving International Competition

22. Thresholds for the use the different procurement methods and recommended thresholds for Bank prior review are given in Table A8.1,

Table A8.1: Thresholds for Proc ement Methods and for Recommended Bank Review

Works: >=US$5,000,000 ICB All =US$250,000 NCB First Two =US$250,000 ICB All = US$25,000 NCB First Two

35 Direct Contracting of Works and Goods, regardless of the contract amount, shall comply with all the provisions stated in paragraphs 3,.6 and 3.7 of the Procurement Guidelines and, therefore, shall be subject to Bank’s prior review. 36 Sole Source selection of Consultants, regardless of the contract amount, shall comply with all the provisions stated in paragraphs 3.9 to 3.13 of the Consultant Guidelines and, therefore, shall be subject to Bank’s prior review. 97 Individual Consultants: Any Estimated Cost ss All >=US$50,000 IC All

ICB = International Competitive Bidding. NCB = National Competitive Bidding. SS = Sole Source. QCBS = Quality- and Cost-Based Selection QCS = Quality-Based Selection FBS = Selection under Fixed Budget LCS = Least-Cost Selection CQS = Selection Based on the Consultant’s Qualifications IC = Individual Consultant.

23. The Procurement Plan will define the contracts that are subject to Bank prior review based on the recommended thresholds given in Table A8.1. Such recommended thresholds could be revised at every update of the Procurement Plan.

24. The following is the list of contract packages identified to date to be procured following ICB procedures:

25. The following is the list of Consultant services identified to date that will be selected with short-lists composed of international firms:

2 I Operational Audit 300,000.00 1 SBCC 1 Prior 1 NOV-20 10

26. Short lists composed entirely of national consultants: Short lists of consultants for services estimated to cost less than US$200,000 equivalent per contract may be composed entirely of national consultants in accordance with the provisions of paragraph 2.7 of the Consultant Guidelines.

98 Annex 9: Economic and Financial Analysis EL SALVADOR: Local Government Strengthening Project

1. The Project will focus on strengthening local governments both in terms of their investment outreach and their local planning and management capacity. All 262 local governments would be eligible for investment support and training, whereas a sub-set of them would receive systematic capacity strengthening. Annex 4 describes the major activities of the various components of the Project. Major investment categories include: water and sanitation infrastructure; rural roads and town streets; electrification and solid waste management and disposal. Project benefits will essentially consist of increased outreach and sustainability of public infrastructure and services provided by local governments.

2. The financial analysis is based on assessing the capacity of local governments to allocate incremental resources for maintenance and operation of project-funded investments. In turn, the economic analysis is based on assessing the minimum benefit required from project-funded investments, to .cover both investment costs and associated recurrent costs. The major data sources are: for the financial analysis, current Municipal assessments conducted with ten representative local governments (in project files); and for the economic analysis, a World-Bank Strategy Report on Recent Economic Developments in Infrastructure3’, proposals of representative investment subprojects (in project files), and data from yearly surveys on household expenditures, used to update the consumer price index (CPI).

Financial Feasibility

3. The financial analysis is based on assessing the capacity of local governments to allocate incremental resources for maintenance and operation of project-funded investments. Based on preliminary expenditure and revenue assessments of the ten representative Municipalities, the relative distribution of funds was estimated. Table 1 presents average figures of such estimates.

Table 1. Relative distribution of funds received by a sample of local governments

Own resources 28% I 25% I 25% I 26% Total 100% 1 100% I 100% I 100%

4. Independent from the actual value of expenditures, the relative distribution of funds by cost categories (in Table 1) clearly shows that local governments spend on average more than half of available resources on recurrent costs (72%), including personnel, infrastructure . 37 World Bank. El Salvador Recent Economic Developments in Infrastructure - Strategy Report (REDI-SR). Report Number 37689-SV. October, 2006. 99 maintenance and operation expenses. Thus, if local governments were to maintain the same ratio of investment costs to recurrent costs, the incremental investment capacity facilitated by the Project would bring about a parallel increase in recurrent costs, which local governments need to cover either from direct transfers from the central government of from resources collected through Municipal taxes of service tariffs. However, if we look at the funding sources for recurrent costs (in Table l), direct transfers from the national government (FODES) are largely insufficient to cover current expenditures on personnel, infrastructure maintenance and service operations. Around 25% of recurrent costs are financed with resources directly collected by local government. In light of this, the Project must ensure that effective feasibility appraisal mechanisms exist in pre-investment stage, to ascertain that the Project will only fund investment proposals which can be sustained into the future, either through increased Municipal taxes or user tariffs, specific to funded investments.

Economic Feasibility

5. Public infrastructure and services are feasible if the benefits to the beneficiary population are greater than the costs incurred to provide them. For the purpose of this analysis, the minimum benefit or impact of any given investment subproject was defined as the annual benefit which will cover investment costs, recurrent costs and opportunity costs of capital, thereby generating a Net Present Value equal to zero. Therefore, this minimum annual benefit of a representative investment subproject is calculated as the annual maintenance and operation costs, plus an Annuity with present value equal to the subproject investment cost, the amortization period equal to the economic life of the investment, and interest rate equal to the opportunity cost of capital (assumed to be 12% per annum). Once the minimum annual benefit is estimated, some evidence is provided on the likelihood of generating such a benefit.

6. Investment, maintenance and operation costs of likely investments to be funded by the Project were obtained from: the above aforementioned World-Bank Strategy Report on Infrastructure Service Provision in El Salvador and proposals of representative investment subprojects. Evidence of willingness to pay, and therefore benefits recognition, are based on data obtained from yearly surveys on household expenditures, used to estimate the Consumers’ Price Index (CPI) in El Salvador. Specifically household expenditures which relate to electricity provision include: electricity payments and goods for illumination. Household expenditures which relate to water provision and sanitation essentially include water and sanitation payments. Household expenditures which relate to roads and streets include: operation of private transportation facilities, and goods and services for house cleaning. Household expenditures which relate to solid waste disposal essentially include goods and services for house cleaning. Table 2 presents average estimates on investment costs, maintenance and operation, minimum expected benefit and evidence of benefit recognition for the major investment categories foreseen by the Project38.

38 Investment, maintenance and operation costs of likely investments to be funded by the project were obtained from the World-Bank Strategy Report on Infrastructure Service Provision in El Salvador, and proposals of representative investment subprojects. Evidence of willingness to pay is based on data obtained from yearly surveys on household expenditures, used to estimate the Consumers’ Price Index (CPI). 100 Table 2. Costs and Minimum Expected Benefits from Representative Investments

Project Investment Categories Electricity 1 Water I Sanitation 1 Roads and I Solid Concept

’ Costs obtained from REDI-SR (World Bank, 2006) and some project proposals, but updated based on changes of CPI. Operation and maintenance costs, plus annuity derived from relevant investment cost, economic life and 12% interest rate. Average related household expenditures (IPC-DIGESTYC, December 2009). Items differ across categories.

7. As shown in Table 2, investment costs per beneficiary household range from US$130 to 1,200, whereas operation and maintenance costs tend be around US$30 per household. Therefore, local taxes or service tariffs needed to cover future recurrent costs (operation and maintenance) seem to be affordable - less than US$3 per month, or 8 cents per day. In terms of benefits, project funded investments need to generate tangible benefits such as savings on household expenditures, or intangible benefits such as improved quality of life of at least: 51 cents per household/day on electricity provision, which represents 35% of average expenditures on electricity and illumination; 45 cents per household/day on water provision which represents 87% of average expenditures on water and sanitation; 35 cents per householcUday on sanitation which represents 68% of average expenditures on water and sanitation; 82 cents per household/day on roads and streets which represents 27% of average expenditures on operation of private transportation facilities and household cleaning; and 14 cents per household/day on solid waste disposal which represents 8% of average expenditures on household cleaning.

8. Expenditures on electricity, water and sanitation are clear indicators of households’ willingness to pay, and thus indicators of benefit recognition for respective investment categories. Thus, they represent good evidence of the likelihood of achieving the minimum benefits. Expenditures on operation of private transportation means and household routine cleaning are partial indicators of households’ willingness to pay for roads and streets, since they are likely to be reduced with investments aimed to improve their condition3’. Even though, we cannot ascertain that such expenditures would be reduced by 27% as a result of improvements of roads and streets, there is a fair likelihood that this might happen. The same argument can be made with respect to expenditures on household cleaning and investments on solid waste disposal, especially considering that expenditures should only be reduced by 8% to generate the minimum benefits.

39 Road improvements are likely to reduce expenditures on operation private transportation facilities, whereas streets’ improvements are likely to reduce expenditures on’house cleaning and maintenance. 101 Annex 10: Safeguard Policy Issues EL SALVADOR: Local Government Strengthening Project

Summary of Environmental Assessment

1. Overview. The Project will provide infrastructure investments under Components 1. These investments are expected to be relatively small-scale given that the average range of funding is between US$lOO,OOO to US$300,000. Their environmental impacts are expected to be neutral or I positive given that many of the anticipated sub-project investments will improve water, sanitation, and solid waste collection and management in Municipalities throughout El Salvador. The Social and Local Development Investment Fund (FISDL) is a national level agency that has regional sub-agencies for social development project design and implementation.

2. Project Summary. Component 1 is the investment component of the Project and seeks to support Municipalities in reducing the financial gaps generated by the financial crisis of recent years. The Municipal sub-projects would be small to medium-scale (ranging from US$50,000 to US$500,000) and demand-driven based on the priorities they establish for investment. Components 2 and 3 involve primarily technical assistance for Municipal strengthening in regard to Municipal management, and to develop plans and pre-investment studies for Municipal investment.

3. From the Municipal diagnostic for a sample of 10 representative Municipalities in the country, initial demand from Municipalities and their communities suggest that the project would invest in five types of small to medium-sized infrastructure projects (US$SOk to US$SOOK): (1) small water and wastewater systems; (2) small electric (<66kV) power provision; (3) solid waste management and (4) rural roadibridge improvements (existing ones). 4. Project Location. The Project geographical scope is the entire country. It is expected that 262 Municipalities will participate ranging from urban to rural. El Salvador is a densely populated country with most natural ecosystems significantly transformed. In addition, it is prone to natural disasters including hurricanes, seismic, and volcanic activity which will be considered in regard to all infrastructure projects to be camed-out.

5. Potential Environmental Impacts. No large-scale, significant or irreversible impacts are expected from the proposed investments. Long term direct impacts are expected to be positive given the need to increase both water and wastewater collection in Municipalities that should generate improved sanitary conditions for Municipal inhabitants, reduce groundwater and potentially surface-water contamination. Solid waste projects similarly will seek to improve collection, safe handling, reduction in volumes, and increase recycling. Efficiency in the delivery of services should also improve and assist in reducing waste volumes and streams as well as reducing costs for poor Municipalities.

6. The size of investments is relatively small and most would be focused on improving environmental conditions in Municipalities. However, given the limitations in regard to investment size, it is expected that the Projects impacts would primarily involve short-term, small-scale, and reversible impacts during construction phase that can be mitigated through proper design and construction practices. No large scale or mechanical treatment plants will be supported. Solid waste investments will be carried-out only to improve management, collection 102 services, composting, to provide support for recycling, and to improve conditions for workers. No new dump sites will be established and will be screened out during the evaluation phase. Road projects will involve improvements of existing roads and bridges in non-critical areas. Assistance that could be deemed too sensitive or have potentially broad social and environmental negative impacts will be screened out prior to approval for funding.

7. The institutions involved in the Project include SSTD, ISDEM, and FISDL. A strategic analysis of the environmental context of Municipalities and-assessment of potential impacts of the sub-project typologies is being prepared through FISDL, which has an environmental unit to support Municipal initiatives and will work closely with ISDEM. ISDEM will be supported by FISDL that would be charged with the oversight of safeguards. FISDL has an environmental unit that has worked under several bilateral and multilateral donor safeguards frameworks (in particular through the Millennium Challenge Fund, FOMILENIO) and has the capacity to carry- out environmental assessment as well as supervise projects in the field given its presence at a national level. Other technical support may be provided through the Ministry of Public Works and other government agencies including the Ministry of Environment and Natural Resources. A mechanism for consultation and support by the environmental authorities for the licensing processes for individual sub-projects will be developed prior to appraisal and included in the environmental management framework.

8. Legal Framework and Environmental Assessment. The Environmental Law requires environmental impact assessment of projects that may have potential negative impacts on the environment. The Ministry of Environment and Natural Resources (MARN), has developed a classification for projects based on their potential impacts. This classification has been adopted formally through the Executive Agreements No. 39, 127, and 23 in 2007 and 2008. Projects are classified as “Group A” if they have low potential to generate environmental impacts and do not require an Environmental Impact Assessment (EIA) or environmental documentation. Projects fall under “Group B” if they have potential for low, moderate, or high impacts and require presentation of environmental documentation. Group B projects may be category 1, which are low impact projects that require presenting environmental documentation; or category 2 which are of moderate to high impact and are required to present full EIA’s to MARN for approval. The present Project will only be financing those projects that fall within the national A and B1 categories of lower risk and requirements for processing. This addresses the Project design requirements by permitting more rapid preparation and implementation while allowing greater transfer of design and supervisory functions with oversight and support from FISDL. MARN has been contacted during preparation and it is expected that a cooperative agreement be signed both in regard to the environmental review of B1 projects as well as Municipal environmental capacity strengthening.

9. Environmental Management Plan. Since the exact location and nature of potential activities and subprojects to be developed under the Project will be known only during implementation, the Environmental Management Plan includes an Environmental Management Framework (EF) for review of these projects. The EF includes the necessary procedures to avoid, minimize or mitigate the potential negative environmental impacts of the investments in accordance with Bank .policies and national legislation regarding the categorization of projects. The EF will be adopted by FISDL as part of its regular procedures during the Project preparation and review cycle. The environmental impact review, prevention, and mitigation measures

103 recommended by the EF will be incorporated into the criteria and procedures of the Operational Manual including mechanisms for oversight and supervision, monitoring, and evaluation.

10. The EF will provide criteria to: (i) screen subproject proposals by the type of activity (including basic infrastructure) and the sensitivity of the proposed sites; (ii) identify key potential adverse environmental impacts; (iii) ensure subprojects do not contribute to key environmental problems currently faced in the Project area; (iv) determine the environmental legal and institutional requirements (including the minimum requirements for institutional capacity especially in regard to Municipalities); (v) provide measures to mitigate potential adverse impacts based on the typologies of investments included in Component 1 ; and (vi) carry out the process of public consultations. These criteria will also include a list of activities that are not eligible for subproject financing. It will also provide specific guidelines and questionnaires for the process of reviewing subproject proposals. The framework will also include measures to ensure compliance with the Natural Habitats (OP/BP 4.04), Pest Management (OP 4.09), and Physical Cultural Resources (OPBP 4.1 1) policies.

11. The EF has been finalized and approved by the World Bank. It is expected that the EF for evaluation of investments would occur in stages including: (i) preparation; (ii) prefeasibility; and (iii) feasibility. All investments will go through the preparation and prefeasibility stages. Based on the results of the prefeasibility screening, some investments will have to complete the feasibility steps as well. The steps include: a. Preparation (1) Review eligibility criteria (subproject proponents) b. Prefeasibility (2) Define typology of the subproject (3) Determine environmental category (4) Review list of excluded activities (5) Assess location to ensure compatible with policies (6) Go through checklist of potential impacts (7) Fill out prefeasibility environmental assessment form (8) Prioritize subprojects based on environmental impact c. Feasibility stage ofproposals (9) Gather field data (1 0) Carry out environmental review (and licensing as pertinent) (1 1) Develop specific environmental guidelines for the subproject (1 2) Fulfill mitigation requirements (1 3) Monitor and evaluate environmental impacts Compliance with Safeguard Policies

12. The Project is designed to comply with applicable World Bank safeguard policies, as indicated below:

OP/BP 4.01-Environmental Assessment

13. The Project is classified as Category B, the appropriate classification for projects whose potential adverse environmental impacts on human populations or environmentally important areas are site-specific, reversible, and can be readily mitigated (OP 4.01, paragraph 8). In 104 addition, all projects would fall within the lower category projects as considered by national environmental legislation and regulations.

14. In accordance with this classification, an environmental assessment (EA), including an Environmental Management Framework has been completed and approved by the Bank. The Environmental Management Framework will indicates the procedures for evaluation to be followed, institutional arrangements for preparation and supervision, and including costs for FISDL supervision, assistance, and capacity-building for Municipalities.

15. Given that the investments are demand-driven, a review of a sample of 5 Municipalities has been prepared representing a cross-section of the general typologies and geographic distribution in El Salvador. The EA also includes consultation processes and interviews with key stakeholders. The EA has been publicly disclosed on April 16,2010 in country and in the World Bank’s Infoshop. All 262 Municipalities are considered eligible for project implementation, the specific location and nature of the subprojects can only be determined during the implementation phase. Per the planned social and environmental analysis, a number of public consultations and stakeholder analysis will take place on project design which will cover environmental aspects (impacts and benefits) of the Project (see social analysis section below).

OP/BP 4.04-Natural Habitats

16. Although it is not possible to identify important and critical natural habitats for the specific works to be included under the project, the EA will include a list of the most important natural habitats from a national and regional perspective, while the framework will include a procedure for review at a Municipal level of important habitats and ensure that projects with potential impacts are screened-out or mitigation is provided for including compensatory areas as appropriate under national law and Bank safeguard policy. It is expected that most projects would have a limited scope and dimensions or would be located in previously impacted urbdperi-urban areas which would reduce the chance of encounter with critical and important natural habitats. Water projects would be small-scale and groundwater resource limitations would be reviewed for any new sources so as to avoid or reduce broader impacts to ecosystems and aquatic habitat.

OP 4.09-pest kanagement

17. It is not expected that pesticides or other chemicals would be procured under the sub- projects. Because some sub-projects for roads and power-lines might include the use of herbicides as part of maintenance works, the safeguard has been triggered and specific measures have been incorporated into the Environmental Management Framework regarding their procurement, use, management, and training aspects.

OP/BP 4.1 &Indigenous Peoples

18. Indigenous peoples are believed to account for anywhere from 80,000 to 800,000 (1.6 to 12%) of El Salvador’s population. Given that the Project area potentially encompasses all 262 Municipalities in the country, an unknown number of indigenous peoples may potentially be affected. On the basis of the Social Assessment and iri consultation with indigenous peoples, an Indigenous Peoples Planning Framework (IPPF) was prepared. The IPPF will help to ensure that the principles outlined under OP 4.10 (i.e. screening, social assessment, consultation and 105 participation, etc.) are taken into account during project preparation and implementation. The IPPF has been agreed with the GOES and incorporated into the Operational Manual.

OP/BP 4.11-Physical Cultural Resources

19. It is possible that the civil works under Component 1 might directly and/or indirectly affect cultural property in some locations. These could include known local structures or sites of historic or culturally importance. The Project screening and EA process during project implementation will ensure that such sites will be identified and appropriate actions taken if necessary. In addition, all construction contracts will include chance find procedures which will define specific measures to be taken in the event that Physical Cultural Resources, as defined under the policy, are found during construction. All possible impacts on buildings or other sites of historical or archaeological significance will be mitigated as necessary.

OP/BP 4.12-Involuntary Resettlement

20. The Project triggered OP/BP 4.12 because it may prove necessary to acquire minor amounts of land or other assets. However, it is unlikely to require physical relocation of populations. Because the location, timing and technical features of the specific infrastructure investments to be financed will be determined during loan implementation, a Resettlement Policy Framework (RPF) was prepared. The RPF has been included in the Operational Manual.

Public Consultation and Disclosure

21. The EA itself has been disclosed in country and through InfoShop on April 16, 2010. Likewise, the EA has been consulted in accordance with OP 4.01,

Summary of Social Safeguard preparations

22. SSDT contracted an independent consulting firm to conduct a social assessment for the Project. The terms of reference for this contract were agreed with the Bank team. The key deliverables of the social assessment process included the following:

a) Social Assessment report consistent with the requirements of Annex A of OP 4.10; b) Resettlement Policy Framework (RPF) consistent with the requirements of Annex A of OP 4.12; c) Indigenous Peoples Planning Framework (IPPF) consistent with the requirements of Annex C of OP 4.10.

23. The following sections highlight the key findings and recommendations contained in each of these reports. Before turning to the specifics of each of these reports, it is important to highlight the specific social screening measures that the Project has designed to ensure that the proposed investments are not only approved by the various Municipal and national governments, but also represent the interests and priorities of the respective communities within the Municipalities.

24. Firstly, the Social Assessment identified the need to produce an instrument that will be used to classify the nature and scope of citizen participation in the process of identification and prioritization of the proposed Municipal investments. This participatory screening form will help to identify and categorize the quality and transparency of the consultations and participatory

106 mechanisms that served to select the proposed investments. For example, Municipal Governments will be asked to substantiate how the proposed investments were prioritized, which Municipal actors participated, whether or not they received any technical assistance in the design and implementation of the consultative and participatory planning processes that prioritized the proposed investments, etc. These Participatory categorization forms will be included in the Project’s Operational Manual, and will constitute an essential element of each technical proposal that the Municipal governments will submit to FISDL for evaluation. On the basis of the information submitted in the participation form, the technical committee (FISDL) will assess the extent to which each particular investment has been sufficiently vetted through popular participation. In the event that the social specialists from FISDL are not convinced that such levels of adequate participation led to the selection of the proposed investments, they will sub- contract adequate technical assistance in order to initiate such a process before the proposed investment could be approved for funding. Furthermore, the World Bank social specialist will provide additional capacity building and supervision for those responsible for the screening and technical evaluation of sub-project investments. This capacity building will consist of a seminar, currently scheduled for May 201 0, on project specific safeguard implementation issues.

25. This seminar will be followed by technical assistance provided to all 262 Municipalities, before they are eligible to receive any transfers, related to fiduciary requirements, safeguard screening processes and compliance and technical screening for the various types of investments that could be requested by Municipalities for financing. FISDL will accompany Municipalities in the entire life-cycle (pre-investment, implementation and supervision of investments) of all investments as it relates to fiduciary, safeguards and technical requirements. Additionally, ISDEM will be supporting the initial consultative process that each Municipalities needs to confirm they have complied with or will conduct to confirm that sufficient consultation and consensus (Le. according to social policies) on the identification and prioritization of investments has occurred. The second block of TA will be to a priority group of low capacity Municipalities that will receive additional technical assistance to strengthening participatory planning systems for the preparation of five year development plans.

26. The Social Assessment process also highlighted the need to produce similar instruments to be used to classify the nature and scope of involuntary resettlement and impacts on indigenous peoples that could result from the proposed Municipal investments. These tools are annexed to each of the respective social safeguard frameworks developed for the Project, and will similarly be included in the Operational Manual so as to constitute additional essential elements of each technical proposal that the Municipal governments will submit to FISDL for evaluation.

Summary of Social Assessment

27. A Social Assessment was conducted during project preparation. Its objective was to ensure that project design would lead to the achievement of the Project objectives, i.e. strengthening technical and financial capacities of local governments and supporting institutions. The assessment was designed to: (i) characterize the population from the Project intervention area; (ii) carry out a stakeholder analysis to understand the characteristics, interests, resources and power relationships of the various social and institutional actors; (iii) identify potential barriers in accessing project benefits from a gender and intercultural perspective; and (iv) identify potential social risks and develop mitigation plans.

‘107 28, Data for the assessment were provided by representatives of local governments, Municipal associations, multi-lateral and bilateral donors, NGOs, indigenous peoples, farmers, women, and youth organizations, other public and social sub-national entities, and private actors related to productive and economic initiatives. The assessment draws from: consultations with representatives of a range of social and community organizations based in a sample of 10 Municipalities chosen to represent different development characteristics and institutional capacities (January through March 2010). The methodology used in the workshops emphasized the participation of women, youth and indigenous people. The social assessment final report has been made available to the public on the Government website.

29. The allocation of the funds to the Municipalities would be based on criteria such as population, poverty levels, equity and geographic extension. In order to contribute to the promotion of the territorial development and to amplify the impact, sub-projects that benefit two or more Municipalities will be preferably supported (mancomunidades and associations or in an independent way).

(i) The Project’s Social Objectives.

30. The objective of the Local Government Strengthening Project is to strengthen institutional arrangements between the Municipal governments and civil society for sustainable management of Municipal public investments. To achieve this, the following social objectives must be achieved:

0 Empowerment of small producers, farmer communities, women and youth by strengthening their role in the process of Municipal planning and identification of investment opportunities and priorities.

0 Strengthened transparency of Municipal governments and project implementing entities (including mancomunidades and local community organizations) through institution of disclosure mechanisms and strengthening of other methods of social accountability. Greater intra-Municipal communication and collaboration, with the establishment of approaches linking development based in non-partisanship and mutual interests to ensure the social viability of investments and the promotion of Municipal consultations,

(ii) Legal Framework

3 1. The Project will be implemented within the legal and regulatory framework for decentralized governance and social participation, as defined principally in Article 2 of the Municipal Code (Decree No.274). This law assigns Municipal Governments the duty to develop and implement policies aimed at broadening the decentralization process in agreement with political, social, cultural, economic actors, and at ensuring that there is mutual understanding and respect for the respective responsibilities of national and sub-national governments.

(iii) Stakeholder Groups

32. Community organizations. In El Salvador, there are many community-based organizations. All communities represented by such groups, independent of their form of organization, will participate in the Municipal planning process and be eligible to have their projects incorporated into the program. Through the Municipal governments they will be able to obtain cofinancing for 108 subprojects in transportation infrastructure, energy, water and sanitation and other productive investments.

33. Economic organizations. A large segment of the Project's beneficiary population belong to productive and labor organizations, producer organizations and firms related to agriculture, artisan, tourism and other activities. These groups are organized sector (for example, production of corn, cattle ranching, fishing, ecotourism, etc.) and they can be Municipal, regional, or national in scale. Some are specifically women's organizations, while others include both men and women. Currently these organizations have varying degrees of involvement in Municipal development plans. The Project will promote and establish mechanisms for their participation.

34. National sociopolitical organizations. Most Salvadorans belong to their own local community and economic organizations and are also members of sociopolitical organizations that may be national in scope. These include Arena, FMLN, PCN, etc.

35. Municipal governments. Municipal governments are responsible for waste management, Municipal roads, lighting in public areas, among others. They are composed of an elected Municipal Council, including the mayor and councilors, and an executive branch headed by the mayor. The national government transfers about seven percent of its total budget to the Municipal governments to carry out their 'hnctions. The transfers are distributed in proportion to population, equity, and size criteria. Since 1994, these transfers have been carried out in conjunction with a program of training and technical assistance for the Municipal governments. While this helped create a foundation of institutional capacity at the local level, rural Municipalities continue to have serious weaknesses, mainly in (a) preinvestment planning, (b)project management, and (c) capacity for operation and maintenance of civil works and infrastructure. Municipal governments will be the beneficiaries of capacity building for pre- investment, management of productive investment projects, and operation and maintenance of infrastructure under Component 3, and will be the executing agencies for subprojects financed under Component 1.

36. Associations of Municipalities (Mancomunidades). Mancomunidades are voluntary associations created by groups of neighboring Municipal governments, mainly to strengthen local development efforts. In general the mancomunidades are headed by a directorate composed of the mayors of the member Municipalities and an executive technical body usually consisting of a manager and varying numbers of technical specialists depending on the size, degree of consolidation, and number of projects or activities being carried out by the mancomunidad. The mancomunidades will be the preferred actors in the process of regional planning, which will help strengthen their capacity and channel project resources to support their productive investment projects. Different mechanisms have been designed through which the mancomunidades will participate in the Project, depending on their level of consolidation.

37. Nongovernmental Organizations (NGOs). In most Municipalities there are activities and projects conducted by NGOs, including the Catholic Church and/or the Evangelical Church, bilateral donor agencies (e.g. German cooperation, Japanese technical cooperation and Danish cooperation) and other NGOs. . In the 10 Municipalities surveyed, many of these groups have strong relationships with Municipal authorities and frequently work together to achieve common objectives on particular social or environmental issues, for example crime prevention, environmental conservation, public awareness, etc.

109 (iv) Consultations

38. The first phase of consultations was camed out from January-February 2010 through site visits and interviews with Mayors, Councilors and Municipal employees from a representative sample of ten Municipalities located in different regions of the country. These interviews reviewed recent experience and capacity in five areas: (i) governance; (ii) service provision; (iii) mancomunidades; (iv) technical assistance; and (v) investments.

39. From February through March 2010, five additional consultations and workshops were held with various stakeholders, including representatives from both public and private sectors.

(v) Key Findings and Inputs to the Project Design from the Civil Society Consultations 40. Input from Municipal actors to project design. The following are some of the key comments and suggestions made by Municipal actors:

0 The capacity of Municipal governments to manage project implementation should be strengthened. 0 Associations of Municipal governments (mancomunidades) should be key actors in regional planning processes and should facilitate the planning of Municipal governments. 0 Disbursement of project funds and the Project cycle in general need to be streamlined to avoid delays which carry a high political cost for the Municipal governments. The sustainability of infrastructure and its adequate use will be ensured by the active participation of the population in project design and implementation as well as during the subsequent operations and maintenance phases.

41. Input from other local actors to project design: The following are some of the key comments and suggestions made by community organization and other local stakeholders: Institutional strengthening activities should reinforce the political participation of women in Municipal governments. To increase productive investments, the capacity of Municipal governments as suppliers of goods and services, needs to be enhanced. The relationship between Municipal governments and social and economic actors needs to be strengthened to promote political and functional stability. Institutional strengthening should also be targeted toward social organizations in order to develop their social capital. 0 Mancomunidades have a wide array of opportunities to promote local economic development at regional scale.

42. There are positive experiences in the execution of supra-Municipal projects by mancomunidades, such as those in solid waste management in Santa Ana, and in health services in San Vicente. From these experiences, important lessons can be drawn for the execution of the new project. Therefore, processes of sharing experiences among mancomunidades should be promoted.

110 (vi) Social Characteristics

43. According to data from the 2001 Population and Housing Census of the Salvadoran population (6,704,092 inhabitants), 37.6 percent of the population nationwide lives in rural areas. 32 of El Salvador’s 262 Municipalities are considered extremely poor, with an average of almost half of the households (1 75,038 people) living in extreme poverty (see Table A1 0.2).

Poverty Level No. Municipalities % Extreme Percent of Severe Poverty Infant Malnutrition Severe 32 49.92 4.8 High 68 35.59 4.5 Moderate 82 23.9 1 3.6 Low 80 12.45 2.6

2004. Accessed 02/19/10. URL: httw//www.comunidades. eob.svlwebsitelcomunidades/dlocal/Conce~to%2OMava%2Ode%2OPobre~a.~df.

44. Other notable features which can be mentioned regarding the social characteristics of the country include the following: There are different levels of political stability in the Municipalities across the country. Where there is more stability, the Municipal executive tends to adopt a greater focus on economic development. Traditional political parties dominate and exclude indigenous, peasant, and women’s organizations. Thus, small-scale peasant sectors have limited influence, and greater importance is given to large-scale agricultural and livestock activities. Municipalities with a strong degree of political homogeneity are often correlated with high levels of governability and effectiveness. 0 Due to migration, some Municipalities have a majority of women who now must play a larger role because of the predominance of female heads of households.

45. Since Municipal governments have not outlined policies or actions with a gender equality approach, the proposed project will support the inclusion of women into the processes of political and economic decision making. For this, the Project will: i) promote the participation of women’s organizations in regional planning; ii) ensure that in the formulation of investments, that specific benefits for women will be targeted and risks to women will be assessed and iii) in the institutional strengthening component, specific methodologies for training women council members, women mayors, and women community leaders will be incorporated.

111 Summary of Resettlement Policy Framework4’

A. Overview

46. OP/BP 4.12 is triggered because the Project will fund small scale civil works and rehabilitate rural roads. These activities may involve small amounts of land acquisition, especially with respect to right-of-ways. However, it is not anticipated that the Project will cause physical displacement of people. Because the location, timing and technical features of the potential infrastructure investments to be financed under the Project remain unknown at this time, the Client has prepared a Resettlement Policy Framework (RPF), which was publicly disseminated and will form part of the OM. The RPF will serve as the guide to the site-specific formulation of Resettlement Plans (RP), which in many cases will be Abbreviated Plans4’ due to the relatively small numbers of people affected and relatively minor impacts. As discussed above, FISDL will use the mandatory resettlement categorization forms submitted by the Municipal governments in order to screen each proposed investment for resettlement impacts. In all cases where land acquisition is necessary, FISDL or an appropriately qualified sub-contractor will assist the relevant Municipal authorities to prepare a sub-project specific Resettlement Plan consistent with the requirements of OP/BP 4.12. These plans will be submitted to the World Bank for review before the specific investments are approved.

47. The RPF is guided by a set of policy principals to:

minimize and mitigate potential negative social and economic impacts caused by the Project ; 0 ensure that all affected people, regardless of their tenure condition, receive proper compensation and/or assistance to replace assets lost and the restoration of livelihoods at an equal or superior level; make certain that affected people are informed about their options and rights, as well as consulted on the available choices; prepare a Resettlement Plan (RP) consistent with the provisions of the Bank’s policy on resettlement for each subproject that will involve resettlement.

Eligibility

48. Eligibility will be determined on a case by case basis once the necessary socio-economic cadastres have been done. This would include all types of rural inhabitants and/or formal or informal group, regardless of whether their lands and/or dwellings are legalized or not.

Legal Framework

49. The Project’s RPF is consistent with the existing legal framework in El Salvador. There are, however, some challenges that remain beyond the scope of this project. The Highways and Local Roads Law delegate to the Ministry of Public Works (MOP) the coordination, planning, construction and maintenance of the highways and roads, and their use and the areas next to the

40 This summary is based on the framework prepared by the Social and Local Development Investment Funds (FISDL) in February 201 0: - Marco de Reassentamento Involunthrio. 4’ Where the affected people are not physically displaced and less than 200 persons have less than 10% of their productive assets affected. 112 public roadways. It does not specify the powers of the MOP in this regard, which has created some confusion of territorial jurisdiction with the Municipality for the authorization of urban development versus the development of the highway infrastructure.

50. As far as obtaining the ownership of the rights-of-way, loopholes have been found in the Highways and Local Roads Law as well as the Law of Expropriation and Occupation of Assets by the State that in practice affect the processes for obtaining rights-of-way due to the following irregularities: 1) the property has no known owners; 2) the owner was incapable of defining the eitent of his property; 3) there are rights in favor of third parties such as Guarantees, Leases, etc.; and 4) there is no title registered in favor of the owner or the title is defective. 5 1. Though the Law of Expropriation and Assets by the State applies the rules of common law with regard to these cases, in reality it involves extremely long legal procedures in the processing thereof, which has become an obstacle in the execution of infrastructure works and has created an atmosphere of legal insecurity for developers since they cannot know the result of this process when starting the works, and even during their execution. If the outcomes were in the end unfavorable, this could imply the modification of segments or parts of the design that affect the Project.

Institutional Assessment

52. The Project has been designed to support a decentralized approach to planning and decision- making. Project activities will promote the participation of community-based and other local organizations through the preparation of demand-driven investment plans. The Project would primarily support rural agricultural and non-agricultural small-scale producers - including small farmers, and rural workers - organized in associations, cooperatives, formal (with legal status) and informal networks or alliances. 53. The Secretary of Strategic Affairs of the Presidency would be responsible for overall project coordination. The Project Coordinator will also be assisted by a team of technical specialists including social and environment specialists. This Technical Evaluation Committee would prepare the Project Operational Manual (OM) that will include the Resettlement Policy Framework (RPF). The OM will provide all the rules and criteria for the evaluation of proposed investment plans. The Salvadorian Institute of Municipal Development (ISDEM), the Social and Local Development Investment Funds (FISDL) and the Corporation of Municipal Governments (COMURES) will also train and certify qualified Technical Service Providers (TSP) who would assist the Municipalities to design investment projects consistent with the social, environmental, technical and financial guidelines specified in the Operational Manual. 54. In the event that any proposed investments would require land acquisition or involuntary resettlement, FISDL will work closely with the civil works contractors to prepare and implement sub-project specific Resettlement Plans (RPs) according to the guidelines established in the Resettlement Policy Framework. This includes: (i) data collection, including a cadastre of affected families and a land cadastre; (ii) elaboration of an RP, including a socioeconomic profile of affected families, evaluations of affected assets, qualitative and quantitative aspects of degrees of impacts, and refined definitions of options and eligibility criteria; and (iii) an action plan that includes institutional responsibilities, timetable, and budget. Once the draft RP has been reviewed by the FISDL or responsible Municipal authority to ensure consistency with the

113 Operational Manual and national legislation, it will be sent to the Bank for review and “no objection.”

Grievance Procedures

55. During the process of formulating and implementing site-specific RPs, FISDL and ISDEM will maintain an open channel of communication with potentially affected families. This will be carried out through the appointment of a specialized interagency ombudsman responsible for channeling the concerns and complaints of local stakeholders to the appropriate agencies capable of providing solutions. Monitoring and Evaluation

56. The Project Coordinator in the Secretary of Strategic Affairs of the Presidency will have the primary responsibility for monitoring the implementation of the principles agreed under the RPF. Bank supervision will closely follow progress during the design phase of subprojects through the inclusion of social and safeguard concerns. Monitoring will be done through regular reporting and field visits to ensure the enforcement of relevant safeguard frameworks, clauses, and satisfactory implementation of civil works contracts. The following indicators will be tracked to monitor progress: number of landholdings affected by land acquisition and number of RPs effectively implemented. In addition an ex-post evaluation would be conducted in cases where more than 200 persons are affected; however, such cases are not anticipated in this project. Indigenous Peoples, participation and intercultural issues

57. Within the social assessment framework, special attention was given to the situation of indigenous peoples and to intercultural and ethnicity features. Although indigenous peoples are believed to account for anywhere from 80,000 to 800,000 (1.6% to 12%) of El Salvador’s population, none of these people can be considered “Indigenous” according to the World Bank’s definition adopted in OP/BP 4.10. Coinciding with the upsurge in international indigenous peoples activism since the 199Os, an increasing number of Salvadorans have chosen to self- identify as “indigenous”. These people are largely descendents of the Nahuat, Lenca or Cacaopera speaking groups that were historically persecuted by the country’s European and Ladino elite. Today, those choosing to self-identify as Indigenous are rarely recognized as such by others. Most do not speak an indigenous language, nor do they maintain socia1,’economic or political customs or institutions that are distinct from the dominant society. A key factor identified for achieving significant levels of interaction and inter-cultural relations in the public sphere is to have organizations with the representation of indigenous peoples who are consolidated, legitimate, and willing to share the work needed for development.

58. As a precautionary measure, the Project’s Indigenous Peoples Planning Framework (IPPF) includes a specific instrument designed to screen and classify the nature and scope of any potential impacts on indigenous peoples that could result from the proposed Municipal investments. This tool is annexed to IPPF and will be included in the Operational Manual so as to constitute an additional essential element of each technical proposal that the Municipal governments will submit to FISDL for evaluation. As discussed above, FISDL will use the mandatory indigenous peoples (IPS) categorization forms submitted by the Municipal governments in order to screen each proposed investment for potential impacts on IPS. In all

114 cases where such impacts are identified, FISDL or an appropriately qualified sub-contractor will assist the relevant Municipal authorities to prepare a sub-project specific Indigenous People Plan (IPP) consistent with the requirements of OP/BP 4.10. These plans will be submitted to the World Bank for review before the specific investments are approved.

(vii) Risks identified during the social assessment 59. The following risks were identified during the interviews and consultations with key stakeholders (January - March 201 0): In some Municipalities, especially those with more resources from state budget transfers which are experiencing rapid growth, there are rivalries and struggles for power between urban and rural zones. Not all Municipalities (especially the smallest ones) meet the contributions they themselves have established for the functioning of their mancomunidad; this tends to weaken the mancomunidad due to its subsequent lack of financial capacity.

60. An analysis of potential solutions and of the roles of distinct social actors will be found in the Action Plan incorporated in the final report of the Social Assessment. The risks that can be mitigated are those related to scarce resources, growing contributions, management capacity, migration, and the negative affects generated by other projects in the same areas.

Monitoring and Feedback

61. The Social Assessment contributed to the design of the Project, providing insights to how the monitoring indicators should be structured. The results of the assessment have led to: (i) plans to report separately the participation of women and men in the services provided by the Project; (ii) an analysis of the effects of migration on women, children and the elderly and recommendations for consideration of this factor in subproject eligibility criteria; (iii) specific recommendations for avoiding the creation of parallel women’s organizations and for utilizing instead existing community organizations to involve women in the Project; (iv) anticipating the risks related to the low capacity of executing agencies and providing budget in the Action Plan for training of service providers and mechanisms for quality control; and v) a comprehensive, integrated approach to the design of subprojects; for example, including technical assistance and maintenance plans with road rehabilitation sub-projects.

115 Annex 11: Project Preparation and Supervision EL SALVADOR: Local Government Strengthening Project

Planned Actual

~ PCN review 0 1/25/20 10 01/25/2010 Initial PID to PIC 0 1/15/20 10 02/15/2010 Initial ISDS to PIC 0 1/ 15/20 10 02/15/2010 Appr ai s a1 04/19/2010 04/19/2010

Negotiations 04/22/2010 04/22/2010 , Board/RVP approval 05/27/2010 05/27/2010 Planned date of effectiveness 07/30/2010 Planned date of mid-tern review 04/15/20 13 Planned closing date 11/30/2015

Key institutions responsible for preparation of the Project . Subsecretariat for Territorial Development and Descentralization (Subsecretaria de Desarrollo Territorial y Descentralizacidn - SSTD) . Salvadoran Institute for Municipal Development (El Instituto .SalvadoreZo de Desarrollo Municipal - ISDEM) . Social and Local Development Investment Fund (Fondo de Inversidn Social para el Desarrollo Local - FISDL)

Bank staff and consultants who worked on the Project included: Name Title Unit Eli Weiss Jr. Professional Officer LCSAR Jania Ibarra Operations Officer LCSPS Jimena Garrote Counsel LEGLA Fabienne Mroczka Financial Management Analyst LCSFM Alvaro Larrea Procurement Specialist LCSPT Armando Guzman Hazard Risk Mngt. Specialist LCSUW Albert0 Leyton Country Representative LCCSV Ming Zhang Lead Urban Economist LCSUW Yoonhee Kim Urban Economist LCSUW Francis V. Fragano Environmental Specialist LCSEN Mark A. Austin Senior Operations Officer LCSAR Patricia De la Fuente Hoyes Senior Finance Officer CTRFC Geeta Sethi Lead Economist LCSPE

Jorge Martinez Public Finance Economist Consultant ' Stephen Jeremy Brushett Lead Transport Specialist LCSTR Jason Paiement Social Development Specialist LCSSO Dino Francescutti Senior Economist FAO-CP Caroline Charpentier Consultant LCSAR Max Velasquez Water and Sanitation Specialist ETWAN Xiaoping Wang Senior Energy Specialist LCSEG Fernando Lecaros Senior Energy Specialist LCSEG

116 PEER REVIEWERS Jonas Frank Public Management Specialist LCSPS Jordan Schwartz Lead Economist LCSSD Roy Bahl Consultant Consultant Keith McLean Sr. Social Development Economist ECSSD

SECTOR LEADER Gregor Wolf Sector Leader LCSSD

Bank funds expended to date on Project preparation:

1. Bank resources: US$256,000 2. Trust funds: US$O.OO 3. Total: US$256,000

Estimated Approval and Supervision costs:

1. Remaining costs to approval: US$20,000 2. Estimated annual supervision cost: US$150,000

117 Annex 12: Documents in the Project File EL SALVADOR: Local Government Strengthening Project

1. El Salvador Recent Economic Developments in Infrastructure - Strategy Report (REDI), Report No. 37689-SV, Jordan Schwartz, The World Bank,October 10,2006. 2. Republic of El Salvador Public Expenditure Review, Ana Lucia Armijos, The World Bank, June 30,2004.

3. Tipologia de Municipios El Salvador 2007 - Herramienta de apoyo para la planificacion del Desarrollo Local y la Descentralizacion, GTZ y FUNDAUNGO, Marzo 2009.

4. Municipal Diagnostic of a representative sample of 10 Municipalities of El Salvador, under preparation, 201 0.

5. Municipal Diagnostic of all 262 Municipalities of El Salvador, under preparation, 201 0.

6. Social Assessment, April, 201 0.

7. Environmental Assessment, April, 201 0.

8. Indigenous People Framework, April, 201 0.

9. Involuntary Resettlement Framework, April, 201 0.

10. Analisis y diagnostic0 del rol y alcances de las Asociaciones de municipios en su papel de promotoras del desarrollo local - Recomendaciones para superar las limitaciones y principales problemas que enfrentan. GTZ, Junio del 2009.

1 1. Instrumento para la autoevaluacion de la Gestion Municipal, PROMUDE-GTZ, mayo del 2008.

12. Sistemas de Monitoreo de Proyectos Municipales MOPROMU, PROMUDE-GTZ, Febrero 2008.

13. Herramientas para el logo de la transparencia en la gestih Municipal. Proyecto de Fortalecimiento Democratico Local (FODEL), G6chez y Bonilla, RTI / USAID, 2004.

14. Construyendo transparencia en 10s municipios. Diagnostic0 y lineas programaticas para promover la transparencia a nivel local en El Salvador, USAID, Marzo 2007.

15. Hacia la construccion de una agenda centroamericana de desarrollo local y descentralizacion del estado, partiendo de las agendas nacionales, San Salvador: FUNDE, 2007.

16. Desarrollo economico local: enfoque, alcances y desafios, FUNDE, 2005.

17. Centroamerica : hacia el desarrollo local y la descentralizacion del estado, San Salvador : CONFEDELCA, mayo 2008 118 18. La FUNDE ante la Politica Nacional de Descentralizacion presentada por la presidencia de la rephblica, FUNDE, 2007.

19. El Salvador desarrollo local y descentralizacion del Estado: situation actual y desafios. Informe enero 2003 - diciembre 2005, Red para el Desarrollo Local, Diciembre 2006.

20. The El Salvador Municipal Competitiveness Index 2009, USAID, 2009.

21. Almanaque 262. El Desarrollo Humano con Rostro Territorial, UNDP, 2009.

22. FISDL: Historia y experiencia institucional- 19 aiios de experiencia 1990 - 2010

23. Compromisos para una Agenda Nacional de Eficacia de la Ayuda - Hoja de ruta para la mayor efectividad e impact0 de la cooperacion para el desarrollo. 9 de marzo del 2010. Actores de la cooperacion en El Salvador

24. Identification de Procesos de Planeacion' Participativa y Procesos de Transparencia en la Gestion Municipal. FISDL. 2009.

119 Annex 13: Statement of Loans and Credits EL SALVADOR: Local Government Strengthening Project Difference between expected and actual Original Amount in US$ Millions disbursements Project ID FY Purpose IBRD IDA SF GEF Cancel. Undisb. Orig. Frm. Rev’d PO95314 2010 SV Fiscal Mgmt and Public Sector PerfTA 20.00 0.00 0.00 0.00 0.00 20.00 0.00 0.00 PI 17440 2010 SV-Income Support and Employability 50.00 0.00 0.00 0.00 0.00 50.00 0.00 0.00 PI 18036 2010 SV Sustaining Social Gains 100.00 0.00 0.00 0.00 0.00 100.00 0.00 0.00 PI 14910 2009 SV Public Finance and Social Sector DPL 450.00 0.00 0.00 0.00 0 00 248.88 -200.00 0.00 PO64919 2003 SV JUDICIAL MODERNIZATION 18.20 0.00 0.00 0.00 0.00 4.81 4.81 0.00 PROJECT PO67986 2002 SV-EARTQUAKE EMERGENCY REC. & 142.60 0.00 0.00 0.00 0.00 14.27 14.27 0.00 HEALTH SER

Total: 780.80 ’ 0.00 0.00 0.00 0.00 437.96 - 0.00 180.92 EL SALVADOR STATEMENT OF IFC’s Held and Disbursed Portfolio In Millions of US Dollars

Committed Disbursed IFC IFC FY Approval Company Loan Equity Quasi Partic. Loan Equity Quasi Partic. 2005 AAH 30.00 0.00 0.00 0.00 12.34 0.00 0.00 0.00 2004 Banco Agricola 47.06 0.00 0.00 0.00 47.06 0.00 0.00 0.00 Banco Uno-El Sal 10.00 0.00 0.00 21.94 10.00 0.00 0.00 21.94 2006 Banco Uno-El Sal 0.25 0.00 0.00 0.00 0.15 0.00 0.00 0.00 2007 Banco Uno-El Sal 0.70 0.00 0.00 0.00 0.00 0.00 0.00 0.00 200 1 CAESSIEEO 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 2002 CALPIA 0.00 0.01 0.00 0.00 0.00 0.00 0.00 0.00 2004 CALPlA 3.50 0.00 5.00 0.00 3.50 0.00 5.00 0.00 1998 CUSCATLAN-ES 5.73 0.00 0.00 0.00 5.73 0.00 0.00 0.00 2003 CUSCATLAN-ES 0.00 0.00 15.00 0.00 0.00 0.00 15.00 0.00 2004 Confia AFP 0.00 7.50 0.00 0.00 0.00 6.73 0.00 0.00 2004 La Hipotecaria 20.00 0.00 0.00 0.00 15.10 0.00 0.00 0.00 2004 Metrocentro 25.00 0.00 0.00 0.00 25.00 0.00 0.00 0.00 1999 SEF IMACASA 0.00 0.05 0.00 0.00 0.00 0.05 0.00 0.00 Total portfolio: 142.24 7.56 20.00 21.94 118.88 6.78 20.00 21.94

Approvals Pending Commitment FY Approval Company Loan Equity Quasi Partic.

Total pending commitment: 0.00 0.00 0.00 0.00

120 Annex 14: Country at a Glance EL SALVADOR: Local Government Strengthening Project

El Salvador at a dance t?/9/09

POVERTY and SOCIAL El Amerlca mlddle. Salvador (L Carlb. Income Developmntdlmold 2008 Population,mid-year (millions) 6.1 565 3,702 Life expectancy GNIpercapita (Atlasmethod, US$) 3,460 6,781 2,078 GNI(At1as merhod,US$ billions) 212 3,833 7,692 I Average annual growth, 2002-08 Population (%) 0.4 12 12 Labor force (%J 11 22 16 Most recent eatlmata (Iataat year avallable, 2002.08) Povert y (%of population below nationalpo verfyline) 37 Urban population (%of to tal populatio n) 60 79 41 Life expectancyat birth (pars) 71 73 68 Infant mortality (per lOOOlive births) 8 22 46 Child malnutrition (%of children under5) 6 5 26 Access to improved water source Access to an improvedwatersource (%ofpopulation) 84 91 66 Literacy (Omofpopulationage Sij 62 91 83 Gross primaryenroiiment (%of school-age population) 115 17 09 -D W"& Male 17 19 n? Lav~-ml&++lnsome gap Female 10 115 06 -

KEY ECONOMIC RATIOS and LONG-TERM TRENDS 1988 I998 2007 2008 Economlcratkd GDP (US$billions) 4.2 9.0 20.4 22.1 Gross capital formatIoniGDP 9.8 R.6 8.1 15.0 Trade Exports of goods and services/GOP 15.8 24.8 27.2 27.7 Gross domestic savingsiGDP 6.3 5.3 -5.3 -72 Gross national savingsiGDP 8.7 8.6 0.4 8.1 Current account balance/GDP -5.6 4.8 -5.8 -7.2 Interest paynentsiGDP 19 13 2.5 Domestic Capital 2.3 savings formation Total debUGOP 47.7 27.2 46.7 45.7 Total debt serviceiexports 18.3 0.0 9.3 0.4 Present value of debtiGDP 44.4 42.3 Present value of debtiexports 05.2 96.7 Indebtedness 1988-98 1998.08 2007 2008 2008-I2 (average annualgrowth) GDP 5.1 2.7 4.7 2.5 0.0 GDP per capita 3.8 2.3 4.2 2.1 -15 Exports of goods and services 9.2 5.8 4.1 6.8 -2.0

STRUCTURE of the ECONOMY ' 1988 1998 2007' 2008 Growth of capltal and GDP (%) (%of GDP) I I Agriculture .. 9.9 9.1 0.2 industry .. 30.2 28.8 28.5 Manufacturing .. 22.9 22.0 218 Services .. 56.9 59.1 56.4 Household final consumption expenditure 810 85.0 96.1 98.0 General gov't final consumption expenditure P.7 9.7 9.2 9.2 Imports of goods andservices 22.3 37.1 48.5 49.8

1g88-98 1998-08 2007 ' 2o08 Growth ofexportaandlmportr(%) (average annualgrowth) Agriculture 15 2.8 8.6 7.3 '0 Industry 4.9 2.5 3.4 16 M anufacturing 5.2 2.7 3.7 2.7 ," services 4.3 2.8 4.4 19 ; Household final consumption expenditure 7.4 3.6 7.7 3.9 0 General gov't final consumption expenditure -14 14 11 18 0.) nd nr M nr 08 Gross capital formation 8.5 2.0 5.9 -5.3 -Exports -C Imports Imports of goods andservices 14.7 5.6 8.6 4.8

Note 2008 data are prelimmaryestimates This table was produced from the Development Economics LDB database *Thediamonds showfourkeyindicatom in thecountry(in boid)comparedwthits income-groupaverage fdata are missing,the diamondwil be incomplete

121 El Salvador

PRICES and GOVERNM ENT FINANCE 1988 1998 2007 Domestic prices (%change) 8 Consumer prices B.8 2.5 4.6 7.3 8 hplicit GDP deflator 3.9 3.9 4.4 5.9 4 Government finance 2 (%of GDP, includescunenl ganfsj Current revenue I 116 15.2 6.0 04 OB 08 Current budget balance 0.9 2.2 03 05 07 15 -C CPI Overall surplusldeficit -GDP dcflnior I -2.0 -0.3 -15 -

TRADE 1988 1998 2007 *Oo8 Export andlmport levels (US mill.) (US$ miilio ns) I I Totalexgotis (fob) 597 2,480 4,039 46fl 12,000 Coffee 358 324 87 259 I Sugar 67 72 76 Manufactures 223 2,036 3.779 4276 Total imports (cif) 1007 4.058 8,712 9.754 Food 225 789 1752 Fuel and energy 81 87 500 Capital goods 252 832 1365 1341 0 MI 04 08 07 08 Export price index(2000=WO) 84 03 m 02 03 05 1 Import price index(2000=WOj 78 94 P4 02 mExpm llmponr Terns of trade (20W.W) 83 11) 90 88 I BALANCE of PAYMENTS 1988 1998 2007 2008 Currentaccount bdancetoGDP(%) (US$mii/ionsj I Exports of goods and services 888 3,048 5,533 6,Pl Imports of goods andservices 2223 4,502 9,890 lion Resource balance -336 -1455 -4,357 -4.892 Net income -P1 -83 -576 -536 Net current transfers Current account balance -235 -91 -183 -1596 Financing items (net) a5 394 1463 1930 Changes in net reserves 60 -303 -280 -334 M emo: Reserves Includinggold (US$millions) 354 1902 2,88 2,515 Conversion rate (DEC, locaMUSS) 10 1.0 i0 10

EXTERNAL DEBT and RESOURCE FLOWS r 1988 1998 2007 (US$mi//ions) Totaldebt outstanding and disbursed 1998 3,268 9,50 0.11) I IBRD 155 287 401 400 IDA 24 8 0 9 450 1055 1003 Total debt service 203 D IBRD 22 47 75 72 2364 IDA 1 1 1 1 Composition of net resource flows Official grants 246 tB 82 65 Official crediton 46 61 -28 258 E 702 Private creditors -8 -28 -270 298 Foreign direct investment (net inflows) TI 104 1508 704 F 5. portfolio equity(net inflows) 0 0 0 0 World Bank program Commitments 0 0 00 0 Disbursements 0 34 35 52 A- IBRD E. Bilateral Principal repayments n 29 52 53 6. IDA 0. W mrltilaterd F - Rivate C IMF Net flows 2 6 -n -2 . G .SM-term Interest payments a 20 24 B Net transfers -9 -yI -42 -21

Note:This tablewas producedfrom the Development Economics LOB database. Q/9/09

122 MAP SECTION

IBRD 37765

90°W 89°W 88°W

Municipalities Tally Population Urbanization Unsatisfied VAT Taxpayers Basic Needs per TYPE 1 7 188,240 (large) 92% 12.7 (low) 526 (high) 10,000 people TYPE 2 17 72,964 (intermediate/large) 91% 15.5 (intermediate/low) 127 (intermediate/high) CITALA EL SALVADOR SAN IGNACIO TYPE 3 69 28,114 (intermediate) 65% 28.6 (intermediate) 86 (intermediate) METAPAN SAN FERNANDO TYPE 4 137 14,027 (small/intermediate) 40% 41.6 (intermediate/high) 45 (intermediate/low) LA PALMA TYPE 5 129 8,221 (small) 19% 58.5 (high) 28 (low)

GUATEMALA SAN FRANCISCO MORAZAN AGUA CALIENTE SANTA ROSA LA REINA DULCE NOMBRE SAN ANTONIO GUACHIPILIN DE MARIA PAJONAL EL CARRIZAL SANTIAGO DE COMALAPA LA FRONTERA MASAHUAT TEJUTLA LA LAGUNA SAN OJOS SANTA DE AGUA CANDELARIA DE RAFAEL RITA HONDURAS TEXISTEPEQUE NUEVA CONCEPCION CONCEPCION LA FRONTERA EL PARAISO QUEZALTEPEQUE LAS ARCATAO VUELTAS NUEVATRINIDAD

CHALCHUAPA CHALATENANGO LAS FLORES EL PORVENIR SAN ANTONIO SAN ANTONIO DE LA CRUZ NOMBRE SAN LORENZO LOS RANCHOS SAN ISIDRO DE JESUS ° EL PAISNAL AZACUALPA LABRADOR ° 14 N SANTA ANA SAN PABLO SAN MIGUEL 14 N TACACHICO SAN JOSE EL REFUGIO SAN FRANCISCO DE MERCEDES PERQUIN SAN SEBASTIAN CANCASQUE SAN PERQUIN AHUACHAPAN TURIN LEMPA SAN LUIS POTONICO VICTORIA ATIQUIZAYA SALITRILLO FERNANDO AGUILARES SUCHITOTO DEL CARMEN ARAMBALA COATEPEQUE JUTIAPA TOROLA JOCOAITIQUE TACUBA SAN GUAZAPA SENSUNTEPEQUE JOATECA MATIAS CINQUERA SAN SAN JUAN GUACOTECTI ANTONIO EL ROSARIO JUAYUA OPICO SAN JOSE MEANGUERA NUEVA CONCEPCION APANECA GUAYABAL TEJUTEPEQUE CAROLINA SAN ISIDRO ESPARTA DE ATACO NEJAPA ILOBASCO SALCOATITAN QUEZALTEPEQUE SAN LUIS LISLIQUE EL CONGO ORATORIO DE TENANCINGO SAN ISIDRO OSICALA CONCEPCION SAN DE LA REINA SAN CORINTO SAN FRANCISCO MENENDEZ CIUDAD ARCE GUALOCOCTI POLOROS NAHUIZALCO APOPA TONACATEPEQUE DOLORES GERARDO SIMON CACAOPERA SAN BARTOLOME DELICIAS SANTA CATARINA MASAHUAT NUEVO EDEN CONCEPCION IZALCO CUSCATANCINGO PERULAPIA MONTE EL DE SAN JUAN DE CONCEPCION ORIENTE SAN PEDRO PUXTLA SAN PEDRO SAN JUAN ROSARIO ARMENIA AYUTUXTEPEQUE SAN CIUDAD BARRIOS YOLOAIQUIN JUJUTLA DELGADO PERULAPAN SAN SEBASTIAN SAN ESTEBAN SONZACATE SANTA CRUZ EL RAFAEL GUAYMANGO SACACOYO MEJICANOS SAN CEDROS CATARINA LOLOTIQUILLO COLON CUSCATANCINGO MICHAPA CARMEN CHILANGA ANAMOROS SAN ANTONIO DEL MONTE MARTIN SANTA CLARA SAN COJUTEPEQUE SANTO SESORI SANTO DOMINGO DE GUZMAN CALUCO SAN JULIAN SOYAPANGO DOMINGO TEPECOYO SALVADOR ILOPANGO SAN SAN SOCIEDAD JAYAQUE CANDELARIA SAN CRISTOBAL LORENZO SAN ILDEFONSO GUATAJIAGUA SENSEMBRA SAN FRANCISCO ANTIGUO SAN SALVADOR RAMON GOTERA EL SAUCE NAHUILINGO TALNIQUE NUEVA SANTA CRUZ SAN SALVADORCUSCATLAN SAN MARCOS SANTIAGO JERUSALEN VERAPAZ SAN CAYETANO APASTEPEQUE SAN ANALQUITO ISTEPEQUE NUEVO SAN MARCOS TEXACUANGOS EMIGDIO MERCEDES NUEVA YAMABAL SANTA ROSA DE LIMA ACAJUTLA SANTO PARAISO DE LA CEIBA TEPETITAN GRANADA CHAPELTIQUE CUISNAHUAT CUSCATLAN TOMAS SAN MIGUEL DE OSORIO SANTA MARIA ESTANZUELAS SAN CARLOS SAN FRANCISCO TEPEZONTES OSTUMA JOCORO COMASAGUA PANCHIMALCO GUADALUPE EL TRIUNFO HUIZUCAR CHINAMECA SAN JUAN SANTA ISABEL ISHUATAN TEPEZONTES SAN PEDRO TEOTEPEQUE LOLOTIQUE EL DIVISADERO CHILTIUPAN ZARAGOZA OLOCUILTA SAN ANTONIO NONUALCO SAN VICENTE SAN This map was produced by MASAHUAT MERCEDES UMANA SONSONATE TAMANIQUE BUENAVENTURA BOLIVAR the Map Design Unit of The SAN JOSE TAPALHUACA MONCAGUA SAN JOSE World Bank. The boundaries, VILLANUEVA ROSARIO JICALAPA DE MORA CUYULTITAN SANTIAGO BERLIN NUEVA GUADALUPE COMACARAN YUCUAIQUIN PASAQUINA colors, denominations and NONUALCO QUELEPA any other information shown ALEGRIA SAN JUAN SAN RAFAEL JUCUAPA on this map do not imply, on LA LIBERTAD TALPA OBRAJUELO SAN AGUSTIN SANTIAGO ULUAZAPA the part of The World Bank DE MARIA CHINAMECA EL ROSARIO Group, any judgment on the SAN ZACATECOLUCA YAYANTIQUE legal status of any territory, JUAN CALIFORNIA SAN MIGUEL SAN ALEJO SAN LUIS TALPA NONUALCO TECOLUCA TECAPAN or any endorsement or SAN JORGE acceptance of such SAN PEDRO SAN FRANCISCO SANTA ° MASAHUAT JAVIER ELENA boundaries. 90 W SAN RAFAEL ORIENTE OZATLAN SAN LUIS DE EREGUAYQUIN EL TRANSITO LA HERRADURA USULUTAN SANTA JIQUILISCO MARIA EL CARMEN LA UNION EL SALVADOR CONCEPCION PUERTO BATRES EL TRIUNFO CHIRILAGUA CONCHAGUA LOCAL GOVERNMENT LA UNION SAN DIONISIO JUCUARAN MEANGUERA DEL GOLFO STRENGTHENING PROJECT PUERTO EL TRIUNFO INTIPUCA Golfo de Fonseca TYPE 1 MUNICIPALITIES TYPE 2 MUNICIPALITIES P TYPE 3 MUNICIPALITIES A C TYPE 4 MUNICIPALITIES I 13°N F 13°N TYPE 5 MUNICIPALITIES I C O C E A N NATIONAL CAPITAL MUNICIPAL BOUNDARIES 010203040 Kilometers DEPARTMENT BOUNDARIES 02010 30 Miles INTERNATIONAL BOUNDARIES 89°W 88°W

APRIL 2010