Report No. 39817-NI Nicaragua Institutional and Governance Review April 17, 2008 Poverty Reduction and Economic Management Latin America and the Caribbean Region Document of the World Bank ABBREVIATIONSAND ACRONYMS AECI SpanishAgency for InternationalCooperation AGO Attorney General's Office ALN Alianza Liberal Nicaragiiense AMAT EmpresadeAcueductosy Alcantarillados de Matagalpa BCN Central Bank ofNicaragua BIDE cc BostonInstitute for Developing Economies Coordinadora Civil CDE Consejos Directivos Escolares CDP Community DrivenProjects CEA CentrosEscolaresAutonomos CEM Municipal Evaluation Committee CGR Controller General's Office (Contraloria General de la Rep2iblica) CNE National Commission on Energy (Comisidn Nacional de Energia) CNR CentroNacional de Registros CONAPAS ComisidnNacional deAgua Potable y Alcantarillado Sanitario CONAR ComisidnNacional de Revisidn CONPES Economic and Social Council CONTRAS cos0 NationalResistance Committee of SponsoringOrganizationsofthe Treadway Commission CPL cso CriminalProceduralLaw Civil Society Organization DGI InternalRevenueService (Direccidn General de Ingresos) DGR Direccion Generalde Registros DIRAC Direccidn Alternativa de Conjlictos DNR GeneralDirectorate ofRegistry (DireccidnNacional de Registros) DP Departmentof Law (Procuraduria) EMAJIN EmpresadeAguay Alcantarillado del Departamentode Jinotega ENACAL EmpresaNacionaldeAcueductosy Alcantarillados ENEL National Electricity Company (EmpresaNicaraguensede Electricidad) EU EuropeanUnion FIL Freedomof InformationLaw FISE SocialEmergencyInvestment Fund FSLN Frente Sandinistade Liberacidn Nacional GDP Gross domestic product GMR GlobalMonitoring Report 2006 HIPC Iand I1 Heavily IndebtedPoor Country Iand I1 IADB Inter-American Development Bank IBI Impuestoa 10s Bienes Inmobiliarios (municipal tax onlocalproperties) ICA Investment ClimateAssessment ICAC Inter-American Convention against Corruption IDA International Development Association IDB Inter-American Development Bank IADB-INPRHU-CINASE survey IGR Institutional and GovernanceReview IGV GeneralSales Tax (Impuesto General de Ventas) INAA Instituto Nicaraguense deAcueductosy Alcantarillados INE National Energy Institute (Instituto Nacional de Energia) INIM Instituto Nicaragiiense de la Mujer INSS National Institute of Social Security INETER Instituto Nicaraguensede Estudios Territoriales INPRUR Instituto de la Propiedad Reforma Urbanay Rural 111 INRA Instituto de Reforma Agraria INSS National Institute of Social Security IP Administration of Property(Intendencia de la Propiedad) I S 0 Landadministration services providers JP Judicial Power MDC Municipal DevelopmentCommittee MDRI MultilateralDebt ReliefInitiative MEC Municipal Education comitB MFPC Ministry of Finance and Public Credit MHC Municipal Health Committees MOE Ministry of Education MOF Ministry of Finance MOFL Ministry of Family MOH Ministry of Health MRS Movimiento de RenovacibnSandinista N A National Assembly NGO Nongovernmentalorganization NP National Police NPS National PenitenciarySystem OAS Organizationof American States OCI Ojcinade CuantiJicacibnde Indemnizaciones OOT Ojcinade Ordenamiento Territorial OTR Oficina de Titulacidn Rural OUT Ojcinade Titulacidn Urbana PA Poverty assessment PAININ Programof IntegralAttention for Children PC Partido Consewador PER Public ExpenditureReview PFM Public FinanceManagement PGR GeneralBudget ofthe Republic PLC Partido Liberal Constitucionalista PRODEP Land Administration Project(Proyecto de Regularizacibn de la Propiedad) PRS PovertyReduction Strategy PRSC PovertyReduction SupportCredits PS PenitentiarySystem RAAN NorthAtlantic AutonomousRegion R A A S AutonomousRegionofthe South RJF RuralJudicial Facilitators RPIM PropertyRegistry (Registro de la Propiedad Inmeubley Mercantil) SCJ Supreme Court ofJustice SEC Supreme Electoral Council (ConsejoSupremo Electoral) SECEP Secretary for Coordination and Strategy ofthe Presidency SIGFA The computerizedpublic financial management system SIICAR Initiatingthe Integration of Registry and Cadastre SINARE National Registry System (SistemaNacional de Registros) SISCAT A softwareprogram implementedcountrywide SISEP Superintendence ofPublic Services TELCOR National Institute for Telecommunicationsand PostalServices (Instituto Nicaragiiense de Telecomunicacionesy Correos) UNO UnibnNacional Opositora USAID UnitedStates Agency for InternationalDevelopment WBI World Bank Institute iv Acknowledgments This report was prepared by a team led by Amparo Ballivih (LCSPP) and comprising David Reinstein (LCSEG), Frederic de Dinechin (LCSAR), Antonio Blasco (LCSFM), Jose Eduardo Gutierrez (LCSPS), Klaus Urban (FAO) and Consuelo Cruz (consultant). The EC office in Managua and Alejandro Alcala (LEGLA) contributed to Annex 2 to Chapter I,section B. Eloy Vidal (CITPO), Jordan Schwartz (LCSTR) and Gustavo Saltiel (LCSUW) contributed to Chapter 11. Peer reviewers are Richard Messick (PRMPS), Stephen Ndegwa (AFTPR) and Helge Jahn (Kreditanstalt fiir Wiederaufbau, Germany). All these contributions, as well as those of participants inthe decision meeting, are gratefully acknowledged. V NICARAGUA INSTITUTIONAL AND GOVERNANCEREVIEW Table of Contents EXECUTIVE SUMMARY ......................................................................................................... CHAPTER I:INTRODUCTION.............................................................................................. 1 -4 CHAPTER 11:THE REGULATORY SYSTEMFORPUBLIC SERVICES ............................. 7 A . Background .................................................................................................................. 7 B Legal and Institutional Framework., ............................................................................ 9 C 16 D Institutional and GovernanceBottlenecks 18 E.. .. Formal and Informal Decision-making Mechanisms ................................................ Policy Options ............................................................................................................ ................................................................. 21 CHAPTER 111: SECURITY OF PROPERTY RIGHTS 24 A . ........................................................... 24 B. Background................................................................................................................ Institutional Framework: Strengths, Weaknesses, and GovernanceProblems C . ..........26 and Governance Problems ......................................................................................... The Systemof Property Registry: Processes, Formal and InformalMechanisms, 32 D ReformProposals: Options andRisks ....................................................................... 38 E.. 41 CHAPTER IV: OVERSIGHT AND ACCOUNTABILITY MECHANISMS ......................... Conclusions................................................................................................................ 43 A 43 B .. Background ............................................................................................................ Control Systems .................................................................................................... -44 C. Social Accountability Mechanisms ....................................................................... 51 Annexes Chapter I.Annex 1:Monitoring Governance: Indicators and their Use 58 Chapter I. Annex 2: Country GovernanceBackground .......................................................... .................................. 75 Chapter I11. Annex 1: Summary Processfor Registration o f a Property Title ....................... -92 Chapter I11.Annex 2: Organigrams (Corte Suprema de JusticidINETER) ............................. 94 Chapter I11. Annex 3: Legal Framework for Property Rights andRegistration of Property ..................................................................................................... Chapter I11-Annex 4: Listof SIICAR Beneficiaries and their Roles.................................... Titles inNicaragua 95 Chapter I11-Annex 5: Property Legalization inNicaragua Institutional MappingMatrix Chapter I11-Annex 6: Summary o f Legalization Costs and Time for a Sale Procedure.......113 ....111 121 Chapter IV -Annex 1:External Control Models and Their Application inNicaragua ..........122 vi List of Tables Table 2.1: Telecommunications. LocalTariffs inCentral America in 2003 (US$) Table 2.2: Average Water Tariffs in SelectedLatin American cities Table 2.3: Average Electricity Tariffs in LatinAmerica (US$kWh) Table 2.4: InstitutionalArrangements for Public Service Regulation inNicaragua Table 3.1: Costs for the Legalizationof a Rural Property inNicaragua, 2000; Model Property of 10 mz. Category of Land Use P2. (US$) Table 3.2: Revenuesand Costs of the Property Registry inNicaragua(in C6rdobas) Table 4.1: NICARAGUA-CGR Total Audits Included inThe Annual Audit Plan in2003-2005 (innumbersandpercentages) Table 4.2: CGR ResultsofAudits by LegalResponsibility in2003-2005 (innumbersofaudits andamounts inmillions) List of Figures Figure2.1:InternetPrices for Twenty Hours per Month Figure4.1 NICARAGUA: CGR's Audits Origin Sources in2003-2005 Figure 4.2: Correlation betweenNumber o f Cases and Amount of Fines Collected in2005 List of Boxes Box 2.1: Summary of Legal Framework inthe Water and Sanitation Sector Box 2.2: Summary ofLegal Framework inthe Electricity Sector Box 2.3: Summary ofLegalFramework inthe Telecommunications Sector vii EXECUTIVESUMMARY 1. Beyond the formal lines of Nicaragua's political and judicial systems1, their functioning inpractice conditions outcomes inthe three areas examined inthis Revied, as political party considerations influence strongly many aspects of public management. Given this, profound institutional and governance reforms have been scarce and several have not been sustained. Hence, expectations for rapid and deep change from donors and civil society need to be modest. Yet, in the three areas examined (regulatory system, security of property rights and social accountability mechanisms) there i s scope to implement some actions of a long-term and less politically-controversial nature, that can makepublic services more efficient andtransparent, laying the ground for more profound and long-lasting institutional reform. 2. What matters most i s not what are the best institutional and governance arrangements -in any o f the areas- in an abstract sense, but what institutional and governance structures are likely to work best within the Nicaraguan context. Such considerations, which are likely extensive to other key areas for Nicaragua's development, lead to three main conclusions. First, reform efforts seeking to be sufficiently long-lasting to achieve their intended results need to be taken with broad political consensus to decrease the probability o f policy reversals. Secondly and as a corollary to the above, reforms may need a longer lead time before their approval and implementation, while such consensus is achieved. And thirdly, first best technical solutions are likely to be short lived ifthey are not politically informed. The consequence for donor support points to lower expectations about the swiftness and extent of reforms, and emphasize work on the technical aspects that lay the ground for the success of reforms. 3. The application of these conclusions inthe area o f regulation of public utilities (electricity, water and sanitation and telecommunications) indicates that, while the independentregulatory modelhasprovento yieldthe bestresults inother countries and is still the model that Nicaragua should aim for in the long run, its implementation in Nicaragua should be progressive and take into account the political context. Steps forwards leading to this objective entail several options outlined in the corresponding chapter, butpriority issues to decide include: 0 Whether Nicaragua should have a single multi-sector regulator or three independentregulators, one for eachpublic service. 0 The degree of separation of policy-making and regulatory functions. In this respect, the recent creation of the Ministry of Energy is an important decision. Similar separation of functions is desirable inthe water and sanitation and in thetelecommunications sectors. The degree of independence granted to the regulatory agency or agencies. Moreover, while the extent of autonomy granted to the regulatory agencies is See Annex 2 to Chapter Ifor a briefdescriptionofNicaragua's politicalandjudicial systems. RegulationofPublic Utilities, SecurityofPropertyRights, andOversightandAccountability Mechanisms. 1 important, even more important is the respect for their assigned responsibilities. Predictability for service providers and consumers is the key factor. 4. Inorder to makethe above decisions, technical considerations andbest practice examination of other countries' experiences are necessary, but not sufficient. The most important factor i s the achievement of a modicum o f consensus among the political decision-makers and affected stake holders, following a debate o f the options that is both technically andpolitically informed. 5. Maintaining the status quo is not advisable, especially in the electricity sector, where problems are acute and their solution depends largely on attracting new investment, which requires a credible regulatory framework. The SISEP law provides an opportunity for making progress in this area -should the Nicaraguan authorities opt for multi sector regulation-, but only if it is amended so that the selection of its principal authorities requires political consensusbetweenthe executive andthe legislative. 6. Inthe areaofproperty rights, similar conclusions may be drawnwithrespectto the long-term objectives and the short term actions. While the independence of the property registrar is desirable as an ultimate goal, the achievement of this objective under the present circumstances of Nicaragua is not likely. At the other extreme, maintaining the status quo would imply perpetuating the tenure insecurity that affects mostly the poor's access to real and financial assets. 7. A few options for moving forward, two of which have been maturing for the past few years, can improve considerably the current situation, while laying the ground for the best long-term alternative. These are: 0 Approval of the Registries Law, creating the National Directorate of Registries and laying the ground for the integration of cadastral and property registry information. 0 Implementation of the computerized system for the integration of the property registry andcadastralrecords (SIICAR). 0 Furtherinvolvement ofmunicipalities inthe cadastralregi~try.~ 8. Regarding the performance of the General Comptroller's Office, substantial changes to the prevailing governance arrangements would require a major overhaul o f the legal framework for the institution's functioning. An alternative to this i s to proceed with meaningfulimprovements that can be made at the technical level and which would go a long way towards increasing the institution's credibility as a control and oversight mechanism. Some of these are: Aside from the nation-wide benefits of this action in terms of property security, this could have the secondary benefit of improving municipal tax collection. 2 The annual audit of execution of the general budget could become regular, cover progressively more public sector institutions, including decentralized andautonomous ones, andbe conducted according to international accounting standards. The CGR could change its mode of selection of audits, relying less on accusations and more on risk-based analysis, to increase the chances of finding recoverable assets. The coordination betweenthe executive andjudicial branches of government in the pursuit of CGR's findings would need to be strengthened in order to lead to actual punishments, especially for civil and penal offenses, if the intention is that audit findings become an effective deterrent for wrong-doing and that the general population regards the institution as a credible means of control ofpublic resourcesandpublic servants. 9. Finally, several groups within Nicaraguan society have implemented various forms of social accountability mechanisms. Some of these have beenled by civil society organizations and other by public institutions seeking feedback on their performance. But the results in terms of influencing policy decisions are meager. The National Assembly has recently approved the Law of Access to Information, which can become a useful instrument to increase the impact of these social accountability mechanisms. Some government actions that would makemuchprogresstowards this end include: Making available to the public monitoring indicators of public policy, in particular those related to the country's poverty reduction strategies and the MilleniumDevelopment Goals. These andother informationalready available to the public -such as the national budget and its execution- could be presented in a more user-friendly format that is easily understandableby the generalpopulation. Implementing mechanisms of public consultation before approving policy decisions, especially with relevant stakeholders, both at the executive and legislative levels. These mechanisms can go a long way towards ensuring the sustainability of public policy in several areas. A possible starting point could be inthe regulatory systemfor public services. Approving implementing regulations to the Access to Information Law regarding filing, archiving and presentation of information in public institutions andpreparing them to meet informationdemands from the general public. 3 CHAPTERI INTRODUCTION 10. Nicaragua is one of the poorest countries in Latin America, with a per capita gross national income of only US$l,OOO in2006 (Atlas method) and a total populationof 5.2 million. Poverty is heavily concentrated inrural areas and associated with agricultural sector activities, which still account for a large proportion of gross domestic product (GDP) (12 percent) by regional standards. Nicaragua also has among the lowest social indicators in Latin America; however, these broadly correspond to the differences inper capita income levels. 11. In the past few years Nicaragua has been very successful at stabilizing its economy and restoring growth. This effort has been supported by a heavy influx of foreign resources and debt relief including HIPC Iand I1 and, more recently, the Multilateral DebtReliefInitiative (MDRI).Most of the resources freed from debt-service have gone to poverty reduction. Accordingly, poverty-related expenditures increased from the equivalent of 8 percent of GDP in 1998to 13.5 percent in2005.4Yet, the results of such financial efforts inreducing poverty are modest at best. 12. The big question now is how to achieve greater impact from public policies on poverty reduction. While the amount of financial resources assigned to poverty- alleviation efforts, their mode of delivery, and the accompanying public policies are strong determinants of development results, experience has shown that the results can be disappointing. There i s a largebody of literature and much country experience that points to the crucial link between the strength of public institutions and governance arrangements,on one hand, anddevelopment results on the other.5 13. While Nicaragua is a country, like many others, with institutional and governance challenges, analyzing all of them in detail is beyond the scope of this document. Annex 1presents the main governance indicators for the country, as compiled by the World Bank Institute(WBI), andhow are they usedby international institutions in making decisions about assistance to Nicaragua. Although these indicators have weaknesses, they can provide a general indication of what are the priority areas for investigation. Accordingly, the present review concentrates on a few key areas where the Bank's expertise canaddvalue andcomplement the efforts ofother donors, including: (a) the regulatory system, (b) the system of property registries, and (c) two o f the mechanisms for oversight and accountability of public sector performance (the Comptroller's Office and social accountability). Nicaragua: "Informe de Gasto en Pobreza Enero-Marzo," Secretaria Tdcnica, Presidencia de la Republica, 2006. The first milestone report for the Latin America and the Caribbean Region was the 1998 flagship report, "Beyond the Washington Consensus: Institutions Matter," by S. J. Burki and G. E. Perry. An additional bibliography, covering a wide array of periods, regions, and analytical methods, is included in the recent D A C report, "Strengthening Bank Group Engagement on Governance and Anticorruption," prepared as background for the 2006 Meetings of the Development Committee. 4 14. A further reason to take a closer look at Nicaragua's governance challenges is their impact on the investment climate and, hence, growth prospects. The latest Investment Climate Assessment (ICA) for Nicaragua indicates that "Firms perceptions rank weak governance, lack o f finance and uncertainty in the provision o f electricity services as their most important obstacles. Two areas dominate the top ten rankings o f obstacles, weak governance and lack o f finance. Over 55 percent o f all surveyed firms report that these two issues affect their ability to grow. Entrepreneurs were very clear that institutional governance issues such as corruption, economic and regulatory policy uncertainty and macroeconomic instability are o f great concern as is their ability to access finance at a reasonable cost. Concerns over informality, crime, electricity and the level o ftax rates round out the top ten concerns expressed by firms." 15. Another useful finding from the I C A for the purposes o f this Review is firms' perception o f corruption. Perceptions o f "grand" corruption or influence remain high and seem to contribute to overall perceptions o f corruption and high levels o f policy uncertainty. Firms perceive corruption as the single largest obstacle to the growth o f their firm, but report few actual experiences with petty corruption. The paradox o f a high perception o f corruption, but relatively low actual experience with it, seems to be due to a pervasive sense that some can unfairly gain business advantage though influence. Rather than actual payoffs, influence is the practice of "bending" rules to favor certain well- placed individuals or companies. One result i s that firms feel great uncertainty about economic and regulatory policy since they feel current policies may be changed due to influence. This finding has been taken into account when deciding on the coverage o f this Review. ReportObjectives 16. The overall objective o f the Institutional and Governance Review (IGR) is to examine the institutional and governance bottlenecks that stand in the way o f more effective impact o f key public policies, particularly poverty reduction policies. Since the report i s limited in scope, the criteria to decide priority areas for review included: (a) issues that are o f particular significance for better governance and institutionality, (b) issues that are particularly important inrelation to poverty reduction, (c) issues where the Bank has a comparative advantage, and(d) issues where there would not be a duplication o f effort with other donors or other studies undertaken by the Bank and where the IGR can add value. 17. To summarize, the objectives o fthe IGR are: a) To provide recommendations for policy-makers inthree areas: regulatory framework, property rights, and oversight and accountability mechanisms. b) To provide a framework for the Bank's next Country Assistance Strategy, and for other donors, on issues o f governance and institutionality that impinge on the effectiveness o f the country's reform efforts. 5 ComplementaryAnalyticalWork andReportStructure 18. The IGR complements three other analytical works undertakensimultaneously by the Bank: a Public Expenditure Review (PER), a Poverty Assessment (PA), and an Energy Strategy Study. The IGR was contemplated in the last Interim Strategy Note for Nicaragua covering FY06-07, as a mechanism to provide an analytical underpinning for Nicaragua's development initiatives and Bank-supported programs for poverty reduction, including the design o f the new Country Assistance Strategy FY08-11, a possible new series of Poverty Reduction Support Credits (PRSCs), and investment operations. By the same token, the IGR should facilitate donor coordination, especially in the context of joint budget support operations and investment operations that have a governance/institutional reform component. 19. Chapters I1 through IV provide more in-depth institutional and governance analysis of the three substantive areas of this report: the regulatory system for public services, the system of registration of property rights, and two areas of accountability and oversight (the Comptroller's Office and social accountability), and discuss the reform alternatives and political economy implications of their timing and sequencing. 20. Inall countries, public sector institutions andgovernance arrangementscanonly be properly understood within each country's political andjudicial context. Annex 2 to this chapter describes briefly the Nicaraguan political andjudicial systems and derives some conclusions on how it conditions both the current state of the institutions and governance arrangements in the three areas mentioned and what political considerations must be taken into account in the search for long-lasting improvements. Inthe case of Nicaragua, the impact o f political dynamics on the institutional and governance arrangements inthe three substantiveareas of this report, as well as inmany other areas, illustrate the importance o fthe political context powerfully. 21. Two basic conclusions emerge from this analysis. First, rapid and fundamental reforms should not be expected, but in the three areas analyzed there are possible improvements of a more technical nature that can lay the ground for more profound reforms. Secondly, the key to long-lasting institutional and governance reforms in the three areas of this report, as well as others affecting poverty reduction, is strong political consensus betweenthe executive and legislative branches o f government, as well as with civil society. Prior attempts to reform that did not fulfill this condition have led to subsequent policy reversals, conducing to what can be characterized as an excessive propensity to reform withfew long-lasting results for poverty reduction. 6 CHAPTERI1 THE REGULATORYSYSTEMFORPUBLIC SERVICES A. Background 22. Access to public water, energy and telecommunication services determines the quality o f life for people in urban and rural areas, principally for people who live in poverty. These services, provided through an efficient infrastructure, also have powerful effects throughout the economy, expanding and deepening markets, opening new opportunities, and reducing costs in all sectors. The current situation o f these services in Nicaraguavaries from sector to sector. The telecommunications sector is characterized by high competition among private providers. Coverage, especially in cellular service, has increased significantly in recent years and average prices have gone down, although they are still high by regional standards (see Table 2.1). The same can be said o f internet prices (see Figure 2.1). At the other extreme are water and sanitation services, provided by public companies, where coverage and quality o f services are low, but tariffs are also low (Table 2.2). Electricity is somewhere in the middle, with some public generation, public transmission, and private actors in generation and distribution. Tariffs in this sector are also highby regional standards (Table 2.3), a consequence both o f the fact that 75 percent o f electricity generation is oil-based, and o f electricity losses due to technical losses, stealing, and legal limitations onpursuing electricity thefts. Table 2.1: Telecommunications. Local Tariffs in Central America in 2003 (US%) Figure 2.1: Internet Prices for Twenty Hours per Month Commercial _I (1,000 min.) 51.05 48.11 Guatemala 28.03 40.56 El 35.28 36 Salvador 1 31.24 Honduras 23.72 Nicaragua 41.83 20 Costa 12.5 Rica 10 Source: Calculationsbasedon 0 T regulatoryagency information. Belize Nicaragua El HondurasPanamaGuatemalaCosta Mexicc Salvador Rica Source: ITU. 7 Table 2.2: Average Water Tariffs in Table 2.3: Average Electricity Tariffs in Latin SelectedLatinAmerican cities America (US$/kWh) City Average Commercial Industrial Residential Argentina 4.44 2.08 Tariff Barbados 19.95 19.65 Bolivia 8.43 3.98 (US$/m3,2003) Brazil 7.27 3.84 Arequipa 0.22 Chile 8.21 5.56 Bogoth 1.16 Colombia 9.24 7.17 Cali 0.76 Costa Rica 8.58 5.96 Cochabamba 0.32 Cuba 10.45 8.35 Costa Rica 0.34 Ecuador 11.11 9.65 La Paz 0.22 ElSalvador 11.89 12.10 Lima 0.32 Grenada 23.40 18.80 Managua 0.31 Guatemala 6.21 7.48 Haiti 8.84 8.45 Medellin 0.78 Honduras 2.88 3.44 Pernambuco 0.5 1 Jamaica 15.03 11.55 Santa Cruz 0.59 Mexico 13.95 6.95 Trujillo 0.38 Nicaragua 16.24 12.61 Uruguay 0.72 Panama 11.80 9.90 Paraguay 5.97 3.76 Average 0.51 Peni 7.59 7.20 Median 0.38 Dominican Republic 10.60 10.82 Minimum 0.22 Suriname 17.30 13.10 Trinidad & Tobago 3.73 4.62 Maximum 1.16 Uruguay 7.03 3.89 x m e : ADERASA. Venezuela 7.90 2.80 burce: SIGET. 23. Although in the final analysis utility regulation is a means to an end-better sector performance-this review focuses on legal and institutionalinputs that regulatory agencies needto fulfill their roles, and does not look into the outcomes interms of sector performance. The evaluation concentrates on describing formal, legal attributes of the regulatory system, and on informal decision-making mechanisms, and identifying problems areas. This chapter i s not intendedto be a complete evaluation o f the regulatory system, butto examine only the first of two basic dimensions o f any regulatory system- regulatory governance and regulatory substance-in the Nicaraguan context.6 The objective of the report is to provide options to improve the system, focusing on those elements of the regulatory system that, if changed, would clearly lead to better sector outcomes. In other words, the report will make note of what i s good, but focus on what canbe improved. Regulatory governance refers to the institutional and legal design o f the regulatory system and the fi-amework within which decisions are made. Regulatory governance involves decisions about the independence and accountability o f the regulator, the relationship between the regulator and policymakers, the process by which decisions are made, the transparency o f decision-making, the predictability o f decision-making, and the organizational structure and resources o f the regulator. Regulatory substance is the content o f regulation. It is the actual decisions, whether explicit or implicit, made by the regulatory entity about tariff levels and structures, quality-of-service standards, automatic and non-automatic cost pass-through mechanisms, investment or connection obligations and reviews, accounting systems, network access conditions for new and existing customers, and periodic reporting requirements. This side o f regulation will not be addressedinthis report. 8 24. The next section of this chapter, Section By will describe the legal and institutional framework applicable to the three regulated sectors: water and sanitation, energy, and telecommunications. Section C will look at the formal and informal decision- making mechanisms. On this basis, Section D looks at the governance bottlenecks. Section Eprovides policy options. B. Legaland InstitutionalFramework 1. Water and Sanitation 25. Important legal reforms were made in the water and sanitation sector during 1998-2004, resulting in the partial separation of functions among government agencies. The main laws and decrees enacted inthis period for the sectors are summarized inBox 2.1. In May 2004, the Executive Secretary of the Consejo Nacional de Agua Potable y Saneamiento (CONAPAS) was created. Soon afterward, CONAPAS created a Special Commission to work together with the Executive Secretary in the development of the sector strategy.' In addition, the government formulated a National Development Plan, the Environmental Plan for Nicaragua, and the National Health Plan. Taken together, these documents define the basic planning framework for the different programs to be executedby various government institutions inthe water and sanitation area. 'The water sector strategy is contained in the document titled, "Estrategia Sectorial de Agua Potable y Saneamiento (2005-2015)," published by CONAPAS in August 2006 with support fiom the Inter- American DevelopmentBank. 9 Box 2.1: Summary of LegalFrameworkinthe Water and SanitationSector Law 275 reformed the Organic Law of the Nicaraguan Institute for Water and Sanitation giving to the Znstituto Nicaragiiense de Acueductos y Alcantarillados (INAA) the regulatory and quality-control functions. Law 276 created Empresa Nacional de Acueductos y Alcantarillados (ENACAL) as a decentralized commercial state entity, with its own governance and budget defined and approved by the Central Government, indefinite duration, and capacity to acquire rights and make contractual commitments. The main objective o f this company is to provide water and sanitationservices. Decree No. 47-98 created the Empresa de Agua y Alcantarillado del Departamento de Jinotega (EMAJIN) and the Empresa de Acueductos y Alcantarillados de Matagalpa (AMAT). In 1998, Executive Decree No. 51-98 created CONAPAS with the main objective of formulating strategies and policies in the water and sanitation sector. CONAPAS is composed o f the Executive Presidents o f ENACAL and INAA, the Minister o f the Environment, the Health Minister, and the Director o f Instituto Nicaragiiense de Estudios Territoriales (INETER). In 2001 two new companies were created to provide water and sanitation services in the cities o f Lednand Chinandega. Laws 479 and 480 (2003) reformed the law that created ENACAL. InNovember 2003 Decree No. 75 limited the functions of ENACAL to the urban areas and gave the Social Emergency Investment Fund (FISE) the responsibility o f servicing all rural areas o f the country. This Decree also added two new members to the CONAPAS board, the Secretary for Coordination and Strategy o f the Presidency (SECEP), and the Executive President o f the Social Emergency InvestmentFund (FISE). 26. The water and sanitation sector is still a monopoly in the hands of the State and privatization is not an option for the current administration. The current institutional setup i s a result of reforms adopted in 1998, when three main public institutions were created: (a) the policy body Consejo Nacional de Agua Potable y Saneamiento (CONAPAS), (b) the regulatory body Instituto Nacional de Acueductos y Alcantarillado (INAA), and (c) the public operator Empresa Nacional de Acueductos y Alcantarillados (ENACAL). INAA and ENACAL startedoperations in 1998, but CONAPAS operations were delayed until 2002 when Decree No. 33 redefined its functions and organization as a multidisciplinary body o f the Executive Power to formulate objectives, policies, strategies, and general directions for the entire water and sanitation sector. This function includes indicative planning in order to promote development o f these services for the entire country. Decree No. 33 appointed an Executive Secretary and earmarked a budget directly from the NationalGeneralBudget. 27. ENACAL i s the main service provider in Nicaragua, serving 147 urban and rural concentrated localities. There are also 26 small municipalities managing their systems and about 5,000 rural water boards. ENACAL i s headed by a president, designated by the President of the Republic. It has a general manager, six functional managers, 32 vice managers, and 28 departments, agencies, and units. In addition, there 10 are the following units depending on the President: Planning, Legal Advisors, Technical Communications, Energy, andone unitto follow managerial performance and operational results. ENACAL's internal structure i s reasonable, but it i s grossly overstaffed. There are 7 employees per 1,000 water service connections, far from the international standard of less than 3 per 1,000 customers. 28. Regarding INAA, once it was re-created as a regulatory body, it passed new decrees and resolutions to mandate a reformed tariff structure.' However, this was not a real sector reform, because the political weight of both CONAPAS and INAA are still marginal in the face of the dominant role of ENACAL. INAA regulates only three regional companies: ENACAL, the national provider of water and sewerage services in urban areas of the country; EMAJIN, the provider of services to the Department of Jinotega; andAMAT, the provider o f services to the Departmentof Matagalpa; as well as a group o f small municipal and rural companies. A concession agreement between ENACAL and INAA does exist, but it does not include operational indicators to allow effective monitoring. INAA's budget for fiscal year 2006 was US$1.1 million. The numberof INAA employees-8 employees per 1,000 customers- surpasses the industry standards inother countries. 2. Energy 29. The structural reforms inthe energy sector started in 1993 with the creation of the National Electricity Company (Empresa Nicaragiiense de Electricidad, ENEL). Through this act, all previous entrepreneurial functions of the National Energy Institute (Instituto Nacional de Energia, INE) were passedto ENEL, while INEretained planning functions, policy formulation, and approval of norms and regulations for the energy sector. This process was reinforced in 1998 by the enactment o f Laws 271 and 272, which limited the responsibilities of INE to the regulatory, supervision, and control functions, while entrusting the responsibility of approving energy policies to the National Commission on Energy (Cornisidn Nacional de Energia, CNE). Box 2.2 summarizes the current legal fiamework ofthe electricity sector. 30. The energy sector underwent a deep restructuring during the late 1 9 9 0 ~as~the 1998 Electricity Law unbundledthe generation, transmission, and distribution divisions of the state-owned ENEL, and allowed the privatization of generation and distribution activities. The Electricity Law of 1998 divided the governance functions for the power sector betweentwo institutions: CNE and INE, 31. INE is the regulatory agency, responsible for approving and enforcing specific norms and procedures for the electric energy and hydrocarbons sectors. The Institute's top authority is its Council, composedof three members.The members are chosen by the National Assembly from a list of candidates submitted by the President of the Republic. The President of the Council is appointed for a six-year term, while the other members have alternateperiods with respectto Presidential terms, to reduce political influence. 'INAA uses long-runmarginal cost methodology as the mechanismfor setting water rates, under which there is norole for state subsidy. 11 Box 2.2: Summary of Legal Framework in the Electricity Sector 0 Legislative Decree No. 46 (1993) created ENEL as a public enterprise, giving it the responsibility to generate, transmit, distribute, and market electric energy. 0 Law 271 (1998) is the Organic Law o fthe National Instituteo f Energy (INE). 0 Law 272 (1998), known as the Electricity Industry Law, and Decree No. 128 (1999), created the National Commission on Energy (CNE), giving it policymaking responsibilities and leaving INEas an independent regulatory agency. 0 Decree No. 128-99 reformed the previous scheme separating policymaking and regulatory functions and created the CNE, giving it policymaking responsibilities and leaving INEas an independent regulatory agency. 0 Law 467 (2003) limitsthe concessions for hydroelectric projects up to 5 megawatts. 0 Laws 465 and 494 (2004) reformed Law 272 and added articles 18 and 135. e Law 493 (2005) reformed Law 271 allowing for the destitution o f INE's authorities with 60 percent o f the votes o f legislators. 0 Law 53 1 (2005) increasesthe limit to allow private investments inhydroelectricity from 5 to 30 megawatts. e Law 532 (2005) intends to promote electric generation usingrenewable energy sources. 0 Law 554 (2005) is the Energy Stability Law, creates an Energy crisis Fund, establishes price controls, regulates the energy spot market and allows the settling o f cross-debts between distribution companies and publicly-owned generators. e Law 600 (2006) reformed Law 554, extendingthe period for spot market regulation and for subsidies to consumers o f less than 150 kilowatts per month to December, 2007. Authorizes the Ministry o f Finance to issue bonds for up to US$ 5 million to finance purchases o f energy by the transmission company. 32. INE employs approximately 100 people and is administratively and financially independent.Itmanagesits own budget financed by: (a) a regulatory service fee of up to 1.5 percentg of the total billing of the regulated electricity companies, (b) fees for concessions and distribution licenses, and (c) a regulatory and control fee o f up to US$0.06 per barrel of oil or oil products sold by hydrocarbon retailers. The budget for fiscal year 2006 was approximately US$3.4 million." The main function o f INE is to promote competition inorder to lower the costs for consumers and improvethe quality of energy services, assuring the financial efficiency o f the agents in the market. Specific functions include: protecting consumer rights, approving and controlling tariffs, controlling and enforcing regulatory decisions, preventing agents from discriminatory practices, and resolving problems among industry agents. Until recently, the CNE was responsible for formulating sector policies, preparing national and rural power-expansion plans, proposing energy sector laws and presidential decrees, and implementing rural electrification projects. The Ministry of Energy and Mines, created in January 2007, absorbed the CNE and assumed the functions of INE with respect to licenses and concessions. The current fee is 1.O percent. loLaw 569, calculatedat the exchange rate of C$18.1623 per US$. 12 3. Telecommunications 33. In 1982 the Revolutionary Government passed Decree No. 1053, which created the National Institute for Telecommunications and Postal Services (TELCOR)," an agency of the central Government, that had the functions of the Ministry of Posts and Telecommunications, the Regulatory Agency and operated both postal and telecommunications services. Through this Decree, the State retained the mandate to promote, facilitate, andregulate the services, promote private investment, intervene inthe market, and guaranteeuniversal access to the population. Reforms inthe structure of the telecommunications sector started in 1995 by the approval of two laws: (a) Ley 200, the General Telecommunications Law, that established the separation o f roles of the State (policy setting and regulation) and the private sector (operation of companies to provide services), and (b) Ley 210, the Private Participation in the Telecommunications Sector, that divided TELCOR into three parts: (i) ENITEL, the telecommunications Operator, (ii) Correos de Nicaragua, the postal Operator, and (iii) TELCOR, that will remain the Policy Making Body and the Regulator. New laws and decrees complemented the regulatory framework, as describedinBox 2.3. Box 2.3: Summary of LegalFrameworkin the TelecommunicationsSector Law 200 (Ley General de Telecomunicacionesy Sewicios Postales) of 1995 established the legal and institutional principles giving autonomyto TELCOR-under the tutelage of the Presidency-to develop faculties to norm, regulate, plan, and supervise all sector activities, with the aim of acceleratingsector development. 0 Law 210 (1995) allowed private participation in the operation and extension of telecommunicationservices inthe country. 0 Presidential Decree 19 of 1996 defined procedures and requisites needed to obtain licenses to operate any type oftelecommunicationservices. Law 320 (1999) reformed Law 200. 0 Law 389 (2001) reformed Law 210 introducing some changes to the bidding procedures for the privatization of ENITEL. 0 Presidential Decree No. 19 of 1996 defined procedures and requisites needed to obtain licenses to operate any type oftelecommunicationservices. 0 Decree No. 131 of 2004 reformed and improved some articles of the previousPresidential Decree. 34. In addition to these norms, over the years TELCOR has enacted a set of internal regulations, according to the particular conditions of the telecommunications market inthe country, in order to guarantee the fulfillment of the quality and expansion goals for telecommunication services. 35. Liberalization has been more successful in the telecommunications sector than in the water and sanitation and energy sectors. TELCOR increased tariffs for local telephone services to Mly recover costs and a reasonable rate of return on investment; and l1 Decree No. 1053, June 5, 1982 (Ley Orgdnica del Instituto Nicaragiiense de Telecomunicaciones y Correos). 13 awardednational licensesto three newcellular operatorsto competewiththe incumbent, Bell SouthofNicaragua, Radio MovilDypsa andENITEL.This marketliberalization hasresulted inadramatic increaseinthe number offixed andmobile phones- from 194,000 in 1999to more than 1,800,000 phonesin2006 (1,100,OO ENITEL, 700,000 Movistar). Today there are two operators actively competing for the market, with networks covering almost all areas of the country, except insmall ruralcommunities. 36. The Government sold 40 percent of the shares of ENITELwith management control to MEGATEL, a consortia of Honduran and Swedish investors in December 2001. It also sold 11percent of the shares of ENITELto its workers. As per Law 210, at the time of the transaction, ENITELhad an exclusivity over local, long distance andinternational telephone service for 3 years, expiring in December 2004. Later, in 2003, The Government sold the remaining49 percentofENITEL's sharesto America Movil S.A.ofMexico. America Movil also purchasedthe 40 percentfrom MEGATEL,whichenabledthemto control the company. 37. In April of 200512, competition started in the basic local, long distance and international telephone service. Prices for international calls plummeted. It is important to note that in the telecommunications sector, all services are under competition and the Governmentdoes not operateany commercial service. 38. TELCOR is the most successful of the three regulators. It has well-qualified technical professionals, although its total number of employees-4ose to 200-is about twice what it needs. The number and qualityof TELCOR personnelcanbe explainedat least partlyby its generous budget,which, for fiscal year 2006, was US$6.2million. 39. Table 2.4 shows the overall picture of the institutional arrangements for the regulationofpublic services inNicaragua. Table 2.4: InstitutionalArrangements for PublicService RegulationinNicaragua Energy(electricity Ministry ofEnergyandMines ComisidnNacional de andhydrocarbon Energia (CNE) GEMOSA fuels) ExecutivePresident GEOSA appointedbythe National HIDROGESA Assembly fiom a list of GECSA candidatesnominatedby PRISMA the Presidentofthe ENTRESA Republic DISNORTE DISSUR 9 municipaldistributioncompanies Water andsanitation ComisidnNacional deAgua Instituto Nicaraguensede ENACAL services Potabley Alcantarillado Acueductos y AMAT Sanitario (CONAPAS) Alcantarillados (INAA) EMAJIN Municipalandruralentities l2Four monthsafter the exclusivityexpired, due to the additionaltime to approve andpublishthe concessioncontract inthe official newspaper. 14 ITelecommunications Insrituto Nicaragiiense de Insrituto Nicaragiiense de ENITEL (fixed, mobile, long- 3 Telecomunicacionesy Correos Telecomunicacionesy distance, private) (TELCOR) Correos (TELCOR) MOVISTAR ,ENITEL(mob) ExecutivePresident ESTESA (TV), DirectTV, Cable appointedbythe nation's ComTV, President 10TV channels, 3 ISP, andradio operators 4. New Initiatives 40. Inlate 2004 Nicaragua's NationalAssembly approved newinitiatives to reform public services regulation. On November 27, 2004, the Assembly approved Law 511, which created the Superintendence of Public Services (SISEP) as a single regulatory agency for telecommunications, water and sanitation, and energy services. This law also gave the Superintendence of Public Services (SISEP) the mandate to protect consumer rights.13The adoption of this and other laws followed some constitutional changes. A nine- month debate ensued in Nicaragua on whether public utility regulation should be carried out by sector-specific regulators or by a multisector regulator, and on which government branchshould appoint the headof regulatory agencies. These changes were resisted by the Executive, which did not recognize the newregulators namedby the legislation, and for a while each sector had two regulators, contributing to great un~ertainty.'~ a result of a As political truce in2005, these changes were put on hold until a new elected administration was sworn in. The new administration assumed power in early 2007, but the entry into force o fthe SISEP and other laws was soonpostponed for an additional year. 41. The entry into force of the SISEP Law would significantly modify the institutional framework for regulation of public services. Under Law 511, SISEP would have one Superintendente and four Intendentes, one for each public service, and a fourth one for consumer protection. All are to be appointed for fixed terms o f five years. The Superintendent would be appointed by the National Assembly from a list of candidates proposed by the President, butthe National Assembly can add candidates to this list. This provision defeats the purpose of finding a political consensus between the Executive and Legislative branches for the appointment o f regulators, a provision which serves as an incentive to appoint the best technical professionals and gives them increased freedom to act as independent regulators. SISEP would create norms and regulations, supervise and control the application of norms and regulations, and receive and resolve all appeals in a first instance before going to the judicial system or civil law. Changes to norms and regulations would be decided by the Board of Directors. Ministries would continue defining the policies for each individual sector. 42. The SISEP Law is a good attempt to reorganize and improve the quality of regulation of public services in Nicaragua. Given the size of the market for public l3 While the SISEP law changes the organization of Nicaragua's regulatory agencies, it does not change or modifythe sectorlawsor specific sectorregulations. l4The law was adoptedby the Legislature onNovember27,2004. The Presidentvetoedit onDecember 17, 2004, and the legislature overrode the veto on January 14, 2005, and appointed the Superintendente and Intendentes onFebruary28,2005. 15 services inNicaragua in terms o f land, population, and the small number o f companies to be regulated, it would be reasonable for Nicaragua to have only one regulator for the three public services. This scheme has several other advantages: (a) the regulation is likely to be more understandable by consumers and regulated companies if only one entity regulates all public services, and the general policy direction and policy priorities o f the government are applied consistently; (b) it would allow the body o f regulators to exchange experiences across all services and to develop similar solutions to common problems; (c) the quality o f regulatory services inthe electricity and water and sanitation sectors could be improved, because the amount o f monetary resources available to the telecommunications regulator in Nicaragua greatly surpasses those o f the energy and water services, while a single regulator would have the possibility o f optimizing these resources and improving the quality o f the overall public services regulation process; and (d) having a superintendent above sector intendentesprovides a natural mechanism for a first appeal process. C. Formal andInformal Decision-makingMechanisms 43* Regulatory practices in the three public services have been very unstable and discretionary inthe past five years. The decision-making rules are well defined intheory, but both regulated companies and consumers think that their application lacks transparency. The decision-making process has been politically influenced in different directions, a situation that has resulted in numerous appeals, on-going legal demands through the judicial system, international arbitration and a claim o f guarantee by the private electricity distribution company to the Multilateral Investment Guarantee Agency (MIGA). 44. The importance o f informal decision-making mechanisms i s best illustrated by the electricity sector. Although a recent assessment o f regulatory quality15 in this sector based on analysis o f the formal decision-making mechanisms showed that INE has medium levels o f regulatory quality inthe Latin American region and very highlevels o f autonomy indecision-making, there are a number o f facts that contradict this assessment, including continuous disputes with the private distributors, disputes that are the subject o f arbitration and claims o f multilateral guarantees, unforeseen subsidies, consumer protests, andthe current threats to re-nationalizethe industry. 45. Infact, the electricity sector has been in crisis over the last two years, despite the considerable efforts made in separating the generation, transmission, and distribution sub-sectors, and creating an independent regulatory body. The tariff-setting methodologies and market rules inthe energy sector are already inplace and well defined in the set o f regulations issued by INE. The rules are similar to those applied in many countries. The problem inNicaragua during the past two years has been that the decisions were prepared and implemented without any discussion with stakeholders. This has been due to the opportunistic way in which the regulator has applied some measures, the lack l5RegulatoiyGovernanceAssessmentof theInstitutoNicaraguensedeEnergia (INE),LuisA. Andresand SebastianLopezAzumendi, April, 2007 16 of transparency in the decision-making process, which seems to have responded mostly to political pressures from different sides, and the attention to short-term problems, without a rigorous approach taking into account the long-term effect on investments needed inthe sector. The ideal of regulatory stability could not be applied due to critical and urgent problems faced by the regulator inthe tariff-setting area, inlight of rising oil prices. The result has beenno new investments inrecent years, increasing power outages, the breakdown of public confidence in the market, and growing litigiousness between private investors andthe Government. 46. INE has tried to solve the problems inthe best way to guarantee continuity of service. However, some companies continued to complain, while at the same time trying to take advantage of the weak position of the regulator, amidst a very complicated political environment. This situation has resulted in the opportunity for the distribution companies to avoid some of their responsibilities, such as reducing losses in the distribution systemthrough investments, and social work with the communities. 47. Threats of a possible re-nationalization of the electricity distribution companies were a good political flag during the election period in 2006. But the current authorities have realized the tremendous cost that this decision could carry to the country, and that it would not solve the energy (electricity) sector problems. The Government and the regulator have expressed their commitment to lower the level of public discussions and consolidate the tariff-setting process with the introduction of a new methodology to automatically adjust the electricity tariffs in relation to the fuel costs of the generation plants. Tariffs were adjusted upward by 32 percent in 2006 and again by 2 percent in June 2007, with promises to increasethem againprogressively. 48. The automatic adjustment would give a good long-term signal to the market, and is likely to be a strong incentive for new investments. A new tariff proposal for the next five years is expected to be presented by the distribution companies Disnorte and Dissur to INE, including a general approach to tariff-setting and a review o f subsidies. Currently, the subsidy to the first 150 megawatt-hours o f consumption is high and is not an incentiveto save energy and use it rationally. It is applied to all consumers and is not directedto poor people, whose consumption is even lower thanthis amount. There are no direct subsidies inNicaragua, and the law prohibits cross-subsidies. The new Ministry of Energy needs to work more closely with the Ministry of Finance and the Technical Secretary of the Presidency to define a subsidies policy that can be enforced and well controlled by all state agencies. 49. Regulatory decision-making mechanisms in the water sector have been even more heavily conditioned by political considerations, probably a natural consequence of the public nature of the service providers. INAA has suffered political interference from the Executive, the National Assembly, the Supreme Court, and non-government organizations that prevented the regulatory body from adequately exercising its functions of supervision of service quality and o f tariff-setting as foreseen inthe tariff decree. The problem of regulating a monopolistic company is reduced to the tariff-setting process, and issues such as quality of services are almost impossible to control, especially when the 17 monopoly i s owned by state-owned investors. On the other hand, the new management o f ENACAL, led by a former leader o f the consumers' association, has personally assumed the operational transformation o f the company in terms o f cost reduction, increased coverage, and operational efficiency, and i s trying to demonstrate that the tariffs inplace today are adequate and proportional to the quality o f the water and sanitation services provided inthe country. 50. Although the telecommunications sector i s probably the least influenced by politically-driven decisions, in 2005 TELCOR suffered the direct consequences o f having two regulators at the sametime due to the political confrontation between the Legislativeand the Executive powers over the SISEP Law. This situation resultedinincreased administrative problems and more uncertainty inthe regulatory process. The companies waited some time before makingnew investment decisions and the problem disappeared immediately when a political truce was agreed, as explained in Annex I1to Chapter 1 o f this report. This is a lesson for preservingthe stability o fthe regulatory environment. D. Institutionaland GovernanceBottlenecks 51. Sector differences and the role of regulators. Due to the different market structures and stages o f development o f the sectors considered, the roles o f the regulators inthe three sectors are very different. Inthe water and sanitation sector, since all service providers are owned by the public sector and the largest company, ENACAL, has considerably more resources than the regulatory agency, the latter has played a very limited role. Since this is a case o f a public agency regulating other public agencies, it is probably inevitable that the decisions are mostly influenced by political considerations. In the energy sector, where there is a mix o f public and private service providers, the main bottleneck has been the pass-through o f higher hydrocarbons costs to the electricity tariff.16 This has generated a series o f cross-debts between the generators and the distribution companies, andbetweenthe Government (as a consumer) andthe distribution companies. Regulation o f the telecommunications sector has faced fewer problems, given the competitive nature o f the market, and its role has been mostly oriented toward protecting the market structure, that is, to uphold the interconnection regime, manage spectrum, assign licenses for mobile competition, assure that competition policies are upheld, and respond to consumer complaints. The particular regulatory bottlenecks o f each sector are discussed below. 5. Water and Sanitation 52. Water coverage is high in urban areas (95 percent), but it is very low in rural areas (47 percent), posing a serious sanitary risk that affects mainly the poor. Sewerage coverage at the national level is only 35 percent, o f which 42 percent is treated. Service quality and efficiency is ingeneral very poor. Water rationing inurban areas is constant, with only halfo fthe systems receiving water inan uninterruptedmanner. There is a high degree o f inefficiency regarding water losses; non-revenue water is estimated at 56 l6About 75 percent ofNicaragua's electricity generation is oil based. 18 percent, resulting from both technical losses and poor domestic metering and tariff collection. Initial estimates o f losses show 100,000 sites where superficial and subterranean water escapes due to lack o f maintenance o f the water distribution network in Managua. Labor and energy costs are high. Maintenance and rehabilitation of the systems has not been done inyears. 53. The main problems o f the water companies relate to defining a new tariff scheme for the next four to five years. In 2003, Nicaragua had one o f the lowest residential water tariffs in Latin America (see Table 2.2). INAA has not approved tariff increases since mid-2003 (when a 5 percent increase was implemented) despite large increases inthe cost o f fuel, which is a significant element inthe cost structure for water services. As a result, in 2006 ENACAL needed a US$15 million subsidy to cover operational expenses. Inaddition, the existing cross-subsidies lack both transparency and a clear pro-poor focus. INAA is waiting for ENACAL to propose new tariffs, but the new management o f the company thinks that the problems are more operational and technical thanjust aproblemoftariffs. 54. Onthe costs side, one o f the crucial factors for ENACAL operational indicators i s the company's ever-increasing energy bill. ENACAL paid US$3.6 million more for electricity in2006 than in 2005. The company does not pay any taxes. INAA i s awaiting ENACAL's five-year planning and results exercise before it authorizes a water rate change. 55. INAA is promoting the passageo f a new law for the water sector that will more clearly define the functions o f the regulator and the Government at the national and regional levels. This issue must be addressed along with the new financing requirements to support the expansion o f coverage o fbasic services. 6. Energy 56. The main challenge in the electricity sector is to increase coverage and ensure sustainable service provision, at reasonable tariffs, Overall electricity coverage ranges between 54 and 68 percent in 2005, depending on the source. Inrural areas coverage is around 36 percent. Service interruptions are frequent and tariffs are high by regional standards, as explained earlier in this chapter. The high cost o f electricity and frequent interruptions lead to high losses inproduction for firms, equivalent to over three percent o f sales." The effect on productivity i s less robust (significant at only the 10 percent level) but estimates show that firms suffering the average number o f hours in service cuts have lower productivity by 0.5 to 2.8 percent, on average. These figures are low mainly due to the fact that the majority o f large firms (77 percent) have back up generators and so are less affected by service cuts. l7"NICARAGUA: Investment Climate Assessment," Evidencefrom the ManufacturingSector, World Bank, 2005. 19 57. This overall situation can be traced to three main factors: low supply, high dependency on oil and shortcomings inthe legal and regulatory framework.18 Nicaragua needs new investments in electricity generation to ensure stable service provision, increase coverage and keep tariffs at a reasonable level. The public sector i s limited by the shortage of domestic resources and debt-sustainability constraints on the absorption of foreign financing. In order to attract private investment to the sector and take advantage of Nicaragua's abundant water resources, the adoption o f a reliable regulatory framework is paramount. 58. As explained inthe recent Energy Sector Policy Note, institutional weaknesses have been evidenced by the confrontation between: (a) the authorities and the private operators, and (b) within the public sector itself. Inthe former area, the problems arose from the reluctance of the regulator to pass on to tariffs the higher oil prices, coupled with large losses due to lack of investments and legal constraints. Within the public sector, the confrontation between the executive and the legislative eventually led to the appointment of two regulators, andthere was also lack of cooperation betweenthe former policy-maker (CNE) andthe regulator (INE). 59. Today the separation of roles among the policy-maker, the regulator, and the service provider is clearer. The central government can now concentrate on its primary role of policy-maker and respect the independence of the regulator in applying the regulatory framework, so as to increase the credibility and stability of the new rules. The separation of roles is also important to establish a leveled and non-discriminatory playing field for private and state-owned companies, improve the investment climate for private capital, and improvethe corporate governanceo f state-ownedenterprises. 60. Another crucial bottleneck for the development of the electricity sector in Nicaragua i s the lack of a law on water rights. This partly explains why there has not beenmore private investment inthe generation of hydroelectric power ina country with vast water resources. Until a couple of years ago, the law limitedprivate investment in hydroelectric generation to plantsof 5 megawatts. Today the limitation has beenraised to 30 megawatts. This legal provision, uncommon in most countries, was approved by the legislature inorder to avoid the depletion o f the country's water reservoirs, giventhe lack o fregulation on water concessions. 61. A further important bottleneck is the lack of punishment of electricity thefts, which are commonplace. Solving this problem requires the passage of legislationmaking the theft of electricity, as well as of other public services, a penal offense. But the final outcome will also depend onthe will of thejudicial systemto enforce such legislation. 7. Telecommunications 62. The main challenges faced by the Nicaraguan telecommunications sector are: extendingservice to rural andpoor areas, reducing tariffs for international communications, l8 These problemsare explainedindetail ina recent WorldBankPolicyNote andwillnot berepeated here, exceptfor the institutionalandgovernancechallenges. 20 promoting the adoption of new and accelerated technological advances, and responding to new market demands. The new demands arise from convergence of cable television and telecommunicationsservice operatorsthat provide multiple services (known as "triple play", or voice, internet access andvideo). E. Policy Options 63. The governance scheme for utility regulation that has shown the best results in achieving the aim of providing quality services with wide coverage at reasonable cost is the independent regulator model.l9 The principal characteristic of the independent regulator model is the separation of roles between policymakers and regulators, giving the later independence in decision making within their legally assigned roles. Achieving this on a sustainablebasis requires implementation of a number of institutional and legal principles. The most commonly recommendedprinciples are accountability, transparency and public participation, predictability, clarity of roles, completeness, simplicity and clarity of rules, proportionality, requisite powers, appropriated institutional characteristics, and integrity. 64. Although the independent regulator model is a widely accepted "best-practice" model of regulation that any country should aim for, it i s unrealistic to expect that the model can be adopted immediately in Nicaragua. The current situation in Nicaragua could be defined as a transitional regulatory system that could develop well and give excellent results ifthe Government makesa real commitment to improve the provision of public services to the Nicaraguan population. The World Bank and other donors could work together with the Nicaraguan Government to demonstrate to consumers the benefits of moving toward commercialization with cost-reflective prices to regular consumers and transparent subsidiesto the poor. These arrangementscanbetter achieve the goalsthat the Government itselfhas set for the improvement inservices inthe three sectors. The goal is to achieve a regulatory system that transparently provides investors with credible commitments and consumers with genuine protections. 65. The scheme proposed in the SISEP Law seems appropriate for Nicaragua, provided the institution is granted legal, institutional, and technical independence. This scheme has shown benefits of its application in other countries of the same market size and consumer characteristics. However, the mechanism proposed to select the members of the regulatory agency must be modified to avoid the possibility of adding names to the list submitted by the Executive, in order to ensure a maximum political consensus. 19 6`The Handbook for Regulatory Assessment" provides three principal reasons why this model is preferable to others. "First, it has become the de facto governance model, at least on paper, in most o f the 200 countries that have created new national or regional regulatory systems in the past 10 years. Second, there is some empirical evidence that shows that the independent regulator model, when adopted in both law and practice, leads to better sector outcomes. And third, the independent regulator model can accommodate a wide variety o f sector structures and transactions." More detailed standards needed to make the principles operational in day-to-day practices can be found in Appendix A o f the Handbook, which provides an excellent description and rationale for 15 standards that are designed to move the independent regulator model fiom theory to practice. The appendix could be used as a basic resource document in discussions with Nicaraguan policy-makers about regulatory design and implementation. 21 Ultimately, however, the exact structure of the regulatory system is less important than thecommitment to the rule oflaw. 66. The allocation of qualified human and financial resources available to the regulatory agencies needs to be improved. The people proposed by the Executive should have the academic and professional qualities, and a minimum o f experience inthe sector they are going to regulate, and they should have no family ties or other conflicts of interest with the regulated companies. Experiences in all parts o f the world show that a high level o f training and personal qualities of the regulators leads to the highest probability of obtaining the expected results in economic growth, investment, and improvement in quality of services. This must be accompanied by the establishment of competitive salaries to attract the best-qualified professionals, and competitive recruitment to guarantee transparency and independence. Inaddition, staggered terms of appointment of the members of regulatory bodies are advisable to provide continuity of decisions. De-linkingthe terms of appointment from presidential terms i s also advisable as a means of decreasingpolitical influence. 67. The level, stability, and reliability of the budgetary resources available to the regulators are essential to give them more autonomy, and can contribute to the predictability and transparency of the regulatory decision-making process. The ability of the regulators to manage their own budget without interference from the Government allows them to undertake the studies or investments needed to improve the quality and opportunity of the regulatory services, without compromising their independenttechnical criteria. 68. There are complementary means of addressing regulatory capacity constraints. Regulators should seek the active participation o f civil society, customers, and regulated companies in the decision making process. The experience in many countries i s that a timely and open discussion and consultation process achieves excellent results. This does not mean that stakeholders should be the decision-makers, because they all have conflicting interests. The regulatory bodies need to implement a mechanism to periodically communicate with all levels of the population in order to educate customers about their social obligations, while at the same time informing them about improvements inthe provisiono f services due to advancements inthe regulatory process. This mechanism reducesthe number of complaints and increasesthe awareness ofpeople and companies about their rights and obligations. A good informationmechanism can go a long way toward making sure politicians make credible and feasible commitments. The role of the Nicaraguan regulator inthe medium and long term i s to build confidence and trust between the regulated companies and the general public through an open, timely, and transparent discussion with all parties, while keeping its independence through studies and surveys o f very good technical and academic standards and quality. TELCOR has had a positive experience usingpublic consultation processes for proposedchangesto regulations and procedures, thus demonstrating that this process can work well in Nicaragua. 22 69. The privatization of the water sector would not be advisable before a thorough debate o f its pros and cons among all relevant stakeholders, and improvement in the general situation o f ENACAL. There are few successful experiences in other countries where the administrations tried to privatize the water and sanitation sector. These experiences have demonstrated that the sector needs a long-term policy. In the current environment Nicaragua should concentrate in improving the managerial capacity and performance o f ENACAL, revise the policy-making role o f CONAPAS -including the possibility o f creating an executive office for policy-making purposes- and develop a framework for the provisiono f water and sanitation services inthe rural areas. 70. But an adequate regulatory framework for water is essential at any time, even when there i s no privatization process foreseen. The development o f an independent water regulatory agency is necessary to correctly apply the tariff principles necessary to obtain cost recovery of the services provided to those that can afford it, thereby guaranteeing continuity, and to make subsidies to the poor more transparent, so as to improve their targeting and financial sustainability. An independent regulatory agency can help address the political problems that arise from a decision to increase tariffs or reduce subsidies. And it could also help increase managerial capacity o f state-owned service providers by providing objective analysis o f the quality and coverage o f services, or even monitoring the compliance with a contract planwith ENACAL. 71. Over the longer term, Nicaragua would benefit from regional market integration in all public services. All countries in the Central America region have the common problem o f small market size relative to the amount o f investments needed to obtain economies o f scale to provide infrastructure and services to lower-income populations. This problem could be overcome with regional service provision. Inthis case, the region could have a single regulatory entity in each country that follows general market rules and defines the terms o f the cross-national interchanges in terms o f service quality, competitive tariffs, and reliability of services, and engenders a more rational use o f the natural resources available inthe region. Donors could help to promote the transnational agreements needed to achieve this objective. 23 CHAPTER I11 SECURITY OFPROPERTYRIGHTS A. Background 72. Nicaragua has long beencharacterizedby unequal access to landandhighlevels of tenure insecurity. According to an index of property rights calculated by the International Property Rights Alliance, Nicaragua ranks next to last worldwide in its protection of physical property rights.20The task of providing secure tenure is not only complicated, it i s made more urgent by the long legacy of past expropriations, which has resulted in a large fiscal burden associated with having to compensate landowners who hadbeen the target of expropriations. 73. The importance of a functioning property registry for the enhancement of investment and economic development is highlighted in a number of background studies,21according to which tenure insecurity inNicaragua affects mainly the rural poor. More than half of Nicaragua's small producers report that they lack formal proof of landownership. This goes handinhandwith strong demand for registeredtitle: 84 percent ofthose eligible indicate that having their plot registered would be desirable, but that they lack the resources to do so. While the rich can pay for gate/parcel keepers or title insurance (an alternative to property registry), the most vulnerable groups (for example, poor rural family farmers) cannot and are therefore most affectedbytenure insecurity. 74. The above-mentioned studies also investigated the link between registered title and investment. There are two ways in which greater tenure security can increase investment. One is the investment demand effect associatedwith greater tenure security. The second is the credit supply effect that can come with formal title. Results from the analysis of titling and registration of property in Nicaragua in the last decade (see, for example, Deininger and Chamorro 2002, cited inWorld Bank 2003:20) illustrate that full registration o f a plot had a significant investment-enhancing impact and increased the propensity to invest by between 8 and 9 percent. The results also suggest that award of agrarian reform title per se, without accompanying registration, had only minimal effect on investment. Further analysis also showed that having a registered plot does not increase a household's propensity to invest in other non-registered plots, which suggests that the investment-enhancing effect o fregistration is indeedplot specific. 2oThe index for Nicaragua is 2.7 out of a maximum of 10. It is calculatedon the basis of both surveys and administrative data. For details, see www.propertyrightsalliance.org. 21 World Bank 2003; Deininger, Chamorro, and Lavadenz 2003; Deininger and Chamorro 2004. These studies were conducted as background to the World Bank-supported Land Administration Project (PRODEP, US$32.6 million, 2003-07), which aims at the development of the legal, institutional, and technical fi-amework for the administration of property rights, and at demonstrating the feasibility of a systematic land rightsregularization programthrough six project components: (1) policy and legal reforms, including a land policy kamework and legal and regulatory changes; (2) institutional decentralization and strengthening; (3) titling and regularization services, including alternative conflict resolution training; (4) demarcationand consolidation of protected areas; (5) demarcationof indigenous lands; and (6) an upgrade to an integratedinformationsystem. 24 75. The analysis also included the examination of the economic impact of the investment: Returns to land-attached investments were the highest (about 29 percent), followed by returns on livestock (12 percent), and returns on machinery (3 percent). In line with the hypothesis that marginal returns to land-attachedinvestment are higher than those to mobile capital, shifting resources from capital investment toward land-attached investment will increase the overall economic efficiency of the sector. This leads to the assumptionthat, inaddition to enhancing overall levels of investment, the higher level of tenure security brought about by landtitling inNicaragua will also lead to a more optimal balance in the mix of investment between moveable and attached goods (World Bank 2003:21). Taken together these results provide a strong justification for programs of titling and registration from an economic perspective. Contrary to other countries, producers in Nicaragua appear to need a legally clear title, rather than an intermediate substitute to invest. This result was also supported by the qualitative assessment carried out inthe context ofthe backgroundwork for this Review. 76. Finally, the studies also came up with interesting results on the impact of tenure security on landvalues. Specifically with respect to the impact o f titling and registration, the analysis found that bothformal andinformal rights enhancelandvalues. The analysis showed that rights of possession, as embodied inlengthof time during which the plot had been cultivated, provide a marginal increase in tenure security. Each additional year the plot has been held by the current owner increases landvalues by 1.3 percent. Compared to this, registration o f a plot signifies a quantum jump in tenure security. Using an estimate for the impact of possession, registration would increase the land values by about 30 percent-equivalent to more than 20 years of continuous possession (World Bank2003:23). 77. Insummary, the studies showedthat the titling efforts of the past decade had a perceptible economic impact. The Government o f Nicaragua has initially focused on "agrarian reform" lands. However, the policy of awarding mainly agrarian reform titles that stopped far short of full registration appears to have foregone considerable and relatively immediate benefits. The World Bank analysis (2003) hence suggests that providing fully registered title can greatly enhance the economic benefits to be expected from the current land-titling efforts. Indeed, the Government has recently made plans to systematically register all plots that have undergonethe titling process. 78. This chapter presents an analysis of the current situation regarding real state property rights from the point of view of the institutional and governance arrangements of the system. It describes the institutional and legal Eramework o f the system, its major strengths, weaknesses, and governance problems; looks into the processes, formal and informal decision making mechanisms, and governance problems of the property registry and cadastre systems; discusses the institutional and legal reforms currently under discussion in Nicaragua, including proposed legal changes, the integration of registry, and cadastre systems, and the role of municipalities; and offers options for improving the system. 25 B. InstitutionalFramework:Strengths,Weaknesses,andGovernance Problems 1. InstitutionalFrameworkfor LandAdministration 79. The overall framework for land administration involves three public agencies, each incharge of distinct procedures: (a) the Intendencia de la Propiedad (IP), in charge of landtitling and regularization; (b) the Instituto Nicaraguense de Estudios Territoriales (INETER), in charge of cadastre services; and (c) the Supreme Court, in charge of property registry services. 80. In order to streamline the institutional framework for land administration, in 1996 through Law 290, the Government integrated a number of formerly independent and diverse organizations withinthe Intendancy of Property (IP), under the Ministry of Finance and Public Credit. Among the entities absorbed were the OJicina de Titulacidn Rural (OTR), the OJcina de Ordenamiento Territorial (OOT), the OJicina de Cuantzjkacidn de Indemnizaciones(OCI), the OJcina de Titulacidn Urbana (OUT), and the State Notary. In a next move, the formerly independent agencies were transformed into five directorates under the mandate o f the Intendente de la Propiedad, and 14 departmental delegations were established throughout the country (see organigram IP 2006 in Annex 1 to this chapter). Irrespective o f a number of remaining management problems and overlapsY2*these changes-which were supported by the IDA-financed Proyecto de Ordenamiento de la Propiedad (PRODEP) project-represent a significant step toward a more clearly definedinstitutional framework for landadministration. 81. Today, the IP is the main institution responsible for the decisions concerning regularization of rural and urbanland and property o f the reformed sector.23The IP is in charge o f allocating landinthe rural areas, granting titles, reviewing the validity of Land Reform titles, and dealing with a number of certifications and authorizations for land sales and rentals. It took over the functions of the Instituto de Reforma Agraria (INRA) and through the OTR (later Directorate for Titling) demonstrated its capacity to grant titles (inthe areas o f lesser conflicts). The IP by means of Law 88-90 i s also responsible for reviewingthe legitimacy of Land Reformtitles granted during the transition period o f 1990 to both individuals and cooperatives, and for the processing o f the indemnification claims of landowners who lost their properties during the LandReform. 82. Physical Cadastrellnstituto Nicaragiiense de Estudios Territoriales (INETER). INETER is an autonomous institutionunder the Presidency of the Republic responsible for the seismological and meteorological systems, and for the physical cadastre in both urban and rural areas (that is, mapping o f property location and limits). 22 There continue to be some overlaps with the fimctions o f the Procuraduria de laJusticia (located under the Presidency), which handles the distribution o f land from former state enterprises, and the Judicial Branch, which also grants titles as a result of civilian processes(titulos supletorios). 23The reformed sector includes all beneficiaries ofpublic landtransfers through (i) agrarian reform o f the the Sandinista government inthe 80s as well as (ii) the provisionoflandto members ofthe through resistance and to demobilized members ofthe Sandinista army by post-Sandinista governments. 26 INETER has a General Directorate for the Cadastre, based in Managua, with offices in the departments of Chinandega, L e h , Managua, Masaya, Granada, Carazo, Rivas, and Esteli (see Organigram INETER in Annex I2 to this chapter). The remaining eight departments have not yet undergone cadastre, mainly due to financial constraints. The physical cadastre of INETER is authorized to verify and approve the topographic plans required in the legalization process for properties in the areas that have undergone cadastre. This information is the principalbase for issuing the cadastral certificate, which legally constitutes an indispensable requirement for the inscription of properties in the property registry offices in those areas where land has undergone cadastre. So far, the cadastre covers only about 20 percent of the country, mainly inthe Pacific Region, and a large part of this is outdated since most landtransfers after 1970 have not beenreported. USAID-BIDE (2002:16) estimate the proportion of the outdated cadastral data to be as high as 40 percent on average. The lack of integration of the registry and cadastre systems i s an important problem, because the current system allows several titles for the same parcel. 83. Fiscal Cadastre. The office of the fiscal cadastre is responsible for collecting the landtransaction tax (Impuesto de Transmisidnde Propiedades)andthe General Sales Tax (Impuesto General de Ventas, IGV). This office forms part o f the departmental administration of the Direccidn General de Ingresos (DGI) of the Ministry of Finance and Public Credit. Contrary to the physical cadastre, the public registry, and the IP, the fiscal cadastre office does not manage its own data-base on the properties they evaluate. Itdoes, however, carry out checksonthe cadastraldatawith its ownpersonnel, partlydue to mistrustof the quality of the dataprovided by INETER.The certificate for having paid the land transaction tax i s another indispensable requirement for the inscription o f the properties inthe property registry.24 84. The Property Registry: The Property Registry (Registro de la Propiedad Inmueble y Mercantil (RPIM) is administered by the Supreme Court (see organigram in Annex 11). It is the task of the Property Registry to provide legal security to landowners and other people involved in land transactions. This is done through the inscription of titles and other official documents that describe rights and interests in land. Every transaction that involves the creation, transmission, modification, or cancellation of land rights has to be inscribed inthe property registry in order to have effect on third parties. There is an office o f the public Property Registry ineach departmental capital. The legal foundation of the Property Registry goes back to the Cddigo Civil of 1904. In spite of a number of subsequent laws that regulate the functioning ofthe Public Registry, the basic processes still follow the Cddigo Civil, which does not allow the use of modern technology in the inscription process. The new Registry Law currently under discussion in the National Assembly, however, would provide the foundation for a substantial modernization of the Public Property Registry. 85. The Direccidn Alternativa de Conflictos (DIRAC) is responsible for conflict mediation and arbitration. It was created inFebruary2000 under the SupremeCourt inan attempt to resolve pending conflicts that involve property issues. These are first 24The role of municipalities with respect to landtaxes is explained insection D ofthis chapter. 27 addressedby mediators, specifically trained for this purpose, and then go the Tribunales de Arbitraje. Supported by the IDA-financed PRODEP project, DIRAC's role is to support the process o f developing alternative conflict resolution through civil society actors, and to train the communal mediators and negotiators that the project will put in place. 86. Private Sector. The system also has several private sector intermediaries. There are about 5000 notaries throughout the country, certified by the Supreme Court to carry out the property registry process on behalf of their clients. The Supreme Court does not only certify the notaries, but regulates their activities and has the power to sanction them in case of irregularities. Similarly, in order to elaborate the cadastral map of their property which is required for the inscription process the interested party has to commission a private topographer, authorized by INETER.There are about 300 of these, as well as about 10 companies providing topographic services. As in the case of the notaries, INETERalso establishesthe norms that regulate the surveyors' activities. 2. LegalFramework 87. The comprehensive restructuring of the institutional framework for land administration goes hand inhandwith a number o f changes inthe legal framework. Some of these changes relate to the overall reform of the land administration framework, such as the Ley 290 of 1996 creating the Intendency of Property (IP), and the Ley Creadora del Instituto de la Propiedad Reforma Urbana y Rural (Ley INPRUR) o f 2004. Other laws or draft laws aim at reformingvarious elements of the institutional framework, such as the cadastre law and its regulations (enacted in 2005), the newproperty registry law (under discussion in the National Assembly PA]), and the regularization law (bill presented to the NA in 2005). The promotion of these legal initiatives is part of the agendaof the IDA-supported PRODEP project.25 ChangesRelating to the Overall Framework 88. Both Law 290, creating the Intendency of Property (IP), and the law which creates the Instituto de la Propiedad Reforma Urbana y Rural (INPRUR) aim at streamlining and integrating the formerly dispersed land administration institutions. Whereas Ley 290 of 1996 integrated various functions related to titling, compensation, and landuse planning inthe new Intendency of Property, the INPRUR Law approved by the National Assembly on 25 November 2004 goes one step further. The INPRUR law integrates (a) the IP (as created by Ley 290), (b) some functions of the General Administration (Procuraduria General) relating to the legalization o f public properties, and (c) the Comisidn Nacional de Revisidn (CONAR), created in 1990 (Ley 11-90) for the revision and supervision of the processes related to the confiscation o f properties by the Nicaraguan State. However, inthe aftermath of political conflicts in connection with a number o f new laws aiming at constitutional changes (one of which was the INPRUR law), the NA-after mediation through the Organization of American States (OAS)-on 20 October 2005 enacted the Ley Macro para la Estabilidad y Gobernabilidad del Pais, 25For details on the laws discussed inthis section, see Annex 3. 28 which suspendedthe implementation of all laws aiming at constitutional changes untilthe beginning of 2007 when the new elected Government was to take power (now extended untilthe beginning of2008). 89. The conflicts basically referred to the controversial attribution of functions to different segments of the Executive and Judiciary, politically dominated by the strongest forces in the NAYthe Sandinistas and the PLC. According to PRODEP staff, the implementation of Ley INPRUR (even in 2008) i s not very likely, mainly for political reasons. There are, however, also technical reasons "against" the implementation of Ley INPRUR. Despite the further integration of land administration functions, which i s regardedas positive, INPRUR in its current form integrates only the land administration functions related to the reformed sector (as is known inNicaragua, see footnote 23), and thus does not include the legalization of private properties. This would make it more difficult inthe future to also integratethe property registry andthe cadastre functions that relateto boththe reformed andthe private sector. ChangesRelating to SpecificLandAdministration Functions 90. O f the more specific laws, the Cadastral Law and its regulations were enacted in 2005. The Cadastral Law is a big step forward in the modernization of the national cadastral system by establishing and reforming the national cadastre on three levels: (a) the national cadastre with its legal and administrative functions on the national territory through INETER, (b) the fiscal cadastre through the Direccidn de Catastro Fiscal of DGI, and (c) the municipal cadastre with its legal and administrative functions on the municipal territory through the municipal governments. In addition, the Law creates the National Cadastre Commission (Comisidn Nacional de Catastro) under the Presidency withthe objectives of defining policies and strategies for the development of the national physical cadastral system, and organizing, coordinating, and harmonizing the different cadastral activities of the organizations participating in the commission. The Law also regulates coordination with the property registry, including the establishment of the Sistema Integrado de Informacidn Registral y Catastral (Initiating the Integration o f Registry and Cadastre, SIICAR). Finally, the Law lays the foundation for a broader integration o f the municipal cadastres into the national cadastral system, by not only making them responsible for the maintenance of the national physical cadastre (within their boundaries), but also by allowing their integration as service providers in ongoing landregularization activities ifthey prove that they havethe requiredcapacities. 91. Probably the most important and also most controversial of the more specific legal changes is the new Draft Law on the Property Registry (Ley General de Registro Pziblico). This Law aims at modernizing the public property registry. Through establishing the basis for a more efficient and transparent property registry process, (to a large extent by allowing the use of modern informationtechnology), the new law has the potential to overcome major bottlenecks of the current property registry process, which has been widely criticized for being costly, non-transparent, and prone to abuses. Due to the importance of this Law for the objectives o f this Review, its implications are discussed separately insection 1II.D of this document. 29 92. Finally, the Draft Regularization Law (Ley de Regularizacidn de la Tenenciade Tierra) elaborated by the Property Intendency (IP) aims at simplifying and accelerating the regularization processes carried out under the responsibility of the IP. The law introduces a methodology for massive regularization processes in the rural and urban areas and creates the legal basis for their accelerated implementation. Landregularization i s a systematic process to identify and clarify property rights to land that includes mapping, cadastral surveys, demarcation, titling and adjudication of rights, registration and record-keeping and resolution of conflicts, combined with wide communication campaigns, publicity and legal assistance to ensure the participation of all beneficiaries and stakeholders and institutional strengthening. The law was presented to the NA in 2005, but has not yet been approved by the legal commission of the NA before it can be discussedinthe Plenary. 3. Strengths,Weaknesses, and GovernanceProblems 93* Notwithstanding recent improvements, there still remain a number of problems relatedto the overall institutional framework: 0 Despite the efforts to streamline the land administration institutions by creating the IP, the overall land administration framework is still fragmented, with individual institutions linked to different ministries or government agencies. Whereas the IP itself is positioned as a General Directorate Ministry of Finance and Public Credit, the property registry is under the Supreme Court; INETER, an independentagency, is under the Executive; and the fiscal cadastre is under the DGIofthe Ministryof FinanceandPublic Credit. 0 None o f the agencies directly involved inthe public registry system (physical and fiscal cadastre, public registry) i s administratively and financially autonomous, but is dependenton its respective"mother organization" (Ministry of Finance and Public Credit [MFPC], Supreme Court, INETER). MFPC, the Supreme Court, and INETER pursue a number of goals outside the land administration sector. Consequently, the budget allocations are provided in competition with the other sub-sectors. This is particularly worrisome in the case of the registry-related activities which-in spite of their income-generating potential-are not operating on a financially sustainable basis; rather, the income i s usedto cross-finance other sub-sectors. The administrative and financial dependence often goes handinhand withalack ofphysical infrastructure andhumanresources. 0 Earlier efforts to reduce the fkagmentation and to homogenize the institutional framework o f land administration have failed due to political considerations and power issues. This was also true in the case of the proposed institutional integration o f the public registry and cadastre, as will be discussed in section 1II.D. Experience shows that if proposals for change intervene in the results of political bargaining processes, this has to be considered in the design o f the reform options. This is particularly true if income-generating agencies such as the 30 public registry are at stake. Another issue is that the administrative function o f the registry is mixed with the judicial function o f the Supreme Court, so when there are disputes this can leadto conflict o f interest situations. Land-related institutions are still overly centralized. Though there are some advances, as for example, documented in the case o f the IP, the potential lying within the decentralization o f service provision is still underexploited. Transferring services (for example, cadastral services) to the municipalities would significantly lower the cost to the clients. Even though past efforts to strengthen the capacity o f municipalities for service provision have proven more cumbersome than originally expected, there i s no promising alternative, and the past results are sufficient to justify the further pursuit o fthis path. Women Lack Equal Access to LandTitle. A legal recent study undertaken by the Bank found out that Nicaragua has a number o f discriminatory provisions in its legal framework regardingland and family laws related thereto. The study found that women in general, are facing de jure (due to the text o f the law itself, its inconsistency with Constitutional provisions and international commitments entered into by Nicaragua) and de facto (in practice during the enforcement or dispute resolution process) discrimination, whenever land titling i s registered. According to Instituto Nicaragiiense de la Mujer (INIM), in2005 only 13% o f all land titles were held by women, either individually or jointly (mancomunada).26 This remains true despite the fact that, inmany cases, goods and land owned by a family were acquired through the combined efforts of boththe husband and wife. However, where the land i s only titled in the name o f the husband and the relationship ends, the wife i s often left without claim to that land. Article 49 o f Nicaragua's Law 278 on Urban and Agrarian Property Reform (Ley 278 Sobre Propiedad Reformada Urbana y A g r ~ r i a ~addresses this issue by allowing ~ ) married women --whether married "formally" (matrimonio) or "informally" (unidn de hecho estable) -- to register landjointly with their spouses/partners. Yet only 7.85% o f landtitles have beenjointly (Le. under mancomunada title) issued to women and their partners/spouses.28 Indeed, confusion related to the issuance o f joint title under Art. 49 o f Law 278 (i.e. mancomunado title) has resulted in more land (25.03%)29 being jointly titled to others in other family relationships (such as fathedson), than to the women it was intended to benefit.30 The Law's lack o f clarity, as well as the lack o f a corresponding mechanism to implement the joint title has, inpractical terms, left women without sufficient legal recourse and mechanisms to claim their rights to land. 26Ocon, Tierra y Propiedad 27Ley 278, publicada en la Gacetano. 239 de 16 diciembre 1997. 28Lastarria-Cornhiel et a1 (2003): "Titulacih mancomunada en Nicaragua, Indonesia y Honduras," the landtenure center at the University o f Wisconsin-Madison, p. 20 29Sistema de la PropiedadOTR 1992-2000 30I d at 7. 31 C. The System of PropertyRegistry:Processes, FormalandInformal Mechanisms,and GovernanceProblems 94. The Property Registry (Registro de la Propiedad Inmuebley Mercantil, RPIM) i s administered by the Supreme Court, which i s responsible for appointing the registrars in each RPIMoffice, and likewise, may remove them for just cause. In each RPIM, a registrar runs the daily operations and acts independently in approving registries. The authority of each RPIM office registrar, however, i s relatively limited. The Court administers the RPIM's budget, publishesthe regulations and policies, and monitors the RPIM's day-to-day operations. Each Supreme Court Magistrate is assigned supervisory responsibility for at least one registry office and its registrar. 1. StructureandOrganizationofthe RPIM 95. Currently, the RPIMincludes 16 offices, one ineach department o f the country. While, as indicated, the RPIMsystem as a whole i s administered by the Supreme Court, each office functions independently. Ineach office the registrar i s the chief official. The registrar is responsible for deciding whether applications may be processed, processing accepted applications, signingprocessed documents, and establishing internal office rules andprocedures.RPIMstaffis organized into departmentsthat correspond to the stages of the inscriptionprocess. 96. Since 1904, Nicaragua has employed the Folio Real system.31Accordingly, three separate books or registries are maintained by the RPIM:the Diario, the Folio Real, andthe Registry of Persons. The Diario tracks each document that enters and leaves the registry, noting the name o f the person who submits it, the time and date of submission, the assigneddocument number, an abstract of the document's content, its disposition, and the time and date it leaves the registry. The Registry of Persons records all births, deaths, marriages, and so forth. The Folio Real is the key registry and tracks all rights and interests pertaining to real property, including ownership, services, usufructs, and leases. 97. In some cases, the same parcel has two or more independent records, and several parties claim ingood faith to possess good title. This is a key problem, due inpart to the lack of integration between registries and cadastres. Further, the accuracy of information is doubtful, even in the best RPIM offices. Most registry books are maintained manually. Geographic information about property is provided by registry users and i s often neither tied to a physical cadastre nor independently verified. Other information may be out of date. Because the system lacks internal controls, even good faith users may present false information that they received from others, thereby maintaining and perpetuating errors. 31 Previously, the Registro Consewador was organized by the Folio Personal system by which land transactions are tracked according to the parties involved and not the parcel. This system is inferior to the Folio Real system because all rights and interests pertaining to a particular tract are not immediately obvious to athirdparty (see, for example, Trackman, Fisher, and Salas 1999). 32 98. The physical condition of the records inmany offices is poor. A central focus of recent reform efforts has been the conversion of paper records to microfilm and partial scanning of books. The degradation o f the RPIM books and documents i s attributable not only to their age, but also to the fact that a central tenet of Nicaragua's registry system has been that registry records are public documents. Even after the advent of photocopying technology, people who requested registry documents or informationwere permittedto examine the originals, raising concerns about record security. Insome areas, registry records have been lost, stolen, or destroyed. Despite efforts to recreate lost registries, the accuracy and completenessof current records is suspect. 99. The budget of the RPIM is preparedand approved by the Supreme Court. The money is part o f the Court's general budget, which is appropriated by the National Assembly and legally guaranteed to be no less than 4 percent of the general national budget. Monies allocated to the RPIM are then divided among the 16 offices. The total annual budget is approximately US$750,000. Most of this money is usedfor salaries and for the day-to-day operations of the registries. The RPIM also collects fees for the services it provides. All fees are determinedby the AranceZ de Zos Registros, which i s set by the NationalAssembly. All ofthose revenuescurrently go to the National Treasury. 2. Process Times and Costs 100. The RPIM is charged with inscribing rights and interests pertaining to real property. Inaddition, the RPIM provides certifications and responsesto inquiries relating to land status, ownership, and encumbrances. The RPIM also cooperates with other government agencies to inscribe newly granted titles issued as part of landregularization efforts.' 101. The processesrequired to inscribe a property inthe Property Registry intimately links three organizations: the Property Registry, the physical cadastre, and the fiscal cadastre, which are involved at different stages of the process. Inprinciple, the registry process for any property transaction follows the rules described in Annex 1 to this chapter, though with some internal variations, for example, incases with or without prior cadastre or in case o f divisions of property (desrnernbra~iones).~~ To initiate the process, an interested party must first prepare an inscription application to be submitted to the RPIM. Depending on the circumstances, this process can be more time-consuming and costly than the inscription process at the RPIM itself. To open the inscription process RPIM requires four documents: A notarized affidavit oftheprevious owner inscribedinthe RPIM 0 The original and a copy of the new contract describing the parcel of land and the beneficiaries 0 A cadastralcertificate issuedby the Physical Cadastreof INETER 0 A fiscal evaluation certificate issuedby the Fiscal Cadastre ofDGI. 32There is, however, one important alternativeprocedure, the so-called titulo supletorio, which, due to its widespread(and controversial) use, will also be presented indetail below. 33 102. Time. The time required to issue the cadastral certificate varies from office to office, but i s approximately 7 to 10 days. The time to obtain the fiscal evaluation certificate is approximately 4 days. The lengthy wait is in the process o f registering the title at the RPIMitself, which i s about 6 months, on average; although in some cases it canbe done in 100days. 103. Costs. Table 3.1 presents the typical costs for the legalization of a landpurchase transaction in different municipalities. This does not include the costs for the topographical services, if a topographical planhas to be elaborated (incase this does not exist or in case of separation of properties). The latter, if required, usually accounts for a large portionof the overall costs, slightly below the honorarium for the lawyer. Cardenas Las Flores Sn. Pedro Wadala Esteli S. Tomes N. Guinea ProcessElement Rvas Masaya Chinand. Matag. Esteli Chontal RAAS 104. The total costs for legalization ranges between US$147.74 in San Pedro del Norte in Chinandega and US$401.24 in Las Flores in Masaya. The data show that the costs for the legalization of a property transaction usually are muchhigher ifthe property i s located closer to the bigger cities of Nicaragua, as i s the case of the properties in the municipalities of Esteli, Masaya, and Santo Tomas Chontales. On average, these costs representaround 5 percent of the market value of the property. 105. There is also a widespread culture of bribes inmany of the public organizations that participate in the legalization process. Bribery is common for clients who need a timely responseto their request for registry. Many lawyers include the amount required for bribes intheir fees. This can easily meanan increase of between 10 and 30 percent o f thetotal cost for the legalization of a small property. Inaddition, the costs for landholders who live far from the departmental capitals tend to rise over-proportionally due to the extra costs involved in transport to the capital and the extra payment for topographic services by authorized service providers who have to travel far if the plot is located in a remote area. 106. Another informal mechanism to secure property rights has emerged recently, and is mainly being used for tourism-oriented property purchases along side the south Pacific coast. This i s title insurance and the service is provided mostly by foreign 34 companies. However, title insurance does not work in the same way as in the United States, where the process involves a search o f titles in the public records and the insurance guarantees that the property being sold has good title and i s debt-free. In Nicaragua, title insurance can not guarantee the legality of the property, but functions more as common insurance does: if the buyer eventually loses the property to a legal dispute, the issuingcompany reimburses the loss. 3. OtherMechanismsof LegalizationandGovernanceIssues 107. The Nicaraguan law foresees a number of additional mechanismsthat can lead to the legalization of properties, of which the titulo supletorio (supplementarytitle) is not only the most relevant but also the most controversial. The titulo supletorio can be requested by anyone who is inpossessionof a property without a title that supports his or her rights. The law requires that the candidate must have possessed the property uninterruptedly, peacefully, and publicly for at least 10 years. Inthis case, the candidate can approach a public court and request the initiation of a process leading to the inscription of the titulo supletorio inthe RPIM. Upon verification of possessionthrough three witnesses from the same municipality and a public announcement to check that there i s no opposition to the issuance o f the title, a civiljudge will grant such a certificate. The municipality and the Procuraduria also have the authority to intervene to verify that no public interests are affected. However, this intervention often does not take place. Supplementarytitles are regulatedbythe Civil Code. 108. Inpractice, the process is seldom carried out appropriately, basically for two reasons. First, in areas in which INETERpossesses cadastral information (20 percent of the country); itis possible to trace prior registry inscriptions through the cadastralnumber associated to the property. In areas where this is not the case, it is practically impossible to trace prior inscriptions, which creates the danger of multiple inscriptions. Secondly, the law actually requires the three witnesses to be people living on properties directly neighboring the applicant's property. Since this, in practice, is very often impossible (among other reasons, because the neighbors themselves usually also do not possess legal documents regarding their own properties) judges-especially in areas without cadastral maps on the part of INETER-have come to accept any "respected" person in the municipality as a witness, even if he or she does not fulfill the legal requirements mentioned above. In recent years this has led to repeated cases o f double (or triple) titling, partly because of lack of due diligence, inadequate coordination among government agencies, and institutional weaknesses such as lack of upgrading of the registry records, but very often also due to abuse. Currently, the percentage o f property inscriptions in the RPIM on the basis o f this mechanism is estimated to be around 30 percent oftotal property inscriptions. 109. There are further mechanisms similar to the titulo supletorio, such as adverse possession andjudicial sales (ventasjudiciales), but they are not o f major relevance. The discussions regarding the titulo supletorio, on the other hand, are controversial and have played a central role inthe discussion of the new Registry Law inthe National Assembly. 35 4. Institutionaland Technological Integration(and common databases) 110. The fragmented inscriptionprocess increasesthe time andcosts for the end user. Eventhough the offices of RPIM and the physical and the fiscal cadastre are all located inthe capital of the department,they are not necessarily located near each other. As the internal processes again are subdivided, this amounts to a long process o f waiting, queuing, paying of fees and taxes, and then continuing the same procedure at the next location. Further, the fragmentation is also reflected in the procedures, mechanisms, tools, and databases developed by the three organizations involved. The tools and software used by, for example, the physical and fiscal cadastre (and also the cadastre o f the municipalities) are incompatible. Because cadastral data were not available electronically (and because the registry is restricted in the use of modern information technology), RPIMhas to rely on the complicated and lengthy process of obtaining the paper version ofthe cadastral certificate describedabove. 111. An automated process integrating the cadastral and the registry process with access to one joint cadastral database would simplify the procedure tremendously. Similar processes are ongoing in other Central American countries (Guatemala, Honduras, Panama) and haven already been accomplished to full use in El Salvador. In Nicaragua this process has been initiated through PRODEP and the development of the SIICAR program. However, the institutional implications of such an integration process are immense, since the rigidity of the processes and the resistance to change is due not only to the complexity o f introducing a new technology, but also to the threat of an automated systemto end systematic abuse. 5. FinancialSustainability, Physical Infrastructure, and Trained Manpower 112. As mentioned, none of the agencies directly involved in the public registry system is administratively and financially autonomous. RPIM's current annual budget is allocated out of the Supreme Court's budget. Ingeneral, the allocations are not sufficient for efficient service provision. Moreover, according to various sources, the low salary levels inthe RPIM makethe officials prone to bribes and corruption. The situation i s not much different in the physical cadastre of INETER. Here, the low levels of budget allocation seriously restrict the options of modernizing the physical infrastructure, and thus the extension of the national cadastral coverage. In both cases all the revenues collected through fees are transferredto the National Treasury. 113. Experiences inthe region clearly demonstratethat the registry systems have the potential to be financially self-sustainable on the basis of the income they generate. Pipe (2004) has shown this for the Nicaraguan property registry and finds that the income generated could easily self-finance the registry's operations (Table 3.2). What is more, the income generated could help to cross-finance the cadastral services in an integrated, administratively and financially autonomous system. 36 Table3.2: Revenuesand Costs of the PropertyRegistryinNicaragua(in Cbrdobas) - mmm Rmm Revenues 32,485,027 33,292,580 36,974,899 40,433,557 43,668,241 costs I 15.462.234 17,185,054 17,888,756 19,063,867 24,723,868 PersonnelServices 11,557,554 13,655,5 17 14,5 12,248 15,100,698 22,947,054 Other Servicesd 2,191,124 2,22 1,949 1,821,656 2,584,869 972,7 10 Materials and Supplies 575,449 3 18,489 456,457 351,282 247,869 Goodsd 834,680 739,901 822,682 821,828 451,645 Transferse 303,427 249,198 275,713 205,190 104,590 Balance 17.022.793 16,107,526 19,086,143 21,369,690 18.944.373 a. IncludesPropertyandTrade Registry. b. Projectedbasedondatauntil31October2003. c. Costs as budgeted,incomeestimated. d. Computingequipment, firnitwe, air-conditioning. e. Counterparthnds for foreign-financedprojects. Source: Pipe(2004:30). 114. Dueto the high dependence of the property registry on a functioning cadastral system, the institutional integration of cadastre and registry would represent an important step forward. The experience of the Centro Nacional de Registros (CNR) in El Salvador shows that not all of the institutions that form part o f the national land administration system have to be financially self-sustainable. The operational costs of the physical cadastre inEl Salvador are higher than the income it generates, just as inthe case of the physical cadastre of INETER. Even if cost-saving procedures are introduced in the cadastral process, the cadastral activities will still have to be subsidized through the Property Registry. The worldwide average subsidy for a modern, independentcadastre is 25 percent o f its budget. 6. ClientOrientation 115. Practically all potential clients of the Property Registry interviewed complained about the difficult access to information and the lack of transparency of the procedures. Infact, neither the physical cadastre nor the Property Registry offers online information to their clients. Only recently, the property registry in Managua has microfilmed a considerable part of its registry books, which are now available online for consultation. However, this process was stopped due to the shortage of financial resources. Under these circumstances the implementation of the SIICAR can signify a quantum leap in terms o f client orientation. Like in El Salvador and Honduras, where similar computerized systems have beenfully or partly installed, once implemented,the SIICAR will not only significantly simplify the registry process itself, but will also allow the customers to follow every step of the registry process online, a measurethat will by itself significantly increasetransparency. 37 D. ReformProposals:OptionsandRisks 1. Creatingthe LegalBasisfor aModernPropertyRegistrySystem(Ley de Registro) 116. In 2001 the Supreme Court presented a proposal for a new Registry Law (Proyecto de Ley General de Registro Ptiblico) to the National Assembly. The proposal was revised and commented on by the legal committee of the National Assembly and approved for revision in the Plenary inNovember 2004. In2005, the Plenary started the final process of revision, article by article, and introduced a series of changes inthe new law. UntilNovember 2005 about 70 of the total of 114 articles were revised. Since then no further action has beentaken intheNationalAssembly. 117. The proposed law creates the conditions for the modernization of the property registry by: Establishing the National Registry System (Sistema Nacional de Registros, SINARE) under the new General Directorate of Registry (Direccidn Nacional de Registros, DNR); Laying the foundations for the future financial autonomy of the registry by prescribing that the revenues generated by the public registry will be directly allocated to the SINARE (additionally to the 4 percent of the national budget allocated to the Supreme Court); and Enabling the DNR to use modern information technology (exchange of electronic information, electronic signature). 118. These three innovations represent a major step forward inthe establishment of a modern, client-oriented property registry. The proposed law, however, does not yet lay the foundation for the institutional integration of the cadastre and the Property Registry. Eventhough a study tour to the Centro Nacional de Registros (CNR) in El Salvador in 2004 generated considerable enthusiasm among the participating government officials and legislators, inthe end no consensus was reached on this issue. The main reason for this was that the Government didnot want to give the SupremeCourt additional power in landrelated issues. This would have been the case because the Supreme Court would de facto have absorbed the cadastre under the model presented in the new law. Subsequently, the idea of introducing the integrated system already in the law was dropped. 119. The proposed law has a number of further limitations. It does not create the Public Registry as an autonomous agency, but as a General Directorate o f Registries (DGR) under the Supreme Court, and the Supreme Court will continue to exert major functions in the operation of the National Registry System (Sistema Nacional de Registros, SINARE), such as the selection and appointment o f registrars. This significantly reduces the administrative authority of the future General Director of 38 Registry. Also, the new law is not very precise about what institutions belong to the SINARE. Even though the law foresees the reflow of the income generated to the SINARE, it does not clearly define whether the funds will be allocated directly to the DGRor to the SupremeCourt (andfor which purposes). 120. Two more controversial issues considered in the National Assembly were: (a) the overall character o f the inscription of the properties as declarative (declarativo) or constitutive (constitutivo), and (b) the supplementary titles. Regarding the first, if the inscription of titles i s consideredto be "declarative," this means that property titles do not necessarily have to be inscribed in the property registry, whereas if it i s considered "constitutive," all property titles by law will have to be inscribed inthe property registry. Even the current legislation on this point i s interpreteddifferently. Whereas some parties maintain that the Civil Code of 1904 and subsequent legislation declare the overall character of the inscription process as declarative, others say it is constitutive. The decision on this issue i s of major relevance. At the moment it appears that the majority o f the involved (including the Supreme Court, which presented the law), want to see the law define title inscription as "constitutive." This would improve the conditions for a more transparent and dynamic land market, but on the other hand-as the opponents maintain-it carries the risk of bringing to the fore additional and "unnecessary" land conflicts. With respect to the "supplementary titles," the discussion has also been difficult, and at some point it was even considered not to explicitly treat this issue inthe law. It was, however, in the end decided to maintain the option of supplementary titles, but to strictly regulate their implementation inorder to avoid further abuse. The proposed law was finally amended inthat sense. 121. Despite these limitations, the approval of the new Registry Law is a necessary, urgent, and important step forward in the creation of a modern public registry. The SIICAR and the associated software package are currently being designed. The first test version is expectedto be ready inJune 2007, and after a trial runthe final implementation i s planned for 2008. As long as the new registry law i s not approved by the National Assembly, this will not be possible. Already the installation of the trial runwill be more difficult without the enactedlaw. 2. Initiatingthe Integration of Registryand Cadastre (SIICAR) 122. From a technical point of view, the institutional integration of the registry and cadastre in one administratively and financially autonomous agency supported by a jointly used information system would be the best way to guarantee the modernization and sustainability of the services inthe mediumand long term. Since this was politically not feasible, PRODEP, in consultation with the Supreme Court and INETER, has opted for a stepwise procedure that would (a) first develop ajoint information system (Sistema de Informucidn Integrado Catustroy Registro, SIICAR), (b) implementthis software as a pilot in one or two departments, and (c) promote (on the basis o f the experience of the pilot project) the integration of the two registries under one roof and the implementation ofthe reformed systems inthe rest of the country. 39 123. The first step will allow the simplificationof the inscription proceduresonce the new Registry Law i s adopted. The consulting firm responsible for the design of the SIICAR is already working on this issue, taking into consideration the terms o f both the Civil Code of 1904 and the new legislative proposal. In this context, the Nicaraguan authorities planto reduce both the individual steps to be taken by the applicant by about 70 percent and the time required for the inscription of a property, from 6 months to 16 days. 124. The integrated use of the common software by two separate agencies, however, bears some risks. Currently, it is foreseen that the responsibility for the SIICAR and for the maintenanceof the databases will remain with the Supreme Court. Boththe cadastre and registry agencies, though, will have the right to access the system under a joint sharing agreement. It remains to be seen whether this i s sufficient to overcome past deficiencies regarding the security of the registrykadastral data or whether an institutional integration of both functions under one authority i s a necessary precondition for this. The present system, furthermore, will not allow a cross-financing of the cadastre to improve its physical and humanresource infrastructure. For this and for the expansion o f its national coverage, INETERwill continue to dependon external support. Inthe past, however, this has not proven to be a promising strategy for providing institutional stability and sustainability to INETER. 125. Another issue o f concern to private sector clients regarding the future SIICAR is the security of the data. A modernized, electronic system creates the conditions for improved data security, but by itself does not guarantee it. The private banking sector, though strongly in favor of the changes envisioned (new Registry Law, SIICAR), warns o f the complexity of the security issue after its own painful experience with the introduction o f online services, and has offered support through its own expert software security team. In addition to a solid software solution, data security requires adequate internal controls. The currently foreseen legal and institutional framework (fragmentation of hierarchical power among and within the participating organizations) will surely not simplifythe task. Though the new law introduces a number of improvements, suchas (a) the establishment of the DGR as the entity in charge, (b) the creation of a Special Registry Commission (Cornisidn Especial de Registro) with a minimum o f three Magistrates as membersto oversee and control the DGR, and (c) a provision that makes registry officials legally accountable for errors (which was not the case hitherto), the persisting institutional separation (between cadastre and registry) and the still blurred boundaries in the definition of the functions o f the DGR and the Magistrates (as described above) reduces the power of the Director of Registry to exert authority, for example, incases of abuse. 3. Decentralization of Land Administration Functions (Cadastral Services) 126. Although in the long term Nicaragua would benefit from having a single agency, under the Executive Power, with administrative and financial autonomy, responsible for cadastre and registry procedures, in the interim, the hitherto underused 40 potential of the municipalities can come to play a major role. The new Cadastral Law adopted in 2006 and its regulations not only foresee the municipalities as the entities responsible for the maintenance of the national cadastral data, but they also allow their integration as serviceproviders inongoing landregularization activities ifthey prove that they have the requiredcapacities. 127. The successfulintegrationofthe municipalities intothe SNARE, specifically in the provision of cadastral services, will largely depend on the dynamics of the municipalization process in this decade. The Ley de TransferenciaPresupuestaria a 10s Municipios of 2003 guaranteesthe transfer o f up to 10percent o fthe national tax receipts to the municipalities. The amount received by each individual municipality, however, is linkedto a number of criteria, two of which are "efficiency" criteria, referring to (a) the efficiency of tax collection, and (b) the efficiency of the implementation of municipal policies. The first provides a strong incentive for the collection o f the municipal tax on local properties (IBI). For this, however, the municipalities need to have their cadastral services inplace. 128. Inthe past, despite the right to collect the IBI, municipalities, ingeneral, have been reluctant to expand the collection o f this tax, largely because it is locally very unpopular. Furthermore, the members of the municipal council, who are in charge of creating the conditions for the collection of the IBI, have little incentive to do so, especially since they themselves will represent the most strongly effected. Thus, in spite of broad support through international aidprojects, the results of past efforts to strengthen the municipalities have beenrather meager. This, however, seems to be changing, at least regarding the capacities of the municipalities to collect the IBI. Some municipalities have made considerable improvements, partly due to the countrywide implementation of a software program (SISCAT). One o f municipalities that has strongly profited fiom the strengthening and modernization of its cadastre office i s the municipality o f Managua, which has increased its IBI revenues from 32 million C6rdobas in 2001, to over 70 million C6rdobas in2004, to 100million C6rdobas in2006. 129. Under these circumstances(and inview of the institutional problems regarding the integration of cadastre and registry at the national level), the alternative of relying more strongly on the municipalities as partners in the establishment of functioning cadastres (and not only inmaintaining them) might prove to be an attractive option. This could also be politically feasible given the clear commitment of the new Government to a more pronounced municipalization process inthe coming years. E. Conclusions 130. The long-term aim o f Nicaragua should be the integration o f cadastral and registration services in one institution, under the Executive power -given the purely administrative nature of these services- with administrative and financial autonomy. 41 Giventhe political sensitivities involved, a few measures can be implementedinthe next few years, which would pave the way for this longer-termobjective. 131. The approval of the new Registry Law i s crucial for the implementation o f the institutional reforms initiated by the Nicaraguan authorities and supported by PRODEP. The information system SIICAR represents a first important step toward the integration o f the cadastral and registry services of the country. The need for a faster, cheaper, and more transparent systemof property registryinNicaragua i s evident, andthe expectations that the SIICAR will providethis are high.The privatebankingsector has offered support intechnical issues andinpromotingthenewlaw intheNationalAssembly. 132. Another important step would be the increasedinvolvement of municipalities in cadastral-cum-registration services. The legal fiamework already allows them to perform these functions and this should be to their own advantage, allowing them to increase collections o fmunicipalproperty taxes. 133. The cadastral and titling process already initiated needs to be extended country wide andcompletedas soon as possible. 134. Finally, the authorities could work more closely with the private sector (real estate agents, notaries, banks) to improve the system through training and modernization, inparallel to the strengtheningof the public land administration services. The idea is to introduce a strategic quality standards to all land administration services providers (IS0 like), moving toward a result and client oriented approach. 42 CHAPTER IV: OVERSIGHT AND ACCOUNTABILITY MECHANISMS A. Background 135. Nicaragua has advanced significantly in developing and implementing modem core public sector management reforms. The computerized public financial management system (SIGFA) is currently processing all Central Government financial transaction and about 70 percent o f total public sector expenditures. The recently approved Financial Administration Law (Law 550) sets the rules to govern sound financial management procedures for all public institutions and establishes the grounds for the implementation of effective accountability mechanisms. More modest advances have been observed in the area of public procurement. Although the SIGFA system has developed automated modules to process procurement transactions and most of them are openly published, the necessary normative framework is still to be approved and modern e-procurement practices are still to be developed andimplemented. 136. In the area of human resource management, the country has also made significant progress. A Civil Service Law was approved in 2004 and, although it still needs to be improved and its implementation has been slow, it has initiated a comprehensive reform to professionalize and institutionalize the government's civil service. As part o f this program, a merit-based accreditation process was initiated and well advanced during the outgoing administration. Some 5,000 public sector employees have already been accredited under this systemas an initial step toward a comprehensive professionalization program. 137. The Nicaraguan Government has also started some practices to promote a more transparent public administration. The Government initially implemented a voluntary disclosure policy, while the Access to Public InformationLaw was being discussedinthe National Assembly. This led to increased accountability in some key areas of the public sector. The Access to Public InformationLaw has recently been approved by the National Assembly giving further legal strengthand institutional coverage to those initial efforts. 138. Despite progress made inthese areas, government effectiveness continues to be the lowest rated among the six dimensions of governance tracked by World Bank Institute's governance indicators (see Annex 1 to chapter I). are serious problems There affecting the institutional foundations to promote effective checks-and-balances mechanismsthat would leadto adequatecontrol andperformance inthe public sector. 139. The purpose of this chapter is to present the institutional roots of deficiencies affecting control and accountability mechanisms at two levels: (a) the role and performance of the Comptroller's Office, and (b) complementary social accountability mechanisms. Sections B and C deal with each of these. The analysis of accountability focuses on their governance and institutional aspects rather than on their technical or procedural dimensions. The idea is to identify how political and other governance-related 43 problems might be affecting and limiting the independence of control and oversight institutions inorder to identifyareas of reform. B. ControlSystems 1. Background 140. Nicaragua's control systems for the use of public sector resources are based on the legal framework and the particular responsibilities assigned to each entity. Operationally, the most important institution in charge of these responsibilities is the Comptroller General's Office (ContraloriaGeneral de la Repziblica, CGR). The purpose of this section is to ascertain the efficiency of the control system and its transparency to citizens, which is the key to the system's credibility. Since it is citizens' taxes that mostly finance public expenditures, and at the same time they are the direct or indirect beneficiaries o f such expenditures, the question i s whether the system i s capable o f satisfying citizen expectations. Ifthe answer is yes, as a whole, they can trust it, meaning that the governance structure will ensure the public sector's capability of implementing public policies, especially those that are pro-poor. 2. The Legaland GovernanceFrameworkof the ControlSystem 141. The core legal framework of the Control System comprises two main legal bodies: the set of laws related to the CGR33and the Law o f Public Finance Management and Budget Regime.34Since the foundation of the Republic of Nicaragua in 1838, constitutional provisions of external controls on the incomes and expenses of the State have been a common prin~iple.~~ The creation of the Comptroller's Office in 1979 changed the nature of the institution from one having a judicial approach to one having an administrative approach. Whereas Decree No. 86 established that the General Controller was to be designatedby the Executive, and DecreeNo. 612 addedthe figure of a Sub-Controller, designatedby the Executive as well, the amendedPolitical Constitution of 2000 changed the governance structure of the institution. After the Constitutional amendments of 2000, the maximum authority of the CGR is its Board of five permanent members and three replacements, elected by the National Assembly (NA) for five years. The CGR has administrative and hctional independence, and responds only to the National Assembly. The amendment gives some prerogatives and responsibilities to the Board, although it did not change other articles to adjust the institution's performance to the newgovernance structure. 33The most important are the Law of creatingthe CGR (Decree-Law No. 76 dated September 20, 1979), CGR's Organic Law (Decree 625 dated December 22, 1980)) and the Law of Reform of CGR's Organic Law (Law 361 datedMarch21,2001). 34Law No. 550, dated August 24, 2005. The enactment of this Law is the result of efforts to modernize Public Financial Management in order to improve control of the financial resources using the formulation and execution of the budget as the ordering mean. The International Development Association has contributedheavily to these efforts andto the enactment ofthis Law. 35See Annex 1 for a briefhistory of the institution and the models o f externalcontrol. 44 142. The introduction of the Board and the selection of its memberswas a result of a political pact between the two major political parties From the perspective of the governance scheme, the existence of a Board means that the decision-making process, even for administrative matters, has to be concerted, and therefore i s slower than in the case of one authority. Although legally accountable to the NAYinpractice it i s not clear to whom the Board i s accountable, since the relationship with the NA is only related to the nomination mechanics and the presentation of the annual report.36Moreover, the Board has been involved in some cases of a highly controversial political nature, even suggestingthe removal o fthe Presidento fthe Republic.37 143. The CGR is part of the constitutional order of the Republic. The Constitution establishes that the CGR is the "lead agency for the system of oversight in public administration and the stewardship o f State property and resources." Its constitutional mandate vests it with the authority to: (a) establish a control systemensuring the due and proper use of government funds, (b) conduct continuous budget management audits with respect to the nation's general budget, and (c) oversee, examine, and evaluate the administrative and financial management of government agencies, state-subsidized agencies and organizations and public or semi-public enterprises. The CGR's Board and its President have the responsibility to report annually to the NA on their activities and findings. However, the Constitution does not say anything about the content of the information and what the NA should do with it. The CGR has no jurisdictional prerogatives, meaning that, incases of presumption of criminal responsibilities, the CGR has to sendthe case to the judicial systemfor prosecution. 144. The Organic Law of the CGR regulates its functions, which are: (a) regulatory; the CGR has chief responsibility for formulating and updating policies and technical standards related to internal control systems for government agencies or institutions; (b) audit; this i s the major activity of the CGR and i s primarily concerned with compliance audits, includingaudits o f consistency with laws and regulations, and financial audits; (c) legal; the CGR determines administrative and civil responsibilities and makes presumptions of criminal responsibility based on its findings from the corresponding audits; and (d) anticorruption; this involves the examining and reviewing declarations of assets by incomingand outgoing government officials and employees. 145. InFebruary 2004, the CGR presented a new draft law to the NA, aimed at: i) giving CGR financial autonomy by assigning to it 1 percent of the annual public sector budget and ii)strengthening the legal provisions needed to improve the government's control system. At the time of this report this draft law is under review and public consultation by the Ethics andProbity Sub-Commission of the NA. 36Besides, the destitution mechanism is confusing. In November 1992 the NA tried to remove to the General Controller based on its administrative legislation but did not succeed due to a Judicial Resolution which statedthat the NA had exceed its functions. 37On October 7,2004 the CGR's Board enacted a Resolution through which they accused the President of the Republic of public fund misuse, established a fine of 12 months' salary and suggested his destitution. See, Garcia Omar (2006). 45 146. The control system is complemented by internal controls in each public entity, supported by the external control of the CGR. The audits' objective i s to assess the degree to which the entities and public servants have acted in accordance with their functions and responsibilities. In addition, the CGR recommends actions to improve the operations and activities of the public sector, including public enterprises, public-private enterprises, the National Institute of Social Security (INSS), the Central Bank (BCN) and others. The system gives responsibility to each public entity to develo ex ante controls, andto the internal audits offices andthe CGRto do ex post controls. 38) 147. Law 550 adopts a system of Public Finance Management (PFM), in order to strength the internal control, efficiency, effectiveness, and transparency of the use of public financial resources. The Law regulates all the processesrelatedto the formulation, approval, execution, control, and evaluation of the General Budget o f the Republic (PGR), as well as the information processes of public entities' budgets. The Law clearly recognizes external control as exogenous audits executed by the CGR on the public entities. The Law establishes four sub-systems to implement the financial management system: (a) budget, (b) treasury, (c) public debt, and (d) public accounting. Within the sub-systems, the evaluation of the annual budget execution is done by the Ministry of Finance and Public Credit (MHCP) and the CGR. The role of the MHCP is to elaborate andpresentquarterly and annual reports to the NationalAssembly (NA) and to elaborate an annual report on the budget execution, includingthe financial statements of the public sector, and send it to the NA and the CGR, no later than March 31 of the new fiscal year.39On that basis, the CGR has to express its opinion no later than end-September.Up to now, the MHCP has beendutifully elaborating the reports, sending them to theNA and publishing them on the internet. Until very recently, the CGR had never conducted a proper audit of budget execution and the NA had not enforced the CGR's legal mandate inthisrespect. 148. The first audit report of budgetary execution following national government audit norms -which inturnincorporate important aspects of international audit standards- correspondedto fiscal year 2005 and was sent to the National Assembly inMay 2007. At the same time, the CGR issued 19 partial reports on an equal number of institutions subject to the public budget regime. These reports have been published in CGR's webpage. This effort was financed by the international cooperation. It i s fundamental that the annual audit exercise be financed on a sustainable basis and concluded according to the timing provisions o f Law 550, in order to contribute to the formulation of the next annual budget. In addition, the scope of the annual audit needs to be improved by including a single auditor's opinion over the situation of the saving-investment account, 38Inthe literatureabout the approach ofthe system control, internal control objective is the provide tools to the management on the achievement o f the institutional objectives, part of its framework are the policies and procedures are established and implementedto help ensure the risk responses are effectively carried out. Insome countries internal control is associated mainly with the existence o f ex-ante controls. Internal Control is defined by the COS0 report as: "Anything which supports people intheir efforts to achieve the objectives ofthe organization" 39InNicaraguathe fiscal year begins inJanuary and ends inDecember. 46 which should consolidate in a single account the financial situation o f the overall non- financial public sector.40 149. Concerning the auditor's findings in the 2005 budget audit report, despite the fact that the CGR sent the audit report to the legislative branch, the latter has not used it to improve budget formulation and control over the executive branch. This might be explained by the significant time lag betweenthe report's delivery andthe formulation o f the next budget. Since the executive branch has no indications from the legislative branch, based on the CGR's recommendations, about possible deviations from legal mandates by executive agencies, it does not have incentives to improve its internal control mechanisms. Therefore, the system has not been fulfilling its purpose of improving the quality of overall budget formulation and execution based on audit work. Regarding the audits of the 19 institutions, the CGR sent to the principal authorities of the audited entities a Board Resolution indicating a term o f 90 days to comply with the recommendations, mostly concerning improvements in the internal control systems. In this sense, the exercise has been positive, promoting an analysis, discussion, and solutions to the shortcomings of the control systems within the affected institutions, as well as at the CRG. 3. The ExecutionofInternalControlFunctions 150. RegulatoryFunction.Although the internal control procedures are an internal responsibility of each public agency, it i s up to the CGR to establish procedures for coordinating and evaluating the operations of internal auditing units, allowing for the presentation of relevant recommendationsto audited agencies. Up to the end of 2006, 57 entities had advanced to various degrees in adopting international audit norms, of which 26 entities had finished this task. On the other hand, out of 153 municipal governments, 145 were certified, of which 68 had complied 100 percent of the requirements and eight municipalities had not sent any certification report. This level of compliance (even under the indulgence of a self-assessment methodology) implies that the preventive control system falls short and there is still a wide scope for discretionary decision-making, in spite of the relative stability of the internal audits units.41 151. Since the executive authorities of each agency decide the budget amounts for the internal audit unit, they can guide its work. Empirical evidence shows that budget allocations are generally poor and the approval of the operational plans is only valid for the current administration and not in the case of political changes. Generally, the executive authorities consider that the internal audit units have no clear functions and are viewed more as obstaclethat as support units to improve institutional development. 40Inspite of progress inthe implementation of PFMreforms, the information system (SIGFA) still does not allow to get the consolidated saving-investment account. Addressing this i s a priority for the MHCP andthe CGR. 41Article 59 o f the Organic Law o f the GCR states that any auditor o f the internal audit unit o f any agency cannot be removed without CGR's authorization. 47 152. The audit function. The main function of the CGR is to plan, implement and supervise audits of public entities. The CGR has an annual audit plan, which i s based on geographical terms rather that on risk analysis. This i s one aspect of the problem. Another aspect is that the plani s not followed. Table 4.1 shows the distribution of executedaudits included or not inthe plan, during the period2003-2005.42 Table 4.1: NICARAGUA-CGR Total Audits included inThe Annual Audit Plan in 2003-2005 (in numbers and percentages) Year Annual Annual Type Pian Other ~otai Pian Other Total */The operational audit (OP) was on the Bank's Superintendence about the bankruptcy of four private banks. SP: Specialaudit... SOURCE: Bank'sStaff estimations on CGRs data. 153. The law gives CGR enough flexibility to deviate from the annual plan and rather to respond to accusations, non-programmed special audits, emergencies and other situations. In fact, most of CGR's audits originate in accusations and media scandals. Table 4.1 and Figure 4.1 show the source of CGR's audits for the period 2003 to 2005. Even though Table 4.1 seems to show that the importance of the audit plan has been growing, in 2004 and 2005 there are some audits that were planed in previous years, so the planedaudits for those years are inflated. Infact, the main sources o f CGR audits are accusations and Board resolutions, and the later often have accusations and media scandals as its main sourcetoo. Figure 4.1 NICARAGUA: CGRs Audits Origin Sources in 2003-2005 Evaluationof External internalcontrol Audit Firm 18% *P/o Accusations 37% UIA Report Board Resolution 13% 30% SOURCE Bank'sStaff estimationson CGR Data. 154. A serious efficiency problem arises when the leading trigger for audits is accusations. The problem i s that the institution assigns its resources in cases that are 42See Annex 3 for the PlanedAudits not performed. 48 weak relatedto potential results, leading to economic loses as well as loss of ~redibility.~~ This is illustrated inFigure 4.2, which presents the relationship betweennumber of audits and amount of fines in2005. Figure4.2: Correlationbetween Numberof Cases and Amount of Fines Collected in 2005 92% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% PUBLICSERV MUNlClPALlM CENTRALGOV PUBLENTPRISE BANKRUPTCY AUTONOMOUS UNIVERSITY SPTnDA' IlnlPl SOURCE: Bank's Staff estimations on CGR Data. REGION IOAmounts QCases 155. The CGR is tryingto strengthenthe planning process, basing its audit sample on risk factors and giving greater weight to planned audits. For example, the special audits for 2007 have beenselectedaccording to the seriousness ofthe problems withthe internal control systems found during the implementation ofthe 2007 budget audit Table 4.2: CGR Resultsof Audits by LegalResponsibilityin2003-2005 (In numbersof audits and amountsinmillions) Year Type Servants Public Responsiblllty TYpe of Total Derived OffencesAmounts Involved Civil Criminal C P C8P A W C$ IUS$ C$ I US$ SP, 1 OP I 3332 SOURCE: Bank'sStaff estimations on GCRs data 43There are some cases where the amount o f fines collected is lessthat US$4,000. 49 156. The audit process ends when the audit report i s sent to CGR's Legal Department, which provides legal fimdamentals to the auditor's opinion and validates the types of responsibility concluded (i.e. civil, criminal and admini~trative).~~Table 4.2 shows the types of responsibility that the CGR's establishedduring 2003-05. As the table shows, most o f the findings relate either to administrative faults or find no responsibility (66 percent inaverage), another indication o fthe weakness o fthe planning system. 157. The final result o f CGR's work depends on the Judicial Power, which has the authority to prosecute people suspected of wrong-doing and collect effectively the amounts owed. The sad story i s that today no resourceshave beenrecovered by the State and there is nobody in prison as a result of this control system. The recovery of the amounts is the responsibility of the Attorney's General Office, who has brought some cases to court, butjudges have ruled that CGR's Resolutions are not "Executive Titles," and therefore not valid for forceful collection. According to those rulings, it would be necessaryto ask the Ministry of Finance to confirm CGR's work, which would require a newinvestigation. This hasnot been done to date. 4. Conclusions 158. The impact ofthe CGR inthe accountability systemis marginal bothbecauseof the way it chooseswhat audits to conduct and its little ability to pursuecrimes against the State. Internally, at the CGR, the lack of concrete results also causes low morale, because evenifthe CGR hadthe best risk-based systemsto choose audits, the final result depends on the judicial power. Therefore the problem i s not the sole responsibility o f the CGR, rather is a problem that needs to concurrence of three State powers (Executive, Legislative and Judicial) to be solved. The State is confronting a high opportunity cost in waiting for the recovery o f resources, deter crimes and improve both public policies and the public's credibility in the political and institutional system. The improvement in the system requires a broad agreement and understanding of CGR's objectives among all brancheso f government andcivil society. 159. Nevertheless, the CGR could improve the preventive system monitoring and training public institutions to implementinternational audit norms and standards to have better internal controls. The Executive Power could also contribute to this effort by strengthening internal control units in various government agencies, preparing them to provide advice and recommendation to the authorities on how to comply better with regulations, improve the efficiency o f public operations and prepare accurate and reliable financial reporting. Conversely, the highest authorities of executive agencies need to perceive their internal audit reports as tools for a better administration, so an awareness campaign within the public administration to understandthe added value of the internal control function would beneeded. 160. Since CGR's mandatesare multiple andthe institution is weak, it needs to focus its resources and efforts on its most important tasks and the ones that are most likely to 44The CGR's Organic Law (article 10, number 17) allows it to determine three types of responsibility: administrative, civil, or presumptivelypenal. 50 yield control improvements. From this perspective, the emphasis needs to be on the annual audit o f execution of the national budget. The CGR's annual budget should be approvedwith the inclusionof sufficient and predictable resources for this purpose. C. SocialAccountability Mechanisms 1. Introduction 161. The Constitution establishes the right o f Nicaraguan citizens to know how public resources are used and to receive any information they request about public matters.Nicaragua, as a democratic country, has beenpromotingthe participation of civil society in the policy making processes to reinforce the democratic system and improve the governance of the country. Nicaraguan Civil Society Organizations (CSOs) have focused their efforts on two main issues: (a) debate and approval of a Freedom of Information Law (FIL); and (b) the design and implementation of social accountability processes, especially at the municipal level. 162. The objective of this section is to describe the institutional arrangements for these social accountability processes and their effectiveness. Three areas are discussed: (a) the legal context for civil participation, (b) a summary o f the actions that CSOs engaged in to secure passage of the FIL, and (c) the most significant social audit initiatives. A few conclusions are thenpresented.45 2. The Legal Context for Civil Participation 163. According to its Constitution, Nicaragua is "a representative and participative democracy." 46 This means that Nicaragua's Constitution mandates that the country's style o f democracy is beyond the democratic practice to vote to elect authorities from time to time, and states the right of citizens to request and interact with different government authorities and institutions. Civil participation is meant to be the social process by which the organized population mobilizes, interrelates, and influences public policies. Several laws refer to civil participation as a right, of which the most important are summarized below. Constitutionof theRepublic of Nicaragua (1987 and amendments) 164. Several articles of the Constitution provide for various forms of civil participation, ranging from the democratic principleso f the nation, to specific processes such as plebiscite and referendum, the right to be informed, to petition, to make accusations, to participate freely in the political process, to create organizations, to present bills, and to be included inconsultative councils such as the Economic and Social 45Unions, although an important influence on governanceandpolicy decisions, are not covered. They are, however,an area for kture study. 46Arts. 2 and 7 of the "Constitucidn Politica de la Repziblica de Nicaragua" (1987 and amendments). At: http://www.asamblea.gob.ni. 51 Council (CONPES).47 Although the articles might appear general, the Constitution recognizes and emphasizes civil participation as fundamental to the development o f the nation. The provisions embody the principles that are developed inspecific laws. Law of CivilParticipation (2003) 165. The Law of Civil Participation comprises principles and procedures for participating in the formulation of bills at the local, regional, and national level. It also regulates civil participation in the formulation of public policies at various stages, civil consultations at the local level, and citizen participation in the formulation o f the Municipal Investment Plan and Development Strategy. The legislation establishes that these rights do not limit the development o f new forms of participation. Furthermore, it states that when new governmental entities are created, they have to establish civil participation processes related to their functions. This law also mentions the right of citizens to report irregularities committed by public servants.48 MunicipalitiesLaw (1997) 166. Citizens are seen as the cornerstone of the MunicipalitiesLaw. According to the Law, the Municipal Government, "guarantees participative democracy with autonomy," and emphasizes civil participation for the creation of and membership in the Municipal Development Councils.49The Municipalities Law provides the opportunity for citizens to participate individually in public councils, or as groups of individuals through different entities. It also includes provisions for creating another form of citizen participation by requesting periodic reports on the execution of projects. The law mandates the recognition of the formal and traditional authorities of indigenous communities. Article 40 of the Law prescribesthe procedure a citizen can follow ifhe or she feels wronged by the action of a Municipal authority and wishes to take action against him or her. The principle of "positive silence" applies: ifthe Administration does not question the claim, it is consideredresolved infavor ofthe claimant. Law of Organization,Jurisdiction,andProceduresof theExecutive (1998) 167. The Law of Organization, Jurisdiction, and Proceduresof the Executivedefines the general structure of State Power, authorizes the President to create sector cabinets with the option of includingmembersof civil society, and defines the membership of the Economic and Social (CONPES). The Law allows citizens who feel wronged by a decision of any authority or institution within the Executive to pursue legal recourse through two processes: review and appeal. The law also allows suspension of the administrative decision or action in order to initiate the correspondent appeal for legal protection or administrative litigious procedure. 47Arts. 2, 7,48,49, 50, 52, 55, 66,99, 140, and 150 of the Constitution. 48Arts. 82 and 83, Ley de Participacidn Ciudadana,La Gaceta: Diario Oficial, No. 241, December 19, 2003. 49Arts. 3 and 28, Ley deMunicipios,La Gaceta: Diario Oficinal, No. 162, August 1997. 52 3. Freedomof InformationLaw 168. This Law was approved in May 2007, after considerable work by the Grupo Promotor to generate a general consensus among the governmental and civil society spheres. The Grupo Promotor, led by the Violeta Barrios de Chamorro Foundation, organized at least 20 seminars to consult and disseminate the draft law. Throughout this process, the Judicial Commission of the National Assembly objected that the provision on personal information regarding assets of public employees was risky and contrary to citizen's rights to privacy. The Commission pointed out that sensitive information regarding asset declarations o f public servants would be fully disclosed if the draft FIL was approved. The Grupo Promotor disagreed with the Commission's opinion, arguing that one of the most important objectives of the draft law was that it be used as a tool to fight against public officials engaging in corruption, as provided by the Inter-American Convention against Corruption(ICAC)." 4. Social Monitoringof PublicGoods andPublicServices 169. Since 1999, several Nicaraguan CSOs have been systematically applying social accountability processes at the municipal level, especially insmall communities." One of the reasons for the municipal focus is that at this level it is easier to promote the participation of citizens because public actions affect them directly. The main concerns o f citizens are: (a) the provision of public goods, such as paved streets, public parks, markets, security, and so forth; (b) the quality of certain public services, such as education, health, and waste management; and (c) the participation decisions regarding allocations of the municipal budget. There are at least nine significant experiences on social accountability mechanisms in the country, some triggered by public sector programs and some by CSO initiatives, eachwith its own methodologies and results. The following paragraphs describethem. Social EmergencyInvestmentFund (FISE)Programs 170. The FISE finances public investment projects in rural communities. Accountability processes are integrated into FISE's projects based on a model of Community Driven Projects (CDP), which promote civil society participation at each stage of the project's identification, formulation, and execution. The initial initiatives were the Patronatos Escolares, to supervise the construction of educational infrastructure. The CDP methodology includes community organization, training, technical assistance to the community to deal with technical and administrative factors, resource transfers to the communities, local government involvement to ensure the ~~~ ~ ~ The ICAC was signedby Nicaragua in 1996 and endorsed by the National Assembly in2003. 51The most relevant experiences inthe recent past were: (a) monitoring ofurbanandruralmunicipalities in the aftermath of Hurricane Mitch in 1999, (b) a more or less systematic monitoring in2001 at the municipal level, and (c) processesled by the CoordinadoraCivil and Red deDesarrollo Local to monitor and oversee the Poverty Reduction Strategy in2002 to 2003. 53 financial resources for further maintenance of the investments, and community counterpart financing of 5 percent of the total cost of the project. This model allows communities to oversee project execution through a direct relationship with the contractor selectedby FISEto buildthe project. 171. A characteristic of this model is that community participation ends once the project investment stage finalizes. However, this mechanism has allowed rural communities to have a voice inthe decisions on how their priorities should be included during the projects' cycle. Results show that under this methodology, social infrastructure -schools, health centers, public parks- has achieved better quality standards without significant delays. However, this model can be improved by enhancing the way the supervision committee i s selected, which is currently subject to collusion risk, and by ensuring broader participation of the committee not only in the supervision phase, but also inthe decision making phase about project selection vis-a-vis community priorities, as well as during the operational phase. Ministry of Education (MOE) Programs 172. The MOE initiateda reformprocessin 1993 with the objective of improvingthe quality and coverage of education inthe country. The process is based on the assignment of certain responsibilities to parents, teachers, and students in the school management through the Consejos Directivos Escolares (CDE). To make the reform permanent, the Nacional Assembly approved the School Autonomy Law, which formalizes the decentralization process. The participatory model is based on two pillars: (a) the institutional pillar composed of the Centros Escolares Autonornos (CEA) and Municipal delegations of MOE, and (b) the participatory level to implement social accountability processes through CDEs and the Municipal Education Committee (MEC), which in turn i s part of the Municipal Development Committee (MDC). Both mechanisms determine all the activities to foster quality education. 173. The new government has expressed concerns over this system, on the grounds that parents in some school districts are being asked to make financial contributions whereas public education should be free. There are also concerns that parents have too muchpower over academic themes. Bothissues put inquestion the governance structure of the CDEs. Also, it is important to update teachers and school directors on school management issues, and to design and implement better communication tools among the executors, controllers, and beneficiaries. Despite some governance weakness, the involvement of parents and students is considered very positive for the general improvement o f educational services. Ministry of Family (MOFL) Programs 174. The MOFL is implementing the Program of Integral Attention for Children (PAININ) to promote the participation of poor families inorder to improve the education andhealthservices for vulnerable children. The program is executedby nongovernmental 54 organizations (NGOs) under the supervision of parents, who implement social accountability mechanisms inthe planning processesas well. 175. PAININ's objectives are: (a) to improve the quality of the integral services for children under age 6; (b) to permanently improve the quality of the program; and (c) to strengthen the institutional framework o f the program. The institutional arrangements are based on two actors: (a) the Municipal Committee for Children, composed of the MOE, the Ministry o f Health (MOH), and NGOs, all responsible for program development; and (b) the involved families. Both actors have functions manuals and receive training on supervision, participatory methodologies, and administrative management. The results are good because the program assists very poor people and helps parents improve the quality of life of their children. Moreover, parents have more time to spend looking for better economic opportunities to increase family income. Ministry of Health (MOH)Program 176. The MOH, based on the Health Sector Law, promotes social participation to improve the quality of the services that the health system provides to citizens. The law establishes the responsibilities of civil society actors like the Municipal Health Committees (MHC) and Departmental Committees. The model of participation i s based on: (a) the constitution of focal groups to conduct social accountability processes to evaluate the quality of the health services at the municipal level; (b) a survey to learn about customer perceptions of service delivery; (c) systematization of the survey; and (d) monitoringand evaluation of activities of the work of the health brigades. 177. One aspect that weakens the initiative for the community i s the lack of access to budget sector information to improve the planning and supervision processes. Also, the institutional weakness of the M O H to take into account the results o f the social accountability processes reduces the motivation of the participants. Both aspects affect the levels of ownership, thus increasing sustainability risk. Economic and Social Council (CONPES) 178. The CONPES is a constitutional entity, chaired by the President o f the Republic. The Council members include representatives of many organizations, such as labor unions, the private sector, autonomous regions, social organizations, and other CSOs. Government participation in CONPES depends on the discussion area. CONPES i s represented in five sector cabinets: production, infrastructure, social, governance, and economics. The main role of CONPES is to express opinions on the reformprocessesthat are part o f the government program, such as the Poverty Reduction Strategy (PRS). One of the main contributions of CONPES in the context of social accountability was the monitoring of expenditures of the HIPC resources in 2001. One of the most important areas for civil society impact on future policy decisions through CONPES is the decentralization strategy. The Coordinadora CivilExperience 55 179. The CoordinadoraCivil (CC) is a group of about 300 CSOs with various aims that is active in Managua and in other departments of the Nicaraguan Republic. The CC promotes various accountability processes using different methodologies. A good example is the case of municipal monitoring through store-cards in 21 municipalities. This initiative has involved several member organizations of the CC and has received IDA support. Further, with the assistance of NGOs, the communities have conducted training courses on social auditing. The results of the application of the store-cards are scant interms of quantitative evaluations, because the CSOs have not processed the data they collected during the application of the methodology. Therefore, it is not possible to conclude whether this social audit mechanism based on store-cards has had an impact on public policies to improve the provision of public services.52This experience illustrates that the process of modernization o f the State requires effort and sharing o f information not only from the public sector but also from CSOs. TheEtica and TransparenciaExperience 180. Etica and Transparenciais the local chapter of Transparency International. Its main objective is to monitor elections and promote electoral participation through a network of volunteers. Lately, it has started an initiative to oversee the competitive processes of acquisition of goods and services o f the Ministries of Education, Health, Transport and Infrastructure, and a few municipalities, and to promote social controls of acquisitions and hiring by the public institutions. The initiative seeks to achieve six results: (a) to have a more transparent public sector, especially in the Ministries of Education, Health, Transport and Infrastructure, and municipalities; (b) to improve the institutional knowledge on the quality of the transactions and processes o f purchases o f the State; (c) to improve the acquisition of works and services with higher quality; (d) to foster social control; (e) to increase citizen participation in the pursuit and denunciation of irregularities described as corrupt actions; and (0to apply the results andmethodology in other organizations at the national and international level. The initiative recently signed cooperation agreements with the mayors of North Santo Tomas, San Marcos, Diriamba, Rosario, and Masatepe. 5. Conclusions 181. Civil participation in social audit mechanisms in Nicaragua i s high. There are several participatory movements and institutions that are concerned with government accountability, both at the local and national level. However, the participatory processes are not strong enough to influence national policy decision-making, Therefore, the results dependonthe quality of the intervention and onthe politicalwill of the authorities to use 52Inthe Municipality of Malpaisillo, 424 people completed the application of the scorecard inthe second semester o f 2004. The methodology used a scale o f 1(very bad) to 5 (excellent) to assess the evaluation o f education and health services. The results show that in education the variables o f (a) learning capability received 3.29, close to average; (b) infrastructure received 2.75, between poor and average; and (c) social participation received 2.85, between poor and average. However, it is unknown if policies or implementation methodologies changed after the social audit processeso f 2005 and 2006. 56 the results ofthe various social accountability initiatives to improvepublic policy-making and implementation of public programs. 182. Despite the fact that the prior government developed and implemented a voluntary Freedom of Information initiative, until now civil society has confronted problems understanding the implications of available public information, particularly related to budget execution and its distribution. Clearly, the lack of access negatively impacts the accountability process, which, in the end, affects the quality o f the public policy intervention and the services provided. The recently approved Freedom of Information Law could constitute a major step to ensure the accountability of the Government to any interestedcitizen. Regular publication o f poverty reduction indicators and MDGs in a simple format would be an advisable first step. Further, the efforts to reform and modernize the State now have a potential feedback mechanism to improve their scope and results, through the use of consultation mechanismsprior to adoption of policies. These consultations can and should be undertaken both by executive and legislative agencies. 57 Chapter I Annex 1 - Monitoring Governance: Indicatorsand their Use 1. Nicaragua is a country with numerous institutional and governance challenges. Figure 1 shows progress in the six dimensions of Governance regularly monitored in "Governance Matters."53 Figure 1:Nicaragua,Evolutionof GovernanceIndicators(1996-2005) NICARAGUA (2005) Government Effectiveness Regulatory Quality Rule of Lau Control of Corruption e 25 i e 75 : ie Conparison betueen 2885, 2884, 2883, 2082, 2888, 1998, 1996 {top-botton order) Country`s Percentile Rank (8-188) Source: "Governance Mutters V," World Bank Institute (2006). 2. As the chart shows, there was significant progress in most dimensions of governance during the early 2000s and Nicaragua is no longer among the lowest 25 percent of the 213 countries surveyed, in any of the six dimensions. Further, while the aggregate data masks some important details, it i s fair to say that there has been notable progress on issues related to public sector management, in particular public financial management. Nevertheless, overall performance in most o f the six dimensions is weak and progress in some of them has been either stagnant or deteriorating lately. The weakest dimensions o fNicaragua's governanceare government effectiveness and the rule of law. The former has several components but the most notable i s probably related to the effectiveness of poverty reduction programs and the low quality o fpublic services. These 53The latest Global Monitoring Report 2006 (GMR) chooses a different set o f 14 indicators to measure various dimensions o f governance. We have chosen the WBI indicators instead because historical data and regional averages for the GMR indicators are not immediately available. The main IGRwill further explore various governance data sources. 58 issues will be examinedin the PER and PA. These IGR examines a few areas where the situation has deteriorated considerably inrecent years, like the regulatory environment, or has not advanced sufficiently quickly, like the system of protection of property rights (an important component of the sub-indicator "rule of law"). 3. It must be borne in mind that these indicators are mostly based on perception surveys and hence are not intended to point into what policies should be implemented. Nonetheless, they are useful indicators of the major areas of attention. Furthermore, the WBI indicators are based on other indicators, which are used for important decisionmaking purposes by international organizations and the private sector. Some of these decisions include the amount of aid resources to be assigned to the country, the country's investment risk and interest rates charged by some industrialized countries on loans made to Nicaragua. For this reason, the country would benefit from constant monitoring of these indicators. With this purpose inmind, Table 1attachedto this Annex provides the detailed list of indicators usedto construct the WBI governance indicators, their definition, where can they be found and their evolution inthe case of Nicaragua in the past few years. Table 2 of this Annex presents the decision-making process and the governance indicators used by 3 international organizations, including the International Development Association, in determining aid amounts or investment decisions regarding Nicaragua. 59 x a p1 2 a 0 00 x 2 xVI vl 2 m 8 d m N x a LA B f N Q N -s 3 3 & B S B hB h .E D 0 v0 c I VJ P I P I o B I \o B m c? 0 2m m B 3 m F? 0 f I p. 2 3 0 r- 2 OQ c? 0 x - a S sL 2m 2 xv) d ? 0 N 2 v! 2 v) v) 0v! 0 2 p' 2 p' 2 1 s i 3 a o B& W 2 x m 2 2W W 2 B N i W 2 2 -- x am Y N N c. e eI B I - I c. 3 i 1 6 a S m 8 aS 2. 2. 6 0 0 ..:a - m v) I d 2 I VI 2 I VI 2 W 2 j N d 2 S j S h 0 .E B ?5 - I I 0 = P I 2 c 2 I 0 2 d 8 10 f0 a - x v) a 2 p' 0c! d f0 2 N - a 2 a w x a 3 0 N - ": m W 10 x rn E8 v b k =: a" 3= B N I B I m s 0 I- a II W W E: L 8 0 x rz W 2 a 1 8 N 0 8 3 x CI 2 m 0 N l I 0 - c 3 c 3 g c h 2 . 3 $a 0 - 2.3 0- ll oo 00 n! 0 x I a N j W c! 0 a N m Ee I t m 8 a :i, -x rt 1 Ici r! v, 0 0 x N 3 h p! W m 0 8 0 a m x 0 0 Q N x N x N x N 2 S L h &.! 0- a a B a P I 3 25L E l i Chapter I-Annex 2 Country Governance Background A. The Political System 1. Basicfeatures 1. The formal lines of Nicaragua's political-institutional system are clear-cut. Most notably, the country's democracy is constitutional, presidential, and repre~entative.'~ But while unambiguous in its formal design, like in many other countries, the system is in practice a complex hybrid of informal and formal relationships. Inpresidential systems, althoughthe executive enjoys extensive prerogatives, the various branchesof government remain independent. In Nicaragua, the system functions as a mix of presidential and parliamentary systems. Also, in representative systems, citizens elect and eject their leaders from office, and leaders in turn both make binding decisions on behalf of their constituencies and are accountable to them. InNicaragua, the electoral principle i s much weightier thanthe accountability principle. 2. The country's political and institutional degree of consolidation remains unclear. Consolidated formal systems are typically stable, even predictable. Moreover, when formal systems are closely entwinedwith robust institutions, even ifthese are informal, it i s the resilience and legitimacy of the hybrid itself that i s tested over time. Nicaragua's hybridsystemis characterizedby aduality ofpolitical power, butthis duality is subject to frequent renegotiation and contestation. Moreover, when observing reforms that alter: (a) the structure or functions o f the state, (b) the rules of the game (regime), andor (c) the distribution of resources and power; the Nicaraguan political system exhibits a strong propensity to reform and institutional volatility. The number of major institutional reforms in recent years -covering a range of administrative, electoral, judicial and political domains, and instituted through changes to the 1987 Constitution and the Electoral Law No. 331 i s striking. - 2. Electoral Politics 3. Inthe electoral process,Nicaraguanpoliticalparties, pressure groups, civil society groups, and the electoral branch (Supreme Electoral Council, SEC) fulfill their roles relatively well. Elections are competitive and binding. That is, candidates wage vigorous electoral campaigns, the pressprovides ample coverage, political parties get out the vote, voters are free to cast their ballots, the tallying proceeds without gross irregularities, and the losing side acceptsthe outcome. Of course, the degree of anxiety andmistrustamong contenders varies from one electoral cycle to another, and complaints are lodged withthe SEC. But no deliberate misconduct sufficiently serious to de-legitimate an election has been established since the transition to democracy. All four major elections held in the last decade and a half -1990, 1996,2001, and 2006- have been regarded by international observers as generally fair. Among those that have given their seal of approval are the 54 The Nicaraguan Constitution establishes four constitutional branches: Executive, Legislative, Judicial, andElectoral. 75 Organization of American States (OAS), the Carter Center, and the European Union (EU). As a result, four different administrations (Chamorro, 1990-1 997; Alemh, 1997- 2001; Bolaiios, 2001-2007; and Ortega, 2007-) have been duly installed, incrementally establishing a solid record of electoral continuity andpeaceful transfers o f power. 4. Other functional aspects of Nicaraguan elections deserve note. The emergence of new and effective contenders, for example, points to considerable organizational and adaptive capacity on the part o f the country's political class. The performance of all the major contenders suggests that the electoral landscape, though apparently polarized, includes a sizable mixed middle. Two electoral poles became discernable in the 1990s, FSLNloyalists at one end andthe hard opposition at the other. But opinion surveys also have shown the persistence o f a multi-class segment that holds ambivalent and/or intermediate views, and identifies with neither pole. Waves of surveys conducted by CID/-Gallup (November 1997 to March 2004) indicate that the FSLN and the PLC jointly capture the loyalty of 45 to 60 percent o f voters duringperiods between elections, while a sizable 40 to 55 percent ofthe electorate remains undecided. Partly inresponseto this unmet demand(and partly because defeated presidential candidates that garnered at least 1.1 percent of the national vote were entitled until recently to a seat in Congress), political parties proliferated. Twenty three parties and coalitions in addition to the Sandinista and Liberal contenders participated in the 1996 elections. But these small, disparate groupings failed to reach undecided voters with a compelling alternative, and by election time most ofthe undecidedchoseto alignwith one ofthe two poles. 5. Similarly capabilities were subsequently deployed by internal challengers against the traditional leaders of the two major parties. Their respective splinter parties and coalitions-the Movimiento de Renovacion Sandinista plus its smaller allies (Alianza MRS) and the Alianza Liberal Nicaraguense (ALN)-both made their presence felt during the 2006 electoral campaign (Table 1.1). The 2006 results suggest that the prospect of catching this floating mixed middle is a realistic goal. From a systemic perspective, however, the results also show a fragmented electorate. .,,Party not yet formed, already dissolved, or not important interms o fvotes received. * Guillermo Osorio o f Camino Cristiano received 4 percent, Noel Vidaurre o f the Partido Conservador (PC) received 2.26 percent, and a group o f about 20 candidates with under 1percent o fthe votes each **collectivelytook 4.9 percent o fthe total. Electoral reforms show their consolidating effect. Source: ConsejoSupremo Electoral. 76 6. Congress presents a similar picture. The National Assembly seats 92 deputies. O f this total, 90 are elected from party lists. The other two places are reserved, one for the outgoing president, the other for the runner up in the presidential race. In the most recently installed National Assembly (January 2007), the FSLNholds 38 seats, the PLC 25, the ALN 24, and the MRS 5. Hence, no single bloc is strong enough to legislate effectively without the cooperation of another. This has important consequences for legislative recommendations arising from the substantive chapters of this Review, as well as other legislative decisions, but at the same time the needto reachpolitical consensus to approve legislative measurescan be regardedas a welcome sign of their staying power. 7. A salient characteristic of contemporary Nicaraguan politics is that the parties situated at either end o f a left-right ideological spectrum, though presumably separatedby the greatest ideological and partisan distances, are better able to cooperate with one another than with those that stand closest to them. This suggests that Nicaraguan politicians do not fit the "normal" pattern -European or American style- of ideology- based norms and behavior. Furthermore, the PLC and the FSLN appear to have establisheda power duopoly, but one that is both renegotiable and contestable, with the corollary of ahighreformcapacity. 3. Dual-partyPoliticsandPropensityto Reform 8. The origins, mechanisms, and consequences of two-party dominance are closely tied to an identifiable set of informal roles, norms, and practices that blend with formal democratic institutions. Inthe case o fNicaragua four stand out: long-standing leadership, politics by institutional means, pact-making, and extra-institutional arbitration. Long-standingLeadership 9. Nicaragua's political leadership i s not subject to regular renewal. An important consequenceis that election battles are generally not fought on the basis of programmatic proposals. Rather, influence and connections are the basis o f political leadership. The FSLNhas beena strong political contender inall past elections, with the same candidate. In the case of the PLC, its leader has been able to retain the prerogative to select the presidential candidate in the past four elections. This situation may be starting to change with the emergenceof splinter parties from boththe PLC and the FSLN.Inbothcases the emerging political forces were assembled by former party members that were expelled from their respectiveparties. Politicsby InstitutionalMeans 10. Conflicts between the executive and legislative branches of government have been recurrent in Nicaragua. A months-long stalemate between the Executive and the Legislature brought the country to the edge of a constitutional crisis in 1995. The first years of the next administration (1997-2001) were rocked by clashes between the FSLN and the PLC in Congress, and related rioting on the streets. Confrontation between the 77 two branches was keen during the previous administration (2001-07). The sitting president (Bolafios), who had served as Vice-president in the previous administration, accused the former president (Aleman) of corruption. Uncooperative at first, the Assembly, which was headed by the former president, eventually lifted the immunity of the former president in the face of public mobilization, and the former president was convicted and sentencedto 20 years inprison, which was commuted to house arrest. 11. The confrontation between the two branches of government started after those events. Indeed, PLC deputies entered into an agreement with FSLN deputies. This renewed FSLN-PLC alliance was cemented in 2005 by a new set of proposed constitutional reforms, which aimed to increase the prerogatives of the legislative branch at the expense of the executive and to pursue impeachment of the president. The result was a paralyzing standoff between the Administration and the Congress. Under severe pressure to resolve the impasse, the executive andthe opposition reachedan agreement to dismantlethe impeachment machinery being assembledinCongress against the president inexchangefor newconstitutional reforms during the nextelectoral cycle. Pact-making 12. Pact-making is a clearly recognizable informal institution of Nicaragua's politics, entailing distinct roles, goals, and norms and typically involving a very limitednumber of partners.Partnership status shifts with the correlation of forces, which inturn depends on the partners' negotiating leverage. Pacts, it should be noted, can have unintended consequences.However, recent Nicaraguan pacts suggest that a pact's short-term efficacy may be prolonged, at least partially. These recent pacts have been engineered to afford the partnersa modicum of governmental effectiveness, andto do so inways that enhance and/or consolidate their own power. 13. Partnersdo not necessarily obtain equal benefits, but power balancesare not ruled out. The simplest is the allocation of power quotas. This typically involves the parceling of state institutions among partners, including those that should be of a technical nature, such as the regulatory agencies, property registrar, or internal audit offices. This largely explains the institutionalproblems and governancebottlenecks inthese areas indicated in the following chapters. A more delicate but potentially more flexible and rewarding approach involves the remaking o f the rules o f the game. Either way, pacts can be renegotiated, and partners can change. Norms of partnering allow aggrieved or abandonedpartners to adjust andto seek alternatives. 14. Since the beginning of the 199Os, pact-making has been a consistent part of the political landscape and have altered the rules of the game and redistributed institutional power inways that have beenbeneficial to the partners. The most important of these was the 1999 pact between the FSLN and the PLC, which was partially codified into law through the constitutional reformo f 2000, and subsequentlyexpandedin2005. 15. On the electoral front, some of the crucial reforms resulting from this pact included: (a) the proportionof votes a presidential candidate must garner to win ina first 78 round was reduced from 40 to 35 percent, provided that the second-place candidate receives at least 5 percentage points less, (b) political parties that previously failed to obtain at least 4 percent of the vote were denied standing, (c) registration o f a new political party would now require its organizers to present notarized signatures o f at least 4 percent of the last electoral roll, and (d) municipal electoral councils were to be created with the understanding that their presidents and vice-presidents would alternate between thetwo parties that came infirst and secondplace inthe previous election.55,56 16. The constitutional reforms also legalizedthe following changes: (a) the number of Supreme Court Justices was increased from 12 to 16 magistrates, and the number of magistrates on the Supreme Electoral Council was increased from five to seven, (b) the maximum authority of the Comptroller General was increased from one person to five board members, (c) the presidential candidate who receives the second-most votes i s entitledto a seat inCongress,57(d) former presidentsare entitledto a seat as well, and (e) the removal of presidential immunityrequires two-thirds of the congressionalvotes. 17. The pact's 2005 expansionandattendant constitutional reform created an Instituto de Propiedad to resolve long-standing property disputes involving vast amounts of land and millions of c6rdobas in compensation. The pact's expansion also called for the creation of the Superintendenciade Servicios Publicos (SISEP) to regulate public service utilities (electricity, water and communication). The partners to the pact, through congressional deputies, appointed heads of these new regulatory and arbitration institutions,58 Other Key Actors 18. Three hallmarks of democratic modernity are the separation of Church and State, an apolitical military, and an independent press. Deviations fiom these roles and norms do occur, of course, even in the advanced democracies o f Europe and the United States. But the degree and frequency of such deviations matter, as does a system's capacity to self-correct. 19. Inthe case of Nicaragua, the Church has been and important extra-institutional mediator inthe past. During the 1980sPopeJohn Paul I1elevatedthe bishop of Managua, Miguel Obando y Bravo, to the College of Cardinals. Crucial consequences followed from this decision. In 1988, Obando y Bravo served as mediator between the FSLN government and the National Resistance (CONTRAS), and in 1990 he helped negotiate the latter's disarmament. In 1995, he played the role of impartial mediator betweenthe "As mentioned at the outset electoral law No. 33 1o f 2000 has been characterized as the most restrictive in LatinAmerica. In2002, the Supreme Court struck down some of its provisions, but the majority remains in effect (Dye). 56Inthe 2006 elections President Ortega was elected inapplication ofthe electoralrule of35 percent minimumplusa 5 percent difference rule. 57The outgoing vice-president andthe vice-presidential candidate o fthe runner-up are designated substitutes. " No.520, Ley Reforma Parcial a la Constituci6n (passed inJanuary o f2005, andpublished inthe Gaceta Ojcial on February 18). 79 feuding Executive and Legislative branches. Three combined factors made possible the peaceful resolution of that constitutional crisis-the army's non-interventionist stance, foreign donor pressure on the disputants, and the Cardinal's authority. This episode serves to illustrate how the Nicaraguan Church's authority - traditional in character but non-politicalinnature- can serve as an effective extra-institutional moderator. 20. Regarding the military, the Nicaraguan Army begun to struggle for institutional autonomy during the regime's latter years, and since the early 1 9 9 0 ~ ~the top brass have shunned all manner of political imbroglios. The army's institutionalidentity, infact, now appears to be tied to a professional code of conduct and a neutral posture. From a historical perspective, Nicaragua's military, as well as its policy force, has modernized considerably in the last decade and a half. Moreover, the army appears relatively effective at containing non-state violence. 21. Press freedom is quite strong inNicaragua, in spite of isolated events inthe mid- 2000's that resultedin a decline inthe corresponding indicators (see table 1in annex 1). Nevertheless, dissent is allowed and access to information is expected to improve with therecent passageofthe Access to InformationLaw. 4. ConcludingRemarks 22. The two predominant political parties, the PLC and the FSLN, are strong political-electoral machines, with broad territorial reach, considerable capacity to get out the vote, and functional patronage distribution systems. Both parties, however, continue to find it difficult to reinvigorate their leadership and democratize their power structures. Relations between the Executive and Legislative branches oscillate between keen confrontation and pact-making intimacy (the latter generously described by some as a de facto quasi-parliamentary system). It i s quite possible that all this contributes to the results of a poll conducted by Latinobardmetro in 2005, showing that 45 percent of Nicaraguans can conceive of a properly functioning democracy without a Congress or political parties. This perception of Nicaragua's National Assembly can be partly due to its weak exercise of its oversight and control functions over other branches o f government as pointed, for example, in the chapter on Oversight and Accountability Mechanisms o fthis Review. 23, Insummary, theNicaraguanpolitical systemremains vulnerable to clasheswithin the National Assembly or between the Assembly and the Executive. Regarded as partial even by those who assembled it, the judiciary is not seen as an effective framework to settle serious institutional conflicts. Nonetheless, the current administration is the first to begin its term in office without serious opposition in any of the other branches of government. This may help to advance reforms, but may also help solidify future opposition. In the short term, the country's political-institutional hybrid of formal and informal institutional arrangement may continue to generate its characteristic low- intensity turmoil, withplayers continuingto readjust alliances. 80 B. The JudicialSystem'' 1. InstitutionalFramework 24. The Nicaraguan judicial system is built on several independent institutions that providejudicial services inseveral ways: e The Judicial Power (JP), exclusively responsible, according to Article 159 of the Constitution, for the jurisdictional powers of judging and establishing sentences. Theheadof the Judicial Power is the SupremeCourt of Justice (SCJ). e The Attorney General's Office (AGO) is an independent organization to which prosecuting attorneys of different levels belong. Its function within the administration of justice is to represent society in general and the victims of criminal offenses, initiatingcriminal lawsuits, and conducting investigations. e The National Police (NP) acts as Judicial Assistance inthe investigation of crimes andmisdemeanors. e The National Penitentiary System (NPS), which according to Article 39 of the Constitution has the fundamental purpose of transforming inmates in order to reintegrate them into society. The Nicaraguan model indicates that the sentence should re-educate andre-socialize the individual. a The Department of Law (Procuraduria, DL) i s responsible for, among other things, the legal representation ofthe State's judicial interests. e The HumanRights Advocacy Office is the institution in charge of the defense o f human rights. The task of fostering and defense of human rights entails monitoringviolations o f rights due to actions or omissions by state authorities. 25. Relevant fundamental changes have taken place inrecent years inthe Nicaraguan judicial system. However, it still shows a low citizen trust index, thus revealing the existence of a set of issues and dissatisfactions, of which the most important are the politicization o f the Supreme Court, the slow pace o f rulings, and a lack of access to justice for a large portiono fthe population. 2. JudicialSituation GeneralSituation 26. The Nicaraguanjudicial system has seen relevant changes inrecent years: e In 1998 a new judicial organization was approved by the Organic Law of the Judicial Power (Law No260). e The Attorney General's Office was establishedinMay 2000. a A newCriminalProcedureLaw (Act No406) was passedin2001. s9This section, as well as the Annex to this chapter was contributed by the European Union, a contribution gratefully acknowledged. 81 123 Houses of Justice were established to bring the justice system outside the nation's capital. Severaljudicial buildings were constructed throughout the 1 9 9 0 ~and ~ the Public Advocacy office and the Forensic Medicine Institute were created. A newPenitentiary Regimenand Sentences Law passedin2003 (Act No473). All judge positions are now filled by lawyers, whereas until 1991, 90 percent of the judges were not professional lawyers. A LegalProfession Law was approvedinOctober 2004. The Mediationand Arbitration Law was passed in2005 (Act No540), which can greatly improve the pace at which lawsuits are handled in court and assist people insolving their problemsthrough out-of-court settlement. 27. These changes represent fundamental steps that evidence the transformation o fthe justice system. Despite this progress, however, the Nicaraguans' trust index in their judicial system is still low,6oreflecting several problems. Access to judicial services is limited, and excludes mostly poor and culturally diverse segments of society. But it also i s the result ofjustice service providers not being sufficiently trained to provide minimum levels of service, plus the fact that there are very few lawyers' offices. Inaddition, neither operational conditions nor the existing technological level i s satisfactory. 28. However, there are other issues in the background that explain this lack of trust, such as the politicization of justice, corruption, justice's indifference toward social problems, the corporatism ofjudges and magistrates, lack o ftransparency, and absence of accountability of judicial officials, among other factors. In a situation where judicial institutions do not yet have a systemic vision and there is virtually no tradition of coordinated work, it is very complex or almost impossible to properly and comprehensively address common problems. 29. One traditional problem faced by all judicial systems is the poor allocation of resources. Although there i s a constitutional provision that guarantees a minimum level (4 percent) o f budget revenues for the Judicial Power, a budgetary analysis shows a concentrated allocation of funds at the highest levels and in administrative items, to the detriment of lower-leveljurisdictions. The largest allocation is for the Judicial Power and the smallest allocation is for the HumanRights Advocacy office. The Attorney General's Office allocation stands out because it neither matches its workload nor the institutional functions conferred by law, especially within the framework of the new Criminal Code. Hence, there is a needto conduct a revision of budget management in order to achieve a more rational and efficient use of funds. Independence and Transparency 30. Judicial bodies at all levels are mostly questioned for their political dependence. Although the passing of the Legal Profession Law could represent the starting point for 60 Among Latin American countries the satisfaction and trust index is only around 14 percent, according to a survey conducted inNicaragua inMarch 2005 (IADB-INPRHU-CINASE survey). 82 the professionalization and institutional consolidation of Judicial Power, the legal periods for its implementation have elapsed and the necessary legal instruments for effective enforcement have not beenauthorized. Among such instrumentsare the Legal Profession Promotion Scheme, the implementation o f the Judicial Training and Documentation Institute, the Retirement Benefits Fund, the general regulations o f the law, and performance assessments. The absence of these regulations affects the enforcement of the Legal Profession Law and weakens independence, a situation that could be solved by merit-based hiring proceduresfor judges andmagistrates. 3 1. Another sensitive topic i s corruption. Surveys show a widely held perception o f the existence of high levels of corruption. Undoubtedly, progress in the eradication o f these practices i s a fundamental condition to improve the public administration ofjustice. Inthis same regard, at the institutional level, little progress has been achieved. The NP has an Economic Investigation Directorship and the Department of Law has an Anti- corruption Unit.Inaddition, the AGO recently established an Anti-corruption Unit within its Specialized Units. More important, there i s a need to strengthen the work of the internal control units inthese institutions to reduce internal corruption. Infrastructure 32. Judicial system entities show an uneven infrastructure development. Although the JP, NPS, and National Police (NP) have physical infrastructure inmany areas of the country, the situation is different for the other institutions. In the case of the JP, infrastructure improvement has taken place thanks to international cooperation through the execution of important projects such as the Housesof Justice andJudicial Complexes, andManaguais expectedto have anewJudicial Complex very soon. 33. The lack of proper infrastructure, especially affects the AGO. In2002, there were 96 prosecutors. Currently, there are 259, but due to infrastructure limitations they do not serve the entire country. The AGO, which i s mandated by law to operate nationwide, is present inonly 65 o f the country's municipalities and in 108 of the 269 o f the country's existing criminal courts. Inmany o f those places they operate out o f police delegations, while the rest operate inthe so-called itinerantprosecutors' offices. These are prosecutors that serve several municipalities by visiting the locations for hearings and to consult with the police about investigations under their jurisdiction. These prosecutors lack resources, use public transportation, and bring their files with them, risking both their integrity and the safekeeping ofthe information. 34. The NP, inits Judicial Assistance task, also operates under poor conditions due to a lack of proper equipment, tools, vehicles, and supplies to efficiently carry out its investigative duties. A recent report by the NP states that 30 percent o f the investigation offices are inpoor condition. On the other hand, there are infrastructure issues inmost o f the NPS's prisons that demand immediate attention, since they do not provide proper safety conditions (for example, the Tipitapa prison, prisons in Chinandega, the Women's Prison "La Esperanza," and Bluefield's' prison). Budget limitations have prevented the construction o f a specialprisonfor adolescents. 83 35. Lawyers' offices are outdated, as is the poorly structured administrative platform that supports common judicial services. Information systems and the reliability of data are limited. Judicial system institutions lack the structures to generate statistical data that would enable the implementation ofjudicial policies over the use of traditional intuition- basedmechanisms. 36. The level of development of information technologies in the Nicaraguanjudicial system is extremely low. There is no policy for information technology development, equipment is obsolete andlacks maintenance, some systems are non-existent or unable to meet the needs of key staff, and infomation systems' technical teams are atomized. There i s no follow-up system to track lawsuits to enable other systems to operate, such as monitoring, statistics, and so forth. Although the AGO has a system inplace, it i s not yet operational. The topic is viewed as little more than the replacement o f typewriters, leading to multiple disarticulated information systems, information system duplication, limited internal networks, and lack of connectivity among and within institutions. Existing systems basically provide services to administrative areas, with marginal operation in the judicial area. The NP performs its investigative work mainly using typewriters. Human Resources 37. Judicial services have improved considerably inrecent years with the appointment of more judges, magistrates, public prosecutors, and defense lawyers. However, the numberis clearly not enough. The country is rankedamong the countries with the lowest number ofjudicial employees, with 5.81 `udges, 4.72 prosecutors, and only 1.35 public defense lawyers per 100,000 inhabitants!' By contrast, the neighboring country of Costa Rica has 7.16 prosecutors per 100,000 inhabitants, and Guatemala has 6.87; and in the case o fpublic defense lawyers, Costa Ricahas 5.7, El Salvador 4.2, andHonduras 3.1 per 100,000 inhabitants. 38. Sector policies are nonexistent in several areas. Human resources, training, infrastructure, and information technology and systems are treated differently by the institutions although they share the same problems. For instance, in the case o f human resources, there are different career systems in the judicial system (JP, AGO, NP, PS, DL), which entail different staff training mechanisms, different disciplinary systems, different planning structures, different incorporation requirements, different training goals, and different remuneration schemes, among other differences. Under these circumstances, it is very difficult to structure a homogeneoushumanresourcespolicy for thejudicial sector. This is not to deny, however, the possibilityofcreating conditions that would enable the setting of framework policies that, acknowledging singularities and independence, would establish fundamentals such as work incentives, remunerations, and training systems, among others, inorder to bringinstitutions closers. 61 "Justice in Nicaragua.A Diagnostic of the Nicaraguan Judicial System," PA1 NIC/CE Program, Managua, Nicaragua, October 2006. 84 39. There are 5,135 employees inthe judicial system and the Judicial Power employs almost half of them. Currently, there are 73 magistrates, of which 16 work in the Supreme Court of Justice and 57 inthe Appeals Courts. There are 319 judges, of which 134 work in District Courts and 185 in Local Courts. In the Attorney General's Office (AGO) the situation i s critical. The agency employs 517 people, of which 259 are prosecutors distributed in 17 departments or provinces and Autonomous Regions, implying that there are 4.72 prosecutors per 100,000 inhabitants. The situation i s critical inareas such as the South Atlantic Autonomous Region (RAAS), Jinotega, Chinandega, and Lebn, which are considerably below this average. The human resources picture is complete with 78 public defense lawyers, 259 prosecutors, 46 procurators (at the DL), and 861policementhat providejudicial assistance. 40. Women play a prominent role inthe Nicaraguanjudicial system, both innumbers and the type of positions they occupy. At the Judicial Power, two women have presided over the Supreme Court and currently, a woman is Deputy Attorney General. Their most prominent role i s in the Judicial Power and AGO, where most positions are held by women. This situation i s different, however, inother entities such as the NP andthe DL. Jurisdictional Load and Yield, andAccess to Justice 41. Nicaragua does not show a large number of litigations, with 2,300 cases per 100,000 inhabitants. Costa Rica, in contrast, has over 22,000 lawsuits per 100,000 inhabitants. Hence, in terms of procedural load, Nicaragua shows manageable indicators compared with other Central American countries, with an average of 395 lawsuits per judge, while Guatemala has 3,959 lawsuits per judge, Costa Rica 2,061 lawsuits per judge, and even Chile has more than 3,000 cases per judge. But this could also indicate the existence of access-related issues. Regarding the procedural load injudicial system entities, the JP i s responsible for handling more cases than the rest of the institutions, which is natural, since justice is centrally served. On average, based on 2004 data, each judge hears 395 cases annually, which i s a totally manageable number. Inthe case of the AGO, this indicator i s only 181 cases annually per prosecutor, while for the NP, the indicator is 102 complaints perjudicial officer. 42. Regarding yield rates, just like the rest of Latin America, judicial services in Nicaragua do not properly and ina timely manner meet the increasing demand related to the resolution of conflicts filed for its consideration. The workload normally shows backlogs, representing a generalproblem, as shown inTable 1.6. 85 Table 1.5: JudicialSystem's Effectiveness JudicialPower 126,126. 60,773 48%'. Attorney General's Office 46,939'** 38,363 82% National Police 88,5 19'" 43,115 49% HumanRights Advocacy Office 2,425 1,029 42% 43. Ina district analysis, the area with the largest workload is Managua, with 39,969 cases, which implies 799 cases per judge. The eastern region's rate i s 448 cases, the second-highest rate of cases per judge in the country. Instead, areas such as the North Atlantic Autonomous Region (RAAN)or the Autonomous Region o f the South (RAAS) that have only 191 and 91 cases, respectively, imply that there is an access issue. It is noteworthy that women show a significant presence in civil processes, since they are partyto 41 percent ofthe cases, menarepartyto 44 percent, andlegal entities are partyto 21 percent. 44. Poverty is the first barrier to effective access to justice. The country's Central District has 9.8 judges per 100,000 people, but Managua hasthe lowest indicator with 3.6 judges per 100,000 people. Nationwide the numbers show an uneven and heterogeneous growth o fthese services. The largest supply ofjudicial servicesrelates to criminaljustice. Approximately 73.8 percent of district courts are criminal courts. In addition, of the 185 local courts, 32 are criminal courts, but 127 are non-specialized courts, which also hear criminal cases. At any rate, the existingcourts have limitedoperations. 45. Regarding public defense, despite progress made in recent years, such efforts have been unsatisfactory. The 78 public defense lawyers do not seem to meet the needso f the poor or of the entire population, since on average there is one defense lawyer per 70,300 people, equal to 1.4 public defense lawyers per 100,000 inhabitants, which is a very low indicator compared to other countries. On a nationwide basis, the average is 11,661 extremely poor people per each public defense lawyer, and this number i s even worse in certain areas o f the country, such as the North District where there is one defense lawyer per 30,197 extremely poor people, followed by the R A A S with 27,703, andLas Segovias with 22,580. From an access perspective, the Rural Judicial Facilitators (RJF) program is a good practice, benefiting almost 347,000 people in 71 rural municipalities. 46. Inits function ofJudicial Assistance, theNPhas25 investigativeunits inanequal number of territorial delegations that are part of the institution, inaddition to the Central 86 Directorship. A total of 861 officers form these units, but this organization does not meet the demandand this situation is represented by effectiveness indexes that hardly reach 49 percent. At the same time, the NPS has eight prisons, with the capacity to hold 5,446 inmates. Since there is no special prison for adolescents, special cells have beenadapted inthe Tipitapa prison. A significant access-relatedissue occurs in prison treatment and internal services, since there are only 13 medical doctors, 21 psychologists, and 10 social workers to care for inmates' health. 47. Finally, one topic that needs to undergo extensive review is competencies. Inthe current model, protection lawsuits are brought to Courts of Appeal and filed in the SupremeCourt, with ruling by a single office. This imposes a geographic access barrier; the centralization created by litigating such cases only in Managua does not seem a reasonable option for the defense of basic rights of the population. The reason is that it impliesthat less-significant cases have more access, because the population can litigate in almost all cases intheir ownjurisdictions. Specialized Justice Civil Matters 48. Civil proceedings are regulated by a code that dates back from 1907, which explains among other things why these laws are slow and written in an exaggeratedly formalistic fashion. Civil lawsuits include proceedings that need to be reordered and suppressed, because of their futility or time consuming characteristics. There is a severe accumulation in civil offices, produced not by the ordinary process load (44,559 new civil lawsuits in 2004), but by the 116,033 processes and other proceedings (seizures, sequestrations, marriages, birth certificate replacements, and so forth) nationwide, and which shall follow differentprocedures. 49. These situation leads to the need o f making a deep procedural reform of civil laws, inorder to makethe systemmore efficient. Basedonthe experience of the criminal reform, initiated by the passing and implementation of a new procedural code, the judicial system would surely make a significant leap forward by the implementation of a civil procedural reform. FamilyMatters 50. An issue still pending regarding Family laws is the creation of specialized courts to address family related issues, which are already expected considering the especially sensitiveness requiredto address this types o f conflicts. Two Family courts are expected to be established in 2007 with support provided by the Spanish Agency for International Cooperation (AECI), and this will be a pilot experience to be replicated inother parts o f the country. 87 51. During 2004, Local Courts and Civil District Courts addressed 13,318 family related cases, accounting for 29.9 percent o f the cases in those jurisdictions (the total number of civil lawsuits that include family affairs was 44,559). This shows that family related matters are prominent in civil lawsuits, although there are numbers that denote low litigation andwhich could conceal anaccess issue to thejudicial systemfor women. 52. Several judicial system institutions have structured special entities to address jurisdictional-family matters: the JP has created a Family Unit within Public Defense offices; the AGO has a Special Unit on Deliberate Omission and Contempt and a Unit specialized in domestic violence; the NP has Women's precincts. However, this lack of mechanisms to promote inter institutional family related capacities i s questionable since that would allow the proper coordination of such important efforts. Labor Matters 53. There are Labor District Courts and Local Labor Courts. However, there are only three o f the latter: two in Managua and one in Le6n. For the rest of the country, civil judges hear and rule on labor disputes. In Nicaragua, according to the household and employment survey conducted by the INEC (November 2004), the working population i s 1.97 million inhabitants, with the largest number working in the informal sector (63 percent), a sector without good labor options since labor rights are often violated. Inspite o f this labor matters significance is very limitedsince it only accounts for 2.3 percent of the annual number o f lawsuits handled by the JP. This represents 11,502 proceedings during the 2001 to 2004 period. This data, compared to the general labor situation, may indicate the existence of access to justice issues for people working under poor conditions andwhose labor rightsare violated. Constitutional Matters 54. The unconstitutionality recourse (constitutional control authority of the Supreme Court) faces a series of issues, and one of them i s its use as apolitical instrumentinmany cases. Inaddition, the term to pronouncejudgment on this type of actions i s not complied with. In2004, 28 recourses of this type were filed and only one was ruled on, andrulings were issuedthat year on nineother recourses accumulated from previous years. 55. Regarding protection recourses, since the Protection Law (1989) came into effect up to the year 2000 (eleven years), 1,661 protection recourses were filed and 1,072 (64 percent) were ruled on. More recently, 2002-04 (three years), 1,519 cases have been received, and 481 (32 percent) cases have been sentenced. Although currently a higher number ofnew cases are filed eachyear, the cumulative trendonrulings is maintained. 56. Likewise, habeascorpus recourses filed inthe Criminal Chamber ofthe respective Court o f Appeal account for a significant number o f cases. In2001 the number of cases was 5,378, and in 2004, the number was 3,197. This reduction i s the result o f the application of the Criminal Procedure Code, although the number is still significant accounting for 32.53 percent ofthe cases received by the Courts of Appeal. 88 57. Regarding protection proceedings, an access issue has been identifiedbecause the Nicaraguan constitutional rights protection model places this responsibility on the Courts of Appeal (entity that receives the lawsuit) and the Constitutional Chamber of the SCJ, with limitedresults. It would be easier and faster to claim a right included inan ordinary law than to seek protection of a constitutional right because in the latter citizens are requiredto go the provincial capital city to file their lawsuit at the Courts of Appeal and thento Managua, for litigationat the SupremeCourt.62 Administrative Matters 58. InNicaragua, this area of administrative law has the problemthat currently there i s only one office inthe Administrative Chamber o f the SCJ. This situation i s detrimental to the right to have access to justice for those who wish to contest administrative acts o f public entities, either central or decentralized levels, since it constrains those offended because they need to go from any place in the country to the Court's office located in Managua. 59. Probably this situation is responsible for the low number of cases. During 2002- 06 only 47 lawsuits of this type were filed. This procedure needs to be revised, as well as the appropriateness of having one Chamber at the Supreme Court to see such small numberof cases (it only received 11cases in2004 and 14in2005), which shows that this i s one o f the jurisdictional body with the highest cost per case inthe country. The Criminal ProcedureReform 60. A criminal procedure reform is recognized as the most important judicial transformation in recent years since it has meant a true restructuring inthe way criminal justice develops. However, this journey has not been easy and the international support for this purpose has been intermittent. The Inter-institutional Coordination Commission and the Technical Commissions created by the Criminal Procedural Law (CPL) have operated in a limited way, and thus no solutions to the multiple coordination problems were found. This situation has demanded a greater institutional effort from the JP, the AGO, and the NP. 61. The implementation of the CPL lacked the required administrative and financial support. Although significant efforts have been made by all institutions, the lack o f resources has prevented the development of key matters such as the reengineering of support services for the judicial function (forensic medicine, expertise, notifications, parties' tables, general common services), and prompted a lack of proper technical support for the reform (this process was not accompanied by the necessary technology information assistance for processes automation). Despite infrastructure adaptation in certain areas of the country, more infrastructures is needed, including the redesign of Protection proceedings are filed at the respective Court of Appeal, which will try the first actions including untilthe suspension of the action. The main issue is ruled by the Constitutional Chamber of the SCJ. 89 judicial offices, to define the administrative support to the work performed by judges; suchtask has recently startedthrough an IADBproject. 62. Despite the progress, certain problems persist such as the lack o f a modern Criminal Code according to the CPL; the lack of prosecutors and district and localjudges to apply the Criminal Procedure Code; the lack o f public defense lawyers; the precarious conditions of hearings' infrastructure; the lack o f technical equipment; more training is neededbecauseaninquisitivemindset still persists; the NP is only 49 percent effective in investigative tasks, and a bottleneck needs to be overcome; most evidence deposits and custodian locations that exist in the country lack the proper storage and safekeeping conditions, and so forth. 3. Challengesfor JudicialSystemReform 63. The Nicaraguan judicial administration system faces significant challenges, but three o f them stand out. First, reforms are needed to improve judicial system effectiveness in order to provide timely, modern, and quality services. These reforms would entail some changes to the institutional judicial model with the purpose of improving capabilities and increasing efficiency. There is a need for enhanced coordination between the Judicial and Executive powers, and the establishment o f common policies in the judicial system, including: (a) improved governance through greater political independence of the system; (b) better management based on reliable statistical information; (c) establishment of common humanresource, infrastructure, and informationtechnology policies; (d) coordinated work inthe fight against corruption; (e) coordinated strategies among all judicial system institutions; (f) improved capabilities and use of institutional planning; (g) clear differentiation of administrative and jurisdictional matters; (h) present alternatives to improve institutional revenues through judicial rates systems; (i) improved community services (notifications, parties' tables, expert reports, forensic medicine, and so forth); (`j)appointment of professionally and ethically capable employees, and training of judicial workers and improved teaching at law schools; and (k) improvedjurisprudence of the Supreme Court of Justice to increase predictability and guarantee compliance with the principle o f equality under the law. Together with the above, a fundamental and urgent step is the prompt and effective enforcement of the Legal ProfessionLaw. 64. Second, access to justice needs to be expanded and improved, aimed at eliminating the current barriers that prevent such access (economic, cultural, social, geographic, and so forth) and promoting and guaranteeing free defense services to those excluded. Youth, adolescents, women, and indigenous communities need special attention because o f the particular difficulties these groups face regarding access to prompt and effective justice. Closely linked to service access and improvement i s the issue o f balancing the allocation of resources, based on the territorial characteristics, demand, and population. Other important topics are the current limitations of the penitentiarytreatment, the effectiveness of the Courts of Appeal andthe Chambers at the Supreme Court of Justice and the impact of the so called "other proceedings" in civil issues that are overloading the work of civil courts (see Annex 1to this chapter). 90 65. Third, current laws need to be amended and systematized in order to update certain provisions such as of the Civil Procedural Code, the Commerce Code, the Family Code, the Criminal Code, andthe Administrative Litigation Law, and criminal procedural reform needs to be consolidated (see Annex 1to Chapter I). Updatingthe Civil Procedure Code and the Commercial Code is extremely important, since they date back to 1904and 1914, respectively. Equallyrelevant is the topic of constitutional justice, bothfor political independenceand for the delays inrulings. 91 Chapter I11 Annex 1 - SummaryProcess for Registration of a Property Title 1. In order to be able to issue the cadastral certificate the Physical Cadastre of INETER requires a topographic plan of the property which if it doesn't exist has to be elaborated by qualified technical service providers authorized by the General Directorate of Cadastre of INETER. The physical cadastre of INETER itself will later verify the topographic plan comparing the specifications with INETER's cadastral map o f the zone inwhich the parcel is located. Ifthe data does not coincide INETERhas to carry out a supervision missionin situ. 2. Also, in all cases of divisions of properties new topographic plans have to be prepared for the new properties. The cost for the elaboration of the topographic plan varies according to a number of factors, such as the size o f the plot, type of plan (complete plot or subdivision), the convenience of the access to the plot and the distance betweenthe office ofthe service provider and the locationof the plot. The times required for issuingthe cadastral certificate vary from office to office. InChinandega, the process takes between 7 and 10 days (USAID-BIDE2002:20). 3. With the cadastral certificate the applicant can go to the office of the Fiscal Cadastre o f DGI to request the fiscal evaluation certificate. In order to evaluate the property, DGI often carries out an inspection in the field and subsequently issues the fiscal evaluation certificate. Upon receiving the fiscal evaluation certificate the applicant has to pay the sum o f 1percent of the total value of the property as stipulated by DGI as transmission tax. This process usually takes upto four days. 4. Once the applicant has all the documents required, he submits the application to the Property Registry RPIMoffice inhis department. The RPIMemployee who receives the application performs a perfunctory check to determine whether the legal formalities have been met. Chief among these i s proof o f payment of the appropriate registry fee (Trackman, Fisher, and Salas 1999). Ifthe document passes the pre-presentation check, it will be officially accepted in the registry. Depending on the office, an automatic time/date stamp will be used to mark the document and assign it an official document number. The applicant receives a receipt of submission with a similar time/date stamp and document number. After acceptanceinto the system, documents are sorted according to their subject matter and distributedto registry operators who examine them thoroughly for validity. The operator in charge of each case also conducts a title search for the relevant property, checking to see that no reasonexists to prevent the inscription. Inmost of Nicaragua, this process i s still not automated. If deficiencies or errors are noted, the document i s returned to the submission window, where the applicant may pick it up. Errors may be mending. The former may be fixed by the applicant without forfeiture o f thedocument's priority number. 5. Once the initial review is completed, the operator will record the size and location of the property. Notations indicating that old mortgages have been paid in full and the corresponding liens cancelled inscriptions of new mortgage interests, as well as persisting 92 servitudes and other interests will also be made as appropriate. Once completed, a corresponding notation i s entered on the original application. This notation includes the time, date, document number, and location (book, folio, and page) where the transaction i s officially recorded. Following the inscription, the book where it is made must be presented to the Registrar who reviews it and, by signing, dating, and stampingit with the RPIMseal, give the inscriptionfinal approval. The applicationdocument is also stamped with the RPIM seal and signed by the Registrar. Next, the registry indexes are updated. Duringthe last years, Nicaragua has been successful inbringing many o f these indexes up to date. Many departments now have digitized indexes, which can be searched by the parcel number or name o f the property owner. 6. The application is then returned to the submission section where a notation o f the inscription i s made in the Diario. The interested party retains this stamped title as a receipt o f registration and proof o f ownership. In Managua, the inscription process typically lasts between 30 and 60 working days. 7. However, the times for registry services vary significantly from one departmental registry office to the other, depending basically on the management procedures established. Since there are no binding rules, each register is free to establish the procedures he prefers for the different services. The same accounts for the duration o f the cadastral services. USAID-BIDE made an enquiry with lawyers in Chinandega carrying out the registry procedure on behalf o f their private clients (who however mostly did not have full legal documents in support o f their claims). Results show that the whole procedure from the first contact up to the reception o f the certification o f the inscription for a plot o f up to about 20 hectares would usually take between 100 and 200 days depending on the complexity o f the transaction and the availability o f the required documents (USAID-BIDE2002:13). Similarly, the representatives o f the private sector, interviewed inthis assignment, estimated the time on average required for the inscription o f a property inManagua at six months. 93 ChapterI11 Annex 2 - Organgrams (CorteSupremadeJusticiaDNETER) 94 0 0 I m 0 0 v, L (El Q M 1 2a Et! .r( v1 .s s I b B ae& m Q t? c;l a .I L a 3 4B Chapter 111-Annex 4 Listof SIICAR Beneficiariesand their Roles Name Description Role Movable Property Holder o f a Property Right 0 Performs real estate operations Owners Title 0 Exercises rights and duties on their immovable property. GeneralDirector of National Cadastre 0 Manages, coordinates, and PhysicalCadastre Management. executes cadastral policies at department and national levels. Updates Director Function o f analysis and 0 Incharge o fcentrally updating update o f cadastre. the graphic andalphanumeric cadastre. Maintenance Director Function o f quality analysis 0 Incharge ofreviewing and control of cadastral topographic blueprints, quality services. control o f cadastral procedures. Supervision o fphysical cadastre delegation offices. Physical Cadastre Function o fpublic services 0 Incharge ofpublic services and Delegations and approval o fcadastral approval o f cadastral transactions. transactions at department level. Direct Lawyers and Public person authorized by Authorizes immovable property Beneficiaries Notaries the Supreme Court o f Justice transactions. to testify, according to the law, incontracts and other acts. Cadastral Agents Intermediariesbetweenthe 0 Arranges cadastre formalities. (Lawyers, Notaries, interested parties andthe and Agents) Cadastral offices, responsible for carrying out procedures at the cadastre onbehalfofthe interested party. Topographers or Licensed by the Physical 0 Performs topographic surveys o f surveyors Cadastre General Directorship locations, to the request o f to carry out land surveys. owner. Town Halls Municipal government 0 Titleholder o f municipal land. Property MHCP Office incharge o f Works with cases related with Superintendent solving property problems the laws 85 and 86 (urbanplots) causedby the laws 85, 86, andthe law 88 (rural land); and 88. delivering, rejecting or annulling property titles. Town Halls Municipal government 0 Responsible o furban Indirect development within its Beneficiaries municipality. 0 Municipal tax collector (IBI) 111 Chapter I11-Annex 4 (cont.) List of SIICAR Beneficiariesand their Roles Name Description Role Town Halls Municipal government 0 Responsible o f urban development within its municipality. Municipal tax collector (IBI) Judicial Sector Incharge ofadministering 0 Receives and solves property justice litigation cases. Property MHCP Office incharge o f 0 Consults the Cadastre and the Superintendence solving property problems Register to gather information causedby the laws 85, 86, on property subject to a and 88. resolution. Indirect Beneficiaries GeneralRevenues MHCP Structure incharge o f 0 Collects taxes on immovable Directorship tax collection. property operations. National and foreign Economic agents that invest 0 Investspart o f its capital in investors inproductive enterprises. productive enterprises inthe immovable property field. Bankingsystem and 0 Finances loans secured with mortgageagents in landas collateral. general RealEstateAgencies Agents that engage inreal 0 Shall protect its clients estate sales transactions for according to the legal situation commercial mmoses. o fthe property. Property Register Administrative head office o f Responsible for the Register the territorial office ofthe office (subordinate staff and Register at department level. document safekeeping) 0 Authorizes and sets registration Interested procedures. Institutions Firstauthority inthose cases where the interested parties do not accept a certain classification recorded intheir property documents. Deputy Registrar Register's administrative 0 Authorizes and signs authority incharge o f a part registration procedures inthe o fthe registration process in assigned area. the Register's office with high demand. Alternate Registrar Second administrative 0 Acts as Registrar inits absence. authority inthe Register's office. RegisterTechnician Register's staffthat performs 0 Performs registration operations. registration operations. 112 I I b, 3 I IA 3 3 00 3 3 Chapter I11-Annex 5 (cont. Current registration procedure 1) The seller, the buyer, and the notary gather to sign a sales contract on a property. Once the terms are agreed, the notary transcribes the deed using as referencethe data on the sellers' deed. 2) The buyer of the property goes to the Immovable Property Public Register (RPPIM, Spanishacronym) to request the registration of the property to hisher name, where is informedthe following requirements must be fulfilled: a) Deedunder seller's name previously registered inthe RPPIM. b) Original and copy ofthe Testimony ofthe new sales contract. c) Cadastralcertificate issuedby the INETERPhysical Cadastre, and d) Fiscal appraisalcertificate issuedby the DGIFiscal Cadastre. 3) The agent following the procedure goes to the INETERPhysical Cadastreto request a cadastral certificate, where is informedthe following requirementsmust be fulfilled: a) Deedunder seller's name previously registered inthe RPPIM. b) Original and copy ofthe Testimony ofthe new sales contract. c) Cadastralblueprint of the property. 4) The agent fulfills requirementsof the INETERPhysical Cadastre. 5) The INETER Physical Cadastre verifies the location of the cadastral blueprint in its cadastral maps (ifthe property i s located withina cadastral area), otherwise schedules a field visit. 6) The INETER Physical Cadastre verifies the data included in the deed against cadastral file and, ifno inconsistenciesare detected, 7) Issues a cadastral certificate inthree partskeeping the same lot number. 8) After several days the agent returns to the INETER Physical Cadastre to get the requested certificate, which receives intwo parts. 9) The agent goes to the DGIto request a fiscal appraisal certificate, where is informed the following requirementsmustbe fulfilled: a) Background of the Property Public Register on the property b) Original andcopy ofthe Testimony ofthe newcontract. c) Cadastralcertificate issued by the INETERPhysical Cadastre 10) The agent fulfills requirementsofthe DGIFiscal Cadastre. 11) The DGI initiates research process on the owner; area, boundaries, and registration datawith the purposeof makingchanges and updating data, andthen 12) Schedules a field visit to inspect and appraisethe property, y subsequently 13) Issuesthe CadastralAppraisal certificate for the payment of 1% IT on the appraisal value amount. 14)After several days the agent returns to the DGIto get the requestedcertificate andpay the IRtax amount. 15) The agent fulfills requests ofthe RPPIM, which sends himiher to the corresponding Town Hall to pay the IBImunicipal taxes. 16) The Town Hall estimatesthe IBItax payment and the agent pays such amount. 17) The agent returns with all the documents and RPPIMpayment receipts. 18) The RPPIM estimatesthe appraisalon the property to be registered and issues a payment order to the agent. 119 ChapterI11-Annex 5 (cont.) Currentregistrationprocedure 19) The agent paysthe appraisal and goes to thejournal sectionto formally initiate the registration procedure. 20) After one monththe agent returns to the RPPIMto confirm there are no mistakes to be corrected andpreventaregistration denial. 21) The RPPIMperforms the registration inthe absence of errors. 22) The RPPIMregisters the farm [11under the name o fthe new owner, possibly ina newvolume andpage, indicating the number assignedto the plot by the INETER Physical Cadastre, and 23) Updatesthe Table of Owners. 24) After severalmonths the agent returns to the RPPIM to get the requestedregistration. 25) The DGIupdatesinits files the name o fthe newowner of the property, through its own mechanisms, and 26) After several months the RPPIMsends to the INETERPhysical Cadastrethe cadastralcertificate with the newregistration data. 27) The Cadastre issues the change order type D1-Change of name o f owner, and records the newregistration entry. 120 I I h m e3a v1 h ed A ZI m U Y 0 I a I ed m 0 ed Ccl 0 3 a 0 m 3 L.ll .I & 8a ChapterIV-Annex 1 ExternalControlModelsand Their ApplicationinNicaragua A. ModelsofExternalControlsinPublicAccounts French or Judicial Model 1. The "Cow des Comptes" is the French model of an institution that performs external controls in public accounts. The creation of the Cow de Comptes (1807) was inspiredbythe principles ofresponsibility, honesty, integrity andpublic morality. 2. The institution is currently composed of 250 magistrates with personal autonomy who therefore cannot be removed from office. 64 The Cow de Comptes is independent from the government and the parliament even though it assists them in the control of financial laws. Its nature i s mainly jurisdictional since the control of public accounts is done after their expenditure and the Cows de Comptes then has to decide about the personal responsibility of the public functionary. 3. Currently, the legislator has added other functions besides checking the incomes andexpendituressuch as the opinionaboutthe use of credits. UnitedKingdom or Westminster Model 4. The external controls in England are done by the National Audit Offices directed by the Comptroller General of the Receipt and Issue of Her Majesty's Exchequer and Auditor General of Public Accounts, also known as Comptroller andAuditor General. 5. The pillars are the Public Accounts Committee as Parliament control and the Comptroller and Auditor General as technical control. The cycle o f the control start whenthe House of Commons authorized the generalbudget, the Comptroller andAuditor General controls the emission of the public funds, the accounting is performed by the different departments which are revised later by the Comptroller and Auditor General. However, the control is done after the expenditure o f public accounts. The results are examinedthenby the Public Accounts Committee. 6. National Audit Office i s subordinated to the Parliament. For this reason, the controls of the Comptroller and Audtor General are done under supervision of the House of Commons. The Comptroller works under the premise of "value for mone audit" and i s totally independent from the Executive and only respond to the Parliament s.However, itdoes not havejurisdictional attributions only administrative ones. Some magistrates are selected by Decree fiom the Minister Council, others are selected by public exam and by the President o f the Republic. See Omar, Garcia. "La Contraloria General de la Repziblica y el Control Extern0 en el Estado DemocrriticoNicaragiiense" UCA (2006) Page28 65 The control is more oriented to economical criteria than legal. Op. Citpage 32 122 7. The Comptroller i s selected by the Queen under recommendation of the Prime Minister who previously consulted with the person responsible for the Public Accounts Committee66the independence of the Comptroller i s visible by the fact that he cannot be removed from his post without the approval o f two thirds of the House of Commons and House of Lords. B. HistoricalEvolution of ExternalControlson the Public Accounts ofNicaragua 8. The control onthe Public Accounts inNicaragua can be divided inthree historical periods: Parliamentary control (1824-1893) Court of Accounts (1893-1979) and the Comptroller Office period(1979 to the present). Parliamentary Control (1824-1893) 9. After the independence of Central America from Spain (1821) it took some time for Nicaragua to become an independentcountry (1838). Inthe first Constitution (which was mostly a copy of the previous Central American versions) mentions that "the Legislative has the faculty to request to the government the income and expenditures from all or part of the rents and any other useful information" 67The Constitution of 1858 has a similar provisioninthis matter. Court of Accounts (1893-1979) 10. The Constitution of 1893 (also known as "Libhima") outlined the principles of external controls in the public accounts and created the "Court of Accounts" that ruled from that year until 1979. The legislator also created four secondary laws and regulations for the operation of the institution. 11. The main attribution was to examine the accounts that use public funds and the Court was independent from the Executive untilthe Constitutional reforms of 1896 that changed that. The regulations also allowed the Court o f Accounts (in 1930) to make previous controls as well as posterior controls inthe execution of national budget andthe formality to present each year the execution to the Congress. In the next Constitutions they were minimal changes that relatesmostly to the dependencyto the Executive. Comptroller's Office (1979 to the Present) 12. After the Sandinista Revolutionof 1979, the government enactedthe Decree No. 86 o f September 20th of 1979 that created the Comptroller's Office giving functional autonomy andindependencebut without jurisdictional attributions. 13. The Comptroller's Office was initially presidedby a General Comptroller and a Deputy one elected by the National Assembly (Constitution of 1987) from a list provided by the Executive. However inthe Constitutional reforms of 2000, the legislator changed 66Normallythis personis a prominentmember ofthe opposition. Omar, Garcia. Op. Cif.page 31 67Omar Garcia. Op. Cif. page60 123 the impersonal composition of the Comptrollers' Office to a Board of five directives who annually elect themselves a Presidentto headthe chair. 124 BIBLIOGRAPHY Alianza MRS. 2007. "Cien Dias de Gobierno: Pocasluces, muchastinieblas." Abril 16. Alvarado Martinez, Enrique. 2003. "Los pactos en la cultural politica de Nicaragua. 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