about 3.8% of the national budget is returned to the municipalities.
38
 Moreover, of the 3.8%, over half of
this is destined for Lima.
There are 2000 municipalities, or more institutions of local governance per capita than in most
neighboring countries. Of the 2000 municipalities, 1800 are district municipalities, the basic unit of
governance, and 200 are provincial municipalities, which aggregate the district municipalities. Each
Department (State) is divided roughly into six or seven provinces, which in turn are divided into a similar
number of municipal districts. Mayors are elected at the district and provincial levels, as are city council
members, in Peru known as 
regidores
.
The large number of municipalities is somewhat misleading in terms of citizen access to local
government. There are many municipalities with large extensions of territory but with relatively few
inhabitants. There are a few municipalities with large populations, particularly within Lima. For example,
of the 1800 districts in Peru, 75 contain 50% of the population, and 1,725 represent the other 50%.  The
municipal structure is like a pyramid of districts with a large base of very small municipalities at the
bottom, with few resources and scant institutional development. At the top of the pyramid, there are
perhaps 150 to 300 municipalities that have the capacity to generate their own revenue and collect local
taxes.
In general, municipal funding is dependent on central government revenue collection and transference.
Since 1994, special taxes earmarked for municipal development are used to create a Municipal
Compensation Fund (Foncomun). The new fund supports privileged District Municipalities over
Provincial Municipalities. Twenty percent of these funds are distributed to the Provinces and 80% to the
Districts, following criteria based on population, poverty, urban development, violence and natural
resources. Distribution criteria are determined by the Ministry of Economy and Finances. Of the total
transfer payments received by a municipality, 30% can be used for operating expenses and 70% must be
used for investments. Although this is designated by law, many people interviewed indicated that the
30% was insufficient to meet basic payroll and expenses, and invariably the municipalities had to draw
from the other 70%, despite the potential for legal problems over the misuse of funds.  At the same time,
it is important to point out that even those municipalities with the capacity to generate their own revenues
are often reluctant to do so, for political reasons. Electoral law allows mayors to be re elected
indefinitely, which in turn makes them reluctant to tax their constituents or raise fees.
Additional revenues are also directly transferred to municipalities through the  Glass of Milk Program 
(
Vaso de Leche
), and charges and surcharges on oil and mining activities. For about half of all
municipalities, the Municipal Compensation Fund and the  Glass of Milk Program  are their only
sources of revenues. For many others, with the exception of Lima and a few other important cities, these
form the principal source of funding. When the Fund is added to the  Glass of Milk Program  and the
other special surcharges, the municipal share in the central budget rises to about 5.5%.
3.
Central Government Control
Despite the reluctance of the state to transfer resources to local control, over the past decade the central
government has dramatically increased spending at the local level to promote infrastructure and rural
development. From 1992 to 1999, the central budget expanded by 500%. The central government
manages 94% of the budget, while the municipalities manage under 6%. In this period, two Ministries
                                                    
38
 Comparatively, Bolivian and Colombian municipalities each receive 20%.
H:\INCOMING\July24\MSI Submission\Fn Email.doc
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