brazil: country strategy with the idb (2004-2007)

DOCUMENT OF THE INTER-AMERICAN DEVELOPMENT BANK

BRAZIL

BANK STRATEGY WITH BRAZIL (2004-2007)

This document was prepared with contributions by Bank staff in CBR, RE1, PRI, MIF, SDS and INT, coordinated by a team made up of: Wagner Guerra (COF/CBR); Héctor Salazar (RE1/SC1); Gabriel Casaburi (RE1/FI1); Mario Yano (RE1/EN1); Carlos Herrán (RE1/SO1); Patricio Duarte and Javier Ortiz (RE1/OD1), Coordinators; and José Daniel Reyes (RE1/OD1).

CONTENTS

EXECUTIVE SUMMARY INTRODUCTION I.

BRAZIL: GENERAL CONTEXT .............................................................................................. 1 A. Growth and equity in the long term ........................................................................... 1 B. Recent macroeconomic developments....................................................................... 6 C. The government strategy: the Multiyear “Brazil for All” Plan for 2004-2007...... 12 1. Economic scenario in the Multiyear Plan for 2004-2007 ............................... 13 2. Comparative economic scenarios for 2004-2007 ............................................ 15

II. DEVELOPMENT CHALLENGES AND OBJECTIVES OF THE STRATEGY FOR 2004-2007....... 16 A. Challenges for growth............................................................................................... 16 1. Increase the per capita GDP growth rate ......................................................... 16 2. Ensure sustainable growth over time without any sudden fluctuations causing unstable macroeconomic conditions................................................... 19 3. Ensure that growth is achieved with proper management of natural resources ............................................................................................................ 20 B. Social challenges....................................................................................................... 20 1. Reduce poverty.................................................................................................. 20 2. Improve equality and inclusion ........................................................................ 22 C. Institutional challenges ............................................................................................. 23 1. Increase participation, transparency, and social oversight.............................. 23 2. Modernize the State and strengthen institutions.............................................. 23 D. Objectives .................................................................................................................. 24 III. REVIEW OF PREVIOUS STRATEGIES AND THE ACTIVE PORTFOLIO ................................... 28 A. B. C. D. E.

Country strategy for 1996-1999 ............................................................................... 29 Country Strategy for 2000-2003 .............................................................................. 30 Evolution of the focus............................................................................................... 32 Active portfolio ......................................................................................................... 32 Lessons learned ......................................................................................................... 34

IV. THE BANK STRATEGY FOR 2004-2007.............................................................................. 37 A. The objectives and priority areas of Bank activity .................................................. 37 1. Productivity and infrastructure ......................................................................... 38 2. Poverty, equity, and human capital .................................................................. 40 3. Living conditions and efficiency in cities ........................................................ 44 4. Institutional strengthening and modernization of the State............................. 45 5. Other general and crosscutting issues .............................................................. 47

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B. Strategy implementation........................................................................................... 48 1. Activity with subnational agencies................................................................... 48 2. Nonfinancial services........................................................................................ 50 3. Private-sector instruments ................................................................................ 50 4. Lending scenarios ............................................................................................. 52 5. Complementarity and coordination with other sources of funding ................ 56 6. Civil society....................................................................................................... 57 7. Risks in implementation ................................................................................... 58 8. Monitoring strategy implementation and indicators........................................ 59 V. ISSUES FOR DIALOGUE WITH THE AUTHORITIES ............................................................... 61 VI. BIBLIOGRAPHY................................................................................................................... 63

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ANNEXES

Annex I Annex II Annex III Annex IV Annex V Annex VI Annex VII Annex VIII Annex IX Annex X Annex XI Annex XII

Macroeconomic indicators, 1994-2002 Multiyear Plan (PPA) organization Operations program-lending Operations program-technical cooperation Program of studies Seminars and analytical studies requested for the strategy Matrix of the Bank’s country strategy with Brazil Chart of IDB priority areas of activity Brazil: Millennium Development Goals Consultations with civil society Management’s actions regarding the recommendations made by OVE in its Country Program Evaluation Brazil 1993-2003 2004-2007 operations program. Linkage with objectives of the strategy

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ABBREVIATIONS

APA APEX APL BNDES CBR COFIEX COFINS COPOM CPMF DF GDP IIC IFC IIRSA IMF IPCA LIBOR LRF MDG MERCOSUR MIF OVE PBF PBL PCG PEF PIS PPA PPP PRI PROEX PROMOEX QUALISUS REFORSUS

Area de Proteção Ambiental [Environmental Protection Area] Agência de Promoção de Exportações [Export Promotion Agency of Brazil] Arranjos Produtivos Locais [local production chains] Banco Nacional de Desenvolvimento Econômico e Social [National Bank for Economic and Social Development] Country Office in Brazil Comissão de Financiamentos Externos [External Financing Committee] Contribuição par o Financiamento da Seguridade Social [Contribution for Financing the Social Security System] Comitê de Política Monetária [Monetary Policy Committee of the Central Bank of Brazil] Contribuição Provisória sobre Movimentos Financeiros [Provisional Contribution on Financial Turnover] Distrito Federal [Federal District] Gross domestic product Inter-American Investment Corporation International Finance Corporation Initiative for Integration of Regional Infrastructure in South America International Monetary Fund Índice de Preços ao Consumidor Amplo [Expanded Consumer Price Index] London InterBank Offered Rate Ley de Responsabilidade Fiscal [Fiscal Responsibility Act] Millennium Development Goal Southern Common Market Multilateral Investment Fund Office of Evaluation and Oversight Programa Bolsa Família [income transfer program for poor families] Policy Based Loan Partial credit guarantee Programa de Estabilidad Fiscal Programa de Integração Social [Social Integration Program] Plano Plurianual [“Brazil for All” Multiyear Plan for 2004 – 2007] Public-private partnerships Private Sector Department Programa de Financiamiento a las Exportaciones Programa de Modernización del Control Externo Política de Qualificação de Atenção à Saúde no SUS [Health Care Training Policy in the Unified Health System] Programa de Reforço à Reorganização do Sistema Único de Saúde [Program to Strengthen Reorganization of the Unified Health System]

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SAIN SEBRAE SELIC SENAI SMES SUS SWAP VIGISUS WB WTO

Secretaria de Assuntos Internacionais [Department of International Affairs] Serviço Brasileiro de Apoio às Micro e Pequenas Empresas [Brazilian Service to Support Micro and Small Enterprise] Sistema Especial de Liquidação e de Custódia [Special System for Settlement and Custody] Serviço Nacional de Aprendizagem Industrial [National Service for Vocational Training] Small and medium-sized enterprises Sistema Único de Saúde [Unified Health System] Sector-wide approach Universidade Luterana do Brasil [Lutheran University of Brazil] Vigilância em Saúde No SUS [Health Surveillance in the Unified Health System] World Bank World Trade Organization

EXECUTIVE SUMMARY

Long-term growth and equity Until the 1980s, Brazil was a country with rapid growth but great inequity. Then, as a result of an adverse international environment, the so-called “debt crisis,” and heavy distortions in its domestic policies, Brazil saw a drop in its per capita gross domestic product (GDP) during the 1980s. The macroeconomic imbalances were also reflected in extremely high and variable inflation rates.

To address this situation, in the 1990s, Brazil implemented a series of structural reforms consisting primarily of trade liberalization, reform of the State, and modernization of the economy, and in 1994 it launched a stabilization plan known as the Real Plan.

Despite the magnitude of the reforms and a favorable external situation, growth only increased moderately. Still, the reforms were very successful in achieving greater stability, leading to major improvements in the purchasing power of the population.

Moreover, a very active social safety net policy helped consolidate significant improvements in the absolute and extreme poverty rates.

On the other hand, the income gap—one of the highest in the world—remained practically unchanged throughout this lengthy period.

Recent macroeconomic developments During the second half of the 1990s, Brazil faced a more adverse external scenario, with a significant sudden stop in capital inflows to the region and lower demand for its exports. Furthermore, the fiscal situation began to deteriorate increasingly in 1995. This then led to successive changes in the exchange regime, culminating in the free float (and heavy devaluation) of the real on 15 January 1999. The government committed to achieving—and did achieve—growing primary surpluses and established “inflation targets” as the monetary system under the successive agreements with the IMF. After the economy grew by 4.4% in 2000, Brazil endured serious periods of instability, the last of which was prompted by the 2002 transition to the new administration.

Widespread mistrust spurred major cycles of increases in the exchange rate and country risk, causing surges in inflation and debt (closely linked to the exchange rate). The hike in the real interest rate and deteriorating expectations caused aggregate spending to drop, with a considerable negative impact on labor market indicators.

In 2003, the Lula administration made efforts to get the macroeconomic situation under control while it took its first steps towards launching a large-scale social agenda.

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The government strategy: the Multiyear Plan for 2004-2007 The “Brazil for All� Multiyear Plan (PPA) submitted to the Brazilian Congress by the federal government in 2003 (and supplemented by state government multiyear plans) establishes the development strategy for the country for the next four years. The plan assumes that efforts will be maintained to ensure a fiscal and external balance, in order to gradually achieve greater stability and higher growth. The strategy revolves around three objectives: (a) social inclusion and reducing inequalities; (b) environmentallysustainable growth with the generation of employment and income and a reduction in regional inequalities; (c) promotion and expansion of citizen empowerment and strengthening of democracy. The plan calls for gradual progress on all these fronts, allocating an average of US$150 billion in federal funding to them.

Challenges for development According to the Bank analysis, Brazil has a considerable number of development challenges to address.

With respect to growth, first of all it faces the challenge of increasing per capita GDP growth on a sustained basis over time, reversing the economic stagnation it had experienced in the 1980s and 1990s. Second, growth must be more stable, without the sudden stops Brazil endures because of lack of basic macroeconomic equilibria. And third, growth must go hand in hand with efficient management of the country’s natural resources.

The social challenges for the country are, first of all, to reduce poverty levels on a sustainable basis (and to a lesser extent, malnutrition), and second, to achieve greater equality and social inclusion, addressing such various issues as regional, gender and racial inequalities, and disparities between rural and urban areas.

Lastly, noteworthy among the institutional challenges Brazil must overcome are achieving greater participation, transparency, and social oversight, and continuity in efforts for modernization of the State (in the different branches of government and jurisdictions) and institutional strengthening.

Objectives of the IDB strategy for 2004-2007 In order to overcome the above-described challenges, the following three general objectives will guide Bank activities during the period from 2004 to 2007: (a) promote sustained, stable and environmental sustainable growth; (b) reduce poverty, promote social inclusion, and enhance social and regional equity; and (c) support institutional strengthening and promote democracy and citizen participation.

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Previous strategies The last two country strategies were prepared at times when Brazil was experiencing very different circumstances. This changing scenario required close coordination between the Bank and the government.

The first strategy (1996) was drafted when Brazil was focusing on achieving greater stability (after the Real Plan) and still enjoyed considerable growth rates. It focused operations (in close coordination with the “Brazil in Action” Multiyear Plan) on three priority areas: reform of the State, reduction of the “Brazil cost,” and meeting social needs and poverty reduction. In the subsequent strategy (2000), prepared in accordance with the Avança Brasil Multiyear Plan at a much more difficult time, the Bank deepened its work in the above three priority areas and added a fourth priority, the environment.

Issues of regional integration also took the forefront, reflecting the higher priority that integration was being assigned in practice in the Bank’s activities. During the period covered by the two strategies, the Bank had to be flexible in seeking to remain relevant in the country and maximize its contribution in ever-changing circumstances.

Areas of activity In accordance with the “Brazil for All” Plan, the following four areas of Bank activity have been identified: (a) productivity and infrastructure, with emphasis on small and medium-sized enterprises (SMEs) and the use of public-private partnerships for construction and operation of new infrastructure; (b) poverty, equity, and human capital formation, with a focus on programs for income distribution as short-term measures for poverty alleviation, and on education and health as sustainable means of improving equity; (c) living conditions and efficiency in cities, integrating measures to fight urban poverty with improvements in habitability, efficiency and environmental quality; and (d) institutional strengthening and modernization of the State, with emphasis on subnational governments.

Operations program and lending scenarios Given the complexity of Bank activities with various types of borrowers (federal, state and municipal governments, development banks, and private sector), the possible lending scenarios will depend on the constraints each type of borrower must address and the following decisive factors: macroeconomic factors and fiscal constraints; the limited capacity of the Bank to meet the potential demand from Brazil given its current exposure; the fiscal and managerial situation of the subnational governments; and the Bank’s capacity to offer new instruments or facilities that could allow lending consistent with the primary surplus goals.

Based on these factors, the lending scenario under this strategy would range from US$4.5 billion to US$6.5 billion.

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There would be four basic channels for lending: •

Greater support for increased inflows into the country would be provided through operations with the federal government and development banks, by means of loans in amounts consistent with the goals of spending cuts.

•

Traditional federal government investment projects will focus on programs in the social sectors, modernization of the State, and productive infrastructure works.

•

Lending to subnational governments (states and municipalities) with sovereign guarantees will depend on the capacity of the borrowers to incur new debt (under the Fiscal Responsibility Act and debt agreements with the federal government) and the total amount of the guarantee issued by the federal government for such loans.

•

Direct lending to the private sector is an area of Bank activity most developed in Brazil and that could also be expanded, depending on the progress made in new national initiatives for public-private partnerships.

Risks One risk is that the economic assumptions may not materialize. Although various public and private indicators are now signaling a recovery in economic activity, the latter remains subject to the risks inherent in countries financed with a high proportion of external savings and in which local investors are still periodically subject to credibility issues. A second risk is that the administration elected in October 2002 is under heavy social pressure to produce immediate results.

Both situations could result in lower growth rates and consequently constraints on borrowing, with a lower number of new loans contracted by the federal government, a lower number of guarantees granted to subnational borrowers, and the persistence of budgetary constraints.

The risks associated with any drastic change in government priorities are considered remote, given the highly planned, explicit nature of government programming, with a four-year plan supported by consultations and approved by the National Congress.

Issues for dialogue To monitor the implementation of the strategy and the relationship between Brazil and the Bank, three main topics of dialogue are proposed: Formulation and financing of the main initiatives under the 2004-2007 Multiyear Plan, especially in the social sectors—the Bolsa Família cash transfer program and others—and promotion of public-private partnerships [PPP]), including Bank interest in increasing its contribution to the country through nonfinancial services, with emphasis on:

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•

improving the country’s business climate, especially to encourage private investments in the expansion and operation of infrastructure through mechanisms like the PPP and the catalytic role of the Bank’s windows that finance private projects.

•

a possible Bank contribution to deepening regional integration; measures to enhance progress towards the Millennium Development Goals; improvements in the administration of justice and in public sector management capacity.

•

the Bank’s collaboration in a pilot project headed by the IMF on the subject of treatment of infrastructure spending within the primary surplus accounts, the consideration of the PPP as an important instrument for expanding infrastructure, and approval of spending on investments made by State-owned enterprises that are considered to be governed as commercial entities.

Subnational entities: given the Bank’s increased participation in providing financing to subnational entities, there is a need to express the following: •

Bank interest in continuing and even expanding projects with states and municipalities, through new models for cooperation and financing, in particular to address problems in cities;

Execution of the portfolio, with emphasis on: •

the effort to reduce project execution periods and, in particular, a deepening of efforts to clean up and streamline execution of the portfolio.

•

intensification of measuring the mid-term and final outputs and outcomes of operations and programs, pursuant to the commitment to monitor strategy implementation on an ongoing basis,

INTRODUCTION This strategy paper establishes the main lines of Bank activity in Brazil for the next four years. In accordance with the country planning cycle, it was formulated in close association with the Multiyear Plan for 2004-2007 (PPA) prepared by the new administration in 2003.

The strategy reflects the core objectives of the national plan—to achieve sustainable growth with social inclusion and promote greater democratization and citizen participation. It will guide Bank activity, pursuant to an analysis of the challenges the country must address, and taking into account the experience and comparative advantages the Bank has in the country. The objective of the strategy is to maximize the value added of the Bank in the country, subject to the above-described constraints.

In chapter I, section A, the strategy paper first reviews the main economic and social trends in Brazil, with emphasis on the goals achieved under the ambitious reform program launched in the early 1990s.

Section B of chapter I focuses on the difficult international environment that arose in 1997-1998, and the series of measures Brazil took to respond to it and that led to the successful presidential transition in 2002.

Section C describes the thrust of the economic, social, and institutional policy the new administration has established in the Multiyear Plan, and compares the economic scenarios the government has assumed to meet its established targets with the scenarios forecast by other sources.

In chapter II, based on the analysis set forth in chapter I, the key challenges are identified for achievement of the three general objectives, which are discussed in section D of chapter II. The objectives were devised by integrating the general analysis conducted, the general objectives set by the Government of Brazil in the Multiyear Plan, and the Bank’s institutional strategy.

Chapter III reviews the two previous Bank strategies with Brazil (1996 and 2000) and the active portfolio, concluding with a series of lessons learned.

In chapter IV, a set of key aspects of the Bank strategy for the period 2004-2007 is reviewed. Section A stipulates the priority areas of activity in which the Bank will focus its efforts to achieve the three above-mentioned general objectives, based on the analysis conducted on the nature of the Bank’s comparative advantages.

Section B of chapter IV highlights strategy implementation, including a description of possible scenarios for lending, disbursements, and net flows of funding, along with the potential risks involved.

Lastly, chapter V lists the main issues to be included in the Bank’s country dialogue.

I.

BRAZIL: GENERAL CONTEXT

A.

Growth and equity in the long term

1.1

For a very large part of the twentieth century, Brazil was a country with high inequity, but rapid growth. From 1900 to 1970, GDP increased at an average annual rate of 5.3% (2.8% in per capita GDP growth), one of the highest in the world.

After institutional reforms were implemented in the country in the late 1960s, growth accelerated to close to 9%.

1.2

However, the process did not continue in the 1980s. As growth rates worldwide slowed and developing countries suffered through the so-called “debt crisis,� Brazil saw its growth rates decline significantly. Thus, during that period, in the context of an adverse international environment and major imbalances in its macroeconomic policies, GDP contracted in Brazil.

1.3

At the same time, whereas in previous decades, growth was spurred by high growth rates in physical capital assets, in the 1980s, the share of this factor declined significantly. In addition, total factor productivity also dropped during that period, to close to zero,1 contributing to the poor performance in per capita income.

1.4

In particular, investment as a percentage of GDP plummeted to abnormally low rates (less than 20%), not only when compared with international standards, but also considering the rates achieved in previous decades.2 This development was the result of two different factors: the relatively high prices of investment and the low level of savings. The latter was due to the significant deterioration in public accounts and the retraction of foreign saving (due to the debt crisis).

1.5

Moreover, the major macroeconomic disequilibria led to much higher spikes in inflation than in the past. Relatively volatile prices ensued, causing distortions in the allocation of resources, particularly in investment funds, which were also affected by the retraction that generated a climate of greater macroeconomic uncertainty.

1.6

The macroeconomic disequilibria were also reflected in a much more volatile GDP than in previous decades. As a result, one of the features of the Brazilian economy in the 1980s was short cycles of expansion and intense recessions.

1.7

Given this situation, in the early 1990s, the government decided to address the problems and launched a series of reforms. The main ones are described below.

1

Lisboa, M. et al. (2002).

2

Lisboa, M. et al. (2002).

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a. Liberalization of trade 1.8

In 1990 Brazil signed the Treaty of Asunción, establishing MERCOSUR. It also began to greatly reduce its tariffs and other barriers to trade with other countries,3 in order to promote additional gains in productivity and scale, and to modernize its productive apparatus. As a result, despite the setbacks at the end of the 1990s, Brazilian trade liberalization expanded sharply compared with previous decades4 and had a positive impact on productivity in the productive apparatus.5 b. Reform of the State

1.9

Brazil entered the 1990s with a need to balance its public finances. As noted above, the deterioration in public accounts had contributed towards decreased saving, which became a considerable obstacle to growth. To address the situation, the government launched a series of initiatives to improve tax collections and tighten spending at the three levels of government.

1.10

The tax measures undertaken helped collections grow dramatically. Tax collections at all three levels of government increased from 22.4% of GDP in 1988 to 29.4% in 1995, and 35.9% in 2002 (Graph 1). However, the increase in the tax burden, achieved to a great extent by increasing cascade taxes (such as the taxes for social Graph 1. Tax burden (% of GDP) integration (PIS), social security 35.86 40 + 60% (COFINS), and financial transactions 29.41 30 (CPMF)), acted as a major obstacle to 22.43 % 20 Brazil’s growth, competitiveness, and penetration of the international economy.

10

1.11

1988 1995 2002 The higher levels of tax collections Source: Varsano (2003) y Dall' Acqua ensured an average primary surplus equivalent to 2.9% of GDP between 1991 and 1994. Subsequently, however, a large increase in spending brought the figure down to –0.2% of GDP from 1995 to 1998, with primary deficits in states, municipalities, and State-run enterprises.

1.12

It was not until after 1998 that the government undertook a series of measures, to which it had committed under successive agreements with the International Monetary Fund (IMF), that helped generate strong consolidated primary

0

3

See Sanguinetti, P., J. Traistaru, and C. Volpe Martincus (2003).

4

The phenomenon of greater liberalization in the 1990s continues to this day, although it is less intense if the rate is assessed at “purchasing power prices.”

5

López-Córdoba, E. and M. Mesquita Moreira (2002).

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surpluses.6,7 However, social security, especially the segment covering the civil service, continued its a trend towards increasing deficits, despite the positive impact of the social security reform enacted in 1998.

1.13

Furthermore, the high public debt-toGraph 2. Net public debt (% of GDP) GDP ratios (Graph 2) and their upward 60.0 56.5 trend, exacerbated by the sharp increases 55.0 52.6 in interest rates instituted in order to 50.0 48.7 48.8 contain the exchange rate and prices, % 45.0 41.7 40.0 33.7 33.3 were a significant source of 33.3 34.4 35.0 30.6 31.0 30.0 macroeconomic instability. In particular, 30.0 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 the high proportion of debt placed at Source: IMF y Dall' Acqua (2003) variable interest rates or with adjustable exchange rates—both of which highly subject to the ongoing fluctuations in investor attitudes towards the economic outlook—considerably magnified the instability.

1.14

These very high, growing debt levels and the type and structure of their servicing exerted upward pressure on domestic interest rates, thereby contributing towards keeping them very high and becoming one of the decisive factors in the low growth rates in recent years. c. Modernization of the economy

1.15

Brazil launched a major program for reform and modernization of its economy. A strong privatization program8 improved efficiency in such sectors as communications, the iron and steel industry, and mining. Less progress was achieved in energy, transportation, water supply, and sanitation services. In addition, through the expedited design of new regulatory frameworks, a set of agencies was established to regulate services, along with systems to promote competition. A major financial reform was also implemented, and included privatization and major regulatory changes in the sector.

6

Giambiagi, F. (2002).

7

A negative aspect of the adjustment process was that it disproportionately affected investment spending.

This was mainly due to serious budgetary rigidities, given the large amount of resources that by law had to be allocated specifically to finance certain current expenditures.

8

During the 1990s, Brazil privatized 119 enterprises that generated US$86.9 billion in resources, making this privatization process one of the largest in magnitude in the world. Building momentum in 1995, the privatization program culminated with almost complete divestment of formerly State-run enterprises in almost all the sectors that had been practically the exclusive domain of the State for decades. Thus, by the end of the 1990s, private investors controlled telecommunications, railroads, major ports, some of the main highways, two thirds of power distribution and part of power generation, and a growing proportion of water and sanitation services. See Castelar, A. (1999).

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1.16

These structural reforms were supplemented with a stabilization plan known as the Real Plan, which was launched in July 1994. At the same time, the debt was renegotiated under the Brady Plan, very successfully, considering that it did not have the explicit support of the IMF.9

1.17

The reforms as a whole were very successful in achieving greater stability. The inflation rate, which in the first half of 1994 was rising at a monthly rate of over 40%, had plummeted to 1% to 3% by the end of the year. And even more importantly, inflation continued to decline in subsequent years to an annual rate of 1.7% in 1998.

1.18

However, despite the magnitude of the reforms, growth continued to behave erratically. Thus, throughout the 1990s, Brazil’s growth rates were on average higher than those posted the previous decade, but lower than historic rates.

Moreover, the higher growth rates were due mainly to the increase in overall productivity of factors of production, one of the expected results of the reforms undertaken. Nevertheless, the increases were lower than expected given the scope of the changes made. The accumulation of capital goods remained sluggish, significantly delaying the growth process.

1.19

Greater stability, however, led to major improvements in the purchasing power of the population. From 1994 to 1995, minimum wages increased in nominal terms by 43%, which, in conjunction with the lower increases in prices, meant a real improvement of 17%. This development had a significant impact on the status of lower income brackets, considerably decreasing absolute and extreme poverty rates (Graph 3).

% of population

Graph 3. Absolute and extreme poverty (%) 55.0

Absolute poverty

45.0 35.0 25.0

Real Plan Extreme poverty

15.0 1977 1978 1979 1981 1982 1983 1984 1985 1986 1987 1988 1989 1990 1992 1993 1995 1996 1997 1998 1999 2000 2001 2002

5.0

Source: Barros, Henriques e Mendoça (2000).

1.20

Furthermore, an active social safety net policy in the 1990s helped consolidate this trend. Transfers of some R$23 billion were made annually to low-income groups, 80% of which were in the form of direct income transfers10 (income support, unemployment insurance, extension of benefits, and programs in such areas as youth employment (Agente Jovem), school attendance (Bolsa-Escola) and eradication of child labor) also helped achieve this objective.

1.21

In any event, poverty remained very high, especially in rural areas and in segments of the population of indigenous and African origin, and with lower education levels.

9

IMF (2003).

10

Paes de Barros, R., M. De Carvalho, and S. Franco (2002).

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1.23

1.24

1.25

1.26

However, the series of programs for transfers and investments in the social sectors help rapidly improve various social indicators in different areas, such as education and public health (Graphs 4 and 5), helping Brazil gradually move towards achieving some of the respective Millennium Development Goals.

In education,11 Brazil consolidated major progress. In addition to achieving almost universal enrollment in basic education (97%), it improved school retention rates and the quality of teaching.

In health,12 equally impressive progress was made. Infant mortality continued to decrease, the mortality rate due to infectious diseases declined, and average life expectancy increased (to 68).

Nevertheless, income disparities in Brazil, among the greatest in the world,13 remained practically unchanged, as can be seen in Table 1.

Lastly, it is important to note that although major social progress was achieved, it was insufficient. The poverty rate in Brazil was so high that growth with stability was not enough to reduce it to normal levels in a reasonable time frame, for instance to halve the rate by 2015, as targeted under the Millennium Development Goals (MDGs) (see Table 2 for a summary of the main social goals).

11

World Bank (2003).

12

World Bank (2003).

13

Ministry of Finance (2003).

20.0

18.2

16.6

15.6

15.0

14.2

13.0 11.0 8.5

10.0

4.0

5.0 0.0 1992 1993

1994

1995 1996

1997

1998 1999

Source: World Bank

Graph 5. Infant mortality rate 50.0 47.8

Death per 1,000 live births

1.22

% of population aged 7-14

Graph 4. Children not in school (%)

45.2 43.0

45.0

41.1

40.0

39.6

38.4

37.5 36.7 36.1

35.0 30.0 1990 1991 1992 1993 1994 1995 1996 1997 1998

Source: World Bank

Table 1 Inequality indicators Year

1.

2.

3.

4.

1977

0.62

0.91

27.50

26.80

1982

0.59

0.71

25.60

23.00

1986

0.59

0.72

24.00

22.10

1990

0.62

0.78

31.20

26.90

1996

0.60

0.73

29.80

24.60

1999

0.60

0.72

27.20

23.30

Source: Barros, Henriques y Mendoza (2000).

1.

2.

3.

4.

Gini coefficient Theil index Ratio of average top 20% income to lowest 20% Ratio of average top 10% income to lowest 40%

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1.27

Consequently, it is clear that only through improvements in income distribution will a faster pace in poverty reduction be achieved than in the 1990s so that the respective MDGs can be achieved.14

Table 2 Social indicators (MDGs) 1990 2000 2015pr Poverty (%) Extreme poverty (%) EDUCATION Net primary enrollment % completing 8th grade HEALTH Under-5 mortality (per 1,000) Infant mortality (per 1,000) Maternal mortality (per 1,000)

43.8

31.9

21.9

20

15

10

81

96

100

52

61

100

60

38

20

B.

Recent macroeconomic developments

1.28

As mentioned above, the second half of 48 35 16 260 114 65 the 1990s was a period characterized by major achievements for Brazil, but also by % of birth with health staff 75.6 97 100 considerable instability and macroPr: Projected economic volatility. They were also years Source: United Nations 2003 during which Brazil had to cope with a more adverse external scenario marked by considerable sudden stops in capital inflows to the region and lower demand for its exports.

1.29

As mentioned earlier, the fiscal situation in Brazil began to increasingly deteriorate in 1995.15 The ensuring fiscal imbalance led to a gradual decline in competitiveness and increasing deficits in the current account on balance of payments (see Annex 1). In this context, the Central Bank was unable to avoid the deterioration in these variables through a contractionary monetary policy, forcing the government to seek greater flexibility in its exchange policy.

1.30

On 6 March 1995 a new system of exchange bands was announced, but had to be modified almost immediately due to a serious run on the currency. New changes were made through the end of 1998, but the system continued to operate under heavy pressure. On 13 January 1999, the Central Bank, responding to major run on its reserves, announced a significant change in its exchange regime. Two days later, on 15 January, it allowed the currency to float.16

1.31

Abandoning the currency peg for prices made it necessary to adopt new monetary guidelines. Thus, with the support of the IMF for the revised program in March

14

Annex 10 provides detailed information on the progress made by Brazil since 1990 towards the Millennium Development Goals, based on updated data from the World Development Indicators Database (2004). The overall conclusion that can be drawn from the information is that Brazil has made substantial progress towards meeting the MDGs since 1990.

15

The situation was due to a combination of factors, among which the following should be mentioned: (1) delays in updating the prices of government enterprises; (2) the loss of liquidity for spending through inflation until the 1994 stabilization; (3) increases in public sector salaries; and (4) the expansionary effect of the salary increase on social security accounts.

16

The decision caused a sharp devaluation of the currency. It was only once the Central Bank raised interest rates considerably, causing short-term rates to rise above 45% in March 1999, that the devaluation stopped and speculation about a possible debt restructuring dissipated.

-7-

1999, Brazil took the pioneering step of adopting the “inflation targets� system as its guideline for monetary policy in June 1999.

1.32

Since then the Central Bank has been actively managing its main instruments (the SELIC clearance and custody rate, reserve requirements, etc.) in order to keep inflation under control. At the same time, it launched a major financial reform designed to improve system efficiency as well as to build up its resistance to external shocks.17

1.33

However, the volume of credit as a percentage of GDP continued to be low (compared with similar developing countries), and the lending spreads and borrowing rates very high. The Central Bank took a series of microeconomic measures to address these problems, but the latter remain major obstacles to achieving higher growth rates.

1.34

The new exchange regime required a considerable fiscal commitment. In March 1999, under the Review of the 1998 Stand-By Arrangement, Brazil and the IMF agreed to replace the debt ceilings with minimum primary surpluses for the consolidated public sector as performance criteria, in recognition of the fact that the latter was under the most direct influence of the government.18

1.35

Beginning in that year, the government was to achieve increasing primary surpluses, a Graph 6. Primary surplus 5.0 4.3 goal that it actually exceeded. Two core 3.5 3.7 4.0 3.2 elements of the strategy were the Fiscal 3.0 Stability Program and the Fiscal 2.0 Responsibility Act, which extended 1.0 0.3 0.0 budgetary austerity to subnational 0.0 -0.1 governments. However, the improved -1.0 -1.0 -2.0 performance in primary public accounts (Graph 6) did not translate into significant reductions in the debt-to-GDP ratio due to Source: Ministry of Finance the adverse impact of the increased interest rates and currency devaluation.

4.3

1.36

2003

2002

2001

2000

1999

1998

1997

1996

1995

1994

% of GDP

4.0

Beyond these measures, however, the public sector experienced not only a genuine improvement in its accounts, but also a veritable transformation in governance. In terms of spending, preparation of the multiyear plans represented a true innovation that let to strategic allocation of federal government resources based on a system of objectives and programs. In addition, a series of major structural reforms led to a significant improvement in spending by states and municipalities.19

17

Goldfajn, I., K. Hennings, and H. Mori (2003).

18

IMF (1998).

19

See Dall’ Acqua, F. (2003) for a detailed description of the set of regulations that led to the landmark

-8-

1.37

In addition, as noted in the previous section, the government very actively sought to mitigate the impact of the external sector crisis by obtaining assistance from various international organizations, such as the above-mentioned 1999 agreement with the IMF, the IDB, and the World Bank.

1.38

Overall, the measures were quite successful in greatly improving external indicators, while growth began earlier than expected, spurred by exports and import substitution activities. Thus, in 2000 Brazil posted GDP growth of 4.4%, a very high rate for Brazil in the past two decades.

1.39

However, an accumulation of new external upsets, the main one being the crisis and subsequent collapse of Argentina (December 2001),20 led to a spike in country risk ratings and the interest rates, and consequently a decline in GDP (Graph 7). Towards the end of 2001, the indicators began to improve and economic activity as well, but unfortunately this would not be the last crisis for Brazil.

Graph 7. Country risk and nominal exchange rate 5.0

1900

4.0

1400

2.8

900

3.0

R$/US$

Basis points

2400

471 Dec-03

Jun-03

Sep-03

Mar-03

Dec-02

Jun-02

Spread

Sep-02

Mar-02

Dec-01

Jun-01

Sep-01

Jan-01

2.0 Mar-01

400

TCN

Source: Cent ral Bank, J.P Morgan.

1.40

At the beginning of 2002, a major wave of speculation began, linked to the possible change in economic policy that might result when the new administration took office in January 2003. The country risk thus increased suddenly, while the currency underwent a rapid devaluation.

1.41

This situation led to a strong increase in domestic interest rates and a reduction in credit, causing investment and private consumption to contract, especially for nondurable goods. The result was another period of GDP contraction (Graph 8).

Graph 8. GDP growth 5.0 4.36 3.0

Growth

Growth

Year 2001:1.3

Year 2002:1.9

Growth Year 2003:-0.2

1.0 -1.0

The significant devaluation of the real was decisive in generating a more manageable situation in the external Source: IBGE sector, enabling Brazil to post considerable surpluses in the balance of trade and current account balance (Graph 9). In particular, exports increased by 28.7% in 2003 as a result of 2000 01 1 01 2 01 3 01 4 02 1 02 2 02 3 02 4 03 1 03 2 03 3 03 4

1.42

Fiscal Responsibility Act of May 2000 and its supplementary regulations. The paper also reviews the positive impact the regulations had on limiting the borrowing capacity of subnational agencies.

20

Another major factor was the energy crisis Brazil experienced in 2001.

-9-

improvements in international prices (except for manufactures), but also generalized increases in the quantum index.21 However, the decline in the real had a significant adverse impact, since it triggered a strong acceleration of inflation,22 which made it impossible to meet some of the inflation targets set.

Moreover, the increase in the exchange rate (and, to a lesser degree, in prices), in the context of a high proportion of indexed debt, raised the debt-to-GDP ratio to levels that caused alarm among investors.

Graph 9 Balance of trade and current account balance (US$ billions) 10 30 Balance of trade 0 20 Current account -10 10 0

-20

-10

-30

-20

-40

Jan-97 Sep-97 May-98 Jan-99 Sep-99 May-00 Jan-01 Sep-01 May-02 Jan-03 Sep-03

1.43

Source: Central Bank

1.44

This development in turn contributed towards raising country risk, resulting in higher interest rates and further devaluation of the real, clearly illustrating the existence of mechanisms that amplify macroeconomic volatility.23

1.45

Furthermore, the combination of a decrease in GDP and the increase in prices led to deterioration in the social situation. In particular, the labor market reacted badly only a few months later, with high unemployment rates and a drop in real wages.24

1.46

Nevertheless, the situation began to return to normal after the October elections.

Announcement of the new measures, and the considerable support provided by international organizations once a new agreement was reached with the IMF on 6 September 2002 (with disbursements equivalent to US$32 billion over a 15-month period), helped accelerate the process.

21

Among the noteworthy factors in the rapid growth of exports in the second half of 2002 were: (a) the sharp devaluation experienced in 2002 (only very partially reverted in 2003); (b) the recovery of the Argentine economy beginning in the second half of 2002; (c) expanded trade with China as a result of its admission to the World Trade Organization (WTO); (d) the international increase in commodities prices; and (e) increased productivity and diversification of exports as a result of the reforms implemented by Brazil in the 1990s.

22

Pastore, A. and M. Pinotti (2004) found that the annual pass-through rate between devaluation and inflation is 10% to 15%. In other works, a 10% increase in the exchange rate sustained for a year increases the consumer price index (CPI) of inflation between 1% and 1.5%. Other authors have found higher rates.

23

Laspina, L and J. Ortiz (2003) show a variation on the classic Mundell-Fleming model, in which debt indexed to the exchange rate makes the mobility unstable.

24

The open unemployment rate, which had declined in 2002 from 13% to less than 11% in December 2002, began to rise in January 2003 to back up 13% in June. Since then, unemployment rates have not declined, but remained at similar levels, with only minor variations (in January 2004 the rate was 11.7%). Meanwhile, real wages, which had increased in 2002, declined significantly in 2003, for a cumulative annual loss of over 12%.

- 10 -

1.47

After the new administration took office, it maintained the macroeconomic strategy Brazil had had since 1999, that is, a flexible exchange regime supplemented by inflation targets as the guidelines for monetary policy and fiscal responsibility (solvency), which helped improve expectations considerably.

1.48

The trend was strengthened by the adoption of ambitious primary surplus goals (for the consolidated public sector, equivalent to 4.25% of GDP, even higher than the 3.75% target agreed upon with the IMF),25 and a monetary policy that called for increases in the SELIC rate (Graph 10) and reserve requirements.26 These decisions helped dissipate the prevailing investor skepticism.27

Graph 10. SELIC interest rate Central Bank 27.

25.

23.

% 21.

19.

16.5

17.

Jan-01 Mar-01 Apr-01 Jun-01 Aug-01 Oct-01 Dec-01 Feb-02 Apr-02 Jun-02 Aug-02 Oct-02 Dec-02 Feb-03 Apr-03 Jun-03 Aug-03 Sep-03 Nov-03 Jan-04

15.

Source: Central Bank

In April 2003, the federal Executive Graph 11. Debt*/GDP and real exchange rate index submitted a bill on budget preparation 65.0 170.0 61.7 57.0 guidelines to Congress that extended 60.0 150.0 the commitment to achieving primary 55.0 130.0 surpluses equivalent to 4.25% of 50.0 110.0 GDP through the end of President 45.0 90.0 Lula’s term of office. The bill, passed in July 2003, provided new Net public sect or debt guarantees on the fiscal responsibility *= Source: Central Bank that the new federal administration was willing to assume. By the end of the year, government had achieved a surplus equivalent to 4.32% of GDP, even higher than the new law required.

1.50

The rapid drop in interest rates, and—more importantly—the resulting appreciation of the real, prompted a steep fall in the public debt-to-GDP ratio (Graph 11),

Jan-01 Mar-01 MayJul-01 SepNovJan-02 Mar-02 MayJul-02 SepNovJan-03 Mar-03 MayJul-03 SepNov-

REFRI

Debt/GDP (%)

1.49

25

In February 2003, Decree 4591 increased the primary surplus goals for the consolidated public sector to 4.25% of GDP. The new increase was supplemented by the contingent release of R$14 billion in allocations for expenses in the 2003 Budget.

26

On 14 October 2002, the Monetary Policy Committee (COPOM) increased the SELIC rate (its main instrument for monetary policy) by 300 basis points, giving rise to a series of increases that brought the rate up to 25% in December 2002. After the change in administration, SELIC rate increases continued until they reached 26.5% in February 2003. This policy also included an increase in reserve requirements for deposits, primarily through Circular 3177 of February 2003, which increased the reserve requirements for sight deposits from 45% to 60%.

27

For a representative view of fears about debt sustainability, see Goldstein, M. (2003). For an opposing view, see Goldfajn, I. (2002).

- 11 -

helping to dispel concern about the sustainability of the debt, which further enhanced confidence and led to lower interest rates.

1.51

The authorities took advantage of the lower levels of uncertainty and the improved international financial environment to manage the public debt more actively, at a lower financial cost, in order to reduce the proportion of the debt tied to the exchange rate. These measures were taken in recognition of the fact that such debt was a major source of instability, since it significantly amplified the impact of the recurrent shocks affecting the Brazilian economy on the main macroeconomic variables.

1.52

To this end, in late 2003 the Central Bank adopted an active policy of accumulating reserves, in order to increase Brazil’s sovereign creditworthiness. This policy also avoided a further appreciation of the real, although the authorities were adamant that in no way did it mean a preestablished goal for the nominal (or real) exchange rate.

1.53

A new agreement with the IMF approved in December 2003 increased the resources available to Brazil under a Stand-by Arrangement to the equivalent of US$14 billion. It also postponed repayments to the IMF to 2005 and 2006, thereby helping not only to improve the country’s financing needs profile, but also to provide greater security on the direction of economic policy.

28

Finally, approval of important legislation, such as the social security reform for civil servants and the tax reform,28 helped improve the climate of expectations so that monetary policy could be relaxed with less of an impact on inflation and expected inflation (Graphs 12 and 13), paving the way for growth to resume on a more solid foundation. Towards the

3.5

3.0

2.5

1.3

1.5

0.8 0.6

Actual inflation Source: Central Bank

Jan-04

Sep-03

May-03

Jan-03

Sep-02

May-02

Jan-02

Sep-01

May-01

-0.5

Jan-01

0.5

Core inflation

Graph 13. Expected inflation (CPI) % next 12 months 15.0

13.4

Inflation goal

10.0

5.5

5.0 0.0 Jan-02 Mar-02 May-02 Jul-02 Sep-02 Nov-02 Jan-03 Mar-03 May-03 Jul-03 Sep-03 Nov-03 Jan-04 Mar-04 May-04 Jul-04 Sep-04 Nov-04

1.54

Graph 12. Inflation rate (CPI) – (monthly %)

Source: Central Bank

Two major tax reforms to reduce distortions in the tax system had been approved in the previous months. One of the cascade taxes, called the PIS, was transformed into a value-added tax in late 2002, and Provisional Measure 135 of October 2003 changed a very significant tax, the social security contribution (COFINS) into a noncumulative one. Collection of this major tax began in early 2004.

Because it is levied on value added, the rate had to be increased to preserve collections.

- 12 -

third quarter of 2003, numerous indicators pointed to a new period of increased economic activity.

1.55

At the beginning of 2004, important legislation such as the Bankruptcy Act and the very topical Public-Private Partnerships Act, which would promote the construction of infrastructure and improved efficiency in its management, were pending approval by Congress. In the meantime, the government had started to take steps to enhance its major social agenda: in October 2003, it launched its Bolsa Família education program, National Program for Youth Entering the Workforce, and Lowcost Housing Program.

C.

The government strategy: the Multiyear “Brazil for All” Plan for 2004-2007

1.56

With the macroeconomic situation under greater control, following the applicable procedures, on 31 August 2003 the federal government submitted its new Multiyear Plan to Congress for review (after consultations with civil society that were unprecedented in scope).

1.57

The “Brazil for All” Multiyear Plan29 establishes the long-term development strategy that the federal government has planned for the next four years.

1.58

These strategic guidelines are linked through three overarching objectives comprising five different dimensions. The three overarching objectives in turn address 30 challenges (see Graph 14). To meet these challenges, the government lists 374 programs made up of 4,300 activities (Annex 2). Each of the activities is listed in the bill, along with its respective budget items, indicators, Graph 14. Multiyear planning for 2004 -2007 and goals.

1.59

The overarching objectives are: a. Social inclusion and a reduction in social inequalities b. Growth with the generation of employment and income that is environmentally sustainable and reduces regional disparities

Development strategy

3 overarching objectives (5 dimensions)

30 challenges

374 programs with close to 4,300 activities

c. Promotion and expansion of citizen participation and strengthening of democracy

29

Ministry of Planning, the Budget, and Management (2003). To view the entire plan, see www.planejamento.gov.br.

- 13 -

1.60

The first objective concerns the social dimension of development; the second, the economic, regional, and environmental dimensions; and the third, the democratic dimension. The plan calls for gradual progress on all these fronts, earmarking an average of US$150 billion in federal government spending for its implementation.

1.61

Since a favorable economic scenario Graph 15. Budgetary resources by overarching objective is assumed for the period 2004 to 2% 2007, the plan calls for increasing 35% federal spending over time, with 90% of it earmarked for programs 63% designed to directly meet demand for social services and meet social Growth with generation of employment and income needs.

Graph 15 shows the Social inclusion and reduction in social inequalities Promotion and expansion of citizen participation allocation of budgetary resources by overarching objective. It illustrates the high priority assigned to social issues by the current administration (social inclusion and reducing inequality), while recognizing the limited resources at the federal government’s disposal and the need to respect those limits in order to ensure sustainable development.

1.62

Moreover, in recognition of the severe constraints imposed during the fiscal emergency, the plan calls for restoring public investment, through new and preexisting arrangements, as a means of bringing overall investment back up to normal levels, which is expected to promote growth.30 1. Economic scenario in the Multiyear Plan for 2004-2007

1.63

30

The plan recognizes that the foundation of promoting a strategy of development with social equity—the priority for the new administration—must be macroeconomic stability. Accordingly, the plan includes the following projections for the main macroeconomic variables (Table 3).

Federal-level planning is supplemented in Brazil by multiyear plans at the state level in each state in the union. The state plans, formulated pursuant to the applicable legislation, are used to strengthen the planning process throughout the country.

- 14 -

Table 3 Macroeconomic projections in PPA for 2004-2007 Estimated 2003 Change in real GDP (%) CPI inflation (% change, Dec.-Dec.) Exchange rate (R$/US$, year-end) Balance of trade (% of GDP) Exports of good (% of GDP) Imports of goods (% of GDP) Current account (% of GDP) Primary public sector surplus (% of GDP) Central government (% of GDP) Government enterprises (% of GDP) States and municipalities (% of GDP) Public sector short-term debt (% of GDP)

0.1 9.3 2.9 4.9 14.4 9.5 0.8 4.3 2.5 0.8 1.1 57.2

2004

PPA projections 2005 2006

2007

3.5 5.5 3.5 3.9 14.9 11.0 -0.1 4.3 2.5 0.8 1.1 58.1

4.0 4.5 3.6 3.7 15.2 11.5 -0.5 4.3 2.5 0.8 1.1 55.0

5.0 4.0 3.9 2.7 15.8 13.1 -1.9 4.3 2.5 0.8 1.1 48.2

4.5 4.0 3.8 3.4 15.5 12.2 -1.3 4.3 2.5 0.8 1.1 51.9

Source: PPA (2003) Estimated based on Central Bank survey (2004) Data as of December 2003

1.64

Growth. The plan assumes that GDP will grow during the 2004-2007 period in increments until it reaches an annual rate of 5% for 2007, led by investment and exports. It also assumes that there will be a gradual recovery of private consumption, prompted not only by the increase in income, but also by the constraints on government current expenditure.

1.65

Stability. The plan assumes that inflation will gradually decline to an annual rate of 4% in 2007.

1.66

Balance of payments. The projections call for an increase in trade liberalization, with positive but declining trade balances and consequently moderate deficits in the current account on balance of payments.

1.67

Fiscal balance. The plan assumes that the primary surpluses in the public sector will be compatible with a reduction in the consolidated public sector short-term debt below 50% of GDP in 2007. In addition, it projects increases in central government resources in absolute terms, but a slight reduction in them as a percentage of GDP (although still above 23%). Furthermore, it calls for a gradual increase in social spending and in infrastructure spending by the government, in both absolute terms and as a percentage of GDP

1.68

Sustainability of growth. The plan assumes that investments will increase (from 19.3% of GDP to 21.2% of GDP in 2007) and the domestic savings rate will be maintained.

- 15 -

2. Comparative economic scenarios for 2004-2007

1.69

According to a survey of the main market analysts conducted by the Central Bank, expectations in early January 2004 did not differ greatly from the government forecast, as set forth in the Multiyear Plan, or from those included in the December 2003 agreement with the IMF (Table 4).

Table 4 – Prospects for 2004 2003 Growth (%) Inflation (% change, Dec.-Dec.) Nominal exchange rate (year-end) Current account (% of GDP) Primary surplus (% of GDP)

-0.1 9.3 2.9 0.8 4.3

2004 Forecast Government IMF 3.5 3.5 5.5 5.5 3.5 n.a.

-0.1 -0.9 4.3 n.a.

Market 3.6 6.0 3.1 n.a.

4.3

Source: PPA, Central Bank, and IMF n/a: not available Data as of December 2003

1.70

The growth rate is expected to increase in 2004 and 2005 and, with a little more pessimism on the part of the private sector, inflation is expected to decrease. The government’s primary surplus goals are expected to be met, and the external sector should be stable.

1.71

There is thus a consensus now in Brazil that growth will gradually return in a context of greater stability in prices and exchange rate.

1.72

In subsequent years, there is still some doubt as to whether with the current allocation of resources the potential GDP of Brazil can grow at the rates projected in the Multiyear Plan for 2007 (5%) or lower rates (such as the 4% projected by the World Bank for that year31).

1.73

In any event, there is a consensus that in order to grow at more than moderate rates, Brazil needs to implement additional reforms of such a magnitude and enjoy an international situation so favorable that the scenario seems unlikely.

31

World Bank (2003).

- 16 -

II. DEVELOPMENT CHALLENGES AND OBJECTIVES OF THE STRATEGY FOR

2004-2007 2.1

In accordance with the above analysis, the main challenges to be met during the strategy period were identified, as described below.

A.

Challenges for growth

2.2

Over the past two decades, Brazil has suffered from low, volatile growth rates, along with extreme instability in other key macroeconomic variables such as prices, the exchange rate, and interest rates. It also faces the challenge of achieving sustainable growth without exhausting its abundant natural resources. To do so, it must achieve the following objectives: 1. Increase the per capita GDP growth rate

2.3

Brazil must accelerate the convergence of its average per capita income with that of developed countries. To achieve this objective, Brazil needs to: •

Increase the capital accumulation rate, to which end the following six main initiatives must be taken: a. Promote public savings as a means of increasing domestic savings. b. Develop an even more secure and more efficient financial system that will help increase overall savings levels and transform them into higher levels of domestic investment. c. Establish an enabling tax framework32 that respects investor rights to property and income.

32

Varsano (2003) mentions the following among the main problems in the current tax system: (1) high evasion; (2) fiscal wars between states; (3) undue pressure on payroll; (4) overburdening of business and relatively low burdens on individuals; (5) complexity; (6) cumulative taxes; and (7) tax problems between states.

- 17 -

d. Deepen trade liberalization to reduce the price of capital goods, in order to promote technological modernization in the country.33 e. Continue the financial system reforms undertaken in order to reduce intermediation costs and lower risk ratings for interest rates (which keep borrowing rates and spreads high), reducing the cost and increasing the use of credit. f. Organize government finances so that sufficient resources are available to increase government investment in infrastructure, in projects with a positive net present value assessed in social terms. Public investment levels have been cut for legitimate fiscal reasons in recent years, but the decline has been so steep that if it were sustained for too much longer it would have an adverse impact on growth in Brazil and the competitiveness of its economy. •

Increase total factor productivity by taking the following 10 measures: a. Promote market competition as the primary mechanism for resource allocation. b. Improve operation of the regulatory frameworks for public services, promoting the enforcement of clear, transparent rules that respect acquired rights and the independence of the regulatory agencies for those services. c. Increase efficiency in the provision and operation of infrastructure, by continuing the privatization process and implementing public-private partnerships (PPPs).

33

Although Brazil has made major progress in opening up its economy, it could still greatly improve efficiency if it stays the course (see Mauricio Mesquita (2003)). On the export side, Brazil has made considerable progress in the use of export financing facilities (BNDES-EXIM and PROEX) and in coordinating the various agencies involved (Chamber of Foreign Trade) and has made more efficient use of export promotion systems for small and medium-sized enterprises (APEX). However, there are still major domestic constraints for SMEs, the main ones including: high volatility in the real exchange rate; anti-exporter bias and a complex tax system; high interest rates and lack of credit; the high cost of importable inputs; and major deficiencies in infrastructure.

- 18 -

d. Deepen integration and liberalization of the Brazilian economy.34 35 e. Support technological innovation and its adoption in production, transportation, and marketing processes. f. Reaffirm an enabling business climate by ensuring legal security, fighting corruption, and reducing the red tape that hinders private initiative. g. Improve access for business, especially SMEs, to public or semipublic goods that are critical to increase their productivity and international market penetration (such as international certification of technical and health standards or key information on foreign markets). h. Improve effectiveness and efficiency in the use of public funds for business development by enhancing coordination between agencies and between the various levels of government, and more effectively involving the private sector in the design and use of instruments. i. Reduce the distortions in the allocation of resources caused by the tax system. j. Promote formalization of the labor market in order to increase workforce productivity. •

Increase the rate of human capital formation, to which end the following four steps should be taken, among other activities: a. Increase the efficiency and targeting of government social programs in order to improve the education and health of the workforce. b. Support job training programs that have strong externalities and can therefore best be provided in smaller quantities by the private sector. c. Support the work of organizations whose purpose is to generate and disseminate knowledge that can have a general impact on the economy.

34

Special attention should be paid to Brazil’s participation in the Initiative for Integration of Regional Infrastructure in South America (IIRSA), considering that the country shares borders with nine of the 11 countries in South America and that the more progress is made in physical integration, the more intraregional trade will grow and the economies will enjoy mutually complementary growth.

35

Increased liberalization will not only improve the efficiency and levels of growth, it will also improve income distribution, as noted by various academics, by expanding more labor-intensive production of goods. It will also help reduce macroeconomic volatility, making the country less vulnerable to sudden stops.

- 19 -

d. Increase formal employment in the workforce, since it is a crucial factor in worker productivity and consequently in the rate of human capital formation.

2. Ensure sustainable growth over time without any sudden fluctuations causing unstable macroeconomic conditions

2.4

To this end, in the context of great external volatility, Brazil has opted for a strategy supported by three main pillars: (a) a floating exchange rate, in order to accommodate external shocks; (b) goals for the consolidated primary surplus as an instrument to limit the increase in its debt; and (c) a monetary policy with inflation “targets.�

2.5

In addition, Brazil has implemented a borrowing policy designed to improve the debt structure so that it is less vulnerable to external shocks. Accordingly, through the Central Bank, Brazil is promoting a significant increase in its international reserves. This approach was strengthened by policies to make the financial system more resistant.

2.6

It is important that the Government of Brazil continue these efforts. The social security reform is a far-reaching reform to balance finances at all three levels of government. It will reduce the social security deficit (which is now the equivalent of 5.5% of GDP) by 10% over the next 20 years. New initiatives will no doubt be necessary to gradually achieve a balance in the needs for financing for the consolidated public sector, although major steps have already been taken, such as enactment of the Fiscal Responsibility Act in May 2000.

2.7

In the financial sector, the set of reforms to improve efficiency needs to continue, including enactment of the Bankruptcy Law reform, which has been partially approved by Congress, and the program for privatization of public banks currently under way. Lastly, legislation granting autonomy to the Central Bank will help Brazil strengthen the inflation target system by giving it more credibility and therefore greater control over inflation and expectations.

2.8

In order to reduce the country’s vulnerability to external shocks, it is vital that Brazil maintain the debt management and reserve policy it has been implementing.

In particular, as it did in 2003 and 2004, Brazil should continue to reduce the proportion of its foreign currency-denominated debt issued at a floating rate and indexed to the exchange rate, which makes it vulnerable to shifts in investor confidence. Furthermore, a higher level of reserves would signal investors that they can feel more secure about investing in assets in Brazil.36

36

In early 2004, the Central Bank assigned priority to this objective, and has since accrued a considerable amount of international reserves.

- 20 -

3. Ensure that growth is achieved with proper management of natural resources

2.9

Growth often involves a great increase in pollution, environmental degradation, and overexploitation of natural resources. Brazil has the greatest biodiversity on earth, with 40% of the tropical rainforest and 20% of water reserves in the world. It is therefore crucial that growth be achieved with conservation of those resources.

2.10

Water resource management means addressing two key problems: (i) a severe water shortage in regions such as the Northeast affects their development and the quality of life of their rural populations; and (ii) increasing pollution of rives and other bodies of water close to cities are causing health problems and a low quality of life, especially for low-income groups. Addressing these issues will be a serious challenge for Brazil in the coming years. Moreover, there is a considerable deficit in sewerage and wastewater treatment in urban areas and the situation in rural areas is even more critical.

B.

Social challenges

2.11

As noted above, Brazil has a high degree of income inequality, which has remained quite constant over a prolonged period of time. It also has a high extreme poverty rate and a considerable malnutrition rate.

1. Reduce poverty

2.12

In the 1990s, Brazil successfully met the challenge of reducing poverty, especially extreme poverty and hunger, but much remains to be done. It is important to bear in mind that in order to make new progress in this area (and for it to be sustainable), it should be possible to: (a) increase the volume of resources transferred by the government to poor families; and (b) more importantly in the medium and long terms, increase the income generation capacity of those families on a permanent basis.

2.13

Increasing transfers to the poor can be achieved by making effective use of resources earmarked for social programs through improved efficiency in the use of the resources, better targeting, and greater effectiveness. Increased efficiency means that fewer resources are spent on administration and other expenses not related to the beneficiaries; better targeting means only provided benefits to those people who really need them; and increasing effectiveness means that program design and implementation are tailored to the problems being addressed.

2.14

In the recent past, Brazil has carried out a set of income transfer programs that have been successful in sustaining the most vulnerable groups (youth and children, the elderly, inhabitants of rural areas, etc.). However, it is crucial that progress continue to be made in this direction. Unified, conditional income transfer program that are better managed can have a positive impact on such groups. A key case is the Bolsa

- 21 -

FamĂ­lia initiative, a unified program for conditional transfers that the current administration has been actively promoting.

2.15

Social security reforms also have a major impact on some of these segments, since social security currently accounts for 56% of social spending, but 51% of social security benefits are concentrated in the wealthiest 20% of the population, with only 7% reaching the poorest quintile. By contrast, transfer programs specifically targeting poor families represent only 5% of social spending.

2.16

Increasing the income generation capacity of poor families will help make sustainable progress in the fight against poverty. Here efforts should be geared towards increasing the quality of the workforce (in terms of education and health), of jobs, and in the link between labor supply and demand. Reforms, such as the tax and labor reforms, are key The challenge of urban poverty and IDB activities factors in this strategy. The centerpiece of the strategy is to formalize a major part of the In Brazil, absolute and extreme poverty have traditionally been more acute in rural areas, where the rates are currently labor market that currently 56% and 27% of the population, respectively. Certain parts operates informally.

In of the country are disproportionately affected, especially the addition, by reducing labor Northeast, where the respective rates are 56 and 28%. costs and enacting more flexible legislation, economic However, although rural poverty has declined in recent years, urban poverty, particularly in big cities in the growth could generate more, Southeast, has increased as a result of the slowdown in better quality jobs. growth and the resulting unemployment following the

2.17

However, given the recognized link between education and income, a core activity is to continue efforts to increase human capital in Brazil.

Beyond the progress already achieved in basic education, further progress needs to be made in secondary education and in the quality of education.

2.18

The latest household surveys show that during the last period, poverty increased mainly among young people in urban and the large industrial areas of the Southeast, which have been seriously affected by the repeated downturns in the

economic crisis in 1997-1998.

Because of the high population density in urban areas, with poverty rates close to 30%, 73% of poor people live in those areas. The growing weight of marginal groups in the outskirts of large cities represents a huge challenge, in terms of both providing social services and public services and the controlling violence and insecurity, which affect the quality of life and the investment climate in big cities.

Through its ongoing urban programs, the Bank has been a leader in investment programs in metropolitan areas. Its experience with city governments includes both social investment programs with major components for sanitation and basic infrastructure and, more recently, comprehensive poverty reduction programs that include activities in several sectors, strengthening models for integrated management of social problems. This type of program has enormous potential to address the problems of cities, and has great strategic value as it contributes to developing successful models for management of public policies that link different government agencies and levels of government in the same geographic area, thereby enhancing their impact and improving efficiency in the use of resources.

- 22 -

economy since the late 1990s. This increase in poverty, caused by higher unemployment and lower average income, has led to security problems, violence, and juvenile delinquency in those areas that need to be addressed if sustainable progress is to be made in the fight against poverty. A comprehensive approach to poverty should thus be taken, with efficient linkage in the activities carried out at the different levels of government, in the major cities in which this phenomenon is growing.

2. Improve equality and inclusion

2.19

The challenge to achieve greater equality and social inclusion involves a number of dimensions in Brazil. One is regional disparities, but equally important are gender, racial, rural and urban inequalities. A key element to address these problems is ensuring growth driven by the private sector in an investor-friendly environment.

2.20

However, even if such an environment were achieved, it would not be sufficient.

The policy on transfers and public spending has a central part to play in providing access to goods and services for all segments of the population, especially in education and health, that will ensure more equitable income on a permanent basis. Recent studies have shown that almost three fourths (72%) of the gap in family wage earnings is due to the interaction of differences in education and factors of segmentation and discrimination that operate through the labor market.

Among these factors, differences in education levels and the respective wage differentials account for over half of income disparities (52%). Regional disparities and the gap between the formal and informal sectors explain another third; the gap in years of experience in the workforce explain another 6%; and the rest is due to racial discrimination (another 6% of wage disparities), once adjusted for educational differences, years of experience, and differences in productivity between sectors and regions.

2.21

The policy implications are clear, and stress the predominant role that education policies37 must play as the main policy tool to reduce income disparities in the medium and long terms and promote mobility and social inclusion among disadvantaged groups.

37

In the past 10 years, Brazil has made considerable progress in basic education coverage and pass rates, improved education funding systems, and expanded coverage of the Bolsa Escola program, a major instrument to reduce poverty that strengthens investment in the human capital of the poor. The country has achieved universal primary education but is still far from universal attainment of basic education (only two out of three students complete eighth grade), which represents a major obstacle to expansion and equity in middle school education, enrollment in which is increasing by half a million students a year.

- 23 -

2.22

It is also clear that the weight of economic factors, including infrastructure, is decisive in the disparities in productivity between regions and between sectors.

Moreover, policies and programs specifically designed to reduce social exclusion linked to racial or ethnic background—which alone have as much impact as job experience in the work force—play an important part as well.

2.23

Tax policy also has a part to play. In Brazil the tax system is highly regressive,38 given the preponderance of indirect taxes. In this case, however, the prospective shift to a system with a higher proportion of taxes on income and property is limited by the need for economic growth and competitiveness.

C.

Institutional challenges 1. Increase participation, transparency, and social oversight

2.24

The new Multiyear Plan places unprecedented emphasis on citizen participation in and democratic decision-making. The new administration plans to meet the challenges of increasing participation, transparency, and social oversight in government decision-making. The Multiyear Plan also heavily stresses strengthening citizenship, respect for diversity, and the protection of individual rights, both property rights and human rights.

2.25

These efforts should continue, expanding to the state and municipal levels, where participation could still be increased and oversight systems improved. At these levels, participation should not just be limited to oversight but should include formulating major government lines of action and planning activities to achieve those purposes (democratic decision-making), areas the federal government has been actively promoting.

2. Modernize the State and strengthen institutions

2.26

Brazil also still needs to continue major reforms designed to meet the challenge of achieving modernization of the State, with special emphasis on institutional strengthening at all three levels of government. In the 1990s, Brazil established and then consolidated a large number of institutional reforms in such diverse areas as taxation, spending, monetary regulation, public services, and competitiveness.

2.27

The new government has lent continuity to a large number of the reforms, especially macroeconomic reforms, but new initiatives will be necessary to consolidate the gains.

2.28

In the area of fiscal reform, the government needs to continue increasing efficiency, not only in tax design, but also in tax management, where major progress has been

38

Affonso, J. R. et al. (2004)

- 24 -

made. In terms of spending, it must continue to improve public policy management, monitoring, oversight, and evaluation.

2.29

With regard to regulatory agencies and frameworks, the agencies need strengthening of their autonomy, stability, and technical capacity. It is also important to avoid any reversals in the regulatory frameworks that could have an adverse impact on investment and quality in the services provided or regulated by the government.

2.30

In addition, there is another major area for development outside the Executive, in which improved institutional operation will ensure higher quality in legislation and more equitable access for all citizens to the Judiciary, the branch of government that interprets the legislation. Likewise, significant improvements in the operation of various markets, such as the financial and labor markets, also depend on more effective operation of the Judiciary.

D.

Objectives

2.31

Meeting the challenges described in the section above will help achieve the following three general objectives, which will guide Bank activities during the period from 2004 to 2007: •

Promote sustainable growth, with stability and environmental sustainability.

•

Reduce poverty, promote social inclusion, and enhance social and regional equity.

•

Support institutional strengthening and promote democracy and participation.

2.32

These objectives are consistent with the mandates of the Eighth Replenishment and the Bank’s Institutional Strategy, which established two overarching objectives for the Bank: (1) sustainable economic growth, and (2) poverty reduction and enhanced social equity.

2.33

However, based on the Multiyear Plan, the Bank objectives also include promoting democracy and citizen participation, with an emphasis on institutional strengthening, an area in which Brazil has made significant progress in the recent past that should be deepened.

2.34

The social objective reflects the concern expressed by the government about reducing several types of social inequalities, including regional disparities.

2.35

Lastly, the objectives highlight the need for growth to be both environmentally sustainable and sustainable over time, as well as subject to less volatility than historical trends, particularly in the past two decades.

- 25 -

2.36

These objectives have a corollary in a series of quantitative targets that both the country and the Millennium Goals initiative have established as a guide for the development process. Table 5 shows a series of indicators (with their respective baselines) that refer to these targets, organized by objective.

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Table 5. Representative indicators of long-term development challenges PPA goals/IDB MDG 2015* strategy 2007 Objective 1: PROMOTE SUSTAINABLE GROWTH, WITH STABILITY AND ENVIRONMENTAL SUSTAINABILITY GDP growth rate 1.5% From 3.5% in 2004 to 5% in 2007, with a cumulative18.1% Higher per capita over the period growth rate Key results for Investment as a percentage of GDP 18.5% 21.2% achieving the Exports plus imports as a percentage 24.0% 35.0% MDGs of GDP Increase in the supply of public bank 10.6 17.7 credit for microenterprises and small businesses (billions of reais/year) Participation of SMEs in exports 10% 20% Electricity generation capacity 84654 (03) 98739 (thermoelectric and hydroelectric plants and wind energy, in MW) Stable and Inflation rate 8% 4% sustainable growth Public debt as a percentage of GDP 57.0% 48.2% over time Consolidated public-sector primary 3.9% 4.3% surplus as a percentage of GDP Ensure that Increase in forested area under proper 350000 (03) 700000 economic growth use (has/year) involves proper (MDG 7) Reduction of areas with outbreaks of 230000 (03) 200000 natural resource fire (has/year) management Objective 2: REDUCE POVERTY, PROMOTE SOCIAL INCLUSION, AND ENHANCE SOCIAL AND REGIONAL EQUITY Families covered by the rent transfer 3.6 (03) 12.7 program (in millions) Percentage of people in extreme 15% All poor people 11% (MDG 1) Poverty reduction receiving transfers poverty Percentage of children attending 97% 100% 100% (MDG primary school 2) Population without access to potable 22% Reduction of 1.1 12% (MDG 7) water percentage points in urban areas Percentage of population without 31% (03) 49.1% (03) to 42.1% 20% (MDG 7) in urban effluent removal communities Municipalities with solid waste 29% (03) 43% treatment Infant mortality (per 1,000 births) 27 (03) 24 16 (MDG 4) Maternal mortality (per 100,000) 56 (99) Reduction 30 (MDG 5) Greater equality Availability of essential medications 51% (03) 80.0% and social inclusion Rate of population covered by family 31.9% (03) 70.0% health teams Percentage of children attending 36.0% 45.0% secondary school Challenge

Indicator

2002

- 27 -

PPA goals/IDB MDG 2015* strategy 2007 Families in rural areas with electricity 78% (01) 100% Objective 3: SUPPORT INSTITUTIONAL STRENGTHENING AND PROMOTE DEMOCRACY AND PARTICIPATION Greater Government effectiveness ratios 50 Below 50 participation, transparency, and Key results for control by society achieving the MDGs Modernization of Ratio of personnel expenditures to Smaller number of states above 0.6 the State and liquid assets of the states institutional Ratio of debt to liquid assets of the Smaller number of states above 2 strengthening at states three levels of government Source: IDB based on MDGs, PPA, and World Bank *Progress towards MDG 8 is of particular importance, since it tends to generate an international economic climate that favors poverty reduction, which depends to a large extent on better trade and financial policies in industrialized countries.

Challenge

Indicator

2002

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III. REVIEW OF PREVIOUS STRATEGIES AND THE ACTIVE PORTFOLIO

3.1

Despite the difficult circumstances Brazil has had to cope with in recent years, it was able to institute significant changes (including a successful transition to an opposition party President) and major reforms. This dynamic scenario meant that the Bank had to work very closely with Brazil during that time.

3.2

The previous two country strategies, approved in 1996 and 2000, were formulated when the country had very different circumstances to address. At the time of the first one, Brazil was still in search of greater stability after the Real Plan was launched, and was still posting high growth rates. When the second one was drawn up, the environment had become much more adverse, and Brazil needed to deepen a set of reforms in a scenario in which capital flight from emerging economies had soared, demand for regional products was declining, and government social programs needed improved effectiveness in order not to reverse the progress achieved, particularly in the previous five years, in the fight against absolute and extreme poverty. Both strategies were closely connected to the national multiyear development plans formulated by the government, which already reflected these different situations.

3.3

The two strategies led to approval of 70 loans totaling US$13 billion, including two emergency loans in 1999 and 16 private sector operations. Under its lending program, the Bank supported a broad range of investments in social programs and infrastructure, helped the country weather the crisis after 1998, and contributed to strengthening the role of the private sector as the engine for development.

3.4

To review Bank activities in Brazil over the past few years, in addition to a series of specific analytical and sector studies, three studies were conducted on the following topics: (a) the implicit strategies implemented by the Bank;39 (b) lessons learned from Bank activities;40 and (c) portfolio execution, for the first time covering a multiyear period (1999-2002).41 Below is a discussion of the previous two country strategies (approved in 1996 and 2000), emphasizing the strategic focus developed during the two periods, and the active portfolio as of early 2004. The discussion highlights areas of continuity in the Bank’s action, the targeting processes followed, and in particular the flexible approach adopted to adjust the strategic focus according to the experience accrued, and taking into account the changes in the country situation.

39

Averbug, M. (2003).

40

Trigo, J. (2003).

41

Dominguez, F. (2003).

- 29 -

A.

Country strategy for 1996-1999

3.5

In the 1996 strategy (country paper for 1996-1999), the Bank established three priority areas of activity consistent with the government’s “Brazil in Action” Multiyear Plan: (1) reform of the State; (2) reduction of the “Brazil cost”; and (3) meeting social needs and poverty reduction.

3.6

The strategy helped the Government of Brazil address some of the main development challenges at the time. Brazil needed to continue its public sector reform, especially to extend some of the progress achieved at the federal government level to the state level (reform of the State). In addition, it had to consolidate gains in competitiveness so that the stabilization strategy adopted could be maintained and growth increased (the “Brazil cost”), in the context of a rigid exchange regime. Third, a more ambitious, effective agenda for its fiscal policy would make it possible to continue the progress verified through a set of social indicators (social needs and poverty reduction).

3.7

The subsequent country strategy42 noted that Bank activity during the period 19961999 had made a significant effective contribution to improved competitiveness (as well as to regional integration), had had a positive impact on the social sectors (particularly urban problems), and had continued to strengthen progress in modernization of the State. It had also had a major impact on environmental issues.

3.8

These areas had emerged as priorities in the government analysis and had also been identified as such by the Bank. Bank activities accordingly focused on the sectors and issues in which the Bank enjoyed comparative advantages that would enhance its impact on them.

3.9

During the period in question, and subsequently, the Bank carried out a significant lending program that included 30 operations totaling US$9 billion, of which US$3.4 billion was for the two emergency loans in 1999. In addition, the first seven private-sector loans were approved, for a total of US$292 million, paving the way important Bank action in this area in Brazil.

3.10

In the area of modernization of the State, support was provided for reform and modernization of the tax collection and administration systems, including a first operation coordinated by the federal and state governments. It launched what has now been consolidated as a Bank line of activities with projects building on the experience accrued and the facilities developed, expanding its reach to the municipal level and broadening its areas of activity to administration. These operations were successful and were recognized as having had a significant direct

42

IDB (2000).

- 30 -

impact on tax collection. They are considered important factoring in supplying Brazil with the resources it needs to achieve greater levels of stability and provide more comprehensive public goods more effectively.

3.11

In terms of reducing the “Brazil cost,” the Bank consolidated its presence in the highway infrastructure, with a significant impact on highway management, promoting decentralization and greater private-sector participation. Along with the private sector, the Bank also participated in the construction of electric power and gas infrastructure, integrating various regions of Brazil and integrating the country with its neighbors. In addition, the Bank provided medium-term financing to small and medium-sized enterprises through lines of credit channeled through commercial banks, at a time when the crisis made it difficult for SMEs to access financing elsewhere.

3.12

In the area of social programs, funding was provided to improve low-income neighborhoods and to address the problems of substandard housing and unplanned development in large cities in Brazil, and to support reforms in education and the health care system.

3.13

Moreover, during the period the Bank supported programs for environmental management and ecotourism, and plans for environmental recovery of bodies of water were implemented. Assistance was provided for microenterprises through credit and technical support, and pioneering programs were carried out targeting children and young people in marginal urban areas.

3.14

At the end of the period (1999), during the financial crisis, the Bank contributed to the effort by international organizations and other countries by approving two largescale operations under the emergency lending program, for a total of US$3.4 billion, designed to protect social spending and provide credit to small businesses during the crisis.43

B.

Country Strategy for 2000-2003

3.15

In the strategy approved in July 2000, formulated in accordance with the Avança Brasil Multiyear Plan for the period 2000-2003, the Bank ratified its focus on the three priority areas in which it had been working, emphasizing some of them and adding a fourth area, the environment. The strategy also highlighted regional integration, which, along with the environment, had been gradually becoming a priority in the Bank’s activities.

3.16

The priority areas of activity for the 2000-2003 strategy were articulated as: (1) reform and modernization of the State; (2) reduction of social inequalities

43

The two programs were the reform and social protection program (US$2.2 billion) and the global credit program (US$1.2 billion).

- 31 -

and poverty; (3) competitiveness, access to international markets for Brazilian production, and reduction of the “Brazil cost�; and (4) addressing the problems of environmental management and protection of natural resources.

3.17

At the time, Brazil was using a new macroeconomic strategy to overcome the crisis of January 1999. The Bank strategy called for activities to strengthen and consolidate the economic progress made by the country and prevent the difficult economic environment from reversing the progress made in social development.

3.18

During the period 2000-2003, 24 loans were approved for a total of US$3.3 billion, along with nine private sector loans totaling US$432 million. Annual approvals were expected to remain between US$1 billion and US$1.5 billion, for a total of US$4 billion to US$6 billion for the period. Ultimately, however, they stayed at the lower end of the projections, due to the impact of the recent emergency loans and the increasingly strict spending cuts made by the government.

3.19

For reform and modernization of the State, priority was assigned to extending support for efforts to modernize fiscal management to the three levels of government, initiating activities at the municipal level for modernization of the social security system, and modernization of administrative management and external oversight of the public sector.

3.20

For reduction of social inequality and poverty, priority was assigned to reforms in education, health, and municipal and urban development (with a focus on low-cost housing and water supply and sanitation services). The areas identified for support were those that would contribute to strengthening the social security network to alleviate poverty and efforts to improve the impact of government social spending on vulnerable groups. A US$500 million sector loan addressing those issues was approved in 2001.

3.21

In the area of competitiveness and modernization, the Bank continued to support the country’s efforts to strengthen infrastructure (transportation and energy), enhance the financial system, support micro, small and medium-sized enterprises, promote technology development, develop tourism, support competitiveness in agriculture, and improve the regulatory frameworks. As in the previous period, Bank activity in this strategic area was reinforced by MIF financing, especially through the private sector window.

3.22

Lastly, in environmental management and natural resources, in addition to the above-mentioned areas of urban sanitation (water supply, sanitation, wastewater treatment systems, and solid waste disposal) and the environmental impact of productive activities, programs were included for sustainable development of environmentally vulnerable areas (Pantanal, Amazon, and the Zona da Mata region in Pernambuco).

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C.

Evolution of the focus

3.23

During the period covered by the previous two strategies, the Bank had to adjust its strategic focus on more than one occasion in order to maintain its relevance in the country and maximize its contribution. As discussed above, this required ongoing adjustments in the selection of areas of activity and facilities.

3.24

Special mention should be made of replicating innovative experiences. The best way to extend such projects that were suitable for replication and specifically requested had to be devised. This was the case, for example, for the first successful projects for neighborhood improvement and tax reform. The greatest challenge here was to determine how to take a project that had been successful in a given state or municipality and replicate it in a substantial number of others at the same time or in rapid succession, or to take a successful federal project and expand it to the subnational level, while recognizing that a simple, individualized focus for each subnational unit was impossible.

3.25

To this end, the Bank expanded its action through larger-scale operations with the federal government (and in certain cases with development banks) that would onlend (or channel grants) to the subnational agencies, thereby expanding coverage.

This approach was used for the large-scale social programs approved after 1996 for education, health, sanitation, and housing, and for the state-level operations for modernization of the State.

3.26

After 1999, new legislation and policies—particularly the Fiscal Responsibility Act and the decision to maintain primary surpluses—required a new approach on the part of the Bank. Its focus shifted to subnational agencies capable of contracting new loans, and the scope of its projects with the federal government became smaller, including very small-scale, innovative projects, focusing on high-priority areas and operations linked to protected budgets (social sectors).

3.27

The ongoing process of selecting areas of activity and types of operations tailored the current reality was reflected in 2004 in the development of appropriate mechanisms for the core tasks of identifying working issues (to which end a new review had to be conducted by the Bank), formulating pilot projects (expanding successful innovation loans), and designing means of expanding and replicating successful experiences (replacing the currently limited federal intermediation system), in the context of persistent fiscal constraints.

D.

Active portfolio

3.28

The active portfolio in Brazil includes 51 operations with the public sector for a total of US$8.5 billion, with an undisbursed balance of US$3.9 billion. In addition, there are 16 private-sector operations for US$724.5 million, 35 technical-

- 33 -

cooperation projects for US$19.7 million, 21 MIF operations for US$28.8 million, and three Social Entrepreneurship Program projects for US$1.2 million.

3.29

The portfolio is noteworthy for its size, variety, and complexity, in particular: (i) the large number of projects (51 loans); (ii) the size of the loans (averaging US$168 million); (iii) the variety of borrowers and executing agencies (federal government, legislature, state governments, municipal governments, State-owned enterprises and banks, judiciary bodies, and private enterprises); and (iv) the wide geographic range of the projects throughout this vast country.

3.30

The portfolio reflects the cumulative effect of the targeting under the last two strategies. It is concentrated in the social sectors (21 operations) and competitiveness (15 operations), which account for 32.7% and 38.6% of the total loan amounts, respectively. Geographically, the operations that can be associated with specific regions of the country are concentrated in the Southeast (22.1% of the total amount) and the Northeast (17.3%). An analysis of the various borrowers shows that subnational agencies accounted for 41.2% of the portfolio amount and another 18.1% was channeled to states and municipalities through the federal government and development banks.

Borrower/Area of activity

In recent years, the Bank’s work has shown some degree of specialization by area of activity, and within each area, by specific issues. However, it has also led to the development of special capacities for work with a certain type of borrower, and as a result, certain combinations of area of activity and borrower that have been particularly fruitful. Examples include working with the private sector on energy and transportation, with development banks for small and medium-sized enterprises, and with state and municipalities on urban problems.

The Bank will make optimal use of the comparative advantages it has developed and draw lessons learned from its experience with a view to devising and consolidating similar combinations (dual specialization in both areas of activity and operations). To expand on this approach, account has been taken of the variety of ecosystems and degrees of development in the various regions of Brazil, to identify priority areas of activity and the preferred type of borrower for each one. Thus, ratifying the trends and specializations identified during the period from 1994 to 2000, the Bank has assigned priority to activities for: sustainable development with local governments in the northern Amazon region; enhanced competitiveness targeting small enterprise, with development banks in the Northeast; municipal urban development with municipalities in the eastern central region; and other such combinations.

3.31

In recent years, there has been more international instability, with serious repercussions on the Brazilian economy and consequently on the Bank’s relations with Brazil. The situation also had a major impact on how the current strategy was implemented. This period has demanded a considerable effort on the part of the Bank and the government to maintain the good levels of portfolio execution that had been achieved. To this end, the Bank and the Office of International Affairs increased project monitoring activities and the number of corrective measures.

- 34 -

3.32

Thanks to these activities, the portfolio execution level continued to be good, although a new type of operation arose “with execution problems” that were not due to technical aspects of project design or implementation, but to the limitation on authorizations for spending. This development affected larger-scale federal operations approved before 1999 in particular.

3.33

The prospect of this situation continuing in the immediate future led the Bank and the government to conduct a special review of operations for which the federal government is responsible, which were hardest hit by the budgetary constraints. In some cases, the project sizing or content was adjusted accordingly.44

E.

Lessons learned

3.34

Based on the analysis of recent strategies and portfolio execution, certain lessons learned can be drawn to guide future activities, in terms of both strategy formulation and project design and portfolio management. a. Strategy formulation

44

•

Formulating the 1996 and 2000 strategies in harmony with the national multiyear plans for development ensured a strong sense of strategy ownership on the part of the country. Similarly, with respect to specific operations, financing major government projects also had a positive impact.

•

Since Brazil is a country that carries out detailed medium-term planning, and in which potential demand for Bank services far exceeds the ability to meet it, an effort needs to be made to target Bank activities. The “strategic areas of activity” thus need to be more specifically identified, beyond general issues (competitiveness, poverty reduction, and reform of the State). This would also help improve the evaluability of the Bank contribution.

•

Analytical work should be expanded and deepened for formulation of the overall strategy, the particular strategies for sectors, issues, and regions, and for project design, assigning special priority to poverty issues and the social welfare needs of vulnerable groups.

•

With a sustained presence in certain thematic areas, such as urban development and tax administration, the Bank has been able to carry out

The annual portfolio review mission in 2003 focused on this issue. In reviewing foreseeable limitations on spending (based on the draft national budget and the preliminary parameters of the Multiyear Plan), in conjunction with any gains from exchange rate fluctuations (which affect the older operations in the federal portfolio), potential adjustments in about 10 operations were identified.

- 35 -

sequences of operations that are part of project clusters, in which proper application of lessons learned has maximized their overall development impact. Additional analysis would enhance their evaluability and maximize their potential replicability.

•

The structural reforms in Brazil are gradually maturing and gaining acceptance in political circles and among the general public. In designing the strategy and its programs and projects, the Bank must take full account of the social and political environment and political timing (national, state, and municipal elections).

•

Bank action is important as a catalyst and disseminator of public policy, helping the authorities in its implementation.

•

Despite the major progress achieved in the social sectors, Brazil still has high levels of social inequity. Spending on social equity, especially subsidies, should be targeted from many directions, in order to ensure that it reaches the poorest segments of the population.

•

Progress has been made in health, universal primary education, and increased enrollment in middle school and vocation education, but the quality of social services still needs to improve. The social strategy should focus on projects designed to improve the quality and efficiency of social spending by implementing impact evaluation systems. b. Project design and portfolio management

•

In recent years, project design has improved in terms of monitoring and evaluation of the expected development impact of the projects, with more explicit objectives and better-defined components. This effort must be redoubled and expanded, to the extent possible, to Bank programs and strategies. In particular, ways of helping the country develop its own capacity in this area at the various levels of government should be devised.

•

Complementarity can be generated with significant results in terms of efficiency and impact by grouping activities at different levels around a core issue, region, or specific executing agency. This is the case for projects carried out at the national level that could be implemented at the state and municipal levels as well, and for activities in various sectors integrated into plans of activity at the level of a particular region or borrower.

•

The Bank strategy with Brazil to work more closely with civil society is considered good and is having a positive impact. Civil society must actively participate in projects, especially those involving expropriation and family resettlement. An effort should also be made to ensure that the necessary

- 36 -

agreements on policy and social measures have been reached before a project is initiated.

•

Greater efforts should also be made in the areas of social management, oversight of resources, transparency, and participation by civil society. In particular, social projects should be carried out directly with municipalities or states, which are closer to civil society, citizens, and communities.

•

In the social sectors, there is a series of programs carried out by various levels of government (federal, state, and municipal), whose roles tend to overlap and duplicate each other’s. Bank activities should be careful to specify the role of each level and ensure linkage between them.

•

Considering that certain infrastructure projects have had problems with sustainability and maintenance, special attention should be paid in the design of such projects to ensuring that the legal framework and administrator capacity are in place to ensure payment for the services.

- 37 -

IV. THE BANK STRATEGY FOR 2004-2007 A.

The objectives and priority areas of Bank activity

4.1

Given the decisive factors described above (the development challenges for the country, the Multiyear Plan prepared by the new administration and approved by the legislature, the objectives established under this country strategy, and the analysis and evaluation of previous Bank activities in Brazil, conducted both by Management and by OVE), Bank activity in Brazil for the period 2004-2007 has been designed for the following purposes: respond to the priorities set by the country, identifying the components of the Multiyear Plan most appropriate for the Bank’s capacities and comparative advantages; consolidate the areas of Bank presence that have emerged in recent years, in accordance with the government, and as reflected in the extensive portfolio, with considerable numbers of operations carried out and under way; and readjust Bank operations to the limitations on borrowing and current expenditure (assuming positive results from this policy), which is expressed in active portfolio management, the consideration of new models for action, including smaller projects, more activity at the subnational level, and the use of possible new instruments.

4.2

In an effort deemed necessary to target activities and improve their evaluability, and following the medium-term plan established by the government, the definition of the priority areas of Bank activity is directly associated with each of the main objectives (growth, , poverty and equity, and reform of the State), and at the same time seeks to better identify the nature of the Bank’s involvement in each general area. Thus, under the government’s Multiyear Plan, to meet the challenges of achieving the three objectives established, the Bank will focus its cooperation with Brazil on four areas: Aimed at the objective of growth: •

Productivity for small and medium-sized enterprises and infrastructure, assigning priority to public-private partnership (PPPs) models in the new investments

Aimed at the objective of poverty and equity: •

Poverty, equity, and human capital formation, with a central focus on conditional income distribution programs

•

Living conditions and efficiency in cities, integrating activities to fight urban poverty with improved habitability, efficiency and environmental quality in cities

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Aimed at the institutional objective •

Modernization of the State and institutional strengthening, with emphasis on subnational governments

4.3

In addition to the four priority areas of strategic activity, the Bank has assigned priority to certain crosscutting issues that occur in many if not all the strategic areas, with the following standing out in particular: integration, the environment, and reducing regional, gender, and racial inequality. The Bank will also maintain a presence in other areas, including those activities not directly connected to the four new key areas, and new pilot or exploratory activities that might help establish new areas of activity or focus and target the areas proposed in response to new demand or experience gained.

4.4

The idea is thus to make better use of the specialization and comparative advantages the Bank has developed in the country; to complete the investments under ongoing projects (51 operations with an available balance of US$3.89 billion); and implement a basic focus of consolidating and targeting its areas of activity.

1. Productivity and infrastructure

4.5

The Bank will continue to assign priority to supporting Brazil’s efforts to enhance its competitiveness and modernize its productive sectors in order to achieve efficient allocation of its resources and faster growth driven by the private sector, with stability and environmental sustainability. In particular, the Bank will support initiatives that imply improvements in productivity and higher levels of investment in productive activities. It will also support activities to improve the business climate in the country and to promote public-private partnerships.

4.6

This set of initiatives will help stimulate growth, which should result in a sustainable improvement in the labor market situation by increasing the number of jobs and average wages, thereby contributing to achieving one of the key objectives of the Multiyear Plan.

4.7

To this end, the Bank will continue to provide support for initiatives to: •

Restore infrastructure investment and ensure its quality through conventional public and private sector projects, along with new operations under publicprivate partnerships.

•

Improve government agencies that enhance and promote competitive behavior on the part of the private sector in the production of goods and services.

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•

•

4.8

Support SMEs and microenterprises, promote the competitiveness of local productive systems, help develop innovations and new technology, improve the environmental quality of productive activities, and establish appropriate regulatory frameworks that will ensure an enabling business climate in the country. These areas will also be supported with resources from the MIF and the private sector window, which is expected to continue to provide financing for energy, transportation, Subnational programs to improve competitiveness telecommunications, and banking.

Assign special priority to subnational programs to improve the productivity, quality, and competitiveness of SMEs, including pilot projects for innovations with leading states. Such projects can then be replicated in other states and those carried out on a regional scale can be expanded to states and regions with less capacity. The experience of local production chains [Arranjos Produtivos Locais] (APL) will also be strengthened and expanded.

Because Brazil is such a large, diverse country, many geographic areas specialize in certain economic activities with very close connections among the respective businesses and with associations of business organizations, local government agencies and private concerns providing support. These groups of stakeholders revolving around a product or supply chain (Arranjos Produtivos Locais) has been identified in Brazil as the unit based on which the public policy for support of business development is being organized. This shift in the policy is consistent with best international practices in the area and with the Bank strategy on competitiveness and local development (the Bank has ongoing projects and more in the pipeline in this area in Pernambuco and Sergipe, which a focus on chains for fruit production and rural tourism and culture through the MIF, the Program for Development of Business Opportunities for Small Rural Producers cofinanced with SEBRAE and APEX to support three fruit APLs in various states in the country).

Certain states have been leaders in this approach, undertaking a dialogue with the Bank to find areas for cooperation. The States of Bahia, Minas Gerais, Pernambuco, Rio de Janeiro and Sao Paulo have already identified a number of APLs and have begun to establish links with state and municipal government agencies local business associations, universities, and regional SEBRAE and SENAI offices under a program to promote productivity, quality, and international market penetration by APL businesses.

The state government officials have expressed interest in Bank support as a catalyst and enabler for local initiative. These projects also target the very important objective of improving the effectiveness of the resources allocated by the country to support business, to address problems of overlap and lack of coordination between the three levels of government.

Other areas of activity for competitiveness include: road transportation, for modernization of highway maintenance on the main corridors, considering new forms of private-sector participation in highway construction, maintenance, and operation; financing for concessionaires, through private-sector loans, on hightraffic highways; mass transit under local initiatives for urban development; and state roads.

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4.9

Energy is another area of activity in which the Bank will continue to provide support for consolidation of the electric power sector model and strengthening of planning. Activities include surveys of water resources and analysis of generation expansion. Special emphasis will be placed on electrification of remote, lowincome localities, in accordance with plans for universal access to power service by the end of the decade.

4.10

Support for SMEs and microenterprise can be provided through medium- and long-term loans to finance SME investment projects through BNDES and commercial banks, supporting innovation and export development.

4.11

Tourism can be promoted by continuing successful regional experiences, with projects focusing on increasing international demand and indirectly the national market, along with ecotourism, adventure tourism, and cultural tourism, with emphasis on tourism management at the local level, training, and preservation of the natural and cultural heritage.

4.12

Agriculture will be strengthened in four key areas to improve sector competitiveness: (i) a national system for agrifood technology that will consolidate a more competitive innovation system; (ii) a food safety and protection system; (iii) implementation of a georeferenced national rural property system and registry that will help regularize titling and issue new property titles with legal guarantees; and (iv) implementation of a new framework for investment in irrigation that will operate based on efficiency and sustainability, promoting private-sector participation in project financing and operation. Of particular importance in this area are the APLs in extremely poor regions because of their impact on decreasing rural migration due to the lack of opportunities.

2. Poverty, equity, and human capital

4.13

The Bank is maintaining the top priority assigned to initiatives for reduction of poverty and inequalities, social development, and human capital formation that over the past few years have consistently represented the largest percentage of its portfolio in Brazil and which have also been heavily emphasized by the government in the Multiyear Plan.

4.14

Although the active portfolio currently includes a considerable amount of resources approved for social projects that face budgetary constraints, some of these resources could be reallocated to other priority issues during the 2004-2007 period, when the country (federal and subnational governments) is expected to gradually recover its capacity to make major investments and increase social spending. The Bank will support the social initiatives taken by the new administration.

4.15

During the period, the Bank will provide support for:

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•

the new integrated initiative for income transfer to poor households (the Bolsa Família program);

•

investment projects in education and health, as the main pillars of the medium- and long-term policies to reduce poverty and inequality;

•

monitoring and evaluation of social policy at both the federal (Bolsa Família) and state levels;

•

activities to support technical and vocational education and to evaluate and upgrade programs to support the working life cycle; and

•

rural poverty alleviation and consolidation of settler communities.

4.16

Targeted income transfer programs (Bolsa Família). The diagnostic assessment of poverty and inequality in Brazil pointed up the need to combine structural policies to reduce poverty and inequality in the medium and long terms (human capital development) with specific poverty alleviation programs with a distributional impact in the short term. Among the latter, the most important is the Bolsa Família Program (PBF), under which all the main programs for conditional transfers to families would be unified, in order to reduce the duplication of efforts and improve the targeting, efficiency, and impact of these income transfers to the poorest families.

4.17

The PBF is the main government income redistribution program for poverty alleviation and the largest such program in the region. The World Bank has been supporting the government with technical assistance to improve the unified roster of beneficiaries and information and control systems, for which it is preparing a first stage. However, in order to meet the program goals, in terms of income transfer programs, a strategy needs to be developed, along with the technical and financial resources necessary to integrate the major metropolitan areas of the country into the program, unifying their rosters and local income transfer programs.

4.18

The Bank has been a leader in the region in providing financing and other support for programs for conditional transfers to poor families and has much relevant experience in Brazil strengthening management capacity at the municipal and state levels. It also has a major comparative advantage in social investment programs in the main metropolitan areas, in which a large, growing proportion of poor families are concentrated.

4.19

The Bank will support expansion of the PBF, with emphasis on metropolitan areas, including technical assistance for the studies and instruments necessary for program expansion, and partial financing to increase the number of beneficiary families, through a multiphase investment loan or results-based disbursement (transfers to families).

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4.20

Education. Despite the major progress achieved towards universal access to primary education and lower school dropout and repeater rates, Brazil is still far from guaranteeing that its population completes the eight years of mandatory basic education (Millennium Development Goal for education). There remain great inequities in educational opportunities, reflected in both the number of years of schooling of the poor population (4.5 years) and serious problems in system quality (some 50% of students who complete the fourth grade are functionally illiterate).

4.21

All the diagnostic studies conducted on poverty and inequality concur that education is the primary public policy that will improve the income generation capacity of the poor and that differences in education explain over half of the differences in wages. Furthermore, the labor market is demanding increasingly high levels of education, as reflected in the widening income gap between those who complete secondary and higher education (some 20% of the population) and those who do not even complete primary education (about 60% of the population).

4.22

In this context, the fight against poverty and social exclusion basically requires a firm agenda ensuring continuity in and assigning priority to improving the quality and equity of basic education, including secondary school education. Furthermore, an effort should be made to devise effective strategies for inclusion of functionally illiterate young people and adults and school dropouts into the formal education system, to ensure that they develop the basic skills necessary to exercise their rights as citizens and to find productive employment.

4.23

The Bank is strategically positioned to meet this challenge through its large portfolio of ongoing projects in support of secondary, technical, and vocational education, as well as through new operations to provide financial and technical support for the formulation of effective education policies in the three priority areas for the country’s education authorities: (i) formulate a policy for primary education establishing the minimum requirements for quality and equity for primary enrollment; (ii) identify and implement effective models for nonformal education and job training for young people and adults; and (iii) invest in programs for continuing education and to improve teacher quality.

4.24

Health. With completion of the program to strengthen reorganization of the unified health system (REFORSUS) in 2004, the Bank may support new projects to meet the pending challenges in the organization, financing, and operation of the unified health system, with emphasis on enhancing equity and social inclusion. Among the priority activities, the Bank will support: (i) expansion of successful experiences in primary health care, such as the Family Health Program, including access for excluded groups and strengthening promotion and prevention services; (ii) changes in the resource allocation systems in the unified system, designed to reduce regional disparities by favoring the areas in which the unified system population is the largest; and (iii) improvements in the quality of the services through the strengthening of managerial capacity, ongoing training of human resources, and the

- 43 -

development of instruments to protect user rights. These activities, among other initiatives, may support the central government through national programs such as the Health Care Training Policy in the Unified Health System (QUALISUS), currently being implemented, or subnational programs supporting the development of regional service networks, programs tailored to the local epidemiological profile, and specific health activities in the context of integrated local development programs.

4.25

Social policy monitoring and evaluation. A key area to improve the effectiveness and impact of social policy in Brazil is support for the development of capacity for monitoring, oversight, and evaluation of social policy and compensatory programs.

Given the volume of resources involved in these programs and the lack of an evaluation culture for this type of program in the country, the Bank’s technical support in this area is a strategic priority. Support should be provided for implementation of the PBF, which needs to include a significant component for evaluation and oversight at the central level and for strengthening of the program management and monitoring capacity at the level of the participating municipalities and states. Support will also be provided for innovative programs to strengthen monitoring and evaluation of social policies at the state level.

4.26

Employment and equity. The Brazilian labor market is highly informal and has high wage disparities associated with the highly unequal distribution of human capital. The Brazilian government is fighting the inequality in human capital through its programs to improve access to education and health. Furthermore, although Brazil has a regulatory framework and set of labor institutions that are relatively effective, they cover only a fraction of workers and can limit the capacity of enterprises to adapt to economic developments.

4.27

Brazil has established a series of programs to support Brazilian citizens during their working lives, including their education and entry into the work force, unemployment insurance, retraining, and reentry into the work force. These programs cover the areas of job training, job placement, protection for unemployed workers, and formalization of employment.

4.28

The dynamics of the Brazilian economy and changing conditions of the international economy require an ongoing evaluation of whether the institutions and programs are consistent with adequate economic growth and employment opportunities. The Bank has been supporting the Government of Brazil in its efforts in this connection, especially the activities linked to training, support for entry into the work force for young people, worker protection, formalization of employment, and regulatory and institutional reform.

4.29

The Bank will also cooperate in initiatives for rural poverty alleviation and sustainable local development, through programs and investments in production and the social sectors to improve living conditions, contribute to consolidation of

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settler communities, and train rural workers in new sources of employment in their own communities, thereby reducing migration.

3. Living conditions and efficiency in cities

4.30

The 2000 strategy identified the problems of local government efficiency as an important area of activity, along with the general problem of poverty and living conditions in the growing urban areas of the country.

4.31

The persistence of this problem and the valuable experience accrued identify this combination of work on problems in the cities with projects carried out by subnational agencies as one of the borrower/area of activity relationships in which the Bank’s comparative advantage in Brazil is clearest.

4.32

In addition, there is a need to contain the growth of urban poverty, a phenomenon that has worsened in recent years. Although the poverty rate is higher in rural areas and smaller cities, the number of poor people in large cities represents 73% of all low-income groups in the country. The situation of employment and production in large industrial centers, particularly in the Southeast of Brazil, also requires additional activities in major urban areas.

4.33

The Bank will support: •

integrated social investment programs targeting major urban areas, designed to alleviate urban poverty and ensure access to basic services for low-income groups; and

•

activities to improve municipal management and investment programs to improve habitability and efficiency in cities.

4.34

Using an integrated approached and a broad definition of “city problems,” the Bank will thus continue to support municipal urban development, capitalizing on its capacity to operate with the state and municipal governments it has developed in the country.

4.35

The key areas for cooperation will continue to be programs for modernization of financial management by states and municipalities (such as expansion of the tax administration projects to the municipal level, a new nationwide program for administration and management, and local tax administration projects), municipal development programs through the states, integrated urban development programs for rehabilitation of depressed city centers, mass transit programs, integrated programs to upgrade low-income neighborhoods with substandard housing, programs for basic urban sanitation, and environmental recovery of urban and periurban bodies of water, among other areas.

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4.36

All of the above-mentioned areas of activity and other emerging ones such as citizen security and the problem of financing municipal development, remain highly relevant and have been assigned priority in the national development plan and subnational multiyear plans.

4.37

The Bank will continue to give preferential attention to the issues of water management and the provision of water and sanitation infrastructure and services, with the comprehensive approach that has helped resolve problems in city planning, land use, and natural risk prevention, devise solutions for urban storm drainage, and improve parks, protected areas, and solid waste collection and disposal. These projects will continue to target primarily marginal and low-income groups.

4.38

To finance municipal and urban development, the Bank will support the country in establishing systems for effective operation of groups of municipalities in large metropolitan areas, paying special attention to the design of institutional and financial mechanisms, such as financing for consortia of government agencies, for execution and subsequent operation and maintenance of the investments.

4.39

In addition, the Bank will support the country in the design of sustainable financing mechanisms through the financial and capital markets that will give municipalities access to long-term financing compatible with the investments they must make. In addition, appropriate financial mechanisms and products will be explored for global credit for a significant number of the many mid-sized municipalities that could not receive individual loans from the Bank.

4.40

Considering the deficits in basic sanitation and the financial and operational situation of most utilities, there is a need to consider alternatives for management, investment, and cofinancing. The participation of private concerns could be a viable option in many cases, provided that the sector is properly regulated and the role of states and municipalities clearly defined.

4.41

In terms of nonfinancial services, the Bank will work with the Ministry of Cities to formulate a participatory action plan to achieve the respective Millennium Development Goals.

4. Institutional strengthening and modernization of the State

4.42

With a view to deepening and expanding one of the Bank’s areas of activity that has had the greatest development impact in recent years, the country strategy for reform and modernization of the State is to: •

Consolidate the programs to improve governance at the state and municipal levels, with special emphasis on the efficiency and quality of public spending and services for citizens.

•

Improve governance through comprehensive programs.

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•

Improve management of the justice and citizen security systems at the federal and subnational levels, with emphasis on citizen access.

4.43

The Bank has assigned priority for the period to activities designed to improve the efficiency, effectiveness, quality, and internal, external, and social oversight of public spending. This line of activity is consistent with the Multiyear Plan goal of implementing good governance based on ethics, transparency, participation, decentralization, social oversight, and a citizen focus.

4.44

The Bank will help expand its successful experiences in this area of activity to the state level, implementing the programs for tax administration and activities for external oversight and deepening in the specific states and municipalities under the fiscal management programs that will continue to consolidate the support for all levels of government that the Bank promoted under the previous strategies. The Bank will also consider new activities for modernization of the social security administration and possible expansion to municipalities with the necessary borrowing and execution capacity of comprehensive operations for reforms and investments to strengthen fiscal management and social security management, and modernization of the instruments for management of human resources, procurement, and monitoring and evaluation.

4.45

In addition, to support the government objective of strengthening citizen participation by guaranteeing human rights and citizen security, the Bank will support pilot and innovative projects for access to justice and citizen security, with emphasis on strengthening the management capacity of the federal Ministry of Justice and the state Departments of Justice, with possible involvement of the Public Prosecutor’s Office at the federal and state levels.

4.46

Other possible areas of cooperation for reform of the State include policy measures designed to expand social security coverage for informal workers in urban areas, further strengthen systems for complementary coverage, consolidate a public system for universal coverage, and explore other options to unify the public and private social security systems.

4.47

Furthermore, the government policies and programs that imply coordination between the federal, state and municipal levels and/or transferring resources for decentralized execution (the usual arrangement for social programs) raises the major challenge of developing and strengthening institutional capacity for program management at the local level, closer to the beneficiaries. The Bank’s experience in municipal operations to develop community leaders and social managers will be used as the foundation to make a critical contribution to the new programs (especially the PBF) in terms of training and strengthening of local management.

- 47 -

5. Other general and crosscutting issues

4.48

Integration. The Bank will continue to provide support especially for regional integration of the physical infrastructure in transportation, telecommunications, and energy markets, including financing for binational works under the Initiative for the Integration of South American Regional Infrastructure (IIRSA), with a view to enhancing Brazil’s competitiveness on international markets.

4.49

The Bank will also deepen its support for integration of trade in agrifood products (initiated with technical cooperation to support implementation of a regional system for control of foot-and-mouth disease in the expanded MERCOSUR countries) and will promote harmonization of technical standards and procedures to improve trade within the region and with other regions.

4.50

The Bank will continue to support efforts to enhance integration not only in trade but also in the flow of capital, labor, technology, and other factors of production.

Furthermore, it will support efforts to bolster regional integration, which have mainly been channeled through MERCOSUR through new initiatives for trade liberalization, policy coordination, integrated provision of public goods, and other projects designed to ensure efficient allocation of resources in the area.

4.51

Environment and natural resources. The Bank recognizes that environmental quality and the foundation of natural resources represent the basic capital that sustains economic growth and competitiveness and helps reduce poverty and improve social welfare. This principle applies to all Bank interventions, beyond the traditional approach of “environmental operations.” Thus, Bank cooperation on the environment is carried out in all the priority areas of activity established. It includes the traditional approach—with a high social impact—of urban sanitation that embraces all Bank activities in water supply, sewerage, and wastewater treatment, environmental pollution and solid waste (cities); the issue of the environmental impact of productive activities (competitiveness); natural resource management; institutional strengthening and modernization of the subnational agencies responsible for environmental licensing and monitoring; and measures and mechanisms to increase participation by civil society and the private sector in environmental protection and sustainable economic activities (modernization of the State).

4.52

Special reference should be made to water resources in the country. Brazil is making major efforts to improve their management, and the Bank will cooperate in formulating a national water resource plan that will address the issue and help meet the respective Millennium Development Goal.

4.53

Reducing regional, gender, and racial inequalities. Brazil has low-income groups that need support in the Northern, Amazon, and especially Northeastern region of the country, and in rural areas in general. It also needs to address

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considerable inequalities in the levels of education, income, access to public goods and opportunities that mainly affect women, Afro-descendents, and indigenous groups.

4.54

Pursuant to the institutional strategies of the Bank and to continue ongoing activities in Brazil, under the guidelines set forth by the federal government in the Multiyear Plan, the Bank will provide crosscutting support for initiatives to help reduce gender and racial inequalities in Brazil. It will also support crosscutting initiatives to reduce regional disparities in the country.

B.

Strategy implementation

4.55

Implementation of this strategy will ultimately depend to a great extent on the lending scenario eventually established and the behavior of the risk factors identified, which are mainly exogenous. The Bank will contribute to strategy implementation by making efficient use of its instruments and experiences, focusing many of its currently dispersed capacities on the problems of cities, ensuring complementarity with other sources of funding for the country, and through integrated work and an ongoing dialogue with all levels of government, especially subnational governments, and with civil society.

4.56

Successful implementation will also require systematic monitoring by the Bank, the government, and civil society. To this end, a basic set of variables has been identified to gauge the actual and expected impact of the Bank activities, as summarized in the matrix attached as an annex to this proposal. Obviously the core issue persists of sizing the financial contribution of the Bank in an economy the scale of Brazil’s. As in the previous strategy periods, it requires very careful selection of the areas of activity and borrowers in order to maximize the Bank’s development impact.

1. Activity with subnational agencies

4.57

The Bank has consistently maintained and deepened its work with subnational governments in Brazil, which currently account for 38% of the active portfolio with direct borrowers and 56% if sublending and grants are included. The relationships the Bank has established with states and municipalities reflect a number of factors, both the type of problems being addressed at that level of government and the impact of decentralization and the new focus on citizens and their problems, as well as the problem of scale, given that in a country the size of Brazil, the development impact of the Bank is the greatest at the subnational level.

4.58

Its work with subnational agencies has evolved in recent years from identifying the individual activities in which the Bank demonstrated that it was very efficient (such as roads and sanitation), to simple expansion of these experiences to other areas (such as substandard housing and urban transportation). Subsequently, it began to

- 49 -

devise additional facilities, usually in association with the federal government or development banks, to serve a larger number of agencies (such as tax administration, tourism, education). This last stage was reached for the dual purpose of serving a much larger number of beneficiaries and also to extend the service to units that would not be able to access it individually.

4.59

In these experiences, the Bank’s relationships with the subnational agencies took various forms. In some cases, the agencies were direct borrowers (with federal government guarantees), subborrowers (under loans granted by development banks), or recipients of grants under loans contracted by the federal government.

Although such arrangements will continue, the Bank is seeking new models that will afford greater flexibility and efficiency in its work with subnational agencies.

The possibility will be considered of granting loans to consortia of municipalities that, although independent entities, share a given problem, which is often the case in major urban areas in the country. The possibility could also be explored of creating global lines of credit for municipal financing with the participation of private banks.

Instruments for strategy implementation To implement the strategy, the Bank has a number of instruments for lending, technical assistance, and nonfinancial products, some of which could be used more extensively, along with recently approved new instruments, designed to improve the Bank’s flexibility, responsiveness, and timeliness in addressing the needs of its borrowing countries.

Traditional investment lending instruments—such as specific loans, multiphase loans, and global loans for multiple works—can be used with an overall sector focus to improve coordination and efficiency in support for the sector investment plans set forth in the Multiyear Plan, for example through a time slice operation. Along the same lines, performance-based loans (in which disbursements are subject to verifiable achievement of goals rather than the execution of project-related expenditures), is another new instrument based on the achievement of results that could be used for sector programs whose performance could be accurately measured in the mid term. Global credit programs, an important new line of work for the Bank in Brazil, may lead to sue of the new conditional line of credit for investment loans, which saves resources and is more expeditious. The line could also be used with executing agencies implementing investment programs on an ongoing basis, in sectors such as transportation, for example. In addition, greater use is expected to be made of direct lending and guarantees for the private sector, without sovereign guarantees.

The strategy will also use sector facilities and innovation loans (designed to support pilot programs), which have already been used in Brazil although to a lesser extent, which are well suited to institutional strengthening activities and complex programs. Other options include nonreimbursable technical-cooperation funding and MIF projects, together with possible general or sector studies.

Furthermore, within the caps set under the Bank’s new financing framework, sector or policy-based loans (PBLs), which are loans designed to be flexible and fast-disbursing, could continue to be used. These include fungible resources to support governments that are involved in major government reforms.

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4.60

The main constraints for Bank activity with subnational subborrowers stems from their fiscal situation and the federal government capacity to grant the respective guarantees. Given that the capacity of states and municipalities to contract new debt is included in their negotiations with the federal government and their annual updates, the key constraint remains the problem of the federal guarantee required by the Bank. This question should therefore be one of the core issues in the Bank’s strategic dialogue with the country.

2. Nonfinancial services

4.61

The need for more studies and other nonfinancial services in Brazil has been highlighted in evaluations of Bank activity, with special emphasis in the evaluation conducted by OVE. It is clear from the studies that improving the level of policy dialogue with the country (which has not been reported frequently but has had recognized positive results) is a current challenge and a valuable opportunity for cooperation, as well as a core element for proper design of the strategy and financial products.

4.62

Studies conducted by international organizations are often used as the foundation for internal discussions that bring together different sectors and institutions.

Promoting this area of activity could thus better position the Bank in the dialogue on national development.

4.63

The current context of strict fiscal discipline also strengthens the priority of increasing the nonfinancial component in the set of services provided to the country. Moreover, certain specific situations, such as the mass training required for executing unit staff and transfer of experiences between executing agencies, call for the provision of more training and dissemination services.

3. Private-sector instruments

4.64

In the context of the strict fiscal constraints that Brazil has put in place at all three levels of government, private-sector instruments are increasingly important in stimulating development, especially for infrastructure financing in a series of key sectors, but also for activities directly connected to growth, from capital market expansion to support for regulatory reforms in major commodity and factor markets.

4.65

Private Sector Department. The Private Sector Department (PRI) will continue its focus on supporting infrastructure projects, again stressing the Bank’s role as providing additionality and a demonstration effect, as it has achieved in energy and toll road projects. PRI has begun to carry out activities to support foreign trade financing initiatives. It also expects to help strengthen local capital markets through partial credit guarantees (PCGs). The first such operation is currently being structured for a telecommunications firm. PRI has sought to identify projects in

- 51 -

nontraditional sectors, such as health and education. Working jointly with Regional Operations Department 1 (RE1), it has been discussing initiatives to bring nontraditional sectors to a viable stage of development.

4.66

The recent measures by the Government of Brazil to promote public-private partnerships, which are currently being considered in the Brazilian Congress, should have a positive impact on private-sector participation and PRI initiatives.

However, the expected positive outcome will depend on the findings of the review and the structure approved for the GOB proposal. In this context, PRI has begun structuring a lending facility to finance infrastructure projects through private financial institutions.

4.67

PRI has launched a Brazilian investment fund for public-private infrastructure.

With BNDES, RE1 is exploring the possibility of participating in the fund or in a parallel fund that would supplement the private fund activities. The Bank could thus contribute to investment alternatives for pension and other funds, supporting infrastructure development in Brazil (transportation, telecommunications, water supply, sanitation, and energy).

Public-private partnerships (PPP) A key factor in achieving sustained growth in Brazil lies in increasing investment in infrastructure in such sectors as electric power, oil, transportation, basic sanitation, communications, and waterways (Ministry of Planning, the Budget, and Management, 2003). Given the considerable fiscal constraints the government must deal with in undertaking such initiatives, active participation by the private sector is all the more crucial.

In response to this challenge, the government recently submitted a PPP bill to Congress to allow private-sector participation in infrastructure in those initiatives that are carried out jointly with the public sector for periods of up to 35 years. In addition to increasing investment levels, the purpose of the bill is to make major gains in efficiency in the construction, management, and quality of the services provided.

It should be noted that this type of enterprise emerged in the 1990s in a number of OECD countries (especially the United Kingdom through its Private Finance Initiative), and were pioneered in Latin America by Chile and Mexico. To be considered a PPP, the government must agree on an arrangement with the private sector through a long-term contract establishing participation of the private sector in the financing of a public investment and its active involvement in project design, construction, and operation. A PPP project is considered successful if it leads to the provision of high-quality services at a lower cost than if the services had been provided by the government. A PPP also requires adequate transfer of risks to the private sector, and proper reporting and accountability of its fiscal implications.

The IDB sees its participation in PPP financing, with the BNDES and other major stakeholders in the capital markets, but at the same time in a number of other areas that will contribute to successful implementation of such mechanisms to promote investment in Brazil.

4.68

The PRI portfolio in Brazil consists of 14 approved loans (six in the transportation sector, seven in energy, and one in an operation for foreign trade financing) and two partial risk guarantees granted to energy sector firms.

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4.69

MIF. The MIF has focused its support for the private sector in Brazil on three areas: (i) promoting innovation in small business by testing different approaches to enhance access to markets, new production technology, preparation of business plans and the provision of business advisory services; (ii) improving market operation by guaranteeing its openness, efficiency, and transparency; and (iii) improving labor competitiveness. The MIF will assign priority during the fouryear strategy period to the following activities: support the public sector to strengthen implementation of programs for public-private cooperation, specifically to establish appropriate regulatory frameworks at both the federal and state levels; improve business competitiveness by establishing quality standards for production; develop microenterprise, by introducing sound, efficient microfinance practices, strengthen the frameworks for regulation and oversight, and enhance access for micro and small enterprises to sources of credit and innovative financial services, including the use of emigrant remittances; and improve access for small and medium-sized enterprises to venture capital financing, particularly for information technology and high technology. The MIF also has a fund for special projects under the delegation initiative, through which over 10 projects can be financed to help local organizations devise innovative solutions by strengthening supply chains and promoting better environmental management.

4.70

Inter-American Investment Corporation (IIC). In the medium term, the IIC will focus on financing small and medium-sized enterprises that are mainly or partially exporters, through medium-term corporate loans (two to five years) or long-term loans (five to 12 years) for expansion projects. The IIC will also continue to grant loans to local financial intermediaries, which may in turn onlend the resources to eligible companies.

4. Lending scenarios

4.71

Given the complexity of Bank activity in Brazil, particularly with regard to the various types of lenders involved (federal, state, and municipal governments, development banks, and private sector), each one of which reflects independent realities, capacities, and interests during the period, the possible lending scenarios will depend on the limitations that each one faces in the coming years and on a series of determining factors, described below.

4.72

The first factor concerns the macroeconomic environment. Two possible basic macroeconomic situations are foreseen for the period 2004-2007:

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Table 6. Macroeconomic Assumptions for Lending Scenarios (%)

Low projection

2004

2005

2006

2007

Average

GDP variation

2.5

3.0

3.0

3.5

3.0

Price variation

6.0

5.0

4.0

4.0

4.7

Primary surplus/GDP

4.3

4.3

4.3

4.3

4.3

57.0

55.5

55.0

54.0

55.4

GDP variation

3.5

4.0

4.0

4.5

4.0

Price variation

7.0

6.5

6.0

5.0

6.1

Primary surplus/GDP

4.3

4.3

4.3

4.3

4.3

56.0

55.0

53.5

52.0

54.1

Net public-sector debt/GDP High projection

Net public-sector debt/GDP Source: Own estimates (December 2003)

4.73

Both cases assume that, as a result of the increased economic activity and higher prices, tax collection by federal and subnational governments will rise, so that spending can gradually be increased closer to normal levels, particularly with regard to federal government spending. The fiscal constraints can then be gradually lifted and demand for Bank financing should increase accordingly.45

4.74

The two possible scenarios differ in that they assume average GDP growth of 3% in one case and 4% in the other, even though both show an increasingly favorable scenario over time. The first case reflects the possibility of a moderately favorable international economic environment (though somewhat worse than at the moment) and a slower pace in the reforms, and the second, a very favorable international situation and a fast pace in the reforms. Even in the base case scenario, the economic growth rate would be higher than that reported for the previous strategy period (average annual growth of 1.9% in 2000-2003), during which US$3.4 billion in loans to the public sector was approved.

4.75

Both cases assume committed public-sector consolidated primary surpluses (4.25%) and the gradual reduction of the public debt-to-GDP ratio (which is expected to reach levels between 54% and 52%, respectively, by the end of 2007).

The different responsiveness of these indicators is also determined by the various external and internal factors assumed. In both cases, the debt levels remain high but sustainable and below current levels.46

4.76

Among the internal conditions that make the high scenario possible, the following structural reforms stand out: (a) new phases of the tax and social security reform;

45

46

In addition, both scenarios assume greater needs for financing on the part of the country, but also that both the public and the private sectors will gain increasing access to voluntary debt markets, a trend that has been observed.

In the risk section, reference is made to risks imposed on the lending program by these high debt levels should there be a series of even more unfavorable external and domestic events.

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(b) labor reform; (c) Central Bank autonomy; (d) progress with regulatory frameworks; and (d) reduction of specifically allocated funds in the federal budget.

4.77

Progress in these areas will pave the way for Brazil gaining access to the highest growth scenario, which is based on higher levels of loan approval by the Bank.

4.78

The second factor, which is closely related to the first, concerns the fiscal and managerial situation of subnational borrowers during the period. Their borrowing capacity has been limited since 1998 when the Fiscal Stability Program was launched and the Fiscal Responsibility Act was passed. Additional regulations were approved in 2000. With economic recovery, their capacity will improve, although selectively and gradually, as the subnational governments collect more resources (mostly through indirect taxation directly linked to the level of activity).

4.79

A third major factor stems from Brazil’s status as the Bank’s main borrower, with potential demand that may exceed the Bank’s response capacity. Considering current Bank exposure in the country, the maximum amount of regular lending would be about US$6 billion or US$7 billion.

4.80

Moreover, the Bank’s capacity to offer more or more expeditious new instruments (or new modalities for existing financial instruments) will allow financing to be granted that is consistent with the goals of ensuring a primary surplus. It would also help boost lending to the higher-level scenario.

4.81

The possible lending scenarios under this strategy—ranging between a minimum of US$4.5 billion and a maximum of US$6.5 billion—are defined on the basis of these constraints.

4.82

These scenarios emerge from the materialization of various possibilities associated with four basic channels of financing associated with the different types of borrowers from the Bank in the country. Estimates of their possible share of overall lending depend on their situation during the four-year period in question. Their behavior is expected to be relatively independent and may vary over time.

1. The largest share of the flows of funding to the country will consist of operations with the federal government and development banks, through lending consistent with the current constraints on spending. The Bank will offer new fast-disbursing instruments similar to policy-based loans that may significantly increase the contribution of this factor to the total.

2. The second channel will be lending to the federal government for traditional investment projects, centered around programs for reform of the State, the social sectors, and productive infrastructure works. The latter, historically a key component of Bank activity, could be reactivated towards the end of the period, depending on economic developments in the country. This is why the two macro scenarios proposed assume different responses from this flow of loans.

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3. The third channel consists of financing for subnational agencies (states and municipalities) with a federal government guarantee. The share of this type of financing to subnational governments in Bank activity has grown so much that it now accounts for practically half of the active portfolio. Based on revealed demand, it could increase even further and fill the vacuum left by the contraction in lending to the federal government. However, its volume will depend on two critical factors: the capacity of the subnational governments to contract new debt (under the Fiscal Responsibility Act and their debt rescheduling with the federal government, currently being negotiated) and the total volume of guarantees issued by the federal government for such lending.

These factors are also sensitive to the rate of recovery of the activity and resources.

4. The fourth channel includes direct lending to the private sector, an area of activity in which the Bank is most active in Brazil, and that could also expand depending on the rate of progress observed in the approval and implementation of the new national initiatives for public-private partnerships.

4.83

A listing of the operations in each area of the four areas strategic areas of activity for the period 2004-2006 (in the pipeline or recently approved) is included in Annex III. To articulate the relative emphasis with different borrowers in the various areas of activity, the annex also provides a breakdown of the operations program by activities with the public sector and those with or in support of the private sector, and a breakdown of public sector activities by component with the federal, state, and municipal governments.

4.84

Disbursements. During the 2000-2003 period, Bank activity in Brazil featured high levels of disbursement (US$6.8 billion), despite the strict budgetary constraints imposed and the significantly low volumes of new loan approvals (US$3.7 billion), as a direct result of the debt reduction policy. This led to a steep decline in resources pending disbursement, from US$6.97 billion in early 2000 to US$3.89 billion at the end of 2003, the lowest level in the past nine years. This drop has made room for increased financing during the 2004-2007 period.

4.85

Net flows. The net flow of resources in convertible currency began at very positive levels during the period (US$2.49 billion) due to the disbursements of the 1999 emergency loans in 2000, but in the first few years dropped to negative balances (-US$740 million) because of repayments of the same emergency operations. This trend should revert during the 2004-2007 period, once the emergency loans are fully amortized beginning in 2004. In the base scenario, the average net flow of loans is projected at US$570 million during the 2005-2007 period, while for the high scenario the figure would be US$645 million over the same period.

4.86

Behind this variation in flows lies a central feature of the Bank’s relationship with Brazil during the last period: the Bank was able to provide large amounts of

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resources at times of financial crisis and the country is repaying these considerable amounts on schedule.

4.87

Exposure. The Bank’s exposure in Brazil remained above 20% in 2000-2003, peaking at 25.9% in 2002 when disbursements reached the maximum levels and repayment of the large 1999 loans had not yet begun. The total amount of outstanding debt leading to such exposure levels reached US$12 billion. This amount is expected to decline at the beginning of the 2004-2007 period with the remaining repayments of the emergency loans, but subsequently should stabilize at around US$11 billion. Depending on the situation of the other countries, the Bank’s exposure with Brazil could stabilize at about 21%. In particular, under the base scenario, debt levels will reach an estimated US$10.5 billion at the end of the strategy period, while under the high scenario, they would reach US$10.6 billion.

5. Complementarity and coordination with other sources of funding

4.88

Brazil has a consolidated system for cooperation of international aid that involves several ministries, led by the Ministry of Planning, the Budget, and Management and an interagency committee for financial cooperation (COFIEX) and the Ministry of Foreign Relations for technical cooperation. In recent years, this system has helped the government carry out an efficient process to define and adjust the areas of activity for the Bank and the World Bank, the main sources of external aid for project financing. The Andean Development Corporation has recently become involved in the process and is playing a growing role in infrastructure financing.

4.89

The system has also helped organize joint activities such as studies and project financing. In recent years an effort has been made to expand the practice to integrated monitoring of the active portfolio.

4.90

This specialization, through which the comparative advantages of each institution are considered and enhanced, has generated complementarity in terms of sectors (primary vs. secondary and vocation education), issues (rural vs. urban development), and borrowers. To date only the Bank operates with municipal governments, reflecting its attention to urban problems and its greater involvement in urban development and reform of the State, while the World Bank has focused on the environment and the financial sector, among other areas.

4.91

The difference in some of the instruments the two institutions have available has had a special impact on the determining their relative areas of activity. In general, the World Bank has been able to offer the country a significant volume of basic studies that have been reflected in the major contribution to policy formulation and financial instruments such as policy-based-type loans disbursed in a single payment, which are particularly attractive for the country. In terms of lending, the government has also highlighted the difference in the cost of the financing offered by the two banks. The IDB recently addressed this issue with the establishment of

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the new LIBOR-based lending facility. A larger amount of resources available for basic studies and the development of new financial facilities (especially fastdisbursing, policy-based-type loans or with single-tranche disbursement) could have a key impact on this equation.

4.92

In the recent past, the two banks actively participated in the meeting called by the new administration to deepen the coordination system. As a result, it is likely that all the parties will ensure efficient, productive complementarity during the strategy period. Joint work is already being done on the teams to support priority programs such as the PBF, and sector documents have been prepared jointly, for instance on health, and certain activities are being carried out to harmonize instruments in the area of procurement.

4.93

The United Nations agencies and bilateral donors continue to play a fundamental part in financing basic studies, providing technical cooperation, and supporting project preparation. However, the volume of project cofinancing (which has been received mainly from Japan in recent years) is expected to decline, in line with the trend towards reducing current debt.

4.94

With regard to the volume of financing, the Bank has ranked first for the past eight years, totaling 54% of approvals and 55% of disbursements in investment, sector, and emergency lending. However, this situation has changed in the last four years, during which the Bank reduced its share to 37% of approvals while remaining at 56% of disbursements for projects.

4.95

The International Monetary Fund (IMF) has maintained solid support for Brazil to help it overcome the crises it experienced, especially in the second half of the 1990s. Brazil currently has a 15-month extension of a standby credit from the IMF approved on 6 September 2002. The IMF also approved a US$6.6 billion augmentation of the stand-by credit, while postponing US$5.8 billion in payments to 2005 and 2006.

6. Civil society

4.96

Two important phenomena have combined in Brazil to promote participation by civil society. First, the work of over 200,000 organizations actively involved in the delivery of services and advocacy on social and environmental issues over the past 10 years is being consolidated; and second, the new administration is anxious to expand and institutionalize systems for citizen consultation. This imitative has been reflected in particular in the consultation process at the state legislature level throughout the country for formulation of the Multiyear Plan and by establishing the Economic and Social Development Council (which operates at the national level and has local offices) as an ongoing mechanism for participation and dialogue.

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4.97

The Bank will support the Economic and Social Development Council’s activities with diagnostic studies and nonreimbursable financing to enhance the links and dialogue between the State and civil society.

4.98

The Bank itself is deepening its outreach to civil society through the Advisory Council, which is the main mechanism it has been using continuously as a point for dialogue and consultation, with staff assigned to focus on this issue, and that carries out an ongoing productive dialogue, especially with the groups directly affected by Bank-financed projects. The Council is made up of 19 organizations from throughout the country that represent various segments of the population, as well as a broad range of social issues and interests (environment, human rights, culture, women, urban and rural workers, business, children), and was used to discuss the Bank strategy. It is also expected to play an important part in monitoring strategy implementation.

4.99

Consultation with civil society. As a forum for consultation during formulation of the strategy, in May a one-day seminar was held in Brasilia for the Civil Society Council of the Country Office in Brazil (CBR) in its expanded version (with additional guests), and with a high-level government representative in attendance.

The meeting was organized and chaired by the participating organizations. Similar meetings are planed for the strategy implementation period.

4.100 The main recommendations made during the consultations referred to the need for the Bank’s country strategy to highlight more forcefully the issues of regional disparities in a country the size of Brazil, as well as gender and racial inequalities. It was also recommended that periodic reviews of the strategy be conducted on an ongoing basis, that a regional strategy could be formulated (as a pilot project), and that proper attention be paid to interregional differences during implementation of the strategy.

4.101 A detailed report prepared by the Council itself, specifying the seminar conclusions and the full recommendations, is available on the OD1 webpage and is attached to this strategy as Annex 10.

7. Risks in implementation

4.102 A first risk is that the expected economic scenarios may not materialize. Although various public and private indicators already point to a recovery in economic activity, it remains subject to the risks inherent in countries such as Brazil that are financed with a high proportion of external savings and in which local investors still periodically lose credibility.

4.103 These factors mean that Brazil is still vulnerable to a crisis in confidence that could significantly affect the course of economic variables, especially given the high debtto-GDP ratio Brazil has seen early in the new strategy period. Additional

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improvements in its institutions and public finances, and—of particular importance in the case of Brazil—higher international reserves will continue strengthening the existing perception regarding debt sustainability 4.104 The probability of debt sustainability in a context of continued implementation of the policies of recent years is reasonably high, in particular given the government’s demonstrated capacity to react to adverse events.

4.105 In any case, to minimize this risk, Brazil must consolidate the reforms during the first years of the strategy period, taking advantage of the exceptionally good developments in its external variables (high prices for its exports, strong demand for its products, and significant capital inflows into emerging markets), in order to avoid any adverse situation once the international environment becomes less favorable.

4.106 A second major risk is the high level of social demands, which puts considerable pressure on the administration elected in October 2002 to produce immediate results. As it had done during the previous period, Brazil must move forward on a solid foundation, staying the course of its main economic reforms, thereby avoiding the implementation of policies that should prove unsustainable over time.

4.107 Both situations would lead to lower growth rates and consequently to constraints on borrowing, which could be expressed as both a decline in new loans entered into by the federal government, limited guarantees for subborrowers, and the persistence of major budgetary constraints throughout the strategy period similar to those imposed in recent years.

4.108 The risk of a dramatic change in government priorities is considered unlikely, given the highly planned, explicit government policies, using a four-year plan supported by a broad-based consultation process and discussion prior to approval by the Congress.

8. Monitoring strategy implementation and indicators

4.109 Strategy implementation will be monitored in close coordination with the Department of International Affairs (SAIN) and with the various federal and state executing agencies and authorities through the SAIN. 4.110 A set of benchmarks to monitor strategy implementation is proposed in the strategy matrix. They include national benchmarks linked to the country objectives in the various areas of Bank intervention, and midterm benchmarks for the projects to be carried out.

4.111 The purpose of the national benchmarks selected is to demonstrate the progress made in implementation of the Multiyear Plan, with emphasis on the priority areas of the strategy. Noteworthy among these are the benchmarks for human capital

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development that will gauge the progress made towards the Millennium Development Goals.

4.112 The information on the impact of the Bank activity will be drawn from the midterm performance indicators of quantity and quality for completed or ongoing projects and portfolio performance.

4.113 Progress in strategy implementation will be evaluated periodically by the country authorities and the Bank through: (i) midterm portfolio reviews; (ii) the annual portfolio review mission; (iii) sector missions; (iv) the annual update of the operations program; and (iv) periodic reviews of the agenda for dialogue.

4.114 In addition, the Bank will continue the following practices: its dialogue based on the regular visits to executing agencies and borrowers, including subnational agencies in particular; coordination and cooperation with other international organizations operating in the country (especially the World Bank); and consultation with civil society through the standing advisory council and specific contacts with the population groups affected and targeted by its activity.

4.115 For this effort to be successful the country needs to adopt more of a culture of evaluation during project implementation, and the monitoring and evaluation capacities of borrowers and executing agencies must be strengthened. The Bank and the country should address certain important methodological challenges (such as responsibilities), which are always complex, but especially critical in Brazil, given the difference in relative size between the Bank contribution and the national economy (even at the level of selected subnational or sector areas).

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V.

ISSUES FOR DIALOGUE WITH THE AUTHORITIES

5.1

As Brazil’s political and institutional maturity combines with more favorable economic conditions, the country is poised to launch a cycle of sustainable growth with poverty alleviation and enhanced equity. The Bank plans to contribute to this new cycle by implementing the new strategy agreed upon, pursuant to the priorities established by the government in the Multiyear Plan. The focus of Bank activity during the period 2004-2007 will be to: promote the competitiveness of national production; reduce poverty and improve living conditions; and deepen the reform of the State.

5.2

The Bank’s relationship with Brazil is particularly important since, because Brazil is its main borrower, portfolio performance and the lending program have a considerable impact on Bank operations and the net flow of funds and exposure.

Likewise, the Bank’s contribution in Brazil is considerable, mainly because of the localized impact its financial and nonfinancial products can have on subsectors and on states and municipalities.

5.3

To monitor implementation of the strategy and the relationship between Brazil and the Bank, three main areas of dialogue are proposed: Formulation and financing of the main initiatives under the Multiyear Plan for 2004-2007: in particular in the social area—the Bolsa Família program and others—and promotion of public-private partnerships), including the Bank’s desire to increase its contribution to the country through nonfinancial services. Emphasis would be placed on: •

Improving the business climate in the country, especially to promote private investment in the expansion and operation of infrastructure, through such mechanisms as the PPP and the catalytic role of the Bank’s private sector window; other instruments, and the possibility of providing financing in local currency.

•

The possible Bank contribution to deepening regional integration, particularly by assigning priority to the investment plans for the IIRSA initiative and its coordination and financing; activities to make more progress on the Millennium Development Goals and monitor the respective indicators; and improvement of justice systems and the public sector’s management capacity.

•

In addition, the Bank’s collaboration in the pilot project headed by the IMF on the subject of treatment of infrastructure expenses from primary surplus calculations, consideration of the PPP as an important instrument for increasing infrastructure, and approval of expenditure on investments made

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by State-owned enterprises that consider themselves governed like business entities; Subnational entities: given the Bank’s growing participation in financing to subnational entities, it will be necessary to express: •

Bank interest in continuing and even expanding activities with states and municipalities, with the adoption of new models for cooperation and financing, particularly to address the problems of Brazilian cities through a comprehensive approach; Bank support for subnational governments, under a framework for cooperation between the federal and subnational governments that will contribute to fiscal sustainability, increased efficiency in state management, and development of production;

Execution of the portfolio: considering the importance of the topics covered by the active portfolio and the obstacles encountered in the recent past, the dialogue on execution should highlight the following: •

efforts to reduce project execution periods, especially a deepening of efforts to clean up and streamline execution of the portfolio pending disbursement, particularly for projects under the direct responsibility of the federal government, within the framework of the spending established in the Multiyear Plan and Budget Act; and

•

intensification of measuring the mid-term and final outputs and outcomes of operations and programs, and the commitment to monitor strategy implementation on an ongoing basis, including reviews and adjustments in the context of the regular dialogue with the country.

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VI. BIBLIOGRAPHY

Affonso, J. R, E. A. Araujo, and S. W. Vianna (2004), “Carga Tributaria Indireta no Brasil: Análise da Incidência Efetiva sobre as Famílias”, IDB, Washington, D.C., mimeo, January.

Averbug, M. (2003), “Implantación de la Estrategia del BID en el Brasil: 1994-2002,” IDB, Washington, mimeo, April.

Barros, R., Henriqez, R., and Mendonca, R. (2000), “A Estabilidade Inaceitável: Desigualdade e Pobreza no Brasil”, IPEA Document for Discussion 800, Rio de Janeiro, June.

Castelar, Armando (1999), “Privatização no Brasil: Porque? Até onde? Até quando?”, in A Economia Brasileira nos Anos 90, Giambiagi, F. and M. Mesquita Moreira, BNDES, Rio de Janeiro, January.

Dall’ Acqua, F. (2003), “Ajuste Fiscal e Empréstimos Externos”, IDB, Washington, D.C., mimeo, May. Dominguez, F. (2003), “Brasil: Washington, D.C., mimeo, July.

Informe

Plurianual

de

Cartera

(1999-2002)”,

Giambiagi, F. (2002), “Do Déficit de Metas as Metas de Déficit: A Política Fiscal do Período 1995-2002”, Pesquisa e Planejamento Econômico, 32, April.

Goldfajn, I. (2002), “Há Razões para Duvidar que a Dívida Pública no Brasil é Sustentável?”, Working Paper 25, Central Bank of Brazil, July.

Goldfajn, I., K. Hennings, and H. Mori (2003), “Brazil’s Financial System: Resilience to Shocks, No Currency Substitution, but Struggling to Promote Growth”, Working Paper 75, Central Bank of Brazil, June.

Goldstein, M. (2003), “Debt Sustainability, Brazil and the IMF”, Institute for International Economics, WP 03-1, Washington, D.C., February.

Grossman, G. and E. Helpman (1991), Innovation and Growth in the Global Economy, MIT Press.

IDB (2000), Brazil Country Paper, GN-2104-1, Washington, D.C., July.

IDB (2003a), Sustainable Economic Growth, Strategy Document, Washington, D.C., August.

IDB (2003b), Poverty Reduction and Promotion of Social Equity, Strategy Document, Washington, D.C., August.

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IMF (2003), “IMF and Recent Capital Account Crises”, Independent Evaluation Office, Washington, D.C., July.

Krugman, P. (1979), “Monopolistic Competition and International Trade”, Journal of International Economics.

Laspina, L. and J. Ortiz (2003), “Volatilidad Macroeconómica y Política Monetaria en Presencia de Deuda Vinculada al Tipo de Cambio: Brasil 2002-2003”, mimeo, Washington, D.C., November.

Lisboa, M. et al. (2002), “A Agenda Perdida”, Rio de Janeiro, mimeo, September.

López-Córdoba, E. and M. Mesquita Moreira (2002), “Regional Integration and Productivity: The Experiences of Brazil and Mexico”, IDB, Washington, D.C., mimeo, May. Lucas, R. (2002), Lectures on Economic Growth, Harvard University Press.

Maddison, A (1995), “L’Économie Mondiale 1820-1992: Analyse et Statistiques”, OECD, Brussels, May. Mesquita Moreira, Mauricio (2003), “Notes on Brazil’s Integration into the World Economy”, IDB, mimeo, Washington, D.C., December.

Ministry of Planning, the Budget, and Management (2003), “Desenvolvimento da Infraestrutura no Brasil: Agenda Para o Crescimento”, Brasilia, December.

Ministry of Planning, the Budget, and Management (2003), “PPA 2004-2007. Brasil de Todos”, Brasilia, September.

Ministry of Finance (2003), “Política Econômica e Reformas Estruturais”, Brasilia, April.

Paes de Barros, R., M de Carvalho, and S. Franco (2003), “Vulnerabilidade a Fome no Brasil: Dimensão, Determinantes e Políticas de Combate”, IPEA, mimeo, Rio de Janeiro, February.

Pastore, A. and M. Pinotti (2004), “Brazil Market Brief”, LatinSource, mimeo, New York, January.

Reis, J.G. (2004), “Reforma do Sistema Financeiro do Brasil: Implementação Recente e Perspectivas”, IDB, mimeo, Washington, D.C., January.

Sanguinetti, P., J. Traistaru, and C. Volpe Martincus (2003), “Economic Integration and Location of Production Activities: The Case of Mercosur”, IDB, Washington, D.C., mimeo, September.

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Trigo, J. (2003), “Lecciones Aprendidas de la Implementación de la Estrategia de País del BID en Brasil 2000-2003”, IDB, Washington, D.C., mimeo, August.

Varsano, R. (2003), “Tax Reform in Brazil: The Long Process in Progress”, IDB, Washington, D.C., mimeo, April.

World Bank (2001), “Country Assistance Strategy Progress Report,” Report No. 22116-BR, Washington, D.C., May. World Bank (2003), “A More Equitable, Sustainable and Competitive Brazil”, Country Assistance Strategy 2003-2007, Washington, D.C., November.

Annex I Page 1 of 1

MACROECONOMIC INDICATORS, 1994-2002

1994 Change in real GDP (%) Inflation (CPI, Dec./Dec., %) Base money (Dec./Dec., %) M2 (Dec./Dec., %)

5.9

1995 1996 1997 1998 1999 2000 2001 2002 4.2

2.7

3.3

0.1

0.8

4.4

1.4

1.5

916.6 22.4 3,322.4 22.6 1,196.7 34.8

9.6 -8.7 5.6

5.2 60.8 27.0

1.7 23.1 6.3

8.9 23.6 7.8

6.0 -1.5 3.3

7.7 11.7 13.1

12.5 37.6 24.0

Current account (US$ billions) Growth in exports (%) Growth in imports (%)

-1.8 12.9 31.0

External debt (US$ billions, year-end) International reserves (US$ billions, year-end) Exchange rate (R$/US$, year-end) Real effective exchange rate

148.3 159.3 179.9 200.0 241.6 38.8 51.8 60.1 52.2 44.6 0.844 0.971 1.039 1.116 1.208 137.7 141.6 144.1 145.6 133.0

241.5 36.3 1.788 96.8

236.2 33.0 1.955 98.2

209.9 35.9 2.320 89.8

212.9 37.8 3.533 68.4

Public sector financing needs (% of GDP) Primary balance (% of GDP) Net public debt (% of GDP)

44.3 4.3 30.0

10.0 3.2 48.7

4.6 3.5 48.8

5.2 3.7 52.6

4.7 3.9 56.5

Source: IMF database, Data Stream and Central Bank Data as of December 2003

-18.4 -23.5 -30.5 -33.4 -25.3 -24.2 -23.2 -7.8 6.8 2.7 11.0 -3.5 -6.1 14.7 5.7 3.7 51.1 6.8 12.0 -3.4 -14.7 13.4 -0.4 -15.0

7.1 0.3 30.6

5.9 -0.1 33.3

6.1 -1.0 34.4

7.9 0.0 41.7

Annex II Page 1 of 1

MULTIYEAR PLAN (PPA) ORGANIZATION Dimension

Overarching objectives

Overarching Objective I

Social Dimension

Social inclusion and reduction in social inequalities

Economic Dimension

Overarching Objective II

Regional Dimension Environmentally sustainable growth with the generation of employment and income and reduced regional disparities

Environmental Dimension

Democratic Dimension

Lines of Activity 1.

Fight hunger with the goal of eradicating it and promote food safety and nutrition, ensuring social inclusion of the population

2.

Expand income transfers to poor families and enhance transfer mechanisms

3.

Promote universal access to social security (health care, retirement and welfare), with quality and equity

4.

Increase school enrollment and quality, promting universal access to education

5.

Promote increase supply and reduced prices for consumer goods and services

6.

Implement urban reform, improve habitability, accessibility, and mass transit in urban areas, with emphasis on the quality of life and the environment

7.

Reduce the vulnerability of children and adolescents to all forms of violence by enhancing mechanisms for effective exercise of their rights

8.

Promote a reduction in racial inequalities

9.

Promote a reduction in gender inequalities

10.

Expand access to information and knowledge through new technology, closing the digital divide

1.

Achieve macroeconomic balance with a recovery of sustained growth and distribution of income, job creation, and employment

2.

Expand internal sources of financing and ensure democratic access to credit for investment, production, and consumption

3.

Expand the supply of jobs, promote vocational training, and regulate the labor market, with emphasis on reducing informality

4.

Implement effective agrarian reform, recover existing settlements, strengthen and consolidate family farming, and promote sustainable development of rural areas

5.

Coordinate and promote productive investment and increased productivity, with an emphasis on reducing external vulnerability

6.

Expand, deconcentrate at the regional level, and strengthen training in science and technology in support of development, ensuring more democratic access to it

7.

Promote investment in infrastructure in a coordinated, sustainable manner

8.

Reduce disparities between and within regions, with integration of the various levels (national, macroregional, subregional, and local), stimulating citizen participation in local development

9.

Improve environmental management and quality and promote conservation and sustainable use of natural resources, with emphasis on environmental education

10.

Expand Brazil’s penetration of the international market, safeguarding national interests

11.

Provide incentives for and strengthen micro, small and medium-sized enterprises, with development of entrepreneurship

1.

Strengthen citizen participation with guarantees for human rights, respecting diversity in human relations

2.

Guarantee the integrity of indigenous groups, respecting their cultural identity and economic organization

Overarching Objective III

3.

Respect diversity in national and regional cultural expressions

4.

Ensure citizen security with the implementation of decentralized, integrated public policies

Promotion and expansion of citizen participation and strengthening of democracy

5.

Preserve national integrity and sovereignty

6.

Promote national interests and intensify Brazil’s commitment to a culture of peace, solidarity, and human rights in the international arena

7.

Implement new governance with ethics, transparency, participation, decentralization, social oversight, and a citizen focus

8.

Fight corruption

9.

Ensure democratic access to the media, allowing alternative media and diversity in expression

Annex III Page 1 of 1

Operations Program 2004-2006 (US$ millions)

Objective: Growth

Objective: Poverty and Equity

Objective: Institutional

BR BRAZIL

Productivity and Infrastructure BR-0254 Florianopolis-Osorio Highway Modernization BR-L1001 Food and Agriculture Research BR0318 Tourism Development South of Brazil (PRODETUR SUL) BR0392 Cadaster and Land Regularization Program BR0358 SMEs Financing - BNDES BR-L1013 Ecotourism Development Mata Atlantica, S.Paulo BR-L1012 Sustainable Development Semi-Arid in Sergipe BR-L1023 Development of Clusters in Bahia BR-L1028 Northeast Development - Minas Gerais BR-L1027 Minas Gerais Municipal Road Access BR-L1021 Sustainable Industrial Development of Minas Gerais BR -L1020 Pernambuco's Clusters Competitiveness BR-L1016 Competitiveness of Clusters São Paulo BR0411 Unibanco (PRI) BR0370 Campos Novos Hydroelectric Power Project (PRI) BR0395 Termonorte (PRI) BR0402 Tele Norte Leste Bond Guarantee (Telemar)-Telemar Norte Leste S.A. (PRI) BR-L1011 Brazil Infrastructure Investment Fund (BIIF) (PRI) BR0412 Braskem (PRI) BR-L1007 Banespa Trade Finance Facility (PRI) BR-L1015 Coelba Investment Program (PRI) BR-L1017 Integrated Cogeneration Facility (PRI) BR-L1019 Comgas Investment Program (PRI) BR-L1014 Construtora Norberto Odebrecht S.A. (PRI) SUBTOTAL

322.0 36.0 200.0 18.0 1,000.0 9.0 90.0 10.0 10.0 50.0 10.0 10.0 10.0 50.0 75.0 68.0 75.0 75.0 75.0 50.0 64.8 75.0 43.0 20.0 2,302.8

Poverty, Equity and Human Capital BR-L1004 Support to the Social Protection System (Bolsa Família) BR-L1022 QUALISUS (Quality and Equity-Health System) BR-L1009 São Paulo: Evaluation and Improvement of Social Policies BR0413 Ulbra University and Hospital Project (PRI) SUBTOTAL

1,000.0 85.0 5.0 42.3 1,132.3

A A A A

72.0 140.0 21.0 52.0 19.3 46.5 85.2 80.0 21.0 75.0 161.4 28.2 24.3 825.9

A

Modernización del Estado BR0372 São Paulo Fiscal Administration BR-L1026 Fiscal Management Program in the State of Bahia BR0403 External Control Modernization Program States - PROMOEX BR0405 States and DF Administration Modernization I - PNAGE SUBTOTAL

20.0 12.0 38.6 93.0 163.6

A

TOTAL

4,424.6

A A A

Living Conditions and Efficiency in Cities BR0400 São Bernardo do Campo Urban Transportation BR-L1005 Igarapes de Manaus Environmental-Social Program BR-L1008 BH Citizenship: Integrated Development Project, Belo Horizonte BR-L1006 Macambira Anicuns Urban Program BR0396 Environment & Rehabilitation Paraibuna River Juiz de Fora BR0397 Environmental Rehabilitation Belo Horizonte BR0302 Fortaleza Urban Transportation BR0375 Curitiba II Urban Transportation BR0376 Environmental Improvement for Amapa BR0390 Porto Alegre Environmental Recovery BR-L1018 Brasilia Urban Transportation Program BR-L1024 Environmental Management Itaqui and Ressaca Watersheds BR-L1025 Paulinia - Municipal Infraestructure and Administration SUBTOTAL

A : Approved operation

Growth

Main Strategic Impacts Poverty Equity Institutional Environment

Integration

Annex III

Operations Program 2004-2006

BR

Productivity and Infrastructure BR0254 Florianopolis-Osorio Highway Modernization BR-L1001 Food and Agriculture Research BR0318 Tourism Development South of Brazil (PRODETUR SUL) BR0392 Cadaster and Land Regularization Program BR-L1011 SMEs Financing - BNDES BR-L1013 Ecotourism Development Mata Atlantica, S.Paulo BR-L1012 Sustainable Development Semi-Arid in Sergipe BR-L1023 Development of Clusters in Bahia BR-L1028 Northeast Development - Minas Gerais BR-L1027 Minas Gerais Municipal Road Access BR-L1021 Sustainable Industrial Development of Minas Gerais BR -L1020 Pernambuco's Clusters Competitiveness BR-L1016 Competitiveness of Clusters São Paulo BR0411 Unibanco (PRI) BR0370 Campos Novos Hydroelectric Power Project (PRI) BR0395 Termonorte (PRI) BR0402 Tele Norte Leste Bond Guarantee (Telemar)-Telemar Norte Leste S.A. (PRI) BR-L1011 Brazil Infrastructure Investment Fund (BIIF) (PRI) BR0412 Braskem (PRI) BR-L1007 Banespa Trade Finance Facility (PRI) BR-L1015 Coelba Investment Program BR-L1017 Integrated Cogeneration Facility BR-L1019 Comgas Investment Program BR-L1014 Construtora Norberto Odebrecht S.A.(CNO) (PRI) SUB-TOTAL

322.0 36.0 200.0 18.0 1,000.0 9.0 90.0 10.0 10.0 50.0 10.0 10.0 10.0 50.0 75.0 68.0 75.0 75.0 75.0 50.0 64.8 75.0 43.0 20.0 2,445.8

Poverty, Equity and Human Capital BR-L1004 Support to the Social Protection System (Bolsa Família) BR-1022 QUALISUS Project (Quality and Equity - Health System) BR-L1009 São Paulo: Evaluation and Improvement of Social Policies BR0413 Ulbra University and Hospital Project (PRI) SUB-TOTAL

1,000.0 85.0 5.0 42.3 1,132.3

Living Conditions and Efficiency in Cities BR0400 São Bernardo do Campo Urban Transportation BR-L1005 Igarapes de Manaus Environmental-Social Program BR-L1008 BH Citizenship: Integrated Development Project, Belo Horizonte BR-L1006 Macambira Anicuns Urban Program BR0396 Environment & Rehabilitation Paraibuna River Juiz de Fora BR0397 Environmental Rehabilitation Belo Horizonte BR0302 Fortaleza Urban Transportation BR0375 Curitiba II Urban Transportation BR0376 Environmental Improvement for Amapa BR0390 Porto Alegre Environmental Recovery BR-L1018 Brasilia Urban Transportation Program BR-L1024 Environmental Management Itaqui and Ressaca Watersheds BR-L1025 Paulinia - Municipal Infraestructure and Administration SUB-TOTAL Modernization of the State BR0372 São Paulo Fiscal Administration BR-L1026 Fiscal Management Program in the State of Bahia BR0403 External Control Modernization Program States - PROMOEX BR0405 States and DF Administration Modernization I - PNAGE SUB-TOTAL TOTAL A : Approved

Private Sector and Support 2004-2006

BRAZIL

(US$ millions)

BR

Public Sector 2004-2006

PRI+

(US$ millions) Productivity and Infrastructure

A A A A

BR-L1011

PMEs Financing - BNDES

BR-L1023

Development of Clusters in Bahia

BR-L1021 BR -L1020 BR-L1016 BR0411 BR0370 BR0395 BR0402 BR-L1011 BR0412 BR-L1007 BR-L1015 BR-L1017 BR-L1019 BR-L1014

Productivity and Infrastructure BR0254 Florianopolis-Osorio Highway Modernization BR-L1001 Food and Agriculture Research BR0318 Tourism Development South of Brazil (PRODETUR SUL) BR0392 Cadaster and Land Regularization Program

Sustainable Industrial Development of Minas Gerais Pernambuco's Clusters Competitiveness Competitiveness of Clusters São Paulo Unibanco (PRI) Campos Novos Hydroelectric Power Project (PRI) Termonorte (PRI) Tele Norte Leste Bond Guarantee (Telemar)-Telemar Norte Leste S.A. (PRI) Brazil Infrastructure Investment Fund (BIIF) (PRI) Braskem (PRI) Banespa Trade Finance Facility (PRI) Coelba Investment Program Integrated Cogeneration Facility Comgas Investment Program Construtora Norberto Odebrecht S.A.(CNO) (PRI)

10.0 10.0 10.0 50.0 75.0 68.0 75.0 75.0 75.0 50.0 64.8 75.0 43.0 20.0 1,710.8

Ulbra University and Hospital Project (PRI)

SUB-TOTAL

42.3 42.3

Northeast Development - Minas Gerais

9.0 90.0 10.0 50.0

Minas Gerais Municipal Road Access

A A A A

SUB-TOTAL

735.0

SUB-TOTAL

0.0

Modernization of the State BR0372 São Paulo Fiscal Administration BR-L1026 Fiscal Management Program in the State of Bahia BR0403 External Control Modernization Program States - PROMOEX BR0405 States and DF Administration Modernization I - PNAGE SUB-TOTAL

20.0 12.0 38.6 93.0 163.6

A

TOTAL

1,090.0

0.0

Modernization of the State

SUB-TOTAL

SUB-TOTAL

1,000.0 85.0 5.0

72.0 140.0 21.0 52.0 19.3 46.5 85.2 80.0 21.0 75.0 161.4 28.2 24.3 825.9

A

A : Approved

BR-L1028 BR-L1027

Sustainable Development Semi-Arid in Sergipe

Living Conditions and Efficiency in Cities BR0400 São Bernardo do Campo Urban Transportation BR-L1005 Igarapes de Manaus Environmental-Social Program BR-L1008 BH Citizenship: Integrated Development Project, Belo Horizonte BR-L1006 Macambira Anicuns Urban Program BR0396 Environment & Rehabilitation Paraibuna River Juiz de Fora BR0397 Environmental Rehabilitation Belo Horizonte BR0302 Fortaleza Urban Transportation BR0375 Curitiba II Urban Transportation BR0376 Environmental Improvement for Amapa BR0390 Porto Alegre Environmental Recovery BR-L1018 Brasilia Urban Transportation Program BR-L1024 Environmental Management Itaqui and Ressaca Watersheds BR-L1025 Paulinia - Municipal Infraestructure and Administration SUB-TOTAL

A

4,567.6

Ecotourism Development Mata Atlantica, S.Paulo

Poverty, Equity and Human Capital BR-L1004 Support to the Social Protection System (Bolsa Família) BR-1022 QUALISUS Project (Quality and Equity - Health System) BR-L1009 São Paulo: Evaluation and Improvement of Social Policies

Living Conditions and Efficiency in Cities

20.0 12.0 38.6 93.0 163.6

BR-L1013 BR-L1012 10.0

Poverty, Equity and Human Capital

72.0 140.0 21.0 52.0 19.3 46.5 85.2 80.0 21.0 75.0 161.4 28.2 24.3 825.9

322.0 36.0 200.0 18.0

1000.0

SUB-TOTAL

BR0413

BR PUB

(US$ millions)

1,753.1

TOTAL A : Approved

2,814.5

A A

A

Annex III

Federal Program 2004-2006

BR

Program with States 2004-2006

FED

(US$ millions) Productivity and Infrastructure BR0254 Florianopolis-Osorio Highway Modernization BR-L1001 Food and Agriculture Research Cadaster and Land Regularization Program

SUB-TOTAL

Productivity and Infrastructure

Tourism Development South of Brazil (PRODETUR SUL)

200.0

18.0 BR-L1013 BR-L1012

Ecotourism Development Mata Atlantica, S.Paulo

BR-L1028 BR-L1027 BR-L1021

Northeast Development - Minas Gerais

Sustainable Development Semi-Arid in Sergipe

Minas Gerais Municipal Road Access Sustainable Industrial Development of Minas Gerais

SUB-TOTAL

9.0 90.0 10.0 50.0 10.0

369.0

SUB-TOTAL Poverty, Equity and Human Capital

Poverty, Equity and Human Capital

1,085.0

Living Conditions and Efficiency in Cities

S達o Paulo: Evaluation and Improvement of Social Policies

5.0

SUB-TOTAL

5.0

SUB-TOTAL

Igarapes de Manaus Environmental-Social Program

BR0390 Brasilia Urban Transportation Program

161.4

SUB-TOTAL

322.4

BR-L1024 BR-L1025 0.0

Modernization of the State

SUB-TOTAL

0.0 TOTAL

A : Approved

Modernization of the State BR0372 S達o Paulo Fiscal Administration BR-L1026 Fiscal Management Program in the State of Bahia BR0403 External Control Modernization Program States - PROMOEX BR0405 States and DF Administration Modernization I - PNAGE SUB-TOTAL

1,461.0

TOTAL A : Approved

Curitiba II Urban Transportation

21.0 52.0 19.3 46.5 85.2 80.0

Porto Alegre Environmental Recovery

75.0

BH Citizenship: Integrated Development Project, Belo Horizonte Macambira Anicuns Urban Program Environment & Rehabilitation Paraibuna River Juiz de Fora Environmental Rehabilitation Belo Horizonte Fortaleza Urban Transportation

21.0

Environmental Improvement for Amapa

BR-L1018

72.0

140.0 BR-L1008 BR-L1006 BR0396 BR0397 BR0302 BR0375

BR0376

0.0

Living Conditions and Efficiency in Cities BR0400 S達o Bernardo do Campo Urban Transportation

Living Conditions and Efficiency in Cities BR-L1005

SUB-TOTAL

0.0

1,000.0 85.0 BR-L1009

SUB-TOTAL

BR MUNIC

(US$ millions)

322.0 36.0

376.0

Poverty, Equity and Human Capital BR-L1004 Support to the Social Protection System (Bolsa Fam鱈lia) BR-1022 QUALISUS Project (Quality and Equity - Health System)

Program with Municipalities 2004-2006

Productivity and Infrastructure

BR0318 BR0392

BR STATES

(US$ millones)

Environmental Management Itaqui and Ressaca Watersheds Paulinia - Municipal Infraestructure and Administration

SUB-TOTAL

28.2 24.3 503.5

Modernization of the State 20.0 12.0 38.6 93.0 163.6

A

SUB-TOTAL

860.0

0.0 TOTAL

A : Approved

503.5

A A

Annex IV Page 1 of 1

Technical cooperation and MIF (US$ thousands) Technical cooperation BR-T1003 Cairu Strategic Development Plan BR-T1010 Challenges in Higher Education for Indigenous Peoples BR-T1004 Support to Social Rental Housing Pilot Project BR-T1012 Development Ecotourism Strategy Mata Atlantica State Park BR-T1011 Study of Savings and Loan Cooperatives BR-T1008 Vulnerable Groups, Social Inclusion Organizations BR-T1009 Support for Indigenous Peoples Statutes Formulation BR-T1016 Preparation SMEs Tourism Estrada Real TC9811896 Regional Transportation Planning Information System TC0212011 Support to CNPE (National Board of Energy) BR-T1014 Support of the Amazon Protection System BR-T1015 Water Resources National Plan BR-T1017 Socio-cultural Restoration in the Historic "Gloria" Neighborhood BR-T1006 Improved Management & Information Systems Tijuca NP BR-T1013 Structuring a Small Hydro Power (SHP) Generation Financing Facility BR-T1018 Sustainable Development of Uruguay River Basin BR-T1019 Requalification of Port Area and Historical Center of Santos TOTAL Technical Cooperation MIF BR-M1003 BR-M1004 BR-M1006 BR-M1007 BR-M1008 BR-M1010 BR-M1002 BR-M1005 BR-M1009 BR-M1011 BR-M1001 BR-M1016 BR-M1019 BR-M1018 BR-M1015 BR-M1017 TC0202026 TC0004003 TC9703506 BR-M1013 BR-M1014

Virtual Incubator for Fruit-Processing Microenterprises Quality Enhancement through Human Resource Development Development of a Distribution System for Auto Replacement Parts Worker-Managed Microenterprise Network Implementation of Quality System in the Civil Construction Sector Strengthening the Cleaner Production Center in Bahia Basic Skills for the Entertainment Industry Microenterprise Development in the Agricultural Sector Competitiveness of the Productive Chain of the Rattan Sector Support for the Productive Chain of the Honey Industry in Piaui Public-Private-Association (PPA) Minas Gerais Support for the Cooperative Credit System in Tocantins Formalization of Tourism Microenterprises in Southern Bahia Microfinance Institutions Management Capacity Support Program for the International Competitiveness of Software SMEs Training Program for Recreation Sector Development of Productive Chains ABC Paulista Remittance Fund for Entrepreneurs Development and Management of Small Enterprises (Biominas) CRP Venture Investment Fund for Technology Companies, DVC II

TOTAL MIF A : Approved

BR BRAZIL 142.7 15.0 465.0 29.5 65.0 51.6 50.0 95.0 750.0 138.0 750.0 550.0 149.0 250.0 120.0 1,500.0 149.9 5,270.7

A A A A A A A A

27.7 95.0 77.1 89.9 60.2 68.0 35.0 92.8 89.5 65.0 675.0 95.0 46.9 45.0 1,100.0 25.0 1,200.0 750.0 1,000.0 3,700.0 4,000.0 13,337.1

A A A A A A A A A A A A

Annex V Page 1 of 1

Program of studies BR-N1001 BR-N1002 BR-N1005 BR-P1001 BR-P1002 BR-P1003 BR-P1004 BR-P1005 BR-P1006 BR-P1007 BR-P1008 BR-P1009 BR-P1010 BR-P1011 BR-P1012 BR-P1013 BR-P1014 BR-P1015 BR-P1016 BR-P1017 BR-P1018 BR-P1019

BR: Economic situation and prospects Education, family background, and wage disparities by race in Brazil P003: Protection and penetration of imports in Brazil, 1987-2003 Programs to accelerate learning in primary education PENAFE evaluation Study on poverty Government and social exclusion PENAFE evaluation Elements for a program for SME competitiveness and technology innovation Options for local currency financing Frame of reference for the energy sector in Brazil (RE1/SDS/PRI) Municipal financial markets Evaluation of project BR-0321: environmental recovery of the Guaiba watershed Action plan: water and sanitation PROCIDADE studies State development strategy formulation Studies on federal land Studies on Brazilian competitiveness Trade policy and the labor market New challenges in financial reform Labor market: regulatory framework, tax burden, and informality Social security: the missing reforms

BR BRAZIL OD1 POV ITD SO1 RE1 SO1 SC1 SC1 FI1 FI1 FI1 FI1 EN1 EN1 CBR CBR CBR CBR OD1 OD1 OD1 OD1

Annex VI Page 1 of 2

SEMINARS AND ANALYTICAL STUDIES REQUESTED FOR THE STRATEGY

Seminars “Brazil: Elements For An Effective Social Agenda”. OD1/SO1/RE1. IDB. Washington, D.C., 29 July 2003.

“Brasil: Riesgos y Oportunidades de Integración en la Economía Mundial”.

OD1/RE1, INT, IDB and FGV-SP. Sao Paulo, 4 November 2003.

Studies Abreu, M. (2003)*, “Política Comercial Brasileira: Impasses e imobilismo”, mimeo, IDB, November.

Afonso, J, E. Araujo, and D. Werneck (2003), “Carga Tributária Indireta no Brasil: Análise da Incidência Efetiva sobre as Famílias”, mimeo, IDB, February.

Amadeo, E. (2003)*, “A Lógica era de repressão das importações”, mimeo, IDB, November.

Cardoso, E. and A. Souza (2003), “The Impact of Cash Transfers on Child Labor and School Attendance in Brazil”, paper delivered at the conference on “Elements for an Effective Social Agenda ”, IDB, July.

Dall’Acqua, F. M. (2003), “Ajuste fiscal e empréstimos externos: uma análise da recente experiência brasileira”, mimeo, IDB, May. De Oliveira Lima, I.M. (2003), “Marco Setorial do Transporte no Brasil” mimeo, IDB Ferreira, F. (2003), “A Social Policy Reform in Brazil: A Discussion”, paper delivered at the conference on “Elements for an Effective Social Agenda ”, IDB, July.

Laplane, M. (2003)*, “The Impact of Foreign Direct Investment on The Brazilian Economy”, mimeo, IDB, November.

Mesquita, M. (2003)*, “Abertura e Crescimento no Brasil: Deu errado?”, mimeo, IDB, November.

Nogues, J. (2003)*, “Argentina’s Interests in Trade Negotiations”, mimeo, IDB, November.

*

Papers delivered at the seminar entitled “Brasil: Riesgos y Oportunidades en la Economía Mundial” [“Brazil: Risks and Opportunities in the Global Economy”.

Annex VI Page 2 of 2

Oliveira, G. (2003), “Pontos para a Reforma das Agências Reguladoras no Brasil”, mimeo, IDB, March.

Oliveira, G. (2003)*, “Regulação Pró - Concorrencial e o Novo Ciclo de Abertura Comercial no Brasil”, mimeo, IDB, November.

Pacheco, C. (2003) *, “A Inserção Internacional do Brasil: Políticas Tecnológicas, Industrial e de Comércio Exterior”, mimeo, IDB, November.

Reis, J. G. and S. Valadares. (2004), “Reforma do Sistema Financeiro do Brasil: Implementação Recente e Perspectivas”, mimeo, IDB, February.

Thorstensen, V. (2003) *, “De Doha a Cancun: Causa dos impasses e implicações para as negociações regionais”, mimeo, IDB, November.

Annex VII Page 1 of 11

IDB COUNTRY STRATEGY MATRIX FOR BRAZIL IDB activity Challenges for the country

Government strategy (PPA)

IDB strategy

Recent and ongoing

Proposed

Other strategies/ bilateral/ multilateral measures

Benchmarks 2007 PPA goals

2015 MDG goals

Strategy / program implementation, 2007

Objective 1: Promote sustained, environmentally sustainable growth with stability Increase per capita GDP growth rate

Expand internal sources of financing and ensure more democratic access to credit

Support SMEs and microenterprise

Credit for SMEs and microenterprise

Credit for SMEs and microenterprise

WB: WB and IFC microfinance loans

- Increase supply of credit for micro and small enterprises In percentage: 2% In accrued amount: R$41.4 billion

Coordinate and promote productive investment and increased productivity Promote investment in infrastructure on a coordinated, sustainable basis

Restore levels of infrastructure investment

Power generation

Power generation

WB: programmatic policy loans Growth agenda

National highways and local roads

Infrastructure Investment Fund (PPP)

WB: risk guarantees WB: SWAP road maintenance

US$1 billion in credit for SMEs disbursed (2007) -

Increase in annual gross billing by the program’s end-borrower companies during the analysis period (microenterprise: 85%; small business: 25%; and medium-sized business: 15%)

-

Increase in the number of jobs at the program’s end-borrower companies up to analysis period (microenterprise: 65%; small business: 15%; and medium-sized business: 10%)

- Expansion of power generation in plants: 14,085 MHW

Complete and expand private sector activities for power generation

- Highway construction: 5,500 km (cumulative 2004-2007)

Federal and state highway programs completed; weigh stations implemented in federal highway system

- Highway repair: 23,000 km (cumulative 2004-2007) - Highway maintenance: 43,000 km (cumulative 2004-2007)

Annex VII Page 2 of 11

IDB activity Challenges for the country

Government strategy (PPA)

Expand Brazil’s international market penetration

IDB strategy

Recent and ongoing

Greater integration of trade, capital, labor, technology, and other factors of production

Integration highways

Increase human capital formation rate

Vocational training

Improve government agencies that enhance private-sector competitiveness

Tourism development

Proposed

Other strategies/ bilateral/ multilateral measures

Benchmarks 2007 PPA goals

MERCOSUR highway (Sao Paulo-Buenos Aires axis)

Regional tourism programs (PRODETUR Nordeste II, PRODETUR Sul)

Strategy / program implementation, 2007 Recovery of investment levels in integration highway network Florioanópolis-Osorio section initiated

Teachers trained: 1.8 million

Teacher training

2015 MDG goals

Vocational training program completed

PRODETUR NE-II Number of direct employees: Area

2000

Fin prog

Descobrimento Coquierais Dunas

3,676 2,642 6,673

4,130 3,110 7,326

-

Total number of visitors/year to destinations and corridors developed by PRODUTUR Nordeste II increases from 2.5 million in 2000 to 3.7 million by end of program

PRODETUR SUL Number of direct employees: Area

2000

Costa Oeste 5,335 Sierra Gaúcha 9,188 Sierra de Bodoquena 6,673 -

Fin prog 8,300 12,600 700

Total number of visitors/year to destinations and corridors developed by PRODUTUR SUL increases from 4.8 million in 2002 to 7 million by end of program

Annex VII Page 3 of 11

IDB activity Challenges for the country

Government strategy (PPA)

IDB strategy

Recent and ongoing

Proposed

Other strategies/ bilateral/ multilateral measures

Benchmarks 2007 PPA goals

Local competitiveness plans Property registry and regulation activities in various sector projects Support technological innovation and its application to production

2015 MDG goals

Strategy / program implementation, 2007 Five plans implemented in the period

Property registry and regulation

WB: through “Cédula da Terra” program, tries to facilitate small producers’ access to land

Properties with title: 400,000

Establish National Registry of Rural Property

Agrifood research

WB: analytical services for technology innovation

- Increase number of graduate students from 6,300 to 10,000

Expand agrifood research system with private sector participation

- Increase number of articles published in scientific journals from 48,000 in 2003 to 74,000 - Increase Brazilian patents registered by 80% - Increase software exports by US$100 million

Annex VII Page 4 of 11

IDB activity Challenges for the country

Government strategy (PPA)

IDB strategy

Ensure stable growth sustained over time

Achieve macroeconomic equilibrium with recovery and sustainability of growth and income distribution

Support progress towards unified social security systems and increased formal employment

Support studies on policies for labor and social security reforms

Financial sector reform

Study on financial sector reform

Recent and ongoing

Proposed

Other strategies/ bilateral/ multilateral measures

Benchmarks 2007 PPA goals

2015 MDG goals

Strategy / program implementation, 2007 Studies completed in 2005

WB: technical assistance for Central Bank

Studies completed in 2005

WB: IFC support for financial market development Achieve economic growth with proper management of natural resources

Improve environmental management and quality and promote conservation and sustainable use of natural resources with emphasis on environmental education

Urban sanitation

Recovery of urban environment and urban and periurban bodies of water

- Cleanup of bays in major metropolitan areas - Environmental improvements in midsized cities

Water supply for 3.7 million people in 200 cities in semiarid areas of Brazil

-

Second stage of environmental recovery of Guanabara Bay initiated

-

Improved coverage of water supply, sewerage, and solid waste collection, with environmental recovery of urban bodies of water in municipalities served under direct programs (Belo Horizonte, Juiz de Fora, Goiania, Macapa, Porto Alegre, and S達o Jose dos Pinhais)

-

Belo Horizonte: number of connections installed: 5,380 units; collector sewers installed: 54.7 km total; interceptor sewers in watersheds: 31.4 km total

-

Juiz de Fora: The sewer system is expanded to cover 420,000 inhabitants (90% of urban population), with excreta collection and treatment by 2008 (baseline 2002: 1%)

Annex VII Page 5 of 11

IDB activity Challenges for the country

Government strategy (PPA)

IDB strategy

Recent and ongoing

Management of natural heritage

Sustainable development of Acre

Proposed

Other strategies/ bilateral/ multilateral measures WB: Program for protected areas in Amazon rainforest

Benchmarks 2007 PPA goals - Increase area of forest under certified sustainable management from 350,000 hectares to 700,000 hectares

2015 MDG goals

Strategy / program implementation, 2007 Annual rate of deforestation in Acre cut from 0.4% in 2002 to 0.3% by end of program, i.e., less than 50,000 has/year

- Reduce forest area at risk of wildfires by 30,000 hectares by 2007 - At least 10% of territory with protected areas by 2007

Implement effective agrarian reform, recover current settlements, strengthen and consolidate family farming, and promote

Institutional strengthening and modernization of responsible agencies

National Environment Fund (FNMA), Phase I

National Environment Fund, Phase II

Contribute to institutional modernization and poverty reduction

- Settlements

Consolidation and emancipation of land reform settlements

Land reform

The FNMA will raise at least US$4 million in additional nonbudget resources

WB: through “Cédula da Terra” program tries to facilitate small producers’ access to land

Improvement in social and production infrastructure in 75 land reform settlements

12,000 families in sustainable settlements (agrarian reform)

Annex VII Page 6 of 11

IDB activity Challenges for the country

Government strategy (PPA)

IDB strategy

Recent and ongoing

Other strategies/ bilateral/ multilateral measures

Proposed

Benchmarks 2007 PPA goals

2015 MDG goals

Strategy / program implementation, 2007

sustainable development of rural areas Objective 2: Reduce poverty and promote social inclusion and greater social and regional equality Poverty reduction

Fight hunger with the goal of eradicating it and promote food security and nutrition

Income transfers to households

Expand income transfers to poor families and enhance the transfer mechanisms

Monitoring and evaluation of social policies

Implement urban reform, improve urban habitability, accessibility, and mass transit, with emphasis on the quality of life and the environment

Social investment in major urban areas

Bolsa FamĂ­lia program (PBF) (expansion in metropolitan areas and evaluation)

Monitoring of state and federal social policies

-

WB: PBF SWAP

-

WB: First Job SWAP

-

Families served: 12.7 million (100% poor families)

WB: state projects in the Northeast

WB: analytical services for the welfare program

- Budget allocated: R$10.7 billion

Extreme poverty rate: decline from 15% (2002) to 11%

Expansion of PBF to urban areas (from 6 million to 11 million families between 2004 and 2007) -

Repeater rate for poor children falls 6%

-

Average number of years of schooling for poor children increases by 3.4%

-

PBF coverage increases from 3.8 million families in 2004 to 12.7 million in 2007

-

National census of social services organizations completed and published in 2006

-

Complete state-level pilot project, design indicators for monitoring social programs and municipal goals

-

Design system for monitoring PBF

-

Complete and expand projects to improve substandard settlements and neighborhoods, including community development in shantytowns in large urban areas (70,000 families)

- Increase the percentage of social services that go to the poor (currently highly regressive) Improvement of substandard housing and neighborhoods

- Substandard housing (shantytowns, tenements) and neighborhood improvement

WB: Programs for technical assistance and housing SWAP

New housing units: 1.2 million

Annex VII Page 7 of 11

IDB activity Challenges for the country

Government strategy (PPA)

IDB strategy

Recent and ongoing

Basic sanitation

Proposed

Other strategies/ bilateral/ multilateral measures

Benchmarks 2007 PPA goals

2015 MDG goals

Strategy / program implementation, 2007

- Support for Ministry of Cities

-

Complete projects to improve substandard housing in metropolitan areas (10,000 families)

- Recovery of degraded urban areas

-

Basic sanitation

Covered under the environmental improvement projects in medium-sized urban areas

WB: Integrated state programs for water and sanitation WB: water and sanitation for small municipalities and SWAP sanitation

- Families in urban areas with water supply, sewerage, and solid waste disposal: 9 million - Sanitation coverage in urban areas: increase from 50.9% to 57.9% - Proportion of municipalities with proper solid waste disposal: increase from 29% to 43%

- Urban population with access to potable water: from 87.3% (2002) to 96.9% (2015)

Improved water, sewerage, and solid waste collection coverage with environmental recovery of urban water courses in municipalities covered by direct programs (Goiania, Macapa, Porto Alegre, and SĂŁo Jose dos Pinhais)

- National population with access to proper sanitary sewerage: from 48% (2002) to 71% (2015)

Flood control Municipal development

-

Supply of public services index in program’s municipalities increases

-

Municipality’s fiscal effort index increases

Annex VII Page 8 of 11

IDB activity Challenges for the country

Government strategy (PPA)

IDB strategy

Recent and ongoing

Proposed

Other strategies/ bilateral/ multilateral measures

Benchmarks 2007 PPA goals

2015 MDG goals

Recovery of city centers

Increase years of schooling and education quality, promoting universal access to education

Enhance equality and social inclusion

Investments in education

Primary education: support for pilot project formulation

Reduce disparities between regions and within regions with integration of the various scales (national, macroregional, subregional, and local)

Middle-school education at the national and local levels

Promote reduced racial and gender inequalities

Diversity in universities

Expand, strengthen, and deconcentrate the science and technology foundations to support development in the regions

Human capital

WB: integrated education projects for states

- Enrollment of children aged 7-14: 100% - Number achieving literacy (cumulative, 2004-2007): 16.3 million

WB: Programmatic loan for human development

- Enrollment: increases from 8.7 million to 10 million

Strategy / program implementation, 2007 -

Market value of property increases in project area.

-

Collection of indirect taxes increases (rise in local businesses)

Net primary enrollment: increase from 97% (2002) to 100%

Operation to support implementation of FUNDEB (Fund to finance students through basic education—including initial and middle) developed and approved by 2006

Illiteracy ratio of men to women: maintain at close to 1

Middle-school education operation at national level redesigned and completed in 2006

Pilot project implemented

Teacher training

WB: IFC support for higher education

Teachers trained: 1.8 million

Annex VII Page 9 of 11

IDB activity Challenges for the country

Government strategy (PPA)

IDB strategy

Recent and ongoing

Expand access to information and knowledge through new technology, helping to close the digital divide Promote universal access to quality social security with equity (health care, welfare, and retirement)

Proposed

Other strategies/ bilateral/ multilateral measures

Benchmarks 2007 PPA goals

2015 MDG goals

Nonformal education and training

Investments in health

Investments in health

QualiSUS program (health)

Operation to support vocational education reform in all states and the Federal District completed

WB: VIGISUS I and II, and AIDS III

- Expand access to care through unified health system (SUS): 100% of population - Access to essential medication: from 51% (2003) to 80% - Reduce infant formality from 27 per thousand live births to 24 per thousand live births

Conservation of cultural heritage

Strategy / program implementation, 2007

- Infant mortality rate: decrease from 29 (2002) to 16 per thousand live births

-

Continue financing national health programs

-

Complete health care staff training activities

-

At least 20 municipalities sign agreement with National Historical and Artistic Heritage Institute (IPHAN) to enforce standards based on IPHAN inspections

- Material mortality rate: decrease from 56 (1999) to 30 per 100,000

Annex VII Page 10 of 11

IDB activity Challenges for the country

Government strategy (PPA)

IDB strategy

Recent and ongoing

Proposed

Other strategies/ bilateral/ multilateral measures

Mass transit in major cities

Benchmarks 2007 PPA goals - Increase in average daily monthly passenger transportatio n by train from 4.5 million to 6.5 million

2015 MDG goals

Strategy / program implementation, 2007 Reduce urban transit costs in metropolitan areas directly served

- Increase urban transit rates from 1.5 trips/day to 2 trips/day per inhabitant Mass transit— mid-sized cities Rural electrification

SWAP rural electrification

Universal access to electric power: 1.7 million households

WB: advisory and analytical services for municipalities

- Improve government effectiveness indicator ranking (2002=50)

Objective 3: Support institutional strengthening and promote democracy and participation Increased participation, transparency, and social oversight

Fight corruption and ensure more democratic access to the media, allowing alternative media and diversity in expression

Improve efficiency, effectiveness, quality, and internal and external oversight

Modernization of external oversight

Redesign methods, techniques, and procedures for external oversight, including performance reviews at the national, state, and municipal levels -

Reduction of 5% per year in the average period between proceedings and final decision in 50% of participating official auditing offices (baseline: 1 year)

-

At least 5% reduction per year in the number of proceedings dormant for over 12 months (baseline: 1 year)

Annex VII Page 11 of 11

IDB activity Challenges for the country

Modernization of the State and institutional strengthening at the three levels of government

Government strategy (PPA)

IDB strategy

Recent and ongoing

Implement new governance: ethics, transparency, participation, decentralization, with social oversight and a citizen focus

Consolidate program to improve governance at the state and municipal levels

Modernization of the State

Ensure citizen security with implementation of decentralized, integrated public policies

Improve management of justice system and citizen security

-

Office of the Auditor General

-

Integration of legislature

Proposed

-

Fiscal management by states

-

Municipal management and training of municipal managers

-

Sector support for federal government studies

-

Management of states

Other strategies/ bilateral/ multilateral measures

WB: advisory and analytical services for municipalities

Benchmarks 2007 PPA goals

-

Reduce the ratio of personnel costs to liquid current income in states

2015 MDG goals

Strategy / program implementation, 2007 -

National website implemented in year three

-

75% of the official auditing offices integrated in national network

-

Performance audits increase 10% over total audits in 75% of the participating official auditing offices by end of phase I. Baseline: zero official auditing offices have the capacity to conduct performance audits.

Complete phase one of municipal fiscal management program (700 municipalities)

-

Basic studies on judiciary system

-

For at least 75% of participating states, compliance with 80% of established targets and, for no more than 25% of the participating states, compliance with 50% of these targets. Targets established: (i) planning and financial execution process; (ii) integrated database of active and inactive civil servants and pensioners; (iii) cost management system; (iv) channels of communication implemented; (v) integrated information system; (vi) program to raise awareness and facilitate change in institutional culture formulated and implemented.

Annex VIII Page 1 of 1

CHART OF IDB PRIORITY AREAS OF ACTIVITY

PRODUCTIVITY AND INFRASTRUCTURE Recover investment levels

Improve Institutions

BOLSA FAMĂ?LIA

Investment in education and health

Support SMES

POVERTY, EQUITY, AND HUMAN CAPITAL Monitoring of social policy

Technical and vocational education

LIVING CONDITIONS AND EFFICIENCY IN CITIES Integrated social investment in cities

Support for improved efficiency

INSTITUTIONAL STRENGTHENING AND MODERNIZATION OF THE STATE State and municipal management

CROSSCUTTING AREAS

Integration

Comprehensive management

Administration of justice and citizen security

Environment

Regional, gender, and racial inequalities

Annex IX Page 1 of 1

BRAZIL: MILLENNIUM DEVELOPMENT GOALS

1990

1995

2001

2002

2015 target: Halve 1990 proportion of people whose income was less than US$1 day and malnutrition rates 1. Eradicate extreme poverty and hunger Population below US$1 per day (%) Poverty gap of population below US$1 per day (%) Share of poorest quintile in national consumption Prevalence of underweight children (% of children under 5) 7.0 5.7 Proportion of population below minimum level of dietary energy consumption 13.0 10.0 2. Achieve universal primary education 2015 target: 100% enrolment Net enrolment ratio in primary education (% of relevant age group) 86.4 89.7 97.0 71.7 70.8 Proportion of pupils starting grade 1 who reach grade 5 (%) 95.5 Youth literacy rate (% of 15-24-year-olds) 91.8 94.1 95.6 3. Promote gender equity 2015 target: 100% education Ratio of girls to boys in primary and secondary education (%) 103.4 103.0 Ratio of literate women to men (% of 15-24-year-olds) 102.9 102.8 103.0 45.4 Share of women in wage employment in the nonagricultural sector 42.8 44.1 Proportion of seats held by women in national parliament (%) 5.0 7.0 6.0 7.0 4. Reduce child mortality 2015 target: Reduce 1990 under-5 mortality by two thirds 36.0 Under-5 mortality rate (per 1,000) 60.0 48.0 35.7 31.0 50.0 41.0 29.5 Infant mortality rate (per 1,000 live births) 99.0 Immunization against measles (% of children under 12 years) 78.0 90.0 5. Improve maternal health 2015 target: Reduce 1990 maternal mortality by three quarters Maternal mortality rate (per 100,000 live births) 260.0 Births attended by skilled health personnel (% of total) 75.6 91.5 6. Combat HIV/AIDS, malaria and other diseases 2015 target: Halt and begin to reduce AIDS, etc.

HIV prevalence among women (% of women aged 15-24) 0.5 77.0 Contraceptive prevalence rate (% of women aged 15-49) Number of children orphaned by HIV/AIDS 130.0 (thousands) Incidence of tuberculosis (per 100,000 population) 68.2 Tuberculosis cases detected under DOTS (%) 1.0 2015 target: See note 1 7. Ensure environmental sustainability Land area covered by forest (% of total) 65.6 63.0 Ratio of national protected area to surface area (% of total) 4.4 4.2 6.7 Energy use per US$1 GDP (PPP per kg oil equivalent) 6.9 6.0 6.8 Carbon dioxide emissions per capita (metric tons per capita) 1.8 1.4 1.6 Access to improved water source (% of population) 83.0 87.0 Access to improve sanitation system (% of population) 71.0 76.0 Access to secure tenure (% of population) 2015 target: See note 2 8. Develop a global partnership for development Youth unemployment rate (% of total work force aged 15-24 years) 6.7 11.4 18.3 Telephone lines and cellular subscribers (per 1,000 population) 65.0 93.4 357.1 62.9 Personal computers (per 1,000 population) 3.1 17.3 -

Source: World Development Indicators database, April 2002.

Notes: 1. Integrate the principles of sustainable development into country policies and programs and reverse the loss of environmental resources.

By the year 2015, reduce the proportion of people without sustained access to drinking water by 50%.

2. Develop an open, rule-based, predictable, nondiscriminatory trading and financial system.

Annex X Page 1 of 2

CONSULTATIONS WITH CIVIL SOCIETY (Summary prepared by the Bank of the official report on the consultation meeting, the full text of which is available on the OD1 website) During preparation of the new country strategy, a dialogue was undertaken with the Brazilian authorities and numerous activities were carried out designed to expand the consultation process to the main civil society organizations in Brazil. The idea was to identify those areas in which there was a broad enough consensus to support the proposed agenda.

In May 2004, the Bank met with the main civil society organizations. Also in attendance were members of the IDB Civil Society Advisory Council in Brazil, special guests, and members of the team preparing the IDB strategy with the country. The following methodology was used: the strategy team presented a working document; the participants were divided into working groups; a plenary session was held to present the findings; and the meeting ended with comments and conclusions.

There was a consensus on the general lines of the strategy. In particular, the working groups agreed with the diagnostic assessment and the document recommendations, and thanked the Bank for the opportunity for civil society to express its views and for taking those views into account and reflecting them during strategy preparation.

During the consultation with civil society, the participants raised the following issues as suggestions and contributions to the strategy: emphasize the regional aspects of the strategy paper; expand the discussion of agribusiness; deepen the issues of gender, race, and ethnicity; include the issue of human rights; and elaborate on the issue of employment policy.

On the regional issue, the participants suggested enriching the general analysis of the document, as well as the review of certain projects, using this type of approach. It was suggested that regional and local characteristics (such as the diversity in natural resources, in the population, and in management) be taken into account in each of the regions involved in the strategy.

Agribusiness and its inclusion in the strategy were extensively discussed. Certain participants suggested that it should be added to the crosscutting issues because of its interconnection with various economic sectors and the active role it should play in achieving the strategy goals, such as growth and the production of food and renewable energy, participating with regard to generating foreign exchange. However, other participants did not believe the issue warranted more emphasis because of the high liabilities it implied for society.

Annex X Page 2 of 2

The consultation group stressed that proper treatment should be given to the issues of gender, race, and ethnicity. In particular, excluded and vulnerable groups should be described in more detail. It was also suggested that such factors could be added to the crosscutting issues, along with the environment.

Another very important issue was the treatment of human rights during project execution.

An effort needed to be made to integrate the issue throughout the document in a coherent manner in order to disseminate it.

On the issue of employment, it was suggested that the possibility be carefully reviewed of devising a structural policy targeting not only formal employment, but also the informal economy, family farming, small-scale producers, and small enterprise. The social dimension of employment should be borne in mind.

Lastly, the group suggested designing an alternative strategy in case the “optimistic� projections by the government (as described in the multiyear plan) failed to materialize.

Annex XI Page 1 of 5

MANAGEMENT’S ACTIONS REGARDING THE RECOMMENDATIONS MADE TO BY OVE IN ITS COUNTRY PROGRAM EVALUATION BRAZIL 1993-2003

I. Recommendations

II. Management’s Areas of Activity

1. The Bank and Brazil should establish clearly the parameters of their working relationship going forward.

a) the new strategy specifically identifies four areas of Bank activity in Brazil and each of these incorporates subareas or areas of emphasis (1. Productivity and infrastructure, with new emphasis on local productive systems, publicprivate partnerships (PPP), and support for private investment (infrastructure); 2. Poverty, equity, and human capital formation, with targeted incometransfer programs added to efforts in education and health; 3. Living conditions and efficiency in cities, with emphasis on the problems of urban poverty and habitability; and 4. Modernization and institutional strengthening, with emphasis on making subnational government spending more efficient). These areas and subareas were identified because they offer the best opportunities for pressing the comparative advantages developed by the Bank in the country. This identification process was the result of an important effort of analysis concerning the different aspects of the country’s economic and social reality, and involved the participation of academics from the main national institutions and staff from the Bank’s various departments.

These basic studies served to identify the development challenges. In addition, with different analyses on the experiences and comparative advantages of the Bank (in areas as diverse as improving the quality of life in the cities to strengthening in the areas of tax administration and expenditure management), it was possible to select from the Plano Plurianual [Multiyear Plan for 2004 – 2007] (PPA)—the Brazilian federal government’s main planning instrument—and from priorities outlined by the Brazilian subnational authorities, those in which Management could maximize the value added. During the entire strategy preparation process, an active dialogue was maintained with the government and with different civil society organizations, through various rounds of consultation for preparation of the proposal. This made it possible to incorporate the main demands and expectations of the government and local society regarding the Bank’s action in Brazil over the next four years.

a)

In the next Country Strategy, Management should reflect on the comparative advantages of the institution in the context of specified development challenges by looking at what the Bank does best and how it can strengthen the value of its actions in these areas.

b) The next Country Strategy should also clarify Brazil’s expectations of the Bank, among other aspects on the question of whether programlevel objectives, in which case they should be accompanied by indicators, baselines and targets.

Annex XI Page 2 of 5

I. Recommendations

II. Management’s Areas of Activity b) It is worth noting that Brazil has an elaborate planning system—particularly at the federal level—that calls for the execution of multiyear plans (a requirement of the constitutional reform of 1998). These plans include a significant number of targets associated with programs for which there are baselines and monitoring indicators. The Bank has incorporated the national plan’s indicators into the summary matrix of the strategy that are pertinent to the areas of activity proposed by the Bank and has proposed to the authorities that these be monitored as a core element of the dialogue with the country. In addition, the Bank is systematically incorporating baselines and indicators at the project level that will make it possible gradually to build a series of indicators that will make it possible to move towards an evaluation at the sector level.

2. If projects continue to be the principal form of engagement between the Bank and Brazil: a)

It is imperative that projects improve their evaluability, particularly during execution.

b) Certain aspects of project supervision also need to be improved.

In reference to this recommendation, OVE’s own document indicates that evaluability exists, though only at the project level, and highlights the absence of outcome indicators: “Across the twelve sectors, the evaluation found generally good performance in the delivery of promised outputs” (CPE Brazil 1993-2003, OVE, page iii).

The presence of outputs that can be evaluated with good results in the Bank’s project portfolio in Brazil in fact stems from the Bank’s increased efforts to improve project evaluability and supervision and control of project outcomes. The intensification of efforts to improve measurement and supervision (which included new obligations for the executing agencies, the development of measurement tools, new data generation processes, and others) came about as the result of the increased importance that this topic has gradually been gaining in recent years at multilateral institutions.

Management is firmly committed to making continued progress in this area and efforts persist to obtain baselines and monitoring indicators in the projects being executed, which originally did not include this type of instrument.

Similarly, the information and monitoring systems (PPMR) and their application have been revised.

In reference to the definition of “outcomes” associated with the Bank’s activities, Management makes a special effort to define them in all cases where identifying them is feasible, taking into account the constraints arising from

Annex XI Page 3 of 5

I. Recommendations

II. Management’s Areas of Activity well-known problems of attribution, influence of exogenous factors, and delays in generating results, among others.

In its dialogue with the authorities, the Bank promotes incorporating intermediate outcome indicators, in which the linkage with the Bank’s efforts is more immediate, making it easier to monitor them over time.

The strategy includes a special section that places priority on this topic (paragraph 4.104 and following) and in particular on the need to adopt a better culture of evaluation during program and project implementation, and on the strengthening of national monitoring and evaluation capacity (paragraph 4.110). This topic is also highlighted in the proposed dialogue agenda (paragraph 5.3, last subparagraph).

3. The Bank should increase its diagnostic and analytic work on the problems that emerge in individual projects or groups of projects, with a view to replicating them.

Management agrees with the recommendation made by OVE about increasing diagnostic and analytic work. In fact, and even with current resource constraints, 17 analytic works were commissioned for formulating the strategy, some of which were directly related to existing and future Bank interventions (such as essays on the transportation strategy or on conditional income transfers from the government to households). At the same time, the proposed program of studies (Annex 5 of the strategy) identifies 22 new works, including evaluations of previous operations (PNAFE, PROCIDADE, and Guaiba watershed).

The Bank will continue giving high priority to the topic of learning from successful projects. This effort has made it possible to fine tune the designs and, depending on the case, enabled replication by the Bank and other executing agencies by adapting them to specific conditions (and frequently on a larger scale); replicability of the operations or their main approaches outside the country; and, most important, appropriation of these approaches by the country in its regular activities, a fact that is not necessarily embodied in the new requests for financing from the Bank. (Among others, Favela Barrio has served as a guiding experience for 18 projects in 11 countries; PROCENTRO was singled out as “best practice” by HABITAT; and Paraná-Cidade is recognized as an international yardstick.)

Annex XI Page 4 of 5

I. Recommendations

II. Management’s Areas of Activity The text of the strategy identifies the need to deepen analytical work as an important lesson learned (paragraph 3.34 a), third subparagraph), and highlights the interest and strategic value of greater activity in the area of studies (paragraph 4.61 and 4.62).

4. There is a need to examine more closely the transaction costs incurred by the Bank in Brazil. a)

Project preparation and execution performance should improve

b) Management should develop concrete proposals, ideally with performance targets for the portfolio as a whole.

Management agrees with this recommendation, although with the qualifications expressed in due course regarding OVE’s analysis, which: (a) did not place enough emphasis on the execution difficulties arising from the tight fiscal constraints implemented by Brazil in response to the difficult external events experienced during the second half of the 1990s; and (b) did not ascribe importance to Management’s efforts in Brazil to design, based on local plans and priorities and the Bank’s mandates and competitive advantages, the package of specific interventions that seeks to maximize the value added for the country.

The Bank continues to work on speeding up the preparation of operations and on shortening execution periods. Aware of the importance of this matter, Management’s ongoing efforts, expressed in particular during portfolio review missions, require specific and realistic action plans, that take into account existing conditions, to address problems with execution, and make consideration of any extension conditional upon the existence of such plans.

All this is particularly relevant given the—so far persistent—conditions of restrictions on public spending in force in Brazil, which have a significant impact on operation preparation, approval, and execution periods. Moreover, the Bank will continue to propose using performance-driven operations, taking into account all those cases in which countries express tangible interest in that type of operation.

The text of the strategy highlights the topic of preparation and execution periods in the defined dialogue agenda (paragraph 5.3 second-to-last subparagraph).

Annex XI Page 5 of 5

I. Recommendations

II. Management’s Areas of Activity

5. The Bank should explore alternatives to traditional project funding, with a view to:

Management will continue its efforts to incorporate performance targets in all pertinent cases and, in the process of defining the strategy, has conducted an active dialogue with the government that includes discussions on Bank policies and means of intervention that will lead to a more effective performance and lower transaction costs. In this ongoing dialogue process, the Bank will surely benefit from the new instruments that have been or may be approved and that allow the Bank to expand the services it provides to the Brazilian government and private sector and make them more efficient. The issue of new instruments and the impact they could have on the lending scenarios is highlighted in the strategy (paragraph 4.76).

a)

improving outcome achievement

b) enhancing the policy dialogue c)

reducing transaction costs

The Bank should also consider the use of the newly approved flexible lending instruments.

Annex XII Page 1 of 12

2004-2007 OPERATIONS PROGRAM LINKAGE WITH OBJECTIVES OF THE STRATEGY

Projects

Project objectives

Linkage with the objectives of the Bank’s strategy with the country

Objective of promoting growth

BR-0254

BR-L1001

BR-0318

Modernization of the FlorianopolisOsorio highway

The main objective is to continue expanding and rehabilitating the highway system that connects the main urban centers from São Paulo to southern Brazil, Argentina, and Uruguay. The project will resurface the existing road and will build another to create a two-lane highway. The project will improve intraregional transportation in the country and will facilitate integration with the economies of the MERCOSUR member countries.

Objective of promoting growth. Competitiveness and infrastructure area. Crosscutting issue: integration. Main initiative under the integration heading, directly complements the IIRSA border initiatives. Central impact in proving private-public complementarity in the financing of infrastructure.

Objective of promoting growth. Productivity and infrastructure. The program helps boost the competitiveness of the agrifood sector.

National agrifood research system

The program would include competitive R&D financing components in strategic areas; strengthening and decentralization of the national agrifood innovation system through joint ventures with the private sector and State-owned companies; and the promotion of pilot hubs of information technology and management for family farms.

The project consolidates and strengthens southern Brazil as a tourist destination. It links various individual destinations to form corridors capable of attracting more tourists. Investments include infrastructure, tourist attraction improvements, professional training, and strengthening of municipalities and state tourism departments.

Objective of promoting growth. Productivity and infrastructure area. Crosscutting issue: environment.

Project with a regional impact (at the state level), focused on sustainable development of tourism hubs. Main linkage with productivity through provision of infrastructure and support for small and medium-sized enterprises (SMEs). Secondary linkage in the improvement of urban living conditions and environmental quality, and institutional strengthening of subnational governments.

Tourism development in the south— PRODETUR Sul.

Annex XII Page 2 of 12

Projects

BR-0392

Land register and property regulation

Project objectives The program’s general objective is to improve rural land titling in Brazil through increased efficiency in land management. The program will be comprised of the following components: (i) physical-legal cleanup of property rights; (ii) establishment of the National Cadastre of Rural Properties; and (iii) modernization of property registries.

Linkage with the objectives of the Bank’s strategy with the country Institutional objective. Institutional strengthening and modernization of the State. Objective of promoting growth.

Competitiveness and infrastructure area. Crosscutting issue: environment. Contributes to more efficient use of rural resources and to increased competitiveness by enhancing legal security of rural property. Supports the objective of institutional modernization by strengthening federal and state land-related institutions. Also helps improve foundation for poverty reduction policies and conservation of natural resources by improving the property information base.

The objective of the proposed line and program is to Objective of promoting growth. Competitiveness and support the gradual strengthening of competitiveness infrastructure area. Provision of medium-term credit to and job creation in the microenterprise and small and SMEs and microenterprises. medium-sized business sector through medium- and long-term financing of ventures for execution of investment projects.

BR-L1011

Financing of SMEs–BNDES

BR-L1013

The purpose of the program is to organize and consolidate conservation units in the Mata Atlántica area, south of São Paulo, as tourist attractions, and support organization and promotion of ecotourism as Mata Atlántica ecotourism, São Paulo a sustainable development instrument. The executing agency will be the Environment Department of the state of São Paulo (SMA), with support from the Forestry Foundation and the Forestry Institute.

Objective of promoting growth. Competitiveness and infrastructure area. Crosscutting issue: environment.

Local impact project targeting sustainable development, with important implications for institutional development.

Sustainable development of semiarid Sergipe through expansion of the production base, modernization and management of the institutional structure, and strengthening of social and cultural capital.

Institutional objective. Institutional strengthening and modernization of the State. Objective of promoting growth. Productivity and infrastructure area. Crosscutting issue: environment

BR-L1012

Sustainable development of semiarid Sergipe

Contributes to the institutional strengthening objective by strengthening the region’s municipal governments and supporting the development of public-private strategies for

Annex XII Page 3 of 12

Projects

Project objectives

Linkage with the objectives of the Bank’s strategy with the country promoting investments in, and attracting tourists to, the region. Contributes to growth through investments in irrigation systems and rural road infrastructure.

Development of northeast Minas Gerais

Strengthen and expand rural electricity services in the Objective of promoting growth. Competitiveness and northwestern region of the state of Minas Gerais, infrastructure area. Crosscutting issue: reducing regional which are under the responsibility of public utility inequalities. concessionaire CEMIG.

BR-L1027

Municipal accessibility in Minas Gerais

The main objective of the operation is to improve access of residents of low-income municipalities to markets and basic services through improvements and paving of the roads connecting to the state road network.

BR-L1021

The program seeks to boost the collective competitiveness of SMEs located in 7 Arranjos Produtivos Locais [local production chains] Productivity of SMEs in Minas Gerais (APLs) in the state of Minas Gerais, through actions to increase their productivity, help improve their management, and ensure access to basic technology infrastructure and support services.

BR-L1028

BR-L1023

BR -L1020

Strengthening of business activity in Bahia

The program seeks to train and prepare business actors in selected sectors (enterprises, service providers, support organizations) and implement mechanisms for development that will increase productivity and the SMEs’ foothold in global markets.

Local production chains in Pernambuco

The program seeks to develop an institutional process to identify and overcome the main bottlenecks affecting the competitiveness of businesses in participating APLs, create mechanisms to help them gain a foothold in the markets, generate consensus on policies to promote APLs, and establish publicprivate investment commitments.

Objective of promoting growth. Competitiveness and infrastructure area. Initiative has local impact with the important social effect of improving access to areas on the state’s periphery.

Objective of promoting growth. Competitiveness and infrastructure area. Initiatives with local impact involving the strategic objective of promoting the increased competitiveness of local production systems and the establishment of suitable regulatory frameworks to ensure a good business climate. Subsequent replicability anticipated.

Annex XII Page 4 of 12

Projects

Project objectives The program seeks to strengthen the overall competitiveness of SMEs in the APLs in the state of São Paulo, through the provision of support services, the building of consensuses and internal cooperation mechanisms, and the coordination of public policies and programs to support entrepreneurship.

BR-L1016

Local production chains in São Paulo

BR-0370

Development of an 800-MW hydroelectric plant to Hydroelectric plant in Campos Novos be built on the Canoas River in the state of Santa (Pri) Catarina.

BR-0395

Termonorte thermoelectric plant (Pri)

BR-L1015

Coelba Investments

BR-L1017

Integrated cogeneration facility

BR-L1019

COMGAS

BR-L1011

Infrastructure Investment Fund (Pri)

Linkage with the objectives of the Bank’s strategy with the country

Construction and operation of a 340-MW thermoelectric plant at a cost of US$230 million. This project is phase II of an existing plant.

The 2004-2007 Coelba investment program seeks to Objective of promoting growth. Competitiveness and improve the productivity and reliability of the infrastructure area. Local initiatives for the generation and electricity distribution network. distribution of energy supporting private participation in the sector.

Design, development, construction, operation, and maintenance of a cogeneration unit in the city of de Vitória, Espirito Santo.

The 2004-2007 COMGAS investment program consists of the expansion of a connection network between the city of São Paulo and the state’s interior, in the amount of R$1.040 billion (approximately US$347 million) A US$1 billion fund to finance CAPEX and rehabilitation of projects in Brazil.

Objective of promoting growth. Competitiveness and infrastructure area. Central support for financing PPP activity in infrastructure.

Annex XII Page 5 of 12

Projects

BR-0411

Unibanco (Pri)

Project objectives The project consists of an infrastructure financing facility comprised of an A loan of up to US$50 million and a B loan of about US$100 million for Unibanco - UniĂŁo de Bancos Brasileiros, S.A. The facility will be used to provide medium- and longterm financing for domestic infrastructure projects carried out by Brazilian companies, including Brazilian subsidiaries of companies from IDB member countries.

BR-L1007

Banespa trade facility (Pri)

The project consists of a financial facility for trade, which includes an A loan of up to US$50 million, with a maturity of up to three years, and a B loan of up to US$150 million, with a maturity of up to two years to be extended to Banespa.

BR-0412

Braskem (Pri)

Transaction in the capital market to finance the capital spending program of Braskem, a petrochemical company.

BR-0402

Leste Norte guarantee bonds (Telemar) (Pri)

Partial credit guarantee for a domestic corporate bond denominated in reais. The resources will be earmarked for the 2002-2004 Telemar investment program, to facilitate expansion and modernization of the Telemar telecommunications network and the management support systems, enabling improvements in the quality of the network and achieving leadership in data and internet services, and to develop its information technology services.

BR-L1014

Partial credit guarantee for the issue of US$100 million in secure corporate bonds in local currency by Odebrecht construction company (Pri) Construtora Norberto Odebrecht S.A, a top Brazilian construction company, to be placed in the domestic capital market.

Linkage with the objectives of the Bank’s strategy with the country

Objective of promoting growth. Competitiveness and infrastructure area. Support for the banking system; financing of infrastructure and trade

Objective of promoting growth. Competitiveness and infrastructure area. Guarantees for domestic corporate bond issues in local currency. Development of the capital market.

Annex XII Page 6 of 12

Projects

Project objectives

Linkage with the objectives of the Bank’s strategy with the country

Poverty, equity, and human capital formation objective

Social safety net system (Bolsa Família, PETI)

The program will support the expansion of the Bolsa Família program, which gives cash subsidies to eligible poor families in exchange of school attendance and health and nutrition monitoring, and the PETI program aimed at eradicating child labor.

Another goal is to strengthen the Ministry of Social Development’s institutional capacity to monitor and evaluate social welfare policies.

Poverty and equity objective Poverty, equity, and human capital formation. New type of operation (SWAP) to support implementation of a policy for the social welfare sector and improve the sector’s institutional capacity.

Qualisus (Quality and Equity Health System)

The project seeks to strengthen Brazil’s public Sistema Único de Saúde [Unified Health System] (SUS), placing particular emphasis on reducing regional inequalities in the distribution of federal resources.

Poverty and equity objective. Poverty, equity, and human capital formation. Cross-cutting issue: regional inequalities.

BR-L1009

Evaluation of social policies in São Paulo

The program consists of developing a single registry for the state of São Paulo in which all information on families and social programs will be gathered. The Pro-Social system will be the basis for designing and structuring a set of social program monitoring indicators. In addition, a system of social targets for municipalities will be developed as well as a social observatory to promote research, prepare diagnostic assessments, and make policy recommendations.

Poverty and equity objective. Poverty, equity, and human capital formation: Innovation program through a new institutional development facility. Development of a new social policy management model, linking programs at the three levels of government.

BR-0413

Expansion of Ulbra University through construction Poverty and equity objective. Poverty, equity, and human and equipment of (i) an expansion of the academic, capital formation. PRI window social project research, and medical facilities on the Canoas Ulbra University hospital project (Pri) campus, including construction of a new hospital; and (ii) new campuses in Carazinho and Santa Maria, both in the state of Rio Grande do Sul.

BR-L1008

Bh Cidadania – Comprehensive development program in Belo Horizonte

BR-L1004

BR-L1022

Component 1. Access to education. Access to early education for children up to six years of age will be promoted

Poverty and equity objective. Poverty, equity, and human capital formation. Crosscutting issue: gender and race inequality. Innovative initiative to facilitate access to basic services for the low-income sectors in large urban areas.

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Projects

Project objectives

Linkage with the objectives of the Bank’s strategy with the country

The project could be replicated in similar areas.

Component 2. Access to health services. Actions focus on prevention, health promotion, and healthcare services for the beneficiary population, based on its epidemiological and risk profiles.

Component 3. Productive inclusion. This will include professional development actions, promotion of the formal labor market, and organization for autonomous service delivery.

Component 4. Social welfare and dissemination.

Community conviviability will be encouraged and induced through cultural and sports activities, education, and social welfare.

BR-L1005

The program provides for activities and works in the watershed of the Educando-Cuarenta igarapé [small Amazon waterway] through execution of the following components: (i) sanitary infrastructure to improve water, sanitation, and trash collection service coverage in areas neighboring the watershed’s Socio-environmental program Igarapes igarapés; (ii) environmental recovery to improve Manaus environmental and living conditions in the area affected by igarapé flooding in the watershed, including resettlement of families at risk; and (iii) institutional development to improve operating and management capacity of entities involved in the program.

Poverty and equity objective. Living conditions and efficiency in cities. Crosscutting issue: environment.

Operations with local impact. Important effects on improving the living conditions of low-income populations in flood-prone areas. Basic works to make possible the recovery of central areas and restructuring of space and urban flows. Reduction of environmental deterioration in main urban bodies of water. Flood control and environmental education. Projects with a local impact that nevertheless generate new institutional capacities at the local level, capable of continuing and replicating this type of project.

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Projects

BR-L1006

BR-0396

BR-0397

Project objectives

Macambira Anicuns urban program

The program’s objective is the environmental recovery of the Macambira and Anicuns streams and it focuses on implementation of the following components: (i) recovery of the bodies of water with execution of macro drainage and sanitation works, the creation of linear parks, and three environmental conservation areas; and (ii) neighborhood improvement with paving, housing construction, and fixtures.

Environmental rehabilitation Juiz de Fora Mg

Improve the quality of life of the population in the city of Juiz de Fora through environmental recovery of the Paraibuna River. To this end, the program will seek to: (i) reduce polluting discharges into the Paraibuna River, including expansion of the sanitary sewerage system, recovery of polluted water, and industrial pollution control; (ii) prevention of degradation in high risk areas with the construction of a linear park along the river and population resettlement; and (iii) social and institutional sustainability.

Environmental rehabilitation Belo Horizonte

Help improve the quality of life of the population in the municipality of Belo Horizonte, through improved environmental conditions. To this end, the program will emphasize: (i) infrastructure works aimed at environmental cleanup of water courses and reduction of flood risks; (ii) sanitary and environmental education to raise the population’s awareness; (iii) institutional strengthening to ensure the program’s effectiveness .

Linkage with the objectives of the Bank’s strategy with the country

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Projects

Project objectives Improve environmental conditions and promote economic development for the state’s population through: (i) sustainable economic development, with investments to support the state’s promising sectors; (ii) improvement of environmental quality, with financing for urban drainage works, liquid and solid waste collection and treatment, and small potable water projects; and (iii) modernization of the State, focused on the institutions.

BR-0376

Environmental improvement Amapa

BR-0390

Help improve the socioeconomic and environmental conditions of the population in the city of Porto Alegre, through the following three projects: (i) construction of main sewers, collectors, Environmental sanitation Porto Alegre interceptors, and a wastewater treatment plant; (ii) construction of dikes, drainage channels, and measures to protect against floods; (iii) implementation of planning, participation, and oversight mechanisms.

BR-L1024

Environmental recovery Itaqui and Ressaca Rivers

This operation seeks to address two problems in the city of São José dos Pinhais. The first is the environmental deterioration of the Itaqui and Ressaca Rivers, caused primarily by industrial waste and settlements on the banks of the rivers and channels, which contribute to problems of periodic flooding and degradation in the valleys. The second is the deterioration of the city’s urban center, emphasized by problems of haphazard growth, lack of connectivity between the center and outlying neighborhoods, and with the main federal highways (BR-277 and BR-376), which places limits on the development of the city and periurban areas.

Linkage with the objectives of the Bank’s strategy with the country

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Projects

Project objectives

BR-0400

The measures to improve urban transportation financed by this program are divided into three large groups, interventions in the area of road Urban transportation SĂŁo Bernardo do infrastructure, capitalization on these interventions to Campo improve public transportation operations, and improvement of the urban transport management system.

BR-0302

Urban transportation Fortaleza

The objective of this global multiple-works program is to improve the quality and safety of urban public transportation and nonmotorized circulation (pedestrians and cyclists). The program includes actions to improve bus circulation, such as exclusive lanes, and better terminals and integration systems, more direct routes, and pedestrian corridors and bicycle lanes.

BR-0375

Urban transportation Curitiba 2

BR-L1018

Urban transportation Federal District

Linkage with the objectives of the Bank’s strategy with the country

Poverty and equity objective. Living conditions and efficiency in cities. As a core activity for making urban operations more efficient, with special impact on improving travel conditions and access to workplaces and schools for low-income sectors. This area of experience in which the The program’s general objective is to improve access Bank has developed a comparative advantage complements to, and the security and efficiency of, the urban public previous actions in Curitiba and has had international repercussions as a successful innovative approach. transport system of Curitiba, which is expected to help reduce the operating costs of the main lines of the integrated metropolitan transportation network (RIT).

The interventions financed under this program are divided into three large groups: road infrastructure works; capitalization on the latter to improve public transport system operations (metro and buses) and promote urban renewal; and improvement of the urban transportation management system. The specific components of the program are:

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Projects

Project objectives

Linkage with the objectives of the Bank’s strategy with the country

(i) creation of exclusive corridors for mass transit and improvement of the public transportation system; (ii) improvement of road infrastructure and operational support for mass transit; (iii) road safety improvements; (iv) universal accessibility improvements; (v) modernization of the traffic light system; (vi) institutional and managerial strengthening of transport, urbanization, and environmental sectors; and (viii) concurrent costs, such as expropriations, resettlements, and environmental mitigation and compensation.

Institutional objective

BR-0372

BR-L1026

BR-0403

Fiscal management São Paulo

The program’s objective is to contribute to the State of São Paulo’s fiscal modernization and reform process. Specifically, the program will seek to improve the efficiency, effectiveness, and transparency of public resource management, through the modernization and institutional strengthening of SEFAZ and the agencies involved in the state’s tax, financial, and budget administration.

Fiscal management Bahia

The program’s objective is to contribute to the State of Bahia’s fiscal modernization and reform process.

Specifically, the program will seek to improve the efficiency, effectiveness, and transparency of public resource management, through the modernization and institutional strengthening of the Department of Finance and the agencies involved in the state’s tax, financial, and budget administration.

Modernization of states’ external control– Promoex

The program for modernization of the external control systems of Brazilian states and municipalities -PROMOEX- includes the following components: 1) development of interagency networks among public branches and institutions (Union, States,

Institutional objective. Institutional strengthening and modernization of the State. Local project (at the state level) stemming from a similar operation with national coverage (PNAFE program). This involves a second generation of replicability (after projection nationwide) with more far-reaching activities. Operations that deepen and consolidate fundamental progress in the administration of public resources at the subnational level.

Institutional objective. Institutional strengthening and modernization of the State. National project developed on the basis of previous experiences at the central level, complementing PNAFE, FNAFM, and PNAGE initiatives, with a focus on topics of external and targeted control.

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Projects

Project objectives

Linkage with the objectives of the Bank’s strategy with the country

Federal District and municipalities) and with civil society; 2) redesign of external control methods, techniques, and procedures, including outcome evaluation; 3) strengthening of strategic planning and management systems in the courts; 4) design and implementation of an information technology management policy; 5) adjustment of the personnel management policy.

BR-0405

Modernization of management in the states and Federal District—Pnage

The general objective of the program is to modernize public administration in the states and Federal District. It includes the following components: (i) strengthening of public policy planning and management capacity; (ii) development of human resource policies and management capacity; (iii) modernization of organizational structures and administrative procedures; (iv) strengthening of administrative transparency and communication mechanisms; (v) modernization of information management and integration of information technology systems; and (vi) development of a culture of promoting and implementing institutional changes.

Institutional objective. Institutional strengthening and modernization of the State. National project with a general framework similar to, and complementing, the PNAFE and PNAFM initiatives, aimed at consolidating the subnational governments’ planning and management capacities.