Public Disclosure Authorized. Public Disclosure Authorized. Public Disclosure Authorized. Public Disclosure Authorized. Report No.

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1 Public Disclosure Authorized Public Disclosure Authorized Public Disclosure Authorized Public Disclosure Authorized Project Name Region Sector Project ID Borrower(s) Environment Category Report No. PID10828 Brazil-Municipal Pension Reform Project Latin America and Caribbean Region Pensions & Social Insurance BRPE74777 GOVERNMENT OF BRAZIL Date PID Prepared December 6, 2001 Projected Appraisal Date February 12, 2002 Projected Board Date May 14, 2002 Implementing Agency Address MINISTRY OF SOCIAL SECURITY & SOCIAL ASSISTANCE Address: ESPLANADA DOS MINISTERIOS BLOCO "F" 7th FLOOR-SALA BRASILIA--DF Contact Person: Vinicius Carvalho Pinheiro, Secretary of Social Security Tel: (55-61) Fax: (55-61) C 1. Country and Sector Background One of the most serious fiscal problems confronting Brazil's Federal, state and municipal governments is pension reform. The most recent Country Assistance Strategy Brazil Country Assistance Strategy Report No BR; March, 2000, identifies social security reform as "the single most important fiscal issue facing the Federal and sub-national Governments". The CAS estimated overall pension deficit including interest and public debt accumulated on behalf of public pensions at about 9.5% of GDP or nearly $80 billion. Four fifths of the pension deficit is public and about half of that belongs to states and municipalities.there is a growing consensus among government officials that the fiscal burdens imposed by social security are not sustainable. Reform proposals most often discussed look at the benefits regime: the links between retirement, time of contribution and minimum age to receive pensions, retirement age for men and women, and benefits for disability and death. There is also speculation regarding the advantages of merging public pensions (Regime Proprio de Previdencia--RPP) into social security (Regime Geral de Previdencia Social--RGPS), especially for small sub-national systems. However, these reforms are all highly political and require, in some cases, Constitutional amendments. Hence they would only be possible following the fall, 2001 elections provided there was broad based political support. In the absence of a new round of benefits reform, the Government has followed an interim strategy to improve pension management and strengthen the pension reform constituency. It has done so by first implementing important reforms in the legislative framework governing

2 sub-national pension administration including requirements for reporting and actuarial balance of pension funds. Second, it has undertaken to provide technical assistance to improve state and municipal management of pensions. And third, it has built up MPAS's capacity to monitor, evaluate, validate performance and provide technical assistance. It has done this with the support of multilateral institutions and especially the World Bank. Legislative Framework Reforms. Three years ago the Federal Government was constitutionally constrained from intervening in state and municipal pension regulation, had no internal unit concerned with such matters, and knew next to nothing about sub-national pensions. States and municipalities managed their pensions independently and without the benefit of adequate laws, systems, data bases, actuarial opinions, or qualified human resources. Brazilian policy makers addressed pensions during President Cardoso's second term, approving a half dozen significant reforms over the past three years beginning with Constitutional Amendment 20/1998. On paper these laws constitute a major reform in pension management. They, inter alia, established (i) lower benefits, stricter eligibility requirements and the phasing in of the new Complementary pension regime(ii) individual accounts and regulations regarding participant and public contributions, (iii) actuarial and financial standards and requirements for pension funds based upon accurate cadastres(iv) regular reporting, publication of results and transparency (v) validation by the Government of results, and penalties for noncompliance (vi) restrictions on use of pension funds for non-pension ends and on investment of funds in government instruments (vii) restitution by the Federal Government of pension liabilities assumed by states and municipalities (Compensacao Financeira)(vii) enhanced role of the Government through MPAS to assure implementation through supervision, monitoring, validation of results, and provision of technical assistance. Technical Assistance and MPAS Capacity. Few states and even fewer municipalities possess the resources to unilaterally reform pension management and comply with the new legislative framework. Another problem confronting the Government is that little information is available on municipal social security systems. Hence the challenge for the Federal Government has been to create in MPAS an organization capable providing technical input to the development of the new framework, supervising, monitoring and validating performance and assisting sub national governments to reform. This was done primarily through the establishment and strengthening of DEPSP within MPAS. 2. Objectives The objective of the Municipal Pension Reform Project ("PREV-MUN" or Programa de Apoio a Previdencia dos Municipios in Brazil) is to upgrade municipal pension management. It will do this by (i) addressing pension problems in 26 of Brazil's state capital and larger municipalities, and (ii) strengthening the Ministry of Social Security and Social Assistance (MPAS) capacity to carry out its legal mandate to provide technical assistance, monitor, evaluate and validate pension management and performance. The loan targets these larger municipalities because they account for a preponderance of the total aggregate municipal pension debt. Also, given their importance and geographic distribution, they can eventually become vehicles for extending the PREV-MUN approach to the over 2,700 municipalities operating public pension systems throughout Brazil 3. Rationale for Bank's Involvement -2-

3 The World Bank has successfully partnered with the Government and brought it's technical knowledge to bear upon both national and sub-national pension reform. Bank operations including PARSEP, the INSS two S/Secals for nearly $1.4 billion in and important AAA have all contributed to excellent relations between the Government and the Bank, which has become a trusted and valued interlocutor in the sector. As part of its interim strategy, the Government has decided it is time to directly address municipal pension problems and has called upon the Bank to adapt PARSEP to create a municipal project, PREV-MUN. The Bank has assisted in the refinement of the PARSEP model to address municipal issues and Bank experience in implementing PARSEP also assures that implementation will move forward smoothly. 4. Description By Component:Project Component 1 - US$2.02 million Component I: Institutional Strengthening of MPAS/SPS and Project Management This $2.01 million project component addresses institutional strengthening of MPAS and specifically SPS required to manage PREV-MUN and carry out its mandate of monitoring, evaluating, validating and providing technical assistance to sub-national governments. The sub-components follow.a. Provision of Technical Assistance. Following PARSEP's successful formula, a core group of consultants in information technology, actuarial science, and pension legislation will be retained at DEPSP to supplement MPAS staff and service municipalities during the project. B. Project Management Support. A project team comprising DEPSP staff and several project management consultants will be retained plus a financial management specialist. Once again, the size of the team to administer the program for 26 municipalities is based on PARSEP experience with 26 states. C. Technical Assistance for Municipalities--Logistics. Experience demonstrates that pension reform cannot be managed centrally but rather requires the continuous presence of MPAS specialists in the field. The MPAS based PREV-MUN team will need to constantly travel to municipalities to assist in the diverse activities each will be undertaking including project formulation and implementation, cadastre upgrade, SIPREV implementation, actuarial diagnostic and legislative reform. DEPSP officials will also assist with municipal workshops and procurement. Hence care has been taken to ensure that resources are adequate to sustain the projected level of field operations. D. Acquisition of Hardware and Software. A small ($58,500) amount of computer equipment includeing computers, printers, software, and ancilliary equipment has been budgeted to ensure that DEPSP is equipped to run PREV-MUN together with PARSEP and also manage its mandate to service sub-national governments. E. MPAS Sponsored Training Workshops and Publications. DEPSP will sponsored three training workshops for municipal officials and other relevant stakeholders. It will also undertake a series of seven technical publications that will disseminate laws, regulationsities, best practices and other materials relevant to sub-national pension management. F. Institutional Studies. Two important studies will be undertaken: (i) pension fund asset management and (ii) needs evaluation and strategy for assisting the universe of municipalities operating their own pension systems. This latter study will be done around the time of the mid-term review and will draw upon the experience of PREV-MUN and PARSEP. G. Training of MPAS/SPS Staff. A small training program that will ensure that MPAS staff are exposed to best practices internationally and acquire the requisite skills to ensure that the sub-national program is conducted - 3 -

4 making use of the latest knowledge and methodologies.h. SIPREV Development and Implementation. The electronic cadastre format, SIPREV, will ensure that all requisite data for benefits calculation and actuarial analysis is collected and inputted. Actuarial and benefits modules will also be installed and other modules developed. SIPREV and its modules will be free to the municipalities. This component comprises the costs of installation, maintenance, upgrade, training, and refinement and development of new modules. Component II: Institutional Strengthening of Municipal Pension Management A second component totalling $6.8 million (689) of the project total is dedicated to upgrading pension management in the municipalities. The sub-components are a follows.a. Acquisition of Hardware and Software for SIPREV. Small hardware/software packages valued at about $19,000 will be provided to each municipality to ensure that the pension agency has the requisite equipment to operate SIPREV and otherwise carry out the project. B. Cadastre Upgrade. At $2.2 million this is the largest sub-component and one of the pillars of the PARSEP/PREV-MUN approach. Each municipality will be provided with consultant services valued at $80,000 plus assistance from DEPSP specialists. It is expected that the municipalities will also spend from their own resources, as was the case with states receiving PARSEP assistance, to complete and validate their cadastres. The advantages for the municipalities of this undertaking include accurate actuarial analysis, savings from elimination of unjustified benefits payments, and submission of reimbursable pension costs to the Federal Government under the Compensacao Financeira program.c. Actuarial Evaluation. This is a second pillar. It includes a diagnostic--something legally required of all sub-national governments starting July, It also includes the development of proposals for achieving actuarial balance and reforming pension systems. D. Municipal Workshops and Dissemination. Stakeholder participation through municipality sponsored workshops and the dissemination of pension materials is an essential part of the PREV-MUN program. The purpose is to disseminate the PREV-MUN program, report results, provide knowledge on best practices, and advance reform proposals. Each municipality will conduct two such workshops accompanied by the preparation and dissemination of materials.e. Municipal Training. Two types of training are contemplated. The first is a workshop in basic pension management, concepts and best practices for two key agency officials from each municipality. A second venue will be training for groups of up to fifteen agency officials held in the municipalities. One key contribution will be the identification of permanent, accessible training venues for sub-national governments. 5. Financing Total ( US$m) BORROWER 5 IBRD 5 Total Project Cost Implementation Implementation ArrangementsThe project executing agency will be MPAS. Within MPAS there will be a Project Coordinating Unit (PCU) and a Project Executing Unit (PEU) whose attributions are described below.project Coordinating Unit (PCU). A PCU already exists in the Executive Secretaries Office of MPAS. It is charged with financial management/execution of the Ministry's projects. This body is also the PCU for the Bank's INSS LIL

5 PCU responsibilities will be to manage Project budgeting and financial control orient the PEU (see below) regarding Bank guidelines and procedures guarantee that Bank norms and procedures are followed supervise and ensure the completion of the Project's physical, budget and financial chronograms respond for audit and Project evaluation requirements provide the Bank with financial and evaluation reports, statements of accounts and other reports as neededensure the implementation of PEU approved activities and procurement in accordance with the Operations Manual.ensure the payment of the Project's contracts and acquisitions.project Executing Unit (PEU). The PEU will be responsible for the technical execution of the Project. It will reside within DEPSP in the Secretary of Social Security (SPS). The PEU will comprise many of the same employees that are successfully managing the technical execution of PARSEP. The current PCU/PEU arrangement is similar to what exists for PARSEP except that the PCU resides in the Ministry of Finance and not MPAS. PEU responsibilities will be to:coordinate, plan and supervise the implementation of municipal and SPS activities ensure that Bank norms are followed elaborate technical reports regarding Project implementation form a Procurement Commission to accompany and evaluate purchases and service provision support the Bank and SPS in general Project supervision and evaluation provide documentation required by auditors disseminate Project results within and outside of MPAS. The DEPSP team is responsible for PARSEP's execution including technical aspects and most of the procurement. It is experienced, well staffed, and has earned the respect of state officials. Hence, theexpectation is that this will be a very strong PEU.a. ProcurementWhile PARSEP is formally executed by the Ministry of Finance, project execution--including most aspects relating to procurement--is managed by the DEPSP team. DEPSP develops TORs and is responsible for all procurement cycle matters including contacts with the Bank, UNDP (the PARSEP procurement agency), state clients and vendors. The group maintains good relations with the CMU Implementation Team that handles PARSEP procurement matters and UNDP. It has become experienced in Bank procurement procedures through close Bank contacts that include a recent procurement workshop and Post Review.PREV-MUN procurement should be well managed. Procurement will be simplified by virtue of the MP LIL being similar in structure and components to PARSEP. It is also likely that procurement procedures and documents can be adapted and that the universe of vendors will not vary greatly from PARSEP. A strong CMU Implementation Team will again provide all necessary procurement support. And similar to what is done for PARSEP, UNDP or a similar agency will be retained to support procurement operations.b. Financial ManagementThe Bank has evaluated the Project Coordinating Unit's financial management capacity and found it to be satisfactory. The PCU is finalizing software that will be employed specifically for PREV-MUN and other multilateral projects executed by MPAS. Again, the loan is similar to PARSEP and the INSS LIL, which are being managed satisfactorily, hence no difficulties are expected. 7. Sustainability Project sustainability is assured owing to the following circumstances.(i) The legislation governing subnational pension systems management has recently been reformed providing a permanent framework with strict compliance rules. It requires sanitized cadastres, actuarial analysis and balance, regular reporting and compliance with administrative guidelines, especially those governing pension fund management and the benefits regime permitted in sub-national governments. PREV-MUN - 5-

6 facilitates municipal compliance in each of these areas.(ii) PARSEP has successfully piloted methodologies in states that will be implemented in PREV-MUN. This is especially true of SIPREV which responds to sub-national government demand for a comprehensive electronic cadastre format to unify pension data managed by different government branches. SIPREV and the new actuarial and benefits calculation modules also respond to strong sub-national government demand for pension management tools.(iii) Growing awareness of the fiscal burden imposed by pensions together with the Fiscal Responsibility Law restrctions on state payrolls are strong incentives for municipalities to find solutions to their pension problems. PREV-MUN helps municipalities to assess the burden in actuarial terms and develop proposals for dealing with it. In essence, it provides municipalities with a tool for strengthening the reform constituency. (iv) For municipalities, PREV-MUN facilitates compliance with legal requirements. There are also positive fiscal incentives. SIPREV facilitates the solicitation to the Federal Government for reimbursement of pension liabilities (Compensacao Financeira) and cadastre upgrade can eliminate significant unwarranted payments. In addition, MPAS has taken strategic decisions bearing on its role in the provision of sub-national services offered by PREV-MUN on a sustainable basis. As a result, it is also looking for permanent, accessible and self supporting venues for training and SIPREV maintenance. This becomes especially important considering that many of the 2,700 municipalities operating their own pension systems will need support. Regarding training, a University of Brasilia foundation, FINATEC, will be retained to provide train-the-trainers courses and direct training in pension management. If successful, FINATEC will become a permanent purveyor of pension training for sub-national governments. A decision has also been taken to retain a private organization to maintain and service SIPREV on a permanent basis. Finally, DEPSP has determined that it can and should provide technical assistance in the legal area for all sub-national governments and respond to specific requests in other areas. It believes this will be possible with its current staffing levels. This proposition will be tested over the four year loan period and adjustments will be made based upon implementation experience. 8. Lessons learned from past operations in the country/sector A number of lessons were learned via the implementation of the precursor PARSEP LIL which are reflected in the operation's design, namely:client Commitment. Formal client agreements (convenios) need to be more closely linked to client action plans to ensure commitment. Client Teams. Municipal project coordinators and their teams should be integrated into the pension agency structure to mitigate problems of weak ownership and lack of influence. Sequencing. Activities should not be sequenced with rigid trigger conditions but rather municipalities should develop their own individual plans to strengthen ownership and avoid waivers, merger and elimination of components resulting from different client needs and priorities. Loan Components. The basic PARSEP structure and components including the need for a strong DEPSP based team providing technical assistance is appropriate for municipalities. Special care should be given to ensuring adequate travel expenses given importance of direct DEPSP intervention with different branches of municipal government, departments and agencies to overcome vested interests, provide technical assistance, and implement the project. Training. It is not enough to train key officials. Given the lack of a pension career stream and - 6 -

7 specialized courses, personnel turnover and dependence on consultants in sub-national governments, a permanent and accessible training venue must be found.cadastre Upgrade. The potential financial benefits to sub-national governments from eliminating unwarranted payments and submitting proposals to the Federal Government for restitution (Compensacao Financeira) are sufficiently strong incentives to overcome inertia in this activity. States have spent much more on this component than funding offered by PARSEP.Upscaling. There is a need to find "multipliers"--like national associations of pension officials (CONAPREV) and other municipal bodies--to become permanent centers of technical assistance and knowledge sharing for sub-national pension matters given the huge number of potential sub-national governments requiring assistance.actuarial Software. The Bank's PROST software was a very useful pedagogical instruments, useful for conducting several important studies and served as a model for SIPREV development. However, ownership, specific country needs, maintenance and upgrade issues argue strongly for development of a local software, especially in countries with Brazil's technical capacity. PARSEP and PREV-MUN support Brazil's development of SIPREV and its modules. SIPREV Maintenance. MPAS will not be able to maintain, upgrade, and train the universe of clients who will demand SIPREV assistance. This function will have to be let out to a private group(s) with DEPSP supervising and working on upgrades. Stakeholder Dissemination. Locally sponsored workshops and materials dissemination have proven very effective in states to inform stakeholders of project objectives and results and to build reform constituencies. The dearth of materials addressing pension management, best practice and the legislative framework hampers training, compliance with new guidelines, and management reform. Hence PREV-MUN supports a significant publications effort. 9. Program of Targeted Intervention (PTI) N 10. Environment Aspects (including any public consultation) Issues N/A 11. Contact Point: Task Manager Chris Parel The World Bank 1818 H Street, NW Washington D.C Telephone: (202) Fax: (202) For information on other project related documents contact: The InfoShop The World Bank 1818 H Street, NW Washington, D.C Telephone: (202) Fax: (202) Web: Note: This is information on an evolving project. Certain components may not be necessarily included in the final project. -7 -

8 This PID was processed by the InfoShop during the week ending Dec. 21, 2001 Lucy Njuguna M:\InfoShop - Tonya's weekly directories\dec 21, 2001\P txt December 17, :55 PM - 8 -