IMPLEMENTATION COMPLETION AND RESULTS REPORT (IBRD-7827-BR) ON A LOAN IN THE AMOUNT OF US$485 MILLION TO THE STATE OF RIO DE JANEIRO, BRAZIL

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1 Public Disclosure Authorized Public Disclosure Authorized Public Disclosure Authorized Public Disclosure Authorized Document of The World Bank Report No: ICR IMPLEMENTATION COMPLETION AND RESULTS REPORT (IBRD-7827-BR) ON A LOAN IN THE AMOUNT OF US$485 MILLION TO THE STATE OF RIO DE JANEIRO, BRAZIL WITH THE GUARANTEE OF THE FEDERATIVE REPUBLIC OF BRAZIL FOR A FISCAL SUSTAINABILITY, HUMAN DEVELOPMENT AND COMPETITIVENESS DEVELOPMENT POLICY LOAN Human Development Department Brazil Country Management Unit Latin America and Caribbean Region June 16, 2011

2 CURRENCY EQUIVALENTS (Exchange Rate Effective June 15, 2011) Currency Unit = Brazilian Real (R$) R$1.00 = US$ 0.63 US$ 1.00 = R$1.58 FISCAL YEAR ABBREVIATIONS AND ACRONYMS ANVISA National Health Surveillance Agency Agência Nacional de Vigilância Sanitária BP Basis Point Ponto Base CDI Interbank Deposit Certificate Certificado de Depósito Interbancário CPS Country Partnership Strategy Estratégia de Parceria para o País DPL Development Policy Loan Empréstimo para Políticas de Desenvolvimento FY Fiscal Year Ano Fiscal GDP Gross Domestic Product Produto Interno Bruto GoRJ Government of the State of Rio de Janeiro Governo do Estado do Rio de Janeiro IBRD International Bank for Reconstruction and Development Banco Internacional para Reconstrução e Desenvolvimento ICR Implementation Completion and Results Report Relatório de Conclusão de Implementação e Resultados de Projeto IDEB Basic Education Development Index Índice de Desenvolvimento da Educação Básica LRF Fiscal Responsibility Law Lei de Responsabilidade Fiscal OECD Organization for Economic Cooperation and Development Organização para Cooperação e Desenvolvimento Econômico PAC Program of Accelerated Growth Programa de Aceleramento do Crescimento PAF Fiscal Adjustment Program Programa de Ajuste Fiscal PAHI Program to Support Municipal Hospitals Programa de Apoio aos Hospitais do Interior PISA Program for International Student Assessment Programa de Avaliação Internacional de Estudantes PPA Multi-Year Plan Plano Plurianual PREM Poverty Reduction and Economic Departamento de Redução de Pobreza e PRODESF Management Network Rio de Janeiro State Economic and Social Development and Fiscal Sustainability Program Gerenciamento Econômico Programa de Desenvolvimento Econômico, Social e de Sustentabilidade Fiscal do Estado do Rio de Janeiro PSIA Poverty and Social Impact Assessment Avaliação de Impactos Sociais e de Pobreza RJ Rio de Janeiro Rio de Janeiro SEEDUC State Secretariat of Education Secretaria de Estado de Educação SEFAZ State Secretariat of Finance Secretaria de Estado da Fazenda SELIC Special System of Clearance and Custody Sistema Especial de Liquidação e de Custódia SEPLAG State Secretariat of Planning Secretaria de Estado de Planejamento SESDEC State Secretariat of Health and Civil Secretaria de Estado de Saúde e Defesa Civil Defense SIL Specific Investment Loan Projeto de Investimento

3 SISNAC Live Birth Information System Sistema de Informações sobre Nascidos Vivos SISPRENATAL Monitoring System of the Humanization of Prenatal and Birthing Care Sistema de Acompanhamento do Programa de Humanização no Pré-Natal e Nascimento STN National Treasury Secretariat Secretaria do Tesouro Nacional SUS Universal Health System Sistema Único de Saúde SWAp Sector Wide Approach Abordagem Setorial Ampla TAL Technical Assistance Loan Empréstimo para Assistência Técnica UPA Urgent and Emergency Care Unit Unidade de Pronto Atendimento Vice President: Pamela Cox Country Director: Makhtar Diop Sector Manager: Chingboon Lee Task Team Leader: Michele Gragnolati ICR Team Leader: Michele Gragnolati ICR Primary Author: Debora Brakarz

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5 BRAZIL Fiscal Sustainability, Human Development and Competitiveness Development Policy Loan CONTENTS Data Sheet A. Basic Information B. Key Dates C. Ratings Summary D. Sector and Theme Codes E. Bank Staff F. Results Framework Analysis G. Ratings of Program Performance in ISRs H. Restructuring 1. Program Context, Development Objectives and Design Key Factors Affecting Implementation and Outcomes Assessment of Outcomes Assessment of Risk to Development Outcome Assessment of Bank and Borrower Performance Lessons Learned Comments on Issues Raised by Borrower/Implementing Agencies/Partners Annex 1. Bank Lending and Implementation Support/Supervision Processes Annex 2. Beneficiary Survey Results Annex 3. Stakeholder Workshop Report and Results Annex 4. Summary of Borrower's ICR and/or Comments on Draft ICR Annex 5. Comments of Cofinanciers and Other Partners/Stakeholders Annex 6. List of Supporting Documents MAP

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7 A. Basic Information Country: Brazil Program Name: Fiscal Sustainability, Human Development and Competitiveness DPL Program ID: P L/C/TF Number(s): IBRD ICR Date: 06/21/2011 ICR Type: Core ICR Lending Instrument: DPL Borrower: Original Total Commitment: Revised Amount: USD 485.0M Implementing Agencies: Rio de Janeiro State Secretariat of Finance STATE GOVERNMENT OF RIO DE JANEIRO USD 485.0M Disbursed Amount: USD 485.0M Co-financiers and Other External Partners: B. Key Dates Process Date Process Original Date Revised / Actual Date(s) Concept Review: 09/14/2009 Effectiveness: 03/31/ /29/2010 Appraisal: 11/04/2009 Restructuring(s): Approval: 02/02/2010 Mid-term Review: Closing: 12/31/ /31/2010 C. Ratings Summary C.1 Performance Rating by ICR Outcomes: Risk to Development Outcome: Bank Performance: Borrower Performance: Satisfactory Low or Negligible Satisfactory Satisfactory C.2 Detailed Ratings of Bank and Borrower Performance (by ICR) Bank Ratings Borrower Ratings Quality at Entry: Satisfactory Government: Satisfactory Quality of Supervision: Satisfactory Implementing Agency/Agencies: Satisfactory

8 Overall Bank Performance: Satisfactory Overall Borrower Performance: Satisfactory C.3 Quality at Entry and Implementation Performance Indicators Implementation QAG Assessments Indicators Performance (if any) Potential Problem Program at any time (Yes/No): Problem Program at any time (Yes/No): DO rating before Closing/Inactive status: No No Satisfactory Quality at Entry (QEA): Quality of Supervision (QSA): None None Rating: D. Sector and Theme Codes Original Actual Sector Code (as % of total Bank financing) Central government administration Health Primary education Secondary education Theme Code (as % of total Bank financing) Administrative and civil service reform Education for all Health system performance Regulation and competition policy Tax policy and administration E. Bank Staff Positions At ICR At Approval Vice President: Pamela Cox Pamela Cox Country Director: Makhtar Diop Makhtar Diop Sector Manager: Chingboon Lee Chingboon Lee Program Team Leader: Michele Gragnolati Michele Gragnolati ICR Team Leader: ICR Primary Author: Michele Gragnolati Debora Brakarz

9 F. Results Framework Analysis Program Development Objectives (from Project Appraisal Document) The objective of the operation is to assist the Government of Rio de Janeiro (GORJ) in strengthening its policies to improve fiscal management, competitiveness and social service delivery, and in covering the projected fiscal gap during 2010 resulting from a temporary fall in revenues associated with the recent global financial crisis and economic slowdown. Revised Program Development Objectives (if any, as approved by original approving authority) Not applicable (a) PDO Indicator(s) Indicator Indicator 1 : Baseline Value Original Target Values (from approval documents) Formally Revised Target Values Actual Value Achieved at Completion or Target Years Net asset position of the pension fund not subject to executive discretion increases. Value (quantitative or R$16,229 million R$50,495 million R$54,332 million Qualitative) Date achieved 12/31/ /31/ /31/2010 Comments (incl. % Value at completion exceeds target. achievement) Indicator 2 : Value of tax collected increases. Value (quantitative or R$22,920 million R$26,438 million R$29,086 million Qualitative) Date achieved 12/31/ /31/ /31/2010 Comments (incl. % Value at completion exceeds target. achievement) Indicator 3 : Number of electronic invoices issued increases. Value (quantitative or Qualitative) 5,626,353 95% of all invoices 81% of all invoices Date achieved 12/31/ /31/ /31/2010 The lower than expected outcome is due to national business associations Comments requesting a delay in the deadline for registering with the electronic invoice (incl. % system (originally set for December 2010 and delayed to April 2011) # see achievement) explanation in Section 3.2. Indicator 4 : Financial revenue from cash flow management increases. Value R$ 500 million R$ 550 million R$ 542 million

10 (quantitative or Qualitative) Date achieved 12/31/ /31/ /31/2010 Comments (incl. % achievement) Indicator 5 : Value (quantitative or Qualitative) The difference between the target and actual value is not significant and is due to three factors that are independent of sound management of cash flow # see explanation in Section 3.2. Net financial position (cash less current liabilities) increases. R$ 1,140.6 million R$ 1,233.6 million R$ 2,176.5 million Date achieved 12/31/ /31/ /31/2010 Comments (incl. % Value at completion exceeds target. achievement) Indicator 6 : Share of payments made in less than 30 days increases. Value (quantitative or 82% 84% 94.2% Qualitative) Date achieved 12/31/ /31/ /31/2010 Comments (incl. % Value at completion exceeds target. achievement) Indicator 7 : Proportion of services contracted using the Pregão Eletrônico procurement method increases. Value (quantitative or 90% 95% 96.2% Qualitative) Date achieved 09/30/ /31/ /31/2010 Comments (incl. % Value at completion exceeds target. achievement) Indicator 8 : Average number of days to register a firm is reduced. Value (quantitative or Qualitative) Date achieved 12/31/ /31/ /31/2010 The slightly slower than expected progress is due to Cadastro Fácil only Comments becoming fully operational in Dec instead of Apr 2009, as planned. The nr of (incl. % days continued declining and reached 31 by the end of Apr 2011#see achievement) explanation in Section 3.2 Indicator 9 : Number of teachers trained for Projeto Autonomia increases. Value (quantitative or 0 1,363 2,030 Qualitative) Date achieved 12/31/ /31/ /31/2010 Comments (incl. % Value at completion exceeds target. achievement)

11 Indicator 10 : Number of students enrolled in Projeto Autonomia increases. Value (quantitative or 0 43,000 31,263 Qualitative) Date achieved 12/31/ /31/ /31/2010 Comments (incl. % achievement) See Section 3.2 for an explanation of why the target was not met. The total number of students enrolled continued to increase after Dec and by April 2011 it was estimated to be 42,743. Indicator 11 : Number of students receiving Conexão Educação smart cards increases. Value (quantitative or 0 600, ,291 Qualitative) Date achieved 12/31/ /31/ /31/2010 Comments (incl. % Value at completion exceeds target. achievement) Monthly reports on teacher and student absenteeism by school produced within Indicator 12 : 7 days of the last day of the month to be delivered to Human Resources Management Superintendence (by April 30, 2010). Value (quantitative or Qualitative) No reports produced. Monthly reports produced and delivered within 7 days of the last day of the month. Capacity for monthly production of reports exists but reports are produced only if requested. Date achieved 12/31/ /31/ /31/2010 Indicator was partially achieved, as Conexão Educação has indeed allowed for Comments these reports to be produced bi-monthly, through the program s electronic (incl. % management module. The reports are produced only if requested rather than achievement) routinely. Monthly report on expenditures for student meals and transport produced Indicator 13 : within 14 days of the last day of the month (by June 30, 2010). Value (quantitative or Qualitative) No reports produced Monthly reports produced and delivered within 14 days of the last day of the month. Capacity for daily meal reports exists but monthly reports are produced only if requested. Date achieved 12/31/ /31/ /31/2010 Indic was partially achieved as Conexão Educação has allowed the meal Comments reports to be produced daily by any admin staff with access to the info system (incl. % and reports can be produced if needed. Implementation of transportation achievement) monitoring is still in progress Indicator 14 : Number of services at UPAs increases. Value (quantitative or 1.3 million 3.7 million million Qualitative) Date achieved 12/31/ /31/ /31/2010 Comments Value at completion exceeds target.

12 (incl. % achievement) Indicator 15 : Number of municipalities with signed PAHI performance agreements increases. Value (quantitative or Qualitative) Date achieved 12/31/ /31/ /31/2010 Comments (incl. % Value at completion exceeds target. achievement) (b) Intermediate Outcome Indicator(s) Indicator Indicator 1 : Value (quantitative or Qualitative) Date achieved Comments (incl. % achievement) Baseline Value Original Target Values (from approval documents) Formally Revised Target Values This DPL did not include intermediate outcome indicators Actual Value Achieved at Completion or Target Years G. Ratings of Program Performance in ISRs No. Date ISR Archived DO IP Actual Disbursements (USD millions) 1 03/16/2010 Satisfactory Satisfactory /17/2010 Satisfactory Satisfactory H. Restructuring (if any) Not Applicable

13 1. Program Context, Development Objectives and Design 1.1 Context at Appraisal 1. In mid-2009, the state Government of Rio de Janeiro (GoRJ), in coordination with the Federal Government of Brazil, requested a single-tranche stand-alone Development Policy Loan (DPL) to help with projected 2010 financing needs resulting from reduced projected revenues caused by the global financial crisis mainly due to lower oil royalties, state taxes and intergovernmental transfers, and increased expenditures on infrastructure associated with the national Program of Accelerated Growth (PAC). 2. The global financial crisis of 2008 hit Brazil hard and interrupted twenty-one consecutive quarters of Gross Domestic Product (GDP) expansion. It caused contagion in domestic financial markets, a fall in commodity prices, exchange rate depreciation, external and domestic credit curtailment, a liquidity squeeze for domestic firms, decline in exports, decrease in foreign direct investment, decrease in industrial production, and increase in unemployment, among others. However, during the last decade, the federal and state governments including Rio de Janeiro have undertaken reforms and improvements that have led to a robust macro-economic management framework. This allowed the federal government to act quickly to rein-in the effects of the crisis, with an aggressive expansionary policy that included the Central Bank adopting measures to inject liquidity into domestic markets and provide foreign exchange to corporations. In addition, the state of Rio de Janeiro also had the advantage of a relatively limited dependence on federal transfers, dominance of the service sector and oil extraction in its economy, and rapidly growing public revenues. 3. However, despite the nation s quick economic recovery from the global economic crisis, damaging effects lingered. In the state of Rio de Janeiro in particular, revenue collection deteriorated and limited GoRJ s ability to keep pace with planned investments and other expenditures, especially relating to its Strategic Plan. Thus, GoRJ and the federal government requested financial help from the World Bank in the form of a DPL. The country s and the state of Rio de Janeiro s macro-economic frameworks were deemed solid and appropriate for this DPL. 4. The Loan was designed to partially compensate for the expected fall in revenues caused by the 2008 crisis and to help sustain the implementation of GoRJ s Strategic Plan, which was in its initial stages of implementation. The Plan affirms that fiscal balance is the fundamental condition that will lead to achievement of its main goals of providing efficient and effective public services in the areas of health, education, and public safety. These development priorities are also reflected in the national Multi-Year Plan (PPA). 5. Special attention was given to lagging sectors, such as education and health. In education, the state s outcomes were by far the lowest in the Southeast Region, were well below the national average for secondary school completion rates (44.5% compared to 50.9%), and 1

14 only barely passed the national average in primary school completion rates (57.8% compared to 53.7%). From 2005 to 2007, the state fell from ninth to fourteenth place in the Basic Education Development Index (IDEB) for fourth grade students and from seventeenth to twentieth place for eighth grade students. In health, the state s outcomes were also the lowest in the Southeast Region, especially in relation to the coverage of basic health programs and the delivery of urgent and emergency care services. In 2007, only 27.7% of Rio de Janeiro s population was covered by basic health care programs, while the average for the Region was 40.5% and 58.1% for the country. 6. This DPL was also one of a number of sub-national DPLs and Sector-Wide Approaches (SWAps) designed to reinforce fiscal discipline, public sector management, and service delivery as an integral part of the World Bank s Brazil Country Partnership Strategy (CPS). The DPL addressed both the Growth and the Equity pillars of the CPS, and supported policy measures consistent with the CPS objectives of: (a) strengthening macroeconomic fundamentals, public sector management, and fiscal consolidation; (b) reducing poverty, vulnerability and social exclusion by increasing efficiency, quality of spending and accountability of the health and education sectors, especially at the subnational level; and (c) improving competitiveness and the investment climate for achieving inclusive economic growth in Brazil. 7. This Loan was originally conceived as a Specific Investment Loan (SIL) with a SWAp framework. During concept stage, at the request of GoRJ and the Federal Government of Brazil, it was changed to a DPL covering the same sectors that would have been covered by the SIL/SWAp. The change was requested due to the urgent need for funds to compensate for an unexpected loss in projected revenues, especially during the first half of Thus, the governments decided that a single-tranche disbursement would be more efficient and effective than a multi-tranche operation. 1.2 Original Program Development Objectives (PDO) and Key Indicators (as approved) 8. Program Development Objective. The objective of the operation is to assist the Government of Rio de Janeiro in strengthening its policies to improve fiscal management, competitiveness and social service delivery, and in covering the projected fiscal gap during 2010 resulting from a temporary fall in revenues associated with the recent global financial crisis and economic slowdown. 9. Key Indicators. (a) Net asset position of the pension fund not subject to executive discretion increases; (b) Value of tax collected increases; (c) Number of electronic invoices issued increases; (d) Financial revenue from cash flow management increases; (e) Net financial position (cash less current liabilities) increases; (f) Share of payments made in less than 30 days increases; (g) Proportion of services contracted using the Pregão Eletrônico procurement method increases; (h) Average number of days to register a firm is reduced; (i) Number of teachers trained for Projeto Autonomia increases; (j) Number of students enrolled in Projeto Autonomia increases; (k) Number of students receiving Conexão Educação smart cards increases; (l) Monthly reports on teacher and student absenteeism by school produced within seven days of the last day of the month to be delivered to Human Resources Management Superintendence (by April 30, 2010); (m) 2

15 Monthly report on expenditures for student meals and transport produced within fourteen days of the last day of the month (by June 30, 2010); (n) Number of services at UPAs increases; (o) Number of municipalities with signed PAHI performance agreements increases. 1.3 Revised PDO (as approved by original approving authority) and Key Indicators, and Reasons/Justification 10. Not Applicable 1.4 Original Policy Areas Supported by the Program (as approved) 11. GoRJ s Strategic Plan aimed at improving the efficiency and effectiveness of public services by focusing on a set of nine priority areas: (a) development of human capital; (b) expansion of preventative actions and modernization of the health system; (c) economic development, attraction of investment, and technological innovation; (d) renovation and strengthening of public administration; (e) social development, productive inclusion and citizenship; (f) restoration of public safety; (g) environmental sustainability; (h) expansion and improvement of urban infrastructure and transportation logistics; and (i) promotion of culture and integration through sports. 12. The policies supported by this DPL were part of GoRJ s medium-term reform program, corresponding to the first four of the nine priority areas. Specifically, the Loan supported measures that: (a) strengthened fiscal consolidation through reduced long-term fiscal risk, improved efficiency of tax administration, and strengthened budget procedures and financial management; (b) improved the quality and efficiency of the business registration process; (c) increased the quality and efficiency of the basic education system; and (d) increased access to and the efficiency of health services, especially for urgent and emergency health care in disadvantaged areas and for low-income populations. 13. Fiscal Consolidation. In order to achieve its central mission of maintaining positive fiscal balances, GoRJ s Secretariat of Finance (SEFAZ) has developed and put in place an appropriate and sound structural and institutional framework, and has strengthened fiscal management procedures since early The strategy has been to increase transparency, predictability and credibility, and the fiscal policy area of this DPL supported specific reforms in all three of these dimensions: (a) reducing long term fiscal risk, by transferring oil revenues to the pension fund (RioPrevidência), preventing them from being used for other purposes and protecting them from executive discretion; (b) improving the efficiency of tax administration (and therefore increasing tax revenue and compliance), by increasing the number of qualified staff through new hires with selective public exams (concursos) and retrained existing staff, and by increasing the adoption of electronic fiscal invoices (nota fiscal eletrônica); and (c) strengthening the institutional framework for budget procedures and financial management, through reorganization of the budget programming process, definition of precise procedures, introducing a public timetable for invoice payments, and improving fiscal transparency in state operations. 3

16 14. Business Environment. Another objective of GoRJ s strategic plan is to achieve economic diversification and growth. The business environment in the state is hampered by excessive bureaucracy and high costs of registering businesses. Thus, the strategy GoRJ adopted to improve the business environment includes initiatives to ease bureaucratic processes relating to registering and operating businesses, decentralize the provision of services to businesses, and integrate organizations that deal with businesses at different levels of government (national, state and municipal). This DPL supported two of these initiatives that have a direct impact on the quality and efficiency of the business registration process: (a) Cadastro Fácil (Facilitation of Firm Registration), which will provide a more uniform procedure and decrease the need for businesses to take documents or questions to SEFAZ, thereby expediting the registration process; and (b) Rio Poupa Tempo (Integrated Business Service Centers), which will provide services such as company registration, licensing and permits in one location, and significantly improve the quality of services that are provided within these units. 15. Quality and Efficiency of Basic Education. Brazil aims at reaching OECD-levels of PISA learning outcomes by In order to do so, every state needs to undergo reforms of its basic education system, including Rio de Janeiro. GoRJ faces four major challenges to improve the quality and efficiency of basic education: low primary and secondary school completion rates, lack of management information at the school and administrative levels and inefficient resource use, inadequate physical conditions in schools, and poor student learning outcomes. This DPL supported two actions the government has undertaken in order to address the first two of its major challenges: (a) large-scale implementation of a high quality accelerated learning program (Projeto Autonomia) designed by Fundação Roberto Marinho that enables overage students to complete the curriculum in reduced time, so as to increase primary and secondary school completion rates and reducing agegrade distortion; and (b) installation of wireless internet, provision of laptops for teachers, promotion of access to digital teaching and learning resources, and introduction of smart cards to monitor student and teacher attendance, and access to school lunches and transport (Conexão Educação), so as to modernize system information and resource management, and increase accountability and efficiency of resource use. 16. Coverage and Efficiency of Health Services. The health system in the state of Rio de Janeiro faces two major challenges: the lack of coverage and quality of health services in responding to urgent and/or emergency needs of populations living in the poorest neighborhoods, and weak management and inefficient use of resources. In order to address these issues, GoRJ s strategy includes implementing 24-hour Rapid Service Units (Unidades de Pronto Atendimento - UPAs) in low-income areas, increasing coordination within the urgent and emergency care network, implementing a system of performancebased state financial transfers to municipalities (Program to Support Municipal Hospitals - PAHI), implementing medical protocols starting with the more costly and prevalent diseases, and establishing State Health Foundations to introduce flexibility and strengthen performance and accountability in the system. This DPL supported the first three of these GoRJ s initiatives to increase access and efficiency of health services by: (a) expanding the new UPA system of urgent and emergency care in disadvantaged areas and for lowincome populations in order to provide ambulatory care (including performing low- and 4

17 medium-complexity surgeries, and treating and stabilizing some severe cases before hospital transfer) and to provide and receive referrals and counter-referrals for all health facilities and programs (which fills a significant gap in the state system of health networks and increases coordination within the urgent and emergency care network); and (b) implementing the PAHI program, a performance-based transfer system from the state to municipalities of additional resources tied to improvements in maternal and child health and hospital care (in order to increase efficiency of health spending and accountability of health service provision by creating incentives for health units and municipalities to deliver more efficient and higher quality services). 1.5 Revised Policy Areas (if applicable) 17. Not Applicable 1.6 Other significant changes 18. Not Applicable 2. Key Factors Affecting Implementation and Outcomes 2.1 Program Performance 19. This was a single-tranche operation which disbursed upon effectiveness. Negotiations between the World Bank and GoRJ ran smoothly, and the Loan approval process transpired swiftly with no significant delays approval was on February 2, 2010, and effectiveness was on April 29, 2010, originally planned for March 31, The Loan closed as scheduled on December 31, All policy actions required by the Loan Agreement were met by GoRJ prior to negotiations. Since GoRJ s reform program was initiated in 2007 and the Loan became effective in 2010, the DPL supported an already mature and proven set of initiatives. Single Tranche Development Policy Loan Amount Expected Release Date Actual Release Date Release USD 485.0M 15-Apr Aug-2010 USD 485.0M Condition Status Social Security System for state public servants capitalized with oil-based revenues and those transfers protected from risk of executive discretion (Decree No /2009) Met Tax collection enhancement measures adopted, including: (a) Recruitment of qualified staff and upgraded training for existing staff of the State Revenue Sub-Secretariat (SEFAZ official hiring and training records); (b) Adoption of electronic invoices to increase tax Met compliance and oversight (SEFAZ Resolutions No. 118/2008 and 162/2008) Budget processes reorganized to improve financial management (Decrees No /2009 and /2009) and procurement processes (Decrees No /2008 and /2008) Met Streamlined business registration process Cadastro Fácil implemented (SEFAZ Resolution No. 248/2009) Met Integrated business service centers Rio Poupa Tempo units implemented (Decree No /2009) Met New accelerated learning program developed to reduce age-grade distortion in basic Met 5

18 education designed by Fundação Roberto Marinho (Decree No. 38/2008) New school management information program Conexão Educação developed to increase accountability among teachers and students and efficiency of resource use (Decrees No. 33/2008, 41/2008, 56/2009) 24-hour operating Urgent and Emergency Care Units (UPAs) are used to deliver urgent and emergency services (SESDEC Directives creating UPAs) and proper registration of UPAs in National Registry of Health Entities (CNES) and National Registry of Private and Public Entities (CNPJ) System of performance-based transfers established between the state and municipalities based on improvements in mother-child health and hospital care (SESDEC Resolution No. 843/2009) Met Met Met 2.2 Major Factors Affecting Implementation 21. Both internal and external factors contributed to the program s successful implementation. One vital factor was GoRJ s continued commitment to its reform program throughout the implementation of the Loan, as evidenced by its continued efforts to preserve and deepen its policy reform program even in the face of financial emergency and political transition. With regards to the latter, the mid-cycle federal and state elections in November of 2010 did not delay the implementation of the program as the governor of Rio de Janeiro was reelected with 66% of the votes in the first round, which helped strengthen GoRJ s commitment to the reform program. 22. The sound background analysis by both the World Bank and GoRJ teams also contributed to the appropriateness of the design of the operation. The background analysis was built on a number of formal and informal World Bank studies and reports, including a well-received Poverty and Social Impact Analysis (PSIA); the Doing Business 2010: Reforming Through Difficult Times report and the Doing Business 2010: Brazil sub-report; the 2008 report Hospital Performance in Brazil: The Search For Excellence; and detailed background documents prepared by the task team on Rio de Janeiro s fiscal and debt sustainability, and education policy strengths and needs. 23. The in-country partner analytical inputs to the design of the operation included the GoRJ Strategic Plan prepared after it took office in January 2007; the state s Fiscal Adjustment Program (PAF) with the federal government for 2007 and 2008; a series of technical notes prepared by SEFAZ and SESDEC; and a 2007 report on the National Policy for Urgent Care by the federal Ministry of Health. Academic inputs included studies by experts on the social and economic development challenges in the state; on the obstacles for the state s educational system in general and among the urban poor in particular; and on health system management in the Rio de Janeiro metropolitan area and on the Manchester Triage System for Emergency Care. 2.3 Monitoring and Evaluation (M&E) Design, Implementation and Utilization 24. M&E Design. Performance indicators and end targets were defined jointly by GoRJ and the World Bank team, and represented adequate and appropriate measures of the impact of all supported prior actions in the selected policy areas within the one-year time frame of the loan. Moreover, changes in the indicators can be attributed to the implementation 6

19 of the supported policy actions. No new method of data collection and monitoring was designed specifically for this operation, due to the short-term nature and quick disbursement of the Loan. Rather, data was collected using monitoring systems already in place within SEFAZ, SEEDUC and SESDEC which have long been institutionally sound and have continually produced good quality, reliable data. Additionally, at the time of program launch the monitoring systems of the State Secretariat of Planning (SEPLAG) were also to be used, but as the systems of the other three secretariats proved comprehensive, it was soon determined that there was no need to use the SEPLAG s supplementary monitoring. 25. M&E Implementation. Since already-existing monitoring tools were used, baseline data was readily available. This also allowed for indicator data to be collected accurately and in a timely fashion. 26. M&E Utilization. SEFAZ, SEEDUC and SESDEC successfully coordinated their monitoring efforts, generating clean and organized data that were used to inform decision-making and resource allocation. In particular, the indicators helped assess whether the policies supported by the World Bank would have the expected impact (for example, the slower than expected progress in a few indicators of the education policy area helped identify the need to strengthen capacity in SEEDUC). In addition, the monitoring and evaluation arrangements used under this DPL are sustainable as they are already part of the institutional structure, which has proven to be sound. 2.4 Expected Next Phase/Follow-up Operation (if any) 27. This is the first of three stand-alone sub-national DPLs designed to reinforce fiscal discipline, public sector management, and service delivery in Rio de Janeiro as an integral part of the World Bank s Brazil CPS. The second is the RJ Metropolitan Urban and Housing Development DPL, which was approved on March 15, 2011, and is scheduled to close December 31, The objective of this DPL is to support GoRJ in strengthening its policies regarding planning and managing territorial growth in the Rio de Janeiro metropolitan area by promoting the provision of affordable housing and creating integrated social development programs targeted to the poor. The operation is divided into three policy areas that reflect government priorities: strengthening planning and management of livable and sustainable urban growth in the metropolitan region; promoting the provision of affordable housing with reasonable access and quality; and providing targeted and integrated social assistance programs to the urban poor. 28. The third related operation is the RJ State Fiscal Consolidation for Efficiency and Human Development DPL, which held its first pre-identification mission in October During the mission, it was decided that this DPL will continue to focus on and expand some of the policies previously covered by this DPL (in the areas of fiscal consolidation, education and health) and additionally focus on public sector management reforms in particular the implementation of a policies to strengthen the links between planning and budgetary processes to ensure that the adopted policies are consistent both with the priorities of GoRJ and with resources likely to be available in the medium term. 7

20 29. Other operations that are also contributing to the CPS aims of reinforcing fiscal discipline, public sector management and service delivery in Rio de Janeiro, and which are closely coordinated with this DPL, include the RJ State Renovating and Strengthening Public Management Technical Assistance Loan (TAL), and the RJ Municipality Public Sector Efficiency, Human Development and Competitiveness DPL the coordination with the latter is of particular note as it will contribute to a better alignment of the state and municipal governments policies (and thus to more efficient service delivery) in the areas of health, education and business environment a first in the World Bank s history of policy and investment operations in Brazil. 3. Assessment of Outcomes 3.1 Relevance of Objectives, Design and Implementation 30. The design of this DPL was relevant because: (a) all of the resources the DPL would make available were needed to cover GoRJ s 2010 projected financing gap; (b) there was an urgent need for the funds to compensate for the unexpected loss in revenue; (c) GoRJ did not have space in its Fiscal Adjustment Program (PAF) for a larger multi-year borrowing program; (d) the political cycle that the DPL timing would cover included federal and state elections in November of 2010, and state governments were not allowed to sign new loans after June of 2010; and (e) in view of the then-impending state elections, it was preferred not to bind the new administration to specific policy triggers agreed with the previous one. 31. The policy areas the DPL supported helped to sustain the implementation of GoRJ s Strategic Plan, which in turn reflects similar developmental priorities to the national Multi-Year Plan (PPA). This DPL also supported policy measures that were fully consistent with and closely linked to the World Bank s Brazil CPS objectives of: (a) strengthening macroeconomic fundamentals, public sector management, and fiscal consolidation; (b) reducing poverty, vulnerability and social exclusion by increasing efficiency, quality of spending and accountability of the health and education sectors, especially at the sub-national level; and (c) improving competitiveness and the investment climate for achieving inclusive economic growth in Brazil. 32. The loan amount (US$485 million) was determined by the National Treasury Secretariat (STN) as the maximum amount GoRJ could borrow in 2010 within the parameters of the national Fiscal Responsibility Law (LRF), which was enacted in Brazil in May 2000 to strengthen fiscal institutions and establishes the framework for fiscal planning, execution and transparency at the federal, state and municipal levels. Therefore, this amount covered all the available fiscal space in the state s 2010 Fiscal Adjustment Program (PAF). 8

21 3.2 Achievement of Program Development Objectives 33. Achievement of the PDO is rated satisfactory as most of the results indicators (nine out of fifteen) were not only achieved, but also exceeded their end target values. The few indicators (six) that fell short of their expected targets nonetheless improved significantly and are on track to continue to improve and very likely to be achieved in the near-term, indicating that the impact of the reform program is robust. In addition, the progress towards achievement of the PDO and the overall implementation progress of the programs supported by the DPL were both continuously rated satisfactory during all supervision missions. 34. Most importantly, though, the overall purpose of the DPL was achieved in that it ensured that GoRJ could sustain its reform and investment programs, and guaranteed that the supported policy areas did not suffer from the temporary economic slowdown of 2008 and Policy Area 1: Strengthened Fiscal Consolidation Through Reduced Long-Term Fiscal Risk, Improved Efficiency of Tax Administration, and Strengthened Budget Procedures and Financial Management. The outcome of this area is rated satisfactory rather than highly satisfactory because two (out of seven) indicators had lower than expected results, even though one of these was below target by an insignificant amount. This was the increase in financial revenue from cash flow management (indicator 4), which was one of two indicators chosen to measure the improved financial management and strengthened institutional framework for budget procedures. The target for this indicator was R$550 million at the end of 2010, yet the outcome was a slightly lower R$542 million (a minor difference which represents only 1.45% below target). The difference between the target and actual value is not significant and is due to three factors that are independent of sound management of cash flow: (a) the crisis in 2009 resulted in a decreased final balance; (b) the monetary policy response to the economic crisis included decreasing the Special System of Clearance and Custody (SELIC) rate by 500 BPs, thus decreasing the remuneration that GoRJ received from private banks (which is indexed as a percent of Interbank Deposit Certificate CDI, which, in turn, depends on the SELIC); and (c) GoRJ changed the payment date for its payroll, bringing it from the 8 th to the 2 nd of the month, causing it to lose about five to six days of remuneration from its financial applications. 36. An increase in the net financial position (cash less current liabilities) was the second indicator used for measuring improved financial management and budget procedures (indicator 5). This had an outcome of fully 76.4% above the target value, due to the positive effects of fiscal adjustments made in 2009 (the outcome value was R$2,176.5 million, while the target was R$1,233.6 million by end of 2010). At the end of 2009, this indicator was 47% below its expected mid-term value, with a target of R$1,191.9 million but an actual value of R$632.6 million. This was due to three factors: (a) external factors such as frustration revenue; (b) delays implementing accounting adjustments deriving from the adoption of Constitutional Amendment No. 62/2009 (allowing judicial payments to be moved from short- to long-term liabilities); and (c) the settlement of the Liquidity Public Debt Fund (which represented the cancellation of liability related to 9

22 judicial payments by offsetting amounts owed and paid). Since there was no time to make accounting adjustments in 2009, the positive effects of these adjustments could not be reflected in 2009 accounts. However, the positive effects were reflected in 2010 accounts, showing the indicator was on track and well above the expected value. 37. This policy area also aimed at increasing the net asset position of the RioPrevidência pension fund and improved fiscal sustainability, measured by the increase in the amount of net assets of the pension fund that were not subject to executive discretion (indicator 1). The target for this indicator was R$50,495 million at the end of 2010, and the outcome was R$54,332 million, which represents 7.6% above target value. In addition, the oilbased revenue transfers were not subject to executive discretion, as intended. The indicator also surpassed its 2009 target by 11%, with the target set at R$48,459 million and the actual value amounting to R$53,777 million. This increase in funds strengthened RioPrevidência s fiscal sustainability and allowed it to pay in full all pension obligations and, thus, protect the share of GoRJ s budget needed for other expenses. 38. Another aim of this policy area was to increase tax revenue, compliance and oversight, which was measured by two indicators, both of which exceeded their end targets. The first indicator was the increase in the value of tax collected (indicator 2), which revealed results 10% above the expected target of R$26,438 million, with outcome revenues of R$29,086 million in collected taxes by the end of 2010, due to the modernization of tax inspection procedures in businesses, to SEFAZ s new approach towards appreciation of its staff and in particular the tax inspectors, to the hiring of new and well-qualified inspectors and training of the existing ones, and to a vigorous post-crisis pick up in the state and national economies. The revenues were also 2% above target in 2009, with a goal of R$ 24,413 million and an outcome of R$ 24,884 million. The second indicator measured the increase in the number of electronic invoices issued (indicator 3), and was the other indicator in this area that fell short of achieving its target. The target was for 95% of all invoices to be issued electronically by the end of 2010, yet the actual value was of 81% (15% below target). This was due to a request by the national business associations to delay the deadline for registering with the electronic invoice system (originally set for December 2010 and delayed to April 2011), which in turn caused not all businesses to have to be registered by the loan completion date. This was a federal policy change external to the control of GoRJ and thus does not indicate either a limited appropriateness of the original policy or a problem in its implementation. However, even with such unexpected and exogenous change, the actual number of electronic invoices issued increased 46% from 2009 to 2010 (from 56 million to 82 million). In addition, by April 2011 (the new deadline for businesses to register with the system) the total number of electronic invoices issued was already 45.7 million, representing an average of 11.4 million per month, while in 2010 the average was of 6.8 million invoices per month (a 68% increase). The final 2011 total is estimated to surpass 130 million invoices issued. 39. The final two indicators, which also achieved their targets, were used to measure the increased predictability and transparency of expenditures. The first was the increase in the share of payments made in less than 30 days (indicator 6), which surpassed the expected outcome by 12%, with the target being 84% and the actual end value being 10

23 94.2% by the end of The target was surpassed due to sustained improvement in SEFAZ Treasury processes, which resulted in the Treasury being awarded the International Organization for Standardization s (ISO) 9001 certificate in March 2011, which indicates it meets standards related to quality management systems. The other indicator was the increase in the proportion of services contracted using the Pregão Eletrônico procurement method (indicator 7), which increased to 96.2% at operation completion, exceeding its target of at least 95%. This was due to the successful implementation of the program s electronic Integrated Procurement Management System (Sistema Integrado de Gestão de Aquisições SIGA), which includes a web-based procurement portal and greatly enhanced the state s procurement administration and organization processes. 40. The measures supported by the DPL in the fiscal consolidation policy area contributed to Standard and Poor s giving the state, in March 2010, a global Issuer Credit rating of BBB- with stable outlook (foreign and local long term). This was the first time a subnational government in Brazil was considered worthy of investment grade. 41. Policy Area 2: Improved Quality and Efficiency of the Business Registration Process. The outcome of this area is rated satisfactory rather than highly satisfactory because there were delays in the implementation of the Cadastro Fácil program, causing the indicator to be slightly below target. This indicator the reduction in the average number of days to register a firm (indicator 8) measures the increase in efficiency of the business registration process, with an end target of 30 days but an outcome of 36 days by the end of Cadastro Fácil became operational eight months behind schedule, due to delays in establishing a system that would link the various public sector organs responsible for implementing the program. However, once the program got underway the number of days to register a firm declined at a rapid pace: from 57 in 2009 to 36 in 2010 (a 37% drop in a single year) and to 31 by the end of April 2011, basically reaching the end target value. In addition, SEFAZ reported that the Rio Poupa Tempo units were already having a larger impact than expected by the end of 2010 (their utilization rate had already increased 28% compared to the 25% target value). 42. Policy Area 3: Increased Quality and Efficiency of the Basic Education System. The outcome of this area is rated satisfactory rather than highly satisfactory because of implementation problems that caused the outcome of one (out of five) of the indicators to be below the expected target values and because two further indicators were only partially achieved. The indicator with the outcome below expected target value was the increase in the number of students enrolled in Projeto Autonomia (indicator 10), which along with a second indicator of an increase in the number of teachers trained for the project addressed primary and secondary school completion rates and age-grade distortion. This indicator was 27% below target, with an outcome of 31,263 students enrolled at the end of 2010 against a target of 43,000. This was due mainly to a shortage of teachers within the state education network in 2009 (due both to a general shortage and to a higher number than expected transferring to the federal and municipal education systems), which led to a lack of available teachers for Projeto Autonomia (as they must be removed from regular courses) and limited funds to pay regular teachers for overtime 11