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1 Public Disclosure Authorized Public Disclosure Authorized Public Disclosure Authorized Public Disclosure Authorized Document of The World Bank FOR OFFICIAL UE ONLY IMPLEMENTATION COMPLETION REPORT (CPL TF-25256) ON A LOAN IN THE AMOUNT OF U$ MILLION TO THE TATE OF BAHIA FOR THE BAHIA MUNICIPAL INFRATRUCTURE DEVELOPMENT AND MANAGEMENT PROJECT March 30, 2005 Finance, Private ector and Infrastructure Department Brazil Management Unit Latin America and the Caribbean Region Report No: This document has a restricted distribution and may be used by recipients only in the performance of their official duties. Its contents may not otherwise be disclosed without World Bank authorization.

2 CURRENCY EQUIVALENT (Exchange Rate Effective March 28, 2005) Currency Unit = Brazilian Real R$ 1.00 = U$ 0.37 U$ 1.00 = R$ 2.73 FICAL YEAR January 1 December 31 ABBREVIATION AND ACRONYM CAR Companhia de Desenvolvimento e Ação Regional - tate Regional Development Company CA Country Assistance trategy CONDER Companhia de Desenvolvimento Urbano do Estado da Bahia - Bahia tate Urban Development Company DEENBAHIA Agência de Fomento do Estado da Bahia - Bahia tate Development Agency FRL Fiscal Responsibility Law FUNDURBANO Fundo de Desenvolvimento Urbano - Urban Development Fund ICM Imposto sobre Circulação de Mercadorias e erviços - Value Added Tax IPTU Imposto sobre Propriedade Territorial Urbana - Real Property Tax IRR Internal Rate of Return I Imposto sobre erviços - ervices Tax (municipal) NGO Non-Governmental Organization PROURBANO Programa de Financiamento para Desenvolvimento Urbano - Program for the Financing of Urban Development ECOMP ecretaria de Combate à Pobreza e às Desigualdades ociais - ecretariat for the Reduction of Poverty and ocial Inequalities EPLAN ecretaria de Estado do Planejamento - tate ecretariat of Planning TA Technical Assistance Vice President: Country Director ector Manager Task Team Leader/Task Manager: Pamela Cox Vinod Thomas John H. tein Eleoterio Codato

3 BRAZIL BAHIA MUNICIPAL INFRATRUCTURE DEVELOPMENT AND MANAGEMENT PROJECT CONTENT Page No. 1. Project Data 1 2. Principal Performance Ratings 1 3. Assessment of Development Objective and Design, and of Quality at Entry 2 4. Achievement of Objective and Outputs 5 5. Major Factors Affecting Implementation and Outcome ustainability Bank and Borrower Performance Lessons Learned Partner Comments Additional Information 29 Annex 1. Key Performance Indicators/Log Frame Matrix 30 Annex 2. Project Costs and Financing 31 Annex 3. Economic Costs and Benefits 33 Annex 4. Bank Inputs 35 Annex 5. Ratings for Achievement of Objectives/Outputs of Components 37 Annex 6. Ratings of Bank and Borrower Performance 38 Annex 7. List of upporting Documents 39

4 Project ID: P Team Leader: Eleoterio Codato Project Name: Bahia Municipal Inf. Dev't. and Mgm't. TL Unit: TUDUR ICR Type: Core ICR Report Date: March 30, Project Data Name: Bahia Municipal Inf. Dev't. and Mgm't. L/C/TF Number: CPL-41400; TF Country/Department: BRAZIL Region: Latin America and the Caribbean Region ector/subsector: General water, sanitation and flood protection sector (78%); General transportation sector (13%); ub-national government administration (9%) Theme: Access to urban services and housing (P); Municipal finance (P); Municipal governance and institution building (P); Public expenditure, financial management and procurement (P); tate enterprise/bank restructuring and privatization () KEY DATE Original Revised/Actual PCD: 07/15/1994 Effective: 06/19/1997 Appraisal: 05/06/1996 MTR: Approval: 03/04/1997 Closing: 03/30/ /30/2004 Borrower/Implementing Agency: Other Partners: TATE OF BAHIA/CAR TAFF Current At Appraisal Vice President: Pamela Cox Gobind T. Nankani (Acting) Country Director: Vinod Thomas Constance Bernard (Acting) ector Manager: John Henry tein Paul Meo Team Leader at ICR: Eleoterio Codato Braz Menezes ICR Primary Author: Eleoterio Codato; Ivo Imparato 2. Principal Performance Ratings (H=Highly atisfactory, =atisfactory, U=Unsatisfactory, HL=Highly Likely, L=Likely, UN=Unlikely, HUN=Highly Unlikely, HU=Highly Unsatisfactory, H=High, U=ubstantial, M=Modest, N=Negligible) Outcome: ustainability: Institutional Development Impact: Bank Performance: Borrower Performance: L U QAG (if available) Quality at Entry: Project at Risk at Any Time: No ICR

5 3. Assessment of Development Objective and Design, and of Quality at Entry 3.1 Original Objective: The primary project objectives were to: (a) improve the living conditions of the urban poor, through: (i) development of detailed, reliable systems for mapping of urban poverty in the state to guide state and local investment strategies; and (ii) a poverty-targeted program of urban upgrading in critically poor urban areas, or bolsões de pobreza (pockets of poverty); (b) increase municipal public sector efficiency and sustainability of financing for key municipal services; (c) support privatization and concessioning of service delivery; (d) increase cost recovery of municipal investments; and (e) strengthen municipal financial management capacity, especially for effective expenditure control and capital budgeting. The project was designed within the guiding framework of the Country Assistance trategy (CA) of June 6, 1995 and updated in June 1996 which supported structural reforms at the federal and state levels with an emphasis on lending to the states, increasingly. This emphasis was principally due to the increased importance of the states in the provision of key services and infrastructure, and the finding that projects were successful primarily in states with viable fiscal positions (and hence investment programs); only in such cases was the needed volume of counterpart funding available. Within that context, the project was consistent with the CA as Bahia was (and continues to be) a creditworthy state. The Bank s strategy in the urban sector in Brazil supported the decentralization reforms which took effect with the 1988 Constitution, and fostered among Brazil s municipalities strengthened financial management and increased fiscal responsibility. In addition, it emphasized the importance of targeting benefits to the very poor. Thus, the project was part of a poverty reduction strategy for Brazil that involved economic and sector work, country dialogue and lending in the areas of rural development, health and education as well as urban development. The project also responded directly to the tate s developmental strategy centered on the need to strengthen the administration of urban areas, particularly in the tate s interior. While the project objectives were, overall, appropriate and responding to the priorities of the Bank, the Federal Government and the tate of Bahia, the risks to achieving the objectives were high. In spite of the good track record of the tate, the project was still large and complex, especially when considering the change in approach brought about by the infrastructure component which was based on the use of sub-loans for financing municipal infrastructure investments. As will be discussed later, this was in part responsible for a longer than anticipated implementation period, and the need to reformulate the project after it was approved by the Board. Notwithstanding the underestimation of risk, the project objectives can be considered satisfactory. 3.2 Revised Objective: The project established changes in the mix of components in However, these changes did not result in a change in project objectives but rather were aimed at better achieving the original objectives. The component changes are discussed in the section on Revised Components. 3.3 Original Components: The original project design included four primary components, each with specific - 2 -

6 sub-components. It is important to note that the components and their description was taken from the Loan Agreement (chedule 2) and they do not necessarily coincide fully with the description provided in the taff Appraisal Report (Report No BR). Part A. The Municipal Reform and Institutional Development component (U$18.1 million). This component supported: a. b. c. The preparation of diagnoses and, when necessary, recommendations for: (i) the privatization of enterprises controlled by municipalities or concessioning of municipal services; and (ii) the strengthening of the management, institutional and financial capabilities of municipalities. The carrying out of projects consisting of one or more of the following activities: privatization of enterprises controlled by municipalities or concessioning of municipal services; and restructuring of municipalities enterprises, through downsizing of staff and other administrative reforms, to facilitate privatization or concessioning of municipal services. The carrying out of projects consisting of one or more of the following activities: strengthening, through the provision of consultant services for technical assistance, staff training, and acquisition of equipment (including hardware and software), of the management, institutional and financial capabilities of municipalities, including, among others, the upgrading of property tax cadastres, improvement of procedures, policies, and physical infrastructure for billing and collection of property and other taxes and tariffs, improvement of procurement procedures, and preparation of updating of master plans, codes, and technical standards for construction work. Part B. trengthening of the tate Regional Development Company (CAR) and Poverty tudy (U$1.9 million). This component supported: a. b. The strengthening of the technical and administrative capabilities of CAR, through the provision of technical assistance and staff training,and acquisition of related equipment (including hardware and software) The carrying out of a study to evaluate the impact of the Project on the improvement of the living conditions of the urban poor in the Borrower s territory, such study to include a poverty mapping. Part C. Urban Infrastructure (U$186.5 million). This component supported the carrying out of projects consisting of one or more of the following activities: (a) installation and/or expansion of water treatment and production systems, water supply networks and domestic water supply connections, and operational and commercial improvements such as installation of water meters, water leak detection and rehabilitation of related equipment; (b) installation and/or expansion of sewerage treatment systems, networks and domestic connections; (c) acquisition of equipment for solid waste collection and final disposal, and construction of landfills; (d) street paving, macroand micro-drainage, and flood and erosion control works, and channeling of creeks; (e) other - 3 -

7 activities complementary to those under paragraphs (a) to (d) above, such as street lighting, urbanization, construction of sidewalks and planting of trees and shrubbery; (f) construction of municipal markets and slaughterhouses; and (g) construction or expansion of air, road and water transport passenger shelters, and tourism bureaus. Part D. Urban Upgrading (U$15.5 million). This component supported the carrying out of projects consisting of one or more of the activities referred to in Part C (a) through (e) of the Project in locations where the average monthly household income is three minimum salaries or less. The components were well conceived and designed, and consistent with the stated objectives of the project. They reflected the state of the art at the time of preparation, taking into account lessons learned and in project design more generally. The project included best practices from over 18 loans in the urban sector in Brazil going back to 1978, an additional 19 loans in water and sewerage projects since 1971, also largely in urban areas. More specifically, the loan incorporated lessons learned from a generation of municipal development projects (anta Catarina Ln BR; Paraná Ln BR; Rio Grande do ul Ln BR; Minas Gerais Ln BR; and Ceará Ln BR). Among the lessons learned, included in the project were: The need to limit investments under the project to those in urban infrastructure. The need to establish a clear link between TA and infrastructure, with realistic, limited conditionality on sub-loans. The need to have acceptable bylaws and statutes for the project approved by the Borrower prior to negotiations. The need to have computerized project management and monitoring. Early and thorough marketing of the project is essential to its success The need to ascertain that implementing agency has experience in gathering municipal and regional data, and capacity to standardize and simplify procedures for the purpose of the institutional and financial diagnosis. A well-defined group of first-year investments is fundamental to effective project launch. Pilot components, if not begun right away, often do not begin at all. While these lessons were mostly assimilated, the Municipal Reform and Institutional Development component included a set of activities designed to support the privatization of enterprises controlled by municipalities or concessioning of municipal services that were never implemented. The appraisal report mentions that the pilot Municipal Reform Program of privatization and/or concessions would be identified early through a diagnosis of each interested municipality. In spite of the fact that such diagnoses (Municipal Reform and Institutional Development Plan) were carried out no interest in the privatization of municipal services emerged and, as a result, the pilot never materialized. 3.4 Revised Components: There were a few revisions to the project components, but none that altered the project objectives. These were generally changes that allowed for project refinements and allowed the project to better meet its overall project objectives. The changes are indicated below

8 2001 Part A. A fourth item was added to the list of eligible activities to include training of staff in participating municipalities. Part B. CONDER, the tate s Urban Development Company, was included as a beneficiary for purposes of strengthening of the technical and administrative capabilities. Item (b) on the carrying out of a study to evaluate the impact of the Project on the improvement of the living conditions of the urban poor in the Borrower s territory was dropped and replaced with the strengthening of CAR s capacity through the carrying out of: (i) different analysis, assessments and performance evaluations of project implementation; and (ii) project dissemination campaigns. Part C. It was agreed that until July 31, 2000 or a date 90 days after the enate Resolution No. 78, dated July 1, 1998, were modified to exempt from its provisions the Infrastructure ubprojects, such subprojects, up to a limit of U$26 million, could be financed through Grants, instead of subloans. In such case, the beneficiaries were required to contribute with a minimum amount of fifteen percent of the total cost of the subproject, excluding the Faz Cidadão Program subprojects for which no contribution was required Part B. EPLAN, the tate ecretariat of Planning, was included as a beneficiary for purposes of strengthening of the technical and administrative capabilities. Part C. While the description of this component remained the same, changes in arrangements for carrying it out were introduced in order to allow DEENBAHIA, the tate Development Agency, to make loans to the beneficiaries for the financing of infrastructure subprojects in substitution for subloans that were no longer practical as a result of the Fiscal Responsibility Law of March Quality at Entry: Quality at entry can be considered atisfactory, albeit with some deficiencies. The level of analysis during project preparation was highly satisfactory. The objectives, as has been indicated earlier, were clear and consistent with both the CA priorities and the development priorities of the tate of Bahia. Local buy-in of the objectives and components, an ingredient considered essential for success, was high, with the project promoting explicit state policies, even though, with the benefit of hindsight, the emphasis on the privatization of enterprises controlled by municipalities or concessioning of municipal services in Part A of the project did not find much correspondence with reality. The project also promoted Bank sector priorities in urban development. pecifically, the project set out to operationalize the Bank s guiding urban policy document for Brazil, namely Brazil, The Challenges of Municipal ector Development in the 1990 s and to advance the objectives of decentralization reforms set forth in the 1988 Constitution. 4. Achievement of Objective and Outputs 4.1 Outcome/achievement of objective: The achievement of the objectives and outcomes can be considered satisfactory for the project - 5 -

9 overall. Because of the demand-driven and programmatic nature of the investments financed under the project, there were no specific targets for project outputs. Annual investment programs were put together on the basis of proposals received from participating municipalities that met eligibility criteria defined for the project. Nonetheless, project outcomes can be considered positive and with a high potential for sustainability. About 3.8 million people (about 43% of Bahia s urban population in the year 2000) benefited from investments financed under the project. This number includes the entire population of urban areas that received investments in community facilities such as public markets, public squares and landfills. Following the original design, project s actions were initiated in the Municipal Reform and Institutional Development component for the purpose of promoting management changes through instruments and processes that enabled municipalities to better manage their finances and plan infrastructure investments, including those financed under the project. After applying the Municipal Finance and Institutional urvey, CAR was able to identify those municipalities that met the established requirements to access investment funds under the project and worked with them in identifying investment priorities and complying with the project operational manual. Towards the end of the year 2000, the Borrower and the Bank agreed to adopt a set of indicators for the purpose of monitoring outcomes and outputs which are presented in a table below. Type Unit Forecast Actual OUTCOME INDICATOR Municipal Institutional trengthening # of municipalities Basic anitation projects financed by subloans U$ million Basic sanitation projects financed by grants # of municipalities Upgraded low-income areas # of areas Institutional trengthening of tate Agencies # of agencies 2 3 OUTPUT INDICATOR Unit Forecast Actual Institutional Development Projects # of projects ubloans to Municipalities U$ million Infrastructure projects financed by grants # of projects Urban Upgrading # of areas Institutional trengthening of tate Agencies # of agencies 2 3 Three of the above outcome indicators and three related output indicators call attention due to the discrepancies between what had been forecasted and what was actually achieved. Namely, these indicators are: basic sanitation projects financed by subloans and its related output indicator on subloans to municipalities; basic sanitation projects financed by grants and its related output indicator on infrastructure projects financed by grants; and, finally, upgraded low-income areas and its related output indicator on urban upgrading. The discrepancies have their roots in a situation which came about with the enactment of the Fiscal Responsibility Law (FRL) in March of The FRL and its ancillary laws prohibited lending operations among different levels of government and, as a result, made it impractical for the tate Government to lend to - 6 -

10 municipalities for urban infrastructure through the tate Urban Development Fund (FUNDURBANO) that had been established under the project. The impasse created by the FRL lasted for more than two years during which the Bank and the Borrower agreed on the reallocation of loan resources between the different components in order to allow project implementation to continue. This resulted in an increased amount of loan funds being allocated for infrastructure projects financed by grants as well as for urban upgrading projects and, consequently, an increase in the number of such projects and beneficiary municipalities. Of particular importance was the fourfold increase in the number of urban upgrading projects which, together with the very positive outcomes of the Novos Alagados II area in alvador (financed with project funds), eventually led the tate Government to establish a new strategy for scaling up such interventions and resulted in the formulation of a new project proposal which is being considered for Bank financing. Lending for urban infrastructure resumed in 2003 after a long negotiation process with the Federal authorities to allow DEENBAHIA, the tate Development Agency, to lend to municipalities. To this end, DEENBAHIA established a lending facility called PROURBANO. 4.2 Outputs by components: Municipal Reform and Institutional Development (Part A): This component is rated atisfactory. Even though the pilot program for the privatization or concessioning of municipal services did not materialize, the rating is warranted by the highly satisfactory results achieved by the carrying out of activities for the upgrading of property tax cadastres, improvement of procedures, policies, and physical infrastructure for billing and collection of property and other taxes and tariffs through the revision or implementation of tax codes and the computerization of services for financial management and tax administration. In addition to introducing more efficiency in financial management and tax administration at the municipal level, these activities resulted in increased local revenues, thus reducing municipal dependence on fiscal transfers from the tate and Federal Governments. A total of 451 outputs were produced under this component, as follows: 96 urban development master plans; 110 information technology master plans; 43 studies for administrative organization; 78 municipal cadastres; 30 tax codes; 23 solid waste management plans; 66 information technology projects; 1 tax collection study; and 4 other general studies. From the sample of 11 municipalities used for evaluating the results of this component, seven (64 percent) showed a sustained increase in the collection of property taxes (IPTU) and taxes on services (I) over the period from 1996 to 2000 when compared to a control group of 8 municipalities that did not benefit from the project. The survey carried out as part of the project s mid-term evaluation, revealed that municipal officials had a very positive assessment of the technical assistance activities carried out under the project and wished for continuity through a program to further help improve institutional capacity. The survey also revealed that municipal officials valued the knowledgeable and professional advice they received from CAR as well as the training that was provided to municipal staff under the project. trengthening of CAR (Part B): This component is rated atisfactory. In addition to CAR, CONDER and EPLAN were also included as beneficiaries of this component. CAR was able to - 7 -

11 expand its information technology capacity by acquiring new hardware. This component also financed: (a) the restructuring of CAR s Contract Management ystem, which made it possible to have detailed and up-to-date information on all phases of contracts, from procurement to implementation progress monitoring, to reporting; (b) the acquisition of vehicles that allowed CAR staff to travel to beneficiary municipalities throughout Bahia in order to guide and supervise project implementation. Furthermore, this component also allowed CAR staff to improve their technical skills by: (i) supporting their participation in several training programs as well as exchange of experience with other staff working on similar projects in other Brazilian states; and (ii) hiring consultants to complement the skills of CAR staff in order to assist in project implementation and, most importantly, in delivering some of the training programs for strengthening the capacity of municipal staff (a total of 1991 staff benefited) in the areas of urban planning and management, procurement, subproject review and monitoring, especially for capacity building. Consultants were also engaged across Bahia to provide direct support to beneficiary municipalities under the leadership of CAR staff in alvador. This component also supported the strengthening of CONDER through the acquisition of adequate furniture and equipment needed for the management of data and maps associated with the subproject for the development of reference maps for urban areas across the tate. Data and maps of the geographical information system on urban areas were made available through the Internet. Finally, this component supported the strengthening of EPLAN by financing: (a) the purchase of information technology equipment which was instrumental for the modernization of its management systems; and (b) a study to assess the economic impact of the establishment of Ford s auto assembly plant in the Municipality of Camaçari, which is part of alvador s Metropolitan Area. Urban Infrastructure (Part C): This component is rated atisfactory. While investments in urban infrastructure were financed mostly by grants rather than subloans as initially envisaged, this component did contribute to improving living conditions of urban residents in 175 municipalities across Bahia. Of these, 141 received grants and 34 received subloans. A survey conducted in 10 beneficiary municipalities (Alagoinhas, Candeias, Cruz das Almas, Ilhéus, Itabuna, Itapetinga, Lauro de Freitas, alvador, and Teixeira de Freitas) revealed that 90 percent of people interviewed confirmed that their living conditions had improved in several different aspects, such as: better access and reduction of dust and respiratory diseases as a result of street paving; reduction in the incidence of water-born diseases and in the presence of insects and foul odors as a result of investments in drainage, water supply and sanitation; and more pleasant living environment in general. In addition to the above survey that was conducted for the project mid-term evaluation, another survey was carried out in seven beneficiary municipalities in 2001 before PRODUR investments were made and, again, in This second survey interviewed 4,437 households in the municipalities of Brumado, Camaçari, Canavieiras, Catú, Cruz das Almas, Ilhéus, and Lauro de Freitas, and revealed a significant reduction in the number of infectious diseases. For example, the number of water-born diseases decreased from 49 to zero and 197 to zero in Brumado and - 8 -

12 Camaçari, respectively; in these same municipalities, the number of infectious diseases caused by insect bites decreased from 259 to one, and 29 to one. It also revealed that there was a significant reduction in the risk of land slides. In Ilhéus, which had the highest percentage of households exposed to the risk of land slides amongst all seven municipalities reporting such a risk, the exposure level was reduced from about 20 percent of households in 2001 to only about 8 percent in Urban Upgrading (Part D): This component is rated Highly atisfactory. Eighty-eight neighborhoods were upgraded under PRODUR to the benefit of 678,710 people (more than 120,000 families). In Novos Alagados alone, 11,900 people benefited from investments. This neighborhood comprised almost entirely of stilt houses (palafitas) with no access to public services such as energy, water and sanitation, went through a great transformation and, today, people live in houses on firm land and enjoy access to services. This was achieved at an average cost of about U$3,000 per family. Even though this cost is higher than those for other areas that benefited from PRODUR, it can be considered reasonable in view of the difficult initial conditions which required land-filling, soil stabilization and relocation of part of the population to an adjacent area where new houses were built. It is important to note that Novos Alagados was settled on a mangrove whose vegetation has been restored, as a result of the improvement in environmental conditions. Not only the physical conditions improved dramatically in Novos Alagados but, more importantly, the community became more organized with the assistance of an NGO engaged by the Bahia tate Urban Development Company CONDER. In addition to helping the community organize itself to deal with the challenges brought about by the project, including resettlement, the NGO assisted in the organization of economic development activities for the community, including the creation of a cooperative that provided labor for housing construction. 4.3 Net Present Value/Economic rate of return: An ex-post evaluation of a sample consisting of 22 urban infrastructure subprojects across 15 beneficiary municipalities yielded an average internal rate of return (IRR) of 34.8 percent against 24.5 percent estimated at subproject appraisal which is well above the 12 percent minimum IRR established for such investments in the project appraisal report (AR). This sample included six infrastructure subprojects financed by subloans, 11 infrastructure subprojects financed by grants, and five urban upgrading subprojects which consist mostly of investments in drainage, street paving and sewers. The economic evaluation was based on the same methodology used at appraisal which employs increased property values as a result of investments as a primary benefit determinant. 4.4 Financial rate of return: NA 4.5 Institutional development impact: The institutional development impacts are ubstantial. The large number of institutional development subprojects implemented in 133 municipalities has been responsible for significant changes, especially in the areas of budget and tax administration, information technology, planning, and human resources management. Perhaps, more importantly, the tate has recognized the importance of improving the living conditions of the poor and, in December of 2001, established a ecretariat for the Reduction of Poverty and ocial Inequalities (ECOMP) and - 9 -

13 pioneered in Brazil the creation of a Poverty Reduction Fund financed by an additional 2 percent surcharge on the value-added tax (ICM) and other budgetary allocations and contributions. In addition, in January of 2004, the tate established a ecretariat of Urban Development that has absorbed the mandate of CAR s Urban Department and given it a higher institutional profile. Finally, the tate is preparing a new project Viver Melhor that will be presented to the Bank for financing soon. This new project proposes to scale up tate interventions in low income neighborhoods in the 13 major urban centers across Bahia, based on the successful experience of the Ribeira Azul Program that included the Novos Alagados area. 5. Major Factors Affecting Implementation and Outcome 5.1 Factors outside the control of government or implementing agency: Keeping in mind that the government in this case is the Government of the tate of Bahia, the following factors are considered to have impacted the implementation of the project, and were outside of the government s control. Fiscal Issues: The 1998/99 IMF agreement with Brazil, that called for a higher primary surplus, impacted the disbursements of all international loans, including PRODUR, causing a deceleration in project implementation pace during that period. In addition, in 1998, a new enate Resolution tightened the debt limits for subnational governments and, in 2000, the enactment of the Fiscal Responsibility Law, which included provisions prohibiting lending between different levels of government, brought to a halt the model of the Urban Development Fund (FUNDURBANO) loans to municipalities under the urban infrastructure component. It took almost three years to resume lending to municipal governments under the project. Election Cycles: The project went through two elections during its implementation. In 2000, municipal elections were responsible for a slow down in subproject implementation, including the flow of institutional development assistance. When new local administrations take office in Brazil, the tradition is to replace not only high level municipal officials, but often technical level staff as well. This hindered the flow of project implementation as new teams had to be brought up to speed, and led to buy-into the institutional development program, which may have begun under the predecessors term in office. In addition, Brazilian election legislation prohibits contracting during the three months leading to election day. This often led to the stalling of contracting processes underway in the 2000 municipal elections and, again, in the 2002 gubernatorial elections. 5.2 Factors generally subject to government control: Institutional Changes. With the change in state administration in January of 1999, URBI (Bahia s Housing and Urban Development Company) was folded into CONDER which had its mandate expanded from being the Metropolitan Region Development Company to become Bahia s Urban Development Company. This change slowed down the implementation of the urban upgrading component with which CONDER was charged. Financial. Difficulty in making counterpart resources available by the ecretariat of Finance to the executing agencies, particularly during the first quarter of the year. This also affected the flow of resources to participating municipalities and resulted in project implementation delays

14 5.3 Factors generally subject to implementing agency control: Weak Technical Capacity. While CAR had adequate technical capacity at the project inception, PRODUR necessitated new skills in urban development, especially in connection with the municipal reform and institutional development component. This was addressed by training staff directly involved in project implementation and by engaging consultants. However, the tate suggests that there was difficulty in attracting well qualified consultants in the area of institutional development. While capacity exists in the country, the tate s difficulty may have been associated with the dispersed nature of the institutional development activities in a territory as big as France. The logistics and the costs involved in mobilizing a team of consultants from another part of the country may have been a critical factor in the lack of interest on the part of consulting firms. Finally, the initial lack of knowledge on the part of CAR staff in following Bank procurement guidelines, especially for the selection of consultants, led to significant delays in the implementation of the institutional development component. Weak Municipal Capacity. Except for the urban upgrading of Novos Alagados that was executed by CONDER, all other infrastructure investments were executed and contracted at the municipal level. There was a lack of capacity on the part of municipalities to adequately supervise the works and to understand Bank procurement procedures. This issue was somehow mitigated by the consultants CAR engaged at the regional level to supervise procurement processes and ensure an adequate level of supervision of works by municipalities. In addition, CAR staff in the central office also provided assistance to help municipalities with procurement procedures. While it is true that municipalities started from a low level of capacity, they have improved it by participating in the project. This allowed them to receive technical assistance in areas where lack of capacity was an issue and learn (by doing) how to design and implement infrastructure investment projects. 5.4 Costs and financing: The initial estimated cost of the project was U$222.0 million, of which U$100.0 million was to be financed by a Bank loan. At closing, total project cost was U$146.0 million and the Bank loan in the amount of U$100.0 million was fully disbursed by January 28, Given the financial difficulties faced by the tate, the Bank agreed, in 2000 and again in 2004, to increase its financing share of certain eligible expenditures and, as a result, ended up financing about 68 per cent of total project costs. In spite of delays in project execution and loan disbursement lags, the outcomes indicate that the project was implemented in accordance with the original components and revised allocations in each disbursement category. Another major issue affecting project costs and financing was the devaluation of the Real that allowed for significant cost savings and the expansion of outputs. 6. ustainability 6.1 Rationale for sustainability rating: ustainability is rated as Likely. From a policy perspective, the tate has fully internalized the promotion of poverty reduction and of decentralization using the strengthening of municipal management and governance to lead the effort. As mentioned before, the tate established a ecretariat for the Reduction of Poverty and ocial Inequalities (ECOMP) and pioneered in Brazil the creation of a Poverty Reduction Fund. It also established the ecretariat of Urban Development with a mandate to promote better living conditions in urban centers and strengthen

15 the capacity of municipal governments. In addition, the tate has adopted a strategic development plan that calls for the strengthening of key urban centers across the tate as a means for better economic integration and regional development. This strategy is complemented by the establishment of regional development councils, thus creating opportunities for stakeholder participation in regional policy and economic development. Finally, the establishment in the Bahia tate Development Agency (DEENBAHIA) of a financing window for municipal infrastructure (PROURBANO) after the Fiscal Responsibility Law prohibited inter-governmental lending, ensures the sustainability of a new financing model for urban infrastructure development that the project initially supported through FUNDURBANO. 6.2 Transition arrangement to regular operations: As mentioned before, the urban infrastructure financing mechanism is fully integrated in DEENBAHIA and will be capitalized with loan re-flows from FUNDURBANO and loans already made by DEENBAHIA itself under the project. Arrangements to ensure the continuation of technical assistance for municipal capacity strengthening are being finalized between the ecretariat of Planning and the ecretariat of Urban Development so that the capacity that was created in CAR is retained and fully utilized. 7. Bank and Borrower Performance Bank 7.1 Lending: Bank performance during the lending period is rated atisfactory. A total of 16 technical missions were undertaken during the course of project preparation, in addition to the appraisal mission. The team comprised some of the Bank s top specialists in the areas of urban development and the level of technical analysis and planning reflects that expertise. The project objectives were clearly and appropriately identified, when compared to the government s and Bank s policy priorities, and represented the state-of-the-art thinking regarding the best approaches to addressing urban challenges approaches and strategies that remain relevant today. In retrospective, it can be said that the whole package was well formulated, given that over approximately seven years of implementation the basic structure of the project did not change (even though a few adjustments were made by introducing two sub-components, but this was due to legal restrictions affecting the implementation of the urban infrastructure component), and the objectives did not change at all. Given the project outcomes, it is clear that the project was well conceived and prepared. 7.2 upervision: upervision is rated atisfactory. Over the course of the project lifetime there were four separate task managers. This would normally be excessive and a source of potential problems in supervision, but it is not unusual in a project that was implemented over a seven and a half year period. In addition, there was considerable overlap when transitioning from one task manager to another and, thus, there was no institutional memory loss. upervision missions were regular (at least twice a year) and when supervision was decentralized to the Country Office in Brasilia they became more frequent. Decentralization of supervision to the Country Office greatly facilitated and improved supervision quality, allowing the borrower easier and more frequent access to the Bank

16 The Bank is considered to have been proactive and responsibly flexible in the supervision of the project. The tate of Bahia is arguably one of the Bank s best and most important clients in the Brazil program. The Bank has identified Northeast Brazil as a priority region for assistance, given its high incidence of poverty. Bahia has been a model for developing and implementing good policies in a variety of fields from urban and rural development to social programs. It has also been a tate highly receptive to working with the Bank. For this reason, when the project struggled through difficult periods, the Bank was responsive: the loan closing date was extended twice; Bank cost sharing increased when cash-flow problems restricted the availability of counterpart funding; disbursement method was changed to a financial management report system in order to enhance efficiency in project implementation; and the Bank worked creatively with the tate to solve issues such as overcoming the limitations on intergovernmental lending presented by the Fiscal Responsibility Law. In addition, Bank missions enhanced the quality of project outputs through the institution of Bank policies and safeguards, especially for resettlement. 7.3 Overall Bank performance: For the reasons stated before, overall Bank performance can be rated as atisfactory. Borrower 7.4 Preparation: Borrower performance during preparation is rated atisfactory. Project ownership was strong at the highest level, with the project clearly responding to the tate s policy priorities. Preparation was thorough and efficient. The tate took direct responsibility for much of the project preparation details, including drafting the Operations Manual and creating the Project Coordinating Unit within CAR. 7.5 Government implementation performance: Government implementation performance is also rated atisfactory. The project was a clear priority of the Government, and was seen as the most effective vehicle for pursuing its urban development goals. The tate took many actions to ensure effective performance during the implementation period, including: (i) making adequate budget allocations for project execution, even though funds were not always made available in a timely manner; (ii) engaging outside consultants to assist the tate in overcoming its own technical shortcomings; (iii) upgrading and modernizing information systems and instituting capacity building programs for tate employees associated with the project; and (iv) establishing a new financing window for urban infrastructure in DEENBAHIA to ensure the continuation of a new model for urban infrastructure development financing in view of the impracticality of FUNDURBANO as a result of the Fiscal Responsibility Law. 7.6 Implementing Agency: Implementing agency performance is rated atisfactory. As the project implementing agency of the tate, CAR fully embraced its responsibilities under the project and took actions to ensure effective performance during the implementation period. pecifically, CAR engaged outside consultants to assist in overcoming its own technical shortcomings, especially in the area of municipal reform and capacity building; and instituted capacity building programs for its own staff associated with the project

17 7.7 Overall Borrower performance: The Borrower s overall performance is rated atisfactory. 8. Lessons Learned Institutional development activities usually require considerable lead time in order to be ready for implementation, especially because of the complexity of assessing municipal institutional development needs and consolidating municipal management instruments to address such needs. For this reason, more attention and time should be given to the preparation of institutional development components in projects such as PRODUR. trong project ownership and commitment to its objectives on the part of the Borrower (including the implementing agency) and decentralization of the responsibility for the contracting of works, goods and services directly to the beneficiary municipalities were key elements in achieving a successful implementation of the project. The engagement of a capable NGO to work on the social aspects of the Novos Alagados urban upgrading sub-component proved to be a major asset for its successful implementation. The NGO complemented well the skills of CONDER, the tate government agency responsible for managing implementation of this sub-component; acted as an honest broker between the community and CONDER; and, helped to organize the community and mobilize additional capital for investments in social infrastructure, such as day care units. It also assisted in the organization of economic development activities for the community, including the creation of a cooperative that provided labor for housing construction and improvements in the Novos Alagados area. External support for the implementation of essential services in municipalities should always be carried out through direct financing to the municipalities concerned, on the basis of sustainable financing. Grants should be limited to a small part of the total amounts to be invested, and solely as a way of ensuring more efficient planning and better coordination procedures. Training for tate as well as municipal staff involved in project implementation, together with systematic technical assistance targeted on the municipalities were key elements in ensuring that the tate and municipalities acquired the necessary skills to effect changes in policy formulation and management practices. Low-cost infrastructure activities in small towns were seen to be more successful than those in medium to large cities, in view of the higher levels of commitment and greater participation by the local communities. 9. Partner Comments (a) Borrower/implementing agency:

18 GOVERNMENT OF THE TATE OF BAHIA ECRETARIAT FOR PLANNING EPLAN REGIONAL DEVELOPMENT COMPANY CAR BAHIA MUNICIPAL INFRATRUCTURE DEVELOPMENT AND MANAGEMENT PROJECT PRODUR UMMARY OF THE IMPLEMENTATION COMPLETION REPORT CONTRIBUTION OF THE BORROWER TO THE PREPARATION OF THE IMPLEMENTATION COMPLETION REPORT ICR February

19 INTRODUCTION The Bahia Municipal Infrastructure Development and Management Project (PRODUR) was conceived by the Bahia tate Government as one of the instruments for improving the urban policy of the state. The project primarily set out to improve the living conditions of people living in poor urban areas and to enhance the efficiency of the services provided either directly or indirectly by the municipalities to their populations and to render the financing arrangements for essential municipal services more sustainable. The Project was financed by the World Bank under Loan Agreement 4140-BR, signed on 28 April The Project was due to get underway on 3 June 1997 and was planned to run until 31 March Loan Agreement 4140-BR was amended five times to take into account modifications relating to the amounts and percentages under the Expenditure Categories subhead or to define new completion dates for the Project. The Project closed on eptember 30, At the time Loan Agreement 4140-BR was signed, the cost of the Project was budgeted at U$191.5 million, which included U$100 million from the World Bank and U$91.5 million from the tate of Bahia and participating municipalities. The total cost of the Project at completion amounted to a total of U$ 146 million, including U$100 million from the IBRD. 1. PRODUR OBJECTIVE 1.1. Original Objectives The original objectives of the Project, defined at the time of its preparation and recorded in taff Appraisal Report No BR (AR) of 28 January 1997, were the following: a. b. c. d. To improve the living conditions of people living in poor urban areas through (i) efficient and reliable systems for mapping urban poverty in the tate with a view to guiding state and municipal investment strategies and (ii) an urban improvement program targeted on poverty in the most critical areas, the so-called pockets of poverty. To increase the efficiency and sustainability of the municipal public sector and the financing of essential municipal services; To provide support for the privatization and contracting-out of services; To increase cost recovery of municipal investment; and

20 e. To strengthen municipal financial management capacity, especially for effective expenditure control and capital budgeting Revised Objectives The Regional Development Company (CAR) faced considerable difficulties to bring on stream the ub-loan Infrastructure Component. This was planned to be the main beneficiary of resource allocation, but the component utilized only U$ 5.1 million of the Loan Agreement 4140-BR funds, due to the delays experienced by the municipalities in getting their requests for borrowing processed by the Central Bank, responsible at the time for analyzing the financial capacity of municipalities and for authorizing contractual arrangements in respect of financing. The situation was made worse with the promulgation of Resolution 78/98 which reduced the indebtedness capacity of municipalities and increased red tape. These circumstances led the Bahia tate Government to put forward, in 1998, a series of proposals for changes in the design of the Project. The main objective of the tate at that point was to get the resources allocated to the Infrastructure ub-program transferred to Municipalities as grants, i.e: no longer as loans. While this new approach did not modify the original objectives of the Project as far as improving the living conditions of people in poor areas was concerned, nevertheless failed to address the objective of enhancing the efficiency of the municipal public sector and of making essential municipal services financially sustainable. Given the problems encountered by the Bahia tate Government to enter into contractual arrangements regarding financing for the municipalities, the World Bank agreed to the proposed modification and signed the First Amendment to the Loan Contract on 17 December This included a new component the Urban Infrastructure Grant but retained the ub-loan to Municipalities Component through FUNDURBANO, with the original amount of U$ 83.9 million reduced to U$ 40.9 million. ubsequently, with the introduction of Complementary Law 101/00 (the Fiscal Responsibility Law) the tate of Bahia was obliged to suppress FUNDURBANO. ince the tate of Bahia and the World Bank wished to retain the original objectives of PRODUR, both continued to seek alternatives for securing financing for essential municipal services on the basis of PRODUR. On 4 June 2003, with the signing of the 4th Amendment, a further device was created which allowed the resumption of the Municipal ub-loan Component, with resources of around U$12.0 million from Loan Agreement 4140-BR, benefiting a total of 27 municipalities. 2. PROJECT COMPONENT OF THE PROJECT 2.1. Original Components (in accordance with the text of Loan Agreement 4140-BR, which does not necessarily coincide with the text of AR No BR)