IMPLEMENTATION COMPLETION AND RESULTS REPORT (Loan No BR) ON A LOAN IN THE AMOUNT OF US$14,460,000 FEDERATIVE REPUBLIC OF BRAZIL FOR A

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1 Public Disclosure Authorized Public Disclosure Authorized Public Disclosure Authorized Public Disclosure Authorized Document of The World Bank IMPLEMENTATION COMPLETION AND RESULTS REPORT (Loan No BR) ON A LOAN IN THE AMOUNT OF US$14,460,000 TO FEDERATIVE REPUBLIC OF BRAZIL FOR A FINANCIAL SECTOR TECHNICAL ASSISTANCE PROJECT November 6, 2008 Finance, Private Sector and Infrastructure Department Brazil Country Management Unit Latin American and the Caribbean Region Report No: ICR

2 CURRENCY EQUIVALENTS (as of November 5, 2008) Currency Unit = Real (R$) R$ 1.00 = US$ 0.47 US$ 1.00 = R$ 2.12 FISCAL YEAR January 1 December 31 SELECTED ABBREVIATIONS AND ACRONYMS BCB BMF BOVESPA CAS CBMTAL CPS CVM FSTAL IFRS IT PAD PFSECAL I PFSECAL II PROER RTGS SPC SRO SUSEP TA UNDP Banco Central do Brasil (Brazilian Central Bank) Newly Combined Commodity and Futures Exchange & Sao Paulo Sock Exchange Country Assistance Strategy Central Bank Modernization Technical Assistance Project Country Partnership Strategy Comissao de Valores Mobiliarios (Brazilian Securities and Exchange Commission) Financial Sector Technical Assistance Loan International Financial Reporting Standards Information Technology Project Appraisal Document First Programmatic Financial Sector Adjustment Loan Second Programmatic Financial Sector Adjustment Loan Programa de Estimulo a Restructuracao e ao Fortalecimento do Sistema Financeiro Nacional (National Financial System Restructuring Program) Real Time Gross Settlement Secretaria de Previdencia Complementar (Complementary Pensions Secretariat) Self-regulated organization Superintendencia de Seguros Privados (Private Insurance Superintendency) Technical Assistance United Nations Development Program Vice President: Country Director: Sector Manager: Project Team Leader: ICR Team Leader: ICR Primary Author: Pamela Cox John Briscoe Lily L. Chu Eduardo Urdapilleta Eduardo Urdapilleta Manuel Lasaga 2

3 BRAZIL Financial Sector Technical Assistance Project Contents 1. Program Context, Development Objectives and Design Context at Appraisal: Original Program Development Objectives (PDO) and Key Indicators (as approved) Revised PDO: Original Policy Areas Supported by the Program: Revised Policy Areas: Other significant changes: Key Factors Affecting Implementation and Outcomes Project Preparation, Design and Quality at Entry Major Factors Affecting Implementation Safeguard and Fiduciary Compliance Post-Completion Operation/Next Phase (if any): Assessment of Outcomes Relevance of Objectives, Design and Implementation Achievement of Program Development Objectives Project Efficiency Overarching Themes, Other Outcomes Assessment of Risk to Development Outcome Assessment of Bank and Borrower Performance Bank Performance Borrower Performance Lessons Learned Comments on Issues Raised by Borrower/Implementing Agencies/ Partners

4 A. Basic Information Country: Brazil Project Name: BR TA Financial Sector Project ID: P L/C/TF Number(s): IBRD ICR Date: 11/10/2008 ICR Type: Core ICR Lending Instrument: TAL Borrower: Original Total Commitment: Environmental Category: C Implementing Agencies: Banco Central do Brasil CVM Cofinanciers and Other External Partners: B. Key Dates FEDERATIVE REPUBLIC OF BRAZIL USD 14.5M Disbursed Amount: USD 6.8M Process Date Process Original Date Revised / Actual Date(s) Concept Review: 12/04/2000 Effectiveness: 07/23/ /23/2002 Appraisal: Restructuring(s): Approval: 09/04/2001 Mid-term Review: Closing: 06/30/ /31/2008 C. Ratings Summary C.1 Performance Rating by ICR Outcomes: Risk to Development Outcome: Bank Performance: Borrower Performance: Moderately Satisfactory Moderate Moderately Satisfactory Moderately Satisfactory C.2 Detailed Ratings of Bank and Borrower Performance (by ICR) Bank Ratings Borrower Ratings Quality at Entry: Moderately Satisfactory Government: Moderately Satisfactory Implementing Quality of Supervision: Satisfactory Moderately Satisfactory Agency/Agencies: Overall Bank Overall Borrower Moderately Satisfactory Moderately Satisfactory Performance: Performance: i

5 C.3 Quality at Entry and Implementation Performance Indicators Implementation QAG Assessments Indicators Performance (if any) Potential Problem Project No at any time (Yes/No): Problem Project at any time (Yes/No): DO rating before Closing/Inactive status: No Moderately 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) Banking Capital markets Central government administration 7 7 Law and justice 4 4 Payment systems, securities clearance and settlement 7 7 Theme Code (Primary/Secondary) Legal institutions for a market economy Secondary Secondary Macroeconomic management Secondary Secondary Regulation and competition policy Primary Primary Standards and financial reporting Primary Primary E. Bank Staff Positions At ICR At Approval Vice President: Pamela Cox David de Ferranti Country Director: John Briscoe Gobind T. Nankani Sector Manager: Lily L. Chu Fernando Montes-Negret Project Team Leader: Eduardo Martin Urdapilleta Anjali Kumar ICR Team Leader: ICR Primary Author: Eduardo Martin Urdapilleta Manuel Lasaga F. Results Framework Analysis Project Development Objectives (from Project Appraisal Document) The central objective of the project is to support the development of institutional capacity to assist the implementation of Brazil's program of financial sector reforms. ii

6 The Financial Sector Technical Assistance project was prepared in parallel to the first phase of programmatic lending, and was intended to facilitate the achievement of reforms targeted for the subsequent stages, as well as reinforce, in the medium term, institutional capacity at the two key financial sector regulatory agencies in Brazil; the Banco Central do Brasil (BCB, Brazil.s central bank) and the Comissão de Valores Mobiliários (CVM, Brazil's securities commission). Technical assistance is targeted at a number of areas which are included in the scope of the reform program and which would support the overall effectiveness of the supervisory agencies. Specifically, assistance to the Central Bank would include: support for the reduction of interest rates and spreads, strengthening of banking supervision, regulation, and failure resolution as well as enhanced preparedness for banking sector difficulties, payments system reform, and finally, support to increase the overall efficiency of the Central Bank through a follow up to Bank-assisted diagnostic work on information technology systems. Support to the CVM would focus on: strengthening compliance, supporting greater transparency and better monitoring of corporate financial accounting and disclosure, improving market surveillance, strengthening investor protection and public information, and finally, undertaking diagnostic studies on the present and future roles, resources and responsibilities of capital market regulatory agencies. Revised Project Development Objectives (as approved by original approving authority) (a) PDO Indicator(s) Indicator Indicator 1 : Value quantitative or Qualitative) Baseline Value Original Target Values (from approval documents) Formally Revised Target Values Actual Value Achieved at Completion or Target Years Policy studies / diagnostics to formulate appropriate reform strategies launched and action plans drawn up. BCB payments system: Study on Study on residual Policy studies on residual residual risk risk undertaken by payments risk agreed. undertaken - Deloitte - action action plan plan formulated formulated Date achieved 09/04/ /30/ /30/2005 Comments (incl. % Achieved achievement) Indicator 2 : Policy studies / diagnostics to formulate appropriate reform strategies launched and action plans drawn up. BCB: Additional BCB: Additional Value Support to policy research policy studies: policy studies: quantitative or studies in core economic Residual studies Residual studies as Qualitative) areas identified. undertaken agreed undertaken iii

7 Date achieved 09/04/ /30/ /30/2005 Comments (incl. % Achieved (five studies undertaken). achievement) Indicator 3 : Policy studies / diagnostics to formulate appropriate reform strategies launched and action plans drawn up. Value quantitative or Qualitative) CVM Study on CVM: Need for study on role and resources: overall role and resources undertaken and identified. action plan formulated CVM Study on role and resources: undertaken and action plan defined Date achieved 09/04/ /30/ /30/2008 Comments (incl. % Achieved achievement) Indicator 4 : Policy studies / diagnostics to formulate appropriate reform strategies launched and action plans drawn up. CVM Study on CVM Study on information Value CVM: Information information technology: study quantitative or technology study agreed technology: study performed and Qualitative) performed action plan being followed Date achieved 09/04/ /30/ /30/2008 Comments (incl. % Achieved (ex, new IT strategy resulted in all manuals available online). achievement) Indicator 5 : Policy studies / diagnostics to formulate appropriate reform strategies launched and action plans drawn up. Value quantitative or Qualitative) CVM enhancement of governance through strengthened regulation agreed CVM Governance and minority shareholder protection: study completed CVM Governance and minority shareholder protection: study completed and recommendations made Date achieved 09/04/ /30/ /30/2008 Comments (incl. % Achieved (including creation of investor protection area) achievement) Indicator 6 : Institutional strengthening through training / IT modifications launched. Value quantitative or Qualitative) Need for exam manuals and rating system agreed BCB: New examination manuals and bank rating system: Complete and in use BCB: New examination manuals and bank rating system: Complete and in use (with BCB resources) Date achieved 09/04/ /30/ /11/2007 iv

8 Comments (incl. % achievement) Indicator 7 : Value quantitative or Qualitative) Achieved by BCB, but completed with BCB's own resources (outside this project). Institutional strengthening through training / IT modifications launched. Project support for credit BCB Enhanced BCB Enhanced risk center upgrades Credit Risk Center Credit Risk Center identified. put into operation launched Date achieved 09/04/ /30/ /11/2007 Comments Achieved by BCB, but completed with BCB's own resources (outside this (incl. % project). achievement) Indicator 8 : Institutional strengthening through training / IT modifications launched. Value quantitative or Qualitative) Project support for BCB IT upgrading in electronic data management agreed BCB IT upgrading and electronic data management: Electronic data management system in use. BCB IT upgrading and electronic data management: Electronic data management system finalized. Date achieved 09/04/ /30/ /11/2007 Comments (incl. % Partially achieved by BCB with BCB's own resources (outside this project). achievement) Indicator 9 : Institutional strengthening through training / IT modifications launched. Value quantitative or Qualitative) Project arrangements in surveillance and inspection identified. CVM Enhanced surveillance and inspection: New surveillance and enforcement system finalized, enhanced on-site inspection program launched. CVM Enhanced surveillance and inspection: New surveillance and enforcement system finalized, new inspections manuals finalized,enhanced on-site inspection program launched. Date achieved 09/04/ /30/ /30/2008 Comments (incl. % Achieved (ex., new inspection manuals available online, in use by all inspectors) achievement) Indicator 10 : Institutional strengthening to cope with market innovations Value quantitative or Qualitative) Mutual funds included under regulation and supervision of CVM CVM Study on Mutual Funds finalized, training performed, resulting in enhanced knowledge of product characteristics for regulation and supervision CVM Study on Mutual Funds finalized, training performed, resulting in enhanced knowledge of product characteristics for regulation and supervision v

9 Date achieved 09/04/ /30/ /30/2008 Comments (incl. % Achieved (including training delivered on May 2008) achievement) Indicator 11 : Publicly Held Companies registered in CVM (Novo Mercado) Value quantitative or Qualitative) Date achieved 12/31/ /31/ /30/2008 Comments (incl. % achievement) Achieved and numerically surpassed. Novo Mercado is the more stringent governance market within Bovespa (related to project activities), which grew more than the traditional listings Indicator 12 : Trading Value per Year in BOVESPA Value quantitative or Qualitative) BRL 205 Billion BRL 650 Billion BRL 1,154 Billion Date achieved 12/31/ /31/ /30/2008 Comments (incl. % achievement) Achieved and numerically surpassed. Brazil became the largest EM capital market. Indicator 13 : Net Assets of Investment Funds Value quantitative or Qualitative) BRL 570 Billion BRL 1,500 Billion BRL 1,610 Billion Date achieved 12/31/ /31/ /30/2008 Comments (incl. % Achieved. Regulation of investment funds was part of the project. achievement) (b) Intermediate Outcome Indicator(s) Indicator Indicator 1 : Value (quantitative or Qualitative) Baseline Value Original Target Values (from approval documents) Formally Revised Target Values Actual Value Achieved at Completion or Target Years CVM and BCB: Strengthened overall effectiveness of supervisory agencies in financial system Core action plan Core action plan Launching of core agenda defined agenda defined studies/actions to achieve following study following study these objectives outcomes with outcomes President of CVM Date achieved 09/04/ /30/ /30/2008 Comments (incl. % Partially achieved. Successfully done with CVM but not with BCB. achievement) vi

10 G. Ratings of Project Performance in ISRs No. Date ISR Archived DO IP Actual Disbursements (USD millions) 1 12/10/2001 Satisfactory Satisfactory /31/2002 Satisfactory Satisfactory /03/2002 Satisfactory Satisfactory /28/2003 Satisfactory Satisfactory /05/2003 Satisfactory Satisfactory /04/2004 Satisfactory Satisfactory /17/2004 Satisfactory Satisfactory /04/2004 Satisfactory Satisfactory /07/2005 Moderately Satisfactory Satisfactory /21/2005 Moderately Satisfactory Satisfactory /23/2006 Satisfactory Satisfactory /13/2006 Satisfactory Moderately Satisfactory /13/2007 Moderately Satisfactory Moderately Satisfactory /14/2007 Moderately Satisfactory Moderately Satisfactory /29/2008 Moderately Satisfactory Moderately Satisfactory 5.94 H. Restructuring (if any) Not Applicable I. Disbursement Profile vii

11 1. Program Context, Development Objectives and Design 1. The Financial Sector Technical Assistance Loan (FSTAL) was designed within the context of the financial sector reforms supported by two programmatic adjustment loans, and as continuation of another technical assistance loan. The FSTAL was to support the Central Bank (Banco Central do Brasil, BCB) and the Securities and Exchange Commission (Commissao de Valores Mobiliarios, CVM), the two principal financial regulators in Brazil. 1.1 Context at Appraisal: 2. The Bank's first programmatic adjustment loan to Brazil's financial sector had its underpinnings in a series of financial sector reform actions initiated with the Real Stabilization Plan introduced in 1994 Real Plan, which accelerated after 1999, when macroeconomic stabilization was demonstrated to endure. 3. The Real Plan succeeded in sharply reducing inflation, which had been the driver for bank earnings during the years of hyperinflation since the banks would re-invest noninterest bearing deposits in high yielding financial instruments. The end of inflationary profitability left the banks exposed to high-cost structures, non-performing loans, and few earnings alternatives. Failure to adapt to a new competitive environment led to the failure of a number of banks including two large institutions: Banco Economico and Banco Nacional. In 1996, Bamerindus, the fifth largest bank in the country, also encountered some problems and was sold in early 1997 to a major international bank. 4. Having battled serious banking difficulties, the BCB embarked on a program of institutional renewal to strengthen their regulatory and supervisory capabilities. As main regulator of the banking system, the Central Bank instituted in 1995 a program of incentives to allow the restructuring of banks (PROER Programa de Estimulo a Restructuracao e ao Fortalecimento do Sistema Financeiro Nacional) and created a private deposit insurance agency. Motivated by bank intervention and restructuring costs, BCB had begun a long-term modernization initiative to upgrade its ability to anticipate and prevent major bank failures, to manage bank failures more expertly, and to make the financial system more crisis-resilient. As part of these initiatives, the Bank s support was sought in the form of a Central Bank Modernization Technical Assistance Loan (CBMTAL) which was approved in November Although macroeconomic circumstances confronting the country grew more difficult in 2001, due to both a deterioration in external conditions and a domestic energy crisis, the government not only maintained but accelerated its pace of financial sector reforms. CAS discussions in 2001 reconfirmed the financial sector as a priority area for assistance through programmatic adjustment lending. The first Financial Sector Programmatic Loan (PFSECAL I) approved in 2001 rested upon a series of reform achievements that had occurred cumulatively over the period since

12 6. A series of macroeconomic setbacks confronted the country in the year prior to the approval of the Second Programmatic Financial Sector Loan (PFSECAL II) in June 2002, approximately one year after the approval of the First Loan. These included (i) an international demand slowdown following the crises of September 2001, corporate scandals, and an oil price shock; (ii) the rapid downturn in Argentina and Uruguay, and ensuing erosion of confidence towards Brazil; and (iii) a domestic energy crisis precipitated by historically low rainfall levels that depleted hydro reservoirs, and ensuing electricity rationing that constrained economic activity. The Government reacted to the shocks with an appropriate mix of monetary and fiscal tightening. The Central Bank increased short-term interest rates in order to contain inflationary pressures resulting from a sizeable depreciation of the currency. 7. Financial sector reforms supported by PFSECAL I had raised the level of confidence in the soundness of the financial system. And by the time of Board approval of the PFSECAL II, the economy appeared to have resumed steady but modest expansion, but with somewhat higher inflation. 8. This FSTAL was designed to provide the institutional support for the effective implementation of the financial sector reforms which were in turn supported by the programmatic adjustment loans. The FSTAL was to follow the CBMTAL with continued support to BCB and expand the focus to the securities industry through its support to CVM. The rapid growth of capital markets after the inception of the program proved the importance of including support to this regulator. 1.2 Original Program Development Objectives (PDO) and Key Indicators (as approved) 9. The central objective of the Financial Sector Technical Assistance Loan (FSTAL) was to support the development of institutional capacity to assist in the implementation of Brazil s program of financial sector reforms. The specific objectives were (a) to raise efficiency in financial intermediation and broaden access to financial services; (b) to enhance financial system transparency and effectiveness of regulation and supervision; and (c) to bolster defenses against crises. 10. The specific objectives of the FSTAL were in line with the overall financial sector reforms which were supported by the programmatic lending program (PFSECAL I & II). In order to achieve those stated goals, the loan would formulate reform strategies, prepare regulatory reforms; and strengthen institutional capacity of the principal regulatory agencies. Main Beneficiaries 11. The project was to achieve these objectives through technical assistance to the two key financial sector regulatory agencies in Brazil entrusted with the design and 5

13 implementation of the reform program; BCB and CVM. The TA resources were aimed at building capacity or institutional development of these two agencies. Original Components 12. The project was divided into two major components pertaining to each of the regulatory agencies: BCB and CVM. The output consisted of diagnostic studies to help formulate appropriate reform strategies; preparation and adoption of new regulations associated with the financial sector reforms; and institutional strengthening consisting of acquisition of software and hardware, training of staff, compiling of information and data bases, and development of policies and procedures manuals, and other reference materials to enhance the institutional memory of the two agencies. 13. The design of the project components reflects a balance between diagnostic studies, preparation of new regulations and institutional strengthening. Table 1 shows a list of the principal components for each agency and the corresponding output indicators as approved by the Board. In the case of the BCB component, some of the subcomponents were building on work already completed under the previous TA loan, the CBMTAL. With respect to CVM, this was the first TA loan provided by the Bank BCB Component 14. The BCB component was to provide support to address systemic financial sector issues and to reinforce banking supervision. Financial sector reforms had created a new Brazilian payment system characterized by the co-existence of several clearinghouses. Payment system risk reduction was a critical systemic financial sector issue. Diagnostic studies of risk management at clearinghouses would help identify areas for BCB control of payment risks and the acquisition of hardware and software for a new BCB-owned and operated RTGS (real time gross settlement) would strengthen the functioning of the payments system, which in turn would help to augment the efficiency of financial sector intermediation. 15. The banking supervision sub-component built on and expanded on considerable work initiated in this area in the CBMTAL. This project focused on information technology needs for off-site supervision. This involved the development of information systems that would capture information from depository institutions on a timely basis for easy analysis and review by bank examiners and to generate standard as well as customized reports. Through this sub-component, the project was to contribute to increased effectiveness of banking supervision, particularly off-site supervision. 16. The strengthened bank failure resolution was an attempt to facilitate the process of extra-judicial liquidations of failed banks that had been obstructed by legal and bureaucratic hurdles. This was a response to the challenges faced by BCB in the mid- 1990s following the failure of a number of banks including two large institutions. Reinforcing BCB s effectiveness in defending against financial crisis was one of the pillars of the financial sector reforms. 6

14 17. With the support of the Loan, BCB was to undertake several studies to explore selected areas of the financial system with the potential for improving intermediation efficiencies. These studies emphasized concrete recommendations that would lead to action plans for regulatory reforms. If the recommended changes in legislation and regulatory policies were to be achieved and BCB was equipped with the tools to implement these new policies, then the recommendations made by the studies would have contributed to greater efficiency in financial intermediation. 18. Other important areas for institutional improvement of BCB were the enhancement of the Credit Risk Center and the preparation of an IT diagnostic with recommendations for upgrading of the system. In an effort to reduce credit risk through better information on borrowers credit standing, the Loan was to provide funding for expanding the coverage of the Credit Risk Center (Central de Risco) to very small loans, above Reais1,000. This sub-component was a continuation of substantial work in the development of the Credit Risk Center that had already been accomplished through the CBMTAL. The outcome of the Credit Risk Center would be reflected in greater intermediation efficiency, through better pricing of risk, and in broader access to financing, since financial institutions would have up-to-date debt servicing information on customers that they would otherwise not have considered as loan candidates. The IT diagnostic study was also an important institutional piece given the highly intensive information processing requirements of BCB as regulator and monetary authority. CVM Component 19. Being a relatively newer agency than BCB, CVM s principal challenge in the face of fundamental financial sector reforms was gearing up for regulating increasingly sophisticated markets but with severe constraints on available resources. The overall growth of the market, as well as the internet, automated securities trading and increased access to foreign markets was making market oversight more challenging. The specific tasks identified for this project were determined against the background of an overall review of CVM, of its present and future responsibilities, and its institutional development needs in some of the key functional areas. The institutional strengthening of CVM was expected to enhance financial system transparency and the effectiveness of regulations as well as to raise efficiency in financial intermediation 20. In terms of strategic positioning, several diagnostic studies were to be completed dealing with different aspects of the organization. These studies dealt with key organizational issues. The first was an assessment of CVM s organizational structure and its adequacy in meeting the challenges of a rapidly changing regulatory environment. The second was a study on the enforcement capabilities of the agency, which are essential in establishing its credibility as an effective regulator. The third addressed the organization s IT infrastructure needs. The quality of regulatory oversight hinges on the availability of state-of-the-art IT, particularly in an industry dominated by technology driven financial services. 7

15 21. Strengthening of compliance and regulations were important in terms of financial system transparency and the effectiveness of regulations. In order to promote greater transparency, CVM designed a project for digitalizing and indexing of all official CVM statements, legal and accounting interpretations and disciplinary actions, and making them available on the CVM website. Ready access to policy statements also facilitates compliance and reduces the workload of CVM staff by eliminating requests for advice or interpretation on previously disseminated topics. CVM staff also identified a number of existing Instructions (regulatory statements) requiring updating and revision, including 5 Instructions on listing standards, 13 on tender offers, and 31 on material event disclosure in accordance with a new Corporations Law and other initiatives. 22. Supporting corporate governance and disclosure was important in terms of financial system transparency as well as efficiency of intermediation. In view of the large volume of corporate disclosure documents, including securities registration filings, IT support was needed to improve the throughput of important information. This subcomponent called for the installation of a system to track all documents filed with the capability to selectively review certain types of documents as well as the on-line availability of the full text of all corporate disclosure documents. Loan funds were also earmarked for training in selected areas of corporate governance and accounting. In order to support the adoption of international standards a comparative study on international accounting norms was planned. 23. One of the critical components for effective supervision of securities market activities is a well-grounded surveillance and inspection program. A fundamental responsibility of a securities regulator is monitoring activities of securities markets and participants to ensure fair dealing for investors and financial integrity of the system. Because of limited resources, CVM had not kept up with technological changes regarding market surveillance systems and thus the project was to finance the upgrade of the system and associated hardware. Another important initiative was the upgrading of inspection manuals which had become outdated in terms of changes in regulations, market activities, and best practices that had been developed by CVM staff through years of in-the-field experience but had not been molded into the institutional memory. 24. The central focus of the investor protection sub-components was on increased disclosure and other information investors need to make informed decisions. The main initiatives included a consultancy to redesign and upgrade the CVM website, including the identification of all categories of public information to be made available on the website; and the procurement of equipment and software to upgrade the website. With respect to the mutual funds, the project included a consultancy on the use of the CVM website to make publicly available statements of mutual funds data including monthly holdings, net asset value, expenses and administrative fees. In addition CVM was to perform a survey of investors to better assess the needs for regulations and educational programs. By providing up-to-date financial information to investors via its website, CVM would help enhance financial system transparency and as a consequence raise efficiency in financial intermediation by encouraging greater investor participation in the securities markets. 8

16 Table 1: Outputs Indicators Outputs Central Bank Component 1. Payment System risk reduction and strengthened securities markets for government debt. Output Indicators ($8.2 million): Prepare studies on risk management at clearing houses, and adopt recommended actions. Upgrade the hardware for the implementation of new payment system. Studies to explore possibilities for extending the duration of government debt securities. 2. Strengthened banking supervision Upgrade the supervision unit s information system (SISUP) for off-site surveillance. Study on the regulation of competitiveness within the financial system. Update policies and procedures for licensing of new financial institutions. 3. Strengthened bank failure resolution New law on bank failure drafted, contingency plan formulated within Central Bank. 4. Sectoral policy to enhance intermediation efficiency (studies and action plans) Undertake studies on financial system competition, interest rate spreads, bankruptcy procedures, collateralization, and taxation; and formulation of action plans. Enhancement of the Credit Risk Center. 5. Reduction of intermediation spreads through improved Risk Center. 6. IT diagnostic and implementation Prepare an IT upgrading plan and implement proposals on electronic data management and Unified Access interface. Outputs CVM Component 1. Diagnostic studies including CVM organization and role of related agencies 2. Strengthening of compliance and regulations 3. Improved corporate financial analysis capacity and disclosure. 4. Enhanced surveillance and inspection 5. Strengthened investor protection and increased transparency in collective investment schemes Output Indicators ($6.7 million): Special studies launched on CVM s role, resources and responsibilities. Study and recommendations for strengthening enforcement. Special diagnostic of IT needs undertaken. Discussions of results with senior officials and Action Plans formulated. Update CVM regulations on areas including governance and minority investor protection. Digitalization and public availability of database on regulation, rulings, decisions and other disclosures. Design and install a system for tracking all documents filed by listed firms. Training programs on corporate finance and accounting completed. Comparative study on international accounting norms. Enhanced surveillance program formulated and launched. Update inspection manuals. Website strengthened and increased information for investor protection made available. 6. Mutual Fund investor protection Expand CVM website to make available financial information of mutual funds. Perform a survey of investors to better assess needs for regulations and educational programs. 9

17 25. At the time of project preparation, higher focus was given to the specific project outputs relative to market outcomes. During project implementation, however, outcome indicators related to those outputs were added in consultations with the Government in order to more thoroughly review the implementation status of the project. These outcome indicators referred to payment system efficiency as well as capital markets evolution in terms of companies, trading value, and investment funds. 1.3 Revised PDO: N/A 1.4 Original Policy Areas Supported by the Program: N/A 1.5 Revised Policy Areas: N/A 1.6 Other significant changes: Cancellation of BCB Component 26. In an unexpected turn of events, not foreseeable at the time of project design nor related to the performance of BCB or the BCB component, the Bank was informed in December 2004 by the President of the Central Bank that it would not seek an extension of the project closing date of June 2005 and that it would cancel any remaining funds not utilized by that date. 27. The reason for cancellation by BCB was a fortuitous decision by the Brazilian courts which made available to the Central Bank a sizeable amount of revenues collected from the financial transactions tax. The Central Bank was formally granted the use of certain public revenues from financial transactions, the RECHEQUE funds providing them with up to an estimated US$20 million in annual funds. The funds could be used for strategic projects and were costless for BCB. The Central Bank indicated that it would continue the technical assistance collaboration with the Bank, although financing would not be sought. At the time of cancellation of the BCB component, US$3.7 million had been utilized of the original US$8.3 million project allocation, for a net cancellation amount of US$4.6 million; thus 44.6 percent of the original project funds were utilized. 10

18 28. Bank staff recommended to cancel the BCB component but opted not to seek Board approval for a formal restructuring of the project since the activities that had been completed were considered to be key priorities identified in the PAD. Other key activities were completed by BCB with its own funds. Extension of Closing Date 29. At the request of CVM the project closing date was extended twice. The closing date was first extended from the original date of June 2005 to June 2007; and subsequently it was extended a second time to June As explained in the section on Implementation, the extension was in part due to notable delays in terms of the Brazilian Government s budgetary approval process, and to a lack of coordination between the UNDP and CVM s project management. At the time the project closed in May 2008 CVM had utilized US$3.5 million or 51.5 percent of the original allocation of US$6.8 million. 2. Key Factors Affecting Implementation and Outcomes 2.1 Project Preparation, Design and Quality at Entry 30. The FSTAL had a solid foundation in terms of the underlying Programmatic Financial Sector Program to which it was providing support. The sector analysis and diagnostic was developed during the preparation of the Program. The ICR for the Programmatic Loans rated the program as satisfactory and its institutional development impact as substantial. 1 The FSTAL provided support in areas where there was widespread agreement: improving prudential regulations and strengthening bank and securities markets supervision. 31. In preparation of this loan, consideration was given to several options. First, an expansion of the existing CBMTAL was looked at but the available funding was insufficient and it did not incorporate a CVM component. Second, the possibility of adding other beneficiaries, in this case SUSEP, the regulator of insurance and open-ended funds, and SPC, the regulator of closed-end funds, was evaluated but not adopted because of the additional risk associated with a more complex institutional structure. 32. Lessons learned were incorporated into the design of the project. According to GP 8.40, TA projects need to be flexible to accommodate the borrower s evolving needs and priorities. For these reasons, the project included funds that were to be specified later based on the recommendations of the diagnostic studies to be undertaken during the initial phase of project implementation. 1 Implementation Completion Report for a Second Programmatic Financial Sector Adjustment Loan, September 26, 2003, Report No: BR. 11

19 33. The design of the project also recognized the high technical capacity at both agencies, BCB and CVM. The design of the BCB component was greatly facilitated by the existence of the CBMTAL. In fact, this project expanded on activities that had already been initiated under the earlier TA loan. Those earlier activities initiated in the previous CBMTAL included: Upgrading of banking supervision: diagnostic study of the supervision department; preparation of supervision manuals; and development of training programs for bank examiners. Review of financial sector issues: studies on bankruptcy law, interest rate spreads, inflation targeting, and methods for currency circulation. Payments system: upgrade of hardware to expand capacity. IT upgrades: development of software to process banks information, a data warehouse to consolidate all data systems, and a catalogue of information dealing with the financial system Enhancement of the Credit Risk Bureau through increased capacity and more powerful software for data analysis and reports. 34. In terms of the BCB, the FSTAL was thus a follow-up operation to the first CBMTAL with a broader scope by including new areas for improvement such as upgrading the banking supervision department s off-site supervision capabilities, strengthening of bank failure resolution, and preparing an IT unified access interface. On the other hand, the overlap of some activities between the two projects delayed the launch of the new one, as explained below. 35. On the other hand, CVM was relatively new to Bank lending, particularly a TA project. CVM s important resource constraints underscored the importance of this project. CVM also had to create space within its organization to manage special projects such as the Bank s TA loan. In this regard, the workload as specified in the CVM component was somewhat ambitious. While there were important institutional needs in a number of areas of the agency, it may have been helpful to have prioritized the tasks, and to have reduced the scope of the work to address the more critical needs of the agency, with the option of structuring a follow up TA loan to CVM that could also include the other agencies that had been considered at the time of loan preparation. Since this was the first formal working relationship between the Bank and CVM, a narrower work agenda would have allowed CVM to move up a shorter learning curve before deciding whether it made sense to negotiate a follow up TA loan. 36. Both implementing agencies demonstrated strong commitment to the project. The Central Bank saw it as a logical extension of the work done under the CBMTAL and was very interested in including other areas in the project. CVM s support for the project was 12

20 expressed by all levels of the organization. Many units contributed their own proposals for design and keenly debated alternative conceptual approaches towards implementation. 37. At the time of project preparation Bank staff had identified several areas of risk. The critical risks were considered modest such as lack of budgetary allocations from the government to use project funds, the potential for startup difficulties of CVM as a relatively new and resource constrained agency and its inability to allocate sufficient human resources to the project. 38. Based on the project s preparation and design, quality at entry is judged to be Moderately Satisfactory. While continuity under the BCB component was a favorable factor, the design of the CVM component was somewhat ambitious. 2.2 Major Factors Affecting Implementation 39. Project implementation was facilitated by the Government s commitment to financial sector reforms and demonstrated through the successful completion of the Bank s financial sector programmatic loans (PFSECAL I & II). The improvement in the macroeconomic environment starting in 2003 and the consequent influx of foreign investment into the securities markets underscored the importance of staying committed to the project. 40. The implementation experience of BCB and CVM was influenced by a combination of technical and organizational factors. The technical capacity of BCB and CVM staff was a favorable factor for successful implementation. However, in some instances each agency faced the challenge of managing a relatively young professional staff which had the technical skill sets, but still lacked the operational and field experience to internalize project components. After completing the CBMTAL, BCB s priority was training bank examiners to use the new manuals, before taking on more commitments under the FSTAL. In the case of CVM there was a bigger constraint in terms of limited staff resources. Project Outputs 41. The principal outputs of the project are depicted below: 13

21 Table 2: Actual Project Output Indicators Outputs Central Bank Component Output Indicators ($3.7million out of $8.2 million): 1. Payment System risk reduction Hardware for the implementation of new payment system was purchased and installed. 2. Strengthened banking supervision Training for banking supervision staff 3. Strengthened bank failure resolution Cancelled 4. Sectoral policy to enhance intermediation efficiency (studies and action plans) Study on adherence to international accounting norms in preparation for Brazil s adoption of IFRS standards. 5. Reduction of intermediation spreads Expanded system coverage to loans from R$ through improved Risk Center. 1,000 and higher. 6. IT diagnostic and implementation Purchase of videoconferencing equipment. Outputs CVM Component Output Indicators ($3.5 million out of $6.7 million): 1. Diagnostic studies including CVM organization and role of related agencies 2. Strengthening of compliance and regulations 3. Improved corporate financial analysis capacity and disclosure. Study and recommendations for strengthening enforcement. Special diagnostic of IT needs. Cancelled Training programs on corporate finance and accounting completed. Comparative study on international accounting norms. Update of inspection manuals completed. Laptops for on-site inspectors purchased Equipment and software purchased in order to increase Website capacity 4. Enhanced surveillance and inspection 5. Strengthened investor protection and increased transparency in collective investment schemes 6. Mutual Fund investor protection Comparative study completed of regulatory characteristics of the investment funds industry for a selected group of countries Implementation factors 42. The final list of outputs was shorter than what was proposed at the time of Board approval and some of them had been changed in scope. The reduced level of output is explained by the partial cancellation of the BCB component and decision not to further extend CVM s closing date. 43. Delays in budget allocations led to closing date extensions. The project could not begin for approximately a year and a half after its Board presentation in September 2001 due to delays in meeting effectiveness conditions until July 2002, and subsequent delays by the Government in approving the transfer of project funds to the general budget of the two agencies January 2003 for CVM and May 2003 for BCB. In the pluriannual budget framework of Brazil s Government, budget requests have to be submitted up to a year in advance for Congressional approval. The Loan was finally approved by the Senate in May Then initial budgetary funding was authorized for release in December 2003 in the amounts of $1.2 million for CVM and $3.7 million for BCB. This was a critical setback for timely implementation of the project. 14

22 44. The skill set of BCB and CVM staff as regulators facilitated their supervision and quality control over consultants output. The regulatory culture at each agency proved to be a useful transferrable skill in terms of project monitoring and control. For example, staff in both agencies was quick to discover problems with translation of consultants reports. In the case of CVM, staff overseeing the work by the consultant identified a design flaw in a survey of enforcement practices in time to incorporate changes before implementation. Project ownership by the staff of both agencies also contributed to efficient implementation. 45. Lack of coordination in TA lending resulted in a bottleneck for the BCB component. The FSTAL was approved when the CBMTAL had not yet closed. One of the setbacks for the BCB component was the overlap with the CBMTAL, which was not closed until December 2003, or two years after the approval of this project (see table 3 below). This created a backlog for the project s work schedule particularly for those subcomponents that were to be implemented as a follow-up to the work in the prior TA loan. In fact, the banking supervision department was hesitant to move ahead with its subcomponent of the project pointing out that under the previous project numerous outputs had been achieved, such as the establishment of the Risk Center, the development of a bank rating system, the preparation of examination manuals; and that the supervision department needed time to internalize the new instruments. Table 3: World Bank Support of Financial Sector Reforms: / /01 09/01 03/02 06/02 12/02 12/03 05/08 CBMTAL (TAL I) Approved Closed PFSECAL I Approved Closed FSTAL (TAL II) Approved Closed PFSECAL II Approved Closed CBMTAL (TAL I): Central Bank Modernization Technical Assistance Loan, TA Loan I PFSECAL I: Programmatic Financial Sector Adjustment Loan I FSTAL (TAL II): Financial Sector Technical Assistance Loan II, TA Loan II PFSECAL II: Programmatic Financial Sector Adjustment Loan II NOTE: the dates refer to actual approval & closing dates, but are not separated by a consistent measure of the length of time between dates. 46. Change in BCB leadership led to some shifting of project priorities. Following the change in its senior leadership with the appointment of a new Governor in January 2003, there was less emphasis on further strengthening of banking supervision and more on the need to train entry level staff, particularly recent new hires that were replacing a higher than normal attrition rate of experienced examiners. Another significant change involved the promotion of the head of the project team to the position of secretary to the Governor, and the consequent loss of project leadership. The project unit was then transformed to a new project management unit with considerable expanded responsibilities for BCB special projects. 15

23 47. BCB moved quickly on the priority areas of the project. Once project funds were approved and the CBMTAL project had closed, BCB made strong progress on the payments system components of the project and the banking supervision department proceeded with a training program for new examiners. 48. As a high capacity agency, BCB preferred institutional strengthening through onthe-ground organizational improvements. BCB tended to focus more on central bank modernization including equipment for its payment systems than on policy support, although the project s studies agenda showed some progress. Based on the actual output, the BCB component emphasized the purchase of equipment for the operation of the payment system and for other IT needs, training for banking supervision staff, expanded coverage of the Risk Center, and a very focused study to identify those areas where the central bank needed to incorporate new accounting norms consistent with International Financial Reporting Standards (IFRS). BCB took advantage of the latest technology and best practices available through the Bank s expertise in the design and delivery of technical assistance support. 49. An unexpected and important windfall in BCB revenues reduced the need for Bank funding. As explained in the earlier section on design, BCB s decision not to extend the closing date was driven by economics. Neither BCB nor the Bank could have anticipated a Court decision on a complex case involving the Central Bank s access to revenues originating from the financial transactions tax. In light of its unexpected windfall, BCB re-assessed its budgetary needs and decided that the costs, both opportunity and financial costs, of the Bank loan were higher than their own reduced internal cost of funds. Just prior to this decision, a Bank supervision mission had rated the BCB component as satisfactory, and there was still an active project pipeline. 50. Changes in CVM leadership and in the project management unit may have contributed to a slower pace of implementation progress. CVM underwent a series of changes in its leadership from the start to project closing which posed a challenge to project implementation, although the potentially disruptive effects were attenuated thanks to the support shown by each new leadership team towards the project (see table below). Nevertheless, the changes in leadership and its consequent impact on the organization may have contributed to a slower pace in project implementation. The project management team within CVM also underwent changes particularly during the preparation and initial phase of implementation, these also included changes in the procurement sub-team which created duplication of efforts due to the need to train new members on Bank procurement policies. 16

24 Table 4: Chronology of CVM Presidents during project preparation & implementation From To Maria Helena Dos Santos Fernandes de Santana 07/18/2007 Today Marcelo Fernandez Trindade 06/07/ /17/2007 Luiz Leonardo Cantidiano 07/15/ /27/2004 Jose Luiz Osorio de Almeida Filho 01/28/ /12/ Delays caused by lack of coordination with UNDP further held up implementation. The UNDP has played a critical role in most TA loans by the Bank in Brazil in terms of coordinating procurement and financial management practices of project implementing agencies. The UNDP office was located in Brasilia which served BCB well and their earlier experience with the CBMTAL had helped establish a closer working relationship between the two organizations. However, since the project management unit of CVM was located in Rio de Janeiro, coordination with UNDP on the procurement and disbursement process was complicated, which was further compounded by the fact that this was CVM s first participation in a Bank project, meaning it also needed to assimilate the Bank s project management culture. The procedural differences in procurement between the Bank and UNDP did not facilitate the implementing agency s work. CVM pointed to delays in disbursements due to UNDP agents for this project where some staff lacking experience had inadvertently contributed to startup deferrals. A Bank procurement review in November 2006 assessed that the relationship with UNDP provoked procurement delays and rated performance as marginally unsatisfactory. This rating was upgraded after the delays were resolved. 52. The project provided an opportunity to overcome CVM s resources constraints. Due to its budget constraints, CVM had pent up demand for institutional development in a number of areas. During project preparation, CVM staff presented a number of initiatives that had been identified as operational priorities. The rapid changes in the regulatory environment, particularly the new responsibilities assumed by CVM, as well as reforms in financial sector legislation had stretched the agency s capacity to undertake key institutional development projects. At the same time, the long-standing lack of resources to hire more technical staff had meant that CVM professionals were fully occupied with day-to-day regulatory and enforcement matters and with little time to keep up with new initiatives, to upgrade their policies and procedures, and to learn from the practices of securities regulators in other countries. The consultants hired through this project helped launch the organizational initiatives that had been held up in CVM s internal pipeline. 2.3 Safeguard and Fiduciary Compliance 53. No significant deviations were found with respect to the Bank s financial management, procurement, and disbursement policies. The Controller s Office of Brazil 17

25 conducted annual audits of project expenses and found no material issues. The quarterly reviews of applications for report-based disbursements found that the periodic reports prepared by the project implementation units were satisfactory. However, a procurement post-review supervision mission in November 2006 found procurement marginally unsatisfactory due in large part to excessive unacceptable delays in procurement processing. 54. An issue of contract management arose in the case of the CVM sub-project to develop an enhanced surveillance system for monitoring market activities. The firm chosen for the project was acquired by another company after they had started work on the project, and the new firm requested a renegotiation of the scope of work. CVM had already made an initial disbursement of funds to the contractor. Fortunately, after both parties reached an amicable settlement the funds were returned except for minor costs that had already been incurred by the consultant. In view of the approaching closing date the decision was made not to proceed with a new RFP. Nevertheless, CVM is currently in the process of contracting with another firm using its own funds to complete the market surveillance project. 2.4 Post-Completion Operation/Next Phase (if any): 55. No operation has been defined as a next phase. However, given the strong relationship developed during the course of the project, CVM and the Bank agreed on future collaboration on research of specific regulatory topics of interest to both parties. 3. Assessment of Outcomes 3.1 Relevance of Objectives, Design and Implementation 56. Brazil s past experience with financial crises and the consequent deterioration in economic performance, had served as a key lesson on the importance of financial sector reforms to the stability and sustainability of economic growth. After taking office in January 2003, one of the first signals that a new Government gave to the markets was its continued commitment to financial sector reforms. That posture has not wavered. In fact the new Corporations Law in 2007 adopted international accounting standards as the norm in Brazil. In view of the current turmoil in global financial markets, the Government s successful implementation of financial sector reforms will prove to be the major factor in dampening the impact from these external shocks on the rest of the economy. 57. Without the institutional strengthening of BCB and CVM, which are the principal regulators of the financial system, many of the financial sector reforms would have become ineffective. The design of the FSTAL was thus logically consistent with the goal of enhancing efficiency in financial intermediation, financial system transparency, and 18

26 effectiveness of regulation and supervision. A strong payments system is critical to the stability of the financial system in times of liquidity problems like nowadays. Well trained bank examiners are essential to providing effective oversight of the banking system. Providing in-depth studies on securities industry practices in other countries is an essential input in the design of new regulations that are relevant to the Brazilian reality. Updating of the institutional memory of regulatory agencies in terms of their procedures, manuals, and supervisory practices ensures that best practices are established as the norm. For these reasons, the relevance of this project is deemed to be High. 3.2 Achievement of Program Development Objectives 58. The central objective of the FSTAL was to support the development of institutional capacity to assist the implementation of Brazil s program of financial sector reforms. The specific objectives were to formulate reform strategies; prepare regulatory reforms; and strengthen institutional capacity of the principal regulatory agencies. Contribution of the BCB component towards project objectives 59. From a front-line perspective, BCB s role in supporting the efficiency of financial intermediation, maintaining the effectiveness of regulations, and bolstering defenses against financial sector crisis is heavily reliant on the integrity of the payments system and on the quality of banking supervision. The other institutional strengthening components such as the improved Risk Center and the IT plan have also contributed to BCB s technical capacity. The policy studies were a valuable component; although several policy studies had already been completed under the previous CBMTAL such as the one on bankruptcy and on interest rates. The preparation of regulatory reforms for bank failure resolution was not pursued in view of insufficient political support for additional financial sector legislation as became evident during the preparation of the PFSECAL II. While greater attention was paid to the key institutional areas, the partial cancellation of this component was a limiting factor to the achievement of program objectives. 60. Key BCB outputs in terms of development impact were: Upgrading of the payments system: The acquisition of hardware and software to expand the new system s capacity was necessary in order to ensure the integrity of the payments system by enabling the Central Bank to monitor large system payments on a real time basis including the non-banking clearing houses and to prevent systemic risks arising from overdrafts and other liquidity problems. Training of banking supervision staff: At the time of loan preparation the BCB s banking supervision department had experienced an exodus of experienced bank examiners through retirement as well as other professional opportunities in the financial industry. As a new crop of examiners was hired, it was imperative to bring them up to speed quickly with the use of the new 19

27 examination manuals that had been prepared as part of the CBMTAL. This was an important institutional development initiative that had a material impact on the effectiveness of banking supervision. Contribution of the CVM component towards project objectives 61. The strengthening of institutional capacity of the resource-constrained CVM was evident in the quality of outputs even with the limited use of the available funds under this component. There were additional sub-components that had been programmed including some for which an RFP had already been prepared; however, it was decided that they would not be ready or near completion by the expiration of the second extension of the project closing date. This in turn diminished the effectiveness of the CVM component. 62. Key CVM outputs in terms of development impact were: Study and recommendations for strengthening enforcement: One of the principal outcomes of this study was the decision to establish a separate enforcement division within CVM. Other recommendations of the study included the preparation of a manual for investigations, reinforcement of CVM s supervision of SROs such as the BMF Bovespa exchange, Brazil s principal securities exchange. As the newly created enforcement division adopts these and other recommendations made by the consultant s report it will enhance the effectiveness of securities markets regulations and supervision. Diagnostic of IT needs: Due to the rapid growth in the securities industry, the new responsibilities assumed by CVM, the introduction of new instruments, and the increase in information processing, CVM s IT system could not keep up with the demand by its users. The IT diagnostic study addressed the system s capacity, its technological relevance and adequacy of existing hardware. Some of the other sub-components of the project that involved the acquisition of software and hardware were postponed until completion of this study in order to benefit from its diagnosis and recommendations. As a result of the study recommendations were made that led to the decision to outsource the IT infrastructure to a large government-owned IT company but to maintain an in-house capability of systems analysts in order to respond more effectively to IT requests from other departments. A larger state-of-the-art IT system will strengthen the effectiveness of financial system regulation and supervision. Comparative study on international accounting norms: With the new Corporations Law in 2007 Brazil adopted the IFRS standards. This was an important reform that called for CVM to develop new rules on reporting of financial information. The comparative study of international accounting norms will be a key instrument since it provides recommendations based on international practices for the development of the new norms. Through its impact on the goal of helping to prepare regulatory reforms this initiative will enhance financial system 20

28 transparency and also raise the efficiency of intermediation by increasing the accuracy of financial information. Update of inspection manuals: While CVM already had inspection manuals, these had not been updated. There was a body of institutional knowledge that experienced inspectors had not been able to incorporate into the prevailing documents. By carefully updating and then posting the manuals online with links to numerous references such as legislation, CVM policies, and regulations, as well as standard forms used to execute inspections, it has materially improved the quality of inspections, particularly for less experienced staff. This initiative will significantly improve the effectiveness of regulations in the securities industry. Comparative study of international regulatory norms in the investment funds industry: The objective of this study was to identify regulations in foreign countries that could serve as a reference to Brazilian accounting standards particularly in light of the adoption of IFRS. The study addressed a number of issues such as administrative fees, custody, legal framework, and accounting standards. Given the surge of investment funds in Brazil, this study was critical to the development of new regulations that would enhance financial system transparency through better disclosure of investment funds information, strengthen the effectiveness of regulations and also raise the efficiency in financial intermediation by providing investors with more accurate and timely information on investment funds. Consistency of Outcomes with Market Indicators 63. The FSTAL was designed to support institutional capacity for implementing financial sector reforms. The linkages from outputs to outcomes occur first through the institutional strengthening of BCB and CVM, then through the preparation of regulatory reforms, and eventually through the combined effect of these outcomes at the agency level with the overall impact of the financial sector reforms supported by the Bank s programmatic loans (PFSECAL I & II) on the overall financial system development objectives. While it may not be possible to quantify the specific contribution of the FSTAL to financial system outcomes, it is reasonable to establish the consistency of actions taken under the project with overall developments in the financial system. Some of the salient features include: Consolidation of the payments system has increased the efficiency of interbank transfers and the settlement operations of other systems as well as securities markets exchanges. For example, the volume of interbank funds transfer settlement system doubled between 2002 and

29 The securities market capitalization to GDP has gone from 29.7 percent in 2002 to 97.1 percent in Consistently, trading value has grown from R$ 205 billion in 2003 to R$ 1,154 billion in The issuance of private sector debt in the securities market has risen from 5.1 percent of GDP in 2002 to 13.0 percent in The BOVESPA securities exchange has become the leader in Latin America in the total number of listed companies with 404 issuers as of December This also makes Brazil the most heavily weighted emerging market contained in the MSCI equity index, in which both China and India are also represented. 64. Based on the effectiveness of project outputs and the positive contribution to outcomes, but cognizant of lost opportunities from partial cancellation of project funding in terms of additional outcomes that could have resulted in a higher degree of achievement of the project s objectives, the efficacy of this project is rated as Moderately Satisfactory. 3.3 Project Efficiency 65. Perhaps the principal factors affecting project efficiency were the long delays in disbursements and the partial cancellation of the project. Both agencies were satisfied with the work performed by consultants and with the quality of the equipment purchased. However, the long period between the approval of the project and the completion of its components lowered the overall efficiency in terms of the opportunity costs from delays in implementation and the lost opportunities from having had more time to complete other sub-components that were eventually cancelled. As explained in the previous section, implementation delays were mainly caused by the nature of Government budget allocations as well as by lack of coordination between CVM and UNDP. In the case of BCB some of the policy studies were not viewed as important as focusing on the upgrading of their information and data systems and their regulatory and operational infrastructure. Thus design of the BCB component may have adversely affected efficiency by including policy studies which could have been more efficiently financed through the agencies internal resources. Based on the experience of the project, efficiency is considered to have been Moderately Unsatisfactory. Justification of Overall Outcome Rating: 66. The FSTAL has had significant positive outcomes in terms of the strengthening of both regulatory agencies and is expected to facilitate the development of new securities markets regulations as Brazil continues to achieve greater compatibility with international norms. Relevance of project objectives was thus rated High and project outcomes as Moderately Satisfactory due to the partial cancellation of the project. The long delays in implementation and consequent loss opportunities in terms of outputs resulted in a 22

30 Moderately Unsatisfactory efficiency rating. The overall outcome rating is thus considered as Moderately Satisfactory. 3.4 Overarching Themes, Other Outcomes Poverty Impacts, Gender Aspects, and Social Development 67. Given the nature of the project on financial system strengthening, it has only indirect impact on these issues. Institutional Change/Strengthening: 68. The FSTAL s contribution to institutional development has been discussed in the previous sections on implementation and outcome. About 80 percent of the output from the project was directly related to institutional strengthening. The relevance rating reflected the importance of institutional development for an efficient and well regulated financial system. Other Unintended Outcomes and Impacts (positive and negative): N/A Summary of Findings of Beneficiary Survey and/or Stakeholder Workshops (optional for Core ICR, required for ILI, details in annexes): N/A 4. Assessment of Risk to Development Outcome 69. The risk to the project s development outcome is deemed as Moderate. The FSTAL sustainability factors are favorable in a number of key areas. Government commitment to financial sector reforms is firmly embedded in macroeconomic policies. The recent turbulence in global financial markets has heightened the importance of effective regulation and supervision of the financial system as a deterrent against local contagion from external shocks, and Brazilian regulators have proved very professional and effective in handling its local impact. 70. As the two principal regulators of the financial system, BCB and CVM benefitted from the institutional strengthening achieved through their participation in this project. BCB had the advantage of a previous TA loan, the CBMTAL, which had already contributed to institutional improvement in a number of areas. At the same time, BCB has had experience in dealing with financial crises, the most recent being the banking system 23

31 problems in the mid-1990s; and has then adequately equipped to deal with the sources of systemic risk in the financial system. 71. CVM is a relatively newer agency with tighter resources, in part due to the historically dominant role of the banking industry in the development of the financial system. The impressive growth of the securities markets heightens the risk to development outcomes if CVM does not continue to reinforce its institutional capacity. The partial cancellation of the CVM component leaves a gap in terms of initiatives for which the agency may still lack the funds and the personnel to complete them without additional support. Some of these activities will be probably done under an existing Growth TA Loan, and the recent agreement between the Bank and the CVM will help in further strengthening the regulatory framework. 5. Assessment of Bank and Borrower Performance 5.1. Bank Performance Bank Performance in Ensuring Quality at Entry (i.e., performance through lending phase): 72. The FSTAL was designed to support institutional capacity to assist in the implementation of broad financial sector reforms. Thus, the Bank s policy and institutional analysis related to the preparation of the programmatic financial sector loans (PFSECAL I & II) served well in the assessment of this project. The Project Appraisal Document provided an in-depth analysis of institutional needs and appropriate instruments to achieve the goals of the project. However, as mentioned in the section on design, the decision to proceed with this project with a BCB component before the previous CBMTAL had been closed contributed to implementation delays, and to BCB s hesitation to take on additional projects after just completing the CBMTAL. The CVM component was based on a thorough analysis of its institutional needs that were represented in a detailed matrix of project activities. While the preparation was commendable, Bank staff may have been somewhat ambitious in terms of the scope of the CVM component. The Bank s risk assessment identified the key challenges facing project implementation, including the possibility that BCB and CVM would not receive adequate budgetary allocations from the Government, yet this risk should have called for a more streamlined design. For these reasons, Bank performance in ensuring quality at entry is judged to be Moderately Satisfactory. Quality of Supervision: 73. Bank staff was diligent in monitoring the implementation of the FSTAL. The status reports showed a focus on the project s development objectives, presented a good summary of key implementation issues, and included outcome measures not present at the preparation stage. Frequent missions by the project team, including procurement and 24

32 financial management specialists helped address implementation issues. Special attention was noted in terms of supervision of the procurement process with periodic assessments by the Bank s procurement department. Perhaps greater focus on detailed flow-ofproject-funds would have been helpful. Quarterly financial reports showing programmed expenditures by detailed sub-components and the actual amounts posted on a data file showing the evolution of the project would help in monitoring the pace. Bank performance during supervision is deemed as Satisfactory. Rating of Overall Bank Performance: 74. In determining the overall Bank performance rating, greater consideration is given to quality at entry in view of the design and risk issues that eventually led to the partial cancellation of parts of the BCB and the CVM components. Even though effective supervision helped to produce productive outputs in key areas of institutional development in both agencies, the overall evaluation results in a Moderately Satisfactory rating. 5.2 Borrower Performance 75. The evaluation of Borrower performance is based on the role played by the two implementing agencies BCB and CVM, and by the Government overall. Commitment to project objectives was satisfactory. As reported in the ISRs, the twin objectives of supporting reform and simultaneously building institutional capacity at both agencies were being actively supported. The high technical skills of the staff at both agencies contributed to the good quality of outputs. BCB benefitted from the successful implementation of the previous CBMTAL and the continuity of the staff that had participated in the previous project. 76. Implementation was met with some challenges. Leadership changes in both agencies affected the effectiveness of implementation, although the staff appointed to key project tasks proved to be a positive factor in the quality of the outputs. High Government ownership was not able to overcome delays due to the process of budget approval. Since these agencies do not have budgetary autonomy, this was a detrimental factor to the project s outcome. The partial cancellation of the project by BCB heightened risks to the development objectives. CVM s procurement problems arising from lack of coordination with UNDP staff further delayed implementation. 77. The strong project commitment and high quality of staff in the two agencies was an important factor in performance; however, due to some implementation shortfalls the overall Borrower performance is rated as Moderately Satisfactory. 6. Lessons Learned 25

33 78. The principal lessons learned are: Technical assistance loans are a good complement to Programmatic lending. The Brazilian government s strong commitment to financial sector reform and the Bank s extensive work in preparing the programmatic loans facilitated the design of the FSTAL and its focus on supporting institutional development needs of the principal financial sector regulatory agencies. High capacity countries like Brazil need TA loans to support institutional strengthening, but the projects have to be focused on the needs of the beneficiary. In the case of BCB, their interest was mostly in hardware and software to upgrade essential components of the payments system and in training programs for banking examiners. CVM s needs were concentrated in the operational areas of enforcement, inspections, surveillance, and financial and accounting norms. A TA loan, in general, should not be approved until an existing project to the same beneficiary has been closed. At the time the FSTAL was approved, the previous CBMTAL was still under implementation and did not close until about two years later. In the case of the FSTAL consideration should have been given to a stand-alone CVM project. Budgeting and procurement capacity of the Borrower are important factors in appraising a project. In view of the extensive delays in budget approval by the Brazilian government and the subsequent procurement coordination issues involving UNDP and CVM, perhaps limiting the scope of the project to a few large sub-components would have been a more efficient approach. TA projects should have a short duration with active Bank participation. The project timeline should define the scope of activities. Simpler, shorter and possibly more frequent projects may result in better outcomes over time. TA loans should be stressed as an important part of the Bank s economic development mission. 7. Comments on Issues Raised by Borrower/Implementing Agencies/ Partners (a) Borrower/Implementing Agencies: 79. The Borrower highlighted the fact that this loan represented a key point in the history of CVM. They depicted certain projects financed through this loan that they consider of great relevance, including the Enforcement Study, the formulation of Supervision Manuals, the Infrastructure Diagnostic, and the study on Accounting Convergence to IFRS. 26

34 80. They also acknowledged that at the outset of the project they were not fully prepared to manage it complexity, and added that this experience has helped them create an internal unit that manages all of its projects. They underlined the collaborative relationship with the Bank, which helped address CVM s needs. Annex 7 has a complete detail of the comments received, both the original in Portuguese, and its English translation. (b) Cofinanciers: (c) Other partners and stakeholders (e.g. NGOs/private sector/civil society): 27

35 Annex 1: Project Costs and Financing Project Component Appraisal Estimate Actual/Latest Estimate Percentage of Appraisal Central Bank (BCB) Payment System Reform 755,800 1,948, Improved Banking Supervision, 2,345, , Regulations, Bank failure resolution Studies on interest rate spreads and 551, , sectoral policy Implementation of IT Diagnostic 2,240, Proposals Project Management 3,000,000 82, Second phase activities 2,107, , Sub Total BCB 11,000,000 3,729, CVM: Diagnostic studies 1,229, , Strengthening compliance, corporate finance, 1,863,200 1,140, Surveillance and on site inspection Investor protection, public information and 363, , Collective investments Institutional support and project 1,322, , management Second phase activities 1,800, Sub Total CVM 6,579,360 3,466, Total Base Costs 17,579,360 7,196, BCB CVM Categories Estimate Actual Estimate Actual (US$ 000s) Goods 4,637 1,872 1, Consultants & training 6,578 1,775 5,391 3,265 Front fee Total 11,297 3,730 6,760 3,467 28

36 Annex 2: Outputs by Component Table A1 : BCB Components and expenses Actual Payment System risk reduction Consultants & training 380,594 Hardware & software 1,563,479 New SELIC market 4,911 Strengthened banking supervision Training 504,214 Strengthened bank failure resolution Sectoral policy studies Study of international accounting norms 377,002 Other studies 44,892 Improved Credit Risk Center Consultants & training 88,477 IT diagnostic and implementation Other Methodology for statistical information 48,206 Development of market indicators 28,071 Economic research department (DIPEC) 161,806 Other training (DIESP) 30,203 Translation 24,073 Institutional development 82,619 Video conferencing equipment 308,225 Front end fee 82,980 TOTAL 3,729,754 For a detailed description of the outputs see the Output section of the report. Since this component was cancelled, the outputs cover a selected number of activities. 29

37 Table A2: CVM: Project Components and Expenditures CVM Component Description Status Additional Comments Consultant Planned Actual 1 Diagnostic Studies A Comprehensive internal assessment of CVM s resources and responsibilities B C D Study and recommendations for strengthening enforcement Examination of the overall Brazilian regulatory structure and the role of the CVM Study on Internationalization of Brazilian securities markets assessment of CVM s resources and requirements in the context of the changing capital market environment; a comparison of CVM resources, in terms of fees, budgetary outlays, etc. to other regulatory agencies in emerging markets Study of the extent and consequences of the CVM s limitations in enforcement due to its limited administrative remedies, lack of access to civil litigation and / o criminal sanctions Comparisons with regulatory structures in other markets, especially in terms of degree of consolidation of supervisory responsibilities between securities market regulators and relative to banking supervision Cancelled in 2007 Completed in 08/2007 Cancelled in 2004 Cancelled Two firms provided very high bids: AT Kearney with R4.5 mill & Booz Allen with R 9.0 mill. CVM will implement in future date Policy discussions moved away from strategy to consolidating under a single regulator, thus reducing relevance of component 386,000 22,686 NASD (FINRA) 128, ,030 30

38 E Information technology capacity assessment and identification of needed enhancements. This foundational study would pay special attention to infrastructure capacity and security, market surveillance and Internet website needs including improved public access to corporate and mutual fund data Completed in 09/2005 Produced a five year strategic plan for IT with some areas linked to other project components Bearing Point 284, ,733 2 Strengthening compliance and regulations 216,000 A Digitizing and indexing of all official CVM statements, legal and accounting interpretations and disciplinary actions, and making them available on the CVM website Agreement signed with IDB for implementing an Electronic Document Management System with electronic workflow construction features. B Updating a select number of CVM s existing regulations to reflect the government s financial sector reform agenda and changes in the marketplace. Subsequently CVM proposed to focus on two areas: clearing houses and comparison to international accounting standards. 3 Supporting corporate finance, Auditing and Accounting disclosure A Develop a system for tracking all documents filed to enable closer monitoring of staff productivity. Component 1E will define system Cancelled wait for SPED B Design of a software to Cancelled Same as 3A Bidding problems as one firm challenged the process. When resolved in 2006, it was too late. Bidding problems, then merged as part of the following: MERGED: A, B, C, and D. SPED system being developed at the time 7,816 7,932 31

39 customize the tracking system to CVM's organizational processes. Component 1E will define system. Equipment to be defined C Installation of software enabling implementation of a selective review system to improve the quality of CVM review and increase the efficiency of its reduced staff D On line availability of the full text of all corporate disclosure documents to enhance public access to all filed documents E Training in select areas of corporate financial analysis and accounting standards F Study to compare Brazilian accounting standards with foreign standards wait for SPED Cancelled wait for SPED Cancelled wait for SPED Completed in 12/2006 Completed in 05/2008 Same as 3A Same as 3A Various 315, ,860 Ernst & Young 513,867 4 Market surveillance and on site inspection A Surveillance capacity study Merged with F B Consultancy to assist in updating existing CVM operations manuals and protocols for inspections of broker dealers and mutual funds. C Supervision of futures markets and participants Completed in 03/2005 Cancelled D Consultant to prepare an Merged overlap with IDB project International Securities Consultancy 360, ,939 32

40 analysis of electronic trading systems E Institutional capacity would be strengthened by the provision of portable computer equipment to on site inspectors F Consultancy to assist in establishment of CVM program for surveillance and inspection of commodity stock index futures markets and participants with F Completed in 03/2005 Contract Cancelled Acquisition of 16 notebooks 45,000 34,513 Euronext awarded contract but firm acquired a new owner did not reach agreement with CVM Euronext (cancelled) 500,000 29,532 5 Investor protection and public information A Consultancy to redesign and upgrade CVM website B Procurement of equipment and software C Consultancies to assist with designing special online information pages Cancelled in 2007 Completed in 2005 Merged with 5A RFP was prepared but Bank made decision to cancel various 25,000 32,000 16,291 6 Mutual fund investor protection A Consultancy on use of CVM website to make publicly available statements of mutual funds data including monthly holdings B CVM would undertake to engage consultancy services of a survey design firm to assist in the design and preparation of a survey on investor Merged with 5A Cancelled in 2007 BM&F sponsored CVM's development of website for mutual funds. 60,000 5,005 33

41 protection C Study of Investment Funds Industry Completed in 05/2008 Ernst & Young 542,781 7 Overall institutional support: Project coordination unit A Local travel, equipment, and Completed translation services was various 708, ,838 translator services moved from B to A B Provisions for continued Completed various 149, ,413 training C Other & Overseas training Completed various 216, ,832 D Library and reference materials Completed various 200,000 34,605 8 Additional funds for years 2 and 3 3,150,760 TOTAL 6,777,300 3,466,672 34

42 Annex 3: Economic and Financial Analysis Brazil- Selected Economic & Financial Indicators * GDP and prices Real GDP growth (% p.a.) na CPI inflation (period average) Money market interest rate (% p.a.) External sector Trade balance (% of GDP) na Current account balance (% of GDP) na Exchange rate Reais/USD (average) Gross international reserves (months of merchandise imports) na Public Sector Balance (% of GDP) Overall public sector balance na Of which: primary balance na Securities Market Bovespa market capitalization (US$ bill) , ,511.2 Mutual investment funds (net worth - R$ mill): Financial investment funds 466, , , , , ,436 Stock funds 41,669 49,491 59,878 88, , ,469 Initial Public Offerings in the equity market: Number of issues Value (R$ million) - 1, ,132 12,265 * as of June 2008 Source: BCB and IMF Economic Costs and Benefits of the Project As established in the Project Appraisal Document (PAD), cost effectiveness analysis was not applicable in this project. The TA character of institutional strengthening of a government agency of the operation implied that quantitative economic and financial analysis was not possible or appropriate. However, the project was expected to generate benefits at two levels: support of overall financial sector reforms in Brazil; and enhanced capacity, credibility and effectiveness of key policy making, regulatory and supervisory bodies in the financial sector, the Central Bank and CVM. The project was quite successful in improving the regulatory support environment and the capacity of the agencies involved, particularly CVM. For a detailed analysis of project outcomes see the main text of this report. 35

43 Annex 4: Bank Lending and Implementation Support/Supervision Processes (a) Task Team members Lending Names Title Unit Responsibility/ Specialty Supervision/ICR Patrick Conroy Program Director/Senior Adviser GCMDR Luiz C. Gazoni Consultant LCSPT Mario Guadamillas Sr Financial Economist LCSPF Patricia Rodrigues de Melo Language Program Assistant LCSPF Adam G. Parsons Temporary LCSFP Luis R. Prada Villalobos Senior Procurement Specialist LCSPT Camila Adriana Rodriguez Hernandez E T Consultant LCSTR Marco Sorge Economist CSFDR Denise von Gersdorff Consultant LCSPF (b) Staff Time and Cost Staff Time and Cost (Bank Budget Only) Stage of Project Cycle No. of staff weeks USD Thousands (including travel and consultant costs) Lending FY FY Total: Supervision/Completion FY FY FY FY FY FY FY Total:

44 Annex 5: Beneficiary Survey Results (if any) N/A Annex 6: Stakeholder Workshop Report and Results (if any) N/A Annex 7: Summary of Borrower's ICR and/or Comments on Draft ICR (if any) Original Comments in Portuguese: O acordo de empréstimo com o Banco Mundial, sem dúvida, representa um marco na história da autarquia. Por meio dele, foram realizados projetos de grande relevância. Apenas para fazer referência a alguns exemplos relevantes, por meio do Estudo de Enforcement, criou-se a Superintendência de Processos Sancionadores e busca-se aprimorar a tramitação dos inquéritos; por meio dos Manuais de Fiscalização, conseguiu-se a padronização dos procedimentos relativos a esta área; com o Diagnóstico de Infra-estrutura, vislumbrou-se o cenário tecnológico para os próximos anos e foi fundamento para o início de outros projetos da autarquia; os estudos contábeis criaram-se condições para o amadurecimento da Convergência Contábil e para a adoção de novos instrumentos de regulação no mercado brasileiro em consonência com o mercado mundial. Ao longo da execução do projeto ocorreram algumas mudanças de escopo, mas não houve mudança nos objetivos a serem alcançados. O gerenciamento de projetos na CVM, antes inexistente, experimentou grande amadurecimento durante a vigência do programa e, por isso, criaram-se condições para que outras iniciativas similares sejam adotadas. O programa tornou a CVM melhor tanto no que se refere ao público externo, o mercado, quanto no interno, relativo à sua eficiência. Não há dúvidas de que, para tanto, concorreram os esforços da própria equipe da CVM. Contudo, é fato que merece especial destaque o bom relacionamento que sempre tivemos com o Banco Mundial, sensível às necessidades da CVM, e sem os quais os benefícios, de certo, não teriam sido sentidos. Roberto Dias, Superintendente da CVM English Translation: The Loan Agreement with the World Bank certainly represents a high point in the history of this autarchy (organization). Many projects of great relevance were accomplished through this loan. 37

45 Just to mention some important examples, with the Enforcement Study was created the Superintendence of Sanctioned Processes and improvements were being made to the investigations processes; with the Supervision Manuals, we were able to standardize procedures regarding this area; with the Infrastructure Diagnostic, we were able to project the technological scenario for future years and it served as a base for other autarchy projects; with the accounting studies conditions were created for the adoption of an Accounting Convergence (IFRS) and for the adoption of new regulatory instruments in the Brazilian market consistent with the global market. Throughout the execution of this project changes were made to its scope, but not to its objectives, which remained the same. The management of projects at CVM, inexistent until then, experienced great growth throughout the life of program, and for that reason, conditions were created so that similar initiatives can be also launched. This program has promoted improvements at CVM not only to the external public, the market, but also to the internal one, related to its efficiency. The efforts of the CVM Team played a key role in achieving these results. Nonetheless, it is important to emphasize the good relationship we have with the Bank, always sensible to CVM s needs, and without which it would not have been possible to achieve these benefits. Roberto Dias, Superintendent of CVM Annex 8: Comments of Cofinanciers and Other Partners/Stakeholders N/A Annex 9: List of Supporting Documents 1. Project Appraisal Document, Report No BR, August Loan Agreement, June Project Agreement BCB, June Project Agreement CVM, June ICR Central Bank Modernization Technical Assistance Loan, Report No , June ICR Second Programmatic Financial Sector Adjustment Loan, Report No BR, September PSRs for the following dates: 12/10/2001; 05/29/2002; 11/14/2002; 12/03/2002; 05/28/2003; 12/05/2003; 06/04/2004; 07/22/ ISRs for the following dates: 04/07/2005; 11/21/2005; 06/23/2006; 12/13/2006; 06/13/2007; 09/14/2007; 05/29/ Miscellaneous project documents. 38

46 39