Public Disclosure Authorized The World Bank REPORT NO.: RES29864 RESTRUCTURING PAPER Public Disclosure Authorized ON A PROPOSED PROJECT RESTRUCTURING OF RIO GRANDE DO SUL SWAP APPROVED ON MAY 1, 2012 TO STATE OF RIO GRANDE DO SUL, BRAZIL Public Disclosure Authorized TRADE & COMPETITIVENESS LATIN AMERICA AND CARIBBEAN Public Disclosure Authorized Regional Vice President: Country Director: Senior Global Practice Director: Practice Manager/Manager: Task Team Leader: Jorge Familiar Calderon Martin Raiser Anabel Gonzalez Marialisa Motta Cristian Quijada Torres, Gregoire Francois Gauthier
ABBREVIATIONS AND ACRONYMS CD Country Director CREMA Restauração e Construção de Rodovias Road Construction and Maintenance DECAP Departamento de Captação de Recursos Fundraising Department DLIs EEPs FY GDP Disbursement Linked Indicators Eligible Expenditure Programs Fiscal Year Gross Domestic Product ICMS Imposto sobre Circulação de Mercadorias e Serviços Tax on Circulation of Goods and Services MTR PAD PDO Mid-Term review Project Appraisal Document Project Development Objective PGFN Procuradoria-Geral da Fazenda Nacional General Attorney Office SEPLAN Secretaria de Planejamento, Governança e Gestão Secretariat of Planning, Governance and Management SPGG Secretaria de Planejamento, Governança e Gestão Secretariat of Planning, Governance and Management STN Secretaria do Tesouro Nacional National Treasury TA Technical Assistance
BASIC DATA Product Information Project ID P120830 Original EA Category Partial Assessment (B) Approval Date 01-May-2012 Financing Instrument Investment Project Financing Current EA Category Partial Assessment (B) Current Closing Date 28-Feb-2019 Organizations Borrower State of Rio Grande do Sul, Brazil Responsible Agency SPGG/DECAP,SEPLAN/DECAP Project Development Objective (PDO) Original PDO The Project Development Objective is to improve public investment planning and implementation by strengthening the capacity of the state planning agency and selected sector secretariats. These are in education, science & technology, economic development and infrastructure. The Project will provide cross-cutting technical assistance in public investment and human resource planning, procurementmanagement, contract management, impact assessment, environmental and disaster risk management and citizen participation in decision-making. It will also support, through eligible expenditure programs, investments in education (technological modernization and buildings repair), transport (highway rehabilitation and maintenance), private sector development (cluster programs, industrial extension services and technology parks) and public sector management (public asset management.) Summary Status of Financing Ln/Cr/Tf Approval Signing Effectiveness Closing Net Commitment Disbursed Undisbursed IBRD-81550 01-May-2012 11-Sep-2012 01-Oct-2012 28-Feb-2019 480.00 351.57 128.43
Policy Waiver(s) Does this restructuring trigger the need for any policy waiver(s)? No I. PROJECT STATUS AND RATIONALE FOR RESTRUCTURING A. Implementation of Eligible Expenditure Programs (EEPs) and Technical Assistance Components (TA) 1. Overall project disbursement has reached 73%. The level of disbursements for EEPs is still lower than desired (58% of resources disbursed), and even though all CREMA (Road Construction and Maintenance) contracts have been signed, some of them have not begun implementation and are requiring close monitoring from the project team. Utilization of EEP resources for the education component are also being closely monitored due to delays in the implementation of the infrastructure work related to schools. 2. With regards to TA activities, there was a significant improvement in the commitment of available resources. The level of implementation is still quite low (~ 22% of available resources), but resource allocation (including the definition of Terms of References and beginning of procurement processes for goods or services) has increased to 69% in June 2017. B. Project Development Objective (PDOs) and Disbursement Linked (DLIs) indicators 3. Three of the four Project Development Objective (PDO) indicators have already been met (PDOs 2, 3 and 4), while there has been significant progress in meeting PDO 1 Implementation of road pavement management system. 4. With regards to DLIs, the program has been meeting targets for most indicators except for DLIs 2 (Investment Expenditures) and 3 (Revenue from ICMS), which are the reason for this request for restructuring. The program has not reached the targets for these two DLIs since 2016. These DLIs were originally designed to provide incentives to the State to focus on the achievement of realistic revenue and investment targets during the operation. In the current form these DLIs will not serve that function, since the targets set for these DLIs did not accurately predict the impact on the state s tax collection of the deep economic crisis that has affected Brazil since 2015. 5. Important steps to promote fiscal consolidation have been taken since then by the State Government, but even these efforts will not be sufficient to restore ICMS tax collection and investment levels to the targets set during the mid-term review (MTR) for this operation. Moreover, during the supervision of the program the Bank team and the counterpart noticed that the investment targets in the results framework were being measured as investments for which budget had been allocated (despesa executada), and not as investments which have been invoiced (despesa liquidada). 6. This restructuring is being requested to adjust these two DLIs so that they can better reflect the original intention for these indicators. This is being done through the drafting of an Action Plan by the Borrower, as stipulated in the Loan Agreement (Section IV.B.2(b) of Schedule 2), which has been presented and discussed with the Bank team and
reviewed by the Bank s Legal team, and has been found to be acceptable. This Action Plan stipulates revised targets for these two DLIs, as well as adjustments to the methodology for measuring them. II. DESCRIPTION OF PROPOSED CHANGES Table 1: DLIs 2 and 3 following 2015 restructuring Cumulated targets (R$ millions) FY 2015 FY 2016 FY 2017 FY 2018 FY 2019 2014 2015 2016 2017 2018 DLI 2: Investments expenditures ( conceito de despesa liquidada ) DLI 3: ICMS tax collection 1,100 700 749 847 957 22,500 27,900 29,845 31,781 34,008 7. Back in 2015, DLIs 2 and 3 were adjusted through a project restructuring. At that point, the magnitude of the crisis to affect the whole of the Brazilian economy was not clear and, therefore, the targets set for these two indicators proved to be too optimistic. In 2015, the expected value of tax revenues for the federal government was R$453.6 billion. Because of the crisis actual tax revenues were R$424.7 billion in that year (6.3% below the initial estimate), providing an estimate of the impact the crisis on the State of Rio Grande do Sul. This significant decline in tax collection has consequently affected the state's ability to maintain the desired level of investments. As the crisis unfolded and the shortfalls in revenue collection deepened, achieving the targets set for DLIs 2 and 3 became effectively not possible. 8. This situation was initially discussed with the state government during the supervision mission of December 2016, and since then the Bank team has consulted with the counterpart to find a solution. Since these are DLIs, failure to comply with the targets has led to the retention of significant program resources, even while the state government has carried out and continues to carry out significant (and often unpopular) reforms to improve its fiscal situation and economic performance. 9. Following various discussions with the state government and internal consultations within the Bank, including a review by the Bank's legal team of the Loan Agreement, Disbursement Letter, the minutes of the negotiation and the project appraisal document (PAD), the Borrower has decided to use the flexibility set forth on Section IV.B.2(b) of Schedule 2 to the Loan Agreement, which states:
If the Bank has ( )not received evidence of full compliance with the DLIs referred to in Schedule 5 to this Agreement, the Bank shall: (i) deduct a set amount for each non-compliant DLI from the otherwise disbursable amount, all as set forth in said additional instructions; (ii) request the Borrower to prepare a time-bound action plan to achieve such DLI or DLIs in a manner satisfactory to the Bank; and (iii) when satisfied that the DLI or DLIs have been complied with and/or such action plan has been implemented, authorize that the unwithdrawn amount by which the corresponding disbursement had been reduced to be added to the next planned disbursement amount, all as set forth in said additional instructions. 10. This section allows the Borrower to draft and submit to the Bank for its review and approval an Action Plan with revised targets and timelines for meeting these DLIs that may be different from those stipulated in Schedule 5 of the Loan Agreement. 11. The state government formally presented to the Bank the proposal for an Action Plan for these DLIs, where it proposed to adjust: (i) the targets for the two indicators, to better reflect the effects of economic crises on the state s finances, (ii) the concept used for investment (DLI 2) to reflect executed investments (investimento liquidado), instead of allocated (investimento empenhado) which was being considered until now, and (iii) the methodology for measuring both indicators, to reflect cumulative amounts. 12. The proposed adjustment would be performed as follows: (i) Both the ICMS tax collection target and investments targets would be adjusted to reflect the impact of the crisis over the state s revenue collection and investment capacity. The adjustment factor was estimated as the ratio of the actual federal government tax revenue and the budgeted federal government tax revenue for calendar year 2015, which equals 93.6 percent. The annual targets for ICMS tax collection and investment expenditures, which were agreed during the 2015 restructuring process 1, are then multiplied by the ratio. Annual targets will still report an upward trend and, therefore, the initial intention of annual growths for both indicators will be kept. The adjustment was performed over the calendar years 2015-2018, since Brazil reported negative GDP in the 2015-2016 period. (ii) Regarding the target for investment expenditures, the restructuring of 2015 reported expenditures under the concept of despesas empenhadas, which reflects budgetary allocation and not executed investments despesas liquidadas. While those two concepts report a similar trend, budgeted investment expenditures tend to be 5-10 percent higher than executed investments expenditures. Since the original PAD agreement set targets for executed investment expenditures, it is proposed a return to the original concept. The adjustment would consider the ratio between executed and budgeted investments expenditures in 2015 (95.2 percent), to be applied to annual investment targets (2014-2018 period). 1 Another issue with the targets set during the 2015 restructuring is that the government shared values for the expected ICMS tax collection and investments expenditures in each year. However, the restructuring reported those amounts as the actual collection and expenditure for the past calendar year. The budgeted ICMS tax collection for 2015 was mistakenly reported as the actual ICMS tax collection of 2014 and so on. These led to overestimated amounts for both targets.
13. Applying the above adjustments to DLIs 2 and 3 will result in the following targets. Table 2: Adjusted DLIs 2 and 3 following 2017 Action Plan, non-accumulated Annual targets (R$ millions) FY 2015 FY 2016 FY 2017 FY 2018 FY 2019 2014 2015 2016 2017 2018 DLI 2: Investments expenditures ( conceito de despesa liquidada ) DLI 3: ICMS tax collection 1,047 624 667 755 853 22,500 26,114 27,935 29,747 31,831 14. Lastly, the team proposes that both DLIs targets be measured on cumulative basis. Table 3: Proposed DLIs 2 and 3 following 2017 Action Plan 2 Cumulated targets (R$ millions) FY 2015 FY 2016 FY 2017 FY 2018 FY 2019 2014 2015 2016 2017 2018 DLI 2: Investments expenditures ( conceito de despesa liquidada ) DLI 3: ICMS tax collection 1,047 1,671 2,338 3,093 3,946 22,500 48,614 76,549 106,296 138,127 Source: investments expenditures are under the concept despesa liquidada, obtained from Sistema FPE - Cubos DW - CAGE - Despesa Orçamentária Portaria 163; ICMS tax collection was provided by Receita Estadual, Secretaria da Fazenda do RS (Balanço Geral do Estado - ANÁLISE E INTERPRETAÇÃO DOS RESULTADOS, available at Sefaz: http://cage.fazenda.rs.gov.br/lista/713/prestacao-de-contas-do-governador) 15. The Bank met with representatives from the Federal Government - Secretaria de Assuntos Internacionais (SEAIN), Secretaria do Tesouro Nacional (STN) and PGFN) - to inform them of the suggested adjustments to these two indicators using the mechanism established by the Loan Agreement (and which consequently does not require modification of the Legal Agreement). This meeting took place in Brasilia on May 5, 2017. 2 The proposed adjustment of DLIs 2 and 3 will be reflected in the disbursement letter.
16. It is important to note that the EEP s must be incurred and all the other conditions for disbursement (i.e. the receipt of evidence of compliance with the revised targets, the 70% rule, and the delivery of the EEP statements) must be met before disbursements will be made under this option. III. SUMMARY OF CHANGES Changed Change in Results Framework Not Changed Change in Disbursement Estimates Change in Implementing Agency Change in DDO Status Change in Project's Development Objectives Change in Components and Cost Change in Loan Closing Date(s) Cancellations Proposed Reallocation between Disbursement Categories Change in Disbursements Arrangements Change in Overall Risk Rating Change in Safeguard Policies Triggered Change of EA category Change in Legal Covenants Change in Institutional Arrangements Change in Financial Management Change in Procurement Change in Implementation Schedule Other Change(s) Change in Economic and Financial Analysis Change in Technical Analysis Change in Social Analysis
PDO_IND_TABLE The World Bank Change in Environmental Analysis IV. DETAILED CHANGE(S) OPS_DETAILEDCHANGES_RESULTS_TABLE RESULTS FRAMEWORK Project Development Objective Indicators Implementation of road pavement management system Unit of Measure: Yes/No Value No No Yes No Change Date 31-Dec-2012 23-Jun-2017 28-Feb-2019 Completion of impact evaluation of industrial extension services Unit of Measure: Yes/No Value No Yes Yes No Change Date 31-Dec-2012 31-Dec-2016 28-Feb-2019 Submission of draft public asset management law to legislative assembly Unit of Measure: Yes/No Value No No Yes No Change Date 31-Dec-2012 23-Jun-2017 28-Feb-2018 Implementation of system for learning assessment at primary and secondary levels Unit of Measure: Yes/No Value No Yes Yes No Change Date 31-Dec-2012 30-Dec-2016 28-Feb-2019
Intermediate Indicators IO_IND_TABLE Primary fiscal balance Unit of Measure: Text Value 1004 278 PAF target No Change Date 30-Jun-2013 26-Jun-2017 31-Dec-2018 Investment expenditures Unit of Measure: Number Value 1047.00 2703.80 3946.00 Revised Date 31-Dec-2014 31-Dec-2016 31-Dec-2018 Revenue from ICMS Unit of Measure: Number Value 22500.00 83365.88 138127.00 Revised Date 31-Dec-2014 31-Dec-2016 31-Dec-2018 Cumulative percentage of paved road network under CREMA contracts Unit of Measure: Percentage Value 0.00 16.00 14.00 No Change Date 30-Mar-2012 30-Dec-2016 28-Feb-2019 Cumulative number of construction and refurbishment school projects undertaken Unit of Measure: Number Value 75.00 361.00 320.00 No Change Date 11-Sep-2013 26-Jun-2017 30-Jun-2018
Agreements signed/renewed with APLs Unit of Measure: Number Value 0.00 17.00 20.00 No Change Date 11-Sep-2012 26-Jun-2017 30-Jun-2018 Agreements signed/renewed with extension centers Unit of Measure: Number Value 0.00 9.00 9.00 No Change Date 11-Sep-2012 26-Jun-2017 30-Jun-2018 New triple helix alliances implemented Unit of Measure: Number Value 0.00 4.00 5.00 No Change Date 11-Sep-2012 26-Jun-2017 30-Jun-2018 OPS_DETAILEDCHANGES_DISBURSEMENT_TABLE DISBURSEMENT ESTIMATES Change in Disbursement Estimates Yes Year Current Proposed 2012 0.00 0.00 2013 31,250,000.00 31,250,000.00 2014 39,046,791.00 39,046,791.00 2015 89,604,539.74 89,604,539.74 2016 47,352,249.08 47,352,249.08 2017 81,215,173.68 81,215,173.68
2018 152,660,702.44 112,927,000.00 2019 37,670,544.12 81,600,000.00