Documentof The World Bank FOR OFFICIALUSEONLY ReportNo:31856-BR PROJECTAPPRAISAL DOCUMENT ONA PROPOSEDLOAN INTHEAMOUNT OFUS$49.296MILLION TO THE STATEOFBAHIA WITH THE GUARANTEEOFTHE FEDERATIVEREPUBLICOFBRAZIL FORTHE BAHIAPOORURBANAREAS INTEGRATEDDEVELOPMENTPROJECT-VIVER MELHORI1 October 31,2005 Finance,PrivateSector and InfrastructureDepartment Brazil Country Management Unit LatinAmerica and CaribbeanRegion This document has a restricted distribution and may be used by recipients only in the performance of their official duties. Its contents may not otherwise be disclosed without World Bank authorization. CURRENCYEQUIVALENTS (Exchange Rate Effective April 11,2005) Currency Unit = Real (R$) R$ 2.58 = US$ 1.00 US$ 1.00 = R$2.58 January 1 FISCAL-YEAR December 31 ABBREVIATIONSAND ACRONYMS AVSI Association of Volunteers for International Service BID Interamerican Development Bank BNDES National Bank for Social and Economic Development C A Cities Alliance CEF Federal Savings Bank CTGA Technical Group on Environment at CONDER COFIEX External Financing Committee of the Federal Government CONDER Urban Development Company of the State of Bahia COPEL Permanent Procurement Commission CRA Bahia State Environment Agency FUNCEP State Fundfor Poverty Reduction GNP Gross National Product HABITAT UnitedNations Human Settlements Program HDI Human Development Index IDB Interamerican Development Bank IBGE Brazilian Institute o f Geography and Statistics ICMS Tax on Circulation of Goods and Services IPTU Municipal Tax on Land and Buildings MAE Ministry of Foreign Affairs of Italy MIS Management InformationSystem PAT Technical and Methodological Assistance,Project PATS Technical and Social Support Project PDDU Master Plan for UrbanDevelopment PEMAS Strategic Municipal Plan for Informal Settlements PID Integrated Local Development Plan PIS Social Intervention Area PIF Physical Intervention Area PMS Municipality of Salvador PNUD United Nations Development Program PRA Ribeira Azul Program PRODUR Bahia Municipal Infrastructure Development and Management Project PROJUR Office of the Attorney General PSIA Poverty and Social Impact Analysis RMS Metropolitan Region of Salvador SECOMP Secretariat for the Reduction of Poverty SEDUR Secretariat of UrbanDevelopment SEI Superintendence for Economic and Social Studies SEPLAN Secretariat of Planning TR Terms of Reference UFBA Federal University o f Bahia PMU Project Management Unit Vice President: Pamela Cox Country Director: John Briscoe Sector Manager: John Henry Stein Task Team Leader: Ivo Imparato .. 11 BRAZIL BAHIA POORURBANAREAS INTEGRATEDDEVELOPMENTPROJECT -VIVER MELHOR I1 PROJECTAPPRAISAL DOCUMENT Date: October 31, 2005 TeamLeader: Ivo G.P. Imparato Country Director: John Briscoe Sectors: Generalwater, sanitation andflood Sector Director: Makhtar Diop protection sector (50%); Housing construction Sector Manager:John Henry Stein (25%); Other social services(25%) Themes: Access to urban servicesandhousing (P);Municipal governanceand institutionbuilding (S);Land administration and management (S);Poverty strategy, analysis and monitoring (S);Other humandevelopment (S) Project ID: PO81436 Environmental screeningcategory: Full ILendingInstrument: Assessment Specific InvestmentLoan SafeguardscreeningCategory: Limitedimpact For Loans/Credits/Others: Total Bank financing (US$m.): 49.296 Proposed terms: Fixed-Spread Loan (FSL) with principal repayments linked to commitments, with variable rate and standard repayment schedule with level repayments and a total term DEVELOPMENT Total: 79.500 2.696 82.196 Borrower: SEDUR - Secretariade Desenvolvimento Urbano do Estadoda Bahia Av. Tancredo Neves, 450 -34, Ed.Suarez, Salvador, Bahia Tel: 55+71+3115-5103 Fax: 55+71+3 115-5105 ResponsibleAgency: CONDER - Companhiade Desenvolvimento Urbano do Estadoda Bahia Av. Edgar Santos, 936, Narandiba, Salvador, Bahia, Brazil40210-720 Tel: 55+71+3117-3680 Fax: 55+71+3117-3686 ugpvivermelhor@conder.ba.gov.br Project implementation period: Start July 31,2006 End: July 31 2010 Expectedeffectivenessdate: July 31,2006 Expectedclosing date: January 31,2011 Does the project depart from the CAS in content or other significant respects?Ref. PAD A.3 [ ]Yes [XINO Does the project require any exceptions from Bank policies? Ref. PAD 0.7 1 Have these been approved by Bank management? [ ]Yes [ IN0 Does the project include any critical risks rated "substantial" or "high"? Ref. PAD C.5 [ ]Yes [XINO Does the project meet the Regionalcriteriafor readinessfor implementation? Ref. PAD 0.7 [XIYes [ ] N o Project development objective Ref. PAD B.2, TechnicalAnnex 3 The Projects development objective is to reduce urban poverty in a sustainable manner, targeting the poorest and most vulnerable sections of Salvador and strategic cities of the state of Bahia with access to basic services and improved housing and social support services. This development objective i s aligned with the Millennium Development Goals MDGs (especially Goal 7, Target 11) in line with the growing number of governments around the world that are launching comprehensive slum upgrading programs, setting development targets, undertaking reforms to prevent the growth of new slums, and leveraging public and private resourcesto improve the lives of slum dwellers. Project description[one-sentence summary of each component] Ref. PAD B.3.a, TechnicalAnnex 4 The proposed Project consists of three major components, as follows: A - Urban InfrastructureDelivery (65%): This component will finance priority infrastructure investments focused on poor communities. Financingunder this component will: (a) help provide basic services to the poor including urban drainage, roads, street paving, water supply and sewage, solid waste management, housing replacement etc. and (b) macro-level infrastructure investments that would be necessary to integrate upgraded settlements into the urbanfabric. B - Social Services Delivery (25%): This component will finance social investments like strengthening of local community based organizations (CBOs), income strengthening through training etc. and the needed facilities such as day-care and basic health `care unitsthat will complement the investments in community infrastructure. C - Institutional Strengthening, Studies and Project Management (10%): This component would finance (i)varietyofcapacitybuildingactivitiesforparticipatingmunicipalities, givingthemtoolsthatwill a enable them to better manage and plan the process of urban poverty reduction projects, (ii) a variety of studies that will be necessaryto underpin Project implementation and (iii) project management, including monitoring and evaluation. Which safeguardpolicies are triggered, if any? Ref. PAD D.6, TechnicalAnnex 11 OP/BP4.01 EnvironmentalAssessment; OP/BP 4.36 Natural Habitats; OPN 11.03 Cultural Property; OP/BP 4.12 Involuntary Resettlement. Significant, non-standard conditions, if any, for: Ref. PAD C.7 iv Board presentation: None Loadcrediteffectiveness: None Covenants applicable to project implementation: None V BRAZIL BAHIA POORURBANAREAS INTEGRATEDDEVELOPMENTPROJECT. MELHOR I1 VIVER CONTENTS Page A . STRATEGICCONTEXTAND RATIONALE ............................................................................... 1 1. Country and sector issues..................................................................................................................... 1 2. Rationale for Bank involvement ........................................................................................................... 1 3. Higher level objectives to which the Project contributes ..................................................................... 4 B. PROJECTDESCRIPTION ............................................................................................................... 4 1. Lendinginstrument............................................................................................................................... 4 2. Programobjective and phases.............................................................................................................. 4 3. Project development objective and key indicators ............................................................................... 4 4. Project components .............................................................................................................................. 5 5. Lessons learned and reflected in the Project design............................................................................. 6 6. Alternatives considered andreasons for rejection................................................................................ 8 C. IMPLEMENTATION ........................................................................................................................ 9 1. Project institutionaland implementation arrangements ....................................................................... 9 2. Partnership arrangements................................................................................................................... 12 3. Monitoringand evaluation of outcomes/results ................................................................................. 12 4. Sustainability ...................................................................................................................................... 13 5. Critical risks andpossible controversial aspects................................................................................ 14 6. Loan conditions and covenants .......................................................................................................... 15 D .APPRAISAL SUMMARY ............................................................................................................... 15 1. Economic. financial and fiscal analyses............................................................................................. 15 2. Technical............................................................................................................................................ 17 3. Fiduciary............................................................................................................................................. 17 4. Social.................................................................................................................................................. 18 5. Environment....................................................................................................................................... 19 6. Safeguard policies .............................................................................................................................. 19 7. Policy Exceptions and Readiness....................................................................................................... 20 vi Annex 1A: Country and Sector Background ............................................................................. ............................................................... 21 Annex 1B: ProgramBackground Annex 2: Major RelatedProjectsFinancedby the Bank and/or other Agencies ..................3035 Annex 3: Results Framework and Monitoring ..................................................................... ........................................................... 36 Annex 4: DetailedProject Description 43 Annex 4A: The Process of Selectionof Eligible Municipalities ......................................... 47 Annex 4B: Project and Subproject Cycle ................................................................... 50 Annex 5: Project Costs ......................................................................................... 53 Annex 6: ImplementationArrangements .................................................................. 54 Annex 7: Financial Managementand DisbursementArrangements ................................. 64 Annex 8: Procurement Arrangements ..................................................................... 70 Annex 9: FiscalAnalysis of Bahia State Government. 2000.2004 .................................... 73 Annex 10: EconomicAnalysis ................................................................................. 93 Annex 11A: Environmental Impact Assessment .ExecutiveSummary.............................. 115 Annex 11B: Resettlement Action Planfor Alagados VI ExecutiveSummary. ..................... 124 Annex 12: Project Preparation and Supervision ......................................................... 135 Annex 13: Documents inthe Project File .................................................................. 136 Annex 14: Statementof Loansand Credits .................................................................. 138 Annex 15: PSIA -Poverty and SocialImpactAnalysis ................................................ 140 Annex 16: UrbanCrime andViolence Prevention Component .......................................... 149 Annex 17: Country at a Glance .............................................................................. 152 Annex 18: Maps ................................................................................................ 154 vii A. STRATEGIC CONTEXTAND RATIONALE 1. Country andsector issues 1. In Brazil's cities, most of the poor live in unplanned or `informal' settlements of various kinds, which usually constitute a large part of the urban area. In varying degrees, these areas are characterized by poor access to basic infrastructure and services, environmental degradation, lack of economic and educational opportunities, poor health care and day care facilities, lack of security of landtenure, social exclusion and violence. The consequences include: (i) a deterioration in health conditions and quality of life in general, particularly of the most vulnerable - the elderly and the young; (ii) negative economic impacts due to higher costs of health care, loss of productivity, and a poorly trained and uneducated workforce; and (iii) a perpetuation of the vicious cycle of poverty, through poor health, lack of opportunities, and lack of capacity to compete in thejob market and generate income. According to data from the 2000 Census, there are about 15 million households in urban informal settlements in Brazil. Additionally, a 2002 Bank study of the dynamics of household formation found that, every year, upwards of 600,000 new urban households nationwide have no housingalternative but the informal sector. 2. Inthis context, the state of Bahia is no exception. Roughly a third of Bahia's urban dwellers- around 3 million people-live inhouseholdsthat fall below the poverty line, andurban poverty correlates strongly with informal housing and slums. At 35.7% of households in 2001, the relative extent of urban poverty in Bahia i s now higher than in the 1980s (Verner 2004). Sprawling squatter settlement areas in Salvador, such as Alagados or Pau da Lima, are by-words for urban degradation. In the state's intermediate cities, such as Feira de Santana, IlhCus, Itabuna or Juazeiro, large and growing areas of informality display similar features to those of Salvador. 3. The strong correlation between urban poverty and informal settlements in Bahia was demonstrated by a recent targeting exercise carried out by the state government. The poverty and social exclusion mapping methodology introduced by Aldaiza Sposati in ,350 Paul0 was adapted for use in Bahia, and employed with data from the 2000 Census in Salvador and twelve other municipalities. At the same time, informal settlement areas were identified and mapped out. The strong correlation led the government to base its urban poverty reduction strategy on geographic targeting, coupling slum upgrading, i.e. an access to basic infrastructure and services package, with other social spending in the same geographic areas, identified by poverty mapping. Such geographic targeting of poverty reduction actions, leadingto improved targeting of social spending, i s a key recommendation of a recent Bank study of poverty in Bahia (Verner 2004), which shows that currently only 14 % of social spending reaches the 1'` quintile. 2. Rationalefor Bankinvolvement 4. The Brazil Country Assistance Strategy-CAS 2004-2007, which was discussed by the Board on 9 December 2003, highlights the increasing poverty trends in metropolitan areas, expressed in urban violence and high unemployment. It suggests a stronger focus on metropolitan poverty reduction, and calls for "an integrated approach in support of multisectoral, rural and urban development strategies at the sub-national level." The strategic goals of "a more equitable, sustainable, and competitive Brazil" include as long-term development outcomes "reducing extreme poverty, vulnerability, and social exclusion," "more equitable access to local services" and under strategic goal #4 "good governance." The proposed operation i s in line with these challenges. The Project fits into at least two of the four buildingblocks for assistance within the Bank's urban strategy: (iii)scaling up programs to provide services to the poor; and (iv) expanding assistance for capacity building, particularly at the municipal level. The Bahia Poor Urban Areas IntegratedDeveloment Project - Viver Melhor I1i s explicitly envisaged inthe CAS. 5. Of all Brazilian states, Bahia i s perhaps the one whose partnership with the Bank i s strongest and most consolidated. A long history of successful projects in various sectors has led to a constant and fruitful policy dialogue. In addition, the state's investment capacity, restored by a rigorous fiscal adjustment in the early 1990's, makes it possible for the policy dialogue to translate into specific Bank- financed projects. Bahia's comprehensive poverty reduction strategy will thus be supported by Bank- financed projects in health, education, income generation, protection of vulnerable groups, slum upgrading, urban poverty reduction, transport and logistics infrastructure, water resources management, rural poverty reduction, public sector management and institutional strengthening at the local and state government levels. In addition, Bank support to this Project will add to the expertise in urban upgrading and municipal development that has already been provided to Bahia through the recently closed Bahia Municipal Development Project (PRODUR - Loan 4140 BR) and the Bank's supervision of the Cities Alliance-funded TA to the RibeiraAzul Program(see Annex 1B). 6. The State of Bahia's Government has set the long-term goal of raising the state's Human Development Index (HDI) from the current 0.688 to 0.766, the median for Brazil, by 2020. To achieve this, it has prepared a long-term strategic development program (Plano EstratCgico da Bahia, PEB 2003- 2020) and a medium-term public investment plan (Plano Plurianual, PPA, 2004-07). These plans seek a Bahia that i s (i) socially just and cohesive, (ii) environmentally sustainable, (iii)spatially integrated, and (iv) economically diversified and competitive. The 2004-2007 CAS calls for "transformation of the cooperation with state governments into integrated state strategies and projects, including public expenditure and policy analysis, coveringboththe rural space and urban centers." Withinthis framework, the Bank has developed aBank assistance program (Bahia State Program) which i s complementary to the assistance from other donors and which aims to support the State's strategy by expanding economic opportunities, conserving natural resources, building human capital, promoting good governance and spatial integration, and improving transport infrastructure. The proposed Project i s thus part of a comprehensive poverty reduction strategy to be supported by the Bank in Bahia. 7. The myriad problems of Bahia's informal urban settlements and the weakness of the State's urban network pose serious obstacles to the achievement of the PEB objectives. Accordingly, PEB proposes a comprehensive urban strategy that will focus on poverty reduction and the strengthening of the State's strategic cities or "cidades-pdlo", materialized in the Viver Melhor Program. The proposed Project in support of Viver Melhor i s an important element of the Bank's emerging Bahia state strategy. InOctober 2004, the State of Bahia, in its document, "A Participa@o do BIRD no Projeto Bahia 2020: Construindo Estratkgias de Desenvolvimento Integradas", specified the proposed Project among six current and prospective Bank operations which are strategic for the State. These six operations, which are made possible by Bahia's creditworthiness, directly address 10 and indirectly another nine of the 37 programmatic areas contemplated in the State's PPA. The Bank's role in the State's investment program i s substantial. Those Bank projects included in the State's CY04 budget account for some R$224 million, or about 7% of investments (10% if counterpart funds are included). Table 1summarizes how ongoing and proposed Bank assistance will contribute to the objectives of Bahia's PPA, and the Bank's own integrated assistancestrategy for the State. 8. The proposed Project will actively explore synergies with other Bank operations in Bahia. It i s * envisaged, for example, that the Project will be complemented by the Produzir rural poverty reduction project, which will finance activities in the rural areas of the selected municipalities. The integrated and community-driven approach to slumupgrading and urban poverty reduction of Viver Melhor i s based on the same premises that have led to the development of the approach to rural poverty reduction that is beingimplemented with similar local arrangements by the Produzir rural poverty reduction project series. It i s expected that the combined action of the two projects will have a significant poverty reduction and capacity-building impact on the Project's municipalities. The combined poverty reduction and 2 infrastructure investments of the two projects are also expectedto enhance these municipalities' prospects for economic development. 9. With regard to the Health and Education operations,' by agreement with the relevant sector Secretariats, the various Bank operations will seek to concentrate their actions, where possible, in or near Viver Melhor intervention areas, taking advantage of the geographic targeting mechanism that has been set in place for the Project. The Health and Education Secretariats will take part in the planning process for each subproject, which will lead to specific and detailed agreements with SEDUR regarding Project actions in these sectors. Such cross-sectoral integration i s reflected in the Project's proposed expenditures. 25% of the Bank loan and its correspondent counterpart funding are slated for social investments (see Annex 5). Table 1: Bahia PPA (2004-07): Strategies, Lines of Intervention and Integration/ Complementarity of Strategy Lines of Intervention Viver Melhor ducation PGRH CREMA-BA IBIRD Rural P Water Trans ort Bahia de Toda Gente: Social assistance X Social action and Quality of life X citizenship Promotion of citizenship X Citizen protection X Bahia que Faz: *Globalizing Bahia's Strengthening growth, economy generating employment *Deepening Bahia's X X and income economy Economic inclusion X Attracting, fostering X businesses Caminhos para Bahia: Logistic insertion at Infrastructure and int'l level logistics *Develop logistics at state level *Restructuring Bahia's energy matrix Riauezas da Boa Terra: *Recoup degraded X Preservation, recovery resources of natural, cultural *Sustainable use of natural X assets and cultural resources *Environmental education X Gestdosoliddria e *Shared responsibilities X Govern0 Comuetente: and decentralization Public sector *Modernize, strengthen modernization and public services efficiency *Improve skills of public service employees 1 Todosos Cantos da *Dynamic areas of Bahia X &: Spatial integration *Remote border areas X *Development of the X X X Semi-arid X 1*strategic cities ador, SEPLAN, 2003. X X X #asedon: "Bahia 2002: O&turo a gentefaz: Plano Estratkg o da Bahia." Sa 'TheBahia Education Project (Loan 7186 BR), locally known as Educar para Vencer,and the Bahia Health Project (Loan 7182 BR). 3 3. Higher level objectives to which the Project contributes 10. The State's long-term strategic plan, PEB, includes dimensions very similar to those of the Bank's Brazil 2004-2007 CAS. The state's strategic plan identifies widespread poverty as Bahia's key challenge, which was reflectedby the creation of a new Department and Fund for Poverty Reduction by the state government, covering both rural and urban poverty. The proposed Project would finance part of the implementation of the Viver Melhor Program, which i s the flagship urban poverty initiative proposed by PEB. B. PROJECTDESCRIPTION 1. Lendinginstrument 11. The Project will take the form of a Specific Investment Loan (SIL) of US$49.296 million. 2. Program objective and phases 12. The Government of Bahia i s committed to the full state-wide US$ 160 million Viver Melhor Program in two phases, per the November 2003 Cofiex approval. The proposed US$ 81.2M Project (of which US$49.296 Mi s the IBRDLoan) will support the first of the two phases. Although it was decided not to lock the Bank into a pre-determined series of investments through an APL, the needs of the state's urban poor, strong client demand and capacity built through previous projects indicate that Bank support to the second phase of the Viver Melhor Programi s desirable and likely. 3. Project development objective andkey indicators 13. The Project's development objective i s to reduce urban poverty in a sustainable manner, targeting the poorest and most vulnerable sections of Salvador and strategic cities of the state of Bahia with access to basic services and improved housingand social support services. This development objective i s aligned with the Millennium Development Goals (MDGs) (especially Goal 7, Target 11) - in line with the growing number of governments around the world that are launching comprehensive slum upgrading programs, setting development targets, undertaking reforms to prevent the growth of new slums, and leveraging public andprivate resources to improve the lives of slumdwellers. 14. Specific objectives of this Project are: (i) improved quality of life and asset base for the poor through the provision of basic infrastructure services, improvement of housing conditions and access to urban land, and regularization of land tenure and buildings in slums and unplanned settlements; (ii) improved access to social programs in the areas of income and employment generation, direct support to families' survival strategies, health care, education and job training, and initiatives in the area of community security at the local settlement level; and (iii)enhanced state and local government capacity to plan, implement, monitor and evaluate integrated urban poverty reduction strategies involving several different departments, undertake urban upgrading and land delivery, coordinate social policy on the ground through participatory planning, and monitor and evaluate government programs through poverty and quality of life indicators. 15. Key indicators of attainment of the project's specific objectives are the following: (i) Improvement in access to basic infrastructure, services and housing conditions for 30,000 householdslocated in informal urban settlements in 8 municipalities, as measuredby: a. Improvements to 3,400 houses in Salvador and 2,600 in the Interior; b. Reduction of number of housingunits occupying risk areas by 600 in Salvador and 1,300 inthe Interior; 4 (ii) Increasedaccesstosocialprogramsandincomegeneratingopportunitiesandenhancedsafety for 78,000 households located in target informal settlement areas and their immediate surroundings in 8 municipalities, as measuredby: a. Increase in percentage of children attending preschool, to 30 % in Salvador and 20 % in the Interior; b. Participation injob training programs of 1,200 beneficiaries in Salvador and 1,000 in the Interior; (iii) Improvementofthecapacityof6StateSecretariats(UrbanDevelopment,PovertyReduction, Labor and Social Protection, Health, Education and Public Security) and 8 Municipalities to plan, implement, monitor and evaluate integrated urban poverty reduction strategies, as measuredby: a. Amount of additional funding mobilized by relevant State and Municipal agencies (for investment and O&M) equivalent to US$ 2 million in Salvador and US$ 2 million in the Interior, over and above Project resources; b. Number of community meetings held with the participation of relevant State and Municipalagencies- 116 in Salvador and234 inthe Interior; c. Training of 50 municipality staff in Salvador and 70 in the Interior in key policy issues and implementation tools (pro-poor urban planning and land management, cost recovery, community surveys, M&E,GIS). 4. Project components 16. The Project will include the followingthree components (Annex 4 contains a detailed description of each component): A UrbanInfrastructureDelivery (US$51.40M, or 65%) rn B Social ServicesDelivery (US$19.45M, or 25%) C Institutional Strengthening andProject Management (US$7.75M, or 10%) --- 17. Components A and B will be delivered through subprojects in geographically targeted informal settlement areas. With regard to infrastructure and housing delivery, these areas of intervention are called PIFs, the Portuguese acronym for physical intervention areas. For social services delivery, the immediate surroundings of the PIF will also be included, and the area (the PIF plus its immediate surroundings) i s called a PIS, or social intervention area. Each subproject will be guided by an area-based Integrated Local Development Plan (PID), which will be prepared with the participation of local residents and their organizations, as well as the relevant state Secretariatsand municipal departments. 18. Component A UrbanInfrastructure Delivery: - This component will finance urban upgradingof informal settlements and will have four sub-components. The first will finance urban infrastructure investments (urban drainage, roads, street paving, water supply and sewage, solid waste management, home improvement, replacement housing) with impacts within the targeted communities. The second will finance macro-level infrastructure with impacts within and beyond the target communities, such as road links to enhance citywide mobility, macro drainage and green areas / parks. The third will finance low-cost housing alternatives for the poor. The fourth will finance engineering designs and consultant services for on-site supervision and quality control. 19. Component B- Social Servicesand Facilities Delivery This component will finance social service delivery and the provision of the physical facilities needed to deliver such services and will have three sub-components. The first will finance social services delivery 5 through: strengthening of local community based organizations (CBOs); support to government institutions, NGOs and CBOs providing key social services to local residents; income and employment generation; health and environmental education; direct support to families' survival strategies; promotion of and support to sport and cultural activities; and crime and violence prevention initiatives for enhanced security at local level. The second will finance refurbishment or constructionof facilitiesand buildings needed to deliver or enhance social services listed under sub-component B1 such as day care centers, kindergartens, buildings for primary education and health care, sport and professional training facilities. The third will finance architectural designs and operation and maintenance plans of ,specific facilities and buildings. The nature and scope of the necessary social services and facilities will be identified within the "Social Development Plans", which will be developed with the participation of local residents and their organizations as well as the participating municipalities and state Secretariats, and will bepart of the PID. 20. Component C- InstitutionalStrengtheningandProjectManagement This component will include three sub-components: The first will finance the preparation of studies on topics such as Local Economic Development, affordable land delivery mechanisms and cost recovery and subsidy mechanisms for infrastructure, and others required for Project implementation. The second will finance institutionalcapacitybuildingfor slumupgrading and urban poverty reduction both on state and local government levels and sustainableurban and social service delivery by benefitedmunicipalities. The thirdwill finance projectmanagement,includingmonitoring and evaluation. 5. Lessonslearnedandreflectedinthe Projectdesign 21. The concept of coupling a slum upgrading package with social support actions i s not new. In addition to experiences in Bahia itself, projects like the Bank-funded Guarapiranga in Siio Paul0 (Loan 3504 BR, closed in 2002), the recently launchedPROMETROPOLE in Recife (Loan 4690 BR), the PAT- PROSANEAR Program to extend water supply and sanitation service coverage to the poor (Loan 4532 BR) and Rio's Favela-Bairro (financed by IDB) have utilized integrated approaches to slum upgrading, on a large scale. One of the lessons from such large-scale projects has been the importance of support to resident communities extending beyond the period of the physical works, in the areas of income generation and social development, as well as in the use and upkeep of the new facilities and infrastructure. A promising new approach to urban poverty reduction i s emerging from these projects, usingurbanupgradingas an entry point for a range of social programs. This new approach seems poised to make a key contribution to the attainment of the "Cities Without Slums" MDG(Target 11). 22. Some slum upgrading interventions implemented in Bahia in recent years have allowed the state government, with assistance from the World Bank, the Cities Alliance and bilateral donors, to develop an approach to slum upgrading that i s particularly integrated, in the sense that it includes a very strong emphasis on social program content. The pilot project at Novos Alagados, in Salvador, which was financed by the Bank's PRODUR project, was based on an integrated and participatory methodology, seeking to address the many dimensions of poverty and enhance the asset base of the poor in one of Salvador's poorest areas. Begun in 1995, the Novos Alagados Urban Upgrading and Social Promotion Project was implemented in the northernmost part of the area known as Ribeira Azul. In 1999, the Government of Bahia launched the Ribeira Azul Program, aiming at replicating the methodology of Novos Alagados in the remaining parts of Ribeira Azul, including the series of squatter settlements on stilts known as Alagados. 23. The Ribeira Azul Program benefits from a Cities Alliance-funded and NGO-executed TA and social support project, through a US$ 5 million grant from the Italian Government, whose execution is supervised by the Bank. In addition to the standard slum upgrading package of provision of basic urban infrastructure, housing improvements and environmental rehabilitation, the Ribeira Azul Programdevotes 6 significant resources to community-driven development and participatory planning, plus a range of actions that address social exclusion, inter alia access to basic education, improvement of the quality of education, improved public health services, support to families (and especially women-headed households) through enhanced day care services and income and employment opportunities. In this context, the social intermediation role of AVSI, the Italian NGO that executes the TA project, is very important. One of the challenges of Viver Melhor I1in replicating this approach on a larger scale will be to foster the creation of a critical mass of local social intermediation capacity, through NGOs and also consultancy firms. The continuation of the Cities Alliance-funded TA arrangement will be ensured by a second Italian Government grant. This will allow the Project, with AVSI's help, to organize courses and on-the-job training for the creation of local social intermediationcapacity. 24. The experience of the Novos Alagados Project and the Ribeira Azul Program constitute the conceptual underpinnings of the Viver Melhor Program. The poverty reduction strategy of Ribeira Azul and its spending allocation methodology, which will be replicated at a larger scale in Viver Melhor, are based on a study of poverty correlates in the area. The findings are similar to, and the approach matches key recommendations of, the recent Bank study on poverty in Bahia inter alia, the use of a geographic targeting mechanism, in which spending allocations are guided by overlaying poverty and service coverage maps; focusing public spending on items that disproportionately benefit the poor, such as basic services in slum areas; beneficiary participation in design and implementation; the emphasis given to day care and early childhood2programs; the emphasis given to education as the strongest poverty reduction correlate; and the resources devoted and emphasis given to monitoring and evaluation, including, importantly, impact evaluation. 25. Given the importance of the Novos Alagados and Ribeira Azul experience to the concept of the proposed Project, a Poverty and Social Impact Analysis was carried out with a view to learning the lessons in a systematic way and reflecting them in Project design. The preliminary findings of the PSIA studies confirm the findings of the study of poverty correlates in the area and the soundness of the integrated approach suggested (see Annex 15). Among the key issues raised by the PSIA that will merit specific attention by the Project are the following: 0 The resettlement housing provided at Novos Alagados, in spite of its relatively high quality and cost, appears to have been a source of discontent among beneficiary households. The lack of suitable land at Novos Alagados imposed a high-density solution with its attendant problems, but the new Project will look for ways to produce housing that i s less expensive in terms of the initial investment but that allows customization and expansion over time. 0 The success of the integrated approach, using slum upgrading as an entry point for a range of social investments, was dependent on a strong local team with high social intermediationcapacity, which required a significant amount of resources. Such a strong government-NGO team was made possible by the availability of Cities Alliance grant funding. The new Project will benefitfrom a similar grant, and 25 9% of Project resources will be devoted to social investments, which should make replication of the Novos Alagados approach feasible. 26. Project design also benefited from the experience acquired through previous Bank operations in urban development in Bahia, and especially the recently completed PRODUR project. Lessons learned from PRODUR include the need to: (i) base partnerships between the state government and the Project's participating municipalities on the latter's active participation in the subproject identification and One of the key poverty correlates in Bahia is young heads of households with young children; furthermore, the gender of head of household affects poverty more in Bahia than inBrazil as a whole (Verner 2004). 7 planning process; (ii) clear contractual arrangements spelling out the rights and obligations of the develop partners; (iii)monitor compliance with these covenants and use it as an incentive for access to further subprojects under the Project; and (iv) continue organizing and financing Project-related capacity- buildingfor municipalities. 27. The format and content for the Participation Agreements, contractual arrangements that will spell out rightsand obligations of municipalities and the state government in each subproject, borrows from the "Contruts de Ville" or City Development Contracts concept that is being used by Bank projects in West Africa. The Convinio, the usual format for agreementsbetween different government levels in Brazil, has a short time horizon and usually covers only the execution of pre-identified works. The City Development Contract - Participation Agreement format engages the partner in a long-term development process, starting with subproject identification and planning and spanning the implementation and post- implementation stages, including operation and maintenance of facilities and infrastructure, as well as monitoring and evaluation and participation in Project-sponsored capacity-building activities. Drafts of the Participation Agreement and other legal documents have been prepared and are available in the Project files. They will also be includedinthe Project's Operational Manual. 6. Alternatives considered and reasons for rejection 28. The project is based on an integrated approach to slum upgrading, focusing on specific areas of high concentration of urban poverty in strategic cities of the state. The alternatives considered and respective reasons for rejection are described below. 29. Choice of instrument: APL vs. SIL: The instrument that was initially proposed was an APL, along the lines of the APL series already in place in Bahia in the education, health and rural development sectors. It was decided, however, in line with a policy adopted by the C M U for all lending to states, not to lock the Bank into a pre-determined series of investments through an APL, but rather to respond to client demand in a more flexible manner. An eventual follow-up operation, envisaged by the approved Curtu- Consults, would bebased on the continued strength of client demand and fiscal performance. 30. Single sector versus integrated approach: The Project's approach could have been to focus exclusively on infrastructure needs rather than on integrated urban upgrading interventions combining both infrastructure delivery and social development. The single-sector approach was not pursuedbecause the Government has a clear poverty focus for this Project. Previous experience inBahiawith conventional sector-specific urban upgrading projects, such as the ones financed by Habitar B r a d BID and Pr6- Moradia, in which investments in the social components are negligible, has shown that the poverty- reductionimpact and the sustainability of such interventions were quite limited. 31. Covering the metropolitan region of Salvador versus covering strategic cities of the State's urban network: During preparation, three alternatives were analyzed for Project coverage. The first alternative, which would cover the 100poorest of the 417 municipalities inthe state, would actually target less than 8 % of the total urban population of Bahia (urban poverty i s actually concentrated in Bahia's largest and wealthiest cities). The second one, which would cover the Metropolitan Region of Salvador (RMS), would cater to only one-third of the total urban population and would leave out the significant numbers of urban poor who live in the main cities of the state's urban network. The third alternative for Viver Melhor I1 coverage, which was chosen by the government, i s in line with the state's strategic development plan, strengthens the strategic urban network and covers about 40 % of the total urban population. The criteria and procedure utilized for the selection of the 8 municipalities to be covered by the Project is described inAnnex 4A. 8 32. Targeting overall city infrastructure needs versus targeting the urban poor: The Project could have set up a facility to finance priority infrastructure works according to proposals based on predefined eligibility criteria, rather than targeting the urban poor through integrated and geographically-targeted interventions. While recognizing that infrastructure investment favors growth and thereby has a poverty reduction impact, the Government opted for a more direct poverty reduction focus by targeting the urban poor directly. Poverty reduction i s seen by the Government as a specific cross-sectoral line of action, witness the creation of the Secretariat and Fundfor Poverty Reduction, which will provide the bulk of the counterpart fundingfor the Project. 33, State versus municipal implementation and grants versus loans to municipalities. The complexity of integrated slum upgrading interventions and the fact that the state of Bahia has amassed considerable specific capacity in this field, which the municipalities lack, have pointed to execution primarily by the state as the preferred implementation alternative. The involvement of municipalities throughout the subproject cycle i s intended to foster the development of a critical mass of municipal capacity in this field for future initiatives. Considering the present fiscal situation of Bahian municipalities and the state, it i s evident that only the state can leverage sufficient resources for an urban poverty reduction program of the proposed scale, which, although unprecedented, i s still not equal to the scale of the problem in Bahia. Although they will not be borrowers, municipalities will be active partners and their contributions will be leveraged by the Project, since they will be required to make long-term financial commitments. Each subproject will leverage municipal resources for complementary investments and operations and maintenance, according to clear contractual arrangements. C. IMPLEMENTATION 1. Projectinstitutionalandimplementationarrangements 34. While the Borrower will be the State of Bahia, SEDUR, the Secretariat for Urban Development, will be the implementing entity, responsible for planning, overall supervision and control of all Project activities and monitoring and evaluation. In addition, CONDER, the state's Urban Development Company, which reports to SEDUR and i s one of the Secretariat's implementation arms, will take the leadrole in implementing component A, component B and a good part of component C. 35. To this end, SEDUR has nominated a Project Coordinator who will work with the various relevant departments of the Secretariat. Project managementfunctions will be carried out by civil servants in the various departments of SEDUR, but the Project Coordinator and a small group of civil servants working on the project full-time will constitute a Project Management Unit (PMU). SEDUR will also interact with the Bank and other relevant state entities and municipalities that will be implementing other actions complementary to the Project in each subproject area. A Steering Committee chaired by the State Governor and integrated by the Secretaries of Finance, Labor and Social Protection, Planning, Public Security, Reduction of Poverty and Social Exclusion, Education, Health, and Urban Development, will provide strategic direction and political support for project implementation and will meet at least twice a year. Other Secretaries may participate in these meetings whenever their presence i s required to discuss specific sector issues related to the project. 36. The PMU will review and submit to the Bank all required documentation during project implementation. The PMU was established through Decree No. 8941 of February 4, 2004, and an experienced civil servant was appointed to head the unit, which is already operational and has participated inProject preparation activities since its inception. DuringProject implementation, the PMUwill have an additional consultant on procurement and five full-time staff to cover the areas o f results monitoring and evaluation; management information system; financial management; and urban infrastructure. The PMU will be responsible for overall management and supervision of Project implementation. To this end, it 9 will: plan, coordinate, control, monitor and evaluate Project activities; define priorities and allocate resources for carrying out Project activities on the basis of annual work programs; seek partnerships to ensure the implementation of complementary investments by municipalities, other state Secretariats and other service providers, both public and private, in areas benefiting from Project investments; liaise with other Government agencies involved in Project execution; prepare Project monitoring reports, including FMR and disbursement requests; liaise with the World Bank; and serve as a secretariat to the Executive Committee, among other responsibilities (see Annex 6). The detailed set of responsibilities of the PMU i s part of the Operational Manual for Project implementation. 37. Eight strategic cities of the State's urban network have been selectedfor Project interventions, on the basis of criteria described in Annex 4A. Participatingmunicipal governments will play an important role during project implementation by entering into Participation Agreements (Conv2nios de Participa@o) for each subproject to be implemented in its jurisdiction. Such agreements will clearly define the responsibilities of both parties, including the responsibility of the State to implement urban upgrading investments in selected areas and provide grant financing for institutional strengthening activities that may be required so that the municipality can structure the provision of services that will result from the upgrading effort supported by the Project, such as: solid waste collection; street cleaning; maintenance of roads and storm sewers; among others. Through such Participation Agreements, municipalities would agree to carry out such activities according to project implementation procedures established inthe Operational Manual and to implement services per studies and plans financed as part of the institutional strengthening activities. SEDUR will also sign Participation Agreements with the other agenciesparticipatingin each subproject, such as other state secretariatsand utility companies. 38. In addition, Participation Agreements would also define the responsibility of municipalities to implement complementary investments such as those for the construction of pre-school, day care andor primary health facilities, operation and maintenance of such facilities (also when builtby the Project), and operation and maintenance of road networks, drainage works and other infrastructurebuilt by the Project. Municipalities will have a strong performance incentive, since their performance of obligations under the Participation Agreement will be closely monitored, and well-performing municipalities will have preferential access to further investments under the Project. This approach will ensure allocative efficiency of funds and rewardbetter-prepared andmore efficient municipalities. There will be no across- the-board complementary investment requirements to be met by participating municipalities or secretariats. Each case will be analyzed on its own merits and the level of complementary investments will be the result of a negotiation based on the needs of each subproject and the capacity of the participatinginstitutions. 39. Contributions from municipalities and state secretariats other than SEDUR and SECOMP would be part of the Viver Melhor Program, and would thus be covered by the legal documents to be signed by the partners, but would not be part of the Bank-financed Proiect. PRODUR and other experiences have shown that having the municipal contribution as counterpart funding for the loan can lead to administrative complexity and delays in subproject execution and Bank disbursement, which the client Government would like to avoid inthis Project. 40. Prior to enteringinto specific Participation Agreements regarding subprojects, municipalities will formalize their commitment to join the Project by signing Commitment Letters (Termos de Ades6o) in which they makethemselvesresponsible for certain activities and investments, among which participation in subproject selection andplanning, and project-sponsored capacity-building efforts. These Commitment Letters will be inplace before Project activities start in each municipality. 41. Once Commitment Letters are signed, two key tools will be used in subproject selection: the poverty and social exclusion maps mentioned in paragraph #3, and the Cost-Beneficiaries Estimate 10 System (SECB). Together, these tools will allow the state government and partner municipalities to target the poor in the most vulnerable urban areas in a given municipality and select the lowest-cost intervention. Beyond mayors and municipal secretaries, the process of subproject selection will involve the municipality's technical staff and allow the municipality to prioritize investments inpoor areas on the basis of previously unavailable information. The involvement of the local technical staff will allow the State's team to identify issues and areas in needof improvement and design the specific capacity-building activities that will be implemented by the Project in each municipality. See Annex 4B for details and a flowchart of the subproject cycle. 42. For each subproject that i s identified, a participatory planning process will be organized. A methodology for the preparation of participatory Integrated Local Development Plans (PID) has been developed in the Ribeira Azul Program and will be used in the Project to organize the participatory planning process, gather the contributions of local residents and their organizations, municipalities and state secretariats and negotiate with each to define Project investments in each sector and the complementary investments and commitments of each organization. Local residents and their organizations will be gathered in a Local Development Forum for each subproject area, and the Project's technicians, from CONDER, the municipality and the participating secretariats, will work out of a local facility called the Casu do Viver Melhor. 43. Specific project components will be implemented as follows: ComponentsA andB CONDER will be responsible for implementing the full range of activities in each subproject, under Components A (Urban Infrastructure Delivery) and B (Social Services and Facilities Delivery). To this end, CONDER will enter contracts with private firms for the execution of works and facilities; and will engage consultants to work on the design of specific investment projects, as needed. For implementation of Components A and B, CONDER will be supported by the same NGO that was engagedin the upgrading of Novos Alagados I1and Ribeira Azul, thanks to a new Italian Government grant through the Cities Alliance. Once investments are completed, SEDUWCONDER will enter Transfer Agreements (Termos de CessZo e Compromisso) with entities, either public or private, responsible for the operation and maintenance of services provided, in order to secure sustainability. CONDER will: (a) assist municipalities in the preparation of subproject proposals and ensure their compliance with the established eligibility criteria; (b) organize the participatory planning process, gather the contributions of local residents and their organizations, municipalities and state secretariats and negotiate with each to define Project investments in each sector and the complementary investments and commitments of each organization; (c) prepare all required documentation for the participation of partner agencies in the Project, including drafts of the legal agreements mentioned above; (d) prepare implementation and procurement plans for each subproject; (e) plan, prepare and carry out the required bidding processes for civil works, goods and services; (f) prepare draft contracts, agreements and working plans; (g) monitor the execution of each contract and perform quality control functions; and (h) provide to PMUmonthly progress reports on the implementation of activities under its responsibility. CONDER will also work with municipalities in the establishment of the local Casu do Viver Melhor and provide management and technical support for the Local DevelopmentForum(see itemC4 below) . ComponentC SEDUR will be responsible for carrying out the set of studies in the areas of housing, urban development and poverty reductionthat will support policy makingat the State level. It will also be in charge of implementing overall Project management activities through the PMU, as well as the capacity-buildingactivities that will benefit SEDUR itself. 11 Also under component C, municipalities will be responsible for implementing some of the activities of the institutional capacity building sub-component. Municipal institutional strengthening activities under this sub-component will be implemented by participating municipalities in order to enhance their capacity - financial, management and technical - to provide services for which they are responsible inthe areas benefitingfrom Project investments. Finally, CONDER will implement some of the activities in component C, such as management of the monitoring and evaluation plan and capacity-buildingactivities that will benefit CONDER itself. 2. Partnership arrangements 44. The Project is part of a wider state program (Viver Melhor) to fight urban poverty, with sector investments and technical assistance in subproject areas. Partner agencies in this program include (a) the Ministry of Foreign Affairs of Italy (MAE), which has pledged to finance a Technical and Methodological Assistance Project (PAT), through a 6 million Euro grant, to be channeled through the Cities Alliance; it i s envisaged that PAT will be executed by AVSI, the Italian NGO that i s already working with the state government, under similar arrangements, in the Ribeira Azul Program; (b) state secretariats which will provide financing and technical assistance to carry out agreed sector investments insubproject areas; (c) municipalities; and (d) Community BasedOrganizations (CBOs) andNGOs. 3. Monitoring andevaluation of outcomes/results 45. Monitoring and Evaluation. An extensive and innovative monitoring and evaluation scheme has been designed for the Viver Melhor Program and for the Project. This will include regular monitoring of the core indicators outlined in the results framework, a participatory monitoring scheme to allow for feedback from beneficiaries duringProject implementation, and a rigorous impact evaluationto be carried out for a sample of communities. Monitoringdata will be largely based on the Management Information System (MIS). The impact evaluation will be based on a comprehensive baseline survey, as well as ex- post surveys to be carried out in a sample of communities at three points in time following Project implementation. This panel survey will include socio-economic data on household members, as well as data on physical living conditions. Qualitative methods will also be used to assess Project impact. 46. For its MIS, the Project will make use of an adaptation of the existing GEP, a State system that has been successfully used by the Secretariats of Education and Health in the implementation of Bank- financed Projects. This system has been already installed in CONDER, and there i s an agreement to put the system in operation for the Project prior to loan signing. The operation of the system will be sharedby SEDUR, CONDER and all the agencies involved inthe Project. The MIS will cover the areas of financial management, accounting, procurement, disbursements, implementation progress and all required Project reports. 47. Management of the M&E plan will be carried out by a small team in CONDER, responsible for oversight, maintaining the data bases, and producing periodic reports. The Superintendzncia de Estudos EconBmicos e Sociais da Bahia (SEI), the state's statistics bureau, will provide technical input on survey design and implementation, and data analysis. The World Bank will also provide technical input through the Development Impact Evaluation (DIME) initiative, a Bank-wide effort aimed at promoting impact evaluations of promising development interventions. The Project is among the core projects to be includedunder the selection of slumupgradingevaluations of DIME. 48. This scheme goes well beyond the M&E design of most projects. The State of Bahia has expressed a strong commitment to ensuring transparency and effectiveness in implementation through puttinginplace such a comprehensive scheme. Periodic monitoring of implementation and clear feedback 12 mechanisms will allow for improvements in implementation during the Project. The longer term evaluation of Project impacts on the population will contribute directly to future policy and Project decisions for urban poverty reduction in the State. This work will also have important lessons for urban poverty projects far beyond Bahia. Details on Project monitoring andevaluation are provided inAnnex 3. 4. Sustainability 49. There are several levels of sustainability in this project. With regard to the physical infrastructure, sustainability would depend on the proper maintenance of structures developed with Project support. This would be primarily a responsibility of municipal government -to repair streets and walkways, maintain drainage, collect waste, etc. At a financial level, improved public services such as water, sanitation and electricity will be subject (in many cases for the first time) to payment of normal utility tariffs. These aspects are often fragile in slumupgradingprojects, due to the following issues: (a) lack of involvement in the planning, design and works phases, of the organizations that will be responsible for the post-intervention day-to-day operations and management of infrastructure and services created by the Project (local government, municipal council, utility companies); (b) emphasis on the creation of new services rather than the strengthening of existing local public sector facilities or private non-profit organizations already providing services; (c) absence of a clear and previously negotiated handover policy for the post-intervention stage, including a funding strategy for the new recurrent expenditures linked to the new services and infrastructure; (d) lack of negotiated service use and cost recovery arrangements leading to clear contractual relationships with Project beneficiaries, leading to poor cost recovery and persistence of illegal connections and other instancesof non-compliance. 50. These problems will be dealt with in a systematic way in the Project. The highly participatory nature of the Project, in which neighborhood residents and CBOs are involved at every stage of planning and implementation, increases the likelihood that the Project works will be properly maintained, since the communities involved will have a stake in the new infrastructure and services. This factor will also contribute to sustainability since local residents and utilities will have a financial stake in maintaining physical infrastructure and discouraging improper use. Finally, the social sustainability of the Project will depend in large measure on the effectiveness of community/CBO mobilization, the post intervention services provided and the capacity of the community to take over management and operation of community facilities such as day-care and job training so that such facilities will become self-sustaining. CONDER has accumulated a great deal of experience in this area and can point to successful experiences in developing and strengthening community-based social services in the Novos Alagados and Ribeira Azul areas. 51. There will also be an emphasis on clear contractual relationships with partner institutions, stakeholders and beneficiaries. The Participation Agreements that will be signed with the municipality and participating state secretariats for each subproject, the clear handover terms (Transfer Agreements) for infrastructure and services, the contract-based partnerships that will be established with local organizations providing social services for their strengthening and for enhanced service provision, and clear contracts with beneficiaries specifying rights and obligations will be key features of the Project. Many of these features, such as the contracts with existing local organizations/CBOs to enhance service provision, have been successfully introduced and tested in the Ribeira Azul Program, while others, such as the subproject ParticipationAgreements, will be introducedby the Project. 13 5. Critical risks andpossible controversial aspects 52. Foreseeable risks and mitigatior neasures envisaged at this moment are: I Risks iisk Risk Mitigation Measures Xating wl VIitigation Inter-institutional cooperation, There is strong commitment from the Governor and vloderate coordination and commitment: The key Secretaries, and actual project implementation multi-dimensional nature of the will be done by SEDUR and CONDER, which interventions proposed under the Project already have experience in implementing WB loans. demands coordination and ownership In addition, a multi-agency Steering Committee will from diverse government agencies. This be formed, composed of all the relevant Secretaries complexity will require horizontal plus the President of CONDER, and chaired by the institutional arrangements and a strong Governor, and an Executive Committee to be chaired coordination mechanism, based on the by the President of CONDER. These committees capacity to develop a local poverty will guide project implementation. reduction strategy and related plans through multi-stakeholder consultations. Municipal capacity and involvement. (i)Municipalities will take active part in the Moderate to Many previous experiences, among which subproject planning process. This will provide the Substantial PRODUR and Ribeira Azul, show that basis for a Participation Agreement through which municipalities in Bahia have serious they will take responsibility for specific investments capacity constraints, and that the state under the Program and for the operations and tends to take over their responsibilities. maintenance of the municipal level infrastructure and social services to be built by the Project. (ii) partofeachsubproject, municipalitieswillbe As required to take part in Project-sponsored capacity- building activities. (iii)The performance of the municipality's obligations in relation to each subproject will be closely monitored, and an acceptable rating will be a pre-condition for eligibility for further subprojects. (iv) Municipalities will receive funding from the Project for the preparation of O&M plans for the infrastructure to be provided by the Project. Commitment to operations and (i)Through the Participation Agreements mentioned Moderate tc maintenance. Insufficient involvement above, participating organizations, including Substantial of municipalities and other public service Municipalities, State Secretariats and utilities such as providers during subproject preparation EMBASA and COELBA, will take responsibility for and execution could originate problems O&M prior to initiation of works. regarding technical standards and (ii)Such organizations' involvement in thc perception of ownership of the subproject cycle, all the way from the identificatior infrastructure and services created by the and planning stage and throughout execution, wil subproject, which could lead to problems ensure ownership and shared technical standards. regarding operation and maintenance. (iii)The participation of municipalities and othei organizations in capacity-building activities undei the Project will strengthen local O&M arrangements. Cooperation across the political The state government has taken a non-partisar Moderate spectrum. Most of the 8 pre-selected approach to the selection o f municipalities, which ic municipalities, including Salvador and evidenced by the composition of the list, anc Ilhtus where the first batch of subprojects especially the fact that Salvador, which is ir are located, are governed by parties other opposition hands, is due to receive 50% of thc than PFL, the party in power at the state Project's investments. Municipalities, on the othe level. Successful Project implementation hand, will have a strong incentive to collaborate wit1 will hinge on collaboration between the the state government. due to the stronn demand fo I 14 state and local governments, and there i s upgrading from slum dwellers and their movements a riskthat this may be difficult to achieve and the excellent opportunity represented by the across the political divide. Project to cater to that demand. Initial contacts between state and local authorities have been friendly and business-like, which bodes well. Overall RiskRating Moderate 6. Loanconditionsandcovenants 53. No significant, non-standard conditions are envisaged for Board presentation or loan effectiveness. D. APPRAISAL SUMMARY 1. Economic,financialandfiscalanalyses 54. A complete cost-benefit analysis was conducted to determine the economic viability of a sample of interventions of the proposed Project in Salvador, Bahia (evaluating economic impact to 30% of total direct beneficiaries). The analysis demonstrates the overall viability of the evaluated proposed interventions and of all of its individual sub-components. It has been agreed that project interventions in the other municipalities will be subject to an economic analysis following the methodology used for this analysis: basically a least cost analysis of alternatives for each intervention and an economic cost-benefit analysis. Only those proposed subprojects presenting a positive net present value and ERR > 12% will be eligible for investment, which will inpractical terms concentrate investment in well-designed subprojects, maximizing impacts and reducingcosts. 55. Interventions in two areas in Salvador: Alagados VI and Pau da Lima, were the object of the analyses conducted for appraising the proposed Project, including the integrated investments proposed from the 3 components (A, B, and C) in the areas. Direct interventions under component A1 will benefit approximately 8,800 families in Salvador. Components A2, and B1, B2 and B3 will benefit approximately 21,200 families in Salvador. Component C will also benefit the total number of families in the two areas of intervention. (See Annex 4 for a more detailed description.) 56. Detailed economic and financial assessments were undertaken for the specific components of the Project. All project components were included in these analyses, including the infrastructure works and complementary actions, in a sample of interventions of three areas. Returns to the investment in institutional development, community participation andeducation, are included inthe analyses as they are considered the basis for service sustainability and are ultimately expressed in improved access to urban services in the different macro-areas of intervention, as the aim i s to manage and deliver urban services more efficiently and effectively. Once the viability of all the proposed components was verified, the overall project viability was assessed. 57. To determine the net incremental costs and benefits, "with" and "without" project scenarios were constructed. On the basis of these scenarios, the net incremental financial benefits and costs of the proposed investment programs were assessed, which were then adjusted for the impact of taxes, subsidies, and externalities to arrive at the economic flow of costs and benefits. The cash flows were discounted usinga discount rateof 12 %, which is estimated to be a proxy of Brazil's opportunity cost of capital. 58. Costs include capital costs, operation and maintenance costs, rehabilitation, resettlement, environmental mitigation and contingencies. For all the different components, costs of complementary actions necessary to derive the expected benefits and sustainability levels targeted, were considered. It 15 was deemed necessary to include these additional costs in order to permit the assumption that the expected benefits of the project will actually be realized. 59. The main benefits of the project include: (i)improved access due to rationalization of street layout and street paving, including a reduction in transport costs and travel times; (ii) improved water supply and sanitation services, including a reduction or elimination of supply rationing and intermittent services and ultimately improved heath conditions and reduction of morbidity rates; (iii) reduction of risk to lives and property due to the resettlement of people living in risk-prone areas; (iv) a reduction in risks and losses to life and property due to a reduction of flooding resulting from investments in macro and micro drainage; (v) a reduction in risks and losses to life and property due to interventions aiming to prevent risks of landslides and slope erosion; (vi) environmental and health improvements derived from improved solid waste collection services; (vii) increased access to recreational and leisure activities with the financing of ecological and community parks, bringing associated social benefits; (viii) increases in social capital by involving community groups in the planning and execution of the project as well as the financing of community driven activities; (ix) access to formality from conferring title and address (i.e. easier to gain formal employment); (x) sustainability through improved cost recovery (property tax (TPTU), tariffs, service fees - currently the level of PTUcollection inthe project areas i s quite low); and (xi) improved institutional capacity to address planning and shelter needs in low-income areas. 60. To estimate the economic benefits of access to improved urban services, a hedonic pricing methodology was used. The hedonic price function is based on the property and housing market in which transactions can be observed. The welfare significance of the hedonic price function comes from the fact that people are revealing the marginal value of particular attributes (such as access to services, distance to center, etc.) that are not sold separately in the market, but are embodied in the house and reflected in housing values. A hedonic price function was built to estimate the marginal value of these non-market attributes provided by the project, allowing for the measurement of welfare effects from changes in non- market attributes, which i s the goal of the economic analysis. 61. Results from the Alagados VI macro-area presented an overall economic internal rate of return (EIRR) of 33.9%, and those from the Pau da Lima macro-area of 37.6% demonstrating that the proposed interventions are economically viable. The result for the intervention in Salvador analyzed overall yields a positive economic net present value of R$. 102.2 million with an ERR of 35.81%. Given that other interventions to be financed are requiredto have at least a 12% EIRR, it can be concluded that the overall proposed project will be economically feasible. For details on the economic and financial analyses, see Annexes 9 and 10. 62. A Fiscal Analysis of the borrower was also carried out (see Annex 9). Following a rigorous fiscal adjustment in the early 1990s and the modernization of fiscal management that ensued, the Bahia state government has earned a reputation as a fiscally responsible administration. This reputation i s borne out by analysis of the Lei de ResponsubilidudeFiscal (LRF) indicators for 2000-2003, which show Bahia in a very comfortable position, in absolute terms and also vis-&-vis other states. Its capacity to take on new debt i s high. In addition, the state's high primary surplus in the last four years bodes well for payment capacity. These figures confirm the indication that Bahia, of all Brazilian states, i s in the best position to take on new debt, which was given by STN duringthe CASPortfolio Review held on 27 and 28 September 2004. With regard to the Bahia Poor Urban Areas IntegratedDevelopmentProject - Viver Melhor 11, the proposed operation i s specifically included in the fiscal adjustment agreement signed between the Bahia state government and STN. 16 2. Technical 63. The works and services to be financed will include local urban infrastructure (urban drainage, roads, street paving, water supply and sewerage, solid waste management, home improvement, replacement housing), macro-level infrastructure (such as road links to improve access to subproject areas, macro drainage and sewerage and green areas / parks), home improvement support and low-cost housing alternatives for the poor. Studies undertaken during Project preparation have included: (i) a review of technology and level of service options for typical informal settlement situations and their costs, one of whose outputs is the Cost-Beneficiary Estimate System (SECB); (ii) macro-area master plans for three specific subprojects, spelling out the linkages between the slum areas of intervention and their surroundings, which has allowed the identification and preliminary design and costing of neededmacro- level infrastructure; and (iii)basic physical planning and engineering designs for the same three subprojects, which has allowed their costing. 64. This last study has included the preparation of a Technical Specifications Manual (Cahier des Charges- Caderno de Encargos) for the Project, which defines appropriate minimal standards to be met by Project-financed upgrading and housing works. These standards are based on the considerable experience with slum upgrading in Bahia and elsewhere in Brazil, and have been developed to ensure an adequate level of service and ease of operation and maintenance, while preservingcost-effectiveness and affordability. This detailed work should provide a good platform for the Project to engage with municipalities and utility companies in a fruitful discussion to overcome some of the obstacles to scaling up slumupgradinginBahiathat are related to unrealistic technical standardsfor housing, land subdivision and infrastructure. The Technical Specifications Manual also provides a template for monitoring of progress and cost of works that will provide real-time per-capita and per-household cost data for the various works components. This should allow the Project to avoid, from its start, the lack of adequate cost information that i s a recurrent problemplaguing slumupgradingprojects. 3. Fiduciary 65. Accounting, financial reporting and auditing arrangements: Project financial data will be registered by the PMU in three, separate, systems: (1) SICOF, the State of Bahia's budgetary and accounting tool, where all public expenditures are necessarily recorded, after being properly budgeted and committed, and through which all payments are made; (2) The PMU's financial management and monitoring system, GEP, which will be the basis for preparation of Financial Management Reports (FMRs) and Project financial statements; (3) MIS, the Management Information System where works' progress i s recorded. As a basic control procedure, a regular (monthly) routine reconciliation will be undertaken by the PMUbetween (i) "movimentos de recursos bancdrios" made available by CONDER to SEDUR; (ii) payments made, in SICOF, by CONDER to contractors; and (iii) expenditures total actual reported on FMRs. 66. An agreement was reached with the PMU with regard to the format, content and periodicity of FMRs. In addition, based on PRODUR's experience, it has been decided to use quarterly FMRs for disbursement purposes. The fourth quarter FMR would be used as the year-end Financial Statement for auditing purposes. (See Annex 7 for details on Financial Management arrangements and a summary of the financial managementassessment). 67. Procurement: COPEL, CONDER' s procurement committee, will assist in the preparation and carrying out of the Project's procurement processes. COPEL currently has six staff a president, a member, 2 administrative staff, and 2 support staff. The bidding committee i s composed of 6 members, and there is always a lawyer among them. As Federal Law 8666 requires that at least one member be changed every year, a committee composed of six members can maintain at least four of its members over 17 the years. At CONDER, the head of the bidding committee has filled this position for some years now. Both the president and the memberof COPEL have at least 10years of procurement experience. 68. During Project preparation, the Bank carried out a procurement capacity assessment of CONDER, and prepared an Action Plan that should be implemented prior to Project implementation, as follows: (a) preparation of a Procurement Plan for the initial 18 months of Project implementation, which i s already available and cleared by the Bank; (b) training of COPEL personnel in Bank procurement; (c) hiring of a full-time procurement specialist for the Project by CONDER; and (d) creation of a procurement module within the GEP. Training will also be given to the SEDUR and municipality staff who will be involved in a small percentageof the Project's procurement under component C. See Annex 8 for details of procurement arrangements anda summary of the procurement capacity assessment. 4. Social 69. As described above, the Project rests on the mobilization of communities in poor informal settlements of the target cities. These areas are often characterized by fractured social capital, that suffer the multiple effects of (a) the distractions of the struggle for survival, (b) the short-term commitment to projects dependent on clientistic politics, (c) the presence of criminal violence and anti-social activities revolving largely around the drug trade and other illegal or illicit activities, and (d) the lack of a tradition of collective action. The forms of action supported by the Project are not necessarily compatible with endogenous social processes in urban slums which tend to favor vertical relations over horizontal ones. These are difficult obstacles to overcome but CONDER's experiences in Salvador (arguably the most difficult urban context the Project will face) have been remarkably positive. This appears to be the consequenceof major investments in humancapital formation, inthe development of local leadership and an extraordinary degree of sensitivity to local demands in a context where government has not always been highly responsive. There have been setbacks, sometimes due to community resistance and sometimes because political opportunism has won the upper hand. CONDER, with considerable assistance from AVSI, has developed a truly different style of operation and has understood that investments in human capital are just as important, if not more, than investments in physical infrastructure. 70. The Project will seek to replicate the arrangements for participation that are in place in the Ribeira Azul Program, where local residents and their organizations are involved in every stage of the subproject cycle, through carefully designed channels that include: (i) workers on call at the Casa social do Viver Melhor and general meetings to allow individuals to express their opinion and make complaints; (ii) sector-specific meetings with special interest groups and local organizations active in the sector; and (iii)general meetings with all local organizations involved in the subproject, gathered in a Local Development Forum. The involvement of local organizations, which are usually small and often informal, is particularly important, since many of the Project's actions, especially in the social sectors, will be implemented through them. Extension of service coverage will, more often than not, be based on the identification and strengthening of local organizations already providing a particular service (e.g. pre- schools, day care centers, and mother and child health programs). Local organizations that are willing to partner with the Project receive support for their formalization, enhancement of administrative and fund- raising capacity, training for staff, and upgrading of facilities. The experience of Ribeira Azul shows that this is a cost-effective alternative for service extension, since the cost per organization is small, and the impact i s considerable. Given that such organizations are already active and self-sustaining to begin with, the support afforded themby the Project makesthem even more resilient, and ultimately sustainable. 71. Participation begins with the involvement of local residents and organizations in surveys for baseline physical, social and economic information, and it i s particularly important in the planning stage. The Project's key planning instruments- subproject-level IntegratedLocal Development Plans (PID) and 18 Social Development Plans (SDP) will be built in a participatory way, with the involvement of relevant state secretariats, the municipalities and other service providers. As Ribeira Azul and other relevant experiences show, the success of participationdepends on the availability of well-trained technical staff in sufficient numbers and under competent leadership. Such staff will be present in the field, in close contact with local residents and organizations, through the Casas do Viver Melhor, facilities that will provide a focal point for all the Project's actions ina given area, and will bejointly staffed by the municipalities and the participating state secretariats. 5. Environment 72. The potential environmental impacts are associatedwith provision of water supply and sanitation, urban drainage, street paving, solid waste collection and disposal, stabilization of slopes and embankments, parks and recreation areas and other basic amenities and services at the community level. Most of the impacts identified are positive in nature such as reduced risk from landslides and cave-ins, better water quality, reduced exposure to sewage, reduction in dust, better solid waste disposal, etc. The few adverse impacts identified relate mainly to the implementationphase such as dust, noise and vibration from construction activities, disposal of debris, temporary disruptions in traffic and service delivery and possible safety risks. All these risks are addressed by the Environmental Guidelines that have been developed from existing borrower guidelines for this Project. No long-term adverse environmental impacts are likely. 73. As indicatedinthe EnvironmentalAnnex, the Bahia StateEnvironmental Agency (CAR) requires that CONDER form an environmental group within the agency to oversee environmental issues. This unit is called CGTA (Technical Working Group on Environment). This institutional innovation will provide an ideal device for screening subprojects and supervising their implementation from the environmental and social perspectives. CAR also has a commitment to train members of the CGTA in environmentalanalysis. 6. Safeguard policies Safeguard Policies Triggered by the Project Yes No Environmental Assessment (OP/BP/GP 4.01) [XI [ I Natural Habitats (OP/BP 4.04) [XI [ I Pest Management (OP 4.09) [ I [XI Cultural Property (OPN 11.03, being revised as OP 4.11) [XI [ I Involuntary Resettlement (OP/BP 4.12) [XI [ I Indigenous Peoples (OD4.20, being revised as OP 4.10) [ I [XI Forests (OP/BP 4.36) [ I [XI Safety of Dams (OP/BP 4.37) [ I [XI Projects inDisputedAreas (OP/BP/GP 7.60) [ I [XI Projects on InternationalWaterways (OP/BP/GP 7.50) [ I [XI 74. The Project intervention triggers OP 4.12, the Resettlement Policy. Slum upgrading involves limited involuntary resettlement due to the need to relocate families occupying high-riskareas such as unstable slopes and flood-prone areas. Limited involuntary resettlement may also be neededto improve the road network or establish rights-of-way for infrastructure networks, waste collection, etc. In the proposed Project, individual subprojects will be designed to minimize resettlement. The executing agency, CONDER, has experience in minimizing resettlement in slum upgrading projects and finding relocation solutions for displaced families in nearby areas, in line with Bank policy. A Resettlement Framework for yet unplanned subprojects was prepared for this Project in accordance with OP/BP 4.12. 19 A Resettlement Action Plan was prepared for the Alagados VI subproject in Salvador and a few other smaller interventions that are planned for Year Iof the Project. 75. The Resettlement Framework is basedon the minimization of resettlement and, where absolutely unavoidable, offering choices to persons subject to relocation. The framework adopted involves offering either new housing or cash compensation to families facing relocation. Cash compensation would be based on a table of values corresponding to the estimated replacement value of the assets lost plus an additional compensation inversely related to total estimated asset value per family. This provides an additional "boost" to the poorest families, offsetting to some extent the vulnerability of families facing relocation. There i s also a minimum compensation value for families with very low assets that would allow them to minimally acquire a new home in a legal neighborhood. The other major alternative would be relocation to housing projects located very close to the neighborhoods from which people are relocated (usually less than 1000 meters) and equipped with all basic urban services. The quality of the planned new housing is very good, and far better than most of the housing it replaces, but not extravagantly so. Social support before, during and after resettlement will be offered to help people adjust to new conditions and to maintain and even expand their dwellings. 76. The Project may also trigger OPN 11.3 (Cultural Property) with regard to certain sites that are considered sacred by one or more of Bahia's many religious groups, especially the CandomblC (Afro- Brazilian) religion which holds sacred the S5o Bartolomeu Park in Salvador, Bahia where several OrixAs (Gods) reside. The Project would involve close consultation with community members and CandomblC leaders to assure that sites considered sacred are not disturbed in such a way as to offend members of the religion. At the same time, the Park would receive physical improvements and security enhancements to make it more user-friendly. 77. The Project will also trigger OP/BP 4.04 (Conservation of Natural Habitats) in some limited cases, inwhich interventions will take place in settlements locatedin slopes or along water courses, which in many cases are protected areas under the law. Project interventions will generate positive environmental impacts in such areas. The EMP (see Annex 11)sets forth procedures for such cases. 7. Policy Exceptions and Readiness 78. No policy exceptions are anticipated. 20 Annex 1A: Country and Sector Background BRAZIL - BAHIAPOOR URBANAREASINTEGRATEDDEVELOPMENT PROJECT VIVER MELHOR - 11 1.M A I NNATIONALAND SECTOR ISSUES 1.1. Brazil 2. Brazil has a number of particular features in relation to social inequality and poverty level. In other countries with per capita income levels comparable to that of Brazil (US$3,500 - 6,000) an average 10% of the population falls below the poverty line, against 30% in Brazil. World Bank data show Brazil as the world's third worst country in terms of income distribution. Recent data for 2003 from the Brazilian Geography and Statistics Institute (local acronym ZBGE) show that the richest 10% of the active population earned 16.9 times more than the poorest 40%, and the richest10% of the population overall reported 51.6 times more income than the poorest 10%. Ina universe of 177 nations in 2002, Brazil was 72nd in terms of HDI (0.775 against 0.696 in 1991). In 2003, life expectancy was 71.3 and female fecundity rate was 2.1; in the same year, the illiteracy rate in the population aged 15 or more was 11.6%, and 64.0% of 14 year-old pupils were enrolled in a school-year or course appropriate for younger pupils (age - school year discrepancy). 3. Inrelation to sanitation, on combiningindicators for pipedwater, sewage drainage andgarbage collection coverage, 64.1% of Brazilian homes were classified as appropriate by the IBGEin 2003. 4. Brazil i s a highly urbanized country: according to the National Households Sample Survey (local acronym PNAD), the urbanization level rose from 75% to 81% over the 1991-2000 period, and reached 85.7% in 2003. 5. In recent decades Brazil has been impacted by a process of disorderly urban growth caused by large-scale migration to the major cities, together with rapid population growth and restricted employment opportunities. As a result, Brazilian cities incorporate spatial segmentations that reflect divisions into separate groupings on the lines of income, quality of life, and living standards, and situations of legality or informality. In2003, the Brazilian unemployment rate was 9.7%. 6. An analysis of this segmentation process shows permanent aggravation. In 1970, only 1% of the population of the Greater SBo Paul0 area lived in shanty towns Cfavelus) but by 1995, this proportion had reached 20%. The situation in other state capitals i sjust as grave - 25% in Belo Horizonte; 28% in Rio de Janeiro; 33% in Salvador; and 50% in BelCm. Data from FundaqBo Joiio Pinheiro show that Brazil's housingdeficit in 2000 was estimated at over 6.6 million units, of which 81.3% were inurban areas. This deficit i s concentrated (84%) in families whose income i s less than three times the minimum wage. For those whose income i s 3 to 5 times the minimumwage, the deficit i s 8.4%, while for those earning 5 to 10 times the minimumwage it i s 5.4%. 1.2 The Northeast Region 7. The Northeast Region (NE) concentrates the most critical numbers for most of the social indicators (as does the North Region, although this has much less weight in the national aggregate, due to its relatively small population). 8. Inrelation to HDIs, data consolidated by region are not available; however, we may note that none of the state inthe Northeast reached the national average for HDIsin 1991 or 2000. In 1991, Brazil's IDHwas 0.696, while the highest IDHinthe Northeast was the state of Pernambuco with 0.620; in2000, 21 the national number was 0.766, and the best states in the Northeast (Pernambuco and Rio Grande do Norte) reported 0.705. 9. Considering the most recent IBGEdata for social indicators, extracted from the 2003 PNAD, and comparing the Northeast with the most developed region of Brazil (the Southeast), we find that life expectancy for those born in the Northeast was 66.7 against 70.1 in the Southeast; fecundity rates were 2.4 and 2.1 respectively. 10. There are major regional differences ineducation too: in the Northeast, illiteracy among over-15s i s 23.2% against 6.8% in the Southeast; the 'age and school-year' discrepancy or age-course discrepancy among 14 year-olds was 81.8% and 51.7% respectively. 11. Unemployment among over-10s was 8.7% inthe NEcompared with 11.5% inthe SE. 12. Inrelation to income distribution, the richest 10% of the active population inthe NE 10% earned 18.2 times more than the poorest 40%, and in the population in general, the ratio between the incomes of the richest 10% and the poorest 10% was 54.3. The corresponding ratios in the SE were 15.1 and 39.6 respectively. 13. Finally, again using IBGE data for 2003, 39.6% of households in the NE were classified as adequatefrom the point of view of sanitation, against 86.2% inthe SE. 14. More specifically on urban issues, the level of urbanizationin the NEis 70.8%, against 91.9% in the SE. Turning to the housing deficit, 2.6 million of those affected are concentrated in the NE, corresponding to almost 40% of the nationaltotal. 1.3. Stateof Bahia 15. Bahia is the fifth-largest state in the country in terms of area, with 6.7% of the country's surface area; it has approximately 13.5 million inhabitants, or 7.8% of the population of Brazil; it produces around 4.5% of the country's GDP (and i s the 6" largest state in GDP terms), and 1/3 of the wealth of the Northeast. 16. Bahia's annual demographic growth rate was 1.08% in 1991-2000 compared with a national rate of 1.63%. 17. Inrelationto IDH,Bahiais in22ndplaceinBraziland4" placeamongthe Northeast states with 0.688 (IBGE, 2000). 18. Although child mortality has been gradually reduced (from 61.5 per thousand in 1991to 42.7 per thousand in2002), it's higher than the national level. 19. Taking the most recent socioeconomic data from the Institutes survey (IBGEPNAD,2003) life expectancy for those born in Bahia i s 68.5 andthe fecundity rate i s 2.2. 20. Education indicators in Bahia are a matter for concern: the illiteracy rate for over-15s i s 21.4%, and 83.4% of 14 year-olds are behind with schooling, being enrolled in a course that does not correspond to their age. 21. The unemployment rate for over-10s is 9.8% (practically the same as the nationalaverage). Again usingdata for 2003, 18.5% of the active population reported per capitaincome of upto half the minimum 22 23 families to be relatively concentrated in the largest municipalities. 27. However, there are different trends within each region, and some small municipalities increasingly tend to draw poor families, especially those involved in tourism, such as Port0 Seguro, Nova Viqosa, Mucuri and Camamu. Certain cities leading regions of low economic density are much larger than other cities in their regions, and here too there has been a trend for poor families to be attracted to these centers over the last ten years. This i s the case of Juazeiro inrelationto its region. 28. Inrelationto the housingdeficit inthe state of Bahia, there are a number of different categoriesin quantitative and qualitative terms, as the tables below show: 1IFamily Precarious housing 135.6 1206,993 multi-occupancy I51.5 I299,442 Replacement due to deterioration?? 1.2 6,977 Excessive rent burden 11.7 68,029 TOTAL 100 581.441 Source: Fundagdo Jodo Pinheiro/2000 ~~ Source: FundugdoJodo Pinheiro/2000 1.4. Mainissues 29. The sector issues posed for Brazil as a whole tend to be significantly worse in the Northeast and inthe state of Bahia. Some of these issues are typically urban innature, and are increasinglyconcentrated inmedium or large municipalities. 30. The Northeast and Bahia (largest state in the region) contain a high proportion of the poor in Brazil. More specifically, cities in Bahia (mainly the state capital and its metropolitan region) feature great income and wealth inequality between richest and poorest. Therefore housing and sanitation deficiencies are clearly and significantly concentrated in the most disadvantaged layers of the urban population. Added to these factors, there i s highunemployment - also more concentrated in urban areas, and although it is distributed among all strata in society, joblessness has more devastating effects for the poorest families bereft of "social shock absorbers." 31. Health and education indicators, and provision of services, although significantly better in urban than in rural areas, are still critical, particularly when we look at the breakdown between urban spaces occupied by middle andupper classes on the one hand, and the poor on the other. 24 Source: IBGE SocialIndicators 2003/PNAD. 2. GOVERNMENTALSTRATEGIESTO FIGHTPOVERTY 2.1 FederalGovernmentstrategies 32. The analysis of sector issues clearly shows the close relations between combating poverty and urban development. Therefore the Federal Government approach to tackling urban poverty follows two main guidelines: social policies, and urbanrehabilitationfor deprivedareas. 33. Social policies based on conditional transfers of income from government are articulated by the Bolsa Familia family grant program, with an outlay of 5 billion Brazilian Reais in 2004 to assist 4.6 million families, and a target of reaching 11million families by the end of the current government's term of office. Bolsa Familia articulates a number of other programs, in particular Bolsa AlimentapTo (food) andBolsa Escola (education). 34. The Bolsa Alimenta@io food program was previously runby the Ministry of Healthand seeks to reduce malnutrition in children by promoting better health and nutrition for pregnant women, mothers breastfeeding children aged under six months, and children aged from six months to six years of age, in families with monthly per capita income of half the minimum wage or less. Each family in the above mentioned situation receives R$ 15.00 per individual up to a maximum of 3 individuals, i.e. R$45.00. 35. The Bolsa Escola school grants program was previously run by the Ministry of Education and assists families with individuals aged 6 to 15 and monthly per capita income of half of the minimumwage or less. The amounts are the same as those of the Bolsa Alimenta@o food program. Children must be enrolled and attending school in order to be eligible. 36. Another important program, as yet not absorbedby the Bolsa Familia family grant programi s the Child Labor Eradication Program (local acronym PETI). This was the first focused income transfer program to be introduced in Brazil (1996) and assists families with children aged 7 to 15 that are engaged in degrading, unhealthy or dangerous employment and with monthly family income per capita of half of the minimum wage or less. It provides grants of R$ 25.00 per child in rural and urban areas of municipalities with up to 250,000 inhabitants, and R$ 40.00 in urban areas of municipalities with populations larger than this. In addition to receiving a grant, children attend school for a full day (known as the "Extended Day") to supplement normal class schedules. Eligibility for the program depends on 25 school attendance and the child not being in employment. In some states, former PET1beneficiaries are participatinginthe Young Human Development Agent program. to "promote social inclusion - in partnership with all spheres of the government and with society - by 37. In relation to urban administration actions, the current government createdthe Ministry of Cities articulating and implementating programs and actions aimed at universalizing access to decent housing, environmental sanitation, and mobility through the circulation of traffic and public transportation"' The main housing and urban programs run by the Ministry of Cities are Habitar Brad (IDB); Prcj-Moradia and Morar Melhor. 38. Hubitar B r a d (IDB)provides finance for housing, sanitation, and infrastructure; it also organizes social promotion activities for families with income of three times the minimum wage or less living in subnormal settlements. Habitar Brad has 88 projects contracted, of which 5 are concluded and 59 currently underway, with an investment of over R$656 million, 3/4 from the Ministry of Cities and ?Astate and municipal counterparts. 39. Prd-Moradia also benefits families with income of three times the minimum wage or less by financing improvements in housing, infrastructure, and sanitation. An investment of around R$ 660 million i s plannedfor 2003-2007. 40. The Morar Melhor programassists families inthe same income group with financing for building homes and urbanizing areas. Its activities include the purchase of individualized kits containing basic buildingmaterials. 2.2. Bahia State Governmentstrategies 41. The Bahia State Government intends to take active measures to reach the United Nations Millennium Development Targets. Efforts made so far have concentrated on reducing poverty inthe state and seeking to raise its Human Development Indices above the Brazilian national average through combined urban development and anti-poverty strategies. In this context, international cooperation has become an important instrumentinmaterializing social programs at government level. 42. The 2003 Bahia Strategic Plan (local acronym PEB) and the Working Program posed inthe State Government' s 2004/2007 Multi-year Plan, in consonance with the Federal Government's Public-Private Partnership (local acronym PPA) prioritize measures and targets based on the aim of investing in improved socioeconomic and environmental conditions in the state of Bahia, thus promoting social inclusion and improvingquality of life. 43. The 2003-2007 Multi-year Plan i s based on the long-term planning structure defined by the Plan Plano EstratLgico Bahia 2020 - 0 Futuro a Gente Faz ("We Make the Future - Bahia Strategic Plan 2020") and poses three particularly innovative features: '' consultation with society as a decisive instrument of participation and transparency; the concept of transversality, aiming to ensure synergy in government action and real articulation; ' and commitment to obtaining results, translated as mechanisms for systematically evaluating government actions. 'www.cidades.qov.br 26 ally as PEB 2003) Vision for the year 2020 - a society able to ensurefull development of citizenship; - universal access to basic services and equipments of Bahia Socially Fair and Cohesive - quality (health, education, house, sanitation and Public (reducing internal inequalities as a means Security); of ensuring social cohesion) - broadening access to information, culture, sport and - leisure; and better income distribution. - strengthening technology ; Bahia EconomicallyDiversifiedand - -- training for people; Competitive reducingcosts of andinternal transport; and - (articulation of productive chains) innovation and development of the technical-scientific apparatus and infrastructure to ensure dynamic competitiveness. Bahia SpatiallyIntegrated - - economic deconcentration; (socioeconomic articulation of the area -- strengthening strategic cities, and as a condition for ensuringits unity) integratingdynamic areas located at the extremes of the state, as a means of stimulating the development of the semi-arid zone. - technological progress along with conservation of natural Bahia EnvironmentallyClean - and cultural environments; and - (buildingnew relationships between rational and sustainableuse of resources, includingthe humanactivities andthe environment) development and application of more appropriate mechanisms and tools for environmentalissues, esDeciallv inrelation to water sources. 44. To ensure the feasibility of these plans in the four-year period, the Government will have access to funds in the amount of R$ 26.2 billion, comprising R$ 13.9 billion (53.1%) from its own budget and R$ 12.3 billion (46.9%) in non-budget funds. The government's top priority of ameliorating the social situation in the state i s being tackled by the strategy known as "Bahia for us all" (Bahia de Toda Gente) with the aim of ensuring quality of life and promotion of citizenship and this line of intervention includes actions to ensure universalization and quality in basic services, including urban improvement. The strategy i s the most important part of the PPA and absorbs 40.9% of its total funding. 45. Since 1992, the Bahia State Government has been implementing substantive measuresto improve sanitation, housing and urban development. One of the key actions being undertaken i s the Baia de Todos os Santos Environmental Sanitation Program (Bahia AzuZ) - which benefits 12 municipalities with an investment of US$ 600 million and funds from international agencies IDB, IBRD, and OECF; the Brazilian sources are the country's development bank (local acronymBNDES),the Federal Savings Bank (Caixa EconBmica Federal) and the Bahia State Government. This Program covers an area with many important physical, economic, historical, cultural, environmental and tourist features. Sewage and drainage coverage in Salvador was being expanded from around 26% of the population in 1992 to 80%. Bahia Azul i s South America's largest environmental sanitation program. 46. PRODUR acted on three fronts: institutional strengthening for municipal governments, basic sanitation, and integrated investment in infrastructure for needy areas. In 2003, PRODUR reached 128 municipalities, half of them reporting the worst HDIs in the state. The budget for the program, already concluded, was US$ 154 million, of which US$ 100 million came from the World Bank and US$ 54 27 million from state and municipal counterparts. Products of the Program: 450 studies of institutional development, 148 urban infrastructure works, 59 public works items to rehabilitate needy areas, and 65 training events for 1,700 participants. 47. The Viver Melhor slum upgrading program has been in place since 1995, benefiting 85 communities in the Salvador Metropolitan Region and more than 80 municipalities in the State of Bahia. Around 150,000 families or 600,000 people benefited and the investment of around R$ 350 million comprised funds from the Federal Savings Bank (Cuixu Econ8rnicu Federal),the federal budget, Hubitur Brusil (IDB), PRODUR (IBRD) and the Bahia StateGovernment. 48. actions), but their central targets do emphasize differentiated and complementary aspects - institutional The three above-mentioned programs may overlap (particularly in relation to urban infrastructure development relatedto urban subjects, environmental sanitation, and housing improvement. However, we find that the main innovations from the strategic point of view comprised two projects - Novos Alugudos experience of ViverMelhor - although financed with PRODUR funds. (resettlement around dams) and Ribeiru Azul (environmental sanitation) - which we locate within the 49. The Novos Alugudos Project incorporates new paradigms such as valorization of environmental issues and an emphasis on the social question with specific targets, programs, and products for these issues. It i s also innovative in that the institutional model for intervention involves setting up councils of representatives to broaden discussions of intervention. Funds from financing agencies as a whole include both public and private bodies comprising the World Bank, AVSI, Federal Government through the Pro'- Morudia housing program, the State Government and the Italian Government through its Ministry of Foreign Affairs. 50. The RibeiruAzul programwas basedon the experience of the initial stage of the Novos Alugudos Project and its target i s to promote improved living conditions for 150,000 people in the Subu'rbio Ferrovia'rio neighborhood in Salvador. One highlight of Ribeiru Azul is that it i s incorporating the concepts of community involvement and integration, with substantial gains in terms of social inclusion, and urban and environmentalrehabilitation. Financing comes from the same sources as Viver Melhor and it too has technical and social support from the Technical and Social Assistance Project (local acronym PATS), thanks to a donation from the Government of Italy administered by Cities Alliance andthe World Bank. 51. The Ribeiru Azul experience led to a change in the performance paradigm for the state government in urban areas of concentrated poverty. It showed that isolated investments in infrastructure and housing improvement are not enough to raise the quality of life of residents of these areas. Investments in people and institutions are also required, both in the target community and in the governmental instances responsible for the different actions, in order to ensure all possible articulation and integration, potentiatingfunds and results, andto guarantee sustainability for the benefits. 52. The accumulated experience from the NovosAlugudos and Ribeiru Azul programs i s basically the point of departure for designingViver Melhor ZZ. 3. GLOBALTARGETSSUPPORTEDBY THEPROJECT 53. As noted above, the Viver Melhor ZZ Project is a strategic high-priority action for the Bahia State Government and has the purpose of promoting urban development and improving living conditions for the population residinginurban areas with highconcentrations of poverty inthe city of Salvador and the main urban centers of the interior of the state. 28 54. ,ThisProject is aligned with the MDGs (Goal 7, Target 11) and in line with the growing number of cities in the world that are adopting comprehensive slum upgrading program, setting development targets, undertaking reforms to prevent the growth of new slums, and leveraging public and private resources to improve the lives of slumdwellers. 55. The premises for action of the World Bank Group's CAS for Brazil 2004-2007 state that It assistance of the World Bank planned in the area of direct poverty reduction include more support for urban services provided to the poor, including improvements in low-income neighborhoods and social and physical infrastructure ... ." Furthermore,it suggests a more selective focus on reducingurbanpoverty and recommends "an integrated approach to support multi-sector urban and rural development strategies at sub national level." The strategic goal of a `inore equitable, more sustainable and competitive Brazil" includes long-term development resulting in a reduction in extreme poverty, vulnerability and social exclusion, "more equal access to local services" and "good governance". The program i s attuned to these guidelines. 56. Thus Viver Melhor ZZ will be an important instrument for operationalizing the CAS, which has the primary aim of reducing poverty in developing countries through the involvement and participation of community associations and other representativesof beneficiaries in designing and implementing projects intervening in needy areas. Viver Melhor ZZ i s framed within two or more of the World Banks major .. blocks of programs assisting urban development: Scalingupprograms that promote services for low-income populations. Expanding assistance for training, particularly at municipal level. 57. The CAS also recommends "Transformation of the cooperation with state governments into integrated state strategies and projects, including public expenditure and policy analysis." In this context, Viver Melhor ZZ i s part of an inclusive strategy for reducing poverty in Bahia to be supported by the World Bank. 58. .. Viver Melhor ZZ also relatesto the followingCities Alliance guidelines: The city and its region as focus rather than the sectors of a government's activities; Promoting socially inclusive urban citizenship with emphasis on the exchange of ideas and knowledge between local authorities and the urban poor, to develop a shared vision of the city; Scalingup solutions developed by local authorities with the urbanpoor. 29 BRAZIL - BAHIAPOORURBAN Annex 1B: ProgramBackground AREASINTEGRATEDDEVELOPMENTPROJECT VIVER MELHOR - I1 1. THERIBEIRAAZUL PROGRAM-SALVADOR,BAHIA 1. Salvador (population 2.7 million), has 1.2 million people, fully 45% of the population, living in squatter settlements or informal land subdivisions. The RibeiraAzul program, begun in 1999, i s a US$ 70 million urban upgrading initiative in a 4 sq. km. area, with around 40,000 households (population 150,000) living in informal subdivisions and squatter settlements around the Cabrito and Tainheiros inlets, in the Bay of Todos os Suntos, in the northwestern suburbs of Salvador. T h i s area, which concentrates around 12.5% of Salvador's informal settlement dwellers, was considered the "highest risk" area of the city of Salvador in a 1999feasibility study,' for the following reasons: rn It was wholly composed of squatter settlements and informal subdivisions, where land tenure is very insecure; Of the 40,000 households, about 2,500 livedin houses on stilts, on the mangrove swamp areas of the two inlets; rn The area was separatedfrom the surrounding formal city by natural and man-made obstacles, and access to the settlements and circulation within them was limited to narrow alleys that precluded access by the vehicles that provide public transport, solid waste collection, ambulance services, andpolice protection; The area was highly pollutedby household and industrial waste; rn The entire area was low-lying and flood-prone; rn The area's social indicators (e.g. income, literacy, health) were the worst inthe city; rn Access to infrastructure and basic serviceswas severely limited inmost of the area. 2. When the Government of Bahia moved in 1999 to upgrade the slums in RibeiraAzul, it had some previous experiencesto buildupon. The state government had launched a programin 1995, Viver Melhor, which resettled families living in landslide-prone slopes in Salvador and upgraded surrounding areas. In the RibeiraAzul area itself, Italian development aid had supported slumupgradinginthe Novos Alagados slum since the early 1990s. The result of the Italian Government's support to the partnershipjoining together the ItalianNGO AVSI and the Government of the State of Bahia-through CONDER, the state's Urban Development Company - was the successful Novos Alagados Project, which has addressed infrastructure, landtenure, housing and social development issues for a population of 15,000. Buildingon earlier experiences in other parts of Brazil, the Novos Alagados Project developed a participatory, integrated and area-based methodology for slum upgrading that goes a long way towards explaining the Project's success. This methodology, which puts far more emphasis on social development activities than i s usual in slum upgrading programs, i s not only focused on achieving the slum dwellers MDG (Target 11). but is also impacting on virtually all of the other MDGs.The methodology is now being successfully replicated by the Ribeira Azul Program, which is scaling up the Novos Alagados experience to the whole of the RibeiraAzul area.3 3. The outputs of the Ribeira Azul program as a whole include basic infrastructure (including improved access roads, storm drainage, water supply and sanitation and solid waste collection), social services (including health, education, day care, nutrition support, assistance to children and youth at risk, This feasibility study was undertaken for the multi-donor "Bahia de Todos os Santos" program, which is aimed at the environmental recovery of the Bay of Todos os Santos and the development of tourism. The "Bahia Azul" environmental sanitation project, which was partly financed by the World Bank, is part of the "Bahia de Todos os Santos" program. The population of the Ribeira Azul area (150,000) is ten times larger than that of Novos Alagados. 30 job training, income generation through support to local cooperatives), support to home improvement, new housing units for the resettlement of households that are currently occupying risk areas, and land tenure regularization. The Ribeira Azul program will regularize and upgrade informal settlements, and improve access to basic social services, for 10,000 householdsliving in the poorest sections of the Ribeira Azul area, and also improve access to infrastructure andbasic services for 30,000 households living inthe more consolidated parts of the area. The target population i s thus comprised of 40,000 households or 150,000 people. 4. The institutional and financing arrangements for implementation of the Ribeira Azul Programare worthy of note. In a recent article, Journalist Peter Katel wrote that "Ribeira Azul i s a rare species of development program. Though Brazil - like other countries - traditionally treats anti-poverty work as a government responsibility, the staff and leadership of RibeiraAzul come both from the public and private sectors. Fundingflows from multiple sources as well." 5. Inits attempt to scale up slum upgrading to the whole Ribeira Azul area, the Government of Bahia, besides mobilizing US$ 12.2 million from its own budget, secured US$ 14.7 million in loan financing from Caixa Econamica Federal, US$ 6.7 million in targeted Brazilian federal government transfers: and US$ 16.9 million from the World Bank's Projeto Metropolituno and PRODUR loans. The Italian Government provided a total of US$ 7.5 million in grants (including the US$ 5 million PATS grant), and AVSI provided a further US$ 2 million in grants from private sponsor^.^ Working with these funding sources, each with its own administrative and technical requirements, posed the challenge of ensuring consistency in methodology across the various separate interventions. From the start, CONDER movedto ensurethat the projects in the various communities formed a coherent whole, understandingthat scaling up slumupgradingrequires a long-term vision and a programframework. This posed a formidable technical and coordination challenge, which was addressed by the Ribeira Azul Technical and Social Assistance Project (PATS). 6. PATS, which provides coordination and technical assistance, as well as the execution of social development activities: i s based on a broad-based international partnership. The Italian Government provided the financing for PATS, through a grant of US$ 5 million. Italy decided to channel this grant through the Cities Alliance, in order to multiply the impact of the Ribeira Azul Program as a learning opportunity and entry point for future slum upgrading activities in Bahia and elsewhere. PATS i s executed by the NGO AVSI, in partnership with CONDER. The World Bank, which was a co-sponsor of PATSfrom the start, provides overalltechnical assistanceand supervision. 7. Through PATS financing, a joint Ribeira Azul Program Management Unit (PMU) was set up, with staff from CONDER and AVSI. PMUi s headedby two Co-Directors, one from AVSI and one from CONDER, who manage the program by consensus. The US$ 5 million technical and social assistance package thus ensures the sound use of the entire US$ 70 million program budget. According to Peter Katel, "At the programlevel, AVSI supplies 100of the Ribeira Azul personnel; 37 come from CONDER. Inthe field, work is sharedsocompletely that itisvirtually impossibleto tellthe public-sector staff apart from the NGO workers." These transfers, which came to Bahia as federal grants, are proceeds from the Inter American Development Bank Habitar Brasil BID loan to the federal government, The funding already mobilized adds up to $ 60 million, or 86% of the estimated $ 70 million total cost of the Ribeira Azul program. O f the $ 60 million already mobilized, the State of Bahia took out loans for $ 31.6 million, or 53% of the amount mobilized. $ 28.4 million, or 47% of the amount mobilized, i s represented by the State budget and by federal and international grants. The grant and loan resources mobilized by the Government of Bahia to finance the Ribeira Azul Program focused on the housing and infrastructure work and did not finance the social development work, a strategic function that was taken on by the Italian grant. 31 BOX 1.MAINACTIVITIES OFTHETECHNICALAND SOCIAL ASSISTANCEPROJECT Inthe Technicaland Social Assistance Projectthere are six maintypes of activities: (a) Support to the management and coordinationof the RibeiraAzul Program, through the provision of part of the personnelandlogisticsto the ProgramManagement Unit; (b) Technical assistance and socio-technical support to specific activities in the Ribeira Azul Program (e.g. participatory information gathering and analysis, participatory area development planning, land tenure regularization,urbandesign); (c) Engineering and architectural plans and projects for specific works that are part of the Ribeira Azul Program (e.g. the Scenic Road along the bay, basic infrastructure for the settlements, and housing for resettlement); (d) Execution of social programs(e.g. health, education, day care, job training, support to local cooperatives, home improvement)andbuildingof social equipment inthe RibeiraAzul area; (e) Studiesto be usedfor the preparationof the new state wide slum upgradingprogram, Viver Melhor 11; (0 Manuals,trainingmaterials,on-the-jobtraining and workshops on the participatory andarea-basedplanning andimplementationmethodologyusedinthe RibeiraAzul Program.\ 8. PATS also has a crucial role in further scaling-up, since it finances a series of studies to support the preparation of a new, much wider, slumupgradingprogram for Salvador and other key cities in Bahia. The technical assistanceprovidedunder PATS andthe Bank's own supervisory role inRibeiraAzul have underpinned the discussions between the Government of Bahia and the World Bank regarding a new US$ 160 million state wide slum upgrading program, called Viver Melhor (Bahia Integrated Urban Development Program), which i s already being prepared. The new program has been given a green light by the Brazilian federal government through COFIEX the commission that analyzes and approves all external loans, and is in the Bank's active pipeline for FY05. Viver Melhor will also be based on the participatory, integrated and area-based methodology of Novos Alagados and Ribeira Azul. 9. Therefore, the Cities Alliance activity has had a catalytic role in ensuring, first, the replication of the Novos Alagados methodology on the muchlarger Ribeira Am1 scale, and, later, the extension of slum upgrading with an integrated approach to a citywide scale in Salvador and beyond. The success of PATS has led the Italian Government to pledge a new Euro 5 million grant which will be used to replicate the Ribeira Azul technical assistance arrangements in the management of Viver Melhor. The new program will thus be based on the same partnership between the Government of Bahia, the Government of Italy, the Cities Alliance and the World Bank that has underpinned Ribeira Azul. 10. The scaling-up process from community, to area development, to citywide and now statewide scales of action, has been made possible by the coherent efforts of the broad range of development partners who are directly contributingto these efforts. These are of course primary objectives of the Cities Alliance. 32 2. THE VIVER MELHORPROGRAM 11. The Viver Melhor program resulted from the Bahia State Government's commitment to fight poverty and social inequalities. Conceived as a scaling up of the experience of integrated intervention provided by the Ribeiru Azul Program, this i s a high-priority governmental strategic action for promoting social inclusion and improving quality of life in economically marginalized segments of the population, residing in previously identifiedareas of high social vulnerability, and i s especially linkedto the policy of urban development and combating poverty. 12. Inthe context of the guidelines andtargets set by the Stateof BahiaStrategic Plan(local acronym PEB 2003) and actions under the Multi-year Plan (local acronym PPA 2004/2007), the Viver Melhor program seeks to lay new institutional bases to attain a responsible urban development process, assisted by social, economic, cultural and environmental sustainability in order to change the low indicators of quality of life now found inBahia, starting by broadening and reinforcing actions that have been executed in similar government programs. 13. The Viver Melhor program seeks to lay new social, urban, economic, and institutional bases to attain a process of responsible urban development, assisted by social, economic, cultural and environmental sustainability in order to turn around the low quality of life indicators now found in Bahia, startingby broadeningandreinforcingactions that havebeenexecutedby similar government programs. 3. MAINSECTORALISSUESTACKLEDBY THEPROGRAM 14. The sectoral strategies of the Bahia State Government converge toward a vision of the future, so the Viver Melhor Program in all sectors articulates actions set by the policy of integral development instated by the Bahia State Government with other programs pursuing improvement of quality of life for low-income social segments through interventions directed to the provision of basic infrastructure and services, housing and urban improvement, community development and strengthening and in particular creatingjobs and income for the populationresiding inprecarious urban settlements. 15. The interventions planned for VIVER MELHOR are directed to tackling problems detected by the Program in the pilot areas for intervention which generally characterize the other areas of major poverty . concentration inthe state. These problems may be summarized as follows: PRECARIOUS HOUSING AND URBAN INFRASTRUCTURE - refers to deficient or non- existing urban infrastructure and public services, as well as irregular lot ownership titles, with low quality urban planning and housing found in these areas. This reality combines with the situation of poverty for residents and leads to a precarious pattern of occupation that i s inadequate and predatory on urban areas, that creates serious environmental and sanitary problems with a negative impact on the environment, health, and safety not only for residents but for the . population as a whole. SOCIAL EXCLUSION - derives directly from poverty, social inequality and the absence of opportunities to become engaged in the process of formal socioeconomic development. This reality, which i s derived among other factors from the low level of schooling and the absence of residents' occupational qualifications, associated with existing precarious urban structures, leads to a hostile and unequal urban scenario that i s socially vulnerable and based on informal and oftentimes illicit activities. This combination of factors acts as a multiplier for the situation of unemployment, urban violence, and social unraveling that i s so common inthose areas. 33 . PRECARIOUS CHANNELS OF PARTICIPATION AND SOCIAL MOBILIZATION - resulting from precarious participation of the residents in directing the process of urban development inthe areas in question, hence the fragility of the mechanisms of social participation which often not only leads to demands unrelated to the real needs and priorities of the population, . but also does very little to strengthenanddevelop community spirit. FRAGILE PUBLIC ADMINISTRATION - corresponds to institutional aspects and the administrative practices of the agencies responsible for directing and articulating public policies which are generally lacking mechanisms, qualified technical cadres, and agile operational structure compatible with efficient and effective administration to underpin the social and urban development process in these communities. Therefore this situation generates inefficiency, overlapping activities, conflicts, dissavings, disappointments, and also weakens the involvement of the government in moving forward on issues inherent to its competence, leaving a worrying political and institutional vacuum. 16. In addition to the need to tackle these problems, another decisive issue in defining the scope and reach of Viver Melhor relates to the state government's belief in the need to reinforce spatial decentralization of public investments in Bahia. This belief i s based on the premise that the effectiveness of the strategy of development and combating poverty that has been put into practice inBahia depends on strengthening urban and socioeconomic structures in strategic cities in the interior of the state. This i s directly related to reducing regional inequalities and consequently to balancing and redirecting migratory flows - particularly those from the interior of the state toward the state capital. 17. In these conditions, there is a need to face the challenge of mitigating the predominance of Salvador as the urban center of the state and of reducing the demographic and economic concentration in i t s metropolitan area, based on investing in improvements of urban infrastructure and strengthening socioeconomic structures inthe urban centers of the interior of the state that show development potential. The state government has fostered the implementationof projects and social and economic activities that draw more investment to these centers in an attempt to have the population remain rooted in the interior of the state. 18. The Viver Melhor Program broadens and reinforces this practice in seeking to distribute interventions around 19 cities in the interior of the state, in addition to the state capital, Salvador, thus helping to fulfill guidelines set by the Bahia Government in relation to interiorizing development and achieving more balanced spatial distribution of public investments, as a means of reducing social and demographic pressures seen in the metropolitan region and strengthening strategic centers in the interior of the state. 34 BRAZIL BAHIAPOORURBANAREASINTEGRATEDDEVELOPMENT -Annex2: Major RelatedProjects Financed by the Bankand/or other Agencies PROJECT VIVER MELHOR - I1 Water and Sanitation BR-PO6541SHo Paulo,Paran6andFederalWater S (ICR rating) S (ICR rating) Quality Projects(closed) BR-PO43420Water Sector Modernization S (ICRrating) S (ICR rating) Project BR-PO82328BetimMunicipal IntegratedProject Not Yet Effective Not Yet Effective ......................... ........ Water Resources BR-PO6436State of CearfiUrbanDevelopment s-WRM s-WRM Management andWater ResourcesManagement Project component component (closed) (ICR rating) (ICR rating) BR-PO35728State of BahiaWater Resources S S Management Urbanand Municipal BR PO6562 BahiaMunicipal Infrastructure S (ICR rating) S (ICR rating) Development DevelopmentandManagementProject - PRODUR (closed) BR PO6367 Salvador MetropolitanDevelopment S (ICR rating) S (ICR rating) Project (closed) BR-PO6524State of Minas GeraisMunicipal S (ICR rating) S (ICR rating) DevelopmentProject (closed) BR-PO6436 State of Cear6 UrbanDevelopment S - Urban S - Urban andWater Resources ManagementProject Component Component (closed) (ICR rating) (ICR rating) BR- PO49265RecifeUrbanUpgradingProject S S ..Other Development A.. mcies ______ BR Municipality of Manaus- PROSAMIM (IDB, approved by the Board, not yet signed) BR- Municipality of Juiz de Fora Urban EnvironmentalRehabilitation(IDB) BR- Municipality of Belo Horizonte DRENURBS(IDB) BR- Municipality of Porto Alegre Environmental Rehabilitation(IDB) BR- Municipality of Rio de Janeiro Favela Bairro (IDB) BR- Municipality of SHo Paulo Prd-Centro (IDB) BR- Municipality of Belo Horizonte BH Cidadania (IDB- under preparation) 35 Annex 3: ResultsFramework and Monitoring BRAZIL - BAHIAPOOR URBANAREASINTEGRATEDDEVELOPMENT PROJECT VIVER MELHOR - I1 Monitoring and EvaluationPlan 1. A comprehensive Monitoring andEvaluationPlan hasbeendeveloped for implementationinthe Project. The plan includes aframework for monitoring and evaluation, detailed outline of institutional arrangements, costs, indicators, anddata collection instrumentswhich are described below. 2. This plan is linked to a broader World Bank initiative - Development ImpactEvaluation (DIME), aimed at increasing the number of Bank projects with impact evaluation components in particular strategic areas and themes, and building a process of systematic learning on effective development interventions based on lessons learned from solid evaluations. One of the key themes that has been selected is urban upgrading. Through the link with DIME, the methodological approaches and innovations from carrying out impact evaluations in the Bahia Poor Urban Areas Integrated Development Project - Viver Melhor I1as well as similar projects in other countries will be shared, along with the lessonslearned on the longer term impacts of integrated urbanupgradingon poverty reduction. Conceptual Framework 3. The design of the M&E scheme i s based on a set of indicators directly linked to the results framework. Monitoring will be carried out on a regular basis, with longer-term impacts to be evaluated for a sample of communities at three points in time following Project implementation. The M&E system i s designed to focus on capturing direct benefits in the selectedcommunities. 4. Monitoring & Process Evaluation. Monitoring will be largely based on inputs recorded in the Management Information System (MIS) and existing administrative data. Reporting will be carried out every quarter by the CONDER. Participatory monitoring will be based on continuous feedback from beneficiaries collected through the "Casus do Viver Melhor". This information will be channeled to the CONDER with a formal mechanism for follow up. This feedback will also be included in the Quarterly MonitoringReports. 5. Zmpact Evaluation. A rigorous impact evaluation has been designed to assess Project impacts on beneficiary households and communities over time. A specially designed baseline survey (described below) will be carried out for all households in selected communities prior to Project implementation as well as in a sample of control communities with characteristics similar to the project communities. Follow up panel surveys will then be carried out for a sample of households in sample communities one year after implementation, 5 years after implementation and a final round 9 years after implementation. The impact evaluation will be based on a mix of data sources: primary data collection through the household survey, a survey of land and housing valuation, an epidemiological survey, focus groups with beneficiaries, and selected secondary data sources (mainly administrative). Data Resources 6. . The key data resourcesto be usedfor monitoring and evaluation are outlined below: MIS. A complete managementinformation system will be developed under the Project to include full information on spending, material inputs, number of beneficiaries, and Project status. This . system will provide the basis for inputs in the monitoring system. Information will be available on a current basis. Household Suwey. A baseline survey would be carried out for all households in MVSU areas. The survey follows an existing approach that CONDER uses for targeting beneficiaries and includes two parts: a physical cadastre and an extensive socioeconomic profile (PSE- Pesquisa Socio-EconGmica). In subsequent years, data for a sample panel of households would be 36 collected for a sample of communities. Data would also be collected for control groups in a . similar manner. Data collection would be contracted out to a private firm with strong experience in survey implementationthrough acompetitive process. Focus Groups. The household surveys will be complemented by focus groups in the projects' communities. At the time of the baseline, the focus groups will include two thematic areas, identification of priorities, and characterization of conditions. In the follow up survey years, the focus groups will focus on changes over time to understand Project impact. In the control . communities, focus groups will only be carried out in follow up years capturing changes over time. . Land and Housing Valuation. Valuation will be carried out for a representative sample of households ineach community by specialized consultants at the time of baseline, and three follow up surveys as apanelto accurately assess how landandhousingvalues have changed. Epidemiological Suwey. A rapid epidemiological survey i s currently being used inselected areas inthe State of Bahia. This survey will becarriedout inthe Project and control areas. Secondary Data. Existing administrative, census and other data will be used to provide regular input for monitoring purposes. These data are available at the level of the micro-area and will thus be compatible. Indicators 7. A set of indicators related to the Project development objectives has been developed by the client and broadly discussed during Project preparation. Results indicators for Project monitoring will be compiled every quarter and are listed below. Longer-term impact indicators are to be finalized at a workshop prior to Project launch and would be analyzed and reported at periodic intervals following Project implementation (+ 1year, + 5 years,+9 years). survey, qualitative 37 Institutionalarrangements 9. CONDER will be responsible for the overall management implementation of the Monitoring and Evaluation Plan. This will include maintaining the data base for monitoring, managing the flow o f information, and producing the periodic monitoring reports. Technical assistance on the design and analysis o f the impact evaluation will be contracted to the Superintend2ntencia de Estudos Econbmicos o Sociais da Bahia (SEI), with inputby the World Bank through the DIMEinitiative. 10. Within CONDER, one full time senior person will be responsible for managing the M&E plan, with two technical staff responsible for maintainingthe data bases and producing the periodic reports. ResultsFramework OutcomeIndicators (i)Improved quality of life and asset Improvementinthe quality of living base for the poor through the provision conditions for target communities iolicies and programsby the of basic infrastructure services, (hdice de vulnerabilidade social e nunicipality and state to improvementof housing conditions and urbana) naximize impactson poverty access to urbanland, and regularization *eductionand improve living of land tenure and buildings in slums :onditions. and unplannedsettlements; (ii)Improved access to social programs in the areas of income and employment generation,direct support to families' survival strategies (e.g. through better and easier to access daycarefacilities), healthcare, educationandjob training, and initiatives inthe area of community security at the local settlement level; (iii) Enhancedstate and local governmentcapacity to plan, implement, monitor and evaluate integratedurbanpoverty reduction strategies involving severaldifferent departments, undertakeurbanupgrading and land delivery, coordinate social policy on the ground through participatory planning, and monitor and evaluate governmentprograms through poverty and quality of life indicators. IntermediateResults ResultsIndicators for eachComponent Useof resultsMonitoring (one percomponent) ComponentA ComponentA ComponentA By the end of year 4 some 30,000 urban 1. Number of improved houses ... will demonstrate poor of selected informal settlements in 2. Number of families in precarious successlimpactof:. .. 8 municipalities provided with basic housingresettled (% of demand) 1. Upgradingon local property urban infrastructure and secure housing 3. Reduction in proportion of housesin markets riskareas (flooding, landslides) 2. Resettlementoptions for the 4. Reduction in water-borneor most vulnerable sanitationrelated illness 3. idem 5. % of land I home tenure 4. Health outcomes regularization 5. Housing policy for the lowest 6. Increasedaccess to upgraded income groups including settlements and mobility of residents tenureregularization (measured by improvements in 6. Provision of basic urban quality and number of feeder roads services (water, sewerage; and road links, reducedtraveling solid waste) 38 times) 7. Integratedurban planning to 7. Increased trunk infrastructure for include physical inclusion o f W&S and urban drainage for target informal settlements and communities (% of demand) access to public space ComponentB ComponentB ComponentB B y the end of year 4 some 78,000 urban 1, Installation of "Casa Viver Melhor" successhmpactof.. . ...will demonstrate poor of selected project areas in 8 intarget communities municipalities have improved accessto 2. Initiation of social programs (health, 1. Increased coverage of public social programs and income generating education, and training) social policies and programs opportunities 3. Increased number of children (all levels of government) vaccinated 2. Idem 4. Increased number of children 3. Health outcomes attending preschool 4. Educational attainment I 5. Reduction in child malnutrition 5. Health outcomes 6. Number attending training programs 6. Income earning opportunities 7. Number of teens, adults attending for youth, working age literacy programs population 8. Reduction in incidence of reported 7. Educational attainment; crime and violence 8. Community and personal security, enhancedby urbanization efforts ComponentC ComponentC ComponentC Improvedinstitutional and management 1. Amount of additional funding from successhmpact of:. .. ...will demonstrate capacities at state and local government involved state and municipal levelto plan, implement, monitor and organizations, both for investment 1. Sustainability of program evaluate, operate and maintain and O&M (yearly and total over 4 intervention integrated poverty reduction strategies Years) 2. Effectiveness and efficiency 2. Project management structure and of Project management instruments (MIS, SGI, M&E) 3. Capacity building activities implemented and functioning on all 4. Community participation levels 3. Number of municipality staff trained I inkey policy issues (urban planning and occupation control, SGI, cost recovery, etc.) 4. Number of community meetings held 39 BRAZIL BAHIA POORURBANAREAS INTEGRATEDDEVELOPMENT - Annex 4: DetailedProject Description PROJECT VIVER MELHOR - I1 1. The Project will includethe following three components: 0 UrbanInfrastructureDelivery: This component will finance priority infrastructure investments focused on poor communities. Financing under this component will: (a) help provide basic services to the poor including urban drainage, roads, street paving, water supply and sewage, solid waste management, housing replacement etc.; and (b) macro-level infrastructure investments that will be necessary to integrate upgraded settlementsinto the urban fabric. 0 Social Services Delivery: This component will finance social investments like strengthening of local community based organizations (CBOs), income strengtheningthrough training etc. and the needed facilities such as day-care and basic health care units that will complement the investments in community infrastructure 0 Institutional Strengthening and Project Management: This component will finance a variety of capacity building activities including planning, monitoring and evaluation tools that will enable government agencies to better manage and plan the process of urban poverty reduction projects. Component A- UrbanInfrastructure Delivery: (US$51.4 million) 2. This component will finance urban upgrading of informal settlements and will have four sub- components. The first will finance urban infrastructure investments (urban drainage, roads, street paving, water supply and sewage, solid waste management, home improvement, replacement housing) with impacts within the targeted communities (PF). The second will finance macro-level infrastructure with impacts within and beyond the target communities, such as road links to enhance citywide mobility, macro drainage and green areas / parks. The third will finance low-cost housing alternatives for the poor. The fourth will finance engineering designs of civil works and consultant services for on-site supervision and quality control. 3. The scope, nature and location of upgradingworks under this component will be identified as part of the PID. Sub-component A1 Communitv infrastructure: US$36.7 million - 4. Investments under this component will provide basic urban infrastructure and access to landand housing for the poor in the targeted project areas through: (i) works for urban drainage, roads, street civil paving, water supply, sewerage, solid waste management, housing replacement as needed, stabilization of slopes and embankments and flood protection, recreational and community areas; (ii) improvements in physical access to plots and site layout; (iii) and, in a few limited cases, where remaining in place i s intra- not feasible, extra-settlement rel~cation;~(iv) supporting home improvement and expansion efforts of low-income urban residents offering improvement kits such as "cesta de material" and "sanitation kits"; and (v) regularizationof landtenure and buildingsinthe targeted project areas.' 5. The technical standards applied to upgrading sub-projects under this sub-component will take As in Ribeira Azul, every effort will be made in Viver Melhor I1to minimize resettlement. When absolutely necessary due to situations of risk or other project imperatives, relocation will be to nearby areas. 'Regularizationprocessesprovide security of land tenure to existing occupants while affordable land delivery mechanisms, which cater to new households entering the housing market, are necessaryto prevent new slum formation. 43 into account the urbanization pattern of surrounding areas (such as the layout and conditions of the road network; multi- or single story buildings; minimum lot size), affordability (willingness to pay for improvements) and cost/efficiency criteria. A pre-condition for financing will be the presence of minimal infrastructure (including sufficient water supply; waste water treatment plants, etc) in the targeted area or nearby that can support new connections from the upgraded settlement. Home improvements (such as roof and wall improvements, sanitary installations, etc) shall be financed by micro-credits offered by existing credit lines, individually or in groups. The levels of subsidy for home improvements under the Viver Melhor Project will be differentiated and will take into account the applicant's level of social vulnerability and the capacity to pay. 6. Component A1 will directly benefit some 30,000 families in 8 cities, including Salvador, the state's capital (see Annex 18, Map 1). Sub-component A2 Macro-level works: US$11.25 million - 7. This sub-component will include complementary trunk infrastructure (macro-level works) identified by macro-planning (such as PID), necessary to integrate targeted informal areas into the fabric of the formal city. These include: (i) macro-sewerage and drainage; (ii) links that both serve the road targeted informal settlement and improve citywide mobility; (iii) water supply mains; and (iv) parks and recreational areas alongriverbanks, etc. 8. Macro-level works which will serve both the settlement to be upgraded and a broader range of beneficiaries in the neighborhood are eligible for financing under this component. The proportion of program funds allocated for macro-level works should not exceed 25% of those to be invested to benefit directly the poor dwellers of the targeted area. Sub-component A3 Housing alternatives for the poor: US$1.5 million - 9. This sub-component will finance the development and testing of mechanisms for starting-up affordable formal land delivery and other housing alternatives to the poorest segments. Based on complementary studies to be financed under component C1, alternatives such as site-and-service delivery in unoccupied urban areas and re-use of abandoned industrial/commercial areas or buildings in central urban settings for housing purposes will be tested. These activities respond partially to the demand for new housing and to avoid the formation of new slums and informal settlements. These interventions can also contribute to the revitalization of degraded urban areas such as parts of "Cidade Baixa" inSalvador. Sub-component A 4 Engineeringdesigns: US$1.95 million - 10. The investments under this sub-component will fund: the production of "Integrated Local Development Plans" (PID); the engineering designs of civil works; and consultant services for on-site supervision and quality control. Scope and extent of details of engineering designs will be adapted to the needs and conditions of interventions in unplanned informal settlements, where it does not make sense to invest in fully detailed designs before works begin, due to the need for many changes and adaptations as work proceeds. Therefore, technical projects will have the status of "projetos bhicos" and construction works will be accepted "As Built". In spite of this, in order to ensure quality, all upgrading works will have to meet appropriate minimal standards, defined in the Program's Technical Specifications Manual (Cahier des Charges,or Cadernode Encargos). Component B- Social Services and Facilities Delivery (US$19.45 million) 11. This component will finance social service delivery and the provision of the complementary physical facilities needed to deliver such services. The nature and scope of the necessary social services and facilities will be identified within the "Social Development Plans", which will be part of the "Integrated Local Development Plans" (PID). Community support will be stimulated to improve 44 sustainability and management of provided basic services. 12. The interventions under this component will benefit approximately 78,000 families in the areas targeted for upgrading works (component Al) and their immediate neighborhood with similar social disadvantages. Sub-Component B1- Social services delivery: US$7.45 million 13. The participatory planning process in each area of intervention (PID; Social Development Plan- PDS) will drive this sub-component. According to the identifiedpriority needs and demands of each area, it will seek to create conditions for sustainableurbanpoverty reductionthrough a subset or combination of the following: (i)strengthening of local community based organizations (CBOs) and facilities providing social services such as child-care; (ii) income and employment generation, through job training, stimulating local entrepreneurship and micro (informal) businesses (training and access to micro-credit) - these efforts will include job creation in depressed areas by wide use of labor-intensive construction techniques by the hired construction firms and local labor in the public works to be financed by the Project; (iii)health and environmental education and notions on appropriate use and maintenance of the new facilities provided by the Project, as a pre-condition for lasting impact and sustainability; (iv) direct support to families' survival strategies (e.g. through increased day-care facilities); (v) supporting governmental institutions and CBO's providing primary healthcare, primary education, access to higher education and computer and internet access; (vi) promotion of and support to sport and cultural activities to get youth-at-risk off the streets; and (vii) initiatives for enhancedsecurity at local community level (see Annex 16). 14. As inRibeira Azul, this component will give priority to identifying, strengthening and partnering with existing public and non-governmental institutions and programs. Sub-Component B2 Social service facilities and buildings: US$11.4 million - 15. This sub-component will finance complementary facilities and buildings needed to deliver or enhance social services listed under component B1and defined by specific local plans (PID; PDS) such as kindergartens, buildings for primary education and health care, sport and professional training facilities. Financing under this sub-component also includes the construction of so called "Casa do Viver Melhor" in or near slums and informal settlements to be up-graded. These facilities will have two purposes (a) to be entry points for provision of social services provided by the state and municipal governments; and (b) to host the local coordination unit of the Viver Melhor Project during the implementation period of planned interventions. 16. Based on the M O U to be signed at the beginning of any intervention in a given municipality between SEDUR, the involved state entities and the benefited municipality, staffing of these social service facilities and other M&O costs (recurrent costs) will be assumed by state and/or municipality entities. Sub-Component B3 Praiect Desim for Local Social Development: US$0.6 million - 17. The above designated funds will be used to develop plans and projects for local social development (PDS), articulated and coordinated within so-called "Integrated Local Development Plans" (PID)producedunder sub-component A4. Component C- Institutional Strengthening and Project Management- US$7.75 million 18. This component will include three sub-components: The first will finance the preparation of studies on topics such as local economic development, affordable land delivery mechanisms and cost 45 recovery and subsidy mechanismsfor infrastructure, and others requiredfor Project implementation. The second will finance institutional capacity building for slum upgrading, urban poverty reduction both on municipalities. The thirdwill finance project management, including monitoring and evaluation. state and local government level and sustainable urban and social service delivery by benefited Sub-componentC1- Complementary studies: US$l.O million: 19. This component will finance: (i)local economic development studies for each area of intervention; (ii)studies of mechanismsto deliver appropriate housing alternatives to the poor (e.g. site & service, rehabilitation and reuse of existing buildings); (iii) of organization, technical support and design assistance to offer access to micro-credit lines; (iv) Management Plans and Master Plans for selected protected areas and parks (e.g. APA Cobre, SZo Bartolomeu Park); (v) other studies required for Project implementation and, finally; (vi) feasibility studies for a second stage of the Viver Melhor llProject. Sub-componentC2 Institutionalcapacitybuildingfor urbanpovertvreduction: US$2.0 million: - 20. Investments under this sub-component will finance the provision of technical assistance, consulting services, training and the necessary equipment to the state's departments and local governments, enabling them to use the instruments developed and disseminated by the project such as: urban planning and land development mechanisms and tools; tools to keep track of the development of informal settlements and measure/monitor urban poverty indicators; subsidy structures that reflect the beneficiaries capacity to pay for private goods (e.g. for home improvements) and cost recovery strategies. Activities under this component aim to strengthen the institutional framework for urban poverty reduction, including building the necessary relationships among state and municipal agencies and between state and local governments. Inparticular, the following will be financed: (i) training in project related technical and social issues. This includes training in requirements and procedures within Bank financed projects and other definitions set out in the projects operational manual; (ii) technical assistance and consulting services in order to support municipalities to organize urban and social service delivery to the poor in a sustainable manner, as well as M&O of infrastructure, facilities and services created by the Project; (iii) strengthening of SEDUR, CONDER (especially it's environmental department CTGA) and other state departments involved in project implementation; and (iv) provision of complementary equipment for local project coordination (Casa Viver Melhor), SEDUR and CONDER. Sub-componentC3 Proiect Management,MonitoringandEvaluation:US$4.75 million: - 21. This sub-component comprises the following: (i) Project management (e.g. technical and overall operational planning, procurement, supervision; financial planning and accounting, coordination of executing agencies; reporting). The Viver Melhor Project will be executed by SEDUR and CONDER. This sub-component will also include staffing and recurrent costs of the "Casa do Viver Melhor" during the project's presence in the area of intervention and a transition period, altogether for about 36 months. Project management will be assisted by a computerized web-based management information system-MIS capable to manage and document all implementingprocesses. This computer system will have linksto the GIS database (INFORMS); (ii) monitoring and evaluation; and (iii) communication and public relations. 22. The M&E scheme will include Project monitoring reports every three months based on input from the MIS and `Casas do Viver Melhor', as well as an extensive evaluation measuring impacts in sample communities at three points in time following Project implementation. The impact evaluation will be based on baseline and follow-up surveys in project and control communities, as well as qualitative data. The work will be managedby CONDER with technical assistance. 46 BRAZIL BAHIA POOR URBANAREASINTEGRATEDDEVELOPMENT - Annex 4A: The Process of Selection of Eligible Municipalities PROJECT -VIVERMELHOR I1 1. During Project preparation, in line with the state's Strategic Development Plan (PEB), the following criteria and procedures were developed to identify municipalities eligible for interventions under the Viver Melhor I1Project (see Figure 1). Figure 1: Selection of eligible municipalities for Viver Melhor 11:Procedures and criteria ...................................................................................................................................................................................... The State's Network of Strategic Cities ...................................................... i 40 municipalities Step 1 *I Urban centres with .......................................................................................... micro-regional potential Mediumsize cities Municipalities with potential of ................................................................................................. micro-regional attractiveness, but Iii with a low Human Development Highly urbanized large (Salvador) Urbancentres with high Index (HDI),characterized by: or medium sizes Municipalities, II .................................................................................... population growth characterizedby: + Be an economic centre of a + micro-region; Municipalities with TCGA be included among those who 1991/2000 (Annual Geometric together concentrate 80% of social 3 Integrate the UrbanNetwork of the MainTransportation Corridors; Growth Rate) two times higher and economical flows; than the highest TCGA o f the 3 have 3 have more than 40,000 more than 80,000 inhabitants inthe year 2000; cities in state of Bahia. inhabitants inthe year 2000; +have +have an urbanization rate higher an urbanization rate higher Step 2 than 50% inthe year 2000; than 70% inthe year 2000; + + have an urban centre with Integrate the Urban Network commercial character of local with Governance Potential (branch influence; offices o f DIRES, DIREC, + have a Municipal HDI lower CIRETRANS and INFAZ). than0,70 inthe year 2000. ....--.-municipditysilected, I ....."....... I................. I -77 20 Pre-selected municipalities Step 3 representing 52% o f Bahia's urbanpopulation 8 Selectedmunicipalities representing 41% o f Bahia's urban population (see Annex 18,Map 1) :.......................................................................................................................................................... 47 2. Based on Figure 1, from the 20 pre-selected municipalities for the state's Viver Melhor Program, 8 were selectedas eligible for Viver Melhor I1Project interventions, as follows: Salvadori s the biggest city of Bahia State and concentratesa significant portion of Bahia's urban poverty. . i Feira de Santana, the second biggest city in the state, also concentrates a significant portion of the state's urbanpoverty. IlhCus and Itabuna, strongly affected by the cocoa crisis in the mid 1970s, which caused an . explosion of poverty and the spread of informal settlements in the urban area, taking on the characteristics of a real emergency. Juazeiro, Barreiras, Brumado e Teixeira de Freitas complete the list due to their status of development hubs undergoingfast growth. They have great economic and logistic importance as well as a strategic distribution inthe state's territory (see Annex 18, map 1). 3. The municipalities of Salvador and IlhCus already have subprojects with basic engineering designs and draft social intervention plans that were elaborated during Project preparation and will soon be ready to be implemented, once the participatory validation process i s finalized. In the Ribeira Azul area of Salvador, Viver Melhor I1will complement some interventions already initiated by the Ribeira Am1Program, and will finance new subprojects inAlagados VI and Mangueira. Also in Salvador, a new subproject i s ready to be launched inthe Pau da Lima area. IlhCus i s a strategic municipality for the state's development process due to its tourism potential as well as regional importance, and i s home to one of Bahia's main seaports. In addition, the city i s considered as an important historical and cultural center of the state. InIlhCus,the Malhado subproject i s ready to be launched. 4. The Project will be extended to informal settlements to be defined, in the other 6 selected cities. The Project's institutional and implementation arrangements lay out additional conditions for municipalitiesto participate inthe Viver Melhor I1Project (see Annex 6). 5. Another important aspect to be highlighted within the selection process i s the political party in power in each municipality. From the 8 selected municipalities, only two have their mayors from the Same party inpower inthe State Government of Bahia, which i s the PFL (see Table 1below). 48 Table 2. MuniciDalitv and remective Dolitical~ a r t v Ssource: Uni& dos Municipws da Bahia 2005, http//www.upb.org.br 49 BRAZIL BAHIAPOORURBANAREASINTEGRATEDDEVELOPMENT - Annex 4B: Project and Subproject Cycle PROJECT VIVER MELHOR - 11 . Project preparation stage As shown in Annex 4A, selection of municipalities started with the 40 strategic municipalities9 representing about 58% of the state's total urban population (see Annex 4A). From these 40 municipalities, the 20 to take part in the two phases of the Viver Melhor Program were pre- selectedaccording to the following criteria: J Economicrelevance- 12municipalities J Micro-regionaldevelopment centers7 municipalities J Highurban growth- 1municipality Out of the 20 municipalities, 8 were selectedto participate in the Viver Melhor I1Project (i.e. the first phase of the Viver Melhor Program) on the basis of the Poverty Mapping exercise and the . SECB tool that were carried out duringProject preparation (see Annex 18, Map 2). A specific study for the selection of areas of intervention in each city was carried out in four of the eight municipalities (Feira de Santana, IlhBus, Itabuna and Salvador), in collaboration with . local authorities. Basic engineering and social project designs were prepared for priority areas in two municipalities in the list, Salvador and Ilhdus, where the social and urban vulnerability situation was found to be worst (see Annex 4C for a description of the areas of intervention for the Project's rollout stage -Ribeira Azul, Pituap andMalhado Project areas). . Subproject implementation stages SEDUR will organize workshops with each of the 8 selected municipalities in order to present and discuss the Social Vulnerability Mapping and the Cost-Beneficiaries Estimate System (SECB) which are the tools used for the selection of the intervention areas and estimation of approximate intervention cost. Each municipality will then develop, with Project assistance, its . preliminary subproject proposal or proposals. Based on the eligible criteria, including issues such as the interest shown by the municipality and the resources it mobilizes at the subproject preliminary proposal preparation stage, the municipality's selection will be confirmed. After confirmation, each municipality will sign with . SEDUR a Commitment Letter. Initially, only one subproject will be prepared per municipality, with the exception of Salvador, due to the concentration of poverty inthe capital city. On the basis of the preliminary subproject proposal or proposals, SEDUR and the municipality will sign a Participation Agreement that will clearly define the responsibilities of both parties, including the responsibility of the state to implement urban upgrading investments in selected areas and provide grant financing for institutional strengthening activities that may be required so that the municipality can structure the provision of services that will result from the upgrading effort supported by the Project, such as solid waste collection; street cleaning; maintenance of roads and storm sewers; among others. The Participation Agreement will also include The state's 40 "strategic" municipalities are those defined as such in Bahia's Strategic Development Plan 2003- 2020. 50 complementary investments to be made by the municipalities and Secretariats that will not be financed by the Project. Based on the Poverty Maps and the Cost-Beneficiaries Estimate System (SECB) information, SEDUR andCONDER, in agreement with the municipality and other institutionsparticipating in the Project implementation, will finalize identification of the Social Intervention Area (PIS) and the Physical Intervention Area (PIF) for the subproject and will initiate the local participatory planningprocess. Development Integral Plan (PID) preparation. CONDER, the municipality, participating Secretariats and local stakeholders will cooperate in the preparation of the plan, which will be discussed with the local residents at a Local Development Forum to be established with the support of the Project. The PID will include: Information Gathering and Analysis, Physical Planning and Engineering Designs, EnvironmentalAssessment, Resettlement Action Plan, Social Development Plan and Cost-Benefit Analysis. Plans for the subproject will then be submitted to the ExecutiveCommittee, headedby CONDER, which technically evaluates subprojects and confirms compliance with subproject technical, social, environmental and safeguards guidelines, as well as with the eligibility criteria established inthe Project's Operations Manual, before submitting the subproject to SEDUR for approval and presentation to the Bank seeking no-objection. Once the Bank grants its no-objection, a Working Plan will be elaborated and signed between CONDER and the municipality for each subproject. The Working Plan, which will add detail to the preparation stage, will spell out the terms and conditions for the funding, execution, ownership, operation and maintenanceof the selectedsubproject. CONDER will then prepare the subproject implementation plan, procurement plan and bidding documents, and submit the documentation to PMUBEDUR. SEDUR will then release the funds for subproject implementation, which will be managed by CONDER. CONDER will then contracts goods, works and services needed for subproject execution. SEDURand CONDER will monitor andevaluate subproject through the Project's M&Esystem. 1. The Bahia State Government will undertake the direct implementation and execution of Project investments. Nevertheless, considering that the implementation will have a direct impact in the municipal urban territory, the engagement of local governments as well as local communities i s a key issue for the sustainability of Project interventions. Inthat sense, the government established participatory instruments and institutional articulation for all stages of the project cycle. The Project's strategy for municipal participationon the Viver Melhor 11,divided in six stages, is illustrated inFigure 1. 51 Annex 5: Project Costs BRAZIL BAHIAPOORURBANAREASINTEGRATEDDEVELOPMENT - PROJECT VIVER MELHOR - I1 Project Costs Components /Sub-components Local Foreign Total US$ million US$ million US$ million A1 Community Infrastructure 36.70 0.00 36.70 A2 Macro-level works 11.25 0.00 11.25 A3 Housing alternatives 1.50 0.00 1.50 A4 Engineering designs 1.90 0.00 1.95 B SocialServices delivery . 19.45 0.00 19-45 B1 Social Services 7.45 0.00 7.45 B2 Social service facilities 11.40 0.00 11.40 B3 ProjectDesignfor local Social Development 0.60 0.00 0.60 C1 Studies and plans 0.50 0.50 1.00 C2 Institutional Strengthening (training, consultant 1.90 0.10 2.00 services; equipment) C3 Project Management 3.30 1.45 4.75 Total Baseline Cost 76.55 2.05 78.60 Physical and Price Contingencies (4%) 3.03 0.45 3.48 Total Project Costs 81.71 Interest during construction Front-End Fee 0.12 0.12 Total FinancingRequired 79.58 2.62 82.20 Identifiable taxes and duties are US$ 4.81 million, and the total cost, net o f taxes i s US$ 77.39 million. Therefore, the share of project cost net of taxes is 94%. 53 BRAZIL - BAHIAPOOR URBAN Annex 6: ImplementationArrangements AREASINTEGRATEDDEVELOPMENTPROJECT-VIVERMELHOR I1 1. Inorder to implement a multi-sector Project coveringeight municipalities indifferent regions of the State of Bahia, the administration and execution of Viver MeZhor ZZ will require the different public sector agents - state government secretariats and target municipalities - and the non-governmental organizations involvedto cooperate on a partnership basis. These public and private agents shall compose an institutional arrangement in which a prominent role shall be played by a Project Management Unit (PMU)basedinthe UrbanDevelopment Secretariat. 2. The organizational guidelines, functions and responsibilities, structure, teams and the dynamics for the operation of the institutional arrangement for the administration and execution of Viver Melhor ZZ are described below. 1. Organizationalguidelinesfor operationofthe InstitutionalArrangements 3. The efficient (optimization of resources), efficacious (reaching objectives) and effective (social relevance) operation of the InstitutionalArrangements shall be basedon these guidelines: mMuZtisectoriaZity - to tackle the complexity and multiplicity of the problems in the areas . covered, which require combinations of sectoral solutions in order to cause the impact desired; Matrix operation through which the units of the existing structures inSEDUR, CONDER - and other bodies of the State of Bahia and relevant municipalities shall work together in an integrated manner and provide the resources and technical staff required for the execution of the work ina functional andproductive manner; .De-bureaucrutization - decisions shall be made on the levels closest to the action. For this purpose, there shall be a major contribution from the use of an automated information system; all project-related data required for information purposes, or disclosure and publicizing, or monitoring, or evaluation or redirection shall thus be placed within reach of all parties responsible or concerned; mPro-active nature project monitoring shall seek to locate problems in advance, not only to - meet physical or financial needs, but also to measure the level of knowledge and satisfaction of the communities in relation to the actions planned or executed, thus working to ensure the involvement, commitment and responsibility of the agents and the population itself, in favor of the intended results; .Integration of teams, efforts and actions - the network formed by government agents (on state, municipal and federal levels), private agents and the third sector to undertake the project, constitutes a complex organization that will require appropriate mechanisms for buildingconsensus, sharing visions, negotiating, cooperating, settling any disagreements or tensions, and positively exploiting their diversity, in order to achieve the intended results. 2. Structure of the InstitutionalArrangement Governmentof the State of Bahia 4. The Government of the State of Bahia i s the Borrower in the Loan Agreement with the World Bank - IBRD. 54 SEDUR Urban Development Secretariat - 5. SEDUR i s the institution managing the Viver Melhor ZZ Project. It will be responsible for planning, supervision, coordination and administration of the Project activities, as well as monitoring and evaluation. It represents the Borrower and will be responsible for the dialogue with the World Bank. SEDUR will be responsible for all political and strategic decisions and will liaise with the other organizations participating in Viver Melhor ZZ. SEDUR shall house the PMU and Steering Committee of Viver Melhor ZZ. 6. The Secretary of State for Urban Development shall take on the responsibility for controlling expensesand the operating account in local currency for funds providedunder the financingarrangement. 7. The Project Steering Committee i s a forum for articulating, bringing together proposals and actions, reaching consensus and agreeing on political-institutional commitments, disseminating information, identifying needs, garnering guidelines and directions for the Project and evaluating results. It shall be attached to SEDUR and chaired by the Governor of the State of Bahia. The Executive Secretary of the Steering Committee i s the manager of the PMU, which shall provide the Committee with support and advice. 8. The following shall be members of the Steering Committee, in addition to its President: the state government secretariats for Urban Development; Planning; Finance; Labor and Social Protection; Public Security; Reduction of Poverty; Education; Health; and the President of CONDER. The remaining state government Secretariatsmay take part inmeetings when requested. 9. Mayors of the municipalities involved and other stakeholder organizations may also have seats on the Steering Committee as guests of the state government, to deal with themes of interest for the Project and the local collectivity. 10. The manager of the PMUand a CONDER Project representative shall attend the meetings of the Committee to provide information. 11. The Steering Committee shall meet at least twice a year, and may be convened by its President whenever necessary in addition to its regular meetings. CONDER State ofBahiaUrbanDevelopment Company - 12. CONDER, a state-owned company that reports to SEDUR, shall be SEDUR's implementation arm for Viver Melhor ZZ, and will implement Project actions directly by contracting construction works and services and purchasing goods as needed. 13. The President of CONDER shall take responsibility for the executive account in local currency that will receive loan proceedsand counterpart funding for expenditures authorized by SEDUR. State Secretariats 14. The Government of the State of Bahia's secretariats shall take part in Viver Melhor ZZ as beneficiary organizations of the Project, and shall take responsibility for complementary investments and operation and maintenanceof services created by the Project intheir areas of institutionalcompetence. 55 Municipalities involved 15. The municipalities shall act as partners of the government of the state in the execution of Viver M e l h d BIRD, and shall take part in decisions on the selection of the Project's intervention areas and actions affecting them. They shall take responsibility for carrying out activities favoring institutional strengthening as part of the Institutional Development Sub-component to be capable of performing management, technical andfinancial tasks (see Annex 4). Localcommunity organizations 16. Local community organizations (also known as intermediary organizations) shall act as partners of the government of the state to ensure sustainable grass-roots participation of the communities involved inexecution of the Project. Inthis context, they shall beresponsible for execution of specific development actions and activities with the community. Project ManagementUnit (PMU) 17. The PMU was established by Decree No. 8941 of February 4, 2004, and an experienced civil servant was appointed to head the unit, which is already operational and has participated in Project preparation activities since its inception. 18. The PMU was set up within SEDUR and is directly attached to the Secretary. It constitutes a management mechanism for political-strategic coordination for Viver Melhor ZZ, and coordination between its actors and agents in accordance with the state government's macro guidelines. 19. The PMUwill make decisions related to the planning, execution, and monitoring and evaluation of the results and impacts for the Project. Also it i s responsible for dealings with the World Bank during implementationof the Loan Agreement with the Government of the State of Bahia and responsible for the submission of the accountability reports. 20. As the coordinationbody for the development and implementation of Viver Melhor ZZ, the PMU will liaise with federal and state bodies, the participating municipalities, third-sector, and private-sector organizations to ensure synergy across actions and to reach agreements on partnerships andcooperation. 21. Inparticular, thePMUwillliaisewith: The Planning Secretariat, which shall follow-up, monitor and evaluate the set of Projects .. comprising the Strategic Plan of the State of Bahia, and the state's programmatic actions involving contributions of external funds; The Finance Secretariat, as the agency responsible for budget and financial management of state funds and holder of the account for the external loanagreedwith the World Bank; The Reduction of Poverty and Labor and Social Protection Secretariat, and the Secretariat for Public Security of the state. 22. Inorder to performthese tasks, the PMUshall rely on assistancefrom the appropriate SEDUR unitsand may also contract consulting servicesprovidedby individuals or organizations. 23. The maintasks and responsibilities of the PMUstaff and composition of team, are as follows: .. Main Responsibilities of the PMU: Managementand overall supervision of the implementation of the Project; Decision-making as related to the planning, coordination, control, monitoring and evaluation of 56 the Project; .. Define priorities, set up partnerships,allocate resources, determine the overall schedule and make other decisions related to overall Project implementation. Plan, supervise and guide biddingproceduresconducted inthe ambit of the Project; Approve public announcementsrelated to biddingprocedures and obtain appropriate no-objection from IBRD when applicable. Foster political-institutional articulation between the state and the financing agent, with federal . and state executive bodies and agencies, the participating municipalities, partner organizations and other participatingagents; Foster integration of the Project with the State's Urban Development policy and other Programs related to its scope and objectives; . Ensure the adherence of executors to the guidelines, strategies and rules set by the government of the state of Bahia, the World Bank and other instancesfor managementand control of the Project; Advise and assist the Steering Committee of the Project inits functioning and decisions; Determine strategies for media communication and outreach for the Project - in the State of Bahia and outside; Prepare, with support from the executive bodies, contracts, agreements, accords and other normative instruments to be signed in the ambit of the Project and submit them for approval by the competent bodies; Control execution of the signed contracts; Advise the director of the Urban Development Secretariat in hidher task of controlling expenses inrelation to the financial resourcesinvolved inthe Project; Take measures requiredin order for SEDUR to undertake transfers and other bankingtransactions it is responsible for: Administer the Management Information System (MIS) of the Project; Monitor, using the MIS, implementation progress and results of the Project and evaluate its impact in light of the indicators defined; Conduct opinion surveys in the communities involved to monitor their level of knowledge and satisfaction as regardsthe activities and impacts of the Project; Propose measures for improving the Project, seeking to constantly strengthen the involvement, commitment and responsibility for interventions on the part of the participating communities ; Foster implementation and development of the local centers known as Casa Viver Melhor. These centers provide a means of interaction with municipal authorities and institutions participating in . the Project and act as a space for community information, access, interaction andparticipation; Carry out overall supervision of `Casa do Viver Melhor'; Prepare and submit accountability reports and other progress reports to the Financial Agent and other Project control agencies as required; Provide the bodies responsible for drafting the State of Bahia budget proposals with the information required for allocating financing and counterpart funds; Meet, accompany and advise missions from IBRD and teams and delegations from the Finance and PlanningMinistries responsible for monitoring and financial auditing of the Project; Filedocumentation inrelationto accountability reportsfor the Project. PMUstaff . PMU team members, professionals working with SEDUR units, members of the Steering Committee, occasional Technical Consultants, CONDER team members. . Minimumcomposition of the PMUteam: Manager, professional for monitoring and evaluating of results, permanent Consultant (from SEDUR staff or contracted), professional in the bidding procedures and contracts area, professional information system administrator, financial management services professional ,and 57 professional inthe area of services for infrastructure interventions Inthis context, CONDER shall assume the following tasks and responsibilities: Coordinate the execution of the Project; Mobilize, guide, supervise, integrate and support the executive bodies, partners and contracted agents in the implementation of Project activities; Define and use mechanisms for preparing and integrating the different agents and teams participating inthe Project; Ensure integrated execution of the different Project activities aimed at optimizing results and use of planned resources; Advise the PMUon defining the Project's media and dissemination strategies; Keep the Operational Manual updated and set supplementary rules and procedures as requiredfor execution of Project activities; Ensure execution of rules and procedures determined by the financing agent and other appropriate administrative and operational provisions for execution of the Project; Advise and assist the Project's ExecutiveCommittee with its functioning and decisions; Analyze public announcements drafted by the executive bodies related to contracts for studies, projects, construction work and services in the ambit of the Project, and examining technical specifications included in them; to request adjustments to specifications in public tender announcementsand submit them for approval by the PMU; Monitor biddingprocedures heldin the ambit of the executive bodies of Viver Melhor I1relating to contracts for the associated studies, projects, construction work and services; Prepare and submit to the PMU contracts, agreements, accords, working plans and other normative instruments to be signed in the ambit of the Project; Perform physical and financial monitoring for the Project and propose different formulations if applicable; Prepare and submit for appreciation by the PMUaccountability reports and other progress reports related to Project execution, in accordance with the requirements determined by the Financial Agent and other controlling agencies; Advise the PMU on accompanying missions from IBRD and teams and delegations from the Finance and Planning Ministries responsible for the Project's monitoring and financial auditing arrangements; Provide technical and management support for the functioning of the 'Casa Viver Melhor'; Advise the executive bodies, partners and contracted agents to ensure the Project's social mobilization and outreach to the population inthe participating municipalities; Coordinate inputs to the Project's MIS for the executive bodies, ensuringthat data and pertinent information are furnished in an appropriate and timely manner. Test the consistency of and consolidate information entered in the system, in order to enable the PMU to make appropriate use of the systemin so far as it competencies are concerned; Project Executive Committee 25. The project Executive Committee is a forum for joint work between the PMU, SEDUR and CONDER, for sharing and taking decisions relating to scheduling and implementing actions concerning the different Components and Sub-components of the Project, as well as servicing and evaluating execution of its physical andfinancial targets. 26. The Executive Committee shall be coordinated by the President of CONDER. It i s composed of the coordinator of the PMU, directors of the CONDER units involved in executing the Project, representatives of other executive units and representatives of partner organizations involved in the implementationprocess of Viver Melhor 11. 58 27. To manage the Project's execution, CONDER shall have assistance from its administrative units, including the Legal, Administrative, and Financial Departments, inrelation to matters involving logistics, execution, and financial control. It may also arrange for consulting services to be provided by individuals or organizations to support Project management work. 28. Technical support shall be provided by CONDER units, including and in particular its Operations and Planning section, Social Protection Department, Housing Department, Urban and Environmental PlanningDepartment, Technical Commission for EnvironmentalGuarantees (local acronym CTGA) and the Department for Supervision of Construction Work. Other Executive Bodies 29. The Urban Development Secretariat, State Secretariats for Education, Health, Labor and Social Protection, Public Security and Reduction of Poverty Secretariatsare also considered Executive Bodies of the Project due to the nature of the interventions stipulated in the different Components and Sub- components, in so far as they use counterpart funds or funds derived from the Loan Agreement. 30. The municipalities taking part in the Project may assume the role of co-executors using own funds or funds from other sources, when necessary for implementation of supplementary actions in the ambit of the Project. 31. These executive bodies may implement Project actions directly by contracting construction work or services or do so together with partner organizations. Casa Viver Melhor 32. The local centers, named 'Casa Viver Melhor', are crucial instruments for participative administration and for ensuring convergence between actions and the (public, private, and community) agents involved inViver Melhor 11. These centers shall be located,in the Social Intervention Areas (local acronym PIS) of the municipalities participating in the Project and shall consist of a social space for effective community participation. They shall act as the main channels for direct communication between the population and the different agencies and bodies of the Project, and shall also forward demands, provide responses, share information and settle issues. 33. Casa do Viver Melhor centers aim to "implement local development actions in an integrated and responsible manner, and coordinate actors and agencies in order to enhance the effectiveness of joint management'and to ensure: a) implementation of decisions relatingto the Project; b) involvement in the Project of the community and its associations ; c) Project managementinthe post-interventionphase; and d) Sustainability of provided infrastructure and equipment. 34. In fulfilling this purpose, the Casa Viver Melhor centers will implement cooperative arrangements conceived inthe Project's management instances and those administering its execution; they shall also foster other participative arrangementsin local areas. 35. When executing physical interventions, the Casa Viver Melhor may offer support for supervision of construction work, and integration of these interventions with the Project's social actions in order to mitigate any negative impacts and improve or broaden the intended results. 59 36. PMUKEDUR shall undertake the overall supervision and ongoing evaluation of the results obtained by the Casa Viver Melhor and CONDER shall provide technical and management support for their appropriate functioning. 37. A management body shall be set up for the Casa Viver Melhor centers in CONDER's Social Protection Department. The coordination of each Casa Viver Melhor shall be the responsibility of a committee comprising representativesof the state and the local government, as well as other instances of government and non-governmental agencies in accordance with the nature of the planned project interventions. The Coordinator of this Committee shall report to the managementbody for the CasaViver Melhor/CONDER". 38. Support for the administration of the Casa Viver Melhor shall be the responsibility of CONDER's Administrative department. 39. Detailed specifications of the management model and functioning of the CasaViver Melhor shall be provided in a specific executive project to be preparedduringthe Project pre-execution phaseand shall be used as the basis for creating and implementing these centers as crucial items to complete the Institutional Arrangement for Administration and Execution of the Viver Melhor I1 Project. The Executive Project shall take into account the conclusions and recommendations of the workshops held in June and October 2004 to discuss the Project, at which the following proposal for the Casa Viver Melhor was made: "Aggregate, integrate, articulate and implement sustainable local development actions in the social, economic, housing and institutional ambit, at networked centers based on shared rules of conduct and containing joint management units. ' I 40. Each Casa Viver Melhor shall have a team composed of at least one Coordinator, one professional in community mobilizationand participation and 2 professionals for administrative support. 41. Operational support services such as: cleaning, guard, transport, printing or copying and other services of this nature may be contracted or provided directly by CONDER. 42. There follows a preliminary proposal for the organizational structure of the Casa Viver Melhor, to be further developed when drafting the executive project for management. "ReportonProduct2(P2)oftheViverMelhorII,InstitutionalDevelopmentProjectcompiledbyconsultantsCelinaSouzaand Helder Mendes Ribeiro. 60 CasaViver Melhorcenters Outlineof proposedorganizationalstructure - INSTITUTIONALARRANGEMENT Partnershiparrangements EXECUTIVE COMMITTEE 61 I*- ) i iI - ! Bti -E? 0 .................................................... .........LLI# (D. .......~... 8 P 5e P ............................................................................................................................ ............................................................. ................................................................. I 0 m u .-N m Ju E m 0 m 84 u 73 m m I BRAZIL - BAHIAPOORURBAN Annex 7: FinancialManagementandDisbursementArrangements AREASINTEGRATEDDEVELOPMENT PROJECT VIVER MELHOR - I1 FinancialManagementandDisbursements 1. The Bahia Poor Urban Areas Integrated Development Project - Viver Melhor I1i s the first stage of a full state-wide urban poverty reduction program in the amount of US$16OM, out of which US$96M are expected to be financed by the Bank, over the next eight years, of which US$49.296M i s for this first phase. The program, Programa de UrbanizaG6o e DesenvolvimentoIntegral deAreas Carentesno Estado da Bahia, is part of the broader "Viver Melhor" and will be part of an integrated set of Bank-financed interventions, among other sectors, in public sector management, rural development, health, education, environment, urban development and water management. 2. Institutionalarrangements for this project will benefit from the successfulexperience with several Bank-supported urban development projects in the State of Bahia, namely the recently closed PRODUR loan. 3. ImplementingEntity.TheProject will be managedby anewly createdProject Management Unit (PMU) within the State's Secretariat of UrbanDevelopment (SEDUR). The PMUwill report to a Steering Committee, chaired by the Governor of the State of Bahia, will interact with the Bank and link with other relevant state entities and sectors. 4. The project will be, for the most part, implementedby CONDER through its various departments; its main responsibilities will be procurement, basically works and contractors, and technical supervision and monitoring of physicalprogress of works. 5. CONDER i s a state-owned company, with vast experience in the sector and currently involved in the implementationof several other programs. 6. FinancialManagementAssessment Conclusion.The assessment was carried out in accordance with OP/BP 10.02 and the Guidelines for Assessment of Financial Management Arrangements in World Bank Financed Projects issuedby the FinancialManagement Sector Board on October 15,2003. 7. The overall objective of the assessment was to determine whether the Borrower has, or will have, acceptable financial management arrangements in place by loan effectiveness. These include, but are not limited to, capacity to (a) properly manage and account for all program's proceeds, expenditures and transactions, (b) produce timely, accurate and reliable programfinancial statements and reports, including Financial Monitoring Reports (FMRs), for general and Bank special purposes, (c) safeguard program's assets, (d) timely engage independent auditors acceptable to the Bank; and (e) disburse Bank funds in accordance to applicable Bank rules and procedures. 8. The assessment was carried outjointly with SEDUR and CONDER staff members involved inthe implementation of the program. It included (a) discussions with both entities' financial management staff; (b) evaluation of financial management systems in place andlor those to be used for program monitoring, accounting and reporting; (c) review of staffing requirements, including training; (d) discussion of flow of funds arrangements and disbursement methodology; (e) review of internal control mechanisms in place; (f) discussion with regard to reporting requirements, including the format and content of FMRs; and (g) review of internal andexternal audit arrangements. 9. The overall Financial `Management Assessment conclusion i s that, provided a satisfactory 64 financial management system i s installed, with staff properly trained, the Project will have satisfactory financial management arrangements in place to meet Bank's minimum requirements. The financial management risk associated with the project, has been assessed as moderate. The project's financial management system will be able to provide relevant and reliable financial information, in a timely manner, and to support Project management in the control, planning, implementation and monitoring of the Project, towards the achievement of its objectives. 10. Financial Management System. Project financial data will be registered by the PMUin three, separate, systems: (1) SICOF, the State of Bahia's budgetary and accounting tool, where all public expenditures are necessarily recorded, after being properly budgeted and committed, and through which all payments are made; a cost center exclusively for the project has already been createdinthe system; (2) the PMU's project financial management and monitoring system- GEP, a system already being used by the Bahia Education project, will be the basis for the preparation of quarterly Financial Monitoring Reports (FMRs) and the Project's annual financial statements. This system will be available at SEDUR's PMUand at CONDER; and (3) CONDER's own system-HELP. 11. The GEP system was developed some years ago, for the implementation of several Bank operations - Bahia Education project, Bahia Health project, both under implementation, andthe new Rio de Janeiro Early Childhood project. It i s a good, comprehensive system that includes an accounting module, with the project's chart of accounts, and i s capable of reporting in dollars andreais. 12. CONDER's HELP, will also be available as an additional, back up system, where most of Project-financed expenditures, namely works, accounting for approximately 75% of the loan, will be recorded. 13. As a basic control procedure, a regular (monthly) routine reconciliationwill be undertaken by the PMUbetween (i) "Movimentos de Recursos Bancdrios" made available to CONDER by SEDUR; (-ii) total payments made, in SICOF, by CONDER, to contractors; and (iii) expenditures, reported on actual FMRs. Discrepancies, if any, will beinvestigated by the PMUina timely manner. 14. As of mid April 2005, the GEP system has not been fully installed, neither at CONDER, nor at the PMU; the installation of the GEP software, including the accounting module, at both entities, testing and trainingof staff, should be a condition of effectiveness. 15. Staffing. The PMU will be staffed with a Project Coordinator, assisted by a Financial Management Director, who will have access to SICOF and be responsible for disbursement and financial managementissues, a financial manager (still to be hired), a monitoring and evaluation assistant, a public works specialist and a disbursement assistant. 16. Reporting. Agreement was reached with the PMU with regard to the format, content, and peridocity of FMRs. In addition, and based on PRODUR's experience, it has been decided to use quarterly Financial Monitoring Reports (FMRs) for disbursement purposes. The fourth quarter FMR can beusedas the year-endFinancial Statementsfor auditing purposes. .. 17. The following items will be covered by quarterly FMRs, inUS Dollars and Brazilian Reais: Financial Reports: FMR I A - Sources and Uses of Funds, by disbursement category, cumulative (project-to-date; year-to-date and for the period) vs. actual expenditures, including a variance analysis; FMR 1B- Uses of Fundsby Project Activity or Component, cumulative (project-to-date; year-to- date and for the period, by financing source) vs. actual expenditures, including a variance analysis; 65 FMR ID - Project Expenditures by financing source; FMR I E - Cash-Flow forecast; 18. Accounting Basis, Proceduresand Policies. Project financial statements will be prepared, on a cash accounting basis, quarterly and annually. These statements will be prepared in accordance with consistently applied accounting standards as per Law 4.320, acceptable to the Bank. 19. Supervision.Financial management supervision will take place every six months and include (a) reviewing of quarterly FMRs; (b) reviewing of the auditors' reports and follow-up of issues raised by auditors inthe management letter, as appropriate; (c) participation inproject supervision; (d) followingup on any financial reporting and disbursement issues; (e) updating the financial management rating in the Implementation Status Report (ISR). 20. Flow of Funds. Funds will be deposited, upon request from SEDUR via the State's Secretaria of Finance (SEFAZ), by the Bank into an USD Special Account, preferably, in Salvador, Bahia. From this account, SEFAZ, instructed by SEDUR, will tranfer funds as needed, to make short term payments (not exceeding 30 days), into a local currency account - the BIRD operational account - an account opened just for the Project. A second operational account, also in local currency, will be opened for the counterpart contribution to the Project. Bank funds will flow, temporarily, through the State's single treasury account; they'll be timely available to the project. 21. From these two separate operational accounts, funds in local currency will then be transferred to executing agencies - CONDER, state secretariats and municipalities, as applicable. Executing agencies will mingle counterpart and Bank resources in accounts opened exclusively for the Project; payments made out of these accounts will be made to contractors and service providers, using SICOF, through OrdensBanca`rias,against adequate supporting documentation (invoices, progress reports, certificates by independent entities). Once the supporting documentation i s received, CONDER enters the data in the GEP system, makingit available to SEDUR, reviews and forwards it to SEDUR's PMU who will then submit the withdrawal application to the Bank, requesting replenishment of the Special Account, via SEFAZ. Payments to municipalities, usually doneunder Convh`os, will, as with all project expenditures, be recorded as expensedonly when properly documented. 22. Disbursements. Drawing on PRODUR'S successful implementation of a satisfactory Financial Management system, and with the installation of the GEP system, including adequately trained staff and the capacity to produce sound financial data, the PMUhas opted for the report-based baseddisbursement methodology. Accordingly, quarterly FMRs will account for eligible expenditures paid during a given period and advances made by the Bank for Project implementation. It has been agreed with the borrower that, depending on the Project's cash-flow needs, more than one advance can be made within a trimester. A US$ special account, with a maximum authorized allocation of US$ 4,900,000 will be made available for a timely flow of funds and smooth project implementation. 23. Auditing Arrangements. Annual project financial statements will be audited by independent auditors, satisfactory to the Bank, in accordance with acceptable auditing standards. In principle, the State's Tribunal of Accounts, an entity duly recognized by the Bank, will undertake the Project's annual financial audits. The external audit will be conducted in line with Terms of Reference acceptable to the Bank and auditors will be required to issue a single opinion on the Project's financial statements, as per the guidelines "Annual Financial Reporting and Auditing for World Bank-financed activities", of June 30, 2003. Auditors will also have to produce a management letter, where relevant internal control weaknesses will be identified and properly followed up by the PMU, contributing to the strengtheningof the controlenvironment. 66 24. The auditor's report will be submitted to the Bank no later than six months after the closing of the borrower's fiscal year. Assuming that the loan will become effective only in the first semester of 2006, it may be that the first audit will cover a period of less than 12 months, from the first disbursement from the loan account (front end fee excluded) through December 31, 2006. This first audit would then be due on June 30,2007. FinancialManagementRiskAssessment 25. The RiskAssessmentMatrix below, presentsthe items of potential riskfor the project from a Financial Management standpoint. Risk H S M L Mitigators i. Country specific X ii. Sub-national level X iii. Entity specific X iv. Project specific New system to be installed at two entities X (SEDUR and CONDER); staff trained. 26. The overall Financial Management risk is considered moderate provided that a satisfactory financial management system is properly installed and staff trained. 27. RequiredActions and Next Steps. Regarding the financial management system, the Bank has received model Financial Management Reports (FMRs) consistent with Section 4.02 of the Loan Agreement, which will be used for project implementation. Bank Financial Management Specialists will be completing discussions with the Government from November 2005 to January 2006 to resolve any outstanding operational details related to the financial management system. 67 The table below sets forth the Categories of items to be financed out of the proceeds of the Loan, the allocation of the amounts of the Loanto each Category and the percentage of expendituresfor items so to be financed ineach Category: Table 2 -Allocationof La n Proceeds Amount of the Cateaorv LoanAllocated % of Expenditures (ExpressedinDollars) to beFinanced (1) Goods and non- 4,406,720 80% consultants'services (2) Works 36,056,040 54% (3) Consultants' services 8,710,000 85% and training (4) Front-end fee 123,240 Amount due under Section 2.04 of this Agreement (5) Premia for Interest 0 Amount due under Rate Caps and Interest Section 2.09 (c) of this Rate Collars Agreement TOTAL 49,296,000 68 ~eK v) L %a I I I 4 8 -* 3Z BRAZIL BAHIA POORURBANAREAS INTEGRATEDDEVELOPMENT - Annex 8: Procurement Arrangements PROJECT VIVER MELHOR - I1 A. General 1. Procurement for the proposed project would be carried out in accordance with the World Bank's "Guidelines: Procurement Under IBRD Loans and IDA Credits" dated May 2004; and "Guidelines: Selection and Employment of Consultants by World Bank Borrowers" dated May 2004, and the provisions stipulated in the Legal Agreement. The general description of various items under different expenditure categories are described below. For each contract to be financed by the Loan, the different procurement methods or consultant selection methods, the needfor prequalification, estimated costs, prior review requirements, and time frame are agreed between the Borrower and the Bank project team in the Procurement Plan. The Procurement Plan will be updated at least annually or as required to reflect the actual project implementation needs and improvements ininstitutional capacity. 2. Procurement of Works: Works procured under this project will include basic local infra- structure delivery such as: drainage; access roads; water supply and sanitation; macro sewerage; home improvements; and on-demand infra-structure. The procurement will be done usingthe Bank`s Standard BiddingDocuments (SBD)for all ICB and Seain's SBD agreedwith the Bankfor NCB. 3. Procurement of works above US$10 million will be subject to ICB, works contracts estimated to cost more than US$350,000 will follow NCB, and those contracts below US$350,000 may be procured through shopping. 4. Procurement below US$ 150,000 for works under components A and B can be done in accordance with par. 3.17 of the Guidelines (Community Participation). The Ribeira Azul Program successfully adopted this procurement method which has been developed with Bank help. This i s a competitive process between local cooperatives or small local contractors, which will be responsible for the construction of urban and social equipment, housingunits and home improvements. The procurement method i s basically a comparison of three proposals. It i s expected that, as in the case of Ribeira Azul, this will foster the creation of localjobs and local capacity in the construction field. Participating local cooperatives and small contractors will be enabled through this scheme to bid for contracts outside the Project as well. The small local cooperatives and contractors' bids will be evaluated by CONDER, as for all other biddingfor works under the Project. The project's operational manual will detail this process. 5. Procurement of Goods: Goods procuredunder this project will include equipment to support the project's activities or small purchases to equip communities' social facilities (Casus do Viver Melhor). Examples of such goods are vehicles, IT equipment, project management software, and office furniture. These goods will likely be financed out of counterpart funds exclusively. However, should the Borrower wish to finance them out of the loan proceeds, the procurement would have to be done using Bank`s SBD for all ICB and Seain's SBD agreed with the Bank for NCB. If the contracts are below US$lOO,OOO, the Borrower may follow shopping procedures. 6. The thresholds for the procurement of goods, following Bank procedures, are: ICB for contracts above or equivalent to $500,000, NCB for those above or equivalent to US$lOO,OOO, and shopping for those less than $100,000. 7. Procurement of non-consulting services: Non-consulting services under this Project will include e.g: (i) social services delivery with contracts awarded to CBOs and/or specialized firms in areas such as non-formal education, cultural activities, family assistance and children day-care, (ii) training of 70 technical staff of the above mentioned CBOs; (iii)courses for beneficiaries on professional training, creation of cooperatives and small businesses; and (iv) training of technical staff engaged in the Project's management. For contracts estimated to cost less than US$lOO,OOO, shopping may be used. 8. Selection of Consultants: Consultant contracts will include e.g: integrated local development plans (PID), plans for local social development (PDS), engineering design, works supervision, design and implementation of social support activities such as environmental and health education programs, park management plan preparation, subproject resettlement and environmental assessments/action plans, housing alternatives feasibility study, and services to support project management. Short lists of consultants for services estimated to cost less than US$500,000 equivalent per contract may be composed entirely of national consultants in accordance with the provisions of paragraph 2.7 of the Consultant Guidelines. 9. Under components A and B, local engineers, architects or small formal sector construction companies will be hired competitively to provide support to local cooperatives/small local contractors in preparation of bids, materials purchases, technical assistanceand quality control. 10. Under component C, the project may hire individual consultants to provide capacity buildingto the project staff. 11. According to the procurement plan, besides QCBS, the project will hire certain services using CQS or LCS. 12. OperationalCosts: Operational costs financed by the project - e.g. office maintenance, office materials, travel costs - may be procured using the implementing agency's administrative procedures, if reviewedand found acceptableto the Bank. 13. Others: N/A B. Assessmentof the agencv'scapacityto implementprocurement 14. Procurement activities will be carried out by CONDER. The agency's Procurement unit i s staffed by 2 procurement officers. The agency's biddingcommittee i s composed of 6 members. 15. Capacity building for Operation and Maintenance (O&M) of facilities and infraestructure will be financed by the project (under subcomponent C2) as part of the institutional strengthening activities, and will be procured by the selected municipalities. The total amount to be spent on such activities for each municipality will range from a minimum of US$50,000 in the case of smaller municipalities like Brumado and Teixeira de Freitas to $150,000 for IlhCus and Itabuna, US$200,000 for Feira de Santana and $300,000 for Salvador. The municipalities must apply the Guidelines, and a clause on this respect mustbe introduced inthe related legal documents. 16. An assessment of the capacity of CONDER to implement procurement actions for the project was carried out by Lucian0 Wuerzius on February 01,2004, and cleared by Luiz Gazoni on the same date. 17. Most of the issues/ risks concerning the procurement component for implementation of the project have been identified and include (i) of a procurementmanagement system and (ii) needto lack the train the biddingcommittee members. The corrective measures which have been agreed are (i) to create a procurement module within the project's management information system to run procurement reports, including the procurement plan, and to help manage the on-demand project activities, (ii) to train all of the project's procurement staff, and (iii) to hire a full-time procurement specialist for the Project, to be 71 basedat CONDER, under TOR acceptableto the Bank. 18. The overall project risk for procurement is average. C. Procurement Plan 19. The Borrower, at appraisal, developed a Procurement Plan for the first 18 months of project implementation which provides the basis for the choice of procurement methods. This plan has been agreed between the Borrower and the Project Team on April 20, 2005, and is available at the Viver Melhor I1 office at CONDER. It will also be available in the Project's database and in the Bank's external website. The Procurement Plan will be updated in agreement with the Project Team annually or as requiredto reflect actual project implementation needs and improvements in institutional capacity. D. Frequency of Procurement SuDervision 20. In addition to the prior review supervision to be carried out from Bank offices, the capacity assessment of the Implementing Agency has recommended annual supervision missions to visit the field to carry out post review of procurement actions. E. Prior Review 21. Prior review for the project will be carried out in accordance with the provisions of the Procurement Plan. The amounts indicated in the attachment below are those recommended in the Capacity Assessment, and they will be respected. In addition, the Bank may, however, determine what other contracts shouldalso be subject to prior review, which will be reflectedinthe Procurement Plan. F. Details of the Procurement Arrangement involvinginternationalcompetition 22. Goods and Works and non consulting services. (a) List of contract Packages which will be procured following ICB and Direct Contracting: According to the initial procurement plan, there i s no ICB under this project due to the low complexity and low volume of works in widespread informal neighborhoods. There i s no ICB for goods either. (b) Contracts estimated to cost above USD 500,000 for goods and USD 5 million for works per contract and all Direct Contractingwill be subject to prior review by the Bank. 23. Consulting Services. (a) List of Consulting Assignments with short-list of international firms. N/A (b) Consultancy services estimated to cost above USD 200,000 per contract and Single Source selection of consultants (firms) for assignments will be subject to prior review by the Bank. (c) Short lists composed entirely of national consultants: Short lists of consultants for services estimated to cost less than USD 500,000 equivalent per contract may be composed entirely of national consultants inaccordancewith the provisions of paragraph 2.7 of the Consultant Guidelines. 72 BRAZIL BAHIA POORURBANAREASINTEGRATEDDEVELOPMENT - Annex 9: FiscalAnalysis of Bahia State Government, 2000-2004 PROJECT VIVER MELHOR - I1 Summary 1. During the period 2000-2004, the fiscal performance of Bahia State Government was sound. Responsible fiscal behavior enabled the state government to achieve increasing and substantial positive primary balances since 2001. From a balanced situation in 2000, the state produced a primary surplus of 3% of net current revenue in 2001, 9.5% in 2002 and 6.3% in 2003. The recovery of the Brazilian economy in 2004 led to a strong increase in revenues that allowed the state to achieve a vigorous primary surplus of 11% of net current revenue, confirming the solid fiscal situation of Bahia. 2. The good fiscal performance resulted from the combinationof the control of current expenditures and the enhancement of revenue collection efficiency which allowed Bahia State Government to produce substantial primary balances and to generate significant current account surpluses to finance its investment expenditures and to cover part of its financial obligations. 3. As a result of its sound fiscal performance, Bahia complied with all the fiscal limits established by the Fiscal Responsibility Law (FRL) since its enactment in 2000. Even more important, the FRL indicators improved as a consequence of the strong fiscal discipline. Net consolidated debt, used for compliance with the Fiscal Responsibility Law, fell from 178% of net current revenue in 2000 to 142% of net current revenue in 2004, below the legal ceiling for state governments of 200%. In 2000-2004, personnel costs represented varied between 51% and 57% of net current revenue, below the ceiling of 60%. Other FRLindicators are also well below the limits established by law: since 2000, the highest level for credit operations was 8% (against the FRL ceiling of 16% of net current revenue). Given the high interest payments and amortizations that allowed the reduction of consolidated debt, debt services represented in average 15% of net current revenue (against the FRL ceiling of 11.5% of net current revenue). 4. Inadditionto theFiscalResponsibilityLaw requirements, the BahiaStateGovernment achieved all the targets of the Fiscal Adjustment Program agreed with the National Treasury Secretariat (STN) for 2000-2004. Given the good performance of the last year, the state government and the STN agreed in maintain the targets contained inthe agreement for the period 2003-2005. 5. Inthe last years, an impressive progressintax collection efficiency allowedthe stateto generate current savings that financed most of its investment expenditures. While intergovernmental transfers represents 20% of current revenues, which indicate a strong dependence on federal transfers, most of them are constitutionally or legally sanctioned, thus, the risk associated with this dependence i s lower than it seems at first sight. 6. On the expenditure side, despite its comfortable situation, a major source of vulnerability i s the upward trend of pensiodsocial security benefits for retired public employees. In the last years, the FUNPREV (State Employee Social Security Fund) have generated increasing deficits that have being covered by the state Treasury. The state employees' social security system i s a pay as you go system and presented an actuarial deficit of R$ 23 billions at 2004, or 250% of net current revenues. This indicates potential increase on personnel expenditures that can deteriorate the financial situation with the need to decrease on other current expenditures or investment. However, it i s important to mention that social security imbalance is a reality for public sector in Brazil at all levels of government. 7. The substantial fiscal balances obtained over the past few years, together with projections based 73 on realistic assumptions, indicate that Bahia State Government has sufficient capacity to repay its debt. Projections for the fiscal accounts and the indebtednesscapacity for the next ten years show that the state government could assumethe new loan from the World Bank without risking the fiscal health of the state government. Projection exercises for the period 2005-2015, depict a favorable evolution for the main fiscal and financial indicators showing that the continuity of the responsible fiscal behavior should guaranteethe debt sustainability. 8. The sensitivity analysis shows that the guaranteeof fiscal sustainability depends on the deepening of the enhancement of tax revenue efficiency collection and the perseverance of the tight control of personnel expenditures. 9. In summary, through compliance with Fiscal Responsibility requirements and successful implementation of the adjustment program agreed with the STN, the Bahia State Government has demonstrated that it seeks to continue its trajectory of fiscal sustainability. 10. This fiscal analysis contains six sections. The first describes the evolution of the fiscal balances and fiscal revenues and expenditure for the period 2000-04. The second section analyzes the evolution and composition of the state debt. The third relates the evolution of the main Fiscal Responsibility Law indicators of Bahia and the accomplishment of the state fiscal accounts with the legal ceilings and the targets of the Fiscal Adjustment Agreement agreed with the STN. The fourth part contains the projection exercises which depict scenarios for the evolution of fiscal accounts and estimate the impact of the World Bank lending operation on the state fiscal accounts. The fifth section performs a sensitivity analysis to illustrate the effects of changes in the determinants of fiscal accounts on them. The final section summarizesthe main overall findings and makes a number of policy recommendations. The Evolutionof BahiaState GovernmentFiscalBalances,RevenuesandExpenditures,2000-2004 A.l FiscalBalances. 11. During the period 2000 to 2004, Bahia State Government fiscal accounts presented a solid improvement expressed in the generation of substantial fiscal balances. Table 1 shows that since 2000, the state government promoted a strong fiscal adjustment. The primary balance passed from a balanced position in 2000 to a surplus of 3% in 2001 and 9.5% in 2002. The economic slowdown of 2003 determined the reduction of fiscal revenues and the temporary interruption of the increasing trend of the primary balances.The strong recovery of the economic activity in 2004 led to a vigorous primary of 11% of net current revenue. 12. Interms of current balance, duringthe period of analysis Bahia generated substantial surpluses of about 15% of net current revenue which enabled it to finance investment expenditures and deficits on capital account and generate resources to meet its debt obligations. Consequently, Bahia obtained positive nominal balances since 2002 - a rare occurrence inthe public finances of Brazilian states. 13. In summary, Table 1 shows that the fiscal adjustment was based on the increase of current revenues and the stagnation of capital expenditures. Table 1also shows the decrease of capital revenues and the growth of current expenditures forced the state government to reduce capital expenditures. 74 Million of Reais of 2004* 2000 2001 2002 2003 2004 Current RevenuesI 9,869 10,284 12,214 12,104 13,626 CapitalRevenues-I1 608 749 923 564 526 Total Revenues111=I+ 11 10,296 11,034 13,137 12,668 14,152 FinancialRevenuesIV 663 756 766 653 484 InterestRevenuesIVa 190 164 134 196 127 CreditOperationsRevenuesIVb 472 588 544 448 314 Debt amortizationIVc 1 1 3 3 2 Asset Sales Ivd 0 4 85 5 40 Other DeductionsV 1 1,069 I 1.034 I 1.103 ~~ PrimaryRevenuesVI =I11-IV V - 9,633 10,277 11,302 10,981 12,565 CurrentExpenditureVI1 8,575 8,974 9,646 9,920 11,122 CapitalExpenditureVI11 2,049 2,25 1 2,133 1,997 1,840 NominalBalanceXIV = XI1 IVa-XB + (414) (211) 331 37 534 Memo Items Net Current Revenue(NCR) 7,234 7,580 8,185 8,002 9,075 Primary Balance /NCR 0.0 2.9 9.5 6.3 10.8 Current Account Balance /NCR 15.4 17.3 18.3 14.4 15.4 Nominal Balance /NCR -5.7 -2.8 4.0 0.5 5.9 75 A.2 The Evolution of Fiscal Revenues. 14. As mentioned above, the sound fiscal policy followed by Bahia was based on the good performance of revenues. Table 2 shows that from 2000 to 2004, current revenue grew by 38%, while capital revenue experienced a fall of 10%. The net current revenues, which measures the real availability of fiscal resources, increasedby 27%, at constant prices. Brazil's accumulated GDP growth was of 9.5% duringthe period, indicatingthat Bahia available revenue grew 17%above GDPduringthis period. 15. The growth of net current revenues mainly resulted from the enhancement of tax collection efficiency as current transfers exhibited a more modest performance. Tax revenues grew by 28% while current transfers increased by 10%. Other revenues experienced a strong growth of 500%, however as they are small, the impact of their growth on the state available revenues was limited. 16. In2001, the state government launched an aggressive programto enhancethe efficiency of the state revenue service. Investments in software and the modernization of administrative process and the establishment of a regime of annual collection targets and a scheme of incentives to the state employees explain the good performance of state revenues. 17. The most important state tax, the ICMS", increasedby 28% duringthe period of analysis. IPVA12 and the remaining taxes increased by 72% and 80% respectively. Fee charges exhibited a poor performance with an accumulated growth of 6%. 18. Current transfers from the federal government grew by 17% while other current transfers fell by 30%. The growth of federal transfer can be explained by the introduction of the transfer from SUS in 2001 and the CIDE transfer, that beganto be transferred in 2004.13 19. Overall, given the better performance of tax revenues vis-a-vis of the federal transfers, the state dependence on transferred resources was reduced. In2000, current transfers represented 25% of current revenue while in 2004 the dependence on transfers fell to 22%. It i s important to remark that in 2000, the transfers corresponding to the SUS and CIDE did not exist. As in2004, they represented 16.9% of current transfers; ifthese transfers were not included, the dependence on federal transfers would fall to less than 20%. ''AAutomobileproperty 'I VAT collected by the states. tax. l3 SUS (Health Unique System - Sistemu Lfnico de Sulide) i s a transfer to health assistance done by the state government. It is a program of decentralization of health provision from federal government to lower levels of government. CIDE (Contribuigio de Intewen@o no Domini0 EconBmico) is an economic contributioncharged by the Federal government over the commercializationand importationof oil and its derivatives, natural gas and its derivatives and alcohol, that was created on 2001 (ConstitutionalAmendment n. 33, 2001) andits revenue collection is being shared with states and municipalities since 2004. 76 Table 2 BahiaState Government RevenueStructure,2000-2004 - - Million of Reais of 2004* Current Revenues ICMS EconomicContributions FUNDEFBalance I - I - I 1.069 I 1.034 I 1.103 Net Current Revenues I 7,234 I 7,580 I 8,185 I 8,002 I 9,075 CaDital Revenues I 580 I 749 I 923 I 564 I 526 Credit Operations 472 588 544 448 314 Capital Transfers 105 157 290 107 169 Asset Sales 2 4 85 5 40 Debt amortization 1 1 3 3 2 20. As a result, the current revenue composition does not represent a major risk in the sense that reductions on intergovernmental transfers do not have a significant impact on the Bahia fiscal situation, as the state has a limiteddependence on this revenue source. At the same time, fiscal adjustments which call for revenue increase can be achieved by their own tax collection effort and do not depend on the collection performance of other units of government. 21. Additionally, most of the federal transfers are revenue sharing mechanisms constitutionally sanctioned or established by complementary laws as SUS, FUNDEF and the export compensation law 87/96.Thus, federal discretionary transfers have a very small impact on Bahia public finances. 22. Vulnerability comes from the concentration of ICMS tax revenue collection on few economic activity sector and regions. Figure 1 shows that the oil sector i s responsible for almost 40% of ICMS tax 77 revenue, electricity and telecommunications sectors contribute with 20% while the contribution of industry i s relatively low given the importance of this sector in the state economy. Interms of regional concentration, the metropolitan region of Salvador (the state capital), contributes with more than 75% of ICMS revenue. Given the strong dependence on a few sectors and regions, any adverse sector or regional shock would have significant negative effects on the state public finances. Thus, the diversification of the tax base would make the state tax revenues more resilient to shocks. Figure 1: Bahia ICMSTax Revenue Compositionby Sectors, 2004 Electricityand Other Telecom Commerce Oil 38% 23. On the capital account, capital revenues were reduced from 2000 to 2004 - 10% at constant prices. Credit operations were reduced 40%, but have been very small in all the years due to severe limitations on new credit operations imposed by the FiscalAdjustment Program, agreedwith the National Treasury Secretary, and by the National Monetary Council controls on credit supplied by financial institutions to public sector.14 Capital transfer increases partially compensated for the fall of credit operations, while other current revenues are insignificant. After privatization at the end of the nineties, asset sales hadreduced its importance as a revenue source. A.3 The Evolutionof Expenditures. 24. The comfortable fiscal situation derived from the good performance of revenues allowed Bahia to expand its expenditures without abandoning a sustainable path for its fiscal accounts. From 2000 to 2004, total expenditures increasedby 30% at constant prices. This increase resulted from a strong expansion of current expenditures of 39% and the reductionof capital expenditures of 10%. l4NationalMonetary Council ResolutionsNo. 2827 limit bank exposureto the public sector to 45% of equity. 78 2000 2001 2002 2003 2004 Total Expenditure 9,947 11,225 11,779 11,917 12,962 CurrentExpenditures 7,95 1 8,974 9,646 9,920 11,122 Personnel 4,120 4,280 5,019 5,210 5,649 Employees 3,191 3,324 3,946 4,134 4,443 Social security benefits 929 955 1,073 1,076 1,206 Interest Payments 604 595 582 665 569 ConstitutionalTransfers to municipalities 1,428 1,509 1,622 1,640 1,894 Other Current Expenditures 1,800 2,590 2,423 2,404 3,009 CapitalExpenditures 1,996 2,25 1 2,133 1,997 1,840 Investments 1,148 1,195 1,154 921 861 DebtAmortization 386 573 675 776 804 Other CapitalExpenditures 461 483 305 300 175 Memo Items: Net Current Revenue 1 7,234 I 7,580 I 8,185 1 8,002 I 9,015 Personnel Expenditure (FRL) 3,717 3,749 4,186 4,555 4,867 Personnel Expenditure /Net Currrent 51 49 51 57 54 Revenue (1) Personnel Expenditure (Exc. Retired and 3,176 3,292 3,927 4,092 4,366 Pensionist) Personnel Expenditure /Net Currrent 44% 43% 48% 51% 48% Revenue (2) Fiscal Responsibility Law Ceiling: 60% Debt Service (Interest Payments + Debt 990 1,169 1,257 1,441 1,373 Amortization) I I I I Fiscal Responsibility Law Ceiling: 11,5% I I 25. Personnel expenditures, the most important component of current expenditures, increased by 37%. Other current revenues and constitutional transfers to municipalities also experienced a strong increase. Interest payments were slightly reduced. 26. The higher increase of personnel expenditures compared with that observed in the net current revenue led to the increase of the Fiscal Responsibility Law indicator of personnel expenditure on net current expenditures which passedfrom 51% in 2000 to 54% in 2004, still far below the legal ceiling of 60%. 27. The evolution of personnel expenditures'deserves special attention as they seem to be the most important source of risk for the state public finances. In particular, the increasing trend of the State Employees Social Security Fund (FUNPREV) deficits would threaten the comfortable fiscal situation. The state Treasury has covered the deficit FUNPREV that in 2004 achieved almost R$ 500 million. At July 2004, the FUNPREV actuarial deficit achieved R$ 23 billion or 2.5 of net current revenue which 79 indicates that increase in the future level of personnel expenditures (contributions to social security or retiree personnel) is very likely. health of all three administrative levels - central, state and municipal - in Brazil. Over the past few years, 28. The imbalances in the social security system are a major preoccupation affecting the financial two Constitutional Amendments" were introduced in an attempt to reduce this imbalance by modifying the rules governing social security. The 2003 Constitutional Amendment for example established the possibility of levying social security contributions on retirement and pension benefits, subject to certain lower thresholds. 29. The second most important component of current expenditure corresponds to the category of other current expenditures which embraces the operating expenditures, mainly good and services purchases and maintenance expenditures, and the contribution of the state government to the Basic Education Development FundFUNDEF.From2000 to 2004, other current expenditures increased65% at constant prices, reflecting the inclusionof FUNDEFtransfers inthis expenditure category. 30. Constitutional transfers to municipalities increased by 33% from 2000 to 2004. The constitutional-automatic nature of transfers to municipalities means that any tax revenue increase should be translated into increasesintransfers to municipalities. On the contrary, interest payments fell by 2% as the state debt was reduced. 31. As personnel expenditures, constitutional transfers and interest payments are rigid expenditures, their evolution are out of the government control, the expenditure increase was alleviated through the control of capital expenditures. Infact, capital expenditures suffered a strong reduction of 10%from 2000 to 2004. 32. Most of this reduction was due to a decrease indirect investment expenditures which fell by 25%. Debt amortization experienced the highest increase among all the expenditure categories (208%) which also explains the compression of investment expenditures. Other capital expenditures which comprise capital transfers and financial investment also were reduced as part of the expenditure control in a context inwhich obligatory expenditures (personnel, constitutional transfers and debt amortization) experienced a significant increase. 1 I 1 Figure 2: Bahia State Expenditure Composition, 2000-2004 I 100 90 80 70 60 50 40 30 20 10 00 200 200 200 200 200 Personnel 0InterestPayments OTransfers to Municipalities Investments 0DebtAmortization Mother CurrentgCapital Exp I l5Constitutional Amendment no. 20 (1998) and Constitutional Amendment no. 41 (2003). 80 33. As a consequence, the evolution of the state expenditure composition was not favorable. Figure 2 shows that the increase of current expenditures and debt amortization reduced the space of state investment expenditure. In summary, the evolution of the different expenditure categories shows that the quality of state expenditures worsened. The increaseof rigid current expenditures constrained the state to expand public investment expenditures fostering the regional economic growth. B -ConsolidatedDebtandDebt Capacity 34. As a result of the tight fiscal policy, from 2000 to 2004, Bahia contractual debt increased only by 2% or R$ 253.5 million at constant priced6. It i s important to observe that the strong increase of consolidated debt in 2002 due to the exchange rate shock was reversed in the last years. The net consolidated debt, usedfor compliance with the Fiscal Responsibility Law, decreased by 0.5% or R$ 50 million at constant prices. 35. Given the higher increase of net current revenue, from 2000 to 2004, net consolidated debt fell from 178% of net current revenue to 142%, far below the ceiling of 200% established by the Fiscal Responsibility Law, implying further legal indebtedness capacity. As a result of the expansion of net current revenue and the stagnation of consolidated net debt, Bahia expanded its indebtedness capacity by R$ 3.7 billion at constant prices. 36. Interms of the componentsof state debt, while domestic debt decreasedby 4% or R$445 million at constant prices, external debt exhibited a strong increase of 48% or R$445 million at constant prices. This pattern reflects the lack of access to domestic credit operation and the use of this form of financing in substitution of domestic credit operations. Also, exchange rate devaluation was responsible for the increaseof state external debt. 37. In terms of indexation composition, the Bahia State Government debt can be considered diversified. The debt with the National Treasury (STN) l7which i s mostly indexed to the Wholesale Price Index (IGP-DI and IGP-M) represents 45%, debt linked to exchange rate represents 27%, and the debt indexed to the Rate of Reference (TR), used by federal financial institutions, contributes with 23%. The remaining 5% of Bahia State debt is indexedto the Central Bank monetary policy rate (SELIC) and to the long run interest rate TJLP which i s a subsidized interest rate offered by the National Bank of Economic and Social Development (BNDES), also a federal financial agency. 38. The diversified composition of the state debt does not imply low vulnerability of debt to macroeconomic shocks. Inparticular, the strong correlation between the Wholesale Price Index and the exchange rate makes the state debt vulnerable to external shocks as 70% of it i s directly or indirectly linkedto the exchangerate. l6isimportanttopointoutthatduringthisperiodthefederalgovernment,throughtheNationalMonetaryCouncil, It imposed controls for public sector credit supply, which restricted the space for new credit operations with government owned banks, the most important source of public sector credit supply. l7Brazil's federal government set up three bailout operations in ten years, reflecting the weak fiscal discipline of state governments in the eighties and nineties. At constant prices of 2004, in 1989 the federal government assumed R$ 22 billion of state's external debt which represented 1.4% o f GDP. In 1993, the National Treasury assumed R$ 89 bi or 7.2% of GDP of state's debt with federal financial institutions. Finally, in 1997, the federal government restructured state's bond debt by R$200 bi or 11.7% of GDP. Bahia state government debt was rescued in the three operations. In the first operation, National Treasury rescue a debt of R$ 1.3 billion, the second bail-out operation achieved R$ 7.8 bi and the third amounted 2.2 bi of Reais of 2004. As a result, the most important creditor of the state i s the National Treasury from which Bahia has a debt of R$ 9.4 billion of 2004. 81 Table 4 Bahia State Government Consolidated Debt - - Million of Reais of 2004 (*) 2000 I 2001 I 2002 I 2003 I 2004 I I I I Deductions = Financial Assets - Processed 695 574 184 303 Floating Debt Net Consolidated Debt 12,928 12,569 14,865 13,054 12,878 I I I I I Net CurrentRevenue 7,234 7,580 8,185 8,002 9,075 Net ConsolidatedDebt/Net CurrentDebt 1.79 1.66 1.82 1.63 1.42 Fiscal ResponsibilityLaw ceiling: 2.0 , Spacefor further indebtness 1,539 2,591 1,504 2,950 5,212 Figure 3: BahiaState GovernmentDebtComposition, 2004 Exchange Rate IGP-M 2% 82 C. FiscalResponsibilityLaw (LRF) andFiscalAdjustmentProgram Compliance 39. As a result of its sound fiscal performance, the state government has complied with most of the fiscal limits established by the FRL. As mentioned above, net consolidated debt as a proportion of net current revenue, used for compliance of the FRL, fell from 178% to 142%, far below the legal ceiling of 200%. 40. Table 5 shows that the Bahia State Government has kept within the other limits laiddown by the FRL. In2000-2004, overall personnel costsrepresentedabout 54% of net current revenue, also below the ceiling of 60% of net current revenue". 41. The percentage of credit operations and debt servicing as a proportion of the net current revenue was well below the legally-imposedlimits of 16%. In 2004 credit operations representedonly 3.5% of the net current revenue. The only limit which was not complied with i s the ratio of debt service payments to net current revenue that varied around 15%, while the FRL ceiling i s 11.5%. However, further legislation permits the state governments to stay above the FRL until 2016, when this requirement should be complied with. Also, it i s important to note that highdebt service implies highamortization payments that acceleratethe reduction of state debt. itv T,nw T.imit~ Million of Reais of 2004 (*) 2000 2001 2002 2003 2004 Net Current Revenue 7,234 7,580 8,185 8,002 9,075 FRLLimit= 11.5%) 13.7% 15.4% 15.4% 18.0% 15.1% Spacefor further Debt Service (159) (297) (315) (521) (329) Personnel Expenditures 3,717 3,749 4,186 4,555 4,867 % Net Current Revenue FRLLimit=60% 51% 49% 51% 57% 54% Also, the upper FRLlimit imposed on expenditure on personnel was respected by the Bahia Executive branch (about 48%, as against the ceiling o f 54% of the FRL) as well as by the Legislative branch (about 2.0%, as against the 3.0% FRLceiling) and the Judiciary branch (about 4%, as against the 6% FRLceiling). 83 42. As part of its fiscal adjustment, the Bahia State Government subscribed in 1999 to contract governing the refinancing of its debt with the National Treasury. Inaccordance with its terms, the value of the operation with regard to Bahia amounted to R$ 2.15 billion at 2004 constant prices. In exchange, the Federal Government undertook to carry out a Restructuring and Fiscal Adjustment Program (FAP)". 43. The targets established in the FAP are very similar to the FRL requirements. In addition to the personnel and indebtedness indicators, the FAP covers targets for primary surplus, own revenue collection and investment expenditures. 44. Up to now, the good fiscal performance of Bahia allowed it to meet comfortably most of the requirements set in the two FAPs signed by the state government with the NationalTreasury. 45. Insummary, by meetingthe key requirements of the FiscalResponsibility Law and implementing the FAP, the Bahia State Government has demonstrated that it genuinely seeks to continue its trajectory of sustainability. As described in the above sections, there is no real evidence of fiscal imbalances during the entire period under analysis. Between 2000 and 2004, the Bahia State Government consolidated its sound fiscal performance. D -ProjectedFiscal Situation (2005 2015) - 46. In this section, the fiscal situation of Bahia State Government will be projected from 2005 to 2015 in order to evaluate the impact of the World Bank credit operation of US$49.296 million under the project Viver Melhor ZZ. Also the projection exercise assesses the repayment capacity of the state to meet the financial obligations to be generated by the proposed lending operation. The main assumptions of the basic scenario are on Table 6 below. 47. The projectedfiscal situation of Bahia State Government duringthe period 2005 to 2015 indicates the continuance of a comfortable fiscal situation which will allow the state to meet its financial obligation derived from the World Bank lending operation Viver Melhor ZZ. The projection exercise shows a very limitedimpact of the proposed operation on fiscal balances, indebtednessand the FRL indicators. 48. Besides the FRL indicators, two others indicators which evaluate the cash flow generation of the state will be analyzed. The first i s interest coverage, which represents current account cash flow without interest payments, the flow of saving funds generated before interest payments, divided by the interest payment. The second i s investment coverage, which represents the amount of investment financed with cash flow (current account balance). The minimumlevel recommended for the first indicator i s 1.5 while for the second i s 30%. The projection exercise shows that these two requirements will be complied in each of the years projected. The FAP agreed with 26 state governments under the Debt Restructuring Program was an additional tool used by the Federal Government to reinforce fiscal discipline for subnational governments. The achievement of the targets facilitates new credit operations by the states. 84 Table 6 Assumptionsfor FinancialProjections - Variables Assumptions Base year figures- 2004 Budget execution 2004. Macroeconomicldemographic Population growth 0.98% in 2005 decreasingto 0.95% in 2010, same rate thereafter. Bahia population average growth was 0.98% for 2000-2004 by IBGE. GDP growth 3.5% per year, from 2005 to 2014 Inflation rate 5.7% in 2005 and 4.5% thereafter Exchange rate Central Bank Market Expectations for 2004 and 2005, varying with inflation afterwards Revenue ICMS Increase with GDP growth and inflation IPVA Increase with population growth and inflation Social Contributions Increase with personnel expenditures Others Increase with GDP growth and inflation Transfers State Participation Fund-FPE Increase with GDP growth and inflation Unified Health System - SUS Increase with population and inflation Other federal transfers Increase with inflation Multigovernmental transfers Increase with population and inflation Fundef Increase with inflation Other Current Revenues Increase with inflation Capital Revenues Credit Operations Obtained from Fiscal Adjustment Program 2003-2005 agreed with the National Treasury Capital Transfers Increase with inflation Expenditures Current Expenditures Personnel, includingsocialsecurity Increase with population growth and inflation. benefits Goodsand Services Increase with population growth and inflation Transfers to municipalities Increase with GDP growth and inflation Interest payments Obtained from DebtDepartment of SEFAZ Bahia Capital expenditures Investment Increase with GDPgrowth and inflation Capital transfers Increase with inflation Amortizations Obtained from Debt Department of SEFAZ Bahia IBRD Loan US$49.3 Million, grace period 5 years, maturity 15 years Annual interest rate of 4% (including other fees) 49. Inthe base case scenario depicted in Table 6, Bahia will maintain its comfortable fiscal situation inthe future. Tables 7 and8 below show that fiscal balanceswould be maintainedat the current levels - about 10% of net current revenues for primary surplus and 13% of net current revenue for the current account surplus- with a tendency to increase. A reasonable assumption for growth (annual rate of 3.5%) and the control of current expenditures guaranteethis comfortable fiscal scenario. 50. During the period of the Viver Melhor ZZ project implementation (2006-2010), an increase in investment expenditures is expected that would reduce the projectedprimary balance in an annual amount of about R$ 50 million for 2004. This amount will represent about 5% of projected investment 85 expenditures of the state during the implementation period and will reduce the primary surplus to 0.4% of the projected net current revenue. 51. Interms of indebtedness, the operation will increaseby 0.5% the projected consolidated debt of Bahia at the beginning of the implementation (2005-2007) when the disbursement are expectedto be low. The proposed operation will increase the debt by 1.5% in 2010-12 when the amount of the loan will achieve its highest level. 52. With relation to the credit operation requirement, the highest annual disbursement of the Viver Melhor ZZ project, expected to occur in 2007, will represent only 0.4% of the projected net current revenue for this year. The additional financial obligations originated by the Viver Melhor ZZ are not significant when compared with the projected debt service payments without this operation. On the contrary, the . projection exercise shows that the state debt service payments will fall to 11% of net current revenue, making Bahia compliant with regard to the FRLrequirement of 11.5% before 2015. 53. The projection for the personnel expenditures to net current revenue ratio shows a smooth decrease that would reduce this ratio to a level lower than 50% in 2010. This result strongly depends on the assumption of a low populationgrowth and a higher GDP growth that would affect revenues. 54. The projection for the interest coverage and the investment coverage indicators, confirms the sustainability of the healthy fiscal situation of Bahia as both exhibit an increasing pathuntil2015. 55. In summary, it is evident that the realization of the project will not compromise the financial sustainability of the state 86 00 00 E Sensitivity Analysis - 56. The purpose of the sensitivity analysis in this section is to identify the most important sources of risk for the future fiscal performance of Bahia State Government and to assess the sensitiveness of the main fiscal variables to each of these potential risks. 57. The financial performance will be measuredby the six financial indicators analyzed in section D. The first i s the net consolidated debt to net current revenue ratio that should not be higher than the FRL ceiling of 200%); the second is the credit operations to net current revenue ratio that should be kept below the FRLceiling of 16%; the third is the debt service to net current revenue ratio that has a FRLceiling of 11.5%; the fourth is the personnel expendituresto net current revenuesratio with a maximumFRLceiling of 60%; the fifth i s the interest coverage which should be higher than the recommended level of 1.5; and the sixth i s the investment coverage with a minimumrecommended level of 30%. 58. The potential risks analyzed are changes on: ICMS revenue, federal government transfers, personnel expenditures, other current expenditures (including goods and services), population and state GDP growth rates andthe exchange rate. To show the sensitiveness to these variables it will be calculated the change on each of these variables that would make Bahia not compliant with the FRL/recommended levels of the financial indicators above duringthe projection period of 2005-20 15. 59. The most important source of risks are the ICMS tax collection on the revenue side, and the personnel expenditures on the expenditure side. The importance of ICMS tax revenue on the revenue structure of the state i s the reason why the fiscal soundness of the state i s highly sensitive to the performance of ICMS revenue. 60. Personnel expenditures constitute a significant risk for the Bahia State Government. More specifically, expenditures with retirement benefits and pensions i s an important source of risk.According to the actuarial evaluation, at July 2004, the technical deficit, on actuarial terms amounted R$23 billions, or 250% of net current revenues. In this sense, an increase in the future level of personnel expenditures (contributions to social security or retiree personnel) i s very likely. And as this i s an important item of expenditure, financial health i s very sensitive to it. A 13% higher level of personnel expenditures than projected will imply that the state will not comply with at least one of the financial indicators above. 61. Federal government transfers and other current expenditures can be considered of moderate risk. On the other hand, state GDP and population growth rates and exchange rate are variables that represent low risk to the financial sustainability of the state. The results of the sensitivity analysis are shown in BOX Ibelow. 89 BOX I-Sensitivity Analysis Exercise i) ICMS revenue-risk:high 62. Tax revenue has a direct impact on revenue and the state VAT, the ICMS represents94 of Bahia state tax revenue. According to the sensitiveness exercise, ICMS collection could be 12% lower than the projected level on the base case scenario and still Bahia would comply with all financial indicators considered in this analysis. Inthis sense, tax revenue changes represent a moderate risk for the financial health of the state. ii) Federal Government Transfers -risk: low 63. Federal government transfers must be 30% smaller than on the base case scenario to imply that at least one of the indicators will achieve a personnel expenditures to net current revenue higher than the FRL ceiling of 60%. iii) PersonnelCosts-risk:high 64. Personnel expenditures 13% higher than projected levels would imply the non-compliance of the personnel expenditures to net current revenue ratio required by the FXL. Personnel costs here included active personnel expenditures and social security benefits - retirement benefits and pension payments -, which represents x% of total personnel expenses. According to Actuarial Evaluation Report of July 2004, the social security fund had a technical deficit of R$23 billions. As a result,we should expect an increase in retirement and pension payments and on social security contributions for the next years. Inthe basic scenario, the hypothesis was that the increase in personnel expenses, at constant prices, with population growth. Inthis sense, we classified personnel costs variable of highriskto Bahia's public finances. 65. Social security imbalance is a concern for the financial situation of all the levels of federation in Brazil. Inthe last years, two ConstitutionalAmendments2' tried to reduce this imbalance, changing social security rules. The reform of 2003, allowed the collection of social security contributions charged over retirement and pension benefits, but with a floor of benefits that could be charged. This floor i s the same for federal, state and municipal governments. This represented an advance to the federal government, which had been trying to charge this contribution without success, but, for state and municipalities, the measure will have a limited impact. iv) Other current expenditures, including expenditures with goods and services - risk: low. 66. Other current expenditures must be 28% above the assumptions to imply non-compliance of at least one of the financial indicators analyzed. Although financial sensitivity to this variable i s not weak, other current expenditures represent less risk, since the government can have more control on it. Inthis sense, we classify its risk as moderate. v) State GDP growth -risk: low 67. The growth rate of Bahia GDP should be negative duringthe entire projection period to make the state non compliant to at least one of the financial indicators. As this hypothesis i s not likely to occur, the state GDPfluctuations do not representa serious risk for the state fiscal accounts. 2oConstitutionalAmendment n.'20, from 1998 andConstitutional Amendment n. 41 from 2003. 90 vi) Population growth - risk: low 68. According to our hypothesis, population growth has an impact on operating expenditures. The base case scenario considered a growth rate from 0.99% to 0.96% per year, according to Brazilian Geography Institute estimates for Bahia. An additional growth rate of 5 percentage points (a growth rate of 6%, which is very unlikely) would imply the non compliance of at least one of the indicators. This can show us that the financial situation i s not sensitive to population growth. vii) Exchange rate-risk low 69. Exchange rate depreciation has a direct impact on dollar indexed debt and an indirect impact on general price index (IGP) indexed debt, since this price index i s very sensitive to changes on exchange rate. We assumed a general price index (IGP) additional variation of half of the real depreciation of the exchange rate. Only an exchange rate devaluation of more than 100% will make Bahia non compliant to the FRL on net consolidated debt to net current revenue FRL requirement. Although a significant part of the debt is dollar influenced, the initial level of debt is relatively low, making the fiscal accounts less sensitive to exchangerate variations. 70. It is important to mention that all the projections above considered the maintenance of the investments level of the last two years. Inthis sense, even if there i s an unfavorable change in any of the variables analyzed, part of the adjustment can be done on investment expenditures, without compromising the financial health of the state. F Conclusions - 71. During the period 2000-2004, the fiscal performance of Bahia State Government was sound. Responsible fiscal behavior enabled the state government to achieve increasing and substantial positive primary balances since 2001. Interms of current balance, during the period of analysis Bahia generated substantial surpluses of about 15% of net current revenue which enabled it to finance investment Consequently, Bahia obtained positive nominal balances since 2002 - a rare occurrence in the public expenditures and deficits on capital account and generate resources to meet its debt obligations. finances of Brazilian states. 72. The good fiscal performance resulted from the combination of the control of current expenditures and the enhancement of revenue collection efficiency which allowed Bahia State Government to produce substantial primary balances and to generate significant current account surpluses to finance its investment expenditures and to cover part of its financial obligations. 73. As a result of its sound fiscal performance, Bahia complied with all the fiscal limits established by the Fiscal Responsibility Law (FRL) since its enactment in 2000. Even more important, the FRL indicators improved as a consequence of the strong fiscal discipline. Net consolidated debt, used for compliance with the Fiscal Responsibility Law, fell from 178% of net current revenue in 2000 to 142% of net current revenue in 2004, below the legal ceiling for state governments of 200%. 74. In2000-2004, personnel costsrepresented varied between 51% and 57% of netcurrent revenue, below the ceiling of 60%. Other FRL indicators are also well below the limits established by law: since 2000, the highest level for credit operations was 8% (against the FRL ceiling of 16% of net current revenue). Given the high interest payments and amortizations that allowed the reduction of consolidated debt, debt services representedon average 15% of net current revenue (against the FRL ceiling of 11.5% 91 of net current revenue). 75. In addition to the Fiscal Responsibility Law requirements, the Bahia State Government achieved all the targets of the Fiscal Adjustment Program agreed with the National Treasury Secretariat (STN) for 2000-2004. Given the good performance of the last year, the state government and the STN agreed to maintain the targets contained inthe agreementfor the period 2003-2005. 76. In the last years, an impressive progress in tax collection efficiency it was observedthat allowed the state to generate current savings that financed most of its investment expenditures. While intergovernmental transfers represents 20% of current revenues, which indicate a significant dependence on federal transfers, most of them are constitutionally or legally sanctioned, thus, the risk associated to this dependenceis lower than it seems at first sight. 77. On the expenditure side, despite its comfortable situation, a major source of vulnerability is the upward trend of pension/social security benefits for retired public employees. In the last years, the FUNPREV (State Employee Social Security Fund) has generated increasing deficits that have being covered by the state Treasury. The state employees' social security system i s a pay-as-you-go system and presented an actuarial deficit of R$ 23 billions at 2004, or 250% of net current revenues. This indicates potential increase on personnel expenditures that could deteriorate the financial situation with the need of decrease on other current expenditures or investment. However, it i s important to mention that social security imbalance i s a reality for the public sector inBrazil at all levels of government. 78. The substantial fiscal balances obtained over the past few years, together with projections based on realistic assumptions, indicate that Bahia State Government has sufficient capacity to repay its debt. Projections for the fiscal accounts, and the indebtednesscapacity for the next ten years show that the state government could assume the new loan from the World Bank without riskingthe fiscal health of the state government. Projection exercises for the period 2005-2015, depict a favorable evolution for the main fiscal and financial indicators showing that the continuity of the responsible fiscal behavior should guarantee the debt sustainability. 79. The sensitivity analysis shows that the guarantee of fiscal sustainability depends on the deepening of the enhancement of tax revenue efficiency collection and the perseverance of the tight control of personnel expenditures. 92 BRAZIL BAHIAPOORURBANAREASINTEGRATEDDEVELOPMENT - Annex 10: Economic Analysis PROJECT VIVER MELHOR - 11 1. The project development objective i s to reduce urban poverty in a sustainable manner, targeting the poorest and most vulnerable sections of Salvador and strategic cities of the state of Bahia with access to basic services and improvedhousing and social support services; specifically to: (i) improve quality of life and asset base for the poor through the provision of basic infrastructure services, improve of housing conditions and access to urban land, and regularize land tenure and buildings in slums and unplanned settlements; (ii) improve access to social programs in the areas of income and employment generation, direct support to families' survival strategies (e.g. through better and easier access to daycare facilities), health care, education and job training, and initiatives in the area of community security at the local settlement level; and (iii) enhance state and local government capacity to plan, implement, monitor and evaluate integrated urban poverty reduction strategies involving several different departments, undertake urbanupgrading and landdelivery, coordinate social policy on the ground through participatory planning, and monitor and evaluate government programs through poverty and quality of life indicators. 2. A cost benefit analysis was conducted to determine the economic viability of a sample of proposed interventions in two macro-areas in Salvador, Alagados VI and Pau da Lima, which will serve as the basis to demonstrate overall project feasibility. The results of the analysis showed the overall viability of the subprojects analyzed and of all of their individual sub-components. The following . interventions were analyzed: Alugudos V: It is located in the sea border in the All saints Bay, in an area with high risk of flooding. Interventions in this macro-area include the urbanization of the area, with the provision of urban services including, water and sewerage connections, drainage, access roads -allowing for solid waste collection, and the resettlement of families living in high risk areas (paluphites), which will be resettled inthe same macro-area. It also includes improvements to identified house, the recuperation of degraded areas, and the building of a border road, and access to social services, crime prevention activities and parks and sport areas. The analysis presented in this annex makes reference to the economic analysis done for the total investments needed to . consolidate and formalize the area; and Puu du.Lima:This highly populated settlement located along the "highland" area of Salvador, is also a high risk area with erosion and presence of land slides. Investments in this macro-area include the urbanization of the area, with the provision of urban services including water and sewerage connections, drainage, access roads -allowing for solid waste collection, protection of slopes and erosion prevention activities, and specific resettlement of families living in high risk areas, who will be resettled in the same macro-area. It also includes improvements to identified houses, recuperation of degraded areas, building of parks and social equipment, and areas for sports. 3. The analysis presented in this annex makes reference to the economic analysis done for the total investments needed to consoIidate and formalize the two areas which are expected to benefit both direct residents receiving access to new and improved urban and social services, as well as the overall residents of the macro-area expected to benefit from social equipment, interventions like parks and roads that will improve mobility inthe area, and crime reduction activities. 4. Detailed economic assessments were undertaken for the specific components of the Project. All project components were included in these analyses, including the infrastructure works and complementary actions. Returns to the investment in institutional development, community participation 93 and education, are included in the analyses as they are considered the basis for service sustainability and are ultimately expressedin improved access to urban services. Once the overall viability of the proposed components was verified, the overall project viability was assessed. 5. To determine the net incremental costs and benefits, "with" and "without" project scenarios were constructed. On the basis of these scenarios, the net incremental financial benefits and costs of the proposed investment programs were assessed, which were then adjusted for the impact of taxes, subsidies, and externalities to arrive at the economic flow of costs and benefits. The cash flows were discounted using a discount rate of 12 %, which is estimated to be a proxy of Brazil's opportunity cost of capital. The following sections provide more detailed information on the estimation of economic benefits and costs. 1. Economiccosts 6. Costs include capital costs, operation and maintenance costs, rehabilitation, resettlement, environmental mitigation and contingencies. For all the different components, costs of complementary actions necessary to derive the expected benefits and sustainability levels targeted, were considered. It was deemed necessary to include these additional costs in order to permit the assumption that the expected benefits of the project will actually be realized. For the estimate of economic costs, specific adjustments were made to deduct embedded taxes in material and labor, from investment and operation and maintenance costs. The conversion factors used in the analysis are presented in Table 1. Once all financial costs were converted into economic costs, incremental costs were calculated based in the comparison of the "with" and "without" project scenarios. StandardConversionFactor (CF) 0.94 CFof uskilledlabor 0.46 CF of skilledlabor 0.81 CF of importedmaterials and equipement 0.80 CFof nationalmaterials and equipment 0.88 CF of electricity 0.97 1 CF of chemicals 0.83 2. Economicbenefits 7. The project's main benefits include: the improvement of overall urban quality in Alagados VI and Pau da Lima slums, which are expectedto generate an overall increase inproperty prices inboth areas; reduced riskto lives and property due to the resettlement of people living inrisk prone areas; reductionin risks and losses to life and property due to a reduction of flooding resulting from investments inmacro and micro drainage; increasedaccess to water and sewerage services, and solid waste collection improving overall sanitary conditions inthe areas, with ultimate impacts on public health; improved access to roads within the two macro areas, allowing for better connectivity to formal city, and solid waste collection; increased access to recreational activities with the financing of ecological and protection areas inPauda Lima, bringingsocial benefits, especially for children andyouth; savings intime and improved quality of life due to reductionin crime and violence; sustainability through improved cost recovery (tariffs and service fees, there i s currently low collection inboth project areas); improved institutional capacity to addressurban planning sustainability inlow-income areas; 94 (x) resettlement of families improving the self-esteem of the dwellers that i s reflected often in improvements intheir housing conditions, partly due to formalization land tenure and having access to a formal address. Estimation of economic benefits: 8. As mentioned above, the analysis presented in this annex makes reference to the economic analysis done for the total investments needed to upgrade and consolidate the whole slum. To estimate the economic benefits of access to improvedurban services, hedonic pricing methodology was used. The hedonic price function is based on the housing market in which transactions can be observed. The welfare significance of the hedonic price function comes from the fact that people are revealing the marginal value of particular attributes (such as access to services, distance to center, etc.) that are not sold separately in the market, but are embodied in the house and reflectedin housing values. A hedonic price function was built to estimate the marginal value of these non-market attributes provided by the project, allowing for the measurement of welfare effects from changes in non-market attributes, which i s the goal of the economic analysis. (i) Estimation of benefitsfrom investments in the Alagados VI area 9. The proposed interventions in this macro area of Salvador are expected to benefit directly 2,090 families with local and macro level infrastructure; 1,261 from water and/or sewerage connection; 590 families would directly benefit from resettlement from high risk prone areas (palafites), to consolidated areas within the macro area; 36 from improvements in their household and about 5,000 indirectly from overall improvements inthe area. 10. During model specification, different functional forms were analyzed. However a linear model was selected, and results from this regression appear to be consistent with real estate information available and collected during project preparation. The results showed that the only benefit not fully captured were those associated with access to water and sanitation services that were analyzed independently. 11. Results from the application of the methodology showed that the average total increase in property prices expected in the area i s R$5,826 per property. Each of the main interventions proposed in the macro areas were analyzed independently to verify their overall viability. Results from the cost- benefit analysis are presented and summarized inTable 2. Intervention Benefits Investments O&M Costs NPV ERR Roads 12.401.627 4.122.833 1.219.202 7.059.592 28,84% Drainage 12.401.627 1.039.539 307.412 11.054.675 8931% Social equipment 13.889.822 2.593.861 2.568.909 7.514.098 38,43% Total social and 37,204,881 7,756,233 3,820,282 25.628.366 41,88% 95 urban infrastructure Resettlement 10.902.506 8.172.983 2.603.543 125.979 12,25% Household 12,41% improvements 172.012 128.561 44.218 3.97 1 Water and sewerage 5.329.906 885.140 304.439 4.172.946 47,22% Macro level infrastructure 25.781.425 7.242.857 2.491.140 16.314.336 37,64% Total 79,390,730 24,185,774 8,959,358 46,245,599 33.88% (ii) Estimation of benefitsfrom investments in the Pau da Lima area 13. The proposed interventions in the Pau da Lima macro area of Salvador are expected to benefit directly 6,697 families with local and macro level infrastructure; 3,350 from water and/or sewerage connection; 810from improvements in their houses; 50 families would directly benefit from resettlement from highriskprone areas (Le. landslides), to consolidated areas within the macro area; and about 16,862 will benefit indirectly from overall improvements inthe area. 14. For Alagados VI, different functional forms were analyzed during model specification. However a linear model was selected, results from this regression appear to be consistent with real estate information available and collected during project preparation. The results showed that the only benefit not fully captured were those associated to access to water and sanitation services that were analyzed independently. 15. Results from the application of the methodology showed that the average total increase in property prices expected in the area i s R$ 1,711 per property. Each of the main interventions proposed in the macro areas were analyzed independently to verify their overall viability. Results from the cost- benefit analysis are presentedand summarized inTable 3. 16. Results from this analysis showed that the proposed interventions in the macro area yield a positive return. The net present value of the investments are all positive with a ERR > 12%. Investments inresettlement inthe area were optimizedto yield positive results by optimizing the use of available land inthe macro area, reducingthe need for landfills, and by a better distribution in time of the investments, all other subcomponentshave substantial net economic returns. The estimated total net present value from investments intheAlagados VI macro area i s R$46,245,599 with an economic rate of return of 33.8%. Table 3: Resultsof economiccost benefitanalysisfor Pauda Lima Macro level 96 3. Resultsof the cost benefitanalysis 17. With an overall economic internal rate of return of 35.81% the proposed project interventions in Salvador are economically viable. Investments in the Pau da Lima area has an individual ERR of 37.63%, followed by investments in Alagados VI, with an ERR of 33.88%. It i s expected that the economic analysis from other cities inthe interior of Bahia will yield similar results, and to maintain the overall feasibility of the Viver Melhor I1project, a condition for eligibility will be to yield a positive economic returnwith an ERR >12. To confirm the robustnessof the results, sensitivity and risksanalysis were conducted for each of the subprojects analyzed, and for the investments in the city of Salvador as a whole. Table4. Summary of benefitsandcostsfor interventionsinSalvador NPV offlows (R$ 000) Component Benefits Investment O&M Costs Net Benefits EIRR Alagados VI 79,390,730 24,185,774 8,959,358 46,245,599 33.88% Pauda Lima 87,858,608 24,341,572 7,482,520 56,034,515 37.63% NPV Total 167,249,337 48,527,346 16,441,878 102,280,114 35.81% 4. Risk andsensitivityanalysis (i) Sensitivity analysisfor Pau da Lima: 18. The following assumptions were identified as those with the greatest uncertainty and were includedinthe analysis of Pau da Lima Subproject, with the following distributions: Assumption: Annual/family Normaldistributionwith parameters: Mean $21,071-41 Standard Dev. $2,107.14 Selected range isfrom -Infinityto +Infinity $14,74999 $1791070 $21.0714 I $24232.12 127.39253 Assumption: C48 Roads Triangular distributionwith parameters: Minimum 3,489,707.69 Likeliest 3,640,167.96 Maximum 4,004,184.76 Selected range is from 3,489,707.69 to 4,004,184.76 348070789 351832695 374594622 357558549 40041647B Assumption: C49 Drainage Trianaular distributionwith parameters: - w Minimum 2,890,832.43 Likeliest 3,002,942.28 Maximum 3,303,236.5 1 Selected range is from 2,890,832.43 to 3,303,236.51 289083243 299393345 308r03447 32oo.135~0 3,30323851 97 Assumption: C50 localequipment Triangulardistribution with parameters: Minimum 6,881,553.74 Likeliest 7,109,663.34 Maximum 7,820,629.67 Selected range is from 6,881,553.74 to 7,820,629.67 588155374 7.11832272 7351.08171 758586060 7.82062887 Assumption: C51 Resettlement Triangular distribution with parameters: Minimum 509,437.50 Likeliest 536,250.00 Maximum 589,875.00 Selected range is from 509,437.50 to 589,875.00 SO843750 52854588 54985825 55818553 58887500 Assumption: C52 householdimprovement Triangular distribution with parameters: Minimum 1,866,484.68 Likeliest 1,933,513.14 Maximum 2,126,864.45 Selected range is from 1,866,484.68 to 2,126,864.45 186848484 183157882 1986,67457 205178951 2.12688445 Assumption: C53 Water & Sewerage Triangular distribution with parameters: Minimum `2,642,949.80 Likeliest 2,749,254.30 Maximum 3,024,179.73 Selected range is from 2,642,949.80 to 3,024,179.73 264291960 273825728 283358477 2P2867225 3.024.l7813 Assumption: C54 Macrolevel invest. Triangular distributionwith parameters: Minimum 6,903,320.32 Likeliest 7,200,960.00 Maximum 7,921,056.00 Selected range is from 6,903,320.32 to 7,921,056.00 Assumption: E54 Indirect beneficiaries(macrolevel) Normaldistributionwith parameters: Mean 16,862 Standard Dev. 1,686 Selected range is from -Infinityto +Infinity 11803 14333 15862 18,381 21021 Assumption: K2 populationgrowth rate 98 Normal distribution with parameters: Mean 1.02 Standard Dev. 0.01 Selected range is from -Infinityto +Infinity 099 100 102 103 105 Sensitivity Chart Tar@ Forecast: I381 NWTotal Pauda Lima PI FAMUA 90.6% c54SupralocaInwt 3.7% c50 localequipment 23% c49 1.5% c4aRoads 0.6% ~ I 0.5% c53water&-mge 1c52householdirnpmerrmt 02% E% Indirectheficienes insupralocal 0.2% 1K2populaticngmvdh rate 0.Ph I c51 Resettlement 0.0% 19. Results from the Sensitivity analysis show that the assumptions that generate the main risks to the NPV are the annual valorizationper household inthe area, and investments in macro-level infrastructure, local equipment and drainage. All other assumptions contribute less than 1% in variance of the overall NPV of the subproject analyzed. (ii) Economic Risk Assessmentfor Pau da Lima: 20. To enhancethe accuracy of the economic analysis by incorporating the uncertainty of the real world, Crystal Ball software was used. This software allows one to measurethe extent of various risks and their effect on the project, modeling a probability distribution for each riskvariable and the resulting outcome. Based on a Monte Carlo simulation of 1,000 trials, the model recalculated the results of the economic analysis by changing the major riskvariables all at the same time. The risk analysis was conducted for each subcomponent of the subproject analyzed. The results from Pau da Lima show the robustness of the analysis, with all subcomponentsfeasible, posing no major risks to the proposed project. Overall results for Pau da Lima subcomponent show a mean Net PresentValue of R$61,907,813 and a meanEconomic rate of return of 39.6%. 99 Resultsof the EconomicRiskAssessment after 1,000 simulationsfor Pauda Lima 21. The following Charts summarize the results of the risk assessment for the overall Pau da Lima investments and of all of the components analyzed separately, showing the robustnessof the model. I Forecast 6J81 NPVTdal P ada Lima C ~ d C i l Wmart 991 asplayed I I""" " ............... ....... ......... ~ ~ " I 59S47i.2 m m s s 61 923138 63 107322 64291% F6 Forecast:EJ&2ElRRTotal Pauc!aLima 999Trials CurrlsdiveUwl 991 Displayed 1.W II ............................................................................... ............. ............................................................................. : 499.5 ae ..................................................... qn a 2M.7 3.04% 38.85% 39.65% 40.46% % 100 Roads subcomponent: I-- - Forecast: M31NWRoads WL Curdative Chart 992Displayed 1 6,936,459 7,049,408 7,162,358 7,275,307 7,388,257 Rk. Forecast: FvgzERR Roads F'DL Cmativechart 992 Displayed Drainage subcomponent: Forecast: T81 NPV DrainageWL Curdative Chart 996Displayed -999 -749.2 T1 9 an - 499.5 e n -249.7 2a - 0 7,763013 7,853,162 7 9 3 , m 8,033,519 8,123,688 Rk. 101 I Forexst:T@ ElRR Drainage WL CWativeChart 996 Displayed 39.04% 40.13% 41.22% 42.31% I % Local equipment subcomponent: I I Forecast:W1NW!adEq~pre-4WL 1999Trials Curwlativechart I 2,427,849 2,630,415 2832981 3,a35,547 3,238,113 Rs. I Forecast: AA82 BRR Local e@pnent WL 999 Trials Curwlative Chart 988 Displayed -999 - 749.2 = 2 - 499.5e n - 249.723 - 0 16.3% 16.78% 1723% 17.6756 % 102 Resettlement: I Forecast:AH81 NPV ResettlementWL 999Trials W a i v e Chart 989 Displayed ~ I 5,494,769 6,616,434 7,738,100 8,859,766 9,981,m F$. I Forexst: AH= ElRRResettlementWL 1 999Trials Curdative Chart 990Displayed I 135.54% 16274% 169.W/O 217.13% 244.3% % HouseholdImprovementssubcomponent: Forecast:ACB1 NFVHousWdirrprovements WL 999Trials Curdative Chart %9Displayed 9,563,301 9,619,208 9,675,114 9,731,021 9,786,m Rk. 103 I I Forexst: AcB2 URR Hasehddlnpwements WL 999Trials CurwlativeChart 989 Displayed ~ 1.m 999 ,750 ... 749.2 ,500 ................................................................................. ..- 499.5 .m ............................. ... 249.7 .m -. 0 66.64% 68.35% I % Water andSewerage subcomponent: Fwecast: AM1 NPVWater andS w x q WL Curwlativechart 998Displayed iI13 i .,Ill ,750-....... ................................................................ 1: l Q ,500.............................................................................................. ' i s I & e ....... .................................. ,w) -.*lfltil I I 3,193,295 3,278,539 3,363,783 3,449,026 3,534,270 I s. I Forecast:AV82 ORR WaterandSmerqp 939Trials Cudative Chart 999 Displayed ~ I 1.w ~ 'I .-3 ,750 -...... ............................................................................... ,111 ........ n ' - 1111 I ,500 .................................................. ~ I nW 1111 I ,250 _ ................................................ I ~ I I 24.34% 25.EZ'h 27.31% % 104 Macro-level infrastructure subcomponent: I Forecast:Bc81NFVbkcrdevelinfmstructureFdL 1 999Trials CurwlativeChart I: I ......................................................................................... ............... 1,. ,750 = t i I "a 7 ........ n m I m 500 -.......................................................................................... 1. 499.5 e m I gn Q 3 ,250_................................................................ dUUU ........ 249.7 I 1111 2775,871 23337,296 23,218,721 23,440,145 Rk. I:........ 3 499.5 CI m e ........ Q a 249.7 46.10% 47.49% 4887% 50.25% 51.63% Yo (iii) Sensitivity analysisfor Alagados: The following assumptions were includedinthe analysis of the Alagados Subproject, with the following distributions: Assumption: K2 Populationgrowth rate Lognormaldistributionwith parameters: Mean 1.02 Standard Dev. 0.01 Selected range is from 0.00 to +Infinity 098 105 Assumption: ResettlementAlag. Triangular distributionwith parameters: Minimum 9,208,268 Likeliest 9,692,913 Maximum 10,662,205 Selected range is from 9,208,268 to 10,662,205 9208288 8571 752 0935238 10288721 10662205 105 Assumption: Macro-levelInfrastructureAlag. Triangular distribution with parameters: Minimum 7,410,000 Likeliest 7,800,000 Maximum 8,580,000 Selected range is from 7,410,000 to 8,580,000 Assumption: C22 RoadsAlagados Triangular distribution with parameters: Minimum 4,061,754 Likeliest 4,275531 Maximum 4,703,084 Selected range is from 4,061,754 to 4,703,084 4061 754 4222086 4382419 4542.751 1.703984 Assumption: DrainageAlag. Triangular distribution with parameters: IhVESTlMENlO DRENAGEM A@ Minimum 1,024,139 Likeliest 1,078,041 Maximum 1,185,845 Selected range is from 1,024,139 to 1,185,845 - 1,024,138 I084568 I104882 1.l45.418 1185ffl5 Assumption: Local EquipmentsAlag. Triangular distribution with parameters: Minimum 2,555,433 Likeliest 2,689,930 Maximum 2,958,923 Selected range isfrom 2,555,433 to 2,958,923 Assumption:HouseholdImprovementsAlag. Triangular distributionwith parameters: Minimum 131,528 Likeliest 138,450 Maximum 152,295 Selected range is from 131,528to 152,295 ~ 131528 138,720 141912 l47.103 152295 Assumption: Water 81Sewerage Alag. Triangular distribution with parameters: Minimum 905,566 Likeliest 953,227 Maximum 1,048,550 Selected range is from 905,566to 1,048,550 Assumption: Annuallfamilyvalorization Resettlement Alagados Normaldistributionwith parameters: 106 Mean $2,527.97 Standard Dev. $252.80 Selected range is from -Infinity to +Infinity Assumption: E28 Indirect beneficiaries(macrolevel) Normal distribution with parameters: Mean 5,000 Standard Dev. 500 - Selected range is from -Infinity to +Infinity 3.500 4250 5,000 5750 SensitivityC M Tar@ Forecast: Total EIRR Alagados VI 67.6% I 21.Ph 111 6.8% 1.5% lii Inmtimlos - EquipamentasLccasAlag 1.4% IMIESTIEENTODREWEMAlag 0.5% Inmt Aguae EsgdoAlag 0.2% 1Ii E28 Indirectbeneficlanes(macrolewl) 0.1% 0.1% 0.Vh 0.0% 11 b 5056 090 50% lWh WuredbyContributimtoVariarce 22. Results from the Sensitivity analysis, show that the assumptions that generate the main risks to the economic feasibility of the proposed investments are the population growth rate, the annual valorization per household in the area, investments in macro-level infrastructure, roads and local equipment. All other assumptions contribute less than 1%in variance of the overall EIRR of the Alagados subproject. (iv) Economic Risk Assessmentfor Alagados VI: 23. To enhance the accuracy of the economic analysis by incorporating the uncertainty of the real world, Crystal Ball software was used. This software allows one to measure the extent of various risks and their effect on the project, modeling a probability distribution for each risk variable and the resulting outcome. Based on a Monte Carlo simulation of 1,000 trials, the model recalculated the results of the economic analysis by changing the major risk variables all at the same time. The results show the robustness of the analysis, with all subcomponents feasible, posing no major risks to the proposed project. Overall results for Alagados subcomponent show a mean Net Present Value of R$ 44.8 million and a meanEconomic rate of return of 33.3 %. 107 24. The results of this analysis shows that with the exception of the proposed investments for Resettlement and Household improvements in the Alagados subcomponent, all of the other components have a 100% probability of ending up economically feasible as designed. Given the 50% uncertainty in the result for the resettlement component, the project team will be especially careful in maintaining the proposed level of investments and closely monitoring this component for any cost-overrun, that might jeopardize its feasibility. The resettlement component in Alagados, i s an important investment item as it corresponds to 36% of total investments of this subproject and so, even though the household improvement component has similar results, the resettlement component i s the main risk of the subproject as the investments in household improvements represent only 1%of total investments in the area. The resettlement component will pose the greatest challenge to the project and will require most effort and dedication from the supervision team, to maintain its economic feasibility. 25. Overall the proposed Alagados subproject i s economically feasible and the results of the economic risk assessment after a 1,000 simulations show that the project would yield a positive net present value with a mean of R$44.8 millions and a mean economic internal rate of return of 33.3%. The following Charts summarize the results of the economic risk assessment for the overall Alagados subproject and of all of the subcomponentsanalyzed separately, showing the robustness of the model. Forecast:Net ResentValue TotalAagados VI 1,ooOTriaJs CLnxlativechart 992 Displayed I 35,173,154 40,318,449 45,463,744 55,754,334 I (Rk.) 108 , 1,MOTnals i - 4 .................... " .............. " " Roadssubcomponent: Forecast: NWRoadsWsgdc6 CuTulativeChart i m. Forecast: HRR R& Alslgadcs CunclativeChart 0 24.Wh 26.45% 28.52% 32.65% % 109 Drainage subcomponent: Forecast:NW DrajnageA- 1 1 1,000Ttials Cumlative Chart 988 Displayed 1 . m -. ____.. .. I ,750 -r.. ....................................................................................... i A l l a,467,756 9,952,560 11,47,364 1292,168 14,406,972 I R$. r- ,I Forecast: URR DrainageA@ 1,000Tnals Cu-dative chart 932Displayed - loo0 z - 750 - 5 0 0ae - 2 5 0 $n - 0 I 81.21% ffl,Wk 95.95% I % LocalEquipment subcomponent: 987 Displayed 7,577,464 9,150,981 10,724,497 m. 110 Forecast: EIRR Lccal Eypnent Wq&s Curdative Chart 38.05% 40.61% 43.17% % Resettlementsubcomponent: Forecast:NW ResettlementAla- Curdative Chart I Forecast:EIRR ResettlemR pia- Curdative Chart 994Displayed I i 6.58% 9.3956 12.2056 15.01% 0, 111 HouseholdImprovementsSubcomponent: 1.Mx) - 1wO ,750 .......................................................................................... I.................... 750 500 ......................................................................................... 500 250 ................................................................ ..,II~~~~HII 2% Mx) 0 599 5,153 9,707 R. I I,(OOTnals .- sB9Dsplayxl 0 11.1% 12110/. 1257% % Water andSewerage Subcomponent: 1,894.743 2,317,204 2739,660 3,162,116 3,584,572 I R. 112 I Forecast: ElRRWaterandSaw- Aagxlas Curdative chart 996cisflayed 39.64% 41.97% 46.61% % Macro-level Infrastructure Subcomponent: Forecast: NWfvkc~levdInfmstructureAagacbs Clmclativechart 997Displayed 15,624,907 15,871,506 16118,105 16,364,704 16,611,933 RF. ~ Forecast:ElRR fvkc~levelInfmstructureAagadcs Clmclativechart 997 DisplayKi 35.77% 36.87% 37.Wh i % 113 (v) Overall risk assessment for Salvador Investments: 26. An overall economic risk assessment was conducted to assess the risk that all of the identified assumptions for Alagados VI and Pau da Lima subcomponents will create the economic results of the analysis if iterating at the same time, thus introducing the uncertainties for the two proposed subprojects as if they were parts of an overall Salvador project to be financed under Viver Melhor 11. The overall results confirmed the economic feasibility of the proposed investments with a meaneconomic net present value of R$. 111.7 million with a 100% probability of ending with a positive net economic impact, and a mean economic internal rate of return of 37.6%, also with a 100% probability of being equal or greater than 12% l Forecast:Total NPVViverN e bIt l WTrials Cunlative chart Gis&5yed I 4 - 4 I. MLI I .................................................................... : i ................. -.Id ...... 749.2 I 106,8R357 114,166,227 121,450,088 128,733,953 RF. I Forecast:Total ERR Viver Nehor II 1 WTrids CuniativeChart 991Displayed 1 1m ...... .= ' & 1 I 750 ................................................................................ L........... 1 . -4 Fi ,5004................................................................ ....... ~ 499.5 I - i ... 11 I 34.52% 37.59% 39.12% 40.65% % 114 BRAZIL - BAHIA Annex 11A: EnvironmentalImpactAssessment ExecutiveSummary - POORURBANAREASINTEGRATEDDEVELOPMENT PROJECT-VIVER MELHOR I1 1. The objective of the Bahia Poor Urban Areas Integrated Development Project - Viver Melhor I1- entitled `Viver Melhor ZZ' is to implement a series of structural policies to improve living conditions for people living in unsafe and unstable informal urban settlements located in defined areas within the Metropolitan Region of Salvador (RMS) and other municipalities in the interior of the state. The main components of this programare as follows: Component A - Urban and Environmental Upgrading - interventions aimed at improving urban, environmental and housing conditions together with activities linked to involuntary resettlement and securing land titles. Component B - Economic, Social and Community Development - activities are concerned with the construction and support for the installation and management of the community facilities needed for developing social practices that have beenidentified as key priorities. Component C - Organization and Management Development- Encompasses a range of activities aimed at perfecting the process of planning, management and execution of the Viver Melhor ZZ Project. 2. The Project i s classified as a "Category A" project under the World Bank`s (the Bank's) Environmental Assessment (EA) policy (OP 4.01). As such, a full-scale EA was conducted as part of project preparation to identify the project's potential environmental impacts, to propose appropriate measures to mitigate any negative impacts and enhance positive impacts, and to develop an environmental management plan comprising all screening, mitigation and enhancement measures to be implemented as part of project activities. The followingdocument summarizes the results of the EA. A. BACKGROUND 3. In the State of Bahia, rapid urban growth over the past few decades has resulted in high population concentration in the cities, including the Salvador Metropolitan Region (RMS), where about 38% of the total population of the state currently lives. 4. The fast and disorderly process of urban growth, together with the heavy flow of people into the state capital (particularly into the periphery) from the countryside, have generated a process of slum creation characterized by `invasions' of hillsides, river bottoms or flood-prone areas. In such circumstances, the housing fails to meet minimumconstruction standards; municipal urban infrastructure i s almost totally absent, minimum health standards are ignored, and there i s a constant risk of landslides and flooding. 5. Furthermore, these areas are also characterized by: (i) levels of transmissible, particularly high water-born, disease; (ii) low educational levels (functional illiteracy, lack of qualifications, etc); (iii) high unemployment and underemployment with the informal employment sector predominating (low family incomes and productivity leading to even lower qualifications); (iv) high crime rates and a generalized sense of insecurity; and (v) low environmental quality. B. INTERVENTIONS PLANNEDFOR lST2NDYEARS AND 6. 7 municipalities, in addition to the capital, were pre-selected for Project interventions. Together, these contain 41% of the entire urban population of the State of Bahia. For intervention planning purposes (1" and 2"dyears of execution) first phase, Project Areas and subprojects areas were selectedas indicated inthe following table: 115 Intervention Proiect Areas and Submoiect Areas for lSt2"dvearsand Municipality ProjectArea Subproject Areas RibeiraAm1/ Cobre Salvador Alagados ; Pituaq6 I PaudaLima I I IlhCus II Malhado I Malhado I Duringthe preparationstagethefollowing studies were developed: Integrated Local Development Plans (PID) and Technical Projectsfor Operational Areas, in order to define the set of physical and socialinterventions at the locallevel. Master Plansfor the Project Areas aimedat definingthe set of interventions at macro-level. Locally-based interventions are as follows: Water supply: Installation of water-supply networks, branch connections inhousingzones; Installationof lifting stations and reservoirs; Sewerage- Installation of wastewater collection networks; interceptors and sewage pumping stations; Public Lighting:extension of lightingnetwork, repositioningof posts and replacement of lamps; Urban sanitation: Installationof appropriate waste collection infrastructure; Improvement andrepair of streedroad system: Layingdown network for vehicular and pedestrian traffic; repairingexisting streetsh-oads; Urban micro-drainage: Installation of micro-drainage networks, rainwater culverts and related facilities; Public works/ transport facilities: Public works (eg public squares) and Installation of transport facilities (bus-stops); Removal of geological and flooding risk situations: Evacuation of gullies, ravines and high risk " hillsides; Recovery of areas defined as Permanent Preservation Areas (APP) (steep slopes, river banks, etc.); Shoring up and providing protection for sloping areas, landscaping, replanting, installingretainingwalls and reinforcementof measuresagainst landslides etc.; Urban and environmental recovery: rehabilitation of water courses, riparian vegetation andlocal springs; paving, landscaping and recovery of degradedareas; installationof publicfacilities; installation of public leisure and meeting areas; Housing: repair to dwellings and improvement of housingconditions; Property regulation: Proceduresto regularizeproperty rights and confer title to owners; Resettlement: Relocation and resettlement of families where necessary The environmental aspects of the proposed interventions were analyzed in accordance with the appropriate environmental guidelines, viz: (i) reduction of the risk of flooding and landslides; (ii) recovery and maintenance of permanent preservation areas; and (iii) minimization of resettlement. With regard to the geological risks, the intervention options took account of the Salvador Master Plan for Hillsides which considers the various risk situations and the different proposals put forward for solving them. 10. In addition, the concept governing the planned interventions in the PIDs and the Master Plans sought to accommodate two lines of action: a) incorporation of the 'environmental variable' in the locally-targeted interventions and b) the opportunity to consolidate areas of high environmental value 116 with a view to the environmental stability of the entire region. 11. Pau de Lima Subproiect area is densely populated, with over 250 inhabitants per hectare and with the majority o f dwellings clinging to steep hillsides (50" to 70" gradients), some of which are at serious risk of slippage. Public areas such as leisure centers and green areas are practically nonexistent in the area. 12. Adjacent to Pau da Lima is the Mata dos Oitis, recently awarded the status of Botanical Garden. This contains a large number of Mata Atlantica (Atlantic Forest) species in an area covering 14,000 hectares and i s devoted to researchon plants used in Afro-Brazilian rituals. This is the only green area in the Pauda Lima region. 13. In addition to the interventions planned to improve the local urban infrastructure, the following activities are planned: (i)upgrading the roadhtreet system in the region by improving the road interchanges; (ii) upgrading of the region with the Centro de,Bairro; (iii) environmental recovery of the Rio Pituaqli through dredging, recovery of the river banks and the installation of a Linear Park; and (iv) activities aimed at upgrading and strengthening the environmental management of the Botanic Garden area. 14. Alagados Subprsiect (Flooded Area) i s an integral part of the Ribeira Azul area, stretching along the shore of the Bay of All Saints and occupying an area of 4 Km2.Approximately 35,000 people live there and it is considered to be the area with the highest level of urban and environmental decay in the entire city of Salvador. Human occupation of the area now extends to practically all the vacant space andhas begunto invade the mangrove swamps (already environmentally degraded) by buildingshacks on stilt jetties over the water ("puluftus"). Lack of proper sanitation in the area has reachedcritical levels. 15. The local infrastructure interventions proposed in the Viver Melhor ZZ Project complement the Ribeiru AzuZ program funded by the World Bank and the Italian Foreign Ministry through AVSI. 16. As for the interventions of a macro-level type, the Project will support the consolidation of the Cobre/SBo Bartolomeu Environmental Protection Area covering the Piraja Metropolitan Park and the SBo Bartolomeu Park. These areas contain a considerable fragment of original Atlantic Forest, a recovered area, and the Cobre dam and reservoir, which form part of the water supply system for Salvador. significance inthe region, beinga historic site - indian village, `quilombo' (haven for ex-slaves) and sugar 17. The SBo Bartolomeu Park within the APA i s a heritage site of major cultural and environmental mill,sceneofbattles for the independenceofBahiaandatraditional Afro-Brazilian religious sanctuary. 18. The following macro-level interventions are proposed for the above areas, in conjunction with the authorities responsible for managing them: 0 APA Cobre / SBo Bartolomeu: Environmental Zoning andManagement Plan; 0 SBo Bartolomeu Park: elaboration of the Master Plan for the park and drafting of policies to protect the park (eg: fencing and upgradingthe perimeter road). 19. Malhado SubPro.iectcomprises 3 micro-areas that are highly vulnerable from a social and urban point of view: (I) Alto do Ampuro; (ii) Alto do Coqueiro and (iii) Alto do Cucuu. These areas the the the typify urban poverty associated with human occupation on steep slopes presenting high risks of landslides. The region lacks green and leisure areas for use by the localpopulation. 20. The macro-level interventions planned for the above include the establishment of the Alto do Amparo Park in an area of natural scenic beauty and with vegetation that currently suffers from illegal occupation. 117 C. ENVIRONMENTAL ANALYSIS FOR COMPLIANCE WITH BRAZILIAN ENVIRONMENTAL LEGISLATIONAND THE ISSUEOF ENVIRONMENTAL LICENSING 21. State of Bahia environmental legislation embraces five types of environmental license. For large undertakings with major environmental impacts, state law requires a three-stage licensing procedure: a preliminary (or `location') license known as an LP / LL, an installation license (Lo, and an Operating License (LO). 22. For small and `micro' undertakings, local legislation requires a simplified license (LS) which replaces the above three licenses. Works aimed at upgrading abnormal areas forming part of consolidated urban situations are subject to a fairly straightforward type of license known as an Environmental Authorization. 23. For interventions falling within the local scope of the Project, the licensing instrument will be the Environmental Authorization. The majority of supra-local interventions will qualify for a Simplified License. 24. To comply with Brazilian and Bahia environmental legislation, the investments proposed under the project will be submitted to the environmental licensingprocess as described above. D. ENVIRONMENTAL ANALYSIS IN COMPLIANCEWITH THE BANK'S SAFEGUARD POLICIES 25. The Project triggered and addressed the following World Bank safeguards: Environmental Assessment (OP 4.01); Natural Habitats (OP 4.04); Involuntary Resettlement (OP4.12); and Cultural Property (OP4.11).The Project design incorporates the mitigation measures for each policy, as described below. OP4.01 EnvironmentalAssessment EA - 26. A comprehensive EA has been carried out in accordance with Bank policy for Category A projects. The EA evaluates the existing conditions, identifies the potential direct and indirect environmental impacts and proposes suitable mitigation measures for each negative impact identified, as well as measures for enhancing each identified positive impact. The mitigation and enhancement measures are summarized in the Environmental Management Plan, including associated costs, responsibilities and timetable. A public consultation exercise has been carried out, supported by appropriate documentation allowing for a meaningfulcommunity decision-making process. 27. As part of the aims and concept of the Project, interventionsare planned with a view to improving the housing and living conditions of selectedprecarious urban settlements as well as to promoting quality of life improvements for the resident population. 28. The main activities linked to environmental protection include (i) the recovery, preservation and consolidation of the existing protected areas within the areas of influence (macro-area); (ii) protection of the cultural heritage; and (iii)the creation of new protected areas such as linear parks. 29. Furthermore, the Project will promote the strengthening of environmental management of CONDER (the StateUrban Development Agency). Public Consultation 30. A series of consultations, contacts and meetings ("scoping" procedure) with bodies associated with the state government and the municipal authorities of Salvador and Ilhkus and NGOs active on 118 environmental affairs in Bahia State took place at the Project preparation stage. The main concerns referred to the possibility of support for the consolidation of the protected areas within the regions of influence of the various interventions. 31. On 25 February, at the meeting of the State Environment Council (CEPRAM), CONDER presented the overall concept of the Project and the results of the EnvironmentalAssessment. CEPRAM embraces a number of bodies - state government, civil society representatives and environmentalist NGOs. CONDER also took on the responsibility for placing the executive summary on the company's internet site. Inthis regard, announcements were made in the local newspapers drawing attention to the site and requesting inputfrom membersof the public. 32. The key issues raised at the consultation event are summarized in the EA. The complete list of participants, the issues discussedand recommendations are also included inthe EA documents. OP4.04 NaturalHabitats 33. Areas of Permanent Preservation (APPs) are located within the areas of influence of the interventions. These consist of 30 m wide strips on each side of the water course seasonal beds such as those forming the edges of high sloping areas that have not been occupied and which are still reasonably intact from an environmental standpoint. Many of these areas constitute "Critical Natural Habitats" according to the Bank's policy. 34. The Project will finance rehabilitation and protection of two areas by creating the Alto do Amparo Urban Park in IlhCus (US$ 180,000) and the riverside park along the Rio Pituaqd in the city of Salvador (US$ 350,000). In this respect, the Project will aim to mitigate impacts on Critical Natural Habitat Areas. 35. Project Natural Habitat Impacts: The Project will have a highly positive impact on biodiversity and natural habitats, resulting from the strengthening of the management instruments of the conservation units such as the CobrePirajB and Botanic Garden APAs and the rehabilitation of riparian vegetation along stream courses which are at present affected and degraded. OPN11.3 CulturalProperty 36. The Project also sets out, in cooperation with the Municipality of Salvador and the participation of NGOs and religious organizations, to foster the elaboration of the Master Plan for ensuring the preservation of the S5o Bartolomeu Park, an important historicaVcultura1site and religious sanctuary. 37. As one of the immediate steps, the Project plans to fence off the park area and to improve the existing road known as the "sightseeing belt" (cinturc'o de visibilidude), thereby providing better conditions for the control and monitoring of land invasions and for ensuring better security for visitors to the park. Such activities will form the basis for discussion with civil society representatives and government bodies inthe course of the elaboration of the Master Plan. 38. To comply with the Physical Cultural Property policy, chance find procedures will be included in all construction contracts inthe event that remains of cultural significance are encountered. OP4.12 -Involuntary Resettlement 39. Interventions of the Project for improving housing and living conditions of the local resident population by establishing the appropriate infrastructure (correcting the urban design to facilitate circulation and solid waste collection) and the reduction of the risks of landslides and flooding will require families to be resettled. 40. Significant differences exist between the intervention areas of the Project. The Alagados VI region (stilted shacks) will probably involve the relocation and resettlement of about 721 families. The 119 Population Resettlement Plan has been drawn up in accordance with the guidelines laid down in OP 4.12. 41. InMalhado and Pau da Lima, resettlement of approximately 40 and 60 families respectively is planned. The resettlement plans will be in accordance with the policy governed by OP 4.12 and will be subject to prior review by the Bank before construction begins. E. OVERALL ENVIRONMENTALIMPACTS 42. The Environmental Assessment has analyzed the potential impact (negative and positive) of the physical interventions involved inthe urban and environmental uplifting of the areas subject at present to abnormal occupation. 43. Ingeneral terms, the negative impacts are localized, reversible and temporary, mainly arising from activities associated with the implementation of the various pubic works and can be abated by the adoption of preventive measures, namely good planning of the interventions and by employing suitable construction procedures. 44. On balance, it i s expected that the interventions will be highly positive and permanent and will result in a significant reduction of social and urban vulnerability as far as local populations are concerned. E.l Positive Environmental Impacts 45. The local urban upgrading interventions in the intervention areas will have positive effects such as: (i) reduction of the risk of landslides and flooding; (ii) improved health conditions for the local population with the installation of sewage networks, better water supply facilities, micro-drainage etc; (iii) improved access to public services in general ; (iv) property rights regularization and better housing standards; (v) enhanced leisure facilities; (vi) raised levels of self-confidence among local people; (vii) improved urban and environmental conditions in the region (green areas, water bodies etc); and (viii) risingproperty values etc. 46. Such impacts are substantial and should produce a lasting effect. At the same time they will help to reduce the urban and social vulnerability of the residents of the affected areas. 47. Moreover, the Project will have a highly positive impact on biodiversity and the natural habitats by incorporatingand consolidatingprotected areas located inthe areas of influence of the interventions. 48. Inorder to reinforce and ensure the beneficial effects of the interventions, the Project plans to introduce social communication activities, as well as those relatingto community participation, health and environmental education and environmental and social management. 49. StrenatheninaEnvironmentalMunuaement.The environmental legislation of Bahia State (Law No7799/2001) provides an incentive for the introduction of environmental management units in both public and private institutions with a view to developing activities subject to environmental licensing which reflect the environmental variable embedded in the works to be undertaken. The role of these units (referred to as Environmental Assurance Technical Commission-CTGA) will be to follow up and monitor the activities carried out by different companies. They will also be responsible for the development of environmentally-oriented studies and reports and will actively participate in the environmental licensing process, particularly insofar as smaller firms are concerned. 50. The CONDER CTGA is under implementation. The Project will support its consolidation in the areas of technical trainingand environmentalenforcement. 120 E.2 Negative EnvironmentalImpacts 51. The majority of the local and supra-local infrastructure interventions involve negative localized and small-scale impacts resulting from the works. These can be mitigated through adequate planning of the execution stage of the interventions and by employing appropriate construction procedures. 52. Impacts resulting from the works. The Environmental Construction Manual was drawn up to act as a guide to good environmental practices to be followed by the firms contracted to undertake the various works involved in the interventions. The Manual deals inter alia with the following: (i) environmental management of the construction sites and the workers' encampments; (ii) environmental monitoring of the construction activities to include noise abatement, site operating hours, earth-moving activities, infills, borrow pits, transport, the transporting and temporary stocking of materials, whether consisting of building rubble or incoming building materials, etc; (iii) safety measures covering construction workers and the local population; (iv) traffic control; (v) activities involved in repairing properties, streets and public service facilities that may be damaged as a result of the works; (vi) managementand final disposal of material dredged from rivers and streams; (vii) control and disposal of site protection material, buildingrubble, excavation sites, etc; and, finally, (viii) ensuringthat suppliers of construction materials comply with environmental rules, especially inthe above-mentioned borrow pits. 53. Since the Alagados VI area involves the need for land fill, a large amount of building aggregates will be required. According to information provided by the CRA, there are a number of officially licensed areas from which such material can legally be extracted. The Environmental Construction Manual makes clear that CONDER and the construction companies involved will be granted permission to extract such material only from the legally authorized areas. 54. Relocation and resettlement of families. The interventions referring to urbanization and improvement of housing conditions, reduction of the risks of flooding and landslides and the implementation of infrastructure (correcting the urban design to facilitate circulation and solid waste collection) will call for the resettlement of families. 5. Since the Alagados VI area involves housing in the form of stilted shacks, the relocation of around 721 families will be called for. The Population Resettlement Plan was drawn up in accordance with the guidelines laid down under OP 4.12. 56. In Malhado and Pau da Lima, around 40 to 60 families respectively will be resettled. The resettlement plans will follow the policy adopted in OP 4.12. E.3 Environmentalimpacts of interventions infollowing years 57. The local level interventions for the remaining municipalities inthe Programwill follow the same impact pattern as those described above, representing virtually the same impact levels generated by the Project. Similarly, the need to relocate and resettle families will represent the same impact as that to be experienced inPau da Lima and Malhado. The measuresto be taken as regards environmental impacts are explained in the Environmental Construction Manual and the Resettlement Policy of the Project. All environmental and social impacts expected under these components will be subject to environmental impact studies as required under Bank policies and appropriate mitigatory measure will be taken. Environmental analysis and resettlement action plans will be subject to prior review by the Bank. 58. As for the supra-local interventions in the Project, the main selection criteria for intervention areas will revolve around the existence of trunk infrastructure, such as wastewater treatment stations, urban macro-drainage and final waste disposal facilities. The possibility exists for the Project to provide support for complementing and enhancing the latter. 121 59. Furthermore, the Project must be consideredas representing a window of opportunity to introduce sustainable development to the region of influence of the interventions by supporting the consolidation or creation of Environmental Protection Areas. 60. The EA carries a number of environmental criteria that needto be considered inthe context of the PIDs and respective engineering projects and proposes a "screening" process of the interventions to be executedunder the aegis of CONDERjointly with CTGNCONDER. F. ENVIRONMENTAL LICENSING 61. The local interventions in the Ribeira Azul area were awarded an environmental license in 1997 covering the Alagados I,11,111, N,V and VI areas. Considering the gap of nine years between the time that the license was awarded and the proposed implementation of the undertaking, as well as the appearance of the 2001 new environmental law, the renewal by the CRA of the Alagados VI simplified license i s recommended. 62. For the remaining subprojects - Pau da Lima in Salvador and Malhado in Ilh6us - the respective environmental authorizations will be required. 63. Preparation of the EnvironmentalAssessmentsand applications for the simplified licenses will be done by the CONDER CTGA. G. ENVIRONMENTAL MANAGEMENTPLAN 64. The EA includes various mitigation, compensation and reinforcement measures to ensure the reduction of the negative impacts and enhancement of the positive impacts. These measures, together with the associatedcosts, schedules and the identificationof those responsible for their execution are included in the Environmental Management Plan, as described below. The activities in the Environmental Management Plan have been included as components of the Project itself. G.l Environmental Management System: a Socio-Environmental Management System (SGSA) will be established at CONDER and integrated into the Project's Management System aimed at: (i) the coordination of the socio-environmental activities of the Project; (ii) monitoring, follow-up and guidance for executing the mitigatingeffects required under the environmental licensing regime andthe recommendations institutional strengtheningsub-components. of the Environmental Construction Manual; and (iii)the supervision of the environmental education and 65. The CGTNCONDER will take responsibility for the environmental studies and assessments for the following years (3rdand 4") and for the respective procedures regarding the environmental licensing of the interventions. 66. The costs of this activity will be included inthe Administration and Management of the Project and has beenbudgetedfor. G.2 Social Communication Project aims to facilitate implementation of the Viver Melhor ZZ Project by involving the population both directly and indirectly affected by the interventions in the areas of influence. This activity already contains the components of the Project and will be under the aegis of CONDER. Resourcesto be spent are projected at US$ 300,000. G.3 Health and Environmental Education Project - a Project of health and environmental education will be implemented. For this Project (aimed locally as well as further a field) the planned resources, amounting to US$500,000, will be the responsibility of CONDER. 122 G.4 Strengthening EnvironmentalManagement The range of activities proposed involves institutional strengthening (action-medium) for executing the environmental and social Projects under Viver Melhor BIRD. The following activities are foreseen: Strengthening the CONDER CTGA (US$ 150,000) involving technical training for the CTGA technical team, enhancing the environmental quality of the CONDER activities and supporting environmental monitoring. To be the responsibility of CONDER. Strengthening of ConservationUnitsand ProtectedAreas. The following activities are planned for years 1and 2: The Cobre / SBo Bartolomeu APA: drafting of the Management Plan, at a cost of US$ 100,000, will bethejoint responsibility of CONDER and SEMARH. Parque SBo Bartolomeu: preparation of the Park's Master Plan and activities designed to protect the park, valued at US$ 550,000, will be the joint responsibility of CONDER and the Municipality of Salvador. Botanic Garden of Salvador - preparation of the Strategic Plan, activities designed to recover the springs andto provide support for the Environmental EducationNucleus valued at US$ 250,000. To be the joint responsibility of CONDER and the Municipality of Salvador. 67. For interventions inthe other years, resources valued at US$ 600,000 are planned for activities in the following areas: (i)support for management instruments (management plans); (ii)support for environmental Projects and monitoring of UCs (Conservation Units); and (iii)environmental interventions in UCs. G.5 EnvironmentalManualfor CivilWorks under the Project:this "Environmental Manual" was drafted as a guide to appropriate environmental practices to be complied with by the construction companies contracted to execute civil works. The Manual will be includedas an obligatory element inthe biddingprocessesso that companies will be fully aware of the need to adopt such practices in advance of making their bids and compliance with the manual will be a contractual obligation for all contractors. Implementationof these practices i s the responsibility of CONDER and the constructionfirms. 123 A AS I n 1. This docurnen articulated social, economic and physical ~nterv~ntions in hous~ngand inf~ast~cture~and educa~~onal and environmenta~~~pgrading. 3. The Alagados VI area inSalvador was chosen for interve~tio~Year 1 of the Project. in 4. A ~ VI, locatedinthe lower region of~Salvador with appro~imate~y ~ A ~ ~ ~ 133,357 ~nhabi~ants (4% of the city's total), i s seen as the most degraded area of the city inurban and e n v i r 5 n ~ e ~terms. It t a ~ con~ainsniangrove cwamps and ~ o o d - p r o ~land and has been ~ ~ ~ a by e~ nev d~ r o ~ ~ degrada~iQn e c e n ~ a ~ since the 1970's due to raw sewage effluent and idustrial waste dumped in the drainage area. Intensive receiit decades has not only used all ava~~abledry land but also totally destroyed the m a ~ g r o ~swamps where ~housandsof stilt houses have spread and created an extreme ~ ~ i h e a ~ t ~ ~ e environment. 3.1 -~ n ~ e ~ vProposal~ o n e ~ ~ 5. The Project includes ~ ~ ~ e r ~ 7 edevelopeds by the ibeira Azul Programinthe Alagados region n ~ ~ o n including: Urban i n f r ~ s ~ (i)transportesystem, urban~za~ionand street lighting; (ii)water supply, (iii) ~ c ~ ~ ~ sewage system; (iv) storm raina age; (v) special ~5nstruc~~~ns;(vi) landscape deve~opmentand recovery of damaged areas; (vii) housing ~m~rovement ~ Q p u ~ a tresettlement ~ o n Social e ~ ~ ~ p ~ e ~ i ~ 6. The p o p ~ ~ aof~Alagados VI i c to be resettled for two basic reasons: (i) b u ~ a coastal road t o ~ to ~ d "`Extracted from the documentCARTA CONSULTA COFIEX - EMPRESTIMOBIRD- AN0 2002 PROCRAMA VIVER ~~~~~~R II "Fiomthec1ocu:nent -EstudosPre11m:nares - para Elabo:a@o de Projetoide Engenhanae Aquiteturd corn \ista? h XecupefafPo Ambiental da Comunidndede Alagados V I e MangueiraiprehminarySlitdies for thc Developmentof the EngineeringandA~clutecturalProjectsAiming at the EnvironmentalRecoveiy of the Alagados VI and Mangticira Commtiniry) 124 system and improve internal roads; (ii) eliminate housing risk and unsafe living conditions (sanitary, to safety and other aspects). 7. A point to be emphasized is that many engineering solutions have been studied and the one chosen involves the least number of resettlements. However, it will still be necessary to remove 721 dwellings as detailed in the table below: 8. The removal of 721 dwellings from a total of 2245 i s extremely significant since it represents 32% of the total dwellings inthe area. The reasons for this situation are as follows: a. Of the 721 dwellings to be removed 546 are extremely unsafe stilt houses located in risk a; b. The 1699 brick dwellings (75.6% of the total number of homes) occupy approximately 81% of the total area of the neighborhood, while the 546 stilt houses occupy 19%. So neighborhood populationdensity i s high, but it i s even higher inthe stilt-house area where the quality of life i s even more degraded; C. The area occupied by the 546 dwellings i s not on dry ground. The stilt houses are built over water and classed as high-riskhousing; d. Many engineering solutions have been studied for this areabutnone presenteda possibility of keepingthe stilt houses; e. Studies and surveys have shown that the most sociallv vulnerable families are the ones living inthe stilt houses; 9. In light of all the above facts, the following is a presentation of the Viver Melhor I1Involuntary Resettlement Policy for families affected by the Project inthe Alagados VI area. 4 -Involuntary Resettlement Policy 10. The Viver Melhor I1Project includes an Involuntary Resettlement Policy to be applied in areas where population resettlement i s necessary. This policy i s described in the document "Politica de Reassentamento Involunta`rio para o Programa Viver Melhor IT' ("Involuntary Resettlement Policy for ' the Viver Melhor I1 Project") with all fundamentals and proceedings to be adopted by the Project regarding this specific issue. This document summarizes the fundamentals of this policy since the Planfor Resettlement of Alagados VI i s based on these principles. 4.1 -Fundamentals of the Involuntary Resettlement Policy 11. Unless adequate measures are properly planned and implemented, relocation may lead to problems such as impoverishment, serious environmental damage, and breakdown in social support networks. The Involuntary Resettlement Policy must ensure that aualitv of life for families involved in the Proiect will be restored, not only compensating for physical aspects such as losing their homes, but also loss of earnings (disruption of productive activities), or loss of social support networks and relations 125 with neighbors. Note that the Involuntary Resettlement Policy should preferably lead to improvements inthe lives of the families affected. 12. Therefore, the policy mustbe guided by certain fundamentals: 0 Minimize the number of properties to be displaced ; 0 Ensure that a number of options for compensation are offered; 0 Ensure that housingconditions are maintained or improved; 0 Ensure that there are opportunities to maintain income; 0 Ensure compensation in the amount of the replacement value of the property - including any home improvements made; 0 Ensure social services are provided: education, healthcare, transport etc; 0 Constantly seek to minimize social andor environmental impact; 13. In`addition to the fundamentals described above, CONDER will be implementing "good practices", as follows: 0 Engineeringwork will not start until all families directly involved in the specific stage of the Project have beenrelocated; 0 Affected families will be free to choose the compensation option that best fits their needs; 0 CONDER will recognize the needs of the community involved inthe Project; 0 CONDER will not impose conditions for negotiations that will prevent families rebuildingtheir lives; 0 If resettlementscheduleisdelayed,CONDERwillnotputpressureonthepopulationinorder the to meet deadlines for the construction project. 14. Negotiations with the populationwill only take place when compensation options are available. 5 InvoluntaryResettlementPlan-Methodology - 15. The development of an Involuntary Resettlement Plan i s based on the analysis of 4 main data, which are: a. Situation of families to be affected by the project, b. Social-Economic Profile of the Families and Properties Affected, c. Social Dynamics, and d. LandSituationand Personal Documentation 16. The following items present the situation of each of these structuring elements of the ResettlementPlan considering the case of Alagados VI. 5.1 - Situation of affected families 17. The situation of affected families inthe specific case of Alagados VI i s a very particular one since most (75.7% or 546 units) are living inhigh-riskstilt houses. buildthe internal road system - corresponding to 17.2% of the total - are spread around the area. Note that 18. The other 124 dwellings (82 brick and 42 wooden homes) that have to be removed in order to in the specific case of these 124 homes, the executive engineering project will consider the possibility of maintaining some properties if the level of intervention is considered partial and will not affect the main part of the property. This may considerably reduce the number proposed. If this situation involves wooden homes, they will be included in the home improvement policy to be implementedby the project, which will convert them to brick constructions. 19. The 51remainingdwellings (29 wooden and 22 brick) correspond to 7.1% of the total and will be removed in order to reduce population density in the area. These properties are very small in size, located 126 inunsuitable areas and lack minimumlivingconditions (ventilation, lighting, minimumoccupancy area). 5.2 -Socioeconomic Profile of Families and Properties Affected 20. Census surveys and registration in the Alagados VI area were undertaken from October 2003 through January 2004. In order to develop the Resettlement Plan, only data gathered from the families affected by the Project were used. Also, in order to assist understanding of the real situation, data were processed in two samples. One comprised affected families living in stilt houses, the other affected families living on dry land, inbrickconstructions or wooden homes (very few cases). 1. Almost all properties affected are for single family residential use and are occupied by the proprietors; 2. There is a high risk of stilt houses collapsing, but less for homes on dry land. 3. The stilt house properties are extremely poorly maintained made of wood and usually have one floor, whereas levels of maintenance vary for dry-land house made of brick and up to 3 stories high. 4. Both dry land and stilt householdshave large families - over 6 members. 5. Almost one quarter of stilt houses lack sanitary units, against 7% for houses on dry land 6. Almost all properties have illegal water and electricity supplies; waste water goes directly into the sea; Profile of Headof Family 1. Heads of family are mostly males aged 26 - 40. 2. Most of them have only elementary schooling and monthly income is the minimumwage. 5.3 - Social Dynamics 21. The implementation of an involuntary dispossession and resettlement project i s predominantly a social task, although there are some significant legal and technical issues. In the current stage of the project, many contacts have been made with the affected families. The main steps taken so far regarding communicatiodinteraction and community participation were: Home visits in order to fill out the socioeconomic survey and registration form. A census was conducted from OctI2003 through Jad2004 and assistants were trained to provide information on the Viver Melhor I1Project; Meetings with leaders and community in order to present the Viver Melhor I1Project in the area of Alagados VI (on June 17th, 2004 with 55 people present, June 18th, 2004 with 70, July 16th, 2004 with 91present); for the Project - section 6.2 of this document) on June 7*, 2001 with 25 people, on June 29*, 2004 Meetings with formal and informal leaders on the Joanes Am1 complex (one of the resettlement areas with 42 and on June 30*, 2004 with 47 people. Subjects raised were selection of families, urban lots, type of housingunits, location of the day care center; Meetings with formal and informal leaders and community on the preliminary version of the urban division of the Massaranduba complex (one of the resettlement areas for the Project - section 6.2 below). Subjects raised: urban lots, type of housingunits. 22. However, there i s still much to be done in terms of community participation and development. There are plans to increase communitv participation in the next stages of the proiect. CONDER will open an office to provide exclusive support for the families involved and will also assemble a multidisciplinary team dedicated exclusively to resettlement activities. It i s a matter of principle for CONDER that the Resettlement Plan and criteria for compensation must be deeply disseminated to the people involved. 127 will take steps to ensure that more vulnerable groups (elderly, fmnilies supported by women, widows, family supportedby very young people, etc) are heard and have their rights guaranteed. ~ompensatio~ipolicy will include specific support measures to assist social integrationfor these groups. 24. ~ O N ~ co~pensatjo~policy will seek to establish proper negot~a~icriteria and ~ ~ ' s n ~ disse~natethe ~nfor~atjon to avoid the use of unclear criteria. Tra~sparen~ and accessible c o ~ ~ ~ ~ n ~channelsoand well-defined negotiating criteria are the basis for estab~~shinga hea~~hy c a t ~ n re~at~o~shipbetween the government and the conimun~ty and CON ER will seek to fulfi~~ this r e ~ ~ ~ ~ einmallestages of the process. There must be commL~ni~yparticipation ~hroughoutthe project n ~ since this i s the only way possible to ensure its success. Photo 3: Meetingheld with leaders. Photos4 and 5: Predominanceof women presentat the meetings 5.4 -~ocumenta~ionfor s ~ ~ d ~ v i sand lots i ~ n s 25. Occupation of the Alagados `VI area started s p ~ ~ t ~ e oand ~ yu s there was no p~an~ing. Therefore, there was no concern with r e g u l a ~ z ow ~ ~ g ts. Since the Viver ~ eIIproject proposes~that r ~ ~ the area be legalized and deeds be deli17 ccupants, CONDEW has taken specific measures regardingthis issue. ER will provide free legal assistance and/or ~ ~ p p ofort families affected eo help them r acquire all documen~ationnecessaryfor the resettlement process. olicy of an I n v o ~ u n t a~ese~~lement ~ ~ 1seekt to rebuj~d ~ Plan s ve qua~ityof life, productive capab~~ity,and living con~i~~ons. The aim m~st to compensate any losses in so far as this i s possible. be 28. A key issue here is that, even when families are pat of the same context, it does not mean that their realities and needs will be exactly the same, so d~~ferentsolutions may uired. The proposed compe~sa~~onpolicy includes options in order to offer solutions i~~atch~ngthe nt family profiles. It i s i~~portant meration that the social profile of the ~ o ~ ~ l aaffected shows that the residents in stilt to t ~ o n house areas are more socially v ~ ~ n e r a bthan ~ e those living on dry land. owever, their cocial s ~ t u a t ~i so ~ not far removed from that of the families living on dry land and some indicators are quite s ~ ~ ~This~ a r . ~ 128 analysis suggests that assistance policy should address the issue of differenttypes of support for different profiles of families affectedby the project. 6.1 -Registrationof PopulationAffected 29. A georeferenced census (conducted October 2003 -January 2004) registered 2245 households in Alagados VI but since it was not specifically for resettlement purposes, CONDER plans to conduct a specific socioeconomic and property survey to register all families affected by the project within the next few months and before beginningconstruction work, in order to provide better grounds for the process of baseline for the Project and when concluded - with the population involved kept fully informed - any negotiating with the families and so ensure their rights are respected. This registration will then be used as families moving into the area will not have the same rights as those now registered. It is important to consider the families' preferencesexpressedduringthe survey at this stage of planning. 6.2 -Compensation Policy 30. .. CONDER compensation policy i s basedon 3 basic guidelines: Resettlement to HousingComplex Monitored Resettlement Cash compensation 31. Duringthe various meetings held withthe community there was much interest in resettlingto a housing complex, preferably in the same area or nearby. 6.2.1 - Option -Resettlement to HousingComplex 32. Providing resettlement to housing complexes involves a large number of measures from the planning phases through to removal to new homes working to a definite schedule and in sequence as planned. . 33. Selection of Resettlement Areas and Housing Models -CONDERhas already identified areas for resettlement: Joanes Azul Complex - Located 1000 meters from Alagados VI, 189 units, 35m2, single family . (2 bedrooms, living room / kitchen) - final phase of construction. 120 units to be used for Alagados VI. Massaranduba Complex - Continuation of Alagados VI covering 1.32 hectares (aprox. 3.26 . acres); private property and dispossessionprocess has already started. Urban studies point to the feasibility of standard vertical housing- 2 stories, capacity for 313 units.Floor space 36 m2 each; Site of former Corema shipyard, now disused - Area of 1.9 hectares (aprox. 4.69 acres) 500 meters from Alagados VI, expropriation procedure under study. This area would hold 300 housingunits. Summarv Table -Area Available for Resettlement Area / HousingComplex Number of HousingUnits JOANES AZUL 120 MASSARANDUBA 313 COREMA SHIPYARD 300 TOTAL 733 34. All the resettlement areas shown above are suitable for urban infrastructure, have adequate topography and satisfy legal requirements. 129 35. The housing units will be built to meet current technical and comply with legislation. They will be provided with all necessary urban infrastructures (water and sewage network, electricity supply, garbage collection, public transportation etc.); homes will have 2 bedrooms, kitchen, full sanitary and drainage facilities, etc. 36. Income Replacement Model - There are very few commercial or mixed-use (residential and commercial) properties involved and since most resettlement areas are nearby, relocation is unlikely to have significant impact on family income. However, if this does occur, they will be compensated. On drafting the evaluation report, amounts in relation to loss of earnings from the commercial businesses involved will be evaluated and the total addedto the final amount of compensation. 37. Moving Assistance - All affected families will receive moving or transfer assistance for their movable property or goods inthe amount of R$300.00. 38. Post-movinp; assistance - CONDER's team will assist families in their new housing units so resettlement work will not cease on transfer. Before families are transferred, CONDER will begin joint activities aimed at assisting them to adopt their new way of life in terms of rational and proper use of urban services, use of collective areas, community organization, integration with the population in the surroundingareas, etc. 6.2.2 -Option -MonitoredResettlement-Conception 39. Another possible option is MonitoredResettlement. Of the 721 properties affected, 104 are brick constructions so their market value i s much higher than that of the stilt houses. Of these 104 units, CONDER recently evaluated 15 units that show good building standards. Their values vary from R$15,500.00 to R$65,918.12 and the average i s R$35,000.00. When properties reach higher evaluation prices (above the amount houses in the resettlement area are fetching) their proprietorsusually prefer compensation, whereas most owners of lower-value properties prefer to be resettled. 40. Note that one of the basic points in the Resettlement Plan i s the need to offer different compensation options for the families affected. If there i s to be real choice, the options posed must have equivalent attractiveness, meaning that if an excellent model for resettlement i s offered and the compensation on offer i s not enough to returnthe family to the market, then there will be a rush towards resettlement, even if it i s not originally the preferred option. If the contrary occurs, there will be a rush towards cash compensation. Therefore, the options available have to be well balanced. 41. This means that families who prefer to look for their own housing solutions in the local real estate market must be able to do so. Based on the initial amount - called PO - there will a table including progressive subsidies. Therefore, proprietors andor occupants of smaller and unsafe homes should get enough to regain or even improve their living conditions. The proprietors of homes with higher evaluation value will get smaller subsidies. 42. CONDER will assist families opting for Monitored Resettlement to find and acquire their new homes. If they decide not to accept this support, they must prove that a new property has been acquired inorder to receive financial compensation. 43. When the same person is proprietor and/or occupant of more than one of the properties due to be affected, the subsidy will be calculated on the total value of all properties and home improvements. Therefore, the evaluation amounts for all properties will be summed and compensation applied on the basis of the total. 130 44. The final compensation table will be based on the individual evaluation reports compiled. However, a provisional compensationtable may be drafted and adiustedas necessary when the reports are ready. 45. Two guidelines have been used to determine the PO amount. One is that the PO amount must be equivalent to the amount required to build the home, not including infrastructure. The other is based on the current market prices of properties for sale on dry land in Alagados VI, which range from R$6,500.00 to R$9,000.0. The stilt houses were valued at R$1,500.00 to R$2,500.00. Note that during execution of the dispossession project, values of properties not dispossessed tend to increase due to extra demand as those compensated seek to recompose their property. The project's table for indemnification with compensation is shown below: 46. All affected families, whether they have chosen resettlement to a housing complex, / monitored resettlement or indemnification, will receive movingassistancein the amount of R$300.00. 47. There are very few tenants or families living in homes with permission from the owners. Tenants and "permission" families will receive the equivalent of 6 months rent (taking the average rent for the region), totaling approximately R$1,800.00, plusR$300.00 moving assistancetotaling R$2,100.00. 48. Home Purchase Support - All families choosing compensation will receive the following support from CONDER:selection of new home available onthe real estate market; legal assistancefor acquisition of new home; social assistance for their re-insertion into the new environment; and support for access to educational and healthcare services. 6.2.3 -Option 3 -IndemnificationKash compensation 49. The third and last option offered by the program i s indemnification in the amount of the property's evaluation price. Inthis case proprietors and/or occupants are not required to show proof of how the compensation i s to be spent. Indemnification must be made beforehand and cover the replacement value of the asset. 6.2.4 - Compensation policy Table Applications of the options and cases to which they are applicable are shown inthe followingtable: 131 Current I - em situation Degree Affected -RESID CompensationPolicy I NTIAL USE Option 1 - Resettlementto housing complex+ movingassistance + movingassistance Directly MonitoredResettlement Totally Option 2 - MonitoredResettlement + movingassistance Affected Option 3 -CashCompensation + movingassistance [ndirectlyfor Option 1 - Maintenanceassistance during periodof activity interruption determined (calculatedusing Project criteriaand Technical Rules for evaluation), rent period paymentdue to interrupted access, or any other disruptionduring this period. Option 1 -Resettlement to housingcomplex movingassistance, if the part of + the lot affected makes it difficult to stay in the unaffectedarea - this involves 1.1 Proprietorsl losingthe right to the unaffectedarea. Occupants Option 2 - MonitoredResettlement+ movingassistance, if the part of the lot affected makes it difficult to stay in the unaffected area, this involveslosingthe right over the unaffectedarea. Partially Affected Option3 - MonitoredResettlementon affected area and paymentof evaluation amount for unaffectedarea, ifproprietor1occupant chooses notto stay inthe unaffected area. Option4 - Compensationfor the affected area Indirectlyfor Option 1-Maintenanceassistance duringperiodof disruptedactivity (calculatec determined underProjectcriteriaandTechnical Rules of evaluation); paymentof rent due to period interruptedaccess or any other disruptionduringthis period. TenantsI Totally 1.2 `permission" iffected o Directly or Option 1-Payment of HousingAssistance Movingassistance + occupants Partially Indirectly PROPERTIES-MIXES USE-COMMERCIAL /RESIDENTIAL I Totally Affected Proprietorsl 2.1 OccupantI permission occupants Partially movingassistance, for entire a Affected - TenantsI Totally 2.2 `permission" lffected o - occupants Partially ,'ransfer assistance is the same amountas housingassistance 132 7.0 Action Plan - 7.1 -Institutional Matrix 50. CONDER will open a resettlement center in Alagados VI to assist families affected by the project, including a multidisciplinary team working exclusively on this task. This center will be directly center will be run by CONDER staff and an outsourced team - all highly experienced in resettlement subordinated to PMU, which is directly subordinated to the Urban Development Secretary's office. The projects. 7.2 -Scheduled Activities 51. Resettlement activities precede engineering work so if they are not carried out on time other components may be delayed causing financial onus and uncertainty for the population. The work schedule i s presented in Annex I. 7.3 -Budget 52. The budget for the dispossession and resettlement project is an estimate, since actual numbers will not be available untilthe evaluation reports have been concluded. Nevertheless, the estimate i s likely to be quite accurate. Item I ACTIVITY I Unit I Quantity I Unit Cost 1 Total (R$) (R$) 1.O Cash compensationI MonitoredResettlement 1.1 Cashcompensation-Dry land/ Brickconstructions indiv. 1 , 1 73 35,000.001 2.555.000.00 1.2 1Cashcompensation- Stilt houses- estimated 1 indiv. I 28 2,500.001 70,000.00 adhesions-5% of total 1.3 MonitoredResettlementPayment- Stilt houses- indiv. 54 8,500.00 459,000.00 estimatedadhesions 10%of total 1.4 MovingAssistance indiv. 721 300.00 216,300.00 1.5 HousingAssistance(Tenantsand "permission" indiv. 53 1,800.00 95,400.00 occupants) 2.1 \Costof buildingnew housingunits **** I indiv. I 566 21,955.501 12,426,813.00 3,O Notary Public Costs 3.1 Notarypubliccosts indiv. 620 500.00 310,000.00 4.0 Project Costs (Reports / Registration) andPlan overall Implementation (including monitoring) 750,000.00 Total 16,882,513.00 *** Amount I I I I I I includes: purchaseof site, subdivision/ lots, buildinghouse,drainage, and urbaninfra-structure 133 7.4 - Sources of funds 1.O Compensationpayment 3.395.700,OO 3.395.700,OO 2.0 Buildingresettlement homes **** 12.426.813,OO 2.873.858,OO 9.552.955,OO 3.0 Notary Public costs 310.000,OO 310.000,OO 4.0 Projectcosts (Reports / Registration)and Plan Implementation 750.000,OO 173.477,OO 576.553,OO TOTAL 16.882.513,OO 6.753.005,OO 10.129.508 8.0 Monitoring - 53. CONDER will monitor resettlement activities for compliance with fundamentals and reaching objectives at three points in the project: (i) on conclusion of registration, when a group of affected families will be selected for follow-up during the process; (ii) immediately after the negotiation process and on handing over the new home or paying compensation; (iii)preferably some 12 months after families have moved. Monitors will have to devise instruments to compare these three phases, so that the analysis will clearly show how the processi s evolving (or failing to evolve). 9.0 Critical Paths - 54. CONDER will be paying special attention to certain resettlement plan activities that could affect other components in the Project including documentation for lots / individuals; availability of funds; CONDER's channels of communication with the community; families integrating on moving to housing complexes; payment of compensation within the agreedperiod. 134 BRAZIL BAHIAPOORURBANAREASINTEGRATEDDEVELOPMENT - Annex 12: Project Preparation and Supervision PROJECT VIVER MELHOR - I1 A) ProposedPreparation Schedule Planned Actual Project identification mission February 2004 February 2004 PCNreview October 2004 October 2004 Pre-Appraisal mission December 2004 March 2005 Pre QER meeting February 2005 QER review March2005 Appraisal mission April 2005 April 2005 Negotiations May 2005 October 2005 BoardRVP approval June 2005 December 2005 Planned date of effectiveness July 31,2006 Planned date of mid-termreview July 31,2008 Planned closing date January 31,201 1 B)Team composition: Name Title Unit Ivo Imparato Task Team Leader LCSFU EleotCio Codato Sector Manager TUDUR Mila Freire RegionalAdviser LCSFP Madalena dos Santos HDSector Leader LCSHD JosC August0 Carvalho Lead Counsel LEGLA Judy Baker Senior Economist TUDDR Abhas Kumar Jha Senior UrbanSpecialist LCSFU Daniel Gross Consultant LCSEO Emilio H.Rodriguez Consultant LCOPR Albert0 Rodriguez Senior Education Specialist LCSHE Gerard La Forgia Senior Health Specialist LCSHS Fernando Lavadenz Senior Health Specialist LCSHS MariaAngClica Sotomayor Economist LCSFW Bernice Van Bronkhorst Urban Social Specialist LCSFU Fernando Blanco Economist LCSPE JosCJaneiro Senior FinancialMgmt. Specialist LCOAA SusanaAmaral Finance Analyst LOAG3 Lucian0 Wuerzius Procurement Specialist LCOPR C) Peer Reviewers: Name Title Unit Catherine Farvacque-Vitkovic Lead Urban Planner m u 2 Christine Fallert Kessides Senior Adviser TUDUR Sumila Gulyani Senior Urban Planner AFTUl D)Key institution: SEDUR-Secretaria de DesenvolvimentoUrbano da Bahia 135 BRAZIL BAHIA POOR URBANAREASINTEGRATEDDEVELOPMENT - Annex 13: Documentsinthe Project File PROJECT VIVER MELHOR - I1 State of BahiaStrategic Documents: ... "A Participaqiio do BIRDnoProjeto Bahia 2020: Construindo EstratCgiasde Desenvolvimento Integradas" Plano Plurianual (PPA) 2004-2007 Plano EstratCgico da Bahia (2003-2020) CartaConsulta: Programa Viver Melhor I1 Technical AssessmentsProject preparation documents: ....Estudos bisicos das Micro-ireas de Vulnerabilidade Social e Urbana -MVSU.Basic Studiesof areas of social and urban vulnerability (CONDER) Estimativa de custos e beneficios de intervenqties nas MVSU. Cost-benefit estimateof the MVSU, (CONDER) . Sistema de Estimativa de Custose Beneficios - SECB. Cost-BenefitEstimateSystem - SECB (em andamento), (CONDER) Description of Sample Areas Master Plans Salvador and Ilheus .. - . Diagndstico expedito. Project Areas Diagnosis (CONDER) Propostasalternativas. Alternative proposes (CONDER) Relatdrio conclusivo e pesquisaimobilifia. Final Report and Real EstateResearch (CONDER) PhysicalPlans and EngineeringDesigns ... Projeto Executivo de Alagados VI e Mangueira.Alagados VI Physical Plan and Engineering Designs (Vol. Iand 11),(CONDEWAVSI) Plano de Desenvolvimento Social e Ambiental do Programa RibeiraAzul. Environmental and Social DevelopmentPlan of Riberia Azul Program (CONDEWAVSI). Poverty and Social ImpactAnalysis (PSIA) of Novos Alavados I1 ... Diagndsticointegrado da ireas operacionais. Integrated Diagnosis of the operational areas. (CONDER) Plano de Desenvolvimento Local Integrado - PDLI. Integrated Local DevelopmentPlan - PID, (CONDER) Caderno de Encargos. Technical Specifcations Manual (emandamento), (CONDER) Projetos Bisicos (em andamento). Basic Plans, (CONDER) Economic, Financial and Social Studies .. Anilise econbmica e financeira do Programa Viver Melhor 11(CONDER) Regulamento Operacional: CritCrios de elegibilidade e avaliaqiio de Projetos (CONDER). 136 Formattingof the Project .. Relat6rio Sintese. Viver Melhor ZZ Project, Executive Summary (CONDER) . Manual Operacional. OperationalManual (emandamento), (CONDER) Draft Commitment Letters and ParticipationAgreements EnvironmentalAnalysis . . Relat6rio de Avaliaqiio Ambiental. Environmental Zmpact Assessment report (CONDER) Sumhrio Executivo do Relat6rio de Avaliaqiio Ambiental. Environmental Zmpact Assessment, Executive Summary (CONDER) InvoluntaryResettlement .....Politica de ReassentamentoViver Melhor 11.Znvoluntary Resettlement Policyfor the Viver Melhor ZZProject (CONDER) Plano de Reassentamento-Alagados VI. ResettlementAction Plan -Alagados VI (CONDER) Sumhrio Executivo do Plano de Reassentamento.ResettlementAction Plan -Alagados VZ, Executive Summary (CONDER) FormulBrios e modelos para process0de reassentamento (CONDER) Propostaspreliminares paracomunicaqiio com a comunidade e capacitaqiio dos tCcnicos (em andamento), (CONDER) LandTenure Regularization .. Land Tenure Regularization Policy (CONDER) Preliminary Plansfor Land Tenure Regularization (CONDER) SocialDevelopment . Diagn6sticoS6cio-organizativo e Diretrizes para o Desenvolvimento Social nas Macro-Breasde Malhado, Pituap e RibeiraAzuVBacia do Cobre (AVSI/ CONDER) Estimativa das NecessidadesSociais nas Macro-fireas de Malhado, Pituaqu e Ribeira AzullBacia do Cobre (AVSI / CONDER) Manual de Desenvolvimento Social e Comunithrio para o Programa Viver Melhor I1(AVSI/ CONDER) InstitutionalCapacity Building . Anhlise da situaqiio atual e engenharia politico-institutionaldo programa: desenhosbhsicos (CONDER) Modelo de regulaqiio e articulaqiio dos agentes e agCncias envolvidos no Viver Melhor I1 (CONDER) Others ... Preparation Missions Aides MCmoire PCNand PCNMeetingMinutes and Comments QER and DecisionMeeting Minutes and Comments 137 Annex 14: Statementof Loansand Credits BRAZE-BAHIAPOORURBANAREAS INTEGRATED DEVELOPMENT PROJECT-VIVER MELHOR I1 Difference between Original Amount inUS$Millions expected and actual disbursements Project FY Purpose IBRD IDA SF GEF Cancel. Undisb. Orig. Frm. ID Rev'd PO69934 2005 BR-PERNAMBUCOINTEG 31.50 0.00 0.00 0.00 0.00 31.50 0.00 0.00 DEVT: EDUC QUAL IMPR PO80829 2005 BR 1st. PRL for Environmental 502.52 0.00 0.00 0.00 0.00 500.01 -2.51 0.00 Sustainab. PO82328 2005 BR-1nteg.Munic.Proj.-Betim 24.07 0.00 0.00 0.00 0.00 24.08 0.00 0.00 Municipality PO83533 2005 BR TA-Sustain.& Equit Growth 12.12 0.00 0.00 0.00 0.00 12.12 0.00 0.00 PO87711 2005 BR Espirito Santo Wtr & Coastal 36.00 0.00 0.00 0.00 0.00 36.00 0.57 0.00 Pollu PO87713 2004 BR (CRL1) BolsaFamilia 1st 572.20 0.00 0.00 0.00 0.00 572.20 0.00 0.00 APL PO60573 2004 BR Tocantins Sustainable 60.00 0.00 0.00 0.00 0.00 60.00 6.00 0.00 RegionalDev PO80830 2004 BR Maranhao Integrated: Rural 30.00 0.00 0.00 0.00 0.00 30.00 1.53 0.00 Dev PO83013 2004 BR Disease Surveillance& 100.00 0.00 0.00 0.00 0.00 99.50 0.00 0.00 Control APL 2 PO54119 2003 BR BAHIA DEVT (HEALTH) 30.00 0.00 0.00 0.00 0.00 28.51 5.51 0.00 PO70827 2003 BR-2ndAPL BAHIA DEV. 60.00 0.00 0.00 0.00 0.00 42.99 19.79 0.00 EDUCATIONPROJECT PO49265 2003 BR-RECIFEURBAN 46.00 0.00 0.00 0.00 0.00 44.99 5.60 0.00 UPGRADING PROJECT PO58503 2003 GEFBR Amazon RegionProt 0.00 0.00 0.00 30.00 0.00 26.31 0.00 0.00 Areas (ARPA) PO80400 2003 BR-AIDS & STD Control 3 100.00 0.00 0.00 0.00 0.00 91.85 14.15 0.00 PO76977 2003 BR-EnergySectorTA Project 12.12 0.00 0.00 0.00 0.00 12.12 3.72 0.00 PO74777 2003 BR-Municipal PensionReform 5.00 0.00 0.00 0.00 0.00 4.90 4.10 0.00 TAL PO57665 2002 BR-FAMILY HEALTH 68.00 0.00 0.00 0.00 0.00 50.81 37.74 0.00 EXTENSION PROJECT PO57653 2002 BR- FUNDESCOLAIIIA 160.00 0.00 0.00 0.00 0.00 205.51 -22.78 0.00 PO51696 2002 BR SA0 PAUL0 METROLINE 209.00 0.00 0.00 0.00 0.00 163.48 122.58 0.00 4 PROJECT PO55954 2002 BR GOIAS STATE HIGHWAY 65.00 0.00 0.00 0.00 0.00 34.46 33.79 0.00 MANAGEMENT PO60221 2002 BR FORTALEZA 85.00 0.00 0.00 0.00 0.00 111.47 55.68 0.00 METROPOLITAN TRANSPORTPROJ PO74085 2002 BR SergipeRural Poverty 20.80 0.00 0.00 0.00 0.00 3.13 -2.40 0.00 Reduction PO73192 2002 BR TA FinancialSector 14.50 0.00 0.00 0.00 0.00 9.30 5.98 0.00 PO43869 2002 BR SANTA CATARINA 62.80 0.00 0.00 0.00 0.00 60.07 18.33 0.00 NATURAL RESOURC& POV. 138 PO70552 2002 GEFBR PARANA 0.00 0.00 0.00 8.00 0.00 8.42 5.86 0.00 BIODIVERSITY PROJECT PO66170 2002 BR-RGN 2ND RuralPoverty 22.50 0.00 0.00 0.00 0.00 14.18 6.38 0.00 Reduction PO73294 2001 BR Fiscal& Fin. Mgrnt.TAL 8.88 0.00 0.00 0.00 0.00 6.74 5.78 0.00 PO59566 2001 BR- CEARA BASIC 90.00 0.00 0.00 0.00 0.00 71.32 -18.68 0.00 EDUCATION PO50772 2001 BR LAND-BASED POVRTY 202.10 0.00 0.00 0.00 58.13 151.01 152.74 0.00 ALLEVIATION I(SIM) PO50875 2001 BR Ceara RuralPoverty 37.50 0.00 0.00 0.00 0.00 8.64 2.64 0.00 ReductionProject PO50880 2001 BR PemambucoRuralPoverty 30.10 0.00 0.00 0.00 0.00 17.70 13.43 0.00 Reduction PO57649 2001 BR BahiaRural Poverty 54.35 0.00 0.00 0.00 0.00 8.39 0.62 0.00 ReductionProject PO50881 2001 BR PIAUI RURAL POVERTY 22.50 0.00 0.00 0.00 0.00 8.93 7.27 0.00 REDUCTION PROJECT PO39199 2000 BR PROSANEAR2 30.30 0.00 0.00 0.00 6.40 22.29 28.69 22.29 PO47309 2000 BR ENERGY EFFICIENCY 0.00 0.00 0.00 15.00 3.29 9.20 11.17 4.36 (GEF) PO62619 2000 BR INSS REFLIL 5.05 0.00 0.00 0.00 0.00 0.36 -0.14 0.67 PO06449 2000 BR CEARA WTR MGT 136.00 0.00 0.00 0.00 0.00 68.66 45.66 2.90 PROGERIRHSIM PO50776 2000 BR NE Microfinance 50.00 0.00 0.00 0.00 0.00 30.15 -19.85 0.00 Development PO35741 2000 BR NATL ENV 2 15.OO 0.00 0.00 0.00 2.32 5.61 7.93 7.93 PO48869 1999 BR SALVADOR URBAN 150.00 0.00 0.00 0.00 0.00 85.95 85.95 0.00 TRANS PO58129 1999 BR EMER. FIRE PREVENTION 15.00 0.00 0.00 0.00 0.00 5.46 5.46 -0.02 (ERL) PO50763 1999 BR- Fundescola2 202.00 0.00 0.00 0.00 0.00 17.29 17.29 0.00 PO42565 1998 BR PARAIBA R.POVERTY 60.00 0.00 0.00 0.00 0.00 11.16 11.16 0.00 PO57910 1998 BR PENSIONREFORMLIL 5.00 0.00 0.00 0.00 0.50 1.48 1.98 1.08 PO35728 1998 BR BAHIA WTR RESOURCES 51.00 0.00 0.00 0.00 0.00 4.03 4.03 -0.97 PO06559 1998 BR (BF-R)SP.TSP 45.00 0.00 0.00 0.00 0.00 3.88 3.88 0.00 PO38895 1998 BR FED.WTRMGT 198.00 0.00 0.00 0.00 40.00 54.67 94.67 21.29 PO06474 1998 BR LAND MGT 3 (SA0 55.00 0.00 0.00 0.00 10.00 36.98 46.98 19.96 PAULO) PO43421 1998 BR RJM.TRANSIT PRJ. 186.00 0.00 0.00 0.00 27.78 92.74 120.52 0.00 PO43420 1998 BR WATER S.MOD.2 150.00 0.00 0.00 0.00 125.00 19.33 144.30 3.28 PO06532 1997 BR FEDHWY DECENTR 300.00 0.00 0.00 0.00 50.00 61.51 111.51 111.51 PO34578 1997 BR RGS HighwayMGT 70.00 0.00 0.00 0.00 0.00 32.54 32.54 32.54 PO43873 1997 BR AG TECH DEV. 60.00 0.00 0.00 0.00 0.00 15.24 15.24 15.24 PO43868 1997 BR RGSLAND 100.00 0.00 0.00 0.00 0.00 10.94 10.94 10.94 MGT/POVERTY PO06210 1996 GEF BR-NATL 0.00 0.00 0.00 10.00 0.00 1.83 2.59 1.10 BIODIVERSITY PO37828 1996 BR (PR)R.POVERTY 175.00 0.00 0.00 0.00 10.00 39.68 49.68 49.68 Total: 4,832.91 0.00 0.00 63.00 333.42 3,181.62 1,315.60 303.78 139 BRAZIL BAHIAPOOR URBANAREASINTEGRATEDDEVELOPMENT - Annex 15: PSIA Poverty and SocialImpact Analysis - PROJECT VIVER MELHOR - I1 Introduction 1. The development of the Integrated Urban Development Project drew largely on a series of successful urban development projects in Bahia. One of the notable experiences has been in the Ribeira Azul neighborhood in the city of Salvador. Here, the integrated and participatory approach have been implementedby the state through the Viver Melhor Program with the assistanceof grant fundingfrom the Italian Government through CitiesAlliance for the provision of TA and social development activities. 2. In preparation of the Integrated Urban Development Project, the World Bank carried out a Poverty and Social Impact Analysis (PSIA) to assess the potential impacts of the policy reforms and investments under the project. The approach to the PSIA work was to draw on the lessons from the existing experience in Ribeira Azul implemented from 1999-2004 (specifically the Novos Alagados I1 area) with analysis of the implications for scaling up. 3. Ribeira Azul is a relatively small area, covering approximately 4 square kilometers along an inlet with 40,000 families and 135,000 individuals. This represents 6 % of Salvador's population. Ribeira Azul i s part of a broader area which has been characterized by poverty and isolation, and poor social and environmental conditions. At the start of the project, some 2500 families in the area lived in precarious stilt houses @alafitas) informally constructed over the inlet. Conditions were quite dangerous, particularly for children who would frequently fall into the water, in some cases leadingto death. 4. The Viver Melhor Program in Ribeira Azul combines physical interventions with investments to improve the social and economic conditions of the area's population. This includes housing and infrastructure improvements (roads, water, sanitation, public lighting), and programs in health care, child nutrition, education, training, and employment generation through cooperatives. Community participation has beena fundamental aspect of the program. PSIA approachand methodology 5. The PSIA work focused on answering four key issues which would have implications for scaling up. These include: 1) What has worked well with the integrated urban development approach and what has not? 2) How cost effective are interventions? 3) With the multi-sectoral approach, what are the institutional arrangements, how have they worked? What are the lessons? 4) What are the main sustainability issues and how will these impact on the poor over time? 6. Several methodological approaches were used for carrying out the PSIA combining quantitative and qualitative tools. The area of study was the Novos Alagados I1neighborhood in the Ribeira Azul area, chosenbecause here the full range of physical, economic, and social interventions have taken place. 7. For the first issue of analysis, what has worked well and what has not, an extensive qualitative study was carried out in Novos Alagados I1involving focus group discussions and in-depth interviews. Focus groups were organized around the themes of housing, education, health, employmentkooperatives, 140 and institutional actors. Cross cutting themes that were discussed include specific issues of children and youth, leisure, violence, knowledge of the program and perceptions on the integrated approach. 8. The cost effectiveness analysis usedavailable data on costs, physical interventions and number of beneficiaries from the Government agency CONDER (Urban Development Company of the State of Bahia) and the Italian NGO implementingthe social interventions, AVSI (Association of Volunteers for InternationalService). A unit cost was calculated for 12 indicators. While assessing the relative value of each cost can be somewhat subjective, the data provides overall guidance on comparative costs for interventions which is useful for policy decisions in scaling up. 9. The institutional analysis drew on interviews with key informants from the main stakeholders both at the policy level and in the field: Government agencies (CONDER, SEDUR), the World BanUCities Alliance, AVSI and CDM (Local NGO), and community residents. The sustainability analysis also drew on in-depth interviews with key stakeholders, combined with the existing literature on sustainability of slum upgradingexperiencesfrom Brazil and other developingcountries. Mainfindings 10. The full PSIA report discusses the main findings in detail. Here we summarize the key points which are particularly relevant for the policy dialogue. On the whole, the experience in Novos Alagados I1and more broadly in RibeiraAzul of integratedurbandevelopment is perceived to be highly successful in terms of its implementation and positive impact on living conditions. Cooperation between the two main implementing agencies, CONDER and AVSI, functions well. Community participation has played an important role inthe project thus far and will continue to be critical to the longer term sustainability of investments and reforms. Among the interventions, the issue of housing has proven to be the most challenging; costs are relatively high, yet beneficiaries have numerous complaints. Scaling up will provide some additional challenges as the scope of the project i s much greater andthe existing institutions may not be able to be involved in such an integrated and intensive way. I. Whathasworkedwellwiththeintegratedurbandevelopmentapproachandwhathasnot? 11. Feedback from beneficiaries through the focus groups and detailed interviews point to many positive aspects of the Viver Melhor Program. Community residents refer to general improvements in quality of life, reduction in health and morbidity risks due to the new housing and housing improvements (particularly for children), increases in property values, rights associated with tenure, reductions in urban violence, health and nutritional improvements from the social programs, expanded educational and training opportunities for children and youth, positive impacts from having educators in the community, and increased opportunities in the labor market through the cooperatives. All of these contributed to an increasedsense of dignity to which residents emphasized in many of the discussions. 12. Among the `negative' aspects of the project mentioned by beneficiaries was a demand for increased opportunities through the project, ultimately a result of the positive perceptions mentioned above. Residents voiced the need for more spaces in the education, nutrition and training programs so that more people could participate. Issues related to housing generated the most negative views. Beneficiaries complained about the poor quality of materials used, the size of the houses, lack of privacy (and resulting increases in domestic violence), and uncertainty related to the ownership of the housing units. 2. How cost efective are interventions? 13. The project area of Novos Alagados I1included 2020 households, or 7800 people. A total of 141 R$22.1 million was spent from 2001-2004 on physical infrastructure, equivalent to R $ l1,000 (US$3928) per household. Unit cost data for a range of 12 indicators presentedinthe graph below shows substantial variation. 14. The highest expenditures under the Program were for the construction of new houses for those resettled from the precarious palafitus (stilt houses). The costs ranged significantly depending on size - the average cost of the larger houses inthe range of 20-40 square meters were R$11,600 (US$4143), and for the smaller units (20 square meters), R$5600 (US$2000). T h i s compared with under R$2000 (US$7 14) for improvements to existing housing. Resettlement costs are generally higher than in-situ upgrading, and the larger the house, the higher the cost. 15. Per capita costs for the social programs varied as well, from a high of R$3500 (US$1250) for the CEDEP (Centro de E u c q b Desportiva e Profissionalizante) training program (in housing maintenance skills) to a low of R$180 (US$64) per year for the CEDEP sports programs. 16. Comparative data on such costs are rare. A recent study (Flood, 2004) estimated costs for upgrading on a regional basis. The estimates for the Latin America and Caribbean Region were US$2440 per household (based on 5 persons per household) for the construction of basic housing, and another US$712 per person for other upgrading activities including land, infrastructure (including social infrastructure), and capacity building.23 A study of self-help housing programs in Central America estimated the average costs at US$3168 for new housing of 36 m2;US$2112 for new housing 25 m2; US$1584 for 18 m2;and US$792 for the smallest units at 9m2.24 Other upgrading costs totaled US$2018 per household, or US$404 per person for landand infrastructure. These costs are not dissimilar from the estimates for Novos Alagados 11. 23 See Flood, Joe 2004, "Cost Estimate for Millennium Development Goal 7, Target 11 on Slums." Background Report for UNMillenniumProject Task Force on Improving the Lives of Slum Dwellers and UN-HABITAT, Urban resources, Elsternwick, Australia, also in, Millennium Project, 2005, Improving the Lives of Slum Dwellers, http://ww w.unmillenniumproject.org/documents/Slumdwellers-chapters5-8.pdf 24 See, Millennium Project, 2005, Improving the Lives of Slum Dwellers, http://www.unmillennium~roiect.or~/documents/Slumdwellers-cha~ters5-8.~df; Adapted from FUNDEVI, 2001, (Fundacion para el Desarrollo de la Vivienda Social Urbana y Rural); Angel, et.al., 2004, "Rapid Urbanization in Tegucigalpa, Honduras: Preparing for the Doubling of the City's Population in the Next 25 Years." Woodrow Wilson School for Public and Intenrational Affairs, Princeton, University, Princeton, N.J; Acevedo and Pleitez, 2003, Opciones de Financiamiento Para Una Politica de Vivienda Populare en el Salvador, San Salvador, Programa de las Naciones Unidas para el Desarrollo. . 142 Unit Cost Data, Novos Alagados II 14000 12000 10000 8000 6000 4000 2000 0 7 DI I 143 3. With the multi-sectoral approach, what are the institutional arrangements, how have they worked? Whatare the lessons? 17. The institutional arrangements for the Project in Novos Alagados 11can be considered complex. The main the relevant agency. There are, however, no formal or systematic mechanisms for negotiating with Government agencies. Among the main local agencies involved in Ribeira Azul are LIMPURB, in charge of garbage collection and street cleaning, drainage (under the responsibility of SUMAC), construction permits (under the responsibility of SURCAP) as well as the Municipal Secretariat for Education and the Municipal Secretariat for Health. At the level of the state government, the main agency that i s involved is the State Secretariat for Public Security. The state agency for water and sanitation, EMBASA, also plays a role. 18. Community involvement has been strong in Ribeira Azul, with the community involved in the management of the project through participation in specific activities developed in the field as well as in discussions on the development of the project with its senior managers. The project has worked primarily with existing Community Associations (CAS). In those cases where the communities were less organized, field managers have a direct relationship with residents. Several incentives have been provided to the CASto stimulate cooperation; grants for improving their training courses on how to apply for resources and how to design projects; and grants for improving the physical conditions of social services facilities provided by them, such as nursery schools. This strategy, however, has brought about some disputes among CASgiven their lack of financial resources. 19. When project implementation initially began, the institutional arrangements within the PMUwere seen to be somewhat fragmented. This has gradually evolved to meet the project's increasing demands and i s now perceived by stakeholders as a strong and effective working relationship which has contributed to the general success inimplementing the Ribeira Am1 project. 20. Based on the interviews for this study, the key institutional factors that are considered to have contributed to successful implementation were: agreement of clear roles and responsibilities between CONDER and AVSI; the benefit of time and flexibility to allow for the relationships between main institutions to evolve as was necessary; trust built through personal relationships; and complementary skills between agencies. Communications were generally considered satisfactory between managers and field teams, as well as with the community. Novos Alagados 11, and more broadly, RibeiraAzul, also had a strong base of community organizations which contributedpositively to implementation. 21. Most of the institutional challenges in implementation were in some way related to the physical infrastructure works, particularly housing. This included general problems with construction, as well as with the community in their dissatisfaction in the size of the housing units, selection process of who would move, and length of time to resolve problems. Other challenges exist with regard to communications between and across government agencies resulting in gaps in service delivery. This was particularly noted with regard to health care services. Community members also cite poor level of services for garbage collection, street cleaning, drainage and construction permits, enforcement of public security and problems due to drug trafficking. All but public security and drug trafficking are local government responsibilities. It i s interesting to note that of these services, garbage collection was perceived to work better than the other local services because of its decentralized management 4. What are the main sustainability issues and how will these impact on thepoor over time? 22. Project and policy interventions of this nature raise important questions related to longer term sustainability. Once the project has been implemented and the project team moves on from the area, how will the policies and programs put in place fare? To analyze this, several key issues were identified: 144 financial sustainability, tenure security, slum prevention, operations and maintenance, and environmental sustainability . Financial sustainability 23. The costs of most of the physical and social interventions appear to be in line with current spending patterns for the state. Providing housing under the resettlement program, specifically for the larger houses, i s somewhat costly and affects policy issues of affordability and cost recovery. InBahia there i s a strong culture of entitlement for goods and services from the Government. Thus attempts at cost recovery have generally not been successful. 24. Currently, CONDER subsidizes 80 % of new houses and house improvements, with 20 % to be repaid by beneficiaries within 10 years. This comes out to approximately R$20-40 per month, with the amount not to exceed 10 % of one minimum salary. Under the existing Viver Melhor Program, the default rate i s very high, estimated at 80 - 90 %. This i s attributed to the culture of entitlement and resistance to payments rather than the value of the payments. Attempts to provide incentives, such as a scheme which allows the funds from repayments to be reinvested in the community, have not worked. The enforcement mechanism currently in place makes the legalization of title deeds conditional on repayment. This has, however, been ineffective as residents can buy and sell their improved homes using informal documents. Another potential source of cost recovery in most countries is property taxes. However, inthe municipality of Salvador, property taxes are not collectedinfavelas. The problems with cost recovery are not limited to housing. In water and sanitation, the default rate is estimated at approximately 40 %. 25. One exception that has worked relatively well i s that of COELBA, the privatized electricity utility of Bahia. AVSI i s working with them to provide outreach whereby about 100 social agents from local communities in Salvador act as an interface between COELBA and the community. On the one hand the agents inform the company of irregular connections, and on the other, they provide the community with information on how to obtain subsidies, reduce consumption, negotiate debts, get maintenance done, etc. They also mediate when the company decides to cut the connection to long-term debtors (this is a last resort as the cost is high for COELBA). No cost recovery data are available but the repayment rates are thought to be muchhigher than other services. 26. As the Project expands to cover a much greater number of households, policies to encourage improved financial sustainability are necessary. A key area i s to explore the policy options for providing serviced land and access to credit rather than housing. While this would be a major policy shift for the state, there are relevant experiences in other countries which have worked well. A second area i s to explore options for collecting property taxes in thefavelas, including a targeted subsidy for the poorest. Income levels in the favelas are somewhat heterogeneous and some families can afford to contribute. This will provide some additional revenue for the Municipality and may improve accountability for service delivery. Finally, the experience with community agents of COELBA has been a positive one. Expanding this to include cost recovery of housing and other services could enhance long term financial sustainability . Sustainability of Tenure 27. Despite the widely recognized benefits of land tenure, large gaps exist in Salvador. The processes for land titling are long and costly, and paid for by the public sector (typically the municipality). Even the alternative of usucapiiio - granting titles after five years of occupation - i s difficult to enforce because of inefficiencies in the legal system governing property transactions and registration, and the opposition of legal owners, especially when private lands have to be regularized. 145 28. The official process of regularizingland tenure differs between those informal settlements where the public agencies have provided urban improvements, and the informal settlements where the improvements (at least in housing) have been made by local residents only. In both cases, the cost of the legalization process (for the land and property) i s covered by the public sector and considered to be relatively expensive at about R$200 for eachplot. 29. Inthe Ribeira Azul area, the state government has directly assumedthe responsibility of land regularization for 9,000 residents (of the 40,000 benefiting from the program). This approach i s contrary to other areas in the city where the Municipality of Salvador has been responsible for the regularization process and i s perceived to be performing well (some 50,000 - 60,000 plots have been legalized). These plots, however, are located in already consolidated favelas where the public sector has not provided any improvements, hence the processhas not beenhamperedby problems of cost recovery. 30. As the state embarks on a comprehensive program of urban development, it will be crucial to tackle the issue of land tenure. The Project will provide an excellent opportunity to identify an approach to makingthe process more efficient, less expensive. The introduction of accessible credit programs for residents will help to ensure that they can actively participate in the cost recovery scheme, ultimately enablingthem access to titles. Slum Prevention 31. Urbanization i s likely to continue in Bahia and thus preventingnew slums from forming will be a key challenge. As slums are upgraded, it will also be a challenge to prevent new invasions. 32. The experience in Ribeira Azul has been successful in preventing new invasions in the project area since implementation. This i s attributed to the intensive presence of AVSI and CONDER, outreach to the community to get them to play a role, and physical interventions specifically designed to prevent invasions (such as a road between the houses and the sea which blocked the construction of new palafitas). The turnover in the community as a whole has also been relatively low which contributes to general stability. 33. In a neighboring community just outside Ribeira Azul, a new invasion has recently appeared, in part motivated by the nearness to the relatively highquality of services inthe upgraded RibeiraAzul area. CONDER i s working on trying to resettle the residents. 34. Urban upgradingcan also generate incentives to invasions indirectly, as beneficiaries can decide to sell their houses and invade elsewhere. A CONDEWAVSI survey indicates that a relatively low number of residents in Ribeira Am1 (17% of a 280 sample) sold their homes to move elsewhere. These data, however, refer to formal transactions only, and thus it i s not known if and how many houses have been sold informally. In any case, according to impressionistic perceptions by field workers, the turn- over of residents has been quite low. In contrast, in other upgradedfavelas in Salvador the picture is strikingly different-for instance, inthefavela Silvio Leal (inthe region of Pau da Lima), the turn-over of residents is about 75 %. This appears to be closer to the n o min Salvador. 35. Beyondthe approachesused in Ribeira Azul, a more systematic approach to slumprevention will be necessary for scaling up. One of the policy reforms being considered i s the provision of serviced land for the poor. While the availability of appropriate public land in Salvador i s possibly a constraint, this option could provide a viable solution for preventing new slum invasions as the urbanization process continues. Both the state and the municipalities will need to play a role in identifying suitable land. A similar approach state-wide would provide alternatives for those migrating to cities. 146 Operations andMaintenance 36. InRibeiraAzul a majorchallenge hasbeena lack of involvement of the Municipality of Salvador in the operations and maintenance of community improvements. The Municipality is responsible for garbage collection, paved roads and drainage which i s supposed to be considered their counterpart contribution to the project. This has not functioned well, in part due to resource constraints. As no property taxes are collected inthefavelas, funds for operations and maintenance are scarce. 37. To the contrary, the responsibility for operations and maintenance of water and sanitation infrastructure has been transferred to EMBASA, the state water company, and this has been working relatively well. 38. Communities have not explicitly taken on any responsibilities for operations and maintenance, though there have been some educational activities to familiarize residents with the use of specific services. T h i s i s thought to have generated beneficial behavioral changes. For example, garbage is no longer being thrown inthe sea or inappropriate places inthe streets. 39. In scaling up, the issue of operations and maintenance will need to be addressedfirstly by the municipalities. Their role is crucial to sustainability and thus involving them from the start i s essential. Raising public awareness through education can also play an important role and ideally will be included as a project sub-component. A third possibility will be the contracting of local cooperatives which have been formed and trained under the project to carry out necessary operations and maintenance work. This will provide local employment, and contribute to the sustainability of investments. EnvironmentalSustainability 40. The Ribeira Azul area was an environmentally sensitive area to begin with and has raised the attention of environmental groups. The apparent environmental impact i s considered to be positive, as evidenced by the renewed growth of mangroves and the related ecosystem in the bays once the palaftas were removed. This resulted in the elimination of solid waste and wastewater disposal. The longer term effects of a land fill built on part of the Bay are not known but it may require heavy engineering interventions for maintenance. It i s not clear how this will be financed but it will need to be monitored closely. 41. An indirect environmental concern affecting the area is a consequenceof problems from outside the area. Wastewater disposal from neighboring communities flows from these areas into the sea, re- pollutingthe bays where the residents of RibeiraAzul live. 42. The longer term environmental sustainability will require a more systemic vision to environmental management. Neighborhood-specific investments are not sufficient to ensure city-wide environmental improvements. Inscaling up, it would be beneficial to have this systemic vision, clearer institutional responsibilities in environmental management, and close links to operations and maintenance. Conclusions 43. The overall experience of integrated urban development in Ribeira Am1 has been quite positive. Scaling up will present considerable challenges. First, the scope will be much greater including many more communities and agencies. This may require a different way of working and other institutional arrangements. Second, i s that in the case of Ribeira Azul, there was already a base of active community organizations which may not exist in other communities. Community participation was critical to the 147 success in implementation and thus additional efforts will be needed to foster this from the start. Third, the heavy involvement of AVSI with its international experience and ability to attract foreign donations may not be possible to such a great extent in a larger number of communities. Without such presence, it i s unclear if and how that gap would be filled. Finally, there are several questions of longer term sustainability which remain unaddressed. As the Project goes forward, it will be important to identify and implement appropriate policy options to ensurethe long-term success and viability of investments. 44. Among the key lessons for scaling up gleanedfrom this work are: 0 Participation i s critical to successfulimplementationand sustainability. 0 Clear roles and responsibilities are needed in the institutional arrangements, but flexibility i s also needed. 0 Municipalities will needto play a greater role from the start, particularly to ensure project sustainability . e Construction problems should be addressed early; performance-based contracts may be an effective alternative. 0 Capacity buildingfor Community Associations (CAS)can be highly beneficial. e Strengthening inter-governmental relations could improve service delivery. 0 The existing system of land regularization requires reform to make the process more efficient and less expensive. 0 With the high costs of providing housing and continuing invasions, there is much scope for a policy shift towards providing inexpensive serviced land and access to credit rather than housing. 0 Community agents can provide an important interface on issues of cost recovery and service delivery. 0 Public awareness campaigns for issues of operations and maintenance have been quite successful. 0 Environmental planning for the community needs to be integrated with a broader systemic plan at the city and state level. 148 BRAZIL BAHIAPOOR URBANAREASINTEGRATEDDEVELOPMENT - Annex 16: Urban Crime and Violence Prevention Component PROJECT VIVER MELHOR - I1 1. The problem of the very high levels of crime and violence is recurrently pointed as one of the most severe problems affecting urban householdsin Brazil, especially the poorest and especially affecting young men both as perpetrators and as victims. Most countries and cities battling highlevels of crime and violence (such as the experience of Bogota, Colombia) find that measures such as police reform - whilst an essential element -are not sufficient to by themselves have a significant impact on crime and violence. The international policy debate has increasingly recognized the role and cost effectiveness of various prevention strategies that go beyond traditional police responses. 2. Whilst there is no 'silver bullet' to the problem of crime and violence and little systematic evaluation to date, the international and regional experiences with differentpolicy approaches suggest that an integrated framework combining their various strengths can lead to a successful crime and violence preventionh-eduction strategy and combines: 0 judiciaVpolicing reform - ensuringthat order, fairness, and access to due process is maintained in the day to day activities of the community and reducing the public fear of crime. The World Bank can not be directly involved in policing issues such as police reform, indirectly it can recognize the importance of the role of the police and the judicial system, work on judicial reform, and encouragecrime and violence preventionpartnerships that include the police. social prevention - targeted multi-agency programs that address the causes of crime and violence. There are many other examples ranging from long-term parenting skills programs and early childhood education programs that have been proven to protect children from violent behavior in later life, to cultural programs, life skills programs,job training programs with at-risk adolescents, programs that keep kids occupied after and before school, programs to prevent domestic and gender-based violence, educational programs in conflict resolution to mentionjust a few. 0 situational prevention - measures that reduce opportunities for particular crime and violence problems through spatial interventions such as such as Crime PreventionThrough Environmental Design (CPTED) methodology and urban renewal. The basic premise of CPTED i s that if the physical environment is planned, designed and managedappropriately, certain types of crime can be reduced and perceptions of safety increased. This can be applied to city-planning, the planning of the public transport system, parks and recreational spaces, low-income housing, downtown areas, etc. For example, this 'spatial' aspect was also an essential element in the overall Bogota crime and violence reduction strategy. 0 Lastly, what i s clear from regional and international experience i s that one of the most effective entry-points for crime and violence prevention i s the 1ocaVmunicipal level. Much crime is local and very localized (including specific 'hotspot' neighborhoods, blocks even). The local/municipal level i s the level of government where projects can be designed to target the specific needs of the local community. This i s also where the day-to-day delivery of services happens (water and sanitation, trash collection, public works and lighting, education and health, social services, recreation, etc.). These services improve people's quality of life and build better living environments. Many of these services are also the basic elements of crime and violence prevention. Effective local government action requires all the municipal services to work together, rather than in isolation. It requires support from the different sectors in the community 149 such as justice, health, education, media, police, social services, the private sector, NGOs, and other CBOs such as religious organizations. And importantly, it requires support from higher levels of government and linksbetweenthe national level, state, region or province. C&V PreventionComponent: 3. The component does not intend to solve Salvador's or the state's crime and violence problems, rather it seeks to take advantage of the infrastructure and social investments and mainstreamprevention at the local level into the overall Project. The inclusion of the violence prevention component represents an innovative approach in this Project and has received much support from the state government. 4. The component will focus specifically on the reduction of the very high levels of homicide, youth violence, and associated risk factors in the participating neighborhoods. The vulnerability mapping exercise used for the selection of project areas also included a safety component and there i s indeed a very high correlation between the most vulnerable and the most crime-ridden and violent communities. The component i s adopting this municipalhrban renewal approach with apreventive, multi-sectoral, and local strategy through activities that are complementary to, coordinated with, but go beyond traditional police responses. Particularly important are the synergies between the infra-structure, upgrading, and the `situational prevention' and community-based `social prevention' activities. The model for the Neighborhood level social prevention intervention i s the highly effective "Fica Vivo" Project in Belo Horizonte. The component will have four subcomponents: Diagnostics: Crime and violence mapping of the micro areas using police statistics and where possible using the GIS system; victimization section in the baseline survey, and; community baseddiagnostics. Situational prevention: measures that reduce opportunities for particular crime and violence problems through spatial interventions such as such as Crime Prevention Through Environmental Design (CPTED) methodology and urban renewal. The basic premise of CPTED i s that if the physical environment is planned, designed and managed appropriately, certain types of crime can be reduced and perceptions of safety increased. This method will be mainstreamed in all the infrastructure works of the Project through the training of the architects, engineers and other technical staff in the CONDER, SEDUR and relevant other agencies. This methodology i s relatively new in Brazil but has been successfully piloted in the Bank-financed PROMETROPOLE Project inPernambuco. Capacity-building, training and technical assistance in multi-sectoral crime and violence prevention to the participating government agencies, municipalities, and CBOs. The training and technical assistancewill include the following themes: Crime and Violence diagnostics, community-based diagnostics, mapping, information systems. Planning methodology, local crime and violence prevention partnerships, and the design of preventionstrategies. Situational Prevention (CPTED). Youth Violence Intra-family violence Community and problem solving policing methods Local arms control strategies Monitoring and evaluation. 150 4) Complementary investments and activities: A fundfor complementary investments and activities: the neighborhood residents will work with the partner agencies and the technical staff of the Viver Melhor to develop a plan for C&V prevention and use these funds to implement the prioritized subprojects and community programs that are not already covered by one of the other project programs or partner programs. The menu for these: social infrastructure investments - such as recreation centers, community facilities, and public lighting not financed through the infrastructure works components, and; Social prevention activities - such as life skills, job skills, and parenting skills training, conflict resolution training, homework clubs, sports and arts-based recreational activities, victim support, and domestic violence prevention. 5. As these will be complemented with technical assistance activities such as community-based diagnostics, preventive strategies and capacity building, the objective i s a comprehensive intervention at the neighborhood level. A technical advisor from UFMG-CRISP and the Minas `Fica Vivo' neighborhood-level homicide reduction program will be contracted to support and accompany the component. It i s critical that the crime and violence prevention component i s at all times closely coordinated with the infrastructure component (situational prevention, provision of social infrastructure) as well as with other relevant municipal, government, and non-governmental programs addressing different manifestations of crime and violence and their associatedriskfactors inthese neighborhoods. 6. Institutional arrangement: The component will be executed by the CONDER through a minimum of one technical expert in community-based C&V preventionin each of the Casa Viver Melhor teams and one general coordinator. It is envisaged that the general coordinator is a highly qualified individual with extensive experience with the `Fica Vivo' `program. The role of these technical experts i s to: carry out the community-based diagnostics; formulate participatory community safety plans and strategies; liaise and coordinate with other relevant agencies and associations, in particular with Community Safety Councils and the Police; coordinate closely with the works to ensure integration of CPTED principles; identify and work with youth at -risk in the community; organize and mobilize the community around the concept of safety though community campaigns (e.g. community clean-up\painting days, community safety festival, etc.); initiate additional projects such as colBnias defe`rias for at-risk youth, etc. 151 Annex 17: Countryat a Glance BAHIAPOORURBANAREASINTEGRATEDDEVELOPMENT PROJECT- VIVER MELHOR 11 Latin Lower- POVERTYand SOCIAL America middle Brazil & Carib. income 2003 Population, mid-year (millions) 176.6 5 2,655 Life expectancy GNI per capita (Atlas method, US$) 2,720 3,260 1,480 GNI (Atias method, US$ billions) 1,741 3,934 Average annual growth, 1997-03 0.9 Labor force ("A) 1.2 GNI Gross per primar) capita nrollment 50 Lifeexpectancyat birth (years) 69 Infant mortality (per 1,000 live births) 32 Child malnutrition ("9 of childrenunder5) 11 Accessto improvedwater source - Access to an improvedwater source (% ofpopulation) 81 10 112 113 -Brazil Lower-middle-incomeorouD 111 STRUCTURE of the ECONOMY 1983 1993 2o02 2003 IGrowth of investment and GDP (%) ("hof GDP) I Agriculture 10.9 7.6 5.8 industry 44.0 41.6 20.6 19.1 Manufacturing 33.2 25.0 12.4 Services 45.1 50.8 73.5 Privateconsumption 71.2 60.1 58.1 56.9 Generalgovernmentconsumption 9.7 17.7 20.1 19.3 - Imports of goodsand services 9.0 9.1 GDI -GDP I 1983-93 1993-03 2o02 2003 IGrowth of exports and imports (%) (averageannualgrowth) I Agriculture 2.4 3.9 5.0 5.5 Industry 1.2 1.8 2.6 -1.o Manufacturing 0.0 1.4 1.4 2.7 Services 3.0 2.5 1.6 -0.2 Private consumption 0.8 1.9 -0.4 -3.3 General governmentconsumption 6.4 2.0 1.o 11.6 Gross domestic investment 4.9 1.2 -4.3 -4.5 -Exports -9-Imports Imports of goodsand services 5.9 4.0 -12.3 -1.9 152 Brazil PRICES and GOVERNMENT FINANCE 1983 1993 2002 2003 Inflation (70) I Domestic prices I (%change) 15 T Consumer prices t35.0 1928.0 P.5 9.3 i o Implicit GDP deflator 140.2 1996.6 13.2 P.8 Government finance 5 (%of GDP,includes current grants) 0 Current revenue 23.9 23.7 98 99 00 01 02 03 Current budget balance 2.8 3.0 Overall surplus/deficit -GDP deflator -e-CPI TRADE 1983 1993 2002 2003 (US$ millions) Export and import levels (US$ mill.) Total exports (fob) 38,563 60,362 73,084 80,000 7 Coffee 2,466 3,049 3,456 Soybeans 3,074 3,032 4,290 Manufactures 25,935 33,000 39,653 Total imports (cif) 25,256 47,237 48,260 Food 1,089 1,085 924 Fueland energy 2,t39 6,240 6,577 Capitalgoods 8,369 11,643 13,348 Export price index (995=1OO) 80 91 88 95 97 98 99 00 01 02 03 Import price index (995=x)O) 57 67 91 90 Exports OlmpOrtS Terms of trade (995=MO) 140 t36 97 135 BALANCE of PAYMENTS 1983 1993 2002 2003 (US$ mi//ions) Current account balance to GDP (Yo) Exportsof goods and services 23,611 41,616 69,9t3 83,567 Imports of goods and services 19,534 31,795 61,709 63,819 ' T Resourcebalance 4,077 9,821 8,204 19,748 Net income -11,022 -P,099 -18,191 -18,552 Net current transfers 138 1,686 2,390 2,867 Current account balance -6,837 -592 -7,597 4,063 Financingitems (net) 4,946 9,805 -6,003 -963 Changes in net reserves 1891 -9,213 W O O -3,130 Memo: Reserves includinggold (US$ millions) 4,563 32,211 37,823 49,296 Conversion rate (DEC,/ocal/US$) 2.13E-13 3.22E-2 2.9 3.1 EXTERNAL DEBT and RESOURCE FLOWS 1983 1993 2002 2003 (US$ millions) ~ Composition of 2003 debt (US$ m i l G I Total debt outstandingand disbursed 98,525 144,134 228,662 236,245 I IBRD 3,628 6,575 8,585 8,588 A 8,588 IDA 0 0 0 0 G 22,x)3 I Total debt service '~3,304 x),883 51,636 56,793 IBRD 507 1,858 1,518 2,013 IDA 0 0 0 0 Composition of net resource flows I Officialgrants 16 59 0 Officialcreditors 1,576 -1,033 9% Private creditors 2,659 13,073 -9,541 233 Foreign direct investment 1609 1,292 0 I Portfolio equity 0 6,570 0 F World Bank program 155,904 Commitments 2,067 636 1,276 1,2n A - IBRD E - Bilateral Disbursements 1,204 471 1,384 1,291 B IDA - D Other rmltilateral ~ F- Private Principalrepayments 270 1,279 1,063 1,633 C-IMF G- Short-term 153 Annex 18: Maps BRAZIL - BAHIA POOR URBAN AREAS INTEGRATED DEVELOPMENT PROJECT ­ VIVER MELHOR II Map 1: Selected Municipalities on Viver MelhorII Project / II 154 Map 2: Poverty Map Municipality of Municipality Salvador of Ilheus 3320 m 0 3320 m 0 3160 m SOURCES: CONDER/INFORMS. Base Cartográfica escala 1:2000, 1998.; IBGE. Censo Demográfico 2000. Dados por Setor Censitário; CEM/CEBRAP. Metodologia para Definição do Índice de Vulnerabilidade Social, 2003; UTP VIVER MELHOR 2. Adaptação da Metodologia CEM/CEBRAP, 2003. 155 Poverty Map Municipality of Barreiras Municipality of Municipality Feira de Santana of Itabuna Municipality of Juazeiro no scale Municipality of Teixeira de Freitas SOURCES: CONDER/INFORMS. Base Cartográfica escala 1:2000, 1998.; IBGE. Censo Demográfico 2000. Dados por Setor Censitário; CEM/CEBRAP. Metodologia para Definição do Índice de Vulnerabilidade Social, 2003; UTP VIVER MELHOR 2. Adaptação da Metodologia CEM/CEBRAP, 2003. 156