PROJECT INFORMATION DOCUMENT (PID) CONCEPT STAGE Report No.: AB1050 Project Name. Brazil Municipal Lending Program I ( APL Region

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1 Public Disclosure Authorized Public Disclosure Authorized Public Disclosure Authorized Public Disclosure Authorized PROJECT INFORMATION DOCUMENT (PID) CONCEPT STAGE Report No.: AB1050 Project Name Brazil Municipal Lending Program I ( APL Region LATIN AMERICA AND CARIBBEAN Sector General water, sanitation and flood protection sector (100%) Project ID P Borrower(s) MUNICIPALITY OF TERESINA Implementing Agency Municipality of Teresina Praça Marechal Deodoro, 860 Palácio da Cidade, Centro Teresina, Piauí Brazil Tel: rosanaabreu@ .com Environment Category [X] A [ ] B [ ] C [ ] FI [ ] TBD (to be determined) Safeguard Classification [ ] S 1 [X] S 2 [ ] S 3 [ ] S F [ ] TBD (to be determined) Date PID Prepared August 6, 2004 Estimated Date of March 7, 2005 Appraisal Authorization Estimated Date of Board August 11, 2005 Approval 1. Key development issues and rationale for Bank involvement Brazil is a largely decentralized country. The 1988 Constitution gave states and municipalities more revenue raising power and freedom to set tax rates, reduced the federal government s share of tax revenues and increased automatic transfers from federal to state and municipal governments to more than half of public sector revenues. Claiming about 20% of total public sector revenues, and a large share of expenditures, the ability of municipalities to adequately manage revenues and expenditures is important to Brazil in maintaining fiscal stability. Municipalities are also responsible for the provision of most basic services, although there is often significant overlap with State governments. Generally, municipalities have responsibility for household services such as solid waste management, public transport and share responsibilities with states for water supply and sanitation (WS&S), education and health and have recently acquired increasing responsibility for investing in infrastructure required for economic and social growth (such as housing). Recent government estimates suggest that investments at the municipal level are less than one third of investment needs in the areas of WS&S and housing. Municipalities are at the forefront of addressing the infrastructure and housing needs of the country s 5.4 million households living in sub-standard conditions. Decentralization has also placed municipalities in the front lines of addressing the so-called brown environmental agenda (encompassing, inter alia urban environmental degradation; urban water pollution; flooding, solid waste management; natural risks, such as hillside destabilization) At the top of the brown environmental agenda is water supply and sanitation with strong links to safe and secure housing and proper urban land use and development.

2 It is recognized by both the Bank and the Government, that it is the poor that suffer most from scarce and poor management of water resources, inadequate WS&S services and the unhealthy environment such inadequate service levels generate. Good management of water resources and access to WS&S services promote employment generation, improved health, and better environmental quality in human settlements, all of which are essential for the alleviation of poverty. Promoting coordination between the WS&S sector and other related sectors such as urban planning/management, solid waste management, drainage, health, land use planning, environmental protection and urban upgrading/housing, are necessary conditions for the successful implementation of urban infrastructure and is seen as priority challenges by the Bank and the Government of Brazil. Consistent and compatible policies across sectors avoids wasted resources and facilitates the coordination of interventions and the consequent reaping of the cumulative benefits of coordination. Municipalities, which have extremely scarce resources to invest in infrastructure and housing, are particularly aware of the need for improved integration and coordination across sectors. The Federal government recognizes the local priority of urban environmental infrastructure and housing related investments, including among the selected actions and medium term goals in the Multi- Year Budget (PPA), increased sewerage collection and treatment, the number of municipalities with solid waste management systems and land tenure regularization in poor urban neighborhoods. Municipalities are demanding financing for integrated urban environmental infrastructure and related actions. In November 2003, the federal government approved requests from five separate municipalities to seek World Bank financing for such integrated infrastructure projects, to complement the already approved loan for the municipality of Betim. In addition, there is a backlog of about a dozen more such municipal interventions awaiting Federal Government approval with more expected. The five loan requests approved in November represent the foundation and first phase of this programmatic, horizontal APL for municipal lending in Brazil. The pipeline will represent the future flow of projects and subsequent phases under the APL. The Brazil CAS (November 10, 2003) indicates that an, integrated approach to water pollution control and urban upgrading can enhance the benefits of a wide range of interventions. It also points out that there are health benefits of effective sewerage, water supply, solid waste management and urban development investments and that integration of these sectors can ensure increased benefits and promote cooperation among the myriad local actors responsible for urban service delivery. The CAS further points out, based on lessons learned from Bank experience, that integrated urban environmental infrastructure projects at the local level can serve as vehicles for targeting social programs, such as those aimed at reducing crime and violence, and can serve as a means to provide a holistic program of municipal support. To that end, the CAS is explicit in laying out a program to support multi-sector urban development strategies at the sub-national level, and emphasizing municipal governments as key partners in delivery on Bank corporate, government and MDG priorities in Brazil. The Bank will bring real value to the beneficiary municipalities. Borrowing from experience with the Water Quality and Pollution Control Projects (PQA) in Brazil, linking urban-development with environmental management will complement earlier work the Bank has done in municipal development through the Municipal Development Funds projects. The lack of local lending institutions in Brazil with experience in holistic, cross-sector project development wil be addressed in the proposed APL. Further, the Bank has the capacity to further integrate social sector objectives into these projects, borrowing, for example, from the Bank s experience in targeting of social program (eg. Bolosa Familia at the local level), health and education, as well as recent experience in targeting youth development and crime and violence reduction components in urban upgrading projects. In addition, these projects will serve as a learning laboratory for Bank/Government efforts to develop innovative packaging of similar interventions, including wholesale lending mechanisms that will leverage private capital for the financing of integrated urban municipal projects.

3 2. Proposed objective(s) The overriding objective is to develop a program of direct support to creditworthy municipalities for the purpose of fostering replicable models of sustainable, integrated urban environmental infrastructure and management with the aim of improving quality of life of all residents, in particular the poor. Indicators of success will include development of: Prototype interventions that can be used in scaling-up Bank municipal lending in Brazil through desired wholesale mechanisms; Replicable models for urban services delivery, particularly in the efficient, equitable and sustainable provision of water supply and sanitation, housing and related environmental infrastructure, integrated with effective municipal environmental management; A model for using urban environmental infrastructure investments as a vehicle for more effective social policies and programs at the municipal level, where such integration is seen to be effective and where this can advance federal or state objectives at the local level; Effective mechanisms for cross-fertilization and comparison of outcomes across the range of municipal beneficiaries by building a system of monitoring and evaluation; and Improved municipal management and governance and the local level, including fiscal management, so as to ensure the sustainability of the investments and to serve as national models in these areas. In addition, each individual operation, while contributing to these broader cross-cutting objectives and expectations of replicability, will have their own specific objectives and expected outcomes 3. Preliminary description The proposed program responds to a growing demand among municipal governments seeking financing for investments in environmental infrastructure and urban upgrading, together with institutional support to improve municipal level environmental management and local governance. As indicated previously, such an approach supports both the Bank and the GOB s strategy of integrating and coordinating infrastructure investments with institutional work in related activities such as urban planning/management, solid waste management, drainage, health, land use planning, environmental protection governance and regulation and complementary social sectors. This is an explicit strategy to allow for consistent policies across sectors, reduce wasted resources resulting from a lack of cooperation and to capture the consequent cumulative benefits of effective coordination. A Pooled Approach: It is proposed that the project take the form of a pooled lending program of municipal support. Therefore, the intervention would be developed as an Horizontal APL, that would finance investments in integrated urban environmental infrastructure and shelter consistent with the overriding development objective. The first phase of the APL would be the four municipal loans approved by COFIEX in November 2003: Uberaba (Minas Gerais); Belo Horizonte (Minas Gerais); Recife (Pernambuco) and Teresina (Piaui). Each loan in the first phase would be prepared separately and at its own pace, according to the preparedness of the Borrower and the project. Each municipal loan would have a Federal Government guarantee. The umbrella concept for the horizontal APL would be presented to the Board together with the project(s) that is (are) prepared first, indicating that this would be one phase of a series of municipal loans to be developed under the APL, all following a similar line of development (i.e. urban environmental infrastructure/management and shelter with important social and governance elements), with the intention that all future loans under the umbrella would be approved through a streamlined approval process.

4 It is anticipated that the APL would be done in three phases: Phase I would be the first set of four municipal loans for delivery in FY 05; Phase II a second set of municipal loans for delivery in FY 06; and a Phase III for delivery in FY 07. With each sub-loan having an average implementation period of five years, it expected that the lending program would have a life of eight years. While triggers for subsequent phases will still need to be developed, a minimum set of triggers for phases II and III would include: An agreement with SEAIN on criteria for selecting future municipalities that will borrow from the World Bank to ensure a consistent pipeline of projects sharing development priorities; An evaluation of the process of preparing and approving the first and second packages of municipal loans in order to gauge the commitment of the government and the potential bottlenecks in the approval process of municipal loans; Adoption of an internal (Bank) City Strategy that will set the course for the longer-term Bank strategy for municipal lending in Brazil. A strategy for wholesaling mechanism(s) for municipal lending in Brazil. A Holistic Approach: In addition to the natural integration between urban environmental management and urban infrastructure, working at the municipal level presents other opportunities to provide a holistic, cross-sector program of support to the municipality. Therefore, each of the municipal operations will evaluate the possibilities for further cross-sector integration. Among the options are institutional capacity and local governance to improve municipal management, in part to ensure the sustainability of the investments. Social interventions are another area of priority, including effective targeting of subsidy programs (e.g. making Bolsa Family more effective at the local level), in addition to potential discrete components for specific investments in health, education and social inclusion. Improving the efficiency of public service provision is a constant objective in all of the interventions. Each package of support will be tailor made to the needs and demands of the municipality. A Broader Strategy: The proposed operation fits within a broader strategy to attend the growing municipal demand for Bank support to finance integrated urban environmental infrastructure, shelter and complementary activities. To address the lack of long-term, flexible financing in the domestic market for municipal infrastructure and municipal services in Brazil the Bank has begun preparation of an urban municipal operational strategy. The strategy includes: A short-term program of direct (eg. Betim) and pooled Loans (Horizontal APL) that provide financing to municipal governments for integrated urban environmental infrastructure projects; The medium-term development of wholesale mechanisms to use Bank funds to leverage other public and private sector capital to deepen the local capital market for municipal infrastructure financing (currently working with BNB and in future with CAIXA and others); and development of a Urban Municipal Strategy that will, based on strong urban analytical work and stakeholder consultations, lay-out a longer-term vision and strategy for Bank work at the municipal level in the urban space. Phase I Projects: The sub-loans in the first phase of the APL include the municipalities of:

5 Uberaba (Agua Viva, US$29.42M; US$17.65M loan amount): This is a medium-sized municipality (+250,000 pop.) in the state of Minas Gerais. The project will focus on water resources management, universal WS&S (including collection and treatment), macro-drainage and environmental protection of the Uberaba River Basin Environmental Protection Area. It will include efforts to strengthen local environmental management capacity, as well as local governance and fiscal management. Improving overall efficiency of the municipal water company is another aspect of the project. Belo Horizonte (Villas Urbanizadas; US$51.67M; US$31.0M loan amount): This is the capital and largest city in the state of Minas Gerais. The project will lay the foundation for a large-scale, citywide program of slum urbanization, linking with the municipality s efforts at social inclusion and water pollution control (the latter two efforts financed by IDB loans). It will also include a component of early childhood education, focused on the two initial project areas, and will include components in governance and fiscal management. This individual loan may also be developed as its own APL to scale-up the Vilas Urbanizadas program and the early childhood development efforts, both priorities of the municipality, in its subsequent phases. Recife (Capibaribe Melhor; US$46.8M; 32.76M loan amount): Recife is the capital of the state of Pernambuco and has the highest percentage of informal settlements of any city in Brazil. This project will support the sustainable development and revitalization of the Capibaribe River Basin in the municipality of Recife, one of the city s most important natural resources, and an important mixedincome community. It includes resettlement, urban development, sanitation and environmental management. It complements the on-going Bank financed work in the Beberibe River Basin, and is a priority recommendation of the Metropolitan City Development Strategy. This project includes specific social components in employment and job creation and will also explore the inclusion of governance, fiscal management and social targeting. A key aspect of this program will be to rationalize the integrated development of an important area of the city, while also focusing on improving the efficiency of municipal services, in particular WS&S. Teresina (Lagoas do Norte; 40.43M, 28.30M loan amount): Teresina is the capital of Piauí. The project will build on the award winning Villa Bairro program, by supporting a program of favela upgrading, urban development, sanitation, social inclusion, economic development and environmental management to the Lagoas do Norte Region. The program includes components of metropolitan planning, local governance and data base development for targeting of social programs, among others. A key aspect of this project is the improvement in the provision of WS&S services through development of a model concession contract for these services 4. Safeguard policies that might apply [Guideline: Refer to section 5 of the PCN. Which safeguard policies might apply to the project and in what ways? What actions might be needed during project preparation to assess safeguard issues and prepare to mitigate them?] 5. Tentative financing Source: ($m.) BORROWER INTERNATIONAL BANK FOR RECONSTRUCTION AND 28.3 DEVELOPMENT Total Contact point Contact: Martin P. Gambrill Title: Senior Water Engineer

6 Tel: Fax: Location: Brasilia, Brazil (IBRD)