Minas Gerais Partnership III DPL/PBG Region. LATIN AMERICA AND CARIBBEAN Country

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1 Public Disclosure Authorized Public Disclosure Authorized Public Disclosure Authorized Public Disclosure Authorized PROGRAM INFORMATION DOCUMENT (PID) CONCEPT STAGE August 9, 2011 Report No.: AB6729 Operation Name Minas Gerais Partnership III DPL/PBG Region LATIN AMERICA AND CARIBBEAN Country Sector Sub-national government administration (35%);Other Renewable Energy (20%);General education sector (20%);Health (20%);General industry and trade sector (5%) Operation ID P Lending Instrument Development Policy Lending Borrower(s) THE STATE OF MINAS GERAIS BRAZIL Subsecretaria de Investimentos Estratégicos Secretaria de Estado de Desenvolvimento Econômico Minas Gerais Tel: +55 (31) Implementing Agency SEPLAG Renata Maria Paes de Vilhena Secretaria de Estado de Planejamento e Gestao de Minas Gerais (SEPLAG) Cidade Administrativa - Prédio Minas - 3 andar Rodovia Prefeito Américo Gianetti, s/n Belo Horizonte Minas Gerais Tel: (55-31) renata.vilhena@planejamento.mg.gov.br Date PID Prepared July 27, 2011 Estimated Date of Appraisal November 21, 2011 Estimated Date of Board July 17, 2012 Approval Corporate Review Decision Following the corporate review, the decision was taken to proceed with the preparation of the operation. I. Key development issues and rationale for Bank involvement and the World Bank Group have a long-standing partnership. The Country Partnership Strategy (CPS) for 1 recognizes significant achievements in tackling development challenges using innovative approaches, and contributing to shaping the global policy agenda. The CPS also responds to the demand for more flexible and efficient products that are better suited to the country s evolving needs, while maintaining a focus on key long-range development 1 CPS (Report No. xxxx-br) currently under review.

2 issues. The proposed operation is fully consistent with and closely linked to the objectives of the proposed new CPS, , currently under preparation. This operation is one of a number of sub-national DPLs and SWAps designed to reinforce fiscal discipline, public financial management and service delivery as an integral part of the Bank s Country Partnership Strategy in. The operation will address issues in three of the four strategic objectives of the CPS. In particular, the policy measures supported by the loan are aligned with the CPS objectives of (i) increasing the volume and productivity of public and private investments; (ii) Improving the quality and expanding the provision of public services for low income households; and (iii) improving sustainable natural resource management and climate resilience. By supporting policies such as decentralized management, citizen participation, strengthened quality of expenditure, social assistance and environmental sustainability, the operation will contribute to improve such CPS outcome indicators for the whole country. The Bank has established a strong partnership with the State of Minas Gerais, and this operation would be the third in the Minas Gerais Partnership series 2. In fact, it would provide support to consolidate results and to continue an innovative result-based public sector management model that, after being adopted with Bank support by the State of Minas Gerais, is now being emulated by other states and municipalities. The proposed operation responds to the needs of the state Government of Minas Gerais (GoMG). The operation will help the GoMG reinforce fiscal discipline and public service delivery, in the face of increasing pressures on expenditure, and enable the State to develop programs which are both efficient and respond to the needs of citizens. It will support the improvement of the public financial management of the state and strengthen policies in the education and health sectors to deliver better services. By leveraging private sector financing the operation represents and innovative approach to subnational financing in, and allows the World Bank to provide more effective support with fewer resources. At the same time, it enables the State to begin to return to private capital markets, within a fiscally sustainable framework, and thus provides a possible example for other sub-national entities in. II. Proposed Objective(s) The proposed overall development objective of the operation is to promote fiscally, environmentally and socially inclusive sustainable development in the State of Minas Gerais, by means of third generation public sector reforms aimed at strengthening the quality of fiscal policy and public service delivery, while reducing inequality and promoting environmentally sustainable growth. III. Preliminary Description The proposed operation is a single-tranche operation designed to support the State of Minas Gerais in its efforts to promote fiscally, environmentally and socially inclusive sustainable development, by means of third generation public sector reforms aimed at strengthening the quality of fiscal policy and public service delivery, while reducing inequality and promoting environmentally sustainable growth. In addition to supporting the reform agenda it also will allow the Government to replace a costly and potentially unsustainable source of finance, with a transparent market based transaction, 2 The earlier two being the Minas Gerais Partnership for Development (P088543) and the Minas Gerais Partnership II SWAP (P ).

3 which will in addition ensure future fiscal sustainability and increase fiscal space for investment and improved service delivery. The intention is to use US$450 million of Bank resources to leverage additional resources up to a total value of approximately US$2.2 billion. The form of the proposed operation is either a stand-alone Development Policy Loan or a Policy Based Guarantee, depending upon agreement on the financing arrangements. In either case disbursement will take place, or the guarantee activated upon the Government s completion of prior policy actions, which will be set forth in the loan agreement. The four policy areas supported by this operation are described in the next section and in more detail in Table 7. These policy areas are: (i) Public Sector Management; (ii) Fiscal quality and sustainability; (iii) Environmental Sustainability; and (iv) Social Inclusion. The World Bank and GoMG have tentatively agreed upon the prior actions listed as conditions for presenting the operation to the Bank s Board for approval. The Government program goes well beyond the prior actions agreed with the Bank. Following good practice principles on conditionality the operation s policy matrix will use a limited number of prior actions that have been chosen according to their importance in achieving results. These actions are part of a comprehensive reform plan with a solid track record of implementation. Table: Policy Areas and Actions Objectives Prior Action Policy Pillar 1: Public Management Decentralize management reforms and policy actions Increase citizen participation in developing priorities Strengthen Human Resource Management in Education Policy Pillar 2: Fiscal Quality and Sustainability Increase the quality and effectiveness of expenditure Ensure investment projects are effective in achieving objectives of Prior Action 1. Creation of an Under-secretariat for Strategic Government Management (Subsecretaria de Gestão da Estratégia Governamental SEPLAG) (Delegated Law) Prior Action 2. Creation of 22 Strategic Management and Innovation Advisory Units (Delegated Law) Benchmark: Disaggregation of Minas Integrated Development Plan (Plan Mineiro de Desenvolvimento Integrado, or PMDI) by networks, with regional indicators Prior Action 3. Development of methodology for participatory management and hold the first two meetings of the Regional Committees of the pilots Benchmark: Creation of two Regional Committees (Decree) Benchmark: Signing a letter of intent by the Secretaries of State to implement 2 pilots Benchmark: Mapping of civil society organizations in two regions Benchmark: Regional Meeting with civil society organizations Benchmark: Appointment of 47 Directors of Personnel in the Regional Education Prior Action 4. Financial Management system (SIAD) module for the preparation of multi-year budget commitments implemented Benchmark: Definition of pilot methodology for assessing the quality of expenditures: construction of statistical models to assess the impact of spending in the results for per area (pilot to be in education) Benchmark: Implementation of intensive planning of government procurement in 12 state agencies, from the model of procedures for planning purchases Benchmark: Redesign of the model for negotiating the quality of public agreements results Benchmark: Mapping the policy needs in the territory to guide the allocation of resources Prior Action 5. Methodology for development and evaluation of projects funded by previous agreements with the Union with a total cost estimated at over R$ 5 million and institutional process to review these

4 Objectives Prior Action public policies million and institutional process to review these Benchmark: Budget and financial programming decree published Benchmark: Handbook of the "framework" published Policy Pillar 3: Environmental Sustainability Strengthen the capacity to Prior Action 6. Creation of the Under-Secretariat for Environmental Inspection manage environmental and Control (Subsecretaria de Controle e Fiscalização Ambiental) challenges Benchmark: Creation of the Secretariat for Management and Settlement (Subsecretaria de Gestão e Regularização) Benchmark: Physical centralization of regional units of IGAM, FEAM, and IEF Create incentives for the generation of new business related to environmental sustainability and low carbon economy Policy Pillar 4: Social Inclusion Reducing poverty in the most deprived areas, so as to reduce exclusion and regional inequalities Create an efficient and equitable education system guided by international quality and cost standards Environmental Prior Action 7. Development of implementing regulations for Law 18365/09 which virtually bans the use of charcoal from deforestation by 2018 Prior Action 8. Implementation of Minas Basic Welfare system (Piso Mineiro da Assistência Social), through co-financing of infrastructure for social assistance to complement federal and municipal resources Benchmark: Development of Map Project of Social Deprivation of the State of Minas Gerais (Projeto Mapa das Privações Sociais do Estado de Minas Gerais), in order to identify the main principal needs and location of the vulnerable population Benchmark: Implementation of local continued specialized training of public school teachers statewide Benchmark: Selection of 100 Professores da Familía for training Benchmark: Training of teachers for the monitoring and support of families. Benchmark: Follow-up of families with low levels of education IV. Poverty and Social Impacts and Environment Aspects Poverty and Vulnerability As shown below (Figure 1), in recent years poverty and extreme poverty have declined in the state of Minas Gerais. 3 Conversely, per capita income, life expectancy, school attendance and literacy rates, and the state Human Development Index have improved. Figure 1: Poverty and Extreme Poverty Rates Table 1: Selected Socioeconomic Indicators MG Table 1: Selected Socioeconomic Indicators Minas Gerais Per capita Income (R$) Life expectancy (in years) School attendance rate ( percent) Literacy rate for 15+ years population HDI Source: Fundação João Pinheiro/CBMM, Perfil de Minas Gerais 2010: A Guide to the Economy of Minas Gerais. 3 Source: Comunicados do Ipea no. 58: Dimensão, evolução e projeção da pobreza por região e por estado no Brasil. Brasília: IPEA, 13 de julho de 2010.

5 However, in 2010, 4.6 percent of the nearly 19.6 million people in the state population continued to live under the extreme poverty line representing 5.6 percent of the extremely poor ian population. The state rural population was overrepresented among the extremely poor; they represented just 16.7 percent of the state population, but 60 percent of the extremely poor people. Illiteracy rate reached 7.0 percent of the people aged 15 years and over and 37.1 percent of the people aged 10 years and over had four or less years of schooling. Average schooling equals 6.5 years in the state, but just 4.8 years among the rural population. Infant mortality rate equaled 14.5 deaths per 1,000 live births. 4 As shown in Figure municipal HDI as well as in Graph per capita Gross Domestic Product for the state and its planning regions, poverty continues to be unequally distributed by regions within the state. The North of Minas and the Jequitinhonha and Mucuri valleys, at the Northeast portion of the territory, are its most deprived areas. Figure 2: 2000 Municipal HDI Minas Gerais 5 Figure 3: Per capita Gross Domestic Product Year State and Planning Regions The state s open unemployment rate has also declined. In 2008, nearly 64 percent of the working-age people were economically active in the state and about 94 percent of them were actually employed. However, 64.4 percent of the employed population was concentrated on the two or less minimum wages income group and just 38.6 percent of them had a job in the formal labor market. Micro and small size business which counted for 97.6 percent of the business open in the state comprised 41.9 percent of the formal labor market, but, in the average, paid the smaller wages (R$695 or 66 percent of the average wage paid in the state). Women earn smaller wages than men in both the formal and informal sectors. 6 PSIA Methodology During project preparation the team will expand and improve the desk review of secondary data as well as carry on interviews and focus groups consultations with key stakeholders and experts to assess the potential distributive effects of the policies supported by this operation. The analysis will focus on the role that better school education, professional 4 Comparatively, the ian rate was 15.0 deaths per 1,000 live births. 5 Source: UNDP, Atlas do Desenvolvimento Humano Sources: Fundação João Pinheiro/CBMM, Perfil de Minas Gerais 2010: A Guide to the Economy of Minas Gerais, Belo Horizonte: FJP, 2010; and SEBRAE, Anuário Estatístico Micro e Pequena Empresa, Belo Horizonte: SEBRAE/MG, 2009.

6 training, opportunities in the formal labor market, social assistance networks and popular participation in public policy decision making can play on poverty reduction. The complementary objective will be to disaggregate the distributive effects of these policies on poverty according to factors such as rural/urban situation, gender, generation, and ethnicity, which play a determinant role on poverty intensity and social inequality. Social Safeguards It is not expected that the policies supported by this operation will bring adverse consequences related with direct impacts related with the involuntary taking of land or Indigenous People. During preparation, the team will assess (a) whether these policies may in the future promote activities that might have such direct adverse impacts; (b) the state legal framework and institutional capacity to deal with these issues; and, (c) the needs of institutional strengthening and capacity building to address them. The provisions of OP 8.60 on Development Policy apply to this operation. The policies and reforms supported by this operation, which promotes improvements in public sector management, quality and fiscal sustainability, environmental sustainability and social inclusion, have great relevance to the Minas Gerais State environmental management enhancement. It is expected that they will produce net positive environmental effects in the whole State. Minas Gerais State has a comprehensive and detailed environmental policy framework addressing environmental licensing, land use planning, economic activities regulation, and regional development. The State has a comprehensive Environmental System (SISEMA) formed by the following entities: the State Secretariat for the Environment and Sustainable Development (SEMAD), the State Foundation for the Environment (FEAM), the Minas Gerais Institute for Water Management (IGAM), the State Forest Institute (IEF), the State Council for Environmental Policy (COPAM), the Environmental Management Nuclei (NGAs) of State secretariats forming COPAM; the Military Environmental Police; and the Hydrographic Basin Committees and Agencies. The policies supported by this operation, strengthening public administration capacity to manage environmental risks and promote green growth, and supporting introduction of innovative programs to reduce regional inequalities do not pose a risk of intensifying the existing environmental challenges. On the other hand, they may have direct positive impacts on the State environmental conditions. Economic development policies could result in adverse environmental effects, due to their nature. However, Minas Gerais State has a comprehensive environmental policy framework, well-defined provisions and a sound institutional capacity to internalize environmental and social considerations during the policies implementation. The Minas Gerais environmental legal and regulatory and institutional capacity indicates that the proposed program can be developed in accordance to appropriate environmental management practices, minimizing negative environmental effects, mitigating implementation impacts, and producing net positive results to the society. V. Tentative financing Source: ($m.)

7 Borrower 0 International Bank for Reconstruction and Development 450 Borrower/Recipient Others (specifiy) Total 450 VI. Contact point World Bank Contact: Roland N. Clarke Title: Lead Public Sector Management Specialist Tel: (202) Fax: (202) rclarke@worldbank.org Borrower Contact: Fernanda Cimini Subsecretaria de Investimentos Estratégicos Secretaria de Estado de Desenvolvimento Econômico Minas Gerais Tel: +55 (31) fernanda.cimini@desenvolvimento.mg.gov.br VII. For more information contact: The InfoShop The World Bank 1818 H Street, NW Washington, D.C Telephone: (202) Fax: (202) Web: