PROGRAM INFORMATION DOCUMENT (PID) APPRAISAL STAGE <Date> Report No.: AB6998. Third Minas Gerais Development Partnership DPL Region

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1 Public Disclosure Authorized Public Disclosure Authorized Public Disclosure Authorized Public Disclosure Authorized PROGRAM INFORMATION DOCUMENT (PID) APPRAISAL STAGE <Date> Report No.: AB6998 Operation Name Third Minas Gerais Development Partnership DPL Region LATIN AMERICA AND CARIBBEAN Country Brazil 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 State of Minas Gerais Subsecretaria de Investimentos Estrati Minas Gerais Brazil Tel: +55 (31) Implementing Agency EPLAG Secretaria de Estado de Planejamento e Gestao de Minas Gerais (SEPLAG) Rua Bernardo Guimaraes, 2731 Bairro Santo Agostinho Belo Horizonte Minas Gerais Brazil Tel: (55-31) ana.cristina@planejamento.mg.gov.br Date PID Prepared February 29, 2012 Estimated Date of Appraisal April 24, 2012 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. Other Decision {Optional} Teams can add more if they wish or delete this row if no other decisions are added I. Country and Sector Background Minas Gerais is one of Brazil s largest and economically most important states and has benefited from Brazil s improved growth and macroeconomic stability. The state has the country s second largest population (19.5 million people, equivalent to 10 percent of Brazil s population in 2010 census). The state s economy is the third largest in Brazil and comparable to the size of Peru. Minas Gerais can be considered a microcosm of Brazil. Its GDP per capita is slightly lower than that of Brazil as a whole (US$7,176 compared with US$8,472 in Moreover, Minas

2 contains deep regional disparities paralleling those at the national level. For example, Minas has a poor Northern region with similar conditions of extreme poverty, subsistence agriculture, semiarid climate and intermittent drought experienced in the Brazilian Northeast, the poorest region in the country. At the other extreme, the state contains some of Brazil s most dynamic economic areas (for example, the Triangulo Mineiro and the metropolitan area of Belo Horizonte, the state s capital). Minas Gerais has made important advances, particularly in developing effective management practices, in the last eight years. From a situation of mis-management and near bankruptcy prior to 2003, Minas Gerais was able to restructure both its fiscal position and management processes for service delivery, with the result that it became a model for other states in Brazil. Even so, the GOMG recognizes that additional reforms and innovations are needed to ensure the sustainability of its recent achievements and for the State s continued social and economic development. The advances made in the fiscal, public sector management and service delivery areas co-exist with persisting development challenges associated with poverty, inequality, health services and economic diversification. The Government is therefore faced with a dual challenge of ensuring sustainability of the reform process and intensifying its public sector innovation path to set the bases for further development. II. Operation Objectives The objective of the proposed operation is to assist the Government of Minas Gerais to deepen its innovative management model, strengthen its budget management, and sectoral policy management in the areas of social inclusion, environmental management and metropolitan governance. Each of these objectives is directly linked to increasing the quality of service delivery, and ensuring that the gains made in recent years can be sustained into the future, beyond the current administration. In addition the operation will be supporting reforms, which will provide useful lessons and the possibility of transfers of knowledge to other States in Brazil. The proposed operation is a stand-alone development policy loan, which is part of a quasiprogrammatic long-term engagement with the State of Minas Gerais. The four policy areas supported by this DPL are are: (i) Strengthening Public Sector and Budgetary Management; (ii) Promoting Social Inclusion; (iii) Increasing Environmental Sustainability; and (iv) Developing a Metropolitan Governance Framework. The World Bank and GOMG have tentatively agreed upon the prior actions listed as conditions for presenting the DPL to the Bank s Board for approval. The central theme of the operation is to support the deepening of the management model developed over the last eight years. The third generation of management reforms initiated in 2011 aim to increase the institutional strength of the reforms by ensuring that the practice of management of results is embedded in each secretariat and agency, rather than being driven from the center as in the past. In each of the four pillars of the operation the institutional strengthening of management is seen to be the key to improving service delivery.

3 Summary of the Proposed Operation Objectives, Policy Areas and Prior Actions Objectives Prior Actions for Loan Disbursement Policy Area 1. Strengthening Public Sector and Budgetary Management 1.1 Increasing the robustness Prior Action Strategic Management and Innovation Units have been and sustainability of the created through Delegated Law 180/2011 and made operational by relevant Results Based Management competency decrees and agreed work-plans. Model 1.2 Increasing the predictability and control of budget execution 1.3 Increasing citizen participation in the definition of regional priorities Policy Area 2. Promoting Social Inclusion 2.1 Reduce poverty in the most disadvantaged areas so as to reduce exclusion and regional inequalities 2.2 Strengthening the management of education Policy Area 3. Increasing Environmental Sustainability 3.1 Increase the capacity of the State to manage environmental challenges Prior Action 2. Adoption of the compulsory requirement for all spending units to implement planning of intra-year expenditure and to register and program all contractual commitments, as required by Decree 45,906 of February 6, Prior Action 3. Adoption of the compulsory requirement for screening and prior evaluation of costs and impacts of new investments co-financed by the Federal Government (convênios) whose value exceeds R$5 million, as required by Decree 45,906 of February 6, Prior Action 4. Implementation of participatory processes in two regions of the State following an approved methodology, as evidenced by Decrees creating the two regional committees and minutes of Regional Meetings with Civil Society Organizations. Prior Action 5. Plans for social assistance under the Piso Mineiro signed with at least 214 out of 853 of municipalities, under Law and Resolution No Prior Action 6. Establishment of the Door-to-Door program through Decree no. 45,694 of August 2011 Prior Action 7. Institutionalization and strengthening of meritocratic processes for the selection of regional superintendents and school directors as provided for in the Delegated Law 182 of January 21, 2011 and SEE Resolution no of March 22, 2011 and made operational through the Edital Nº 02 of May 21, 2011 and Governor Acts of January 21, 2012 nominating regional superintendents and school directors. Prior Action 8. The Under-Secretariats of (i) Environmental Control and inspection; and (ii) Management and Regularization have been created through Delegated Law 180 of January 20 th, 2011 and theirs competencies institutionalized through Decree no. 45,824 of December 20 th, 2011 Prior Action 9. Creation through Decree XX of [day/month], 2012 of mechanisms to develop forest plantation to supply at least 95 percent of charcoal consumed by the steel industry in the State by Policy Area 4. Developing a Metropolitan Governance Framework 4.1 Strengthen Metropolitan Governance to enable the coordination of State and Municipal public policies in the Metropolitan Region of Belo Horizonte (RMBH) Prior Action 10.Approval by the RMBH Metropolitan Development Council of the Integrated Regional Development Master Plan for the Metropolitan Region of Belo Horizonte (PDDI). 2 1 This prior action is expected to be completed by the time of appraisal. 2 The PDDI is a strategic plan for the integrated development of the RMBH. As such, it presents guidelines and makes suggestions on public policies and investments for promoting the development of the region. Nonetheless, the PDDI is not an actual investment plan.

4 III. Rationale for Bank Involvement The State of Minas Gerais has had a long standing partnership with the World Bank Group. The partnership has been one of long term engagement and support for innovative approaches to reform, which are seen as models by other States. The Country Partnership Strategy (CPS) for Brazil recognizes significant achievements in tackling development challenges using innovative approaches. 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 issues. The aim of this operation is to maintain the support for the reforms being carried out by Minas Gerais, and to develop solutions to development issues, which can be used by other States and indeed other countries. Although Minas Gerais is a relatively well developed state the challenges, which it faces reflect those of Brazil as a whole (both in terms of development of institutions and with regard to poverty and marginalization). By working with a State such as Minas Gerais with relatively high capacity, the policies and innovations being supported can serve as models for other States in Brazil. The DPL will help Minas Gerais to further develop and institutionalize its capacity for management and service delivery, while at the same time reinforce fiscal and financial discipline, in the face of increasing pressures on expenditure. The Bank team has been working very closely with the Agence Française de Développement (AFD) which is preparing a parallel financing of 300 million to support the reduction of social and regional inequalities in the state of Minas Gerais. The mandate of AFD is broadly to finance investments leading to inclusive growth in an environmentally sustainable manner. Therefore, this operation will have a budget support format and will be based on the Government s strategy to broaden the coverage of basic infrastructure and housing in the poorest regions of the State. The operation will also support the refinancing of the State s debt with CEMIG (the energy company of Minas Gerais). IV. Tentative financing Source: ($m.) Borrower 0 International Bank for Reconstruction and Development 450 Borrower/Recipient IBRD Others (specifiy) Total 450 V. Tranches (if applicable) ($m.) First Tranche 450 Second Tranche Etc. Total

5 VI. Institutional and Implementation Arrangements The Secretariat of Planning and Management (SEPLAG) will be responsible for overall implementation of the proposed operation and for reporting progress and coordinating actions with the other line secretariats involved in the program. SEPLAG will lead the actions under Policy Area 1 (Budget and Public Sector Management), closely monitor implementation of the program and gather the necessary evidence and data. The Secretariats of Social Development (SEDESE) and Education (SEE) will be jointly responsible for the implementation of the reforms under the second policy area (Social and Productive Inclusion). The State Secretariat for Environment and Sustainable Development (SEMAD) and the State Institute for Forest (IEF) will lead implementation of the reforms under the third policy area (Environmental Sustainability). Finally, the Secretariat for Metropolitan Governance (SEGEM) and the Development Agency of the Metropolitan Region of Belo Horizonte (ARMBH) will be responsible for the actions under the fourth policy area (Metropolitan Governance). VII. Risks and Risk Mitigation Economic and fiscal risks: Minas Gerais has a considerable exposure to the world economy and the domestic macroeconomic situation. A major global slowdown, particularly affecting China (and commodity prices) could have an impact on the mining and other export industries as well as on public revenues, particularly through the impact on the State s value added tax (ICMS). Equally, a reduction of the rate of growth of the Brazilian economy, due to either external or internal macroeconomic policy shocks, could have an impact in Minas Gerais. Nevertheless strong revenue collection and improved efficiency of tax administration, as well as the ability of the state to recover quickly from previous downturns, and its good economic management track record over the past 9 years mitigate this risk. Additional fiscal risks are associated with national pressures on personnel expenditures, including possible new legally mandated minimum salaries for certain types of public servants, particularly in the area of security personnel. Nevertheless the Government has shown in the past that it has the capacity to manage such pressures in the past, including through the implementation of some of the reforms supported by this operation. Political and institutional risk: The main political and institutional risk in the State of Minas Gerais is that the implementation of the reform agenda depends upon a relatively small number of senior officials including the Governor and key secretaries. In particular, the success of various components of the reform program depends on the buy-in by line secretariats. Examples include the de-concentration strategy and the implementation of social protection measures and citizen participation processes. Changes in a significant number of key government officials could weaken the reform efforts. This risk is mitigated by the fact that over the past nine years the Government has experienced stability in its senior management and has been able to build strong support for its strategies. Moreover, the key officials have been working with the Governor for a long period of time and are less likely to leave the administration. While there is a risk that the reform program faces internal obstacles, these would most likely be localized and therefore, easier to be addressed by the strong center of government. The fact that a significant number of professional managers (graduating from the State School of Government and recruited as public entrepreneurs) have been hired and are progressively spreading across the public administration also facilitates the buy-in from line secretariats, since these civil servants are more

6 attuned to more modern public sector management practices. Continued World Bank support to the reform program will also mitigate these risks. VIII. Poverty and Social Impacts and Environment Aspects The overall impact of policies supported by this operation are expected to be very positive for poverty alleviation and reduction of social and regional inequalities in Minas Gerais as they address key constraints to sustainable regional development, social inclusion and democratic processes of public governance. The operation will support policy changes that: (i) increase citizen participation in policy planning and decision-making, strengthen civil control of public policies, and promote stronger citizenship; (ii) improve state fiscal efficiency, quality and sustainability; (iii) promote environmental sustainability through the creation of incentives and instruments that facilitate compliance with measures for low carbon growth, which are key for core activities of the state economy (pig-iron, iron-alloy, and steel); (iv) promote social inclusion by tailoring social assistance and educational policies to reach the most vulnerable social groups in the most depressed municipalities; and (v) reduce regional disparities, by focusing on the most deprived regions and poorest areas of the state. They are expected to bring positive social and economic impacts for the most vulnerable population. Stakeholder consultations revealed that policy changes in public sector management, civil participation, and social inclusion face no opposition and are expected to have positive social and distributional impacts. Participatory processes are broadly conceived of as able to increase the legitimacy for and the social control over policy planning and implementation, to circumvent political interferences and patronage, to improve state responses to actual local and regional needs as they would increase transparency, civil participation, social ownership and accountability. Policy reforms related with Metropolitan Governance have been set through a widely participatory process and are also expected to bring overall positive social impacts in metropolitan development. The proposed policies will strength the coordination between state and municipal agencies, allow more coherence and synergy among the municipal Master Plans to be developed, and increase civil society s engagement in the decision-making processes about metropolitan issues. The Integrated Development Master Plan of the Belo Horizonte Metropolitan Region (PDDI) will guide this process of strengthening metropolitan governance and was elaborated in a very participatory way and engaged thousands of representatives of the civil society. Positive social outcomes are expected from better metropolitan coordination and governance, as it will address key issues and challenges related with precarious living conditions in more peripheral areas of the metropolitan region. Responses to policy changes proposed for promoting environmental sustainability and green growth are less consensual. The consultations carried out suggest broad and general support for policy changes related with the centralization of the environmental regulatory and inspection functions. The expected results are (i) more effective and efficient control/response and lower impunity for crimes against the environment; (ii) reduction of unfair competition faced from those who reduce their production costs by not complying with environmental legislation; and (iii) closer and easier access to regulatory and inspection state agencies, with a quicker response to demands. It is expected that by strengthening the organization and management of environmental controls and by increasing the responsiveness of the State Government to environmental challenges, these policies can re-enforce the abidance to environmental legislation

7 and have the potential to expand forested protected areas (Legal Reserves and Permanent Protected Areas). In consequence, they may reduce pressures over natural resources due to the expansion of both the agrarian frontier and the forestry sector. As the livelihood and the wellbeing of traditional communities and family farmers rely mostly on these natural resources, these policies may bring benefits to these more vulnerable groups in rural areas. Nonetheless, and due to historical trends in the development of the forest sector, stakeholders diverge on the expected distributional effects of policy changes related with the development of the implementing regulation and institutional arrangements to give effect to the Law /09, banning the use of charcoal from non-renewable resources by The development of the forest sector is tied to a legacy of environmental degradation and frustrated expectations on job creation, poverty alleviation and socioeconomic development in the State s most depressed regions, which have fueled a heated debate. On the one hand, some social movements and environmental NGOs remain distrustful, reluctant, or fiercely opposed to incentives to renewable charcoal as they associate forestry development for energetic uses to adverse environmental and social impacts. On the other, supporters of the forest sector and the ban on the use of charcoal from non-renewable resources have emphasized the vital role that the metallurgic and forest sectors play on the economy of many municipalities in the most depressed regions of the State. Supporters have also highlighted the positive roles renewable forests play as carbon sinks in a global warming scenario; in the protection and recovery of areas degraded by erosion, extensive cattle raising and mining; in improving soil fertility, nutrient cycling, watershed and biodiversity protection; and as barriers against pressures over native forests. Finally, they argued that socioeconomic conditions have improved better than state averages in municipalities where forestry development is the core economic activity; stressed the ongoing improvements in labor relationships at the sector; and highlighted the beneficial social and environmental outcomes that can be expected from broader incentives and expanded use of renewable charcoal. Despite these controversies and risks, the policy reforms proposed to promote green growth by banning the use of charcoal from non-renewable resources are expected to bring positive impacts and benefit some parcels of the poor rural population in the most deprived state regions. Environment Aspects Overall, the specific policy reforms supported by this development policy loan are expected to have significant and positive environmental impacts because they promote improvements in public sector management and environmental compliance. These are of great relevance to improve environmental sustainability. The policies supported by this operation, strengthening public administration capacity to manage environmental risks and promote green growth, should have direct positive impacts on the State environmental conditions. Strengthening public sector management capacity should increase the efficiency and effectiveness of the State environmental management programs. The main environmental challenges identified in Minas Gerais are related to unplanned occupation of environmentally sensitive areas. Improvements in governance and social sector coordination should generate positive regional effects, improving land use regulations enforcement and decrease on deforestation.

8 Environmental regulation enforcement and monitoring is crucial. The creation of the Under- Secretariat for Environmental Control and Supervision is key to improving environmental compliance. The associated programs can also contribute to protection of the region s environment. The strengthening of project evaluation and project management capacity has positive effects on environmental protection and the inclusion of environmental aspects in project preparation is plays an important role to assure the State s sustainable development. The proposed measure to promote the production of charcoal from plantations should also promote positive environmental results. It should contribute to decreasing the pressure for deforestation of the threatened Cerrado biome while decreasing the GHG emissions of the State, leading to green growth. Without this measure, the increased enforcement of environmental law would curb deforestation, but would have the result of promoting the use of coal to replace the charcoal, leading to more GHG emissions. 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. IX. 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 Brazil Tel: +55 (31) fernanda.cimini@desenvolvimento.mg.gov.br X. For more information contact: The InfoShop The World Bank 1818 H Street, NW Washington, D.C Telephone: (202) Fax: (202) Web: