Document of The World Bank FOR OFFICIAL USE ONLY Repor No. 11714-BR STAF APPRAISAL REPORT BRAZIL -MS GERAIS S MICIPAL MANAGMNT AN) ENVIRONM INFRASTRUCTURE PROJECT JUNE 21, 1993 MICROFICHE CODY Report No.:11714-BR Type: (SAR) Title: MINAS GERAIS MUNICIPAL MANAGEM Author: SHEEHAN, MARY Ext.:39383 Room:I 7131 Dept.:LA1IN Infrastructure Operations Division Country Department I Latin America and the Caribbean Regional Office Thi document ha a restdcted distibution sod may be used by recpients only in the performance of their otflkia duties. Its contents may not oterwise be dbisosed withd Wodd Bank autbhorian CURRENCY EOUIVALENTS January 15, 1993 Cunrency Unit = Cnrzeiro (CR$) US$1.00 = CR$13,440.86 CR$1.00 = US$0.0000744 WEIGHTS AND MEASURES Metric System ISCAL MR January 1 to Deember 31 ABBREVIATIONS AND ACRONYMS AMM - Associado Mlieira de Munidpios - State Association of Municipalities BDMO - Banco de Deenvolmeno de Mias Gerais - Minas Geris Sta.? Development Bank CEP - Catxa Econonmca Federal - Federal Savings Bank CEMIG - Companhia Energica de Minas GeraJs - Minas Geris State Energy Company CODEMA - Consefio Munipl de Desenvolvimento do Meio-Ambiente - Municipal Environmental Development Council COPAM - Conselho Eswad de Potwca Anbiental - State Eavironmental Policy Council COPASA - Companhia de Saneamento de Minas Gerais - Mnas Geais State Water Company DIU - Depaawmeo de Infraesrrutura - nfrastrcture Department (Project Unit) ELA/RIMA - Estudo de Impacto AknbientalRelatorio de Impacto do Meo-Ansbiente - Environmental Impact Assessment FEAM - Fundag4o Estadual do Melo-Ambente - State Environmental Foundation 1P - Fundaf,o Joto Pinheiro - Joao Pinheiro Foundation FMIS - Fimancial Management Information System PNS - Fundag'o Nacional de Saude - National Health Foundation FPM - Fundo de Panicipa$o MunWal - Municipal Participation Fund GOB - Government of Brazil ICMS - Imposto sobre Cbrulgo de Mercadorias - Value-Added Tax IGP-M - Indice Geral de Pre'os de Mercado - General Market Price Index IPTU - Iniposto sobre Propriedade Terriorial Urbana - Real Property Tax PAE - Pano de Apdo Es*rategia - Strategic Action Plan PDO - Programa de Desenwolvbnento Operacional - Operatona Improvement Program PLANASA - Plano Nacionl de Sanewnento - National Sanitation Plan SEAM - Secrearia Esdad de Assuntos Mukicipais - State Secretariat for Municipal Affairs SEP - Secretaria de Estado da Fazenda - State Sereariat of Fmance SEPLAN - Secretaria de Estado do Plane3amento - State Secretariat of Planning SErOP - Secretaria de Estado de Transporte e Obras Pdblicas - State Seretaiat for Transport and Public Wodrs SOMMA - Programa de Saneanento B6sicow Organiza$o e ModemdWa4o Munipal - Municipal Management and Environmental Infrastructre Program FOR Oms:IL USE ONLY NG ERI BU MPA AMEN RNMNTiOL 22SsUCnoMMM srs; APPRAISAL Tabk o clt"tsX LOAN AND PROJECr SUNM&RY ................. i L PROJECT O UE .................................. 4.................. 1 IL THE URBAN S CQ ................................. -.2 A. Intf e ........ 2 B. Urbanatdon: StUcue:andTrends ...... ............ .................. 2 C. Provision of Urban Jhnstructu and Suvios .... .............. 3 D. De..n.a..zan ...... . ........... 3 .L 1he ----o---- Conteo .. ... ............. 4 P. Se ategy: A MeIum-Tem Vision for te Role of Municipalities . . ................ S G. TheStamefOf Gerais .. . . .............. 6 H. Bank E rie In the UrbanS . ................... 9 L U*aSectrStrategy ............ ..... 9 moL ......................... 10.. . . . .. . . . . . . .. . . . . .1 A. Proje Objeives and aonale ........................... 10 B. Ptoj Descuon . ......... .1......... I C. ProjeDesFeatms ........ .......................... . 14 D. Ppojed Costs andFIncIngPlan ......... ............ 14 E. Ml Borovr and the Execing Ageny ........ . . ....................... . 16 F. Sau sofProjectPrpaaon ........................... . . . ... 16 IV. ZBME= ........ .......................... 17 A.. MISOLAAProgrn .................................. 17 B. The SOMMA Municipal Dvepent Fund .................................. 17 Tsreport s basd on th fidinp of an appais maion which visd rail fiom Januq 12-22, 1993, conidsing of d. Sheehan, tk managw (LAIN; B. Varon Lenis, sanltary enginwe R. Gilbet, economist; and V. Coelho, vir aspedida (onmunts). LA. Caalo (LLA), M. Sugar (LOAEL), M. Fra' (on leave), E. Codato (LAIIN, T. Campbell (IATAD) and E. Mbi (AFSCO) also p*ipated in projec prepadon.L .Michelse, S. Abmad, L Lewin and A. TWunt (LAI"N hped with report prparaton. The Pee Reviewers for the poject wear . hks ad C. Butne (UM ). G. T. Nankan (SASVP) was the PrW's Lead Advisor. A. Faiz, 0. Grmesand R. B. Stchn m th managing Division Chief, Projec Adviso, and Deatme Dircor, respectively, forthe project Ths document ha a retted dstbutioa may be used by recipints only in the performane of ther offici duties Its contets may noot erwe be discosed without World Bnak authoizati C. BDMG's Appya7 iPme ...................................... 19 D. Lega .A rgI ens .............. ........ . ...... ......... . ... . . 21 E. Procurmm ......... ................... ..... ............ 22 F. II zne .............................. 24 G. AcounIg and Armaeients ................................... 24 H. Monihing, Mid-Taom Reew adEvauan ........Eaao...................... 25 I. entaImpamcStudies ............................. * S. 25 J. mplementationSchedule ........ ................ ............... 26 V. FINANOM ASPEEC OF THE ZRODEC ...................... 26 A. StaeFinances ................ ....*, 26 B. MunicipalFinanes .... .. .2............... 27 C. CostRecvery Policy .........*..............* 28 D. DIne gofSOlBIA .....*............... ........ 28 E. Sustnability ................................... ... 29 VL PEENBEBMDR AM .. .............. ........ 29 A. Fiancialands onaliact .......................... ....... . 29 B. Einnetnd Hedth Bnef .................................... 29 C. Implicatonsfr SectordaPoUh .. .................. ............. 30 D. PovertynImpac .................. ......... . 30 E. EconomicBenefits ....................... 30 F. Risi ...... ....... ......#***#.**.......... 30 V ... . ............ ; ...... . 31 TABLES: 2.1 M icdpal Revenue Sources ..................... .. ..... .. ........ . 4 2.2 RelativeImpotnanceofMunicipalitieslInBrazibnPublicaFin e ...................... S 3.1 auuCononen ............................................... 12 3.2 ProjectCosts byCompontet ......................*...... 14 3.3 Project Financing Plan ... .................................... IS 4.1 Sub-ILoan Tems and Conditions . . .......................................... 18 4.2 Project Costs by Mement and P...Me...... ...................... . 22 5.1 MunIcipa Revenues and Expenditrs In I s Geais ........ . . ........................... . 27 ANNEXES: .... ..................................................... 33 1. Pgie Orig 1A. lhe Projein Support of Decentrlization . ............. . ......... *.*..... 35 1B. lesonmLeaed from Previous Projec .... .. ...... ..... O*. ..*. 39 2. The Urban Sector in Badl d in the Stae of Mn Gewais 2A. Municipal Fisa Regime: Tax Asslgnent In Brzi ....... . . ........................ . 44 2B. EvoludonoftheSizeof the TheLevels,ofGovnmmesatn Brazi ................. 45 2C. MInp tesi StatandIheirPbpolstionbyzSize Grp .......... .......... 46 2D. InCatos of Reative Wedth in tho Stft . ............................... . 47 2E. Wat and Sewerage Covege Levels and Instttona ArrngnI s in the State ........ 48 2F. PolicySttementofDecentaiodnand MmicipalStg goftheStat .......... 49 Pago No. 3. Pxoes 3A. ProjectDeslgnMatix ............................................. 54 3B. DetalledProjectDescription ......................................... 55 3C. DetiedEstimateofProjectCosts ........... .......................... 64 3D. Oudine Term of Refence r Studies ..................... 66 3E. BDMG: he Exeuting Agency . ...................................... 69 3P. Ihe FwdaAo Jobo Pinheiro ......................................... 77 3G. COPASA Financal Statements and Plan .................................. 79 4A. SOMM COrgankAtion Chart ......................................... 82 4B. Ptoject ksittional and plem on A ge........................ 83 4C. SOMMA OionalArrgenens . ..... ................................ 84 4D. SOMMAA Fd Sn ation and Cash Flow Diagram ........................... 97 4E. Etimated Sample Contac Profles ..... ................................ 99 4F. Esimated Disbursement Schedule ...................................... 100 4G. Selected Key Monitoring ndicators ..................................... 101 4H. Project Schedule . . .................................... 103 41. Supervision Plan .,................ 104 SA. Fhiancial Situaion of the State ............... 105 SB. Structure of Municipal Revenues and Expenditure in Selected Mucipaities in the State ... 107 SC. Debt Capacity of Municipalities in the First-Year Pogram ............... 108 S5D. Cost-Recovery Instrunments ............... 109 6. 2ect Justification 6A. Eoonomic and Financia Evaluation of Sub-Projects ......... ................. 110 6B. EnvironmentalAspects ............... 113 7. Selected Documents in the Project File ..... ........... 115 MAP: Economic regions and selected cities in the State of Minas Gerais, IBRD Map No. 24654. IgguzK: oStat of Minas Garas. Mmy: Banco de Desometo de Mas Gerais (BDMG). Amddeft: Municpaities in Minn (ends and seled SSta agenie. Mimi: US$150.0 mtaiion equivalent. Tems Repayable in 1S years, inlung five yeam of grace, at te Bank's standard vaible lnteredt rate. C!W2ee0ves: The objectives of tie proposed proj am to: (a) skengthen amuicipl finnca _ in support of the recn dectralihrion ass retforasce tothrouhcesohica mobiiatn, and tning amnd m tves for efficent allocatn of tesours for both cuent expedture and cap ita nvestment; and (b) Improve II II eniomnal ueeti o u,tms develomen of a cohereat Stat strategy for loed provison of wawt and swwm services, Investment in porty basic sanion Infastructuae, and provision of tehcalbin formunpa a dii tn onvironmdenal ien addon, the project ais to begin mobiln private resource tot municpl service pvion, te cooperative regional service provson in mal, institutionally weaker muncipa nd initiate tr of muniipal magemen skls to the lessdeveiloped North of the Stat. Hon: Tbe proposed projet would conis of five coponents: (a) an inonl dml_gmo m to upgrade municipal financial administrtin and improve municipa manan and envionmena plnning; (b) an h IM Ju imo 9mm ut p d v c sm ad relatd services, pmarly water, seworuge, draing, solid waste, seet pavin ad lhting in the State's muniia; (c) "1 gm tmoI test pivate sector prviso of muniipal sevs, and regional cooperative EInin runr Nor ; and (d) and (o) tw ggfe focuing on: the devewopment of a Stateide w stra for local proviion of water and we services; and mediumem opdmDs for municipal nfrastutu finance. Terms: Th SSte would use Bank funds to capitaie a municp develkope fond, managed by the EDM, whih wold make sub-loans to munwiipalities and selected St ac. Te loans would be relent at a varibl inest rat of about 12% in ral tms (ajusted for inflaon, and nding a spread to cover the costs of program adminisraion and foig exchae rs) adjusted binally for tms of five, ten and flfleen years (depending on tpe of Ivstkent), including on to ee yea gace. Bam IThe pincipal beneft of te ptoposed project would ber (a) enhanced municp resource mobilization as a result of inrsed prperty ta and use- g reveus; and (b) geater dficienoy in _anaSemat of cuen expendtur and prortzat in of in . It e project's enfructur investments would have dgnificant positve impact on envir conditions In the Sta. Benefits would also incude increased access of a largp poton of urban poor to basicnfiatuctur services. Decu of th selection of tho Stao of Mims Genie, te project would address eneeds of a broad cros-section of B ra's municipatie. t s expetd that about 150 of the munIcipalIties (tho with popuation over 20,000), repmetng about 75% of to Stae populton, would padcipate In the enfiukuctm compone, while about 300 nmunipali, or aboutt 90% of the State's populton would padcipate in the oional devdopment component (I) I~~~~~~~~~~rer IIE I It An NVRONNMM TLnr uPRr L PROJECT ORIGIN 1.1 Brazil's 1988 cnst n ro bamaa entd th monc of munIcipalitIes, giving them bot gree resposbilIties and eased revemes tc i1fil their new reponsibil l hese reforms are estimod to leavo ui les bet off in 1993 tham they w In 1989 by about one-third, on average, lagely fom edea and sta tafrs but also fm nowly-rated own sources. esponsIbites which peious had been delat to higher evds of pvemet due to lack of loca reso s ad Bris centralistc system - in pa uar in the area of provison of hsuctre and soca savices - are now back In the hands of municipa mayors. The dhalleg I fbr municipalties to provide these servc efficiendy, i.e., I ingly relying on own rather a tansfer rsources, borowing prudeny. _ d, Iesting in cost-effective projects, congtctng- out atd pdv szn savi where oVWh. 1.2 he poposed project ge out of the Min Geras State Govenmens dual objectives of supporting sound fhnancial m_emnua and fisc r ib at the loca level - which diminishes the burden of servi provsion on Stte resources - while adsing preing basic sanitaion needs. Alhoug war suWly cover is high (94% of the urban population), sawage collection ad treatme (53% and 0.5%, respctivdy) ar lower n ohr states i m tive siz and wealth. Fw tmore, Joint prvis of these sevices less common dtm In odter states (the Stae company prov s jug 53% of war and 21% of sewrage sevices, with the remainder locally provided). The Staes goal i to pdie seae and seek innovatie is tionl arangements for efficient services. 1.3 1his the fiflh In a sedes of municipal deveopment projects designed to support Brazil's d 1 (soo Ane IB). Th e&a projes bav reached the mid-tem reiew stae and lessons from ts of project have been Irported into project deign. Like its predecessors, the proposdprojet's prmary objective is the srengfning of mucipal fnancil maagemt. Where the odwe ammpsa an g of uban sevic, the proposed projecs focus ib limited to environmenta 6 'w dDcure In dte basic sanitaton seco (wat, sewerage, solid wast ad drainage) priorized by the State, since eperec has how the po imple ment a of a narrower sectoral focus. In additon, the poject seeks to provide a m strgy for efficint wate and sewerage service prvso nd to explore pvaiato of municipal services. The project also alms at foil cost- recovery for, inra _structIre sub-projec fianced, wheprovidigfor limited, well-targeted grantsthrough an Idende Pio projctd In t Stes poorer North. 1.4 f nmuiciplities a to be respoble for exeditu on many types of public goods and services, refom of the role, ction and financial mngm et of local pvee must be designed as a oweent pad . A set of cta to osse dedgn of muicipal policy-making and reforms and its applicaton to dhe cm of Mia eri i shown in Ane IA. I i tis anysis, along with the leon (Amn IB), which has prinpaly guided both th Bank ad Stae ems in project design. 1.5 he proect wa Idetid in May 1991. Three misi to Mia Geras asisted the State in ptoec pepaio h projet was appraised in Januay 1993 and negotato completed in May 1993. 'I Delopd in 2r7.. Vs .q ttMdotwf &cm Dew s in AU h ISM, 1M. 2(3R No. 10616.BR). -2 - EL THlUE UAN SICR A IntrodIon 2.1 The 1988 constitutional reforms have enonced th Importance ofmunlcpalW In Bil's fdera system, so that they now have both geaer sbilies - in padeular In to area of provision of Infasructure and soal sevices - and esed rmes fom ow and taser s s t fulfill mw resposib. Ti rem comes at a tm when Brazil's municpalWes conuo c challenges in the aequate and efficient povidon of srvic. Agait te bakound of macroeconomic crish hich bn i th e rly 1980s and high nubation rate (as rura poor migrated to cities, driven in part by the crisis), minipalt fCe the de owing st of A_,IM: Te fir i low productvity of assets. Brazil1's mau Infraclure networks a among the most extenie in th rgion. however, these a assets have not been adequatey maintined andre mufficient to moe the growing demand for service. Second, with populatio presure and the eonomic crisis, the Inr economy has provided services In an faion which hus led to egrdation of the urban ecosystem, particulaly in wa aras. hrd, ov the past decade, povery in Bral has become hoemir_y an urban problem. Although the absolute numbs of rur poo are bigh, urba poverts sha as inreased to nexly half of tota poor. Fourth, with crisis has coo failure of fedal nastructuredelivy progrn, creatin an ad resource gap. And .ff1 despite tie decetralzation, mumicpties codiue to be 4opndet financially on fedeal and state tsfars, with less tha oneflfh of revemues geneated by own sources on avere These, factors point to a need to egthen municipaies' capabilities to efficiently gmane both their resources and resonsibilities. D. Uba o: Shute and Thads 2.2 Brazil's fedal stur of government p 26 stae and 4,493 a . h about 7S% of its 13.2 millionabitants livig In ura area In 1990, Brazil s one of the most popu urbn societies in the woV. In addition to ihe umegacides of Sib Paio and Rio de Janeiro - - with metropolitan region population of about 16 miion and 11 million spec y - Brazil has a ftlher nine citides with more than one million inhabit, inludn Beo Hor te, the capial of Minas Gean and the country's hid4argest city (ereon popuoation of 3. million), and numerous m msized cities (with poplations of 100,000 to one mion). The largest of urban populon is fnd in the me developed Southeast region of e contry (of which the State of Mns Geas Is a pat). 2.3 In the past, apid urba popation growth reqrd a major fft by public sector authrities to keep up with the inrea demand for urban Infrastructr. Durg the 1970s, Bri's urbm poulation grew by 4.4% per year. Migrats leaving dqerssed rural a , the populatons of which fell by 60% during the decade, helped fuel this urban demogaphic growth. U izaon ts slowed in the 1980s to an avae of 3.4%. P y reults of th 1991 census ha so fa not yielded data on uba populao, hower, the census hndicates a sinfcant dow-down in B d aphic growth to 1.9% per year over the 1980-91 perod (agai 2.5% per year dudrng 1970-80). Ths reduced pae of popaion growth may gve n some oeadtng spc to makb much-needed I in the quaity of urban services proided. I/ Tdoeooto _a be u d tea. Dug 199Q _ppxW y 300 .wmuniuinWe sd bainas th cattal to abA 4,800. 2/ Ouba=, ang| mcomkhrd to be o p w popd S 20,000. -3 - C. Providon of Urban and Serices 2.4 Duing the peid of I e cetrism prior to the new Constitutio (1961-1988), local ubn hifrastructure was delved trough an eteive network of federal and statsuons. Naiona urban policy was ormuled by the National Commission on Metropolitan Regions and Urn Policy (CNP) during the 1970s, by an -ministerd National Urba Development Councl (CNDU) in the mid-1980s, and finally by a short-lived Misy of Urba Develomen (MDU) from 1985 to 1988. Troughout the nte priod urba inastructure fincing was dominated by WO National Housing Bank Bow Nadul de HaM o - BNH). BNH dchan ed the proceeds of workes' compusory savigs (GTS) Int housing and sniadon Inrstmt. Among die ost mort, BNH-financed programs were dhe Nadonal Sanaton Pln (Ma Nacoi de SMnenm - PLANASA) for waer and sewerage work, execued trvgh state water and sewrage companes; and the Nationd Low-Cost Housing Plan (Piao lonad de Habkagdo Popuar - PLANHAP) for low-cost housing programs, also exeued through st agcies. Urban transport was centralized as wetl, under the Braziian Urban Transport Company (i)pis Brasie ra de DwIhorta Ur*waos - EBTU). 2.5 Th efforts deliberately ecluded municipalites n the ame of centass nati coordiato objectives and economyofscale gains. Sice 1982, fderal goverment fiscal deficits have obliged a steady rere from the use of dtese centra f cing institutos and their policy-mig bownapats. ISo principal financial btamWiby of the Government of Brazil (GOB) and one of the couty's lagest b , the Ca1xa Ecoxmic Federl (CEF), has iherited die remainder of these earier programs wihout die rsorces t ustin them. The effective colLapse of these centralized fiacing scemes in the early 1990. could have been seen, in reospect, as imiltable since they relied on le subsidies In th absence of meanigful cost recovery. D. De tlon 2.6 MuniipIties remained weak durig ftiod of militay dictator (1964-1985) when finandci resources were concetated in the hands of the fedea govement. Afer the restrai of democracy in the 1980. and free econs at al levels of governm the 1988 Constion re d a watershed. Key provisom of die Constition consolidated the proc of decentralzing autority away from the fideral govenent Atie 30, for example, spels out the responsiblitles of municipalites with respec to tax colection and die prvsion of loca serices; Articles 156 and 158 proe for enhanced fisca remes for munices to meet these respo ilidies. 2.7 n luO 1 eaons. The Constiuton increased both municipal shared and own revenue sources, at the expen of federal revemues (Annex 2A). Betwen 1988 and end-1993, the mnicip share of fedeal noome tax (IR) is exet to icrease from 17% to 22.5%; federa idustial product tax M tO inctease from 16% tO 22.5%; ad vaue-added tax colected by states (ICMS) to grow from 20% to 25%. Mhe Contitton also stablised a new municipal tax on fuel sales (iVVC) as well as giving excusive collecdon rigts t municipalities for the prperty tra tax MIM whiuh was foerdy shared with states. In the short run, addiiona fiscal revenue will accrue to municipalties mosBy thugh increased rovenue sbaing, pdmarily ICMS. New municipal taxes are not epecteDtO susiue property tax (IPU) and service tax (ISS) as municipalities' princW own sources of revenue. Studies show that by end-1993, these reforms wiUl have increased rmuicispal reenue by a ly one third By that tme, municipa har of all taxes collected in Brazil should reach 23%, again a 'I FPen_o Romez and JloRRoba R. Afoa, A R*nna Fca na Neiw Cbx&*Wr in: RMM de Ath*sh*w;b -eLJe O D., 1969. VI~~~jV U 0 t ~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~l I i~~~~~~~~i .Ci2~~~~~~~~~s I Ii~~~~~~~~~~~- a ii jil; A~~~~~~~ 1.ji~~~~~~i;~~~J I" U"~~~~J 0I. ti ~ ~ ~ Li i - I ~~~~~~~~jJ ~~~~~~I~~~~ej~~~~~ 1 ~~~tgP~ A~~~;~I! U : ~~~ tj~~~ [Ii !ih! hen C deied about 2NA% fm ows sources such as prpaty taxes. Better local service provo will nacmas resdn' wiines to pay both local txes amnd ur charges. Reveu As percent of GDP 2.4 2.5 5.2 Asshdaeofpublicsector 10.1 11.5 14.6 Expendiuro: As percet of GDP 2.5 2.7 4.3 Asshameofpubicsor 10.6 11.1 11.3 Sow..: -rf 2 Cno 1mge offMomi4 Seet Dewia hi dhe 19f3, MRD Report 10161-DR U12 Tlee important linkages with the macroeconomy fA municIpales. First are the negatvo effcs of endemic inflation: (i) pam of prperty and other tax, impotant sources of own renes, are difficult to adjust for Iftion; (l) fnanciad s n, notoriousy weak in smaler municWities, must to be agile and efflcit to manage Iftio; and II high infation makes adequat plannig and budgeting virtaly impossible. Second is the potei for a municipal debt crisis, If boowi not done on a prdet scale. Off-budget items such as sppliers' credits and rollover of existing debt are commo, prmily in the larger mudicpalities hich have a hbistoty of borrowing (the smaler one do not). Caidon will need to be exertd in ensuring that discretionary transfers ar not relied upon to sevice impdent borrowig, and that rollovers, tansufe and suppliers' credits are aequty acunted for in calculation of credi Hmits. And third is the paucity of adequate, consiste financial reporting and fiancal data across mun ies with which to moni progress on Implementaton of policy and impact on the m of the cowntry. F. Sector Stratg: A Medium-Tem Visin for the Role of Muicipaliies 2.13 The Ban's asistan strate in Bra is to sort policies and invetme hat wil encura eoomic growth and socW develomnt In the contx of mc stabity. Empsis on efficit resource allocaon, increased efficiency In the public sector, improved envir manageme and the ppropriate targetig and ddeiery of seviea to the poor. Ihe Bank's strategy In the rban sector has been tO support dece izaton re s which took effect in 1988, and foster among Brai's muicipiies mulation of eficiency, strmtening of final resources and management, and increased fiscal responbilty, t the m m c policies of the federal government. 2.14 With decenizaton, micipties at as quasi-aonomou managers of exeditur on servie such as beath, education, wat was coectin draiage, paving ad public trans Micipalkies, in hory, have a comparadive advantage In he tovision of thee serCes becau local gover , particly folowing a ren to dem ly-ecd leader, are more knowledgeable about local neds and are better at respodig rapidly to chanes In these needs. bis does not meam th m uIciplits shoudd provide al servics by themselves. For many of these acivities, n should rely on tho privte sector through concems , conacting or investmet precipaion, e the scope of service deiv. Since many of these servic are Itmet goods in the productinof private sevices, municipal Ifn in agn these expeiture will also cobute to he deminationofBrBl's mcperfmance. Municipaitiesshod also contbute to a rtur tO 8sutible enc growth tugh their own fiscal effor and ensure eir financal and heat by manmizing te reenue they can raise from their own sources. The loca taburden - nluding locl tax levels but alo loca user f and the pricing of loca sevces - should Inagly be ddemined by the levd of demand fo serviws. 2.15 I I sum, over the medun-term municipalIties will need to place greater emphasis on efficency and fnacal management. The challeg for munIcipalities today is to establish their own m of Iitructueddery based upon their ieasing fisc aunomy. To this end, improvedmuicipal an can hep to fill the vaum left by the demis of nati programs. he key goals for municipalWes wll be to: * mobBil more effectvely their own resources, widening their tax bases and exploring alternative sources of reve such as user chrges and b d g * aLoca these rsouces more eftlcienty trugh rigorous appraisal of investments; * incrase efficiency In the use of resources for current expenditure through he ovement of day-to-dy adminisraton; * egage the private sector, through privatation and conacting out, for those municipal vb and serices it can provide more efficienty; * prudently borrow maket resources to fund priority operations with bigh economic and financa rates of ret; and * hqbeg tO p and budget more effively whie xplicilty monit financial p once. G. Me State of Mn Gea 2.16 The name genera mines' was given to a newly-eated captaincy of coloni Brazn in 1720, becae gold could be foud almost everywhere. Today the State of Mns Gerais covers an area of 587,20 square kilomers (about the same size as France) and is the noternmost state of Brazi's richest Southes ren. is thie only densely populated state in Braz which has no coastine. Covering such a larea, its teain is qe varied: extensive scrublands, or aenwds, covering dth northem half up to the bounday widh the ounts capital, Btasfiia; udlating cleared forest bntd in the souhern part of the Stato; us regos near te State capital, Belo Horznte; and several impora river basins (see map). 2.17 Mia Gerais is the trd largest state in area and second in terms of populato it has 756 municipalits, by far the largest unber of any Braiian state. With about 7S% of its population lving it cites, Mns Geras had an ura populton of some 12.0 million In 1990. Municipal populaton by dsze oup is provided in Anmex 2C. As shown, the vast majority of muicipalides are very smal: 72 have less than 20,000 inbabitants and ar entally rua towns. The rmaIng 150 municipaties withb populations above 20,000 represent 74.4% of the States poputon. Preliminy rWesults of the 1991 ceonu idicate that 212 muIcipes, mostly small ones, acuay lost populatlon durwing e 1980W91 pedod. At the other end of the scale were the fastest growing cities of Sete I agos and Montes Claros, w amual popuation increases of 3.3% and 3.1% respectively. 2.18 National4evel tends have nowhere been more apparent than in the State of Mins Gerals. The Staes domina economic acdvity, particualy in the southern regions proxime to the pdmary marets of Sbo Pauo and Rio de Janeiro, has shifted over the past decade from agricture (30% of Stae GDP in 1960, fallIg to 15% In 1989) to the urban-based heavy industrial sectors, which grew from 14% of GDP in 1960 to 28% in 1989. Changing ecoowmic tends and employment qoptnities led to a dramatic urban on, with urm populi more than doubling over the period (from 36% of total in 1960 to 78% In 1989). Although this ecomic act has enabled Min to beoome one of Braz's weathet es - GNP was US$38 bilion, or 10% of the aoal total in 1990 - ths wealth is '1 SDNNAM Lat -7 - unevenly distributed, with 35% of the economically ave po on In 1987 suving on just two minium salrs, compared with the naton rat of 29% at tis level (se pam 2.24 and Awn 2D). Under the stress of Increased popuaton ad indequa mant_ e, ur bftuure ha become significantly degraded, pardcularly In the ar of sitaton, where enviomet, health and povety- aleviation concerns play an importat role. The sataon sectors have bee identified by the State govment as among those with bighest plority. 2.19 Tbe Regions. Minas' hig deg of geographic and economic statification make it a microcosm of Brazil. For planning purposes the State govek-nme has diided Mias erais nto egh macroerSlpons (see map). By far the most doveloped of the responsible for 63% of the Stt's industri production, is the Mestlrgica e Campo dus Verentres macro-region, whee the capital, Bedo Hordote is loced. Also is- the recndy privatized USIMNAS steel plat In th M o e Alto Paranla regio, GDP per capita is esmated at 34% above the State avera, derived frm arcua and idusra sectors linked to the markt of the State of Sbo Paulo to the south. Tbree other macro-regions have per capita GDPs near the Ste avrage: the southern macr-region, bordetg on SAO Paulo; the Alto Sao Fra co, an expanding agriculural region; and the Mata macro-region borderng on the State of Rio de Janeiro. The three poorest macro o are located in the norteast of Mis Gerais and together account for 51.6% of the toal of the terri of the State. Of these, the worst socecoiomic conditions are foud In the Jequtnhonha macro-region, where the ave GDP per capita is about US$400 per capita Rural migration to escap drought condios smilr to tos of Brazil's arid Northeast region feed rapid urban growth in the maco- Rio Doce mac-region suffers from a decline in agriculture and many of t mnicipalities have declnn popations. Finally, the NAest macro-region, preominay agricultural, has also boee I decline, but includes an area of incWient i izaton, notably in the major ciy of montes Caros.8 Under the project, a pilot program for coopative regional urban sevice delv would be undertaken in two of these macrregions, Alto SF 1)cco and Je. 2.20 he Eonomy. Mins Geris has the third largest GDP in Brazil. Per capia ime has been estmated at about 90% the national average, or about US$2,400. Mirring its macro-egions, the State has a diversified economic base. Agdture was responsible for 15% of state GDP in 1989 nd generally more productive per hectare dt the average for Brazil. Coffbe is the main product, but there also sificant production of maze, soybean, beas, sugar cane, rce, potatoes, and tDbaco. Catde and dairy products are impot e. M s Gorais is more wellknown as an industri state, however, with g accounting for 28% of GDP In 1989. Heavy industry, notably meallurgy (in, stee and aluminum), chemicals and non-metal miea are well rrsed In tho Stat. Ming, especially for iron ore, reain an impora actvity, in which the o of GOB's giant p-tl CVRD (Co,npa do Vale do Rio Doce) are paa_mon Other importt industries are teies and food processing. With the economic slowdown during the 1980s, and the contraction of the domestic market, all sectors responded to the all in domestic demand through e s of eports and today, Minas Gers has become one of the pincpal exporting states of Bi (second only to SAO PaWlo). 2.21 State Govenment Plns and Prrities in Mh Geraa. The developmnt plans of the presen State an are set out in Its phlrlna plan, or Plano Pluwa de Cwnwe do de Mbins GeCams 1992-95. The plan umes fsc on s wilm limi govement acton for the forseeble future. It is pessimistc about the possibility of further increasing ICMS colecos and Is Pat of di mawo-;on is ncludd in do aa underd te esonIt of SUEN, thdal psvnmes S fArftIo Northesa The mnGaaa of SUDE onsit of 42 nmIpasr that saupptofth '1 AD data td Noe: DMG,RNm f AB dda Wm for XIDU MWO, AJ6nd 1X Dkdmw * PWWWM (ol I - SO J.fPX) -8- disd lca dvotmh rentogenth of sevcing the Stots debt (ChoprS). Greater munici particiao o develom thet wit h exaten financ support are seen as means o overom tfe present difn ds in the or ot in l planopod project is dd as net of the ky state gove t proSmu in the plur_nmd phn, emphasis which is reflected In the Policy Staement on Decentization and Munipal Siwhich sets out the Stats policy intentions regarding municipal management and urba sector strate in the medium-term, and the projects role in achieving this (Annex 2F). 2.22 dc Sadtation. The State's plan gives pmary impotnce to heat, education, basic santatn, trnsport and ero The basic sanhation setors (water, sewerage, drainage, solid waste) have been given special prioity, due to their spillover effect on health and environment, and as a resut of the reent failure of federal instons and progrms. Basic sanitato needs, particulaly regding sewerage, are pressing. Although water supply crerage is high (94% of the urban populadon), service provision is inefficient and _ais poor. Sewage collection and treatment (53% and 0.5%, respecdvely) are lower ta other states of its compartive size and weath. Furthermoe, joint state provision of water and sewerage Is less common tm in other states - the State company provides 53% of water and but oly 21% of sewerage services, with the remainder localy provided. While the National Health Foundation (FNS) provides technical assistance to about 56 municipalities, most provide service on their own. The Stats go is to priorize sewerage and seek Inoatve isttutnl arrangements for efficient service povion. The callenge today is to ensure that potable water is safe and free from pollution by iusti and rsiial effluent. Annex 2E provides the covage leveis and instituional arrangements for water and sewerage sevice provision in the State. 2.23 Brnhmnue. In a large state like Minas Gerais with intensive industrial, m and agricultural actvities, envir lI issues Invitably arise In comnectio with the process of economic develpment. Among the most serous of these are: (a) pollution of rivers by ustria and domestic effluet, pesticides and fertlizers; (O) soil erosion through mining acdvities and agricultua praices; and (c) de-forestation, particularty in areas of agdcultural expansion Envime problems are already acute in paru of the Stae. Pollution of the Rio das Vdhwa, for example, which skirts the metropolitan region of Belo Horlot, threatens water supply to the capit. This problem is currently bei addressed with the support of the Bank under the Mia Gerais Water Quality and Pollution Control Project (L 3554-BR). Although there have been signs of improvement (one study show that respiray circulatory and abdomi illnesses, classifiedas amenable to reductionthroughImprovement in basic s8atao had fallen as causes of death from 57% to 36% in 1988), conditions in the State's cities remain of concer Municipalities, with the support of State environment authorties, must assess their key I env a problems and determine prioriy actions to address them. 2.24 Poverty. in spite of the significant economic developmen that has taken place in Mas Qeis, poverty in both urban and ru areas has remained acute and worsened during the slowdown of economic gowth during the 1980s. Esmates for 1987 IndIcae thi 35% of urban households in Minas Gerais had Incomes of less than two minimm salaries per monthV (widely consiered to defin the poverty ine fora famly of fourlving in n& urban ara) mpared to 29% for Brazi (Annex 2D). A study of Brazi's metropolitan areas found that the share of the total population living below this pover"t line in Belo Hor te rose fom 18% In 1980 to 35% in 1985. Mun ies can help assess the uban needs and productie possibilities of ther populations and develop local provisions for the urban poor. O/ BDMG, Table 15, SBCPLAN-MG (1991). 3/1 39. O wminimum au is crntl equl to about US$60. "I Son Rocha, Lih de Pohrezrp. as RegiUes MOopoItana, P. &ab Metad da Duada de 80, BERA, 1988. -9- H Bnk bpermae In the Urban Sector 2.25 Lasons Lmned. Since 1978 the Bank has made 17 loans for urbn development and transport projecs I Brazl, totalling US$1.6bilion. I additon, 16 loanstotlngUS$1.9billonbave been made for water and sewerag projects since 1971, lo largly In ua ara. With this long history of Bank Involvement m the sector, many mt lessom can be drn Rcet OED audits of projecs completed dudrg the 1980s have emphasized a need for strengthening of munipal reource mobflization and access to fincing, and noted the lack of involvemen of both state and municipal authorities in the urban planning process, and a haphazard approah to e ea magement. Greater employment of appropriate, low-cost techologies in the waer and seweg sectors has been ded, along with more integrted, cross-sectoral approaches to enviom manag_ d Ivestent prioritiaton. Furthermorreports have commnted on excsive complexity of poect, ambition of objecdves and weakness of executing ageces, sugestig the need for si con of project design, greater flexibility in project Implementaton nd new and more effective means of supervision. Ihese needs are greater In the North of the country, where imple I capacity is weaer. 2.26 AccordtIly, and following the recent decentrization reorm in Braz, project design and objectives have begun to shift toWAds Impg the capcity of the states and municipalities to ffectively assume increased resposbilities for efficient maagemnt of rsources and servces under a new generton of municipal development projects, mong the frs of which ae under implementation in the southern states of Santa Cataina (Ln. 2623-BR - P1OU1B), Paran U. 3100-BR - PEDU) and Rio Grande do Sul (Li. 3129-BR - PIMES). The lat two have recenty gone though midterm review evaluations. The proposed project atmpts to build a bridge between te epences In the South and planed operations in Nohem states such as Ceat and Pambc. AnnexIB pres signifcant lessons learned and means by which these are Ioporated Into the design of the proposed project. I. Urban Secor Strtegy 2.27 Urban sector stra In Brz is based largely on rece sector work, in particular the report BrazUi: The Callenge of Mwndpl Secr Dewlopme In te 1990), which identfies three key areas for reform: (a) responsibility for poliCY coordntio; (b) desi of asfer; and (c) municipal expitue and revenue mangemeat While eq y Ipotant, it is recognized that these refrms must be Implemented through discrete smen and according to diffing tmetabls. Given the difficulty of addressing through one project the needs of apro l 4,800 Brazfian ts, the Bank's urban stateg in Brazi - consistent wih the couty's poltcal and fiscal detalization-has involved lending through the more manageable vehicle of the states. Iplemao strategy for policy coordinadon reorms (the locus of which is national), is dirctd through policy diaogue, using such avenues as workshops to diseminate secto work and tecicalt aito the line agencies. Reform of the state/municipal transfer system (the locus of which is the state) is done trgh policy dialogue and lending - wit the trgetinlg of projects to fiscally responsible states such as Mns Geras. One element In the deinion of fiscal responsibility the reduction of gotiaed trsfer, in which Mia has made significaprogres (from 32% to 10% of total from 1990 to 1992). Finally, lendi wil directly target local reforms in municipal revenue and expenditure anagement, one of the primay objectives of the prposed project. In sum, nationa-level ss wil be addressed lagely trough policy diaogue and technical assistance, while local management issues - and suot for fiscal responmibility and well- designed tranfer systems at the subational level - are tareted pimary trough lend. Annex 1A presents a smmary of the proposed project's application ofthe reom aon of ts sector worL - 10- m. THE PROJECT A. Project Objectives and Ratonale 3.1 Objectives. The primary objectives of the proposed Min Gerais iunildpal Management and Enionmental nfrastructr (SOMMA) Project ae: (a) to IEnShen Muni quancialvm in support of the recent decentrzadon reforms, through technical assistance to increase ownresource mobilizaton, and training and Incentives for efficient allocadon of romurces for both current expenditur and capital investment; and (b) to impmr iromn aw m ntgm in , k, though development of a coherent State straW for provision of waer and sewege services, investment in prioriy basic sanitation inastructre, and provisionof ate cal aistance and trbai for municipal dminitraons in environmental managemnt In addit the project wil test the viability of two alternatves to municipal service provision: prive sector provision of municipal services; and woperatve regiona seviprovison Inpoorer, institutionally weaker Northern municipalities. Annex 3A prese the project objectives, means of achieving them (tools and policy conditions), key monitoring indicators and risks in matx format. This matrix, developed on the basis of urban sector work and lessom leaned in previous projects, establishes the frmework for project design. Consistent with the Bank's goals for the sectr, te projects primary areas of emphasis are first, improved public sectr mage_m (fiscal reonibility, efficiency of investmes), second, onviomental management and, third, to the extn possible, private-sector development and poverty-alleviation. 3.2 Project objectives are explicitly esosed in a Policy Statement of Deentlization and Municpal Strengthenn of the State of Minas Gerais, preseted to the Bank duri Negotiations. The Policy Statement sets out the Staes commitment to s gthening loal govements, thrugh sound fiscal and mitative magement, accountbility and effiiency In investments and cmTent expendiur and equity in sevice provision. As one of the key means of achieving these goas, the Policy Staement sets out the State's Intenion to reduce discretionary trsfers to municipalities and instead chamnel these funds as to whe SOMMA program, where they will be invtd accordig to clearly-defined criia. Ihe text of the Policy Statemn is presented in Annex 2F. 3.3 RatInale. lhe proposed project is an integral part of the Bans urban sector strategy suportng the decentralization reorms which took effect with the 1988 Conion (para 2.27). IThe project wi foster among the State's municipalities stimulation of efficiency, strengthening of fiancial resourmces and management, and increased fiscal responsibility, sUping the mc policies of the State and federal governments. By improving service corg levels and isting In frmuating a more integrated approach to municpal management of urban nation services, the proposed project would also improve the overal urban eniomen of the State. Findly, the prosed project would initiate efrts to mobilize private sector resources (both equity capital and credit) for local investment, and begin to extend the benefits of improved municipal financi mangemen to Brazil's poorer North, where the Ban's uban development experience has been less succesaflu. The proposed project also provides an opportuity to apply the lessons learned in the sector, in pudcua trugh similar projects in the country's S h, to a state which represents more closely the diverse needs of the country as a whole. -11- 3.4 The projects tming s planned so as to adcieve the greatest possible lmpact: muicipal deons woe held In October 1992, wIth new mayors beginning thek four-yea terms as of January 1993. The impl_ation stra will be to accomplish as great a propordon of the objectves as possible within the fist three to fimur years of project iplementation. B. Project Desipdon 35 'no projec consists of five components: Part A - sdtutImn d, mpsing US$29.4 millon, or 8% of tot project costs; Part B - enIronmental Intrte acoountag for US$292.0 milion, or 88% of costs; Part C - pilot program, totling US$10.7 million, or 3% of costs; and Part D and E - studies, acmcuntig for US$1.6 millon, or lessthan 1% of costs. A detailed project desdptin is provided In Annex 3B, and summarized below. ;election crteria sad methoology for both Istitional development and infrastructure subroject e set out Chapter 4 on Project mplmttio and in Ane 4C. (a) bsevbment 3.6 The inutionl developmt component (Part A) consists of technical wistance, training and small office-technology equipment puchas for municipalities. Of the total 756 munIcipalities in the Stt, it is epected tha about half (repenting about 90% of the population) will participate I this componn which would be the key to entry into the SOMMA progrm. Individuaized tecnical asistan and t plans would be developed for each muncipality, on the basis of a diagnostic questionaire based on rapid- methodologies successfuy employed in the South of Brazil and sewhere. Needs would be evaluated in fthree aeas: (a) fisca and administrative; (b) planning;, and (c) o alnd basic saniaton services. Ihe menu of possible Iteventions would Include, beer aita: - fiscal and adme: upgradi property tax cadaste Qncud revauing existing property, cusion of un-registered property); Imprving prou, pol and phyi fstrucure for bllMing and collection of property and other taxes and tariff; boving procuementprocedur; * plannIng: preparing nd updatg of master plans; updating real popey mapping; works and construction codes and technical standads; and * uurnmn and base sntation: establisbing (and ratonali land-us and zoning codes and regulats; saning local eomental enfo agencies (CODEMAs); encouageme of regina cooperadon through water basin authries; prepaing long-u marginal cost pricing studies, as input to revising user-charges to be based on economic costs. 3.7 _ would Include cost esdmates, and would be cateized as high, medium or low porty dpeni oan urgency and on their impact on overal municipal fhnncial management. Tohicd assistmc interventions would be coupled with on-t-job training, to ensure dectiveness. On the basis of the dignosis, a Strategic Action Plan, or Plano de Apdo Emragia (PAO would be disc d and agreed wth eah municipality (or locnependent waer company) in cosultaon with local groups and v bodies, setting specific target for finncia and siutional Improvements. In order to encourage participation in ths Ii phase of the project, and to ensure wide access to all municipalities, prepation of PAEs would be gra-financed. One committed to such a sgbhctory PAE, municipalities would be eligible for loans for techncal assae and grs for the accompanying tining. Following inition of this process, and providing adequate creditwors (see para 4.9-4.11), client n es (or water andlor seweage agecies or compaes) would be ele to aly for loaos for infatuce imtments. T a a nce loans would be Inke to - 12 - perbma standards rgding resource mobilization, cost-recoveay and managm efficiency which, I tur, would be linked to Subrojct digibility criteria for ifsucu (par. 4.124.17). 3.8 his approach builds on past sector work and project ex ene by establishing a longerm plan for strgheig of local governments. he Institutona development COMPOnn Increases the level of comitment for capacity strengthenin of local governments by working through a state-lel Institution, the Fwando Joao PYero (FJP), which will develop a strategy, create prcedr, set stand"ds and norms to faciitate isionl strengthenig of municipalities (see Anmnx 3F). Imple of technical assistance and training woul be done dtrough privae sector, univeiy and other provides, with standard-etng and suevision and monitoring by the FJP, which over time wil shif to providw "wholesal ntvtos aimed at fostering private sector delivery of tchnical assistance and Waning. Tecical asistance under this component would also be provided to strengthen the FIP In this apex tole. A draft proposa for stegtei of PIP to fulfill this role was agreed during Negotiations. (b) Enm1Juk canid nmm 3.9 im t ft cre invesmn (Pa B) would focus on needs in the highpriorty sanitaon and rdated inauture sub-sectors. It is estimated that about 150 municIpalities (ikely those with poplatio over 20,000, resnting about 75% of the pputin) would patcipat in the InFrastructure componet (Annex 2C). Sub-project ivesmet would be fMly repaid at longterm lrket-appoximing iere rates (para 4.5), with full cost-recvery via user-charges based on economi costs, or indirectly via increased property values and tax collection as a result of Infrauc ImprovemeNt (pm. 5.7 and Annex 6A). Investments shown in Table 3.1 would be eligible: Inesmet Decpin Wat_ wate tratnt ad amplificdaion # prduon; Icementalwok ftesion and domesti connecons; opeatonal and commetwa mpovements, suh as S.mg, ink d_eeci, -rehabMton of equinme. Sewa BEqum for trement tms, extenion of newoand domesic connoedon. Wel40sted, low- sttechnoIogi, in paticula in smal commmie, would be enc ged Soul Waste Sold wast colleon equpmen, consucto of landfis, and equ_m r final disposl In this _componet ao weltsd, aert low-cost soions would be _nac sed. Pain and Steet pain, mo- and miro-drinage, flood and erosion contl, chan g of crk, 'is Dange sa it_w_._ L°h8t n Extendon of service, and an eer conserato program to inta - ficit Bght bulb. 3.10 Watr and sewerage services (egally the responsibility of municipties) are provided by the State company, C&xdea hde Sowuemode Mbhs Gerai (COPASA), independent and municipal companies as well as by mmuicipal government departments (Annex 2E). Thus, while municipalities would be primary sub-borr s, water and sewerage agencies and companes would also be digible for subloans to undertak Investmt on behf of the municipalities for which they hold service concsions. 4I Wih th eo_n of Bet Horizont and Contgem in the wter and we setor, sinc the mor sa setor ivstmet of tso tes wi be finned under the Minsu Ge Water Qutand Polluton Conr Ptojet (La. 3554BR). The wo prjtsm anlly complementar Bel Horiot and Co_tam wi be ncouragd to ene the stuona development compnentof SOMA, whl SOMMA wM encour sma nUller _ b dopd ooopo, m b apoh ad tdw technea eaation and ootreovey teiqu adopted uderdto Water Quaiy prje. - 13 - 3.11 Investments to be undaken by COPASA fail no two categories: Incremental expansion of waer and sewerage connetons, to be Implemented on behaf of municipalities which ha granted concessions for service to COPASA; and Ivestmes In network Impovements, such as mering, repair of equipment and leakage detection. The laer lnvestms - which enable the whole COPASA system to oprato more ffidiently and thus Improe svice and econdions at the Stt level - do not directly beneft individual municipalities, thus COPASA would begin these invosments wihout the municipal participation in SOMMA. These Investments are expected to comprise no more than 10% of the total project. System exaon investments, which direcey befit indiv municipalitie, will be implemented by COPASA once a municipality has comittd to entern the SOMMA program. (c) Pot ogr 3.12 The project includes two small pilot programs (art C). he first will assess the potenta for privabt on of curreny publicly-provided municipal servics (such as , bus and other trsport terminals, and other services) and test alterative privzti methods. The two primary avenues under the project wUi be subloans to mun c for construction of iastructu to be opeatd and maintained by the prvme sector under concesslo and sub-loas direcdy to a private sector fim for construction and operation of the service. The first area tested woud be slau hous, for which there is active prive sector hnterest and a strong heal-laed eative for improved seice. In paralle to the test case, BDMG would undertake a study to determine fturer poten municipal services to be privatized, xamn economic ch, financial and commerc viability, and the need for reguation bth for helth/safety and financial regulation to protect conmers from monopoly power). The theoet fraework for the stdy i sown in Anme 3B. Theo secnd pilot would work through an associaton of smaller municipalities in *e North of the Sta to help bufld experience in the special requim of ihese weaker mucipalties. The aociation would borrow from the Fund (through a consortium) and undertake cooperative Iestments in local sanitadon needs common to several municipalites. The f irst associion to be tesed under this pilot is in the S. faico region (see map). If successful, the pilot would be eteded to the poorer and more hlenging Jecq udonha region. 3.13 Both pilots are designed to test innovative techniques for municipal service delivery, on the basis of clearly-dined objectives, and both inlude explicit performance mont. During Neoai agreement was ed on tholowing: (a) a proposa for Implemetio of the micro-regiona pilot; (1) terms of refenco for the study mpoe of te priatzan pot, and lea agements for the slaughterhous test case; and (c) funding limits for each pilot, and th during the mid-tem review it would be deteine whether to discontinue or expand the pilots. (d) State Wimes 3.14 Two studies at the State level (Parts D and E) we agreed durg the cose of project prepaLation as priory areas for reerch and inovative strategic planing in the medium tem Fist, In light of the partcular coverage and bitittonal c Ii of the water and sewerage sector in Mih Gerais, and gradual weakeing of the federally-operated PLANASA system, the Sate would undmea a onsultant study to develop an opeatonal strategy for the water and sewerage sanitaion sector in the State, emphasizing pulWy service prvion at the locad level. Second, in order to guide development of medum-term policy for SOMMA, a second study would amine options for finacng (equity capital and debt) of infiuure services for which munidcpalities ar constutionally resposible. One of the objectives of the study would be to sk altatives for mobizing domestc pvate savis for longrm inastructure Inesmet. During Negotaons it was agreed that the Water and Sewerage Sector Strategy Study would be an obHigaon of the State to carry out, wit the odstance of EDMG, while the Municipal Infrtas t Sdy would be an obligation of BDMO. Tems of r , as well as timetables for Ilent of the studies (to be completed no later than mid- term view), were agreed during Negoation. Outline terms of refore ar shown in Annex 3D. -14- C. Dedgn Featurs 3.15 Project design has been guided by the Bank's on-going economic and sector work dWogue wih the GOB on policy in the udn sector (see Annex 1A), and lessom learned fiom past project (se Annex IB). Several key desi featus emerged during project preparion, including th following: * ongoing dialogue with the State Govnment on policy reforms regadn: sound fiscal m nagent (the Policy Statement); and increased efficiency and equity In the water and sewea sector (the State's Water aod Sewerage Sector Stra Study); * fil cost-recovery for ifastructre Investments, at market-equivalent Interest rates * defiition of a pool of 30 pre-appraised 'first year munic t with eligible investmens totaling US$60.0 million (about 20% of estimated in6ructure investments); * single- rather a multsector focus to simplify project desig and comolidate beneft; * operational manua preared arly, and tested durig project preparation; * computaizaIon of all evuation and monitodng which wil form the basis for the States' municipal financial information management system (FMIS); * transparent financi arangement with a ll costs included In the oiteres rate 'spread'; * pilot programs to test aenative methods of service provision, to be contiued if successu; * strategy to atact pive sector capital for investment In municipal serices ad in SOMMA (Prvatlzation Pilot Program, and Municipal Infrastructure Finance Study); and 3 limited grants for dwelopment of PAEs and for ting, as a means of providing incentive for entry and wide access to all municipalities. D. Project Costs and FJhuncdg Plan 3.16 Project Costs. Total project costs are estimated to be about US$333.1 million equivalent, Induding price contngencies and Indirect taxes. Ihe proposed Bank loan of US$150.0 milion equivalent would finance about 45% of total costs (50% of costs less taxes). Detailed co estates are presented i Annex 3C and s_dmrzed in Table 3.2. I~~~~~~~~~~~~~~~~~~~~a S bD 2Q2 66 Zt 24% Do1ako 139.5 46.S 186.0 25% Rol 20msbw AU 25X Fact Pmg8" 6.7 3.3 10.0 33% SIE Shur= 0.7 0.3 1.0 33% WTAL BAM OSTS uusIM A,,au :. 2% Pa=u Wtisa,l wcSieat bl1 2S% TStALtaROlB OSTS 2492 Au2 _ 25% dai sbt US$30.0 min In; . ,atms. 3.17 As thown, tot project costs iwnude US$27.5 milion oquivalt (or 8% of basn costs) for ishtial developme and US$273.5 million (or 88% of base costs) for irtructuro. An addional US$10.0 million (or 3% of bas co) woud be spent on the two pilot progms, nd US$1.0 milon (or less t 19% of base ost) on studies. Due to high Brazflian infladon, costs bave been caluated in aew (bas csts of Jaluary 1993) and cOnvOet tO equivalt US doas at praing exchago ates. ITe e scale of Investments at the local level was detmined by the edmated demand for services, bmrowing capacity of municipalWes, and cuterpart payment caacity of the State and municipalities (se para 5.9 and Annex 3B)? Because the Bank loan would finance a tim-slice of municipal iveme, total project costs are not precise and should be see as indicaive. 3.18 The foign exchange component is esimated to be about US$78.7 million (about 25% of base costs). bndirect taxes arm about US$30.0 million (10% of base costs) and will be financed by sub- borrowers or the State.' Physical coutingencies have not been budgeted due to the project's c approach, desbd above. Project costs inlude puco ntingencies of abo US$21.1 mMion (7% of base costs).' Rough cost esfimates for c"i wors are based on ext eng n designs and unit cost of comparable investment in Brazfl, supportd by engineering esim and recet coo prices. Consultant service costs are based on prevaing local and foeig person-month rates. 3.19 t oagcn Plan. The project would be fianced by: the proposed loan, toalling US$150.0 million (45% of project costs); State resoures of about US$85.4 million (26% of project costs); munciW cnterpa of about US$72.7 million (22% of project cos); COPASA for abou US$23.0 mlio q(7% of project costs); and about US$2.0 million Oess than 1%) private sector participation for investments under the proposed pilot program. The proposed loan would finance all foreign exchange costs (about US$83.9 million, including contingencies), plus about US$66.1 million of local expenditr. The project's ptoposed financing pla is provided in Table 3.3 below: Pivat Bank % bnL Dev. 7.0 74 - - 15. 29.4 51% Bdvk. bJfa. 74.4 63.2 23.0 - 131A 292.0 45% Pilot Pzomj 3.5 2.1 - 2.0 3.1 10.7 29% SL fitd Li= = D.I Lab 56% rYAL 4SA 72.7 23.0 2.0 150.0 333.1 45X (as%oftotal) 26% 22% 7% - 45X 100% 2Y }7WOne mm es he eparesed interst in dh progam to date, ad 30 bv pented elgible swb.uect (of te 30, ttoalad fial evaluaon have been comWleed fr 22). projes fi year pam of Inetmnt sI basd on te proposed Inestmt of tes 30 nmunies 'I Abtough exmpton fiom impor dui fr mateils ptocourd under id finacinSg Is no longe a poliy of the GOB, duties are not consideed based on the assumpton hat the eecuting agon wl iod h obtaing wai 41 P ice aoe calnulated on dt basi of the esimad diu t schduL (Annex 4P) and O.D. 6.50 (Octob1992 in which th Dans MUV ine averag about 3.08% per yewa ove p thei_ popiod. - 16 - 3.20 DurWg Negotitons, agrmn was reached on the project fincng plan and the Borrower's guante ngarng ncsswy projet countpart funds. E. The Borow and Ezecuting Agency 3.21 The Borrower wouldbe the State of Mias Gera. lhe State would use the proceeds of the Bank loan and its own counterpart funds to capialize a municipal development fund managed by the Banco de Desnvotemo de Afins Gwais, S£ (BDMG), the States development bank. During Negodatio, it was agreed that BDMG would execute Parts A-D of the project; the State Setat of Plaig would execute Part E, with the assitce of BDMG. It was also ageed tat the State would caus BDMG to perfom satsfctoily under the project. BDMG was created with State Law #2,607 In 1962 as a public autarky,u wholly ownd by the State. I was the fis In what was to become a system of State-owned development banks. BDMG's Presidet is appointed by the Govern. Shares are held In the name of the State. Ihe Seary of Planning serves as Chairman of the Ban's Board of Directors. All bankig actvity in the State is coordined tirough the State Seretariat of Finance (SEF). BDMO I headquatered in the State's capital, Belo Hodzoe, and has regional offices In eleven m d cities around the State, and representative offices in Brasilia and Rio de Janeiro. 3.22 BDMG is a well-perfoming bank by mo standrds and is the highest rankd Briian development bank in tums of lending and profitability. As of end-1991 its total assets were on the order of US$600 million. In recot years the BDMG has made significant effors to improve its equity postion, somwat eroded dur the late 1980s due to nn-performng (largely federal govenment) obligatios. This was done through negotation of terms and a State equity capital increase following the sale of State- owned company shares (on which BDMG was a lead advisor). In 1991 the Bank's employees numbered 530. BDMG's Board of Directors approved in Apil 1990 bncorporaon of the company's assets, equity and liabilities into a socedade andma (SA), or public company, which has increased its autonomy. BDMG has succsfully execued severa multilateral agency-finaned progrms, including the Bank- financed PROFLORESTA Project (Loan 2895-BR), and is executing agency (through a soerate project unit) for the Minas Gerais Water Quality and Pollution Control Project (Loan 3554-BR). An institutional and fanci apprais of BDMO is prded in Annex 3E. 3.23 Since the SOMMA Program is expected to continue aftr the project ends (para 5.10), project hmplementaton responsibility wil reside with a pre-existing department of the BDMG, the Department of Infrastruc-Ire (DIU). The DIU has maged municipal infrstructure investment funds fnanced with CEF and other resorces. Following its recent strengthening In preaation for the SOMMA program para. 4.8) the DIU consists of a grup of 15 technical staff, four support staff and one manager. A technicalge agreement with FJP would ure, Inter ala, ta tehnical staff from the PIP wil be availe, as needed, to assist the DIU in the Iiutional developmet component of the projecL F. Stu of Projct Prepartion 3.24 Project preparation was begn by a unit within the Plnig Department of the BDMG in coordinan with SEPLAN, the Secretay of taona Relats EAI, the Serety of Municipal Development (SEAM) and F1P, asisted by etern conlts. During the preparation period, four missions were held, as well as workshops with other municipal development projects (i the States of Parani and Rio Grande do Sul). Several confere have been held to date with muicipal mayors, and 30 municipalities with suceflly-evaluated ub-projects are prepared to sign Participation Agrn . Detaled designs for the COPASA component (20% of inftastructure investment costs) and the public lHghting component (8% of costs) are finalized. Designs for infrastructure investments for the first-year ptogm (US$60.0 million, or 20% of costs) are undey and will be completed by July 1993. The Operational Mual was agreed durig Negotation (para. 4.3). Ihese and other documents relatd to prect preparaton, are avlable in the Proect File (Annex 7). - 17 - IV. PROJECT IMPLEMENTATION A. The SOMMA Program 4.1 The Minas Gerais Muncipal Management and Environmental u Program (SOMMA) is design to be a long-term State program to support development of locd fancial management capacit and prit inastructure estments. Through the proposed project, the Bank loan and State countepart funds would capitalize the SOMMA Municipal Development Fund which would onlend resources to municipalities for: (a) technical assistance twards Improved financial, Intiutonal and management; and (b) economically-viable ifasucture ivtment on the bis of well- defied sub-borrower crei ti and sub-ject eigibility citeria. Counepart fund wd be prd by local goverment and loans would be repaid at market-apximating rA (pma 4.5). 4.2 SOMM's Board of D)irectors includes repr es of the SEP, SEPLAN, SEAM, te Secret of Trasport and Public Works (SEMOP), and the Asociaon of State Municipaities (AMN). The Secretary of Planning would presido vver the Board, and would handle policy matters related to the Program through an opetional Executive Secrtariat. BDMG would be solely respone for day-to-day imp ont of the Program. The organition chrt for SOMMA is preented in Amex 4A. Institutional and gpleeonaf arraements for the proposed proJect are deied in Ane 4B. 4.3 Opeaional arrangements, based on those developed under similar ongoing program in the southern states of ParanL Rio Grande do Sul and Sant Cataina, are set out in the Progams Operona Manual. hefe volmues include: volume l- basic orientionguide for municipalis; volume 2 - sub- project eligibility crita; volume 3 - sub-borrower eligbility criteri; volume 4 - pruremet manmal and mod documelts; and volm 5 - monitring ad evaation. Durn Negoiation the Operatio Mau wa reviewed and found to be satisfactry, and it was agreed that the SOMMA prgm would be operaed in acd wih the Manual. he appwroved veion of the Mana was isued by the Board of Diretors of BDMG on June 9 1993. ne Manu is descrbed futher in Ane 4C. S. The SOMMA Munipal Devlopment Fund 4.4 The SOMMA Municipal Development Fund (SOMMA Fund) was establised wih State law #11,085, dated April 30, 1993. The SOMMA Fund would be located in and managed by the BDMG, which would perform all sub-project and sub-borrower evaluation (see paras. 4.9.17). About US$144.0 million equ ent of the Bank loan would capitalize the SOMMA Fud, together with Stae resources, in a relatonip of proximay two-to-one. (is is equ o the full amount less about US$6.0 millin, wiMch, together with Sta counterpart would finance preparation of PASs and traing - hrough a seprte grat account - and the State studies and technical assistance to PJP.) The SOMMA Fund would onlend o municipalities, muicipal water companies and COPASA for up to 75% of the cost of eligible Institutio development and irucure sub-projects. Ihe remain counterpart (minimum 25%) woud be provided by sb-borrowers, tough payment of nvoices, or in-kind labor conrb tions. 4.5 Terms and Conditions. Sub-loans wo",ld be made to sub-borrowers in three categories, with tem of Up to five, te ad fifteen yes (including grace peiods of one to tree years), depending on he cot-recovery profie of the Invesmen. Sub-loans would carry an interest rate aee duing Nepation to be calclatd on the basis of the cost of the World Bank loan plus a -spread- of 3% - 18 - (Yieldin an esdmated project average rate on the order of 12%).' The ineest rate for sub-loans would be vaiable, ajusted semiannually on the basi of the Interest ra on the Bank loan All sub-loan balces, dissemets and rpayments would be denominaed In cruzeiros. Duing Ngt 1atic ms t was aWeed th subloan amounts and balances would be adjusted for aion usin the Idce Gwl de PMs de Mer4do ([GP-), Issed by the Getulio Vargas Foundaton, an Index commonly used in the financial sectr to maintain h rel value of balances. The spread woud cover the adminstrtie cos of manig the SOMMA Fund and the risks associated with foreg excage fluctuadon (auming the adjusteat index moves rougy in tandem with the devaluation et the cruzero). Residua risk due to diffe s In the movement of ths index and the devaluadon of local curreny agns h currencies of the Bank loan would be borne by the Stat. Given the high rat of Brazilian inflation, and f cial market ditotion, during Negotiations It was agreedthat the in rate would be dicussed anmually. Table 4.1 prens sub-loan tem and condiion for each type of invetment via \.0 LA .W10- I'W. . R- Gram IWTOpof i _bnet TOm Pedod Cad Upgrades, Masr Plns, Othd Teonal Anoo, Pchas of Sold Wast EBu_nt Water and Sewe System up to up to Iovwmee, Pdvataion Pilot Mro-Basin Fiiy Sudios 5 yea 1 yer We Dstrbi and Seowe Cledoni Connectos. up to up to PavalWllt, PUbrw LW&& o8, o-Di10 years 2 yea Wftr Pnxud and T _det S _epT _ef= SoUd Wasb Dlqmn4 Msao-DnJn>D, Wwro-A. tciw P"t upto up to | hn_ | 11 _ I _I | | _t ~~~~ ~~~15 yms 3 . 4.6 It w farth agreed durig Negotations that sub-oans would be guaned by municities' vauedded tax (ICMS) a (or, in cases where thisI i sufficient, by the munici patciaion find (FPM)). In the case of COPASA, other water companes, and the private sector pilot investent, it was agreed tht guarae would be made by pledging of revues, or physica or finanil assets. Under a previous municipal program Idm red by BDMG (Annex 3E), there were no aman, and no need to call on guarantees. If a ca of non-payment occs, requirg th invoking of a guarantee, BDMG would not re-lend to dth sub-borrower unti the situaton i satisfactoriy resolved. In order to ensure a wide ditribution of project benefts, it was agreed during Negons that no single sub-borower would be able to borrow annually more thn 10% of toWal sub-loams made without prior coultbaon between the Borrower and the Bank (in the case of COPASA, no more tham 20% of the total). In order to ensue project flexibility In the eady years of implemeton, tds limitation would tae effect only in the project's third year. 4.7 Flow of Funds. Annex 4D prves a diagm showing the projected flow of finds f*om the vario finncing sources to BDMG and sub-borrowers, and a simuation of funds flows on bis of the tem, estiatd lending, and renms to the SOMMA Fund over a twenty-year period. As shown, if the project i implme_d accrding to sdcedule, the revolving natur of the Fund would enable it to lend on the order of US$25-40 milion per semester in the five-year period following project compledon, or rouoly the same order of magnitde as Fund lending during the peak of project ecuton. 1I huhis also ooasdera proybog4r waka Intes rates in Brad!, ask its coprbl to thleta. (18 yer, 10-2)under t) h o ly sounfsturfinancd avblef im pubfio.aseorba (tNsaoolDevelopment Dak (INDE) and Fedwra Doonoado Fund (CU)) andf to thseetablishd undewsnuk Bank-financelod peels in otber tates. - 19. C. IDMG's Appial Proes 4.8 BDMGs DlU would mMge all aspects of m gemet d opetion of the SOMMA Pogam, nludg prepaaon of all subborrower nd sub-project appraisa acordig to selecton crkeria set out In the Operonal Manual. During project prpation BDMG made dgnifican dforts to pre for tis project: it agreed to strength the DIU wih additional technical stf ented Ito ageemes with the Ste water company (COPASA), the Nadonal Health Foundation (FNS) and FJP for specialized eptise In the preparation of the project, prepared working drft of the Operational Manual, ted proposed procedum trough preevaua8on of a groW of 30 fir-year municipalities, geed to purc and insal upgraded computer equipment in the DIU, araged for electro mmunication with Bank headqurers, and recently lanched a publicty campaign for SOMMA. Durn Negotations the Bank was furnied with evidence of ysa ctory increased staffing (four addiionl technical staf) and comput erzation (threo additional computers and three additional printers) of the DIU, and it is now fully preped to Ia operaton of SOMMA. Annex 4C ses out in detail BDMG's pprais process, providi an llusration of su-oower and su-project evaluati for a sample case, the city of Patos de Minas, one of the Progras first-year municipalities. The appra pces is summized below. (a) SubBoffower l;igibiC 4.9 All municpalities in the State, plus municipa water and/or seweage tord es and COPASA, would be eligible to pardcipate t the SOMMA program, providing they comply wih miimum criteria, and undergo a detailed finac and insiuto appraisal. FWI sub-borwer eligibiity crteria are detaied in the Progrms Operol Manual, Volume 3. Key steps for enry are as follows: (a) signtr of a Participation Agreement (ConvDnlo de Panicdpap) which formalizes m pal Wnerest in SOMMA and commiment to its principles; (b) compleon of an sitial nd financial diagnosis, accordig to rpid methodology developed and tested under simlar programs in other states; (c) establment of an agreed set of instittion-building acdons, with dlealy-defied perorance targets, oudined in a Strategic Action Plan (PAO ); (d) demoed compliance with Federal legislation on payment of taxes and othe& obligato; and (e) demonstrati of debt capacity according to fedal gidelines for public sector borrowing (set out in Senae Resoutdon #36, 1992). 4.10 MnicWities with independent water and/or sewrage c nes wOuld also present the last three years' f stamets, in addition to the above conditions for the parent munipalt. COPASA's Iutiona and financial sionhas been appraisd, and found to meet minimum conditionq for entry Io the SOMMA Program The Botrower agreed during Negotditone N that COPASA would maintan and improve its pefmace according to an agee Financial Plan which tgets Inqey operaoal and fical per nc Idicators (see Amnex 3G).2 4.11 To undetake frutctue sub-los, municipaides and water agen woud demonst: (a) debt capty acording to federal guidelines for public sector borrowing (para. 4.9); (b) avbility of required couart funds (minimum 25% of proposed project costs); (c) ability to provide aguarantee;ad (d) compliance with federal regultons regading inta-govermn debt. 2/ Consisted w bh arVa ad ameomeu reachod under dhe rweedy4ppred Mins On= Water Quahty and P*Mn cat P,oj (.& 3554-U). -20- In addition, munIc vitIa wich hav not upgraded their reside and mmrcidal proprty tax cadaste sin the new Constitution took effec (end-1988) would commit to upgrding them in the PAB. Municipal watr and/or sewe compaies would agree to undertake a marginal cost anysis of tariff and incorpor the resuts over the pi of the project. Ibose and conditi arm staed in the Operonal Man and woud be made explicit In sub-loan contrac between sub-borowers and BDMG. (1b) ft -te Ei g$ fW4 4. 1 4.12 Sub-project eligibility crita are set out In tie Opetional Manua, Volume 2. AU sub-pojects would undergo techical, economic, fiancial and e ental evaluation by a team of BDMG staff. 4.13 Te _na evaluadon involves analysis of demand for th service, and densatio tha the dose alternive Is the least-cost means of meeting demand. This eauaon wou be pefomW by BDMG engis with the assistance of spiized technical agts as necessy (for example for sdid wasto disposal, or alternative sewg tratge m). Proposas wil be reuned to muicWities for reion if necessary. In the case of sew tream and solid waste diosal subproject, low-cost, well-teste alternative techologies such as anaerobic sw e teatm shoud be encouraged, wher appropriate. Sewage treatment and solid waste disposal Investents would be subject to specific te cal analysis to determine tho vIHIty of isolated investents In single municipalities. In cases where the only viable, or the least-cost, solution to sewerag or solid waste pollution is multi-municipal or regional in nature, municipalities would be encouraged to form water basin associations and work colaorati develop a viable subojct. Gran financing, admintd separately from the SOMMA fImd, would be avalable for feasbility studies for hs type of opeation. 4.14 EconomIc cost-e t anlysis would be done to detemine projet viability. The minimum citeria for sub-projes would be at they provide an intel rate of return which meets or exceeds the opportunity cost of capital, estted to be about 12%. In the case of g sevices such as water, sewerage and public ligdtng, economic benefits would be calculated on the basis of tariff revenues as a proxy for wDIne to pay. In the case of non-me reve nue sepism, such as drnage and paving, economic benefits would be based on increased Ind values as a resut of the infrastructure improvements. Becse of the difficulty in quafyi full economic benefits for solid wate disposal and sewerae _treate subprojects, for those subwprojects costing less than US$1.0 million (and for micro-regional sub-projects), estim of per capita benefits would be sufficient, prvidng the technical solution is least-cost and benefts are shown to be largely witdin the munIciplt (Annex 6A). 4.15 huandal costbeft analys would provide the basis for determining cost-recovery. All infrastructure sub-prjects (with the exception of some sewage tment and solid wate disposal), are expected to achieve full cost recovery. Sub-projec inestments would be aked to specific targets to incree user fees and ta, to be agreed with municipalities in the PAE and reflected in the terms and conditions of subloans for inftrce investment. For exaplo, the case of Patos de Minas, shown in Anne 4C, the municipality wil need to increase its bettment charge in order to provide fuIl cost recovery for the proposed storm diag sub-project 4.16 All necessary environmentl evaluation and ment would be part of requiredo (see para 4.32 and Ane 6B). I assessments, where required, would be completed by private consutants, ev_atd by PEAM and submitted to BDMG prior to sioatu of sub-loan contracts. 1 umplwhic hs t Adlod ., 1hS. of PJua"m dob.SpedeAmex4wD otpduiuy swstt breape, wic hve bes e4.s oal, with rbl. la Soo Ann4D. -21 - 4.17 Infastucture nestments would be linked to specific technical assistance intervons. For exmple, investments In solid waste collectizo and disposa, if deteed to be a municipal priorty and econocally vble, would be accompanied by appropriate creaswe in the relvt user charges and/or taxes, tcical assistance in zoning and land-use, In the Improved efoment of local env l reglons and training for Involved staff at the local level. hI this way, the instudonal development and infhstructure components would be fWlly complementay. Given the Importance of maintaining this linkage, RIP will work closely with the BDMG project teim on the recommended package of tchnical ss inteventions for each municipality. For each sub-borrower, a team of one engine, one econom Wslfinancil analyst and one institutional speciist wi be assigped to work together with local authories, from diagnosis and PAE to euation and supervsion of the Inrastructure invetmets. (c) eviewcedu 4.18 Given the large number of small and medium-sized sub-pojects expected during this project, BDMO would undertake the evauation of municipal sub-components beyond those evaluated during Appraisal (the COPASA compone of about US$60.0 million, first-year municipal iftructr Invetm totalling about US$60.0 million, and the public liting component of about US$22.0 million, or a toal of about US$142.0 million) according to agreed criteria set out in the programs Operational Manual. During Negotions it was agreed that for sub-projec expected to cost more than US$5.0 mili, the Bank would have prior review of al prwopsed tehical, economic and finacial aspects; ex- post review would be undertaken below this amount. The limit would be US$2.0 million in the case of sewae treatment and solid waste disposal, which are more likely to employ less well-ested technologies. Sub-projects would be considered for review until three months before the projec's Closing Date. (d) Technical Age 4.19 Tecical agents would assist ncipalities and BDMG in the preparation and evaluation of sub- pojects. Municipalities would be fee to seek technical advice from State, local, university, pdvate or other sources. bh order to provide a guaranteed source of experdse, several umbellaw technical agent agreements would be signed at the project's outset. During Negotatons it was agreed t technical agent agreements satisfctory to the Bank would be sigped with any competent agency, as needed, for the puposes of evaluation and supervision of the project. Umbrella tecical agent agreements with COPASA for water and sewage, and with the State electicity company (CEMIG) for public lighting would be igned prior to Effctiveness. A technical agent agment has already been signed with the Nadonal Health Foundation (FNS), which furnishes technical assistance for water and sewerage services to municipalities which provide service independent of COPASA, pimay in the North of the State. A teical agent contract satisftory to the Bank would also be signed with FJP prior to Effectiveness. The agreement would Include elaboration of PlP's responsibDies as *ape tedhnical assistance institution: developing a coherent framework for the insitutional development component, including sdM questionnaires, diagnostic prcedures and guidelines, and model terms of reference for key technical assistance Interventions; as well as supervision, evaluation and monioring of the tchnical asstace component. D. Lgal Arrangements 4.20 Implementaton arangements for the project would be fomalized in the following legal documents: (a) the SOMMA fwnding Law; (b) a Loan Agreement between the Bank and the Borrower, the State; (c) a Guarantee Agreement between the Federd Government nd the Bank; (d) a Project Agroeemet between the Bank and the Executing Agency, BDMG (e) Particiaion Ageement (cownos depxnipa4lo) between the State (BDMG) and particIpatig ncipalies; and (t) Sub-Loan Contacts betweeni BDMG and participating m a municipal and independent water companies and COPASA (see Annex 4C). Areem on the final veri of the model Pariciation Agements and -22 - Sub-Lao Conta was reached durig Negotations. k was also agreed tha all conditions present in tho lgal agments betwen the ank and BDMG, the State and the Federal Govenment and COPASA, would be reected in the s, as necessary. F. Prourment 4.21 All prorement of goods and works would be cried out following the World Dans Gudelwnes Jbr e Pro awM May 1992). Past Bank-financed projects have encounr delays and difficulties due to dicrepancies between Bank procur guidines and Brazilian feeral and state lelateon. Specific dcmandes betwee Bank guidelines and these loca laws ar: (a) price as a fctor In consultant selectin(b) number of bid envelopes in competive bidding; and (c) use of brackeedng and price ceilings In competitive procedures. A ruing of the federal Mlbwnl de Comas last year upheld the positon that Bank guidines should prevail over local law under Bank-financed projects. Furtherorem, a new national procurmen law which is co_istet with this position has been recenty passed by Congress. This new law, combined with the us of stadard bidding documet (Par 4.26) should help to reduce procument problems prviouly enoountred. 4.22 The proposed procurement arangements for the project are in Table 4.2 below. Civil wors under the proposed project would represent about 62% of total project costs; equipme and materals about 32%; and codtant services, includw technica assstance, training, studies, engeering desi and works supervision, about 6%. Amex 4E provides esmated profles for sub-project contracts. ~~~~~~~~~I IEo T& CbillWoda 38.5 155.6 125 20C.6 (17.3) (681) (50) (911) --uii eSand Matoulk 67.5 30.0 8.8 106.3 (30.4) (13.5) (3.5) (47.4) ConsultmMSwio - - 20.2 20.2 (11.5) (11.5) kTMAL 106.0 18S.6 41.5 333. of vAtBn iscd(47.7) (0) (20.0 (M.X .,,.nwod ,,hW ulo d b"an ) a d bbSaoobns 4.23 Cvii Worla. be eimated value for civil works co ct is US$206.6 million. Due to the widW ran of szes of mnicipalities paricipating in the project, e will be a nunber of small conacs as wel as larg ones. Most contracts will be scattered throughout municipdles in the State and average US$100,000 - US$3 milion in value, with a few ecceptions of large work ove US$5 million, to be eed by COPASA and lgter municipalies. Its eapected that the smaller, dipesed contracts wi1l not be aave to fore bidders. It is thereore proposed Ihat al contracts for civl work estimated to cos the oqulent of US$5.0 milion or less up to an Aggated value of US$155.6 mMlion wil be proured on toe basis of loal cmpetkit bidding (LCB) prcedures satifto to the Bank. Forei fims wil be allowed to parftipte in the biddig. Above these lims, procurement wil be carried out on the basis of intatonal competitve bidding CB), under Bank sle8in. Local shopping - 23 - procedures acceptable to the Bank would be allowable for m civir work contrac mated to cost the equivalent of US$100,000 or less, up to a tot agpgra value of US$12.5 millio. 4.24 Goods. Purchase of equipnt and materials b eed to tota about USS106.3 millon under the project. Ihe majority of these pures wil be small machinery, equipment and merdals necry for the installadon of infastructue srvices, and most contrts ae e d to rag bewe US$50,000 - US$250,000. lhere will be sigfican scope for economy-of-sae purching of equipment, however, in the case of wat and sewerage investments to be executed by COPASA and public 1ighting ilnvestmen to be executed by CE?G. Tn both cases, thes State companies wil procure goods on behaf of the municipalities and a speal effot will be made to Ideny ICB packae. For this reason it Is proposed that all contracts for equipment and mateals esmate to cs the equivent of US$250,000 or less and not exceeding US$30.0 million in agrega would be procured on the basis of LCB procedures satisfactory to the Bank, with foreig firms allowed to participat in the bidding. Above these limits, procurement will be carried out on the basis of ICB under Bank guidelines. ICB doc_ would Indicate specificaly whether domestic preference would apply in b evaluaon. Loca dsopping procedures acceptable to the Bank would be allowablse for small eqpment pues estmated to cost the equivalent of US$25,000 or less, up to an aggegate of US$8.1 million. 4.25 C_oult Serices. All tecical assice studies, t ng, egineerg desig and wors supervision contrs, amountg in total to about US$20.2 million wil be procured in accordance with the Bank's Gddelbesfor dte Use of C utat (August 19), icluding proposals from ftip aod local fim. Due to the dispersed nature of the sub-projects, and the large number of epected small concts for technical a ce and training, project design and supervon, duing Netato It was reed that Bank ex-most review wil be used for contnt sevices ng o less ta US$100,000 (although terms of refee wi be reviewed), with prior review for aU conultn sevices pected to cost ore than th amoun' 4.26 Stadrbidding documents and contracts for civil works and services under ICB, LCB and local hopping methods are set out in Volume 4 of the Opational Manual. A draft leoer of Initaon and sample coract for consultant services will also be included in the Opeaonal Mual. ADI m under ICB (about 30% of total project costs) wl be subject to prior Bank review of advertig, bdding documents, bid eauation and contract awards.5 In the interest of expditing project execuon, all procrement under LCB wi be reviewed by BDMG's DIU, which is eperienced in tis type of procurem review. However, LCB procurement processes for works expected to cost US$2.0 million and above, and toalling about US$90.0 miion, would be subject t the Bank's prior mview. The first three LCB proemet for both goods and works, regrdless of amount, will also be subject to the Bank's prior review. The proposed prior review arangements would prvide a prior review coveag of about 65% of the toW cost of Bank financed goods and works, which Is considered Wpropriate. Al other procurmnt pocesses will be subject to ex-post review by sampling. If the Bank determines In the review by sampling hat procurement is inconsistent with agreed pwcedur, the Bank would reve the contract review procedures, and no expendiures for such kems will be financed out of the proceeds of the Loa F murteme, the Bank may cancel an equivalant amo of the Loa In tis even, th Bank may also require ex-ant review of subsequent LCB documents. Audit responsible for the verification of project accounts would be Instucted to eamine and report on the use of these p procedures. A genal announcement of the types and sizes of COtract to be awarded during the subsequent year would be published by BDMG at the beginnin of each year in local nd International 4/ To confxm with guiden establishd in OD 11.10 (Anne C) dated Novnme 1992. sI As pe OD 11.00 (Am= C) of Novnmber 1992, when bids am Inited oan a fxed-i, besk he documeots wd Iwld, a specific provison to protet bide fiom extension of bid vadty. -24 - journas of wde cirladon. The teb for the first such advertsement has been fern1sbd by 9DMO and would be published in Deweopment Business once the proposed project has been presented to the Ban's Board of Directors. The above procurement aragements were ageed duing Negotiadons. F. Disbursement 4.27 The proceeds of the proposed loan would be disbursed according to the following categores ad percentage: (a) for subloans for technical assitce and e, 60% of sub-loansb and 100% sub-loan amount in the case of foreign epnditures, excluding taxes; (b) for training grants, 50% of all subloan disbursements; and (c) for consultant senices for studies, 100% of all expenditures. Allocation of loan proceeds is shn in Table 3.4. Disbusmnsare expected to be completed over a five and a half year period, as reflected in Annex 4F. A disbursement schedule somewhat shorter ta the regional profile of seven years is Justified by the experience and competence of the executng agency and the project's tming within the local electoral cycle (para. 3.4). The Project's Completion Date would be June 30, 1998, and Closing Date would be December 31, 1998. 4.28 In order to ensure efficient and timely implemeion of the project, it was agreed durng Negotaions that a Special Account in the amount of US$8.0 million equivalent would be established in a bank acceptable to the Bank and the Borrower. Because the projec would involve a substantia number of smal contracts, disursement for civil works contracts amouanting to less t US$2.0 milion, for purase of goods moundtg to less than $250,000 and for consulta services amount to less tha US$100,000 would be made under the Saement of Exenditures (SOB) procedure, prepared and ceIfied by BDMG, which has adequate accouting conttols for this puWose.' Expenditres for coas above these limits would be documented. All documentaton would be reta by the DIU for inspectio during Bank supervision and be subject to review of enal auditors. Because several sub-projects are wel-advanced, retroactive financing of up to 10% of the loan amount for eligible expendures incred after Januay 1993, but not more tham 12 months prior to loan Signaure, is recommended. During NegOaions, these disbursement arrmgements were agreed. G. Acooung and Auditing Aragn 4.29 The accounts of BDMG, the project's executing agency, are examined annually by prvate ernal auditors, as well as State-level government auditing bodies. Accounting practes and pOcedures, including the chart of accounts, have been reviewed and found satiscory. During Negotations the following accounting and audit arrangements were agreed: (a) tha BDMG would maintain a separate, consolidated project account of sub-project expenditures for monitoring and audit purposes, to be audited along with BDMG corporate acounts by private exteal auditors acceptable to the Bank; (b) that the projet accounts of parcipan municipalities be maintined separately, and be subject to annua audits by the Stats 7Hbamal de Cmas, or Accounting Trbuna, as curretiy practiced; and (c) dth COPASA maintain separate project accounts, to be audited (together with corporate financial ) by private externa auditots. These reports would be furnished to the Bank within six mounts of the end of each fiscal year. S/ Moatut awio would be poded by G=; fo ndviual constn fUld -25 - IL Monitoring, Md-Twrm Reviw and Evaldtlon 4.30 In addition to BDMG's site visi, sub-borrowers would be aepectd to pren peiodic progress reports on project Implementai (with periodicit eablishd In subloan contat), on the basis of which BDMG would furis concise quartly progress ports to the Bank. hese reports would compare actua and forecast progess. Ihe ded range of project monoing Idicators i provided in Volume S of the Opat Man. Thes cu sandard sgeed pfobrmance indicators monitoring physical, fiancial and operatioal pros of Iid sub-projects. and 4 a project pefrmace for all sub-proJects. Included are specfc Indicators for COPASA, as agreed in the COPASA Fincial Plan (Anmex 3G). A set of "key impact lndiators' and targ, selected from among the goup of Indicators to be monitored durig the project, hav been agreed, Including: (a) number of Participation Agreements signed; (b) nmber of PAPs completed; (c) overall project completion, measured in e s; (d) discretonary as a percent of total State trasfs to nil; and (e) average property tax per capita in the State (see Annex 4G). These indicator, aon0g others, would be monird In quarterly reports. It was agreed during Negotiaons that quatedy rports be furnished no later tham 30 days after the end of each of the following quarters: Marc 31, June 30 and Septembe 30, and an annuls report would be prepared for the December 31 perod, to be funished within two months of year-end. These reports would include, wer alia, the monitorn indicators set out in the Manual. Repor tng would begin with the first fu arter following Effetns. 4.31 In order to review project progress, and If neceay reorient hpi on, it was agreed durn Negotiadons that a mid-term review would be scheduled a two-and-a-haf years (betwe thirty and forty months) after Effectiveness. In order to ensure Its useuness ad that effective evaluaton procedures are established during proect implntatn, the broad objective of this review a included as part of the Operaonal Mana and are shown in Anex 4L The mid-term review wod, bsw alla, review the agreed progess on the pilot progrm and stdies, and make specific ,-- mnundadons for condnutin in the case of the former, and impl of recommedations in the case of the latr. Et was also agreed that the Borrower, throu BDMG, would also prepare and frish to the Bank a Project Completion Report within six months after the Cloig Date. L EvUiron49meta impat studies 4.32 Specific guidels for evaluation of nzuclpa projects wih iamc t have been established by the State envI al agen, Fdao E l d ombm AM) for the puroes of tho project. The new rles establish guidelines for eroel s by pioject size and expected impact (on te basis of physical measures, such pipe size for water and sewerage). These gudines ar rougy comparable to simlar ones In other stes, and are compatble with both federal govenmet law and Bank guidein. There are three categories: the first, for projects of significant size nd mact, would be a fu nvirnmental impact a smet and report MAIRIMA); the second cateoy, for projects of smaller size and impact, would be a simplified assessment, or environmenta control report (RCA). The third category of investments would requi only licensing. Enronmental assme under the project wil be prpard by prvat cotants and reviewed by FEAM. Full enviometalt impact _ will need to be done for about 10% of appraised first- ye sub-pjects (sewa treaument and landfill projects and larger drainag projects, principally to ensure adequaesting), while about 15% wI reqire simpler impact reot and th remainder licensing or no action at all. Et is expected that subserojcts financed under SOMMA would reflect these percentages. e Operational Manualstiptes that asessment would be conducted as needed, consIst with Brazilian law and Bank guideines, pdor to signt of sub-loan contracts. Durig Negia it was agreed that EmA/RIms and RCAs would have been comleted for sub- -26- proJects wh envioment impact,' consistent with Brazilian and State laws and Bank guidelines, prior to any disbursement on the relevant component. BDMG would provide tecdhica assistance to municipalties and ovesee the environmetal screing proces, fom selection of consultams (Or which It wiU mslntain an open data base of firms) to subsequent evaluation by FEAM. BDMO wil also maintain an agreed model set of terms of rerence for eironment assessmen, prepaed in conjuntion with FEAM and the Bank (Anmex 6B). During Negotiations the State provided assurances that FEAM would comply with its review and evaluation responsibilides in a satsfatr and tmely way. J. Implemaon Schedule 4.33 Annex 4H presents the proposed projects ageed implentadon schedule, which outlines key actions in project execudon fOr smooth implemeion. his wM be frther detaied through the use of project manment software, to be established and programmed during the projects inception mission. Of priay iport are targets for Participadon Agreemen with m es, procuem of major work, and progress on tedchical assistance intevenions. This schedule is to be prepared on a roling quartery basis. AIrgeme for project supewrision are outline in the supervsion plan in Annex 41. Pbysical project supervision wil be caried out by the DIU and coultants on the basis of site chec. BDMG's 30-year expience as a development bank will greatly aid supevision. V. FINANCIAL ASPBCrS OF THE PROJECT A. State Fiances 5.1 Sound fiscal and financl management, in particular over the last two year, places the State of Mins Gerais in stable financial condition, despite recession and onomic difficulties in the country as a whole. Responsible fiscal management of the current State administraton has been a key factor In colaboration between the Bank and the State in praation of the SOMMA project. The State relies on own ces (ICUS and other ta) for about 60% of its tota receipts. As of end 1991, a revenues were US$4.9 bilion, compried of US$2.9 billion, or 59% own source tributary revenues; US$0.9 billion, or 19% federal govermen transfers; US$0.7 billon, or 15% from credit operatio; and US$0.3 bilion, or 7% from other sources. On the expenditr side, curret exp represent about 77% of all expenditures, with personnel cosu equalling 42%, signIficantly below the legally stipulated 65% Maximum he remaing 23% went towards capital exp, of which about US$140 milion was invsmnent exenditure, lower tha In previous years due to the constran of recesion. he Stats debt burden is manageable giveS its resources, and debt service cover and other financial atios are satsfactory. IThe State asembly has passed authorization for borrowing fo the SOMMA project, whkh is well wihin it federally-stipulated credit limit. Financial projections assume a 5% annual real Increase in both fisca revenue and expenditue over the next five yes. Detais of the State's historic and proected financ siuation appear In Amne SA. 5.2 According to the State's pluram_ development plan for the I992-1995 period, and conssten with genraly accepted evaluation, the decentalization reforms and possible future is refrms wil not bring Icreased own re es for the States in Brazil's federl sym Thus the Stateis agevely pmotg gater municipal financial independence and respibilty, as confirmed in its Policy Statement of Municipal Strengtening and Decentraizaton (para 3.2 and Annex 2P), where the State sets out its view of the proposed project as a key instrument in its staW r faievAng gre muni fiscal respnsibility and idependence. n fact, Mi has succeeded in reduci negodated grans ftom / Alioug o imea uatdr dho pjoat, t wou il amy impact ad p_= for m, if aoar. -27 - 32% of tota grnt finds provided to just 10% of fiuds fwom 1990 to 1992. A foml prposal to condition l Ihnstruct urein em funded at the Stae level on a specified muncpal coupart (for benefit s) p ing leiswati action. 5.3 The Staes borwwing capaci was estimed on th bass of 1992 epected perfrmance and the nwly promulgated, sigen ferda legislation () regardIAg d,tobe about US$900 milion annually. Ihe Stts's two top priority Inveme to be financed by milateal crdit ar: the Waw Qualty and Pollution Contrl Project (L. 3554-BR, US$145 million); and the prposed project S. Munclpal F _iae 5.4 Following the fis decenlon d a nst refoims, both munipl rewources ad igpodituroIncreased iy. Municip ditues rose from about 11% of to tot disposition of final revenue (aveag over h last two decades) to about 17% in 1990. ExpedItres Incraed from about 11% to about 14% of totl (see ACn 5B). The effe of hsre ant yet fully dear, however. Lat seem to have benftted more than smaaller ic i, did tose with a larger economd i base over txose weak ecoomies. Mos municiplties, however, ar much better off finanily folowing the refom. Ti can have a perverse impact on own re ces, however; for ample, Contagem, the Stats second-largest city, reeived among the highest ICMS tnsfers whie own revenes decreased during the period.' 5.5 Miost munic Ies I M rely heavily on tran s from the Federal and State gov et. Table 5.1 beow indicates munipal revmuo sources on the bas of a sample of 217 muals. As shown, own-source revenues, prmaly rpresed by IPTU and ISS, reprstd on averg about 21% of tot rvenues In 1990. The project would generate eased own reven Itugh criteria which would emsur cost-revy rough user- ges, betmnt fe, and property and other tae. 2 I ~~~~~~uss-- 5Of- S 7 of R Iam 000 TO I vww US$ Td1 TIde 40. 79 CWra 1M 7 n ICms 2089 37% Odr 236.7 42% own Souna 117.0 21% Cagial 1484 25% WmIU 18.4 3% O_b. 98.6 18% T(TAL 58.8 100% TOTAL 5626 100% De1 (2) 3% 5.6 Debt Capact. Mos municipalities bh borrwed pviously only on a liHmted basis, tough small lInes of credit opeated by BDMO (tota of US$100 mlon beween 1980-1992) and CEP lons to larger municipalities for sanitat This will be the first c for lag4cale municipa boowing in te Stat. in general a cd hy dsnc hey ha not previously borrowed and are now better off ta previouly. Howe, ther are svrad lag muwhi $1 A Mmw LqWegE. 2Whtat" e P/*ta sobrew as mnow Mimie4b BDDMG, 199. -28 - are sgdficaly levenged, ad mus botrow with extreme cautn Simulations prepared on the bai of Fe y 1992 data suggest that 538 unWpaltes (with 97% of the Stato's urbn populatin) have a legl Indetednes limit of about US$216.0 million. Of th tota, 29 municipalitles bave a limit gre ta US$1.0 mllion per year, 36 have between US$500,000 and US$1.0 million per yea, 244 between US$100,00 and US$500,000 and 229 less tha US$100,000. Annex SC shows e debt cacty of 22 first-ye municipalities to be US$64.5 million, and repaymen capacity US$134.8 milli C. Cost Reovery Polcy 5.7 All sub-project appraisas would be based on the pidnple of cost recovery. Services which ar revenue-earning (water supply, sewerage, solid waste colection) would recover cost tough as and user dages, while services which anon-venue earning aWng, drainage) would be reovrd trough Iaes in property valuation and subsequent prperty and btmnt ax. Annex SD contains a breakdown of the cost-rcovery instrumens f al components. 5.8 Pcing Poecy. As set out In the SOMMA Operation Mamnu, ta for reenuvg se n icz would be set so as to recover costs (on the basis of long-n margina costs, with a pwvio for the financial health of the entity). Tariff studies would be done under the uonal devetopmen component, and tariffs restructed gradually over the life of te proect according to specific arge established for each nicipality in the PAE. COPASA's curet taiff stucture and level provides for reasonable cost recovery; tis wHi be ensured twough its compliace with agWed financa and opeationa targets in the COPASA Final Plan (para. 4.10). In a state where a lr potio of te sewerago service provided is throug mnici agencies separty fm water sevic, the I lle sop for cross-sus fom water to sewerage, or from the economy-of-scope gais fom joint provion. Thus marginal cost anaysis and prcing will be combimd with efforts, thog a study at te Stat level to exam ituonal arrangements and altnatives for establish0joint prvon of water and seweae services, whether th'ough Joint municipa e c ies, pvaation, munlcipalization, and contracting Out. D. Do of SOMMA 5.9 In order to dimension Inestments for the SOMMA program, the Stat ad BDMO evaluated sevral key a$rea: demand for resources; municipal and State capaciy to borrow and repay loan hinds; and Sate and mmuicipal techical, hstittonal and financial absorpdve capacity. First, the Stat sponsored a study wbich demonsd that over the next decade ly US$3 billion, or about US$300 million per year In Investments wer needed in the State to adce the objectves of ineased service coverage levels. Second, as part ofproject preparation, in July 1991, BDMG undertook a survey of 25 of the Sta's larger cities, reprenting about 3 million inhabitans, or about 20% of the popWulaon. The study confirmed hat the most widely demanded investment were water supply, sewrge collecton and trement, solid waste collecton and diposal, street paving and drainage, and idefied potetl iWesments on the order of US$100 miUlion. Third, BDMG prepard an evauaton of the credi limits of about 400 of the Staes cipalies, r seng about 95% of the pol Ion. is evaluation showed a tot debt capacity, according to feded guidelines, of about US$600 million on the basis of the muicipal fiscal year 1990. Finally, the Stat Govement de Ine its hitoric finalnl statements that for the past several years it has been spending on the order of US$200-250 million on nd capital investment, laWrdy In urban is the o aent of thes huds whih would go into the SOMMA find as State couart. The proposed project scope of about US$330.0 mllion for infrastructue and ntiutonal development investments over a six-year peiod (or about us$ss.0 million per year) wasbsed on these findigs. With State uterpatof aboutUS$15.0 mon and a simil amount from municipalites and water companies to be provdled each year, the project is conservatively dimensioned. Smulions dicate hat about 120-150 of the Staes muicipates (those -29 - wih poplatio gretew 20,000) will pardcipa In the faucture component and about half of th Stes cIpalies (90% of the population) in the Instit development compont 5.10. The firm commiment of the govermn of the Stae of Minas Gerais to project objectives, as set 1xth in th Policy Staement presented by the Borrower at Negodations, Is a prmary tor contbuting to the projects likely susnabilky. An pedeanced actig agency is a sed fctor. PFuer, the prposedprectis the fif In a seres of smila projes wblch ar being succfully implemed n ote states In Brazil. UTe proposed project was developed beaing in mind the specific lessons leared in thes previous projecs. Maket-equivent Interet rates, cost recovery at the sub-project leve, and the facd the Bank loan would be repaid by the Stat (making Bank unds a peman capiizatin of the SOMMA Fu Increas the project's c of finanal s8talnability. VI. PROJECT lENEFIIS AND RISKS 6.1 Ii beneft of the proposed project would be enhanced muncpal reource mobiliaton as a eult of weased wpr ty tax and user-chge revene and greaer efficie Iny I _ of loca _itsHW fo both operati and Invtment. Ihe projects uniaon Ivetment would have sinficant posidve impact on environmental conditions In the Stae. Becas of the sdecto of the State of Mns Gerads, the project would address the needs of a broad cross-secton of Brazs municipalities. Benefts would also Inldude the Increased access of a lag proporton of the st's urba poor to basic i servines. A. Flnanc and IfttutIonal hIpat 6.2 The prposed project would stegen the finan mi a t of local pvenmen, enab thm to bette pro the services for which they are responsible fbolowing the consuiarefms, thus fUly suort the governme's den objectves. Ihe project would also srgthen local goverments I. Specifically, the project would help local govemnment develop the capaciy to efFctvy prioritz, prepae and evaluate economically-viable nvestmet projects; en municalites to Icea own-source revenues - through appopprit taxes and us-charges based on ecnomic costs, and Impv collecton pracdces - and icetiVe to control current expendie; and seek al ve meam of efficient service-rovision rugh the private sector or through regional cooperdon. Mhee meaures wil make local pgvmen better at provAidig the svices for which they arers sible, and will support the maroe c policies and objectives of the fedea gvrnent lb8 project will o begin to mobilize pivate sector capital for municiW inveme In the State, amilarzing the priva secto with municipaliies and building their rdi. n ths way the prposed project would als s sound flnaial sector polcy and the govments overall oeconomic objectdves. B. E- ---ndr_-l and Realt& Benefits 6.3 Because of its focus on the basic sanitation sectors, the project Is expected to have signfica env -a benefits, pimaly teated to Impoed solid wste colection nd diposal, Iprved draig and sewerage collecdon, reduced water diuton system leakage and wae losses, a more intgrd aproah to management of sanitation services at the municipa level, and inreased efficiew nd ulit of siceprovisionftrough the development and impleM to of innovative The c al assistance omponem wil mficthe drat of munii nironmea -30 - legislation ad strengtheung of municipal nronen councils, consisten with the ciation strategy of the Stat's onm l ay. By encouraging local and regional cooperation, the poject will also stimulat solutions based on mico-basins, and will consolidate, wihn the smaller municipalities in the State, the experience of the Minas (eras Water Quality and Pollution Control Project (adressing the polluion of watvas in the capita). No serious visues foresee En*onmental aspects of fie project ae trated In deta in Anex 6B. C. Implcatons for Sectoral Policy 6.4 With the Policy Staement on Decentrai ansd Municipal Strengtening, the Bank and the Bonrwer have ane dfective Instrument for futre dialogue, and for assessing policy in the sector. The project wil further develop the strategy for the sion sector in the State, in particular poviding increased mwnicWuizatioe of services, exploring options for joint provision of water and sanitation, and examng a broad range of institutional arrangements for provision of sanitation services, includi private provis, mixed municipal ad Stat provision, etc., thrby adrsing one of te most citial efficiy issus the State faces in the sector. Finally, the Municipal ructure Finance Sud and Pvaization Pilot Program wil begin to develop altenaves for mobilizing private sector savi for long-term investment In municipal services, consistent with financial sector policy objectives. D. Poverty Impact 6.5 While poverty alleviation is In Itself not a primary objective, the project is ex to have an important impaci on the overall situation of the poor in the State. In add!,lon, infructru investments would provide inreased service access to the poor (below the poverty line) In percentcges rouly proportional to the share of poor in the total State populaion (estimated to be about 30% of total). The poor in margina urban popuatons, will benefit trough life-line rates which would gradually be built into tariff stuctures to be reformulated though margina cost studies. Ihe pilot program for regiona infrarcture service delivery in the So Francisco region in the North of the State wi be a povety- targeted program, where municipalkies with Icome less that US$500 per capia wil be eligible for Pcal State grans tO cofic their invements. Twelve of the 14 chies expected to participate In the fhrst phase of this pilot fall under is limit. The success of this tagetng would be monhord, and the pflot would be contiued, If succesfl, in Jecquitlhonha, the Stae's poorest region E. Economic Benefits 6.6 The weighted-averge pected rate of return for the infrastructue component Is about 27%, based on a sample of sub-projects representing about 65% of total proposed project Invsnts. The remainder of sub-projects are expected to yield rates of return vaying from 12% to 90%. Subpoject selection cArtei ensure a minImum 12% economic rate of return for all sub-projects. Detailed economic ost-benefit and sensitivity analyses are presented in Annex 6A. F. Risks 6.7 The major project risk b iplemeion of the instudevelopme program, which is a challeg compone requing significant advance planing, in particular in a state with such vaied municipal Istttonal capcite. For this reason, ageed tecbnical asstce and traiing programs and trets for muniipl to enter the project's first-year progam have been preared and progress on the institutional development compone will be linked explicitly to the inlfastrucro ompon for all sub-boers. This risk is also migted through the execuing agency's access to the experience of ndegboring southern stat with similar projects. Ihere are few tchnical riskso with the -31- poject, snce most InOrastructure ivestments ae of a rouine nate, with the excepdon of cetain sewe trtme sub-projecs which may employ low-cost altnatv tecnologes stll somewhat iovtive and less-well tested. Amounts allocated to thi ty of sub-project are limted, and Bank prior- eview of sub-project proposals minim this rislk nher is a risk that State govenent decdons In 1994 may be dirupdve to the project, however the fat that municipal mayors recenty took office (Januy 1993) for four-year terms which coincide with the project Imlemention period, diminisbes thi risk somowhat by ensuig ontinuity at the local level. The executidg agcy is a sophistcated and well-managed development bank, with experience in maaging urbar devedopmen projects and working with muldila agencies. VII. AGREEBMS AND RECOMlMATION 7.1 Df HgZgdW=, agreement was reached on the fllowing: (a) a proposal for implementation of the micro-regional pilot; te of reference for the sudy component of the privatizatdon pilot, and legal arrangemens for imple ion of the slughtousetest case; funding limit for each pilot program, and thateth mid-term review detemine whether to discontinue or expand these pilots (parm. 3.13); (b) terms of reference for the State studies, and timetables for thkeir i me l (to be completed no later than mid-tem review, para. 3.14); (c) the project finacing plan and the Borrower's guarantee reg necessary project conterpart fiuds (par. 3.20); (d) tdat BDMG execute Parts A-D; the State excte Part E (through its Planing Secretariat, wi BDMG's assistance) and cause BDMO to perform sasfarily (para. 3.21); (e) the final vesion of the Operational Manual (issued by BDMG's Board June 9, 1993), and dWt the SOMMA program be opered in accod with the Mau (para 4.3); M the sub-loan intrest rate to be calculated on the basis of the inerest rate of the Bank loan plus a 3% spread; the IGP-M to be used for ad-sting local-cuency sub-loan balances; and that this rate be discussed annually (par. 4.5); (g) appropriate guarantees tO be provided by sub-borrowers; and that, being In the third year of implementation, no sub-borrower borrow annually more than 10% of the toWal project amount (with the exception of COPASA, lmited to 20%) withou prior consultation with the Bank (para. 4.6); (h) that the State cause COPASA to maintain and improve its performnce, according to an agreed Finmcial Plan (pars. 4.10); (O) tat the Bank have prior review for those sub-projects expected to cost US$5.0 million or more, and US$2.0 million in the case of sewage tratment and solid waste disposal sub-ojects (pars. 4.18); 0j) that Tecnical Agent aeements satisfactory to the Bank for assitnce with eauation and supervision of sub-proJects be signed with qualified agencies as needed during proJect implemIentation (para. 4.19); (k) model Pardcipation Agreements and Sub-Loan Conutc; and dt all condidons present in the ageements betwen the Borrower and the Bank be reflected in the sub-loan coacts between BDMG and sub-borrowers, as neesy (pars. 4.20); (1) procuement satisfactr to the Bank (pa. 4.21-4.26); (M) disburement a gements sa ctory to the Bk Inluding establishmet of a Specia Account (paras. 4.274.28); (n) audit arrangements saico to the Bank (parm 4.29); .32 (o) quatelNy monitoring reo, Inluding one deted annua rport be fnhed to the Bank on the dat agreed, to hnlde, tnter alla, the agreed Implementto schedule and motoring Idicator inth Operational Mauma (para. 4.30); (p) hat a mid-tem revIaw be scheduled about two and a half yas ater Effctvess; and tha the Borrwer prepar and fhmish to the Bank a Ptoject Completdon Rot within six months after the amlng Dats (para 4.31); and (q) that the Stae cse FEAM to perform sisfctry (para 4.32). 7.2 As agreed, pQia to A atlgn . the Stat provided a fia version of Its Policy Statement on Decentralization and Municipal Strenig, dated April 1, 1993 (para. 3.2). 7.3 Prior to Lou , Teci cal Agent satisfactory to o Bank would habe bee signed betwen EDMG and the following: COPA;A, CEMG and FJP, wit the lat to Incude specific responsibities regarding PIP's role as ae instdion for the instional devdopmet componet (pa. 4.19). 7.4 As a Condhion of nO appropriateenira asssmem consistentwithBrazilian law and Bank guli (includig rsettlement pls, if nsary) would be undertan (para 4.32). 7.5 Subject t the above condtions, the project sutable for a Bkloan of US$1S0 olion equivent, to be repd over a perd of 15 years, including five years of gre, at the Bans standard vable interest rae. Retroactive fiacing for up to 10% of the proposed loan amount for eloe incurred after Janury 1993 is also reomded (par. 4.28). -33 - ANNEXES *35- BRAZL MINAS GE MUNCIPAL MANAGEMNT AND ENMRONMEAL DNFRAOMcM PROJECr noe ft*do in SDor of o 1. The CM for ra . There areswev ar_um in favor of fidelism or d _onostsare that becew some public services have naionwid beneft (eg., deese, resea) wo oters are gogpicaly hwltd (eg., puc l , allocative efficiy calls for publi senvies to be provided (ad eir cos shared Iine &with pnce. of tho reden of the relevant benefit region Tha is, servies with aionwide beneft should be provided for natonally; serices wi loca beft sould be provided for locally. Det ao is so justified for polical resos. It is beliW d thdt on is needed In order to lmit te power of one dividual over another and that It povides a taing ground N- democratic governent. On th institutional fron, d lio appe to filitae the lo coordinao necessary in the case of muiple loca services (I.e., street paving, war and sew_ag servioes). 2. TIe Bra_la Context. Brazil's 19B8 Consditution is the most reon attempt of the country to promb ote decetralzatio and federalism. Commien to ehne the role of st an municipalities in the oniduct of public polit is a cear darctistic of the Constitutional tex The mConstitton bas inessed municipal 'spIbti, so that they now cover, Lwer alia, ua public transpor, pe-school and sent_y eduaton, pevenive heath cau and land-use. As shown in Annex 2A, at the revenu leved number of municipal taxes has doubled frmm two - a tax on propery and a tax on servie - to four: the ura property ta (IPTU); the excise tax on services in a number of tertary activities (ISS); a tax on property sal (B andafaeltax (I[VVCLh). Asaresult oftheseg, theshare ofnm ipes itogovement rvenues has mor than doubled. However, in absoute terms the effect bas not been as kaW as expected, de in lre part to the recessive economic envirnmed (see Annex 2B). 3. Resio and fiscal adjustmet have also motivated both te fedel and stae governmets to asolerate the Implmetao of the es as ed by te Consttion to the municipalities. However, t is u tn Whether will have the capiacty to assume these new ibil d to manage tr now resoure efficiety and equitably. In several sectors, for istance beat and environment, municipi' e e b very limited. 4. Fd of Econom and Sector Work. Rocent Bank economic and sector work - in paniauar, te study Brxai:M Ihe oifenge 0MuW Sedor Dewwsd_ in the 19Js' - bas idetfied swvd isses in municipa management, one of the key ars of refrm recommended in he repor. On he expendiu sde, municipalities d as irsufficieIavestment lbeves and an oversized inIsrion whichas t d to consume most ofthe incse in mves through curnt exndit. n e venu side, there is a clear lck of inceive to mximize own-revene and to be acounta for finaal User fees and propety tx ae sub-optmay employed and negotated trnfer ontne to be major ims In muicipa budgtgs in sdeded camss. Mh need for trnspareny and sustaabgity requi that ngoated tawsers be replated by formula-driven tase and that extea-budgetary acounts (another way of reoeiving and spending tesources) be included in the ordinary budget. S. TIe SOMMA Project and . le proposed Minas aernis Municipal ad In _ fasucture(SOMA) Project fis Ito e above contex by eicily adssig ho It MD 3qp6 No. 10616M ry 1992 36 - MM 1A MU 01 mo O senoW in ml_ d 1 the setor wor. lb ma objtive is to ass the kauties of tho Stt of Mas (erl in caryi out thdir n -w nsIbilit as efficiety as posibe. It does duda in sonSd ways: (a) Iho prect provides financial incentives to local nmet to earg ter Ines capacity and to prvide pubio sevie in a sustiae fashon - the use of full co-rovery thro taift and es is h on aly way to enue ta those public services w be provided even after the of the project (b) It srnte loca istitutiona apacity, with padculr emphasis on finca mmgemt and the basi saniaionand enviom nrst tors,tr a y mup rpo ies. Ie Institutional conte will emphasize the folobwng activities: * provIdn tain and tech anil for finncid nmangem; * _Xlpreenig dsmpb, reali guideh, perforance IndIcator and normtibon structu to aist proper ; idenffyn caall no be faU prvtzd; * designin appro Inciv to keep epnius under tght contol; - local environng tad managemen councils and lgsaton; esurngth stentenn of municipal tax adm initto capacity primariy through uprAdin Sand renovating property tax cadastre and Vappropite traiing and mvingtasreti in poverty aia . (c) In addtion, tro of its finacil and Institui ddabal, the proposed project wWi begin to move the St and towards a Muniipa Managemnt bInf aon Sysii MIS tacould hep monitor polcy, provide cnsie repo at all lev om ananalysIa base o improve inrgov al fiseca trases. 6. Loca Goverment NonmAtv CWteria Dat ds to be d in term of bow load ar dde ng the servkes for which they an responsie. MI abov feraeced sector wo*k, usn basic precot fwm economic ltratue, provides guld=ne this d espect It agues tat perfomance of the publo sector in gnal and of the munpitto in partcr ca be assessed in tm of,. (a) accountOu;ity; (b) productin fficiency; (c) demad efficiec; (d) equy; and (e) miWmbift, mpieed in geaer dta as folows: (a) A is a direct requiremen of hnc_eased. Aout to rloodo is requid as a suwaant tha the condct of thel dected offials i in Hlin with eo voters' wh. to to highw lves of the govern_ent is requred when municipas act as ages (or as spede) of fedea or sotae gr-money. Rible financal dd is probably th shigl most moho _eueu for _ (b) ?yNodfwPet Dn eaffiiec stiulte that sevice provided by the municipality should correspon to the minimmcostprovisiL ibabo meddrectly,obevig wheta muncipalthas osen to least-co soution to provide a give service, or indirecdy by looking at how employment has evolved or how sigoift b the padcon of the pdrvae stor. (c) Demand efeq rlats to the evel at which consumer demad i mtched by providon of publi services at an economic cooL Demand efficy is meaurd by th dege to which public senvice we financed by cost reovey a d along te lin of the benefit-cle- tos who benefit fvo the good or servic duld be those o pay. - 37- 1 (d) Equity goh als ude thsngde dope to whic action incteas, or diminish intepeaonal or Inter- 5egiona nome dsa itist I sgemnery accepted that equit comncen shoud be pursned by higher bvds ofpvamenL Loca p"mets ying ito, promote Income ditrbuton, with ther own nuores u Into financial problems as higher-imncoe tax paycei itend to leaved the winnlty. MmI realm ofthe toedl government should be limitd to fth provision of servIce for which s-bsdes ane faible - for example wate supply financed by high-Incme groups and made avINabl to low- income ones throug life-ine rate. (*) a£nd rveue be ninimized and imp Uie thd reveon autrity be. cs el as possible to expenditre audtority. 7. Table I indiaes te am of anlysi and indicat which an be used to assess the adequacy of municipal olicqy making acording to these five criteda. i1 ,\1,~f~a tiXl'Ellt hilp Iu' II'il,tii/¢itifiteiKill -39- AMiN IB MNAS G"S MUNICIPAL MEM AND ENVIRONMNTAL NFRASTRUCTUtE PROJECr 1. 1. Section I of tis annex, focu is on the histodcal experice of nary two of Book lendi to Brazil In the ura and w sectos. Many ofthes lessos, combined with th nfiv aceaed by do polinca and fisa -I on of 1988, contiuted to tde r of a ww gof municipal dvelopent pjots fousing on _e the cacity of local govenments to mange d povide basi srvioes. Lesos learned fm these - recen experene are disus in section I. L Ehitoried P eetv 2. Sihce 1978 the Bank has made 17 loans for urban development and tnsport projet in Br.zl, ttling US$1.6 bMion. In addion, 16 loans t ing USS1.9 billion hav been made for bai saniaio ojects since 1971, also largely in urban aeas. Wit tis long hisoy of Bank involvmnt in the ecor, many impot lessons ha bee dwn. OED audit repots have pointed out signiflcant lesso: the Urn Tnsport I Ptojec (1563-BR) audit drew atent to th need for gVer feity in projeict _ _ Mm adit of the Sites and Servic and Low Cost Housig Pojec (1654-l" pointed out the rik of daln With an unwilling borow and weak ecutig aencies. On the oter hand, It noted that the project had helped to change NH poliis towrds th financing of more ot-dfedve and affiordbl, upgmding programs. In respect of specific components for employlme genetion which atemptd to address u povery issues, audit orts for the Medium-Sized Cits Project (1720-B1 and o Noeast topoitn Project (2193-BR) note wat ... th co}mpe tend to be very complex to implment, hav little polic support at the loca level, requre inved sments of Bnk staff time and en . g. . 3. Speciicaly regardg envnmeal degadaon in areas, a recnDt OED Report, The Wod Bank and Poujon in Sao Palo, (1989) sttes tbat: ... in spite of Word Bak uppot in poluton contol dftu sin e eary 1970. .-.. expience veals h limiions of takig a partial approach to polton olol ... reqrs both incre emphasis on economic policy, together with technical, financial nd Institutional, msa and applicatn of a mom integrtd, coss-sectorl approach to public invetmen and the regulaion of producve activities at the udr or metwpolitn leveL 4. FuremI ore, over th past decad the Bak and odter nstiuons hav suppored rgoa dewvopmt prms in non-urba setors whi have had la impact on U, sroundtg ubma aia. In its seda Euwbwwuentalww &,udes in Braalthe OED recotly found tha: the phys Impc on ura areas of nany sc non-uan projes wee sbally u t ; e provson of uba services oaer the peat decade hav been far from adequa in the regional dvp rojetb, as the il deficibt of I _fl-r an ashelte have rpidy expanded due to economic succo of the projeb; and mhe e etiv involvemen of stae and loc autho In the planing and delivey of urban services hv be viually non-exsent If the Bank is rtequtd to suppaot a special progrm to addrss th e nI problem of these dveopnt regios, it dould be prepad to do so. -40- A-NNEI12 5. In summauy, s O repots In Sge nfored t i.wd for * s"mple design; * coodiaton and nsttonal strengtenIng at the loc level; * _ of Iho finncil mehasm and poleo for pro3jet imnta; pwvision Of pwfonaam bnetvas to municIpli ble for pe * reIabOl" finaning soutces for urba Investments; * mo thomo financl monoring of particiatn umIcipalities; * of th lo and innovatons in lw-cos sntation; * gater I_teg aog In pubc nvestme planing; and * explit mecanism to address th envirnmnta impwts of di range of productie activit i tho locus of utban aes. 6. Ibeo ct fand rter poliy innovaio wero incozporated, beginnin te late I9O, into to desig of a nw genern of mnicpal deveopment project whih focs ond thre g of locd gov_rnmental capacit for sevioe provision on tie basis of municipel devopment find at th St lvd. lheso funds are dego ed to provide a reib soue of faning for udw luftatbuctr Investm, mud apropiate technical, eoomic and financial seleton crtoa which aim at th grat yftkwy in un of 1ds. _ b we compl_dby tbdno sa _bm nand traning twa uimPmvcd ltandd manto Mhe first of these projes wv the Pamat Market Towns Pject (2343-BR, folowed by the San Cta Sma Towns Developmeat Pojot - PROURB (2623-BR ad mom reoet Munic Diopa Pojcts In th States of Pamnd - PEDU (3100-BR); and in ho State of Rio Gmnd do Sul - PlM (3129-BR. Thes project set the framwoA fur fther policy fmmiuatn for tde seor, basod on th expeenc of past two decades. The projects and teir cunt a su ae shown in Tab 1. below. Piojo Boud Amwot Mid-Tumt PCR Dbied No. Dta (US$ M) ReviewDat Date (US$ M) 2343-DR 023/83 52.70 NA 130o90 5.9" 26234DR 09/19185 24.50 NA. FY9 17.6 31004Dt 622M 100.00 6193 FY96 43.4 3129-R lot" 100.00 11/92 FY96 223 a, A -.Ap I30-, 1993. IL Re" Et 7. Som le lesson ave emerpgd fom the PCR of te PRAM project (completod in 1990 and fium md vie condted moe recety for other projects. The lso leand fm such projeb can be divided ido thr bread categoi: (a) fco of comparative suoess, or thos which contriuted to smooth and rpid achiveetat of objectives and which support the of the baidc project desig; () pat fact of compastv dc duo teO coidicions wh have boe lawely solved; and (a) sig fators wbh contnue to contrbubt to deays, oompcons or problens, and which aeot yet fly rolved. Ths factors should be ecitly onderd In the desig of operations. lbe fira two -41 - ANNEi1X am dlaboted In point fom, and the tird in a matil fomt wbich dmonsrate ow th specific Isues have been addrsed in th desigl of te prposed project. * Demd for Resources. The forecast demd for resourc bas in fat ,mtlined, as reflected In the complt commitment of Ioad une PRAM, and the forecat for flil disbursement under do odim Ihm proje3o (sm &6nemedb_ InTa 1). * a_Commity Response. Communty/constlut rpon has bee ex_tmy poidve to rformng loca adm itrain, as ep_ssed In: willing to pay though trf and taes for services efficnly provided roeleiodon of many mayors who partcipated in thes project; and wide cover in all tate: PRAM achieved coveage of about 90% of all mnIclties i tho Stae; PEDU has raed 99%; PMES about 30%;' and PROUlRB 99%. * InstItutIonal ConsGstency. Ptojects are most sucoossfl when m nder the Instiuonl stctr of aprweexit progamm. For example, a lare pat of the suess of the PEDU progm has to do with the eadrie work do unde tho PRAM projet Many of th same systm (for _emeno, ummkoft, chunds for dhcudons wit mayors, etc.) ar st in plc and have sily been upgraded. Th impcaton fwr te popoed project Is ofdthe dselecto of EDMO as euting agen, since UDMO has had dsgifct epience, ledng to muniipaities under oth dmilr programs. *_t of Fu_m. Mhe PRAM proec sad th ongoing procts have demostated mnicipa abilimy and willingness to ropay loeands. Guarte hv not bee cled in any of de progmmes. * I a In uNWIa Own R ¢". Tere i edee from al fu poject ta municipal finazdal mangement has improved. is is most eiden in Parnt, whe di eond projetd has gined from tle existeno of th first. A specific evaion of this will be confimed owing the mniderm eview of th PEDU project, shedule f June 1993. * Ting of Start-up. Bot Paara and Rio Grand do Sal bega at or na th beginin of the mayoal trm s undoubtdy has hlped in h pojec' D ie o cycle a lg can be expected. The proposed project has been dtied so as to tak advantage of a new mayorl cyce (wh beg a fouryear tm Janmay 1993). S. Thes faors _ _ bwsuslaiit of to oveall prject concept, ad Jsi* ndeion of folow-up operains. 9. Three importat external fc have in he past indeed projct o, howeve (du to in pat to collaboron between th GOB and the Bank), m s have ben take reduce or cage the impact of these factor. Thes ara ar reltd to: _ ; obloa a and dsuent. I saoul be noted tht in adit to being apoved he monts aS. PBDU sd hs gSt$ a ier datt, PM abso 1id so bestfi fhem a pzeios Stae prgrm, a did PSDU. -42 - AM 1s * IFist, procaneut n It under all project in Bazi have suffeed e conasequene of B _zian prouremet leon's inconsstency wilth th Bank's pmew n guidelines. n May 1993 a now fdeal procumet law was pad, dfecdvdy most of the serious ncousitenMas. This new law, together with use of the Banks stndarbidding docuents, should effctively emnate y poemeat prblems which led to slpicat delays in other progms. * Second, the Senate Resolution stdng out guielies for pubic sector Ildn dt Imn the past stpuated that all muicipalitles should be reviewed idivkidaly. As of 1993, condoned on the faet ta municipal projects adopt fedeal creditworthins creia, ah Sate wfll approve its muncipal bowing proga at the sam e as th Ste's borwlng and the Federal (overnnn's guarn is approved. This will cut down on the aecuting agency' ub-project pr_sg time, and save stff time previously spe lobbying the Senate committe. * Third, regarig d, thlere isb no longer a B azil-wide requirm to hold sa Speci Accoun in th Central Bk in Braslia. In the past tis has reated Sm confuion and lag time i dix processes. As of 1993, Special Accounts may be held in a bank mutuay aogable to the parties. This will also minim prcess ddays. C. Cgmlicatg or Dlayi Factors 10. Ih matrix shown as Tabl 2. below indicates t' oe key, unresolved factors of project compldcation o deay, and oudines how the desipg of the proposed pre at Incporates measures whi wM mDigate t risk Of such factos. Lesson Projet Deog One of the key sores of delay has b broad Inest have ben limited sertor focuw: _ , Institionl and social sectrs have a to te sanion secors, been _qrseted. Eqpien demonsrates tha infrastracture ddrmid by the State and by invesmt are more qu y implemeted; socia sector a sampln of mniipaltes to invs under both PEDU and PIMES ar behind schedue. be among the higbest proriy At midterm finds have been reallocated to i u , invemes in the Sta. primarily water sector operaona improvements. Part of reason is Lnkage to the social sectors diffity i dm i priojcts with vaeied seocoral fews, wM be done through wproved pudclariy expeise fr euation, supervision and monioring of orat wit ongiag sub-project. (eduaton, healt) projets. -43- ANkXJ IB Ilrporation in Lesn Projec Desg A second key sourm of deays has been lack of focus and clarity in The project has explicit lika tho ititutional devdopment (ID) component. Capacity-building between TA and infas , tecno asisac was beg with PRAM, however, it was not with realistic, lmited given pioity. PRODURE applied stricter conditionality for sub- conditionality on sub-loans. loans, but it was am enibred. Under PEDU and PIMES, explicit Teams and conditions for the tis between the soa development and infrasucture Institutional development components were estabished, focusing on efficient management component bave been discussed (financal/InstItutil). The conditionaity was in fact enforced in detai (comparing approaches somewhat too sticdy in the first years of PEDU (with the quest used in PEDU and PIMES) and for perfecon cauing delays). As a result, ID investments in discussed with the State and PEDUrs first year wenr low. Terns for olending for the ID municipal mayors. hese wil component were also somewhat unclear. are cleady defied in the manuals. In seva of the project, Institutional arrangements wve not Aceptable bylaws and statutes cleadly defind, atiulay responstbilitie among insfituto. for the Program which legally Lack of lear stu and bylaws made such progams vulnerable bind institutional arragement to changi politicald fotunes; lack of separation between have been approved by the State Executive C of Directors and implementing bodies, prior to Negotions. lbe between ma_geeo M and supervision of program also created project unit is a flly- conltison at times. Key team member were sub-contaed to the funcioning departmen of the extng ageny, ratder than having permanent staff positions. DDMG with career staff. go I i'in is ee to smooth implementafion and BDMG has begun a (modulr) adequate monitoding. However, much of the evaluation and compridve scheme for moniting has to be perfected during implementaion. computerization of evaluatio ________________________________________and monitorinkg of the program. Early and thorough marketing of the prograr is essential to its lm State embared on a sucess. Lawk of this compromises coverage. (PIMES did not publicity campaign for the have the benefit of that PEDU did of well established channels program in January 1993, and fom a previous program). plans for marketing have been Jnfonuaton gathering (for the purpose of the institutionl and The Ptogram's Excutive fiacial diosis) frm municipalitie is often complicated and Secrat wl expicitly assist tmeonsming, due to unfmilarity with forms, poor data, weak municipalities in pmarng the MsdWional ¢acily. conrect douenion, fteig IEDMO f this task. I!llot compo s, if not be right away, do not get offthe The ters of refece and ground. Housing pilots were not begun early in project arnements for implementation and goveanment officials lost interest. impe nion of the two pilot programs in Mba hae bee agreed during Negoions. C X~~ g Ig . Is l d II 3~~~~~~~~~~~~~~~~~~~~~....................................... ................. *45- h BRAZEL MINAS GERAS MUMCPAL MANAGEMENT AND ENVROMETAL IKFRASTRUCrURE PROJECT Table 1: Evoluo of the SEn of t2 MlM Levels of Govem en (ftm as % of GDPt * j.iI-v" lmn ieo 1,s REVENUE 271 24 23.7 21 26.1 31. Ceuta 14.8 15 15.6 1217 14. 13 Stub 94 6.7 58 65 7. 93 Municipal 2.7 2A 2A 25 3.8 52 E1CPEND1CDuE 25A 24.0 23. 243 32.7 310 Central 145 15.0 15.7 145 209 16 Stae 83 65 5C 7.1 81 102 MuIcipail 2.6 25 25 2.7 3.7 43 of whkkl WAGES&SALARIES 83 7.1 63 6.9 9.7 105 Cmntl 3S 3.0. 25 25 4.1 3C Statb 3.9 33 2.8 3A 4.0 5.0 Municipal 0.8 09 10 1 LC 1.8 GOODS&SERVICES 3.0 3.0 2.9 2.9 4.6 5.1 Central 15 1.6 1.6 13 23 26 Stat. 10 0.8 08 0.9 L4 15 Municipal 05 06 0.6 8 0.9 1L1 *IRANSR TO CONSUltES 9.0 9A 1 8.8 9A 10.0 Ceatral 7S 83 10.4 7.4 7.7 8.0 Stat 13 10 0.9 12 12 1.5 Municipal 021 0. 022 02 05 0QS DNrERNALDBTSERVICE 0.7 0.4 Q8 33 6.1 19 Central 0.4 03 03 2.8 5.9 1.8 State 03 1 0.2 0Q 0.1 0.1 Municipal 0.0 0.0 O 0.1 0.0 0.0 GROSS INVES 4A 3.9 2.4 23 29 35 Cenal 1.6 Ls8 0.7 05 09 05 State 19 13 0.9 L2 14 2.1 -unIcpal .LO 0.8 0.7 Q6 0.7 09 -46- ANNEXI2 BRAZIL MINAS GERAIS MUNICIPAL MANAGEMENT AND ENVRONMENTAL SANITATION PROJECr Tae 1: Minlclnelities in the State of Mhns gest A-ad ThlrPoulaflon by ize r (as of 1990) Populaton Garnp Total Populaon by Number of Total labbitants MunioipaUtIe s Inhabitants % of total cumulated 10,00 or less 418 1,931,360 12.0 12.0 10,001 to 20,000 154 2,194,638 13.6 25.6 20,001 to 40,000 78 2,142,082 13.3 38.9 40,001 to 70,000 35 1,893,666 11.7 50.6 70,001 to 100,000 17 1,431,437 8,9 59.5 100,001 - 150,000 8 913,877 5.6 65.1 50O,001 - 250,000 5 861,517 5.3 70.4 250,001 - 500,000 5 1,681,892 10.4 80.8 above 500,000 2 3,104,365 19.2 100.0 TOTAL SrATE 7222 16,154,834 100.0 - Memo Item: Totl aboe 20,0 15D 12,028,836 74.4% 1 Tod BraziP 4,800 1S3,164,000 _ | Sour8 : SUC USELAN-MG, 3DMG. 'IiM lags m ath. i S d e and their 1990 poputions ane as Mflows: Belo Horzote 2,048,861 (3,461,908 in tho Mdrepoln Region of wr Bdelo Horionte, whioh includes 18 ); Juiz do Fo 385,756; Ubertladi 366,711; Montes Cawo 247,286; GovemaVales 230,487; Uberaa 210,803; Ipatig 179,696; S00 Loas 143,611; Teoolo Otani 140,639; Pogo de Cds 110,152; ad Pats de Minns 102,698. 2 T w 723 min tbe Stat in 1990. The muw a of lad do Min, whose popuation had not bees ist- ated'in 1990, Ii not included. Dwing 1992,33 new municipa wee odablished, big the etreat total to 7. S/ PopulWado 1991, IBRD; number ofn fi emted. -47 - AMIEX2D BRAZIL MNAS GERAS MUNICIPAL MANAGEMENT AND ENVIRONM NTAL 1NFRASMICrURE PROJECr Incatoms of Relative WFath in M}fas ggais Table 1: Monthly lucomme of Urban Households Brazil vs the State of Minas Gerals (as of l987 Tobl Household lnoome Groups (nwbobe of m hahaum per mn)P holds <1 1 >1<2 |>2 S<10 |>10c20 > >20 | ox nundww(WM 34,291 4,081 5,967 11 ,14S 6,755 3,532 1 9S 857 % of tola 100.0 11.9 17.4 32.S 19.7 103 5.7 2. cuulte _ 11.9 29.3 61.8 81 S 91.8 97.S 100.0 tm*(OOO 3,606.0 $5S 721 1,168 S91 3aB 17 90 % of total 100.0 15.4 20.0 32.4 16.4 8.4 4.9 2.5 ===uldod 15.4 35.4 67.8 842 92.7 97.S 100.0 Soures: Dazi P.saa NAiodal por Amwotra dr Dwakiiles, Rio de o ude, 13GB, 1988. Mis Usual: Ann" Estatuce de AMie Gerais, 1988-1989 - SUCEISEPLAN - MG; BDMG, Planning Dept 1I Does not inld pealone or household employees. Avmp pesos per housebold approzimaty 4. 21 On minhm salay in Bril currnty avere about US$60. S1 Other pifin eier no respose obined, or fmilies wh no imnm, at alL -48- WAL MUNAS GERAS MUNCPAL MANAGEWM AND EINVRONMAL NWRASMUCTURE PROJECr in the St of MI eis Tabb 1. Covqe dE Wd d SempSwv - [t ~~1960 1970 1- 1980 191S IOTAL 18.7 30.6 493 7S.0 URBAN 43.1 54.1 72.3 94.3 RURAL 2.0 3.2 2.8 167 Co (do MXAL) __ 13.7 _17.7 33.S.8 Su A 8,93222 8 S0.0 53.0 IINS 1,107 56 92% 56 701 btunio~~pslitIss~3,324 320 sA.. 412 OA.. NO service - - 260 35% TOTAL 12,463 756 100% 7_6 100% _ . -.. _- - - m Sources: Table 1: SaIA-MG, fixw 3wak - baca e C DMO, COPASA Table 2: Consukau adlats baWd on data from MBGBIDDUG/PASAAFNS/SRPLAN. !if IIIX fill [I sU. Irl l {T~I I in0 Ii a iit i Xi t. i I -1# -50- AN=Ii 2P Policy SUatM=n gf Decetraization and Municipal StrengiheX of tle State of Minas!aerais 1. Promotion of economic development and improvement in the quality of life of its populadon are the prmy objectives of the Government of the State of Minas 3erais. Bearing in mind these objectves - along with the goals of ensuring the efficiency, productivity and competiiveness of Is economy - the pres adminisationhas worked towards greater equity in the development process, through measu and actions that broaden and enhance the supply of basic goods and services to the State's populato The govenment's activities are planned to take place mainly within the realm of Its traditional fumctions: education, health, sanitation, and public safety. Ihese are the effective priorities set in the Multi-Year Govemetal Action Plan (PPAG) for the period 1992-1995. 2. The administration has estabLished the strategic outline for the implementaIon of its objectives, two of which are of particular relevance: (a) the expansion of basic infrastture, especialy envirome nta_l sanitation; and (b) the decentralization and strengthening of local govements, and eir partcipation in the provision of services. The latter objective derives from the recognition of excessively cenalized decision-making and financing, which is no longer accepted either by society or under the new Stae Constitution. 3. Furthermore, greater efficiency in the provision of public services can be achieved through, among other measures, the decentraization of such services to the local level. Bring decon making dcoser to the population provides local administrators with the oppormity to better evauate specific local needs, and decide how best to meet them - usually at a lower cost ta would be incured in the context of a centralized decision-making process. Thus, the State government is implementng a strategy of decentization to the lociJ level in all its priority areas. Bfasic and lSnvironmental Sanitation 4. Noting can better express the actual priority of this sector for the Minas Gerais Goveme than the Program of Basic Sanitation, Organization and Modernization of Municipalities (SOMMA), which - - together with PROSAM, the Water Quality and Pollution Control Program for Belo Horizonte and Contagem2 - will constitute the primary instruments of State basic and e enta sanitation policy. The Government intends to pursue in this sector its overall decentralizing policy, thereby superdming he past centraized model of the National Sanitation Plan (PLANASA). a. With specific reference to the State water and sewerage company (COPASA), the following guidelines will be carried out in the context of the SOMMA program: COPASA will maintain the market area of its services, i.e., it will expand service only to respond to population growth of the municipalities where the company already holds the concession, and / Parday linanod by Wodd Bank Loan No. 3445-BR. -51- ANNEX2F COPASA wil increase its self-fiacing capacity through establisLment and mAnance of realistic tariff policy and execution of operational development programs, thereby overcoming its fincing constraints. b. Regarding autonomous municipal water and sewerage services, SOMMA will be the instrument for executing the objective of broadening and improving the supply of these municipal services. With the completion of the Sanitation Sector Policy Study and the Privatization of Municipal Services Study, both to be financed under SOMMA, the State Covernent will have the techical capability to promote the insutional restructuring of the sector through increased decentralization, gradual privatzation of services, and establishment of a cooperative working relationship between COPASA and the municipalities. Sguppohe Dizatio S. For the State Govenmen, however, the objectives and role of the SOMMA program are not restricted to basic sanitation, for the following reasons: a. The Federal Constitution has assigned a larger share of fiscal revenues to the muicipalities. The impact of this measure has not yet been fully felt, because of the notable decrea In tax collection brought about by the recessionary environment. Notwihtanding the merits of this initiative supporting fiscal decentralization, there are potentia risks as well, namely, that of poor application of the incremental revem,es by municipal governments and the possible option for fiscal retrenchment regarding collection of municipal own taxes. With a view to reducing these risks, the State Government has devised SOMMA in order to contrbute to the institutional strengthening of local administrations, with emphasis on the areas of tax management and expenditure control. At the same dme, the State Govemment has established as basic principles: (a) that untied, ad hoc transfers to municipal governmeus will be reduced with each fiscal budget; and Ob) that these transfers will only be made to those municipalities which fully collect all potential revenues under their authority in order to support actions and projects geared to low-income groups. b. An effective transfer of previously State-level activities to municipalities requires that local administraions be prepared to carry out these new functions. It is the State's inention that the strengthening of municipal management will be implemented largely through the insttional development component of SOMMA. c. The State Government is aware that investments in municipal infrastrucure, especially in basic and enviromnene sanitation, require resources which cannot always be accommodated fully wihin mnicipal budgets. As there are no sources of financing for municipalities for this pupose, the State Government is establishing under SOMMA a revolving fimd, called the SOMMA Fund. Its aim is to create a sustainable financing mechanism with clear and pre-defied rules, under terms th are consistent with expected rates of return for these infrastructure invesme. Together with loan repayment by the municipality to the fimd, the cost recovery, user-payer and benefit principles represent consistent rules for meeting the needs of the target population as well as the finacial health of all municipalities supported by SOMMA. The same principles are expected to be applied in operations within PROSAM. Moreover, by sponsoring -52 - ANN=C 2E the prparadon of a Study of PFnacing Options for cpalIes, the Stat Govenmt Intds to eplore the feasibility of othr sources of long-term financng for mmicipal infrstructure mes, posibly as a cofining scheme with tie SOMMA Fund. d. St resources destned to municIpalities under SOMMA constie a superor altertve to more direc ad hoc Stae transfe. ence under SOMMA of agreed teical criteia for municipa elgilty and sub-rojet approv - e.g., col with the debt rpayment capacity and cr t gudines for public entides set out In Seat ResolutIon #36; and the requremnXt of tectnical, economic and financial vabiity for proposed sub-projects - ensures the transparen access of all municipalities to the SOMMA Fund, and guantee ta resource allocation wil be guided by parme that lead to eficcy and equity. e. The enm al suti in Minas Getals calls for a decisive State poicy t eosure sustie development. his poliy wifll b eexecuted in the coe of PROSAM and SOMMA aloDg the following Hles: first, through the isitutional srengthening of the State enironment enty (FEA) and the pardcipaing municpities n developing and --mpI _g anti_ actins; second, by having COPASA and the municipal water and sewerage asutities emphasiz invesments in the colle and treatment of domestc and industria sewerage, as well as in the collecton and final disposal of solid wat. t. Lasdy, a wvised role for th public sector and a new mecaism for sasfying municipal demand for sevice wil be tested tugh two pilot programs under SOMMA. On the basis of the condlusions of the abovemeoned Study of Pr zvat of Mnicipal Srvices, the viability of private sector participaton in the delivery of municipal evics will be evuted under modalities, schemes and appropriate regulations dth ensure optimal conditions for the proviion of such services and for the protection of their consumers and us. Such evaluatio wi also be conducted rugh a pilot pdvatzatn of laugrse, whih wil also bring about Important In public health and san on contrl. In order to met the svice needs of ose municipal govenments with litle ecomic weight in poorer regios, an associative model wil be testd tough a pflot program to be executed in the Ntern region of the State, which will rely on the possible eonowmies of scale that may be reached if a group of municipaities are served together in their commo needs. Decenttidon hI O*m Secm Educion 6. The PPAG allocaes to h ducaton setor an averago of 20% of effecdtvly-available resources each year. T resources are being allocated, in an inceasngly decentralized fasion, through a program geared towards improving te quaity of basic educadon and reducing faiure (and consequendy drop-ou) rates. The dc b s being implmented at al levels, from the teacig unk - which now has ample pedagogical and adminisative automy, with community participatin in the dection of scwol prinpals - all the way thou to the regiondal education offices. For the imp l of this program, cooperi f&om th Wodd Bank is being sout -53 - &kL&UKZE2 7. lhe anual allocation to the health sector use ected to be, ona srag, 9.2% of the resources effecdvely avalable in the State budget. Key proposed actions aim at expanding access to health services and implemenng In Minas Gerais the federal Unified Health System" (SUS) program. In addWon to allocaton of reources, the Stadminitaon has also been eanusted to coordina wit the federa and loca govenm_m the estblisment of a modd of integated asistance, within which the fuctions of eoxcuting and managin health-care sevices would be left endrey to municipalities. Ibe State Secretariat ofHealth wiU be responsible for stategy planning and policy-makdng, as well as for such services which are only feasible when provided at the state level or In major regional centers. Puble Safety 8. Public safety services ae forecast to absorb an avge of 8% of the availble resources. The StaWs objective In this sector is to modernie, broaden, and raise the efficiency of police ins ions. The provion of suich services has tmitonaUy been caied out in a decentaized way, through local military police unts and local civil police dprtmen. BRAZIL MINAS GERAS MUNICIPAL MANAGEMEN AND ENVIlONMEAL INRASTRUCrURE PROJECr GERAS Im mena Saitutional nfrastrut eecon cr b imed BWer q ualitydca Cotcovey mechaisams ianaem TA & traiponeng: TA t arsgd rntdso regionld own of aveooal not enforced: taffs and and as a coEWIM, baimpr legin, investmnts, cost- eimt coucis taxes not appbpriaely zongown resounocs, cusat r tone a lpopby bsuent and icmrees e d or collctd duo prt ionool propertutx and ltRs; no. mnipoas to lack of pola willA ivstat pdorhiztion .pafts with MSsys weak Bak betw nev; no. g rnical duriifm n& infratrucure cverae in compoents privte cvet conomc cots, last. invetmentunitcosts inceasei mtnrupaluia kwmawbomn SAsioS ttmbw Selection or"i mked Water qualhy hsicto; _ottoa _uab prioriy an imation bet TA & i lt ning fo r d assess cost te c osla n o. of ac tvc aned not lemecd:nati and impsovies tegeslmson, inv ptentsiHal piv of (resulsofAetorstu)d y DO6g communit institutina 4and ict and mosedo cogodod due incp aon ti ink of pnliiaW nm _ Create sustaienable Permaehntsrel ng eun baw : tnreifs Sate cveratios Lckibof privat f s neoct finafing m covamgo if componentl; pchve covnr economin ats; vast- of fond; t succe ss; in icncd, minpit;ies' prioritn seces; stu toscai talc t;i; rcalsuted soint walighte dist inpa_ t oi role ci tal mas*_etmbasnoicpa ofnc se snpnw d s tro tue tems; poteria pilo NumBe of paor studW) programn in ftgd g Crcf su_mbl Pemnn _vmn _ und byhws: mWw4medbs Rate of rocnttmo Lac of pyivn setoor fincuing to for fwr d deicier y cgnds onkding ; r prgialon of eiod; sumber in su ofidebe in ptdl ins udban ktsu_msf resoues to bilc p31o; load f_ doody b Mitg prasc UCr coochins prme in iwisn_s, inchiding proies; awuy to copk*l rsb of llght of distorim in mob_zig piatempta mobgizis privte capital ..municipd iallsBW fic nanohl ndmf Target bawf to broad Infwuea_ iwvstmat Seocton cf;* piot Nundfer of paripang Weabz, poorer ranp of municipiaic, crhiwa, pRot project in prorant with ord gmnl municipalities per muicdaie wM not be incuding to poor whae niroregion aod monitoring; msargl cos region; nubr of stb- a41 htavc inre m possible and to North pricing studies project in pilot prgrm participation, despite I I in North g n I These objectis ae sd out in the Stte' Polioy S_tment (Ann 2F). - SS- AM=I 3B MIAS GERMS MIMCIPAL MANAGEME AND ENVIRONMENTAL NFRASMUCTURE PROJECT Deled hq2drolndf 1. Oudined below Is a detailed desciption of the project's compoents: InstItutional Developmt (t A); Basic Sanitation and Related I ruct Investme (Pat B); Pilot Progrm (Put C); and State-Sponsored Studies (Pas D and E). Operational arrangements which set out selecton criteria and lik the technical assis and Inratucture sub-projects are set out in Anex 4C. A. ntonaWlo DVegmA omnaXnen1 (US$29.4 million, 8% of project costs) (a) Objective 2. This component will be the doorway to entry Into the progrm. The speciftc objectves of die component, consist with the Sttment of Decentization and Muicipa trgn (see Amex 2'), are to: * improve local govement fpmcial particarly ncasg own as a portion of totl revenues and efficiency in current expenditures; * reinforce municipal aactv t plan. anrt. select and imniement effdibcie i-vesnta on the basis of appropriate sdection criteria; and * strengen municipal =nM=me plannig evaat and manftadn& consise ih the State's objective of increasing decentrization of responsibilities for environmental 3. Eligibility crieria wil ensure that all municialities enteri the progm develop ai acceptable institutional and financia development plan, or Strategic Action Plan (Pao de Apo Eratdgko, or PAE) - descrbed in greater det in Annex 4C - prior to beig eligible for a loans. It i estImated at about half of the State's 726 muniipalities will paticipat in s mponent, ntig about 90% of the Stats total population. 4. Once an agreed program of instttonal development acdn is agreed, illuding boh trining and thnical assistance, the municipality will demin sourcing of aista on the basis of shorts . For training, municipalities will choos among the Staes Fwdaoo Jo4o P}ner (PP, see Amex 3F) and nt consultant. Becawse of its comparative adt in the provion of tning, it X iely that a large portion of the aining component will be executed by FJP. It Is planned ht most lassistc i oterv will be exeoed by independent constans accding to sds and gdelines prepared by F1P and agreed with the BDMG and the Bank. For technical lstnd municipalities will choose on the basis of term of referene and htort lists as stipulated Und the -56 - AM 3 Proras guidelines d consistent with Bank prouremment guidelines. Becauso of thoe smal si of most such technical ssitace and training conacts (estmated to be below US$100,000), BDMG wil review tem of referene, short lists and conts prepared by municipalities (with Bank ex-post review), fllowing the Bank's OD 11.10. For coacts above US$100,000, the Bank will provide ds revew. Sample terms of refern for standard technical assistance investments, such as upgrading of property cadastres will be agreed wih the Bank for tis purpose. BDMO will also maiain a database of consulting firms Ieested in providing technical assita to municipalities in thes ar, to be advertised annually. Ihis list wil be in no way be restrictive, and will be valeo ncii smply as a resource. 5. Because of its fundamental goal of increasing local govemment own-resource mobilization ad Improved efficency in both curt and capital expedit , the stiona developme cmonet is directly linked to progress on inastructure inestme. This linge will be tablished in each mnicipality through the PAE and sub-lo contrao, and osedy monitored (see Annex 40). (c) Technical AssIsance Investments (US$17.4 milion) 6. The technical assistace sub-componet would focus on interventions in three areas: 3 fiscal and Ir ae: upgradiog prope tax cadastes (ncluding revuing existing property, inclusion of un-egistered property); Impving procedurs policies and physical infrastructr for biling and collectio of property and other taxes and tariff; Improving proment procedures; *- plannig: prepaing and updating of master plans; updati real prpey mappig; wor and construcon codes and terch standards; and - envIronmen and basic sanitation: establishing (and rationaliing) land-s and zong codes and regulatons; shening local enviro a en e agencies (CODEMA)s) encouragemen of regional coperation trough water basin authorities; preparing long- marginal cost pricing studies, as inpUt to revAg user-charges to be based on economic costs. 7. Technical assistuce costs have been estmated on the basis of current market costs of similar tedical as n interventions in Minas Geras and other stat, estimated by RJP which is a provier of such services. Tecical assi investments averagg about US$75,000490,000 per municipity for about 350 municipalities have been budgeted. (d) TmanIng Invstments (US$8.8 million) 8. The traing program is desige to complement the technical assstace component and would be largely oriented towads on-thob training, rater classroom lectures. k would include, bier alla, the foRowi reas: municipl bAing and budgeing, procurement methods, land-e planing and usage of master plans, on protection and enfocment instruments, finncil and adminisave managemet; ptoject evalu 9. Local traig unit cots (costs per paticipa per day) have been estmated on the basis of on- going proam implementd by PIP and other Brazilian agencies, averaged from aggegae costs pet -J- ANNEX7 evt per day. Cost include rental of training facilies, trainers' fees and honorar and travel and subsistee costB for bo trainers ad pardcipas. It is esmated that about 4,500 municia staff in 300 municpalIties will be trined under the project, (e) Equipmet (US$3.0 million) 10. SOMMA wIll also finance limited and wel-justified office equipment purchases, largely computers, pinters, and other office teology upgrades which wil Improve the efficiency of processes and iinmation flow in municipalities. (t) State Te cal Assita (US$800,000) 1I. Teical assistn for the Stats eoomic devlpment fondation, P, would also be provi under this compoen The project would finance preparation of FIP to dscharg th role of apex municipal management institutin at the State level to develop a strategy, ceate procedures, and set nDO and standards to facflitate ntiutiond strteing of municiplits. In essence, the PP should be iftg its modus opani for istutona development of local goverments into a new phase, increasingly mrked by normative standards, wholesale intv os aimed at ftering private sector delivery of tenical asstance and Waining, and tie monitorn of develpmen The plan for strenghening PIP was agreed during Negodations. The pdmary responsibilities of FIP in meeting the objeces of tis plan, and fulfilling its ape role, would be set out in the tehi agent agment beween F1P and BDMG, to be signe prior to Effectveness. B. (US$292.0 mWiO4 88% of project costs) (a) Focus and D oing of 9SMIMA 12. Upon Its ety in 1989, the new State govement Idefi the basic saniation sectors, Including wae, sewea, drainge and solid waste as among Is key pdorties. As set out in its Policy Statement, the Stes itetion i t tbe SOMMA progrm wll be Its primy vehide for such investmen in the State. Of the total 756 municiities in the State, it is expected tht about 150 munIcipalities (those wih ppulations over 20,000, or about 75% of the Ste's population) would participate in the infrastructure compo M cipal eligibilit for sub-loms would depend on fIlflment of the criteria for sdection, eg., acceptable debt capaiy and adquae financia and isuonal capaity (set out in Anne 4C), rather tan on municipal size. 13. In orde to dimension inve for the SOMMA program. the State of Mns Gerais and BDMG evaluated several key area: demand for resources; municipal and State capacity to borrow and py loa funds; and State and municipal tehnical, bstional and fincial absorptv capacity. First, the State sponsored a study whih demonate that over the next d approimately US$3 bllio, or about US$300 mIion per year in hwestme w edd in the Stat to ahieve the objectivs of increasedservicecoveragelevels. Second, aspartofpojecppation, inJuly 991, BDMGundertook a survey of 25 of the State's larger cities, rqesti about 3 million inhabits, or about 20% of the populati. The study confirmed tat the most widely deinvdestme wer water supply, sewerag oecton and treatment, solid waste collecton and dispos, stueet paving and drang and Idendfied potentiastments on the order of US$100 mim TIr, BDMO prepared an vluation -- 58 of the credit limits of about 400 of the State's municipalities, representing about 95% of the populatio. This evaluation showed a total debt capacity, according to federal guidelines, of about US$600 million on the basis of the municipal fiscal year 1990. Finally, the Ste Government demonstated in its historic financial statements that for the past several years It has been spending on the order of US$200-250 million on capital investments, largely in urban infrastructure. It Is the equivalent of these funds which would go Into the SOMMA fimd as State counterpart. The proposed project scope of about US$330 miion for infrastructure and institutional development investments over a six-year period (or about US$S million per year) was based on these findings. With State counterpart of US$15 million and a similar amount from municipalities and water companies to be provided each year, the pwject Is conservatively dimensioned. (b) First-Year Program 14. The proposed Bank loan will finance, together with State and municipal counterpart resources, a timeslice of municipal investments. A program of investments for the first year was identified building on the sub-project idendfied in the 1991 survey and other interested municipalities. Tchnical, economic and ficial evaluation demonsated that infrastructure sub-projects amounting to about US$60 million in. 30 municipalities met selection criteria agreed under the program. This group of municipalities was evaluated during appraisal and forms SOMMA's first year program. The investment ptogms of subsequent years are likely to mirror that of the first year, although the exact mix of sub-projects camot be demined in advance and will be subject to change depending on the priorities of the sub-borrowers. Thus the physical targets, established on the basis of the first year progm, should be seen as indicaive only and will be reviewed througbout project implemeon. (c) Term and Conditions 15. The infrastucture component is subject to the following guidelines: No municipality will receive more tan 10% of total funds lent in any given year, without prior Bank agreement (to begin in the third year of project implementation, in order to provide for flexibility in the initial two years). Given the large irvements to be made in the sanitation sector in Belo Horizonte and Contagem under the proposed Water Pollution Conrol Project (La. 3554-BR) in the Arrudas and da Onga Basins, these two cities (both COPASA concessions) will be excluded from the infrastructure component (except for public lightg invesmens); however, these cities would be eligible to participate in the Insitonal developmet component, and the siuation would be reviewed at the project's mid-tem. All inuucture sub-projecs will be bid and executed by the sub-borrowers, except in the case of the street lighting component, where CEMIG, the State electricity company, will bid large packages on behalf of municipal sub-bortowers (see pm. 23). 16. As explained elsewhere, inftructure investments would be financed through sub-loans for up to 75% of the sub-project cos0t from the SOMMA Fund and the remaining 25% (minimum) provded by the municipality as counterpart, either in the form of payment of receipts for expenditr, or ind labor contributions. The form of counterpart contribution would be agreed prior to contacng the loan, and stipulaed In the sub-loan contrac between BDMG and the municipality. Rach sub-loan would hae a grace perod and maturity corresponding with the sub-project's implementaion and pay-back periods, respectively. -59 - &IANNRX3B (d) Water and ewaap _e (US$186.6 millio) 17. Eligble under th compoent would be: (J) wate d rbudion coecto and lbmite producti and treatnt; (11) swg collection and lmIted, primary low-Cost tology, treant; and i opAol rov such as m g. Water and swe r mge will be excuted by municipalities In cases whr ey opera the "f,systs or by COPASA, the Ste water and sewgO ComPa, in caes wher operates municipal syems under conceion COPASA wil also be digible to borrow for opedo Iovth, e benefits *om which accrue principally to the company. Sewa treatm t invmns over US$2 million would be subjec to Bank prio review. * COPASA (US$61.4 miWlon) 18. COPASA will execte a program of Investments limited to 20% of project costs anmually (so as not to advesy afdct the total amount of hinds avala to muncipliies), also to begin In the projects dIbW yew of l pe lnton ihe COPASA program wfll focus on water and swage network expansion (aCesd wgetrw) ad op l improv t (PDO). This allocation would be explicitly rested durg the mid-trm review. 19. Network Exnson. bnvestn totlling US$29.6 i11tion have bee apprai to meet the filowing target 272.5 km of wate pipes for 19,500 now connectons In 56 mnicipalitis and 270.7 km of water and 130.1 km of seww pipes to provide for 18,650 new wate conncio and 13,460 now sewerg e _ in 14 m. COPASA would be the swer under sub- cmonent, ad tha would pov 25% conepart in the foam of payment of e_uipmmt and works bid. Nework exdso would be done only in conjunton with municipal pdtipat In SOMMA, tugh h o nal develop_m component, and shoud be bid in lae packages, once a gwup of mnicia programs have been identfied. 20. Opwa_Al I eme DO). 1nesw of US$31.8 million w evaluated. It w estiated that these bi, compring micro-metering, revision of consumer adasre and of quipme In 25 municipis woud s billed volme in these systn frm 20% to 100%. Financing a mn_ would be theo- as unde the netwok expandson MUb - _M" Watw metes and odter equipment woud be purchsd I lag lot fowing agreed ICB procdur. Becae the sub-component beneft accrue primriy to COPASA (whm expasion bft also accr to the munils), ese ins would not be ihked to muicIPal pmudipadion, and this o m 1pone should be one of the first launched. I i envisindtht about US$5 millon In retoactve fiancing could bW spent on ths componenL * Munldpulltles (US$125.2 milion) 21. Muicipl govrmen and local water companie would bid and implement nbv In vaious war d swer investme. The mix of fitar yeastmet s ruhy equaly divided bewan wate and sewea investm , with each reaching a Ily US$20 million. Low-cs and alerive tedmologies for seweage trame would be pri . Sewerage treatmet Inves would be eligible whe, In addition to odthr selon citria, techa analysis demonstat thl beneft to be prmarly on-site, or widdh the municipality. Those 'off-ste'w s for which beaft may be more broadly d to otr urromunding Ina water-basin ar requr -60- A N= 3 formation of a waer basn csortim and a diled feasility sdy, for which grant f_inag would be avaiabe. (e) Draa e P ad Patng IwuIII (US$76.0 million) 22. MIcro- and macro-dra nage, ad amionf lood conol investmen would incude costucton and in some cae r labit of draig etwrk. Bocse land subjeat to floodig ar gay im aluable, tue at-iskdc nr often the sies of Inoma low-Income stem . Project mg to about US$10 million uwder te first-year prom have ben evaluated. Diagosis of at-£s area is part of the teccal t compon in affected municipalides and would be dentfied In the onsitutona euaton process. Urban stret ping, often In conjncin with micro-drainage n to a firther US$10 miion of thO fir-year progam. Pavn INesmen would Inlbude local roads, m tais ad reated retg wal and drainage. Most c ewcod to participat In the prgm hwe pbl work dewhich ar capable of and supervig hese rtvey OsIpl wowk. If durAg project impthe Bak and EDMO determin ta tis Is not the case, the Stae Roads D(ea parew de Eusrdas e Rdqge -DEER), or other qualUfd coltants,od hbe contactd to opere as a nical ag for works and M Sold Waste Intm (US$12.0 milion) 23. ThIs coampt would comist of construction of sanitary landfills, limited atenativ disposal tchnologie such recyding and composi pln, nd purce of l watecoll and disoa eqdum TIh comone de also inhuidenstucdionofde waedhazrwdouswadposits. Technical bfor ev ton and supervision of sub-projects would be povid by univesy and loca specdiaized l. Approximately US$2 million in biestmet bave bee Iodfied under th fit ya program Solid was disposa mnve over US$2 milion would be subjet to Bak prior rview. (g) Stre ILng US$ 2M33 million) 24. TIb would cnst off _nv In lamp s and dsoi e of Ihe, pWk Mmioa network. Whe mu ities l em works, techical a e fOr b_pi and sueviowil be provided by CEMIG, e Ste power comany, to whomnealy in d iesho Sta ha" Vanted 1 for public liht. CEMG has sbo dsigd ado n the componnt. Mudncip woud borw, and ecute tee programs, under the technica standards of CEMIG. In order to iitate nIplmunicipal partic in th program would no be a pdor, but rather an ex-ast, conditon of ths componen Equipme and Istltion of lamp replacement would be bid uing ICB procedue by CEMIG - on behalf of groups of muite - to gain savi due to onomy-of-sae packaging. The compet would be lmited to less ta 10% of proec cost. -61- AMB3I C. (US$10.7 mUllon, 3% of co) 2S. I lpoj3ct includ. two dl pio prgrm (Pau C and D): one to sm the potnal fr pvatdn of crny pbHcypivl municipal services; nd the second to work wih asocia of smal MDc in the orth of the Stae to hep buld expeiec in t special iemen of th smal rual _ncipal in ths rgIo (a) P dlluo Plt (US$7.2 mi) 26. lhoobjectlvofthopilotwoltdbetode th_e potetadfoandtostthepp of pva cr entry (in its bmdest dedinon to bidude f&il owneip, partia Intest, I _g opai, ontr -out, ec.) in th rn of rvics legly ttribuAe (dejwe or de fiha) to uic piot would consist of two _ : fhg of s in toot cue (Pat C), and a study to idefy liky ae of gre_test e ficIenc pi d of munic* sevices (t D). first test cue would be - for whichtheisprivaesector interest, no legal _ and an Important tbe ave for movied vice. Ih study, to be eOcute by BDMG In paald to the slaugher ts case, would defin oth services ad sect8 s In which przv on would be possibl. Mh study would Invo,hr b aU rview of- pnnim -*~ 910of these sweries on the basis ofpubli choic theoy, Incufdigthe need rw _ropdate .- tcw "elation (in dh cue of nual mon_poles) or halh/safety a t l aend on ical to ;d * financIal/commercIal viability of the services and aof possible conditions to private sector ets. 27. Tem of frenc for the stdy ha been agee. The study would be completo por to embaring on ay futher twe cases, and in any caso no later than the pros scheduled mid-tem reviow. The matdx hown in Tablo 1. on dto nx page ue basic public choice toy to outline th aroach to be ousd to detei the feadbffiq of privatzaton of servic ad wi guid praron Of the study. -62- iNL3 SW40$0 SbofMm Gb Type Good dveGdwE Colsoeton, Usmit and dhtrbution of COPASA, _oo toll (cowept 8ona. yos, _ooua (with _ate (thde_l, coouwla and munipal os., mun_4a commo-pol asation) tuabn_t laduu dep., PNS colecton (witb sdies) and foleceln atd buute of mwwq COPASA, autonomous tol (ecpt some ye, colfriin NW (tedeat coumm a ha . * _od _ hdutrla)( dqis., PNS _tasmut) CoGoodon Uanmat and fisal dmidtiao atnmu municipa cmi, collectin pzlvA%e yes, obollcln, of sW woiw (sdmtl, comomer muniipad depIIiIo s. and hioduidQ tollvUnt(wt Pbollutocontrol PA CODEMAS publi, tol ____e_ (____ Drana. and channoli of rain wate ____________ publi,oll WI_______ RomN vivlceprovliic __________ Yes Hdoal ioopW nhl@ - ya (with .s a) _ _ _ _ _ _ _ __ssi_ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ public possibly _ _ _ _ _ _ _ o wnmcewaikdapublic PON"bl _ ____ _______ _W U_ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ possilyl _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ Imm i _ _ _ _ _ _ _ _ public possibl _ _ _ _ ___ __ ___ ___ _ _7W T _ _ _ _ _ _ _ _ _ _ __ -_ _ _ _ _ _ _ _ __. ._ _ . . |Town _rof - n pia 0os. 1ia yes Sbj ~ ~ ~ _ _ __ ___ puli ___ _ e_ ________________ ~~~municpaliIe pubic"ys(mroe Ka bou_of publlp pbnub muow" e I poelf Coaanof __w WWM publb POISA*b D_d of 4s dm Muiosd t olpublio yes In soea S oI_ ___ . D_ _ _ A s_ __. - d- _w _ 1 9 9 1._M M . . . . Souros: IIDMO,G MJ dt J,4f 1991; IBIID mIsson. - 63-* X 3B (b) Mlao4lWon Pilot Pngram (USS3.5 miion) 28. The pilots dual objecdvs are: (a) to develop experc and lessons in muical development In Bra's poor an rural-based Nort; and Cb) to test the possiblity for municipal develomnat through regional oopadon. Ihe pilot will be teted first i the micrrg of SO Fwncdsco, in the cewO North of the Stae. 'he justficadons for choice of this region weo Its ratve povety per capita, high grow rat, and low degre of basic inftu coverage. If successM, the pilot would be eteded to th States poorestregon, theJeqWhon reglon. s rgion wll req loner preparationtm due to lack of data and Intiuional weaknesses. 29. FlP would sst BDMO ln thcarying outofthe pilot: to be 8t out i thFiPTe _ P cAgent qpemwL A proposal for of the pflot was agreed during Negotiations, under which tchnicians would betralned, through e mnicipa assoation, to implemen low-ost _ 0ti services with locd municipal parction (labor) in works Im t n In two are of t association, defined by wat basins. Municipalities would borrow joindy, hrough a consortium, for purcha of equipment with an erilcit State subsidy componet with eigibflity to be detemned on the basis of VAF/capita, and m cpal terpart provided thrug labor for execution of wodr. FIP would monitor progress and prepar an evaluation of perience with the targeting scheme, includig pota applicatons in the rest of the North of Bm1zi. D. SnmdI (U3S$ 1.1 million, less t 1% of projea costs) 30. Two stu at the State level (under Par D and E) were agreed during te cous of poject preparation as priority areas for research and innovativ staegic planning in te medium term. Terms of referenc are shown in Anex 3D. The stdies would be completed no later ta th mid-tem review. * F in lgHt of th parcar coverage and Insitutiona cir an s of the water and sewerage sector in Mins Geras, and gadua weakening of the federally-operated PLANASA system, the Stat would undera a coonstant study to develop an strtsegy for the water and wrage seOt in the State, emphasizing particulady service provision at the local levd and lnsdttudional gements. * Second, in order to guide development of mediumterm policy for SO0, a seoCnd study would amine opos for financing (equity capital and debt) of asucturo servis for which municipalties are contutonally responsible. One of thfe objective of the study would be to seek alteraves for mobilizing domesdc private savwin for log-term Infrastur Iements. V1 VAP, owMr qra_o,As.l, is a tuau.of m uuipainome(all poducnoaf goodsanld sue,b is mpoasts do Impae of sc babows) hich is Usuemt ad casl calbla Ot iB th bashea win IC ho danUmlnao Nd whicb as agmed to be on appofpriat p yuel . .64 - s NMAS GR MUCIPAL M W AND EMNRONNMNrAL INIRASTfrUCME pROJCr Detild nadma of PmleotCas (i US$ MIos) * coaecsmrr yowl Tm: YeW) Yerw4 YowS T_ul A. IustitutonelDe,,apueg odm1AUUhsM 1)33 28 1 363 2 I" us I10W4 LU 4 25 Lo 1.0 82 US oCk( pam) 06 e uso 0 la4 o SulaA. _ 5 47 65 5. U _ 275 U 2SV 218 A 20 IA 24 412 WaeteSupp* 90 7.7 140O 90 S4 40 14A5 S8pq 143 12u 2. 143 U 71.5 23.9 SoldWau 24 20 37 24 4 10 3 PehasdIn&arsuctu17 14 V. 17.W 103 875 205 1 3.1 71.1 303 21 1.9 65 2L.0 J ;bsotbb4* 44 U7 2ZO U1% Other 0.0 00 t00 0 0.0 13 us CDPASA*M 15 9eS 1715 573 21 S,uinJmuro .u(PI" 7.0 60 IQ 7.0 42 353 2135 Tmre.eataIS oa 45 38 9 425 2.? 33 U%1 Subeowifl. 547~~~~~~st 465 SU St 32. 271 $II7% c P90UosPI PublicMhSegndPebdoa 05 0a Lo Q 1 00 IL7 us Nm10R.hlDd m 0.7 LO6 10 Q? 0.4 33 1%6 SubtoaulC 12 11 29 _ 04 100 121 D. SwdlattbsSw.L Subla_D. 0 01 0, U 00 LO 03% IDTALDA 003 a . 41* 1. 03 ELO 3S5 3120 111 Pi L2 10 64 43 S2 2L1 67 IDTALMoJBCrOI!3 U.? Z0 IM..7 67* 4L7 gm 1017% Cot baed ENd hld Win, eginmd to Iobwt S3.0 wM= or about 10% of pijet oostL om confingeWau an basUed an lb. Bmns MW d (Ocober1992), *Nab avm.s 3.08% auy Wover te pe Due. to do pq_a.m1 appr Iat'pe undatdo ps,ceut, * - onopodan bmw a bOI bdseted. - 65 - AWI Eshutd Pla Casts for the Firs-YMa jZjaM oIn US$ MMIon) MunIclpaN~y WaSr SawR D _ia. Was9 TOIAL Bubscm 262 2.62 Boa Eapexanca 0.15 '0J5 Co_cnhas 638 638 GovmnadorVda zes 114 L14 Ipatunp 2.00 2.00 200 6X0 Itkuna 3.40 3.40 hoso Monioad. 0.30 0.30 0.60 Juz deFoma 2.00 2.00 Lambd O.15 045 0.30 Lawas 1A4 1.4 Machado 2.00 2.00 NovaLma 1.50 lSO 3.00 Patos de 1.50 1.0 3.0 Pow AlMor 2.70 2.70 So.Jbao delRRa 1.10 110 Sao Lourenco 0.17 0.17 TrePontas 130 130 Ubeba . 1.0 LO Vargnha 4.00 4.00 Albnas M=0= 1220 Belo Odente 190 1.90 36dm 2.00 2.00 Cambuqufa 0.30 0.30 CnOwsolAb tAets LOO 0.75 1.75 DMnopolis 2.00 2.00 G _anhaee 2.00 2.00 Mual. 2.00 2.00 PaM 2.00 2.00 Pfrapora 2.00 2.00 'flmoteo 2.00 2.00 TOTAL 209 16.2 .- 2201 2.00 61_42 -66- ANN BRAZIL MONS GERAIS MUNCIPAL MANAGEMENT AND ENRONMENTAL INmRASFRUCFURE PROjECT L Santatin Sectwo Str In the State Bacgoud 1. Out of a ta 756 municIpalt in th State, jus over hlf ar provided witb water servic by COPASA wvi only abot 40 recve sewerg sevice *om te Sae company.' Thus, the santatIo seodor in Mines G s I distinguished from that of the rest of Ba's I in that It has: (a) m mqunicipal-run systms (watw and sewera) t any oder state; and (b) a highe incidence of searat of proviion of water and sewrg than In any other ste. lhe low lvel of snwge coverp In the Stato and bilit of many syems to talc advtage of the cae economies in Invest, operaton and mobdenanoo of a joiny-opeated system is likely a consequen of ths instiuonal situatio Ihe backgrou dsod clady set out the rnge of Ises in te sector. * institutional (COPASA, mucIt, arole of municipalsi , P NS * senrvic covea (thi should focus on the uniquenes of MO hitina araangm en d possile csad Ulink to sevice coverag levels, and sd include a detald rview of he curnt stuton of COPASA (what an its problems, compao it fina_ay and operatomalyti odter st companies SAEP, CEDAB, SANEPAR, CORSAN, edc.) 2. The Sta's objeciv for e setor aro to pdoriiz sewerae investmen and encourg tfher of vices. The objectve of tho study should be to fornmuate a medum- to longter stratgy for delivery of sanitation servies In te Ste, eavisinig extension of servic, finaning soureso, IlwOeas pdvate seor patcpion nd logical dio. bis dould inlude a cle s _owd of to Sate's objective for direcdon in he sector, setting out Staes stategy not to ese COPASA and to Icpuviz sevices while providing Inentv for seweorag vestme. Tho befts of joint pwovision of water and sewer (conomies of scales in estmen, operaton, mahonance, bdg, onf water for sewer, elc.) would be eplicily addresd Scope of Work 3. The prpose projet could seve as a vdse to fith defin an I sttegy. Tho stdy dsu exmin operaonl alte vs ad recommedtons for ways in whic SOMMA could assist In theonof his strategy, in light of the paicular cacteiti of the sectr in Min, th demiso of PLANASA, and the recen dfor mis. One possie opertonal meanism 1 My.ulx aw roesw 1c aoeute in watr ad ewwmp morvi povidho (m d Nationa Hea PonednM hnn Fam porfV a ?II'r' I 'hElP  hilt1 St Ir't.I a 3. iiIi. S E WI 11111 sill 181301.1 I$1 I ih flh; SJ v ±11 I' Ilk j Ep I ', J 13th 81*1 U 11FI j *11W I Ip I It i l 2 ~~I i @ 3 3 i NA a} iliiil 1 . Sfl;1|1, I|iii i r * * . * - * * ** . * - * -69- ANB MINAS GERAIS MUNICIPAL MANAGEMENT AND ENVIRONNTAL INFRASTRUCTURE PROJECr 1. I performance of BDMO must be a0n I ght of the oval cooomic envionent of the country aod the Stab, as well as the particular of th banking subsecW in Brazil over ac last decade or so. tree bwgound ators are of pariular Inest In rviewing the finvacia and instIonl situation of the IDDMO: Fist, the heaty res to tho bakiag seo as a whole duri the past sever years, as a result of the Iflatioy cdsis, high real intet ae. and drying up of oreIgn and long-term credit Seond, is tie reform of the banking sector, undetk in late 1988, which alowed commal banks to eer into dirtet consumer c¢dit, leasing, real estae credit and hvstmet, among odter serices. In addidon, baries to entry were feed, and nealy 200 new bank were cretd in Bazil in the first half of 1990 done. Stat dvelopmet banks, however, have not yet beean igible, formally, to eder into thes more hlcatve makts; the purview of state bak has been limited to project financing Investtent and/or working caa), aantees, saboler participation, and otier limited services. And the third facor is te dalig healt of the natonal economy geneally. 2. EDMO's response to te factor has been to focus itB effrs in key strategic areas, developing new makets which ar less prone to recession or which do not fae lSel consraints, searchig for new oendinu sources, developing advisory servces, and moving out of th fieda public sector. In summary, BDMO bas rsoded well to difficult cieal , by seah for niche markt and seking ateative oeadn paters and new cliet bases. EDMG contnues to be by most measur of size, lending, profitability and _ th do most scce of the sate development banks, and weill rpected in the bakn ammnity genernly. A ClM and 3. The Banco de Desenvolvimento do Mna Gus - IDMG was crated wit State Law 2607 in 1962 as a public aularcy, wholly owned by the State of Mins loais. It was the first In what was to beome a ssm of Stawned development bak, linked to the nional development bank, Banco de DeI)ncse Economkco e Sochl (MNDES). EDMO's Pres t Is appointed by the Govenor. Shaes ae held in dte nme of the State Se y of Panning, who seres as Chaimn of the Bank's Board of Dirts. All bankin activity in te Slt I coordinated throg thio State Secrta of Finance. EDMO Is nd ie State's capit, Belo zonte, and hs onal offioes In el medium-sized cides wxowid dfie S (see map), and qsientdve offices in Brasili, Rio de laneho and Sao Paulo. In 1991 the Bank's employees aumbered 530. An orgaLaon ¢ht s hnluded on pag 74. 4. Its Board of Directors approved In Apil 1990 incorporton of the company's asses, equit and liabitie into a sodedad anonbag (SA), or mibxd capital company. TIh Stat contne to own 99.9% of theo B s shs. W e thre ae no sewio constri to seling ses of the compay to private sharholdes. -70 - S. DMdO ofibr medium- and long-tem Ions for vnvestents In fi.ed assets and woiting capta for pria and pubio enies In th Seate, pdmaly in the aroao of miaing, Idtry, agrculu and rurl devdopmint and u1a Inastmu. Trdtionally B)MG has kn only a small porton of own resour, wit sourc for lending comin fom onlenig of domestic and fo egmore. in addition, DDMG provd guans, coloea, urtie and exot finaing imd, In_rey, has moved Into the proviin of ne mb adVISorW s i In corPorate e s aMl on, privatiation, debt onavesion nd sil sateg and conomic studIes. Notable teentl' w_o advisory svices DMO provided to CMIG In its pul se of dsh and undewrting of a TLAEMG bond off°n. IUDMO also provided aVIsOry serICe0s in the plamt of shrs in the recentl pivatrtdon of USIMNAS, one of the first and moOt Im t t eor I BIzil's pivadtlo prolm. I)MG IhaS ao dveloped a no mket leading load fiaig consorla for Subta projects, beadn over 20 such syndies, for tot Invtmt amounting to US300 mmon sie 1988. 6. As dsw in Tabl 1., BDMG'san lending opeatbsave doerased sgificaty in volum, over th post seval ya. his s do to th oveall rsion in the B lan econmy, vich is paiculy sharp inb indst and agrcutul sectors which form DM's trado client base, and as a esl of Iceing scaroe fnd for onadin. he buWk of the Bnes ledi was to ft finhustl and mna secotos (abou 34%). Of tol len opeato, jut 2% we for publc so noties (men largdy ),wi remainder to te pvae scor (whincludes publicly-owned st companies). 1985 1986 1987 198 1989 1990 1991 Lt (MM =2.I 371.2 441.3 440.7 238A4 103.3 60.4 bdustrl 7% 13% 10% 9% 0% 23% 0% MAtmS Mdetl & 42% 33% 42% 20% 19% 12% 23% No-Meal 4% 3% 9% 5% S% 9% 21% Agdclu 16% 11% 7% 10% 9% 3% 6% UrWan 5% 11% 6% 40% 30% 16% 12% _s_ & Q_ 26% 291 27% 17% 37% 37% 38% ToWo 100% 100% 100% 100% 100% 100% 100% POW 25% 17% 10% 42% 10% 4% 2% 75% 83% 90% 58% 90% 96% 98% 7. Of the toWlm US$60 monI new reores lent In 1991, 76% compsed 13% lendig nd 11% _ 00. T i M lussotmd inh T 2. -71- Ann US$S Mi s unE LeniG OjMatio7 159.5 : 71.S% 45.9 760% Onlondlug 126.2 56.8% 45.9 76.0% BNI)7S 262 11.8% 21.9 362% FNAME 49._ 22.3% 9.6 1.9% lewma 28.7 12.9% 3.4 5.7% BACBISN 8.0 3.6% 2.7 4.5% BNI)RSwIeSUUt_ 0.0 0.0% 2.4 4.0% FDWSt 7.8 3.5% 1.9 3.2% FRP 0.0 0.0% 1.9 3.1% PROPLORESTA 0.0 0.0% 1.0 1.6% -SP 3.6 1.6% 0.0 0.0% Od- 2.4 I.1X 1.1 is% BDWM Own LendIg 24.7 11.1% 7.7 12.8% uar antOpetion 60.0 27.0% 6.8 112% TOTAL Opmton 222.1 100.0% 604 87.2% S. As dwn above, a mrge pert of BDMG 1innc pmeens onda om other baking inttuo. Fnancg fom te ENDEs system in 1991 provided 40% oftoa opwaton, as wU as resources fwm Fedra prgams sch a CEP, pdmaily to finc Inuat e w s in dh ior of tho Slta St funds for spcf p¢og s amounted to 3% of total. Exten resoue amouftd to abot 7%, whIe own Boank resouces to 24% of total opra , Inludi _Ag s. 9. d ly pestjust 115% of lnding,thse oinfrstucisato averocetly ree d up to 40% ofth Band's lendn actvitie (and hIlude a la cate y of lead to pbi ente&rls,a prmay wate ad saibtin ulies). Ih oreet falig-off inoa m o led to Ieased las in th Oa of _.ssbucturo, in Pariulad rStranspo TrtaI nAstutue investntalso Includu urbas Inrasr audi as pai agnd stre light, purhe of school buses, cehes, d., &thgh CEP. 10. Despite its comparavely redued leng volume, EDMO is On of the few pubcly-owned bans whic ha main d opetns with external fin instutons. RDMQ has syndiaton opton wit sm of the larged Eurpean, Ameic and Japaese bn, as wel as mst mor Bra n bas. - 72- AN 3 11. CompaIo with othr stat dwdopm bak Indicates that BDMO's size nd perfrmance far outweigh th other ton or so stato deeopment bans. According to a publcaton of the Ba_la Assoiaon of Development Fine nitutions (ADE), BDMO totesouos lent and oileat in 1991 mound to nearly 50% of the total lt in the stats systems (vot ilud BNDES), and was more than twice the seoond lUrget state bank. In neay every other meases of size and profiaity IDMO dominaes.1 12. Historically stong, BDMO's financial peformne ovea the past two yes has eroded somewhat, wilh the declining stat econmy. Averg trn on equity (RtOE) for the perod 1985-1988 was about 10%, however in 1989 fel to 6.1%S and to 3.2% in 1991 after a loss in 1990. DMG's renues, lik the res of the baing sector in Brazil during the past sever s, have rlied heavily on income from short-tes seities inesmn. Personnd expenses have been rdafively connt a about 2-3% of total rv_ens. 13. Dudig the period 1984-1987 major sourcos of capitl eame fom: (a) bank gurntes (26%); (b) onenig of federal, state and extenl credits (W0); and (¢) own rsoure and other (14%). Of the onlenlXng, 23% was provided by FINAME (a fedea governet fnd managed by BNDES and dirctd towards ind development); 15% by BNDES; and 11% external crdts. Ti aerge funding mix bega to change in 1988-1989, howvr, as BNDES begn to withdrw its funding from state development banks (filling from averg of 11% to jus SS In 1988).2 To balane ihese effc, CEF (tbrough its PRODURB fnd) Ieased paricpation f*om about 1% averagp over 1984-1987 to 40% in 1988, and funding from the Ba'S own rewores also Increasod from an averg of 14% to 19% In 1988. In additon, the Bank has slody moved away frm rlon on guarantees, tis being just 5% of onlent resou in 1968. Tota o-uding loans amounted to abut US$850 mMion at eand 1989 (US$l bilion, Inuding antees), about 75% to the pdrvate sector and 25% to the public sector, avegep pedod of about 3-4 years. 14. These trends vwer drven not only by exogenous fctors, but also by demand for loans. On the asset side, the fal In dt fones of tho mining stor has been o _I by a decrea In its overall pecentage, oftotal outang loans in met , forexample, frm 18% in 19 to 11% ln 1989, and a correponing inrase in some of the infi_structure-reated sectos, such as transport and communications (although loans to publc en rses have also decasd, aeng overl Infrastructure lnding). 15. Depie the fing economic peroman of the state, and a seres of other impor factors (such as increased loan-loss resre rquiremet and the limiations on public enterpise borowing establhed by Central Bank Resolutions), which have had an impact an the an's financia health, its ovrall condition remins very sound. In fa its opeatng raio has declined from 87.5% in 1984 to 83% in 1989, indicat likely increased efficiny and cost control in the face of reduced vues. 16. UDMO has made signficat efforts in the past sva yeas to impr s cataol adequay, wich was eoded though the need to set aside reatively large loan loss resoaes due to fdeal goverment exposr. As shown in th atahed able, BDMO now has a bealty asset/equity atio of S. Mhe Bank has taken svalaoy steps in this proc: Fir, esolving all ousading debt with two main feder debtors, Usminas and LAA. For the Udimas debt EDMO took payment in pdvatztion bonds, which It then sold to a consortium of Usmhas employees. his way, EDMO participat in the fist major privatization of 'I E&aw* do SLve fhoaeb De, eb. 1992. 2/ Nod that among to few remanig frei olf t by BDMG is a Wodd Bk loan for USA48.1, offectve in 1918, for devehVment of faaa under the pgrgam PROFLOSTA . -73- ANNEX the Bri p1 ra, whle also rsovin a sedoius ssst qult bs. Ihe Beak has also siged a _emowndm of undesta with the Fderal Govenmnt on solun of det wit thoe ndonad aloohl insituio (AA), whi was eztipisted In 1991. L loss coverp b a and consitent with Btazllan logisatin and International standards. L moov rae Is also satsfctor. 17. BDMO _ strategy in the past sevral yeas has focused an reaining the Baks capital adequaoy aio, blaning Ils pordolio idsk (away from tie publi setr), and developig a niche maake speiaizing fiaal ser s tecnical and advisory services, and eadng consorta. Althoug ihe ter Is stI only a sml porton of th overall vnes of the compay It provides a lag put of the Bek's z~ton. Sinoe 1968 about US$233 m have been povilod tugh ovaer 20 financing syndicates led by MO, largely h the agricuture, Inustiallurgy setos. 1 Is s *'us about its movement into sewvio proviion and expanding its role from tha of a radiiona developmt I ik (and fuher indict It is likely prepaing to ent the stock maret with a bond or shar offern Itl, a8iig to push the _om wof th lel defto of the esnbies ad oblWos of a stae bak e stasegy is eaboateSd In a thre-year roil stratesgic pln I plans objetves in the anet three year pedod include: (a) _ g of fiaes; (b) renvigoration of the utin twrgh nw ptogm and new clents; (c) and bu s m partclry in the aea of cmMpuriztio AgagMg PUcies d Andt zmgM 18. Acco_un is don on bads of ntre of expes . Cost-ene acoutinad i beig Implemented ftoethe with i unon. Account inIs consistet with generally-accepted accounting principles, including om adjustments, wofaccorg to Fedel law 6004. Atou the Bank is not reured to prset financal stdat In a curecy of consta puaion power, It wM ake montly Inftion a4justments, athet t ammal as in te past, as of fisol yea 1993. For this ron, fth dollar odeom ed fina l -hdoolu for the perod 1989-1992 should not bs seen as preis tansa (sinoo a m we done at yar-end and do not refect ac 19. BDMG has extenive eiene lndag to the publio and pdrve sector. EDMO's Departm of U J astructure (DIU), dated to be the Project Unit under the proposed opeadon, as been responsible for all DMG's lenig to h muwcipa secr. In pula, it has ma fncing avilabl under 311 opentios in about 200 muncilitsn th amount of abo $153 milo sce 1980 under tgee main hes of areit: (a) PUNDBURI, cailz by Stat souce (se bel); (b) PPODMRB, capitad by CEP; and (c) FINAME ca ized by fbads flvn BNDES. Both to lter coasd dfuto In 1991, and will not be furiter capitalized Ih FUNDE URfnd rains open, howe CEP is nt providn rsue. 2D. BDMG's DIJU has been appried by the Bank for opeatn of to proposed apeaton and found adoqck". n addionm to its prexist significant exeiene with munp borwers, BDMt has, durig poject prqpati, DMO underta_. the following mneasres: i strengtheon the DIU wth addiona tec al staff, enrd into tcna aeements with COPASA, FNS and PIP for seiaized expets for evuatio a pr d wof ,gr drafts ofthe Operationa Maua, ted poposed poce s thmoug preevastio of a goup of 30 m cpiies, purhased and Inad upged comper equimen in the DIU, arngd for eectronI r cmication wit Bank hadquart, and more reoeny, launhd a publict prorm for SOMA As a ult of the effots the DIU Is now y prepaed to initate operto of SO8A. - 74 A UlIDt _mgmo Ba f,b fss I Rw_ Jt l~~~~~~~ M _da _ at~~^ u~~~~~~~ok -Ll O__ I~~~~ RJ0m DM AU& 1om _~~~~~~~Aowu .L cBudD & ~~~1 I :3. 1 hi~~~~~~~~~~~ I i3I~~~~~~~~~E I* w~~~~.* i~~~~ ~~~~ ii a aggMiBiaZ a .sR NX ts Spz a; B i o3XS X3§; glBt til 85 ii~~~ Lt I3 RR1 iZXEiSt0a3;zS ;;EssSolsSX s §00;a1gi on us$ sofMus,n Ud taliUm G 314Dc 314DoC 314ou 304.. 1919 1990 1991 1992 AwStz 109,571 100% 677.742 100% 511,000 100% 59,32 100% cah a Secuddes 2,691 0% 639 0% 53,944 9% 2,787 0% airagOPU&*= 356.901 44% 239,181 35% 112,217 31% 208,326 36% Laain8OpmQaa 1,582 0% 803 0% 0 0% 0 OK Other C 22,037 3% 37,825 6% 24,706 4% 26,561 % OerAsm 1.101 0% 495 0% 61 0% 354 0A Losg.Tem Asson * 3192 %699 223 806 = 31492.7 M4 Sec8dtes 44.491 5% 42,722 6% 869 1% 2,491 4% L-d_ Ogmam 321,721 40% 307,876 45% 254,999 44% 271,291 47% LmlngOpeutis * (824) 0% (56) 0% 0 0% 0 0% OtherLa TeamAs 30.803 4% 30,171 4% 34,371 6% 27,004 5% p-unAmW is 2W2 J2i 2.U .4 .2LS1 bavainets 390 0% 241 0% 34 0% I8 s Prpay PlntE 20,891 3% 14,177 2% 18,996 3% 19.956 3% LeasdAists 7,192 1% 1,941 0% 667 0% 261 09 DdvChwagp 586 0% 1,720 0% 1,306 0% L192 0% Lialfnuilisad Rquk 809,571 100%A 677,742 100% 581,000 100% 579.312 10 UWab s u289.93 233l7 215-081 - 013 m DepadlA 70,707 9% 91,791 14% 63,505 11% 55,461 10% Local Onlmading 195,079 24% 166,167 25% 125,921 22% 90,480 16% Feculgp Onlkaid1 14,505 2% 14,745 2% 13,647 2% 12,790 2% Othe 9,653 1% 11,007 2% 12,009 2% 19,275 3% Leng-TernIAabillties mAaz ~ d0h 23a11487 & 308.774 Depoafita 17,690 2% 21,749 3% 11,398 2% 16,344 3% Dodla 217,773 36% 235,921 35% 217,200 39% 234,013 40% FoepOn1mia 35,037 4% 24.552 4% 11,403 2% 5,131 1% OtdLOIgTer 10,9lo 1% 26,553 4% 22,024 4% 24,862 4% Derenudlacum L013 Di L^ 40 22 Q Shazeho1de'sEqgW _ JjLIZ am f4. J J I 11% 8C,90 1% 39,760 6% 6,215 1% 16,889 3% CaPal 0 0% 0 0% 17,235 3% 40,910 7% _d m of M 131,791 16 515 9% 132,70 23% 126,458 22% RgvaL R CapItal 3.un~ 14,583 2% 13,421 2% 6,571 1% 7,015 1% Rdd=dEaznlA( ) 1,863 1% (21,033) -4% (69,30) -12% (7081) 2% a77- ANMJE URAZEL MINS GERAIS MUNCIPAL M E AND ENVIRONME4TAL nFRF PROJECr A. MuIiL3aI&ujain.MbuuKas 1. Sectr Develop in Mim Gami and IU seto wwt ompetd lot yer on figl B a n z lays a fir IIpe0dy to Iitutional w@skIm d Table O- Value of Merchand Tax of ppamtlon by all bves of govenment by City Siz in M_. Gal, 1990 b lilt owit to ds under t4 City ICMB by Value "Ib I , IS ftd since 198. one won Size Range (US$ 1990 reOgnizd p-b corno the wide rnge- of In polaton siz and cqaciy of te 4000 Ove 200 r 1 knin BiLn min us ____ low1 100 200 eoonW a r _xw tive sam* of dd tangis qov 33 24 0 SO,OOOW 2. 1abl I, a _umml of the ran4108 of 20,000. 11 65 70 p_dioan md waftin *al 723 50,000_ Isa 4 ltloi w ,wA eUSU a o - aoiato bewo ta tre sdro sad Bd*w 2 S3 S5 ds h maq ablo bet a as a py for instiutonl caacity in local governments, beartigIn mind that a few statistica "OWIYM - smll mnipaNowhich hous a single larg, wealthy Indutry- are aso reflected bem. N d -a such cases, te vast maorty of nmo u si eatgemely weak. At does- time, tog, week H-1ane unlikly to be afhtekd directy by the Muniipa progm oSEject Then afteamsarcse nmirord in irtualy every country in the region Inevilably, WIth - 'oliatin ~Brazi, with help frma te Back, wil need to devise a stratey of mt to lOca govenmetshat balances seg eng fforts to suit both minority of govermmint with the bulk of population a well as doe majoriy of goverment with a minor share of the papilatln The proposed project aWms Sl to deal only with. te lagSt 40 percen of the 111f in the sbtat. S. I ---.k I uflouLm rsJwmm Mm goe propose p f roject is foced with a common problem of linking two agecie, which. up until nw. have been institutionally sr'qmts and untiwonaly distnct The funcii agenc, Banc de Duenvovlmento de Minu Geawk or BDMG has been in busines for 30 year and appear to have a strog tehialwapaity in Bunan"a and economic evaluatio The tewhica agen for inttton" dsaqUig eFnl b lhwo O,v cweaod at the begsnning ofth 1970h and, althouh weaened by the rcntw fisca and polhla criss in the country,, is beginning to emerg somewhat reurihed* follwing of an emergency Plan -78- K 3P and am leadnersip Mm two lutluton opstb in difaren thdqms and foramat, and an fa*zie separated by an cultural whic wm rquir tm and dlr_ate to ovwercom. Some s tons to lauhdi proo an Inlued intde aide memoir, afttaced. IL AMM R O P 4. Ih Faad$e o1o J'bs ra (IP) w creaed In 1969, asa foudato, foly ownd by de Ste It Is Unbd directly to to. Secrtaria of Planing. As die Staes econononioadaae foundatio, PIP dsvlps studies and undermtake rser to undevpin die wok of d. State Planning Seoreria which recelly has beg to focus mor on effiliy of local govanmet and efedvely theo whid came about with d new Costuto 5. TMe cpu of techia capacitn hew RiP, _odkc wi lbray, e _let dab and Tb T f,zd=tod_ S ctnlU uw Dpre ." P, M=Gri, bubatonof inonnlo UkA eq!pment 199 assim tl IPndertak Core Units .To. Mstre PhD. hsUm deieopento nSOMMA.M ff Preious prgrm uder Ban ad DB joint finaminglo seagm bh d u loal n h bav bld Admln Dow 23 7 0 af k gbd of tetxpeboo_ g 8Bva dqxwt_f. of the PIP inth a1h of loed Munll Dev 24 2 1 P"Mmat dun. Mm too" "got mentadm qlsor/ is 7 1 WI _soiai of _ (Ie !OWDOU _d cbv k_nqwb ddeivq sdW, _ot ,m by vi°w nmwdo_kms _badm , a80 Fmnomic 47 30 4 a 3mph la ithk SOMMA projet. How, t - - - I impoa at thd two pogrms (PROD8MU SOON 19 11 5 ndSOiMN ano _yntu _d P budg separde_ but __adongy oordbAmAdmins 52 8 3 6. Now dkieedehe fJ?. Be do end o of do yearw, di Foundaios IIto have addional _ 8ughmmi of proesonal staff in two aW cit-one aw scool of aothera statistical and n raoncr. T-es 8addosmw s_oogd ite Foundatis capackity, but wil rqu some shr un to adsorb tm. TM onfomton center nlves do.-transfer of 40 pfsIal ad Wst personnL Aim SEPLAN (s_t planig, ogather withyfo gateig and regary publshing statison socild and aconomIc _1a t stao te.To support dt fwi ncton, di PIJ will, boe t nd of to yea, be takig ddivy of 25 PCs wit 486 chips. Beginning nt yr the F4armemsm1t5 ,d .Nd PROJECT - SOMMA ECONOMIC REGIONS AND 15- ~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~SELECTED MUNICIPALITIES 0BuriIi.s '5 F. D. ° i * 15 Arinios A ~~~~~L.8 %E. /O<\_ .WCIA AREA OF MICRO-ASSOCIATiON PILOT PROGPAm G 0 1 S 6 ~~RRAWAMUNICIPALITIES TO PARTICIPATE IN MICRO- G O I S , OUnR0 Sdo Romdo% 4 VI ASSOCIATION PILOT PROGRAM GOIANIA > bonbnop~~~~Soli , o y J ECONOMIC REGION bOUNDARIES GOIANIA gonfinpoli0 MUNICIPALITIES FORECASTED TO PARTICIPATE j ~ RW1If6p0iB F' d ( Ml IN SOM M A'S FIRST YEAR ,S OPartrzootu 4° > '-~ STATE BOUNDARIES *_ JolsQo PIOiveiEQ Aq *piroporo G o ao rd .M6 r o , INTERNATIONAL UNDARIES LVQOE,IOP r ECONOMIC REGIONS: STAT GOP 1 METALORGICA E CAMPOS DAS VERTENTES 51% Governodo, / I;Ii MATA 0% GuonhOns SC70dares III SUL 13% o ~~~~~~~~~~~~~IV TRIANGULO E ALTO PARANAIRA 11% IV' t*B I Or ilencl to 1{,_/>_., XX v V ALTO SAO FPANCISC-O 4r IV . u ._,..S _ r Cx Aa plno . ESPIRITO VI NOROESTE 5% SELO A R A NASANTO Vill RIO DOCE 6n 081 Divin6po Be~~~~~~~~~~~~otim lORIZONTE a Joao Mon do AL VI EOIIHON0% 00~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~TTL10 soliieiro La~oi*Be ,.,Z. ,TvIT6RIA 'o AfncGeS t+* * R f e( RGNTNt4Brbece ne0 Mac/ do* ea _1inh de o Pr flARCBRA9 ~~~ PAULO *~~~~~~~~~~~ ~~~~Cenbu0oira 0 PERZUI ( *~~~~~Lgmbcrl .0 PR Ai, megre RIO DE JANEIRO - (RIO DE JANEIRO A OLIVIA -- A t~~~~~ *SOPAULO 1 PARANA 0/ c e o,n ~~~~~~ 400 I~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~'~~~~~~~~~~E ~~~~~~~~MARCH 1993