Document of The WorldBank FOR OFFICIAL USEONLY ReportNo: 31691-BR PROJECT APPRAISAL DOCUMENT ONA PROPOSEDLOAN INTHEAMOUNT OFUS$4.0MILLION TO THE FEDERATIVEREPUBLICOF BRAZIL FORA HOUSINGSECTOR TECHNICAL ASSISTANCELOAN October 13,2005 FINANCE,PRIVATESECTOR, AND INFRASTRUCTURE BRAZILCOUNTRYMANAGEMENT UNIT LATINAMERICA ANDTHECAFUBBEANREGION This document has a restricted distribution and may be used by recipients only in the performance o f their official duties. Its contents may not otherwise be disclosed without World Bank authorization. CURRENCYEQUIVALENTS (Exchange Rate Effective August 31,2005) Currency Unit = Brazilian Real (BR$) BR$2.4025 = US$ 1 US$0.416 = BR$ 1 FISCALYEAR January 1- December 31 ABBREVIATIONS AND ACRONYMS BNDES National Bank for Economic and Social Development (BancoNacional de Desenvolvimento Economico e Social) CAS Country Assistance Strategy CEF Federal Loan and Savings Bank (Caixa EconBmica Federal) CFAA Country Financial Accountability Assessment CNM National Monetary Council (Conselho Nacional Moneta`rio) CQ Consultants' Qualifications C V M Security and Exchange Commission (Comissiio de Valores Mobilia`rios) DPL Development Policy Loan FAT Workers' Assistance Fund(Fundode Assistencia aos Trabalhadores) FM FinancialManagement FMR FinancialManagement Report FNHIS National Housingand Social Interest Fund (FundoNacional de HabitaGiio de Znteresse Social) GTI-SFH Interministerial Housing Policy Group (Grupo de Trabalho Interministerial de Acompanhamento das Politicas de Financiamento e Subsidios ii HabitaCiioo) FGTS Workers SeveranceFund(Fundo de Garantia de Tempode ServiGo) ICB Intemational Competitive Bidding IBGE Brazilian Statistical Institute (ZnstitutoBrasileiro de Geografia Estatistica) IBRD Intemational Bank for Reconstruction and Development PEA Institute of Applied Economics (Znstituto de PesquisaEconomica Aplicada) MOC Ministry of Cities (Ministerio das Cidades) LCR LatinAmerica and the Caribbean Region M&E Monitoring and Evaluation MDG MillenniumDevelopmentGoal MP Medida Provisdria (Project Law Issuedby the Executive) MW Minimumwage (lMW=R$ 300at Negotiations) NCB National Competitive Bidding NGO Non-GovernmentalOrganization NHP National HousingPolicy Vice President: Pamela Cox Acting Country Director: UlrichZachau Sector Director: Makhtar Diop Sector Manager: John Henry Stein Task Team Leader: Maria Emilia Freire / David N.Sislen *. 11 FOROFFICIAL USE ONLY NPV Net Present Value OGU Federal Budget (Orcamento Gerdo da Unilio) OP Operational Policy PAR Social Rental Program (Programa de Arrendamento Residencial) PAU Policy Analysis Unit PSH Social HousingProgram(Programa de HabitapZo de Interesse Social) QBS Quality Based Selection SBD Standard BiddingDocument SBPE Brazilian Savings and Loan System (Sistema Brasileiro de PoupanGae Emprkstimo) SFH Housing Finance System (Sistema Financeiro de Habitaqrio) 1 SFI Real Estate Finance Sistem (Sistema Financeiro Imobilicirio) SNH National Housing Secretariat (Secretaria Nacional de Habitagdo) SOE Statementof Expenditure S T N Treasury (Secretaria do Tesouro Nacional) SWAP Sector Wide Approach TA Technical Assistance TAL Technical Assistance Loan TR Reference Interest Rate (Taxade Referencia) This document has a restricted distribution and may be used by recipients only in the performance of their official duties. Its contents may not be otherwisedisclosed without World Bank authorization. BRAZIL HOUSING SECTORTECHNICAL ASSISTANCE PROJECT Project AppraisalDocument Date: October 13, 2005 Team Leader: DavidSislen / MariaEmiliaFreire Acting Country Director: UlrichZachau Sectors: Housing Finance, Public Sector Sector Director/Manager: Makhtar Diop/ John Management, Poverty Alleviation Henry Stein Themes: Urban Development (P); Access of the Poor to Public Services, Municipal Management (S) Project ID: PO50761 Environmental screeningcategory: Category C Lending Instrument: Technical Assistance Loan Safeguard screeningcategory: No impact Project FinancingData [XI Loan [ ] Credit [ ] Grant [ ] Guarantee [ ] Other: For Loans/Credits/Others: Loan Currency: UnitedStates Dollars Amount of Loan: US$4.0million Proposedterms: Fixed-Spread Loan (FSL) with principal repayments linked to commitments, with a variable rate with automatic rate fixing every six months and a standard repayment schedule with a total term of 17 vears and a mace period of 5 vears Total: 2.0 2.0 4.0 Contact person: Ines Magalhaes, National Secretary for Housing, Ministryof the Cities, Brasilia Tel.: +55.61.2108.1000 Fax: +55.61.223.5243 E-Mail: Imagalhaes@cidades.gov.br Estimateddisbursements(Bank FY/US$m) FY 2006 2007 2008 2009 Annual 1.60 1.07 0.80 0.53 Cumulative 1.60 2.67 3.47 4.00 Does the project depart from the CAS in content or other significant respects? ]Yes [XINO Does the project requireany exceptions from Bank policies? I[[]yes1 [XI NO Does the project includeany critical risks rated "substantial" or "high"? [ ]Yes [XINO Does the project meet the Regionalcriteria for readiness for implementation? [XIYes [ ]No iv Project development objective Ref. PAD B.2, TechnicalAnnex 3 The development objective of the proposed TAL would be to support the implementation, monitoring, and evaluation of the Government reform program supported by the Programmatic Loan for Sustainable and Equitable Growth: Housing Sector Reform. The Housing Sector Reform Loan aims to improve the policy environment for improving the living conditions of the poor and strengthening their access to assets, notably housingand servicedherviceable land and would be embedded inthe cluster of support for the Government's growth agenda, presentedto the Bank's Board of Executive Directors in anticipation of the proposed TAL. The DPL supports the Government's program to (a) strengthen the sector institutions managing Federal housing and urban development policy and programs; (b) build an efficient market for formal housing finance capable of absorbing long-term savings and which will provide a stock of finished housing for medium-term down-filtering of middle class housing; (c) establish a rational and complementary system for housing subsidies for the poor; and (d) improve the conditions for land and urban development by reducing barriers to formality and improving the affordability of formal land and housingdevelopment. Project description [one-sentence summary of each component] Ref. PAD B.3.a, TechnicalAnnex 4 The four components of the TAL are: Component 1: Supporting the Institutional and Legal Frameworkfor Housing Policy (US$ 1.31 million). The TAL would include resources to support the Ministry of Cities in its internal reorganization, including the consolidation of the National Housing Secretariat as the key technical and policy entity for coordinating policy design across the many public sector actors. Component 2: Housing Finance Market Development (US$0.29 million). The Housing Finance Market Development Component would support the improvement of the legal and regulatory framework for housing loans, including incremental reforms to the existing housing finance system, the future integration of SBPE in the full market system, and overall strengthening of the market-based Housing Finance System (SFI). Component 3: Housing Subsidies for the Poor (US$ 1.33 million). The focus of technical assistance activities as relates to housing subsidy policy would be the rationalization of the Government's various subsidy programs and the establishment of effective targeting, monitoring, and evaluation mechanisms. Component 4: Land and Urban Development (US$ 1.06 million). The component would include the provision of technical assistance for (a) the design and implementation of programs of the Ministry of Cities to strengthen local governments in their efforts to achieve accreditation of their institutional capacity to take the lead in local urban development policy setting and implementation (gestzoprdpria); and (b) the development of a national urban upgrading program, including, inter alia, (i)research, monitoring, and evaluation activities, at the Borrower`s federal level, of policy and regulatory efforts for urban development and land subdivision; and (ii) a series of activities to facilitate the implementation of the policy innovations under the Program for progressive housing development, the preparation of local master plans @lanosdiretores), and demand-side organization for housing subsidy programs. Which safeguardpolicies are triggered, if any? Ref. PAD D.6 There are no safeguard policies triggered. Significant, nonstandard conditions, if any, for: Ref. PAD C.5 V Boardpresentation: NIA Loan Effectiveness: NIA Covenants applicable to project implementation: NIA vi BRAZIL HousingSector Technical AssistanceLoan CONTENTS ASTRATEGIC CONTEXTAND RATIONALE ....................................................................................Page1 1.Country and sector issues ......................................................................................................... 1 2.Rationale for Bank involvement............................................................................................... 3 3.Higher level objectives to which the project contributes.......................................................... 4 4.Poverty Impact.......................................................................................................................... 4 B.PROJECT DESCRIPTION .................................................................................................................... 5 1.Lending instrument................................................................................................................... 5 2.Project development objective and key indicators ................................................................... 5 3.Project components................................................................................................................... 6 4.Lessons learned and reflected inthe project design ................................................................. 8 5.Alternatives considered and reasons for rejection.................................................................... 8 C.IMPLEMENTATION ............................................................................................................................. 9 1.Partnership arrangements (if applicable) .................................................................................. 9 2.Institutional and implementation arrangements........................................................................ 9 3.Monitoring and evaluation of outcomeshesults ..................................................................... 10 4.Critical risks and possible controversial aspects .................................................................... 10 5.Loadcredit conditions and covenants .................................................................................... 11 D.APPRAISALSUMMARY .................................................................................................................... 11 1.Economic and financial analyses............................................................................................ 11 2.Technical ................................................................................................................................. 11 3.Fiduciary ................................................................................................................................. 12 4.Social ...................................................................................................................................... 12 5.Environment ........................................................................................................................... 12 6.Safeguard policies................................................................................................................... 12 7. Policy Exceptions and Readiness .......................................................................................... 12 vii Annex 1: Country and Sector or Program Background ........................................................................ 13 Annex 2: Major Related Projects Financed by the Bank and/or other Agencies 22 Annex 3: Results Framework and Monitoring Indicators .................................................................... ................................ 23 Annex 4: Detailed Project Description 27 Annex 5: Project Costs.............................................................................................................................. .................................................................................................... 31 Annex 6: ImplementationArrangements ............................................................................................... 33 Annex 7: The Monitoring and Evaluationof the NationalHousing Policy 35 Annex 8: Financial Management and DisbursementArrangements ................................................... ......................................... 39 Annex 9: Procurement .............................................................................................................................. 42 Annex 10: Project Preparationand Supervision .................................................................................... 44 Annex 11:Statement of Loans and Credits ............................................................................................ 45 Annex 12: Letter of Development Policy ................................................................................................. 49 Annex 13: Summary of Social and Environmental Issues ..................................................................... 54 Annex 14: Country at a Glance ................................................................................................................ 58 Annex 15: Map IBRDNo .33377.................................................................................... 60 ... V l l l A. STRATEGICCONTEXTAND RATIONALE 1. Countryandsectorissues Background and Key Sector Issues. Brazil is among the most urbanized countries in Latin America, with approximately 80% of the population living in urban areas and 90% of the country's GDP being generated in cities. Access to housing and reliable urban services i s essential to poverty reduction and growth in Brazil, with housing being a potentially important component of the economy, contributing to job creation (housing investment has a multiplier effect of 1.8), expansion of the finance system and creation of household wealth. In the past, Brazil's performance in this area has been woefully inadequate; outstanding mortgage loans are approximately 3-4% of GDP (compared with 15% in Chile and 65% in the US), the housing "deficit" is estimated at 7.1 million units (equivalent to 28 million people without access to adequate shelter); urban informal settlements are growing 4 times faster than average urban growth; and an estimated 65% of new households formed annually cannot afford the most basic house produced inthe formal market (700,000 householdsper year). In February 2001, Brazil's Congress passed a constitutional amendment which guarantees the right to adequate housing for all Brazilians. Accomplishing this ambitious goal while maintaining fiscal and political discipline represents a major challenge; defining the role of the public sector in meeting the housing needs of Brazil's poor population requires comprehensive and sustained policy reform and investment, with a focused effort to mobilize financial sector resources and private sector savings. While the issue of housing and the attendant social, economic, environmental, and health issues which stem from the sustainable urban development agenda was a priority in the electoral campaign of the President, elected in 2002, progress has been slow in the last two years, in large part as a result of the fiscal restrictions self-imposed by the Government and the initiation of administrative and institutional reforms to managethe sector. Thekey issues facing the country include: 0 The need to rationalize sector institutions and strengthen the capacity of public-sector institutions to design, monitor, and implement housing and urban development policy. The formal housing system in Brazil is a complex web of federal entities, private sector developers, and state and local governments. Over the last fifteen years, responsibility for housing and urban issues has been transferred to a number of ministries and secretariats, resulting in a general mismanagement of the sector and an obvious lack of policy direction. In the context of the Government's decision to transform the sector and make housing a national priority, efforts are needed to establish a coherent public sector structure able to formulate national housing and urban policy and to coordinate the various agents and authorities at the federal, state and local levels. While the creation of the Ministry of Cities in 2002 represents an important first step, efforts are needed to (a) articulate the strategic direction for the housing sector; (b) establish a national program for housing finance while avoiding the bottleneck risks of a single-window for transferring sector resources; (c) link federal housing policy and finances to other policy efforts at the local and state level; and (d) significantly strengthen the Ministry of Cities' capacity and policy relevance through a series of institutionalreforms. 0 The need to create a h i d and efficient formal housing market. The absence of an efficient market for formal housing credit has a direct impact on the lower- and lower-middle income households directly and indirectly. On the one hand, housing finance markets are incomplete and do not serve large segments of the low-income population because the costs and risks to do so are too high. On the other hand, a well functioning mortgage market for higher-income households i s critical, in the medium-term, to poorer households as it creates a stock of financed housing which can "filter" down. While the overall market dynamic i s in large part driven by the macroeconomic conditions and public sector debt-related interest rate dynamic, the short-term policy agenda is rich. Simultaneous efforts are needed to (a) provide access to housing finance to households which could afford monthly mortgage payments but which lack a stock of savings for the current high levels of down payment of 30 to 40 percent required; (b) incorporate micro-lenders into the housing finance market by increasing their access to the below-market rate funds to which large financial institutions currently have access; and (c) improve the legal and regulatory framework which governs the formal market, including the management and administration of the Workers Severance Fund (Fundo de Garantia do Tempo de Servigo, or FGTS)resources. 0 The absence of a consistent and broad uroa-amof subsidies for the poor. Well-targeted subsidies for the poor are an important aspect of any housing market. Inthe absence of an efficient private market for very basic low income housing (because costs and risks are too high for formal market players to enter), and in order to compensate for the costs imposed by inappropriate regulation and market inefficiencies, subsidies in the short-term can help bridge the wide affordability gap which, in principle, could narrow in the medium-term as unaffordable planning regulations are removed, land management systems improved, and the structure of the housing finance system made more efficient. The key challenge for the Government will be to establish a housing subsidy policy which is both of highimpact and efficient, maximizingthe impact of limitedfiscal resources by leveraging credit from the financial system. 0 The high costs - both financial and administrative - of land development, subdivision, and housing creation. The lack of formality in which new settlements for the urban poor emerge is a key driver of the creation of slums Cfuvelus) and the vicious cycle of marginalization of Brazil's urban poor. Inhabitants of informal / illegal settlements are often unable to access public services, have limited access to legal recourse, etc. It has taken decades for Brazil to recognize that a policy environment which creates incentives for formality i s a key pillar of both rational urban development and the overall poverty-reduction and growth agenda. The key challenges for Brazil are to address both the stock and flow of informality through (a) a concerted effort to formalize existing slums and improve their access to basic public services by developing a national slumupgrading strategy and a program of financing for urban upgrading; and (b) reducing the costs of new land development, subdivision, and registration. The Government's medium-term strategy to improve access to affordable housing for the poor has 4 key tenets: 0 Rationalize sector institutions and the lePal and regulatory framework for housing and urban development. The Government aims to strengthen the capacity of the Ministry of Cities to formulate, articulate, and implement housing and urban development policy in Brazil. Some of the efforts underway include (a) the creation of a National Housing Plan (NHP) which would identify the targets, priorities, and key sector investment programs; (b) restructuring the Ministry of Cities to establish the needed institutional framework for cogent sector management, including the establishment of an interagency coordinating mechanism to manage sector dialogue across the public sector; (c) the establishment of a National Low Income Housing Fund (FNHIS) to finance the NHP; and (d) initiatives to extend technical assistance to state and municipal governments for the implementationof the many locally managed aspects of housing development policies. 0 Support the development of a formal housing finance market. Since the mid-90s, Brazilian authorities have been struggling to restructure the country's housing finance sector and to enhance the role and impact of the market-based housing finance system (SFI) and to improve the existing savings-linked 2 Sistema Brasileiro de PoupanGa e Emprestimo (SBPE) and the higher-end market based mortgage system, known as the SFI (Sistema Financeiro Zmobilia`rio). As regards SBPE, the key efforts in coming months and years will focus on the orderly and phasedexpansion and the integration of SBPE in the full market system and broaden its reach through changes to the targeting and weighting of loans eligible for financing. For the broader SFI, the Government aims to set the stage for a gradual expansion of market-based finance as market conditions evolve. 0 Address affordabilitv of housing through the creation of a comprehensive housing subsidy policy. The Government is implementing a multi-pronged approach as regards housing subsidies: (a) to dramatically increase the amount of finances in the system; (b) to move away from implicit interest rate subsidies to explicit upfront grants; and (c) to separate credit-linked subsidies from non-credit related grants. The Government has created the Programa Social de Habitquo (PSH), which combines an upfront down-payment subsidy to households with an upfront subsidy to lenders to compensate them for the extra risks and costs in lending to lower income households, and a well conceptualized auction system for participating financial agents. At the same time, the Federal Pension Severance Guarantee Fund (FGTS) has established a similar program for upfront housing subsidies for the poor. 0 Reduce the barriers to formality of housing and services for the poor. The Government i s supporting efforts to break the cycle of overregulation and informality which has dominated the growth of urban areas inBrazil for the last 30 years and which i s most evident in the expanses of urban and peri-urban slums that characterize Brazilian cities. The Government's strategy involves: (a) supporting a new law for land subdivision and development which aims to increase the supply of urban land by reducing the administrative requirements for new urban development (e.g. minimumlot sizes, overly onerous requirements for public spaces as a percentage of new development, unrealistic infrastructure dimensioning requirements, etc.); (b) enforcing the existing legal and administrative mechanisms required to regularize existing slums; and (c) extending technical assistance and capacity building to state and, particularly, municipal governments, the latter of which will play the key role as interface between the public sector and developers, financial institutions, and residents. 2. Rationalefor Bank involvement CAS Linkage. The program i s fully consistent with the Brazil CAS, discussed by the Bank's Board of Directors on December 9, 2003, as it supports the three main pillars of equity, sustainability and competitiveness. Most fundamentally, the operation would support capacity buildingefforts linked to he Government's initiatives to improve access to affordable housing and basic services and strengthen the real assets of the poor. Housing often serves as a key source of capital accumulation and income generation for lowlmoderate-income households, and improving urban development enhances the efficiency and competitiveness of cities, which account disproportionately for national economic growth. In addition, the comprehensive reforms being undertaken by the Government would increase the sustainability and competitiveness of the housing finance sector. Further, the results-based-CAS sets the framework for monitoring progress towards achieving the CAS goals. Within that framework, the CAS states specifically that the TAL and proposed housing sector SWAP would contribute to a more sustainable Brazil. The CAS identifies as medium-term outcomes: (a) that housing programs be better targeted to the poorest; and (b) the reform of housing finance and land development regulation. Rationale for Bank Involvement. The Bank is uniquely positioned to support the Government's program. First, the Bank is a natural partner given its lead in engaging the Government in housing and urban development policy dialogue over the last three years. Second, the proposed program i s fully consistent with the CAS objective of building a more sustainable and equitable Brazil, as it will support the 3 Government's efforts to increasethe number of households with access to safe and secure formal housing and services. Third,the proposed operation supports the Government's efforts maximize the efficiency of housing market interventions through improvements to the structure and targeting of federal subsidy programs and through the reduction of supply-side constraints for housing and land development. Fourth, the Bank's proposed engagement leverages its ability to simultaneously bring financial support for programmatic policy reform, technical assistance for policy design and capacity building, and investment- linked support for housing subsidy programs. 3. Higher level objectives to which the project contributes The proposed TAL and accompanying Development Policy Loan (DPL) directly contribute to the Government's poverty reduction and growth agendas. As regards the former, the package of policy reforms and accompanying technical assistance intendto increase the access of Brazil's poor to affordable shelter solutions through increased access and more efficient use of public sector subsidies, and through the strengthening of the housingfinance system, a critical element in expanding the stock of housing. The operations contribute to growth, both through the financial system reforms and through housing-related investment and consumption. 4. Poverty Impact Housing:Policv and Poverty. The Government has committed itself to the objective of reducingBrazil's rate of extreme poverty by 50% by the year 2015. The strategy to achieve this objective includes sustainedeconomic growth based on financial stability, investments in the poor through better education, health and other social services as well as improved access to physical and financial capital, improved access and enhanced social protection including social assistance and conditional cash transfers linked to specific social targets. World Bank financed projects support several elements of this poverty reduction strategy. World Bank analysis shows that the Government's poverty reduction strategy can be achieved through a combination of 4.5% annual growth, continued increases in educational outcomes and human capital, and further improvements in social policies. The TAL supports the Government's housing reforms, which have been designed to benefit Brazil's poor and are considered essential to improve the access of the poor to physical and financial assets and to improve the human capital of the poorest segments of the society. Specifically, the proposed reforms would have a bearing on poverty reduction by: (a) increasing the access of the poor to essential shelter services; (b) enhancing their capacity to accumulate physical assets, access credit, improve self-image; and (c) contribute directly to increased social capital inpoor communities. Indirectly, access to improved shelter has been demonstrated to lead to higher returns for their children's education and expand opportunities for higher paidjobs.' The reforms supported by the housing reform-focused DPLs (which form a part of the cluster of operations linked to the Government's growth agenda) which the proposed TAL supports, would help increase the access to adequate housing through different ways, including better targeted subsidies to the poor (formerly excluded from subsidized public lending for housing), improving the availability of mortgage credit to low income families - with the benefit of teaching the financial market how to work with this type of clients and therefore contribute towards a less perceived risk - expanding the policy making capacity of the government structures in terms of land policy, regulations and other supply ' Access to adequate shelter or housing services can help predict subsequent improvement in both cash income of the family as well as its well-being measuredby health indicators, education performance (including dropout rates) and probability of exiting extreme poverty (Geoffrey Payne, 2004). 4 bottlenecks, while contributing to a more liquid and seamless housing finance market attracting a wider base of resourcesfor the low income segment. B. PROJECT DESCRIPTION 1. Lendinginstrument Integrated Bank Support to the Government's Program. Bank support to the Government's housing reform and investment program would be structured over the next four years or so and would comprise (a) Development Policy Loans aligned with the Government's budget cycle and linked to federal policy reform efforts, including the establishment of a sector-wide housing subsidy program; (b) the proposed Technical Assistance Loan (TAL) which would support efforts to strengthen the capacity of the Government to formulate and implement housing and urban sector policy; and (c) a possible investment- linked operation, to be prepared under the Sector Wide Approach (SWAp) modality, which the Government has requested to finance the harmonized subsidy program expected to emerge before the second phase of the housing sector program. The proposed loan supports the establishment of the institutional and policy environment for sustainable housing sector development consistent with the emerging national priorities and would identify the medium-term trajectory of housing and urban policy, setting the stage for follow-on DPL, the focus of which will be to enhance the effectiveness of the housingfinance system and the targeting and transparency of subsidy programs. RequestedBankFinancinl Instrument (US$ million) DPL I 500.0 Technical Assistance Loan 4.0 DPLI1 200.0 Housing Subsidy Sector Investment Program(SWAp) 300.0 DPL I11 200.0 2. Projectdevelopmentobjectiveandkeyindicators Project Development Objective. The development objective of the proposed TAL would be to support the implementation, monitoring, and evaluation of the Government reform program supported by the Programmatic Loan for Sustainable and Equitable Growth: Housing Sector Reform. The DPL, presented to the Board in late FY05, aims to improve the policy environment for improving the living conditions of the poor and strengthening their access to assets, notably housing and servicedserviceable land and would be embeddedinthe cluster of support for the Government's growth agenda. The DPL supports the Government's program to (a) strengthen the sector institutions managing Federal housing and urban development policy and programs; (b) build an efficient market for formal housing finance capable of absorbing long-term savings and which will provide a stock of finished housing for medium-term down- filtering of middle class housing; (c) establish a rational and complementary system for housing subsidies for the poor; and (d) improve the conditions for land and urban development by reducing barriers to formality and improving the affordability of formal land and housing development. Key Indicators. The key indicators of TAL implementation are directly relatedto (a) the implementation of capacity building; (b) the Government's overall policy trajectory; and (c) the use of information and knowledge generated by the TAL in redesigning and refocusing the Government's policy initiatives. Among the key indicators (see Annex 3 for the complete list of indicators) are: 5 OverallIndicators 0 Subsequent Housing DPLtriggers are met (as far as they are supported by the TAL) 0 Program implementation, monitoring, and evaluation based on the results of the analytical and technical work of the TAL Component 1-Institutional and Legal Framework 0 Preparation of a draft law for the National HousingPolicy 0 Finalization of the National HousingPlan 0 Preparation of the comprehensive regulations for operation of the FNHIS Component 2 -Housing Finance Market Development 0 Workshops heldto discuss housing market credibility withjudiciary and legislators 0 Strategic study on the future of FGTS completed Component 3-Housing Subsidiesfor the Poor 0 The Government has prepared a program for the harmonization of subsidies, including federal budget and off-budget resources (including FGTS). 0 Establishment of the subsidy monitoring and evaluation system Component 4 -Land and UrbanDevelopment 0 Preparation of toolkits for cadastre and registry development 3. Project components Total I 4.00 I 4.00 I * It is understood that, if the proposed Loan is not presented to the Bank's Executive Directors for approval before June 30, 2006, the amount of the front-end fee, which i s financed under the Loan and was calculated as 0.25% of the Loan amount, will revert back to an amount equal to 1% of the Loan amount. In this event, the Loan amount will have to be increased to reflect a capitalized front-end fee of 1%. However, if the Bank's Executive Directors approve a front-end fee waiver that applies after July 1,2006, the Loan amount will be reduced to reflect the amount of any such waiver. 6 The four components of the TAL are: Component 1: Supporting the Institutional and Legal Frameworkfor Housing Policy (US$ 1.31 million). The TAL would include resources to support the Ministry of Cities in its internal reorganization, including the consolidation of the National Housing Secretariat as the key technical and policy entity for coordinating policy design across the many public sector actors. The component would finance technical assistance related to the establishment of the FNHIS and, critically, to implement a broad program of capacity building and training at the municipal and state level. Because municipalities will be taking on greater responsibilities in the context of the evolving legal framework, efforts are urgently needed to strengthen the ability of local governments to recover costs and manage the basic fiduciary and technical aspects of urban development. Component 2: Housing Finance Market Development ( ~ $ 0 . 2 9million}. The TAL would include resources to support the improvement of the legal and regulatory framework for housing loans, including incremental reforms to the existing housing finance system, the future integration of the SBPE in the full market system, and overall strengthening of the market-based Housing Finance System (SFI). While the reform agenda is broad and complex, and the sector actors have initiated a number of studies and technical reviews, the Government has requested that the TAL activities be focused on (a) efforts to disseminate information about the importance of a credible regulatory and legal framework for housing finance among a broad audience which would include the judiciary and members of Congress; and (b) a strategic study, by independent consultants, of the medium-term future of FGTS. The TAL activities would complement other Government technical work on a number of issues, including: (a) the development of new legal and financial instruments for promoting greater primary and secondary market development; (b) the integration of SBPE in the full market system, and (c) efforts to support the drafting of housing-specific consumer protection legislation, including a short study tour to the United States and/or Western Europe where such efforts are also underway. Component 3: Housing Subsidies for the Poor (US$ 1.33 million}. The focus of technical assistance activities as relates to housing subsidy policy would be the rationalization of the Government's various subsidy programs, and the establishment of effective targeting, monitoring, and evaluation mechanisms. Activities to be supported include (a) technical assistance for subsidy harmonization and regularization across the various subsidy programs (includingFederal budget or OGU resources, off-budget financing, and FGTS programs); (b) the establishment of a tiered system of monitoring and evaluation, including regular monitoring of subsidy programs as regards targeting, impact, unit costs, the performance and compliance of financial intermediaries, and which would address both real-time needs and medium-term living standards impact; (c) demand-side technical assistanceto local communities/local governments for structuring and packaging requests to the PSH; (d) a series of outreach and dissemination activities as regardsnational subsidy programs to improve understanding at the local level; and (e) technical assistance to improve the targeting of subsidies, including studies and analysis for the establishment of a system for poverty categorization that i s more reliable than the current system of self-declaration and i s consistent with Bank and Government experience. Component 4: Land and Urban Development (US$ 1.06 million}.The component would include the provision of technical assistance for the carrying out o f (a) the programs of the Ministry of Cities to strengthenlocal governments in their efforts to achieve accreditation of their institutional capacity to take the lead in local urban development policy setting and implementation (gestzo prdpria); and (b) the development of a national urban upgrading program, including, inter alia, (i) research, monitoring, and evaluation activities, at the Borrower's federal level, of policy and regulatory efforts for urban development and land subdivision; and (ii) a series of activities to facilitate the implementation of the 7 policy innovations under the Program for progressive housing development, the preparation of local master plans (planus diretores),and demand-side organization for housing subsidy programs. Disbursement Category % Bank Financing us$ Category 1- Goods,Services,and Incremental OperatingExpenses 100% Total $3,990,000 4. Lessons learned and reflected inthe project design The experience of the World Bank and other donors in housing and urban development, and in TA projects, generally, suggests a number of key lessons incorporatedin programdesign of the TAL: 0 First and foremost, the synthetic nature of the housing and urban sectors requires addressing reforms in a range of areas to be effective, including credit and household savings, subsidies, and the broad urban development agenda. At the same time, selectivity i s important, and both the TAL and DPLs focus on what the Government and Bank team consider to be the most important issues in developing a robust housing system. For example, despite the complexities of urban land development issues in Brazil, the Government's approach to focus on reducing the cost of formality for the poor and improving land subdivision, regularization, and infrastructure development is a critical area of reform with the necessary political support to take immediate action. 0 Second, the decision by the Government to pair housing-related DPLs with targeted technical assistance reflects both the commitment of the Government to support the strengthening of the housing sector institutions - and particularly the Ministry of Cities National Secretariat for Housing - and the interest in maintaining Bank involvement through hands-on technical assistance. 0 Third,housingsubsidies function best inthe form of grants madeunder aunifiedsubsidy system that meets criteria for efficiency and equity, and the Government's reforms inthis area have made major strides in achieving this. When markets function, these grants best take the form of portable vouchers that households join with their own down payment and a market-rate loan to buy the home of their choice. When distortions disrupt markets - as i s too often the case for low-income households, in general, and which in Brazil also affects many moderate-income households - reforms that facilitate supply (e.g. organizing households into groups for projects, making available serviced lots, and strengthening property rights) arejust as important and a pre-requisite for the effective functioning of subsidy programs. 0 Finally, in technical assistance operations, it is important to have flexibility in the allocation of funds. To this end, the TAL has been designed to offer the sector actors flexibility during implementation. 5 Alternatives considered and reasons for rejection Theteam and Government considered two alternative design options: 0 A simificantly larger TAL which would include a broader program of capacity buildingactivities at all three levels of the Brazilian public administration. Given the needs for capacity 8 strengthening and training at the municipal level, particularly, the team considered the inclusion of financing a large municipal strengthening program. This approach was rejected because of the Government's request to maintain the simplicity and focus of the operation. The Government requested that the TAL concentrate on creating the institutional capacity within the Federal Government, and in particular within SNH, to allow for the subsequentimplementationof needed municipal capacity building. A multi-institutional implementation arrangement. The Government and team initially discussed a project management arrangement that would have placed the TAL directly under the InterministerialHousing Policy Group (Grupo de Trabalho Interministerial de acompanhamento das Politicas de Financiamento e Subsidios h HabitapZo) (GTI-SFH). The Government determined that, given the significant objective of the TAL to strengthen the capacity of the SNH, and in order to put in place a streamlined and efficient project management structure, the operation should be managed within the SNH with a well-defined oversight role for the GTI- SFH. C. IMPLEMENTATION 1. Partnershiparrangements(ifapplicable) Not applicable. 2. Institutionalandimplementationarrangements Borrower. A Loan of US$4.0 million will be made to the Federative Republic of Brazil. Proiect Implementation. The Project has been designed to be implemented based on the existing sector institutions and the evolving arrangements for policy management in the housing sector without creating parallel implementation institutions. The National Housing Secretariat within the Ministry of Cities will be the key implementation agent responsible for day-to-day TAL management in collaboration with the Government's Interministerial Housing Working Group (Grupo de Trabalho Interministerial de acompanhamento das Politicas de Financiamento e Subsidios h Habita@o) (GTI-SFH).The GTI-SFH, created by Portaria Interministerial no. 404 of September 6, 2005 i s comprised of representatives of the Ministry of Cities, Ministry of Finance, Central Bank and Casa Civil da Presiddncia da Repdblica. The National Housing Secretariat would prepare six-month implementation plans in collaboration with the GTI-SFH.Because of the importance of the finance sector institutions represented on the GTI-SFHin providing technical oversight and guidance for issues related to Component 2 and Component 3 of the Project, the GTI-SFHwould review technical outputs for consultancies financed under those components. This is especially important given the links between the TAL and a number of technical reviews already underway and planned in the housing sectors by the National Treasury, Ministry of Finance, and Central Bank, inparticular. Procurement Arrangements. Procurement for the proposed project would be carried out in accordance with the World Bank's "Guidelines: Procurement Under IBRD Loans and IDA Credits" dated May 2004; and "Guidelines: Selection and Employment of Consultants by World Bank Borrowers" dated May 2004, and the provisions stipulated in the Legal Agreement. For each contract to be financed by the Loadcredit, the different procurement methods or consultant selection methods, the need for prequalification, estimated costs, prior review requirements, and time frame are agreed between the Borrower and the Bank project team in the Procurement Plan. The Procurement Plan will be updated at least annually or as required to reflect the actual project implementation needs and improvements in institutional capacity. Procurement activities will be carried out by the Ministe`rio das Cidades. An 9 assessment of the capacity of the Implementing Agency to implement procurement actions for the project was carried out during preparation. The assessment reviewed the organizational structure for implementingthe Project and the interaction between the Project's staff responsible for procurement. The overall project risk for procurement was determined to be average. Details of the procurement arrangements and assessmentcan be found in Annex 9. Financial Management and Audit Arrangements. Financial managementarrangements for federal projects in the country rely on the Government's SistemaZntegradode.Administra@o Financeira (SIAFI) system. The systemcan adequately manage and track the receipt anduse of funds ina highly transparent manner, with a low risk for Bank and country funds. A financial management assessment of the Housing Technical Assistance Loan was conducted during preparation. The assessment was carried out in accordance with OP/BP 10.02 and the Guidelines for Assessment of Financial Management Arrangements in World Bank Financed Projects issued by the Financial Management Sector Board on October 15, 2003. The financial management risk associated with the project has been assessed as &. Details of the financial management and audit arrangements as well as of the Financial Management Assessment can be found in Annex 8. 3. Monitoringand evaluationof outcomes/results The program includes a significant component for monitoring and evaluation of the implementation and results of the Government's housing policies, and includes financing for baseline studies, the appropriate information systems, and long-term impact evaluation. Monitoring, evaluation, and targeting activities are focused on two levels - the implementation of the Government's federal housing policies and programs, and, of equal importance, the implementation of housing policies at the local level, includingthe areas of policy and implementation action which fall under the responsibilities of locally elected officials. Annex 7 includes a detailed description of the monitoring, evaluation, and targeting activities to be included underthe TAL. 4. Critical risks and possible controversial aspects The TAL itself is expected to have few significant risks. Nonetheless, the medium-term success of the initiatives financed by the TAL would be contingent on the overall impact of the Government's housing reform agenda. 10 Table 3: Critical Risksa d ControversialAspects Risk Mitigation Macroeconomic risks and vulnerability of the Macroeconomic shocks could have a profoundly financial system to shocks Nonetheless, this risk i s deemed to be low;sector. negative impact on the financial in the current macroeconomic environment - particularly as regards fiscal discipline - the benefits of future declining interest rates and financial sector stability outweigh the downside risks. Reforms at Federal level not accompanied by The TAL instrument i s designed to address these capacity buildingat the municipal level risks. Nonetheless, this risk is deemed to be moderate; large municipalities in Brazilhave highly trained officials and the central Government has embarked on an ambitious program to support capacity building at the local level in areas directly related to the proposed Program. Coordination and institutionalrisks This risk is deemed to be moderate; coordination difficulties are inevitable but unlikely to significantly sidetrack the reforms now in motion. Duringpreparation and implementation, significant care will need to be taken by the Ministries of Finance and Cities to bridge internal Government differences as well as reach out to non-state actors. No controversial aspects, in addition to those indicated as risks, are foreseen. 5. Loadcredit conditions and covenants There are no Loan conditions. D. APPRAISAL SUMMARY 1. Economicandfinancialanalyses Not applicable. 2. Technical The project supports efforts to improve the complex and inter-related system of housing finance and urban development in Brazil. It aims to channel technical assistance to complement the four key areas of Government policy which are being supported under the DPL that it accompanies. The technical literature, international and Bank experience demonstrate that improving the availability of affordable shelter for the poor and improving the strength and depth of the housing finance system for higher income families are inextricably linked. The TAL and DPL aim to address issues of credit and household savings, subsidies, land and urban development, and sectoral institutional strengthening in a comprehensive but focused manner. 11 3. Fiduciary Financial management and procurement capacity assessments were undertaken during project preparation. The overall FinancialManagement Assessment conclusion is that the National Secretariat for Housing has satisfactory financial management arrangements in place to meet the Bank's minimum requirements. The financial management risk associated with the Project has been assessed as &. The project's financial management system i s able to provide relevant and reliable financial information, in a timely manner, and to support project's management in the control, planning, implementation and monitoring of the project, towards the achievement of its objectives. The Procurement Capacity Assessment reviewed the organizational structure for implementing the project and the interaction between the project's staff responsible for procurement. An action plan was agreed upon and the overall project risk for procurement was assessedas average. 4. Social The actions included in the accompanying DPL in the area of housing policy, subsidies, and finance are expected to have significant positive social impacts. A rapid environmental and social assessment of the main issues addressedinthe programwas commissioned and i s summarized inAnnex 14. 5. Environment The DPLand TAL support a policy reform agenda and provide accompanying technical assistancewhich aim to improve the environmental health condition of Brazil's poor and middle-class. The program is expected to have significantly positive environmental impacts. Annex 14 summarizes the key environmental issues related to the program. 6. Safeguard policies Safeguard Policies Triggered by the Project Yes No Environmental Assessment (OP/BP/GP 4.01) [ I [XI Natural Habitats (OP/BP 4.04) Pest Management(OP 4.09) Cultural Property (OPN 11.03, being revised as OP 4.11) Involuntary Resettlement (OP/BP 4.12) Indigenous Peoples (OD 4.20, being revised as OP 4.10) Forests(OPBP 4.36) Safety of Dams (OPBP 4.37) ProjectsinDisputedAreas (OP/BP/GP 7.60)* Projects on International Waterways (OPBP/GP 7.50) 7. Policy Exceptions and Readiness The operation complies with all applicable Bank policies. * By supporting the proposed project, the Bank does not intend to prejudice thefinal determination of the parties` claims on the disputed areas 12 Annex 1: Country and Sector or ProgramBackground BRAZIL: HousingSector Technical AssistanceProject Background and Key Sector Issues. Brazil is among the most urbanized countries in Latin America, with approximately 80% of the population living in urban areas and 90% of the country's GDP being generated in cities. Access to housing and reliable urban services is essential to poverty reduction and growth in Brazil. Housing is also an important component of the economy both on the consumption and investment sides; it contributes to job creation and creation of household wealth. Brazil's housing sector has, however, performed poorly in fulfilling its potential for either poverty alleviation or economic growth: the housing "deficit" is estimated at 7.1 million units mostly for households with incomes of less than 5 minimum wages (equivalent to 28 million people without access to adequate shelter); informal urban settlements are growing 4 times faster than average urban growth; and an estimated 50% of new households formed annually cannot afford the most basic house produced in the formal market even with deep finance ~ubsidies.~ Moreover, the quantity of new houses constructed by the developer / construction industry, includingby small builders,i s extremely inadequate. It is estimated that only 250,000 units were constructed in 2003 by developers and small builders, compared to more than 1 million new households formed in urban areas per year (Diamond and Rottmann, 2004). Such low formal sector housing production makes it impossible to deal with the housingbacklog and the problemof informal settlements. Housing ,is a large economic sector with significant forward and backward linkages, making it an important instrument for anti-cyclical policies and sustained economic performance. Empirical data indicate the importance of the sector in the economy across countries. Interms of consumption, housing- related spending accounts for 20 to 50% of household expenditures (35% in Brazil). It forms 80-90% of household wealth, and approximately 45% of national wealth. In Brazil housing accounts for 6% of GDP (but this figure could be increased considerably) and 11% of annual capital formation (22% for the construction sector as a whole). Inaddition, residentialconstruction, real estate services and the housing finance industry are important employment sectors in most countries. Brazil's housing sector employs about 5% of the labor force, while direct jobs for the construction sector represent 9.3% and 17.3% if indirect jobs are considered. Multiplier effects are high both in terms of labor and expenditure (between 1.4 and 1.81)4.Housing has a large weight in the price index - 29% in Brazil'. Housing finance i s an important component of the financial sector and often drives innovations in the financial sector at large. In most developed countries, mortgage related assets represent more than half of total financial assets. In the USA and Japan, mortgage loans represent more than 50% of GDP; while inBrazil this figure i s barely 5%. Construction activitv in Brazil has followed the vagaries of the public investment program. The economic stabilization effort has resulted in substantial decline in public works which in turn led to a decline in the sector GDP (-13% in 2003). Increase in formal sector residential construction would provide a good opportunity for a renewed boost in the sector. As an indication of the potential demand for housing, in 2004, 70% of all cement sales were for self-help construction. The construction industry i s well aware of this potential demand inthe lower income segment and i s eager to collaborate with the public sector inthe development of low-cost solutions. The institutional and regulatory inefficiencies in the land and finance markets have prevented the industry from realizing this growth potential in this lower-middle income market. Fundacao Joao Pinheiro, Brazilian HousingDeficit (2004) and World Bank, Policy NoteJune 2002. CBIUFGV (2004),basedon 2002 data on the constructionsector. According to IBGE's POF-Pesquisu de Orpmentos Familiares. 13 In February 2001, Brazil's Congress passed a constitutional amendment which guarantees the right to adequate housing for all Brazilians, making shelter an essential social service similar to education and health. Accomplishing this goal, while maintaining fiscal discipline, i s a major challenge. Defining the role of the public sector in meeting the housing needs of Brazil's poor population includes comprehensive and sustained policy and regulatory reforms and the creation of incentives to mobilize financial sector resources and private sector savings. While the issue of housing and the attendant social, economic, environmental, and health issues was a priority in the electoral campaign of President Luiz Ignacio "Lula" da Silva elected in 2002, progress in housing outcomes has been slow in the last two years. This is in large part due to the fact that the new Government had to develop an institutional and policy framework for the sector from the ground up. Fiscal restrictions, self-imposed by the Government, further limited the ability to launch new housinginvestment programs. There are several reasons for the poor housing. sector performance. Brazil is a middle income country with modest population and urban growth. It has subsidized its housing sector deeply and over a long period of time. Yet, compared to countries with similar economic and demographic characteristics, housing conditions are worse than would be expected. General lagging economic performance over the last few decades and decreasing real incomes explain part of the housing sector's inadequate outcomes especially for the very poor. Furthermore, monetary policy and lingering high government real interest rates make housing finance a less attractive investment in general. The small size of the housing finance system (both private and public) attests to that; Brazil has an outstanding residential mortgage debt of about 3-4% of GDP and the real estate securities market has not developed beyond a pilot stage. However, the inadequacv of the institutional frameworks and deficient finance and subsidy policy have had a major impact on the poor sector performance. On the institutional front, the formal housing system in Brazil has been a complex web of federal entities, state and local governments, private sector developers and financial institutions. Over the last fifteen years, responsibility for housing and urban issues has been sharedby a number of ministries and secretariats, resultingin a weakened managementof the sector and a lack of policy direction. Legal and institutional bottlenecks in the housing finance sector have prevented the creation of a liquid and efficient formal housing. market and constrained demand for housing. Brazil's housing finance markets are incomplete and do not serve large segments of the middle and low-income population because the transaction costs and risks to do so are too high. Housing finance has been dominated by government institutions dependent on directed credit and does not respond well to demand pressures. The absence of a well functioning mortgage market limits the production of middle income housing and the related downward filtering of existing housing to lower-income households. The existing sector institutions and financing mechanism will need to change to a more encompassing, sustainable and competitive systems. Until recently, the bulk of housing subsidies in Brazil were provided through the government housing finance systemto a broad spectrum of middle income households. Households earning incomes below the median, for whom neither the housing market nor the government mortgage system delivered, were largely excluded from federal subsidies, with the exception of limited upgrading subsidies. While 95 percent of the housing deficit i s concentrated on poor people (earning less than 5 minimumwages) there were neither measures to reduce the afSordability gap nor to establish a consistent and broad program of subsidiesfor thepoor.6 Well-targetedsubsidies are an important aspect of most housing markets in emerging economies as a large part of the low income strata cannot affordthe cheapest house producedinthe formal market and the private market is reluctantto enter the low income housingmarket because of smaller profit margins and high risks. Subsidies can in the short-term help bridge the wide affordability gap. In principle, this gap should narrow in the medium-termas cumbersome and thus costly urban planning and 14 The dominance of the existing directedcredit and public housing finance systems i s clear. Out of about 360,000 housing loans made in 2004, 75% were financed through the systems of FGTS, FAT and SBPE, using tax-based funding or tax-subsidies and using CEF as its main lender. State governments do often have their own funds to make housing loans for underserved groups, bringing the proportion of loans made through public sector institutions closer to 80 percent. While these systems have allowed housing lending to continue duringperiods of macro-economic volatility and high interest rates for housing loans, they are costly, are uneven in the depth of subsidies they provide and in their current coverage of segments of the "market". They can not easily respond to increaseddemand for finance. The lack of expansion of private housing finance as well as the lack of use of subsidized funds by private banks has several causes. These include Brazil's history of macro-economic instability, the judicial protection of borrowers, and the dominance of special government funding and lendingsystems. The most important reason, however, appears to be the high SELIC rate (set at 18.75% in February), the real domestic interest rate, which offers investors risk-free and liquid assets at attractive returns. This rate results from the monetary policy adopted by the Government to stabilize the economy. While a stable macro economy i s critical for the performance of the housing finance sector, the current high Selic rate puts a floor in the housing finance market. As long as the SELIC rate remains high relative to investments in more risky and administratively more costly housingfinance loans, the development of the private mortgage market will remain limited. In addition, the high real interest rates make borrowing unaffordable for most households. Also, with current high real government rates and high lending risks in the housing finance sector, subsidized funding for housing finance is not attractive for lenders when compared to other risk-adjusted market investments.I Further. restrictive land subdivisions, inefficient registry and complex perrilitting system all constrain the elasticity of urban land supplv limiting the access of the poor to urbanized land, and increasing the costs of housing solutions. The Long-term vision: The vision for the sector i s a combination of a well-functioning. housing. market and targeted policy interventions to attend to market failures and address the affordability gap. Inthis scenario: (a) new households will be able to access formal shelter - either renting or purchasing it - according to their preferences and income level; low-income households who qualify for a loan with some help would be served with credit-linked subsidies to help them with down payment in complement to their own savings; for those who do not quality for finance, non-credit linked subsidies would be provided by municipalities inthe form of serviced land or partially built housingunits'; (b) as interest rates come down, microeconomic policies improve credit risk and risk insurance and secondary real estate finance provide attractive long-term assets for investors the housing finance would likely grow rapidly (as it has in other countries) possibly reaching 10% of GDP in 5-7 years and 15% in another 5 years and will serve an increasing proportion of the upper- and middle- income market; as interest rates come down, the existing directed credit system (SBPE) would be deregulated over time and the capital market would expand to serve the middle and upper levels of demand: development regulations are removed,land management systems are made more effective, andthe structure and efficiency of the housing finance systemimproved. These subsidized funds are moreover often limited (FGTS) or costly to accumulate (savings accounts of the tax exempted SBPE system). * These families would be able to contribute through self-help efforts or by taking out micro-finance loans to complete their "authorized" house. 15 (c) FGTS would continue in the intermediate term to provide finance-linked subsidies (depending on the decision of its membersand contributors). It will be able to leverage the participationof private lenders and other housing finance institutions into moderate income sector; in the medium term, when the Government can expand its subsidies through the PSH, FGTS will increasethe return on its assets to provide members with a positive real return and decrease its role as the housing provider of last resort; (d) resources available for the federal housing policy would be usedto leverage resources available at the state and local levels, probably in a 1:8 ratio, stimulating regulatory change to improve land supply for low-income housing and preventing further expansion of informal settlements and providing titles to slum dwellers with a minimumof administrative problems; (e) municipalities would gradually understand the negative impact of informality and would adopt well-designed plans, drawn jointly with local populations and aimed at pre-empting illegal occupations or squatting on non-serviced landplots. In such a scenario, risks are better measured and priced, and pension funds, insurance companies, and other long-term savers believe that the housing market i s sufficiently secure and attractive to deserve part of their funds. While the market could increasingly take care of the newcomers, the public sector would have better chances to address the housing deficit in a sustained way. This will take more than one decade. The Government has taken stem towards the implementation of the above vision and is committed to significant uolicy changes. With the gradual stabilization of the macro economy and increasein economic growth (GDP growth of approximately 5% i s expected in 2005), the Government is focusing attention on the core areas of institutional and regulatory reforms in the land and finance sector that hinder the expansion of housing production and the investment in existing substandard housing. The core areas of reform include: Institutional Framework. In the context of the Government's decision to make housing a national priority, efforts are being made to establish a coherent public sector structure able to formulate national housing and urban policy and to coordinate the various agents and authorities at the federal, state and local levels. The creation of the Ministry of Cities (MOC) in 2002 with full responsibility for sector policy represented an important first step. Further efforts are needed to: o articulate the strategic direction for the housingsector; o establish a coherent federal program to improve access to housing finance and rationalize housing subsidies; o linkfederal housingpolicy and finances to other policy efforts at the local and state level; and o significantly strengthen the Ministry of Cities' capacity and policy relevance through a series of institutionalreforms. Finance. While the financial system and markets are in large part driven by macroeconomic conditions and public sector debt-related interest rate dynamics, it i s critical to pursue a short- and medium-term policy agenda to ensure that mortgage contracts are fulfilled, credit information i s generally accessible, and new credit instruments are created for the financing of housing. The Government's policy agenda focuses on the strengthening of a capital-markets based housing finance system, and a gradual transitioning away from the current directed credit systems and segmented markets. Simultaneous efforts are needed to encourage more banks and non-bank financial institutions to participate inthe housing finance market by: o improving the legal and regulatory framework which governs the formal housingfinance market (both government and market-based segments); o establishing a liquidsecondary market for tradable real-estate instruments; 16 o increasing access by lenders to existing special funds for housing finance and subsidy programs and allowing lenders to price their products according to competitive profit incentives; and o ensuring that related markets, such as construction and land markets, operate competitively and are not constrained by cumbersome procedures or inappropriate regulations. Housing subsidy policy to assist the poor while improvingformal housing market output within the context of limitedfiscal resources is the driving force behindthe new government policy. A major challenge is to improve targeting and transparency of existing housing subsidies, adjusting subsidy instruments to medium and long-term macro-economic expectations, and to leverage investments by the financial system, sub-national governments and individual households. Land Supply Rigidities. The obstacles to formal land development accessible to the urban poor are a key driver of the creation of slums (favelas) and the vicious cycle of marginalization of Brazil's urban poor. Inhabitants of informal / illegal settlements are often unable to access public services and have limited access to legal recourse. It has taken decades for Brazil to recognize that a policy environment which creates incentives for private sector housing development i s a key pillar of both urban development and the overall poverty-reduction and growth agenda. The key challenges for Brazil are to address both the stock flow of informal developments through: o a concerted effort to formalize existing slums and improve their access to basic public services by developing a national slum upgrading strategy and a program of financing for urban upgrading; and o reducing the regulatory complexity and excess, costs and time it takes to subdivide and develop new land, and register titles. Housing Policy and Poverty. The Government has committed itself to the objective of reducingBrazil's rate of extreme poverty by 50% by the year 2015. The strategy to achieve this objective includes sustainedeconomic growth based on financial stability, investments in the poor through better education, health and other social services as well as improved access to physical and financial capital, improved access and enhanced social protection including social assistance and conditional cash transfers linked to specific social targets. World Bank financed projects support several elements of this poverty reduction strategy. World Bank analysis shows that the government poverty reduction strategy can be achieved through a combination of 4.5% annual growth, continued increases in educational outcomes and human capital and further improvements in social policies. The proposed reforms would have a bearing on poverty reduction by: (a) increasing access of the poor to essential shelter services; (b) enhancing the capacity to accumulate and improve housing assets, by expanding access to housing credit and upfront subsidies for housing, Indirectly, access to improved shelter in poor communities has been demonstrated to lead to improved self-image, higher returns for children's education and increasing opportunities for better paidjobs.' Access to adequate shelter or housing services can help predict subsequent improvement in both cash income of the family as well as its well-being measured by health indicators, education performance (including dropout rates) and probability of exiting extreme poverty (Geoffrey Payne, 2004). In addition to providing shelter, housing also plays a more standard role as an asset, as acquisition for the urban poor offers the opportunity for small incremental investments (World Bank, November 2004, Report No 30465, The Urban Poor in Latin America). The returns to housing as an asset include the flow of housing services it provides some of which can be monetized in case of need by taking in new tenants or extended household members who share in the upkeep o f the household. In addition, homeownership provides a constant flow of services and frees the family from the constraint of having to generate a 17 The reforms supported by the housing sector-related DPLs would help increase the access to adequate housing in a number of ways, including(a) better targeted subsidies to the poor (formerly excluded from all the housing subsidize public lending); (b) improving the availability of mortgage credit to low income families - with the benefit of teaching the financial market how to work with this type of client and therefore contribute towards a less perceived risk; (c) expanding the policy making capacity of the government structures in terms of land policy; (d) regulations and other supply bottlenecks; and (e) contributingto a more liquid and seamless housing finance market attracting a wider base of resources for the low income segment. House affordability is a major issue in Brazil, directly associated with poverty and low income levels. Brazilian poor, like all poor always find a way to protect themselves against the weather inclemency and to create a minimum of privacy. In fact, the annual production of housing units i s estimated at 1.1 million, roughly keeping up with household formation." However, only 16% of these houses were authorized buildings. The others were built without being in compliance with the planning and building regulations, i.e., favelas, invasdes, and improvised housing. Estimates of the current stock of unauthorized housing range from 32 % in Recife to 14 % in Rio de Janeiro; and 9.4 % in Sao Paulo, in a recent IPENDIRUR study". These units are deprived of minimum infrastructure, easy prey of violence and crime and often instruments of discrimination in the labor market. The main reason for such wide gap i s low affordability. Household incomes are low relative to housing costs in the formal market. The lowest market produced house (approximately 35 to 40m2) in suburbs of metropolitan areas, sells for R$29,000 to R$31,000. Other new construction figures show prices as low as R$22,400 for flats of 20m2.I2 The median urban household income is estimated at R$770 (December 2001)13. With current high mortgage interest rates of approximately 20 %, 60 to 70 % of urban households cannot afford to buy the lowest priced market-produced, unsubsidized house. These values are confirmed by analytical work carried out by the Bank.14 A conjugated approach would require both a boost in the purchasing power of the lowest deciles and measures to reduce the cost of housing units. These include improvement in the housing finance andthe cost of formality - connected with land policies and zoning and regulations. The Growth / Housing Relationship. The disappointing track record of the reforms of the 1990s has its roots in both slow capital accumulation and limited productivity growth. Not even in the 1980s was the contribution of capital accumulation to growth as low as it was in the 1990s. Gross annual capital formation decreased from 23.5 percent of GDP in the mid-seventies to less than 15 percent in the early nineties, bouncing back slightly to 17 percent in 2000. Emerging economies such as Chile and China as fixed sum for rent every month. Given the large share of the poor employed in the informal markets, the poor will prefer to own their own shelter and avoid commitment to a fixed and regular payment as a housing rent. This can be important especially at time of crisis: in Uruguay, 10% of renters declared they had to move following the crisis in order to cut down on cash payments. Evidence from surveys on risk management in Chile and Peru finds that investment in housing acts as a substitute for formal retirement svstems. Home ownership in L A C tends to be higher than in other parts of the world and some authors tend to believe that this i s a way to cope with uncertainty and the negative consequences of financial crisis and macroeconomic disasters. Io Instituto Ciduduniu, 2000. This observation i s consistent with backlog figures for 2000 showing relatively less overcrowding. The mayor of Salvador estimates that 50% of households live infuvelus or invusdes. Differences need to be clarified. 12 Including local IPTUand ITBItax breaks. l3 We compared different household income data for all households, urban households and households in the six large cities, using minimum wage and consumption information. While there are differences, the data are not inconsistent. l4Keeping the reform momentum. June 2002; Low Income Progressive Housing, December 2002. 18 well as OECD countries have sustained investment ratios much larger than Brazil during the last fifteen years. Since 2003, the Government has established an agenda of microeconomic and institutional reforms to foster capital accumulation and productivity gains and thereby favor sustainable and equitable growth. Decline in investment levels in infrastructure have been large. Productivity performance has been relatively better but a poor "investment climate" is still a major obstacle to further productivity gains. The reforms were structured around four pillars: (a) reducing logistics costs to raise productivity and ease trade; (b) improving the business environment to enable better market functioning; (c) enhancing financial efficiency and depth; and (d) transforming knowledge into productivity through innovation. These were considered a sufficient and politically feasible set of reforms and still part of broader development strategy to promote sustainable and equitable growth. The new housing strategy i s a deepening of the government's microeconomic agenda of reforms. Increased mortgage credit, effective property rights, and removing obstacles to commercial lending for housing are among the pillars of a sound housing strategy. These match the broader initiatives of supporting private sector development, improving the business environment, and increasing financial depth, which are ingredients of the government's growth agenda. Better and streamlined regulation for land use are also an ingredient of the larger task of improving infrastructure regulation and simplifying business entry and operation, other elements of this agenda. And the emphasis on targeted subsidies and auctioning i s part of a broader effort to increase the efficiency of social expenditure. The new housing policy will thus galvanize the government's microeconomic agenda, reduce social distress and improve fiscal management Housing Finance and the Finance Market Linkages. The link between housing and finance is evident. Housing i s a long duration good (the average age in the USA i s 70 years) which i s amenable to be , financed by long-term debt. Indeveloped countries, housing financial instruments are used to deepen the capital markets as they provide long maturity papers backed by secured collaterals. In developing countries, and in Latin America in particular, the development of mortgage markets did not happen until the 1990s, a consequence of widespread financial instability, macroeconomic fluctuations, the lack of regulatory framework and very high interest risk. Inthe past, housing finance was provided in a directed and segmented way through the public sector, by special banks and funded by special resources (most often compulsory wage deduction, liquid tax free deposits) and oriented to specific consumers classes under fixed interest rate caps. The closed system was obviously inefficient as it stifled competition and did not allow for any expansion of the market or the attraction of universal banks. Macroeconomic instability and high price levels contributedto this situation. The idea of an open system, where universal banks and capital markets are encouraged to take part of the housing sector development (especially the low income where the needs are the highest) does not appear until the mid 1990s with some important legislation passed in several countries in Latin America. In Brazil, the development of mortgage credit (moving away from special circuits), ensuring effective property rights, removing obstacles to commercial lending for housing, and mark up to capital markets i s one of the fundamental pillars of World Bank housing policy ad~ice'~.Brazil has made impressive progress in terms of integration in the world economy, exchange and interest rates policies and macroeconomic stability. On financial infrastructure, the basic pillars are in place. The legal system i s accountable, accounting systems are in place, financial institutions are subject to regulation and the payment systems are inplace. The same i s the case with most urban laws and policies. Generally there is clarity of ownership and property rights, urban planning i s moderately sensitive to economic factors, land development is somewhat unpredictable, local and national taxation are stable and predictable. However, EnablingMarketsto Work, 1993 19 interest rates for housing are still regulated in line with the still existing direct and subsidized interest rate system; government continues to intervene in the financial system - notably in the housing direct credit and through implicitly subsidized interest rates while the government public debt continues crowing out of long-termcapital markets (total). The strategy toward specialized financial institutions and services for housing, industry, SMEs and agriculture is gradually changing with the Government being increasingly open to have universal banks do housing mortgages to attract the largest volume of resources to the sector. While there is coordination of financial policy, regulation and supervision, the policy towards competition among financial institutions is slowing takinghold, promoting a gradual access to subsidized sources of funds and in theory defending the transition from market segmentation into seamless financial markets, supported by a legal framework that is coherent, simple, non-discriminatory, and pragmatic. The proposed program would steadily contribute for the deepening of the system and its expansion. At the moment, the non-regulated financial system represents about 4% of total housing finance. Private direct credit (funded by saving book accounts, SBPE) represents 25%; FGTS/CEF accounts for 54% of housing finance; the central government finances another 4%. Core Reform Areas. The key issues which the Government has engaged in reforming the housing sector include: 0 The need to rationalize sector institutions and strengthen their capacitv to design, monitor, and implement housing and urban development policv. The formal housing system in Brazil i s a complex web of federal entities, state and local governments, private sector developers and financial institutions. Over the last fifteen years, responsibility for housing and urban issues has been shared by a number of ministries and secretariats, resulting in a weakened management of the sector and a lack of policy direction. In the context of the Government's decision to transform the sector and make housing a national priority, efforts are needed to establish a coherent public sector structure able to formulate national housing and urban policy and to coordinate the various agents and authorities at the federal, state and local levels. While the creation of the Ministry of Cities (MOC) in 2002 with full responsibility for sector policy represents an important first step, efforts are needed to (a) articulate the strategic direction for the housing sector; (b) establish a national program for housing finance and housing subsidies while expanding distribution channels and the number of participating lenders ;(c) link federal housing policy and finances to other policy efforts at the local and state level; and (d) significantly strengthen the Ministry of Cities' capacity and policy relevance through a series of institutional reforms. 0 The need to create a liquid and efficient formal housing market. The absence of an efficient market for formal housing credit has a negative impact on the middle and lower income households, both directly and indirectly. On the one hand, housing finance markets are incomplete and do not serve large segments of the middle and low income population because the costs and risks to do so are too high. On the other hand, the absence of a well functioning mortgage market for middle and higher-income households limits the production of middle income housing and the related downward filtering of existing housing to lower-income households. While the overall market situation i s in large part driven by macroeconomic conditions and public sector debt-related interest rate dynamics, the short-and medium term policy agenda to improve access to finance and formal housing i s critical to pursue. The Government's explicit policy agenda revolves around the establishment and strengthening of a capital-markets based system, a clear departure from a history of directed credit and a segmented market. Simultaneous efforts are needed to (a) provide access to housing finance to households which could afford monthly mortgage payments but who lack a stock of savings for the current high levels of down payment required; (b) encourage more banks and alternative lenders to participate in the housing finance market by increasing their access to existing funding and 20 subsidy programs and allowing them to price their products according to competitive profit incentives; (c) improve the legal and regulatory framework which governs the formal mortgage market and the establishment of a liquid secondary market for tradable mortgage-based instruments; and (d) ensure that related markets, such as construction and land markets, operate competitively and are not constrained by cumbersome procedures or inappropriate regulations. 0 The absence of a consistent and broad urea-am of subsidies for the Door. Well-targeted subsidies for the poor are an important aspect of most housing markets in emerging economies as a large part of the low income strata cannot afford the cheapest house produced in the formal market and the private market i s reluctant to enter the low income housing market because of smaller profit margins and highrisks. Subsidies can in the short-term help bridge the wide affordability gap. In principle, this gap could narrow in the medium-term as cumbersome and thus costly urban planning and development regulations are removed, land management systems are made more effective, and the structure and efficiency of the housing finance system improved, changes which would drive down prices and improve the affordability of housing solutions. The key challenge for the Government will be to establish a housing subsidy policy which is effective in reaching its objectives, efficient, well-targeted and transparent, and uses its limited fiscal resourcesto leverage investments by the financial system and individual households. 0 The high costs - both financial and administrative - of land development, subdivision, and housingcreation. The obstacles to formal land development accessible to the urbanpoor are a key driver of the creation of slums (favelas) and the vicious cycle of marginalization of Brazil's urban poor. Inhabitants of informal / illegal settlements are often unable to access public services, have limited access to legal recourse, etc. It has taken decades for Brazil to recognize that a policy environment which creates incentives for formal private sector housing development i s a key pillar of both rational urban development and the overall poverty-reduction and growth agenda. The key challenges for Brazil are to address both the stock flow of informal developments through (a) a concerted effort to formalize existing fuvelas and improve their access to basic public services by developing a national slum upgrading strategy and a program of financing for urban upgrading; and (b) reducingthe regulatory complexity and excess, costs andtime it takes to subdivide and develop new land, and register titles. 21 Annex 2: Major Related Projects Financed by the Bank and/or other Agencies BRAZIL: HousingSector Technical Assistance Project Latest Supervision Sector Issue 1 Project (1%) Ratings (Bank-financed projects only)" Bank-financed 1 l6 HighlySatisfactory; S: Satisfactory; U:Unsatisfactory; HU:HighlyUnsatisfactory HS: 22 Annex 3: Results Framework and MonitoringIndicators BRAZIL: Housing Sector TechnicalAssistance Project Results Framework ..- me In Use of-Outcome Information Suuport and inform the Subsequent DPL triggers are met (as lverall sector management, implementation, monitoring, and far as they are supported by the ncluding preparation of subsequent evaluation of the Government TAL) IPLs and SWAP reformprogram supported by the Programmatic Loan for Sustainable Program implementation, and Equitable Growth: Housing monitoring, and evaluation based on Sector Reform. the results of the analytical and technical work of the TAL LTse o f Results Monitoring Component One: Component One: Zomponent One: Strengthen sector institutions and Workshops to broadly disseminate FeedbackI input into the design of consolidate the National Housing the NHP and discuss its content with :he draft law for National Housing Secretariat as the key technical stakeholders held Policy policy entity inthe housing sector. Preparation of a draft law for the National Housing Policy Finalization of the National Housing Redesign and finalization of the Plan National Housing Plan Strengthening of the capacity of the SNH Preparation of the comprehensive regulations for operation of the FNHIS Component Two: Component Two: Strengthen the housing finance legal Workshops held to discuss housing Design activities and, if necessary, and regulatory framework. market credibility with judiciary and new legal instruments,for legislators strengthening the legal and regulatory framework, including Study completed on possibilities for credit market insurance. credit insurance market development Strategic study on the future of FGTS completed 23 Component Three: ComponentThree: Component Three: Improvethe harmonization, The Government has prepareda Regular and periodicrefinementto management, targeting, monitoring programfor the harmonization of the housingsubsidy programsas and evaluation of Government subsidies, includingOGUand off- relate to harmonization and subsidy programs. budgetresources (includingFGTS). targeting. Workshopsfor disseminationof Review of possible adjustmentsto housingsubsidy programsheld. the PSHparcelamento program. Preparationand disseminationof new PSHand other subsidy program trainingmaterials. Completionof studies on transforming PSHparcelamento into a block grant program, includingthe use of municipalcontributionsin bid evaluation. Component Four: ComponentFour: Component Four: Improveurbandevelopment through Completionof adiagnosis of the Redrafting/ adjustments of the draft the strengthening of the capacity of compatibilityof the environmental landsubdivisionlaw. federal and local entities. framework with the new land subdivision law. Preparationof toolkits for (a) cadastre andregistrydevelopment; (b) risk management and definition of ZEIS areas; and (c) progressive infrastructuredevelopment and management. 24 1 I ' B .-M si i -eE u e, U 4 z Annex 4: Detailed Project Description BRAZIL: HousingSector Technical Assistance Project 1.Project Components andFinancingArrangements The operation has been designed with four components linkedto the four programmatic areas of policy reform being undertaken by the Government. Consistent with the country financing parameters, the operation would finance 100% of eligible expenditures for the four components of technical assistance. The Ministry of Cities' National Housing Secretariat would act as the key implementing agency, responsible for day-to-day management (including procurement) of the TAL. The Interministerial Housing Policy Group (GTI-SFH), which includes representatives of the Central Bank, Ministry of Finance, Casa Civil da Presid2ncia da Repu'blica, and Ministry of Cities, would play an important role as the project steering committee, reviewing a six-month Project implementation plan and signing off on all terms of reference and technical deliverables for Components 2 and 3. 2. Detailed Descriptionof Project components The Project i s structured with four components: Component I: Supporting the Institutional and Legal Framework for Housing Policy (US$ 1.31 million). The TAL would include resources to support the Ministry of Cities in its internal reorganization, including the consolidation of the National Housing Secretariat as the key technical and policy entity for managing coordinate policy design across the many public sector actors. The component would finance technical assistance related to the establishment of the FNHIS and, critically, to implement a broad program of capacity building and training at the municipal and state level. Because municipalities will be taking on greater responsibilities in the context of the evolving legal framework, efforts are urgently needed to strengthen the ability of local governments to recover costs and manage the basic fiduciary and technical aspects of urban development. The specific activities includedunder Component 1include: 0 Dissemination of the National Housing Policy. The operation would finance technical assistanceto support the public dissemination of the National Housing Policy (NHP) and its instruments, and the strengthening of the managerial, technical and operational capacities within SNH. Specifically, the component would finance (a) activities to broadly disseminate the NHP and discuss its content with stakeholders; and (b) technical assistance for converting the NHPinto a draft law, expected to be submittedto Congress in2005. 0 Strengthening of the National Housing Secretariat and Technical assistance to support the preparation and dissemination of the National Housing Plan. The National Housing Plan i s the technical counterweight to the National Housing Plan which outlines the specific activities, targets, actions, activities, and policy tools which would be used to implement the National Housing Plan. The operation would finance (a) local and international technical assistance to support the drafting of the National Housing Plan; (b) consultant services to support the strengthening of in-house capacity for policy formulation as regards the housing sector, including experienced national and international technical specialists; (c) training activities, including in-country training and international training for SNH staff; (d) a small amount of office equipment, namely computers and software, 27 to facilitate the work of SNH staff and consultants; and (e) incremental operating expenses, includingoffice expenses and domestic travel 0 Technical assistance to support the operationalization of the National Housing Fund. The National Housing Fund, which was established by law in 2004, represents the juridical instrument for the implementation of a rationalized system of federal housing subsidies across income groups and geographical areas. In the short-term, as the Government prepares to channel federal budget (OGU) resources through the Fund, efforts are needed by the Ministry of Cities to establish the operational procedures for the functioning of the Fund, including managerial responsibility and oversight, access criteria, the nature and composition of OGU budget items and programs included under the Fund, reporting requirements and procedures, and the roles and responsibilities of decentralized and local actors, including financial agents and promoters, in the use of Fund resources. The Project would finance a contract with a consulting firm to support the Ministry in preparinga comprehensive operational manual for the Fund. Component 2: Housing Finance Market Development (US$ 0.29 million). The TAL would include resources to support the improvement of the legal and regulatory framework for housing loans, including incremental reforms to the existing housing finance system, the future integration of the SBPE in the full market system, and overall strengthening of the market-based SFI. While the reform agenda i s broad and complex, and the sector actors have initiated a number of studies and technical reviews, the Government has requestedthat the TAL activities be highly focused on (a) efforts to disseminate information about the importance of a credible regulatory and legal framework for housing finance among a broad audience which would include the judiciary and members of Congress; and (b) a strategic study, by independent consultants, of the medium-term future of FGTS. The TAL, activities would complement other Government technical work on a number of issues, including: (a) the development of new legal and financial instruments for promoting greater primary and secondary market development; (b) the transition and future integration of SBPE in the full market system, and (c) efforts to support the drafting of housing- specific consumer protection legislation, including a short study tour to the UnitedStates and/or Western Europe where such efforts are also underway. The core activities to be financed under the Component include: 0 Outreach and information dissemination for Judiciary, NGO and Congressional committee members. The persistent unpredictability of the legal and regulatory system as regards the rights of lenders and borrowers remains an important impediment to the credibility of the housing finance system. The Project would finance a series of workshops to disseminate information among academics, NGO representatives, members of thejudiciary, and Congressional committee members and their technical staffs. 0 A study and assessment of alternative lenders. The purpose of the study is to assess the potential of alternative lenders, such as microfinance institutions to provide financial products to low-income families, such as housing improvement loans, that would be an alternative to traditional mortgage financing, potentially filling an important affordability gap that exists inthe current housing finance system. 0 A strategic study for FGTS. The Project would include financing to prepare an independent assessment and strategic vision of the structure, efficiency, and coherence of FGTS' role and activities. The strategic assessment of FGTS would include, inter alia: (a) a review of options for improving access to a broad spectrum of domestic lenders, 28 including options for adjusted interest rate pricing according to income and credit risk; and (b) options for supporting the transition of the FGTS imbedded-interest rate subsidy into a less-distorting, more explicit and transparent upfront subsidy. The strategic study would likely be undertaken by a multi-sectoral consulting firm with experience in finance, law, and public sector management. Component 3: Housing Subsidies for the Poor (US$ 1.33 million). The focus of technical assistance activities as relates to housing subsidy policy would be the rationalization of the Government's various subsidy programs and the establishment of effective targeting, monitoring, and evaluation mechanisms.Activities to be supported include (a) technical assistancefor subsidy harmonization and regularization across the various subsidy programs (including OGU, off- budget, and FGTS programs); (b) the establishment of a tiered system of monitoring and evaluation, including regular monitoring of subsidy programs as regards targeting, impact, unit costs, the performance and compliance of financial intermediaries, and which would address both real-time needs and medium-termliving standards impact; (c) demand-side technical assistanceto local communities/local governments for structuring and packaging requests to the PSH; (d) a series of outreach and dissemination activities as regard national subsidy programs to improve understanding at the local level; and (e) technical assistance to improve the targeting of subsidies, including studies and analysis for the establishment of a system for poverty categorization that i s more reliable than the current system of self-declaration and is consistent with Bank and Government experience. The activities under Component 3 include: 0 Support for Subsidy Harmonization and Rationalization. The most critical action in the immediate term for the Government is to rationalize the Government's myriad subsidy programs across income groups, establishing consistent criteria for subsidy access and consistent subsidy terms (financial and administrative) that create a harmonized spectrum of both credit-linkedand non-credit linked subsidies. The TAL would include financing for consultants to support the Ministry of Cities and the GTI-SFHto review the existing subsidy programs, including PSH, PAR, and the FGTS subsidies (both upfront and interest rate) and fine-tune them consistent with the overall monitoring and evaluation approach. 0 The establishment of a comprehensive monitoring: and evaluation system. The program would finance a tiered system for targeting, monitoring and evaluation of the Government's housing programs and which would aim to provide policy makers with information about municipal land and housing markets. Annex 7 includes a detailed description of the M&E approach. 0 Dissemination activities of national subsidy programs to improve understanding: of federal subsidy schemes at the local level. There i s significant demand from local governments to understand the Government subsidy programs, specifically the new PSH. The Project would finance (a) a program of regional workshops to broadly disseminate PSH and other program information to both state and local officials; and (b) the improvement of existing training materials which would be distributed to local governments and financial institutions. Component 4: Land and Urban Development (US$ 1.06 million). Provision of technical assistance for the carrying out o f (a) the programs of the Ministry of Cities to strengthen local governments in their efforts to achieve accreditation of their institutional capacity to take the lead in local urban development policy setting and implementation (gestlio prdpria); and (b) the 29 development of a national urban upgrading program, including, inter alia, (i)research, monitoring, and evaluation activities, at the Borrower's federal level, of policy and regulatory efforts for urban development and land subdivision; and (ii) a series of activities to facilitate the implementation of the policy innovations under the Program for progressive housing development, the preparation of local master plans (planos diretores), and demand-side organization for housing subsidy programs. Inparticular, the TAL would support: 0 Workshops, studies, case studies, and data collection related to urban land markets. Activities would include technical activities related to the analysis of the regulatory and institutional supply constraints as inputs for the preparation of the pillar of the National Housing plan related to increasing urban land supply and reducing supply-side constraints on formal housing development. Specific studies would include analysis and data collection in regards to licensing, processing, registration, infrastructure requirements, and the establishment of minimumlot sizes and other standards at the local level. Such activities would culminate in the creation of a simple municipal land and housingbenchmarlung system, includedas part of the overall M&Eprogram. 0 Activities for the development of local governments' capacity for improving permitting and registration processes. Based on the results of the land market analytical work, the Ministry would prepare and widely disseminate information related to best practices and options for improving the often onerous permitting and registration procedures in municipalities in Brazil, which &e among the most important impediments to greater development of urban land. 0 Technical assistanceto strengthen sub-national planningand housingentities. The TAL i s limited in scope and reach, but a series of actions will be taken at the Federal level to create an environment and the appropriate instruments for building capacity by local agents, including municipalities, to implement sector efforts. In addition to subsidy- policy specific efforts for local governments and actors financed under Component 3, the TAL would finance: (a) technical assistance, including a series of two workshops, also involving state-level officials, aimed at the elaboration of cadastre systems, payment collection procedures and staff training, including methodologies for systematizing local cadastres and facilitating their integration with state and federal databases; (b) a series of activities for municipalities to build capacity in identifying and mapping existing informal and precarious settlements as well as serviceable land in locations for low- income development, in order to define ZEIS perimeters in an equitable and proactive way; and (c) the preparation of information for low-cost progressive infrastructure for new land subdivision. 0 Develoument of a National Urban Upgrading program. A number of programs exist at the Federal level aimed at the upgrading of existing informal settlements. Rationalizing these programs into a single program with consistent rules, adequate targeting and monitoring and evaluation, i s a key challenge for the medium term. The TAL would finance a number of activities to evaluate the efficacy of these existing programs, providing a basis for developing a national urban upgrading program that cuts across all secretariats within the Ministry of Cities and that could be supported through the newly established National Housing and Social Interest Fund. 30 Annex 5: Project Costs BRAZIL: HousingSector Technical Assistance Project Project Cost By Component andor Activity us Bank $mi11ion Financing Category 1- Goods,Services,and Incremental Operating 3.99 3.99 Expenses TotalProjectCosts $3.99 $ 3.99 Front-endFee $0.01 $0.01 TotalFinancingRequired $ 4000 $ 4*00 Component 1: Institutional Strengthening and Support Cost incl. Bank Financing (US$) of the National Housing Policy :ontingencies (US$) 2006 2007 2008 576,000 192,000 192,000 192,000 15,000 15,000 30,000 15,000 15,000 100,000 100,000 40,000 20,000 20,000 30,000 30,000 70,000 52,500 17,500 75,000 25,000 25,000 25,000 9. Consultant to assist in management of loanfiduciary responsibilities procurement specialist - 75,000 25,000 25,000 25,000 10. Study and technicaltravels for the Ministry of the Cities 50,000 30,000 20,000 I11. Travel and study tours for members of the interministerialworking group 50,000 30,000 20,000 12. Paper Publications 70,000 35,000 35,000 13. Acquisition of Hardware and Software sufficientto monitor the NationalHousing Plan 100,000 100,000 14. Financial Audits 21,000 6,930 6,930 7,140 I Total 1,302,000 676,430 376,430 249,140 31 Bank Financing (US$) Housing Finance Market 2006 2007 2008 ~ 1. Workshopsfor members of the judiciary, NGOs,and Congress 50,000 25,000 25,000 2. A strategicstudy of FGTS 100,000 100,000 3. Studies to review of the regulatory framework of alternative lenders 20,000 20,000 4. Diagnosticstudy of alternativelenders 20,000 20,000 5. Diagnosticstudies of SBPE 100,000 Total 1 290.000 265.000 25.000 - I /Component3: Improving and Harmonizing National I Housing Subsidy Policy and Programs Cost incl. Bank Financing (US$) Contingencies (US$) I 2006 2007 2008 1. Comprehensivesubsidy harmonizationand rationalization studies 100,000 100,000 2. Developmentand establishmentof a Monitoringand Evaluationsystem 1,128,000 372,240 372,240 383,520 3. Studies relatedto the PSH parcelamentoprogram 20,000 20,000 4. Evaluativestudies on the effectivenessof the PSH and PAR 1 80,000 1 80,000 Component 4: Improvingthe Legal Framework for Cost incl. Bank Financing (US$) Lowering Urban Land Costs Contingencies (US$) 1. Developmentof Toolkits for (I) good practice on improving- 1 2006 2007 2008 development approval processesat the local level; (ii) streamlining and making accessiblethe registrationprocess 2. Developmentof Toolkits for localofficials on good practice in cadastre management 3. Developmentof a National Urban Upgrading Programfor MetropolitanAreas Total 32 Annex 6: ImplementationArrangements BRAZIL:HousingSector TechnicalAssistance Project Borrower and Executing Agencies Borrower. A Loan of US$4.0 million will be made to the Federative Republic of Brazil. A front- end fee of 1% -less any applicable waiver - would be assessed. Project Implementation. The Project has been designed to be implemented based on the existing sector institutions and the evolving arrangements for policy management in the housing sector without creating parallel implementationinstitutions. The National Housing Secretariat within the Ministry of Cities will be the key implementation agent responsible for day-to-day TAL management in coordination with the Government's Interministerial Housing Policy Group (Grupo de Trabalho Interministerial de acompanhamento das Politicas de Financiamento e Subsidios h Habitaqlio) (GTI-SFH).The GTI-SFHis comprised of representatives of the Central Bank, Ministry of Finance, Casu Civil da Presidtncia da Repziblica and Ministry of Cities. The National Housing Secretariat would prepare six-month implementation plans in collaboration with GTI-SFH. Because of the importance of the finance sector institutions represented on the GTI-SFH in providing technical oversight and guidance for issues related to Component 2 and Component 3 of the Project, the GTI-SFH would review technical outputs for consultancies financed under those components. This i s especially important given the links between the TAL and a number technical reviews already underway and planned in the housing sectors by the National Treasury, Ministry of Finance, and Central Bank, in particular. The key responsibilities of the Project implementation team within the National Housing Secretariat would include: Preparation of the Project's 6-month work plan; Management of Project procurement activities, including preparation of terms of reference in collaboration with the GTI-SFH for terms of reference related to Components 2 and 3 of the Project; Project financial management activities, including account management and the preparation of Project financial reports; Supervision and maintenance of the Project's administrative records; Preparation of regular Project implementation information to the World Bank, and coordination with the World Bank as regards supervision missions; Contracting and provision of information to external auditors; and Other ad hoc management and coordination activities, including the preparation of workshops and/or training activities. Procurement. For the purchase of goods or services financed wholly or partly by Bank funds, the implementation agencies will adhere to the Bank procurement guidelines. Goods will be procured in accordancewith the Banks "Guidelines for Procurement under IBRD Loans and IDA Credits" dated May 2004. Consulting services, either wholly or partly financed by IBRD, will be procured in accordance with the Banks "Guidelines: Selection and Employment of Consultants by World Bank Borrowers" datedMay 2004. 33 Monitoring and Evaluation Arrangements M&E System. The Project would finance a comprehensive monitoring and evaluation program related to (a) the health of the housing finance sector, including the impact of Government actions on housing credit availability and cost; (b) the implementation of the Government's housing subsidy programs, their targeting, efficiency, and impact; and (c) municipal-level actions related to the availability of housing and land. Details of the monitoring and evaluation approach are included inAnnex 7 and the overall Project monitoring indicators are included inAnnex 3. Proiect Supervision. Supervision missions will be undertaken at least three times a year and Implementation Status Reports (ISRs) will be updated after each mission. Project supervision will be front-loaded and focus initially on ensuring the preparation of terms of reference for key studies and consultants. In addition to regular supervision, the Bank will periodically review the progress of the operation in conjunction with sector reforms under the DPLs. The Ministry of Cities, in conjunction with the GTI-SFH, will submit quarterly progress reports during project implementation, includingfinancial monitoring. A mid term review will be carried out in August 2006. 34 Annex 7: The Monitoring and Evaluation of the National Housing Policy BRAZIL: HousingSector Technical Assistance Project Obiectives of the Component. This component seeks to support the National Housing Policy of Brazil (Politica Nacional de Habitap70, or PNH) in designing and implementing a results-based monitoring and evaluations system aimed at: (i) assessing housing needs at the intra municipal level to facilitate the identification of the target population in each municipality, (ii) monitoring implementation and service delivery of PNH's various programs, for quality control, accountability and legitimacy purposes, and (iii) assessing program effectiveness and eficiency via impact assessment and cost effectiveness studies. The Monitoringand Evaluation System of Brazil's National HousingPolicv. The monitoring and evaluation system proposed includes four main activities: (a) Intra-Municipal Level Housing Needs Mapping to improve the targeting of PNH's programs at the municipal level; (b) a Management Information System to improve effectiveness of program delivery; (c) Processes Monitoring and Quality Control to ensure accountability and legitimacy; and (d) Impact Assessment and Cost Effectiveness studies. Intra-Municipal Level Housing Needs Mapping The objective of this subcomponent is to provide a tool to municipal authorities to identify areas within municipalities that are priority for the implementation of PNH's programs (PSH, etc.). The proposal i s to combine census and national household surveys to estimate housing deficits at the census segment level. This would serve two purposes: First, it will help municipal governments in prioritizing the implementationof PNH's programs by targeting geographic areas in which poor eligible beneficiaries currently reside. Second, by comparing the housing needs map to the map of the incidence of the PNH programs, the federal government will be able to monitor the targeting performance of these locally implemented PNH programs. That is, inconsistencies found between the housing needs map and the actual programs' incidence map will alert the federal government to inadequate targeting of the intended beneficiary population by municipal governments. Specific activities for this subcomponent include: (i)hiring of consultants to elaborate the housing needs map; (ii)workshop and publications to disseminate results of the housing needs map; and (iii) hiringof consultants to develop a web page to make maps available. Management Information System The objective of this subcomponent is to assist the Ministries responsible for the PNHprograms in developing a management information system (MIS) to gather and process real time information that i s crucial for program management and implementation supervision. Once in place, the system will be able to instantaneously supply information about various implementation indicators to the program management teams and policy makers alike. The MIS will be designed to ensure proper resource use, to facilitate quality control, and to ensure public accountability. It entails the systematic documentation of key aspects of program performance that are indicative of whether the program i s functioning as intended or according to some appropriate standard. Thus, the MIS will be designed to answer questions, for example: 0 How many individuals (or families) are directly benefiting from the program? 0 Total number of families that have applied to the program to date? 35 0 Total number of beneficiaries receivingprogram benefits? 0 Amounts transferred per month and per municipality? 0 Average time elapsed between beneficiary application and selection into the program? 0 Average time elapsed between beneficiary selection into the program and receipt of benefit? 0 Socio-economic profile of beneficiary households? The MIS developed under this subcomponent will gather and process information held by municipal governments and the financial agencies implementing the various programs under the PNH. Regular newsletters and reports with detailed information on program delivery information will be prepared and sent to key policy makers at federal, state and municipal levels. A web site will also be developed to provide real time information on programdelivery and outreach status. This subcomponent would support the following activities for the setting up of PNH's MIS: (a) the design, training of staff and implementation of the MIS system; (b) MIS software and hardware equipment; (c) system maintenance and updating; (d) operational costs for the first 2 and `/z years of the program; (e) training and dissemination workshops for MIS users (including federal, state and municipal government staff and policy makers). Processes Monitoring and Quality Control This subcomponent seeks to strengthen PNH's efficacy by supporting its programs in the area of quality control audits and the monitoring of downstream processes to ensure accountability, legitimacy and transparency of programexecution by establishing effective incentive mechanisms for decentralized implementation. Therefore, this subcomponent will support the design and execution of random audits at the municipal level to check whether beneficiary selection procedures follow program guidelines, and if beneficiaries are receiving adequate services. A random sample of municipalities will be drawn each year. From each municipality, a further random sample of beneficiary families will be selected to verify the validity of their reported eligibility, and the quality of the services delivered. The followingquestions will be addressed: 0 Are those benefitedthe intended target? 0 Are membersof the targeted population aware of the program, and of programrules? 0 Are necessary programfunctions beingperformedadequately? 0 Are beneficiaries receiving the proper amounts, type and quality of service? 0 Are there eligible targets that are not receiving services? 0 Are programresourcesused effectively and efficiently? 0 Are costsper service unit deliveredreasonable? 0 Are municipalprojects in compliance with requirements imposedby the PNH? 0 Are participants satisfied with the services they receive? Specific activities for this subcomponent include: (i) hiring of consultants to design survey instruments, sampling strategy, and to implement periodic field surveys in municipalities randomly selected each year; (ii) workshop and publications to disseminate results of the quality control survey; and (iii) hiring of consultants to develop program re-design strategies to address implementation issues identified by the quality control survey. 36 Impact Assessment and Cost Effectiveness studies An assessment of program effectiveness and efficiency will be conducted to examine the degree to which the desired outcomes are generatedby the program, and if such outcomes are produced with the lowest possible costs. Impact assessments cannot be made with certainty but only with varying degrees of plausibility. Typically, evaluation studies assess the effects of social programs by comparing information about the outcomes for participants and non-participants. The main objective of an impact assessment i s to produce estimates of the net effects of an intervention, that is the impact uncontaminated by the influence of other processes and events that also may affect outcome indicators. The main objective of an efficiency assessment is to provide a framework to compare program costs to outcomes. There are usually two types of efficiency analysis: (i) cost-benefit analysis, and (ii)cost-effectiveness analysis. Cost-benefit analysis requires that program costs and outcomes be known and valued by a common measurement unit (usually monetary units). When outcomes cannot be converted to monetary units, cost-effectiveness analysis permits interventions with similar goals to be compared in terms of their relative efficiency. To be feasible, cost- effectiveness analysis requires that several programs (or interventions) are evaluated for impact. While most administrative costs are captured by the monitoring systems of the programs themselves, some non-administrative costs (private or community costs) need to be assessed through primary data collections. This sub-component will support PNH's monitoring of outcomes and assessment of program impacts. At a more aggregate level, the project will support monitoring and impact evaluation of economic and social indicators, as well as social capital indicators and indicators to measure municipal level supply of public services that might constrain program effectiveness. The monitoring and evaluation of outcomes at the municipal level will utilize existing and newly collected data at the municipal level. Existing data sources include the national population census, and sample data from large national surveys (e.g., PNAD, POF, PNDS, etc.). The latter will be usedto estimate key municipal indicators through out of sample imputation methods. The use of imputation methods will allow for the spatial analysis of poverty and inequality outcomes at the municipal level before and after program implementation. At the household level, this subcomponent will support baseline data collection from a sample of program participants as well as non-participant households. Program participants included in the sample will be interviewed right after being selected for any of the PNH programs. This will ensure that sample beneficiary households will be more likely to provide valid information when answering the baseline survey, since the probability of their receiving the program will not be affected by their answers to the survey. Comparable non-participant households will also be interviewed. The data gathered during this exercise will provide baseline information for the relevant impact indicators. This subcomponent will also support follow up surveys. If possible, the sample of non-participant households should be selected from the pool of applicant households that were registered, but that were not selected into the program because they did not meet the eligibility criteria. Surveying these excluded households will allow for two valuable types of analysis: (i) an assessment of the efficacy of the beneficiary selection process, by verifying if excluded householdsare in fact less deprived than beneficiaries, and (ii) an assessment of the impact of the program on household level socio-economic indicators via the method of regression discontinuity design (see Hahn, Todd and Van der Klaauw, 2001). 37 Specific activities for this subcomponent include: (i)organization of a Log-Frame workshop to identify program outcome indicators to be monitored and for which impact will be estimated, (ii) hiring of consultants to develop the monitoring and impact assessment methodologies, including the design of survey instruments and sampling strategy, and (iii) workshop and publications to disseminate results of the impact assessment and monitoring studies. 38 Annex 8: Financial Management and Disbursement Arrangements BRAZIL: HousingSector Technical Assistance Project FinancialManagementandDisbursements 1. Introduction. The objective of the proposed technical assistance operation is to assist in the implementation, monitoring and evaluation of the Government reform program supported by the housing sector reforms under the Programmatic Development Policy Loan. The project will be implemented by the National Secretariat for Housing, which is part of the Ministry of Cities, through its Unidade de Gerenciamento de Projectos (UGP),an entity already experienced in the implementation of multilateral development agencies operations. 2. Financial Management Assessment Conclusion. A financial management assessment of the Housing Technical Assistance Loan was conducted on March 15 and 16, 2005. The assessment was carried out in accordance with OP/BP 10.02 and the Guidelines for Assessment of Financial Management Arrangements in World Bank Financed Projects issued by the Financial Management Sector Board on October 15,2003. 3. The overall objective of the assessment was to determine whether the Borrower has, or will have, acceptable financial management arrangements in place by loan effectiveness. These include, but are not limited to, capacity to (a) properly manage and account for all program's proceeds, expenditures and transactions; (b) produce timely, accurate, and reliable program financial statements and reports, including Financial Monitoring Reports (FIWRs), for general and Bank special purposes; (c) safeguard program's assets; (d) timely engage independent auditors acceptable to the Bank; and (e) disburse Bank funds in accordance to applicable Bank rules and procedures. 4. The assessment was carried out jointly with the National Secretariat for Housing's UGP staff members involved inthe implementationof the program. It included (a) discussions with the UGP's financial management staff and STN officials; (b) a review of evaluation of financial management systems in place andor those to be used for the program's monitoring, accounting, and reporting; (c) review of staffing requirements, including training and qualifications; (d) discussion of flow of funds arrangements and disbursement methodology; (e) review of internal control mechanisms in place; (f) discussion with regard to reporting requirements, includingthe format and content of FMRs; and (g) review of external audit arrangements. 5. Financial management arrangements for federal projects in the country rely on the Government's Sistema Zntegrado de Administrag& Financeira (SIAFI). The system can adequately manage and track the receipt and use of funds, in a highly transparent manner, with a low risk for Bank and country funds. 6. The overall Financial Management Assessment conclusion is that the National Secretariat for Housing, namely its UGP, has satisfactory financial management arrangements in place to meet the Bank's minimum requirements. The financial management risk associated with the Project has been assessed as low. The Project's financial management system i s able to provide relevant and reliable financial information, in a timely manner, and to support the project's management in the control, planning, implementation and monitoring of the project, towards the achievement of its objectives. 39 7. Financial Management Systems and Reporting. Project expenditures will be recorded - budgeted, committed and paid - in SIAFI, the Federal Government's public financial management system. A new Unidade Gestora will be opened specifically for the project in the SIAFI system, which will produce monthly lists of payments and reports by expenditure, to be used as the basis for disbursements. For monitoring purposes, and given that the Loan Agreement will have a single disbursement category, agreement was reached during negotiations on the Financial Monitoring Reports (FMRs) format. FMRs will be produced, on a spreadsheet, every quarter, providing the following data: FMR 1A - Sources and Uses of Funds, by disbursement category, cumulative (project-to-date; year-to-date and for the period) and budgeted vs. actual expenditures, including a variance analysis; FMR 1B - Uses of Funds by Project Activity or Component, cumulative (project-to-date; year-to-date and for the period, by financing source) and budgeted vs. actual expenditures, including a variance analysis; Physical Progress Report: FMR 2 - MonitoringPerformance Indicators. Formats for Procurement monitoring and physical progress have also been agreed upon by the Bank and Government and would be used during implementation. 8. Supervision. Financial management supervision will take place at least once a year and include (a) reviewing of FMRs; (b) reviewing of the auditors' reports and follow-up of issues raised by auditors in the management letter, as appropriate; (c) participation in project supervision; (d) following up on any financial reporting and disbursement issues; and (e) updatingthe financial managementrating inthe Implementation Status Report (ISR). 9. Disbursements. Payments will be made directly to consultants and suppliers by the UGP, using the SUFI system. Funds will be transferred from the single treasury account to the payee, upon instructions from the UGP. On a monthly basis, the UGP will extract, from SIAFI, a list of payments, ordens bancririas, and a summary of Project expenditures. These two reports will be accompanied, as applicable, by invoices for payments made for contracts above the Bank's prior review threshold and will be submitted to the Bank via Secretaria Nacional do Tesouro (STN) of the Ministry of Finance. The Bank will then reimburse STN on the basis of such reports, which will support the withdrawal application. The Bank will finance one hundred percent of eligible expenditures, including taxes, in accordance with the recently approved country financing parameters. 10. Accounting Basis, Procedures and Policies. Project financial statements will be prepared, on a cash accounting basis, quarterly and annually. These statements will be prepared in accordance with consistently-applied accounting standards as per Law 4.320, acceptable to the Bank. 11. Auditing Arrangements. Annual project financial statements will be audited by independent auditors, satisfactory to the Bank, in accordance with acceptable auditing standards. In principle, the Secretaria Federal de Controle, (SFC) an entity duly recognized by the Bank, will undertake the project's annual financial audits. The external audit will be conducted in line with Terms of Reference acceptable to the Bank, and auditors will be required to issue a single opinion on project's financial statements, as per the guidelines "Annual Financial Reporting and Auditing for World Bank-financed activities", of June 30, 2003. Auditors will also have to produce a management letter, where relevant intemal control weaknesses will be identified and properly followed up by the UGP, contributing to the strengthening of the control environment. The auditor's report will be submitted to the Bank no later than six months after the closing of the borrower's fiscal year. 40 FinancialManagementRisk Assessment Program Risk Assessment. The Risk Assessment Matrix below presents the items of potential risk for the project from a Financial Management standpoint. The overall Financial Management riskis consideredlow. Table 1 FinancialRiskAssessment - Risk 1H SI IM 1L Mitigators 1 H-High S-Substantial M-Moderate L-Low 41 Annex 9: Procurement BRAZIL: HousingSector Technical Assistance Loan General 1. Procurement for the proposed project would be carried out in accordance with the World Bank's "Guidelines: Procurement Under IBRD Loans and IDA Credits" dated May 2004; and "Guidelines: Selection and Employment of Consultants by World Bank Borrowers" dated May 2004, and the provisions stipulated in the Legal Agreement. The general description of various items under different expenditure category is described below. For each contract to be financed by the Loan, the different procurement methods or consultant selection methods, the need for prequalification, estimated costs, prior review requirements, and time frame are agreed between the Borrower and the Bank project team in the Procurement Plan. The Procurement Plan will be updated at least annually or as required to reflect the actual project implementation needs and improvements in institutional capacity. 2. Procurement of Works. There will be no procurement of works inthis project. 3. Procurement of Goods. This project is expected to have a very low volume of procurement of goods. There will be purchase of computer equipment and software which shall be procuredthrough ``preg6o eletr6nico" (reverse auction) if the amount involved falls below the shopping threshold. In addition, small contracts for procurement of printing services are also planned. No National Competitive Bidding (NCB) for procurement of goods was identified during preparation. If necessary during implementation, procurement will be done using the Bank's Standard Bidding Documents (SBDs) for all ICB and the model bidding documents publishedby SEAINfor NCB. 4. Procurement of non-consulting services. No contract of non-consultingservices was identified. 5. Selection of Consultants. Project design shows a high volume of consultant contracts, mainly for technical assistance, marketing and communication plans, development of a monitoring and evaluation system, design of toolkits, and development of national urban upgrading program, among others. Some smaller studies are likely to be done by individuals. Short lists of consultants for services estimated to cost less than $500,000 equivalent per contract may be composed entirely of national consultants in accordance with the provisions of paragraph 2.7 of the Consultant Guidelines. Assessment of the agency's capacity to implement procurement 6. Procurement activities will be carried out by the Ministe`rio dus Cidudes. An assessment of the capacity of the Implementing Agency to implement procurement actions for the project has been carried out by Alexandre Borges de Oliveira on November 17,2004 and later discussed with the client on March 18, 2005. The assessment reviewed the organizational structure for implementing the Project and the interaction between the Project's staff responsible for procurement. 7 The major issued identified i s the lack of specialized procurement staff in the implementing agency. An action plan was agreed to during project preparation to strengthen the procurement team. 42 The overall project riskfor procurement is average. Procurement Plan 8. The Borrower, at Appraisal, developed a Procurement Plan for project implementation which provides the basis for the procurement methods. This plan has been agreed between the Borrower and the Project Team on March 30, 2005 and is available at the Ministe`rio dus Cidudes and the Bank CMU files. It will also be available in the Project's database and on the Bank's external website. The Procurement Plan will be updated annually in agreement with the Project Team or as required to reflect the actual project implementation needs and improvements in institutional capacity. Frequency of Procurement Supervision 9. In addition to the prior review supervision to be carried out from Bank offices, the capacity assessment of the ImplementingAgency has recommended two post-reviews for the first year of project implementationand annually from there on. r Procurement Methods and Thresholds" pocurement Method hresholds rior Review !Comments , I IfUSD) I Fhresholds (USD) 1 Shopping (Goods) <100,000 buringproject 2 National Competitive Bidding(NCB for Goods) 2 100,000 All above USD r i onsultants I Selection Method r&?old rior Review threshold (USD) , 1 Quality and cost based selection (QCBS) 100,000 2 Selection basedon consultant's qualifications i100,000 I, 3 k 100,000 I I Least cost selection l7 Neither ICB nor NCB for procurement of goods was identified for this Project. However, if necessary during implementation, NCB will be required for goods estimated to cost more than US$ 100,000 and less than US$350,000. Above US$ 350,000, if necessary, goods shall be procured through ICB. All ICB and direct contracting will be subject to Bank's prior review. Consultancv services estimated to cost above US$ 100,000 per contract and all Single Source selection of consultants (firms) will be subject to prior review by the Bank. Short lists comprising entirely of national consultants. Short list of consultants for services, estimated to cost less than $500,000 equivalent per contract, may comprise entirely of national consultants in accordance with the provisions of paragraph 2.7 of the Consultant Guidelines. 43 Annex 10: Project Preparation and Supervision BRAZIL: Housing Sector Technical Assistance Project Planned Actual PCN review January 7,2005 January 7,2005 Initial PID to PIC January 7,2005 January 7,2005 Initial ISDS to PIC NIA NIA Appraisal March 28,2005 March 28, 2005 Negotiations July 15, 2005 September 27, 2005 BoardIRVP approval September 2005 November 2005 Planned date of effectiveness January 2,2006 January 2,2006 Planned date of mid-termreview January 2007 January 2007 Planned closing date September 30,2009 September 30,2009 Bank staff and consultants who worked on the project included: Name Title Unit Maria Emilia Freire Task Team Leader LCSFU DavidN.Sislen Task Team Leader LCSFU Dean Cira Urban Specialist LCSFU Ivo Imparato Urban Specialist LCSFU Loic Chiquier HousingFinance Specialist OPD Marja Hoek-Smit Housing Specialist Consultant Kathy Lindert Monitoring and Evaluation Specialist LCSHS Pedro Olinto Monitoring and Evaluation Specialist LCSPP Paula Pini Environmental Specialist LCSEN Maria do Carmo Bicudo Environmental Specialist Consultant Edesio Femandes Land Specialist Consultant Jose Janeiro FinancialManagement Specialist LCOAA Luiz Gazoni Procurement Specialist LCOPR Jose August0 Carvalho Counsel LEGLA Cristina Velazco-Weiss Language ProgramAssistant LCSFU Violeta Wagner Senior ProgramAssistant LCSFU Robert Buckley Peer Reviewer TUDUR Sonia Hammam Peer Reviewer SASE1 Christine Kessides Peer Reviewer TUDUR Anna Wellenstein Peer Reviewer LCSFP Omar Razzazz Peer Reviewer MNCLB 44 Annex 11:Statement of Loans and Credits BRAZIL: HousingSector Technical Assistance Project Differencebetween expectedandactual Original Amount inUS$Millions disbursements Project ID FY Purpose IBRD IDA SF GEF Cancel. Undisb. orig. Frm.Rev'd PO82328 2005 BR-Integ.Munic.Proj.-BetimMunicipality 24.07 0.00 0.00 0.00 0.00 24.08 0.00 0.00 PO83533 2005 BR TA-Sustain.& Equit Growth 12.12 0.00 0.00 0.00 0.00 12.12 0.00 0.00 PO87711 2005 BR Espinto Santo Wtr & CoastalPollu 36.00 0.00 0.00 0.00 0.00 36.00 0.73 0.00 PO69934 2005 BR-PERNAMBUCO INTEGDEVT: 31.50 0.00 0.00 0.00 0.00 31.50 0.79 0.00 EDUC QUAL IMPR PO60573 2004 BR Tocantins SustainableRegionalDev 60.00 0.00 0.00 0.00 0.00 60.00 7.00 0.00 PO80830 2004 BR Maranhao Integrated:RuralDev 30.00 0.00 0.00 0.00 0.00 30.00 1.92 0.00 PO83013 2004 BR Disease Surveillance & Control APL 100.00 0.00 0.00 0.00 0.00 99.50 0.00 0.00 2 PO87713 2004 BR (CRL1) Bolsa Familia 1st APL 572.20 0.00 0.00 0.00 0.00 572.20 0.00 0.00 P070827 2003 BR-2ndAPL BAHIA DEV. 60.00 0.00 0.00 0.00 0.00 42.19 20.68 0.00 EDUCATIONPROJECT PO49265 2003 BR-RECIFEURBAN UPGRADING 46.00 0.00 0.00 0.00 0.00 44.99 6.25 0.00 PROJECT PO58503 2003 GEFBR Amazon Region Prot Areas 0.00 0.00 0.00 30.00 0.00 26.3 1 0.00 0.00 (ARPA) PO54119 2003 BR BAHIA DEVT (HEALTH ) 30.00 0.00 0.00 0.00 0.00 28.27 6.27 0.00 PO80400 2003 BR-AIDS & STD Control 3 100.00 0.00 0.00 0.00 0.00 91.85 17.15 0.00 PO76977 2003 BR-Energy Sector TA Project 12.12 0.00 0.00 0.00 0.00 12.12 4.02 0.00 PO74777 2003 BR-Municipal PensionReform TAL 5.00 0.00 0.00 0.00 0.00 4.90 4.30 0.00 PO51696 2002 BR SA0 PAUL0 METRO LINE4 209.00 0.00 0.00 0.00 0.00 163.48 126.58 0.00 PROJECT PO73192 2002 BR TA FinancialSector 14.50 0.00 0.00 0.00 0.00 9.30 6.48 0.00 PO55954 2002 BR GOIAS STATE HIGHWAY 65.00 0.00 0.00 0.00 0.00 34.46 34.12 0.00 MANAGEMENT PO57653 2002 BR- FUNDESCOLA IIIA 160.00 0.00 0.00 0.00 0.00 209.31 -22.78 0.00 PO57665 2002 BR-FAMILY HEALTHEXTENSION 68.00 0.00 0.00 0.00 0.00 50.81 38.67 0.00 PROJECT PO70552 2002 GEFBR PARANA BIODIVERSITY 0.00 0.00 0.00 8.00 0.00 8.59 5.99 0.00 PROJECT PO74085 2002 BR Sergipe Rural PovertyReduction 20.80 0.00 0.00 0.00 0.00 3.13 -1.96 0.00 PO60221 2002 BR FORTALEZA METROPOLITAN 85.00 0.00 0.00 0.00 0.00 111.47 57.35 0.00 TRANSPORT PROJ PO66170 2002 BR-RGN2ND RuralPovertyReduction 22.50 0.00 0.00 0.00 0.00 13.68 6.48 0.00 PO43869 2002 BR SANTA CATARINA NATURAL 62.80 0.00 0.00 0.00 0.00 59.96 19.11 0.00 RESOURC& POV. PO73294 2001 BR Fiscal & Fin. Mgmt. TAL 8.88 0.00 0.00 0.00 0.00 6.74 5.78 0.00 PO50881 2001 BR PIAUIRURAL POVERTY 22.50 0.00 0.00 0.00 0.00 8.78 7.45 0.00 REDUCTION PROJECT PO59566 2001 BR- CEARA BASICEDUCATION 90.00 0.00 0.00 0.00 0.00 71.32 -18.68 0.00 PO50772 2001 BR LAND-BASEDPOVRTY 202.10 0.00 0.00 0.00 58.13 151.01 152.74 0.00 ALLEVIATION I(SIM) PO50880 2001 BR PemambucoRural PovertyReduction 30.10 0.00 0.00 0.00 0.00 16.65 12.92 0.00 PO57649 2001 BR Bahia RuralPoverty Reduction 54.35 0.00 0.00 0.00 0.00 5.02 -1.77 0.00 Project 45 PO50875 2001 BR Ceara RuralPovertyReduction 37.50 0.00 0.00 0.00 0.00 7.26 2.01 0.00 Project PO50776 2000 BR NEMicrofinanceDevelopment 50.00 0.00 0.00 0.00 0.00 30.15 -19.85 0.00 PO47309 2000 BR ENERGY EFFICIENCY (GEF) 0.00 0.00 0.00 15.00 3.29 9.39 11.17 6.25 PO39199 2000 BR PROSANEAR 2 30.30 0.00 0.00 0.00 6.40 22.29 28.69 22.29 PO06449 2000 BR CEARA WTR MGT PROGERIRH 136.00 0.00 0.00 0.00 0.00 67.27 47.14 4.00 S I M PO35741 2000 BR NATLENV 2 15.00 0.00 0.00 0.00 2.32 5.61 7.93 2.29 PO48869 1999 BR SALVADOR URBANTRANS 150.00 0.00 0.00 0.00 0.00 85.95 85.95 0.00 PO50763 1999 BR- Fundescola2 202.00 0.00 0.00 0.00 0.00 17.29 17.29 0.00 PO58129 1999 BR EMER. FIRE PREVENTION(ERL) 15.00 0.00 0.00 0.00 0.00 5.46 5.46 0.18 PO42565 1998 BR PARAIBA R.POVERTY 60.00 0.00 0.00 0.00 0.00 11.16 11.16 0.00 PO35728 1998 BR BAHIA WTR RESOURCES 51.00 0.00 0.00 0.00 0.00 4.03 4.03 0.03 PO06559 1998 BR (BF-R)SP.TSP 45.00 0.00 0.00 0.00 0.00 0.02 0.02 0.00 PO06474 1998 BR LAND MGT 3 (SA0 PAULO) 55.00 0.00 0.00 0.00 10.00 36.98 46.98 21.63 PO38895 1998 BR FED.WTR MGT 198.00 0.00 0.00 0.00 40.00 54.67 94.67 26.23 PO43421 1998 BR RJM.TRANSIT PRJ. 186.00 0.00 0.00 0.00 27.78 92.14 120.52 0.00 PO57910 1998 BR PENSIONREFORMLIL 5.00 0.00 0.00 0.00 0.50 1.48 1.98 1.28 PO43420 1998 BR WATER S.MOD.2 150.00 0.00 0.00 0.00 125.00 19.33 144.30 3.78 PO06532 1997 BR FEDHWY DECENTR 300.00 0.00 0.00 0.00 50.00 61.51 111.51 111.51 PO43873 1997 BR AG TECH DEV. 60.00 0.00 0.00 0.00 0.00 15.24 15.24 15.24 PO43868 1997 BR RGS LAND MGTIPOVERTY 100.00 0.00 0.00 0.00 0.00 8.79 8.79 8.79 PO34578 1997 BR RGS Highway MGT 70.00 0.00 0.00 0.00 0.00 30.09 30.09 30.09 PO37828 1996 BR (PR)R.POVERTY 175.00 0.00 0.00 0.00 10.00 38.36 48.36 48.36 PO06210 1996 GEFBR-NATLBIODIVERSITY 0.00 0.00 0.00 10.00 0.00 1.87 2.59 1.30 Total 4,325.34 0.00 0.00 63.00 333.42 2,666.68 1,323.62 303.25 46 BRAZIL STATEMENT OF IFC's Held andDisbursedPortfolio InMillions of US Dollars 2001 AG Concession 0.00 15.00 15.00 0.00 0.00 14.07 0.00 0.00 2002/2005 Amaggi 55.71 0.00 0.00 0.00 40.71 0.00 0.00 0.00 2002 Andrade G. SA 27.50 0.00 10.00 16.67 27.50 0.00 10.00 16.67 2001 Apolo 7.21 0.00 0.00 0.00 4.71 0.00 0.00 0.00 2005 Aracruz 50.00 0.00 0.00 0.00 50.00 0.00 0.00 0.00 1998 Arteb 20.00 7.00 0.00 18.33 20.00 7.00 0.00 18.33 1999 AutoBAn 22.73 0.00 0.00 17.25 22.73 0.00 0.00 17.25 1998 BSC 1.24 0.00 0.00 0.66 1.24 0.00 0.00 0.66 1996/2003 Banco 1.19 0.00 0.00 1.75 1.19 0.00 0.00 1.75 Bradesco 2001 Brazil CGFund 0.00 20.00 0.00 0.00 0.00 1.60 0.00 0.00 1994/1996 CHAPECO 11.78 0.00 0.00 5.26 11.78 0.00 0.00 5.26 2002/2004 CN Odebrecht 29.04 0.00 20.00 31.59 29.04 0.00 20.00 31.59 1973/ 1978/ 1983 CODEMIN 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 2003 CPFL Energia 0.00 0.00 40.00 0.00 0.00 0.00 40.00 0.00 1992 CRP-Caderi 0.00 0.32 0.00 0.00 0.00 0.32 0.00 0.00 1996/ 1997 CTBC Telecom 11.50 18.17 0.00 0.00 11.50 18.17 0.00 0.00 2004 Comgas 45.00 0.00 0.00 45.00 12.50 0.00 0.00 12.50 1997/ 2000 Coteminas 4.69 5.43 0.00 0.00 4.69 5.43 0.00 0.00 1980 / 1992/ 1993 DENPASA 0.00 1.12 0.00 0.00 0.00 1.08 0.00 0.00 1998 DixieToga 0.00 14.90 0.00 0.00 0.00 14.90 0.00 0.00 1987/ 1996/ 1997 Duratex 6.76 0.00 0.00 3.95 6.76 0.00 0.00 3.95 1999 Eliane 19.20 0.00 13.00 0.00 19.20 0.00 13.00 0.00 1998 Empesca 5.00 0.00 10.00 0.00 5.00 0.00 10.00 0.00 2000 / 2004 Fleury 25.79 0.00 6.00 0.00 5.79 0.00 6.00 0.00 1998 Fosfertil 5.30 0.00 0.00 21.36 5.30 0.00 0.00 21.36 1998 Fras-le 6.00 0.00 10.00 0.00 6.00 0.00 6.70 0.00 1994 GAVEA 0.94 0.00 5.50 0.00 0.94 0.00 5.50 0.00 2002 GP Cptl Rstrctd 0.00 8.70 0.00 0.00 0.00 8.62 0.00 0.00 2001 GPC 9.00 0.00 0.00 0.00 9.00 0.00 0.00 0.00 1997/ 1998 Guilman- 20.99 0.00 0.00 28.74 20.99 0.00 0.00 28.74 Amorim lV998 lcatu Equity 0.00 14.00 0.00 0.00 0.00 12.62 0.00 0.00 1999 lnnova SA 12.50 5.00 0.00 30.00 12.50 5.00 0.00 30.00 1980/ 1987/ 1997 lpiranga 23.62 6.32 0.00 39.75 23.62 6.32 0.00 39.75 1999 ltaberaba 0.00 5.34 0.00 0.00 0.00 5.34 0.00 0.00 2000 / 2002 / 2003 Itau-BBA 99.29 0.00 0.00 0.00 71.69 0.00 0.00 0.00 1999 JOSAPAR 7.57 0.00 7.00 0.00 2.57 0.00 7.00 0.00 1995 Lojas 2.00 0.00 0.00 0.00 2.00 0.00 0.00 0.00 Americana 1987 / 1992/ 1999 MBR 12.50 0.00 10.00 0.00 12.50 0.00 10.00 0.00 2002 Macae 45.25 0.00 10.00 37.50 45.25 0.00 10.00 37.50 2002 Microinvest 0.00 1.25 0.00 0.00 0.00 0.42 0.00 0.00 2002 / 2003 Net Servicos 0.00 36.39 0.00 0.00 0.00 36.39 0.00 0.00 1994 Para 8.60 0.00 9.00 0.00 8.60 0.00 9.00 0.00 Pigmentos 1987/ 1996 Perdigao 2.19 0.00 0.00 0.00 2.19 0.00 0.00 0.00 19941 Portobello 12.52 6.15 0.00 0.00 12.52 6.15 0.00 0.00 20001 2002 2000 Puras 2.67 0.00 0.00 0.00 2.67 0.00 0.00 0.00 2003 / 2004 Queiroz Galvao 30.00 0.00 10.00 0.00 5.00 0.00 5.00 0.00 2004 Randon Imp1 3.73 0.00 3.00 0.00 3.73 0.00 3.00 0.00 Part 1987/ 1997/ 2003 SP Alpargatas 36.67 0.00 0.00 0.00 21.67 0.00 0.00 0.00 47 19941 Sadia 6.11 0.00 3.83 38.74 6.11 0.00 3.83 38.74 19951 1997 1997 Samarco 6.30 0.00 0.00 0.00 6.30 0.00 0.00 0.00 1998 Saraiva 3.46 3.00 0.00 0.00 3.46 3.00 0.00 0.00 2003 Satipel 12.86 0.00 10.00 0.00 12.86 0.00 10.00 0.00 2000 Sepetiba 26.85 0.00 5.00 0.00 11.85 0.00 5.00 0.00 1999 Sudamerica 0.00 15.00 0.00 0.00 0.00 15.00 0.00 0.00 2001 Synteko 15.43 0.00 0.00 0.00 15.43 0.00 0.00 0.00 1996 TlGRE 1.92 0.00 0.00 0.00 1.92 0.00 0.00 0.00 1998 12004 Tecon Rio 12.80 0.00 5.50 15.52 4.70 0.00 5.50 7.42 Grande 2001 12003 Tecon Salvador 3.30 1.56 0.00 4.15 3.30 1.32 0.00 4.15 2004 TriBanco 10.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 19811 1987 Triunfo 0.00 -0.00 0.00 0.00 0.00 0.00 0.00 0.00 2002 12003 UP Offshore 11.60 10.00 0.00 30.00 0.00 3.00 0.00 0.00 198811994119961 Unibanco 57.18 0.00 0.00 0.00 57.18 0.00 0.00 0.00 2002 12003/ 2004 48 CARTADEPOLfiICA PAR40 SETORWITACIONAL i Brasilia, 06 de maiode2005. Sr. James Wolfensohn Presidente BancoMundial Washington, D.C. PrezadoSenhor Wolfensohn, 0 GovemodoPresidenteLuizInacioLuladaSilvatern imprementad0m aimportante agenda de reformas microecon6micas, destinada a promover o aumento da produtividade da economia brasileira e o crescimento eqtiitativo Nesse contexto, a fim de apoiar o financiamento do seu esforgo de reformas para o setor habitacional, o Govemo Brasileiro solicitou a0 Banco Mundial umprograma de Emprktimos paraPolitica de Desenvolvimento (DPLs). Essas reformas h e m parte do grupa de atividades que o Banco Mundlal vem apoiando na kea de Crescimento Eqtiitativo e Sustentado, CUJO primeiro empristimo foi aprovado noan0 passado. 2 0 Governoatual tem dado ao setor habitacionalpara a popula@io de baixa renda uma grande imporcrincia, em fimgiio do impact0 que a habitaeo tem M vida cotidiana dos segmentos de mais baixa renda da popula@o, bem como na cria@o de empregos e na promo@odaatividade econBmica Abaixo, es60 mencionadas as medidasmais importantesjh adotadas, ou planejadas, paraer&entar as principais quest6es que afetam o setor habitacional no Brasil. 3. 0 Govemo esth ciente dos enormea des&os que o setor apresenta. 0 deficit habitacionalbrasileiro esth estimadoem cerca de 7 milhaes de unidades, sendo que 88% desse deficit est30 concentrados em familias com renda inferior a 5 saliirios mininos. Esses indicadores1150 melhorartiose n b conseguirmosenfr-entaro excess0 de demanda por servigos de habi-o gerados por novas unidades familiares que se formam anualmente. Parcela significativa do n~merode &nilias formadas anualmente nlo consegue ter acaso i s residhcias mais baratas produzidas pelo mercado e recorrem ao mercado informal de habitago. 4. 0 Governo ja identificou quam &leas em que medidas e reformas sZo cruciais para aumentar o acesso dos maispobresa moradiaadequada. Primeiro, o Govemo esthtrabalhando parafortalecer as instituir$.es que atuam no setor, bem como sua capacidadede wordenago, tendo por base informap% estatisticasadequadas e analises detalhadas, a fim de defmir um plan0 de mddio prazo, com prioridades claras e metas fmancerras realistas. Segundo, o I Governo esth empenhado em uma maior integmgZo do mercado financeiro de habitago, apoiada na conso1idaqZ.o da estabilizaeo macroeconamica e em refonnas esmturais que permitam a redu@o consistente da taxa de juros basica e dos spreads cobrados no sistema financeiro. A estrategia govemamental 15de, no curto pram, melhorar a situago do sistema finanwho habitacional, promovermaioreficiencia entreos agentes financeirosqueoperamno setor, hannonizando subsidios implicitos e explicitos e criando mecanismos que reduzam o risco juridico dos contratos, protegendo tanto mutuarios quanto agentes financeiros. Desta forma, estariioestabelecidasas condiqaes paraque, no hturo, se alcance maior integragfo dos mercados de financiamento habitacional. Terceiro, o Govemo continuark seus esforgos para modemizar o setor de &anciamento habitacional e os instrumentos do mercado de capitais, a fim de adequar o volume de recursos financeiros do setor habitacional e permitir uma reonentaeo gradual d.esse financiamento para as classes de renda mais baixa. Quarto, o Govemo esti trabaIhando na mehora 'cla oferta de term urbanizada formal. Muitos dos desafios encantram-seno niveldos govemos estaduais e municipais, emparticular na oferta de solo urbano, incluindo formalidades para titulaeo e parcelamento do solo, Iicenciarnentode construg6es e.licenciamentosurbanistic0e ambiental. ;#ortalecimento Institucionrl 5. As questbes referent- B politica e financiamento habitacional no Brasil em sido responsabilidadede vhias aghcias govemamentais, o que requeruna coordena@oentre elas. Nesse contexto, o Governo tomou importantes medidas, comepndo com a cria@o do Ministerio das Cidades (Lei 10.683, de 28 de maio de 2003) e sua Secretaria Nacional da Habitago, como 6r@o federal responsive1pela politica habitacional, seus programase aq6es. Outras medidas form adotadas, visando assegurar a capacidade tknica e administrativa da Secretaria Nacional da Habitago, incluindo: (a) a criafio de unidade tknica para elaborar, monitorar e avaliar o Plan0Nacional de Habitago e (b) a contratago de pessoal/consultores paraasseguraradequadacapacidadetecmca intema. 6 Com a criaflo do Minist6rio das Cidades, o Govemo, em colaboraflo corn amplos setores da sociedade civil, avanpu na prepara@o de sua politica habitacional, visando estabelecer as wordenadas da aq5.o governamental que assegure o acesso da popula@o a moradia adequada. Esseesforp resultounapublicaqiZo, em 2004, pelo Mhkterio das Cidades, de documento intitulado Politica Nacional de Habita@o, o qual define as primcipaisdiretrizes para o setor, alem de propostas para sua implementaflo. Ajustes provavelmente oconerZo durante o process0 de imp1ementaR.oda politica e de sua consoiidaqiio efetiva por meio de lei e deplan0 de investimentospiunanualcontendo objetwos, metase mdicadores. 7. Em consonhcia com esse esforvo, o Congress0Nacional est&apreciandoProjeto de L e i que cria o Fundo Nacional para Habitaqiio de Interesse Social (FNHIS), para coordenar transferhhs, subsidios, recursose hanciamento a politica de habitaeo. 0 Projeto de Leifoi aprovado pela Gmara dos Deputados e aguarda sua aprovaglo pel0 Senado. A criaglo do Fundo representauma tentativa de articular os recursos orptnenthrios utilizados para fins de politica habitacional e de aumentar sinergias entre programas financiados pel0 setor pcblico. No curto prazo, e ap6s a aprovaeo pelo Congress0 Nacional, sera necesdrio regulamentara operacionalizaqtio e funcionamento do FNHIS, defmindo sua esmtura de gestFio e promovendo incluso progressivados subsidios orgamenthos nesta unica estrutura, na forma definida em lei. 8 Para consolidar a colabora@o e coordenago entre os entes envolvidos, o Govemo cnou um Grupo Interministerial de Acompanhamento das Politicas de Financiamento e Subsidios Habitaeo, que acompanhara os componentes da Politica Habitacional nas bases I# de mercado e de interesse social, assim como os trabalhos desenvolvidos com apoio do i emprhtimode assistkncia tknica doBancoMundialparao setor 9 Para reforgar a capacidade de imp1ementaG.odessas politicas, o Govemo lanpu urn programa abrangente de capacitago, visando o fortalecimento dos municipios na operago de programas e politicas do Minist6rio das Cidades. Esta a@o esti sendo acompanhada de medidas para mapear e avaliar a capacidade das aghcias sub-nacionais envolvidas com planejamento e politica habitacional. Finalmente, estamos reforgando as atividades institucionais e de treinamento em municipios, com foco em instrumentos e pdticas de politicas urbanasehabitacionais. Ampliando o FinanciamentoHabitacional 10. 0 financiamepto habitacional e um dos pilares para a promqLo de amplo acesso a habitago. No Brasil, grandes reformas tbm sido feitas nos ulhmos anos para estimular o desenvolvimentode mercados secundhrios e a emissao de papeis securitizados quepodem ser transacionados no mercado com seguranp e lucratividade. Nossa experikncia tem sido bem sucedida. Embora o mercado de titulos lastreados em financiamento habitacional seja alnda incipiente, apresentaum forte potencia1de crescimento, o qualdeve aumentar paripassu com a consolida@o da melhora das condiqaes macroeconbmicasque temos observadonos ultimos meses Importantesmedidas foram tomadas para estimular a canaliza@o de poupanp para o setor, tal como a aprovaw da Lei 10.931, que inclui: (a) o fortalecimento da aliena@o fidziciuria (criada em 1997,Lei 9.514) como um sistemaaltematrvo de garantia; (b) o reforp do grau de confianp das instit&bes de crkhto interessadas em financiamento habitacional, tomando possivel regdamentar titulos de credito imobiliirio (CRI e LCI); (c) a regulamenta@odoPatrim6nio deAfeta@o em incorpora@s imobiliarias; (d) a introdug5o de meios eficazes de fiscalizagiio, tomando vihvel a continuidadedos trabalhosde construg50, em cas0 de filBncia dos empreendedores; (e) a simpllficagfio do imposto incidente sobre as receitas do Patrimbnio de AfetaHo, mediante instituiflo do Reghe de T r i b u w o Especial (RTE), corn agmpamento de taxas e conmbuipks federais em uma imica aliquota; e (9 a regulamenta@oda solu@o de disputasIegaiscontroversas. 11 Alem disso, o Govemo instituiu reformas legais que permitem aos credoressecuritizar seus emprbtimos habitacionais e fhcilitar a cria@o de companhias privadas de securitiza@o, assim como, estabeleceu arcabougo legal para os instrumentos do mercado de titulos Recomprade CWs-Certjcado de Recebnieis Imobiliarios- foi criada pelaRes.3155/2003, derivativos de emprktimos lastreados em garantia imobiliaria (CRT). A Carta de Garantia de do Conselho Monetfirio Nacional (CMN), com o objetivo de aumentar a liquidez desses titulos, melhorandoa seguraqa dos detentores dos creditos e estimulando a expansb de um mercado secundirrio de hipotecas. Finalmente, as Leis 11.053/04 e 11.033/04 hcilitam o desenvolvimento do mercado de papels lastreados em garantias imobiliirias, pot incluir mcentivos fiscais para fundos mutuos e de pensgo na compra de papeis de Iongo prazo, alkm de instituir a isen@o de imposto de rendapara invesbdores de varejo que tenham papeiscom lastroem credito imobiliirio (LH,LCIe CRI). 12. Como proposito de consolidare expandir o mercado, o Govemo pretendecontinuar o aprimoramento do arcaboup legal, apresentando propostas para reduzir o nsco juridic0 dos contratosde credit0 imobilifrrio e promover a institui@o de umbancode dados de prot@o ao consumidor(cadaszroposirivo), contemplandoos mutuirios do setor habitacional.Alem disso, pretende-se estudar o potencial de desenvolvimento do seguro de crklito e trabalhar com o Iudiciario para refletir conjuntamentesobre as condiges especificasdo mercado babitacional e a necessidadede reforgar os contratosmmo medidavital paraque o mercadofloresqa. 13. A consolidaeo da estabilidade macroeconBmica e as reformas de carkter microecon6mico que v6m sendo adotadasja contribuem e VZO certamenteproporcionar um ambiente amda mais favorhvel a uma maior participwiio dos bancos privados no financiamento habitacional, tomando mais interessante para o setor financeiro conceder financiamentoshabitacionais. 14. Durante esse period0 de consolida@o de reformas, o mercado financeiro habitacional de longo prazo requer regulamentagiioe protqiio adequada. Os dois segmentos de mercado .&ue contabilizam mais de 75% do mercado habitacional incluem o SBPE e o FGTS. 0 primeiro tem suprido cera de 25% dos emprdstimoshabitacionais.Financiado por cademetas de poupanpa, que deshtam de isenqZode impostos, o SBPE (Sistema Brasileiro de Poupanqa eEmprestimo)tem ti suadisposipo um grande volume de recursos, parcialmentedirecionados para empr&timos habitacionais. Dada a baixa lucratividade relativa desses creditos e a ainda pequena atuago dos bancos privados nesse segmento, o Conselho Monetirio Nacional determinou um aumento na aplicaflo em emprbtimos habitacionas dos recursos captados pela poupanpa, bem como instituiu mecanismos de monitoramento para que os bancos atendam a essa deter"a@o. Acreditamos que, no futuro, tal sistema niio seja mais necesskio, quando as condiges permitirem sua integra@o ao sistema de mercado. Mais recentemente, a Resolu@o 3.259, de janeiro de 2005, compatibilizou as obrigatoriedadesde aplicaflo em crMito imobilihioa capacidade do mercado de produzir unidadeshabitacionais, e definiu mcentivos para o financiamento a im6veis para a populapo de baixa renda ou de baixo valor. 15. 0Fundode GarantiadoTempo deServip (FGTS) permanecerhsendo, mesmoemum horizonte mais longo, uma fonte importante de financiamento para habitaflo social. Ele responde por maisde metade do total de crditos habitacionais e e intenqiiodo Govemo fod- l o na populaflo de baixa renda, mantendo sua lucratividade e seguranqa.No passado recente, o FGTS melhorou seus procedimentos de gestiio de forma notivel pela inclusiio do dlculo explicit0 dos subsidios que concede nos financiamentos habitacionais (Resoiu$o 460, CCFGTS). Alem disso, determinou que, por volta de 2008, todos os recursos do FGTS beneficiario familias com menos de 10 salkrios minimos (SM), aumentando, ja em 2005, a quantiade cr6dito disponivel parafamilias derendainferiora 6 SM 16. No curto prazo, o Govemo continuani empenhado em assegurar uma gestfio eficiente do FGTS, no seu duplo papel de findo providente e de fonte de financiamento habitacional, procurandoexplorar op~$es que estimulem o us0 de tais recursospor umgrupo mais amplo de institui9es financeiras. Melhorando a Eficihcia dos Subsidios para HabitaGo 17 Pela primeira vez, o Govemo criou um programa de subsidio dueto e antecipado. 0 Programade Subsidio a HabitaqZo de Interesse Social (PSH) tem sido muito bem sucedido e um programatransparente de subsidos antecipados; que prev8 um sistema de IeilLo pbblico paraa distnbuieo de recursosdo PSH, com o proposito de expandir o universode instituiqBes financeiras participantes; financiado com recursos do orpnento federal (OGU); e que vem sendo aprimorado ao longo do tempo. As melhoras iniciadas recentemente, entre outros objetivos, visam expandir o universo de instituig6es Gnanceiras participantes. Est50 sendo estudados mecanismos que proporcionern um ambiente mas competitivo p w agentes de credit0 e produtos alternativos, por meio de: (a) estabelecimento de um sistema de pr6- qualificaeo de agentes financehos, incluindo companhias do setor publico local e (b) melhoria do processo de credenciamento tkuco, para eliminar o risco de possiveis praticas desleais ou ilegais 18. No futuro imediato, o Govemo continuara os esforgos para racionalizar e coordenar os programas de subsidio. A harmonizafio de Go diversos programas como OS subsidlos do FGTS,PAR,PSHeoutros, deve contemplar questces relativas a beneficiosporfaixade renda e criterios de acesso, entre outras. Como inovaeo recente, pode-se ressaltar a aprovago da Resolu@o 460 pelo Conselho Curador do FGTS, que estabeleceu uma nova politica de subsidiosantecipados, prevendoa afocaQo de R$1,2 bilMo para 2005, segundo cderios bem definidos para sele@o de beneficihrios, e contemplandoa possibilidade de conceder subsidios paraaquisiqiiode imoveis usados. 19. A agenda de curto prazo inclui a harmonizaeo do sistema de subsidios, melhona de focalhaglo dos programas e a preparaflo de arcaboup para o sistema de Monitoramento e Avaliago do ProgramaHabitacional do Govemo, comparticular ateneo aos componentes de subsidios. ReduqHodo Custo da Formalidadee Aumento dr Oferta de SoloUrbano 20. Os obsticulos a uma oferta mais adequada de terra a preps acessiveis para a populagio de baixa renda continuam a ser um grande problema Aspectos da pr6pria legislafio, bem como de processos de registros, dificultam as apks de promogo da ampliaeo da oferta de terra pel0 mercado formal. 0 Govemo empreendeu um processo de consultapublica e apoiou o delineamento da proposta de nova lei de parcelamento do solo e regular@o fundifiria para Areas urbanas. Conhecido como "Lei de Responsabilidade Territorial", esse PL pretende promover avangos a partir do arcabougo legal do Estatuto da Cidade, constituiudo o novo mano regulatorio da produqLo e regulariza@o de assentamentos humanosnopais. 21. AIem disso, o Govemo lanqou um programa de apoio ao desenvolvlmento de planos urbanisticos mmcipais incluindo: (a) o desenvolvimentode umconjunto de ferramentas para preparago de planos diretores, no contexto do Estatuto da Cidade; (b) o desenvolvimentode um banco de dados nacional de consultores qualificados para dar suporte aos municipios, na preparaqBode pIanos diretoresparticipativos; e (c)a alocaqHo de verbas do OGU paraapolar o desenvolvimentode planosdiretores participativos. , 22. No mdio prazo, o Govemo devera langar um programa de integra@o urbana de assentamentos preduios em areas metropolitanas, onde se encontram90% dos assentamentos informais. Relativamentea politica de desenvoIvimento urbano, o Govemo deveri incluir no Plano Nacional de Habita@io diretrizes de politica para estimular a oferta de tem urbana, definindo instrumentos e incentivos aos govemos municipais e outros agentes para a redugo de custos administrativosdeacesso ao mercadoe parcelamentode terra urbana. Assistsncia Financeira 23. A agenda de reformas e iniciativas descritas acima demonstra o forte comprometimentodo Govemo com o setor da habita@o. Nessecontexto, o Govemo agradece a participa@o do Bancono t i n a " t o do programa de reformas descrito adma e o apoio dado atraves do Emprhtimo para Politica de Desenvolvimento. Desejamos continuar trabalhando com o Bancoem emprestimosprogramaticos fbturos voltados parao crescimento eqiiitativo e sustenthvelda economia brasileim e para a provis!io de moradia adequada e de serviqoshabiiacionaisaos brasileuos. :;,dCordialmente, I Ar-tonio Palocci ?ilho MinistrodaFazthda Ministro das Cidades / Annex 12: Letter of Development Policy BRAZIL: HousingSector Technical Assistance Project The attached i s a translation of the Government of Brazil's Development Policy Letter, submitted originally for inclusion in the Programmatic Loan for Sustainable and Equitable Growth: Housing Sector Reform. LETTER OF DEVELOPMENT POLICY TRANSLATED FROMORIGINAL DOCUMENT Brasilia, May 06, 2005 MrJames Wolfensohn President World Bank Washington D.C. Dear Mr.President 1. The Government of President Luis Inacio da Silva has been implementing an important program of microeconomic reforms aimed at promoting an increase in economic productivity and equitable growth of the Brazilian economy. In this context, the Brazilian Government has requested from the World Bank a program of Development Policy Loans (DPLs) to support the financing of its housing sector reform. This reform program is part of the activities that the Bank i s supporting in the area of Sustainable and Equitable Growth and whose first loan was approved last year. 2. The present administration has given a noticeable importance to the low income housing sector as a result of the impact that shelter has in the daily lives of the lowest income groups, as well as in the creation of jobs and in the promotion of economic activity. Below you will find the most important measures already taken, or to be taken, to address the main issues afflicting the housing sector in Brazil. 3. The Government i s aware of the enormous challenges ahead. Brazil's housing deficit i s estimated at about 7 million units; 88% of this deficit i s concentrated in families earning less than 5 minimumwages. These numbers will not decline if we fail to address the excess of demand for housing services generated by the new households. A significant portion of the households formed every year cannot afford even the least expensive market-built house and turn to the informal housingmarkets. 4. The Government has identified four areas where measures and reforms are crucial to increase the access of the poor to adequate shelter. First, the Government i s working to strengthen the institutions dealing with the sector as well as their capacity of coordination, based on adequate statistics and sound and detailed analysis so as to define a medium term plan with clear priorities and within realistic financial targets. Second, the Government i s committed to produce a greater integration of the housing finance sector supported by the consolidation of the macroeconomic stabilization and the structural reforms which will lead to a consistent reduction of the basic interest rates and the financial intermediation spreads. The Government strategy i s in the short run to improve the situation of the housing financing system, promoting greater 49 efficiency among financial agents, harmonizing implicit and explicit subsidies, and creating mechanisms of credit insurance that protect both lenders and borrowers. Inthis way, we will be creating the conditions to reach in the future a greater integration in the housing finance markets. Third, the Government will continue its efforts to modernize the housing finance sector and the capital market instruments in order to increase the volume of resources to the sector and allow a gradual reorientation to the lower income classes. Fourth, the Government i s working to improve the supply of formal urbanized land. Many of the challenges are found at the level of state and municipal governments, in particular in the supply of urban land, includingformalities in titling and subdivision, construction licenses, urbanand environment licensing. InstitutionalStrengthening 5. Housing policy and housing finance issues have been the function of several government agencies which require an effective coordination. In this context, the Government has taken important measures, beginning with the creation of the Ministry of Cities and its Housing Secretariat. (Law 10.683,. May 28, 2003) and the creation of the National Housing Secretariat as the Federal agency responsible for the development, execution and monitoring of housing sector policy, programs and actions. We have taken further steps to ensure the technical and administrative capacity of the National Housing Secretariat, including, inter alia: (a) the creation of a technical unit to design the housing plan and conduct the associated monitoring and evaluation and (b) the contracting of staffkonsultants to ensure adequate in-house technical capacity. 6. With the creation of the Ministry of Cities, the Government in collaboration with large groups of civil society has advance in the preparation of its National Housing Policy, aiming at establishing the coordinates of the Government policy to guarantee the Brazilian population the access to adequate shelter. This effort has let to the publication by the Ministry of Cities of the National Housing Policy document in 2004 defining the main principles and guidelines for the sector as well as the proposals for its implementation. Adjustments will likely take place during the implementation of the housing policy and of its effective consolidation through its law and the multi-year national plan comprising objectives, targets and indicators. 7. Inparallel and as a complement to that effort, the National Congress is reviewing a Project Law which creates the National Social Interest Housing Fund (FNHIS) to coordinate transfers, subsidies, financial resources and funding to support the housing policy. The Projeto de Lei was approved by the House of Representatives and awaits its approval in the Senate. The creation of this Fundrepresents an attempt to homogenize the way resources are used for housing policy purposes and to increase synergies between programs financed by the public sector. Inthe near term, and after the approval by the National Congress, it will be necessary to regulate the functioning of the FNHIS, defining its management structure, and promoting a progressive inclusion of all budget subsidies inthis single structure, as defined by the law. 8. To ensure the collaboration and coordination of the program, the Government has created an Inter-ministerial Group to follow the Housing Finance and Subsidy Policy that will follow the market-basedand subsidy components of the HousingPolicy as well as the work developed under the Bank-financed Technical Assistance Loanfor the sector. 9. To strengthen the implementation capacity of these policies, the Government has launched a comprehensive capacity building program aimed at the institutional strengthening of municipalities in the operation of programs and policies of the Ministry of Cities. This action has been accompanied by measures to map and assess the capacity of the sub-national agencies 50 involved with housing planning and policy. Finally, we are strengthening the institutional and training activities in municipalities in metropolitan regions focused on instruments and practices in urban andhousingpolicies. AmplifyingHousingFinance 10. Housing finance i s one of the pillars to promote wider access of housing. In Brazil, major reforms have been undertaken in the last years to promote the development of secondary markets and the issuing of securitization papers that can be traded in the market with confidence and profitability. Our experience has been quite successful. Although the housing capital market i s still limited, it has great growth potential which will materialize pari passu with the consolidation and improvement of the macroeconomic conditions as observed in the last months. Important measures have been taken so far to channel savings to this sector, such as the approval of Law 10931, which includes (a) the strengthening of alienapo Jiduciaria (the trust deed instrument, created in 1997, Law 9514) as an alternative mode of collateralization; (b) the strengthening of credit institutions interested on housing financing, makingit possible to regulate real estate credit titles (CRI and LCI); (c) regulation of the PatrimBnio de AfetaGa'o ("affected assets") at real estate developments; (d) introduction of efficacious means of inspection and making feasible the continuity of the construction works in case of the developers' bankruptcy; (e) simplification of the tax over the revenues of Patrimonio de AfetaGa`o, through the creation of the Special Tax Regimen (RET - Regime Especial de Tributaqco); grouping federal taxes in a single tax aliquot; and (f)regulationof the solution of controversiallegal disputes. 11. In addition, the Government instituted legal reforms which allow lenders to securitize their housing loans, facilitate the creation of private securitization companies, and establish legal framework for capital market instruments (CRI) for mortgage derivatives. Trust Letters for the repurchase of CRI's - Certificados de Cre`ditoZmobilia`rio - were created by Res.3155/2003 of the National Monetary Council `(CMN), aimed at increasing the liquidity of these titles, improving the security of credit holders, and stimulating the expansion of a secondary mortgage market. Finally, Laws 11.053/04 and 11.033/04 facilitate the development of mortgage securities, including tax incentives for mutual and pension funds to purchase long term securities, in addition to implement income tax exemptions for retail investors holding SFI paper (LH, LCI, and CRI). 12. With the objective of developing and expanding the market, the Government intends to continue improving the regulatory framework, presenting proposals to reduce the judicial risk of the housingcredit contracts and promote the establishment of a data bank for consumer protection (positive cadastre) aiming at the housing sector clients. In addition, the Government intends to study the potential to develop risk insurance and to work with the Judiciary to analyze jointly the specific conditions of the housing market and to assess the need to enforce the contracts as a vital measurefor the market to flourish. 13. The consolidation of the macroeconomic stability and the microeconomic reforms that have been implemented already contribute and will certainly create an environment more favorable to a larger participation of the private banks in housing finance, making it more interesting for the financial sector to lend for housing relatedproducts. 14. During this period of consolidation of reforms in the sector, the long-term housing finance will require adequate regulation and protection.. The two segmented markets that account for more than 75% of the hosing market include SPBE and FGTS. The first has been providing around 25% of housing loans. Funded by tax free saving accounts, SBPE system (Sistema 51 Brasileiro de Poupanca e Emprestimo)has at its disposal a large volume of resources which have been partially oriented for housing loans. Given the relatively lower profitability of such credits, and sill limited role of the private banks in that segment, the Monetary Council has determined an increase in the application of funds to housing loans as well as the monitoring mechanisms to ensure that banks follow those rules. We believe that in the medium-term, this system would no longer be needed, when the conditions will allow its integration in the full market system. More recently, Resolution 3.259 of January 2005 has established an adequate degree of allocation to housing finance in line with the sector capacity to produce housing units while defining the incentives to finance low income groups and low housingvalue. 15. FGTS (Fundo de Garantia do Tempo de SewiGo) will remain an important source of financing for social housing probably even in a longer horizon. It accounts for more than half of total housing exposure and it i s the intention of the Government to focus it to low income populations while maintaining its profitability and security. In the recent past, the FGTS have improved management procedures, notably by including explicit upfront calculation of the cost and risk to lenders of the FGTS interest rate subsidy program differentiated by income group (Resolution 460, CCFGTS). In addition, it determined that, by 2008, all FGTS resources will benefit households earning less than 10 minimumwages, increasing in 2005 the amount of credit available for households earningless than 6 MW. 16. In the short term the Government will remain committed to ensure an efficient management of the FGTS, in its double role of provident fund and source of housing finance, looking for alternatives that promote the use of these resources by a wider group of financial institutions. Improvingthe Efficiencyof HousingSubsidies 17. For the first time, the Government has created a program of upfront subsidies. The Social Housing Program (PSH) has been very successful. It i s a transparent upfront subsidy program financed from Federal budget resources (OGU) which includes a system of public auction in the allocation of its resources with the objective of expanding the universe of participating financial institutions and which has been improved over time. Improvements recently undertaken include, inter-alia, the expansion of the universe of participating financial institutions. Other mechanisms are being studied to create a more competitive environment for alternative lenders and products by (a) establishing an improved system of pre-qualification of lenders and other agents, including local public sector companies and (b) further improvement of the technical accreditation process to reduce the risk of underbidding and possible unfairhllegal practices. 18. In the very near future, the Government will continue its efforts to rationalize and coordinate subsidy programs. The harmonization of very different programs such as the subsidies of FGTS, PAR, PSH and others should address questions related to benefits by income level, procedures to access subsidy funds, and others. As recent innovation, we mention the approval of Resolution 460 of the Board of Directors of FGTS which established a new policy of FGTS upfront subsidies with an allocation of R$1.2 billion for 2005 with well-defined criteria for the selection of beneficiaries and inclusion of the subsidy component for existing houses. 19. The near-term agenda includes harmonization of the subsidy framework, improved targeting of both programs and Preparation of a Framework for the Monitoring and Evaluation 52 system of the Housing Program of the Government, with particular attention to the Subsidies component. Reducethe Cost of Formalityand ImproveSupply of UrbanLand 20. Constraints to an adequate land supply, especially at affordable prices for low income people continue to be a major problem in attempting to provide universal shelter. Aspects of the legislation itself, as well as registry system, impede the action of the Federal and the local governments to provide formal land on-time. The Government has championed the public consultation process and supported the drafting of a new land law, known as the Law of Temtorial Responsibility, which aims to promote advances based on the new legal framework of Estututo du Cidude,becoming the new regulatory framework for the production and regulation of urban settlements inBrazil. 21. Moreover, the Government has launched a program to support the development of strategic municipal plans including: (a) the development of a toolkit for the preparation of master plans within the framework of the City Statute; (b) the development of a national database of qualified consultants for providing support to municipalities in preparing participatory urban strategic plans; and (c) providing budget resources to municipalities for the development of their participatory urban plans. 22. In the medium term, the Government will launch a program of urban integration and upgrading in the metropolitan areas, where there are 90% of the informal settlements. In relation to the urban development policy, the Government will include in the National Housing Plan the policy guidelines to stimulate the use of urban land, defining the instruments and incentives for the municipal governments and other agents to reduce the administrative costs to access the formal housingmarket and urbanized land. FinancialAssistanceRequest 23. The reform agenda and the initiatives described above indicate the strong commitment of the Brazilian Govemment'to the housing sector. Inthis context, the Government is grateful of the Bank's participation in the financing of the reform program described above and the supported provided through the Development Policy Lending. We wish to continue working with the Bank in future programmatic' loans aimed at the sustainable and equitable growth of the Brazilian Economy and the provision of adequate shelter and housing services for most of its inhabitants. Sincerely, Antonio Palloci Filho Olivio OliveiraDutra Ministro de Estadoda Fazenda Ministro de Estado das Cidades 53 Annex 13: Summary of Social and Environmental Issues BRAZIL: HousingSector Technical Assistance Project The proposed TAL, and associated DPL will support government policy efforts in the areas o f institutional reform and support of the national housing policy; housing finance and market reforms; low-income housing subsidy policy; and land and urban development legal and institutional frameworks. The reforms supported in this program are intended to increase access of poor and moderate income families to formal sector housing - including finished housing, urbanized land, and the upgrading of informal settlements. These are all actions that would have potential substantial positive environmental and social impacts. A rapid environmental and social assessment of the main issues addressed in the program was commissioned. This Annex presents a summary of the findings. EnvironmentalLegalandInstitutionalFramework Brazil's legal and institutional framework concerning the environment i s substantially advanced compared with many other developing countries and is adequate for regulating and reviewing the kindof localized environmental impacts that are associatedwith urban development and housing policies and programs. The Federal Constitution establishes the legislative and administrative competencies regarding the natural environment, providing for (i) the Union to legislate general environmental norms of a national interest; (ii)the states to legislate norms of state level interest; and (iii) municipalities to legislate norms of local interest. States and municipalities, therefore, have competency to legislate over environmental matters, provided that such legislation i s not in conflict with federal law. The Constitution further requires, in paragraph 1 of Article 225 that any public works or activities that may cause significant environmental degradation must first be subject to a study of the environmental impacts, thus laying the basis for the environmental licensingprocess. Federal law 6.938 of August 31, 1981 established the National Environmental Policy (PNMA). The law was regulated by Decree No. 99.274 of June 6, 1990 (altered in 1991and 2001). Among the preventive instruments established in the policy, and of relevance to the urban and housing sectors, are the establishment of environmental quality parameters, environmental zoning and assessment of environmental impacts. This law also defined the National Environmental System (SISNAMA),together with the institutionsresponsible for protecting environmental quality: 0 Ministry of Environment, responsible for planning, coordinating, supervising and controlling environmentalpolicy at the federa1,level; 0 The Brazilian Institute of Environment and Natural Resources(IBAMA); 0 State institutions responsible for controlling and overseeing activities that can cause environmental degradation; and 0 Municipal organizations or institutions to control and oversee activities that can cause environmental degradation at the local level. Environmental licensing i s the most relevant instrument for environmental management at the local level. The National Environmental Council (CONAMA) edited resolutions No. 237 of December 19, 1997, altering Resolution No. 001/86, in order to more systematically treat the environmental licensing process. This defines works and activities that are subject to environmental licensing. Among those relevant to the housing and urban development area are: 54 land subdivision, treatment and disposition of urban solid waste, activities related to water and waste water services. While the institutional and legal frameworks are adequate, in practice there are often conflicts betweenjurisdictions and capacity, particularly at the local level various from place to place. These problems are prevalent in the urban realm, particularly in the approval of subdivisions, social housing projects and the regularization of informal settlements. This is an area that requires greater integration and streamlining between the legal and institutional frameworks governingurban development and environmental licensing. IdentifiedPotential SociaVEnvironmentalIssues A brief assessment of the environmental and social impacts of the project identified a number of areas of potential risk and weakness as regards environmental and social impacts. The proposed project addresses these in systematic way. Policy Area 1: HousingPolicies and Institutions Disarticulation of Programs: There is an historic disconnect between housing programs and urban development policies and instruments such as territorial planning, municipal zoning and environmental programs. This can result in construction of social housing projects in inadequate areas, such as in environmentally sensitive areas. In addition, it has been identified that there has been an historical disconnect between programs in solid waste management, urban transport, water supply and sanitation and housing. This can result in the development of housing that may prevent low-income beneficiaries of government housing programs from enjoying the full benefits of urban life, with housing often being built far from transport networks and sources of employment, for example. There have been advances, however, to mediate these potential negative social and environmental impacts, several of which are supported by the DPL. These include: creation of the Ministry of Cities, the promotion of good planning instruments as those identified in the City Statute and technical assistance to municipalities to formulate integrated planning actions through Planos Diretores and Municipal Housing Plans. The Technical Assistance Loan that i s associated with the DPL envisages actions that would lead to the better integration of the various secretariats within the Ministry of Cities, including transport, water supply and sanitation, housing and urban development. The national housing policy, to be monitored through the National Housing Plan, articulates the need for such improved integration. There is a risk that still exists, however. The Ministry of Cities i s a new ministry. Its current structure which segregates housing, urban development, sanitation and transport into separate secretariatsdoes not facilitate the neededintegration, and the DPL could take extra effort to better integrate these secretariats, especially in the reformulation of the land subdivision law which has direct impact on the urban development and housing secretariats, inparticular. Fragmentation between Levels of Government: Urban and housing policies are generally fragmented between levels of government and there i s a need to bring greater harmonization among these various levels. This i s partly a legacy of a long period in Brazil's history of not having defined housing and urban development policies at the national level. The lack of integration among levels of government has contributed to the low level of impact of social housing programs in Brazil, and a likely poor allocation of scarce public resources in the sector. The National Housing Policy addresses these issues by attempting to develop synergies between federal, state and local policies and to develop institutions, such as National Housing Fund, that will attempt to establish an appropriate hierarchy of policies and integration of programs. Weakness in Resource Mobilization: A legacy of the collapse of the Brazilian National Housing Bank (BNH) has been an inability to mobilize resources for social housing and other programs 55 aimed at improving the living conditions of the urban poor. The government proposes to develop a National Low-Income Housing Fund that would serve as the vehicle to mobilize public (and potentially private) sources of funds for housing and urban development programs at the federal level. The policy calls for a systemthat would encourage the leveraging of these funds with state and local resources, and would establish clear rules for accessing the resources available in the fund. The DPLwould support that process. Policy Area 2: Housing Finance Market The actions to be supported in the Housing Finance Market are aimed at increasing the availability of housing finance, the effectiveness of housing finance and deepening the market for housing finance, including providing incentives to make existing programs reach lower income groups. The actions supported in the DPLare expectedto have positive social impacts. Policy Area 3: Housing Subsidies Disarticulation Between Subsidy Programs: One of the identified deficiencies in the current subsidy environment, i s that there i s a greater need to integrate housing programs with national income transfer and other social programs such as Bolsa Familia, Bolsa Escola and Fome Zero. The result of this disarticulation i s continued social exclusion, as it i s implied that housing programs are not well targeted to the poor. This i s one of the prime areas to be developed under the DPL and the accompanying TAL. It is recommend that linlung housing programs for the poor with national income transfer programs such as Bolsa Familia, will allow for the better targeting of such programs and ensure that the poorest are benefiting. The program aims to rationalize existing subsidy programs, develop better targeting mechanisms and develop monitoring and evaluation systems for the existing government programs. A Lack of Information: The social assessment indicated that there is a lack of credible information regarding living conditions to determine if housing programs and subsidies will be targeting the geographic areas and families in greatest need. One of the impacts of this is that resources may not be directed to geographic regions with the highest demand for public investment, and thus continue the current trend of informal development in certain regions. Historically, for example, more public housingresources have gone to the south and southeast, at the expense of the northeast where housing deficits are considered highest. Developing proper data bases will be important to properly channel public resources to regions of greatest deficits. The development of data bases and monitoring and evaluation systems would be developed under the accompanying TAL. Lack of Optimization of Resources: The assessment also indicated that the National Housing Policy, and its implementation through the National Housing Plan, will be ineffective if scarce public resources (both financing and subsidy) are not better optimized to allow for greater coverage of beneficiaries and to ensure that the poor are properly targeted. Without such optimization, housing deficits would continue and housing programs would not reach the poorest. The assessment suggests instruments such as proper local planning would help to optimize resources for housing programs by ensuringthat they are most effectively used at the local level. The DPL would support such efforts, and more, by ensuring that subsidy programs are harmonized and that monitoring and evaluation systems would ensure that the proper segments of the market are benefiting from subsidy programs. 56 Policy Area 4: Land andDevelopment Minimum Lot Sizes: The assessment suggests that any debate on Law 6.766/79 will need to balance the elimination of minimum lot sizes, with the constitutional right to dignified housing and the potential impacts of increased density that an elimination of minimum lot sizes could induce. However, this should be viewed against the current situation in which many argue that too onerous development standards lead to increases in land prices, a lack of developed land for the poor and the resultant process of large-scale informal urban settlements. This i s one of many areas of the proposed reforms to the law that will be heldto public debate, led by the Ministry of Cities. Compatibility between Legislation: Environmental legislation i s considered to be further advanced than the legislation governingland subdivision. It has also been noted that conflicts are inherent in the licensing process of new subdivisions, particularly between state and municipal jurisdictions, which may disagree on what is in the purview of local authorities and what i s in the purview of state authorities. This conflict is one of the main reasons for the long time it takes to approve new land subdivisions. This results in unauthorized subdivisions and perpetuates the problem of informality in urban areas. Revision of 6.766/79will need to resolve these conflicts if it is to be effective. Likewise, any revised law must resolve the conflicts between environmental legislation and the regularization of existing informal settlements, many of which occupy environmentally protected areas. This will require careful analysis and consensus buildingas the law is debatedinthe public arena. 57 Annex 14: Country at a Glance BRAZIL: Housing Sector TechnicalAssistance Project -Brazilat a glance @I504 b t I R Lwer- POVERTY and SOCIAL AmerlCs middie- X I X B r a 1 8. Corrb. It~'om6 Devaopment alamond' 20Q3 POplabon mid"II m J h s ) 1?66 534 2 656 Life expffitancy GNIpar capita{Atksmegral USSl 2 720 3 260 I480 GNI[Absm&od itSSbiUtars) 4'19 5 1,741 3 B?? A V R T ~mnod growth, 1997.03 R Poplabon FPC) 1 3 1 5 Rg Labor fwce (461 1 6 2 1 1 2 GNI Gmss per ' pimary Mostrecent estimate(Mest ymr Walhtrle, 1997.01) =P*l inmlimen! mterty(xo~pcputaocmbeRwnoiranarpovertyMoa) 22 Urhanpopulationp'' dtutalpopllohonl 83 77 53 Ma ewectanwstt bi BP 11 m InfantmMahty(F4 #&Sf 33 28 32 Child malnutritionI under6) 6 11 Aecassto immmsd wabr soum kwssio an impm 87 86 81 Illibaracy (X ofpaptrlabonsya15+1 14 11 10 Gmss primat-$enrdlment 1% dsehCsg0popwbbonI 148 129 112 Male 153 131 113 k m d e 144 126 111 KEY ECONOMilfGRATIOS and LOW-TERMTRENDS l9s3 f9W 2002 2003 GDP ~VSSbrlRaPsl EEunnmlCrXlOC 203 3 4393 460 a 4323 Gmss drmesbcinueslme~WGDP 16 7 aa 18 8 20 I Exptts of pmds and S~WICXJGDP 114 105 15 5 Trada Gmssdcmesbc 5aungs/GDP I D 1 223 21 8 T16Q J R Gmw. nabonalsavmgsx;DP 202 185 20 7 CurrentamounttidancuiGDP 3 4 41 -16 O R Interestpa'vmentsiGUP 3 9 06 2 0 27 Domestic lnmstmant Total dsbVGRP 43.5 9 9 48 6 48 0 Total d d t ~pr*rcB'exp~Tts 547 244 70 3 66 1 Presentvalue di debtGDP 52 6 Presentvalue d debtmplts 32g 6 lndebtednass 1983.93 1993-03 2002 2003 2003LW (ammesnmalgrowtl?) GRP 24 2 3 1 9 4 2 36 ----%I3d GDP percapita 06 1 0 0 7 -1 4 29 Loffer-trwddle-"ne goup Exprts d ycods and s ~ ~ i o y s 63 7 5 142 7 0 1 6 STRUCTUREof the ECONOMY t983 t993 2WZ 2003 I I'bcbGDPI Agriculture I U D 7 6 S B 58 Industry 440 416 206 191 10 Manufncturina 332 B n 124 114 SrMcas 451 9 8 735 751 0 Prrab cmsumpticn 712 EUI 58 I 560 10 Generalgwemmer! consumpbm 9 7 I 7 7 201 193 Importaofgoods and WNICC~S 9 0 0 1 134 131 1983-33 1993-03 2002 2003 (avemge a n m I qfoMb1 Qncutture 2 4 3 9 5 0 55 20 Industry 1 2 1 R 2 6 -10 t D Manuhcbring 0 0 1 4 1 4 27 SeMces 3 0 2 5 1 E -02 U Pnvate msumptim 0 8 19 4 4 -33 in Generalq w w " t consumdm 8 4 2 0 1 0 116 Gmes domesbcinmstment 4 0 1 2 4 3 4 5 ImpDrtsofgoods and CQNICBS 5 9 4 0 -123 -10 Nde 2003 data are preliminweestimates 'The diamondsshowfourkeyindicatus inthecounby fin bo14 cumpred wh ik incoma-groupaverage Ifdata are mlssing the diamondwill be inmmplate 58 PRICES and GOVERNMENT FINANCE 1983 1493 2m2 2003 5o~esTR: p&champ] pricas Consumer moas 135.0 1,828.0 125 9 3 Implicit GDPdeRabr 1402 1.9E.6 102 12 8 GovemmaRf finance (% o f G W mtuoescutrent wants) Current revenue 23 !3 23 7 Cumnt budqet balance 2 8 3 0 Overallswrplustdeficrt TRADE 19883 1993 2002 2003 IUS$ mrmwns) Tot8 exports (fob) 38 563 60 362 73084 coffee 2466 3 049 3456 Soybeans 3074 3 032 4,200 htanufactures 25 935 33 000 39 653 Total i m ~ r ticiPJ s 25 256 47237 4E260 Food 1089 1085 R24 Fueland energy 2.139 6 240 6 577 Capital good5 E369 11E43 10,348 Exportprlca index ~ l Q ~ 5 = ~ 0 Q ] 80 91 88 95 l m w t pnw index t1QIRs=XWJ 57 67 91 90 Terms of trade f1995=f001 1 4 136 97 105 BALANCEof PAYMENTS 1983 2993 2002 2003 [US$ mrifions) Current account Dalanco to GDP pcj Exportsof goods and =NICE6 23611 41.616 69913 E3567 2 lmmts ufgmds and sewiws 19,5'34 31 795 61 709 63819 I Resuurcabalanw 4.0Ti 9821 a 204 i9,748 O ! . I Net income -1l.OD -12099 -1E19l -18.552 t Net current transfers 103 1,686 2 390 2 867 3 1 Current account balance 6,837 -592 -7 597 4 063 4 . Finencinq items (net] 4.846 9605 -6003 -863 Changesin net reserves 1.891 -9,213 13600 -3,lOU fi!W-fJO. Resewasincludino aold WSS nV?!"kol 4,563 32.211 37 823 49,296 Convanicn rak (DEC fma#US$l 2.10E-10 3.22E-2 2 0 3 1 EXTERNAL DEBT and RESOURCEFLOWS 1983 1983 2002 2M13 (US$mdhRS) Totaldebt outsbndinqand disbursed 98,525 144.104 228 662 236 245 IBRD 3,628 6.575 8 555 8 588 A:[ IDA 0 0 0 0 G : P , i 0 3 Tdol debt serdm 51 636 56 793 IBRD 1518 2010 IDA 0 0 Compsition &net remrcefluvrs Cmiaal q m t s 1% 59 0 Official aedrtmtas 1,576 -1.033 916 Pnvata creditors 2,658 10073 -9541 233 Foreign dired invesbnbnpnt 1,609 1292 0 POltffollUBqUlh 0 6.570 0 F: 155.904 Wald Bank Dwram Commitnllants 2,067 636 1 276 1,217 A- IBRD E Bilateral - DIsbursrmsnts 1.2W 471 1384 1.291 B IDA- D -0th- mltilatersl F -Prnrate Pnncipalrepayments 270 1279 1063 1.633 C-IMF G Short-tmn - Net flows 5% 405 322 342 Interest payments 237 570 456 377 Net tmflSfQl5 689 -1.387 -134 -719 59 70°W To Ciudad Guayana 60°W 50°W 40°W R.B. DE GUYANA VENEZUELA French BRAZIL Guiana O ri noco SURINAME (Fr.) ATLANTIC COLOMBIA Boa Vista OCEAN AMAPÁ AMAPÁ STATE CAPITALS RORAIMA Macapá Macapá NATIONAL CAPITAL 0° 0° RIVERS A m Negroa z o n Amazon Belém Belém MAIN ROADS São Luís Amazon Manaus RAILROADS STATE BOUNDARIES B a s i Madeira Tapajós Fortaleza n MARANHÃO MARANHÃO Teresina RIO GRANDE INTERNATIONAL BOUNDARIES A M A Z O N A S PA R Á CEARÁ CEARÁ DO NORTE Natal Purus Teles PARAÍBA ARAÍBA João P I A U I Porto Velho Pires Xingu Pessoa ACRE Tocantins PERNAMBUCO Recife Rio Branco Maceió 10°S RONDÔNIA RONDÔNIA Juruena Araguaia Palma ALAGOAS TOCANTINS Aracaju PERU M A T O SãoFrancisco B A H I A SERGIPE G R O S S O Mato Grosso B r a z i l i a n Salvador Plateau Cuiabá Cuiabá F.D. BOLIVIA BRASÍLIA BRASÍLIA GOIAS Goiânia Goiânia M I N A S G E R A I S PACIFIC To H i g h l a n d s Santa Cruz Belo OCEAN MATO GROSSO CHILE ESPÍRITO ESPÍRITO DO SUL Grande Horizonte SANTO 20°S Paragu Campo 20°S Grande Vititória ória To ya Santa Cruz SÃO PAULO SÃO Paraná RIO DE PARAGUAY São São Paulo Rio de JANEIRO PARANÁ ARANÁ Janeiro ATLANTIC BRAZIL Curitaba OCEAN STA CATARINA Florianópolis RIO GRANDE DO SUL Porto Alegre SEPTEMBER 30°S ARGENTINA 0 200 400 600 Kilometers 30°S IBRD To Buenos This map was produced by the Map Design Unit of The World Bank. Aires URUGUAY 0 200 400 Miles The boundaries, colors, denominations and any other information shown on this map do not imply, on the part of The World Bank 33377 2004 Group, any judgment on the legal status of any territory, or any 70°W 60°W 50°W 40°W endorsement or acceptance of such boundaries. To Montevideo