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Document of
The World Bank
FOR OFFICIAL USE ONLY
Report No. 51690-BR
INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT
PROGRAM DOCUMENT FOR A PROPOSED LOAN
IN AN AMOUNT EQUIVALENT TO US$1,045 MILLION
TO
THE MUNICIPALITY OF RIO DE JANEIRO, BRAZIL
FOR A
FISCAL CONSOLIDATION FOR EFFICIENCY AND GROWTH
DEVELOPMENT POLICY LOAN
June 2, 2010
Economic Policy Unit
Poverty Reduction and Economic Management
Brazil Country Management Unit
Latin America and Caribbean Region
This document has a restricted distribution and may be used by recipients only in the performance of their official
duties. Its contents may not otherwise be disclosed without World Bank authorization.
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BRAZIL – GOVERNMENT FISCAL YEAR
January 1 – December 31
CURRENCY EQUIVALENTS
(Exchange Rate Effective as of April 30, 2010)
Currency Unit Real (R$) US$1.00 R$1.8
Weights and Measures Metric System
ABBREVIATION AND ACRONYMS
AAA Analytic and Advisory Activity Atividade de Análise e Consultiva
BCB Central Bank of Brazil Banco Central do Brasil
BILLIONDES National Bank of Economic and Social
Development
Banco Nacional de Desenvolvimento
Econômico e Social
CEM Country Economic Memorandum Documento Econômico do País
CFAA Country Financial Accountability
Assessment
Avaliação do Sistema de Gerenciamento
Financieiro do País
CIDE Contribution for Intervention in Economic
Activities
Contribuição de Intervenção no Domínio
Econômico
CMN National Monetary Council Conselho Monetário Nacional
COFINS Social Security Contribution Contribuição para Financiamento da
Seguridade Social
CPMF Provisional Contribution on Financial
Transactions
Contribuição Provisória sobre Movimentação
Financeira
CPS Country Partnership Strategy Estratégia de Parceria para o País
DPL Development Policy Loan Empréstimo para Políticas de Desenvolvimento
DSA Debt Sustainability Analysis Análise de Sustentabilidade da Dívida
EDI Integrated Preschool Program Espacio de Desenvolvimento Infantil
EMBI Emerging Markets Bond Index Índice de Títulos da Dívida de Mercados
Emergentes
ESW Economic Sector Work Estudos em Economia e Setoriais
FPE State Participation Fund Fundo de Participação dos Estados
FUNDEB Fund for Maintenance and Development of
Primary Education and of Teacher’s
Valorization (formerly FUNDEF)
Fundo de Manutenção e Desenvolvimento da
Educação Básica e de Valorizaçãodos
Profissionais da Educação
GDP Gross Domestic Product Produto Interno Bruto
GFS Government Financial Statistics Estatísticas Financeiras do Governo
HDI Human Development Índex Índice de Desenvolvimento Humano
IBGE Brazilian Institute of Geography and
Statistics
Instituto Brasileiro de Geografia e Estatística
IBRD International Bank for Reconstruction and
Development
Banco International para Reconstrução e
Desenvolvimento
ICMS Brazilian State Value-Added Tax Imposto sobre Circulação de Mercadorias e
Serviços
IDB
IETS
Inter-American Development Bank
Institute for Studies on Labor and Society
Banco Inter-Americano de Desenvolvimento
Instituto de Estudos do Trabalho e Sociedade
IDEB Basic Education Indicator Indice de Desenvolvimento da Educação
Básica
IDE-Rio Education Indicator for Rio Indice de Desenvolvimento da Educação - Rio
IFC International Finance Corporation Corporação Financeira Internacional
IFI International Financial Institution Instituições Financeiras Internacionais
IGP-DI General Price Index –Domestic Availability Índice Geral de Preços – Disponibilidade
Interna
IMF International Monetary Fund Fundo Monetário Internacional
INDG Institute for Managerial Development Instituto de Desenvolvimento Gerencial
IPCA Consumer Price Index Índice de Preços ao Consumidor Amplo
IPTU Municipal Property Tax Imposto sobre Propriedade Predial e
Territorial Urbana
IPVA Tax on Motor Vehicle Property Imposto sobre a Propriedade de Veículos
Automotores
ISS Tax on Services Imposto Sobre Serviços
LDO Law of Budgetary Guidelines Lei de Diretrizes Orçamentárias
LDP Letter of Development Policy Carta de Política de Desenvolvimento
LFT Financial Letters of the Treasury (Bonds) Letras Financeiras do Tesouro
LOA Annual Budget Law Lei Orçamentária annual
LRF Fiscal Responsibility Law Lei de Responsabilidade Fiscal
MTEF
MoRJ
Medium Term Expenditure Framework
Municipality of Rio de Janeiro
Arcabouço Fiscal de Médio Prazo
Prefeitura Municipal de Rio de Janeiro
NCD Net Consolidated Debt Dívida Consolidada Líquida
NCR Net Current Revenue Receita Corrente Líquida
NFE Electronic Tax Invoice Nota Fiscal Eletrônica
NPV Net Present Value Valor Presente Líquido
NRR Net Real Revenue Receita Líquida Real
OECD Organization for Economic Co-operation
and Development
Organização para a Cooperação e
Desenvolvimento Econômico (OCDE)
OSCIP Civil Society Organization with Public
Interest
Organização da Sociedade Civil de Interesse
Público
OS Social Organization Organização Social
PAC Growth Acceleration Program Programa de Aceleração do Crescimento
PAF Program of Fiscal Adjustment Programa de Ajuste Fiscal
PB Participatory Budgeting Orçamento Participativo
PEFA Public Expenditure and Financial
Accountability
Método de despesa pública e responsabilidade
financeira
PER Public Expenditure Review Revisão de Despesa Pública
PME Employment Monthly Survey Pesquisa Mensal de Emprego
PNAD National Household Survey Pesquisa Nacional por Amostra de Domicílios
PPA Multiyear Plan Plano Plurianual
PPP Public-Private Partnership Parceria Público-Privada
PROES Program of States’ Banks Restructuring Programa de Reestruturação de Bancos
Estaduais
PSIA Poverty and Social Impact Assessment Avaliação de Impactos Sociais e de Pobreza
PYAG Pay As You Go System Sistema de Repartição Simples
RBM Results Based Management Gerência centrada nos resultados
SELIC Headline Interest Rate from Central Bank
(Clearance and Trustee System)
Taxa Básica de Juros do Banco Central
(Sistema Especial de Liquidação e Custódia)
SMF Municipal Secretariat of Finances Secretaria Municipal de Fazenda
SME Municipal Secretariat of Education Secretaria Municipal de Educação
SMS Municipal Secretariat of Health Secretaria Municipal de Saude
STN National Treasury Secretariat Secretaria do Tesouro Nacional
SUS National Health System Sistema Único de Saúde
SWAP Sector Wide Approach Abordagem Setorial Ampla
Vice President: Country Director:
Sector Director: Sector Manager:
Sector Leader: Task Team Leader:
Pamela Cox Makhtar Diop Marcelo Giugale Rodrigo A. Chaves Pablo Fajnzylber Yaye Seynabou Sakho
BRAZIL
MUNICIPALITY OF RIO DE JANEIRO FISCAL CONSOLIDATION FOR
EFFICIENCY AND GROWTH DEVELOPMENT POLICY LOAN
TABLE OF CONTENTS
I. INTRODUCTION .................................................................................................................. 1 II. COUNTRY AND MUNICIPALITY CONTEXT.................................................................. 4
A. Current Macroeconomic Outlook ......................................................................................... 4 B. Recent Economic Developments in the City of Rio de Janeiro ............................................ 8 C. Macroeconomic Outlook and Debt Sustainability in the Municipality of Rio de Janeiro .... 16
III. THE GOVERNMENT’S PROGRAM AND PARTICIPATORY PROCESSES .................. 20 A. The Government Program .................................................................................................... 20 B. Participatory and Consultative Process ................................................................................ 29
IV. BANK SUPPORT FOR THE GOVERNMENT STRATEGY .............................................. 31 A. Rationale for Bank Involvement and Link to Current Country Partnership Strategy
(CPS) and Forthcoming CPS ................................................................................................ 31 B. Choice of Instrument and Relation to Other Bank Operations ............................................. 33 C. Collaboration with the International Monetary Fund (IMF) and Other Donors ................... 36 D. Lessons Learned ................................................................................................................... 38 E. Analytical Underpinnings ..................................................................................................... 39
V. THE MUNICIPALITY OF THE CITY OF RIO DE JANEIRO FISCAL
CONSOLIDATION FOR EFFICIENCY AND GROWTH DPL ....................................................... 41 A. Operation Description ........................................................................................................... 41 B. Policy Areas .......................................................................................................................... 47 C. Impact of the Government’s program on Fiscal Aggregates ............................................... 50
VI. OPERATION IMPLEMENTATION ..................................................................................... 52 A. Poverty and Social Impacts .................................................................................................. 52 B. Implementation, Monitoring and Evaluation ........................................................................ 54 C. Fiduciary Aspects and Disbursements .................................................................................. 55 D. Disbursement ........................................................................................................................ 56 E. Environmental Aspects ......................................................................................................... 57 F. Risks and Risk Mitigation .................................................................................................... 57
ANNEX 1: LETTER OF DEVELOPMENT POLICY ....................................................................... 61 ANNEX 2: OPERATION POLICY MATRIX – RESULT INDICATORS ....................................... 66 ANNEX 3: FUND RELATIONS NOTE ............................................................................................ 71 ANNEX 4: STATEMENT OF LOANS AND CREDITS .................................................................. 74 ANNEX 5: FISCAL AND DEBT SUSTAINABILITY ANALYSIS ................................................. 79 ANNEX 6: BRAZIL AT A GLANCE ................................................................................................ 90 ANNEX 7: THE DECENTRALIZING EFFECTS OF THE CONSTITUTION OF 1988:
SERVICE PROVISION, INTERGOVERNMENTAL TRANSFERS TO MUNICIPALITIES,
AND THE SMALL-MUNICIPAL-SIZE BIAS .................................................................................. 92 ANNEX 8: BRAZIL: IMPACT OF THE GLOBAL CRISIS ............................................................. 94
List of Figures
Figure 1: Industrial Production Activity Index and Unemployment Rate, 2002-10 .............................. 5 Figure 2: Inflation, 2002-10 ................................................................................................................... 5 Figure 3: Current Account, 2002-10 ....................................................................................................... 5 Figure 4: Ibovespa Stock Market Index, Sovereign Spreads, Exchange Rate, 2005-10 ........................ 5 Figure 5: Municipal GDP Real Annual Growth, 1985-2003 and 2004-07 ............................................. 9 Figure 6: Rio de Janeiro and Brazil, GDP decomposition, 2007 .......................................................... 10 Figure 7: Rio de Janeiro’s Investments, 2004–09 ................................................................................. 12 Figure 8: Revenue Decomposition as of 2009 (percent of Total Revenue) .......................................... 13 Figure 9: Fiscal Responsibility Law, 2004-14 ...................................................................................... 20 Figure 10: Rio de Janeiro Doing Business Report 2006 ....................................................................... 24 Figure 11: The Three Pillars of the Proposed DPL ............................................................................... 41 Figure 12: Fiscal Impacts of the Government’s Program...................................................................... 51 Figure 13: Evolution of LRF Indicators, with and without Bank Operation ......................................... 52
List of Tables
Table 1: Brazil Macroeconomic Outlook, 2009–12 ................................................................................ 7 Table 2: Municipal transfers revenues (expressed as percentage of total revenues), 2004-09 .............. 11 Table 3: Government Finance Statistics Figures, in thousand of Reais 2004–09 ................................. 14 Table 4: Evolution of Fiscal Responsibility Law (LRF) Indicators ...................................................... 14 Table 5: Evolution and Composition of Net Consolidated Debt, 2004-09 ........................................... 15 Table 6: Rio de Janeiro, Fiscal Projections, 2010-2014 ........................................................................ 16 Table 7: Rio de Janeiro, Capital Expenditure by Sector, 2009-13 ( percent ot total expenditure) ........ 18 Table 8: Federal Programs in Rio de Janeiro State ............................................................................... 36 Table 9: DPL Policy Pillars and Long Term Vision ............................................................................. 42
List of Annex Figures
Figure A5.1: Rio de Janeiro’s Fiscal Balances, 2004-09 ...................................................................... 79 Figure A5.2: Evolution of Current Revenues and expenditures from 2004 to 2009 ............................. 80 Figure A5.3: Evolution of Gross and Net Consolidated Debts, 2004-09 .............................................. 81 Figure A5.4: Consolidated Debt Composition, 2008-09 ....................................................................... 81 Figure A5.5: Evolution of Debt Service, 2004-09 ................................................................................ 82 Figure A5.6: Risk Analysis ................................................................................................................... 87
List of Boxes
Box 1: Fiscal Impact of the Olympic Games in Rio de Janeiro in 2016a .............................................. 19
Box 2: Complementarities between Rio State and the Rio Municipality DPLs .................................... 34 Box 3: Good Practice Principles on Conditionality .............................................................................. 39 Box 4: Prior Actions for First Tranche Loan Disbursement ................................................................. 43 Box 5: Conditions for Second Tranche Loan Disbursement ................................................................. 45
Map of Brazil ........................................................................................................................................ 96
The Rio de Janeiro Municipal Fiscal Consolidation for Efficiency and Growth Development Policy Loan was
prepared by an IBRD team consisting of Yaye Seynabou Sakho, Pablo Fajnzylber, Ngoc-Bich Tran, Fernando Blanco,
Cristian Quijada Torres, Barbara Bruns, William Dillinger, Andre Medici, David Evans, Jose Guilherme Reis, Evelyn
Levy, Juliana Wenceslau Biriba, Tarsila Velloso, Marcelo Caetano, Mario Rattes, Regis Cunnigham, Luciano
Wuerzius, Antonio Paulo Vogel de Medeiros, Antonio Velandia, Miguel Navarro Martin, Anderson Caputo Silva,
Armando Roselli, Ana Tereza Pereira, Erica Amorim, Zélia Brandt de Oliveira, Miguel Santiago, Tammy Lynn
Pertillar, Andresa Lagerborg, Ricardo Rocha Silveira Kai Kaiser, and João Pedro Wagner de Azevedo.
i
LOAN AND PROGRAM SUMMARY
BRAZIL
MUNICIPALITY OF RIO DE JANEIRO
FISCAL CONSOLIDATION FOR EFFICIENCY AND GROWTH DEVELOPMENT
POLICY LOAN Borrower
Municipality of Rio de Janeiro with a guarantee of the Federative Republic of Brazil. A
waiver is requested by the Board of Executive Directors to Bank policy for DPLs which
limits the definition of subnational borrower to states and provinces. Other than the
definition of borrower, all other provisions of Bank policy are applicable to this operation.
Implementing Agency
Municipal Secretariat of Finance of the City of Rio de Janeiro
Financing Data
IBRD Loan
Terms: Commitment-linked IBRD Flexible Loan with a variable-spread, denominated in
US Dollars, with an amortization consisting of customized repayments of principal,
payment dates of the 15th of each calendar month with a 1 month grace period, and 30
years of final maturity, with all conversion options selected, and the front-end fee and
premia for Interest Rate Caps and Collars to be paid by the Borrower from their own
resources. An additional transaction fee charged at a rate of one hundredth of one percent
(0.01%) of the Loan amount per annum applies for the Borrower’s selection of a monthly
amortization schedule for the Loan. Such transaction fee shall be added to the interest rate
applicable to the Withdrawn Loan Balance and shall be payable monthly on each Payment
Date.
Amount: US$1,045 million
Operation Type
Development Policy Loan, two tranche operation: First tranche amounting to US$545
million to be disbursed upon effectiveness and second tranche mounting to US$500 million
be disbursed in FY2011.
Main Policy Areas
The proposed loan will support policy actions in the following areas:
Creating fiscal space to expand public investment through improvement in revenue
collection and rationalization of pension expenditures;
Reforming public services delivery through: (a) improved government processes for
registering businesses; (b) improved access to quality family health and emergency
care services; and (c) improved early development of poor children, better quality of
primary schools (Escolas do Amanhã) in high-conflict slum areas, and system-wide
advances in student learning outcomes;
Strengthening the institutional framework for efficient service delivery through: (a)
implementing a medium term expenditures framework and results-based management
tools within the public sector, and (b) the creation of the institutional framework for
public-private partnerships (PPPs) to invest in infrastructure and service delivery
projects with the private sector.
Key Outcome Indicators for
the first tranche (by January
31, 2011) and for the second
tranche (by January 31,
2012)
Reduced NPV of the pension system’s actuarial deficit over the next 50 years by17% or
R$6.3 billion of which R$3.1 billion from parametric reforms (first tranche) and
R$3.2Billion from the recapitalization measures (second tranche);
Improved revenue collection, evidenced by a 4 percent increase in ISS tax collections
through the introduction of electronic fiscal invoice system (Nota Fiscal Eletrônica);
Reduction in the number of days required to obtain a municipal business license in Rio
from 20 days in 2009 to 12.5 days in 2010;
Doubling of family health care coverage from a January 2009 baseline of 6 percent to a
projected 12 percent in December 2011;
Annual reductions in student within year and between year dropout rates and annual
improvement in the national and municipal education indices IDEB and IDE-Rio for
Escolas do Amanhã from the 2009 baseline; and annual expansion in enrollments in
ECD centers and pre-schools targeted to low-income communities from 29,921
(crèches) and 77,845 (preschools) in 2009 baseline by 3000 new openings a year;
Implementation of the initial year of a 3-5 years MTEF strategy with associated
expenditures plan and financing plan;
ii
Implementation of Results Based Management, evidenced by annual evaluation of
performance contracts signed by the mayor with line secretariats;
Improved efficiency in stock management reduces losses in the stock of goods in the
health sector from 20 percent to 10 percent;
Establishment of a framework to enable PPPs to invest in infrastructure and service
delivery projects, evidenced by at least one project prepared by the PPP unit.
Program Development
Objectives and Contribution
to the Country Partnership
Strategy (CPS)
The objective of the proposed operation is to assist the municipality of Rio de Janeiro in
creating fiscal space which will be used for investments to improve the quality and
efficiency of public service delivery, especially in poor areas, through innovative programs
in health, education and private sector development. Other investments will strengthen the
institutional framework for efficient service delivery through the implementation of a
medium term expenditures framework, results-based management with the public sector,
and PPPs with the private sector.
The proposed operation is fully consistent with and closely linked to the objectives of the
Brazil CPS, 2008–11, which include sound macroeconomic management; fiscal
consolidation; efficient public sector management; better investment climate; increased
quality of education and health expenditures, especially at the subnational level.
Risks and Risk Mitigation
The operation is subject to three main risks:
1. The main implementation risk of the operation is related to the fact that the city’s
administration is relatively new and may overestimate the pace of reforms or may not have
sufficient support from civil servants with longer experience in the public sector. As a
result, poor implementation of the agreed measures could result in delays in the second-
tranche disbursement. The Bank is supporting the efforts of the municipality to reinforce its
implementation capacity including through a Bank technical assistance loan in the main
areas of the loan, close supervision during implementation, as well as facilitating
knowledge exchanges with other countries and other subnational governments in Brazil.
2. The main political risk is related to the presidential and state elections in November
2010. Though the municipal government is not up for election, the administration may have
limited political space to implement deep reforms because it may face a complex political
situation and groups with entrenched political interests may oppose the proposed reforms.
In particular, this may be the case for pensions, where reform means reducing benefits for a
defined interest group. However, the design of the operation is a mitigating factor because
the reforms targeted in pensions are focused on future public servants which cause a lower
political risk. In addition, the preparation of the World Cup and the Olympics implies that
the federal and state government will likely support and foster continuity of the
municipality’s strategic programs.
3. The main risk in implementing the PPP program relates to the city’s weak institutional
capacity to manage an incipient PPP program as well as contingent liabilities that may
result from PPPs. The Bank is supporting the municipality in designing a well-planned and
executed capacity-building program and in the hiring of advisors to mitigate this risk. The
potential risks from contingent liabilities are mitigated through the setting up of an
institutional framework with adequate checks and balances and a guarantee fund that will
cover payments when called for. The institutional framework provides an additional
mitigation factor as it warrants an active role from the City’s treasury to assess the need for
guarantee, monitor and budget for potential contingent liabilities according to best
practices.
Operation ID Number
P111665
1
IBRD PROGRAM DOCUMENT FOR A PROPOSED
FISCAL CONSOLIDATION FOR EFFICIENCY AND GROWTH
DEVELOPMENT POLICY LOAN TO THE
MUNICIPALITY OF THE CITY OF RIO DE JANEIRO
I. INTRODUCTION
1. This document presents a proposed two-tranche Development Policy Loan
(DPL) of US$1,045 million to the Municipality of Rio de Janeiro (MoRJ) in Brazil.1 The
loan would support the MoRJ in its efforts to achieve faster growth and improve the quality
and coverage of social services, particularly in poor and violent areas of the city.
2. Among Brazilian cities, Rio is second only to São Paulo in population and
contribution to gross domestic product (GDP). Rio’s population was about 6.2 million in
2008 and its GDP was R$128 billion (US$57 billion) in 2007. The city is twice as large as
Uruguay in population and GDP. The city’s budget is Brazil’s 10th largest, behind the federal
government, the seven biggest states, and the city of São Paulo.
3. Rio is affected by social and economic inequalities. The poor comprise about 13
percent of the population, and the wealthiest 4 percent have incomes 44 times greater than the
poorest 8 percent, who earn the minimum wage or less. Poor people live in neighborhoods
often characterized as slums, called favelas, with inadequate water, sewerage, road access,
schools, and health facilities. In recent decades, slums have expanded both horizontally and
vertically—despite a number of municipal initiatives to limit them. The favelas are now home
to nearly 19 percent of the city’s population.
4. Rio’s social conditions are partly the result of a long period of economic decline.
The transfer of the national capital to Brasília in 1960 removed a primary engine of the city’s
economy. Like many other parts of Brazil, Rio then suffered from the economic stagnation
that began with the 1973 oil crisis and persisted through the international debt crisis of the
1980s and various domestic economic setbacks. But Rio fared worse than other key Brazilian
cities. While São Paulo, Recife, and Brasília continued to grow, Rio’s economy shrank at an
average annual rate of 1.1 percent between 1985 and 2003. As a result, formal-sector
employment levels stagnated and poverty rates did not fall as fast as they did in the rest of the
country. The city’s finances also suffered. Along with other Brazilian subnationals, Rio has
received a series of bailouts in which the federal government has assumed the majority of the
city’s outstanding obligations in return for fiscal reforms.
5. Rio is now poised for a turnaround. Brazil’s overall economic performance has
improved since the introduction of the Plano Real stabilization program in 1994. Rio’s fiscal
adjustment since 2000 has resulted in a more sustainable level of debt, and growth has picked
up since 2004, fueled by a positive domestic and international demand. Despite the
improvement, Rio’s economic growth is well below other state capital cities in Brazil. The
city is laying the foundations for faster growth by increasing investment in physical and
human capital and strengthening government institutions. Stepping-up growth will allow the
1 World Bank policy (OP 8.60) provides for DPLs to be extended to subnational governments but limits the
definition of subnational to states and provinces. A waiver is sought from the Board of Executive Directors of
the World Bank to this definition to allow this DPL to be extended to the Municipality of Rio de Janeiro. All
other provisions of Bank policy would remain applicable to this operation.
2
city to sustainably foster fiscal advances and respond to its unique social challenges. The
proposed operation will support: (i) policies to create fiscal space for physical investment; (ii)
innovations in service delivery to simplify businesses’ registration processes and improve the
quality of health and education services; and (iii) measures to modernize public sector
management. The city has been chosen to host the Soccer World Cup in 2014 and the
Summer Olympics in 2016. Even though those events do not drastically change the city’s
growth strategy, they will require frontloading some planned physical investment and can be
seen as opportunities for growth. Beyond the World Cup and Olympic Games, however,
challenges remain—in particular, improving public service delivery in poor areas and laying
the foundations for faster growth.
6. Since taking office in January 2009, the city’s administration has taken
significant steps to address these challenges and improve Rio’s prospects. To tackle the
immediate concerns about the efficiency of expenditures and the after effects of the global
financial crisis, it has slashed recurrent expenditures, temporarily frozen investment, and
launched an effort to upgrade tax administration. The city has also devised well-defined 4-
and 10-year development strategies based on: (a) generating fiscal space for capital
investment; (b) improving the quality of social services, particularly in low-income areas; and
(c) modernizing the city’s internal administrative processes to reduce costs and enhance
performance.
7. The proposed loan would enhance this strategy with three major components
that support continued improvements:
The fiscal space component will help generate additional resources for public
investment through measures to improve revenue collection and reduce pension
costs.
The service-delivery component will support expansion of innovative approaches to
primary and emergency health care as well as preschool and primary school
programs in low-income and violence-prone areas. This component will also help
improve government processes for registering businesses.
The public-sector management component will support the establishment of a
system of results agreements for key municipal functions and the implementation of
some elements of a medium-term expenditures framework. The component will also
support reforms in public procurement and management and establish a framework
to enable PPPs to invest in infrastructure and service delivery projects.
8. As a municipal DPL, the proposed operation represents an innovation in Bank
operations for three reasons. First, the DPL will support efforts to better align policies at
different levels of government—federal, state, and municipality. The DPL has been
designed in conjunction with the State of Rio de Janeiro Fiscal Sustainability, Human
Development, and Competitiveness DPL. The operation will thus help achieve better policy
integration and coordination at different levels of government. For instance, the DPL-
supported programs are tackling poor learning outcomes at the municipal level through
expanding early childhood education for low-income children, strengthening the teaching of
basic literacy skills, and providing targeted support for schools in high-crime areas. At the
state level, the focus is complementary and set on reducing the age-grade distortion, offering
over-aged students a chance to graduate on time by following a special compressed
3
curriculum with intensive teacher support. To the extent that this innovative approach proves
successful, it could be replicated in other Brazilian states and large municipalities—and
perhaps in other countries as well. Rio’s relatively high policy and institutional capacity and
level of development makes it a suitable place for the Bank to start an innovative development
model that directly engages with the city while vertically integrating the state and federal
levels.
9. Second, the proposed operation is the first of a new generation of policy reforms
geared at enhancing fiscal consolidation at the municipal level in Brazil. The proposed
operation closely resembles and shares its rationale with previous Bank DPL operations that
support fiscal consolidation at federal and state levels in Brazil. In the first generation of
DPLs, the Bank supported fiscal consolidation of the federal government; in the second
generation, the Bank addressed fiscal consolidation of the states of Ceará, Minas Gerais, Rio
Grande do Sul, and Alagôas. This third generation of reforms targets fiscal consolidation at
the municipal level.
10. Third, this proposed operation represents an innovation in Bank engagement
with cities that are the main providers of essential public services, making them critical
for the country’s success in promoting growth, reducing poverty, and ensuring that all
citizens receive services of equal quality. The Federal Constitution of 1988 makes municipal
governments autonomous entities of the Brazilian Federation, independent of both the state
and federal governments. The Constitution reserves for the municipalities the power to
legislate over matters of local interest and gives them principal responsibility for providing
essential public services, including education (until 9th
grade), health, sanitation, garbage
collection, and general urban infrastructure. Funding mechanisms for such services as health
and education allow the federal government to influence policy, but responsibility for
implementation resides with subnational entities, including municipalities.
11. The proposed operation will enable the Bank to support Rio with the
knowledge, expertise, and technical advice needed to implement reforms. In this respect,
the Bank will draw from experiences with subnational governments in Brazil, including
operations in Alagôas (Fiscal and Public Sector Reform, 2009), Rio Grande do Sul (Fiscal
Sustainability for Growth, 2008), and Minas Gerais (Partnership for Development, 2006).
These operations have provided the Bank with substantial subnational experience in the kind
of fiscal and public-sector management reforms now being pursued by Rio’s municipal
government.
12. The proposed operation and associated Bank support meet the criteria for
engagement with subnational governments in the CPS with Brazil for 2008–11. The
operation has been prepared based on the following principles of engagement: (a) the
municipality’s ownership of the program; (b) policy measures that respond to the
municipality’s present and future needs; and (c) a sound basis for a long-term partnership with
the Bank. As specified in the CPS, the preparation of this DPL has been approved by the
National Treasury Secretariat (STN).
4
II. COUNTRY AND MUNICIPALITY CONTEXT
A. CURRENT MACROECONOMIC OUTLOOK
13. The global economic crisis’ impact on the Brazilian economy was immediate
and strong, but the country has demonstrated significant resilience. Twelve consecutive
quarters of GDP growth since 2006 were interrupted by seasonally adjusted declines of 3.5
percent in fourth quarter 2008 and 0.9 percent in first quarter 2009. Based on fourth quarter
2009 data, Brazil had a year-on-year contraction of 0.2 percent for 2009. The decline owed
much to a 9.9 percent drop in investment.
14. Resurgent growth, solidifying aggregate demand, and record-low
unemployment indicate that a swift and strong economic recovery is underway. Seasonally adjusted growth resumed in second quarter 2009 and continued through the end of
the year. The recovery of domestic demand has been driven by a strong resumption of
investment starting in the second half of 2009 as well as a strengthening of consumption.
15. Industrial production, capacity utilization, retail sales and the jobless rate also
point to a buoyant first quarter 2010. Seasonally adjusted industrial output capacity
utilization and retail activity kept expanding at a fast pace (see Figure 1). Recovery in the
industrial sector has been driven mainly by manufacturing. A record number of jobs were
created in first quarter 2010, and the seasonally adjusted jobless rate was lower than a year
ago. The recovery is expected to continue in 2010 and beyond. Market expectations for GDP
growth for 2010 are close to the before-crisis growth peak. The fast pace of recovery and
seasonal and temporary factors led to increases in inflation, starting in October 2009 (see
Figure 2). It reached a seasonally adjusted 5.1 percent in March 2010, moving up the target
range’s center of 4.5 percent. In April, the central bank raised interest rates by 1 percentage
point. Markets expect that this move as well as possibly subsequent ones would reduce
inflation concerns for 2011. Market expectations for inflation are 5.2 percent for 2010.
16. Strong economic recovery is widening the current account deficit and fueling
international investors’ confidence in Brazil. Depressed global demand led to declines in
both imports and exports in 2009. The current account deficit narrowed in 2009, mostly
because of a smaller deficit in the services and income balance. The domestic and global
recovery in first quarter 2010 has increased the seasonally adjusted trade surplus, but these
factors were not sufficient to compensate for the widening of the services and income deficit.
As a result, the current account deficit is widening and expected to reach 3 percent of GDP in
2010 (see Figure 3). The Real has appreciated to its pre-crisis level—at about R$1.75 per
dollar. The exchange rate is increasing exporters’ concerns over declining competitiveness in
international markets. Interest rates are at record lows—with the SELIC policy rate at 9.75
percent. Even so, they are still attractive compared to rates in developed countries. In March
2010, the BOVESPA stock market index reached its highest level since June 2008, matching
its pre-crisis level (see Figure 4). Capital inflows have moved above their pre-crisis trend,
which led the government to impose a 2 percent tax on foreigners’ bond and equity
acquisitions and a 1.5 percent tax on American Depositary Receipts (ADRs) to slow portfolio
investment inflows. The country’s international reserves reached US$244 billion by the end of
March 2010, well above the pre-crisis peak. Sovereign spreads are below their pre-crisis
levels at about 170 basis points.
5
Figure 1: Industrial Production Activity Index and
Unemployment Rate, 2002-10
Figure 2: Inflation, 2002-10
Source: IPEA
Source: BCB
Figure 3: Current Account, 2002-10
Source: BCB
Figure 4: Ibovespa Stock Market Index, Sovereign Spreads, Exchange Rate, 2005-10
Source: LCSPE Macromonitoring Indicators: World Bank
0
2
4
6
8
10
12
14
90.0
95.0
100.0
105.0
110.0
115.0
120.0
125.0
130.0
135.0Jan-0
2
Aug
-02
Mar-
03
Oct-
03
May-0
4
Dec-0
4
Jul-05
Feb
-06
Sep
-06
Ap
r-07
No
v-0
7
Jun-0
8
Jan-0
9
Aug
-09
Mar-
10
(In
du
str
y A
cti
vit
y In
dex)
(Un
em
plo
ym
en
t R
ate
%
)
Industrial Production Activity Index and Unemployment Rate, 2002-10
Industrial Production Index (s.a) Unemployment Rate
-2
3
8
13
18
23
28
33
Feb
-02
Jun-0
2
Oct-
02
Feb
-03
Jun-0
3
Oct-
03
Feb
-04
Jun-0
4
Oct-
04
Feb
-05
Jun-0
5
Oct-
05
Feb
-06
Jun-0
6
Oct-
06
Feb
-07
Jun-0
7
Oct-
07
Feb
-08
Jun-0
8
Oct-
08
Feb
-09
Jun-0
9
Oct-
09
Feb
-10
12 - Month Accumulated Inflation, 2002-10
Consumer Price Index (IPCA) Wholesale Price Index, IPG-M.
-5
-3
-1
1
3
5
Oct-
02
Fe
b-0
3
Ju
n-0
3
Oct-
03
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b-0
4
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4
Oct-
04
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b-0
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05
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b-0
6
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6
Oct-
06
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b-0
7
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Oct-
07
Fe
b-0
8
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n-0
8
Oct-
08
Fe
b-0
9
Ju
n-0
9
Oct-
09
Fe
b-1
0
% o
f G
DP
Current Account and Foreign Direct Investment,
2002-10 (12 Months accumulated flows)
Current Account Foreign Direct Investment
1.5
1.7
1.9
2.1
2.3
2.5
2.7
2.9
3.1
100
200
300
400
500
600
700
800
900
Jan
-05
Ap
r-0
5
Au
g-0
5
Dec-0
5
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6
Jul-
06
No
v-0
6
Ma
r-0
7
Jun
-07
Oct-
07
Jan
-08
Ma
y-0
8
Sep
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Jan
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g-0
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Dec-0
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Ex
ch
an
ge R
ate
(R
$/U
S$
)
EM
BI
Sp
rea
ds
(Ba
sis
Po
int)
Brazil EMBI + Sovereign Spread and Exchange Rate, 2005-10
EMBIPLUS Exchange Rate
22000
32000
42000
52000
62000
72000
Jan
-05
Ap
r-0
5
Au
g-0
5
Dec-0
5
Ma
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6
Jul-
06
No
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6
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7
Jun
-07
Oct-
07
Jan
-08
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y-0
8
Sep
-08
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-09
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9
Au
g-0
9
Dec-0
9
Ma
r-1
0
Ind
ex
-E
nd
of
Da
y
IBOVESPA Stock Market Index, 2005-10
6
17. A favorable pre-crisis external environment and sound economic policy choices
helped foster resilience, create strong macroeconomic foundations, and restore economic
growth. Five factors have been at work. First, far-reaching structural reforms and price
stabilization in the 1990s were followed by consistent adoption of sound macroeconomic
policies in the past decade. Second, floating exchange rates and the accumulation of foreign
reserves have allowed Brazil to adjust well to external shocks. Third, adoption of an inflation-
targeting regime has contributed to lowering inflation to the center of the target range,
enabling the independent central bank to focus on countercyclical monetary policy. Fourth,
the Fiscal Responsibility Law (LRF) framework has generated significant primary surpluses,
which contributed to decreases in net debt and fiscal adjustments prior to the crisis. Fifth, a
pre-crisis boom in commodities and buoyant global demand helped dramatically reduce
Brazil’s fiscal and external vulnerabilities.
18. The strong fundamentals built in the last decade have allowed the use of a wide
range of policy tools. The government used its increased fiscal and external solvency and
enhanced credibility to adopt expansionary fiscal and monetary policies during the crisis.
Monetary, fiscal, and quasi-fiscal countercyclical policies have included lowering the SELIC
policy rate to a historical low of 8.75 percent, reducing the reserve requirement on financial
institutions, injecting credit into the financial system through public banks, extending credit
lines to exporters, and more modest tax exemption measures- mainly of the IPI tax.
19. In sum, the macroeconomic policy framework for Brazil is considered adequate
for the purposes of the proposed Development Policy Loan. Strong fundamentals built in
the last decade have allowed the country to smooth the impact of financial turmoil with
relative speed. The macroeconomic outlook reflects this strong resilience to external shocks.
In the baseline scenario (A), growth projections reflect a gradual recovery to 5.5 percent in
2010 and 4.8 percent for 2011 and debt dynamics indicate a continued reduction of debt levels
from 42.8 percent of GDP in 2009 to 38 percent of GDP in 2012. The inflation is expected to
pick up in 2010 and to lie above the target at 5 percent and get back to the center of the target
inflation in 2011. In the low case scenario (B) growth recovery is more gradual at 5.0 percent
in 2010 and at 4.5 percent in 2011. The inflation will reach 6 percent in 2010 and will recover
gradually the inflation target in 2012. In both scenarios, the macro framework is adequate
with net debt gradually decreasing and fiscal balances improving (see Table 1).
7
Table 1: Brazil Macroeconomic Outlook, 2009–12
20. Despite the country’s overall resilience, the crisis has put strains on the finances
of subnational governments, and these forces are likely to slow the resumption of growth
in some parts of the country. Subnational governments suffered considerable reductions in
fiscal revenues, both as a result of lower tax collections and reduced federal transfers. With
the hard budget constraints and limited credit access imposed by LRF, subnational
governments had limited space to implement countercyclical fiscal policies. Instead, they cut
discretionary expenditures, mainly investments. In Rio, economic activity suffered from the
crisis—in particular, industrial production and retail sales. However, tax revenues remained
resilient.
Political Context
21. Eduardo Paes (PMDB) was elected Rio’s mayor for four years at the end of
2008. His campaign platform promised renewed economic opportunities. Support for the
mayor comes mainly from the poorest segments of the city, but he has been gradually winning
support from the middle class as well. The mayor is a close political ally of President Lula
Indicators 2009
(A) (B) (A) (B) (A) (B)
National Accounts
Real GDP Growth (%) -0.2 5.5 5.0 4.8 4.5 4.5 4.2
Consumption Growth (%) 4.0 5.3 4.2 5.0 4.8 5.6 3.9
Investment Growth (%) -9.9 6.8 9.6 4.5 3.7 0.5 7.4
Investment (% of GDP) 16.6 19.2 17.9 19.1 17.8 18.3 18.2
Public sector 2.8 2.5 2.5 2.8 2.8 3.2 3.2
Private sector 13.8 16.6 15.4 16.2 15.0 15.1 15.0
Gross National Savings 14.6 15.7 14.6 15.5 14.3 15.3 15.2
External Sector
Trade Balance (US$ bi) 25.4 15.9 18.1 19.1 21.4 21.4 21.0
Current Account Balance (US$ bi) -24.3 -67.9 -65.6 -72.4 -69.8 -64.9 -64.9
Current Account Balance (% of GDP) -1.5 -3.5 -3.4 -3.6 -3.4 -3.0 -3.0
Foreign Direct Investment 25.9 33 33 35 35 35 35
International Reserves (US$ bi) 239 270 268 286 283 290 289
Debt Service to Exports (%) 28.6 12.0 12.0 12.6 12.6 11.7 11.6
Interest Payments to Exports (%) 9.1 4.7 4.6 4.8 4.7 4.7 4.6
Nominal Exchange Rate (eop) 1.7 1.76 1.8 1.8 1.8 1.9 1.9
Public Sector
PS. Primary Balance (% of GDP) 2.1 3.0 2.9 2.8 2.8 3.0 2.9
PS. Overall Balance (% of GDP) -3.3 -1.8 -2.1 -1.2 -1.5 -0.8 -0.9
Net Public Sector Debt (% of GDP) 42.8 42.0 42.3 39.2 39.7 37.7 38.4
Gross Gen. Gov. Debt (% of GDP) 62.8 70.0 70.0 68.0 68.0 66.0 66.0
Prices and Economic Activity
Consumer Inflation (%) 4.3 5.0 5.5 4.5 4.8 4.5 4.5
Wholesale Inflation (%) -1.7 6.0 6.8 5.0 5.2 4.5 4.5
Headline Interest Rate (% eop) 8.8 10.5 10.5 10.5 10.5 10.0 10.0
Unemployment (%) 8.1 6.9 6.9 6.5 6.5 6.5 6.5
Industrial Cap. Utilization (%) 79.8 85.0 85.0 86.3 86.3 86.0 86.0
Source: IMF, BCB, IBGE, WB Calaculation
2010 2011 2012
8
(PT) and Rio de Janeiro State Governor Sérgio Cabral, who is from his political party
(PMDB). Up for re-election in October 2010, Governor Cabral is currently leading the polls.
22. Regardless of who wins the upcoming federal and state elections in October
2010, the political leadership of Rio municipality is expected to receive continued
support. A change in political leadership at the state level is not likely to have a significant
effect on policy continuity and relations with the city. At the national level, any of the two
leading presidential candidates—São Paulo State Governor José Serra (PSDB) and Minister
Dilma Rousseff (PT)—share broad development priorities and would likely maintain agreed
cooperation with the city. In addition, the ―halo effect‖ of the World Cup and Olympics would
effectively shield the municipal government as both the state of Rio and the federal
government are committed to making those events a success.
B. RECENT ECONOMIC DEVELOPMENTS IN THE CITY OF RIO DE JANEIRO
23. Rio de Janeiro’s municipal government is comparable in size to a state
government or small country. Rio’s GDP is the second largest among Brazil’s cities, trailing
only São Paulo, and fifth when compared to state governments. Measured against countries,
Rio has a GDP about twice as large as that of Uruguay or Costa Rica. In 2009, the city had a
budget of R$11.3 billion (US$5.1 billion), including capital transfers. It made Rio Brazil’s
10th
largest public sector entity—behind the federal government, seven state governments,
and São Paulo city. In a city of more than 2 million households and a high population density,
Rio’s municipal government is the key actor in social and economic development. These
responsibilities generate large expenditure needs.
24. The city of Rio de Janeiro has experienced a trend of economic deterioration. In
the 1960s, economic activity migrated to other states, mainly São Paulo. First, manufacturing
left and then the financial sector, leading to declines in the flow of resources that had
supported the city’s industrialization in previous decades. Industrial production dropped
significantly the first part of the 1980s, and the city’s share of Brazil’s real GDP fell
significantly over the next two decades. Since then, Rio’s growth has picked up, although at a
lower level than Brazil’s other capital cities (see Figure 5).
9
Figure 5: Municipal GDP Real Annual Growth, 1985-2003 and 2004-07
Source: IBGE, McKinsey (2006).
25. Rio’s economy boomed from 2004 to 2007, led by the performance in services.
The service sector grew strongly during 2004-07, reflecting the demand from a large
population of federal retirees and the presence of big state-owned enterprises. In 2007,
services represented about two-thirds of the city’s economy (see Figure 6). In the three-year
boom, retail grew robustly, led by sales in construction materials, cars, and pharmacy
products. Fiscal revenues are mostly based on services and real estate taxes. They have
performed well, boosted by the services needs of important oil-based industries, the real estate
boom, and reforms to improve tax-collection efficiency. Industrial production performance
lagged behind the country as a whole, with many years of decline that reduced it to about 10
percent of the city’s economy.
0% 2% 4% 6% 8%
Rio de Janeiro Fortaleza
São Paulo
Porto Alegre Recife
Brasília Curitiba
Salvador Belo Horizonte
Manaus
Municipal GDP Real Annual Growth, 2004-07
4.7 percent 2.8 percent
1.7 percent 1.6 percent
1.1 percent 0.3 percent
0.2 percent - 0.1 percent
- 1.1 percent - 1.1 percent
Manaus Brasilia Recife
Fortaleza Belo Horizonte
São Paulo Curitiba
Salvador Porto Alegre
Rio de Janeiro
Municipal GDP Real Annual Growth 1985-2003
10
Figure 6: Rio de Janeiro and Brazil, GDP decomposition, 2007
Source: Municipal Secretariat of Finance
26. Going forward, Rio’s growth will continue to be anchored by services—tourism,
call centers, telecommunication, as well as energy and knowledge-based services. Improvements in infrastructure and human capital, coupled with reforms to improve the
business environment, should thus be critical for enhancing the performance of Rio’s
economy in the medium term. Economic growth should in turn contribute to fiscal
consolidation through increased revenues and improved debt dynamics.
Federal, State, and Municipality Interactions
27. Municipal governments are autonomous entities, providing essential public
services in Brazil. The Constitution of 1988 gives the same legal status to states and
municipalities, greatly expanding their spending obligations and increasing public-sector
employment benefits. This constitution also increased revenue-sharing transfers to states and
municipalities and earmarked revenues for social responsibilities. As a result, municipal
governments like Rio’s became the main providers of essential public services in Brazil. Rio’s
large service delivery responsibilities imply large expenditures needs. At the same time,
municipal governments became autonomous entities in the Brazilian Federation, independent
from both state and federal authorities. Hence, policy reforms cannot be imposed on Rio by
higher levels of government; the initiative must come from the city itself.
28. The fiscal arrangement between the municipality and the federal and state
governments is appropriate for the purpose of the proposed DPL. The municipality
receives from the state transfers stemming from ICMS (Brazilian State Value-Added Tax) and
IPVA taxes (Tax on Motor Vehicle Property), oil royalties, and FUNDEB (Fund for
Maintenance and Development of Primary Education and of Teacher’s Valorization, the fund
for basic education).
Pesos Setoriais no PIB (2007)
0%
10%
67%
23%
5%
24%
14%
56%
0%
10%
20%
30%
40%
50%
60%
70%
Agropecuária Indústria Serviços Impostos sobre produtos
Município do Rio de Janeiro Brasil
Agribusiness Industry Services Taxes on products
Municipality of Rio de Janeiro Brazil
11
Table 2: Municipal transfers revenues (expressed as percentage of total revenues), 2004-09
Source: Municipal Secretariat of Finance
29. The macroeconomic framework of the state of Rio is considered adequate and
its fiscal situation is deemed sustainable. Revenue transfers from Rio state to Rio
municipality should not be affected in the medium term. Rio state transfers to the city
benefited from a favorable economic environment in Brazil and worldwide, a boom in
commodity prices that increased oil sector royalties, and significant improvements in tax
collection efforts (ICMS). Between 2004 and 2008, Rio state’s tax revenues increased by 25
percent, largely due to growth in ICMS collections and an 80 percent rise in oil and gas sector
revenues. During the financial turmoil in 2009, the municipality of Rio recorded increasing
transfers and tax revenues because the economies of both the state and the city are heavily
based on services.
Fiscal Situation of the Municipality of Rio de Janeiro
30. After continual fiscal deterioration through the 1990s, Rio de Janeiro has
achieved some fiscal consolidation. The city produced a strong fiscal-adjustment effort in
the past decade through compliance with the LRF’s strict borrowing controls.2 Unfortunately,
this fiscal adjustment was largely done by reducing investment. As a share of total
expenditures, it fell from 11 percent in 2004 to 9 percent in 2008. However, efficiency gains
remain to be achieved to improve expenditure quality. During the financial crisis, investments
have been cut to 4 percent of total expenditures to generate a primary surplus in 2009 (see
Figure 7).
31. Despite fiscal adjustment, debt reduction, and compliance with LRF, Rio still
faces significant mandated expenditures. The city needs to continue the process of fiscal
consolidation to improve the composition and quality of expenditures. Personnel outlays have
been increasing and now represent more than 50 percent of current expenditures. The growth
of mandated expenditures in health, education, pensions, and debt service exerts a strong
pressure on municipal finances. Therefore, the set of discretionary expenses that could be
reduced would be mostly limited to investment. Debt service as represented by interest
2 The signing of the debt renegotiation contracts with the National Treasury Secretariat (STN) in 1997 and the
enactment of the LRF in 2000 obligated subnational governments to adopt fiscal adjustment efforts by
incorporating hard budget constraints into a single, unifying framework. Under Law 9496 of September 1997
and the Provisional Measure 2185 of 2000, the STN refinanced the bond debt of 25 states and 180 municipalities
over 30 years. The strict observance of the debt renegotiation contracts and the LRF resulted in significant
improvements in subnational governments’ fiscal performance and a decline in subnational indebtedness from 18
percent of GDP in 2003 to 14 percent in 2008.
2004 2005 2006 2007 2008 2009
Federal Transfers 15% 11% 9% 14% 11% 11%
of which royalties 0.5% 0.6% 0.8% 0.7% 0.6% 0.4%
State Transfers 17% 19% 19% 16% 15% 14%
of which royalties 0.7% 0.9% 1.0% 0.8% 1.0% 0.7%
Multigovernamental Transfers (FUNDEB) 9% 9% 9% 9% 9% 10%
Capital Transfers 0% 0% 1% 0% 1% 1%
Total Transfers (% of total Revenue) 41% 39% 38% 39% 37% 36%
12
payments and net amortizations are still a considerable part of expenditures, and the LRF
prevents the municipality from directly contracting new external credit operations.3
Figure 7: Rio de Janeiro’s Investments, 2004–09
Source: Municipal Secretariat of Finance
32. Rising deficits in the civil service pension system are another culprit in the
increase of current expenses. Retired personnel and their beneficiaries (survivors) represent
44 percent of all municipal claimants, and pension benefits consume more than 40 percent of
total personnel expenditures. The difference between the pension scheme’s contributions and
benefits is projected to reach almost 10 percent of Rio’s net current revenues in the next five
to ten years.
33. Pension system imbalances also affect the fiscal situation of the three levels of
government in Brazil. As a result, the federal government amended the Constitution in 2004
to authorize expenditure reductions in select pension benefits and specific increases in social
security contributions. Rio’s pensions systems have yet to take advantage of those provisions.
34. Despite being discretionary, public outlays for goods and services have
contributed to expenditure rigidity because they are increasingly associated with
recurrent service delivery obligations. Furthermore, some investment expenditures generate
future operating costs that lead to further budget increases.
35. As a result of past excessive borrowing and high interest costs, debt service also
consumes a significant portion of Rio’s revenues. Projections indicate that Rio will
continue to pay the LRF cap of 13 percent of its net current revenues for debt service until
3 The LRF prevents highly indebted states to access credit operations, except for debt restructuring. The LRF
explicitly prohibits debt refinancing operations between different levels of government, which moderates the
moral hazard problem in intergovernmental fiscal relations derived from sequential bailouts. It also set limits on
personnel costs, credit operations, total debt, debt services, and guarantees. Under Senate resolutions 40 and 43,
borrowing is prohibited if: (i) consolidated net debt exceeds two times net current revenue (NCR); (ii) new credit
operations exceeds 16 percent of NCR and; (iii) debt service exceeds 11.5 percent of NCR. In addition,
borrowing is prohibited if it violates the debt reduction schedules set by the debt renegotiation contracts under
Law 9496, and issuance of subnational governments´ bonds is prohibited through 2020 for states with debt less
than their NCR and through 2025 for other states.
0%
2%
4%
6%
8%
10%
12%
-
200,000
400,000
600,000
800,000
1,000,000
1,200,000
1,400,000
2004 2005 2006 2007 2008 2009
% o
f To
tal
Exp
en
dit
ure
Tho
usa
nd
R$
Rio de Janeiro's Investments, 2004-09
Gross Capital Formation
Financial Investments
Gross Capital Formation (% of total expenditure)
Financial Investments (% of total expenditure)
13
2012. Assuming an annual real growth rate of 3.5 percent for municipal revenues, Rio will
begin to pay down the stock of residuals by 2011. Even if the debt path is declining, the large
debt service obligations prevent the municipality from new borrowing, unless it is for debt
restructuring.
36. Rio’s expenditure program is considered adequate for the purposes of the
proposed DPL. The evolution of revenues, expenditures, and fiscal balances from 2004 to
2008 indicates that Rio’s fiscal performance has improved. During this period, the primary
balance recorded average surpluses of R$348 billion and grew by 28 percent. In 2009, the city
generated a primary surplus of R$1.394 billion by drastically cutting gross capital investment.
The fiscal adjustment was based on the 19 percent growth in municipal revenues over the four
years. Revenue growth was mostly driven by increased Tax on Services (ISS) collections,
which in 2009 accounted for 44 percent of total revenues (see Figure 8). After 2006, revenue
growth accelerated with the faster growth in Brazil’s economy. The municipality was less
successful in controlling its current expenditures, particularly those related to wages and
salaries and goods and services. After tightly controlling expenditures from 2004 to 2006,
when they grew by a mere 3 percent, current expenditures ballooned from 2006 to 2008,
growing by 18 percent (see Table 3).
Figure 8: Revenue Decomposition as of 2009 (percent of Total Revenue)
Source: Secretaria Municipal de Fazenda.
Tax Revenue44%
Social Contributions
7%
Other Current Revenue
13%
ICMS10%
FUNDEB10%
SUS8%
IPVA3%
Royalties1%
Others4%
Capital Transfers1%
Transfers36%
Revenue Structure as of 2009- Transfers Composition -
Social Contributions
7%
Other Current Revenue
13%
Transfers36%
IPTU11%
ISS24%
ITBI3%
Impostos3%IRRF
3%
Tax Revenue44%
Revenue Structure as of 2009- Taxes Composition -
14
Table 3: Government Finance Statistics Figures, 2004–09
(In thousands of Reais)
Source: Secretaria Municipal de Fazenda, MoRJ, and staff calculations.
37. By 2009, the city’s macroeconomic and fiscal situation was sound and in
compliance with the prudential limits set out in the LRF. In fact, strong revenue
performance and debt reduction have allowed the municipality to improve in all indicators
monitored by the federal treasury under the LRF. These are related to personnel expenditures,
indebtedness, revenue collection, and debt services (see Table 3 and Table 4).
Table 4: Evolution of Fiscal Responsibility Law (LRF) Indicators
(R$ Thousand of 2009)
Source: Secretaria Municipal de Fazenda
38. Net consolidated debt significantly decreased from 79 percent of NCR in 2004 to
25.4 percent five years later. Although the outstanding consolidated debt decreased during
the period, the decrease in net consolidated debt has been reinforced by the increasing sales of
financial assets, which drastically reduced the stock of net consolidated debt (see Table 5).
2004 2005 2006 2007 2008 2009
I. REVENUE 9,527,430 9,109,707 9,506,243 10,405,360 11,248,365 11,471,969
Taxes 3,322,995 3,498,812 3,694,426 3,958,400 4,782,939 5,059,928
Social Contributions 624,442 626,059 685,066 725,444 787,267 793,059
Transfers 3,952,279 3,575,234 3,676,009 4,141,131 4,148,077 4,176,040
Other Revenues 1,627,713 1,409,602 1,450,742 1,580,385 1,530,083 1,442,943
II. EXPENSE 8,185,536 8,239,614 8,454,166 9,289,034 9,972,847 9,908,361
Compensation of Employees 3,580,714 3,689,421 3,824,790 3,932,621 4,496,238 4,372,848
Goods and Services 2,663,282 2,520,435 2,477,338 3,166,629 3,105,180 3,006,165
Interest Payments (paid) 544,765 567,366 590,656 597,807 615,614 679,796
Pensions 1,396,775 1,462,391 1,561,382 1,591,977 1,755,816 1,849,552
III GROSS OPERATING BALANCE (I - II) 1,341,894 870,093 1,052,077 1,116,326 1,275,518 1,563,608
IV. TRANSACTIONS IN NON FINANCIAL ASSETS 910,956 663,128 787,681 964,143 879,670 400,729
V.PRIMARY BALANCE (VI + Net Int. Payments) 439,419 247,238 314,781 293,350 519,614 1,393,988
VI. NET LENDING / BORROWING (III - IV) 430,938 206,965 264,396 152,183 395,849 1,162,879
VII. TRANSACTIONS IN FINANCIAL ASSETS AND LIABILITIES -17,196 -219,520 164,465 -298,543 -599,948 -265,844
New Loans 241,063 89,366 26,356 9,867 50,904 29,970
Amortizations net 216,063 228,551 265,641 255,968 250,426 272,086
Amortizations paid 285,098 303,077 347,032 343,257 358,769 376,697
Amortizations received 69,036 74,526 81,391 87,289 108,342 104,611
Asset sales 2,454 23,142 429,329 8,241 20,315 60,631
Financial Investments 44,650 103,476 25,578 60,683 420,739 84,359
TOTAL BALANCE (VI + VII) 413,742 -12,555 428,861 -146,360 -204,099 897,035
Legal
Limit
% NCR VALUE % NCR VALUE % NCR VALUE % NCR VALUE % NCR VALUE % NCR VALUE % NCR
Personnel Expenditures ≤ 60% 3,922,658 46.0% 4,416,367 52.5% 4,711,965 53.8% 4,465,594 46.8% 5,208,325 51.7% 5,153,217 49.5%
Of which Executive ≤ 54% 3,670,000 43.1% 4,143,600 49.3% 4,422,273 50.5% 4,171,445 43.7% 4,909,711 48.7% 4,842,724 46.6%
Of which Legislative ≤ 6% 252,658 3.0% 272,767 3.2% 289,692 3.3% 294,149 3.1% 298,614 3.0% 310,493 3.0%
Net Consolidated Debt ≤ 120% 6,736,566 79.1% 5,339,832 63.5% 4,527,698 51.7% 3,974,103 41.7% 4,844,328 48.0% 2,638,916 25.4%
Credit Operations Revenues ≤ 16% 241,063 2.8% 89,366 1.1% 26,356 0.3% 9,867 0.1% 50,904 0.5% 29,970 0.3%
Debt Services ≤ 11,5% 829,864 9.7% 870,444 10.3% 937,689 10.7% 941,064 9.9% 974,382 9.7% 1,056,493 10.2%
8,519,970 8,412,162 8,750,525 9,536,920 10,083,441 10,401,075
2009
Net Current Revenue (NCR)
Indicators2004 2005 2006 2007 2008
15
Table 5: Evolution and Composition of Net Consolidated Debt, 2004-09
(R$ Thousand of 2009)
Source: Secretaria Municipal de Fazenda
Economic and Fiscal Impact of the Global Financial Crisis
39. The global financial crisis had some temporary effects on economic activity. The
growth rate of commercial activity fell 2 percentage points from the third to fourth quarter
2008, led by declining sales for cars and auto parts, construction material, and clothing. Retail
growth slowed, and industrial production growth dropped significantly due to poor results
from the metallurgic sector, the pharmaceutical industry, and the beverages industry.
40. However, the financial crisis had only a mild overall impact on the
municipality’s macro and fiscal situation. This is due to the fact that Rio’s tax revenues are
mainly based on services (ISS) and on real estate (IPTU), which were both resilient to the
crisis. Overall, tax revenues and social security contributions increased by 5 percent from
2008 to 2009, while current transfers remained at the same level. For instance, the state
transfers linked to the industrial activity (IPI-EXP) decreased by 19 percent in 2009, but they
account for only 0.7 percent of the transfers received by the municipality. Capital transfers,
which represent 1 percent of total revenues, decreased about 15 percent. Other current
revenues, which include interest revenues and the industrial and services revenues, which
amount to 13 percent of total revenues, experienced similar decreases.
41. Rio’s unemployment rates slightly worsened in the months following the crisis,
but they have stabilized and even improved with the midyear recovery. The city’s
unemployment rate had been steadily improving prior to the crisis, falling from 8.3 percent in
2002 to about 5 percent in 2008. With the crisis, the rate increased for a few months before
resuming its downward trend. Overall, the employment rate has been more resilient in Rio
than in the rest of Brazil.
42. In 2009, the municipal government cut capital expenditures. Two main reasons
motivated this decision: First, upon taking office in January 2009, government authorities
froze expenditures and investment to allow time to review current outlays and elaborate a
municipal strategic vision. Second, in anticipation of potential adverse effects from the global
crisis, the administration reduced capital expenditures. This allowed the administration to
generate a primary surplus. Only debt service and personnel expenditures continued to
increase. During the period, primary revenues rose 5.8 percent and primary expenditures
increased 1.8 percent.
2004 2005 2006 2007 2008 2009
Consolidated Debt (I) 10,455,412 9,881,702 9,723,694 9,479,292 10,055,560 9,094,454
External Debt 1,041,423 895,162 760,397 563,297 762,693 504,487
Domestic Debt 9,413,989 8,986,540 8,963,297 8,915,995 9,292,867 8,589,967
National Treasury (STN) 8,337,338 7,953,979 7,872,718 7,898,351 7,965,554 7,246,925
Banks 182,273 162,773 147,929 128,678 149,365 146,262
Other Debts 894,379 869,788 942,649 888,966 1,177,947 1,196,780
Financial Assets (II) 3,718,846 4,541,870 5,195,996 5,505,188 5,211,232 6,455,538
Net Consolidated Debt (I)-(II) 6,736,566 5,339,832 4,527,698 3,974,103 4,844,328 2,638,916
Net Consolidated Debt/ Net Current Revenues (≤ 120%) 79% 63% 52% 42% 48% 25%
16
C. MACROECONOMIC OUTLOOK AND DEBT SUSTAINABILITY IN THE
MUNICIPALITY OF RIO DE JANEIRO
Macroeconomic Outlook for 2010–14
43. Rio’s medium-term and projected fiscal accounts show sustainable trends, and
the macroeconomic framework is adequate. Tax revenues and current transfers are
expected to be strong in 2010–14 because the municipality’s economy relies mainly on
services. Revenues driven by the tax on services (ISS) were resilient in 2009 and are projected
to keep growing for 2010-14. ISS administration is improving collections and will continue to
do so with the implementation of an electronic fiscal invoice (NFE). A user charge on public
lighting will bring significant additional revenues. On the expenditures side, however,
intrinsic rigidities related to personnel expenditures will continue to increase from previous
years, and gross capital formation will resume after 2009. Overall, fiscal balances are
expected to fall in 2011 as investment begins to recover, and they become increasingly
sustainable from 2012 onward (see Table 6).4
Table 6: Rio de Janeiro, Fiscal Projections, 2010-2014
(R$ Thousand of 2009)
Source: WB Staff estimates
Figures adjusted by the Consumer Price Index (IPCA)
44. Fiscal revenues are expected to be driven by tax receipts—in particular, the levy
on urban land and property (IPTU) and the ISS—and by current transfers, especially
4 These projections do not include the outcome of the proposed DPL operation.
2009 2010* 2011* 2012* 2013* 2014*
I. Total Revenue 11,471,969 11,957,152 13,006,262 14,133,084 15,353,467 16,675,532
Tax Revenue 5,059,928 5,661,726 6,249,025 6,884,495 7,574,675 8,324,431
Social Contributions 793,059 849,366 905,339 965,001 1,028,594 1,096,379
Other Current Revenue 1,442,943 878,231 917,751 959,050 1,002,207 1,047,306
Transfers 4,176,040 4,567,829 4,934,147 5,324,539 5,747,991 6,207,416
Current Transfers 4,055,356 4,440,508 4,801,096 5,185,501 5,602,696 6,055,583
Capital Transfers 120,684 127,321 133,051 139,038 145,295 151,833
Memo Items:
Net Current revenue 10,401,075 10,788,747 11,785,279 12,857,157 14,020,123 15,282,188
II. Total Expenditures 9,908,361 10,080,709 10,440,646 10,838,203 11,385,179 11,951,046
Employee Compensation 4,372,848 4,364,631 4,652,260 4,958,844 5,285,632 5,633,955
Goods and Services 3,006,165 3,156,473 3,298,514 3,446,947 3,602,060 3,764,153
Interest Payments 679,796 784,106 674,408 598,421 551,696 540,898
Transfers - - - - -
Pensions 1,849,552 1,775,499 1,815,464 1,833,990 1,945,792 2,012,040
III. Gross Operating Balance 1,563,608 1,876,443 2,565,617 3,294,882 3,968,288 4,724,487
IV. Investment in Non-Financial Assets 400,729 883,171 2,014,497 2,889,478 3,471,881 3,901,347
V. Primary Balance 1,393,988 1,306,256 733,206 489,349 510,474 802,217
(Primary Balance / NCR) 13% 12% 6% 4% 4% 5%
VI. Net Lending / Borrowing (Overall Balance) 1,162,879 993,272 551,120 405,404 496,406 823,140
17
those from the state, such as the ICMS and FUNDEB.5 The economies of Rio state and
Rio municipality are both heavily based on services, with industries accounting for only a
small share of GDP. This explains why the state transfers and the ISS tax are the sources of
growth of municipal revenues and why the state and the municipality’s economies were
resilient during a financial crisis that affected mainly industrial activity.
45. The liquidity gains and cost reductions from the debt restructuring of 20
percent of the municipality’s debt with the federal government would amount to about
R$1 billion in interest savings for the next three years, providing significant fiscal space
for financing capital expenses. In addition, the reforms supported by the operation will lead
to improvements in the ―above the line‖ variables—such as increased total revenues from the
tax measures and decreased interest, personnel, pensions, and operating expenditures.
Revenue increases and expenditure containment will further strengthen the municipality’s
medium-term fiscal consolidation and investment strategy.
46. Discovery of the Pre-Sal oil reserves will bring modest revenues to the city. Oil
parcels off the Brazilian seacoast near Rio de Janeiro and São Paulo have fueled speculation
about new sources of revenue as well as new revenue-sharing rules for the state, federal, and
municipal governments. In reality, the situation is very complex and subject to many
uncertainties. Therefore, the team chose to be conservative and account for only modest
revenues from Pre-Sal in the medium-term budget.
47. The legislation governing oil revenue may change to the detriment of the city.
Under current rules, Rio as an oil-producing municipality is entitled to royalties and special
participation rights for exploited fields and to federal and state transfers related to the oil
revenues. Although royalty revenues are shared among the Brazilian states, municipalities, the
National Treasury, public R&D funds and others, these rules, if left in place for the new
fields’ production, would double or triple Rio’s current oil revenue. However, the revenue-
sharing rules are under tough political negotiations at the federal and state levels, which could
expand the number of beneficiary states and municipalities and significantly reduce the share
allocated to Rio.
48. Other states and municipalities may receive a greater share of oil revenues. In
March 2010, the Brazilian House of Representatives approved an amendment to the oil-
reform bill that would force the three largest oil-producing states—Rio de Janeiro, Espirito
Santo, and São Paulo—to share more revenue from new fields with other states. The new
royalty revenue sharing system could potentially cause a revenue loss of almost R$5-7 billion
to Rio state. This potential drop in the state revenue would reduce transfers to Rio
municipality. In addition, the new revenue-sharing rule would also potentially reduce the
city’s direct oil revenue. The reform proposal now goes to the Senate for passage, months
before the start of the presidential campaign. If vetoed, the division of royalties will follow the
current methodology. Under it, states and municipalities that do not produce oil or are not
affected by loading and unloading of the product would only share 7.5 percent of revenue.
5 A detailed discussion on the fiscal assumptions is available in Annex 5.
18
Risks and Vulnerabilities
49. The main medium-term macroeconomic risk affecting the fiscal balances is
related to continued increases in personnel expenditures and pension deficits. On the
expenditure side, salary growth is the main driver of government expenses, including the
pension benefits that are based upon the latest salary. This suggests that controlling current
personnel expenditures and salary adjustments is important to strengthening fiscal balances.
Pension expenses also affect the sustainability of the fiscal balances, especially with Rio’
aging population.
50. On the revenue side, some fiscal components are rigid. Most sensitive would be
items that are service-driven, such as ISS taxes and ICMS transfers. However, the service
sector is expected to grow steadily. The recent financial crisis has demonstrated the strong
resilience of the economy to external shocks.
51. Risks related to oil revenue stem from the price of oil traded in international
markets. Oil production is expected to remain stable and then increase as new fields enter
into production. Such price fluctuations benefitted Brazil during the commodities boom of
2007-08. However, the global financial crisis depressed commodity prices, and royalty
revenues decreased from R$178 million in 2008 to R$122 million in 2009.
52. The upcoming Olympic Games in Rio de Janeiro are not expected to have a
negative effect on the municipality’s fiscal position. The federal government is partnering
with the state and municipal governments in financing the capital investment projects (see
Table 7 and Box 1). Unlike other recent Olympic Games, the budget will be guaranteed by the
Federal Government, not by the private sector. Therefore, any additional costs would fall
neither on the state nor on the municipality.
53. The Olympics are accelerating the execution of the existing development strategy. The municipality is undertaking infrastructure projects that are integral to its development
strategy, such as the Rapid Transit Bus lanes that will benefit the Olympics. Moreover,
funding from the federal government will partly finance this project. Thus, the incremental
investment expenditures associated with the Olympic Games are expected to be only a small
fraction of the city’s capital expenditures over the next four years. Table 7 details the capital
expenditure schedule from 2009 to 2013, including the share of Olympic expenditures. Other
expenses, such as security, are of the state’s responsibility.
Table 7: Rio de Janeiro, Capital Expenditure by Sector, 2009-13 ( percent ot total expenditure)
SECTOR SOURCE OF FINANCING 2009 (Actual) 2010 (Budget) 2011 2012 2013
HEALTH AGREEMENT AND CREDIT OPERATION 2% 14% 4% 0% 0%
OTHER SOURCES 98% 86% 96% 100% 100%
3% 8% 5% 9% 6%
EDUCATION AGREEMENT AND CREDIT OPERATION 0% 2% 3% 4% 3%
OTHER SOURCES 100% 98% 97% 96% 97%
12% 6% 6% 7% 14%
INFRASTRUCTURE AGREEMENT AND CREDIT OPERATION 73% 60% 55% 51% 24%
OTHER SOURCES 27% 40% 45% 49% 76%
76% 66% 71% 69% 61%
OLYMPIC GAMES AGREEMENT AND CREDIT OPERATION 25% 33%
OTHER SOURCES 75% 67% 100% 100%
0% 2% 5% 1% 0%
OTHER AGREEMENT AND CREDIT OPERATION 16% 62% 75% 72% 74%
OTHER SOURCES 84% 38% 25% 28% 26%
9% 18% 13% 13% 20%
100% 100% 100% 100% 100%
OTHER Total
TOTAL
CAPITAL EXPENDITURE BY SECTOR, 2009-13
HEALTH Total
EDUCATION Total
INFRASTRUCTURE Total
OLYMPIC GAMES Total
19
Box 1: Fiscal Impact of the Olympic Games in Rio de Janeiro in 2016a
The financing of the 2016 Olympic Games is covered by two budgets. The one for the Organizing Committee for
the Olympic Games (OCOG) includes all expenditures directly related to the games, such as the opening and
closing events. The non-OCOG budget is the responsibility of the federal, state, and municipal governments.
It covers public and private investments to build new sports venues and infrastructure works, including
airport expansion, transport improvements, and other operations (See Table 7).
The total OCOG budget is US$2.8 billion, with 31 percent from the International Olympic Committee (IOC), 45
percent from such private sources as marketing, ticket sales, and licensing, and 24 percent from the three levels
of government. Hence, conservative estimates show that the state, federal, and municipal governments need to
cover US$700 million, or US$233 million each.
The total non-OCOG budget is US$11.6 billion, with 34 percent allotted to projects already under way, 35
percent to projects already planned, and 31 percent to new projects.
The city’s expected total cost is approximately US$4 billion for 2010–16, which represents an average increase
of approximately 4.2 percent in total expenditures. Financing will be covered by loans from the Federal
Government.
Among the investments associated to the Olympic Games, the City will be in charge of the improvement of the
new Rapid Transit Bus lanes and new rail systems, both of which will be financed in a large extent by the
Federal Government. This project, which would contribute to the city’s growth, is expected to be implemented
through 2012. It is worth noting that the Rio will host one site of the 2014 FIFA World Cup, which will
accelerate the development of transport infrastructure well before 2016. Most of the sport venues will also be
paid by the Federal Government. The other major expenses are related to security (investments that will remain
after the games) and improvements in environmental management.
Source: http://www.rio2016.org.br/en/.
Fiscal Responsibility Law Indicators Projections
54. The main LRF indicators show a sustainable path for 2010–14. Personnel
expenditures as a share of net current revenue (NCR) are assumed to grow in line with the
personnel growth rate and the IPCA inflation rate (see Figure 9). Projections indicate a slight
increase after 2010—but remaining below the limit of 60 percent of NCR. The net
consolidated-debt-to-NCR indicator is expected to decrease from 2010 onward. The decline is
driven by projected surpluses in the overall fiscal balance, including net interest payments and
an NCR growth rate higher than the IGP inflation rate, which corrects the outstanding debt
stock. The jump projected for the net consolidated-debt-to-NCR indicator in 2010 results from
a conservative assumption that foresees no sales of financial assets. Given the amortizations
and the interest payments profile, debt service as a share of NCR follows a sustainable path,
with no major debt principal repayments expected for the next five years. (See Annex 5 for a
detailed analysis.)
20
Figure 9: Fiscal Responsibility Law, 2004-14
Source: WB Staff estimates, Municipal Secretariat of Finance
III. THE GOVERNMENT’S PROGRAM AND PARTICIPATORY PROCESSES
A. THE GOVERNMENT PROGRAM
55. The administration that took office in January 2009 won the municipal elections
on a platform of three main pillars: maintaining fiscal responsibility, implementing a
public sector modernization reform, and promoting private-sector development. Those
pillars support the administration’s objectives of guaranteeing equal opportunities for Rio’s
children and young people by improving public service delivery. The administrative reform
agenda is embodied in its multiyear plan, which focuses on actions and programs that will lay
the foundations of improved public service delivery and foster growth.
56. In addition, the new administration immediately confronted challenges related
to controlling expenditures in the face of the global financial crisis. Under the previous
administration, personnel and operating expenditures had grown considerably between 2006
and 2008. So had interest expenditures, with 90 percent of debt at 9 percent plus IGDP-DI, a
very volatile price index.
57. The municipal government’s response was to: (a) seek support from the World
Bank and the National Treasury to set up a debt-restructuring operation that would decrease
the interest costs and create fiscal space for investment; (b) implement a short-term fiscal-
adjustment program based on aggressive expenditure cuts in operating costs, longer-term
revenue collection, and pension benefits reductions;6 (c) implement innovative programs to
reform service delivery in poor and high-conflict areas; (d) reorganize and modernize the
municipal public administration system to introduce results-based management tools to
increase the quality and efficiency of expenditures as well as project units to monitor the
6 The government generated R$1.6 billion in primary surplus between January and April 2009, and Rio had the
best relative performance among all Brazilian Federation Entities on operational expenditures control.
0%
20%
40%
60%
80%
100%
2004 2005 2006 2007 2008 2009 2010*2011*2012*2013*2014*
% o
if N
et
Cu
rre
nt
Re
ven
ue
Fiscal Responsibility Law, 2004-14
Personnel Expenditure (≤ 60% of NCR)
Net Debt Consolidated ( ≤ 120% of NCR)
Debt Services (≤ 11,5% of NCR)
21
implementation of projects; and (e) partner with the private sector in the financing of
infrastructure investment and provision of public services through PPPs.
A-1 Fiscal Adjustment
58. The government’s program is focused on fiscal adjustment. First, Rio’s proposed
debt restructuring, would open fiscal space with interest expenditure savings and
improvements in the debt-service profile. Second, DPL-supported reforms on social security
and personnel expenses would contribute to increasing fiscal space for investments. Third, the
continuity and strengthening of the municipal tax revenue performance would reinforce the
expansion of fiscal space and foster growth.
Debt restructuring
59. The city’s high debt-service obligations affect the fiscal space available for
investment. Debt-service obligations represent more than 13 percent of the city’s real net
revenue. The high debt service stems from lax fiscal managements in the 1980s and 1990s,
which led to accumulation of public debt and federal bailouts.7 The bailouts’ terms are quite
expensive because of indexing to a volatile price index (IGP-DI) that makes the profile of
debt payments uneven. This has consequence for Rio’s fiscal space in the sense that any
accumulation of debt-service obligations reduces the availability of resources for investments.
60. The Federal Government would reduce the interest rate the Treasury charges
municipalities and states on their debt following a partial repayment. A legal measure
known as MP Nº 2,185-35 established the terms of the debt agreement between the Treasury
and municipalities and states. The refinancing period was set at 30 years, and the interest rate
was set at 9 percent plus inflation. The measure allows a reduction in the inflation-indexed
interest rate to 7.5 percent plus inflation if the state or municipality prepays 10 percent of its
outstanding debt stock with the Federal Government, or to 6 percent plus inflation if the
prepayment reaches 20 percent. Since taking office, Rio’s administration has taken steps to
seek a debt restructuring operation under the federal law.
61. The city is improving its debt management processes to further reduce its
exposure to interest rate, currency, fiscal, and financial risks. The reforms would allow
Rio to fund its expenditures in a timely manner and meet its obligations as they fall due
without maintaining too-high idle balances or running undue operational, credit, or market
risks. These measures could lead to increased credibility as obligations are met on time.
62. The municipality is strengthening its institutional capacity on debt and cash
management by supporting the municipal Treasury in three ways: (a) revising the
organizational structure to include a function to analyze the portfolio financial risks and
prepare strategies for managing assets and liabilities; (b) designing and implementing
integrated systems for debt recording and cash management to enhance the security and
7 As a result of the debt-restructuring operations of 1997 and 1999, the federal government became the main
creditor for 90 percent of Rio’s total public debt. Debt servicing on the refinanced debt, the so-called intralimite
debt, was capped at 13 percent of a municipality’s net revenues, defined as current revenues net of earmarked
revenues (Receita Líquida Real, RLR). Any debt service above the 13 percent cap was deemed residual and was
automatically recapitalized and added to the intralimite debt stock. Any residual debt balances at the end of the
contracts—in 2028 for states and 2032 for municipalities—were to be paid off in 10 years.
22
efficiency of data capturing and information sharing; and (c) training the staff involved in
debt and cash management to develop the necessary skills to undertake risk analysis, quantify
cost-risk tradeoffs, and prepare proposals for managing Rio’s assets and liabilities. These
measures will enable the development of analytical and strategic functions needed in the
municipal Treasury. They will also allow the municipality to better evaluate alternatives to
consolidate the management of its assets and liabilities.
Consolidating fiscal adjustment
63. Fiscal-adjustment rigidities in expenditures and revenues further contribute to
the reduction of the city’s fiscal space for investment. About 80 percent of municipal fiscal
revenues are allocated to mandatory expenses. The proliferation of revenue-earmarking
mechanisms on the revenue side (mainly for the education and health sectors) introduces
rigidities that further reduce the space for discretionary outlays in general and investment
spending in particular.
64. The reduced fiscal space is associated with the deterioration of municipal
service delivery, affecting efforts to reduce poverty and inequality. Incidence analyses of
public services indicate that reduced fiscal space will affect the quality of public service
delivery, particularly in poor areas. For instance, the inability to expand and improve the
quality of family health care and education services for younger residents is a factor that will
contribute to worsening income distribution in the future.
65. Expanding the city’s fiscal space would create room for sustainable investment
in improving the quality of public services, especially in poor and vulnerable areas, and
modernizing public-sector management. Restructuring Rio’s debt would be a first step in
achieving fiscal sustainability in the medium and long term. Fiscal sustainability will further
require the city to adopt strong, consistent, and continuous fiscal-adjustment measures, such
as those supported under the proposed operation. Those efforts include reducing the pressure
of current and personnel expenditures on the city’s finance finances and improving tax
revenue performance.
66. Achieving lasting fiscal sustainability will depend to a large extent on a strong
revenue performance that comes with faster growth. The government is adopting
measures to increase tax revenue. Given the restrictions on raising tax rates, these actions are
concentrated on improving tax collection’s efficiency. Other measures supported by the
proposed operation will contribute to laying the foundations for economic growth and foster
future revenue growth.
67. The DPL-supported measures focus on three fronts: (a) improving capacity for
taxpayer surveillance through the introduction of modern tax-evasion detection tools and the
integration of economic and fiscal databases; (b) enhancing the recovery of taxes in arrears
through the simplification of processes; and (c) re-establishing a user fee for public lighting as
a new user charge financing source.8 In addition to its revenue effect, the user charge has a
progressive nature because rates will vary according to private electricity consumption. Initial
8 This public illumination charge was adopted by several municipalities in 2004. However, the Supreme Court
declared it unconstitutional because it was not included in the tax code. In 2007, the national Congress approved
a complementary tax regulation allowing municipalities to impose this charge.
23
steps have been taken to implement these measures, and all the improvements will be
complemented by the introduction of results-based management tools that establish targets for
tax collections and the three other initiatives.
68. On the expenditure side, the fiscal-adjustment effort would be focused on
tightening control of operating costs and personnel expenditures. After taking office, the
current administration enacted several immediate measures to rein in spending on active staff.
These are: (a) a 30 percent reduction in the number of positions to be filled by political
appointments (cargos comisionados); (b) the elimination of the permanent incorporation into
salaries of commissions earned by direct public civil servants while working on indirect
administration; and (c) the revocation of a decree linking increases in salaries to increases in
the minimum wage. Going forward, Rio has proposed additional measures to curb personnel
expenditures, such as conducting an audit of the payroll bill, further reducing commissioned
positions, and implementing tougher controls on payroll management to reduce the incidence
of fraud or clerical errors that result in overpayments to staff members. Other potential
avenues for limiting personnel expenditures under consideration are related to better planning
of the workforce needed by the government to avoid overstaffing or higher salaries than
needed to attract, retain, or motivate personnel. Some of these measures would be
implemented prior to the DPL’s second tranche.
Pensions
69. Rio has an already mature system, with a ratio of pensioners and survivors to
active employees at 76 percent. This dependency ratio is much higher in Rio than in Brazil’s
other state capitals—an average of 43 percent—and states—an average of 55 percent—and it
is not all that far below the Federal Government’s 87 percent. The situation will be even more
delicate in the future because population aging tends to make the dependency ratio even
greater.
70. Rio is in the process of adopting some provisions mandated by federal law.9 The
city’s ability to reduce its pension obligations is governed by national limits on the scope for
pension reforms, laid out in Constitutional Amendment 41 of 2003. The basic rules regarding
eligibility, benefit formulas, pension indexation, and contribution rates are established either
in the federal Constitution or in federal laws.
71. Adopting reforms, including those laid out in the federal Constitutional
Amendment 41 would result in strong fiscal savings for the city. Those measures are
related to: (a) the benefit formula for pensions, which should be based on the average wage,
not on the worker’s last wage; (b) the inclusion of benefits based on inflation, and (c) the
correct replacement rate for survivor benefits should be at a marginal replacement rate of 70
percent above the Regime Geral de Previdência Social (RGPS) threshold, not 100 percent.
Rio also has a benefit for surviving single daughters that is not consistent with current
practices. The benefit was stopped in 2003; however, a pool of 2,800 single daughters is still
receiving it. The city is currently applying the correct eligibility conditions to teachers vis-á-
vis the Constitutional Amendment. Executing all these reforms would allow the municipality
to obtain a certificate of compliance with the pension legislation, issues by the federal
9 This section is based in large part on the report, ―Diagnostic of the Pension Systems of the Municipality of Rio
de Janeiro,‖ by Marcelo Caetano and Mario Rattes, and contributions from Bill Dillinger.
24
government (CRP, Certificado de Regularidade Previdenciaria). Not having the CRP would
imply a cessation of transfers from the federal government to the municipality. Currently the
city holds a judicial decision that allows it to receive transfers from the federal government
without having a CRP.
72. The city is exploring measures to reduce pension costs through administrative
reforms aimed at improving asset management and a proposed audit of the wage and
pension bill. The administrative measures under consideration include reforms to capitalize
the pension fund (FUNPREVI) including through future flows of royalties to be received by
the municipality, from the municipality real estate portfolio, or other equivalent measures. On
the asset-management side, the city is considering investing in technology for a new payment
system for pensioner and retiree benefits and a new database control system. Rio is improving
its investment policy by creating an investment controlling committee and elaborating
corporate governance strategy to improve the corporate governance of the pension fund. The
audit will be conducted in conjunction with the audit of active public servants, and it may turn
up significant numbers of people receiving payments for which they are not eligible.
A-2 Service Delivery Innovations
Business environment
73. One of the municipality’s main challenges is to improve the business
environment, including by reducing the excessive bureaucracy and discretion companies
experience in dealing with the government. In a Doing Business survey conducted at the
subnational level in Brazil in 2006, Rio ranked next to last among 13 municipalities in terms
of the ease of doing business locally (see Figure 10). In particular, company registration is one
area in which the city could improve. This has consequences on the business environment and
a firm’s decision to operate in the formal economy.
Figure 10: Rio de Janeiro Doing Business Report 2006
Source: Doing Business in Brazil (2006)
74. Seeking to take advantage of opportunities provided by the international events
taking place in Rio, such as the FIFA World Cup and the Olympic Games, the new
administration has a strategy for a more efficient business registration process that
would improve competitiveness and foster economic growth. As a first step, the
municipality has begun to address the cumbersome procedures needed to register a business.
This project, called Alvará Já, was initiated by Decree No. 30.568 on April 2, 2009, and it
will simplify registration and issuance of business licenses for activities with low sanitary risk
19
25
30
35
41
41
44
44
47
49
68
68
152
Minas Gerais
Bahia
Rondônia
Rio Grande do Sul
Mato Grosso do Sul
Mato Grosso
Santa Catarina
Ceará
Maranhão
Federal District
Amazonas
Rio de Janeiro
São Paulo
Number of Days needed to start a business
25
and/or environmental impact. The web portal for businesses to apply for licenses was
unveiled on September 8, 2009.
75. In addition to the Alvará Já, the municipal government is working to integrate
its business registration systems with organizations at the national and state levels. Rio’s
government is committed to joining the Integrated Registration System (REGIN) by 2010.
This reform will facilitate centralization of the registration process to minimize the number of
steps and time it takes for businesses to register and be licensed with the various levels of
government that regulate business activity in Brazil.
Health
76. Upon taking office, the current administration diagnosed three major
challenges facing Rio de Janeiro’s health system: (a) the lack of coverage and quality for
primary health care services, which interferes with meeting the poorest neighborhoods’ needs;
(b) poor management of hospitals and health facilities, which has led to inefficient use of
resources; and (c) chaotic organization of emergency services in municipal hospitals.
77. Rio state has 25 UPAs in operation, 16 of which are located in Rio City and 9 in
other municipalities. From 2007 to January 2010, these UPAS handled 4 million medical
treatments. By 2010, the state government expects to build 18 more UPAs, with the potential
to cover 2.4 million inhabitants in the city of Rio. 10
78. To increase efficiency, the municipal government is organizing a new Health
Management System based on social organizations. In an attempt to increase efficiency
and accountability and improve health outcomes, new public hospital and health unit
management models have been established in many of Brazil’s states and municipalities since
the 1990s. Experience so far has shown that public hospitals and health units under
autonomous management perform better than those run directly by the government. This
model was adapted recently to the municipal public administration environment and will be
used in several sectors, including health and education. Municipal Law Nº 5026 (May 19,
2009) authorized the city government to establish management contracts with social
organizations (OS) and defined the context in which these contracts will operate. The
municipal legislation defined OS as private nonprofit institutions that administer their own
assets, have managerial and financial autonomy, and develop an internal audit system.
79. To address these challenges, the government has developed a set of measures.
The main policies focused on primary health care are designed to: (a) increase the number of
family health teams, prioritizing the poorest neighborhoods that are without access to
adequate primary care; (b) create infrastructure for primary care by remodeling existing
facilities and building new Primary Health Care Centers (called Clínicas de Família) in these
areas and; (c) improve access to urgent and emergency care by building Emergency Care
Units (Unidades de Pronto Atendimento, or UPAs). All these policies have been developed
under the umbrella of the Saúde Presente project.
10
From January 2007 to June 2009, Rio state created 25 UPAs. Those areas include Iraja, Santa Cruz, Bangu,
Campo Grande, Belford Roxo, Tijuca, Duque de Caxias Ricardo de Albuquerque, Botafogo, Cabuçú, Marechal
Hermes, Vila Sarapuí, Ilha do Governador, Barra Mansa, Jacarepaguá, Penha, Campo Grande II, Realengo e
Engenho Novo.
26
80. Finally, to improve hospital urgent and emergency services, the Municipal
Health Secretary (SESDEC) is testing new processes by: (a) introducing patient risk
classification at the hospital’s check-in area, and (b) using the unit-dose medication system in
hospitals’ urgent and emergency care operations.
Education
81. Rio’s school performance, measured by student learning levels, grade
repetition, and dropout rates in primary school, is above average for municipal school
systems across Brazil. The city’s educational performance is also significantly better than the
Rio state system. However, Rio municipality lags other large public school systems in the
southeast and south of Brazil, which are comparable to Rio in terms of per capita incomes and
local resources. Average repetition rates in the Rio municipal system, for example, are well
above those for São Paulo, Curitibá, and Belo Horizonte.
82. Between municipal, state, and private providers, educational availability at the
primary school level is universal; however, preschool coverage, where the city has
exclusive public responsibility, is limited and day-care services are not available to many
infants and young children. The municipal system serves 705,659 students in 1,063 primary
schools, 253 city-run crèches, and 159 registered day-care facilities that are publicly funded
but managed by private-for-profit or NGO entities. Approximately 80 percent of municipal
enrollments are in primary schools (grades 1–9); 16 percent are in preschools (for children
aged 4–5 years) or day care centers (for children aged 3 months to 4 years); and 4 percent are
in evening adult literacy programs.
83. Upon taking office, the new administration conducted a comprehensive study
that identified a number of core educational challenges: (a) poor student learning
performance, revealed in weak literacy and math scores on the national Prova Brasil exam and
the municipality’s specially designed achievement tests; (b) extraordinary difficulties faced by
schools in high-crime urban neighborhoods; and (c) tremendous unmet social demand for
preschool and day-care services, which are a municipal responsibility.
84. Based on the results of the study, the Municipal Secretariat of Education (SME)
has moved impressively in the administration’s first year to craft and implement major
new initiatives in all three areas. They have the potential to transform the education system
and make it a model for many other municipalities in Brazil. The focus of the SME’s efforts
to improve student learning outcomes has been strengthening the teaching of literacy skills in
the early grades and helping older students with weak skills catch up. Priority and innovative
programs include: (a) Reforço Escolar—the establishment of new curriculum standards and
learning materials for core subjects aimed at helping teachers deliver a more challenging
curriculum more effectively; (b) Escolas do Amanhã—a comprehensive package of targeted
support to 150 schools in the most disadvantaged areas, seeking to create both state-of-the-art
educational institutions and community centers; (c) Espaços de Desenvolvimento Infantil
(EDIs)—a new model for primary care that integrates crèches and preschools and offers
health services; (d) Literacy courses—intensive remedial literacy programs, delivered in
partnership with a private foundation, targeted to the large number of fourth, fifth and sixth
grade students who have scored as functionally illiterate on the SME’s diagnostic tests; and
(e) Universidade Virtual do Educador Carioca—―on-demand‖ online courses and peer
tutoring to improve the effectiveness of teachers in service. Moreover, the SME has created a
27
rigorous impact evaluation system to make sure a timely and reliable feedback mechanism is
in place (see Section IV.B Implementation, Monitoring and Evaluation for details).
A-3 Public Sector Management
Modernizing and strengthening public-sector management
85. The new administration faces three major challenges related to public sector
management: (a) a weak planning-budgeting system that lacks strategic focus on priorities:
(b) a poor management system that does not efficiently allocate public expenditures or
adequately monitor progress in the implementation of the municipality’s strategic projects: (c)
a lack of performance-based management tools undermines attempts to increase the quality of
expenditures and public-service delivery; and (d) fragmented and less competitive
procurement methods that hinder the government’s ability to achieve greater economies of
scale. In addition, an overly complex organizational structure, cumbersome administrative
procedures, fragmented services, and inadequate instruments to monitor performance
constrain the efficiency of the municipal public administration. As a result, the municipal
government has not been fully successful in meeting the population’s needs and in fostering
development.
86. Addressing these challenges will require transforming the municipal public
administration into a more efficient and results-oriented institution. The new
administration reorganized planning and budgeting in Casa Civil, which is in charge of
implementing and operating a results-based management system. This provides clear political
and technical leadership.
87. Rio can learn from Brazil’s vast and rich federal and state experience in public-
sector management. In the late 1990s, the federal government initiated the modernization of
its planning framework, better linking it to fiscal realities, budgeting, and results-oriented
management of public programs. Since then, a number of states and municipalities have
initiated similar efforts.
88. Rio’s city government has been able to quickly adapt these experiences. Supported by McKinsey & Company consultants, Casa Civil (the office of the chief of staff of
the municipality) developed a strategic plan setting out the priorities for the next four years.
Movimento Brasil Competitivo and Fundação Brava11
sponsored McKinsey’s work. For each
of 10 priority areas, the government identified its main challenges, key projects, outcome
indicators and targets, and important milestones. This strategic plan will serve as a means to
focus both financial and human resources on the government’s priorities. The government
also intends to implement the first steps of a Medium Term Expenditure Framework (MTEF)
as a means to two ends—increasing and ensuring consistency among different planning and
budgeting instruments and fostering a more informed debate over strategic priorities and
resource allocation across and within sectors. As a critical first step, the government would
prepare a comprehensive medium term costing (and projected annual incidence) of planned
expenditures, in particular capital investments, their related operational costs, and other
expected expenditures associated with major sporting events in 2014/16. In tandem, the
government would prepare an associated realistic financing plan including all anticipated
11
Foundations created by the nation’s top business groups to promote improvements in public sector
management in the country.
28
funding sources: own revenues, transfers, borrowing, and any special support modalities,
including from higher levels of government. Put together, these two elements would ensure
medium term sustainability of expenditures, especially as Rio looks to host a series of major
international events. This exercise would ideally be repeated on an annual basis in order to
inform annual budget preparation.
89. Leveraging the lessons of other states and municipalities allowed the
municipality to introduce a results-based management system to foster performance
improvements in public administration and monitor progress towards the strategic
plan’s goals. The city designed new management procedures and tools to provide a
systematic and strategic approach to achieving development goals. For instance, Rio
established a Project Management Unit, modeled on those set up by Brazil’s most innovative
state governments. It provides support to line agencies in planning project execution,
monitoring project execution, and providing project management training. Moreover, the
municipality has implemented some key accountability provisions for management and
execution has been clarified with the designation of a manager for each project. Going
forward, the municipality intends to further develop and introduce procedures for the
evaluation and selection of investment projects, with the goal of increasing their relative
efficiency. The municipality aims to strengthen the quality of project preparation to support
subsequent timely and cost-effective implementation and completion.
90. Rio quickly adopted results agreements to provide both formal and informal
incentives for achieving development goals. Formatted as quasi-contracts, the results
agreements are meant to be a key managerial instrument to focus government agencies on
desired outcomes. In signing the agreements, the mayor commits to providing the secretariats
with sufficient resources to implement the strategic projects, and he grants management
autonomy over how to achieve the results. As a key formal incentive, attainment of targets
triggers the payment of bonuses to public servants. Informal incentives are also in place, such
as peer pressure among secretaries and informed dialogues between the secretary and mayor
on development goals and priorities.
91. Finally, to increase its efficiency, Rio is improving the institutional
arrangements for procurement. Rio’s objective is to better manage and monitor
procurement performance in an environment where procurement operations are highly
decentralized—i.e., each government entity or agency is responsible for its own procurement.
In early 2009, the municipal government decided to expand the use of electronic reverse
auctions as a procurement method (pregão eletrônico) to register prices under framework
agreements for the supply of common goods and services (known as the price registration
system). Decree N° 30.354 mandates that electronic reverse auctions processes should
account for 75 percent of all procurement processes carried out in 2009. At the same time, the
municipal government has been centralizing procurement of common goods and services.
Decree N° 31.539 (3/17/2009) requires all government entities and agencies to provide the
Municipal Secretariat of Administration (SMA) with their annual plans for the procurement of
common goods and services. After review, the SMA will group similar items into packages
and go out to bid these packages on behalf of all entities and agencies. This centralized, more
rational approach to the procurement of common goods and services has the potential to
generate economies of scale. For this approach to be successful, however, good management
of procurement processes and of stocks—a goal supported by the proposed DPL—is essential.
29
Therefore, a necessary next step is for the municipal government to develop a good
management system.
Increasing service provision through Public Private Partnerships
92. Rio is embarking on a vast program over the next seven years to provide
infrastructure and services that will be crucial for economic growth. Public-Private
Partnerships (PPPs) are expected to play an important role by increasing private participation
in the financing and operation of infrastructure, social assets, and public services. The main
planned projects are in the areas of transport (i.e., the expansion of rapid bus transit systems)
and sanitation. The city plans to use the existing federal law for PPPs to govern such
partnerships. The legislative assembly has just passed a municipal law on PPPs that ratifies
the federal law at the municipal level. The city law also creates a PPP Council, defines the
criteria for PPP projects to meet (i.e., being efficient and affordable), and creates a guarantee
fund for PPPs. The municipality’s limited PPP institutional capacity will be an obstacle to
presenting well-designed projects to the PPP Council. There is a need to create a PPP unit to
support the PPP Council. The Bank is supporting the municipality’s efforts.
93. However, the government still faces major tasks in implementing its PPP
program. They are related to defining the details of the institutional framework for PPPs,
including governance structure, and assigning roles and responsibilities. Key issues include
the role of a PPP unit in designing projects and the role of the Treasury as guardian of public
finances and final approver of resources. The government is aware of (a) the importance of
laying out an effective institutional structure and (b) the need to build institutional capacity
within the municipal government to design and manage PPP projects. The governance
structure will also assign responsibility for post-contract award performance monitoring and
will establish the conflict resolution system to be used for PPPs in the city.
B. PARTICIPATORY AND CONSULTATIVE PROCESS
94. Rio de Janeiro’s development priorities, including the policies supported by this
DPL, are embodied in the Multiyear Plan (PPA). They reflect not only rigorous technical
analyses but also the participatory decision-making process defined in the Municipal Organic
Law (Lei Orgânica do Município do Rio de Janeiro) and Municipal Law No. 3189.12
The
PPA, the Annual Budget Law, and related government initiatives are discussed in the
Municipal Assembly, which has the authority to revise and approve the government’s
proposals. The PPA is subject to annual Municipal Assembly review, which includes
government reports on the previous year’s performance in meeting plan objectives.
95. The municipality maintains consultative councils comprised of civil society and
government representatives. The purpose of these councils is to assist the administration in
the analysis, planning, policymaking, implementation, and supervision of government actions
and decisions in their respective areas. Councils created by the organic law include education,
health, human rights, defense of children and teenagers, economic development, science and
technology, environment, and urban policy. The municipal government provides
12
Municipal Law No. 3189 (March 23, 2001) provides for the participation of the community in the preparation,
definition, execution, and monitoring of the multiyear plan and annual budgetary law. Available at:
http://smaonline.rio.rj.gov.br/legis_consulta/17279Lei percent203189_2001.pdf
30
infrastructure and budget to maintain these councils. Usually, participation to these councils is
defined by representatives of civil society organizations. Participation is voluntary and
unpaid. The councils meet regularly.
96. For instance, the Rio de Janeiro Municipal Council on Health is in charge of the
design, strategy, and execution of policies, including the financing and economic aspects. The council comprises users (50 percent), health professionals (25 percent), and government
officials and health-services providers (25 percent). All participants have the right to vote and
affect policy decisions. In addition to the municipal council, the city has 10 health council
districts (Conferências Distritais de Saúde), with the same composition as the municipal
council. All of the secretariat’s important decisions are discussed in these councils, allowing
for broad community participation. For instance, the implementation of family health care
units and emergency care units, an action supported by the proposed DPL, was discussed and
approved at a municipal health conference. The contracting of social organizations as part of
the public sector management reforms, also supported by this DPL, was broadly endorsed by
the Districts’ Health Conference, a representative and deliberative body.
97. The Rio de Janeiro Municipal Council on Education focuses on schools. It is
composed of 12 members—half government officials, half civil society representatives—with
the municipal education secretary as president. A School Community Council (CEC) for each
school is composed of diverse representatives, including school directors, professors,
students, parents, and assistants. Each regional council appoints two representatives—a
primary representative and a substitute—that participate in bimonthly meetings with the
education secretary, assisting in the formulation of strategies to improve the quality of
education.
98. Overall, the policy areas supported by this DPL are part of the government’s
PPA and budget law and undergo discussions in the Municipal Assembly and councils as
part of a participatory budget process defined by Law No. 3189. The policies supported
by the Bank have benefited from the institutional, participatory, and consultative processes.
For instance, private-sector policies to improve the business environment were designed after
consulting key stakeholders, including representatives of commerce and industry,
accountants, staff members of the 19 regional inspection units responsible for licensing and
fiscal oversight, and entities that provide support and technical assistance to micro-
entrepreneurial businesses. The municipal government periodically conducts public opinion
polls that reveal support for measures to improve the use of public space and reduce informal
commerce.
31
IV. BANK SUPPORT FOR THE GOVERNMENT STRATEGY
A. RATIONALE FOR BANK INVOLVEMENT AND LINK TO CURRENT COUNTRY
PARTNERSHIP STRATEGY (CPS) AND FORTHCOMING CPS
99. As a municipal DPL, the proposed operation represents an innovation in terms
of Bank engagement with cities. Municipal governments such as Rio’s are main providers of
essential public services in Brazil, making them critical for promoting economic growth,
reducing poverty, and ensuring an equal quality of service delivery to all citizens. Under the
federal Constitution of 1988, municipal governments are autonomous entities in the same way
states governments are independent from the federal government. To a great extent, policy
reforms cannot be imposed on Rio by higher levels of government. They must be initiated by
the city itself. To support such efforts, the Bank must engage directly with the city
government.
100. The proposed operation responds to a request from the Rio de Janeiro
municipal government and the National Treasury. A strong institutional capacity and
sound and large economy make Rio an ideal place for the Bank to test a new development
model that directly engages with the city while vertically integrating the state and federal
levels.
101. As an example of leveraging lessons of other states and municipalities, Rio has
introduced a results-based management system to foster performance improvements in
public administration and monitor progress towards the strategic plan’s goals. The city
established a Project Management Unit, modeled on those set up by Brazil’s most innovative
state governments. The city learned of the need to have a strategic plan first and follow with a
system of performance management and a monitoring system. This allowed Rio to sign 14
performance contracts with direct administration in the first year. The Bank will bring in the
GET PSP (Global Expert Team in Public Sector Performance) to further support the
municipality in the annual evaluation of the first signed results agreements.
102. The proposed DPL would also allow the Bank to support, for the first time, the
integration and coordination of sectoral policies at different levels of subnational
government. The operation has been designed in conjunction with the State of Rio de Janeiro
Fiscal Sustainability, Human Development, and Competitiveness DPL to support innovative
policies to reform health care delivery, education services and business registration processes.
At least in these areas, the operation will help achieve better integration and coordination of
policies at different levels of government, maximizing their impact on improving the welfare
of Rio’s population. To the extent that this innovative approach proves successful, it could be
replicated in other Brazilian states and large municipalities in other countries.
103. In the health sector, the Bank’s support to the municipality will be leveraged
through a Non Lending Technical Assistance project (NLTA) to the state health
secretary. The project will support activities related to emergency care units that are also
supported in the municipal DPL. The project will strengthen the administrative procedures for
the acquisition and allocation of medicines, introduce a cost-accounting methodology for
UPAs and hospitals, and develop a quality accreditation system for UPAs.
32
104. In the education sector, the municipality is partnering with the Bank as well as
local universities to help them design a monitoring and evaluation system for the crèche
and early childhood program. This is the frontier of best practices, but it is coming from a
municipality that has high institutional capacity and one of the best evaluation systems for
early childhood programs in effect (―crianças marvilhosas”).
105. The proposed operation could become the first of a new generation of policy
loans aimed at supporting fiscal consolidation at the municipal level in Brazil. The
proposed operation closely resembles and embodies a similar rationale as existing and
previous Bank DPLs supporting fiscal consolidation at the federal and state levels in Brazil
and other countries. In supporting the MoRJ, the Bank is also assisting the Federal
Government in implementing the LRF. In these cases, the Bank acts as a credible partner in
supporting corrective policy programs when deviations from LRF may take place.
106. The commitment of the MoRJ to fiscal consolidation and to the LRF is
reflected in a request by the MoRJ and the Federal Government of Brazil to include an
agreement between these two levels of government as a condition of effectiveness of this
DPL. Such an agreement would be fully consistent with the LRF and would represent a
commitment by the MoRJ to further strengthen fiscal consolidation through a prepayment of
at least twenty percent of the Municipality’s debt to the Federal Government.
107. Through the proposed operation, the Bank will support Rio’s efforts to break
the unsustainable trend of increasing current expenditures and make room for needed
investment. The reforms supported in the pension areas, for example, will reduce the NPV of
the actuarial deficit over 50 years by about 17 percent from a baseline of about R$36 billion.
Moreover, the municipality will be able to restructure 20 percent of its debt to the federal
government. This will provide Rio with short-term fiscal space of about R$1 billion for 2010–
12 and will decrease the NPV of the city’s total debt by R$2.8 billion. The prospective
liquidity gain of about R$330 million a year would correspond to 3 percent of the total
municipal revenues and 5 percent of revenues without transfers.
108. The municipal government has the institutional capacity to manage the
additional fiscal space generated by these and other DPL-supported fiscal measures. In
fact, the second and third components of the proposed DPL allow the Bank to help Rio
improve the effectiveness and efficiency in the delivery of public services, especially in poor
and high-crime areas. The components also provide assistance in improving the city’s
capacity to manage public projects and attract private funds for investment through PPPs.
109. The proposed operation is fully consistent with and closely linked to the
objectives of the World Bank Group’s Country Partnership Strategy 2008-2011 (Report
#42677-BR) discussed by the Executive Directors on May 1, 2008, and the Progress
Report (Report #53356-BR) discussed by the Executive Directors on April 20, 2010. In
particular, the policy measures supported by the loan are aligned with the CPS objectives of:
(a) strengthening macroeconomic fundamentals and public-sector management; (b) reducing
poverty, vulnerability, and social exclusion by increasing government efficiency, improving
the quality of spending, and enhancing accountability in the health and education sectors,
especially at the subnational level; and (c) improving competitiveness and the investment
climate. The current partnership strategy was developed in close consultation with the federal
33
authorities that see Bank support to the states as central to their efforts to improve fiscal
management and the provision of public services.
B. CHOICE OF INSTRUMENT AND RELATION TO OTHER BANK OPERATIONS
110. DPL vs. Investment Lending. The operation supports a set of policy reforms to
which the municipal government, an autonomous legal entity, is committed. A DPL is
therefore the appropriate vehicle. The municipality’s reform program is robust and embodies
cross-cutting themes, such as fiscal and public sector management and improving service
delivery. The government’s program and priorities provide a solid ground for confidence that
the operation will contribute to poverty reduction.
111. As bank operational policy does not explicitly provide for DPLs to be extended
to municipalities or cities, approval is sought by the World Bank’s Board of Executive
Directors for a waiver to the definition of the Borrower in Operational Policy (OP) 8.60
for this operation. All other provisions set forth in OP 8.60 would remain applicable to this
operation.
112. One-tranche DPL vs. two-tranche DPL. A single-tranche DPL was unsuitable for
two reasons. It would not allow the bank and the municipality a continuous emphasis on
reforms beyond debt-restructuring. A one-tranche operation would hinder the Bank’s ability
to establish a longer term engagement to support key elements of Rio’s reform agenda. This
consideration takes on added importance with an administration that has been in office for
less than a year and would require our continued support.
113. Two-tranche DPL vs. programmatic DPLs. Brazil’s rigorous fiscal control regime,
which has contributed to fiscal responsibility since the late 1990s, imposes relatively high
transaction costs on processing subnational loans. Each loan would have to go through a
rigorous process of reviews and approvals by federal agencies. This process could take
months or longer and introduces a high degree of uncertainty regarding the timing of loan
approval. The political cycle calls for federal and state elections in November 2010, raising
the possibility of additional uncertainty at the time of a second programmatic operation. Even
though the city’s administration is not running for election in 2010, it is not isolated from the
state political cycle and the presidential election. The two-tranche DPL is sought to avoid
potential delays during a period of political transition.
114. The two-tranche design provides the right incentive scheme because: (a), the
first tranche, presents the reform plan that will be implemented in the second tranche, (b) it
circumvents the long process of internal approval of Bank operations that delays loan
preparation considerably. In Rio’s case, these factors are crucial because the operation will
happen during a period of political transition that potentially adds to the length and risk.
115. The municipal operation is linked with the ongoing Rio State Fiscal
Sustainability, Human Development, and Competitiveness DPL. The US$485 million
DPL aims to provide the state with the financing to smooth its expenditures patterns and to
increase infrastructure investments in the context of the national program for growth
acceleration (PAC) in 2009. The state loan also supports policy actions to strengthen fiscal
consolidation, improve the quality and efficiency of the business registration process, enhance
34
the quality and efficiency of the basic education system, and increase access to health services
and the efficiency of their delivery, especially in disadvantaged areas (see Box 2).
Box 2: Complementarities between Rio State and the Rio Municipality DPLs
For the first time in the history of World Bank policy and investment operations in Brazil, DPL-supported
policies will contribute to aligning policies at different levels of government, achieving better services in health,
education, and the business environment. Policies supported by the city and state DPLs will strengthen the
components that are the responsibilities of each level of government and encourage a more robust system
overall. The figure below illustrates the formal division of responsibilities between municipalities and states in
Brazil.
Education. In the past, policy coordination between Rio state and municipality has been limited, partly because
of the competing political affiliations of previous administrations. Since January 2009, however, dialogue has
developed between the two education secretaries, and the two World Bank DPLs under preparation are
contributing to coordinated and more efficient service delivery in education. The DPLs are tackling the same
problems at different points in the system: the inefficient flow of students due to poor learning outcomes,
excessive grade repetition, and resulting age-grade distortions.
At the municipal level, this involves: (a) expanding early childhood education for low-income children; (b)
strengthening the teaching of basic literacy and numeracy skills in the first two grades (Reforço Escolar), with
special emphasis on remedial instruction for children falling behind their grade levels; and (c) providing targeted
support for schools in high-conflict and high-crime areas, whose students are at greatest risk of repeating grades
and falling behind. Complementing these policies, the state’s DPL-supported program also focuses on reducing
age-grade distortion. Through the innovative Projeto Autonomia, the state is offering over-age students a chance
to graduate on time by following a special compressed curriculum with intensive teacher support. (Despite the
official assignment of education responsibilities, the state and municipality still have some duplication of
provision in grades 6–9, which were historically the responsibility of state government.)
Health. The policies supported by DPLs the Bank is preparing with the two subnational governments have a
mutually reinforcing impact on health-care integration. On one side, the DPL with the Rio state government is
supporting policies to deliver better coverage and quality of medium- and high-complexity health services
through UPAs. These facilities are concentrated in the Rio municipality, where a large proportion of the poor
population lives without access to urgent and emergency care. In a complementary manner, the DPL with the
Rio municipality is supporting policies to increase coverage and quality of primary health care by the expansion
of family health clinics, creating solid mechanisms of cooperation between the state and the municipal health
secretariats to deliver services through structured networks. These networks, organized in administrative health
regions, will be jointly regulated by a clear and enforceable referral and counter-referral system between state
and municipal health units.
Business Environment. Both operations support reforms to the business registration process and follow similar
approaches: first, redesigning and simplifying internal procedures related to either state registration (Inscrição
Estadual) or municipal operating licenses (Alvará de Licença para Estabelecimento); second, joining a
centralized business registration system (Registro Mercantil Integrado, REGIN). REGIN will unify and link
hitherto separate processes that firms are required to follow to fully register with all pertinent agencies (tax,
sanitation, environmental, and fire brigade) at the three different levels of government, creating a one-stop shop
for the registration process. Both the state and municipality have decided to integrate their business registration
systems into the REGIN.
35
116. In health, there is a complementary placement of the UPAs in the Rio
municipality that was coordinated with Rio state UPAs. While the main focus of the
municipality health secretary is primary care (clinicas da familia), the state puts greater
emphasis on urgent and emergency care UPAs. Therefore, there is no duplication of actions or
programs but a sharing of responsibilities in the urgency and emergency programs for
populations in different areas.
117. In education, federal policies drive state and municipal service delivery in two
key areas, and in each of them the current collaboration between the Rio municipal
education secretariat and the federal Ministry of Education is quite good. The areas are:
(a) federal support for the expansion of municipal-level ECD services through FUNDEB
financing reform; and (b) federal support for a stronger focus on learning outcomes through
the IDEB (index of basic education quality). Rio municipality is ―mainstreaming‖ this focus
across its system by translating IDEB performance targets down to the level of each school.
Rio is even going further by introducing a teacher bonus program linked to annual progress on
IDEB outcomes.
118. The proposed operation is related to the Renovating and Strengthening Public
Management (Pró-Gestão) Technical Assistance Project, currently under preparation
with the State of Rio de Janeiro’s Secretariat of Planning. This proposed project has three
objectives: (a) renovation and strengthening of public administration, (b) development of
human capital, and (c) expansion of preventive care and modernization of the health system.
This technical assistance project will finance activities that have synergies with the proposed
DPL. In education, for instance, it will finance, among other things, critical studies in relation
to Projeto Autonomia, which addresses age grade distortion and is supported by the state DPL
and is a benchmark in the municipality DPL. In health, the project will support activities
related to emergency care units, which are also supported in the municipal DPL. The project
will strengthen the administrative procedures for the acquisition and allocation of medicines,
introduce a cost-accounting methodology for UPAs and hospitals, and develop a quality
accreditation system for UPAs.
119. As a subnational, two-tranche DPL, the operation is similar in design and
nature to other Bank operations with Brazilian state governments. The relevant projects
are Alagôas (Fiscal and Public Sector Reform, 2009), Rio Grande do Sul (Fiscal
Sustainability for Growth, 2008), and Minas Gerais (Partnership for Development, 2006).
These experiences with subnational governments have provided strong foundations for this
operation in three ways. First, the preparation and supervision of the three operations gave the
Bank substantial experience in the kind of subnational fiscal and public-sector management
reforms now being used by Rio’s municipal government. Second, the operations’ success
enhanced the Bank’s reputation and led the federal and municipal governments to request a
similar operation for Rio. Third, as part of project preparation and supervision, the Bank has
been fostering increased dialogue on technical issues among civil servants of these
subnational governments. For example, the dialogue has included such topics as subnational
debt management, project monitoring, and public investment management. This initiative
allows for sharing experiences and learning from peers that may be especially helpful to new
reformers.
36
120. Rio has benefitted from several projects financed by the Bank through direct
loans to either the municipality or the federal government. In the 1990s, for instance, the
Bank supported a project for preventing flooding in Rio through a loan to the federal
government. Rio has also benefited from lending operations approved since 2004 related to
family health, AIDS and sexually transmitted disease (STD) control, VIGISUS (health),
Fundescola III (education), the Bolsa Família program, and PARSEP (social security).
C. COLLABORATION WITH THE INTERNATIONAL MONETARY FUND (IMF) AND
OTHER DONORS
Collaboration with IMF
121. IMF collaboration does not apply directly because the proposed operation
involves a subnational government. The consultations between the Bank and Fund teams in
the case of the federal government are consistent with the recommendations of the Joint
Management Action Plan (JMAP), which aims to improve coordination at the country level.13
The plan calls for Bank and Fund staffs to consult at least annually in the preparation of their
work programs.14
Collaboration with Other National and International Partners
122. The actions supported under this DPL are clearly linked to the federal
government’s strategy to improve the overall quality of education in Brazil, given the
role of the municipality in delivering education services. Rio has eight programs supported
by the federal government (see Table 8).
Table 8: Federal Programs in Rio de Janeiro State
13
See ―Enhancing Collaboration: Joint Management Action Plan (Follow Up to the Report of the External
Review Committee on World Bank-IMF Collaboration,‖ September 20, 2007). 14
A February 2008 memorandum from IMF First Deputy Managing Director Lipsky and World Bank Managing
Director Wheeler to IMF Heads of Area Departments and Bank Regional Vice Presidents indicated that,
beginning in April 2008, all Bank country teams and Fund missions preparing CAS/CAS progress reports or
Article IV consultations (whichever came first) should hold annual discussions to pool analytic and diagnostic
work, discuss macro-critical sectoral and other issues, and strategize over how best to sequence needed analytic
work.
Program Main Purpose
National School Feeding Program (Programa Nacional de Alimentação Escolar, PNAE)
Transfer financing resources to the city to support merenda escolar.
Programa Dinheiro Direto na Escola (PDDE) Transfer financing resources directly to each school to improve pedagogical
and physical infrastructure.
Open School Program (Programa Escola Aberta) Transfer financing resources to promote sports, cultural, and arts activities on weekends.
Programma de Desenvolvimento Enfantil (PDE) – Escola
Transfer financing resources to support schools with low
Índice de Desenvolvimento da Educação Básica (IDEB) levels. The schools will be in charge of developing action plans to help low-outcome students.
More Education (Mais Educação)
Transfer resources to extend school time and arts, cultural, sports, and
learning activities.
National Program of Educational Technology (Programa Nacional de Tecnologia Educacional,
PROINFO)
Distribute to schools computers, digital resources, and educational content to promote the use of information technology in public education.
National Textbooks Program (Programa Nacional de
Livro Didático, PNLD)
Distribute textbooks to students and teachers in the following subjects:
Portuguese, mathematics, science, history, geography, and literacy.
National School Library Program (Programa Nacional de
Biblioteca da Escola, PNBE)
Distribute books to build libraries for students in Ensino Fundamental.
37
123. With support from the Municipal Education Secretariat (SME), the United
Nations Educational, Scientific and Cultural Organization (UNESCO), and the Bank’s
DPL, the administration has launched 150 Escolas do Amanhã since January 2009,
serving 108,576 students. Federal programs such as Mais Educação and Escola Aberta will
encourage full-time education through a variety of sport, arts, and cultural activities. The
Escola Aberta program will bring the community to schools on weekends through activities
such as cinema clubs and workshops.
124. The SME in partnership with UNESCO is developing incentives for a reading
program in early childhood education. The program beneficiaries are children aged 3
months to 3 years, 11 months, enrolled in municipal crèches and preschools. The proposed
DPL supports the expansion of municipal crèches and pre-schools. The SME requested
UNESCO technical assistance to implement a pilot program. The agreement has three
immediate objectives: (a) preparing and implementing the pilot program in 10 schools that
participate in the Primeira Infância Completa Program (PIC), (b) implementing reading
strategies in the schools, and (c) disseminating the pilot program’s main results.
125. Rio participates in a national program of technical assistance provided by the
Inter-American Development Bank (IADB) with resources channeled through the
federal government. The purpose of the National Program in Support of Administrative and
Fiscal Modernization (Programa Nacional de Apoio à Modernização Administrativa e Fiscal,
PNAFM), currently in its second phase, is to improve existing fiscal systems in Brazil. It
seeks to do so by supporting the integration of revenue secretariats and the modernization of
Brazilian municipalities’ administrative, fiscal, and financial procedures. In Rio, PNAFM
activities will be in the area of internal and external controls and financial managements. An
initial activity already undertaken has been an audit of the personnel and survivors payroll,
designed to identify fraud or errors that could be causing undue expenditures. This action is a
benchmark for the proposed DPL in the area of creating fiscal space.
126. The private sector is also supporting the municipality in its reforms. The Brazil
Competitive Movement (Movimento Brasil Competitivo, MBC) is dedicated to reducing
Brazil’s tax burden through efficiency in public spending. The MBC has drawn on private-
sector funding to hire consultants to advise subnational governments on how to improve tax-
collection and expenditure management. For instance, MBC has hired the National Institute of
Managerial Development (Instituto Nacional de Desenvolvimento Gerencial, INDG) as well
as McKinsey to help the municipality develop and implement its strategy. The policy reforms
supported under the public sector component of the proposed loan build on the INDG and
McKinsey work.15
15
Sponsored by the MBC, the INDG has been providing advisory services to improve the efficiency of
governmental processes in the states of Minas Gerais and Rio Grande do Sul and the city of Rio de Janeiro. A
July 6, 2009, Financial Times article highlighted the successful experience of private sector support for public
sector reforms (http://www.ft.com/cms/s/0/31a6843a-69c5-11de-bc9f-00144feabdc0.html?nclick_check=1).
38
D. LESSONS LEARNED
127. The design of the proposed operation reflects several lessons from recent
experience with state DPLs in Brazil. Most important is the need for client ownership of the
reform program. Rio’s commitment to reform was established in the initial identification
mission, and it has clearly been in evidence since then. The strongest affirmation is the
sustained progress made in implementing DPL-supported policies since the current
administration took office in January 2009. The commitment is reinforced by the fact that all
DPL-supported reforms are critical parts of the government program.
128. A two-tranche rather than a programmatic approach was chosen to prompt the
Bank and city government to agree on conditions for both tranche disbursements at the
outset, rather than leaving longer-term reforms for a subsequent operation. The current
administration has made progress in important policy areas, including provision of health and
education services and improvements in fiscal discipline that create the conditions for a stable
macroeconomic environment. The project’s time frame and disbursement mechanisms have
been designed to reduce the risk of wavering political commitment in the future. The project
would disburse entirely within the term of the current administration. It focuses on procedural
and administrative reforms that will be self-sustaining.
129. A third lesson from recent experience is the need for in-depth communication
with the municipality during the proposed operation’s preparation and implementation. The project team has worked closely with Rio’s administration to define the reform measures
to be supported by the DPL and to put in place arrangements to assist their implementation
over the medium term. This has been accomplished partly through the Renovating and
Strengthening Public Management Technical Assistance Project, including state and
municipal policies and evaluating their impact. The city government’s proactive role in the
technical preparation phase—defining a policy matrix with measures and policy options that
were both high impact and feasible—has been exemplary. Furthermore, the municipality has
strongly supported the two-tranche design because of the stronger commitment that the
conditions for release of the second tranche would generate.
130. Finally, the Bank’s experience with state DPLs has demonstrated the
importance of coordination with the federal government. The operation was initiated with
the concurrence of the National Treasury and was prepared as a DPL in full coordination
between the state government and the National Treasury. See Box 3 for a discussion of good
practice principles.
39
Box 3: Good Practice Principles on Conditionality
Principle 1 – Reinforce Ownership: The operation has strong ownership at the highest levels of city, state and
federal governments. All municipal secretariats involved in the DPL have shown remarkable commitment to the
government’s medium-term reform program and the policies supported by the DPL. Government commitments
are also clearly stated in the Letter of Development Policy.
Principle 2 – Agree up-front with the government and other partners on a coordinated accountability
framework: The Bank’s support is summarized in a brief and focused policy matrix with observed and expected
results. The Secretariat of Finance, together with Casa Civil and the individual sector monitoring units, will
collect the necessary data to measure the extent to which the results have been achieved.
Principle 3 – Customize the accountability framework and modalities of Bank support to address country
circumstances: Brazil’s rigorous fiscal control regime has contributed much to enforce fiscal responsibility
since the late 1990s and has provided a powerful framework to ensure all borrowing, including from IBRD, is
consistent with a sustainable fiscal environment.
Principle 4 – Choose only actions critical for achieving results as conditions for disbursement: The Bank’s
policy matrix uses a limited number of prior actions. They are part of a comprehensive policy reform plan with a
solid track record. The matrix also uses select benchmarks to track implementation of the government program.
Principle 5 – Conduct transparent progress reviews conducive to predictable and performance-based
financial support: The World Bank is working with IPEA (the Institute for Applied Economic Analysis) and
IETS ( The Institute for Labor and Social Studies) to evaluate the impact of daycare on child development and
parental welfare. The study also aims to design a methodology for monitoring and evaluation of Integrated
Preschool Programs (EDIs).
The World Bank is also carrying out Phase II of the Family Health Program (Programa de Saúde da Família,
PSF). Phase II will support quality improvements, strengthening the capacity of states to: (a) monitor and
evaluate the PSF, (b) introduce a performance-based financing mechanism between the federal government and
participating states and municipalities, and (c) develop and test a results-based management system for PSF
teams.
E. ANALYTICAL UNDERPINNINGS
131. The proposed operation builds on a number of reports and studies produced by
the DPL team in close collaboration with the municipality. These diagnostic studies
include:
Municipality of Rio de Janeiro: Fiscal Sustainability Analysis and Impacts of the
World Bank Program, by Fernando Blanco and Ngoc-Bich Tran (World Bank);
Municipality of Rio de Janeiro: Diagnosis of the Social Security System and
Impact of Proposed Reforms, by Marcelo Abi Ramia Caetano and Mario Rattes
(World Bank consultants);
Municipality of Rio de Janeiro: Strengthening Public Sector Management,
Procurement and Investment Systems, by Juliana Wenceslau, Luciano Wuerzius,
and Tarsila Velloso (World Bank);
Municipality of Rio de Janeiro: Assessment of Debt Restructuring Options, by
Antonio Paulo Medeiros (World Bank consultant);
Municipality of Rio de Janeiro: Poverty and Social Analysis of the Impact of the
DPL, by Alberto Coelho Gomes Costa and Judith Lisansky (World Bank).
40
Other areas of analytical work used to underpin the operation are detailed below.
132. Fiscal sustainability: The analytical underpinnings of specific policy reform areas
are based on a series of technical notes (Notas Técnicas) prepared by SMF. The Nota
Técnica: Administração Tributaria do Municipalidad do Rio de Janeiro—Exercício de 2008 e
Perspectiva para o período de 2009–2011 was used as the basis of the program to strengthen
tax collections and increase revenues. The fiscal projections, the analysis of the operation’s
impact, and the sensitivity analysis of fiscal aggregates to external and internal shocks are
based on the technical note, ―Projeções Fiscais e Análise das Finanças Públicas do
Municipalidad do Rio de Janeiro,‖ which covers the policies adopted on tax administration,
the official decrees, and expected impacts.
133. Public sector modernization: Analytical work in other Brazilian subnational loan
documents will provide input for the loan design. For example, the program documents for
Minas Gerais’ Partnership for Development and Rio Grande do Sul: Fiscal Sustainability for
Growth were fundamental to the operation’s design. In particular, the experience with other
states on results-based management and partnerships with nongovernmental organizations in
the provision of public services will be used in the Rio context.
134. Business environment: The strategies and actions for improving the business
environment build on several documents, including the Bank’s Doing Business in Brazil
(2006), Andre Urani’s analysis of the challenges to Rio’s economic development in Trilhas
para o Rio16
, and such studies as the SMF technical note, Uma avaliação ex-ante de algumas
políticas para melhoria do ambiente de negócios no Estado do Rio de Janeiro (2007) and
McKinsey & Company’s Dinamizando o Crescimento da Economia do Rio de Janeiro
(2006). The focus on supporting the development of an effective institutional structure to deal
with PPPs has analytical backing from a number of studies that have identified the importance
of careful project design and an appropriate regulatory framework for the success of PPP
projects (Guasch 2004; Delmon 2009). Infrastructure neglect in Rio state and municipality is
emphasized by such reports as the National Transport Federation’s Pesquisa Rodoviária,
(2007). The impacts of this deficit in infrastructure investment, common across Latin
America, include much higher logistics costs. They are well documented in Guasch and
Kogan (2005). The importance of investing in infrastructure for developmental outcomes is
more broadly emphasized in Calderón and Servén (2003), while the importance of the role the
private sector can play in helping decrease the deficit in infrastructure investments is
articulated in Andrés and others (2008).
135. Education: An analysis carried out by the SME in partnership with the Ayrton Senna
Foundation (Fundação Ayrton Senna) involved testing 21,000 students in Portuguese. It was
the basis for implementing literacy courses, the Schools of the Future (Escolas do Amanhã)
program, and the new primary care model that integrates crèches and preschool (Espaços de
Desenvolvimento Infantil, or EDIs) and offers health services. The implementation of this new
model for primary care used as background a study conducted by IPEA, IETS, and the Bank.
The study’s objective was to evaluate the impact of daycare on child development and
parental welfare. The study showed that youngsters who received early childhood education
16
André Urani, Trilhas para o Rio: do Reconhecimento da Queda à Reinvenção do Futuro, Elsevier, Rio de
Janeiro, 2008.
41
are more likely to finish school and secure better positions and higher salaries. The study, still
in progress, also aims to design a methodology for monitoring and evaluating EDIs.
136. Finally, the ESW report titled Brazil: Improving Fiscal Conditions for Growth
addresses important policy issues related to budget rigidity and expenditure management. It
contributed to the assessment of the fiscal and public sector management challenges the
municipality faces. The Bank recently produced a report titled Topics in Fiscal Federalism,
which describes the existing system of controls of subnational governments and highlights
their achievements and limitations.
V. THE MUNICIPALITY OF THE CITY OF RIO DE JANEIRO FISCAL
CONSOLIDATION FOR EFFICIENCY AND GROWTH DPL
A. OPERATION DESCRIPTION
137. The proposed DPL is designed to support the Rio city government in its efforts
to reverse economic decline and improve the quality and coverage of social services,
particularly in poor and vulnerable areas. In particular, it supports the government’s
strategy aimed at: (a) generating additional internal resources for capital investment; (b)
improving the quality of social services, particularly in low-income areas; and (c) improving
internal administrative processes to reduce costs and enhance performance. In line with these
objectives, the operation is comprised of three key pillars: fiscal adjustment, service delivery
innovations, and public sector management (see Figure 11). These three components were
selected in partnership with the city government on the basis of a shared assessment of their
relevance to development objectives, feasibility, and the Bank’s value added to the reform
agenda.
Figure 11: The Three Pillars of the Proposed DPL
138. These policies will contribute to fostering a new development cycle in Rio and to
establishing the foundations for improved public-service delivery and equal
opportunities for the city’s young population. The three components are aimed at creating
fiscal space for public investment through measures to improve revenue collection, reduce
staffing, and cut pension costs. They will also support: (a) expansion of innovative approaches
to primary and emergency health; (b) preschool, primary school, and literacy programs in
low-income and violence-prone areas and (c) establishment of a system of results agreements
Service Delivery Innovations
Public Sector Management
Fiscal Adjustment
Improved Social
Services
42
for key municipal functions and rationalizing procurement processes and the management of
stocks (see Table 9).
139. These components are fully consistent with the CPS objective of strengthening
macroeconomic fundamentals and public sector management to support improved
delivery of public services. As a municipal DPL, the proposed operation represents an
innovation for the Bank. Nevertheless, it closely resembles existing Bank DPL operations at
the state level in Brazil and other countries and has much the same rationale. The loan is part
of the Bank’s strategic engagement with Brazil’s federal and subnational governments and is
one of a number of subnational DPLs and SWAPs designed to reinforce public-sector
management as an integral part of the Bank’s strategy for governance in Brazil. This
operation will enable the Bank to provide Rio with the knowledge, expertise, and technical
advice needed to implement the reforms.
Table 9: DPL Policy Pillars and Long Term Vision
Policy Pillar Long-term Vision
Pillar 1: Creating Fiscal Space
Fiscal adjustment: revenue enhancement and
expenditure control.
Improvement of municipal tax collections to achieve
long-run fiscal sustainability and efficient management of
government expenditures.
Pillar 2: Innovations in Public Service Delivery
Improving competitiveness. Reducing administrative barriers and the cost of doing
business.
Improving the coverage and efficiency of primary
care and urgent and emergency health services.
Increased provision of quality health care services.
Improving the quality and coverage of municipal
education services.
Greater equality of opportunities for children and youth.
Pillar 3: Public Sector Management
Strengthening the institutional framework for
sustainable efficient service delivery and the
implementation of the first steps of a MTEF.
Effective public management assured by generalized
results-based systems in the public sector, more efficient
government procurement and a strategy with associated
expenditures plan and financing plan.
Increasing the municipality’s ability to attract new
investments for greater economic growth.
Broad participation of private-sector companies in the
provision of infrastructure services, with improvement in
quality and efficiency.
140. The proposed operation is a two-tranche DPL totaling US$1,045 million. The
first tranche of US$545 million will be disbursed upon completion by the government of the
prior actions. The second tranche of US$500 million will be disbursed when the government
meets the second tranche conditions. These are expected to be met by year-end 2010.
Disbursement of the first tranche would recognize the government's reform efforts since the
current administration took office in January 2009. The prior actions and second tranche
conditions are enumerated in Boxes 4 and 5.
43
Box 4: Prior Actions for First Tranche Loan Disbursement
Policy Pillar 1: Creating Fiscal Space
Objective: Creating fiscal space to expand public investment and lay the foundations for municipal
growth.
Prior Action 1.
Submitting to the legislative assembly a draft law
consistent with the federal Constitutional
Amendments No. 20 of 1998 and No. 41 of 2003
that mandate for new public servants:
(i) the calculation of pension benefits based on the
average wage rather than the last wage;
(ii) the indexation of pension benefits on inflation
rather than wage growth;
(iii) the reduction by 30 percent of survivors
benefits for pensioners above the RGPS
ceiling.
Outcome Indicator
Reduced NPV of the pension system’s actuarial
deficit over the next 50 years by R$3.1 billion or
8.5% stemming from the parametric reforms.
Policy Pillar 2: Innovation in public service delivery
Objective: Reforming public services delivery with (a) improved government processes for registering
businesses; (b) increased access to quality family health care and emergency care services through a
new model for subcontracting social organizations to manage health facilities; and (c) improved early
development of poor children, better quality of primary schools in high-conflict slum areas and system
wide improvements in student learning outcomes.
Prior Action 2
Approval of Decree No. 30.568/2009, which
simplifies the registration process for municipal
business licenses for activities with low
environmental risk.
Outcome Indicator
Reduction in the number of days required to
obtain a municipal business license in Rio from
20 days in 2009 to 12.5 days in 2010.
Prior Action 3
Approval of the Law No. 5026/2009 and Decrees
No. 30.780/2009, No. 30.907/2009 and No.
30.916/2009 to transfer public services
management to social organizations and
implementation of the law with the Municipal
Health Secretariat signing three management
contracts with qualified social organizations to
deliver services in ten family health care clinics
(clínica da família) and three emergency care
clinics (UPA).
Outcome Indicator
Doubling family health care coverage from a
January 2009 baseline of 6 percent to a
projected 12 percent in December 2011.
44
Prior Action 4
Issuing of:
(a) Decrees No. 30.934/2009 and No. 31.022/2009,
establishing the design and budget for
innovative schools (Bairro Educador/Escolas
do Amanhã) in 150 high-conflict slum
neighborhoods; and
(b) Resolution No. 1057/2010 (published in the
official gazette on January 25, 2010) that
establishes a new model of integrated early
child care and pre-school services called EDIs
(Espaços de Desenvolvimento Infantil), with
the first set of centers in targeted low-income
areas.
Outcome Indicators
(a) Annual reductions in student dropout rates
within year and between-year and annual
improvement in IDEB/IDE-Rio for Escolas
do Amanhã from the 2009 baseline; and
(b) Annual expansion by 3,000 new openings
in enrollments in ECD centers and pre-
schools targeted to low-income
communities from the 2009 baselines of
29,921 (crèches) and 77,845 (pré-escolas).
Policy Pillar 3: Public Sector Management
Objective: Developing a framework to improve the efficiency of services delivery (a) in the public
sector through introduction of result-based management (RBM) tools and the implementation of the
first steps of a MTEF and (b) in the private sector through public private partnerships (PPP) in
priority areas.
Prior Action 5
Approval of Decree No. 32214/2010 and the
signing of 16 results agreements with said entities
and secretariats for the implementation of a
monitoring and evaluation system with results-
based management tools.
Outcome Indicator
Implementation of RBM, evidenced by annual
evaluation of the performance contracts.
Prior Action 6
Establishment of a framework to enable PPPs to
invest in infrastructure and service delivery
projects, including:
(a) approval of Law No. 105/2009 on municipal
PPP programs by the Legislative Assembly; and
(b) the issuance of Decree No. 32120/2010
establishing the by-laws of the Municipal
Guarantee Fund for PPPs.
Outcome Indicator
Establishment of a framework to enable PPPs to
invest in infrastructure and service delivery
projects, evidenced by the at least one project
prepared by the PPP unit.
45
Box 5: Conditions for Second Tranche Loan Disbursement
Policy Pillar 1: Creating Fiscal Space
Objective: Creating fiscal space to expand public investment and lay the foundations for municipal
growth.
Condition 1
Submitting to the Legislative Assembly a draft
law and/or adopting the adequate legislative
framework to allow the following resources
transfers to recapitalize FUNPREVI including
through:
(a) future royalties revenues from the
municipality;
(b) returns (amortizations and interests) from the
portfolio of real estate loans of FUNPREVI;
(c) real estate assets from FUNPREVI;
(d) real estate assets from the municipality; or
(e) other equivalent measures.
Outcome Indicator
Reduced NPV of the pension system’s actuarial
deficit over the next 50 years by R$3.2Billion
equivalent of 8.8% stemming from the
recapitalization measures.
Condition 2
Implementing the Electronic Fiscal Invoice
(Nota Fiscal Eletrônica) for the collection of the
municipal ISS and creating a database system
(Sistema de Inteligencia Fiscal) to facilitate the
identification of ISS tax evasion.
And submitting to the legislative assembly a draft
law to expedite the recourse to judicial measures
to recover tax arrears.
Outcome Indicator
Improved revenue collection, evidenced by a 4
percent increase in ISS tax collections through
NFEs.
Policy Pillar 2: Innovation in public service delivery Objective: Reforming public services delivery with (a) improved government processes for registering
businesses; (b) increased access to quality family health care and emergency care services through a
new model subcontracting with social organizations to manage health facilities; and (c) improved
early development of poor children, better quality of primary schools in high conflict slum areas and
system wide improvements in student learning outcomes.
Condition 3 Continued implementation of the new
management model with the Municipal Health
Secretariat signing 5 new management contracts
with social organizations to implement services
delivery in 10 additional family health care
clinics (clínicas da família) and 4 additional
emergency care clinics (UPA).
Outcome Indicators Family health care coverage will double from a
January 2009 baseline of 6 percent to a projected
12 percent in December 2011.
46
Condition 4 First 10 EDIs (Integrated Early Child
Development Centers) opened and fully
operational in targeted low-income
neighborhoods.
Outcome Indicators (a) Annual reductions in student dropout rates
within year and between year and annual
improvement in IDEB/IDE-Rio for Escolas
do Amanhã from the 2009 baseline; and
(b) Annual expansion by 3,000 new openings in
enrollments in ECD centers and pre-schools
targeted to low-income communities from
2009 baselines of 29,921 (crèches) and
77,845 (pré-escolas).
Policy Pillar 3: Public Sector Management Objective: Developing a framework to improve the efficiency of services delivery (a) in the public
sector through introduction of result-based management (RBM) tools and the implementation of the
first steps of a MTEF and (b) in the private sector through public private partnerships (PPP) in
priority areas. Condition 5 Initiated the implementation of a medium term
expenditures framework as evidenced through a
report presented by the Borrower’s Secretariat of
Finance confirming consistency between said
framework and the Borrower’s budget guideline
draft law of 2012 in form and substance
satisfactory to the Bank
Outcome Indicator Implementation of the initial year of a 3-5 years
strategy with associated expenditures plan and
financing plan.
Condition 6 Monitoring and evaluation system for results
agreements in operation as evidenced by the
publishing of the annual evaluation of the 16
results agreements signed in 2010.
Outcome Indicator Implementation of RBM, evidenced by annual
evaluation of the performance contracts.
Condition 7 Piloting a stock-management system for the
health sector and approval of the schedule for
municipality-wide rollout implementation within
15 months.
Outcome Indicator Improved efficiency in stock management allows
reducing losses in the stock of goods in the health
sector from 20 percent to10 percent.
Condition 8 The PPP unit has been created (decree issued and
published in the Official Journal), is staffed and
operational, and has issued processes approved by
the PPP council for the preparation and
procurement of PPP projects.
Outcome Indicator Establishment of a framework to enable PPPs to
invest in infrastructure and service delivery
projects, evidenced by the at least one project
prepared by the PPP unit.
47
B. POLICY AREAS
141. The proposed operation would support essential policy reforms within three
broad components: fiscal adjustment, service delivery innovations, and public-sector
management. The policy reforms supported by the proposed operation as well as the expected
results are described in detail below.
Pillar 1: Creating Fiscal Space
142. The actions included in this component support creation of fiscal space through
enhanced efficiency in tax-revenue collections and control of pension-related
expenditures. The fiscal space created for public investments should help finance innovative
public services delivery and modernization of public sector management. In the medium to
long term, the fiscal measures supported by the program should help Rio achieve long-run
fiscal sustainability.
143. As a prior action for the first tranche, the DPL would support submission to the
legislative assembly of three parametric reforms related to the Constitutional
Amendment 41 and applied to new public servants. They are: (a) calculating pensions
benefits based on the average wage rather than the last wage; (b) the indexation of pension
benefits on inflation rather than wage growth; and (c) decreasing the replacement rate of
survivor’s benefits from 100 percent to 70 percent for pension benefits above the RGPS
ceiling.
144. As a second-tranche condition, the proposed loan would support the
recapitalization of the pension fund FUNPREVI including through: (a) future royalties
revenues from the municipality; (b) returns (amortizations and interests) from the portfolio of
real estate loans of FUNPREVI; (c) real estate assets from FUNPREVI; (d) real estate assets
from the municipality, or (e) other equivalent measures.
145. Additional conditions in the fiscal area further support: (a) the implementation of
the Electronic Fiscal Invoice (Nota Fiscal Eletrônica) for the collection of the municipal tax
on services (ISS) and the creation of a database system (Sistema de Inteligencia Fiscal) to
facilitate the identification of ISS tax evasion; and (b) the submission to the legislative
assembly a draft law to expedite the recourse to judicial measures to recover tax arrears. The
expected outcomes of the actions are: (a) reduced NPV of the pension system’s actuarial
deficit over the next 50 years by R$6.3 billion from a current baseline deficit of R$36 billion;
and (b) improved revenue collection, evidenced by a 4 percent increase in ISS tax collections
through NFEs.
Pillar 2: Innovations in Public Services Delivery
146. The DPL supports efforts to bring greater efficiency to the public sector. Reforms seek to improve government processes for registering businesses, increase access to
quality family health care and emergency care services, and establish programs that foster
preschool learning and primary schools in poor and highly violent neighborhoods.
147. Improving the business environment. As a prior action for the first tranche, the
DPL supported approval of Decree No. 30.568/2009, which simplifies the registration process
48
for municipal business licenses for activities with low environmental risk. The expected result
from this component is a reduction in the number of days required to obtain a municipal
business license in Rio from 20 days in 2009 to 12.5 days in 2010.
148. Improving the coverage and efficiency of family health-care services. The
operation’s first tranche will support a new model to manage family health care and
emergency care clinics through social organizations, a strategy sanctioned by Legislative
Assembly approval of Law No. 05026/2009. The first tranche calls for the signing of three
management contracts with a qualified social organization to deliver services in ten family
health care clinics (clínica da família) and three urgent and emergency care clinics (UPA).
Reforms in the second tranche support the continued implementation of the new management
model, with the Municipal Health Secretariat signing five new management contracts with
qualified social organizations to implement services delivery in 10 additional clínicas da
família and four additional UPAs.
149. Strengthening the delivery of urgent and emergency care services. The operation
will support the implementation of urgent and emergence care clinics (UPA). UPAs are health
units that receive, stabilize, and, when necessary, transfer patients in critical medical
conditions to hospitals, providing services that are too serious to be delivered by a family
health-care unit but not serious enough to require hospital care. UPAs are open 24 hours a
day, seven days a week, addressing patient needs that could not be attended by the traditional
basic health-care units or health centers that work only during regular civil service schedule
(8:30 a.m. to 5:00 p.m.). The first tranche of this operation will finance the installation of
three UPAs, which will be managed under a contract signed between the municipality and a
qualified social organization. The second tranche calls for installation of four more UPAs,
also managed under management contracts with qualified social organizations. The municipal
UPAs will complement the UPA network being built and operated by the state government in
the city, integrating state and municipal health networks and collaborating to improve quality
health coverage for the municipality’s poor population.
150. The proposed health-care reforms will produce a range of benefits. The
implementation of contracts between the Municipal Secretary of Health and social
organizations to deliver health services will increase flexibility in acquiring better human
resources and supplies, increasing efficiency, and focusing management on agreed outcomes.
151. The DPL will support improving the quality and coverage of municipal
education services. The proposed operation supports the two core programs established by
the municipal Secretariat of Education (SME): (a) targeted support to schools in the most
disadvantaged areas (Escolas do Amanhã); and (b) expansion of quality early childhood
development services, especially for the poorest families.
152. The DPL will support specific measures in each area. For the first tranche, the
municipality has agreed to implement efforts to improve the quality and equity of education
services. First, it will issue Decree No. 30.934/2009 and No. 31.022/2009, establishing the
design and budget for innovative schools (Bairro Educador/Escolas do Amanhã) in 150 high-
conflict slum neighborhoods, and Resolution No. 1057/2010 (published in the Official
Gazette on January 25, 2010), establishing a new model of integrated early-childhood care
and pre-school services called EDIs (Espaços de Desenvolvimento Infantil), with the first set
of centers in targeted low-income areas. Second, the municipality will implement the Reforço
Escolar, which entails an intensive program of remedial literacy courses for 21,000 students
49
diagnosed as functionally illiterate and special training to upgrade the effectiveness of 3,800
early-grade teachers in imparting basic literacy skills to their students.
153. For the second tranche, the municipality has two aims. First, it will have the first
10 Integrated Early Child Development Centers (EDI) opened and fully operational in
targeted low-income neighborhoods. The government also plans to open additional spaces in
traditional crèche and pre-school centers and continue its collaboration with the Bank on a
rigorous evaluation of the benefits and cost-effectiveness of the municipality’s alternative
ECD models. Second, the municipality will adopt a decree establishing a system of bonus pay
for schools that attain their annual targets for improving student learning outcomes and
student flows and pay the first year’s bonus (expected by September 2010). The latter action
is not a condition for disbursement. The expected outcome of the first- and second-tranche
actions are improved student learning performance on national exams (Prova Brasil and
Provinha Brasil) and reductions in repetition, leading to more efficient student flows and
lower total costs per primary school graduate.
Pillar 3: Public Sector Management
154. This component supports policies to strengthen Rio’s institutional framework
for efficient service delivery and attracting new investments. The DPL will support the
government’s efforts to (a) introduce a medium term expenditures framework as well as
results-based management and increase efficiency in procurement, and (b) establish the
necessary institutional framework for the development of PPP projects in priority areas. This
set of actions is expected to lead to significant improvements in the government’s ability to
effectively and efficiently provide services to the city’s population.
155. The DPL’s first tranche will support introduction of results-based management
systems. This tranche requires the signing of 16 results agreements with the direct
administration and the implementation of a monitoring and evaluation system for the results
agreements. For the second tranche, the city will show the following achievements: (a) the
implementation of the first steps of a medium-term expenditures framework (MTEF) to
inform the preparation of the budget guideline law of 2012-LDO (Lei das Diretrizes
Orçamentárias); (b) the introduction of a monitoring and evaluation system for results
agreements. The latter will be judged on four actions: (a) the publishing of the annual
evaluation for the 16 results agreements signed in 2010 with respect to the year’s targets; (b)
the updating of the IT system with information on progress toward meeting targets for
elaboration of monthly status reports; (c) the maintenance of quarterly meetings on the
progress towards achieving results agreements targets; (d) the preparation of reports on
lessons learned in the first year of implementation of the results agreements and their
monitoring system.
156. An important benchmark for the second tranche is the implementation of a
Public Investment Framework for the municipality to evaluate and select capital
investment projects. Many governments seek to increase fiscal space to boost public
investment in physical assets such as public infrastructure or health facilities; however, the
lack of processes and controls during different phases of the project cycle may undermine the
efficiency of public investment. A well-functioning public investment system could greatly
increase the relative efficiency of public investment as well as its ability to contribute to
enhanced future economic prospects. Such systems include basic processes and controls for
50
project screening, evaluation, selection, funding, and implementation. This benchmark aims to
register the government’s initial efforts towards the development and introduction of basic
processes and controls for public investment projects.
157. Improving procurement process is an important step for increasing economy in
government purchases, thus contributing to overall government efficiency. The second
tranche of the proposed operation will support improvements in the municipal system of
procurement of common goods and services. The municipality will establish a pilot for a
stock management system for the health sector and approve the schedule for municipality-
wide rollout within 15 months.
158. PPPs can enhance the provision of municipal services. As a prior action for the
first-tranche disbursement, the government has agreed to establish a framework to enable
PPPs to invest in infrastructure and service delivery projects. Key actions include: (a)
approval of Law No. 105/2009 on municipal PPP programs by the Legislative Assembly and
(b) the issuance of Decree No. 32.120/2010 establishing the by-laws of the Municipal
Guarantee Fund for PPPs. The DPL’s second tranche will support the implementation of the
PPP program’s institutional structure, with the PPP unit operational and staffed and processes
for the preparation and procurement of PPP projects approved by the PPP council. The goal is
a functioning PPP unit that can prepare projects to attract financing.
C. IMPACT OF THE GOVERNMENT’S PROGRAM ON FISCAL AGGREGATES
159. The debt-restructuring will directly and positively affect the debt dynamics and
the debt-service profile. Rio’s plan to pay down 20 percent of the debt held by the National
Treasury (STN), will reduce the interest rate on the remaining debt from 9 percent plus
inflation to 6 percent plus inflation.
160. The IBRD loan will increase the municipality’s exposure to exchange-rate risk. Dollar-denominated debt will initially rise from 7 percent to 19 percent of the total. However,
several factors mitigate risk—the decreasing size of the debt, the initial low exposure to
dollar-denominated debt, and expectations that the Real will keep appreciating against the
dollar in the medium term. Furthermore, the operation will allow the municipality to diversify
its currency risk by reducing the significant exposure to the retail price index (IGP-DI), which
carries its own exchange-rate risk. Now, almost 90 percent of the debt is indexed to the IGP-
DI.
161. The fiscal impact of the government’s program including the policy reforms
supported by the proposed DPL has been assessed within the debt sustainability analysis
(for details, see Annex 5). On the revenue side, the reforms promise ISS tax revenue
enhancement through the implementation of the electronic fiscal invoice. On the expenditure
side, the government’s program includes: (a) interest payments savings from the debt
restructuring; (b) reduced costs of goods and services due to the implementation of reverse
auction procurement; and (c) reduced pension’s expenditures from rule changes for wages and
survivor benefits. The impact of the reforms is assessed on the evolution of the government
balances, the civil service pension deficit, and the key LFR indicators of total debt, debt
service, and personnel expenditures.
51
162. The analysis indicates that the government’s program will have a strong and
positive impact on the municipality’s fiscal sustainability. The reforms will increase both
the primary and overall balances and reduce the debt indicator expressed in terms of net
current revenue (NCR) (see Figure 12).
Figure 12: Fiscal Impacts of the Government’s Program
Source: World Bank staff projections based on data from the Secretaria Municipal de Fazenda
163. The government’s program will improve the city’s debt sustainability. This is
evidenced by expected further reductions in the city’s net consolidated debt, debt services,
3.00E - 01
2.00E+09
4.00E+09
6.00E+09
8.00E+09
1.00E+10
2009 2010 2011 2012 2013 2014
Reais
Net Consolidated Debt, 2009- 14 -
Baseline Tax Revenue Enhancement Expenditure control Debt Restructuring
0.00E+00
3.00E+08
6.00E+08
9.00E+08
1.20E+09
2009 2010 2011 2012 2013 2014
Reais
Debt Service, 2009-14
Baseline Debt Restructuring
0.00E+00
5.00E+08
1.00E+09
1.50E+09
2.00E+09
2.50E+09
2009 2010 2011 2012 2013 2014
Reais
Primary Balance, 2009-14
Baseline Tax Revenue Enhancement Expenditure control Debt Restructuring
0.00E+00
5.00E+08
1.00E+09
1.50E+09
2.00E+09
2.50E+09
2009 2010 2011 2012 2013 2014
Reais
Overall Balance, 2009-14
Baseline Tax Revenue Enhancement Expenditure control Debt Restructuring
0.00E+00
1.00E+08
2.00E+08
3.00E+08
4.00E+08
5.00E+08
6.00E+08
7.00E+08
8.00E+08
2009 2010 2011 2012 2013 2014
Reais
Interest Payments, 2009-14
Baseline Debt Restructuring
4.00E+08 9.00E+08 1.40E+09 1.90E+09 2.40E+09 2.90E+09 3.40E+09 3.90E+09 4.40E+09 4.90E+09 5.40E+09
2009 2010 2011 2012 2013 2014
Reais
Investment, 2009-14
Baseline Tax Revenue Enhancement Expenditure control Debt Restructuring
52
and personnel expenditures, all of which will fall further below the requirements of the LFR
(see Figure 13).
Figure 13: Evolution of LRF Indicators, with and without Bank Operation
Source: WB Staff Calculations
VI. OPERATION IMPLEMENTATION
A. POVERTY AND SOCIAL IMPACTS
164. The proposed operation is expected to have a significant positive impact on poor
and vulnerable groups. During preparation of the DPL, the Bank undertook a preliminary
poverty and social impact study to determine how it would affect different stakeholder groups
and look for ways to enhance the positive impacts and reduce negative impacts and risks. The
Poverty and Social Impact Assessment (PSIA) focused on policies and programs expected to
have the largest potential impacts on Rio’s poor and vulnerable groups. The analysis
concentrates on activities to improve the business environment and health and education
services. 17
165. Rio de Janeiro’s development priorities, including the policies supported by this
DPL, are embodied in the Multiyear Plan (PPA) and reflect not only rigorous technical
analyses but also the participatory decision-making process defined in the Municipal
Organic Law (Lei Orgânica do Município do Rio de Janeiro) and Municipal Law No.
17
The full PSIA, including a list of stakeholder group meetings, is available in the project files. The report is
based on primary and secondary sources, including municipal research results and statistical data.
0%
20%
40%
60%
80%
100%
2004 2005 2006 2007 2008 2009 2010* 2011* 2012* 2013* 2014*
% oif Net Curre nt Revenue
Impact of the Bank Operation on the LRF indicators, 2004-14
Personnel Expenditure (? 60% of NCR) Personnel Expenditure (with WB operation)
Net Debt Consolidated ( ? 120% of NCR) Net Debt Consolidated (with WB operation)
Debt Services (? 11,5% of NCR) Debt Services (with WB operation)
53
3189.18.
The municipality maintains consultative councils comprised of civil society and
government representatives. The purpose of these councils is to assist the municipal
administration in the analysis, planning, policymaking, implementation, and supervision of
government actions and decisions in their respective areas. The councils created by the
organic law include education, health, human rights, defense of children and teenagers,
economic development, science and technology, environment, and urban policy.
166. For the business environment, operation-supported policies and reforms would
encourage the formal business sector. Alvará Já is simplifying the licensing of low-risk
businesses, and REGIN will facilitate business documentation requirements. These will likely
have positive social impacts on poor and vulnerable groups, now predominantly employed in
the informal economy. These reforms will likely increase the employment opportunities in the
formal economy and improve workers’ access to better labor regimes, higher earnings, and
improved benefits. In addition, it is expected that the two programs’ time and cost savings
will provide incentives for informal entrepreneurs to properly register their businesses and
workers.
167. Operation-supported policies will provide more and better health services to
poor and vulnerable groups, such as women, youths, and the Afro-Brazilian population. Saúde Presente is expected to have positive effects on the poor because it aims to improve
primary care and will target the poorest, fastest growing, remotest, and most poorly serviced
urban neighborhoods, such as Santa Cruz, Paciência, and Sepetiba in the western region.
Currently, these neighborhoods are characterized by the municipality’s highest levels of social
and economic vulnerabilities—the worst health indicators, the most precarious public
transportation, and the highest indicators of crime and violence. One of the main risk factors
is the difficulty of assigning highly skilled medical personnel, and especially physicians, to
poor neighborhoods. The contracts with social organizations are expected to significantly
contribute to better incentives for physicians and other skilled health personnel. In addition,
steps are being taken to enhance security by locating health facilities near major roads, and a
training program for community health agents to accompany home visits is being developed.
168. Low educational attainment closely correlates with poverty and criminal and
violent behavior; hence, the municipality’s main focus is intervening early to ensure high-
risk children’s healthy development and to achieve universal primary school completion, with
improved teacher quality and learning outcomes. Educational indicators—among them,
truancy levels, grade repetition, dropout rates, and test results—are worst in the poorest
neighborhoods. The operation-supported educational programs include the Escolas do
Amanhã, expanded investment in EDIs (Espaços de Desenvolvimento Infantil), crèches and
pre-schools, and system wide support for remedial tutoring and better learning outcomes.
These programs are expected to have significant positive social impacts on poor and
vulnerable groups. Improvements in public educational quality and efficiency generate
relatively greater gains for poor people, who rarely have alternatives to the public school
system. Investments in early childhood development—especially those targeting children
from poor and vulnerable families—have been shown worldwide to have major impacts on
children’s health, nutrition, cognitive abilities, and success in later schooling. They also have
18
Municipal Law No. 3189 (March 23, 2001) provides for the participation of the community in the preparation,
definition, execution, and monitoring of the multiyear plan and annual budgetary law. Available at:
http://smaonline.rio.rj.gov.br/legis_consulta/17279Lei percent203189_2001.pdf.
54
long-term positive effects on employability, social interaction, and avoidance of risky
behaviors, crime, and incarceration. One of the main risks faced by Rio youths is a high level
of crime and violence and the temptations to join gangs and engage in illegal activities.
Research indicates that the kinds of ECD and school-quality interventions this operation will
support are some of the most powerful strategies for keeping children in school and away
from violence.
169. The introduction of results-based management (RBM) as well as medium term
expenditures framework will help ensure greater efficiency of public expenditures
including for the poor. These new public sector management tools will help ensure that Rio
municipality’s public expenditures are efficiently used to address the issues of the entire
population, including the poor and to help better plan the major events that Rio will be hosting
in the medium term. Results based management will further create increased accountability on
the quality of public services delivered to the poor. Medium Term Expenditures elements will
help increase Rio municipality’s forward costing and planning of capital as well as recurrent
expenditures and as such lower the probability of fiscal slippages that could affect key social
expenditures.
170. On pensions, the reform proposed is focused on new public servants and as such
is not expected to have an impact on the poor. The reform supports the application of
constitutional guidelines in effect since 2004, which Rio has yet to adopt. These are across-
the-board reform applied, or in the process of being applied, in all states and municipalities in
Brazil. Those reforms supported by the operation are not targeted to poor people; rather, they
affect future municipal servants who, in most cases, will be in the high-income brackets. For
instance, the reform on reducing survivor benefits from 100 percent to 70 percent only applies
to those that receive benefits above the RGPS ceiling (about RS 3.416,54, which is equivalent
to 2.5 times the average wage in the metropolitan area). As a result, the reform will only
affect the 10 percent richest pensioners. The second reform supported by the operation
determines benefits based on the average wage rather than the last wage. It is more generous
than the private-sector rules, which provide only a portion of the average salary. The reform
will curtail artificially generous and unsustainable benefits and better align public servants’
benefits to those received in the private sector.
B. IMPLEMENTATION, MONITORING AND EVALUATION
171. The Secretary of Finance, with support from the Secretary of Planning and the
individual sectors, will be responsible for the overall implementation of the proposed
operation and for reporting progress and coordinating actions. Two tasks are essential:
(a) providing evidence justifying the first and second tranches; and (b) overseeing and
reporting progress toward completion of the second-tranche conditions, including tracking
individual conditions and facilitating the timely completion of the studies and activities
required for meeting these conditions.
172. The Bank will vet the prior conditions for the first tranche. The timing of this
disbursement will depend upon the city’s ability to provide the Bank with satisfactory
evidence that the conditions have been met. While most of these conditions have already been
addressed during project preparation, the Secretary of Finance still has the responsibility to
present the information in a timely manner and in a format satisfactory to the Bank.
55
173. Similarly, the Secretary of Finance will be responsible for marshalling the
information necessary to demonstrate that Rio has satisfactorily met the second-tranche
conditions and covenants. In the event that one or more conditions is not met or only partly
met, the Secretary of Finance will take the lead in identifying and explaining causes and
determining what, if anything, can be done to mitigate the corresponding risks.
174. A Project Implementation Committee of officials from the agencies directly
involved in the DPL-supported reform agenda will monitor implementation, including
all essential technical assistance activities. In addition to monitoring and management
systems, this project will support a number of evaluation activities that will generate data to
inform city policies and—by informing policies—strengthen a culture of evidence-based
policymaking. Several activities present opportunities for significant learning, both for the
municipality itself and for other governments in Brazil. The major initiatives for evaluation
activities are taking place within the human development sectors, namely in education, and
health.
175. In education, the SME is taking advantage of several learning opportunities. First, the SME is collaborating with the Bank and researchers from the Catholic University of
Rio (PUC-Rio) to evaluate merit pay for teachers in schools that achieve key goals, seeking to
determine the impact on subsequent efforts and teaching methods and—most important—
student outcomes. Second, the SME is collaborating with the Bank and IPEA researchers to
evaluate the effectiveness of municipal crèches relative to alternative options sought out by
parents—whether private crèches or home care. This evaluation will provide data on
children’s learning outcomes, parents’ involvement in schools, and parents’ labor market
participation. Third, the SME is collaborating with the Bank and University College London
researchers to evaluate a Saturday-only crèche option, which includes parenting classes at the
end of the day. A pilot is underway, and the program will be expanded in January 2010.
Finally, the Bank is discussing with the SME a plan to evaluate the new Escolas do Amanhã
program, which provides well-resourced schools in crime-ridden areas.
176. In health, the State Secretariat of Health and Civil Defense (SESDEC) will be
carrying out an evaluation of patient risk assessment in one hospital to work out the
details of implementation and gauge patients’ reactions and the impact on hospital
efficiency. The evaluation will be critical to improving the program and implementing it in
hospitals throughout the municipality.
C. FIDUCIARY ASPECTS AND DISBURSEMENTS
Foreign exchange control environment
177. The IMF Safeguards Assessment of the Central Bank of Brazil, first done in
October 2002 and updated in March 2004, concluded that the Central Bank does not
present widespread vulnerabilities that could compromise the safeguarding of Fund
resources. In particular, the Central Bank audit is conducted by an internationally recognized
audit firm, while the Central Bank’s internal audit function contributes effectively to internal
control systems. Since the IMF Safeguards Assessment of the Central Bank has not been
updated in recent years, the Bank also reviewed the year-end Central Bank financial
statements for 2006, 2007, and 2008, including the Explanatory Notes to the financial
56
statements and the independent auditors’ report that included an unqualified opinion on the
financial statements for all years.
178. The Explanatory Notes, audited as an integral part of the financial statements,
provide an extensive explanation of the Central Bank’s risk management policies,
including those related to financial instruments held to manage the international
reserves. In relation to operational risks, the audited Notes state that the Central Bank ―uses
internal control systems, which are considered adequate for its activities.‖ Based on the IMF
Safeguards Assessments and the review of the Central Bank’s financial statements, the control
environment, procedures, and regulations governing the Central Bank’s operations through
which the foreign exchange from the operation would flow are considered adequate.
Public financial management of budget resources
179. The Bank’s review of the municipality’s key public financial management
(PFM) institutions, systems, processes, and policies, indicates that the municipality’s
PFM system, including budgeting, accounting, financial reporting, control and cash and
debt management is considered to be functioning adequately. Management has also
demonstrated a clear commitment to strengthening municipal PFM. Planning and budgeting
processes are timely and produce realistic budgets and reasonably strong budget execution
controls are spearheaded by the independent Office of the Controller General. The
management of cost data is possibly a ―good practice‖ in the Brazilian public sector. Some
PFM systems are aging but still provide reasonable control.
180. Upon taking office, the new administration found a planning and budgeting
system that lacked strategic focus on priorities and a poor management system that
undermined government effectiveness. The municipal public administration also suffered
from an overly complex organizational structure, cumbersome administrative procedures, and
a lack of instruments to monitor performance. In response to this situation, the new
administration has strengthened its PFM by: (a) reorganizing planning and budgeting in Casa
Civil and putting it in charge of preparing a strategic plan and implementation and operation
of a results-based management system; (b) strengthening debt and cash management by
creating a function to analyze the portfolio financial risks; designing and implementing
integrated systems for debt recording and cash management; and training staff to undertake
risk analysis, quantify cost-risk tradeoffs, and manage the municipality’s financial assets and
liabilities;(c) tightening controls over spending on active staff; (d) defining a strategy to
streamline administrative procedures; (e) passing Municipal Law Nº 5026 authorizing the
municipal government to establish management contracts with private nonprofit institutions;
and (f) enhancing accountability through the implementation of results agreements.
D. DISBURSEMENT
181. Once the Bank formally notifies the borrower that the loan is available for
withdrawal, the borrower may submit a withdrawal application so that the proceeds of the
loan would be deposited by the Bank. The Bank will disburse the two tranches of the loan
proceeds. All withdrawals from the Loan Account shall be deposited by the Bank into a
defined account as found acceptable to the Bank. The Borrower shall ensure that upon each
deposit of an amount of the Loan into this account, an equivalent amount is accounted for in
the Borrower’s budget management system, in a manner acceptable to the Bank. The
57
Municipal Secretary of Finance will then provide the Bank a written confirmation of the
transaction.
E. ENVIRONMENTAL ASPECTS
182. The proposed operation is not expected to have a significant environmental
impact. An analysis of the environmental implications reveals no likely environmental impact
from the DPL-supported policies. In particular, streamlining the registration process for
businesses should in fact free up Environmental Secretariat resources to focus licensing
efforts on the economic activities that do have environmental impacts. The expected increase
in formal-sector businesses will increase demand for environmental monitoring, and the
secretariat has already requested additional funds to hire more personnel. A few months into
implementation of the Alvará Já, the experience so far has shown that the majority of
companies that have used the program to register do not need environmental licensing to
operate—for example, service providers. While rising demand for environmental monitoring
is expected, the actual increase in personnel capacity need may not be large. Finally, firms
that tend to benefit the most from these types of reforms are micro and small enterprises,
either new firms or previously informal ones. Given the scope of these companies’ activities,
and the fact that these reforms are not expected to increase large companies’ economic
activity in mining and other sectors, the expected environmental impact is low.19
F. RISKS AND RISK MITIGATION
The proposed operation is considered of moderate to substantial risk.
183. Implementation of the government’s reform program: The main risk is related to
the fact that the city’s administration is relatively new and may overestimate the pace of
reforms or may not have sufficient support from civil servants with longer experience in the
public sector. As a result, weak implementation of the agreed measures could result in delays
in the second-tranche disbursement. This risk is mitigated as follows. First, the Bank is
supporting the municipality’s efforts to reinforce implementation capacity—including a
technical assistance loan in the areas of public-sector management, pensions, education, and
health; close supervision during implementation; and knowledge exchanges with other
countries and other subnational governments in Brazil. Second, the government has shown a
strong commitment to its reform program and has made progress in some areas, establishing a
solid track record since taking office.
184. Upcoming presidential and gubernatorial elections: The main political risk is
related to the presidential and state elections in November 2010. Though the municipal
government is not up for election, the administration may have limited political space to
implement deep reforms because it may face a complex political situation and groups with
entrenched political interests may oppose the proposed reforms. However, the municipality’s
19
The Alvará Já reform has been facilitating the registration process for micro and small companies that
typically do not need environmental licenses to operate. Prior to the Alvará Já, every company had to go
through the same registration procedures, regardless of their potential environmental impact or their need for an
environmental license. The Alvará Já now simplifies the licensing for companies with a low environmental
impact or without a need for such an environmental license. However, this streamlined licensing process does
not mean that companies will not be monitored for possible environmental impacts; in fact, it frees up resources
that, coupled with the additional personnel, should make the municipality more effective in its monitoring tasks.
58
political leadership enjoys support from both of the main candidates for elections presidential
and state levels, and the outcome of the elections should not affect the municipality’s
development programs. In addition, the preparation of the World Cup and the Olympics
implies that the federal and state government will support and foster continuity of the
municipality’s strategic programs.
185. Fiscal and Public Sector: There is a risk that preparations for the Olympics
may burden the municipality’s finances and the capacity to implement its reform
program. Previous Olympics ended up costing much more than initially planned and
temporarily hijacked government resources to complete hosting infrastructure in time. The
Olympics are in 2016, and the second-tranche disbursement is planned for July 2011. The
reforms supported by this DPL should not be affected by the Olympics planning. However,
there is a risk of fiscal burden from the Olympics that would occur beyond the loan’s
implementation period. This risk is mitigated in three ways. First, the federal and state
governments will be working with the municipality to share the implementation and financial
burdens related to the games. Second, this DPL supports a set of institutional reforms geared
to improve the institutional capacity to manage projects and strengthen the efficiency of
resource allocation in the medium term. Third, the technical assistance loan will have a strong
public-sector component that will support capacity building in public investment
management, medium-term financial planning, and results-based management. The bank will
also share with the municipality the experiences of other countries and subnationals in
implementing public-sector management reforms, partnering with the GET-PSM (Global
Expert Team on Public Sector Management).
186. Pensions: There is a moderate risk that the government does not take advantage
of the full range of pension reform measures. Each reform implies a loss in benefits for one
political constituency or another and is likely to face resistance from unions or retiree
associations. The operation’s design is a mitigating factor because the reforms are focused on
future public servants, implying lower political risk.
187. The proposed pensions reforms are mandated by the federal constitutional
amendment and have already being undertaken in Rio and in other municipalities and
states since 2004. Although the reforms are ―prescribed by the federal constitution,‖ there is a
chance that the legislative assembly will not approve them. However the team deems that risk
as limited, given the high political support for the current administration and the fact that the
measures target new public servants. The fiscal implications of a potential delay in pension
reform would be increased pensions expenditures and inconsistency with current federal
legislation, which could affect federal transfers to the municipality.
188. PPPs: The main risks center on the institutional capacity to manage a PPP
program and the generation of financial contingent liabilities. Institutional capacity risks
can be mitigated by a well-planned and executed capacity-building program, including the
hiring of key advisors for the transactions. The municipality is aware of the need to ensure
institutional capacity to manage its PPP program effectively. City officials are thinking
carefully about the structure of such a program and the expertise they will need to manage it.
189. The municipality is also moving to mitigate contingent-liability risks. Rio’s PPP
program entails a number of projects that are not fully financially viable. The municipality
will have to enhance the project through financial contributions and guarantees. This may
59
generate contingent financial liabilities, creating the need to manage them appropriately and
track them trough a register. The potential risks from these liabilities are limited and will be
mitigated because the municipality is setting up a fund with liquid assets to guarantee
committed financial payments for PPP projects. The city's Treasury is establishing a process
to adequately assess the need for guarantees in projects. The Treasury is also aware of the
need to properly report and budget for contingent liabilities, and it has committed to do so in
accordance with best practices. The municipality’s recurrent payments will be assigned yearly
through the budget; in the event of a failure to pay, the guarantee will be triggered and the
guarantee fund will be used to cover payments. Two issues are critically important—ensuring
allocated funds are exclusively used for the appropriate purpose and ensuring the guarantee
fund has adequate resources. The municipality’s intentions are set out in their draft by-laws
for the guarantee fund, greatly reducing the usual risk associated with contingent liabilities.
The issue of termination remains, but in that case assets will be recovered. On balance, the
fiscal costs of termination should be minimal, leaving just an issue of liquidity at the time of
paying termination compensation.
190. As part of the operation preparation, the Rio DPL team has received advice
from the Bank’s Global Expert Team for PPP (GET-PPP) in advising the municipality
on its PPP program. This support has included several consultations on the guarantee fund
that will be established for PPPs and an initial assessment of the municipality's institutional
structure and capacity to manage a PPP program. The GET-PPP team has provided
recommendations on the guarantee fund and its by-laws and produced a draft document with
recommendations for the institutional framework and capacity-building activities. The Bank
team would continue to provide the municipality with the technical support needed to develop
its PPP Program.
191. Education: Rio is implementing the Escolas do Amanhã program in high-crime,
drug-infested areas. Due to the unstable environment in these neighborhoods, there is some
risk that it will be difficult to implement all elements of the ambitious program at all sites.
Plans calls for ―cinema clubs‖ at the schools on weekends, skills training centers, and one-
stop shops at schools for all types of municipal services, including birth and marriage
certificates, car registrations, and pension claims. To achieve the goal of full integration and
community acceptance of the Escolas do Amanhã, the SME has created new positions—an
educador comunitário, responsible for the link between each school and the community, and a
mães comunitárias, responsible for monitoring attendance and assisting at school events.
The program is off to a good start, but it is likely to face greater implementation challenges in
some communities than others. To mitigate these risks, the SME has assembled a strong and
experienced team that is working closely with the municipality’s social services branches.
192. Implementing and operating the Espaços para Educação Infantil program
requires the development of a strong analytical framework with results-based evidence. Without this framework, it would be hard to improve the EDIs. To mitigate this risk, SME in
partnership with UNESCO is already developing a pilot program in 10 schools to test and
adapt the model before full implementation. The SME is also joining with IPEA, IETS and
the Bank to implement a rigorous, randomized controlled trial to evaluate the developmental
benefits and costs of the SME’s new models and traditional crèche and pre-school services,
comparing them to situations with no access to ECD services. Sovereign repayment risks.
The team feels confident that the sovereign repayment risk for Brazil is very low. Portfolio
investment flows have been increasing, but they are currently at the same as 2007 and well
60
below levels that can constitute a vulnerability for the country as a whole. The accumulation
of reserves up to US$239 billion and the consistent application of sound macro policies in the
past 10 years more than offset the short-term increase in portfolio investments in making an
assessment of low vulnerability.
61
ANNEX 1: LETTER OF DEVELOPMENT POLICY
62
63
64
65
66
ANNEX 2: OPERATION POLICY MATRIX – RESULT INDICATORS
Actions in bold are the core prior actions and conditions for this DPL
Programs Long Term Vision Prior Actions
(First Tranche)
Conditions
(Second Tranche)
Outcome Indicators
Pillar 1: Creating Fiscal Space
Creating Fiscal Space
Creating fiscal space
to expand public
investment and lay the
foundations for
municipal growth.
Submitting to the legislative
assembly a draft law consistent with
the federal Constitutional
Amendments No. 20 of 1998 and No.
41 of 2003 that mandate for new
public servants:
(i) the calculation of pension
benefits based on the average
wage rather than the last wage;
(ii) the indexation of pension
benefits on inflation rather than
wage growth;
(iii) the reduction by 30 percent of
survivors benefits for
pensioners above the RGPS
ceiling.
Approval by the legislative
assembly of the draft law on
pensions that was submitted as a
prior action for the first tranche.
Submitting to the legislative
assembly a draft law and/or
adopting the adequate
legislative framework to allow
the following resources transfers
to recapitalize FUNPREVI
including through:
(f) future royalties revenues from
the municipality;
(g) the returns (amortizations
and interests) from the
portfolio of real estate loans of
FUNPREVI;
(h) real estate assets from
FUNPREVI;
(i) real estate assets from the
municipality; or
(j) other equivalent measures.
Implementing a set of legal and
administrative measures to
improve the corporate governance
of the pension fund and the
institutional capacity to manage
Reduced NPV of the pension
system’s actuarial deficit over
the next 50 years of 17% (from
a current baseline of R$36
billion) or R$6.3 billion of
which R$3.1 billion from
parametric reforms and
R$3.2Billion from the
recapitalization measures.
Improved revenue collection,
evidenced by a 4 percent
increase in ISS tax
collections through NFEs.
Rationalized current
expenditures as evidenced by a
reduction in the growth of
personnel expenses.
67
Programs Long Term Vision Prior Actions
(First Tranche)
Conditions
(Second Tranche)
Outcome Indicators
Decree No 30.345 (01/01/09)
mandating the reduction of 30 percent
of commissioned positions in the direct
and indirect municipal administration
and the reduction of the incorporations
of benefits earned in the private sector.
Approval of the draft law to introduce a
user charge tax on public illumination
by the legislative assembly.
the pension funds’ assets.
Issuing an administrative decree
(Decreto Interno) setting up the
organizational restructuring and
the institutionalizing of the cash
management function performed
by the Treasury.
Implementing the Electronic
Fiscal Invoice System (Nota
Fiscal Eletrônica) for the
collection of the municipal tax
on services (ISS) and creating a
database system (Inteligência
Fiscal) to facilitate the
identification of ISS tax evasion.
Submitting to the legislative
assembly a draft law to expedite
the recourse to judicial
measures to recover tax arrears.
Completion of the municipality
payroll audit including
compensation for active
employees, pensioners, and
survivors benefits.
Pillar 2: Innovation in public service delivery
Reforming Public Services
Delivery
(a) Improved
government
processes for
registering
businesses.
(b) Increased access to
quality family health
care and emergency
Approval of Decree No. 30.568/2009,
which simplifies the registration
process for municipal business
licenses for activities with low
environmental risk.
Approval of the Law No. 5026/2009
and Decrees No. 30.780/2009, No.
30.907/2009 and No. 30.916/2009 to
REGIN (one stop shop for business
registration) is implemented at the
municipal level.
Continued implementation of the
new management model with the
Municipal Health Secretariat
signing five new management
contracts with qualified social
Reduction in the number of
days required to obtain a
municipal business license in
Rio from 20 days in 2009 to
12.5 days in 2010.
Family health care coverage
will double from a January
2009 baseline of 6 percent to a
projected 12 percent in
68
Programs Long Term Vision Prior Actions
(First Tranche)
Conditions
(Second Tranche)
Outcome Indicators
care services.
(c) Improved early
development of poor
children, better
quality of primary
schools in high
conflict slum areas
and system wide
improvements in
student learning
outcomes.
transfer public services management
to social organizations and
implementation of the law with the
Municipal Health Secretariat signing
three management contracts with
qualified social organizations to
deliver services in ten family health-
care clinics (clínica da família) and
three emergency care clinics (UPA).
Issuing of (a) Decrees No.
30.934/2009 and No. 31.022/2009
establishing the design and budget
for innovative schools (Bairro
Educador/Escolas do Amanhã) in 150
high-conflict slum neighborhoods;
(b) Resolution No. 1057/2010
(published in the Official Gazette on
January 25, 2010), establishing a new
model of integrated early child care
and pre-school services called
Espaços de Desenvolvimento Infantil
(EDIs), with the first set of centers in
targeted low-income areas.
Establishment of a Partnership
agreement with Ayrton Senna Institute
for delivery of remedial classes during
2009 for 21,000 students diagnosed as
functionally illiterate and training of
1,736 teachers in literacy teaching
skills.
organizations to implement
services delivery in 10 additional
family health-care clinics
(clínicas da família) and four
additional emergency care clinics
(UPA).
(a) First 10 EDIs (Integrated
Early Child Development
Centers) opened and fully
operational, in targeted low-
income neighborhoods.
(b) Issuance of Decree No.
30.860/2009, establishing a system
of bonus pay for schools that attain
annual targets for improvements in
student learning and student flows.
December 2011.
(a) Annual reductions in
student within year and
between-year dropout rates
and annual improvement in
IDEB/IDE-Rio for Escolas do
Amanhã from the 2009
baseline; and
(b) annual expansion by 3,000
new openings in enrollments
in ECD centers and pre-
schools targeted to low-
income communities from
29,921 (crèches) and 77,845
(pré-escolas) from 2009
baseline.
The share of municipal Grade 2
students meeting national
reading proficiency standards
on Provinha Brasil rises by at
least 1 percentage point
annually from 73 percent in
2009.
The share of children more than
two years behind grade level at
grade 8 or 9 (atrasados)
decreases by at least 1
percentage point annually from
14.3 percent in 2009.
Pillar 3: Public Sector Management
Strengthening the Public
Institutional Framework
for efficient service
Developing a
framework to improve
Approval of Decree No. 32214/2010
and the signing of 16 results
agreements with said entities and
Initiating the implementation of a
medium term expenditures
Implementation of the initial
year of a 3-5 years strategy
with associated expenditures
69
Programs Long Term Vision Prior Actions
(First Tranche)
Conditions
(Second Tranche)
Outcome Indicators
delivery the efficiency of
services delivery (a)
in the public sector
through introduction
of a MTEF and result-
based management
(RBM) tools and (b)
in the private sector
through public private
partnerships (PPP) in
priority areas.
secretariats for the implementation
of a monitoring and evaluation
system with results based
management tools.
Development of an IT system for
results monitoring.
Establishment of a Project Unit to
monitor a portfolio of 46 priority
projects linked to the Strategic Plan of
the Municipality.
Establishment of a framework to
enable PPPs to invest in
infrastructure and service delivery
projects, including:
Approval of Law No. 105/2009 on
municipal PPP programs by the
Legislative Assembly and
The issuance of Decree No.
32120/2010 establishing the by-laws
of the Municipal Guarantee Fund
for PPPs.
Decree Nº 30.539 (of March 17, 2009)
institutionalizing yearly procurement
planning for the centralized purchase
of general consumption goods and
services.
framework as evidenced through a
report presented by the
Borrower’s Secretariat of Finance
confirming consistency between
said framework and the
Borrower’s budget guideline draft
law of 2012 in form and substance
satisfactory to the Bank
Monitoring and evaluation
system for results agreements in
operation as evidenced by (a)
the publishing of the annual
evaluation of the 16 results
agreements signed in 2010; (b)
the updating of the IT system with
information on progress towards
achievement of targets for
elaboration of monthly status
reports; (c) the maintenance of
quarterly meetings on the progress
towards achieving results
agreements targets; (d)
preparation of report on lessons
learned in the first year of
implementation of results
agreements and their monitoring
system.
Implementation of a Public
Investment Framework for the
municipality to evaluate and select
capital investment projects.
The PPP unit has been created
(decree issued and published in
the Official Journal), is staffed
and operational, and has issued
plan and financing plan used
for the preparation of the
budget guideline law of 2012 -
LDO (Lei das Diretrizes
Orçamentárias).
Implementation of RBM,
evidenced by annual
evaluation of the
performance contracts.
Establishment of a
framework to enable PPPs to
invest in infrastructure and
service delivery projects,
evidenced by the at least one
project prepared by the PPP
unit.
Average savings of 20 percent
through centralized
procurement of general
consumption goods and
services and the estimated cost.
Improved efficiency in stock
management allows reducing
losses in the stock of goods in
the health sector from 20
percent to10 percent.
70
Programs Long Term Vision Prior Actions
(First Tranche)
Conditions
(Second Tranche)
Outcome Indicators
processes approved by the PPP
council for the preparation and
procurement of PPP projects.
Publication in the Official Journal
of the call for expressions of
interest for one PPP project.
Piloting a stock management
system for the health sector and
approval of the schedule for
municipality-wide roll-out
within 15 months.
71
ANNEX 3: FUND RELATIONS NOTE
Bank and Fund country teams for Brazil meet regularly. Economist teams have been
meeting once every three months on average, and lead economists/sector leaders have been
meeting twice yearly. During the IMF yearly surveillance mission—Article 4 mission—in
Brazil, the Fund team meets with the Bank team’s lead economist in Brasília. The Bank
representative participates in the presentation of the Brazil Article 4 board document. The
IMF country resident representative is in regular contact with the Bank team. He serves as a
peer reviewer for the Rio de Janeiro State Fiscal Sustainability, Human Development, and
Competitiveness DPL. The primary objective of the consultations is to inform each institution
of the other’s ongoing projects and studies. The IMF work on Brazil includes one staff visit
and a yearly surveillance mission (also referred to as Article 4 mission), which are the basis
for preparation of the Article 4 documents and the Selected Issues Papers. The secondary
objective is to share views about the direction and effectiveness of macroeconomic policies
being considered by the government and to articulate and influence each other’s sectoral and
macroeconomic priorities. The Bank also shares with the Fund the progress and findings of
Bank economic studies. Because of its engagement at the subnational and sectoral levels, the
Bank brings this perspective to the discussion. The outcome of consultations is a short joint
memorandum and ―action matrix‖ that summarizes the main issues discussed and the work
program for the next 12 months. The memorandum and matrix include: (a) identification of
analytical work of joint interest; (b) tentative mission dates; and (c) expectations for main
programs, projects, technical assistance, and lending operations for the period ahead.
72
73
74
ANNEX 4: STATEMENT OF LOANS AND CREDITS
BRAZIL: Municipality of Rio de Janeiro Fiscal Consolidation for Efficiency and Growth DPL
Original Amount in US$ Millions
Difference between
expected and actual disbursements
Project
ID
FY Purpose IBRD IDA SF GEF Cancel. Undisb. Orig. Frm. Rev’d
P118410
P106703
P106390
P113540
P108443
P099469
P101508
2010
2010
2010
2010
2010
2010
2010
BR Mato Grosso do Sul Roads
BR São Paulo Water Reagua
BR São Paulo Metro Line 4-Phase 2
BR AIDS-SUS
BR SP Sust. Rural Dev. & Access to
Markets
(APL 2) 2nd National Environment
BR-RJ Sustainable Rural Development
300.0
64.5
130.0
67.0
78.0
24.30
39.50
0.0
0.0
0.0
0.0
0.0
0.0
0.0
0.00
0.00
0.0
0.0
0.0
0.00
0.00
0.00
0.00
0.00
0.00
0.00
0.00
0.00
0.00
0.00
0.00
0.00
0.00
0.00
0.00
300.0
64.5
130.0
67.0
78.0
24.30
39.40
0.00
0.00
0.00
0.00
0.00
0.0
1.83
0.00
0.00
0.00
0.00
0.00
0.00
0.00
P119215 2010 BR AF Minas Gerais Swap 461.0 0.00 0.00 0.00 0.00 461.00 0.00 0.00
P116170 2010 BR São Paulo Metro Line 5 650.0 0.00 0.00 0.00 0.00 650.00 0.0 0.00
P108654 2010 BR Pernambuco Sustainable Water 190.00 0.00 0.00 0.00 0.00 190.00 0.00 0.00
P106663 2010 BR Sao Paulo Feeder Roads Project 166.65 0.00 0.00 0.00 0.00 55.73 -110.50 0.00
P103770 2010 BR ALAGOAS Fiscal & Public Mgmt Reform
195.45 0.00 0.00 0.00 0.00 74.96 -120.00 0.00
P104995 2010 BR Municipal APL5: Santos 44.00 0.00 0.00 0.00 0.00 44.00 0.00 0.00
P111996 2010 BR RJ Mass Transit II 211.70 0.00 0.00 0.00 0.00 210.67 -0.50 0.00
P006553 2010 BR SP APL Integrated Wtr Mgmt 104.00 0.00 0.00 0.00 0.00 104.00 3.78 0.00
P117244 2010 BR Rio State DPL 485.00 0.00 0.00 0.00 0.00 485.00 0.00 0.00
P104752 2009 BR Paraiba 2nd Rural Pov Reduction 20.90 0.00 0.00 0.00 0.00 20.90 0.00 0.00
P099369 2009 BR Ceara Regional Development 46.00 0.00 0.00 0.00 0.00 45.89 0.07 0.00
P095205 2009 BR 1st Prog. DPL for Sust. Env
Mgmt
1,300.00 0.00 0.00 0.00 0.00 1,300.00 1.30 0.00
P094315 2009 BR Municipal APL4: Sao Luis 35.64 0.00 0.00 0.00 0.00 33.49 -1.90 0.00
P106208 2009 BR Pernambuco Educ Results& Account.
154.00 0.00 0.00 0.00 0.00 97.84 -55.77 0.00
P106765 2009 BR Ceara Inclusive Growth (SWAp II)
240.00 0.00 0.00 0.00 0.00 137.05 27.29 0.00
P106767 2009 BR RGS Fiscal Sustainability DPL 1,100.00 0.00 0.00 0.00 0.00 450.00 0.00 0.00
P107146 2009 BR Acre Social Economic Inclusion
Sust D
120.00 0.00 0.00 0.00 0.00 104.00 -0.70 0.00
P107843 2009 BR Fed District Multisector Manag. Proj.
130.00 0.00 0.00 0.00 0.00 129.68 29.23 0.00
P110614 2009 BR: Sergipe State Int. Proj.: Rural Pov
20.80 0.00 0.00 0.00 0.00 17.55 2.81 0.00
P088716 2009 BR Health Network Formation &
Quality Im
235.00 0.00 0.00 0.00 0.00 234.41 4.07 0.00
P106038 2008 BR Sao Paulo Trains and Signalling 550.00 0.00 0.00 0.00 0.00 307.04 34.30 0.00
P083997 2008 BR Alto Solimoes Basic Services and Sust
24.25 0.00 0.00 0.00 0.00 21.59 5.04 0.00
P101324 2008 BR-Second Minas Gerais Dev't Partnership
976.00 0.00 0.00 0.00 0.00 235.40 6.34 0.00
P088966 2008 BR Municipal APL3: Teresina 31.13 0.00 0.00 0.00 0.00 28.64 4.42 0.00
P095626 2008 BR (APL2)Family Health Extension
2nd APL
83.45 0.00 0.00 0.00 0.00 83.24 26.15 0.00
75
P089013 2008 BR Municipal APL: Recife 32.76 0.00 0.00 0.00 0.00 32.68 13.96 0.00
P094199 2008 BR-(APL) RS (Pelotas) Integr. Mun. Dev.
54.38 0.00 0.00 0.00 0.00 39.36 5.42 0.00
P089929 2008 BR RGN State Integrated Water Res Mgmt
35.90 0.00 0.00 0.00 0.00 31.20 20.73 0.00
P082651 2007 BR APL 1 Para Integrated Rural Dev 60.00 0.00 0.00 0.00 0.00 51.20 45.20 0.00
P089793 2007 BR State Pension Reform TAL II 5.00 0.00 0.00 0.00 0.00 4.99 3.17 0.00
P095460 2007 BR-Bahia Integr.Hway Mngmt. 100.00 0.00 0.00 0.00 0.00 87.90 24.43 0.00
P089011 2007 BR Municipal APL1: Uberaba 17.27 0.00 0.00 0.00 0.00 13.05 9.49 0.00
P050761 2006 BR-Housing Sector TAL 4.00 0.00 0.00 0.00 2.70 0.96 3.66 -0.29
P090041 2006 BR ENVIRONMENTAL SUST.
AGENDA TAL
8.00 0.00 0.00 0.00 0.00 4.88 4.85 0.69
P089440 2006 BR-Brasilia Environmentally Sustainable
57.64 0.00 0.00 0.00 0.00 21.22 19.30 0.00
P093787 2006 BR Bahia State Integ Proj Rur Pov 84.35 0.00 0.00 0.00 0.00 30.72 0.22 0.00
P092990 2006 BR - Road Transport Project 501.25 0.00 0.00 0.00 0.00 228.70 209.95 0.00
P081436 2006 BR-Bahia Poor Urban Areas Integrated Dev
49.30 0.00 0.00 0.00 0.00 38.96 38.96 0.00
P083533 2005 BR TA-Sustain. & Equit Growth 12.12 0.00 0.00 0.00 0.00 7.70 7.70 0.00
P069934 2005 BR-PERNAMBUCO INTEG DEVT:
EDUC QUAL IMPR
31.50 0.00 0.00 0.00 0.00 9.15 9.15 0.00
P087711 2005 BR Espirito Santo Wtr & Coastal Pollu
107.50 0.00 0.00 0.00 0.00 31.06 -40.26 -17.93
P076924 2005 BR- Amapa Sustainable Communities 4.80 0.00 0.00 0.00 0.23 2.35 2.58 1.99
P060573 2004 BR Tocantins Sustainable Regional Dev
60.00 0.00 0.00 0.00 0.00 18.19 18.19 0.00
P076977 2003 BR-Energy Sector TA Project 12.12 0.00 0.00 0.00 0.00 5.63 5.63 0.00
P049265 2003 BR-RECIFE URBAN UPGRADING PROJECT
46.00 0.00 0.00 0.00 0.00 8.13 8.13 0.00
P066170 2002 BR-RGN Rural Poverty Reduction 45.00 0.00 0.00 0.00 0.00 15.49 -6.95 15.55
P060221 2002 BR FORTALEZA METROPOLITAN TRANSPORT
PROJ
85.00 0.00 0.00 0.00 62.60 9.79 65.37 13.65
P051696 2002 BR SÃO PAULO METRO LINE 4 PROJECT
304.00 0.00 0.00 0.00 0.00 27.67 -67.10 27.90
P006449 2000 BR CEARA WTR MGT PROGERIRH SIM
239.00 0.00 0.00 0.00 0.00 96.74 -6.00 1.00
Total: 10,235.16 0.00 0.00 0.00 65.53 7,042.94 253.04 42.56
76
BRAZIL
STATEMENT OF IFC’s
Held and Disbursed Portfolio
In Millions of US Dollars
Committed Disbursed
IFC IFC
FY Approval Company Loan Equity Quasi Partic. Loan Equity Quasi Partic.
2005
ABILLION AMRO REAL 98.00 0.00 0.00 0.00 15.77 0.00 0.00 0.00
2005 ABILLION AMRO REAL 98.00 0.00 0.00 0.00 15.77 0.00 0.00 0.00
2001 AG Concession 0.00 30.00 0.00 0.00 0.00 30.00 0.00 0.00
2002 Amaggi 17.14 0.00 0.00 0.00 17.14 0.00 0.00 0.00
2005 Amaggi 30.00 0.00 0.00 0.00 30.00 0.00 0.00 0.00
2002 Andrade G. SA 22.00 0.00 10.00 12.12 22.00 0.00 10.00 12.12
2001 Apolo 6.04 0.00 0.00 0.00 3.54 0.00 0.00 0.00
1998 Arteb 20.00 0.00 0.00 18.33 20.00 0.00 0.00 18.33
2006 BBM 49.40 0.00 0.00 0.00 49.40 0.00 0.00 0.00
2001 Brazil CGFund 0.00 19.75 0.00 0.00 0.00 18.15 0.00 0.00
2004 CGTF 54.01 0.00 7.00 65.12 54.01 0.00 7.00 65.12
1994 CHAPECO 10.00 0.00 0.00 0.00 10.00 0.00 0.00 0.00
1996 CHAPECO 1.50 0.00 0.00 5.26 1.50 0.00 0.00 5.26
2003 CPFL Energia 0.00 40.00 0.00 0.00 0.00 40.00 0.00 0.00
1996 CTBC Telecom 3.00 8.00 0.00 0.00 3.00 8.00 0.00 0.00
1997 CTBC Telecom 0.00 6.54 0.00 0.00 0.00 6.54 0.00 0.00
1999 Cibrasec 0.00 3.27 0.00 0.00 0.00 3.27 0.00 0.00
2004 Comgas 11.90 0.00 0.00 11.54 11.90 0.00 0.00 11.54
2005 Cosan S.A. 50.00 5.00 15.00 0.00 50.00 5.00 15.00 0.00
Coteminas 0.00 1.84 0.00 0.00 0.00 1.84 0.00 0.00
1997 Coteminas 1.85 1.25 0.00 0.00 1.85 1.25 0.00 0.00
2000 Coteminas 0.00 0.18 0.00 0.00 0.00 0.18 0.00 0.00
1980 DENPASA 0.00 0.52 0.00 0.00 0.00 0.48 0.00 0.00
1992 DENPASA 0.00 0.06 0.00 0.00 0.00 0.06 0.00 0.00
Dixie Toga 0.00 0.34 0.00 0.00 0.00 0.34 0.00 0.00
1998 Dixie Toga 0.00 10.03 0.00 0.00 0.00 10.03 0.00 0.00
1997 Duratex 1.36 0.00 3.00 0.57 1.36 0.00 3.00 0.57
2005 EMBRAER 35.00 0.00 0.00 145.00 35.00 0.00 0.00 145.00
1999 Eliane 14.93 0.00 13.00 0.00 14.93 0.00 13.00 0.00
1998 Empesca 1.33 0.00 2.67 0.00 1.33 0.00 2.67 0.00
2006 Endesa Brasil 0.00 50.00 0.00 0.00 0.00 50.00 0.00 0.00
2006 Enerbrasil Ltda 0.00 5.50 0.00 0.00 0.00 0.00 0.00 0.00
2006 FEBR 12.00 0.00 0.00 0.00 12.00 0.00 0.00 0.00
2000 Fleury 0.00 0.00 6.00 0.00 0.00 0.00 6.00 0.00
1998 Fras-le 4.00 0.00 9.34 0.00 4.00 0.00 6.04 0.00
2006 GOL 50.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00
2005 GP Capital III 0.00 14.00 0.00 0.00 0.00 0.14 0.00 0.00
GP Cptl Rstrctd 0.00 2.22 0.00 0.00 0.00 2.16 0.00 0.00
2001 GPC 0.00 0.00 9.00 0.00 0.00 0.00 9.00 0.00
77
GTFP BIC Banco 44.91 0.00 0.00 0.00 44.91 0.00 0.00 0.00
GTFP BM Brazil 4.22 0.00 0.00 0.00 4.22 0.00 0.00 0.00
GTFP Indusval 5.00 0.00 0.00 0.00 5.00 0.00 0.00 0.00
1997 Guilman-Amorim 18.08 0.00 0.00 14.37 18.08 0.00 0.00 14.37
1998 Icatu Equity 0.00 5.46 0.00 0.00 0.00 4.16 0.00 0.00
1999 Innova SA 0.00 5.00 0.00 0.00 0.00 5.00 0.00 0.00
1980 Ipiranga 0.00 2.87 0.00 0.00 0.00 2.87 0.00 0.00
1987 Ipiranga 0.00 0.54 0.00 0.00 0.00 0.54 0.00 0.00
2006 Ipiranga 50.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00
2006 Itambe 15.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00
2000 Itau-BBA 12.86 0.00 0.00 0.00 12.86 0.00 0.00 0.00
2002 Itau-BBA 70.61 0.00 0.00 0.00 38.47 0.00 0.00 0.00
1999 JOSAPAR 7.57 0.00 7.00 0.00 2.57 0.00 7.00 0.00
2005 Lojas Americana 35.00 0.00 0.00 0.00 35.00 0.00 0.00 0.00
1992 MBR 0.00 0.00 10.00 0.00 0.00 0.00 10.00 0.00
2006 MRS 50.00 0.00 0.00 50.00 0.00 0.00 0.00 0.00
2002 Microinvest 0.00 1.25 0.00 0.00 0.00 0.82 0.00 0.00
Net Servicos 0.00 10.93 0.00 0.00 0.00 10.93 0.00 0.00
2002 Net Servicos 0.00 1.60 0.00 0.00 0.00 1.60 0.00 0.00
2005 Net Servicos 0.00 5.08 0.00 0.00 0.00 5.08 0.00 0.00
1994 Para Pigmentos 2.15 0.00 9.00 0.00 2.15 0.00 9.00 0.00
1994 Portobello 0.00 0.59 0.00 0.00 0.00 0.59 0.00 0.00
2000 Portobello 4.28 0.00 7.00 0.00 4.28 0.00 7.00 0.00
2002 Portobello 0.00 0.90 0.00 0.00 0.00 0.90 0.00 0.00
2000 Puras 0.00 0.00 1.00 0.00 0.00 0.00 1.00 0.00
2003 Queiroz Galvao 26.67 0.00 10.00 0.00 26.67 0.00 10.00 0.00
2004 Queiroz Galvao 0.60 0.00 0.00 0.00 0.08 0.00 0.00 0.00
2006 RBSec 22.83 1.51 0.00 0.00 0.00 1.51 0.00 0.00
Randon Impl Part 2.33 0.00 3.00 0.00 2.33 0.00 3.00 0.00
1997 Sadia 2.55 0.00 2.33 3.28 2.55 0.00 2.33 3.28
1997 Samarco 3.60 0.00 0.00 0.00 3.60 0.00 0.00 0.00
1998 Saraiva 0.00 1.24 0.00 0.00 0.00 1.24 0.00 0.00
2000 Sepetiba 26.24 0.00 5.00 0.00 11.24 0.00 5.00 0.00
2002 Suape ICT 6.00 0.00 0.00 0.00 6.00 0.00 0.00 0.00
1999 Sudamerica 0.00 7.35 0.00 0.00 0.00 7.35 0.00 0.00
2006 Suzano petroq 50.00 0.00 10.00 140.00 39.50 0.00 10.00 110.50
2001 Synteko 11.57 0.00 0.00 0.00 11.57 0.00 0.00 0.00
2006 TAM 50.00 0.00 0.00 0.00 17.00 0.00 0.00 0.00
1998 Tecon Rio Grande 3.55 0.00 5.50 3.71 3.55 0.00 5.50 3.71
2004 Tecon Rio Grande 7.87 0.00 0.00 7.76 7.59 0.00 0.00 7.48
2001 Tecon Salvador 2.95 1.00 0.00 3.10 2.95 0.77 0.00 3.10
2003 Tecon Salvador 0.00 0.55 0.00 0.00 0.00 0.55 0.00 0.00
2004 TriBanco 10.00 0.00 0.00 0.00 10.00 0.00 0.00 0.00
2006 TriBanco 0.35 0.00 0.00 0.00 0.35 0.00 0.00 0.00
2002 UP Offshore 9.01 9.51 0.00 23.29 0.00 2.51 0.00 0.00
2002 Unibanco 16.89 0.00 0.00 0.00 16.89 0.00 0.00 0.00
Total portfolio: 1,164.15 253.88 144.84 503.45 703.91 223.86 141.54 400.38
78
Approvals Pending Commitment
FY Approval Company Loan Equity Quasi Partic.
2000 BBA 0.01 0.00 0.00 0.00
1999 Cibrasec 0.00 0.00 0.00 0.00
2006 Ipiranga II 0.00 0.00 0.00 0.10
2002 Banco Itau-BBA 0.00 0.00 0.00 0.10
Total pending commitment: 0.01 0.00 0.00 0.20
79
ANNEX 5: FISCAL AND DEBT SUSTAINABILITY ANALYSIS
A5-1 Fiscal Analysis: Municipality of Rio de Janeiro, 2004–09
Evolution of Fiscal Balances, 2004–09
A5.1 The municipality of Rio de Janeiro’s fiscal revenues experienced a turning point in
2005 with increases that allowed for more investment. Revenues rose sharply from R$8.7 billion
in 2004 to R$10.78 billion in 2008, driven mostly by higher receipts from the Imposto Sobre
Serviços (ISS), the municipal tax on services. Nevertheless, the municipality was less successful
in controlling current expenditures, particularly those related to wages and salaries and purchases
of goods and services. From 2004 to 2006, current expenditures grew a mere 1.3 percent, but
they ballooned from 2006 to 2008, growing 21.6 percent. Despite the lack of control over
expenditures, the city’s gross operating balance grew from R$834 million in 2005 to R$1.2
billion in 2008. This has allowed the municipality to reverse the pre-2005 decreasing trend in
investment, with a 70 percent increase from 2005 to 2008. As a result, the primary balance
decreased from R$137 million in 2004 to R$95 million in 2008. During 2005–08, interest
expenditures also increased by 13 percent. As a result, the modest overall fiscal balances have
decreased and fallen into negative territory, going from R$99 million in 2004 to -R$23 million in
2008. In 2009, current expenditures decreased during the financial turmoil, the city maintained
increasing revenues and drastically cut the capital investments. This resulted in an extraordinary
fiscal primary surplus of R$1.394 billion that contrasts with an average primary surplus of
R$363 million generated in the previous year (see Figure A5.1).
Figure A5.1: Rio de Janeiro’s Fiscal Balances, 2004-09
Source: Municipal Secretariat of Finance
Evolution of Fiscal Revenues, 2004-2009
A5.2 On the revenue side, tax revenues and transfers are the main drivers, representing on
average 39 percent of total revenues (see Figure A5.2). From 2004 to 2008, current revenue
increased by 18 percent, with taxes rising 44 percent, led by increases in collections from the ISS
and the Imposto sobre Transmissão de Bens Imóveis (ITBI), the tax on real estate conveyance.
Together, these two levies accounted for more than 65 percent of revenues. Transfers increased 5
percent from 2004 to 2008, led by Fund for Maintenance and Development of Primary Education
0
200,000
400,000
600,000
800,000
1,000,000
1,200,000
1,400,000
2004 2005 2006 2007 2008 2009
Tho
usa
nd
R$
Rio de Janeiro's Fiscal Balances, 2004-09
Primary Balance Overall Balance Public Investment
2.4
80
and of Teacher’s Valorization (FUNDEB) transfers, which increased by 31 percent and
represented 26 percent of the total transfers in 2008. State transfers, which accounted for 42
percent of total transfers in 2008, increased 2 percent during the period. Federal transfers
decreased 13 percent. In 2009, despite the financial crisis, the government of Rio recorded
increasing revenues, although at a slower pace than 2004-08. The driving factors were the strong
tax revenues and transfers.
Figure A5.2: Evolution of Current Revenues and expenditures from 2004 to 2009
Source: Secretaria Municipal de Fazenda
Evolution of Expenditures, 2004–09
A5.3 From 2006 to 2008, rapid growth in expenditures for wages and salaries, goods and
services, and interest expenses tightened fiscal adjustment. Current expenditures increased by 22
percent in the past four years. Personnel expenditures, including pensions, are the largest part of
current expenditures, increasing by 26 percent from 2004 to 2008. Goods and services (custeio),
the second largest component on the expenditure side, rose by 17 percent during the period.
Despite declining indebtedness, the accumulation of debt service payments in the short run
prevents Rio from contracting credit operations to finance investment expenses—a consequence
of borrowing restrictions coming from the debt renegotiation agreement under the MP2185.
Nevertheless, the municipality should be commended for managing to increase investment
expenditures. In 2009, due to the global crisis, current expenditures decreased. Only interest
payments and the pensions spending increased during the same period.
Evolution of net consolidated debt, 2003–09
A5.4 The good revenue performance and consistent fiscal adjustment over the past five years
lowered the debt-to-revenue ratio from 79 percent in 2004 to 48 percent in 2008. The decline
allows Rio to comply with Fiscal Responsibility Law (LRF) requirements. In 1999, Rio’s
refinanced debt amounted to R$3 billion, representing 19 percent of the total debt refinancing
package for municipal governments. Despite strict observance of the debt renegotiation contract,
Rio’s stock of refinanced debt has been growing, reaching R$8.3 billion in December 2008 and
R$7.5 billion in 2009, or more than 82 percent of Rio’s total debt. The net consolidated debt has
drastically decreased from 2008 to 2009 due to extraordinary sales of financial assets (see Figure
A5.3)
0
2,000,000
4,000,000
6,000,000
8,000,000
10,000,000
12,000,000
2004 2005 2006 2007 2008 2009
Tho
usa
nd
R$
of
20
09
Evolution of Revenue, 2004-09
Taxes Social Contributions Other Current Revenues Transfers
0
2,000,000
4,000,000
6,000,000
8,000,000
10,000,000
12,000,000
2004 2005 2006 2007 2008 2009
Tho
usa
nd
R$
of
20
09
Evolution of Expenditure, 2004-09
Compensation of employees Goods and Services
Interest Payments Pensions
Investments
81
Figure A5.3: Evolution of Gross and Net Consolidated Debts, 2004-09
Source: Secretaria Municipal de Fazenda
A5.5 The outstanding debt stock is composed mainly of domestic debt, averaging 92 percent
of total debt for 2004–09. Both the share of external and domestic debt has decreased since 2004.
In 2009, refinanced, or intralimite, debt represented more than 82 percent of the total debt stock
(see Figure A5.4).
Figure A5.4: Consolidated Debt Composition, 2008-09
Source: Secretaria Municipal de Fazenda
-
2,000,000
4,000,000
6,000,000
8,000,000
10,000,000
12,000,000
2004 2005 2006 2007 2008 2009
R$
Th
ou
san
d o
f 2
00
9
Evolution of Gross and Net Consolidated Debts , 2004-09
Consolidated Debt (I) Financial Assets (II)
Net Consolidated Debt (I)-(II)
External Debt5%
Domestic Debt47%
National Treasury (STN)42%
Banks1%
Other Debts5%
Domestic Debt95%
Debt Decomposition as of 2009
2008 2009
Consolidated Debt 10,055,560 9,094,454
Total Intra-limite Debt 8,334,781 8,680,481
Intra-limite Debt (R$) 7,970,237 8,443,705
Of which MP 2.185 - Normal 7,841,240 7,188,233
Intra-limite Debt (US$) 364,544 236,776
Total Extra-limite Debt 1,720,779 413,973
Extra-limite Debt (R$) 1,322,630 146,262
Extra-limite Debt (US$) 398,149 267,711
82
A5.6 Debt service has been growing modestly, mainly from interest payments. Under the
Fiscal Responsibility Framework, debt service is capped at 11.5 percent of net current revenues.
The ratio of debt service to net current revenues remained below the threshold during 2004-09
(see Figure A5.5).
Figure A5.5: Evolution of Debt Service, 2004-09
Source: Secretaria Municipal de Fazenda
Evolution of Fiscal Responsibility Indicators, 2004-09
A5.7 Since 2004, the municipality has improved in all indicators monitored by the National
Treasury under the LRF. By 2008, all indicators were well below their prudential limits,
indicating a comfortable situation on the fiscal and debt sides.
A5-2 Fiscal and Debt Sustainability of the Municipality of Rio de Janeiro, 2009–13
Fiscal Assumption
A5.8 The following assumptions underlying the fiscal projections. Under the baseline
scenario, Rio’s revenues and expenditures will broadly grow in line with IPCA consumer-price
inflation, the GDP growth rate, and specific components of the IGP inflation rate. The
outstanding stock of debt is indexed to the projected IGP inflation. The fundamental
macroeconomic variables that are affecting the paths of fiscal projections and debt—most
importantly, inflation rates, the nominal GDP growth rate, and the fiscal assumptions—are
detailed in the Table A5.1. The Secretaria Municipal de Fazenda recommended those
assumptions. A set of alternative scenarios has also been run to assess the vulnerability of the
fiscal situation to risks linked to macroeconomic variables. The baseline case does not include
any policy reforms. Alternative scenarios simulating the impact of the fiscal reforms, the debt
restructuring, and the impact of royalties and the Olympic Games will also be discussed.
A5.9 On the revenue side, we assume that tax receipts, including the ISS and ITBI, grow in
line with real GDP and the IPCA inflation rate. The Imposto sobre Propriedade Predial e
Territorial Urbana (IPTU), the tax on urban land and property, and the Imposto de Renda Retido
na Fonte (IRRF), the withholding income tax, are expected to increase with the IPCA inflation
rate. Social security contribution revenues are assumed to follow IPCA inflation and the
personnel growth. Current transfers, such as FUNDEB, grow in line with IPCA inflation, while
8.8%
9.2%
9.6%
10.0%
10.4%
10.8%
0
200,000
400,000
600,000
800,000
1,000,000
1,200,000
2004 2005 2006 2007 2008 2009
Tho
usa
nd
R$
of
20
08
Evolution of Debt Service, 2004-09
Debt Amortization Interest payments Debt Service / NCR (right axis)
83
capital transfers are increasing with the real GDP growth. Interest revenues, nonfinancial assets,
and other current revenues are assumed to grow with IPCA inflation. Net current revenue (NCR)
is derived from current revenue and capital transfers, less transfers to the municipality and social
contribution revenues. This variable is used to standardize the fiscal and debt outcomes in
compliance with LRF requirements. The net real revenue (NRR)20
is used to calculate the debt
service ceiling—13 percent of NRR—is expected to growth with nominal GDP.
A5.10 On the expenditure side, personnel expenses follow IPCA inflation and the personnel
growth rate. The latter is mainly driven by an automatic residual growth (crescimento
vegetativo), estimated at 1 percent a year. Goods and services purchases (custeio) are increasing
in line with IPCA inflation. Pension expenditure projections follow actuarial calculations. Rio’s
finance secretariat provided the amortization and interest-payment profiles. The fiscal space left
for further investment will be defined by the gross operating balance’s surplus. This fiscal
account classification follows the Government Finance Statistics (GFS) system recommended by
the IMF.
A5.11 On the debt side, the outstanding stock of debt is indexed to projected IGP inflation. Net
consolidated debt is defined as consolidated debt less financial assets. The fundamental
macroeconomic variables affecting the paths of the debt and fiscal projections, such as the
inflation and nominal GDP growth rates, are detailed in Table A5.1. Regarding the
macroeconomic variables, the baseline projections for the exchange rate are based on the
FOCUS Survey forecast from the Central Bank of Brazil (BCB). The medium term projections
for the baseline real GDP growth and the IGP and IPCA inflation rates follow FOCUS survey
estimates and afterward their long-run equilibriums. For 2010, we expect real GDP growth of 5.5
percents and to reach the long-run equilibrium in 2011. The inflation rates will rise in 2010, with
IPCA reaching its equilibrium in 2011 and the IGP in 2012. The macroeconomic projections
used in this document are conservative. Brazil’s potential GDP growth has been estimated at 4.5
percent to 5 percent. The assumptions for the baseline and the alternative scenario are
summarized in Table A5.2.
20
Net real revenue is sum of current and capital revenues excluded: FUNDEF transfers, credit operation revenues,
asset sales revenues, capital transfers, constitutional transfers to municipalities and the SUS revenues.
84
Table A5.1. Assumptions for Fiscal Projections
Variables Assumptions
Base year figures – 2008
REVENUES
Tax Revenues
ISS, IRRF, impostos Increase with real GDP growth and IPCA inflation
IPTU, IRRF Increase with IPCA inflation
ITBI Increase with real GDP growth and IGP inflation
Social Contributions Increase with personnel growth and IPCA inflation.
Transfers
Current Transfers Federal transfers Increase with IPCA inflation and real GDP growth State transfers Increase with real GDP growth and IPCA inflation
Of which ICMS Increase with real GDP growth and IGP inflation
IPVA Increase with real GDP growth and IPCA inflation
FUNDEB Increase with IPCA inflation
Royalties Increase with IPCA inflation
Capital Transfers Increase with real GDP growth
Other Current Revenues
Non financial assets and Admin. Fees Increase with IPCA inflation
Interest revenue Increase with IPCA inflation.
Sales and miscellaneous Increase with IPCA inflation
Deduction to Net Current Revenue FUNDEB transfer revenues
Net Real Revenue Increase with real GDP growth and IPCA inflation
EXPENDITURES
Wages Increase with personnel growth and IPCA inflation.
Goods and Services Increase with IPCA inflation.
Interest payments Obtained from Debt Department of SMF Rio Municipality
Social Benefits (Pensions) Actuarial calculations
Investment 81 percent of fiscal space left by the gross operating balance
(four-year moving average)
Amortizations Obtained from Debt Department of SMF Rio Municipality
Financial assets 47 percent of the consolidated debt which is the historical
average. (four-year moving average)
IBRD Loan Approximately US$1,045 million disbursed in two tranches.
Source: Secretaria Municipal de Fazenda and World Bank staff.
A5.12 The baseline scenario is described in Section II-C. The alternative scenarios have their
meaning in the risk assessments. We have simulated pessimistic scenarios to assess the potential
risks to the municipal government. In particular, we will discuss possible effects on main fiscal
and debt indicators, including the LRF indicators.
85
Table A5.2. Assumptions for Macroeconomic Variables
(Baseline and Alternative scenario)
Source: Secretaria Municipal de Fazenda, BCB
Fiscal and Debt Projections, 2010–14
A5.13 The projected fiscal accounts of the Rio municipality suggest a sustainable trend in the
medium term; that is, the macro framework is adequate. The trajectory of revenues in the
medium term is largely driven by sales taxes and current transfers. On the expenditures side, the
main determinants are personnel expenditures, pensions, and purchases of goods and services.
The resulting fiscal balances—the primary fiscal balance, the overall balance and the gross
operating balance—are all expected to record surpluses for the projected period, thus creating
fiscal space for increased city investments.
A5.14 On the revenue side, the key tax receipts and current transfers are mainly subject to the
volatility of inflation and the real GDP. On the expenditure side, salary increases are the main
driver of government expenses, suggesting the importance of controlling current expenditures
and salary adjustments to strengthen fiscal balances. The 2016 Olympic Games are not expected
baseline
alternative
(lower) baseline
Alternativ
e baseline
alternative
(higher)
2009 -0.20% -0.2% 1.74 1.74 -0.3% -0.3%
2010 5.50% 4.7% 1.76 1.65 6.0% 6.8%
2011 4.50% 4.0% 1.80 1.60 5.0% 5.2%
2012 4.50% 4.0% 1.90 1.60 4.5% 4.5%
2013 4.50% 4.0% 1.99 1.50 4.5% 4.5%
2014 4.50% 4.0% 2.07 1.50 4.5% 4.5%
2015 4.50% 4.0% 2.17 1.45 4.5% 4.5%
2016 4.50% 4.0% 2.27 1.45 4.5% 4.5%
2017 4.50% 4.0% 2.37 1.50 4.5% 4.5%
2018 4.50% 4.0% 2.47 1.50 4.5% 4.5%
baseline
alternative
(higher)
2009 4.3% 4.3%
2010 5.0% 5.5%
2011 4.5% 4.8%
2012 4.5% 4.5%
2013 4.5% 4.5%
2014 4.5% 4.5%
2015 4.5% 4.5%
2016 4.5% 4.5%
2017 4.5% 4.5%
2018 4.5% 4.5%
Year
Real GDP growth
rate
Exchange rate
(R$/US$)
IGP inflation
Year
Population growth
rate
Personnel growth IPCA inflation
baseline baseline
1.1% 2.0%
1.1% 2.0%
1.0% 2.0%
1.0% 2.0%
1.0% 2.0%
0.9% 2.0%
0.8% 2.0%
0.9% 2.0%
0.9% 2.0%
0.9% 2.0%
86
to have a detrimental effect on the municipal financial position. On the debt side, the
consolidated debt remains well below the limits set by the federal government.
Table A5.3. Debt Amortization and Interest Payments Schedule, 2010-2014
Source: WB Staff estimates
Figures adjusted by the General Price Index (IGP-DI)
Fiscal Responsibility Law Indicators Projections
A5.15 The fiscal and debt sustainability analysis shows a sustainable path for the main LRF
indicators for 2010-14. Hence, personnel expenditures as a share of net current revenue (NCR),
net consolidated debt per NCR, and debt service as a share of NCR will remain below the limits
set by the federal government. Personnel expenditures per NCR, which are assumed to grow in
line with the personnel growth rate and IPCA inflation, increase slightly in 2010 but remain
below the limit of 60 percent of NCR. The net consolidated debt to NCR indicator is expected to
decrease from 2010 to 2014, driven by the projected surpluses in the overall fiscal balance. This
projection includes the net interest payments and a NCR growth rate higher than the IGP
inflation that adjusts the outstanding stock of debt. Given the amortization and the interest
payment profiles, the debt service per NCR is following a sustainable path with no major debt
principal repayments expected for the next five years (see Figure A5.5).
Risk Analysis
A5.16 The risk analysis assesses the impact on the fiscal and debt projections of uncertainties
surrounding fundamental macroeconomic variables, such as the exchange rate, the GDP, oil
revenues, and inflation. The analysis consists of adding stochastic shocks to the fundamental
economic variables and assessing their impacts on projected fiscal and debt aggregates. We also
assess the impact of simultaneous random shocks on the fiscal and debt aggregate by performing
Monte Carlo simulations, which draw shocks from specific probability distributions.
A5.17 The risk analysis finds that the fiscal situation of Rio state is sustainable, and the impact
of the proposed Bank operation is positive and sustainable. Since the portion of foreign-
denominated debt is small, the impact of the exchange rate on debt dynamics is not significant.
The municipal government is likely to remain below LRF requirements, even when subject to a
combination of stochastic shocks (see Figure A5.6).
Unit: R$ Thousand of 2009
2010* 2011* 2012* 2013* 2014*
Consolidated debt 7,587,474 7,339,573 7,261,155 7,172,899 7,096,889
Intralimite Debt 7,598,159 7,487,551 7,609,159 7,674,126 7,712,717
Extralimite Debt (10,686) (147,978) (348,004) (501,227) (615,828)
Net Consolidated Debt 7,587,474 7,339,573 7,261,155 7,172,899 7,096,889
Debt Amortization 529,790 514,069 243,201 267,071 294,854
Intralimite Debt 483,157 478,993 208,051 233,177 261,332
Extralimite Debt 46,633 35,076 35,150 33,894 33,522
Interest payments 602,315 649,612 674,371 684,403 690,802
Debt Services 1,132,105 1,163,681 917,572 951,474 985,656
87
Figure A5.6: Risk Analysis
Source: WB Staff estimates
A5-3 Fiscal Impact of the Policy Reforms and Debt Restructuring, 2010-14
A5.18 We simulated the impact of policy reforms undertaken by the municipal government in
expenditure control (payroll audit, pension, and procurement process for common goods and
services) and tax revenue enhancement (efficiency gain collection and NFE for ISS taxes). We
also estimated the effects of the debt restructuring on fiscal aggregates.
A5.19 The assumptions under the two scenarios are as follows:
a. ISS revenue collection efficiency measures such as the adoption of the system of
database integration to detect evasion and the electronic invoice system should lead to tax
receipt increases that would be 5 percent higher than the baseline scenario, which projects
an ISS growth rate that follows GDP growth and IPCA inflation.
88
b. Payroll census, audit, and the new HR system will generate a one-time decrease of 1
percent of the payroll registered in 2010 under the reform scenario. The baseline scenario
implies that payroll will grow with GDP and inflation.
c. Social security reforms consist of indexing pension benefits to the average wage rather
than the final wage and reducing survivors’ benefits from 100 percent to 70 percent for
those above RGPS. The baseline scenario implies that pensions grow with population,
national GDP, and inflation.
d. Reforms in procurement with expansion of the use of electronic reverse auction and
rationalization and centralization of procurement of common goods and services will
generate savings of 10 percent in 2010 on government purchases of goods and services.
Thereafter, expenditures on goods and services will grow at the same rate as inflation and
GDP in both scenarios.
e. The World Bank loan of US$1,045 million would have the following financial
conditions: 30 years, a five-year grace period, and LIBOR + 1.4 percent.
89
Source: WB Staff estimates
Net Consolidated Debt / NCR 2009 2010 2011 2012 2013 2014
Basel ine 25.37% 66.41% 58.95% 53.58% 48.64% 44.24%
Tax Revenue Enhancement 25.37% 65.02% 56.35% 49.86% 43.90% 38.65%
Expenditure control 25.37% 63.65% 58.40% 53.10% 48.22% 43.88%
Debt Restructuring 25.37% 67.01% 60.76% 55.20% 49.90% 45.18%
Debt Service/ NCR 2009 2010 2011 2012 2013 2014
Basel ine 10.46% 9.27% 9.15% 6.77% 6.45% 6.14%
Debt Restructuring 10.46% 8.39% 5.63% 4.82% 4.74% 4.53%
Primary Balance / NCR 2009 2010 2011 2012 2013 2014
Basel ine 13.40% 15.96% 9.40% 7.95% 8.26% 8.22%
Tax Revenue Enhancement 13.40% 17.32% 9.72% 8.52% 9.01% 9.17%
Expenditure control 13.40% 18.93% 9.52% 8.07% 8.37% 8.33%
Debt Restructuring 13.40% 15.96% 6.39% 6.37% 6.87% 6.91%
Overall Balance / NCR 2009 2010 2011 2012 2013 2014
Basel ine 11.18% 14.81% 8.14% 6.77% 7.26% 7.41%
Tax Revenue Enhancement 11.18% 16.19% 8.50% 7.40% 8.08% 8.44%
Expenditure control 11.18% 17.82% 8.26% 6.90% 7.38% 7.53%
Debt Restructuring 11.18% 18.55% 6.82% 7.50% 7.91% 8.00%
Interest Payments 2009 2010 2011 2012 2013 2014
Basel ine 6.54% 5.27% 5.22% 4.98% 4.64% 4.31%
Debt Restructuring 6.54% 1.53% 3.53% 2.67% 2.60% 2.42%
Investment 2009 2010 2011 2012 2013 2014
Basel ine 3.85% 7.73% 17.08% 21.21% 23.23% 23.76%
Tax Revenue Enhancement 3.85% 7.60% 19.21% 24.28% 27.28% 28.82%
Expenditure control 3.85% 7.49% 17.74% 21.81% 23.79% 24.29%
Debt Restructuring 3.85% 7.73% 20.09% 22.79% 24.62% 25.07%
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ANNEX 6: BRAZIL AT A GLANCE
BRAZIL: Municipality of Rio de Janeiro Fiscal Consolidation for Efficiency and Growth
DPL
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ANNEX 7: THE DECENTRALIZING EFFECTS OF THE CONSTITUTION OF 1988: SERVICE
PROVISION, INTERGOVERNMENTAL TRANSFERS TO MUNICIPALITIES, AND THE
SMALL-MUNICIPAL-SIZE BIAS
A7.1 After two decades of centralization during the period of the military regime, increasing
social demands resulting from political openness created pressures to expand social expenditures.
As a reaction to the centralism of the military regime, democratization also fueled a strong
decentralization movement both in the fiscal and political spheres. These forces were
institutionalized in the 1988 Constitution.
A7.2 The constitution guarantees free access to social services and establishes higher social
security benefits and entitlements for rural workers, the elderly, and the disabled. Since states
and municipalities provide most of these benefits, the constitution greatly increased their
expenditure obligations and expanded public-sector employment benefits by providing
employment tenure, higher compensation, and a generous social security system. In exchange,
the constitution increased revenue-sharing transfers to states and municipalities and revenue
earmarking to guarantee the financing of social expenditure responsibilities. To reduce regional
disparities, however, the increase in intergovernmental transfers did not benefit large states and
municipalities such as Rio; rather, they favored small municipalities with low expenditure needs
because of low population density, low population growth, and low urbanization levels (see
Figure A6.1).
Figure A6.1: Intergovernmental Transfers: Revenue-sharing Mechanisms, 2006 (As percent of corresponding tax revenue)
Source: Secretariat of Economic Policy (SPE). Ministry of Finance.
A7.3 The fiscal conditions of large subnational governments deteriorated in the early 1990s.
The end of the inflationary period worsened the fiscal situation of all levels of government due to
CIDE Tax on fuels
FCO Regional development funds for the development of Center-West ICMS State Value-Added Tax
FNE Regional development funds for the development of Northeast IOF - Ouro Tax on Financial Operations on Gold
FNO Regional development funds for the development of North IPI Tax on Industrial Goods
FPE States’ participation fund IPVA State Motor Vehicle Tax
FPEX Compensation Fund for Exports IR Income Tax
FPM Municipalities’ participation fund ITR Federal rural property tax
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the decline of the ―inflationary tax,‖ which allowed a reduction of public expenditures in real
terms and payment of negative real interest rates on the public debt. High interest rates resulting
from the price stabilization effort also exacerbated debt accumulation. The social obligations
imposed by the constitution, coupled with fiscal revenue stagnation due to Brazil’s slow growth
and ineffective controls for indebtedness, led to successive subnational debt crises.
A7.4 The signing of the debt renegotiation contracts with the National Treasury in 1997 and
enactment of the LRF in 2000 obligated subnational governments to adopt fiscal adjustment
efforts by incorporating hard budget constraints into a single, unifying framework. Under Law
9496 of September 1997 and the Provisional Measure 2185 of 2000, the Treasury refinanced the
bond debt of 25 states and 180 municipalities over 30 years. Strict observance of the debt
renegotiation contracts and the LRF resulted in a significant improvement in subnational
governments’ fiscal performance and significant declines in subnational indebtedness from 18
percent of GDP in 2003 to 14 percent of GDP in 2003, the same figure as 2008.
A7.5 The subnational fiscal adjustment has been realized mainly through a considerable
reduction of investment expenditures. Facing high expenditure rigidity from increasing personnel
expenditures and debt service obligations, new earmarking schemes in social sectors, and poor
revenue performance at least until 2004, subnational governments cut investment expenses to
obtain increased primary balances and reduce indebtedness.
A7.6 Consequently, domestic credit operations to municipalities were drastically reduced,
further affecting municipal investment expenditures and amplifying the gap between municipal
investment needs and resource availability. In addition, the overall public-sector fiscal
adjustment forced federal and state governments to reduce capital transfers to municipalities,
deepening the gap and making current-expenditure savings the main financing source for
municipal investments.
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ANNEX 8: BRAZIL: IMPACT OF THE GLOBAL CRISIS
A8.1 The global financial crisis has affected Brazil through contagion in financial markets, a
fall in commodity prices, exchange-rate depreciation, and external and domestic credit
curtailment. Effects on the real economy were felt immediately, with two consecutive quarters of
negative growth suggesting a recession.
A8.2 Effects on the external sector were also sharp—but again, temporary. The fall in
commodity prices and the worldwide economic slowdown led to declines in exports from a
monthly average of US$18 billion in third quarter 2008 to less than U$S10 billion in first quarter
2009. For the first time in seven years, the trade balance was negative in January 2009.
Nonetheless, the domestic economy’s deceleration reduced imports and the trade balance quickly
became positive again. The nominal and real exchange rates and terms of trade experienced a
temporary depreciation that was reversed with the increase in commodity prices and the
reduction of risk aversion in financial markets. The current account balance and foreign direct
investment (FDI) also suffered during the global crisis. However, economic activity contraction
and improving market sentiment have helped stabilize the current account balance while FDI
flows into the country have resumed.
A8.3 The government acted promptly to restore foreign-exchange markets’ confidence,
alleviate the liquidity squeeze, and avoid sharper declines in economic activity. The central bank
adopted various measures to inject liquidity into domestic markets and provide foreign exchange
to Brazilian corporations facing obligations abroad. A wide range of policies were used to
alleviate private-sector difficulties in raising resources in domestic and foreign markets and
avoid deeper exchange rate depreciation, They included: Reductions in reserve requirements,
liquidity provision to small financial institutions facing difficulties, incentives to large financial
institutions to buy smaller ones with liquidity problems, repo-credit line auctions in dollars for
exporters, and sales of international reserves to irrigate the spot exchange rate. In addition, public
banks massively increased their lending to industry and agriculture to compensate for the fall in
private credit supply. The government’s quick response was successful in normalizing credit
market conditions in a short period. A year after the crisis, both domestic credit and access to
foreign credit have returned to their pre-crisis levels.
A8.4 On the monetary side, the economic slowdown and the fall in commodity prices also
lessened inflationary pressures and opened space for central bank easing. Twelve-month
accumulated inflation fell from 6.3 percent in September 2008 to 5.5 percent in March 2009, hit
the center of the central bank target zone at 4.5 percent in July, and fell to 4.2 percent in August.
Inflation expectations for 2009 fell from 5.5 percent in September 2008 to 4.5 percent in March
2009 and to 4.3 in September 2009. Consistent with the inflation-targeting regime, and drawing
on the credibility earned in the last decade, the central bank cut interest rates by 500 basis points
to 8.75 percent in July 2009—its lowest historical level. Rates were 13.75 percent in December
2008.
A8.5 On the fiscal side, the government adopted a countercyclical stance. Nonetheless, there
are reservations about measuring the actual size of the fiscal stimulus and the countercyclical
nature of the government’s fiscal impulse because part of the primary surplus is not associated
with expansionary fiscal policy but with decisions taken before the global crisis’ emergence.
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Indeed, prior to the crisis, the Brazilian government had been increasing its expenditures,
especially expanding current expenses through increases in operating costs, public employees’
wages, and social protection transfers. With the arrival of the crisis, the countercyclical fiscal
stimulus consisted of tax breaks, acceleration of capital investment, and expansion of federal
banks’ credit supply.
A8.6 Another important component of the government’s expansionary policy was the
significant increase in credit supply from public financial institutions. It is estimated that the
quasi-fiscal stimulus associated with increased lending from public banks reached 3 percent of
GDP. In fact, credit by public banks grew 25 percent in the year since September 2008, while
credit from private institutions grew only 3 percent. The expansion of finance from public banks
included credit to exporters, the agricultural sector, and housing and durable-goods consumption.
As a result, the share of public banks in total outstanding credit grew to 39 percent in June 2009,
compared with 34 percent in September 2008. In addition, the government has stimulated large
private banks to increase their participation in the market.
A8.7 Strong monetary easing, expansionary fiscal policy, increases in credit supply from
public banks, and the recovery of commodity prices have allowed a quick and strong economic
activity recovery. Indeed, Q2-2009 GDP growth achieved an impressive quarter-over-quarter
rate of 1.9 percent. Information on industrial production, job creation, unemployment in
metropolitan areas, and labor income provides clear signals of an ongoing consolidation of GDP
recovery in Q3-2009, indicating that GDP decline in 2009 will be less accentuated than expected
and should be followed by a strong acceleration of growth in 2010.21
21
Market forecasts for growth in 2009 rose from -1.5 percent in April to 0 percent in September. For 2010, the
improvement in market growth-rate projections went from 3 percent in April to 4.5 percent in September.
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Map of Brazil