The World Bank FOR OFFICIAL USE ONLY€¦ · Commitment-linked, US Dollar Fixed-Spread Loan (FSL), annuity repayment schedule and all FSL conversion options. Grace period: 5 years

Document of The World Bank

FOR OFFICIAL USE ONLY

Report No: 35063-BR

PROJECT APPRAISAL DOCUMENT

ON A

PROPOSED LOAN

IN THE AMOUNT OF US$32.76 MILLION

TO THE

MUNICIPALITY OF RECIFE

WITH A GUARANTEE FROM THE FEDERATIVE REPUBLIC OF BRAZIL

FOR THE

RECIFE URBAN DEVELOPMENT AND SOCIAL INCLUSION PROJECT (CAPIBARIBE MELHOR)

IN SUPPORT OF THE SECOND PHASE

OF THE

BRAZIL MUNICIPAL LENDING PROGRAM

November 20, 2007

Sustainable Development Department Brazil Country Management Unit Latin America and the 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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CURRENCY EQUIVALENTS

(Exchange Rate Effective October 10, 2007)

Currency Unit = BRL BRL$ 0.55 = US$1

US$ = BRL$ 1.80

FISCAL YEAR January 1 – December 31

ABBREVIATIONS AND ACRONYMS

APL Adaptable Program Loan BMLP Brazil Municipal Lending Program BEA Brown Environmental Agenda BNDES Banco de Desenvolvimento Econômico e Social (National Bank for Economic and

Social Development) CAMEBA Caracas Slum Upgrading Project CAS Country Assistance Strategy CEF Caixa Econômica Federal (Federal Savings and Loan Bank) CODECIR Civil Defense Coordinator COFIEX Commission on External Financing COHAB State Housing Company COMPESA Water and Sanitation Company of Pernambuco State COMUL Urbanization and Legalization Commission CPRH Environmental and Water Resources Company for the State of Pernambuco CTTU Traffic and Urban Transportation Company of Recife DIEESE Departamento Intersindical de Estudos e Estadísticas Sócio-Econômicas (Inter-

Labor Union Department of Statistics and Socioeconomic Studies) EA Environmental Assessment EAAC Águas do Capibaribe (Waters of the Capibaribe Environmental Education

Project) EMLURB Recife Municipal Public Services Company FGTS Fundo de Garantia do Tempo de Serviço (Worker’s Provident Guarantee

Fund) FRL Fiscal Responsibility Law IBAM Instituto Brasileiro de Administração Municipal (Brazilian Institute for

Municipal Administration) IFR Interim Financial Report IPEA Instituto de Pesquisa Econômica Aplicada (Institute of Applied Economics

Research) IPTU Imposto Predial e Territorial Urbano (Urban Land and Building Tax) ICB International Competitive Bidding ISS Municipal Services Tax JICA Japan International Cooperation Agency MIS Management Information System NCR Net Current Revenues

FOR OFFICIAL USE ONLY

This document has a restricted distribution and may be used by recipients only in the performance of their official duties. Its contents may not be otherwise disclosed without World Bank authorization.

PMSS II Second Water Sector Modernization Project PMU Project Management Unit PQA Water Quality and Pollution Control Program PREZEIS Regularization Program of the Special Zones of Social Interest RMR Recife Metropolitan Region SEAIN Secretariat of International Affairs, Ministry of Planning SOE Statement of Expenses SOFIN Financial Management Software UE Unidade de Esgotamento Sanitário (Wastewater Microdrainage Unit) URB Recife Urban Development Company WSS Water Supply and Sanitation ZEIS Special Zones of Social Interest ZEPA Zonas Especiais de Proteção Ambiental (Special Environmental Protection

Zones)

Vice President: Pamela Cox Country Manager/Director: John Briscoe

Sector Director: Laura Tuck Task Team Leaders: Ivo Imparato

Dean A. Cira

RECIFE URBAN DEVELOPMENT AND SOCIAL INCLUSION PROJECT (CAPIBARIBE MELHOR)

MUNICIPAL LENDING PROGRAM APL

TABLE OF CONTENTS

Page

A. STRATEGIC CONTEXT AND RATIONALE ................................................................. 1

1. Country and sector issues.................................................................................................... 1

2. Rationale for Bank involvement ......................................................................................... 3

3. Higher level objectives to which the project contributes.................................................... 6

B. PROJECT DESCRIPTION ................................................................................................. 6

1. Lending instrument ............................................................................................................. 6

2. Program objective and Phases ............................................................................................ 7

3. Project development objective and key indicators.............................................................. 7

4. Project components............................................................................................................. 8

5. Lessons learned and reflected in the project design.......................................................... 10

6. Alternatives considered and reasons for rejection ............................................................ 12

C. IMPLEMENTATION ........................................................................................................ 12

1. Partnership arrangements (if applicable) .......................................................................... 12

2. Institutional and implementation arrangements................................................................ 12

3. Monitoring and evaluation of outcomes/results................................................................ 13

4. Sustainability..................................................................................................................... 13

5. Critical risks and possible controversial aspects............................................................... 15

6. Loan/credit conditions and covenants............................................................................... 15

D. APPRAISAL SUMMARY ................................................................................................. 16

1. Economic and fiscal analyses ........................................................................................... 16

2. Technical........................................................................................................................... 17

3. Fiduciary ........................................................................................................................... 17

4. Social................................................................................................................................. 18

5. Environment...................................................................................................................... 18

6. Safeguard policies............................................................................................................. 19

7. Policy Exceptions and Readiness...................................................................................... 19

Annex 1: Sector and Program Background ............................................................................. 20

Annex 2: Major Related Projects Financed by the Bank and/or other Agencies ................. 27

Annex 3: Results Framework and Monitoring ........................................................................ 28

Annex 4: Detailed Project Description...................................................................................... 36

Annex 5: Project Costs ............................................................................................................... 45

Annex 6: Implementation Arrangements ................................................................................. 46

Annex 7: Financial Management and Disbursement Arrangements..................................... 49

Annex 8: Procurement Arrangements ...................................................................................... 54

Annex 9: Economic, Financial and Fiscal Analysis ................................................................. 57

Annex 10: Safeguard Policy Issues............................................................................................ 70

Annex 11: Project Preparation and Supervision ..................................................................... 87

Annex 12: Documents in the Project File ................................................................................. 89

Annex 13: Statement of Loans and Credits.............................................................................. 90

Annex 14: Country at a Glance ................................................................................................. 94

Annex 15: Map IBRD 35778 ...................................................................................................... 95

BRAZIL

BRAZIL MUNICIPAL LENDING PROGRAM: RECIFE URBAN IMPROVEMENT AND SOCIAL INCLUSION PROJECT (CAPIBARIBE MELHOR) – APL I

PROJECT APPRAISAL DOCUMENT

LATIN AMERICA AND CARIBBEAN

LCSUW

Date: November 20, 2007 Country Director: John Briscoe Sector Director: Laura Tuck Project ID: P089013 Lending Instrument: Horizontal Adaptable Program Loan (APL)

Team Leaders: Ivo Imparato, Dean A. Cira Sectors: General WSS (40%); Access to Urban Services (40%); Municipal Governance and Institution Building (20%) Environmental screening category: Full Assessment Safeguard screening category: Limited Impact

Project Financing Data [X] Loan [ ] Credit [ ] Grant [ ] Guarantee [ ] Other: For Loans/Credits/Others: Total Bank financing (US$m.): 32.76 Proposed terms: Commitment-linked, US Dollar Fixed-Spread Loan (FSL), annuity repayment schedule and all FSL conversion options. Grace period: 5 years Maturity: 16.5 years Commitment charge: Per the new financial conditions of the Bank no commitment charge will be applied. Front-End Fee: One quarter of one percent (0.25%) of the Loan Amount.

Financing Plan (US$m) Source Local Foreign Total

BORROWER/RECIPIENT 14.04 00.00 14.04 IBRD 32.76 00.00 32.76 Total: 46.80 00.00 46.80 Borrower: Município do Recife Cais do Apolo, no. 925, Palácio Prefeito Antônio Farias Recife - Pernambuco - Brasil (81) 3232-8117 Responsible Agency: Empresa da Urbanização do Recife (The Recife Urban Development Company, URB) Av. Oliveira Lima, 867 Boa Vista, Recife, Pernambuco, CEP 50050-390 (81) 3232-5000

Estimated disbursements (Bank FY/US$m) FY 08 09 10 11 12 13 0 0 0 Annual 0.79 6.38 10.15 9.20 3.24 3.00 0.00 0.00 0.00 Cumulative 0.79 7.17 17.32 26.52 29.76 32.76 0.00 0.00 0.00

Project implementation period: January 1, 2008 to December 31, 2012 Expected effectiveness date: January 1, 2008 Expected closing date: June 30, 2013

Does the project depart from the CAS in content or other significant respects? Ref. PAD A.3

[ ]Yes [X] No

Does the project require any exceptions from Bank policies? Ref. PAD D.7 Have these been approved by Bank management? Is approval for any policy exception sought from the Board?

[ ]Yes [X] No

[ ]Yes [ ] No [ ]Yes [X] No

Does the project include any critical risks rated “substantial” or “high”? Ref. PAD C.5 [X]Yes [ ] No

Does the project meet the Regional criteria for readiness for implementation? Ref. PAD D.7 [X]Yes [ ] No

Project development objective: Improve the well-being of the low-income population living in the Capibaribe River Basin area of the city and the fiscal, urban and environmental management capacity of the Recife Municipal Government. Project description: I. Institutional Development: This component will include: (i) a program of fiscal management putting in place a medium-term fiscal adjustment framework in support of fiscal discipline and responsibility; (ii) actions to improve the regulatory capacity of the municipal environmental agency and foster greater flexibility in the use of urban planning and land development instruments, reducing barriers to land development; and (iii) support to scale-up urban development and urban upgrading programs by improving project development and appraisal capacity as well as monitoring and evaluation of urban operations and supervision of works. II. Integrated Urban Territorial Development: This component focuses on improving living conditions and regularizing land tenure of a large slum population, providing incentives for the further physical and socio-economic development of this impoverished area. It will include investments that are aimed at improving the quality of urban spaces along the margins of the Capibaribe river through the development of new, or the rehabilitation of existing, infrastructure, including: (i) Water Supply and Sanitation/Urban Upgrading; (ii) Parks and Green Spaces; (iii) Macro Drainage Systems; and (iv) Increasing Accessibility and Urban Mobility. III. Social, Environmental and Economic Development of the Territory: This component will focus on activities designed to promote the participatory social and economic development of the targeted communities and at the same time raise awareness of the natural environment of the region. It will include: (i) Job and Income Generation Assistance targeted to the project’s primary beneficiaries by focusing on the reduction of barriers to employment and income generation as a complement to broader activities the municipality is undertaking to promote business development and economic growth of the municipality and region; and (ii) Environmental/Sanitary Education, natural hazards risk management, civil defense promotion and community participation.

Which safeguard policies are triggered, if any? OP 4.01 Environmental Assessment; OP 4.04 Natural Habitats; OP 4.09 Pest Management; OP 4.11 Cultural Property; and OP/BP 4.12 Involuntary Resettlement. Significant, non-standard conditions, if any, for:

Board presentation: None Loan/credit effectiveness: • Signed Subsidiary Agreement acceptable to the Bank and Borrower; • Signed Participation (Cooperation) Agreements acceptable to the Bank and Borrower. Covenants applicable to project implementation: Standard

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A. STRATEGIC CONTEXT AND RATIONALE 1. Country and sector issues Country and Sector Background 1. The growth, poverty and equity agenda is largely an urban one in Brazil. With some 80 percent

of its population living in urban areas, Brazil is one of the most urbanized countries in the world. Most of the country’s GDP is generated in cities, poverty is increasingly urban and urban environmental problems harm the poor more than any other environmental issue. Municipalities in Brazil’s decentralized environment are on the front lines of delivering essential services to urban dwellers, creating an environment conducive to economic development and managing a large share of public sector financial resources. About 700,000 new households per year cannot attain formal housing; 28 million people (7.1 million households) live in sub-standard housing; urban informal settlements on the peripheries of cities grow at a rate 4 times faster than average urban growth; municipalities claim about 20% of public sector revenues and an even greater share of public expenditures; and municipalities are responsible for the provision of most basic services such as solid waste management, street cleaning, drainage and public transport, share responsibilities with states for water supply and sanitation (WSS), education and health, and the infrastructure required for economic and social growth (such as housing).

2. A key challenge for Brazil is to make cities more livable, more equitable and more competitive

by maximizing agglomeration economies (efficiency gains derived from market size and the efficient exchange of goods, services and information) and minimizing congestion costs (traffic, pollution, crowding, violence, loss of social capital and economic opportunity). Scale and agglomeration economies of cities suggest that assistance to cities can result in high impact of interventions at a relatively low cost: urban areas provide a nurturing environment for job and firm creation, and essential services can be provided most efficiently in cities. Through a selective and strategic program of support to cities, the Bank can play a part in demonstrating how policies, effectively implemented at the local level, can largely improve the lives of the urban poor, promote sound local governance and lead to a more competitive local economy.

Recife 3. Recife well represents the problems of rapid, unchecked population growth, the congestion

effects of urban poverty, and inequality. Located in the Brazilian northeast in the state of Pernambuco, the Recife Metropolitan Region (RMR) is the fourth largest metropolitan region in Brazil with a population of 3.3 million.1.4 million live in the municipality of Recife itself, the largest of the 14 municipalities that comprise the region. The RMR is an important commercial and service center in the Northeast, generating 60% of the GDP of Pernambuco. However, more than half of the working population is employed in the informal sector and 77% of the informal workers earn less than two minimum wages, with nearly 50% earning less than one minimum wage. The RMR in many respects presents a rich-poor spatial dichotomy with higher income neighborhoods located along the coastal axis, while low-income neighborhoods follow inland axes, along federal highway BR-101 and along the Beberibe and Capibaribe rivers. Roads connecting these axes are also mainly occupied by lower-income households. Indeed, Recife has the highest income gap in the country, according to recent IBGE figures.

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4. Nearly 40% of the population, or 1.2 million poor people, live in informal settlements in the RMR – one of the highest percentages of any city in Brazil.1 These are settlements characterized by: their location in environmentally sensitive or high risk areas; makeshift, self-built housing; irregular development patterns; lack of basic services such as WSS and solid waste management; lack of physical and social infrastructure; and insecure land tenure. The origin of these settlements has typically been a product of rapid rural to urban migration against a backdrop of limited access to land and housing due to market and government failures. This has led to the creation of vast tracts of illegally squatted (mostly on public land) and illegally subdivided (mostly on private land) settlements. Failure of the public sector to enforce property rights ex ante, and then the failure to recognize these settlements as legitimate ex post, and the subsequent lack of public investment in collective goods in these areas, have facilitated their proliferation and resulted in poor living conditions.

5. According to the Cadastro de Áreas Pobres (PPCR/URB) there are 660,000 inhabitants in 421

informal, low-income settlements in the Municipality of Recife itself. The vast majority of these settlements can be found along the margins of Beberibe and the Capibaribe rivers. Slightly more than half of these settlements have been incorporated in the legal zoning classification known as ZEIS – unique zoning that allows for the special treatment of informal settlements. Likewise, about half of the 50 or so low-income communities within the part of the Capibaribe basin that corresponds to the Municipality of Recife, are classified as ZEIS. The Capibaribe river basin spans several municipalities before it reaches the urbanized Municipality of Recife where the cumulative effects of the river’s pollution combine with the social inequalities unique to the stretch of the river corresponding to Recife. Of the approximately fifty low-income settlements in the basin area, over 75% are on the right side of the river, with the right side also often used to resettle families in favelas that appear from time to time on the left bank of the river.

A few statistics illustrate the level of poverty along this stretch of the river:

• While overall potable water coverage is around 89%, this falls to 76% in poor communities with

only 24% of those living in informal settlements reporting receiving water on a daily basis; • Overall sewage collection is 36%, falling to 7% in poor neighborhoods with only 20% of

collected sewage receiving treatment; • Drainage is precarious and many drainage canals are encroached by illegal human settlements,

leading to the reduction of river and channel beds and the impediment of water flow, and exposing poor families whose houses are precariously close to the water bodies to flood risks;

• Urban transport is dominated by road-based motorized modes and during peak periods highway corridors are clogged with cars and buses, compromising air quality;

• Homicides and traffic accidents are responsible for 51.3% and 23.4% of fatalities not of natural causes, the latter being especially prevalent in poorer communities and the young (the informal community of DETRAN is located in the project area and has the highest indices of crime and violence in Metropolitan Recife).

6. By 2015, the population of Metropolitan Recife is projected to increase by an additional

872,000. The vast majority will be poor. And, ceteris paribus, these new urban poor households will seek housing solutions through informal means. In the older, denser settlements any remaining vacant land will be occupied. In addition, households will increase the density of existing settlements by building upwards. In the newer, more peri-urban areas, vacant lands will be squatted, extending urban

1 Source: IBGE. Informality estimates lack precision in Brazil due to the existence of conflicting definitions. The Ministry of Cities and IBGE are working to try and standardize definitions of informality and to improve survey questions to obtain better, standard data regarding informality.

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boundaries further. In response the Municipality of Recife, the State of Pernambuco and other municipalities in the RMR (notably Olinda) have been putting in place perhaps the only comprehensive program of sector reform that takes a metropolitan outlook to the problem of growing informality. The regional approach to addressing the problem of informality has at its core the upgrading of slums and the regularization of land tenure (i.e., improving the stock of housing). But it includes equally important policy and institutional work that aims to: (i) create conditions to provide future shelter and infrastructure solutions in accordance with demands and income levels, thereby attempting to address problems associated with housing flows; (ii) improve the capacity of public institutions to provide basic services; (iii) mobilize resources by seeking public-private partnerships and promoting the efficient use of scarce public funds; and (iv) facilitating the land development process at the local level thereby creating an enabling environment for more equitable access to land. Some of these reforms are being supported by the Bank, both through lending operations such as PROMETROPOLE2, as well as through direct technical assistance with support from such programs as the Cities Alliance.

7. The proposed Capibaribe Melhor project will take on-going reforms further. First, no long-term

program to increase investments at the local level can be done without ensuring the fiscal health, and adequate investment/fiscal planning and management capacity at the municipal level. The project will support these goals with a sustained and direct program of medium-term fiscal adjustment and improved fiscal management. Second, while PROMETROPOLE is important as the only program of its kind in Brazil that attempts to establish a metropolitan framework for urban upgrading and land management, the proposed Capibaribe Melhor project is equally important for its direct support to the municipality which has functional responsibility for the upgrading and regularization of informal settlements. The project therefore would endow the municipality directly with the capacity to scale-up, and develop a systematic program for the upgrading of its substantial stock of informal housing and neighborhoods. Third, through a program of direct support to improving the regulatory environment for land development, the project will address one of the most critical bottlenecks to access to land by the poor. The physical investment program would simultaneously serve to improve living conditions in one the most inequitable regions of the municipality, and serve as an entry point for furthering the goals of sound fiscal management, scaling-up the upgrading and regularization of sub-standard housing and creating an enabling environment for urban development by addressing regulatory bottlenecks. Viewed holistically, the project represents a continuum of Bank support to the housing and urban sectors: land and housing policy reforms at the national level (series of policy loans, technical assistance and potential SWAp); an organizing framework for state/municipal co-operation to address urban informality at the metropolitan scale (PROMETROPOLE); and direct support at the municipal level which is directly responsible for ensuring good living conditions for its citizens and where reforms in the real sectors must be enacted as part of the effort to reduce Brazil’s growing urban informality within a sound fiscal environment.

2. Rationale for Bank involvement 8. The proposed operation is grounded in a rich analytical framework and policy dialogue between

the Bank and the Government of Brazil as regards urban development, municipal fiscal policy, land management, housing, basic urban services to the poor and decentralized environmental management. Lending to the Municipality of Recife is a strategically selective decision due to its importance as an urban center for the country’s Northeast Region, and because the proposed operation will serve as an instrument to finance on-the-ground investment with explicit linkages to national priorities in the areas of improved fiscal management and responsibility, improved shelter provision for the urban

2 Bank-financed urban upgrading program undertaken by the State Government of Pernambuco in the Beberibe River basin parts of the municipalities of Recife and Olinda (Ln. 4690-BR).

4

poor, urban and environmental management and the scaling-up of slum regularization while also providing lessons for other large municipalities in Brazil. In addition, the proposed Project fits within the overall development priorities for the State of Pernambuco and the Bank, balancing a portfolio of urban and rural regional development, with support to the social sectors and public sector governance.

9. First, the Project advances the Government of Brazil’s fiscal sustainability goals. Fiscal

responsibility is among the top priorities of the Government of Brazil. Municipalities claim around 20% of total public sector revenues (5.4% of GDP) 3 and their ability to adequately manage revenues and expenditures is important to Brazil in maintaining its goals of fiscal stability. Reforms such as the Law of Fiscal Responsibility have introduced more stability for sub-national fiscal management. National and regional programs to promote sound fiscal management at the municipal level have also contributed to overall improved fiscal management.4 Still more could be done to assist local governments to increase their own-source revenues (large municipalities collect about 24% of potential own-source revenues) and better manage expenditures. Recent studies indicated that while the overall fiscal situation of Brazilian municipal governments has been experiencing significant improvement, there are some concerns that must be highlighted: the fiscal situation of the largest Brazilian municipalities has suffered some deterioration and the guarantee of municipal fiscal sustainability depends on the enhancement of municipal revenue collection and the containment of current expenditures.5 The Project therefore prioritizes on improving fiscal management by enhancing the institutional and technical capacity of the Finance and Planning Secretariats in the design and implementation of a medium-term fiscal adjustment framework.

10. Second, the Project provides a natural complement to the Bank and Federal Government’s program to

create an enabling policy environment for housing and urban land development reforms aimed at poverty reduction and asset accumulation by the poor. The Project has, as its primary focus, the scaling-up of slum regularization and the creation of solutions to improving access to urban land and thus it complements, from the bottom-up, the reform efforts the Bank is supporting at the federal level. The Government has initiated a multi-faceted program to create opportunities for Brazilian families to access affordable housing by expanding the reach of housing finance, by reducing the barriers to formal land development, by strengthening and rationalizing housing subsidies, and by improving the institutional capacity of the Federal, State and local governments to deliver sustainable housing solutions for all segments of society. The project is in line with the objectives of the Federal Government’s Programa de Aceleração do Crescimento (PAC). The PAC aims to finance public infrastructure works in the transport, energy, sanitation, housing, and water sectors in select states, including Pernambuco. A large share of the PAC investments that have been announced for Pernambuco will be devoted to slum upgrading. The works undertaken with Capibaribe Melhor will therefore complement works executed under the PAC. This is a shared inter-governmental agenda, in which the two major players are the national and municipal governments. Municipal governments in particular are responsible for enforcing existing legal and administrative mechanisms required to regularize existing slums, facilitate access to land by creating a local regulatory environment that facilitates, rather than hinders, land development accessible for all segments of society, and have in place the institutional framework to implement government housing and urban development programs.

11. Third, the Project would support national environmental decentralization policies by

strengthening the capacity of the Recife municipal environmental agency to carry out environmental

3 While increasing, this is still low when compared to many other countries, e.g. USA, 16.3% of GDP, and Japan, 37.7%. 4 Such as the National Program to Support Administration and Fiscal Management of Municipalities (PNFAM) and the National Program to Modernize Tax Administration and Fiscal Management (PMAT) 5 Blanco, Fernando. The Evolution of Brazilian Municipal Finances, 2000-2004, January 2006. World Bank. Work in Progress.

5

management at the municipal level. The Bank's involvement focuses on strengthening the client's capacity to apply environmental safeguards for project preparation and implementation. The proposed Project also supports the national policy objective of decentralization with a program to strengthen the capacity of the municipal environmental agency in establishing and managing ZEPAs (Special Environmental Protection Zones). The Bank's technical assistance is linked to the Environment DPL and the Environment TAL as well as to WBI's institutional capacity development agenda in Brazil.

12. Fourth, the project is a natural outcome of a long program of Bank support to the Recife

Metropolitan Region and the State of Pernambuco. The Bank, with support from the Cities Alliance, assisted the State of Pernambuco to undertake the first strategic development plan in the country that looks at an entire metropolitan region through the lens of sustainable economic development. Subsequently, similar initiatives are now being advanced for the Metropolitan Region of Belo Horizonte in Minas Gerais State and for the Baixada Santista Region in São Paulo State. The RMR strategic development plan, known as ‘Metropole Estratégica’ (Metropolitan Recife Strategic Plan), outlines a medium-term development strategy under several macro-economic, social and environmental scenarios. The plan revealed that among the greatest threats to the region’s growth is the low quality of living conditions in the region, impacting the potential for growth, exacerbating social exclusion and threatening environmental quality – important for a region that depends greatly on tourism. Attacking the problem of irregular human settlements emerged as a development priority. The Bank responded by financing the state government’s PROMETROPOLE project which creates a metropolitan cooperative framework for urban upgrading and land management. This work has been complemented, with support from the Cities Alliance and the Brazilian Institute for Applied Economics (IPEA), by policy work in the area of land and housing market assessments with policy recommendations for increasing access to land for the poor. Recife has been the focus of much of this work. Direct support to the Municipality of Recife is a natural extension of the Bank’s program of support to the State of Pernambuco, given the important role that municipalities have in addressing the issues of urban informality, and the leading role that Recife plays in the development of the RMR.

13. The project supports the vision for a more equitable, sustainable and competitive Brazil outlined in

Government’s Multi-year Plan (PPA). The Project provides a classic example of challenges facing urban municipalities in Brazil as it grapples with constraints to growth, social challenges, environmental vulnerabilities and identifying appropriate financing mechanisms for sub-national entities.

14. The 2004-2007 CAS builds on the PPA and outlines a program to support multi-sectoral urban

environmental development strategies. The CAS recognizes the important role of sub-national level support in realizing broader growth and economic development as a means to achieving social equity in Brazil’s urban conurbations. In June 2006, the Bank's Board of Directors approved a Progress Report based on activities undertaken in support of the 2004-2007 CAS. This report re-focused Bank support to those areas where less progress has been made: i. Investing in growth, including enhanced emphasis on improving competitiveness and investing in

infrastructure; ii. Improving sustainability of “green” and “brown” environmental policies and development

strategies; iii. Making fiscal adjustment sustainable, enhancing the quality of public spending to deliver the

most effective services most efficiently, thus freeing up resources for investment, as well as improving public sector management;

iv. Building human capital for improved equity and growth; and v. Regional development in both urban and rural environments, with a special focus on the

Northeast and selected urban areas.

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15. Finally, it should be noted that the Capibaribe Melhor Project, together with its counterpart projects in the Cities of Uberaba, Teresina, Cubatão, Santos, Guarujá, and São Luis represent the first generation of Bank municipal projects in Brazil. These are the first projects that were approved for direct lending by the Brazilian Government, and have served as a basis for better understanding the demands and necessities of municipal governments. Work on these projects has helped to shape the Bank’s emerging strategy for municipal and urban support.

16. In addition, future work with local governments will be developed within a clear municipal and urban

support framework, within a strategy that will highlight: - pushing forward the city competitiveness and growth agenda; - helping the federal government to design a sustainable market-based sub-national credit system and

assisting municipalities to become creditworthy; - continuing support to the national housing program, with more attention to the supply constraints,

including land and construction sector; - helping local governments to help themselves in governance and fiscal matters, including tax

administration, cadastre, planning and visioning, and partnerships with the private sector; and - strengthening sectoral ministries and sub-national governments to improve efficiency in the service

delivery agenda.

The above will be accomplished by promoting a holistic approach to municipalities as service providers and helping maximize the return on their scarce resources by exploring synergies across municipalities and across sectors.

3. Higher level objectives to which the project contributes 17. The project contributes to the higher level objectives set out in Brazil’s 2004-2007 multi-year plan

(PPA), discussed above. Its development strategy emphasizes: (i) social inclusion and universal access to high-quality public services; (ii) macroeconomic stability and job and income growth; (iii) greater equity among the regions through regional and local development; (iv) greater integration between development and the environment; and (v) the promotion of civil society participation in decision-making. The project is also aligned with the objectives of the Federal Government’s Programa de Aceleração do Crescimento (PAC), launched in January 2007. The PAC is designed to finance public infrastructure works in the transport, energy, water and sanitation and housing sectors in select states, including Pernambuco, with a strong focus on slum upgrading. The urban development works undertaken with Capibaribe Melhor will therefore complement works executed under the PAC.

B. PROJECT DESCRIPTION 1. Lending instrument 18. The Capibaribe Melhor Project will be supported through a Specific Investment Loan to the

Municipality of Recife. The loan, of US$32.76 million, will be disbursed over a period of five years and will be guaranteed by the Federative Republic of Brazil. The Project supports the development priorities of the Municipality of Recife and is consistent with the Bank’s program of support to the State of Pernambuco. It also supports national policy priorities in the fiscal, housing/urban development and environment sectors. The Municipal Council authorized the Prefecture to enter into a Loan Agreement with the World Bank with the approval of Municipal Law 17.163/2005, published in the Official Gazette (Diario Oficial) on December 12, 2005.

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19. This Project Appraisal Document refers to the Specific Investment Loan package for the Municipality of Recife. This package is part of the larger Brazil Municipal Lending Program (BMLP) horizontal APL. For greater detail on national level context and sector issues and the design and components of the APL, please refer to the umbrella PAD (Report No: 32314 – BR).6

2. Program objective and Phases 20. The Brazil Municipal Lending Program is structured as a Horizontal Adaptable Program Loan (APL)

consisting of up to eight operations for key cities having a common focus on poverty alleviation, urban environment, local economic development, and municipal management. These themes have been selected by the federal government and the municipalities as priorities for this first municipal assistance program. The Capibaribe Melhor Project meets the specific APL criteria, which state that projects should: (i) focus on the priorities of urban poverty, environment, economic development, and municipal management; (ii) serve as models of innovation in municipal management and provision of services, thereby contributing to cross-municipal learning, replication, and federal policy development; and (iii) comply with the Fiscal Responsibility Law.

3. Project development objective and key indicators 21. The objective of the project is to: Improve the well-being of the low-income population living in the

Capibaribe River Basin area of the city and the fiscal, urban and environmental management capacity of the Recife Municipal Government.

22. The project will support the upgrading of slums in the Capibaribe River Basin and promote the

integrated and sustainable development of the region. While the focus, in terms of resources, is on improving the lives of the region’s poorest residents through the installation and improvement of infrastructure, as well as improved housing conditions, land tenure regularization and reduced exposure to natural and man-made hazards, the project will also promote sound fiscal management, local economic development, improved institutional capacity to scale-up upgrading, environmental education, community participation and will advance a more favorable land development and environmental regulatory environment.

23. Key Outcome Indicators will include:

1. Net consolidated debt to net current revenue (NCD/NCR) is maintained at less than 40%. 2. Property values of poorest families in the project area increase by 20% or more due to investments made in infrastructure.

6 The Umbrella PAD, together with the first Specific Investment Loan for the municipality of Uberaba, was approved by the Board on March 15, 2007. Authority to approve subsequent loans under the BMLP (up to a total program lending ceiling of $240 million) was granted to the Regional Vice President for Latin America and the Caribbean. In accordance with the Bank’s procedures for horizontal APLs, each subsequent loan package would be circulated to the Board for information after approval in principle by Management. In the absence of requests from three or more Executive Directors for Board consideration of the loan, Management approval would become effective ten working days after circulation of the documents to the Board.

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3. Percentage increases of the target population reporting improvements in: a. Water: 10% b. Sanitation: 15% c. Access/mobility: 8% d. Drainage: 10% e. Parks: 25% f. Environment:15%.

4. Municipality’s urban management capacity is enhanced, as evidenced by a 40% rise in the number of informal settlement areas that are officially recognized as ZEIS (Special Social Interest Zones) and in the municipality’s overall expenditures in urban upgrading interventions over the life of the project.

5. Municipality’s environmental management capacity is enhanced, as evidenced by the establishment of 4 ZEPAs (Special Environmental Protection Zones), with management frameworks in place.

The Monitoring and Evaluation framework is presented in Annex 3. 4. Project components 24. The project includes the following components: 25. I. Institutional Development (US$4.73 million, of which $4.52 million IBRD loan and $0.21

million local counterpart financing): to include (i) Fiscal Management and Adjustment; (ii) Environmental and Urban Management; and (iii) Scaling-Up Capacity.

26. IA. Fiscal Management and Adjustment (US$0.74 million, of which $0.61 million IBRD loan and

$0.13 million local counterpart financing): This sub-component aims to place the municipality on a long-term sustainable fiscal path. The objective is to improve the institutional and technical capacity of the Municipal Finance and Planning Secretariats in the design and implementation of a medium-term fiscal adjustment framework. This will include five primary actions: (i) establishment of a fiscal studies department within the Finance Secretariat; (ii) institution of a program to control personnel expenditures; (iii) installation of a permanent working group that will analyze costs and propose cost containment measures for the most important municipal activities (notably health and education); (iv) strengthening of budgetary and financial execution capacity; and (v) improved management of contracts and agreements of direct and indirect municipal administration.

27. IB. Environmental and Urban Management (US$0.25 million, of which $0.20 million IBRD loan and

$0.05 million local counterpart financing): This component will support federal efforts to further decentralize environmental planning and management responsibilities, and promote greater flexibility in the use of urban planning instruments for land development. This sub-component will include actions to support the Environment Secretariat, with a primary focus on the observance of Bank safeguard policies in project implementation and in the establishment and management of ZEPAs (Special Environmental Protection Zones) within the municipality. In the urban management sphere, the project will seek to enhance the municipality’s capacity to scale-up, and develop a systematic program for the upgrading of its substantial stock of informal housing and neighborhoods. It will assist the Municipality in identifying areas that fulfill the requirements for classification as ZEIS (Special Social Interest Zones) and in undertaking the necessary steps to increase the percentage of informal settlement areas that are so classified, which at present is little more than 50%. Making the official ZEIS list correspond more closely to the reality of the city’s informal settlements is an important step for Recife to leverage PAC and other investments in slum upgrading and improve the management of the improvement and regularization of the city’s informal areas in general. Finally,

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through a program of direct support to improving the regulatory environment for land development, the project will address one of the most critical bottlenecks to access to land by the poor.

28. IC. Scaling-Up Capacity (US$3.74 million, of which $3.72 million IBRD loan and $0.02 million local

counterpart financing): This component will include Project Management assistance, supervision of works, monitoring and evaluation and project communication with the public. It supports those activities that are essential to effective implementation and the reduction of operational risk. Further, it will focus on increasing the capacity of the municipality to manage multi-sector, large-scale projects, focusing on improving project design and appraisal capacity, coordinating multi-sector activities, improving monitoring and evaluation capacity and works supervision.

29. II. Integrated Urban Territorial Development (US$40.25 million, of which $26.73 million IBRD

loan and $13.52 million local counterpart financing): This component will include investments that are aimed at improving the quality of urban spaces along the margins of the river through the development of new, or the rehabilitation of existing, infrastructure with the aim of improving the quality of life of the area’s poor population. These physical improvements will focus on four macro areas of intervention: Slum Regularization and Water Supply and Sanitation; Parks and Green Spaces; Macro Drainage Systems; and Increasing Accessibility and Urban Mobility.

30. IIA. Urban Upgrading and Water Supply and Sanitation Systems (US$20.00 million, of which $12.97

million IBRD loan and $7.03 million local counterpart financing) will include macro-infrastructure investments to ensure adequate service levels in the region and the integrated development of poor communities through the municipality’s system of ‘integrated WSS’ development (i.e., water supply, sewerage, drainage, paving, urban upgrading, housing resettlement/improvements, tenure regularization and related activities). The integrated WSS investments to be supported under this component include: the implementation of integrated urban upgrading and WSS in UEs 39 and 40 (two of the UEs, wastewater drainage sub-basins into which RMR was divided in the 2000 wastewater management master plan) including the integrated development of 17 extremely poor ZEIS communities, reaching 200,000-plus beneficiaries. These 17 communities, which represent extreme pockets of poverty, have been designated as ZEIS areas, giving them special treatment as regards to reduced urban standards and fast-track status for land tenure regularization.

31. IIB. Parks and Green Spaces (US$5.00 million, of which $2.50 million IBRD loan and $2.50 million

local counterpart financing) will focus on the provision of leisure spaces that incorporate and consolidate the goals of environmental protection, cultural development and facilitation of organized community activities. The aim is to foster sustainable development through the provision of public goods, reducing the pressures to occupy these spaces for private use, which will make it easier for the public authorities to control the unlawful occupation of these areas. This sub-component includes the creation of the Apipucos Park, the expansion and recuperation of the Caiara and Santana Parks and the recovery of degraded areas that were formerly occupied by squatter settlements.

32. IIC. Macro Drainage (US$4.25 million, of which $3.61 million IBRD loan and $0.64 million local

counterpart financing) investments are required to improve water flow and reduce flooding incidence in the project area. The existing drainage system has been severely compromised by poor maintenance and the encroachment of informal housing along the margins of the existing canals. Resettlement will therefore be a key element of this sub-component, as will the treatment of the margins of the canals with investments in tree planting, mini-parks, etc. to prevent the re-occupation of these areas by squatters. Investments will include the recovery of the ABC, Buriti/Macaxeira, Caiara, Jenipapo, Parnamirim, Prado, Santa Rosa, São Mateus, Serpro, Sport and Valença canals.

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33. IID. Increasing Accessibility and Urban Mobility (US$11.00 million, of which $7.65 million IBRD loan and $3.35 million local counterpart financing) focuses on improving access to, and mobility within, the project’s geographic boundaries, including roads and bikeways. This component will serve to facilitate the physical integration of the two sides of the river and provide greater access by both the local communities and the city as a whole to public transport, to the parks that will be built and recuperated, and to other physical assets in the area. It will also include bike paths along the margins of the river, connecting the parks and serving both as a barrier to prevent the re-invasion of the river banks, and to promote environmental protection and sustainable economic development of the territory.

34. III. Environmental, Social, and Economic Development of the Territory (US$1.74 million, of

which $1.43 million IBRD loan and $0.31 million local counterpart financing): As has been learned with projects that focus on improving the built environment in low-income communities, physical investments can be used as an entry point for targeting social activities for low-income residents. This component will focus on activities designed to provide incentives for the participatory social and economic development of these communities and at the same time raise awareness of the natural environment of the region and the behaviors that are conducive to its protection. To that end, this component will include two sub-components: (i) Job and Income Generation Assistance; and (ii) Environmental and Hygiene Education.

35. IIIA. Job and Income Generation Assistance (US$0.69 million, of which $0.55 million IBRD loan and

$0.14 million local counterpart financing) will focus on micro-business owners, both individuals and collectives, and assist them in their capacity to generate income and employment. It will also establish a resource to local job seekers in the form of a Public Employment and Income Generation Center in the project area that will also act as a business incubator and will serve to identify local barriers to employment and income generation. The sub-component will also promote the installation of a solid waste triage center to support the 700 people in the project area who survive on the collection of recyclable materials. In all the above activities, priority will be given to youth at risk, given Recife’s current status as the most violent city in Brazil and the particularly high levels of crime and violence in the project area.

36. IIIB. Environmental and Hygiene Education (US$1.05 million, of which $0.88 million IBRD loan and

$0.17 million local counterpart financing) will focus on raising environmental consciousness. The Projeto Águas do Capibaribe will be expanded under this sub-component. This will include support to the Escola Ambiental do Capibaribe (Capibaribe Environmental School) which links with the formal municipal primary school education curriculum, by taking school groups on educational boat trips along the Capibaribe River to inform them on the natural environment of the river and the cultural and economic significance of the region. It will also include an environmental and hygiene education program, aimed at building the capacity of schools and teachers to build environmental and hygiene content into their curricula. It will also focus on raising environmental and hygiene awareness in the beneficiary community by working through the existing municipal program on Family Health. Community Participation is embedded into these activities. The component will include meetings, assemblies and community consultations in the process of project implementation and ex-post project supervision.

5. Lessons learned and reflected in the project design 37. Bank experience in the urban development and WSS sectors has provided valuable lessons that will

be incorporated in to the project, building on such experiences as the Municipal Funds projects, CAMEBA in Venezuela, PROMETROPOLE in Metropolitan Recife, Guarapiranga in Metropolitan São Paulo, the Water Quality Management Projects of the 1990s and a host of other urban services

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and water resources management projects. Among the lessons learned from this vast array of projects are the following:

• Programs aimed at strengthening municipal capacity, as has been learned from the Bank’s vast

experience with municipal funds projects in Brazil, work best when coupled with a lending program which can provide leverage for implementing reforms.

• Experience also suggests that lending at the sub-national level can be an effective means for the implementation of national policy priorities at the sub-national level.

• Integrated approaches are needed to tackle problems related to urban upgrading, basic services, and the brown environmental agenda. With a basis in multi-sector and inter-institutional principles; an integrated approach to these issues can enhance the benefits of a wide range of interventions and contribute to poverty alleviation. In addition, holistic approaches focusing on basic service provision – in particular basic infrastructure – but also paying attention to local social and economic questions, are necessary in order to address the complex challenges of spatial development.

• This concern for a holistic approach to development has led to a call for greater integration in Bank-funded projects. This aim of ‘integrated’ development, however, risks development paralysis whenever objectives become overly complex. A ‘Christmas tree’ approach to development weighs down implementing and coordinating agencies. Integration, it has been learned, must be ‘natural’ so as to not force undue burdens on borrowers and implementing agencies. This project takes into account several important lessons in that regard, including those established through the urban, water supply and sanitation, and water quality sectors.7

• A macro urban perspective is important in upgrading programs, as it is essential for weaving marginalized communities into the broader urban fabric. As an organizing force, river basins and their sub-basins can be effectively used as a basis for planning, not only for infrastructure delivery but also for prioritizing complementary urban upgrading actions.

• Resettlement is an inherent element of any large-scale upgrading operation in slums. The need to provide rights-of-way for infrastructure and to remove families located in high-risk or environmentally fragile areas necessitates resettlement. It is known from experiences throughout Latin America that resettlement will increase project costs, but when included within the overall envelope of neighborhood consolidation, the overall cost is about ¼ that of pursuing the alternative of wholesale new housing construction and slum clearance. In addition, recent experience suggests that governments have become more adept and sensitive in handling the resettlement process, and that, when done properly, resettlement provides a win-win solution for beneficiary families and society.

• At the same time, integrated projects, as the experience of the PROMETROPOLE and PQA projects have demonstrated, are complex to implement and careful planning is required to prevent delays, especially if there are multiple implementing agencies involved. The centralization of implementation with URB intends to mitigate this risk.

• Decentralizing responsibility of investments to the lowest level possible, such as municipalities, increases accountability and typically improves service quality as a result.

• When developing upgrading projects, care should be taken to develop a useful monitoring and evaluation program. Indicators should be clear and easy to measure, focusing on project outcomes and performance for use as a management tool. In that regard, baseline beneficiary assessments are useful for making ex-ante and ex-post analyses of quality of life improvements in slum areas, and help design interventions aimed at social inclusion.

• As has been learned in state-level interventions, sector investments can be used as an entry point for horizontal, cross-cutting components aimed at improving the governance of public sector institutions.

7 See, for example, Azevedo, et al. ‘Brazil: Managing Water Quality: Mainstreaming the Environment in the Water Sector’ World Bank Technical Paper No. 532, December 2002, pp. 38-41.

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6. Alternatives considered and reasons for rejection 38. Several alternatives had been considered for the delivery of this, and other, municipal operations in

Brazil. These included: (i) lending through a federal intermediary; (ii) lending via a federal ‘counterpart’ for learning/dissemination; and (iii) pooling the loans into a horizontal APL. These were rejected for several reasons. First, lending through a federal intermediary has legal and administrative barriers that would require exceptions and require a longer time horizon to develop into a viable option. Second, there is no federal counterpart prepared to take on the multi-sector nature of this or other municipal operations. Third, lending to the federal level for sub-national interventions has proven largely inefficient and ineffective in many sectors in Brazil. Pooling of loans into a horizontal APL was considered as a means of reducing transaction costs and consolidating preparation and supervision. However, it would be difficult for the federal authorities to integrate the analysis required for granting a federal guarantee to a loan with several different borrowers, and there was a range of different levels of capacity and stages of project preparation among participating municipalities. Therefore, pooling was rejected in favor of individual Specific Investment Loans.

39. In the specific case of Recife, the municipal authorities considered several alternative scenarios for

the region. Scenario A included an expanded project area from the BR-101 to the mouth of the Capibaribe River. This option would have included the very poor historic center of the city, and would have shifted much of the focus of the project to historical preservation in the context or urban renewal and economic development. However, it was concluded that such a scenario would limit the resources available for interventions in the very poor neighborhoods elsewhere in the region. In addition, it was determined that the historic center benefits from other programs, including ‘Morar no Centro’, MONUMENTA-BID and PRODETUR-BID, the latter two being state-financed programs.

40. Scenario B would have been a slightly smaller geographic area than the selected scenario, from the

BR-101 to the second bridge. However, this option would have excluded some of the poorest communities which are priority investment areas for the municipal government. The project scope that was finally chosen, Scenario C from the BR-101 to the Agamenon Magalhães Avenue, encompasses the poorer communities excluded under Scenario B, underscoring the poverty focus of the project.

C. IMPLEMENTATION 1. Partnership arrangements (if applicable) 41. The financing for BMLP would come from IBRD and the participating municipalities. To supplement

Bank funded analytical (AAA) work at the federal level, the Bank will develop a partnership with the Ministry of Cities, its principal counterpart in the advancement of national policies in housing, urban development, water supply and sanitation, and urban transport. Other main government partners would include the Ministry of Finance and National Treasury for issues related to fiscal responsibility and management, and the Ministry of Planning and its research institute, IPEA (Instituto de Pesquisa Econômica Aplicada, Institute for Applied Economic Research), for ensuring consistency of the lending program with national priorities and guiding the knowledge and policy horizontal component in support of national policies.

2. Institutional and implementation arrangements 42. The Borrower will be the Municipality of Recife with a guarantee from the Federative Republic of

Brazil. General program coordination will be provided the Empresa de Urbanização do Recife (URB) – an autonomous municipal agency attached to the Secretariat of Participatory Planning, Works,

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Urban Development and Environment. That same institution will undertake execution and management responsibilities by staffing the Project Management Unit. The Project Management Unit (PMU, or UGP in Portuguese) will be staffed with personnel from the Municipality. The PMU will be assisted by consultants that will provide specialized management services to the Unit, particularly in the areas of financial management, procurement, and monitoring and evaluation. In addition, specialized engineering firms will also provide assistance in works supervision.

43. Financial management will be the overall responsibility of URB/PMU and will include oversight and

support from the Secretariat of Finance, while procurement will be the responsibility of URB/PMU and URB’s Procurement Committee, which has experience in managing large works procurement packages. Financial management, procurement and auditing will be under the direct coordination of the Administrative Coordinator of the PMU.

The project’s institutional arrangements are detailed in Annex 6. 3. Monitoring and evaluation of outcomes/results 44. Monitoring and evaluation (M&E) will be carried out by the Project Management Unit. In April 2004,

an initial stakeholder workshop was undertaken to develop the project objective and results framework. The workshop led to the development of the first Monitoring and Evaluation proposal, which was refined over the ensuing year as the project preparation progressed. The M&E plan, finalized in June 2007, is summarized in Annex 3. Monitoring and evaluation will be the responsibility of URB/PMU, with technical assistance from the relevant municipal agencies as needed.

45. The M&E framework presents indicators for the Project outcomes and for the various components,

the latter of which have been selected to support the overall development objective of the Project. To the extent possible, baseline indicators have been identified. In those cases where this has not been possible, baselines will be established in the first year of the project, with annual or semi-annual targets established, when feasible. A feature of the M&E program will be a household survey to be applied in the Project area and a control area. The purpose of the survey will be to identify project impacts that are not obvious ex-ante, such as impacts on health, education, access to employment, self-esteem, among others. The survey will be applied in years 1 and 5. It is envisaged that support to municipal level M&E would be provided through the learning and knowledge sharing component of the APL program.

4. Sustainability 46. Borrower commitment is critical to the sustainability of the project, and the project is a clear priority

of the municipal government. As indicated earlier, the commitment to urban upgrading in Recife is a long standing municipal tradition, transcending political ideologies over the years. The policy changes in the 1980s, which first recognized the legitimacy of informal settlements, were a reflection of a strong commitment to improving the lives of the urban poor and led to the highly-regarded PREZEIS program of formalizing squatter settlements and illegal subdivisions. The Capibaribe Melhor Project, together with the other municipal programs of ‘Recife without Stilt Housing’ and PROMETROPOLE, represents an opportunity to bring scale to urban upgrading in the city with the highest concentration of informal settlements in Brazil.

47. Another key element to the sustainability of the project is the municipality’s strong commitment to

stakeholder participation. Two elements of stakeholder participation that will be incorporated into the program are worth mentioning: PREZEIS and Orçamento Participativo. PREZEIS is the first and

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longest-running program of systematic urban upgrading in Brazil, dating back to 1983. It provides several forms of permanent stakeholder participation, including: the Urbanization and Legalization Commissions, or COMULs; the Permanent Forum (Forum Permanente) which links the commissions to a broader participatory body charged with integrating PREZEIS with the broader policy dialogue as regards urban development of the city as a whole; and the Coordination Forum (Fórum de Coordenação) which aims to integrate social and economic programs into PREZEIS.

48. With strong links to stakeholder participation, participatory budgeting (Orçamento Participativo) has

been a strong tradition in Recife, regardless of which party is in power. The participatory budgeting process is an important element to foster transparency in the allocation of municipal budget resources, and to respond to the articulated demands of the community. It is argued that the process stimulates citizenship, solidifies the commitment between government and the public and helps ensure the appropriate allocation of public resources.

49. Fiscal sustainability is also essential for the success of the project. There is a common understanding

between the Bank and the municipal authorities that the fiscal situation in Recife requires implementation of an adjustment program that would combine revenue enhancement and current expenditure control measures. Local authorities recognize the need to implement a multi-annual program of fiscal adjustment to guarantee the long-run sustainability of the municipal fiscal accounts. The fiscal component will include a medium term program of technical assistance and capacity building. The program will set annual targets for fiscal balances, own revenue collection increases and the containment of current expenditures.

50. Sustainability of WSS investments is important, in particular since it represents such a large chunk of

the investment program. The sustainability of WSS investments was a similar concern during the preparation of the PROMETROPOLE project. To that end, the Bank has been actively involved in working with COMPESA through both the PROMETROPOLE and PMSS II projects, with promising results to date, as listed below. The sustainability of the investments in WSS will depend on continued improvements in COMPESA’s operational and financial efficiency. To that end, COMPESA can now point to: (i) the recent signing of the first ever concession contract with the municipality of Recife, with goals and objectives for the sector; (ii) an institutional arrangement with the municipal Secretariat of Sanitation which establishes the latter’s role in supervising investment and service quality in informal settlements, and which establishes investment goals and an investment fund for these areas; (iii) a reversing of operating deficits to an operating surplus; (iv) the completion of the first-ever Strategic Business Plan for COMPESA; (v) a commitment to creating geographical ‘business units’ corresponding to a modern program of water loss reduction, and to modernizing its commercial operations; and (vi) a commitment to the introduction of private sector participation in commercial risk operation(s) linked to WSS in selected business unit(s).

51. Links to other projects will also serve to enhance the sustainability of investments. The municipality’s

direct execution of the Bank financed PROMETROPOLE project will guarantee a strong and sustained presence of the Bank, as well as serve to strengthen the technical capacity of the municipal authorities. This will allow for the transfer of lessons learned between the two projects, since both the Bank teams and the municipal teams overlap in the supervision and implementation of these projects. In addition, the Bank-financed PMSS II project is undertaking important measures in Metropolitan Recife that will serve to sustain the investments in WSS (the bulk of the investments) as previously indicated. Further, the broader policy work in the housing and urban development sectors that is supported by the Bank through a broad program of lending and sector work will serve to sustain the investments by helping to create an enabling environment for housing and land development for the poor.

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5. Critical risks and possible controversial aspects

Risks Risk Mitigation Measures Risk Rating w/Mitigation

Fiscal Situation has improved, but it requires careful monitoring given recent history.

Implementation of a multi-annual program of fiscal adjustment to ensure the long-run sustainability of the municipal fiscal accounts. This will be supported under the project.

H

Inability to hedge exchange rate risk in dollar-denominated debt.

Project preparation included a thorough fiscal assessment of the municipality and its financial management capacity. The fiscal assessment indicated a low risk regarding the exchange rate. Options do exist to reduce FOREX risk: a lending instrument that allows the possibility of swapping debt to local currency, as was done in the case of Betim; or direct lending in Reais. The latter must be weighed against the risk of higher interest rates and shorter amortization periods of local currency loans in Brazil. .

M

Inexperience of the client with Bank procedures may cause delays in implementation. The Financial Management Assessment rated the fiduciary risks as high.

The client has experience with other projects financed by the IDB (PRODETUR, MONUMENTA) and is a secondary implementing agent of the World Bank-financed PROMETROPOLE project. The Financial Management Assessment rated the risk as high, owing primarily to the lack of a defined implementing agency at the time of the assessment. The definitive decision to use URB as the implementing agency was subsequently taken. The risk mitigation plan that was put in place for Financial Management was declared completed at the time of appraisal. Devolving some fiduciary supervision tasks to the Bank’s local office in Recife may also reduce this risk.

H

Inexperience of client with Bank procedures translates into high Procurement risk as per the Procurement Assessment.

URB has considerable procurement experience, as it is responsible for undertaking and implementing 80% of all public works projects in the municipality. It has adequate controls and systems to manage the procurement process and experienced procurement staff. A risk mitigation plan was put in place for Procurement, and it was declared completed at the time of appraisal. Devolving some fiduciary supervision tasks to the Bank’s local office in Recife may also reduce this risk.

H

The relatively large-scale of resettlement could cause delays given bureaucratic processes in land acquisition.

These actions will take place in parallel to project design/engineering and will be carefully phased to coincide with works implementation. Works not requiring resettlement will be executed first. A resettlement framework has been prepared.

M

Overall risk rating Substantial 6. Loan/credit conditions and covenants 52. Conditions for effectiveness are: • Signed Subsidiary Agreement acceptable to the Bank and Borrower; • Signed Participation Agreements acceptable to the Bank and Borrower. In addition, the Loan Agreement will require that no bidding process in which the works involve resettlement shall advance without Bank prior review of the respective Resettlement Action Plans.

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D. APPRAISAL SUMMARY 1. Economic and fiscal analyses 53. Economic Analysis: A benefit-cost analysis was prepared for the Project to determine its economic

feasibility. The analysis presented in Annex 9 demonstrates the overall economic viability of the Project as well as its individual components.

The economic analysis of the Capibaribe Melhor Project was evaluated taking into account the

following investment components. (i) Parks, Leisure Areas and Green Spaces; (ii) Integrated Water Supply and Sanitation (including urban upgrading of slums); (iii) Macro Drainage; and (iv) Access and Mobility.

54. Based on the evaluations of the individual components of the Project, the overall Project economic

evaluation reveals that the Project has an estimated net benefit of R$94 million, an economic internal rate of return of 25% and a benefit/cost ratio of 3.12, indicating its economic viability. The economic benefits to be generated by the Project are extremely significant, as confirmed by the sensitivity analysis. All indicators analyzed presented levels of confidence greater than 99%, confirming the robustness of the values obtained. The final conclusion is that, even in the worst-case scenarios, the unitary benefits of the Project remain positive and robust.

55. Fiscal Analysis: A fiscal analysis of the Municipality of Recife was conducted in October, 2004 and

updated in November 2005. A summary of the assessment is presented in Annex 9. The full study is available in the Project Files. In addition, STN conducted its own analysis as a pre-condition to authorize negotiations. The latest STN analysis was finalized in August 2007. As regards the capacity to support the World Bank loan, the fiscal situation depicted by this baseline scenario is healthy, although there is relative vulnerability. Small variations on revenues, expenditures and growth rates can have important negative impacts on municipal finances. Personnel expenditures also contribute to a higher risk, since an increase is to be expected in the annual social security imbalance. This vulnerability indicates the importance of continuing the policies of tight control over expenditures and revenue enhancing that were established in 2005 (reversing negative trends from 2001-2004). In this respect, as mentioned above, the World Bank lending operation will support the municipality’s medium-term adjustment program directly.

56. The results of the fiscal analysis made clear the need for the maintenance of the fiscal stance adopted

by the municipal government in 2005 to maintain public services delivery, to keep increased investment levels and to assign the necessary counterpart resources to develop the CEF- and Bank-financed projects. In addition, control of the rate of growth of personnel expenditures and perseverance in the strict containment of expenditures on goods and services need to be maintained. Although the net debt is now much higher than previously, the financial indicators relating to personnel and debt show an adequate trend along the projection period.

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2. Technical 57. The following technical studies were undertaken: • Revision of cost estimates for infrastructure components; • Study of investment alternatives; • Study of priorities for selection of poor areas; • Mathematical modeling of water quality of the Apipucos reservoir as relates to the proposed by-pass; • Water quality modeling using QUAL2E of the Capibaribe river as relates to the expected impacts of

the proposed Cordeiro wastewater treatment plant; • A revised conceptual study of the proposed Cordeiro wastewater treatment plant based on the water

quality modeling; • Traffic count study at critical points in the Capibaribe road network; • Assessment of the carrying capacity of the existing road network in order to properly scope out the

proposed investments; • Preliminary design of the proposed road network investments; • Evaluation of the proposed road network investments and compatibility/impact with the public

transport system; • Evaluation of possible segregated bike lane in the proposed road network investments; • Assessment of parking requirements within proposed road network investments; • Detailed assessment of the current status of the Municipal Environment Agency; • Fiscal Assessment and Action Plan. 3. Fiduciary 58. Financial Management: A financial management risk assessment of the Project was carried out in

accordance with OP/BP 10.02 and the Guidelines for Assessment of Financial Management Arrangements in World Bank-Financed Projects issued by the Financial Management Sector Board on October 15, 2003. The Project will be implemented by a PMU located inside URB – Empresa de Urbanização do Recife – which is a public enterprise, fully owned by the Municipality of Recife. URB falls within the purview of the Secretariat of Participatory Planning, Works, Urban Development and Environment.

59. The overall objective of the assessment was to determine whether the Borrower has, or will have, acceptable financial management and disbursement arrangements in place by Loan effectiveness.

60. The conclusion of the FM assessment is that the financial management arrangements for the Project as set out in this Report, once in place and fully operational, will satisfy the Bank’s minimum requirements, and that financial management systems are or will be in place that can effectively control and monitor the Project, providing with reasonable assurance accurate and timely information on its implementation progress.

Details of the Financial Management Assessment can be found in Annex 7.

61. Procurement: A procurement capacity assessment was carried-out in November 2004 and reassessed in 2005.

62. The procurement capacity assessment provided an agreed action plan. Both the assessment and the development of the action plan were carried out with the full participation of URB and were

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discussed in detail with its President and senior management in order to ensure ownership of the proposed actions. The actions proposed in the plan have been incorporated as project components and will be funded through the loan as needed.

63. At the time of the assessment it was indicated that URB would be responsible for procurement for the

proposed project. The assessment, therefore, covers only URB’s bidding committee and does not include the Municipal bidding committee. The overall conclusion is that, while URB has considerable procurement experience and capacity, it does not possess experience with Bank-financed contracts and is not aware of Bank procurement procedures. The action plan proposes investments in human resources qualification as well as the hiring of a senior procurement consultant who will provide URB with the needed capacity to execute Bank procurement.

Details can be found in Annex 8. 4. Social 64. A social assessment was carried out for the project, which included a combination of household

surveys, interviews and focus groups consisting of potentially impacted and benefited stakeholders. The study verifies that the project will have a positive social impact and that the benefits of the project will largely accrue to a poor population. The results of the study also largely validate the focus of the project to integrate sanitation, water, drainage, parks and road network improvements with actions aimed to facilitate access to employment or income producing activities. Of the issues identified to be most critical in the project area, the most cited in order of frequency were: basic sanitation (WSS and drainage); road paving and access; and (a lack of) parks, leisure and open spaces. The study also indicates that the targeted population is a largely vulnerable population. Of the surveyed population, 32% were unemployed and searching for employment, and only 13% of the employed worked in formal sector employment, underscoring the importance of the municipality’s efforts to create conditions for increased employment and income generation opportunities. The study also confirms that the project’s adherence to strong community participation will serve to enhance the sustainability and effectiveness of the proposed interventions. The study is available in the Project Files.

65. A Resettlement Policy and Framework has been prepared. The Resettlement Policy and Framework

sets forth the policies and guidelines that will be put into practice as regards the resettlement of families that will be required during the course of project implementation. No resettlement is anticipated during the first year of project implementation. Specific resettlement action plans will be prepared for all works requiring resettlement in subsequent years. These action plans will derive from the Resettlement Policy and Framework. Conditions for the bidding of any works requiring resettlement will include the preparation of a specific Resettlement Action Plan to be approved by the Bank.

A summary of the Resettlement Policy and Framework is presented in Annex 10. 5. Environment 66. In accordance with Bank Safeguard Policy OP 4.01, the Project has been classified as a Category A

project for environmental impacts. An environmental impact assessment (EIA) has been carried out for the project in order to identify potential environmental impacts, recommend mitigation and compensatory measures of the negative impacts and maximize the largely positive environmental impacts expected of the project. Included in the EA is a proposed Environmental Management Plan,

19

which has been fully incorporated into the project design. In addition to the EIA, the project triggered safeguards related to Natural Habitats, Pest Management, Cultural Property and Involuntary Resettlement. These have been adequately addressed in the course of project preparation and are reflected in the project design. The Terms of Reference for the Environmental Assessment were reviewed by qualified Bank staff and were discussed in a public forum with the environmental licensing authority for the State of Pernambuco (CPRH) and with the Public Ministry (Ministério Público) of Brazil prior to initiating the assessment. A public consultation process and disclosure of the EIA was held and documented on January 6, 2006.

67. Overall, the Project’s social and environmental impacts are positive in nature, as would be expected

of a project whose main outcomes include the upgrading of slums, including upgrading of basic services, the development and recovery of parks, improvements in macro drainage and the resettlement of families living in high risk areas, as well as actions to raise urban and environmental management capacity and environmental awareness. All potential negative environmental impacts can be mitigated and are primarily those associated with the construction process itself. A summary of the Environmental Impact Assessment is included in Annex 10.

6. Safeguard policies

Safeguard Policies Triggered by the Project Yes No Environmental Assessment (OP/BP/GP 4.01) [X] [ ] Natural Habitats (OP/BP 4.04) [X] [ ] Pest Management (OP 4.09) [X] [ ] Cultural Property (OPN 11.03, being revised as OP 4.11) [X] [ ] Involuntary Resettlement (OP/BP 4.12) [X] [ ] Indigenous Peoples (OD 4.20, being revised as OP 4.10) [ ] [X] Forests (OP/BP 4.36) [ ] [X] Safety of Dams (OP/BP 4.37) [ ] [X] Projects in Disputed Areas (OP/BP/GP 7.60) [ ] [X] Projects on International Waterways (OP/BP/GP 7.50) [ ] [X]

Note that the dam, originally in the project design, was eliminated during project preparation.

7. Policy Exceptions and Readiness 68. No policy exceptions are anticipated.

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Annex 1: Sector and Program Background

RECIFE – CAPIBARIBE MELHOR Recife Background 1. The Municipality of Recife is one of 14 municipalities that comprise the Metropolitan Region of

Recife (RMR). With an area of 2,800 km2, the RMR has a total population of 3,330,000 inhabitants, according to the 2000 demographic census. Recife, is the largest municipality in the RMR, accounting for around 40% of the total population of the region. The RMR is in many respects a trans-municipal city with 50km of continuous urbanized coastline, interlinking the municipalities of Jaboatão, Recife, Olinda and Paulista, with seven infrastructure systems interlinked: collective transport, paving, water supply, energy, public lighting, telecommunications and urban upkeep.

2. The RMR accounts for about 35% of the GDP of Brazil’s Northeast. In the state of Pernambuco,

Recife accounts for the lion’s share of the state’s GDP and that of the RMR. But that has fallen over the years: In 1985 Recife accounted for about 75% of the GDP of the RMR. By 1998 that share had fallen to slightly more than 60%. As an economic hub and a city with relatively better services than its neighbor’s, traditionally, Recife has served to attract new migrants, although this has slowed over the past decade.

3. Despite its attraction for employment and services, or perhaps because of it, Recife still suffers from

high rates of poverty and poor living conditions for much of its population. Employment figures generally show unemployment rates higher than national averages and some studies indicate for example that rates can reach as high as 19% taking into account workers working occasionally or informally, but who are looking for formal employment8. An unemployment rate on the order of 19% translates into around 125,000 people searching for work. The same studies also suggest that those aged 18-24 have the highest unemployment rates at closer to 37 and that of the active working population, around 50% work in the informal sector. This can be much higher in areas of high poverty concentrations. An important issue in Recife is the high level of inequality – considered currently the highest of any Brazilian city. Perhaps predictably, Recife also has the highest rates of crime and violence, per capita, of any Brazilian City.9

0.54

0.56

0.58

0.6

0.62

0.64

Gini Co-Efficient

1992 1995 1997 1999

Year

Family Income Inequality

RMR

Pernambuco

8 Departamento Intersindical de Estudos e Estatísticas Sócio-econômicas (DIEESE) estimated that from 1998-2000 Recife unemployment rate averaged 19%. 9 IBGE.

21

4. The following map also illustrates geographically the income inequality that exists in Recife. In the area of the Capibaribe Melhor project, for example, the map shows the high concentration of wealth on the left bank of the Capibaribe river verses the high concentrations of poverty on the right bank. The neighborhoods on the left bank (with some notable exceptions) have the highest concentrations of incomes in all of Recife – above 10 minimum salaries per head of household, on average. Meanwhile along most the right bank of the river the percentage of families with incomes less than 2 minimum salaries varies between 51-72% and 73-100%, depending upon the neighborhood. The RMR in many respects presents a rich-poor spatial dichotomy with higher income neighborhoods located along the coastal axis, while low-income neighborhoods follow an in-land parallel axis, along federal highway BR-101, the Beberibe and Capibaribe rivers. Roads connecting these two axes are also occupied mainly by lower-income households.

5. The physical manifestations of poverty and inequality are seen most clearly in the large number of

informal settlements in Recife. In fact, according to IBGE, Recife has the highest percentage of its population living in informal settlements – 46% — than any other Brazilian city.10 This translates into about 39.6% of all households in Recife. In 2001, the Municipal Prefecture completed the Cadastre of Poor Areas of Recife, updating the earlier survey it completed in 1991. According the cadastre, there

10 This is 40% for the RMR and 46% for the municipality. These are estimates, but all estimates tend to hover around these percentages regardless of the source.

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PROMETROPOLE Project Area

22

are 421 informal settlements in Recife with a total population of 659,076. The vast majority of these areas have been in existence for longer than 10 years (90%). All of these areas are poor: 20% are classified as poor; 65% classified as very poor; and 16% classified as critically poor. Thus, 80% of the city’s informal settlements have populations that can be considered either very poor or critically poor.

6. Informality is characterized by large settlements in Recife. According to research done in 2004

(Pontual, et al), more than 25% of informal settlements in Recife are classified as large – that is with populations of more than 500 households (more than 2,000 people). What’s more, more than 75% of informal settlements in Recife have populations with more than 101 households (at least 400 people). This compares with cities like Curitiba where less than 5% of informal settlements have populations of 501 or more households. It is also worth noting that, unlike many other cities where informality tends to be pushed to the periphery, informality in Recife can be found throughout the city, even the city center, giving rise to the saying that, “in Recife you are never more than a kilometer from a favela.”

7. While rates of growth in informal settlements are declining in Recife, they are still higher than the

population growth rates for the region as a whole. Current growth rates for households in informal settlements is 3.7% per annum – higher than the approximately 1% for the region. The continued relatively high growth rates fuel continued informality, and contribute to the high percentage of informal households living in high risk areas and the high percentage of informal settlements that encroach upon the natural environment. According to recent studies (Pontual, et al), for example, 38.3% of informal settlements are subject to flooding; 32% are subject to landslides; 21.7% are encroaching infrastructure (such as being located under high tension wires); 23% are too close to areas of high volume traffic circulation (like highways); and 20% are in “unhealthy” areas, or areas considered unsuitable for human settlement.

8. Similarly, many informal settlements encroach on environmentally fragile areas, or contribute to

environmental degradation. For example, on average 21% of informal settlements are located in environmental protection areas, and 30% are at risk of contaminating or contributing to the contamination of waterways.

9. The physical informality also corresponds to poor social conditions for those living in the informal

settlements. According to the Cadastre of Poor Areas of Recife, none of the heads of households surveyed had 8 or more years of schooling. It also found that on balance, 23.75% of family heads had less than 3 years of schooling. In some cases, such as the poorer communities in RPA 411, as high as 54.55% of heads of households have less than three years of schooling.

10. The survey also revealed that 92.16% of the households had inadequate sanitation, which compares

with 58% of households in municipality as a whole. In this case, families resort to sanitary septic tanks (which are rarely properly maintained), non-sanitary septic tanks, holes, etc. for disposal of human waste. Similarly, 40.86% of informal settlements have inadequate drainage systems. These two factors combine for high health risks of infectious and contagious diseases. Although infant mortality rates have dropped considerably in Recife over the past couple of decades, it can still be said that 70% of childhood deaths of those aged four years or younger can be attributed to infectious parasites from contaminated water. The incidence is highest in these settlements, especially those that encroach upon drainage canals due to the very contaminated water in these areas. Finally, household incomes are also very low. In the 421 low-income, informal settlements, 82% of households have family incomes that are less than two minimum wages (1MW=R$300 or approximately US$125)

11 Recife is divided into Administrative Units (RPA). The Project straddles RPAs 3 and 4.

23

11. The two largest concentrations of informal settlements in the Municipality of Recife are found in the

Beberibe and Capibaribe river basins. Through the PROMETROPOLE project, the municipality is engaged in a large-scale integrated urban upgrading program that includes investments in slum-upgrading, resettlement, drainage, risk management, basic services improvements, parks, and road network improvements, among other complementary activities in the Beberibe River basin. This project is implemented in partnership with the State of Pernambuco and the Municipality of Olinda.

12. The Capibaribe river basin, represents a varied settlement pattern, unique to the region. Over the

years and decades, urban planning and investment was focused on the left margin of the river. The neighborhoods of Casa Forte, Graças, Espinheiro, among others, received large public works investments in sanitation, public facilities such as parks and plazas. More than any other public action, investments in capital improvements serve to shape land use patterns in urban areas. As a result, significant private investment has taken place alongside the public infrastructure investments on the left margin of the river. Today, the left margin of the river is a mostly middle-class enclave of high-rise apartments and historic, middle-class, single-family neighborhoods.

13. By contrast, the right side of the river is characterized by a high concentration of poor areas, with a

deficit of leisure areas and parks, public facilities and a lack of good public services, such as water supply and sanitation. The right margin of the river still includes vast areas of the territory that preserve the natural environment, but this is juxtaposed with vast areas of very dense, horizontal slums and low-income settlements that also characterize the right side of the river. The central location of the area makes it strategic from a perspective of territorial development and urban form, which makes it a center piece of the municipality’s strategy to renew the urban dynamic of the region, and promote a more sustainable and equitable growth of the region. The river represents a physical barrier between the rich and poor. Improving the living conditions of the urban poor, better integrating the left and right sides of the river and diminishing this physical, social and economic inequality is the center piece of the Capibaribe Melhor project. The project will be used as a basis for focusing many of the municipality’s disparate poverty focused programs into a comprehensive effort to improve the living conditions in one of the poorest areas of the city, reducing inequality and creating the potential for more equitable and sustainable growth of the territory.

14. Through its combination of integrated urban investments in a large territory within the Municipality

of Recife, its concentration on improving the lives of slum-dwellers, the promotion of local economic and social development and the provision of assistance in governance and planning, the project will advance many of the country’s National Urban Development Policies, as articulated through the Ministry of Cities, at the local level. These include the following12: (i) reducing the qualitative housing deficit in urban areas; (ii) moving towards the universal provision of environmental sanitation, prioritizing low-income families located in precarious urban settlements in an integrated fashion; (iii) promotion of the efficient, effective and sustainable management of sanitation services; (iv) increasing urban mobility; (v) finding equilibrium between the protection of green spaces and the built environment; (vi) promoting improved territorial planning and management; and (viii) integrating actions of urban development with actions aimed at stimulating income and employment generation in cities.

Broader Policy Issues 15. Housing and Land: The physical investments in urban upgrading provide the opportunity to address

broader policy and institutional issues. This is particularly the case as regards the housing and land

12 Política Nacional de Desenvolvimento Urbano, Ministério das Cidades. Pages 81-83.

24

sector. The high costs – both administrative and financial – of land development subdivision are an impediment to urban development. The obstacles to formal land development accessible to the urban poor are a key driver of the proliferation of slums and the vicious cycle of marginalization of the poor. An estimated 1.3 million new urban households are formed each year in Brazil and form the basis for annual housing demand. In 2005 only 505,500 housing were built in the formal sector – short of estimated 1.1 million units of demand13. As about 65% of Brazilian households cannot access even the cheapest house available through the formal sector they are left with few alternatives short of illegal or informal occupation. Informal settlements grow 4 times faster than average urban growth. Urban informality thus continues to grow.

16. There are many factors that drive the lack of formally produced housing in Brazil and these include a

history of weak government response, financial sector deficiencies, low income levels and real side constraints. Good policies must address these together if formal production is to increase and options other than informal housing are to emerge for the 65% of the population currently without access. Improving the living conditions and regularizing the tenure situation of the 7.1 million urban households currently living in substandard housing is an essential component of Brazil’s housing policy. But it is not sufficient to only address the conditions of the housing stock. Measures must also be taken to address the flow, if greater access to formal housing and urbanized land is to be achieved. This requires cooperation between all levels of government and the private sector.

17. The Brazilian government is attempting to address these issues with a comprehensive reform program

that aims to improve public institutional capacity to develop, implement and monitor housing policy and programs, bring greater liquidity and efficiency to the formal housing market, better target, harmonize and rationalize housing subsidies for the poor, and reduce the high costs of land development, subdivision, and regularization. Municipalities have a particularly important role in reducing development costs. Land development is regulated in large measure by Federal Laws 6766/1979 and 9785/1999 which regulates, inter alia, land subdivision and environmental approvals. The regulations are largely seen as increasing the costs of land due to excessive requirements in lot sizes, public infrastructure and due to the complicated administrative approval processes the laws generate. This has an impact particularly on the poor. While reform of the legal framework broadly requires the efforts of the federal government, municipalities have some flexibility in setting development standards and in using planning instruments to reduce the costs of development.14 Municipalities can also reduce bureaucratic and administrative barriers to approving land development. It is not unusual in many municipalities, including Recife, for development approvals to take 3-5 years.15 By comparison, Mexican officials recently set as a goal reducing the average time approval of development processes from the current 18 months to 12 months. By streamlining the approval process, in particular environmental licensing, and using flexible planning instruments, such as ZEIS, municipalities can reduce the barriers to access to formal land and housing for the poor. The Project therefore includes components to improve environmental licensing capacity and to implement more streamlined and flexible approaches to land development, in partnership with the private sector, with a focus on increasing formal access to urbanized land by the poor.

13 Official government figures including developer financing, cooperatives, SBPE, FGTS, FAT and PSH. This does not include informal housing production or production of housing by sub-national entities with own sources of funding, the latter of which is considered negligible. 14 Recent studies clearly demonstrate that by reducing regulation rigidity and reducing minimum infrastructure requirements, land costs can decrease significantly in Recife. These same studies indicate that under current conditions, informal development is much more profitable than formal development of housing/land for the poor with formal development not even reaching a return of 11.5%, the opportunity cost of capital in Brazil (Avila) 15 Avila, Paulo, C. “Land Use Regulations in Brazil: Impacts on Urban Markets and Access of Low-Income People to Land and Housing”, working paper, World Bank/Lincoln Institute of Land Policy.

25

18. Fiscal Responsibility: Municipalities have been faced with financing a greater share of public investment, including the regularization of informal settlements, basic infrastructure, health, education and other services, since the decentralization process began in 1988. If municipalities are to be able to address these critical issues, including generating enough income for critical investments in infrastructure, they must improve their fiscal planning and management capacity.

19. Fiscal responsibility is among the top priorities of the Government of Brazil. Municipalities claim

around 20% of total public sector revenues (5.4% of GDP) 16 thus their ability to adequately manage revenues and expenditures is important to Brazil in maintaining its goals of fiscal stability. Reforms such as the Law of Fiscal Responsibility have introduced more stability for sub-national fiscal management. National and regional programs to promote sound fiscal management at the municipal level, such as the National Program to Support Administration and Fiscal Management of Municipalities (PNFAM) and the National Program to Modernize Tax Administration and Fiscal Management (PMAT) have also contributed to overall improved fiscal management. Still more could be done to assist local governments to increase their own-source revenues (large municipalities collect about 24% of potential own-source revenues) and better manage expenditures. Recent studies indicate that while the overall fiscal situation of Brazilian municipal governments has been experiencing significant improvement, there are some concerns that must be highlighted: the fiscal situation of the largest Brazilian municipalities as suffered some deterioration and the guarantee of municipal fiscal sustainability depends on the enhancement of municipal revenue collection and the containment of current expenditures.17 Recognizing that lending should be done to municipalities only under fiscally sustainable conditions, the Project will include a component to put in place a medium-term fiscal adjustment framework in support of longer-term improved fiscal management capacity and sustainability.

16 While increasing, this is low when compared to many other countries: 8.7% of GDP; USA 16.3% of GDP; Japan 37.7%. 17 Blanco, Fernando. The Evolution of Brazilian Municipal Finances, 2000-2004, January 2006. World Bank. Work in Progress.

26

Integrated Territorial Development: Includes investments that are aimed at improving the quality of urban spaces along the margins of the river through the development of new, or the rehabilitation of existing infrastructure, with the aim of improving the quality of life of the area’s poor population. These physical improvements will focus on four macro areas of intervention: Slum Regularization and Water Supply and Sanitation; Parks and Green Spaces; Macro Drainage Systems; and Increasing Accessibility and Urban Mobility.

Core of the Investment Program

Social, Environmental and Economic Development: will focus on activities designed to provide incentives for the participatory social and economic development of these communities and at the same time raise awareness of the natural environment of the region. To that end, this component will include two sub-components: (i); Job and Income Generation Assistance (ii) Environmental and Sanitary Education

Large Supports Core Investments, Sustainability

and Consolidation of Government Programs.

Institutional Development: Will include actions that include (i) Fiscal Management and Adjustment; (ii) Environmental and Urban Management; and (iii) Scaling-Up Capacity.

Largely Supports National Development Priorities and

Sustainability of Core Investments

Capibaribe Melhor Project (Municipal Level)

The Project will support the lending/policy dialogue program to the State of Pernambuco which largely is focused on Urban Development, Metropolitan Strategic Development, Rural Poverty Reduction, and Education/Governance

From the bottom-up, the Project will support national development priorities and areas of priority bank engagement with the Government of Brazil, including: • Fiscal sustainability goals (Bank support through AAA) • Policy environment for housing and urban land development reforms aimed at

poverty reduction and asset accumulation by the poor (Bank support through AAA and programmatic lending of DPLs, TAL and possible SWAp).

• National environmental management decentralization policies at the local level (Bank support through AAA, WBI support, and lending of DPL and TAL)

27

Annex 2: Major Related Projects Financed by the Bank and/or other Agencies

RECIFE – CAPIBARIBE MELHOR

Latest Supervision (PSR/ICR) Ratings18 Sector Issues Projects Implementation

Progress Development

Objective Bank Financed Projects Water and Sanitation Water Resources Management Urban and Municipal Development

BR-PE-06541 São Paulo, Paraná and Federal Water Quality Projects (closed) BR-PE-043420 Water Sector Modernization Project BR-PE-082328 Betim Municipal Integrated BR-PE-06436 State of Ceará Urban Development and Water Resources Management (closed) BR-PE-035728 State of Bahia Water Resources Management BR-PE-06524 State of Minas Gerais Municipal Development BR-PE-089440 Brasília Environmentally Sustainable Project BR-PE-06436 State of Ceará Urban Development and Water Resources Management BR-PE-049265 Recife Urban Upgrading Project BR-PE-089011Municipal Lending Program I Uberaba-Agua Viva

S S HS S – WRM component (ICR rating) S S (ICR rating) MS S – Urban Component (ICR rating) MS S

S S S S – WRM component (ICR rating) S S (ICR rating) MS S – Urban Component (ICR rating) S S

Other Development Agencies

BR- Municipality of Juiz de Fora Urban Environmental Rehabilitation (IDB) BR- Municipality of Belo Horizonte DRENURBS (IDB) BR- Municipality of Porto Alegre Environmental Rehabilitation (IDB)

18 Provide for Bank-financed projects only

28

Annex 3: Results Framework and Monitoring


PDO Outcome Indicators Use of Outcome Information Improve the well-being of

the low-income population

living in the Capibaribe River

Basin area of the city and the

fiscal, urban and

environmental management

capacity of the Recife

Municipal Government

1. Net consolidated debt to net current

revenue (NCD/NCR) is maintained

at less than 40%

2. Property values of poorest families

in the project area increase by 20%

or more due to project investments

3. Increases in satisfaction of the

population in the project reporting

improvements with water and

sanitation services, access/mobility,

parks, and the environment (Water

by 10%; Sanitation by 15%; Access

by 8%; Drainage by 10%; Parks by

25%; Environment by 15%)

4. Municipality’s urban management

capacity is enhanced, as evidenced

by a 40% rise in the number of

informal settlement areas that are

officially recognized as ZEIS

(Special Social Interest Zones) and

in the municipality’s overall

expenditures in urban upgrading

interventions over the life of the

project.

5. Municipality’s environmental

management capacity is enhanced,

as evidenced by the establishment

of 4 ZEPAs (Special Environmental

Protection Zones), with

management frameworks in place.

1. Fiscal indicators will be used to

ensure that an adequate debt-to-

revenue ratio is maintained despite

increased investments.

2. Hedonic pricing methodology will

be used to determine the impact of

investments on property values in

the targeted area (this will be

compared to a control group). A

household survey will also be

applied to determine if private

investment in property was

induced by the public investment

program.

3. Satisfaction levels in the key

infrastructure areas will be

assessed pre- and post project to

determine direct perceived

benefits. A household survey will

be applied to assess perceived

effects of improved services and a

better living environment.

4. Creation of new ZEIS and increase

in spending are good measures of

increased urban management

capacity, as they represent the end

result of a complex technical and

institutional process involving all

aspects of urban management.

5. The creation of ZEPAs (as of ZEIs) is

under the responsibility of the

municipality, as part of the

implementation of the City Master Plan.

This is a measure of the increased

capacity of the municipality in

environmental management, as it

represents the final product of a

complex technical and institutional

process.

Intermediate Expected Results

Results Indicators for Each Component Use of Results Monitoring

Improved fiscal performance of the

municipality

• Current account savings

increase 5% annually in real

terms

• A positive primary balance is

maintained

• Personnel expenditure to net

current revenue (PE/NCR)

decreases from 46% to less

than 45%

Annual targets will be used to

assess the impact of the fiscal

improvement program and as a tool

for adjusting course, as needed. In

particular, they will be used to

ensure that personnel expenditures

do not grow, as this is the greatest

potential threat to fiscal stability in

Recife.

29

The Secretaries of Finance and

Planning will provide this

information on an annual basis.

Improved environmental

management capacity of the

municipality

• 4 ZEPAs (Special Environmental

Protection Zones) are legally

established, with management

frameworks in place

The creation of ZEPAs (as of ZEIs)

is under the reponsibility of the

municipality, being part of the

implementation of the City Master

Plan. This is a measure of the

increased capacity of the

municipality in environmental

management, as it represents the

final product of a complex technical

and institutional process. Indicators

will be fed by administrative project

data.

Improved quality and coverage of

basic urban services, well-being and

coverage of legal land titles in the

project area

• Households connected to

wastewater collection increase

by 15%

• Households with formal water

connections increase by 10%

• Population living in areas of

flood risk is reduced from 30%

to 20%

• 100% regularization of land

tenure for all households

resettled by the project

Pre- and post-project household

surveys will be used to verify

baseline percentages and final

percentages. The information will

be used to assess the

improvements brought about as a

result of the physical investments

made in the project area, and will

be compared to the perception of

the population according to item (3)

in the PDO indicators above.

Improved capacity of the community

programs to promote employment

and income generation in project

area

• Number of local residents

receiving vocational training

• Percentage of training

participants who are satisfied

with its effectiveness

• 20% of clients of the job center

reporting concrete benefits

from it

• 80% of users of the two

recycling centers reporting

benefits

Administrative data will be used,

together with interviews of those

directly benefiting from these

programs to determine if and what

kind of specific benefits resulted

from these programs. This will be

used by the municipality to assess

the efficacy of these programs and

make changes as needed.

Raised environmental awareness in

the community

• Number of people participating

in Águas do Capibaribe

environmental education

program increases 20% each

year

• Percentage increases 10%

every year, of program

participants who recall at least

3 key environmental messages

conveyed during the program

Administrative data will be used, as

well as interviews with beneficiaries

to measure acquired knowledge and

awareness of environmental issues.

The municipality will use this as a

tool to assess the extent to which

its social communication and

environmental education programs

are resulting in desired behavioral

changes/outcomes.

30

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34

General M&E Responsibilities 1. Overall responsibility of the M&E component will rest with the Project Management Unit, under the

direction of URB-Recife. The PMU will be assisted in this process by specialized consulting firms as needed. The M&E of the Project will be the direct responsibility of the General Coordinator, who will rely on both the Technical Coordination Unit and the Administrative/Finance Unit. The Technical Coordination Unit will have responsibility for the M&E of all the project’s technical components, with input from the Water and Sanitation; Infrastructure; Economic and Social Development; and Environmental Management Units. The Administrative/Finance Unit will have responsibility for M&E of project implementation targets and fiduciary targets and commitments.

2. The Project Management Unit will be assisted by the relevant municipal agencies in the execution of

the M&E of the project. This includes: • Secretariat of Sanitation (SESAN) and Sanear: The Sanitation Secretariat and its Autarky will provide

technical input into the monitoring and evaluation of level and quality of urban services in the targeted area.

• Secretariat of Public Works through its two Autarkies: - EMLURB: The Public Services Enterprise will provide technical input into indicators of macro and micro drainage and solid waste collection, as well as information regarding the use, operations and maintenance of parks. - CTTU: The Municipal Urban Transport Company will support monitoring and evaluation of the mobility and accessibility component.

• The Secretariat of Education, Sport and Leisure will assist in monitoring the environmental education component, in particular the Águas do Capibaribe component.

• The Secretariat of Science, Technology and Economic Development will provide support in the M&E of the economic development components, providing information on employment resulting from the Job Center, development of solid waste recycling cooperatives and training of social workers in sports and cultural media.

• Secretariat of Participatory Planning, Works, Urban Development and Environment will assist in the M&E of the development approval processes and implementation of urban development PPPs in the project area. It will support M&E through one of its Autarkies also:

- DIRMAM: The Municipal Environmental Directorate will provide information regarding the creation of ZEPAs.

• The Secretariat of Finance will provide information pertaining to the meeting of established goals in the fiscal management component.

• SEHAB: The municipal Housing Secretariat will provide information related to the construction of new houses for resettlement.

3. Household Survey: A household survey will be applied at years 0 and 5 of the project. The survey will be used to assess pre-established socio-economic indicators and perceptions of beneficiaries in the project area, as well as in a control area of similar physical, social and economic conditions, without involving a full impact evaluation. The purpose of this survey is to search for simple associations between the proposed public works, social and economic activities and institutional development actions and the (objective and perceived) living conditions of project beneficiaries, rather than causal relations – that is, it does not aim at producing a full impact evaluation. To that end, the survey will attempt to identify changes in such issues as health, education, employment, household property values, crime and violence, among others, comparing this to a control group. The survey will be carried out through the contracting of a specialized firm or institution with previous experience in this sector (not merely in marketing, opinion or poll surveys), and will be under the direct responsibility of the Project Management Unit at URB. The

35

procedures for bidding out the baseline survey should start immediately following the project´s approval by the Bank, so that the contract with the winning firm/institution may be signed upon project effectiveness. This would allow data collection to occur before the beginning of the project’s interventions.

36

Annex 4: Detailed Project Description


1. The interventions proposed in the Capibaribe Melhor project are predicated on the fundamental principles of the city’s participatory master plan, which states that “the social function of the City of Recife corresponds to the right of access to urbanized land, housing, environmental sanitation, transport, health, education, social assistance, leisure, work and income, as well as public spaces, urban services and infrastructure, cultural and environmental patrimony.”

2. This feeds into the Project’s overall objective to: Improve the well-being of the low-income

population living in the Capibaribe River Basin area of the city and the fiscal, urban and environmental management capacity of the Recife Municipal Government.

3. The project is consistent with the strategic plan for improved municipal management in Recife that

was developed over the past two years. The strategic plan aims to integrate public investments and programs in a systematic manner in order to create a healthy city that balances the preservation of the natural environment with the development of urban space, and serves as a means to guide the municipality’s social development strategy. In order to achieve the project objectives it will be necessary to undertake investments that will serve to revitalize and stimulate the physical, social, cultural and economic vitality of the Capibaribe river basin, while also stressing the importance of fiscal discipline, sound financial management, improved urban and environmental management and improved capacity to scale-up urban upgrading programs.

4. The Project will have three macro-components: (i) Institutional Development; (ii) Integrated Urban

Territorial Development; and (iii) Environmental and Socioeconomic Development. The geographic area of the project’s physical interventions is represented in the following map:

Centro Expandido

BR 101

Av. Norte

Av. Agamenon

Av Caxangá

37

5. I. Institutional Development. There will be three sub-components within this component: (i) Fiscal Management and Adjustment; (ii) Environmental and Urban Management; and (iii) Scaling-up Capacity.

6. IA. Fiscal Management and Adjustment: This sub-component aims to place the municipality on a

long-term sustainable fiscal path. In order to support fiscal adjustment consolidation, the Bank and the municipal authorities agreed upon a fiscal component for the project. The objective is to improve the institutional and technical capacity of the Municipal Finance and Planning Secretariats in the design and implementation of a medium-term fiscal adjustment framework. This will include five primary actions: (i) establishment of a fiscal studies department within the Finance Secretariat; (ii) institution of a program to control personnel expenditures; (iii) installation of a permanent working group that will analyze costs and propose cost containment measures for the most important municipal activities (notably health and education); (iv) strengthening of budgetary and financial execution capacity; and (v) improved management of contracts and agreements of direct and indirect municipal administration.

7. The guarantee of fiscal sustainability and the improvement of the efficiency of the use of municipal

resources demand the adoption of a medium term fiscal framework (MTFF). The establishment of a fiscal studies unit is an initial requirement for the adoption of a MTFF. Making fiscal constraints and budget allocations compatible requires the preparation of analytical pieces for the estimation of the main revenue and expenditure components that will define the fiscal envelope in which budget allocations are proposed.

8. The unit of fiscal studies will be responsible for the construction of scenarios for the main fiscal variables that will feed into the preparation of the main budgetary pieces. In particular, the unit will be responsible for the preparation of the Fiscal Policy Document (FPD) that should contain the forecast for revenues, expenditures and the definition of the fiscal envelope in a multi-annual framework. The FPD will orient the discussion on budget allocations within the municipal administration. These discussions will promote the commitment of the different municipal units with fiscal discipline and with an efficient and realistic allocation of municipal resources. Additionally, the unit will be responsible for the preparation of analytical studies on specific areas that can be requested by the municipal government authorities. The Finance, Planning and Economic Development Secretariats will be the implementing units of the policy output of the fiscal studies department that will be hosted within the Finance Secretariat.

9. The expansion of personnel expenditures was the major factor behind the fiscal problems faced by the municipal government and currently constitutes the most important source of fiscal risk. The payroll bill represents almost 50% of the municipal revenues. Thus, its control can generate substantial savings. It is worth noting that the municipal government has already implemented a considerable set of measures to allow for better control of personnel payments, reduction of irregular payments as well as alleviation of its inertial growth. The activity supported by the World Bank lending operation will be the establishment of a Committee for the supervision of the payroll bill of each unit of the direct and indirect municipal administration and for the design of personnel management policies. The Finance, Administration and Legal Affairs Secretariats will be the implementation units for this activity.

10. The increase in expenditures for goods and services constituted another source of risk for the municipality’s finances. The fiscal adjustment implemented in 2005 was mainly based on cuts in this expenditure category and the consolidation of the current fiscal effort critically depends on maintaining strict control of goods and services purchases. Besides the fiscal impact of the control of municipal government goods and services purchases, efficiency gains can be obtained through the

38

measurement of the costs of municipal activities and programs and the introduction of systematic evaluation of the results of these activities. Thus, control of municipal expenditures would also improve the quality of municipal expenditures.

11. In support of the goal of expenditure control and improved quality of public expenditures, the fiscal management component will include the establishment of a working group for the measurement of the cost of municipal programs. In the short run, it is proposed to launch a pilot project for the Education Secretariat, which is the municipal secretariat responsible for execution of a substantial part of the municipal budget. In a second phase, it is proposed to implement a corporate system of cost accounting. The implementing unit will be the Finance Secretariat, which will coordinate the activities with the sector secretariats.

12. The integration of budgeting, accounting and financial execution is another area which would enhance the efficiency of municipal resource management and improve prospects for fiscal sustainability. In this regard, the Project will support a capacity building program for municipal staff responsible for budgetary, accounting and financial execution activities. In particular, the lending operation will finance the physical infrastructure and training courses on budgeting, accounting and financial execution. The Finance and Government Secretariats will be the implementating units for this activity.

13. The last activity included in the fiscal component is the management of contracts and agreements signed by the direct and indirect units of the municipal administration. In particular, the centralization of contracts would allow a closer control of the contracts signed by the different units of government. Besides the fiscal gains of the centralization of the management of contracts, efficiency gains can be obtained through a better supervision of the contracts signed by the municipal government.

14. IB. Environmental and Urban Management: This component will support federal efforts to, on the

one hand, further decentralize environmental planning, management and licensing responsibilities and on the other hand, promote greater flexibility in the use of urban planning regulatory instruments for land development. A key federal government-sponsored bill under appreciation by the lower House of Congress addresses the bottlenecks in formal land development for the poor, reducing its costs. The new bill would remove the misguided provisions that have driven nearly all land subdivision activity into illegality in Brazil over the last 28 years, since the present land subdivision legislation (Law 6766, also known as Lei Lehmann) was introduced in 1979. Law 6766 imposed unrealistically high standards and requirements for upfront infrastructure provisions that apply to the whole country, making it impossible for developers to provide affordable serviced land through formal channels. In contrast, the new bill would facilitate affordable land development by: • allowing the progressive implementation of infrastructure for land subdivision; • reducing the percentage of land to be donated for public uses; • simplifying the permits process by introducing joint channels (urban and environmental); • allowing the use of administrative rather than judicial channels for many key processes. The new bill would also open the way to large-scale land tenure regularization. It reflects and deepens the important changes in Brazil’s urban laws that took place since the original land law of 1979 (including the Constitution of 1988 and the City Statute of 2001), significantly decentralizing decision-making to municipal governments.

15. This sub-component will include actions to support the Municipality’s Environmental Secretariat,

including: (i) development of capacity to establish and manage ZEPAs (Special Environmental Protection Zones), including the establishment of four ZEPAs within the project area; (ii) structuring the municipal environmental education policy; (iii) increasing environmental regulatory capacity; and (iv) developing capacity to observe Bank safeguard policies in project implementation.

39

16. On the urban management front, activities will assess the feasibility of reducing regulatory barriers

that often make formal land development excessively costly and often economically unviable (it currently takes an average of 4-5 years to secure development approvals in Recife). In that regard it will focus on assessing and recommending policy changes to allow the municipality to better take advantage of the flexible planning instruments in the City Statute that can increase access to land for the poor and recommend how these instruments can be better used to leverage greater private sector investment in land development and urban operations.

17. It will also include assessment of the land development approval processes, identifying areas where

such processes can be streamlined to reduce approval times Providing greater synergy between development and environmental approval processes is essential to reducing barriers to land development and reducing the costs of such development and thus this component will assess and make recommendations as to how the land development and environmental clearances process can be more effectively implemented, eventually moving towards a one-stop shop once the proposed new federal land subdivision legislation is approved.

18. The project will also seek to enhance the municipality’s capacity to scale-up, and develop a

systematic program for the upgrading of its substantial stock of informal housing and neighborhoods. It will assist the Municipality in identifying areas that fulfill the requirements for classification as ZEIS (Special Social Interest Zones) and in undertaking the necessary steps to increase the percentage of informal settlement areas that are so classified, which at present is little more than 50%. In order to benefit from the urban management instruments that were introduced by the City Statute, an area has to be officially classified as ZEIS under the Master Plan, a special zoning designation that allows for relaxed development standards and the facilitation of land tenure regularization. Making the official ZEIS list correspond more closely to the reality of the city’s informal settlements is an important step for Recife to leverage PAC and other investments in slum upgrading and improve the management of the improvement and regularization of the city’s informal areas in general.

19. IC. Scaling-Up Capacity: This sub-component will include Project Management assistance,

supervision of works, monitoring and evaluation and project communication with the public. It supports those activities that are essential to effective implementation and the reduction of operational risk. In addition, this sub-component includes contracting specialists to assist in the project’s monitoring and evaluation, including establishing baseline data in the first year of the project and assisting in the mid-term review and final evaluation, and it will include assistance in the supervision of public works. The sub-component will also include a communication plan and development of external communications materials for presenting the project to the public. The support will go beyond traditional project management support, with training and capacity building included that will focus on increasing the capacity of the municipality to manage multi-sector, large-scale projects, improving project design and appraisal capacity, coordinating multi-sector activities, improving monitoring and evaluation capacity and supervising complex urban works.

20. II. Integrated Urban Territorial Development: This component will include investments that are

aimed at improving the quality of urban spaces along the margins of the river through the development of new, or the rehabilitation of existing infrastructure, with the aim of improving the quality of life of the area’s population. These physical improvements will focus on four macro areas of intervention: Water Supply and Sanitation/Urban Upgrading; Parks and Green Spaces; Macro Drainage Systems; and Increasing Accessibility and Urban Mobility.

21. IIA. Urban Upgrading and Water Supply and Sanitation Systems: This component will improve the

living conditions for approximately 200,000 mostly low and very-low income people through a

40

program of integrated urban upgrading and sanitation. Included in this population are 17 very low income communities (pockets of extreme poverty) within areas designated as ZEIS.19 This sub-component supports the national policy of improving the vast stock of sub-standard housing, through its integrated approach of sanitation, housing, micro drainage, roads, land tenure regularization and related activities. In addition to neighborhood-specific integrated upgrading, this sub-component includes trunk infrastructure investments in wastewater and water supply.

22. Investments proposed for wastewater collection and treatment can be divided into those affecting the

right and left banks of the river. On the right bank, interventions will include: the partial execution of the Cordeiro wastewater collection system; the rehabilitation of the Caranguejo/Tabaiares wastewater collection system (UE 45, Cabanga system); and the construction of the first phase of the Cordeiro wastewater treatment plant. On the left bank of the river, wastewater investments will include the rehabilitation of two existing wastewater collection systems, Caetés/Laura Gondim and Poço da Panela, including the upgrading of four ZEIS settlements.

23. Rounding out the wastewater investments will be the installation of the first phase of the Cordeiro

wastewater treatment plant, in accordance with the recommendations made by a JICA-funded study in 2001. This will include an upflow anaerobic reactor, a bio-filter, disinfection and sludge drying beds. The approach will be a phased construction, with the first phase sufficient to support the investments in UEs 39 and 40, with subsequent phases being concluded as demand warrants.

24. Water Supply Investments: This sub-component will include the sectorization and effective

operational control of the water supply and distribution system in the project area. The improvements in the water supply system will directly benefit an estimated 240,000 residents on the left and right banks of the river.

25. Local Offices: The sub-component will include the installation of Local Offices, in the RPA 3 and

RPA 4 areas (administrative planning districts). These offices, which are also a feature in PROMETROPOLE, are used as the base of multi-disciplinary teams that facilitate the social outreach and social communication aspects of the project.

19 It should be noted that there are several categories of informal settlements in Brazil. Favelas are squatter settlements, the most informal of all; but there are also informal subdivisions, which can be subdivided into loteamentos irregulares and loteamentos clandestinos. Favelas are generally the result of an un-orderly, non-organized occupation of land. Loteamentos iIrregulares are generally land subdivided by the owner of the land, with individual pots sold to individual families. However, they are “irregular” because they have been subdivided without proper permits and therefore are often lacking in basic services and lack clear title. Loteamentos clandestinos are illegaly subdivided and parceled lots with a higher degree of informality than loteamentos irregulares, since they occupy land whose ownership is in question in the first place. ZEIS is a tool that is used to recognize some of these settlements to make their upgrading and legalization easier. While there are 17 ZEIS communities to be upgraded in the project area, it should be noted that the entire area suffers from varying degrees of informality and lack of basic urban services.

41

26. IIB. Parks and Green Spaces: With only a total of five parks, Recife is considered to have a high deficit of parks, green spaces and leisure spaces per inhabitant. The current ratio of park space per inhabitant is 0.70 m2. State law sets a minimum standard of between 6 and 8 m2 per inhabitant for green spaces in urbanized areas, while the United Nations recommends a minimum of 12 m2 per inhabitant. In some developed countries, like Germany, there is an average of 13 m2 of park and green space per inhabitant in urban areas. By all measures, Recife is well below an acceptable minimum standard, and in places like Capibaribe, which has the highest densities in Recife, the already low city-wide ratio is even lower. Urban parks, in addition to providing benefits of increasing property values in areas close to park access, can generate a number of less quantifiable benefits. Among these include: (i) stimulating local economic development; (ii) acting as a community integrator and facilitator of increased social interaction; (iii) preserving the natural environment; (iv) promoting better health with increased access to sports facilities; (v) raising awareness of the city’s river resources; and (vi) promoting environmental and cultural education. Also importantly, in an area such as the Capibaribe River where pressures are high for the continued informal occupation of land, parks can serve as a powerful physical barrier to the informal occupation of land, especially land located on the margins of rivers or other areas warranting protection.

27. This sub-component will include the construction of one new park (Apipucos), the recovery and

expansion of two existing parks (Caiara and Santana) and the recovery of degraded areas along the margins of the Capibaribe River. Total direct beneficiaries are estimated at 125,000 people, including the residents of Alto do Mandu, Apipucos, Casa Amarela, Casa Forte, Caxangá, Iputinga, Parnamirim, Poço da Panela, Santa and Torre. Indirect beneficiaries include the entire municipality.

28. Apipucos Reservoir: This sub-component will include the urbanization and re-forestation of the

margins of the Apipucos reservoir, situated on the left margin of the Capibaribe River next to the BR-101 highway. The park will serve as a pole for environmental education, and will include a sport fishing center (subject to water quality testing) and the installation of equipment for sports, leisure and cultural activities. During project implementation, a water quality monitoring program will be initiated to determine the feasibility of recreational uses of the reservoir, in particular fishing.

29. Caiara Park: Also included in this sub-component is the recuperation of the Caiara Park, located on

the right bank of the river. This park will have an emphasis on sports activities, via the construction of a Center of Sports and Leisure.

30. Parque Santana: This sub-component will also include the rehabilitation of the Santana Park on the

left bank of the river. It serves as an integrator of the right and left margins of the river, and will serve the poorer population of the right bank as much as the middle class population of the left bank. All of Recife’s parks are managed and operated by EMLURB. As a condition to the financing of the parks, an operations and maintenance plan has been developed, or will be developed, for each of the parks, including possibilities for partnering with the private sector in their operations and maintenance. In

Caiara

Santana

Apipucos

Capibaribe

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addition to the three parks, the sub-component will include the construction of pocket parks along the river, to rehabilitate degraded areas from which families have been resettled, including Rua Arlindo Gouveia, Rua José de Holanda, Vila Abençoada de Deus and Vila do Vintém II.

31. IIC. Macro-Drainage: These investments are required to improve water flow and reduce flooding

incidence in the project area. The existing drainage system has been severely compromised by poor maintenance and the encroachment of housing along the margins of the existing canals. Resettlement of approximately 200 households will therefore be a key element of this sub-component, as will the treatment of the margins of the canals with investments in tree planting, mini-parks, etc. to prevent the re-occupation of these areas.

32. There are a total of 23 macro-drainage canals in the Capibaribe river basin in the Municipality of

Recife. The vast majority are open canals, without proper urban treatment on their margins. As a result, many of these canals are encroached upon by informal housing and are poorly maintained. Investments will include the recovery of 11 of the 23 canals: the ABC, Buriti/Macaxeira, Caiara, Jenipapo, Parnamirim, Prado, Santa Rosa, São Mateus, Serpro, Sport and Valença canals.

33. The selection of the 11 canals was based on the following criteria: � That they be located within the boundaries of the Capibaribe Melhor Project; � The quantity of housing located along the margins (those with greater encroachment being more

critical); and � That they be easily integrated with the investments proposed for the wastewater systems and urban

upgrading investments. 34. Of those canals indicated as priority, six are encroached by informal housing and require the

resettlement of families living in precarious conditions (on stilt housing, for example) or who have built their housing over the canals, making maintenance impossible. The other five do not require the resettlement of families, but their incomplete nature inhibits proper maintenance, and improvements will seek to reduce operations and maintenance costs. In addition, these canals complement the sanitation and urban upgrading work that will be done and, in the case of Jenipapo, will complement the work on the Apipucos Park.

35. IID. Increasing Accessibility and Urban Mobility: The sub-component focuses on improving access

to and mobility (including bridges, roads, paving, signage and control and bikeways) within the project’s geographic boundaries, given the region’s limited access and its economic importance to the city. It will serve to facilitate the physical integration of the two sides of the river and provide greater access – for both the local communities and the city as a whole – to public transport, the parks that will be built and recuperated and other physical assets in the area. The municipal authorities also expect to leverage the investments in the road network by attracting greater private urban development in the project area.

36. III. Environmental, Social and Economic Development of the Territory: As has been learned

with projects that focus on improving the built environment in low-income communities, physical investments can be used as an entry point for targeting social and economic activities for low-income residents. This component will focus on social and economic activities designed to provide incentives for the participatory social and economic development of these communities and at the same time raise awareness of the natural environment of the region. The component will include two sub-components.

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37. IIIA. Job and Income Generation Assistance will focus on micro-business owners, both individuals and collectives, in particular those working in the informal sector, and assist them in their capacity to generate income and employment. The sub-component will include the installation of a Public Employment and Income Generation Center in the project area. These exist in other parts of the city and are used to provide business education and information and act as business incubators. They also provide assistance to job seekers in the area. The sub-component will include the construction and outfitting of the center, including classrooms and computers through which courses can be taught by different entities. Also included will be a study to map the primary informal and formal sector economic opportunities in the region, as well as to identify the major obstacles to employment and income generation in the targeted area.

38. The sub-component will also include the installation of a solid waste triage center to support the 700

people in the project area who survive on the collection of recyclable materials. This will include the construction and equipment of the recycling center as well as technical assistance to the catadores in the area with the aim of developing cooperatives and building capacity in commercialization of their products.

39. Also to be supported by this sub-component will be the rehabilitation of six anchoring spots and 30

embarking/disembarking points along the river. This supports the efforts to highlight the importance of the river, from a social, economic and environmental perspective.

40. Sports and cultural activities under this component will focus primarily on developing the capacity of

educators, community activists and others in the use of sports and culture as a social tool for youth development. Building on the strong base that exists in the community for culture and sports, these municipal programs aim use popular culture and sports as a means to provide supervised social activities to youth.

41. IIIB. Environmental and, Hygiene Education will focus on raising environmental consciousness. The

Projeto Águas do Capibaribe will be expanded under this sub-component. This will include the support to the Escola Ambiental do Capibaribe which links with the formal municipal primary school education curriculum, by taking school groups on boat trips along the Capibaribe River to educate them on the natural environment of the river and the cultural and economic significance of the region. It also includes building capacity of institutions and teachers to build environmental and hygiene education into their curricula. Also included in this sub-component are traditional hygiene and environmental education activities that are aimed more broadly at the beneficiary communities and the institutions involved in the implementation of the project in the field. The hygiene and environmental education activities will be tied to existing programs, such as the Family Health and Environmental Health Programs.

42. The uniqueness of the Escola Ambiental Águas do Capibaribe (EAAC) is worth mentioning. The

EAAC, inaugurated in 2003, is part of the Municipal Basic Education Network, operated by the Department of Special Programs of the Municipal Secretariat of Education. The objectives of the program are the following:

� Understanding the city’s water assets as important elements in the city’s history and culture and the importance of these resources in the city’s socio-environmental development;

� Understanding the social and ecological relationship between humankind and the natural environment;

� Ensuring that there is space within the educational curriculum for environmental education, that is experiential, interactive and promotes the understanding of sustainable development; and

� Creating opportunities to interact with other institutions, both governmental and non-governmental, in developing actions that aim to improve the natural environment.

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43. According to the 2004 school census, there are 130,513 students in the municipal education system.

The target population of the EAAC program is those in the municipal schools, with access also available to those in state-sponsored schools (18,000 students) and youth and young adults studying for the secondary studies equivalency. When not in use for educational purposes, the facilities are used for recreational purposes during weekends and school holiday periods, which serves to support the operational and maintenance costs of the floating school.

44. Under the project, the following activities will be undertaken in support of EAAC: (i) acquisition and

outfitting of a second “floating school” and of a school bus to be used to transport students to the boat and other areas of environmental importance; (ii) the systematic registration of the EAAC educational experience; and (iii) the contracting of specialists to provide classes, workshops, seminars and talks for students, teachers and the general community regarding the environment in the project area.

45. It is important to note that the socioeconomic components of the Project rely less on the creation of

new activities, but rather build on existing municipal programs. The intent is to use the project as a catalyst for greater integration and coordination across municipal secretariats and to eliminate duplication of effort across programs.

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Annex 5: Project Costs


Component Local US$

Millions

Foreign US$

Millions

Total US$

Millions I. Institutional Development Fiscal Management and Adjustment 0.132 0.6077 0.7397 Environmental and Urban

Management 0.05 0.195 0.245

Scaling-Up Capacity 0.0225 3.7211 3.7436 SUBTOTAL I 0.2045 4.5238 4.7283 II. Integrated Territorial

Development

Urban Upgrading, Water Supply and Sanitation Systems

7.035 12.965 20.0

Parks and Green Spaces 2.5 2.5 5.0 Macro Drainage 0.6375 3.6125 4.25 Increasing Access and Urban

Mobility 3.35 7.65 11.0

SUBTOTAL II 13.5225 26.7275 40.25 III. Environmental, Social and

Economic Development of the Territory:

Job and Income Generation Assistance

0.14 0.5543 0.6943

Environmental, Sanitary Education 0.042 0.3439 0.3859 Desenvolvimento das

Potencialidades Esportivas e Culturais

0.02 0.0733 0.0933

Promoção de Operações Urbanas 0.001 0.0486 0.0496 Participação Popular e Controle

Social 0.11 .04067 0.5167

SUBTOTAL III 0.313 1.4268 1.7398

Front-End Fee - 0.819 0.819

TOTAL PROJECT COSTS 14.04 32.76 46.8 Share of Resources 30% 70% 100%

Includes contingencies. The share of project costs net of taxes is estimated at 86%. Amounts are approximate and may not add due to rounding

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Annex 6: Implementation Arrangements

RECIFE – CAPIBARIBE MELHOR 1. The Borrower will be the Municipality of Recife. 2. General project coordination will be provided by URB. URB is an independent municipal corporation

attached to the Secretariat of Participatory Planning, Works Urban Development and Environment (SEPLAN). Its President has Secretarial standing in the municipal government. It is legally and administratively autonomous but its financial resources are provided through the municipal budget. URB is responsible for the bidding and execution of about 80% of the civil works projects that are executed in the municipality. URB will be responsible for the overall coordination of the project and will be the primary interface with the World Bank, responsible for ensuring the adequate execution of all fiduciary obligations under the project. All procurement will be centralized through URB.

3. URB will form a separate unit under its coordination, responsible for the day-to-day execution,

monitoring and evaluation of the project. This unit will be known as the Project Management Unit (PMU). The PMU will have a General Coordinator, under which will be an Executive Coordination unit, a Technical Coordination unit and an Administrative Coordination unit. Within these coordinating units, the PMU will have a number of engineers, technicians and other professionals deemed necessary to adequately execute and monitor the works and other activities envisaged in the implementation plan. The Technical Coordination Unit will include Management Units in Integrated Sanitation, Infrastructure, Economic Development, Social Development and Environment. The Administrative Coordination Unit will include Management Units in the areas of Budgeting and Accounting, Procurement and Financial Management.

4. The PMU will have the following administrative attributes:

• Administrative Autonomy;

• Competency to determine expenses through its Coordinator;

• Its own budget (incorporated into the overall municipal budget, as with any other Secretariat), approved by the Municipal Council;

• Competency to receive products of civil works;

• Competency to liquidate expenses;

• Competency to authorize and make expenses, sign checks, in tandem with the Secretariat of Finance, or Secretariat, in the absence of the Secretary of Finance;

• Competency to effect all bidding processes with respect to the project;

• Competency to process contracts and enter into and make effective contracts.

5. In addition to these administrative attributes, the PMU will execute the following activities within the project:

• Coordinate the activities of the Project for the Municipal Prefecture, advancing the project objectives and in accordance with the Loan Agreement;

• Ensure the fulfillment of the project goals and objectives, in concert with the other entities involved in its execution;

• Manage the Project’s financial resources, and propose alterations in the physical-financial chronogram as needed, throughout project implementation;

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• Elaborate the annual operational plans;

• Promote and coordinate all Procurement activities including Project bidding in accordance with applicable legislation and the norms and directives of the World Bank

• Ensure full compliance with World Bank Environmental and Social Safeguards, including environmental clearances and resettlement;

• Maintain policies and procedures that are adequate to allow continual monitoring and evaluation of the project’s execution and outcomes;

• Coordinate and elaborate regular progress reports based on project activities, monitoring and evaluation;

• Adopt corrective measures necessary to guarantee the efficient conclusion of the Project and the achievement of its objectives;

• Promote regular, periodic meetings with the World Bank regarding Project execution, in order to evaluate the advancement of implementation;

• Control and evaluate Project results and actions, and coordinate actions with other entities involved in the execution of the Project;

• Represent the Municipal Prefecture in issues related to administrative, technical and financial activities of the Project, acting as the primary interlocutor with the World Bank in the execution of the Project;

• Accompany, supervise and evaluate the physical-financial execution of the Project;

• Ensure the fulfillment of directives and strategies necessary to reach the goals and objectives of the Project;

• Manage the Project resources and propose alterations in the programming of financial resources during Project execution, in accordance with established priorities;

• Promote and elaborate the compatibility of annual operational plans;

• Promote and coordinate, in collaboration with other municipal entities as pertinent, the necessary actions to promote and disseminate information about the Project, ensuring a permanent dialogue with civil society and establishing partnerships to ensure the effectiveness of the Project;

• Coordinate and elaborate the Project Evaluation Report at the end of the Project execution.

6. The PMU will have a General Coordinator, who will respond directly to the Municipal Prefecture, responsible for the general coordination and administration of the Project. The PMU will have a team of professionals made-up of technical personnel from the municipal entities involved in the Project.

7. The PMU will have an administrative structure that will include, in addition to the General Coordinator: Coordination of Planning and Management; Technical Coordination; Procurement Officer; and Budgeting and Finance Coordination.

8. The PMU will work with the URB Procurement Committee that is legally constituted, and will be made-up of individuals trained in the bidding procedures of the World Bank. The committee will facilitate the bidding processes.

9. In addition, the PMU will coordinate with the Secretariat of Finance to affect all payments, manage the designated account and other financial aspects of the project. Withdrawals from the designated account will be authorized by the Mayor or the Secretary of Finance.

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10. Technical support will be provided by several secretariats, in particular URB, which will provide

technical support to the PMU, not only in coordination, but also in the execution of most civil works. It is important to note that URB, through the PMU, will be solely responsible for the execution of all project components with support from other secretariats as appropriate.

11. The public will participate through all phases of project implementation through meetings, assemblies

and the process of participatory budgeting. This process will be facilitated through the Local Offices (Escritórios Locais) that will be used for public consultation purposes.

12. A management consulting firm will be hired to assist the PMU in project management, procurement

activity (including the implementation in the PMU of a computerized procurement control and monitoring system) and development of capacity to scale-up urban upgrading. In addition, the supervision of civil works execution will be conducted by engineering firms on an as-needed-basis.

13. A series of agreements will be signed to formalize and strengthen the institutional arrangements:

1) Loan Agreement between the Bank and the Municipality of Recife; 2) Guarantee Agreement between the Bank the Federative Republic of Brazil; 3) A Subsidiary Agreement between the Borrower and URB; 4) Cooperative Technical Agreements (Participation Agreements) between URB and:

a) Secretariat of Participatory Planning, Works, Urban Development and the Environment (including CODECIR as co-signatory)

b) Secretariat of Education, Sports and Leisure c) Secretariat of Culture d) Secretariat of Science, Technology and Economic Development e) Secretariat of Public Services (with EMLURB and CTTU as co-signatories) f) Secretariat of Sanitation g) Secretariat of Finance.

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Annex 7: Financial Management and Disbursement Arrangements


Part A – Financial Management Assessment I. Scope of Assessment A financial management risk assessment of the Project was carried out in accordance with OP/BP 10.02 and the Guidelines for Assessment of Financial Management Arrangements in World Bank Financed Projects issued by the Financial Management Sector Board on October 15, 2003. The Project will be implemented by a PMU located at URB (Empresa de Urbanização do Recife) – a public Enterprise within the Secretariat of Participatory Planning, Works, Urban Development and Environment of the Municipality of Recife (PR). The overall objective of the assessment was to determine whether the Borrower has, or will have, acceptable financial management and disbursements arrangements in place by Loan effectiveness. These include, but are not limited to the capacity to: (a) properly manage and account for all program’s proceeds, expenditures and transactions, (b) produce timely, accurate and reliable financial statements and reports, including Interim Financial Reports (IFRs), for Project’s Management and Bank’s purposes, (c) safeguard program’s assets, (d) timely engage independent auditors acceptable to the Bank, and (d) disburse Bank funds in the most efficient way, in accordance to applicable Bank rules and procedures. The assessment was carried out at URB and municipal offices and included meetings and work sessions with Municipal Secretaries of Finance and Planning, President or URB, Coordinator of the PMU, as well as with other Municipality and URB staff members and officials who are or will be involved in the future Project implementation. It also included: a) assessment of the financial management system to be used for Project’s accounting, financial administration, controlling and reporting, b) analysis of the financial staff – manpower and organization to be engaged, including training and qualification requirements, c) review of funds flow mechanisms, d) review of internal controls mechanisms and administrative procedures, e) discussions about the disbursement methodology to be used, f) discussions about reporting requirements, including format, contents and frequency of IFRs submission to the Bank, g) review of internal audit procedures, and h) review of external audit arrangements and submission of yearly audited financial statements. II. Conclusion of FM risk assessment The conclusion of the FM assessment is that the financial management arrangements for the Project satisfy the Bank’s minimum requirements and, that financial management systems are in place that can effectively control and monitor the Project, providing with reasonable assurance, accurate and timely information on its implementation progress. III. Project Risk analysis A risk assessment questionnaire was filled in on basis of the observations made and is filed together with the financial management assessment work papers. The overall Financial Management risk associated to this Project is rated as substantial, and adequate mitigating measures will have to be implemented. At the time of appraisal, it was confirmed that the Borrower had implemented the Financial Management Action Plan recommendations and that the appropriate steps have been taken to reduce the overall financial management risk.

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The Risk Assessment Matrix below summarizes the degree of risk of each of the items related to the Financial Management of the Project. Risk Assessment Matrix Risk H S M L Comments Inherent risk * Municipality specific X Overall, capacity building at the municipal

level is recommended; training on Bank FM and disbursements procedures

* Implementing entity X Clear definition of roles and responsibilities, at the PIU level, is required.

* Project specific X Internal audit department to be strengthened.

Control risk 1. Implementing Entity X Political issues in defining PMU. 2. Funds Flow X No experience in dealing with foreign

finance. 3. Staffing X 4. Acc. Policies and Procedures X Sound procedures in place in municipality. 5. Internal Audit X Internal audit in place, reporting to Finance

Secretary. Lacks independence. 6. External Audit X Short list submission for no objection, TOR

review. Include Audit in Project’s financing.

7. Reporting and Monitoring X 8. Information Systems X Follow up on system

choice/implementation/upgrade. H – High S – Substantial M – Moderate L – Low or negligible Project’s implementation will have to be closely monitored in order to mitigate FM risks. Recife Municipality staff seems to be interested in the Project, but real engagement and commitment will be reached only with the formation of the PMU and assignment of staff. There is some experience from the State Project Prometropole, which includes implementation by the municipality. Auditors’ engagement process will have to be closely monitored. It is strongly recommended that Audit Costs are included in the Bank’s financing portion so as to use Bank’s procurement guidelines instead of 8666 Law. Audit TOR and auditors’ short list will be carefully reviewed by the Bank. Although not essential from the FM point of view, a management firm will also be hired to support implementation. Other risk mitigation measures: a) at least one supervision Mission per year, b) review of quarterly IFRs, c) Annual audit and review of Audit Reports, d) training in FM and Disbursements to be provided to staff, e) Designated Account in R$ to reduce exchange risks. Part B – Financial Management Arrangements IV. Project Implementation Unit & Staffing A PMU has been formed through an Executive Decree from the Mayor. The PMU will be placed under URB’s organization. The PMU will have full autonomy in managing Project’s resources, although

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Bank’s funds in the designated account and municipal counterpart funding will be under the Finance Secretariat responsibility. The PMU will have its own executive/technical/administrative/financial staff and will have support from all other Secretariats especially from Finance Secretariat for FM issues. A management consulting firm will be hired to assist in the overall Project implementation during the first two years of operation. The President of URB will be primarily responsible for Project implementation. The PMU General Coordinator will report directly to the President of URB. The General Coordinator will liaise with all municipal secretariats, the consulting firm and all other entities involved in the Project’s implementation. Reporting to the General Coordinator there will be three sector Sub Co ordinations: Executive, Technical and Administrative/Financial. The PMU, through its financial administrator will operate the Project’s Financial Management system and coordinate all other FM functions as disbursements, accounting, reporting in IFR format, with the support where and when necessary, of the municipality which has a complete administrative/financial structure including budgeting, accounting and financial units. All PMU staff will be recruited from the municipality statutory manpower (public servants), with qualification and required experience to carry out their responsibilities. It has been agreed that at least one fully qualified accountant will be placed in the Administrative/Financial Unit. Workshops will be scheduled in due course, to train PMU staff in Bank’s FM and Disbursement procedures. V. Flow of funds and disbursement The standard Flow of Funds and Statement of Expenses (SOEs) mechanisms will be used. The flow of funds includes a Designated Account in R$ to be opened in a first line Commercial Bank in Recife (possibly Banco do Brasil). The Project’s Designated Account would receive Bank funds and counterpart funds from the Municipality’s Treasury Bank Account. The Designated Account would be in the name of the municipality’s Finance Secretariat and the withdrawals would be authorized/signed by the Mayor, the Secretary of Finance and/or designated delegates.

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The flow of funds for this Project will be as follows: The Borrower decided to utilize the SOE disbursement method. The usual initial allocation of 10% to the Designated Account should suffice. VI. Accounting Policies and Procedures, FM system, Internal controls Municipal accounting is subject to the Public Budgeting and Accounting Law No.4.320 of March 17, 1964. The municipality’s system - SOFIN was developed by Emprel in 2002 and is used by the whole Municipality including direct and indirect (Public Enterprises) administration. It is an integrated system which encompasses budgeting, revenues, expenses, treasury, accounting, financial execution, commitments (empenho) and payments (liquidação). Once the municipal budget is approved each year by the “Camara dos Vereadores,” it is recorded in SOFIN, and from then on, all commitments and/or payments can only be made through it and for a program or activity which was included in the budget and previously recorded in SOFIN. Any subsequent alteration in the budget can only be done and recorded on basis of formal proposals made by the Mayor and approved by the Camara de Vereadores. For Project administration, it was decided by the borrower to procure a special financial/monitoring system (SIG) considering that the adaptation of SOFIN for Project management purposes would be costly and would have legal implications towards Law 4320 and the Fiscal Responsibility Law (Law 101/2000). The TORs of the new system have been finalized and were reviewed by the Bank. The new system would use the PR Code of Accounts, so as to facilitate the integration with SOFIN. The new system, developed by NT Consultores, has been installed in URB computers and the staff of URB’s Directoria Administrativa e Financeira trained. The Borrower has satisfied the following areas previously identified by the Bank as requiring attention with respect to the system: (i) the PIU needs to be set up and its staff trained in the use

WB Loan Account

Designated Account R$ REC

Municipality Treasury Account

30%

70%

Payments Goods, Works and

Services

53

of the system; (ii) contract/procurement data needs to be entered into the respective module; (iii) activities financed exclusively out of Prefeitura's resources and within project scope should be recorded in the system, as the system should capture all project costs, regardless the source of funding. A Financial Manual will be prepared as part of the Operational Manual. All the fixed assets to be acquired for the Project will be registered in the Municipality’s Fixed Assets inventory system. VII. Financial Reporting (IFR), Supervision The following Interim Financial Reports (IFRs) will be prepared for reporting: Required:

• RSF 1 – Source and Application of Funds by cost categories. This report will include opening and closing balances of the Designated Bank Account.

• RSF 2 – Project spending by Components, sub components and activities. Highly Encouraged:

• RSF 5 – Designated Account Reconciliation Statement. • RSF 7 – Reconciliation Statement with Bank’s Client Connection site.

All reports will be in R$ and prepared on a quarterly basis and submitted to the Bank up to 45 days after the closing of each quarter. They will contain figures for each quarter, accumulated for the year, and accumulated for the Project life. Samples were prepared and reviewed by the Bank and will be incorporated into the new system. It is recommended that at least one FM Supervision Mission per year be carried out during Project implementation. VIII. Internal Audit The municipality has an Internal Audit Department within the Finance Secretariat. It lacks independence in view of its report line to the Secretary but technical level and staff experience are satisfactory. It performs ex-post reviews of the Municipality’s operations, on basis of a predefined yearly program or random selection of activities. The audits are followed up to check if proper actions were taken to remedy situations found and if the recommendations were implemented. Internal Audit Department has a staff of 13 members among certified accountants and business administrators. Internal Audit work could be taken into account by the external auditors in defining the scope of their work. IX. External audit – Audit Reports External audit will follow Bank’s audit policy and guidelines issued by the FMSB on June 30, 2003. Project’s accounts and Financial Statements will be audited by an independent audit firm, selected among a pre approved short list of a minimum six candidates, and under Terms of Reference previously reviewed and approved by the Bank. It is strongly recommended that audit costs are included in the cost share to be financed by the Bank, thus avoiding the use of Law 8666, and that the hiring process starts right after the signature of the Loan Agreement. Auditors report will include a single opinion on the Financial Statements and Project’s accounts. As part of their work, the auditors will prepare a management letter identifying any internal control weaknesses and areas of improvement and recommendations thereof. Fourth quarter IFRs’ cumulative financial reports, may be accepted by the World Bank as the basis for the annual financial statements on which auditors’ will express their independent opinion. The auditors’ report will be submitted to the World Bank no later than six months after the closing of each fiscal year.

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Annex 8: Procurement Arrangements

RECIFE – CAPIBARIBE MELHOR A. General 1. Procurement for the proposed project would be carried out in accordance with the World Bank’s

“Guidelines: Procurement under IBRD Loans and IDA Credits” dated May 2004; and “Guidelines: Selection and Employment of Consultants by World Bank Borrowers” dated May 2004, and the provisions stipulated in the Legal Agreement. The general description of various items under different expenditure categories are described below. For each contract to be financed by the Loan/Credit, the different procurement methods or consultant selection methods, the need for prequalification, estimated costs, prior review requirements, and time frame are agreed between the Borrower and the Bank project team in the Procurement Plan. The Procurement Plan will be updated at least annually or as required to reflect the actual project implementation needs and improvements in institutional capacity.

2. Procurement of Works: Works procured under this project, would include: integrated urban works,

including construction of small buildings for human resettlement, road paving, drainage, sewage, construction of urban parks and small restorations. The procurement will be done using the Bank’s Standard Bidding Documents (SBD) for all ICB and National SBD agreed with (or satisfactory to) the Bank.

3. Procurement of Goods: Goods procured under this project would include: printing of materials,

procurement of computer equipment and software, procurement of equipment for solid waste treatment. The procurement will be done using Bank’s SBD for all ICB and National SBD agreed with (or satisfactory to) the Bank.

4. Selection of Consultants: Consultants will be hired to provide social advice, supervise environment

activities, support project management, provide marketing and advertisement advice, advise the municipality on issuance of environmental licensing, advise on hazard treatment activities, and auditing services. Short lists of consultants for services estimated to cost less than $500,000 equivalent per contract may be composed entirely of national consultants in accordance with the provisions of paragraph 2.7 of the Consultant Guidelines. No single-source has been identified for this project.

B. Assessment of the agency’s capacity to implement procurement 5. Procurement activities will be carried out by URB - Empresa de Urbanização do Recife. No other

implementing agency was identified. The Capacity Assessment included the following action plan:

Action Timeline

1. Creation of the Project Management Unit – UGP

Prior to negotiations (completed)

2. Definition of which agency will do procurement for the project

Prior to departure of the appraisal mission (completed)

3. Hiring a procurement specialist acceptable to the Bank Up to one month after Effective

Date of loan

4. Development of a computer system that will produce procurement Up to one month after Effective

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monitoring and reports, including the Procurement Plan Date of loan

5. Preparation of the procurement plan for the first twelve months of project implementation

Up to appraisal (completed)

6. Training on Bank-financed procurement Up to one month after Effective

Date of loan

6. An assessment of the capacity of the Implementing Agency to implement procurement actions for the

project has been carried out by a Bank procurement specialist in October, 2004. The assessment reviewed the organizational structure for implementing the project and the interaction between the project’s staff responsible for procurement Officer and the President of URB. The assessment was updated in August 2005.

7. Most of the issues/risks concerning the procurement component for implementation of the project

have been identified and include: (i) clear definition that URB will be the only implementing agency of the project. The agreed corrective measures had been implemented by appraisal.

8. The overall project risk for procurement is high. C. Procurement Plan 9. The Borrower, at appraisal, developed a Procurement Plan for project implementation which provides

the basis for the procurement methods. This plan has been agreed between the Borrower and the Project Team on September 18, 2007 and is available at URB. It is also available in the Project’s database and will be made available in the Bank’s external website. The Procurement Plan will be updated in agreement with the Project Team annually or as required to reflect the actual project implementation needs and improvements in institutional capacity. In summary, the Bank will finance approximately 70% of the total investment plan, with the municipality financing 30% of the total investment plan, in general accordance with the following table.

10. Disbursements Categories for the loan proceeds will be the following:

Category Amount of the Loan Allocated (Expressed in Dollars)

% of Expenditures to be Financed20

Works 27,179,500.00 75.36% Goods 902,700.00 79.32%

Consultant Services 4,595,900.00 96.45% Front End Fee 81,900.00 100%

Total 32,760,000

The following table summarizes the procurement methods to be used according to expenditure category and threshold:

20 Counterpart funds will cover 100% of Land Acquisition costs, resulting in 70% Bank financing of total program costs, and 30% counterpart financing. Before accounting for land acquisition costs, the 32.76M of Bank financing represents 77.91% of the total 42.05M of Works, goods, and consultant services.

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Expenditure category

Contract value threshold a

(US$ thousands)

Procurement method

Contracts subject to prior review

>10,000 ICB All processes 500 = = 10,000 NCB First process

Works

= 500 Shopping First process >500 ICB All processes

500= = 100 NCB First process Goods

= 100 Shopping First process >500 ICB All processes

100 = = 500 NCB First process Non-consulting services (incl. training, communication)

= 100 Shopping First process

>500 QCBS/QBS All processes 500 = <200 QCBS/LCS All processes

Consulting (firms) 100 = 200

= 100 QCBS/LCS

CQ/LCS The first process for each selection method.

Consulting (individual) a

Section V in the Guidelines

All cases above US$50,000 and all single-source contracts

Direct contracting

All cases regardless of the amounts involved

Agreements All cases regardless of the amounts involved D. Frequency of Procurement Supervision 11. In addition to the prior review supervision to be carried out from Bank offices, the capacity

assessment of the Implementing Agency has recommended two post-review missions for the first two years of project implementation and annually from there on.

E. Details of Procurement Arrangements Involving International Competition Goods, Works and Non-Consulting Services 1 2 3 4 5 6 Reference Description Est. Cost Method Prior Review Expected Opening 1 Integrated Water and

Sanitation US$35.5M ICB Yes December 2007

Consulting Services 1 2 3 4 5 6 Reference Description Est. Cost Method Prior Review Expected Opening 1 Improvements in Fiscal

and Financial Management

US$0.6M QCBS Yes January 2008

2 Project Management US$2.4M QCBS Yes January 2008 3 Program Supervision US$1.0M QCBS Yes January 2008 12. Sole source contracting for the annual audit is also proposed following the audit for the first year,

dependent upon the performance of the firm originally contracted.

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Annex 9: Economic, Financial and Fiscal Analysis

RECIFE – CAPIBARIBE MELHOR 1. Economic Analysis 1. A benefit-cost analysis was prepared for the Project to determine its economic feasibility. The

analysis presented in this annex demonstrates the overall economic viability of the Project as well as its individual components.

2. The economic evaluation of the Capibaribe Melhor Project was evaluated taking into account the

following investment components: (i) Parks, Leisure Areas and Green Spaces; (ii) Integrated Water Supply and Sanitation (including urban upgrading of slums); (iii) Macro Drainage; and (iv) Increasing and Improving Access and Mobility.

3. The structural element of the Project is the integrated urban development of the identified territory,

the promotion of resettlement in high-risk areas and the socio-economic development of the territory. 2 – Beneficiary Population 4. The beneficiary population is estimated at 263,000 direct beneficiaries, representing approximately

70,000 households and a total investment of US$56 million.21 2.1 – Parks, Leisure Areas and Green Spaces 5. The interventions in this component will directly benefit approximately 99.784 inhabitants who are

residents of nearby neighborhoods, (Alto do Mandu, Apipucos, Casa Amarela, Casa Forte, Caxangá, Iputinga, Monteiro, Parnamirim, Poço da Panela, Santana e Torre) and will indirectly benefit the entire population of the municipality of Recife.

Parks, Leisure Areas and Green Spaces Direct Beneficiary Populations

Apipucos 33,144 Caiara 32,212 Santana 34,428 Refinaria Multicultural 42,000

6. The supply of new space for cultural activities (the Refinaria Multicultural) that will be constructed

alongside the Caiara Park with support from Petrobrás, through the Federal Law of Cultural Incentives, will attend to the demand for educational, leisure and cultural activities and spaces. The Refinaria will allow for art exhibitions, educational courses, theatrical works, seminars and other cultural activities. In this regard the profile of those who will benefit from this center will extend well beyond those living within the geographic boundaries of the Project.

7. Among the principle benefits of this component, we can identify:

� The social integration of the communities of the Project area; � Preservation of the natural environment and its diversity;

21 This includes some US$10 million of road investments that will be part of subsequent investment phases in the area, but which were evaluated in order to determine their economic viability and phasing.

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� The promotion of a healthier lifestyle and opportunities for physical exercise; � Integration of the Capibaribe River as an organizing force for environmental education; � Promotion of cultural practices and the valuing of cultural assets and cultural production in the

city 2.2 – Integrated Water Supply and Sanitation (including urban upgrading of slums) 8. The interventions in WSS in this component will provide direct benefits in 13 informal, poor

settlements on the right bank of the river, located in the micro-drainage areas of UEs 39 and 40. It will also provide direct benefits to 7 informal, poor settlements on the left bank of the river in the EU 27 and District 8.

9. The improvement of water supply and distribution will provide direct benefits to the population

residing in Districts D8A, D10 and D11, located on the left bank of the river, with a total of 76,306 beneficiaries. Improvements to be made in water supply and distribution on the right bank of the river in Districts D8B, D4B, D5, D26 and D29 will benefit 168,526 people.

Region Beneficiary Population

UE 39 19,200 UE 40 17,664 UE 45 2,668 Poço da Panela 560 Laura Gondim 1,024 Ilha das Cobras 840 Vila São João 1,320 Vila Esperança 738 Cabocó 316

10. Among the principle benefits expected from this component, it can be indicated:

� Improved supply of integrated sanitation and improved living conditions of the region’s poor population;

� Removal of sewage from the proximity of the human settlements, public spaces and areas of environmental sensitivity, reducing problems associated with bad odors and water-borne diseases;

� Improved natural and built environmental conditions; � Increased property values; � Improved health conditions of the impacted population; � Promotion of sanitary and environmental education in the project area; � Assured adequate water supply and quality of distribution for the beneficiary population.

2.3 – Macro Drainage 11. The proposed investments in this component will benefit approximately 78,560 people, directly.

Recuperation of eleven drainage canals will be undertaken, including the resettlement of families encroaching on these canals.

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Canal Beneficiary Population Jenipapo 5,216 Buriti 7,236 São Mateus 5,420 Caiara 8,372 Santa Rosa 7,356 Parnamirim 6,832 Serpro 6,344 Valença 5,956 Sport 2,744 Prado 4,664 ABC 18,420

12. Among the principle benefits of this component are:

� Reduced number of families living in areas of high risk to flooding; � An overall reduction in flooding; � Reduction in soil erosion; � Improvement in canal maintenance conditions, resulting in lower maintenance costs; � Improvement in sanitary and environmental conditions; � Reduction in areas of flood risk and improved flood control;

2.4 – Increasing and Improving Access and Mobility 13. Increasing and improving access and mobility will provide direct benefits to the population residing

in the Project area, limited by radial streets R2 – North Avenue and R6 – Caxangá Avenue – BR 101 and Agamenon Magalhães Avenue which is hampered by poor integration between the two sides of the river. This is because, both the perimeter and radial streets form part of the principal arterial road network with the radials forming part of the primary public transport and services corridors and which promote the physical integration of the two sides of the river.

14. The principle benefits of this component are expected to be:

� Improvement in the structure of the arterial road network, facilitating access to and from the area; � Improved access to parks and public installations; � Reduction in distance and travel time between the two sides of the river; � Reduction in trip times, including that of public transport; � Reduction in transport times and costs; � Improved property values; � Improved opportunity for the urban and socio-economic development of the impacted region.

2.5 – Resettlement 15. The proposed investments for the components of: (i) Integrated Water Supply and Sanitation

(including urban upgrading of slums); (ii) Macro Drainage and (iii) Increasing and Improving Access and Mobility will result in the resettlement of families. It is estimated that 1,453 families will be resettled under the project.

3 – Economic Benefits

16. An analysis of each of the incremental benefits and costs of the Project components was conducted in order to maximize the social surplus of the investments ensuring that the net present value of the benefits is greater than the net present value of the costs (investment, operations and maintenance),

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with both discounted at the same rate. For that reason, the economic flows of costs and benefits were estimated for each component and for each component the following indicators were calculated:

� Net Present Value (NPV)

� Benefit/Cost Ratio (B/C)

� Economic Internal Rate of Return (EIRR)

Projects for the benefits and costs were evaluated over a 20 year period, discounted at 12% per year.

17. In order to quantify the direct and indirect benefits, it was necessary to determine, ex ante, the types

of benefits that would be generated from the implementation of the Project, as well as the number of beneficiaries per intervention. Once the localities and communities receiving the benefits were determined, the actual beneficiary population of each intervention was calculated, with the projections based on appropriate statistical models over the project time horizon indicated.

18. All population projections were based on the published data from the last census of IBGE– the

Instituto Brasileiro de Geografia e Estatística. 19. Poverty and principally social inequality constitute the principle problems of the region, reflected in

the large concentrations of slums (favelas) and large agglomerations of poor settlements. Poverty in the region is notable for both low-incomes of the inhabitants, as well as the low coverage of basic services and access to public goods.

20. As regards the benefit/cost analysis, these are associated with the benefits and costs of each

component of the Project, such as:

� Implantation/recuperation of parks, leisure areas and green spaces, � Implantation of integrated sanitation and wastewater treatment, � Recuperation of drainage canals and corridors, � Construction of bridges, opening of road networks and paving of roads.

3.1 – Methodologies Adopted 21. The benefits of integrated urbanization and recuperation of drainage canals were captured using

hedonic pricing of the impacts on property values, estimating the impact of the interventions on the increase of property values in the area of Project influence.

22. The benefits of the interventions impacting the natural environment, such as parks and wastewater

treatment, were evaluated through the application of a contingent valuation methodology, in which hypothetical markets were created using household surveys of beneficiaries regarding their willingness to pay for the public goods offered by the Project.

23. In addition, a Highway Design and Maintenance Model (HDM) was used to estimated the benefits

resulting from the interventions in the road network, estimating reduced vehicle operation costs and travel times.

24. The following table presents the number of surveys applied for each evaluation method.

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INTERVENÇÃO PROCEDIMENTOS Methodology Intervention Sample Size

Contingent Valuation Pq. Apipucos 129 Pq. Caiara 134 Pq. Santana 127 Cordeiro Wastewater

Treatment Plant 96

TOTAL 486 Hedonic Pricing Project Area 904

Control Area 200 TOTAL 1,104 Overall Total 1,590

3.2 – Estimation of Economic Benefits 25. Based on the field surveys, applying the above mentioned methodologies, the economic benefits were

estimated as the following:

COMPONENT Estimated Economic Benefits Parque Apipucos R$ 15.56 / family / month Parque Caiara R$ 16.55 / family / month Parque Santana R$ 7.25 / family / month ETE Cordeiro R$ 5.89 / family / month Integrated Sanitation R$ 8,157.00 / beneficiary property Water Connection R$ 4,475.00 / beneficiary property Wastewater Connection R$ 2,120.00 / beneficiary property Paving R$ 899.00 / beneficiary property Resettlement R$ 10,000.00 / property Drainage R$ 1,961.00 / beneficiary property

4 – Economic Costs 26. Market prices were converted to economic prices. All project costs were included in the analyses,

including infrastructure, institutional development, management of the project, works supervision and other complementary actions. Conversion factors were applied to transform market prices to economic prices utilizing the conversion factors of the economic evaluation study of the Second Sanitation Sector Modernization Project (PMSS- II) of the World Bank.

Conversion Factor

Overall 0.94 Skilled Labor 0.81 Non-skilled Labor- 0.46 Local and Imported Goods 0.88 National and Imported Equipment 0.80 Chemicals 0.83 Electricity 0.97 5 – Results of the Benefit Cost Analysis 5.1 – Parks, Leisure Areas and Green Spaces

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Economic Flows (R$)

Year Investment O&M Total Cost Parks Benefits Refinaria Benefits Net Benefits

TOTAL 11.490.516 4.136.586 15.627.101 21.113.868 7.560.000 13.046.767

NPV 11.195.045 1.487.544 12.682.589 13.560.739 2.718.626 3.596.776

EIRR 20,7%

R B/C 1,83

5.2 – Integrated Water Supply and Sanitation (including urban upgrading of slums)

Economic Flows (R$)

Costs Benefits

Year Investment O&M Total Integrated

Sanitation Recuperation

of SES Resettlement Wastewater Treatment Water Supply

Net Benefits

TOTAL 58.496.847 16.571.355

75.068.201 88.747.454 46.840.830 22.377.770 15.283.504 115.368.596 213.549.953

NPV 54.267.966 5.772.123

60.040.089 30.927.536 16.723.755 7.915.357 8.764.365 38.517.678 42.808.602

EIRR 22,7%

R B/C 2,84

5.3 – Macro Drainage

Economic Flows (R$)

Costs Benefits Year

Investments O&M Total Recuperation Resettlement Net Benefits

TOTAL 12.243.222 10.428.561 22.671.783 89.488.750 9.954.418 76.771.384

NPV 10.888.688 3.606.927 14.495.614 28.638.062 3.409.011 17.551.459

EIRR 29,2%

R B/C 4,4

5.4 – Increasing and Improving Access and Mobility 27. In the original Capibaribe Melhor Project conceptual design, 20% of the project costs were allocated

to this component, with an estimated investment of R$25 million. After revising the component, taking into account costs associated with eminent domain and resettlement of families, investment cost estimates for this component doubled to R$54 million. This new reality resulted in the need to undertake a cost-benefit analysis for this component that would allow for the prioritization of different segments of the proposed package of road investments. This resulted in seven segments: A, B, C, D, E, F and G, which were divided into two groupings of packaged investment alternatives: A, B, E and F and C, D and G. The analysis indicated that the grouping A, B, E and F should be prioritized based on the economic returns and the benefits accruing largely to the low-income population of the area.

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Economic Flows (R$)

Costs Benefits of HDM Year

Investment O&M Total Cost COV CTV Net Benefits

TOTAL 23.649.415 3.783.906 27.433.321 95.017.050 67.969.800 135.553.529 NPV 19.376.910 1.173.944 20.550.854 30.667.167 20.827.471 30.943.785 EIRR 30,19% R B/C 4,94

5.5 – Overall Evaluation 28. Based on the evaluations of the individual components of the Project, the overall Project economic

evaluation demonstrated satisfactory results, which are presented below:

Component Investments O&M Total Costs Benefits Net Benefits EIRR RBC

Parks, Leisure and Green 11,195,045 1,487,544 12,682,589 16,279,365 3,596,776 20.65% 1.83

Integrated Sanitation 54,267,966 5,772,123 60,040,089 102,848,691 42,808,602 22.71% 2.84

Drainage 10,888,688 3,606,927 14,495,614 32,047,074 17,551,459 29.22% 4.39

Access and Mobility 19,376,910 1,173,944 20,550,854 51,494,639 30,943,785 30.19% 4.94

NPV Total 95,728,608 12,040,538 107,769,146 202,669,769 94,900,623 25.03% 3.12

Economic Flows (R$)

Year Investments O&M Total Costs Benefits Net Benefits

TOTAL 105,879,999 34,920,408 140,800,407 579,722,040 438,921,633

NPV 95,728,608 12,040,538 107,769,146 202,669,769 94,900,623

EIRR 25.03%

R B/C 3.12

29. The results of the economic evaluation reveal that the Capibaribe Melhor Project has an estimated net

benefit of R$94 million, and economic internal rate of return of 25% and a benefit/cost ratio of 3.12, indicating its economic viability.

6 – Risk and Sensitivity Analysis 6.1 – Sensitivity Analysis 30. The principle objective of the sensitivity analysis was to investigate the relative impact of variations

in the flow of costs and benefits of the Project, identifying the relative importance of the assumptions as regards the Project’s economic viability. The variation limits were calculated within which the project remains viable. The information generated is fundamental to the team responsible for project management and monitoring with the objective of maintaining project viability during implementation.

31. The following table indicates various scenario studies and their results on the overall economic

viability of the project.

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SCENARIO Net Benefit (R$) EIRR (%) B/C >10% - Investments 85.3 million 22.91 3 > 15% - Investments 80.5 million 21.97 3 > 25% Investments 70.9 million 20.25 2 < 10% Benefits 74.6 million 22.55 3 < 15% - Benefits 64.5 million 21.26 2 < 25% - Benefits 44.2 million 18.57 2 Limit –> 32% Investments e < 31% - Benefits 1.4 million 12.18 1

6.2 – Risk Analysis 32. Crystal Ball software was utilized to undertake the risk analysis. This software allows for the

measurements of the extent of various risk variables and their effect on the project, modeling a probability distribution for each risk variable and a final result. Based on a Monte Carlo simulation, the model recalculates the results of the economic analysis manipulating all the principal risk variables at the same time.

33. Through a probability distribution it was possible to calculate the chances of the project being

unviable, considering different risk weights. The distributions are available for review in the full report.

34. In summary, the risk and sensitivity analysis indicates the assumptions and variables that present the

greatest risk to project viability and which should be most closely watched during project implementation. The following graphs present the cumulative probability for each distribution, considering NPV, EIRR and the B/C ratio.

7 – Financial Analysis 35. The principle objective of the financial analysis is to investigate strategies and propose mechanisms

to most efficiently ensure the financial sustainability of the systems to be implanted, including the incremental generation of income. The financial analysis considered the incremental income and expenses associated with the implantation of the Project. The work was done in consideration of the capacity to recover the costs of the interventions, identifying specific income associated with each component.

36. It is important to disclose a series of variables which must be considered: implantation of adequate

infrastructure; public sector investment limitations; and payment capacity limitations of the beneficiaries. These variables define the question of financial viability and sustainability of the actions supported by the Project, taking into account legislative limits imposed regarding the payment of tariffs and taxes.

37. The operations and maintenance costs that are proposed for the investments are the basis for which

adequate resources to ensure sustainability are sought. A portion of the resources must be paid through tariffs and taxes of those benefited under the Project.

38. Municipal income, defined constitutionally, is primarily derived from: IPTU - Imposto Predial e

Territorial Urbano (Property Tax), ISS - Imposto sobre Serviços de Qualquer Natureza (Service Tax) e o ITBI - Imposto sobre Transmissão “Inter Vivos”, a Qualquer Título, por Ato Oneroso, de Bens Imóveis, por Natureza ou Acessão Física, e de Direitos Reais sobre Imóveis (Transfer Tax). These three tax sources can be used by the municipality as part of a cost-recovery strategy.

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39. The primary sources of income considered for this Project are: � IPTU – Imposto Predial e Territorial Urbano; � Water and Sanitation Tariffs of COMPESA (State Water Company).

40. At the same time, the municipality imposes user fees that correspond to public sanitation, public

lighting, etc. However, these fees, many times, are imposed at rates well below the cost of these services. Consequently, the service is put at risk of being unsustainable.

41. The marginal tariffs of COMPESA were used for infrastructure associated with sanitation and IPTU

was used for activities associated with urban development and housing (resettlement). 42. It should be noted that the cadastre of property values, updated in 2000, indicates that only 50% of

registered properties paid IPTU taxes, resulting in a considerable income loss to the municipality, accentuated by the fact that property values are only assessed at 60% of their market value.

43. The following tables present the financial analysis, per component and overall, based on the identified

and respective incremental income and expenses associated with implementation of the proposed interventions, calculating for Net Present Value (NPV), and Financial Internal Rate of Return (FIRR).

7.1 – Parks, Leisure Areas and Green Spaces

Financial Flows (R$)

Year Investment O&M Total Cost Capacity to Pay

Financial Benefits Net Benefits

TOTAL 15,119,100 5,442,876 20,561,975 171,652 6,330,546 (14,231,429) NPV 14,913,708 3,088,747 18,002,455 102,390 3,212,120 (14,790,336) FIRR -15%

7.2 – Water Supply and Sanitation Water Supply and Sanitation

Financial Flows (R$) Costs Financial Benefits

Year Investments O&M Total Costs Water

Income Wastewater

Income Net Benefits

TOTAL 82,389,925 19,885,625 102,275,551 56,748,869 14,160,909 (31,365,773) NPV 74,578,644 11,118,031 85,696,675 26,198,882 6,731,519 (52,766,273) FIRR -4%

7.3 – Macro Drainage Recuperação do Sistema de Macro-Drenagem

Financial Flow (R$)

Year Investments O&M Total Costs

Capacity to pay

Financial Benefits

Net Benefits

TOTAL 16,252,790 13,002,232 29,255,022 518,944 8,299,900 (20,955,122) NPV 15,277,790 6,895,331 22,173,121 309,547 4,348,289 (17,824,831) FIRR #DIV/0!

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7.4 – Access and Mobility

Financial Flow (R$)

Year Investment O&M Total Cost Capacity to Pay

Financial Benefit Net Benefits

TOTAL 31,117,651 4,978,824 36,096,475 7,542,613 (28,553,862) NPV 25,495,934 1,544,663 27,040,597 2,287,125 (24,753,471) FIRR -19%

7.5 – Overall Financial Viability

Financial Flows (R$)

Year Investments O&M Total Costs Benefits Net Benefits

TOTAL 144,879,465 43,309,557 188,189,023 78,003,940 (110,185,082) NPV 132,800,085 23,742,474 156,542,559 36,983,707 (119,558,852) FIRR -9.4%

44. It is possible to observe that investment and O&M costs will not be fully recovered. The project’s

fiscal component will be important to helping the municipality maximize its income potential, especially considering the low payment rate of IPTU.

8. – Final Considerations 45. The economic benefits to be generated by the Project are extremely significant through any lens. This

is borne out through the sensitivity analysis. All indicators analyzed presented levels of confidence of greater than 99%, confirming the robustness of the obtained values. The final conclusion is that, even in the worst case scenarios, the unitary benefits of the Project remain positive and robust.

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Fiscal Analysis

Summary

46. During the period 2000 to 2005, the fiscal performance of Recife municipal government was irregular. Fiscal contractions have followed fiscal expansions and vice-versa without a clear municipal fiscal stance. After a strong fiscal adjustment in 2001, in 2002 and 2003, the municipal government adopted a lax fiscal policy that produced a strong deterioration of the municipal fiscal accounts. In 2004, the lax fiscal stance continued but extraordinary revenues avoided a deeper deterioration. In 2005, the municipality has adopted a strict fiscal adjustment interrupting the deterioration trend exhibited in the past years.

47. After 2001, fiscal balances have followed a declining trend until 2004. Primary balances fell from 8.6% of net current revenue in 2001 to -3.3% in 2003. Net current savings were positive but declined from 12% of net current revenue in 2001 to 3% in 2003. Borrowing requirements also suffered a strong deterioration passing from -12% of net current revenues in 2001 to 1.7% in 2003. The fiscal deterioration accelerated in 2004, when current savings before interest payments on debt were insufficient not only to cover investment expenditures but also interest payments. In this year, extraordinary revenues from the social security account of municipal employees were used to cover part of the debt service and to finance investments. As a consequence, primary balance reached 3.9% of net current revenue (would be -7% without this extraordinary resource), net current savings grew to 8.9% (would be -0.5% without this revenue) and borrowing requirements reached -4.9% of net current revenue (would be a positive borrowing requirement of 6% without this extraordinary revenue). In 2005, the municipality has generated substantial fiscal balances but in this case, the improvement was based on expenditure containment22.

48. The strong expenditure expansion observed since 2002 was the driving force of the deterioration trend observed until 2004. In 2001, Recife cut expenditures by 9%. However, this containment was temporary and since 2002 total expenditures resumed their increasing trajectory growing more than 13% in two years. In 2004, the expenditure expansion trend was reinforced increasing 14% relative to the previous year, accumulating a growth of 29% since 2002. In 2005, Recife municipal government has been able to interrupt the increasing path of expenditures cutting them by 3%.

49. Even more critical, during the expansion period, current expenditures grew faster than investments thus negatively affecting the overall quality of municipal expenditures. The increase of current expenditures was due to the growth of personnel expenditures. The number of active public servants increased 48% from 2000 to 2003. Besides that, temporary employees were hired, most of them to work in the health and education sectors. Despite being temporary contracts, due the constitutional earmarking mechanisms that obligate municipalities to spend a minimum level on health and education, the personnel expenditures related to these temporary employees should increase the expenditure rigidity and should make more difficult adjustment through expenditure cuts. As a result, during the fiscal adjustment episodes of 2001 and 2005, investment expenditures were heavily reduced given the impossibility to reduce current expenditures.

50. Alternatively, revenues experienced modest and continuous growth until 2002. In 2003, economic stagnation led to a fall in tax revenue collection and intergovernmental transfers, which in a context of expenditure expansion worsened the municipal fiscal accounts. In 2004 and 2005, the strong recovery of economic activity fostered strong revenue growth that contributed to the improvement of fiscal balances in the last two years.

51. The consolidation and continuity of the fiscal adjustment initiated in 2005 are the major challenges of the current administration. The municipal government still enjoys comfortable financial indicators. The Fiscal Responsibility Law – FRL relating to personnel expenses, debt and debt service are well below the FRL

22 . The information for 2005 was estimated using figures coming from the Budgetary Execution reports up to the fifth bimester of the year thus covering the period January-October.

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ceilings and can be maintained at reasonable intervals in the next years if the current fiscal adjustment effort were sustained in the medium term.

52. In this respect, municipal authorities and Bank staff are working in the design of a medium term fiscal adjustment framework in order to guarantee fiscal sustainability. The Project will include a component for the enhancement of institutional and technical capacity of the municipal Finance and Planning secretaries for the design of the medium term fiscal adjustment framework.

53. The adjustment program will be based on the combination of a permanent and strict control of personnel expenditures and other current expenditures expansion and of tax revenue increases. In fact, in 2005 the municipality adopted this approach, controlling the growth of personnel expenditures, cutting goods and services purchases and improving tax collection.

54. The persistence of the expenditure expansion containment and the enhancement of the efficiency of the municipal tax collection capacity would guarantee not only the consolidation of the fiscal adjustment but also would allow the recovery of investments within the fiscal envelope defined by the fiscal adjustment framework for the next years.

55. On the revenue side, the municipal government is developing an R$ 21.0 million three year project for modernizing tax administration, with resources from the Inter-America Development Bank (IADB). Although those programs may permit an increase in tax collection, we should not expect a significant increase since Recife already has relatively high tax revenues, as compared with other capital cities in Brazil. This means that most of the adjustment should fall on expenditures with goods and services, the category with the higher increase in the period 1999 to 2004. In 2005, the municipality already reduced the expenditures in goods and services by 9%.

56. The consolidation of the fiscal adjustment effort faces serious obstacles that are associated with the budget rigidity. Besides the rigidity generated by personnel expenditures it is important to take into account that part of the expenditures in good and services is financed with earmarked protected resources, as health (SUS), and that another amounts are necessary to comply with legal obligations. Overall, about 25% of these expenditures are protected by constitutional mechanisms mentioned above. Thus, the municipality has reduced space to cut current expenditures as most of them are obligatory (personnel expenditures) and a considerable part are protected by constitution.

57. Higher debt service expenditures for the next years should bring additional rigidity. In particular, in 2003-2005, the municipality has recognized debt with the National Institute of Social Security that would impose new financial obligations23. In the same direction, the resumption of the municipal contribution to the FUNDEF (Fundo de Ensino Fundamental) would add additional pressure on municipal finances. In 1999, the municipal government went to the Justice Department and got an injunction to stop contributing to the FUNDEF, a situation that still waits for final decision. An unfavorable decision, which is highly probable, may have significant impact on the municipal budget in two ways: first, the resumption of the municipal transfer to FUNDEF and second the recognition of the FUNDEF transfers in arrears as debt will imply additional debt service payments.

58. Additionally, given the strong increase in the number of civil servants, the municipal government should be prepared to face increasing retirement payments in the medium term. Since June 2004, the municipal government and the public servants contribute with 11% of salaries paid to the Municipal Social Security System. An autarchy was recently created – RECIPREV – to manage the social security system for municipal employees. Nevertheless, in 2004 R$135.6 million from the RECIPREV Fund were recently used to finance the ordinary municipal budget, thus, creating a liability to be paid in the future.

23 The debt stock grew fast as Social Contributions in arrears began to be booked and recorded in the financial statements. Nevertheless, only a small portion is already renegotiated and being paid.

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59. Projection exercises for the period 2006 to 2014 depict a favorable evolution for the main fiscal and financial indicators. However, the favorable scenario results from the assumption of a higher economic growth rate (which drives revenues) than the growth rate of population (which drives expenditures). Even more important, the projection exercise shows that the guarantee of fiscal sustainability depends on the continuity of tax revenue collection efficiency and the perseverance of the tight control of personnel expenditures. The inclusion of the renegotiation of debt relating to Social Contributions, of the contribution to the FUNDEF and of the expenditures associated to the Capibaribe Melhor project, reinforces the need for the perseverance of current expenditure control.

The fiscal analysis in its entirety is available in the Project files.

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Annex 10: Safeguard Policy Issues

RECIFE – CAPIBARIBE MELHOR 1. The Capibaribe Melhor Project was classified as category “A” in accordance with the environmental

policies of the World Bank. The following safeguards were activated: (i) Environmental Assessment (OP 4.01); (ii) Natural Habitats (OP 4.04); (iii) Pest Management (OP 4.09); (iv) Cultural Property (OP 4.11); and (v) Involuntary Resettlement (OP 4.12).

OP 4.01 -ENVIRONMENTAL ASSESSMENT 2. During the preparatory stage of the Capibaribe Melhor Project, the present Environmental

Assessment Report was prepared in accordance with the terms of reference approved by the World Bank team, in order to comply with the environmental policies of the Bank applicable to category “A” Projects.

3. The EIA examined the potential positive and negative environmental impacts of the proposed Project, comparing them with viable alternatives and possible different scenarios (including under-performance of the Project) and recommended a series of necessary measures designed to avoid, minimize, mitigate or compensate for adverse impacts while (i) maximizing the positive impacts and (ii) improving performance with respect to environmental management initiatives under the aegis of the Project.

4. The mitigating measures of the negative impacts were included in an Environmental Management

Plan (EMP) involving incorporation of an environmental management system during the implementation of the undertaking. Eleven environmental programs were in fact proposed. Costings were drawn up for each program, together with schedules. Reference was made to the bodies that would be responsible for program implementation.

5. Given that environmental degradation in the Basin of the Capibaribe has reached appalling levels,

particularly in the area planned for Project intervention, and the obvious need to improve living conditions for the population involved, the Project clearly presents a positive environmental externality. It is important to emphasize that this Project comprises a group of interventions of an urban, environmental and social nature. As such, the Project is intended to improve the environmental situation in the Capibaribe basin and help reduce the urban and social vulnerability of the population. The Project in this respect plans investments with a view to improving the dwelling conditions of a total of 19,725 people living in 25 poor areas within the Project area.

6. Together with the above interventions, a number of environmental protection initiatives were conceived. The key initiatives covered activities focused on (i) the implementation and recovery of three urban parks; (ii) the regulation of four ZEPAs located in and around the Project area; and (iii) the structuring and installation of the Subcommittee of the Basin of the Capibaribe River of the RMR (Recife Metropolitan Region). As a complement to the above, activities to reinforce municipal environmental management, principally with respect to the municipalization of the environmental licensing procedures and up-scaling environmental enforcement, are of great importance for the sustainability of the Project given that the municipal environmental management structure was set up recently (2001) and is still in the formative stage.

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7. During project preparation several public consultation were conducted during meetings with CPRH, Ministerio Público, and micro-regional forums of participatory budget program. Public consultations of this EIA took place on January 9, 2006.

OP 4.04 - NATURAL HABITAT 8. The Natural Habitat Safeguards Policy was activated by the Capibaribe Melhor Project in view of the

proposals for interventions in permanent conservation areas (APPs), according to Municipal Law 16.930/2003 and on the area of land protected under the Parque Apipucos ZEPA, which will be the site of the aforementioned park. In accordance with Law 16.609 of 2000, the Parque Apipucos Conservation Unit was set up within the Parque Apipucos ZEPA to afford special protection for the existing ecosystems within the area. However, the ZEPAs and the Conservation Unit have not yet been regulated.

9. The APPs of the Capibaribe Melhor Project comprise the following: (i) a 120 meter long strip along

the banks of the Capibaribe River (width varying between 60 to 130 meters); (ii) a 40 meter long strip along the other watercourses of up to 10 meters wide; (iii) of 15 meter strip around the wet perimeter of the Açude de Apipucos; (iv) the mangrove swamp area.

10. According to Municipal Law 16.930/2003, which is compatible with the National Forest Code, the

total or partial removal of permanent conservation vegetation will be allowed only for executing works, plans, activities or projects that are considered to be of public or social interest and providing prior agreement has been given by the Municipal Environmental and Urban Development Councils and express authorization has been handed down by the Municipal Executive Power. The APPs of the Capibaribe Melhor Project relate in effect to the urbanized areas in accordance with the Forestry Code. They aim to comply with the ‘minimum strips specifications’ as defined in the Forestry Code in line with the urban reality of the locality and with the objective of minimizing social impacts. The municipality of Recife, in conformity with the requirements of the Code covering permits for urbanized areas, possesses an Environmental Council (COMAM) with deliberative power and a ‘Master Plan’. This latter body is responsible for assessing requests for removal of vegetation or the maintenance of areas occupied within the APPs.

11. In order to verify any changes that had been caused by the implementation of the Capibaribe Project

in the Permanent Conservation Areas alongside the Capibaribe River, an aerial photography survey was carried out. This survey produced the following results:

Table 3: Occupation of Permanent Preservation Areas

Occupied (ha) Scenario

Left Bank Right Bank Total

APP Unoccupied 16,50 30,30 46,80

APP Residence and Road System 56,40 48,70 105,10

APP Parks 4,10 2,70 6,80

Before

77,00 81,70 158,70

APP Unoccupied 4,20 26,60 30,80

APP Residence and Road System 60,80 45,50 106,30

APP Parks 6,60 9,60 16,20

APP ETE 2,50 - 2,50

APP Resettlement 2,90 - 2,90

After

77,00 81,70 158,70

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12. Since various interventions have been planned under the aegis of the Project (parks, ETE, roads etc)

in the area bordering the Capibaribe River, it was obvious that increased occupation would take place along the APP strip. Before the Project, 70.5% of the APP was occupied whereas after the Project had been implemented 80.5% of the area will be occupied. The additional occupation is due to the substantial expansion of the park areas in accordance with the table below.

Table 4: Additional APPs Occupation

APP Area Occupied (ha) Area Added

Occupation Before After (ha)

%

Parks 6,80 16,20 9,40 58,75

Resettlement 2,90 2,90 18,13

ETE 2,50 2,50 15,63

Residence/Road System 105,10 106,30 1,20 7,50

Total 111,90 127,90 16,00 100,00

13. The Project will have a highly positive impact on the biodiversity and on natural habitats since it will

finance investments in the three parks and green areas described above. In this sense, the Project will mitigate the impact that will be caused to the APPs. Moreover, the Project will provide funding for regulating the four ZEPAs located in the area covered by the Project.

OP 4.09-PEST MANAGEMENT 14. Since the Project takes into account activities for creating and improving the three urban parks of

Recife, it is necessary to activate the Pest Management Safeguard in order to minimize the environmental dangers and impacts on public health due to the use of pesticides in green areas.

15. Pesticides may be used occasionally in Municipal Parks that receive project support for the purpose of

controlling ants, other stinging insects, termites, rats or mice. Only pesticides found on the WHO approved list will be used. If and when they are used, the following rules will be followed:

• Pesticides will be used only when other methods of pest control cannot be used and when they

pose a threat as a nuisance or risk to safety. • Pesticide use must be authorized explicitly by the chief managing officer of the Parks Department

of each municipality after alternatives are considered. • Applications of pesticide will be done in the lowest effective concentration at the longest

effective intervals. • Park personnel or outsourced personnel will be properly trained in and equipped for pesticide

handling and application. Protective gear will be supplied and its use shall be mandatory. Antidotes for accidental exposure or ingestion of pesticides shall be kept on hand.

• The public shall be properly warned when pesticides are used. • Proper records will be kept of the type, time and concentration of pesticide applied. • Pesticide receptacles from shall be properly stored in secured areas. • Used pesticide receptacles will be properly disposed of and precautions shall be taken to avoid

contamination of dump sites, access by people or animals. • The same precautions shall be followed in the use of herbicides.

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If pesticides are applied on a regular basis, regardless of whether they are financed directly with loan funds, the PCU will appoint a properly trained safety officer to monitor and report on pesticide or herbicide use.

OP 4.11 CULTURAL HERITAGE 16. The Cultural Heritage Safeguard was activated by the Capibaribe Melhor Project given that the area

covered by the Project is of great historical and cultural importance, comprising 13 Special Historical and Cultural Heritage Preservation Zones of the total of 33 such a zones existing in the entire municipality. Some of the proposed interventions are located around or nearby the ZEPH, but none has direct impact on the ZEPH.

17. During the implementation of the works, activities requiring the use of heavy equipment could

interfere with the ZEPH located near to the interventions. The following are the main sites at risk: ZEPH 15 – Casa Grande do Engenho Barbalho (near to the Comunidade Airton Senna and Santa Marta); ZEPH 02 - Apipucos and ZEPH 05 - Poço da Panela. Damage could be caused by activity close to any of these sites. The Prefecture of Recife needs to require contractors to adopt specific steps to avoid damage during the execution of works near to the ZEPAs. Detailed procedures can be found in the Environmental Construction Plan (PAC). In order to comply with the Protection of Cultural Heritage Policy, strict procedures will be included in building contracts when significant historical and cultural assets are at stake.

OP 4.12 -INVOLUNTARY RESETTLEMENT 18. It is estimated at 1,453 families will be re-settled as a result of the implementation of the interventions

proposed under the aegis of the Project. In order to comply with the requirements of World Bank resettlement policy and to plan correctly the resettlement of the families that will be affected by the interventions of the Capibaribe Melhor Project, a Conceptual Resettlement Framework was drawn up, pending elaboration of the PDRI during the first year of the Project. The choice of a Conceptual Framework is justified by the fact that the physical interventions remain to be detailed at basic Project level. For identification of potential land where families could be re-settled, a series of field visits was carried out and plots identified near to the areas from which families are to be removed - which should help minimize the negative impacts of resettlement.

SUMMARY OF SAFEGUARDS ACTIVATED BY THE PROJECT AND MITIGATION MEASURES

Safeguards Activated by the Project Mitigation Measures

Environmental Assessment OP 4.01 EIA, EMP and Public Consultations

Natural Habitat OP/BP 4.04

Constructive Methods to Replace Permanent Conservation Vegetation, Study Program and Research to Preserve Açude de Apipucos, Park Management Plan, Rio Capibaribe Water Quality Monitoring Program, ETE Cordeiro Operation and Monitoring Program

Pest Management - OP 4.09 Control of Procedures Related to the Use of Pesticides in the Parks and Green Areas

Cultural Heritage - OP 4.11 Specific Requirements to avoid damage to the ZEPHs during the Implementation of works. Detailed procedures for the execution of works described in the Environmental Construction Plan.

Resettlement - OP/PB 4.12 Design of the Conceptual Resettlement Framework

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ENVIRONMENTAL ANALYSIS TO COMPLY WITH BRAZILIAN ENVIRONMENTAL LEGISLATION; ENVIRONMENTAL PERMIT QUESTIONS 19. The licensing system adopted by the State of Pernambuco (CPRH) is based upon the allocation of

four licensing documents which constitute legal instruments. In addition, the Environmental Impact Study is regarded by the State authorities as a technical and scientific instrument employed in the course of the Environmental Impact Assessment (AIA) for assessing undertakings/initiatives that could bring about significant changes in the environment, and prior to awarding them environmental permits.

I. Preliminary Permit (LP) - given at the preliminary stage of planning any activity and contains the

basic requirements to be complied with when selecting localities, preparing plans for installation and operation of activities. It serves to ensure awareness of rules of compliance with municipal, state or federal planning rules regarding land-use.

II. Installation Permit (LI) - authorizing the ‘go-ahead’ for establishment of a specific activity in accordance with the specifications set forth in the Approved Executive Project.

III. Operation Permit (LO) - authorizing, after the necessary verification steps have been taken, the ‘go-ahead’ for the licensed activity and its control mechanisms in accordance with the procedures contained in the ‘preliminary’ and ‘installation permits’.

IV. Authorizations - legal instruments allowing activities that may cause some alterations to the environment to proceed within a defined timescale. The period of validity varies according to the type of activity to be undertaken.

20. In order to comply with Brazilian environmental legislation and that of the State of Pernambuco, the

investments planned for the Project must be submitted to the environmental licensing process administered by CPRH, as described above. The Capibaribe Melhor Project will have a Preliminary Environmental Permit (LP), with an IA/RIMA for the Project as a whole. As work on the planning of the different interventions proceeds, these will be eligible for their respective Installation Permits (LI). The process of licensing the Capibaribe Melhor Project began in June 2005, at which time the undertaking was registered in CPRH on the basis of completion of the ‘Form for Undertakings and Miscellaneous Works’.

OVERALL ENVIRONMENTAL IMPACTS 21. Given that environmental degradation in the basin of the Capibaribe has reached shocking levels,

particularly in the area planned for Project intervention, and in view of the need to improve the living conditions of the population involved, it is obvious that the Project clearly presents a positive environmental externality. It should be particularly noted that the forecast of impacts is ‘generic’ since none of the interventions proposed in the Capibaribe Melhor Project has been detailed in the Basic Project.

22. It can be seen that the majority of the negative impacts refers to the execution phase of the works. It is

necessary to emphasize however that these impacts at generally are on a minor scale, localized and likely to be of short duration, confined to the period during which works will be in progress.

23. It is important to highlight that this Project comprises a group of interventions of an urban,

environmental and social nature that aim to improve the environmental situation in the Capibaribe Basin. The Project also embraces a multiplicity of activities designed to improve living conditions and urban infrastructure by relocating people to better-quality dwellings and to improve

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environmental sanitation in an area of serious water pollution, as well as to upscale drainage systems and improve and extend parks and green areas. The Project in this respect plans investments with a view to improving the housing conditions of a total of 19,725 people living in 25 poor areas within the Project area.

24. It needs to be reiterated that the different activities have been submitted as an integral part of the

Project and will be dealt with jointly on the basis of prior planning, thereby guaranteeing environmentally sustainable solutions.

POSITIVE ENVIRONMENTAL IMPACTS PLANNING AND IMPLEMENTATION OF WORKS STAGE 25. At the planning stage the main positive impacts consist of an improvement in associative working

methods, particularly as regards liaison between the Municipal Secretariat and other bodies involved in the Project. In order to maximize the potential of these impacts a number of activities concerned with social communication, environmental education, community participation, environmental and social management will be undertaken. At the time of execution of the works, the main positive impact will be an increase in the availability of employment for the population, providing appeals are made to the construction companies to give priority to contracting people from the local community.

OPERATIONAL STAGE

(A) Parks and Green Areas 26. Bearing in mind that there will be no need to expropriate and relocate the population, the

establishment of the Parque Apipucos, the rehabilitation of Parque Caiara and the expansion of the Parque Santana will incur highly positive impacts for the population benefited by the Project and for the municipality as a whole, with the creation of better conditions for thousands of city dwellers to enjoy decent spaces in which to practice leisure and sporting activities, surrounded by the renewed vegetation of the urban area. Since the interventions concerning the parks will be accompanied by better access, the people living on both sides of the Capibaribe River will be able to visit these facilities more regularly. Consolidated public use of leisure areas on both banks of the Capibaribe River will reduce the pressure exerted by inappropriate settlements on the Environmental Protection Agency and will at the same time serve as a response to the growing demands for facilities of this type - considered to be important for integrating the resident population into an area of an increasingly densely populated city.

(B) Water and Sewage Macro System 27. The proposed implementation and recovery of the sewage systems will eliminate the need to empty

domestic sewage directly onto the ground or into the drainage system, thereby improving the sanitary conditions of the area covered by the Project and reflecting positively on the health conditions of the local population. Positive environmental impacts will be further increased by the implementation of the program consisting of the elimination of crossed connections (illegal connections made on the sewage network) in the UEs 39 and 40. Moreover, the operation of the proposed system will result in an improvement in the quality of the water of the Capibaribe River and its tributaries within the area of the Project through the establishment of a system for collecting and treating domestic effluent. This particular intervention will not only benefit the local environment but will also improve the quality of life of people living in the area and those in the area situated downstream from these watercourses.

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28. Installing integrated sanitation in selected poor areas will improve living conditions for 19,725 inhabitants as a result of the following: (i) better accessibility; (ii) elimination of informal garbage dumps; (iii) facilities for channeling rainwater; (iv) improved sanitary and health conditions of the population; (v) increased control over irregular activities. These impacts will be strengthened on the basis of Environmental Education and Popular Participation Activities designed to motivate participation by the community and to encourage the formation of community associations and/or interest groups aimed at ensuring the long-term sustainability of the improvements.

29. The proposed interventions for the water supply system will improve the system substantially by

improving the operation, reducing leakage and avoiding water rationing in the area covered by the Project.

30. The positive impacts related to the water and sewage macro-system are significant and permanent. It

is expected that they will help to reduce urban, environmental and social vulnerability of the population residing in the Project area. In order to reinforce and guarantee the beneficial effects of this intervention, the Project plans the development of social communication, community participation, environmental and health education activities together with a system of environmental management.

(C) Recovery of the Macro Drainage System 31. The recovery of the 11 canals under the aegis of the Project will result in the following positive

impacts: (i) improvements to the drainage capacities of the canals and of the surrounding landscape conditions; (ii) cleaning activities made easier; (iii) reduction of flooding, which will bring considerable improvements to the quality of life of the population residing near to the canals; (iv) will contribute to returning strips of public land (at present occupied) to the public domain which will make enforcement more efficient and efficacious. In order to maximize the positive impacts, the Project has planned the development of environmental education activities aimed at increasing environmental awareness -mainly of the population living on the River banks- basically to teach them not to dispose of solid waste in the network of macro drainage canals.

(D) Increasing Mobility and Urban Accessibility 32. The interventions concerned with a improvements in the road system proposed under the Project will

improve the traffic flow in the area of influence of the undertaking by integrating the two sides of the Capibaribe River thereby bringing about improved integration of the two neighborhoods separated by the River as well as substantially improving urban mobility to other parts of the city. A further positive impact that has been foreseen by the Project is encouraging the use of bicycles and improved safety for cyclists on the basis of establishing cycle paths (ciclovias).

(E) Social and Economic Development of the Territory 33. This component is predominantly positive. It will provide incentives for the development of

participative and economic league entrepreneurial communities in the area covered by the Project. At the same time this component will is still into these communities the need to preserve and conserve the natural and the built environment in the places where they live.

(F) Institutional Development 34. In the institutional development component also possesses strong positive appeal since it will permit

up-scaling of personnel training in a number of different thematic areas of interest to the Project,

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particularly operational modernization and the strengthening of the environmental capacity of the Prefecture. The following are the expected positive impacts of this component: (i) improvement in physical and financial management of Recife; (ii) strengthening of municipal environmental management with initiatives that will have a decisive effect on the sustainability of the Project given that the environmental management structure of the municipality was established recently (2001) and is still at the formative stage.

NEGATIVE ENVIRONMENTAL IMPACTS PLANNING AND WORKS IMPLEMENTATION STAGE 35. In the planning phase, the main impacts will be the generation of expectations among the resident

population in the Project intervention areas. The following three basic activities will be undertaken: social communication, environmental education and community participation, all of which are designed to make the population aware of the real benefits that will flow from the interventions. These activities will be also useful for ensuring participation by the population in the Project and enable the potential beneficiaries of the Project to be appropriately informed.

36. The majority of infrastructural interventions will have negative impacts but they will be localized and

small-scale arising from the actual works. They can be mitigated with adequate planning of execution of interventions and good building procedures.

(A) Impacts during the Works Stage 37. An Environmental Construction Plan (PAC) was drawn up as a guide to appropriate environmental

practices which must be complied with by the contractors executing the various works. The environmental construction plan involves among other things: (i) environmental management of the construction sites and the accommodation set aside for construction workers; (ii) environmental control of the building activities, covering noise control, working hours, leveling activities, ditching, land-filling, transport and temporary stocking of materials, building rubble or civil construction inputs, etc; (iii) security measures for site workers and to protect the local population; (iv) traffic control; (v) repair of buildings, streets and public service equipment that could be damaged during works; (vi) handling and disposal of material dredged from rivers and canals; (vii) control and rehabilitation of the areas used for construction work and storage of new and used materials, etc; (viii) strict requirements for environmental rules to be followed by suppliers of materials.

(B) Land Expropriation 38. With the aim of compiling a register the Prefecture of Recife is collecting data on owners of the land

where the interventions will take place. At present, it is not possible to quantify the impacts caused by possible land expropriation. Nevertheless if expropriation becomes necessary, an Expropriation and Involuntary Resettlement Plan will be drawn up, to guarantee that expropriation occurs peacefully and in accordance with guidelines laid down by the Prefecture of Recife and the World Bank.

(C) Relocation and Resettlement of Families 39. The proposed interventions will result in the resettlement of an estimated 1,453 families. The change

of residence of families from the localities where they have lived for many years is a significant negative impact and anxiety can be generated by having to move to a new location. Other downside effects include peoples’ need to adapt to a new and better constructed home and the breaking of neighborhood ties. The high density typical of the Project can also generate a negative impact unless

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resettlement is accompanied by measures guaranteeing environmental quality of the area (the possibility of the future environmental deterioration of the area, as for example occurred in other popular ‘housing settlements’). With the aim of guaranteeing trouble-free resettlement of the families and in accordance with the guidelines laid down by the Prefecture of Recife and the World Bank, an Expropriation and Involuntary Resettlement Plan should be drawn up forthwith.

OPERATIONAL STAGE (A) Parks and Green Areas 40. The Parks run the risk of being under-utilized unless an appropriate working structure and efficient

administration is put in place. This negative impact could be mitigated by implementing the Management Plan for the Apipucos, Santana and Caiara parks. Furthermore, in order to guarantee the sustainability of the Parks public-private partnerships will be offered the management of these parks.

41. A eutrophisation assessment was drawn up of the Açude de Apipucos based on application of the

CEPIS model, taking into consideration three scenarios: (i) Scenario 1- tendencial; (ii) Scenario 2 - installing a bypass for the canal and tributary waters that feed Cell No 1 (proposed by the Project); (iii) Scenario 3 - total removal of the sewage at present flowing into the Açude. Given the nonexistence of consistent data referring to discharge measurement and the phosphorous concentration in the tributaries of the Açude, an assessment of the phosphorous load was not possible based on the concentrations and outflows. In order to estimate a figure for the phosphorous load, data was used from relevant literature regarding flows created by domestic waste water and superficial drainage. The results, taking into account the dry season are presented in the following table:

Scenario

Cell

Result ConcentrationP (mg/L)

2 100% hypereutrophic 3,844 1

1 100% hypereutrophic 6,306

2 100% hypereutrophic 3,844 2

1 100% hypereutrophic 4,306

3 2 19.26% hypereutrophic 74.90 % eutrophic 5.83% mesotrophic

0,138

42. These simulations demonstrate that the alternatives suggested for removing all the sewage generated

in the basin of the Açude are not sufficient to completely resolve the eutrophization of the Açude. Unfortunately, although the bypass alternative (Scenario 2 - installing a bypass for the canal and tributary waters that feed Cell No. 1) initially appeared promising and would have been a relatively low price investment, did not turn out to be as efficient as expected. Consequently, this method is not to be recommended for recovering the environmental degradation of the Açude.

43. Despite the lack of data, the model demonstrated that the Açude de Apipucos is at present extremely

degraded from an environmental point of view and steps are needed which are likely to involve structural and nonstructural initiatives. Proposing such solutions however requires a deeper level of understanding of the hydrological, hydraulic and limnological conditions existing in the Açude. The

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elaboration of a program of studies and research is proposed which would present alternatives for rehabilitating the Açude de Apipucos.

(B) Sewage System 44. At the operational stage, the negative impact of the system will be limited to the following: the

possibility of the obstruction and rupture of sewage networks, odor emissions from the elevators and the ETE, possible overflows of effluents to the watercourses, generation of solid waste retained in the sand filters, and sludge originating in the aerobic reactors. Furthermore, the increase in sewage bills (to be paid by the population served by the system) needs to be taken into account as a negative fall-out from the Project. Measures designed to improve the operation and maintenance of the sewage systems include setting up the Green Belt in the ETE, treatment and appropriate transport for waste and its disposal in landfills, encouraging social communication and the introduction of a ‘social tariff’ to enable poorer people to pay for domestic waste water services have been proposed in order to mitigate the negative impacts on the population.

45. Simulations have been done with the application of the QUAL2E model to explore a number of

alternative situations for quality assessment of the water in the Capibaribe River. The following conclusions are of interest:

• the quality of water in the Capibaribe River will deteriorate substantially unless investments are

made in sewage treatment; • the interventions proposed in the Capibaribe Melhor Project are not sufficient to substantially

improve the quality of the water in the Capibaribe River; • secondary treatment with the application of disinfectants in all the sewage flowing into the

Capibaribe River in the municipality of Recife is not sufficient to bring the quality of the water of the river up to acceptable standards;

• to obtain a satisfactory level of water quality in the urban stretch of the river running through the city of Recife the following are required as a minimum: treating the sewage produced in the Capibaribe basin in Recife and Camaragibe at secondary level with disinfectant; to maintain the present conditions in the upstream inflows; to carry out efficient collection of the sewage of the Capibaribe basin in Recife belonging to the Cabanga and Peixinhos systems.

46. These results do not necessarily lead to the conclusion that the sewage interventions proposed in the

Project should be discounted. Since resources are not always available to carry out the necessary interventions, dividing the future work into different stages is the only way of reaching the desired target. Therefore, the decision of including the ETE Cordeiro implementation in the project is justified due to its contribution to:

• consolidation of the sewerage system concept in the municipality and the metropolitan areas,

according to the current plan; • immediate occupation of the planned area and availability of the equipment (avoiding the risk of

having the equipment assigned to a different use); • improvement, although not significant, of the Capibaribe water quality.

(C) Recovery of the Macro Drainage System 47. The negative impacts with respect to the operation of the drainage canals are mainly to do with the

risk of obstruction of the canals due to the population throwing garbage into them. Environmental

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education designed to instill environmental awareness into the population-particularly people living near the banks of the canals- is called for in order to mitigate this negative impact.

(D) Enhancing Urban Mobility and Accessibility 48. In order to lay down cycle tracks on the banks of the Capibaribe River and to construct roads running

alongside the River, a number of stretches of vegetation at present in the APP will need to be removed, producing a negative impact. However, in the majority of cases, removal of the vegetation will be confined to areas covered with grass or bush and this will only mean the loss of permeable areas.

ENVIRONMENTAL MANAGEMENT PLAN

49. The Environmental Assessment includes various measures of mitigation, compensation and reinforcement to ensure reduction of the negative impacts and to highlight the positive impacts. These measures, together with their costs, schedules and organs/bodies responsible for their implementation, are set out in the Environmental Management Plan. The activities described in the Environmental Management Plan were included as Project components.

50. System of environmental management: a System of Socio-Environmental Management (SGA) will be set up in the Recife Urbanization Company (URB/Recife) - linked to the Secretariat for Participative Planning, Works and Urban/Environmental Development and forming part of the Project Management System with the following responsibilities: (i) to coordinate the socio-environmental aspects of the Project; (ii) to inspect, follow up and provide guidance for the execution of the mitigating measures called for by the various environmental permits and the recommendations laid down in the Environmental Construction Plan; (iii) to supervise implementation of the sub components ‘environmental education’ and ‘institutional strengthening’. URB/Recife is responsible overall for Environmental Management but will call for assistance from contractor firms. The costs of this activity are included in the administration and management of the Project.

51. Program of Social Communication: this program is already an integral part of the Capibaribe Melhor Project (Component 3 – ‘Institutional Development’/Subcomponent: ‘Management, Monitoring and Assessment of the Project’) and as a result the cost, amounting to R$81.000,00, is already incorporated in the overall cost of the Project. This program aims to facilitate implementation of the Project through the involvement of the population directly and indirectly affected by the interventions and, in due course, the whole population of the municipality concerned. This program is under the responsibility of URB/Recife which will be in a position to contract specialist firms or to establish partnerships with local institutions for the direct execution of the services required.

52. Health and Environmental Education Program: this program is already an integral part of the Capibaribe Melhor Project (Component 2- ‘Social and Economic Development of the Territory’/Subcomponent ‘Development of Environmental and Health Education’) and its cost (R$255,000.00) has already been incorporated in the overall costs of the Project. It is estimated that implementation of a program of health and environmental education will have far-reaching local impacts. This program should be ongoing during the entire period of implementation of the Project and will be the responsibility of URB/Recife. The establishment of a Management Committee is planned. This committee will comprise representatives of URB/Recife, UGP/Capibaribe Melhor Project; the Environmental Directorate/SEPLAM, the Social Communication Advisory Unit and, finally, the Secretariat for Education.

53. Program to Eliminate Crossed Connections (R$150,000.00): this program will be implemented in Sewage Units UEs 39 and 40 in order to prevent sewage from continuing to infect the watercourses

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and rainwater and compromising the capacity of sewage collection facilities and sewage transport and treatment systems in the region. The program will be implemented by URB/Recife supported by SESAN/SANEAR – the Sanitation Agency of Recife and COMPESA- and the Pernambuco Sanitation Company. The program to eliminate crossed connections should be initiated simultaneously with the works dealing with sewerage and should be concluded six months following the conclusion of these sewage improvement works.

54. Management Plan for the Apipucos, Santana and Caiara Parks (R$ 100,000.00): The Parks Management Plan is indispensable for the physical and environmental sustainability of the Parks, since public use of green areas is closely linked to the maintenance, conservation and security of these areas. The principal aim of the plan is to ensure that the urban parks and green areas under the aegis of the Project can continue adequately to serve the population. For this a management system capable of capable of maintaining the facilities on a permanent basis is needed. Another aim is to secure information that would help to improve the initial phase of installation of the facilities. It is recommended that the municipality should seek other alternatives for managing the parks and green areas. One method might be for civil societies and entities to ‘adopt’ the parks and manage them. For the moment, the installation of the parks is the responsibility of the URB/Recife which can contract specialist firms or establish partnerships with local institutions to carry out direct management.

55. Monitoring and Operation Program for the Cordeiro ETE: (the cost to be incorporated into the amounts reserved for the Cordeiro ETE Project): this program consists of two sub-programs: (i) a monitoring plan for the Cordeiro ETE and (ii) a plan for installing green belt in the Cordeiro ETE. The Cordeiro ETE Monitoring Plan aims mainly to verify the efficiency and efficacy of the measures adopted at the implementation and operational stages of the Cordeiro ETE together with the activities related to minimizing the negative impacts of the undertaking. The Green Belt Implementation Plan contains a suggestion that the edges of the Cordeiro ETE land should be planted so as to form a green belt to act as a windbreak and minimize the effects of possible emissions of malodorous gases which may originate at the anaerobic phase of the sewage treatment process. The services to the implemented by this program are the responsibility of URB/Recife.

56. Program to Monitor the Quality of the Water of the Capibaribe River (R$120,000.00): This program aims to provide data about the quality of the waters circulating in the stretch of the Capibaribe River within the area of influence of the Project. Monitoring and diagnosis will also be a ‘preventive activity’ insofar as changes in the quality of the waters are concerned. Such diagnoses will permit the timely adoption of control measures to avoid future problems. The responsibility for implementing this program belongs to URB/Recife in collaboration with CPRH - the State Agency for the Environment and Water Resources. Other institutions (COMPESA and SESAN/SANEAR) will be called upon to participate in the production of information, diagnoses and monitoring of the waters within the context of this program.

57. Program of Studies and Research for Defining Alternatives for Recovery of the Açude De

Apipucos (R$500,000.00): This program aims to monitor the quality of the water in the Açude de Apipucos during the first two years of the development of the Capibaribe Melhor Project. The program will comprise limnological, batimetric, hydrological, hydraulic (measurements of the outflow from the tributaries) as well as efforts to determine the following: (i) the existing and affluent organic load in the Açude; (ii) the catchment area; (iii) interception of all the tributaries flowing into the Açude. The program will help to instill a better understanding of the internal dynamics of the lacustrine ecosystem and provide information for designing a new model for gauging the water quality of this Açude and adoption of measures for its rehabilitation and management. Responsibility for implementing the program falls to URB/Recife jointly with SESAN/SANEAR. COMPESA and SESAN/SANEAR can be called upon to participate in the production of data, diagnosis and monitoring of water within the ambit of the Project.

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58. Environmental Plan for Construction (PAC) (the costs will be included in the overall cost of the

works and therefore the PAC must be included in the technical specifications of the works): this plan was elaborated for adoption as a guide to cover appropriate environmental practices to be complied with by the firms contracted to execute the works. Therefore, it must be incorporated into the bidding processes so that the construction firms can have prior knowledge of the requirements and understand that compliance with the plan will be reflected in the contractual arrangement. Implementation of the plan is the responsibility of URB/Recife and of the construction companies.

59. Expropriations and Involuntary Resettlement Plan (R$32,287,569.56): the Project will relocate an

estimated 1,453 families. A Conceptual Framework for Resettlement has been developed based upon the resettlement policies of the Prefecture of Recife and according to the resettlement guidelines of the World Bank. The PDRI will be developed during the first year of implementation of the Capibaribe Melhor Project. The Conceptual Framework offers two compensatory alternatives for the relevant families or property owners: (i) resettlement on a property possessing basic services and near to the present locality occupied by the above and (ii) financial compensation. Implementation of the Expropriations and Involuntary Resettlement Plan will be the responsibility of URB/Recife, which will act in partnership with the Secretariat for Housing. Both official organs would be free choose to contract specialist firms to carry out the works if necessary.

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Resettlement Framework Summary

Brief Project Description:

60. The project objective is to improve the technical capacity of the municipal government in the areas of fiscal/financial management, urban and environmental management, and the scaling–up of urban upgrading while promoting the socio-economic equality and urban development of the territory of the Capibaribe Basin between BR-101 and Avenida Agamenon Magalhães, one of the largest geographic concentrations of informal settlements in Recife.

61. The objective will be obtained through a program of (i) Institutional Development aimed at

improving medium-term fiscal and financial management, improving municipal environmental and urban development management and licensing process, and improved capacity to plan and manage large-scale, integrated urban development projects. (ii) Integrated Urban Territorial Development that will include investments in the upgrading of slums, macro drainage and resettlement of households in high risk areas, parks and open space, water supply and sanitation and, and urban road networks, concentrating in poor neighborhoods; and (iii) Social and Economic Development, including environmental and sanitary education, civil defense preparedness, job and income generation activities, including training of community leaders, small and medium enterprise development and community participation.

Project activities requiring land acquisition and population resettlement 62. All the project’s activities requiring population resettlement and land acquisition are included on the

Component (ii) Integrated Urban Territorial Development, namely: slum upgrading; macro-drainage; removing of households in high risk areas; removing households from environmental protected areas; parks and open space; sanitation; urban roads.

Why a Resettlement Framework 63. During the project preparation phase, pre-feasibility studies were undertaken for the formulation of

the project concept, objectives and specifics activities. In addition, these studies provided appropriate inputs for developing other key analytical works such as a comprehensive alternative design assessment, and key documents such as the Resettlement Framework and the Environmental Impact Assessment.

64. Based on the project implementation timetable agreed with the government, during the project’s first

execution year, detailed engineering plans will be prepared for each physical activity. In parallel and fully integrated with these engineering plans, a Resettlement Action Plan following the Resettlement Framework’s recommendations will be prepared for providing detailed operational guidance for executing the resettlement activities synchronized with the civil works. The families’ effective resettlement to a new house is expected to initiate during the project’s second execution year, with the initiation of civil works. The acquisition of private land (titled and vacant urban plots) activities will be initiated during the project’s first year to allow for initiating the resettlement housing construction during the second year of implementation. The resettlement housing will also be built in two public owned plots, which are already available for the resettlement housing construction.

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Estimated resettlement and land acquisition needs 65. Resettlement: an estimate of 1,453 families living in unregulated stilt housing in slums spread over

canals and mangroves. 66. Land acquisition: several vacant and titled urban plots located within the project area, and some ten

titled small buildings. Resettlement principles and alternatives 67. The proposed resettlement activities and solutions aim at ensuring: improved quality of life through

better housing quality, strengthened social fabric and social inclusion. This will be achieved through a comprehensive set of actions including: the adoption of a tested participatory methodology involving the affected families in the resettlement process early in the project implementation stage; the provision of a well trained technical team constituted of social workers and urban development specialists with expertise in resettlement; the provision of appropriate and timely financial resources to ensure an adequate execution of the resettlement activities; construction of resettlement housing units in the proximity of the removal area so as to minimize negative impacts on community routines; and, offer of cash compensation to provide flexible resettlement solutions to the affected families.

68. The resettlement solutions will provide for significantly improving the families living conditions.

Today, those families are living in extremely precarious housing solutions; most of them constructed non-durable materials such as cardboard. Two resettlement alternatives are proposed: new house construction and cash compensation.

69. The resettlement houses will be built in several small areas located within the project area and in the

proximity of the removal areas. The houses size will vary from 30 m2 to 33 m2 in a ‘townhouse’ solution type. Some areas will allow for two floor buildings solutions that will ensure independent access to each housing unit. The estimated cost of the housing unit, including the land, is R$23,000.00 (~ US$10,450.00). The resettlement houses will be titled and free of costs for the resettled families.

70. The cash compensation mechanism has been designed following two approaches: assisted cash

compensation allowing the families to choose a new house of their preference; and support to families willing to return to their original community. Assisted cash compensation: the project will assist the family in finding an appropriate housing unit in the market. The house quality and documents will be assessed by the project’s team of social workers and lawyers in order to ensure to the family an appropriate resettlement solution.

Legal Framework 71. The proposed resettlement activities and solutions are in accordance with the Federal law “Estatuto

das Cidades”, and the State of Pernambuco law Zona Especial de Interes Social law (ZEIS). Based on both laws, the Municipality of Recife is entitled to invest in improving the living conditions in unregulated low-income settlements, including investing in the construction of resettlement housing at no cost for the resettled families.

The method of valuing assets 72. The houses to be removed are of extremely poor quality, constructed over canals and mangroves (stilt

houses). The large majority has less than 40m2 and 75% are frequently affected by flooding. The

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current market value of these houses is significantly inferior to the cost of the resettlement houses offered by the project. The current market value of the affected houses is also significantly inferior to the cash compensation amount foreseen as part of the project resettlement compensation package. The families affected by resettlement will be entitled to the resettlement compensation package regardless the reduced value of their current houses. Those families opting for cash compensation will be compensated based on the value of their current property, using a standard formula and development of a table indicating housing values by type of housing, location and availability of services. All affected families electing this option will receive a minimum cash-compensation even if the value of their property falls below this threshold. This is the minimum amount deemed necessary for a family to enter into the real estate market. These families will also receive the R$350 moving allowance.

73. Approximately 71% of families are owners of the homes in the project area. Those families affected

who are renting their home, will be entitled to six months of rent (~ R$175/month in the project area), plus R$350 in moving expenses, for a total compensation of R$1,400.

Institutional and technical arrangements for executing the resettlement activities 74. The Housing and Social Assistance Secretariat of the Municipality of Recife is the governmental

agency responsible for supervising the resettlement activities. This Secretariat has accumulated large resettlement experience from previous slum upgrading interventions executed by the Municipality of Recife. In addition, the Project Management Unit (PMU) will provide technical/implementation support to this Secretariat to respond to the bulk of resettlement activities during the project three first implementation years. To this end, financial and technical provisions have been made to create a PMU with the appropriate skills.

Coordinating civil works and resettlement activities 75. The Resettlement Action Plan will be prepared during the project first execution year, integrated with

the engineering designs for each of the activities entailing resettlement. Resettlement housing construction will initiate in the first year in the two receiving areas belonging to the Municipality of Recife. Resettlement of first group of families is expected during the second year.

Resettlement estimated costs – summary (US$ Million) Activity Total Cost Municipality World Bank Expropriation (small buildings) 1.6 1.6 - Expropriation (land for resettlement) 1.7 1.7 Resettlement Housing 8.5 1.2 7.3 Cash compensation 0.5 0.5 Assistance to move 0.006 0.006 12.5 5.0 7.3

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Steps in the Process Activities Collection of Information • Analysis of cartographic information, aerial photographs and other relevant

information to identify areas of risk, land invasions of available space for infrastructure, etc.

• Identify available areas for resettlement Community Contacts • Provide information on the Project Resettlement Policy

• Inform the community of affected areas Planning Workshops • Negotiate a consensus over relocation decisions Complete the diagnostic of the area • Socio-economic survey and cadastre of affected properties (preliminary

cadastre) • Consultation with the affected parties as regards preferences of compensation

alternatives • Undertake title search on affected properties and areas appropriate for

resettlement • Prepare instruments for acquisition through cash compensation • Real estate market • survey

General Planning Workshop • Present urban plan solutions for resettlement • Discuss compensation options and clarify doubts • Negotiate agreements with affected parties

Elaboration of Pre-Plans • Elaboration of pre resettlement plan Discussion of Pre-Plans with Community

• Discuss pre-plans with the affected households and community representatives

Close Intervention Plan • Update the cadastre (final cadastre) • Finalize the Resettlement Action Plan • Present the final Resettlement Action Plan • Acquisition of land for resettlement (a process that is on-going in parallel)

Implementation of the Intervention • Sign the terms of compensation with affected households • Contract the construction of housing units • Form groups for self-help housing, when appropriate • Accompany the process of acquisition and rental of housing • Execute the process of payments for cash-compensation and moving

assistance • Provide social and legal assistance to families in the process of resettlement

Monitoring and Evaluation • Provide assistance to resettled families for one year • Evaluate the processes of resettlement and take corrective actions

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Annex 11: Project Preparation and Supervision


Planned Actual PCN review 03/18/2004 03/18/2004 Initial PID to PIC 04/30/2004 07/28/2004 Initial ISDS to PIC 04/30/2004 07/28/2004 Appraisal 12/12/2005 05/22/2006 Negotiations 07/15/2007 Board/RVP approval 09/15/2007 Planned date of effectiveness 011/01/2007 Planned date of mid-term review 07/12/2009 Planned closing date Key institutions responsible for preparation of the project: Municipality of Recife and the Recife Urban Development Company (URB – Recife) Bank staff and consultants who worked on the project included: Name Title Unit Ivo Imparato Sr. Urban Specialist, TTL LCSUW Dean Cira Sr. Urban Specialist (TTL

through appraisal) EASUR

Martin Gambrill Sr. Water Engineer LCSUW Paula Pini Sr. Social Dev. Specialist LCSUW Claudio Mettlestaedt ET Consultant LCOAA Catarina Portelo Counsel LEGLA Daniel Gross Sr. Social Specialist Consultant Francesco di Villarosa M&E Specialist Consultant Sarah Anthony ET Consultant LCSUW Luis Prada Procurement Specialist LCSPT Alexandre Oliveira Procurement Assistant LCSPT Jose Janeiro Sr. Financial Mgmt. Spec. LCSFM Lilian Pena Pereira Consultant LCSUW Alexandre Fortes Environmental Specialist Consultant Wilson Rocha Water Engineer Consultant Everaldo Cabral Transport Specialist Consultant Julia Conter Team Assistant LCSUW Maria Madalena dos Santos Consultant LCC5C Adriana Weisman Operations Officer OPCCE Karina de Sousa Marcelino Team Assistant LCSUW Cary Anne Cadman Environment Specialist WBISD Jose Augusto Carvalho Lead Counsel LEGLA Juliana Wenceslau Governance Specialist Consultant Ulrich Hoerning Human Development Consultant David Le Blanc Peer Reviewer OPD

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Sílvia Mourthé Valadares Economist Consultant Fernando Blanco Economist LCSPE Maria Angelica Sotomayor Economist LCSUW Rogerio Gerheim Economist Consultant Carlos Velez Lead Economist LCSUW Yasuhiko Matsuda Sr. Public Sector Mgmt. Spec. EASPR Bob Buckley Peer Reviewer FEU Jorge Rebelo Peer Reviewer LCSTR Bank funds expended to date on project preparation:

1. Bank resources: ~$90,000 2. Trust funds: N/A 3. Total: ~$90,000

Estimated Approval and Supervision costs: 1. Remaining costs to approval: US$10,000 2. Estimated annual supervision cost: US$65,000

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Annex 12: Documents in the Project File

RECIFE – CAPIBARIBE MELHOR Relatório Conceitual do Projeto Capibaribe Melhor, Abril 2005 Relatório Atendimento à Ajuda Memória, Agosto 2005 Relatório Técnico das Intervenções Propostas para o Saneamento Integrado no Projeto Capibaribe Melhor, Setembro, 2004 Estudo Conceitual do Sistema Viário, Outubro 2005 Marco Conceitual de Reassentamento Involuntário, Outubro 2005 Relatório de Avaliação Ambiental (e Anexo), Setembro 2005 Avaliação da Eutrofização do Açude d Apipucos, Setembro 2005 Estudo de Modelagem Matemática da Qualidade das Águas das Bacias do Rios Capibaribe, Beberibe e Jaboatão, Outubro 1998 Aplicação Prática do Modelo QUAL2E, Setembro 2005 Relatório de Avaliação Social, Outubro, 2005 Relatório de Avaliação Institucional, Outubro, 2005 Avaliação Econômica – Financeira, Outubro, 2005 Avaliação Fiscal, Outubro 2005

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Annex 13: Statement of Loans and Credits


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

P082328 2005 BR-Integ.Munic.Proj.-Betim Municipality 24.00 0.00 0.00 0.00 0.00 24.08 0.00 0.00

P083533 2005 BR TA-Sustain. & Equit Growth 12.12 0.00 0.00 0.00 0.00 12.12 0.00 0.00

P087711 2005 BR Espirito Santo Wtr & Coastal Pollu 36.00 0.00 0.00 0.00 0.00 36.00 0.00 0.00

P080830 2004 BR Maranhao Integrated: Rural Dev 30.00 0.00 0.00 0.00 0.00 30.00 0.38 0.00

P060573 2004 BR Tocantins Sustainable Regional Dev 60.00 0.00 0.00 0.00 0.00 60.00 3.00 0.00

P083013 2004 BR Disease Surveillance & Control APL 2

100.00 0.00 0.00 0.00 0.00 100.00 0.00 0.00

P087713 2004 BR-Bolsa Familia 1st APL 572.20 0.00 0.00 0.00 0.00 572.20 0.00 0.00

P054119 2003 BR BAHIA DEVT (HEALTH ) 30.00 0.00 0.00 0.00 0.00 28.67 2.67 0.00

P070827 2003 BR-2nd APL BAHIA DEV. EDUCATION PROJECT

60.00 0.00 0.00 0.00 0.00 46.89 18.62 0.00

P058503 2003 GEF BR Amazon Region Prot Areas (ARPA)

0.00 0.00 0.00 30.00 0.00 27.00 0.00 0.00

P049265 2003 BR-RECIFE URBAN UPGRADING PROJECT

46.00 0.00 0.00 0.00 0.00 45.14 3.79 0.00

P076977 2003 BR-Energy Sector TA Project 12.12 0.00 0.00 0.00 0.00 12.12 2.82 0.00

P074777 2003 BR-Municipal Pension Reform TAL 5.00 0.00 0.00 0.00 0.00 4.90 3.50 0.00

P080400 2003 BR-AIDS & STD Control 3 100.00 0.00 0.00 0.00 0.00 95.00 8.30 0.00

P057665 2002 BR-FAMILY HEALTH EXTENSION PROJECT

68.00 0.00 0.00 0.00 0.00 50.81 34.94 0.00

P057653 2002 BR- FUNDESCOLA IIIA 160.00 0.00 0.00 0.00 0.00 205.51 -22.78 0.00

P055954 2002 GOIÁS STATE HIGHWAY MANAGEMENT

65.00 0.00 0.00 0.00 0.00 36.80 34.13 0.00

P051696 2002 SÃO PAULO METRO LINE 4 PROJECT 209.00 0.00 0.00 0.00 0.00 165.18 112.28 0.00

P074085 2002 BR Sergipe Rural Poverty Reduction 20.80 0.00 0.00 0.00 0.00 9.13 2.27 0.00

P073192 2002 BR TA Financial Sector 14.50 0.00 0.00 0.00 0.00 9.30 3.81 0.00

P070552 2002 GEF BR PARANA BIODIVERSITY PROJECT

0.00 0.00 0.00 8.00 0.00 8.32 5.47 0.00

P066170 2002 BR-RGN 2ND Rural Poverty Reduction 22.50 0.00 0.00 0.00 0.00 14.98 5.28 0.00

P060221 2002 FORTALEZA METROPOLITAN TRANSPORT PROJECT

85.00 0.00 0.00 0.00 0.00 111.47 50.68 0.00

P043869 2002 BR SANTA CATARINA NATURAL RESOURC & POV.

62.80 0.00 0.00 0.00 0.00 60.07 15.69 0.00

P059566 2001 BR- CEARA BASIC EDUCATION 90.00 0.00 0.00 0.00 0.00 74.76 -15.24 0.00

P073294 2001 BR Fiscal & Fin. Mgmt. TAL 8.88 0.00 0.00 0.00 0.00 6.74 5.78 0.00

P050772 2001 BR LAND-BASED POVRTY ALLEVIATION I (SIM)

202.10 0.00 0.00 0.00 0.00 218.16 158.43 0.00

P057649 2001 BR Bahia Rural Poverty Reduction Project

54.35 0.00 0.00 0.00 0.00 13.60 2.92 0.00

P050881 2001 BR PIAUI RURAL POVERTY REDUCTION PROJECT

22.50 0.00 0.00 0.00 0.00 10.64 7.97 0.00

P050880 2001 BR Pernambuco Rural Poverty Reduction 30.10 0.00 0.00 0.00 0.00 20.02 14.15 0.00

P050875 2001 BR Ceara Rural Poverty Reduction Project

37.50 0.00 0.00 0.00 0.00 13.94 5.69 0.00

P035741 2000 BR NATL ENV 2 15.00 0.00 0.00 0.00 2.32 5.61 7.93 7.93

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P039199 2000 BR PROSANEAR 2 30.30 0.00 0.00 0.00 6.40 22.29 28.69 22.29

P006449 2000 BR CEARA WTR MGT PROGERIRH SIM

136.00 0.00 0.00 0.00 0.00 74.29 42.67 -0.87

P062619 2000 BR INSS REF LIL 5.05 0.00 0.00 0.00 0.00 0.36 -0.14 0.67

P050776 2000 BR NE Microfinance Development 50.00 0.00 0.00 0.00 0.00 30.15 -19.85 0.00

P047309 2000 BR ENERGY EFFICIENCY (GEF) 0.00 0.00 0.00 15.00 3.29 9.96 12.13 0.68

P050763 1999 BR- Fundescola 2 202.00 0.00 0.00 0.00 0.00 17.29 17.29 0.00

P058129 1999 BR EMER. FIRE PREVENTION (ERL) 15.00 0.00 0.00 0.00 0.00 5.46 5.46 -0.42

P048869 1999 BR SALVADOR URBAN TRANS 150.00 0.00 0.00 0.00 0.00 90.35 90.35 0.00

P042565 1998 BR PARAIBA R.POVERTY 60.00 0.00 0.00 0.00 0.00 13.55 13.55 0.00

P006474 1998 BR LAND MGT 3 (SAO PAULO) 55.00 0.00 0.00 0.00 10.00 37.32 47.32 14.91

P035728 1998 BR BAHIA WTR RESOURCES 51.00 0.00 0.00 0.00 0.00 7.72 7.72 -0.28

P006559 1998 (BF-R)SP.TSP 45.00 0.00 0.00 0.00 0.00 3.88 3.88 0.00

P038895 1998 BR FED.WTR MGT 198.00 0.00 0.00 0.00 40.00 54.67 94.67 6.47

P043421 1998 BR RJ M.TRANSIT PRJ. 186.00 0.00 0.00 0.00 27.78 96.09 123.87 0.00

P043420 1998 BR WATER S.MOD.2 150.00 0.00 0.00 0.00 125.00 19.33 144.30 1.94

P057910 1998 BR PENSION REFORM LIL 5.00 0.00 0.00 0.00 0.50 1.48 1.98 0.48

P043873 1997 BR AG TECH DEV. 60.00 0.00 0.00 0.00 0.00 17.42 17.42 17.42

P006532 1997 FED HWY DECENTR 300.00 0.00 0.00 0.00 50.00 63.46 113.46 107.00

P034578 1997 BR RGS Highway MGT 70.00 0.00 0.00 0.00 0.00 35.07 35.07 35.07

P043868 1997 BR RGS LAND MGT/POVERTY 100.00 0.00 0.00 0.00 0.00 12.95 12.95 12.95

P037828 1996 BR (PR)R.POVERTY 175.00 0.00 0.00 0.00 0.00 52.08 52.08 52.08

P006210 1996 GEF BR-NAT'L BIODIVERSITY 0.00 0.00 0.00 10.00 0.00 1.79 2.59 0.50

Total: 4,298.82 0.00 0.00 63.00 265.29 2,796.12 1,319.94 278.82

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.

2001 AG Concession 0.00 15.00 15.00 0.00 0.00 14.07 0.00 0.00

1996/97 Algar Telecom 0.00 8.17 0.00 0.00 0.00 8.17 0.00 0.00

2002 Amaggi 25.71 0.00 0.00 0.00 25.71 0.00 0.00 0.00

2002 Andrade G. SA 30.00 0.00 10.00 20.00 30.00 0.00 10.00 20.00

2001 Apolo 7.61 0.00 0.00 0.00 5.11 0.00 0.00 0.00

1998 Arteb 20.00 7.00 0.00 18.33 20.00 7.00 0.00 18.33

1999 AutoBAn 24.35 0.00 0.00 19.41 24.35 0.00 0.00 19.41

1998 BSC 6.07 0.00 0.00 3.09 6.00 0.00 0.00 3.09

1993/96 BUNGE CEVAL 0.00 2.31 0.00 0.00 0.00 2.31 0.00 0.00

1996 Banco Bradesco 1.69 0.00 0.00 2.50 1.69 0.00 0.00 2.50

1994/96 CHAPECO 1.78 0.00 0.00 5.26 1.78 0.00 0.00 5.26

2002/04 CN Odebrecht 25.00 0.00 0.00 0.00 25.00 0.00 0.00 0.00

2003 CPFL Energia 0.00 0.00 40.00 0.00 0.00 0.00 40.00 0.00

1992 CRP-Caderi 0.00 0.32 0.00 0.00 0.00 0.32 0.00 0.00

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2004 Comgas 45.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00

1997 Copesul 12.50 0.00 0.00 38.57 12.50 0.00 0.00 38.57

1997/00 Coteminas 0.00 0.48 0.00 0.00 0.00 0.48 0.00 0.00

1980/92 DENPASA 0.00 0.12 0.00 0.00 0.00 0.12 0.00 0.00

1998 Dixie Toga 0.00 15.00 0.00 0.00 0.00 15.00 0.00 0.00

1997 Duratex 7.29 0.00 0.00 11.19 7.29 0.00 0.00 11.19

1999 Eliane 21.33 0.00 13.00 0.00 21.33 0.00 13.00 0.00

1998 Empesca 5.00 0.00 10.00 0.00 5.00 0.00 10.00 0.00

2001/02 Escola 0.00 0.25 0.00 0.00 0.00 0.25 0.00 0.00

2000/04 Fleury 20.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00

1998 Fosfertil 6.06 0.00 0.00 26.02 6.06 0.00 0.00 26.02

1998 Fras-le 6.67 0.00 10.00 0.00 6.67 0.00 6.70 0.00

1994 GAVEA 1.88 0.00 5.50 0.00 1.88 0.00 5.50 0.00

GP Cptl Rstrctd 0.00 8.70 0.00 0.00 0.00 8.59 0.00 0.00

2001 GPC 9.00 0.00 0.00 0.00 9.00 0.00 0.00 0.00

1997 Guilman-Amorim 21.88 0.00 0.00 33.53 21.88 0.00 0.00 33.53

1998 Icatu Equity 0.00 14.00 0.00 0.00 0.00 12.60 0.00 0.00

1999 Innova SA 13.75 5.00 0.00 35.00 13.75 5.00 0.00 35.00

1980/87/97 Ipiranga 23.62 0.00 0.00 39.75 23.62 0.00 0.00 39.75

1999 Itaberaba 0.00 5.34 0.00 0.00 0.00 5.34 0.00 0.00

2000/02 Itau-BBA 103.63 0.00 0.00 0.00 64.08 0.00 0.00 0.00

1999 JOSAPAR 7.57 0.00 7.00 0.00 2.57 0.00 7.00 0.00

1995 Lojas Americana 4.00 0.00 0.00 0.00 4.00 0.00 0.00 0.00

1992/99 MBR 15.00 0.00 0.00 0.00 15.00 0.00 0.00 0.00

2002 Macae 52.03 0.00 10.00 43.75 52.03 0.00 10.00 43.75

Macedo Nordeste 0.00 0.00 2.50 0.00 0.00 0.00 2.50 0.00

2002 Microinvest 0.00 1.25 0.00 0.00 0.00 0.12 0.00 0.00

2002 Net Servicos 0.00 31.74 0.00 0.00 0.00 31.74 0.00 0.00

1994 Para Pigmentos 10.75 0.00 9.00 0.00 10.75 0.00 9.00 0.00

1996 Perdigao 4.38 0.00 0.00 0.00 4.38 0.00 0.00 0.00

1994/00/02 Portobello 0.00 1.15 0.00 0.00 0.00 1.15 0.00 0.00

2000 Puras 3.00 0.00 0.00 0.00 3.00 0.00 0.00 0.00

2003/04 Queiroz Galvao 0.60 0.00 0.00 0.00 0.08 0.00 0.00 0.00

Randon Impl Part 4.20 0.00 3.00 0.00 4.20 0.00 3.00 0.00

1997/03 SP Alpargatas 30.00 0.00 0.00 0.00 5.00 0.00 0.00 0.00

1994/97 Sadia 6.91 0.00 4.33 43.79 6.91 0.00 4.33 43.79

2002/04 Salutia 0.00 0.08 0.00 0.00 0.00 0.08 0.00 0.00

1997 Samarco 7.20 0.00 0.00 0.00 7.20 0.00 0.00 0.00

1998 Saraiva 4.62 3.00 0.00 0.00 4.62 3.00 0.00 0.00

2003 Satipel 13.93 0.00 10.00 0.00 13.93 0.00 10.00 0.00

2000 Sepetiba 26.93 0.00 5.00 0.00 11.93 0.00 5.00 0.00

1999 Sudamerica 0.00 15.00 0.00 0.00 0.00 15.00 0.00 0.00

1990/91 Suzano Bahia Sul 0.00 1.60 0.00 0.00 0.00 1.60 0.00 0.00

2001 Synteko 16.71 0.00 0.00 0.00 16.71 0.00 0.00 0.00

1996 TIGRE 3.85 0.00 0.00 0.00 3.85 0.00 0.00 0.00

1998/04 Tecon Rio Grande 8.10 0.00 0.00 8.10 0.00 0.00 0.00 0.00

2001/03 Tecon Salvador 0.00 0.56 0.00 0.00 0.00 0.55 0.00 0.00

2002 UP Offshore 11.60 10.00 0.00 30.00 0.00 3.00 0.00 0.00

2002/04 Unibanco 20.00 0.00 0.00 0.00 14.80 0.00 0.00 0.00

93

1999 Vulcabras 8.33 0.00 0.00 0.00 8.33 0.00 0.00 0.00

1999 Wiest 0.00 0.00 8.00 0.00 0.00 0.00 8.00 0.00

Total portfolio: 699.53 146.07 162.33 378.29 521.99 135.49 144.03 340.19

Approvals Pending Commitment

FY Approval Company Loan Equity Quasi Partic.

2002 Andrade 0.00 0.00 0.00 0.10

2000 BBA 0.01 0.00 0.00 0.00

2002 Banco Itau-BBA 0.00 0.00 0.00 0.10

2001 Brazil CGFund 0.00 0.02 0.00 0.00

1999 Cibrasec 0.00 0.01 0.00 0.00

2004 Comgas 0.00 0.00 0.00 0.05

2002 Net Servicos 2 0.05 0.00 0.00 0.00

2002 Suape ICT 0.01 0.00 0.00 0.00

2004 TermoFortaleza 0.06 0.00 0.01 0.11

2004 TriBanco Brazil 0.01 0.00 0.00 0.00

2002 Unibanco-CL 0.00 0.00 0.00 0.15

Total pending commitment: 0.14 0.03 0.01 0.51

94

Annex 14: Country at a Glance


Lat in Lo wer-P OVER T Y and SOC IA L A merica middle-

B razil & C arib. inco me2002Population, mid-year (millions) 174.5 527 2,411GNI per capita (Atlas method, US$) 2,830 3,280 1,390GNI (Atlas method, US$ billions) 494.5 1,727 3,352

A verage annual gro wth, 1996-02

Population (%) 1.3 1.5 1.0Labor force (%) 1.7 2.2 1.2

M o st recent est imate ( latest year available, 1996-02)

Poverty (% of population below national poverty line) 22 .. ..Urban population (% of to tal population) 82 76 49Life expectancy at birth (years) 69 71 69Infant mortality (per 1,000 live births) 30 27 30Child malnutrition (% of children under 5) 6 9 11Access to an improved water source (% of population) 87 86 81Illiteracy (% of population age 15+) 12 11 13Gross primary enro llment (% of school-age population) 162 130 111 M ale 166 131 111 Female 159 128 110

KEY EC ON OM IC R A T IOS and LON G-T ER M T R EN D S

1982 1992 2001 2002

GDP (US$ billions) 281.7 390.6 509.0 452.4

Gross domestic investment/GDP 21.1 18.9 21.2 19.3Exports o f goods and services/GDP 7.6 10.9 13.2 15.8Gross domestic savings/GDP 20.4 21.4 20.2 21.5Gross national savings/GDP 15.3 20.1 16.6 18.0

Current account balance/GDP -5.8 1.6 -4.6 -1.7Interest payments/GDP 3.4 0.7 3.0 3.0Total debt/GDP 33.3 33.0 48.3 51.3Total debt service/exports 81.9 21.1 76.4 70.2Present value o f debt/GDP .. .. 52.6 58.4Present value o f debt/exports .. .. 334.2 ..

1982-92 1992-02 2001 2002 2002-06(average annual growth)

BrazilP R IC ES and GOVER N M EN T F IN A N C E

1982 1992 2001 2002D o mestic prices(% change)Consumer prices 100.5 951.6 7.7 7.7Implicit GDP deflator 104.8 968.5 7.5 8.5

Go vernment f inance(% of GDP, includes current grants)Current revenue .. .. 22.7 24.1Current budget balance .. .. 3.0 3.1Overall surplus/deficit .. .. 3.8 ..

T R A D E1982 1992 2001 2002

(US$ millions)Total exports (fob) .. 35,793 58,223 60,362 Coffee .. 2,534 2,932 3,049 Soybeans .. 2,696 2,726 2,199 M anufactures .. 23,787 32,901 33,001Total imports (cif) .. 20,554 55,572 47,219 Food .. 850 1,169 1,085 Fuel and energy .. 3,069 6,276 6,281 Capital goods .. 6,335 14,808 11,593

Export price index (1995=100) 73 92 94 95Import price index (1995=100) 65 63 114 115Terms of trade (1995=100) 112 147 82 82

B A LA N C E o f P A YM EN T S1982 1992 2001 2002

(US$ millions)Exports of goods and services 21,967 38,999 67,545 69,968Imports of goods and services 24,761 25,717 72,653 61,863Resource balance -2,794 13,282 -5,108 8,105

Net income -13,510 -9,382 -19,743 -18,191Net current transfers 2 2,243 1,638 2,390

Current account balance -16,302 6,143 -23,213 -7,696

Financing items (net) 11,101 8,926 19,795 -3,570Changes in net reserves 5,201 -15,069 3,418 11,266

M emo :Reserves including gold (US$ millions) 3,994 23,754 35,866 37,823Conversion rate (DEC, local/US$) 6.52E-11 1.64E-3 2.4 2.9

EXT ER N A L D EB T and R ESOUR C E F LOWS1982 1992 2001 2002

(US$ millions)Total debt outstanding and disbursed 93,932 129,060 245,844 232,075 IBRD 2,694 7,238 7,963 7,710 IDA 0 0 0 0

Total debt service 19,215 8,647 54,322 51,636 IBRD 411 1,913 1,362 1,518 IDA 0 0 0 0

Composition of net resource flows Official grants 24 38 81 0 Official creditors 966 -936 2,742 916 Private creditors 7,580 5,888 -1,781 -9,541 Foreign direct investment 2,910 2,061 22,636 0 Portfo lio equity 0 1,704 2,482 0

World Bank program Commitments 1,090 1,344 1,624 1,276 Disbursements 623 581 1,639 1,384 Principal repayments 215 1,266 828 1,063

-5

-4

-3

-2

-1

0

96 97 98 99 00 01 02

C urrent acco unt balance to GD P (%)

0

25,000

50,000

75,000

96 97 98 99 00 01 02

Exports Imports

Expo rt and impo rt levels (US$ mill.)

0

5

10

15

20

97 98 99 00 01 02

GDP def lator CPI

Inf lat io n (%)

G: 23,395

A: 7,710

D: 17,722

C: 20,827

F: 152,327

E: 10,094

C o mpo sit io n o f 2002 debt (US$ mill.)

A - IBRDB - IDA C - IM F

D - Other mult ilateralE - BilateralF - PrivateG - Short-term

95

Annex 15: Map IBRD 35778


35°00' 34°50'

35°00' 34°50'35°10'

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IBRD 35778

NOVEMBER 2007

R E C I F E

J A B O AT Ã OM O R E N O

C A B O

M O R E N O

São LourençoDa Mata

Camaragibe

N. Sra. Da Luz

Moreno

Muribeca DosGuararapes

Jucaral

Sto. Agostinho

A T L A N T I C

O C E A N

Capibaribe

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KILOMETERS

BRAZIL

RECIFE URBAN DEVELOPMENT ANDSOCIAL INCLUSION PROJECT

(CAPIBARIBE MELHOR)

PROJECT AREA: CAPIBARIBE MELHOR

SELECTED TOWNS

RIVERS

BUILT-UP AREAS

MUNICIPAL BOUNDARIES

INTERNATIONAL BOUNDARIES

This map was produced by the Map Design Unit of The World Bank. The boundaries, colors, denominations and any other informationshown on this map do not imply, on the part of The World BankGroup, any judgment on the legal status of any territory, or anyendorsement or acceptance of such boundaries.

ATLANTICOCEAN

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BRAZIL

BOLIVIA

CHILE

ARGENTINA

PERU

COLOMBIA

R.B. deVENEZUELA

URUGUAY

GUYANASURINAME

French Guiana(Fr)

BRASILIA

PARAGUAY

Recife

Pernambuco