World Bank Document€¦ · Report No: ICR0000972 IMPLEMENTATION COMPLETION AND RESULTS REPORT (IBRD-72180 - 73860) ON A LOAN IN THE AMOUNT OF EUR427.20 MILLION (US$505.05 MILLION

Document of The World Bank

Report No: ICR0000972

IMPLEMENTATION COMPLETION AND RESULTS REPORT (IBRD-72180 - 73860)

ON A LOAN

IN THE AMOUNT OF EUR427.20 MILLION

(US$505.05 MILLION EQUIVALENT)

AND A LOAN

IN THE AMOUNT OF US$601.510 MILLION

TO THE

FEDERATIVE REPUBLIC OF BRAZIL

FOR A

SERIES OF PROGRAMMATIC LOANS FOR SUSTAINABLE AND EQUITABLE GROWTH - LOANS I AND II

February 27, 2009

Finance and Private Sector Unit Brazil Country Management Unit Latin America and the Caribbean Region

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CURRENCY EQUIVALENTS

Currency Unit = Brazil Real (R$) November 5, 2008 - R$1.00 = US$0.4729 November 4, 2008 - US$1.00 = R$2.1143

FISCAL YEAR

January 1 – December 31

ABBREVIATIONS AND ACRONYMS AAA Analytic and Advisory Activity ATM Automatic Teller Machine ANATEL Telecommunications Agency ANTAQ National Water Transport Agency ANTT National Land Transport Agency AP Port Authority BCB Central Bank of Brazil BDS Business Development Services BNDES National Bank for Economic and Social Development CADE Economic Defense Council CAS Country Assistance Strategy CCI Real State Credit Bill CCT Science and Technology Council CDI Industrial Development Council CDM Clean Development Mechanism CETESB Environmental Technology Company CNI National Confederation of Industry CNJ National Justice Council CNPE National Energy Policy Council CONIT Ministerial Committee for Integration of Transport Policies COFINS Social Security Contribution CONAMA National Environmental Council CPS Country Partnership Strategy DOs Development Policy Objectives DPLs Development Policy Loans ESW Economic and Sector Works GCR Global Competitiveness Report GDPL1 First Programmatic Loan for Sustainable and Equitable Growth GDPL2 Second Programmatic Loan for Sustainable and Equitable

Growth GDP Gross Domestic Product ICCC Brazilian Inter-ministerial Commission for Global Climate

Change ICR Implementation Completion Report IRI International Roughness Index

ISR Implementation and Results Report IFC International Finance Corporation IGC Corporate Governance Index IMF International Monetary Fund IRB Brazilian Reinsurance Institute MCT Ministry of Science and Technology MDIC Ministry of Development, Industry and International Trade MF Ministry of Finance MIPEM Micro and Small Enterprises PASEP Public Employee Asset Formation Program PD Program Document PDOs Program Development Objectives PNMPO National Program of Oriented Productive Microcredit PPA Multi-Year Plan PPP Public-Private Partnership PRONAF National Program for Family Agriculture R&D Research and Development RTGS Real Time Gross Settlement System S&T Science and Technology SEAE Economic Monitoring Secretariat SELIC Clearance and Trustee System SEP Special Secretariat for Ports SME Small and Medium Enterprises SNDCT National System of Scientific and Technological Development SNUC National Protected Areas Law SNV National Transport System SPB Brazilian Payments Clearing System SPI Strategic Investment and Planning Secretariat SRB Secretariat of the Federal Revenue SRG Secretariat for Judiciary Reform STF Constitutional Court STR Reserves Transfer System SUSEP Private Insurance Supervisor TAL Technical Assistance Loan

Vice President: Pamela Cox

Country Director: Makhtar Diop

Sector Manager: Lily Chu

Task Team Leader: Jose Guilherme Reis/ Paulo Correa

ICR Team Leader: Jose Guilherme Reis/ Mariluz Cortés

4

BRAZIL First Programmatic Loan for Sustainable and Equitable Growth

(GDPL1) and Second Programmatic Loan for Sustainable and Equitable Growth (GDPL2)

CONTENTS

Data Sheet A. Basic Information

B. Key Dates C. Ratings Summary D. Sector and Theme Codes E. Bank Staff F. Results Framework Analysis G. Ratings of Program Performance in ISRs H. Restructuring

1. Program Context, Development Objectives and Design………………………………….1 2. Key Factors Affecting Implementation…………………………………………………...7 3. Assessment of Outcomes………………………………………………………………...15 4. Assessment of Risk to Development Outcome…………………………………………..21 5. Assessment of Bank and Borrower Performance………………………………………..21 6. Lessons Learned……………………………………………………………………….…23 7. Comments on Issues Raised by Borrower/Implementing Agencies/Partners……………24 Annex 1 Bank Lending and Implementation Support/Supervision Processes……………….26 Annex 2 Beneficiary Survey Results…………………………………………………………28 Annex 3 Stakeholder Workshop Report and Results………………………………………...29 Annex 4 Summary of Borrower’s ICR and/or Comments on Draft ICR…………………….30 Annex 5 Comments of Cofinanciers and Other Partners/Stakeholders………………………31 Annex 6 List of Supporting Documents……………………………………………………...32 Annex 7 Summary Matrix of GDPL1………………………………………………………..33 Annex 8 Summary Matrix of GDPL2………………………………………………………..35 Annex 9 Matrix of Government Growth Program…………………………………….……..37 Annex 10 Map………………………………………………………………………….…….46

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A. Basic Information Program 1

Country Brazil Program Name

Brazil First Programmatic Loan for Sustainable and Equitable Growth

Program ID P080827 L/C/TF Number(s) IBRD-72180 ICR Date 03/04/2009 ICR Type Core ICR

Lending Instrument PSL Borrower GOVERNMENT OF BRAZIL

Original Total Commitment

USD 505.1M Disbursed Amount USD 516.2M

Implementing Agencies Ministry of Finance Cofinanciers and Other External Partners Program 2

Country Brazil Program Name Second Programmatic Sustainable and Equitable Growth Loan

Program ID P095675 L/C/TF Number(s) IBRD-73860 ICR Date 03/04/2009 ICR Type Core ICR

Lending Instrument DPL Borrower BRAZILIAN FEDERAL GOVERNMENT--MF

Original Total Commitment

USD 601.5M Disbursed Amount USD 150.0M

Implementing Agencies Ministry of Finance Cofinanciers and Other External Partners B. Key Dates Brazil First Programmatic Loan for Sustainable and Equitable Growth - P080827

Process Date Process Original Date Revised / Actual Date(s)

Concept Review: 06/19/2003 Effectiveness: 06/21/2004 Appraisal: 12/18/2003 Restructuring(s): Approval: 02/19/2004 Mid-term Review: Closing: 12/31/2004 12/31/2004

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Second Programmatic Sustainable and Equitable Growth Loan - P095675

Process Date Process Original Date Revised / Actual Date(s)

Concept Review: 12/01/2005 Effectiveness: 12/18/2007 Appraisal: 02/15/2006 Restructuring(s): Approval: 06/06/2006 Mid-term Review: Closing: 06/30/2008 06/30/2008 C. Ratings Summary C.1 Performance Rating by ICR Brazil First Programmatic Loan for Sustainable and Equitable Growth - P080827 Outcomes Moderately Satisfactory Risk to Development Outcome Moderate Bank Performance Satisfactory Borrower Performance Satisfactory Second Programmatic Sustainable and Equitable Growth Loan - P095675 Outcomes Moderately Satisfactory Risk to Development Outcome Moderate Bank Performance Satisfactory Borrower Performance Satisfactory

C.2 Detailed Ratings of Bank and Borrower Performance (by ICR) Brazil First Programmatic Loan for Sustainable and Equitable Growth - P080827

Bank Ratings Borrower Ratings Quality at Entry Moderately Satisfactory Government: Satisfactory

Quality of Supervision: Satisfactory Implementing Agency/Agencies: Satisfactory

Overall Bank Performance Satisfactory Overall Borrower

Performance Satisfactory


Bank Ratings Borrower Ratings Quality at Entry Moderately Satisfactory Government: Moderately Satisfactory

Quality of Supervision: Satisfactory Implementing Agency/Agencies: Satisfactory

Overall Bank Performance Satisfactory Overall Borrower

Performance Satisfactory

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C.3 Quality at Entry and Implementation Performance Indicators Brazil First Programmatic Loan for Sustainable and Equitable Growth - P080827

Implementation Performance Indicators QAG Assessments

(if any) Rating:

Potential Problem Program at any time (Yes/No):

No Quality at Entry (QEA) None

Problem Program at any time (Yes/No): No Quality of

Supervision (QSA) None

DO rating before Closing/Inactive status Satisfactory


Implementation Performance Indicators QAG Assessments

(if any) Rating:

Potential Problem Program at any time (Yes/No):

Yes Quality at Entry (QEA) None

Problem Program at any time (Yes/No): Yes Quality of

Supervision (QSA) Unsatisfactory

DO rating before Closing/Inactive status Satisfactory

D. Sector and Theme Codes Brazil First Programmatic Loan for Sustainable and Equitable Growth - P080827

Original Actual Sector Code (as % of total Bank financing) Banking 25 25 Central government administration 10 10 General industry and trade sector 35 35 General transportation sector 25 25 Law and justice 5 5

Theme Code (Primary/Secondary) Infrastructure services for private sector development Primary Primary Legal institutions for a market economy Secondary Secondary Regulation and competition policy Primary Primary Tax policy and administration Secondary Secondary Trade facilitation and market access Primary Primary

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Original Actual Sector Code (as % of total Bank financing) Central government administration 8 8 General finance sector 22 22 General transportation sector 26 26 Law and justice 20 20 Other domestic and international trade 24 24

Theme Code (Primary/Secondary) Infrastructure services for private sector development Primary Primary Regulation and competition policy Secondary Secondary Standards and financial reporting Secondary Secondary Technology diffusion Secondary Secondary Trade facilitation and market access Primary Primary E. Bank Staff Brazil First Programmatic Loan for Sustainable and Equitable Growth - P080827

Positions At ICR At Approval Vice President: Pamela Cox David de Ferranti Country Director: Alexandre V. Abrantes Vinod Thomas Sector Manager: Lily L. Chu Susan G. Goldmark Task Team Leader: Jose Guilherme Reis Paulo Guilherme Correa ICR Team Leader: Jose Guilherme Reis ICR Primary Author: Mariluz Cortes-Gorman Second Programmatic Sustainable and Equitable Growth Loan - P095675

Positions At ICR At Approval Vice President: Pamela Cox Pamela Cox Country Director: Alexandre V. Abrantes John Briscoe Sector Manager: Lily L. Chu Susan G. Goldmark Task Team Leader: Jose Guilherme Reis Paulo Guilherme Correa ICR Team Leader: Jose Guilherme Reis ICR Primary Author: Mariluz Cortes-Gorman

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F. Results Framework Analysis Program Development Objectives (from Program Document) The main objective of this program is to support sustainable and equitable economic growth in Brazil. The program will raise Brazil's sustainable economic growth potential, thus increasing employment and reducing poverty. In logistics, key actions will cut customs release times by 40 percent, cut container handling costs in ports by 10 percent, lower road transport costs by about 5 percent and increase non-road transportation by 10 percent. Improvements to the business environment will increase public-private partnership, increase cartel prosecutions by the competition authorities, halve the time to register a business in selected cities, and increase the speed of resolution and the recovery value of insolvent enterprises under the new bankruptcy law. Financial sector reforms will reduce bank overheads, increase financial access and reduce credit risk, accelerate the expansion of the insurance industry, and increase access to bank accounts from 95 million to 103 million people by the end of the program. In innovation, a new innovation law will increase technology transfer contracts between universities and the private sector by 20 percent and increase the private share in R&D by 10 percentage points. Supported improvements in the Clean Development Mechanism will generate at least US$100 million in carbon credits. Revised Program Development Objectives (as approved by original approving authority) N/A (a) PDO Indicator(s) Brazil First Programmatic Loan for Sustainable and Equitable Growth - P080827

Indicator Baseline Value

Original Target Values (from

approval documents)

Formally Revised Target Values

Actual Value Achieved at

Completion or Target Years

Indicator 1 : Reducing Logistics Costs # Improve Customs Effectiveness

Value (quantitative or Qualitative)

Custom selectivity levels of 40%

Selectivity levels cut from 40% to 30%, and average gross release time for merchandise cut by 20%

No

Selectivity levels were cut to 30%. Average gross release time for merchandise was cut by 20%

Date achieved 12/18/2003 12/31/2004 12/31/2004 12/31/2004 Comments (incl. % achievement)

100% Average release time for merchandise decreased form 5 to 4 days for imports and from 2 to 1 day for exports.

Indicator 2 : Reducing Logistics Costs # Reduce Port Costs and Delays Value (quantitative or Qualitative)

Actions to increase efficiency of docks taken

Port Productivity Improvement Plan approved

No Agenda Portos approved

Date achieved 12/18/2003 12/31/2004 12/31/2004 12/31/2004 Comments 100% Approval of Agenda Portos was an important step in increasing port

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(incl. % achievement)

efficiency.

Indicator 3 : Reducing Logistics Costs - Reduce Transport Costs on Federal Roads Network


Output based maintenance contracts on 15% of federal road networks

Output based maintenance/rehab contracts on 30% of federal road networks

No

Output based maintenance/rehab contracts on 30% of federal road networks


100%

Indicator 4 : Reducing Logistics Costs - Foster Multi-Modal Transport


Geographical restructuring of railways underway

10% increase in non-road transport share

No

Geographical restructuring of railway concessions completed


Increase in non-road transport share was a medium term objective.

Indicator 5 : Improve the Business Environment # Strengthen Infrastructure Regulation


PPP Law submitted to Congress

PPP Law approved by Congress and Career Development Plan for Regulators submitted to Congress

No

PPP Law and Career Dev. Plan Law approved by Congress


100% Both laws were approved by Congress in December 2004.

Indicator 6 : Improve Business Environment # Enhance Competitiveness Environment and Strengthen Corporate Insolvency Framework (Bankruptcy and Antitrust regimes)


Amendment to Antitrust Law reviewed by inter-ministerial committee

Amendment to Antitrust Law submitted to Congress

No Amendment not sent to Congress


Some improvements made in enhancing competitiveness environment. Pre merger notification to CADE has been made mandatory and CADE has investigated and decided on several mergers and acquisitions.

vii

Indicator 7 : Improve the Business Environment # Simplify Entry and Business Operations


Constitutional amendment approved to unify tax collection at federal, state and municipal levels for micro and SMEs

Law regulating the unification of tax collections approved by Congress

No

Law creating the Simples Nacional approved by Congress


This law, approved by Congress in December 2006, unifies tax regime for micro and SMEs. Tax exemption for capital goods impo rts of exporting firms also approved.

Indicator 8 : Improve the Business Environment # Improve Judicial Contract Enforcement


New Bankruptcy Law and Tax Code Amendments passed by lower House

New Bankruptcy Law and Tax Code Amendments enacted

No

New Bankruptcy Law and Tax Code Amendments enacted


100% Both laws were approved by Congress in December 2004. Training programs for courts started.

Indicator 9 : Enhance the Efficiency and Depth of the Financial Sector # Increase Financial Competition


Draft Complementary Law extending application of antitrust to Banking submitted to Congress

Effectiveness of Banking Competition Law

No

The Banking Sector Bankruptcy Law under discussion in Congress


The Banking Sector Bankruptcy Law was approved by Congress in February 2005.

Indicator 10 : Enhance the Efficiency and Depth of the Financial Sector -Sound Fundamental Legislation and Systemic Risk Control


New large value payments installed and operating

Blueprint prepared for second phase payments form (retail and small value payments)

No

Blueprint prepared for second phase payments form (retail and small value payments)


Also, evaluation of residual risk in the payments system completed.

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Indicator 11 : Enhance the Efficiency and Depth of the Financial Sector #Mobilize Long-Term Resources in Insurance Sector


Reinsurance monopoly held by IRB

Permission for provision of reinsurance extended to new entrants

No

Reform of the reinsurance sector submitted to Congress


Reform of the reinsurance sector approved by Congress in 2007 opening the door to private reinsurers

Indicator 12 : Enhance the Efficiency and Depth of the Financial Sector # Improve Efficient Access to Financial Services for the Poor and SM Es


Provisional Law and Resolution passed to expand financial access to banks

Not specified No

Enactment and regulation of payroll deduction loans.


Payroll deduction loans reached R$6 billion in 2004.

Indicator 13 : Increase Innovation Capacity - Increase Public R&D Effectiveness Value (quantitative or Qualitative)

Innovation Law sent to Congress

Innovation Law approved by Congress

No Innovation Law approved by Congress


100% The National Innovation Law was approved in December 2004. The legal framework for direct subsidy to private sector R &D enacted.

Indicator 14 : Increase Innovation Capacity # Foster Private Innovation


No evaluation of operations and management procedures of Sector Funds

Evaluation completed of operations and management procedures of Sector Funds and FINEP

No

Regulation of Fondo Verde Amarelo and other mechanisms to support R&D introduced


Also, tax breaks and tax incentives for private R&D developed.

Indicator 15 : Increase Innovation Capacity # Create Innovation in Environmental Markets


Kyoto Protocol ratified and ICCC operational

ICCC approval and monitoring system financially self sustainable

No ICCC approval and monitoring system operational

Date achieved 12/18/2003 12/31/2004 12/31/2004 12/31/2004 Comments

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(incl. % achievement) Second Programmatic Sustainable and Equitable Growth Loan - P095675



approval documents)

Formally Revised Target Values



Indicator 1 : Reducing Logistics Costs - Improve Customs Effectiveness


Custom selectivity levels of 30%

Selectivity levels cut to 20%, and average net release time of merchandise further cut by 10%

No

Average time for custom clearance for imports 2 days and for exports 13.5 hours


100% The time needed to complete an export decreased from 18 days in 2007 to 14 days in 2008 and the number of days to compl ete an import decreased from 24 to 19 days in the same period (Doing Business 2009).

Indicator 2 : Reducing Logistics Costs - Reduce Port Costs and Delays


Actions to increase efficiency of dock companies taken

Average cargo transit time through ports reduced from 13.8 to 10 days (imports) and from 8.4 days to 5 days (exports)

No

Average port and terminal handling reduced to 4 days for imports and to 3 days for exports


100% Average port and terminal handling as reported in Doing Business 2009

Indicator 3 : Reducing Logistics Costs - Reduce Transport Costs on Reducing Logistics Costs - Federal Road Network


Further 5% of the remaining federal network under concession and government plan for maintenance of federal network establish ed

Further 5% of the remaining federal network under concession

No

The percentage of output based maintenance contracts for the federal road network increased from 15% in 2003 to 37% in 2007.


100% In addition, 49.5% of the federal road network is considered to be in good conditions; average road transport cost decr eased by 11% between 2003 and 2007.

x

Indicator 4 : Reducing Logistics Costs - Foster Multi-Modal Transport


High concentration on road transportation

10% increase in non-road transportation share

No Not met


0% Brazil#s transport continues to be mostly based on road networks.

Indicator 5 : Improve the Business Environment - Strengthen Infrastructure Regulation


Institutional framework for PPPs projects not consolidated

Institutional framework for PPPs projects consolidated

No

Institutional framework for PPPs projects consolidated


Several PPP projects have been approved at the state level. However, up to now no PPP projects have been approved at the fed eral level.

Indicator 6 : Improve the Business Environment - Facilitating Entry and Exit


Time needed to register a firm of 152 days

Time needed to register a firm reduced to 76 days in pilot cities

No

Time needed to register a firm reduced to less than 76 days in selected cities


Minas Gerais has reduced time needed to start a business to 10 days and Sao Paulo has decreased the number of days to start a business from 152 to 50.

Indicator 7 : Improve the Business Environment - Simplify Entry and Business Operation


No synchronization of tax collection systems implemented in key selected states

Synchronization of tax collection system implemented in key selected states

No

Simples Nacional a special unified tax regime for micro and SMEs has been implemented in most states and municipalities.


Tax collections through Simples Nacional increased from R$8,340 million in 2007 to R$24, 187 million in 2008.

xi

Indicator 8 : Improve the Business Environment - Improve Judicial Contract Enforcement


PL 90/2005 (Sumula Impeditiva) not approved and Conselho Nacional de Justica not consolidated

PL 90/2005 (Sumula Impeditiva) approved and Conselho Nacional de Justica consolidated

No

Constitutional Amendment No. 45 approved (Sumula Vinculante) and Conselho Nacional de Justica consolidated


100% Appeals rate decreased by 5 percent annually and clearance rate increased by 10% annually in civil cases. Number of pro cedural recourses and extraordinary recourses seen by the Supreme Federal Court slightly reduced.

Indicator 9 : Enhance the Efficiency and Depth of the Financial Sector - Increase Financial Competition


Top 4 banks concentrate 56% of the deposits (2001)

Concentration in deposits of top 4 banks reduced by 10 percentage points

No

The share of deposits in the top four banks has remained almost constant


However, evidence of increased competition in the banking system is the fall in bank spreads from 41.3% in December 2003 to 28.4% in December 2007 and the decline in directed (earmarked) lending.

Indicator 10 : Enhance the Efficiency and Depth of the Financial Sector -Sound Fundamental Legislation and Systemic Risk Control


Non-implement key actions of BCB report on rationalization of retail payment systems, especially as regards interconnection o f ATM and POS networks and ineffective use of credit registries

Implemented key actions of BCB report on rationalization of retail payment systems, especially as regards interconnection of ATM and POS networks and effective use of credit registries

No

BCB has made significant progress in minimizing risks in the payments system, but inter-linkage of credit registries has not been established.


The share of transactions performed using credit and debit cards increased by 20% between 2006 and 2007.

xii

Indicator 11 : Enhance the Efficiency and Depth of the Financial Sector -Mobilize Long-Term Resources in Insurance Sector


Reform of the reinsurance sector submitted to Congress

Reform of the reinsurance sector advanced

No

Reform of the reinsurance sector approved by Congress in 2007

Date achieved 05/03/2006 12/31/2007 12/31/2007 06/30/2008

Comments (incl. % achievement)

100% The reform of the reinsurance sector opened the door to private reinsurers 35 reinsurance companies have been registere d with SUSEP. Of these, 3 local have been authorized and 11 foreign have been approved to operate in Brazil.

Indicator 12 : Enhance the Efficiency and Depth of the Financial Sector - Improve Efficient Access to Financial Services for the Poor and S MES


Regulation on positive information credit reporting non-existent (Cadastro Positivo)

Regulation on positive information credit reporting (Cadastro Positivo) issued

No

Regulation on positive information credit reporting (Cadastro Positivo) has been issued.


Increase in payroll deduction loans from R$6 billion in 2004 to R$40.3 billion in 2008. Portfolio balances of R$368.76 milli on in micro-credits were provided by the financial sector during Q1 2008

Indicator 13 : Increase Innovation Capacity - Increase Public R&D Effectiveness


Innovation Law not implemented by selected federal universities and public research centers

Innovation Law implemented by selected federal universities and public research centers

No

The Ministry of Science and Technology has taken steps to rationalize the use of resources available to finance R&D activ ities with public resources through the sector funds


The share of privately funded R&D increased from 41.3 % in total R&D in 2003 to 49.9% by end 2006.

Indicator 14 : Increase Innovation Capacity - Create Innovation in Environmental Markets


Executive Secretariat of ICCC not equipped according to increased responsibility and volume of projects

Executive Secretariat of ICCC equipped according to increased responsibility and volume of projects

No

ICCC secretariat is fully operational. It has approved CDM projects of over US$100 million in sales of carbon credits

Date achieved 05/03/2006 12/31/2007 12/31/2007 06/30/2008 Comments A total amount of 130.2 million tons CO2 eq. is expected to be reduced during

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the first commitment period with an estimated benefit for the Brazilian economy of about US$780 million.

Indicator 15 : Increase Innovation Capacity - Foster Private Innovation


Tax Breaks and tax incentives for private R&D Development

10% point increase in privately funded R&D share in total R&D expenditures

No

Share of Private R&D increase from 41.3% in total R&D in 2003 to 49.9% by end 2006


Brazil has the highest private R&D expenditure as a percentage of total R&D among Latin American countries.

(b) Intermediate Outcome Indicator(s) Brazil First Programmatic Loan for Sustainable and Equitable Growth - P080827



approval documents)

Formally Revised

Target Values



Indicator 1 : N/A Value (quantitative or Qualitative)

Date achieved Comments (incl. % achievement)


Date achieved Comments (incl. % achievement)




approval documents)

Formally Revised

Target Values




Date achieved Comments

xiv


G. Ratings of Program Performance in ISRs Brazil First Programmatic Loan for Sustainable and Equitable Growth - P080827

No. Date ISR Archived DO IP

Actual Disbursements (USD millions)

1 06/08/2004 Satisfactory Satisfactory 0.00 Second Programmatic Sustainable and Equitable Growth Loan - P095675

No. Date ISR Archived DO IP

Actual Disbursements (USD millions)

1 06/23/2006 Satisfactory Satisfactory 0.00 2 11/28/2006 Satisfactory Moderately Satisfactory 0.00 3 05/08/2007 Satisfactory Moderately Satisfactory 0.00

4 06/06/2007 Satisfactory Moderately Unsatisfactory 0.00

5 12/20/2007 Satisfactory Moderately Unsatisfactory 0.00

6 05/23/2008 Satisfactory Satisfactory 149.63 H. Restructuring (if any)

1

1. Program Context, Development Objectives and Design

This implementation Completion Report (ICR) describes the results of a series of two DPLs: the First Programmatic Loan for Sustainable and Equitable Growth (GDPL1) and the Second Programmatic Loan for Sustainable and Equitable Growth (GDPL2). Together they comprise a programmatic lending operation spanning four years of the Lula da Silva Administration. The results of the first operation were presented in a Simplified ICR

1

. These results will be briefly reviewed in this document, as well as in the context of describing the program results. The last operation will be described in more detail in this document as will the full program results.

1.1 Context at Appraisal Context at Appraisal of GDPL1

During the 1990s Brazil had laid the institutional foundations for a sounder macroeconomic management and better inflation control. High inflation had been eradicated by the end of the decade and the combination of inflation targeting, fiscal balance, and a floating exchange rate regime had created a stable macroeconomic base, the permanence of high interest rates notwithstanding. Although efforts had begun to make public spending more effective in attacking poverty, economic growth during the decade had remained at a disappointing 1 percent and national unemployment had reached record levels of around 13 percent. The “first generation” structural reforms were unable to foster solid growth. Public investment had fallen to about 2.6 percent of GDP and private investment had remained weak, partly because of the uncertain investment climate particularly in relation to Government regulation and microeconomic impediments to investment, innovation, and productivity. Fiscal rigidities and high Government consumption leaved little room for public investments, especially in infrastructure. Government deficits continued to crowd private-sector borrowing out of credit markets, and the financial sector was still highly regulated and dominated by large public sector institutions. Brazil’s administration of President Lula da Silva combined a clear commitment to social justice with a sound economic program. The new administration had taken office on January 2003 with the strong support of social movements. Faced with low investor confidence, currency depreciation, and inflation, the administration increased interest rates and cut spending. As a result, inflation and inflationary expectations were brought in line with targets set by the Central Bank of Brazil (BCB). During 2003, the Government introduced a number of reforms including initiating the reform of the public-sector social security system and the rationalization of Brazil’s system of social assistance transfers. The Government’s economic strategy--the Growth Agenda—included growth determinants such as macroeconomic stability, education, institutions and governance. At the core of this strategy are a number of microeconomic measures and institutional reforms--The Growth Program (see Annex 9)--to improve economic efficiency and stimulate investments and savings. The GDPL1 was approved in February 2004, to support a subset of microeconomic, institutional and policy reforms within the Growth Program in the areas of logistics, business environment, financial efficiency and depth, and knowledge and innovation.

1 Implementation Completion Report on a Loan in the Amount of EURO 427.2 Million to the Federative Republic of Brazil for the First Programmatic Loan for Sustainable and Equitable Growth. Report N. 32604-BR.

2

Context at Appraisal of GDPL2

By early 2006, macroeconomic fundamentals of the Brazilian economy had greatly improved. The austere macro-fiscal policy had generated an impressive improvement of market sentiment with regard to the sustainability and growth prospects of the Brazilian economy. The primary surplus grew from 3.9 percent of GDP in 2002 to 4.9 percent in 2005. Government had used the primary surplus as a device to assure Brazil’s credibility in financial markets and guarantee the sustainability of public debt. The responsible fiscal stance resulted in significant fall of public debt as share of GDP and the improvement of debt composition. Inflation fell from 12.5 percent in 2002 to 5.7 percent in 2005. The realignment of inflationary expectations to the BCB target zone heralded a substantial reduction of the interest rate from 26.5 percent in February 2003 to 16 percent in April 2004. The value of exports almost doubled from 2002 to 2005 as a result of high commodity prices and diversified industrial exports. The current account of the balance of payments reached a surplus of 0.8 percent of GDP in 2003 and 1.8 percent of GDP in 2005. External debt sustainability indicators were the best in the last 30 years. Sovereign spreads fell from 2,400 basis points in October 2002 to below 300 basis points in 2005. The robust trade and current account balances promoted an appreciation of the exchange rate from RS$3.60 to the US dollar to RS$2.25 over the same period. The improvement of macroeconomic conditions allowed Brazil not to renew the stand-by arrangement with the IMF and to make an early repayment of its entire outstanding obligations in January 2006.

While Brazil had begun to pick up the returns of its sound macroeconomic policy in terms of poverty reduction, growth rates had remained below expectations. The government program of well targeted conditional cash transfers and the recovery of labor income were having the desired effect in improving income distribution, as indicated by the fall of the Gini index from 0.59 in 2002 to 0.57 in 2004, and the drop in poverty from 32.9 percent in 2002 to 31.7 percent in 2004. However, growth rates remained disappointing compared with other parts of the world and even other countries in the region. After the 2003 adjustment, the Brazilian economy had experienced an expansionary period and the growth rate increased from 0.5 percent in 2003 to 4.9 percent in 2004 (the highest rate in ten years). But the tight monetary and fiscal policies decelerated the growth rate to around 2.9 percent in 2005, and the expectation was that the growth rate for 2006 would only recover to around 3 to 4 percent. By early 2006, the vast majority of key conditions established for a second DPL operation had been met, including the approval of important legislative pieces. The GDPL2 was approved in June 2006.

Structural/sector background The Government’s Growth Program addressed constraints to Brazil’s growth in a number of microeconomic areas, including four areas supported by the Growth DPL series: (i) logistics, (ii) business environment, (iii) financial efficiency and depth, and (iv) knowledge and innovation. Logistics

Logistic costs accounted for the largest share of doing business in Brazil. Conservative estimates suggested that avoidable logistics costs added more than US$1.2 billion per year to the costs of external trade and at least US$1.3 billion per year to the costs of domestic inter-regional trade in corridors with available rail services, particularly in poorer regions. High logistics costs resulted from the combination of four factors: (i) excessive delays for customs clearance.Clearance time on import and exports averaged 5 and 2 days, respectively, more than twice the international averages due to the excessive focus on revenue collection rather than on trade facilitation; (ii) poor conditions of the road network. Inadequate road maintenance for many

3

years was due to fiscal and institutional limitations; (iii) inefficient port services. The Port Modernization Law was passed in 1993, but the reform of port services remained incomplete; and, (iv) insufficient development of multimodal transportation systems. Freight transport market was dominated by trucking over long distances instead of low-cost coastal shipping or rail-based options.

Business Environment

Insufficient investment in infrastructure due to limitations in the regulatory framework. Investment in infrastructure as a share of GDP had remained under 1 percent for much of the last decade. Low investment rates resulted from the incompleteness of the legal environment in selected sectors, the inappropriateness of concession designs; the weaknesses of regulatory governance, and the high rate of renegotiation of contracts. The least developed regulatory framework was in the water and sanitation sector, but some major progress was still required to consolidate the legal framework in the electricity sector and increase market opportunities in the gas and railway industries. Cumbersome procedures for obtaining environmental licenses were a source of risk, particularly in the energy and road sectors. Ill-defined property rights and liabilities in concession contracts and the absence of an appropriate basis for efficient public-private partnerships in infrastructure projects were also obstacles for higher levels of investment.

Unfriendly investment environment due to weaknesses in the legal framework and its enforcement. The main problems included: (i) Weaknesses in competition law enforcement. Brazil’s Competition Law broadly resembles competition laws in other countries, but enforcement has been weak due to the complex enforcement of merger control provisions, institutional fragmentation with three Government bodies involved in competition law enforcement, and lack of a stable corps of qualified professionals; (ii) Weaknesses in the framework for creditor rights and slow contract enforcement by the Judiciary. Although the legislation for corporate insolvency provided for both reorganization in the case of insolvency and for liquidation processes, the system was characterized by weak creditor protection and few meaningful rehabilitation options. Poorly designed procedures hindered turnaround of viable enterprises in distress and impeded the efficient functioning of credit markets. In addition, difficulties associated with judicial debt collection, due to procedural requirements, weakened creditors’ rights and rendered credit more expensive; and (iii) Government-generated entry barriers. These included unduly complicated business registration processes, costly and time-consuming labor regulations, restrictive standards and registration procedures, and difficulties in acquiring and developing land or receiving environmental licensing, at the federal, state and municipal levels. The cumulative effect of these requirements removed the incentive to formally register a business, leading to a vicious circle of informality and contributed to lower productivity Financial Markets

Scarce and expensive credit for individuals and SMEs. Although financial depth in Brazil, gauged by the ratio of credit to GDP, was somewhat greater than in other major countries in the region, it was considerably lower than in several emerging markets, due in part to the “crowding out” of bank intermediation by Government borrowing. Additionally, about 40 percent of total credit in the banking system was “earmarked”, at non-competitive rates, for selected sectors such as housing and agriculture. Credit spreads (an average of 40 percent per annum) were among the highest in the world. In this context, small and medium enterprises (SMEs) and low income individuals had limited access to financing. The bulk of financing to SMEs came from public banks or microfinance institutions indirectly supported by public banks at subsidized rates.

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Important complementary reforms were still needed to strengthen financial intermediation. The amendment in 2003 of Article 192 of Brazil’s Constitution paved the way for a series of reforms by allowing the individual treatment of different issues by appropriate complementary laws. Specific areas for further reform included: (i) the legal framework for systemic risk control and bank failure resolution. The failure of one medium-sized bank prior to appraisal of GDPL1 showed that the legal framework for systemic risk control and bank failure resolution was still inadequate and needed upgrading to ensure maximum protection of small depositors and retail investors; (ii) the retail payments system and credit information systems. Although a Real Time Gross Settlement System (RTGS) had been launched in 2002, there was considerable room for improvement in the efficiency of retail payment instruments and systems. In the area of credit information regulation was needed for the enhanced use of positive credit information to expand coverage and facilitate access to credit to low income individuals and SMEs; (iii) competition and antitrust oversight in the banking sector. Market structure and barriers to entry were a constraint to a competitive and affordable provision of financial services to the population at large; and (iv) the capital markets. The contribution of pension funds and insurance companies to financial intermediation and growth had yet to achieve its potential due, among other reasons, to their moderate size relative to banks, under-funding problems in closed pension funds, and excessive financing of the public sector (which accounted for roughly half of their portfolios). A large share of resources in the insurance industry continued to be channeled to finance the public sector. One reason for limited technical skills and product innovation was the Government’s reinsurance monopoly through the Brazilian Reinsurance Institute (IRB).

Knowledge and Innovation

Brazil has been a pioneer of science and technology policies in Latin America, but overall technological performance measures of private sector innovation and technology absorption were not as good as expected. In 1998, Brazilian R&D spending as a share of GDP was the largest in Latin America and spending per researcher was in line with other countries in the same income level. But federal R&D spending declined, on average, 3.1 percent per year between 1996 and 2002. R&D effectiveness measured by the ratio of US patents to R&D expenditures and the number of licensing agreements was also low by international standards. Low private-sector innovation levels were caused more by the low effectiveness of R&D expenditures than by a shortage of inputs. Low innovative outputs were the result of misaligned incentives for public R&D and weak Intellectual Property Rights (IPR) protection. Seventy-five percent of the Brazilian R&D efforts were aimed at “general knowledge improvement” as opposed to any specific activity, an emphasis on basic research that is much higher than that found in countries with arguably comparable cultural heritage. Cost-effective output-oriented research was not duly rewarded and the transfer of public-sector generated knowledge to the private sector for commercial application was not encouraged. Public resources allocated through “Sector Funds” could not be directly transferred to the private sector to support R&D. On the other hand, low private R&D investments was due to low expected net private returns, since IPR laws in Brazil were still inadequate despite recent improvements. Also, Innovating in Environmental Markets was at an incipient stage. Brazil was a signatory of the Kyoto Protocol. The Brazilian Inter-ministerial Commission for Global Climate Change (ICCC), the Designated National Authority responsible for the approval and promotion of CDM (Clean Development Mechanism) needed restructuring to improve efficiency, and its approval process had to be streamlined and the monitoring system improved, in order to take full advantage of market potentials.

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Rationale for Bank Assistance The Program of Growth DPLs was a key part of the Country Assistance Strategy (CAS) for 2004-2007, discussed by the Board on December 9, 2003. The CAS proposed Bank support towards a more equitable, sustainable and competitive Brazil, built upon a foundation of good governance and macroeconomic stability. The Growth Program was a centerpiece of the Bank’s planned support to Brazil and one of the four thematic pillars of the CAS2. This series of programmatic loans supported the third pillar of the CAS “A More Competitive Brazil”, which pursued a more competitive Brazil through reduced logistics and financial costs; increased investment through better regulation; and increased productivity through innovation. The series of programmatic loans also supported the sustainability and equity pillars of the CAS by strengthening natural resource management through strengthened environmental licensing services, and through innovative market development initiatives such as the CDM and carbon trading under the Kyoto protocol. In addition, the program pursued more equitable growth through measures to ensure access of the poor to financial services. In assessing its support for the Growth Program, the Bank had concluded that the program was politically feasible due to the Government’s emphasis on consensus building in support of the reforms, and that the reforms were consistent with sound macroeconomic management and subject to public scrutiny.

1.2 Original Program Development Objectives (PDO) and Key Indicators (as approved)

Program Development Objectives. The main objective of this program was to support sustainable and equitable economic growth in Brazil. The program would raise Brazil's sustainable economic growth potential, thus increasing employment and reducing poverty. In logistics, key actions will cut customs release times by 40 percent, cut container handling costs in ports by 10 percent, lower road transport costs by about 5 percent and increase non-road transportation by 10 percent. Improvements to the business environment will increase public-private partnership, increase cartel prosecutions by the competition authorities, halve the time to register a business in selected cities, and increase the speed of resolution and the recovery value of insolvent enterprises under the new bankruptcy law. Financial sector reforms will reduce bank overheads, increase financial access and reduce credit risk, accelerate the expansion of the insurance industry, and increase access to bank accounts from 95 million to 103 million people by the end of the program. In innovation, a new innovation law will increase technology transfer contracts between universities and the private sector by 20 percent and increase the private share in R&D by 10 percentage points. Supported improvements in the CDM will generate at least US$100 million in carbon credits. Program Design. Bank support for Brazil’s Growth Program was designed as a series of programmatic loans. In GDPL1 key next steps were established and a set of complementary measures, a critical mass of additional reform initiatives, were defined in each of the four selected reform areas: logistics, business environment, financial sector and innovation. GDPL2 was to be prepared when the vast majority of key conditions had been concluded, including the approval of important legislative pieces. GDPL2 was designed to consolidate reforms implemented in the four areas originally selected, and reinforce steps taken to improve judicial performance, a field not originally supported by the program due to its complexity. A third Growth DPL had been envisaged, but it was dropped. The Bank and the authorities decided that with a much-improved

2 The four thematic pillars of the CAS were: A More Equitable Brazil, A More Sustainable Brazil, A More Competitive Brazil and Good Governance and Public Sector Management.

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macroeconomic situation and reduced vulnerability in Brazil, the Bank should provide less financing and more knowledge services to the Federal Government and focus the majority of its funding on State programs. The Series of Growth DPLs was accompanied by a US$12.12 million Sustainable and Equitable Growth Technical Assistance Loan (Growth TAL) to support the ministries involved in the four areas of the program. Key Indicators. GDPL1 defined a result-oriented framework in which key measures (triggers), progress indicators and target outcomes were identified for each reform area. In logistics, the main targets were deep cuts in the through times in customs and ports to ease trade and improve productivity, and improvements in road maintenance. Within the business environment, an important target was to halve the average time taken to register a new business. The number of cartel prosecutions would also provide an indication of progress in improving antitrust activity. The main measures of success of financial reforms would be falling intermediation spreads and increased access to credit. In innovation, a higher share of private R&D and a value of trade under the CDM of roughly US$100 million were some of the outcome indicators. GDPL2 incorporated most of the same key progress indicators revising the target values in the areas in which the original target values had been achieved, and adding new indicators for new actions concerning facilitating entry and exit, improvement of judicial contracts, and access to financial services. The table of PDO indicators in Section F has been modified to present outcome indicators of both, GDPL1 and GDPL2 as defined in the Summary Matrices of these operations.

1.3 Revised PDO (if any, as approved by original approving authority) and Key Indicators, and Reasons/Justification The Program Development Objectives are basically the same for both Growth DPLs, although some output indicators and target values of some outcome indicators were modified and additional indicators were incorporated in GDPL2 concerning tax reform, improvement of judicial contracts, and regulation on credit reporting, reflecting new developments and Government priorities.

1.4 Original Policy Areas Supported by the Program (as approved): The Growth DPL series supported structural legal and institutional measures in four areas of Brazil’s Growth Agenda: logistics, business environment, financial efficiency and depth, and innovation. A feature of Brazil’s Growth Agenda is that it consists not only of passing laws (constitutional amendments and complementary laws), but also of (a) defining approaches to public-private interactions, (b) strengthening the institutional capacity of agencies to plan and regulate, and (c) enforcing laws and regulations consistently and predictably. This required the exercise of judgment in defining the triggers of the Growth DPLs appropriately, since there was a trade-off between insisting on “observables” such as laws or the formation of agencies, and “less tangible” measures such as the definition of an approach in a Government White Paper or the adoption of hiring norms in an agency, which taken together could be more important for economic growth than enacting new laws strictu sensu. The Growth DPL series contains a combination of these two types of action.

1.5 Revised Policy Areas (if applicable)Not Applicable.

1.6 Other significant changes

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(in design, scope and scale, implementation arrangements and schedule, and funding allocations) As indicated, the Growth DPL series had been envisaged as three consecutive operations. However, the Bank and the Brazilian authorities decided to drop the third operation on the consideration that with a much-improved macroeconomic situation and reduced vulnerability, Brazil was not in need of Bank financing and that the Bank should focus on providing knowledge services to the country. The same consideration led to a decision to disburse only US$150.0 million of the originally approved loan amount of US$601.510 million of GDPL2.

2. Key Factors Affecting Implementation and Outcomes

2.1 Program Performance. Program performance of both Growth DPLs was moderately satisfactory in the sense that a number of legal and institutional reforms were implemented in the four reform areas covered by the program and that the triggers for the GDPL2 were met. However, program performance varied among components and in some areas the reforms lacked enough depth to achieve the expected outcomes. Moreover, dropping a third operation meant that follow up actions needed to complete the reforms were not taken in some areas. The following is a summary of the program’s performance by component focusing on the prior actions met for each GDPL and the key output indicators for the program, including some intermediate indicators presented in the summary matrix of each operation. Outcome indicators are discussed in Section 3 of this report.

First Programmatic Loan for Sustainable and Equitable Growth Prior Actions Status A. Reduce Logistics Costs

1. Improve Customs Effectiveness: custom reform strategy approved. 2. Reduce transport Costs on Federal Roads Networks: Law reorganizing Federal Transport Administration approved and implemented, 9% of non-truck roads on remaining federal network transferred to state management. 3. Foster Multimodal Transport: Geographical restructuring of railway concessions underway.

Met

B. Improve Business Environment

4. Strengthen Infrastructure Regulation: Creation of land and water transport regulatory agencies (ANTT and ANTAQ). 5. Enhance the Competitiveness Environment: PPP Law submitted to Congress and Amendment to Antitrust Law approved by inter-ministerial committee. 6. Simplify Entry and Business Operations: Constitutional Amendment approved to, inter alia, unify tax collection at federal, state and municipal levels for micro and small companies, simplified procedures for companies’ registration adopted in some cities, export norms simplified by MDIC. 7. Strengthen Corporate Insolvency Framework: new Bankruptcy Law and Tax Code Amendments passed by lower house.

Met

C. Enhance the Effectiveness and Depth of the Financial Sector

8. Increase Financial Competition: Draft Complementary Law extending application of Antitrust to banking submitted to Congress. 9. Sound Fundamental Legislation and Systemic Risk Control: Constitutional Amendment (Article 192) approved, new large value payments system installed and operating successfully.

Met

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10. Mobilize Long Term Resources in Insurance Sector: regulation strengthened on asset allocation, eligibility, registration, custody and audit requirements enacted. 11. Improve Efficient Access to Financial Services to Poor and SMEs: Provisional Law and Resolutions passed to expand financial access to banks.

D. Increased Innovation Capacity to transform knowledge into Productivity Growth

12. Increase Public R&D Effectiveness: Innovation Law sent to Congress. 13. Foster Private Innovation: regulation of Fundo Verde-Amarelo and other mechanisms to support private R&D introduced. 14. Create Innovation in Environmental Markets: Kyoto Protocol ratified, ICCC operational and CDM project approval mechanism published.

Met

Second Programmatic Loan for Sustainable and Equitable Growth Prior Actions Status A. Reduce Logistics Costs

1. Improve Customs Effectiveness: selectivity levels cut from 40% to 30% and average net release time cut by 20%. 2. Reduce Port Costs and Delays: approval of Port Agenda. 3. Reduce transport Costs on Federal Road Networks: output-based maintenance/rehabilitation contracts on 30% of federal road network. 4. Foster Multimodal Transport: geographical restructuring of railway concessions completed.

Met

B. Improve Business Environment

5. Strengthen Infrastructure Regulation: PPP Law and Law on Career Development Plan for Regulators approved by Congress. 6. Facilitate Entry and Exit (Bankruptcy and Antitrust Regime):Bankruptcy Law enacted and training programs for courts started and Amendment to Tax Code enacted. 7. Simplify Entry and Business Operations: tax regime to facilitate refund of indirect taxes on acquisition or importation of capital goods by exporting firms approved. 9. Improve Judicial Contract Enforcement: Constitutional Amendment No.45 approved and Law No. 11,187/2005 approved by Congress.

Met

C. Enhance the Effectiveness and Depth of the Financial Sector

10. Sound Fundamental Legislation and Systemic Risk Control: evaluation of residual risk in the payments system completed and blue print prepared for second phase payments reform (retail payment). 11. Mobilize Long Term Resources in Insurance Sector: submission of reform of reinsurance market to Congress (later approved). 12. Improve Efficient Access to Financial Services to Poor and SMEs: regulation and enactment of payroll deduction loans.

Met

D. Increased Innovation Capacity to transform knowledge into Productivity Growth

13. Increase Public R&D Effectiveness: Innovation Law approved and legal framework for direct subsidy to private sector R&D established. 14 Foster Private Innovation: reform of Fundos Sectorais and tax breaks and tax incentives for private R&D developed.

Met

Component A. Reduce Logistic Costs.

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The Government program to reduce logistic costs focused on addressing the problems of excessive delays for customs clearance, inefficient port services, poor conditions of the road network, and insufficient development of the multimodal transport system. As shown below, some progress has been achieved in improving customs effectiveness, in roads maintenance, and in improving the ports, but less progress has been made in fostering multimodal transport. (1) Improve customs effectiveness. A prior action to GDPL1 was the approval of a customs reform strategy. Following this strategy, improvements were made in customs effectiveness with the modernization of clearing systems and of the customs administration’s management information systems. As a result, the goals of cutting selectivity levels from 40 percent to 30 percent and reducing the average release time of merchandise by 20 percent were accomplished by early 2006, before approval of GDPL2. Export procedures have been simplified, especially through the expansion of the Blue lane regime. As a result, it is faster to complete an export or an import. A customs administration modernization plan, financed under the Growth TAL was approved in October 2008. However, the customs administration modernization plan and the reengineering of customs procedures and systems are not yet fully implemented. (2) Reduce port costs and delays. The approval of the Agenda Portos, the creation of a Special Secretariat for Portos (Secretaria Especial de Portos—SEP) in September 2007, and Decree 6,620/2008 that defines policies and guidelines for the development of the port sector, are important steps setting up the stage for ports reform and infrastructure rehabilitation. Since the creation of SEP, the sector has made advances in terms of infrastructure improvements, operational performance and reduction of port handling costs. Several programs and studies for the modernization of the ports are underway such as: the National Dredging Plan (Plano Nacional de Dragagem); the General Concessions Plan (Plano Geral de Outorgas) for the concession of new public ports; and the project of a Paperless Port, to accelerate port operations. (3) Reduce transport costs on federal road network. After many years of inadequate road maintenance, the federal government has been gradually strengthening its road maintenance management capacity, establishing new criteria for the concession of federal highways, and increasing funding for road maintenance and rehabilitation. These activities have been supported by the Growth TAL. As a result, the percentage of output-based management contracts for the federal road network increased from 26 percent in 2003 to 30 percent prior to approval of GDPL2, and to 37 percent in 2007. Efforts in transport cost reduction on federal roads are being financed by the Bank’s Road Transport Project, under execution. (4) Foster multimodal transport. Government efforts to foster multimodal transport have met only partial success. The geographical restructuring of railway concessions, a key next step in GDPL1, was completed and progress was made on the regulation of the railway sector. An important objective not yet accomplished is making the Inter-Ministerial Committee for Integration of Transport Policies (CONIT) operational. There is also a need for appropriate transport regulation and investment in infrastructure to resolve connectivity bottlenecks. Component B. Improve Business Environment The Government program to improve business environment under the Growth DPL series has focused on addressing the problems of insufficient and declining investment in infrastructure, weaknesses in competition law enforcement, weaknesses in the framework for creditor rights and turnaround of viable enterprises, competitive environment damaged by Government-generated entry barriers, and slow contract enforcement by the judiciary due to procedural requirements.

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Several important laws and regulations have been passed and institutions have been created and strengthened, but it is too early for these measures to produce the expected outcome of easing doing business in Brazil. (5) Strengthen infrastructure regulation. Brazil has established 16 independent regulatory agencies, including the land and water transport regulatory agencies (ANTT and ANTAQ) created before approval of GDPL1. An important step to improve the efficiency and effectiveness of these agencies has been the passage in 2005 of a Law on Career Development Plan for Regulators. However, the regulatory system still suffers from limited institutional capacity as demonstrated by failures in the power sector and the air and ground transportation systems. The Public Private Partnership Law (PPP Law - Law 11,079/2004), approved by Congress in December 2004, creates the appropriate legal environment for joint public private investments in infrastructure. Additional legislation was passed in order to regulate other aspects of the PPPs and establish the Management Committee for the Federal PPPs. Several State Governments have also approved state legislation on PPPs and established PPP contracts3. The Bank is supporting the Government’s PPP unit through an IDF grant, as well as PPP initiatives at the state level. Although the actual implementation of PPP initiatives at the federal level is taking longer than expected, the federal government has signed a number of road concessions with the private sector, which operate as public private partnerships, without the subsidy component incorporated in PPP contracts. (6) Enhance the competitiveness environment and strengthen corporate insolvency framework (Bankruptcy and Antitrust regimes). A number of important laws affecting business environment have been approved. The Bankruptcy and Insolvency Law (Law 11,101/2005)and the corresponding changes in the Tax Code were approved by Congress in 2005. These two pieces of legislation align the bankruptcy legislation in Brazil with international best practices. Following the approval of the new law, training was provided to judges and prosecutors under an initiative by the Justice Ministry – financed by the Growth TAL – in order to enable the justice system to properly apply and enforce the new legislation. The Bankruptcy Law needs to be complemented by enforcement of a simple and effective antitrust regime. Enforcement of the 1994 Antitrust Law has been affected by the complex enforcement of merger control provisions, institutional fragmentation with three government bodies involved, and lack of a stable corps of qualified professionals. Despite these difficulties, the Conselho Administrativo de Defesa Econômica – CADE (Administrative Council for Economic Protection), one of the three bodies involved in the enforcement of the antitrust law, has been achieving successful results that contribute to the enhancement of the competitiveness environment. CADE is responsible for setting guidelines, overseeing, preventing and investigating abuses of economic power. An amendment to the Antitrust Law was sent to the Congress in 2004, but it has not been approved yet due to controversies generated by proposed institutional changes. (7) Simplify entry and business operations. Government generated entry barriers in Brazil include unduly complex business registration procedures and cumbersome regulations at the federal, state and municipal level, that make costly and time consuming to establish and operate businesses. Some success has been achieved in simplifying the tax system with the passage in December 2006 of a new tax system law for SMEs (National SIMPLES) that combines the six

3 Rio de Janeiro, São Paulo, Bahia, Rio Grande do Sul, Ceará, and Santa Catarina have approved PPP legislation. Minas Gerais has established a PPP for the expansion, rehabilitation, and maintenance of the MG-050 road. The state is now developing additional PPPs in the road sector and in other sectors. The state of São Paulo is also considerably advanced in the area of PPPs

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federal taxes with state and municipal taxes levied on consumption. This law, backed by Constitutional Amendment No. 42 on Tax Reform, is expected to lower taxes to SMEs and help reduce informality. Also export norms have been simplified and a tax regime (RECAP) was implemented in 2005 to reduce bureaucratic costs and administrative procedures related to the compensation and refund of indirect taxes (PIS-COFINS) on the acquisition or importation of capital goods by export-oriented firms. Also, some progress has been achieved in simplifying company registration processes, but progress has been very uneven throughout Brazil. Several state governments have initiated programs for simplifying procedures and establish single entry points for businesses. (8) Improve judicial contract enforcement. Brazilian courts operate with long delays in the provision of court services to citizens and businesses. Part of the problem is that courts handle and decide on an unusually high caseload and there is a high rate of appeals and repetitive cases. Measures supported by the Growth DPL series to reduce these problems include the passage in 2004 of a Constitutional Amendment, the súmula vinculante that allows the Constitutional Court (STF) to declare its constitutional interpretations binding both on all other judges and on the administrators, in order to eliminate repetitive cases and reduce court congestion. Also, during 2005 and 2006, four laws were enacted introducing important amendments to the Code of Civil Procedures4, to hasten court procedures. After being formally created in 2004, in mid 2005 the Conselho Nacional de Justiça (National Justice Council) was finally implemented. One of the functions of this Council is to develop and publish information on the judicial process which may inform and lead to additional measures to improve court procedures. It is still early to assess the effect of these laws on court procedures. Component C. Enhance the Efficiency and Depth of the Financial Sector The Government program to enhance the efficiency and depth of the financial system under the Growth DPL series has focused on addressing the problems of lack of competition in the financial sector, the risks in the payment system, the limited role of the capital markets in the provision of long term finance, and of scarce and expensive credit for individuals and SMEs. Progress had been made in establishing the legal basis for enhanced competition in the financial sector and in expanding access to financial services to poor segments of the population. However, competition in the financial sector remains low and the cost of borrowing remains high, limiting access to credit to both families and SMEs. (9) Increase financial competition. A number of measures have been taken to enhance competition in the banking sector, including the approval by Congress of the Banking Sector Bankruptcy Law in February 2005, and the signing of a formal agreement between the BCB and the antitrust authority (CADE) establishing a clearer division of responsibilities in the oversight of competition issues. (10) Enact sound fundamental legislation and systemic risk control. A major legal impediment to the ability of Brazil’s financial sector to grow and mature was lifted with the amendment in 2003 of Article 192 of the Constitution. This amendment paved the way for a series of reforms by allowing the individual treatment of different issues by appropriate complementary laws. Important new legislation on bank failure resolution and to enhance systemic risk control is still pending. On the other hand, the BCB has made significant progress in minimizing risks in the

4 Laws: 11187/2005; 11232/2005; 11276/2006; and 11280/2006.

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payments systems. Steps have been taken to strengthen and clarify the oversight role of the BCB in the risk management of clearing houses. Also, after the successful launching of an RTGS system for large value payments, the authorities are working on the modernization of the retail payments system to increase the relative use of electronic payment instruments vis-à-vis paper based instruments. (11) Mobilize long term resources in the insurance sector. Efforts to mobilize long term resources in the insurance sector have had good results. The insurance supervisor, SUSEP, has made major advances in strengthening insurance regulation and supervision aimed at strengthening asset allocation, eligibility registration and audit requirements. Complementary Law 126, approved in January 2007, eliminated the state monopoly over reinsurance, transferred the regulatory and oversight functions of the reinsurance market to SUSEP, and introduced a new regulatory framework based on the existence of local and authorized foreign insurers registered and overseen by SUSEP. The expectation is that the establishment of the reinsurance market will reduce the cost for the final consumer, create greater underwriting capacity, and increase competition amongst insurance companies. (12) Improve access to financial services for the poor and SMEs. A number of actions have been taken in this area including the launching by the Federal Government of a National Program of Oriented Productive Microcredit (PNMPO) in November 2004, aimed at expanding access to productive credit for formal and informal micro-entrepreneurs, and of several agricultural insurance schemes and rural credit mechanisms. Regulation on positive credit information reporting (Cadastro Positivo) has been issued, but the inter-linkage of credit registries has not been established. Importantly, regulation of payroll deduction loans was introduced to facilitate access to credit to low income groups. To expand access to housing loans, Law No.10,931/2004 was enacted, which developed and improved financial and securitization instruments for the real state segment, and two new instruments—the Real State Credit Bill (CCI) and the Real State Letter of Credit (LCI) were created to complete the existing framework. Component D. Increase Innovation Capacity The Government program to increase innovation capacity to transform knowledge into productivity gains focused on addressing the problems of low effectiveness of public R&D and low private investment in innovation. The legal foundations for more effective public R&D have been established, incentives have been created for grater private investment in R&D, and Brazil has made important advances in presenting project for the carbon trading market. (13) Increase public R&D effectiveness. Approval in December 2004 of the National Innovation Law (Law 10,973/2004) was an important step towards a productive application of the scientific knowledge available in Brazil. This law promotes collaboration between public entities and private companies, creates boundaries for the definition of intellectual property rights distribution over inventions between researchers and research institutions, and provides for direct public support for private research and development (R&D). In addition, the Ministry of Science and Technology (MCT) has taken steps to rationalize the use of resources available to finance R&D activities with public resources through the Sector Funds and to improve management of the funds. (14) Foster private innovation. Steps have been taken to improve the system of tax incentives to stimulate private investment in R&D. These include deductions of up to 80 percent of the expenses in technological research and technological innovation from the corporate income tax base, and the provision of a subvention of up to 60 percent of the cost of hiring researchers with

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post-graduate studies if the companies are located in the regions of Sudam and Sudene. Companies located in other areas may obtain subventions of up to 40 percent for the same costs. In private sector R&D Brazil outperforms many middle income countries. Since 2006, BNDES has designed new facilities aiming at the increase of innovative activities in all economic sectors. For instance, the financing lines Innovation R&D and Innovation Production were created in 2006 and revised and renamed in 2008 as Line Innovative Capital and Technological Innovation. More recently, BNDES has developed programs to support innovation in specific industries such as aeronautics, digital TV and car engines. (15) Environmental markets. Following Brazil’s ratification of the Kyoto Protocol, the ICCC was made operational and the mechanism for approval by the ICCC of project activities under the CDM of the Kyoto Protocol was established and published.

2.2 Major Factors Affecting Implementation: Initially, the Government was highly committed to the reform program. The Lula da Silva administration that had taken office in early 2003 was concerned that despite deep macroeconomic reforms, Brazil’s economic growth had remained low and erratic, threatening the administration’s goals of creating employment and reducing poverty. Moreover, low growth and high social expectations threatened to unravel achievements already attained in macroeconomic and social reforms. Growing recognition at the highest levels of Government that the removal of microeconomic impediments to investment, innovation and productivity were crucial to galvanize growth, led to the adoption within the Government’s development strategy of an ambitious Growth Program of microeconomic reforms. Such program involved some political risks, since it required coordinating actions across an array of sector ministries, and to some extent substituted for a competing, more economically distorting growth agenda. The Government’s growth program was discussed in two official documents: “Roadmap for the New Economic Development Agenda” launched jointly by the Ministries of Finance, Planning, Development and the Chief of Staff, and the Multiyear Plan (PPA 2004-07) sent to Congress in September 2003. Prior to Board approval of GDPL1, the Brazilian Government had proven its commitment with the reforms by supporting the Amendment of Article 192 of the Constitution a needed step in approving fundamental legislation in the financial sector and by submitting to Congress new bills on bankruptcy and innovation. However, fiscal constraints limited the Government’s capacity to implement some reforms. The average growth rate of Brazil during the period 2003-2006 was 3 percent, below the average of the Latin American region. This low growth rate limited the fiscal resources required to implement some of the infrastructure reforms supported by the Growth DPL series, particularly in road construction and maintenance and in ports modernization. Government priorities had changed by the time GDPL2 became effective. Government commitment to the reform program remained strong until the approval of GDPL2 in mid-2006. However, several factors reduced the Government’s commitments to the microeconomic reform program agreed with the Bank. First, the departure of key officials in the Ministry of Finance, including the minister, shortly before approval of GDPL2 signaled a change in Government priorities that led to an 18 months delay in the effectiveness of the loan. Second, by 2007, Brazil’s economic growth had started to accelerate as commodity prices increased and the authorities did not need additional resources. This led to a loss of interest in some aspects of the microeconomic reform agenda and to the decision not to have a third Growth DPL operation.

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The background analysis supporting the reform program was sound. The Growth DPL series were based on extensive analytical work done by the Bank. The report: “Brazil: the New Growth Agenda”5 issued in 2002, contained much of the diagnostic work and policy recommendations that were later included in the Government’s Growth Program. This report was important in giving support to those in the administration that were in favor of market oriented microeconomic reforms as opposed to those in favor of more interventionist approaches. The Bank report helped to organize the policy debate and to reach consensus on the reform agenda. Further analytical work by the Bank that influenced the design of the Growth DPL series include the Investment Climate Assessment issued in December 2005, the 2006 Doing Business in Brazil, a report on the costs of contract enforcement, an analysis of the regulatory environment for infrastructure investments, a trade policy report and a labor market report. Also, Bank’s economic and sector work (ESW) on the financial sector provided critical insights that helped to design the reform program in this area, including a report on the cost of intermediation which helped to “demystify” the issue of high spreads in Brazil by calling attention to the SELIC as the primary driver of both, interest rates and spreads, and a report on the banking industry market segments which was effective in helping identify the extent of competition in the sector. These studies were complemented by analysis done for the fiscal reform series of policy-based loans and for the human development series, and advisory work (AAA). And the Bank provided continued support to the institutions involved in implementing the program through the accompanying technical assistance loan. The Growth DPL series were supported by a companion Growth TAL that provides support to the ministries and agencies involved in the four pillars of the program. This support was important to galvanize interest and generate momentum for the progress of sector specific reforms. Among the activities financed under the Growth TAL are studies on the impact of judicial bottlenecks on private sector performance, which contributed to the design of the legal reforms submitted by the Government in this field, and support for the modernization strategy of customs carried out by the Secretariat of Federal Revenue (Secretaria da Receita Federal do Brasil--SRB). Assessment of Program Design The Growth DPL series covered too many reform areas making it difficult to support deep reforms in some of the areas and to maintain a productive policy dialogue between the Bank and the Government. The programmatic approach was appropriate to Brazil’s legislative process which dictates a flexible approach. Constitutional amendments must pass two stages of voting in each House of the Legislative Branch and complementary laws have to be approved by both houses. This implies that some reforms will progress faster in some areas than others and a programmatic approach can accommodate this uneven pace of policy reforms. Also, a programmatic approach allows for adjustments to further strengthen the program goals and its overall outcomes as circumstances change over time. However, as is the case with many DPL operations, the Growth DPL series included reforms in too many sectors: logistics, business environment, financial sector and innovation with 15 components and each of them with a number of outputs and outcomes. Although the analytical work supporting the reform measures was sound, such a wide coverage of reform areas reduced the depth of the reforms and made it difficult for the Bank and the authorities to maintain a substantial policy dialogue during the course of the series. In hindsight it would have been more effective to have a series of sector specific loans.

5 World Bank, “Brazil: The New Growth Agenda”, Report No.22950-BR

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2.3 Monitoring and Evaluation (M&E) Design, Implementation and Utilization

GDPL1 defined a result-oriented framework in which key next steps, progress indicators and target outcomes were identified for each reform area.. The key next steps of GDPL1 were, for the most part, well designed to reflect incremental stages of the reform process and provided the basis for deciding if and when to go ahead with a second operation. Conceptually there was a good connection between outputs and outcomes. However, the outcome indicators were too numerous and in some cases difficult to measure. The only Implementation Status Report (ISR) archived for GDPL1 does not present a table of outcome indicators because such a table was not required at the time of loan preparation. This meant that the only information on compliance with GDPL1 key next steps is presented in the Simplified ICR for that operation issued on June 28, 2005. Before preparation of GDPL2, the Bank reviewed in detail compliance with the next key steps and selected outcome indicators of the first operation and concluded that most of them had been met. This positive review cleared the way for preparation of the second Growth DPL. The Bank prepared six ISRs for GDPL2. The ISRs provide information on the base line and end of project target of 14 mostly output indicators, but no information is provided on the status of compliance with any of these indicators or on the outcome indicators defined in the policy matrix, because the focus of the supervision missions was to make the loan effective. In the case of GDPL2 the output and outcome indicators were also too numerous and in some cases difficult to measure.

2.4 Expected Next Phase/Follow-up Operation (if any): No next phase or follow-up DPL operation to the Growth DPL series is envisaged in Brazil, although the Growth TAL continues to support key reform areas of the series. In May 2008, the Bank approved its new Country Partnership Strategy (CPS) for Brazil, which will guide the overall program in the country for 2008-2011. The CPS recognizes that Brazil’s needs have evolved remarkably since the previous partnership strategy reflected in the 2004-2007 CAS, with a much-improved macroeconomic situation, and reduced vulnerability, and that the focus of lending also needs to be considerably different. Instead of large federal loans in support of the balance of payments, most of the federal program will consist of technical assistance programs of ambitious scope but modest financial size, focusing on areas where Brazil has not yet devised solutions and where international experience can be of particular value. The states will be the main recipients of most (70 percent) of the Bank financing, based on their development priorities and in compliance with the Fiscal Responsibility Law. Within this new framework, the Bank is expected to continue supporting reforms in the areas of innovation and logistics, mostly through state level investment loans.

3. Assessment of Outcomes

3.1 Relevance of Objectives, Design and Implementation (to current country and global priorities, and Bank assistance strategy) The objectives of the Growth Program remain highly relevant to current country priorities.Brazil’s macroeconomic conditions have improved considerably over the last five years, and its fiscal outlook, debt situation, and financial sector health are much better. Also, growth has been strongly pro-poor. Nevertheless, Brazil still faces the challenges of how to achieve long-run growth sustainability, reduce its high levels of taxation, reduce remaining barriers to a more efficient financial intermediation, improve its business environment reducing the time and cost involved in setting up a business; and increase public investment in infrastructure. The Bank and the Brazilian authorities have agreed that future Bank support should move away from policy

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based lending and place greater emphasis on supporting the country’s current priorities through technical assistance and lending at the state level. Nevertheless, it is important that the federal Government focuses also on completing the microeconomic reforms supported by the Growth DPL series.

3.2 Achievement of Program Development Objectives (including brief discussion of causal linkages between policy actions supported by operations and outcomes)

a. Achievement of the Program’s Broader Development Objective In achieving the objective of accelerating economic growth by making Brazil more competitive, the performance of the Growth DPL series has been moderately satisfactory. Although important progress has been made in all the reform areas supported by the Growth DPL series, more reforms are needed to make Brazil more competitive by lowering logistic costs, facilitating doing business, making credit more accessible and less costly, and promoting innovation and technical development. The recently published Global Competitiveness Report (GCR) for 2008-2009 ranks Brazil 64 out of 134 countries, a minor improvement from a rank of 66 in the previous year. The ranking of Brazil is below that of other Latin American countries such as Chile (28), Panamá (58), Costa Rica (59) and Mexico (60). On the other hand, Brazil’s economic growth averaged only 3 percent during the period 2003-2006, below the average of 4.5 percent for the region and of 8-9 percent for emerging market economies during the same period. The growth rate jumped to 5.4 percent in 2007, and continued strong during the first half of 2008. This improved growth performance is more the result of high commodity prices than improved Brazilian competition. Nevertheless, growth slowed down in the last quarter of 2008 due to the worsening of the effects of the international financial crisis in the domestic economy. The expectation before the recent financial crisis was that the growth rate for 2008 would reach 6.2 percent. It is unlikely that Brazil will be able to sustain a high economic growth in the absence of more reforms to improve Brazil’s competitiveness, particularly if the external conditions remain unfavorable with lower demand for commodities and higher financing costs. b. Achievement of the Program’s Sub Objectives

(A) Reduce Logistic Costs: Moderately Satisfactory.

Improve customs effectiveness: Progress has been made in achieving the expected outcome of reducing customs gross release times. The expected outcome of reducing custom clearance time has been met. The average time needed for customs clearance has been reduced from 5 to 3 days, and the average clearance time for exports has decreased from 2 days to 13.5 hours. According to Doing Business 2009, the time needed to complete an export decreased from 18 days in 2007 to 14 days in 2008 and the number of days to complete an import decreased from 24 to 19 days during the same period. Despite these improvements, the Global Competitiveness Report (GCR) 2008-2009 ranks Brazil 127 out of 134 countries in burden of customs procedures. Reducing port costs and delays. According to Doing Business 2009, the average port and terminal handling time has been reduced from 13.8 days for imports and 8.4 days for exports to 4 and 3 days respectively. Although port delays have been reduced, lack of modern cross-border links and port conditions continue to constrain Brazil’s integration into international trade. The GCR ranks Brazil 123 out of 134 countries in quality of port infrastructure.

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Reduce transport costs on federal road networks. The expected outcomes of improving road conditions and reducing transport costs have been met. The percentage of output-based maintenance contracts for the federal road network has increased from 26 percent in 2003 to 37 percent in 2007, above the 30 percent target established in GDPL1. With better maintenance, 49.5 percent of the federal road network (a total of 52,524 km) is considered to be in good conditions according to the International Roughness Index (IRI), and the average road transport cost decreased in roughly 11 percent between 2003 and 2007. Despite these achievements, the GCR ranks Brazil 110 in quality of roads and 101 in quality of transport infrastructure out of 134 countries.

Foster multimodal transport. The expected outcome of a 10 percent increase in non-road transportation has not been achieved, although productivity of railroad operations has increased as a result of improvements in railroad regulation. Brazil’s transport continues to be based on road networks. There is a need for appropriate transport regulation and investment in infrastructure to resolve connectivity bottlenecks.

(B) Improve Business Environment: Moderately Unsatisfactory.

Strengthen infrastructure regulation. Although infrastructure regulation has been strengthened and the legal and institutional framework for PPP is in place, public investment in infrastructure has remained under 1 percent of GDP crowded out by other budget expenditures and a rigid budget framework. Private investment is holding back due to the risks posed by regulatory uncertainty and contract renegotiations. Although some states are beginning to implement PPP projects, the actual implementation of PPP initiatives at the Federal level is taking longer than expected.

Enhance the competitiveness environment and strengthen corporate insolvency framework. Although the Antitrust Law has not been approved, some improvement have been made in enhancing the competitiveness environment. Pre-merger notification to CADE are mandatory, and over the last five years CADE has investigated and decided on several mergers and acquisitions, having rejected requests from important companies. The number of days taken by CADE to decide on mergers and acquisitions has decreased from 84 days in the early 2000s to 48 days in 2008.

Simplify entry and business operations. Progress in simplifying company registration processes has been very uneven throughout Brazil. For example, Minas Gerais has established one-stop shops that have reduced the number of days to register a business to 10 days. São Paulo has also taken some measures to simplify business registration and aims to reduce from 152 to 30 the days needed to register a business. Nevertheless, the GCR 2008-2009 ranks Brazil 127 in time required to start a business and 125 in number of procedures to start a business out of 134 countries. The Doing Business 2009 report ranks Brazil 125 out of 181 economies in ease of doing business.6 There is still more to do to facilitate starting and operating a business in Brazil.

Improve judicial contract enforcement. Despite amendments to the Code of Civil Procedures and other legal and institutional reforms introduced under the Growth DPL

6 This ranking is somewhat biased by the fact that it is based on data from Sao Paulo, where the time needed to start a business is much higher, 152 days, than in other States, which take 68 days or less.

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series, contract enforcement remains slow and uncertain. Also, it is unclear if the number of appeals has decreased. A proxy indicator for the reduction in appeals rate is the reduction in the number of procedural and extraordinary recourses seen by the Supreme Federal Court. These decreased only slightly between 2003 and 2008. According to Doing Business 2009, the time involved in enforcing contracts in Brazil has remained unchanged in the last three years (616 days), and Brazil ranks 100 overall for enforcing contracts out of 181 economies.

(C) Enhance the Efficiency and Depth of the Financial Sector: Moderately Satisfactory.

Increase financial competition. The antitrust scrutiny over financial sector mergers and acquisitions has increased. CADE has reviewed 7 cases of bank mergers and acquisitions. Nevertheless, competition in the financial sector remains low. Although the top four banks have maintained their share in deposit from 56 percent in 2001 to 57.6 percent in 2008, competition in the financial market has increased as evidenced by the declining trend in total bank spreads from 41.3 percent in December 2003 to 28.4 percent as of December 2007, and the decrease in the share of administrative expenses in the total spread from 19.5 percent in 2003 to 16.9 percent in 20067. The reduction in spreads is also the result of reform measures to reduce credit risk, such as payroll deduction loans and improvements in credit information. Also, the banks are facing increased competition in the provision of funds from Brazil’s capital market. Enact sound fundamental legislation and systemic risk control. Fundamental financial legislation on systemic risk control and bank failure resolution is still pending. But, Brazil has made advances in modernizing the legal framework and physical infrastructure for the payments system. This has led to the increase in the relative use of electronic payment instruments vis-à-vis paper based instruments. Payments with credit and debit cards increased 20 percent between 2006 and 2007; and 25 percent between the first quarter of 2007 and the first quarter of 2008. There have been advances in rationalizing the interconnection of automatic teller machines (ATMs) and point of sale networks. Also banks use nationwide telecommunications network over satellite to help deliver services throughout the country.

Mobilize long term resources in the insurance sector. The objective of increasing competition in the reinsurance sector has been largely met. Following the elimination of the state monopoly over reinsurance, 35 reinsurance companies have registered with SUSEP, of these, three local reinsurers have been authorized and 11 foreign ones have been approved to operate in Brazil. Evidence of improved capacity of the insurance sector to mobilize resources is that the insurance market has increased from R$51.1 million in 2003 to R$84.3 million in 2007.

Improve access to financial services for the poor and SMEs. This objective has been partly met. Following legal reform is this area, the volume of payroll deduction loans has increased from around R$6 billion to about R$40.3 billion between January 2004 and August 2008. The volume of overall bank credit has increased from 28 percent of GDP in December 2005 to 35 percent in December 2007 and to 38 percent in August 2008. A large share of the increase has been in the retail market. Importantly, earmarked credit for housing, agriculture and BNDES has declined in relative terms from around half of total

7 BCB Frequently Asked Questions Series. Lending Interest Rates and Bank Spreads.

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credit in 2000 to around a third in 2006. Bank accounts also expanded from 95 million to 140 million, and housing finance credit operation tripled in volume. Important to improve access to finance has been the reduction in the SELIC base rate from a peak of nearly 20 percent in 2005 to 10.33 percent in December 2007, although it increased to 12.75 percent in August 2008. Cost of borrowing remains high, limiting access to credit to both families and SMEs. According to the GCR 2008-2009 Brazil ranks 77 out of 134 countries in ease of access to loans.

(D) Increase Innovation Capacity: Moderately Satisfactory.

Increase public R&D effectiveness. Despite the passage of a comprehensive Innovation Law, Brazil’s overall R&D expenditures remain hovering around 1 percent of GDP, and new patents and scientific papers from Brazilian inventors and academics have not increased substantially. However, these are outcomes that take time to materialize even if the environment for public and private R&D has improved. According to the GRC 2008-2009, Brazil ranks 43 in the quality of scientific research institutions out of 134 countries.

Foster private innovation. Steps have been taken to improve the system of tax incentives to stimulate private investment in R&D. In private sector R&D Brazil outperforms many middle income countries. According to the GCR 2008-2009 out of 134 countries, Brazil ranks 27 in capacity for innovation and 31 in company spending on R&D.

Environmental markets. Brazil has been among the most proactive countries in the carbon trading market under the Kyoto Protocol. In 2005 78 CDM projects were approved by the ICCC, more than any other in the world. According to MCT, a total amount of 130.2 million tons CO2 eq. is expected to be reduced during the first commitment period with an estimated benefit for the Brazilian economy of about US$780 million.

3.3 Justification of Overall Outcome Rating (combining relevance, achievement of PDOs) Rating: Moderately Satisfactory The overall outcome rating is moderately satisfactory based on the following reasons. First, at the end of GDPL2 a substantial number of the expected outputs had been achieved in most of the microeconomic reform areas. However, many of the expected outcomes that would make Brazil more competitive had not materialized, in some cases because it is too early to see the results of the reform measures, and in others because the reforms have not been deep enough to produce the desired results. Second, after several years of average growth rate of 3 percent, Brazil’s economic growth jumped to 5.4 percent in 2007 and continued strong during the first half of 2008. However, faster growth was achieved more due to high international commodity prices than to improved competitiveness resulting from the microeconomic reforms implemented under the Growth DPL series. Nevertheless, what has been accomplished so far in microeconomic legal and institutional reforms is a good basis for the Brazilian Government to continue deepening the reforms that would enable Brazil to face the current deterioration in external conditions with lower demand for commodities and higher financing costs. The Growth DPL series provided significant synergies with IFC activities in support of the private sector, such as IFC’s involvement in drilling down the doing business indicators to specific municipalities, its support for PPP and BNDES, as well as with large banks and corporations to increase SME access to

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finance and in housing finance. The Bank work was also strongly complementary to Brazil’s program with the IMF of strengthening economic stability.

3.4 Overarching Themes, Other Outcomes and Impacts (if any, where not previously covered or to amplify discussion above) (a) Poverty Impacts, Gender Aspects, and Social Development

The Government Growth Program has had important pro-poor effects, particularly by increasing access to financial services to the poorer social segments and by simplifying entry and business operations. Specific measures to increase the access of the poor to financial services under the program included: (i) the simplification of the procedures to open bank accounts in public banks with the opening of more than 4.6 million bank accounts between August 2003 and December 2004, which are exempted of bank tariffs and taxes on financial operations; (ii) the offering of loans through payroll deductions, which increased from R$6 billion in 2004 to R$40.3 billion in 2008, subjected to interest rates of 40.3 percent per year against 70.7 percent per year for other personal credit lines; (iii) the launching of the PNMPO, aimed at expanding access to productive credit for formal and informal micro-entrepreneurs with annual revenues up to RS$ 60,000. Other reforms aimed at simplifying entry and business operations are likely to benefit SMEs and hence contribute to increase employment and reduce poverty. Similarly, the reduction in road transport costs may have pro-poor effect by improving access of the rural poor to health and education services in urban areas.

(b) Institutional Change/Strengthening (particularly with reference to impacts on longer-term capacity and institutional development) The Growth DPL series and the Growth TAL have had a significant impact on the institutional strengthening of the ministries and agencies involved in the reform program. Institutional strengthening actions include the creation or revitalization of several inter-ministerial committees such as the Economic Policy and Infrastructure Committees; the National Science and Technology Council (CCT) the Capital Markets Working Group. Measures that involved institutional strengthening include the modernization of clearing systems and management information systems in the Customs Administration; the reorganization of the Federal Transport Administration; the set up of the PPP unit in the Ministry of Planning; the geographical restructuring of railway concessions; the strengthening of BCB’s capacity to minimize risks in the payments system and to exercise oversight over competition issues in the financial sector; steps taken by the MCT to rationalize the use of resources available to finance R&D activity through the sector funds and to improve management of the funds; and measures taken to make the ICCC operational with a transparent project approval mechanism and to establish the NJC. The Growth TAL has been particularly effective in supporting the modernization strategy of customs carried out by SRB including the implementation of an electronic system of risk analysis and artificial intelligence system for customs. (c) Other Unintended Outcomes and Impacts (positive or negative)N.A.

3.5 Summary of Findings of Beneficiary Survey and/or Stakeholder Workshops (optional for Core ICR, required for ILI, details in annexes) N.A.

4. Assessment of Risk to Development Outcome

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Rating: Moderate The risk that the reform actions taken under the Growth Program will not be maintained is moderate. The legal and regulatory reforms were approved by Congress after intensive public consultation. From this point of view, the reforms have strong legitimacy and political support and are not likely to be reversed. However, there are internal and external risks that could delay the accomplishment of some of the development outcomes that are expected in the medium to long term. One internal risk is that Government has increasingly shifted its focus away from microeconomic reforms to addressing other key government bottlenecks to growth, especially issues related to infrastructure and fiscal and public resource management. Another risk is that lack of political consensus may delay the passing of key legislation in sensitive areas of the Growth Program such as tax and antitrust reform. Finally there is the risk that the public resources needed to increase investment in infrastructure, ports and roads improvement, and on R&D will be delayed for lack of fiscal space. An external risk that has become a major threat recently is the reduction of external financing and the effects of volatility from the international financial crisis on interest rates and inflation, and eventually on the liquidity and solvency of the local banks. Although the Government has acted promptly to provide liquidity for those banks that needed it, the passing of complementary legislation to strengthen systemic risk control and bank failure resolution is of outmost importance. These domestic and external risks are mitigated by sound macroeconomic policies that provide a solid anchor to the economy.

5. Assessment of Bank and Borrower Performance (relating to design, implementation and outcome issues)

5.1 Bank Performance (a) Bank Performance in Ensuring Quality at Entry (i.e., performance through lending phase) Rating: Moderately Satisfactory for GDPL1

Moderately Satisfactory for GDPL2 The program of reforms agreed with the Government was based on extensive analytical work done by the Bank during the identification and preparation of GDPL1 (see section 2.2). The Bank was also instrumental in supporting consensus-building among different sectors of the government, actively helping in the assessment of short-term impact of reforms as well as potential winners and losers. However, despite excellent analytical work the Bank team made the wrong decision of combining under one operation a large number of reform areas when a better approach would have been to prepare several more sector specific operations. Preparation of GDPL2 demanded less analytical effort on the part of the Bank because the major themes had been already studied for the first operation, although changes were made in key measures for the second operation to reflect changing circumstances. But, the Bank continued with the same approach of covering a wide range of reform areas and went ahead with the second operation despite signals that the Government was changing its focus towards new priorities as economic growth accelerated reducing the need for additional resources. Bank misreading of the changing circumstances led to a long delay in the effectiveness of GDPL2. (b) Quality of Supervision (including M&E arrangements) Rating: Satisfactory for GDPL1

Satisfactory for GDPL2

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The structure of the program puts emphasis on project preparation rather than on supervision. The formal supervision of GDPL1 was undertaken during preparation of the Simplified ICR and the preparation of the second operation. GDPL2 required some supervision efforts during the long delay in loan effectiveness to assess the willingness of the Authorities to sign the loan. Nevertheless, the Bank team was in regular interaction with the Brazilian authorities in the context of the Growth TAL, the discussion of economic and sector work that supported several aspects of the program, and the preparation of the Country Partnership Strategy for Brazil which presents a review of the accomplishments of the 2004-2008 CAS. (c) Justification of Rating for Overall Bank Performance Rating: Satisfactory for GDPL1

Moderately Satisfactory for GDPL2 Despite flaws in the design of the Growth DPL series, Bank overall performance is rated Satisfactory for GDPL1 for the following reasons. First, during preparation of the first operations and in the context of the Growth TAL the Bank provided quality policy advice based on extensive economic and sector work. The Bank put together a high quality multi-disciplinary team to provide advice and experience and to liaise with the local preparatory and implementation teams involved in the design of the Growth Program. Second, the Bank provided timely support to an important transition in Brazil, when the development strategy of the new da Silva administration was being designed. Bank support for a program of microeconomic reforms helped to strengthen the resolve of groups in the Government that advocated for marked oriented reform as opposed to groups that were inclined to adopt more interventionist industrial policies to confront the decline in economic activity and increase in unemployment. Bank management showed foresight in supporting Brazil during the complex political transition, when uncertainty prevailed among international investors. The Bank’s financial assistance helped Brazil meet its external obligations at the same time that allowed the new administration to build a reputation of good macroeconomic management. The Bank rating for the GDPL2 is rated moderately satisfactory because the Bank failed the react to the signals that the Government was changing its priorities away from microeconomic reforms.

5.2 Borrower Performance (a) Government Performance Rating: Satisfactory for GDPL1

Moderately Satisfactory for GDPL2 Throughout preparation of the of the Growth DPL series, the Ministry of Finance had a leadership role in the design of the microeconomic reform agenda incorporated into the Growth Program, and was instrumental in working with the Bank Team in shaping into a cohesive operation the various goals and strategies of each institution that participated in the Program. During implementation this ministry successfully coordinated the many participating ministries and agencies and ensured that the Program objectives remained on track. However, changes in key staff in the Ministry of Finance and in the Government priorities led to an 18 months delay in making the second Growth DPL effective and to the eventual disbursement of only one fourth of the original loan amount. (b) Implementing Agency or Agencies Performance Rating: Satisfactory for GDPL1

Satisfactory for GDPL2

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Several ministries and government agencies were involved in all steps of program design and implementation, dedicating highly qualified and committed staff to the program. The most relevant include the Ministries of Finance, Justice, Transport and Science and Technology. Within the Ministry of Finance, the SRB has played a very important role in customs reform. (c) Justification of Rating for Overall Borrower Performance Rating: Satisfactory for GDPL1

Moderately Satisfactory for GDPL2 The rating of Satisfactory for GDPL1 is justified for the following reasons: First the Government of Brazil developed a clear vision and strategy of its microeconomic reform agenda that was incorporated into an ambitious Growth Program, a center piece of its broad Growth Agenda for the period 2004-07. By subjecting this strategy to intensive consultation with civil society, the Government ensured the program was politically feasible, despite other competing views that supported a more interventionist approach. Second, several ministries and government agencies, under the leadership of the Ministry of Finance, designed the specific reforms within their respective areas and managed and monitored their implementation, adapting the reforms to reflect changing country circumstances. Third, the technical staff of these government agencies worked with the Bank Team to shape into a cohesive operation the various goals and strategies of each institution and to identify key next steps, progress indicators and target outcomes for each reform area. The rating of Moderately Satisfactory for GDPL2 is based on the fact that the Government went ahead with the second operation although its priorities were changing away from microeconomic reforms.

6. Lessons Learned (both operation-specific and of wide general application)

The lessons learned from the two Growth DPLs are the following:

(i) Deep legal and institutional reforms may require sector specific operations rather than DPLs with large number of reform areas. This DPL series, as is the case with many other DPLs, covered too many reform areas: four sectors (logistics, business environment, financial sector and innovation) with 15 components and each of them with a number of outputs and outcomes. Such a wide coverage of reform areas reduces the depth of the reforms and makes it difficult for the Bank and the authorities to maintain a substantial policy dialogue during the course of the series.

(ii) The quality of the technical analysis underpinning a policy based operation is crucial

to engage the borrower’s commitment to the reform agenda. Extensive analytical work done by the Bank provided the diagnosis and policy recommendations that were incorporated into the Government’s Growth Program. The high quality of the technical analysis was crucial to engage the authorities’ commitment to a market oriented approach to stimulate economic growth at a time in which more interventionist industrial policies were being considered.

(iii) Sustained Government ownership of the reform agenda is crucial to the success of a

policy based operation. The da Silva administration was at first highly committed to both macroeconomic and microeconomic reforms to accelerate economic growth and reduce poverty and inequality. It did not hesitate to take unpopular macroeconomic measures when it was needed and to send to Congress proposals for constitutional

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reforms and for complementary laws in areas that were highly controversial such as tax reform. At the time of effectiveness of GDPL2 the Government had shifted its focus and the momentum moved on to macroeconomic reforms and investment incentives. This led to long delays in loan effectiveness and to the dropping of a third operation.

(iv) Selection of outcome indicators for a series of programmatic loans should include

medium-term results as well as long term results, to allow for an assessment of the results if fewer loans materialize than initially envisaged. A number of outcome indicators for the two Growth DPLs were designed with the expectation that there was going to be three consecutive operations, and that the expected outcomes would be met at the end of the third one. Since only two DPLs were eventually approved, at the time of this ICR it is too early to assess the results of some of the implemented reforms. It would have been useful if some intermediate outcome indicators would have been established against which to evaluate the success of the policy reforms in the absence of a third operation.

(v) Programmatic loans should be subject to a more structured schedule of supervisions

missions to assess the progress in implementing next key steps and in meeting outcome indicators. GDPL1 was supervised once in the context of preparation of the Simplified ICR. GDPL2 was supervised in FY07 and FY08, in the context of trying to make the loan effective. However, during this time limited information was obtained to assess progress towards accomplishing the key next steps or the expected outcome indicators. This makes it difficult for the Bank to assess progress in accomplishing the program goals and be able to influence the outcomes through country dialogue, before producing the final ICR.

7. Comments on Issues Raised by Borrower/Implementing Agencies/Partners (a) Borrower/Implementing agencies

1. We refer to the document “Report Nº: ICR0000972 – Implementation Completion Results Report (IBRD – 72180 - 73860) on a loan in the amount of EUR427.20 million (US$505.05 million equivalent) and a loan in the amount of US$601.510 million to the Federative Republic of Brazil for a series of Programmatic Loans for Sustainable and Equitable Growth – Loans I and II”. 2. We inform that this report was reviewed by various organizations of the federal public administration interested in the achievement of the objectives stated in the Policy Letter related to the above mentioned Operations. With regards to this report, the organizations identified some incorrect statements, as well as some judgment values that are politically sensitive in the form presented. 3. The Brazilian Government disagrees with the opinion expressed in the document with regards to the loss of interest with microeconomic reforms. To mention some examples, it was approved: the Gas Law, the National Plan and Program for Dredging (Law 11.610/2007), the Policies and Guidelines for the Port Sector (Decree 6.620/2008). In addition, the Government is making significant efforts in the National Congress in order to approve the tributary reform, a polemic issue that affects various interests; the Project

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Law for the Regulatory Agencies and for the Brazilian Competency System; and new directives for the civil aviation and aquatic sectors. This Government disagrees with the methodology used in the Doing Business 2009, World Bank, and doesn’t recognize this publication as a benchmark for determining performance. For this reason, we request that this observation should be included in the document. * Note: In addition to these comments, the Borrower made some clarifications concerning outcome indicators that have been incorporated to this text. (b) Cofinanciers N/A (c) Other partners and stakeholders (e.g. NGOs/private sector/civil society) N/A

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Annex 1. Bank Lending and Implementation Support/Supervision Processes (a) Task Team members P080827 – First Programmatic Sustainable and Equitable Growth Loan

Names Title Unit Responsibility/ Specialty

Lending Supervision Mark Roland Thomas Sr. Economist LCSPE Paulo Guilherme Correa Senior Economist ECSPF Aymeric-Albin Meyer Sr Transport. Spec. LCSTR Anjali Kumar Sr Financial Economist LCSPF

(a) Task Team members P095675 - Second Programmatic Sustainable and Equitable Growth Loan

Names Title Unit Responsibility/ Specialty

Lending Supervision Jose Guilherme Reis Lead Private Sector Dev. Specialist LCSPE Fernando Andres Blanco CossioEconomist LCSPE Paulo Guilherme Correa Senior Economist ECSPF Mariam Dayoub Junior Professional Associate LCSPF Linn A. Hammergren Consultant AFTPR Patricia Rodrigues de Melo Language Program Assistant LCSPF Aymeric-Albin Meyer Sr Transport. Spec. LCSTR Eduardo Martin Urdapilleta Sr Financial Economist LCSPF

(b) Staff Time and Cost P080827 - Brazil First Programmatic Loan for Sustainable and Equitable Growth

Staff Time and Cost (Bank Budget Only) Stage

No. of staff weeks USD Thousands (including travel and consultant costs)

Lending FY03 156.81 FY04 374.65 FY05 0.05 FY06 0.00

Total: 531.51 Supervision FY03 0.00 FY04 0.00 FY05 100.39 FY06 0.00

Total: 100.39

27

P095675 - Second Programmatic Sustainable and Equitable Growth Loan Staff Time and Cost (Bank Budget Only)

Stage No. of staff weeks USD Thousands (including

travel and consultant costs)Lending FY06 51 290.21 FY07 0.00 FY08 0.00

Total: 51 290.1 Supervision FY06 0.00 FY07 3 4.88 FY08 5 15.54 FY09 6 26.70

Total: 8 47.12

28

Annex 2. Beneficiary Survey Results (N/A)

29

Annex 3. Stakeholder Workshop Report and Results (N/A)

30

Annex 4. Summary of Borrower’s ICR and/or Comments on Draft ICR See note on Page 25.

31

Annex 5. Comments of Cofinanciers and Other Partners/Stakeholders

32

Annex 6. List of Supporting Documents

World Bank. Brazil: Program Document for a First Programmatic Loan for Sustainable and Equitable Growth. Report No. 27507-BR. January 21, 2004

World Bank. Brazil: Program Document for a Second Programmatic Loan for Sustainable and Equitable Growth. Report No. 36059-BR. May 3, 2006

World Bank. Brazil: Country Partnership Strategy 2008-2011. Report No. 42677-BR

World Bank. Brazil: Implementation Completion Report for the First Programmatic Loan for Sustainable and Equitable Development. June 28, 2005. Report No. 32604-BR

World Bank. Brazil: Investment Climate Assessment. Volume 1 - December 6, 20005.

World Bank. Doing Business 2009. Country Profile for Brazil.

World Bank. Brazil the New Growth Agenda. Report No. 22950-BR

World Economic Forum. Global Competitiveness Report for 2008-2009.

Brazil Ministry of Finance, Secretariat for Economic Policy. Microeconomic Reforms and Long Term Growth. Brasilia, December 2004

33

Annex 7. Summary Matr ix - Brazil First Programmatic Loan for Sustainableand EquitableGrowth:

Area/Policy Pr ior Actions Key Next Steps Medium Term Actions Expected Outcome Indicators

MACROECONOMIC MANAGEMENT AND OVERALL GROWTH PROGRAM DEFINITION• Adequate macroeconomic framework• Publication of Updated Growth Strategy and Prioritization of Public Investments

Reduce Logistics Costs1. Improve Customs

Effectiveness• CustomsReform Strategy Approved • Selectivity levels cut from 40% to 30%

• Average net release time further cut by20%

• Clearancesystems and proceduresstreamlined and adapted to expandedCustom’s mission and selectivity cutto 20%.

• Average gross release time decreased from5 to 3 days (imports) and from 2 days to 1day (exports)

2. ReducePor t Costsand Delays

• Productivity improvement planapproved

• Port authorities restructured andproductivity plan implemented.

• Average cargo transit time through portcut from 13.8 to 10 days for imports and8.4 to 5 days for exports; averagecontainer handling cost cut by 10%

3. ReduceTranspor tCostson FederalRoad Network

• Law reorganizing Federal TransportAdministration approved andimplemented

• 9% of non-truck roads on remainingfederal network transferred to statemanagement

• Output based maintenance/rehabcontracts on 30% of federal roadnetwork

• Further 12% of non-truck roads onremaining federal network transferredto state management

• Road network classification lawapproved.

• In addition to road concessionsexisting in 2003, further 5% of theremaining federal network underconcession.

• 50% of road network in good condition (asevaluated by the International RoughnessIndex).

• Average road transport costs decreased 5%• Total of 25% of non-trunk roads on

remaining federal network transferred tostate management.

4. Foster Multi-ModalTransport

• Geographical restructuring ofrailway concessions underway

• 10% increase in non-road transportationshare

Improve the Business Environment1. Strengthen

InfrastructureRegulation

• Creation of land and water transportregulatory agencies (ANTT andANTAQ)

• PPP Law submitted to Congress

• PPP Law approved by Congress• Law on Career Development Plan for

Regulators submitted to Congress

• Law on Career Development Planfor Regulators approved byCongress

• 5 Public-Private Partnerships projectsapproved

2. Enhance theCompetitivenessEnvironment

• Amendments to Antitrust Lawreviewed by inter-ministerialcommittee

• • Amendment to Antitrust Lawapproved by Congress

• Increase in number of “hard-core” cartelcases successfully prosecuted

• Pre-merger notification made mandatory3. Simplify Entry and

Business Operation• Constitutional amendment approved

to, inter alia, unify tax collection atfederal, state and municipal levelsfor micro and small companies

• Simplify procedures for companies’registration adopted in some cities

• Export norms simplified by MDIC

• Law regulating the unification of taxcollections approved by Congress

• Time needed to register a firm decreasedto 76 days in pilot cities

4. Strengthen • New Bankruptcy Law and Tax Code • Bankruptcy Law enacted and training • Bankruptcy Law becomes effective • Increased speed of recuperation/resolution

34

CorporateInsolvencyFramework

Amendmentspassed by LowerHouse

program for courtsstarted• Amendment to Tax Codeenacted• Preparation program initiated for

judiciary and courts for new law

and higher recovery value of insolvententerprises

• Reduced spreads in financialintermediation


Enhance the Efficiency and Depth of the Financial Sector1. IncreaseFinancial

Competition• Draft Complementary Law, extending

application of Antitrust to Bankingsubmitted to Congress

• Effectivenessof BankingCompetition Law

• Examination of market conduct issues inbanking sector by competition authorityinitiated

• Reduced bank administrativecostscomponents in bank spreads

2. Sound FundamentalLegislation andSystemic RiskControl

• Constitutional Amendment (Article192) approved

• New large valuepaymentssysteminstalled and operating successfully

• Key legal initiatives for financialreform presented to Congress

• Evaluation of residual risk in thepaymentssystem completed

• Blueprint prepared for second phasepayments reform (retail payments)

• Key legal reforms in financialsystem voted by Congress

• Second phase(retail) paymentssystem reform launched

• Legal framework and physicalinfrastructure for financial systemmodernized; risks reduced and access tofinancial servicesexpanded

3. MobilizeLong-Term Resources inInsurance Sector

• Regulation strengthened on assetallocation, eligibility, registration,custody and audit requirementsenhanced

• Extend permission for provision ofreinsurance to new entrants

• Accelerated expansion of insuranceindustry assets on sound basis

• Enhanced serviceproviders in reinsurance

4. Improve EfficientAccess to FinancialServices for thePoor and SMES

• Provisional law and Resolutionspassedto expand financial access to banks

• Evaluate impact of new microfinancemeasures in terms of cost, outreach andimpact

• Introducesmall claims courts for smallcredits

• Establish interlinks of credit registries

• Passage through Congress of newfactoring law

• Enhanced use of positiveinformation for credit reporting

• Reduction of tax writeoffs foruncollected small claims

• Banks accounts (sights-savings) expandedfrom 95 (end 01) to 103 million by 2006

• Increased credit availability on soundfooting to small borrowers

Increase Innovation Capacity to Transform Knowledge into Productivity Gains Increase Innovation Capacity to Transform Knowledge into Productivity Gains1. IncreasePublic

R& D Effectiveness• Innovation law sent to Congress • Innovation Law approved by

Congress• Number of technology transfer contracts

between public universities/researchcentersand theprivatesector increased by20%

2. Foster PrivateInnovation

• Regulation of Fundo Verde-Amareloand other mechanisms to supportprivateR&D introduced

• Evaluation completed or operationsand management procedures ofSector Funds and FINEP

• 10 percentagepoint increase in privatelyfunded R&D share in total R&Dexpenditures

3. Create Innovationin EnvironmentalMarkets

Kyoto protocol ratified, ICCC operational,and CDM project approval mechanismpublished

• ICCC approval and monitoringsystems financially self -sustaining

• US$100 million in sales of carbon credits

35

Annex 8. Summary Matr ix - Brazil Second Programmatic Loan for Sustainableand EquitableGrowth


MACROECONOMIC MANAGEMENT AND OVERALL GROWTH PROGRAM DEFINITION• Adequate macroeconomic framework• Publication of Updated Growth Strategy and Prioritization of Public Investments

Reduce Logistics Costs5. Improve Customs

Effectiveness• Selectivity levels cut from 40% to

30%• Average net release time cut by 20%

• Selectivity levels cut from 30% to 20%• Average net release time further cut by

10%

• Selectivity levels decreased to 10%• Siscomex system coordinated with

other agency clearanceorcertification

• Average gross release timedecreased from5 to 3 days (imports) and from 2 days to 1day (exports)

6. ReducePor t Costsand Delays

• Approval of Agenda Portos (PortAgenda)

• Actions to increaseefficiency of dockcompanies taken

• Dock companies reorganized orprivatized

• Labor improvement productivitymeasuresunder implementation

• Average cargo transit time through portcut from 13.8 to 10 days for imports and8.4 to 5 days for exports; averagecontainer handling cost cut by 10%

7. ReduceTranspor tCostson FederalRoad Network

• Output based maintenance/rehabcontractson 30% of federal roadnetwork

• Further 5% of the remaining federalnetwork under concession

• Government plan for maintenanceoffederal network established

• Transferring of non-truck federalroads to statescompleted

• Road network classificationapproved

• 50% of road network in good condition (asevaluated by the International RoughnessIndex).

• Average road transport costsdecreased 5%

8. Foster Multi-ModalTransport

• Geographical restructuring ofrailway concessionscompleted

• CONIT operational • 10% increase in non-road transportationshare

Improve the Business Environment5. Strengthen

InfrastructureRegulation

• PPP Law approved by Congress• Law on Career Development Plan

for Regulators approved byCongress

• Institutional framework for PPPsprojectsconsolidated

• Remaining legal bottlenecksovercome in selected sectors

• Lei das Agencias approved byCongress

• 3 Public-Private Partnershipsprojectsapproved

6. Facilitating Entryand Exit(Bankruptcy andAntitrust regimes)

• Bankruptcy Law enacted andtraining program for courtsstarted

• Amendment to Tax Codeenacted

• Approval of Antitrust Law byCongressand implementation underprogress

• Increase in number of “hard-core” cartelcases successfully prosecuted

• Increased speed of recuperation ofinsolvent enterprises

7. Simplify Entry andBusiness Operation

• Tax exemption (PIS-COFINS) forcapital goods imports of exportingfirms approved

• Synchronization of tax collectionsystem implemented in key selectedstates

• Electronic tax receipt (Nota FiscalElet.) implemented

• Time needed to register a firm decreasedto 76 days in pilot cities

8. ImproveJudicialContractEnforcement

• Constitutional Amendment No.45approved (Sumula Vinculante andConselho Nacional de Justiça)

• Law No. 11,187/2005 approved byCongress

• PL 90/2005 (Sumula Impeditiva)approved

• Conselho Nacional de Justiçaconsolidated

• PL 52/2004 and PL 44,97/2004(Execução de Sentenças and TitutlosJudiciais) approved

• PL 4,728/2004 (Matéria Repetitiva)approved

• Appeal rate (includesextraordinaryrecourses) decreased by 5% annually.

• Clearancerate increased 10% annually incivil cases

36


Enhance the Efficiency and Depth of the Financial Sector5. IncreaseFinancial

Competition• Banking Competition Law enacted • Increase the coverage of antitrust scrutiny

over financial sector mergers andacquisitions

6. Sound FundamentalLegislation andSystemic RiskControl

• Evaluation of residual risk in thepaymentssystem completed

• Blueprint prepared for second phasepayments reform (retail payments)

• Implementation of key action points ofBCB report on rationalization of retailpayment systems, especially as regardsinterconnection of ATM and POSnetworks

• Effectiveuse of credit registries forenhanced supervision of systemic risk

• Rationalization of the infrastructurefor securities trading and settlementsystems.

• Improvement of accounting andcorporate governancestandards

• Increased by 10% theshare of transactionsperformed using debit and credit cards.

7. MobilizeLong-Term Resources inInsurance Sector

• Submission of reform of reinsurancemarket to Congress

• Reform of the reinsurancesectoradvanced

• IRB reorganized to competeundernew market conditions

• Entry of at least two new serviceprovidersin the reinsurance market

8. Improve EfficientAccess to FinancialServices for thePoor and SMES

• Regulation and enactment of payrolldeduction loans

• Regulation on positive informationcredit reporting (Cadastro Positivo)

• Impact evaluation of microcreditmechanismsconcluded

• Increased availability of non-earmarkedcredit to small borrowers

Increase Innovation Capacity to Transform Knowledge into Productivity Gains Increase Innovation Capacity to Transform Knowledge into Productivity Gains4. IncreasePublic

R& D Effectiveness• Innovation law approved• Legal framework for direct-subsidy to

privatesector R&D established(Subvenção Economica)

• Innovation law implemented byselected federal universitiesand publicresearch centers

• Number of technology transfer contractsbetween public universities/researchcentersand theprivatesector increased by20%

5. Foster PrivateInnovation

• Reform of Fundos Setoriais (asexpressed in creation of Comite deCooredenação)

• Tax Breaks and tax incentives forprivateR&D developed

• Further simplification of Finepoperational policies implemented‘

• Subsidiesevaluated

• 10 percentagepoint increase in privatelyfunded R&D share in total R&Dexpenditures

6. Create Innovationin EnvironmentalMarkets

• ExecutiveSecretariat of ICCCequipped according to increasedresponsibility and volume of projects

• ICCC coordination of climatechange issuesstrengthened

• US$100 million in sales of carbon credits

37

Annex 9. Matr ix of theGovernment Growth Program

Policy Areas and Program Goals First and Second Loans

Actions Completed

FutureDevelopment Areas Expected Outcomes andMonitor ing indicators

Short-Term Actions Medium Term Actions

1. Reduce logistic costs

1.1 Improve Customs’Effectiveness

• customs’ reform strategy fortrade facilitation approved, as afirst step to update customs’mission and performance targets

• annual performance indicatorsand targets set-up

• trade facilitation and safetydivisions established in customs

(Recommendations for amodern and efficientcustoms’ management.PROCOMEX technicaldocument, 2004)

• Customs’ strategic plan forreform implementation ready,including reengineering andsimplification of clearanceprocedures, staff development,and performance monitoring andevaluation

• internal restructuring plan andintegrity program underway

• average gross release timedecreased from 5 to 3 days(imports) and from 2 days to 1 day(exports)

• selectivity levels cut from 40%to 30%

• average net release time cut by20%

• selectivity levels cut from 30%to 20%

• average net release timefurther cut by 10%

• selectivity levels decreased to20%

• SISCOMEX systemcoordinated with other agencyclearance or certification

• average gross release timedecreased from 5 to 3 days(imports) and from 2.0 days to1.0 day (exports)

• export clearances facilitatedand simplified procedures (BlueLane regime) expanded to smallerfirms (Normative Instruction No.611/2006)

• computer-based clearancesystems (SISCOMEX,MANTRA) operational, and

• SISCOMEX-CARGA andHARPIA systems established inmain ports

• Integrated customs operationswith a second Mercosur countryunderway

• average selectivity levels cutfrom 40% to 30%

• new customs clearanceprocedures in effect, includingadvance release and expressshipments release system,coordinated with other agencyclearance or certifications, andSISCOMEX re-organized

• risk management system

38


Actions Completed



users’ risk evaluation system(RADAR) established, to pursuesimplification, modernization andintegration of Customs’ clearancesystems

• pilot cargo control system(SISCOMEX-CARGA) and riskassessment and cargo selectionsystem (HARPIA) designed

• integrated customs operationsin effect at Argentina border

• some inland bondedwarehouses established

operational

• selectivity levels reduced to20%

• new standards and regulationsimplemented for customs bondedwarehouses

• publication on Internet ofclearance times

• performance evaluation andcompensation policy revised

• revised human resources policyand of new safety measures underimplementation

• study on security measures toensure officers’ security underimplementation

1.2 ReducePort Costs andDelays

• port operations privatized,private ports authorized for publicuse, and twelve ports delegated tostates/municipalities

• action plan to proceed withport reform and investment(Agenda Portos) approved

• decision taken andimplemented to maintain in orexclude dock companies fromprivatization program

• two secondary ports privatized • average cargo transit timethrough port decreased from 13.8to 10 days (imports) and from 8.4to 5 days (exports), and averagecontainer handling cost decreased10 percent from 2003

• port administration andmonitoring improved through:dock companies withdrawn fromport operations

• assessment of dockcompanies’ finances and

• norm for port authorities’ tariffadjustments issued

• port performance monitoringsystem established in 20 mainports

• dock companies reorganizedinto port authorities or privatized

39


Actions Completed



operations completed

• norm issued for leasing andsupervision of ports areas andfacilities

• port performance monitoringsystem operational in 10 ports

• draft decree revised tocoordinate integration of trade-related operations information andcontrol systems

• Merchant Marineshiptracking system beingcomputerized (automaticidentification system-AIS)

• decreeapproved andcommission established

• SISCOMEX-CARGA andMerchant Marineship trackingsystems established in main ports

• SISCOMEX-CARGA,Merchant Marineship tracking,and terminal operators’ cargotracking systems integrated inmain ports

• labor productivity increasedthrough reduction of registeredstevedores (to 27,000), negotiatedgang sizes and contracted labor,and through increased cargothroughput

• facilitate negotiation ofcollective labor agreement

• labor productivityimprovement measures underimplementation

1.3 ReduceTransport Costs onFederal Road Network

• road management andfinancing capacity strengthenedthrough:

� approval andimplementation of the law onreorganization of the federaltransport administration (LawNo. 10,233/2001)� adequate funding for roadmaintenance andrehabilitation in 2004-2005(around RS$ 1.4 billion)

• Government’s strategy forroad maintenance managementapproved

• funding adequate for 2006road maintenance andrehabilitation program

• first phase of hiring of DNITstaff completed

• former inefficient federal roaddepartment (DNER) closed

• road management capacitystrengthened and administrativeprocedures streamlined

• funding remains adequate forroad maintenance andrehabilitation program, takinginto account overall fiscalsituation

• 50% of road network in goodcondition, average road transportcosts decreased 5%

40


Actions Completed



� approval by law of careerplan for DNIT staff (Law No.11,171/2005)

. • decentralization of roads oflocal interest to thestates initiated,with 20% of theFederal networktransferred to statemanagement

• 30% of the federal networktransferred to thestates

• road network classification lawapproved

• privatesector participation inmanagement of road networkincreased, with 8% of the federalroad network under concession,and 20% under output-basedcontracts

• road concession/PPP modelrevised, strategy for delegatedconcessions and continuation ofconcessions program defined

• output-based contracts on 30%of the federal road network

• an additional 5% of the federalroad network underconcession/PPP

• an additional 5% of theFederalroad network underconcession/PPP

1.4 Foster Development ofMultimodal Transport

• geographical restructuring ofrailway concessions completed

• institutional frameworkstrengthened through:

� establishment of inter-ministerial commission forinfrastructurepolicies andcreation of theNationalCouncil for Integration ofTransport Policies (CONIT,created by Law No.10,233/2001)� reorganization of transportministry and strengthening ofplanning department (Decree

• draft law on Portos Secossubmitted to Congress

• Transport Ministry’s planningdepartment operational with newpositions approved for planningspecialists

• pilot transport PPP structured

• CONIT operational

• pipeline developed of transportprojects suitable for private sectorfinancing

• transport information systemoperational

• monitoring and evaluationcapacity of public expendituresprograms set up in TransportMinistry

• 10 percent increase in non-road transportation share

• Infrastructure planningcapacity up to internationalstandard

41


Actions Completed



No. 4,721/2003)� establishment of PPP unitin Planning and selection of 2multimodal projects withinthe first 5 priority pilottransport PPP projects

• competitiveness ofmultimodal transport servicesincreased with:

� railway concessionsoperations and ownershiprestructured� rail norms and regulationsfor joint and interchangetraffic, and captiveshipperrates enacted and enforced� norm for licensing ofMTOs issued andimplemented (ANTTresolution 794/2004), with146 MTOs licensed� modal shareof railwaysincreased from 19% to 23%

• agreement reached betweenfederal and state of São PauloGovernments on freight traintraffic improvement plan

• share of rail/water transportmodes in goods transportationvolumes increased by 10%

• norms and standards in effectin the following areas: rights andobligations of operators, liabilityand insurance, commoditycertification, equipmentinterchange, and electronic datainterchange

• freight train trafficimprovement plan in São Paulounder implementation

2. Improve theBusiness Environment

2.1 Strengthen InfrastructureRegulation

• PPP law approved by Congress(Law No. 11,079/2004)

• Lei das Agências approved byCongress (Law No.11,094/2005)

• remaining legal bottlenecksovercome in selected sectors

• threePPP projects approved

• law on career developmentplan for regulatory agenciesapproved by Congress (Law No.11,094/2005)

• institutional framework forPPPs projects consolidated

• selected measure to improvegovernanceof regulatoryagencies undertaken

42


Actions Completed



2.2 Enhance theCompetitiveEnvironment

• approval of Lei do Bem (LawNo. 11,196/2005)

• establishment of theSimplesregistration for SMEs (Law No.11,196/2005)

• Supersimples law project (No.210/2004) to bevoted by thelegislature

• completion of integrationprocess of tax administration atthe three levels of Government

• law regulating theopening of anew business at thenational level

• timeneeded to register a firmdecreased by 90 percent (from 152days to 15 days) in pilot cities

2. 3 Enhance theCompetitiveEnvironment

• Bankruptcy Law enacted andAmendment to Tax Codeenacted

• Antitrust Law Reform sent toCongress

• Approval of Antitrust Law byCongress and implementationunder progress

• Increase in number of “hard-core” cartel cases successfullyprosecuted

• Increased speed of recuperationof insolvent enterprises

2.4 ImproveJudicial ContractEnforcement

• Constitutional AmendmentNo.45 approved in 2004(Sumula Vinculante andConselho Nacional de Justiça)

• simplification of judicialclaims to speed up transit timeof appeals in Courts approvedby Congress (PL No.4,727/2004)

• draft law (PL No. 90/2005(Sumula Impeditiva) approvedybCongress

• Conselho Nacional de Justiça(National Council of Justice)consolidated

• SJR studies (on the "costs ofjustice" and “execuçõesfiscais”) completed

• PL 52/2004 and PL 44,97/04(Execução de Sentenças andTitutlos Judiciais) approved

• PL 4,728 (Matéria Repetitiva)approved

• Appeal rate decreased by x%

• Clearance rate increased to X%

3. EnhanceEfficiency and Depth of theFinancial System

3.1 Sound FundamentalLegislation, Competition andSystemic Risk Control

• Formal agreement betweenCADE and BACEN onantitrust regime for bankingindustry following the linesofproposed Banking CompetitionLaw (Diario Oficial da União09/15/20)

• Evaluation of residual risk inthepayments system

• Banking Competition Lawapproved by Congress

• Improvement of accountingand corporategovernancestandards

• Implementation of key actionpoints of BCB report on

• Rationalization of theinfrastructure for inter-bankmoney markets and securitiesexchanges

• Implementation of necessaryimprovements for SCR 1.2 andenhanced useof creditregistries for risk-based

• Reduced concentration indepositsof top 10 banks by 10percentagepoints from 2001

• Increased efficiency of retailpayment networks

• Increased coverageof SCR

43


Actions Completed



completed (Oct. 2004) andincreased oversight function ofcentral bank over paymentsystems

• Blueprint of retail paymentsreform completed (May 2005)

• Launch of web based creditinformation system withupdated client profiles andpayment history (SCR 1.1)

• Key legal initiatives forfinancial reform presented toCongress

rationalization of retailpayment systems

• Effective monitoring of thelevel of competition inrelevant financial markets

supervision

3.2 MobilizeLong-TermResources in InsuranceSector

• Draft Law for gradual openingof the reinsurancesector andreforming IRB presented toCongress (PL No. 249/2005)

• Risk based regulation andsupervision initiatives ineffect, including rulesoninternal controls, actuarialtables, actuarialresponsibilities, policy registryand others (Res. CNSP114/2004, 118/2004, 8/2005,121/3005 and Circs. SUSEP249/2004, 280/2004,287/2005)

• Higher transparency throughpublic hearings and consumerprotection through ombudsman(Res. CNSP 108/2004,110/2004 and 127/2005)

• Draft Law opening thereinsurancesector tocompetition approved byCongress

• Reform of IRB strategy andstructurewithin newcompetitiveenvironment

• Enhanced risk-based prudentialregulation and supervision inthe insurancesector

• Improvement of consumerguarantees and consolidation ofinsurancedatabases

• Expansion of insuranceAUMby 20% from 2001 on asoundbasis

• Entry of new serviceprovidersin the reinsurancemarket

44


Actions Completed



• Tax relief for insurancecompanies (Decree5,172/2004)

3.3 ImproveAccess toFinancial Services for SMEs andthepoor

• CVM regulation of newreceivables funds FIDC

• Credit securitizationmechanisms (LCI, CCI andCCB, Law No. 10,931/2004and No. 11,076/2005)

• Agricultural insuranceandrural credit mechanisms(PRONAF, shared premiumschemes and crop guarantees)

• Enhanced productdiversification and prudentialregulation for creditcooperatives (Law No.10,865/2004, Res CMN3,198/2004; 3,309/2005;3,321/2005; and, Circ. BCB3,294/2005)

• Regulation and enactment ofpayroll deduction loans(DecreeNo. 4,961/2004)

• Introduction of agriculturalguarantees program forfamilies within PRONAF(CMN resolution No.3.,234/2004)

• Cadastro Positivo Lawapproved by Congress

• Tax simplification for SMEsand microcredit institutions

• Regulation for basic insuranceproducts for thepoor (seguropopular)

• CVM regulation of innovativefinancial instruments for widermarket access

• Factoring law approved byCongress

• Impact evaluation of newmicro-finance measures andoriented credit schemes..

• Bank sight accounts, includingsavings, expanded by 10%from 2001

• Increased availability of non-earmarked credit to smallborrowers

45


Actions Completed



4. Increase Innovation Capacity to Transform Knowledge into Productivity Gains4.1. IncreasePublic R& DEffectiveness

• Innovation Law approved

• Legal framework for direct-subsidy to privatesector R&Destablished (SubvençãoEconomica)

• Innovation law implementedby federal university andpublic research centers

• Subsidies structured andunder implementation

• Technology extensionprogram established forSMEs

• Subsidies evaluated

• Number of technology transfercontracts between publicuniversities/research centersand theprivatesector increasedby 20%

4.2. Foster Pr ivate Innovation • Reform of Fundos Setoriaisunder way

• Tax Breaks and tax incentivesfor privateR&D developed(MP do Bem)

• FNDCT proposal approvedin Congress

• Tax Breaks and incentivesfor privateR&D consolidated

• Governanceof Sector Fundsfurther improved

• Further simplification ofFinep operational policiesimplemented

• 10 percentagepoint increase inprivately funded R&D share intotal R&D expenditures

4.3. Create Innovation inEnvironmental Markets • CDM projects evaluated and

approved in predictedtimeframe

• ExecutiveSecretariat ofICCC staffed and equippedaccording to increasedresponsibility and volumeofprojects

• ICCC responsibilitiesexpanded to coordination andplanning of climatechangeissues.

• US$200 million in sales ofcarbon credits

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STA CATARINA

RIO GRANDEDO SUL

A M A Z O N A S

RONDÔNIA

PA R Á

RORAIMAAMAPÁ

MARANHÃO CEARÁ

P I A U I

RIO GRANDEDO NORTE

PARAÍBA

ALAGOAS

SERGIPE

PERNAMBUCOACRE

Porto Alegre

Rio deJaneiro

São Paulo

Vitória

Salvador

Maceió

Recife

João Pessoa

Fortaleza

São LuísBelém

Porto Velho

Cuiabá

Belo Horizonte

Goiânia

Teresina

Palma

Florianópolis

Curitaba

Aracaju

Natal

Macapá

Boa Vista

Manaus

Rio Branco

CampoGrande

BRASÍLIA

COLOMBIA

PERU

BOLIVIA

PARAGUAY

URUGUAY

ARGENTINA

CHILE

GUYANA

SURINAME

FrenchGuiana

(Fr.)

R.B. DEVENEZUELA

A m a z o n

B a s i n

B r a z i l i a n

H i g h l a n d s

Mato GrossoPlateau

Amazon

Amazon

O

r i noco

Negro

Purus

Madeir

a

Teles Pires

Juru

ena

Xing

u

Ara

guai

a Toca

ntin

s

São

Fran

cis

co

Paran

á

Grande

Paraguay

Tapajó

s

ATLANTICOCEAN

ATLANTICOCEAN

PACIFICOCEAN

To Ciudad Guayana

To Santa Cruz

To Santa Cruz

To BuenosAires

To Montevideo

70°W 60°W 50°W 40°W

70°W 60°W 50°W 40°W

20°S

30°S

0°

10°S

20°S

30°S

0°

BRAZIL

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.

0 200 400

0 200 400 Miles

600 Kilometers

IBRD 33377

SEPTEMBER 2004

BRAZIL

STATE CAPITALS

NATIONAL CAPITAL

RIVERS

MAIN ROADS

RAILROADS

STATE BOUNDARIES

INTERNATIONAL BOUNDARIES