PROGRAM INFORMATION DOCUMENT (PID) CONCEPT STAGE November 7, 2013 Report No.: AB7421 (The report # is automatically generated by IDU and should not be changed) Operation Name BR Amazonas DPL Region LATIN AMERICA AND CARIBBEAN Country Brazil Sector General public administration sector (50%);Sub-national government administration (50%) Operation ID P147979 Lending Instrument Development Policy Lending Borrower(s) STATE OF AMAZONAS Implementing Agency Secretariat of Finance (SEFAZ), State of Amazonas Date PID Prepared November 19, 2013 Estimated Date of Appraisal January 20, 2013 Estimated Date of Board March 20, 2014 Approval Corporate Review Decision TBD Other Decision {Optional} TBD Key development issues and rationale for Bank involvement The State of Amazonas is sparsely populated with only 3.6 million inhabitants, and has the second lowest population density in the world, only higher than that of Mongolia. Amazonas’s GDP totaled R$59.8 billion in 2010 (US$34 billion), which represents 1.6 percent of the country’s GDP. Per capita GDP was R$17,158 in 2010 (US$8,500), which is equivalent to 87 percent of the national average. With 41.7 percent of the population living under the poverty line (under US$4 PPP/day) and 24.5 percent in extreme poverty (under US$2.50 PPP/day), the incidence of poverty in Amazonas continues to be a pervasive problem. Currently, the State registers the fourth highest poverty rate in Brazil and the highest in the Northern region. Poverty reduction has been achieved in recent years, although the reduction has been less than the rest of the country. Whereas poverty in Brazil has fallen steadily from 41 percent in 2004 to 25 percent in 2011, poverty in Amazonas has declined from 55 percent to 41 percent. Crime and violence is also a growing challenge. While states such as São Paulo reduced their homicide rate by almost 70 percent between 2000 and 2010, in the North homicide rates doubled over the same period. In Amazonas alone the rise reached 54.6 percent, from 19.8 per 100,000 inhabitants, in 2000, to 30.6, in 2010. In the capital city, Manaus, the homicide rate reached 56.2 per 100,000 inhabitants in 2011. In 2011, the State also presented the second highest robbery rate in the country, reaching 1,038 per 100,000 inhabitants. Due to its poor social indicators, elevated crime rate, and vast territory, the State has been investing more than the national average in social sectors since 2000, 2.8 percent of GDP compared to 1.1 percent respectively. Among Amazonas’s primary budget expenditures is citizen security, which accounts for 9 percent of total expenditure and has been increasing rapidly in recent years. Between 2010 and 2012, expenditures on citizen security increased by 31.8 percent in real terms, compared to an increase of 8.6 percent in education and a 1.8 percent drop in health. This significant increase in sector expenditures is explained mainly by the Government’s efforts to respond to rising levels crime and violence through the establishment of Integrated Police Delegations (Delegacias de Polícia Integrada – DIPs) of the civil and military police. This trend towards increasing expenditure in this sector is estimated to continue for at least the next two years. However, should this path continue, the State’s fiscal sustainability could be at risk. Driven by higher operating expenses generated by public investments and increases in public wages (following the inflation rate), current expenditure totaled R$10 billion in 2012, representing a real increase of 7.9 percent over the previous year. Between 2007 and 2011, Amazonas recorded budget deficits, leading to a decline in public investment spending in 2012 of 27 percent in real terms. For 2013, the projections from the Finance Secretariat (Secretaria da Fazenda- SEFAZ) estimate a budget deficit of 0.9 percent of GDP, mainly reflecting the nominal growth in staffing costs (7.6 percent) and other current expenditures (23.5 percent). In this context, one of the State’s main challenges is to more efficiently manage the State’s financial resources and to promote service delivery. Support for the security sector is important both because of the priority given to service delivery in this area (reduction of crime and violence is fundamental for citizen welfare and for economic growth) and the risk that the expansion of this sector could inhibit service delivery in other sectors that are critical for sustained poverty reduction if resources are not used more efficiently. Rising demands from citizens for greater quality services, combined with tighter fiscal conditions, make increasing public expenditure efficiency and improving public sector management critical for the State. Proposed Objective(s) The Policy Development Objective (PDO) of this proposed operation is to assist the Government of Amazonas to improve public sector management by (i) increasing tax compliance; (ii) streamlining public financial management and procurement; and (iii) increasing efficiency in the citizen security sector. In order to achieve this, the loan will help the State devise and put into practice policies, procedures and tools to improve public sector performance in these areas. The policy areas covered by this operation aim to support the State’s own goals in the areas of public sector management; therefore, the PDO is fully aligned with the Government’s longer-term development objectives. Furthermore, the proposed operation also supports other programs under implementation or preparation by the State aimed at improving its fiscal position and the quality of public sector management. For instance, the IADB-supported Program of Consolidation of Fiscal Equilibrium for Social and Economic Development in the State of Amazonas (Programa de Consolidação do Equilíbrio Fiscal para o Desenvolvimento Econômico e Social do Estado do Amazonas - Proconfins) from SEFAZ. The expected result from this operation is an improvement in public sector management and performance through increased efficiency. These efficiency gains will be perceived through increased tax compliance, streamlined procedures, policies and systems for procurement and financial management resulting in public sector savings, and through the implementation of a results-based management approach and greater coordination in the citizen security sector which would lead to a more optimal allocation of resources. Given the breadth of these reforms, these measures would benefit all state citizens, but in particular those in vulnerable groups who are more dependent on government services. From the tax administration pillar the expected results are intended to increase sales tax compliance through the modernization of the fiscal receipt system, which will formalize many smaller retailers. In the financial management and procurement pillar, the expected results are reductions in the cost of selected out-sourced services through the implementation of a contract management system and Price Registry, standardization of service specifications, and improvements in planning and execution of public private partnerships (PPP). On the citizen security pillar, the expected results include improved police performance, more efficient allocation of resources, and increased citizen participation. The direct beneficiaries of this last pillar will be citizens who live in areas most affected by crime and violence in the State. Preliminary Description This proposed operation is a single tranche Development Policy Loan in the amount of US$216 million to the Brazilian State of Amazonas, to be carried out in partnership with the Inter- American Development Bank and supports the program of the Government of Amazonas in areas of public sector management. The operation is structured around three pillars: a tax administration pillar, a financial management and procurement pillar, and a citizen security pillar. Pillar I. Tax Administration. The main objective of this first pillar is to increase tax compliance through modernizing and simplifying sales tax procedures to boost voluntary collection as well as expand the taxpayer database. Amazonas suffers from low sales tax collection rates. As such, the Government of Amazonas has sought innovative solutions to strengthen tax administration, such as the implementation of the 2013 pilot of the Consumer Electronic Fiscal Note (Nota Fiscal do Consumidor Electronica - NFC-e). The NFC-e, a free system for retailers, creates an electronic file at the time of purchase with the invoice information and sends it to SEFAZ, which then validates the information against the taxpayer database. Once this information is validated, the invoice is issued to the consumer. The system’s rollout across the whole State will substitute the previous system involving paper receipts, reduce the cost of compliance for retailers, decrease the demand for in-depth audits by increasing the availability of real-time and reliable information on collection, and elevate the risk of non-compliance. This, in turn, is estimated to increase tax compliance and improve taxpayer database. The State has planned for a gradual deployment of the NFC-e, starting with voluntary membership in July 2013 and moving to obligatory compliance for retailors by 2015. This pillar directly supports the implementation of this system. A continuation of this reform involves instituting incentives for consumers to comply with sales tax obligations. Pillar II. Financial Management and Procurement. The main goal of this second pillar is to streamline public financial management and procurement procedures to generate savings, foster transparency, and increase efficiencies by strengthening expenditure control and consolidating improvements in the preparation and execution of the budget. The Government of Amazonas suffers from low efficiency in budget and financial planning and from the absence of standardized policies and tools in the areas of (i) control of recurrent expenditures; (ii) contract management; (iii) public procurement systems; and (iv) investment planning. The proposed actions of the operation support the adoption of the new policies and standards for procurement and contract management that will allow the executive branch to improve planning of resource allocation, thus, improving financial control and generating savings. Pillar III. Improved Efficiency in the Security Sector. Policy actions to be financed under this component aim at improving efficiency in the citizen security sector through: (i) the integration of resources and actions of the various sector entities; (ii) the planning, monitoring and evaluation of police performance and public security expenditures; (iii) the promotion of intergovernmental coordination and streamlining of operating costs; (iv) and the promotion of greater transparency and social control of public security management. The lack of coordination, information sharing, and trust between the civilian and military police have historically posed problems in many Brazilian states and in the country as a whole. Ronda Bairro is therefore the main State effort to integrate the work of the two police forces in order to avoid duplication of efforts and lack of coordination. The program is based on the principles of results-oriented and community policing, aimed at increasing efficiency in the allocation of citizen security resources, establishing monitoring and evaluation mechanisms to oversee citizen security performance and expenditures, and at strengthening the relationship between the police and civil society. This operation will directly support the administrative strengthening of these coordination processes through the formal integration of the civilian and military police into DIPs as well as the creation of a results-based approach for evaluating police activities. The operation will also support enhancing civil society participation in the sector through the creation of a disclosure mechanism for expenditure indicators. Poverty and Social Impacts and Environment Aspects Poverty and Social Impacts The policy actions supported by this operation are expected to have a positive impact on poverty as they will address good governance and fiscal sustainability, citizen security and gender equity issues. The PSIA assesses the expected distributional impacts and attempts to identify political economy and implementation risks linked to this operation on different socioeconomic groups, especially poor and vulnerable groups. The assessment relies on the analysis of secondary data. The combined social and economic impacts of the policies supported by this operation for the most vulnerable population are expected to be positive. To demonstrate the potential pro-poor effects of the citizen security policies supported by this operation, it is necessary to assess the distributional impacts of crime and violence in Amazonas. Violence and criminality rates are much higher at the capital city and in its more underserved areas with higher rates of poverty, poor housing stock, unemployment, lower educational attainment, low levels of investment in public spaces and higher levels of social vulnerability (the East, the North and the West Regions). As elsewhere in Brazil, age, gender and race disparities are also characteristic of crime victimization in Amazonas. The rate of homicides more than doubled in the state and in its capital city in the last decade. These rates experienced larger increases among the youth: at the state level, homicides among the young population grew 138 percent; in the capital city, this growth equaled 151.5 percent. Furthermore, while homicide rates are much higher among men than women at the state and city levels, incidence of domestic violence, physical assault and rape hit the female population harder. Finally, homicide rates are higher among Afro-Brazilians than among white Brazilians, and this gap is increasing. In the last decade, this rate has increased 155.7 percent among the Afro-Brazilians and 128.3 percent among the white Brazilians. Therefore, the proposed policy changes in citizen security are expected to bring positive outcomes for the society as a whole, but they will particularly benefit the poorest and most vulnerable segments of the population, including youth, women and the Afro-descendant population. Additionally, by emphasizing public disclosure of criminality rates and police activities, the proposed citizen security policy changes will foster transparency and social accountability in the involved sectors. The strengthening of Public Sector Management by means of improved planning and budgeting systems, and financial and resource management are essential for Amazonas to expand the State’s capacity in public service delivery. By adopting new policies to improve planning and budgeting, increase compliance with the tax system, and expand tax collection, the GoAM is expected to increase fiscal space and efficiency in the allocation of public funds, to provide public services more effectively, and to target better programs and projects to benefit the poor. Furthermore, the establishment of the NFC-e is expected to curb tax evasion, and increase revenues from sales tax (which represented 11.5 percent of the total revenues collected by the state). The impact of this policy change may be felt most by segment of small merchants and service providers in the retail sector, but it is also expected to reduce the financial burden that small merchants currently face to comply with the requirements for emission of consumers’ receipts, as the new solution cuts costs with specific hardware and equipment maintenance. Although, in rolling out the NFC-e a major bottleneck that remains to be overcome is the low- level of internet access services currently available in Amazonas. Redistributive and pro-poor effects are expected from increased compliance with the NFC-e and increased state fiscal space as the better-off segments of the population will finance improved public services, and the higher revenues might be allocated according to existing social priorities. Environment Aspects No direct impact is expected on the environment or natural resources from the improved efficiency and transparency of governmental expenditure and in the public security sector supported by the operation. In the long term, greater efficiency in these sectors should increase government capacity to deal with issues that may result in positive indirect impacts on biodiversity and forest protection, such as greater control over illegal activities involving natural resources (e.g. animal traffic and commercialization of illegal timber). This large and remote state encompasses 18.5 percent of the country’s territory and still maintains over 90 percent of its original forest cover, which houses globally important biodiversity. The State has a satisfactory institutional framework for sustainable development, environmental protection and indigenous affairs, and although the long distances and difficult access (mostly through river transportation) limit the reach of institutional action, these factors also contribute to maintaining most of the forest in its original state. Tentative financing Source: IBRD ($ 216 million) Borrower: State of Amazonas 0 Total $ 216 million Contact point World Bank Contact: Laura De Castro Zoratto Title: Economist Tel: (202) 473-0940 Email: lzoratto@worldbank.org Borrower Contact: Francisco Junior (Secretaria da Fazenda do Amazonas/SEFAZ) Title: Project Coordinator Tel: 55-92-21211868 Email: upc.am@sefaz.am.gov.br; fjunior@sefaz.am.gov.br For more information contact: The InfoShop The World Bank 1818 H Street, NW Washington, D.C. 20433 Telephone: (202) 458-4500 Fax: (202) 522-1500 Web: http://www.worldbank.org/infoshop