Document of The World Bank Report No: 23331 -BR PROJECT APPRAISAL DOCUMENT ONA PROPOSED LOAN IN THE AMOUNT OF US$46.0 MILLION TO THE STATE OF PERNAMBUCO, BRAZIL WITH THE GUARANTEE OF THE FEDERAL REPUBLIC OF BRAZIL FOR THE RECIFE URBAN UPGRADING PROJECT April 1, 2003 Finance, Private Sector and Infrastructure Country Management Unit 5 Latin America and Caribbean Region CURRENCY EQUIVALENTS (Exchange Rate Effective 12/06/2001) Currency Unit = Brazilian Real B$3.68 = US$1.00 US$1.00 = B$3.68 FISCAL YEAR January 1 -- December 31 ABBREVIATIONS AND ACRONYMS BNDES National Development Bank (Banco Nacional de Desenvolvimento) CAS Country Assistance Strategy CBO Community Organizations CDS City Development Strategy CELPE State Power Company COFIEX External Finance Commnission (Comissao de Financiamento Extemos) COHAB State Housing Agency COMNPESA State Water Company CONDERM RMR Development Council DRUP Rapid Participatory Urban Diagnostic EA Environmental Assessment EMHAPE State Housing Agency EMP Environmental Management Plans FIDEM Foundation for Municipal Development (Fundaqio de Desenvolvimento Municipal) GSP Government of the State of Pemambuco GTZ German Technical Agency (Deutsche Gesellschaft fur Tecchnische Zusammenarbeit) IPrr Property taxes NGO Non-governmental organization PRAFEP State of Pemambuco Fiscal Adjustment Program (Programa de Restruturaqc,o e de Ajuste Fiscal do Estado de Pernamnbuco) PREZEIS Plan to Regularize Areas of Special Social Interest (Piano de Regulag&o das Zonas Especiais de Interesse Social) PROMETROPOLE (Infrastructure Pmgram for Low-Income Areas (Programa de Infra-etura em Areas de Baixa Renda da RMR) RMR Recife Metropolitan Region SEM State Economic Memorandum SEPLANDES Planning and Development Secretariat SIGMA Management Infonnation System URB Recife Urbanization Company WS&S Water Supply and Sewerage WTP Willingness to pay Vice President: David de Ferranti Country Manager/Director: Vinod Thomas Sector Manager/Director: Danny Leipziger Task Team Leader/Task Manager: M. Vitor Serra & Dean A. Cira BRAZIL RECIFE URBAN UPGRADING PROJECT CONTENTS A. Project Development Objective Page 1. Project development objective 2 2. Key performance indicators 2 B. Strategic Context 1. Sector-related Country Assistance Strategy (CAS) goal supported by the project 5 2. Main sector issues and Government strategy 5 3. Sector issues to be addressed by the project and strategic choices 10 C. Project Description Summary 1. Project components 14 2. Key policy and institutional reforms supported by the project 15 3. Benefits and target population 16 4. Institutional and implementation arrangements 18 D. Project Rationale 1. Project alternatives considered and reasons for rejection 23 2. Major related projects financed by the Bank and/or other development agencies 27 3. Lessons learned and reflected in the project design 27 4. Indications of borrower commitment and ownership 29 5. Value added of Bank support in this project 29 E. Summary Project Analysis I. Economic 30 2. Financial 34 3. Technical 34 4. Institutional 35 5. Environmental 37 6. Social 42 7. Safeguard Policies 49 F. Sustainability and Risks 1. Sustainability 49 2. Critical risks 50 3. Possible controversial aspects 51 G. Main Conditions 1. Effectiveness Condition 52 2. Other 52 H. Readiness for Implementation 53 I. Compliance with Bank Policies 53 Annexes Annex 1: Project Design Summary 54 Annex 2: Detailed Project Description 58 Annex 3: Estimated Project Costs 75 Annex 4: Cost Benefit Analysis Summary, or Cost-Effectiveness Analysis Summary 76 Annex 5: Financial Summary for Revenue-Earning Project Entities, or Financial Summary 87 Annex 6: Procurement and Disbursement Arrangements 88 Annex 7: Project Processing Schedule 100 Annex 8: Documents in the Project File 101 Annex 9: Statement of Loans and Credits 103 Annex 10: Country at a Glance 107 BRAZIL RECIE URBAN UPGRADING PROJECT Project Appraisal Document Latin America and Caribbean Region TUDUR Date: April 1, 2003 Team Leader: M. Vitor Serra Sector Manager/Director: Danny M. Leipziger Sector(s): Solid waste management (30%), Water supply Country Director: Vinod Thomas (30%), Housing construction (30%), Central government Project ID: P049265 administration (5%), Sub-national government Lending Instrument: Specific Investment Loan (SIL) administration (5%) Theme(s): Access to urban services for the poor (P), Land management (S), Civic engagement, participation and community driven development (S) Project Financing pata . . - . - - . , ,. [X] Loan [ ] Credit [] Grant [ ] Guarantee ( ] Other: For Loans/Credits/Others: Amount (US$m): 46.0 Borrower Rationale for Choice of Loan Terms Available on File: M Yes Proposed Terms (IBRD): Varable-Spread Loan (VSL) Grace period (years): 5 Years to maturity: 15 Commitment fee: 0.75% p.a. Front end fee (FEF) on Bank loan: 1.00% Financing Plan (USSm): Source - - - Local - Foreign - Total BORROWER 26.92 11.08 38.00 IBRD 26.49 19.51 46.00 Total: 53.41 30.59 84.00 Borrower: ESTADO DO PERNAMBUCO State of Pernambuco Responsible agency: MUNICIPALITIES/FIDEM/COMPESA Funda,ao de Desenvolvimento Municipal (FIDEM) Address: Rua das Ninfas 65, Boa Vista, CEP 50070-050, Recife, PE, Brazil Contact Person: Amelia Reynaldo and Barbara Kreuzig Tel: 81-421-28-13 Fax: 81-222-07-93 Email: idpresi@fisepe.pe.gov.br Other Agency(ies): Municipality of Olinda Municipality of Recife COMPESA Estimated Disbursements ( Bank FY/US$m): -FY . :900-4. 200 5 >2006 ! )2007' 2008 .2009 , : Annual 4.00 7.82 14.60 9.20 6.00 4.38 Cumulative 4.00 11.82 26.42 35.62 41.62 46.00 Project implementation period: July 2003 to November 2008 Expected effectiveness date: 07/01/2003 Expected closing date: 03/31/2009 A. Project Development Objective 1. Project development objective: (see Annex 1) Improve the wealth and well being of the urban poor of the Beberibe River Basin in the Recife Metropolitan Region by increasing the institutional capacity of public (state and local), and civic entities to plan for, deliver and maintain basic shelter and urban services for the low-income in a coordinated and sustainable manner. This effort will commence with a focus on improving the built and natural environment of the Beberibe River Basin of Metropolitan Recife which will improve the urban living conditions of the basin's approximately 500,000 people, including 150,000 individuals (35,000 families) living in low-income settlements along the margins of the Beberibe River. 2. Key performance indicators: (see Annex I) Outcome / Impact Indicators (project): El Measures of Wealth and Well Being o Measures of the changes in property values pre-and post-project. o Measure of the quality of housing pre- and post project (measure of private investment). O Measure of the perceptions of quality of life through qualitative focus groups surveys. O Measure improvements in quality of services (hours of WS&S service, solid waste collection, etc.) E Measures of Project Efficiency and Effectiveness o Measure cost recovery of OM&R of investments (tariffs, urban services fees, property tax and other mechanisms such as betterment levies). o Program cost to income ratio, defined as the ratio of the median cost of investments/household to the median income per household in project area. o Program cost structure defined as the proportion of total project costs spent on overhead and management, project engineering and design, direct infrastructure investments, land titling, social outreach, resettlement housing and microcredit investment in housing. Output Indicators (project): Program coverage structure: the number of households benefited from the upgrading program as compared to the program coverage potential (number of communities and households projected to benefit). The physical outputs to be measured will be: Corresponding to output statement (1) in Annex 1: o # of new/legalized household water, sewer and electricity connections; o % change in public lighting coverage; o # of kms of drainage constructed or rehabilitated; o % change in conduction capacity of drainage; o #of kms of new and/or rehabilitated primary and secondary access roads constructed; o # of kms of pedestrian paths and communal space improved and/or constructed; o # of new retaining walls constructed; -2 - * # of families resettled due to geotechnical risk and/or encroachment into environmentally sensitive areas; * # of new property titles issues * (all of the above measured at the neighborhood level in the target area) * Increase in access to recreational activities (projected parks); * Direct employment of community members in execution of project works; and Inputs: (budgetfor each component) A.) US$69.4 million B.) US$10.1 million C.) US$ 4.1 million Front end fee = US$460,000 Change in property To measure the Among other data, the During the PDLI The consultants values of housing in economic benefits of household surveys to process and at the end conducting the PDLI project area. pre- and the project through be conducted in each of the project as part of for pre-project post-project expected incretase in UE as part of the the project evaluation property values diagnostic phase of the FIDEM will hire firm PDLI, an assessment of to conduct ex-post property values will be evaluation which will done include a sampling to measure property At the end of the values project, a sampling of households will be done to measure changes in property values Measure changes in This is intended to Among other data, the Dunng the PDLI The consultants housing quality pre- and provide us with a household surveys to process and at the end conducting the PDU post-project. measure of private be conducted in each of the project as part of for pre-project investment in housing UE as part of the the project evaluation diagnostic phase of the FIDEM will hire firm PDLI, an assessment of to conduct ex-post housing quality will be evaluation which will included include a sampling to measure changes in At the end of the housing quality project, a sampling of households will be done to assess changes in housing quality Measure perceptions of To provide a As part of the PDLI Dunng the PDLI The consultants quality of life pre- and qualitative assessment process, focus groups process and at the end conducting the PDLI post-project of changes in the should be conducted to of the project as pait of for pre-project perceived quahty of life assess resident's the project evaluation pre- and post- project perceived qualty of FIDEM will hire firm life to conduct ex-post evaluation which will As part of the end of include additional project assessment, focus groups to similar focus groups measure changes in should be conducted in perceived quality of order to measure life changes in perceptions Measure improvements in To measure changes in As part of the PDLI Dunng the PDLI The consultants the quality of services the quality of services process, the household process and at the end conducting the PDL1 - 3 - pre- and post- project surveys will assess of the project as part of for pre-project. quality and availability the project evaluation of urban services FIDEM will hire firm to conduct ex-post As part of the end of evaluation which will project assessment, a include a sampling of sampling of households households to assess will include an changes in urban assessment of urban service quality service qualty Measures of Efficiency and Effectiveness Measure Cost Recovery This will provide us Annual end-of-year Annually FIDEM will be wnth a measure of reporting of collections responsible for expected improvements in targeted area by collecting the in cost recovery of respective agencies. information from the WS&S tanffs, solid (measured as actual respective agencies waste fees and property and percentage of tax collections in the potential) Property Taxes project area Municipalities WS&S Tanffs WS&S provider Solid Waste Fees Municipalities Program cost to household To measure the average Household incomes End of project FIDEM income ratio investment per will come from household to the end-of-project survey average household sample. Average income. investment per household will be determined at the end of the project and determined from records of direct investments to be kept by FIDEM. Program cost structure This will give us a Cost will be made End of Project FIDEM good idea of the available from the average costs of the project accounting vanous aspects of the project, including Administration and management Engineenng and Design Social Outreach Direct investment in urbanization Resettlement housing Cost of land tenure regulanzation Outp bdlinto -. ' Program Coverage This will measure how From the PDU surveys End of Project FIDEM Structure well we achieved our we will know how projected coverage. many families we have benefited of the expected 35,000 Additional output These are physical These will be measured Annually and end of FIDEM indicators (see list outputs of the project. from reports indicating project above) physical outputs. - 4- B. Strategic Context 1. Sector-related Country Assistance Strategy (CAS) goal supported by the project: (see Annex I) Document number: Date of latest CAS discussion: June 13, 2002 The project directly supports the CAS Development Objective of Urban Poverty Reduction and the focus on the Brazilian Northeast. The CAS discussion on urban poverty identifies several critical problems affecting the urban poor: a lack of urban services, in particular sanitation; a high incidence of water-borne diseases which is directly related to the former; a qualitative and quantitative housing deficit, exacerbated by a lack of access to land through normal market mechanisms and the ensuing problems of insecure land tenure, particularly in squatter settlements (favelas). The development strategy for addressing these issues is four fold: (i) increase access to water and sanitation while modernizing the WS&S sector; (ii) upgrade, in an integrated manner, poor urban neighborhoods; understanding that this can only be done sustainably by also (iii) improving the functioning of urban land and housing markets; and (iv) creating sustainable mechanisms to finance urban infrastructure. 2. Main sector issues and Government strategy: Background. Located in the northeastern region of Brazil in the state of Pernambuco, the Recife Metropolitan Region (RMR) is the fourth largest metropolitan area in Brazil with a population of approximately 3.3 million distributed among 14'different municipalities - the largest of which are Recife -1.40 million, Joboatao dos Guararapes- 580,000 (urban) and Olinda - 368,000. Recife and Olinda are 100% urban. Together these three municipalities contain approximately 72% of the population of the RMR. The RMR is the most important commercial and service center in the northeast region of Brazil, generating about 76% of the GDP of Pemambuco. However, more than half of the working population above the age of 15 is employed in the informal sector. Of the informal sector workers, 47% earn one-half of a minimum salary, 54% earn one minimum salary or less and 77% earn two minimum salaries or less. The RMR presents a rich-poor spatial dichotomy with higher income neighborhoods located along the coastal axis, while low-income ones follow an inland parallel axis, along federal highway BR-101, the Beberibe and Capiberibe rivers. Roads connecting these two axes are also occupied mostly by lower income households. These low-income areas are home to 40% of the RMR population or 1.2 million people. They are characterized by their location (often in environmentally sensitive or high risk areas); makeshift, self-built housing; irregular development patterns; lack of basic urban services such as water, sanitation, solid waste collection; lack of physical and social infrastructure; and insecure land tenure. The origin of these settlements has typically been a product of rapid rural to urban migration against a backdrop of limited access to land and housing due to market and government failure. This has lead to the creation of vast tracts of illegally squatted (mostly on public lands) or illegally subdivided (typically private) settlements. Failure of the state to enforce property rights ex ante, and then the failure to recognize these settlements as legitimate ex post, and the subsequent lack of public investment in collective goods (for a variety of reasons) in these areas, have conspired to at once facilitate their proliferation and to make for poor living conditions. Today, rural to urban migration has slowed and much of the increase in the settlement of population -5 - arises in large part from natural population increases and new household formation. By 2015, the population of the RMR is projected to increase by an additional 872,000. The vast majority will be poor. And, ceteris paribus, these new urban poor will continue to seek housing solutions through informal means. In the older, denser settlements, any remaining vacant land will be occupied. In addition, households will increase the density of existing settlements by building upwards (i.e. adding second and third stories to existing housing). In the newer and more pefi-urban settlements, vacant lands will be squatted, extending the urban boundaries. Such unregulated, unplanned growth makes the provision of infrastructure and services a difficult task at best. It is a conflict between the need for land and shelter (private goods), which is typically secured first, and services and infrastructure (collective goods), the latter usually supplied ex-post without the benefit of adequate planning, and at considerable financial, social and environmental cost. The dismal living conditions in the favelas and irregular urban settlements in the RMR are among the worst of any major metropolitan region in Brazil. This may be in large part due to the fact that urban services are generally poor throughout the RMR, not only in low-income areas. Water, sanitation, solid waste collection, transit networks and transport are generally inadequate regionally, but the situation is especially poor in the low-income areas. Some statistics highlight the gravity of the situation: o Water. Water is supplied by the aquifer as well as from a complex of large and small dams located in various small watersheds and from the larger Capiberibe and Beberibe rivers. Unaccounted for water (UFW) is very high and supply is usually very intermittent. Overall water supply coverage is 89%, falling to 76% in the poor areas. In the higher income areas of the RMR, households resort to self-supply, drilling directly to the aquifer, resulting in an estimated two thousand wells, which pose at once a loss of revenue for the utility, a potential environmental problem, and an inefficient aggregate solution for water production. What's more, the sustainability of this situation is questionable given the rapid rate which the aquifer is declining. Recently, the RMR, due to exceptional climatic conditions, has gone through a particularly serious water shortage crisis. In times of "normal" service levels, service in low-income areas is very poor with only 24% of residents in informal settlements receiving water on a daily basis. o Sanitation. The situation of sewerage is more dramatic. Overall coverage is around 36%, falling to 7% in the poor areas. In Recife and Olinda (in wealthier areas), though sewage is removed from the lots, it is discharged into open canals running along the main avenues, which overflow during severe rains. In turn, these canals discharge, without any treatment, into the river systems of the two municipalities. In the RMR, only an estimated 20% of total sewage is treated, the four existing treatment facilities presenting severe operational problems. As a result, the heavily contaminated river system affects the quality of the water along the coast, especially the northern coast, from Olinda onwards. These problems are further complicated by the poor management of solid wastes. In the RMR, 20% of solid wastes are disposed of informally, most often in drainage and sewage canals. This is especially a problem in the favelas. o Drainage. Drainage is complex and critical in the RMR, demanding both a systemic approach and a site-specific one. The drainage system of the RMR has 66 main channels, 92 km long, representing a low drainage channel-to-area ratio (0.44 km of channels per km2 of surface area). It runs through sedimentary plains with low gradient and hills highly prone to erosion, both encroached on by illegal human settlements, leading to the reduction of river and channel beds and to the impediment of water flow. This situation carries high risks of an eventual large (not necessarily exceptional) flood, in particular for the population of the Beberibe river basin. o Access and Transport. Each day 2.3 million person trips take place in the RMR, of which 59.4% are - 6 - by bus, 34% by private automobile, 4.6% by METROTEC, 0.7% by suburban diesel train and the remaining 1.3% by trolleys. Urban transport activity is dominated by road-based motorized modes and is concentrated in eleven radial corridors and four semi-circular rings which bisect these corridors. During peak periods, most highway corridors are clogged with cars and buses. Bus services is generally of low speed and unreliable due to traffic congestion. Air quality is also degraded as a result of traffic congestion and the high level of road-based modes of transport. There are four main government bodies responsible for overseeing the urban transport sector in the RMR: the State Roads Administration; The Recife Metropolitan Transport Company which coordinates intermunicipal bus services; The State Traffic Administration in charge of traffic engineering; and the Companhia Brasileira de Trens Urbanos which operates the metropolitan and suburban train services. The Specific Case of the Beberibe River Basin. According to the most recent census figures, the Beberibe River Basin represents 18% of the population of the RMR, with a total population of 550,000 inhabitants. With a total area of 81.37 square kilometers and a length of 23.7 kilometers, the Beberibe River Basin spans three municipalities - Recife, Olinda and Camaragibe. The population is concentrated mainly in the municipalities of Recife (66%) and Olinda (33%). Growth rates are low in the Recife and Olinda areas of the basin (.73% and .46% respectively) indicative of the already high population densities of this portion of the basin (6,800 inhabitants/square kilometer). Meanwhile, the less urbanized municipality of Camaragibe is experiencing a population growth rate within the basin of 2.25% per annum, demonstrative of higher growth rates at the margins of the urbanized RMR. Without proper planning, the basin will continue to grow outward towards Camaragibe repeating the ad hoc, unplanned development that characterizes the Recife and Olinda portions of the Beberibe River Basin. The Beberibe River Basin has one of the highest concentrations of poverty in the RMR. According to available census data, 40% of the families in the RMR with household incomes below 2 minimum salaries reside in the Beberibe River Basin. Two minimum salaries is an income measure of poverty, consistent with the World Bank's definition of the poverty line of less than one dollar per day per person. Further, while 50% of households in Recife and Olinda are reported to earn less than 2 minimum salaries, that percentage increases to 66% within the Beberibe River Basin, further demonstrating the high concentration of poverty in the basin. The high concentration of informal settlements and poverty in the Beberibe River Basin, has compelled both the governments of Recife and Olinda to establish Special Social Interest Zones which create the legal basis for intervention in these areas. In Recife there are total of seven social interests zones, or ZEIS, representing about 50% of the basin's population. MuniciDalitv of Recife - Established ZEIS ZEIS Population Campo Grande 20,406 Fundaq5o de Fora 4,048 Tamanneira 216 Alto do Mandu/Sta. Isabel 13,484 Casa Amerela 191,582 Dots Unidbs 3,128 Linha de Tiro 11,980 Total 244,844 In the case of Olinda, in preparation of the project, the municipality passed the municipal law No. 5224 on September 9, 2000 which establishes special regulation for the areas of the project, allowing for the installation of infrastructure and special social treatment of these areas. Characteristic of poor urban areas, the living conditions in most the Beberibe River Basin are - 7 - sub-standard, providing the basis for intervention in these areas: o Water Supply: Household connections for water supply reach 90%, with close to 70% having connections inside the domicile. Approximately 30% of connections are external to the house. Yet despite an apparent high level of household connections, these figures include a high percentage of un-metered and illegal connections, as well as the poor level of service. Approximately 18% of household connections in the project area are illegal adding to the already intermittent service levels in the area as a whole. o Sewerage: Only about 29% of households are connected to the sewerage network but none of this is treated. Another 41% of families use septic tanks to dispose of sewage. Fully 11% (increasing to 16% among the lowest income households) use open-pit latrines. All of this adds to the poor sanitary conditions of the area and the high incidence of water borne disease. o Drainage: Most micro drainage is superficial (87%), but is not adequately channelled adding to erosion of hillsides, damage to buildings and infrastructure. The present system is incomplete and insufficient. Rain water often mixes with sewage increasing health risks to the community. o Solid Waste: Only about 60% of solid waste is collected door-to-door in the Beberibe Basin. The rest is indiscriminately disposed of in open land areas, and more often in canals which greatly impedes drainage in the area. o Electricity: About 72% of families are legally connected to the electricity distribution network. CELPE, the private electric company is responsible for the provision of electricity, and have put in place a program to regularize service in low-income communities such as those in the Beberibe River Basin. o Access and Transport: The Road layout of the Beberibe River Basin is strongly determined by the area's geography. It is made up of a single collector axis, Av. Kennedy, that runs parallel to the Beberibe River for approximately 8KM. Avenida Kennedy is also a strip that holds most the Basin's commercial and industrial uses. However, it is in a poor state, with limited regular maintenance, lacking effective traffic engineering and management to alleviate congestion points, increase traffic flow and better accommodate pedestrian use and safety. Local streets in the Beberibe River Basin have developed in an aggregative way, without the guidance of a local plan, resulting in an intricate web of streets full of missing links and a lack of uniform street widths and inadequate surfacing. o Green Areas and Parks: The Beberibe River Basin, with a population of approximately 500,000 has no parks, green areas, or community parks that are open to the public. On the other hand, it has a number of areas of natural interest and importance that could be easily rehabilitated , protected and opened to the public. Providing the community with recreational and open park areas, can help reduce, inter alia, problems associated with social exclusion and violence. o Housing Conditions: Eighty-six percent of housing in the Beberibe Basin is constructed of brick, indicative of the long average period of residency in the area (an average of 11 years). This housing is constructed slowly over time, with newer families living in housing made mostly of wood and of poor construction quality. Access to small loans for housing improvement would greatly assist families to make improvements in their housing. Another incentive to private investment in housing is to increase the percentage of families with legal title to their property. Only 51% of households in the Beberibe Basin has legal title to their property. - 8 - * Social Exclusion: Among the problems created by extreme poverty and lack of adequate urban services, is a sense of social exclusion. This problem manifests itself in many ways, including urban violence. At least two of Recife's most violent neighborhoods are located in the Beberibe Basin, including Nova Descoberta and the project's first pilot area, Campo Grande. The case of Olinda is even worse, with three of the city's eleven most violent areas falling in the project area - Peixinhos, Favela V 8 and Favela Ilha de Santana. At the same time, there is a high level of community participation in the Basin, with over 300 community organizations registered in the Recife portion of the Basin and 90 community associations registered on the Olinda side. Strengthening these entities and providing greater opportunities for social inclusion is as important as the project's efforts to improve infrastructure, housing and urban services in the area. State Government Strategy. The provision of urban services and infrastructure, and by extension the urbanization of low-income areas, involves several state agencies as well as agencies from 14 municipalities in the RMR. This requires extensive coordination at the metropolitan level. The shelter situation of the poor and the virtual breakdown of urban systems provision in the RMR reflects more than the scarcity of resources for investment, or of income to pay for services but also largely reflects the poor management of public resources and the failure of govemment to plan, regulate, enforce property rights, invest appropriately, and define transparent and fair subsidies for the urban poor. The government strategy has been to address these multi-sectoral issues in an ad hoc and mostly uncoordinated manner. There is a movement to improve coordination at the metropolitan level in specific sectors. Regarding integrated urban development in low-income communities, great advances have been made through the municipality of Recife's PREZEIS program, but these have fallen short of true urban integration and meaningful scale so as to make a true impact on quality of life and level of urban services in low-income areas. From the mid-eighties on, the Municipality of Recife initiated the implementation of a slum upgrading program of considerable success, the Plano de Regulaqdo das Zonas Especiais de Interesse Social (PREZEIS), which defined the legal process for regularizing land tenure, and promoted installation of integrated infrastructure, together with community consultation and participation. Also, around this time the Government of the State of Pernambuco, through the state housing agency (COHAB, now EMHAPE), developed a program of regularization of land tenure, which provided around 50.000 titles to the population of the RMR. Both PREZEIS and the COHAB titling program have the ingredients with which to establish a larger infrastructure-based poverty alleviation program. However, these programs have lacked other ingredients which impeded a larger impact, such as: (i) too small a spectrum of "quasi-housing solution," in particular, no attention being given to programs oriented to new housing demand (upgrading programs usually limit themselves to the current stock of housing and pay no attention to new demand); (ii) lack of effective, agile sector policies, in particular for water and sanitation (introduction of private sector participation, control of UFW, pricing policies), and the protection of the environment; (iii) a failure to endow these efforts with a true program character, including the definition of goals, adequate resources, long-term time-horizon, monitoring and evaluation, cost-recovery and subsidy policies; (iv); a lack of exposure to public scrutiny; and (v) a limited amount of coordination with other stakeholders. This latter point is critical, as a number of actors must be engaged to adequately address the slum problem, as well as the greater planning challenges posted by multi-jurisdictional areas such as the Beberibe River Basin. The PROMETROPOLE represents a radical departure from previous ad-hoc, small-scale and geographically scattered attempts to address issues of housing and urban services in low-income areas. The PROMETROPOLE project serves as a pilot for truly integrated, large scale urban services and housing upgrading, mixed with social development at the community level. It will bring together - 9- sectorial policies and programs into one coherent package, while at the same time fostering inter-governmental cooperation in the provision of basic urban planning and the provision of services in the Recife Metropolitan Region. 3. Sector issues to be addressed by the project and strategic choices: The Move Towards Reformn: At the state level an overall adjustment program has already begun which will impact all aspects of service provision. On January 14, 1999, the Government of the State of Pernambuco (GSP) signed the Programa de Reestrutura,do e de Ajuste Fiscal do Estado de Pernambuco (PRAFEP) which requires decisive short and long-run adjustment measures on the part of the GSP. These include cuts in recurrent expenditures, the restructuring of the state public administration, compliance with the Camata law (which limits personnel expenditures), the creation of a pension fund for state employees, an increase in state revenues, and a program of privatization of state owned enterprises - the two most notable of which are CELPE and COMPESA, the statewide power and water utilities respectively (CELPE is already in private hands whereas the privatization of COMPESA is being modeled by BNDES). PRAFEP contains a number of fiscal and financial targets to be met by 2004 and the PROMETROPOLE Project, is one of four external credit operations proposed by the State. It is a clear priority and represents a critical step in moving towards a coordinated approach to addressing the housing and urban services needs of the poor in the RMR. Heretofore, as noted in the previous section, most efforts have been at small-scale, and took no programmatic approach or systematic look at the underlying causes of the problems. This marks a turning point. The PROMETROPOLE project proposes the first large-scale, coordinated approach to addressing the shelter and service needs of the urban poor in the RMR, and goes even further by bringing true integrated urban planning to the entire Beberibe River Basin. The project focuses on improving the existing physical conditions of the low-income settlements through the introduction of services, infrastructure, the regularization of land tenure and the resettling of families living in areas of high geotechnical risk or environmental sensitivity. This aspect focuses on the Beberibe river basin, where approximately 18% of the RMR population reside, and where the highest concentration of poor are found. Improving the living conditions in this area would benefit the single largest agglomeration of urban poor in the RMR, and would provide indirect benefits well beyond its geographic area (i.e. reducing environmental degradation of the Beberibe river, reducing erosion of hillsides, etc.). As importantly, however, the project would endow the municipalities, the state, and civil society with the capacity to address these issues over the long-term through a program of capacity building and strengthening. In addition, the project would pilot new efforts aimed at preventing new slum formations, by addressing structural problems in the markets for, and government policy regarding, access to land and the provision of shelter and services for the low-income market. It is a truly comprehensive approach, and should be viewed as the first phase of a programmatic approach to shelter and service provision in the RMR. The project will specifically address the following sector issues: The upgrading of the current stock of shelter and services. The invasion of land sets off a process of progressive construction of the housing unit and of active search for the provision of infrastructure, which entails the application of own labor and of family savings, and the political lobbying for the installation of urban services. Slums are, in this sense, a solution rather than a problem. But they are also a solution which embodies a high number of negative externalities, which affect not only slum dwellers themselves but also the remaining inhabitants of the RMR. These externalities are the result of the location and unregulated nature of slum settlements, in which no original provision was made for certain public goods such as safe location, definition of rights-of-way, separation of public from private - 10- spaces, etc. The lack of the proper definition of property rights, collective as well as individual, compounds the problem, leading to the impossibility of charging property taxes and tariffs for services and to the hesitant attitude towards the provision of public and private services (from address definition to school location). Individual costs for the provision of the housing unit can also be higher than necessary due to the protracted and unskilled construction of the housing unit, which depends on the fluctuations of the dweller's income and on his ability to invest in his housing unit. The project consequently will differentiate between what consists of, on the one hand, a solution, and on the other, a problem, and will concentrate on resolving the latter. Consequently, it will: (i) provide for the upgrading of street layouts, drainage works, small open and recreation spaces, and for proper slum growth regulation; (ii) define property rights, including provision of titles to slum-dwellers; (iii) provide urban and social services, such as water, sanitation, electricity, community centers, etc; (iv) provide credit and technical assistance for housing improvement; (vi) provide for the resolution of environmental conflicts through resettlement of populations from highly environmentally sensitive areas, as well as those living in high risk areas; (vii) strengthen governmental agencies, in particular municipalities; (viii) stimulate participation of civil society in the solution of their problems; and (ix) encourage cost recovery of investments. The Greater Beberibe View: While the focus of the project is on the improvement of infrastructure and urban services for the urban poor residing in the Beberibe River Basin, it must be emphasized that the project deliberately takes a broader approach by looking at the urban structure of the Basin as a whole. In that regard, the project provides benefits well beyond those accruing directly to the poor. As part of project preparation, FIDEM completed a structural plan for the future development and preservation of the Beberibe River Basin. This plan lays the foundation for orienting development along three broad lines of actions: improving habitat; socioeconomic development and environmental management. In this regard, the project addresses the following sectorial issues in the following ways: * Water Supply and Sanitation: The PROMETROPOLE project design has fully taken into account concerns related to the sustainable operation and maintenance of the water supply and sewerage (WS&S) systems to be constructed under the project. The state water and sewerage company of Pernambuco, COMPESA, is responsible for WS&S in the Metropolitan Region of Recife (RMR). COMPESA, like many other state water companies in Brazil, is inefficiently managed and consequently operates and maintains its WS&S infrastructure very precariously. This is true for rich and poor areas alike, but is especially the case in the poorer districts and the slum areas of the RMR, such as those which are the object of the project, where WS&S service provision is at best precarious but often completely absent. The project proposes new alternative institutional arrangements for the provision of water in the project area, and improving the water supply and sewerage networks in the 13 intervention areas. * Drainage: Macro and micro drainage problems affect the totality of the population and its resolution goes beyond the poverty-focus of the project. Still, the sustainability of the PROMETROPOLE investments require attending to a number of the measures with respect to macro and micro drainage. Also, other PROMETROPOLE investments, such as the park system proposed along the banks of the Beberibe river, coincide with the needs and interest of both macro and micro drainage. The project will thus help the municipalities of Recife and Olinda set up a basic institutional framework which will allow the further identification of drainage problems and their solutions in the river basin. This would be done through the establishment of an intermunicipal Comite de Preservacdo de Bacia do Beberibe which is currently being studied by FIDEM. In addition, the project will support the study of the value and environmental impacts of the eventual construction of an excess-water retaining dam in the Municipality of Camaragibe (upstream) and will identify and eliminate a number of structures - 11 - that impede the flow of water along the Beberibe, the Morno and the Abacaxi rivers. In addition drainage measures will include protection of the few remaining unoccupied areas along the three rivers, and support of preparation of a micro-drainage master plan for the Beberibe River area as well as installation of main trunk lines. o Roads and Access: The Project will address the main problems of the road network with emphasis on low-cost rehabilitation work that would serve public transportation for the poor. Thus the project would promote the: (i) rehabilitation of 8 km of the Av. Kennedy; (ii) introduction of traffic engineering measures to improve circulation in the Beberibe basin; (iii) construction of bus/passenger terminal; (iv) rehabilitation of 10 km of the Estrada do Brejo (Morno River Road); (v) widening and construction of missing links in local roads layout; (vi) paving of bus routes in low-income areas; (vii) and improvements in local access roads. o Green Areas and Parks: These areas, besides containing no equipment or security support, are being encroached gradually by informal urbanization. They area also ecologically sensitive areas not fit for urban use, being partly mangrove, occasionally flooded or steep hillsides. Their occupation by recreational areas would avoid urban encroachment of the type of difficult future consolidation, would protect the few remaining environmentally sensitive areas in the region, in addition to providing a recreational outlet for the population and improving substantially the urban local standard and quality of life in the surrounding neighborhoods. In this vein the project will support: (i) surveys and studies which help focus on the nature of activities and equipment necessary for the promotion of the intense recreational areas by the poorer segments of the population, as well as the environmental protection purposes for these areas; (ii) urban, landscape and engineering designs; (iii) civil works including fencing, signage and protection of these areas, grading of terrain, landscaping, construction of accesses, small maintenance buildings, and construction of pedestrian and bicycle trails; (iv) design of maintenance management plans involving the municipality, community, private sector, and NGOs. The state environmental secretary, as well as environmentally focused NGOs, would also be deeply involved in order to strengthen the environmental protection purpose of these areas. o Social Inclusion: The project, through its participatory approach, will strengthen community groups who will be active in project preparation, execution and the maintenance of investments when completed. The project will also finance the rehabilitation of the Matadouro Park, which is currently used by many groups, in an impromptu fashion, as a cultural center. The project will encourage partnerships with the community for the protection of parks, collection of recyclables and other activities that can engage the community. o The creation of the conditions to provide future shelter and infrastructure solutions in accordance with demand and income levels. Facilitating access to reasonably located and subdivided (with public and private spaces clearly delineated), even if poorly serviced land, is a priority from the perspective of many of the poor, and most certainly from that of the poorest. Such facilitation, while meeting demand, has the added benefit of avoiding the long-run social and environmental costs of slum formation. However, policy recommendations in this area are not easy to determine, and even more difficult to implement as they involve considerations as to excessive regulation, requirements with respect to adequate service levels, taxation, patterns of land ownership and the role of public investment in infrastructure. The project will 'support a more thorough investigation of the economics of facilitating access to land, looking into the feasibility of utilizing credit as an alternative to direct land supply by the government and will test one or two pilots which hopefully will be replicable in subsequent loans. In the long run, sustainability depends on facilitating access to land, shelter and urban services and avoiding the formation of new slums. - 12- * The improvement of the capacity of public and civic institutions to plan, deliver and maintain basic urban services in a coordinated and sustainable manner. Access to formal housing provides the general population with a bundle of private (the housing unit and network utilities) and public goods (safe location, street layout, etc), the latter supplied by the private developer by delegation of the municipal authorities. In addition, with formal housing development, negative environmental externalities (such as avoiding development in flood plains) is avoided, or minimized, with proper planning. By means of invasions, the poor resort to the self-provision of the housing unit - the private bundle of goods - creating a vacuum with respect to the provision of collective goods. Municipalities have been ill-equipped to adequately address the problems associated with informal housing development The project places great emphasis on building local capacity and inter-governmental cooperation and coordination in the development of policies, actions and programs aimed to address the problems associated with informal subdivision development. This effort would be coordinated by FIDEM, the state agency charged with strengthening the municipalities and coordinating planning at the metropolitan level. Coordination efforts and capacity building will focus on the following issues: LI Metropolitan outlook. The Fundac3o de Desenvolvimento da Regiao Metropolitana do Recife (FIDEM) would be the agency at the state level in charge of metropolitan project coordination and planning. Through a program of institutional capacity development, it would be endowed with the capacity to operate as a metropolitan planning agency, providing technical assistance to the municipalities in developing appropriate responses and policies to addressing the problems of shelter and the poor. This is a natural vantage point for coordinating issues which are metropolitan-wide. El Decentralizing neighborhood planning and execution of local works to municipalities. Municipalities will become the program executors and will share in project financing The state will provide oversight, policy advice, financing and monitoring functions. The project will have a program of institutional capacity building ensuring municipalities' readiness to participate in the project. Decentralizing execution and the appropriate urban planning functions to the municipal level is essential to long-term sustainability, and much is needed to provide municipalities with the technical capacity to take on this role. This is particularly true of municipalities other than Recife, such as Olinda. This project, with the supportive structure of FIDEM, will allow them to take on their responsibility of urban planning and coordination, rather than relying on individual, uncoordinated, sectorial investments, as has been the norm. LI Ensuring true community participation: The PREZEIS program has built in community participation to its successful pilot program. The PROMETROPOLE would expand this to the metropolitan level. Participation is central to the project. Even at these stages of project preparation, considerable community participation has taken place in the development of first-two intervention plan in Campo Grande and Passarinho. In these cases, community workshops have been held and a community co-management group developed, which has articulated the communities' needs, preferences and priorities in developing the intervention plans and resettlement plans. In addition to these co-management groups, neighborhood assemblies have been held to ensure acceptance from the greater community. This process will continue throughout the project execution phase, and continue into the post-execution and management phases as well. O Real estate analysis and definition of appropriate shelter options. The scope of projects to be undertaken by the municipalities depends on the demand for land, urban services and quasi-housing types, as well as financing and cost recovery schemes available. The cases of Olinda and Recife for example are very different from those of Itamaraca, Igarassu and Ipojuca. In the former, the trend is towards the densification of existing slums and the need to promote their upgrading. In the latter, appropriate responses might be facilitating access to land and - 13- services to accommodate the faster growth rates to avoid slum formation. Consequently, FIL)EM's planning function requires that it resort to real estate analysis so as to analyze the RMR as one single quasi-housing market constituted by a number of quasi-housing sub-markets (slums, illegal subdivisions, corticos, etc). Demand and supply for these submarkets will be assessed and policy recommendations formulated. By understanding the nature of the problem, municipalities will be better equipped to develop and implement the appropriate policies. O Mobilizing resources and seeking private partnerships. Both community organizations and the private profit and non profit sectors have much to contribute: (i) on the more accurate definition of people's needs, wants, demands, interests, (ii) more precise targeting of beneficiaries, (iii) more extensive or efficient use of resources, and (iv) in promoting change in behavior with respect to maintenance of infrastructure and public spaces, environmental awareness and cost recovery. The project will encourage community participation at the level of definition of needs and aspirations of the population, private sector participation in areas complementary to those supported by the project, and will put together a plan of social communication with the population of the RMR, in order that it be properly informed of the objectives and means of the project so as to facilitate community involvement and ensure participation in project implementation, as appropriate. C. Project Description Summary 1. Project components (see Annex 2 for a detailed description and Annex 3 for a detailed cost breakdown): . . Indicativa .Eank-- % oY Componant Costs o of financing -anl- - . - - -, . . - . * . . (USfsul) Toial (US$iv1) financing A. Infrastructure 69.35 82.6 36.64 79.7 A-1. Beberibe River Macro Investments A-2. Water Distribution and Sectorization A-3. Two low-income Area Pilot Sub- projects A-4. Additional Low-Income Area Sub-projects B. Complementary Urbanization Actions 10.05 12.0 5.60 12.2 C. Program Management and Institution Building 4.14 4.9 3.30 7.2 Total Project Costs 83.54 99.5 45.54 99.0 Front-end fee 0.46 0.5 0.46 1.0 Total Financing Required 84.00 100.0 46.00 100.0 Amounts may not add due to rounding Costs include contingencies A. Infrastructure 1. Beberibe River Macro Investments: This component focuses on the financing of - 14- infrastructure and environmental projects that will have a positive impact on the overall improvement of the built and natural environment of the Beberibe River Basin. This component will include financing of sub-projects which include: (i) parks- (including the ecological park along the margins of the Beberibe River, pocket parks within each of the UEs and the rehabilitation of the Matadouro, an historic structure that will be re-used for community enhancing purposes; (ii) roads and improvements in the general flow of traffic; (iii) improvements in macro drainage that will reduce flooding; and (iv) improvements in the transport systems of sewage to be treated by the Peixinhos waste water treatment plant. The total number of beneficiaries of this sub-component is approximately 500,000 people. Total cost of this sub-component is approximately US$11.80 million. 2. Water Distribution and Sectorization: This component will principally finance works associated with improving the water distribution system in the project area and isolating the water distribution network of the project area as part of a greater effort to improve the commercial operations of water delivery in this area. This will finance works associated with sectorization and macro metering, and will also include the purchase of micro meters for new installation and replacement where needed. Total cost of this sub-component is approximately US$5.50 million. 3 & 4. Beberibe Low-Income Investments: This component will finance the urbanization of 13 groups of low-income settlements corresponding to micro drainage basins. The total beneficiary population of this sub-component is approximately 35,000 families. Investrments will include a full complement of urbanization works including water supply and sanitation improvements and household connections, secondary road improvements, micro drainage, public lighting, public parks and open spaces, resettlement for risk prone areas, among others. The sub-component is divided into three additional sub categories a. First two pilot areas of Campo Grande and Passarinho b. Additional areas in Recife (7 additional) c. Additional areas in Olinda (4 additional) T}he total cost'of this sub-component is approximately US$52.10 million B. Complementary Urbanization Actions. This component will finance actions that are complementary to the urbanization actions of components A and B. This includes the design and engineering of urbanization and infrastructure investments, social outreach and community participation, environmental education, additional studies for a possible sites and services sub-component, studies for expanding future investments to the entire RMR and a pilot micro-credit program for housing improvement and small business development. The approximate cost of this component is US$10.10 million. C. Project Management and Institutional Development. This component will finance project management and institutional development. It will include the contracting of a project management unit to assist the municipalities and the state in the planning and execution of the project. The approximate cost of this component is US$ 4.15 million. 2. Key policy and institutional reformns supported by the project: The project seeks to: * Rationalize the state's housing policies, including, establishing Slum upgrading and consolidation and the Provision of access to land and infrastructure as key state and municipal policies thus replacing those which advocate the provision of finished housing (too costly) and the passive acceptance of informal settlement formation. - 15- o Promote decentralization of planning and implementation to municipalities in the preparation of neighborhood plans and execution of upgrading works. o Facilitate the coordination of the state, local and community stakeholders at the metropolitan level by establishing and strengthening FIDEM as the metropolitan coordinating and planning agency providing technical assistance to the municipalities in developing appropriate responses and policies to addressing the problems of shelter and services of the poor and other urban infrastructure. o Develop appropriate institutional models for the delivery, operations and maintenance of urban services, looking at the possibility of alternative models, such as the case in water supply. The emphasis here is on improving services, minimizing cost and fostering cost recovery. o Collaborate with the State's environmental authorities in controlling the encroachment of population along rivers and channels as part of a broader policy of controlling the urban built and natural environment of the Beberibe River Basin in accordance with the established Beberibe Structural Plan and other important studies being undertaken to promote the rational development and protection of the basin. 3. Benefits and target population: The target population is the low-income population of the Beberibe River Basin, particularly that part of the population which, in addition to living in poverty using a conventional income measure, also lack a number of basic urban services which magnify the impacts of poverty. The Beberibe River Basin has a total population of approximately 492,000 inhabitants, which can be broken further into roughly 333,000 living in the municipality of Recife, and 159,000 living in the municipality of Olinda. Of this total population, 68% (227,000) live in households which earn less than 2 minimum salaries in Recife and 61% (97,000) in Olinda. When this is further analyzed to look at extreme poverty (less than I minimum salary) these percentages are still high at 45% and 36% respectively. Thus from a purely income-based perspective, these areas are among the poorest in the RMR. Extending the concept of poverty to include access to basic services, those in the Beberibe are among the least served, and by extension among the poorest. Looking at recent and existing investments in sanitation, for example, a spatial analysis indicates that virtually no significant investments have been made in the Beberibe basin (PQA Study), with nearly all investment occurring in more wealthy areas south of the Beberibe river. Targeting for the project is based on an extended definition of poverty to take into account both income and a lack of public investment. The Beberibe River Basin, in that regard, is the most appropriate area of intervention. Over the five year implementation period, and with the resources allocated, the project will target a total of 13 areas along the Beberibe River Basin. This will include 8 areas in the municipality of Recife and 5 in the municipality of Olinda. Together, the project will directly benefit 35,000 families in the 13 areas. In addition, the unallocated portion of the project can finance up to an additional three low-income areas that have the potential to benefit an additional 8,000 families. Further, as the project contemplates basin wide investments, the entire population of approximately 500,000 people in the Basin will benefit from improvements in the road network, macro drainage, risk mitigation, improved water service, as well as environmental improvements with improved parks and open space, as well as recreational areas heretofore non-existent. And importantly, the project will establish rational planning criteria for the future - 16- Benefits of the project will include, inter alia: (i) improved access due to rationalization of street layout and street paving, including a reduction in transport costs and travel times; (ii) improved water supply and sanitation services, including a reduction or elimination of supply rationing and intermittent services and ultimately improved heath conditions and reduction of morbidity rates; (iii) reduction of risk to lives and property due to the resettlement of people living in risk prone areas; (iv) a reduction in risks and losses to life and property due to a reduction of flooding resulting from investments in macro and micro drainage; (v) environmental and health improvements derived from improved solid waste collection services; (vi) increased access to recreational and activities with the financing of ecological and community parks, bringing social benefits; (vii) increases in social capital by involving community groups in the planning and execution of the project as well as the financing of community driven activities through the community investment/micro credit fund; (viii) access to formality from conferring title and address (i.e. easier to gain formal employment); (ix) sustainability through improved cost recovery (IPTU, tariffs, service fees, there is currently low collection of IPTU in the project area); and (x) improved institutional capacity to address planning and shelter needs in low-income areas. The pilot areas Passarinho is representative of irregular settlements in the municipality of Olinda. It was first settled in the 1950s and grew rapidly in the 1970s with the introduction of utility rights of way and road access and in the 80s with some limited infrastructure investments. Densification of the area occurred in the 90s and now about 5% of the families live in high risk situations due to being forced to build on steep hillsides. The vast majority of the area's 7,500 residents (1,780 households) are poor and over 40% are considered indigent (earning less than R$73/month). Education levels are low, especially among women who have a 29% illiteracy rate. Partly as a result of the low education levels, many in Passarinho work in low wage, low skill jobs and many work in the informal sector (information obtained from DRUP and survey of 166 households, which is 10% of the total). A logical circulation pattern of access is one of the principal problems in Passarinho. Many of the roads and streets are unplanned, spontaneous routes which drastically limits vehicle circulation. The principal roads are the Rua da Linha and the Estrada Passarinho, to which an ad hoc system of secondary roads intersect to penetrate the interior. However, these roads lack planning, are unpaved and are often only partially navigable. Access is a serious problem in the area. Sanitation is another serious problem with virtually no connections to any public waste removal system. Households have septic tanks, pit latrines or simply deposit human waste in the streets or micro drainage canals, all of which directly pollute the Beberibe river. Macro and micro drainage is nearly non-existent. Water service is rationed in this area, and only about 70% of the population is currently served by the formal network. In areas where there is good access, solid waste collection is fairly good. In most of the area, however, solid waste collection is inadequate. Total proposed investments in Passarinho include paving; geotechnical risk mitigation; drainage; sanitation; water supply; community infrastructure; open spaces and plazas, resettlement and acquisition of land for resettlement. Preliminary detailed plans for these investments have been developed and discussed with the communities. Campo Grande represents an irregular settlement in Recife, which is located in a plane, but where flooding and encroachment onto (in some cases literally on top of) the very polluted Beberibe river is a severe environmental health problem. Initial occupation of the area began about forty years ago, facilitated by the informal subdivision of the property by its owners and the shaded eye of local government enforcement. In 1994, however, the area was designated as a Special Social Interest Zone, or - 17 - ZEIS, under municipal law 15.866/94. This legislation which was applied to over 25 areas in Recife paves the way for the legalization of the occupation of this and similar areas, as well as opens the door to investments in infrastructure and land tenure regularization. According to surveys done by the municipality of Recife as part of project preparation, the majority of the population of Campo Grande finds work outside of the formal employment sector. Not surprisingly, about 55% of Campo Grande's 2,000 families earn less than I minimum salary/month. As in the case of Passarinho, education levels are low with 56% of the adult population not having completed elementary school and 12% of the population classified as illiterate. Infrastructure and urban services are generally poor. For example, with the exception of those residing along Rua Jer6nimo Vilela and Estrada de Belem where there is an existing sewer network (District 14) operated by COMPESA, there is no public system of sewage collection or treatment in the area. Most waste is disposed of through individual septic systems, or more commonly, in streets or micro-drainage canals. Macro-drainage is provided by the canals Farias Neves and Vasco da Gama/Peixinhos, both of which eventually drain into the Beberibe river. The Vasco da Gama/Peixinhos is the principal canal for the area and suffers from partial obstruction due to the high levels of solid waste dumped into it. Drainage is also complicated by the lack of paving and deforestation of low lying hills in the area. Water is supplied in all areas of Campo Grande, but the quality of service varies, from good in the "loteamentos privados" to poor in the other areas, the latter due to informal connections at small diameters, with high physical water losses. Solid waste collection in Campo Grande is not systematic in the informal sectors with most solid waste dumped on the street or in secondary and primary drainage canals. Electrification began to be regularized in the 1970s, but still many irregular connections exist as new units are built. The newly privatized electricity company, however, is systematically regularizing all connections. There is an inadequate amount of public lighting, and that which exists is poorly maintained and often vandalized by youth groups. Transport quality is varied with those living close to the two principal transport corridors of Estrada de Beldm and Av. Correia de Brito e Rua JerOnimo Vilela enjoying reasonable access. However, those residing in areas in the center have few access options and commuting times are high to the nearest bus terminal. Investments in Campo Grande, preliminary consultative plans for which already exist include paving, drainage, earthwork, sewerage, water supply, community infrastructure, plazas and open spaces, public lighting and resettlement of families in sensitive and high risk areas. The plans are based on the participatory diagnostic, and expert analysis and planning 4. Institutional and implementation arrangements: The Borrower will be the State of Pernambuco. The loan would be guaranteed by the Federative Republic of Brazil. The project will be executed in phases, and as the project phases advance, the institutional arrangements and responsibilities will also change. The first phase, should be viewed as the pilot phase of the project. In this phase, the first two areas, one representing a low-lying flood plane and the other a hilly region will be upgraded. These areas, Campo Grande and Passarinho respectively, will serve as a learning laboratory before the project advances to the urbanization of the remaining 11 areas as well as the macro level Beberibe investments. With this in mind, the basic institutional arrangements are as follows: Executing Agencies: The Executing Agencies for the project will be the state of Pemambuco's Foundation for Municipal Development (FIDEM) as well as the municipalities of Recife and Olinda. FIDEM will be responsible for bidding and contracting the initial pilot areas of Campo Grande and Passarinho as well all Beberibe Level investments which have a generally inter-municipal focus. The -18- remaining 11 project areas will be executed by the municipalities of Recife and Olinda, respectively. In addition, the municipalities will be responsible for facilitating the community outreach through the establishment of the local field development offices. In addition, each team of consultants preparing designs and engineering for the 13 investment areas, as well as the contractors executing the works, will have a team of social workers that will ensure proper community participation in all phases of sub-project execution. The municipalities' local field offices will work to facilitate and supervise the community outreach efforts. The planning and execution of the project by FIDEM and the municipalities will be assisted by specialized consulting firms with experience in project management and the implementation of Bank financed projects. The firms will be contracted directly by FIDEM and the municipalities to assist them in planning and execution of the project as well. This will help to ensure cohesion of planning and execution amongst the three primary project executing agencies. In addition, the Water Distribution and Sectorization component will be executed by the State Water Company (COMPESA). COMPESA will be responsible for contracting out the works to be carried out under this sub-component. COMPESA will also be responsible for procuring the micrometers which will be installed by the third party system operator as part of the alternative management arrangements for water distribution services that will be developed for this area. - 19- 6 FIDEM k President Project Management Executive Directorate of Regional "Program Government Manaqement Municipalities" (CONDERM) LLjChamber Center| Special Advisor Superintendence of Prolect Implementation ;r ti1:aff;lia;Wr Dutb Directorate of Directorate of - Procesaingi / preparation.01 tudies and complementary Planning and General pocts soid wast. sughterou h Mu cpal Admnistraon intorm PMU aboui work prgresseveloDMent Prepare now proect (PROMETROPOLE 11) Proaram 1 i Management Unit Coordination PMU - ' PMU - Manager of projects of state and municipal responsibility - Repres.CPRH and ; other organizations Sub-Manaqement Sub-Manaeement - - Representatives of tpontracts and Agreements - Municipal and etropolitan | utho population Projects Suppen the adr.oritrtlou or the p.ogram c Eiabomate and consoidlaie ihe sweosury duocs of areas of -- Documrentation or the oxecuos o0 thie intervention contract with tIRD I________________________ ;Financial Itonra(lon systls _____________________ .1 e .... n ., d~~~~~~~~~~~~~~~ - Foswo teike xe cution ol the program Duties Dutiea: Support bids and contracts Follow the physical and tinancal xwecution Make opeatiosal the politcal guidelines PROMETROPOLE Suppor the elaboration o1 operational pians of the pnagnam Prepare tormalion for decision making (Counsel. CONDERM) Prepare TORs for services to be contracted Consolidate annual operation plans Prepare annual operabon la. Help monltoring the Progna O.fietu/progrem actions ot Operate a monitor system, to contract assassmrent 0f program Program and prepare training and organizabonal development Ensum inter-instliutional coordinaion oreanizatnn1 deaeloprpent Promote inter4rnstitutuonal Cneoae inks with extemal and nallonal tinandal organizations (tladnical questions) Support coordinetion o0 environmental coordination Idesstiytprovide technical assistance to agents and sanitary education Promot paerclpaeti o0 communities Ensure apptication o0 procedures and methodoloy PROMETROPOLE Suppor the coordinatlon o0 s1rengthanrmg private seobr Ensure eligibility ol munIcipal protects and o0 state oecsutlon community organuzations (social responsibility) Promote organizational development coordinate environoentel end sanitry educabon and communlty deneopmeni Ensure social communialion of the program - 20 - Seetanes SEPLANDE5 SEFAZ SEIN, SECTMA, CONDERM ari e nd Mrdstdes d peadpart Kaopalitles, _ ......* ....... . Presdernt ofFIDEM FUR Mayors, Setanes arKor Head of State Orgarizasrr 3 State eangmssren 14 locd lerslatve res,oresentabves Reptesentaties of Conrtides - Tedcht Statenoom Political Decision .................................................... .................................................................................... ... Program Management Unit ** * <. . . -PMU- .........PMU.. . I Project Minage,s - State and nixdcipo perlaforrce, reosentves CPHR and Duties. other rxanmzabonrs CoDdnate the exeAan of Ste pregmm Represalves of pDprar segot of areas of acon Rpresantahes of Goeerrent and pdvate rgaruzatiare, irmted to dscsns about speafic tCols Unit of Project Execution Municipal Projects Studies and Municipal - Projecs Perionmance Management (FIDEM) a ~ Offi - w::i ~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~i 0 ~~~~~~~~Constnictors/ Executors - 21 - 4oovo o I 4 4 0 4 4 4 0 *00 ( | Local Manager lLocal |Entities ° | l ~~~~~~~~~~~ ~ ~~~~~~~~Development Commuty .^ - . ~~~~~~~~~~~~~~Com mittee Ette Com munity Development P hysical I nterve ntion (Social Project, Resettlement, (works) Strenghtening of Comm Org. Env. Education, Comm Fund.) 0~~0 4 O S_ 4~~~ HieoExcultanaersnite CommuenityeDveltonpment POER PhyialItevnto (Socdinale Proect fscaiettleemenuinoorsadati(orks)(otatrnohreeuos Articulate nghtenxn i ofComm O -rg s with - c n - Env. snayeducation,)om ud Supervision (Mayor with help of the Board of Directors) Hired Executives (GO, NGOs, Private) Duties of LOCal Office Prepare intervention plans PROMETROPOLE Coordinate and fiscalize the execution of works and actions (contractors and other executors) Articulate the execution of the interventions wih the commubnies (includg environmental and sanitary education) Promote community collaboration Develop projects for community groups (community fund) Ensure Information flow Flow-of-Funds and Financial Reporting: The Bank loan will be assumed by the State of Pernambuco. The municipalities will contribute aprroximately US$20.0 million in counterpart financing of the total US$84.0 million project cost. The remaining counterpart financing will be provided by the State of Pernambuco. The Finance Secretariat will establish a special account and the funds (US$) will be transferred to an operational account (R$) to be managed by FIDEM using procedures based on a cash forecast report. For those projects that will be executed by the municipalities directly, the funds will be transferred to the executing agencies based on legal agreements with the municipalities (convenios). The - 22 - state counterpart funds will also be transferred to the executing agencies based on the cash forecast submitted from FIDEM to the Finance Secretariat. The executing agencies will record the funds received to pay the contractors as per their contracts. These executing agencies will submit the SOEs to FIDEM which will consolidate them to be submitted to the Bank for replenishment to the Special Account. The flow-of-fund will be facilitated through the establishment of a state-of-the-art management information system - SIGMA. SIGMA has the financial, accounting, disbursement, contracting, monitoring and procurement modules necessary for effective project management. Its capacity to generate reports is considered strong and meets project flow of information demands. The system is capable of generating FMRs for management purposes and SOEs for disbursement of loan funds. Monitoring and Evaluation: FIDEM will be responsible for monitoring project progress and evaluating project impacts in accordance with the physical, financial and impact indicators established for the project. The SIGMA system will facilitate the capture of information for management purposes and monitoring of project progress and evaluation of project impacts. In addition to standard financial audits to be received annually, FIDEM will provide quarterly project updates in accordance with the reporting procedures to be outlined in the Operations Manual, the final which will include an annual summary report of project performance. D. Project Rationale 1. Project alternatives considered and reasons for rejection: State Wide: The original project concept (1992) proposed a state-wide program of basic infrastructure provision in low-income areas. The total urban population of the State of Pernambuco is approximately 5.4 million. Nearly 60% of the urban population, or 3.1 million, reside in the RMR. As the RMR has the single greatest concentration of urban population in the state, the decision was made to narrow the focus of the project to that of the RMR. In addition, the RMR has the highest concentration of poverty in the state, and a RMR focused project would better target resources to the poor. Water and Sanitation/Environmental Focus: After the decision was made to re-focus the project on the RMR, it was proposed to present the project as an environmental project, focusing on improving the environmental conditions of the principal watersheds in the RMR: Beberibe, Capibaribe and Joboatao. It was proposed that this be done through the state in a centralized manner working only through the state water company - COMPESA. This approach proved too limiting as it: (i) failed to adequately take into account the poverty dimensions of living conditions in these areas; and (ii) neglected other important urban issues such as land tenure regularization, geological risk, in-migration and pressures for new unplanned growth, etc. In addition, executing the project directly through COMPESA would conflict with the Bank's flag-ship water and sanitation project, PMSS II, which sets strict levels of financial and operational efficiency as eligibility criteria before financing water and sanitation investments directly with state-owned water companies. In addition, as early versions of this project moved from environmental to water and later to urban, a conscious decision was made to support and moves towards privatization of the water and sanitation sector, thus shifting the responsibility for large-scale waste water treatment to the private sector. This is a policy goal that is still relevant. Thus, the decision was made to pursue an integrated urban approach, as has been seen as the most efficient response to meeting the urban services needs of the urban poor and a clear mandate for the public sector. In the case of this project, a pilot project will be set-up an alternative institutional arrangement for WS&S services in the project area in response to the inefficient operations of COMPESA. This opens the door for investments in the water sector in the Beberibe basin. - 23 - Urban Integrated Approach with Geographic Focus: The integrated urban upgrading approach was adopted, and the decision to focus on the Beberibe River Basin because it addresses critical policy issues related to sustainability such as those outlined above and in previous sections of this document. In addition, by focusing on the Beberibe River Basin, the program is effectively targeting the poor and will have the highest and most visible impact on poverty alleviation. After the decision was made to address the problem in an integrated urban/shelter manner, three alternatives were further discussed for addressing these problems within the Beberibe River Basin. Each altemative looked at different geographical approaches for upgrading within the Beberibe. The alternative chosen, to focus on 13 areas along the Beberibe River in Olinda and in Recife, was determined to be the best alternative in its reach and targeting of the poorest households and with achieving the greatest impact of integrated urban Improvements, in the most cost-effective manner. Once it was determined that the highest impact would be gained through an integrated urban upgrading project within the Beberibe River Basin, an evaluation process was undertaken to determine the most effective use of employing resources within the Basin. The following tables indicate the choices considered. Description Characteristics Beneficiary P Population Alternative I Integrated interventions along 'This altemative is the Bebenbe and Momo charactenstic of a senes of (tnbutary) Rivers continuous and contiguous integrated interventions along ±160,000 inhabitants the Bebenbe River where there is the greatest density of families and the most severe environmental problems, as well as the highest concentrations of poverty Alternative H Integrated interventions in two This alternative represents the distinct centers, one along the BR development of the extreme 101 and the other at the mouth of penpheries of the urbanized the Beberibe River portions of the Bebenbe River, ±158,000 inhabitants also highly dense areas that could then extend towards each other in future interventions. Alternative III Sector (WS&S) investments in This alternative represents the hills of the Recife portion of mainly investing in the Basin and integrated complimentary infrastructure nvestments in the Ohnda - ostensibly sewerage - in ±215,000 inhabitants portion areas in Recife where other investments have been made previously These represent slightly wealthier areas which have undergone a considerable consolidation process - 24 - After identifying the alternatives, 15 criteria were established to determine the most appropriate of the three areas: Criteria Alternative I Alternative II Alternative III Reach and depth of the 82% 76% 53% interventions Number of poor attended ++ ++ + Visibility and urban impact ++ + ++ Possible need for additional 2 RAFAS, Anel Norte 2 RAFAS Ampl.. Peixinhos waste investments (--) (-) water treatmnent plant and 1 RAFA ____________________________________________(--) Likely sustainability of ++ ++ +++ investments based on ability to pay of beneficianes Impact on habitability +4+ ++ + Impact on risk reduction +++ ++ + Contnbution of urban +++ +++ + integration and economic and social impact on the community Current lack of investments +++ ++ + Potential to meet demands of special social interest zones (ZEIS) +++ +++ + Replicability of the expenence +++ +++ + Environmental impact on +++ +4+ + recovery of nver basin Impact on property values +++ +++ ++ (wealth) Contnbute to resolving land +++ +++ + conflicts and reduction of land invasions . Potential to increase availability +++ +++ + of urbanized lots for sale Cost of intervention/family ++ ++ +++ (lower is better) Based on these criteria Alternative number 1 was selected since it represents the best approach for a fully integrated urban approach that benefits not only the poor, but also the entire population of the Basin. In addition, this alternative reaches the greatest number of poor inhabitants, includes areas of the Recife ZEIS designation, will have the greatest positive environmental impact of the three alternative, attends the areas with the greatest infrastructure deficits, will have the most visible and tangible urban impact and is the most replicable of the alternatives. The areas to be attended to by the selected alternative are the following: - 25 - Municipality Geography Drainage Area Location Area Population (UE) (Hectares) (inhabitants) Recife Hills UE-03 Dois Unidos 98.10 8,825 Recife Hills UE-04 Dois Unidos 55.50 4,993 Recife Hills UE-08 Dois Unidos 93.60 8,421 Recife Hills UE-17 Vasco da Gama, Alto 124.30 23,611 Sta Teresina, Linha do Tim, Porto da Madeira Recife Hills UE- 19 Linha do Tiro, 157 00 24,701 Beberibe, Fundao Agua Fna, Porto da Madeira Recife Plains UE-20 Arruda, Agua Fna 106 40 16,646 Recife Plains UE-21 Fundao, Campina do 137.60 21,419 Barreto Recife Plains UE-23 Campo Grande 72.60 8,816 (pilot area) Olinda Hills UE- 17 Passarinho, Alto da 80 60 7,444 Bondade (pilot area) Olinda Hills UE-15 Caixa D'Agua, 108 00 16,235 C6rrego do Abacaxi Olinda Plains UE- 13 Bebenbe, Caenga 48.50 3,630 Olinda Plains UE-12 Peixinho, 80.31 10,440 Depuradora, Cabugato Olinda Plains UE-07 Varadouro 47 64 4,697 -26- 2. Major related projects financed by the Bank and/or other development agencies (completed, ongoing and planned). . (PSR -Lat6st St6rvtisng '-,Sector Issue p Project - Latet (PSR) visting . _______ *_'_ '_.__ '___I_._X,_'_.__ __ ______E , ________ _ 1. ,(Bank-fna nced rojects.only) Implementation Development Bank-financed Progress (IP) Objective (DO) Water and Sanitation BR-PE-06368 Water S S Sector Modernization BR-PE-06541 S. S S Paulo/Parana States Water Quality * BR-PE-06436 State of S S Ceara Ur Dev.lWater Urban and Municipal BR-PE-06524 State of S S Minas Gerais Muni. Dev. BR-PE-06562 Bahia S S Muni. Dev. Rural Poverty BR-PE-6436 State of S S Ceara Ur Dev./Water BR-PE-42566 State of Pernambuco Rural Poverty Urban Transport * BR-PE-38882 Recife S S Metro Other development agencies Urban Favela Bairro Favela Upgrading in Rio (1DB) Habitar Brasil - National Shelter Project (IDB) IP/DO Ratings: HS (Highly Satisfactory), S (Satisfactory), U (Unsatisfactory), HU (Highly Unsalisfactory) 3. Lessons learned and reflected in the project design: Lessons from early upgrading projects and more recent efforts are incorporated into the project design concept. They include: o Community participation, from the outset in project design, is one way to ensure that the most appropriate infrastructure and service options are used. Community participation also facilitates cost recovery, accountability of government agents and ensures the sustainability of investments. Community participation is at the core of the project design. - 27 - o Pursuing supportive policies such as developing a process of land tenure regularization and revision of urban development standards that allow for special exemptions in low-income areas, and incorporate them into the overall urban planning process can facilitate the development of more affordable, secure housing options for the poor. Supporting the development of clear rules of the game for shelter and infrastructure investment subsidies for low-income areas, which take into account the true willingness and capacity of households to pay, and which minimize distortions in the markets, such as housing finance, for example, are critical to sustainability and for lowering the bar of affordability. o Decentralizing responsibility of investments to the lowest level possible, such as municipalities, increases accountability and typically improves service quality as a result. Decentralization of basic urban services and infrastructure provision poses several important challenges, the most urgent being the need to increase the capacity of local governments and agencies to manage these activities. Decentralization to private providers is another option, and presents challenges to the public sector in the form of regulation. Developing this capacity is incorporated into the project design. o In recent years, many projects have demonstrated that the poor have a high willingness to pay and that at least partial cost recovery is possible from investments in low-income communities. Developing a cost-recovery strategy, combined with clear subsidies based on the nature of the good (public, private, semi-private) and willingness and capacity to pay is an explicit strategy of the project, and is critical to the sustainability of investments. o Resettlement is an inherent element of any large-scale urbanization operation in the slums. Given the need to provide rights-of-way for infrastructure and to remove families located in high risk or environmentally sensitive areas necessitates resettlement. It is known from experiences not only in Brazil, but in other parts of Latin America as well, that resettlement will increase project costs, but when included within the overall envelope of slum consolidation, is about 1/4 the cost of pursuing a program of new housing construction for the poor, thus putting consolidation projects much more in line with the capacity of the poor to pay for shelter and service provision. In addition, recent experiences suggest that governments, often together with NGOs and specialized consulting firms, have become more adept at handling the resettlement process with technical capacity and social sensitivity. Resettlement in upgrading projects clearly benefits society as a whole as well as the individual recipient of the new home, and is distinct from resettlement in such projects as dam construction, where the beneficiary is clearly not the resettled family. o Using appropriate technologies and standards does not necessarily mean using the lowest cost or most innovative technologies available. Rather, it means using technologies which best respond to needs of the end user, and at the same time fit with their capacity to pay for and use that technology. It is also known that the use of certain technologies often requires significant training and or information dissemination in the use and maintenance of the technologies, or their useful life will be greatly reduced. The project design takes this into account. o Integrated urban approaches have proven to be the most effective way to address the urban service needs of the poor. In the past, sector approaches have often proven to be inadequate. Lessons from the Bank financed PROSANEAR program in Brazil demonstrated clearly the need to finance a package of investments together with investments in water and sanitation. This reduces the costs of investments in the long run and significantly reduces cost of operations and maintenance. o Finding the right institutional models for the operations and maintenance of infrastructure investments is critical to the sustainability of investments. In this project, a model has been - 28 - developed that is expected to make investments in the water sector more sustainable through a management contract with the private sector. Similar innovations will be sought, such as private-public partnerships for the maintenance of parks in the Beberibe basin and for the control of unauthorized occupations in currently unsettled areas. * A macro urban perspective is also important in upgrading programs. This is a lesson learned from the Caracas upgrading project which goes beyond only integrated household investments, to include larger infrastructure investments that have a benefit beyond the immediate target area. This is important for integrating these areas into the overall urban fabric. For this reason, the project contemplates additional investments in macro drainage, urban parks and inter-urban access roads. 4. Indications of borrower commitment and ownership: The project is a clear priority for the Government of the State of Pernambuco (GSP). On January 14, 1999, the GSP signed the Programa de RestruturaVao e de Ajuste Fiscal do Estado de Pernambuco (PRAFEP) with the Federal Government. The PRAFEP required that the GSP take decisive short- and long-term adjustment measures. The PRAFEP contains a number of fiscal and financial targets to be met by 2004, as well. The proposed project is one of four external credit operations proposed by the state and included in the PRAFEP. The GSP has further demonstrated its commitment and ownership of the project by working with the Bank in the development of the State Economic Memorandum (SEM), recognizing that the memorandum would be used to determine the borrowing capacity of the state and the future of the proposed project. COFIEX has approved the project and the State has completed preparation, appraisal and negotiations of the project. Equally compelling evidence of Borrower commitment is the advanced state of preparedness of the project. Technical studies have been done in the areas of institutional and financial arrangements, resettlement policy/framework, analysis of project alternatives, environmental education, assessment of poverty, preliminary environmental and social impacts, etc. In addition, two areas, Campo Grande (Recife) and Passarinho (Olinda) were selected early on in the preparation process as the two first pilot areas for intervention. These areas are representative of the 13 areas to be upgraded as part of the project, and preliminary improvement plans have already been developed for these two areas, together with the beneficiary communities, beginning with the Rapid Participatory Urban Diagnostic (DRUP) methodology, and then the developing of detailed intervention plans. The execution of these plans could begin immediately upon effectiveness (or sooner) of the project. It should also be noted that the Government of Pernambuco has been fully cooperative with the Bank in appraising this project, agreeing to concessions not originally anticipated. Chief among these, the GSP has agreed to pilot an alternative instituional arrangement concept which foresees creating a separate and distinct (from COMPESA) entity to handle water service in the project area. This decision was made at considerable political risk to the state. One of the key elements of this process, was the agreement of the project's institutional implementation arrangements between the State and the municipalities. On January 25, 2002, the State and the municipalities entered into an agreement establishing the responsibilities of each entity in the execution of the Project. 5. Value added of Bank support in this project: The sustained commitment on the part of the Bank ensures that the enabling environment will be created so as to develop the institutional capacity to prepare and carry-out a policy and program for intervention in low-income settlements in the RMR. Developing institutional capacity, introducing cost-recovery and land titling aspects to the project are all areas where the Bank will add considerable value to the project -29 - and to existing efforts such as the PREZEIS program. Endowing true program characteristics to nascent state and municipal initiatives will be the major value added of Bank support to this project. In that regard, the Bank brings a body of regional experience to this process (Guatemala, Venezuela and Colombia). The Guatemala experience, for example, demonstrated the capacity of communities to plan, execute and manage infrastructure and service investments without significant government intervention. Venezuela is the Bank's first large scale upgrading intervention in the region, and demonstrates the need for careful inter-institutional coordination, up-front planning and a long-term vision for the sector. It also demonstrates the benefits of using a geographic approach to interventions for purposes of targeting the poor, and for reaching impact on a large scale based on rational planning. By focusing not only on physical investments, but also understanding the importance of finding mechanisms to avoid slum formation and to rationalize land markets and legalize land tenure in low-income areas, this project goes a step further in ensuring the sustainability of investments than previous upgrading efforts in Brazil. Current sector work in the areas of land and housirig markets will provide valuable policy advice so that the state and municipal governments can design housing policies which are more appropriate for the urban poor than the current ones. In addition, on-going sector work in the area of financing urban infrastructure will assist in identifying sustainable sources of financing for these investments and facilitate cost-recovery. The Bank also adds significant support in the pursuit of a metropolitan perspective of the project and in the establishment of the project within a broader policy framework of urban development for the metropolitan region. For the past year, the Bank has been assisting the 14 municipalities of the RMR, and the State of Pemambuco in the elaboration of a City Development Strategy (CDS) for the RMR. This strategy, in addition to undertaking a number of analytical studies, will lay out a number of policy options for the RMR under several different economic scenarios. Among the policy options are strategies for urban development and poverty alleviation. The CDS will be a useful tool in determining in what direction a follow-on project should take with respect to addressing issues of poverty alleviation in the RMR through investments in housing and infrastructure. And there is great synergy between the CDS and the PROMETROPOLE project. For example, as part of the project preparation activities, a geographic information system was developed, which has been used to map the geographic pockets of poverty in the RMR. This can be used for a variety of analytical purposes, including identifying the relationship between investments and poverty. This is part of the commitment the Bank has made to working with the RMR in a sustained and integrated manner. Likewise, the preparation of the project has allowed for a renewed dialogue between the Bank and the state water company, COMPESA. The Bank's presence has facilitated the experimental approach that will be used to introduce innovations in the water sector. This innovative approach will serve as a benchmark to assessing the interest and ability of the alternative water and sanitation service providers to work in the lowest income communities in the RMR. This cooperation between the Bank and the State, has also opened to door to additional possibilities for collaboration, including Bank assistance in the possible future privatization of COMPESA. E. Summary Project Analysis (Detailed assessments are in the project file, see Annex 8) 1. Economic (see Annex 4): O Cost benefit NPV=US$73.833 million; ERR = 37 % (see Annex 4) O Cost effectiveness O Other (specify) - 30 - A complete cost benefit analysis was conducted to determine the economic viability of the proposed Project. The analysis demonstrates the overall viability of the project and of all of its individual components. Individual components as presented in the project description were grouped differently to facilitate quantification of the benefits associated with the proposed investment costs. The following components were analyzed: * Beberibe level investments, including: the Peixinhos Matadouro Historic Park, the Beira Canal Avenue, wastewater transport to Peixinhos facility, macro drainage works, an ecological park in the margins of the river, and road and transport improvements within the basin, and all its associated complementary urbanization actions at the basin level, including: a micro-credit component, sanitation and environmental education, design and engineering studies for the above mentioned infrastructure works and the Project management; * Beberibe low-income investments, which includes the urbanization of 13 groups of low-income settlements based on the detailed costs of interventions in two pilot areas (Passarinho in Olinda and Campo Grande in Recife) and complementary actions related to the specific areas (local field offices and design and engineering studies); * Resettlement including land tenure and regularization for the construction of the Beira Canal Avenue and the resettlement associated with urbanization in the low-income areas, ncluding land tenure regularization; and o Investments in water supply in the low-income areas for the proposed water system sectorization, to pilot a specific private service provider for the area. The objective of these analyses was to test the viability of the specific sub-components and, based on these results, the benefits and costs of the entire project, to estimate its overall economic feasibility. Note that these components due not directiv correspond to the Project Descrtption as these were grouped according to pack.agev of activities In the final anal-,sis. however. all activities are the same in both instances Detailed economic and financial assessments were undertaken for the specific components of the Project. All project components were included in these analyses, including the infrastructure works and complementary actions. Returns to the investment in institutional development, community participation and education, are included in the analyses as they are considered the basis for service sustainability and are ultimately expressed in improved access to urban services in the Beberibe basin since the aim is to manage and deliver urban services more efficiently and effectively. Once the overall viability of the proposed components was verified, the overall project viability was assessed. To determine the net incremental costs and benefits, "with" and "without" project scenarios were constructed. On the basis of these scenarios, the net incremental financial benefits and costs of the proposed investment programs were assessed, which were then adjusted for the impact of taxes, subsidies, and externalities to arrive at the economic flow of costs and benefits. The cash flows were discounted using a discount rate of 12 percent, which is estimated to be a proxy of Brazil's opportunity cost of capital. Costs include capital costs, operation and maintenance costs, rehabilitation, resettlement, environmental mitigation and contingencies. For all the different components, costs of complementary actions necessary to derive the expected benefits and sustainability levels targeted, were considered. It was deemed necessary to include these additional costs in order to permit the assumption that the expected benefits of the project will actually be realized. A central area of the economic analysis was a distributive analysis that was carried out to assess the impact of the project on overall beneficiaries, especially focusing on the poverty impact and on the - 31 - impact on different government stakeholders, mainly the State of Pernambuco and the municipalities of Olinda and Recife (fiscal impact). Finally, risk and sensitivity analyses, testing a number of scenarios, were conducted to assess the impact of changes in critical assumptions on the economic viability of the project. The main benefits of the project include: (i) improved access due to rationalization of street layout and street paving, including a reduction in transport costs and travel times; (ii) improved water supply and sanitation services, including a reduction or elimination of supply rationing and intermittent services and ultimately improved heath conditions and reduction of morbidity rates; (iii) reduction of risk to lives and property due to the resettlement of people living in risk prone areas; (iv) a reduction in risks and losses to life and property due to a reduction of flooding resulting from investments in macro and micro drainage; (v) environmental and health improvements derived from improved solid waste collection services; (vi) increased access to recreational and activities with the financing of ecological and community parks, bringing social benefits; (vii) increases in social capital by involving community groups in the planning and execution of the project as well as the financing of community driven activities through the community investment/micro credit fund; (viii) access to formality from conferring title and address (i.e. easier to gain formal employment); (ix) sustainability through improved cost recovery (IPTU, tariffs, service fees, there is currently low collection of IPTU in the project area); and (x) improved institutional capacity to address planning and shelter needs in low-income areas. To estimate the economic benefits of access to improved urban services a hedonic pricing methodology was used. The hedonic price function is based on the housing market in which transactions can be observed. The welfare significance of the hedonic price function comes from the fact that people are revealing the marginal value of particular attributes (such as access to services, distance to center, etc.) that are not sold separate in the market, but are embodied in the house and reflected in housing values. A hedonic price function was built to estimate the marginal value of these non-market attributes provided by the project, allowing for the measurement of welfare effects from changes in a non-market attributes, which is the goal of the economic analysis. During the specification of the Hedonic model, the results showed that the only non-market attribute intended to be valued for the project found to be non-significant was water. It is however very clear that given the fact that almost every house has a water connection legal or illegal, access to this service would be reflected in a reduced marginal effect on the overall housing values. The provision of water services was therefore analyzed independently, and treated as a separated component. Economic benefits of water services are assumed equal to the willingness to pay (WTP) for water supply. The WTP was estimated using revealed preferences method, based on information from previous studies by Banco do Nordeste on water demand in Northeast Brazil. Although the improved hygienic and environmental conditions (such as reduced health care costs and a reduction in missed work days) that result from increased water supply and sewerage coverage and the from improved quality and reliability of these services, are clearly important benefits, these benefits were not quantified in this analysis. With an overall ERR of 37%, the project is clearly economically viable. A comprehensive sensitivity analysis confirmed the robustness of the results. The Beberibe low-income investments (responsible for 66% of overall Project costs) has an individual ERR of 38%, followed by the Beberibe level investments component with an ERR of 34%, the water services component (10% of overall Project costs) with an ERR of 37%and the resettlement component (6% of overall Project costs) with an ERR of 25%. - 32 - Poverty impact: As the project's ultimate objective is to improve the wealth and well-being of the urban poor in the Recife Metropolitan Region additional analyses focused on assessing the poverty impact of the project. Potential impacts on the poor were considered both from macroeconomic and microeconomic perspectives. Additionally, a distributive analysis was conducted to quantify the expected impacts of the project. A comprehensive monitoring and evaluation system is envisaged to allow for a more detailed ex-post impact analysis of the project, based on baseline data. From a macroeconomic perspective, considering the state of Pernambuco and the municipalities of Recife and Olinda, the project is expected to have a positive impact linked to: * Economic Growth - the project's investments are linked to economic growth mainly through tourism sector (specially in the Historic Olinda area adjacent to the Beberibe basin), and also by creating an enabling environment for new local private investments resulting from the provision of improved and reliable services; * Employment Generation - although it hasn't been conceived as a permanent employment generation program, the project would generate a considerable amount of short term employment as labor (mainly unskilled labor) accounts for about 40% of total project investments, (this effect is quantified as part of the economic analysis as the shadow price for unskilled labor was used). On the negative side, direct beneficiaries are expected to pay the full O&M costs of the project which is currently subsidized by the municipalities. But this is off-set by improved urban services, and in some cases, the provision of services that don't currently exist. The main impacts, however, are expected at the microeconomic level, that is at the community level, due to a pro-poor project design. The project makes the strategic choice in the favor of access by subsidizing investment costs for a large population. At the same time, however, the project provides incentives to adopt low cost technologies to promote affordability (i.e. paving will only be done where technically necessary so as to lower costs and increase affordability). The State government and the Municipalities would subsidize the investments, will recover costs via taxes and user charges and pilot a micro credit program to provide low-income households with access to finance, inter alia, bathroom fixtures to connect to the sewerage system. Additionally, by including specific actions aiming to increased efficiency in service provision, as in the case of water services, there is an expectation to considerably reduce the amount of fiscal resources that would otherwise be needed to pay for the inefficiencies of the state water company. The tariff structure would also be modified to introduce volumetric charges that would provide a clear signal to the user on the real cost of water and would contribute to use the service in a more efficient way. The distribution of the total impact of the project was analyzed to determine who benefits from and who pays the costs of the project. The big winners clearly are the consumers, particularly the poorest, but society as a whole (indirect beneficiaries) and the federal govemment also realize a share of the benefits. It is clear that the State and the local govemment are the only stakeholders that have a net negative impact from the project. Results from the distributive analysis show that the project would have a considerable positive impact especially among the poorest of the poor (the majority of the direct beneficiaries) those living on less than one minimum monthly wage per family, with an average per capita income of R$ 30/month) would receive a net impact (NPV) of US$ 43.7 Million, 41% of the poorest population would receive more than half of the net impact of the project and 74% of families living under 2 minimum wages would receive 95% of the net impact, this is possible due to strong subsidization from the govemment at the State level. - 33 - 2. Financial (see Annex 4 and Annex 5): NPV=US$ million; FRR = % (see Annex 4) Fiscal Impact: The net impact on government, estimated at US$ - 46.0 million, results from subsidized project investments, with basically no cost recovery on investments, except from the water works component. Incremental taxes paid to the government clearly are not sufficient to compensate for the negative impact. However, it was conservatively assumed that all incremental IPTU revenues to the municipalities would be used to pay for O&M costs of services (except in the case of water and sewerage). O&M cost may be overestimated as we expect to introduce a more efficient service delivery that could reduce them and could compensate for the negative impact to the municipalities. The project design considered the fiscal impact and has eliminated all the negative impact from operations and maintenance that would be 100% paid by the users. The results show that there is room to charge the consumers to reduce both the impact on state and probably eliminate the impact on the municipalities. In this case keeping in mind that this intervention is targeting the poorest within the Recife Metropolitan Region and equity should be considered, a recommendation would be to introduce a differential rate to those beneficiaries in a higher income level (society, as the poorest are part of the Beberibe region) to compensate for the municipal negative impact of the Project. 3. Technical: The project is an urban upgrading project which adopts the recommendations of the Bank's Brown Environmental Agenda report by concentrating on the provision of basic urban services, and in the case of water supply and sanitation, first and foremost, on the expansion of water supply and sanitation services to the poor, according to their priorities and demonstrated demands. In addition, the project takes a full urban development approach by taking the urban planning and development process to a broader level, in this case the greater Beberibe River Basin. In this case it is forward thinking, looking at ways to optimize investment in the basin and laying the foundation for rational, planned urbanization of the area. Urban upgrading experience demonstrates that in dense, informal settlements and slums, an integrated approach to infrastructure delivery, that includes the general coordination of all relevant actors, is needed to ensure the sustainability of investments at the least cost. Although the municipality undertakes the works, there needs to be strict collaboration with the sector agencies since these interventions need to be fully integrated into the larger urban systems/networks. Even though the community may have an important role in the correct operation and maintenance of, for example, WS&S systems in these informaUslum settlements, the ultimate responsibility for the management of these systems is with the service provider. For this reason, the service providers must review, ensure the appropriate standards of, and approve, the proposed technology for specific sector interventions in these low income areas. The project ensures that a systemic as well as a sector approach to urbanization of the project area will be taken. This will include making sector investments based on integrated planning (as with the Beberibe Plan) and also proposing, when appropriate, alternative institutional models for the operations and maintenance of the investments (as in the case of water supply and sanitation). (See Annex 2 for more details). -34- 4. Institutional: An institutional assessment of the capacity of the executing agencies was carried out as part of the project appraisal, and an action plan to strengthen procurement, project and financial management capacity was prepared. 4.1 Executing agencies: FIDEM's role was revised by state decree in 1999 from a state agency exclusively dedicated to addressing municipal planning issues in the RMR, to include the extension of services to all municipalities in the state. It also provides technical advice and information to the Planning and Development Secretariat (SEPLANDES), to which it is attached and to the RMR Development Council (CONDERM). It's traditional role has been one of research, planning and promotion of projects in the vein of metropolitan planning, as well as to work in the development of municipal strategic plans in the RMR. FLDEM also manages the RMR Development Fund, which finances projects determined by the CONDERM. The three sub-entities of FIDEM which bear relevance to the project are the General Administration Directorate, the Directorate of Planning and Municipal Development and the Municipal Information Center. FIDEM has the minimum structure necessary to undertake a project of this type, but that structure is generally weak, understaffed and not entirely prepared to address the complexities involved in a large, inter- institutional and governmental project of this size. It's strength lies in its minimal, but dedicated staff, its excellent Municipal Information Center. Its planning and project management (procurement and financial administration) functions will require the building of capacity. Its internal information and data management systems are being improved and modernized. COMPESA, the state water company, will be responsible for procuring water meters and pipes for the sectorization component, as well as procuring the works to execute this component, under the direction of FIDEM. Municipality of Recife and URB: The municipality of Recife is represented in the program by the Urban and Environmental Secretariat, and specifically by the Recife Urbanization Company (URB), the municipality's executing agency in charge of physical interventions. URB has experience in the urbanization of low-income settlements through the ZEIS and PREZEIS programs. Municipal legislation in 1983 created Special Social Interest Zones (ZEIS). This legislation, which was pioneering in Brazil, allowed for the official recognition of informal urban settlements, the legal urbanization of these areas and facilitated the process of legalizing land tenure and titling of plots in the urbanized/upgraded settlements. Four years later, in 1987, the Plan to Regularize Special Interest Zones (PREZEIS) was created as a means to operationalize the earlier ZEIS legislation. Experience has been limited, however, due mainly to a lack of funds and clear program character of the PREZEIS (i.e. establishment of long-term goals, objectives, etc.). That notwithstanding, URB maintains a technical staff and organizational structure sufficient and adequate for the execution of the project. URB consists of five departments, four of which are directly integrated in the PROMETROPOLE inter-governmental structure: Urban Projects; Civil Works; Special Programns and Urban Integration. The Urban Projects Department is charged with coordinating urbanization efforts, including the coordination of various municipal corporations. The Civil Works Department is the executor of civil works projects, and is responsible for developing and overseeing the technical aspects of all engineering projects in low-income areas. The Urban Integration Department has three sub-units associated with the disposition of public property and the regularization of land tenure in low-income areas. The Special Programs Department is principally in charge of overseeing macro-drainage projects in the RMR. Municipality of Olinda: The Municipality of Olinda lacks the experience and internal management and - 35 - technical capacity of Recife. The municipality demonstrates a commitment to the program, but significant assistance from FIDEM and others will be required to build-up sufficient capacity in Olinda. That notwithstanding, the municipality has taken recent actions to build internal capacity by creating the Planning, Transport, Economic Development and Environment Secretariat which has direct supervision of project for the municipality. Building the municipality's institutional capacity is critical and its current weak state is a project risk. 4.2 Project management: FIDEM will be the project's executing agency responsible for overall project coordination and management. The first phase of the project, the two pilot areas of Campo Grande and Passarinho will be executed directly by FIDEM, who will be responsible for the contracting of the engineering projects as well as the contracting and supervision of civil works. In subsequent phases of the project (the remaining 11 sub-project areas) will be executed directly by the municipalities, who in this case will be responsible for all contracting and supervision, with coordination from FIDEM. FIDEM, in all cases, will be responsible for the project's quality control, adherence to Bank regulations and guidelines and the timely submission of all relevant project reports, including annual audits of the project accounts. The municipalities will be required to provide access to the project accounts by the auditors hired by FIDEM to audit the Project accounts. Given the mostly weak capacity, and inexperience of all the executing agencies in the implementation of large, complex urban improvement projects, and the unfamiliarity with Bank financed projects, several measures are being taken to ensure that project management capacity is strengthened. To begin with, external consulting firms, with experience in urban upgrading projects, as well as experience with Bank financed projects, will be hired directly to assist in the planning and execution of the project. The firms will assist FIDEM and the municipalities in issues of procurement, planning and supervision and in fulfilling reporting obligations to the Bank and in the preparation of disbursement requests. In addition, to facilitate the project management function, a state-of-the-art management information system has been designed and installed for the project. This system, known as SIGMA, has all the necessary modules for effective project management, including financial, accounting, disbursement, contract monitoring and procurement. It also can accommodate the input of project output and impact indicators for easy reporting to the Bank, state and federal governments. To establish the proper flow of information between the various project executing agencies, a version of SIGMA will be installed in each of the executing agencies' offices so that information can then be appropriately consolidated in the Central Monitoring Office within FIDEM. The system permits each executing agency to utilize each module for their own individual sub-components of the project (budget, procurement, contracting, accounting, etc.) ensuring that the data is correctly entered into the system so that reports can be generated in a timely manner and consolidated when required. In each case, FIDEM will have real time access to the data entered and controlled by each sub-executor (the municipalities) either jointly, or individually, in such a manner as to allow it to continually monitor cash-flows and payment schedules. With this information FI)EM can solicit whatever report it requires to ascertain the financial and physical status of the project and individual sub-projects, thus facilitating it monitoring functions. Project Management will also be carried-out at the municipal level by Recife and FIDEM. While FIDEM will coordinate all project activities, the municipalities will execute works at the UE level apart from the first two pilot areas. In that regard they will need to maintain project accounts, following Bank procedures with regard to procurement and all social safeguards. FIDEM will provide guidance in this regard and will be ultimately responsible for ensuring this compliance. In addition, each municipality will hire a specialized firm to assist primarily on project financial management and procurement - 36 - activities. 4.3 Procurement issues: A procurement assessment was carried out during project appraisal. Overall procurement capacity is considered weak and the risk for the project is considered high. The actions described in the action plan that was agreed with the Borrower, will alleviate the risks of having separate implementing agencies at the municipal level and the project coordination unit at the state level. A procurement plan was approved for the tasks to be carried-out during project implementation. The plan was approved by the Regional Procurement Advisor's office and is in the project files. The procurement action plan includes the following: * A team of procurement staff with experience in World Bank procurement shall be retained by FIDEM throughout project implementation. The terms of reference and profile of the individuals shall be reviewed by the Bank and the procurement expert should have experience in the hiring of consultant firms. An engineer with experience in contract administration shall be a part of the Project Management Unit. These roles are expected to be filled by the Project management consulting firm. * FIDEM shall submit an updated procurement plan by negotiations. * FIDEM shall hire external consultants to carry-out an independent procurement review annually for itself and each participating municipality. * The municipalities shall hire specialized consultants to assist in procurement activities. * All executing agencies shall have access to SIGMA and will be trained in its use. * FIDEM and the two municipalities will participate in procurement workshops with an emphasis on Bank ICB, NCB and hiring of consultants. 4.4 Financial management issues: A financial management assessment was carried out during project appraisal. Financial management risk is considered high, due to the lack of institutional capacity and experience on the part of the project executing agency, FIDEM. That notwithstanding, FIDEM has installed the SIGMA project management system which includes all financial controls and reporting necessary to ensure sound financial management and reporting required for the project. The system is integrated among the project executing agencies (State Secretary of Finance, FIDEM and the municipalities), and this will ensure the adequate flow of information and the.timely generation of management reports. The project systems will be fully functional with staff training prior to project effectiveness. In addition, FIDEM has demonstrated capacity to manage external bank resources through the appropriate use of PHRD grant funds in the amount of US$900,000 used in the preparation of this project. An external audit of this fund was carried-out and no misuse of funds was reported. Based on the financial management review, FIDEM has the very minimal financial management capacity necessary to carry-out this project, and that capacity will be substantially enhanced with the SIGMA management information system and the contracting of an external management firm. Following arrangements for Bank financed project in Brazil, the annual financial audit of the project accounts for the period January 1 to December 31 of the year audited, will be carried-out by independent auditors acceptable to the Bank, no later than June 30 in the year following the year for which the audit is being conducted. The Auditor's terms of reference have been discussed with the Borrower. The audits will include the issuance of a management letter on internal controls six months after effectiveness. The format of the project financial statements has been established. 5. Environmental: Environmental Category: B (Partial Assessment) 5.1 Summarize the steps undertaken for environmental assessment and EMP preparation (including consultation and disclosure) and the significant issues and their treatment emerging from this analysis. - 37 - The project's investments will construct/improve basic urban infrastructure in low-income areas. The project should improve the urban environment of the Beberibe river basin, including reduction of trash in the Beberibe, better drainage, reduction of erosion, higher public regard for environment, and improved public health. As such, no major negative environmental impacts are envisioned. Most negative impacts will be associated with construction nuisances in populated areas. That notwithstanding, the proposed upgrading activities could cause limited alterations to the environment that would minimize the benefits if not handled in a proper manner. Potential impacts pertain directly to the management of the construction process (nuisance, dust and nose from construction activities, disposal of construction waste, increased traffic, timing of construction and pedestrian safety). Of additional concern is the long-term management of solid and liquid waste in the area, and the need to control urban growth in environmentally sensitive areas along the Beberibe River Basin. The project presents an important opportunity for both developing an urban environmental management plan for the Beberibe River Basin and the environmental management of urban construction in cases of large-scale upgrading, which can later be extended to others areas of the RMR. An Environmental Assessment (EA) was prepared for the program, which establishes the required guidelines and methodologies to manage and mitigate pertinent environmental impacts resulting from the implementation of the proposed Urban Plan. The EA was contracted by FIDEM, prepared by GTZ, and reviewed by a representative of the Bank. The report includes: i) identification of the current environmental characteristics of the Beberibe basin; ii) probable impacts resulting from the proposed local and basin-wide civil works; iii) recommendations for measures to control, prevent, mitigate and correct the identified negative impacts to be included in the Projetos Basicos; and, iv) TORs for preparing area-specific and basin-wide Environmental Management Plans. In separate reports, specific details for the two pilot areas, Campo Grande and Passarinho are presented following the same outline as the Program EA, and tailored recommendations are made for each area. 5.2 What are the main features of the EMP and are they adequate? An urban structural plan for the Beberibe River Basin has been developed through this project, which is used to guide development in the area and rationalize the improvement of the low-income settlements within the greater scope of the surrounding area. A Basin-wide Environmental Management Plan was designed in order to address potentially significant negative environmental impacts and to enhance the improved environmental conditions which will be brought about by the project. The EMP: o Establishes environmental analysis procedures for future project areas; o Presents a conceptual model for proper environmental management of the Beberibe basin, including required instruments, institutional structure, responsibilities, strategies, financing, and legal/regulatory reforms; o Evaluates and make compatible studies and initiatives for sewage collection and treatment; o Establishes a conservation program for natural resources, including ecosystem conservation, and reforestation. This includes fortifying the Metropolitan System of Conservation Areas and an Open Space system; o Suggests zoning, using ecological and economic criteria, the Beberibe basin; and, o Proposes environmental initiatives, including community awareness, environmental education, degraded area recuperation and community-driven initiatives. Another important issue is the management of environmental and social impacts during construction. Typical construction nuisances such as noise, dust, traffic congestion, danger to pedestrians, etc. will be exacerbated, in several instances, by the high population densities. These nuisances will be lessened by proper planning, including careful planning of disruption in electricity, phone and water services, scheduling of construction traffic, proper signage of construction routes and zones, etc. The rules for - 38 - contractors have been detailed in a construction manual, and specific environmental rules will be included in the bidding documents. The Japanese Grant financed the elaboration of the above-outlined EMP, as well as the other environmental activities, including: an environmental education program; preparation guidelines for the treatment and disposition of construction wastes; and community guidelines for solid waste collection. [XI Summarize issues below (e.g., resettlement planning, compensation) [] To be defined (indicate how issues will be identified) [ I None Population resettlement will be necessary to provide rights-of-way for infrastructure and to remove families located in high-risk and environmentally sensitive areas. Avoiding resettlement outside of the target area is one of the guiding principles of the resettlement policy for the project. That is, every effort will be made to resettle families within the project area so as to minimize dislocation from family, jobs, school and social structures. To achieve this, alternative housing solutions will be made available, such as the verticalization of existing housing and orderly densification. Another alternative would be the concept of "residence exchanges" which has been utilized in other successful project in Brazil. This process would allow unaffected families to leave the area if they choose with financial assistance provided by the project, opening that family's formerly occupied house to occupation by a famnily affected by the upgrading process. Site visits indicate that the project targeted areas are of sufficiently low density so as to allow resettlement within the geographic boundaries of the project. The families affected by resettlement will also be beneficiaries of the investments in improved basic urban infrastructure. In truth, those resettled are the ones who will receive the greatest direct benefit of the project. Beyond the investment in basic infrastructure, they also benefit from a housing program that gives them access to a "risk-free" home which meets livability norms, and which are supplied with basic services. Estimate of the number of families to be resettled Prior to appraisal a participatory preliminary urban improvement design for two pilot areas (13 expected to be the total number of areas benefiting by the project) were prepared. An intense consultation process, involving the whole community as well as the families potentially affected by resettlement, was a key aspect of the methodology for preparing these preliminary designs, which one of the main objectives was to permit estimates of the needs of the areas for resettlement requirements. The detailed engineering projects that will give precise information about the intervention in these areas including resettlement will be financed during the execution of the project, prior to the civil works. Based on other interventions of the same type as PROMETROPOLE previously undertaken in poor areas of the Recife Metropolitan Region, it is estimated that of the 156,000 people (35,500 families) directly benefited by urbanization works of PROMETROPOLE, around 5% (1,780 families) should be relocated and resettled. This average percentage of a maximum 5% of families to be relocated is the benchmark for the urbanization of the 13 low-income areas selected in the Beberibe basin. In the two pilot areas, Passarinho and Campo Grande, the resettlement estimates are for: 70 families, corresponding to 4% of the total number of families in the first area (due nearly exclusively to the risk of landslides); and 340 families in the second area corresponding to 17% of total families (due principally to the wretched conditions of housing along the margins of the canal). - 39 - Family profiles Through consultations with the population and socioeconomic research in the two pilot areas, it is known that more than 90% of the families subject for potential resettlement are "owners" (they constructed or bought their homes, but do not possess a legal property title) of the building in which they live. Only around 3% of the families cohabit with one or more families in the same house, and around 1% pay rent. Only 1% of the potentially affected buildings house small commercial activities. More than 90% of the houses have an area of less than 40 m2, the material is predominantly wood or other improvised material, and a significant percent (50% in Campo Grande) have no bathrooms. The water and sewer services, when they exist, are largely irregularly connected. Piped city water arrives at the houses generally for several hours two days per week. Family income is about I to 2 Minimum Salaries. Around 80% of the families say they do not have the financial resources necessary to build a new house, while at the same time more than 70% showed a willingness to participate in the construction activities themselves. The consultation revealed that the most adequate form to meet the needs of the majority of those potentially being resettled is the building of ground level single-family homes. "Do-it-yourself' construction, using kits of construction materials furnished by the Program, enjoys a high degree of acceptance by those affected. Eligibility criteria for consideration of relocation Those eligible for consideration for relocation are all people/ families from an intervention area of PROMETROPOLE that falls within the previously defined categories. The PROMETROPOLE Program will take steps to avoid non-eligible people and those who install themselves in an area with the intention of taking advantage of the Program, benefiting improperly from supportive measures of resettlement. For this reason, all the families and their goods within an area subject to relocation will be registered right at the start of the participative planning process with the community. The date registration takes place will be the date limit to determine eligibility for consideration for resettlement. - 40 - Table of compensation alternatives - total loss .Sitiiii5hsaffte d- - ;' '*K't l . Re'pon opn_k : - - :.*- .*: - (a) Lessees (who rent or provide) (al) of land 1. Indemnification in cash according to the (a2) of the building (residential, property assessment and table of assigned commercial or mixed use) credit. (a3) of lands and building (residential, commercial or mixed use) (b) owners/ leaseholder-residents or I . Indemnification in cash, for expropnations of land according merchants to property assessment (bi) of land . Urban lot and building kit (Kit built or not, according to (b2) of building (residential, assigned credit value) commercial or mixed use) 3. Living unit/ mixed use to be constructed/ provided by the (b3) of lands and building (residential, Program; acquisition of additional financing in case the assigned commercial or mixed use) credit is insufficient. 4 Exchange of property locally or in another place, acquisition of supplementary financing where assigned credit is insufficient. 5 Indemnification in cash according to property assessment and assigned table of values, as given in paragraph 5 1. (c) Tenants and cohabitants (paying rent or not) 1. Assistance identifying another residence or (cl) residents and co-inhabitants commercial property according to the table (c2) merchants of credit values. (c3) mixed (living and business) 2. Urban lot and building kit; payment of the difference between compensation given and the pnce of the lot or the kit. Table of compensation alternatives - partial loss *ta, Lesce. tAho rernl or gi'e access) I Indemnification in cash for the pan affected according to (at) of land the property assessment, and eventual compensation for loss of (a2) of the building (residential, commercial rent, according to the table of assigned values. or mixed use) 2. Indemnification in cash for total loss based on the property (a3) of the land and building (residential, assessment, without nght to compensation for loss of rent. commercial or mixed use) (b) Owners/ resident leaseholders or I. Jndemnification in cash for the part affected according to merchants the property assessment. and eventually proportional (bI) of land compensation for the loss of rent and/or foregone profit, (b2) of the building (residential, according to the table of assigned values commercial or mixed use) 2. In case of non-acceptance for partial loss, the case can be (b3) of the land and building (residential, considered a total loss, if the remaining building can be commercial or mixed use) exchanged with another relocatee. (c) tenants and cohabitants (paving rent or not) 1. Support in renting other living or commercial space, (c I) residents and cohabitants according to the payment scale (c2) merchants 2. Urban lot and construction kit; payment of the difference (c3) mixed (residential and commercial) between the compensation supplied and the price of the lot or the kit. Vulnerable Groups: Vulnerable groups such as single mothers and retired persons in precarious econornic situations will receive special assistance for access to housing. PROMETROPOLE will assume the costs of building the housing kits. - 41 - Mechanisms for protests and complaints People who feel wronged or not adequately compensated have several alternatives for protesting and complaining. First, the technical resettlement team that works out of the local office close to the home of the complainant is trained, along with the community representatives (COMUL, Committee), to clear up doubts or request for reassessments of losses caused by relocation. Furthermore after exhausting all possibilities of an amicable resolution with the team, complainants can pursue the reconciliation council. This group will be created within the management structure of municipal projects. As a last resort, the person affected by relocation can appeal to the justice system. In case of disagreement, the local government/state, will escrow the value in dispute of the assigned credit under the two following circumstances: o In the case of improvements made in public land: o The public authority will repossess through legal action, land occupied by squatters In the case of private property:Through a legal expropriation action, with a request for escrow deposit of the value assessed and consequent application of the right of eminent domain. Institutional Responsibilities and Relocation Assistance Planning and monitoring of the resettlement process are the responsibility of the Municipalities participating in PROMETROPOLE, and will be carried out by the team making up the Management Unit of the Project within the implementing bodies of the program. The management team will include technical personnel from all the areas of specialization necessary for the project, such as engineering, finance, social work and resettlement specialists, etc. 5.3 For Category A and B projects, timeline and status of EA: Date of receipt of final draft: September 01, 2001 5.4 How have stakeholders been consulted at the stage of (a) environmental screening and (b) draft EA report on the environmental impacts and proposed environment management plan? Describe mechanisms of consultation that were used and which groups were consulted? Community groups in the Beberibe River Basin have been consulted as part of the Rapid Urban Diagnostic Assessments and the preliminary intervention plans for Campo Grande (Recife) and Passarinho (Olinda), the two pilot areas to be first addressed by the project. Many professionals, including academics, government and environmental advocacy groups, partook in the preparation of the EA. More than 29 consultations on the EA and project were conducted, ranging from the terms of reference for the EA to the Intervention Plans. A public advertisement announcing the availability of the EA was published in the Official State Newsletter on September 11, 2001. 5.5 What mechanisms have been established to monitor and evaluate the impact of the project on the environment? Do the indicators reflect the objectives and results of the EMP? The Urban Environmental Management Plan for the Beberibe River Basin and the Environmental Management Plan for urban construction both contain monitoring mechanisms. While not monitored by the project due to their complexity, many positive environmental and public health effects are expected to result from this project. 6. Social: 6.1 Summarize key social issues relevant to the project objectives, and specify the project's social development outcomes. - 42 - One of the principle outcomes of this project will be the direct and indirect development of the capacity of local community groups. The project includes a program of capacity building of local community groups, particularly through the process of the participatory planning strategy that is discussed below. In addition, one of the components includes a micro-credit program which contemplates providing credit for three possible uses: improvement of housing units, micro-enterprise development and for the building the capacity of local groups such as NGOs active in the project area. The latter is based on the successful GTZ program known as PRORENDA. 6.2 Participatory Approach: How are key stakeholders participating in the project? The foundation of the project is its participatory approach, rejecting the conventional notion of undertaking a project for the community, and instead undertaking the project with the community. The typical roles of state and beneficiary are reversed, with the state in this case taking on the role of facilitator and enabler. The beneficiary communities assume the direction of the process, making this a bottom-up process. The following diagram indicates the participatory planning process to be followed. This process has already begun in the two pilot communities of Passarinho and Campo Grande. The planning process is divided into several steps. Once secondary information is collected and analyzed, the areas of intervention are divided into small groupings of 500 families or fewer. Once these areas are identified, the first interaction with the community populations begins with a series of meetings with community representatives to discuss the planning process for intervention. With the help of these representatives, the next phase begins with large assemblies in each of the sub-areas. The purpose of these assemblies is to inform the population of the participatory planning process and to identify and recruit community representatives into the planning process. The next phase is the diagnostic phase, where community members, together with technical experts, prepare a socioeconomic cadastre of the sub-areas, and work through series of workshops to identify social and urban problems and to identify priorities, as well as to identify potential solutions to these problems. This is the beginning of developing the action plan. This process is complemented through surveys and analysis of the issues. A second series of workshops is then undertaken whereby the communities identify strategies for the upgrading interventions, define actions to be taken and the priority of works to be undertaken. Ultimately through this participatory planning process, intervention plans are developed which include physical investments, social projects and land tenure regularization. The next phase is the execution phase, where project execution occurs. Here, a co-management unit is set-up at the community level to ensure continued participation of the communities in the development process. This phase includes on-going negotiations, meetings and social accompaniment. Community participation continues in the operations and maintenance of investments, when applicable and strong follow-up from the technical team after the works are completed. - 43 - Preparation of Integrated Plans for interventions in Low-income Areas Tools Community Technical Equipment/Technicians Municipalities, State, NGOs, Planning others Method Stop t VISP Community - Collect and organize relevant information (Visual settle- wOctiviti y (secondary information), preparallon of basic cartography mentsualsnnle- )totivities * i .. ~~~~~~~~~~~~~~~~~~ment pianning) Meetings with Step 2v Reps. of communities -Organize a planning process -Sub-divide areas of intervention in sub-areas <500 families, among others Meetings per Step 3 Sub-area -Inform the population about participative planning -Choose representatives ot community -Participate In planning process -Registry of area dwellers; soclo-econ cadastre Planning Stop 4 DRUP Office by -Identity social and urban problems Micro- Office bJy -Establish pnonty for problems and solution Planning Subo arean -Idefine fu te sategy . _ ~~~~~~~v Immediate acions l Step 5 lo be developed I -Complete, organize relevant information by the community _ -Apply sample service (selected sssues) -Synthetize information in a sop o-economic diagnosis (entry prohle) Office i a u p o of Planning -Define fture strategyr _ -Define actions / prionty wories Lciost VISP Wl7 ~~~~~~prionty works, -Synthetize information and prepare intervention plan ._ < VS in cluding an urban plan, social development plan, and resettlement plan (pre-plans) Meetings Step a -Discuss pre-plans with populationJ v~~~~~~~~~~vS Meetings Stop M i -~~~~~~~~~~Prepare technical document VISP -Im -Adap t pLand Use Planr , prepare prolectsi Ct -of urban Improvements social development, [ ~~~~~~~~~~~~titling, other \ ~~~~~~~~~~~~~~~~~n V DRUP Sel an Stp1 Meetings IMlcro- Co-Management -Sueris excto FolwU ZPPann Re-Planning - 44 - The following tables highlights some of the participatory aspects of the project and identifies expected outcomes of the participatory activities. Pro ject Activities Promoting Communitv Participation and Decision Making ...-| .z; - Projert C ele Phases .,- .. .:-, .Diaguns-ic. inhtljaled Urban-, -Design - - Cmilworks i* '. - Post 1orli -- - '¼" -. 'Planning . Engineering ' . i,n r-- t . rnpeio-v - *t- .... -i 1, - ..~.-m. >,oaPIing E "g7 rie C eri,mpngeu r; _________________-.- c. I - ~~~~~~ ~~~Follooa-up ",r Diseni.mni,n.r, o1 C:rmiiuii.-r, oi The loeal The I,-al E%-pust beneicl,rF project objectives, local development development development assessments are methodology, committees committees committees carried out, expected (comprised of continue to work continue to operate timetables and representatives with the architects and monitor the Communities goals using local from the and engineers as construction monitor the quality means of community which the conceptual plan process as a of operations and communication, will accompany the is put into final shadow maintenance of planning process. design, construction investments and Identification of supervisor, are instructed on community leaders Specific capacity Meetings are held community and existing building exercises to discuss any To the extent responsibilities community that coincide with required possible, local with respect to the organizatsons the objectives of adjustments to labor is employed maintenance of the (CEOs, NGOs, the planning final plan using the in the execution of investments, Municipal process, including same participatory the works, Committees and community planning The committees of Neighborhood organization methodology those affected by Associations), management, employed in the resettlement leadership planning phase, monitor the Constitution of development, resettlement small community meeting Committees of process. groups (created by facilitation, those affected by sub-areas within participatory resettlement are Financial resources the UE) for methodologies, and formed and are identified for continual other topics as engaged according community consultation requested by the to the resettlement development through meetings community, policy and the initiatives and the and focus groups, specific financing of small- Creation of special resettlement action scale community Occasional large- committee for land plan is prepared projects (i e scale neighborhood tenure together with the community meetings to discuss regularization and committee gardens), based on results of small development of the GTZ Prorenda area group land tenure action Sanitation and model meetings, plan, environmental education program Sanitation and Continued small Large-scale continues, environmental area group neighborhood education meetings and meetings to discuss Roster of potential continues focusing finalization the results from skilled and on post diagnostic results work with the local unskilled laborers construction issues developmnent for civil works committees which construction are continues the comprised process of participatory planning in identsfying needs and priorities, analysis of alternatives, and assessment of pros and cons of these alternatives resulting in a final conceptual plan, Begin the sanitation and environmental education workshops - 45 - Expected Outcomes of Community Participation Pro,ject Cycle Phases -Diagnostic. Integroted Utrban Design Ci il Work Post Works , u . --- Planning Enginecring Construction Completion . . ., - . . _ - ~~~~~~~~~~~~Follow-up Community leaders Local development Resettlement Community micro Possible and organization committees are communities are credit fund is community-based are contacted and created; provided created to assist arrangements for committees formed assistance, community efforts maintenance of the to interact with the The local strengthened, given in small business, investments (i.e project's technical development legal, social and housing "Friends of the teams, offices are created economic help and improvement and Beberibe Parks serving as a are organized ; community based Association or A participatory community The final urban projects; associations for diagnostic is meeting space for plan is prepared maintaining semi- prepared using the the project at and readied for Community private DRUP which the bidding and is "watchdog" groups infrastructure) are methodology (see community has completely vetted are established to considered and/or diagram) immediate access by the community, monitor the the creation of to the project construction small business (i e planners (remains process for operating throughout the certain investments project life), recycling centers), Community leaders Same watchdog and groups are groups can given increased continue to capacity to interact monitor the quality with project's of service technical team and provision in the public service area and have providers, increased capacity to interface with A final plan is public and private developed and sector providers, agreed upon by the entire community. Community organizations have increased capacity to mainstream community issues in public planning processes, prepare, negotiate and execute projects on their own; Local development offices remain for re-use based on community identified needs (i e community center, health outpost, satellite police kiosk) 6.3 How does the project involve consultations or collaboration with NGOs or other civil society organizations? As has been indicated elsewhere in this document, the project will initiated infrastructure development activities in the two pilot areas of Campo Grande in Recife and Passarinho in Olinda. During the project preparation, phases one (Diagnostic) and two (Integrated Urban Planning) have been completed using the participatory methodologies outlined in this section. During the process, a number of community based organizations were identified and brought into the planning process. These organizations having been fully incorporated into the diagnostic and planning process have identified their own expectations - 46 - regarding this project. This serves as a starting point for determining what role each organization can play in the next phases of the project, and what activities should be undertaken to strengthen the capacity of these CBOs so that they can meet their expectations of the project. It also serves as a test case for future areas where the project will intervene. The following table presents those organizations that were involved in the community planning and their expectations of this project. COMMUNITY ASSOCIATIONS IN THE PASSARINHO AREA ommunity Identification Expectations of PROMETR6POLE Associations Community-based * Centro de Apoio Comunitano Increased capacity and self managment associations * Associacao Comunitaria de Passannho Parents and * Escola Municipal Vereador Josd Mendes Participate in the environmental education program teachers associations Religious * Assembl6ia de Deus Work to increase partipcation from their membership Groups * Igreja Batista de Passannho Identify potential partners and lead in negotiating with them. * Igreja Presbiteriana * Centro Espinta Paz e Luz * Terreiro de Candomble Ile Oloxum Sports ' Grupos de Domin6 The acquisition of sporting equipement such as playing fields Associations * Grupo Jovem Futebol Clube and receive funds for strenghtening of youth groups and * Nautico Futebol programs * Flamengo Futebol Clube a Passarinho Futebol Clube * Juventude Futebol Clube * Milla Futebol Clube * Time de Futebol Feminino Cultural * Banda Filosofia Urbana Assist in community workshops and express urban realities Associations through music (rap) * Banda Por Acaso Receive assistance in acquiring instruments and materials * Banda Sambarraios Expect community fund to provide assistance in transport to events and with scholarships to study music theory * Banda Ponto Final Expect assistance to promote their progams of teaching music to children * Troga Mista Urso carente Express urban realities through theatre work as part of planning process. * Concurso Garota do Baifro Use their courses to promote self-esteem of girls within the context of the project * Artista/Desenhista Potencializa.go do conhecimento e utlizacago como multiplicador * Serigrafista e pintor Use the project as a vehcile for young artists to express themselves * Meninos Cantores de Olinda Create opportunities for this youth singing group to express itself in the context of the project through music Criadores de Cavalo Are hoping to support publicity of PROMETROPOLE - 47 - COMMUNITY ASSOCIATIONS IN CAMPO GRANDE AREA Community Identification Expectativas com o PROMETR6POLE Associations Community-based o Centro de Apoio Comunitario de Campo Use the project as a tool to create cooperatives amnong the associations Grande, community organization. a Associacao Comunitana Uniao dos Palmares, a Associaqlo dos Moradores de Campo Grande; a Conselho de Moradores de Saramandaia Mothers a Centro Educacional Sao Jos5, Works as partners in the environmental education program. associations a Clube de Maes Hononna de Freitas (Escola Comunitaria); ° Clube de Maes Capild Religious groups a Assembleia de Deus Use their position to identify and negotiate with potential 0 Centro de Organiza,ao Comunitaria Padre partners in the project. Villesman; o Centro Espfnta Yl1 Axd Oyagade; a Cenaculo Espfnta Casa de Maria (CECAM); Centro Espfnta Josefa Mana da Conceicao Sports associations ° Liga de Domin6 do Tiao; Expeting playing fields and the opportunity to use the project as a means to work with youth through sport. ° Vasco da Gama Futebol Clube Cultural groups a Afro Acaua Juvenil Use this as an opportunity for youth to express themselves through project related workshops ° Bald Afro Rafzes Culturais Use this an an opportunity for community members to express themselves through dance events related to the project • Troca Urso da Tua Mae NA • Troc,a Camavalesca Foi Fonmoso NA • Darue Malungo NA ° Grupo Capoeira e Teatro NA 6.4 What institutional arrangements have been provided to ensure the project achieves its social development outcomes? To ensure the active participation of the communities, as well as NGOs and other relevant members of civil society active in the project area, the project will include local site offices. These offices will serve as the direct link with the community and will be staffed by municipal representatives. When their use as the local project office is completed, the sites will be used for cormnunity uses as identified as most urgently needed by the community. In early consultations with community groups in Passarinho, it was indicated that the preferred post-use would be to house a local community policing office. Violence is a major concern in many of the project communities. 6.5 How will the project monitor performance in terms of social development outcomes? In addition to the hard indicators that will be monitored throughout the project, the project also include a mid-term and final-year qualitative assessment of beneficiary satisfaction to be conducted through stakeholder workshops and focus groups. In addition, as was indicated above, the communities will be involved in all phases of the project cycle, and importantly will themselves be involved in the monitoring of critical aspects of the project such the resettlement of affected families and the process of construction. - 48- 7. Safeguard Policies: 7.1 Are an' of the fIllowing safeguard policies triggered bv the project9, -. - : - SPolicy . - :-. Triggered Environmental Assessment (OP 4.01, BP 4.01, GP 4.01) * Yes ( No Natural Habitats (OP 4.04, BP 4.04, GP 4.04) (9 Yes * No Forestry (OP 436, GP 4.36) ( Yes * No Pest Management (OP 4.09) (9 Yes * No Cultural Property (OPN 11.03) U Yes * No Indigenous Peoples (OD 4.20) U Yes w No Involuntary Resettlement (OP/BP 4.12) * Yes U No Safety of Dams (OP 4.37, BP 4.37) U Yes * No Projects in International Waters (OP 7.50, BP 7.50, GP 7.50) (U) Yes * No Projects in Disputed Areas (OP 7.60, BP 7.60, GP 7.60)* C Yes No 7.2 Describe provisions made by the project to ensure compliance with applicable safeguard policies. Appropriate measures have been taken to ensure compliance with the Bank's environmental policies, including an Environmental Management Plan and other actions discussed in Section 5, such as the plan to minimize construction impacts. In addition, a resettlement policy has been prepared and approved. A resettlement action plan for the first two areas has been prepared and approved. Subsequent resettlement action plans will be prepared and reviewed by the Bank and supervision by the Bank will include careful monitoring of the resettlement aspects of the project. F. Sustainability and Risks 1. Sustainability: Sustainability derives from: (i) developing an inter- institutional and jurisdictional mechanism for planning and investing in the improvement of low-income urban settlements in the RMR; (ii) a clear cost-recovery and subsidy policy for infrastructure investments; (iii) a high level of community/beneficiary participation; and (iv) taking an integrated approach to the urbanization of the Beberibe basin including macro infrastructure as well as household infrastructure and urban services for the poor. Political Sustainability: The project has potential political risks which have been identified and mitigated to ensure political sustainability of the project. These are represented most evidently in the institutional arrangements. A formal agreement was reached between the state and the municipalities of Recife and Olinda during the final appraisal mission in January 2002, and this agreement was signed by the respective parties during that mission. The arrangements agreed by the State and municipalities recognizes both political realities and natural responsibilities of the state and municipalities. It was agreed that the state would oversee and supervise the entire project execution, being responsible for overall project coordination. In addition, the state, through FIDEM, would be responsible for ensuring the coordinated planning of all future interventions in the Beberibe River Basin of the RMR. This is within the specific role that FIDEM was created to fulfill. In addition, FIDEM will execute all works within the project that are of a cross-municipal nature. It will also execute the first two pilot areas of the low-income investments. This is to ensure quality in the test cases before devolving this task for the remaining II low-income area investment areas to the municipalities. It is acknowledged by the State, - 49 - the municipalities and the Bank, that the execution of local infrastructure works, as those proposed for the low-income area investments, are of a municipal nature, and the long-term sustainability of such investments necessitate that they be executed and maintained at the municipal level. Thus the project accommodates this principle. The agreement signed by the State and municipalities as well as the Loan Agreement to be signed by the state, and the Project Agreements to be signed by the municipalities of Recife and Olinda, make these arrangements legally binding. Economic and Financial Sustainability: The Project follows the explicit strategy of subsiding the capital costs of providing basic infrastructure in low-income communities. Recovery of operating and maintenance costs is another explicit strategy that makes the investments sustainable in the long-term. The most obvious attempt at cost recovery is the proposed institutional arrangements for the delivery of water and sanitation services in the project area via a third party arrangement, with tariffs based on efficient costs of operation and maintenance. Other urban services are financed through user charges (in this case solid waste collection) and the collection of property taxes (IPTU). The project will monitor the collection of these fees and taxes in the project area to encourage collection by the municipalities and payment by the beneficiaries. In addition, in the short term the Project will generate significant employment of unskilled labor. In the longer terrn, the state proposes to use the rehabilitation of the historic Matadouro site as a job training center with an emphasis on information technology. In addition, the project will support the creation of alternative institutional models for the operations and maintenance of the infrastructure investments, including the possibility of small, community based businesses to assume these responsibilities. The most obvious example would be the support of neighborhood recycling centers. Finally, the investments are projected to have a significant impact on wealth creation for the project beneficiaries, through measurable increases in the value of real property and the regularization of tenure arrangements. Housing is generally the single most valuable asset of the families in the project area. Social Sustainability: Through a strong program of community participation in all phases of the project (from planning to post construction), the project will generate considerable social capital of community groups, NGOs and community leaders. This is the most important social feature of the project's design, and the nature of community participation is detailed in subsequent sections of this PAD. In addition to participation, however, the project contemplates a number of activities that will enhance the social sustainability of the Project. To begin with, the project takes a holistic approach to upgrading of the Beberibe River Basin, attempting to endow it with characteristics that will improve the overall quality of life of its residents. The financing of parks, for example is a unique aspect of this project. Parks will provide recreational, social and economic opportunities to those residing in the Project area. Parks can reduce crime, improve the physical environment and provide recreational opportunities that had not previously existed. Providing families with regularized land tenure and house addresses will also serve to build the self-esteem of project beneficiaries and potentially increase their access to such things are credit and jobs. In addition, as the project fits within the context of an overall strategic plan for the Beberibe Basin, the project, through its direct work with community groups and community leaders, serves as an entry point to undertake social programs that are directly aimed at the community and identified in the Beberibe strategic plan. One example, is environmental education, which will finance as part of the project. 2. Critical Risks (reflecting the failure of critical assumptions found in the fourth column of Annex 1): Ri$k' _ RIsk Ratngk ~ - Risk Mitigaii Seasure ~. From Outputs to Objective Inter-institutional/governmental M Requirement to have intergovernmental - 50 - cooperation and commitment is not memorandum of understanding between the retained throughout the project cycle states and the municipalities specifying roles and responsibilities. Weak management and technical H Hiring of a consulting firms to assist in the capacity of the executing agencies coordination of the project. (FIDEM and Municipalities), particularly in the areas of procurement and financial management. Problem in the transition to alternative S Agreements between the State and the management arrangements in the WS&S municipalities and SEPLANDES and sector COMPESA. Municipalities don't maintain S Some Project funds will be allocated according commitment to cost recovery through to triggers, including a demonstrated IPTU and/or other means such as special commitment to increasing collections of IPTU service fees and/or other service fees in the project area and the water sector pilot is designed on the basis of cost recovery. From Components to Outputs Lack of sufficient community buy-in, M Use of field tested participatory strategies will including commitment to pay for services ensure community buy-in, as will local field received. office and requirement to build social teams into design and engineering contracts as well as construction contracts. Unavailability or delays in availability of M Five year project implementation period is counterpart funding. designed to accommodate possible cash-flow problems. Highest risk is with the municipality of Olinda. Don't maintain project costs within 15% N Pilot areas will test cost structure and allow for of estimates cost-saving adjustments in subsequent 11 additional interventions. Overall Risk Rating 5 Risk Rating - H (High Risk), S (Substantial Risk), M (Modest Risk), N(Negligible or Low Risk) 3. Possible Controversial Aspects: The most controversial aspect of the project will be the piloting of alternative institutional arrangments for water distribution in the project area. The proposal is controversial on several counts: (i) there is significant municipal opposition within the municipality of Recife to the proposal; (ii) the vast majority of the consumers in the proposed coverage area are poor, and there is a perception that they lack the ability to pay for services; and (iii) COMPESA will still be responsible for supplying bulk water to the private operator. On the other hand, the solution is innovative and has the potential to set a benchmark - 51 - for possible private sector participation in the WS&S sector in metropolitan Recife. In addition, in the process of negotiating this sub-component, future collaboration between the Bank and COMPESA has arisen including support for the future privatization of COMPESA (technical consultants financed through PMSS II), the possibility of PMSS II financed investments and PMSS II direct financing of the analytical and engineering studies required for the isolation of the water distribution system pilot. G. M3ain Loan Conditions 1. Effectiveness Condition o The terms of reference and bidding documents for the consulting firm to provide project management services to FIDEM will have been presented to and found satisfactory to the Bank. O The financial management system will have been established, and the relevant staff of FIDEM, COMPESA and the Municipalities will have received a minimum of 40 hours of training in the use of such systems. o FIDEM shall furnish to the Bank, a final version of the project's Operations Manual containing, inter alia, the roles and responsibilities of the executing agencies, financial and project management reporting requirements, flow-of-funds and flow-of-information between the state and the municipalities, the procurement plan and procedures, prototype of quarterly monitoring reports to furnished the Bank and estimated annual investment plan and sources of finance, in form and substance satisfactory to the Bank and criteria for the allocation of funds under the Additional Macro and Low-income Area Investments component. o The State of Pernambuco shall furnish to the Bank signed contracts between the State of Pernambuco and the municipalities of Recife and Olinda, respectively, specifying the roles and responsibilities of each in the planning, execution, monitoring and supervision of the project as well as commitment of financial resources of each entity, in form and substance satisfactory to the Bank. 2. Other [classify according to covenant types used in the Legal Agreements.] FIDEM shall: o Establish and maintain a financial management system, including records and accounts, and prepare financial statements, all in accordance with accounting standards and practices acceptable to the Bank, consistently applied, adequate to reflect its operations and financial condition, and to register separately the operations, resources and expenditures for and in connection with the carrying out of the Project; o Have the records, accounts and financial statements (balance sheet, statement of income and expenses and related statements) for each fiscal year audited, in accordance with auditing standards acceptable to the Bank, consistently applied, by independent auditors acceptable to the Bank; o Furnish to the Bank as soon as available, but in any case not later than six months from the end of each such year: (A) certified copies of the financial statements referred to above for such year as so audited; and (B) an opinion on such statements, and a report of such audit, by said auditors, of such scope and in such detail as the Bank shall have reasonably requested; and o Furnish to the Bank such other information concerning such records, accounts and financial statements, and the audit thereof, and concerning said auditors, as the Bank may from time to time reasonably request. FIDEM shall also: o Furnish to the Bank, not later than January 1, April 1, July I and October I of each year of project execution, reports, of such scope and in such detail as the Bank may request, on the progress of the - 52 - Project in the calendar quarter preceding the date of each such report; * Maintain policies and procedures adequate to enable it to monitor and evaluate on an ongoing basis, in accordance with the Monitoring Indicators, the carrying out of the Project and the achievement of the objectives thereof; * Prepare a mid-tern evaluation report on or about June 30, 2005, integrating the results of the monitoring and evaluation activities performed throughout the project. Said report shall set forth measures for ensuring the efficient carrying-out of the Project and the achievement of the Project objectives during the period following such date; and * Shall hire procurement auditors to carry-out independent procurement reviews once a year in each participating municipality and of itself in accordance with terms of reference and hiring procedures acceptable to the Bank. H. Readiness for Implementation 0 1. a) The engineering design documents for the first year's activities are complete and ready for the start of project implementation. 1 1. b) Not applicable. O 2. The procurement documents for the first year's activities are complete and ready for the start of project implementation. 2 3. The Project Implementation Plan has been appraised and found, to be realistic and of satisfactory quality. i 4. The following items are lacking and are discussed under loan conditions (Section G): The conceptual integrated urban development plans for the first two pilot intervention areas are completed and the terms of reference to contract the "projetos basicos' will be completed and approved as a condition to negotiate. 1. Compliance with Bank Policies i 1. This project complies with all applicable Bank policies. L 2. The following exceptions to Bank policies are recommended for approval. The project complies with all other applicable Bank policies. M, Vitor Sass Danny M, L Vinod Thomas Team Leader Sector M na§*1 or Country Director - 53 - Annex 1: Project Design Summary BRAZIL: RECIFE URBAN UPGRADING PROJECT Key Performance Data Collection Strategy iHierarchy of Objectives Endicators Critical Assumptions Sector-related CAS Goal: Sector Indicators: Sector/ country reports: (from Goal to Bank Mission) Urban Poverty Reduction by Indicators are National CAS Not specified in CAS following a development strategy o Water: 100% coverage by o Urban Poverty Strategy of water and sanitation provision 2007; o Urban Employment ESW and modernization of the sector; o Sanitation: 35% coverage Financing Municipal upgrading of poor urban by 2007; Investments neighborhoods; improving the o Significant private sector ESW functioning of urban land and participation to achieve o Land and Housing Markets housing markets; and creating service targets; ESW sustainable mechanisms to o Increase percentage of o WS&S Strategy finance urban infrastructure population living in urban upgraded areas; o Increase secunty of urban land tenure for the poor; o Develop state enabling environment for housing, and away from direct provision; o Development of sustainable mechanisms for urban infrastructure financing. - 54- * - - - - Key Performance Data Collection Strategy . - - ; Hierarchy of Objectives .]. Indicators . - Critical Assumptions Project Development Outcome I Impact Project reports: (from Objective to Goal) Objective: Indicators: Measures of Wealth and Well Inter-institutional commitment is To improve the wealth and Beinz Special survey studies designed retained throughout the project well-being of the urban poor in specifically for this purpose. cycle. the Bebenbe River Basin in the * Measure of the changes in Recife Metropolitan Region and property values pre-and Mission reports/PSR. Additional capacity can be built develop the institutional capacity post project at both FIDEM and the two of state, local and civic entities to * Measure of the availability Quarterly project municipalities of Recife and plan for, deliver and maintain of housing pre- and implementation reports Olinda basic shelter and urban services post-project (a measure of for the low-income in a private investment) Project can transition smoothly to coordinated and sustainable * Measure of the perceptions the pnvatization of key state manner of quality of life of project provided services, especially beneficianes water/sanitation and electncity The municipalities maintain commitment to cost recovery. This effort will commence with a Measures of Efficiency and Monitonng and evaluation. focus on improving the built and Effectiveness natural environment of the Bebenbe River Basin of the * Measure of improvements in RMR, improving the living cost recovery of OM&R of conditions of the Basin's investments approximately 500,000 * Program decentralization inhabitants, including the 150,000 structure, assessing the individuals (35,000) families division and devolution of residing in the 13 sub-basins that responsibilities from state to are the direct targets of the municipalities, communities project. and pnvate sector - 55 - ' f.' .,!'.', '' ' ( '. | ISey Performance |Data Collection Strategy. Hierir6h-of Objectives : -lndicators - - - D - -Critical Assumiptions Output from each Output Indicators: Project reports: (from Outputs to Objective) Component: Program coverage structure: - Quarterly and annual project Sufficient community buy-in of Urbanization and consolidation of the number of households management reports generated by the project concept, including the low-income settlements in the benefited from the upgrading the project's management willingness to pay on the part of Bebenbe River Basin. program as compared to the infornation system (MIS), which beneficiaries. program coverage potential will integrate physical outputs Built-up capacity of state, (number communities and and financial project information. Project costs remain within 15% municipal and civil/neighborhood households projected to benefit). of cost estimates. capacity to address shelter/service The physical outputs to be o Regular supervision mission problems of low-income measured would be: reports and PSRs. populations in the RMR (and in particular the Beberibe River o # of newAegalized o Implementation Completion Basin) household water, sewer and Report (ICR). electncity connections; o % change in public lighting coverage; o # of KMs of drainage constructed or rehabilitated; o % change in conduction capacity of drainage; o # of KMs of new and/or rehabilitated pnmary and secondary access roads constructed; o # of KMs of pedestnan paths and communal space improved and/or constructed; o # of new retaining walls constructed; o # of families resettled due to geotechnical nsk and/or encroachment into environmentally sensitive areas such as flood plains; o # of new property titles issued; o Increase in access to recreational activities (projected parks); o Direct employment of community members in the execution of project works. Institutional outputs: o # of community civil/community based groups integrated into the upgrading process in the Beberibe River Basin; o Adoption of a streamlined process of land tenure regularization in the informal settlements; - 56 - | --i . | Key-Performance' -j --:|-Data Collection StcateI- g yl '. I.. r ''' Hierarchy of Objectives' Idicators';afi tY' - : 4 . - 's,4ritIcaI Asumptions.. Project Components / Inputs: (budget for each Project reports: (from Components to Sub-components: component) Outputs) (A) Infrastructure Inputs: (budget for each * Integration of information . There are not significant project Bebenbe Level Works component) from quarterly and annual cost over runs. Low-income Works A.) US$ 69.40 milhon reports with information C ) US$ 10.10 million collected from special There is not a shortage of (B) Complimentary Actions of D.) US$4.10 million studies. available counterpart funds, Urbanization Additional monitoring includes: * Mission reports and PSRs. especially at the municipal level. * ICR. (C) Project Management and Program Cost-to-Income Ratio: Institutional Development defined as the ratio of the median cost per household of implementing the upgrading program and the median household income in the target area. Program Cost Structure: defined as the proportion of total program cost spent on overhead, surveying and planning, infrastructure, titling, social services, resettlement, etc. - 57 - Annex 2: Detailed Project Description BRAZIL: RECIFE URBAN UPGRADIN G PROJECT All costs include contingencies. Details follow the original summaries below. By Component: Project Component 1 - US$11.80 million Al. Beberibe River Basin Macro Investments. This component focuses on the financing of infrastructure and environmental projects that will have a positive impact on the overall improvement of the built and natural environment of the Beberibe River Basin. This component will include financing of sub-projects which include: (i) parks (including the ecological park along the margins of the Beberibe River, pocket parks within each of the UEs and the rehabilitation of the Matadouro, an historic infrastructure that will be re-used for community enhancing purposes; (ii) roads and access improvements in the general flow of traffic; (iii) improvements in macro drainage that will reduce flooding; and (iv) improvements in the transport systems of sewage to be treated by the Peixinhos waste water treatment plant. Project Component 2 - US$5.50 million A2. Water Distribution and Sectorization: This component will finance investments required improve water distribution and to isolate the water supply distribution network in the project area, as well as macro metering to measure the amount of water coming in. This is required to an independent operator to manage the pilot water distribution system envisaged for the area. This component will also finance the purchase of micrometers for households and the purchase of small diameter pipes necessary to make immediate improvements in the system apart from those that will be done as part of the low-income area improvements. Project,Component 3 - US$ 52.10 million A3 & A4. Beberibe Low-Income Investments: This includes two subdivisions. The first, the pilot areas, will finance the integrated urbanization of the first two pilot project areas of Campo Grande and Passarinho. Campo Grande (Recife) is representative of a low-lying area while Passarinho will provide a laboratory for investments in areas of difficult, hilly topography. These first two areas will allow for adjustments in the investment plans for the remaining 11 project intervention areas. The second, includes the financing of 11 additional areas (UEs) that will complete the 13, integrated urbanization packages. As with the two pilot areas, investments will include works in access ways (roads and pedestrian), paving, drainage (mnicro), water and sanitation connections and improvements to the networks, public lighting, collection points for solid waste collection, resettlement for risk and works and parks and open space rehabilitation and construction. It will also include the construction of the local management offices, that will be designed for alternative uses (such as field offices for police, field points of contact for local service providers) Project Component 4 - US$10.1 0 million B. Complimentary Urbanization Actions: This component will finance actions that are complimentary to the urbanization actions to be financed under the project. This incudes the design and engineering of urbanization and infrastructure investments, social outreach and community participation, environmental education, additional studies as needed and a pilot micro-credit program for housing improvement, business development and small-scale community investments. Project Component 5 - US$4.15 million Project Management and Institutional Development: This component will finance project management and institutional development, the latter focusing on the contracting of consulting firms to assist FIDEM and the municipalities in the implementation of the project. - 58 - Framework: As a geographically targeted intervention, a number* of site-specific analyses were conducted in preparation of the project and in determination of the final component mix. Among the many important studies and analyses conducted, the Plano Estructurador - Bacia do Beberibe is among the most important as it sets the framework for the physical interventions to be undertaken in the Beberibe Basin. The Plano Estructurador includes a series of studies and activities that were undertaken and then combined to establish a strategic vision for the development and protection of the Beberibe River Basin which includes the municipalities of Olinda, Recife and Camaragibe. The plan considers three basic elements: Housing, Infrastructure and Urban Services (Habitat): This aspect of the plan analyzed community perceptions, as well as technical solutions to questions of improving the quality of the physically built environment of the Beberibe Basin. In this regard the plan contemplates a number of actions that can be taken to recuperate the natural environment, urban uses, housing, basic infrastructure and urban services as well as the recuperation and expansion of public spaces such urban parks and plazas. Socioeconomic Development: Looking at the spatial distribution of physical structures and urban functions, the plan considers solutions to improving access to employment and income generating activities, as well as increasing local access to education and health services, cultural and recreational activities as well as improving public security in an area with some of the most violent neighborhoods in the RMR. Environmental Management: The plan also considers options for improving citizen input and p,rticipation in the urban and environmental management of the Beberibe River Basin, including the evaluation of public policy with regard to its development and protection. The Plano Estructurador proposes a series of strategic actions within each of the three elements of the plan. The plan was done through a participatory process involving community groups and leaders, as well as representatives from the municipalities, state agencies and the private sector. The PROMETROPOLE is designed with these strategic actions in mind. While space limitations do not permit a full accounting of the strategies and actions proposed, the following table identifies the primary objectives and strategies with respect each of the three strategic elements of the Plano. - 59 - Concept Objectives Strategies Habitat: Improve the Basin's physical Reevaluateldesignate existing land use o Promote the designation of space, taking into account the standards for the Basin public spaces and the creation of new recuperation of the natural social gathering points in harmony with environment, as well as standards of the area's particular natural environment land use and development, housing, urban infrastructure/services and 0 Promote a land use occupation public spaces. that respects the natural environment (hills, plains, meadows, etc) Improve accessibility of road network 0 Improve the Public Transport and urban integration, providing ystem with expansion and consolidation of incentives for the use of technologically Structurally Integrated System (SEI) appropnate solutions that are cost-effective and conserve the natural Provide incentives for the use of environment. on-motonzed, traditional forms of ansportation such as bicycles. Construct and improve roads that ntegrate the local area with the metro region Improve accessibility in low-lying as well as in the hill regions (the latter f which is particularly in need of attention) Expand and improve basic sanitation Give pnonty to projects that services. ropose to integrate sanitation solutions with rban infrastructure in general and that rotect the environment and involve community participation Improve the drainage system. o Expand, recuperate and promote he conservation of the natural drainage network Improve the stability of hillside areas. Recuperate and promote the Iready occupied hillsides in a manner that is tructural and integrated to a larger program Promote the full urbanization of occupied , Promote integrated urban areas and the improve of housing units evelopment of occupied areas that use echnologically appropriate solutions and that differentiate between public and pnvate goods, providing incentives to the private sector to provide the latter. Socioeconomic Development: Promote Promote and stimulate popular and Create opportunities and space for the socioeconomic development of the traditional culture in the area he development of popular cultural activides area, including maximizing the spatial (i.e. local arts and entertainment) distribution of economic activities, creating economic development opportunities and improving social conditions induding access to health care, education, cultural and recreational activities and improving citizen security. Contnbute to the development of 0 Continually promote activities that citizenship, justice and sccunty/ ontribute to the growth of citizenship in a systematic way Improve the population's access to basic Decentralize and create local public health services. community health centers Stimulate employment and income o Assist in the formation of generation rofessional service cooperatives and promote job training opportunities. Stimulate the development local Develop local service centers secondary commercial centers Provide incentives for the development of Provide the right incentives for new industry in the region. business development. Promote quality education in the area. - 60- * Involve the community in the management of schools and in the quahfication of human and technical resources required Environment: Manage the natural Guarantee citizen participadon in the * Fonmahze and institutionalize a envirornent in a way that involves the taking of decisions affecting the natural permanent channel for civil society public and privates sectors and with environment participation. appropriate interface with civil society. Provide consciousness raising among the * Promote environmental education local citizenry of the value of preserving as a process of providing infonmation to the the natural environment communities regarding cntical environmental problems and potential solutions involving the community (defining the role of the community) Actualize and make adequate normative * Actualize the legal regulations instruments for the management of the regarding the urban and environmental environment management of the region. * Define long-term policies that will reduce the threat and possibility of natural disasters, particularly on hillsides Monitor and control environmental * Establish appropnate local resources pohcies to control and supervise the urban development of the region * Define cntena and policies for the rational use and conservation of natural resources * Provide incentives to develop alternative models for the control of the urban and natural environment of the Bebenbe River Basin, taking into account its multi-municipal nature The project,responds to the objectives and strategies as outlined in the Plano Estructurador. The project components, and their relationship to the Plano Estruturador follow: Beberibe Basin Investments Including Water SuDPIV Distribution and Sectorization: The Beberibe Basin macro investments focus on improving the natural environment, access, drainage, water and sanitation and recreational opportunities for the Beberibe River Basin. In this regard the project includes investments in: parks, both ecological and recreational, improvements in the road network, waste water transport, water distribution systems work, macro-drainage and improvements in the Beberibe road systems network. Green Areas and Parks. The Beberibe river basin with half a million people, 49 % of which earn below I minimum wage, has no parks, green areas, or local neighborhoods parks open to the use of the public. On the other hand it has a number of areas of natural interest which, at a very small cost, could easily be rehabilitated, protected and opened to the public. Amo.hg the many benefits of these parks and urban open spaces are that they: * provide a safe place for children to play; * give a neighborhood a distinctive character; * irnprove the value of adjoining developed properties; * provide a setting for contemplation and relaxation; * invite recreational use and enjoyment of the outdoors; and, - 61 - o establish a public realm for social interaction. People need and enjoy parks and recreational facilities that are close to their place of residence. The link between increased exercise and improved physical health is well established. However, park users are not limited to physiological benefits. Many aspects of mental health are positively affected by urban parks and recreation. Anxiety, stress, boredom and feelings of isolation, that lead to aggressive and violent acts, are all reduced as a result of the use of urban parks. The economic benefits from urban parks represent a significant, but little recognized segment of the overall economy. The economic benefits of urban parks are often understated. In addition to real estate value enhancements, parks generate spending in their vicinity and provide opportunities for small retail businesses to improve revenue. Trees reduce pollution and mitigate temperature extremes. A surprising amount of wildlife exists in urban areas as well and benefit substantially from park like settings. Parks also provide settings for managing and treating storm water and flood mitigation and control. The parks which are targeted in this project are: o 8 to 10 km (average width including the river varying from 30 m to 650 m) along the banks of the Beberibe river (In the eastern most part, as it reaches the sea, the Beberibe still contains some important mangrove covered areas); o the Passarinho ecological reserve with approximately 12 ha.; o the Dois Unidos ecological reserve with approximately 26ha; o the Matadouro de Peixinhos complex of historic buildings with approximately 1,95 ha. The project will support: (i) surveys and studies which help focus on the nature of activities and equipment necessary for the promotion of the intense recreational areas by the poorer segments of the population, as well as the environmental protection purposes for these areas; (ii) urban, landscape and engineering designs and construction; (iii) civil works including fencing, signage and protection of these areas, grading of terrain, landscaping, construction of accesses, small maintenance buildings, and construction of pedestrian and bicycle trails; (iv) design of maintenance management plans involving the municipality, community, private sector, and NGOs. The state environmental secretary, as well as environmentally focused NGOs, would also be deeply involved in order to strengthen the environmental protection purpose of these areas. Main Road System. The road layout of the Beberibe River Basin is strongly determined by the area's geography. It is made up of one single collector axis, Av. Kennedy, that runs parallel to the Beberibe River, for approximately 8 km, draining mostly the basin's north traffic (Olinda side). Av. Kennedy is transversally cut by three arterial roads which establish connections between Olinda and Recife (first is the Estrada Velha da Agua Fria-Perimetral Metropolitana; second is the Correia de Britto-Antonio Costa; and, third, on its eastern end, the Agamenon Magalhaes-Pan Nordestina). On its westemn end, Av. Kennedy splits into three main segments, each of which runs parallel to the rivers Morno (Estrada do Brejo), Beberibe (Av. Hildebrando Vasconcellos, in the Recife side, and Estrada do Passarinho on the Olinda side), and Abacaxi (Estradas da Caixa D'Agua-Passarinho). The Momo segment reaches the federal highway BR-101, a major road axis for the development of the metropolitan area. Av. Kennedy is a key transport corridor where buses and automobiles circulate carrying the basin's population to work and other destinations side-by-side with commercial trucks and delivery vehicles. As expected from such a transport corridor, Av. Kennedy is also a strip holding most of the basin's commercial and industrial - 62 - uses. Av. Kennedy has 2 lanes of approximately 8m in each direction with a separation I m wide. It is flanked by pedestrian walks on both sides along all of its length. Its continuation along the Estrada do Brejo (reaching BR 101) is 5,6 km long with 2 lanes and a width of 8 m. Av. Kennedy is in a state of poor maintenance, lacking effective traffic engineering and management measures that could alleviate congestion points, increase the flow of traffic, better accommodate pedestrian use and increase safety of both vehicles and pedestrians. Local Streets Layout. The layout of local streets of the Beberibe river valley has developed in an aggregative way, without the guidance of a local plan, resulting in an intricate web of streets, full of missing links with no clear distinction per width or surfacing between local streets and collectors. Some of the local streets have slopes of extreme inclination, all of these structures reflecting the problems of erosion due to overall the lack of drainage structures. The Project will address the main problems of the road network with emphasis on low-cost rehabilitation work that would facilitate public transportation and safety of the poor. Thus the project would support: * a simplified study of traffic patterns, detailing information and proposals of the Plano Estruturador da Beberibe, basin with classification of the road network (major arterial roads, major arterial roads with limited access, rinor arterial roads, collector roads, local roads, etc); definition of traffic counts; identification of bus routes and share of public transport trips; and identification of black spots in the area and determination of reasons for serious accidents; * assessment of the need and feasibility of a bus priority scheme along main arterial roads; * assessment of the need for construction of bus/passenger terminals; * assessment of the scope and extent of non-motorized transport on the basin, identifying possible constraints for the facilitation of walking and biking trips and alternatives for NMT modes of transport; * an urban design study of the local streets layout to determine missing links and eventual need to widen streets; * rehabilitation of the main road network including paving of bus routes in low-income areas, construction of local missing links, widening of streets, and works necessary to support a bus priority scheme (this will very possibly include rehabilitation of the 8 km of Av. Kennedy and that of its three western continuation segments, at approximately US$ 90.000/km) * construction of structures to facilitate walking and biking trips; * introduction of traffic engineering measures; Macro-drainage. The Beberibe river forms a small basin with 81 km2 which is fully contained in the Metropolitan Region of Recife. The river, itself, with 19 km, originates in the municipality of Camaragibe, and then runs along side the municipalities of Olinda and Recife, through an alluvial plain. The river banks of the Beberibe and that of its two main tributaries, the Morno and the Abacaxi, are densely occupied by urban uses, mostly squatter housing, but also commercial and industrial activities that take over the river banks and even, at points, the river bed, impeding the free flow of water, and leading to the frequent flooding of its banks with potential loss of life and severe property damage to the adjoining urban areas, and particularly to the poorer households (the Beberibe, at this point an open sewage, still shows some important areas of incidence of mangroves, especially at its mouth). Two studies of the macro drainage situation have been conducted, the latter as part of project - 63 - preparation: (i) an assessment of the macro drainage situation of the Recife Metropolitan Region; and (ii) a model of the behavior of the dynamics of the water flow of the Beberibe river in order to specify the probable reach of the flooding of the river banks within certain time periods. The results indicate floods in 20 and 10 year periods of grave consequences. Preventive and corrective measures must be taken to impede the future encroachment of urban uses on the banks and bed of the river and to eliminate structures that impede the free flow of water. Also, measures need to be taken to mitigate the flooding of river banks. The measures to be supported by the project are: o the further development of the model of water flow dynamics ensuring that it produces inputs to the design of urban projects (in particular those of PROMETROPOLE intervention); o preparation of a macro/micro drainage master plan for the Beberibe basin; o preparation of an urban design plan for the banks of the Beberibe river with the creation of buffer zones which can be utilized for recreational use and for the recuperation of riverbed vegetation; o the study of the value and environmental impacts of the eventual construction of an excess-water retaining dam in the less urbanized area; o the assessment and possible elimination of the existing structures that impede the flow of water along the Beberibe, the Morno and the Abacaxi; o the effective protection of the few remaining unoccupied areas along the course of the these three rivers; and o inclusion in the environmental education plan to be prepared under the project of a "civil emergency" chapter. The latter will contemplate both preventive measures (population alert on the event of floods and education of population on actions which minimize impact of flooding); corrective (strengthening the capacity of municipalities to avoid occupation of sensitive areas); and of mitigation (what to do in the event of floods). Micro-drainage. Urban micro-drainage (surface or below ground) in the Beberibe river basin does not follow a systematic plan. The present system is incomplete and insufficient, the result of the ad-hoc construction of structures built with different criteria at different times. Rain water, which is highly concentrated in a rainy season - often mixed with sewage - flows unimpeded through geologically unstable and accentuated slopes, leading to the severe erosion of terrain, private as well as public, and causing damage to the street system and urban infrastructure. No or very little maintenance of the urban infrastructure escalates the effects of the poor micro-drainage system. The project will support the following additional measures: o preparation of the previously mentioned macro/micro-drainage master plan for the Beberibe River basin; o the assessment and possible construction of a number of structural trunk micro-drainage lines; o installation of micro-drainage structures at the level of the UEs (most of it will be superficial but articulated to a below ground network Finally, with regard to macro/micro drainage, the Recife Metropolitan Region lacks definition of competences, a regulatory framework and capacity to enforce regulations. It is, of course, of great consequence for the installation and maintenance of both macro and micro drainage in the Beberibe river valley that this situation be resolved. A rationale for project support to drainage measures and actions beyond the boundaries of the area where - 64 - the poorest live is that solution of the micro-drainage problems of these areas requires, for technical and sustainability reasons, that attention be given to larger set of aspects of the drainage situation (master plans, trunk lines, etc). Another important rationale is that there is a strong synergy between the proposals of both macro and.micro-drainage and the possibility of meeting recreational needs of the poorest population of the area. Water Supply and Sewerage. The case of water supply and sewerage (WS&S) is given special attention in the project for the reasons outlined below. Among the innovations of the PROMETROPOLE project is the search for sustainable approaches to urban services delivery. This case of WS&S and sanitation is particularly important. Background: The PROMETROPOLE project design has fully taken into account concerns related to the sustainable operation and maintenance of the water supply and sewerage (WS&S) systems to be constructed under the project. The state water and sewerage company of Pernambuco, COMPESA, is responsible for WS&S in the Metropolitan Region of Recife (RMR). COMPESA, like many other state water companies in Brazil, is inefficiently managed and consequently operates and maintains its WS&S infrastructure very precariously. This is true in RMR for rich and poor areas alike, but is especially the case in the poorer districts and the slum areas of RMR, such as those which are the object of the project, where WS&S service provision is at best precarious but often completely absent. The Bank has a long history of engagement in the water sector in Brazil. The Bank WS&S portfolio's current flagship project, the Second Water Sector Modernization Project (PMSS-II), has as one of its main objectives improving the efficiency of investment in, and management of, WS&S infrastructure through either financial and operational efficiency improvements of the state and municipal water companies, or through the deepened involvement of the private sector in state and municipal WS&S service provision. To qualify for investment financing under PMSS-II, water companies have to attain minimum levels with regard to key financial and operational efficiency indicators (increasingly stringent levels for different categories of investment), or have to embark on sector reform involving the participation of the private sector. Given its extremely weak performance, COMPESA has not qualified for even the lowest level of investment under PMSS-U over the last few years. Given the above, the PROMETROPOLE project team initiated discussions with the state government and COMPESA during project preparation in order to find a mutually acceptable solution for the management of the 35,000 water and sewer connections in the area of the Beberibe basin covered by the PROMETROPOLE project, which sought to not contradict the eligibility status of COMPESA under PMSS-II for access to investment financing. The Bank is also currently implementing a WS&S project for low-income/slum areas, Prosanear-Il, through which it finances the execution of local integrated development plans and engineering designs for WS&S and complementary infrastructure for such areas, and the execution of tariff and subsidy policies for the WS&S infrastructure. Recife and Olinda have both been selected for inclusion in Prosanear-I's first selection of municipalities for the financing of such development plans and engineering designs - for slum/unplanned areas in each municipality where PROMETROPOLE interventions will be implemented. The PROMETROPOLE project team has helped articulate a dialogue between the Prosanear Bank and government coordinators such that the Prosanear interventions in Recife and Olinda fully support, and complement, the planned activities of PROMETROPOLE, both in terms of slum-upgrading integrated development planning and engineering design, and in terms of support to the design of the solution for the management of the Beberibe WS&S interventions, as described below. - 65 - During the preparation of PROMETROPOLE it had originally been assumed that COMPESA would be privatized by the time the project were to be effective. Although it is still the intention of the state government to privatize COMPESA (BNDES is currently undertaking the financial and technical modeling of how the privatization will be structured), it is now clear that this process will not happen in the original time period projected and depends on progress in developing an appropriate regulatory framework. However, there is still a long term expectation that COMPESA will be privatized within the first couple of years of the new mandate (2003/4). The PROMETROPOLE team sees this as the optimal solution for sustainable WS&S service delivery for the state and for RMR generally, and for the Beberibe basin in particular. Given that the privatization of COMPESA will likely not happen for another two to three years, and given the aforementioned constraints concerning COMPESA's eligibility for financing of WS&S interventions under PMSS-1I, the PROMETROPOLE preparation team worked in collaboration with the state government and COMPESA, and in liaison with the municipalities of Recife and Olinda, to identify a solution to the management of the planned WS&S PROMETROPOLE interventions - as described below. This work of the PROMETROPOLE team with COMPESA had the additional benefit of helping to create a dialogue with the state government and with COMPESA and, subsequently, with the Bank and government coordinators of PMSS-11, such that the following agreements have recently been reached: o PMSS-II will support the state government, through the financing of expert consultants, in its analysis of the outputs and recommendations of the privatization modeling currently being undertaken by BNDES; o PMSS-II will recommence a dialogue with COMPESA with a view to the latter preparing and presenting revised sub-project proposals for PMSS-II consideration, based on COMPESA's eligibility for the different levels of investment; and o PMSS-II will directly support the analysis, development and design of the solution identified for the management of the WS&S interventions planned under PROMETROPOLE for the Beberibe basin (see below). PROMETROPOLE's WS&S Interventions Although, as mentioned above, the PROMETROPOLE team sees the eventual privatization of COMPESA as the optimal solution for sustainable WS&S service delivery to inhabitants of the Beberibe river basin and beyond, it has worked with COMPESA to prepare an outline structure for an interim solution for WS&S services for the target areas of the project. The solution that has been developed for the management of these services in the target areas involves the creation of an institutional model which allows the project's estimated 35,000 WS&S connections to be under the operation, maintenance and commercial risk of a third party entity, under contract to COMPESA. This arrangement will be designed so that it will not interfere with the future possible privatization of COMPESA but will, instead, complement such an ambitious privatization program by providing valuable experience on the management of WS&S infrastructure by a third party entity in low-income/slum areas of RMR. The proposed solution will have the following design/characteristics: Area of intervention: o The thirteen 'spatial units' ('UEs' - these are sewerage micro-basins that were identified under the Bank's Federal Water Quality and Pollution Control project) in the Beberibe river basin which make up the current area of intervention of the PROMETROPOLE project, plus: - 66 - * any other ULEs that may be added to the area of intervention of PROMETROPOLE over the life of the project; and * any additional areas that are judged necessary for incorporation in order to allow technically viable operation and maintenance of the WS&S systems (for example, UE22, which is completely surrounded by ULEs of PROMETROPOLE though is not included in the project itself). Institutional arrangement: o COMPESA is currently responsible for the provision of WS&S services in the area of intervention of PROMETROPOLE, as it is for the entire RMR, having been delegated this task by the municipalities of Recife and Olinda. o A 'service provision code' ('regulamento de servico') will be established by agreement of the State (Seplandes/Fidem, Seain/COMPESA) and the municipalities of Recife and Olinda (Secretariat of Sanitation and Secretariat of Planning, respectively), defining the quality standards for WS&S service provision and the responsibilities of each agent (state and municipal governments, service provider and customers). * The municipalities and the customers will supervise COMPESA with regard to the relevant elements of the service provision code. * COMPESA will take the necessary executive decisions and employ the measures needed to ensure that the administration, operation and maintenance of the WS&S systems are the most efficient possible. COMPESA will also report to the municipalities on the results of the service provision in the PROMETROPOLE area, as defined in the service provision code. Instruments for defining the institutional relationships: * Agreement ('Convenio') between the state government and the municipalities of Recife and Olinda, which will define: * that the approach to be used in the provision of WS&S services in the PROMETROPOLE area of intervention will be treated as a pilot, with the application of a differentiated management model, tariff structure, monitoring and evaluation procedures, and a specific service provision code, etc. * the roles and responsibilities of the different actors (state, municipal, customers) * the procurement procedures to be followed in the tendering of the WS&S designs and works under the PROMETROPOLE program * those responsible for managing the tendering process and the supervision of these design and works contracts * that COMPESA is responsible for the administration, operation and maintenance of the WS&S services in the PROMETROPOLE area * Agreement ('Convenio') between Seplandes/FIDEM and Seain/COMPESA which will define: * the nature/structure of the WS&S management arrangement for the PROMETROPOLE area * that COMPESA will contract, through a public bidding process and in accordance with the service provision code, a third party to manage the WS&S services in the PROMETROPOLE area of intervention, as defined above * that, in a first phase, COMPESA will provide treated water to the new operator and will undertake the operation, maintenance and replacement (O&M&R) of the distribution network, and the new operator will be responsible for the following activities: o O&M&R of the water meters o O&M&R of the sewerage network and any lifting stations and rising mains within the PROMETROPOLE area (but not including the Peixinhos wastewater treatment works which - 67 - will continue to be the responsibility of COMPESA) o meter reading, and billing and collection of WS&S bills o once the civil works for the isolating/'sectorization' of the water distribution network have been completed (the second phase), COMPESA will continue to provide treated water to the operator, but the responsibilities of O&M&R of the distribution network will be transferred to the latter. O the following rights and responsibilities of the new operator will be defined, as a minimum, in the contract: o provide services for the two phases in accordance with the standards stated in the service provision code o pay a volumetric tariff to COMPESA, based on an 'efficient cost' for the production, treatment and transmission of water, in appropriate quantity and at appropriate pressure, to the limit of the PROMETROPOLE area of intervention o be remunerated through a tariff charged to customers, which value reflects an 'efficient cost' for providing the services o assume the commercial risk of the operations under each phase o Contract between COMPESA and the new operator: this contract will be tendered through public procurement and will incorporate the following features: o a maximum duration of five years o supervision of contract to be undertaken by COMPESA o stipulation of tariff to be charged to customers and tariff that the operator will pay COMPESA o indices to be used in readjusting both tariffs for inflation, and frequency of such readjustments o the quality of service to be provided by the operator, in accordance with the service provision code, and the penalties and sanctions to be applied whenever any contract conditions are not complied with o the quality of the service to be provided by COMPESA to the operator in the provision of treated water, and the penalties to be applied for non- compliance o the chronogram for WS&S works execution for PROMETROPOLE will be used as a basis for the operator's proposal - any change in the chronogram will have implications in the costs of the contract with the operator, leading to adjustments that will be provided for under the contract Bidding process for contracting of new operator: o Technical pre-qualification of bidders will be undertaken. o The criteria for evaluating proposals will be based on the value of the tariff to be charged to customers, adopting one of the following approaches: (i) smallest tariff; or (ii) best price coefficient to be applied to a predetermined base tariff. In either case, maximum and minimum tariff limits will be established and any proposals outside of these limits will not be considered. o The technical annexes of the tender documents will contain, as a minimum, the following: (i) the contract model; (ii) the service provision code; (iii) technical and commercial information about the PROMETROPOLE area and about the existing and proposed WS&S systems; and (iv) the chronogram of WS&S works. Tariffs and subsidies: o The tariff structure and the tariff rates will be specified for the PROMETROPOLE area and will be based on the following general criteria: (i) a fixed value which recovers the fixed costs related to administration, meter reading and billing; (ii) a volumetric cost for water and sewage based on (a) the remuneration of the efficient cost of the water to be provided by COMPESA, and (b) the recovery of efficient costs for the O&M&R for the services of water distribution and sewage collection. - 68 - o The investment costs of the in-house plumbing, including the house connection, will be partially recovered (depending on the family's level of income) over a maximum period of 36 months. The other elements of the water distribution network and the sewerage collection network will be provided at no cost to the beneficiaries, as far as the tariff is concerned. PROMETROPOLE and complementary interventions: o Technical and financial feasibility studies for the proposed institutional model will be undertaken with the support of PMSS-II and Prosanear. o Isolation/'sectorization' works will be undertaken either by alternative financing sources, if available, or by PROMETROPOLE during the first months of project implementation This will allow the water provided by COMPESA to the new operator to be macro-metered at the limits of the PROMETROPOLE area, so that the operator can take on the O&M&R of the distribution network (thus passing from the first to the second phase of the contract). Once this happens, the contract will be revised such that the operator is remunerated for these new responsibilities, and the tariff to be paid to COMPESA adjusted to this new situation. * During the first months of implementation of the PROMETROPOLE project, the recuperation/installation of the water distribution network and the household meters will be undertaken for all areas within the domain of the operator's contract. Methodology and Next Steps I. Identification of sources of funding for undertaking the following activities, where these have not yet been established. 2. Contracting a consultant to coordinate the process and pull together the different elements of the analysis and design of the proposed institutional arrangement (PMSS-1I to finance). 3. Contract a consultancy to undertake: (i) technical surveys/analyses of water production, treatment and transmission by COMPESA to the project area in order to identify an 'efficient cost' for these activities; (ii) technical survey/analyses of the water distribution networks, water meters and house connections to identify status and costs for substitution/rehabilitation in the project area; (iii) update of the technical and commercial cadastres in the project area; (iv) analysis of the technical and financial feasibility of isolating ('sectorizing') the project area with macro meters; (v) establishment of the baseline efficient costs for the operator; and (vi) development of a tariff and subsidy structure to ensure sufficient resources to remunerate both COMPESA and the operator. 4. Bank and state government project teams to review results of above consultancy and make recommendations as to the scope of the new operator's role. 5. Contract a consultancy to produce the following documents in a collaborative way with the different levels of government and the Bank team: (i) the two above-mentioned agreements ('convenios'); (ii) the service provision code; (iii) the draft operator contract; (iv) the pre-qualification and tender documents and procedures; and (v) a legal review of all of the above documents. - 69 - Beberibe Low-Income Investments: The primary focus of the project, is the urbanization of low-income settlements in the Beberibe River Basin. As indicated in other portions of this document, the Beberibe River Basin has a total population of the approximately 492,000 inhabitants of which nearly 50% live in extreme poverty earning less than one minimum salary. This particular component will focus on improving the living conditions of the one of the poorest and least served, in term of public infrastructure and services, areas of the Beberibe River Basin. Over the five year period of the project, investments will be made in a total of 13 UE under this component to the benefit of 35,000 families. The following map indicates the 13 areas that will be the focus of this component, including the two first pilot interventions of Passarinho and Campo Grande. The shaded area represents the component target areas, while the hashed lines represent the boundaries of the Beberibe Basin. The objective of the component is to improve the living conditions of the 35,000 families, approximately 80% of which are considered to be poor. The intention is to confer legitimacy on these settlements by endowing them with improvements in infrastructure and urban services that are characteristic of more formal urban settlements in the RMR. This will be done at the most efficient cost possible, while still maintaining a high level of quality. The component will begin with the integrated urbanization of the first two pilot intervention areas of Campo Grande and Passarinho which have the following characteristics: Passarinho is representative of irregular settlements in the municipality of Olinda. It was first settled in the 1950s and grew rapidly in the 1970s with the introduction of utility rights of way and road access and in the 80s with some limited infrastructure investments. Densification of the area occurred in the 90s and now about 5% of the famulies live in high risk situations due to being forced to build on steep hillsides. The vast majority of the area's 7,500 residents (1,780 households) are poor and over 40% are considered indigent (earning less than R$73/month). Education levels are low, especially among women who have a 29% illiteracy rate. Partly as a result of the low education levels, many in Passarinho work in low wage, low skill jobs and many work in the informal sector (information obtained from DRUP and survey of 166 households, which is 10% of the total). A logical circulation pattern of access is one of the principal problems in Passarinho. Many of the roads and streets are unplanned, spontaneous routes which drastically limits vehicle circulation. The principal roads are the Rua da Linha and the Estrada Passarinho, to which an ad hoc system of secondary roads intersect to penetrate the interior. However, these roads lack planning, are unpaved and are often only partially navigable. Access is a serious problem in the area. Sanitation is another serious problem with virtually no connections to any public waste removal system. Households have septic tanks, pit latrines or simply deposit human waste in the streets or micro drainage canals, all of which directly pollute the Beberibe river. Macro and micro drainage is nearly non existent. Water service is rationed in this area, and only about 70% of the population is currently served by the formal network. In areas where there is good access, solid waste collection is fairly good. In most of the area, however, solid waste collection is inadequate. Total proposed investments in Passarinho include paving; geotechnical risk mitigation; drainage; sanitation; water supply; community infrastructure; open spaces and plazas, resettlement and acquisition of land for resettlement. Preliminary detailed plans for these investments have been developed and discussed with the communities. Campo Grande represents an irregular settlement in Recife, which is located in a plane, but where - 70 - flooding and encroachment onto (in some cases literally on top of) the very polluted Beberibe river is a severe environmental health problem. Initial occupation of the area began. about forty years ago, facilitated by the informal subdivision of the property by its owners and the shaded eye of local government enforcement. In 1994, however, the area was designated as a Special Social Interest Zone, or ZEIS, under municipal law 15.866/94. This legislation which was applied to over 25 areas in Recife paves the way for the legalization of the occupation of this and similar areas, as well as opens the door to investments in infrastructure and land tenure regularization. According to surveys done by the municipality of Recife as part of project preparation, the majority of the population of Campo Grande find work outside of the formal employment sector. Not surprisingly, about 55% of Campo Grande's 2,000 families earn less than I minimum salary/month. As in the case of Passarinho, education levels are low with 56% of the adult population not having completed elementary school and 12% of the population classified as illiterate. Infrastructure and urban services are generally poor. For example, with the exception of those residing along Rua Jer6nomo Vilela and Estrada de Belem where there is an existing sewer network (District 14) operated by COMPESA, there is no public system of sewage collection or treatment in the area. Most waste is disposed of through individual septic systems, or more commonly, in streets or micro-drainage canals. Macro-drainage is provided by the canals Farias Neves and Vasco da Gama/Peixinhos, both of which eventually drain into the Beberibe river. The Vasco da Gama/Peixinhos is the principal canal for the area and suffers from partial obstruction due to the high levels of solid waste dumped into it. Drainage is also complicated by the lack of paving and deforestation of low lying hills in the area. Water is supplied in all areas of Campo Grande, but the quality of service varies, from good in the "loteamentos privados" to poor in the other areas, the latter due to informal connections at small diameters, with high physical water losses. Solid waste collection in Campo Grande is not systematic in the informal sectors with most solid waste dumped on the street or in secondary and primary drainage canals. Electrification began to be regularized in the 1970s, but still many irregular connections exist as new units are built. The newly privatized electricity company, however, is systematically regularizing all connections. There is an inadequate amount of public lighting, and that which exists is poorly maintained and often vandalized by youth groups. Transport quality is varied with those living close to the two principal transport corridors of Estrada de Belem and Av. Correia de Brito e Rua Jeronimo Vilela enjoying reasonable access. However, those residing in areas in the center have few access options and commuting times are high to the nearest bus terminal. These two pilot areas will serve as the basis for all 13 interventions in the component's target area. The integrated interventions will include infrastructure investments that will full urbanize these areas. In this regard the component will: Complement and improve the existing system of access roads and pedestrian ways, including stairways providing access in hilly areas. The minimum goal is to guarantee accessibility to all residents, either with street frontage or at the very least, sound and safe pedestrian access. In addition, the goal is to provide the efficient and free circulation of vehicles in areas where it is feasible, so as to guarantee access to collective forms of transportation, delivery vehicles, ambulances, taxis and other forms of emergency vehicles. Complement and complete macro and micro drainage systems (complementary to those contemplated in the Beberibe Level Works). The project contemplates the cleaning of existing drainage canals as well as the construction of new and extension of existing drainage canals. It will also include the redressing of drainage canals and micro drainage works sufficient to improve the drainage problems of the entire 13 unit area. - 71 - Install a system of sewage collection. Within the component a complete sewerage collection system will be installed to attend to the entire 35,000 families of the target area. The project does not contemplate sewage treatment as part of a deliberate strategy to first adequately collect and remove the sewage from the back yards of families. This is consistent with the Bank's brown environmental agenda, as well as recommendations of the Bank financed Water Quality Program (PQA) which extensively studied and provided recommendations for improving waste water collection and treatment in the RMR. Complement and improve the existing water distribution system. In addition to the sectorization work to be completed under the Beberibe Level Works component, this component will include resources to improve and complement the existing water distribution system to reduce leakages and ensure household connection to the formal distribution network for all 35,000 households. Protect and recuperate hillsides. In areas of hilly topography, such as that of Passarinho, the component will finance works to protect and hillsides so as to reduce risk of accidents due to geotechnical instability In addition to revegetation and the retention walls, the project will finance the resettlement of families living in high-risk areas. Install community infrastructure. Each UE will have a local project office. The office will be constructed in a manner that it can be converted to a re-use once the construction activities are completed. Among the possible uses, based on community input, will be a re-use as a day-care center, health post, recycling station or other community-based use for which a sustainable operations and maintenance plan must exist. Upgrade public lighting. In public areas such as street, walkways, parks and plazas, the project will finance the recuperation and installation of new public lighting. This will be done in conjunction with CELPE, the state electric utility. Public lighting helps to reduce criminal activity in evening hours. Improve solid waste collection. The project will include sites for the collection of solid waste and recyclable materials. Consideration will also be given to developing new, community-based forms of solid waste collection. Install recreation areas and parks. The project will include parks and recreation areas, particularly such things as sporting fields aimed at providing youth and adolescents with recreational opportunities. Resettlement housing. The project will include the construction of new housing for families requiring resettlement for either reasons of risk or the installation of infrastructure. A typology of housing is being developed and Passarinho and Campo Grande will serve as laboratories for housing types adaptable to hilly or flat areas. Housing will follow the successful models used elsewhere in Recife, that of self-help housing where beneficiary families provide labor, or sweat equity as investment in their new housing unit. Finally, it should be noted that the conceptual plans, following the participatory methodology outlined elsewhere in this document, have been prepared. The projects leading to the detailed design and engineering of the conceptual plans will be financed by PROSANEAR II, a Bank financed project, and will be completed prior to project effectiveness. Complementary Urbanization Actions: This component will finance actions which complement the urbanization of the UEs. This will include: - 72 - Design and engineering and studies. This component will finance the costs of developing the 13 UE integrated urban development plans, as well as the engineering designs for the macro level works to be financed in the Beberibe Level Works component. Only in the case of the pilot areas of Campo Grande and Passarinho will PROSANEAR II funds be used to finance the UJE engineering plans. This component would also finance studies related to the development of PROMETROPOLE HI and other required studies such as the sites-and-services pilot. Regularization of land tenure. The project will finance legal costs associated with the process of legalizing the land tenure situation of households in the project area. In cases where a fee simple tenure arrangement is not easily accessible, the method of tenure regularization will follow the uso capido procedure, which is a form of leasehold right to occupy the land and is commonly applied in similar situations in Brazil. Environmental Education. The project includes a program of environmental education and management that is community focused. The program contemplates new forms of participation in environmental management, including the possibility of public-private partnership to manage the operations and maintenance of the parks to be financed under the project. This component will finance, in addition to traditional environmental education activities with the community, the environmental management plan that will look at alternative arrangements for managing the environmental assets of the Basin, including the parks. Local Field Offices. Under this component, local field offices will be opened in each of the 13 UEs of the project. These will be staffed by the municipalities and their primary role will be to serve as an administrative center for the project, and a space to hold community meetings and attend to the demands of the public. The actual outreach to the community will be done by the engineering firms preparing the conceptual and final neighborhood plans for each intervention, with accompaniment from the appropriate staff of the municipalities (i.e. social workers). Within the contract for engineering, a team of social outreach workers will be included to ensure community input in the design process in parallel with the design and engineering process. Likewise, during the construction phase, a team of outreach workers will be included in each construction contract to ensure adequate community interface during the construction process. Again, the municipalities will staff the local field offices to assist the construction firms in this process and play the intermediary between the community and the contractor in cases where there are problems with that relationship. Finally, during the post works phase, the municipal team will provide assistance to the community in the proper way to maintain and care for the new investments. Following the project's conclusion, the local field offices will be converted to new community uses, as described earlier. Micro Credit or Fundo Comunitario. The project will include a community development fund that will be competitively bid-out to an experienced NGO or other qualified entity to manage. The fund will have three lines of business. First, it will include a small portion of funds that can be passed on to community groups in the form of community grants to finance community enhancing project. This might include, for example, a local community group that works with at-risk youth in the cultural arts. These would be very small grants and would finance up to 10% of the group's total project costs. As second line of business would be small loans to micro-entrepreneurs in the project area as a means of increasing business opportunities. The third line of business will be a small loan fund for housing improvements so that families can make structural or health related improvements in their housing units to compliment the public investments in infrastructure. The latter two programs would be loans, not grants. - 73 - Project Management and llnstitutional Development: This component will finance the costs of project management, including the hiring of external, specialized consulting firms to assist FIDEM and the municipalities in the management of the PROMETROPOLE project. The firm to assist FIDEM will be hired prior to project effectiveness. -74 - Annex 3: Estimated Project Costs BRAZIL: RECIFE URBAN UPGRADING PROJECT . ~ ~~~ -~ * ;^n Lo,calI~ Foreign %;, Total - Project Cast Bj Cormponent l -" - - US $rnIIion -. LUS.$miIIion- -, lS$million" Al. Infrastructure - Beberibe Level Investments 10.23 0.00 10.23 A2 Water Distribution and Sectorization 4.80 0.00 4.80 A3 Low-Income Area Pilots 6.62 0.00 6.62 A4 Recife/Olinda Low-Income Area Sub-projects 18.54 20.14 38.68 B. Complementary Actions to Urbanization 5.38 3.43 8.81 C. Project Management and Institutional Development 0.95 3.07 4.02 Total Baseline Cost 46.52 26.64 73.16 Physical Contingencies 3.73 1.76 5.49 Price Contingencies 3.29 1.60 4.89 Total Project Costs' 53.54 30.00 83.54 Front-end fee 0.46 0.46 Total Financing Required 53.54 30.46 84.00 .- -, ' , ; -Project CostBy,Category - S '$--iilion'. US$-.lo- ., iIlo Goods 0.92 0.00 0.92 Works 43.15 23.40 66.55 Services 4.43 6.60 11.03 Training and Local Personnel 2.10 0.00 2.10 Land Acquisition 2.94 0.00 2.94 Total Project Costs 53.54 30.00 83.54 Front-end fee 0.46 0.46 Total Financing Required 53.54 30.46 84.00 Numbers may not add due to rounding Idennfiable taxes and duties are 0 (US$m) and the total project cost, net of taxes. is 84 (US$m) Therefore, the project cost sharing ratio is 54 76% of total project cost net of taxes - 75 - Annex 4: Cost Benefit Analysis Summary BRAZIL: RECIFE URBAN UPGRADiNG PROJECT 1. Introduction A complete cost benefit analysis was conducted to determine the economic viability of the proposed Project. The analysis presented in this Annex demonstrates the overall viability of the project and of all of its individual components. Individual components as presented in the project description were grouped differently to facilitate quantification of the benefits associated with the proposed investment costs. The following components were analyzed: o Beberibe level investments, including: the Peixinhos Matadouro Historic Park, the Beira Canal Avenue, wastewater transport to Peixinhos facility, macro drainage works, an ecological park in the margins of the river, and road and transport improvements within the basin, and all its associated complementary urbanization actions at the basin level, including: a micro-credit component, sanitation and environmental education, design and engineering studies for the above mentioned infrastructure works and the Project management; o Beberibe low-income investments, which includes the urbanization of 13 groups of low-income settlements based on the detailed costs of interventions in two pilot areas (Passarinho in Olinda and Campo Grande in Recife) and complementary actions related to the specific areas (local field offices and design and engineering studies); o Resettlement including land tenure and regularization for the construction of the Beira Canal Avenue and the resettlement associated with urbanization in the low-income areas and unallocated amount, including land tenure regularization; and o Investments in water supply in the low-income areas and for the proposed water system sectorization, to pilot a specific alternative service provider for the area. The objective of these analyses was to test the viability of the specific sub-components and, based on these results, the benefits and costs of the entire project, to estimate its overall economic feasibility. Note that thse ee.pown doeto d,reottoonres,todtGo tX Pmjct O senpt,on os these woe 8gltJlped aocotdhoj topoctosge, OfottNoeflS ho tefint 01 totau. hooner ott Octo,O,eo re the soote in troth t,ttNcets 2. Methodology Detailed economic and financial assessments were undertaken for the specific components of the Project. All project components were included in these analyses, including the infrastructure works and complementary actions. Returns to the investment in institutional development, community participation and education, are included in the analyses as they are considered the basis for service sustainability and are ultimately expressed in improved access to urban services in the Beberibe basin since the aim is to manage and deliver urban services more efficiently and effectively. Once the overall viability of the proposed components was verified, the overall project viability was assessed. To determine the net incremental costs and benefits, "with" and "without" project scenarios were constructed. On the basis of these scenarios, the net incremental financial benefits and costs of the proposed investment programs were assessed, which were then adjusted for the impact of taxes, subsidies, and externalities to arrive at the economic flow of costs and benefits. The cash flows were discounted using a discount rate of 12 percent, which is estimated to be a proxy of Brazil's opportunity cost of capital. The following sections provide more detailed information on the estimation of economic benefits and costs. Costs include capital costs, operation and maintenance costs, rehabilitation, resettlement, environmental -76 - mitigation and contingencies. For all the different components, costs of complementary actions necessary to derive the expected benefits and sustainability levels targeted, were considered. It was deemed necessary to include these additional costs in order to permit the assumption that the expected benefits of the project will actually be realized. A central area of the economic analysis was a distributive analysis that was carried out to assess the impact of the project on overall beneficiaries, especially focusing on the poverty impact and on the impact on different government stakeholders, mainly the State of Pernambuco and the municipalities of Olinda and Recife (fiscal impact). Finally, risk and sensitivity analyses, testing a number of scenarios, were conducted to assess the impact of changes in critical assumptions on the economic viability of the project. Summary of Benefits and Costs: 3. Economic benefits The main benefits of the project include: (i) improved access due to rationalization of street layout and street paving, including a reduction in transport costs and travel times; (ii) improved water supply and sanitation services, including a reduction or elimination of supply rationing and intermittent services and ultimately improved heath conditions and reduction of morbidity rates; (iii) reduction of risk to lives and property due to the resettlement of people living in risk prone areas; (iv) a reduction in risks and losses to life and property due to a reduction of flooding resulting from investments in macro and micro drainage; (v) environmental and health improvements derived from improved solid waste collection services; (vi) increased access to recreational and activities with the financing of ecological and community parks, bringing social benefits; (vii) increases in social capital by involving community groups in the planning and execution of the project as well as the financing of community driven activities through the community investment/micro credit fund; (viii) access to formality from conferring title and address (i.e. easier to gain formal employment); (ix) sustainability through improved cost recovery (IPTU, tariffs, service fees, there is currently low collection of LPTU in the project area); and (x) improved institutional capacity to address planning and shelter needs in low-income areas. To estimate the economic benefits of access to improved urban services a hedonic pricing methodology was used. The hedonic price function is based on the housing market in which transactions can be observed. The welfare significance of the hedonic price function comes from the fact that people are revealing the marginal value of particular attributes (such as access to services, distance to center, etc.) that are not sold separate in the market, but are embodied in the house and reflected in housing values. A hedonic price function was built to estimate the marginal value of these non-market attributes provided by the project, allowing for the measurement of welfare effects from changes in a non-market attributes, which is the goal of the economic analysis. During the specification of the Hedonic model, the results showed that the only non-market attribute intended to be valued for the project found to be non-significant was water. It is however very clear that given the fact that almost every house has a water connection legal or illegal, access to this service would be reflected in a reduced marginal effect on the overall housing values. The provision of water services was therefore analyzed independently, and treated as a separated component. Economic benefits of water services are assumed equal to the willingness to pay (WTP) for water supply. The WTP was estimated using revealed preferences method, based on information from previous studies by Banco do Nordeste on water demand in Northeast Brazil. Although the improved hygienic and environmental conditions (such as reduced health care costs and a reduction in missed work days) that - 77 - result from increased water supply and sewerage coverage and the from improved quality and reliability of these services, are clearly important benefits, these benefits were not quantified in this analysis. 3.1. Estimation of benefitsfrom improved urban services First a hedonic price function was estimated. As mentioned above, access to water service was not found to be significant, so was taken out of the regression. During model specification different functional forms were analyzed, however a logarithmic model was selected, as the linear model would considerably overestimate the property values in the with project scenario with values that would not correspond to observable market prices in the Recife Metropolitan Region. Results from this logarithmic regression appear to be consistent with real estate information available and collected during project preparation. All regression signs are according to expectations and significant. As expected from hedonic price models, data have a lot of co linearity (i.e. with more bedrooms you have a larger unit, pavement will facilitate solid waste services and micro drainage, etc.). Tests were performed to check for the robustness of the model and to further investigate and analyze co linearity. Co linearity was found among pavement, micro-drainage and solid waste. The best model specification includes pavement and solid waste and together they incorporate the impact of micro-drainage. Results were consistently similar with different model specifications which indicates the robustness of the model. Co linearity between the three services is explained by the fact that it is extremely difficult to have adequate collection of solid waste in the absence of pavement as it limits the possibility of collection equipment in the 'area, and usually micro-drainage works are done in conjunction with street pavement, which protects the drainage investments in the long run. Pavement and solid waste were both included to have a better prediction tool to estimate net increments in property values. Other attributes included: tonography is a dummy to capture location of the house (plain or hills); city is a dummy to differentiate Recife and Olinda, a proxy of income in the area and overall service reliability; the natural logarithm of plot and construction size; material as a dummy to capture main material of the house; and three additional dummies to capture impact of access to services (sewerage. pavement and solid waste). Regression results are presented in the following table: Table 1. Hedonic Price Function Dependent vanable: In property va ue Attributes Coefficients t Stat Intercept 5.0985 10.8591 Topography (dummy) -0.1782 -2.5029 City (dummy) -0.1382 -1.7087 In plot size 0.1734 1.8056 In construct. size. 0.3824 3.0508 Material (dummy) 2 0466 5 8676 Sewerage(dummy) 0.1747 1.6145 Pavement (dummy) 0.0620 0.6376 Solid waste (dummy) 0.3886 2.6592 Adjusted R2=0.58 F=18.97 Beberibe basin Investments Most of the investments of this component will have a positive impact on the whole Recife Metropolitan Region, however further analyses would be required to estimate the specific impact to the different areas of the Region. Preliminary information from the City Development strategy was used to estimate a conservative impact on house prices limiting the impact to the Beberibe River Basin, excluding those families that would be direct beneficiaries of the Low-Income component (as we assume that these - 78 - benefits would already be embedded in the increased property value). It was assumed that 85,455 families would be benefit directly from these investments. The estimated benefit (increase in property value) for this component was conservatively estimated at US$ 377 for the 85,455 families that are assumed to be directly benefiting from these investments. The estimated investment cost per family for this component was estimated at US$ 207. Low - Income level investments All of the investments in this component will have a direct impact on the property values of 35,000 families. The estimated increase in property values was estimated at US$ 2,963 per house, this was estimated using the information from surveys conducted during preparation and the hedonic price function. The resulting values where considered realistic and were verified in consultations with real state agents working in the low-income areas. The estimated investment cost per family for this component was estimated at US$ 1,867. Resettlement Investments in this component will have a direct impact on the 2,132 families that would be resettled. The impact to this reduced number of families would be substantial, as they would be provided with a standard housing unit with access to all urban services. The resulting property value of these houses is considered equal to the resulting final value of comparable households in the low-income areas (UEs). The increase in property value was estimated at US$ 3,774 per house, this was estimated using the information from surveys conducted during preparation and the hedonic price function. The resulting values where considered realistic and were verified in consultations with real state agents working in the low-income areas. The estimated investment cost per famnly for this component was estimated at US$ 2,888. 3.2. Estimation of benefits from improved water services The following demand function for water was used for estimation of economic benefits of improved water services which was adjusted to reflect 2001 prices, based on the demand function estimated by Banco Do Nordeste, 1997. The sample used to collect the information, statistically representative of the Northeast region, specifically included Pemambuco among other states. The model used was: Q= 2.2 P -o,55 YO,33 (2.513) (15 670) (8 583) Where: Q: Water consumption, (m3 per family per month), P . Marginal pnce of water (R$ per cubic meter), Y: Family income, (R$ per family per month). This specification was made through a sample of 989 households. The model Adjusted R2 = 0.588, and the F = 181.611. The coefficients of all explanatory variables were significant at a 99% level of confidence (the values of the t statistic of the coefficients are presented in parenthesis). Additional information about the "without" project situation in each municipality provided a characterization of the service supplied (type, level, quality, quantity) and its price. Then, using the tariff levels expected in case the project is not implemented (without project scenario), the consumption level was estimated and projected for that scenario. Using the information from surveys applied in the project area-characteristics of the household, of the services supplied and its associated prices, and willingness to pay-the consumption levels from - 79 - alternative sources were estimated for the households that will not have access to piped services if the project is not implemented. Using the proposed tariffs under the project, the consumption levels for this group of consumers was estimated for the with project scenario. The economic benefits of the project for each household are represented by the area under the demand curve defined for the range between the consumption level with and without the project, and the resource savings if as a result of the project the consumers will substitute the use of more expensive sources (for those without a household connection). In that sense it is possible to define two main beneficiary groups: connected households and households that will have access to the service even if the project is not implemented; and households that without project will not have access to a good quality service. The first group, those that will be connected in both scenarios, will have economic benefits only if in the with project situation tariffs are expected to decrease (as a consequence of increased efficiency, for example), and will consume more at a lower price, or if without the project rationing is expected, so their consumption will be reduced in that scenario. The second group will be the main beneficiary as it will be able to substitute alternative (more expensive) sources for reliable piped water and they will also be able to increase consumption. The addition of the incremental benefits from each consumer group determines the gross benefits of the project. The estimation of economic benefits is considered conservative as (i) the quality of service in the with and without project scenarios was assumed similar, although it is expected that service quality will improve and as a consequence consumption could increase; (ii) for the consumers not connected to the system in the without project scenario, incremental benefits are explained by the reduction in the cost of the water, and not to the service quality, and (iii) estimation on impact on health were very difficult to quantify, thus conservatively were not included in the analysis. Other benefits like possible impact to the local economy via increased industrial/tourism opportunities were also not included in the analysis. 4. Estimation of economic costs Costs include capital costs, operation and maintenance costs, rehabilitation, resettlement, costs associated to complementary actions and contingencies. For all the different water user groups, costs of providing additional infrastructure necessary to derive the expected benefits were considered although they will not be necessarily financed by the project, such as sewerage connections and water micro-meters. It was deemed necessary to include these additional costs in order to permit the assumption that the expected benefits of the project will actually be realized. For the estimation of economic costs, specific adjustments were made to deduct embedded taxes in material and labor, from investment and Operation and maintenance costs. This exercise was specifically conducted for Recife to capture specific local taxes. Once all financial costs were converted into economic costs, incremental costs were calculated based in the comparison of the "with" and "without" project scenarios. 5. Results of the cost benefit analysis The results of the economic cost-benefit analysis for the four major components and the overall project are presented in the following table. - 80 - Table 2. Summary of benefits and costs NPV of flows (US$ 000) Component Investments O&M Total costs Benefits Net Benefits EIRR Bebenbe level 8,475 1,140 9,615 21,792 12,176 34% Low-Income 29,846 4,468 34,314 85,392 51,079 38% Resettlement 2,813 284 3,097 5,437 2,340 25% Water 5,543 1,193 6,736 14,974 8,238 37% NPV Total 46,677 7,085 53,762 127,595 73,833 37% With an overall IRR of 37%, the project is clearly economically viable. A comprehensive sensitivity analysis confirmed the robustness of the results. The Beberibe low-income investments (responsible for 66% of overall Project costs) has an individual ERR of 38%, followed by the Beberibe level investments component with an ERR of 34%, the water services component (10% of overall Project costs) with an ERR of 37%and the resettlement component (6% of overall Project costs) with an ERR of 25%. Financial flow of funds for the water component The water component under analysis considers the investments associated with the sectorization of the water services that are considered essential in order to incorporate a private operator for the provision of the water and sanitation services. To test the viability of this component preliminary cost estimates were prepared which included all costs associated with the provision of water and sewerage services, excluding capital costs but including a heavy maintenance and reposition component which is required given the age and level of deterioration of the existing network. Assuming volumetric charges would be introduced in this special service, the estimated monthly bill based on a consumption of 100 Uc/d, would represent 4% of the monthly income for water and sewerage services. The financial results of this component show that it is financially viable with a financial internal rate of return of 19%. Table 3. Financial Flow of Funds for the water component (US$ 000) jInvestments . O&M Total costs Benefits Net Benefits IRR NPV 7,821 1,609 9,430 12,092 2,663 19 % Main Assumptions: 6. Main Assumptions The implementation period of investment programs is 20 years for all components. Current and projected population in the project area is based on the population census and the populations projections. The number of households per connection is assumed to be one. For all components, except water, the increase in property values resulting from the project investments would have a positive impact in municipal income as the base for IPTU tax would increase accordingly. It was assumed however that these resources would correspond to the cost of O&M of the additional investments, which is a municipal responsibility. It was conservatively assumed that there would be no fiscal impact. However it would be possible for the municipality to increase efficiency in O&M of urban infrastructure, and to receive a net additional fiscal income from the application of IPTU in the Basin. - 81 - Beberibe Level Investments It was assumed that 85,455 families would benefit directly from these investments. The estimated increase in property values was estimated at US$ 377, generating an increase in the base of IPTU (tax) estimated at 1% of the property value. Low-Income Level Investments It was assumed that 35,000 families would benefit directly from these investments. The estimated increase in property values was estimated at US$ 2,963, this would generate an increase in the base of IPTU (tax) estimated at 1% of the property value. Resettlement Component It was assumed that 2,132 families would be directly benefited from these investments. The estimated increase in property values resulting from resettlement was estimated at US$ 3,774, this would generate an increase in the base of IPTU (tax) estimated at 1% of the property value. Water Component: The water component is assumed to be executed by an efficient private operator and efficiency gains in the administration, operation and maintenance are included and reflected in the flow of funds, both financial and economic. Per capita water consumption is calculated as the weighted average of the current per capita consumption of metered and non-metered households. Per capita water consumption of non-metered households is assumed equal to that of metered consumers after adjustments for the impact of price elasticity, which is assumed -0.55. Water billed. Non-metered customers are charged a flat fee, and metered customers are charged by volume consumed. The metering rate is projected to increase to 100% by the second year. Service coverage would increase from 70% coverage to 100% in 3 years Sensitivity analysis / Switching values of critical items: 7.1 Sensitivity analysis The sensitivity analysis shows that the results of the economic analysis are robust for the five cases analyzed. The variables identified as conveying major risks to the subprojects are: net incremental increases in property values in the Beberibe Low-Income component; changes in consumption (price elasticity of demand); resource savings (substitution of alternative water sources for project's piped water; and investment and operating cost overruns. The impacts of these four variables were analyzed in the sensitivity and risk analysis. The following table shows the possible impact and risk significance of the identified risk factors. - 82 - Table 4. Risk Variables, their Significance and Impact Risk Variable Impact and Risk Significance Net property value increase Direct impact on economuc benefits of the project if property values don't increase as (Bebenbe, Low income, expected'in the real estate market Beyond management control this variable could Resettlement) convey a high risk to the project. Pnce Elasticity of Demand - Water Direct impact on revenues and profitability. Beyond management control; this vanable could convey a moderate risk to the project. nvestment Cost Overrun Direct impact on investment costs. Largely under management control, conveys a moderate nsk to the project Operating Cost Overrun Direct impact on operating costs. Largely under management control Conveys a moderate nsk to the project. The sensitivity analysis calculates the impact of single variable changes in a static world. The four variables identified in Table 3 above, were switched until the subproject analyzed presented no positive impact. In most cases, the exclusion of benefits from resource savings will not be sufficient for the subprojects to yield a NPV = 0. The large percentage of operating cost overruns required for a negative result, show that the miscalculation of that variable alone will not be sufficient to make the sub components fail. Only in the case of water is it possible that an investment cost overrun could jeopardize the economic result of the subproject. In view of the relatively high switch values for the different variables, subproject results tum out to be robust for all cases. Table 5. Results of the Economic Sensitivity Analysis - Switching Values for Net Benefit Economic benefits Economic costs Components Reduction in overall property value (NVP=O) Reduction in water consumption (NVP=O) Investment Cost Overrun (NPV=O) Operating Cost Overrun (NPVV=0) Beberibe -75% 154%945% Low Income -54% 90%583% Resettlement -89% 69%1,036% Water -408%77%128% Low Income Areas: To test consistency of the estimated results in low-income areas, a new scenario was built using information from a study prepared in 2000 that apparently used a hedonic price function. While the specification of that model is not available, but the reported results were used to compare to those obtained as part of this analysis. Calculating the flow of benefits based on the information provided, the average increase in property value would be US$ 2,098 per house. Main differences result from the fact that estimations in this study were made based on the Passarinho area, in the hilly area of Olinda. Using this benefit estimation the component would still be viable with a EIRR of 27%, as shown in the following table. Results from the sensitivity analysis demonstrate the robustness of the results. Economic Flow of funds P. Hadad's estimation (low income) Investments O&M Total costs Total benefits Net Benefits EMIR NPV 29,846,100 3,163,972 33,010,072 60,473,964 27,463,893 27% - 83 - 7.2 Economic Risk Assessment To enhance the accuracy of the economic analysis by incorporating the uncertainty of the real world, Crystal Ball software was used. This software allows to measure the extent of various risks and their effect on the project, modeling a probability distribution for each risk variable and the resulting outcome. Based on a Monte Carlo simulation of 1,000 trials, the model recalculated the results of the economic analysis by changing the major risk variables all at the same time. According to the sensitivity analysis the variables that will have the highest impact are the price elasticity of demand and the investment costs in the initial years. Table 6. Assumnptions on Probability Distribution and Standard Deviation Risk Factors Distribution Pnce elasticity of demand Normal distnbution. Mean=-0.55, standard deviation-0.037. Investment cost increase Tnangular distribution. Mean: cost overrun of 1.1. Minimum = no cost overrun; Maximum = 1.20. Changes in the price elasticity of demand will have a direct impact on consumption and its associated benefits. When the demand is more price elastic, price increases will be neutralized by decreases in the demand for services. According to results from the demand analysis, price elasticity has been assumed to be normally distributed, with mean = -0.55 and standard deviation = 0.037, with values ranging from -0.27 to -0.78. Investment cost overruns have a direct impact on the costs of the project. For this variable, a triangular distribution was used. Conservatively, assuming that the engineers accurately estimated the investment costs, the most likely value for overruns is 10 percent. The minimum value is no cost overruns (engineers' estimates) and the maximum value is 20 percent. Results of the economic risk analysis are presented in Table 6. Although the probabilities of a positive net present value are between 55 and 75%, the mean expected net present value from the simulations were positive in all cases, and considerably higher than the estimated NPV of the subprojects. Table 7. Economic Risk Assessment of Subprojects Component Subproject Net Benefits Probability NPV>o Mean Expected NPV(US$ 000) Beberibe 75% 181,955 Low Income 55% 410,819 Resettlement 65% 89,320 lWater 65% 854 8. Distributive analysis - Poverty and fiscal impact Poverty impact: As the project's ultimate objective is to improve the wealth and well-being of the urban poor in the Recife Metropolitan Region additional analyses focused on assessing the poverty impact of the project. Potential impacts on the poor were considered both from macroeconomic and microeconomic perspectives. Additionally, a distribute analysis was conducted to quantify the expected impacts of the project to the . A comprehensive monitoring an evaluation system is envisaged to allow for a more detailed ex-post impact analysis of the project, based on baseline data. From a macroeconomic perspective, considering the state of Pemambuco and the municipalities of - 84 - Recife and Olinda, the project is expected to have a positive impact linked to: * Economic Growth - the project's investments are linked to economic growth mainly through tourism sector (specially in the Historic Olinda area adjacent to the Beberibe basin), and also by creating an enabling environment for new local private investments resulting from the provision of improved and reliable services; * Employment Generation - although it hasn't been conceived as a permanent employment generation program, the project would generate a considerable amount of short term employment as labor (mainly unskilled labor) accounts for about 40% of total project investments, (this effect is quantified as part of the economic analysis as the shadow price for unskilled labor was used). On the negative side, direct beneficiaries are expected to pay the full O&M costs of the project which is currently subsidized by the municipalities. But this is off-set by improved urban services, and in some cases, the provision of services that don't currently exist. The main impacts, however, are expected at the microeconomic level, that is at the community level, due to a pro-poor project design. The project makes the strategic choice in the favor-of access by subsidizing investment costs for a large population. At the same time, however, the project provides incentives to adopt low cost technologies to promote affordability (i.e. paving will only be done where technically necessary so as to lower costs and increase affordability). The State government and the Municipalities would subsidize the investments, will recover costs via taxes and user charges and pilot a micro credit program to provide low-income households with access to finance, inter alia, bathroom fixtures to connect to the sewerage system. Additionally, by including specific actions aiming to increased efficiency in service provision, as in the case of water services, there is an expectation to considerably reduce the amount of fiscal resources that would otherwise be needed to pay for the inefficiencies of the state water company. The tariff structure would also be modified to introduce volumetric charges that would provide a clear signal to the user on the real cost of water and would contribute to use the service in a more efficient way. The distribution of the total impact of the project was analyzed to determine who benefits from and who pays the costs of the project. The big winners clearly are the consumers, particularly the poorest, but society as a whole (indirect beneficiaries) and the federal government also realize a share of the benefits. It is clear that the State and the local government are the only stakeholders that have a net negative impact from the project. Results from the distributive analysis show that the project would have a considerable positive impact especially among the poorest of the poor (the majority of the direct beneficiaries) those living on less than one minimum monthly wage per family, with an average per capita income of R$ 30/month) would receive a net impact (NPV) of US$ 73.833 Million, 59% of the poorest population would receive more than half of the net impact of the project and 74% of families living under 2 minimum wages would receive 107% of the net impact, this is possible due to strong subsidization from the govemment at the State level. - 85 - Table 8. Distribution of Net Impact Among Beneficiaries NPV of flows US$(000) USERS (according to income level) Total Society Less Between Between More Direct (Indirect Government Total than 1 and 2 2 and 3 than Beneficiaries Beneficiaries) 1 min. 3 Min. wages Wages Benefits 171,524 42,298 19,630 13,788 127,595 21,627 22,302 171,524 Costs 97,691 6,643 3,083 2,165 20,038 - 77,653 97,691 NET IMPACT 73,833 35,656 16,547 11,623 107,558 21,627 (55,352) 73,833 % of net impact 59% 48% 22% 16% 146% 29% -75% 100% Table 9. Distribution of Net Impact of the project Among Major Stakeholders NPV of flows US$ (000) USERS GOVERNMENT SOCIETY TOTAL Benefits 127,595 22,302 21,627 171,524 Costs 20,038 77,653 - 97,691 NET IMPACT 107,554 (55,352) 21,627 73,833 % of net impact 146%1 -75% 29% 100% Table 10. Distribution of Fiscal Impact Among Government Levels NPV of flows US$ (000) .____ _ Municipalities State Federal Total Fiscal Impact Revenues 317 22,302 20,227 1,758 Expenditures 54,479 - 77,653 _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _23 ,17 4 _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ NET IMPACT (2,947 (52,722) 317 (55,352) % of Fiscal Impact 5% 95% -1% 100% Table 11. Distribution of Fiscal Impact Among Government Levels NPV of flows US$ (000) Municipalities State Federal Total Fiscal Impact Revenues 20,227 317 22,302 1,758 Expenditures 23,174 54,479 - 77,653 NET IMPACT (2,947) (52,722) 317 (55,352) % of Fiscal Impact 5% 95% -1% 100% Source: Own calculations, based on Pesquisa Diagonal - PROMETROPOLE, 2001 - 86 - Annex 5: Financial Summary BRAZIL: RECIFE URBAN UPGRADING PROJECT US$ Year 1 Year 2 Year 3 Year 4 Year 5 Year 6 A. irnrastrucrurE S 69,346,796 i. Beberfbe Level Investments $ 17,237,996 Peirinhos Matadoro Park $ 1,104,000 $ 1,104,000 Ecological Park - Bebenbe $ 883,200 $ 883,200 Earth Movement and Rententon Works $ 750.466 $ 380,233 $ 380,233 Av Beira Canal Vasco da Gama $ 916,459 $ 458,230 $ 458,230 Resettlement (causaudo primplantaco de Av Bear Canal) $ 2,126,254 $ 637,876 $ 1,063,127 $ 425,251 Land Acquisibon (para reasenlamento Av Bema Canal) $ 796,921 $ 796,921 Waste Water Transport (solo Peinnhos) $ 175,101 $ 175,101 Macro Drainage $ 1,695,594 $ 847,797 $ 847,797 Water System Sectonzabon $ 5,468,001 $ 1,367,000 $ 4,101,001 Bebenbe Road System Works $ 3,312,000 $ 1,656,000 $ 1,656,000 2. Bebenbe Low-ncome Invesitments $ 52,108,8W a. First Pilot Areas CampoGrande(UE23)-Recife $ 3,864,000 $ 2,318,400 $ 1,545,600 Passannho (UE 17) - Oainda $ 3,753,600 $ 2,252,160 $ 1,501,440 b Recte Urbarezabon of UE 21 $ 3,864,000 $ 1,159,200 $ 2,704,800 Urbanizabon of UE 3 and 20 $ 7,728,000 $ 5,796,000 $ 1,932,000 UrbanizabonofUE4aand 8 $ 7,728,000 $ 3,091,200 $ 4,636,800 Urbarzabon of UE 17 and 19 $ 7,728,000 $ 1,545,600 $ 4,636,800 $ 1,545,600 Land Acquisibon for Resettlement $ 1,545,600 $ 463,680 $ 463,680 $ 618,240 c Ominda UrbanrzabonofUE15 $ 3,753,600 $ 750,720 $ 2,252,160 $ 750,720 Urbanizabon of UE 13 $ 3,753,600 $ 1,876,800 $ 1,876,800 Urbanizabon of UE 12 $ 3,753,600 $ 750,720 $ 2,252,160 $ 750,720 Urbanizabon of UE 7 $ 3,753,600 $ 750,720 $ 3,002,880 Land Acquisibon for Resettlement $ 883,200 $ 220,800 $ 220,800 $ 220,800 $ 220,800 r. i,omPemenlarY AcODns $ 10,046,004 Land Tenure Regulanzation S 1,012,000 $ 202,400 $ 202,400 $ 202,400 $ 202,400 $ 202,400 Sanbabonand EnvironmentalEducabon S 1,076,400 $ 215,280 $ 215,280 $ 215,280 $ 215,280 $ 215,280 PersoneaforLocalFieldOffices $ 560,804 $ 112,161 $ 112,161 $ 112,161 $ 112,161 $ 112,161 Maintenance of Local Field Offices $ 496,800 $ 99,360 $ 99,360 $ 99,360 $ 99,360 $ 99,360 Equipment for Local Field Offices $ 331,200 $ 99,360 $ 2,318,400 Micro Credit Loan Program $ 1,104,000 $ 220,800 $ 220,800 $ 220,800 $ 220,800 $ 220,800 DesignandEngineenngforl13UE's $ 4,140,000 $ 414,000 $ 1,242,000 $ 1,242,000 $ 828,000 $ 414,000 Design and Eng,neenng for Bebenbe Level Works and Addibonal Stuoles (Prometropole 11) $ 1,324,800 $ 397,440 $ 397,440 $ 331,200 $ 198,720 1, ierenciamenro au rrograma S 4,147,20 FlDEMManagement $ 752,640 $ 37,632 $ 150,528 $ 150,528 $ 150,528 $ 150,528 $ 112,896 Mumcipal Management $ 322,560 $ 16,128 $ 64,512 $ 64,512 $ 64,512 $ 64,512 $ 48,384 Prqect Management Contract $ 3,072,000 $ 153,600 $ 614,400 $ 614,400 $ 614,400 $ 614.400 $ 460,800 Front End Fee $ 460,000 $ 460,000 Totals wnth Contingencies $ 84,000,000 $ 720,720 $ 17,324,739 $ 35,759,988 $ 25,429,351 $ 4,919,681 $ 1,472,081 - 87 - Annex 6: Procurement and Disbursement Arrangements BRAZIL: RECIFE URBAN UPGRADING PROJECT Procurement Procurement Responsibility. Project implementation will require procurement of infrastructure works, goods, hiring of consultants for studies, and training activities in 13 poor areas. There would be three implementing agencies: (a) FIDEM; (b) the Municipality of Recife; and (c) the Municipality of Olinda. COMPESA would also be responsible for the procurement of goods and works under the Water Distribution and Sectorization component. FIDEM will be responsible for supervising and monitoring the overall project procurement activity, including compliance with procedures and timetables agreed with the Bank, although each municipality, and COMPESA, will be required to follow Bank procurement guidelines. The former will enter into Project Agreements with the Bank. FIDEM and the two Municipalities will hire management firms with procurement specialists and other disciplines in order to carry out their supervisory responsibilities. The management team of the PMU, and/or the management consulting firm that it will hire, will include a procurement team consisting of at least one senior procurement specialist and one junior procurement specialist. The procurement experts, who should be already familiar with the Bank's procurement guidelines, will carry out the hiring of consultants by the PMU (including the procurement auditors), will administer the information system, will do the reporting and will provide the overall quality control of procurement and works. The procurement team will prepare the procurement section of the various directives or operational manual of the Project. The procurement team and support staff as well as the management team of the municipalities will participate in a procurement workshop that will focus on the procurement of works through NCB and ICB and hiring of consultants. This applies equally to FIDEM and the municipalities. Procurement Plan. The FIDEM PMU prepared a procurement plan for the tasks to be carried out during the project implementation. The procurement plan includes the tasks of the two municipalities The procurement plan as explained above was approved by the RPA's office and is in the project files. The procurement plan consists of: (i) procurement plan for the project's goods and works, including contract packaging, applicable procedures and process scheduling; (ii) a consultant selection process plan for the project's consultant services, including contract packaging, applicable procedures, shortlists, selection criteria. The procurement plan and consultant selection process plan will be updated periodically, every 6 months. The plans include the (i) list of contracts completed, under execution, under procurement, to be procured in the upcoming calendar semester and, tentatively in the subsequent semester; (ii) costs of completed and under execution contracts, estimated costs for upcoming contracts; (iii) schedule of bidding; and (iv) particular methods of procurement of goods or selection of consultants. Methods for Bank-Financed Procurement. Bank-financed procurement will be carried out in accordance with provisions stipulated in the Loan Agreement and the Bank's Guidelines for Procurement (published in January 1995, revised in January and August 1996, September 1997 and January 1999) for the procurement of goods and works and the Bank's Guidelines for Selection and Employment of Consultants (published in January 1997, revised in September 1997 and January 1999) for technical assistance and other consultant assignments. The Bank's Standard Bidding Documents and Standard Request for Proposals will be used for the Bank-financed ICB works, goods and consultant services, respectively. For NCB procurement of goods and works, FIDEM, COMPESA and the two Municipalities will use the model standard bidding document issued by SEAIN in November 2000. The project's procurement arrangements for each component are summarized in Table A. - 88- Procurement methods (Table A) Table A: Project Costs by Procurement Arrangements (US$ million equivalent) - ; - 2; ! -- e wu 'u -3_ ~~~~~~~~~~~~~~~. a - ; 1X, Procureme6nt-Methodd Expenditure Category.N ; .,<';NCB-. Other;-- -';N.6.F. -,.'Tot Cost 1. Works 23.40 43.15 0.00 0.00 66.55 (12.59) (23.73) (0.00) (0.00) (36.32) 2. Goods 0.59 0.00 0.00 0.33 0.92 (0.32) (0.00) (0.00) (0.00) (0.32) 3. Services 0.00 0.00 11.03 2.10 13.13 (0.00) (0.00) (8.90) (0.00) (8.90) 4. Land Acquisition 0.00 0.00 0.00 2.94 2.94 (0.00) (0.00) (0.00) (0.00) (0.00) 5. Front-end fee 0.00 0.00 0.46 0.00 0.46 (0.00) (0.00) (0.46) (0.00) (0.46) Total 23.99 43.15 11.49 5.37 84.00 _ _ _ (12.91) (23.73) (9.36) (0.00) (46.00) "Figures in parenthesis are the amounts to be financed by the Bank Loan. All costs include contingencies. 21 Includes civil works and goods to be procured through national shopping, consulting services, services of contracted staff of the project management office, training, technical assistance services, and incremental operating costs related to (i) managing the project, and (ii) re-lending project funds to local government units. Figures may not add exactly due to rounding. - 89 - Bank- Financed Goods and Associated Procedures. The proposed project would finance goods consisting of furniture and vehicles as well as pipes and meters for the Water Distribution and Sectorization component. The thresholds defining the procurement methods will be set forth in the Loan Agreement and applied to the two municipalities as well as FIDEM and COMPESA. Bank-financed Works. The works in the Project include stairways, water and sewage works, illumination, housing, road work, drainage work and other urban works. One key feature of the packaging of the works is the integration of the multiple interventions in each zone. Consequently, these works will be packaged in single bidding procedures per zone UE Unidade de Esgoto with several lots, which would be all mandatory for all participants to bid, in order to ensure the coordination, less disruption and interfacing of the works in the beneficiary community. A few lots within the bidding (for example: housing) will be included in the same bidding but contractors may be allowed to bid for the single lot due to the specialization required. Given the multiplicity of the scope of works within in each package, URB at Municipality of Recife should be the contracting entity and the Secretariat of Planning in the case of Olinda. With regard to the first two pilot areas of Campo Grande and Passarinho, as well as Beberibe Level macro works, FIDEM will be the contracting entity. In the case of works and goods associated with the Water Distribution and Sectorization component, COMPESA would be responsible for procurement, following Bank guidelines for NCB. ICB will be carried out for packages higher than US$5 million. It is estimated that two packages for Recife will follow ICB whereas other estimated 8 packages for community works and four packages for supra-local works will follow NCB procedures (including goods and works procured by COMPESA) in individual packages not exceeding US$5 million and in an aggregate amount not to exceed US$43.15 million. Small works left over in the bidding may be procured through three written quotations in individual packages estimated to cost less than US$50,000 in an amount not to exceed US$1 million. Bank-Financed Consultant Services and Associated Procedures. The proposed project would finance consultant services for studies and management consultants. The management consultants would include management, procurement, finance, social work and information technology. The project's selection and employment of consultants will be carried out under arrangements acceptable to the Bank (Table A2), using the Bank's Standard Forms and Contracts. Most of the project's studies, implementation supervision, financial and procurement audits would be carried out following Quality and Cost-Based Selection (QCBS) methods, individual consultants, and other exceptional methods as detailed in Table Al. Table Al: Consultant Selection Arrangements (optional) (US$ million equivalent) * . - - - - Selection 151'14 ;1od Consultant Services_ Expenditure Categgry OCaS QBS SFB- LCS CcQ Oher :.B.F. Toal Cost A. Firms 9.62 0.00 0.00 0.00 0.00 0.00 0.00 9.62 (7.78) (0.00) (0.00) (0.00) (0.00) (0.00) (0.00) (7.78) B. Individuals 0.00 0.00 0.00 0.00 0.00 1.41 2.10 3.51 (0.00) (0.00) (0.00) (0.00) (0.00) (1.12) (0.00) (1.12) Total 9.62 0.00 0.00 0.00 0.00 1.41 2.10 13.13 _ (7.78) (0.00) (0.00) (0.00) (0.00) (1.12) (0.00) (8.90) 1\ Including contingencies Note: QCBS = Quality- and Cost-Based Selection - 90 - QBS = Quality-based Selection SFB = Selection under a Fixed Budget LCS = Least-Cost Selection CQ = Selection Based on Consultants' Qualifications Other = Selection of individual consultants (per Section V of Consultants Guidelines), Commercial Practices, etc. N.B.F. = Not Bank-financed Figures in parenthesis are the amounts to be financed by the Bank Loan. - 91 - Prior review thresholds (Table B) Procurement Review and Methods. The Bank's procurement review will be outlined in the Loan Agreement as per tables A. and Al above and in accordance with Appendix 1 of the Guidelines for Procurement. All ICB will be subject to Bank's prior review. The first two NCB procedures in each Recife, as well as the first two NCB contracts to be let by FIDEM, will be subject to prior review as well as the first three written quotation procedures. All NCB contracts to be let by Olinda and COMPESA will be subject to prior review. With regard to consultant services, prior to issuance of any requests for proposal, a complete plan for selection of consultants under the project should be prepared by FLDEM or the participant Municipalities and the PMU, depending upon the case. The Bank's review of selection of consultants will be in accordance with Appendix I of the Guidelines for Selection and Employment of Consultants and the provisions stipulated in the Loan Agreement. Consultant contract documents to be reviewed will include TORs, shortlists, evaluation reports, and contract forms. A review process similar to individual consultants, will apply to training and workshops. Advertising. A General Procurement Notice for hiring of consultant services, and the ICB goods and consultants services should be published in the United Nations Development Business, no later than January 31 of each year. The Notice will be updated annually for outstanding consultant services and ICB goods. In addition, detailed consultant services and assignments will be advertised, as they become available, in at least one national newspaper of a large circulation. Furthermore, the implementing agencies may also advertise some of the project's studies in an international newspaper or a technical magazine. The agencies may also seek "expressions of interest" by contacting embassies, professional organizations, or firms that it knows or that are registered in DACON (paragraph 1.15 of the Guidelines for Selection and Employment of Consultants). In this case, the information required would be minimum, limited to make a judgement on the firm's suitability. Sufficient time (not less than 30 days) will be provided for responses, before preparing the short lists. Methods for Non-Bank Financed Procurement. Land will not be financed from loan proceeds. O&M of the local field office, as well as staffing with government personnel and procurement of vehicles and office furnishings will be non-bank financed. Procurement Records. Detailed procurement records, reflecting the project's supply of goods and consultant services, including records of time taken to complete key steps in the process and procurement activities related to supervision, review and audits, will be maintained by PMU. These records will be maintained for at least two years after the project's closing date. The records for goods will include public notices, bidding documents and addenda, bid opening information, bid evaluation reports, formal appeals by bidders and outcomes, signed contracts with related addenda and amendments, records on claims and dispute resolution, and any other useful information. The records for consultant services will include public notices for expression of interest, request for proposals and addenda, technical and financial reports, formal appeals by consultants and outcomes, signed contracts, addenda and amendments, records on claims and dispute resolution and any other useful information. Procurement Risk Assessment. There is a Country Procurement Assessment (CPAR) for Brazil dated 1993. A federal review is under way. The preliminary results of this review indicate that the judicial protests or recurso continue to be a major difficulty in the government procurement. Another finding indicates that the use of pregdo and other modern procurement methods will add efficiency and transparency to the government procurement. The project Procurement Capacity Assessment carried-out in October 2001, indicated that the UGP's risk was rated high as was that of Olinda. Recife was rated average and the overall rating of the Project is high. COMPESA was not assessed, and for that reason all - 92 - contracting to be done by that entity (two processes - one for goods and one for works) will require prior review. The Action Plan to minimize the risks include hiring of management firms, training, setting up the information system for all participant users and procurement audits. Frequency of procurement supervision missions proposed: The Bank will carry-out ex-post and supervision mission on procurement once a year. Procurement audits will be carried out once a year in the participant municipalities starting the second year of project implementation, as in the first year, most procurement will be subject to prior review by the Bank. - 93 - Procurement Audits. PMU will provide the Bank, no later than six months after the end of each year or in accordance with Table Al above, procurement records audited by independent procurement experts, acceptable to the Bank. The term of reference for the procurement reviews will be in accordance with internationally accepted standards. Table B: Thresholds for Procurement Methods and Prior Review' Contract Value Contracts Subject to Threshold PFrocurement Prior Review Expenditure Category (US$ thousands) M1athod (US$ millions) 1. Works > 5,000 ICB 23.99 > 1,000 but <5,000 NCB Prior review will include all ICB contracts, the first two NCB contracts procured by FIDEM, the first two NCB contracts procured by Recife, All NCB contracts procured by Olinda and all contracts procured by COMPESA. <1,000 Quotations None (post review) 2. Goods >350 ICB .59 All 3. Services Firms >100 QCBS 9.6 All Firms<100 QCBS First first two selection processes of FIDEM, Olinda and Recife. Thereafter, Post Review. Individuals >50 Section V of Consultants All Guidelines Individuals<50 First two selection processes of FIDEM, Olinda and Recife. Thereafter, Post Review. 4. Miscellaneous 5. Miscellaneous 6. Miscellaneous - 94 - Total value of contracts subject to prior review: 50.40 Overall Procurement Risk Assessment High Frequency of procurement supervision missions proposed: One every 12 months (includes special procurement supervision for post-review/audits) Procurement Records: FIDEM shall maintain Procurement Records adequate to reflect in accordance with sound procurement practices (including related supervision, review and auditing) the procurement activities of FIIDEM, the Municipalities of Olinda and Recife and COMPESA. FIDEM will also ensure that all such procurement records retained until at least two (2) years following the closing date. Such records for goods and works will be defined as: public notices of bidding opportunities; bidding documents and addenda; bid opening information; bid evaluation reports; formal appeals by bidders and outcomes; signed contracts, addenda and amendments; records on claims and dispute resolution; and records of time taken to complete key steps in the process. With regard to the selection of consultants, such records shall be defined as: public notices for expressions of interest; requests for proposal and addenda; technical and final evaluation reports; formal appeals by firms and related outcome; signed contracts and amendments; records on claims and dispute resolution; and records of time taken to complete key steps in the process. Thresholds generally differ by country and project. Consult OD 11.04 'Review of Procurement Documentation" and contact the Regional Procurement Adviser for guidance. - 95 - Disbursement Allocation of loan proceeds (Table C) Table C: Allocation of Loan Proceeds . periditureCaRegory . Fmourn in USSmilIion -nancing Perceniage Works 36.32 55% Goods 0.32 55% Consultant Services 5.60 70% (Micro Credit, Designs and Studies, Technical Assistance and Environmental Education Consultant Services 3.30 100% of foreign expenditures and 70% (Management Contract) of local expenditures Total Project Costs 45.54 Front-end fee 0.46 100% Total 46.00 Payments made for authorized expenditures prior to the date of the Loan Agreement up to an aggregate anmount not to exceed US$1.0 million may be made on account of payments made within one year of the date of the Loan Agreement. Country Issues A CFAA has recently been conducted for Brazil and a draft report has been prepared with the final report to be completed following a workshop including the Bank and relevant government officials. The report presents findings that state that Brazil has sound financial management and accounting practices which allows for the transparent budget elaboration and its execution. The report provides adequate assurance that there are no major accounting or financial management accountability issues. Strengths and Weaknesses. FIDEM has installed a project management system (SIGMA) which includes all financial controls and reporting necessary to ensure sound financial management and reporting required for the project. The system is integrated among the project executing agencies (i.e. Secretaria da Fazenda, FIDEM and municipalities) that will ensure the adequate flow of information of project execution that will include the generation of timely project reports (i.e. SOEs, FMR, cash-flow, procurement, contract management, etc.). The project system will be functional with staff trained in its use prior to the effectiveness of the project. In addition, FIDEM has demonstrated capacity to manage external Bank resources through the appropriate use of PHRD grant in the amount of US$900,000 used in the preparation of this project. An extemal audit of this fund was carried-out and no misuse of funds was reported. Significant Weaknesses Resolution The audit found weakness in the FLDEM FIDEM has addressed through the accounting system and recommended that implementation of the SIGMA system actions be taken to remedy these weaknesses. - 96 - Funds Flow The Finance Secretariat will establish a special account and FIDEM will establish an operational account. The Finance Secretariat will pre finance the payment of the expenditures by transferring the funds in Reais (R$) to the executing agencies based on legal agreements with the municipalities (convenios) and as per FIDEM instructions. The executing agencies will record the funds received to pay contractors as per their contracts. These executing agencies will submit SOE's to FIDEM which will consolidate them to be submitted to the Bank. Having paid these expenditures, the executing agencies (municipalities of Olinda and Recife) will feed the information system where FIDEM will consolidate the SOEs and use them as the basis for claiming a reimbursement from the Special Account to the operational accounts of the Finance Secretariat and for the replenishment of the Special Account. Results of the Assessment: The Finance Secretariat of Pernambuco is staffed with accountants and accounting technicians who are experience in Special Account and disbursement procedures. The State of Pernambuco is one of the Bank's clients in Brazil, and has previous experience with the Bank's financial and disbursement procedures that will minimize control and inherent risks regarding the use of loan funds. Implementing Entity and Staffing FIDEM has in its organizational structure a financial and administrative unit, where all the financial reports and accounting records are kept FIDEM has the minimum structure necessary to undertake a project of this type, however, this current structure is generally weak lacking elements required to carry-out a project of this size and complexity on its own. It is noted, however, that a financial manager and an accounting assistant are already on board, and they have experience with disbursement procedures. They have also attended financial management seminars delivered by SEAIN and the Bank. The municipalities of Olinda and Recife, while having in place the basic structure to under financial management of the project, do not have experience with Bank financed projects. Results of the Assessment: The weaknesses referred to with respect to financial management will be resolved through the contracting of an extemal professional services firm to assist in all aspects of project execution and control, including financial management. FIDEM has the capacity to adequate manage this contract in a way that will add value to their management capacity. Likewise, the municipalities will also hire extemal firms to assist with project execution, including financial management. These firms will have specialized expertise with Bank financial management procedures and rules. Accounting Policies and Procedures. FIDEM maintains and records its accounting transactions in the accounting system used by the State of Pemambuco, which is SIAFEM, Sistema de Informac,es Contabeis e Financeiras. This accounting system complies with local public accounting and budget law. Specific accounting codes have been established by the Finance Secretariat of the State of Pemambuco to allow FIDEM/FUNDERM to identify the expenditures of the project. General ledger and trial balance sheet are generated in an accurate manner, to allow accounting staff to produce accounting analyses of the expenditures and prepare financial management reports. FIDEM is implementing an integrated financial management system (SIGMA), which runs with - 97 - financial, monitoring and procurement modules. The financial management system, which is under implementation, interfaces with SLAFEM, where the accounting records can be reconciled and FMRs can also be generated. Results of the Assessment: FIDEM is implementing a financial management system software with financial, accounting, monitoring and procurement modules to allow the Project Implementation Unit to monitor the progress of the project by generating reports and accurate financial information. This system will also be extended to the executing agencies to speed up financial information and disbursement of the funds. The implementation of the system is still in progress, and it has been agreed that the financial management system will be up and running before project effectiveness. Use of statements of expenditures (SOEs): The financial management system will generate FMRs, however, disbursements will be made on the basis of statements of expenditure (SOEs) except for works above US$5,000,000 equivalent, goods above US$350,000 equivalent, and contracts with consulting firms above US$100,000 equivalent and with individual consultants above US$50,000. In these cases all contract information has to be attached to the Summary Sheet (SS). The informnation required for the compilation of SOEs will be maintained by the Project Management Unit (PMU) and executing agencies in the management information system. The SOEs will be submitted to the Bank as per cash flow requirements. Special account: In order to facilitate project implementation, the Borrower will establish a special account in US$, in a commercial bank. The Special Account will have an authorized allocation of US$4.0 million which will be restricted to US$2.0 million until the amount drawn down from the loan reaches US$15.0 million. Internal Audit. FIDEM does not have internal audit department. However, it is subject to annual audits from State Court of Accounts of the State of Pernambuco. No relevant accountability issues have been reported. External Audit. Following arrangements for Bank-financed projects in Brazil, the special account will be audited in conjunction with the annual financial audit of the project accounts for the period January I to December 31 of the year carried out by an independent audit firm, which is acceptable to the Bank to perform the Bank's financed projects in that state . The audit will be performed according to terms of reference acceptable to the Bank. The audit report will be submitted to the Bank no later than June 30 in the year following the year for which the project accounts are audited. The Auditor's TOR will include the issuance of a management letter on internal controls six months after effectiveness. - 98- Audit Report Due Date Entity Not required Project 30/Jun/XX following the year which the expenditures have been reported SOE 30/Jun/XX following the year which the expenditures have been reported Special Account 30/Jun/XX following the year which the expenditures have been reported Other (specify) opinion on the compliance of 30/Jun/XX following the year which the the contract clauses expenditures have been reported Reporting, Monitoring and Information Systems. SIGMA is the financial management system, which is under implementation at FIDEM and its executing agencies. The system had financial, accounting, disbursement, contract, monitoring and procurement modules. Its capacity to generate reports can be considered strong to meet projects flow of information demands. The system can generate FMRs for management purposes and SOEs for disbursement of the loan funds. Conditions During the appraisal mission (Oct 8 - 12, 2001), some conditions of effectiveness were identified as a result of this assessment. The project coordinator is fully engaged to make all arrangements, so that before project effectiveness all conditions be met. Action Responsible Person Completion Date To implement SIGMA Project Coordinator Before effectiveness To begin selection process Project Coordinator Before effectiveness of management firm 99 - Annex 7: Project Processing Schedule BRAZIL: RECIFE URBAN UPGRADING PROJECT Projeci Schedule k.: . - -|Plar.nerl .cu Time taken to prepare the project (months) 18 52 First Bank mission (identification) 05/01/1997 05/01/1997 Appraisal mission departure 12/01/1998 10/08/2001 Negotiations 03/15/2002 11/11/2002 Planned Date of Effectiveness 07/01/2003 Prepared by: State of Pernambuco, Brazil Jarbas de Andrade Vasconcelos, Governor Jose Mendo,a Filho, Vice Governor Secretaria de Planejamento e Desenvolvimento Social (SEPLANDES) Jose Arlindo Soares, Secretary Fundac,o de Desenvolviemento Municipal (FIDEM) Amelia, Reynaldo, President Barbara Kreuzig, Project Manager Preparation assistance: A Japanese Grant (PHRD) in the amount of approximately US$900,000, managed by the State Government of Pernambuco, was utilized in the preparation of this project. Bank staff who worked on the project included: _ _"_,, _X _ _ _ _ _l,_-_= _ _ _ _ _ _,1_n,-,_ S p eciality , ,,. ,r, - ' M. Vitor Serra Co-Task Team Leader and Lead Urban Specialist Dean A. Cira Co-Task Team Leader and Senior Urban Specialist Martin Gambrill Senior Sanitary Engineer Maria Angelica Sotomayor Infrastructure Economist Paula Dias Pini Social Development Specialist Kirsten Oleson Operations Analyst Juan David Quintero Lead Environmental Specialist Tulio Correa Financial Management Specialist Efrafm Jimenez Lead Procurement Specialist Luis Baltar Civil Engineer (consultant) George Gattoni Lead Urban Specialist (retired) Cristina Velazco-Weiss Language Program Assistant Dorte Verner Sr. Country Economist (Peer Reviewer) Roberto Chavez Lead Urban Specialist (Peer Reviewer) Carlos Velez Lead Economist (Peer Reviewer) Jose Augusto Carvalho Lead Counsel Patricia Caicedo Civil Engineer Mariangeles Sabella Counsel - 100- Annex 8: Documents in the Project File* BRAZIL: RECIFE URBAN UPGRADING PROJECT A. Project Implementation Plan Manual de Operacao B. Bank Staff Assessments Economic Analysis Procurement Assessment Financial Management Assessment C. Other 1. Programa de Infra-estrutura em Areas de Baixa Renda da RMR PROMETROPOLE - Documento Sfntese; 2. Plano Estrategico de Combate a Pobreza Urbana na RMR - Referenciais Basicos; 3. Polftica de Reassentamento Involuntario; 4. Processo de Elaborac,o de Planos de Intervencao sob o Enfoque Participativo; 5. Avalia,co dos Impactos Ambientais dos Equipamentos Metropolitanos Localizados na Bacia do Rio Beberibe; 6. Fichas Sintese dos Estudos, Planos e Projetos Existentes; 7. Caracterizac,o da Pobreza Urbana na RMR; 8. Banco de Dados Georreferenciados sobre a Pobreza Urbana na RMR; 9. Termos de Referencia para o Modelo de Financiamento e Manutenc,o das Infra-Estruturas Locais; 10. Termo de Referencia para o Plano de Gestao Ambiental para a RMR; 11. Relat6rio de Avaliac,o da Capacidade Organizacional dos Agentes; 12. Projeto Executivo de Desenvolvimento Organizacional; 13. Projeto Executivo para o Fortalecimento de Organiza,ces Comunitarias; 14. Plano Detalhado de Educacao Ambiental; 15. Plano Financeiro por Componente e Instituic,o; 16. Sistema de Gerenciamento Detalhado; 17. Sistemas de Metas e Parametros; 18. Sistema de Monitoramento; 19. Relat6rio de Avaliacao Econ6mico-Financeira do Programa; 20. Analise Financeira dos Agentes Participantes do Projeto; 21. Analise Social dos Beneficios do Programa e do Enfoque Participativo; 22. Relat6rio de Avalia,co dos Impactos Ambientais; 23. Plano de Implementa,co do Programa; 24. Plano de Interven,co na UE-23 Campo Grande - Recife; 25. Plano de Interven,co na UE - 17 Passarinho - Olinda; 26. Areas de lntervenc,o do Programa; 27. Plano de Reassentamento na UE-23 Campo Grande - Recife; 28. Plano de Reassentamento na UE-17 Passarinho - Olinda; 29. Termo de Referencia para Elaborac,o de Projetos Basicos na UE-23 Campo Grande - Recife; 30. Termos de Referencia para a Elaboracao de Projetos Bdsicos na UE-17 Passarinho- Olinda; 31. Projeto Basico de Reabilita,co da ETE-Peixinhos; 32. Termo de Referencia para Diagn6stico T6cnico e Projeto Basico do Sistema de Transporte de Esgotos da ETE-Peixinhos; - 101 - 33. Projeto Executivo para as Ac6es de Educac,o Ambiental para a UE - 23 Campo Grande - Recife; 34. Projeto Executivo para as Ac6es de Educac,o Ambiental para a UE - 17 Passarinho - Olinda; 35. Projeto Executivo de Ac6es Participativas a Serem Desenvolvidas na UE - 23 Campo Grande - Recife; 36. Projeto Executivo de Ac6es Participativas a Serem Desenvolvidas na UE- 17 Passarinho - Olinda; 37. Relat6rio de Avaliacao de Impactos Ambientais para as Intervenc,es Previstas na UE - 23 Campo Grande - Recife; 38. Relat6rio de Avaliac,o de Impactos Ambientais para as Intervenc6es Previstas na UE - 17 Passarinho - Olinda; 39. Projeto de Desenvolvimento Organizacional para as Entidades Envolvidas na Implementac,o dos Projetos Piloto. 40. Plano Estructurador da Bacia Beberibe 41. Modelo de Financiamento e Manutencao das Infraestructuras em Areas de Baixa Renda 42. Analisis do Mercado Imobiliario Informal 43. Reabilitacao Urbana e Ambiental da Bacia do Beberibe *Including electronic files - 102 - Annex 9: Statement of Loans and Credits BRAZIL: RECIFE URBAN UPGRADING PROJECT 04-Nov-2002 Difference between expected and actual Onginal Amount in US$ Millions disbursements Project ID FY Purpose IBRD IDA GEF Cancel Undisb. Ong Frm Rev'd P074777 2003 BR-Muntripal Pension TAL 5 00 0 00 0 0o 0 0 5 00 0 00 0 00 P060221 2002 FORTALEZA METROPOLITAN TRANSPORT PRO 85 00 0 00 0 00 0 00 95 70 1302 0 00 P051696 2002 SAO PAULO METRO LINE 4 PROJECT 209 00 0 00 0 00 000 206 91 27 58 0 00 P057665 2002 BR-FAMILY HEALTH EXTENSION PROJECT 68 00 0 00 0 00 0 00 68 00 17 00 0 00 P057653 2002 BR-FUNDESCOLAIIIA 16000 000 000 000 18143 000 000 P055954 2002 GOIAS STATE HIGHWAY MANAGEMENT 65 00 0 00 0 00 000 56 62 10 88 0 00 P043869 2002 BR SANTA CATARINA NATURAL RESOURC & P 62 80 0 00 0 00 000 62 80 248 0 00 P074085 2002 Sergipe Rural Poverty Reduction 2080 000 000 000 19 59 313 000 P073192 2002 TAFinancialSector 1450 000 000 000 1432 -005 000 P070552 2002 GEF BR PARANA BIODIVERSiTY PROJECT 0 00 0 o0 8 00 0 00 7 78 0 33 0 00 P066170 2002 BR-RGN 2ND Rual Poverty Reduction 22 50 0 00 0 00 000 22 28 -0 23 0 00 P050881 2001 PIAUI RURAL POVERTY REDUCTION PROJEC 22 50 0 00 0 00 0 00 17 54 20 64 0 00 P050875 2001 Ceara Rural Poverty Reducton Project 37 50 0 00 0 00 0 00 27 82 3 55 0 00 P050772 2001 LAND-BASED POVERTY ALLEVIATiON I (SIM 202 10 000 000 000 19730 9073 000 P050880 2001 Pemambuco Rural Poverty Reduct,on 3010 0 00 000 000 27 51 537 0 00 P073294 2001 BRFiscai&Fin Mgrmt TAL 888 000 000 000 791 345 000 P059566 2001 BR- CEARA BASIC EDUCATION 9000 000 0 00 000 85 45 -4 55 0 00 P059585 2001 BR- BA BASIC EDU PROJECT (PHASE I) 69 60 0 00 0 00 0 00 20 69 -6 88 0 00 P057649 2001 Bahia Rural Poverty Reduction Project 54 35 0 00 0 00 0 00 44 58 793 0 00 P0o50776 2000 NE Microfinance Development 50 00 0 00 000 000 3729 -12 71 000 P039199 2000 PROSANEAR2 3030 000 000 000 2960 -070 000 P039200 2000 ENERGY EFFICIENCY (ELETROBRAS) 43 40 0 00 0 00 0 00 42 66 24 26 0 00 P082619 2000 INSSREFLIL 505 000 000 000 052 003 019 P047309 2000 BR ENERGY EFFICIENCY (GEF) 0.00 0 00 15 00 0 00 12 38 615 0 00 P035741 2000 NATLENV2 1500 000 000 000 1197 1047 874 P006449 2000 BR CEARA WTR MGT(PROGERIRH)(SIM) 136 00 0 00 000 0 00 110 19 45 55 0 00 P058129 1999 BREMER FIREPREVENTION(ERL) 1500 000 000 000 765 766 766 P054120 1999 BR- AIDS & STD Contro III 165 00 0 00 0 0o 350 5 45 8 95 0 00 P048889 1999 SALVADORURBANTRANS 15000 000 000 000 10767 8934 000 P050763 1999 BR- Funrdescola2 20200 000 000 000 2898 -1435 000 P043874 1999 BR- DISEASESURVEILLANCE-VIGISUS 10000 000 000 000 6333 6333 000 P035728 1998 BAHIAWTRRESOURCES 5100 000 000 000 2524 2464 1469 P057910 1998 BRPENSIONREFORMLIL 500 000 000 000 306 308 152 P038947 1998 BR- SC &TECH 3 15500 000 000 000 11522 11522 000 P006474 1998 BR LAND MGT 3 (SAO PAULO) 55 00 0 00 0 00 0 00 50 80 38 40 2547 P006559 1998 (BF-R)SP TSP 45 00 0 00 0 00 0 00 14 82 14 82 0 00 P048357 1998 BRAZIL CEN BANK TAL 20 00 00 0 00 0 00 0 02 0 02 -7 30 P043420 1998 WATER S MOD 2 150 00 0 00 0 00 a00 146 30 144 59 132 44 P051701 1998 MARANHAO RPOVERTY 80 00 0 00 0 00 0 00 7 69 5 56 0 00 P043421 1998 RJMTRANSITPRJ 18600 000 000 1717 13387 151 05 000 P038895 1998 FED WTR MGT 19800 000 000 000 11035 10469 6835 P042565 1998 PARAIBARPOVERTY 6000 000 000 000 2144 1878 000 P006532 1997 FED HWY DECENTR 300 00 0 00 0 00 0 00 149 03 149 03 16 02 P006475 1997 LAND RFM PILOT (SIM) 90 00 0 00 0 00 0 00 19 76 19 76 0 00 P043868 1997 RGS LAND MGT/POVERTY 100 00 0 00 0 00 0 00 52 05 42 85 28 72 P043873 1997 AG TECH DEV 60 00 0 00 0 00 0 00 29 98 29 98 2695 P034578 1997 RGSHWYMGT 70 00 0 00 000 000 51 33 50 67 44 33 Po06562 1997 BAHIA MUN DV 100 00 0 00 0 00 0 00 44 23 44 23 15 43 P006210 1996 GEF BR-NATL BIODIVERSITY 0 00 0 00 10 00 0 00 295 4 04 4 66 P006554 1996 BR- HEALTHSECTORREFORM-REFORSUS 30000 000 000 000 8681 8681 000 P037828 1996 BR (PR)R POVERTY 17500 000 000 000 6808 6808 6808 P006436 1995 Ceara Urban Developrent & Water Resource 140 00 0 00 0 00 0 00 17 97 1797 17 97 P038882 1995 RECIFEMTSP 10200 000 000 000 1038 1038 000 - 103 - Dfflerence between expected and actual Origlnal Amount In US$ Milions disbursements Project ID FY Purpose IBRD IDA GEF Cancel. Undsb. Orig Frm Revd P006564 1995 BELOHMTSP 9900 000 000 000 1425 1425 000 P006541 1993 BRWTRQAPLN(SP/PRIFED) 24500 000 000 5.15 329 8.45 468 Total: 4925 38 0 00 33.00 25 83 2805.87 1589 73 478 61 - 104- BRAZIL STATEMENT OF IFC's Held and Disbursed Portfolio Jun 30 - 2002 In Millions US Dollars Committed Disbursed IFC :FC FY Approval Company Loan Equity Quasi Partic Loan Equity Quasi Panic 1998 Fosfertil 20.00 0.00 0 00 33.75 20.00 0.00 0.00 33.75 1998 Fras-le 9.33 0.00 10.00 0.00 9 33 0.00 6.70 0 00 1994 GAVEA 5.63 0.00 5.50 0.00 5.63 0.00 5.50 0.00 0 GP Cptl Rstrctd 0.00 9.67 0.00 0.00 0.00 9.35 0.00 0.00 2001 GPC 9.00 0.00 0 00 000 9.00 0.00 0.00 0.00 1997 Guilman-Amonm 25.78 0.00 0.00 57.47 25.78 0 00 0.00 57.47 1998 Icatu Equity 0 00 20.00 0.00 0.00 0.00 12.44 0.00 0.00 1999 Innova SA 18.75 5.00 0.00 55.00 18.75 5.00 0.00 55.00 1980/87/97 Ipiranga 29.33 0.00 0.00 57.27 29.33 0.00 0.00 57 27 1999 Itaberaba 0.00 5.34 0.00 0.00 0.00 5 34 0.00 0.00 1999 JOSAPAR 8.00 0.00 7.00 0.00 3.00 0.00 7.00 0.00 1995 LATASA - Brazil 0.00 0.00 5.00 0 00 0.00 0.00 5.00 0.00 1995 Lojas Americana 12.00 0.00 5.00 0.00 12.00 0 00 5.00 0.00 1987/92/96/99 MBR 20.00 0.00 0.00 0.00 20.00 0.00 0.00 0.00 0 Macedo Nordeste 4.75 0.00 5.00 0.00 4.75 0.00 5.00 0.00 1996 Mallory 4.36 0.00 0.00 0.00 4.36 0.00 0.00 0.00 1975/96 Oxiteno NE 7.50 5.00 0.00 0 00 7.50 0.00 0.00 0 00 1994 Para Pigmentos 19.35 0.00 9.00 8.21 19.35 0.00 9.00 8.21 1987/96 Perdigao 15.31 0.00 0.00 2.00 15.31 000 0.00 2.00 1989/95 Politeno Ind. 4.38 0.00 0.00 0.00 4.38 0 00 0 00 0.00 1994/00/02 Portobello 0.00 1.15 0.00 000 0.00 1.15 000 0.00 2000 Puras 4.33 0 00 0.00 0.00 4.33 0.00 0.00 0 00 1998 Randon 6.07 0.00 3.00 0.00 6.07 0.00 3.00 0.00 1991 Rhodia-Ster 0.00 5.95 0.00 0.00 0.00 5.95 0.00 0.00 1995 Rhodiaco/PTA 5.00 0.00 0.00 0.00 5.00 0.00 0.00 0 00 1990 Ripasa 0.00 5.00 0.00 0.00 0.00 5.00 0.00 0.00 1997 Rodovia 25.28 0.00 0.00 39.75 25.28 0.00 0.00 39.75 S.A.1 C.C 0.00 0.00 0.00 0.00 0.00 0 00 0.00 0.00 1994/96 SP Alpargatas 15 00 0 00 5.00 0 00 15.00 0.00 5.00 0.00 1987/97 Sadia 19 50 0.00 6.50 104.00 19.50 0.00 6.50 104.00 1994/95/97 Samarco 10.80 0.00 0.00 5.33 10.80 0.00 0.00 5.33 1997 Samantano 20.00 0.00 0.00 0.00 0.00 0.00 0 00 0.00 2000 Saraiva 9.23 3.00 0.00 0.00 9.23 3.00 0 00 0.00 1998 Seara Alimentos 0.00 3.88 0.00 0.00 0.00 3.88 0.00 0.00 0 Sepetiba 27 00 0.00 5.00 8.00 12.00 0 00 5.00 8.00 2001 Sucomco 6 00 0.00 0.00 0.00 6.00 0 00 0.00 0.00 1997 Sudamenca 0.00 15.00 0.00 0.00 0.00 15.00 0.00 0.00 1999 Synteko 18.00 0.00 0.00 0.00 18.00 0.00 0.00 0.00 2001 TIGRE 11.54 0.00 5.00 4.27 11 54 0.00 5.00 4.27 1996 TRIKEM 0.00 0.00 0.00 0.00 0.00 000 0.00 0.00 1992/93 Tecon Rio Grande 6.38 0.00 5.50 13.60 6.38 0.00 5 50 13.60 1998 Tecon Salvador 3.50 1.00 0.00 5.00 3.50 0.77 0.00 5.00 2001 Unibanco 150 00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 1988/94/02 Vulcabras 15.01 0.00 0.00 0.00 15.01 0.00 0.00 0.00 1999 Total Portfolio: 1009.81 169.26 133.50 761.94 618.53 145.41 115.20 591.57 - 105- Approvals Pending Commitment FY Approval Company Loan Equity Quasi Partic 0 Net 0.00 0.00 19.96 0.00 2002 Suape ICT 6.00 0.00 0.00 0.00 2002 Microinvest 0.00 0.00 1.25 0.00 2002 Net Servicos 50.00 0.00 5.00 0.00 2002 Macae 65.00 10.00 0.00 275.00 2002 Amaggi 30.00 0.00 0.00 0.00 2002 UP Offshore 16.80 0.00 10.00 25.20 2002 Andrade 30.00 10.00 0.00 120.00 1999 Cibrasec 0.00 0.00 7.50 0.00 2000 BBA 10.00 0.00 0.00 50.00 2001 Satipel 15.00 15.00 0.00 0.00 2001 Unisul 15.00 0.00 0.00 0.00 2001 Brad Templeton 0.00 0.00 20.00 0.00 2001 Cataguazes 45.00 0.00 0.00 40.00 2002 Univali 10.00 0.00 0.00 0.00 2002 Unibanco-CL 0.00 0.00 0.00 150.00 2002 Banco ltau 0.00 0.00 0.00 100.00 Total Pending Commitment: 292.80 35.00 63.71 760.20 - 106- Annex 10: Country at a Glance BRAZIL: RECIFE URBAN UPGRADING PROJECT Latin Upper- POVERTY and SOCIAL America middle- Brazil & Carib. Income Development dlamond' 2001 Populabon, mid-year (mIlflons) 172 6 524 504 LHfe expectancy GNI per capita (Atlas method, US$) 3,060 3,560 4,460 GNI (Atlas method, US$ billions) 528.7 1,862 2,248 Average annual growth, 1995-01 Population (%) 1.3 1 5 1.3 GNI Labor force (16) 1.8 2 2 1.8 GNI Gross per primary Most recent estimate (latest year available, 1995-01) capita enrollment Poverty (% of population below national poverty line) 22 Urban populabon (% of total population) 82 76 77 Life expectancy at birth (years) 68 70 71 Infant mortality (per 1,000 live births) 30 29 24 Child malnutrition (% of children under 5) 6 9 9 Access to Improved water source Access to an improved water source (% of population) 87 85 87 Illiteracy (% of population age 15+) 14 11 10 Gross prdmary enrollment (% of school-age population) 154 130 127 Braal Male 156 131 128 Upper-middle-incorne grup Female 152 128 126 KEY ECONOMIC RATIOS and LONG-TERM TRENDS 1981 1991 2000 2001 Economic ratioa- GDP (US$ billions) 263 6 407.7 593.8 502.0 Gross domestc lnvestmenVGDP 231 19.8 21.7 21 0 Trade Exports of qoods and services/GDP 9.4 8 7 10.8 13.4 Gross domestic savngstGDP 22.7 20.5 20 1 19 9 Gross natonal savings/GDP 18.6 18.6 17 2 16.4 Current account balance/GOP -4.5 -0.3 -41 -46 Domestic vsmn Intarest paymentstGDP 3.1 0 5 2 2 2.1 savings Investment Total debUGDP 309 29 7 39.8 45 0 savings Total debt servicelexports 66.4 23.3 92.0 60.5 Present value of debtlGDP . . 37.7 Present value of debtVexports .. .. 327.4 Indebtedness 1981-91 1991-01 2000 2001 2001-5 (average annual growth) GDP 2 9 2.9 4.4 15 2.8 Braal GDP per capita 0 9 1.5 31 0.2 1 6 Upper-middlelncome group Exports of goods and services 6 8 6 4 11.4 12.1 3.7 STRUCTURE of the ECONOMY 1981 1991 2000 2001 Growth of Investment and GDP(%) (% of GDP) 20 Agnculture 10.7 7 8 7 4 9.3 Industry 43 7 36 2 28.3 339 1A Manufactunnq 32.9 25.3 17.4 21.0 Services 45 5 561 64 3 56 8 0 Pnvate consumption 68 0 61 6 60 6 60.1 .10 General qovemmentconsumption 9.3 17.9 19.3 19.9 GDI e GDP Imports of qoods and services 9.8 7 9 12.4 14.4 1981-91 1991-01 2000 2001 Growth of expons and Impons (%) (average annual growth) Aqrlculture 2.5 3.4 3.0 51 40 Industry . 2.2 2.5 4.9 -0.6 Manufacturing 1 4 1.9 6.1 0.6 2 Services 3.5 2.9 3 7 1.5 o Private consumption 1.2 5.0 3 7 2.6 . s 7 00 01 General govemment consumption 7.5 -1 0 0 0 4 8 *20 Gross domestic investment 3.9 3 5 11.2 -2.0 iExports eIniports Imports of qoods and services 2.9 10 0 12 4 0.7 Note 2001 data are prelimnary estimates The diamonds show four key Indicators in the country (in bold) compnared with Its income-group average It data are msing, the diamond will be Incomplete - 107- Brazil PRICES and GOVERNMENT FINANCE 1981 1991 2000 2001 nftatlon (%) Domestic prices 0 (% change) 10 Consumer prices 1017 4328 60 7.7 75 Implicit GDP deflator 107.2 415.3 80 7.4 so Govemment finance /a 2- (% of GDP, includes current grants) o0 Current revenue . 219 23.0 98 97 98 99 00 01 Current budget balance . 1 8 1.8 -G DP deflator - G CPI Overall surplus/deficit 3 2 3.8 TRADE 1981 1991 200 2001 Export and Import levels (USS mill.) (US$ -mlllons) Total exports (fob) , 31,620 55,086 58,223 a Coffee . 2,870 3,048 2,932 Soybeans . 2,031 2,188 2,726 ao, Manufactures . 20,483 41,027 41,144 Total imports (crl) . 21041 55,783 55,581 40.000 Food .. 1,275 1,507 1,169 24 NIODOF Fuel and energy 3,371 6,362 6,276 Capital goods . 5,966 13,591 14,803 Export price index (1995-100) 81 81 97 94 9s ss 97 so 99 oo o Importpncelndex(1995=100) 70 68 118 114 OExporns liniports Termsoftrade(1995-i100) 116 120 82 82 BALANCE of PAYMENTS 1981 1991 2000 2001 Current account batance to GDP (%) (US$ mil/lons) Exports of goods and services 25,522 34,333 64,584 67,545 o + Imports of goods and services 27,200 26,142 72.443 72.62 rIII If Resource balance -1,678 8,191 -7,859 -5,107 Net income -10,272 -11,154 -17,886 -19,743 L._ Net current transfers 10 1,556 1,521 1,638 Current account balance -11.940 -1,407 -24,224 -23,212 | . Financing items (net) 12,286 -3,272 31,904 19,468 Changes in net reserves -346 4,679 -7,680 3,744 .6 Memo: Reserves including gold (US$ millons) 6,693 8,763 33,011 35,866 Conversion rate (DEC, local/US$) 3 38E-1 1 1.48E4 1 8 24 EXTERNAL DEBT and RESOURCE FLOWS 1981 1991 2000 2001 (US$ millions) Composition of 2001 debt (USS mill.) Total debt outstandinq and disbursed 81,454 121.020 236,157 226,067 IBRD 2,286 8,165 7,377 7,963 A 7,963 IDA 0 0 0 0 G 29,292 c Total debt service 17,874 8,340 62,891 42,977 IBRD 317 1,917 1,351 1,362 E 18,583 IDA 0 0 0 0 Composibon of net resource flows Official qrants 8 50 54 Official creditors 1,230 -1,062 -1,780 786 Private creditors 7,512 1,701 7,936 3,615 Foreiqn direct investment 2,520 1,103 32,779 22,457 Portfolio equity 0 803 3,076 2,481 F 152,416 Worfd Bank program Commitments 1,039 1,348 1,290 1,609 |A-IBRD E- Bilateral Disbursements 387 840 1,692 1,639 B - IDA D 0 Other mulblateraJ F Pmvate Principal repayments 136 1,248 887 828 C- IMF G- Short-term Net flows 251 -408 805 810 Interest payments 181 669 464 533 Net transfers 70 -1,077 341 277 ueveiopmenr economics -TleAr4 a. Data refer to central govemment - 108- Report No.: 23331 BR Type: FAC