Report No. 37324-BR Brazil São Paulo: Inputs for a Sustainable Competitive City Strategy (In Two Volumes) Volume I: Main Report March 10, 2007 Finance, Private Sector and Infrastructure Management Unit Latin America and the Caribbean Region Document of the World Bank ACKNOWLEDGEMENTS The "Ssio Paulo: Inputs for a Sustainable Competitive City Strategy" report was prepared under the Task Management of Jose Guilherme Reis and Maria Emilia Freire based on contributions from a team of Bank staff and consultants, namedbelow. Volume I 0 Jose GuilhermeReis. Volume I1 0 Chapter 1: Tito Yepes; 0 Chapter 2: FernandoBlanco; 0 Chapter 3: Jose GuilhermeReis, MariamDayoub and MonicaRomis; 0 Chapter 4: David le Blanc; 0 Chapter 5: Tito Yepes, Andre Herzogand Monica Romis; 0 Chapter 6: Jose GuilhermeReis. Natalie Palugyai contributed to the editing of the report. The team would like to thank the peer reviewers Ellen Hamilton, Christine Fallert Kessides, and Jose Luis Guasch for providing important and insightful comments. The report also benefitedfrom helpful inputs from Makhtar Diop, Jack Stein, Susan Goldmark, Marianne Fay, Ethan Weisman, Jennifer Sara, Martin Gambrill, BerniceK.Van Bronkhorst, Jorge Rebelo, andDaniel Hoornweg. The backgroundpaperspreparedfor this report includeUrani, A. "Novas EstruturasInstitucionais para a Governanqa da RegiBo Metropolitana de SBo Paulo"; and, Biderman, C., and T. Yepes "Returns to Scale and Locationof EconomicActivities in Brazil." The team acknowledges the important contributionsreceived from government officials in SBo Paulo, especially from Francisco Luna, Planning Secretary, and his successor Manuelito Pereira Magalhsies Junior and from Gerald0 Biasoto, Vice-president of EMURB. Javier Toro, from the PlanningSecretariat, providedinvaluablesupport. The team also benefitedfrom insightsprovided in an international meeting organized by the World Bank in Si50 Paulo in April 2006 and from comments received in a meetingorganized by the PlanningSecretariat in Si30 Paulo in December 2006. The findings and views expressed here are exclusively those of the World Bank and neither representsthe views ofthe government of Ssio Paulo nor ofthe federal government. SHo Paulo: Inputs for a Sustainable CompetitiveCity Strategy Table of Contents Executive Summary I.ToolstoReachaSustainableCompetitiveCity:TheFiscalContext...................................... ........................................................................................................................................ 3 I1.City Competitivenessand BusinessEnvironment 6 .Service .................................................................. 7 IV. Partnerships......................................................................................................................... 111 Delivery: The HousingSector................................................................................ 11 13 List of Figures Figure 1. Brazil and selected metropolitanregions: unemploymentrate. 1992-2004(percent) ......3 Figure 2. Selected metropolitanregionsin Brazil: poor populationas a share oftotal population. 1992-2004(percent) ........................................................................................................................ 3 Figure3. Brazil, SBo Paulo state, and MRSP: index of industrial GDP, 1970-2000(1970400) ...4 Figure4. Change in manufacturingGDP by city size, 1970-2000(percent) Figure 5 Services sector: change in shares in value-added by skill level, 1991-2000(percent) . .................................. 4 ....4 Figure 6. Services sector: change injob shares by skill level, 1991-2000 (percent) 4 Figure7 Investmentclimate versus Locationfactors . ..................................................................... ....................... 9 List of Boxes Box 1. World Bank Supportto StrengthenPublic Sector Management in SBo Paulo..................... ......................................... 7 10 Box 3.Housingand the World Bank in SBo Paulo........................................................................ Box 2.World Bank Supportto ReduceCrime and Violence inBrazil 13 Box 4.Water and Sanitationand the World Bank in SBo Paulo ................................................... 15 2 Executive Summary 1. The Metropolitan Region of SPo Paulo (MRSP), the largest in South America, with 19.1 million people livingin 39 municipalities, is facing the challenge to achieve higher rates of growth and standards of service delivery under severe fiscal constraints. Rapid urbanization, and a process of deindustrializationand economic stagnation, resulted in a region afflicted by socialproblems, includingrising unemployment, crime, and a limited capacityto face competitionfrom other areas with regards to attracting investment.Although these problems are commonto other metropolitanregionsin Brazil, some of the most importantindicatorshave been more negative in the MRSP than for the other regions (Figures 1 and 2). Of the 26 metropolitan regions in Brazil, the MRSP has the highest population density (2,245 inhabitants per km2),the highest prices for housing rental, the fourth highest share of population living in slums (9 percent), and the fifth highest share of population living in informal housing (16 percent) (Cities - - - Alliance, 2004). Figure 1. Brazilandselectedmetropolitanregions: Figure 2. SelectedmetropolitanregionsinBrazil:poor unemploymentrate, 1992-2004(percent) populationas a shareoftotal population, 1992-2004 (percent) 18 - /+Brasil +Riode Janeiro +SBoPaulo -CudtibaI 35 I+ Belo Horizonte +Rio de Janeiro +Sa0 Paulo-cCuritibaI 16 - I 30 14 - E12 - =25 t 2(Y f l 0 - ,"20 8 - 6 - 15 T I 10 1990 1992 1994 1996 1998 2000 2002 2004 2001 1990 1992 1994 1996 1998 2000 2002 2004 2CO Source: Basedon PNADABGE. Source: BasedonPNADABGE. 2. The manufacturing sector suffered the most drastic changes. Signs of sluggish growth and structuraltransformationin SBo Paulo started after 1970.Fromthat point on there has been a decline in the MRSP's share of Brazilian manufacturingfrom 40 percent of GDP in 1970 to less than 20 percent in 2001. Firms in the MRSP did not move out massively, but their production did not grow as much as in other areas. Between 1970 and 2003, real production in Brazilian industry grew nearly 6.8 percent per year in areas outside of the state of SBo Paulo, 7.7 percent per year in the rest of the state excludingthe MRSP, and only 2.0 percent per year in the MRSP (Figure 3). The loss in manufacturingin the MRSP was absorbed by smaller areas in the country as ,a whole: (a) areas with less than 1 million inhabitants increased their share by 10 percent, (b) areas with 1 to 2 million inhabitants increased by 7 percent, and (c) areas with 2 to 3 million inhabitants increased by 6 percent. The same pattern is observed among all other Brazilian metropolitan areas, with the exception of Curitiba, which increased its share from 1.3 percent in 1970to 3.3 percent in 2000 (Figure4). 3. I t is not yet clear to what extent SPo Paulo is transforming itself into a non- manufacturingcity. An exercise usingdate for 1970and 2000 shows that MRSP's participation in non-manufacturingproductiondropped in real terms from 21 percent to 18 percent, with this differencebeingabsorbedby smaller populationagglomerations.Inthe MRSP, the service sector 3 is r e ~ ~ ~~ ~~ ac ~~ n~in ~ a ofjob creation,r espcciallqg in business scniices, Figures 5 and ~ term ~ ~ ~ ~ ~ n 6 show sersice industries divided info two groups: (a) business sersices (e.g., finance, i ~ i s ~ r a ~ c e , real state, sofb~are,and ~ o n s u l ~ a ~and)(h) p e r ~ services afq,,o d ~ jr~e~~ ,~ ~ ~ randr ~ ~ s , c ~ , ~ ~ ~ ~ l a c ~ ~ e r ~ a i ~In ~terms ~ofjohs, business services are the ontj ab,rwectate sector in tthich thc ~ e n ~ . ' MRSPactually i ~ ~ r e a s eitsd propo~joIiduring 3 991-2000.The share ofjobs in personat services far thc MKSP decreased by more than t percent drtring the s m e period. Figure 3, Brazil, SHo PauIostate, and MRSP: index: o f ` i n d ~ ~ tGDP,~1............" ....~.~ r i ~ ~(Z 970- 199) ~ ~ ~ ~ ~ ~ ~" ~ " ~ " " .... ...... " -.................. "...........9 1810 1975 1980 1485 9945 2000 2003 I Source: Based on l ~ ~ ~ d a ~ ~ . Source: Based on ~ P ~ ~ d ~ ~ a . Figure5. Services sector: change in shares in value- Figure6, Services sector: change injob shares by adcird b! ski!: Eevcl, i99 1-2000fpercentl skill Ievrl, I99l *(percent) ~ ~ ~ ~ t PA Bt4 R SP SOU~CC'Based 011data from the Rrazitian Ministq of Labor. tabor 4 5. Besides the presentationof new evidence on the investmentclimate in SHo Paulo, its relationshipwith the current economic trends in the region, and an in-depth analysis of a specific area of service delivery (Le., the housing sector), the contribution of this study is to attempt integratingthese different areas into a long-term view of the metropolitan region's development. Besides analyzingspecific areas, includingthe fiscal performance, this report aims at providingan integrated view of the challenges and opportunities faced by the municipality and the metropolitanregion. It must be acknowledged, however, that there are important aspects not covered by the report. Relevant areas of service delivery, like security and transport, are not analyzed. Inaddition, important short- and medium-term issues for the MRSP, like fosteringjob creationand sector specifictargetedpolicies, are not discussed. 6. The critical messages ofthis report are: The MRSP is not a degraded or decadent area, but rather a transforming metropolitan region. All cities go through periods of crisis and seeming rebirth and SLo Paulo has many ways to overcome the current situation.* Like in other large metropolises, there is a deindustrialization process, only partially replaced, so far, in the case of the MRSP, by other sectors. The drop in manufacturingemployment is not explainedby an exodus of firms from the MRSP, but predominantly by the reduction ofjobs in incumbentfirms and by closings of firms. Global experience shows that firms keep their headquarters or high-skilled workers in their original cities rather than relocatingthem into new industrialcenters and SBo Paulo, representing a concentrationof the headquarters of most large firms in the country, has not been different. The city and the metropolitan region have to focus on qualitative growth, pursuing increased productivity, reinforcing policies supporting its main assets, including infrastructure and innovation, and attractingfirms that demandhigh-skilledworkers. 0 In order to achieve faster growth and excellence in service delivery, SHo Paulo has to reinvent its institutions. The experiences of large cities around the world suggest that it is crucial to develop a common long-term vision for the city and the metropolitan region. Implementing a coherent strategy for the development of a metropolitan region requires a collaborativeframework. In the specific case of services delivery, the city and the other actors of the metropolitanregion can reinforceand create new mechanisms of metropolitangovernance in order to achieve increased coordination. There is a wide array of policy, legal, and institutional innovationsavailableto promote inter-governmentalcooperation, public-privatepartnerships, and more accountable and transparent governments. In a context of fiscal constraint and increasing demand pressures, coordination with other public agents and private sector participation are crucial. SLo Paulo needs to pursue a solid fiscal adjustment and commit to recover creditworthiness.In spite of the size of its debt, the municipality of SBo Paulo is in a positionto manage it - between January 2005 and June 2006 the level of net debt was brought down from 226 percent to 206 percent of net current revenues without any tax increase. Deepening fiscal controls will allow the city to reach manageable levels of indebtedness, without incurring excessive cuts on either social spending or investments. Ifthe Brazilian economy could achieve a Glaeser (2005a, 2005b). The Municipality of SBo Paulo is one ofthe pilot cities inthe World Bank's city indicator program (along with Belo Horizonte, Bogota, Cali, Montreal, Porte Alegre, Toronto, and Vancouver). The indicators will measure performance of service delivery and quality of life in a manner that facilitates global comparisons across cities and over time. The first set of indicators will be piloted in 2007. SBo Paul0 already has extensive information on city indicators, which will be incorporated into the proposedindicators. 5 period of sustained growth at rates higher than those obtained inthe last two decades, this would help the city to manage its fiscal situation, provided a sound combinationof expenditurecontrol and revenue increasesis maintainedand deepened. 0 Finally, working on the investmentclimate to attract new businessesis a key factor for the city and the metropolitan region to recover higher growth rates. Evidence examined in this report providesa roadmap for interventionsinthis area. One of SBo Paulo's main assets is its high stock of capital, bothhuman and physical, that appropriatelyexploredcan continueto attract highly productivefirms. Furthermore,high-quality infrastructure intersects with the advantage of SBo Paulo's location, marked by proximity to domestic consumers, suppliers, and the main Brazilian port. There is, however, room to enhance the businessclimate: a recent survey from the World Bank Group ranks SBo Paulo 1lth of 13 large Brazilian cities in terms of the ease of out doing business. Soft infrastructureis perceivedas a disadvantage of being located in the MRSP. Specifically, the need for more agility in public services provision, such as the time and cost of opening a firm, simplification of tax payments and property rights are mentioned as areas for improvement.Finally, alongwith this soft infrastructure side, there is the challenge of safety and security, as high level of crime is perceived as the second main disadvantage of locating in the metropolitanregion. In summary, there is no single solution that provides a magic bullet for solving S5o Paulo's challenges. Rather, a multi-track, integrated, sustained set of actions is needed, complemented by a new partnership process with key actors. The following paragraphs summarize the four key areas for the MRSP's recoverystrategy. I.ToolstoReachaSustainableCompetitiveCity: TheFiscalContext 7. The MSP has a high level of indebtedness that has been limiting, its capacity to provide goods and services to the population.Public policy challenges are increasinggiventhe concentration of low-income groups (with higher needs for social and urban services). Tax revenues per capita grew only 0.8 percent per annum in real terms between 1995 and 2004. This low growth was not compensatedby other fiscal revenues, since total revenues grew 0.6 percent per annum in real terms over the same period. At the end of 2005, net consolidated debt was equal to 223 percent of net current revenues, far above the Fiscal Responsibility Law (FRL)4 ceiling of 174percent, which needsto be reducedto 120percent of net currentrevenues by 2016. With high populationdensity that characterizes SBo Paulo, there is a large demand for municipal expenditures in transportation, water and sewage, housing, waste management, and urban infrastructureservices in general. Thus far, the municipality has not been able to appropriately supply these demands. PolicyRecommendations 8. The municipality faces the challenge of implementing a strong fiscal adjustment, while having to maintain minimum levels of public services and investment. The city needs to go to the root causes of the fiscal crisis and adopt a permanent, sustainable fiscal approach. Projectionexercises show that, albeit not easy to implement,this is feasible:the city can reachthe FRL ceiling and yet have the level of primary expenditures in 2005 and onward higher than in 2000. This could potentially permit the municipality to maintain minimum investmentsin urban infrastructure,even acknowledgingthe changes inthe quantity, quality and coverage of the public services currently provided by the Municipality. Cities such as Barcelona, New York, and ComplementaryLawNo. 101/2000. 6 Philadelphia followed this path, and turned themselves into more competitive cities. The fiscal accounts of the MRSP's municipalities present a different, more positive trend than the one observedfor the Municipality of Siio Paulo: interms of indebtedness, ofthe 39 municipalitiesthat comprise the MRSP, only the Municipality of Ssio Paulo is above the legalceiling set by the FRL. 9. Maintaining and improving Si50 Paulo's favorable endowment of infrastructure is essential. Implementing the fiscal adjustment while maintaining investments in urban infrastructure is the main challenge. Although investment in infrastructure can be achieved through private sector participation, the public sector remains essential, especially is some key areas, such as housing and transportation. However, the focus of public expenditures in infrastructure should be on quality, rather than on quantity. Given the financial constraints, it is imperative to enhance municipal expenditure management through the strengthening of the municipal planning system and the World Bank has already begun to support such efforts (Box 1)- Box 1.World Bank Support to StrengthenPublicSector ManagementinSilo Paulo The activities under the TechnicalAssistant non-lendingactivity "Strengthening the PlanningCapacity of the Municipality of Slo Paulo" supportedthe preparationof the SBo Paulo Multi-YearPlan (Plano Pluri- Annual, PPA) 2006-2009. This was done through training of SEMPLA staff and the staff in other sector Secretariats involved in PPA preparation and the design of a methodology for coordinating the central planningunit andline Secretariats. The PPA preparationprocess for the Municipalityof Slo Pauloshowed the limitationsinthe existingplanning,budgetary,andexpenditureexecutioninstruments. A second group under actions of the Technical Assistant activity focused on the preparationof analytical studies to evaluate the municipally planning system and proposed a set of measures to strengthen it. In particular, the following six areas for improvements were identified: (a) structuring the institutional channels of coordinationbetweenthe central commandofthe municipalplanningsystem andthe execution units, (b) enhancingthe planning capacity of the line Secretariats, (c) improvingthe integrationbetween planning, budgeting, and expenditure execution, (d) strengthening information systems, (e) defining the core ofstrategic programsdescribedinthe PPA, and (0buildingupmonitoringandevaluationsystems. II.City CompetitivenessandBusinessEnvironment 10. What are the main strengths and weaknesses of the MRSP in terms of attracting new private investments?What do municipal governments have to focus on in order to raise the competitiveness of the MRSP?This study tries to answer these questions using both econometric models and tested surveys carried out by the World Bank Group, like the Doing Business and the Investment Climate Survey (ICs). Responses from a follow-up survey (Location Factors Survey 2006) with 447 manufacturing firms selected among the 1,642 firms interviewed for the Brazil ICs carried out in 2003 were also used. Firms were interviewed using a computer-assisted telephone interview system. The methodology is reported in Annex 1 of Volume 11. 11. Connectivityis the main advantage of the MRSP.When asked about the advantages of their location, the majority of surveyed firms in the MRSP mentioned proximity to markets and infrastructure. Consideringthe importance given to proximity to consumers and suppliers, the emphasis on infrastructure is possiblyrelated to transportationand communications services (i.e., "connectivity"). Infrastructure is seen as an asset by firms located inside the metropolitan region, and the Investment Climate Assessment (ICA) indicators of infrastructure quality confirm this positive view. In addition, boththe MSP and the MRSP have many location assets to attract private investments: (a) favorable geographic location, (b) they are a natural hub for air transportation, (c) they are close to the main Brazilian port (Santos), and (d) they are close 7 to agricultural and manufacturingproduction.This is recognizedby entrepreneurs, since the state and the city of SBo Paulo were rankedfirst as the best state and city, respectively, to do business in Brazil (as shown by the LocationFactors Survey 2006 with 447 manufacturingfirms spread over four distinctregions). 12. The MRSP is facing problems in certain dimensions of "soft" infrastructure, notably in business regulation; thus, the road map for action should include short-run measures to improveseveral areas of businessregulationin the MRSP. Compared with other cities in the world and within Brazil, SBo Paulo performs poorly in terms of the ease of doing business- it was placed 1l*among 13 Brazilianstate capitals.This low rank is relatedto: (a) the lengthof time requiredto open a business in SBo Paulo(152 days, which is, for example, 8 times the length of time it takes to accomplish this same task in Belo Horizonte), (b) the difficulty of payingtaxes in the city (SBo Paulo is the city ranked2"din terms of how complicated it is to file tax forms), and (c) the procedural complexityfor enforcingcontracts (SBo Paulo imposesthe 2nd largest burden on entrepreneurs). In addition, the ICs-2003 shows that a significantly higher share of firms in the MRSP ranks the government in the provision of public services as "inefficient" when comparedto other regions. Thus, one measure likely to yield results quickly is the initiative to reduce the number of days to start a business in SBo Paulo city - given that municipalrequirements are the most onerous in the processof openinga business in Brazil.With the support of the InternationalFinance Corporation(IFC), the municipalityis currently carrying out a program to reduce transaction costs of formality for firms by diminishing time and requirementsfor operational and construction license^.^ 13. The MRSP hasa comparative advantage when skills and technology are considered. The share of workers with college degree in firms located in the MRSP is significantly higher than among firms not located in this region. The same is true for the share of workers who frequently use computers to perform their duties. Although the quality of the labor force is an important feature of the MRSP, it was not among its top five location factors; however, infrastructurewas ranked 2nd,and was also considered the 3rdmain advantage for firms locating in the MRSP. Finally, an econometric exercise showed that proximity to suppliers, the quality of the labor force, and urban infrastructureare the main driversof firm's productivityinthe MRSP. 14. Infrastructure is the factor that most affects firm location decisions and Slo Paulo provides infrastructure of higher quality when compared to other regions in the country. When the quality of infrastructureservices was analyzed (as the share of total sales lost due to infrastructure services outages), the MRSP clearly provides services with higher quality than other Brazilianregions.When askedabout the factors that constrain growth, as is done inthe ICs, infrastructureis not rankedas a significantinhibitorto growth. 15. Factors,such as infrastructure,that strongly influence a firm's location decisionare different from the factors that a firm considers in assessing a region's or city's business environment.Factors that most adversely affect the MRSP's business climate are related to tax rates, cost and access to finance, corruption, and crime. This is particularlyevident when the two rankings-locationfactors and obstaclesto business-are placed in the same chart (Figure 7). 5 The project is being implemented by a technical secretariat, formed by local consultants appointed to work with the city of S8o Paulo, and an Advisory Council that is composed of public and private sector stakeholders. The project design ensures active participation of the private sector (in addition to the municipalauthorities) inthe implementationofreforms. 8 16. Crime and violence are key issues in the MRSP. The analysis in Chapter 2 of Volume IIreinforced the generalized agreements that (a) from 2000 to the 2006, they have worsened in the MRSP, and (b) the high level of crime is perceived as a serious disadvantage of being located in the MRSP. From 2002 to 2005, the share of total sales lost due to criminal activities increased by almost 4 times (however, such increases occurred in all regions except the Northeast). These sales losses in the MRSP were significantly higher than those in the South and the Northeast regions. On the other hand, it is important to acknowledge that, accordingto Fundup70 Seade,between 1994 and 2004, the homicide rate inthe state of Siio Paulo fell by 29 percent. In addition, a recent World Bank study found that a 10 percent decrease in homicides in Brazil during 1991-1995 would have led to a 0.2-0.8 percent increase in per capita income over the following five years (World Bank, 2006a). When location factors were considered, crime and violence were ranked the 2ndmain disadvantage for firms located in the MRSP and the proportion of firms mentioningthis disadvantage was significantly higherthan the proportions for firms locatedelsewhere. To deal with crime and violence, most firms located in the MRSP either hire security guards or buy commercial insurance. Working with public policies to curb crime and violence is likely to be on the top of the agenda of public administrators. Beyond the social and human impacts of this agenda, the economic implications for the metropolitanregioncan be very important. Figure 7. Investmentclimate verws Locationfactors Im Locationfactors oObstaclesto business ~ Source: InvestmentClimate Survey 2003 andLocationFactorsSurvey 2006. PolicyRecommendations 17. Our analysis points to some short- and medium-run actions concerning business regulation and the investment climate. Both the Doing Business in Brazil report and the Investment Climate Assessment suggest that there are areas for improvement in business regulation: complexity of contract enforcement, time and cost to start a business, and complexity of payingtaxes. Unifying start up proceduresand introducingelectronic proceduresand payments to start a business, as established in the program currently being carried out by the municipality with support from IFC, as well as acceleratingthe creation of the Development Agency are our main policy recommendations in this area. By the same token, efficient public policies to reduce crime and violence, especially integrated municipal programs for crime prevention, are also 9 necessary and urgent in the MRSP -not only for business development and growth, but also for the well being o f the whole population (Box 2). Box 2. World Bank Support to Reduce Crime and Violence in Brazil The main analytical work done by the World Bank on crime and violence inBrazil, "Crime, Violence and Economic Development in Brazil: Elements for Effective Public Policy," presents six key messages of which two are relatedto the MRSP: (a) Prevention is crucial, complementary to control measures, and cost-effective. In Brazil, estimates suggest that prevention is more cost-effective than control or repression. Some of the approaches include prevention programs targeting at-risk youth and gender-based violence, control of alcohol sale, police reform, and integated municipal (and state) public safetv moaams. (b) The municipal level is an important entry-point for the prevention of crime and violence, and integrated municipal programs are one of the most effective ways to reduce crime. Many municipalities in Brazil assume a crime and violence prevention role, but they need more technical assistance, resources, and coordination with other levels of government to be fully successful. There is need for the participation of municipalities ina state-ledcrime andviolence prevention fiamework. On the urban program side, partnerships were the main activity developed by the World Bank. The program promotes collaboration with partners inside the Bank as well as with other international agencies, national agencies, and nongovernmental organizations (NGOs). Among the different partnerships are: (a) the Inter-American Coalition for the Prevention of Violence, (b) the founding partnership of the Reference on Urban Security Nucleus (Nzicleo de Referlncia em Seguranqa Urbana), with UN-Habitat Safer Cities Programme, IDB, and the National Coalition of BrazilianMayors (Frente Nacional de Prefeitos do Brazil), (c) clearing house and website for municipalities on support, materials, and capacity-building in urban crime and violence prevention, and (d) partnerships in the municipal capacity-building program with research institutes, civil society (e.g., Sr?oPaulo Contra a Viollncia),andmunicipalities. A relevant case is that of Jardim Angela in Diadema, where the homicide rate was more than 100 per 100,000 people in 2000, but fell 73 percent by 2004. Several factors are behind these improvements, including: (a) the use o f integrated information systems and geo-referenced crime mapping, which has allowed for more proactive policing, and involved communities and city and state agencies to address the issues in the city's problem areas, (b) targeted implementation of municipal social programs (e.g., Renda Minima, Bolsa Trabalho, and Comecar de Novo), public transportation improvements, and other advancements inthe city's 10 most violent districts since 2000, (c) participation of civil society inviolence prevention, developing a large number of activities, many targeting at-risk youth and including skill training, income generation, and cultural programs, and (d) alcohol restrictions, since, in Diadema, restrictions on alcohol sales after 10 p.m. have contributed to a significant decline in related homicides (from 76 per 100,000 people in2000 to 35 in2004). 18. From the medium- to long-runperspective, attention should be directed to the main drivers of firm's productivity in the MRSP, notably urban infrastructure and skills of the labor force. These are areas in which Sgo Paulo performs relatively well compared to other regions as shown by the ICs-2003 and the survey on location factors carried out in 2006. However, these two factors deserve continuous attention to reinforce MRSP's comparative advantage. Infrastructure requires particular attention because it is one of the most important location factors for firms in all regions. The problems and costs o f traffic congestion in the city, affecting both passengers and cargo, clearly point to the need to focus on the transport sector, addressing both quality and sustainability o f urban transport in the MRSP. The challenge, therefore, is to establish partnerships with other municipalities as well as with the federal and state governments to increase and streamline investments in this area. To support these efforts in the area o f urban transport, the main World Bank work with the MRSP is "The STio Paulo Metro 10 -Line4." ItaimsatimprovingthequalityandsustainabilityofurbantransportintheMRSP,by interconnectingthe existingsubway, commuter rail, and bus networks through the constructionof the metro's Line 4 (12.8 kilometers with 11 stations). It has two main components: (a) an infrastructure and equipment investment component to build the metro's line 4, which includes transferringstations between road and rail based systems. This project is the first enterprise in Brazil done usingthe Public-PrivatePartnership(PPP) mechanism, and (b) a technicalassistance component to support and finance the project management oversight. A financial management cost recovery study with recommendations on tariff structure is included, as is a follow-up on project finance studies. III.ServiceDelivery: TheHousingSector 19. The report also addresses services delivery, specifically the case of the housing sector in the Municipality of SBo Paulo. The housing sector was chosen because of its importance in the municipalinvestment budget and the coordinationchallenges involved, as well as beingan area in which policies can have high social impacts. MRSP i s experiencing moderate populationgrowth, typical in which central regions are stable or decreasing, while the periphery i s still growingrapidly.Central areas, which include 13 core municipaldistricts, havewitnessed a decline in population and a departure of wealthier households. The periphery of the city has witnessed continued inflows and illegal construction, either on public land Vmelas) or on privately-owned and illegally subdivided plots. Lastly, the headwater-reservoir systems (mananciais), also located in the city's periphery, are critical, environmentally-sensitiveareas, since they provide raw water for potable supply for the MRSP and are suffering the same disorderly occupation pressure from low-income residents. Despite these mananciais areas having been subjected to severe land-use restrictions through decades-old water resources managementand environmental legislation,neverthelessillegal settlements haveproliferated. 20. Efficiency and targeting of housing programs are limited. Finished housing units producedby the MSP do not constitute a sustainable solutionfor households with income below three minimumwages. This is relevant becausehousingdeficienciesare concentrated among the low-income segments of the population. As the distance from the municipal center increases, residents are, on average, poorer and less educated, and suffer more from the lack of basic amenities intheir dwellings. 21. The direct production of housing units is the dominant mode of housing intervention and the public sector provides a significant part of it in the MSP, while the scale of slum upgradingactions has been small. However, these figures do not exactly translate into new housing (net) supply. Many units produced under Locap% Social, the HousingLeasing Program(PAR), andthe MSP partnershipwith Housingand UrbanDevelopmentCompany ofthe State of SBo Paulo (CDHU) have been mainly used to relocate people from slums and high-risk areas. In those cases, no new net supply was involved. Slum upgrading programs have comparatively reached fewer households over time, most of which were located in the Guarapiranga basin, since the MSP has concentrated its efforts on this regiongiven the nexus of key water pollution and social exclusion issues faced there. However, even in this area, the number of families assisted each year was probably less than the number of new irregular householdsbeingformed. 22. The involvement of the private sector in housing programs has been problematic. The framework of the Special Zones of Social Interest(ZEIS) is not conducive to private sector involvement because it is complicated and restrictive.Zones classified in ZEIS are subjected to strict provisionsfor redevelopmentand do not promote financialviability. UrbanOperations have 11 met varying success rates, but other ambitious public-private partnerships (PPPs) have not been implemented. Even when trying to involve the private sector in the rental market, efficiency has been low. Rent subsidies (Bolsa Aluguel), a form of personal rental allowance, was created to allow selected low-income families to find an accommodation in the private rental marketn6 Theoretically, this system was attractive because it involved the private sector's supply of rental units. However, there are two main problemstwith its parameters: (a) the maximum rents permitted (via maximum rent-to-income ratios) are too low and correspond at best, to a small portion of the formal rental supply, and (b) subsidy rates reach 80 percent or higher for households with monthly incomes under three minimum wages, which makes scaling-up ~nfeasible.~ 23. Different municipalities within the MRSP present highly idiosyncratic situations with respect to the way they face low-income housing problems. This report illustrates that housing Secretariats in the different municipalities within the MRSP do not maximize cooperation and informationsharing. Housingprograms should be consistent with a metropolitan strategy for housing and externalities should be addressed in a coordinated fashion between municipalities. Although this may seem ambitious, there is room for information sharing and exchanges in practices between municipalities (e.g., with respect to the monitoring systems). These types of exchanges need neither highly formal institutional settings, nor to be budget consuming. Nevertheless, they would be a very efficient way to improve municipal practices in various areas in addition to the housing sector (e.g., education and health). The exceptionto this rule is the collaborationthat took place under the World Bank-financed Guarapiranga project, which is currently being furthered during the preparation of the proposed follow-up mananciais project in which a dozen municipal governments are discussingwith state authorities a combined effort for urban upgrading (including housing improvements), social inclusion, and water pollution control in areas of mananciais (Box 3). Policy Recommendations 24. Our analysis points to actions concerning partnerships and public finance so that the service delivery of low-income housing could be improved. Regardingpartnerships, there i s a need to strengthening the coordinationwith both the federal and the state governments - a key partner in this process should be CDHU - and between municipalitiesthat are part of the MRSP. The expected outcomes of this effort should be less volatile financial sources, harmonization of similar programs run by different levels of government, creation of an information center concerning low-income housing demand, and development of programs targeting environmentally sensitive areas, especially mananciais.Inaddition, coordinationamong different MSP' Secretariats should be enhanced by integrating their individual information systems and building up program monitoring and evaluation systems. Ultimately, coordination would improveefficiencyandtargetingofthe housingprograms. 25. Three sets of financial actions should be pursued by the MRSP. This would support the development of a unified housing strategy in the long-term with better targeting of subsidies. It is necessary to realign resources so that funds and subsidies for self-construction would boost and housingmicro-credit programs could be effectively implemented.With vertical and horizontal coordination among different government levels, a study on the rental market should be undertaken in order to identify alternativesto finished housing units produced by the The subsidy comprises a monthly allowancethat covers part or all ofthe rent plus a system of guarantees for the landlord. 'Nowadays,thescale o f the programis negligible, with only 1,500 beneficiaries. 12 public sector. By improving COHAB's financial situation of, the coverage and targeting of municipal programs could be enhanced. To do so, it would be necessary to revise policies and parameters of municipalprograms (e.g., locaq6o social and bolsa aluguel) as well as decreasing the depth of subsidies on household financing for mutir6e.s and conjuntos. Finally, actions to leverage public resources for housing should be pursued. These actions include revising the classification of areas under ZEIS, introducing market incentives for the production of middle- and low-income housing units in the renovation process of the MSP's central areas, and expanding (with the appropriate adjustments) the program bolsa aluguel. It would also be helpful to develop a study on the possibilityof landreadjustments schemes as well as the development of an inventorystrategy for public land. World Bank support inthis area has already begun (Box 3). Box 3. Housingand the World Bank in Silo Paulo In 2005, the "Programmatic Sustainable and Equitable Growth - Housing Sector Reform Loan Project" was approvedby the World Bank to support the BrazilianGovernment's efforts to improve access by the poor to betterhousingand servicedserviceable land, while maintainingfiscal discipline. The programaims at (a) developing a soundnationalpolicy, and institutionalframework for housingandurbandevelopment, (b) strengtheningthe housing credit, and savings systems, and provide incentives for the housingfmance marketto expand, (c) designing and implementinga unifiedfederal housingsubsidy systemto address the affordability of housingsolutions for the poor, and(d) reducingthe costs of formalurbanlanddevelopment by strengthening land subdivision and land use legislation, regulations, and real property registries. Furthermore,the programprovides a conceptualframework to help the Governmentmonitor the segments ofthe housingmarket,includingthoserelevant for poorandmiddle-incomefamilies. Inaddition, the World Bankhasbeenworkingcloselywith Cities Alliance. The mainprojectthat emerged from this partnershipbetween the MSP, the Bank, andthe CA was insupport of the municipality'sBairro Legal slum upgradingand land tenure regularizationprogram (2002-2004). The goals of this technical assistance were (a) developingan integratedandparticipatorymethodologyfor intervention, (b) supporting institutional capacity-building and the development of the needed coordination mechanisms, and (c) supportingthe mobilizationofresources from nationalandinternationalfinancial partnersfor the financing o f the proposed interventions. The three outputs o f this partnership were (a) the evaluation of recent housingpoliciesofthe MSP andthe definitionof a clear regularizationandupgradingpolicy for slums, (b) the preparation of the general methodology for the intervention of the program, including mapping and diagnosisof slum settlements,the establishmentof objectives, and the defmition of strategies, and (c) the preparationof three participatoryhousingandurbandevelopmentplans for the districts of Jardim Angela, Brasilbdia, and Cidade Tiradentes, which underpinnedthe regularization efforts there. This technical assistance project was followed by a second one, whose implementationbegan in December 2005, and which focuses on strengtheningthe capacity ofthe MSP HousingDepartmentto designandimplementlow income housingpolicies andprograms. IV.CooperationandPartnerships 26. The MRSP and particularly its core, the Municipality of Si50 Paulo, has not been able to consistently make use of policy and institutional instruments that would guide metropolitan governance and the implementation of basic municipal development policies, plans, and interventions. In addition, constant political changes have signified interruptions to implementation by prior administrations.As a result, private actors have lost trust in sustained and long-term approaches to structural local problems, reinforcing individualist and short-term behavior. A notable exception is the World Bank-financed Guarapiranga Project in which horizontaland vertical investmentsto tacklewater pollution and social exclusionwere undertaken by successive administrations, at both the municipal and the state levels. This happened over a period of eight years, despite changes in administrations and political differences between administrations. 13 27. In the context of fiscal constraint and increasingpublic service demand pressures, coordination with other public agents is crucial. A confusing institutional framework with overlapping responsibilities and the lack of coordination across government levels adds to the difficulties in metropolitanareas. There is a need of coordinationboth vertically (across levels of government: federal, state, municipal) and horizontally (across municipalities), particularly in the education, health, housing, water supply and sanitation (WSS), and transportationsectors, where municipalities play a key role in service provision. PPPs are particularly relevant considering fiscal constraints of the different federative entities, lack of incentives for private sector investments, and a pressing need to invest in infrastructure. The WSS sector provides a good example of these vertical and horizontal challenges. WSS service provision in the MRSP is widely provided by the state water company (SABESP), which is responsible for the macro, metropolitan water supply, and wastewater infrastructure.' However, for a number of years, a group of key MRSP municipal administrationshave been responsible for taking SABESP's bulk water, distributing it, and charging for it at the municipal level - without reimbursing SABESP for the bulk water at the rate that the latter deems appropriate. The same scenario has developed for wastewater, with municipal sewage continuing to flow into rivers while SABESP's wastewater treatment works are underutilized because municipal goverhments cannot agree on how much they should be paying SABESP for the services of collecting sewage and treating it centrally. 28. The land-use/urban informality/environmentalprotectionnexus encountered in the city's mananciaisis one of MRSP's critical development challenges that requires integrated interventionsthrough vertical and horizontalcooperation. There are almost 2 million people, mostly low-income,currently residinginthe MRSP's two main mananciais basins(Guarapiranga and Billings). These informal and slum settlements cause direct pollution of the reservoirs through wastewater and garbage discharge, storm run-off and silting, thus threateningtheir future use as raw water bodies for potable supplies. To tackle this problem, horizontal and vertical government interventions are essential in order to bring together key urban upgrading interventions locally with metropolitan-wide initiatives in wastewater collection and treatment, drainage and solid waste management. The recently-approved Guarapiranga land-use/water pollution control law needs to have its implementation arrangements operationalized to ensure that future land development and urban upgradingare consistent with the sensitive nature of the reservoir basin^.^ World Bank support inthis area begun inthe 1990s and kept evolvingover time (Box 4). 29. The urban transport sector is another area in which cooperation and partnerships are key and where good examples on this can be found. The history of institutional coordination among entities running different components of the urban transportation system is centenarian. Initially, there was a problem of coordinationof public companies within the same mode of transportation. But dispersion of government agencies responsible for overseeing and planning developed over time, leading to tensions between state and municipal agencies. Nowadays, the system is still complex, includingbuses, the subway, and trains beingoperated by public and private agents under a wide variety of contractual arrangements. The state and the municipality of Silo Paulo share the responsibility of the functioning of this system, which is The balance of water supply and demand in MRSP is a critical issue for the city's competitivenessand economic growth. MRSP's extremely low per capita water availability is comparable to that prevailing in the driest areas of the Northeast. Half of the MSP's potable water supply is imported from neighboring river basins, which is contentious given the demands of other largeurban conurbationsvying for the same water. The remaindercomes from headwater-reservoirsystems (manancias)withinthe MRSP itself. 9Law No. 12,233 ofJanuary 16,2006. 14 undertaken by their respective Transport Secretariats. In May 2006, all institutions involved in urban transportation signed an agreement creating the CDTI (Integrated Transport Administration Committee), whose executive board heads the metropolitantransportation system. Although there has been some degree of coordination, this agreement defines the new the CDTI as: (a) a tool to strengthen partnerships between the state and the municipal Transport Secretariat, (b) the aligner o f urban transport planning, administration, and overseeing, (c) the promoter o f efficiency by setting operation standards and investment priorities, and (d) an advocate o f an integrated vision o f passengers' accessibility through unified analysis and tariffs. It avoids creating a separate public entity and establishes the creation o f legal mechanisms that give the CDTI authority for decision making, along with legal definitions to secure investment backups from State and Municipal governments. Box 4. Water and Sanitation and the World Bank inSilo Paulo The World Bank-financed "Water Quality andPollution Control Project" was apioneering US$802 million operation (US$390 million loan)' designed to preserve and improve water quality in densely occupied urban settings insome of Brazil's most important cities, which broke with conventional project approaches by blending water quality and pollution control initiatives with those of social inclusion. Under this umbrella, the US$340 million "Slo Paul0 Water Quality and Pollution Control operation (Programa Guarapiranga)" was designed to assist the government of the state and the municipality of Slo Paulo in setting up institutional capacity to manage the Guarapiranga basin in an environmentally sustainable manner and to improve the quality o f life of residents of slums and illegal settlements in the basin. The lessons learned from its implementation (1992-2000) will be presented in a forthcoming World Bank publication (Sdriekgua Brasil8: PoIuipTo Hidrica de Grandes Centros Urbanos). Since the "Guarapiranga Project" closed, the state of Slo Paulo obtained a PHRD grant from the Japanese Government for the preparation of a follow-up operation ("Programa Mananciais") intended to roll-out vertical and horizontal integrated approaches to water pollution control in all of MRSP's mananciais. As part of this preparation, a study was undertaken into the issue of metropolitan water balance, and its interfaces with water supply and demand, wastewater management, irrigation, drainage, and solid waste management. The study Recursos Hidricos e Saneamento nu Regia0 Metropolitana de Si70 Paulo: Um Desafio do Tamanho da Cidade was publishedin2003 as one ofthe World Bank's Sdrie kgua Brasil. 'Cost and loan figures of the umbrellaoperation include the complementary loans in the states of S8o Paulo, Parank Minas Gerais, and inthe federalgovernment. The MRSP needs constancy of programs and policies. The engagement of the private sector in the MSP's city planning, the reinvention of institutions, and the cooperation through partnershipswith other public agents could help on this continuity. Strategic actions should focus on progressively engaging the key political, economic, and social actors in a consultative process, which could lead to a metropolitan development pact. It is not possible to expect quick results and success from this process, as it will take time for these actors to build consensus. Furthermore, policy coordination between the federal and state levels and within the metropolitan area plays a critical role. Volume I1 o f this report details both the diagnostics and policy recommendations for the two main areas o f this study (i-e., the investment climate and the housing sector, one o f the key areas of service delivery in Siio Paulo). It also brings more in-depth analysis o f the fiscal context and partnerships, two o f the main tools for achieving a sustained growth recovery. 15 REFERENCES CitiesAlliance (2004). "Integrating the poor: UrbanUpgradingand LandTenure - Regularization inthe City of S5oPaulo," December 2004. Glaeser, E.L. (2005a) "Urban colossus: Why is New York America's largest city?" NBER Working Paper Series 11398. Glaeser, E.L. (2005b) "Reinventing Boston:1630-2003." Journal of Economic Geography 5, pp 119-153. Imparato, I.and J. Ruster (2003) Slum Upgrading and Participation: Lessons from Latin America. World Bank Directions in DevelopmentPolicy. L e Blanc, D.and E. Rottmann(2006) "Analysis of HousingProgramsin Szio Paulo." Mimeo. Spink, P., M.A. Texeira. R. 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