Report No. 40036-BR Brazil Minas Gerais ­ World Bank Partnership Building on a Strong Foundation and Leading to Next Steps June 6, 2007 Brazil Country Management Unit Poverty Reduction and Economic Management Unit Latin America and the Caribbean Region Document of the World Bank Table of Contents - 2 - Government Fiscal Year ................................................................................................. Currency Equivalents..................................................................................................... Weights andMeasures.................................................................................................... ---- 6 -- 2 - Abbreviations and Acronyms ..................................................................................... 2 Executive Summary.................................................................................................... 4 - 1. Background and Context ...................................................................................... 1.2 InvestmentClimate inMinas Gerais .............................................................. 1.1Poverty and Social Indicators inMinas Gerais .............................................. -- 12- 13 - 1.3 BriefRecentEconomic History of Minas Gerais........................................... -- 15 - 1.4 The current PAF agreedwith the NationalTreasury (STN) .......................... - 20 - 18 - 1.6 Recent World Bank Relations withMinas Gerais ......................................... 1.5 A BriefReviewofthe PMDI 2003-2020 and the PPAG 2004-2007 .............- 21- 24 - b. Other World Bank Activities........................................................................ a. Development Policy Loan (2006-2007) ....................................................... ---24 - - 2. Plano Mineiro de Desenvolvimento Integrado (PMDI) 2007-2023 ..................... 2.1 Overview ........................................................................................................ -- 25 - 25 - 2.2 Sectoral assessments....................................................................................... - 25 - 27 b. Education Sector Assessment....................................................................... a. Public Sector Management Assessment ....................................................... -- 27 -- c. Health Sector Assessment............................................................................. - 32 - 35 d. Water Sector Assessment ............................................................................. -- 43 - 37 - e. Transport Sector Assessment ........................................................................ -- 51 --- 46 References................................................................................................................ - 53 3. Conclusions and a Way Forward.......................................................................... f.Private Sector DevelopmentAssessment...................................................... - 3 - Abbreviationsand Acronyms BDMG Banco de Desenvolvimento de Minas Minas Gerais DevelopmentBank Gerais CODESUL Conselho de Desenvolvimento do Sul South RegionDevelopment Council DCL Divida Consolidada Liquida Net Consolidated Debt DER DepartamentosEstaduais de Rodovias State-Level Departments for Highways DPL EmprCstimo de Politicas de Development Policy Loan Desenvolvimento EB Educaqiio Bisica Basic Education EF Educaqiio Fundamental Fundamental Education EM Educaqiio MCdia Intermediate Education FAPEMIG Fundaqiio de Amparo B Pesquisade Minas StateFoundationfor Research Gerais FWEMIG Fundaqiio Hospitalar do Estado de Minas StateHospitalFoundation Gerais FIAS Serviqos de Assessoramentopara Foreign Investment Advisory Service Investimentos Financeiros FRL L e i de ResponsabilidadeFiscal Fiscal Responsibility Law GEMG Govern0 de Estado de Minas Gerais State Government of Minas Gerais G E M S Gestiio EstratCgicados Recursos e Aqks Strategic Management of Resourcesand do Estado Actions of the State GDP Produto Interno Bruto Gross Domestic Product HDI hdice de Desenvolvimento Humano Human DevelopmentIndex IADB Banco Interamericano de Desenvolvimento Inter-American DevelopmentBank IBGE InstitutoBrasileiro de Geografia e Brazilian Institute of Geography and Estatistica Statistics IFC Corporaqiio Financeira Intemacional InternationalFinancialCorporation IETS Institutode Estudos do Trabalhoe Institute of Labor and Society Studies Sociedade PEA Institutode PesquisaEcon8micaAplicada Institute of Applied Economic Research MG Minas Gerais State of Minas Gerais MWH Mega Watts / Hora Mega Watts per hour PAF Programa de Ajuste Fiscal Fiscal Adjustment Program PE Projetos Estruturadores Structural Projects - 4 - PMDI Plano Mineiro de Desenvolvimento Long Term DevelopmentPlan Integrado PNAFE Programa Nacional de Apoio A National Program of Support to Fiscal Administraqio Fiscaldos Estados Management o f Brazilian States Brasileiros PPAG Plano Plurianual do Estado State Multi-Year Plan PPP Parcerias Publico-Privadas Public-Private Partnerships PROHOS Programa de Hospitais Hospital Strengthening and Quality Improvement PROSAM Programa de Saneamento Ambiental Minas Gerais Water Quality and Pollution Control Project R A S Acordos de Resultados ResultAgreements R A S Regionalizaqio do Atendimento de Saude Health Care Regionalization RCL Receita Corrente Liquida Net Current Revenue R&D Pesquisae Desenvolvimento Researchand Development RMBH Regiio Metropolitanade Belo Horizonte Belo Horizonte Metropolitan Region SA Assemblbia Legislativa do Estado State Assembly SEC Saude em Casa Health at Home SEDES SecretariaEstadual de Desenvolvimento State Secretariat of Economic Econdmico Development SEE SecretariaEstadual de Educaqio State Secretariat of Education SEPLAG SecretariaEstadual de Planejamento e State Secretariat of Planningand Gestio Management SES SecretariaEstadual de Saude State Secretariat of Health SRES Superintendhcias Regionais Regional Superintendents SECTES SecretariaEstadual de CiBncia e State Secretariat of Science and Tecnologia Technology SWAP Enfoque Setorial Amplo Sector Wide Approach S T N Secretariado Tesouro Nacional Secretariat o f the National Treasury TFP Produtividade Total dos fatores Total Factor Productivity wss Serviqos de Agua e Saneamento Water and Sanitation Services Minas Gerais -World Bank Partnership:Buildingon a Strong Foundationand Leadingto Next Steps Executive Summary The purposeof preparing this Minas Gerais-World Bank Partnership documentwas to provide a vehicle for strengtheningthis bilateraldialogue to continue Bank support for the Minas developmentprogramand to develop the foundations that could support a possible future Bank operation. This vehicle ledto a series o f contacts andvisits where senior officials andtechnical staff had opportunities to exchange ideas, without linking those interactions directly to a specific Bank product (lending or technical assistance). This allowed a freer form o f communicationand focused on long-term development issues, policies, and programs under development by the Minas authorities. This document points the direction for next steps and emphasizesthe elementsand principles of a possiblefollow-up operation to the Development PolicyLoan (DPL) that completed disbursementinApril 2007, recognizing that it was premature to discuss the specifics of such an operation during this exercise. For example, a follow-up operation would likely include a strong technical assistance lendingcomponent for focus sectors. More focus on programs, projects, and related indicators would be central to such an operation and fit closely with the Minas Gerais development plan. Giventhe Minas Gerais spotlight on applying their public sector reforms more effectively inthe sectors, the core sectoral work ina follow-up operation would cover public sector management and public financial management reforms. One key principle would aim to complete the next generation o f public sector management challenges, spreading these advances more deeply insectoral work, with a view to improving public sector services and enhancing economic growth. These elementsand principleswould provide the incentivesand motivations for the choice of focus sectors under a possible Bank operation with Minas Gerais. The sectors covered inthis Partnership document represent areas where the Minas Gerais authorities have concentrated attentionandresources, and where the Bank has a comparative advantage to contribute to the authorities' objectives, policies, and programs. However, becausethis document was part of an initial exercise inthe dialogue process, not all sectors are covered, and even for the sectors that are included, full informationhas not yet beenassessed. Lead actively by the Governor and Deputy Governor, the Minas authorities have clearly identified enhancingthe living conditionsof citizensin the state as the overall priority. They have set an equally clear objective o fmaking Minas Gerais the best place to live inBrazil and have linked this objective to the concrete and measurable human development indicators. Minas has made progress inrecent years to enhance its economic growth andjob creation, as well as to improve the quality o fpublic services delivered or supported by the state. As - 6 - a result o fthese efforts, inrecent years, Minas has generally grown faster than the national average and has made substantial progress with the human development and other poverty and social indicators. 5. Nevertheless,the Minas Gerais targets are ambitious and by international standards there is ample room for additional progress.Not only are real economic growth rates and improvements inpoverty indicators modest, but the overall standard o f living for average families inMinas Gerais could be significantly improved. The main impedimentsto such improvements stem from both national and local factors. Chief among the local factors remain further improvements to the businessclimate and to public sector management, as well as continued robust fiscal policy to stay on a sustainable path. 6. The Minas Gerais authorities have carefully diagnosed this situation and are well on track to addressingthese main issues drawing on their experience and within a context of fiscal requirementsagreed with the federal government. Comparedwith the situation inthe late 1990s and earlier this decade, Minas has made substantial progress. Moreover, based on the experience with the long term strategic development plan (Plano Mineiro de Desenvolvimento Integrado 2003-2020 or PMDI 2003-2020), that emphasized public sector management reforms (the so-called Choque de Gestdo (Management Shock), the authorities have launched a second generation o f the Choque de Gestdo intheir PMDI2007-2023. The key cross-cutting pillars o f this strategy are improving the quality o f the fiscal adjustment inaddition to public sector management reforms. On fiscal policy adjustment, the Minas authorities have worked closely with the federal government to comply with federal requirements outlined infederal debt restructuringoperations with the state, the Fiscal Responsibility Law (2000), and associated fiscal adjustment programs agreed with the National Treasury. 7. ThePMDI2007-2023 places Minas Gerais in the broader Braziliancontext, but takes the benign international context as given. It contains four disparate scenarios, all based on steady world economic growth o f about 3.5-4.5 percent per annum. Along one spectrum the alternatives essentially juxtapose strong economic growth inBrazilbased on measuresto encourage social inclusion and the rationaluse o fnatural resources, on one hand, withmore intermittent measures and unevenprogress at the national level. Along another axis, the scenarios contrast progress inMinas Gerais with reforms to become more creative, competitive, and inclusive, with the alternative o f a conservative, inefficient and exclusive set o f policies. The most likely scenario i s the more progressive Minas set o fpolicies with slow but steady economic growth inBrazil. This i s consistent with the PMDI2007-2023 scenario labeled "Overcoming Adversities". However, the context for the PMDI 2007-2023 does not consider alternative international environments that may be less benign than current circumstances. - 7 - 8. Given this context,fiscalpolicies and publicsector reformsinMinasGerais couldbe expected to yield continuedstronger than nationalaverage economic growth and progress in creatingjobs. Fiscal analysis shows that the adjustment pursuedsince 2003 has beensuccessful inreversingfiscal trends and placing Minas on a sustainable path. Key to the adjustment was current cost containment and improvedrevenuecollection. The improved fiscal outlook has contributed to an improved debt profile, leading to a virtuous cycle. This has also provided room for increase investmentby the state and the reduced risk perceived bythe private sector is encouraging private investment, further enhancing growth andjob creationprospects. 9. The focus of this Partnership document is mainly on the PMDI2007-2023 long-termdevelopmentstrategywith an emphasis on broadeningreforms across sectors (rather than concentrating on the central Secretariats, which was the initial focus o fthe previous PMDI). World Bank staff interacted with the Minas authorities intensivelyregardingpublic sector management, education, health, water, transport, and private sector development issues. Each sector assessment aims to identify: the main issues facing the sector; the government's programs and projects designed to address these issues; potential indicators of relevance for these programs and projects; suggestions for improvements; and areas where further World Bank collaboration could be useful. 10. In summary, sectoralassessmentshighlightedthe followingpoints: 11. On publicsector managementthere were significant advances duringthe first Choque de GestGo,but these advances were not uniform. These advances represent good internationalpractice compared with OECD experience, and best practice inBrazil. Considerable progress was made inefforts to manage civil servants, to identify key results and to streamline bothfiscal and management practices to meet these objectives. Great gains were also made intechnical systems to support taxation, expenditureandprocurement. Most activities are beingcarried forward insecond generation Choque de Gestdo with a stronger sectoral focus, improvedperformance indicators, and better evaluation methods, aiming to spread this new culture o f public sector performance across sectors and down to more technical levels withinthose sectors. The structural project specifically devoted to improved public sector management appropriately focuses on improving performance evaluationand monetary rewards mechanisms, which should have ripple effects across the sectors. However, the link betweendesired outcomes and specific sectoral programs could benefit from improvementsto the process for evaluating individual staff and the system o frewards for performance. On procurement, while Minas i s at the forefront o f innovation, which has already generated significant fiscal saving, additional Bank technical assistance could support the implementationo f a procurement web portal, further studies on strategic sourcing, a review o f procurement business processes, e-learning, development o f an asset management system, and analytical work on the e- procurement system. - 8 - 12. On education, the P M D I2007-2023 appropriately seeks to tackle the twin challenge o f improving educational attainment with a simultaneous betterment o f educational quality. Lookingforward, the Bank would tend to emphasize three recommendations inthe education sector o fthe PMDI: 1) strengtheningthe detailed planning and processes o f discussion to link broad and long-term goals with concrete, detailed, and short-term steps; 2) findingoutside support for the Education Secretariat (SEE)to improve management,; and 3) that two initiatives (to transform the SEE organizational culture, and strengthening performance evaluation and accreditationo f SEE employees) should receive the highest priority. 13. On health, the three structural reform programs (i) Care Regionalization Health (RAS), (i) Hospital Strengtheningand Quality Improvement (PROHOSP); and (iii) atHome(SEC)alreadyunderwayintheMGhealthsectorarecutting Health edge within the Brazilian context and have the greatest potential to improve the quality o f spendingas well as health outcomes. The progress with these programs thus far has ledto a numbero fnewsteps anddirections that couldbe elaborated further inthe Minas Gerais-WorldBank Partnership inthe health-related sector, especially: development of systematic monitoring, focus on impact evaluation, contract management enforcement, revisedinstitutional arrangements for public foundations dealing with drugs and with blood derivatives, and integration o fthe FHEMIC state hospitals foundation into the R A S and PROHOSP reforms. 14. Onwater, the main issues inMinas Gerais include: 1) access to water and sanitation services (WSS) inthe poorer northernpart o f the state; 2) the challenge o f implementingthe federal WSS law covering the institutional and regulatory framework; 3) WSS efficiency and uniform salaries and prices; 4) implementation o fthe water resource management (WRM) framework, especially regarding environmental licensing, planning for droughts and floods, and regulation o f groundwater; 5) the lack o f wastewater treatment; and 6) urban drainage and pollution control. Underthe PMDI 2003-2020a structural project on health contributedto far-reaching legal, institutional, and administrative reforms to strengthenthe state water company (COPASA). The PMDI 2007-2323 continues thishealthproject andadds five other water sector related structuralprojects withinthree results areas: the regional development inthe north, environmental quality, and poverty reduction. A major challenge inthe regional development area will be the establishment and operational implementation o f a COPASA subsidiary to provide water services. Thus, future collaboration with the World Bank could explore possible financial support to COPASA, as well as technical support to help designand implementthe subsidiary. Other possible technical assistancecould cover water sector planning, regulationo f WSS,public-private partnerships inWSS, support to municipalities on WSS and WRM issues, assistance on flood control, and strengtheninginformation systems and public access to information on WSS and WRM matters. - 9 - 15. On transport, the main transport sector issues inMinas Gerais are, insubstance, common to those encountered inother states and at the federal level: 1) slow progress on the decentralization and delegation discussions betweenthe Federal Government and the states; 2) coping with the consequences o f inadequate funding for road infrastructure(andespecially investmentsfor rehabilitation) over the 1995-2004 period; and 3) the needto strengthen public sector capacity. Under the first generation Choque de Gestfio Minas has achieved results inthe transport sector that, on average, go well beyond what other states or the federal government have been able to do. The objective for the second generation Choque de GestZo i s to increase the efficiency o f priority government programs. Government priorities inthe transport sector are adequate and focus on physical infrastructure maintenance and rehabilitation, with selective and localized infrastructure expansion; and a gradual institutional shift toward result-based management, increased involvement o fthe private sector, and fostering o f multimodality. Interms o fpossible future collaboration with the World Bank in the transport sector, the Partnership couldexplore possible financial support to the state road rehabilitation and maintenance program, as well as some options for technical support covering institutional strengthening,improved efficiency o f expendituresunderpublicly financed programs inthe sector, and development of newmodels ofpartnershipwith private. 16. On private sector development, the Minas Gerais authorities are convincedthat improving the investment climate inthe state i s the best way to establish the conditions for long term growth and continuous job creation. Information on the analytical determinant o f economic growth inMinas Gerais are scarce, so using benchmarking, such as results from the World Bank Group's Doing Business in Brazil provides useful insights. Inthis context Minas i s doing well, ranked overall 3'd out o f 13 locations surveyed, but two specific areas stand out for further improvement: paying taxes and enforcing contracts. Eleven o fthe 57 structural projects included inthe PMDI 2007-2023 are relatedto strengtheningprivate sector development and the assessmentfocused on those related to innovation and technology, simplification o f business processes (Descomplicar), and improving tax efficiency. These projects aim at improving total factor productivity inMinas and enhancing performance inthe Doing Business indicators mentioned above. Thus, the Minas Gerais-World Bank Partnership could focus on these areas, as well as on strengthened analysis regarding factor productivity growth processes. 17. Summaries of these assessmentsalso reveal a series of cross-cuttingthemes, in addition to individual sectoralfindings. A naturalconsequence ofthe PMDI i s the continued cross-cutting emphasis on improved public sector management through the second generation Choque de Gestfio. However, one common theme across most ofthe sectoral assessments was the needto filter the principles and objectives o fthe second generation Choque de Gestfio to levels well below senior management inline Secretariats. The ownership o f the P M D I and the structural projects i s muchweaker the closer one gets to the public service provider, who has the most direct contact with the public service recipient. A great deal more - 10- outreach, training, and capacity buildingi s neededto make the P M D I 2007-2023 successful. Similarly, the challenge o f linking indicators with desiredoutcomes andresults i s central to the next steps o fthe PMDI development. Inmost sectors these linkages seem weak and finding or developing such indicators and making them usefulto project managers remains a major challenge. Equally interesting are the linkages across sectors built into the P M D I structural projects. O f particular note, based on the sectoral assessments are the linkages between measuresto encourage private sector development and the needto involve the private sector inother sectoral work, especially transportation. Another important linkage recognizedinthe PMDIwas the important role o f the transport network to develop and foment regional approaches to health care. 18. In short, the sectoralassessments are at the heart of the Partnership dialogue and could be used as the foundation for future developmentof the relationship, especially in areas of technicalassistance or future Bank operations with Minas Gerais. While it would be premature to discuss the modalities o f any future operations, it i s worth noting that a follow-up Development Policy Loan (DPL) or an investmentloan using a Sector-Wide Approach could be considered. The 2006 DPL to Minas Gerais focused on strengtheningfiscal and public sector management, and private sector development. A follow-up operation should expand this focus and accommodate a broader sectoral focus. Regardless of the instrument, the policy and technical dialogue, World Bank provisiono ftechnical assistance, international networking, and knowledge sharingevents inwhich Minas would take part should continue. The scale and speedby which these forms of support take place may dependin part on concurrent financial support from the Bank; however, the commitment and channel o f communications has beensolidified through the process underlyingthis Partnership document. -11- 7. Background and Context 19. MinasGerais(Minas) is one of Brazil's largestand most economically importantstates. The state ofMinas Gerais has the country's second largest population (19.5 millionpeople, equivalent to 10.5 percent o f Brazil's population in2006), about halfthat of S2o Paul0 (41.O million).Minas is the fourth largest state inBrazil, covering 586,553 km2or 7 percent o fthe country. The state's economy is the third largest inBrazil. In2004 the Gross Domestic Product (GDP) o f Minas Gerais was R$166.5 billion (US$60 billion), or 9.4 percent o f national GDP, smaller than S2o Paulo (30.9 percent) and Rio de Janeiro (12.2 percent). Thus, the economyofMinas Gerais is slightly smaller than Peru. 20. The economic structure of Minas reflectsits historicalrootsin mining,with strengths inindustrial chemicals, ironand steel, agro-industry, and more recently inelectronic goods. The statealso has a strong agricultural base. Inthe standard breakdownof state income calculated by the Brazilian Geographical and Statistical Institute(IBGE), Minas has slightly higher concentrations than the national average inboth industryandagriculture, but lower inservices 21 Minas Gerais is sometimes calleda microcosm of Brazil. Its per capita GDP i s close to Brazil's average (ranked 12 out o f 27 in2004).' Moreover, Minas contains deep regional disparities paralleling those at the national level. For example, Minas has a poor Northeastern region with similar conditions o f extreme poverty, subsistence agriculture, semi-aridclimate and intermittent drought experienced inthe Brazilian Northeast, the poorest region inthe country. At the other extreme, the state contains some o f Brazil's most dynamic industrial areas (for example, the Mineiro Mineiro andthe metropolitan area o f Belo Horizonte, the state's capital). Minas has 853 municipalities, or over 15 percent o fthe 5,560 municipalities inBrazil. 1.IPolitical Environment in Minas Gerais 22. Successfulpublicpolicy reformshaveleadto a stable politicalenvironment. After years o f economic difficulties experienced by Minas Gerais (described below), in2002 Governor ACcio Neves was elected to a first four-year term. Governor Neves i s the grandson o f Brazil's first democratically elected President following the military dictatorship. H e i s a leading member o f the Social Democratic Party (PSDB) and has an immensely strong following inMinas Gerais. Governor Neves was re-elected to a second term (2007-2010) by an overwhelmingmajority (roughly 80 percent o fthe vote). His current Deputy Governor, Anastasia, served as Secretary o f Planning during Governor Neves' first administration. Together, they have beenthe driving force behindthe Minas Gerais long-term development plan (Plano Mineiro de Desenvolvimento ' Populationgrowth inMinas also has been close to the national average. - 12- Integrado2003-2020 or PMDI2003-2020) andthe so-called Choquede Gestfio (Management Shock), to improve public sector management. These efforts have contributedto the Minas Gerais economic recovery. Moreover, the success of these reforms also has beenone explanation for the relatively small political opposition inMinas Gerais, as well as a strong outlook for continuity with these policies. 1.2 Poverty and Social Indicators in Minas Gerais 23. Poverty in Minas also broadly reflectsnational levels and poverty and social indicators have been improving. Usinga national food-based poverty line for household per-capita income o f about R$132 (US$56) per month in2005, Minas has a poverty headcount ratio o f about 19percent o fthe population (from 25 percent in2002), implyinga poverty headcount of about 3.7 million. Usinga 2005 extremepoverty line (about halfthe poverty line, or R$66 -US$28), Minas has an extremepoverty headcount ratio o f about 5 percent (roughly 1million persons), compared with 8 percent in2002. As shown inthe charts inFigure 1, Minas has third lowest poverty headcount rate among the states, and a relatively highper capita family income. - 1 3 - Indicator Minas Gerais Rio de Janeiro SBo Paulo RioGrande do Sul .~~ Population(thousands)* 18,999 15,204 39,825 10,726 GDP (R$bi)* 167 223 547 143 with access to network*** Water: % householdwith 95 98 99 97 access to network*** Electricity: % household 98 100 100 99 with access to network*** Garbage: % household 85 98 98 88 with access to network*** 24. The Human Development Indicator (HDI) of Minas Gerais in 2000 was higher than the Brazilian average and Minas was gthamong the 27 states (withanHDIo f 0.773 for Minas, compared with 0.766 for Brazil). However, performance varies widely at the municipal level. Outside the Amazon region, Minas Gerais has the highest dispersion o f municipal welfare indicators inBrazil. Setubinha (inthe Vale do Mucuri) hadthe lowest HDIinMinas in2000 (0.45), reflecting 23 percent illiteracy (ages 18-24) and infant mortality o f 61 (one-year definition, per 1000 live births). At the other end o fthe spectrum Belo Horizonte has an HDIo f 0.84 with near complete literacy (ages 18-24) and infant mortality o f 27. Similar to the national pattern, 375 municipalities out o f 853 Minas Gerais' municipalities (or 44 percent) are included among the 40 percent o f Brazilian municipalities with the highestHDIs, while 222 Minas Gerais' municipalities (or 26 percent) are included among the 40 percent Brazilian municipalities with the lowest HDIs.Inother words, Minas Gerais has a higherproportion o f municipalities with highHDIs and a much lower proportionwith low HDIs relative to the nation. Moreover, indicators regarding access to water and - 14- sanitation as well as education (child enrolments) are above national averages, and infant mortality rates are low compared with other states, as illustratedby Figure 1. Figure 1 Per EnpitaPmiliy Inmmc, aW5 (In Red.) Infanl Mondity(per thouemdborn) ZMO , 70 3 Ill w . 50 . L'-ena1I m l lI 604 N e t Enmhrnt Rite (childrrnfmm 7 to 14). ZWS I Sanitation:household.d t h ~CCCLII to thegencrd ncwrkmnnestion,aWS I I W'stcr:ahare of household.with riceeia to the generalnrwrk connection,ZOOS IW 90. 80 70 60 SO UI 1.3 Investment Climate in Minas Gerais 25. The Investment Climate Survey conductedby the Bank in 2003 reveals that Minas Gerais is representative of Brazil as a whole. Business respondents to the survey rankedthe following as the five most serious constraints to operating a business inMinas Gerais: tax rates; the cost o f capital; macroeconomic uncertainty; regulatory uncertainty; and corruption. Clearly most of the constraints identifiedby the business sector inMinas are outcomes of policies at the federal level, over which the state government has little or no control. These - 15- refer to most o fthe tax burden(Brazilian public sector taxes represented approximately 36 percent o f GDP in2006, usingthe revisedGDP data), the cost o f capital (affected by national monetary policy and financial sector regulations), macroeconomic uncertainty, and some regulatory uncertainty. The portion that remains under the state's control includes measures to re-establish Minas' fiscal stability, control corruption, and reduce regulatory uncertainty inpolicies and services that are directly administered by the state itself. 26. Minas Gerais is the fifth statewith the highesttime tax- which is an overall measure of the regulatory burden -with firms' managers spendingaround 8.5% o f their time indealing with Government regulations (Figures 2 and 3). However, registration times for new firms are relatively low inMinas Gerais. The time tax measuresthe proportion of firms' senior management time indealing with government regulations such as filing forms, inspections, permits, etc. Firms inthe Northeastern states ofParaiba, Bahiaand Ceartt spendthe lowest ondealing with regulations, ranging from 2.4 to about 7 percent of senior managers' time. The results for Minas seem to be linkedto the low levels o f investmentinIT technologies inthe state, at a time when other states were investing. Interms o f registrationtimes, Minas performs quite well (fourth out o f 12 states) a result that was confirmed by the Doing Business inBrazil report. Amazonas 10.3 Maranhao I 9.2 Santa Catarina 9.0 Mato Grosso 1 8.6 Minas Gerais 8.5 Goias 1 8.3 Parana ' 18.0 Rio Grande do SUI :7.9 Sao Paulo 7.9 Ceara 6.9 : Bahia 5.7 Source: Brazil Investment Climate Survey - 16- Figure3. RegistrationTimeswith the Junta Comercialfor FirmsWhich Registered For the FirstTime in 2000 or Later,By State Paraiba Ceara Mato Grosso Minas Gerais Bahia Goias Santa Catarina Rio de Janeiro Rio Grande do SUI Parana Sao Paulo Amazonas 0 10 20 30 40 50 60 days 0Waitingtime without extrapayment I time with extrapayment Waiting Source: Brazil InvestmentClimateSurvey 27. On the businessclimate,Minas Gerais performswell comparedto other Brazilianstates. Among the 13 Brazilian state capitals surveyedby the Doing Business inBrazil (2006), Belo Horizonte i s placed third inthe rank on the ease o f doing business inthe country (the first two are Brasilia and Manaus (Table 2).2 There are two main factors behindthis good performance for Belo Horizonte: starting a businessand getting credit. InBelo Horizonte it takes 19 days to open a business (a process that requires 10procedures) and 2 days to establish collateral at a cost o f 0.85 percent o fthe loan value. These were the shortest periods for these indicators among the 13 state capitals surveyed. 'While the DoingBusinessmethodologyis valueableto comparelegaland accountingrules, it relies on official and formaldocuments,rather than actualpractice,which may differ markedly. - 17- Table 2: Where i s it easiest to do businessinBrazil? 1. Brasilia (Federal District) (easiest) 8. Rio de Janeiro (Rio de Janeiro) 2. Manaus (Amazonas) 9. Florian6polis (Santa Catarina) 3. Belo Horizonte (Minas Gerais) 10. Salvador (Bahia) 4. Porto Velho (RondBnia) 11. Slo Paulo (Slo Paulo) 5. Slo Luis (Maranhlo) 12. Cuiabh (Mato Grosso) 6. Porto Alegre (Rio Grande do Sul) 13, Fortaleza (Cearh) (most difficult) 7. Campo Grande (Mato Grosso do Sul) Source: World Bank, Doing Businessdatabase. 1.4 Brief Recent Economic History of Minas Gerais 28. Economic growth in Minas Gerais laggedbehind the national average for Brazil at a critical point inits economic history. During 1995-1999 Brazil grew at an annual average real rate o f 2.6 percent, while Minas grew by 2.9 percent. However, during 1999-2003 national GDP growth was 1.8 percent per annum, whereas Minas GDP grew by only 0.7 percent per year; thus, Minas fell behind the national average duringthat period. 29. The Minas Gerais state governmentemerged from the 1990s facing a difficult fiscal situation. The combination o f lax fiscal policy adopted by the state, the economic stagnation and the tight monetary policy at the national level usedfor stabilization purposes duringthe period 1995-98, ledto an unsustainable path for the state's fiscal accounts. In 1997 and 1998 this culminated ina bail-out operation from the federal government and a subsequentdebt renegotiation agreement with the National Treasury (STN).3 However, these measures were insufficient to cope with the continuedpoor revenueperformance, increasing current expenditure,and sizable debt service owed to the National Treasury ( S W . 30. In 1999, Governor Itamar Franco declared a debt moratorium and proposed a default on Minas Gerais debt owed to the federal government,which was soon followed by an economic crisis in Brazil and further fiscal imbalances in Minas. The debt moratorium declaration threatened to unravel the adherence by Minas Gerais and the rest o fthe Brazilian states to fiscal discipline and to respect the DebtRefinancingAgreementssignedin 1997.Internationalmarkets reacted adversely to the debt moratorium declaration. At the same time international markets experienced a series o f shocks. The exchange rate depreciated and the Brazilian economy slowed. Eventhough Minas Gerais also announced its own fiscal adjustment in 1999,aggravated by the international context the Minas Gerais fiscal adjustment effort was insufficient to curb the increasingtrend inits The 1997 refinancing agreement between the federal government and 25 state governments was conditioned on the adoption o f Fiscal Adjustment Programs, coordinated by the National Treasury Secretariat. The program had targets on indebtedness, primary results, personnel expenditures, revenues, investments and privatization programs. - 1 8 - indebtedness.Continued slippages inthe control o fprimary expenditure worsened fiscal balances during 2001-02. 31. At the nationallevel,the Braziliangovernmentreshapedits fiscalrelations with the states. Under the 1998 debt renegotiation agreement, states agreed to annually contracted Fiscal Adjustment Programs (PAFs) covering a rollingthree- year period signedwith the National Treasury Secretariat (STN). In2000, the government passed the Fiscal Responsibility Law (LRF), setting targets on fiscal variables. For example, under the LRF a target ceiling for state indebtedness(net consolidated debt (DCL) to net current revenue (RCL)) was set at 200 percent by the year 2015. Inaddition, three other LRFceiling targets includedinterest payments and amortization (11.5 percent o f RCL), personnel expenditure (60 percent o f RCL), and credit operations (16 percent o f RCL). To access credit, states would need to be below these ceilings. 32. In 2003, a new MinasGerais administrationlauncheda strongfiscal adjustmenteffort to promotea turnaroundinthe publicsector accounts, improvepublic sector managementand revitalizethe privatesector. Under a program calledthe Choque de GestLio (Management Shock), the state government definedmeasures directedto curb the increasing trends inexpenditurethrough tight controls onpersonnel and operating costs. 33. The results of this adjustmentwere immediateand impressiveduringthe initialyears of the adjustment. Outcomes included: 1) the primary surplus increased from 3 percent o fRCL in2002 to 7.7 percent in2003; 2) the current fiscal balance increased from -5 percent o f RCL 2002 to 3 percent in2003; and 3) the nominal deficit was reduced from 10percent o fRCL in2002 to 6 percent in 2003. In2004, the recovery ineconomic activity and improvedefficiency o ftax collection contributedto consolidate the fiscal adjustment. The state government primarysurplus rose to 15.8 percent o fRCL, current fiscal saving increasedto 14.3 percent of RCL, and, for the first time inmore than a decade, the state generateda positive nominal balance o f 0.7 percent o f RCL. 34. The fiscaladjustment and Choque de Gesth implementedby the Minas Gerais governmentledto full compliance under the PAF agreedwith STN and all the requirementsestablished under the LRF.The sound fiscal performance and improved economic conditions have ledto a drop inMinas Gerais state indebtedness.The net consolidated debt (DCL) to RCL fell from 278 percent at the end o f 2002 to 181percent in2006. As a result, the state i s below the LRFrequirementof 200 percent. Dueto this debt reduction, interest payments and amortization fell from 14.6 percent o f RCL in2002 to 11percent in2006 (below the 11.5 percent LRF ceiling). Personnel expenditurefell from 66 percent o f RCL in2002 to 50 percent in2006 (below the 60 percent LRF ceiling). In addition to the LRF requirements,in2005 Minas achieved all o f its fiscal targets under the 2004-06 PAF agreedwith STN (see the next section). Therefore, the LRFrestrictions, bythemselves,arenot bindingconstraints for potential Bank lendingoperations to Minas Gerais. - 19- 1.5 The current PAF agreed with the National Treasury (STN) 35. Under Law 9496 of September 1997, MinasGerais subscribedinApril 1998 to a contractgoverningthe refinancingof its debtwith the federal g~vernment.~ Inaccordance withthe contract terms, the value o fthe operation was R$11.9 billion or 16 percent o f state GDP. Inexchange for the rescue package, Minas Gerais (likemost states) committed to comply with fiscal targets and structural reformprograms throughrollingthree-year Fiscal Adjustment Program (PAFs). 36. The targets establishedin a PAF are similar to the FiscalResponsibilityLaw requirements.Besidesthe personnel and indebtednessindicators, a PAF comprises targets for the primary surplus, own revenue collection, and investment expenditure.Inadditionstructural reforms are includedandmay encompass privatization programs, social security reforms, public sector reforms, etc. The PAFs are reviewedand renewedannuallyby the National Treasury Secretariat (STN) inconjunction with the state authorities. 37. Minas Geraishas completedthe fifth review under the DebtRenegotiation Contractof 1998 and since 2003 has been meetingmost of the targets set in the PAFs. The target on investmentexpenditureto net real revenue has been missedconsistently, but has shown a trendtowardmeetingthe target and has obtained a waiver from S T N during each review. Table 2 shows the targets for the period 2006-2008 inthe current PAF agreed with the S T N inMay 2006 andthe outcomes related to the targets definedinpreviousPAFs for 2004-06 and 2005- 2007. The next review, scheduledfor May 2007, showed that Minas met all but one target (on investment)again this year. 4Fromthe late 1980sto 199Os,the federalgovernment restructuredsub-nationaldebt three times: in 1989, the federal governmentassumedpart ofthe states' externaldebt, whichtotaled 2 percentof GDP; in 1993, the federal governmentrefinancedthe state and municipal debt with federal financial agencies, an amount equivalent to 7.2 percentof GDP; finally, in 1997,the federal governmentrestructuredthe states' bonded debt, anoperationamountingto 11.5 percentof GDP.Onlytwo states (Tocantinsand Amapii) didnot have any bondeddebt, and hence did not participate inthe refinancingagreements. - 20 - Own Revenue Collection (R$ bi) (a) * accomplished; (n.a) not accomplished Preliminary information. 1.6 Fiscal and Growth Analysis 38. As noted above, Minas Gerais has undertaken a strong fiscal adjustment since 2003, with a view to obtaining fiscal sustainability, reversing the trend in previousyears. The fiscal measuresthat stand out were the control of spending, especially on personnel and operating costs, and actions to improve the efficiency to collect taxes. The early stages o f this were accomplished duringa period o f economic stagnation, when total revenuewas declining, puttingthe main burdenon expenditurecontrol. However, with a recovery inthe Brazilian economy and inMinas beginningin2004, the reforms were consolidated and more o f the impact occurred through the revenuemeasures. Revenue increase by about 30 percent in2004 compared with the previous year. As a result since 2003, personnel costs have beenfalling as a share o f real net current revenue, own revenuehas beenincreasing, investmentas a share o freal net current revenuehas beenrising, fiscal balances have shiftedfrom deficits to surpluses, and debt as a share o f real net current revenue has declined. Inaddition, overall economic growth inthe Brazilian economy, combined with price stability, strong exports (even inthe face o f an appreciating Real vis-a-vis the US dollar), has provided a I conducive international environment for this recovery. By 2006 the fiscal situation had become more comfortable and the state was able to generate saving, which has allowed the state to increase investmentby over 3 times the level attained in2003. This public investmenti s contributing to faster economic growth andjob creation. - 2 1- 39. The fiscal adjustment has been successful in producing a virtuous circle of improved fiscal and debt conditions, putting Minas Gerais on a sustainable path and encouragingeconomic growth. As noted above, the fiscal adjustment has ledto significant reductions inthe state's net debt position. Consolidated net debt has fallen from 278 percent o fnet current revenueto 181percent by the end o f 2006. This improved debt situation has contributed further to improve the fiscal situation, by lowering requiredinterest and amortization payments. Also important, the reduced debt and strengthenedfiscal position has reduced risk, as perceived by capital markets, and i s encouraging private sector investment. 40. To continue down this growth path, fiscal sustainability should continue to be pursued. Projection exercises conducted by Valadares and Blanco (2006) for the period 2007-2014 show a favorable pathfor most fiscal and financial indicators, suggestingthat Minas could significantly reduce its debt further. Nevertheless, sensitivity analysis reveals that the decline indebt would depend mainly on continued efficiency gains inthe collection o f taxes and rigorous control o f current spending.Moreover, the results dependeven more on per capita economic growth, inpart because tax collection tends to rise with economic growth, but not with population growth; whereas population growth tends to put upward pressure on current spending. To the extent that the government can generate overall fiscal surpluses, it will accumulate net financial assets. In contrast, the use o f such financial assets to finance additional primary spending would tend to reduce the fiscal sustainability that has beenachieved inthe last four years. 1.7 A Brief Review of the PMDI 2003-2020 and the PPAG 2004-2007 41. In 2003 the state governmentinitiated a wide-ranging and comprehensive reformprogram that is one of the best examples of state-level managementin Brazil, and in many ways an international benchmark. The government's overall objective was to improve the state's human development index (HDI) in order "to make Minas the best Brazilian state [inwhich] to live". This strategy comprised three dimensions to: 1) reorganize and modernize the state's public administration; 2) promote sustainable social and economic development; and 3) reinvigorate and extend Minas Gerais policies beyond its borders, inBrazil and overseas. These dimensions were articulated indetail intheir long-term strategy document, the called the Mineiro Integrated Development Plan (Plano Mineiro de Desenvolvimento Integrado 2003-2020 or PMDI 2003-2020). This PMDI 2003- 2020 delineated 10 main objectives which inturn were to be achieved through the implementation o f 31 structural projects 5. These strategic options, main The "structural projects" were: (1) Crime Reduction, (2) Radial Transport Corridors, (3) Logistics in the Mineiro Mineiro, (4) Paved Access Roads, (5) Basic Sanitation, (6) Natural Gas Development, (7) Constructiono fthe New GovernmentAdministrative Center, (8) Renovationofthe PraGada Liberdade(the central historic square in Belo Horizonte), (9) "Choque de GestGo, " or "management shock," (10) Modernization o f the State Revenue Service (Receifu), (11) Family Health, (12) Health Decentralization, (13) Basic Education, (14) Secondary Education, (15) Digital Inclusion, (16) Home Construction, (17) EnvironmentalManagement, (18) Employment Centers, (19) Minas Without Hunger, (20) Estrada Real, - 22 - objectives and structural projects becameoperational inthe medium-termthrough the Minas Gerais multi-yearexpenditureplan(Plano Plurianual or PPAG). The PMDI2003-2020 andthe PPAGwere bornfrom a lengthy diagnostic exercise carried out by the Minas GeraisDevelopment Bank (BDMG) toward the end o f 2002 (the end ofthe previous administration's tenure). That study -"Minas Gerais inthe 21st Century'' -provided an in-depthanalysis o fthe predicamentthe state found itselfin2002 andthe pathby which it had arrived there. (21) Foreign Trade Promotion, (22) Making Minas Enterprise Competitive, (23) S%o Francisco River Revitalization, (24) Rural Electrification, (25) Jaiba Regional Development, (26) "Agrominas" Support to Coffee Production, (27) Local Cluster Development, (28) Northwest Minas Development (IDB Project), (29) PPP Unit, (30) RMBHExport Logistics, and (3 1) Social Inclusion. - 23 - Figure 2: Structure o f Plano Mineiro de Desenvolvimento Integrado (PMDI) azilinn state to liw in Reorganixing and l'roniot ing Rtinvigor:~tingWnas modernking5tate sustainable social and <;erais p)litirall?bqontl public adrniiiistration economic de\.dolmeat it5 borders , , ,I PrioritizedObjectives(IO) Structural projects (31) 42. To support the successful implementation o f the structural projects more direct management o f those projects was put inplace as part o f the Choque de Gestfio (Management Shock). The government also developed a results-based management model. As a result o f these managerial improvements, rates o f execution o f the structural projects were considerable. 1.8 RecentWorld Bank Relations with Minas Gerais a. DevelopmentPolicyLoan(2006-2007) 43. A World Bank developmentpolicyloan(DPL) operationcalledthe "Minas Gerais Partnershipfor Development"' supportedthe three main pillars of the first PMDI2003-2020 that aimed to improvefiscalmanagement,public sector management,and privatesector development. Eachpillar was usedas a cross-cutting opportunity for impact on the entire program o f government policy and spending.At the first level, the DPL operationreinforced the LRF and Brazil's system o f fiscal federalism checks and balances. Second, withinthe state itself, the fiscal adjustment combined with improved economic performance lead to reduced poverty both through higher incomes and through increased spending available for education, health, and basic local infrastructure. Third, the improvements inthe quality o f public management inMinas focused on bringing better service deliveryto the poor. Efforts such as results-based management and The Inter-AmericanDevelopmentBank (IADB) is the other internationalfinancial institutionsupporting Minas Geraisdevelopmentprocess.Ithas a portfoliocoveringprojectson state roadtransportationand regionaldevelopment(Vale de Jequitinhonhaand PlanorOeste)amountingabout US$300 million. IWorld Bank, 2006. ProgramDocument for a ProposedMinasGerais Partnershipfor Development- DevelopmentPolicyLoan(DPL-MG). - 24 - performance-based human resource management have beeninstrumental inthis area. Inpart due to these reforms, and as noted above, Minas Gerais' economic growth performance improved to be slightly above the national growth rate during 2004-06 b. Other World BankActivities 44. In additionto the DPL, the World BankGroup has supportedseveral programsand projectsto further development of municipalities,rural development,and procurementin the state of MinasGerais,including through the Cities Alliance andthrough umbrellaprograms affecting specific municipalities such as Belo Horizonte and Uberaba. The Bank has also supported the municipality ofBetiman industrial city inthe metropolitanregionofBelo Horizonte through an investment lendingproject to increase the coverage o f sanitation services provided by the local government and urbanupgrade workouts. On rural development, the rural poverty reductionproject (PCPR) focuses on the northern part of the state through community driven development projects and to strengthen municipalcouncils. Over 300 community projects have beenapprovedandtraining has beenprovided to 188 municipal councils. Another important area where the World Bank has beensupportive i s relatedto procurement. Technical support for automating and streamlining procurement processes, developingprice benchmarks, and other procurement activities will continue inthe near future with the May 2007 signing o f an International Development Fundgrant. Incontrast, inrecent years, the International Financial Corporation (IFC), the World Bank Group's private sector arm, has not been active inprojects inMinas Gerais. 2. Plano Mineiro de Desenvolvimento lntegrado (PMDI) 2007- 2023 2.1 Overview 45. The PMDI2007-2023 is the second of two long-termdevelopmentstrategies developed by the Governmentof Minas Gerais. The PMDI2007-2023 comprises six major strategies and eleven results areas ("kreas de Resultados'y, each with public sector management improvements (as part ofthe second phase of the Choque de Gestfio), definedstrategic objectives, final targets, and sets of indicators to follow up progress. All results areas are to benefit from improved public sector management and fiscal stability, which are the two overarching objectives o f the PMDI. The PMDI i s supported by 57 structural projects (Projetos Estruturantes"), which are really the priority programs o fthe government, and it identifies other associated projects. The structural projects are to be implementedusingresults-based indicators. The PMDI was approved by the State Assembly (SA) inApril 2007. While the 2007 budgethas been already approved, the 2008 budgetthat will be consistent with the P M D Iwill be sent to the State Assembly by 30 September2007 for consideration. - 2 5 - 46. The Minas Gerais authorities havecreated an Indicators Unit (Area de Indicadores) within the Secretary of Planning. Besides developing indicators and improving the quality o f the indicators, the unit aims to help the government to: better understandthe indicators and through them the impacts o f the state projects; monitor progress with the indicators by comparing stated objectives with actual results; facilitate policy making; do more systematic research with available information and data; and highlightthe importance o f this information withinthe government. 47. Nevertheless,the indicatorsin thePMDZ2007-2023 could be improved. These indicators essentially target three different types: outcomes (final), trends (intermediate) and products (specific and project related). They could be improved using `technical sheets' for each indicator that comprise: definitions, protocols for calculation, baseline data, targets, results, matrix o f responsibilities, sources, and comments or observations -including proposed fields o fresearch. A complementary task regardingthe proposed indicators (targets and results), i s to reviewthe set o f selected figures vis-a-vis absolute and relative benchmarks (at the state, country and regionallevel). Figure 3 I:PLAN0 MlNElRODE D , -. _ _ - ~I-- 48. As part of the preparation of this document,World Bank staff with sectoral expertiseworked with the Minas Gerais authoritiesto assess the PMDI2007- 2023, with a view to strengtheningthe implementationof this long-term strategy.Visits were able to cover issues concerning public sector management, - 26 - education, health, water, transportation, and private sector development.' These preliminary interactions have built a strong dialogue for future engagement. The principle findings and recommendations are summarized inthe following paragraphs. 2.2 Sectoral assessments a. PublicSector ManagementAssessment 49. Beginningin 2003 with Governor Neves' first term, under the Choque de GeMo MinasGerais eliminatedits fiscal deficit,consolidatedadministrative structures,and reducedthe number of non-careerposts. The new management approach was exemplified through the organization o f the highest- priority programs into structural projects (PES), which were managed innovel ways. The planning, monitoring, and evaluation o fthese select projects was intensive.Project leaders were obligatedto meet contracted performance outputs. Periodic meetings were heldto holdproject leaders accountable, and projects were closely monitored by the Governor. Monthly status reports included financial reports. Every three months a synopsis for each PE was consolidated in a Painel de Controle, with one page summary per project. 50. This focus on resultsmirrorssimilar tendencies toward performance managementthat haveoccurredin other OECD countries. Minas' efforts included a variety o f performance measures from relatively simple ones related to business process measures, to those focused on specific results. Their efforts did not go so far as to focus on measures focused on ratios such as costs/output or productivity measures such as outputs per in ut, but they reflect a fairly complex set o f measures inline with OECD practice. As with most OECD experiences o f P performance orientation, Minas has not established direct budgetary incentives tiedto the achievements o f goals. Inaddition, the process o f developing performance assessment o f staffto create proper incentives for achieving the desiredresults needs to be deepened.Finally, the first Choque de Gestfio also faced the difficulties o f connecting the more top down initiatives o f the central secretariats, with the implementation o f plans and programs o fthe line secretariats, a problem often found inOECD countries." While the Bank team intendedto include an assessmentofurbanissues, andpossiblyenergy, resource constraintsand schedulinglimitationspreventedtheir inclusion inthis Partnershipdocumentat this time. For example, a strong interestwas statedbythe Minas Geraisauthoritiesto receiveBank assistanceinthe area ofrenewableenergy, particularlyinsupport ofthe ongoing6-year programwith the privatesector (about 2,000 MW basedon 52 plantationsof about 30,000 hectares and40 MWHeach, generatingabout 250,000 new employments). See Manning,Nick and JurgenBlum.(forthcoming).Recent Public Sector Management Developments in OECD Countries. OECD. p. 36. I OA moredetailedevaluation ofthe first Choque de Gesta"o,basedon case studieso f some ofthe structural projects shouldbe preparedas a follow-upto this Partnershipdocument. - 27 - 51. In 2007, at the start of the Governor'ssecond term, the administrationhas begunwork on a second generationChoque de Gestae. Its content reflects both the successesandperceived shortcomings o fthe first generation (GERAES). The government has carried out a review o fthe experience from 2003-2006 o fthe GERAES. The PEconcept, includingmonitoring and evaluationtechniques, was generally positive (GEMG, 2006). However, there were important critiques, including the fact that the authorities were evaluating and tracking products, indicators, and management processes, but not results and outcomes. These critiques applied to both PESand the 24 ResultsAgreements (RAs) that were signedwith line Secretariats. The impacts o f the PESand R A s were not evaluated. Underthe 24 R A s R$112 million was paid inprbmios (described below), but the money may not have beenwell spent because the indicators were not well linkedto goals. As a result o fthis review, the focus o f the second generation Choquede Gestrlo aims to address this set o f critiques, as described in the following paragraphs. 52. ResultsAgreements: R A s that usedto be with signedwith Secretaries will now be with agreed more broadly across sectors. The Sectoral Projects are being developed inmore detail inApril 2007. Sectoral Results Agreements are scheduled to be completed by May 15,2007. Thus far, the process has beentop- down from the central Secretariats (mainly Planning), but inthe nextphases there i s to be more engagement by lower levels within the relevant sectoral Secretariats. 53. Performance Indictors: Underthe second generation Choquede Gestrlothe key indicators are to be the final outcome indicators, and they will be "unpacked" (desdobrado)to groups inthe relevant departments withinthe Secretariats, to better engage staff inthe achievement o f these outcomes, not only upper management. The group goals, it i s expected, will be definedat the level o f the administrative unit (that usually involve 20-100employees). These relevant parties are to explore indicators that can be measured at least annually for purposes o fthe evaluation. However, it i s often difficult to identify "final outcome" indicators that can be measured annually and simultaneously can be expected to show variation within that time frame. 54. Evaluation: Once identifiedthe final outcome indicators it i s proposed that they will be evaluated as shown inthe following table. The final scores will determine how much o fthe available resources will go to particular departments. -28 - Table 4: Evaluation system Evaluation components Weight Final Results 30% I Management Shock Agenda Structural Projects (PES) (cross-cutting 60% reform items, e.g., procurement) I Indicators on rationalization of I expenditure 10% (e.g., reducingtravel costs, lower expenditure on office supplies) i. TheSpecificChoquedeGestioStructuralProject 55. There are two levels of "management shock" in Minas: 1) the government- wide Choque de Gestio; and 2) the specific Choque de Gestio PE that supported (horizontally) the goals of implementing the wider management reform in Secretariats and departments. Bothtypes of Chuque de GestZu link to each other. 56. While not all the PESwere perceivedas successful during the first generation Choque de Gestio, the specific Choque de Gestio PE was among the PES singled out as effective. The specific Choque de GestZu PE coveredboth classical and more modern management reforms were undertaken. Some o f the classical management reforms were: rationalization o f career plans (reducing career categories to 129, from 893); simplification of the compensation system; strengtheningmerit selection; and introductiono f performance evaluation. More modernelements covered "natural progression" inthe pay matrix (every two years based on satisfactory performance); promotion linked to additional educationandtraining; andpay for performance. 57. The PMDI 2007-2023 includesa second generationspecific Choque de Gestio PE that will focus on improved performance evaluation and monetary incentives. 58. On performance evaluation the system contains four final "grades: excellent, good, regular, and unsatisfactory. Duringthe second evaluation phase (2005- 2006), more than 99% o f employees received an evaluation o f "excellent" or "good." Only 0.34% received "regular" and 0.04% (44 people) received - 29 - "unsatisfactory." Only four processes are underway to remove employees. 70% (good) i s the minimumrequiredto be eligible for a pay reward. Under the PMDI 2007-2023, Minas officials are working to structure two evaluations: 1) individual competencies (a traditional employee evaluation); and 2) evaluation o f whether group goals were met. (These group goals would be included inthe written Employee Work Plan.) The weight o f these two separate evaluations in the final employee score is not yet decided. Table 5: "Second Generation"EmployeeEvaluationScheme Evaluations Targets/ I Expectations Weight Result Impact Established The annually in "competencies" Competencies Employee evaluation alone Work Plan will determine with manager "progression" steps Overall evaluation Group results Specified in determines sectoral RA eligibility for monetary rewards (and possibly promotion) 59. On monetary rewards,duringthe first phase o fthe Choque de Gest&o,the way for an institution to be eligible for a performance reward was to collect more than expected income or to economize on expenditures. This scheme clearly provided advantages to certain institutions (e.g., those with revenue-generating capacity) over others. During2004-2006, 10,89 1 employees from eight different institutions receiveda Pr2mio por Produtividade. Under the P M D I 2007-2023 the monetary rewards system will aim to be more equitable, because all institutions will be eligible -provided the government runs a surplus. But ifat least at 70% o f the goal i s not met, then there i s no payment o f a financial award. ii.Procurement 60. Minasis at the forefront of innovationon procurementin Brazil, designed to support other publicsector management reforms.Procurement reform represents a key element to provide state services efficiently, while generating fiscal saving. Strengthenedprocurement processes and successful application o f informationtechnology ledto the implementation o f sound electronic procurement, that inturnhas resulted insignificant fiscal saving (an estimated 23 percent saving in2006), including a monthly saving o f US$500,000 per month on - 30 - pharmaceuticals alone. These improvements not only lead to saving, but also reinforce objectives o f strengtheningquality and timeliness o fpurchases (and payments) as well as transparency o fpublic purchases. Collaborationwith the World Bank has covered procurement planning (especially the development o f a procurement platform and indicators for monitoring and evaluatingprogress), and acceptance by the Bank o f Minas Gerais procurement practices inBank financed operations. Inthe future, collaboration i s likely to focus more on efficient procurement processes, stock control, price benchmarking, and contract management that are highpriorities with the state modernizationagenda. Additional Bank technical assistance could support the implementationo f a procurement web portal, further studies on strategic sourcing, a review o f procurement businessprocesses, e-learning, development o f an asset management system, and analytical work on the e-procurement system.A grant was recently signedwith the Bank to provide additional technical assistanceparticularly in procurement areas o f civil works management and further modernizationo f processes and information management. Some Observationsand UnresolvedIssues 61. There certainly were advances during the first Choque de Gestdo but these advances were not uniform; nevertheless,most activities are being carried forward in second generation.There are about 30 "new" PES,but most are activities that were already presentinthe former PESand now have beenbroken out as stand-alone PESfor the second generation. 62. The government-wide Choque de Gestdo is a top-down exercise whose logic begins with outcome indicators being set for 2011. These are to be broken into annual (or more frequent) indicators that can be assigned to administrative units. However a challenge still remains because some outcome indicators might only be available, say, every 3 years. Moreover, higher frequency indicators may not show much movement inthe short term o f one year. Inaddition, as with all results-based programs and projects, indicators needto be designedcareful to confront the challenge o f attribution, (linking actions with outcomes and results). Minas Gerais officials are well aware o fthese challenges. The key will largely dependuponwhether appropriate indicators can be found duringthe "unpacking" process to develop inmore detail the PES.For the Sectoral Results Agreements (which involve commitments by more than one Secretariat to a common outcome) it is anticipated that the cross-cutting results inthe R A s will have separate weightingfor those Secretariats and their unitsthat are primarilyresponsible and for those who are contributors. The methodology for this has not beenfully worked out. SEPLAG officials have concluded since the end o fthe second cycle o f individual employee evaluations that an important reason why the evaluations do not differentiate better betweenemployees is that there is too much bureaucracy inthe process; too much paperwork. However, it i s not clear how this issue will be alleviatedifthere are to betwo evaluations inthe place of one. - 3 1 - b. Education Sector Assessment 63. The Secretariat of Education (SEE) is by far the biggestemployer in the State Government, with about 225,000 employees, with 160,000 teachers and 60,000 administrative support staff at the level o f the school; approximately 4,500 staff working inone o f 46 Regional Superintendents(SREs) locatedthroughout the State; and 800 staffworking inthe central Belo Horizonte office ofthe SEE. The State Government manages about 4,000 schools at the Ensino Fundamental (EF: Grades 1through 8) andEnsino Me`dio (EM: Grades 9 through 12) levels. Schools managed by the State government account for roughly half o f the enrollment inEducaqfio Bdsica (EB:Pre-School and Grades 1 through 12). Under the Brazilian Constitution, the Pre-school (Educaqfio InfantiZ) level is the responsibility o f municipalities; EF i s sharedbetweenthe State and Municipalities and EMi s the responsibility o fthe State Government. Given the important links betweenone educationlevel and the other, as well as the co-existence o f State and Municipal schools providing service to the same population, the aspect o f cooperation betweenState and Municipalities requires dedicated policy attention. Inprinciple, this co-operation takes place through bothgeneral and specific contracts (convdnios) for co-operation. An evaluation o f the working o f the convdnios merits a closer and more detailed analysis, as the State Government can scarcely reach a long way with regards to the goals for the education sector without working together with municipal governments. 64. The PMDI 2007-2023 appropriately seeks to tackle the twin challengeof improving educational attainment with a simultaneousbetterment of educationalquality. The eight PMDI structural projects relatedto education are a subset o f SEEpriority intervention" projects. To improve the quality o f education and linkedto a broader government-wide effort to improve the system o fpublic service performance evaluation, the PMDI 2007-2023 incorporates a program o f accreditation o f SEE employees, teachers, and principals, including written exams and school community elections for principals. Moreover, a key initiative being implementedunder this PMDIis the restructuringo fthe SEEto seek a better alignment betweenthe P M D I goals and the functions and competencies o f different departments withinthe SEE.Two elements o fthe restructuring deserve mention -the establishment o f the Sub-secretariat o f Information and Educational Technology, and the conception o f a matrix structure that links the multipleandvariegated projects to the functional hierarchy o fthe SEE.The newly formed Sub-secretariat would be an organizational locus to spearheada transformation inthe organizational culture interms o f monitoring and evaluation as an integral part o f policy framing and implementation. The SEE i s still inthe process o f establishing the exact roles and responsibilities o fthe functionaries o f the Sub-secretariat for information, and hiringtalent from the outside. Success in the efforts regarding the generation and utilization o f information i s a critical element that would determinethe probability o f accomplishment o f the PMDI goals. - 32 - 65. A noteworthyinnovationconcernsthe formation of a matrix for implementationof the plethoraof projects,as shown inthe table below. The idea i s that each school belonging to the State system o f schools would belong to one o f seven "networks" formed by schools that share a common characteristic - shown incolumns o f the matrix below. The rows o fthe matrix would be formed by each o fthe projects, inthe table below only the `structural' projects are shown, though there are some 30 odd projects overall. Each structural project would be underthe responsibility o fa `Project Manager' who would be someone from withinthe line unitso fthe SEE, rather than be apart o fa separateproject management unit; the `Project Manager' might continue to have other line responsibilities, dependingon the particularities o f each project. A particular school may be benefiting directly or indirectly from any combination o fthe projects -there would be a figure o f a `Network Champion' ,a personwho would be functionally located inthe newlycreated Sub-secretariat of Information, who would be responsible for providing monitoring and follow-up regarding the implementationo f all the projects that would be benefiting the schools inthat particular network. - 33 - "Structural" Development 7. Evaluationo f Quality of Learningand Schools 8. Umbrella Project o f Infrastructure, Internet Connectivityand Occupational Certification o f FrontlineWorkers Source: Power-Point presentation"Matriz de Projetos SEE-2007", dated 6" March, 2007. The list of structural projects is at variance with the list in the PPT due to information from interviewscarried out with SEE authorities in the week o f April 16 - specifically, the project called Escola VivdComunidade Aliva, which provides for schools to be open on weekends is being combined with a project to extend the school day for a group of students (Opqrio de Tempo Integral). It is not clear whether Literacy in Early Grades, mentioned in the interviews as a structural project, and included in earlier lists of structural projects remains one. It is not confirmed whether the Accelerated Learning Program refers to the project to be targeted in specific underdeveloped regions o f the State or would be implemented in the whole State. Also, though some projects purportedly includemunicipalschools, it is not clear how these schools would be countedin the proposedmatrix. 66. This innovative arrangement is likely to placevery high demands on the organizational, administrative and leadershipabilities of various people throughout the structure of the SEE, and there is plausibly a great amount of diversity in the existingdistribution of these abilities. The proposed structure seems to be conceptually interesting, but whether it i s an important step towards the accomplishment o f the PMDIgoals depends a lot on the details of implementation o fthe projects and the arrangement inplace to generate and sustain ownership through the SEE, together with the information systems in place to provide information inadequate format for decisionmaking. While officials from the SEPLAGwork together regularly with respective project teams, at least for the structural projects, successful implementationo fthe projects and - 34 - mid-course adaptation with regard to project implementationand the larger PMDI goals would require greater technical assistance from human resources with adequate background and experience inimplementation. A good place to begin this exercise wouldbeto define exactly the meaning o fthe term `project', which inthe current list incorporates a widevariety ofactivities, goals, inputs and products. 67. Lookingforward, the Bankwould tendto emphasize three recommendations inthe educationsector of the PMDI: 1) strengthening the detailedplanning and process o f discussions to link broad and long-term goals with concrete, detailed, and short-term steps; 2) finding outside support for the SEE to improve management, such outside management expertise should simultaneously understanding the circumstances confronting education inMinas Gerais; and 3) that the two initiatives under the PMDI (the Sub-secretariat for Information and Education Technology to transform the SEE organizational culture, and strengtheningperformance evaluationand accreditation o f SEE employees) should receive the highest priorities among all the proposed actions. c. HealthSector Assessment 68. The State's healthsector faces a numberofsystemic challenges that are similar to manystates inBrazil:(i) oversupply o f hospitals, particularly of underutilized small facilities; (ii) primary care coverage resultingin low unnecessary use o f expensivehospital emergency rooms; (iii) quality and low inefficient hospital services, and (iv) little coordination or integration among healthproviders are resulting inpoor quality o f care, inefficiencies, and increased financial burdenon patients. Each o fthese problems has implications on resource allocation and management, quality of spendingand ultimately, health outcomes. 69. Between2003 and 2005 the SES launchedthree large "flagship"programsto address the above issues: (i) Health Care Regionalization(RAS), (i) Hospital Strengtheningand Quality Improvement (PROHOSP)"; and (iii) at Home Health (SEC). The content o fthese programs was complementary, and together they sought to rationalize and coordinate supply, raise coverage and quality o f care, and improve the efficiency o f service organization and delivery. 70. In2005, under the RAS, the SES began to rationalize the organization, demand and supply o f health services based on a regional network model. The program established 13 macro-regions and 73 micro-regions, covering all o f the state's 853 municipalities.'2 The idea i s that each micro- and macro- region would be self- sufficient insecondary and tertiary care respectively. I'PROHOSPwas originallypart o fRAS. I'It is importantto notethat the macro-and micro-regionswere designed basedon criteriathat drew on in- depthanalyses examiningthe spatial (includingroadnetwork) supply and demandcharacteristics of hospitalcare in eacharea. - 35 - 71. PROHOSP aims to improve the quality and efficiency o f hospital services while making managers accountable for results. Consonant with the above-described regionalizationinitiative, PROHOSP directs state investment financing to only to subset o f 130"pole" or referral hospitals inthe macro- and micro-regions. The idea i s to reduce the supply o f smaller facilities while increasingthe case resolution capacity o f larger hospitals. The state plans to convert an undetermined numberof smaller hospitals to ambulatory or emergency care centers. Eventually, all financing for admissions inabout 400+ non-pole facilities will be discontinued. As such, these facilities will essentially cease to be hospitals, and many are likely to shut down. 72. The SEC program seeks to improve the quality and coverage o fprimary care state-wide. Its long-term aim i s to resolve 90% o f the demand for healthcare at the primary level. The cornerstone of SEC involves an innovative financial municipalities. systemto stren henprimary care delivery, especially inthe poorest # 73. The three structural reformprograms ( U S , PROHOSP, and SEC) already context. They addressthree critical areas -- network formation, hospitalreform underway in the MG health sector are cutting edge within the Brazilian and primary care extension, -- which are major challenges throughout SUS. It i s difficult to imagine improving the performance o f SUS-financed health care from fiscal or health standpoints without systematic change ineach o f these areas. In short, the three priority programs selected by SES have the greatest potential to improve the quality o f spendingas well as health outcomes. 74. On the other hand, while the indicators applied to each of the three structural programs by SES tend to have a strong health orientation, many may be inappropriate for the broader Choque de Gestio initiative. This is unfortunate because the core interventions o f each o f these programs contribute robustly to the broader public sector agenda of raising the quality o f spending through rationalizing investments, reducing waste, improving resource management, and linking financing to results. In short, the SES needs to develop an alternative set of intermediate indicators that directly impact on resource management and finance while indirectly impacting health outcomes. The following is a preliminary list of measurable indicators that would result in cost savings or containment: > Reduction o f hospital admissions for conditions susceptible for >> primary health care (already an SES indicator); Reduction o funnecessary hospital admissions; > Reduction o f unnecessary emergency treatments at hospitals; >> Reduction o f unnecessary referrals to higher levels o f care; Increase inproportion o f health system contacts at the primary level; Reduction o f hospital lengths o f stay; ~~~ ~ l3 InBrazil,primarycare is a municipalresponsibility. - 36 - >>>>Reduction inunnecessary diagnostic exams; Increase inproductivity o f surgical theaters; Reduction o f cases requiringmultiple inter-facility transfers; Reduction inhospital infections rates, medical errors and adverse events. 75. To some extent,the progressthus far has ledto a number of new steps and directionsthat couldbe elaboratedfurther inthe MinasGerais-WorldBank Partnershipin the health-relatedsector, especially: development of systematic monitoring, focus on impact evaluation, contract management enforcement, revisedinstitutional arrangements for public foundations dealing with drugs and withblood derivatives, and integration ofthe FHEMIC state hospitals foundation into the R A S and PROHOSP reforms. More specifically, for the RAS, new steps and directions cover: improved coordination across health service providers through a strengthenedcommand structure by the macro-region administrative units with real decision-making authority; pooled financing arrangements across municipalities and hospitals within macro-regions; resource allocation mechanisms that distributepooled financing to each macro-region; further development o f clinical pathways; and improved integrated information systems across the network to better manage care delivery. For PROHOSP, new steps and directions could include: improving organizational and governance arrangements for pubic and publicly-funded non-profit hospitals; payment mechanisms reforms to improve incentives through the way hospitals are paid; strengthened and standardized cost accounting systems; and more wide-spread licensing and accreditation o f hospitals. For the SEC program these new steps and directions include: efforts to improve the quality o fprimary care services; mandates on grant transfers to municipalities to support family health and to provide performance incentives; and health promotion and chronic disease management. d. Water Supply and Sanitation(WSS) and Water Resources Management(WRM) SectoralAssessments Sector Issues 76. Access to Water and Quality of Services. The provision o f Water Supply and Sanitation (WSS) services inMinas Gerais, in general, i s o f very good quality for those systems operated by COPASA (the State Water Company), private concessionaires, and municipal companies or autarquias o fthe most affluent municipalities. However, inthe rest o f the State, particularly inthe smallest and poorest municipalities, access to these services i s limited and their provision severely affected by problems o f intermittency, rationing, and low quality o f service. This inequality i s especially severe inthe valleys o f Jequitinhonha, Mucuri, SBo Mateus and the northernpart o fthe state, an area o f Minas Gerais where the quality o f life resembles the poorer states inthe Northeast. This situation affects the poor disproportionately and, as a consequence, health - 37 - indicators associated with water-related diseases are still highwhen compared to the rest ofthe state andto national averages. 77. Policy Definition and Regulation. Independenttariff regulation and the supervision o f service quality are largely inexistentinMinas and suffer from significant policy interference. The recently approved federal WSS law brings a long overdue institutional and regulatory framework to the sector, but presents many challenges for its nation-wide implementation including inMinas. 78. Sector Efficiency and Pricing. COPASA and some municipal companies operating inthe more affluent municipalities are relatively efficient, but there i s still room for major improvements. Inthe case o f COPASA, the existence o f uniform salary and tariff structures across the state i s particularly troublesome givingthe socio-economic differences that exist inthe geographical area covered bythe company. Inthe smallest and poorest municipalities, room for improvement i s considerable since most o fthem do not even cover their operating and administrative costs, and therefore lack the capacity to provide adequate services. There i s an interesting case o f a direct consumption subsidyto the poor inthe Municipality o fVarginhaprovidedto the poorest COPASA clients. 79. Water Resources Management. Despite the development inrecent years o f a sophisticated institutional and regulatory framework for water resources management inthe state, the implementation o fthe framework and its main instrumentsremains weak. Although only one water supply system operated by COPASA lacks water abstraction licenses, many systems operated by municipalities function without such licenses. The situation i s worse inthe case o f effluent discharge since many sanitation systems function without the requisite environmental licenses and urgently needto regularize their situationto comply with the law andtargets set by the State Environmental Agency. A sustainable and equitable use o f water resources for current and future generations requires better information and more transparency ininvestment and other decision- making processes. As inthe rest o f the South and Southeast regions, urban and rural floods are more frequent and require river basin planningand management approaches to manage excess flows, droughts, and to develop infrastructure. Moreover, unregulated utilization o f groundwater resources i s leading to overexploitation and contamination. The expansion and intensification o f the agriculture frontier inMinas imposes additional pressures on this vital resource. 80. Water Pollution: a lack of wastewater treatment. COPASA supplies water systems in611 (585 are operational) o fthe 853 municipalities inthe state (71.6% o f the total) and sewerage systems in 183 (95 are operational) municipalities (21.4%). Through the operation o f these concessions, COPASA provides potable water to a population o f about 11.6 million (60% o fthe state's total population) and sanitation services to a populationo f about 6.0 million (30% o f the state's total population). The volume o f sewage treated by COPASA i s only 37% o f the collected volume. These numbersunderlinethe significant gap that exists inthe - 38 - provision o f sanitation services vis-a-vis potable water; a feature common to most Brazilian companies and systems that only recently has beganto be seriously addressedby some companies, including COPASA. Years o f discharging untreated wastewater from municipal and industrial users, as well as from agribusiness, has turnedthe degradation o f water quality into a major environmental, social, economic and development issue inthe South and the Southeast regions, including Minas Gerais. 81. Urban Drainage and Pollution Control. As inthe rest o f the country, explosive urban growth has increased exponentially the complexity o f water management, particularly inthe large metropolitan areas. Urban drainage, pollution control, and the protection o f water sources fall within multiplejurisdictions with limited coordination capacity and financial resources to develop and implement investmentsor to operate andmaintainexistinginfrastructure. There is an interesting approach inthe case o f Belo Horizonte, where COPASA contributes a percentage o f its revenue from the city to a municipal fund to invest inWSS inthe protectiono f sensitive environmental areas. Plano Mineiro de DesenvolvimentoIntegrado (PMDI) 82. Understanding that water is a key element in the promotion of sustainable growth and a more equitable and inclusivesociety, the PMDI 2003-2020 included "More Health for Everybody" (Saneamento Brisico: Mais Saride para Todos) as one of its structural projects; and the results achievedin the WSS sector, on average, go well beyondwhat other states have been able to do. O fparticular note were the series o f far-reaching legal, institutional, and administrative reforms taken to strengthenCOPASA. These included issuing shares on the Stock Exchange; negotiationto incorporate the municipality o f Belo Horizonte as a shareholder; actions to regularize concessions throughout the state; bilateral negotiations with selected municipalities (e.g. Betim)to advance sector investments; changes instatutes to allow the company to operate outside the state (for example, COPASA provides technical assistance inAngola); and internal incentives to increase efficiency and competitiveness (for example, a performance-based bonus system). 83. The PMDI 2007-2023 has kept the SaneamentoBdsico WSS initiative as one of the 57 structural projectsand added five new projects linked to improving the provision of WSS services and the management of water resources to its list of priorities. Table 7 shows the four results areas and the six structural projects related to the WSS and WRM sectors. Besides activities designedto continue to improve the state's quality of life through the provision of universal and improved WSS services (i.e., the healthy living result area), the objectives o fthe second generation Choquede Gestao include: a) The social and economic development o fthe poorest region o fthe state (the North o fMinas, Jequitinhonha, Mucuri and Rio Doce) through the structural project - 3 9 - Vidano Vale. This project attacks poverty and inequality inthe north o fthe state, usingWSS as an engine o fchange. The Vidano Valeproject aims to encourage regional development through an integrated package o f actions covering health, education, employment creation andtraining o f local labor, private sector participation, and environmental management objectives. b) The improvement o fthe state's environmentalquality through strengthening WRM andconsolidatingwater basinmanagement, reducingwater pollution, increasing treatment o f solid wastes, and acting on other key related environmental issues. c) The reduction o f poverty through an integrated program (including WSS, housing, education, urban upgrading and security) ina given geographical area (Riberiio das Neves). The Projeto Travessiais another innovative and challenging project that attempts to transform a poor area and form a generation o f young leaders. Table 7:P M D I2007-2023 ResultsAreas and WSS and WRM Projects Results Areas Structural Projects Related to WSS & WRM Sectors Healthy Living Saneamento Bcisico: Mais Sadde para Todos Development o f the Northo f Minas, Vidano Vale Jequitinhonha, Mucuri and Rio Doce Environmental Quality Revitalizaqiiodo Rio das Velhas Tratamentode ResiduosSblidos Consolidaq&oda Gestiiode Bacias Hidroarcificas Poverty Reduction and Productive Projeto Travessia:Atuaqiio Inclusion Integrada em Espaqos DeJinidosde Concentraqiiode Pobreza 84. Implementing projects such as the Vidano Valewill be a challenge, at least during the first year, because of the changes that their executionwill entail, particularly regarding the technicavmanagerial capacity and adaptability of the executingentities. Bothprojects have clearly definedobjectives and are designedto make a clear contributionto the government's development agenda; however, they do not yet have clearly definedimplementationstrategies, nor a consolidated set of instrumentsto achieve the objectives. 85. In this regard, the establishmentand implementation of a COPASA subsidiary, which is necessary for the implementation of the Vidano Vale project, still depends on how the subsidiary will be formed, administered, regulated and controlled. The final model and implementationo fthe new company will determine its degree o f autonomy, and its agility to respond to WSS challenges. For example, will the subsidiary provide services to all localities - 40 - withinthe region or will it be limitedto localities with less than 5,000 people? Its area o f influence, and the way it will grow inthe future will determine who will have access to WSS and over what timeline. Specifically, when and by whom will localities with less than 200 people be attended? Costs and affordability will be determinedby its investment, tariffand subsidypolicies, technological and managerial innovations and practices, and the way it will involve the private sector. Some additional issues relate to how the COPASA subsidiary will face labor legislationinBrazil. Will the subsidiary be treated like any state company andhave to pay the same salary and other benefitsof COPASA's direct employees? H o w will subsidiesto the poor inthe Vidano Valebe seen by the poor inother COPASA concession areas? IfCOPASA can provide cheaper services to Vida no Valewhy could it not provide the same low cost inother areas? How will Vidano Vale be seen by the market and how it deal with COPASA's long-term strategy? The outcomes could consolidate current practices inthe Brazilian WSS sector andlaunchthe sector onanewpath. The Bank could assist the state government inthe evaluation o f these risks andthe analysis o f alternatives, such as negative concessions (PPPs), COPASA sub-concessions or management contracts. Indicators 86. In the water sector, the PMDI 2007-2023 contains relevantaspects in three results areas: RegionalDevelopmentin the North of Minas,Jequitinhonha, Mucuriand Rio Doce; the HealthyLiving; and EnvironmentalQuality.In particular for the Regional Development area, the structural projects seem to need more elaboration to explain how selected projects are supposed to reach estimated results (particularly important incases where big achievements are expected in short periods o f time). For example, the projectedincrease o f 20% inthe coverage level o f water supply ina single year would needto be detailed ina series o f concrete and short-term steps. A key indicator, reduction inthe morbidity rate, i s missing.Inthe Healthy Living area, the set o f final results includes septic tanks as an important factor, although not specified inthe list o f detailed indicators. However, increasing the percentage o f households with access to sewerage or septic tanks i s not enough, since appropriate maintenance (particularly o f the septic tanks) i s crucial to the sustainability o f successful outcomes. Inthe results area o f Environmental Quality, it would be useful to reviewthe experience and lessons learned from PROSAM (the Minas Gerais Water Quality and Pollution Control Project executed with World Bank financing inthe 1 9 9 0 ~particularly ) ~ regardingwater quality indicators. Increasing access to adequate disposal o f solid waste has beenidentified as a priority challenge facing Minas Gerais. However, another equally important indicator, increasing the volume o ftreated wastewater, has beenomitted. The information provided on the volume o f treated wastewater seems too low and may needto be reviewed. 87. PublicInformation. As suggested for the transport sector (described below), the WSS and WRM sectors could substantially benefit from a continuous flow o f -41 - information to the public. The government could define entity-level performance indicators, particularly regarding access to and quality o f service. This would likelyrequirethe definition of a missionstatement for each water sector entity in the state. COPASA and its subsidiary could take the lead, providing an example o ftransparency and outreach to private operators and municipal companies inthe state. This flow o f information would inform forthcoming regulation. COPASA i s now listed inthe Bovespa Novo Mercado stock exchange, which includes minimal requirementsregarding corporate governance, transparency, and accountability. This financial-corporate governance experience could be usedas a model for improving COPASA's operational and social dimensions. FutureCollaborationwith and Assistance from the World Bank 88. In terms of possible future collaborationwith the World Bankin the water (WSS and WRM) sector, the Partnershipcould explorepossible financial support or partial guarantees to COPASA,as well as some of the following options for technicalsupport. Possible technical support: Conducting a public expenditurereview and impact evaluation study o fthe state's WSS sector, with particular emphasis on the projects and the municipalities included inthe P M D I2007-2023. Water sector planning. Approval o f the federal water law has created a needto work on the preparation o f municipal, regional (multi-municipal) and state WSS plans, especially regardingthe study and definition o f approaches to targeting and subsidizing the poor. Regulation o f WSS services. Approval of the federal water law has created an urgent needfor strengthenedWSS regulation, through state, regional, or municipal entities. The Bank could support the establishment o f a state agency and the delegation o f responsibilities by municipalities to this agency. Evaluation o f the risks and the analysis o f alternatives regarding the COPASA subsidiary, such as negative concessions (PPPs), COPASA sub-concessions or management contracts. Specifically, supporting a management contract between the state government and COPASA's subsidiary, with COPASA andthe Secretariat o f Planning as contractual parties, with appropriate indicators and targets. This Management Contract could last until a regulatory agency i s established and operating. Developing a fund for holding and redistributingCOPASA dividends. Developing newmodels for public-private partnerships inthe WSS sector, to identifyand structure such partnerships, and conduct pre-feasibility and feasibility studies. Developing newmodels o f results-based financing inthe WSS sector. Support municipalities on WSS and WRM issues, especiallv access to PAC funding, corporate governance ofwater entities. Aggregation also could be an - 42 - issue insome areas o f the State (such as Zona du Muta, TriSngulo Mineiro) to obtain economies o f scale, increase efficiency, and encourage competition. Support to the state government inflood control, including studies o f associated economic and social costs. Strengtheningstate information systems for WSS and WRM. Rural Sanitation. e. Transport Sector Assessment 89. Road infrastructure in Minas Gerais, the central location of the state in Brazil, as well as the state more recent focus on logistics,have allowed Minas to becomea multimodal transport hub of national importance. Over 15% o f all freight inthe country moves within or through the state. The transport matrix on the freight side i s more balanced than inmost states, with only about 50% o f goods transported by roads (compared to around 65% at the federal level, and over 90% ina number of states). Halfo frail freight can be considered captive (iron ore and semi-finishedironproducts). On the passenger side, the road network provides for over 95% o f all trips, inline with what i s observed elsewhere inthe country. 90. Relatively to most other states, Minas has a well developed transport infrastructure network, including 9,500 km o f federal pavedroads, 15,000 km o f state paved roads, 10,000 km o f state unpavedroads, 5,000 km o f railway lines, 700 km o f waterways, and 3 major airports. Most o fthis infrastructureis located inthe more developed part o fthe state (the southern part, basically from Belo Horizonte south to the state border), on which 70% o f all road and rail traffic takes place. 91. On the other hand, the situation in the infrastructure sector also increases the dependency of the state on the federal government in the resolution of transport infrastructure issues. Federal paved roads, the railway lines, the waterways and the major airports are under federal jurisdiction. Eveninthe road sector, where there i s a substantial part o fthe network under statejurisdiction, around 70% o f all road traffic takes place on federal roads. 92. Over the next 5 years or so, the existingtransport infrastructure is expected to require limited capacity expansion, but relatively significant upgrading to allow for higher quality of road transport services in the poorer and agricultural frontier areas (both interms o f better access to/from markets and services, as well as lower transport costs). Interms o ftransport infrastructure maintenance and rehabilitation, the needs are most pressinginthe road sector, where present efforts will needto be maintainedand possibly reinforced (see below). - 43 - 93. The main transport sector issues in Minas Gerais are, in substance, common to those encountered in other states and at the federal level. These issues include: 1) slow progress on the decentralization and delegation discussions betweenthe Federal Government and the states; 2) coping with the consequences o f inadequate fundingfor road infrastructure (and especially investmentsfor rehabilitation) over the 1995-2004 period; and 3) the needto strengthen public sector capacity. 94. Under the first generation Choque de Gesta'oMinas has achieved resultsin the transport sector that, on average, go well beyondwhat other states or the federal governmenthave been able to do. Teams working on priority programs have beengivenincentives to perform adequately. For example, they have received recognition withinthe government, have more secure availability o f funding, andhave direct accessto the highestauthorities to resolve obstacles to program execution (e.g. delays inobtaining environmental licenses for civil works. Plans are beingexecuted; for example, the ProAcesso program met 85% o f its target in2006. Biddingprocesses (for engineeringprojects and simpler works) are undertaken under 4 months. Environmental licensing has been substantially streamlined. Bills are paid in30 days. Moreover, the private sector works as a partner (rather than a simple service provider) with the public sector. The first generation Choque de Gestliointransport tested the effectiveness o f government programs, by focusing on initially selected priorities and modifyingtheir structure or priority level as necessary. However, by focusing on effectiveness, these results inthe transport sector were relatively easier to achieve. They were possible without having to undertake far-reaching reforms interms o f modifications to the existinglegal, organizational, or administrative framework. 95. The objective for the second generation Choque de Gest&ois to increasethe efficiencv of priority governmentprograms. The program aims to ensure: (i) the assimilationofresult-based management principles by sector entities incharge o f government programs, andthe inclusion o f such principles inthe sector entities' systems, processes, and operational procedures, through the definition and implementation o f anAgenda Setorial de Choque de Gesta`o;and (ii) the rethinkingo fprograms' designand implementationprocessesto increase their efficiency. Implementingthe second generation Choque de Gestlo will be a challenge, at least during an initial period o f 2-3 years. This i s because changes are likely to: (i) to the test the sector entities' technical abilities and adaptation put capacity, giventhe breadtho fthe changes to be implemented(see the agenda provided inannex 1to the transport appendix); and (ii) require external support at the policy, regulatory, normative, technical and operational levels. Moreover, efforts will be requiredto improve the attractiveness to the private sector o f transport infrastructure investment, including through a variety o fpublic-private arrangements including Public-Private Partnerships (also see the private sector development assessment). 96. Government priorities in the transport sector are adequate and focus on: - 44 - Physical:infrastructuremaintenance and rehabilitation, with selective and localized infrastructure expansion; and. Institutional: a gradual shift toward result-based management, increased involvement o fthe private sector, and fostering o f multimodality. 97. Priority investmentprograms have clearly defined objectives, as well as a clear contribution to the government's development agenda; however, they do not yet have clearly defined implementation strategies, or a relatively consolidatedset of instrumentsto achievethe objectives. Two examples are worth highlighting.Under the Regifio Metropolitana de Belo Horizonte project, the Linha Verdeproject appears to be a stand-alone project, (and not the first project ina succession o fprojects) aiming to improve traffic flows inthe metropolitanarea. The ProMG Pleno project uses result-based maintenance and rehabilitation contracts (based on the World Bank model for Brazil). This project i s at the pilot stage (operating in2 out o f 20 areas o f the state) and does not yet have a set o f result-oriented procedures and technical standards. 98, Physicalinvestment program indicators are adequate, usually measuring physical and financial progress o f specific activities under the program. However, process indicators could be added for activities under the program. Basic information on the government's investmentprograms i s presentedinannex 2 in the transport appendix. 99. Indicators on the institutional side are few and, in some cases, not sufficiently specific. As part o fthe detailing o fthe Agenda Setorial de Choque de Gestfio,the government could: (i) and follow administrative processes, such as the time define or number o f steps requiredfor procurement or payment, time requiredbetween the moment a decision i s taken and it i s implemented, number o f irregularities (as identifiedthrough audits), manpower requiredto perform a task, etc.; (ii) review administrative processes and recommend streamlining, simplification, modernization; and (iii) define entity-levelperformance indicators (e.g. maintain at least 70% o f the road network ingood condition, decrease number o f accidents by at least 10%a year, etc.). This would likely requirethe definition o f a mission statement for each entity involved ina project, and as clear as possible a division o f responsibilities betweenthose o fthe entity and those of partner entities. For example: how far could the road administrationbe heldresponsible to meet its road safety performance indicator, iffailure to do so results mainly from insufficient enforcement o f traffic laws? 100. Outcomeindicators (measuring the contribution o fprograms to the government's overall development goals) also could be improved intwo ways. Indicators could be refinedto more clearly show the programs' impact on the Area de Resultado. For example: is the level o f investmentininfrastructure a good outcome indicator o f the contributiono f infrastructureto the State's Valor Agregado da Produqfio result area?More work seems to be neededto ensure that the chosen indicators requirerelatively low cost data collection efforts. For - 45 - example, data requiredto estimate road network conditions are relatively costly to collect. 101. Interms of possiblefuture collaborationwith the World Bank inthe transportsector, the Partnershipcouldexplorepossiblefinancialsupport to the state roadrehabilitationand maintenanceprogram(budget: around R$250 millionperyear), as well as some of the followingoptions for technical support. Possible technical support: 0 institutional strengtheninginthe sector, including helpto consolidate sector policies, models, and norms; 0 improved efficiency o f expendituresunder publicly financed programs inthe sector, including support to: (i) detail and implementthe Agenda Setorial do Choque de GestGo, (ii) structure operational "kits" to improve efficiency o f key programs; and (iii) alignment o froad administration structure andprocesses accordingto result-based management principles; and 0 development o f new models of partnership with private sector inthe transport area, including strengtheningo fregulatory framework and o f capacity to identify and structure partnerships, as well as undertaking pre-feasibility and feasibility studies. f. PrivateSector DevelopmentAssessment 102. The Minas Geraisauthoritiesare convinced that improvingthe investment climateinthe state is the bestway to establishthe conditionsfor longterm growth and continuous job ~reati0n.l~ Accordingly, Minas has created a series o f programs that are related to the improvement o f the investment climate. At least eleven o f the 57 structural projects (projetos estruturadores) inthe PMDI 2007-2023 duringthe next 4 years are directly relatedto the improvement o f the investment climate inthe state. 103. In this regard,the governmentcommissioned a paper on the evolutionof total factor productivity(TFP) in the state comparedto itspeers (Ferreira, 2007). According to this analysis, the TFP inMinas has beenfalling since 1989, following a patternvery similar to the country as a whole. More importantly, the state has been loosing ground to some important competitors (e. g., Rio de Janeiro), while performing better than others (e.g., Sao Paulo). Onthe l4 investmentclimateinacountryoraregionestablishestherulesofthegameandtheenvironment The within which all private sector firms must operate, focusing on policies and institutions that influence the return and the risk associated with investments. It thus includes regulatory policies, administrative procedures, infrastructure conditions, hnctioning of factor markets, as well as incentives embodied in institutionalarrangements,such as securityo fpropertyrights andthe rule o f law. - 46 - determinants o f TFP level compared to other states, the author speculates on four hypotheses: a) the composition o f production inMG i s such that the rural sector is more significant, but less productive; b) the informality level inMGi s higher; c) humancapital levels are somewhat lower; and d) infrastructure availability and quality are inferior. 140 120 100 80 O ~ , , ~ , , , , , , , , , , , , , , , l 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 199920002001 2002 2003 1-MG -SP -BR I Source: Ferreira (2007) 104. In the absence of an in-depthanalysis of determinants of longterm growth, a benchmarkingassessment can be considered a second-best alternative.It provides information on areas where improvements are doable, and where best practices could be followed. As a starting point, the Doing Business in Brazil report, publishedin2006, provides a useful tool covering at least part o fthe elements o fthe businessenvironment. 105. As previously mentioned, the overallperformanceof Minas is good, ranking 3rdamong 13 citieshtatesincludedin the analysis inthe summary ease of doingbusiness indicator.However, a closer look at the differentindicators includedin the report shows that there are a couple of areas inwhich Minas does not performwell (Table 7). Infact, there are two areas -Paying Taxes and Enforcing a Contract - inwhich Minas holds the last rank among the states surveyed.It is not difficult to see that ifMinas had a highranking inthese two indicators, it would probably be the top state inthe overall indicator o f doing business.These two areas are therefore naturalcandidates to be included ina program to improve the businessenvironment inMinas Gerais. Moreover, if informality plays a role inexplaining the low levels o f TFP, these areas are likely to have some impact on informality and, thus, on productivity. But there are other elements o f the investmentclimate, not captured by the Doing Business indicators that are more related to the functioning o f factors markets, like quality and cost o f labor and capital. While many o f these are generally beyondthe scope o f state - 4 7 - government control, one key variable usually identified as one o fthe determinants o fproductivity i s innovation and technology adoption. Indicator MGDHRank State ranked # 1 State ranked # 13 Starting a 1 Minas Gerais Maranhiio business Credit - creating 1 Minas Gerais Ceara collateral Paying taxes 13 Bahia Minas Gerais Registering 5 Santa Catarina Mato Grosso do property and Brasilia Sul Enforcing a 13 RondGnia Minas Gerais contract Overall Ease o f 3 Brasilia Ceara DoingBusiness I 106. Overall, the governmentfocusingon the objective of productivity increases, which is the most appropriate way of fostering sustainedoutput growth and job creation. As part of nation-wide trend, Minas has shifted away from more short-run orientedpolicies, such as fiscal wars, which were frequently used by states through the 1990s. 107. Out of the 57 PESestablishedby the government, at least 11(listed below) are directly linked to the improvement of the investment climate. Projects 1, 2,4, 5 and 6 are under the responsibility o f Economic Development Secretariat (SEDES), while projects 7 to 10are underthe Science and Technology Secretariat. Finally, projects 3 and 11are under Planning and Finance secretariats, respectively. The following paragraphs assess briefly the group o f projects on technology and innovation (7-lo), the Descomplicar project (3), and the project on tax efficiency (11). Projeto 1- Promo@o e atra@o de investimentos estratigicos e desenvolvimento das cadeiasprodutivas das empresas Bncoras Projeto 2 - Inserq7o competitiva das empresasmineiras no mercado internacional Projeto 4 - Oferta de GcisNatural Projeto 3 - Descomplicar - Melhoria do ambiente de negdcios Projeto 5 - Cresce Minas - Oferta e distribuiqco de energia elitrica Projeto 6 - Parceriasparaproviseo de serviqos de interessepziblico Projeto 7 - Rede de Inova@o Tecnoldgica (inclui BHTec, FAPEMIG) Projeto 8 -Sistemade CertiJicaqZoe VigilBnciaSanitciria daProduqeo Agropecuciria Projeto 9 - Arranjos Produtivos em Biotecnologia, Biocombustiveis, MicroeletrGnica e Sofiare - 48 - Projeto I O - Rede de Formaqiio Profissional Orientadapelo Mercado - cursos de curta dura@o e CVT Projeto II -Eficiincia Tributdriae Simplij?ca@o Innovation and Technology Projects 108. The PMDI 2007-2023 places innovation and technology at the top of the agenda. The four PESon innovation and technology are linkedto five strategic objectives: three o fthem on innovation, one on training and the other on quality and certification. The indicators that are beingconsidered -private investmentsin R&D inthe state, overall spendingwithR&D, increase ininnovativeproducts - seem adequate but could include others, especially on quality and certification, where the metrics are less subjective. The Descomplicar Project 109. The Descomplicar project, being led by the Secretariat of Planning, is clearly a high priority for the government. Three main areas are being contemplated: i)to further simplify the process o f starting a business, through improvements and regional expansion o fthe Minus Fdcil program (one-stop shops); ii)to focus on the simplification o fthe environmental licensing process; and iii)to improve government purchases. However, because the program i s still underpreparation, the indicators presentedinthe documents do not reflect yet these objectives. The latest Doing Business indicators to open a business (time and cost) and registeringproperty (number o fprocedures, time and cost) could easily be used and will be targeted by the project. Specific indicators on time it takes to obtain environmental licensing should also be incorporated. 110. More complex is the problem of contract enforcement. This is an area where Minas performs poorly compared to its peers inBrazil. Dealing with this issue involves mainly thejudiciary system; the role o f the executive i s limited. Notwithstanding this fact, the government i s aware o f its importance and i s willing to work inpartnershipwiththe local courts to expeditethe process of contract enforckment. The Tax Efficiency Project 111. Under the tax efficiency project, the government, through the Finance Secretariat, wants to simplify procedures and collect taxes in a more efficient ways. The indicators for this project are under preparationand still don't reflect their objectives, concentrating more on aggregate measures o ftax collection. The recent Doing Business indicators, especially those on procedures (number o f taxes paid, method o fpayment or withholding, frequency o f payments and number o f agencies involved) could be usedas the main indicators for the project. - 49 - 112. The governmenthas a clear diagnosis on why the state has performed so poorly in the 2006 Doing Business in Brazil inthe area of paying taxes. The lack o f investmentsininformation technology inthe late 1990s and earlier this decade put Minas inthis lagging position. This was a period inwhich most o fthe states investedinmodernization; however, incontrast with other states, Minas did not eventap the resources made available by the federal government for modernization of tax collection, known as PNAFE. 113. Under the first PMDI2003-2020, the governmentaimed at catchingup with information technology investments.Now most services for taxpayers are available on the web. The government has also implementedregular surveys with the clients. The availability o f electronic tax filing i s a change that will have an impact on the Doing Businessindicator on the number o fpayments, because where ever electronic filing is available, the tax is counted as paid once a year (even ifthe payment is more frequent). 114. The challengefor the governmentnow is to adapt their systems to recent changes in tax administration adopted at the federal level, (e.g. the law for micro and small firms, and the use o f a single electronic system aimed at integrating tax administration at the three levels o f government to streamline business registration). PotentialAreas for Further Collaboration 115. Four possibilitiesare highlighted below, and the Minas Gerais-World Bank Partnership could explore these further. Consideration could be given to streamliningthe current projects, by establishing clearer and more focused priorities for the next four years. 116. Further analytical work on determinants of productivity and of long-run growth in the state. Inspite o f the data limitations, it seems advisable to work further onthe maindeterminants ofgrowth inthe state, especially those under control o f the state authorities. Interviewswith the private sector may be useful in this regard. Italso would beuseful for Minas Gerais to participateinthe next International Climate Assessment (ICA). 117. Strengtheningthe Science and Technology Secretariat (SSTS). Regarding innovation and technology, the government has plans to strengtheningthis secretariat, through better equipment and capacity building.A World Bank report on Innovation and HumanCapital Development for Brazil i s beingconcluded and the possibility o f follow up with a case study on Minas Gerais could be explored. 118. Increasedfocus in the Descomplicar project. While the current emphasis on streamlining environmental licensing procedures seems adequate, this project could explicitly include issues on enforcing contracts. The Bank could provide technical support inboth areas. A World Bank report on environmental licensing - 5 0 - for Brazil i s beingconcluded andthe possibility o f follow up with a case study on Minas Gerais could be explored. 119. The tax efficiencyprojectseems to be on track, but more focus on simplifyingprocedurescould be adopted,giventhat this is an area ofvery poor performance o f the State. As part o f the World Bank Group, the International Finance Corporation's Financial Investmentand Advisory Services unit (FIAS) has identifiedBrazil as a candidate for some technical assistance work on simplifyingprocedures for paying taxes. Minas could be a pilot for this project at the state level. 3. A Way Forward 120. The ExecutiveSummary of this document recapitulatesthe main findings and conclusionsthat could serve as a foundationfor a possibleBankfollow- up operationto the DPL that finisheddisbursingin early 2007. OnBank support for Minas Gerais development policies at the sectoral level, the sectoral assessments, which are also summarized inthe Executive Summary, indicate a set o fpossible non-lending technical assistance and knowledge sharing activities that could be pursued.However, added coherence could be obtained ifmany o f these activities could be linked to a Bank operation, because an operation could ensure continuity o f interactions betweenMinas Gerais and the Bank, as well as the necessary resources to jointly pursue sound policies and programs. 121. This section attempts to distillthe key elements and principlesfor any such follow-up operation. For example, a follow-up operationwould likely include a strong technical assistance lending component for focus sectors. More focus on programs, projects, and related indicators would be central to such an operation and fit closely with the Minas Gerais development plan. Given the Minas Gerais spotlight on applying their public sector reforms more effectively inthe sectors, the core sectoral work ina follow-up operation would cover public sector management and public financial management reforms. One key principle would aim to complete the next generation o fpublic sector management challenges, spreading these advances more deeply insectoral work, with a view to improving public sector services and enhancing economic growth. 122. These elements and principleswould providethe incentivesand motivationsfor the choice of focus sectors under a Bank operationwith MinasGerais. The sectors covered inthis Partnership document represent areas where the Minas Gerais authorities have concentrated attention and resources, and where the Bank has a comparative advantage to contribute to the authorities' objectives, policies, and programs. However, becausethis document was part o f an initial exercise inthe dialogue process, not all sectors are covered, and even for the sectors that are included, full information has not yet beenassessed. - 51 - 123. Key interlocutors to extend the Minas Gerais -World Bank Partnership and pursue a possible follow-up operationwill continue to interact (betweenthe Governor and Deputy Governor, on one hand, and senior Bank staff, including the Brazil Country Director). At the same time, intensified discussions would also continue between senior officials working with the Vice Governor on the PMDI 2007-2023 and other senior officials inthe Secretariats o fPlanning, Development, andFinance, representingMinas Gerais, andsenior Bank staff, includingthe Lead Economist and Lead Specialist on public sector management. Giventhe shift in focus to sectoral work (relative to the areas coveredunder the DPL that finished disbursinginearly 2007), it wouldbe useful to pursue enhanced interactions betweenthe Secretariats involved inthe execution o fthe PMDI2007-2023 and sectoral Bank specialists and experts. Dependingon the topic, avenues may need to be exploredto reach out to the private sector, think-tanks and academics, and representatives o f civil society, to further open communication about the reform efforts andto guide those efforts to better serve the citizens o f Minas Gerais. 124. In practical terms, the bilateral discussions on a possiblefollow-up Bank operation with Minas Gerais must also include close collaboration with the federal authorities, especially Treasury. With the Minas Gerais authorities taking the lead inthis triangular consultation, the next agreement betweenMinas Gerais and Treasury under the PAF would needto explicitly include reference to possible borrowing from the Bank, especially the amounts, terms and conditions, andfiscal and debt impacts of such borrowing. The Bank stands ready to assist both Minas Gerais and Treasurywith the detailed information surrounding such a possible follow-up operation to make a clear assessment o fthe implications, benefits, and fiscal and financial impacts. 125. Timeline issues will depend in part on the triangular discussions with Treasury; however, ifsuch an evaluation leads to an outcome favorable to a follow-up operation, then the design and processing could take place reasonable quickly. The Minas Gerais authorities would needto agree to the package o f measures being supported by the Bank, and detailed arrangements on sectoral work wouldneedto be clearly identifiedanddocumented. Experience with the recent DPL would facilitate and accelerate the process, which could possibly be completedwithin a 12 monthperiod. - 52 - References Ferreira, Pedro C. (2007) EJci2ncia e Produtividade Total dos Fatores em Minus Gerais. Governo do Estado de Minas Gerais (2005) Programa de Reestruturaqiio e Ajuste Fiscal do Estado de Minus Gerais: Period0 2005-2007, Lei No.9.496/97, Resoluqiio do SenadoFederal No. 99/96, Contrato STN/COAFINo004 de 18.02.98 entre a Uniiio e o Estado de Minus Gerais, Belo Horizonte, May 19. Governo do Estado de Minas Gerais (2006) "AvaliaqBo Qualitativa dos Gerentes sobre o Desempenho do GERAES no period0 2003-2006." Unpublishedreport. Governo do Estado de Minas Gerais (2003) Revisiio do Plano Mineiro de DesenvolvimentoIntegrado, 2003-2020. Governo do Estado de Minas Gerais (2007) Plano Mineiro de Desenvolvimento Integrado 2007-2023: 0 Estadopara Resultados,February 14. Manning, Nick and JurgenBlum.(forthcoming). Recent Public Sector Management Developments in OECD Countries. (OECD). Secretariade Estado de Fazendade Minas Gerais (2007) As Contas Publicus de Minus de 2003 a 2006: A Histdria do "D&cit Zero ". Secretariade Estado de Fazendade Minas Gerais (2007) Estado de Minus Gerais: Desempenhodas ContasPtiblicas de 2003 a 2006, February. Villena, Renata, Humberto FalciXoMartins, Caio Marini, andTadeuBarreto Guimaraes(2006) 0 Choque de Gestiio em Minus Gerais: Politicas da Gestiio Ptiblicapara o Desenvolvimento, Belo Horizonte. Valadares, Silvia MourthC and FernandoBlanco Cossio. "Analise Fiscaldo Govepo Estadualde Minas Gerais", (mimeo). October 2006. - 53 -