3 s Document o f The World Bank FOR OFFICIAL USE ONLY Report No. 53356-BR INTERNATIONAL BANK FOR RECONSTRUCTIONAND DEVELOPMENT AND INTERNATIONALFINANCE CORPORATION COUNTRY PARTNERSHIP STRATEGY PROGRESS REPORT FOR THE FEDERATIVE REPUBLIC OF BRAZIL FOR THE PERIOD FY2008-2011 March 11,2010 Brazil Country Management Unit Latin America and Caribbean Region International Finance Corporation Latin America and Caribbean Department This document has a restricted distribution and may be used by recipients only in the performance o f their official duties. Its contents may not otherwise be disclosed without World Bank authorization. . 1 CURRENCY EQUIVALENTS (Exchange Rate Effective March 10,2010) Currency Unit = Real Real 1.73 = US$1.OO WEIGHTS AND MEASURES Metric System FISCAL YEAR January 1 - December 3 1 ABBREVIATIONS AND ACRONYMS AAA Analytic and Advisory Activity Atividade de Analise e Consultiva BCB Central Bank of Brazil Banco Central do Brasil BNDES National Bank of Economic and Social Development Banco Nacional de DesenvolvimentoEconBmico e Social COFIEX Commission on External Financing Comissio de Financiamentos Externos CONSAD Confederationof Secretariats of Administration o f the Conselho Nacional de SecretGos de Estado da States AdministraqBo CY Calendar Year An0 Civil DPL Development Policy Loan Emprestimo para Politicas de Desenvolvimento FY Fiscal year An0 Fiscal FIU Fiscal Responsibility Law L e i de ResponsabilidadeFiscal GDP Gross Domestic Product Produto Interno Bruto GEF Global Environmental Facility Fundo para o Meio-Ambiente Mundial GOB Government of Brazil Govemo do Brasil IBRD International Bank for Reconstructionand Development Banco Intemacional para a Reconstruqio e o Desenvolvimento IBGE Brazilian Institute of Geography and Statistics Instituto Brasileiro de Geografia e Estatistica ICT Information and Communication Technology Tecnologia da InformaqBo e ComunicaqBo IDEB Index of Development of Basic Education hdice de Desenvolvimentoda EducaqBo Basica IEG Independent Evaluation Group Grupo Independente de AvaliaqBo IFC InternationalFinancial Corporation Corporaqio Financeira Intemacional IMF InternationalMonetary Fund Fundo Monetario Intemacional M&E Monitoring and Evaluation Monitoramento e AvaliaqBo MIC Medium Income Countries Paises de Renda Media NCB National Competitive Bidding Concorrencia Nacional NCCAP National Climate Change Action Plan Plan0 Nacional sobre Mudanqa do Clima NCR Net Current Revenue Receita Corrente Liquida NGO Non Governmental Organization Organizaqio NBo Govemamental NLTA Non-Lending Technical Assistance Assistencia Tkcnica Nio-Reembolsavel OECD Organization for Economic Co-operation and Organizaqio para a Cooperaqio e Desenvolvimento Development EconBmico (OCDE) PAC Growth Acceleration Program Programa de Aceleraqio do Crescimento PEFA Public Expenditure and Financial Accountability Avaliaqio dos Gastos Publicos e Avaliaqio Financeira Assessment da Prestaqio de Contas PPP Public-PrivatePartnerships Parcerias Publico-Privadas SELIC Headline interest rate from Central Bank (Clearance and Taxa bbsica de Juros do Banco Central (Sistema Trustee System) Especial de Liquidaqio e Cust6dia) SEM Sustainable Environmental Management Gerenciamento Ambiental Sustentavel SME Small and Medium Enterprises Pequenas e Medias Empresas SWAP Sector Wide Approach Abordagem Setorial Ampla TA Technical Assistance Assistencia Tecnica WB World Bank Banco Mundial IBRD IFC Vice President: Pamela Cox Vice President: Thierry A. Tanoh Country Director: Makhtar Diop Regional Director: Vincent Gouarne Task Team Leader: Pablo Fajnzylber Country Manager: Andrew Gunther Team Sumort: Flavia Nahmias Task Manaeer: John Barham FOR OFFICIAL USE ONLY TABLE OF CONTENTS I. INTRODUCTION ................................................................................................. 1 I1 . COUNTRY CONTEXT ........................................................................................ 3 I11 . CPS PROGRESS TO DATE ................................................................................ 4 Macroeconomic Foundations and Public Sector Management ........................................... 4 Boosting Competitiveness ................................................................................................... 5 Increasing Equity................................................................................................................. 7 Improving Environmental Sustainability ............................................................................ 8 N e w Development Challenges and Opportunities .............................................................. 9 Portfolio Performance ....................................................................................................... 10 IV . WORLD BANK GROUP STRATEGY LOOKING FORWARD ..................11 V . RISKS ................................................................................................................... 14 ANNEXES ANNEX 1 REVISED CPS OUTCOMES FRAMEWORK : ........................................ 15 ANNEX 2: BRAZIL SELECTED KEY ECONOMIC INDICATORS. 2002-08 ...... 19 ANNEX 3: MACROECONOMIC OUTLOOK, 2009-2012 ........................................ 20 ANNEX A2-1: COUNTRY AT A GLANCE ................................................................ 21 ANNEX B2: BANK PORTFOLIO PERFORMANCE AND MANAGEMENT .......27 ANNEX B3: IBRD AND IFC PROGRAM SUMMARY ............................................. 28 ANNEX B4: SUMMARY OF NON-LENDING SERVICES ...................................... 30 This document has a restricted distribution and may be used by recipients only in the performance o f their official duties. I t s contents may not be otherwise disclosed without W o r l d Bank authorization . I. INTRODUCTION 1. The Board of Executive Directors discussed the FY08-11 Country Partnership Strategy (CPS) for Brazil on M a y lst, (Report No. 42677-BR). The CPS explicitly recognized 2008 Brazil's significant achievements in tackling second-generation development challenges using innovative approaches that the Bank can share with other member countries. Examples include effective conditional cash transfer programs, a successful framework for ensuring sub-national fiscal discipline and cost-effective clean energy sources. The CPS also recognized Brazil's critical contributions to the development o f the global policy agenda and the provision o f global public goods in areas such as climate change and the fight against global infectious diseases. This Progress Report briefly takes stock o f the implementation o f the strategic framework embedded in the CPS, focusing on what has changed in the country context and on how the World Bank Group has implemented its program while adapting to the new realities and evolving demands o f the Government o f Brazil (GOB). 2. The CPS aimed at responding to Brazil's demand for more flexible and efficient products that are better suited to the country's evolving needs. The Government expects the Bank to be agile and flexible in altering i t s m i x o f products and delivery mechanisms in order to respond more efficiently to changes in Brazil's circumstances and Government priorities. Under the CPS, the Bank has effectively answered this Government demand. In particular, Brazil has been able to take advantage o f IBRD's increasing financial product flexibility, as reflected in the use o f customized repayment schedules, embedded risk management tools, and increasing loan maturities. The Bank has also increased i t s speed - e.g. cutting project preparation times by almost two thirds while maintaining high levels o f quality in its portfolio - and made considerable progress in harmonizing i t s systems with those o f other development agencies, and progressively adopting country systems in the areas o f financial management and procurement. 3. The Bank has also been flexible in responding to Brazil's changing priorities for Bank engagement while maintaining i t s focus on the country's key long-range development challenges. In particular, in the context o f rapid growth in reserves and in order to help consolidate Brazil's sub-national fiscal responsibility framework, the GOBhas asked the World Bank Group to provide increasing technical and financial support to States and Municipalities. In particular, the GOB has asked the Bank to support both fiscal management programs and measures aimed at improving service delivery. Improving the quality o f expenditures at the sub-national level i s particularly important in the case o f Brazil because o f the highly decentralized nature o f i t s federation. The World Bank Group has responded by rapidly shifting its lending program towards the State level, using traditional investment projects, stand-alone IFC and Bank advisory services, and also, increasingly, development policy loans (DPLs) and multi-sector operations with a sector- wide approach (SWAPS). The team i s also exploring the possibility o f engaging with large Municipalities through DPLs within the framework o f OP8.60.' Overall, in the context o f i t s Strategy for engaging with middle income countries, the Bank has generally focused i t s work at the sub-national level on supporting path-breaking investments and policy reforms whose impact can be enhanced through replication, and whose design and implementation can particularly benefit from the Bank's unique blend o f financial, knowledge and strategy development services.* 4. Despite i t s fast recovery from the global financial crisis, Brazil s t i l l faces significant challenges to achieve higher rates of broad-based sustainable growth; some of these challenges 1 have actually been accentuated by the crisis. Despite Brazil's good short term prospects, growth could be hampered in the medium to long term by persisting l o w rates o f investment, growing infrastructure bottlenecks and a high tax burden. Indeed, despite a very strong fiscal effort during the last decade, fiscal adjustment has been accomplished mainly by reducing public investment and by raising taxes. The fiscal space for increasing public investment has been further reduced as a result o f recent increases in current expenditures by the Federal Government. The GOBhas thus asked the World Bank Group to support efforts to increase the level and the quality o f Brazil's public and private investments in infrastructure. In this context, the World Bank Group i s engaged in helping the Government implement i t s flagship "Growth Acceleration Program" (PAC) as well as in supporting the incipient development o f public-private partnerships (PPPs). 5. Other areas in which Brazil continues to demand W o r l d Bank Group assistance are related to the country's high levels o f income and regional inequality, and i t s pending challenges in the area o f environmental sustainability. Thus, the Bank i s working with the GOB in its efforts to increase the coverage and especially the quality o f education and health services. The Bank i s also engaged in helping Brazil extend the already very good coverage o f i t s conditional cash transfer program ("Bolsa Familia") to cover virtually all poor families. Moreover, the Bank i s supporting the development o f productive activities and access to basic services in poor rural Amazon and Northeast regions. With reference to the Amazon, the IFC has launched its Brazilian Amazon Initiative, which aims to harness market forces to reduce deforestation. Finally, with regard to the sustainability agenda, the Bank has been working with the GOBon a substantial set o f policy reforms in the areas o f environmental management and enforcement, as well as in expanding the set o f financial mechanisms for promoting sustainable natural resource use. T h i s work has been complemented by direct technical support to program implementation using a mix o f investment loans and trust funds. 6. While the IBRD lending program presented in the CPS was indicative, it has been delivered without significant changes. The indicative lending program identified for the entire CPS period totaled $6.99 billion, o f which $5.2 billion were expected to be delivered in FY08-09. Up to this Progress Report, total lending under the CPS has reached $6.7 billion. O f this amount, about $5.2 billion were approved during FY08-09, which coincides with what had been envisioned for this period in the indicative CPS lending program. About three fourths o f total lending has been to sub-national entities, mostly States, which i s very close to what had been foreseen in the CPS. In terms o f sector composition, the need to respond to crisis-related demands has led to a slight increase in projects geared towards fiscal and public sector management issues, at the expense o f projects pertaining to the equity and competitiveness pillars o f the CPS. For these two areas, however, lending i s expected to grow at a faster rate in the remainder o f the CPS period. The share o f projects aimed at supporting the sustainability agenda has been close to what had been planned in the CPS, and i s expected to remain stable over the rest o f the CPS period. 7. IFC commitments to Brazil totaled $2.18 billion between F Y O S and December 2009. I F C mobilized substantial third party investments, with participants' outstanding balance reaching $1.01 billion. IFC's committed balance stood at $2.36 billion in December 2009, making Brazil IFC's second most important market after India. About half this amount was invested in financial institutions, followed by infrastructure projects with $385 million, and agribusiness with $282 million. As o f December 2009, I F C had 73 active client companies in Brazil. The Corporation's strategy concentrates on projects that reduce poverty and inequality by targeting "Base o f the Pyramid" groups, address climate change, and improve Brazil's competitiveness by supporting 2 , SMEs and improving infrastructure. In 2008 for example, IFC clients employed 200,000 people, helped finance tertiary and technical education for over 700,000 students, and provided 200,000 loans to SMEs. I F C responded to the financial crisis by providing ample trade finance to client banks to increase their liquidity, strengthen their balance sheets, and ease their funding requirements. I F C provided $333.1 million in trade finance in CY 2009 to second-tier client banks. This enabled them to continue supporting their clients, mainly mid-market companies and SMEs. 1 . COUNTRY CONTEXT 1 8. Even though the general political situation has remained largely unchanged during the CPS period, Brazil i s entering an electoral period in which Federal and State authorities will be renewed. The general elections o f October 2010 will involve the Presidency, all State governors and Congress. Municipal elections are only due o n October 2012. The elections are not likely to significantly change Brazil's economic model or i t s sustaining tripod o f primary surpluses, inflation targets and floating exchange rate. Major presidential candidates share broad development priorities, focused o n achieving Brazil's growth potential, and have expressed their commitment to this general framework. Political stability i s also not at stake. While President Lula's eight-year legacy i s likely to remain a very important political and development benchmark for the next government, mainstream presidential candidates should not have difficulty setting up a congressional support coalition. 9. The Bank i s well positioned for dealing with the political transition at the Federal and State levels. Most o f key political stakeholders at the Federal and State levels, government or opposition, perceive the Bank as an impartial solutions provider, a promoter o f social equity at the national level and a fair partner o f Brazil o n common global issues. The Bank i s putting in place a strategy to engage the new Federal and State Governments, coordinating stakeholder dialogue and broader communications to ensure a smooth transition and program continuity, as applicable. The strategy seeks to anticipate new priorities and suggest ways to engage, adjust or develop the Bank program proactively. As was the case in the first Lula administration, when the early, public and decisive Bank support was highly appreciated and created a climate o f trust for the whole administration, the Bank communications strategy will work to highlight the rapid and high quality response allowed by this CPS to the needs o f the new Federal and State Governments, thus positioning the Bank as a k e y partner. Finally, while the team does not expect Federal Government demand for an all-encompassing set o f policy notes covering an exhaustive range o f topics, the Bank will be ready to respond to requests for technical advice o n specific policy issues through the preparation o f demand-driven policy briefs, including for States. 10. Following the outbreak of the global economic crisis in September 2008, Brazil underwent a recession that lasted only two quarters; aided b y very strong fundamentals, a counter-cyclical macroeconomic policy stance and increasing commodity prices the economy i s now recovering at a fast pace. While the prompt response o f the authorities to the tightening o f financial market conditions avoided a credit crunch, the strong fundamentals allowed this time for a countercyclical monetary and fiscal policy stance. Regarding the latter, temporary tax breaks for key industrial sectors (automobile, appliances) were very effective in helping the prompt recovery o f industrial production. Financial markets are also exhibiting a robust r e ~ o v e r y . After ~ experiencing almost zero growth in 2009, Brazil i s projected to grow by between 4 and 6 percent in 2010 and 201 1 (see Annex 3). However, the further expansions in irreversible expenditures, such as public sector salaries, are a concern. While fiscal sustainability is not at stake, the increased rigidity 3 , in expenditures and the reduced fiscal space for investment might negatively affect long-term growth prospects. 11, During the global economic slowdown, sub-national governments have suffered considerable reductions in fiscal revenues, both as a result of lower own tax collection and reduced Federal transfers. Given the hard budget constraints and limited access to credit imposed by Brazil's Fiscal Responsibility Law (FRL), sub-national governments were mostly unable to adopt countercyclical fiscal policies. In particular, in the context o f falling fiscal revenues, and given the strong rigidities existing in current expenditures, many o f them were forced to cut discretionary expenditures, mainly investments. The Bank has been called by the GOBto support selected creditworthy sub-nationals in their efforts to maintain their commitment to long term debt sustainability while protecting their investment and social expenditure programs during the period o f reduced fiscal revenues. While the Bank has attempted to selectively respond to these demands, it has maintained its focus in providing technical and financial support to State Governments whose policy reform and investment programs are expected to have strong developmental impacts. I I L C P S PROGRESS TO DATE 12. The W o r l d Bank Group's work in Brazil has been organized around four of the country's key development challenges. Both the previous CAS and the current CPS have been organized in the form o f four pillars: strengthening the macroeconomic and good governance foundations o f growth; boosting competitiveness; increasing equity; and improving environmental sustainability. The CPS has focused o n monitoring results through a selected set o f indicators. While these are well aligned with the government objectives in each o f the CPS pillars, this Progress Report proposes a revised set o f outcome indicators (Annex 1) to which the Bank's program can realistically be expected to contribute - as opposed to higher order objectives to which the Bank contributes only partially and/or indirectly. As described below, despite the relatively short period elapsed since the presentation o f the CPS, there has been considerable progress made in the CPS outcomes that are more closely linked to the Bank's programs and activities. Macroeconomic Foundations and Public Sector Management 13. Since the presentation of the CPS Brazil has continued making rapid improvements in macroeconomic management. The solid macroeconomic fundamentals built in the last decade have allowed Brazil to smooth the effects o f the financial turmoil with relative speed. The government has been using its increased fiscal and external solvency and its enhanced credibility to adopt expansionary fiscal and monetary policies. As a result o f these policies, however, the Government has been unable to reduce current expenditures (including those in social security) and to increase the share o f public investment. This, nevertheless, has not compromised debt sustainability or the overall macroeconomic policy framework, which continues to be adequate. For example, prior to the advent o f the crisis net public sector debt continued i t s declining path, falling from 45 percent o f GDP in 2006 to 36 percent in 2008. During 2009 this ratio increased again to 44 percent, but it i s expected to resume i t s declining trajectory as the economy recovers (see Annex 3). Moreover, with Bank support, at least 20 State Governments are making significant progress in terms o f reducing unwarranted pension expenditures. 14. Sub-national lending operations have been the main channel for supporting improvements in governance and public sector management. There has been considerable 4 progress towards the CPS-expected outcomes o f improved public sector efficiency and effectiveness at the State level, at least in those States in which the Bank has been active in this area. The Bank has responded to requests by the GOBto support efforts to enhance compliance with the FRL, especially after the advent o f the global financial crisis, by supporting the fiscal adjustment and public sector management reform programs o f the states o f Alagoas, CearQ, the Federal District, Minas Gerais, R i o de Janeiro, and Rio Grande do Sul. Using SWAP and D P L operations, the Bank has helped implement cross-cutting results-based public sector governance reforms which have contributed to improving the quality o f both fiscal management and service delivery in key sectors (e.g. education, health, private sector development and transport). 15. Non-lending technical assistance activities (NLTA) have also played a key role in benchmarking and building the capacity of Brazilian public sector entities. Programmatic Analytical and Advisory Services (AAA) in support o f Governance improvements (FY08 and 09), in particular, supported in-depth assessments o f governance issues in various sectors, and the preparation o f Public Expenditure and Financial Accountability (PEFA) assessments at the State and Federal levels. Additional NLTA has been provided in the areas o f auditing, procurement, investment management and, in partnership with the OECD, also in that o f human resource management. The Bank has also supported annual conferences on Public Management that bring together State level officials in partnership with the confederation o f Secretariats o f Administration o f the States (CONSAD). In addition, through the BRAVA AAA program, the Bank has continued to support the development o f Monitoring and Evaluation Efforts in Brazil. These activities have played a key role in supporting the Bank's lending operations and in sharing advanced knowledge with i t s Brazilian partners. Finally, on tax policy issues, the Bank has prepared analytical pieces on fiscal federalism and counter-cyclical fiscal policies. Boosting Competitiveness 16. Brazil's competitiveness and medium term growth prospects could be hampered by persistently low rates of investment in infrastructure. Capital formation i s s t i l l low, inferior to 20 percent o f GDP, and so i s public investment (3.3 percent o f GDP in 2008). Despite the GoB's intensive efforts to increase investments in infrastructure through i t s P A C program, there have been significant implementation delays, especially in the areas o f transport and logistics, water and sanitation and urban development. At the GoB's request, the Bank is supporting the implementation o f the P A C in the areas o f energy, transport, water, housing, and environmental licensing. Likewise, although the Federal law for PPPs was passed more than 4 years ago and a Federal guarantee fund was put in place, no major Federal PPP has been announced. However, with WBG support some States have made more progress in this area - e.g. SBo Paulo, Minas Gerais and Bahia - and a Federal breakthrough i s being made in the irrigation sector, supported on a fee for service basis by I F C and IBRD. 17. The Bank has supported the GoB's efforts to promote private sector development and competitiveness through multi-sector S W A P and DPL operations at the sub-national level. The Minas Gerais and Ceara SWAP projects, as well as the R i o de Janeiro State DPL, have included components aimed at supporting improvements in the business environment through the simplification o f tax and business registration processes. Moreover, in the case o f Minas and Ceara the Bank has supported respectively the modernization o f State science and technology policies, and efforts to expand "digital inclusion" through the deployment o f broadband internet networks. At the Federal level, a study on Knowledge, Innovation and Competitiveness was disseminated widely in 5 partnership with the national federation o f industry associations (CNI). Moreover, the Bank i s implementing NLTA activities aimed at supporting efforts by the GOBto further improve financial sector regulation and increase access to finance. 18. Efforts to improve competitiveness and the investment climate have benefited from cooperation between IBRD and IFC. Improving the business environment favors SMEs by enabling them to enter the formal economy. The IFC technical assistance facility has supported programs in several cities to reduce the time needed to open new businesses. This has been reflected in the corresponding Doing Business indicator (measured in the city o f Siio Paulo), which has been reduced from 152 to 120 days. The Bank and I F C have coordinated their efforts to improve the investment climate in other cities and States. Other noteworthy indicators o f improvement in Brazil's business environment to which the WBG has contributed include improvements in the effectiveness o f environmental licensing agencies. IFC expects to begin advising State Governments on environmental licensing in 2010, starting with the Amazonian State o f Acre. 19. Support for mid-market companies, second-tier banks, and SMEs i s a central component of IFC strategy in Brazil. IFC has provided about $150 million in (non-trade) financing for second-tier financial institutions since FY 2008. Most o f these banks fund themselves in the local capital markets and were hit by the financial crisis o f 2008. These transactions ranged from a $2.2 million loan to Ceape-MA, a microfinance lender in Maranhiio, to a $55 million investment in certificates o f deposit with warrants issued by Banco Daycoval. In total, IFC approved five SME-focused projects for $117 million and mobilized an additional $395 million since FY 2008. In calendar year 2008, I F C client banks made 216,000 SME loans for a total $14 billion. They also made 1.5 million microfinance loans for an aggregate $1.56 billion. 20. I n the transport sector, demand for borrowing from State governments has been large, and continues to increase as a result of the crisis. The Bank continues to work with key partners in R i o and Siio Paulo on addressing issues o f integrated urban transport planning, adding in a new dimension o f climate change, and major investments in the public transport systems. The Bank's road transport portfolio also continues to be strong at the Federal and State level - e.g. through a Federal SWAP and State-level projects in Bahia, Minas and Tocantins. The Bank has also provided just-in-time advice on the design o f highly visible transactions like the bullet train project from Rio to Siio Paulo and the rail ring o f the city o f SGo Paulo. In the area o f logistics, despite limited progress in improving planning and the regulatory framework at the Federal level, the Doing Business indicators measuring the efficiency o f import/export procedures have improved significantly during the CPS period. 21. The Bank has also supported comprehensive regional approaches to urban development. During the CPS period, the ten municipal projects under preparation were consolidated into two horizontal APLs (Brazil Municipal Lending and Rio Grande do Sul Integrated Municipal Program). At the same time, the new Ceara Regional Economic Development Project i s using an innovative approach for addressing regional governance and economic development by linking secondary cities to the broader development agenda o f the State. This work has been complemented by AAA - e.g. the report "Competitiveness and Growth in Brazilian Cities" and a major world city conference in Port0 Alegre - and NLTA activities. Among the latter, the Bank i s working with the Ministries o f Finance and Cities in the area o f housing sector reform - including supporting the implementation o f the large Minha Casa Minha Vida popular housing program. Moreover, a project is being prepared with Caixa, the second largest public Bank in Brazil, to 6 improve solid waste management across Brazilian cities. This innovative project would be the first to use a financial intermediary to structure carbon finance operations on a wholesale basis. Increasing Equity 22. On the social policy front, the Government has continued to implement well targeted transfer policies that are helping reduce inequality and poverty and minimize the negative social impacts of the crisis. The official poverty rate dropped to 21.6 percent in 2008 from 32.9 percent in 2002. The Gini index also fell significantly, for the first time in many decades, from 0.59 in 2002 to 0.55 in 2008. The Bank has contributed to these outcomes through i t s support to the well targeted Bolsa Familia conditional cash transfer program. While Government expenditures in this program have increased from R$ 5.8 billion in 2004 to R$ 11.1 billion in 2008, they have remained under 0.4% o f Brazil's GDP. Besides having a significant impact on reducing the incidence and severity o f extreme poverty, this program i s helping increase school enrollment among poor children. The Bank has supported the GOBin i t s efforts to improve the targeting o f Bolsa Familia, build strong monitoring and evaluation systems, and strengthen the basic operations o f the program by enhancing the role o f Municipalities. 23. There have also been notable improvements in relative income levels in the North and Northeast regions. The ratio o f per capita disposable income o f the Northeast, with respect to Brazil as a whole, increased from 59.6 percent in 2006 to 62.5 percent in 2008. The corresponding increase for the North was from 65 to almost 72 percent. The Bank contributed to these outcomes mainly through rural poverty reduction projects, which have so far reached over 39,000 communities in the Northeast and North regions. Moreover, thanks to the Crkdito Fundiario program - which the Bank helped develop - the number o f landless and small farmers that have obtained access to land has increased by more than 20 percent between 2007 and 2008. 24. Despite increasing primary enrollment, Brazil s t i l l faces important educational challenges that may hamper further progress in growth and poverty reduction. While Brazil has pressed forward with a series o f successful policies which heralded an expansion o f access to elementary education, almost one-quarter o f children o f secondary school age are still not enrolled. The Government i s taking aggressive actions to address this shortcoming and improve basic education quality. At the request o f the GOB, the Bank has been supporting these efforts both through i t s AAA program and by means o f multi-sector sub-national projects. In FYIO, an . ambitious analytical program was started in partnership with the Federal and selected State and Municipal Governments to help design and evaluate policies and programs related to early child development and different dimensions o f the quality o f education production process. 25. IFC has financed education projects that provide technical and vocational training for middle- and low-income groups. This strategy i s aimed at accelerating Brazil's progress toward an equitable and competitive economy by improving employment opportunities for "Base o f the Pyramid" income groups, and by providing businesses with better qualified staff, A growing shortage o f trained employees is hampering the competitiveness o f Brazilian companies and the economy as a whole. IFC's approach is to seek strategic clients with sufficient scale to deliver high- quality, low-cost education. Since FY 2008, I F C has supported four education projects for a total $100 million. These include a $28 million loan to Anhanguera Educacional, whose students are mainly young working adults from middle and low-income backgrounds. This project i s expected to benefit an estimated 330,000 students in 2010, h a l f o f whom are women. 7 26. While Brazil still exhibits comparatively low and highly unequal health status indicators for its level of income and public spending, the Bank i s supporting efforts to improve access to primary care by the poor. The Bank has been a pioneer in supporting the Brazilian Family Health Program (PSF). Between 2007 and 2008 the coverage o f this program increased from 46 to 50 percent o f the Brazilian population. The positive impacts o f the PSF have been reflected in the improvement o f infant mortality and other health indicators, particularly among the poorest segments o f the population. The Bank approved in 2008 the second phase o f the Family Health program, which will contribute to improve quality o f primary care and extend coverage to 55 percent o f the population by the end o f 201 1. The Bank i s also supporting State-level efforts, in Minas and R i o de Janeiro, to increase the coverage o f the PSF, especially among highly vulnerable populations. 27. The Brazilian National Health System has improved significantly in the last twenty years but still suffers from unequal coverage, low quality and inefficiency. Starting in 2006, however, the Government has implemented a new wave o f reforms, collectively known as health covenants (Pactos pela Sazide), that are setting the stage for increased flexibility for sub-national entities to design and organize their own delivery systems, in line with local conditions but in the context o f results-based budget allocations. The GOBhas asked the Bank to support these reforms through the Federal Qualisus-Rede SWAP project. The Bank is also helping mainstream health reforms at the sub-national level through multi-sector operations with the states o f Amazonas, Acre, Bahia, Ceara, Minas Gerais, Rio de Janeiro and the Federal District. I F C i s financing health providers in Brazil that are focused o n low- and middle-income groups. I F C clients in this field are increasingly working under contract to public sector agencies to provide in-patient and out-patient care as well as diagnostic services. Improving EnvironmentalSustainability 28. With Bank support, Brazil has continued making progress on the environmental sustainability agenda. Deforestation in the Amazon, for example, has fallen steadily, declining from an average o f 1.48 million ha per year during 2005-2007 to 1.3 million ha in 2008. Similarly, protected areas increased from 79 million ha in 2007 to 107 million in 2009. However, many challenges remain in order to address Brazil's key environmental issues. In this context, the GOB has asked the Bank to support i t s efforts to address implementation issues that have slowed down the pace o f forest concessions. Moreover, the Bank i s working with the GOBin developing better incentives for forest preservation and enhancing the management o f protected and indigenous areas. At the Government's request, the Bank is also engaged in supporting implementation o f the country's newly approved National Climate Change Action Plan (NCCAP), which i s expected to lead to signed reductions o f 20 million tons o f C02 eq. per year by 201 1, including through the increased use o f renewable energy.4 I F C i s supporting this strategy with traditional and non- traditional renewable energy projects. Additional support for the NCCAP could be provided under the newly created Climate Investment Funds (CIF) managed by the World Bank Group. 29. T o support the GOB'S environmental sustainability agenda, the World Bank Group has combined trust funds with traditional IFC and IBRD financing. The Bank has mobilized bilateral and multilateral grant funds (e.g. from the GEF) in support o f conservation and natural resource management initiatives. There has also been collaboration between I F C and IBRD on the I F C Brazilian Amazon Initiative, specifically on Forestry projects and in the Para Rural and PROACRE projects. Trust fund and I F C resources have leveraged the impact o f Bank investment 8 loans at the State and Federal level, and that o f the Sustainable Environmental Management (SEM) D P L series with the Federal Government. This program i s supporting the GOB'S efforts to increase the transparency o f the environmental licensing process, enhance the implementation o f mandated Brazilian environmental and social management procedures, and increase the effectiveness o f environmental and social management systems in BNDES and other financial institutions. The Bank is also using investment projects to support institutional capacity building for decentralized environmental management as well as for addressing safeguards issues more generally. 30. I n addressing the natural resource aspects o f the environmental sustainability agenda, the Bank has applied the tenets o f the Amazon Partnership Framework proposed in the CPS. The basic idea i s for the Bank to become a full-service partner to Brazil, supporting improvements in access to basic services in remote areas, helping increase agricultural returns, improving the management o f protected areas and the environmental and social impacts o f infrastructure investments, and helping develop payments for environmental services and incentives for sustainable forestry. This approach has guided the development, not only o f the SEM DPLs, but also that o f new multi-sector investment loans at the State level, and the provision o f lending and non-lending technical assistance. 3 1. IFC launched i t s Brazilian Amazon Initiative in 2008, complementing IBRD's. I t aims to use market forces and economic incentives to slow deforestation and greenhouse gas emissions. The Initiative focuses o n three main areas: sustainable agribusiness (particularly cattle and soy), sustainable forestry, and sustainable finance. IFC's approach i s to develop financially and environmentally sustainable standards to which private sector players can subscribe, and which can be replicated and scaled up. The Initiative includes investments and advisory engagements. The Sustainable Beef Working Group, for example, convened by the IFC, was created and registered in 2009. It includes 36 organizations representing ranchers, meat packers, retailers, financial institutions, and NGOs. I F C and the Brazilian NGO Alianga da Terra have launched a project to improve environmental and social standards for ranchers and soy producers. In FY 2008, I F C approved a pioneering $100 m i l l i o n sustainability loan to Unibanco, intended to set industry benchmarks in this type o f lending for Brazilian companies. Unibanco's Sustainability Credit Line i s aimed at cleaner production, renewable energy, and sustainable construction projects. 32. During the CPS period, the Bank has also made progress in advancing a new and more integrated approach to water resource management. In this approach, which i s reflected in the Bank's six State-level water projects, sub-sectoral investments in water supply and sanitation are made within a broader framework o f institutional and policy strengthening to address environmental flows, watershed protection and irrigation. At the Federal level, the Bank has responded to the Government request for a consolidation o f technical assistance projects by working o n the preparation o f a $1O M integrated water project (Interuguas) which brings together agencies and O ministries that deal with water into a common planning framework. There has also been progress in working jointly with the I F C sub-national facility in developing transactions with several State and Municipal water and sanitation companies using innovative market-oriented finance instruments. New Development Challenges and Opportunities 33. During the CPS period Brazil has discovered very large oil reserves, which creates new development opportunities and challenges. By some estimates Brazil's o i l reserves could reach 40 billion barrels, which would move the country from 14`h to 7th place in world rankings. This creates several new policy challenges, including the need to revamp the sector's regulatory 9 framework, improve management o f uncertain oil-related public sector revenues, address challenges related to the distribution o f such revenues among sub-national governments, and deal with the possible appreciation o f the Brazilian currency. Given that international experiences are particularly relevant for informing the public debate on these issues, the Bank could be called to play a relevant role, notably through its economic and sector work and A M . I F C i s supporting the development o f Brazil's already sizable domestic o i l service industry by enhancing local skills and supply chain linkages to benefit local suppliers. 34. The selection of Brazil as the host of the 2014 W o r l d Cup and R i o de Janeiro as the seat of the 2016 Olympics also bring new challenges and development opportunities for Brazilian cities. The additional infrastructure, which will be financed mostly by the Federal Government, as well as the increased tourism and publicity associated to these events should greatly benefit the host cities. However, local governments also face the challenge o f completing the necessary investments in time without compromising other key development programs. In this context, the Bank could be called to play an important role in helping ensure that planned investments also help enhance local and regional economic development, provide positive benefits to the broader population, especially the urban poor, and are compatible with environmental sustainability - e.g. with a low-carbon approach to urban development. Portfolio Performance 35. As of December 2009, lending under the CPS has been very much as agreed with the GOB at the time of i t s preparation. The lending program identified in the CPS was only indicative, consisting o f 44 projects and a total o f $6.99 billion for the entire CPS period. The indicative lending program for the first two years o f the CPS period (FY08-09) included 33 projects for $5.2 billion. Six o f the projects identified in the CPS have been dropped and four new ones were added to the program. Up to January 2010, the Bank delivered 34 o f the remaining 42 projects in the pipeline, for a total o f approximately $7 billion. The other 8 projects are in preparation. For seven o f the projects delivered in FY08 (totaling $274 million), however, board approval took place before CPS board discussion. Thus, 27 projects have been delivered under the CPS up to this Progress Report, totaling $6.7 billion. O f this amount, about $5.2 billion were approved during FY08-09, which coincides with what had been envisioned for this period in the indicative CPS lending program. 36. Project size and the share of Federal vs. sub-national lending have also been close to what had been envisioned in the CPS. In about h a l f o f the delivered projects identified in the CPS there have been differences between the final size o f the loans and the CPS estimate. However, those changes have implied an increase o f only 6 percent in the overall size o f the indicative lending program. The share o f sub-national operations in total lending -73 percent - has also been very close to the 71 percent that had been foreseen in the CPS. Most loans have been to State Governments: 20 out o f the 26 loans approved under the CPS, with only 3 loans being with Municipalities and 3 with the Federal Government. 37. The impact of the global financial crisis on sub-national fmances has further increased demand for Bank support in the area of fiscal and public sector management. The sector composition o f the program has been quite similar to that envisioned in the CPS. However, the need to respond to crisis-related demands has led to a slight increase in projects geared primarily towards fiscal and public sector management issues, from 41 percent o f the lending program identified in the CPS to 44 percent o f total actual lending. In contrast, the share o f lending aimed at supporting the 10 , equity (14 percent) and competitiveness pillars (23 percent) o f the CPS has been lower than expected (respectively 24 and 29 percent). Finally, lending under the sustainability pillar has accounted for 28 percent o f total loans delivered, compared to the 27 percent envisioned in the CPS. I t i s worth noting, however, that almost h a l f o f the operations delivered under the CPS have been multi-sector, often combining technical and financial support in the areas o f human development, infrastructure, environmental management, and fiscal and public sector management. 38. Under the CPS the Bank has also been successful in achieving greater speed and flexibility. Working closely with the GOB,the Bank reduced total average project processing time, between approval by the Federal Government and loan signing, from 30 to 11 months under the current CPS. Moreover, average loan maturity has been close or equal to 18 years and final maturities to 30 years, compared to the prior average and final maturities limits o f respectively 10.25 and 25 years. Brazil has also begun utilizing the embedded risk management tools (e.g. fixed spread loans) and the repayment flexibility offered by Treasury (e.g. monthly pricing and repayments). 39. In spite of the large number of projects, both active and in preparation, the Brazil portfolio has remained very sound. There are 54 active projects with net commitments o f $7.9 billion. There are only three problem projects, and two potential problem projects. Pro-activity o n problem projects i s at 100 percent. Only one project has been rated with unsatisfactory procurement performance, and another one as unsatisfactory o n financial management. This has been achieved through intense monitoring and management o f the portfolio, and excellent collaboration with the Government - "light" portfolio reviews take place every two months, and in-depth reviews o n an annual basis. 40. The Bank and the IADB have increasingly partnered in the harmonization and country systems agendas. The Bank and the IADB have agreed with the GOBo n standard bidding documents. These are to be used for national competitive biddings, which account for over 90 percent o f project related procurement. The Bank and IADB have also agreed to coordinate o n all upcoming sub-national PEFA assessments. In addition, the Bank has been working with the Government o n improving financial management systems, as well as internal and external audit and control. On the procurement side thresholds for prior review and for using different procurement methods have been raised to relatively high levels. This has been possible because o f the sound local procurement legislation and practice. T h e procurement team has also been working with a number o f States o n the relevant OECD indicators and benchmarks, and has used them to improve procurement capacity in the context o f public sector reform projects. IV. WORLD BANK GROUP S T R A T E G Y LOOKING FORWARD 41. Looking forward, the composition of the WBG program i s likely to be rebalanced towards the equity and competitiveness pillars of the CPS. During the remainder o f the CPS period, loans pertaining to these areas would each account for about 40 percent o f the lending program, while lending under each o f the other two CPS pillars would represent about 30 percent o f the p r ~ g r a mIndeed, the Bank i s facing increasing demand for supporting innovative approaches to .~ social service delivery at both the Federal and sub-national level. Moreover, the GOBi s requesting increased Bank support to i t s program o f public and private investments in infrastructure. This shift in demand i s explained in part by the fact that Brazil i s recovering rapidly from the effects o f the global financial crisis, which raises the importance o f addressing structural obstacles to long term 11 , growth. Moreover, as fiscal revenues tend to recover, the focus o f sub-national governments i s gradually shifting from the objective o f expanding fiscal space towards that o f improving expenditure efficiency and effectiveness - i.e. from focusing on expanding social and investment programs to improving the quality o f service delivery. The Bank i s responding to these challenges through the same type o f delivery mechanisms used in the first part o f the CPS - e.g. multi-sector SWAP projects - but with an increasing emphasis in better coordinating Federal and State policy interventions. Finally, within the sustainability agenda, as the GOBmoves to the implementation o f i t s climate change policy, the Bank is working to provide further support to climate change mitigation and adaptation policies and investments. 42. In line with the Bank, IFC has tightened the focus of its original strategy, and i s emphasizing equity and quasi-equity transactions. I t s strategy i s now concentrated in three key areas. The first is focused on reducing poverty and income inequality with projects that impact "Base o f the Pyramid" groups through transactions principally in health and education, and microfinance. The second area concentrates on climate change-related projects in the Brazilian Amazon and on renewable energy and energy-efficiency ventures. The third area aims to improve Brazil's competitiveness through support for SMEs and infrastructure projects. 43. IBRD lending could reach about $5.7 billion in F Y l O and $2.3 billion in FY11. The indicative lending program for FY 10 and FY11 totals about $8 billion and i s summarized in table 3. In comparison, between the approval o f the CPS in M a y lst, 2008 and June 2009, the Bank approved $5.2 billion in lending to Brazil. Annex B3 provides a summary o f the possible Bank program during the remainder o f the CPS, including an indication o f the development challenges that the respective operations are expected to help address. Lending is concentrated in FYlO because o f the expected reduction in demand during the political transition period in FY11. The shares o f Federal and sub-national lending during the remainder o f the CPS period - respectively 33 and 67 percent - are expected to be very similar to what had been envisioned at the time o f the CPS approval - respectively 29 and 71 percent. I t i s important to note, however, that the above volume o f expected lending is the reflection o f Government request and may be met only if IBRD has sufficient lending capacity. Current projections suggest that, under this lending program, Brazil will remain below the current US$l6.5 billion Single Borrower Limit. PROGRAM FOR FYIO-I I TABLE CURRENT INDICATIVE ESTIMATE IBRD LENDING 3: OF Federa I 776.3 Subnational 4,935.5 201 0 Total 5,71 I.a Federal 1,887.6 Subnational 41 7.6 201 1 Total 2,305.2 Grand Total a,oi 7.0 44. There i s increasing demand for Bank support in the infrastructure sectors, both at the Federal and the sub-national levels. With the drop in revenues and transfers, many state and Municipal Governments are unable to meet the needs o f their ongoing investment programs, including those financed under the PAC. The Bank has been asked to help by providing additional 12 financing to existing investment projects (for example in Siio Paulo), supporting policy reforms through DPLs (for example for urban environmental and water management in Pernambuco), and by financing large state programs with new partners (for instance, feeder roads in Mato Grosso do Sul). There are also requests from the Federal Government to implement a second phase o f the Federal Transport SWAP and possibly for supporting the Government's energy program. 45. The Bank i s also being called to support Brazil's shift towards increasing decentralization, especially in social policies and programs. To the extent that sub-national Governments are responsible for key social services - e.g. in health and education - the improvement o f their capacity to provide high quality social services i s key for addressing Brazil's significant equity challenges. Since the Bank is supporting human development programs at both the Federal and the State level, it is well positioned to help improve the vertical integration o f their respective social policies. The Bank i s seeking to engage with Municipal Governments through DPLs, at least in large urban centers, in order to contribute to the improvement o f public service delivery. Indeed, the Bank would then be in a position to help increase the coordination o f social policies at all levels o f Government, which would likely result in improved effectiveness and efficiency o f social programs. 46. As embodied in the programmatic SEM DPL series, moving to greater sustainability implies making progress on policy implementation as well in scaling up investments. A substantial set o f policy reforms have been put forth in the areas supported by the SEM D P L series. Beyond these projects, the Bank will continue contributing to the sustainability agenda through extensive analytic work and the scaling up o f investments to promote sustainability at the state level. The areas o f focus for AAA are l o w carbon-intensive growth, the risks o f Amazon dieback, and constraints imposed by weak land administration and ways o f unblocking this process. Moreover, the Bank will also support efforts to turn Brazilian metropolis into "green" l o w carbon cities. In particular, the Bank will explore possibilities for blending various financial sources (IBRD, CDM, GEF, and others) to support the implementation o f city-wide GHG reduction plans. 47. The Bank has also started to develop a new strategy for addressing the regional challenges of the North East. The goal is accelerating growth in the poorest region o f Brazil by means o f increasing i t s economic ties with the rest o f the country as well as with global markets. The main feature o f the strategy i s that it will promote regional rather than state-specific interventions. A three-pronged approach i s being proposed to stimulate: (a) innovative and inclusive economic growth (building o n the lessons o f the rural poverty reduction projects and analytical work on supply chains and clusters), (b) integrated water resource management and increased productive use o f the water (building o n AAA and the PPPs in irrigation) and (c) addressing the specific environmental challenges o f the semi-arid together with climate change issues. The strategy will seek out investment synergies across states for a common purpose, in areas such as logistics, market access, ICT, and shared water resources. 48. Across all sectors, the Bank will continue implementing an ambitious Country Study and Conference program. While the Bank has continued providing specific advice to the Government when requested, the high level o f "sophistication" o f Brazilian clients make it critical to further emphasize the quality o f the knowledge services provided by the Bank. Thus, an increasing number of partnerships have been initiated with local scholars in order to promote original research that can shed new lights o n economically important and politically relevant issues. In this context, the preparation o f a series o f Country Studies and Conferences i s underway to help 13 position the Bank o n a number o f critical topics that were highlighted in the CPS and are likely to be widely debated in the next electoral period. In particular, the Country Study program for FYlO will touch upon issues such as quality o f education, j o b quality, aging, early childhood development, climate change and the Amazon dieback, and the effects o f the financial crisis o n poverty. V. RISKS 49. The CPS identified five main types of risks. First, the Bank's engagement with the Federal Government could weaken as a result o f the sharp move to a State focus. T h i s risk was successfully mitigated by ensuring that the conceptualization o f new sub-national projects i s performed with the full engagement not only o f the Bank and the corresponding sub-national Governments, but also with the active participation o f the Federal Government. The Bank was also able to maintain i t s policy dialogue at the Federal level by means o f lending and non-lending technical assistance activities. Moreover, through i t s AAA agenda the Bank is working to provide adequate analysis o f national policy priorities so as to place in better perspective and enhance the effectiveness o f the work being done at the State and local levels. A second risk was that little progress would be made in structural reforms, such as in the areas o f taxes, social security and labor legislation. While the Bank remained engaged whenever opportunities for addressing these politically-difficult structural issues arose, this i s a risk that still persists. A third identified risk was that the planned increase in public investment that underpinned the Government program did not materialize. T h i s risk was also partially confirmed as illustrated by the fact that the implementation o f the P A C has been slower than what was initially planned. The Bank has been trying and will continue to support the GOBin addressing the corresponding management bottlenecks. 50. The CPS also flagged possible external and internal Bank Group risks. These would be associated with sudden reductions in financing, which would affect the economy through an impact o n interest rates and inflation. The global financial crisis did create an important challenge o f this sort for Brazilian policy makers, but their quick and effective responses proved that this risk was indeed moderate or low, thanks to Brazil's improved macroeconomic fundamentals. Finally, the internal risk identified in the CPS, derived from the possibility that the Bank would not be able to pursue a new and more flexible approach in Brazil was also proved not to be significant. Indeed, the Bank was able to effectively implement i t s "principled" albeit "opportunistic" approach, which has been reflected in i t s growing and sound lending portfolio. 51. Looking forward, the main new factor that could affect the Bank Group's strategy in Brazil i s related to the 2010 elections at the State and Federal levels. However, the Bank i s well positioned to act as a continuity factor for new state administrations, helping them minimize transition lags. Although Brazilian political divisions remain deep, at the Federal level and in most states the political climate has evolved from one o f large discontinuities in programs and projects across successive administrations, to one in which politicians increasingly seek to adapt and improve successful initiatives implemented by their predecessors. Bank-financed operations, in particular, have been preserved during recent political transitions. 14 ru 0 w 3 E 5 v m w 3 E s W 2 ru 8Js O n E -$ $ 4% , Y C e, 00 d 0 0 N 4 8 - m 8 8 E s h 00 a Y 0 8 v $ a 5 ? z m d 9 Annex 2: Brazil Selected K e y Economic Indicators, 2002-08 1.1 5.7 3.2 4.0 5.7 5.1 -0.3 3.9 3.9 4.5 5.9 5.4 -4.6 9.1 3.6 9.8 13.5 13.8 15.3 16.1 15.9 16.4 17.5 19.0 2.6 3.2 3.3 3.3 3.3 3.3 12.7 12.9 12.6 13.1 14.2 15.7 16.0 18.5 17.3 17.6 17.5 16.9 24.8 33.7 44.7 46.1 40.3 24.8 4.2 11.7 14.0 13.6 1.6 -28.2 0.7 1.8 1.6 1.3 0.1 -1.8 10.1 18.1 15.1 18.8 34.5 45.1 49.3 52.9 53.8 85.8 180.3 206.8 290.0 210.0 143.2 125.2 120.3 100.2 72.5 53.7 55.8 41.3 32.4 19.0 19.4 14.8 12.2 10.8 9.5 7.1 2.89 2.65 2.34 2.14 1.77 2.3 3.9 4.2 4.4 3.9 3.9 4.1 -4.6 -2.4 -3.0 -3.0 -2.2 -1.5 52.3 47.0 46.5 44.7 42.0 36.0 76.5 69.2 64.2 64.8 68.8 58.6 9.3 7.6 5.7 3.3 4.1 5.9 7.7 12.1 1.2 3.8 7.9 9.1 16.5 17.8 19.5 13.3 11.3 13.8 12.3 11.5 9.8 10.0 9.3 7.9 I Source: IMF, BCB, IBGE, IPEA 19 Annex 3: Macroeconomic Outlook, 2009-2012 Indicator Vational Accounts Real GDP Growth (%) -0.1 -0.3 5.1 4.5 4.5 4.1 4.2 4.2 Consumption Growth (%) 1.1 3.2 4.4 3.2 4.7 2.4 3.8 3.8 Investment Growth (YO) -4.8 -16.2 7.6 10.4 3.7 13.4 7.4 7.4 Investment (% of GDP) 17.6 15.6 18.0 16.4 17.8 17.8 18.3 18.3 Public sector 2.3 2.3 2.5 2.5 2.8 2.8 3.2 3.2 Private sector 15.4 13.3 15.5 13.8 15.0 15.0 15.1 15.1 Gross National Savings 16.2 14.3 14.7 13.4 14.6 14.7 15.5 15.6 External Sector Trade Balance (US$ bi) 21.8 25.9 20.5 25.3 25.1 27.0 25.1 27.2 Current Account Balance (US$ bi) -26.3 -22.1 -62.8 -57.4 -65.5 -62.6 -59.8 -56.5 Current Account Balance (% o f GDP) -1.5 -1.2 -3.3 -3.0 -3.3 -3.2 -2.8 -2.7 Foreign Direct Investment 25.0 25.0 33.0 33.0 35.0 35.0 35.0 35.0 International Reserves (US$ bi) 239 235.5 266 261.4 280 277.8 286 283.6 Debt Service to Exports (YO) 18.6 18.6 12.0 11.9 12.5 12.3 11.5 11.4 Interest Payments to Exports (%) 4.5 4.5 4.6 4.5 4.6 4.5 4.5 4.4 Nominal Exchange Rate (eop) 1.7 1.7 1.76 1.8 1.8 1.8 1.9 1.9 Public Sector PS. Primary Balance (YO f GDP) o 1.8 1.8 3.0 3.0 2.9 2.9 3.0 3.0 PS. Overall Balance (% of GDP) -4.0 -4.0 -1.5 -1.6 -1.2 -1.3 -0.8 -0.8 Net Public Sector Debt (% o f GDP) 44.1 44.2 42.0 42.4 39.3 39.9 37.9 38.5 Gross Gen. Gov. Debt (% o f GDP) 67.0 67.0 70.0 70.0 68.0 68.0 66.0 66.0 Prices and Economic Activity Consumer Inflation (%) 4.3 4.3 4.5 4.5 4.5 4.5 4.5 4.5 Wholesale Inflation (YO) -0.9 -0.9 4.5 4.5 4.5 4.5 4.5 4.5 Headline Interest Rate (% eop) 8.8 8.8 10.5 10.5 10.5 10.5 10.0 10.0 Unemployment (YO) 7.2 7.2 6.9 6.9 6.5 6.5 6.5 6.5 Industrial Cap. Utilization (YO) 81.5 81.5 85.0 85.0 86.3 86.3 86.0 86.0 Source: IMF, BCB, IBGE, W B Calculations 20 CPS Progress Report Annex A2-1 - Brazil a t a d a n c e 113109 Latin Upper Key Development Indicators America middle Br a i l &Carib. income Age distribution, 2007 72008) Mde Femde Population, mid-year (millions) 82.0 56 1 824 7579 Surface area (thousand sq. km) 8,515 20,421 41497 60-64 Population growth (%) 10 22 0.7 Urban population (%of total population) 86 78 75 4M9 30-34 GNI(Atlas method,US$ billions) 14023 3,252 5,854 GNI per capita (Atlas method, US$) 7,300 5,801 7,07 GNIpercapita (PPP,international$) 9,270 9,678 P,072 6 4 2 0 2 4 6 GDP growth (%) 5.1 5.7 5.8 percent of total pqxllation GDP per capita growth (%) 4.1 4.4 5.0 ( m o s t recent e s t l m a t e , 2003-2008) Povertyheadcount ratio at$125aday(PPP,%) 5 8 Under-5 mortality rata (per 1,000) Poverty headcount ratio at $2.00 a day (P P P , YO) 0 T7 Life expectancy at birth (years) 73 73 71 Infant mortality(per 1000 live births) Child malnutrition (%of children under 5) 20 2 22 4 21 1 Adult literacy, male (%of ages 15 and older) 90 92 95 Adult literacy,female (%of ages 15 and older) 90 90 93 Gross prlmaryenrollment, male (%of age group) 04 PO 1P Gross primaryenroIlment,female (%of agegroup) P5 16 09 Access to an improvedwatersource (%of population) 91 91 95 Access to improved sanitation facilities (%of population) 77 78 83 1990 1995 2000 2007 21 i CPS Progress Report Annex A2-1 - N e t A l d Flows I980 I990 2000 2008 a (US$ millions) Net ODA and official aid 85 151 232 297 Growth of GDP and GDP per capita (%) Top 3 donors (in 2007): France 9 8 24 7 13 Germany 48 31 49 77 lo T Spain 0 6 33 Aid (%of GNI) 0 .o 0 .o 0 .o 0.0 Aid per capita (US$) 1 1 1 2 Long-Term E c o n o m l c Trends -10 1 95 05 Consumer prices (annual %change) 05.6 6210 6 .O 7.1 GDP implicit deflator (annual %change) 87.3 2,735.5 6.2 5.9 Exchange rate (annual average, local per US$) 0.0 0.0 18 18 Terms of trade index(2000 = DO) 1980-90 1990-2000 2000-08 (average annualgrowth %) Population, mid-year (millions) PI6 149.6 74.2 82.0 2.1 15 12 GDP (US$ millions) 235,025 461952 644,702 1575,131 2.7 2.7 3.6 (%of GDP) Agriculture 110 8.1 5.6 6.7 2.8 3.6 4.2 Industry 43.8 38.7 27.7 28.0 2.0 2.4 3.2 Manufacturing 33.5 25.3 7.2 6.0 2.0 3.1 Services 45.2 53.2 66.7 65.3 3.3 3.8 3.0 Household final consumption expenditure 69.7 59.3 64.3 60.7 12 3.7 3.3 General gov't final consumption expenditure 9.2 8.3 B.2 20.2 7.3 10 3.3 Gross capital formation 23.3 20.2 18.3 1 .9 8 3.3 4.2 4.0 Exports o f goods and services 9.1 8.2 D.O 14.3 7.5 5.9 8.6 Imports o f goods and services 113 7.0 117 14.2 0.5 tl6 8.0 Gross savings 18.9 23.5 6.9 Note: Figures in italics are for years other than those specified. 2008 data are preliminary. ..indicates data are not available, a.Aid data arefor2007. Development Economics, Development Data Group (DECDG). 22 CPS Progress Report - Annex A 2 - 1 Braz il Balance of Payments and Trade 2000 2008 Governance Indicators, 2000 and 2007 (US$ millions) Voice and accountability Total merchandise exports (fob) 54,187 6 184'21 Po lit icai stab i l l y Total merchandise imports (cif) 55,783 5 Regulatory quaity I Net trade in goods and services -7,860 8,146 Rule of law Current account balance 24,225 28,192 Cnntrnl nf rnrritpttnn as a % of GDP -3.8 -1.8 0 26 60 76 300 Workers' remittances and 02007 Country's percentile rank (0-100) compensation of employees hgheruirber nr#y b e k r n t m p s 1,649 4,382 02000 (receipts) 206,80 I Source: Kauhann-Kraay-Mastrud, World Bank Reserves, including gold 33,011 6 Central Government Finance (% of GDP) Current revenue (including grants) 16.5 24.8 Tax revenue 0.0 15.3 Current expenditure 0.0 21.8 Technology and Infrastructure 2000 2007 Overall surpiusldeficit -2.1 -1.6 Paved roads (% of total) 5.5 Highest marginal tax rate (%) Fixed line and mobile phone Individual 28 28 subscribers (per 100 people) 31 84 Corporate 15 15 High technology exports (% of manufactured exports) 18.7 12.4 External Debt and Resource Flows Environment (US$ millions) 223,84 255,61 Total debt outstanding and disbursed 6 4 Agricuitural land (% of land area) 31 31 Total debt service 61,029 55,420 Forest area (% of land area) 58.3 56.5 Debt relief (HIPC, MDRI) - - Nationally protected areas (% of land area) .. 17.9 Freshwater resources per capita (cu. 3922 28,27 Total debt (% of GDP) 34.7 16.2 meters) 7 7 Freshwater withdrawal (billion cubic Total debt service (% of exports) 89.2 22.8 meters) 59.3 Foreign direct investment (net inflows) 32,779 45,058 C02 emissions per capita (mt) 1.8 1.7 Portfolio equity (net inflows) 3,076 -7,565 GDP per unit of energy use (2005 PPP $ per kg of oil equivalent) 7.3 7.3 Energy use per capita (kg of oil equivalent) 1,090 1,184 23 . CPS Progress Report - Annex A2-1 Composition oftotal external debt, 2007 Energy use per capita (kg of 1,09 oil equivalent) 0 1,184 World Bank Group portfolio 2000 2007 (US$ millions) IBRD Total debt outstanding and disbursed 51 6,704 171 597 Disbursements 0 374 US$ millions Principal repayments 38 115 Interest payments 6 364 IDA Total debt outstanding and disbursed - - Disbursements - - 200 Private Sector Development 0 2008 Total debt service - - Time required to start a business (days) - 152 IFC (fiscal year) Total disbursed and 2,14 Cost to start a business (% of GNI per capita) - 8.2 outstanding portfoiio 6 1,706 of which IFC own 1,15 Time required to register property (days) - 42 account 7 1,284 Disbursements for IFC own account 160 397 200 Portfolio sales, Ranked as a major constraint to business 0 2007 prepayments and repayments for (% of managers surveyed who agreed) IFC own account 111 175 Tax rates 84.5 Access to/cost of financing 84.3 MlGA Gross exposure 706 288 102. Stock market capitalization (% of GDP) 35.1 8 New guarantees 315 5 Bank capital to asset ratio (%) 12.1 9.9 Note: Figures in italics are for years other than those 11/3/0 specified. 2008 data are preliminary. 9 .. indicates data are not available. - indicates observation is not applicable. Development Economics, Development Data Group (DECDG). 24 CPS Progress Report Annex A 2 4 - W t h selected targets to achieve between I990 and 2015 (esbrnate closest to date shown, +/- 2 years) Goal 1: halve the rates for extreme poverty and malnutrition Poverty headcount ratio at $1.25 a day (PPP, YOof population) Poverty headcount ratio at national poverty line (% of population) Share of income or consumption to the poorest qunitile (%) Prevalence of malnutrition (% of children under 5) Goal 2: ensure that children are able t o complete primary schooling Primary school enrollment (net, %) Primary completion rate (% of relevant age group) Secondary school enrollment (gross, %) Youth literacy rate (% of people ages 15-24) Goal 3: eliminate gender dlsparlty in education and empower women Ratio of girls to boys in primary and secondary education (%) Women employed in the nonagricultural sector (% of nonagricultural employment) Proportion of seats held by women in national parliament (%) Goal 4: reduce under-5 mortality by two-thirds Under-5 mortality rate (per 1,000) Infant mortality rate (per 1,000 live births) Measles immunization (proportion of one-year olds immunized, YO) 25 CPS Progress Report - Annex A 2 - I Goal 5: reduce maternal mortality by three-fourths Maternal mortality ratio (modeled estimate, per 100,000 live births) I10 Births attended by skilled health staff (% of total) 72 88 96 97 Contraceptive prevalence (YOof women ages 15-49) 59 77 Goal 6: halt and begin t o reverse the spread of HlVlAlDS and other major diseases Prevalence of HIV (% of population ages 15-49) 0.4 0.6 0.6 0.6 Incidence of tuberculosis (per 100,000 people) 84 71 60 48 Tuberculosis cases detected under DOTS (%) 7 69 Goal 7: halve the proportion of people without sustainable access to basic needs Access to an improved water source (% of population) 83 86 89 91 Access to improved sanitation facilities (% of population) 71 73 74 77 Forest area (% of total land area) 61.5 59.9 58.3 56.5 Nationally protected areas (% of total land area) 17.9 CO2 emissions (metric tons per capita) 1.4 1.5 1.8 1.7 GDP per unit of energy use (constant 2005 PPP $ per kg of oil equivalent) 7.7 7.8 7.3 7.3 Goal 8: develop a global partnership for development Telephone mainlines (per 100 people) 6.3 8.2 17.8 20.6 Mobile phone subscribers (per 100 people) 0.0 0.8 13.3 63.1 Internet users (per 100 people) 0.0 0.1 2.9 35.2 Personal computers (per 100 people) 0.3 1.7 4.9 16. I ~~~ ~ ~~ ~~ ~ Education Indicators ("YO) Measles immunization (% of l-year ICT Indicators (per 100 people) i olds) too 75 I O 50 40 26 20 2000 2002 2004 ZOO8 2007 0 0 2000 2002 2004 20061007 _I Primaw ne1 rnrollmwlrrtr ---LF- Ratio of girh t o boys in prinrrylseoondrry OBiizil olatin AmericaLthe Caribbean O F h d + mobile rubrmibcn mlnlemrturen education Note: Figures in italics are for years other than those specified. .. Indicates data are not available. 11/3/09 Development Economics, Development Data Group (DECDG). 26 CPS Progress Report -Annex B2 Brazil - Selected Indicators* of Bank Portfolio Performance and Management As Of Date 11/11/2009 Indicator 2007 2008 2009 2010 Portfolio A s s e ment Number of Projects Under Implementation a 52 53 54 57 Average Implementation Period (years) 4.0 4.0 3.5 3.5 Percent of Problem Projects by Number 13.5 17.0 9.3 7.0 Percent of Problem Projects by Amount a, 27.9 5.4 2.0 1.2 Percent of Projects at Risk by Number a, 15.4 18.9 13.0 12.3 Percent of Projects at Risk by Amount 28.0 5.6 2.5 17.5 Disbursement Ratio (%) e 35.1 34.9 36.9 10.4 Portfolio Management CPPR during the year (yeslno) Yes Yes Yes Supenision Resources (total US$) 4,674 5,752 Average Supenision (US$/project) 90 109 Memorandum Item Since FY 80 Last Five FYs Proj Em1 by OED by Number 239 28 Proj Em1 by OED by Amt (US$ millions) 28,222.6 2,433.9 % of OED Projects Rated U or HU by Number 24.5 10.7 % of OED Projects Rated U or HU by Amt 24.9 6.8 a.As shown in the Annual Report on Portfolio Performance (except for current FY). b.Average age of projects in the Bank's country portfolio. c.Percent of projects rated U or HU on development objectives (DO) andlor implementation progress (IP). d.As defined under the Portfolio Improvement Program. e.Ratio of disbursements during the year to the undisbursed balance of the Bank's portfolio at the beginning of the year: Inwtment projects only. * All indicators are for projects active in the Portfolio, with the exception of Disbursement Ratio, which includes all active projects as well as projects which exited during the fiscal year. 27 * I ' ' CPS Progress Report - Annex 8 3 - IBRD Program Summary W I 1/2010 Country Federative Republic of Brazil Fiscal y e a r Proj ID IBRD Lending Program I Development Challenges Human Agriculture & Fiscal 8 Public Natura, Development Fiscal proj US$(M) Sector infrastWcture Development Resources in Sensitive yearBorrowr Managmement and Urban & innovation Manaaement biomes 2010 Federal BR- ADS SUS 67.0 i - BR Bolsa Famlia 2nd A R 200.0 i BR- Betrobras Dstributwn Co. hprovemnt 485.0 i - - BR National Environmental 2 Fhase II 24.3 i i 776.3 Subnational - BR S o Paub Feeder Roads 166.7 - BR (AF) S o Paul0 Trains and Signalling 112.9 BR- (AF) Bahia State hteg. Rural 30.0 i BR- ( A R 2 ) F3o Grande do SUIht. hnicipal Dev. 8.1 i BR- Alagoas Fiscal8 h b l i i tvbmnt Reform 195.5 - BR htegrated Solid Waste 8 Carbon Finance 50.0 i i - BR htegrated Water Managemnt S o Paul0 104.0 i i BR- Santos hnicipalii Roject A R 5 44.0 i i - BR PJ Sustainable h r a l Devebpmt 39.5 i - BR No de Janeiro a s s Transit II 211.7 i BR Rrnarbuco Sustainable Water 190.0 i BR Rio State DR 485.0 i BR W de Janeiro FSWFiscal MST 18.7 i BRSPMTROLNE4(FWSE2) 130.0 i BR SP Sust h r a l Dev 8 Access to Markets 78.0 i BR SP Water Reagua 78.0 i i BR- BR (AF) S o Rulo Feeder Roads 326.8 i - BR Parana Fhrral Pbverty 11 50.4 i - BR 'Sao Paub Metro Line 5 650.0 - BR Ro de Janeiro Wnicipal DR 1,045.0 i BR- (AF) 2nd Mnas Gerias Devt. Partnership 461.0 i - BR Mato Gross0 do SUI Roads 300.0 i - BR Sergipe Water 70.2 i BR Santa Catarina Rural Conpetniieness 90.0 i 4,935.5 Result 5,711.8 2011 i Federal - BR hdigenous Peoples Sustainable Development 40.0 BR- 2nd Rog DR for Sust. &v. Management 700.0 i - - BR Vigiius 111 Dsease Surveillance 100.0 - BR Federal htegrated Water 97.6 i 937.6 Sobnational BR- (AF) &aslia Environ. Sustainable 57.6 i - BR Randesul 200.0 i 4 - BR Bahia Health and Water m m n t 60.0 i i 317.6 Result 1,255.2 Other Possibilities Federal - BR (AF) Road Transport Swap 500.0 i BR- Reformof Uliversity tbspRals 450.0 i Subnatwnal - BR Wrnarbuco Regional 100.0 i i Result 1,050.0 Overall Result 8,017.0 28 CPS Progress Report - Annex 83 Brazil: IFC Investment Operations Program 2007 2008 2008 2010* Commitments (USSm) Gross 509.04 1662.83 864.26 478.9 Net** 509.04 1090.33 641.93 478.9 Net Commitmehts bv Sector C%) Agriculture & Forestry 0.00% 7.34% 0.00% 0.00% Oil, Gas & Mining 0.00% 9.17% 0.00% 0.00% Utilities 1.28% 1.31% 3.81% 0.00% Transportation and Warehousing 9.82% 0.54% 0.00% 0.00% Food & Beverages 30.45% 0.32% 3.89% 0* 00% Primary Metals 0.00% 2.29% 0.00% 0.00% Industrial & Consumer Products 6.88% 3.67% 3.89% 0.00% Information 0.00% 0.28% 0.00% 0.00% Finance & Insurance 51.58% 60.38% 88.40% 92.61% Collective Investment Ve hicles 0.00% 4.59% 0.00% 0* 00% Health Care 0.00% 1.56% 0.00% 0.00% Education Services 0.00% 1.23% 0* 00% 7.39% Electric Power 0.00% 7.34% 0.00% 0.00% Total 100% 100% 100% 100% Net Commitments bv Investment Instrument (%) Equity 5.21% 1.75% 1.66% 1.40% Guarantee 24.07% 24.06% 74.57% 83.92% Loan 63.45% 69.93% 12.45% 14.68% Quasi-loan 7.27% 4.22% 11.32% Risk product 0.40% Total 100% 100% 100% 100% * As of January 31, 2010 ** IFC's own account only 29 - - CPS Progress Report Annex B4 Summary of Non-lendihg Services As Of Date 11/11/2009 - Product Completion FY Cost (US$OOO) Audience Objecfive Recent completions BR Environmental Licensing Study 2008 175.0 Government KG,PS BR Biodiesel Study 2008 135.0 Government KG,PD BR (Joint) Energy Study 2008 155.0 Government KG,PS,PD BR Quality of Education' Spending 2008 305.0 Government KG,PS,PD BR Directed Credit aka 2nd Prg. ESW 2008 120.0 Government KG,PS BR City Econ Growth and Competitiveness 2008 160.0 Public KG.PS,PD BR Financial Sector NLTA 2008 82.0 Government KG,PS BR Energy Efficiency Strategy 2008 67.5 Government KG,PS,PD BR Energy Development 2008 160.8 Government KG,PS,PD BR-BRAVA Program Phase 3 2008 140.0 Government KG,PS BR(SCL) Aviation 2008 44.0 Public KG,PS,PD BR Public Debt Management 2009 80.0 Government KG,PS BR Fiscal Federalism 2009 164.0 Government KG,PS,PD BR Freight Logistics, How to decrease 2009 165.0 Government KG,PS,PD BR Labor Programmatic AAA Phase 2 2009 140.0 Government KG,PS,PD BR (SCL) Countercyclical Fiscal Pol. 2009 100.0 Government KG,PS,PD BR (FBS) Concession Pub. Irrig. Perimeters 2009 603.7 Government KG,PS BR Nat'l Housing Plan-Policy (Cities All) 2009 55.0 Government KG,PS BR (FBS) Baixio do lrece II 2009 542.0 Government KG,PS BR Governance capacity in the Health Sector 2009 20.0 Government KG,PS,PD BR Good Governance Prog 2009 100.0 Government KG.PS BR Early Childhood Deveiopmente Conferenc 2009 100.0 Public KG,PS,PD BR Skills Innovation Assessment 2009 50.0 Government KG,PS,PD 3,663.9 Underway 2010 BR GAP Report 2010 80.0 Government KG,PS BR CCH Low Carbon Country Case Study 2010 587.5 Government KG,PS,PD BR Equality of Opportunity 2010 140.0 Government KG,PS.PD BR Early Childhood 2010 113.0 Government KG,PS,PD BR Evaluating and Improving Efficiency 2010 200.0 Government KG, PS BR Labor Programmatic AAA Phase 3 2010 114.0 Government KG,PS,PD BR Building Evidence for CBV Reduction 2010 200.0 Government KG, PS BR Involuntary Resettlement: Review of P 2010 120.0 Government KG, PS BR Improve Quality of Road Investments 2010 160.0 Government KG, PS BR Amazon Regional Programmatic 2010 200.0 Government KG,PS,PD BR Education Quality PAR 2010 113.0 Government KG,PS,PD BR (CCH) Amazon Dieback Analysis 2010 1,150.0 Public KG,PS,PD BR Proposed High-speed Train Project 2010 50.0 Government KG,PS BR BRAVA Program 2010 140.0 Government KG,PS BR SNTA Nova Eletrobras 2010 390.0 Government KG,PS BR PEFA-plus (Federal) 2010 120.0 Government KG,PS,PD BR Housing Sector TA 2010 120.0 Government KG,PS,PD BR Public Sector NLTA 2010 150.0 Government KG,PS BR Financial Literacy Impact Evaluation 2010 60.0 Government KG,PS,PD 4,207.5 Planned 201 1 BR Country Study on Education 201 1 150.0 Government KG,PS,PD BR Money Credit and Growth 201 1 180.0 Government KG,PS,PD BR Aging Country Study 201 1 180.0 Government KG,PS,PD BR MST Job Quality 201 1 180.0 Government KG,PS,PD BR SOCProtec. During 2008 Twin Cities 201 1 180.0 Government KG,PS,PD BR Spatial Structure in Metro Cities 201 1 100.0 Government KG,PS,PD BR BMBF Carbon Markets Strengthening 201 1 50.0 Government KG.PS.PD CA - Brazil TA B Gdnce on NatnlHsng i n 201 1 75.0 Government KG,PS 1,095.0 8,966.4 a. Government, donor, Bank, public dissemination. b. Knowledge generation, public debate, problem-solving, 30 ' Municipalities are autonomous entities o f the country's Federation, independent from both State and Federal Governments. This would allow the Bank to support Brazils efforts to integrate and coordinate policies at different levels o f government. This would also support Brazil's efforts to enhance fiscal consolidation not only at the Federal and State level, but also at the Municipal level. Such efforts would be important for at least two reasons. First, several Brazilian Municipalities are larger than many Brazilian States. Second, Municipalities are the main providers o f essential public services and as such are critical for the country's success in promoting growth, reducing poverty, and ensuring all citizens receive services o f equal quality. I t i s important to note, however, that despite its increased activities at the sub-national level, the Bank has continued (and will continue) to be strongly engaged in contributing to the policy debate on nation-wide developmental challenges through its AAA agenda. Moreover, the GOB has recently increased its requests for Bank technical and fmancial support to Federal programs - e.g. in the areas o f health, education, transport and energy. By February 2010 the Ibovespa stock market index had grown 62.5 percent with respect to March 2009, sovereign spreads were at 180 basis points -- lower than pre-global crisis levels o f about 240. While the exchange rate was s ti l l slightly depreciated with respect its pre-global crisis level o f 1.64 R$/US$, i t had appreciated by 22 percent compared to March 2009, reaching 1.81 R$/US$.Capital inflows also resumed their pre-global crisis trend and the country's international reserves reached US$241 billion in February 2010, a level well above the pre-global crisis peak o f US$205 billion recorded in August 2008. Brazil has set an ambitious set o f goals under its National Action Plan for Climate Change. These goals include reducing deforestation by 80 percent by 2020; increasing renewable energy installed capacity to 7,000 MW by 2010; increasing renewable energy from bagasse to 11 percent o f total electricity generation; increasing the use o f ethanol in automobiles' fuel m i x by 11 percent per year; and decreasing energy use through energy efficiency by 10 percent by 2030. ' Because many operations are multi-sector, shares add up to more than 100 percent. I t i s worth noting that specific analytical and country studies may benefit from custom-tailored L E G L A participation (e.g. through review o f terms o f reference and supervision o f external legal experts). 31