PROJECT INFORMATION DOCUMENT (PID)

CONCEPT STAGE

Report No.: AB3364

Project Name / Minas Gerais Partnership II SWAP
Region / LATIN AMERICA AND CARIBBEAN
Sector / Sub-national government administration (50%);General industry and trade sector (20%);General education sector (10%);Health (10%);Roads and highways (10%)
Project ID / P101324
Borrower(s) / THE STATE OF MINAS GERAIS, BRAZIL
Implementing Agency
State of Minas Gerais
Rua da Bahia, 1600
MG
Brazil
30170011
Tel: 553132385300 Fax: 553132497002
<>
Environment Category / [ ] A [x ] B [] C [ ] FI [ ] TBD (to be determined)
Date PID Prepared / October 5, 2007
Estimated Date of Appraisal Authorization / December 6, 2007
Estimated Date of Board Approval / April 15, 2008
  1. Key development issues and rationale for Bank involvement

Background

Minas Gerais (Minas) is one of Brazil’s largest and most economically important states. The state of Minas Gerais has the country’s second largest population (19.5 million people, equivalent to 10.5 percent of Brazil’s population in 2006). Minas is the fourth largest state in Brazil, covering 586,553 km2 or 7 percent of the country. The state’s economy is the third largest in Brazil. In 2006 the Gross Domestic Product (GDP) of Minas Gerais was equivalent to US$ 100 billion, or 9.4 percent of national GDP, smaller than São Paulo (30.9 percent of national GDP) and Rio de Janeiro (12.2 percent). The economy of Minas Gerais is slightly smaller than that of Peru.

Minas Gerais is sometimes called a microcosm of Brazil. Its per capita GDP is close to Brazil’s average (ranked 12 out of 27 in 2004).[1] Moreover, Minas contains deep regional disparities paralleling those at the national level. For example, Minas has a poor Northern region with similar conditions of extreme poverty, subsistence agriculture, semi-arid climate and intermittent drought experienced in the Brazilian Northeast, the poorest region in the country. At the other extreme, the state contains some of Brazil’s most dynamic economic areas (for example, the TrianguloMineiro and the metropolitan area of Belo Horizonte, the state’s capital). Minas has 853 municipalities, or over 15 percent of the 5,560 municipalities in Brazil.

Successful public policy reforms have lead to a stable political environment. After years of economic difficulties experienced by Minas Gerais, in 2002 Governor Aécio Neves was elected to a first four-year term. Governor Neves is the grandson of Brazil’s first democratically elected President following the military dictatorship. He is a leading member of the Social Democratic Party (PSDB) and has an immensely strong following in Minas Gerais. Governor Neves was re-elected to a second term (2007-2010) by an overwhelming majority (roughly 80 percent of the vote). His current Deputy Governor, Antonio Anastasia, served as Secretary of Planning during Governor Neves’ first administration. Together, they have been the driving force behind the Minas Gerais long-term development plan (Plano Mineiro de Desenvolvimento Integrado 2007-2023 or PMDI 2007-2023) and the so-called Choque de Gestão (Management Shock), to improve public sector management. These efforts have contributed to the Minas Gerais economic recovery. Moreover, the success of these reforms also has been one explanation for the relatively small political opposition in Minas Gerais, as well as a strong outlook for continuity with these policies.

Reforms have led to improvements in a number of indicators, including poverty and social indicators. Using a national food-based poverty line for household per-capita income of about R$132 (US$56) per month in 2005, Minas has a poverty headcount ratio of about 19 percent of the population (down from 25 percent in 2002), implying a poverty headcount of about 3.7 million. Using a 2005 extreme poverty line (about half the poverty line, or R$66 – US$28), Minas has an extreme poverty headcount ratio of about 5 percent (roughly 1 million persons), down from 8 percent in 2002. Minas has the third lowest poverty headcount rate among the states, and a relatively high per capita family income.

The Governor of Minas has asked for the Bank’s support in extending and deepening his reform program. The Bank supported the first phase of reforms with a two-tranche DPL of US$170 million which was fully disbursed in May 2007[2]. This DPL had three main themes – fiscal stabilization, public sector reform and private sector development. In July, the Governor asked the Bank for an operation of $1 billion (the entire borrowing capacity of to the State in its agreement with the Federal Treasury.) in order to support his on-going program. He argued very publicly that the World Bank gave his team the strongest support in terms of the technical assistance and international knowledge. The key request of the Government is to help extend and deepen public sector management reforms in the sectors, while helping to achieve the results of the program.

Subsequent discussions have led to a request for an operation of about US$1 billion, phased over a three year period, in the form of a SWAP and with a technical assistance component.

The Government’s Program – “The State for Results”

Building on the reforms of the “Management Shock,” successfully implemented during the first administration, the Government has developed a long-term strategy entitled the Minas Plan for Integrated Development (PMDI) 2007-2023.[3] After identifying key economic scenarios, the Government highlights six broad themes in which progress is essential in order for Minas to reach its long-term goals. These are: Investment and Business, Network of Cities, An Integrated Perspective of Human Capital, Environmental Sustainability, Equity and Well-Being, and Territorial Integration and Competitiveness. The Government identifies “The State for Results” Program as a cross-cutting effort that will affect all of the above sectors through improvements in expenditure and management efficiency and through a focus on measurable results.

In order to implement the actions required to reach results in the long-term, the Government has identified eleven Results Areas within “The State for Results” Program, (see Figure 1), with Fiscal Quality and Quality and Innovation in Public Management as cross-cutting pillars to be applied to each Results Area. The function of these Results Areas is to define specific objectives for the medium and long-term, define how these will be measured and define the structural projects (projetos estruturadores) that will contribute to the achievement of these goals. Each Results Area also identifies key actions required for implementation of the sectoral public management agenda.

As seen in Figure 1, the beneficiaries of the State for Results Program will include individuals who are well educated, healthy and qualified; young people with better prospects; firms with the possibility to be more dynamic and innovative; cities that are more secure and well- cared for; and individuals and regions that will face less inequality.

Figure 1

Implementation of the Program is based on the signature of Results Agreements between the Governor and the Secretariats that are associated with a given Results Area (many Results Areas require actions from more than one Secretariat and each Secretariat signs all of the results agreements with which it is associated.). Each Secretary commits to the agreed actions and targets, and in return, the Governor commits to providing the Secretariat with sufficient resources to implement the strategic projects and management autonomy over how to achieve results. Each strategic project has a designated manager responsible for results. The Results Agreements are brought together in the “Notebook of Agreements” (Caderno de Compromissos), which can also be found on the web.

In addition the Secretariat of Management and Planning (SEGPLAN) has a Sub-Secretariat (GERAES) that focuses on implementation of the program. Staff in GERAES are assigned to strategic projects in order to support the line Secretariats in managing the strategic projects and assisting the line Secretariats in building the public management reform aspects of the their programs. These staff also support the Secretariats in the development of project plans (plano de projeto) in order to assist in the monitoring and oversight of the structural projects on a regular basis- these planos de projetos are updated quarterly and published annually.

Finally, as part of the State for Results Agenda, SEGPLAN also envisions building upon many of the accomplishments of the first set of reforms (the Choque de Gestao) in order to further strengthen public management. Such efforts include: further strengthening of civil service management, refinement of performance evaluations, the approach to performance bonuses, development of a certification system for public sector employees, further strengthening of financial management systems in order to improve the efficiency and accountability of public spending, and further development of their systems of procurement. In many of these areas Minas is well advanced and among the strongest, if not the strongest state, in the country.

Rationale for Bank involvement

There are a variety of factors that underpin the rationale for Bank engagement in this project.

a) The Bank has had a strong partnership with Minas Gerais in the development of its first set of reforms. Minas continues to pursue one of the most advanced reform agendas in Brazil and in Latin America. They have a strong program and a need for financing and advice to support the implementation of this program. This program will lead to significant improvements in a variety of areas that would improve the lives of the people living in Minas. They have asked us to partner with them again and there is no obvious reason why we should not do so.

b) The Bank can contribute, but also has a great deal to learn from the Minas experience. The Program in Minas is a model for many states in Brazil and as well as for the Federal government and other countries in the region. While the financial resources themselves provide “additionality” by extending the ability of Minas to fund high priority public expenditure programs, the Government of Minas had also called upon the Bank to provide international expertise and value added in the most difficult aspects of the program. The Bank can contribute a lot, but also stands to learn a great deal of what may and may not work, especially when it comes to programs of results –based management.

c) The Bank is uniquely placed to respond to this complex, multi-sectoral request. Although Minas is in a position to borrow from the private sector or other donors, part of their own rationale for requesting Bank assistance is that the Bank is the sole organization that can bring together individuals with deep sectoral knowledge and a capacity to focus on cross-cutting issues in an integrated multi-sectoral program. This is exactly what they need at this point in time.

d) Supporting this loan fits squarely within the new strategy to be presented in the upcoming CPS, which will highlight the Bank’s increasing role at the State level in Brazil and the importance of addressing complex development challenges in an integrated and multi-sector fashion.

e) The request of Minas to help provide funds for their program, but also profound technical guidance in how to deepen their approach to results management in the sectors, presents the type of requests we may increasingly receive from MICS. The case of Minas is an important test of whether the Bank as an institution is up to this challenge.

  1. Proposed objective(s)

Initial discussions with the Minas authorities have led to the following general and specific project objectives.

Broad Project Objective: The project will support the Government of Minas Gerais in its efforts to implement the “State for Results” model in order to improve quality and efficiency in the delivery of public goods and services, reinforcing the fiscal and macroeconomic advances made through previous reforms, with the overall objective of promoting economic growth and poverty reduction.

Specific project objectives:

·  Help the Government of Minas Gerais to strengthen fiscal quality by increasing the efficiency of public expenditures at the sectoral level.

·  Support the process of improved innovation in public management of the State, including more efficient and effective processes for the delivery of services.

·  Support the Government of Minas Gerais in implanting a system of monitoring and evaluation of results in order to reinforce improved fiscal quality and modernization of public sector management.

  1. Preliminary description

The proposed project would be a US$888 million SWAP to support implementation of the Government’s program over a three year period. The project would aim to finance expenses associated with priority expenditure programs that are fundamental to achievement of the Government’s program, while at the same time linking disbursement of these resources to continued improvements in fiscal management, improvements in the efficiency of spending and in achievements of specified results in the results areas. The project will also have a TA component of about 2 percent of total Bank financing.

The operation will focus on three cross-cutting themes that will themselves be strengthened, but will also be the focal points for “drilling down” into the results areas. These three areas are: 1) improving fiscal quality (the efficiency of expenditures); 2) innovation in and strengthening of public sector management; and 3) further development of monitoring and evaluation tools. While the operation will support the Government’s program as a whole, particular attention will be paid to “drilling down” in the following results areas: Healthy Life; Quality in Education; Innovation, Technology and Quality; Investment and Value Added in Production; and Integration, Logistics and Regional Development. (See Figure 2) These areas were chosen as those in which the Government sought Bank assistance and in which the Bank could provide the highest value added.

Figure 2

The Bank team is working with the Minas Government to identify in each results area: 1) key results indicators to be phased over the life of the project; 2) key expenditure programs that require finance and against which Bank funds can be disbursed; and 3) TA requirements of the Government.

For example, in the Healthy Life Results Area, Minas’ health sector faces a number of systemic challenges that are similar to those faced by many states in Brazil: (i) oversupply of hospitals, particularly of underutilized small facilities; (ii) inequitable access to basic and specialty care; (iii) low quality and inefficient service delivery; (iv) little coordination or integration among health care providers at different levels of care; and (v) weak information environment. Each of these problems has implications for resource allocation and management, quality of spending, and ultimately health outcomes.