Documento f The World Bank FOR OFFICIAL USEONLY ReportNo: 35719-BR INTERNATIONALBANK FORRECONSTRUCTIONAND DEVELOPMENT PROJECTPAPER ONA PROPOSEDADDITIONAL FINANCING (LOAN) INTHEAMOUNT OFUS$50.00MILLION TO THE FEDERATIVE REPUBLIC OF BRAZIL FOR A FEDERALWATER RESOURCESMANAGEMENT PROJECT November27,2006 Environmentallyand Socially SustainableDevelopment Brazil CountryManagementUnit LatinAmerica and the CaribbeanRegion This document has a restricted distribution and may be used by recipients only in the performanceo f their official duties. Its contents may not otherwisebe disclosed without World Bank authorization. CURRENCYEQUIVALENTS (Exchange Rate Effective March 31,2006) Currency Unit = Real (R$) R$ 1.00 = US$0.45 R$2.23 = US$l.OO FISCAL YEAR January 1 - December31 ABBREVIATIONS AND ACRONYMS ANA AgGncia Nacionalde Aguas National Water Agency CAS EstratCgiade Assistencia para o Pais Country Assistance Strategy CGU ControladoriaGeralda Unigo General State Control Bureau CQS SeleqBo Baseadana Qualificaqgo do Selection Basedon the Consultants' Consultor Qualifications DO Objetivos de Desenvolvimento Development Objectives EL4 Estudo de Impact0 Ambiental Environmental Impact Assessment EMF Arcabouqo de GestaoAmbiental Environmental Management Framework FM Gerenciamento Financeiro Financial Management FMR Relat6rios de Gerenciamento Financeiro Financial Management Reports FSL Emprtstimo com Amortizaqgo Constante Fixed-Spread Loan FY An0 Fiscal Fiscal Year GOB Govern0 do B r a d Government of Brazil ICB Concorrhcia Internacional para InternationalCompetitive Bidding Contrataqgo de Obras IRR Taxa Internade Retorno Internal Rate of Return LCR Regia0da Amtrica Latina e Caribe LatinAmerica and Caribbean Region LCS Seleqgo pel0 Menor Custo Least-cost Selection M&E Monitoria e Avaliaqgo Monitoring and Evaluation MIC Pais de Renda MCdia Middle IncomeCountry MI Ministtrio da IntegraqgoNacional MinistryofNationalIntegration MMA MinistCrio do Meio Ambiente MinistryofEnvironment NCB Concor&nciaPublicaNacional National Competitive Bidding NGO Organizaqiio NZo Governamental Nongovernmental Organization O&M Operaggo e Manutenqgo Operationand Maintenance PAD Documento de AvaliaqBo do Projeto Project Appraisal Document PAOM Plano de OperaqBo e Manutenqgo Administration, Operation, and Maintenance Plan PCPR Projeto de Combate A PobrezaRural Rural Project Alleviation Projects PIU Unidadede Implementaqgo do Projeto Project ImplementationUnit PGRH Projeto de Gerenciamento de Recursos Bahia Integrated Water Resources Hidricos da Bahia Management Project PMSS Projeto de Modernizaqgo do Setor Sanitation Sector Modernization Project Saneamento FOROFFICIAL USE ONLY PNRH Plano Nacional de Recursos Hidricos National Water Resources Plan PROGERIRHProjet0 de Integraqiio e Gerenciamento Cearh IntegratedWater Resources dos Recursos Hidricos do Cearl Management Project QAT Time de Seguranqa da Qualidade Quality Assurance Team QCBS Seleqgo com Base em Qualidade e Custo Quality- and Cost-Based Selection REA Avaliaqgo Ambiental Regional Regional EnvironmentalAssessment RFV Relatorio Final de Viabilidade Final Feasibility Report RIO Relatdrio de Identificaqiio de Obras Work Identification Report RTP RelatdrioTCcnico Preliminar Preliminary Technical Report SAT Equipe de Salvaguardas Safeguards Advisory Team SBD Documento PadrSlo de Licitaqdes StandardBiddingDocument SEAIN Secretaria Especial de Assuntos Secretariat for International Affairs Internacionais SOE Declaraqiio de Gastos Statement o f Expenditures S R H Secretaria de Recursos Hidricos. Secretariat for Water Resources TCU Tribunal de Contas da UniSlo National Accounts Court TIR Taxa Interna de Retorno Internal ReturnRate TOR Termo de ReferCncia Terms o f Reference SIAFI Sistema Integrado Integrated Federal Financial de Administraqiio Financeira Administration System SIGMA Sistema de Informaqdes Gerenciais Project Information System WRM Gerenciamento de Recursos Hidricos Water Resources Management WUA Associaqiio de UsuArios de Agua Water User Association Vice President: Pamela Cox Country Director: John Briscoe Sector Director: Laura Tuck Sector Manager: Abel Mejia Sector Leader: MarkR.Lundell Task Team Leader: Luiz Gabriel T. Azevedo This document has a restricted distribution and may be used by recipients only in the performance of their official duties. Its contents may not be otherwise disclosed without World Bank authorization. BRAZIL FEDERALWATER RESOURCESMANAGEMENT PROJECT CONTENTS Page I. Introduction ......................................................................................................... 2 11. BackgroundandRationalefor additionalfinancingof US$50 million ........................................................................................................................... 2 111. ProposedChanges ............................................................................................... 5 IV. Consistencywith CAS ......................................................................................... 9 V. Appraisalof Scaled-upProjectactivities .......................................................... 10 VI. ExpectedOutcomes ............................................................................................. 15 VII. BenefitsandRisks ............................................................................................... 18 VIII. FinancialTerms andConditionsfor AdditionalFinancing .......................... 19 Annex 1: .Procurement ................................................................................................. 20 Annex 2: Financial Management, Financial Reports and Auditing Arrangement ..............................................................,.................................................. 25 Annex 3: Disbursement Schedule for Proposed Additional Financing......,...... . .. . .. .... 28 Annex 4: Results Framework and Monitoring.............................................................. 30 This ProjectPaper wasjointly preparedbyLuiz Gabriel Azevedo, Manuel RSgo, Juliana Garrido, Daniele La Porta, andPaula Freitas. Comments and inputs were provided byDanielGross, Maria Isabel Braga, AllanCarroll, Musa Asad, andMartinGambrill. Peerreviewers were ManuelContijoc andMasood Ahmad. The team is grateful to Zelia Brandt andKarenRavenelle-Smith for logistical support andAlicia Hetzner for editorial services. I I BRAZIL FEDERALWATER RESOURCES MANAGEMENTPROJECT ADDITIONAL FINANCING PROJECTPAPERDATASHEET Date: November 14, 2006 Team Leader: Luiz Gabriel T. de Azevedo Country: Brazil Sector DirectodManager: Laura TucMAbel Project Name: Additional Financing - Mejia Federal Water Resources Management Country Director: John Briscoe Project Environmental Category: A Project ID: P100154 Borrower: Federative Republic o f Brazil Responsible agency: Ministry o fNational Integration and Ministry of Environment through the National Water Agency Revised estimated disbursements (Bank FY/US$m) FY 2007 2008 2009 2010 Annual 2.25 30.00 14.00 3.75 Cumulative 2.25 32.25 46.25 50.00 Current closing date: December 31, 2006 Revised closing date: December 21.2009 Source Local Foreign Total Borrower 150.00 0.00 150.00 IBRD/IDA 40.00 10.00 50.00 Others 0.00 0.00 0.00 Total 190.00 10.00 200.00 I.Introduction This Project Paper seeks the approval o fthe Executive Directors to provide an additional loan in an amount o f US$50 million (fifty million US dollars) to the Federative Republic of Brazil, for the implementation o f the Federal Water Resources Management Project (PROAGUA), P038895, Ln.4310-BR. Theproposed additional loanwill help finance the costs associatedwith scaled-up activities to enhance the impact o f a well-performing project inthe water sector. More importantly, the loan will consolidate institutional and legal reforms supported by the project that require time to mature and be fully integrated in government processes. The ultimate purpose o f the additional loan i s to provide continuity to the financing o f the PROAGUA activities consistent with the project's objectives, components, subcomponents, and present expenditure categories. Consistent financing will enable the expansion o f actions to support the management o f water resources and the increase inwater supply for multiple uses. The Additional Financingwill support the continuation o f the existing infrastructure component inthe Northeast Region. Theproject will also include a large institutional development program to continue the support to the Northeastern States and to prepare other Brazilian States for a future infrastructure-intense project. N o major changes are being proposed to the Original Project scope. The Original Project is performingwell and is the foundation ofthe World Bank's assistance to water resources management inBrazil. Through the Additional Financing, the project will expand its activities and impact incoordination with other Federal and State government projects supporting water resources management, some of which have received financial support from the Bank. These projects include Water Sector Modernization Project -PMSS, Rural Poverty Alleviation Projects - PCPR, Cear6 Integrated Water Resources Management Project -PROGERIRH, Rio Grande do Norte Integrated Water Resources Management Project (inpreparation) and Bahia Integrated Water Resources Management Project - PGRH I1(inpreparation). Additional financing i s an important and effective instrument for expanding the Bank's menuo f support to middle income countries (MICs). This instrument should lower transaction costs based on the recognition that frameworks and procedures are inplace and that implementationresults havebeen positive. This project has been the foundation o f the Bank's water resources management support to Brazil, andit has been consideredbest practice inthe LatinAmerica and the Caribbean (LAC) Region. The Brazilian clients' perception about the Bank's provision o f additional support to this effort i s very positive. 11.Backgroundand Rationale for Additional Financingof US$50Million Background The PROAGUA, Loanno431O-BR, inthe original amount o fUS$198 million, was signed on June 3, 1998. It became effective on July 30, 1998, and its original Closing Date was December 31,2003. By the end o fNovember 2003, the Bank approved an extension o f the 2 Closing Date untilDecember 31,2005 and a reallocation o f loan proceeds. As requestedby the GOB,US$40 million were cancelled from the total loan amount. The causes of the cancellationwere primarilytwo: (1) highdevaluation o fthe Brazilian Real prior to and duringthe presidential electionof 2002. Devaluation causedthe project to reduce the pace o f disbursement since the vast majority o f contracts were inlocal currency; and (2) the relatively longtime needed by the new administration to understand the project's innovative nature and to fully embrace its implementation. Following the sudden slow-down inimplementation, the Ministry o f Finance determined that it would be cancelled duringthe consideration o f the first extension o f closing date. However, once the new GOBteam embraced the project implementation, it resumed at a very strong pace. Technical staff at PIUs was maintained, and additional staff were hired. New works were included, and funds were made available to implement the project. Since then, PROAGUA hasbeenrecognized byboth Federal and State governments inthe Northeast as one o f their most effective programs and has beenlisted as highpriority in both governments agenda. InNovember 2005, GOBrequested a new extension o f the Closing Date to December 31,2006 to enable the completion o f ongoing works and activities. The Bank approved the request. The two objectives o f the Original Project remain unchanged. They are to: 1. Promoterational and sustainable use and participatory management o f water resources inBrazil ingeneral, and inthe Northeast inparticular 2. Providereliable and sustainable access to water for domestic, agricultural, rural, municipal and other uses inpriority river basins inthe Northeast. Duringproject implementation, some important changeswere requestedby the GOBand reflected inamendments to the legal agreement. In 1999 the GOBreorganized its ministries and created the Ministryo fNational Integration (MI) responsible, among other tasks, to construct water infrastructure. Inthe following year, the GOBcreated the National Water Agency (ANA), which i s responsible for implementing the water resources management activities at the Federal level and also for assisting the States inthis task. As aresult, the Secretariat for Water Resources (SRH), which originally was responsible for project implementation was restructured and changed its role inthe GOB'Sstructure. In consequence, the GOBrequested that SRHno longer participate inthe project, replacing it with ANA and MI.ANA was made responsible for developingthe activities related to water resources management. MI,through its Secretariat o f Water Infrastructure(SIH), was responsible to assist the States inimplementing the water resources infrastructure. The Original Project was composed o f five components: 1. Water resources management 2. Infrastructure 3. Planning, studies, and project design 4. Sgo Francisco watershed 3 5, Management, monitoring, and evaluation. Duringproject implementation, two new components were added to the loan agreement to meet new demands derivedfrom the change inthe GOB'Sstructure described above: 6. Watershed management models and pilot initiatives enabled ANA to prepare studies and pilot experiences related to water resources management (WRM) issues for Federal Waters. 7. Complementary studies to support the implementation o f water resources infrastructure in the Northeast region. This component enabled MI to carry out Federal studies and plans to implement infrastructure in priority watersheds in the Northeast region. Theproject's overall implementation has beenconsistently satisfactory and compliant with loan covenants. Disbursements reachedUS$149.5 million (94.6 percent o f the total loan amount) as o f August 14,2006. Supervisions carried out for the Original Project have shown that its execution i s consistent with its objectives and that outcomes and impact have superseded expectations. PROAGUA has made major progress toward achieving its objectives. The implementation o f a comprehensive set o f criteria to select subprojects i s among the project's noteworthy achievements. The GOBhas extended the use o f these criteria to most hydraulic works financed by the Federal government. The project has contributed directly to the substantial progress inthe semiarid beneficiary States inthe development and/or implementation of legal and institutional frameworks to promote efficient WRM. Inaddition, the project has financed many important watershed plans, operational and maintenance plans for water systems, feasibility studies, and engineering designs. Several water user associations (WUAs), water basin committees, State water resources councils, and water resources information systems have been created and/or strengthened. These outputs already have led to important outcomes such as improved allocation o fwater rights; reduction inthe frequency and severity o f conflicts among water users, or between users and water agencies; and improved allocation o f fiscal resources to the implementation o f the most viable projects. Inregard to priority works, the project is financing atotal o f42 water infrastructure works, directly benefiting a population o f 2 million inhabitants (originally estimated at 1.3 million) inthe Northeast. Additionally, 2 millionwater users inthe Fortalezametropolitanareawill directly from the completion o f the rehabilitation work inthe Umburanas subproject, bringingthe total number o fbeneficiaries to nearly 4 million. These subprojects have significantly reduced the vulnerability o fNortheast communities to recurrent droughts. The subprojects also have contributed to major improvements inthe quality o f life o fthe poor by improvingthe reliability o f services andthe quality ofwater delivered. The results have been reduced diarrhea and other diseases, significant time saved primarily by women and children infetching water, and improved welfare from supplyingwater to cattle and other economic activities. 4 Rationalefor the Additional Financing Fromthe beginning,the PROAGUA project was conceived as aprogrammatic line ofwork that would include 3 loans for an estimated US$l billion. The implementation o f the first project started well. It disbursedUS$26.4 million inthe first year and US$28.4 million in the second. However, it then faced challenges that hinderedproject implementation. The Brazilian currency had been significantly devalued from project effectiveness to 2003 (from approximatelyR$ 1 .lo to the US$, to R$ 3-60), which resulted inslower than anticipated disbursement rates. Additionally, the government change at the end o f 2002 created additional delays. Nevertheless, following an initial period o f difficult relations with the Bank, the new administration was convinced by the project's very positive successes. From this point on, the GOBhas considered PROAGUA as one o f the Bank's best projects inmany years. The project has beenfully supported by the Federal government as well as by the ten Northeastern beneficiary States. This supported was confirmed by the rapidapproval o f the project's Carta Consulta (Additional Financing) and through numerous correspondences from the Minister o fNational Integration and other high-level authorities. The GOB'Simplementation capacity under this new administrationhas improved consistently as reflected inthe execution ofthe project. For example, inFY06 the project disbursedUS$46.1million. The mechanisms are inplace, PIUs are trained; States are performingwell; and the GOBis readyto prepare the biddingdocuments to be financed duringthe first year o fthe Additional Financingperiod. This scenario would facilitate implementation and disbursements, within the three-year period. Additionally, a declining share o f IBRD financing has been agreed with the GOB,starting at 40 percent from the loan duringthe early stages o fproject implementation and going down to 20 percent inthe secondkhird year. This arrangement would facilitate faster disbursement from the Bank loan duringthe first two years o fproject execution. Key Issues and Government Strategy Water resource management continues to be a highpriority on the GOB'Sagenda, because a National Water Resources Plan recently was launched based on the guidelines set forth in the Water Resources Management Policy, Law 9433/1997. Despite the significant progress achieved, especially inthe Northeast, the region still has a long way to go to achieve sustainable and efficient WRM and to significantly improve the quality o f government spendinginthe implementationo fwater resources infrastructure. In2005 the government indicatedto the Bank that it would liketo pursue the original idea o f a long-term program-succeeding the existing loan with two other projects. The second would be a smaller short-term loan (Additional Financing) that would bridgethe current project and a hture and muchlarger phase (possible futureproject). The third project would be national inscope and expand PROAGUA (includinginfi-astructure) to States in other Brazilianregions. The Carta Consulta for the Additional Financingloan was approved on December 26,2005 for an incremental total project amount o fUS$200 million, corresponding to an IBRDloan 5 o f US$lOO million for 3 years.' Additionally, in a letter from the Minister o fNational Integration, co-executor o f the project, the GOBrequested the Bank to proceed with the Additional Financing. Duringnegotiations, the Borrower requested that the loan amount be reduced to US$50 million due to a change intheir fiscal policy, maintaining the overall project amount. The AdditionalFinancingwill continue to support the implementation o f actions and activities that promote and reinforce the achievement o f the original objectives through the implementation o f infrastructureinthe semiarid region. The new loan also will expand management activities to other BrazilianStates and it would enable the project to scale up its successful results. In addition, the new loan would strengthen the position o f the Federal ImplementingAgencies (ANA and MI) indeveloping and applying more restrictive criteria for the allocation o f Federal funds to finance the implementation o f water resources infrastructure by States. The tightened criteria inturn would improve the quality o f projects and increase the benefits o f public investment inthe sector. The proposed Additional Financingwould confirm the Bank's continued support to consolidate the progress achieved inthe semiarid beneficiary States and expand the project's impact o f improving WRM and planningto other regions. 111.ProposedChanges The Additional Financingwill scale up the achievement o f the same development objectives established by the Original Project. The financing will go from January 1,2007- December 21,2009. There would be more focus on the implementation o f activities to improve water resources management and planningat national level and in States outside the Northeast region. Incontrast, there should be the opportunity to expand the benefits o f water infrastructureto other areas inthe semiarid Northeast region with a combination o f works. These would include water pipelines and conveyance systems, construction o frural water supply systems, construction and/or rehabilitation o f dams, and other similar hydraulic infrastructure for multiple uses. The priorities would be the rehabilitationo f existing systems and the expansion or completion o f unfinished works. This additional period will be extremely important to consolidate institutional and legal reforms inthe participating States. Civil works will consist o f subprojects fully compliant with the environmental screening system developed by the Original Project and considered best practice byboththe LCR - Latin and Caribbean Region Safeguards Advisory team and by the GOB.Engineering designs, cost estimates, and environmentalscreening data sheets were prepared for the 14 subprojects preselected2 for possible implementation duringthe first year, following the '"Carta Consulta" is the approval from the Ministries o fPlanning and Finance for international loans. At this stage, projects listed for possible implementation duringthe first year o fAdditional Financing have not received a final no objection from the Federal government or the Bank. These subprojects are being evaluated for coherence and compliance with PROAGUA's criteria through the project's screening process, which involves three distinct phases, as described later inthis document. 6 revised environmental framework developed for this new phase. Both Federal and State agencies are working toward the completion o f designs and biddingdocuments for first- year implementation. Thepotential subprojects preselectedto be financed by PROAGUA are part of a State Water Resources Plan and/or a Watershed Master Plan and/or the Atlas o f Water Resources publishedby the National Water Agency (ANA).3This screening provides a solid starting point indicating that proposed subprojects have been analyzed as part o f a broader context. This approach also indicates that the problems to be addressedby the proposed subprojects constitute regional priorities and that the solutions chosen result from a planning process (upstream planning process). The same criteria adopted by PROAGUA for access to resources and the eligibility of works will be maintained for the first year o f implementation. For the following years, additional criteria may be defined and included inthe Operational Manual. These criteria will accord with the development stage o fWRM at the State level. They will consider the specificity o f each geographic region inwhich project activities will be implementedas well as the characteristics o f some o f the new works to be financed. An Operational Manual i s beingupdated and will be concluded before Negotiations. Most activities supported under the Original Project will bemaintained. However, to make impact assessments more objective and facilitate the management and monitoring tasks, the first component o f the Original Project would consolidate other components related to planningand studies issues. The result will beonly three components for the proposed Additional Financing: (1) Water Resources Management (which will include the original components 1,3,6 and 7); (2) Priority Works (same as the original component 2); and (3) Management, Monitoring, and Evaluation (same as the original component 5). Implementation Arrangements Overall project management will remain unchanged: the National Water Agency (ANA) and the Ministry o fNational Integration (MI) will be the Federal ImplementingAgencies with support from the States. At the State level, project coordination will continue to rely on a managing agency nominatedby the participating States. The fiduciary tasks o f procurement and financial management arrangements will remain the same as those in place for several years. Audit reports and reviews during supervision missions will attest to their effectiveness. However, the procurement guidelines to be used by the project will be changed from the Original Project due to the launch new Bank guidelines inMay 2004. Therefore, the procurement methods and thresholds and Procurement Plan will follow the new guidelines The Atlas o f Water Resources preparedby ANA identifiedthe water needs: where the sources are; how the water gets to the communities-including quantity and quality; what the alternatives to improve the water supply are; and what the costs related to these alternatives are. The study was carried out in 1,300 municipalities encompassing approximately 34 million inhabitants inthe semiarid region. 7 and the minor method and thresholds changes agreed between the GOBand the Bank due to the government's implementation capacity (Annex 1). The Participating States o fthe Original Project will remainthe same: Alagoas, Bahia, Ceara, Maranhilo, Minas Gerais, Paraiba, Pernambuco, Piaui, Rio Grande do Norte, and Sergipe. These States will have the opportunity to consolidate their WRM frameworks and implement or rehabilitate water infrastructures benefitingapproximately 2 million inhabitants. Inthe Original Project, each Participating State signed a Project Agreement with the Bank.For the Additional Financing, each Statewould sign an Umbrella Agreement with ANA and MIimmediately after signingthe loan agreement. Originally, other States were potential beneficiaries o f the project only through its Federal component. These States now benefit from the project's soft components ineither o ftwo ways 1. The terms o freferencehpecificationsfor studies and water resources management activities would be prepared by the beneficiary State, and ANA or MIwould be accountable for the procurement process to implement the proposed activities; or 2, The State would sign an Umbrella Agreement with ANA and MIindicatingthat the State would be responsible for carrying out project activities related to components 1and 3 at the State level. The Bank requires a fiduciary and technical assessmento f the new participating State before they are able to co-execute project implementation. The Umbrella Agreement, for the new participating states, would be signed only after this evaluation. N o infrastructure subproject will be implementedby States that were not beneficiaries o f the original loan. However, the opportunity for beneficiary States to execute other activities that previously were contracted only through the Federal government component i s intended to develop implementationcapacity for a possible future third phase o f the program. A draft UmbrellaAgreement will be parto fthe Negotiations package, subject to Bank approval, and will be based on the original Project Agreement Statements. A New Participating State will need to meet certainminimumcriteria for Bank assessment before requesting the Umbrella Agreement to be signed, although additional criteria can be required as a result o fthe Bank assessment. The minimumcriteria are: 0 Management unit structured with, at least, a coordinator, financial manager and technical manager well trained to carry out responsibilities for project activities; and readyto inform auditors and the Bank when necessary 0 Management unittrained by the Federal management units 0 State financial and budgetary system inplace capable o f demonstrating the flows o f funds from the IntegratedFederalFinancial Administration System (SIAFI) 0 Project Information System(SIGMA) inplace and operating 8 0 Clear procurement cycle management inplace; control systems inplace, safe and complete record-keeping and staff well trained inBank's procurement guidelines. Fundingfor the preparation o freports such as the Work Identification Report (RIO); Preliminary Technical Report (RTP), and Final Feasibility Report (RFV) will be provided by the Ministryo fNational Integration, instead o fANA. However, ANA will continue to be incharge o f selecting and certifying the eligibility o fpriority works inaccordance with PROAGUA criteria. The costs for components for the Additional Financingwill consist o f (Table 1): Project cost Financing Loan allocation Component (US$mill) % (US$mill) A-Water Resources Management 60 25 15.00 B-Priority Works 127 25 31.75 C-Management, Monitoring, and 10 25 2.50 Evaluation Recurrent cost 3 25 0.75 Total 200 25 50.0 The implementation schedule for the Additional Financingi s expected to be more significant duringthe second year (Table 2). Table 2. Imdementationschedule for DroDosedAdditionalFinancing Calendar year Total 2007 2008 2009 I IBRDfinancing 18.00 21.20 10.80 50.00 Totalfinancing 45.00 101.00 54.00 200.00 A reviseddisbursement schedule is inAnnex 3. IV. Consistencywith CAS The proposed Additional Financingoperation is consistent with the Brazil Country Assistance Strategy 2003-2007 (Report no27043-BR, last discussed on December 9,2003), which nominates three major pillars for action: equity, competitiveness, and sustainability. Brazil's government i s effectively addressing the double challenge o fmacroeconomic stability and fiscal discipline, with reduction o f social deficits. Additionally, the GOBi s makinga strong effort to balance economic growth with social development and the maintenance and improvement o f environmental quality. Inaddition, the proposed Additional Financingis consistent with the CAS ProgressReport (Report no36116-BR,last discussed on June 5,2006). It contributes directly to the sustainability pillar through expandingthe access to local water services and improving 9 water quality and water resources management, especially inthe semiarid region inthe Northeast. The objectives pursued by the Additional Financing support the CAS and the CAS Progress Report. The Additional Financingaims at ensuring the expansion o f good quality bulk water supply for multiple uses, promoting the sustainable use o f water resources, and recouping presently unused investments. The ultimate goal i s to reduce extreme poverty and achieve a better quality o f life for Brazilians, especially inrural areas. Through its infrastructureimprovement activities, which will increase the efficiency o f the water sector, the project will contribute to enhancing the Federal and State governments' competitiveness, improving resource allocation, and consolidating the legal frameworks and institutions. Additionally, by enhancing the role playedby local WUAs and basin committees inWRM, the project will improve local governance. V. Appraisal of Scaled-up ProjectActivities Economic and Financial Analysis The methodology to be used for the economic and financial feasibility analysis o fthe priority works to be financed will be the same as for the Original Project, as described in the Operation Manual and accepted by the Bank. The main economic and financial indicators require (a) an economic internal rate o f return (IRR) o f at least 12 percent; (b) the collection o f tariffs over the use o fbulk water covering 100 percent o f operation and maintenance costs and at least 25 percent o f the investment cost; and (c) a cost not higher than US$200 per beneficiary. A detailed economic and financial analysis was carried out for each subproject proposed for being implemented inthe first year as part o f the regular feasibility study requested inthe Original Project. Technical. Technical capacity is inplace and has improved since the beginningo f the Original Project. The update o f the project information system will continue to be active, with quarterly reports beingprovided on time. The technical criteria applied by the Original Project will continue inforce for the Additional Financing. To obtain resources to finance activities that may improvement water resource management tools, participating States mustshow evidence o f a minimumlegal and institutional framework to ensure the appropriate management o f their water resources. Access to water infrastructure actions will depend on the evolutionary stage achieved by the proposing State's water management system. Only States counting with advanced WRM instruments may access projects to expand their water infrastructure. Furthermore, an identification report, a technical preliminary report, and a final feasibility report will be required, covering all works to be financed. These reports will provide (a) a brief description o fthe work; (b) target population; (c) supply problem; and, (d) technical feasibility, considering all types o f works and, more specifically, dams, pipelines, andpumpingstations. The GOBis confident that the approval process will be carried out and that biddingdocuments for at least ten subprojects will be submitted to the Bankby end 2006. The other four will be readyby April 2007. 10 Institutional. For the States already implementing the project, the institutional frameworks and staffing are inplace. The Federal and State PIUs are inplace, trained, and staffed. The institutions have increased their capacities to implement the project and WRM activities. Some o f the new States have experienced some WRM improvement and/or have implementedBank supported projects. ANA has an action plan that focuses on buildingthe capacity o f these States to implement the water management activities within the project's criteria and Bank's guidelines. It has been agreed between the Bank and the Government that, to be able to directly implement activities supported by the project, each new State will need to meet minimumcriteria to be validated by Bank's fiduciary team. Untilthen, ANA/MI will beresponsible for assisting the new States. Fiduciary Financial management,financial reports, and auditing arrangements, The financial management system to be used under the proposed Additional Financingi s Brazil's Administrative Financial System (SIAFI) and SIGMA (Project Management System), the same as those being used under the ongoing PROAGUA project. They comply with OP/BP 10.02 and the Guidelines for Assessment o f Financial Management Arrangements, which are to: 1. Ensurethat funds are used only for their intended purposes efficiently and economically while implementing agreed activities 2. Enable the preparation o f financial reports that show costs budgeted and incurred for the current period and the total budget and cost o f the project to date 3. Enable the Implementing Agencies (National Water Agency and the Secretariat o f Hydraulic Infrastructureo f the Ministryo f Integration) as well as participating States to monitor efficiently implementation o fthe project 4. Safeguard the project's resources and assets. EachImplementingAgency shall prepare and furnish to the Bank, for monitoring purposes and as part o fthe project Report, not later than 45 days after each calendar quarter, interim unaudited financial reports for the project covering the quarter inform and substance satisfactory to the Bank. Theproject's accounting and reporting system is inplace, audit complying with provisions o f Section 5.09 o f the General Conditions (Annex 2). Overall FMrisk i s considered Modest (taking into account both Federal agencies' and States' project units).As there i s no intentionto make changes inthe implementation arrangements for the Additional Financing phase, a review o f the Financial Management capacity was made on both Federal implementation agencies and site visits to three States. The satisfactory results and improvements made inFMarrangements duringthe implementation o f the Original Project are considered satisfactory. The Borrower initially will keep transactional-based disbursements through statements o f expenditures (SOEs), but has the installed capacity to move to unaudited interim reports (FMR) disbursements. The project will keep the current Federal governmental reimbursement disbursement practices. 11 Procurement Assessment A new assessmento fthe capacity o fthe ImplementingAgencies to implement procurement actions for the project was not carried out since ImplementingAgencies at boththe Federal level and in all States inthe Northeast participatedinthe implementation o f Loan 43 10-BR, which had regular supervision missions. Infact, 12 visits as part o fprocurement post- review exercises took place between 2003 and 2005. Inall cases, an assessmento fthe agencies was done and recommendations and proposed actions shared with the Borrower. There canbebeneficiaries that did not receive funds from Loan 4310-BR; therefore, a procurement assessmenthas neverbeen done. Such new States and agencies will be either (a) subject to a procurement capacity assessment prior to launching any biddingprocess, or (b) ANA and MIwill be accountable for carrying out all steps o f aprocurement process for these newcomers. Procurement activities under this new phase will be carried out by various agencies. At the Federal level, ANA and MIwill have the role o f ImplementingAgencies as well as a supervisory role for contracts implementedby beneficiary States. Many States that received funds from Loan 4310-BR are expected to bebeneficiaries o fthis new operation. In addition, new States will be allowed to apply for funds to improve their WRM capacity. Procurement for the proposed project would be carried out inaccordance with the World Bank's "Guidelines: Procurement under IBRDLoans and IDA Credits)" dated May 2004, "Guidelines: Selection and Employment o f Consultants by World Bank Borrowers,') dated May 2004, and the provisions stipulated inthe Legal Agreement. The general description o f various items under different expenditure categories i s described inAnnex 1. For each contract to be financed by the Loan, the procurement methods or consultant selection methods, the need for prequalification, estimated costs, prior review requirements, and timeframe are agreed betweenthe Borrower and the Bank project team inthe Procurement Plan. The Procurement Plan will be updated at least annually or as required to reflect the actual project implementation needs and improvements ininstitutional capacity. Safeguards The ongoingproject is classified as Category "A," andno new safeguardpolicy will be triggered duringimplementationo f the Additional Financingphase. Duringthe Original Project's implementation, adequateplanning with environment strategy and close supervision (field based) has ensured satisfactory compliance with safeguards. Safeguards specialists were part o f the team since preparation and throughout project implementation. The main assuranceinterms o f compliance with safeguards is the strong positive track record o f implementationo f this project. Procedures are inplace; PIUs are staffed and trained; and the implementation o f 42 subprojects over the past 7 1/2 years has demonstrated the capacity to detect problems and resolve them. The focus o f the work to prepare the Additional Financinghas been to improve the overall framework. This task has beensuccessfully implementedby incorporating lessons learned with the implementation o f the project and by revising it to conform with changes that have taken place inrelevant policies (for example, resettlement and indigenous peoples). The revised framework will be 12 applied to every subproject presented for the Additional Financing phase. The GOBhas been proactive interms o f disclosing all environmental reports and studies developed duringthe first phase. The revisedframeworks already havebeendisclosed inBrazil. They also are available at the World Bank Infoshop together with preliminary studies and information o f subprojects being considered for implementation duringthe first year o f the Additional Financing. Environmental Interms ofcompliance with Banksafeguards, despite the largenumber ofinfrastructure systems that havebeen financed by PROAGUA, there are no major unaddressed environmental issues. Whenever detected, potential problems were dealt with effectively. Ina country with strong civil society groups, PROAGUAhas neverbeen the source o fany complaint. Quite the contrary, throughout its implementation, it often was praised for its efforts to address questions. Furthermore, the project has financed major environmental studies; important environmental components were financed by subprojects (for example, Aguas Vermelhas, inMinas Gerais4); and environmental education programs have been financed inalmost all participating States. The project also financed a regional environmental analysis duringpreparation. Later, duringimplementation, the project developed and improved a screening system that continues to beusedby project beneficiary States. Additionally, environmental, social, and resettlement frameworks for the construction o f dams and water supply systems were developed and approved duringthe preparation o f the Original Project. Manuals with environmental guidelines for the construction of dams and water pipelines also were prepared and adopted duringproject implementation. (These manuals are appendixes to the Environmental Management Framework, or EMF.) Inpreparation for the proposedAdditional Financing, three major activitieshtudies were developed: a. Review o fthe environmental and screening procedures carried out duringthe first phase and an evaluation of results and lessons learned b. Updateo fthe original environmental assessmentand frameworks, adjustingthem to reflect the improvements made duringproject implementation and to revised safeguard policies including an update o f the resettlement framework C. Preliminary environmental assessmento f the 14 subprojects proposed to be implemented inthe first year, with preparation o f environmental screening datasheets for all subprojects and site visits to 4 (1 dam and 3 water supply systems). Prior to project implementation, the sites for all subprojects proposed for the first year will be visited by a team of environmental and social specialists. These three studies were the basis for updatingthe EMF. The Aguas Vermelhas water supply subproject included as environmental components the implementation o f sewage systems, solid waste collection and sanitary landfill, an environmental education program, recovery of riparian forest, and a program to monitor and control schistosomiasis. 13 These studies identified no major new issues. The potential subprojects to be implemented duringthe first year o fAdditional Financingwill be approved within the scope o fthe updated environmental safeguards eligibility criteria. The other proposed subprojects, to be implementedduringthe second and third years, will follow the same environmental framework. The studies didrevealthe needto improve the supervision o fmitigation measures after the conclusion o f construction works and during operation o f the subprojects. To address this issue, the following have been added to be carried out by MI'SUnit: a. Train Federal and State Units on the methodology for subproject supervision during the operational phase b. Include amitigation measures monitoringplaninthe administration, operation, and maintenance plan (PAOM) for each subproject5 C. Assist the States to implement the PAOMs for the subprojects (including the subprojects constructed within the Original Project) d. MIsupervise the implementation ofthe measures after subproject constructionand throughout its operational phase. Inall cases, subproject proposals would cover the institutionalarrangements, determining the responsibility for the implementation and supervision o fthe programmed environmental mitigation measures. The costs o f such actions will mandatorily ineach subproject's budget for economic and financial evaluationpurposes. As inthe Original Project, the future works to be financed will not cause major negative environmental and/or social impacts. The following additional documents also would be submitted to the Bank: (a) aplan for the administration, operation, and maintenance o f the proposed work; (b) evidence that the land and the rights to that land are physically and legally available; (c) evidence that Participating States hold the rights over the water for the proposed work; (d) evidence o f the corresponding environmental permits; and (e) whenever required, a resettlement plan. Following the practice for the Original Project, a Dam Safety Panel would be established to approve the final engineering designs, supervise contracting, and inspect the construction o f any large dams that may be financed, to comply with OP 4.37 (Safety o f Dams). The panel would behired by the MIUnit and would assist all demanding subprojects. For the first Category "A" level subproject to reach the advanced EA stage within the subproject preparation cycle, the (a) client's Environmental Impact Assessment (EIA) and (b) Terms o fReference (TORS) for supplementary environmental analysis to beprepared for Bank sign-off to cover any additional safeguards-related issues that are not covered in the EIA document itself will be submitted to SAT for review. The subsequent Category "A" The Administration, Operation, andMaintenance Plan (PAOM) is developed for each subproject to identify the responsibilities and financial and economic mechanisms that will ensure infrastructure sustainability. In the Additional Financing phase, an effort will be directed to improve the collaboration between the Ministry o f National Integration and the Ministry o f Cities on the development o f this plan. 14 subprojects would be subject to a similar Bank review prior to their approval, but this review would be undertaken by the environmental specialist on the Task Team. Social The Original Project has received strong support by local stakeholders. One reason was the direct benefits from the water works financed. A second reason was the environmental educational, training, and mobilization activities carried out and the support givento WUAs and committees. Beneficiaries o f the Original Project perceived water scarcity as one o f the main hindrances to their quality o f life. After project implementation, the improvements o f water quality and availability have ensured significant improvement o f their lives. Project implementation i s highlyparticipatory involving State agencies as well as water users and beneficiaries. Consultationtakes place both upstream when watershed and State water resources plans are developed as well as downstream duringthe development prior to and duringimplementation o f subprojects. Beneficiaries have the opportunity to provide inputs and suggestions. Often, project designs are adjusted to respond to their inputs.The final designs o f most subprojects implemented (for example, Garrincho, Serra de Santana, Congo, and Aguas Vermelhas) were influenced and modified by local communities' inputsS6These designs included the location of standpipes for water withdrawal, communities to be serviced, and the operation and maintenance (O&M) model to be adopted. There are no indigenous groups living inor near areas inwhich works have been proposed for the Additional Financing. Duringthe Original Project, a model TOR was developed following OP 4.20 to be used inthe evaluation process o f any subproject that could possibly affect indigenous areas. However, no subproject triggered this policy. The Brazilian law highly restricts the implementation o f interventions regarding indigenous lands. Therefore, the first phase o f the project focused on other critical areas. For the Additional Financingphase, no subproject i s expected to affect indigenous areas. However, a revisedindigenous people's framework has been developed as part o f the project's Environmental Management Framework (EMF). It will be used inthe event that any subproject to be considered affects indigenous areas. Exceptions to Bank Policies The scaled-up project will not involve any exceptions to Bank policies. VI. ExpectedOutcomes The Sera de Santanasubproject had24 additional communities included inits design; Garrincho, 6; Congo, 15; and Aguas Vermelhas, 1. 15 The Additional Financingis expectedto improve water resources management throughout the Brazilian States involved and inthe rivers under the domain o fthe Federal government. At the same time, as a result o fthe expansion and optimization ofwater infrastructure works, 2 million people, especially inthe country's less developed semiarid region, will benefitdirectly from project activities. As a result of the Original Project's activities, a number of important outcomes regarding the improvement o f people's quality o f life were identified. These successes include (a) the decrease o f water-borne diseases, such as schistosomiasis (Aguas Vermelhas subproject, State o f Minas Gerais) and diarrhea (Serra de Santana, State o f Rio Grande do Norte); (b) local development due to the opportunity to establish new economic activities and/or increase the value-added o f local production. This development has created job opportunities for the local population, as reflected in lower emigration; (c) increased life expectancy; and (d) decreasedchild mortality. The results o fmost subprojects have shown that water scarcity, which was the key issue in these areas, i s no longer the focus o f government activities and community concerns. Their attention has turned to other important issues, such as education, health, and socioeconomic development, Inaddition, the project supported pilot experiences that mobilizedand trained to operate and maintain the subprojects. These practices have shown great results by guaranteeing the O&M o f small water supply systems with lower costs and increasing community empowerment. The experiences and methodologies adopted inthe Original Project are considered models to be replicated. The proposed Additional Financingphase i s expected to maintain and improve the developed activities and enhance stakeholder involvement. The types o factivities undertaken would be alignedwith the Original Project and its indicators. Inaddition, the targets were revised, based on the existing monitoring and evaluation system, to reflect the new investments to be carried out. The broad range o f activities to be supported by the Additional Financingincludes: Institutionalstrengthening o f the water resources planning and management agencies o f the 27 States Updating and adapting water laws infour States Establishinghmplementing6 State water resources councils, and establishing or strengthening 120user organizations and river basin committees Regulatingprocedures for the allocation o fwater rights infour States Implementinga water user register ineight river basins Establishingbulk water tariffs systems infour States 16 Designing4 State water resources plans, 8 river basin plans, and 4 water infrastructureoperation and maintenance plans Developing and implementing four hydrometeorological information systems Installing 40 hydrometeorological and water quality monitoring stations Preparing 6 studies on water resources or applied research, 8 environmental studies, 8 water availability studies, and 16 hydraulic works identification studies Buildingcapacity o f200 technicians associatedwith water resources systems and o f 200 representatives o f water user committees and associations Organizing 80 training events Establishing, regulating, and/or operationalizing six State funds for water resources management Implementing and/or rehabilitating a minimumo f 15 water infrastructure works benefitingup to 2 million inhabitants Institutional strengthening o f at least two agencies responsible for the implementation and operation o f water infrastructure, at both the Federal and State levels Implementing at least one water environmental project. It i s expected that the implementation o f this set o f activities will translate into an effective project interms o f achieving its development objectives. The expected project outcomes will be significant and will represent an important contributionto WRM inthe beneficiary States. The main noteworthy projected outcomes are: (a) reliable access to safe drinkingwater inone o f Brazil's poorest regions; (b) more cost-effective water supply systems; (c) improved infrastructureto store and regulate water supplies inthe semiaridregion; (d) comprehensive data bases, models, and decision support systems to promote sound water policies and strategies to manage the nation's water resources; (e) milestone for integrated groundwater and surface water management; and (0 systematic implementation o f WRM practices. A revised Results Framework that takes into consideration the extensive monitoring activities carried out duringthe Original Project implementation was prepared and included as Annex 4 o f this document. Inadditionto the framework, a final, complete monitoringandevaluation(M&E) system will be developed to improve the methodology o f evaluating the project's outcomes. This system will complement and improve the existing system used during implementation o f the Original Project. The existing system was designed based on (a) three M&E studies that designed and implemented an evaluation systemto measure the immediate effects and final results on the living conditions o f the local beneficiary populations o f the Original Project; (b) 27 baseline studies carried out to prepare a diagnostic o fthe beneficiary population before the implementation o f the water supply systemand to measure key development 17 indicators; and (c) 3 baseline studies to assess and diagnose the water resources management scenario in each o fthe 10beneficiary States and Federal institutions. VII. BenefitsandRisks BeneJits Major WRM benefits o f the Original Project have been identifiedby independent consultants inthe evaluation ofthe participating States' performance. The evidence was o f major improvements, including inthose States that, at the beginning o f PROAGUA, were at a less advanced stage and to which only a minimumof funds from the Competitive Management Fundwere allocated An institutional assessmento fPROAGUA sponsored by the National Water Agency between October, 2004-April, 2005 concludes: "PROAGUAhas approached the roots of theproblem associatedwith water resources management in the semi-arid region with greatprecision: guaranteeing water supply in quantity and quality to thepopulation; increase in the execution capacity of beneJiciaries;and the sustainability of implemented actions.'" As to the increase inwater supply, over 1million people already have benefiteddirectly from the project. By the completion o f the Original Project, this figure will be increased by another 1.7 million to 2.7 million people. Additionally, the present Federal administration has demonstrated a strong commitment toward the project. The proposed Additional Financingoperation will allow the necessary time for the consolidation o f criteria and mechanisms developed through PROAGUA. The incorporation of such criteria in government processes requires time. Inaddition, the technical assistance(TA) provided by the Bank and the perception, by participating States, o f the Bank as a "honest broker" are considered by the GOBas fundamentally important aspects for the future success o f the program. Risks The underlyingrisks and mitigation measureshave not changed significantly since the development o f the Original Project and therefore are not an obstacle to successful implementation. The upcoming elections and a change in administrationmay disrupt the project's strong implementationrecord since 2004. However, PROAGUA i s fully supported by the Government o f Brazil and by the 10beneficiary States, which guarantees a strong degree o f commitment to project implementation. The awareness achieved by the target audience (direct beneficiaries) as well as by opinion makers, and the demand from participating States, has institutionalized positive pressure on behalfo f the project's implementation, minimizing the impact o f changes inthe administration. The project i s considered highpriority by the Federal government, as well as by these States. National Water Agency, 2004. 18 Another risk to the project's success would be insufficient or delayed financing o f counterpart funds, especially to finance local infrastructure for water distribution. The fact that the proposed project i s included among the "Presidential Targets" i s an additional guarantee o ftimely counterpart funds. Overall risk will be mitigated by the importance o f the project at boththe Federal and State levels, commitment o f PIUpersonnel, experience gained from implementing similar activities duringthe Original Project, and demonstrated capacity o f the ImplementingAgencies. VIII. FinancialTerms and Conditions for the Additional Financing The financial terms and conditions will remain unchanged from the original loan. The GOB has chosen a Fixed Spread Loan inUS dollars and repayment over 17 years, including a five-year grace period, at the Bank's standard variable interest rate. The Federative Republic o f Brazil shall pay the Bank a front-end fee inan amount equal to 1percent o f the amount o f the loan, subject to any waiver determined by the Bank. 19 Annex 1. Procurement A. General Procurement for the proposed project would be carried out in accordance with the World Bank's "Guidelines: Procurement under IBRD Loans and IDA Credits," dated May 2004; "Guidelines: Selection and Employment o f Consultants by World Bank Borrowers," dated May 2004; and the provisions stipulated inthe Legal Agreement.8 The general description o f items under different expenditure categories i s described below. For each contract to be financed by the Loadcredit, the different procurement methods or consultant selection methods, need for prequalification, estimated costs, prior review requirements, and timeframe are agreed between the Borrower and the Bank project team inthe Procurement Plan. The Procurement Plan will be updated at least annually, or as required, to reflect the actual project implementation needs and improvements ininstitutional capacity. Procurement of works. Works procured under this project, would include construction rehabilitation and/or expansion o f water pipelines and conveyance systems, Construction o f rural water supply systems, construction and/or rehabilitation o f dams, construction and/or rehabilitation o f irrigation systems, and other similar hydraulic infrastructure. The procurement will be done usingthe Bank's Standard BiddingDocuments (SBDs) for all InternationalCompetitive Biddings(ICBs) and the model biddingdocuments prepared by the Secretariat for International Affairs (SEAIN) for National Competitive Biddings(NCB) or other documents agreed with (or satisfactory to) the Bank. Considering the experience and outcomes o f similar contracts inLoan 4310-BR, it is expected that the Borrower will duly consider, whenever possible, following a supply-and-install approach to construct new pipelines and include both civil works services and supply o frelated goods inthe same biddingpackage. Procurement of goods. Goods procuredunder this project would include printing materials, office equipment, suppliesfor capacity-building events, pumps, pipes, and electrical equipment. The procurement would be done usingthe Bank's SBD for all ICB, the model biddingdocuments prepared by SEAINfor NCB, or other documents agreed with (or satisfactory to) the Bank. Procurement of nonconsulting services. A large number o f capacity-building events are expected for this operation and, thereby, a great deal o f small contracts to provide logistics support to them. Most o f them are expected to fall into shopping thresholds (up to the maximum amount o f US$lOO,OOO). Contracts above shopping threshold will use the Bank's draft biddingdocuments for technical services or other documents agreed with (or satisfactory to) the Bank. Selection of consultants. Many consulting assignments are expected for this operation. Some o fthem are engineering designs, works supervision, project management services, A complete procurement planhas beensubmittedby the Government and it has been approved by the Bank prior to negotiations of the loan. 20 individual consultants for the PIU, water supply master plans, advice on water supply strategies, and preparation o f environmental campaigns. Inaccordance with the provisions o fparagraph 2.7 o f the Consultant Guidelines, short lists o f consultants for services estimated to cost less than US$500,000 equivalent per contract may be composed entirely of national consultants. The Borrower did not inform the Bank o f any special arrangement or requirement for employment o f universities, government research institutions, nongovernmental organizations (NGOs), or related organizations. Operational costs. Project design describes that the operation i s expected to finance PIU staff through individual consultant contracts as well as provide PIUs office equipment and publication of various working materials. All contracts shall follow the procedures defined inthe Guidelines andthe loanagreement. B. Assessment of the Agencies' Capacity to Implement Procurement Procurement activities will be carried out by various agencies. At the Federal level, ANA (Agencia Nacional de Aguas, or water supply regulatory body) and MI(Ministerio da Integragiio Nacional, or Ministryo fNational Integration) will have the role o f ImplementingAgencies as well as supervisors o f contracts implementedby beneficiary States. Many States that received funds from Loan 4310-BR are expected to be beneficiaries o fthis new operation. New States also will be allowed to apply for funds to improve their water resources management capacity. A project implementation manual shall be prepared before contract signature. Assessments o f the ImplementingAgencies' capacity to implement procurement actions for the project were not carried out. Both ImplementingAgencies at the Federal level as well as all States o f the Northeast and some o fthe Southeast regions participatedinthe implementation o f Loan 4310-BR, which had regular supervision missions. Infact, 12 visits took place as part o f procurement post-review exercises in2003 and 2005. Inall o f these visits an assessment o fthe agencies was done and recommendations and proposed actions shared with the Borrower. Because Additional Financingcan have beneficiaries that did not receive funds from Loan 43 10-BR, these beneficiaries have not had prior procurement assessments. Either (1) such new States and agencies will be subject to a procurement capacity assessmentprior to launching any biddingprocess, or (2) ANA and MIwill be accountable for carrying out all steps o f a procurement process for them. Risks.The overall project procurement riskis high. Most o f the issuedrisks concerning the procurement component to implement the project have been identified. They are: Procurement i s highly decentralized to various participating States. 21 States that were not beneficiaries o f Loan 4310-BR will be allowed to apply for funds from the Water Resources Management and Management, Monitoring, and Evaluation components o f the project duringthe Additional Financingphase. Multiyear civil works contracts might be affected by Federal resolutions related to budget. The new procurement guidelines issued in May 2004 will apply to this operation, which has many beneficiaries used to following the previous version o f the guidelines. This is not a risk but a strength. However, the project team will organize a seminar to highlightthe differences between the two versions. The approach used for construction o f water pipelines and power plants involves civil works and supply o f related goods. This approach can include the procurement o f both works and goods under one bid, or separately Corrective measures. The agreed correctivemeasures are: All Northeast States as well as the State of Minas Gerais were visited by the Bank in procurement post-review exercises for Loan 4310-BR. The Implementing Agencies' assessments o f these States will be updated in the supervision missions o f this new operation. Moreover, States that were not beneficiaries o f Loan 4310-BR will either (1) be assessed prior to launching bidding processes, or (2) have ANA and MI carry out their procurement processes. This loan will become effective after elections. Its implementation phase is scheduled to be completed during the next Presidential term, thus mitigating risks related to budget decisions. To the extent possible, construction and expansion o f existing pipelines should follow supply-and-install approaches in order to couple civil works services and supply o f related goods inthe same contract. C. ProcurementPlan The Borrower has developed a Procurement Plan for project implementation that provides the basis for the procurement methods. This plan i s being revised. Some discussions with the Bank procurement team already have taken place, and a final revised version is expected to beready before Negotiations. It will be available inthe project's database and inthe Bank's external website. The Procurement Planwill beupdatedinagreement with the project team annually or as required to reflect the actual project implementation needs and improvements ininstitutional capacity. 22 The procurement methods are: 11.Works us$lo,ooo,ooo ICB 3. Consulting services (a) Individual Consultants US$50.000 Oualification (b) Firms US$200,000 - US$500,000 QCBS > US$500.000 OCBS For purposes o f paragraph 2.7 o f the Consultant Guidelines, the short list of consultants for services estimated to cost less than $500,000 equivalent per contract may comprise entirely national consultants. D.BankReview of Procurement Decisions The Procurement Plan shall set forth the contracts that shall be subject to the Bank's Prior Review. For reference, table Al.2 was agreed with the client to assist the preparation of the Procurement P1an. Categories Subject to prior review 1.Works All ICBs and Drocessesabove US$5.000.000 2. Goods All ICBs andprocessesabove US$350,000 3. Consulting services I(a) Individual Consultants (b) Firms IAll processes mocesses above US$50.000 All above US$lOO,OOO Prior review o f contracts to employ individual consultants above US$50,000, reports on the qualifications and experience o f all evaluated candidates, terms o freference, and terms o f employment o f the consultants shall be subject to prior approval by the Bank. All Terms o fReference o f contracts to employ consulting services (individual and firms) are subject to prior approval by the Bank. 23 All other contracts shall be subject to post review by the Bank. E. Frequency of Procurement Supervision Inadditionto theprior review supervision to becarried out from Bank offices, the capacity assessmento f the ImplementingAgency has recommended biannual supervision missions to the field to carry out post review o fprocurement actions. 24 Annex 2. FinancialManagement,FinancialReports, and Auditing Arrangements The project i s implemented by two separate agencies: (1) Ministry o f National Integration(MI) and (2) Ministryof Environmentthrough the National Water Agency (ANA); and participating States through subproject agreements. States that do not participate inthe ongoing project will need financial management (FM) assessmentprior to being responsible for implementation. Conclusionof FinancialManagementAssessment Both Federal agencies (MI and ANA) are satisfactory to Bank's requirements and, financial management systems in place: Brazil's Federal Integrated Financial Administration System (SIAFI) and, Monitoring and Administrative Management System (SIGMA) can provide reasonable assurance, accurate and timely information on the status o f the project. Overall risk associated to the project is rated as Modest. Current arrangements should be kept in for the Additional FinancingLoan. ImplementingEntity/FinancialManagement UnitiStaffing Current implementation agencies administrative structures should be kept for the Additional Financing. At the Federal level, both agencies-UGPO and UGPG were considered adequately skilled and no recent turnover has occurred. At the State level, installed capacity varies from each State implementation unit arrangements. Training: adequate training will be a priority for the Additional Financing Loan; both agencies would prepare a training program. Flow of Funds Flow o f funds has changed since Original Project design; modified arrangements have been agreed with the Bank and put in place throughout the years o f implementation. The flowchart in Attachment 1 shows the current disbursement flow o f funds, which will be included in the revised version o f the operational manual. All accounting and financial transactions are made through SIAFI. All Funds (Project and Federal counterpart) are advanced by National Treasury Secretariat to each implementation agency, which signs an agreement (conve^nio)with each participatory State, enabling it to receive funds, and opens a specific account by agreement. The same arrangements will be kept for the Additional Financing Loan. In addition, counterpart funds are now expected to be deposited at the same agreement specific account. Disbursements Upona Governmental decision inFebruary2004, all Federalprojects special accounts were closed and disbursements are now being made on a reimbursement basis. Project would initially keep the current disbursement transaction-based arrangements through Statement o f Expenditures and Summary Sheets (thresholds to follow procurement limits). Incase o f a consensus by both agencies, as capacity is installed, it would move to disburse through Interim Un-Audited Reports (FMR).All support documentation is to be retained inthe relevant Federal agency or State. Audit Arrangements: ExternalAudit Current arrangements should be kept. SFC i s responsible for auditing project's account and financial Statements up to six months after closing o f fiscal year. The reports required are: 25 1. Opinion on Project Financial Statements 2. Opinion onthe use of SOE methodology (ifapplicable) 3. Opinion on Special Account (ifapplicable) 4. Management Letter. Accounting Policies, Procedures, and Internal Controls Current procedures should be retained. Both Federal agencies follow Law 4320/64, the Brazilian accounting policies and procedures of the accounting system prevailing for Public Entities. SIAFI (Federal Integrated Financial Administration System) is used to control budget and financial execution, and SIGMA i s used for monitoring purposes. To better monitor the project, both agenciesas well as the States use SIGMA to enter data and produce reports. Financial Reports As the rigidity of SIAFI does not allow the agencies to prepare FMR, SIGMA is being used by many other Federal projects for monitoring and reporting. For the Additional Financing Loan, quarterly FMRs will be produced and submittedto the Bank by each agency. Each report will contain the figures for the quarter, accumulated for the year and accumulated for the project. Variance will be compared to annual budgetary approved figures. All FMR supporting documentation will be filed in the respective agencies and States for auditor's inspections and the Bank's supervision missionreview. The reports to be produced are: 1. Sources and Uses of Fundsby Components 2. Expenditures by Cost Categories 3. Actual Spending Statement. Supervision Plan Biannual financial management supervision missions are proposed covering both the Federal agencies(ANA and MI) and field visits to States. Operational Manual Both agencies will update the Operational Manual, as mentioned above, to reflect the current flow of funds arrangements at the Federal level and other specifics of the Additional Loan. 26 u, Annex 3. DisbursementSchedulefor ProposedAdditionalFinancing TableA3.1Disbursementschedule Amount o fthe Loan Allocated (Expressed in % of Expenditures Category Dollars) to be Financed (1) For Parts l(a) and 3(a) o f the Project: (a) Goods 1,000,000 40% untildisbursements under this Category shall reach an aggregate amount o f $400,000; and 20% thereafter. (b) Works (only for Part -0- l(a)(iv) of the Project) (c) Consultants' services 10,000,000 40% untildisbursements under this and training Category shall reach an aggregate amount o f $4,000,000, and 20% thereafter. (2) For Parts l(b), 2(a), 2(b) and 3(b) o f the Project: (a) Goods 9,250,000 40% untildisbursements under this Category shall reach an aggregate amount o f $3,700,000, and 20% thereafter. (b) Works (except for Parts 19,050,000 40% untildisbursements under this 1(b) and 3(b) of the Category shall reach an aggregate Project) amount o f $7,620,000, and 20% thereafter. (c) Consultants' services 9,950,000 40% untildisbursements under this and training Category shall reach an aggregate amount of $3,980,000, and 20% thereafter. (3) Incremental Recurrent 750,000 40% until disbursements under this Costs for Parts 1 and 3 o f Category shall reach an aggregate the Project amount o f $300,000; and 20% thereafter. (4) Front-end fee -0- Amount payable pursuant to Section 2.04 of the Loan Agreement in 28 accordance with Section 2.07 (b) of the General Conditions. (5) Premium for Interest -0- Amount payable pursuant to Section Rate Caps and Collars 2.08 (c) o f the LoanAgreement in accordance with Section 4.04 of the General Conditions. TOTAL 50,000,000 29 Annex 4. Results Framework and Monitoring PDO/ Global Outcome Indicators Use of Outcome Environment Objective Information 1.Promote the rational and WATERRESOURCEMANAGEMENT sustainable use and the IO.1. Number o fBrazilian states that have specific Y2 - Mid-term evaluation will participatory management o f water management agencies and that are reasonably indicate the relevance o f works water resources inBrazil in well-staffed or have promoted public selection and support provided to states general, and particularly inthe processes for hiring personnel for water resource management, Northeast. 10.2. Use o f eligibility criteria for the approval o f and will support the definition o f PROAGUA works being applied to the selection o f actions for the review and 2. Provide for reliable and works financed by the MIandlor by the States complementationo f initiatives sustainable access to water for 10.3. Reduction inprevalence rates qf waterborne domestic and municipal use and diseases inthe areas served by PROAGUA works. Y3 Final program evaluation - for other uses inpriority river 10.4. Degree o f improvements inhousing or inthe will highlight lessons learned on basins inthe Northeast hydro-sanitpry system o f households inareas benefiting strategies to be expanded, from PROAGUA works reviewed or created for 10.5. Reduction inwater losses indistribution systems expanding positive impacts, the o f areas that have benefited from PROAGUA works sustainabilityo f works and o f 10.6. Percentage o f communitiesAocalities that have management processes infuture benefited from program works that have active and water resource management regular representation and participation inthe water programs and policies management systems (user associations, river basin committees) Intermediate Results Result Indicators for Each Component Use of Result Monitoring 1.WATER RESOURCE IO1.1. Number o f states outside the Brazilian Semi-Arid MANAGEMENT that have accessed program funds Y l - Y 2 - Evaluationo f the 1.1. Management tools have 101.2. Overall andper state evolution o f the degree o f relevance o f supported been implemented and implementation o f low complexity water resource proposals and their water resource agencies management tools, assessedinaccordance with the potential impact on water have been institutionally scale developed by ANA* resources management in strengthened, IO1-3. Overall andper state evolution of the degree o f the states, allowing for the consolidating the national implementation o f intermediate complexity water re-pactuation o fpriorities water resources resource management tools, assessedinaccordance with management system the scale developed by ANA* 101.4. Overall and per state evolution o f the degree o f 1.2. The efficacy and efficiency Y3 - Identification o f the most implementation o f advanced complexity water resource o f management o f surface management tools, assessed inaccordance with the effective strategies and and ground water scale developed by ANA* mechanisms to strengthen resources has been the water resource 101.5. Overall and per state evolution o f the degree o f expanded, in a management systems, implementation o f management tools, according to their decentralized and considering the different nature: legal, institutional and social articulation tools; participatory manner conditions o f states andor planning; information and support; operational * regions. 1.3. Strategic and operational planning has been consolidated as guiding instruments for governmental action inthe field o fwater resources (*) A prototypefor astate qualification system regarding water resource managementis presently being evaluated by ANA. It is based - on the evaluation of about 30 variables, each one o f them associatedto a management tool, grouped into five major groups of tools: legal, institutional and social articulation tools; planning tools; information and support tools; operational tools. Variables also are classified according to the complexity of the management tools to which they refer: basic, intermediateor advanced. The Result Indicators are basedupon the concepts and on the methodology proposedby this system 30 IntermediateResults ResultIndicatorsfor EachComponent Use of ResultMonitoring 2. PRIORITY WORKS 102.1, Percentage o f new water structure works Y1- Identification o fthe main 2.1. Infrastructure works that completed and functioning (performance) bottlenecks and changes have been rehabilitatedandor 102.2. Relative expansion on water supply service needed inthe execution implementedwhile complying coverage inthe areas benefitedby the works and supervision o f works with principles o f sustainability, 102.3. Percentage o f completed works that have technical, environmental, implemented the actions identified on their respective economic and financial Administration, Operation, and Maintenance Plan Y2-Y3 - Evaluationo f the feasibility. (PAOM) relevance o f the eligibility 102.4. Beneficiaries' satisfaction regarding access and criteria to induce 2.2. Incomplete water systems quality of the water supply service: water quantity and sustainability and and works have been quality, and regularity o f supply effectiveness o f water completed and are supply systems. operational, inaccordance 102.5. Number o f works with public hearings held with Identification o f with the principles o f the benefitedpopulation mechanisms to enhance sustainability, technical, relevance and efficacy o f environmental, economic water works and financial feasibility. 3. MANAGEMENT, 103.1. There are periodic reports by the P M U Yl-Y2 - Identification and MONITORINGAND (MI/ANA) on: i)analysis o fthe program's operational resolution o f problems on EVALUATION performance; ii)data and analysis o f outcome the program's institutional indicators; iii)records o f decisions and changes on arrangements and actions, terms and resources. management 3.1. Efficient and effective 103.2. Number o f contracted works that are suspended management o f the program or cancelled Y3 - Learning about the main assuring achievement o f goals problems and potentialities and objectives o f the management model adopted by the program. 3.2. A monitoring and evaluation system has been implemented, allowing prompt supervision o f the program's performance, results, and impacts on beneficiary groups 31 832 83E hl m Y e D e 54 4 5 L a 8 - M 3 Y N 0 II t t z e, z e, 0 0 \o Q 0 z E N a a a