Document of The World Bank Report No: 58588-BR RESTRUCTURING PAPER ON A PROPOSED PROJECT RESTRUCTURING TO THE STATE OF BAHIA WITH THE GUARANTEE OF THE FEDERATIVE REPUBLIC OF BRAZIL FOR THE BAHIA POOR URBAN AREAS INTEGRATED DEVELOPMENT PROJECT ­ VIVER MELHOR II (LOAN 7344-BR) APPROVED ON OCTOBER 31, 2005 January 4, 2010 1 ABBREVIATIONS AND ACRONYMS CONDER Urban Development Company of the State of Bahia PAC Programa de Aceleração do Crescimento, Growth Acceleration Program PAD Project Appraisal Document SEDUR Secretary of Urban Development of the State of Bahia Regional Vice President: Pamela Cox Country Director: Makhtar Diop Sector Manager / Director: Guang Zhe Chen/ Laura Tuck Task Team Leader: Taimur Samad 2 BRAZIL BAHIA POOR URBAN AREAS INTEGRATED DEVELOPMENT P081436 CONTENTS Page A. SUMMARY................................................................................................................ 4 B. PROJECT STATUS.................................................................................................. 4 C. PROPOSED CHANGES .......................................................................................... 5 ANNEX 1: RESULTS FRAMEWORK AND MONITORING .................................... 9 3 BAHIA POOR URBAN AREAS INTEGRATED DEVELOPMENT RESTRUCTURING PAPER SUMMARY 1. This Restructuring Paper responds to the request of the State of Bahia to amend the Loan Agreement for the Bahia Poor Urban Areas Integrated Development Project (7344- BR) to encompass the following changes: (i) focusing of geographic coverage within a sample of the eight eligible municipalities; (ii) change in the scope of coverage to scale- up overall beneficiary impact; (iii) reallocation of funds between categories and change in the percentage of expenditures to be financed; (iv) extension of the closing date by 12 months to January 31, 2012; and (v) revision of the results framework to reflect the changes in geographic coverage and scope. 2. As the proposed changes do not affect the original Project Development Objective ­ which is to reduce urban poverty in a sustainable manner, targeting the poorest and most vulnerable sections of Salvador and strategic cities of the state of Bahia with access to basic services and improved housing and social support services ­ the proposed restructuring is being processed as a Level II restructuring submission. PROJECT STATUS 3. The Project was approved by the Board on December 6, 2005 in the amount of US$49,296,000. The Loan Agreement was signed on April 7, 2006, and the Project became effective on June 20, 2006. However, Project implementation stalled shortly thereafter and was not resumed until late 2008 due to: (i) a change in State leadership after the gubernatorial elections in October 2006 and the decision of the new government team to carry out a detailed review of the Project's activities; (ii) a change of all municipal Department Heads, in addition to key Project personnel at the Urban Development Company of the State of Bahia (CONDER), the implementing arm of the Secretariat of Urban Development (SEDUR); and (iii) CONDER's workload increased since early 2007 as priorities shifted towards the implementation of the new national Growth Acceleration Program (PAC). 4. Following senior level meetings in August 2008 between the Bank and the State Government, both a new Project coordinator and a new Bank task team were introduced to re-launch the Project. Since then Project implementation has progressed well and has to date achieved 21 percent disbursement and 55 percent commitments. While the Project remains significantly delayed with respect to its original effectiveness date (June 2006), since its earnest re-launching in the third quarter of 2008, the Project's implementation and disbursement profile is compatible with the original expectation, signaling a new and high level of Borrower commitment and expectation of implementation success. It is important to note that the Project fully complies with OP 13.30 with respect to Closing 4 date extensions: (i) the performance of the Borrower and of its implementing agencies is Satisfactory; (ii) Project development objectives continue to be achievable; (iii) neither the loan nor the country is subject to ongoing suspension of disbursements; and (iv) no audit reports of the Project are outstanding or not satisfactory to the Bank. PROPOSED CHANGES 5. The Borrower is proposing to make important changes in the Project scope, approach and timeline for two main reasons: (i) the need to recover the significant implementation delays accrued to date; and (ii) the need to factor into the remaining implementation program an approximate loss of over 50 percent in the Project purchasing power since the original costing, as a combined result of a 43 percent appreciation of the Brazilian Real with respect to the US dollar (from BRL 2.58 : USD 1 at Board approval to the current BRL 1.8 : USD 1) and 20 percent local cost escalation, including due to some market heating effect caused by a significantly increased volume of infrastructure investments. An approximate additional US$ 25 to 30 million would be required to cover the loss in purchasing power for the Project to have been implemented in full as per the original design. In the absence of additional resources, the project implementation would fall short by more than 46 percent in the number of beneficiaries and would, therefore, have result in a significantly reduced development outcome and impact. Alternatively, the Borrower is proposing a series of changes in the project design to refocus the Project geographic coverage and to upgrade the interventions models and scope of coverage. These changes would enable the Borrower to reduce the number of municipalities covered while scaling-up the original number beneficiaries to be reached by the project. This approach is intended to substantially meet the Project's original developmental objectives and scale-up beneficiary targets in the context of the reduced resources. (i) Refocusing of geographic coverage. The Project originally includes eight municipalities. However, in the context of the above mentioned time and cost factors, the Borrower is proposing to focus the integrated urban upgrading interventions in the municipalities of Salvador and Feira de Santana. These municipalities are the two largest in the State of Bahia and as such account for a disproportionate share of urban poverty while also possessing the most capacity to implement the Project's activities. While the number of municipalities would be reduced, the Borrower would considerably scale-up overall beneficiary coverage and impact by intensifying and diversifying interventions in two larger and more densely populated municipalities, thus allowing a larger beneficiary population than the initially targeted 30,000 urban poor to benefit from improvements in community- level infrastructure and facilities and public services. The geographical concentration of the Project's interventions in two municipalities would also have the effect of reducing the implementation difficulty and cost associated with operation in multiple municipalities. The State Government is committed to support the other six municipalities in a subsequent phase of the Program. (ii) Upgrade of interventions models and scope of coverage. Specifically, under Component A, a targeted beneficiary group of approximately 24,000 urban poor 5 would be provided with improved housing conditions (new, improved, indemnities), mobility access (roads and stairways) and sanitation network availability, and another considerably larger beneficiary group of approximately 134,000 urban poor would benefit from improved community-level infrastructure and facilities. Under Component B, approximately 43,000 urban poor in the target communities (reduced from 78,000) would benefit from improved social services and access to new social equipments. Table 1 provides a comparison of beneficiary impacts between the original plan, the forced reductions vis-à-vis the Projects loss of purchasing power, and the proposed new approach. As shown by Table 1, within the constraints of the Project's reduced purchasing power the proposed new scope of intervention would enable both: (i) a broader overall impact due to the concentration of activities in the two highly and densely populated municipalities; and (ii) achievement of project developmental objectives and targets equivalent to those originally outlined. Table 1: Beneficiary Comparison Components Beneficiaries ­ urban poor Original Reduced Proposed Restructuring (1) Implementation (2) Component A 30,000 22,000 · Benefited from improved 24.000 housing · Benefited from improved 134.000 community-level infrastructure and facilities Total beneficiaries: 158.000 Component B 78,000 36,000 3,000 Total 108,000 58,000 201,000 (3) (1) As mentioned in Annex 3 of PAD (2) Resulting from the approximate loss of over 50 percent in the Project purchasing power since the original costing (3) Overall beneficiaries = 201,000 urban poor individually considered. (iii) Reallocation of funds and percentage of expenditures to be financed. The Borrower is requesting adjustments to Schedule 1 of the Loan Agreement to account for changes in the exchange rate and revised subproject costs which require a reallocation of loan proceeds and changes in disbursement percentages. (iv) Project Costs. The Borrower is proposing to change to the indicative Project Costs table to reflect the changes resulting from the refocusing of the Project geographic coverage and the upgrading of the interventions models and scope of coverage. The proposed modifications for each component and sub-component are as follows: (i) activities under sub-component A3 have been incorporated into other sub- components; (ii) the project management firm contracted under sub-component C3 will perform activities originally included under sub-component B1; (iii) expansion of sub-component A1 works in Sao Bartolomeu; and (iv) exclusion of sub- component A2 works at Pista de Borda due to currency appreciation. 6 Project Costs (US$m.) Components/Activities Current Proposed A: Urban Infrastructure Delivery 51.40 60.66 A1: Community Infrastructure 36.70 50.37 A2: Macro-level works 11.25 8.44 A3: Housing alternatives 1.50 - A4: Engineering designs 1.95 1.85 B: Social Services Delivery 19.45 8.01 B1: Social Services 7.45 2.71 B2: Social service facilities 11.40 4.86 B3: Project Design for local Social Development 0.60 0.44 C: Institutional Strengthening; Project Management 7.75 12.20 C1: Studies and plans 1.00 0.91 C2: Inst'l Strengthening (training, consultant services, equip.) 2.00 1.98 C3: Project Management 4.75 9.31 Total Baseline Cost 78.60 80.87 Physical and Price Contingencies 3.48 1.66 Front-End Fee 0.12 0.12 Total Financing Required1 82.20 82.65 (v) Reallocation. The Borrower is requesting a reallocation of loan funds, as described in the table below for the following reasons: (a) the Project management support function financed under the PAT project with a 5m grant from the Italian Government was gradually phased out as a result of the delay in the implementation of Project activities; (b) recruitment of a project management firm to coordinate the contracting of professionals, including social services technicians, engineers, and economists to assist with Project implementation, especially related to the social services activities; (c) reduction in available funds due to the appreciation of the Real resulted in reduction in works packages initially planned under the Project; and (d) acquisition of some of the proposed equipment using counterpart funds. The percent of works financed is proposed to be increased from 54% to a maximum of 100%. This is intended mainly to accelerate disbursement. It is important to note that the proposed split between Bank funds (60%) and counterpart funds (40%) remains the same for the overall Project. To date, the Government has invested in the works category more than its initially determined ratio of 46% by virtue of fully assuming the difference between the lowest qualified bids and the estimated budget in contracts under execution (over and above its 46% share of the pari passu) and financing of the additional work that was deemed necessary for technical or resettlement-related reasons. Category of Expenditure Allocation % of Financing Current Revised Current Revised Current Revised (1) Goods and non- No change 4,406,720 1,565,413 80% No consultants' services change (2) Works No change 36,056,040 33,166,381 54% Up to 1 Difference in Total Project Cost corresponds entirely to Borrower counterpart funding. The Loan amount does not change as a result of the restructuring. 7 100% (3) Consultants' services No change 8,710,000 14,440,966 85% Up to and training 85% (4) Front-end fee No change 123,240 123,240 (5) Premia for Interest No change 0 0 Rate Caps and Interest Rate Collars TOTAL 49,296,000 49,296,000 (vi) Extension of the closing date. The Borrower requests an extension of the closing date by 22 months to November 30, 2012. The Project Development Objective will be achievable within the revised timeframe. The extension will be structured in two phases of 12 months and 10 months each. The second phase extension will be conditioned upon successful completion by July 31, 2011, of the following targets, which have been agreed with the Borrower on October 19, 2010. # TARGETS 1 Contracting of all the works envisaged in the Project Implementation Plan. 2 Conclusion of the Urbanization Works with Produção Habitacional e Infraestrutura Avenida Anchieta. 3 60% execution, as measured by justified expenditures, for Urbanization Works: (i) Produção Habitacional e Infraestrutura Mangueira III; and (ii) Produção Habitacional e Infraestrutura Sussuarana III/Baixa da Paz. 4 15% execution, as measured by justified expenditures, for Urbanization Works: (i) Produção Habitacional e Infraestrutura São Bartolomeu; and (ii) Infraestrutura Parque São Bartolomeu. 5 Establishment of Neighborhood Commissions in 80% of the Areas of Physical Intervention (Poligonais de Intervenção Física). 6 Socio-professional qualification of 400 Project beneficiaries. 7 Improvement of 50 housing units in the São Bartolomeu Community through the implementation of the Self-Construction Pilot Project. 8 Direct assistance to 360 individual entrepreneurs, through the implementation of activities in the Project Implementation Plan. (vii) Revision of the results framework. The original Project design envisioned an extensive and innovative monitoring and evaluation scheme well beyond the scope of most World Bank projects. It included support from the Development Impact Evaluation (DIME) Initiative to assess Project impacts over time and a specially designed baseline survey of target communities and a sample of control communities. The Borrower requests that the results framework be revised to reflect the new scope of activities, especially the reduction of beneficiary municipalities from eight to two, and establishment of a monitoring system commensurate with most World Bank financed projects. 8 ANNEX 1: Results Framework and Monitoring BRAZIL: BAHIA POOR URBAN AREAS INTEGRATED DEVELOPMENT (Note: The indicators use the PIF as the defined intervention area for infrastructure works and the PIS for social activities.) Project Development Objective (PDO): The PDO is to reduce urban poverty in a sustainable manner, targeting the poorest and most vulnerable sections of Salvador and strategic cities of the state of Bahia with access to basic services and improved housing and social support services. Revised Project Development Objective: n. a. D=Dropped Cumulative Target Values** C=Continue Core PDO Level Results N= New Unit of Baseline Data Source/ Responsibility for R=Revised YR 1 YR 2 YR 3 YR4 Frequency Indicators* Measure (2006) Methodology Data Collection (2009) (2010) (2011) (2012) 1. Improvement in the D quality of living conditions for target communities (Indice de vulnerabilidade social e urbana) 2. Increase in the index of N % 0% 0% 0% n.a. 25% YR2, YR4 Sample survey SEDUR (a firm satisfaction with basic will be contracted sanitation conditions in to carry out the the intervention areas survey) (baseline 2010) 3. Increase in the index of N % 0% 0% 0% n.a. 25% YR2, YR4 Sample survey SEDUR satisfaction with the provision of new social equipments in the intervention areas (baseline 2010) 4. Improved infrastructure N % 0% 0% 0% 25% 60% Semi-annual Infrastructure SEDUR (PMU) and social services: plans; physical Increase in the percentage surveys 9 of households within 250 meters of paved roads 5. Improved infrastructure N %. 0% 0% 0% 15% 35% Semi-annual Infrastructure SEDUR (PMU) and social services: plans; physical Increase in the percentage surveys of households with access to sanitation networks (availability of sanitation services) 6. Improved infrastructure N % 0% 0% 0% 10% 30% Semi-annual Infrastructure SEDUR (PMU) and social services: plans; physical Increase in the percentage surveys of households within a 1 km radius of social equipments (improved park, public plaza, soccer fields, community center) INTERMEDIATE RESULTS Intermediate Result (Component A): By the end of year 4, some 30,000 urban poor of selected informal settlements in 8 municipalities provided with basic urban infrastructure and secure housing. Revised Intermediate Result (Component A): By Project completion, some 158,000 urban poor of selected informal settlements in 2 municipalities provided with improved urban infrastructure and housing. 1. Number of households R No. 0 0 274 1,029 2,000 Semi-annual Infrastructure CONDER with the with improved housing plans; physical support of SEDUR conditions (new, surveys; Project improved, indemnities) reports 2. Percentage of households R % 0% 0% 2% 35% 60% Semi-annual Infrastructure CONDER with the in high risk areas or plans; physical support of SEDUR unhealthy conditions surveys; Project resettled reports 3. Number of households R No. 0 0 49 584 983 Semi-annual Infrastructure CONDER with the removed from high risk plans; physical support of SEDUR areas or unhealthy surveys; Project conditions reports 4. Reduction in water-borne D or sanitation related illness R No. 0 0 0 600 2,500 Semi-annual Docs from the SEDUR 5. Number of households Director of Land with secure ownership of Regularization h i h ( bl b 10 their home (able to be benefited with land regularization - habilitado) 6. Number of households R No. 0 0 670 3,778 6,332 Semi-annual Infrastructure CONDER with the benefiting from urban plans; physical support of SEDUR infrastructure surveys interventions 7. Increased trunk D infrastructure for W&S and urban drainage for target communities (% of demand) Intermediate Result (Component B): By the end of year 4 some 78,000 urban poor of selected Project areas in 8 municipalities have improved access to social programs and income generating opportunities Revised Intermediate Result (Component B): By Project completion, some 43,000 urban poor of selected project areas in 2 municipalities provided with improved social services and access to new social equipments. 1. Installation of Local R No. 0 1 4 4 4 Semi-annual Site visits CONDER with the Technical Offices support of SEDUR 2. Number of direct R No. 0 0 2,500 4,588 12,812 Semi-annual Project documents CONDER with the beneficiaries of social and reports support of SEDUR activities of the Project 3. Increased number of D children vaccinated 4. Increased number of D children attending preschool 5. Reduction in child D malnutrition 6. Number of beneficiaries R No. 0 100 250 600 600 Semi-annual Project documents CONDER with the attending socio- and reports support of SEDUR professional training activities 7. Number of young people R No. 0 0 20 420 420 Semi-annual Project documents CONDER with the (ages 11-29) directly and reports support of SEDUR benefitting from social activities of the Project 8. Reduction in incidence of D reported crime and 11 violence 9. Number of social N No. 0 0 0 72 72 Semi-annual Project documents CONDER with the organizations strengthened and reports support of SEDUR by the Project Intermediate Result (Component C): Improved institutional and management capacities at state and local government level to plan, implement, monitor and evaluate, operate and maintain integrated poverty reduction strategies Revised Intermediate Result (Component C): Improved institutional and management capacities at the state government level to plan, implement, monitor and evaluate, operate and maintain integrated poverty reduction strategies 1. Number of O&M plans R No. 0 0 0 4 4 Semi-annual Copies of O&M SEDUR prepared by target Plans municipalities 2. Percent implementation of R % 0% 75% 100% 100% 100% Semi-annual Project documents SEDUR tools for Project and reports management 3. Number of municipality D staff trained in key policy issues (urban planning and occupation control, SGI, cost recovery, etc.) 4. Number of community C No. 0 104 272 558 558 Semi-annual Project documents CONDER with the meetings held and reports, support of SEDUR including Social Operators meeting minutes *Please indicate whether the indicator is a Core Sector Indicator (see further http://coreindicators) **Target values should be entered for the years data will be available, not necessarily annually 12