FOR OFFICIAL USE ONLY Report No: PD000016 INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT PROGRAM DOCUMENT FOR A PROPOSED LOAN IN THE AMOUNT OF JPY 41,623,036,649 (US$277,486,911 EQUIVALENT) TO THE STATE OF ALAGOAS WITH A SOVEREIGN GUARANTEE FROM THE FEDERATIVE REPUBLIC OF BRAZIL FOR THE BR STATE OF ALAGOAS SUSTAINABLE DEVELOPMENT POLICY LOAN February 28, 2025 Macroeconomics, Trade and Investment Global Practice Latin America And Caribbean Region This document has a restricted distribution and may be used by recipients only in the performance of their official duties. Its contents may not otherwise be disclosed without World Bank authorization. The World Bank BR State of Alagoas Sustainable Development Policy Loan (P500614) Government of Alagoas GOVERNMENT FISCAL YEAR January 1 – December 31 CURRENCY EQUIVALENTS (Exchange Rate Effective as of February 20, 2025) Currency Unit US$ 1.00: R$ 5.72 US$ 1.00: JPY 150.00 ABBREVIATIONS AND ACRONYMS Alagoas Alagoas Assets Agency IMA Alagoas Environmental Institute Ativos AM Accountability Mechanism (AM) IMF International Monetary Fund The Agency for the Modernization of Intergovernmental Panel on Climate AMGESP IPCC Processes Change International Public Sector Accounting APA Environmental Protection Areas IPSAS Standards BCB Brazilian Central Bank IVE Vulnerability Epidemiological Index Brazilian Real Maximizing Finance for Development BRL MFD (MFD) Payment Capacity of the States, the CAPAG MIGA Multilateral Investment Guarantee Agency Federal District and the Municipalities CAR/RER Rural Environmental Registry MTBF Medium-Term Budget Framework Country Climate and Development CCDR NAP National Adaptation Plan Report CEF Caixa Econômica Federal NCR Net Current Revenues CEPRAM Environmental Institute of Alagoas State NDC Nationally Determined Contributions Committee of State Secretaries of CONSEPLAN NPV Net Present Value Planning CPF Country Partnership Framework PA Prior Action CPI Consumer Price Index PCE Private Capital Enabling CUs Conservation Units PDO Project Development Objective State Plan for Mitigation and Adaptation to DPF/DPL Development Policy Financing/Loan PEMAMC Climate Change State’s Policy for Combating Climate ERP Environmental Regularization Plans PEMC – AL Change in Alagoas FAMC Alagoas Climate Change Forum IFC International Finance Corporation The World Bank BR State of Alagoas Sustainable Development Policy Loan (P500614) FAP Alagoas Partnership Fund PFM Public Financial Management State Policy for Payment for Environmental FDI Foreign Direct Investments PEPSA Services FEMA State Environmental Fund PES Payment for Environmental Services FOREX Foreign Exchange PIM Public Investment Management FPE State Participation Fund PPA Multiannual Plan FPM Municipalities Participation Fund PPP Purchasing Power Parity FRL Fiscal Responsibility Law PPPs Public-Private Partnerships State Program for Payments for FUCOM Environmental Compensation Fund PROPSA Environmental Services GDI Graduation Discussion Income PTE Ecological Transformation Plan GDP Gross Domestic Product SEFAZ State Secretariat of Finance GHG Greenhouse Gas SEGOV Secretariat of State for Government GNFS Goods and Non-factor Services SEMA State Secretariat for the Environment The State Secretariat for GoAL Government of Alagoas SEPLAG Planning, Management and Assets GRS Grievance Redress Service SOEs State-Owned Enterprises GTI Investments Technical Group STN Federal Treasury Brazilian Institute of Geography and IBGE TCE-AL State Audit Court Statistics International Bank for Reconstruction IBRD WB World Bank and Development Tax on the Circulation of Goods and ICMS WBG World Bank Group Services Regional Vice President: Carlos Felipe Jaramillo Regional Director: Oscar Calvo-Gonzalez Country Director: Johannes C.M. Zutt Practice Managers: Shireen Mahdi, Erwin De Nys Task Team Leaders: Fabiano Silvio Colbano, Werner L. Kornexl, Luigi Butron Calderon The World Bank BR State of Alagoas Sustainable Development Policy Loan (P500614) The Sustainable DPL for the Brazilian State of Alagoas (P500614) was prepared by an IBRD team led by Fabiano Silvio Colbano, Senior Economist and TTL (ELCMU), Luigi Butron Calderon, Economist and TTL (ELCMU), and Werner L. Kornexl, Senior Natural Resources management Specialist and TTL (SLCEN), and comprised of (in alphabetical order): Alberto Coelho Gomes Costa, Senior Social Development Specialist (SLCSO); Ana Carolina Rodrigues Velloso Cordeiro, ET Consultant (SLCE2); Arthur Augusto de Freitas Catraio, Consultant (SLCE2); Beatriz Couto Ribeiro, Consultant (ELCMU); Carolina Luisa Vaira, Senior Governance Specialist (ELCG2); Cornelius Fleischhaker, Senior Economist (ELCMU); Eli Weiss, Lead Agriculture Economist, Program Leader (SLCDR); Flavia Nahmias da Silva Gomes, Program Assistant (LCC5C); Gabriel Lara Ibarra, Senior Economist (ELCPV); Gustavo Covolan Bozzetti, Public Sector Specialist (ELCG2); Heron Marcos Teixeira Rios, Consultant (ELCMU); Hugo Rolando Nopo Aguilar, Senior Economist (ELCPV); Leonardo Silveira do Nascimento, Senior Financial Management Specialist (ELCG1); Luiza Antonaccio Lessa Rodrigues, Consultant (SLCE2); Natasha Pereira Weidmann, ET Consultant (LCC5C); Priscilla Nunes Cardoso de Sá, Program Assistant (LCC5C); Rafael Amaral Ornelas, Economist (ELCMU); Raphael Pinto Fernandes, Consultant (ELCMU); Sadia Afobali, Governance Specialist (ELCG2); Susana Amaral, Senior Financial Management Specialist (ELCG1); and Viviane Lantyer Araujo De Oliveira, Senior Procurement Specialist (ELCRU). The team is grateful for the comments received from Natasha Rovo, Senior Economist (EECM2); Fiseha Haile, Senior Economist (EECM2); and Ernesto Sanchez-Tirana, Lead Environmental Specialist (SAEE2). The team is grateful for the guidance provided by Johannes Zutt, Country Director (LCC5C); Oscar Calvo-Gonzalez, Regional Director (ELCDR); Bárbara Cunha, Lead Economist (ELCMU), Shireen Mahdi, Practice Manager (ELCRD); Erwin De Nys, Practice Manager (SLCEN); and Doerte Doemeland, Director of Strategy and Operations (GGEVP). The World Bank BR State of Alagoas Sustainable Development Policy Loan (P500614) FEDERATIVE REPUBLIC OF BRAZIL BR State of Alagoas Sustainable Development Policy Loan (P500614) TABLE OF CONTENTS SUMMARY OF PROPOSED FINANCING AND PROGRAM ...................................................................... i I. COUNTRY CONTEXT AND OPERATION SUMMARY......................................................................... 1 II. MACROECONOMIC POLICY FRAMEWORK .................................................................................... 2 A. Recent Economic Developments .....................................................................................................3 B. Macroeconomic Outlook and Debt Sustainability ...........................................................................6 C. Fiscal Outlook and Fiscal Sustainability in Alagoas ..........................................................................8 D. IMF Relations .................................................................................................................................11 III. PROPOSED OPERATION ............................................................................................................. 11 A. Link to Government Program, CPF, other WBG operations, and Corporate Priorities .................11 B. Prior Actions, Expected Results, and Analytical Underpinnings ....................................................12 C. Consultations and Collaboration with Development Partners ......................................................21 IV. OTHER DESIGN AND APPRAISAL ISSUES .................................................................................... 21 A. Poverty and Social Impacts ............................................................................................................21 B. Environmental, Forests, and other Natural Resources Aspects ....................................................22 C. PFM, Disbursement, and Auditing aspects ....................................................................................22 D. Monitoring, Evaluation, and Accountability ..................................................................................24 V. SUMMARY OF RISKS AND MITIGATION ...................................................................................... 24 ANNEX 1. Policy and Result Framework .......................................................................................... 26 ANNEX 2. Paris Alignment Assessment ............................................................................................ 29 ANNEX 3. Operation Specific Annex ................................................................................................ 35 ANNEX 4. Required Accompanying Documentation ......................................................................... 39 The World Bank BR State of Alagoas Sustainable Development Policy Loan (P500614) @#&OPS~Doctype~OPS^dynamics@paddpfbasicinformation#doctemplate SUMMARY OF PROPOSED FINANCING AND PROGRAM BASIC INFORMATION Operation ID Programmatic P500614 No Proposed Development Objective(s) The proposed DPL supports reforms of the state of Alagoas to strengthen policies for the sustainable use of public resources and the management of environmental resources. @#&OPS~Doctype~OPS^dynamics@padborrower#doctemplate Organizations Borrower: Government of Alagoas Contact Title Telephone No. Email Implementing Agency: Secretary of Finance Contact Title Telephone No. Email Renata dos Santos Secretary 8233157893 gabinete@sefaz.al.gov.br @#&OPS~Doctype~OPS^dynamics@padfinancingsummary#doctemplate PROJECT FINANCING DATA (US$, Millions) Maximizing Finance for Development Is this an MFD-Enabling Project (MFD-EP)? Yes Is this project Private Capital Enabling (PCE)? No SUMMARY Total Financing 277.48 DETAILS World Bank Group Financing i The World Bank BR State of Alagoas Sustainable Development Policy Loan (P500614) International Bank for Reconstruction and Development (IBRD) 277.48 @#&OPS~Doctype~OPS^dynamics@padclimatechange#doctemplate PRACTICE AREA(S) Practice Area (Lead) Contributing Practice Areas Environment, Natural Resources & the Blue Economy; Macroeconomics, Trade and Investment Governance CLIMATE Climate Change and Disaster Screening Yes, it has been screened and the results are discussed in the Operation Document @#&OPS~Doctype~OPS^dynamics@padoverallrisk#doctemplate OVERALL RISK RATING Overall Risk  Moderate @#&OPS~Doctype~OPS^dynamics@paddpfannexpolicyandresult#doctemplate RESULTS Baseline Closing Period Pillar 1 Average current expenditure between 2025 and 2026 compared to the average between 2022 and 2024, as a share of current revenue (Percentage) Dec/2024 Dec/2026 94 92 Number of real estate assets registered in Alagoas registry database (Number) Dec/2023 Dec/2026 492 1,981 Share of the 2026 state’s new investment projects included in the “project bank” undergoing ex-ante cost-benefit analysis (Percentage) Dec/2023 Dec/2026 0 70 Pillar 2 Share of Environmental Protection Areas (EPAs) under IMA's jurisdiction with updated management plans approved (Percentage) Dec/2023 Dec/2026 40 100 Number of municipalities monitored under the coverage area of the monitoring and early warning system (Number) Dec/2023 Dec/2026 73 102 ii The World Bank BR State of Alagoas Sustainable Development Policy Loan (P500614) Number of days to issue an environmental license for small businesses (Days) Dec/2023 Dec/2026 114 45 Area of all rural properties with georeferenced, analyzed, and approved RERs (Hectare(Ha)) Dec/2023 Dec/2026 102,943 1,208,700 Amount (in R$ thousands) paid to PSA RPPN and PSA Agroecologia programs beneficiaries (Number (Thousand)) Dec/2023 Dec/2026 0 2,900 Share of women-led projects supported by PSA Agroecologia (Percentage) Dec/2023 Dec/2026 0 80 iii The World Bank BR State of Alagoas Sustainable Development Policy Loan (P500614) IBRD PROGRAM DOCUMENT FOR A PROPOSED LOAN IN THE AMOUNT OF JPY41,623,036,649 (US$277,486,911 EQUIVALENT) TO THE STATE OF ALAGOAS FOR THE BR STATE OF ALAGOAS SUSTAINABLE DPL I. COUNTRY CONTEXT AND OPERATION SUMMARY 1. The proposed JPY41,623,036,649 (US$277,486,911 equivalent) standalone1 Development Policy Loan (DPL) from the International Bank for Reconstruction and Development (IBRD) supports reforms in the state of Alagoas to strengthen policies for the sustainable use of public resources and the management of environmental resources. Alagoas has faced two major development challenges over the past decade: significant fiscal imbalances restricting its ability to invest and deliver critical public services and persistent environmental mismanagement marked by widespread deforestation and soil degradation. The DPL seeks to address these challenges through a set of reforms structured around two key pillars. The first pillar focuses on strengthening fiscal institutions and public financial management systems to limit spending growth and improve public investment and public asset management. The second pillar supports policies strengthening Alagoas’ institutional capacity to manage its environmental resources and promote climate action. 2. Alagoas, one of the poorest states in Brazil, faces profound socio-economic development challenges. In 2023, 38 percent of its population was considered poor by international standards (US$6.85/day, 2017 Purchasing Power Parity - PPP). This is almost twice the rate the country exhibits (22 percent). Poverty among children between 0 and 14 years old reached 59 percent in the state (compared to 39 percent in the country) in 2023. Such material deprivation among children is associated with restricted opportunities for human capital accumulation. Rural poor communities largely depend on natural resources (such as water and land) and agricultural activities for their livelihoods. 3. Alagoas' strained fiscal position has significantly hindered its ability to finance investments and deliver essential public services. Persistent pressures from high recurrent expenditures, particularly personnel-related spending, have historically limited the state's fiscal space. To address these challenges, the Government of Alagoas (GoAL) undertook a fiscal consolidation process from 2017 to 2021, successfully reducing current expenditures from 92 percent of current revenues in 2017 to 80 percent by 2021. However, persistent spending pressures caused these expenditures to increase again to reach 98 percent of current revenues by 2022, jeopardizing the state’s capacity to fund investments and sustain public service delivery. Although a partial recovery in tax revenues in 2023 provided temporary relief, without further measures to consolidate past fiscal gains and improve the use of public resources, the state’s fiscal outlook would deteriorate in the medium term, along with its capacity to invest in better development outcomes. 4. The state’s weak environmental management track record is another of its core development challenges. Deforestation surged by 23.7 percent in Alagoas’ Caatinga biome and 23.3 percent in its Atlantic Forest between 2000 and 2022, driven by urbanization, agriculture, charcoal production, and logging. Water pollution and soil degradation pose additional challenges, with 83 percent of the population lacking sewage collection and with agricultural runoff and industrial waste hitting its coast, rivers, and lakes. Deficient environmental management eventually contributed to the Braskem disaster2 in Maceió, one of Brazil’s largest mining-related environmental disasters. Moreover, historically, the Northeast Region (including Alagoas) has experienced the most severe impacts of droughts, as small-scale agriculture is 1 The proposed DPL is a standalone operation as requested by the federal government and its size is determined by Alagoas’ fiscal space to borrow with federal guarantee. This precludes the possibility of a programmatic DPF series at this stage as the federal government allowed for only one loan to restructure costly debt. 2 The Braskem case became known after a land tremor towards residents of some neighborhoods of Maceió, in March 2018. In Pinheiro, a traditional neighborhood of the capital of Alagoas, it also appeared cracks in real estate and streets, sinks of soil and craters. Subsequent studies have pointed to a downgrade of the terrain surface due to the changes in the underground support resulting from the mineral extraction of salt-gemma by the Petrochemical company Braskem since the 1970s. Since then, about 14,000 properties have been unoccupied and since the damage was pointed out, Braskem promoted the closure and stabilization of 35 mines in the affected regions. Page 1 The World Bank BR State of Alagoas Sustainable Development Policy Loan (P500614) rainfed.3 The projected warmer climate could convert the semiarid Northeast into an arid region, impacting subsistence agriculture, water availability, and population health and forcing people to migrate to other regions. In this context, Alagoas’ weak policies against deforestation and environmental mismanagement need to be urgently revised and brought in line with federal standards and best practices. 5. To address these issues, the Government of Alagoas (GoAL) is increasing its capacity to invest in high-quality public services and infrastructure by strengthening policies for the use of public resources. The government’s capacity to increase the volume and quality of public investment while maintaining debt sustainability hinges on its ability to control current spending and improve spending efficiency. This implies adopting a sound fiscal framework and better management practices for public investments and public assets, reforms supported under the first pillar of this operation. 6. The State is also adopting new policies to strengthen the management of environmental resources by aligning its environmental policies with federal legislation and national best practices. Alagoas aims to ensure conditions for sustainable management of natural resources and promotion of mitigation and adaptation actions to increase its resilience to climate change. The GoAL is adopting new rules to advance the implementation of the Rural Environmental Registries (RER), which are necessary to enable the implementation of the Brazilian Forest Code. The state also intends to promote forest conservation by implementing legislation to compensate private agents for environmental services. Alagoas is improving its environmental licensing procedures and adopting a law to combat climate change to complement these measures. These reforms are supported under the second pillar of this operation. 7. The fiscal and environmental policies in Alagoas are deeply interlinked, as effective environmental management depends on the state’s financial health, while sustainable use of natural resources is crucial for the state’s economic stability. Enhancing public resource use enables Alagoas to allocate more resources toward environmental protection, supporting critical investments in forest conservation and climate adaptation strategies. At the same time, by aligning with federal environmental standards and improving natural resource management, Alagoas can mitigate risks that threaten its economy—such as deforestation, droughts, and pollution—which, if left unchecked, lead to environmental degradation that further strains public resources. Hence, through sound fiscal governance, Alagoas can fund policies that curb environmental risks, fostering a resilient economy that can better withstand climate impacts. This dual approach protects Alagoas’ ecological assets and supports sustainable development outcomes that reduce future fiscal pressures, ultimately creating a virtuous cycle of fiscal sustainability and environmental resilience. 8. The proposed operation is aligned with the World Bank’s approach to financing in countries above graduation discussion income (GDI). A key aim of the Bank’s work in Brazil is to strengthen the quality and sustainability of institutions for economic and social development. The program supported by the proposed DPL strengthens the GoAL’s institutions in the areas of public financial and natural resource management. Implementing the program’s reforms will enhance the institutional capacities of the state’s agencies for fiscal and environmental management. Furthermore, these reforms can also serve as examples to be replicated in other Brazilian states. The program also contributes to global public goods through its climate change mitigation and adaptation-related outcomes. II. MACROECONOMIC POLICY FRAMEWORK 9. Brazil’s macroeconomic policy framework is deemed adequate for the proposed operation. Activity remained robust in 2024, driven by recovering investment and strong private consumption, supported by a resilient labor market. Real Gross Domestic Product (GDP) is expected to grow by 2.2 percent in 2025 before converging to its potential of about 2.3 percent. The Federal Government has made notable progress in implementing consistent, growth-oriented structural reforms to improve the business environment, enhance financial sector performance, and is advancing with 3 “World Bank Group. 2023. Brazil Country Climate and Development Report. CCDR Series. © World Bank Group, Washington DC. http://hdl.handle.net/10986/39782 License: CC BY-NC 3.0 IGO.” Page 2 The World Bank BR State of Alagoas Sustainable Development Policy Loan (P500614) a comprehensive reform to streamline indirect taxes. Fiscal policy is anchored by a new framework that enhances clarity and predictability, supporting gradual fiscal consolidation, with the debt-to-GDP ratio expected to stabilize by the end of the decade. The Federal Government reached the primary balance target in 2024, signaling its commitment to improve fiscal outcomes. Public debt remains sustainable, and the country’s external position is resilient, with a low share of foreign currency-denominated debt and ample reserves. Additionally, the government is committed to a medium- and long-term debt management strategy to extend the maturity of its debt portfolio. Brazil’s macroeconomic framework is underpinned by an independent and credible Central Bank, a resilient financial system, an inflation- targeting regime, and a flexible exchange rate. Liquidity risks remain low, supported by the government’s strong cash buffers and limited exposure of public debt to exchange rate fluctuations. A. Recent Economic Developments 10. Brazil’s GDP growth surpassed 3 percent annually in both 2023 and 2024. In 2023, growth was driven by robust private consumption, a resilient labor market, fiscal stimulus (including through social transfers), and declining inflation, which enabled monetary easing. A record grain harvest and favorable external conditions also boosted exports. In the first three quarters of 2024, GDP grew by 3.3 percent year-over-year (yoy), supported by expanded private consumption and investment recovery. In December 2024, unemployment fell to 6.2 percent (the lowest since 2014), and real household income rose 4.3 percent yoy. Consumer Price Index (CPI) inflation ended 2024 at 4.8 percent, above the upper limit of the Central Bank’s target range (4.5 percent), driven by strong demand for services, higher food prices, and exchange rate depreciation (27.9 percent in 2024). In response, the Central Bank reversed the loosening cycle that started in 2023, raising the policy rate by 275 basis points since September 2024. By January 2025, inflation moderated to 4.6 percent. The financial sector remains well capitalized, liquid, and profitable, with the capital-asset ratio reaching 17.7 percent in June 2024, well above the regulatory minimum (8 percent internationally and 10.5 percent in Brazil). 11. Brazil’s external position remains robust despite the recent currency depreciation. In 2024, the trade surplus reached 3.0 percent of GDP (US$66.2 billion), while the current account deficit stood at 2.6 percent of GDP (US$56 billion), partly covered by net foreign direct investment (FDI) inflows of 2.1 percent of GDP (US$ 46.8 billion). The trade balance has benefitted from improved terms of trade (up 3.0 percent yoy), although imports volume rose (up 16.1 percent yoy). Foreign reserves stood at 15.0 percent of GDP (US$329.7 billion) in 2024 (an amount sufficient to cover 14 months of goods imports). The Central Bank’s net foreign exchange (FOREX) position stood at 10.4 percent of GDP (US$228.9 billion) after currency swap operations of US$100.8 billion. External financing needs were moderate at 10.3 percent of GDP in 2024, well below their 2020 peak. The exchange rate depreciated from R$/US$4.8 in December 2023 to R$/US$6.19 at the end of 2024, reflecting shifts in the US monetary outlook and uncertainty over Brazil’s fiscal position. 12. In 2024, the Federal Government achieved its primary balance under the fiscal framework, with revenues increasing and limited spending growth. Net revenues rose by 8.9 percent in real terms, primarily due to higher economic activity, income tax, and social contributions. Meanwhile, spending decreased by 0.7 percent in real terms, influenced by the dissipation of one-off judicial payments (precatórios) of R$ 92 billion (0.9 percent of GDP) in December 2023.4 Consequently, the primary fiscal deficit dropped to 0.4 percent of GDP in 2024. Excluding extraordinary spending, mainly related to the flood in the State of Rio Grande do Sul, the primary deficit stood at 0.1 percent of GDP, within the fiscal framework’s target range (zero deficit ± 0.25 percentage points of GDP). This improvement also reflected in the General Government (GG) primary deficit, which declined to 0.3 percent of GDP in 2024, from 2.4 percent in 2023. Despite a rise in net interest payments from 6.6 percent of GDP in 2023 to 6.9 percent in 2024, the overall GG deficit 4 Precatórios are government liabilities derived from judicial claims, usually related to public wages, social security, and social assistance. Page 3 The World Bank BR State of Alagoas Sustainable Development Policy Loan (P500614) improved from 8.9 percent of GDP in 2023 to 8.3 percent in 2024. GG gross debt increased to 76.1 percent of GDP by the end of 2024 from 73.8 percent of GDP in 2023, with over 90 percent of the debt portfolio denominated in domestic currency. Table 1: Key Macroeconomic Indicators 2021 2022 2023 2024e 2025f 2026f 2027f Real economy Annual percentage change, unless otherwise indicated Real GDP 4.8 3.0 3.2 3.2 2.2 2.3 2.3 Contributions (supply side): Agriculture 0.0 -0.1 1.1 -0.1 0.1 0.2 0.2 Industry 0.9 0.3 0.3 0.5 0.4 0.3 0.3 Services 3.0 2.5 1.7 2.4 1.4 1.4 1.4 Indirect taxes 0.9 0.3 0.2 0.4 0.3 0.3 0.3 Contributions (demand side): Consumption 2.8 3.1 2.9 3.0 1.6 1.8 1.8 Investment 2.4 0.2 -0.6 0.7 0.5 0.4 0.4 Net exports -1.2 0.7 1.4 -0.6 0.1 0.1 0.1 Statistical discrepancy and change in inventories 0.9 -1.0 -0.5 0.0 0.0 0.0 0.0 Imports, GNFS 13.8 1.0 -1.2 8.0 3.0 3.0 3.0 Exports, GNFS 4.4 5.7 8.9 3.5 3.3 3.3 3.3 Unemployment rate (ILO definition) 13.2 9.3 8.0 6.8 7.2 7.5 7.8 CPI (end of period) 10.1 5.8 4.6 4.8 3.9 3.7 3.7 CPI (average period) 8.3 9.3 4.6 4.4 3.8 3.7 3.7 Fiscal Accounts Percent of GDP, unless otherwise indicated Expenditures 38.5 41.2 46.1 45.7 45.9 44.8 43.3 Revenues 36.4 39.4 37.2 37.4 38.4 37.9 37.7 Overall Balance -4.2 -4.6 -8.9 -8.3 -7.5 -6.8 -5.6 Primary Balance 0.7 1.2 -2.4 -0.3 -0.1 0.0 0.3 General Government Gross Debt (Authorities' definition) 1/ 77.3 71.7 73.8 76.1 78.1 79.2 79.4 Selected Monetary Accounts Annual percentage change, unless otherwise indicated Base Money -5.2 2.6 0.7 6.7 - - - Credit to non-government 17.9 15.0 8.1 10.8 - - - Interest rate - Selic (period average) 4.8 12.6 13.3 11.0 - - - Balance of Payments Percent of GDP, unless otherwise indicated Current Account Deficit 2.4 2.1 1.1 2.6 1.8 1.9 1.9 Imports, GNFS 18.0 18.9 15.5 16.7 16.4 16.3 16.2 Exports, GNFS 18.9 19.5 17.9 18.0 17.6 17.5 17.4 Net Foreign Direct Investment 1.8 2.1 1.7 2.1 2.4 2.5 2.5 External Debt (in US$, eop) 3/ 670.3 681.1 732.7 768.3 779.2 791.5 797.5 External Debt 3/ 40.1 34.9 33.4 35.0 33.0 31.4 29.4 Terms of Trade (% change) 8.2 -5.2 1.8 3.0 -0.9 -0.2 0.0 Exchange Rate (average) 5.4 5.2 5.0 5.4 - - - Memorandum items Per Capita GDP (In real US$) 9,098 9,321 9,543 9,760 9,923 10,099 10,273 Gross Reserves (in US$, eop) 362.2 324.7 355.0 329.7 340.4 352.8 366.6 In months of next year’s imports 19.1 13.0 11.6 11.7 11.2 10.9 10.7 As % of short-term external debt 2/, 3/ 208.4 193.7 197.2 166.1 177.7 181.3 186.8 Page 4 The World Bank BR State of Alagoas Sustainable Development Policy Loan (P500614) Nominal GDP (R$ billion) 9,012 10,080 10,943 11,810 12,439 13,391 14,416 Source: Central Bank of Brazil, Ministry of Finance, Brazilian Institute for Geography and Statistics (IBGE), and World Bank staff calculations. Notes: 1/ Brazilian Central Bank definition (2008 methodology), that excludes the Federal securities in the Brazilian Central Bank (BCB) portfolio and includes the stock of BCB repo operations. 2/ It includes the long-term debt repayments due in the next 12 months as short-term debt. 3/ It includes securities issued in Brazil held by foreign residents and intercompany loans. Table 2: Balance of Payments (percent of GDP) 2021 2022 2023 2024e 2025f 2026f 2027f Financing Requirements 2.7 2.0 1.1 2.9 1.8 1.9 1.9 Current Account Deficit 2.4 2.1 1.1 2.6 1.8 1.9 1.9 Trade Deficit (GNFS) 1/ 2/ -0.9 -0.6 -2.4 -0.8 -1.2 -1.2 -1.2 Primary and Secondary Incomes 3.3 2.7 3.5 3.3 3.0 3.2 3.2 Net Errors and Omissions 0.2 -0.1 -0.1 0.4 0.0 0.0 0.0 Financing Sources 2.7 2.0 1.1 2.9 1.8 1.9 1.9 Capital Account Balance -0.3 -0.4 -0.5 -0.7 -0.4 -0.4 -0.4 Net Foreign Direct Investment 1.8 2.1 1.7 2.1 2.4 2.5 2.5 Net Portfolio Investment 0.5 -0.1 0.4 0.0 0.1 0.1 0.1 Net All Other Flows 1.6 0.1 0.4 0.3 0.2 0.2 0.2 Change in reserve assets -0.8 0.4 -1.0 1.2 -0.5 -0.5 -0.5 External Financing Gap 0.0 0.0 0.0 0.0 0.0 0.0 0.0 Source: Central Bank of Brazil, IBGE, and World Bank staff calculations. Notes: 1/ GNFS: Goods and Non-factor Services. 2/ A negative sign in Financial Requirements means a reduction of Financing needs, i.e., a surplus in the account, and vice versa. Table 3: General Government Fiscal Indicators (percent of GDP) 2021 2022 2023 2024e 2025f 2026f 2027f General Government Overall Balance -4.2 -4.6 -8.9 -8.3 -7.5 -6.8 -5.6 External Financing 1.7 -0.6 0.6 1.1 1.1 1.1 1.1 Domestic Financing 2.6 5.1 8.4 7.3 6.4 5.7 4.6 General Government Primary balance 0.7 1.2 -2.4 -0.3 -0.1 0.0 0.3 of which: Central Government -0.4 0.5 -2.5 -0.3 -0.1 0.1 0.4 Total Revenues (and grants) 36.4 39.4 37.2 37.4 38.4 37.9 37.7 Total Primary Revenues (and grants) 34.2 36.6 34.6 35.0 35.3 35.2 35.1 Tax revenues 31.7 32.2 30.9 31.4 31.6 31.4 31.4 Taxes on goods and services 14.1 13.2 12.4 12.5 12.5 12.4 12.3 Direct Taxes 9.6 10.9 10.6 11.0 11.1 11.0 11.0 Social insurance contributions 7.3 7.5 7.4 7.4 7.3 7.3 7.3 Taxes on international trade 0.7 0.6 0.5 0.6 0.6 0.6 0.6 Non-tax revenues 4.7 7.2 6.3 6.0 6.8 6.5 6.3 of which: Interest revenues 2.2 2.8 2.6 2.4 3.1 2.7 2.6 Total Expenditures 38.5 41.2 46.1 45.7 45.9 44.8 43.3 Total Primary Expenditures 33.6 35.4 37.0 35.3 35.4 35.2 34.8 Current expenditures 37.2 39.2 44.2 43.9 43.7 42.6 41.3 Wages and compensation 10.4 10.6 10.7 10.4 10.3 10.1 10.0 Goods and services 4.9 5.4 5.5 5.2 5.1 5.1 5.0 Net Interest payments 4.9 5.8 6.5 8.0 7.4 6.8 5.9 Current Transfers 17.0 17.5 18.8 17.9 17.9 17.9 17.8 Pensions to the private sector workers 7.2 7.2 7.2 7.3 7.4 7.5 7.6 Pensions to the public servants 4.6 4.5 4.5 4.5 4.4 4.4 4.3 Page 5 The World Bank BR State of Alagoas Sustainable Development Policy Loan (P500614) Social Assistance 3.2 3.5 4.6 4.1 4.0 4.0 3.9 Other Current Transfers 2.0 2.3 2.5 2.0 2.0 2.0 2.0 Investments (net) 1.2 1.9 1.9 1.8 2.2 2.1 2.0 General Government Gross Debt (Authorities' definition) 1/ 77.3 71.7 73.8 76.1 78.1 79.2 79.4 Domestic Debt 66.6 62.7 64.6 66.5 68.3 69.3 69.5 External Debt 10.7 9.0 9.2 9.5 9.8 9.9 9.9 Note: 1/ Brazilian Central Bank definition (2008 methodology), that excludes the Federal securities in the BCB portfolio and includes the stock of BCB repo operation. Table 4: Debt Stock and Debt Service Debt Stock (end of period) Debt Service 2024 2024e 2025f 2024e 2025f in million Percent Percent Percent of in million BRL BRL of Total of GDP GDP Gross general government debt (B) 8,984,237 100.0 76.1 3,136,812 3,258,308 21.5 20.2 Internal gross debt 7,780,063 86.6 65.9 2,753,617 2,742,394 19.4 17.1 Securities debt market 6,236,545 69.4 52.8 1,317,627 1,171,100 11.2 9.4 National Treasury securities debt 6,279,036 69.9 53.2 1,326,604 1,179,079 11.2 9.5 Investment of public agencies in securities -49,910 -0.6 -0.4 -10,545 -9,372 -0.1 -0.1 Other federal debt 7,419 0.1 0.1 1,567 1,393 0.0 0.0 BCB repo operations 1,250,516 13.9 10.6 1,384,425 1,525,464 11.7 12.3 Bank Debt 293,002 3.3 2.5 51,565 45,830 0.4 0.4 Federal Government bank debt 19,207 0.2 0.2 3,380 3,004 0.0 0.0 State and Municipal Governments bank debt 273,794 3.0 2.3 48,184 42,826 0.4 0.3 Foreign gross debt 1,204,174 13.4 10.2 383,195 515,914 2.2 3.1 Federal Government 1,031,453 11.5 8.7 328,231 441,914 2.8 3.6 of which: Debt securities traded in the domestic market 680,450 7.6 5.8 216,534 291,531 1.8 2.3 Others 351,003 3.9 3.0 111,697 150,383 0.9 1.2 State and Municipal Governments 172,721 1.9 1.5 54,964 74,000 0.5 0.6 Source: Central Bank of Brazil, Ministry of Finance, and World Bank staff estimates. B. Macroeconomic Outlook and Debt Sustainability 13. GDP is estimated at 3.2 percent in 2024 and is expected to stabilize at 2.3 percent over the medium term. Private consumption, sustained by a robust labor market and fiscal transfers, continues to support growth, while a pick- up in investments is expected to boost output in the following years. Inflation is projected to gradually converge towards 3.7 percent by 2026, within the Central Bank’s target range. However, a recent deterioration of inflation expectations led to a more contractionary monetary policy, which in turn will contribute to moderate growth in 2025. Medium-term growth is expected to stabilize at 2.3 percent, reflecting slightly higher potential output estimates due to recent and ongoing structural reforms. With limited fiscal space for significant policy interventions, poverty reduction in 2025 and 2026 is expected to slow, with a rate of 20.5 percent expected by 2026 (from 21.2 percent estimated in 2024). 14. The external position is expected to remain solid in the medium term. The current account deficit is projected at 1.9 percent of GDP on average for 2025-2027, fully financed by net foreign direct investment inflows of 2.4 percent of GDP over the same period. Brazil’s flexible exchange rate regime and ample international reserves are expected to cushion potential adverse shocks. In addition, foreign currency-denominated public debt will remain at relatively low levels, mitigating exposure to foreign exchange risk. Page 6 The World Bank BR State of Alagoas Sustainable Development Policy Loan (P500614) 15. The financial system is expected to remain sound and stable, with a well-capitalized banking sector. Capitalization ratios are expected to remain above minimum regulatory levels. Furthermore, the Central Bank has been increasing the scope of its financial stability assessment and systemic risk metrics, highlighting the resilience of the system in terms of solvency, liquidity, and adequate provisioning for losses. Additionally, its Financial Stability Committee assessed the neutral macroprudential policy to be adequate in the medium term, with the Countercyclical Capital Buffer5 for credit exposures remaining at zero percent over the next meetings. 16. Previous and ongoing structural reforms are expected to boost potential output growth in the coming years. Following the approval of the tax reform in December 2023, further legislation is needed to operationalize the new tax system.6 The reform is expected to simplify the system, reduce compliance costs, enhance competitiveness by reducing distortions, and make the system more progressive. Recent financial sector reforms are expected to foster efficiency, competition, inclusion and strengthen financial infrastructure.7 Labor market reforms in 2017, with 2020 and 2021 amendments, and infrastructure reforms facilitate private sector entry into key sectors. As a result of all these measures, country risk perceptions have improved. In December 2023, S&P Global Ratings raised its long-term global scale ratings on Brazil to 'BB' from 'BB-‘and, in October 2024, Moody’s upgraded Brazil’s Ba2 rating to Baa1, one notch below investment grade, with a positive outlook. Fitch has affirmed Brazil's Long-Term Foreign Currency Issuer Default Rating at 'BB' and kept the outlook stable. However, structural challenges, such as limited total factor productivity growth, low national savings, and a slower labor force growth rate in the context of an aging population, remain, restricting potential growth. The successful implementation of growth-enhancing structural reforms, including those related to trade openness, market competition, and the business environment, could provide a boost with respect to baseline projections. 17. Compliance with the new fiscal framework will require a gradual fiscal consolidation over the medium term. The fiscal framework limits real expenditure growth to 70 percent of real recurrent revenue growth, with a floor and ceiling of 0.6 and 2.5 percent, respectively. It also incorporates targets for the central government's primary balance for four years (with a tolerance band of 0.25 percentage points of GDP) and emphasizes the expected impact of these targets on public debt. In April 2024, the authorities maintained their zero primary deficit target for 2024 but revised the targets for 2025 and 2026 to a zero deficit and a surplus of 0.25 percent of GDP, respectively (from the previous targets of surpluses of 0.5 and 1.0 percent of GDP), delaying the projected stabilization of the public debt-to-GDP ratio to the end of the decade. If annual targets are not met, the legal limit for spending growth is reduced to 50 percent of recurrent revenue growth and additional triggers to restrict current spending will be applied (bans on new hiring, increases in public wages, new mandatory spending, or increases in assistance policies). 18. Following the fiscal rule, baseline projections assume primary spending to grow less than recurrent revenue over the medium-term. GDP growth is expected to support tax revenues in the following years, while the fiscal rule limits central government primary spending growth to a share of the revenue’s growth. Yet, both the central and general 5 The Committee decides the value of the Countercyclical Capital Buffer for Brazil, which is a reserve to be accumulated by the banks during the expansion phase of the credit cycle, and to be consumed during its contraction period. To determine the level of this indicator, the Committee considers the credit growth pattern, credit market conditions, pricing of assets and other financial stability risk indicators. Thus, the risks of excessive credit growth/decline are mitigated in times of great optimism/pessimism. 6 The proposed tax reform already submitted to Congress includes, among others, the regulation of IBS, at state and municipal level; the CBS, a federal consumption tax; the excise tax, which will apply to products that pose a risk to health and the environment; the Tax on Industrialized Products (IPI), which will apply to goods competing with those produced in the Manaus Free Trade Zone; and the cashback mechanism for poorer families. The proposal foresees an average Value Added Tax (VAT) rate of 26.5 percent, which may vary between 25.7 and 27.3 percent. Moreover, the reform will introduce a fully digital tax system, aimed at preventing fraud and expanding the tax revenue base. Other benefits highlighted include the elimination of cumulative (cascading) taxes and the non-exportation of taxes. 7 Financial sector reforms include the instant payment system (PIX), the Open Finance environment, the ongoing Digital Brazilian Real (Drex) and regulation of cryptocurrencies. Page 7 The World Bank BR State of Alagoas Sustainable Development Policy Loan (P500614) government are expected to run a primary deficit of 0.1 percent of GDP in 2025 but gradually turn into a 0.1 percent of GDP surplus in 2026. The primary fiscal balance of the General and Central Governments is expected to continue its gradual improvement and reach 0.3 and 0.4 percent of GDP surpluses, respectively, by 2027, helped by the constraints on real spending growth (mainly on current transfers and the wage bill). Subnational governments, which have limited ability to borrow, are expected to generate an aggregate deficit of about 0.1 percent of GDP on average for 2025-2027. With short-term interest rates remaining elevated, the overall fiscal deficit of the general government is expected to improve from 7.5 percent of GDP in 2025 to 5.6 percent in 2027. 19. Public debt is projected to increase to 79.5 percent of GDP by 2028 and then slowly decline to 79.1 percent by 2030, driven by GDP growth and the expected fiscal consolidation. GG gross financing needs are expected to decrease from 27.3 percent of GDP in 2024 to 25.6 percent in 2026 on the back of lower interest payments and improving primary balances. They will be met largely through domestic debt issuances (with over 90 percent of percent of federal debt being domestic and in local currency). In terms of debt composition, the government expects to increase from 4.2 to 7 percent its federal public debt bonds indexed to the exchange rate by 2035, contributing to reducing short- term debt (maturity of up to a year) and promoting the issuance of sustainable bonds. The main macroeconomic shocks that pose risks to debt trajectory include lower than projected primary balances, lower GDP growth, and higher real interest rates. A combined negative shock could lead to an increase in public debt by 21.7 percentage points above the baseline scenario by 2030, with debt stabilizing after 2034. 20. Key macroeconomic risks arise from a slower-than-expected fiscal consolidation and deteriorating external conditions. Downside risks encompass a slower path of fiscal consolidation, especially failure to generate expected revenue gains and contain expenditures in the near term, which could compromise a more accommodative monetary policy stance, increase risk premiums, and worsen debt dynamics. The new federal fiscal framework requires significant additional revenue collection or expenditure controls to support compliance with the primary balance targets. Externally, an economic slowdown in China could lead to reduced global demand, including for some of Brazil’s major exports. Tighter-than-expected global financial conditions could increase borrowing costs. On the upside, a strong labor market and fiscal stimulus via expanded social transfers will continue contributing to robust household consumption and resilient economic activity, and revenue mobilization in line with the Government’s estimates would lead to better fiscal outcomes and faster implementation of structural reforms could lead to higher than projected potential growth. Figure 1. Public Debt Sustainability Analysis Debt to GDP ratio under the standarized stress tests Debt to GDP ratio under the combined stress tests Perrcent of GDP Perrcent of GDP 100 110 100 90 90 80 80 70 70 60 60 50 50 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 2025 2026 2027 2028 2029 2030 2031 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 2025 2026 2027 2028 2029 2030 2031 Baseline Primary Balance Shock Real GDP Growth Shock Real Interest Rate Shock Baseline Combined shock Real Exchange Rate Shock Source: World Bank staff calculations. C. Fiscal Outlook and Fiscal Sustainability in Alagoas Page 8 The World Bank BR State of Alagoas Sustainable Development Policy Loan (P500614) 21. Alagoas’ economy has grown faster than its pre-pandemic average since 2022. Alagoas grew by 1.6 percent on average between 2011 and 2019 and just 0.96 per capita, limiting convergence with leading regions and maintaining it as the 21st lowest-income state per capita. Alagoas’ growth dipped to -4.3 percent in 2020 because of the COVID-19 shock but had recovered to pre-pandemic levels by 2021 and subsequently grew by 1.6 percent in 2022 and 4.1 percent in 2023 as it continued to recover. Services (4.74 percent) and industry (7.12 percent) were the main drivers of GDP growth in 2023, while agriculture expanded by 0.66 percent.8 The services sector is the most important in Alagoas, accounting for 61.7 percent of the state’s value-added, followed by agriculture (24.5 percent) and industry (13.8 percent). Unemployment decreased to 8.1 percent by June 2024 (the lowest rate since 2015). The state’s share of extremely poor people living under US$2.15/day (PPP; 2017) was twice the national rate in 2022 at 7.0 percent. Alagoas’ GDP is expected to grow 2.1 percent in 2024 and 1.9 percent in 2025 and 2026, driven by the services sector’s performance.9 22. GoAL made significant fiscal improvements over the past eight years, but persistent spending pressures call for continued progress. Since 2014, the government has taken measures to contain overall spending. It reduced the wage bill by 2.5 percent per year on average in real terms between 2014 and 2021. As a result, Net Current Revenues (NCR) grew by 6.0 percent while overall spending grew by just 2.4 percent in real terms per year. The containment of current spending created room to increase investments by 13.7 percent on average in real terms per year between 2016 and 2022 while still improving the fiscal balance and enabling access to new borrowing with federal guarantees. Alagoas achieved recurrent primary surpluses between 2015 and 2022 and maintained a debt repayment capacity rate (according to the Federal Treasury payment capacity methodology, CAPAG10) of B since 2017. Gross debt declined from 102.3 percent of NCR in 2019 to 76.1 percent in 2023. Debt service remained at 7.8 percent of the NCR in 2023. However, current spending-related pressures and the high level of mandatory expenditures in Brazil (such as the minimum constitutional spending on education and health) pushed current expenditures to 98.2 percent of net current revenues in 2022 and called for continuous fiscal prudence to promote long-term fiscal sustainability. 23. National macroeconomic risks are the key sources of risks for the State. Fiscal decisions at the federal level (such as the increase of the national minimum wage, increases in national civil service salary ceilings, changes in tax rates that impact the sharing of federal tax collections with the states, or judicial decisions that can increase expenses or reduce State revenues) pose fiscal risks to the State. An adverse scenario with lower revenue, higher expenditures, and currency depreciation could strain finances, jeopardizing reforms supported by this DPL. Given the high share of mandatory expenditures (mainly wage bill, pensions, interests, and the minimum constitutional spending limits for health and education), public investments are the first line of expenditures to be reduced in case of fiscal distress. As the region’s small‑scale agriculture is rainfed, the State is also exposed to severe droughts that could convert the semi- arid into an arid region, hurting agriculture, water availability, and population health. 24. The GoAL fiscal framework is adequate for this proposed operation. The fiscal outlook is anchored in the new fiscal framework supported by this DPL. After the 98.2 percent of the current revenues peak in 2022, the new framework will limit current expenditure growth, allowing expenditures to gradually decrease until they stabilize at 90 percent over the medium term. The state’s additional efforts toward spending efficiency, including through measures supported by this operation, are also expected to reinforce the fiscal outlook. In this context, the GoAL will have additional fiscal space 8 SEPLAG Technical Note 2024.NT02: https://dados.al.gov.br/catalogo/dataset/estimativa-trimestral-pib-do-estado-de- alagoas/resource/d89d0c22-6ce3-470c-9e0c-dbf87d2aed2a. 9 Banco do Nordeste: https://www.bnb.gov.br/s482-dspace/bitstream/123456789/2011/1/2024_CME_AL_02.pdf 10 The creditworthiness scoring system (CAPAG) is conducted by the Federal Treasury (STN) for federally guaranteed subnational borrowing. The STN assesses three different indicators: (i) indebtedness; (ii) current savings; and (iii) liquidity. Depending on the combination of the evaluation of these indicators, each subnational government will receive a score between A and D. The federal government generally requires states to have a CAPAG rating of A or B to provide federal guarantees for subnational lending. Page 9 The World Bank BR State of Alagoas Sustainable Development Policy Loan (P500614) and is expected to maintain its CAPAG “B” rating and continue to leverage investments with federally guaranteed borrowing. Public investment is projected to reach US$387 million (2024-2027 average), up from US$310 million (2019- 2023 average). State debt will peak at 63.5 percent of total revenues in 2023 before gradually decreasing to 56.2 percent by 2026. Table 4: State of Alagoas Projected Fiscal Balances (Constant 2023 US$ Million) Estimates Includes IBRD’s Debt Restructure Loan Constant 2023 USD (Million) 2021 2022 2023 2024e 2025f 2026f 2027f I. Revenues 2,913 2,946 3,106 3,206 3,263 3,316 3,375 Own Revenues 1,735 1,538 1,683 1,739 1,768 1,796 1,827 of which: interests 36 88 72 72 72 72 72 Transfers 1,178 1,408 1,423 1,468 1,495 1,521 1,548 II. Total Expenditures 2,629 3,120 3,096 3,260 3,266 3,345 3,388 % of revenues 90.3% 105.9% 99.7% 101.7% 100.1% 100.9% 100.4% Current Expenditures 2,260 2,650 2,731 2,896 2,919 2,938 2,961 Active Personnel Spending 715 813 748 794 789 783 798 Pensions 506 557 614 630 646 663 680 Interests 64 82 114 158 156 145 135 Other Current Expenditures 975 1,199 1,255 1,314 1,328 1,346 1,347 Investment 369 470 365 365 347 407 428 III. Primary Balance (I-II- Interests, net) 312 -180 52 32 81 44 50 % of revenues 10.7% -6.1% 1.7% 1.0% 2.5% 1.3% 1.5% IV. Overall Balance (I-II) 284 -175 10 -54 -3 -29 -13 % of revenues 9.7% -5.9% 0.3% -1.7% -0.1% -0.9% -0.4% V. Net Financing -48 100 81 54 3 29 13 Loans 17 171 170 124 377 127 115 of which: World Bank Operation 300 Amortizations, net -65 -71 -90 -70 -374 -98 -102 Asset Sales 0 0 0 0 0 0 0 VI. Gross Financing Needs (IV + Amortizations, net + pension fund) -219 246 80 124 378 128 115 % of revenues -7.5% 8.3% 2.6% 3.9% 11.6% 3.8% 3.4% VII. Financing Surplus/Gap (IV+V) 236 -74 91 0 0 0 0 % of revenues 8.1% -2.5% 2.9% 0.0% 0.0% 0.0% 0.0% VIII. Net Cash Balance 369 91 339 239 231 223 216 % of revenues 12.7% 3.1% 10.9% 7.5% 7.1% 6.7% 6.4% IX. Stock of Debt (Gross) 1,874 1,946 1,975 1,955 1,891 1,857 1,807 % of revenues 64.3% 66.1% 63.6% 61.0% 58.0% 56.0% 53.5% Memo: Alagoas GDP 13,613 13,836 14,534 15,132 15,376 15,592 15,812 World Bank Operation as share of Gross Financing Needs 79.5% Source: SICONFI/Federal Treasury and World Bank calculations. Notes: (i) Revenues are net of the FUNDEB deductions; (ii) Primary balance and overall balance in 2020 without the federal fiscal support to combat the COVID- 19 pandemic would be US$ 227 and US$ 44 million, respectively. Page 10 The World Bank BR State of Alagoas Sustainable Development Policy Loan (P500614) D. IMF Relations 25. Federal authorities maintain an ongoing dialogue with the International Monetary Fund (IMF) on Brazil’s macroeconomic policy. On July 8, 2024, the Executive Board of the IMF concluded the Article IV consultation with Brazil (see Fund Relations Note in the annex). The Bank and the IMF have collaborated closely with Brazil’s Federal Government in the last years, including on public financial management, public investment management, and a Financial Sector Assessment Program. The IMF has also provided technical assistance to Brazilian authorities in other areas, such as fiscal transparency and fiscal frameworks for Subnational Governments. III. PROPOSED OPERATION A. Link to Government Program, CPF, other WBG operations, and Corporate Priorities 26. The two pillars of the proposed DPF are closely aligned with the guiding themes of the government’s Multiannual Plan for 2024-2027 (Plano Plurianual – PPA)11. Pillar 1 is linked to the government management axis of the PPA, to the chapters on fiscal management and public financial management modernization. Pillar 2 is linked to three axes of the PPA: sustainability and welfare in the chapters on environment and natural disaster mitigation; state and society in the chapter on economic development; and inclusion and development in the chapter on jobs and income generation. 27. This operation also seeks to help the state of Alagoas reduce its debt burden and improve its debt service profile. The GoAL plans to use the IBRD loan proceeds to restructure approximately US$277,486,911 million (JPY41,623,036,649) in domestic debt, lowering its debt service costs. A comparison of the Net Present Value (NPV) of all contracts to be prepaid (US$330.6 million) and the NPV of the IBRD loan (US$220.1 million) shows potential savings of US$110.5 million (36.8 percent of the loan). This demonstrates the operation's financial viability and meets the Federal Government requirement to authorize a federal guarantee of the state’s obligation with IBRD. The refinancing will also result in substantial debt service savings in the initial years due to the extension of debt maturities, providing the state with additional fiscal space. 28. The proposed DPL fully aligns with Brazil’s Country Partnership Framework (CPF) FY2024–28. 12 The CPF supports Brazil's development priorities in its Federal Government’s 2024-2027 Multi-Year Plan (PPA) and Ecological Transformation Plan (PTE). The CPF aims to achieve (i) greater productivity and employment, (ii) greater inclusion of the poor and underserved populations, and (iii) a greener economy with reduced vulnerability to climate shocks. Under Pillar 1, this operation is aligned with Objectives 1.1, which promotes fiscal consolidation and government effectiveness, and 1.2, which aims to improve the regulatory environment to reduce transaction costs. Under Pillar 2, the operation is also aligned with Objective 3.1, which upholds inclusive and sustainable development. Pillar 2 is also consistent with the World Bank Group (WBG) Climate Change Action Plan 2021-202513 and the LAC Climate Roadmap14. This DPL is also aligned with two components (public investment management and asset management) of the “ Progestão Alagoas: Public Sector Management Efficiency Project (P177070)”. 29. The CPF is consistent with IBRD’s graduation policy and reflects International Finance Corporation (IFC) and Multilateral Investment Guarantee Agency (MIGA)’s evolving additionality. The graduation discussion income (GDI) 11 The PPA is the governance tool that defines the guidelines, objectives, and goals of public administration, covering capital expenses and other expenses arising from them, in addition to those related to programs of continuous duration. 12 The World Bank Group Brazil CPF for FY24-28, report number CPF0000013 discussed by the Executive Directors on April 9, 2024. 13 https://openknowledge.worldbank.org/handle/10986/35799 14 https://openknowledge.worldbank.org/entities/publication/d3c58e1a-388b-5157-a88c-a1d171f434be Page 11 The World Bank BR State of Alagoas Sustainable Development Policy Loan (P500614) dialogue emphasizes access to financial markets on favorable terms and the quality and sustainability of institutions for economic and social development. Brazil’s recent upgrades in its sovereign credit ratings provide better access to international capital markets. This position is supported by its deep domestic markets, a flexible exchange rate, and a low share of foreign-currency debt. Nevertheless, Brazil faces unique challenges that slow economic and social progress. The WBG program in the CPF period is designed accordingly. IBRD’s support systematically aims to strengthen Brazil’s key social and economic institutions, which remains a significant agenda. 30. This operation aligns with the mitigation, adaptation, and resilience goals of the Paris Agreement. The supported reform program is consistent and contributes to the country’s climate commitments, including the Nationally Determined Contributions (NDC), National Adaptation Plan (NAP), and the WB’s Country Climate and Development Report (CCDR) for Brazil. On mitigation goals, none of the prior actions are likely to cause a significant increase in GHG emissions or any persistent barriers to transition to low-Greenhouses Gases (GHG) emissions. On pillar one, PA1 (new fiscal regime) ensures the government can fund and maintain long-term climate initiatives with neutral impacts, while all other PAs are expected to have positive mitigation outcomes: PA2 (public asset management) allows for a more efficient use of State assets, and PA3 (public investment management) ensures that public investments will be climate oriented. On pillar two, PA4 (State environmental policy) helps enforce regulations that protect natural resources and biodiversity; PA5 (State climate change policy) sets emissions reduction targets, promotes renewable energy, and implements climate adaptation strategies; PA6 (environmental licensing and risk management) ensures that development projects minimize their environmental impact, thereby contributing to lower emissions and better protection of ecosystems; PA7(RER and EPR) helps monitor and regulate land use, ensuring compliance with environmental laws, reducing deforestation, and enhancing carbon sinks; and PA8 (PEPSA) leads to greater preservation of forests and natural landscapes, crucial for carbon sequestration and biodiversity. Regarding adaptation and resilience goals, risks from climate hazards are not likely to have adverse effects on the PAs’ contribution to the Project Development Objective (PDO). Furthermore, PA2, PA3, and PA6 are designed to create a comprehensive approach to addressing climate change's effects. Hence, all supported policies are aligned with the mitigation, adaptation, and resilience goals of the Paris Agreement. A detailed review is presented in Annex 2. 31. This project is consistent with the Maximizing Finance for Development (MFD) approach by implementing fiscal management and regulatory reforms that enable new private sector investments. By enhancing fiscal sustainability, PA1 will improve the State’s credit profile, enabling improved access to financing for investment with the support of federal government guarantees. By improving the regulatory framework for public real estate asset management (PA2), the GoAL has reduced uncertainty and built better foundations for future private sector investment in public real estate, including through capital markets. By implementing a new Public Investment Management (PIM) system, the GoAL will increase confidence and reduce private investors’ perceived risks of investing in PPPs and concessions (PA3). Finally, the new environmental licensing regulation improved transparency and predictability for investors, thus facilitating private sector investment in business activities with lower environmental risk (PA6). B. Prior Actions, Expected Results, and Analytical Underpinnings 32. The Development Objective of this Standalone DPL is to support reforms of the State of Alagoas to strengthen policies for the sustainable use of public resources and the management of environmental resources. Pillar 1 supports reforms that strengthen the sustainable use of public resources through the adoption of (i) fiscal rules aimed at controlling current expenditures and ensuring fiscal space for public investments, (ii) a new framework for public asset management, and (iii) a new framework for public investment management. Pillar 2 supports policies to strengthen the management of environmental resources by (i) improving the governance of the environmental management system, (ii) a commitment to reduce GHG emissions and measures to adapt to the effect of climate change, (iii) increasing the efficiency in the analysis and processing of environmental licensing, (iv) improving the quality of information used in the Rural Page 12 The World Bank BR State of Alagoas Sustainable Development Policy Loan (P500614) Environmental Registries, and (v) the establishment of the State Policy for Payment for Environmental Services (PEPSA). Pillar 1: Strengthening policies for the sustainable use of public resources. 33. This pillar strengthens control of recurrent spending in Alagoas to free up public resources for investment, climate action, and public services. Alagoas has implemented fiscal adjustment measures since 2014 that have constrained public spending and improved revenue mobilization but faces challenges in safeguarding the space for social spending and investment. Nonetheless, the ratio between current expenditures and current revenues was 98.2 percent by 2022, above the Federal Treasury sustainability threshold (95 percent), limiting the government’s capacity to finance investments and expand public services. To reverse this trend and sustain the progress made in the past years, the GoAL is pursuing reforms that strengthen the institutional framework for fiscal sustainability. 34. This pillar also addresses Alagoas’ weak capacity to manage public investments and assets, affecting its ability to allocate public resources and efficiently prioritize investments. The public investment system lacks established criteria, climate change considerations, and efficient processes, leading to poorly prepared projects with implementation delays, time overruns, and cost overruns. Regarding asset management, less than 25 percent of its real estate assets have complete documentation, leading to reduced public revenues, unused public properties, and high rent expenses. The government aims to enhance the quality of public investment by establishing an institutional framework to improve the selection, monitoring, and implementation of public investments and to adopt a law for improved public asset management. Prior Action #1: To improve fiscal sustainability and safeguard the fiscal space for public investments, the Borrower has limited the growth of current expenditures to the growth of current revenues. 35. Rationale. Expenditure growth has been a particular source of pressure for Alagoas, especially personnel and other current expenses, which increased by 36 percent in real terms since 2019. Given the absence of a fiscal framework to limit spending growth and trigger adjustment measures, current expenditures achieved 98.2 percent of the NCR in 2022. Without a fiscal anchor, current expenditures are at risk of continuing to grow faster than current revenues, reducing fiscal space for public investments and the state’s ability to borrow with a federal government guarantee. 36. Prior Action. The GoAL adopted a new fiscal framework through Law N. 9,324/2024. This framework limits the primary current spending growth of the Executive Branch by capping current expenditures as a share of current revenues of the previous year. If this ratio exceeds 95 percent, current spending growth will be limited to CPI inflation. If the ratio is between 95 and 92.5 percent, this limit increases to 60 percent of real current revenue growth plus the CPI inflation. If the ratio is between 92.5 and 90 percent, the limit is 80 percent plus the CPI inflation. Below 90 percent, current expenditures are allowed to grow at the same pace as revenues. Moreover, to strengthen compliance, if the current savings ratio exceeds 95 percent, the law establishes policy actions that ban wage increases, new civil services positions, and limits hiring. This prior action helps ensure that the adjustment burden falls on current spending rather than on public investment or public service delivery, as in the past. The “Progestão Alagoas: Public Sector Management Efficiency Project” (P177070) will support the state to increase its spending efficiency, complementing this reform's objectives. 37. Expected results. The new fiscal framework is expected to improve control over spending, particularly personnel costs, leading to increased fiscal discipline and a reduced ratio of current expenditures to current revenue. Current expenditures (as a share of current revenues) are expected to decrease from an estimated average of 94 percent from 2022-24 to 92 percent by 2025-26 (result indicator #1), converging to 90 percent in the medium term. Ultimately, the framework ensures long-term fiscal stability and the responsible use of public resources. This will enhance the state's credit profile, enabling improved access to financing, supported by federal government guarantees, for green, resilient, and inclusive development investments. Page 13 The World Bank BR State of Alagoas Sustainable Development Policy Loan (P500614) Prior Action #2: To improve the management of its public real estate assets, the Borrower has enacted a law that adopts a new framework for public asset management facilitating state property evaluation, identification, registration, regularization and disposal. 38. Rationale. Alagoas faces significant challenges in managing its real estate assets due to inadequate arrangements for their management, leading to inefficient asset management and hindering the potential to generate revenues. The state has identified over 2,000 public properties, whose total value is estimated at over R$7.9 billion (US$1.6 billion). However, only 20 percent are fully registered, and just 22 percent have a public deed. Approximately 850 properties are classified as alienable, yet they remain underutilized. Inefficiencies result in vacant properties and unnecessary expenditure on new acquisitions and rental fees. From 2018 to 2022, income from leases and sales averaged only R$0.94 million (US$0.19 million) annually, while the state spent about R$26.5 million (US$5.3 million) annually on renting buildings for service provision. The adoption of a real estate asset framework can strengthen Alagoas Assets Company (Alagoas Ativos SA)15, which is currently focused only on providing guarantees for state Public-Private Partnerships (PPPs but whose mandate also includes the management of the state’s public assets that are part of the Alagoas Partnership Fund (FAP) and structuring operations with the capital market. Additionally, there is no systematic assessment of hazard or climate change risks for public infrastructure assets, and energy audits are not conducted to identify potential savings. 39. Prior Action. Law Nº 9.366/2024 enhances the management of state-owned real estate by introducing principles for the identification, assessment, regularization, use, and disposal of public assets. Under the new law, SEPLAG ( Secretaria de Estado de Planejamento, Gestão e Patrimônio) becomes the central management body of the asset management framework, issuing technical guidelines and overseeing activities. Additionally, SEPLAG is granted the responsibility to manage financial aspects, authorize asset transactions (such as sales, cessions, and integration into investment funds), and emphasize transparency and accountability. The law details procedures for contracting with financial institutions for revenue collection from real estate assets (including occupation fees and taxes) to improve financial and revenue management. The law also establishes rules in property acquisition and concessions that prioritize social, public interest, and environmental aspects. The law provides the basis for establishing real estate investment funds to secure capital market resources. Lastly, climate-related provisions require climate risk assessments in cadastral registration of state- owned real estate assets. SEPLAG will conduct energy audits and collect energy consumption data to ensure sustainable management practices. The “Progestão Alagoas: Public Sector Management Efficiency Project” (P177070) will support the implementation of this reform. 40. Expected Results. Implementing the new framework for public asset management is expected to optimize asset use, reduce underutilization, and enhance cost-effective practices while supporting social and environmental goals. The state expects to increase the number of real estate assets registered in its database from 492 in 2023 to 1,981 by 2026 (result indicator #2). These efforts are expected to contribute to an increase in public revenues from public assets from R$ 0.94 million (US$0.19 million) in 2022 to at least R$ 39.8 million (US$7.9 million) annually, representing 0.5 percent of Alagoas’ total real estate assets estimated value. The reform is also expected to enable and mobilize private sector participation in the utilization of public assets. The reform is also likely to have positive climate impacts. The framework mandates the performance of energy audits and the assessment of data on energy consumption. It also provides guidelines for mandatory climate and environmental risk assessment of newly registered properties, foreseeing identifying existing climate risks. By incorporating adaptive measures and resilience strategies, it aims to future-proof assets against the increasing frequency of extreme weather events. It emphasizes the importance of transitioning to low-carbon operations, promoting sustainability, and reducing greenhouse gas emissions in line with climate targets. 15Alagoas Ativos S.A. is a state-owned company created with the purpose of enabling the implementation of the state’s Public-Private Partnership Program, managing state’s public assets that are part of the Alagoas Partnership Fund (FAP) and structuring operations with the capital market. Page 14 The World Bank BR State of Alagoas Sustainable Development Policy Loan (P500614) Prior Action #3: To improve the efficiency, the effectiveness, and climate sustainability of its public investment, the Borrower has adopted a new framework for public investment management that systematizes project’s evaluation, selection and implementation. 41. Rationale. Alagoas increased its investment rate from 7.1 percent of its revenues in 2019 to 16 percent in 2022, surpassing the national average of 10 percent. The state plans to invest R$ 8.6 billion (US$1.5 billion) over the next four years to boost growth and improve access to services because of tighter recurrent spending controls. This involves around 400 ongoing infrastructure projects, including 200 daycare centers, an airport, and a large hospital, and plans to invest over R$ 2.5 billion (US$436 million) with private companies to achieve 100 percent access to clean water by 2027. Despite these commitments, Alagoas lacks a robust (PIM framework that integrates sound project preparation and technical appraisal and considers climate change and social and environmental impacts. By implementing such a framework, Alagoas will ensure more efficient and sustainable public investments, supporting long-term fiscal health and climate resilience. 42. Prior Action. Decree N. 97,299/2024 mandates a systematic approach to enhance the state’s public investment management system to tackle development challenges, improve fiscal sustainability, and support climate action. It introduces a single-entry point system for implementable investment projects that can be financed within the Medium- Term Budgeting Framework (MTBF). The new decree redefines the roles and responsibilities of SEPLAG and sectoral secretariats to enhance coordination during project preparation, assessment, and evaluation. It requires ex-ante evaluations, including economic, financial, fiscal sustainability, technical, socioeconomic, and environmental feasibility studies, to increase project quality and limit inefficiencies. A project bank at SEPLAG will include pre-assessed projects, projects in execution, and concluded projects. The decree applies to all new public investment proposals, including those linked to Public-Private Partnerships (PPPs) and State-Owned Enterprises (SOEs). It also requires publishing a PIM methodology, which must include details on socioeconomic, environmental, and climatic risks and assigns the obligation to establish emergency procedures for climate-resilient projects. Finally, an Investments Technical Group to advise the Governor in investment project selection is expected under the decree.16 The “Progestão Alagoas: Public Sector Management Efficiency Project” (P177070) will support the implementation of this reform. 43. Expected Results. This reform is expected to improve the quality of Alagoas’ public investments and their efficiency, as well as improve their social and environmental impact. Within this new framework, 70 percent of the state’s new investment projects included in the project bank are expected to have undergone ex-ante cost-benefit analysis by 2026 (result indicator #3)17. The reform is also expected to create a more level playing field for private investors, instilling confidence and reducing perceived risks, leading to more funding opportunities. In addition, the PIM framework will help integrate climate change adaptation and mitigation measures into project planning and pre-assessment, thus improving infrastructure resilience and supporting the state’s climate change adaptation and mitigation efforts. The reform allows for fast-track emergency investments, and the PIM methodology is planned to include response to climate- related disasters to enhance disaster risk management capabilities. Pillar 2: Strengthening policies for the sustainable management of environmental resources. 16 SEPLAG's Internal Ordinance 7,620/24 established the Investments Technical Group (GTI) and its members, and its rules of procedure are being developed. Additional support will be provided by the working group on public investment at the Committee of State Secretaries of Planning (CONSEPLAN), backed by the World Bank through a dedicated trust fund on “Strengthening Public Investment Systems to Advance Climate Smart Infrastructure in Brazil” in the participating states. 17 PIM projects will follow the new legal framework’s methodology for screening, appraisal, and prioritization, leading to higher economic and social returns, timelier implementation, and better aligned with the State’s development priorities. The framework, which also applies to PPP projects, will ensure proper integration into the overall PIM system by enforcing rigorous checks and procedures for prioritization and selection. Page 15 The World Bank BR State of Alagoas Sustainable Development Policy Loan (P500614) 44. The second pillar supports state reforms to strengthen environmental use. Alagoas' limited alignment with recent federal environmental legislation has led to chronic mismanagement, widespread deforestation, and significant soil degradation. Between 2000 and 2022, deforestation increased by 23.7 percent in the Caatinga biome and 23.3 percent in the Atlantic Forest, primarily driven by agricultural expansion, charcoal production, and logging. Water pollution and soil degradation have further heightened climate vulnerability, particularly affecting rural poor communities. Although State Conservation Units cover 10.7 percent of Alagoas' land area, inadequate implementation of environmental regulations and insufficient community incentives threaten their sustainability. Strengthening environmental protections is essential to counteract these challenges. This pillar will enhance the state’s environmental governance, aligning it with federal standards and national best practices in key areas: (i) zoning of protected areas (PA4); (ii) climate change legislation (PA5); (iii) forest code implementation (PA6); (iv) risk-based environmental licensing (PA7); and (v) payment for environmental services (PA8). Prior Action #4: To promote environmental conservation and sustainable development, the Borrower has enacted a law that adopts the State’s Environmental Policy, that redefines responsibilities of the relevant State agencies, requires the integration of data and information from different agencies and programs, and creates two new state funds to incentivize activities aimed at the protection of the environment. 45. Rationale. The GoAL recognizes the need to address environmental challenges from climate change, land degradation, and the unsustainable economic use of nature resources. This requires actions integrating plans, programs, and projects focused on protecting Alagoas’ biomes while assuring sustainable use of natural resources for human activities. In addition, Alagoas needs an overarching environmental policy to ensure coordination among its existing instruments for environmental management, such as the system of conservation units, the solid waste policy, the policy to combat and prevent desertification, the basic sanitation policy, and the water resources policy. The GoAL also seeks to manage data and information from environmental licensing, cadasters, and environmental management more effectively to act quickly and develop fiscal and economic instruments for better environmental management. 46. Prior Action. Law N. 9,312/2024, known as the State’s Environmental Policy, institutionalizes a legal framework to strengthen the Alagoas’ environmental legislation. The law provides directives for environmental preservation, licensing, territorial planning, and cross-sectoral coordination. It provides incentives for environmental protection, enhances environmental management, and strengthens state agencies. It defines responsibilities and tasks, including installing a state council for environmental protection, which includes government and civil society representatives. the law also establishes the state environmental fund (FEMA) to finance the implementation of environmental policy and the environmental compensation fund (FUCOM) to support the implementation and maintenance of conservation units. The law also provides the basis for a unified state environmental data management system, effectively interlinking data from the Rural Environmental Registry (RER), the state registry of conservation units, the state registry of environmental organizations, environmental risk data, and other datasets. 47. Expected Results. Successful policy implementation is expected to foster sustainable development practices that balance economic growth with environmental protection by promoting better coordination of environmental management efforts, increased funding for conservation initiatives, stronger enforcement of environmental regulations, and greater transparency and public participation in environmental decision-making. There are five environmental protection areas (EPAs)18 in Alagoas under the responsibility of the environmental institute, IMA. Two ( Santa Rita and 18Conservation Units (CUs) are legally established by the government with conservation objectives and adequate protection guarantees. In Alagoas, there are 101 Conservation Units, 87 in the Atlantic Forest Biome and 14 in the Caatinga Biome. This means that 11.7 percent (324,765.95 ha) of the territory of Alagoas is protected by Conservation Units, 86.1 percent (209,410.33 ha) in the Atlantic Forest Biome and 13.9 percent (115,355.62 ha) Page 16 The World Bank BR State of Alagoas Sustainable Development Policy Loan (P500614) Catolé) already have updated management plans. By 2026, IMA will create and implement management plans for Pratagy and Murici, and update the management plan for Marituba, thus covering all EPAs under its jurisdiction (results indicator #4). Alagoas’ Conservation Units (CU) will be strengthened by promoting accountability, financing, transparency, stakeholder engagement, and sustainable use of natural resources and safeguarding Alagoas biodiversity by establishing and implementing management plans critical for effective CUs management, supported by both funds (FEMA and FUCOM) to be fully operational by 2026. Prior Action #5: To foster greenhouse gas emissions reduction, and support climate adaptation, the Borrower has enacted a law that adopts the State’s Policy for Combating Climate Change mandating climate-smart actions aimed at the sustainable use of natural resources, and promoting biodiversity and the rights of especially vulnerable populations to be protected against climate change. 48. Rationale. GHG emissions in Alagoas substantially increased from an annual average of 8.7 of CO2e (t) between 2012 and 2021 to 11.1 of CO2e (t)19 in 2022. Agriculture accounted for 33.5 percent of the GHG emissions in 2022; 27.6 percent originated from the energy sector; and 25.6 percent from land use, with the latter being responsible for most of the increase in emissions. As a Northeastern State, Alagoas is highly exposed to climate change effects that can convert the semiarid into an arid region and impact subsistence agriculture, water availability, and population health. Lack of coordination in climate action across government agencies and sectors, especially at municipal levels, insufficient funding for climate mitigation and adaptation projects, and limited public awareness and participation in climate initiatives at local levels in Alagoas can disproportionately impact vulnerable populations. By establishing a comprehensive framework for climate action, the state seeks to improve biodiversity and forest resource management, enhance climate resilience, and promote sustainable development, expanding the coverage of the climate monitoring multi-hazard system to the entire State, including all municipalities. These efforts align state policies with national best practices and climate commitments, integrating climate risk into planning and supporting emission reduction projects. 49. Prior Action. Law N. 9,304/2024 establishes the State’s Policy for Combating Climate Change (PEMC). The law provides for the preparation of the State Plan for Mitigation and Adaptation to Climate Change (PEMAMC), which must include the following minimum content: (i) a diagnosis of the sources of greenhouse gases in the state; (ii) the state’s transition strategy to a low-carbon economy, with net emissions reduction targets; and (iii) sectoral plans composed of mitigation and adaptation measures, considering socioeconomic, territorial and environmental planning aspects, including projects to be implemented. The law establishes licensing requirements (command-and-control measures), sets forth economic instruments to promote mitigation and adaptation activities (such as fiscal and financial incentives), and creates a public registry for emissions and mitigation projects. The law also prioritizes resources for vulnerable populations and regions most affected by climate change and sets targets for emission reductions and carbon neutrality by 2050. In addition, the new policy operationalizes the Alagoas Climate Change Forum (FAMC), created by State Decree No. 94,192 of October 26, 2023. Its scope also includes creating emissions monitoring, recording, and verification systems compatible with nationally and internationally recognized methodologies. 50. Expected Results. Successful policy implementation is expected to lead to reduced GHG emissions, increased climate resilience, and improved adaptation to climate change. In particular, the reform is expected to increase the coverage of areas monitored for climate risks through a real-time, multi-hazard system, increasing its reach from 73 to 102 municipalities by 2026, thereby covering 100 percent of the state's municipalities (results indicator #5). The policy is in the Caatinga Biome. Of the 84 State CU (the remaining is federal or municipal), 14 are under the administration of the GoAL, namely: eight Environmental Protection Areas (APAs), two Ecological Reserves (RESECs), one Wildlife Refuge (RVS) and three Ecological Stations (ESECs). 19 As measured by the Global Warming Potential from the Fifth Assessment Report (GWP-AR5) values of the Intergovernmental Panel on Climate Change (IPCC). Page 17 The World Bank BR State of Alagoas Sustainable Development Policy Loan (P500614) also expected to enhance coordination among government agencies and stakeholders, increase public awareness and participation in climate action, and equitable distribution of climate benefits, especially for vulnerable populations. Prior Action #6: To make environmental licensing more agile and impact-oriented, the Borrower has approved a regulation that streamlines licensing procedures for low-risk business activities. 51. Rationale. Environmental licensing is a core instrument for ensuring sustainability when reconciling economic development with the use of natural resources. In Brazil, overly complex and costly business registration and licensing procedures hinder market dynamism, competition, and productivity and delay the implementation of environmental licensing rules.20 Alagoas’ environmental licensing systems face these challenges, resulting in a slow and inefficient licensing system. To address this, the state is implementing reforms that simplify licensing procedures for low-risk businesses, reduce entry barriers, and stimulate private sector investment while shifting administrative focus to high- climate-risk enterprises. 52. Prior Action. The GoAL updated the CEPRAM (State Environmental Protection Council) Resolution N. 10/2018 with CEPRAM Resolution N. 01/2024 to streamline the environmental licensing process for small businesses while continuing to ensure that larger projects undergo a thorough review. Resolution No. 01/2024 added a new type of license, the Environmental License by Commitment (ELC), designed for streamlined approval of small businesses with low environmental impact, allowing for self-declarations under specific conditions. The resolution revises the classifications, provides a checklist for deciding when a company would qualify for this simpler license, and provides more detailed descriptions of the necessary environmental studies required for each type of activity and size. Further licensing simplification makes the process more efficient, contributes to a better business environment, increases competitiveness and predictability, and boosts private investments, especially in activities with low environmental risks. 53. Expected Results. The improved clarity and streamlined procedures brought by Resolution No. 01/2024 are expected to reduce ambiguity, enhance legal certainty, and minimize potential disputes, ultimately leading to more effective environmental protection and sustainable development while facilitating economic activity in the state. This includes faster approvals for low-impact projects through introducing the "License by Commitment" (that corresponds to about 50 percent of the environmental licensing requests) and clearer guidelines for required environmental studies. The Resolution is expected to decrease the days it takes to issue an environmental license for small business enterprises from 114 in 2023 to 45 days by 2026 (results indicator #6). This will free up state resources to manage activities with higher environmental risks. Additionally, the streamlined process is expected to reduce business entry barriers by reducing business formalities and thus encourage increased private investment. The new regulation's emphasis on licensing for activities that could degrade the environment directly supports the objectives of reducing GHG emissions and promoting climate resilience, in line with the Paris Agreement, and represents a significant shift towards integrating climate change considerations into environmental licensing compared to the previous legislation. Prior Action #7: To improve the quality of environmental information and promote rural properties’ compliance with environmental laws, the Borrower has approved a regulation that strengthens the State’s rules for registering with the Rural Environmental Registry and establishes the Environmental Regularization Program, defining its procedures. 54. Rationale. The Native Vegetation Protection Law (Law No. 12.651/2012), the Brazilian Forest Code, mandates 20Loayza, Norman, Ana Maria Oviedo and Luis Servén. 2005. “Regulation and Macroeconomic Performance. “Policy Research Working Paper 3469, World Bank, Washington, DC, and Barseghyan, Levon. 2008. “Entry Costs and Cross-Country Differences in Productivity and Output.” Journal of Economic Growth 13 (2): 145-67. Page 18 The World Bank BR State of Alagoas Sustainable Development Policy Loan (P500614) minimum conservation standards for private landholdings.21 This represents a cornerstone of Brazil’s approach to promoting climate change mitigation and adaptation through its agriculture, forest, and land use sectors. Registration in the Rural Environmental Registry (RER) enables the enforcement of the minimum conservation standards. It is a prerequisite for obtaining an environmental license for land improvements or vegetation suppression, credit lines, agriculture input subsidies, and other economic incentives. Rural property owners who do not register their properties in the RER are subject to sanctions, such as fines, prohibition of selling the rural property, or inability to obtain agricultural credit. If an environmental liability is detected, properties can enter a process of environmental regularization through the Environmental Regularization Program (ERP). However, implementation of the RER and the ERP has been slow owing to a lack of a clear and transparent implementation process. Also, the lack of transparency on environmental permits and registry entries undermines effective monitoring and oversight, increasing the risk of deforestation. Out of 127,057 RER applications in Alagoas, just 5,996 (4.7 percent) were analyzed as of June 2024, and only 32 (0.03 percent) have been fully validated. Although 45 percent of the registered properties also included a request to join the ERP, registry validation is incipient, and only one entry has been concluded. 55. Prior Action. The Normative Instruction (NI) N. 02/2023 of the Alagoas Environmental Institute (IMA) regulates the RER system in Alagoas. It promotes landholders’ adherence to environmental regulations, compliance with the Brazilian Forest Code and consolidation of the state’s environmental data for monitoring and deforestation control. It establishes a simplified process for smallholders, indigenous, and traditional communities, with technical assistance provided by IMA or authorized entities. The instruction addresses data updates, responsibilities, and penalties for inaccurate information, ensuring the accuracy and integrity of the RER database. The instruction also sets the ERP rules, which involve detailed data submission about property and environmental features by property owners whose adherence is voluntary but mandates previous RER registry to be completed. Property owners must ensure information accuracy, update it as needed, and correct any discrepancies to avoid registration cancellation. 56. Expected Results. The NI will strengthen the RER procedures, which will serve as a reliable record of land use and environmental features on rural properties in Alagoas. The RER is an important step in facilitating environmental monitoring, planning, enforcement, and overall compliance with the National Forest Code. The simplified registration process for smallholders, indigenous, and traditional communities promotes broad participation and equitable access to environmental regularization, ultimately promoting environmental sustainability and legal certainty in land tenure. This prior action is expected to accelerate RER registration and ERP uptake, increasing the share of the total area of all rural properties (2,355,158 ha) with georeferenced, analyzed, and approved RERs from 4.4 percent (102,943 ha) in 2023 to 51.3 percent (1,208,700 ha) by 2026 (results indicator #7). The GoAL strategy to prioritize larger rural properties will help to deliver on this target. Faster and full environmental regularization can contribute to restoring more than 1.011 million ha of land in Alagoas. This is expected to reduce deforestation and enhance carbon sequestration capabilities, as reforested and rehabilitated lands act as carbon sinks and lead to increased biodiversity, providing habitats for various species and contributing to the environment's resilience against climate-related disturbances. The restored areas are also likely to improve water regulation and soil quality, which are critical for agricultural productivity and reducing the vulnerability of communities to extreme weather events. By implementing sustainable land management practices, this initiative not only aims to mitigate the effects of climate change by reducing GHG emissions but also adapts the landscape to better cope 21The Brazilian Forest Code (Law 12.651 of 2012) requires that all private rural landholdings maintain a percentage of native vegetation as Legal Reserves (LRs), and that Areas of Permanent Preservation (APPs), such as riparian forests along watercourses, steep slopes, mountaintops, etc., also be maintained by landholders. The Forest Code also obliges landholders to register their landholdings in the Rural Environmental Registry (RER). This registry contains details on the total area of individual farms, the areas earmarked for alternative land use, APPs and LRs. The percentage to be held as natural vegetation varies from 80 percent in the Amazon biome to 35 percent in the Cerrado biome within the 9 States that make up the “Legal Amazon”, to 20 percent in the rest of Brazil. The enforcement of the “Forest Code” establishes economic and financial instruments to achieve these objectives. The Environmental Regularization Program (ERP) aims at promoting environmental compliance among rural landowners and requests to restore and preserve native vegetation on private properties. Page 19 The World Bank BR State of Alagoas Sustainable Development Policy Loan (P500614) with its impacts, thereby securing ecological and socio-economic benefits for the state. Prior Action #8: To foster the maintenance, recovery, or improvement of ecosystems, the Borrower has approved a decree that creates the State Policy for Payment for Environmental Services establishing, inter alia, eligible services, payment sources, and payment modalities. 57. Rationale. Payment for Environmental Services (PES) programs aim to internalize environmental externalities by compensating individuals or communities for their ability to produce environmental benefits or refrain from causing environmental damage. PES programs have advanced in recent decades at the subnational level, with regulations on the subject being instituted in the states of Maranhão, Minas Gerais, Pará, Rio Grande do Sul, Roraima, São Paulo, and Tocantins. Given the lack of financing and the vulnerability of production systems to climate change, the lack of a PES program in Alagoas has been a significant gap in its environmental management framework. This mechanism is important for improving the income of small rural producers in areas with low agricultural potential and high potential for environmental services. Adopting a PES program has recently become more relevant for Alagoas, whose deforestation increased from 60 ha in 2019 to 3,149 ha in 2022.22 58. Prior Action. Decree N. 93,740/2023 establishes the State Policy on Payment for Environmental Services (PEPSA) in Alagoas. The PEPSA is an overarching policy framework that aims to incentivize environmental conservation and restoration through financial and other incentives. It is aligned with Brazil's national policy on payments for environmental services (Federal Law N. 14,119/2021), recognizing the importance of ecosystem services and their contribution to the state's well-being. The Decree specifies funding sources for the program (such as state budgets and environmental funds) and a wide range of actions eligible for payments (such as carbon sequestration and environmental protection). PEPSA will be implemented through a State Program for Payments for Environmental Services (PROPSA), which outlines the mechanisms for identifying, selecting, and funding projects that provide environmental services. PROPSA will be coordinated and executed by IMA and include subprograms focused on specific areas. A consultative committee will guide implementation, and a statewide project registry is established to monitor and ensure transparency. 59. Expected Results. Successful implementation of Alagoas’ PEPSA program is expected to result in improved environmental quality and increased climate change resilience across the state. This will be achieved through enhanced biodiversity, better protection of water and soil resources, and increased carbon sequestration through reforestation and sustainable land management practices. PEPSA will foster stronger collaboration among government agencies, the private sector, and civil society organizations, leading to more effective and comprehensive environmental management in Alagoas. By supporting projects that restore watersheds and manage natural resources sustainably, the program bolsters resilience to climate impacts. Moreover, incorporating local communities and marginalized groups will ensure that climate adaptation strategies are more inclusive and effective. In the first implementation stage, the launch of the PSA RPPN (Private Reserve of Natural Heritage) and PSA Agroecologia pilot sub-programs are expected to increase the area covered by environmental services in Alagoas, resulting in R$2.9 million in payments by 2026 for people benefitted with these programs (results indicator #8), particularly empowering women, who are at the forefront of agroecological activities. IMA has already concluded the consultation processes for the PSA RPPN and the PSA Agroecologia and it is next to launch the payment schemes for both, assuring that the reform implementation is underway. 60. Gender. According to the most recent national agricultural census conducted in 2017, women account for only 33 percent of family farmers in Brazil. This gap is slightly wider in Alagoas, with women representing just 31 percent of family farmers. Moreover, women are leaving agricultural activities at a higher rate than men: between 2014 to 2022, there was 22Relatório Anual de Desmatamento 2022 - São Paulo, Brasil - MapBiomas, 2023. https://storage.googleapis.com/alerta- public/dashboard/rad/2022/RAD_2022.pdf. Page 20 The World Bank BR State of Alagoas Sustainable Development Policy Loan (P500614) an 18.3 percent decrease in the number of women engaged in agriculture, compared to an 8.5 percent decrease among men. International evidence highlights agroecological innovations' significant role in empowering women farmers and advancing distributive justice. However, the limited participation of women in decision-making processes within these organizations remains a major barrier to change, perpetuating a male-dominated organizational culture. Funding shortages in public institutions and farmer organizations are also recognized as key obstacles to bridging gender gaps in family farming. To close this gap, the GoAL expects that 80 percent of the resources allocated to the PSA Agroecologia program (100 projects) will go to women (results indicator #9). PES is expected to have a ‘dual’ benefit on female producers by contributing to their economic empowerment and encouraging the sustainable management of their productive resources; it will also increase women’s leadership skills and agency. C. Consultations and Collaboration with Development Partners 61. Public consultations on proposed reforms in Alagoas took place both during the development of the policies and while the State Legislative Assembly was reviewing them. The proposed reforms are aligned with the pillars and programs included in the Alagoas PPA 2024-2027, which was prepared with direct social participation through nine participatory regional forums, four thematic workshops (and an online popular consultation).23 For Pillar two, CEPRAM is composed equally of State agencies and civil society representatives24 and is responsible for proposing and promoting the State Environmental Protection Policy and environmental protection activities. Additionally, State Law 9,214/2024 subordinated the creation, structuring, and monitoring of the implementation of the State Policy for Combating Climate Change to Alagoas’ Climate Change Forum (FAMC), which is made up of 35 members, representing the State executive power, the legislative power, the judiciary, federal government bodies and representatives of municipal governments, educational, research and financial institutions, public companies and ten representatives of civil society in Alagoas. Finally, State Decree 93,740/2023 established a Consultative Committee for the State Policy for Payment for Environmental Services (PEPSA) as a permanent and consultative body, with the duties of monitoring and proposing measures to improve the State Payment for Services Program Environmental – PROPSA. This Committee comprises nine members representing the state government, the productive sector, and civil society. IV. OTHER DESIGN AND APPRAISAL ISSUES A. Poverty and Social Impacts 62. Prior Actions 1, 2, 3, and 6 are expected to have indirect but positive distributive impacts from improved access to services. PA1 and PA2 are expected to widen fiscal space, allowing for public services in health, education, and social protection sectors prioritized in the PPA 2024-2027. PA2 is expected to enable the use of public assets that do not currently serve a social function to provide social housing policies in a State with a housing deficit that affects 103,291 families (9.2 percent).25 PA3 and PA6 may also have positive effects by enabling private investments to boost the local economy and generate jobs. The positive outcomes of PA3 are supported by the incorporation into the PIM framework of technical selection criteria that consider social inclusion dimensions necessary to prioritize investments such as sanitation, clean water, and daycare centers, the provision of which is mostly at fault among the lower-income population. 26 23 In total, 1,800 representatives of municipal authorities, non-governmental organizations, social movements, professional associations, municipal councils, nationally recognized experts, and the State government debated 54 topics and presented 956 proposals. 24 Which include representatives of artisanal fishing communities, quilombola communities, and Indigenous Peoples. 25 This housing deficit is concentrated among lower-income families (74.5 percent), households headed by women (62.6 percent) and Afro-Brazilians (66.9 percent). Source: Fundação João Pinheiro, Déficit habitacional no Brasil 2022 / Fundação João Pinheiro – Belo Horizonte, 2023. 26 Only 17.9 percent of the households in Alagoas have access to waste collection networks and 74.2 percent to drinking water supply networks. Page 21 The World Bank BR State of Alagoas Sustainable Development Policy Loan (P500614) 63. Prior actions 4, 5, 7, and 8 in Pillar 2 are also expected to positively and directly impact poverty and society. PA4 is expected to have positive distributive effects on civil society as it will increase its access to decision-making processes related to the environment, enhancing civil participation and social accountability. PA5 is expected to slow the impacts of climate change on small family farmers and artisanal fishery communities who are confronting trends of desertification and water shortage in the semiarid region (rendering subsistence agriculture unfeasible) and sea level rise with devastating effects on coastal areas and resources. PA7 facilitates registration procedures for small landholders, benefiting agrarian reform settlers and traditional communities, ensuring legal security, access to credit, and conflict resolution. Finally, PA8 is expected to help combat climate change by benefiting poor and underprivileged social groups in areas with low agricultural potential and high potential for environmental services. The focus on agroecology is also expected to help rural women, whose production constitutes a fundamental contribution to the budget of poor rural families but often remains “unaccounted”. B. Environmental, Forests, and other Natural Resources Aspects 64. PA1, PA2, and PA3 in Pillar 1 are unlikely to negatively and directly impact the environment, forests, or other natural resources. Implementing the new fiscal framework (PA1) promotes fiscal sustainability and is expected to have negligible environmental impacts. The latest legal framework for public real estate assets management (PA2) ensures a rigorous inventory of assets and the preservation of those with socio-environmental purposes. Incorporating environmental risk assessments into public infrastructure investment projects (PA3) enhances sustainability, ensures that negative impacts and risks are properly identified and mitigated, and promotes responsible environmental management. 65. PA4, PA5, PA6, PA7, and PA8 Pillar 2 have been developed to generate significant positive effects in advancing the state's sustainable development. Improving the State's environmental management system (PA4, PA5) strengthens its capacity to protect the environment, enforce environmental regulations, reduce illegal deforestation in the Caatinga biome, and implement continuous monitoring and evaluation. More specifically, the development, review, and execution of management plans for EPAs enhance the conservation of biodiversity, facilitate the protection of at-risk species and their natural environments, support the restoration of ecosystems, and advance the progress of both monitoring and research initiatives (PA4). Modernizing environmental licensing (PA6) ensures compliance with regulations and mitigates environmental impacts. Enhancing the efficiency of environmental licensing analysis and processing also leads to fewer delays in rolling out environmental mitigation and protection efforts. By adopting a system that prioritizes impact, resources can be more effectively allocated to a project's most important environmental aspects, resulting in better- informed decisions for environmental protection. Increasing the effectiveness of the RER and aligning standards under the National ERP (PA7) allows for better monitoring of rural properties, ensuring compliance with regulations and protecting biodiversity and water resources. The effective implementation of PES (PA8) is expected to conserve biodiversity, prevent desertification, support restoration of ecosystems, reduce greenhouse gas emissions, protect water resources, and decrease deforestation. C. PFM, Disbursement, and Auditing aspects 66. The overall integrated fiduciary risk of this operation is Moderate. A well-developed legal framework underpins the Public Financial Management (PFM) environment in the GoAL. The primary responsibility for implementing it belongs to the State Secretariat of Finance (SEFAZ). Budget preparation and monitoring processes are considered appropriate, and budget documents are available for public access on an external website27. The State Government's PFM environment features strong internal rules and commitment controls. Using the Treasury Single Account model of cash management and a clear allocation of responsibilities facilitates the performance of bank reconciliations. There are continued 27 Portal da Transparência Graciliano Ramos. Available in: https://transparencia.al.gov.br/ Page 22 The World Bank BR State of Alagoas Sustainable Development Policy Loan (P500614) improvements in the external oversight mechanisms, including participation by key stakeholders and sector agencies and following federal rules consistent with international standards. The State's Financial Statements are of reasonable quality and prepared promptly. A recent assessment by the National Treasury Secretariat showed that the State’s financial reports are of considerable quality and comply with most of the requirements established by law28. The State's Supreme Audit Institution (TCE) lacks human and technical resources and proper training to fully comply with its responsibilities to perform finance auditing of the State’s Financial Statements. However, mitigation measures are being addressed under the Progestão Project (P177070). The GoAL is also committed to implementing essential reforms, including with support from the World Bank, to improve the quality and relevance of financial information available for decision-making and to enhance transparency, accountability, and efficiency in PFM. These reforms include (i) implementing the International Public Sector Accounting Standards (IPSAS)29 and (ii) enhancing internal audit arrangements. Based on the analysis of the adequacy of the State’s PFM environment, no additional fiduciary arrangements will be implemented for the operation. 67. The Loan proceeds will be disbursed against satisfactory implementation of the DPL program and deposited into a commercial bank acceptable to the Bank. Once the loan is effective, the borrower will request the World Bank to disburse the loan proceeds in Brazilian Reais (BRL, R$) into a denominated account opened by the GoAL at Caixa Econômica Federal (CEF), and this account will not form part of Brazil’s foreign exchange (FOREX) reserves30. Nevertheless, according to Brazilian regulations, the Central Bank must still be informed of the deposit. For this reason, the control environment governing the Central Bank’s operations was assessed, and the FOREX control environment was considered satisfactory. The CEF is a federal state-owned financial institution that is financially sound, audited regularly, performs a wide range of banking services, provides detailed bank statements, is part of a satisfactory banking network, and charges reasonable fees for its services. The auditors issued an unmodified opinion in the last three audit reports of CEF (from 2021 to 2023). Within 30 (thirty) days after receipt of loan proceeds, the GoAL will confirm to the World Bank that (i) the loan proceeds were transferred to an account denominated in Brazilian Reais (R$);; and (ii) the amount was accounted for in the State´s treasury and budget records. If loan proceeds were used to finance excluded expenditures defined in the Loan Agreement, the World Bank would require the GoAL to refund the amount. 68. Procurement processes in Alagoas are highly competitive and transparent, and they have been improving over time. The Agency for the Modernization of Processes (AMGESP) is an autarchic state entity with the legal personality of internal public law. It has administrative, financial, and patrimonial autonomy and is responsible for the execution, monitoring, and control of material purchases and service contracts. Additionally, the agency manages public policies in Alagoas. It operates under the Secretary of State for Government (SEGOV) supervision. The State provides a section on Alagoas’ Transparency Portal website, which gathers information on bidding processes conducted by all state Executive entities. This section includes minutes of price registration and signed contract data on hiring specialized consultancy services by the Executive Power. Furthermore, the State utilizes the Federal Government's electronic procurement system, ComprasNet.gov. This virtual system facilitates the acquisition of goods and services through electronic auctions. The system offers two types of bidding: waiver of the bidding procedure for purchases below a specific value and reverse auction. Public entities, agencies, and state foundations post their purchasing or service contracting needs on the website and await supplier bids. Suppliers submit their bids in the case of a waiver, while in reverse auctions, negotiations take place until the lowest price is reached. All public entities are accredited and can utilize this instrument, which streamlines the purchasing process, reduces bureaucracy and enables easier control and inspection of the procedure's legality and 28 Quality of the State's accounting and fiscal management information, the State of Alagoas achieved a “B” rating (with the rating “A” representing the best quality and “E” representing lowest). 29 Portaria STN nº 548/2015 (updated by Portarias STN 10.300/2022 and 1.569/2023) - Plano de Implantação dos Procedimentos Contábeis Patrimoniais – PIPCP, to be fully implemented by December 2024, and additional requirements by December 2031. 30 Central Bank regulations permit subnational governments to hold foreign exchange accounts in Brazil, that are not part of the country’s foreign exchange reserves. Page 23 The World Bank BR State of Alagoas Sustainable Development Policy Loan (P500614) transparency. D. Monitoring, Evaluation, and Accountability 69. The Alagoas State Secretariat of Finance (SEFAZ) is responsible for collecting and monitoring information related to program implementation and progress toward achieving the results. SEFAZ is accountable for coordinating all necessary actions among the agencies involved in the reform program supported by this DPF. SEFAZ will be responsible for Pillar one in coordination with other State agencies (SEPLAG and Alagoas Assets Agency). The State Secretariat for the Environment (SEMA) oversee policies and coordinate different institutions under pillar two. The Environment Institute (IMA), that was created in 1975 and is the oldest environmental agency in Brazil, is responsible for implementing state environmental policies. The World Bank (WB) team has worked closely with the above agencies and Brazil’s Federal Government to define results indicators that are spelled out and measurable, giving preference to those already collected by the GoAL on a regular basis to avoid duplication. 70. Grievance Redress. Communities and individuals who believe that they are adversely affected by specific country policies supported as Prior Actions or tranche release conditions under a World Bank Development Policy Financing may submit complaints to the responsible country authorities, appropriate local/national grievance mechanisms, or the Bank’s Grievance Redress Service (GRS). The GRS ensures that complaints received are promptly reviewed in order to address pertinent concerns. Project affected communities and individuals may submit their complaint to the Bank’s independent Accountability Mechanism (AM). The AM houses the Inspection Panel, which determines whether harm occurred, or could occur, as a result of Bank non-compliance with its policies and procedures, and the Dispute Resolution Service, which provides communities and borrowers with the opportunity to address complaints through dispute resolution. Complaints may be submitted at any time after concerns have been brought directly to the World Bank’s attention, and Bank Management has been given an opportunity to respond. For information on how to submit complaints to the World Bank’s corporate Grievance Redress Service (GRS), please visit http://www.worldbank.org/GRS. For information on how to submit complaints to the Bank’s Accountability Mechanism, please visit https://accountability.worldbank.org. 71. Brazil has robust legislation on access to information and grievance redressing .31 The 1988 Federal Constitution (Arts. 103 and 130) and Constitutional Amendment 45/2004 also provide for the creation of Ombudsmen. Hundreds of Ombudsman offices in the federal, state, and municipal bodies and agencies operate in the country and are integrated into the Fala.BR web system developed for the National Ombudsman Network. This platform allows citizens to request public information and manifestations from the ombudsman. The system works 24 hours a day, allows follow-up on the progress of a registered event, and has the option to report anonymously https://www.gov.br/cgu/pt- br/assuntos/ouvidoria. Finally, data on the network performance is publicly available on the website “Painel Resolveu?” (http://paineis.cgu.gov.br/resolveu/index.htm). The Ombudsman's Office of the Comptroller General of the State of Alagoas has been available to the public since May 2019 to receive comments about the policies and public services of the bodies and entities of the Executive Branch of the State of Alagoas. Citizens have the option of making the complaint in person, at the headquarters of the State Comptroller General, online, at the website https://e-ouv.al.gov.br/, by email (ouvidoria@cge.al.gov.br) or by letter. V. SUMMARY OF RISKS AND MITIGATION 72. The project's overall risk is assessed as moderate. Given the complexity of the systems and reforms that will be implemented, the main risks to this operation's objectives relate to institutional capacity constraints. This risk and the 31Including: Constitutional Amendment 19/1988, Federal Law 12,527/2011, Federal Law 13,460/2017, Federal Decree 9,492/2018, and Normative Instruction Ministry of Transparency and Federal Comptroller General (CGE)/Union General Ombudsman Office (OGU) 5/2018. Page 24 The World Bank BR State of Alagoas Sustainable Development Policy Loan (P500614) mitigation measures are presented below. 73. Risks related to institutional capacity for implementation and sustainability are rated as substantial. While endowed with technically sound tenured public officials in key management positions, the administration has capacity constraints, including limited experience in implementing policy reforms in some areas supported by this operation. These risks are mitigated by the strong commitment of the government leadership to the reform agenda, resulting in the prioritization of associated activities. The “Progestão Alagoas: Public Sector Management Efficiency Project (P177070)” enhances the GoAL institutional capacity for the reforms in pillar one, including ensuring that all reforms are supported by change management strategies, capacity building, and technical assistance. Pillar two reforms are implemented by IMA, which has adequate capacity and experience in the implementation of environmental policies. Additionally, several reforms in pillar two will increase institutional capacity through the creation of FEMA (PA4) and PROPSA (PA8), and some of them are already underway, including the licensing process (PA6), the RER (PA7), and the monitoring system. Additionally, the World Bank will continue to support the program through the supervision of this operation. Table 5: Summary Risk Ratings @#&OPS~Doctype~OPS^dynamics@padrisk#doctemplate Risk Categories Rating 1. Political and Governance  Moderate 2. Macroeconomic  Moderate 3. Sector Strategies and Policies  Moderate 4. Technical Design of Project or Program  Low 5. Institutional Capacity for Implementation and Sustainability  Substantial 6. Fiduciary  Moderate 7. Environment and Social  Moderate 8. Stakeholders  Low 9. Other  Overall  Moderate Page 25 The World Bank BR State of Alagoas Sustainable Development Policy Loan(P500614) ANNEX 1. Policy and Result Framework Prior actions Results Indicator Name Baseline Target Pillar 1: Strengthening policies for the sustainable use of public resources RI1. Average current expenditures between 2025 and PA#1: To improve fiscal sustainability and safeguard the fiscal space for public investments, the 2026 compared to the average Dec/2024 = Dec/2026 = Borrower has limited the growth of current expenditures to the growth of current revenues.32 between 2022 and 2024 as a 94 92 share of current revenues (percentage) PA#2: To improve the management of its public real estate assets, the Borrower has enacted a RI2. Number of real estate law that adopts a new framework for public asset management facilitating state property Dec/2023 = Dec/2026 assets registered in Alagoas 492 = 1,981 evaluation, identification, registration, regularization and disposal.33 registry database RI3. Share of the 2026 state’s PA#3: To improve the efficiency, the effectiveness, and climate sustainability of its public new investment projects investment, the Borrower has adopted a new framework for public investment management that Dec/2023 = Dec/2026 included in the project bank 0 = 70 systematizes project’s evaluation, selection and implementation.34 undergoing ex-ante cost-benefit analysis (percentage) Pillar 2: Strengthening policies for the sustainable management of environmental resources PA#4: To promote environmental conservation and sustainable development, the Borrower has enacted a law that adopts the State’s Environmental Policy, that redefines RI4. Share of Environmental Dec/2023 = Dec/2026 responsibilities of the relevant State agencies, requires the integration of data and Protection Areas (EPAs) under 40 = 100 32 Borrower’s Law N. 9,324, dated July 19, 2024, published in the Borrower’s Official Gazette on July 22, 2024. 33 Borrower’s Law N. 9,366, dated September 9, 2024, published in the Borrower’s Official Gazette on September 10, 2024. 34 Borrower’s Decree N. 97,299, dated May 17, 2024, published in the Borrower’s Official Gazette on May 20, 2024. Page 26 The World Bank BR State of Alagoas Sustainable Development Policy Loan(P500614) Prior actions Results information from different agencies and programs, and creates two new state funds to IMA’s jurisdiction with updated incentivize activities aimed at the protection of the environment. 35 management plans approved (percentage) PA#5: To foster greenhouse gas emissions reduction and support climate adaptation, the Borrower has enacted a law that adopts the State’s Policy for Combating Climate Change RI5. Number of municipalities mandating climate-smart actions aimed at the sustainable use of natural resources, and monitored under the coverage Dec/2023 = Dec/2026 promoting biodiversity and the rights of especially vulnerable populations to be protected area of the monitoring and early 73 = 102 warning system against climate change.36 PA#6: To make environmental licensing more agile and impact-oriented, the Borrower has RI6. Number of days to issue an approved a regulation that streamlines licensing procedures for low-risk business Dec/2023 = Dec/2026 environmental license for small 114 = 45 activities.37 businesses PA#7: To improve the quality of environmental information and promote rural properties’ compliance with environmental laws, the Borrower has approved a regulation that RI7. Area of all rural properties Dec/2023 = Dec/2026 = strengthens the State’s rules for registering with the Rural Environmental Registry and with georeferenced, analyzed, 102,943ha 1,208,700ha and approved RERs (hectares) establishes the Environmental Regularization Program, defining its procedures.38 35 Borrower’s Law N. 9,312, dated July 15, 2024, published in the Borrower’s Official Gazette on July 16, 2024. 36 Borrower’s Law N. 9,304, dated July 5, 2024, published in the Borrower’s Official Gazette on July 8, 2024. 37 CEPRAM’s Resolution N. 01, dated May 14, 2024, published in the Borrower’s Official Gazette on June 3, 2024. 38 IMA’s Normative Instruction N. 2, dated August 30, 2023, published in the Borrower’s Official Gazette on September 15, 2023. Page 27 The World Bank BR State of Alagoas Sustainable Development Policy Loan(P500614) Prior actions Results RI8. Amount paid to PSA RPPN Dec/2026 = and PSA Agroecologia programs Dec/2023 = 0 PA#8: To foster the maintenance, recovery, or improvement of ecosystems, the Borrower 2,900 beneficiaries (R$ thousands) has approved a decree that creates the State Policy for Payment for Environmental Services, establishing, inter alia, eligible services, payment sources, and payment RI9. Share of women-led Dec/2026 = modalities.39 projects supported by PSA Dec/2023 = 0 80 Agroecologia (percentage) 39 Borrower’s Decree N. 93,740, dated September 27, 2023, published in the Borrower’s Official Gazette on September 28, 2023 Page 28 The World Bank BR State of Alagoas Sustainable Development Policy Loan (P500614) ANNEX 2. Paris Alignment Assessment Program Development Objective(s): The Development Objective of this DPL is to support reforms of the state of Alagoas to strengthen policies for the sustainable (i) use of public resources and (ii) management of environmental resources. Step 1: Taking into account our Answer: Yes climate analysis (e.g., Country Explanation: The operation is directly aligned with Brazil’s Update of the First Climate and Development Reports or Nationally Determined Contribution (NDC) submission (October 2023) by CCDRs), is the operation consistent promoting inter-alia non-conventional conservation units, deforestation with the country climate reduction and recover of degraded lands. In addition, the operation commitments, including for instance, contributes to improved climate resilience in alignment with the NAP by the NDC, NAP, LTS, and other advancing in risk identification and creating a favorable environment for relevant strategies? investments in adaptation. It also aligns with key CCDR findings and recommendations including reducing deforestation, expand conservation units and productive agriculture, with very limited land‑clearing (incentives to Payment for Environmental Services and Rural Environmental Registry). Lastly, the operation aligns with Alagoas’ strategic initiatives for climate resilience and sustainable agriculture, especially the Alagoas’ Plan for Adaptation to Climate Change and Low Carbon Emission in Agriculture for Sustainable Development ABC+, 2020-2030 (Plano Estadual para Adaptação à Mudança do Clima e Baixa Emissão de Carbono na Agropecuária com vistas ao Desenvolvimento Sustentável ABC+, 2020-2030), Alagoas’ Policy on Climate Change Adaptation (Política Estadual de Enfrentamento às Mudanças Climáticas) State Law No. 9,304/2024, and the Alagoas’ System of Natural Conservation Units (UC) and Environmental Protection Areas (EPAs), established by the State laws No. 7,776/2016 and Law 5347/1992 and Decree No. 32,858/1988. Mitigation goals: assessing and reducing the risks Pillar 1: Strengthening policies for the sustainable use of public resources. Prior Action 1. To improve fiscal sustainability and safeguard the fiscal space for public investments, the Borrower has limited the growth of current expenditures to the growth of current revenues. Step M2.1: Is the prior action likely Answer: No. to cause a significant increase in Explanation: This prior action is not likely to cause a significant increase in GHG emissions? GHG emissions as it aims to strengthen the State’s fiscal position. Conclusion for PA 1: The measure supported by the prior action is not likely to have any negative direct mitigation or emissions generating impact, consequently, it can be considered aligned on mitigation. Prior Action 2. To improve the management of its public real estate assets, the Borrower has enacted a law that adopts a new framework for public asset management facilitating state property evaluation, identification, registration, regularization and disposal. Step M2.1: Is the prior action likely Answer: No. to cause a significant increase in Explanation: This prior action is not likely to cause a significant increase in GHG emissions? GHG emissions. On the contrary, it introduces requirements to evaluate the Page 29 The World Bank BR State of Alagoas Sustainable Development Policy Loan (P500614) environmental and climate risk for real estate assets, along with energy assessments for properties that are newly registered, expected to better measure energy efficiency. Conclusion for PA 2: The measure supported by the prior action is not likely to have any negative direct mitigation or emissions generating impact, consequently, it can be considered aligned on mitigation. Prior Action 3. To improve the efficiency, the effectiveness, and climate sustainability of its public investment, the Borrower has adopted a new framework for public investment management that systematizes project’s evaluation, selection and implementation. Step M2.1: Is the prior action likely Answer No. to cause a significant increase in Explanation: This prior action is not likely to cause a significant increase in GHG emissions? GHG emissions. On the contrary, the policy promotes the reduction of GHG emissions by incorporating climate-smart parameters in the investment project cycle, including Public-Private Partnerships (PPPs) and State-Owned Enterprises (SOEs). Conclusion for PA 3: The measure supported by the prior action is not likely to have any negative direct mitigation or emissions generating impact, consequently, it can be considered aligned on mitigation. Pillar 2: Strengthening policies for the sustainable management of environmental resources. Prior Action 4. To promote environmental conservation and sustainable development, the Borrower has enacted a law that adopts the State’s Environmental Policy, that redefines responsibilities of the relevant State agencies, requires the integration of data and information from different agencies and programs, and creates two new state funds to incentivize activities aimed at the protection of the environment. Step M2.1: Is the prior action likely Answer No. to cause a significant increase in Explanation: This prior action is not likely to cause a significant increase in GHG emissions? GHG emissions. On the contrary, the measure will strengthen the future and existing programs and projects on climate mitigation and adaptation by unifying the State Environmental Data Management System and executing management plans for the Conservation Units (UCs). These initiatives are designed to enhance the efficiency of emission reduction measures. Conclusion for PA 4: The measure supported by the prior action is not likely to have any negative direct mitigation or emissions generating impact, consequently, it can be considered aligned on mitigation. Prior Action 5. To foster greenhouse gas emissions reduction and support climate adaptation, the Borrower has enacted a law that adopts the State’s Policy for Combating Climate Change mandating climate-smart actions aimed at the sustainable use of natural resources, and promoting biodiversity and the rights of especially vulnerable populations to be protected against climate change. Step M2.1: Is the prior action likely Answer No. to cause a significant increase in Explanation: This prior action is not likely to cause a significant increase in GHG emissions? GHG emissions. On the contrary, the measure supports the State’s transition strategy to a low-carbon economy by establishing a net zero emission target and the preparation of the State Plan for Mitigation and Adaptation to Climate Change (PEMAMC). Conclusion for PA 5: The measures supported by the prior action are intended to reduce GHG emissions, consequently, it can be considered aligned on mitigation. Page 30 The World Bank BR State of Alagoas Sustainable Development Policy Loan (P500614) Prior Action 6. To make environmental licensing more agile and impact-oriented, the Borrower has approved a regulation that streamlines licensing procedures for low-risk business activities. Step M2.1: Is the prior action likely Answer No. to cause a significant increase in Explanation: This prior action is not likely to cause a significant increase in GHG emissions? GHG emissions. On the contrary, the measure mandates that projects undergo evaluations for their potential contributions to GHG emissions and will enable authorities to allocate less time to tasks with minimal environmental and climate impact, and more time to those with greater risks, including on potential greater emitters. Conclusion for PA 6: The measure supported by the prior action is not likely to have any negative direct mitigation or emissions generating impact, consequently, it can be considered aligned on mitigation. Prior Action 7. To improve the quality of environmental information and promote rural properties’ compliance with environmental laws, the Borrower has approved regulation that strengthens the State’s rules for registering with the Rural Environmental Registry and establishes the Environmental Regularization Program, defining its procedures. Step M2.1: Is the prior action likely Answer No. to cause a significant increase in Explanation: This prior action is not likely to cause a significant increase in GHG emissions? GHG emissions. On the contrary, as the RER is mandatory for all rural properties, it helps to monitor and control environmental and economic use of those properties, in this manner contributing to combat deforestation and to preserve native vegetation. Conclusion for PA 7: The measure supported by the prior action likely to have positive direct mitigation impacts, consequently, it can be considered aligned on mitigation. Prior Action 8. To foster the maintenance, recovery, or improvement of ecosystems, the Borrower has approved a decree that creates the State Policy for Payment for Environmental Services, establishing, inter alia, eligible services, payment sources, and payment modalities. Step M2.1: Is the prior action likely Answer No. to cause a significant increase in Explanation: This prior action is not likely to cause a significant increase in GHG emissions? GHG emissions. On the contrary, the measure will increase the total areas aimed at protecting and restoring native vegetation, as well as rehabilitating degraded lands, which will enhance carbon sequestration. Conclusion for PA 8: The measure supported by the prior action likely to have positive direct mitigation impacts, consequently, it can be considered aligned on mitigation. Mitigation goals: All prior actions are aligned on mitigation. Adaptation and resilience goals: assessing and managing the risks Pillar 1: Strengthening policies for the sustainable use of public resources. Prior Action 1. To improve fiscal sustainability and safeguard the fiscal space for public investments, the Borrower has limited the growth of current expenditures to the growth of current revenues. Step A2: Are risks from climate Answer No. hazards likely to have an adverse Explanation: This prior action’s development impact is not expected to be effect on the prior action’s threatened by climate risks as its scope is limited to strengthening the State contribution to the Development fiscal sustainability through the adoption of a fiscal rule. Objective(s)? Page 31 The World Bank BR State of Alagoas Sustainable Development Policy Loan (P500614) Conclusion for Prior Action 1: This prior action’s development impact is not expected to be threatened by climate risks. The adaptation risks are low. Prior Action 2. To improve the management of its public real estate assets, the Borrower has enacted a law that adopts a new framework for public asset management facilitating state property evaluation, identification, registration, regularization and disposal. Step A2: Are risks from climate Answer No. hazards likely to have an adverse Explanation: This prior action’s development impact is not expected to be effect on the prior action’s threatened by climate risks. On the contrary, the measure will introduce contribution to the Development provisions to evaluate the climate and environmental risks, and the adequate Objective(s)? adaptation (when necessary) of real estate assets in newly registered properties. Conclusion for Prior Action 2: This prior action’s development impact is not expected to be threatened by climate risks. The adaptation risks are low. Prior Action 3. To improve the efficiency, the effectiveness, and climate sustainability of its public investment, the Borrower has adopted a new framework for public investment management that systematizes project’s evaluation, selection and implementation. Step A2: Are risks from climate Answer No. hazards likely to have an adverse Explanation: This prior action’s development impact is not expected to be effect on the prior action’s threatened by climate risks as its focus revolves around implementation the contribution to the Development Public Investment Management (PIM) framework that considers adaptation Objective(s)? aspects on public investments in new public investments proposals, including Public-Private Partnerships (PPPs) and State-Owned Enterprises (SOEs). Conclusion for Prior Action 3: This prior action’s development impact is not expected to be threatened by climate risks. The adaptation risks are low. Pillar 2: Strengthening policies for the sustainable management of environmental resources. Prior Action 4. To promote environmental conservation and sustainable development, the Borrower has enacted a law that adopts the State’s Environmental Policy, that redefines responsibilities of the relevant State agencies, requires the integration of data and information from different agencies and programs, and creates two new state funds to incentivize activities aimed at the protection of the environment. Step A2: Are risks from climate Answer No. hazards likely to have an adverse Explanation: This prior action’s development impact is not expected to be effect on the prior action’s threatened by climate risks. On the contrary, the measure will enhance the contribution to the Development Government's ability to handle climate threats by reinforcing the legal Objective(s)? structure and developing robust management plans for Conservation Units, including adaptation strategies. Conclusion for Prior Action 4: This prior action’s development impact is not expected to be threatened by climate risks. The adaptation risks are low. Prior Action 5. To foster greenhouse gas emissions reduction and support climate adaptation, the Borrower has enacted a law that adopts the State’s Policy for Combating Climate Change mandating climate-smart actions aimed at the sustainable use of natural resources, and promoting biodiversity and the rights of especially vulnerable populations to be protected against climate change. Page 32 The World Bank BR State of Alagoas Sustainable Development Policy Loan (P500614) Step A2: Are risks from climate Answer No. hazards likely to have an adverse Explanation: This prior action’s development impact is not expected to be effect on the prior action’s threatened by climate risks. On the contrary, the measure will reinforce the contribution to the Development GoAL’s strategy against climate threats by formulating the State Plan for Objective(s)? Mitigation and Adaptation to Climate Change (PEMAMC) and enhancing the scope of the Climate Risk Monitoring and Warning System to include more municipalities. Conclusion for Prior Action 5: This prior action’s development impact is not expected to be threatened by climate risks. The adaptation risks are low. Prior Action 6. To make environmental licensing more agile and impact-oriented, the Borrower has approved a regulation that streamlines licensing procedures for low-risk business activities. Step A2: Are risks from climate Answer No. hazards likely to have an adverse Explanation: This prior action’s development impact is not expected to be effect on the prior action’s threatened by climate risks. On the contrary, the measure will contribute to contribution to the Development strategies against climate threats by allowing the authorities to dedicate more Objective(s)? time into riskier environmental licensing processes and evaluate their climate adaptation aspects. Conclusion for Prior Action 6: This prior action’s development impact is not expected to be threatened by climate risks. The adaptation risks are low. Prior Action 7. To improve the quality of environmental information and promote rural properties’ compliance with environmental laws, the Borrower has approved a regulation that strengthens the State’s rules for registering with the Rural Environmental Registry and establishes the Environmental Regularization Program, defining its procedures. Step A2: Are risks from climate Answer No. hazards likely to have an adverse Explanation: This prior action’s development impact is not expected to be effect on the prior action’s threatened by climate risks as its focus revolves around combating contribution to the Development deforestation, which contributes to increase the climate adaptation and Objective(s)? resilience of the State. Conclusion for Prior Action 7: This prior action’s development impact is not expected to be threatened by climate risks. The adaptation risks are low. Prior Action 8. To foster the maintenance, recovery, or improvement of ecosystems, the Borrower has approved a decree that creates the State Policy for Payment for Environmental Services, establishing, inter alia, eligible services, payment sources, and payment modalities. Step A2: Are risks from climate Answer No. hazards likely to have an adverse Explanation: This prior action’s development impact is not expected to be effect on the prior action’s threatened by climate risks as its focus revolves around increase the total contribution to the Development areas aimed at protecting and restoring native vegetation, as well as Objective(s)? rehabilitating degraded lands, which contributes to increase the climate adaptation and resilience of the State. Conclusion for Prior Action 8: This prior action’s development impact is not expected to be threatened by climate risks. The adaptation risks are low. Adaptation and resilience: All prior actions are aligned on adaptation and resilience. The adaptation risks are low. Page 33 The World Bank BR State of Alagoas Sustainable Development Policy Loan (P500614) OVERALL CONCLUSION OF PARIS ALIGNMENT ASSESSEMENT: The operation is aligned with the goals of the Paris Agreement. Page 34 The World Bank BR State of Alagoas Sustainable Development Policy Loan (P500614) ANNEX 3. Operation Specific Annex Brazil Debt Sustainability Analysis In the context of medium-term fiscal consolidation, public debt is expected to stabilize at slightly below 80 percent of GDP by the end of this decade. Public debt reached a historic peak of 87 percent of GDP in 2020. The recovery from the pandemic-induced recession, a favorable external environment that benefited exports, and the withdrawal of emergency fiscal stimulus measures helped reduce debt to 74.4 percent of GDP by 2023. Public debt is expected to increase, peaking at 78.7 percent by 2028, driven by higher social and capital expenditure commitments by the new administration, along with still elevated refinancing costs. Thereafter, debt is expected to gradually decline to 76.8 percent of GDP towards the end of this decade in the context of a medium-term consolidation effort. The debt trajectory is subject to downside risks. A drop of 2.9 percentage points in GDP growth in 2025 and 2026, the standard deviation between 2013 and 2023, would lead to an increase in public debt to slightly below 90 percent of GDP by the end of this decade, representing a 10 percentage points increase relative to the baseline scenario. This scenario also assumes that every percentage point decrease in economic growth reduces inflation by 0.25 basis points and increases the real interest rate by 0.25 basis points. An accumulated deterioration in the primary balance of about 2.4 percentage points of GDP between 2025 and 2027 would increase debt to 79.2 percent by the end of the decade, 2.5 percentage points above the baseline scenario. This scenario also assumes that every percentage point decrease in primary balance (as a percentage of GDP) increases the interest rate by 0.25 basis points. A permanent increase in the average interest rate of 200 basis points would steadily increase public debt to 81.7 percent by 2030. Finally, under a combined shock (all these shocks affecting the economy simultaneously), public debt would steadily increase to 96.9 percent of GDP by 2030, 20.1 percentage points higher compared to the baseline. Although public debt is expected to stabilize in the medium term, moderate country risk and low external debt would ease its management. Under both the baseline scenario and all standardized tests, total debt and financing needs (as a share of GDP) are expected to remain above their indicative thresholds for emerging countries of 70 percent and 15 percent over the projection period. A significant share of public debt is index to inflation, and thus, subject to interest rate and inflation risks. On the other hand, public debt exposure to currency risk is low, as the share of external and foreign currency denominated debt is total public debt is small. Brazil’s country risk is relatively low, at around 218 basis points in the last three months up to August 2024. Figure 1: Public Debt Sustainability Analysis, Macro-Fiscal Stress Tests Debt would stabilize near the end of this decade… … on the back of economic growth and primary surpluses. Debt to GDP ratio under the base case scenario 20 Perrcent of GDP Debt-Creating Flows 15 100 (in percent of GDP) 10 90 5 0 80 -5 70 -10 -15 60 2017 2018 2019 2020 2021 2022 2023 2024 2025 2026 2027 2028 2029 2030 2031 Residual Real interest rate 50 Real GDP growth Primary deficit 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 2025 2026 2027 2028 2029 2030 2031 Change in gross public sector debt However, this pattern is vulnerable to downside risks, … … in particular to the standardized combined stress test. Page 35 The World Bank BR State of Alagoas Sustainable Development Policy Loan (P500614) Debt to GDP ratio under the standarized stress tests Debt to GDP ratio under the combined stress tests Perrcent of GDP Perrcent of GDP 100 110 100 90 90 80 80 70 70 60 60 50 50 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 2025 2026 2027 2028 2029 2030 2031 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 2025 2026 2027 2028 2029 2030 2031 Baseline Primary Balance Shock Baseline Combined shock Real GDP Growth Shock Real Interest Rate Shock Real Exchange Rate Shock However, debt management is eased by moderate low country risk and low external debt. Public DSA Assessment: Heat Map Debt level 1/ Real GDP Primary Real Interest Exchange Rate Contingent Growth Shock Balance Shock Rate Shock Shock Liability shock 2/ Real GDP Primary Real Interest Exchange Rate Contingent Gross financing needs Growth Shock Balance Shock Rate Shock Shock Liability Shock External Change in the Public Debt Foreign 3/ Market Debt profile Financing Share of Short- Held by Non- Currency Perception Requirements Term Debt Residents Debt Source: World Bank staff. Note on Brazil’s New Federal Fiscal Framework Seeking to strengthen the fiscal policy framework, Brazil’s Federal Government proposed a new fiscal framework to Congress on April 18, 2023, and the bill, with some modifications, was approved by the Senate on June 22, 2023. The new framework envisions limiting primary spending growth, reaching a primary surplus and stabilizing public debt. The main elements of the proposed new framework are as follows:  The proposal commits to a path for the primary balance until 2026, with a target and a band of 0.25 percentage points tolerable variation. In April 2024, the government revised its primary balance targets, now foreseeing a zero primary deficit for 2025 and a surplus of 0.25 percent of GDP in 2026, a change from the previously anticipated surpluses of 0.5 and 1.0 percent of GDP, respectively. The Central Government's primary balance target for 2024 remains at zero, according to the Budgetary Guidelines bill (PLDO) presented by the government. Also, the primary surpluses aimed for 2027 and 2028 are 0.5 percent of GDP and 1 percent of GDP, respectively.  As corrective mechanism in case of non-compliance with the primary balance goal each year, there would be bans on creating civil service positions, readjusting mandatory expenses, creating, or increasing benefits, and granting or expanding tax benefits, among other measures. The correction mechanisms become tougher in case of non- compliance for two consecutive years. In this scenario, in addition to all the previous measures, salary readjustments would be banned, as well as the admission of personnel and public job positions. If the targets are again achieved, the measures cease to be valid. Page 36 The World Bank BR State of Alagoas Sustainable Development Policy Loan (P500614)  The framework establishes a range for the growth of primary expenditure in real terms, with a lower and upper limit of 0.6 percent and 2.5 percent, respectively. This band would limit pro-cyclical fiscal impulses by limiting expenditure growth during an upswing to no more than 2.5 percent in real terms. o The framework exempts a number of spending items from the primary spending growth limits, representing around 4 percent of GDP (or about 20 percent of primary spending): (i) constitutional transfers; (ii) additional emergency primary spending financed with extraordinary credits ; (iii) expenditures financed with grants or with resources from judicial or extra-judicial agreements signed as a result of environmental disasters; (iv) federal expenses of public federal universities, State-Owned Enterprises that provide services for federal university hospitals, federal education institutions and those related to science, technology, and innovation associated with the Ministry of Education, etc.; (v) expenses financed through transfers from the other federal entities to the Federal government and for direct execution of works or engineering services; (vi) non-recurrent spending of the Electoral Justice body directed to finance administrative costs to realize elections. Finally, the framework established a floor for public investment.  The annual increase of total expenditure is limited to 70 percent of the primary revenue growth over the last 12 months to June of the previous year if the target for the primary balance is achieved. This proportion may be reduced to 50 percent if the primary balance target is not achieved.  Primary balances that exceed the target band may be used to increase public investment by an amount equivalent to the excess amount.  While the legal foundations of the framework are included in the Constitutional amendment 126, and Article 163 of the Federal Constitution, the numerical targets of the framework are specified in a law (infra-constitutional), which provides flexibility to adjust them according to circumstances. Figure 1. Scheme and possible outcomes of the new fiscal framework Source: Brazil’s Independent Fiscal Institute. Intergovernmental Fiscal Arrangements in Brazil Brazil is a highly decentralized federation, with Subnational Governments being responsible for the delivery of most public services. The Brazilian Constitution gives State and Municipal Governments substantive fiscal autonomy and large spending responsibilities. Municipalities provide primary education and health care, and States fund most secondary schools and hospitals. Public universities are mostly federal, but many States also maintain public universities of their Page 37 The World Bank BR State of Alagoas Sustainable Development Policy Loan (P500614) own. States are the primary providers of policing and public security. State and Municipal Governments are also in charge of building and maintaining local and regional infrastructure and delivering social protection programs. States and municipalities also raise significant tax revenues of their own. The Brazilian Constitution assigns taxation powers to different levels of government. Brazil’s largest tax by revenue, the ICMS ( Imposto sobre Circulação de Mercadorias e Serviços), is an indirect tax levied by States on goods and selected services (intermunicipal transport and communication). The States also tax motor vehicles (IPVA), and inheritances and donations (ITCMD). Municipalities levy a service tax (ISS) on services not covered by the ICMS, and tax urban properties (IPTU) and real estate transactions (ITBI). State and Municipal Governments have full autonomy to define their tax bases and rates. States also share 25 percent of the ICMS and 50 percent of the IPVA with Municipalities. To provide public services, Subnational Governments receive intergovernmental transfers. Brazil’s Federal Government shares its tax revenues with States and Municipalities through two general-purpose unconditional transfer funds, respectively the FPE (Fundo de Participação dos Estados e do Distrito Federal) and the FPM (Fundo de Participação dos Municípios). These are constitutionally mandated, and their allocation is based on demographic factors, with less developed States and Municipalities receiving higher per capita allocations. As a result, these funds are the predominant source of revenue for poorer States, and poor rural Municipalities. Brazil’s Federal Government also provides specific transfers for education (FUNDEB) and health care (SUS), as well as capital transfers for specific programs. Fiscal rules for Subnational Governments are enshrined in the 2000 Fiscal Responsibility Law (FRL— Lei de Responsabilidade Fiscal). With a view to reducing moral hazards in intergovernmental fiscal relations, the FRL explicitly prohibits debt refinancing operations between different levels of government. Complementary Senate resolutions also prohibit subnational borrowing if certain fiscal thresholds are not respected. The recent subnational fiscal crisis made it evident that the FRL and State-federal fiscal adjustment programs (PAFs) need strengthening. In response, Brazil’s Federal Government approved: (i) a Fiscal Recuperation Regime for bankrupt States (LC 159/2017); and (ii) debt amortization extensions for States facing liquidity problems (LC 156/2016), conditional on fiscal adjustment measures. Following the tendency of improvement of the intergovernmental fiscal relations, Congress modified and approved fiscal rules to support fiscal adjustment at Subnational Governments (LC 178/2021). The main innovations of this law are: (i) the improvement of the FRR by changing LC 159/2017; (ii) creation of the Fiscal Equilibrium Plan (FEP), which was designed to support the adjustment of Subnational Governments with limited debt, but that were facing liquidity problems; (iii) clarified the definition of some limits of the Fiscal Responsibility Law, such as the one for personnel spending. Subnational Governments’ borrowing capacity is tightly regulated, and States and Municipalities cannot issue debt securities. Much of the stock of subnational debt is in the form of long-maturity debt with Brazil’s Federal Government as part of a 1997 bailout and is governed by State-federal fiscal adjustment programs (PAFs). Since 2016, the repayment conditions for these loans have been restructured, lowering near-term payments required from States. Subnational Governments also have significant debts with public banks (BNDES, Banco do Brasil, and CEF), multilateral lenders (mostly IBRD and IADB), bilateral development partners, and, occasionally, commercial banks. Brazil’s Federal Government’s system for authorizing federally guaranteed subnational debts (CAPAG) was reviewed in 2017, with technical assistance from the WB, limiting federal discretion and requiring adequate fiscal space (measured by the current savings rate) from Subnational Governments to qualify for federal guarantees. States and Municipalities cannot issue debt securities directly, they require federal guarantees. The creditworthiness scoring system (CAPAG) is conducted by the Federal Treasury (STN) for federally guaranteed subnational borrowing. The STN assesses three different indicators: (i) indebtedness; (ii) current savings; and (iii) liquidity. Depending on the combination of the evaluation of these indicators, each Subnational Government will receive a score between A and D. To have borrowing access with federal guarantees, the SNG must have a CAPAG A or B score (those are the creditworthy SNGs). Page 38 ANNEX 4. Required Accompanying Documentation Letter of Development Policy [Unofficial translation] LETTER OF DEVELOPMENT POLICY Maceió, February 20, 2025. Dear Mr. Johannes Zutt Director – Brazil Latin America and the Caribbean Region The World Bank Mr. Director, The State of Alagoas, through this letter, expresses its commitment and determination to implement a set of measures aimed at strengthening fiscal sustainability and improving the management of natural resources in its territory. Such measures will be made possible through a credit operation to be established between the State of Alagoas and the International Bank for Reconstruction and Development (IBRD), within the scope of the "Fiscal, Economic, and Environmental Sustainability Program of the State of Alagoas (BR State of Alagoas Sustainable Development Policy Loan)." The actions contemplated by the Program constitute the fundamental basis for ensuring the future of the State of Alagoas. The Government of Alagoas recognizes that the technical-financial support from the International Bank for Reconstruction and Development (IBRD), through the Development Policy Loan (DPL), will be crucial for the success of the “Fiscal, Economic and Environmental Sustainability Program of the State of Alagoas.” Structural measures have been established, backed by legal frameworks, organized into two pillars: Fiscal and Environmental. These pillars provide the necessary support to achieve the Program's objectives. The improvement of existing legislation will enable the State to confront economic and climatic adversities more robustly. Overview of State Public Finances: The fiscal adjustments implemented since 2015 by the Government of Alagoas have created the necessary conditions for the State to achieve fiscal and financial solidity. These advances have allowed for improvements in the risk classification for obtaining credit (CAPAG B), increased investment capacity, expanded public service offerings, and enhanced the value of the state workforce. On the revenue side, state revenue growth was boosted, especially by implementing measures that made the collection of state taxes more effective. Continuous revenue growth, coupled with greater control of public spending, has been essential for maintaining the state's fiscal sustainability. However, since 2022, a change in the trajectory of these results has been observed, with an increase in expenses, particularly in debt service and personnel costs, and a decline in revenues, largely due to the impacts of Federal Complementary Law No. 194/2022 and the end of extraordinary revenues. This situation highlights the fiscal challenges the state will face in the coming years. Although the State's Consolidated Gross Debt (DC) is relatively low (90.18 percent of Net Current Revenue in 2023), the debt profile is not ideal, with domestic contracts featuring high financing costs and relatively short maturities. To address the current fiscal challenges, the State Government is planning the implementation of a new fiscal framework that will limit the growth of current primary expenditures. Additionally, the Government intends to use the loan proceeds from the World Bank to enhance the public debt profile by prepaying debts incurred with national creditors. Even in the face of a relatively favorable fiscal scenario and significant reforms already implemented to ensure the sustainability of public finances, the State of Alagoas still faces significant development challenges. In 2022, poverty and extreme poverty affected 42.3 percent and 7 percent of the population (based on US$ 6.85/day and US$ 2.15/day in 2017 PPP, respectively), nearly doubling national rates. To improve these indices, the government implemented the "Criança Alagoas" Program, which financially assists mothers with children aged 0 to 6 years who are in vulnerable situations. With a Gini coefficient of 0.498, Alagoas presents high inequality, surpassing at least 66 countries globally. Initiatives to improve access to basic sanitation seek to reduce inequality, with access to sanitation currently reaching 65.6% of the population, a figure still below the national average. In education, the state ranks 17th in high school quality among the 27 Brazilian states. To improve this index, the government launched the "Bolsa Conclusão" program, which financially incentivizes students who complete high school. Furthermore, Alagoas has the highest Vulnerability Epidemiological Index (IVE of 0.64), with 89% of the population relying on the public health system. To change this scenario, the government has been investing in health infrastructure by delivering hospitals and urgent care units. Support from the Bank via DPL: In light of the above, the Government of the State of Alagoas requests a loan from the International Bank for Reconstruction and Development (IBRD) in the amount of up to JPY 41,623,036,649.00 (Forty-one billion, six hundred and twenty-three million, thirty-six thousand six hundred and forty-nine Japanese yen), in the DPL modality - Development Policy Loan. Through the DPL, the World Bank will support the State in implementing policies aimed at increasing fiscal sustainability by refinancing onerous and short-term debts with a new debt of equal value, but with more favorable financial conditions and longer terms. In addition to the savings resulting from reduced indebtedness costs, the new structure will allow for a smoothing of payments over time, facilitating financial planning and enabling new investments and social policies for the benefit of the Alagoan population. In this context, the Government of the State aims to improve the public debt profile through a debt restructuring and reallocation operation of state debts incurred with national creditors. This process will allow the State to assume a new credit line commitment with the IBRD under more favorable financial conditions, achieving a more sustainable level of indebtedness. The choice of the World Bank, as an international organization, is due to the more advantageous conditions compared to those offered by other private financial institutions, including reduced costs and extended payment terms for selected credit operations. Although other multilateral financing organizations use the same cost indicator (TONA rate), the IBRD's differential also lies in its strategic alignment in three main areas: fiscal consolidation and government effectiveness; private sector investment and productivity; and equitable and sustainable development. With a focus on fiscal consolidation, the State of Alagoas thus seeks to achieve shared prosperity in an environmentally sustainable manner. To carry out this debt restructuring operation, eight priority actions have been identified, supported by the policy matrix of this project, namely: 1. Promote fiscal sustainability through the implementation of a new fiscal regime. 2. Improve the management of public assets of the state, with an emphasis on real estate assets. 3. Establish a public investment project management system in the state, aiming to enhance the impact, effectiveness, and fiscal and climate sustainability of these investments. 4. Institute the state environmental policy in Alagoas. 5. Establish the state climate change adaptation policy in Alagoas. 6. Update the procedures of the state licensing processes and approve the list of economic activities with higher environmental risks that are subject to environmental licensing by the State Institute of the Environment of Alagoas (IMA/AL). 7. Update the parameters for implementing the Rural Environmental Registry (RER) and establish the Environmental Regularization Program (ERP) in Alagoas. 8. Institute the State Policy for Payment for Environmental Services (PEPSA) and the state registry of projects for payment for environmental services. This set of measures is central to the development policy credit operation requested from the World Bank, with the aim of redefining the State's debt profile, reducing debt service payments in the short term. This reduction will create fiscal space to finance energy transition, modernization, and improvement of governance, as well as expand the provision of public services for the needy population of the State. We count on the realization of this operation, which will contribute to maintaining a trajectory of balance in the state public accounts, without losing sight of public investment and the promotion of sustainable development. Sincerely, Paulo Suruagy do Amaral Dantas Governor of the State of Alagoas Fund Relations Note Bibliography Prior Analytical Underpinnings Actions Pillar 1: Strengthening policies for the sustainable use of public resources World Bank (2017): A fair adjustment: efficiency and equity of public spending in Brazil https://www.worldbank.org/en/country/brazil/publication/brazil-expenditure-review-report Key finding: Elevate growth of current spending, especially on payroll and pensions is creating fiscal pressures, making fiscal rules and policies to contain this spending growth a priority. World Bank (2018). Brazil - Returning to a Sustainable Fiscal Path: Overview. Brazil Policy Notes 2018 Washington, D.C.: World Bank Group. http://documents.worldbank.org/curated/en/099750106262314331/overview000english000policy0notes02018 Key Finding: A tighter management of current spending at the subnational level is necessary condition to keep states and municipalities solvent. World Bank (2018). Brazil - Policy Note on Intergovernmental Fiscal Issues. Brazil Policy Notes 2018 Washington, D.C.: World Bank Group http://documents.worldbank.org/curated/en/099931406262311013/IDU082d4bdbc02ad70482109ecc02019dff PA#1 33e12 Key Finding: Many of the existing fiscal rules for subnational governments re-enforce procyclical spending surges, while rigidities inhibit adjustments needed to maintain solvency. Tesouro Nacional, Boletim dos entes subnacionais (various editions). Key finding: Like many other states, Alagoas experienced fiscal distress in recent years, which improved in subsequent years as spending growth was curtailed. However, in some states such as Alagoas, consolidated debt as a percentage of current revenue have increased recently. International Monetary Fund (2023). 2023 Article IV Consultation with Brazil. https://www.imf.org/en/Publications/CR/Issues/2023/07/31/Brazil-2023-Article-IV-Consultation-Press-Release- Staff-Report-Staff-Supplement-and-537328 Key finding: Expenditure rules for subnational governments that harden budget constraints and strengthen monitoring, while respecting autonomy within Brazil’s federal system, could strengthen fiscal sustainability and credibility, while providing flexibility. IMF. Unlocking Public Wealth, 2018. https://www.imf.org/en/Publications/fandd/issues/2018/03/detterhttps://www.imf.org/en/Publications/fandd /issues/2018/03/ eter Key finding: The publication illustrates the guidance for an updated asset map, including the stages of mapping, cataloguing, and effectively registering real estate assets, as reflected in Alagoas new legal framework. World Bank. Case Study – FONSIS: Pursuing a Tripple Bottom Line of Economic Impact, Financial Returns, and Private Capital Mobilization https://elibrary.worldbank.org/doi/10.1596/978-1-4648-1870- 7_ch9https://elibrary.worldbank.org/doi/10.1596/978-1-4648-1870-7_ch9 PA#2 Key finding: The case study helped the State to strengthen the State Secretariat for Planning, Management and Assets’ mandate and responsibilities, by describing a step-by-step process to strategically turn real estate assets into increased State’s revenue. This will also inform a forthcoming regulatory decree. World Bank. Real Estate Registration Project – Additional Financing (P169463). Key finding: The referenced project was very significant in informing the provisions specified in the State legislation. It also helped validate the outlined State’s asset management strategy and its dissemination among other subnational governments. World Bank. Progestão Alagoas (P177070). The project's technical assistance activities will support the implementation of the new legal framework. World Bank. Reference Guide for Climate-Smart Public Investment, 2022. https://elibrary.worldbank.org/doi/abs/10.1596/38390 Key finding: The report assesses the current PIM adaptation and mitigation measures adopted in different degrees of maturity throughout the world, including preparation, appraisal, and project execution potential activities with CCB. Ministério da Economia. Estruturação de Propostas de Investimentos em Infraestrutura – Modelo de Cinco Dimensões, 2022. https://www.gov.br/produtividade-e-comercio-exterior/pt-br/choque-de-investimento- privado/modelo-de-cinco-dimensoes/guia-modelo-de-cinco-dimensoes.pdf/view Key finding: The framework encompasses the adaptation of the UK PIM methodology to the Brazilian Federal Government, detailing the project cycle and toolkits that can be adapted to subnational entities. Ministério da Economia. Secretaria Especial de Produtividade e Competitividade. Secretaria de Desenvolvimento PA#3 da Infraestrutura. Guia Geral de análise socioeconômica de custo-benefício de projetos de investimento em infraestrutura, 2021. https://www.gov.br/casacivil/pt-br/assuntos/governanca/comite-interministerial-de-governanca/arquivos/guia- geral-de-analise-socioeconomica-de-custo-beneficio.pdf Key finding: The cited reports proved valuable in facilitating the intuitive and visually coherent organization of key points pertaining to climate smart PIM. It also played a pivotal role in aiding the adaptation of international best practices to the specific context of subnational governments in Brazil, considering their attributions and limited budget flexibility. World Bank. Progestão Alagoas (P177070). Key finding: The project's technical assistance activities will support the implementation of the new PIM framework. Pillar 2: Strengthening policies for the sustainable management of environmental resources - National System of Nature Conservation Units – SNUC, LAW No. 9,985, OF JULY 18, 2000: https://www.planalto.gov.br/ccivil_03/leis/l9985.htm Key finding: The cited law establishes criteria and standards for the creation, implementation and management of conservation units. - Statistical Panel of Brazilian Conservation Units: https://app.powerbi.com/view?r=eyJrIjoiMGNmMGY3NGMtNWZlOC00ZmRmLWExZWItNTNiNDhkZDg0MmY4Ii widCI6IjM5NTdhMzY3LTZkMzgtNGMxZi1hNGJhLTMzZThmM2M1NTBlNyJ9&pageName=ReportSectione0a112a2 a9e0cf52a827 Key finding: The Statistical Panel of Conservation Units provides updated evidence on the protection coverage offered by Conservation Units by biome, including within Caatinga and Mata Atlântica. PA#4 - de La Corte Bacci, D. et al. (2024). Public Policies, Ecosystem Services, and Environmental Governance in Brazil: An Analytical Review of Public Policies at Legal, Social, and Institutional Arrangements, at the Federal, State, and Municipal Levels. Springer, Cham. https://doi.org/10.1007/978-3-031-59611-7_24 Key finding: The analysis reveals that states in Brazil are key agents to stimulate and promote environmental governance in the context of climate change, considering the interdependence, trans-scalarity, dynamics, and complexity of protecting ecosystem. - Jatobá, J. (2023). Environmental Federalism in Brazil. In: Shah, A. (eds) Taxing Choices for Managing Natural Resources, the Environment, and Global Climate Change. Palgrave Macmillan, Cham.https://doi.org/10.1007/978-3-031-22606-9_7 Key finding: To improve efficiency and efficacy of environmental policies in Brazil, it is essential to further strengthen institutionalization of environmental protection at states’ levels of government. - Thives, V., Søndergaard, N. and Inoue, C. Y. A. (2022) ‘Bringing states back into commodity-centric environmental governance’, Third World Quarterly, 43(9), pp. 2129–2148. doi:10.1080/01436597.2022.2081144. Key finding: In the context of Brazilian commodity-centric trade, states are required to take a more active role in regulating and governing its environmental protection areas. - SALVIO, G. M. M.; et.al. Sistemas estaduais de unidades de conservação do Brasil. R. Tecnol. Soc., Curitiba, v. 16, n. 39, p. 113-131, jan/mar. 2020. Key finding: The study reveals that while some Brazilian states have established their own State Systems of Conservation Units (SEUCs) to protect biodiversity, there is a lack of uniformity across the country, with some states missing a formal system and others having unique categories not found in the national system. - World Bank Group. 2020. Catalyzing Investment for Green Growth: the role of business environment and investment climate policy in environmentally sustainable private sector development. Key finding: The study finds that effective environmental conservation and climate policies can play a crucial role in promoting green economic growth in developing countries. - Donadelli, F.. (2017). Integração de políticas ambientais no Brasil: uma análise de políticas de mudanças climáticas e biodiversidade. Revista De Administração Pública, 51(5), 734–766. https://doi.org/10.1590/0034- 7612153044 Key finding: Evidence suggest that environmental policy integration across different jurisdictions is an essential element of public policy effectiveness in Brazil. - Política Nacional sobre Mudança do Clima. https://www.planalto.gov.br/ccivil_03/_ato2007- 2010/2009/lei/l12187.htm - Política Estadual sobre Mudanças Climáticas do Pará. https://www.semas.pa.gov.br/legislacao/publico/view/4093 - Ministry of the Environment (2016) National plan for adaptation to climate change–volume 1: General Strategy. Brasília/DF. Key finding: The abovementioned laws played a pivotal role in guiding the writing of the State Environmental PA#5 Act following national definition and goals and learning best practices at the subnational level with Pará’s example. - Julia Niemeyer, Mariana M. Vale, Obstacles and opportunities for implementing a policy-mix for ecosystem- based adaptation to climate change in Brazil's Caatinga, Land Use Policy, Volume 122,2022,106385,ISSN 0264- 8377, https://doi.org/10.1016/j.landusepol.2022.106385. Key finding: The study highlights the urgent need for states in Brazil's Semiarid region to implement effective climate change policies, particularly those focused on ecosystem-based adaptation. - Conama No. 237/97. https://conama.mma.gov.br/?option=com_sisconama&task=arquivo.download&id=237 - Conama No. 01/86. https://conama.mma.gov.br/?option=com_sisconama&task=arquivo.download&id=745 Key finding: These national CONAMA’s resolutions establish basic criteria and general guidelines for environmental impact assessment, and for the review and supplementation of procedures and criteria used for environmental licensing across all levels of jurisdictions. PA#6 - Environmental Assessment Reports (RAA) and Environmental Impact Reports (RIMA) from the Environmental Institute of the State of Alagoas (IMA/AL), available at: https://www2.ima.al.gov.br/relatorios-de-impacto- ambiental-rima/ Key finding: IMA/AL has made Environmental Assessment Reports (RAA) and Environmental Impact Reports (RIMA) available to increase public access to information about licensed projects and the pace of analysis and evaluation for issuing licenses. - World Bank Group. 2020. Catalyzing Investment for Green Growth: the role of business environment and investment climate policy in environmentally sustainable private sector development. Key finding: The study finds that effective investment climate policies, and associated reliable environmental licensing criteria, can play a crucial role in promoting green economic growth in developing countries by fostering sustainable business practices and attracting green investment. - Climate Policy Initiative. Where Does Brazil Stand with the Implementation of the Forest Code? A Snapshot of CAR and PRA in Brazilian States – 2023 Edition Key finding: The report played an important role to understand the status of the Forest Code implementation by the subnational level, allowing to position Alagoas among them and understanding how they can improve their implementation, being CAR/PRA key instruments to do so. - Pinheiro, F. M. and Nair, P. K. R. (2018) “Silvopasture in the Caatinga biome of Brazil: A review of its ecology, management, and development opportunities”, Forest Systems, 27(1), p. eR01S. doi: 10.5424/fs/2018271- 12267 Key finding: The study recommends the development of more effective policies and practices such as the CAR/PRA for sustainable land management and monitoring in Caatinga to preserve the potential of native tree species and their associated ecosystem services. PA#7 - Katharina Schulz, Karsten Voigt, Christine Beusch, Jarcilene S. Almeida-Cortez, Ingo Kowarik, Ariane Walz, Arne Cierjacks, Grazing deteriorates the soil carbon stocks of Caatinga forest ecosystems in Brazil, Forest Ecology and Management, Volume 367, 2016, Pages 62-70, ISSN 0378-1127, https://doi.org/10.1016/j.foreco.2016.02.011. Key finding: The study acknowledges the urgent need of implementing an effective monitoring of land use and soil organic carbon stocks in Brazilian dry forest ecosystems, highlighting the importance of CAR/PRA policies for the Caatinga biome. - Miccolis A, Andrade RMT and Pacheco P. 2014. Land-use trends and environmental governance policies in Brazil: Paths forward for sustainability. Working Paper 171. Bogor, Indonesia: CIFOR. Key finding: The report highlights that reconciling agricultural production with conservation and rural livelihoods requires greater coordination — and harmonization — among sectoral land policies at various levels of government, including government’s implementation of the CAR/PRA in the Caatinga. - Política Nacional de Pagamento por Serviços Ambientais. https://www.planalto.gov.br/ccivil_03/_ato2019- 2022/2021/lei/l14119.htm Key finding: The cited law played a pivotal role in guiding the writing of the State Climate Change Act following national definition and goals. - MICCOLIS, A. et al. (2019) ‘RESTORATION THROUGH AGROFORESTRY: OPTIONS FOR RECONCILING LIVELIHOODS WITH CONSERVATION IN THE CERRADO AND CAATINGA BIOMES IN BRAZIL’, Experimental Agriculture, 55(S1), pp. 208–225. doi:10.1017/S0014479717000138. Key finding: The study highlights the potential of agroforestry systems to reconcile livelihood needs with PA#8 conservation goals in Brazilian rural areas, but emphasizes the need for clear state-level regulations and technical assistance to effectively implement these in restoration efforts. - Faggin, Joana Mattei, and Jelle Hendrik Behagel. “Institutional Bricolage of Sustainable Forest Management Implementation in Rural Settlements in Caatinga Biome, Brazil.” International Journal of the Commons 12, no. 2 (2018): 275–99. https://www.jstor.org/stable/26511529. Key finding: The study finds that the success of Sustainable Forest Management implementation in the Caatinga biome depends on the interplay between formal institutions and local practices, with positive outcomes emerging when environmental services supported by public institutions are grounded on local actors' specific social-ecological contexts. - Mattei Faggin, Joana, Jelle Hendrik Behagel, and Bas Arts. 2017. "Sustainable Forest Management and Social- Ecological Systems: An Institutional Analysis of Caatinga, Brazil" Forests 8, no. 11: 454. https://doi.org/10.3390/f8110454 Key finding: The study recommends a shift from existing modes of Sustainable Forest Management implementation in the Caatinga biome, previously driven by forest biomass production, often neglecting the needs of local communities, towards a community-centric and locally driven approach.