SIMULTANEOUS DISCLOSURE

DOCUMENT OF THE INTER-AMERICAN DEVELOPMENT BANK

BRAZIL

NATIONAL TOURISM DEVELOPMENT PROGRAM IN BAHIA (PRODETUR NACIONAL-BAHIA)

(BR-L1300)

LOAN PROPOSAL

This document was prepared by the project team consisting of: Adela Moreda (INE/RND) and Annette Killmer (RND/CBR), Project Team Co-leaders; Joseph Milewski (RND/CBR); Leonardo Corral (SPD/SDV); Andrés Consuegra (LEG/SGO); Fernando Glasman (FMP/CBR); Carlos Lago (FMP/CBR); Suzanne Casolaro (VPS/ESG); Denise Levy (VPS/ESG); Matias Bendersky (ORP/ORP); Fernanda Soares (ORP/ORP); and Rosario Gaggero (INE/RND).

This document is being released to the public and distributed to the Bank’s Board of Executive Directors simultaneously. The Board may or may not approve the document, or may approve it with modifications. If the document is subsequently updated, the updated document will be made publicly available in accordance with the Bank’s Access to Information Policy.

CONTENTS

PROJECT SUMMARY

I. DESCRIPTION AND RESULTS MONITORING ...... 1

A. Background, problems to be addressed, and rationale ...... 1 B. Objectives, components, and cost ...... 8 C. Key results indicators ...... 9

II. FINANCING STRUCTURE AND MAIN RISKS ...... 10

A. Financing instruments ...... 10 B. Economic viability ...... 10 C. Environmental and social safeguard risks ...... 11 D. Fiduciary and other risks ...... 11

III. IMPLEMENTATION AND MANAGEMENT PLAN ...... 13

A. Program execution and administration ...... 13 B. Monitoring and evaluation arrangements ...... 14

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ANNEXES Annex I Development Effectiveness Matrix (DEM) – Summary Annex II Results Matrix Annex III Fiduciary Agreements and Requirements

ELECTRONIC LINKS

REQUIRED 1. Annual work plan (AWP) http://idbdocs.iadb.org/wsdocs/getDocument.aspx?DOCNUM=36929692 2. Monitoring and evaluation plan http://idbdocs.iadb.org/wsdocs/getDocument.aspx?DOCNUM=36907949 3. Procurement plan http://idbdocs.iadb.org/wsdocs/getDocument.aspx?DOCNUM=36919043 4. Environmental and social management report (ESMR) http://idbdocs.iadb.org/wsdocs/getDocument.aspx?DOCNUM=36929269

OPTIONAL 1. Institutional capacity analysis http://idbdocs.iadb.org/wsdocs/getDocument.aspx?DOCNUM=36913834 2. Program economic analysis http://idbdocs.iadb.org/wsdocs/getDocument.aspx?DOCNUM=36913927 3. Investment matrix http://idbdocs.iadb.org/wsdocs/getDocument.aspx?DOCNUM=36914851 4. Financial analysis of the state http://idbdocs.iadb.org/wsdocs/getDocument.aspx?DOCNUM=36913850 5. PMR http://idbdocs.iadb.org/wsdocs/getDocument.aspx?DOCNUM=36929685

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ABBREVIATIONS

CAS Centro Antigo de Salvador [Old Town of Salvador] CHS Centro Histórico de Salvador [Historic City Center of Salvador] CONDER Companhia de Desenvolvimento Urbano do Estado [State Urban Development Company] EPA Environmental protection area ESMP Environmental and social management plan ESMR Environmental and social management report GDP Gross domestic product FIPE Fundação Instituto de Pesquisas Econômicas [Foundation of the Economic Research Institute] IBGE Instituto Brasileiro de Geografia e Estatística [Brazilian Geography and Statistics Institute] ICAS Institutional Capacity Assessment System IFDM FIRJAN Municipal Development Index IPAC Instituto do Patrimônio Artístico Cultural da Bahia [Bahia Institute of Artistic and Cultural Heritage] IPEA Instituto de Pesquisas Econômicas Aplicadas [Institute of Applied Economic Research] MTUR Ministry of Tourism OC Ordinary Capital PCU Program coordination unit PDITS Integrated Sustainable Tourism Development Plan PEP Program execution plan PMU Program management unit PRM Project risk management R$ Brazilian reais SEMA Secretaría do Meio Ambiente [Environment Department of the State of Bahia] SETUR Secretaría do Turismo [Tourism Department of the State of Bahia] SIET Sistema de Informações e Estatísticas Turísticas [Tourism Information and Statistics System] TCE Tribunal de Contas do Estado da Bahia [State Audit Court of Bahia] TSB Todos os Santos Bay [Baía de Todos os Santos, “All Saints Bay”] TTA Typical tourism activities UNWTO World Tourism Organization WAL Weighted average life

PROJECT SUMMARY

BRAZIL NATIONAL TOURISM DEVELOPMENT PROGRAM IN BAHIA (PRODETUR NACIONAL-BAHIA) (BR-L1300)

Financial Terms and Conditions Borrower: State of Bahia Flexible Financing Facility* Guarantor: Federative Republic of Brazil Amortization period: 25 years Executing agency: The borrower, acting through the Tourism Department of Original WAL 15.25 years the State of Bahia (SETUR) Disbursement period: 5 years Grace period: 66 months Source Amount (US$) % Interest rate: LIBOR-based IDB (OC) 50,822,905 60% Inspection and supervision fee: ** Local 33,881,936 40% Credit fee: ** Total 84,704,841 100% Currency: U.S. dollars from the Bank’s Ordinary Capital Program at a Glance Program objective: The general objective of the program is to help generate formal employment in Todos os Santos Bay (All Saints Bay, or TSB) through tourism activity. The specific objective is to use investments in cultural and nautical tourism segments to increase tourism spending in TSB. The program has five components: (i) tourism product strategy; (ii) tourism marketing strategy; (iii) institution- strengthening; (iv) basic services; and (v) socioenvironmental management. Special contractual conditions precedent to the first disbursement: SETUR will provide the following, on the terms previously agreed upon with the Bank: (i) the technical specifications of the Integrated Project Management System (see paragraph 2.4); (ii) evidence of formal establishment of the program coordination unit (PCU), and appointment of its general coordinator and other coordinators (see paragraph 3.1); (iii) the draft program Operations Manual (see paragraph 3.4); and (iv) evidence of publication of the expression of interest for selection of the management firm to support the PCU (see paragraph 3.2). Special execution conditions: On the terms previously agreed upon with the Bank: (i) prior to the first procurement process for goods, works, and nonconsulting services (a) award of the contract to the management firm to support the PCU (see paragraph 3.2); (b) issuance of the service order for adaptation of the Integrated Project Management System to the program (see paragraph 2.4); and (c) entry into force of the final version of the program Operations Manual, following the guidelines of the environmental and social planning and management manual and environmental and social management report (see paragraph 3.4); and (ii) prior to competitive bidding for the corresponding investments/works: (a) entry into force of the cooperation agreements between the borrower/SETUR and the relevant sector administration (see paragraph 3.3); and (b) entry into force of the cooperation agreements between the borrower/SETUR and the participating município (see paragraph 3.3). Exceptions to Bank policies: None. Project consistent with country strategy: Yes [X] No [ ] Project qualifies as: SEQ [X] PTI [X] Sector [ ] Geographic [X] Headcount [ ] * Under the Flexible Financing Facility (document FN-655-1), the borrower has the option of requesting changes to the amortization schedule, as well as conversions of currency and interest rate, subject in all cases to the final repayment date and the original weighted average life (WAL). The Bank will take market conditions and operational and risk management considerations into account when reviewing such requests. ** The credit fee and inspection and supervision fee will be established periodically by the Board of Executive Directors as part of its review of the Bank’s lending charges, in accordance with the applicable policies.

I. DESCRIPTION AND RESULTS MONITORING

A. Background, problems to be addressed, and rationale 1.1 Bahia, one of the nine states of Northeastern Brazil, recorded a significant increase in per capita income (46%) in 2004-2009, as well as a substantial improvement in its inequality indexes (poverty and extreme poverty rates fell by nearly 17 percentage points).1 Yet despite this, Bahia had the seventh highest poverty rate among Brazilian states in 2009, with twice the national average of extreme poverty2 (10.2% compared to 5.2%). In addition, the unemployment rate is above the national average (10.9% compared to a national rate of 7.6% in 2010).3 In this context, tourism is one of the economic options that the state is using to continue promoting income generation and job creation. 1.2 Opportunities. Bahia is already one of Brazil’s major tourism destinations. In 2011 the state received 11 million tourists, representing 11.6% of the country’s international tourist flows and 8.3% of domestic tourism. These figures put the state in fifth and fourth place, respectively, on the ranking of Brazil’s states in terms of tourist arrivals. These tourism flows generated total revenue of R$7 billion, equivalent to 7.5% of the state’s GDP.4 Tourism’s relative contribution to Bahia’s GDP is much greater than to national GDP (2.5%),5 highlighting the importance of the tourism business for the state. Bahia also leads the Northeast region in terms of both tourist arrivals and volume of offerings: in 2009 it accounted for 27% of tourism flows in the region,6 33% of hotel beds in the Northeast registered by the Ministry of Tourism (MTUR), and 31.6% of formal tourism jobs in the region.7 1.3 Bahia’s tourism business has been growing significantly: employment in tourism grew by 37% between 2002-2008, above the average rate of 24% for the Northeast region as a whole and for Brazil.8 With this growth, Bahia reached a total of 150,000 employees in the sector by 2008, equivalent to 7% of the country’s total tourism jobs. Moreover, tourism revenue generated in the state rose from US$5 billion to US$7 billion over the period 2008-2011. 1.4 The state has several opportunities to continue bolstering tourism in the near future: (i) Salvador has been selected as a host city for the 2014 Soccer World Cup and the soccer championships of the 2016 Olympic Games, both events which will spur demand and raise Bahia’s profile as a tourism destination; (ii) the Tourism

1 Abranhao, Instituto de Pesquisas Econômicas Aplicadas [Institute of Applied Economic Research] (IPEA). 2 Percentage of the population subsisting on a monthly income of less than R$70. Source: Abranhao, IPEA. 3 Instituto Brasileiro de Geografia e Estatística [Brazilian Geography and Statistics Institute] (IBGE). 4 Fundação Instituto de Pesquisas Econômicas [Foundation of the Economic Research Institute] (FIPE). 5 FIPE. 6 Fundação Comissão de Turismo Integrada do Nordeste do Brasil [Foundation of the Integrated Tourism Commission of Northeastern Brazil] (CTI/NE). 7 IPEA. 8 IPEA. - 2 -

Department (SETUR) forecasts that private investments in tourism will total US$5.7 billion between now and 2017 (generating an increase of 25% in hotel capacity, in the Todos os Santos Bay area alone); and (iii) tourism is state policy, as reflected in the Bahia Tourism Strategy for 2007-2016, which includes strengthening local inclusion, innovation, and development of tourism offerings as areas of major strategic focus. 1.5 Challenges. To capitalize on these opportunities, however, Bahia has to overcome a series of challenges in various aspects of the management of its tourist destinations, arising from a combination of market defects. a. Challenges for the tourism product strategy. Since the 1970s the state has been working with a sun and sand model of tourism based on the construction of large resorts/condo hotels and second homes along its coastline. This model has been the driver of Bahia’s positioning among Brazil’s main destinations. However, a number of indicators suggest that the current tourism portfolio should be diversified in order to make it more competitive: (i) The bulk of the area’s tourists are drawn from the surrounding region and inclined to spend less than those coming from further afield.9 Current demand is comprised mainly of the domestic market (94.9% of total arrivals in 2011) and tourists from nearby (50.7% of domestic visitors come from within the state). Despite providing the majority of visitors, local demand contributes only 28.7% of total revenue (compared with 60.8% of revenue generated by visitors from other states). International visitors, in turn, have much higher per capita spending than domestic tourists (R$1,315 compared with R$595), and their production multiplier is also higher (1.47 compared with 1.40).10 The lack of systematic and specialized information on demand preferences and determinants has, thus far, limited the ability to attract new segments inclined to spend more with greater potential to contribute to the local economy. (ii) The state’s cultural heritage is underutilized, as shown by the decline in international travel to the state capital for cultural reasons (between 2004 and 2010 it fell from 35.6% to 25.4% of the total),11 whereas only 15.3% of domestic visitors said culture was one of the main interests of their journey.12 This, despite significant public investments in recent decades to restore the architectural and cultural heritage of Salvador’s historic center, such as those under the Bank-supported “Monumenta” Program for the Preservation of Urban Historical and Cultural Sites (loan 1200/OC-BR), and the area’s being declared a UNESCO World Heritage Site.

9 FIPE, base year 2011. 10 Program economic assessment. 11 Ministry of Tourism, “Estudo de demanda turística internacional” [International tourism demand study], 2004-2010. 12 FIPE, 2011. - 3 -

Furthermore, formal employment in the culture/leisure subsector represents just 1.2% of total typical tourism activities (TTAs).13 (iii) Future mismatches between supply and demand for tourist accommodation should be prevented by diversifying visitors, particularly in view of the projected increase of the state’s capacity over the next few years. The number of hotel rooms grew at a brisk pace in 2002-2009 (35%).14 However, the consumption pattern of current demand is not going along with this growth: in 2004-2010 the percentage of foreigners staying at hotels/hostels in the capital shrank from 74.4% to 51.2%.15 According to FIPE data, the homes of friends or relatives were the accommodation option for nearly 40% of domestic visitors in 2011. These factors are influencing levels of hotel occupancy, which did not exceed 62% in 2002-2009.16 However, accommodation is the subsector that creates the highest volume of formal sector jobs (36.3% of total TTAs).17 Additionally, the program economic assessment (see paragraph 2.2) indicates that the production multipliers associated with tourists staying with friends or relatives tend to be lower than for those staying at tourist establishments (1.36 versus 1.44 for domestic tourists, and 1.43 versus 1.47 for international tourists). (iv) Lastly, the sector faces the structural problem of the high level of informal employment. This is a brake on innovation and improving the qualifications of human capital. The state has a level of informal work in tourism of 66%, with informal jobs being most prevalent in the food and drink subsector (83%). From 2002 to 2008, the level of formal employment in TTAs improved by just one percentage point.18 b. Challenges for the marketing strategy. The tourism industry is highly fragmented, making it difficult to offer visitors clear information. This problem is compounded by the lack of a strategic marketing plan to facilitate convergence between public and private tourism promotion investments in Bahia. According to 2011 FIPE data, an average of 57% of visitors were influenced in their travel decisions by comments from friends and relatives or prior knowledge of the state. This shows that current promotion/distribution channels have a low impact on travel decisions for current tourism demand (just 2.48% of all tourists were influenced by official websites). Implementing investment coordination and evaluation systems seems worthwhile.

13 Average annual data, IPEA, base year 2007. 14 CTI-NE (2009). 15 Ministry of Tourism, “Estudo de demanda turística internacional” [International tourism demand study], 2004-2010. 16 CTI-NE (2009). 17 IPEA, base year 2007. 18 IPEA. - 4 -

c. Challenges for tourism institutions. Cooperation with the private sector and between among levels of government needs to be strengthened, in order to facilitate the convergence of statistics and information required for tourism planning. Currently, this information is scattered among different sources and based on a mix of collection and analysis methods, as noted in a Bank-supported diagnostic assessment of the Bahia Tourism Information and Statistics System (SIET). There is also a significant gap in terms of impact evaluation of investments in the sector. d. Challenges for basic services. Despite the investment efforts and gains made in recent years, solid waste management remains a challenge for many municípios in Bahia, in terms of both coverage (20% of remote municípios have only partial coverage, and 13.4% have none) and methods of waste collection and final disposal (for example, just 6.7% of Bahia’s municípios have selective collection, just 26% of final disposal sites located in the municípios where the waste is collected have an operating license, and just 6.9% of these sites monitor groundwater quality, while 41% have no perimeter fence).19 These factors impact the population’s living standards and the perception of the quality of the destination: 50.3% of international tourists regard cleanliness as an area where Bahia could improve as a destination.20 e. Challenges for the socioenvironmental management of tourism. There is evidence of environmental degradation in certain tourist areas due to increasing demographic pressure, along with shortcomings in land use management of tourist areas (strategic environmental assessment). From the social standpoint, there are opportunities for strengthening supply chains in the tourism sector to foster local inclusion: a pilot study in São João on the tourism value chain shows that there is a flight of resources out of the area, despite the existence of local raw materials (for example, 79% of the seafood consumed in local hotels is imported from Pernambuco).21 The need to strengthen local inclusion in the tourism value chain is also seen in the Historic City Center of Salvador (CHS), currently an important tourist attraction, but where conditions of economic and social vulnerability persist as signs of the urgent need to bring the benefits of tourism to the most disadvantaged. Evidence of this can be seen in the low income levels (46% of the population in the city center lives on less than two times the minimum monthly wage)22 or the high levels of informality reflected in the absence of social safety nets (42.6% of employed CHS residents).

19 IBGE, “Pesquisa nacional de saneamento básico 2008” [National basic sanitation survey 2008]. 20 SETUR/FIPE 2011. 21 “Projeto da SETUR de fomento a criação de arranjos produtivos locais” [SETUR Project to promote the creation of local industry clusters]. 22 “Diagnóstico do CAS; Panorama geral da economia do centro antigo de Salvador” [Diagnostic assessment and economic overview of the Old Town of Salvador], 2009. - 5 -

1.6 The Bank’s sector experience and lessons learned The proposed program represents a continuation of the Bank’s support for tourism development in Brazil, which began in 1994 with approval of the first of two operations to promote socioeconomic development in the Northeast: the Northeast Tourism Development Program I (PRODETUR/NE I) (loan 841/OC-BR), with a cost of US$700 million and Bank financing of US$400 million. Based on this experience, the Bank approved PRODETUR/NE II (loan 1392/OC-BR) in March 2002, with the key objective of improving the quality of life of the population. The operation, with a total cost of US$400 million, has disbursed the entire US$240 million in Bank financing, and the states have committed the subloans (see “Technical Note on Tourism in Brazil”). In addition, the program of Support for the National Tourism Development Program (PRODETUR Nacional) (loan 2229/OC-BR), approved in November 2009 with Bank financing of US$15 million seeks to strengthen MTUR’s capacity to support state tourism planning and investment under a comprehensive national strategy. Bahia is the fourth state to prepare its PRODETUR program under the general guidelines produced in that operation. 1.7 With PRODETUR/NE I, Bahia invested US$246 million (Bank financing of US$140 million) in access infrastructure, basic sanitation, urban development of tourist areas, and environmental protection. Under PRODETUR/NE II, Bahia has executed a subloan through Banco do Nordeste for US$96 million (Bank financing of US$39 million). The resources have been devoted to access routes, restoration of environmental liabilities and architectural heritage, and sanitation expansions, as well as strengthening of municipal management and business capacity-building. The main lessons learned from the various assessments are described below, along with how they are integrated into the operation.

Lesson learned Reflected in program design Investments must be planned and The program is based on prior planning and incorporates an staggered to prevent and mitigate investment timeline: the Integrated Sustainable Tourism the adverse impacts from Development Plan (PDITS) for Todos os Santos Bay (TSB), accelerated tourism growth. TSB Nautical Tourism Plan, and Culture and Tourism Integration Program (ATN/JC-10081-BR). To prevent isolated, low impact The program prioritizes investments in cultural and nautical investments, projects must be part of tourism segments in one of the state’s 13 priority tourism a model targeted territorially and to areas (Todos os Santos Bay). specific demand segments. Tourism development must include An environmental and social management report establishes a tangible environmental guidelines and requirements for the program. A strategic commitment in both planning and environmental assessment of TSB has been done. investment. Environmental impact studies, supervision, and audits will be performed for works. The socioenvironmental management component (US$6.68 million) envisages specific measures. Tourism development programs The program includes investments to strengthen the Tourism must balance infrastructure Information and Statistics System and ensure correct decision- investments with local tourism making and impact assessment. governance. - 6 -

Diagnostic and impact assessments The program includes diagnostic assessments of the tourism help establish the relationship value chain for social inclusion of the most disadvantaged between tourism and poverty. groups and incorporates approaches on impact evaluation23 (see paragraph 3.6).

1.8 Program design. The program focuses on Todos os Santos Bay (TSB) as a geographic target area and a priority of the State Tourism Strategy. It encompasses 18 municípios (including the state capital) with a total of 3.4 million inhabitants (approximately one fourth of Bahia’s population), and its tourism potential is supported by an Integrated Sustainable Tourism Development Plan (PDITS). The state regards this potential as an effective tool to address TSB’s socioeconomic problems, a position supported by economic assessment of the program (see paragraph 2.2): (i) TSB has an average unemployment rate of 13.84%, above the state average (10.9%);24 (ii) TSB has high levels of extreme poverty: in 2010, just 2 of its 18 municípios recorded rates below 15% of the total population, with levels as high as 39.1% in the rural area of Maragogipe;25 and (iii) TSB is characterized by huge territorial imbalances, reflected in the disparity of its municipal development indexes.26 1.9 The program adopts a dual strategy to overcome the challenges related to Bahia’s tourism product: (i) the program will help diversify the current tourism portfolio by attracting new demand segments inclined to spend more, and new, more inclusive, patterns of tourism consumption; and (ii) the program will promote human resource training with a special focus on the formalization of employment in tourism. To achieve the proposed diversification, the program will support efforts to foster cultural and nautical tourism in TSB. 1.10 In the area of cultural tourism, the program is supported by a diagnostic assessment performed with Bank support (ATN/JC-10081-BR), which identified a lack of collaboration between local cultural agents and tourism operators in Bahia’s cultural tourism offerings, which limits the opportunities to capture more income from tourism and actively experience Bahia’s cultural assets (especially the intangible assets). In the specific case of the Historic City Center of Salvador (CHS), there is a problem of sustainability of the architectural restoration efforts in the last few years, since on occasion these interventions have broken preexisting sociocultural bonds.27 Moreover, a 2009 diagnostic assessment on the cultural businesses and facilities in Salvador’s Old Town (CAS) concluded that serious

23 Winters, P., L. Corral, A. Moreda, “Assessing the role of tourism in poverty alleviation: A research agenda.” Forthcoming in Development Policy Review. 24 IBGE, 2010 data. 25 IBGE. 26 Bahia Superintendency for Economic and Social Studies (SEI). 27 Azcona, 2010, “Transformaciones, conflictos e identidades en el centro histórico de Salvador de Bahia” [Transformations, conflicts, and identities in the Historic City Center of Salvador, Bahia]. - 7 -

deficiencies persist in its tourism management. Thus, the program will strengthen Bahia’s cultural tourism offerings by organizing and managing the traditional cultural product in Salvador and promoting creative cultural tourism in TSB as a whole. This mode of tourism, which is booming in major international cultural capitals,28 involves an experiential component based on tangible as well as intangible assets. Creative cultural tourism will foster direct participation by TSB’s visitors in a diverse range of creative and artistic activities. It will optimize the use of existing facilities, structured around actors not traditionally integrated into the tourism value chain (such as local artists, indigenous and Afro-Brazilian communities with unique cultural practices), and it will attract tourists who are inclined to spend more than tourists with more general interests.29 1.11 In the area of nautical tourism, the program is supported by the Nautical Tourism Strategic Plan for Todos os Santos Bay (TSB), which identifies the potential for strengthening nautical tourism and attracting new demand segments. Thus, the program proposes to coordinate innovative nautical products/circuits in TSB. Nautical tourism offers significant advantages as a means of tourism diversification, since it allows remote locations to be reached that lack other types of access infrastructure, and can be broken out into different types of tourism products, both on the water and on shore, opening up a wide range of market niches for a great variety of interests (recreational sailing, water sports, cultural interests, etc.). Indeed, the program puts special emphasis on the integration of cultural offerings with the proposed nautical circuits, in order to add new geographical areas and local actors in TSB to the tourism value chain. The proposed program reflects various international experiences that offer empirical evidence of the potential positive impacts of nautical tourism at local level, as well as the supply and demand data provided by the nautical plan and government statistics, including average spending by domestic nautical tourists (R$1,791 compared with R$1,079 for generalist tourists).30 1.12 Consistency with the Bank’s country strategy and GCI-9. The program is consistent with the Bank’s country strategy with Brazil for the period 2012-2014 (document GN-2662-1), inasmuch as making the TSB more competitive as a tourism destination contributes to the objective to promote development through the private sector, fostering social and territorial equity, and its results indicators are an increase in formal employment and tourism spending. The program will contribute to the following GCI-9 lending targets: (i) poverty reduction and equity enhancement, by focusing interventions on municípios with a development index below the national municipal average (FIRJAN-IFDM index);31 and (ii) support for climate change initiatives and environmental sustainability, by strengthening

28 www.creativetourismnetwork.org, UNESCO Creative Tourism. 29 See Study of Cultural Tourism and other international experiences. 30 FIPE 2011. 31 2009 Data. Average FIRJAN Municipal Development Index (IFDM) for Brazil = 0.7603. Average IFDM index for TSB = 0.7364. - 8 -

environmental management of TSB municípios (see paragraph 1.14.e). The program is also consistent with two of the Bank’s sector priorities: (i) social policy for equity and productivity, through its regional development goal of increasing the share of formal employment in total employment, and its output of the number of jobs added to the formal sector; and (ii) protect the environment, respond to climate change, promote renewable energy, and ensure food security, through its regional development goal of increasing the proportion of terrestrial and marine areas protected to total territorial area, and its output of the number of projects with components contributing to improved management of terrestrial and marine protected areas, by strengthening municipal environmental management of the TSB Environmental Protection Area (which encompasses 80% of TSB’s total area). B. Objectives, components, and cost 1.13 Objectives. The general objective of the program is to help generate formal employment in Todos os Santos Bay (All Saints Bay, or TSB) through tourism activity. The specific objective is to use investments in cultural and nautical tourism segments to increase tourism spending in TSB. 1.14 Components. To achieve these objectives and address the challenges identified in Bahia’s tourism sector, the program will finance studies, final designs, works, equipment, and technical assistance, grouped into five components: a. Component 1. Tourism product strategy (US$54.36 million). This component seeks to diversify the current offerings, as measured by the increase in the number of nautical and cultural tourism providers in TSB. It comprises investments to generate new nautical and cultural tourism options, including: (i) restoration and construction of a network of boating facilities at various strategic points in TSB (boat centers and a group of small structures for mooring and tourist access to points of interest, such as ramps, quays, and jetties), and deployment of a comprehensive nautical beacon system; (ii) organization of a cultural district, structured around cultural corridors that include the local communities as providers of new cultural tourism products and a uniform system of signage and interpretation in the CHS and at other points of TSB; (iii) restoration and development of key heritage resources along the cultural corridors, such as the Black Culture Documentation and Memory Center; (iv) urban renewal and landscaping in degraded areas at key TSB destinations; (v) a network of tourist assistance points in TSB, (vi) diagnosis of the causes, and design of incentives to reduce the informal employment existing in the private sector; and (vii) support for professional and business training, as well as entrepreneurship in the two prioritized types of tourism (nautical and cultural), so as to promote new formal jobs in the sector. b. Component 2. Marketing strategy (US$10.35 million). This component seeks to make the state’s tourism promotion more effective, as measured by an increase in the proportion of tourists influenced by the official tourism - 9 -

website. This includes actions to burnish the state’s tourism image in new outbound markets (with emphasis on nautical and cultural segments). This component will finance the preparation of a tourism marketing strategic plan and implementation of its first work plan, as well as a system for monitoring and evaluation of the outcomes achieved. c. Component 3. Institution-strengthening (US$6.28 million). This component focuses on strengthening interagency coordination at the state and municipal level and improving the quality of the basic information available to measure and analyze tourism activity in Bahia. This will be measured by the number of statistical operations, following the international recommendations of the World Tourism Organization (UNWTO), to ensure data comparability. Activities will include: actions to strengthen the Bahia Tourism Information and Statistics System (SIET), an institutional strengthening project for SETUR, strengthening plans for municipal tourism management, and training of public managers. d. Component 4. Basic services (US$2.4 million). The success of this component will be measured by the reduction in the percentage of tourists mentioning cleanliness of the destinations as a negative aspect of their visit in the surveys conducted periodically by SETUR. The component includes the preparation and implementation of a Solid Waste Management Plan. e. Component 5. Socioenvironmental management (US$6.68 million). This component seeks to mitigate the socioenvironmental challenges identified, as measured by of the number of municípios that include a system of tourism- related socioenvironmental indicators in their management model. The component contributes directly to the conservation and protection objectives of State Decree 7595/1999 establishing the TSB Environmental Protection Area EPA. Activities will include: (i) implementation of the strategic environmental assessment’s recommendations, including those related to the creation of municipal systems for socioenvironmental monitoring of tourism activities; (ii) environmental supervision of selected works and regular environmental audits; (iii) environmental education and awareness activities at the local level; (iv) social inclusion actions through the strengthening of local offerings in the tourism value chain, and support for vulnerable children/teens in the Historic City Center of Salvador (CHS). 1.15 Program cost and financing. The total cost of the program is US$84.7 million. The Bank will finance US$50.82 million (60%) of that amount with Ordinary Capital resources. The Government of the State of Bahia will contribute the local counterpart of US$33.88 million equivalent (40%) (see Table I-1) C. Key results indicators 1.16 Based on the indicators proposed in the Bank’s country strategy with Brazil (document GN-2662-1) and the objectives pursued by the program, the results are expected to be measured in terms of the increase in formal employment in Todos os - 10 -

Santos Bay, as a marginal effect of increased tourism spending. The Results Matrix (Annex II) agreed upon with the executing agency shows a breakdown of outcome and output indicators with intermediate and final targets.

Table I-1 Program cost and financing (US$ millions) Local Investment component IDB Total % contribution I. Program administration 2.10 1.40 3.50 4.13 II. Direct costs 48.04 32.03 80.07 94.53 2.1 Tourism product 32.62 21.74 54.36 64.18 2.2 Marketing 6.21 4.14 10.35 12.22 2.3 Institution-strengthening 3.77 2.51 6.28 7.41 2.4 Basic services 1.44 0.96 2.40 2.83 2.5 Socioenvironmental management 4.00 2.68 6.68 7.89 III. Monitoring, evaluation, and audits 0.36 0.24 0.60 0.71 IV. Contingencies 0.32 0.21 0.53 0.63 V. Finance charges* 0.00 0.00 0.00 0.00 Total 50.82 33.88 84.70 100 Percentage 60 40 100 - * The finance charges, interest, and credit fee will be paid by the Borrower outside the program.

II. FINANCING STRUCTURE AND MAIN RISKS

A. Financing instruments 2.1 The program is structured as a multiple works loan, to be executed over five years with the following disbursement schedule:

Table II-1. Disbursement schedule (%) Source Year 1 Year 2 Year 3 Year 4 Year 5 IDB/CP 7% 26% 26% 23% 18%

B. Economic viability 2.2 The program seeks to expand the revenue generated by the tourism industry in Todos os Santos Bay (TSB). To estimate the full spectrum of direct, indirect, and induced socioeconomic impacts foreseen for the TSB zone, an integrated modeling system was used to generate time scenarios in the period 2013-2027, taking an interregional computable general equilibrium model as its central core. The program’s potential impacts are estimated on the basis of marginal deviations of GDP from the baseline trend in the TSB zone, supported by tourist flow matrices and spending profile estimates for domestic and international tourists, as well as the average length of stay. The ex ante economic analysis confirms that, even in a conservative scenario (i.e., one in which the program achieves a gradual increase in - 11 -

expenditure on excursions and visits to tourist attractions from 2018 onward, rising from 7.51 days to 8.00 for domestic tourists and from 13.87 to 14.00 for international tourists), the program will generate an incremental GDP flow in Bahia equivalent to R$294 million (2007, discounted at 12% per annum). Offsetting the present value of the costs (investment, operation, and maintenance) against the present value of benefits yields an internal rate of return (IRR) of 24%. Microsimulations performed in the evaluation also showed that the program will help reduce poverty: taking the same conservative scenario as above, the poverty rate falls from 24.15% (initial condition without the program) to 23.71% in 2027, representing a significant reduction of 1.8%. C. Environmental and social safeguard risks 2.3 The operation is classified as category “B” under the Bank’s Environment and Safeguards Compliance Policy (Operational Policy OP-703). The team reviewed the socioenvironmental aspects of the operation in the light of applicable legislation, the findings of the strategic environmental assessment, and the Bank’s safeguard policies, and identified the specific oversight, management, and mitigation measures to be applied during execution. The program has a comprehensive component on socioenvironmental management (US$6.68 million) to ensure resources for effective works supervision and oversight measures, strengthening of monitoring through a system of socioenvironmental indicators, socioenvironmental education programs, inclusion of informal solid waste recyclers and other local actors in the tourism value chain, and a social project for vulnerable children and youth in the Historic City Center of Salvador (CHS). As established for the PRODETUR Nacional operations as a whole, program investments will be planned, designed, and implemented in accordance with the requirements and guidelines of the socioenvironmental planning and management manual, attached as an annex to the Operations Manual, which consolidates all instructions and requirements of the applicable Bank policies, as well as the specific requirements for works in the technical annexes to the program Operations Manual. The environmental and social management report (ESMR) presents the environmental assessment findings in greater detail, along with the recommended environmental and social management plan (ESMP) for the program. D. Fiduciary and other risks 2.4 The institutional capacity of the Tourism Department of the State of Bahia (SETUR) as executing agency was assessed using the Institutional Capacity Assessment System (ICAS). Its weighted risk on the ICAS dimensions analyzed is medium. The main mitigation measures adopted are: (i) introduction of an integrated project management system including a financial and accounting management module to ensure that the budgetary and financial functions of the program coordination unit (PCU) comply with the Bank’s accountability requirements; (ii) executing agency capacity building in the Bank’s fiduciary management policies and procedures; (iii) strengthening of SETUR’s planning, monitoring and supervision processes; and (iv) hiring of additional staff to - 12 -

strengthen the PCU with the qualifications agreed upon with the Bank. SETUR will provide, on the terms previously agreed upon with the Bank: (i) the technical specifications of the Integrated Project Management System, as a condition precedent to the first disbursement; and (ii) issuance of the service order for adaptation of the Integrated Project Management System to the program, prior to the first procurement process for goods, works, and nonconsulting services, as a special execution condition. In addition, risks were identified using the Bank’s new guidelines on project risk management (PRM) in sovereign guaranteed projects. The main risks identified are a degradation of the TSB’s environmental quality and coordination difficulties that may arise between SETUR and other strategic actors. The Risk Matrix describes the corresponding mitigating measures, which include the design of the socioenvironmental management component and the signature of participation agreements between SETUR and other sector administrations and the municípios taking part in the program, as well as the respective monitoring indicators and parties responsible for supervision and implementation. 2.5 Audits. External control will be exercised by the State Audit Court of Bahia (TCE), as authorized by the Bank. The program will deliver financial statements to the Bank on an annual basis, duly audited by TCE. The reports and opinions issued must follow the rules established by the IDB for external audits in terms of their content, and must be delivered within 120 days after the close of the fiscal year. 2.6 Procurement. Program goods, works, and services will be procured in accordance with the Bank policies established in documents GN-2349-9 and GN-2350-9, approved in March 2011, as indicated in Annex III (Summary Procurement Plan). The first relevant processes indicated in the Procurement Plan, financed in whole or part by the Bank and regardless of their value, as well as all processes whose estimated cost exceeds the thresholds for international competitive bidding and all direct contracting processes, will be subject to ex ante review until such time as the Bank authorizes the transition to an ex post procedure. 2.7 The state’s financial position and recognition of expenditures. The analysis shows that the State Government of Bahia has pursued a sound fiscal policy over the last five years, and there is sufficient leeway to assume this loan. Recognition of expenditures against the counterpart is envisaged for a value of US$580,000, incurred for actions integrated in the TSB Integrated Sustainable Tourism Development Plan (PDITS), provided that requirements substantially analogous to those established in the loan contract have been met. Recognition of expenditures will apply only to expenditures incurred subsequent to the project profile approval date (8 March 2012), and will not in any event include expenditures incurred more than 18 months prior to the loan approval date. - 13 -

III. IMPLEMENTATION AND MANAGEMENT PLAN

A. Program execution and administration 3.1 The borrower will be the State of Bahia. The executing agency will be the borrower, acting through the Tourism Department of the State of Bahia (SETUR). SETUR will execute the program activities through a program coordination unit (PCU) reporting directly to the State Secretary of Tourism, with responsibility for the general administration, supervision, and evaluation of the program. Other sector administrations such as the Environment Department (SEMA), the Urban Development Company (CONDER) or the Institute of Artistic and Cultural Heritage (IPAC), as well as the beneficiary municípios, will participate in the preparation, competitive bidding, supervision, operation, and maintenance of the various investments under their responsibility. Civil society will play the same active role during execution as it did in preparing the operation, working through the State Tourism Forum. The PCU will have the following responsibilities: (i) ensure that the contractual conditions are met; (ii) deliver work plans for execution and competitive bidding processes; (iii) prepare the required reports; (iv) disseminate program outcomes and monitoring and evaluation reports; (v) submit disbursement requests to the Bank with the proper supporting documentation; and (vi) maintain the program financial/accounting system in accordance with Bank policies. The PCU will have: (i) a general coordinator; (ii) an administrative and financial coordinator; (iii) a tourism coordinator; (iv) a procurement and contracting coordinator; (v) an infrastructure and basic services coordinator; (vi) a socioenvironmental coordinator; (vii) a planning and institutional advisor; and (viii) administrative support. As a condition precedent to the first disbursement, SETUR will provide evidence of formal establishment of the PCU, and appointment of its general coordinator and other coordinators. 3.2 A management firm will assist the PCU, the sector administrations, and beneficiary municípios with technical, administrative, financial, and competitive bidding procedures, as well as program supervision (including works execution and supervision). SETUR will provide evidence of the following, on the terms agreed upon with the Bank (i) publication of the expression of interest for selection of the management firm to support the PCU, as a condition precedent to the first disbursement; and (ii) prior to the first procurement process for goods, works, and nonconsulting services, award of the contract to the management firm to support the PCU, as a special execution condition. 3.3 The sector administrations will provide SETUR with technical support in their respective areas of activity for: (i) preparation of studies and designs; (ii) competitive bidding processes; (iii) technical and environmental supervision of works; and (iv) acceptance, operation, and maintenance of works upon completion. The entry into force of the cooperation agreements between the borrower/SETUR and the relevant sector administration prior to competitive bidding for the corresponding investments/works, on terms previously agreed upon with the Bank, - 14 -

will be a special execution condition. The program beneficiary municípios must formalize their participation through cooperation agreements. Their responsibilities will include: (i) possession of legal title to the land where the works are to be built; (ii) cooperation to obtain authorizations and permits, and in other formalities; (iii) provision of free access to the works sites for SETUR, construction firms, external auditors, and the Bank; and (iv) proper operation and maintenance of the assets within their jurisdiction. The entry into force of the cooperation agreements between the borrower/SETUR and the participating município prior to competitive bidding for the corresponding investments/works, on terms previously agreed upon with the Bank, will be a special execution condition. 3.4 Program Operations Manual. Program execution will be governed by the program Operations Manual, which establishes procedures and responsibilities for project cycle participants, including: (i) preparation and approval of tourism plans; (ii) formulation of projects; (iii) technical review; and (iv) works supervision. The program Operations Manual establishes rules and procedures for the programming of activities, financial management, procurement, contracting, audits, and monitoring and evaluation. SETUR will provide the following, on the terms agreed upon with the Bank: (i) the draft program Operations Manual, as a condition precedent to the first disbursement; and (ii) evidence of entry into force of the final version of the program Operations Manual, following the guidelines of the environmental and social planning and management manual and environmental and social management report, prior to the first procurement process for goods, works, and nonconsulting services, as a special execution condition. B. Monitoring and evaluation arrangements 3.5 The program has a monitoring and evaluation plan agreed upon with SETUR and incorporated into the budget, which includes: (i) indicators for monitoring and evaluation of the program’s impact, baseline, and means of establishing the baseline; (ii) the critical path for activities and outputs; (iii) timetable and the parties responsible for monitoring; and (iv) methodology, activities, and budget. The plan follows the Bank’s Technical Guidelines (document IDB/TN-229) for the assessment of tourism impacts. 3.6 SETUR will deliver a status report annually within 60 days after the end of each six-month period, focusing on the progress of activities, output and outcome indicators met, issues encountered, and measures adopted. The reports for the second half of the year will contain the annual work plan (AWP) for the following year and an updated procurement plan. SETUR will deliver a preliminary evaluation report within 18 months after the effective date of the loan contract; a midterm evaluation report within 90 days after the date on which 50% of the loan proceeds have been committed; and a final evaluation report within 90 days after the date on which 90% of the proceeds have been disbursed. These reports will include: (i) financial execution by component and source of financing; (ii) outputs, outcomes, and impacts achieved; (iii) effectiveness in application of the Operations Manual; (iv) fulfillment of contractual clauses; and (v) outcomes of financial audits, - 15 -

procurements, disbursements, and internal control. The final evaluation report will include measurement of the intertemporal impact on the local economy. The evaluations will be independent and financed with the loan proceeds.

Annex I - BR-L1300 Page 1 of 1

Development Effectiveness Matrix Summary I. Strategic Alignment 1. IDB Strategic Development Objectives Aligned (i) Lending for poverty reduction and equity enhancement, and (ii) Lending to support climate Lending Program chance initiatives, renewable energy and environmental sustainability. (i) Share of formal employment in total employment, and (ii) Proportion of terrestrial and marine Regional Development Goals areas protected to total territorial area (%). (i) Number of jobs added to formal sector, and (ii) Number of projects with components Bank Output Contribution (as defined in Results Framework of IDB-9) contributing to improved management of terrestial and marine protected areas. 2. Country Strategy Development Objectives Aligned The intervention contributes to the development of the private Country Strategy Results Matrix GN-2662-1 sector, and the development through the competitiveness of Brazilian tourism. The intervention is included in the 2013 Country Program Country Program Results Matrix GN-2696 and CP-3463-1 Document. Relevance of this project to country development challenges (If not aligned to country strategy or country program) II. Development Outcomes - Evaluability Highly Evaluable Weight Maximum Score 9.4 10 3. Evidence-based Assessment & Solution 10.0 33.33% 10 4. Ex ante Economic Analysis 10.0 33.33% 10 5. Monitoring and Evaluation 8.1 33.33% 10 III. Risks & Mitigation Monitoring Matrix Overall risks rate = magnitude of risks*likelihood Medium Identified risks have been rated for magnitude and likelihood Yes Mitigation measures have been identified for major risks Yes Mitigation measures have indicators for tracking their implementation Yes Environmental & social risk classification B IV. IDB´s Role - Additionality Financial Management: Budget, Treasury, External control, and Internal audit. The project relies on the use of country systems (VPC/PDP criteria) Yes Procurement: Information System, Shopping Method and National Public Bidding. The project uses another country system different from the ones above for implementing the program The IDB’s involvement promotes improvements of the intended beneficiaries and/or public sector entity in the following dimensions: Gender Equality Activities to reduce informality in the tourism sector and Labor Yes promote new formal occupations in Tourism Activities.

Component of Socio-Environmental Management that will strengthen the environmental management of municipalities Environment Yes linked to Environmental Protection Area of the Bay of All Saints (which represents 80% of the total surface area of beneficiaries).

IO focused on identifying investment integration between tourism and cultural production in the area benefiting from the Additional (to project preparation) technical assistance was provided to the public sector Yes project (ATN/JC-10081-BR) and additionally the Bank hired a entity prior to approval to increase the likelihood of success of the project consultant who conducted a comprehensive assessment on the information system and state tourism statistics.

The ex-post economic evaluation will expand the knowledge of the structure of the tourism sector in the area benefit from the program and its links to the state economy. Also, it is expected The ex-post impact evaluation of the project will produce evidence to close knowledge gaps Yes that ex-post evaluation will provide empirical evidence on in the sector that were identified in the project document and/or in the evaluation plan explicit multipliers of tourism related to tourist segments with different consumption patterns and their impact on households of local communities who benefit from the program.

The project document provides a thorough diagnosis of the challenges associated with promoting tourism in Bahía. Although the project is part of a general strategy for promoting tourism within Brazil that the Bank is supporting, the analysis includes an empirical diagnosis of the particular issues facing the State of Bahía. Further, analyses have been recently completed to identify both constraints to and the potential for tourism in the state with support of the Bank. (Plan de Desarrollo Integrado de Turismo Sustentable del Polo BTS (PDITS), el Plan de Turismo Náutico de BTS y el Programa de Integración de Cultura y Turismo en Bahía). The diagnosis brings together these elements into a coherent project. Since this analysis is well done, it provides an empirical assessment of the issues and potential solutions, and offers a clear justification for the project.

The Results Matrix reflects the objectives and sets of activities in the project and has a clear vertical logic. Key higher-level indicators have values that are a product of a careful ex ante economic analysis. Lower level indicators reflect the project design. Values are provided and the means of collecting the information are noted.

The project has a complete economic analysis that uses a disaggregated computable general equilibrium model to assess the impact of the project in expanding tourism on the Bahian economy. The economic analysis is detailed and well documented. It moves beyond standard models done in other tourism projects by disaggregating the impacts of different types of tourists (national and international as well as by types of lodging) and by simulating the impact the project will have on poverty. A key issue in an economic analysis is that it often fails to consider the distributional effects of programs and this latter element of the ex ante analysis of simulating poverty effects is an important addition. The economic analysis appears to have helped in designing the project.

For the evaluation plan, the project team proposes following the guidelines on evaluating tourism projects developed in conjunction with SPD. This has been used in other tourism projects in Brazil and elsewhere, and is considered the best practice for this type of project. Following the guidelines, data will be collected on households, firms and tourists and a simulation model will be employed. Plans are included for how to implement the evaluation and the project meets the requirements for a non-experimental approach to evaluation. It also proposes that an ex post cost-benefit analysis be conducted using the results of the evaluation. If properly executed, it should be possible to do a high quality evaluation of the project after implementation. Annex II Page 1 of 9

RESULTS MATRIX

Program general objective Increase formal employment in the program’s beneficiary area of Todos os Santos Bay (All Saints Bay, or TSB).

Program purpose Increase tourism spending by better utilizing the TSB’s nautical and cultural heritage through the design and marketing of new tourism products, institution-strengthening, and improved basic services and socioenvironmental management.

Outcome indicators Baseline Target Program Objective 2010: 72,753 people formally employed in TTA jobs in 2018: 1,615 additional people formally employed in TTA jobs as a Increase formal employment in the program’s TSB. direct result of the program in TSB. beneficiary area (TSB). Source: Bahia Superintendency of Economic and Social Source: Ex ante economic evaluation of the program (conservative Indicator Studies (SEI) scenario 2A). Number of people formally employed in typical tourism activities (TTA) in the program’s beneficiary Means of verification: Ex post evaluation of the program; SEI data. area (TSB). Program purpose 2007 (base year without the program 2007, which is the 2018 Increase tourism spending. only year for which data are available for the program Domestic tourists: R$97.50 target area; the rest of the available data is for the state The program seeks to guarantee the logarithmic growth trend in the Indicator as a whole): program’s beneficiary area (TSB). Average daily spending per capita by tourists in the program’s beneficiary area (TSB). Domestic tourists: R$90.18 International tourists: R$139.70 International tourists: R$138.33 Daily spending per capita by international tourists declined 24% between 2007 and 2011 for the state as a whole. The program seeks Source: Ex ante economic evaluation of the program to maintain spending in TSB at 2007 levels with an increase of just 1% by program year 5.

Means of verification: SETUR/FIPE surveys of inbound and domestic tourism; Ex post evaluation of the program.

Annex II Page 2 of 9

Component 1. Tourism Baseline Year 1 Year 2 Year 3 Year 4 Year 5 Target Remarks product strategy Outcome Number of Number of Total number of Frequency of Diversification of tourism Number of nautical additional additional nautical tourism measurement offerings through nautical tourism providers: nautical tourism nautical tourism providers: 12 From year 4 and creative cultural 6 providers: 2 providers: 4 tourism products in TSB. Total number of Source and Number of creative Number of Number of creative cultural means of Indicator cultural tourism additional additional tourism verification: Number of nautical and providers: 0 creative cultural creative cultural providers: 10 SUINVEST and program creative cultural tourism tourism tourism providers in TSB. Source: providers: 4 providers: 6 status reports SUINVEST Responsibility (SETUR) 2011 PCU

Output 1.1 Identification Secondary data on Market study on Secondary data Frequency of of target outbound nautical demand nautical updated with measurement segments and portfolio of demand market study on Year 1 priority boating products. Source: Nautical prepared using nautical tourism plan primary sources demand Means of Indicator prepared using verification Market study on nautical primary sources PCU progress demand prepared using reports primary sources. Responsibility PCU Output 1.2 22 boating 2 civil works for 6 civil works 2 civil works for 6 civil works for At least 16 civil Frequency of Construction of a network facilities in TSB boating facilities for boating boating facilities boating facilities works for measurement of boating facilities at completed facilities completed completed additional Annual strategic points in TSB for Source: Nautical completed boating use on tourist routes. tourism plan facilities built in Means of TSB. verification Indicator PCU progress Number of civil works Total of reports related to boating 38 boating Responsibility facilities completed in facilities in TSB PCU TSB. Annex II Page 3 of 9

Component 1. Tourism Baseline Year 1 Year 2 Year 3 Year 4 Year 5 Target Remarks product strategy Output 1.3 0 2 program 6 program 2 program 6 program 100% of Frequency of Nautical beaconing in boating facilities boating boating facilities boating facilities program measurement TSB. with beacons facilities with with beacons with beacons boating Annual from beacons facilities with year 2 Indicator beacons Number of program Means of boating facilities with verification beacons. PCU progress reports Responsibility PCU Output 1.4 Market study on Secondary data Frequency of Identification of target Secondary data on cultural demand updated with measurement outbound segments and cultural demand prepared using market study on Year 1 portfolio of priority primary sources cultural demand cultural products. Source: Program prepared using Means of for Culture and primary sources verification Indicator Tourism PCU progress Market study on cultural Integration in reports demand prepared using Bahia (ATN/ Responsibility primary sources. JC-10081-BR) PCU

Output 1.5 0 At least At least At least At least At least Frequency of Tourism signage and 2 municípios 2 municípios 2 municípios 2 municípios 8 municípios measurement interpretation at strategic receive program receive program receive program receive program receive program Annual from points for cultural tourism investments for investments for investments for investments for investments for year 2 in TSB. tourism tourism tourism tourism tourism interpretation interpretation interpretation interpretation interpretation Means of Indicator verification Number of municípios PCU progress with program investment reports for tourism interpretation. Responsibility PCU Annex II Page 4 of 9

Component 1. Tourism Baseline Year 1 Year 2 Year 3 Year 4 Year 5 Target Remarks product strategy Output 1.6 0 10 viable 10 viable 10 viable 10 viable At least Frequency of Support for business plans business plans business plans business plans 40 viable measurement entrepreneurship and prepared, and prepared, and eligible for prepared, and business plans Annual from vocational training in 50 people 50 people financing, and 50 people prepared, and year 2 nautical and cultural qualified in qualified in 50 people qualified in 200 people tourism. nautical/cultural nautical/cultural qualified in nautical/cultural qualified in Means of tourism tourism nautical/cultural tourism nautical/cultural verification Indicator professions professions tourism professions tourism PCU progress Number of viable professions professions reports business plans and people Responsibility qualified in nautical/cultural tourism PCU professions. Output 1.7 0 Urban renewal Restoration of Establishment of At least Frequency of Restoration and and development Wanderley Black Culture 3 strategic measurement development of resources of Rua Chile Pinho Museum Documentation works for Annual from of interest for cultural area (in in Candeias and Memory cultural tourism year 2 tourism. Salvador) Center in completed in Cachoeira TSB (1 in Means of Indicator Salvador, 1 in verification Number of strategic Cachoeira, 1 in PCU progress works for cultural tourism Candeias) reports completed in TSB. Responsibility PCU Output 1.8 0 Study of causes Study of causes Frequency of Identification of causes of informal of informal measurement contributing to informal employment in employment in Year 2 employment in tourism in tourism and tourism and TSB. formalization formalization Means of incentives incentives verification Indicator strategy strategy PCU progress Study of causes of developed developed reports informal employment in Responsibility tourism and formalization PCU incentives strategy developed.

Annex II Page 5 of 9

Component 2. Baseline Year 1 Year 2 Year 3 Year 4 Year 5 Target Remarks Tourism promotion Outcome 2.48% of total 3% of total 4% of total 5% of total At least 5% of Frequency of More effective tourism Bahia tourists are Bahia tourists Bahia tourists are Bahia tourists are total Bahia measurement promotion by the state. influenced by the are influenced influenced by the influenced by the tourists are Annual from official tourism by the official official tourism official tourism influenced by year 3 Indicator website tourism website website website the official Percentage of tourists tourism website Means of influenced by the official Source: verification tourism website. SETUR/FIPE, PCU progress 2011 (Report on reports and the features of SETUR domestic and reports on inbound tourism) inbound and domestic tourism Responsibility PCU Output 2.1 0 Strategic and First year of Second year of Third year of Strategic and Frequency of Strengthening the state operational operational operational operational operational measurement and TSB communication/ tourism tourism tourism tourism tourism From year 2 promotion strategy. marketing plan marketing plan marketing plan marketing plan marketing plan (for 3 years) implemented implemented, implemented, (for 3 years) Means of Indicator prepared and results of and results of implemented, verification Strategic and operational first year second year and results PCU progress tourism marketing plan measured measured measured reports (for 3 years) Responsibility implemented, and results PCU measured.

Annex II Page 6 of 9

Component 3. Institution- Baseline Year 1 Year 2 Year 3 Year 4 Year 5 Target Remarks strengthening Outcome 1 tourism 1 tourism At least 2 tourism Frequency of Improvement of the quality 0 statistical statistical statistical measurement of the information available operation in line operation in line operations in line Annual from to measure and analyze with UNWTO with UNWTO with UNWTO year 3 tourism activity in Bahia. recommendations recommendations recommendations (1. domestic Means of Indicator tourism; verification Number of tourism 2. Inbound PCU progress statistical operations tourism). reports and performed under SETUR report international on operations recommendations of the Responsibility World Tourism Organization (UNTWO). PCU Output 3.1 0 At least At least At least Frequency of Management strengthening 10 professional 10 professional 40 SETUR and measurement of SETUR and Bahiatursa. staff provided staff provided Bahiatursa Years 1 and 2 with new with new professional staff of execution Indicator equipment equipment provided with Number of SETUR and new equipment Means of Bahiatursa professional At least At least and training in verification staff provided with new 10 professional 10 professional specific nautical PCU progress equipment and training in staff given staff given and cultural reports specific nautical and courses courses tourism product Responsibility cultural tourism product in specific in specific areas areas. nautical and nautical and PCU cultural tourism cultural tourism product areas product areas

Output 3.2 0 Strategic and Actions for first Actions for Strategic and Frequency of Strengthening of the state’s operational year of state second year of operational measurement tourism statistics system. agenda for state statistical research state statistical agenda (first two Annual from statistical agenda research agenda years) for state year 3 Indicator research implemented implemented statistical Strategic and operational prepared research Means of agenda (first three years) implemented verification for state statistical research PCU progress implemented. reports Responsibility PCU Annex II Page 7 of 9

Component 3. Institution- Baseline Year 1 Year 2 Year 3 Year 4 Year 5 Target Remarks strengthening Output 3.3 0 3 TSB 3 TSB Local Local Local At least 6 TSB Frequency of Strengthening of municípios with municípios with management management management municípios with measurement municipal tourism local tourism local tourism outcomes results measured results measured local tourism Annual management. management management measured incubators incubators incubators established, and Means of Indicator established established results verification Number of TSB measured PCU progress municípios with local reports tourism management Responsibility incubators established, and results measured. PCU Component 4. Baseline Year 1 Year 2 Year 3 Year 4 Year 5 Target Remarks Basic Services Outcome Frequency of Improved tourist 50.3% of No more than No more than No more than No more than measurement perceptions of cleanliness international 49% of 47% of 45% of 45% of Annual from management of the tourists mention international international international international year 3 destination. cleanliness as a tourists mention tourists mention tourists mention tourists mention negative aspect of cleanliness as a cleanliness as a cleanliness as a cleanliness as a Means of Indicator their visit negative aspect negative aspect negative aspect negative aspect verification Percentage of of their visit of their visit of their visit of their visit PCU progress international tourists Source: reports and mentioning cleanliness of SETUR/FIPE, SETUR the destination as a 2011 (Report on reports on negative aspect of their features of inbound visit. domestic and tourism inbound tourism) Responsibility PCU Annex II Page 8 of 9

Component 4. Baseline Year 1 Year 2 Year 3 Year 4 Year 5 Target Remarks Basic Services Output 4.1 0 Comprehensive Plan Plan Plan Plan Plan Frequency of Improved solid waste Solid Waste implemented in implemented in implemented in implemented in implemented in measurement management in TSB. Plan prepared 1 TSB município 1 TSB 2 TSB 2 TSB at least 6 TSB Annual município municípios municípios municípios Indicator Means of Number of TSB verification municípios implementing PCU progress a Comprehensive Solid reports Waste Plan. Responsibility PCU Output 4.2 0 2 program 6 program 2 program 6 program 100% of Frequency of Basic sanitation for boating facilities boating boating facilities boating facilities program measurement boating centers with basic facilities with with basic with basic boating Annual from implemented with the sanitation basic sanitation sanitation sanitation facilities with year 3 program. basic sanitation Means of Indicator verification Number of program PCU progress boating facilities with reports basic sanitation. Responsibility

PCU

Component 5. Socioenvironmental Baseline Year 1 Year 2 Year 3 Year 4 Year 5 Target Remarks management Outcome - Indicator Indicator system Indicator Indicator system Indicator system At least Frequency of Improved system implemented in system implemented in implemented in 6 municípios measurement socioenvironmental designed 1 município implemented in 2 municípios 2 municípios with a system of Annual management of tourist 1 município socioenviron- municípios in TSB. mental indicators Means of in place verification Indicator PCU progress Number of municípios reports with a system of tourism Responsibility socioenvironmental PCU indicators in place. Annex II Page 9 of 9

Component 5. Socioenvironmental Baseline Year 1 Year 2 Year 3 Year 4 Year 5 Target Remarks management Output 5.1 0 At least 10 local At least 10 local At least 10 local At least 20 local At least 50 local Frequency of Strengthening of local suppliers (earning suppliers suppliers (earning suppliers (earning suppliers (earning measurement production associated with less than 2 times (earning less than less than 2 times less than 2 times less than 2 times Annual from tourism in TSB. the minimum 2 times the the minimum the minimum the minimum year 2 monthly wage) minimum monthly wage) monthly wage) monthly wage) Indicator enlisted to supply monthly wage) enlisted to supply enlisted to supply enlisted to supply Means of Number of local producers TBS tourism enlisted to supply TBS tourism TBS tourism TBS tourism verification (earning less than 2 times establishments TBS tourism establishments establishments establishments PCU progress the minimum monthly under common establishments under common under common under common reports wage) enlisted to supply quality standards under common quality standards quality standards quality standards Responsibility TBS tourism quality standards establishments under PCU common quality standards. Output 5.2 0 Recruitment and Recruitment and Recruitment and Services delivered Frequency of Establishment of a services delivered services delivered services delivered to at least measurement Comprehensive Support to at least to at least to at least 100 vulnerable Annual from Center for vulnerable 25 vulnerable 25 vulnerable 50 vulnerable children/young year 3 children/youth in the children/young children/young children/young people by the Historic City Center of people people people center Means of Salvador. verification PCU progress Indicator reports Number of vulnerable Responsibility children/young people served by the center. PCU Output 5.3 0 Environmental Environmental Environmental Environmental Environmental Frequency of Implementation of education/aware- education/aware- education/aware- education/aware- education/aware- measurement recommendations of the ness activities ness activities ness activities ness activities ness activities Annual from environmental assessment conducted in at conducted in at conducted in at conducted in at conducted in at year 2 conducted in TSB. least 3 municípios least 3 municípios least 3 municípios least 3 municípios least 12 municípios Means of Indicator verification Number of beneficiary PCU progress municípios of reports environmental Responsibility education/awareness activities. PCU

Annex III Page 1 of 7

FIDUCIARY AGREEMENTS AND REQUIREMENTS

Country: Brazil Project number: BR-L1300 Name: National Tourism Development Program in Bahia (PRODETUR Nacional-Bahia) Prepared by: Fernando Glasman (Financial Management Specialist) Carlos Lago (Procurement Specialist)

I. EXECUTIVE SUMMARY

Fiduciary management was assessed through a series of meetings with the Bank’s project team, the executing agency, and the Tourism Department of the State of Bahia (SETUR). Also considered were the preparation documents for the operation (project profile, institutional analysis using the Institutional Capacity Assessment System (ICAS), Risk Matrix, and project risk management (PRM) methodology) and the Bank’s experience working on similar projects with federal-, state-, and municipal-level governments. Based on the assessment of the executing agency, the fiduciary agreements applicable for program execution have been prepared for both procurement and financial management.

II. FIDUCIARY CONTEXT OF THE COUNTRY AND THE STATE OF BAHIA

Brazil has robust country fiduciary systems that enable and facilitate good management of administrative, financial, control, and procurement processes, in accordance with the principles of transparency, economy, and efficiency. These should continue to be strengthened, however, in order to meet new fiduciary needs. Thus, the Bank’s fiduciary strategy for Brazil is directed toward the progressive and sustainable use of the country’s fiduciary systems. In the particular case of Bahia, the Bank already has experience from a number of projects with the state and uses country systems for external control. SETUR’s average degree of development, identified by the ICAS analysis, is medium.

III. FIDUCIARY CONTEXT OF THE EXECUTING AGENCY

The executing agency for the program will be the Tourism Department of the State of Bahia (SETUR), acting through a program coordination unit (PCU) reporting directly to the Secretary of Tourism. The PCU will be responsible for coordinating, planning, monitoring, and executing the activities related to the projects and actions financed with IDB resources. It will also be responsible for the fiduciary administration of operation execution, including budgeting, formalities for authorizations, recognition of expenditures, and the respective payments. It will also be SETUR’s liaison for program execution matters with the IDB and other areas of the Tourism Department and state administration involved in execution. Annex III Page 2 of 7

As SETUR does not have sufficient staff or capacity to exercise the aforementioned functions directly, it intends to retain a specialist consulting firm to support program management. This firm will also conduct works supervision and inspection in conjunction with the executing agency. In addition, it will work with the executing agency to conduct the planned procurement processes for the program, which must adhere to Bank policies, and a special bidding commission will be established by decree of the governor. In order to execute the planned actions, the team needs to be strengthened and trained in Bank policies, rules, and procedures, and a computerized system needs to be developed and/or purchased to perform the controls and produce the reports required by the IDB.

IV. FIDUCIARY RISK EVALUATION AND MITIGATION MEASURES

The risk and institutional capacity assessment of SETUR identified the following risks in the fiduciary area that may lead to execution delays:

Risks Mitigation Measures Centralization of bidding processes at the State Creation of special procedures at the Attorney Attorney General’s Office, with limited experience in General’s Office and training of attorneys in Bank procurement policies and corresponding work policies and procedures. overload. Limited knowledge of IDB policies (financial, Hiring of a management firm to support the executing accounting, procurement, status reports). agency. Training and capacity building for members of the executing agency involved in execution and, if necessary, for staff of the management firm.

V. CONSIDERATIONS FOR THE SPECIAL PROVISIONS OF THE CONTRACT

Conditions precedent to the first disbursement: SETUR will provide the following, on the terms previously agreed upon with the Bank: (i) the technical specifications of the Integrated Project Management System; (ii) evidence of formal establishment of the PCU, and appointment of its general coordinator and other coordinators; (iii) the draft program Operations Manual; and (iv) evidence of publication of the expression of interest for selection of the management firm to support the PCU. Special execution conditions: On the terms previously agreed upon with the Bank: (i) prior to the first procurement process for goods, works, and nonconsulting services (a) award of the contract to the management firm to support the PCU; (b) issuance of the service order for adaptation of the Integrated Project Management System to the program; and (c) entry into force of the final version of the program Operations Manual, following the guidelines of the environmental and social planning and management manual and environmental and social management report. Other financial management requirements: Supporting documentation for expenditures will be subject to ex post review by Bank-designated staff or the external auditors. Annex III Page 3 of 7

Agreements and requirements for procurement execution 1. Procurement execution The Fiduciary Agreements and Requirements establish the provisions applicable to all program procurement and contracting: a. Procurement of works, goods and nonconsulting services. Procurements of works, goods, and services to be financed, in whole or part, with the IDB loan proceeds will be conducted in accordance with the “Policies for the procurement of goods and works financed by the Inter-American Development Bank” (document GN-2349-9 of March 2011). International competitive bidding (ICB) will be used for procurements of works, goods, and services with an estimated cost of US$25 million or more for works, and US$5 million or more for goods and services, following the procedures established in Section II of document GN-2349-9. National competitive bidding (NCB) may be used when the estimated cost is less than US$25 million for works, and US$5 million for goods and services. The shopping method may be used for works costing less than US$500,000, and goods and services costing less than US$100,000, in accordance with the procedures established in Section III of the same document. The Bank may recognize the modalities envisaged in the Electronic Auction Act (Law 10520/2002) when the estimated cost is less than ICB thresholds, per contract. Only systems approved by the Bank may be used for electronic auction for procurements of off-the-shelf goods and services with an estimated cost of US$5 million or less, and a price list may be used for off-the-shelf goods with an estimated cost of US$5 million or less, provided that the original price list has been previously accepted by the Bank. b. Selection and contracting of consultants: The selection and contracting of consulting services to be financed, in whole or part, with Bank resources will be conducted in accordance with the “Policies for the selection and contracting of consultants financed by the Inter-American Development Bank” (document GN- 2350-9). International publicity via UNDB Online will be required for the selection and contracting of consulting services with an estimated cost of more than US$200,000. The short lists of consulting firms for work with an estimated cost of less than US$1 million may comprise entirely national consulting firms. c. Selection of individual consultants: The selection and contracting of individual consultants to be financed, in whole or part, with Bank resources will be conducted in accordance with Section 5 of document GN-2350-9. Individual consultants will be selected on their qualifications to perform the work, based on a comparison of the qualifications of at least three candidates. When the situation so requires, notices may be published in the local or international press, to attract qualified consultants. Advance procurement and recognition of expenditures: SETUR expressed interest in requesting recognition of expenditures against the counterpart contribution in the Annex III Page 4 of 7

amount of US$580,000 for the Salvador marina works and the preparation of the environmental and social management plan (ESMP). d. Direct Contracting: No direct contracting with the loan proceeds is envisaged in the program. 2. Table of threshold amounts Brazil (US$) Works Goods Consulting services International National Shopping International National Shopping International Short list competitive competitive competitive competitive publicity 100% bidding bidding bidding bidding Consulting national  25,000,000  25,000,000  500,000  5,000,000  500,000  100,000  200,000  1,000,000  500,000  100,000

3. Main procurement processes Type of Estimated amount Activity bidding (US$000) Works Establishment of the Black Culture Documentation and Memory Center of the Recôncavo area of Bahia NCB 5,000,000 Restoration of the Wanderley Pinho Museum in Candeias (Recôncavo Museum), and urban renewal of the surrounding area NCB 8,600,000 Urban renewal of Rua Chile area, Salvador NCB 7,500,000

Improvement and renewal of Salvador marina (former “Cais da Bahiana”) NCB 1,350,000 Nonconsulting services

Design of the State Tourism Statistics System NCB 2,500,000 Consulting services (firms) Study to identify the demand segment for the development of boating products QBS 2,000,000

TSB cultural /tourism district – Design of new creative cultural tourism products QCBS 2,000,000 Study to identify the factors and causes contributing to prevalence of informal businesses in the tourism sector and strategy design to incentivize their QBS 800,000 formalization Preparation of a communication and marketing plan with special focus on TSB QCBS 1,000,000

4. Procurement supervision In agreement with the project team, it was determined that the first major processes indicated in the procurement plan, financed in whole or part by the Bank, would be subject to ex ante review regardless of value, as would all processes with an estimated cost exceeding the ICB thresholds, and all direct contracting. As and when the Bank deems appropriate, based on a joint analysis with the executing agency, these may be subject to ex post review. 5. Records and files The program records and files shall meet at least the following conditions: (i) Records/processes will contain original documentation filed in chronological order; Annex III Page 5 of 7

(ii) Records/files will be stored in an appropriate place set aside for that purpose, with restricted access and preventive security such as a ban on smoking, entry restricted to authorized personnel, etc. (iii) A record will be kept of all the documentation on file.

VI. FINANCIAL MANAGEMENT AGREEMENTS AND REQUIREMENTS

SETUR will be responsible for strategic and technical coordination of the program and will set program priorities and guidelines. SETUR will also be responsible for operational communication with the IDB and support for execution of actions, including: (i) planning of activity execution according the program execution plan (PEP), budgets, and annual work plan (AWP); (ii) preparation and update of the initial project report, AWP, procurement plan, six-monthly status reports, evaluation reports, and project completion report; (iii) management, monitoring, and supervision of AWP execution and the indicators established in the operation’s results matrixes; (iv) budgetary and financial programming for the program and execution of the corresponding monitoring activities; (v) implementation and maintenance of a control system to ensure proper use of the loan proceeds, as well as the storage and safekeeping of project documents; (vi) execution and supervision of technical aspects of the program; (vii) execution of the activities necessary to conduct program procurements; (viii) preparation of technical files for the execution of each component; (ix) formulation of technical specifications and terms of reference for procurement processes; (x) preparation and regular delivery of program status reports, from the quantitative and qualitative standpoints points; (xi) fiduciary administration of operation execution and responsibility for contracting and financial administration of the program, including funding and payments, preparation of financial reports, accountability, preparation of disbursement requests, and provision of information for audits. The budget for program activities will be approved within the state budget act. The Bank will reimburse eligible project expenditures, in accordance with the agreements established and executed. A. Accounting and information systems The project’s budgetary and financial execution will be performed using the accounting and finance system provided by the management firm, which must create the accountability reports required by the Bank. B. Disbursements and cash flows The Program will operate with funds advanced by the Bank, to meet the project’s actual liquidity needs. This will require submission of a disbursement request, duly accompanied by a financial plan reflecting the fund requirements for the period concerned, as previously agreed upon with the Bank. The execution unit will submit an initial financial plan for the project to the Bank, which must include the disbursement schedule for the whole execution period. For future advances (if any), at least 80% of the funds advanced must be accounted for, and a new financial plan submitted for the period in question. Annex III Page 6 of 7

For the purposes of accounting for the loan proceeds and local contribution resources, amounts paid in local currency will be converted into the currency of the operation in accordance with following exchange rules: (i) The exchange rate in force on the payment date of the expenditures, whether counterpart or chargeable to the loan. (ii) The exchange rate for the internalization of funds, in the case of an advance of funds, or the submission date, in the case of recognition against the counterpart or reimbursement of expenditures. The executing agency shall choose between options (i) and (ii) prior to contract negotiation. Expenditures considered ineligible by the Bank shall be repaid with the local contribution resources or other resources, at the borrower’s discretion, depending on the nature of the ineligibility. C. External control and reports The Tribunal de Contas do Estado da Bahia [State Audit Court of Bahia] will perform the external control function, having been authorized to do so by the Bank. The project will submit annual financial statements to the Bank, duly audited by the State Audit Court of Bahia. The reports and opinions issued must follow the content guidelines set by the Bank for external audits, and must be delivered within 120 days after the close of the fiscal year, stated in the loan contract.

D. Financial supervision plan Supervision plan Supervision activity Responsibility Nature and scope Frequency Bank Third party Review of physical progress of the component Six- actions and activities as compared with Technical team monthly disbursements OPERATIONAL Six- Fiduciary and Review of status report Executing agency monthly technical teams Review of portfolio Annual Technical team Ex ante and ex post review of disbursements Fiduciary team and Annual Fiduciary team and procurements external auditors Financial and operational audit Annual State Audit Court FINANCIAL Review of disbursement requests and Periodic Fiduciary team accompanying reports Inspection visit and analysis of internal Annual Fiduciary team controls and control environment Annual budget allocation for project execution Annual Fiduciary team Executing agency Delivery of audited financial statements and Fiduciary and Annual Executing agency COMPLIANCE operational audit technical teams Fiduciary and Conditions precedent to the first disbursement Once Executing agency technical teams

Annex III Page 7 of 7

E. Execution mechanism The execution mechanism described in the proposal for operation development (POD) will require an administrative/financial execution structure centralized through SETUR. SETUR will be responsible for annual budget formulation and financial execution for both the local contribution and the IDB financing. As stated above, the project’s financial management will be outsourced.

DOCUMENT OF THE INTER-AMERICAN DEVELOPMENT BANK

PROPOSED RESOLUTION DE-___/13

Brazil. Loan ____/OC-BR to the State of Bahia National Tourism Development Program in Bahia (PRODETUR National-Bahia)

The Board of Executive Directors

RESOLVES:

That the President of the Bank, or such representative as he shall designate, is authorized, in the name and on behalf of the Bank, to enter into such contract or contracts as may be necessary with the State of Bahia, as Borrower, and with the Federative Republic of Brazil, as Guarantor, for the purpose of granting the former a financing to cooperate in the execution of a national tourism development program in Bahia (PRODETUR National-Bahia). Such financing will be for an amount of up to US$50,822,905 from the Ordinary Capital resources of the Bank, and will be subject to the Financial Terms and Conditions and the Special Contractual Conditions of the Project Summary of the Loan Proposal.

(Adopted on ______2013)

LEG/SGO/CSC/IDBDOCS: 37424432 Pipeline No. BR-L1300