Northeast rural development project Report No: ; Type: Report/Evaluation Memorandum ; Country: ; Region: Latin America And Caribbean; Sector: Other ; Major Sector: Agriculture; ProjectID: P006345

The Brazil Northeast Rural Development Program (NRDP) was supported by ten Bank-assisted

Public Disclosure Authorized projects, including in the four states of Sergipe (Loan 2523-BR for US$61.3 million), (Loan 2524-BR for US$61.4 million), (Loan 2761-BR for US$171.0 million), and (Loan 2763-BR for US$122.0 million). At US$415.7 million, the four loans accounted for around one- half of the Bank’s support for NRDP. The loans were approved in FY85 (Sergipe and Rio Grande do Norte) and FY87 (Bahia and Ceará). All four loans closed on December 31, 1995, from nine to 30 months late. US$100.0 million of three of the loans was canceled in FY95 following reformulation of the program (Rio Grande do Norte —US$10.0 million, Bahia —US$60.0 million, and Ceará—US$30.0 million). Undisbursed balances totaling US$12.1 million were canceled in FY97. The Implementation Completion Report (ICR) was prepared by the Latin America and the Caribbean Regional Office. The borrower’s comments are attached as Appendix I.

The main objectives of the original program were to (i) increase agricultural production and productivity in the semi-arid and resource–poor Northeast Region; (ii) generate employment for low-

Public Disclosure Authorized income farm families; (iii) increase the capacity of the states to provide efficient agricultural services to small farmers; and (iv) promote water resource development and improved technology to reduce the vulnerability of small farmers to recurrent drought. The project also aimed to strengthen the federal government’s Superintendency for the Development of the Northeast (), which was responsible for coordinating NRDP. All the projects contained essentially the same components, with the Sergipe project funding SUDENE’s activities for the entire NRDP.

Despite successful experiences in some states and activities, the NRDP’s overall strategy foundered in all ten states. A comprehensive midterm review in 1991 and an Operations Evaluation Department (OED) study confirmed the problems and led the Bank and borrower to reformulate the program. This protracted process lasted until 1993. At the time of reformulation, the Sergipe and Rio Grande projects were about two-thirds disbursed, and the Bahia and Ceará projects about one-third disbursed.

Public Disclosure Authorized The fundamental problem was the incompatibility of the projects' centralized structure and administrative arrangements with the country’s rapidly changing political, economic, and social conditions, particularly after 1988. Furthermore, the Northeast's abundant supply of cheap labor made the region vulnerable to an over-valued exchange rate, and rapid inflation undermined the credit component. Planned increases in agricultural production and productivity were foiled by policies on exchange rates, tariffs, and output prices that penalized agriculture. Finally, the projects used a “blueprint” design across states, failing to take into account the different institutional, political, and agronomic conditions in each state.

During the two-year reformulation process, the focus changed from rural and agricultural development (with an emphasis on small farmers and agricultural production) to rural poverty alleviation (with an emphasis on poor rural communities and various productive, infrastructure, and social investments chosen by those communities). The program moved from being driven by public sector Public Disclosure Authorized initiatives to being driven by the needs of the poor communities themselves. The comparatively successful community-based investment component (APCR) under the original design was the starting point for the complete redesign of the program to reflect the growing sentiment in Brazil for decentralization, transparency, accountability, and local empowerment. The new objectives were to (i) provide basic social and economic infrastructure, employment, and income-generating opportunities for the rural poor (not only small farmers); (ii) support rural community groups in identifying, planning, and implementing their own subprojects; and (iii) involve state governments more directly in decisionmaking and in financing the program. Both the borrower and the Bank saw the reformulated projects as part of a compensatory response to the devastating impact on the rural poor of previous unsound policies. Under the new design, SUDENE’s role was reduced, agricultural service agencies were no longer supported directly, states became responsible for counterpart funding, and schemes were implemented through two mechanisms: proposals directly from rural community associations (PACs), and, on a pilot basis, schemes proposed by rural communities that were reviewed and approved by specially created municipal councils (FUMACs).

The four projects under review have successfully achieved their objectives since the reformulation, in many cases exceeding their targets. The ICR describes a measurable and visible improvement in the quality of life and well-being of the communities involved in the projects. Communities responded enthusiastically to the opportunities the reformulated projects offered and produced many more proposals than could be funded. Community participation was up to expectations in Sergipe, Bahia, and Ceará, and only slightly below target in Rio Grande do Norte. Performance in Ceará was the best in the whole NRDP program and greatly exceeded the reformulated targets, largely because the new state governor gave the program high priority, initiating supportive state policies. Local leaders sometimes exercised undue influence on the selection of subprojects, particularly just after the reformulation, but their participation was seen as a positive influence on the implementation process and sustainability. State policies and the preferences of project technicians also had undue influence, so that some subprojects did not reflect community priorities. The Rio Grande do Norte project successfully pioneered the use of nongovernmental organizations (NGOs) for monitoring and supervision services, especially in Serra do Mel.

About 120 different types of subprojects were financed for a total of some 7,100 subprojects. Financing averaged about US$16,000 per subproject. Basic and social infrastructure were the main choices in Sergipe and Bahia, especially rural water supply and electrification, house improvement, latrines, and school repairs. In the other two, state policy encouraged productive subprojects, including tractors for communal use, flour mills, small-scale irrigation, and dairying. The quality of the subprojects was good overall. Beneficiaries were the rural poor as intended, including the landless, and the number of beneficiaries exceeded targets in all states. There are early signs that out-migration has declined as a result. Employment and income targets were wholly or partly met, although in some cases there were insufficient data to measure such impacts. The sustainability of investments is expected to be good. Studies in all four states concluded that the user fees paid by the beneficiaries are sufficient to fund operation and maintenance and replace equipment. The sustainability of the community organizations varies among states. In Sergipe, almost all the organizations continue to function and have proposed more community investments. However, the ICR reports that for the other three projects only around half are engaged in further communal developments. The ICR notes that the states were not required to prepare plans for future operation of the projects but that policies and actions of the state governments are supportive.

At appraisal, the economic rates of return (ERR) for the four projects were estimated to be between 13 to 19 percent, against which the original project designs would have fared poorly. The ICR did not reestimate ERRs for the redesigned projects on the grounds that the costs and returns of such demand- driven programs cannot be determined with any certainty ex-post. However, the ICR notes that an earlier FAO/IBRD analysis in 1995 and 1996 of the whole program indicates that costs per job created was low, social cost-benefit ratios were satisfactory, and that the ERRs of the subprojects analyzed were in the 40– 50 percent range. In an unusual further step, the FAO/IBRD reports took account of the distorting effects of publicly funded grants by shadow-pricing public funds. In all subproject cases examined, the ERRs remained above 17 percent, but the ICR did not provide enough detail to verify these estimates. It did note the difficulties of assessing impacts, pointing to the need for greater attention to baseline studies and monitoring and evaluation in both the original and reformulated project designs.

The Operations Evaluation Department (OED) agrees with the ICR’s rating of outcomes of the four reformulated projects as satisfactory, sustainability as likely, institutional development as substantial and Bank performance as satisfactory overall, although reformulation of the failing original projects took too long.

The ICR is satisfactory, although combining four projects under one ICR cover would best include separate presentations on each project, with the whole drawn together in an overview.

The ICR presents a comprehensive list of lessons learned, some of which are familiar. The overriding lesson is that when a program strategy is overtaken by events that make it redundant, the Bank must take prompt and vigorous actions to adjust the program so that it will succeed in the new circumstances.

An audit is planned.