Bahia Piauí Ceará Pernambuco Paraíba

Document of The World Bank

Public Disclosure Authorized Report No: ICR3043

IMPLEMENTATION COMPLETION AND RESULTS REPORT (IBRD-74970)

ON A

Public Disclosure Authorized LOAN

IN THE AMOUNT OF US$ 32.76 MILLION

TO THE

MUNICIPALITY OF RECIFE

FOR A

RECIFE URBAN DEVELOPMENT AND SOCIAL INCLUSION PROJECT

Public Disclosure Authorized (Capibaribe Melhor)

IN SUPPORT OF THE FIRST PHASE OF THE $240 MILLION

BRAZIL MUNICIPAL LENDING (APL) PROGRAM

April 14, 2014

Public Disclosure Authorized Sustainable Development Department Brazil Country Management Unit Latin America and the Caribbean Region

CURRENCY EQUIVALENTS

Exchange Rate Effective March 28, 2014

Currency Unit = Brazilian real (R$) 1.00 = US$ 0.44 US$ 1.00 =R$ 2.26

FISCAL YEAR

January 1-December 31

ABBREVIATIONS AND ACRONYMS

BNDES Banco Nacional de Desenvolvimento Econômico e Social (National Bank for Economic and Social Development) CAS Country Assistance Strategy CEF CEF Econômica Federal (Federal Savings and Loan Bank) COFIEX Commission on External Financing COMPESA Pernambuco State water supply and sanitation operator in the Project areas CPS Country Partnership Strategy DPL Development Policy Loan EA Environmental Assessment IBGE Instituto Brasileiro de Geografia e Estatística (Brazilian National Geography and Statistics Institute) ICB International Competitive Bidding MDG Millennium Development Goal MTR Mid-Term Review Mission PAC Programa de Aceleração do Crescimento (Growth Acceleration Program) PDO Project Development Objective PGFN Ministry of Finance Legal Department PHRD Japanese Policy and Human Resources Development Fund PMCM National Housing Program (Minha Casa Minha Vida) PMU Project Management Unit PT Partido dos Trabalhadores (Workers’ Party) RMR Recife Metropolitan Region STN National Treasury Secretariat, Ministry of Finance URB Empresa de Urbanização do Recife (Recife Urban Development Company) WSS Water Supply and Sanitation ZEIS Zonas Especiais de Interesse Social (Special Social Interest Zones) ZEPA Zonas Especiais de Proteção Ambiental (Special Environmental Protection Zones)

Vice President: Jorge Familiar Calderon Country Director: Deborah L. Wetzel Sector Manager: Anna Wellenstein Project Team Leader: Marcos-Thadeu Abicalil ICR Team Leader: Marcos-Thadeu Abicalil

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BRAZIL

Recife Urban Development and Social Inclusion Project (Capibaribe Melhor)

CONTENTS

Data Sheet A. Basic Information B. Key Dates C. Ratings Summary D. Sector and Theme Codes E. Bank Staff F. Results Framework Analysis G. Ratings of Project Performance in ISRs H. Restructuring I. Disbursement Graph

1. Project Context, Development Objectives and Design ...... 1 2. Key Factors Affecting Implementation and Outcomes ...... 5 3. Assessment of Outcomes ...... 14 4. Assessment of Risk to Development Outcome ...... 17 5. Assessment of Bank and Borrower Performance ...... 18 6. Lessons Learned...... 20 7. Comments on Issues Raised by Borrower/Implementing Agencies/Partners...... 21

Annex 1. Project Costs and Financing ...... 23

Annex 2. Outputs by Component...... 26 Annex 3. Economic and Financial Analysis ...... 29 Annex 4. Bank Lending and Implementation Support/Supervision Processes ...... 30 Annex 5. Beneficiary Survey Results ...... 33 Annex 6. Stakeholder Workshop Report and Results ...... 34 Annex 7. Summary of Borrower's ICR and/or Comments on Draft ICR ...... 35 Annex 8. Comments of Cofinanciers and Other Partners/Stakeholders ...... 38 Annex 9. List of Supporting Documents ...... 39

A. Basic Information

Recife Urban Development and Country: Brazil Project Name: Social Inclusion (CAPIBARIBE MELHOR) Project ID: P089013 L/C/TF Number(s): IBRD-74970 ICR Date: 12/26/2013 ICR Type: Core ICR MUNICIPALITY OF Lending Instrument: APL Borrower: RECIFE Original Total USD 32.76M Disbursed Amount: USD 19.61M Commitment: Revised Amount: USD 32.76M Environmental Category: A Implementing Agencies: Recife Urban Development Company (URB) Cofinanciers and Other External Partners: Borrower counterpart financing

B. Key Dates Revised / Actual Process Date Process Original Date Date(s) Concept Review: 03/18/2004 Effectiveness: 01/01/2008 10/14/2009 Appraisal: 05/22/2006 Restructuring(s): Approval: 12/20/2007 Mid-term Review: 10/03/2011 11/16/2011 Closing: 06/30/2013 10/31/2013

C. Ratings Summary C.1 Performance Rating by ICR Outcome: Unsatisfactory Risk to Development Outcome: High Bank Performance: Moderately Unsatisfactory Borrower Performance: Moderately

Unsatisfactory

C.2 Detailed Ratings of Bank and Borrower Performance (by ICR) Bank Ratings Borrower Ratings Moderately Quality at Entry: Unsatisfactory Government: Unsatisfactory Implementing Quality of Supervision: Moderately Satisfactory Moderately Satisfactory Agency/Agencies: Overall Bank Moderately Overall Borrower Moderately Performance: Unsatisfactory Performance: Unsatisfactory v

C.3 Quality at Entry and Implementation Performance Indicators Implementation QAG Assessments Indicators Rating Performance (if any) Potential Problem Project Quality at Entry Yes None at any time (Yes/No): (QEA): Problem Project at any Quality of Yes None time (Yes/No): Supervision (QSA): DO rating before Moderately

Closing/Inactive status: Unsatisfactory * Since the final ISR was approved in November 2013 after project closing, the data sheet in the Bank system automatically includes ratings from the penultimate ISR instead, creating the appearance of a disconnect in ratings. Actually, the last ISR did include“U” ratings for both the DO and IP, aligned with the ratings of the ICR.

D. Sector and Theme Codes Original Actual Sector Code (as % of total Bank financing) Flood protection 25 0 Other social services 15 83 Urban Transport 25 17 Wastewater Treatment and Disposal 20 0 Water supply 15 0

Theme Code (as % of total Bank financing) City-wide Infrastructure and Service Delivery 29 87 Municipal governance and institution building 14 11 Pollution management and environmental health 14 0 Urban services and housing for the poor 29 2 Water resource management 14 0

E. Bank Staff Positions At ICR At Approval Vice President: Jorge Familiar Calderon Pamela Cox Country Director: Deborah L. Wetzel Vinod Thomas Sector Manager: Anna Wallenstein John Henry Stein Project Team Leader: Marcos T. Abicalil Ivo Imparato ICR Team Leader: Marcos T. Abicalil ICR Primary Author: Klas B. Ringskog

F. Results Framework Analysis

Project Development Objectives (from Project Appraisal Document) Improve the well-being of the low-income population living in the Capibaribe River Basin area of the city and the fiscal, urban and environmental management capacity of the Recife Municipal Government.

Revised Project Development Objectives (as approved by original approving authority)

The Project Development Objectives were not revised.

(a) PDO Indicator(s) Original Target Formally Actual Value Project Development Baseline Value Values Revised Achieved Indicator (Oct 2007) (from approval Target (Oct 2013) documents) Values 1: Net consolidated 12% debt to net current 28% <40% Not revised revenue (NCD/NCR) (TARGET MET) less than 40% Not available since 2: Property values of loan closed before poorest housing investments RS$ 12,000 RS$ 14,400 Not revised increases by 20% due completed. to project investments (UNKNOWN)

3: Percentage of Water supply Not available since population reporting +10% loan closed before satisfaction Sanitation + 15% relevant project improvements in: (i) Access and components were Water Supply; (ii) 0 Not revised Mobility +8% completed. Sanitation; (iii) Access Drainage +10% and Mobility; (iv) Parks +25% (TARGET NOT Drainage; (v) Parks; Environment MET) (vi) Environment +15% 0 16.6% increase

4: Municipality’s In reality, the (TARGET NOT urban management Results MET) capacity is enhanced, Framework was 40% rise Not revised as evidenced by 40% not updated 1 ZEIS (Lemos rise in number of during Appraisal. Torres) was created ZEIS 6 ZEIS already in the Project area existed in the in 2013. Project area

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before Project initiated. 4

(TARGET MET) 5: Municipality’s environmental management capacity 4 ZEPAS were is enhanced, as created between evidenced by the 0 4 ZEPAS Not revised 2006 and 2008: establishment of 4 Parque das ZEPAS with Capivaras, 2006; management Açude Apipucos, frameworks 2006; Iputinga/Apipucos, 2008; and Ilha do Zeca, 2008.

(b) Intermediate Outcome Indicators Original Target Intermediate Formally Actual Value Baseline Value Values (from Outcome Revised Achieved (Oct 2007) approval Indicator (IOI) Target Values (Oct 2013) documents) 1: Current account 453 savings of 100 128 Not revised municipality (TARGET MET) (RS mn) 2: Deficit of R$ 96.54 Municipality mn. primary R$ 50 mn Positive Not revised balance (TARGET NOT improved MET) 3: Personnel 46% expenditure to 46% <45% Not revised net current (TARGET NOT revenue MET) Not available since loan closed before relevant project 4: Population components were living in flood- 30% 20% Not revised completed. prone areas

(TARGET NOT MET) 5: Resettled Loan closed before ZEIS relevant project households 0 100% Not revised components were with legal land completed. tenure

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(TARGET NOT MET) 581 people have 6: Number of received vocational residents training in the Job receiving 0 +100% Not revised Center rehabilitated vocational by the Project. training (TARGET MET) There is no data available on concrete benefits. However, the Borrower 7: Percentage performed a survey of job center which reported that clients 0 +20% Not revised 80% of the reporting beneficiaries who concrete received training at benefits the Job Center rehabilitated by the Project were satisfied. (TARGET MET). 8: Percentage 0 of target population (TARGET NOT (2,000 MET) catadores) 0 80% Not revised reporting benefits of The two planned recycling triage centers were triage centers not built. Borrower reported 9: Number of that 400 people people benefited from benefiting 0 +100% Not revised environmental from education activities environmental in the Project area. education (TARGET MET) 10: Percentage Not available since of loan closed before environmental relevant project education components were participants 0 +50% in 2009 Not revised completed. recalling at least three key messages of the program (UNKNOWN) 11: People in This is a core 0 Not available Not revised urban areas indicator not

ix provided with originally included access to in the PAD. Target Improved not met since loan Water Sources closed before under project1 relevant project components were completed.

(TARGET NOT MET)

This is a core indicator not originally included 12: People in in the PAD. Target urban areas not met since loan provided with closed before access to 0 Not available Not revised relevant project Improved components were Sanitation completed. under project

(TARGET NOT MET) Note: An error in the target value formulation, where percentage increases from a baseline of zero are specified as targets, was discovered during the ICR creation process.

G. Ratings of Project Performance in ISRs

Actual Date ISR No. DO IP Disbursements Archived (USD millions) 1 02/13/2008 Satisfactory Satisfactory 0.00 2 09/11/2008 Satisfactory Satisfactory 0.00 Moderately Moderately 3 03/19/2009 0.00 Unsatisfactory Unsatisfactory 4 12/11/2009 Moderately Satisfactory Moderately Satisfactory 0.00 5 06/11/2010 Moderately Satisfactory Moderately Satisfactory 0.00 Moderately 6 02/23/2011 Moderately Satisfactory 0.12 Unsatisfactory 7 09/14/2011 Moderately Satisfactory Moderately Satisfactory 3.95 8 03/11/2012 Moderately Satisfactory Moderately Satisfactory 6.65

1 As per OPCS recommendation core indicators were introduced in the ISR and in the Borrower's progress reports. However, as restructuring was not proceeded, they were not formally included in the PAD. Although not mandatory for projects approved before 2009 the team adopted OPCS guidance and included the core indicators in the ICR.

9 10/31/2012 Moderately Satisfactory Moderately Satisfactory 13.98 Moderately Moderately 10 04/10/2013 16.75 Unsatisfactory Unsatisfactory 11 11/11/2013 Unsatisfactory Unsatisfactory 19.53

H. Restructuring (if any) Not Applicable

I. Disbursement Profile

1. Project Context, Development Objectives and Design

1. The Recife Urban Development and Social Inclusion Project (Capibaribe Melhor) was a multi-sectorial urban operation focusing on poverty alleviation in the city of Recife through: (i) physical interventions in the territory along a section of the Capibaribe River; (ii) social and local economic development activities; and (iii) improvement of urban and environmental management aspects. The Project was prepared from 2003 through 2007, approved by the World Bank Board on December 20, 2007, and declared effective on October 14, 2009.

2. During Project preparation from 2004-2007, insufficient attention was paid to the capacity of the Recife Municipality (Prefeitura) to prepare and implement such an ambitious project with the limited financial resources available. Further complicating the Project, implementation did not begin until 2010 after a two year delay in declaring the loan effective due to obstacles in obtaining the National Treasury’s clearance. Implementation took place almost entirely during the years 2010-2012, after which the Project again stalled to discuss a planned restructuring, which in the end did not materialize. Due to massive cost underestimations, the Prefeitura was obliged to identify and secure large additional sources of financing to complete some Project activities.

3. The original Project closing date of June 30, 2013 was extended for an additional 4 months to allow for a planned restructuring.. In the end, despite two attempts, the restructuring did not advance and the loan closed on October 31, 2013, with a substantial portion of Project activities still incomplete.

1.1 Context at Appraisal

4. At the time of appraisal, comparable to the current situation, more than 80% of Brazil’s population lived in urban areas, where most of the nation’s GDP was generated. Income was unevenly distributed, and poverty was increasingly urban: the urban poor had lower incomes, lagged in educational standards, suffered from worse health, lived in housing units of lower quality, and had less access to different kinds of urban infrastructure than their wealthier counterparts. Targeting investments and programs toward the urban poor became a way of reducing such functional poverty. With a population of 3.3 million at the time of the preparation of the Capibaribe Melhor Project, the Recife Metropolitan Region (RMR) was the fourth largest urban agglomeration in Brazil as well as the one with the most unequal income distribution. More than half of the population was employed in the informal sector, about 77% of its families earned less than two minimum salaries, and nearly 50% earned less than one minimum salary2.

2 The minimum salary in Brazil was BRL350 in 2006, at the time of project appraisal.

5. The Project was designed to sustainably reduce urban poverty by strengthening the fiscal, urban and environmental management capacity of the Recife municipality, and by improving urban infrastructure. It included investments in: (i) integrated water supply and sanitation (WSS) development in a number of low-income communities (i.e., expanding and enhancing water supply, sewerage, drainage, paving, urban upgrading, housing / resettlement3, tenure regularization and related activities); (ii) the rehabilitation and expansion of two existing public parks, and the construction of another one; (iii) the improvement of the water flow, the reduction of flood incidence, the resettlement of people living in risk prone areas and the overall upgrading of the margins of 11 drainage canals on the Recife flatlands; and (iv) the construction of a bridge over the Capibaribe river and overall improvement of accessibility and mobility to and within the Project area.

6. Together with Olinda, the municipality of Recife had earlier been part of the Bank- financed Recife Urban Upgrading Project (Prometropole), implemented through a loan to the State of Pernambuco, with the participation of both the state and the municipalities in the low income areas alongside the Beberibe river. Designed in 2001 and implemented from October 2003 to March 2011, the Prometropole project focused on improving the built and natural environment of the Beberibe River Basin in the Metropolitan Region of Recife, and aimed at improving the living conditions of the basin's approximately 500,000 inhabitants living in low-income settlements along the river's margins. Prometropole’s approach, which resulted in a “Moderately Satisfactory” outcome, set the foundation for Capibaribe Melhor.

7. The underlying design of the Project was to use the Capibaribe River as a development vector, concentrating on the 30 Km of the river within the Recife municipal borders. The mixture of urban infrastructure investments, rehabilitation, social infrastructure, and capacity building was to underpin complementary investments, including more remote possibilities such as establishing a simple river navigation system to complement road transport in the congested city and expanding wastewater treatment to improve the water quality of the Capibaribe River. Such plans were early iterations of the integrated urban-water management approach that the World Bank has supported in more recent years.

8. At the time of the early Project identification in 2003, municipalities in Brazil were reaping the benefits of the 1998 Lei de Responsabilidade Fiscal (Fiscal Responsibility Law), which strengthened public finances both in states and in municipalities. However, severe fiscal restrictions on public sector borrowing were in place, and many municipalities still found it difficult to access long-term credit. The Government and the World Bank therefore developed a series of credits wherein the Bank would lend directly to municipalities for projects to improve urban

3 Overall some 1,500 families at the time residing in sub-standard unplanned urban settlements along the Capibaribe River were planned to be resettled.

infrastructure, strengthen municipal fiscal management capacity, and confront urban and environmental challenges such as those posed by the growth of unplanned and underserved low-income communities. The Brazil Municipal Lending Program was structured as a Horizontal Adaptable Program Loan (APL).

9. The first group of municipalities to receive direct Bank assistance included Uberaba, Teresina, Santos, Sao Luis, and Recife4. Each project focused on: (i) favoring social inclusion and increasing equity in the provision of public services; (ii) generating employment; (iii) making infrastructure services more equitable between regions and within municipalities; (iv) integrating economic and environmental development; and (v) involving civil society more in development decisions. This innovative approach also intended to provide cross-municipal learning.

10. Capibaribe Melhor was aligned with Bank municipal lending guidelines as well as the objectives of the 2004-2007 Brazil Country Assistance Strategy (CAS), which encouraged decentralization through building and enhancing the capacity of municipalities to manage their economic and urban growth. It was also well aligned with the priorities and objectives of the national Programa de Aceleração do Crescimento (PAC), launched on January 28, 2007, shortly before the Capibaribe Melhor Board presentation. The PAC financing was substantial and, for the Northeast region in particular, planned social and urban investments accounted for more than half of the total regional budget envelope. The PAC, through grants from the National Budget and loans from the Brazilian Federal Savings and Financing Bank (CEF), was an alternative source of financing for some of the components under the Capibaribe Melhor.

1.2 Original Project Development Objectives (PDO) and Key Indicators

11. The Project Development Objective is: to improve the well-being of the low-income population living in the Capibaribe River Basin area of the city and the fiscal, urban and environmental management capacity of the Recife Municipal Government. Attainment of the development objective was measured by the following set indicators and targets: (i) net consolidated debt to net current revenue (NCD/NCR) less than 40%; (ii) property values of the poorest housing increases by 20% due to project investments; (iii) the percentage of the population reporting satisfaction improvements with water supply, sanitation, access and mobility, drainage, parks and environment; (iv) the municipality’s urban management capacity is enhanced, as evidenced by a 40% increase in the number of ZEIS (Social Interest Special Zones); and (v) the municipality’s environmental management capacity is enhanced, as

4 Of these five projects, only Uberaba (with a “Moderately Satisfactory” outcome) and Recife have closed so far. Santos, Sao Luis, and Teresina have had similar problems to Recife in terms of costing and time needed for completion. The second group involved 5 municipalities in the state of Rio Grande do Sul – Rio Grande do Sul Integrated Municipal Development Program, closed on December 31, 2013, for which the ICR was not completed at the time of the Recife ICR.

evidenced by the establishment of 4 ZEPAS (Protected Environmental Special Zones) with management frameworks.

1.3 Revised PDO (as approved by original approving authority) and Key Indicators, and reasons/justification

12. The Project Development Objectives (PDO) and key indicators were not revised.

1.4 Main Beneficiaries

13. At the time of Project preparation Recife had a low-income population of around 660,000 living in about 420 informal low-income settlements, the majority of which had sprung up on the banks of the Beberibe and Capibaribe rivers. Approximately 23 of these low-income settlements were located along the Capibaribe River, 6 of which had been classified as Zonas de Especial Interesse Social (ZEIS), eligible for special support. This population was the primary target group of the Capibaribe Melhor. It was estimated that 263,000 people in some 70,000 households would directly benefit from the total Project investments of USD 46.8 million.

14. Given that the sustainability of the Project’s efforts to reduce functional poverty among the target population would be contingent on enhanced fiscal, urban, and environmental capacity on the part of the Recife municipality, a small portion of the loan proceeds were earmarked to underpin the fiscal and management performance of the Recife municipality through technical assistance.

1.5 Original Components

15. At approval the Project consisted of three components: (i) Institutional Development; (ii) Integrated Urban Territorial Development; and (iii) Social, Environmental, and Economic Development of the Territory.

16. The Institutional Development component, in an amount of US$ 4.728 million, or 10.1% of the total Project costs, comprised studies to help the Recife Municipality improve its monitoring and evaluation and strategic planning; strengthening of its capacity in the areas of environmental and urban management; financing of a Project Management Unit within the URB (Recife Urban Development Company) implementing agency; and funding of associated studies as needed.

17. The Integrated Urban Territorial Development component, in an amount of US$ 40.25 million, or 86.0% of the total Project costs, comprised planned investments to build or improve water supply and sewerage systems for the target population (US$ 20.0 million, or 42.7% of the total Project costs); works to upgrade two existing public parks and build a third one (US$ 5.0 million, or 10.7% of the total Project costs); investments to rehabilitate and improve macro-drainage to reduce the risks of flooding in the Project areas (US$ 4.25 million, or 9.1% of the total Project costs); and the construction of a bridge across the Capibaribe River and of three

connecting roads to improve communications across the river (US$ 11.0 million, or 23.5% of the total Project costs).

18. The Environmental, Social, and Economic Development component, in an amount of US$ 1.74 million, or 3.7% of total project costs, comprised activities designed to promote income generation, environmental education, sports and culture, and community development.

19. The detailed original Project costs, in absolute and relative terms, are shown in Annex 1, Table 1.

1.6 Revised Components

20. None, as the Project was never revised.

1.7 Other significant changes

21. Closing date. The Project closing date was extended by four months to October 31, 2013, but no official modifications to the Project scope were introduced.5

2. Key Factors Affecting Implementation and Outcomes

2.1 Project Preparation, Design and Quality at Entry

22. Integrated, multi-sectorial municipal-scale approach to urban development. Capibaribe Melhor was one of an early phase of integrated urban water management projects that pioneered a multi-sectorial approach that would not become widespread in Bank-supported projects for several years. Following Prometropole’s approach, this Project used the Capibaribe River to define the Project’s geographical scope, and encompassed wide-ranging interventions. This unusual scope (including environmental and urban management, income generation and urban amenities aspects) also had the complementary impact of calling attention to the importance of the Capibaribe River itself, which has continued to have positive ripple effects on other regional institutions such as the CEF and Federal Ministries. Additionally, Capibaribe Melhor was one of the first examples of direct World Bank lending to a municipality in Brazil, in parallel to another four such urban development projects in Brazil. However, these innovations meant that the projects were attempting new and different approaches for which the lessons from earlier and ongoing operations were limited and the risks were easy to underestimate. This does not fully explain the Bank’s large underestimation of Project costs and overestimation of the capacity of

5 Section 2.2 describes two restructurings attempts proposed by the Borrower at the end of 2012 and the end of 2013, and the reasons why they were not processed by the Bank.

the Recife Municipality to prepare and implement a project of the magnitude and complexity envisaged6.

23. Mismatch between objectives and resources. The financing of the Project was vastly insufficient for achieving the ambitious PDO, and allocations by component were not adequate to achieve intermediate objectives. The lack of realistic estimates, and corresponding allocations, for activity costs was due to the paucity of technical designs created during the preparation period. The Project attracted wide buy-in from different sectors of the Recife Municipal Administration during preparation, and geographically varied areas of the Recife Municipality sought Project financing. Although this wide participation was positive in anchoring the Project politically, it also unduly stretched the financing envelope, as defined by the capacity of the Recife Municipality to borrow, over an expanding number of areas.

24. Insufficient resource allocation for building management capacity and reaching fiscal PDO targets. Funding allocations did not match the scope of the three main components or the PDO. In particular, although about 10% of the Project costs were originally allocated for Institutional Development, the bulk of this was for Project Management and only about 2% went towards building urban management capacity within the Recife municipality. Also, the PDO contained targets for the sustained fiscal performance of the Recife Municipality without significant allocation of resources to support the Municipality’s fiscal performance. In addition, reaching such broad fiscal indicators would require a comprehensive fiscal program, aligned with the fiscal responsibility law and by-law norms, well beyond the scope and reach of the Project7. Despite these limitations, the Project’s ambitious design was successful in bringing about real impacts in terms of capacity building locally. One institution, URB, was responsible for managing all physical interventions as well as a broad scope of actors. This high degree of local ownership strengthened coordination and Project management capacity within the organization, as evidenced by the ability shown by URB in accessing various outside sources of financing (such as PAC and MCMV) to complete Project activities.

25. Social development objectives almost unfunded. Social outreach included activities aiming at promoting citizen participation, economic development and environmental education, as well as investments to improve infrastructure in the Project area. This component financed the rehabilitation of a local Job Generation Center, the Management Plan for the 3 parks financed under the Project, and consulting services for the social work supporting resettlement in the Project area, the latter currently still under implementation. Although the PDO included important goals in terms of social

6 See Section 2.2, Paragraph 33 and Annex 1, Paragraph 3 for a more in-depth explanation and analysis of Project cost overestimations. 7 The Project PAD foresaw “implementation of a multi-annual program of fiscal adjustment to ensure the long-run sustainability of the municipal fiscal accounts” in the Risks section; however, this was not correspondingly provided for in the activities.

development under the objective of “improving the well-being of the low-income population,” actual allocations to this area were very limited at only 3.9% of total Project costs. Due to Project implementation issues, only about half of this amount was actually spent – however, had Project implementation been more successful, the allocated amount would almost certainly have been insufficient to fulfill the PDO.

26. Excessive preparation time eroded municipal support. The preparation of the Project took an unduly long time from the first identification in 2003 through Board approval on December 20, 2007, due in a large part to excessive pre-implementation social and environmental analysis. This lengthy preparation 8 tested municipal and political patience in Recife, where expectations had built up during years of preparation. In the end, the commitment of the Recife Municipality no doubt suffered due to the slowness of the Project to produce tangible results. It should be noted that lengthy preparation was common also for other urban projects during this period.

27. Shortcomings in technical preparation impeded Project readiness. It appears that a strong focus on broad social and environmental analyses at the expense of technical designs during the 2003-2006 preparation period hampered actual implementation readiness at Project rollout in 2009. A stronger commitment to practical planning and design during the preparation period might have enabled faster implementation at loan effectiveness.

2.2 Implementation

28. Delayed startup of Project implementation (2007-2009). The start-up of Project implementation was much delayed. Almost two years passed between World Bank Board approval on December 20, 2007 and the signing of the Loan Agreement on September 3, 2009, with effectiveness on October 14, 2009. This long delay, beyond the usual maximum period of 18 months, required an exception from the World Bank. This delay was due to the time-consuming procedure to obtain Federal approval for the sub-national loan—while the Federal approval process usually takes about six months, in the case of Capibaribe Melhor it required almost two years. The main reason for the protracted procedures was Recife Municipality’s non-compliance with the fiscal limits and required certification of mandatory expenditures imposed by the Federal Fiscal Responsibility Law. The Bank/CMU cannot intervene in the approval process of a subnational loan in Brazil at the Federal Level. A sophisticated monitoring system is in place to ensure municipalities’ compliance with the Fiscal Responsibility Law, and any pending issue identified by this system automatically suspends the Loan Agreement process. The Bank, both in Management Letters and in permanent dialogue with the Borrower, urged the Municipality’s swift compliance

8 The identification mission was held in March 2004 and Pre-negotiation mission held in May, 2007. During this interval the Borrower had to hire consulting services to support Project preparation and to develop studies required by Bank team. The first supervision mission was held on December, 2009.

with Federal fiscal requirements in order to expedite the signing of the Loan Agreement9.

29. Despite delays, 2007-2009 were not “lost years,” since detailed engineering designs for the proposed works were contracted in 2008 and developed in 2009 and 2010. Once declared effective, the Project Management Unit (PMU) and the World Bank (with changed task management) discovered the substantial cost underestimates10.

30. Substantial underestimation of Project costs and prioritization of Bank resources. The original Project financing comprised US$ 32.76 million under the World Bank loan and US$ 14.04 million in counterpart funding for a total of US$ 46.8 million. This financing proved to be far below the actual projected total costs, which are now estimated at US$ 193.08 million, more than four times the original estimate (For detailed costs see Annex 1, Table 1). 11 These higher costs made it necessary to channel limited Bank financing towards a few priority sub-components of the Project, those: (i) aligned with the PDO, (ii) in a more advanced stage of engineering designs, and (iii) whose costs were closer to the real purchasing power of the Project. In the following supervision mission 12 the Municipality presented to the Bank the investments that would receive Bank funds and the ones that would be financed by other sources of financing, particularly the PAC Program.

31. During actual Project implementation, in accordance with the priorities agreed upon with the Borrower, Bank funding financed: (i) Component 1: US$ 2.2 million for the acquisition and implementation of a staff control system for URB, and for overall Project management; (ii) Component 2: US$ 16.9 million for the construction of a bridge across the Capibaribe River with associated access roads; improvements to urban roads subsystems A, B and C; renovation and expansion of two existing public parks and the construction of another one; (iii) Component 3: US$ 0.39 million for the improvement of a job center and social consulting services; and (iv) Front End Fee: US$ 0.08 million.

32. The priorities for Bank funding were thus reduced in scope, although no formal restructuring took place, and a search began for alternative sources of financing for

9 During this period the Bank, learning from this and other similar situations, established a system with the Federal Government whereby Project concept does not go ahead until the Carta Consulta has been approved by the Federal Government. This has greatly improved project preparation and approval times, bringing them down to about 11 months during the current CPS period. 10 As stated in the aid-memoire of the first supervision mission, held in December, 2009. During this mission the Bank team identified that the Project should be restructured and requested the Municipality to start preparing necessary technical, economic and legal assessments. 11 The estimated Project total costs (through full completion of its original scope) are from the URB, the Recife Urban Development Company. 12 Supervision mission of May, 2010.

the components identified as unlikely to be completed with Bank funding.13 These included the water supply and sewerage works, the macro-drainage system, and construction of housing to resettle the families affected by these two components, all of which are now being financed by national programs and institutions: PAC I and II for the integrated WSS works and the macro-drainage, and Minha Casa Minha Vida (National Housing Program – PMCM) for the resettlement housing.

33. Cost underestimations and loss in loan purchasing power. The total original financing envelope of US$ 46.80 million was far below the latest estimated cost of US$ 193.08 million for full completion of Project activities. In order to quantify and understand the magnitude of the impact of cost underestimations during implementation of the Project, this analysis considered Bank disbursements, which amounted to US$19.527 through the first quarter of 2014 14. When performing a comparison for the correspondent amount in BRL following (i) the Project exchange rate at appraisal15; (ii) the actual exchange rate and (iii) after discounting inflation16 in the construction sector, conclusions are as follows:

• The depreciation of the BRL versus the USD, which started towards the end of 2012, was actually beneficial to the Project. Actual disbursements were worth 5% more than would have been the case if the original exchange rate projections had held true; • The impact of inflation was negative– either 19% (if considering the originally projected disbursements) or 15% (if considering the actual disbursements, in this case combining impact of inflation and exchange rate depreciation);

34. Given that actual Project costs are now estimated at four times the original cost estimates, this 15% drop in purchase power accounts for only a fraction of the cost underestimation. Flawed project design remains by far the most important factor. This confirms the essential importance of detailed technical specifications and engineering designs at appraisal. Additionally it should be noted that the boom in construction in Brazil and the launch of PAC program created additional difficulties for the early start of the project, affecting, for instance, the managerial capacity of the Borrower to proceed with simultaneous bidding and contracting processes for distinct source of resources and applicable rules and reducing the number of bidders in bidding processes.

13 See Paragraphs 34-37 of this section (pages 9-10) for a more complete explanation of restructuring attempts. 14 Table 3 in Annex 1 provides the detailed analysis. 15 At appraisal, projections indicated disbursements would end at 2Q2013 and, therefore, there are no projections for the exchange rate for future quarters. We considered exchange rate stable at R$1.8 per USD for future quarters. 16 Paragraph 2 in Annex 1 provides the detailed analysis of the impact of inflation in construction costs..

35. Unsuccessful attempts to perform a project restructuring. By mid-2010, it was clear to the Bank Task Team that restructuring would be needed due to the underestimation of Project costs and implementation time required. However, the Team decided to focus on implementation and procurement given the already substantial delays in that area, and planned to initiate restructuring at the Mid-Term Review Mission (MTR) in November 2011. At the MTR, the Team and the Borrower agreed to a restructuring that included a substantial increase in counterpart funding and covered most of the original Project scope, anticipating possible Additional Financing from the Bank to complete the implementation of all Project activities. This first restructuring attempt included: (i) a slightly changed Project scope; (ii) a modified results framework; (iii) adjusted loan allocation and disbursement percentages; (iv) changed total Project costs, to reflect the increased counterpart funding; (v) modified eligible procurement methods and (vi) a two-stage (12+10) month extension of the Closing Date to April 30, 2015. This first restructuring request was submitted to the Federal guarantor COFIEX17 by the Borrower on August 20, 2012, approved on September 12, 2012, and the Bank informed of the approval on October 18, 2012.

36. Shortly after the Government’s endorsement of the proposed restructuring, municipal elections in Recife brought a new Mayor-elect to power, who requested that the Bank continue to postpone Project activities pending review by the new administration. The new Mayor had previously been Secretary of Planning at the State level and had overseen implementation of the Expanding Opportunities, Enhancing Equity In The State Of Pernambuco DPL. After the inauguration of his term, the new Mayor met with the Brazil Country Director to request a similar Development Policy Loan for Recife18. On meeting with the new administration team in February 2013, the Bank team learned that staff in the PMU in the Recife Urban Development Company (URB) had been gradually dismissed from early 2013 onwards, signaling reduced municipal ownership of the Project.,. However, a 4 month extension to the final closing date of October 31, 2013 was approved to allow time for a revised Project Restructuring.

37. On August 28, the Borrower requested a second restructuring with no additional counterpart financing and a substantially reduced Project scope, with the goal of finishing the Project within the additional 22 months. The lengthy restructuring approval process by the Federal guarantor had to be repeated for the new proposal. Although the second request was approved by the Federal guarantor on October 9, 2013, official notification of the approval was only received.by the Bank on December 2, 2013, a month after Project closing.

17 In Brazil any sub-national project restructuring and loan amendment has to be submitted and endorsed by the Federal Government (the Guarantor), through COFIEX – External Financing Commission under the Ministry of Planning. 18 The request for a DPL represented a shift in strategy from the previous administration, which was considering an Additional Financing for the Project after the first restructuring.

38. The Loan closed on October 31, 2013. None of the components were completed by closure. About US$ 13.15 million (40%) of the Bank loan will be canceled.

Table 1. Project Restructuring Attempts and Closing Date Extension Submitted by Bank Approved Additional Closing the Borrower Notified Project Confirm by the Type Counterpar Date to the of the Scope ed Guarantor t Financing Extension Guarantor Approval Largely Substantial same First Sept. 12 Oct. 18, Level additional Aug. 20, 2012 original 22 months No Restructuring 2012 2012 I counterpart project financing scope In June 2013, CMU Closing Date approved 4 month - 4 months Extension extension. through Oct. Yes 31, 2013 Dec. 3, Substantia No 2013 lly Second Level additional Aug. 28, 2013 Oct. 9 2013 (AFTER reduced 22 months No Restructuring I counterpart Closing project financing Date) scope

2.3 Monitoring and Evaluation (M&E) Design, Implementation and Utilization

39. The monitoring indicators under the Bank loan remain the original ones, since no proposed restructuring was ever finalized. The 5 PDO indicators and 12 Intermediate Outcome Indicators19 are provided in the Datasheet.

40. The design of the Project’s Results Framework was seriously flawed:

• Activities were not linked to particular indicators. This is the case for the “Net Current Revenue over Net Current Debt” PDO indicator and for three Intermediate Results Indicators, for which the target could be achieved independent of any Project financing or activity; • Indicators were not simple and unequivocal and would have required special studies, before and after the Project, to be measured. The property values of poorest houses, the increase in percentage of population satisfied with urban services PDO indicators, the percentage of job center clients reporting concrete benefits, the percentage of target population reporting benefits of recycling triage centers, the percentage of environmental education participants recalling at least three key messages of the program, and the number of people benefiting from environmental education – all Intermediate Results indicators – would have required special studies/surveys that were not planned or budgeted at appraisal, and ultimately were not carried out. It would have been preferable to select

19 Including two core indicators not included in the PAD.

indicators linked to performance indicators routinely collected by institutions such as COMPESA, the state water supply and sanitation operator in the Project areas, or different departments of the Recife municipality; • The methodology for estimating indicators and the manner in which targets were originally set was not clearly defined. For example, when referring to the six sub- indicators under No. 3 it was not clear whether a target percentage increase of 10% refers to an increase of ten percentage points (as from 50% to 60%), or to a relative increase (as from 50% to 55%). Additionally, for several indicators a goal of a percentage increase from zero was identified, leaving the actual target unclear.

41. As a result of the substantially reduced scope of activities carried out with Bank funding and of the delayed Project implementation, many of the indicators were never calculated and the monitoring and evaluation suffered accordingly. Additionally, from the beginning there was minimal Borrower ownership of the Project indicators, which weakened reporting on the Results Framework. However, URB systematically turned in Project Progress Reports each semester, as agreed, with qualitative information on Project activities and issues faced, social and environmental aspects, fiduciary aspects, and other aspects not directly related with the Project indicators.

2.4 Safeguard and Fiduciary Compliance

42. The safeguards refer to the environmental, financial management, procurement and resettlement aspects. The Project was classified as a Category A, and triggered the following Bank safeguard policies: Environmental Assessment (OP 4.01), Natural Habitats (OP 4.04), Pest Management (4.09), Cultural Property (OP 4.11), and Involuntary Resettlement (OP/BP 4.12).

43. The environmental safeguards were well prepared, with an Environmental Impact Assessment and Environmental Management Plan of exceptional quality completed in 2004. Compliance with environmental safeguards was supervised during implementation and was as a rule Satisfactory. Satisfactory compliance was also achieved for the financial management safeguards. Compliance with the procurement safeguards was also generally Satisfactory. The Recife Urban Management Company, URB, proved to be proficient in applying the Bank’s procurement guidelines.

44. Compliance with the resettlement safeguards is rated Moderately Unsatisfactory. The social safeguards documents (Involuntary Resettlement Framework) were overall considered to be of good quality. However, at the time of Loan Closing the resettlement of about 760 families affected by the construction of the road system and bridge over the Capibaribe River, and integrated urban upgrading and macro-drainage works was still pending (Refer to Table 2). Bank supervision did manage to strengthen the protection of resettled households through the preparation of three Resettlement Action Plans (RAPs). RAPs related to the Project activities financed by national programs (such as PAC) were developed in compliance with the applicable Bank rules, and incorporated the inception of grievance procedures.

45. World Bank resettlement policies will apply even though the above described works will not be finished until June 2018, well beyond the Loan Closing date of October 31, 2013. Accordingly, the Bank will continue supervising the resettlement of these 763 families20. It should be noted that the Borrower developed and agreed with the Bank on an action plan for the satisfactory completion of the RAPs, as well as on a monitoring strategy. They have also provided all the financial and legal guarantees that the above will be carried out.

2.5 Post-completion Operation/Next Phase

46. The two components financed by the World Bank, i.e. the three public parks and the bridge with its access roads and urban roads subsystems A, B and C, will be operational once commissioned by departments of the Recife municipality. For the three parks, special management plans have been prepared but it is still uncertain how well-anchored they are within the municipal administration. There are plans to expand the use of closed circuit cameras to monitor the parks and reduce the risk that they may become the domain of criminal gangs. Reportedly, public surveillance and transit control cameras have been effective elsewhere in town to reduce crime and loss of public domains. The operation and maintenance of the bridge and access roads are as yet somewhat distant, but will be the responsibility of the roads department of the Recife municipality. Although no future monitoring and evaluation plan for the Project is in place, the Bank will continue supervision of the Project after the closing date, particularly for the works which started implementation during the term of the Loan Agreement. This will include follow-up on the functioning of infrastructure and services supported by the Project.

Table 2. Pending Works after Project Closing Expected Date of Pending Works Impacts on Safeguards Completion

Construction, Rehabilitation, Santana: Completed and/or Expansion of Apipucos: Partially 1. None Apipucos, Caiara, and Completed Santana Urban Parks Full Completion: June 2014 4 of 11 canals Integrated Urban Upgrading completed and Macrodrainage Works

(PAC financed) 2. May 2015 Casarao do Barbalho Housing Resettlement of 403 families Complex for the Affected October 2014 Families (PAC)

20 For the households to be affected by works under the integrated WSS works, which will not be carried out through World Bank financing and have not yet been started, the Brazilian involuntary resettlement policies will apply. However, the related RAP (in compliance with OP 4.12) was developed with the assistance of the Bank earlier in Project implementation.

Expected Date of Pending Works Impacts on Safeguards Completion Road System and Bridge over Resettlement of at most 360 families. April 2015 Capibaribe River As per the suggestion of the Bank team, the Borrower is currently revising the detailed designs for the 3. Housing Development for the bridge. Besides reducing costs, this Affected Families (Minha June 2016 will safeguard a school (which would Casa Minha Vida) otherwise be affected) and reduce the number of affected people.

3. Assessment of Outcomes

3.1 Relevance of Objectives, Design and Implementation Rating: High

47. The relevance of the Capibaribe Melhor is rated High. At the time of approval, it was well aligned with the objectives of the Brazil CAS to decentralize many decisions by building urban fiscal, environmental, and urban management capacity. The objectives to increase the well-being of the urban poor remain valid under subsequent Country Partnership Strategies. Despite the disappointing outcome of many of the Project components, Capibaribe Melhor has shown substantial resiliency in terms of the need to support integrated urban development, surviving three political cycles and continuing to be recognized as an entity both by the community at large and institutions such as CEF and Federal ministries.

3.2 Achievement of Project Development Objectives Rating: Negligible

48. At Loan Closing the efficacy of the Project, i.e. the achievement of PDO, remained Negligible since no major component had been finished. When measured against the PDO and the Results Framework, achievement is difficult to quantify because of either the poor design of the Results Framework and/or the unavailability of information at closing of the loan to be compared against it:

• Two out of five PDO-indicators were achieved – “Net consolidated debt to net current revenue at less than 40%” and “Municipality’s environmental management capacity enhanced by the establishment of 4 ZEPAs”. The fiscal target was achieved independently of the Project, but there was no specific action (besides the Bank supervision of the Borrower compliance with the fiscal covenants) or financing provided to influence this factor. Likewise, the environmental target was met with no financial input from the Project. It was even met before the Project became effective; • The PDO-indicator on population reporting satisfaction with the infrastructure improvements, for instance, could not be measured, since the works were not yet completed by the closing date of the project. The same with the indicator on increased property values;

• The assessment of performance through the results of the intermediate indicators reveals the following: (i) One of the three intermediate fiscal indicators was achieved, though independently of the Project’s inputs; (ii) Specific results linked to the (incomplete) infrastructure investments (on population taken out of flood- prone areas, legal tenure, and access to water and sanitation) were not achieved; and (iii) results of the social, environmental and economic development component are unclear, since the measurements (sometimes available in absolute numbers – number of people who received vocational training, number of people who benefited from environmental education ) were not made against the formal targets (expressed in percentages).

49. Despite the overall compromised Project efficacy (resulting from the fact that Project activities were not fully completed), some partial / qualitative achievements during the four year implementation period can be identified through the Project outputs21:

• Under the “Institutional Strengthening” Component: Besides the direct support to Project management, Capibaribe Melhor provided a broader support to URB, through financing the implementation of an information system for HR management, which is place. It also supported URB through the acquisition of goods, including IT equipment ; • Under the “Integrated Urban Territorial Development” Component: 2 out of the 3 urban parks to be constructed and/or rehabilitated by the Project – Santana is completed and Apipucos is close to completion with the associated amenities, cultural, leisure and sport activities. These multipurpose parks are considered to be of high quality, and are now benefiting the poor population living along Capibaribe River, previously lacking leisure opportunities. Integrated macro drainage and flood control improvements were also completed in 4 out of 11 canals to receive investments; • Under the “Social, Environmental and Economic Development” Component: the Project supported the refurbishment of a Job Center which is fully operational (having benefited some 581 people with vocational training in the project targeted area). It also provided for the development of Management Plans for the urban parks, as well as for services to support resettlement. Although resettlement remained incomplete at the closing of the Project, some coordinated economic development, social and environmental outreach activities were delivered.

3.3 Efficiency Rating: Negligible

50. The ex-ante economic analysis of the Capibaribe Melhor estimated an economic rate- of-return of 25% on the original Project package. Given that no component is finished, it is impractical to re-estimate the economic rate-of-return since neither costs nor

21 For additional information on Project outputs, refer to Annex 2.

benefits can be reliably calculated. However, it is likely that the rate of return from the Project will be much lower given the quadrupling of the Project costs (in current prices) and roughly doubling (in constant prices) as compared to the cost estimates used in the Project Appraisal Document (PAD). A major portion of these costs are associated with resettlement: for this Project, the ratio between the cost of each infrastructure intervention and the associated resettlement ranges from 0.5 (urban roads and bridge) to 1.0 (integrated sanitation) to 3.0 (macro-drainage). These high costs are due in part to the need for proximate resettlement, in this case in a dense area with very high land prices. The economic efficiency is then rated Negligible.

3.4 Justification of Overall Outcome Rating Rating: Unsatisfactory

51. The overall outcome rating of the Project is Unsatisfactory, combining the High relevance, the negligible efficacy, and the Negligible economic efficiency.

3.5 Overarching Themes, Other Outcomes and Impacts

(a) Poverty Impacts, Gender Aspects, and Social Development

52. Socio-economic conditions were surveyed in 2008 by the consultant firm Geossistemas, which reported that 78% of the families owned their houses; 43% earned one minimum salary or less and about 70% earned two minimum salaries or less; 53% had resided in the area for between 10 and 30 years; and that the areas are predominantly residential with at least 82% of the houses used as residences. Although surveys to measure impacts of the Project are still to be carried out by the consulting firm supporting social resettlement works, once completed the Project is likely to have positive impacts on poverty and social development. The functioning and high frequency of residents in the two completed parks, the functioning of the Job Generation Center; and the improvements in completed urban roads (also comprising pathways, micro-drainage and sewerage) have already improved the living conditions of the residents in the Project area.

(b) Institutional Change/Strengthening

53. The PDO included strengthening the capacity of the Recife Municipality in the areas of environmental, fiscal, and urban management. It is uncertain to what degree the intended strengthening has materialized, since (i) escalating Project costs forced prioritization of other components over the institutional one, and (ii) only 5.9% of the actual Project investments (up to October 2013) was allocated to Institutional Development, and the amount financed mainly the costs of the PMU within URB.

54. Having said the above, it should be however noted that earlier (in 2009, in the transitional period to Project implementation), and partly as a result of the discussions of the Project on institutional development, both the Secretary of the Environment (in charge of environmental licensing procedures) and the Institute Pelópidas da Silveira

(in charge of urban planning at the municipal level) were created, thus improving overall urban and environmental management capacities of Recife.

55. On the other hand, while URB reported that their staff has learned from the opportunity of working in an integrated manner during Project implementation (engineering, social and environmental aspects), starting in early 2013 the newly elected Recife municipal administration chose to reduce personnel expenditures and staffing, which severely affected the PMU staff. The impression is that the institutional strengthening results from the Capibaribe Melhor are limited, all the more so since the Recife municipal administration has weakened URB by centralizing decision management of key works at Secretariat level.

56. The Bank team supported the municipality of Recife in reviewing its fiscal capacity and debt assessment in 2009, thus helping the municipality to get approval for the Bank financed Recife Education SWAP project (P106208, LA 7711-BR) 22. This SWAp project also includes a technical assistance component that supports institutional development for urban planning and mobility, a resulted of a dialogue with the Bank team supervising the Capibaribe Melhor.

57. The excessively long period to prepare and implement the Capibaribe Melhor may have reduced the municipality’s interest in pursuing similar follow-up projects with the World Bank. Instead, there is more interest from the current municipal administration in a Development Policy Loan from the World Bank, since a DPL could be expected to be fast-disbursing and dovetail with the four-year mandates of mayoral administrations. In addition, the existence of grants and financing from PAC to finance urban infrastructure and housing instill competition between sources of funding, and many decision makers opt for sources of financing that are simpler to obtain and implement.

3.6 Summary of Findings of Beneficiary Survey and/or Stakeholder Workshops

58. Not applicable.

4. Assessment of Risk to Development Outcome Rating: High

59. The Project suffers from a number of risks, including financial, institutional, political, and resettlement risks. The financial risks relate to a history of escalating investment

22 Under Capibaribe Melhor, a consultant was hired to work with municipal officials in the Secretariat of Finance, in coordination with the PREM team, to perform such revision. The Task Team of the Project also actively participated in the discussions of the Recife SWAP operation, particularly on the TA component supporting fiscal management, urban mobility and urban planning.

costs that may yet continue into the future. The fact that the financing of the Project required securing resources from PAC I and II and Minha Casa Minha Vida Program also introduces a coordination risk of fragmented financing, particularly with regard to distinct social and environmental requirements, bidding and contracting procedures, as well as preparation and implementation schedules. The institutional risks exist because the Project did not build institutional capacity within the Recife municipal administration to the level that was originally expected. The political risks are latent but remain, given the history of the substantial periods of time required in 2007-2009 to reach decisions on signing the Loan Agreement and making it effective, and in 2012 and 2013 to consider restructuring. Finally, and despite the Bank’s commitment to provide post-closure supervision, resettlement risks remain for about 760 families affected by the Project (for details, refer to section 2.4).

5. Assessment of Bank and Borrower Performance

5.1 Bank Performance

(a) Bank Performance in Ensuring Quality at Entry Rating: Unsatisfactory

60. Quality at Entry has been rated Unsatisfactory for a number of reasons: (i) the substantial underestimation of Project costs raises doubts as to how thorough the costing was during preparation; (ii) the link between PDOs and the resources allocated to reach them is at times weak and particularly so regarding the fiscal PDOs for the Recife municipality and for the social development component; (iii) the design of many of the PDO-indicators and the Intermediate Results indicators is poor and does not allow for an easy and precise way of monitoring project outcomes; (iv) the long preparation did not result in readiness to implement, since it focused on various generic supporting social and environmental studies rather than in detailed technical inputs and designs which would have enabled faster rollout of Project. Bidding documents were ready only in 2010.

(b) Quality of Supervision Rating: Moderately Satisfactory

61. Bank supervision was slow in recognizing the negative impact from the protracted period between Board approval on December 20, 2007 and the failure of the Borrower to meet the conditions for loan signing and effectiveness. A proactive supervision during the years 2008 and 2009 would have been more appropriate with more forceful measures taken, including the possible restructuring of the Project. In contrast, once the substantial cost overrun was discovered following loan effectiveness, Bank supervision was effective and focused on getting implementation up to speed. As a demonstration of the effectiveness of the Bank supervision the Project managed to disburse 60% of the Bank loan in less than three years of effective implementation. The supervision of the safeguards was adequately managed. The Bank supervision team, a different team from that which originally prepared the project, remained the same from effectiveness through the Loan closing date. The

Bank task team identified the need for a restructuring at an early stage and pursued it actively, although unsuccessfully.

62. The combined rating of an Unsatisfactory preparation and a Moderately Satisfactory supervision is Moderately Unsatisfactory.

5.2 Borrower Performance

(a) Government Performance Rating: Moderately Unsatisfactory

63. The long delay in signing the Loan agreement and in enabling effectiveness and implementation seems to have been partly due to the slow response of the Recife Municipal Government in obtaining formal agreement from the Ministry of Finance. In addition, the Recife municipality must also share the onus of the Unsatisfactory Quality at Entry since it financed most of the preparatory studies required by the Bank team and participated in the design of the Project. On the positive side, however, the Municipality was prompt in identifying and committing to alternative financing of those components that could no longer be financed under the original funds assigned to the Project because of the serious underestimation of the investment costs, and continues to show evidence of their commitment to full completion of all project activities.

(b) Implementing Agency or Agencies Performance Rating: Moderately Satisfactory

64. After overcoming moderate initial shortcomings in implementing Bank guidelines and procedures, and after receiving implementation support from the firm contracted for this purpose, URB implemented the Project professionally and effectively during the roughly three-year implementation period. Non-negligible shortcomings in the reporting of M&E remained through the implementation period, but these are considered to be largely a result of the previously discussed “Quality at Entry” issues and lack of Borrower ownership of the Project’s Results Framework. In addition, the PIU must be praised for developing technical inputs that allowed the Municipality to actually reach resources from the PAC and Minha Casa Minha Vida programs.

65. The compound rating of the Government and the Implementing Agency is Moderately Unsatisfactory since the overall Unsatisfactory Project outcome overrides the split rating of the Moderately Unsatisfactory Government performance and the Moderately Satisfactory performance of the Implementing agency. 19

6. Lessons Learned

Lesson One: Excessive preparation periods should be avoided, and technical readiness at rollout assured, to conserve commitment. An inordinately long preparation period reduces the support of the client government and of the beneficiaries and increases risks as administrations may change.23 The time from project identification until start-up of project implementation in this case was from 2003 to early 2010— roughly seven years— and weakened the commitment of the borrowing Recife Municipality. It is also essential to minimize the gap between loan effectiveness and real benefits from investment activities, as the credibility of the government depends on the flow of tangible results. Bank requirements for preparation studies and analyses should be realistically balanced with actual technical inputs (e.g. designs, topography) in the early phases of the project.

Lesson Two: The Project Development Objective (PDO) and the intermediate results indicators should be as few, simple and unequivocal as possible. Intermediate Results Indicators should be directly related to each PDO, and whenever possible, be linked to the Borrower’s or Operating Agencies’ routine monitoring and evaluation system rather than demanding special studies to set baseline values and assess compliance with target values. In the case of Capibaribe Melhor, several project indicators were not directly related to the results of project activities but to other exogenous factors, thus complicating assessment of project results.

Lesson Three: Risks posed by changes in government should not be underestimated and must be mitigated. During project preparation and implementation political risks, particularly those related to transitions, are often underestimated and can affect project efficacy and efficiency substantially. In the case of Capibaribe Melhor, a new government stalled the project for almost a full year in 2013, a delay that ultimately scuttled the necessary restructuring of the Project. Project preparation and implementation can account for such risk through various measures, such as: (i) determination of a concept structure that allows sufficient flexibility to adjust to changing governments; (ii) robust implementation arrangements; (iii) utilization of the Bank’s convening power and maintenance of a constant and high level dialogue with the Borrower; (iv) building of community ownership of the project; and (v) performing proactive supervision during political transitions. This must be complemented by internal dialogue within the Bank across management levels in order to present a united front to the counterpart throughout the transition process.

Lesson Four: Infrastructure projects should focus on identification of the most efficient technical solution on a case-by-case basis. The technique used to identify this solution may be least cost, best available technology, or another method. In the case of Capibaribe Melhor, revision of previous designs for the bridge and parks in order to

23 Annex 4, Table B shows costs during the preparation period substantially exceeded costs during supervision, illustrating this imbalance between preparation and implementation.

simplify the technical design and reduce costs took a substantial portion of the implementation period. Teams preparing and implementing projects should ensure that sufficient attention and budget are allocated for hiring experienced staff for these assessments. When available studies do not offer sufficient information to accurately estimate project costs and select the least cost alternative, this should be highlighted and contingencies included in the project cost to mitigate the risks of imprecise cost estimates. Similarly, continuous vigilance should be exercised during project implementation to ensure that technical specifications are accurate and at the adequate level of detail and that costs are estimated accordingly.

Lesson Five: Large, complex integrated urban development projects require consistent effort over long periods of time. The original PDOs of the Capibaribe Melhor envisaged benefitting about a quarter million low income inhabitants in a sustainable and transformational manner within a project implementation period of five years. The actual outcome fell substantially short of the one originally projected, indicating that significant improvement of the socioeconomic status of low-income populations in Brazil – and likely elsewhere – requires substantially more time than that afforded by a typical World Bank project with an implementation period of five years, as well as an allocation of resources commensurate with the scale of the project’s objectives.

Lesson Six: Resettlement determines the project timeline and costs. Resettlement under urban slum upgrading projects in Brazil frequently determines the timeline for the entire project. Compliant resettlement in dense urban areas is often slowed by the availability of nearby suitable urban land for the building of substitute housing. Resettlement costs in the case of this project ranged from 50% to 300% of the cost of the associated infrastructure, illustrating their importance in the budget of urban projects. To facilitate resettlement, the Bank should reassess the status quo for social housing typologies (density, design, technology, etc.) and mechanisms (financing, zoning, etc.) in Brazil, and reframe its agenda accordingly. For example, discussion and exchange of experiences between the Bank and the Borrower could yield new alternatives and instruments for resettlement housing. From a physical standpoint, this could involve the prioritization of changes to the typology of social housing, allowing for more flexible, innovative and alternative designs. From a legal standpoint, this could include changes to zoning to allow for increased density and mixed uses in low income areas, as well as capacity building for the regularization and further utilization of available urban management instruments (for taxation, land management etc.).

Lesson Seven: For complex urban and infrastructure projects in Brazil, the Bank should favor framework 24 operations with faster preparation periods, while

24 In contrast to the activity-defined projects, framework projects focuses on the type of project-financed activities but not necessarily the identification of each of the specific activities. Only a few activities (usually those to be financed during the first year or so of project implementation) are identified and well defined during preparation (known location and detailed studies available) and are appraised based on specific details and management plans. Eligibility conditions are designed to select future interventions

ensuring adequate time for implementation. Given the two-year Brazilian political cycle, with alternating state and municipal elections, a framework approach for large, complex integrated urban development projects can increase project ownership on the part of the Borrower in order to manage the risk of government transitions. Framework projects are structured with a quick preparation period to lay out a general framework of actions and results, and leave specificities to be worked out on the ground during a longer implementation period. Average implementation for framework projects should be no less than seven to nine years to allow sufficient time for design and implementation, which often cannot be satisfactorily completed in five years. In cases where the Bank opts for a longer preparation period and a shorter implementation time, preparation should include detailed designs and assessments to ensure full readiness for project rollout.

Lesson Eight: Subnational lending requires substantive capacity building. When working with urban projects at subnational level, the Bank must ensure that the gaps in institutional capacity are adequately addressed earlier in project concept and preparation. This includes identifying challenges, defining activities to confront these, and assigning resources sufficient to complete those activities satisfactorily. In the case of Capibaribe Melhor, given its small loan amount, it would have been preferable to target and complete less ambitious infrastructure investments while concentrating on building municipal implementation and management capacity. Examples of areas for capacity improvement include urban planning, land use management, urban taxation (all considered necessary to strengthen the Borrower’s ability to implement national program investments, such as PAC and Minha Casa Minha Vida), as well as infrastructure financing (PPPs).

7. Comments on Issues Raised by Borrower/Implementing Agencies/Partners

(a) Borrower/implementing agencies

(b) Cofinanciers

during implementation, and management frameworks (safeguards, disbursements, etc.) are designed to be applied to those future interventions.

Annex 1. Project Costs and Financing

(a) Project Cost by Component (in USD thousand equivalent) Percentage Total Percenta Actual Total of Appraisal Expected ge of Appraisal (Spent Estimate through Apprais Estimate Component through Spent Completion al Spent (USD Project through of through millions) Closing) Project remaining Complet Closing works () ion I. Institutional 4,728 2365 50% 4,797 101% Development Consultant study for M&E system 740 0 0% 529 72% and Strategic Planning Environmental and Urban 245 0 0% 0 0% Management Project Management & 3,743 0 0% 4,267 114% Other consultants II. Urban territorial 40,250 33,052 82% 179,672 446% development Water supply and 20,000 0 0% 47,373 237% sewerage systems Public parks 5,000 17,525 350% 18,083 362% Macro-drainage 4,250 10,803 254% 15,742 370% and resettlement Urban mobility 11,000 4,725 43% 98,474 895% Land 0 3,875 7,000 expropriation III. Social 1,740 401 23% 1,530 88% development Income 694 401 58% 1,456 210% Generation Environmental 386 0 0% 0 0% Education Sports and 93 0 0% 0 0% culture Urban promotion 50 0 0% 0 0% Community 517 0 0% 74 14% development Front End Fee 82 82 100% 82 100% Grand Total 46,800 39,775 85% 193,081 413%

(b) Financing Appraisal Actual/Latest Type of Estimate Estimate Percentage of Source of Funds Cofinancing (USD (USD Appraisal millions) millions) Borrower, PAC, CEF, Minha Vida 14.04 173.46 1,235% International Bank for Reconstruction 32.76 19.62 60% and Development 46.8 193.08 412%

(c) Loss in Loan Purchase Power Disbursemenst, BRL million Exchange Rate Disbursements, BRL million in constant prices Actual Disbursements US$ millions Projected Projected FX CPI (3Q2008 Projected Actual FX Actual FX (B) Actual FX (D) FX (A) index=100) FX (C)

2Q2011 0.123 1.8 1.77 0.22 0.22 117.9 0.19 0.18 3Q2011 0 1.8 1.77 - - 120.3 - - 4Q2011 0.947 1.8 1.56 1.70 1.48 120.3 1.42 1.23 1Q2012 2.876 1.8 1.56 5.18 4.49 120.3 4.30 3.73 2Q2012 2.702 1.8 1.56 4.86 4.22 120.3 4.04 3.50 3Q2012 1.8 1.56 - - 125.7 - - 4Q2012 3.448 1.8 2.01 6.21 6.93 125.7 4.94 5.51 1Q2013 1.8 2.01 - - 125.7 - - 2Q2013 6.649 1.8 2.01 11.97 13.36 125.7 9.52 10.63 3Q2013 1.8 2.01 - - 125.5 - - 4Q2013 2.782 1.8 2.23 5.01 6.20 125.5 3.99 4.94 1Q2014 1.8 2.23 - - 125.5 - - Total 19.527 35.149 36.896 28.40 29.735 (B)/(A) 5.0% (C)/(A) -19% -15%

1. Bank disbursements amounted to US$19.527 until the first quarter of 2014. We perform a comparison for the correspondent amount in BRL following (i) the project exchange rate at appraisal 25; (ii) the actual exchange rate and (iii) after discounting inflation in the construction sector. Comparing the projected and actual exchange rates shows that the depreciation of the BRL versus the USD that started in 4Q2012 actually benefitted the project, increasing the value of actual disbursements by 5% in relation to FX projections. This was because the largest amount of disbursements occurred after the exchange rate started to depreciate.

2. Considering the impact of inflation, we transform nominal amounts into constant ones, by applying a deflator index based on construction price inflation. Here the impact was negative. Considering the projected disbursements, converted into BRL at constant prices, the delay in disbursements led to a 19% loss in purchasing power. Considering the actual

25 At appraisal, projections indicated disbursements would end at 2Q2013 and, therefore, there are no projections for the exchange rate for future quarters. We considered exchange rate stable at R$1.8 per USD for future quarters.

24 disbursements, converted into BRL at constant prices, and taking into account both the impact of inflation and exchange rate depreciation, purchasing power dropped 15%.

3. Exchange rate and inflation alone do not explain why the project still requires US$153.306 million to be concluded. The total amount disbursed (Bank and Counterpart resources) corresponds to approximately US$39.774 million as of today. Therefore, total project cost would be US$193.08 million, compared to US$46.8 million estimated at appraisal. This quadrupling of costs from those estimated in the PAD indicates that errors in project design were by far the most important factor in cost overruns.

Annex 2. Outputs by Component

COMPONENTS, SUBCOMPONENTS STATUS AND ACTIVITIES TO BE ONGOING EXECUTED

COMPLETED 2013) 31, Oct of (as I. Institutional Development Strengthening of the Municipal

Management The current municipal government implemented a Monitoring and Consulting services for the development of Evaluation System developed by the a M&E System and Strategic Planning for - - - current Mayor when he was Planning the Municipality Secretary of the State of Pernambuco. It is uncertain to what degree the Project activity influenced this M&E system. Environmental and Urban Management Creation, in 2009, of both the Secretary of the Environment (in charge of environmental licensing procedures) and Improvement of the procedures for the Institute Pelópidas da Silveira (in environmental licensing, as well as X charge of urban planning at the improvement of urban management municipal level). There was no direct capacity Bank financing for this activity, although the Bank took part in the discussions leading to this result. Project Management & Other Consulting

Services The related contract will remain valid up to April 2014. The Borrower has Consulting services to support project already provided for the hiring of an X management specific firm to provide the supervision of the works of the road system and bridge. One auditing report still to be developed, related to the 2013 CY and to the grace period of the project. Auditing services X X

Expected date for completion: June 2014 Consulting services for the development of - X a communication plan for the project Acquisition of goods (IT and furniture) to - X support URB and the PIU The system was in place and operational Consulting services the customization, until April 2013. After this, FM maintenance and operation of the FM X monitoring and reporting was done system (SPGP) manually, using information from the Municipal system (SOFIN). Consulting services for the development The system is now fully operational. X and implementation of an information

COMPONENTS, SUBCOMPONENTS STATUS AND ACTIVITIES TO BE ONGOING EXECUTED

COMPLETED 2013) 31, Oct of (as system for HR management II. Urban Territorial Development Water supply and sewerage systems Detailed designs were prepared by URB and submitted for approval. The contract was signed with CEF and the Integrated urban upgrading and WSS bidding documents for the related works works (PAC II – Infraestrutura Social e X are under development. Urbana)

Expected date for completion: January 2018 Related housing development to Expected date for completion: January accommodate families affected by the X 2018 WSS works (Minha Casa Minha Vida) Public Parks Construction and / or rehabilitation of Santana: Completed and open for Apipucos, Caiara and Santana Parks: visitors Apipucos: 1st part completed and open The Bank project finances the for visitors / 2nd part ongoing, to be rehabilitation of two existing parks, the completed in June 2014 Caiara and the Santana (which is also Caiara: Ongoing, to be completed in being enlarged) and the building of a third June 2014 park, the Apipucos. Caiara Park is built to become a sports center for athletes from Expected date for completion: June the entire Recife Metropolitan Region, 2014 whereas the Santana is already widely used for recreation and family sports of different kinds. The Apipucos Park will be lower- key area for families with children. All parks are adjacent to the Capibaribe and two parks are planned to receive river ports X for fluvial navigation. The park investments provide a way for recuperating and securing the general public’s right to use parks that might otherwise become venues for crime and drug trafficking. To this end, the use of closed circuit TV cameras is planned to continuously monitor their use. The parks are a step towards expanding green areas in Recife, which has few such spaces. The current green space per inhabitant ratio in Recife is 0.7 meters squared, about one tenth of what the Pernambuco state law prescribes and even lower than the 12 square meters per inhabitant recommended by the United Nations.

COMPONENTS, SUBCOMPONENTS STATUS AND ACTIVITIES TO BE ONGOING EXECUTED

COMPLETED 2013) 31, Oct of (as Macro-Drainage and Resettlement 4 out of 11 canals completed Integrated urban upgrading and macro- drainage woks (11 canals – PAC X Expected date for completion: May Drenagem) 2015 Related housing development (Casarao do Expected date for completion: October Barbalho) to accommodate families 2014 X affected by the macro-drainage works (PAC Drenagem) Urban Mobility Road System and Bridge over Capibaribe River:

The project financed the construction of a Works were 17% completed by bridge that will connect the two banks of October, 2013 the Capibaribe River, directly benefiting X low-income communities that will find Expected date for completion: April increased employment on the wealthier 2015 bank and save on travel cost along a 15 km stretch of the river that presently lacks any bridge whatsoever. Related housing development to accommodate families affected by the Expected date for completion: June X urban mobility works (Minha Casa Minha 2016 Vida) III. Social Development Income Generation Rehabilitation of a job center in the Project Completed in May 2013. X targeted area Plans were satisfactorily completed and were delivered to EMLURB (the municipal entity in charge of O&M of Consulting services for the development of X the parks) and to the Municipal management plans for the urban parks Secretariats of Tourism, Environment and Education (co-executors of some of the planned activities). Environmental Education These services include not only the implementation of the RAP itself, but also social and economic development Consulting services for the implementation outreach activities, M&E (surveys), and X of the RAP communication services. Works were hired in August 2013. Expected date for completion: June 2016

Annex 3. Economic and Financial Analysis

Not applicable.

Annex 4. Bank Lending and Implementation Support/Supervision Processes

(a) Task Team members Responsibility/ Names Title Unit Specialty Lending Fernando Andres Blanco Senior Economist AFTP4 Fiscal assessment Cossio Jose Augusto Carvalho Consultant LCSPT Procurement Dean A. Cira Lead Urban Specialist AFTU1 TTL Ivo Imparato Principal Regional Team Leader TWILC TTL Integrated Sanitation Martin P. Gambrill Lead Water and Sanitation Spec LCSWS Component Luiz C. Gazoni Consultant LCSPT Procurement Social Development Kathy A. Lindert Sector Leader LCSHD Component Public Sector Yasuhiko Matsuda Sr Public Sector Spec. EASPW Assessment Financial Claudio Mittelstaedt Consultant LCSFM Management Integrated Sanitation Lilian Pena Pereira Weiss Sr Water & Sanitation Spec. LCSWS Component Senior Urban Development Paula Dias Pini AFTU1 Social Safeguards Specialist Catarina Portelo Senior Counsel LEGLE Legal Support Jennifer Sara Sector Manager EASVS Sector Leader Social Development Ricardo Rocha Silveira Senior Operations Officer HDNHE Component Social Development Bernice K. Van Bronkhorst Sector Manager SASDC Component Economic Carlos E. Velez Consultant AFTP3 Assessment Economic Maria Angelica Sotomayor Sector Leader LCSSD Assessment Economic Judy Baker Lead Economist EASIN Assessment Alexandre Borges Senior Procurement Specialist EASR1 Procurement Julia Conter Program Assistant LCC5C Program Assistant Cary Anne Cadman Senior Environment Specialist EASIN Safeguards Luis Prada Villalobos Senior Procurement Specialist MNAPC Procurement Adriana Weisman Operations Officer OPSPQ Operations Karina de Souza Marcelino Program Assistant LCC5C Program Assistant

Supervision/ICR TTL (WSS / Marcos T. Abicalil Sr Water & Sanitation Spec. LCSWS Urban) Emanuela Monteiro Urban Development Spec. LCSDU Co-TTL (Urban) Klas Ringskog Consultant LCSWS Primary author of

ICR Ivo Imparato Principal Regional Team Leader TWILC TTL (Urban) Procurement Sinue Aliram Procurement Specialist LCSPT Specialist Etel Bereslawski Senior Procurement Specialist LCSPT Procurement Urban Marcus Vinicius Ferreira Da LCSUW- Consultant infrastructure Silva HIS Spec. Clarisse Torrens Borges Dall Environmental Senior Environmental Specialist LCSEN Acqua Safeguards Environmental Agnes Velloso Environment Safeguard Specialist LCSEN Safeguards Financial Eduardo Franca De Souza Financial Management Specialist LCSFM Management Financial Susana Amaral Financial Management Specialist LCSFM Management Financial Nicolas Drossos Consultant AFTSW Management Daniel R. Gross Consultant AFTCS Social Safeguards Karina de Souza Marcelino Program Assistant LCC5C Program Assistant Marta Elena Molares- LA preparation Lead Counsel LEGES Halberg and negotiation Operational Sarah Anthony Murphy Consultant AFTA1 Support Catarina Isabel Portelo Senior Counsel LEGLE LA amendment Procurement Luis R. Prada Villalobos Senior Procurement Specialist MNAPC Specialist Francesco Notarbartolo di Social Consultant LCSSO Villarosa Development Jennifer Sara Sector Manager EASVS Sector Leader Senior Social Development Alberto Coelho G. Costa LCSSO Social Safeguards Specialist Monitoring and Abdoulaye Sy Economist MNSED Evaluation Willow Latham Consultant LCSWS

(b) Staff Time and Cost Staff Time and Cost (Bank Budget Only) Stage of Project Cycle USD Thousands (including No. of staff weeks travel and consultant costs) Lending FY04 0.50 2.97 FY05 11.00 89.55 FY06 18.85 107.51 FY07 18.39 95.67 FY08 8.68 54.10

Total: 57.42 349.80 Supervision/ICR FY08 2.20 13.14 FY09 4.90 28.43 FY10 10.04 50.65 FY11 7.43 40.86 FY12 16.00 63.93 FY13 19.93 58.75 FY14 10.07 56.40

Total: 70.57 312.13

Annex 5. Beneficiary Survey Results

Not Applicable

Annex 6. Stakeholder Workshop Report and Results

Not Applicable

Annex 7. Summary of Borrower's ICR and/or Comments on Draft ICR

DEPARTMENT OF PLANNING AND MANAGEMENT EXECUTIVE SECRETARY OF BUDGET AND FUNDING GENERAL MANAGEMENT OF FUNDRAISING

TECHNICAL NOTE

Recife, April 14, 2014

SUBJECT: Comments on the Capibaribe Melhor Project ICR, Implementation Completion and Results Report, prepared by the World Bank - Perspective of the Municipality on Project Evaluation - Impact of political term transition on the attempted restructuring - Integrated view on the portfolio of World Bank- financed projects.

1. From February 3-7, 2014, representatives of the World Bank- IBRD visited the municipality of Recife to collect data and conduct interviews for the preparation of the Capibaribe Melhor Project ICR – Implementation Completion and Results Report. On March 31 and April 1 and 7, 2014, a new mission was undertaken to address issues relating to social and environmental safeguards, as well as to present and discuss the draft of Implementation Completion and Results Report.

2. The text of the ICR was analyzed by the Municipality teams. On April 11, 2014, suggestions for minor adjustments were sent by Berta Maia, representative of the URB.

3. This Technical Note aims to formalize SEPLAG’s general comments on the ICR, and to bring some considerations about the vision of the current municipal administration with regard to Capibaribe Melhor into an integrated approach to the project portfolio held by the Municipality and the World Bank.

4. In general, SEPLAG believes that the ICR addressed the relevant points of the Capibaribe Melhor Project faithfully and appropriately. There is substantial agreement on the evaluation of the project, particularly with regard to the relevance of its objectives.

5. The notable merit of the actions financed by the Project was confirmed by the support of different municipal administrations and their complementarity with national programs with similar purposes (in particular PAC - Growth Acceleration Program and MCMV - Minha Casa Minha Vida).

6. SEPLAG also considered the overall performance ratings assigned to the Bank and the Borrower for the process fairly accurate (both were judged Moderately Unsatisfactory).

7. An aspect highlighted with emphasis in the ICR was the poor performance of the World Bank in ensuring Quality at Entry, especially regarding the estimated costs necessary to achieve the Project objectives. From the point of view of the Municipality, this original flaw (the gap between the values for financing and counterpart contribution estimated in the Loan Agreement and the amounts actually required for completion of Project activities) severely compromised the results, and could not be overcome by the efforts during implementation and supervision by Bank and Municipal staff.

8. On the other hand, SEPLAG recognizes that representatives of the Municipality participated in the design of the project from 2003-2007, and are co-responsible for the poor quality at entry, as they also should have recognized the insufficiency of resources to implement a Project at such a scale.

9. SEPLAG assesses that the resettlement of the population affected by infrastructure works was the variable that most affected costs and impacted the time period needed for completion of the project, considering the characteristics of the area of operations (a region of very condensed and high-priced real estate). In this sense, discussion and exchange of experiences with respect to new alternatives and tools for solving the housing issue is very positive, as recommended by the experts from the IBRD.

10. With regard to the impact of the political transition on the speed of Project execution, the current administration believes that this is a natural feature of the political cycle. Starting in January 2013, the process of agreement on actions with the new administration was initiated, and ran in parallel with the diagnosis of initiatives that were already underway and with the assembly of technical teams. The time required to obtain and analyze information generated delays not only in the case of Capibaribe Melhor, but in the progress of projects in general (e.g. , the World Bank Education SWAp and activities financed by other institutions such as the Caixa Econômica Federal - CEF and BNDES).

11. Within this context, the deactivation of the Project Management Unit (UGP) for Capibaribe Melhor was a decision taken with the purpose of establishing, within SISUR and URB, an integrated vision of strategic infrastructure works for the City, using the existing management structure for the Municipal teams, without the need to create a unit for a single project.

12. It should be emphasized that, in view of the current municipal administration, the initiation of DPL negotiations did not constitute a contrary incentive to the continuity of Capibaribe Melhor. However, the proposal of the municipal administration in 2013 was quite different from the restructuring negotiated between the parties and approved by the Federal Government in 2012; it comprised a substantial reduction in scope and did not provide for the provision of additional resources.

13. The dialogue between the Municipality and the World Bank regarding the new restructuring format started very late, and the project period extension granted (four months) was not sufficient for all the arrangements for approval by the Federal Government. The Municipality did not correctly estimate the time required to obtain the necessary authorizations, which led to the failure of the renegotiation attempt.

14. With the closure of Capibaribe Melhor, IBRD communicated that the remaining undisbursed funds would be transferred to a DPL - Development Policy Loan. It is noteworthy that the resources of the DPL in its entirety will be employed to ensure the delivery of better public services and to achieve relevant objectives for the improvement of the population’s quality of life, including goals related to Capibaribe Melhor (urban infrastructure, sanitation interventions and housing, investment in public management).

15. Finally , as part of a portfolio view of IBRD projects, the Recife Prefeitura considers it relevant to reaffirm the institutional commitments undertaken in relation to Capibaribe Melhor (such as the resettlement of families), as essential to maintaining bilateral trust and to the success of other programs maintained between IBRD and the Municipality, ongoing projects, and projects in negotiation.

RACHEL MATHIAS SOARES PONTES General Manager of Fundraising

Annex 8. Comments of Cofinanciers and Other Partners/Stakeholders

Not applicable.

Annex 9. List of Supporting Documents

Project Appraisal Document (PAD) of the Capibaribe Melhor Project dated November 20, 2007

Loan Agreement Capibaribe Melhor, dated September 3, 2009

Gestao de Reassentamento, Geosistemas, December 2011

Aide-memoires from preparation and supervision missions from 2004-2013

Implementation Status and Results (ISR) reports, from 2008-2013

Notes from conversations with staff and officials involved with the Project from start of preparation in 2003 through end of implementation in 2013.

IBRD 40947 280000 m E 284000 m E 288000 m E 292000 m E BRAZIL ESTRADA Rio Paratibe Riacho DO PROJECT AREA WITHIN Maximino BRANCO do Mino do RECIFE MUNICIPALITY

Corrego PROJECT AREA Rio ESTRADA RECIFE MUNICIPALITY Araçá Rio Piaba ESTRADA MAIN ROADS Rio Beberibe 9120000 m N DA MAIN RIVERS/STREAMS Rio DO Pacas MURIBECA LAKES/RESERVOIRS

Rio PORT Morno MORNO PAULISTA LIGHTHOUSE INTEGRADED PASSENGER TERMINAL N Sources: (UCHÔA, T.M.M; COMPASSO C.EA LEITE, E.M.). 1999. Rio OLINDA MACACOS DOS 296000 m E 9116000 m N

0 1 2 3 4 ESTRADA

KILOMETERS CAMARAGIBE Meio Morno

Dam Prata BR-101 Dam BR-101 Dois Irmãos Dam Apipucos Dam AV. NORTE Rio Beberibe

Rio 9112000 m N

Capibaribe AV. CAXANGÁ

MAGALHÃES

PERIMETRAL PERIMETRAL Capibaribe

S. LOURENÇO DA MATA Capibaribe AGAMENON Rio

Rio CARVALHO

BR-101 BR-101

AV. AV. APOLO

S. João N1

Rio da Várzea AV. ABDIAS DE DO Dam Rio Curado 9108000 m N Bay of Porto CAIS BARRETO Tejipió RUA CEASA BR-232 DANTAS AV. Bay SUL MIGUEL SÃO AV. of Pina RUA

URB

VIVEIROS

VIVEIRO

sv sv Rio Parque do sv

sv sv SVManguezal sv Lagoa Pina

do Araça SV

BR-101 BR-101 Tejipió

Rio

Rio 9104000 m N

AV. RECIFE RECIFE AV. AV.

Jordão ATLANTIC Boa Viagem Beach AV. MAL. MASCARENHAS DE MORAIS AV. BOA VIAGEM AV. DOMINGOS FERREIRA OCEAN

Aeroporto Setúbal JABOATÃO Internacional do Rio

DOS GUARARAPES Recife/Guararapes - Gilberto Freyre 9100000 m N

Canal JABOATÃO GSDPM Map Design Unit DOS GUARARAPES This map was produced by the Map Design Unit of The World Bank. The boundaries, colors, denominations and any other information shown on this map do not imply, on the part of The World Bank Group, any judgment on the legal status of any territory, or any endorsement or acceptance of such boundaries. APRIL 2014 BRAZIL RIO GRANDE DO NORTE RECIFE MUNICIPALITY

STATE CAPITALS STATE BOUNDARIES CEARÁ MUNICIPALITY BOUNDARIES

Joao Pessoa PARAÍBA

PIAUÍ Recife PERNAMBUCO ATLANTIC OCEAN

R.B. DE GUYANA French VENEZUELA Guiana SURINAME (Fr.) COLOMBIA RORAIMA ATLANTIC AMAPÁ OCEAN ALAGOAS PERNAMBUCO AMAZONAS PARÁ MARANHÃO CEARÁ RIO GRANDE DO NORTE PARAÍBA PIAUÍ

ACRE TOCANTINS Recife ALAGOAS RONDÔNIA MATO BAHIA SERGIPE PERU GROSSO BAHIA BRASÍLIAF.D. BOLIVIA GOIÁS MINAS MATO GROSSO GERAIS ESPÍRITO SANTO SERGIPE DO SUL SÃO PAULO RIO DE GSDPM CHILE PARAGUAY JANEIRO Map Design Unit PARANÁ

This map was produced by the Map Design Unit of The World Bank. IBRD 40946

APRIL 2014 STA. CATARINA The boundaries, colors, denominations and any other information PACIFIC ATLANTIC shown on this map do not imply, on the part of The World Bank OCEAN ARGENTINA RIO GRANDE DO SUL Group, any judgment on the legal status of any territory, or any Aracaju OCEAN endorsement or acceptance of such boundaries. URUGUAY