Document of The World Bank

FOR OFFICIAL USE ONLY Public Disclosure Authorized Report No: 42062-BR

PROJECT APPRAISAL DOCUMENT

ON A

Public Disclosure Authorized PROPOSED LOAN

IN THE AMOUNT OF US$24.3 MILLION

TO THE

FEDERAL REPUBLIC OF BRAZIL

FOR A

SECOND NATIONAL ENVIRONMENT PROJECT -

Public Disclosure Authorized IN SUPPORT OF PHASE 2 OF THE

SECOND NATIONAL ENVIRONMENTAL PROGRAM (APL)

August 2 1,2009

This document has a restricted distribution and may be used by recipients only in the performance of their official duties. Its contents may not otherwise be disclosed without World Bank authorization. Public Disclosure Authorized CURRENCY EQUIVALENTS (Exchange Rate Effective April 30,2009) Currency Unit = Brazilian Real US$1 = BR2.17 FISCAL YEAR January 1 - December 31 ABBREVIATIONS AND ACRONYMS IABEMA (AssociaqTio Brasileira de Entidades Estaduaisl Brazilian Association of State Environmental I \de Meio Ambiente I ANA Agdncia Nacional de Aguas ANAMMA AssociaGTio Nacional dos Orgiios Municipais de National Association of Municipal Environmental Meio Ambiente Agencies Adaptable Program Loan Federal thrift institution General Comptroller Administrative Coordination Interministerial Committee on External Finance Country Partnership Strategy Coastal Zone Management Department of Environmental Education Federal District of Brasilia Departamento de Coordenaqiio do SISNAMA Environmental Assets EC ICriterios de Elegibilidade E1 IInstrumentos EconBmicos Env-TAL Projeto de Assistdncia Tecnica para a Agenda de Sustentabilidade Ambiental FUNAI FundaGTio Nacional do Indio FUNBIO Fundo Brasileiro para a Biodiversidade Brazilian Biodiversity Fund GDP (PIB’, Produto Interno Bruto Gross Domestic Product GEF ]Fundo Mundial para o Meio Ambiente Global Environmental Facility GOB IGoverno do Brad Government of Brazil IBAMA Instituto Brasileiro do Meio Ambiente e dos Brazilian Institute for Environment and Renewable Recursos Naturais Renovhveis Natural Resources IBRD Banco Internacional para ReconstruGTio e International Bank for Reconstruction and Desenvolvimento Development ICMBio Instituto Chico Mendes de Biodiversidade Chico Mendes Institute for Biodiversity ID Componente de DesenvolvimentoInstitucional Institutional Development Component IFR Relatorio Financeiro Interino Interim Financial Report IPF Marco de Politicas para Povos Indigenas Indigenous Peoples Framework IPHAN Instituto do Patrim6nio Historic0 e Artistic0 Institute for the National Historic and Artistic Heritage Nacional IPP Plano para Povos Indigenas Indigenous Peoples Plan M&E Monitoramento e AvaliaqBo Monitoring and Evaluation MDG Metas de Desenvolvimentodo Mildnio Millennium Development Goals MMA Ministerio do Meio Ambiente Ministry of Environment MP IMinisterio Publico Public Prosecutor’s Office NGO (0NG)s IOrganizaqTio NTio Governamental Non-GovernmentalOrganization ~OEMAS 1Orgiios Estaduais de Meio Ambiente IState Environmental Agencies FOR OFFICIAL USE ONLY

OP Politica Operacional Operational Policy PA Unidades de Conservaqlo Protected Areas PAD Documento de AvaliaqSlo do Projeto Project Appraisal Document PAC Programa de AceleraqSlo de Crescimento Growth Acceleration Program PCU Unidade de Coordenaqlo de Projeto Project Coordination Unit PDO lobjetivos de Desenvolvimento do Projeto Project Development Objective PNC (Programa Nacional de Capacitaqlo de Gestores National Program on Training of Municipal Officials Municipais POA Plano Operativo Annual Annual Operating Plan PPA Plano Plurianual Multi-Year Plan SECEX Secretaria Executiva Executive Secretariat SINIMA Sistema Nacional de Informaqaes sobre Meio National System of Environmental Information Ambiente - SISNAMA Sistema Nacional do Meio Ambiente Brazilian National Environment System [Involving Federal, State, the Federal District and Municipal Levels of Government] SPU Secretaria do PatrimBnio da Unilo Secretariat of Federal Assets STN Secretaria do Tesouro Nacional National Treasury Secretariat TDR Direitos Transferiveis de Desenvolvimento Tradable Development Right (economic instrument) (instrumento econ6mico) TF Fundo Fiducidrio Trust Fund TORS Termos de Referencia UNDP Programa das Naqaes Unidas para o (Desenvolvimento(PNUD) WG IGrupo de Trabalho PGking Group

STATE ABBREVIATIONS

Acre AC Parafba PB Alagoas AL Parand PR Amapa AP Pernambuco PE Amazonas AM Piaui PI Bahia BA Rio de Janeiro RJ Ceara CE Rio Grande do Norte RN Distrito Federal DF Rio Grande do SUI RS Goids GO Ronddnia RO Espirito Santo ES Roraima RR MaranhSlo MA Slo Paulo SP Mato Grosso MT Santa Catarina sc Mato Grosso do SUI MS Sergipe SE Minas Gerais MG Tocantins TO Pard PA

Vice President: Pamela Cox Country Director: Makhtar Diop Sector Director: Laura Tuck Sector Manager: Laura E. Tlaiye Sector Leader: Mark R. Lundell Task Team Leader: Adriana Moreira and Renan Poveda

This document has a restricted distribution and may be used by recipients only in the performance of their official duties. Its contents may not be otherwise disclosed without World Bank authorization.

BRAZIL Second National Environmental Project .Phase 2

CONTENTS

Page I. STRATEGIC CONTEXT AND RATIONALE ...... 1 A . Country and sector issues ...... 1 B. Rationale for Bank involvement ...... 2 C . Higher level objectives to which the project contributes ...... 4 I1. PROJECT DESCRIPTION...... 4 A . Lending instrument ...... 4 B. Project Objective and Phases ...... 5 C . Performance Indicators ...... 6 D. Project components ...... 8 E. Lessons learned and reflected in the project design ...... 13 F. Alternatives considered and reasons for rejection...... 14 I11. IMPLEMENTATION ...... 15 A . Institutional and implementation arrangements ...... 15 B. Monitoring and evaluation ofoutcomeshesults ...... 16 C . Sustainability ...... 16 D. Critical risks and possible controversial aspects ...... 17 E. Loadcredit conditions and covenants ...... 20 IV. APPRAISAL SUMMARY ...... 21 A . Economic and financial analyses ...... 21 B. Technical ...... 22 C . Financial Management ...... 22 D. Procurement ...... 23 E. Social ...... 23 F. Environment ...... 24 G. Safeguard policies ...... 25 H. Policy Exceptions and Readiness ...... 26 Annex 1: Country and Sector or Program Background...... 27 Annex 2: Major Related Projects Financed by the Bank and/or other Agencies ...... 37 Annex 3: Results Framework and Monitoring ...... 38 Annex 4: Detailed Project Description ...... 45 Annex 5: Project Costs ...... 60 Annex 6: Implementation Arrangements...... 61 Annex 7: Financial Management and Disbursement Arrangements ...... 64 Annex 8: Procurement Arrangements ...... 74 Annex 9: Economic and Financial Analysis ...... 81 Annex 10: Safeguard Policy Issues ...... 83 Annex 11: Project Preparation and Supervision ...... 100 Annex 12: Documents in the Project File ...... 101 Annex 13: Statement of Loans and Credits...... 102 Annex 14: Country at a Glance ...... 106 Annex 15: Maps ...... 108 BRAZIL

SECOND NATIONAL ENVIRONMENTAL PROJECT - PHASE 2

PROJECT APPRAISAL DOCUMENT

LATIN AMERICA AND CARIBBEAN LCSEN

Date: August 13,2009 Team Leader: Adriana Moreira & Renan Albert0 Poveda Country Director: Makhtar Diop Sectors: Sub-national government Sector ManagedDirector: Laura E. Tlaiye / administration (89%);Central government Laura Tuck administration (1 1%) Themes: Environmental policies and institutions (P);Decentralization (P);Water resource management (S);Municipal governance and institution building (S) Project ID: PO99469 Environmental screening category: Partial Assessment Lending Instrument: Adaptable Program Loan

Project Financing Data [XI Loan [ ] Credit [ ] Grant [ 3 Guarantee [ 3 Other:

For Loans/Credits/Others: Total Bank financing (US$m.): 24.3 Proposed terms: US Dollar denominated commitment linked IBRD Flexible Loan with a variable-spread, with level payments of principal, payment dates on June 15 and December 15 of each year, five year grace period, and 30 years of total loan term with all conversion options.

Borrower 10.42 0.00 10.42 International Bank for Reconstruction and 24.30 0.00 24.30 Development Total: 34.72 0.00 34.72

Borrower: Federative Republic of Brazil Responsible Agency: Ministerio do Meio Ambiente SECEX SAS, Qd. 5, B1. H, Ed. Supes IbamdDF Sala 3 10, Brasilia, Distrito Federal, Brazil Tel: 61 3321.2012, Fax: 61 3321.3284, email: [email protected] www.mma.gov. br

vi ExDected closinrr date: December 3 1.20 14

Does the project depart from the CAS in content or other significant respects? [ ]Yes [XINO Ref: PAD I.C. Does the project require any exceptions from Bank policies? Ref: PAD IKG. Have these been approved by Bank management? Is approval for any policy exception sought from the Board? [ ]Yes [XINO Does the project include any critical risks rated “substantial” or “high”? [XIYes []No Ref: PAD III.E. Does the project meet the Regional criteria for readiness for implementation? [XIYes [ ]No Ref: PAD IKG.

Project development objective Ref: PAD II.C., Technical Annex 3 The Project Development Objective is to contribute to strengthening environmental capacity in key Brazilian institutions. This would be accomplished by enhancing the environmental management capacity of institutions at the Federal, State, Federal District and Municipal levels and by demonstrating the effectiveness oftargeted subprojects focused on defined priorities. Project description [one-sentence summary of each component] Ref: PAD II.D., Technical Annex 4 a) Institutional Development Component (US$25.7 million total, US$ 18.0 million IBRD). Based on the lessons learned and the core structure implemented during Phase 1, the Institutional Development component encompasses the following: ( 1) Environmental Licensing; (2) Environmental Monitoring; and (3) Economic Instruments for Environmental Management. b) Integrated Management ofEnvironmental Assets Component (3.0 million total, US$ 2.10 million IBRD): The principle behind the Environmental Assets Component is to provide an incentive to states to identify, rank and address some of their most pressing environmental challenges themselves rather than receive an orientation from the central government. States will qualify to receive matching grants for the development and implementation ofsubprojects. The grants may be used to finance subprojects that deal with a problem identified among the state’s highest priorities. c) Coordination, Dialogue and Communication Component (US$ 5 .O million, US$3.5 million IBRD): The project will support a unit with the technical and administrative capacity needed to develop subprojects and activities at a decentralized level

Which safeguard policies are triggered, if any? Ref: PAD IKF., Technical Annex 10

Environmental Assessment (OP/BP 4.0 1) Involuntary Resettlement (OP/BP 4.12) Indigenous Peoples (OP/BP 4.10)

vii Significant, non-standard conditions, if any, for: Ref: PAD III.E. Board presentation:

Loadcredit effectiveness: (i)the Program Regulation (Portaria) to create the Second National Environmental Project has been adopted and published in form and substance satisfactory to the Bank; (ii)the Project Coordination Unit Regulation (Portaria) has been adopted and published in form and substance satisfactory to the Bank; (iii)the Supervisory Commission Regulation (Portaria) has been adopted and published in form and substance satisfactory to the Bank; and (iv) the Project Operational Manual has been adopted by the Borrower’s Ministry of Environment through a Regulation (Portaria) issued and published in form and substance satisfactory to the Bank.

Covenants applicable to project implementation: (i)procurement audits for partnerships every year; (ii)bi-annual meetings for the Supervisory Commission; (iii)mid-term review about December 3 1, 20 1 1; and (iv) retroactive financing up to 20% of the Loan amount.

viii

I. STRATEGIC CONTEXT AND RATIONALE

A. Country and sector issues

1. Brazil has historically based its economy on exploiting the wealth of its natural resources. A significant part of its economy still relies on the use of natural resources, whether they are used as production inputs or as sinks for industrial waste. Brazil also has a large and growing urban and industrial sector. Industrial and urban effluents are a growing problem, contributing to unhealthful air and water quality and to the dissemination of water-borne diseases. Despite the importance of its natural resource and industrial base, Brazil faces major challenges to reverse a trend of unsustainable use of natural resources and environmental degradation.

2. The environment has been a rising priority in Brazil because of: (i)growing public awareness of environmental issues’ and of the need for improved environmental management; (ii)increasing sensitivity to domestic and external criticism of poor natural resource management; and (iii)growing recognition in both the public and private sectors that better environmental management provides a competitive edge to Brazilian business.

3. As a result of an increasing demand for infrastructure projects at the state and federal levels, environmental licensing has grown in importance as an environmental management tool in recent years. Most environmental licenses are granted by states while the Federal Government issues licenses for major projects that may have potentially large impacts. Environmental enforcement relies too heavily on on-site investigation and checking (known as “command-and-control”) even though many environmental institutions are not sufficiently staffed or efficient to execute their environmental management and protection activities. Furthermore, Brazil has not been able to collect and disseminate reliable environmental information in a timely and comprehensive fashion. The public-private alliances needed for better environmental management have not emerged in most places.

4. Brazil has recently undergone a significant growth spurt with considerable amounts of foreign direct investment and local investment in a wide range of sectors including energy generation, agricultural processing, and public infrastructure (spurred by the PAC - Accelerated Growth Program). These investments have led to increased pressure on environmental agencies’ licensing and monitoring capacities2 Project proponents complain that IBAMA and State Environmental Agencies take too long to issue licenses and that the licenses, once granted, are loaded with conditionality that is difficult and costly to fulfill. Environmental agencies (particularly IBAMA), complain that proponents do not supply requested documentation in a timely fashion3. Once the environmental .

I Especially since the United Nations Conference on Environmental and Development (UNCED) held in Rio de Janeiro in 1992 Environmental licensing can be a useful tool for environmental management to the extent that there is sufficient monitoring of environmental performance. Currently, many projects are not monitored sufficiently carefilly after they enter into operation, unless there has been a prior serious problem. 3 Recent sector work on Environmental Licensing for Hydroelectric Projects in Brazil (World Bank 2008) pointed to problems in IBAMA’s licensing approach. The study points to a number of issues in IBAMA’s procedures such as the lack of expertise on IBAMA’s staff, the lack of standard procedures, poor quality of environmental impact assessments and other problems that add to the delay in issuing licenses.

1 license is issued, there is often insufficient follow-up and monitoring to ensure that conditions are fully complied with.

5. In recent years, the Government of Brazil has adopted a policy of decentralization of basic services including health and education, and environmental management. Within this context, the Second National Environmental Project (NEP 11) represents a strategic initiative for the Ministry of Environment’s efforts to promote environmental management capacity at the state level. Since 2002, the GOB’S program has had four major pillars: (a) decentralization, (b) strengthening the National Environmental System (SISNAMA); (c) social control, and (d) transversality. NEP 11, Phase l4contributed significantly to each one of these pillars. Progress has been achieved in strengthening environmental licensing procedures, managing pollution in selected watersheds, sharing responsibility with state environmental agencies, improving dialogue with the private sector on environmental management, supporting sustainable economic activities, and stimulating interest in the use of economic instruments (EI) for environmental protection.

6. To address this institutional capacity building and coordination of environmental management between federal and state levels, the Ministry of Environment developed with the Bank a phased strategy under the Second National Environmental Program (NEP 11). The NEP I1 was approved as a three-phase AdaptabZe Program Loan (APL) for a total of US$150 million. Phase 1 of NEP I1 was implemented from July 2000 to June 2006. Phase 1 of NEP I1 focused on solidifying the environmental management system at the state level and on strengthening of the National Environmental System (SISNAMA) of which the ’ states, the Federal District and municipalities are the building blocks.

7. Phase 1 of NEP I1 contributed significantly to the SISNAMA, achieved concrete environmental gains in specific basins or ecosystems, and was the main mechanism by which the federal ministry interacted with states to strengthen environmental capacity at the state level. Altogether, 43 partnerships and activities were implemented in 17 states during Phase 1. Both MMA and the states acknowledge the accomplishments of Phase 1 and are eager to proceed to Phase 2 of the program. The triggers for moving from Phase 1 to Phase 2 of the APL (through an eligibility criteria scoring system) were fulfilled during project implementation in 2006, and the Inter-Ministerial Committee on External Finance (COFIEX) authorized preparation of Phase 2 of NEP I1 with a total cost of US$66.3 million of which US$46.4 million would be financed by the Bank. COFIEX required that the loan be divided into two sub-phases, sub-phase A of US$ 24.3 million and sub-phase B of US$22.1 million. The sub-phasing is described in further detail in paragraphs 15-18 below.

B. Rationale for Bank involvement

8. The Bank has accumulated significant experience related to environmental management over the past 25 years. The Bank has supported National Environmental Projects in countries as widely varied as India, Brazil, Mexico, and Poland. For example, one of the earliest such projects was the first Brazil National Environmental Project (NEP I)that was approved in 1990 (PO06446 - Ln: 3 173-BR).

National Environmental Project I1 - Phase 1 (PO35741 - Ln. 4520-BR)

2 9. The Bank also has considerable experience in Brazil and elsewhere in the design of decentralized, demand-driven municipal development and natural resource management project components - including the highly successful matching grants (PED) component of NEP I- and in the design and implementation of social funds for rural poverty reduction. While the latter operations follow a community driven development (CDD) format aimed at strengthening communities and municipal governments, these projects share characteristics with NEP I1 by combining Institutional Strengthening goals and components with the financing of priority investments identified by local stakeholders. Likewise, in recent years, the Bank made a number of Environmental Development Policy Loans (DPLs), aimed at the establishment of policy reforms and improvements in environmental management. These accumulated lessons have uniquely positioned the Bank in terms of technical and administrative experience which has been valued through the years by clients such as Brazil.

10. The Brazil Country Partnership Strategy (CPS) 2008-2011 continues to stress the principles of increasing capacity for environmental management and implementation of environmental policies to stimulate more sustainable use of natural resources and also underlines support for decentralization and for environmental sustainability. The proposed project will be a key instrument for addressing the sustainability pillar of the CPS by strengthening environmental management and contributing to a reduction in costs associated with environmental degradation and by promoting an environmentally sustainable growth pattern in Brazil. The project will also contribute to the competitiveness pillar of the CPS by promoting the institutional development and strengthening environmental policies and regulations, strengthening and streamlining environmental licensing, improving environmental monitoring, supporting the use of economic instruments and finally, through targeted decentralized demand-driven partnerships aimed at improved management and conservation of selected environmental assets.

11. The NEP I1 is a key element in supporting the recently approved First Programmatic Sustainable Environmental Management Development Policy Loan (SEM DPL). This Programmatic series helps GOB’s efforts to: (a) improve the effectiveness and efficiency of policies and guidelines of the Brazilian environmental management system; and (b) further integrate principles of environmentally sustainable development in natural resource management and conservation, water resource management, environmental sanitation, and renewable energy. The SEM DPL also addressed climate change concerns at both the inter-sectoral level and within the targeted sectors.

12. In the area of environmental sustainability, the SEM DPL series focuses mainly on the GOB’s concerted efforts to strengthen environmental management, with particular attention to: (i)improvements in the overall environmental management system; (ii) sustainable management of agricultural lands, forests, and water resources; (iii)reduction of deforestation in the Amazon; (iv) reduction of the environmental degradation of land and water resources that are key determinants of the well being of the poor; and, (v) promotion of renewable energy. The NEP I1 would help support the aims of the First Programmatic DPL for Sustainable Environmental Management by serving as the MMA’s main instrument for improving the overall environmental management system in close partnership with the states.

3 C. Higher level objectives to which the project contributes

13. The project’s higher level objective is the enhancement of environmental quality and sustainability of growth in Brazil. In the past, growth in Brazil has been at the expense of the environment, in terms of health impacts from water and air pollution in urban and industrial areas, destruction or degradation of natural resources such as large areas of forest and critical ecosystems, and soil loss to erosion leading to siltation and contamination of many of Brazil’s waterways. Improving the environmental licensing process is key to increasing investments’ sustainability and reducing environmental costs. The proposed project aims to strengthen the environmental policy framework at the federal, state and Federal District levels and to establish a methodology which states can follow to address key environmental priorities5. By strengthening environmental management, Phase 2 of NEP I1 is expected to contribute to a reduction in some of the costs associated with environmental degradation and to promote an environmentally sustainable growth pattern in BraziL6

11. PROJECT DESCRIPTION

A. Lending instrument

14. The lending instrument for this operation is an Adaptable Program Loan (APL), adopted in order to provide phased and sustained support for a long-term program reflecting the federal and state government’ priorities, and contributing to improvements in environmental quality. The proposed loan would be for implementing Phase 2 of the three-phase APL series which began in 2000.

15. Sub-phases of the Project. The Inter-Ministerial Committee on External Finance (COFIEX) endorsed the contracting of Phase 2 of NEP-I1 for a project cost of US$66.3 million but required the proposed project to be divided into two separate tranches (the first one of US$34.7M and the second of US$31.6M). The loan for Sub-phase A would be US$24.3 million and for Sub-phase B US$22.1 million, and the duration of the proposed project would be of 6 years. The Sub-phase A would last up to 5 years (or less if conditions outlined below are met), considering the initial required qualification of the states to the project, and the subsequent Sub-phase B would last another 2 years as follows:

Sub-phase A: (2009-2014) $24.3M (Loan), $10.4M (counterpart)

0 Sub-phase B: (2014-2015) $22.1M (Loan), $9.5M (counterpart).

16. Key activities to be implemented during Sub-phase A include: (i)major focus on strengthening and streamlining the environmental licensing process at federal, state, Federal District and municipal levels; (ii)qualification of states and/or the Federal District to the program; (iii) updatinghdentification of environmental priorities7; and (iv)

’ The identification or update of environmental priorities would be carried out through the hlfillment of the eligibility criteria (see Annex 16). 6 A detailed analysis to ascertain the costs of environmental degradation to the GDP in Brazil has not yet been conducted. 7 For states which meet this specific eligibility criterion.

4 identification and preparation of partnerships, particularly under the Institutional Development component. Only two partnerships which have been approved previously would actually be funded during Sub-phase A (in the states of Alagoas and Ceara). Sub- phase B would continue implementation of partnerships under the Institutional Development component and broader support to environmental asset partnerships based on the overall structure established during Sub-phase A.

17. COFIEX stipulated that the two Sub-phases be negotiated separately and moving from Sub-phase A to B would be contingent on: (i)commitment of at least 75% of loan proceeds; (ii)actual disbursement of at least 50% of loan proceeds; and (iii)evidence of satisfactory performance under Sub-phase A.

18. Internal processing. Once the above conditions have been met, a fast-track process would be followed in order to avoid a time-lag between the two sub-phases. A concept note/memorandum would be prepared assessing the performance of Sub-phase A, followed by a Decision Meeting based on a new and revised Project Appraisal Document (PAD). Any significant changes or departures from the original Sub-phase B design would be properly appraised and documented (and reflected into the new PAD). If no major changes have ensued, the proposed Sub-phase B would seek the approval of the Regional Vice- president (RVP) and will be circulated to the Bank’s Board of Directors for information.

B. Project Objective and Phases

19. The Project Development Objective is to contribute to strengthening environmental capacity in key Brazilian institutions. This would be accomplished by enhancing the environmental management capacity of institutions at the federal, state, Federal District and municipal levels and by demonstrating the effectiveness of targeted partnerships focused on defined priorities.

20. These priorities would be determined by the Ministry of Environment, states and the Federal District. Institutional development would be promoted by strengthening environmental policies and regulations, strengthening environmental licensing and enforcement, improving environmental monitoring, supporting innovative use of economic instruments and finally, through targeted decentralized demand-driven partnerships aimed at improved management and conservation of selected environmental assets.

2 1. The Program would support this demand-driven partnerships by relying on Phase 1’s eligibility criteria system for state participation and provide strengthening of state capacity to manage the partnerships effectively (see Annex 16 for details on Eligibility Criteria scoring system). The overall approach is to sequence institutional strengthening and targeted environmental investments by providing states with incentives to establish baseline conditions and to move from Phase 1 to Phase 2 in various categories of environmental challenges (e.g., forest management, water resources management, solid waste, etc.). Twenty-five states benefited from Phase 1 at different levels and currently Phase 2 is expected to target all the 26 states and the Federal District, including support for enhancing environmental licensing among other policy areas. In Phase 2 the focus is on enhancing environmental policy reforms, strengthening institutional development, especially environmental licensing, and on investments for targeted environmental assets. A future loan supporting Phase 3 would build on the progress of Phase 2 by providing

5 additional resources for institutional strengthening and environmental investments (Annex 1 provides greater detail on the lessons learned ofPhase 1, which were used to develop the proposed loan and Annex 4 provides detailed description of the logic for the three phases).

22. The role of the federal government during Phase 2 would include: (i)standard setting; (ii)provider of technical assistance; and (iii)coordination with the states. A communication strategy has been developed to disseminate lessons, promote state participation, and build synergies with the private sector, academic institutions and non governmental organizations (NGOs). Specifically, MMA would channel specific technical support to the states that seek assistance in: (i) identifying and/or updating their environmental priorities in order to adopt institutional reforms in fulfillment of eligibility criteria; (ii) designing Environmental Assets/Institutional Development (ENID) partnerships; (iii)identifying opportunities for developing economic instruments, and (iv) implementing partnerships that would strengthen and streamline environmental monitoring, environmental licensing and economic instruments. Additionally, MMA would contribute to harmonizing and improving norms for environmental licensing procedures at the federal, state, Federal District and municipal levels and coordinating environmental monitoring efforts with the National System of Environmental Information (S INIM A).

23. Phase 2 is expected to last approximately six years, and states would be eligible to receive up to two grants under for the Environmental Assets Component during this period. Implementation is expected to consist ofan initial phase focusing on strengthening of environmental licensing systems at federal, state, Federal District and municipal levels followed by the implementation of partnerships in the different components. At the Mid- Term Review an assessment would be made to determine if the trigger levels are valid or need to be adjusted (see Annex 1 for detailed description).

C. Performance Indicators

24. The following performance indicators will guide the supervision and evaluation of the project8: a) At least 2 additional Environmental Assets (EA) partnerships have been implemented completely during this Sub-phase fulfilling the specified requirements including the baseline study and the conclusions and outcomes are disseminated (at least 17 EA partnerships are expected to be completed by the end of Phase 2 (EOP)’ including the baseline of 9 partnerships from Phase 1).

8 Annex 3 includes intermediate indicators which would measure progress in implementation at the end of Sub-phase A, as well as arrangements in result monitoring for the whole program (sub-phases A and B). 9 Since EA partnerships are demand driven and these have not been defined, it is not possible to identify environmental quality indicators at this stage. Nonetheless, environmental quality attainments would be tracked throughout project implementation. Partnership proposals will be aimed at improving environmental quality in a particular area (e.g. a river basin) or sector (e.g. tree plantations). A successful parinershiu urouosal will include the following methodology: (i) identification of the key environmental variables that constitutes the target for improvement and delineation ofthe scope of the project; (ii) a quantitative measure of improvement in the targeted key variables; (iii) definition of specific measures to be taken to improve environmental quality; (iv) plans for a diagnostic study to provide baseline values of the key variables to be measured (departure point); (v) plans for periodic monitoring of key environmental variables including specific accountabilities.

6 At least 10 states (14 states by EOP) have environmental licensing systems that include all three of the following: (i)effective post-licensing monitoring; (ii)on-site monitoring of productive activities; (iii)computerized licensing systems; IBAMA has successfully produced detailed technical manuals on environmental licensing procedures and technical standards for the five most important typologies of investments requiring a federal license (24 months from effectiveness). MMA have signed agreements with IBAMA, ICMBio, ANA, FUNAI, IPHAN, SPU and the Fundaqco Palmares, among others detailing the procedures to be followed and time limits for the completion of licensing procedures where the issuance of a license requires the intervention of any one of these agencies (3 years from effectiveness); IBAMA has a fully functional web-based licensing system that will provide information on procedures and on specific licensing processes (EOP) and this system will be not less detailed and operational than the highest level state licensing system in existence (24 months from effectiveness) and, IBAMA disseminates data on the time elapsed from the date of submission of all license applications to the date a decision is issued (1 8 months from effectiveness); IBAMA has set up a joint licensing procedure that allows for staff cooperation, data sharing and joint licensing procedures agreed with at least 5 states (EOP); At least 10 states (15 states by the EOP) have produced a detailed set of manuals, procedures and technical standards for the three most important typologies of licensed activities; Based on the implementation of new or revised norms, at least 5 states (10 states by EOP) reduce the average time of issuance of preliminary licenses for the three most important typologies in the state by at least 30 percent; At least 10 states (1 5 by EOP) are working in cooperation with municipalities that are currently qualified to conduct environmental licensing outfitted with necessary institutional arrangements, equipment, computerized systems and trained staff (according to the criteria established by the State Environmental Council); At least 4 states (12 states by EOP) have implemented (or strengthened) an environmental monitoring system for the most pressured natural resource for which management decisions require information including: (i)systematized collection and processing of data; (ii)timely public dissemination of data; (iii)evidence that information is being used in management and/or enforcement decision making. At least 4 states (10 states by EOP) have implemented (or significantly improved upon) economic instruments to promote the conservation of natural resources and/or

During partnershin imnlementation, the proponent will: (i)report on measures taken, problems encountered and results achieved; (ii) periodically monitor key environmental variables and compare against baseline values; (iii)disclose the above information to the public in a timely fashion. The final report ofthe nartnership will include: (i) report on changes in the key environmental variables over the life of the project; (ii) report on the measures taken, problems encountered and solutions adopted; (iii) detailed explanation of how and why key environmental variables fluctuated over the life of the project; (iv) plans for future measures to be taken to continue to improve environmental quality.

7 pollution reduction, including suitable monitoring arrangements to gauge the success/failure ofthe instrument;

State QualiJication and Policy Reform Matrix

25. One of the primary goals of the proposed project is to provide an incentive for states to adopt significant institutional reforms that strengthen their capacity for environmental management. Partnership financing is a primary benefit accruing to states that have adopted reforms. Each state decides on the themes and issues on which it will focus its policy reform efforts from ,the eligibility criteria matrix. States earn points in accordance with the degree of difficulty of the reform it adopts. An independent Supervisory Commission reviews the evidence submitted by each state or the Federal District and may award or withhold points based on the criteria stipulated for each theme (see Box 4 in Annex 4, and Annex 16).

26. These criteria were selected by the project team in consultation with experts and state representatives with consideration of the primary institutional issues affecting the states. The primary goal for each criterion is to increase the level of accountability for actual environmental conditions. Variation in the capacity of each state is reflected in the four fulfillment levels indicated for each criterion.

27. To become eligible beneficiaries of project resources states are required to qualify through the adoption of selected policy reforms. The matrix includes 15 categories of environmental management and four levels of achievement for each category. For each criterion, states are awarded from one to four points depending on the level at which the state has qualified. None of the criteria is mandatory; states are free to select among the criteria with the condition that each state fulfill at least eight different criteria. States are also free to fulfill criteria at any level, with the condition that states may not qualify at the same level on the same criteria more than once. There is also a “wild-card” criterion which states can propose, subject to the agreement of the Supervisory Commission. The highest level at which states may qualify (level 4) demands that states present actual data demonstrating the environmental impact (not institutional) of measures taken. The total number of points accumulated by a state qualifies it for a matching grant whose size depends on the level at which a state qualified (see Annex 4 for a detailed description).

D. Project components

28. The proposed Phase 2 of NEP I1 has three core components: (A) Institutional Development; (B) Integrated Management of Environmental Assets; and (C) Coordination, Dialogue and Communication.

Component A. Institutional Development

29. Based on the lessons learned and the core structure implemented during Phase 1, the Institutional Development component encompasses the following: ( 1) Environmental Licensing; (2) Environmental Monitoring; and (3) Economic Instruments for Environmental Management. States’ classification per the Eligibility Criteria matrix would qualify them for matching grants.

8 30. This component has evolved from Phase 1. Given the growing challenges for environmental licensing at the federal, state, Federal District and municipal levels, and growing demands for investments and infrastructure, environmental licensing has become an urgent and sometimes contentious issue for MMA to address and improve. In Phase 2, strengthening the capacity for environmental licensing at the federal, state and Federal District levels will have greater emphasis. The Water Quality Monitoring (WQM) Subcomponent (from Phase 1) has evolved in Phase 2 into the Environmental Monitoring Subcomponent A.2, which would focus on monitoring key environmental issues identified by the states.” The Coastal Zone Management Subcomponent from Phase 1 was phased out for Phase 2, given that it met its desired objectives during Phase 1. In its place, the Economic Instruments for Environmental Management Subcomponent A.3 has been added.

Subcomponent A. 1. Environmental Licensing

3 1. This subcomponent would: (i)continue implementation of customized information systems for licensing in the 15 states that did not participate in Phase 1; (ii)update and improve the licensing systems in the 12 states that received support during Phase 1; (iii) promote the decentralization of licensing systems to qualified municipalities; (iv) provide technical assistance and capacity building to improve licensing systems in states and selected municipalities; (v) harmonize legal instruments and requirements for licensing systems (at all three levels of government); (vi) develop procedures and guidelines to support the licensing procedures and framework at the state and federal level; and, (vii) provide technical assistance and capacity building for updating procedures and environmental licensing methodologies for key sectors (roads, mining, hydrocarbons, among others), for all federal institutions directly linked to the environmental licensing process (IBAMA, ANA, ICMBio, among others), and for key agencies that also participate in the licensing process (FUNAI, IPHAN, SPU, and Fundaqao Palmares’*, among others).

32. This subcomponent would also strengthen the post-licensing monitoring of license conditions, clarifying the roles of different stakeholders to expedite licensing procedures, and integrate brown, green and blue agendas in federal, state and municipal licensing

loThe reason for this change lies in that: (i)WQM did not exist as a coordinated national program with the states prior to NEP 11; (ii)the National Water Agency (ANA) was created while Phase 1 was under execution and has now assumed a key role in supporting Water Quality Monitoring at the State level. Thus, in addressing a specific demand by the States who would like to be able to monitor other pressing issues (air quality, deforestation, biodiversity etc.) it has been agreed with MMA to change this subcomponent into monitoring of specific environmental priorities in the States. States interested in carrying out WQM would still be able to do so under Phase 2. The decision to include this subcomponent has been based on a growing demand by states for developing Economic Instruments as a tool for environmental management. For example at the beginning of Phase 1 there were only 6 states implementing ZCMS ecologicos and now there are 18 states. Some states (MG, MS) have even carried out assessments on how these have led to behavioral change. l2 The FundaqZo Cultural Palmares is a branch ofthe Ministry of Culture and its primary goal is to preserve Brazil’s African heritage. One part of this activity is to assist the descendents of freed slave communities known as Quilombos. The residents of such communities are known as quilombolas. The Federal Constitution of 1988 requires the State and Federal Governments to grant land titles to these communities that lack secure ownership of land. The process is underway. The applicability of the Bank’s policy on indigenous peoples to quilombolas is assured by the fact that they fulfill most of the criteria listed in OP4.10 and additionally they are officially recognized in Brazilian jurisprudence. Thus they occupy a similar situation to that ofthe Garifuna who live in several Central American countries.

9 systems.'3 Investments will be made in the development of standard procedures such as the integration of self-reported with externally collected data, staff training, development of staff profiles, continued development of information systems for the management of licensing data, and equipment purchases where a clear case has been made that lack of proper equipment is hampering the licensing procedure, enforcement, and post-license monitoring. In addition, further studies on licensing policies and procedures will be carried out to help in the design of more efficient and effective licensing systems. Studies will also be done to define policy alternatives and possible regulatory changes.

33. The municipal focus for this component would be implemented through participating states, and would follow selection criteria based on the size and capacity to develop and sustain licensing, and post-license monitoring and enforcement. As illustrated in Table 1 in Annex 4, the subcomponent would allow qualified states to have access to matching grants according to their classification up to the following levels. Class 1: R$500,000; Class 2: R$700,000; Class 3: R$1,000,000; and Class 4: R$1,500,000. Each state or the Federal District will be eligible to receive one grant in this sub-phase. The allocation to the federal government under the licensing component is R$l5,610,000 for activities detailed in Annex 4.

Subcomponent A. 2. Environmental Monitoring

34. This subcomponent will focus on: (i)developing environmental monitoring systems for priority issues and areas as determined by the states' environmental priorities (with a particular emphasis on air quality and water quality given their impacts on human health); (ii)integrating existing federal, state and municipal environmental monitoring networks into MMA's environmental information system; and (iii)enhancing the capacity to process and analyze information from monitoring networks. The activities under this subcomponent would aim at improving decision making processes regarding critical environmental issues and complement, when applicable, the environmental licensing process. The subcomponent would not support creation of new institutions for water- quality monitoring, but would seek to strengthen existing institutions that collect and analyze water quality by improving their techniques, integrating efforts, and ensuring that the results are made available in a timely fashion to decision makers and to the public in a usable form. The financing could be used to assess needs, develop monitoring models, design and build monitoring systems, acquire monitoring equipment, analyze and disseminate environmental (e.g., water, air, biodiversity) quality data to decision-makers, and disseminate approaches to environmental management using monitoring data.

35. This subcomponent would also serve to develop information management systems with a high level of access (e.g. via internet) for interested parties and easy retrieval for dissemination. Key institutional partnerships involving federal agencies, State Environmental Agencies, municipalities, NGOs, universities, research centers, water- resource management agencies, regional development agencies, and the private sector would be sought to strengthen the proposed environmental monitoring systems. As illustrated in Table 1 in Annex 4, the Environmental Monitoring Subcomponent A.2 would allow qualified states to have access to matching grants in the following order: Class 1,

13 This integration, already begun by the State of Minas Gerais, avoids the need to apply for separate licenses for water use, environmental impact and forestry as is the case in complex projects.

IO R$450,000; Class 2, R$670,000; Class 3: R$850,000; and Class 4: R$1,100,000. Each state or the Federal District will be eligible to receive one grant in this Sub-phase.

Subcomponent A.3. Economic Instruments for Environmental Management.

36. This subcomponent would promote alternatives to the command-and-control approach to environmental management, leading to the adoption of innovative instruments such as environmental audits, payment for environmental services, tradeable permits, environmental taxes based on the polluter pays principle, and others. This subcomponent would address a demand by states to develop incentive-based approaches to environmental management/protection. While a number of states have adopted the so-called “Green VATS” (ICMS EcoMgico), very few other approaches have been attempted to date such as “polluterher-pays”, congestion pricing, tax and other incentives for “green” initiatives. This subcomponent would focus on identifying opportunities and designing mechanisms at the state level for the development of economic instruments. MMA will have the ability to commission studies in this area. Specific activities may include: (i) gathering of information to assess installed capacity; (ii)identify opportunities to develop economic instruments at the state level (Le. workshops to assess which instruments best fit state prioritiedneeds); and (iii)design the framework to develop economic instruments in selected states. Partnerships developed under this subcomponent would be encouraged, if applicable, to be integrated into the Environmental Assets partnerships developed under Component B. Qualified states or the Federal District to have access to matching grants in the following order: Class 1, R$330,000; Class 2, R$440,000; Class 3: R$560,000; and Class 4: R$890,000. Each state or the Federal District will be eligible to receive one grant in this Sub-phase.

Component B. Integrated Management of Environmental Assets

37. The principle behind the Environmental Assets (EA) Component is to provide an incentive to, federal agencies, states and the Federal District, through Project Partners to identify, rank and address some of their most pressing environmental challenges and provide support for adoption of integrated management sustainable practices. As stated above, states qualify to receive matching grants for the development and implementation of partnerships. The grants may be used to finance partnerships that deal with a problem identified among the state’s highest priorities. It is important to recognize that these partnerships are not designed to “solve” the environmental problems of the state~’~;rather they are relatively small demonstration projects that present innovative ways to help resolve environmental problems. They afford additional opportunities to state environmental agencies to make investments designed to enhance environmental sustainability, demonstrate the possibility of “green” production, explore novel ways of enhancing access to renewable resources without depleting them, and others. Additionally, the component provides an avenue for environmental agencies to design and implement

‘‘Partnerships should fall within the identified environmental priorities in the state or the Federal District, however, not all of the states’ priorities would be realistically financed under NEP I1 (i.e. air pollution in the S8o Paulo metropolitan region). In order to access resources from this Component, the States will have to carry out a priority setting exercise to comply with the specific eligibility criterion in the policy reform matrix - Criterion H (See Table 3 below). In such cases, States would benefit from receiving TA to help with updating or determining the states environmental priorities.

11 partnerships that build valuable skills that often are in short supply (detailed component information is provided in Annex 4).

38. As an incentive to improve their environmental performance, those states that fall below Class 2 would not qualify for resources under this component; although they could still receive technical assistance for strengthening licensing, environmental monitoring or economic instruments. They could also receive assistance in meeting the reform criteria. States or the Federal District that fall into Class 2 could receive a matching grant of up to R$l.O million; states or the Federal District that fall under Class 3 would receive up to R$2.0 million; and states or the Federal District that fall under Class 4 would be eligible to receive up to R$4.0 million. Each state could qualify for up to two grants in this component (see Annex 4 for details).

39. During Sub-phase A of Phase 2, two states (Alagoas and Ceara) which submitted proposals during Phase 1 but were unable to implement these partnerships for lack of funding, would receive support for implementation of their respective partnerships. Other states or the Federal District would follow a sequence ofpartnership preparation and would become eligible for partnership financing as follows (i)creation of a technical group for the preparation of partnerships; (ii)baseline study of the selected area for partnership according to the states priorities; (iii)preparation of partnership proposal (which would be discussed and endorsed by key stakeholders through local workshops); (v) assessment of partnership proposals by the Supervisory Commission; (vi) implementation of partnerships; and (vii) monitoring and evaluation of partnerships.

Component C. Coordination, Dialogue and Communication

40. The project would support the strengthening of the organizational and operational structure of the Project Management Unit (PCU) with the technical and administrative capacity needed to manage partnerships and activities”. MMA has “mainstreamed” NEP I1 by incorporating it into its organization as its primary vehicle for strengthening the National Environmental System (SISNAMA). The PCU is now situated directly within the Executive Secretariat (SECEX) of MMA which would allow for a fluid coordination with other areas within the ministry and a strategic engagement with the states. (See Figure 2, Annex 6). The PCU staff consists of ministry staff selected by competitive examination and consultants.

41. This component also includes a small communications unit that will develop and implement a strategy to disseminate lessons learned from current and past project activities and help to build support and understanding for environmental programs among various stakeholder groups. The PCU would continue to have the responsibility for coordinating project activities with federal agencies linked to the environmental licensing process, OEMAs, other units within MMA, sector ministries, and other key stakeholders (NGOs, academic institutions, etc). The PCU would continue channeling technical assistance and capacity building to the Project Partners (federal agencies, states, the Federal District, municipalities and NGOs) on: (i)environmental licensing procedures at the federal, state,

15 The PCU has demonstrated its overall implementation capacity during Phase 1 since the project consistently utilized about 98% of the total funds made available by Treasury to MMA over the years of operation, and managed to implement and supervise 43 partnerships nationwide.

12 Federal District and municipal levels (ii)fulfillment of key eligibility criteria (such as updating/identifying environmental priorities); (iii)partnership proposal development; (iv) environmental monitoring partnerships; and (v) development of economic instruments. Additionally, the PCU would call upon the Supervisory Commission for the review and clearance of partnership proposals and the certification of eligibility. The PCU would also continue to contribute to establish synergies and institutional partnerships among OEMAs, municipalities, NGOs, universities, research and training centers, regional development agencies, agricultural development agencies the private sector and other key stakeholders for the implementation of the project.

D. Lessons learned and reflected in the project design

42. Among the lessons learned from Phase 1 was the reaffirmation of the viability of a decentralized approach to environmental management. By transferring decisions and implementation down to the state level, the federal government has been able to accomplish several important goals, including: ( 1) leveraging policy and regulatory change at the state level; (2) generating enthusiasm, energy and counterpart funding for state selected priorities; and (3) building capacity for environmental management at the state level. Thus, Phase 1 demonstrated that there is a great deal more interest and capacity for environmental protection at the local level, especially when state-level entities are allowed to set their own priorities and develop their own methodologies. Phase 2 would continue to employ this valuable approach in its design by empowering states to strengthen their environmental management capacities and to develop their partnership proposals, and determine their environmental monitoring needs.

43. Phase 1 also demonstrated that states are quite willing to have their capacity and performance evaluated objectively, especially when the financial incentive to support state- defined partnerships is added. Most state officials actually welcomed the opportunity to have their capacity evaluated externally because it gave them leverage for policy changes within their governments.

44. An important lesson was the importance of building an effective communications component into the project. During project implementation of Phase 1, there were times when the project received less funding from the budget envelope allocated to MMA than other programs that were narrower in scope and performed less well than NEP 11. This may have been partly a function of how well the project communicated with its various constituencies. The lesson derived is that the success of a project may often depend on its capacity to identify key stakeholders and to communicate with them effectively, in both directions. Phase 1 included a communications team as part of the Project Management component.

45. The lack of baseline data against which to measure actual improvements in environmental quality through the implementation of partnerships at the state level is an important lesson from Phase 1. For the most part, participating states did not develop solid baselines and did not establish a basis for comparing changes in environmental quality as partnerships unfolded under Phase 1. Thus, Phase 2 will establish the development of baseline studies as a requirement for partnership financing. Proponents will need to demonstrate specific plans for conducting baseline studies.

13 46. An additional lesson concerns the delays encountered in the signing of contracts owing to cumbersome administrative procedures by UNDP. MMA has relied on UNDP as a service provider for letting contracts, which often resulted in delays affecting project implementation. MMA is aware of these shortcomings and will demand performance improvements to continue engagement with UNDP (as part of the negotiations for an extension of the umbrella agreement with UNDP beyond 2010). Contracts for state activities would not be channeled through UNDP. In addition, the diagnostic derived from the implementation of Phase 1 indicates the need to continue developing the administrative (i.e. procurement and financial management) capacity within MMA to curb reliance on external service support.

47. Lastly, an important lesson for Phase 2 is related to the flexible methodology provided by MMA to the states for assessing their environmental priorities. This methodology has to be very closely monitored to ensure the proper dimensioning of partnerships and that the proposed priorities addressed within the context of the project are realistic and commensurate to available resources.

E. Alternatives considered and reasons for rejection

48. The basic structure of the Project was determined at the outset of the Program. Among the alternatives considered for the Phase 2 of this Project were to:

(a) Retain the eligibility matrix as it was during Phase 1; (b) Continue to limit the scope of the monitoring subcomponent to WQM; (c) Continue the Coastal Zone Management (CZM) Subcomponent; (d) Omit the Economic Instruments Subcomponent; and (e) Use the Official Bank, Caixa EconBmica Federal as a Financial Agent.

49. With regard to (a), it was agreed that the Phase 1 eligibility matrix needed to be expanded, in order to provide incentives for states to adopt additional reforms, especially for those states that achieved the highest rank during Phase 1 (So Paulo, Minas Gerais and Parana). Moreover, it was decided to add new categories to the matrix offering a wider choice and new challenges to states such as Environmental Enforcement, Climate Change and Land-use Zoning.

50. With regard to (b) it was decided to broaden the scope of environmental monitoring to including other areas such as air quality, vegetative cover, soil loss, etc. to accommodate specific demands by participating states. There is still considerable room for improvements in WQM and states are free to select this area for developing or expanding monitoring programs. However, ANA has assumed greater responsibility for establishing and maintaining a WQM system.

5 1. Regarding (c), significant progress was achieved under NEP Iand during Phase 1 of NEP 11, in building capacity for analysis of CZM such that all of Brazil’s 17 coastal states had the means to use the tools provided under this subcomponent. Many states are using these tools for various purposes, most notably in the Federal Coastline Project (Projeto Orla) which involves the municipalization of control over coastal areas. It was therefore agreed that no further support need to be provided under this subcomponent.

14 52. Regarding (d), Economic Instruments have been in growing demand from states. Six states implemented ICMS ecologicosi6 at the outset of Phase 1, and now there are 18 states. Economic Instruments have been a widely discussed topic in environmental circles for some time. There is widespread recognition that Brazil is overly dependent on command- and-control mechanisms and would benefit from adoption of more incentive-based approaches to environmental protection. While a number states have now adopted so- called “Green VATS”, very few other approaches were tried such as “polluterhser-pays”, congestion pricing, cap-and-trade schemes, tax and other incentives for “green” initiatives, stimulation of a “moral economy” with approaches like the Indonesian PROPER ProgramI7. Sub-component A3 of Sub-phase A addresses this deficiency.

53. The project team, together with the PCU, spent considerable effort seeking a solution to mitigate the problem of delays caused by the slow release of budgeted funds to the project (see section I11 E below). Among the solutions considered was the use of a financial intermediary such as the Caixa EconGmica Federal (CEF, a federal thrift institution). However, it appears that under CEF, funds would be subject to all the potential delays and problems that apply to ordinary budget funds. Another possibility that was considered was to use the Brazilian Biodiversity Fund (FUNBIO), a non- governmental, non-profit organization first established through a GEF Grant. However, it was considered that FUNBIO is already operating in full capacity being involved in many other GEF projects, such as the Amazon Region Protected Areas Project and the Mainstreaming Biodiversity Project.

111. IMPLEMENTATION

A. Institutional and implementation arrangements

54. The PCU of NEP I1 has been active and operating since the implementation of Phase 1, and recently was formally incorporated as part of the institutional structure of MMA under the Executive Secretary (SECEX) of MMA (see Annex 6, Figure 2). Most of the PCU staff have participated in the preparation and implementation of Phase 1 ensuring technical and administrative continuity. Synergy among various externally funded programs and Secretaries within MMA will be assured through the key convening role of SECEX which has, among other things, responsibility for coordinating the SISNAMA and for ensuring consistency among all programs under the Ministry. This would prevent the duplication of efforts and potential conflicts among programs.

55. The PCU of NEP I1 has demonstrated the capacity to manage multiple activities with a wide array of stakeholders and states (most of the procurement and FM staff would remain in Phase 2). Through the implementation of Phase 1, the PCU has acquired considerable expertise in budgeting, project accounting, procurement, financial management and coordination with external executing agencies at all levels of government and with the private sector. Likewise, many states and municipalities gained considerable expertise through the implementation of NEP Iand Phase 1 of NEP 11. This knowledge

16 ICMS Ecolbgico (or “Green VATS”) involves the selective transfer of a portion of the States VAT revenues to municipalities that contribute to environmental protection by,having part of their territory in protected areas or undertaking other conservation measures. l7Garcia Lopez, Jorge, T. Sterner and S. Afash. Public Disclosure of Industrial Pollution: the PROPER Approach for Indonesia? 2004. Resources for the Future.

15 and positive experience and the relationships developed during Phase 1 will help in establishing and managing the partnerships contemplated under Phase 2.

56. MMA, through the PCU, would contract consultants providing technical assistance to the federal agencies, states and the Federal District for the implementation of both core components, as well as for the priority setting exercise, through a technical cooperation agreement with UNDP. In addition, selection of consultants for the PCU and purchase of goods and services other than consulting services will be carried out by UNDP. For the implementation of partnerships and activities under Components A and B, the Ministry would enter into partnership agreements (conv8nios) with the implementing agencies, which may include federal agencies, states, the Federal District, municipalities, and NGOs in order to transfer project resources directly to the implementing unit. Once the resources are received, each implementing unit would be responsible for the selection of its own consultants and for the purchase of goods and services. During the midterm review and towards the end of Sub-phase A, UNDP’s performance would be evaluated. If its performance has not been satisfactory, alternate arrangements would be made for the project’s procurement needs. Likewise, MMA would carry out a capacity assessment (to be jointly undertaken with the Bank) and would require performance indicators from UNDP for this and other projects.

57. Each year the PCU would prepare an annual operating plan, outlining the investments to be made under the project and submit to the Bank for approval. A Supervisory Commission (See Annex 6) would be established in order to review the fulfillment ofthe eligibility criteria matrix as well as the subproject proposals.

B. Monitoring and evaluation of outcomes/results

58. Following the approach developed during Phase 1, the PCU would establish a monitoring and evaluation system (M&E) to track implementation ofproject activities and determine the attainment of the PDO with reference to performance indicators. The system would also allow periodic reporting to be shared with the Bank on progress in project implementation which would consist of (i)annual technical reports; (ii)summary reports for each activity being implemented; and (iii)briefs from technical meetings and supervision missions carried out by the PCU. The M&E system established at the PCU would, as in Phase 1, rely on collection methods (including in-situ field visits, interviews with beneficiaries, periodic quality testing and monitoring on areas subject to project intervention, measurements of levels of social inclusion and participation, partnership sustainability, etc.).

59. The M&E system worked well during Phase 1 and a more robust, organized and methodological system is planned for Phase 2. In addition to the technical execution of project activities, the PCU would closely monitor the financial management, fulfillment of the Bank’s safeguards and procurement arrangements executed by participating states. The use of ex ante baseline studies would also contribute to measure concrete environmental improvements in specific partnerships.

C. Sustainability

60. Sustainability is a major strength of the project design. The Project is the second Phase of an APL that proved successful in its Phase 1 and which has evolved from the first

16 National Environmental Project. NEP I1 has contributed to significant achievements including the consolidation of the National Environmental System (SISNAMA), and has also led to concrete environmental gains in specific basins or ecosystems. Some elements that would ensure sustainability of project activities are embedded in project design. For example, states seeking matching grants for new partnerships under the Environmental Assets Component would be eligible to receive up to two grants during the life of the project provided that the previous partnership has been completed successfully. Furthermore, states which qualified and carried out partnerships during Phase 1, would be able to qualify for Phase 2 when they demonstrate sustainability and mainstreaming results obtained during Phase 1.

61. By strengthening SISNAMA, MMA has internalized many of the products and outcomes and has developed a strong ownership of NEP 11, particularly for the following activities: (i)the National Plan for Environmental Licensing; (ii)the WQM Plan; (iii) Coastal Zone Management; (iv) the development of Solid Waste Management Plans; and (v) the reference data for the Environmental Management System (SIGAB) and for the National Environmental Information System (SINIMA). NEP I1 is currently the primary mechanism through which the federal ministry interacts with states and strengthens environmental capacity at the state level. Both MMA and the states recognize these accomplishments and the need to proceed to Phase 2.

62. NEP I1 has contributed to a number of institutional partnerships involving State Environmental Agencies, municipalities, NGOs, universities, research centers and training centers, water-resource management agencies, tourism agencies, regional development agencies, agricultural development agencies and the private sector. For example, NEP I1 has served as a platform for significant sectoral agreements and environmental mainstreaming including: (i)an agreement between the Ztaipzi Binational Power Company and the Ministry of Environment (MMA) on watershed management; and (ii)an agreement between MMA and the National Water Regulatory Agency (ANA), whereby ANA has agreed to host one of NEP 11’s key products: the website on water quality in Brazil. MMA expects that these agreements and synergies will continue throughout Phase 2 ensuring sustainability in the project’s activities.

D. Critical risks and possible controversial aspects

63. Phase 1 of the Project has been uncontroversial. This testifies to the open and transparent fashion in which the project was implemented and to the fact that priorities are determined and partnerships defined at the state level.

64. Based on the experience of Phase 1, the greatest risk to smooth and successful implementation is the risk of interrupted release of funds from the federal government to the Program. This problem was experienced repeatedly during the implementation of NEP I and NEP 11, Phase 1. The problem did not occur due to lack of commitment to the project, as documented above. The states themselves, through the Association of State Environmental Agencies, ABEMA, gave repeated strong endorsements of NEP and urged the Ministry to strengthen and extend the Program.

17 65. Nevertheless, there were frequent delays and interruptions in funding. First, there were annual delays in congressional approval and release and of the federal budget." In a few years, resources were not released until four months into the fiscal year. During the periods prior to budget releases, the Ministry was permitted to spend up to 1/12th of the budget, but frequently this was insufficient to meet the needs of the Program. Also, within the Ministry of Environment, NEP had to compete for funds with several other programs, even those that had much lower effectiveness in financial execution. The result was that the targets of the state partnerships under the Environmental Assets Component had to be scaled back. Remarkably, the PCU consistently spent more than 90% of the resources actually made available to it. NEP 11, however, was forced to endure continuous resource scarcity. The low disbursement levels experienced in Phase 1 were primarily due to these factors and not to a lack of commitment by MMA or the participating states.

66. Another source of delays was the freeze on federal transfer for states in arrears on obligations to the federal government. Such states were ineligible to receive transfers until the debt was paid or a repayment agreement had been signed, a process that sometimes takes weeks or months. Within this context, partnerships were generally quite successful but often on a lower scale than the original expectation. This explains the apparent anomaly of a project that was highly successful, yet underspent its targets and was forced to cancel more than a third ofthe loan amount.

67. Unfortunately, no definitive solution has been found for this problem which is common to all Bank financed investment loans to the Federal Government in Brazil. Nevertheless, MMA's commitment to the project has been strengthened by the project's having been mainstreamed into MMA's organizational structure.

68. The main risks are summarized below:

Table 2. Main Risks and Possible Mitigatory Measures

Risk Description tating Possible Mitigatory Measures Ratinl TY Pe of of Risk Residur Risk Political Eligibility ratings and partnerships M As during Phase 1, the project has clear rules for L Risk approval could be politicized. eligibility and guidelines for partnerships proposals. Not only the Ministry but also the participating states have a stake in maintaining the integrity of these rules. This can be reinforced by careful supervision. The Supervisory Commission with representation from civil society and the private sector can help guard against manipulation. Staffing Substantial turnover in the project staff M The project team has shared its concern with L Risk could lead to a drop in project high-level officials at MMA and SEAIN. The performance. The PCU in the Ministry Bank team assessed whether the contracting of Environment has excelled over most model from the VIGISUS project can be applied other comparable units in its efficiency for contracting PCU staff and concluded it can. and effectiveness in implementing the Following on this model, PCU staff will be

''Under Brazilian law, all externally financed funds must go through the budget process and are subject to the same restrictions as federal treasury funds, regardless of the cost-sharing arrangements.

18 Risk Description tatin] Possible Mitigatory Measures Rating TY Pe of of Risk Residua Risk Program. Most of the staff at the PCU financed through the Loan. This would provide works with temporary contracts which greater flexibility in hiring qualified staff for expire in July 20 10. Delays in renewal technical and operational functions. In addition, of these contracts (or making them MMA has indicated its desire to hold a permanent), could adversely affect competitive selection process during 2009/20 10 continuitv. - providing further stability to staffing. Financial (A) Two factors constrained H (A) The Bank would seek assurances from S implementationduring Phase 1 of this government that the proposed project would project: (i)budget cuts by the Treasury have high priority over its entire life. An in an effort to meet fiscal targets and (ii) effective communications program would impoundments motivated by MMA’s stimulate public support for the project poor financial performance. particularly in the states where all project activities are carried out.

(B) Indebtedness and arrears at the state H (B) While there is little flexibility for the Bank S level could stall the transfer of project to ameliorate this risk, as states develop more resources from MMA to the states. secure and stable financial systems and there is greater compliance with the Fiscal Responsibility Law, there would be less risk to the project. - Procure- Procurement project risk rate is high H The project risk rate will be revised six months M ment since that some states and municipalities after effectiveness and after the capacity did not participate in Phase 1 and thus assessment of each selected state and their capacity is unknown. municipality, to reflect the overall project risk. It is expected that risk levels would be acceptably moderate, as most states have already participated under a convdnio during previous project phases, and since the PCU would be providing training and guidance on procurement. The PCU would continue to provide training Procurement performance in the states and supervision for the state implementation receiving project support could degrade. units, which proved effective during Phase 1, In addition the Bank would carry out a thorough procurement capacity assessment of participating states.

The PCU will carefblly track procurement M M MMA proposes using UNDP, through a performance and will move quickly to address Technical Cooperation Agreement, for problems that may arise. MMA (which is the purchase of goods and services and negotiating a renewal of the contract with selection of consultants to be contracted UNDP) will demand performance indicators and by MMA. UNDP’s performance has will carry out a capacity assessment with the declined in recent years primarily Bank. During the MTR (which could occur because of delays in issuing contracts. after the 12 month of project implementation), UNDP’s performance will be evaluated and, if necessary alternative arrangements will be made.

Financial State Level M M Mgt. Despite the strong PFM requirements of State FM capacity will be a condition for Risk the LRF, simply due to the lack of - participation. Training will be provided to states

19 Risk Description tatin; Possible Mitigatory Measures Rating TY Pe of of Risk Residua - Risk knowledge of PFM performance in identified as weak performers. The Project team enough states, there is an increased is evaluating the best option to guarantee low level of FM risk. staff rotation.

PCU Partnerships at the state, Federal Partnership transfers linked to FM conditions District and municipal levels, and training will reduce decentralized M M sometimes with agencies with no implementation risk. experience with Bank financed projects. The final funds flow design ,is reflected into the Operational Manual. Internal External Audit Strengthened supervision by the Ministry of Environment Weak internal controls at the sub- M M national level program execution.

Technical Fulfillment of eligibility criteria lags M During Phase 1 more states fulfilled the Risk behind or moves ahead of predicted eligibility criteria than was expected. The time intervals leading to potential remedy was to defer grants to Phase 2 for some disbursement delays. states. This would be avoided during Phase 2 by - having more funds available. Safeguard States may fail to take safeguards into M MMA would provide close supervision of state Risks consideration, performance and there would also be audits of partnership accounts. Environ- Partnerships could potentially cause L Partnerships would be screened for compliance L ment environmental damage or involuntary with Bank Safeguards prior to approval.' As Risk resettlement. necessary, mitigatory measures would be taken to avoid or minimize environmental damage or involuntary resettlement. Indigenous groups are eligible for partnership benefits; in the event that such groups form part of a beneficiary group, the guidelines in OP 4.10 would be followed. OVERALL RISK RATING -M L-M

E. Loadcredit conditions and covenants

69. During Negotiations, the Ministry of Environment presented to the Bank the following documents, which were agreed and finalized: (i)Project Operational Manual; (ii) draft MMA-state partnerships agreements; (iii)draft MMA-federal agencies partnerships agreements; (iv) procurement plan; (v) financial management plan; (vi) a fully staffed PCU. Other conditions met at negotiations were the presentation to the Bank of: (i)draft Program Regulation (Portaria) to be issued and published in order to create the Second Environmental Management Project; (ii)draft Project Coordination Unit (PCU) Regulation (Portaria) to be issued and published in order to establish the Unit; (iii)draft Supervisory Commission Regulation (Portaria); and (iv) draft Regulation (Portaria) to be issued and published in order to adopt the Project Operational Manual.

20 70. Loan Effectiveness Conditions can be met just after signing as they have already been met in substance. These are: (i)the Program Regulation (Portaria) to create the Second National Environmental Project has been adopted and published in form and substance satisfactory to the Bank; (ii)the Project Coordination Unit (PCU) Regulation (Portaria) to establish the Unit has been adopted and published in form and substance satisfactory to the Bank; (iii)the Supervisory Commission Regulation (Portaria) has been adopted and published in form and substance satisfactory to the Bank; and (iv) the Project Operational Manual has been adopted by the Borrower’s Ministry of Environment through a Regulation (Portaria) issued and published in form and substance satisfactory to the Bank.

71. Other covenants are as follows: (i)procurement audits for partnerships every year; (ii)bi-annual meetings for the Supervisory Commission; (iii)mid-term review about December 3 1,20 11 ; and (iv) retroactive financing up to 20% of the Loan amount.

IV. APPRAISAL SUMMARY

A. Economic and financial analyses

72. The outputs of the Phase 1 of the Program were not subjected to benefit-cost analysis largely because these relate mainly to institutional strengthening. During the proposed Phase 2, and through the implementation of environmental partnerships, however, the Program would promote the use of economic analysis methods in the OM and through technical assistance programs, in order to ensure that the partnerships proposals lead the municipal and state participants to use least-cost methodoloaies as .they weigh environmental investment options and decide on specific solutions. Analysis of cost- effectiveness is one of the selection criteria for Environmental Assets partnerships, following the eligibility criteria defined in the Operational Manual.

73. The data to be generated through the monitoring subcomponent, in particular, will be used as inputs to the analysis of cost- effective investment solutions for water resource quality. Wherever feasible, the environmental benefits generated by a particular partnership would be monetized. For example, a solid-waste landfill designed to be operated with cost recovery would be compared to the cost of operating a landfill without cost-recovery. Benefits from reduced pollution loads can sometimes be calculated in terms of reduced hospital visits or disease loads. Proponents would identify beneficiaries of projects, estimate the value of improvements in environmental quality, human health, productivity, amenity values (possibly by using contingent valuation analysis), and/or ecological functions. They would also identify total costs involved (including negative costs borne by other economic agents). If monetary values cannot be defined, a clear description of the likely benefits and costs, as well as clear indicators for monitoring achievements, would be made.

74. The partnerships implemented under the Environmental Assets component are unlikely to have a significant fiscal impact on the state because of their small size relative to state financial budgets.

21 B. Technical

75. Partnerships financed under the Environmental Assets component would be subject to screening on technical, financial and economic criteria set out in the Project Operational Manual. Among the factors to be assessed are the alternatives considered and implications of the proposed technologies in terms of operation and maintenance requirements and costs. The component would encourage the use of simple, appropriate and environmentally-friendly technologies. Wherever possible, partnerships that generate employment and are socially inclusive would be favored.

C. Financial Management

76. The Borrower (federal government), through the Ministry of Environment (MMA), would carry out Project activities, including the administrative and financial management tasks and reporting. MMA has had extensive experience in implementing Bank financed projects, including the recent Phase 1 of the NEP I1 (P035741). Finally, successful implementation of risk mitigation measures would bring together planning, budgeting, accounting, financial reporting, internal control, auditing, disbursement and physical performance for the project. The MMA would continue to generate acceptable financial management arrangements during Phase 2 of NEP I1 implementation, resulting in reduced risk related to the Project staffing and funds flow design.

77. Given the Bank’s extensive experience in the environment area in Brazil, MMA’s performance during NEP Iand Phase 1 of NEP I1 and the current in situ assessment, the overall conclusion of the Financial Management Assessment is that the project has satisfactory financial management arrangements in place to meet the Bank’s minimum requirements. Therefore, the overall financial management risk associated with the project has been assessed as moderate. The project’s financial management system will be able to provide relevant and reliable financial information, in a timely manner, and will support the project’s management in the control, planning, implementation and monitoring of the project.

78. The SIGMA financial management system was first developed by MMA is now in widespread use in other Bank-financed projects, and structured to provide financial, monitoring and procurement controls. The financial system has demonstrated its capacity to maintain adequate accounts, financial reporting, and auditing systems to ensure the provision of accurate and timely information regarding project resources and expenditures to auditors and the Bank. During Phase 1, the PCU produced FMRs in accordance with Bank guidelines.

79. Many ofthe participating states were selected during Phase 1, however they have not yet been assessed regarding their FM capacity for the current phase. Their FM capacity, as well as the FM capacity of other participating federal agencies linked to the environmental licensing process, would be a condition for transfers of funds for approved partnerships under the two core components (Environmental Assets and Institutional Development). The FM criteria will be similar to those applied in the Phase 1 of the NEP I1 and developed in the updated Project Operational Manual including the following: (i)establishment of management unit; (ii)partnerships financial management system in place, according to parameters acceptable to the Ministry of Environment and the Bank; and (iii)action plan

22 for improving FM processes agreed and under implementation (for states where such a plan is deemed necessary based on a risk assessment).

D. Procurement

80. Procurement for the proposed project would be carried out in accordance with the World Bank's "Guidelines: Procurement Under IBRD Loans and IDA Credits" dated May 2004 and revised October 2006; and "Guidelines: Selection and Employment of Consultants by World Bank Borrowers" dated May 2004 and revised October 2006, and the provisions stipulated in the Loan Agreement.

8 1. The PCU's procurement of goods and services will be processed by UNDP, with due application of Procurement Guidelines stipulated in the Loan Agreement. In the event of the replacement of UNDP with another option for carrying out procurement activities, Bank's no-objection and a capacity assessment of the new agent would be required. The Project would also rely on UDNP, through a technical cooperation agreement, for Selection and Contracting of Consultants at the federal level and also at state level, when necessary. UNDP has had a capacity assessment conducted by the Bank and will be required the mandatory application of Bank's Guidelines. It is also reflected on the overall project risk rate and the overall project procurement supervision frequency.

82. Once funds have been transferred, the selection of consultants and purchases of goods and services by the federal agencies, states, Federal District, municipalities and NGOs will be processed by their implementation units following the agreed procurement rules, with the support from the PCU. Therefore, upon their selection and before signature of each partnership agreement (convgnio), a capacity assessment of the respective implementation unit will be conducted by the Bank, establishing thereof the procurement risk rate, the threshold for each procurement method, and the frequency of procurement supervision missions for that convgnio. The latter will reflect on the overall project risk rate and the overall project procurement supervision frequency. Just as with FM, training and TA will be provided to strengthen the procurement capacity.

83. The ex-ante procurement project risk rate is high, because states and municipal capacity is still unknown and must be assessed on a case-by-case basis. The project risk rate will be revised six months after effectiveness and after a capacity assessment of each participating state and municipality, to reflect the overall project risk. It is expected to be acceptably moderate, as many states were already working under a convgnio during Phase 1, and which were subject of procurement reviews showed state procurement capacity to be generally acceptable.

E. Social

84. There are multiple social implications of the project, beginning with the validation (or preparation) of state environmental priorities and including the selection and implementation of partnerships under both the Environmental Assets Component and the Institutional Development Component. Strict enforcement of environmental laws and regulations could affect livelihoods in various instances. MMA has established guidelines to assure that all stakeholders are given an opportunity to have input to the setting of state priorities. In addition, the scope of social impact would be considered in evaluating partnership proposals, such as the number ofpeople that would be benefited.

23 85. MMA has also established a screening procedure to identify such issues in partnership proposals and would ensure that appropriate expertise is applied to problems that may arise. As part of the appraisal of each proposed partnership, social issues such as risks and benefits to vulnerable populations would be identified and addressed in a manner consistent with Bank policy. Since the poor are often the primary victims of pollution or environmental degradation, MMA and the states would seek to ensure their interests are considered and that legitimate representatives of the most vulnerable segments of the population participate in partnership design and implementation. As in the past, solid waste management projects would take into consideration the waste scavengers who occupy and work on landfills. In several partnerships during Phase 1, the project design included assisting the scavengers in setting up organizations, acquiring uniforms and appropriate equipment, preventing child labor, and establishing systems for the effective marketing ofrecycled wastes.

86. Environmental problems often involve conflicts over resource use, for example between producers and the people affected by pollution, or between commercial and subsistence fishermen. The Project would help provide reliable environmental information to all parties to environmental disputes to assist in the resolution of such conflicts. For example, the Environmental Assets and Licensing activities during Phase 1, contributed to resolving some ofthe water use conflicts in the states ofRio Grande do Sul, Santa Catarina and Parana. The Environmental Assets Component would seek to promote negotiated solutions that conciliate between the need for production and society’s demand for a pollution-free environment. The Environmental Assets Component would require the formation of local stakeholder coalitions that will develop and implement management plans for the assets to be protected. Workshops and seminars would be held to disseminate best practice in participatory environmental decision-making. A study emerging from a number of similar programs provided useful guidelines for the social participatory dimensions. Some of the lessons learned include: (i)inclusion of additional stakeholders during implementation could minimize the risk of partnership discontinuity; (ii) environmental partnerships tend to produce results over a long period which needs to be taken into account; and (iii)the role of the federal government as a mediator can be crucial in resolving local disputes.

F. Environment

87. NEP I1 Phase 2 aims to enhance the capacity of state governments and other institutions to define environmental problems, adopt new policies and procedures and to implement pilot projects that would actually lead to beneficial environmental outcomes. The project creates an incentive system for states to strengthen their environmental policies and instruments and to develop new ones. The scale of the Environmental Asset partnerships is not sufficient, in most cases, to correct serious, long-standing environmental problems (Le., deforestation in Amazon states, air quality in Sao Paulo, water pollution in Sao Paulo state, Pollution of Guanabara Bay in Rio de Janeiro, etc.). However, it does provide a ‘demonstration effect’ that can and has, in some cases, resulted in the mainstreaming of a successful approach as in the case of the animal waste partnerships implemented in three southern states in Brazil during Phase 1.

24 G. Safeguard policies

88. Since the specific investments that would be made under the Environmental Assets Component are not known, it is not possible to provide an environmental or social assessment of the potential impacts of these partnerships. Therefore, the Project is presented under an Environmental and Social Impact Framework. Activities supported under the Institutional Development Component are mainly organizational and instrumental. There is, however, a potential social impact to new policies in taxation or regulation that could benefit or adversely affect the interests of resource users, investors and their employees. Such impacts would be assessed under the framework. (See Annex 10).

89. MMA would train the states in World Bank safeguard policies, but it would also undertake to screen all partnerships proposed under the Institutional or Assets components for safeguards implications. While unlikely, it is possible that a partnership could trigger the Indigenous Peoples Policy. For this purpose, an Indigenous Peoples Framework (IPF) has been prepared and incorporated in the OM. In a specific case, an Indigenous Peoples Plan (IPP) would be prepared with full consultation with the indigenous group or groups involved. While physical displacement of populations is extremely unlikely, it is possible that the Involuntary Resettlement policy would be triggered as a result of deprivation of access to a resource in a protected area or landfill. In such cases, the Involuntary Resettlement Policy would be triggered and a Resettlement Action Plan (RAP) would be prepared with full consultation with the affected population.

90. There is a negative list of activities and impacts that the project would not consider for financing. It includes:

Works not directly linked to the project’s objectives; Basic sanitation or water supply works, except for solid waste management which is allowed; Dams or reservoirs; Irrigation works; Landscaping works such as public gardens, plazas and green areas in private condominiums; Facilities for the rehabilitation of wild animals; Municipal Master Plans not related to the proposed partnerships; Activities oriented mainly towards research; and Acquisition of vehicles or other equipment primarily for the strengthening of the implementing agency not related to the proposed partnership.

91. In accordance with OP4.01, the Project has been classified as a Category B project for environmental impacts and the following safeguard policies are being triggered.

25 Safeguard Policies Triggered by the Project Yes No Environmental Assessment (OP/BP 4.0 1) [XI [I Natural Habitats (OP/BP 4.04) [I [XI Pest Management (OP 4.09) [I [XI Physical Cultural Resources (OP/BP 4.1 1) [I [XI Involuntary Resettlement (OP/BP 4.12) [XI [I Indigenous Peoples (OP/BP 4.10) [XI [I Forests (OP/BP 4.36) [I [XI Safety of Dams (OP/BP 4.37) [I [XI Projects in Disputed Areas (OP/BP 7.60)* [I [XI Projects on International Waterways (OP/BP 7.50) [I [XI

H. Policy Exceptions and Readiness

92. No policy exceptions are needed for this project. The Project meets Regional criteria for readiness for implementation. In particular: (a) the Project implementation unit has been set up and is fully operational; and (b) the states qualification process has already started prior to project effectiveness.

* By supporting the proposedproject, the Bank does not intend to prejudice the final determination of the parties' claims on the disputed areas

26 Annex 1: Country and Sector or Program Background

1. For the first time in a generation, Brazilians are benefiting from stable economic growth, a low rate of inflation and improvements in social well-being. Since 1994, the Brazilian Government has coupled stable macroeconomic management with well-directed social policies. This dual focus generated good results. The economy achieved steady, though moderate, growth in 2004-2005, accelerating in 2006 and 2007. At the beginning of2009, predictions show that Brazil’s economic growth would slow down but would still expand. At the same time, inflation rates are around 4% a year, the balance ofpayments is registering record surpluses, the Country has accumulated large foreign exchange reserves and there was a great drop in public debt vulnerability. In this context, the main objective of the World Bank’s partnership with Brazil is to help the country achieve its growth potential in a fair, sustainable and equitable fashion.

2. The Government of Brazil has officially adopted a policy of decentralization of environmental management. Progress was achieved in strengthening environmental licensing procedures, managing pollution in selected watersheds, strengthening the management of conservation units, sharing responsibility with state environmental agencies, removing bottlenecks associated with environmental licensing of investment projects, improving dialogue with the private sector on environmental management, on sustainable economic activities, and stimulating greater interest in the use of economic instruments for environmental protection. During Phase 1 of the NEP, the Brazilian Government adopted a bold new forestry plan that allows, for the first time, the leasing of public lands for timber extraction under controlled conditions. The plan became effective in early 2008 with the first auction of forest leases. It is too early to gauge the success of this Program, but it has generally been received well by the local and international conservation community.

3. On the down side, persistent problems of pollution and natural resource degradation remain in Brazil and, in some areas the government has had little success in improving the situation. Environmental licensing procedures have not always been effective as instruments for environmental management and have often been time consuming and onerous to private enterprise, possibly discouraging public and private investment. Environmental enforcement is spotty and relies excessively on command-and-control while some environmental institutions have not become measurably more efficient in their environmental protection activities. Brazil has not been, able to collect and disseminate reliable environmental information in a timely and comprehensive fashion. Public-private alliances needed for better environmental management have not emerged in most places.

Second National Environmental Program

4. The Second National Environmental Project will contribute to improvements in environmental quality in Brazil. This will be accomplished by strengthening the capacity of environmental institutions at the federal, state, Federal District and municipal levels and by demonstrating the effectiveness of targeted partnerships focused on priorities determined by MMA, states and the Federal District. The goals of the Program include institutional strengthening through improvements in environmental regulation, especially licensing, environmental monitoring and decentralization aimed at improved management and conservation of priority environmental assets. The Program would assist in the

27 identification of key environmental problems in Brazil’s 26 states and the Federal District, and help to build capacity to manage them effectively. During Phase 1, the3focus was primarily on institutional strengthening. As the Program evolves, the focus will initially be on environmental licensing at both the federal, state and Federal District levels which is still seen as a bottleneck to investors. The overall objective of Phase 2 is to stimulate the adoption of sustainable practices in different sectors whose activities impact the environment. Phase 2 will also contribute to strengthening the organizational and regulation infrastructure of the public sector in environmental management, effectively improving the environmental quality and generating socio-economic benefits. The incentive for adopting policy improvements by states would continue to be the awarding of matching grants in exchange for fulfillment of Eligibility Criteria by the states. The Program follows the successful implementation of the National Environmental Project (NEP I)supported by a World Bank Loan (3 173-BR) that focused on capacity building and strengthening key endangered ecosystems.

5. To reach its goal of improving management capacity of priority environmental assets, the Program will implement a phased approach to institutional strengthening and state investment projects in environmental management. The Program consists of three Phases:

0 Phase 1 (2000 - 2006) focused on strengthening the state environmental agencies through two core components: (i) Institutional Development which included activities on water quality monitoring (WQM), environmental licensing and coastal zone management (CZM); and (ii)Environmental Assets aimed at the identification and prioritization of environmental problems and development of partnerships to address some of the states’ pre-identified priorities. Phase 1 began environmental policy improvements at the state level through the fulfillment of the eligibility criteria matrix (additional information is provided in Annex 4).

0 Phase 2 (2009-2014) would continue to strengthen local and state capacity through the implementation of two core components: (i)Institutional Development which would focus on strengthening the states’ capacity for environmental licensing, environmental monitoring; and development of economic instruments for environmental management, and (ii)Environmental Assets; whereby participating states propose pilot partnerships to address the key environmental problems that they have previously identified. Phase 2 would continue promotion of environmental policy improvements/reforms at the state level, through the eligibility criteria matrix which challenges states to adopt policy reforms in exchange for matching grants. This phase would be divided into two tranches because of the demands of COFIEX. The first sub-phase would focus on primarily on strengthening of licensing procedures in states, the Federal District, selected municipalities, and federal agencies linked to the licensing process. During this period, the qualification of states through the fulfillment of policy reforms (which for some states is already underway), the development of partnership proposals, and the implementation of ongoing partnerships would be continued. Sub-phase A would last for up to four years (2009-2014), and Sub-phase B would last for two additional years (20 14-20 15) during which approved partnerships would be implemented for the two core components.

28 Phase 3 (2016-2019) would focus primarily in investments in priority environmental assets and move forward environmental policies at state, Federal District and municipal levels. As states or the Federal District continue to adopt more advanced policies, improving their capacity to manage environmental resources, they would become eligible to receive larger grants.

Performance Triggers for Sub-phase B and Phase 3 of the Adaptable Program Loan (APL)

6. The point system would be used to evaluate Program progress and to trigger Sub- phase B, as well as to trigger the third and last phase of the Program".

.) Trigger 1: The trigger to move from Phase 1 into Phase 2 was reached when a cumulative total of 40 points was achieved.20

.) Trigger 2: The trigger to move from Sub- hase A to B would be reached when a total of 46 points (Trigger Score) would be reached.8

.) Trigger 3: The trigger for moving from Phase 2 to Phase 3 would be reached when a cumulative total of 50 points (Trigger Score) is reached.22 Once this benchmark has been attained, Phase 3 of the Program would be appraised.

7. Phase 3: Phase 3 of the Program would allow states qualify for additional financing for partnerships conditional on advancement to the next higher Eligibility Class. This Phase, expected to last approximately 3 years, would encourage states to continue to adopt institutional reforms. Table 1 below provides an illustration of the progression of the Program by showing the numbers of states that would qualify for each Class at the end of each Phase, beginning with the current status.

Table 1 - Illustration of Target Classes for the three phases of NEP 11.

Phases 3 End of Phase 1 Phase 2 Phase 2 to 3" End of Phase 3 (attained in 2006) Sub-phase B* (Program Class ends)* 1 3 states 3 states 5 states 2 states 2 13 states 10 states 13 states 8 states 3 4 states 5 states 3 states 10 states 4 - 2 states 4 states 7 states Trigger Score I 41 46 52

19 States qualifying for Class 1 would receive one point; states qualifying for Class 2 would receive two points; and states qualifying for Class 3 would receive three points, and states qualifying for Class 4 would receive 4 points. 2o At the end of Phase 1 six states did not qualify; three states qualified in Class 1; thirteen states qualified in Class 2, and four qualified states in Class 3 (Le. 3 t 26+ 12 = 41) thus the trigger was met. 21 In addition to this trigger, moving into Sub-phase B would be also contingent on: (i)commitment of at least 75% of loan proceeds; and (ii)utilization of at least 50% of loan proceeds as requested by COFIEX. 22 For example, 3 States do not qualify (Class 0); 5 States in Class 1; 13 in Class 2; 3 in Class 3; and 3 States in Class 4 = 5 + 26 + 9 + 12 = 52. Any combination totaling 50 or more points would trigger Phase 3 of the Program.

29 8. The success of the project design and the consequent strengthening of the National Environmental System (SISNAMA) of which the states and municipalities are the building blocks, have motivated the Ministry of Environment (with the strong endorsement of the Association of State Environmental Agencies - ABEMA) to secure authorization to prepare Phase 2 of the project from the COFIEX23.

9. The Ministry of Environment (MMA) has indicated that, among all programs seeking external financing, NEP I1 has the highest priority. Ministry officials recognize NEP I1 as one of its most successful programs executed in recent years and it is the mainstay of its outreach to states and municipalities. In addition, MMA considers that NEP I1 would be a strong complement to the recently approved programmatic Sustainable Environmental Management Development Policy Loan (SEM-DPL) among other things since NEP I1 is currently the main mechanism to strengthen the capacity at the federal, state, Federal District and municipal levels for environmental management including licensing. States bear prime responsibility for environmental management in Brazil. They review the vast majority of applications for environmental licenses, issue licenses and are responsible for environmental monitoring and reporting. NEP I1 is currently the primary mechanism by which the federal ministry interacts with states and strengthens environmental capacity at the state level. Both the MMA and the states acknowledge the accomplishments of the NEP which underscores the need to proceed to Phase 2. MMA has further recognized the importance of NEP I1 by incorporating it as a key program within the Ministry.

10. Since project design and objectives are built from the experience of Phase 1 of NEP 11, a description of its challenges and outcomes is provided below.

Phase 1 of the Second National Environmental Project

11. NEP I1 was approved as a three-phase Adaptable Program Loan (APL) for a total of US$l50 million. Phase 1 of NEP was implemented from 2000 to 2006. The original amount for this phase was US$15 million, but after cancellations of US$6.92 million, final disbursement was US$9.0 million. At appraisal (1999), Phase 2 was envisioned to be a total of US$65 million and Phase 3 of US$70 million.

12. Structure & Design. Phase 1 encompassed two major components: (i)Institutional Strengthening (covering WQM, environmental licensing, and coastal zone management), and (ii)Environmental Assets. During first Phase of NEP 11, 25 states carried out an environmental priority setting exercise which guided subsequent partnerships and interventions in the states. Among the priorities identified in Phase 1 were: (i)water quality and livestock wastes in three southern states (Santa Catarina, Rio Grande do Sul & Parana); (ii)protection of key watersheds and solid waste management (S5o Paulo, Goias, Bahia, Minas Gerais and Pernambuco); (iii)natural resource conservation (in the upper Araguaia basin in Mato Grosso) involving erosion control and sustainable tourism; and (iv) protection of the caatinga biome (Pernambuco).

23 As stated in section 11, COFIEX has authorized Phase 2 of NEP I1 for an amount of US$66.3 million, out of which the loan would be US$46.4million. COFIEX has also indicated that the loan would be divided into two sub-phases (US$22,1 million each) to be negotiated separately and contingent on: (i)proof of satisfactory performance under the first sub-phase; (ii) commitment of at least 75% of loan proceeds; and (iii) utilization of at least 50% of loan proceeds.

30 13. Outcomes of Phase 1. The key outputs of NEP I1 included a number of policy reforms and to a larger than expected participation by the states (see Annex 4, Fig. 1). The merits of Phase 1 are based on: (i)the reforms adopted by the states; (ii)the learning process for engagement between MMA and the states; and (iii)the core activities implemented. Previously, only four states (RS, PR, SP and BA)24used any kind of computer system for tracking environmental licenses. By the end of Phase 1, seven additional states (SC, MG, GO, MT, AC, PB and CE)25 had digital licensing systems, making the licensing process more transparent and efficient. Computerization provided not only a tracking tool, but also a tool for transforming the licensing process into a tool for environmental management.

14. Prior to NEP 11, most states had not conducted any exercise to identify key priorities. At the completion of Phase 1, twenty five of the twenty seven states had undertaken an identification of their environmental priorities and 21 states (nine more than the initial target of 12 states) qualified for matching grants by fulfilling eligibility criteria. Similarly, the target for WQM was five states; by the end of Phase 1, 10 states had working WQM systems. Likewise, the target for states implementing environmental assets partnerships was three, while at the end of Phase 1, nine states were implementing partnerships. Overall, Phase 1 which lasted 6 years, contributed to the implementation of 43 specific interventions in 17 states, leading to improvements in decentralized environmental management. While small in size, many of these investments contributed to noticeable improvements. It is clear that neither NEP I1 (nor even project much larger in size) would be able to address all of Brazil's environmental priorities (i.e. such as air quality in Sao Paulo, deforestation in the Amazon, cleaning the Pinheiros or Tiete watersheds in Sao Paulo, etc.). Nonetheless, there were a number of success stories related to improvements in environmental quality in selected areas. For example:

0 The Environmental Assets partnership in the Ipojuca basin in Pernambuco State identified some 120 degraded springs. The project applied treatments to about 20 of these sources to reduce contamination and maintain flow through appropriate revegetation and the exclusion of agriculture from the stream heads. The EA component also contributed to the construction of three sanitary landfills in the Ipojuca basin (serving 80% of the population in the area) that reduced the amount of solid waste and flow of leachate into ground and surface water. Through the WQM subcomponent it was concluded that the quality of (once polluted) sections of the basin had been improved.

0 In Bahia, the Environmental Assets project helped to reduce pesticide use, irrigation water use and burning of agricultural plots in the middle Paraguaqu River Basin, a major source of water supply and energy for the state capital, Salvador, Bahia. The project had a demonstration effect on local farms and ranches. The project also supported solid waste management plans for several municipalities in the middle-Paraguaqu basin. The partnership contributed to improving environmental quality by supporting sustainable agriculture pilots that demonstrated approaches to reducing water use in irrigation, reduced pesticide use, and the development of organic fruit and vegetable farming. These approaches not

24 Rio Grande do Sul, Paranh, SBo Paulo and Bahia 25 Santa Catarina, Minas Gerais, Goihs, Mato Grosso, Acre, Paraiba and Ceara

31 only had beneficial effects on environmental quality but also raised the income of small farmers by lowering their costs and adding value to their products. The project also supported detailed studies of solid waste management (SWM) in several municipalities in the Upper TietC Basin and the redevelopment of a landfill, the management of which was transferred to a consortium of municipalities that operated the landfill jointly.

0 There were environmental improvements in selected watersheds in the three southern states (Parana, Santa Catarina and Rio Grande do Sul) which implemented Environmental Assets partnerships to control pollution from swine raising. The outcomes from these interventions contributed to a reduction of animal waste flowing into key watersheds, with substantial quality improvements. Likewise a partnership in Mato Grosso (in the Araguaia River Basin) aimed at controlling soil erosion from agriculture led to noticeable improvements. (These examples are further detailed in the projects the Implementation Completion Report (ICR)).

15. Phase 1 ofNEP I1 also contributed to a number of institutional partnerships involving State Environmental Agencies, municipalities, NGOs, universities, research centers and training centers, water-resource management agencies, tourism agencies, regional development agencies, agricultural development agencies and the private sector.

16. Challenges in implementation. There were three amendments to the Loan Agreement during Phase 1 extending the closing dates and canceling proceeds from the loan. Thefirst amendment (June 18, 2003) extended the Closing Date of the Project from 2003 to 2005 and cancelled an amount equivalent to US$2.3 million at the request of MMA. This amendment was solicited based on: (a) the fiscal austerity package implemented by the Ministry of Finance which led to severe budgetary restrictions on all Federal projects and reduced budget allocations to MMA, reducing the resources allocated to NEP 11. (b) changes of state officials and limitations on the ability to sign partnership agreements (conv2nios) with participating states during electoral periods, causing delays and affecting the disbursement patterns (in addition to differing capacity among states to implement partnerships); and (c) states took longer than anticipated to qualify for matching grants and to implement partnerships. The project experienced, however, delays due to MMA's processing of individual consultant contracts. The second amendment (May 25, 2005) extended the closing date of the project from June 30, 2005 to June 30, 2006, bringing cumulative extensions to 3 years. This extension requested by the Borrower was granted to: (i)allow the completion of ongoing Environmental Assets partnerships in qualified states; (ii)finalize key environmental licensing and monitoring activities; and (iii) allow time for the transition and preliminary preparation of Phase 2 of the Program. The third amendment (June 27, 2005) cancelled US$3.6 million from Loan proceeds at the request of MMA, following additional cuts and impoundments imposed by the Ministry of Finance. In each case of budget cuts and impoundments, the PCU was obliged to scale ' back partnerships that had been designed and, in some cases, approved. In spite of these budgetary reductions, perhaps one of the most impressive characteristics of Phase 1 was its overall administrative/coordination capacity, since the project consistently utilized about 98% of the total funds made available by MMA during the years of operation. This is certainly the best record of any MMA program under recent execution.

32 The Eligibility Criteria Policy Reform Matrix and Scoring System for State Qualification

17. One of the primary goals of the proposed project is to provide an incentive for states to adopt significant institutional reforms that strengthen their capacity for environmental management. Partnership financing is the primary benefit accruing to states that have adopted reforms. Each state decides on the themes and issues on which it will focus its policy reform efforts from the eligibility criteria matrix. States earn points in accordance with the degree of difficulty of the reform it adopts. An independent Supervisory Commission would review the evidence submitted by each state and may award or withhold points based on the criteria stipulated for each theme (see Table 2 below).

18. The eligibility criteria were selected by the project team in consultation with experts and state representatives with consideration ofthe primary institutional issues affecting the states. The primary goal for each criterion is to increase the level of accountability for actual environmental conditions. Variation in the capacity of each state is reflected in the four fulfillment levels indicated for each criterion (see Table 3 in Annex 4).

19. To become eligible beneficiaries ofproject resources states or the Federal District are required to qualify through the adoption of selected policy reforms. The matrix includes 15 categories of environmental management and four levels of achievement for each category. For each criterion states are awarded from one to four points depending on the level at which the state has qualified. None of the criteria is mandatory; states are free to select among the criteria with the condition that each state fulfill at least eight different criteria. States are also free to fulfill criteria at any level with the condition that states may not qualify at the same level on the same criteria more than once. There is also a “wild- card” criterion (‘P’ in the Eligibility Criteria matrix) which states could use as a substitute for any other criteria. The highest level at which states may qualify (level 4) demands that states present actual data demonstrating the environmental impact (not institutional) of measures taken. The total number of points accumulated by a state qualifies it for a matching grant whose size corresponds to the level at which a state qualified (see Table 1 in Annex 4).

20. Achievements under each basic criterion are divided into four levels. States can choose to qualify at any of four levels on any of 15 criteria (excluding the “wild-card”). Participating states must demonstrate fulfillment on a minimum of eight criteria and a maximum offifteen. The points accumulated by each state at any level in any category are summed (see Box 1 for an illustration of the scoring system). The total score determines the size of the grant for which a state and/or the Federal District would be eligible for the development ofpartnerships.

21. These eligibility criteria would serve as mileposts on the road to more effective environmental management. States and/or the Federal District would be provided with technical assistance throughout the life of the project to attain these benchmarks and would become eligible for increasing amounts of financial support as they attain higher levels of environmental management capacity.

22. Fulfillment of these requirements would serve as indicators of the growth in environmental management capacity by the states which can be used by public and private institutions (Le. BNDES) for evaluating environmental management risks at the state level,

33 and as the ‘trigger’ indicators for advancement from Phase 2 to Phase 3 of the NEP program,

23. A Supervisory Commission with both governmental and private representation would review and clear certification of state and Federal District fulfillment of eligibility criteria. It would also review and clear partnership proposals for matching grants.

Table 2 - Eligibility Criteria and Corresponding Points Earned (See Annex 4, Table 3 for detailed description of Eligibility Criteria)

Scoring

*This Category may be selected by a state that wishes to score points in a category not provided on the list subject to approval and evaluation by the Supervisory Commission.

24. Thus, the proposed project would set graded Eligibility Criteria as an incentive for states at different capacity levels to adopt policy reforms and to further enhance their capacity for environmental management. As in Phase 1, each state could select areas on the matrix where it wishes to demonstrate capacity. States could demonstrate their achievement on each criterion at one of four achievement levels. For each criterion fulfilled, states would earn points depending on the level of achievement on a scale of one to four. The sum of all points earned by a state would place it in a specific Class.

25. The policy reform matrix (Annex 4, Table 3) has been modified and updated from the matrix used during Phase 1. A fourth level has been added, the criteria have been revised based on the experience of Phase 1, and seven new criteria have been added, giving

34 a wider range of choice to states. The newly added criteria area: (i)management of biodiversity; (ii)land-use/ zoning; (iii)environmental information; (iv) environmental enforcement; (v) climate change; (vi) sustainability of environmental management; and (vii) environmental priority setting and planning.

26. Level 4 was introduced in the matrix for Phase 2 in order to create an additional challenge for states that had already achieved Level 3 during Phase 1 (namely Sgo Paulo, Parana and Minas Gerais). The guiding principle for the formulation of Level 4 EC is that each state would be required to demonstrate actual environmental outcomes as a result of the application of the policies adopted. Thus, the new matrix “raises the bar,” creating a higher standard of capacity for environmental regulation.

35 Box 1 - Illustration of the Eligibility Criteria Scoring System

States participating in NEP I1 are required to provide evidence to the Supervisory Commission (See Annex 6 for further detail) of their adoption of policy improvements. States could qualify at any of four levels for each criterion. For each criterion, the attainment of the next higher level requires the state to demonstrate increased capacity to manage environmental resources and (for some of Level 4 criterion evidence of improved environmental quality). Points would be earned for each criterion fulfilled: one point for attaining Level 1; two points for Level 2; three points for Level 3; and four points for Level 4. States are required to demonstrate fulfillment of a minimum of 8 and a maximum of 15 criteria. The total points earned by a state would place it in one of four Classes, corresponding to different Matching Grants amounts per component and activity. Each state would be able to access resources for the execution of at least 2 partnerships in the EA component (as long as the previous partnership has been concluded with satisfactory implementation). A state could demonstrate advances in the Eligibility Criteria matrix and qualify for a larger grant.

Example State X.

ELIGIBILITY CRITERIA Score 1

Forest Management X 1 Water Resource Management X 1 Solid Waste Management X 2 Economic Instruments for Env. Mgt. 0

Climate Change X 1 Sustainability of Env. Management 0 Others 11x1 I121 TOTAL 27

A score of 27 would place State X in Class 2 (see Table 2), making it eligible for a Matching Grant of R$l million for developing a partnership under the EA subcomponent.

* Matching grants vary per component.

36 Annex 2: Major Related Projects Financed by the Bank and/or other Agencies

First Programmatic Reform Loan for PO80829 IEG Outcome Rating: NR Environmental Sustainability - closed Environmental Sustainability Agenda Technical PO9004 1 S S Environmental Assistance Project Sustainability Tocantins Sustainable Regional Development PO60573 Mu MS Project First Programmatic DPL for Sustainable PO95205 S S Environmental Management Goibs State Highway Management Project - PO55954 IEG Outcome Rating: S closed Sustainable Goibs State Highway Management APL I1 PI01418 Under preparation Development Brasilia Environmentally Sustainable Project PO89440 MS MS I Strengthening National Environmental Program I1 - closed PO35741 IEG Outcome Rating: S institutional capacity Bank-managed Pilot Program to conserve the Brazilian Rain various various various Forest (PPG7) GEF- Amazon Region Protected Areas Project PO58503 S S (ARPA) Biodiversity GEF- National Biodiversity Fund (PROBIO) PO062 10 IEG Outcome Rating: S Conservation and Sustainable use GEF - Brazilian Biodiversity Fund (FUNBIO) PO44597 IEG Outcome Rating: S GEF - National Biodiversity Mainstreamingand PO947 15 S S Institutional Consolidation Project (PROBIO 11) GEF - Amazon Aquatic Resources (Aquabio) PO66535 MS MS Other Development Agencies Institutional IDB and Netherlands Funds: National n.a. strengthening Environment Fund (FNMA) capacity. GEF: Establishment of Private Natural Heritage n.a. Reserves (RPPNs - Reservas Particulares do Patrimonio Natural) in the Brazilian Cerrado (FunaturaRJNDP). Biodiversity GEF: Building the Inter-American Biodiversity I 2002 - 2009 conservation. Information Network (IABIN)

UNESCO: Consolidation of the Brazilian September 2001 - September 2004. Biosphere Reserves - BRAMAB I1(MMA).

37 Annex 3: Results Framework and Monitoring

PDO Project Outcome Indicators Use of Project Outcome Information Contribute to strengthen Environmental policy reforms among states Progress towards the PDO environmental capacity in participating in the program. will be used by to measure key Brazilian institutions. the overall success of the This would be Increased capacity for environmental project, promote accomplished by enhancing management at federal, state, Federal District sustainability of activities the environmental and municipal levels and prepare Phase 3 of the management capacity of APL. institutions at the federal, state, Federal District and municipal levels and by demonstrating the effectiveness of targeted partnerships focused on defined priorities.

Intermediate Intermediate Outcome Indicators Use of Intermediate Outcomes for Sub-phase A Outcome Monitoring Phase 2 Increase in the Institutional Strengthening and effectiveness of Implementationof Partnerships environmental institutions at the federal, state, Federal District and municipal State Qualification Process Information would be used levels. by Supervisory At least 18 states demonstrate fulfillment of Commission and Project Adoption of environmental eligibility criteria in the policy reform matrix. management to gauge management reforms by progress towards project participating states. goals. It would also be used by the Ministry of Strategic use of resources Environment and Civil to address environmental Env. Assets Society to assess the priorities through progress of the project. environmental assets At least 2 states begin implementation of partnerships. partnership proposals for environmental assets In addition information can (which would include baseline studies and be used by private and specific targets) and at least five states begin public sector to determine identification and elaboration of partnership the states advancement proposals to be approved by the Supervisory with regards to Commission. environmental management and viability for new Systematic monitoring and evaluation is investments. carried out throughout the life of partnerships.

Env. Licensing

Thirteen or more states and IBAMA have filly functioning environmental licensing systems which would include at least one of the following activities: (i)effective post-

38 systems which would include at least one of the following activities: (i) effective post- licensing monitoring; (ii)on site monitoring of productive activities; (iii) computerized licensing systems;

At least nine states and IBAMA have produced a full set of manuals, procedures and technical standards for the three most important typologies of activities to be licensed.

Based on the implementation of new or revised norms, 3 states reduce the time of issuance of preliminary licenses for the three typologies most important in the state

At least eight municipalities in five or more states are currently engaged in environmental licensing are outfitted with necessary institutional arrangements, equipment, computerized systems and trained staff (according to the criteria established by the State Environmental Council).

Env. Monitoring

Seven or more states have implemented (or strengthened) a monitoring system for the most pressured natural resource for which management decisions require information. The system includes: (i)systematized processing of information; (ii)timely public dissemination of information (iii)evidence that information is being used in management and/or enforcement decision making.

Economic Instruments

At least four states have implemented (or improved on) economic instruments as a mechanism to promote the conservation of natural resources and/or pollution reduction.

Adoption of Policy Reforms at State Level

At least eighteen states have updated (or identified) their key environmental priorities following a participatory methodology

At least 15 states have approved forestry legislation.

At least 14 states have a working council for water resources

At least 8 states have an integrated

39 management plan for solid wastes

40 W ri 2

2

00 2 N

2 W 2

00 Q\ 0

ri 0

* 0 b 0 N d

i

i a I 8 2 ;

8 i

r. r. r4 f

k-l N I?

m N

P a i 2 c N

0

0 m

0 0 WP 5% f: 2

2 f: d

*a 0

N 0

N N 0 0

0 0 0 k 0 8

W 0 N c1

0 CI 2

2 10

10 c

m d

m c 2 N

2 0 Annex 4: Detailed Project Description Project Development Objective

1. The Project Development Objective is to contribute to strengthen environmental capacity in key Brazilian institutions. This would be accomplished by enhancing the environmental management capacity of institutions at the federal, state, Federal District and municipal levels and by demonstrating the effectiveness of targeted partnerships focused on defined priorities.

2. These priorities would be determined by MMA, states and the Federal District. Institutional development would be promoted by strengthening environmental policies and regulations, strengthening environmental licensing, improving environmental monitoring, supporting innovative use of economic instruments and finally, through targeted decentralized demand-driven partnerships aimed at improved management and conservation of selected environmental assets.

Project Components

3. The proposed project has 3 components: (A) Institutional Development; (B) Environmental Assets; and (C) Coordination, Dialogue and Communications.

Component A. Institutional Development (US$25.7 million total, US$18.0 million IBRD)

4. Based on the lessons and core structure implemented during Phase 1, Phase 2 of NEP I1 will include the following subcomponents: (1) Environmental Licensing; (2) Environmental Monitoring; and (3) Economic Instruments for Environmental Management.

5. This component has evolved from Phase 1. For example, the scope of the Water Quality Monitoring (WQM) Subcomponent was broadened to monitor other media. Thus in the proposed current Phase Environmental Monitoring Subcomponent A.2 would focus on activities aimed at monitoring key environmental issues identified by the states, while still providing support to states that wish to focus particularly on water quality. The Coastal Zone Management Subcomponent would not be implemented during Phase 2, given that it met its desired objectives during Phase 1. In its place, the Economic Instruments for Environmental Management Subcomponent A.3, has been included26.

Subcomponent A. 1. Environmental Licensing (US$ 17.1 million total, US$12.1million IBRD)

6. At the request of MMA, this subcomponent would be to be the centerpiece of project activities for at least the first two years. This decision is related to MMA’s commitment to strengthen the licensing function at all levels (federal, state, Federal District and municipal) so that it will serve as an effective tool for environmental protection while not holding back development. Support under this subcomponent would be used to: (i)continue the

26 The decision to include this subcomponent has been based on a growing demand by states for developing Economic Instruments as a tool for environmental management. For example at the beginning of Phase 1 there were only 6 states implementing ICMS ecologicos and now there are 18 states. Some states (MG, MS) have even carried out assessments on how these have led to behavioral change.

45 that it will serve as an effective tool for environmental protection while not holding back development. Support under this subcomponent would be used to: (i)continue the implementation of customized computerized licensing systems in the 15 states that did not participate in Phase 1; (ii)upgrade and improve licensing systems in the 12 states that received support during Phase 1 to continue making them more efficient and agile; (iii)promote the decentralization of licensing systems to qualified municipalities; (iv) provide technical assistance and capacity building to improve licensing systems in states and selected municipalities; (v) continue the harmonization of legal instruments and requirements for licensing systems (at three levels of government); (vi) develop technical guidelines to support the licensing procedures and framework at the state and federal level (Le. guides on conflict resolution in licensing process which would benefit key stakeholders like IBAMA); and (vii) provide technical assistance and capacity building for updating procedures and environmental licensing methodologies for key sectors (roads, mining, hydrocarbons, among others), for all federal institutions directly linked to the environmental licensing process (IBAMA, ANA, ICMBio, among others), and for key agencies that also participate in the licensing process (FUNAI, IPHAN, SPU,, and Fundaqtio Palmares2’, among others).

7. More specific, and as highlighted above, at the federal level the component would support: (i) IBAMA’s efforts to produce detailed technical manuals on environmental licensing procedures and technical standards for the five most important typologies of investments requiring a federal license; (ii)through partnership agreements with IBAMA, ANA and ICMBio, development of detail procedures to be followed (and time limits) for the completion of licensing procedures by FUNAI, IPHAN, SPU and the Fundaqtio Palmares where the issuance of a license requires the intervention of any one of these agencies; (iii) Development of IBAMA’s web-based licensing system that will provide information on procedures and on specific licensing processes. It is expected that this system will be as detailed and operational as the highest level state licensing system in existence. Furthermore, the IBAMA web-based licensing system should disseminates data on the time elapsed from the date of submission of all license applications to the date a decision is issued; and (iv) IBAMA’s efforts to set up a joint licensing procedure that allows for staff cooperation, data sharing and joint licensing procedures agreed with at least 5 states.

8. This subcomponent would enhance the post-licensing monitoring of environmental license conditions, clarifying the roles of different stakeholders to expedite licensing procedures, and will seek to integrate brown, green and blue agendas into the federal, state and municipal licensing systems. Investments will be made in the development of standard procedures, training of staff, development of staff profiles, continued develop of information systems for the management of licensing data, and equipment purchases where a clear case can be made that lack of proper equipment is hampering the licensing procedure and post-license monitoring. In addition, further studies on licensing policies and procedures will be carried

27 The Fundaqio Cultural Palmares is a branch of the Ministry of Culture and its primary goal is to preserve Brazil’s African heritage. One part of this activity is to assist the descendents of freed slave communities known as Quilombos. The residents of such communities are known as quilombolas. The Federal Constitution of 1988 requires the State and Federal Governments to grant land titles to these communities that lack secure ownership of land. The process is underway. The applicability of the Bank’s policy on indigenous peoples to quilombolus is assured by the fact that they fulfill most ofthe criteria listed in OP4.10 and additionally they are officially recognized in Brazilian jurisprudence. Thus they occupy a similar situation to that of the Garifha who live in several Central American countries.

46 out in order to guide the design of more efficient and effective licensing systems. Studies will also be done to define policy alternatives and possible changes in the regulations.

9. This subcomponent would support states in following the criteria established in the Eligibility Criteria Matrix (see Table 2 in Annex 1 and Table 3 below). The states which carry specific activities and improve their licensing systems would be able to attain a higher level in the matrix. The municipal focus for this component would be based through linkages to participating states, and would follow selection criteria based on the size and capacity to develop and sustain licensing, and post-license monitoring and enforcement. As illustrated in Table 1 below, the subcomponent would allow qualified states to have access to matching grants according to their classification. Class 1: R$500,000; Class 2: R$700,000; Class 3: R$1,000,000; and Class 4: R$1,500,000. Each state or the Federal District will be eligible to receive one grant in this Sub-phase. The allocation to the federal government under the licensing component is R$15,6 10,000, This process will also incorporate, as much as possible, the main conclusions and recommendations from the 2008 Economic Sector Work (ESW): Environmental Licensing for Hydroelectric Projects in Brazil: a Contribution to the Debate.

Subcomponent A.2. Environmental Monitoring (US$5.6 million, US$3.9 million IBRD)

10. Resources under this subcomponent would be used to: (i) develop environmental monitoring systems for pre-identified state environmental priorities (e.g. biodiversity, air quality, water quality, soil conditions, etc.); (ii)integrating the existing federal, state and municipal environmental monitoring networks into MMA’s environmental information system; and (iii) enhancing the capacity to process, analyze and disseminate information from monitoring networks. The activities under this subcomponent would aim at improving decision making process regarding critical environmental issues and complement, to the fullest extent possible, the environmental licensing process.28The subcomponent would not support creation of new institutions for water-quality monitoring, but would seek to strengthen existing institutions that collect and analyze water quality by improving their techniques, integrating efforts, and ensuring that the results are made available in a timely fashion to decision makers. The financing could be used to assess needs, develop monitoring models, design and build monitoring systems, acquire monitoring equipment, analyze and disseminate environmental data to decision-makers and to the general public, and disseminate approaches to environmental management using monitoring data. Support under this subcomponent would also serve to develop information management systems with a high level of access (i.e. internet) for interested parties and easy retrieval for dissemination. Key institutional partnerships involving State Environmental Agencies, municipalities, NGOs, universities, research centers, water-resource management agencies, regional development agencies, and the private sector would be sought to strengthen the proposed environmental monitoring systems. As illustrated in Table 1 below, the Environmental Monitoring Subcomponent A.2 would allow qualified states to have access to matching grants in the following order: Class 1, R$450,000; Class 2, R$670,000; Class 3: R$850,000; and Class 4: R$1,100,000. Each state or the Federal District will be eligible to receive one grant in this Sub-phase.

28 For example, environmental monitoring data would be used to target enforcement activities where there is evidence of environmental degradation caused by industrial or agricultural activities.

47 Subcomponent A. 3. Economic Instruments for Environmental Management (US$ 3.0 million, US$2.1 million IBRD)

1 1. Support under this subcomponent would be used to assess and promote alternatives to the command and control approach to environmental management, leading to the adoption of innovative instruments such as environmental audits, payment for environmental services, environmental taxes based on the polluter pays principle, etc. Support under this subcomponent would address demands by states for assistance in developing economic instruments that involve incentive-based approaches to environmental management and protection. While a number of states have adopted the so-called “Green (value added tax) VATS” (ICMS Ecol~gico)~~,very few other approaches have been tried such as “polluterhser- pays”, payment for environmental services, tradable permits, congestion pricing, incentives for “green” initiatives, stimulation ofa “moral Thus, this subcomponent would focus on identifying opportunities and designing mechanisms at the state or municipal level for the development of economic instruments. Specific activities may include: (i) gathering information to assess installed capacity; (ii)identifying opportunities to develop Economic Instruments at the state level (Le. workshops to assess which instruments best fit state prioritiesheeds, technical assistance); and (iii)designing frameworks to develop an economic instruments for selected states. Partnerships developed under this subcomponent would focus on improvements for environmental management (including specific incentives for greenhouse gas emissions) such as emission taxes, payment for environmental services, carbon trading, among others. Partnerships developed under this subcomponent would be encouraged to be integrated into the Environmental Assets partnerships developed under the project. Qualified states or the Federal District to have access to matching grants in the following order: Class 1, R$330,000; Class 2, R$440,000; Class 3: R$560,000; and Class 4: R$890,000 (Table 1 below). Each state or the Federal District will be eligible to receive one grant in this Sub-phase.

29 Under these schemes, a portion of the State VAT revenues is set aside to provide an additional allocation to municipalities that contribute to environmental protection by hosting protected areas or taking action for environmental protection. 30 The “moral economy” approach involves creating an environment in which companies and individuals are singled out for praise or criticism for their environmental performance. An example is the Indonesia PROPER program in which companies rate their own environmental performance and are entitled to display colored flags indicating their commitment to environmentally sustainable production.

48 Table 1 - Component A. Institutional Development: Maximum Grant Size by Eligibility Class

Level Class 1

Points 0 - 15 points Required

Eligibility for Institutional Development Grants

Environmental R$450,000 R$670,000 R$850,000 R$1 ,100,000 Monitoring

Environmental R$500,000 R$700,000 R$1,000,000 R$1,500,000 Licensing

Economic R$3 3 0,000 R$440,000 R$560,000 R$890,000 Instruments

Component B. Integrated Management of Environmental Assets (3.0 million total, US$2.10 million IBRD)

12. Brazil’s states are at markedly different stages of environmental management capacity in terms of legislation, monitoring, enforcement, and its ability to address its environmental challenges3’. In this context, the principle behind this Component is to provide an incentive to states to identify, rank and address some of their most pressing environmental challenges and provide support for adoption of integrated management sustainable practices. As stated above, states qualify to receive matching grants for the development and implementation of partnerships. The grants may be used to finance partnerships that deal with a problem identified among the state’s highest priorities. It is important to recognize that these partnerships are not designed to “solve” the environmental problems of the states32; rather, they are relatively small demonstration projects that present innovative ways to help resolve environmental problems. These partnerships afford one of the few opportunities available to state environmental agencies to make investments designed to enhance environmental sustainability, demonstrate the possibility of “green” production, explore novel ways of enhancing access to renewable resources without depleting them, and others. Additionally, implementation of partnerships has afforded an opportunity to environmental agencies to

” As an illustration, S9o Paulo’s principal environmental agency, CETESB, has more employees than the corresponding federal agency, IBAMA, and multiples of the number in any other state. 32 Partnership should fall within the identified environmental priorities in the state, however, not all ofthe states’ priorities would be realistically financed under NEP I1 (i.e. air pollution in the SBo Paulo metropolitan region). In order to access resources from this Component, the States will have to carry out a priority setting exercise to comply with the specific eligibility criterion in the policy reform matrix - Criterion H (See Table 3 below). In such cases, States and the Federal District would benefit from receiving TA to help with updating or determining the states environmental priorities.

49 design and implement partnerships building valuable skills that often are not present in environmental agencies.

13. Under the proposed project (sub-phase A), two eligible states (Alagoas (AL) and Ceara (CE)) would receive matching grants since they have submitted partnership proposals during Phase 1 but were unable to implement these partnerships for lack offunding. Thus, AL and CE would be the primary beneficiaries under the Environmental Assets (EA) Component and would receive support for implementation of their respective partnerships. The matching grant for the partnership in AL would be R$l million, whereas the partnership for CE would be R$2 million. Other states or the Federal District would follow a sequence of partnership preparation and would become eligible for partnership financing as follows: (i)creation of a technical group for the preparation of partnerships; (ii)baseline study of the selected area for partnership, according to the states priorities; (iii)preparation of partnership proposal (which would be discussed and endorsed by key stakeholders through local workshops); (v) assessment of partnership proposals by the Supervisory Commission; (vi) implementation of partnerships; and (vii) monitoring and evaluation of partnerships. It is expected that under the current sub-phase, participating states would complete the steps up to approval of partnerships proposal by the Supervisory Commission, so that in the next phase of the program, states would be ready to begin implementation ofEnvironmental Assets partnerships.

14. There is a minimum threshold for states to receive a matching grant for the Environmental Assets Component. As an incentive to improve their environmental performance, those states that fall below Class 2 would not qualify for resources under this component; although they could still receive technical assistance for strengthening licensing, environmental monitoring or economic instruments. They could also receive assistance in meeting the reform criteria. During Sub-phase B states or the Federal District that fall into Class 2 could receive a matching grant ofup to R$l.O million; states or the Federal District that fall under Class 3 would receive up to R$2.0 million; and states or the Federal District that fall under Class 4 would be eligible to receive up to R$4.0 million. Once a state or the Federal District has qualified for a grant, it must present a partnership proposal aligned with a priority identified by the state. Each state or the Federal District could qualify for up to two grants in this component but in order to be eligible to present the second partnership proposal, the state would have to undergo a new qualification process and receive additional three points in the Eligibility Criteria table. As in Phase 1, technical assistance will be provided to states through MMA for the preparation ofpartnership proposals and support to foster a participatory process and linkages among key stakeholders.

50 Table 2 - Component B. Integrated Management of Environmental Assets: Grant Size by Eligibility Class

Level Class I

Points 0 -15 points Required Matching Grant Not Eligibility

15. For the Environmental Assets component, matching grants would be awarded only if the partnership proposals have been approved by MMA/NEP I1 Supervisory Commission (and these reflect one ofthe state’s environmental priorities).

16. Partnerships would be defined by their proponents, which may include states or municipalities, but must be selected in accordance with each state’s environmental problems. As in Phase 1, municipalities can play an active role in the design and implementation of partnerships. Partnerships could include: minor works, rural extension activities, reforestation, erosion control, ecotourism infrastructure, training courses, infrastructure for (state or municipal) conservation units, treatment and final deposition ofmunicipal waste, etc., provided that the partnerships: (i)are realistic in size and scope; (ii)have developed baseline studies; (iii)are defined around measurable improvements in environmental quality; and (iv) are designed and implemented in a participatory fashion.

17. The points accumulated by each state and/or the Federal District at any level in any category are summed and the total determines the size of the grant for which a state would be eligible.33 There is a minimum threshold for states to receive a matching grant for the Environmental Assets Component (as an incentive to improve their environmental policy performance, those states that fall below Class 2 would not qualify for resources in the Environmental Assets component).

18. The basic sequence for participation is outlined on Figure 2 and involves the following steps for each state: (i)creation of a technical group for the preparation .of partnerships; (ii) diagnosis of the selected area or theme for partnership development (including baseline studies); (iii)preparation of partnership proposal (which would be discussed and endorsed by key stakeholders through local workshops); (iv) assessment of partnership proposals by the Supervisory Commission; (v) implementation of partnerships; and (vi) monitoring and evaluation ofpartnerships. These stages are further detailed below:

0 A successful partnership proposal will include the following methodology: (i) identify the key environmental variable(s) that constitutes the target for improvement and delineation of the scope of the project; (ii)classify one or more quantitative indicators ofthe current state (departure point) of the targeted key variables supported

33 Note that this ranking system could also serve as a benchmarking mechanism available to a wide variety of public (such as BNDES) and private institutions for evaluating environmental performance and management risks at the state level.

51 by a baseline study; (iii) define specific measures to be taken to improve environmental quality; (iv) develop plans for ongoing measurement of the key variables; and (v) develop plans for dissemination of the results including specific accountabilities.

0 During partnership implementation, the proponent will: (i)report on measures taken, problems encountered and results achieved; (ii) periodically monitor key environmental variables and compare against baseline values; and (iii)disclose the above information to the program and to the public in a timely fashion.

0 The final report of a partnership will include: (i)description on changes in the key environmental variables over the life of the project; (ii)information on the measures taken, problems encountered and solutions adopted; (iii)detailed explanation of how and why key environmental variables fluctuated over the life of the project; and (iv) plans for future measures to be taken to continue to improve environmental quality. It is important to note that proponents are not required to demonstrate progress, since unforeseen factors may affect the expected outcome. Thus, the requirement is to demonstrate the change in the target indicators even if the outcome was not what was expected.

19. As stated above, under this component, two partnerships proposals (submitted by the states of Alagoas and Ceara) which were developed and approved during Phase 1 by MMA’s would be prioritized for immediate implementation while, simultaneously, all interested participating states and/or the Federal District would be eligible to receive technical assistance to carry out the identificatiodupdate of environmental priorities setting exercise. This exercise would follow a standard criteria and a methodology from MMA (based on the health impacts, number of population affected, disruption to critical ecosystems, and key watersheds, economic costs, impediments for further investments etc.).

20. As explained above, once a state has qualified for a grant, it must present a partnership proposal aligned with the priorities identified by the state.34 As in Phase 1, technical assistance will be provided to states through MMA for the preparation of partnership proposals and support to foster a participatory process and linkages among key stakeholders. States may also choose to enter into partnerships with NGOs (if conditions allow) which have a value added on technical issues on specific topics for the implementation of Environmental Assets partnerships.

Component C. Coordination, Dialogue and Communications (US$ 5.0 million, US$3.5 million IBRD)

34 EA partnerships developed under Phase 1 addressed a number of priority issues including: (i) reduction of pesticide use, water use in irrigation and burning of agricultural plots in the middle Paraguay River Basin in Bahia; (ii)development of sanitary landfills and protecting the fragile stream head areas in the Ipojuca basin in Pernambuco; (iii)encouragement of organic agriculture and reduction of pesticide use in the TietC headwaters in SBo Paulo; (iv) erosion control in the Araguaia and Taquari headwaters in Mato Grosso, among others.

52 21. The project will support a unit with the technical and administrative capacity needed to administer partnerships and activities3’. MMA is financing the existing Project Coordination Unit (PCU) for NEP I1 during the transition period between Phase 1 and 2 in order to give continuity to the Program. MMA has also “mainstreamed” NEP I1 by incorporating it into its organization chart as a major vehicle for strengthening the National the Environmental System (SISNAMA). Thus, the PCU would continue to be situated within the Executive Secretariat in MMA, which also coordinates SISNAMA (See Figure 2, Annex 6). This component also includes a project communications unit that will develop a strategy to disseminate lessons learned from current and past project activities and help to build public support for environmental programs. The PCU would continue to have the responsibility for coordinating project activities with OEMAs, with federal agencies, other units within MMA, sector ministries, and other key stakeholders (NGOs, academic institutions, and others). The PCU would continue channeling technical assistance and capacity building to federal agencies, states, the Federal District and selected municipalities on: (i)priority setting exercise; (ii) partnership proposal development; (iii)environmental licensing procedures; (iv) environmental planning; and others. Furthermore, the PCU would call upon the Supervisory Commission for the review and endorsement of partnership proposals. The PCU would also continue to contribute to establish synergies and institutional partnerships among OEMAs, municipalities, NGOs, universities, research and training centers, regional development agencies, agricultural development agencies the private sector and other key stakeholders for implementation of the project.

35 The PCU has demonstrated its overall implementation capacity during Phase 1 since the project consistently utilized about 98% of the total funds made available by Treasury to MMA over the years of operation, and managed to implement and supervise 43 partnerships nationwide. In spite of this achievement, the Program was hobbled, to some extent, by the reduced budgetary allocations, impoundments and freezes that have occurred each year since implementationbegan due to austerity measures imposed by Treasury to MMA. L a S:

3 coL s6J

n 5

3 Z

Fig. 2 - Flowchart on Project Preparation and Qualification at State Level

Sirnulation of Score with the State Coordinating IJiiit- IJCE

aRating

59 Annex 5: Project Costs

Proiect Costs for Phase 2

Project Cost IBRD Counterpart Total By Component and/or Activity US $million US $million US $million Comp. A - Institutional Development I 28.6 12.2 40.8 1, Environmental Licensing 17.6 7.5 25.2 2. Environmental Monitoring 6.7 2.9 9.6 3. Economic Instruments 4.2 1.8 6.0

Comp. B - Integrated Management of Environmental Assets 10.5 4.5 15.0

Comp. C - Coordination, Articulation and Communications 6.7 2.9 9.6

ContingenciesLJnallocated 0.3 1 .o I Oe7 Total Financing Required I 46.4 19.9 66.3

Proiect Costs for Sub-Phases A and B

1. Environmental Licensing 12.01 5.15 17.16 5.62 2.39 8.01 2. Environmental Monitoring 3.92 1.68 5.60 2.80 1.20 4.00 3. Economic Instruments 2.10 0.90 3.00 2.10 0.90 3.00

Comp. B - integrated Management ofEnvironmental Assets 2.10 0.90 3.00 8.40 3.60 12.00 Comp. C - Coordination, Articulation and Communications 3.50 1.50 5.00 3.19 1.37 4.56

ContingenciesAJnallocated 0.67 0.29 0.96

Total Financing Required 24.30 10.42 31.72 22.1 1 9.46 3 I.57

60 Annex 6: Implementation Arrangements 1. The Project Coordination Unit (PCU) for NEP I1 is integrated into MMA’s organization under the Executive Secretariat (see figure 1 below). The unit has been operating since the implementation of Phase 1. Most of the staff at the PCU have participated in the preparation and implementation of Phase 1 (some have even worked since the implementation of NEP I) ensuring technical and administrative continuity. Synergy among various externally funded programs and Secretaries within MMA will be assured through the key convening role of the Executive Secretariat which has, among other things, responsibility for coordinating the SISNAMA and for ensuring that all programs under the Ministry are consistent with the Ministry’s policy goals. This would prevent the duplication ofeffort and potential conflicts among programs.

2. The PCU has demonstrated its capacity to manage and coordinate multiple activities with a wide array of stakeholders and states. Through the implementation of Phase 1, MMA acquired considerable expertise in budgeting, project accounting, procurement, financial management and coordination with external executing agencies at all levels of government and the private sector. Likewise, many states and municipalities gained considerable expertise through the implementation ofNEP Iand Phase 1 ofNEP 11. This knowledge, positive experience, and multi-level dialogue developed during previous phases will help in establishing and managing the partnerships contemplated under this project.

3, MMA would enter into partnership agreements (convPnios) with participating states and the Federal to channel resources for the implementation of partnership activities under the two core components in order to transfer project resources to the state implementing units. MMA would directly contract all consultants providing technical assistance to the states and the Federal District for the implementation of both core components, as well as for the priority setting exercise with the assistance of UNDP. Likewise, the Ministry may enter into partnership agreements with selected municipalities to transfer project resources directly to the implementing unit. Each year the PCU would prepare an Annual Operating Plan (POA), outlining the investments to be made under the project.

4. A Supervisory Commission (SC) would be established, with equal representation, to supervise the qualification process and deliberate over the following aspects: (i) approval of the qualification of states and Federal District to the Project; and (ii)review and approval ofpartnership proposals. The SC would be presided over by the Directorate of SISNAMA at the Executive Secretariat of MMA and would be composed of one representative from the following agencies:

a. MMA (three key secretariats) b. Brazilian Association of State Environmental Agencies (ABEMA) c. Civil Society d. Private sector

36 Many of these agreements have been signed already.

61 5. Project implementation will be partially decentralized and financed through transfers to federal agencies linked to the environmental licensing process, eligible states, the Federal District, municipalities and NGOs,. The Project will utilize pre-established criteria, including specific issues related to financial management to evaluate the different institutions, which will receive funding under this Project. In addition, federal agencies, state, Federal District and/or municipal beneficiaries’ acquisitions will be processed by their implementation units following the agreed procurement rules, with the support from the PCU. Therefore, upon their selection and before signature of each partnership agreement (convznio), a capacity assessment of the respective implementation unit will be conducted by the PCU and/or Bank, establishing thereof the procurement risk rate, the threshold for each procurement method, and the frequency of procurement supervision missions for that partnership agreement (convinio). The latter will reflect on the overall project risk rate and the overall project procurement supervision frequency.

6. UNDP, through a technical cooperation agreement, will be responsible for contracting consulting services, purchasing goods and other inter alia for the PCU according to the Bank’s Procurement Guidelines as stipulated in the Loan Agreement. The participating states, the Federal District and/or municipalities, and federal agencies linked to the environmental licensing process will use their own implementing agencies for acquisition of goods and services and selection of consultants. UNDP will also be responsible for the selection of consulting services for the other federal agencies, states, Federal District and/or municipalities as applicable. The existing UNDP agreement with MMA will be renewed and conditioned on satisfactory performance by UNDP, as evaluated jointly by the Bank and MMA. If UNDP’s performance is not deemed satisfactory, alternative arrangements could be made for the project’s procurement needs37. Likewise, MMA which has been assessing the technical cooperation agreement with UNDP would carry out a technical and financial management capacity assessment (to be jointly undertaken with the Bank) and would require performance indicators from UNDP for this and other projects.

37 In the event ofthe replacement of UNDP with another option for the procurement ofproject activities, Bank’s no-objection and a capacity assessment of the new agent would be required.

62

Annex 7: Financial Management and Disbursement Arrangements

Financial Management Arrangements

1. MMA has satisfactory financial management arrangements in place to meet the Bank’s minimum requirements and has had extensive experience in implementing Bank financed projects, including the Phase 1 of the 2nd National Environmental Project (BR PO3 574 l),the Environmental Technical Assistance Loan (Env-TAL)-, and several Pilot Program Pr~jects.~’Although some aspects of the FM arrangements are still under development (strengthening the core MMA’s staff capacity for project implementation), the primary issues are the lack of detailed knowledge of financial management performance of the UNDP, states, the Federal District, and other federal agencies linked to the environmental licensing process that may potentially participate in the Project and the continuity of the PCU contractual staff. The Risk Assessment Matrix below presents the potential FM risks. The residual overall FM risk associated with the Project is rated as moderate. An FM action plan was agreed with the MMA to implement selected actions related to the identified opportunities for improvement: (i)inter-institutional coordination capacity; (ii)states’ eligibility and selection criteria; (iii)quality criteria for the renewal of the PNUD cooperation agreement; (iv) continuity of the core PCU staff; (v) internal controls, and (vi) transparency and public dissemination of the Project accounts.

2. The Borrower will be the Federal Government, which will carry out project activities through the Ministry of Environment (MMA). The National Project Coordination Unit - PCU -- for this project has been established within the MMA’s Executive Secretariat and under the SISNAMA Coordination Department. At the central level, the PCU would carry out administrative and financial management tasks, including planning, budgeting, disbursements, accounts consolidation and reporting. Accounting and Treasury would be managed by the Ministry’s accounting and treasury departments. At the federal, state, Federal District and municipal levels, the partnerships would be carried out by federal agencies linked to the environmental licensing process and OEMAs (State Environmental Agencies). At the PCU level, commitment of expenditures (“empenho”), will be registered in the Federal Financial Management Integrated System (Sistema Integrado de Administraqco Financeira do Govern0 Federal -SIAFI). States and municipalities will be using their official SIAFEM (Integrated System of State and Municipal Financial Management - Sistema Integrado de Administraqclb Financeira Estadual e Municipal), the Federal District will be using its official SIGGO (Sistema Integrado de Gesta”o Governamental do Distrito Federal) or tailored IT systems. An existing NEP tailored IT system (SIGMA) will be used by all the participating entities for reporting. Project implementation will be largely decentralized and financed through transfers to federal agencies, eligible states, Federal District, municipalities and NGOs using pre-established criteria, including specific issues related to financial management that will be applied to evaluate states selected to receive funding under this program that will be detailed in the Project Operational Manual-POM.

38 Pilot Program to Conserve the Brazilian Rainforest.

64 3. UNDP, through a technical cooperation agreement, will be responsible for purchasing goods and other inter alia for the PCU. The selection of consultants for the PCU and other Project Partners, when needed, will also be made through UNDP. Other Federal agencies, states, the Federal District and/or municipalities will purchase goods and services and also hire consultants, when needed, through their own implementing unit. UNDP will rely on its official financial IT system for accounting and financial reporting to the PCU. The existing UNDP agreement will be assessed by MMA, and renewed provided satisfactory performance is sustained during project implementation.

4. The FM capacity of the participating states, the Federal District and federal agencies would be assessed by the PCU and/or the Bank before the fund transfers for approved partnerships under the two core components (A and B). The assessment will be similar to those applied in the Phase 1 of the NEP I1 based on the Federal Decree no 6.170 and the Portaria Interministerial 127 of July 25, 2007 as mentioned in the Project Operational Manual including the following: (i)establishment of management unit; (ii) partnership financial management system in place, according to parameters acceptable to the Ministry of Environment and the Bank; and (iii)action plan for improving FM processes agreed and under implementation for states where such a plan is deemed necessary based on a risk assessment. Regarding the latter condition, the Ministry of Environment and/or Bank FM teams could carry out in situ evaluation of the federal agencies, states and the Federal District, after selection, before the first transfer of funds or during the supervision missions. For any FM weaknesses, an FM action plan would be agreed; the implementation ofwhich would be a condition of financing.

5. The current project design and coordination organization is depicted in the diagram below:

65 Ministry of Environment

SECEWDSIS"

Administration and Operations 0 Finance Planning 8 Planning Environmental Planning Nat. Coord. Budgetins I I Accounting Accountin MOE Treasup Treasu MoE Procuremen Procuremen UNDP Reporting Communication Reporting Nat. Coord. Assets Contro Assets Contro Nat. Coord. nvironmental Assets Archives Nat. Coord. M&E M&€ Nat. Coord.

6. The Ministry of Environment has the needed capacity and a robust FM system to carry out the project's FM tasks. MMA has extensive experience in implementing Bank financed projects (particularly with project design involving transfers to sub-national governments), while the PCU, with qualified staff had a successful experience implementing the Phase 1 of the Project. However, in the current PCU, experienced and qualified financial management staff is currently composed of experienced consultants, with contracts expiring July 2010. The Bank FM team has accompanied the staffing arrangements at the MMA, providing adequate orientation. During Phase 1 of NEP 11, the project auditors issued clean (unqualified) opinions and the internal controls were considered highly satisfactory.

7. In order to further strengthen the project's FM capacity and cross-team efficiency, a minimum acceptable core team will be stipulated in the Loan Agreement and in the Project Operational Manual, including a financial management specialist/coordinator, a procurement specialist/coordinator and an institutional strengthening specialist/coordinator with terms of reference acceptable to the Bank. At the decentralized level (federal agencies, states, the Federal District, municipalities and

66 NGOs), adequate FM capacity, highly qualified professionals in key positions and adequate capacity building are key elements for successful Project implementation. The Project Operational Manual will further require minimum FM capacity as a condition for other federal agencies, states, the Federal District and municipalities to receive project funds. 39

Finan cia1 Risk Assessment

8. The Risk Assessment Matrix below presents the potential risks, mitigation measures and residual risk for the program from a financial management perspective. The residual overall financial management risk associated with the project is rated moderate, due to the multiple implementing entities at the central and decentralized levels. ' Improvement opportunities are included in the FM Action Plan. The following would mitigate the identified risks: (a) increased inter-institutional coordination; (b) PCU FM staff retention, (c) conditions for transfer of funds linked to the financial management performance of the states, the Federal District, municipalities and NGOs; (d) preparation of an Operational Manual satisfactory to the Bank, (e) training and guidance from the FM, Disbursement and Procurement teams; and (f) close supervision by the Bank FM team, and (h) implementation ofthe agreed FM Action Plan.

Risk & Mitigation Measures

Inherent Risks: Country Level L Brazil's system provides reliable information. Adequate systems L exist to manage and track the receipt and use of funds and there is a high level of fiscal transparency, both of which would support any program of adjustment lending. The risk to both Bank and country funds is low. Sub-national M While the project has sound institutional and financial M (state) Level management information Systems, as well as the satisfactory accounting systems, the following weaknesses have been observed: Weak internal controls and audit units at the state level; Parallel information systems used at the state, public institutions that do not communicate with the federal SIAFI; Despite the strong PFM requirements of the LRF, simply due to the lack of knowledge of PFM performance in enough states, there is a slightly increased level of FM risk. Selection criteria and TA to the partnerships would reduce the above weaknesses. Entity Level M Uncertainty regarding the future of FM staff in the project team L (PCU) (short term appointments), after July 2010; The Secretariat will assign an experienced FM specialist to the Project group; The MMA will open new permanent qualified staff positions,

39 The PCU could hire consultants directly to assist the States for various purposes including the preparation of State priorities, assistance in meeting the minimum acceptable FM capacity, improvements in licensing procedures, etc.

67 Risk & Mitigation Measures

shortly; Directly contracting PCU staff through project funds is considered (following the model of the VIGISUS project). FProject Level M Multiple partnerships at the federal, state, Federal District and M municipal levels, without the necessary experience with Bank financed projects, which may cause bottlenecks in the coordination, annual planning and budgeting, disbursements and reporting. r While MMA and the PCU have previous experience with Bank financed projects, the final arrangements and FM capacity will be reviewed and reflected into the Operational Manual. M

Weak multi-year and annual planning due to delays at the M decentralized level. Detailed budgeting processes in the Project Operational Manual

Good treasury management and accounting procedures using L national and sub-national systems Weak or inconsistent internal controls revealed at the M decentralized level. The conditions for fund transfers will include the quality of internal controls. The external audit will be carried out by the CGU (Contraladoria Geral da UniZo - General Comptroller), which has been evaluated as satisfactory. Flow of Funds M The agreed flow of funds design will be reflected into the M Operational Manual. Financial L The reporting and monitoring capacity of MMA was assessed and L Reporting considered satisfactory by the auditors of the previous phase of the project and by the FM team, during the FMA. Some weaknesses were observed at the UNDP; if not satisfactory financial reporting, the contract with UNDP will not be renewed. Relatively timely and with good quality of external auditing M arrangements. The external audit will be performed by the SFCKGU M

H-High S-Substantia M-Moderate L-Low

Allocation of Loan Proceeds

9. Even though there is counterpart financing, the Bank will finance 100% of specifically identified expenditures, according to the Disbursements Letter and to the Loan Agreement.

68 Flow of Funds

10. The flow of funds design proposed for the project is the following:

,______-___------~ Reimbursements I I Single Treasury Account I I i Counterpart Funds I World Bank b “Conta Ijnica” 4 I I I______-______---- I I“, (W Withdrawal Applications Advances supported by Customized SOEs Providers of Goods, Works PCU MMA b and Services PNMA 11-2 (R$) (Component A, B & C) Payments

PCU and Services b PartnershipFederal Agencies PNMA 11-2 (Component A and B) Accounts

I I I and Services State Partnerships b I Sub-national Counterpart (Component A and B) I OEMA Accounts I Funds I- Payments

Providers of Goods and UNDP b Services PNMA 11-2 Account Payments (Components A, B & C)

I) I) Flow of information: Withdrawal Applications, Procurement requests and conformity of goods and services ___+ Flow of funds

11. MMA will make payments to contractors, suppliers and others for project components from the Single Treasury Account with Federal resources. The transfers of funds to federal agencies, state, and/or Federal District, and NGOs to finance the partnerships and to UNDP will not be recognized as eligible expenditures when the transfer is made, but only when the expenditures for Goods, Works, and Services are actually incurred and reported/documented back. World Bank loan proceeds will flow as Reimbursements from the loan account to the Single Treasury Account as the Federal Government will pre-finance all project expenditures. No use will be made of a World Bank Designated Account.

12. For retroactive financing, MMA pre-financed project eligible expenditures would be reimbursed by the Bank against withdrawal applications supported by Customized Statements of Expenditures (SOE’s), Summary Sheets (SS) and/or Records for payments made for eligible expenditures and for payments made up to an aggregate amount not to

69 exceed $4,860,000 equivalent during a period not exceeding 12 months prior to signature ofthe Loan Agreement.

13. The flow of funds chart, above, will be confirmed during Negotiations and included in the Project's Operational Manual.

Disbursement Arrangements

14. Since February 2004, Federal level operations financed by multilateral development agencies follow, standardized and straightforward procedures. The National Treasury (Secretaria do Tesouro Nacional - STN) commits funds and upon instruction from the relevant executing agency, makes advances for the implementation of project activities.

15. With the Federal Government pre-financing project expenditures, the Bank will reimburse the Borrower against withdrawal applications supported by: Customized Statements of Expenditures (SOE's), Summary Sheets (SS) and/or Records. Disbursement Arrangements will be detailed further in the Disbursement Letter.

Finan cia1 Reporting

16. The Interim Financial Reports (IFRs) would be furnished to the Bank not later than 45 days after the end of each calendar semester. The IFR format will essentially follow the format and design that has been utilized in other similar projects. While the final format of IFRs will be attached to the minutes of negotiations, the description of the reports is indicated below:

IFR I - Sources and Uses of Funds, by disbursement category, cumulative (project- to-date; year-to-date) and for the period, showing budgeted amounts versus actual expenditures reported to the Bank, including a variance analysis4'; a breakdown by funding source is recommended.

IFR 2 - Financial Progress, by component cumulative (project-to-date; year-to- date) and for the period, comparing budgeted with actual expenditures, by financing source, including a variance analysis;

IFR 3 - Federal Transfers versus Actual Expenditures.

17. It is very important that the PCU monitor project performance from a financial management perspective:

planned/budgeted figures; amounts transferred to states; 0 actual expenditures reported by states; 0 re-allocation of unspent balances; 0 reconciliation between amounts transferred, actual expenditures reported

40 Variance analysis reviews any significant variance (let's say higher than lo%), between the actual and planned project implementation.

70 by states, and eligible expenditures (e.g., procurement plans and positive lists)

Accounting Policies and Procedures

18. MMA’s and Project’s budgeting and accounting are part of the overall Federal FM system and therefore all transactions will run through the Federal accounting systems - SIAFI and the state accounting system SIAFEMs. All payments will follow the official commitment (empenho) and payment (liquidaqdo) routine. These procedures are carried out by the Administration and Finance Department of each entity. Individual Project’s transactions are usually performed in a Work Plan (PT - Plano de Trabalho) within the MMA, with a Cost Center specifically designated for the given Project.

19. All Project costs and transfers are recorded according to the Federal and the compatible state chart of accounts. An exclusive cost center or UG (unidade gestura), will be established in SIAFI (and in the SIAFEM and SIGGO) for each participating state in the project. The system will have a code of accounts specific for the Project on basis of the expenditures to be incurred in each component, sub-component and activity.

20. Project financial statements will be prepared quarterly and annually, utilizing cash- basis accounting. These statements will be prepared in accordance with Brazilian legislation - Law 4.320. The Project Operational Manual (POM) will include a detailed description of procedures and guidelines for disbursements, payments, approvals, commitments and payments and be shared with all the implementing entities. The Project may be used as a pilot for the full use of country systems including reporting.

Safeguard over Assets

21, Based on project design, investment in fixed assets is not expected to be high at the state level. The MMA, other federal agencies, the Federal District and OEMAs will be responsible for the management of any fixed assets. All the fixed assets to be acquired under this project should be registered in each federal agency’s, Federal District’s OEMA’s and state’s fixed assets inventory system and monitored by the PCU and subject to annual audits. The fixed asset management procedures will be based on national norms. Subsidiary records of fixed assets and stocks should be kept up to date and reconciled with control accounts and periodic physical inventories.

Oversight, Control and Audit

22. Internal Audit: The internal audit function of MMA is relatively weak, handled by the Minister’s office (Assessoria do Ministro), and carried out only for covenants. The internal control mechanism is performed mainly through segregation of duties and audit reviews by the Federal Controllers Office (Controladoria Geral da Uniao - CGU). The Project auditors issued clean opinions regarding Phase 1 and found the Project’s internal controls to be highly satisfactory.

23. During the FM mission, rationalization and simplification of the payments processes was recommended, as part of the internal control procedures for improved

71 reliability of transactions and accelerated payments, flow of funds and states’ insolvency drawbacks. Even though the PCU demonstrated adequate ability to monitor project execution and reporting from the sub-national level, MMA should focus on its internal audit function improvement through the early engagement of the CGUS Secretaria Federal de Control (SFC), to improve the design and scope of internal audit work to be undertaken within the ministry (including at the sub-national level).

24. External Audit: Annual project financial statements, covering the whole project, will be audited by independent auditors, satisfactory to the Bank, in accordance with acceptable auditing standards. In principle, the Secretaria Federal de Control will undertake the project’s annual financial audits. The external audit will be conducted in line with Terms of Reference acceptable to the Bank; the auditors will be required to issue a single opinion on project’s financial statements.

25. The second-semester IFR will also be the project’s annual financial statements and should include notes to the financial statements. The auditors should have access to all supporting records and make on site examinations both at the PCU and in participating states. As normally done, the auditors would perform at least one interim audit per year to review internal controls and identify areas that require attention of project management. After each interim visit, a memorandum on internal controls (management letter) should be produced to ensure that corrective actions are addressed on a timely basis. A copy of such memorandums will be sent to the Bank by year-end. The audit terms of reference will seek assurance that the expenditures paid with Bank financing were eligible, and in compliance with the Bank financing percentage.

26. Auditors will produce a management letter, where any relevant internal control weaknesses will be identified and properly followed up by the PCU, contributing to the strengthening of the control environment, by focusing on processes related to the monitoring and reporting from sub-national implementing agencies. The results of the procurement processes will be presented in a distinct section of the report. The auditor’s report will be submitted to the Bank no later than six months after the closing of the Government of Brazil’s fiscal year.

Finan cia1 Management Supervision during Implementation

27. During the first year ofimplementation, Bank FM supervision will be carried out at least twice, considering the overall risk profile. Supervisions will review MMA actions agreed to in signed aide memoires, the FM Action Plan and other controls and transactions, as appropriate. This will be complemented by desk reviews of the semesterly IFRs and annual audit report. Thereafter, as long as the FM risk is deemed to be low to moderate, the supervision frequency may be reduced to an annual supervision mission, with the exception of the period prior to project closing which will be monitored closely to ensure that expenditures are not incurred after the closing date. Interim visits may also be needed to follow up on desk reviews.

72 Financial Management Action Plan

Activity Responsible Target Date Status by Negotiations

Legal

Preparation of the standard institutional and MMAPCU By Negotiations Fulfilled operational arrangements between the PCU and federal agencies, OEMAs and UNDP To be included in the Operational Manual Flow of Funds Finalization of the flow of funds design MMA/PCU By Negotiations Fulfilled

Inclusion in the Operational Manual Financial Reporting and Monitoring Submission of IFR format and procedures for MMA/PCU By Negotiations Fulfilled data collection and report generation of same, (to be attached to the for the Bank to provide its no-objection minutes) External Audit Follow-up of the implementation of audit SFCiWB Yearly N/A recommendations will be performed by the auditors and reviewed during Bank supervisions Internal Audit and Controls lnstauration of improved own internal audit I MMAPCU/CGU 1 To be reviewed by the I N/A and control mechanism external auditors during first year’s mid-term

By Negotiations Fulfilled

Inclusion in the Operational Manual Operational Manual Satisfactory Operational Manual including institutional arrangements, flow of funds design, staff functions, accounting policies MMAPCU By Negotiations Fulfilled and procedures, basis of accounting, chart of accounts tailored to include project components if needed, disbursement categories and financing source, internal controls, segregation of duties, fixed assets and records management procedures

73 Annex 8: Procurement Arrangements

General

1. Procurement for the proposed project would be carried out in accordance with the World Bank's '"Guidelines: Procurement Under IBRD Loans and IDA Credits" dated May 2004 and revised October 2006; and "Guidelines: Selection and Employment of Consultants by World Bank Borrowers'' dated May 2004 and revised October 2006, and the provisions stipulated in the Legal Agreement. The various items under different expenditure categories are described in general below. For each contract to be financed by the Loan, the different procurement methods or consultant selection methods, the need for pre-qualification, estimated costs, prior review requirements, and time frame are agreed between the Borrower and the Bank in the Procurement Plan.

2. The Procurement Plan will be updated at least annually, or as required, to reflect the actual project implementation needs and improvements in institutional capacity. However, the demand driven nature of project design (where the type, location and scope of partnerships are unknown) does not allow for the preparation of an initial Procurement Plan to cover more than six months, because only after effectiveness the Project Coordination Unit - PCU will be able to start the selection process to select the states that will receive support through partnership agreements (convinios).

3. States, the Federal District or selected municipalities would qualify for partnership grants by demonstrating advances in environmental policy implementation, based on a matrix, and would implement appropriate partnerships aimed at improving environmental quality in their identified priority area. The size of the federal grant for which a state or the Federal District will be eligible will be based on the level of achievement demonstrated by the state on the matrix. Therefore, it is expected that the initial procurement plan will cover for the first six months and that it would be revised, just after the definition of selected states and municipalities (and before any procurement takes place at that sub-level), to cover for the next 18 months. Each selected state and municipality will need to have its own Procurement Plan, approved by the Bank, and following the same requirements of PCU's one, i.e. covering for each contract to be financed by the convznio, the different procurement methods or consultant selection methods, estimated costs, prior review requirements, and time frame.

4. The Inter-Ministerial Committee on External Finance (COFIEX) has authorized Phase 2 of NEP I1 for an amount of US$66.3 million, out of which the loan would be US$46.4 million. However, the COFIEX authorization requires that the loan would be divided into two sub-phases: Sub-phase A for US$ 24.3 million; and Sub-phase B for US$ 22.1 million. The two Sub-phases would be negotiated separately and moving into Sub-phase B would be contingent on: (i)evidence of satisfactory performance under the first sub-phase; (ii)commitment of at least 75% of loan proceeds; and (iii)utilization of at least 50% of loan proceeds. Thus, the proposed Sub-phase A has a total value of USD 34.7, of which USD 24.3 would be financed by the Bank, and is structured around 3 components, i.e. (a) Institutional Development (through key institutional partnerships

74 involving State Environmental Agencies, with the possibility of partnerships build with municipalities, NGOs, universities, research and training centers, water-resource management agencies, tourism agencies, regional development agencies, agricultural development agencies and the private sector); (b) Environmental Assets (implemented through partnership grants by the qualified states); and (c) Coordination, Dialogue and Communications (through the Project National Coordination - PNC). Procurement activities following Bank’s Guidelines will comprise acquisitions at the PCU and at the federal, states, Federal District and/or municipal levels. Thus, the current PAD and associated Loan Agreement will be for a Loan of US$24.3 Million.

5. The PCU’s procurement of goods and services will be processed by UNDP, through a technical cooperation agreement, with due application of Procurement Guidelines stipulated in the Loan Agreement. In the event ofthe replacement ofUNDP with another procurement agent, Bank’s no-objection and a capacity assessment of the new agent would be required. Acquisitions and selection of consultants made by other federal agencies, states, the Federal District, municipalities and/or NGOs beneficiaries will be processed by their implementation units following the agreed procurement rules, with the support from the PCU. Therefore, upon their selection and before signature of each partnership agreement (convznio), a capacity assessment of the respective implementation unit will be conducted by the Bank, establishing thereof the procurement risk rate, the threshold for each procurement method, and the frequency of procurement supervision missions for that partnership agreement (convznio). The latter will reflect on the overall project risk rate and the overall project procurement supervision frequency. Just as with FM, training and TA will be provided to strengthen the procurement capacity.

6. The Project would also rely on UDNP for Selection and Contracting of Consultants at the PCU level and also at federal, state and Federal District level when required, during the first 18 months of project implementation. UNDP has been trough a capacity assessment conducted by the Bank and is required the mandatory application of Bank’s Guidelines. It is also reflect on the overall project risk rate and the overall project procurement supervision frequency.

7. Procurement of Works: Small works such as sanitary landfills, cabins for park rangers, etc. are anticipated under the project and would be contracted through Bank’s Shopping or National Competitive Bidding (NCB) procedures.

8. Procurement of Goods: Procurement of computers and other IT equipment are expected under the project and its convznios and procurement methods for those goods would be Bank’s Shopping procedures, NCB or electronic “ppregtio” through ComprasNet system (the procurement portal of the Federal Government) or another e-procurement system acceptable to the Bank, International Competitive Biddings (ICBs), and Direct Contracting. All contracts estimated to cost more than US$l,OOO,OOO equivalent per contract will be subject to prior review by the Bank.

9. Procurement of services other than consultants’ services: Procurement of services other than consultants’ services are anticipated under this project and its

75 conv2nios such as airline tickets and other travel costs, logistic and support services for meetings, etc. The procurement methods for those services will be Bank’s Shopping procedures, NCB or electronic “pregiio” through ComprasNet system (the procurement portal of the Federal Government) or any other e-procurement system approved by the Bank. All contracts estimated to cost more than US$l,OOO,OOO equivalent per contract will be subject to prior review by the Bank.

10. Operational Costs: Operational costs are listed under the Procurement Plan as office supplies, perdiem, sundries, incidentals, and other project implementation related expenses which would be financed by the project and would be procured through Bank’s Shopping procedures, electronic “preg8o” through ComprasNet system, or using any implementing agency’s administrative procedures reviewed and found acceptable to the Bank. Vehicle fuel and maintenance contracts on equipment would be carried out through shopping.

11. Selection of Consultants: Consultants contracted by the PCU will be selected through UNDP, following Bank’s Guidelines. Other federal agencies, states, the Federal District and municipalities will contract consultants through their own implementation units, with PCU’s assistance to assure quality of Terms of Reference (TOR) and proper procedures. The PCU, trough UNDP, may also contract consultants for the other federal agencies, states, the Federal District and municipalities as needed. Throughout the project, these services will be hired through Quality and Cost Based Selection (QCBS), Selection Based on Consultants Qualification (CQS), Least Cost Selection (LCS), Single Source Selection (SSS - with Bank No-objection Letter required on a case-by-case basis) and Individual Consultants (IC). Short lists of consultants for services estimated to cost less than $500,000 equivalent per contract may be composed entirely of national consultants in accordance with the provisions of paragraph 2.7 of the Consultant Guidelines. The above will also apply for contracted procurement agents.

12. The procurement procedures and SBDs (Standard Bidding Documents) to be used for each procurement method, as well as model contracts for works and goods procured, are included in the Project Operation Manual (POM).

Expenditure Contract value Procurement Contracts subject to prior review category threshold a method (US$ thousands)

76 Goods >1,000 ICB All processes 1,0002 5100 NCB or preglo First process under each procurement method eletrhico < 100 Shopping First process Services other > 1,000 ICB All processes than consultants’ 1,000 2 < 100 NCB or preglo First process under each procurement method services eletr8nico (incl. training, 5 100 Shopping I First process communication) Consulting >200 QCBSILCS All processes (firms) 5 200 QCBSICQSILCS First process under each selection method Consulting NIA Section V in the First process (individual) Guidelines Direct NIA Para 3.9 - 3.13 in All cases regardless ofthe amounts involved contracting the Guidelines

13. The above thresholds apply to the PCU. Thresholds for each partnership agreement (conv2nio) will be defined at their capacity assessment and will integrate each procurement plan. They can be reviewed during project implementation based on procurement post-review missions. All single-source selection of goods, services, works, and consultants firms or individuals, regardless of the amount of the contract, will be subject to prior-review by the Bank.

Assessment of the agency’s capacity to implement procurement

14. Procurement activities will be carried out by UNDP for selection of consultants purchase of goods and services at the PCU level and by each implementation unit at the federal (other agencies) states, Federal District and/or municipal levels. UNDP would also carry out the selection of consultants for Project Partners as needed. As this is phase 2 of the project and as UNDP, through a technical cooperation agreement, will again be responsible for procurement activities, there was no need for assessing the PCU capacity. In the event of the replacement of UNDP with another option for carrying out procurement activities, a capacity assessment of the new agent will be required. At the federal (other agencies), states, Federal District and municipal level, upon their selection and before signature of each partnership agreement (convinio), a capacity assessment of the respective implementation unit will be conducted by the Bank.

Procurement Action Plan

15. As agreed with the PCU, they need to:

Action Timeframe

1 Revise the Procurement Plan prepared for the first six By effectiveness. months including the dates for each procurement action. 2 Receive training on Banks procurement policies. Within 6 months of effectiveness -- - - - __c

77 3 Prepare the Procurement Plan that will cover for the next 18 6 months after months of the project. effectiveness- 16. The ex-ante procurement project risk rate is high, because other federal agencies, states, Federal District and municipal capacity is still unknown and must be assessed on a case-by-case basis. The project risk rate will be revised six months after effectiveness and after a capacity assessment of each participating state and municipality, to reflect the overall project risk. It is expected to be acceptably moderate, as many states were already working under a partnership agreement (conv&nio) during Phase 1, and which were subject of procurement reviews showed state procurement capacity to be generally acceptable.

78 Procurement Plan

17. The Bank approved a procurement plan for the first 6 months. A revised version is expected right after effectiveness including the dates ofeach procurement action.

18. Specific procurement plans for each state and municipality will be prepared by each implementation unit and approved by the Bank before signature of each partnership agreement (convinio).

Frequency of Procurement Supervision

19. In addition to the prior reviews to be carried out from Bank offices, field supervision missions to conduct post reviews of procurement actions are recommended every six months. Along with the revision of the overall project procurement risk, the frequency may also be revised.

20. The procurement documents for the first procedure under each acquisition method, though out the project, irrespective of its estimated amount, will be subject to prior review, therefore assuring quality and consistency for subsequent procurement activities.

21. The procurement documents for all ICB will be subject prior review by the Bank irrespective of the estimated amount of contract. The.first NCB or pregzo eletrSnico and all ofthem to cost above $350,000 will be subject to Bank’s prior review.

22. Contracts for consultant firms estimated to cost above $200,000 will be subject to prior review by the Bank. The Bank’s review of selection of consultants will be in accordance with Appendix 1 of the Guidelines for Selection and Employment of Consultants and the provisions stipulated in the Loan Agreement. Consultant’s contract documents to be reviewed will include TORS, shortlists, evaluation reports, and contract forms.

Details of the Procurement Arrangements Involving International Competition

Goods, Works, and Non Consulting Services

(a) List ofcontract packages to be procured following ICB and direct contracting:

None anticipated.

(b) All ICB and all single-source or direct contracting as well as the first contract in each category will be subject to prior review by the Bank.

Consulting Services

(a) List ofconsulting assignments with short-list of international firms: not anticipated.

(b) Consultancy services estimated to cost above $200,000 per contract and single source selection ofconsultants for firms will be subject to prior review by the Bank.

79 (c) Short lists composed entirely of national consultants: Short lists of consultants for services estimated to cost less than $500,000 equivalent per contract, may be composed entirely of national consultants in accordance with the provisions of paragraph 2.7 of the Consultant Guidelines.

80 Annex 9: Economic and Financial Analysis

1. The NEP I1 Program will directly support the Ministry of Environment (MMA) and OEMAs to meet major environmental issues identified in a recent study: “State and Federal Environmental Concerns for the period 1998/2001 ”. The study suggested NEP I1 should focus on two main focal areas: (i) institutional strengthening of state environmental agencies specifically focusing on improving their application of environmental management instruments (environmental licensing, WQM and coastal zone management); and (ii)the development of models of sustainable environmental management. This resulted in NEP I1 having three components: (i)Institutional Development; (ii) Integrated Management of Environmental Assets; and (iii) Coordination, Dialogue and Communications.

2. Direct Program benefits will accrue to the MMA, other federal agencies linked to the environmental licensing process, OEMAs, Federal District and municipalities in ensuring the agencies have timely availability of budgetary resources to enhance priority activities under its regular program. This in turn will enable the agencies to improve their resource allocation, operating efficiency and overall effectiveness in delivering mandated services more cost effectively. Improved service delivery will translate into greater accessibility of environmental information, knowledge, appropriate technology and consequently awareness and affirmative action towards environmental and natural resource conservation. Efficient regulatory and monitoring procedures will reduce transaction costs for compliance, thereby creating incentives for stakeholders to make better resource-use decisions and to actively participate in more efficient management of the environment and natural resources.

3. The Project is expected to generate major benefits accruing from more effective monitoring and licensing processes in the states. These benefits would be captured by all persons benefiting from environmental services provided by natural resources and the built environment, project activities, such as cleaner water, cleaner air, less forest degradation, etc. Because these benefits are diffuse and difficult to quantify, specific benefiucost ratios cannot be calculated.

4. The benefits and costs of improved monitoring and licensing procedure can only be estimated once specific proposals are put forward by the states and municipalities that would adopt such systems. MMA will require that such proposals be linked to estimates of the potential benefits (in saving of time and more efficient natural-resource use) that such activities can be expected to produce so as to produce crude benefit-cost analysis and to stimulate the proponent to consider the lowest cost alternative that will produce the greatest social benefit.

5. NEP I1 is a budget support (framework type) project, where the conventional ex ante costbenefit analysis is not possible as most of the major investments have not yet been identified or designed in detail prior to loan effectiveness. Moreover, most of the investments to be financed under NEP I1 (through budgetary support) involve

81 environmental or public sector/institutional capacity strengthening, where it is not possible to quantify benefits in monetary terms. Therefore, financial and economic rates of return cannot be meaningfully estimated. The cost effectiveness ofNEP 11, however, is rated as being high, as the project will purposefully introduce and support procedures that will significantly improve systems and processes in MMA's and OEMA's service delivery over existing/alternative systems. This in turn will improve overall efficiency in the allocation and use of public resources, a key issue identified in the above mentioned study. Economic instruments also have the potential to reduce enforcement costs although they would initially raise monitoring costs. In particular, NEP I1 will support a number of initiatives to address deficiencies which currently hinder efficiency and cost effectiveness. Collectively these efficiencies, and strengthened institutions at the state and Federal level, are critical in the context of Brazil as studies indicate that the economic cost ofweak environmental management can be extremely high.

82 Annex 10: Safeguard Policy Issues

Safeguards Operational Manual

Procedures for Prior Screening of Environmental Impact

1. The state partnerships to be submitted to the Second National Environmental Program (NEP - 11) will be aimed directly or indirectly at improving environmental quality and the conservation and sustainable use of natural resources. Thus, in general, they are not expected to have adverse environmental impacts and consequently would not require mitigating actions. However, all partnership proposals will be subject to a prior environmental screening to identify possible negative environmental and social externalities (damages) and, if these are present, the states and/or the Federal District would follow the procedures described below.

2. In partnerships with planned interventions that may in some way cause pollution or environmental degradation, it will be necessary to present an environmental license or other equivalent legal instrument that provides evidence of the adoption of more environmentally suitable practices and acceptance by the public authority in the form of Brazilian legislation, particularly as stipulated in Law no 6.938/81 and CONAMA Resolutions 001186 and 237/97.

3. In addition to the above procedure, the partnerships should be analyzed with regard to the restrictions contained in World Bank Operational Policies, particularly Environmental Assessment (OP/BP4.01), Natural Habitats (OP/BP4.04), Indigenous Peoples (OP/BP4. lo), Physical-Cultural Resources (OP4.11), and Involuntary Resettlement (OP/BP4.12).

4. The procedures of this prior environmental screening, with the definition of tasks of proponent states and/or the Federal District and of the Ministry of Environment (MMA), are divided into three stages, as detailed below and summarized in a flowchart (section A, presented later):

i) Screening and Evaluation Stage: the partnerships, containing a description of the potential adverse impacts of the proposed activities, are analyzed and classified by the proposing states and/or the Federal District as Categories A, B, or C (depending on the probable degree of environmental impact), in accordance with the World Bank’s safeguard policy4’ and submitted to the program’s Technical Group for approval. Brazilian legi~lation~~should also be observed during this stage, with regard to the need for licensing of possible works or interventions.

41 Bank Operational Policy - OP 4.01 42 CONAMA Resolutions 00 1/86 and 237/97 and corresponding state and municipal legislation,

83 ii) Preparation Stage of Environmental Studies, Plans, and Special Reports: states and/or the Federal District proposing partnerships classified as A or B proceed to prepare the Environmental As~essment,~~Environmental Management Resettlement Action Plan45 or Indigenous Peoples or Quilombolas Plan46 or other studies or plans to be defined in terms of the partnership’s specific characteristics. The partnerships classified in these categories should be submitted for environmental licensing or the signing of adequate institutional and legal agreements and commitments, when they propose works or interventions subject to control by the public a~thority.~’ iii)Implementation Stage: partnerships in Categories A and B, definitively approved by the Supervisory Commission and suitable for implementation (having met the necessary requirements) and partnerships in Category C (without significant environmental impact), begin implementation and carry out the environmental monitoring of implemented actions.

1. Analysis and Evaluation Stage

5. The partnership proposals submitted by states and/or the Federal District for approval by PNMA would be screened by qualified PCU staff for potential environmental or social impacts, described in a specific section that should also contain an analysis of alternatives and an identification of the necessary measures to minimize them, as well as the classification in Categories A, B, or C, in accordance with the degree or scale of potential environmental impact.

6. Upon being submitted for evaluation, partnerships will be analyzed by the PNMA Technical Group to verify the correct identification of impacts, alternatives, mitigation measures, and classification.

7. Some types of partnerships or interventions may not be eligible under the scope of the program if the possibility of significant, irreversible adverse impact is detected.

CATEGORYA. Partnerships with High Environmental or Social Impact

8. A proposed partnership will be classified as Category A if any of the following situations apply:

43 Bank Operational Policy - OP 4.01 44 Bank Operational Policy - OP 4.01 45 Bank Operational Policy - OP 4.12 46 Bank Operational Policy - OP 4.10 and Decree no4.887 dated 11/20/2003 or corresponding document. 47 Most of the projects carried out under the PNMA were originated by State Environmental Agencies which usually are also responsible for the environmental licensing of activities that cause pollution or degradation and that may be envisaged for implementation under the scope of the projects and thus the possibility arose to present other instruments, herein called “adequate institutional and legal agreements or commitments,” besides licenses. The requirement to present environmental licenses, however, continues to be stipulated, since it may be necessary to present those from other federal entities (Federal Government, municipalities, or Federal District), or in the case that the proponent is not the licensing agency.

84 - Causing significant and/or irreversible adverse environmental effects48 - for example, threatening rare/endangered species or their habitats; causing damage or degradation to a large area; increasing the risk of diseases (such as schistosomiasis); destabilizing an ecosystem, etc.; - Affecting areas that are considered to be of relevant landscape, historic, or cultural interest;49 - Causing the involuntary removal of population^^^ (and consequently the need for resettlement), and/or depriving a population of its way of life (provided that this is legally supported); or - Affecting indigenous or quilombola population^.^'

9. The impacts of Category A partnerships may affect a broader area than the locations directly addressed under the scope of the partnership.

CATEGORYB. Partnerships with Medium Environmental Impact

10. A partnership will be classified as Category B if its impacts on human populations or on environmentally important areas (includin mangrove areas, marshes, protected areas, natural monuments, critical natural habitats!2 cultural heritage areas, archeological sites) are limited in scope (local), reversible, or susceptible to mitigating actions.

11. This category may also include partnerships that will be executed under the scope of the Environmental Assets component and whose activities can cause adverse environmental impacts. Some partnerships implemented in Phase 1 of NEP I1 involved the implementation and operation of sanitary landfills53which, led to the need to obtain environmental licenses as well as triggering OP4.0 1 which requires preparation of an environmental impact assessment as well as an Environmental Management Plan.

CATEGORYC. Partnerships with No Significant Environmental Impact

12. A partnership would be classified as Category C if its environmental impacts are minimal or nonexistent. Besides filling in the environmental screening sheet, no additional environmental assessment action will be required. Note, however, that for the impacts identified, even if they are minimal, the presentation of adequate mitigation

46 Bank Operational Policies - OP 4.01 and 4.04 49 Bank Operational Policy - OP 4.1 1 50 Bank Operational Policy - OPh3P4.12 51 Bank Operational Policy - OPh3P4.10. See footnote 14 in Annex 4. 52 Natural habitat in a critical state may be generically defined as that which, due to processes of significant loss, or fragmentation or degradation (including various forms of pollution) of its original area, is experiencing an alteration in ecological processes and loss of key components of biodiversity, so that s ecial, ongoing protection and replacement measures are required. 5E: According to CONAMA Resolution 00 1/86, the implementation of sanitary landfills requires, for environmental licensing, the preparation of an Environmental Impact Study - art. 2, clause X. CONAMA Resolution 237/97 kept the environmental licensing requirement but transferred to the relevant licensing agency-state or municipal-the power, jointly with interested parties, to define the necessary studies, documents, and projects for decision making - art. 10, clause I.

85 measures may be requested.

13. This initial environmental classification will be made by the states and/or the Federal District and should be included in their partnership proposals; it will be summarized by the MMA Technical Group in an environmental summary sheet (see Section B) containing an opinion on each partnership, which will be submitted to the Program's Supervisory Commission for review.

14. The technical opinion should include possible pending issues to be resolved, such as the need for environmental licensing or the submission of adequate institutional and legal agreements and commitments, the submission of the Environmental Management Plan and/or Environmental Impact Assessment Report (if the partnership requires environmental protection measures), the Resettlement Action Plan (if the partnership causes the involuntary removal of a population), Indigenous Peoples or Quilombolas Plan (if the partnership interferes with indigenous or quilombola groups), or another report or plan judged to be more suitable for the issue that is presented under the scope of the partner~hip.~~Final approval of the partnership is therefore subject to compliance with these pending issues.

2. Preparation of Special Plans and Reports (Categories A and B) or Environmental Licensing Stage

CATEGORYA

15. A partnership classified as Category A would follow the procedures below: - If the partnership affects indigenous or quilombola populations, even when in a beneficial manner: repare an Indigenous Peoples or Quilombolas Plan (see item 2.1 and Section C); ps - If the partnership causes the involuntary removal of populations, prepare resettlement necessary: prepare a Resettlement Action Plan (see item 2.2 and Section c);'~ - If the partnership proposal contains the possibility of interventions that can cause a major environmental impact: prepare an Environmental Impact Assessment containing an Environmental Management Plan (see item 2.4 and Section C).57'These two studies should also be submitted if areas considered to be ofrelevant landscape, historic, or cultural interest are affectede5*

54 Brazilian legislation will be observed with regard to environmental licensing, as well as World Bank Operational Policies, particularly OP 4.01, 4.04, 4.10, 4.1 1, and 4.12 available at: httD://wblnOO 18.worldbank.or,~tml/eswwebsite.nsf/~otwe?O~enView&count=5OOOOO (visited on 1/17/2008). 55 World Bank Operational Policy - OP 4.10 56 World Bank Operational Policy - OP 4.12 57 World Bank Operational Policy - OP 4.0 1 World Bank Operational Policy - OP 4.1 1

86 - If the proposed partnership contains the possibility of interventions that can cause a significant environmental impact: proceed to apply for an environmental license (see item 2.3) or if the proponent is the agency responsible for environmental licensing another legally valid instrument may be presented that assures the partnership’s legality and environmental monitoring.

CATEGORYB

- A partnership classified as Category B should proceed to environmental licensing, when applicable (see item 2.3); and - If the need to implement environmental protection measures under World Bank safeguard policies is noted, the preparation of an Environmental Management Plan may be required (see item 2.4 and Section C).

2.1. Indigenous Peoples or Quilombolas Plans9

16. The Indigenous Peoples and Quilombolas Plan should contain specific guidelines to ensure that indigenous or quilombola populations benefit from the partnership, avoiding or minimizing any adverse effects caused by the activities to be implemented.

17. To prepare an Indigenous Peoples or Quilombolas Plan, the state should:

Conduct a social assessment of the indigenous or quilombola communities affected;

Conduct free, prior, informed consultations with affected indigenous or quilombola communities;

Prepare the plan, taking into consideration the consultations with affected populations;

Send the plan to the National Indian Foundation (FUNAI) and/or Ministry of Culture, through the Palmares Cultural Foundation, for analysis and approval;

Incorporate the recommendations of the plan (approved by FUNAI or the Ministry of Culture, through the Palmares Cultural Foundation) in the partnership;

Send the reformulated partnership to MMA, together with the Indigenous Peoples or Quilombolas Plan;

Send to MMA, for review and comment by the World Bank, a report containing information on the social assessment and the consultations.

18. The general guidelines for the preparation of the Indigenous Peoples or Quilombolas Plan are listed in Section C.

59 World Bank Operational Policy - OP 4.10 and Decree no4.887 dated 11/20//2003 or corresponding document.

87 2.2. Resettlement Action Plan6'

19. The preparation of the Resettlement Action Plan is requested if the implementation of the state partnership necessarily implies (in an unavoidable and essential manner) the involuntary resettlement of resident populations.6'

20. In this case, the state should:

a) Formulate a timetable to proceed with the preparation of the Resettlement Action Plan;

b) Prepare the Resettlement Action Plan, following the guidelines provided in OP/BP4.12 , with the informed participation ofthe affected population;

c) Incorporate the plan's recommendations into the partnership proposal and the RAP budget into the partnership budget;

d) Send to MMA and the World Bank the reformulated partnership together with the Resettlement Action Plan.

2 1. The general guidelines for the preparation of the Resettlement Action Plan are listed in Section C.

2.3. Environmental Impact Assessment Report and Environmental Management Plan62

22. The preparation of the Environmental Impact Assessment Report is required when a partnership is classified as Category A and thus has the potential to cause major, adverse environmental or social impacts.

23. The Environmental Impact Assessment Report is a document based on field studies, existing databases and analyses that contains a description of expected adverse environmental and social impacts, the mitigation measures identified, and an Environmental Management Plan. The Environmental Management Plan, in turn, details the institutional, mitigation, and monitoring measures needed to eliminate, compensate, or reduce adverse impacts to acceptable levels and the institutional basis for carrying this out.

24. In this case, the state should:

a) Once the environmental licensing procedure is concluded, if needed (see item 2.3), formulate the Environmental Impact Assessment Report (containing an Environmental Management Plan);

b) Send to MMA a copy the environmental license, the Environmental Impact

6o World Bank Operational Policy - OP 4.12 61 When the need for resettlement affects up to 200 people, a simplified Resettlement Action Plan Resettlement Action Plan will be required. World Bank Operational Policy - OP 4.01

88 Assessment Report, and the Environmental Management Plan.

25. The preparation of an Environmental Management Plan may also be requested for a partnership classified as Category B (potential to cause medium adverse environmental impact), if environmental protection measures are needed, and this should be sent to MMA together with the environmental license, if required. States and/or the Federal District are responsible for filing applications for environmental licenses independently of the EIA and EMP prepared for Bank purposes.

26. The general guidelines for the preparation of the Environmental Impact Assessment Report and the Environmental Management Plan are listed in Section C.

2.4. Environmental Licensing

27. When it is necessary to obtain an environmental license, the state should follow the procedures below:

a) Prepare the environmental licensing timetable; b) Proceed with environmental licensing according to local guidelines, including consultations with affected populations; c) Incorporate the environmental licensing’s mitigating actions in the partnership, when necessary; d) Send the partnership to MMA together with the environmental license. Projects that include actions requiring environmental licensing are subject to current legislation, specifically CONAMA Resolutions 00 1/86 and 237/97, as well as relevant state and municipal legislation. 28. For cases in which the partnership proponent needs to submit an environmental license but is the agency responsible for issuing it, another legally valid institutional instrument may be presented, provided that such instrument assures environmental compliance and that proper monitoring will be carried out.

29. Environmental licensing will be required when partnerships involve such activities as:

- Mineral extraction and treatment; - Implementation ofindustries and activities associated with nonmetallic products, wood, paper and cellulose, rubber, hides and pelts, chemical products, processing oftextile, plant, and animal fibers; - Implementation of food and beverage production activities such as processing, grinding and roasting, manufacture of food products, cold storage, manufacture of canned goods, preparation of fresh and canned fish, preparation, processing, and industrialization of milk and its by-products, refining/preparation of plant oils and fats, production of butter, cocoa, animal fats for foods, and manufacture ofbalanced feed and prepared foods for animals;

89 - Construction of civil works such as roads, dams and dikes, drainage canals, rectification of water courses, opening of sand bars, mouths of rivers, and canals; - Treatment and disposal of industrial and chemical waste and of urban solid waste; recovery of contaminated or degraded areas; - Development of tourism activities such as hotels, spas, resorts, etc.; - Use of natural resources, such as forestry, economic exploitation of lumber or firewood and forest subproducts, management of exotic fauna and wildlife raising, use of natural genetic material, management of live aquatic resources, introduction of exotic and/or genetically modified species, use of biodiversity by biotechnology; and

- Other relevant situations.

3. Implementation Stage

30. At the outset of the implementation stage, all partnerships shall undergo an environmental diagnostic of the area’s situation at partnership start-up, as well as the environmental monitoring of implemented activities. This monitoring shall be performed at regular intervals using appropriate indicators and measurements throughout the partnership cycle, until partnership conclusion, in order to adequately gauge its impact and the success of mitigatory measures, especially in relation to sustainability and environmental quality.

CATEGORYA

31. Projects classified as Category A shall meet the relevant requirements- environmental licensing and Environmental Impact Assessment Report containing Environmental Management Plan; Resettlement Action Plan or Indigenous Peoples or Quilombolas Plan; or others that may be defined-for approval by the Supervisory Commission and should be ready to begin the implementation stage. Prior to implementation, the EIA and EMP shall be subject to prior review by the Bank.

32. During implementation, Category A partnerships should put into practice the plans’ recommendations and the license conditions, when necessary.

CATEGORYB

33. Category B partnerships should have fulfilled the requirements of OP4.01 and any other applicable Bank policies as well as have obtained the respective environmental licensing63 so that they can be approved by the Supervisory Commission and can begin the implementation stage, at which time the mitigating actions and environmental monitoring of actions should be put into practice.

63 When the need for environmental protection measures is verified, the preparation of an Environmental Management Plan may also be requested (see item 2.4), in accordance with World Bank Operational Policy OP 4.01

90 CATEGORYC

34. After a partnership classified as Category C is approved by the Supervisory Commission, its implementation may begin.

4. General Steps for Prior Environmental Screening

35. The steps to be taken, with actions by states and/or the Federal District and MMA, are:

1. States and/or the Federal District send proposals to MMA. partnership proposals should contain a preliminary characterization of likely impacts, indicating alternatives and mitigation measures, as well as their classification according to the scheme outlined in Section 1 above;

2. Partnerships are analyzed by the Program’s Technical Group which verifies the accuracy of the analysis of their impacts and classification. An environmental summary sheet (presented in Section B) is prepared, together with a technical opinion on recommending whether or not to proceed with the following stages, differentiated for each category:

CATEGORYA - A Resettlement Action Plan (in case of involuntary removal)64 or an Indigenous Peoples or Quilombolas Plan following the relevant World Bank Policy (if the partnerships have an impact on these populations)6s should be prepared, incorporating these plans’ recommendations into the partnerships. - Environmental Licensing may be requested, if there is an environmental impact and when deemed necessary and mitigating actions should be incorporated in the partnerships;

- An Environmental Impact Assessment Report (containing an Environmental Management Plan) following the relevant World Bank Policy66 should be prepared for all partnerships in Categories A or B that affect areas considered to be of landscape, historic, or cultural interest.67

- An Indigenous Peoples Plan containing information on the social assessment and the results of consultations with indigenous or quilombola communities and with residents who will be resettled, demonstrating their support for the partnership and the compatibility of the proposed partnership with the the cultural practices of the society, should be submitted to MMA which will then send it to the World Bank, requesting its no objection, prior to the preparation of the Indigenous

64 World Bank Operational Policy - OP 4.12 65 World Bank Operational Policy - OP 4.10 and Decree no 4.887 dated 11/20/2003 or corresponding document. 66 World Bank Operational Policy - OP 4.01 67 World Bank Operational Policy - OP 4.1 1

91 Peoples or Quilombolas Plan or the Resettlement Action Plan; - The Indigenous Peoples or Quilombolas Plans should be sent by the state to FUNAI or to the Ministry of Culture, through the Palmares Cultural Foundation, for analysis and approval; - The reformulated partnerships, the prepared plans, and the environmental licenses should be sent to MMA, which may request ad hoc expert opinions on the prepared plans. If the opinions are favorable, the plans (together with these opinions) will be sent to the World Bank for prior review. . - Once the Bank has given its no objection, the partnership proposal will be sent to the Supervisory Commission, together with a new opinion by the Technical Group (highlighting compliance with the previously identified pending issues), for final approval;

- Once these requirements are met, the partnership will be ready for implementation, including the implementation of the plans’ recommendations and of the licensing’s mitigation measures, if necessary.

CATEGORYB

- ’ Licensing should be requested6*and the necessary mitigating actions should be incorporated in the partnership and their costs integrated into the partnership budget.

- The state partnership should be sent together with the environmental licenses and the Environmental Impact Assessment Reports (containing an Environmental Management Plan), when necessary, to MMA. The Supervisory Commission will give its final approval so that the state can begin partnership execution, which will include the implementation of recommended mitigation measures.

CATEGORYC

36. Once approved by the Supervisory Commission, these partnerships may begin implementation immediately subject only to diagnostic studies at partnership outset and periodic monitoring report.

When the need for environmental protection measures is verified, the preparation of an Environmental Management Plan may also be requested (see item 2.4).

92 SIMPLIFIED ORGANIZATIONAL CHART (including decision-making and implementation authorities)

PNMA II SUPERVISORY PNMA II GENERAL COMMITTEE COORDINATION UNIT - UCG

Coordinating Unit for Integrated Management of Environmental Assets Component

Consultants

Unit - UCE project based on this Manual

93 SECTION A: FLOWCHART

Preparation of projects with characterization of impacts, analysis of Project Analysis alternatives, and indication

Classification of Projects as Issuance of technical A, B, or C opinion on project with request for v environmental licensing and/or Environmental Preparation of Management Plans, Environmental . Resettlement Action . Summary Sheet Plans, or Indigenous ----.-I.."--..+ ..ll-__"" I. . (Technical Group) Peoples or Quilombolas ProjectA 1 Project B - Plan, when appropriate with (with (Technical Group) special I environ- plans* j mental I I impact) ...... i i r LICENSING STAGE AND PREPARATION OF PLANS I Proceed to request AND SPECIAL REPORTS Prepare plans* environmental licensing, when appropriate ' 1 Send plans toad , i hoc consultant for ~ 1 ~ analysis Incorporate plans' 1

~ Incorporate I recommendations in 1 Receive project with I recommendations - - project __*. plans * prepared for mitigating I -Receipt of ad hoc ~ 'i (Technical Group) +-1 I r- I actions i prolect 1 consultant's analysis, 1 L I t L - __ __ p-.-_ ---- with approval Y 1 Send reformulated project and plans to ___ --* I Send plans to World Send project with environmental licenses I to MMA**

IL- - - _I_I_I______* Commission 1 Receipt of no objection (Technical Group)

1 (Supervisory Commission) I lMPL EMEN TATlON STAGE - Implementation (Category C) I I - Execution and implementation of mitigation measures implementationSupervision of 4- and monitoring plan in accordance with environmental studies and implementation of Resettlement Action Plans and Indigenous Peoples or Quilombolas Plans, I I when appropriate (Categories A and B)

...... ~ ...... * Plans refer to the preparation of a Resettlement Action Plan, if !he project causes involuntary removal of the population, or an Indigenous 94 Peoples or Quilombolas Plan, if the project causes interferences with indigenous or quilombola groups, or an Environmental Management Plan (in an Environmental Impact Assessment Report), if the project causes a major. adverse environmental impact, in accordance with World Bank Operational Policies. SECTION B: SAMPLE OF ENVIRONMENTALSUMMARY SHEET

Project:

Action: Current Status:

CHARACTERISTICS OF PROPOSED PARTNERSHIP: 1 Population to be served:

Does it affect indigenous or quilombola populations? Does it affect Federal, State, Municipal Conservation Units I or RPPNs6' Does it affect Areas of environmental interest? Does it affect historical, cultural, or archeological heritage? Does it require environmental licensing? Does it affect areas with critical natural habitats?

* Critical Natural Habitats are defined (OP4.04, Annex A) as: (i)existing protected areas and areas officially proposed by governments as protected areas , areas initially recognized as protected by traditional local communities, and sites that maintain conditions vital for the viability of these protected areas (as determined by the environ-mental assessment process); or(ii) sites identified on supplementary lists prepared by the Bank or an authoritative source determined by the Regional environment sector unit. Such sites may include areas recognized by traditional local communities; areas with known high suitability for biodiversity conservation; and sites that are critical for the conservation of rare, vulnerable, migratory, or endangered species.-Listings are based on systematic evaluations of such factors as species richness; the degree of endemism, rarity, and vulnerability of component species; representativeness; and integrity of ecosystem processes.

Adverse impacts:

I Positive impacts: I

Proposed mitigation measures:

I I

69 Private reserves and officially approved RPPNs (Reservas Particular de PatrimBnio Natural).

95 General Guidelines for Preparation of Indigenous Peoples or Quilombolas Plans and Resettlement Action Plans, and of Environmental Impact Assessment Report and Environmental Management Plan

Guidelines for Preparation of Indigenous Peoples and/or Quilombolas Plan”

Law no. 6.001 of 12/19/73, which discusses the Indian Statute, establishes the following definitions in article 3: - Indian: is any individual of pre-Colombian origin and descent who identifies himself/herself and is identified as belonging to an ethnic group whose cultural characteristics distinguish it from national society; and” - Indigenous Community or Tribal Group: is a set of Indian families or communities, either living in a state of complete isolation in relation to other sectors of the national community, or having intermittent or permanent contacts, but without being integrated in them. Art. 2 of Decree no 4.887 of 11/20/2003 states that “Remnants of quilombo communities, for purposes of this Decree, are considered to be ethnic-racial groups according to criteria of self- definition, with their own history, with specific land relationships, and with presumed black ancestry related to their resistance to the historic oppression suffered.” The state, upon submitting a partnership proposal that directly or indirectly affects an indigenous or quilombola area or community, should present a detailed report containing: - A social assessment with the breadth, depth, and type compatible with the nature and level of the proposed partnership and its potential positive or adverse effects on indigenous peoples or quilombolas; - Results of free, prior, and informed consultations with the affected communities in order to guarantee their consent, with planning that includes gender and intergenerational issues, as well as participation in all stages of preparation and implementation; - Indications of changes or adjustments made to the original partnership in terms of the indigenous issue, indicating those points where the recommendations from free consultations were incorporated and when partnership monitoring activities will be conducted by the affected communities. During the preparation of the Indigenous Peoples or Quilombolas Plan, the following should be considered as guidelines: - The preferences of indigenous or quilombola populations affected by the partnership should be taken into account; thus, they should be consulted through appropriate means (for example, public hearings or community meetings); - The partnership’s likely adverse effects should be foreseen, and the means to impede or mitigate them should be developed; - The institutions responsible for government linkage with indigenous or quilombola populations should have the necessary legal, social, and technical instruments to conduct

70 World Bank Operational Policy - OP 4.10 and Decree no4.887 dated 11/20/2003 or corresponding document. ” OP4.10 provides a broader definition of “indigenous people” that does not require descent from an autochthonous population. In case of conflicts, the Bank’s definition of “Indigenous People” shall prevail.

96 activities, and the arrangements implemented should be as simple as possible-these arrangements may involve existing institutions, local and nongovernmental organizations with experience in issues related to indigenous or quilombola populations; Indigenous patterns of social organization, religious beliefs, and resource use of indigenous or quilombola populations should be respected and integrated in the plan; - The activities performed should support production systems adapted to the needs and environment of indigenous or quilombola populations and help existing production systems to achieve sustainable levels; - The changes introduced should be compatible with the local indigenous or quilombola culture; - The creation or deepening of dependence by indigenous or quilombola populations’ on government and/or partnership agencies should be avoided; - Successful prior experiences or knowledge of the indigenous or quilombo area that will be the subject of interaction with the partnership should be considered. The plans may include activities related to health and nutrition, productive infrastructure, linguistic and cultural preservation, land ownership, and education. The plans should contain: - Legal framework; - Description of current situation; - Land tenure status; - Strategy for local involvement and participation; - Technical identification of development or mitigation activities; - Institutional capacity; - Implementationtimetable; - Evaluation and monitoring; - Cost estimate and financing plan. The Indigenous Peoples or Quilombola Plan will be subject prior review by the World Bank and, as appropriate, by the National Indian Foundation (FUNAI) or by Ministry of Culture, through the Palmares Cultural Foundation. Guidelines for Preparation of Resettlement Action

Resettlement occurs when people are obliged to move from their current homes or places of businesses by activities caused by the implementation of partnerships. If there is no taking of land, the Bank’s resettlement policy (OP/BP4.12) does not formally apply. This does not preclude or prevent the need for taking action if project implementation involves significant disruption of social life or loss of livelihood. In the case of the establishment of a protected area involving the loss of access to an important resource on which the population relies, Bank Policy (OP/BP4.12) requires the formulation of a Process Framework to be negotiated with the affected people. The contents and level of detail of the Resettlement Action Plan may vary, depending on the circumstances and magnitude of the resettlement. However, the plan should necessarily

72 World Bank Operational Policy - OP 4.12

97 include the establishment of objectives and policies, planning principles, an executive summary, and the following topics: - Legal framework; - Organizational responsibilities; - Institutional arrangements; Household census of affected families and businesses -- Socioeconomic analysis; Community participation and integration with the beneficiary population; thus, they should be consulted through appropriate means (for example, public hearings or community meetings); Mechanisms for affected populations to appeal decisions; Eligibility criteria for compensation; Selection of location and alternative sites; Assessment of and compensation for lost assets; Land ownership, acquisition, titling, and transfers; Access to training, employment, and credits; Shelter, infrastructure, and social services; Environmental protection and management; Timetable of implementation, monitoring, and evaluation coordinated with partnership execution; Estimated cost and financing plan.

The Resettlement Action Plan will be reviewed by ad hoc expert consultants (social, technical, and legal specialists) and will be subject to prior review by the World Bank.

Guidelines for Preparation of Environmental Impact Assessment Report and Environmental Management Plan”

The scope and level of detail of the Environmental Impact Assessment Report (requested for Category A partnerships) should be in accordance with the partnership’s potential impacts. The report should include at least the following items: a) Executive summary; b) Administrative, legal, and political structure: present the administrative, legal, and political aspects that the environmental analysis should consider; c) Project description: concisely describe the partnership (a map showing the partnership’s location and its area of influence is normally included); d) Basic data: information on current and proposed activities within the partnership area but not directly related to the partnership, indicating the accuracy and

73 World Bank Operational Policy - OP 4.01

98 reliability of data sources; Where published sources are not available, the partnership proponent will need to support field studies to collect basic data on environmental conditions; Environmental impacts: predict and evaluate the partnership’s probable adverse and positive impacts, in quantitative terms if possible. Identify mitigation measures and any residual adverse impact that cannot be mitigated. Explore opportunities for environmental improvement; Analysis of alternatives: compare feasible alternatives for the location, technology and implementation, including (if appropriate) the “without partnership” situation, in terms of its potential adverse impacts; the feasibility of mitigation; its costs; its adjustment to local conditions; and institutional, training, and monitoring requirements; and g) Environmental Management Plan: address mitigation measures, monitoring, and institutional strengthening. The Environmental Management Plan74consists of a series of institutional, mitigation, and monitoring measurements to be undertaken during partnership implementation to avoid adverse environmental and social impacts, compensate for them, or reduce them to acceptable levels. The plan also includes actions needed to implement these measures.

More specifically, the Environmental Management Plan includes the following components: a) Diagnostic studies to assess baseline conditions prior to project implementation. b) Mitigation: identifies feasible, cost-effective measures that can reduce potentially adverse, significant environmental impacts to acceptable levels. It may also include compensatory measures if mitigation measures are not feasible, cost-effective, or sufficient; c) Monitoring: provides information on the partnership’s environmental impacts and the effectiveness of mitigation measures; d) Institutional capacity: provides a specific description of the institutional arrangements responsible for the conduction and monitoring of mitigation measures; and e) Implementation timetable and cost estimates: provide a physical-financial timetable for the other three aspects (mitigation, monitoring, and institutional development) that are components of the management plan.

74 The preparation of the Impact Assessment Report and the Environmental Management Plan may be requested for Category B projects, if there is a need for environmental protection measures.

99 Annex 11: Project Preparation and Supervision

Planned Actual PCN review 11/05/2007 Initial PID to PIC 04/09/200 8 04/09/2008 Initial ISDS to PIC 04/0 1/2008 0410 1/2008 Appraisal 04/17/2008 Negotiations 05/26/2009 Board/RVP approval 08/06/2009 Planned date of effectiveness 08/12/2009 Planned date of mid-term review 08/16/2010 Planned closing date 0811 0/20 12 Key institutions responsible for preparation of the project: Ministry of Environment of Brazil (MMA) Bank staff and consultants who worked on the project included: Name Title Unit Renan Poveda Sr. Environmental Specialist - TTL LCSEN Adriana Moreira Sr. Environmental Specialist - TTL LCSEN Daniel Gross Consultant LCSEN Andrea Semaan Consultant LCSEN Nicolas Drossos Financial Management Specialist LCSFM Isabella Micali-Drossos Sr. Counsel LEGLA Federico Rabello Procurement Specialist LCSPT Mark Lundell Sector Leader LCSSD Gar0 Batmanian Sr. Environmental Specialist LCSEN Paula Freitas Operations Analyst LCSEN Hugo Rosa Junior Professional Associate LCSEN Gunars Platais Sr. Environmental Economist LCSEN Albert0 Ninio Lead Counsel LEGEN Daniella Arruda Program Assistant LCC5C Claudia Sobrevila Peer Reviewer ENV Nadim Khouri Peer Reviewer ARD Glenn Morgan Peer Reviewer LCSEN Marta Irving Consultant IBRD Monica Port0 Consultant IBRD Bank funds expended to date on, project preparation: 1. Bank resources: US$205,100 2. Trust funds: US$ 0 3. Total: US$ 205,100 1. Estimated Approval and Supervision costs: US$164,900 2. Remaining costs to approval: US$ 76,900 3. Estimated annual supervision cost: US$ 88,000

100 Annex 12: Documents in the Project File

Project Documents:

0 PCN, PID, ISDS, Aide Memoires, BTORs, Minutes.

0 Implementation Completion Report for the Brazil - Second National Environmental Project (Phase 1).

Key Documents Provided by GOB:

0 Manual da componente Coordenaqiio, Articulaqgo e Comunicaqiio do PNMA I1Fase 2.

0 Instrumentos Econamicos para a Gestiio Ambiental do PNMA I1Fase 2.

0 Documento Salvaguardas PNMA I1Fase 2.

0 Manual de Ativos Ambientais do PNMA I1 Fase 2.

0 Manual de Monitoramento Ambiental do PNMA I1 Fase 2.

0 Manual de Subcomponente de Licenciamento Ambiental do PNMA I1 Fase 2.

101 Annex 13: Statement of Loans and Credits

Difference between expected and actual Original Amount in US$ Millions disbursements Project ID FY Purpose IBRD IDA SF GEF Cancel. Undisb. Orig. Frm. Rev'd PI 1 I996 2010 BR RJ Mass Transit II 211.70 0.00 0.00 0.00 0.00 211.70 0 00 0.00 PI 06663 2010 BR Sa0 Paul0 Feeder Roads Project 166.65 0.00 0.00 0.00 0.00 166.65 0 00 0.00 PO06553 2010 BR SP APL Integrated Wtr Mgmt 104.00 0.00 0.00 0.00 0.00 104.00 0 00 0.00 PI 06208 2009 BR Pernambuco Educ Results& Account. 154.00 0.00 0.00 0.00 0.00 154.00 0 00 0.00 PI 04752 2009 BR Paraiba 2nd Rural Pov Reduction 20.90 0.00 0.00 0.00 0.00 20.90 0 00 0.00 PO99369 2009 BR Ceara Regional Development 46.00 0.00 0.00 0.00 0.00 46.00 0 00 0.00 PO95205 2009 BR 1st Prog. DPL for Sust. Env Mgmt 1,300.00 0.00 0.00 0.00 0.00 1,300.00 0 80 0.00 PO943 15 2009 BR Municipal APL4: Sao Luis 35.64 0.00 0.00 0.00 0.00 33.49 -1 97 0.00 PO88716 2009 BR Health Network Formation & Quality 235.00 0.00 0.00 0.00 0.00 235.00 0 00 0.00 Im PI 10614 2009 BR: Sergipe State Int. Proj.: Rural Pov 20.80 0.00 0.00 0.00 0.00 20.75 2 00 0.00 PI 07843 2009 BR Fed District Multisector Manag. Proj. 130.00 0.00 0.00 0.00 0.00 130.00 0 00 0.00 PI07146 2009 BR Acre Social Economic Inclusion Sust 120.00 0.00 0.00 0.00 0.00 104.00 -10 70 0.00 D P I06767 2009 BR RGS Fiscal Sustainability DPL 1,100.00 0.00 0.00 0.00 0.00 450.00 0 00 0.00 P I06765 2009 BR Ceara lnclusive Growth (SWAp II) 240.00 0.00 0.00 0.00 0.00 165.25 -74 15 0.00 PO89929 2008 BR RGN State Integrated Water Res Mgml 35.90 0.00 0.00 0.00 0.00 33.78 15 97 0.50 PO89013 2008 BR Municipal APL: Recife 32.76 0.00 0.00 0.00 0.00 32.76 7 19 0.00 PO94 199 2008 BR-(APL) RS (Pelotas) Integr. Mun. Dev. 54.38 0.00 0.00 0.00 0.00 42.91 -7 98 0.00 PO88966 2008 BR Municipal APL3: Teresina 31.13 0.00 0.00 0.00 0.00 28.68 -0 37 0.00 PI06038 2008 BR Sao Paulo Trains and Signalling 550.00 0.00 0.00 0.00 0.00 375.06 -22 97 0.00 PO83997 2008 BR Alto Solimoes Basic Services and Sust 24.25 0.00 0.00 0.00 0.00 23.21 2 40 0.00 PO95626 2008 BR (APL2)Family Health Extension 2nd 83.45 0.00 0.00 0.00 0.00 83.45 1035 0.00 APL PI01324 2008 BR-Second Minas Gerais Dev't 976.00 0.00 0.00 0.00 0.00 470.06 -503 50 0.00 PArtnership PO95460 2007 BR-Bahia Integr.Hway Mngmt. 100.00 0.00 0.00 0.00 0.00 95.00 12 20 0.00 PO89793 2007 BR State Pension Reform TAL 11 5.00 0.00 0.00 0.00 0.00 4.99 2 50 0.25 PO8901 I 2007 BR Municipal APLI: Uberaba 17.27 0.00 0.00 0.00 0.00 15.60 9 38 0.00 PO8265 1 2007 BR APL 1 Para Integrated Rural Dev 60.00 0.00 0.00 0.00 0.00 56.14 42 14 0.00 PO8 1436 2006 BR-Bahia Poor Urban Areas Integrated 49.30 0.00 0.00 0.00 0.00 42.66 42 66 0.00 Dev PO82523 2006 BR HD Technical Assistance Loan 8.00 0.00 0.00 0.00 0.00 2.31 2 31 0.00 PO52256 2006 BR-MG Rural Poverty Reduction 35.00 0.00 0.00 0.00 0.00 0.96 -4 49 0.00 PO50761 2006 BR-Housing Sector TAL 4.00 0.00 0.00 0.00 2.70 1.27 3 47 0.00 PO93787 2006 BR Bahia State Integ Proj Rur Pov 54.35 0.00 0.00 0.00 0.00 2.64 -2 33 0.00 PO92990 2006 BR - Road Transport Project 501.25 0.00 0.00 0.00 0.00 309.01 254 26 152.76 PO89440 2006 BR-Brasilia Environmentally Sustainable 57.64 0.00 0.00 0.00 0.00 29.76 24 00 0.00 PO9004 I 2006 BR ENVIRONMENTAL SUST. 8.00 0.00 0.00 0.00 0.00 5.25 5 17 0.00 AGENDA TAL PO69934 2005 BR-PERNAMBUCO INTEG DEVT: 3 1 SO 0.00 0.00 0.00 0.00 9.88 9 88 0.00 EDUC QUAL IMPR

102 PO76924 2005 BR- Amapa Sustainable Communities 4.80 0.00 0.00 0.00 0.00 2.78 2.78 0.00 PO877 I 1 2005 BR Espirito Santo Wtr & Coastal Pollu 107.50 0.00 0.00 0.00 0.00 71.50 0.00 0.00 PO83533 2005 BR TA-Sustain. & Equit Growth 12.12 0.00 0.00 0.00 0.00 8.52 8.52 0.00 PO83013 2004 BR Disease Surveillance & Control APL 2 99.50 0.00 0.00 0.00 0.00 22.54 23.04 0.00 PO60573 2004 BR Tocantins Sustainable Regional Dev 60.00 0.00 0.00 0.00 0.00 21.91 21.91 21.91 PO87713 2004 BR Bolsa Familia 1st APL 572.20 0.00 0.00 0.00 4.36 8.67 13.03 0.00 PO74777 2003 BR-Municipal Pension Reform TAL 5.00 0.00 0.00 0.00 0.00 1.80 1.80 -0.1 1 PO76977 2003 BR-Energy Sector TA Project 12.12 0.00 0.00 0.00 0.00 7.43 7.43 0.00 PO49265 2003 BR-RECIFE URBAN UPGRADING 46.00 0.00 0.00 0.00 0.00 11.98 11.98 11.98 PROJECT PO541 19 2003 BR BAHIA DEVT (HEALTH ) 30.00 0.00 0.00 0.00 0.00 5.02 5.02 0.00 PO5 I696 2002 BR SA0 PAUL0 METRO LINE 4 304.00 0.00 0.00 0.00 0.00 71.56 -23.20 -23.20 PROJECT PO60221 2002 BR FORTALEZA METROPOLITAN 85.00 0.00 0.00 0.00 62.60 12.38 69.54 17.83 TRANSPORT PROJ PO661 70 2002 BR-RGN Rural Poverty Reduction 45.00 0.00 0.00 0.00 0.00 21.77 -0.68 17.32 PO50881 2001 BR BR-PIAUI RURAL POVERTY 45.00 0.00 0.00 0.00 0.00 11.89 -10.61 11.89 REDUCTION PO50880 200 1 BR Pernambuco Rural Poverty Reduction 60.10 0.00 0.00 0.00 0.63 11.05 -18.32 3.43 PO06449 2000 BR CEARA WTR MGT PROGERIRH 239.00 0.00 0.00 0.00 0.00 105.85 2.85 1.85 S IM PO38895 1998 BR FED.WTR MGT 248.00 0.00 0.00 0.00 63.00 22.75 35.87 35.87 Total 8,579.21 0.00 0.00 0.00 133.29 5,226.52 - 30.82 252.28

STATEMENT OF IFC's Held and Disbursed Portfolio In Millions of US Dollars Committed Disbursed IFC IFC FY Approval Company Loan Equity Quasi Partic. Loan Equity Quasi Partic.

~~~ ABN AMRO REAL 98.00 0.00 0.00 0.00 15.77 0.00 0.00 0 00 2005 2005 ABN AMRO REAL 98.00 0.00 0.00 0.00 15.77 0 00 0.00 0 00 2001 AG Concession 0.00 30.00 0.00 0.00 0.00 30 00 0.00 0 00 2002 Amaggi 17.14 0.00 0.00 0.00 17.14 0 00 0.00 0 00 2005 Amaggi 30.00 0.00 0.00 0.00 30.00 0 00 0 00 0 00 2002 Andrade G. SA 22.00 0.00 10.00 12.12 22.00 0 00 10.00 12 12 2001 Apolo 6.04 0.00 0.00 0.00 3.54 0 00 0.00 0 00 I998 Arteb 20.00 0.00 0.00 18.33 20.00 0 00 0.00 I8 33 2006 BBM 49.40 0.00 0.00 0.00 49.40 0 00 0.00 0 00 2001 Brazil CGFund 0.00 19.75 0.00 0.00 0.00 18 15 0.00 0 00 2004 CGTF 54.01 0.00 7.00 65.12 54.01 0 00 7.00 65 12 I994 CHAF'ECO 10.00 0.00 0.00 0.00 10.00 0 00 0.00 0 00 1996 CHAPECO 1.50 0.00 0.00 5.26 1 SO 0 00 0.00 5 26 2003 CPFL Energia 0.00 40.00 0.00 0.00 0.00 40 00 0.00 0 00 1996 CTBC Telecom 3.00 8.00 0.00 0.00 3.00 8 00 0.00 0 00 1997 CTBC Telecom 0.00 6.54 0.00 0.00 0.00 6 54 0.00 0 00

103 1999 Cibrasec 0.00 3.27 0.00 0.00 0.00 3.27 0.00 0.00 2004 Comgas 1 1.90 0.00 0.00 1 1.54 11.90 0.00 0.00 11.54 2005 Cosan S.A. 50.00 5.00 15.00 0.00 50.00 5.00 15.00 0.00 Coteminas 0.00 1.84 0.00 0.00 0.00 1.84 0.00 0.00 1997 Coteminas 1.85 1.25 0.00 0.00 1.85 1.25 0.00 0.00 2000 Coteminas 0.00 0.18 0.00 0.00 0.00 0.18 0.00 0.00 I980 DENPASA 0.00 0.52 0.00 0.00 0.00 0.48 0.00 0.00 I992 DENPASA 0.00 0.06 0.00 0.00 0.00 0.06 0.00 0.00 Dixie Toga 0.00 0.34 0.00 0.00 0.00 0.34 0.00 0.00 1998 Dixie Toga 0.00 10.03 0.00 0.00 0.00 10.03 0.00 0.00 1997 Duratex 1.36 0.00 3.00 0.57 1.36 0.00 3.00 0.57 2005 EMBRAER 35.00 0.00 0.00 145.00 35.00 0.00 0.00 145.00 I999 Eliane 14.93 0.00 13.00 0.00 14.93 0.00 13.00 0.00 1998 Empesca 1.33 0.00 2.67 0.00 1.33 0.00 2.67 0.00 2006 Endesa Brasil 0.00 50.00 0.00 0.00 0.00 50.00 0.00 0.00 2006 Enerbrasil Ltda 0.00 5.50 0.00 0.00 0.00 0.00 0.00 0.00 2006 FEBR 12.00 0.00 0.00 0.00 12.00 0.00 0.00 0.00 2000 Fleury 0.00 0.00 6.00 0.00 0.00 0.00 6.00 0.00

1998 ' Fras-le 4.00 0.00 9.34 0.00 4.00 0.00 6.04 0.00 2006 GOL 50.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 2005 GP Capital Ill 0.00 14.00 0.00 0.00 0.00 0.14 0.00 0.00 GP Cptl Rstrctd 0.00 2.22 0.00 0.00 0.00 2.16 0.00 0.00 2001 GPC 0.00 0.00 9.00 0.00 0.00 0.00 9.00 0.00 GTFP BIC Banco 44.91 0.00 0.00 0.00 44.91 0.00 0.00 0.00 GTFP BM Brazil 4.22 0.00 0.00 0.00 4.22 0.00 0.00 0.00 GTFP lndusval 5.00 0.00 0.00 0.00 5.00 0.00 0.00 0.00 I997 Guilman-Amorim 18.08 0.00 0.00 14.37 18.08 0.00 0.00 14.37 I998 lcatu Equity 0.00 5.46 0.00 0.00 0.00 4.16 0.00 0.00 1999 lnnova SA 0.00 5.00 0.00 0.00 0.00 5.00 0.00 0.00 1980 lpiranga 0.00 2.87 0.00 0.00 0.00 2.87 0.00 0.00 1987 lpiranga 0.00 0.54 0.00 0.00 0.00 0.54 0.00 0.00 2006 Ipiranga 50.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 2006 ltambe 15.00 0.00 0 00 0.00 0.00 0.00 0.00 0.00 2000 Itau-BBA 12.86 0.00 0.00 0.00 12.86 0.00 0.00 0.00 2002 Itau-BBA 70.61 0.00 0.00 0.00 38.47 0.00 0.00 0.00 I999 JOSAPAR 7.57 0.00 7.00 0.00 2.57 0.00 7.00 0.00 2005 Lojas Americana 35.00 0.00 0.00 0.00 35.00 0.00 0.00 0.00 1992 MBR 0.00 0.00 10.00 0.00 0.00 0.00 10.00 0.00 2006 MRS 50.00 0.00 0.00 50.00 0.00 0.00 0.00 0.00 2002 Microinvest 0.00 I.25 0.00 0.00 0.00 0.82 0.00 0.00 Net Servicos 0.00 10.93 0.00 0.00 0.00 10.93 0.00 0.00 2002 Net Servicos 0.00 1.60 0.00 0.00 0.00 1.60 0.00 0.00 2005 Net Servicos 0.00 5.08 0.00 0.00 0.00 5.08 0.00 0.00 1994 Para Pigmentos 2.15 0.00 9.00 0.00 2.15 0.00 9.00 0.00 1994 Portobello 0.00 0.59 0.00 0.00 0.00 0.59 0.00 0.00 2000 Portobello 4.28 0.00 7.00 0.00 4.28 0.00 7.00 0.00 2002 Portobello 0.00 0.90 0.00 0.00 0.00 0.90 0.00 0.00 2000 Pura 0.00 0.00 1 .oo 0.00 0.00 0.00 I.oo 0.00 2003 Queiroz Galvao 26.67 0.00 10.00 0.00 26.67 0.00 10.00 0.00

104 2004 Queiroz Galvao 0.60 0.00 0.00 0.00 0.08 0.00 0.00 0.00 2006 RBSec 22.83 1.51 0.00 0.00 0.00 1.51 0.00 0.00 Randon Imp1 Part 2.33 0.00 3.00 0.00 2.33 0.00 3.00 0.00 1997 Sadia 2.55 0.00 2.33 3.28 2.55 0.00 2.33 3.28 1997 Samarco 3.60 0.00 0.00 0.00 3.60 0.00 0.00 0.00 1998 Saraiva 0.00 1.24 0.00 0.00 0.00 I.24 0.00 0.00 2000 Sepetiba 26.24 0.00 5.00 0.00 11.24 0.00 5.00 0.00 2002 Suape ICT 6.00 0.00 0.00 0.00 6.00 0.00 0.00 0.00 1999 Sudamerica 0.00 7.35 0.00 0.00 0.00 7.35 0.00 0.00 2006 Suzano petroq 50.00 0.00 10.00 140.00 39.50 0.00 10.00 110.50 2001 Synteko 11.57 0.00 0.00 0.00 11.57 0.00 0.00 0.00 2006 TAM 50.00 0.00 0.00 0.00 17.00 0.00 0.00 0.00 1998 Tecon Rio Grande 3.55 0.00 5.50 3.71 3.55 0.00 5.50 3.71 2004 Tecon Rio Grande 7.87 0.00 0.00 7.76 7.59 0.00 0.00 7.48 2001 Tecon Salvador 2.95 1 .oo 0.00 3.10 2.95 0.77 0.00 3.10 2003 Tecon Salvador 0.00 0.55 0.00 0.00 0 00 0.55 0.00 0.00 2004 TriBanco 10.00 0.00 0.00 .o.oo 10.00 0.00 0.00 0.00 2006 TriBanco 0.35 0.00 0.00 0.00 0.35 0.00 0.00 0.00 2002 UP Offshore 9.01 9.51 0.00 23.29 0 00 2.51 0.00 0.00 2002 Unibanco 16.89 0.00 0.00 0.00 16.89 0.00 0.00 0.00 Total portfolio: 1,164.15 253.88 144.84 503.45 703.91 223.86 141.54 400.38

Approvals Pending Commitment FY Approval Company Loan Equity Quasi Partic 2000 BBA 0.01 0.00 0.00 0.00 I999 Cibrasec 0 00 0.00 0.00 0.00 2006 lpiranga II 0.00 0.00 0.00 0.10 2002 Banco Itau-BBA 0.00 0.00 0.00 0.10 Total pending commitment: 0.01 0.00 0.00 0.20

105 Annex 14: Country at a Glance

Brazil at a dance 9/24/08

Latin upper. POVERTY and SOCIAL America mlddle- >evelopment diamond. Brazll h Carib. Income 2007 Population mid-year (millions) 191 6 583 823 I GNI per capita (Atlas method US$) 5 910 5,540 6,987 Life expectancy I GNI (Atlas method US$ billions) 1,1330 3,118 5,750 Average annual arowth, 200147 Population 6) 13 1.3 0.7 GNI Gross Labor fwca (96) 18 2.1 13 per pnmw Most recent estimate (latest year avallable, 200147) capita enrollment Poverty (% of pODulation below national poverty line) 22 Urban population (96 of total population) 85 78 75 Life expectancy at birth (wars) 72 73 71 Infant mortalitv (Der 1 W01ive births) I9 22 22 Child malnutntion (% ofchildren under5) 4 5 Access to improved water source Access to an improved water sourca (% of population) 91 91 95 Literacy f% ofpopulation am 15+) 89 90 93 *_"* Gross pnmary enrollment f% of school-age population) 137 118 111 Brazil Male 141 120 112 . Upper-middle-incomegroup Female 133 116 108 I KEY ECONOMIC RATIOS and LONG-TERM TRENDS

1987 1997 2006 2007 iconomic ratios' GDP (US$ billions) 294 1 871 2 10678 13142 Gross capital formatiotVGDP 22 3 17 4 168 22 1 Trade Exports of goods and servicaslGDP 95 68 147 129 Gross domestic savingslGDP 25 6 15 2 197 243 Gross national savingslGDP 21 8 13 6 173 222 1 Curent account balancalGDP -0 5 -3 5 13 04 Domest ic Capital Interest DaymentslGDP 21 12 12 savings formation Total debWGDP 40 8 22 8 18 2 Total debt se~yicB/exporis 41 7 62 5 38 0 Present value of debWGDP 20 7 Present value of debtlexports 1352 Indebtedness 1987-97 199747 2006 2007 2007-11 (average annual growth) GDP 19 28 37 54 45 -'-Brazil GDP Der capita 03 13 24 42 37 _- Upper-middle-incomegroup Ewrts of qwds and services 57 93 46 35 32

STRUCTURE of the ECONOMY 1987 1997 2006 2;; (% of GDP) Agnculture 100 54 51 Industry 459 26 1 309 306 Manufactunnq 320 167 184 175 services 441 685 640 645 Household final consumption expenditure 623 649 604 477 General gov t final consumption expenditure 122 199 199 280 Imports of goods and sewices 62 90 117 107

1987-97 1997-07 2006 2007 Growth of export6 and Imports (*A) (average annual growth) 1 Agnculture 21 42 41 15 Industry 09 23 27 55 Manufactunng 32 24 16 55 services 31 37 41 67 Household final consumption expenditure 36 19 47 -29 General oov't final consumption expenditure 08 25 36 22 Gross capital formation 18 21 87 407 m---E~~~lts -D'lirprts Imports of qoods and services 140 27 181 132

Note 2007 data are preliminary estimates This table was producedfrom the Development Economics LDB database * The diamonds show four key indicators in the country (in bold) compared with its incomegroup average If data are missing the diamond will be incomplete

106 PRICES and GOVERNMENT FiNANCE 1987 1997 2006 2007 inflation (Oh) Domestlc prices (% change) 2o T I Consumer prices 228.3 5.2 8.9 5.1 Implicit GDP deflator 204.1 7.7 4.3 4.5 Government finance (X of GDP, includes cumnf grants) 0- Current revenue 10.4 17.1 .. 36.5 Current budget balance -1.4 0.1 -3.2 -GDP deflator 'O'CPI Overall surplus/deflcit -2.8 2.4 -2.8

TRADE 1987 1997 2006 2007 Export and import ieveio (US$ miii.) (US$ millions) Total exports (fob) 26,225 43,674 127,305 148,324 iron ore, manganese 1,718 2,846 .. 11,629 -1 Soybeans 2,325 2,452 .. 8,030 150 ow Manufactures 14,331 29,199 79,904 75,323 Total imports (cif) 15,053 59,747 96,835 107,941 tooow

Food 500 2,463 .. 2,055 50 OW Fuel and energy 4,674 5,597 .. 18,345 Capital goods 3,958 16,098 49,003 28,179 0 01 02 03 04 05 Export price index (2000=100) 62 113 106 110 Import price index (2000=100) 42 113 89 91 Exports Imports Terms of trade (2000=100) 193 100 120 121

BALANCE of PAYMENTS 1987 1997 2006 2007 Current account balance to GDP (Oh) (US$ millions) Exports of goods and services 28,073 59,870 156,908 166,002 Imports of goods and services 17,749 77,269 120,243 139,394 Resource balance 10,324 -17,399 36,665 28,608 T Net income -11,699 -14,876 -27,489 -23,812 Net current transfers -43 1,823 4,307 -135 Current account balance -1,416 -30,452 13,621 4,661 Financing items (net) 3,583 22,201 18,419 78,199 Changes in net reserves -2,165 8,251 -32,040 -82.860 Memo: Reserves including gold (US$ millions) 7,458 52,173 85,839 169,445 Conversion rate (DEC, /oca//US$) 1.43E-8 1.1 2.2 1.9

EXTERNAL DEBT and RESOURCE FLOWS 1987 1997 2006 2007 :omposition of 2006 debt (US$ miii.) (US$ millions) Total debt outstanding and disbursed 119,842 198,457 194,150 iBRD 9,384 5,743 9,694 9,676 A 9,684 IDA 0 0 0 0 Total debt service 11,957 41,243 62,145 iBRD 1,555 1,428 1,174 1,353 IDA 0 0 0 0 Composition of net resource flows Official grants 35 83 93 Official creditors 36 -1,186 -401 Private creditors -705 16,415 6,197 Foreign direct investment (net inflows) 1,169 19,650 18,782 Porlfoiio equity (net inflows) 61 5,099 7,716 F 148521 World Bank program Commitments 1,394 1,104 1,557 1,365 \ - IBRD E - Bilateral Disbursements 915 1,416 2,203 606 I. IDA D - Other multilateral F - Private Principal repayments 867 1,049 743 805 > - IMF G . Short-terr Net flows 48 368 1,460 -199 Interest payments 688 380 432 548 Net transfers -641 -12 1,028 -747

Note: This table was produced from the Development Economics LDB database. 9/24/08

107

To Ciudad Guayana 70°W 60°W 50°W 40°W R.B. DE GUYANA VENEZUELA French Guiana BRAZIL O SURINAME (Fr.) r i n ATLANTIC COLOMBIA oco Boa VVistaista OCEAN AMAPAMAPÁÁ STATE CAPITALS RORAIMA NATIONAL CAPITAL MacapMacapáá 0° 0° RIVERS N eg zon ro ma A BelémBelém MAIN ROADS Amazon São Luís A m Manaus RAILROADS az s o jó n a Fortaleza ira p STATE BOUNDARIES e Ta ad M MARANHMARANHÃOÃO TTeresinaeresina INTERNATIONAL BOUNDARIES Basin CEARCEARÁÁ RIO GRANDE AMAZONAS PPARÁARÁ DO NORTENORTE Natal

T e s l u u es ur g P n P i PARAÍBAPARAÍBA João i r X e PIAUI s s Pessoa PorPortoto VVelhoelho n i PERNAMBUCO t n Recife

a

ACRE c

o

T a Maceió i o Rio Branco a Palma sc u i ° a c 10 S g ALAGOAS RONDÔNIARONDÔNIA n n a e a r r u TOCANTINS F r A Aracaju

u o

J ã BAHIA SERGIPE MAMATOTO S PERU GROSSO Mato Grosso Brazilian Salvador Plateau CuiabCuiabáá FF.D..D. BRASBRASÍLIAÍLIA BOLIVIA GOIAS GoiGoiâniaânia MINAS GERAIS

To Highlands PACIFIC Santa Cruz Belo MATOMATO GROSSO ESPESPÍRITOÍRITO Grande Horizonte OCEAN CHILE P DO SUL SANTO a

r a 20°S g Campo 20°S

u

a VitóriaVitória y Grande To Santa Cruz SÃOSÃO PAULOPAULO ná ra a P RIO DE PARAGUAY SãoSão Paulo Rio de JANEIRO Janeiro PPARANÁARANÁ ATLANTIC Curitaba BRAZIL OCEAN STSTAA CACATARINATARINA Florianópolis

RIO GRANDE DO SUL PorPortoto Alegre

SEPTEMBER 2004 0 200 400 600 Kilometers 30°S 30°S ARGENTINA IBRD 33377 This map was produced by the Map Design Unit of The World Bank. To Buenos Aires 0 200 400 Miles The boundaries, colors, denominations and any other information URUGUAY 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 70°W 60°W 50°W 40°W endorsement or acceptance of such boundaries. To Montevideo