Documentof The World Bank FOR OFFICIAL USE ONLY Public Disclosure Authorized Report No. P-5051-BR MEMORANDUMAND RECOMMENDATION OF THE PRESIDENTOF THE INTERNATIONALBANK FOR RECONSTRUCTIONAND DEVELOPMENT Public Disclosure Authorized TO THE EXECUTIVEDIRECTORS ON A PROPOSEDLOAN IN AN AMOUNTEQUIVALENT TO USlOO MILLION TO THE STATEOF PARANA Public Disclosure Authorized WITH THr GUARANTEEOF THE FEDERATIVEREPUBLIC OF BRAZIL FO[. A MUNICIPALDEVELOPMENT PROJECT IN THE STATEOF PARANA MAY22, 1989 Public Disclosure Authorized 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 disclosedwithout World Bank authorization. BRAZIL MUNICIPAL DEVELOPMENT PROJECT IN THE STATE OF PARANA Currency Equivalents March 3, 1989 Currency Unit = Cruzado Novo (NCz$) US$ lI = NCz$ 1 NCz$ 1 = US$ 1 Fiscal Year January 1 - December 31 Weights and Measures 1 meter (m) - 3.28 feet (ft) 1 kilomieter (km) = 0.62 mile (mi) 1 square kilometer (km2) = 0.386 square mil (sq mi) 1 metric tonne (t) = 2200 pounds List of Acronyms BANESTADO Parana State Bank CEF Federal Economic Fund COHAPAR Parana State Low.Income Housing Company CPO Central Project Office (of FAMEPAR) FAMEPAR Foundation for the Assistance of Municipalities of the State of Parana FAP (Municipal) Financial Action Plan FDU Urban Development Fund (of Parana State) ICM Merchandize Circulation (Sales) Tax PCU The Project Coordination Unit in SEDU PEDU State Urban Development Program (Parana) PLANASA National Sanitation Plan PR The State of Parana PRAM Parana Market Towns Improvement Project (Loan 2343-BR) RPO Regional Project Office (of FAMEPAR) SANEPAR Parana State Water Company SEDU State Secretariat of Urban Development SUCEAM State Secretariat for Erosion and Environmental Sanitation SUREHMA Parana's Agency for Environmental Protection FOR OFmFCIALUSE ONLY BL\Z~T- MUNICIPAL :ZVEL0?METPpROJEC t 'A STATE OF PARANA Loan and Prot_c s1smary Borrower: The State of Parana. Guarantor: The Federative Republic of Bra:il. Beneficiaries: About 318 municipalities,plus SANEPAR,the State water company and COHAPAR. the-State low-incomehousing company. Executing Agency: Foundation for the Assistance of Municipalitiesin the State of Parana (FAMEPAR). Amount: US$100.0 million equivalert. Terms: Repayment in 15 years. including five years of grace. with interest at the Bank's standard variable rate. Onlending Terms: About 92Z of the Bank loan, plus about 74Z of the State's counterpart contribution,would be on-lent to sub-borrowers throughthe State's Urban DevelopmentFund (FDU), operated by BANESTADO, the State Bank. Sub-loanswould be made for terms of 5, 10 and 15 years,with one year of grace, at an inflation- adjustedvariable interest rate (currently11Z p.a.), at least 3 percentagepoints higher than the Fund's borrowingcost, to cover exchange risk and administrativecosts. Financing Plan: US$ millions Bank 100.0 State of Parana 67.4 Sub-borrowers 59.5 Total 226.9 Return on - Investments: 17.1Z, using revenuesand increasedland values as a proxy for benefits. Staff Appraisal Report: 7715-BR, dated May 22, 1989. This documenthas a restricteddistribution and may be used by recipientsonly in the performance of their officialduties. Its contents may not otherwisebe disclosedwithout World Bank authorization. MEMORANDUHAND RECOMMENDATIONOF THE PRESIDENT OF THE INTERNATIONALBANK FOR RECONSTRUCTIONAND DEVELOPMENT TO THE EXECUTIVE DIRECTORS ON A PROPOSED LOAN TO THE STATE OF PARANA WITH THE GUARANrEE OF THE FEDERATIVE REPUBLIC OF BRAZIL FOR A MUNICIPAL DEVELOPMENTPROJECT IN THE STATE OF PARANA 1. The followingmemorandum and recommendationon a proposed loan to the State of Parana for US$100.0million equivalentis submittedfor approval. The proposed loan would be repaid overi1S years, includingfive years of grace, at the Bank's standard variable interest rate. The loan would help finance municipal infrastructureinvestments in the State. 2. Backaround The rates of urban populationgrowth and household formation in Brazil were very high during the 19708 (4.42..and5.72, respectively,per annum). Althoughthis trend has peaked,over the 1986-95period urban households are still projectedto increaseby 3.7? per annum to a total of 32.7 million by 1995, or almost twice the 1980 total. Parana'sown urbanizationtrend was even more intensivethan for Brazilas a whole (6.02p.a. for populationand 7.32 p.a. for householdsduring 1970-1980),and projectionsshow an annual rate of urban household formation of 5.4Z over the 1986-95 period, generating 0.8 million additionalhouseholds by 1995, equivalentto 60? of today's State total. 3. Meeting the growing demand for urban services will be the major sector challenge for the State in the forthcomingdecade, a task made more difficult by the dramatic increase in urban poverty caused by the combipationof rapid urban growth and the slowingof the national economy. In 1985, the proportion of the total populationwith incomesbelow the povertyline (definedas less than five minimum salariesper family) in the metropolitanregion of Curitiba, the capital of Parana,was 21.52 (up from only 6.0 in 1981), and deficits of basic urban infrastructure and services, mainly affecting the urban poor, are high in Parana. In 1985, 43.32 of urban households in the State had only rudimentary sanitary facilities; about one-third burned, buried or discarded their garbage in vacant lots or in drainage systems.- Hospital and other hazardous wastes are not always separated from regular garbage. Even for water supply, where the efforts of the public sector have been greatest, more than 235,000 urban households (19.3?) in 1984 had no piped water and had to draw water from public standpipes,wells or rivers. 4. Municipalities-,whose powers to plan and administerurban developmentwere constrainedduring the military dictatorship(1964-1985), gained considerable responsibilitieswith the new Constitution,promalgated October 5, 1988. These responsibilities include provision of such services as basic sanitation, water supply, education, primary and secondary education and health care. Municipalities may either operate these services themselves or delegate them to a higher level of government (as was done for water and sewerage under the National Sanitation Plan, or PLANASA). At the same time, municipalitieshave been awarded greater financial resources to pay for these services, through direct taxation and increased revenue-sharing.It has been estimatedthat the fiscal arrangements of the new Constitution will increase the revenues of Parana's municipalities by between 302 and 40?, with much of the gain being made in the next two years as t e reform takes effect. Municipalitieswill rely on 2 State sector agencies for guidancein carryingout these responsibilities.The Secretariatfor Urban Developmentand Environment(SEDU) is in charge of overall urban developmentpolicy. Within SEDU are FAMEPAR,the Foundationfor Assistance to Municipalities, SANEPAR, the State water company, SUCEAM, the State Secretariatfor Erosionand EnvironmentalSanitation, and COHAPAR,the State Low- Income Housing Company. These agencies are competent,but will require some institutional strengthening. With the reduction in many Federal poverty programs, assistance to the poor in basic sanitation, housing and urban transportationwill increasinglybe implemented by sub-national (State and municipal)governments, making it possibleto introduceredistribution policies and strategiesat this level and adjust the tendencyto subsidizehigher income groups noted in previous Bank studies. 5. The main sector issues are to: (a) develop and implement a coherent, sustainable "core" program to improve overall urban sector policies in an integratedapproach focused on the municipalityas the primaryagent for economic development;(b) continue to address sector constraintsin basic sanitation, low-income housing and urban transportation; and (c) deal with serious environmentalproblems. The State's program to accomplish this should: (a) increasemobilization of local resources;tb) improvethe efficiencyof resource allocation;(c) strengthenthe institutionsdealing with rapid urbanization;(d) improve targetingof benefits to low-incomepopulations; and (e) contributeto reducing fiscal deficits. 6. Rationale for Bank Involvement The Bank's assistancestrategy to Brazil is to supportpolicies and investmentsthat will encourageeconomic growth and social developmentin a contextof macroeconomicstability, with an emphasison efficient resource allocation and administrationin the public sector, and appropriatetargeting and deliveryof supportsystems to the poor. The proposed project-is fully consistentwith these longer-termdevelopment goals, in its targeting of economically efficient investments to mainly low-income beneficiaries. In the shorter-term,the Bank's assistance would help to strengthen municipalities'institutional capacities and promote investment planning on the basis of sound financial policy, at this critical point of increasedresponsibilities and resources. The Bank's previousexperience ir. the sector,in particularwith the ParanaMarket Towns Project,or PRAM, (Loan-2343- BR) and the Santa Catarina Project (Loan 2623-BR), provides a basis for continuing the momentum in the sector, and transferringlessons learned in project design and implementation.These projects resultedin a rapid transfer of knowledgeand have pro-videdan institutionalmemory for the sector. 7. ProlectObjectives The main objectiveof this project is