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Results Briefs October 1, 2018

An Adjusting Partnership: World Bank Group Support to Brazil 2011-2018

Brazil is the largest country in the LAC region (8.52 million square kilometers), with a GNI per capita of US$14,810 and with a population of 207 million (2016). Over the past decade Brazil experienced an unprecedented reduction in poverty and inequality. A favorable external environment, credit-fueled consumption, an expanding labor force and an expansion of social programs contributed to fast economic and social progress between 2001 and 2015, when 24.2 million Brazilians escaped poverty. Brazil also experienced a rapid decline in inequality over the past decade, with the Gini coefficient of household incomes falling from 0.59 to 0.51. During FY12-15, Brazil was one of the largest borrowers of the World Bank Group, with a total of US$17.5 billion invested during these four years. After 2015, with the onset of the economic crisis and given limited fiscal space for new investments, IBRD lending has declined to around US$500 million per annum and the program has shifted instead on building the knowledge foundations for supporting an adjustment in Brazil’s growth model and in the WBG’s engagement to support it. IFC has continued to invest around US$1.5 billion per year, although with a shifting profile of clients.

Challenge

Over the past four years, structural constraints on growth have become binding. Previous fiscal expansion during the Golden Decade together with the far reaching Lava Jato  corruption scandal have undermined investor confidence and the resulting deep recession made it clear that Brazil could not sustain its past social gains without changes to its growth model. Recent analysis shows that Brazil faces three core challenges. The first is the large fiscal disequilibrium that has developed since 2012 and that now poses an imminent threat to the resumption of growth and the maintenance of macroeconomic stability. The second is the absence of sustained growth in productivity, which puts future increases in per capita incomes at risk because of a projected reduction in the growth of the country’s labor force. The third challenge is that Brazil’s state increasingly struggles to deliver its basic tasks despite of a large economic footprint. A growing violence epidemic, stagnation in education outcomes, and the failure to connect millions of Brazilians to sanitation services are just some of the symptoms of state failures that will require fundamental changes in governance.  

Approach

The Bank has been at the forefront of supporting Brazil’s efforts towards poverty reduction and reducing inequalities. As such, the FY12-FY17 Country Partnership Strategy was designed to support Brazil’s efforts to eradicate poverty and to become a more prosperous and inclusive country. It aimed to do so by supporting activities to achieve four strategic objectives: i) increase the efficiency of public and private investments; ii) improve the quality and expand the provision of public services for low-income households; iii) promote regional economic development; and iv) improve sustainable natural resource management and climate resilience. The focus towards eliminating poverty and promoting shared prosperity and inclusion was done both through the content of operations and an effective shift of operations to poorer regions, especially in the North East and remote regions in the North West of the country. Furthermore, Brazil has been also at the forefront of trying new innovative approaches and sharing these innovations and experiences through a Bank supported South-South learning and exchange program.

The challenges exposed with the onset of the crisis in 2015 informed the readjustment and design of the new program for Brazil. It had become clear that the unsustainable nature of public spending commitments in the face of low growth and public sector inefficiencies created huge fiscal pressures that put macroeconomic stability at risk. It had also become clear that Brazil would have to improve the way public resources are allocated and overcome vested interests that militate against the reduction of rents, as well as combine public transfers to the poor with stronger incentives for private investment and harness the power of market competition to encourage innovation.

In this context, the FY18-FY23 Country Partnership Framework was designed to focus on three areas: (i) fiscal consolidation and government effectiveness; (ii) private sector investment and productivity growth; and (iii) inclusive and sustainable development. The partnership focuses particularly on leveraging private sector investment, improving the efficiency and targeting of public spending and realizing Brazil’s green growth potential. Innovation remains at the heart of partnership, through a combination of new and traditional financial support instruments, analytical work and advocacy. The analytical work in particular has shifted towards addressing Brazil’s structural constraints through work on fiscal policy including taxes, pensions, payroll, subsidies, fiscal rules and the subnational debt crisis; the growth and productivity agenda including trade and competition, technology and innovation, infrastructure financing, infrastructure gaps and the quality of human capital; and reforming the state to address inefficiencies in service delivery.

On the investment financing side, the shift in approach is well illustrated by the Financial Instruments for Brazil Energy Efficient Cities Project (Finbrazeec), approved by the Board of Directors in June 2018. The development objective of this project is to unlock private financing for urban energy efficiency (EE) projects in Brazil by reducing the credit risk and enhancing the technical quality of efficient street lighting (ESL) subprojects and industrial energy efficiency (IEE) subprojects. The Project will create an innovative EE Facility for ESL and IEE subprojects, comprised of a loan syndication among Caixa Economica Federal (Caixa) and commercial lenders, and a Guarantee Facility (GF) to be established by Caixa to provide liquidity and backstop credit risk for commercial lenders. A technical assistance component will increase Caixa’s internal capacity to implement the Project, support the startup costs of the EE Facility, and help develop a pipeline of high quality subprojects, therefore reducing the technical and financial risk of the transactions.

The project’s innovative structure will help leverage US$ 400 million in commercial financing with a combination of a US$ 200 million contingent IBRD loan and US$ 200 million in lending from the Green Carbon Fund. In doing so, it will not only achieve important EE and carbon emission reduction benefits, but also presents one of the first viable project finance structures to the market at a time when Brazil steps away from the predominant public funding model for infrastructure. The project, which is expected to generate 100 percent climate co-benefits, will help create new asset classes for EE investments and help Brazil achieve its Nationally Determined Contributions (NDC) targets. In addition, the Global Infrastructure Facility (GIF) will be supporting Caixa, the International Finance Corporation (IFC) and the World Bank to identify and structure concessions at the municipal level that will benefit from the Caixa financing.

On the analytical and advocacy side, the shift in approach is well illustrated by the Brazil Public Expenditure Review (BER). The BER, entitled “A Fair Adjustment: Efficiency and Equity of Public Spending in Brazil”, was requested by the Brazilian Government with the objective to conduct an in-depth analysis of government spending, to develop options for Brazil to reduce its fiscal deficit to a sustainable level while consolidating the social gains achieved over the previous decades. The report was launched at the Ministry of Finance on November 21, 2017, in the presence of the Minister of Finance and the Minister of Planning.

The main finding is that some government programs benefit the rich more than the poor, in addition to not achieving their goals effectively. As a result, it would be possible to save part of the budget without reducing access to or the quality of public services that benefit the poorest sections of the population.  The report raised an unprecedented level of debate about the quality of public spending in Brazil. During the period of November 21 to December 18, 2017, in total, around 600 stories on the report were published and the report reached all types of media: TV, radio, printed and online, in the 5 regions of Brazil.  The main prime time evening news (TV Globo’s Jornal Nacional) did a series of four separate in-depth reports of about five minutes each on different nights covering different parts of the report (pensions, civil servants’ wages, social programs and education).

Results

Below are some of the results achieved under the CPS FY12-FY17 period.

The quality of education was improved and the provision of public services for low income households was extended. Activities under this area focused on supporting improvements in the Government’s poverty eradication programs, on improving the quality of Early Childhood Development (ECD) services for the lowest income quartiles, on improving learning outcomes and completion rates in primary and secondary education and improving access to quality primary health care as well as development of integrated health networks. Additionally, activities strongly promoted support for active gender policies.

  • The flagship Bolsa Família Program, which included technical and financial support from the World Bank, is cited as one of the key factors behind the positive social outcomes achieved by Brazil in recent years. In September 2017, the Program reached 13.4 million families (more than 50 million people), a major portion of the country’s low-income population. Poor families with children receive an average of R$70.00 (approximately US$17) in direct transfers. In return, they commit to keeping their children in school and taking them for regular health checks. School attendance monitoring reached 88.6 percent of the children and adolescents aged 6 – 15, and 78.7 percent of 16 and 17-year-olds. 95.4 percent of beneficiaries aged 6 – 15 and 92.7 percent of 16 and 17-year-olds have school attendance records above the minimum required.  Health monitoring reached 73 percent of families in December 2016. 99.7 percent of the pregnant women monitored and receiving benefits under the program are up-to-date with their prenatal care. 99.1 percent of beneficiary children monitored have been vaccinated on schedule. The WBG made significant contributions to the improvement of the targeting mechanisms, the strengthening of the monitoring and evaluation systems and of basic operation of the program. Moreover, the Brazil experience in fighting extreme poverty has been used as an example for other countries and the WBG partnered Brazil, the UNDP and a local think-tank IPEA to disseminate the country’s experience through the “World Without Poverty” (WPP) learning initiative.
  • Operations in Recife, Ceara and Acre supported the expansion and improvement of service delivery in ECD. Specifically, in Recife, the Bank worked with the Municipality to build new facilities in poor and underserved neighborhoods for children aged six months to 5 years of age, as well as to rehabilitate many of the existing ECD facilities. In Ceara, the Bank supported the training for municipal ECD coordinators and school principals through an innovative program that placed strong focus on results-based management and pedagogy. In addition, the Bank also supported the development and evaluation of a home-based training pilot program (Programa de Apoio ao Desenvolvimento Infantil, PADIN), which trains parents and caregivers in providing better cognitive and non-cognitive stimulation to children under five years of age. In Acre, the WBG supported the Asinhas da Floresta program, expanding the coverage of ECD home-based programs to children of ages 0 to 3 years for approximately 3,000 children living in isolated areas.
  • The World Bank supported several innovative education programs with promising results. In Pernambuco and Recife, the Bank supported students enrolled in programs sponsored by the Ayrton Senna Foundation and Roberto Marinho Foundation helping them to catch up and reintegrate into the school system at the correct age-grade level. The Bank also supported the extension of the school day in Pernambuco and Piaui. The provision of full time school in upper secondary education in Pernambuco contributed to reduce dropout rates and was a factor behind the recent progress made by the state on IDEB (Brazil’s national education assessment tool, which measures both learning outcomes and internal efficiency). Pernambuco and Rio de Janeiro also benefited from WBG support in the implementation of an M&E program that increased accountability and allowed customized support to be provided to individual schools. The state networks of both states had the largest increase in IDEB in upper secondary education between 2009 and 2013.
  • As of December 2014, 48.2 percent of the population in municipalities with more than 100,000 inhabitants were covered by the Family Health Strategy and were benefitting from PROSEF. Bank interventions supported the expansion of family health care both at the federal level and through state level interventions in Acre, Bahia, Rio Grande do Norte and Parana. Additionally, IFC supported Rede D’Or, the largest private hospital network in Brazil, and Allier, a diagnostic imaging industry, to expand affordable and high-quality health care services to low income population and underserved regions.

Efficiency of public and private investments was increased. Activities under this area focused on promoting greater adoption of medium-term fiscal frameworks in states and municipalities, as well as achieving increased result orientation in planning, budgeting, and expenditure in states. They also focused on strengthening institutional framework for PPPs and on making contribution to the policy dialogue on productivity issues.

  • The WBG strengthened the capacity of the Federal Government, States if Minas Gerais, Sao Paulo, Bahia State, and the Municipality of Rio de Janeiro to prepare and manage PPP project pipeline through lending operations and Reimbursable Advisory Services (RAS). In the Municipality of Rio de Janeiro, procedures for the technical analysis of PPPs were established and a PPP project pipeline was created. In Sao Paulo, a MIGA Guarantee coupled to an IBRD Loan attracted private financing for the State highway rehabilitation program. This project could become a model for crowding in more private capital in the transport sector in the future.
  • RBM reforms proved to be more robust than efforts to improve fiscal planning, particularly when implemented in selected sectors such as education, health and security. Results orientation under implementation in Manaus and Acre since 2013; Ceara received TA in these areas since 2012 and results-based management (RBM) implemented in 2017 and 2018. Minas Gerais partially reversed some of the RBM reforms after the 2014 election, but maintained them in education, health and security. Bahia, Pernambuco and Rio de Janeiro continue with RBM in education and security sectors. The RBM model, first implemented in Minas Gerais, quickly disseminated and there is strong and sustained demand for support.

Regional economic development increased access to infrastructure services. Activities under this area focused on increasing access to quality infrastructure such as water supply, waste water treatment, transport infrastructure, and energy in remote areas in an effort to reduce inequality between and within regions.

  • The “Light for All” program (Luz para Todos, LpT), delivered over 562,832 new electricity connections, mainly in the North and Northeast, between January 2010 and February 2014. The target of reducing the number of households without access to electricity by 500,000 was exceeded by over 10 percent. However, quality of access and sustainability is still a challenge, particularly in poor (Northeast) and low density (Amazon) regions requiring focus on improving both quality of service and sustainability.
  • WBG support was critical in developing transport and logistics planning at subnational level. World Bank contributions came mainly through technical assistance components in a series of transport multisector operations in Parana, Rio Grande do Sul, Sao Paulo and Tocantins. Performance based management contracts were introduced in a series of states and WBG support facilitated the preparation of a pipeline of transport projects at the subnational level.
  • World Bank-financed projects adopted an integrated approach in which water resources management, water security infrastructure, efficient use of water and expansion of water and sanitation services were combined. This integrated approach provided the tools and mechanisms to better address water challenges, combining institutional development, investments in infrastructure and improved climate forecasting to respond to the impact of climate change. Bank support helped both national and state governments to improve climate monitoring and forecasting, water allocation and planning, preparedness for extreme events such as droughts and floods, from response to reconstruction and increased resilience. The water projects in the states of Pernambuco, Sergipe, Espírito Santo and São Paulo are examples of that integrated approach, as well as the Federal INTERAGUAS technical assistance loan.

Sustainable natural resource management and climate resilience were improved. Activities under this area focused on: improving water resources management and the development of innovative irrigation approaches; improving market access for and adoption of Climate Smart Agriculture (CSA) by small rural producers’ organizations; expanding areas under effective environmental protection; improving institutional capacity for environmental management, upscaling of the Cadastro Ambiental Rural; and on improving disaster preparedness as well as the coordination of post-disaster response in states and municipalities.

  • The Bank portfolio supported the Federal Government and the States of Rio Grande do Sul, São Paulo, Espírito Santo, Bahia, Sergipe, Pernambuco and Ceará in improving water resources management. At the Federal level, the Interáguas Project supported the Government to improve the coordination and strengthen the capacity among key federal institutions in the water sector toward an integrated approach. Through this TAL, the Bank supported water sector reforms and institutional strengthening in individual sectors at the national level and a cross-sectoral component focused on improving implementation performance and coordination of sector policies and activities.
  • By 2015, seven states were implementing programs that promoted the adoption of climate smart agriculture (CSA) by farmers. In 2010 the Government of Brazil started offering producers a credit line for the adoption of CSA technologies to improve the farms’ agriculture practices and consequently reduce the pressure on native forests. In order to increase the rate of adoption, the WBG supported training and technical assistance on low carbon agriculture technologies for small and mid-sized farms in the Cerrado region. Over 14,000small producer organizations were supported by Bank-financed projects in eleven states.
  • The total area under protection (which includes existing protected areas under improved management and newly created protected areas) increased by 31.24 million ha., surpassing the target of 15 million. Brazil has been a world leader in the fight against climate change and the WBG has supported the government in expanding the areas under effective protection, particularly under the Amazon Region Protected Areas Program (ARPA), which supported the creation of 26 million ha of newly created and/or existing areas with improved management effectiveness. Attention also shifted to the Cerrado, which became the focus of land use conversion as protection of the Amazon tightened. The WBG supported the implementation of three programs specifically focused on the Cerrado Biome, which will total nearly US$100 million in investments between 2010 and 2020 and cover a total of around 7 million ha of protected areas.

Bank Group Contribution

The Bank support during the previous CPS (FY12-17) was largely implemented as designed and total IBRD lending (US$9.6 billion) surpassed that originally envisioned. As of end of June 2018, the Bank’s lending portfolio stands at 36 active operations, with a total of $6.58 billion in commitments. In FY18, six new projects million (four financed by IBRD and two financed by GEF/FIP trust funds) were delivered for a total of $686million.  Furthermore, the Brazil program includes a robust ASA program, through which the WBG has been providing timely and valuable knowledge products and policy guidance to the government. The Bank’s analytical program has, in many cases, successfully influenced the government’s agenda and policies.

IFC’s investment portfolio in Brazil now stands at US$3.84 billion as of June 2018, including US$1.10 billion from syndications. In FY17, IFC committed US$1.3 billion (including GTFP), of which US$499 million was in mobilization. Overall key sectors include Financial Markets, Health, Education, Agribusiness and Infrastructure. IFC has also provided Brazil’s fast-growing private sector with various advisory services, including for PPP projects (airports, roads, health, education), through a partnership with BNDES, the Brazilian development bank. Such advice has played a key role in leveraging private finance and exploring new financial structures in the nascent Brazilian project finance market. 

MIGA processed the São Paulo Sustainable Transport Project in FY15, its first exposure transaction in Brazil since FY09. MIGA’s non-honoring of sovereign financial obligations (NHSFO) guarantee mobilized long-term commercial bank financing on competitive terms, by guaranteeing the State of Sao Paulo’s financial obligations under such bank financing. Brazil was also the first IBRD beneficiary of the Bank Group's effort to take advantage of synergies across the balance sheets of World Bank Group entities. Brazil gained about $100 million in additional IBRD lending headroom through an exchange of existing IBRD exposure to Brazil, where MIGA has the capacity to assume higher exposure, for MIGA exposure to Panama, a country where IBRD has available capacity.

Partners

The WBG continues to expand and broaden its support for Brazil’s South-South Cooperation (SSC) activities. Brazil seeks a growing international role, even if its own spending in this area has suffered from fiscal retrenchment recently. It has numerous public, civil society, private, and academic centers of excellence capable of making significant SSC contributions. WBG support has included matching Brazilian counterparts with clients in other countries in areas of mutual interest. IFC has supported investments by Brazilian companies in other developing countries. All SSC initiatives that include technical cooperation components are developed through the Brazilian Cooperation Agency.

The WBG works closely with the IDB and the IMF in supporting the federal and subnational governments. The Bank works closely with IDB in supporting fiscal adjustment and strengthening public financial management at subnational level. The Bank and the IMF are supporting the federal government in complementary areas of public financial management. Building on the newly signed Memorandum of Understanding (MoU) between the IBRD and the New Development Bank (NDB), the WBG will cooperate with the NDB in operations of mutual interest, especially financing for sustainable infrastructure projects.

The WBG support is also closely coordinated with other development partners. The WBG works in partnership with Germany, the Netherlands, Norway, the United Kingdom, and the USA in supporting Brazil’s carbon emission reduction targets. The WBG also works with Kreditanstalt für Wiederaufbau (KfW) and the Agence Française de Développement (AFD) in municipal finance and in infrastructure, and with the UK Prosperity Fund in the area of private sector development. Finally, the Bank coordinates with the United Nations in the area of protection of vulnerable groups, indigenous communities, gender and violence.

Moving Forward

The World Bank Group has been a valued partner for Brazil, providing integrated and often multi-sector development solutions tailored to its needs. The Bank has also benefited greatly from Brazil’s unique demands, which required the WBG to adapt and learn and provided a broad range of lessons on development for the Global Community in areas ranging from poverty reduction to social inclusion and environmental management.

A World Bank Group (WBG) Country Partnership Framework (CPF) for the period FY18-FY23 was presented to the Board of Directors in July 2017, and builds on the progress and experiences of the last FY12‒17 CPS. The new CPF is aligned with the objectives of the country’s development strategy as outlined in the Brazil growth strategy presented by the authorities and is rooted in the findings and recommendations of the WBG Systematic Country Diagnostic (SCD) for Brazil, which contains an analysis of key constraints for inclusive and sustainable growth. The CPF supports Brazil in making further progress on the WBG Twin Goals of eliminating extreme poverty and boosting shared prosperity through a program that focuses on creating the conditions for faster job growth. The CPF reflects the priorities of the Brazilian authorities and the resources and capacity of the WBG to deliver against these priorities.

Beneficiaries

Bolsa Familia

For beneficiary Dinalva Pereira de Moura, a mother who lives in the Varjão favela in the Federal District, the program:

"has been a marvelous thing for me and my family. My children know that when we receive the money, they will have more to eat, and that makes them happier. And they don't skip school, because they know that the money depends on their going."

DGM

Anália, Maria do Socorro and Lucely are ready to fight for what they believe in. These three women are leaders of indigenous, traditional Brazilian communities, and have joined forces to preserve the history of their groups. Read more here and watch the video

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