relatório do banco mundial referentes a parcerias com governo de mg e o choque de gestão.pdf

Document of The World Bank

Report No: ICR00002866

IMPLEMENTATION COMPLETION AND RESULTS REPORT (IBRD-81870)

ON A

LOAN

IN THE AMOUNT OF US$450 MILLION TO THE

STATE OF MINAS GERAIS

FOR A

THIRD MINAS GERAIS DEVELOPMENT PARTNERSHIP

DEVELOPMENT POLICY LOAN

July 20, 2014

Governance Global Practice Brazil Country Management Unit Latin America and the Caribbean

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CURRENCY EQUIVALENTS

(Exchange Rate Effective April 25, 2014)

Currency Unit = Brazilian Reais R$ 1.00 = US$ 0.45 US$ 1.00 = R$ 2.23

FISCAL YEAR

January 1- December 31

ABBREVIATIONS AND ACRONYMS

AFD Agence Franaise de Dveloppement CDM Clean Development Mechanism CEMIG State Energy Company (Companhia Energtica de Minas Gerais) CPS Country Partnership Strategy DPL Development Policy Loan GoMG Government of Minas Gerais IEF State Institute for Forestry (Instituto Estadual de Florestas) IGD-M Index of Decentralized Municipal Management (ndice de Gesto

Descentralizada Municipal) M&E Monitoring and Evaluation PDO Program Development Objective PPA Multi-Year Plan (Plano Plurianual) PROEB Evaluation Program of Public Basic Education Network (Programa de

Avaliao da Rede Pblica de Educao Bsica) RBM Results-Based Management RI Results Indicator RMBH Metropolitan Region of Belo Horizonte (Regio Metropolitana de Belo

Horizonte) SEPLAG Secretariat of Planning and Management (Secretaria Estadual de

Planejamento e Gesto) SIAFI/MG Integrated Financial Management System (Sistema Integrado de

Administrao Financeira)

Vice President: Jorge Familiar Country Director: Deborah L. Wetzel

Senior Practice Director Mario Marcel Cullel Practice Manager: Arturo Herrera

Task Team Leader: Roland Clarke ICR Team Leader: Fanny Weiner

ICR Primary Author: Chris Parel

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BRAZIL

Third Minas Gerais Development Partnership Development Policy Loan

CONTENTS

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

Table of Contents 1. Program Context, Development Objectives and Design ............................................ 1 2. Key Factors Affecting Implementation and Outcomes .............................................. 8 3. Assessment of Outcomes .......................................................................................... 10 4. Assessment of Risk to Development Outcome ......................................................... 17 5. Assessment of Bank and Borrower Performance ..................................................... 18 6. Lessons Learned........................................................................................................ 20 7. Comments on Issues Raised by Borrower/Implementing Agencies/Partners........... 21 Annex 1. Bank Lending and Implementation Support/Supervision Processes ............. 22 Annex 2. Beneficiary Survey Results ........................................................................... 23 Annex 3. Stakeholder Workshop Report and Results ................................................... 23 Annex 4. Summary of Borrower's ICR and/or Comments on Draft ICR ..................... 24 Annex 5. Comments of Cofinanciers and Other Partners/Stakeholders ....................... 25 Annex 6. Citizen Engagement in Policy Priorization: The Estado em Rede experience....................................................................................................................................... 26 Annex 7. Forest Plantation Policy: Limitations to State intervention .......................... 32 MAP .............................................................................................................................. 36

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A. Basic Information

Country: Brazil Program Name: Third Minas Gerais Development Partnership DPL

Program ID: P121590 L/C/TF Number(s): IBRD-81870 ICR Date: 04/24/2014 ICR Type: Core ICR

Lending Instrument: DPL Borrower: THE STATE OF MINAS GERAIS BRAZIL

Original Total Commitment:

US$ 450.00M Disbursed Amount: US$ 450.00M

Revised Amount: US$ 450.00M Implementing Agencies: State Secretariat of Planning and Management (Secretaria Estadual do Planejamento e Gesto - SEPLAG Cofinanciers and Other External Partners: Agence Franaise de Dveloppement B. Key Dates

Process Date Process Original Date Revised / Actual Date(s) Concept Review: 08/04/2011 Effectiveness: 12/13/2012 12/10/2012 Appraisal: 03/29/2012 Restructuring(s): Approval: 07/26/2012 Mid-term Review: Closing: 01/31/2014 01/31/2014 C. Ratings Summary C.1 Performance Rating by ICR Outcomes: Satisfactory Risk to Development Outcome: Low or Negligible Bank Performance: Satisfactory Borrower Performance: Highly Satisfactory

C.2 Detailed Ratings of Bank and Borrower Performance (by ICR) Bank Ratings Borrower Ratings

Quality at Entry: Moderately Satisfactory Government: Highly Satisfactory

Quality of Supervision: Satisfactory Implementing Agency/Agencies: Highly Satisfactory

Overall Bank Performance: Satisfactory

Overall Borrower Performance: Highly Satisfactory

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C.3 Quality at Entry and Implementation Performance Indicators Implementation

Performance Indicators QAG Assessments

(if any) Rating:

Potential Problem Program at any time (Yes/No):

No Quality at Entry (QEA):

None

Problem Program at any time (Yes/No):

No Quality of Supervision (QSA):

None

DO rating before Closing/Inactive status:

Highly Satisfactory

D. Sector and Theme Codes

Original Actual Sector Code (as % of total Bank financing) General education sector 15 15 General energy sector 10 10 General industry and trade sector 10 10 Other social services 15 15 Sub-national government administration 50 50

Theme Code (as % of total Bank financing) Education for all 10 10 Environmental policies and institutions 20 20 Managing for development results 20 20 Public expenditure, financial management and procurement

30 30

Social safety nets 20 20 E. Bank Staff

Positions At ICR At Approval Vice President: Jorge Familiar Hasan A. Tuluy Country Director: Deborah L. Wetzel Deborah L. Wetzel Practice Manager: Arturo Herrera Gutierrez Arturo Herrera Gutierrez Program Team Leader: Roland N. Clarke Roland N. Clarke ICR Team Leader: Fanny Weiner ICR Primary Author: Chris Parel

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F. Results Framework Analysis Program Development Objectives (from Project Appraisal Document) Assist the Government of Minas Gerais to deepen its innovative management model and strengthen its budget management and sectoral policy management in the areas of social inclusion, environmental management and metropolitan governance. Revised Program Development Objectives (if any, as approved by original approving authority) N/A (a) PDO Indicator(s)

Indicator Baseline Value Original Target

Values (from approval documents)

Formally Revised Target Values

Actual Value Achieved at

Completion or Target Years

Indicator 1: Share of Strategic Projects with an execution rate above 85% Value (quantitative or Qualitative) 61.00% 63.00% 88.77%

Date achieved 06/25/2012 01/31/2014 12/30/2013 Comments (incl. % achievement) Overachieved

Indicator 2: Percentage of budget items with contracts greater than the annual budget allocation Value (quantitative or Qualitative)

16.12% 8.06% 1.45%


Indicator 3: Percentage share of government programs and projects for which screening and evaluation procedures are operational (value amount as share of total PPA)

Value (quantitative or Qualitative)

0.79% 9.12% 6.24%

Date achieved 06/25/2012 01/31/2014 12/29/2013

Comments (incl. % achievement)

Underachieved. A pilot application of the screening and evaluation procedures to priority on-going programs indicated that the methodology was unsuited for these and the methodology changed to evaluate Investment Projects with values above R$10 million. 76 percent of these projects were evaluated, showing considerable improvement in that particular area of focus.

Indicator 4 : Level of citizen participation in the identification of regional priorities.


Five strategic priorities identified for each of the regions of the state - North and

Five strategic priorities identified for each of the five additional regions of the state with the participation of civil society.

No additional regions identified.

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Rio Doce - with the participation of civil society

Date achieved 06/25/2012 01/31/2014 12/29/2013


Underachieved. The participatory model developed was launched in two pilot regions, however, due to the lack of capacity and training of civil society in these regions, participation was very passive. The Government thus decided to not expand the model to all ten regions as the pilot regions did not achieve the results initially expected. Nevertheless, the Regional Committees comprised of Government representatives with some civil society participation, eventually played a bigger role than initially expected in integrating civil society in the planning process and were kept in all ten regions.

Indicator 5 : Percentage share of Municipalities receiving co-financing from the State for the delivery of social services Value (quantitative or Qualitative)

25.00 70.00 100.00


Indicator 6 : Number of municipalities with IGD-M below 0.55 (register validation and quality) Value (quantitative or Qualitative) 90 municipalities 45 municipalities 11 municipalities


Indicator 7 : Backlog of education personnel records modification (informativos de alterao) to be included in SISAP-MG Value (quantitative or Qualitative)

91,917 modifications to be included

18,383 178 remaining to be included


Indicator 8 : Share of students reaching adequate learning levels or higher on the annual PROEB exam


Portuguese: 5th year - 42.1%; 9th year - 33.7%; 12th year - 29.7% Math: 5th year - 57%; 9th year - 21.2%; 12th year - 3.7%

Portuguese: 5th year - 46.5%; 9th year - 36.3%; 12th year - 37.5% Math: 5th year - 61.5%; 9th year - 25.8%; 12th year - 5.5%

Portuguese: 5th year 45.9%; 9th year 40.5%; 12th year 36.3%% Math: 5th year 59.7%; 9th year 22.9%; 12th year 3.85%.

Date achieved 06/25/2012 01/31/2014 12/31/2013 Comments Underachieved. The targets were excessively ambitious, in the short

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(incl. % achievement) term, given the teachers strike in 2011, and because previous reforms had already raised the level of education to among the best in the country.

Indicator 9 : Share of irregular business undertakings monitored after being identified through the Special Inspection Operations to ensure mitigation measures are implemented


0.00 100.00 100.00

Date achieved 06/25/2012 01/31/2014 12/30/2013 Comments (incl. % achievement)

Achieved. Out of the four irregular business undertakings identified through the Special Inspection Operations all of them were monitored.

Indicator 10 : Hectares of forest plantation to serve as raw input for charcoal production Value (quantitative or Qualitative)

94.325 hectares 108.474 hectares 62.227 hectares

Date achieved 06/25/2012 01/31/2014 12/30/2013


Underachieved. The new phase of the Kyoto Protocol made Brazil ineligible for CDM payments removed all incentives from the Government program (for unforeseeable reasons external to the Government), although initial indications are that the target would have been met if the CDM had continued.

Indicator 11 : Holding of regular meetings of the Territorial Management Commission (CGT) of the RMBH Value (quantitative or Qualitative)

0 At least one every 60 days 19 meetings held in 2013, one every 2 weeks


Indicator 12 : Average time, in days for the analysis of requests of prior approval for land parceling in RMBH. Value (quantitative or Qualitative)

27.52 days 23 days 10.45 days


G. Ratings of Program Performance in ISRs

No. Date ISR Archived DO IP Actual

Disbursements (US$ millions)

1 11/12/2012 Satisfactory Satisfactory 0.00 2 03/20/2013 Highly Satisfactory Highly Satisfactory 448.88 3 12/09/2013 Highly Satisfactory Highly Satisfactory 448.88

H. Restructuring (if any): Not Applicable

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1. Program Context, Development Objectives and Design

1.1 Context at Appraisal

1. Minas Gerais is often referred to as a microcosm of Brazil. Its income level is close to Brazils national average (ranked 10th out of 27 states in 2012), it has a very poor Northeastern region not different from the semi-arid northeastern serto, and is home to a dynamic industrial area. Minas Gerais also has Brazils second largest population (19.5 million, representing 10 percent of Brazils total) and the economy is the third largest after So Paulo and Rio de Janeiro, and about the size of Peru. Between 2003 and 2012 Minas Gerais grew at an average rate of 4.5 percent, slightly above Brazils 4.4 percent. Nonetheless, the States economy remains vulnerable to the country and the worlds growth dynamics.

2. From 2003 Minas Gerais has had an unparalleled record of public sector reform and sustained engagement with the Bank. The administration elected in 2003 inherited a bankrupt state with large levels of debt, poor management and no investment. Consequently, the Government launched the results based management reform program, Choque de Gesto (Management Shock). It also addressed the dire fiscal situation by imposing fiscal discipline and constraining expenditures while rigorously defining priority programs. Within the new management framework secretaries were held accountable for meeting agreed performance indicators. In the ensuing decade the government successfully dealt with States indebtedness and fiscal constraints while improving public service delivery and significantly reducing poverty.

3. The Bank has supported the Government of Minas since 2006 through the Minas Gerais Partnership Series. The first operation under the partnership series was the 2006, US$170 million Minas Gerais Partnership for Development DPL (P088543).1 It was followed by the 2008 Minas Gerais Partnership II SWAp (P101324), a US$976 million multi-sectoral project that was supplemented in 2010 by an Additional Financing (P119215) of US$461 million. The series was followed by this current operation in 2012. The Bank also played an important technical assistance role collaborating frequently in the fine-tuning of the Choque de Gesto and on sector programs.

4. The Choque de Gesto was based upon priority programs and performance indicators to manage them. As the system evolved these targets were negotiated with sector secretariats that became accountable for delivering program results. By the time of

1 Owing to its compliance with the Federal Governments (Fiscal Reform Law) debt limit rules, 2006 was the first year the State was allowed to borrow.

Estado em Rede - Management for Citizenship (2011-2014) - stressing citizen participation

Third Minas Gerais Development Partnership DPL (2012)

Estado para Resultados - State for Results (2007-2010) - stressing efficiency and results

Minas Gerais Partnership II SWAp (2008) + Additional Financing (2010)

Choque de Gesto - Management Shock (2003-2006) - stressing fiscal balance

Minas Gerais Partnership for Development DPL (2006)

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the SWAp, reforms had entered into a second phase - the Estado para Resultados (State for Results). In this phase, indicators were negotiated at the departmental level, with rewards and penalties linked to the achievement of goals. A special unit was established in the Secretariat of Planning (SEPLAG) to coordinate the elaboration of annual programs and monitor, evaluate and report results. By 2012, the Government strategy had evolved to a focus on citizen participation, called Estado em Rede (Management for Citizenship) with the aim of consolidating previous phases, increasing efficiency and building a permanent constituency through citizen participation while ensuring the models sustainability, through devolution of performance management to individual secretariats. It was organized across eleven thematic networks representing eleven key challenges to be overcome.

5. The Choque de Gesto and its subsequent phases have grown to impact every facet of State economic and administrative management. All Partnership Series operations provided cross-sectorial support to public sector management and the results based framework. Minas Gerais success, starting with the Choque de Gesto, was critical in managing the States economic recovery as well as improving service delivery. In effect, it transformed Minas from a bankrupt and poorly managed under-performer to a fiscally responsible state, featuring an innovative management model. It is considered to be a gold standard of public sector management in Brazil and worldwide.

6. From 2004 to 2008 Minas Gerais consolidated the fiscal adjustment efforts initiated in 2003, significantly improving revenue and operating balances, increasing investments and reducing debt (see Table 1). Not only was it able to borrow after 2006 but by 2008 the State was in a much stronger position to withstand the deep global and domestic recession and fiscal challenges resulting from significant drops in state revenues and federal transfers.

Table 1: Financial Results 2004-2011 (R$ billion2011 constant values) Parameter 2004 2008 2011 Revenues 33.2 50.1 55.3 Expenses 28.6 39.8 45.7 Gross Operating Balance 2.5 6.4 4.7 -% of NCR 15.2 21.6 12.6 Net Current Revenue (NCR) 16.7 29.2 37.3 Primary Balance 2.3 3.7 2.7 -% of NCR 13.8 12.7 7.3 Non-Financial Investment/NCR 9.5 15.0 8.9 Debt/NCR 224.5 175.4 181.8

Source: Third Minas Gerais Partnership DPL PD, p. 14

7. The rate of extreme poverty in the State was reduced from 7.8 percent in 2003 to 3.3 percent in 2011. As part of a continuous effort to further reduce this rate, the Federal Government launched large programs to confront extreme poverty and to empower states to do likewise. Minas Gerais has incorporated poverty mitigation through the creation of the Programa Travessia, to identify the poorest communities and rationalize social protection program support across secretariats. The State also had strengthened the statewide social assistance services and supported a new social safety net funding program (Piso Mineiro de Assistncia Social) complementing federal and municipal efforts.

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8. At time of preparation of the operation, the Government of Minas Gerais (GoMG) had an appropriate fiscal framework, including its expenditure program and its fiscal relations with the Federal Government. Nevertheless, care was required in managing investment owing to projected growth of expenditure exceeding growth of revenue over the medium term and the downside risk that, despite major efforts, revenue might fall short of expectations. Of particular concern on the expenditure side was the medium term increase in the wage bill driven by teachers and public security.

9. The Banks debt sustainability diagnostic concluded that under any plausible set of external conditions the debt and fiscal dynamics were sustainable and consistent with the Federal Governments Fiscal Responsibility Law (Lei de Responsabilidade Fiscal LRF). However, diagnosis of the amortization profile confirmed a spike in 2035 amortization owing to debt owed to the State Energy Company (Companhia Energtica de Minas Gerais S.A - CEMIG). Indexed to the IGP-DI price index (ndice Geral de Preos Disponibilidade Interna), the CEMIG debt was also the most expensive owed by the State and posed a potential future threat to sustainability.

Rationale for Bank Involvement 10. Consolidation of Reforms and creating fiscal space. The DPL offered the opportunity to support the consolidation of important reforms addressed in previous Partnership Series loans. The consolidation required fiscal space for investment to further strengthen the reforms; at the same time, the GoMG made the decision to anticipate future debt payment to avoid unfavorable financing conditions of the existing CEMIG debt, which could have affected the States fiscal situation in the future.

11. Leveraging the States successful results-based management model as an example for other states. The aim of this operation was to maintain the support for the reforms being carried out by the GoMG, and to develop solutions to enhance public sector performance and service delivery issues which can be used by other states and countries. Since 2006, the Bank has been committed to supporting the evolution of this innovative results based management model. Through its Partnership Series, the World Bank had become a major stakeholder in successfully implementing the Choque de Gesto. The success of the public sector reforms in Minas Gerais proved to be an important model with continuing and useful demonstration effects for Brazilian states and other countries confronting similar development problems.

12. Building upon the CPS. The DPL aligned well with the Brazil Country Partnership Strategy (CPS) for 2012-20152. The DPL policy measures addressed four CPS pillars: (i) increasing the efficiency of public and private sector investments; (ii) improving the quality of public services for low income households; (iii) promoting regional economic development; and (iv) improving sustainable natural resource management and climate resilience.3

2 Country Partnership Strategy 2012-2015 (Report No. 63731-BR) discussed by the Executive Directors on November 1, 2011. 3 Although not mentioned in the PD, the DPL was also well-aligned with the Middle Income Countries Strategy, which emphasized knowledge services, financial services, flexibility and sub-national focus.

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13. Strengthening long run financial sustainability. The GoMG recognized that the terms of payment of the CEMIG debt presented a threat to future fiscal sustainability and had negotiated a refinancing arrangement including a cash discount of 35 percent on the current debt face value, if this were to be repaid immediately. This arrangement required resources of about US$2 billion, but would reduce the debt face value as well as decrease the real cost of service, thus increasing fiscal space for investment or providing an additional margin to deal with any external shocks. 14. Leveraging external finance. The initial request from the State to the Bank was for a loan of about US$ 2 billion. While the Bank could not supply this volume of resources on its own, it worked with the State to develop alternative innovative financing solutions. During the preparation of the loan operation, the Bank Treasury provided advice and guidance on the possible structure of a refinancing operation, and explored various options including guarantees of private sector loans. The solution developed in the end involved a parallel financing operation with the Agence Franaise de Dveloppement (AFD) and Credit Suisse to refinance the CEMIG debt. AFD provided a 300 million loan based on a program closely coordinated with the World Bank operation, while Credit Suisse lent US$1.3 billion. The refinancing package was one of the first times since the institution of the Fiscal Responsibility Law that a subnational government in Brazil was able to borrow from an external private sector lender without the guarantee of a multilateral or bilateral development agency. In this sense it was an important innovation facilitated by the World Bank operation, and represented a return to market financing for the State of Minas Gerais, providing an example for other well managed and reforming states in Brazil.

1.2 Original Program Development Objectives (PDO) and Key Indicators (as approved) 15. The PDO was to assist the Government of Minas Gerais to deepen its innovative management model and strengthen its budget management and sectoral policy management in the areas of social inclusion, environmental management and metropolitan governance.

Table 2: Policy Area Objectives and Key Outcome Indicators Policy Areas and Objectives Key Outcome Indicators

Policy Area 1: Strengthening Public Sector and Budgetary Management Increased robustness and sustainability of RBM Model

Increased share of strategic programs with execution rate above 85% (target 63%)

Increased predictability and control of budget execution

50% reduction in the number of budget items with contract commitments above annual budget allocation

Evaluation procedures extended from 0.79% to 9.12% of Government programs

Increased citizen participation in identification of regional priorities

Five additional Notebooks of regional priorities published, identifying regional priorities for additional five regions of the State produced through formal consultation procedures

Policy Area 2. Promoting Social Inclusion Reduce poverty in the most disadvantaged areas so as to reduce exclusion and regional inequalities

Percentage share of municipalities receiving co-financing from the State for the delivery of social services (Social Assistance Floor of Minas Gerais program) increased from 25% to 70%

Reduction of 50% in number of municipalities with IGD-M score below 0.55

Strengthen the management of Increase the share of students reaching adequate learning levels or

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quality of education higher on the annual PROEB examPortuguese and math 80% Reduction in the backlog of education personal records

modifications to be included in Personal Records System of Minas Gerais (SIAP-MG)

Policy Area 3: Increasing Environmental Sustainability Strengthen the quality of environmental management

100% of irregular business undertakings monitored after being identified through a Special Inspection Operation to ensure mitigation measures are implemented.

At least 108,474 hectares of new forest plantations for charcoal production are established

Policy Area 4: Developing a Metropolitan Governance Framework Strengthen governance of the Metropolitan Region of Belo Horizonte (RMBH) improving coordination of state and municipal public policies.

Regular meetings (at least one every 60 days) of Territorial Management Commission (CGT) for Belo Horizonte Metropolitan Area are held

Reduce the average time from 27.5 to 23 days for the analysis of requests of prior approval for land parceling in RMBH.

1.3 Revised PDO and Key Indicators, and Reasons/Justification N/A

1.4 Original Policy Areas Supported by the Program

11. This operation comprised four Policy Areas: (i) Strengthening Public Sector and Budget Management; (ii) Promoting Social Inclusion; (iii) Increasing Environmental Sustainability; and (iv) Developing a Metropolitan Governance Framework. In addition, it included a cross cutting theme of improved fiscal sustainability and increased fiscal space through leveraging external financing for the refinancing of the CEMIG debt.

Policy Area 1: Strengthening Public Sector and Budget Management 12. The Governments objective under this policy area was to deepen its innovative management model, strengthen its budget management and promote greater citizen participation in the definition of regional priorities. While previous reform phases had a strong center of government bias, being highly dependent on the roles of the Secretariats of Finance and Planning, the leading role exerted from the center of government on the implementation of sector policies began to be seen as counterproductive in the long run. Moreover, a key weakness of the model was the fact that it could easily be dismantled from the center by a future administration, for instance with the setting of easier targets or loosening of controls.

13. To increase the robustness and sustainability of the Results-based Management Model, the GoMG shifted responsibilities to line secretariats. Under this phase of the reform supported by this DPL, the public management systems were moved away from a model where power was centralized in the State for Results Unit (Unidade Estado para Resultados) and the Planning and Finance Secretariats, to one where authority is embedded in line secretariats operation units, thereby enhancing ownership of service delivery teams. This was achieved by establishing 22 Strategic Management and Innovation Units (AGEIs) within line secretariats transferring the monitoring of sector policies, definition of targets and responses to problems to line secretariats.

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14. At the same time, the State took an important step in improving predictability and control of budget execution to ensure that investment projects were cost effective and sustainable in the medium term. This required, inter alia, assuring that: (i) projects were adequately reviewed and included reasonable assumptions; (ii) data on contractual commitments were available to avoid unforeseen payments requiring short term budget adjustments; and (iii) budgeted funds were used for their intended purpose. The introduction of new procedures for budget execution planning and evaluation of investments consequently was supported under the DPL. A major policy reform and advance was the migration to a new integrated financial system, which improved the level of data exchange within the system and facilitated the introduction of the new accounting regulations.

15. In order to enhance budget allocation efficiency, a methodology for screening and evaluation of investment projects was developed and formally launched in 2011. The first step in mainstreaming the system was supported in this DPL. The policy reform ensured that all projects exceeding roughly US$2 million co-financed through voluntary transfers from the Federal Government were subjected to rigorous prior review, in order to ensure that they could be implemented as planned and would not result in an undue use of State resources (both financial and administrative) for implementation.

16. Finally, the budget reform included the States pilot for expanding citizen participation. The reform contemplated empowering citizens, especially in poorer regions, to participate in the selection of development priorities. As part of the Estado em Rede program, it was intended to increase understanding of and support for results-based management while refining priorities and upgrading implementation by involving local governments and civil society in priority settings.

Policy Area 2: Promoting Social Inclusion

17. The GoMG has been very successful in its efforts to eradicate extreme poverty, reducing the incidence from 8 percent in 2005 to 3 percent in 2009. Nevertheless, about 6 percent of the rural population was living in extreme poverty in 2009 and there was a large variance in extreme poverty rates across the 853 municipalities. Once the Governments Choque de Gesto results-based management model was firmly in place, the State increasingly focused on reducing poverty and regional inequities. This was intended to be achieved through programs focusing resources in the most deprived areas.

18. The first policy action included a co-financing structure to support the provision of social services at the municipal level. To that end, the Social Safety Net Piso Mineiro de Assistncia Social was established. The Piso Mineiro increased resource transfers to poor municipalities through state co-financing of services and benefits which complemented federal and municipal funding. The calculation of the transfer was based on the number of registered families in the Federal Governments Single Registry of Beneficiaries, the Cadnico, which currently constitutes a keystone of several social programs in the country.

19. A second policy reform was directed at collecting data on and increasing knowledge of the conditions in the poor municipalities, identifying causes, effects and instruments to mitigate poverty. This was implemented through the Door-to-Door program Programa Travessia, which supports the municipalities with the

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preparation of poverty or Deprivation Maps. These maps show key vulnerabilities, identifying poor families yet to be included in the Cadnico, and provide support in the definition of social programs to address the municipalitys key social needs.

20. A third intervention focused on improving management in public schools throughout the State by adopting merit-based selection for regional school superintendents and directors. While not explicitly targeting poorer municipalities, it supported social inclusion because wealthier students tend to opt out of the public school system in favor of private schools. Hence, the public schools serve virtually all of the States poor and near-poor student population.

Policy Area 3: Increasing Environmental Sustainability 21. Minas Gerais is among Brazils largest states, with enormous natural resources and important biomes. Owing to the workload and difficulties of coordination involved in issuing environmental licenses, there was insufficient follow-up on inspection and mitigation. Hence, the State reformed the organization, roles and responsibilities of its environmental agencies to integrate environmental management functions in the administration so that regulatory and oversight actions occurred in a more systematic and coordinated manner.

22. One of the States critical environmental challenges is deforestation to produce charcoal, the energy source for many of the States 62 pig iron mills. Minas Gerais produces 60 percent of Brazils iron and steel and most of the charcoal has come from illegal deforestation of the Cerrado biome. The State approved legislation requiring that by 2018 at least 95 percent of charcoal consumed should originate from managed plantations in order to encourage forest plantation within the States territory. A key Government objective was to create incentives and conditions for planned forestation and to define the financial and technical mechanisms to promote tree plantations under strict environmental sustainability parameters for all sizes on rural landholdings. In addition, it intended to lay out the process to develop a programmatic Clean Development Mechanism (CDM) under the Kyoto Protocol, with the aim to increase attractiveness of the plantations and provide key initial resources to the farmers (See also Annex 7).

Policy Area 4: Developing a Metropolitan Governance Framework 23. The development and eventual implementation of an urban master plan is part of a long process that was, at the time of the loan preparation, unique in Brazil and in Latin America. In 2004 an amendment to the State Constitution was approved, allowing for the creation of metropolitan regions to improve planning and development. Additional legislation passed between 2006 and 2009 introduced institutional arrangements for governing the Metropolitan Region of Belo Horizonte (RMBH). The RMBH has about 5.5 million inhabitants, making it the third largest metropolitan area in the country after So Paulo and Rio de Janeiro, and is an industrial powerhouse. The objective was to promote effective policy coordination among different state and municipal government stakeholders that are coordinated in the Consultative Council of Metropolitan Development (Conselho Deliberativo de Desenvolvimento) in the RMBH, and which is entrusted with the preparation and adoption of the Integrated Development Master Plan. This strategic plan presented guidelines and proposals on public policies and

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investments that guide regional development. The Plan was focused on urban areas where poverty and social vulnerability are concentrated through a combination of structural investments and coordinated measures of social development, environmental quality, generation of jobs, and delivery of local public services.

Fiscal sustainability and external financing 24. The Bank team worked very closely with the Agence Franaise de Dveloppement (AFD), which prepared a parallel financing of 300 million to support the reduction of social and regional inequalities in the State of Minas Gerais. The AFD operation also had a budget support format and was based on the GoMGs strategy to broaden the coverage of basic infrastructure and housing in the poorest regions of the State. The AFD operation supported the refinancing of the States debt with CEMIG. Although AFDs mandate does not include the support for broad reforms of public administration, the agency recognized the advances made by the GoMG with the support of the World Bank and the importance of the current reform program. As a result, the approval of the AFD operation was conditional on the approval of the World Bank operation. In addition to the 300 million loan with 20 year maturity from AFD, Credit Suisse, chosen in a competitive process with other private banks, provided US$1.3 billion with 15 year maturity and 5 year grace period to refinance the CEMIG debt.

1.5 Revised Policy Areas N/A

1.6 Other significant changes N/A

2. Key Factors Affecting Implementation and Outcomes 2.1 Program Performance 25. All required policy actions were satisfied in a timely manner, with no delays in effectiveness or disbursement. The Prior Actions have significantly advanced the States development agenda and have resulted in significant impact, as described below. While some of the indicators, specifically the ones on citizen participation and commercial tree planting have been missed, many outcomes were achieved and valuable lessons were learned. Indeed the State responded pro-actively to the missed indicators and used them as an opportunity to learn and adapt policy interventions.

2.2 Major Factors Affecting Implementation 26. Government commitment. Minas Gerais was and continues to be fully committed to the continuous reforms carried out since the Choque de Gesto. The Prior Actions and Results Indicators came from the States development agenda; hence the strong ownership and the fact that the operation was deeply embedded into the Government program strongly facilitated the implementation. Perhaps the most important evidence of commitment was the fact that the Government had been progressing systematically in its reform agenda, and thus had a long track record of implementation of reforms.

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27. Political and Institutional Risk. In the particular case of the implementation of the citizen participation model, the risk identified during preparation materialized and resulted in the non-expansion of the participatory model to all regions of the State. Despite strong political support, the implementation process and the necessary adjustments that the model seemed to require could not be achieved within the time of the implementation, but require a longer time period. However, valuable lessons learned for the design of citizen participation were obtained and the Government continues adjusting its approach on how to better involve citizens (See Annex 6).

28. Operation design. This DPL was anchored in the Governments current phase of the reform (Estado em Rede) and based on progress initiated by previous Partnership Series operations. The four DPL policy areas were highly relevant and well reflected in the PDO, and aligned with the Governments development agenda and the Banks CPS. The choice of a DPL was appropriate as disbursement to the treasury single account relieved fiscal pressure. Support of selected policy areas furthermore allowed the consolidation of previous reform efforts.

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

29. Design. The choice of a DPL covering multiple sectors and supporting various priority policy areas of the GoMG not only reflected the Governments commitment, but also backed inter-governmental coordination and the consolidation of previous multi-sector approaches. However, the original design of the results framework was weak and was not able to capture all of the progress made with the supported policy reforms (see Section 3.2).

30. Implementation. The Secretariat of Planning and Management (Secretaria do Planejamento e Gesto - SEPLAG) had overall responsibility for M&E, reporting progress and coordinating actions with other involved secretariats. As in the case of the other Partnership Series operations, the management of M&E and liaison with the Bank was carried out by the unit (Gesto Estratgica dos Recursos e Aes do Estado - GERAES) that focuses on day-to-day implementation of the Governments strategic program. SEPLAG led the actions under Policy Area 1; the Secretariats of Social Development (Secretaria de Estado de Trabalho e Desenvolvimento Social - SEDESE) and Education (Secretaria Estadual de Educao - SEE) were jointly responsible for implementation of reforms under Policy Area 2. Policy Area 3 was the responsibility of the State Secretariat for Environment and Sustainable Development (Secretaria de Estado de Meio Ambiente e Desenvolvimento Sustentvel - SEMAD) and the State Institute for Forest (Instituto Estadual Florestal - IEF). Finally, the Secretariat for Metropolitan Governance (Secretaria de Gesto Metropolitana - SEGEM) and the Development Agency of the Metropolitan Region of Belo Horizonte (Agncia de Desenvolvimento da Regio Metropolitana de Belo Horizonte - ARMBH) were responsible for Policy Area 4. As in previous Partnership Series operations, the monitoring of Results Indicators was carried out satisfactorily by the client, and collaboration and communication with the Bank continued to be very good. Consequently, the Bank was aware that some 2013 indicators were at risk (owing to design and not M&E problems) and the State provided detailed explanations. One of the particular strengths of monitoring and evaluation (and indeed overall implementation) was the high degree of coordination across secretariats through SEPLAG, which is also evidence of the efficacy of the management model adopted over the past decade.

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31. M&E Systems. Finally, this DPL and its M&E design significantly supported the strengthening of the States already well-articulated M&E framework, i.e. through the adoption of the SIAFI/MG budget model, and the prior review of investment projects.

2.4 Expected Next Phase/Follow-up Operation (if any) 32. This operation, in conjunction with the Minas Gerais SWAp, created a rich venue for continued collaboration in the Partnership Series. This longstanding relationship between the State of Minas Gerais and the Bank is likely to continue in the future, as it is an important factor in the continuous consolidation of the States reform process. The State has already expressed interest in a follow up operation to support the development of the Belo Horizonte Metropolitan Area.

3. Assessment of Outcomes

3.1 Relevance of Objectives, Design and Implementation

33. The operation was developed based on the States development agenda and was aligned with the Brazil Country Partnership Strategy. The DPL policy measures address four CPS pillars: (i) increasing the efficiency of public and private sector investments; (ii) improving the quality of public services for low income households; (iii) promoting regional economic development; and (iv) improving sustainable natural resource management and climate resilience. The design and objectives were and remain highly relevant for Brazil and for Minas Gerais. This operation was the third in the Minas Gerais Partnership Series and has supported the continuation and consolidation of the Government reform program.

34. The Results Indicators were generally relevant. Nevertheless, some of the Results Indicators could have benefitted from narrower and more operational definitions given the long chain of causality between public sector reforms and sector specific service delivery. For example, on Prior Action 7, while over the medium to long term it would be reasonable to expect improved management has a direct impact on educational outcomes, it would be difficult to attribute the achievement (or non-achievement) of the results indicator to an improved selection process of school managers in the short time frame of the project. The result indicator for Prior Action 10, the number of times the Conselho Deliberativo de Desenvolvimento held meetings, should be considered an intermediate result (i.e. the policy is actively being implemented) but cannot measure the final desired outcome, which would include better social and economic development indicators for the RMBH in future years. Furthermore, as one of the rationales of the operation even though not specifically mentioned in the PDO was to re-finance the debt with CEMIG and to improve the States debt sustainability, the project design would have benefitted from an indicator reflecting this.

3.2 Achievement of Program Development Objectives 35. The PDO was to assist the Government of Minas Gerais to deepen its innovative management model and strengthen budget management and sector policy management in the areas of social inclusion, environmental management and metropolitan governance. Policy Area 1 supported the deepening of the innovative management model and

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strengthened budget management, while the other Policy Areas supported the respective sector policies. The results achieved under each Policy Area are described below.

Policy Area 1 Strengthening public sector and budgetary management

36. This policy area aimed at strengthening the RBM organizational structure, systems and processes. Hence the first Prior Action decentralized RBM functions by establishing 22 Strategic Management & Innovation Units in the line secretariats. This decentralization of monitoring in turn promoted further institutionalization of strategic management and built capacity throughout the administrative apparatus and ultimately improved execution capacity. In line with this, the linked Results Indicator (RI), as targeted (improvements in the execution rates of priority projects -above an 85 percent rating), was overachieved, reaching 88.8 percent of priority projects relative to a baseline of 61 percent.

37. The second and third Prior Actions targeted the introduction of systemic and process reforms through upgrading the SIAFI/MG integrated budget model and completing rigorous prior-reviews of larger investment projects. The introduction of SIAFI/MG allows for monitoring of commitments relative to the planned budget, direct action with the line ministries to ensure compatibility between commitments and budgetary planning, and expansion of the budgetary management for new contracts before the procurement processes. Ultimately, the new procurement portal can block purchase requests that have estimated values beyond the budgetary credit available. Overall, this system improved the predictability and control of budget execution, which was reflected in a decrease in the percentage of budget items with contracts greater than the annual budget allocations from 16.12 percent to 14.5 percent, exceeding the original target of 8.45 percent.

38. The rigorous prior-reviews of investment projects required the previous evaluation of costs and impacts for projects with values above R$5 million. In 2012, 18 convnios were evaluated, and in 2013 the value was raised by decree to R$10 million, changing the focus of the evaluation portfolio to Investment Projects and Associated Projects. An entire methodology for evaluation of the projects was developed and this process is now systematized and institutionalized. The Results Indicator that targeted increasing the (value) share of projects for which screening and evaluation had been performed was underachieved. Approximately 6.2 percent of the total PPA projects were evaluated relative to a target of 9.12 percent. However, 76 percent of the Investment Projects with values above R$10 million were evaluated, showing considerable improvement in that particular area of focus. Moreover the methodology of prior-review is now well established in the State.

39. The final Prior Action targeted broader civil society participation in identifying priorities, particularly with a regional focus. The participatory model developed was launched in two pilot regions where regional meetings and forums were established, facilitated and closely monitored. However, due to the lack of capacity and training of civil society in these regions, the participation was very passive (see Annex 6). The Government then decided not to expand the model to all ten regions as the pilot regions did not achieve the results initially expected. Nevertheless, the Regional Committees comprised of Government representatives with some civil society participation, eventually played a bigger role than initially expected in integrating civil society in the planning

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process and were kept in all ten regions. Furthermore, the State undertook an evaluation of the programs results and reasons for the unexpected outcomes and showed great effort in trying to understand why the participatory model did not work as expected and how to improve it (see Annex 6 for a summary of the Governments evaluation).

40. Citizen participation is also embedded through local consultations as part of the federal governments Multi-Year Plan (Plano Plurianual-PPA). The fact that the participatory model did not reach the results expected is somewhat mitigated by the fact that the federal governments PPA process requires local consultations in devising annual budgets and the State, through its RBM system and deconcentration, continues to identify and vet priorities. Furthermore, the Regional Committees still maintain an element of citizen participation, even though not as formal and structured as initially planned with the Regional Forums.

41. Overall, Policy Area 1 achieved two of the three Results Indicators and the actual outcomes achieved far exceed the results represented by the indicators. The GoMG went to great lengths into the decentralization of the management model, the institutionalization of better budgetary controls, and increase in citizen participation. While not all of the reforms achieved the expected level of success, as was the case for the citizen participation, this resulted in important lessons learned and opportunities to improve future efforts in this area. Indeed the process of learning by doing or feeling the stones to cross the river has been one of the hallmarks of the Minas reform process, whereby successful experiments are adopted and less successful ones are adapted or dropped.

Policy Area 2 - Promoting Social Inclusion

42. In Policy Area 2, the main objective was broadly to strengthen management of social protection and education services, and increase their supply for the poor through increase in resources diagnostics, funding and service delivery. It was recognized that a major challenge was the uneven management capacity across municipalities, which undermined the implementation of social inclusion programs at the municipal level. To strengthen and improve the coordination amongst the various government-level programs for income transfer, productive inclusion and provision of public services, the GoMG took measures for co-financing of social services provided by the municipalities and improvement in the identification of poor families entitled to receive assistance from federal, state and municipal social programs. The Piso Mineiro provided supplementary flexible resources needed by municipalities to finance services and benefits to the most vulnerable and at risk local populations in municipalities based upon the number of poor families registered in the Cadnico.

43. Related to that, along the period of this operation, there was an increase in the number of municipalities receiving state transfers. In fact, all 853 municipalities of Minas Gerais were granted the Piso Mineiro by 2013, ahead of the 2014 schedule. Also, municipalities of Minas Gerais significantly improved their IGD-M4 scores. There was a

4 The IGD-M was created to fund the identification and monitoring of the most vulnerable families by municipalities. It measures the quality of municipal management of Bolsa Famlia Program (PBF) and Cadnico and, based upon performance, ensures monthly federal transfer of funds to municipalities. To receive the resources of the IGD-M, the municipality must score minimum index of 0.55.

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reduction of more than 85 percent in the number of municipalities which IGD-M scored less than 0.55. The overall increase in the IGD-M scores for municipalities, and their compliance with federal social safety net guidelines, eventually yielded higher federal transfers to municipalities. Hence, results indicators 5 and 6 were exceeded, and there was supposedly an increased availability of funding from both federal and state level social programs to municipalities in Minas Gerais.

44. The Prior Action regarding the amendment of the Programa Travessia to increase diagnostics studies in poor municipalities had no associated Results Indicator. However, the State has produced more than 140 Social Deprivation Maps based on the UNDP methodology. Accordingly, they portray the multidimensional aspects of poverty that go beyond economic variables and include health, education, living conditions, and provide a fundamental tool for planning and designing adequate government programs to address the needs of the most vulnerable.

45. The Prior Action for the education sector (the introduction of merit based selection of regional officials and school directors) was particularly important. It is linked to the specific objective of strengthening the management and quality of education according to the rationale that ensuring higher standards in the education system management shall improve overall efficiency and thus have a positive impact on students in lower-income neighborhoods and poorer-performing schools. The RIs associated with this Prior Action refer to the expected short-term stronger managerial performance by the recently selected cadre, measured in terms of the increase in education personnel with updated records in the human resource system, and the longer-term impact on the performance of student learning levels. As such, there was a 99,8 percent reduction in the backlog of education personnel records in the Human Resources System (Sistema Eletrnico de Administrao de Pessoal do Estado de Minas Gerais SISAP-MG), i.e. from a backlog of records to be addressed and input of nearly 92,000 the remaining stock was only 178. This represents an overachievement of the original target.

46. The final RI, namely improved PROEB school testing results in Math and Portuguese, however, was not fully met. All three grades tested in Math and Portuguese exceeded the 2011 PROEB test scores. Nonetheless, the baseline was set as 2010 given the timing for preparation of the project. The rigid baseline and challenging targets were not altered and did not compensate for the longest strike of teachers in the States history (112 days), from June to September 2011. Yet the impact of the strike undoubtedly affected performance of schools in the next two years. In addition, as previously stated, the period for monitoring and evaluation of the operation, was clearly too short to assess the impact of the managerial reform. While good school directors are known to be an essential input of learning performance this could not measurably affect improvement in test scores in two to three years, especially with such a disruption in teaching activities.

47. This notwithstanding, there are mitigating circumstances pertinent to the evaluation of education performance. A mitigating factor is that Minas Gerais was starting from a high level relative to other states owing to numerous reforms implemented over the past decade. In 2011 the State scored first in Portuguese and Math in percentage of students performing at the recommended level in the 5th and 9th grades of basic education and the 3rd year middle school in math, while ranking 4th in Portuguese. Also in terms of Index for Basic Education Development (ndice de Desenvolvimento da Educao

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Bsica IDEB) test scores the early and later years of basic education and middle school ranked first, second and third respectively. Hence, the shortfall on the test score indicator is not representative of continuing recent progress in the education sector in Minas Gerais.

Policy Area 3 - Increasing environmental sustainability

48. The goal of this policy area was to increase state capacity for managing environmental challenges. On the institutional side, responsibilities and business processes on environmental licensing were integrated to ensure better collaboration and more efficient environmental regulatory system. Through the reorganization of the Secretariat of Environment and Sustainable Development (Secretaria Estadual de Meio Ambiente e Desenvolvimento Sustentvel SEMAD) two new Sub-Secretariats were created: the Sub-Secretaria for Management and Regularization (Subsecretaria de Gesto e Regularizao Ambiental Integrada SGRAI) and the Sub-Secretariat for Control and Inspection (Subsecretaria de Controle e Fiscalizao Ambiental Integrada SUCFIS). Both Sub-Secretariats work through decentralized regional offices, yet with an integrated centralized oversight. As a result of the integration and the use of synergies, work flows and communication were improved, and the Government was able to significantly increase controls of compliance with environmental regulations.

49. Special emphasis was given to the detection of non-compliance with environmental regulations. During 2012 and 2013, Special Oversight Operations (Operaes Especiais de Fiscalizao) including aerial mapping of remote forest areas to detect illegal deforestation, and extensive testing on water quality to reveal clandestine disposal of waste waters found four cases of non-compliance with environmental regulations. All of these irregular business undertakings were then closely monitored to assure improvements of the previous situation and compliance with the regulations.

50. Another action undertaken in this Policy Area was the adoption of measures to encourage forest plantation to supply raw input to State metallurgy industries. The intention was to diminish the harvesting of native forest for charcoal production and to stimulate commercial tree planting carried out by the private sector and entrepreneurs, which had been declining since 2009. While it was intended to increase the hectares of planted forest, the number actually decreased by about 35 percent during the time of the project. The Government action was also linked to Brazils participation in the Clean Development Mechanism (CDM) under the Kyoto Protocol, which was expected to finance new tree plantations.

51. However, the new phase of the Protocol unexpectedly declared high-middle income countries, including Brazil, ineligible for the financing scheme. When the CDM payments were discontinued, there was no other mechanism that could have substituted the absence of those payments. Additionally, private sector incentives were further diluted by the recession and a decrease in demand for raw input for charcoal production resulting in a 50 percent decrease of the plantation area for new trees from about 200,000 hectare in 2008 to 100,000 hectare in 2012 The Government could have launched its own incentive program, but due to the decreased demand and a potential time lag for such a program to show results, it would most likely not have been cost effective. It can be assumed that if those two external factors (CDM mechanism and

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economic conditions) had continued, the commercial tree planting would have increased by up to 50 percent. Annex 7 describes in detail the background and lessons learned, including the proposed policies going forward.

52. It should also be underlined that the State undertook several actions to diminish the harvesting of native forest for charcoal production. For example, the State has recently passed laws and regulations requiring 95 percent of raw wood materials to be supplied from cultivated forests. It has eliminated the import of natural forest products from other states to ensure that their forests are not cut to supply local charcoal needs. Each pig iron or steel mill is required to develop annual plans for sustainable supply of wood and charcoal. The State intends to implement these laws including reviewing wood sourcing plans, the use of border crossing point freight inspections and satellites to verify planted areas. These laws are integrated into a broad-reaching, multi-faceted environmental framework that will contribute to ending the harvesting of pristine forests for charcoal.5

Policy Area 4 - Developing a metropolitan governance framework

53. The key outcome associated with Policy Area 4 was to strengthen governance of the RMBH to enable the coordination of State and Municipal public policies. Accordingly, the respective Prior Action required that the RMBH Metropolitan Authority adopt an integrated regional development master plan. This approach, which was also supported through the Minas Gerais SWAp operation, established the guidelines and orientation on public policies and investments for promoting the development of the region, aiming at improving the quality of life of the RMBHs population.

54. The state achieved both Results Indicators which targeted more rapid land parceling procedures and regular agency meetings. The RI requiring regular Commission meetings was intended to ensure that a key new metropolitan agency was operational and performing its important intersectoral and intergovernmental coordinating functions. The Commission was supposed to meet every two months and exceeded this target with one meeting every 15 days, suggesting that it was very actively carrying out its functions. The reduction in the average time for the analysis of requests of prior approval for land parceling in the RMBH also overachieved the original target. Previously it would take 27.5 days to obtain the prior approval as compared to the latest record of 10.5 days. These improvements will become increasingly important as the Metropolitan Master Plan is implemented and generate urban investment projects.

5 State laws and regulations include, the Codigo Florestal Mineiro 2013, Plano de Auto Suprimento, Decreto Plano de Preveno e Combate ao Desmatamento no bioma Mata Atlntica, Lei sobre a Politica de Mudana do Clima, apoio a ABC, Copa Verde, Projeto Certifica Minas-Florestas, Projeto ndice de Atratividade ao Investimento Florestal--and the update of the original plan "Incentivo a Aquisio e Plantio de Florestas de Produo de Base Sustentvel"linked to the Programa Estruturador da SEAPA (Secretariat of Agriculture).

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3.3 Justification of Overall Outcome Rating

Rating: Satisfactory

55. The overall outcome of the PDO was achieved. The outcome of the project is rated satisfactory as the operations objectives as expressed by the PDO of deepening Minas Gerais innovative management model and strengthening budget management and sector policy management was achieved. As described in the previous section, the States reforms of its management model were consolidated, and it is now firmly integrated in the institutional structure of the administration. Sector policy management underwent important regulatory and institutional reforms, with important results achieved in the areas of social inclusion, environmental management and metropolitan governance. Even though the citizen participation model did not fully achieve the outcomes expected, the Government took actions and assessed the shortcomings of the initial model and took initial steps to adapt it. Some result indicators were not fully under the Governments control, as for example in the case of new forest plantation for charcoal production, which resulted in not all result indicators being fully achieved. However, this shortcoming was less related to State performance than to indicator selection and did not negatively influence the overall outcome of the project.

56. On the contrary, when the Government noticed that some of the policies did not generate the desired results, it took actions to adjust those shortfalls. Assessments were carried out and alternatives were developed to adapt the lagging policies. Even more, the lessons learned from those experiences (i.e. from the citizen pilots and commercial tree planting) were rapidly incorporated into further improvements of sector policies and approaches. This process of adaptation has been a central element of the management reform since it began a decade ago.

3.4 Overarching Themes, Other Outcomes and Impacts (a) Poverty Impacts, Gender Aspects, and Social Development

57. This DPL moved the Partnership Series significantly in the direction of addressing poverty by including a Promoting Social Inclusion Policy Area. It addressed poverty through two Prior Actions: (i) implementation of the Piso Mineiro program resulting in transfers to poor municipalities, and (ii) amendment of the Programa Travessia to allow for a more targeted study of impoverished areas. As a result, all of Minas Gerais 853 municipalities were granted transfer through the Piso Mineiro, and the number of municipalities with IGD-M below 0.55 was reduced drastically, from 90 to 11.

58. Poverty aspects were addressed through action in the education sector. Poverty issues were also indirectly addressed under the Social Inclusion Policy Area with a Prior Action requiring merit based selection of state regional school superintendents and school directors followed up by Results Indicators requiring improved learning performance and personnel record-keeping. In the long run this is probably one of the most important poverty oriented measures because the poor and near poor students usually attend public

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schools, and improving the quality of education is one of the most effective mechanisms of increasing the capital of the poor.

(b) Institutional Change/Strengthening

59. The Third Partnership Series DPL, as a continuation of the Partnership Series with Minas Gerais, was first and foremost designed to refine, strengthen and build support for the Choque de Gesto model. Policy Area 1 (Strengthening public sector and budgetary management) deepened the management model through the establishment of 22 Strategic Management and Innovation units, adopting the SIAFI/MG integrated budget system, and requiring rigorous prior review of infrastructure projects over R$5 million. Those actions resulted in improved budget planning and execution. The reorganization of the Secretariat of Environment and Sustainable Development under Policy Area 2 resulted in improved work flows and communication, and the Government was able to significantly increase controls of compliance with environmental regulations. Policy Area 3 (Developing a metropolitan governance framework) introduced important institutional changes, which established the guidelines and orientation on public policies and investments for promoting the development of the region and fostered intersectoral and intergovernmental level coordination.

(c) Other Unintended Outcomes and Impacts (positive or negative, if any)

60. Further steps to adjust solutions for citizen participation are being undertaken. The major unintended outcome is that the State has undertaken further steps to analyze and develop solutions to address the failure to achieve some Results Indicators and their respective development impact. The difficulties encountered in enrolling local participants in meaningful development agenda discussions once Regional Committees had been established is an example for this. The Government has evaluated and analyzed the issues of how to address non-compliance of the regional committees, how civil society can/should be approached and what it has to offer, and the opportunities and limits of participatory development approaches. Annex 6 provides a summary of the Governments conclusions, lessons learned and suggested new approaches.

61. Similarly, the State is evaluating why PROEB test score targets were not met. Finally, a paper analyzing the shortfall in tree plantation hectarage has been addressed in a Government Memorandum (see Annex 7 for a summary). While the State had the intention to eliminate the harvest of native forest for charcoal, the implementation mechanisms chosen are being reconsidered.

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

4. Assessment of Risk to Development Outcome

Rating: Low

62. The risk to the achieved outcome of deepening Minas Gerais management model is considered to be low for a number of reasons. First, the model is now

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embedded in the States institutional structure and its processes, and has reached a mature status of integration and implementation. This is strengthened by a wide support of technical staff as graduates from the State School of Government and others recruited into the government are firmly schooled and committed to the model. Furthermore, it fits seamlessly into federal budget legal requirements to consult, prioritize programs and incorporate indicators. Finally, the models success has been widely recognized and generally acclaimed state-wide, nationally and internationally and has become a source of pride of the GoMG and its public servants.

63. The Choque de Gesto and follow-up reforms were launched and supported by the highest level of government. With elections scheduled in October 2014 there is the possibility of a change in policy priorities which could move away from the previous reform process and/or diminish the Minas Gerais management model. However, a more likely outcome is that if policy priorities changed, the model, which is by now well entrenched, would be used to implement these changes. Conversely, it is expected that the next administration will follow its predecessors priorities and continue with the reform processes.

5. Assessment of Bank and Borrower Performance

5.1 Bank Performance (a) Bank Performance in Ensuring Quality at Entry Rating: Moderately Satisfactory

64. This operation was designed within the overarching context of the Development Partnership Series .The strategy to deepen and expand the reach of previous reforms was a rational progression agreed by the Government and the Bank and provided the basis for the design of this operation. This was a very timely operation, properly conceived with reasonable Prior Actions, objectives and desired outcomes selected within the overarching context of the Minas Gerais Development Partnership Series.

65. The one area where greater care should have been exercised is the results framework and specifically the coverage and definition of Results Indicators. Some had technical design flaws, such as the government not controlling the results, tenuous links between Prior Actions and Results Indicators, and multiple causal chains. As a result, the link between the results framework and the PDO had shortcomings with several indicators not directly measuring the desired PDO outcome.

(b) Quality of Supervision

Rating: Satisfactory

66. Supervision was given close attention because of the loan size and its importance as a Partnership Series operation. The long-standing collaboration and close relations between State officials and Bank staff facilitated the supervision. The Bank was able to exploit synergies since the SWAp and this operation overlapped in terms of implementation

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time and sector coverage, resulting in regular communication and supervision of the operation. In addition to formal supervision missions the Bank team was in continual contact with the State, to advice on issues and problems as they developed.

(c) Justification of Rating for Overall Bank Performance Rating: Satisfactory

67. Overall Bank performance is rated satisfactory as the overall project design and implementation support contributed to the desired outcome of the operation, which facilitated the continuous and enhanced collaboration with the State of Minas Gerais.

5.2 Borrower Performance (a) Government Performance Rating: Highly Satisfactory

68. The Government was fully committed to this operation. The Government of Minas Gerais was and remains fully committed to the continuous reform process supported under this and previous Bank operations in the Minas Gerais Development Partnership Series. It is noteworthy that this operation also had the full support of the Governor, Vice Governor and senior officials who have spearheaded past operations of the Partnership Series. The involvement of stakeholders such as the civil society was addressed in a specific component and high priority was given to this policy area.

69. High technical and institutional capacity facilitated the implementation. The high technical capacity of the government staff, intergovernmental coordination and implementation mechanisms embedded in the Governments existing M&E framework facilitated an efficient implementation process and timely and technically sound resolution of arising implementation issues, for example, the adaption of the pilot methodology for citizen participation.

70. Many of the Prior Actions and Results Indicators are part of the States development agenda, enjoyed high ownership and political support, and the Government mostly overachieved the indicators that it controlled. When the design flaws of some indicators were recognized, the Government took mitigating measures, drew lessons learned and has demonstrated its seriousness in addressing these issues and is doing due diligence. (b) Implementing Agency or Agencies Performance

Rating: Highly Satisfactory 71. All secretariats involved were highly committed to the implementation of this operation, and communication and coordination during preparation and implementation was excellent. The implementing agencies have done an excellent job of implementing this operation, including the use of their internal M&E system for follow-up and early recognition of potential implementation issues, which then were addressed immediately.

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Furthermore, the liaison with and providing information to Bank counterparts was timely and of high quality. (c) Justification of Rating for Overall Borrower Performance Rating: Highly Satisfactory

72. The very positive outcomes of this operation are mainly due to the strong government commitment to the reform process, the technical capacity of the government staff and the continuous effective and efficient collaboration with the Bank team. Hence, following the criteria suggested under the ICR methodology, which focuses on the government and implementing agencies commitment, ownership and provision of an enabling environment, overall Borrower performance is rated Highly Satisfactory.

6. Lessons Learned

73. Results-based Management models cannot be implemented in isolation. While evidence seems to suggest that there is a particularly positive impact of results agreements on service delivery outcomes6, the adoption of the model has not been done in isolation. Fiscal reforms are an important condition to the successful adoption of RBM. In Minas Gerais, the fiscal rationalization was a key objective of the first phase of the reform. The combination of institutional context and interventions, known as performance regime, is what really drives performance for specific services.

74. Reform processes require a long-term commitment and relationship. As in the case of the Results-based Management reform in Minas Gerais, the process evolved over time, it must be adapted and refined. Minas Gerais is a microcosm of Brazil and previously the State was poorly managed and displayed many of the chronic problems found elsewhere in badly managed states in Brazil and in other countries. The Choque de Gesto approach transformed the State and made it easier for future Governments to implement their priorities. There are important lessons to be learned from Minas Gerais experience that will doubtless be of use to other governments. However, the experience of Minas Gerais indicates that there is no unique template of processes and institutions for a successful management model. The iterative application of the system led to considerable adjustments. Supporting a client with a strong program over an extended period has shown to be successful. The decade-long collaboration with Minas Gerais through the Partnership Series of loans created the possibility for continued collaboration, which benefited both the GoMG and the Bank. The strong relationship can be said to have contributed significantly to the success of the reform process.

75. Replication to other States. Numerous countries, Brazilian states and large domestic municipalities have visited the State to learn about the Choque de Gesto, and to draw lessons on how to implement similar reforms in other places. The challenge for the Bank is how to disseminate the case of Minas Gerais more broadly and on how to effectively replicate this experience elsewhere.

6 See Review and Research Agenda on Results-Based Management in Brazilian States (2013)

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76. Reforms need sustained champions. One of the main factors of the success of the Choque de Gesto was the dedication of an incoming administration with a team of highly trained, dedicated professionals and a mission to implant results-based management. It is perhaps worth looking more closely at this dynamic to understand the importance of champions and how the Minas Gerais experience might be replicated.

77. Cooperation with other public and private institutions to provide innovative financing arrangements. This DPL is a good example of successful cooperation and combined efforts with other development institutions (AFD) and private actors (Credit Suisse). In particular, it is noteworthy that the Bank program with GoMG conveyed reassurance to leverage the partnership with AFD, and ultimately the involvement of the three institutions provided the State with the financial and technical resources it needed to solve the CEMIG debt and to improve the States debt sustainability. 78. Identifying results indicators for reforms is a challenge. Great care must be taken with the technical definition of Results Indicators and subsequent supervision. Despite this DPL having been designed by experienced Bank and State officials, the Results Indicators had various technical flaws, some causality chains were tenuous and not all Prior Actions had indicators.

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

(a) Borrower/Implementing agencies

79. The Borrower provided the Bank with their comments on the ICR (See Annex 4). The majority of the comments referred to revisions or further explanations on indicators and is addressed below. Small editorial comments were also addressed.

80. Updated information on Indicator 8 (Share of students reaching adequate learning levels or higher on the annual PROEB exam) was provided by the Borrower; however, indicator still was underachieved. The necessary sections were updated accordingly.

81. As for Indicator 9 (Share of irregular business undertakings monitored after being identified through the Special Inspection Operations to ensure mitigation measures are implemented), the Borrower emphasized that as documented in the Aide Memoire from the January 2013 mission, it was agreed to monitor two irregular business undertakings in 2013, in addition to two other that were already monitored during the previous year. Overall, 100 percent of the four irregular business undertakings identified through the Special Inspection Operations defined at the beginning of 2014 were monitored, achieving the target.

(b) Cofinanciers N/A (c) Other partners and stakeholders N/A

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Annex 1. Bank Lending and Implementation Support/Supervision Processes

(a) Task Team members Names Title Unit

Lending Gianfranco Bertozzi Senior Financial Officer FABBK Roland N. Clarke Lead Economist and Sector Lead LCSPR Joseph Kizito Mubiru Sr Financial Management Specialist LCSFM Tarsila Ortenzio Velloso Consultant LCSPR Pablo Fajnzylber Sector Manager PREM Rafael Barroso Economist LCSPE Fanny Weiner Public Sector Management Specialist LCSPS Miguel Navarro Lead Financial Officer FABBK Leandro Costa ET Consultant LCSHE Anna Fruttero Senior Economist LCSHS Tiago Peixoto Governance Specialist WBIOG Barbara Farinelli Operations Analyst LCSAR Augusto Mendona Consultant LCSSD Alberto Costa Senior Social Development Specialist LCSSO Rogerio Santarosa ET Consultant LCSPP Jos Manuel Rodrguez Senior Public Sector Specialist LCSPS Alessandra Campanaro Senior Infrastructure Specialist LCSDU Flavia Nahmias Program Assistant ECRBX Tatianna Schlottfeldt Program Assistant LCSPS Patricia Mendez Executive Assistant LCSPR Rocio Manrique Program Assistant LCSPS

Supervision/ICR Garo Batmanian Lead Environmental Specialist EASCS Barbara Bruns Lead Education Economist LCSHE Roland N. Clarke Lead Economist and Sector Lead LCSPR Fanny Weiner Public Sector Management Specialist LCSPS Laura de Castro Zoratto Economist LCSPS Ludmila Vidigal Silva Voice Secondee LCSPS Ana Mie Horigoshi Reis Junior Professional Associate LCSPS Angela Nieves Marques Porto E T Temporary LCSPS Brianna Rojas-Elton E T Temporary LCSPS

(b) Staff Time and Cost

Stage Staff Time and Cost (Bank Budget Only)

No. of staff weeks US$ Thousands (including travel and consultant costs) Lending 53 367

Total: 53 367 Supervision/ICR 14 91

Total: 14 91

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Annex 2. Beneficiary Survey Results N/A

Annex 3. Stakeholder Workshop Report and Results N/A

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Annex 4. Summary of Borrower's ICR and/or Comments on Draft ICR The task team received the following comments on the draft ICR:

(i) On Indicator 2: the Borrower pointed that the Indicator was misrepresented in the ICR as 14.5 percent, instead of 1.45 percent. Considering the corrected number the indicators was overachieved.

(ii) On indicator 8: the Borrower provided updated data with respect to the share of students reaching adequate learning levels or higher on the annual PROEB exam.

(iii) On Indicator 9 the Borrower had the following comment:

Inicialmente, foram planejadas 10 Operaes. Entretanto, conforme apontada na Ajuda a Memria da Misso de Janeiro de 2013: para o ano de 2013 sero fiscalizadas e acompanhadas 2 (duas) operaes especiais, de acordo com o Planejamento Operacional. Destaca-se que estas 2 (duas) so adicionais s outras 2 (duas) que j esto sendo monitoradas, a saber: Serra da Moeda e Suinocultura. As metodologias de monitoramento ps fiscalizao sero desenvolvidas para cada uma dessas 2 (duas) Operaes Especiais a partir do planejamento especfico da operao. As quatro operaes estipuladas no incio do ano foram realizadas, ao final do mesmo.

(iv) On Section 3.2 Achievement of Program Development Objectives: the Borrower noted that a revision was necessary, considering the revised indicator referent to Policy Area 1:

Conforme demonstrado acima, o indicador teve meta atingida.

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Annex 5. Comments of Cofinanciers and Other Partners/Stakeholders N/A

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Annex 6. Citizen Engagement in Policy Priorization: The Estado em Rede experience7

The set of planning and management strategies adopted by the Government of

Minas Gerais since 2003 and known as Management Shock (Choque de Gesto) can be divided in three distinct phases. The first phase (2003-2006) focused on fiscal balance; the second phase (2007-2010) focused on creating a goal-oriented system, with results agreements and awards for performance; and the final and third phase, particularly tackled under this operation, focused on Management for Citizenship (Gesto para a cidadania).

The concept of Management for Citizenship, and more specifically of the Estado

em Rede program, proposed the restructuring of the alignment of state structures through the following: (i) the use of transverse and intersectoral networks; the horizontalization and flexibilization of organizational structures; (ii) the development of new forms of participation of the organized civil society; (iii) the regionalization of public policy strategies and goals; and (iv) the improvement of management information systems.

The programs design was based on two pillars: Regionalized Management,

which aimed to bring the strategy of the State Government closer to the specific needs and characteristics of each region; and Participatory Management, where the government presents its strategies and actions and asks for suggestions and opinions of representatives of the organized civil society on the priorities of each region. These two pillars would complement each other in supporting the Government to provide a more regionalized view of the government strategies and goals, increasing the adequacy of the execution of public policies in all of the states regions and contributing to the reduction of existing inequalities. Overall, the program aimed to identify priorities within the strategies, based on regional peculiarities and in partnership with society, therefore allowing for the creation of mechanisms for monitoring the implementation of the strategies. The Estado em Rede Program (as originally envisioned) The program was originally composed of a very complex structure that comprised three governmental bodies and several instances of meetings between government and civil society representatives. For a series of reasons, including the lack of political buy-in and preparation for civil society preparation, the program was not fully successful. While it can be said that the Regionalized Management pillar had good results and succeeded in improving according to lessons learned during implementation, the Participatory Management pillar did not achieve the expected results and the program was not expanded beyond the two initial pilots. Nevertheless, the experience improved the

7 Based on report prepared by the Government of Minas Gerais, Gesto Regionalizada e Gesto Participativa: Avaliao da implantao do projeto piloto.

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governments understanding of the difficulties associated with the citizen participation process and many lessons were l

relatório do banco mundial referentes a parcerias com governo de mg e o choque de gestão.pdf

Documents

development objectives

development outcome

state of minas gerais

assessment of bank

results report ibrd

management secretaria

ratings of program performance

results framework analysis