Document of

The World Bank

FOR OFFICIAL USE ONLY

Report No: 66805-BR

PROJECT APPRAISAL DOCUMENT

ON A

PROPOSED LOAN

IN THE AMOUNT OF US$20.82 MILLION

TO THE

MUNICIPALITY OF SÃO BERNARDO DO CAMPO WITH A GUARANTEE FROM THE FEDERATIVE REPUBLIC OF BRAZIL

IN SUPPORT OF THE

THIRD PHASE OF THE US$130.88 MILLION

INTEGRATED WATER MANAGEMENT IN METROPOLITAN SÃO PAULO ADAPTABLE PROGRAM LENDING (APL)

(PROGRAMA DE SANEAMENTO AMBIENTAL DOS MANANCIAIS DO ALTO TIETÊ - PROGRAMA MANANCIAIS)- SÃO BERNARDO DO CAMPO PROJECT

March 1, 2012

Sustainable Development Department Brazil Country Management Unit Latin America and Caribbean Region

This document is being made publicly available prior to Board consideration. This does not imply a presumed outcome. This document may be updated following board consideration and the updated document will be made publicly available in accordance with Bank’s Policy on Access to Information.

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CURRENCY EQUIVALENTS

(Exchange Rate Effective January, 2012)

Currency Unit = BRL BRL 1.74 = US$1 US$ 0.57 = BRL 1

FISCAL YEAR

January 1 – December 31

ABBREVIATIONS AND ACRONYMS AOP Plano Operativo Anual Annual Operative Plan APL Programa de Empréstimo de Ajuste Adjustable Program Loan ARSESP Agência Reguladora de Saneamento e

Energia Energy and Sanitation Regulatory Agency

BRL Real Brazilian Real CAS Estratégica de Assistência ao País Country Assistance Strategy CAT Comitê do Alto Tietê Alto Tiete River Basin Committee CBH Comitê de Bacias Hidrográficas River Basin Committee CDC Conselho de Coordenadores Committee of Coordinators CDHU Companhia de Desenvolvimento

Habitacional e Urbano do Estado de São Paulo

State of São Paulo Urban Development & Housing Company

CEF Caixa Econômica Federal Federal Bank CETESB Companhia de Tecnologia de

Saneamento Ambiental Environmental Sanitation Technology Company

CP Contrapartida Counterpart funds CRH Conselho Estadual de Recursos

Hídricos State Water Resources Council

CONESAN Conselho Estadual de Saneamento State Water and Sanitation Council DAEE Departamento de Águas e Energia

Elétrica São Paulo’s Water and Energy Department

SEA Estudo de Impacto Ambiental Environmental Impact Assessment EMP Plano de Gerenciamento Ambiental Environmental Management Plan ETE Estação de Tratamento de Esgoto Wastewater Treatment Plant FMA Avaliação do Gerenciamento Financeiro Financial Management Assessment GESP Governo do Estado de São Paulo Sao Paulo State Government IA Convênio Guarda-Chuva Implementation Agreement IBGE Instituto Brasileiro de Geografia e

Estatísticas Brazilian Institute of Geography and Statistic

IBRD Banco Internacional para Reconstrução e o Desenvolvimento

International Bank for Reconstruction and Development

IDB Banco Interamericano de Inter-American Development Bank

Desenvolvimento MRSP Região Metropolitana de São Paulo Metropolitan Region of Sao Paulo M&E Monitoramento e Avaliação Monitoring and Evaluation NGOs Organizações não governamentais Non-governmental organizations O&M Operação e Manutenção Operation and Maintenance OM Manual Operativo Operational Manual OP Política Operacional Operational Policy PAC Programa de Aceleração do

Crescimento Growth Acceleration Program

PAD Documento de Avaliação do Projeto Project Appraisal Document PCN Nota Conceitual do Projeto Project Concept Note PDO Objetivos de Desenvolvimento do

Programa Program Development Objectives

PDPA Plano de Desenvolvimento e Proteção Ambiental

Environmental Protection and Development Plan

PHRD Fundo de Doação Japonês Japan Policy and Human Resources Development Fund

PMG Prefeitura Municipal de Guarulhos Guarulhos Municipality PMSBC Prefeitura Municipal de São Bernardo

do Campo Sao Bernardo do Campo Municipality

PMSP Prefeitura Municipal de São Paulo Sao Paulo Municipality PMSS Programa de Modernização do Setor

Saneamento Water Sector Modernization Project

PP Plano de Licitações Procurement Plan PPAR Relatório de Auditoria da Performance

do Projeto Project Performance Audit Report

PQA Programa de Controle de Qualidade da Água

Water Quality Control Program

RAP Plano de Ação para Reassentamento Resettlement Action Plan RPF Marco da Política de Reassentamento Resettlement Policy Framework SAAE Serviço Autônomo de Água e Esgoto de

Guarulhos Guarulhos Water and Sanitation Autonomous Utility

SABESP Companhia de Saneamento Básico do Estado de São Paulo

State Water and Sanitation Utility

SEHAB Secretaria de Habitação (Antiga SHAMA)

São Bernardo do Campo’s Secretariat for Housing and the Environment (former SHAMA)

SH Secretaria Estadual de Habitação State Secretariat for Housing SHAMA Secretaria de Habitação e Meio

Ambiente São Bernardo do Campo’s Secretariat for Housing and the Environment

SIAFEM Sistema Estadual de Informações Gerenciais

State Administrative and Financial System

SMA Secretaria Estadual de Meio Ambiental State Secretariat for the Environment

SNIS Sistema Nacional de Informações em Saneamento

National Water and Sanitation Information System

SP São Paulo Sao Paulo SSRH Secretaria Estadual de Saneamento e

Recursos Hídricos (Antiga SSE) State Secretariat for Water Supply, Sanitation and Water Resources (Former SSE)

Tbd A ser definido To be defined ToR Termos de Referência Terms of Reference UGL Unidade de Gerenciamento Local Local Management Unit UGP Unidade de Gerenciamento do

Programa Program Management Unit

USP Universidade de São Paulo University of Sao Paulo WRM Gestão de Recursos Hídricos Water Resources Management WSS Abastecimento de Água e Esgotamento

Sanitário Water Supply and Sanitation

Vice President: Hasan Tuluy

Country Director: Makhtar Diop Sector Director: Ede Jorge Ijjasz-Vasquez Sector Manager: Ellen Hamilton (Acting)

Task Team Leader: Oscar Alvarado

BRAZIL INTEGRATED WATER MANAGEMENT IN METROPOLITAN SÃO PAULO

MANANCIAIS HORIZONTAL APL PROGRAM

CONTENTS

Page

I.  STRATEGIC CONTEXT AND RATIONALE ................................................................. 1 

A.  Country and sector issues.................................................................................................... 1 

B.  Rationale for Bank involvement ......................................................................................... 2 

C.  Higher level objectives to which the project contributes .................................................... 4 

II.  PROJECT DESCRIPTION ................................................................................................. 4 

A.  Lending instrument ............................................................................................................. 4 

B.  Program objective and phases ............................................................................................. 5 

C.  Project development objective and key indicators .............................................................. 6 

D.  Project components ............................................................................................................. 6 

E.  Lessons learned and reflected in the program design ......................................................... 8 

F.  Alternatives considered and reasons for rejection .............................................................. 9 

III.  IMPLEMENTATION .................................................................................................... 10 

A.  Partnership arrangements .................................................................................................. 10 

B.  Institutional and implementation arrangements ................................................................ 10 

C.  Monitoring and evaluation of outcomes/results ................................................................ 10 

D.  Sustainability..................................................................................................................... 11 

E.  Critical risks and possible controversial aspects ............................................................... 12 

F.  Loan/credit conditions and covenants ............................................................................... 15 

IV.  APPRAISAL SUMMARY ............................................................................................. 15 

A.  Economic and financial analyses ...................................................................................... 15 

B.  Technical ........................................................................................................................... 17 

C.  Fiduciary ........................................................................................................................... 17 

D.  Social................................................................................................................................. 18 

E.  Environment ...................................................................................................................... 19 

F.  Safeguard policies ............................................................................................................. 20 

G.  Policy Exceptions and Readiness...................................................................................... 21 

Annex 1: Country and Sector or Program Background ......................................................... 23 

Annex 2: Major Related Projects Financed by the Bank and/or other Agencies ................. 29 

Annex 3: Results Framework and Monitoring ........................................................................ 31 

Annex 4: Detailed Project Description ...................................................................................... 39 

Annex 5: Project Costs ............................................................................................................... 47 

Annex 6: Implementation Arrangements ................................................................................. 49 

Annex 7: Financial Management and Disbursement Arrangements ..................................... 52 

Annex 8: Procurement Arrangements ...................................................................................... 59 

Annex 9: Economic and Financial Analysis ............................................................................. 64 

Annex 10: Safeguard Policy Issues ............................................................................................ 71 

Annex 10A: Social Analysis........................................................................................................ 92 

Annex 11: Project Preparation and Supervision ................................................................... 100 

Annex 12: Documents in the Project File ............................................................................... 102 

Annex 13: Statement of Loans and Credits ............................................................................ 103 

Annex 14: Country at a Glance ............................................................................................... 105 

Annex 15: Maps......................................................................................................................... 108 

Annex 16: Municipality of Sao Bernardo do Campo Project ............................................... 109 

BRAZIL

INTEGRATED WATER MANAGEMENT IN METROPOLITAN SÃO PAULO PROGRAMA DE SANEAMENTO AMBIENTAL DOS MANANCIAIS DO ALTO TIETÊ –

PROGRAMA MANANCIAIS - SÃO BERNARDO DO CAMPO PROJECT

LATIN AMERICA AND CARIBBEAN

LCSUW

Date: March 1, 2012 Team Leader: Oscar Alvarado Country Director: Makhtar Diop SectorManager/Director: Ellen Hamilton/Ede Jorge Ijjasz-Vasquez

Sectors: General water, sanitation and flood protection sector (100%) Themes: Water resource management (P); Pollution management and environmental health (P); Land administration and management (P); Access to urban services and housing (P).

Program ID: P006553 Project ID: P125829

Environmental screening category: Full Assessment

Lending Instrument: Four Specific Investment Loans through a Adaptable Program Lending (APL)

Program Financing Data [X] Loan [ ] Credit [ ] Grant [ ] Guarantee [ ] Other: For Loans/Credits/Others: Total Bank financing (US$M): 130.88 Proposed terms: PMSBC Project: US Dollar denominated Commitment linked IBRD Flexible Loan (IFL) with a Variable spread. All the conversion options are selected, with the Premia for Interest Rate Caps and Collars to be paid from the Borrowers’ own resources.

Financing Plan (US$m) Source Local Foreign Total

Borrowers 107.75 0 107.75 State of São Paulo 56.50 0 56.50 SABESP 25.00 0 25.00 Municipality of São Bernardo do Campo 20.58 0 20.58 Municipality of Guarulhos 5.67 0 5.67 International Bank for Reconstruction and Development

130.56 0.32 130.88

State of São Paulo 3.99 0.01 4.00 SABESP 99.75 0.25 100.00 Municipality of São Bernardo do Campo 20.77 0.05 20.82 Municipality of Guarulhos 6.05 0.01 6.06

Program Total: 238.31 0.32 238.63Borrowers: SABESP, São Paulo State Water Utility (Companhia de Saneamento Básico do Estado de São Paulo) State of São Paulo Municipality of São Bernardo do Campo Municipality of Guarulhos Responsible Agencies: State Secretariat for Sanitation and Water Resources, State Housing Agency, State Secretariat for the Environment, State Water Utility, Municipality of São Bernardo do Campo and Municipality of Guarulhos.

Program implementation period: Start October 30, 2009 End: May 31, 2015 Effectiveness date: October 30, 2009 Closing date: September 30, 2015

Does the program depart from the CAS in content or other significant respects? Ref. PAD I.C

[ ]Yes [X] No

Does the program require any exceptions from Bank policies? Ref. PAD IV.G Have these been approved by Bank management? Is approval for any policy exception sought from the Board?

[ ]Yes [X] No [ ]Yes [X] No [ ]Yes [X] No

Does the program include any critical risks rated “substantial” or “high”? Ref. PAD III.E

[ ]Yes [X] No

Does the program meet the Regional criteria for readiness for implementation? Ref. PAD IV.G

[X]Yes [ ] No

The first part of this document refers to the Integrated Water Management in Metropolitan Sao Paulo Program (P006553) as approved by the Board on July 9, 2009. The third phase of this APL pertaining to Sao Bernardo do Campo project (P125829) is detailed in Annex 16 Program development objective Ref. PAD II.C, Technical Annex 3 The overall objectives of the APL Program are (i) to protect and maintain the quality and reliability of MRSPs water resources and potable water sources; (ii) to improve the quality of life of the poor populations residing in key targeted urban river basins in MRSP; and (iii) to improve the institutional capacity and the metropolitan management and coordination in MRSP in water resources management, water pollution control, land-use policy and basic service provision. Program description Ref. PAD II.D, Technical Annex 4 The Program has been organized into four components: Component 1 - Institutional Capacity Building is designed to support the executing agencies by strengthening their institutional capacity and promoting improved metropolitan management and coordination with regard to the key metropolitan challenges of water resources management, water pollution control, land-use policy and basic service provision, by supporting, inter alia: improved metropolitan integrated land-use and water resources management; environmental and water quality monitoring; environmental education and social outreach; and Program management, monitoring, evaluation and dissemination.

Component 2 - Urban Upgrading is aimed at improving the standards and layouts of urban occupation in the targeted basins and improving the quality of life of the residents of these basins, especially the low-income communities living in informal settlements, through: urbanization of slums and irregular settlements; recuperation of high-risk and degraded areas; involuntary resettlement; preparation of housing plans; environmental and urban layout standardization of settlements; and socio-environmental supervision for urban upgrading and housing interventions. Component 3 - Environmental Protection and Recovery is designed to protect and recover natural habitats and environmentally sensitive and degraded areas in the sub-basins with a view to improving environmental quality, through: revegetation and reforestation; urbanization of public areas with creation of green and leisure spaces; establishment of environmentally protected areas; rehabilitation and protection of reservoirs and water production systems; and control of the transportation of hazardous substances in the region. Component 4 - Integrated Water Supply and Sanitation aims at reversing the main factors contributing to the pollution of the reservoirs and providing integrated WSS services to the poor, through: wastewater management improvements; water supply system improvements; and solid waste management improvements. Which safeguard policies are triggered, if any? Ref. PAD IV.F, Technical Annex 10 The Program has received a World Bank Environmental Category A rating and triggers the following safeguards: OP 4.01 (Environmental Assessment); OP 4.04 (Natural Habitats); OP 11.03 (Physical Cultural Resources), OP 4.12 (Involuntary Resettlement); and OP 4.37 (Safety of Dams). Significant, non-standard conditions, if any, for phase 3 of implementation Ref. PAD III.F Board presentation: N/A Loan/credit effectiveness: The Loans have been registered with the Guarantor’s Central Bank. Covenants applicable to phase 3 of implementation: Dated covenants UGLs in the executing agencies fully staffed up to two months after effectiveness of the

respective loan agreement Maintenance of the UGLs with staff and capacity satisfactory to the Bank throughout the

implementation period of the project Until completion of the Project, maintenance of the CDC with the composition, powers and

responsibilities set forth in the Operational Manual

Other covenants The Borrower shall comply with the “Implementation Agreement” with the Program

Executing Agencies. Except as the Bank shall otherwise agree, the Borrower shall not amend, assign, abrogate, waive, terminate or fail to enforce the Implementation Agreement or any of its provisions.

Without limitation to the provisions of Section 5.10 of the General Conditions, the Borrower and the Program Executing Agencies shall exchange views on the implementation of the Mananciais Metropolitan Program with the Guarantor and the Bank, as may be relevant for the successful implementation of the Program.

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I. STRATEGIC CONTEXT AND RATIONALE1

A. Country and sector issues 1. Brazil has undergone an urban transformation, catalyzing economic innovation and expansion, yet bringing with it myriad problems2. Brazilian cities currently grapple with the need to host the informal poor, control crime and violence, improve services, and clean up the environment. As one of the most urbanized countries in the world, Brazil’s competitiveness and prospects for sustainable growth rest on the capacity of its major cities to respond to these pressures. The sprawling Metropolitan Region of São Paulo (MRSP) is emblematic of Brazil’s urban challenges. Housing 19.3 million people in 39 municipalities covering 8,050 km2, it accounts for 17 percent of national GDP and 10 percent of the population. However, MRSP’s share of the GDP is declining, and rapid urbanization, combined with deindustrialization and economic stagnation, has led to social problems, including rising unemployment, persistent criminality and sprawling slums. Currently, one out of six inhabitants of the municipality of São Paulo3 lives in a slum, which is equivalent to approximately 400,000 families, or between 1.6 and 2 million people living in substandard housing in 1,538 settlements occupying 30 km2. 2. São Paulo’s water challenges4. Among the pressing problems facing MRSP, the region’s water supply and demand balance is a critical issue for the city’s competitiveness and economic growth, and its social and environmental sustainability. MRSP’s extremely low per capita water availability is comparable to that prevailing in the driest areas of the Brazilian Northeast. Half of the city’s potable supply is imported from neighboring river systems, which is contentious given the demands of other conurbations vying for the same water. The other half of the water supply comes from headwater-reservoir systems (‘mananciais’) within MRSP itself. The Guarapiranga and Billings reservoirs make crucial contributions, together providing potable water for some 28 percent of MRSP’s population (or some 5.4 million people). Recent forecasts for the metropolitan region indicate that by 2010 there will be a serious risk of demand outstripping supply – with such projections assuming that MRSP’s currently operational mananciais (Guarapiranga, Billings and other systems) will remain fully utilized or further expanded. Should Guarapiranga and Billings be lost as raw water bodies for the city supply, the next closest sources are very distant and could only be brought to MRSP at multi-billion Real costs. Some 1.9 million people reside in the Guarapiranga and Billings river basins – the vast majority of whom are poor, having illegally occupied these areas given their proximity to the city center. The informal/slum settlements cause direct pollution of the reservoirs through wastewater and garbage discharge and storm water run-off and silting, thus threatening their future as water bodies for potable supplies and other uses. To tackle this problem, action is necessary to bring together key local urban upgrading interventions with metropolitan-wide initiatives in

1 This Umbrella PAD describes the entire Integrated Water Resources Management in São Paulo Program as designed and approved by the Board on July 09, 2009 with the first and second phases of this Horizontal APL (State of São Paulo and São Paulo State Water Utility Projects). There are no major changes to this Umbrella PAD and details of the Municipality of São Bernardo do Campo Project are included in Annex 16. 2 Brazil: Inputs for a Strategy for Cities: A Contribution with a Focus on Cities and Municipalities, World Bank Report No. 35749-BR (June 2006). 3 Study by the Municipal Government of São Paulo and Cities Alliance, 2007. 4 Mônica Porto, ‘Recursos Hídricos e Saneamento na Região Metropolitana de São Paulo: Um Desafio do Tamanho da Cidade’ Série Água Brasil 3, World Bank (2003).

2

wastewater collection and treatment, and drainage and solid waste management, all within the context of the urban river basin.

B. Rationale for Bank involvement 3. Programmatic engagement in the São Paulo water sector. The World Bank Group’s Country Partnership Strategy 2012-2015 (Report # 63731-BR) discussed by the Executive Directors on November 1, 2011, lays out a program of continued support to Brazil through four pillars of engagement: equity, sustainability, competitiveness, and sound macro-economic management. The CPS asserts that Brazil continues to falter in the area of environmental sustainability, and that water scarcity and environmental degradation are urgent problems hindering the country’s sustainable growth. The CPS further states that the Bank will focus efforts on those cities that are central to broad economic growth, the very definition of the MRSP as it is so crucial to the Brazilian economy. The São Paulo State Government (GESP) and the Bank intend to develop a 10-15 year programmatic engagement in the water sector to address the key statewide challenges of water resources management, water supply and sanitation, and water pollution control. This programmatic engagement includes ongoing initiatives to implement sustainable land use and water resources management plans in rural river basins, and large-scale restoration of riparian forests in the Cerrado and Atlantic Forest biomes, through the São Paulo Land Management program (P006474) and the GEF Ecosystem Restoration of Riparian Forests project (P088009), respectively. The proposed Bank-financed Reágua project (BR-P106703) is another key piece in this programmatic engagement, having a results-based design to address issues of water quality recovery and water quantity conservation throughout the state. The proposed Mananciais Program, which is the subject of this Project Appraisal Document (PAD), represents a major vehicle in the Bank’s programmatic engagement with São Paulo state in its water sector, as it is designed to help the state and municipal governments of MRSP tackle the challenges with water quality and urban informality in the state capital as described above. The state and municipal counterparts assert that the Bank plays a crucial role in moving such a complex Program forward.. The Program’s counterparts further state that without the Bank’s participation in its preparation and implementation, the Program would be more difficult, more risky or, possibly, unfeasible. This programmatic engagement builds on a rich partnership between the Bank and GESP in the urban water sector over recent decades.

4. Bank as catalyst and convening power. The Bank has a unique role to play under the proposed Mananciais Program in bringing the myriad state, municipal and non-governmental actors together to tackle MRSP’s land use and water resources challenges. This role of catalyst and convening power was achieved under the preceding Bank-financed Guarapiranga project5 although to a lesser degree (for only one of the mananciais and with fewer actors). The Bank’s ‘honest-broker’ role has been demonstrated during the preparation of the Program’s federal government approval document (carta consulta, CC) – a significant feat of bringing a dozen state entities and municipal governments together around a common vision, program and modus operandi within a single CC. This achievement was due in large part to the presence of the Bank through the use of a Japan Policy and Human Resources Development Fund (PHRD) grant as a vehicle for promoting such cooperation. The water resources/urban informality challenge can

5 São Paulo, Paraná and Federal Government Water Quality & Pollution Control Project SAR No. BR-28962 (1992); Loan Agreement BR-3503 (1992).

3

only be tackled and reversed if such horizontal and vertical collaboration can be maintained and replicated in the medium- to long-term. The Program would provide the institutional consolidation for this cooperation and the crucial continuity needed during the frequent electoral cycles. The Program would also leverage state and municipal debt capacity, and complementary federal government Growth Acceleration Program (PAC) funding, to achieve broader and deeper impact, provide a framework of common goals and complementary action plans for each player and promote the participation of other such actors in the future.

5. Consolidating an unfinished agenda. As reflected in the Implementation Completion and Results Report (ICR) and in the Independent Evaluation Group (IEG) Review and subsequent PPAR6 for the predecessor Guarapiranga project, as well as in the Bank’s 2003 Water Resources Sector Strategy, persistence, patience, pragmatism and flexibility are needed to implement innovative programs such as the proposed operation. Some of the key cutting-edge work initiated under the Guarapiranga project only came to legal fruition following project closure (the state water charging law, and the new state land-use law for the Guarapiranga basin). The Guarapiranga project was groundbreaking with regard to its hybrid approach of tackling the inter-related issues of urban water pollution and poverty/land use. The key executors of the project, however, ‘kept their heads beneath the parapet’ since, during the 1990s in Brazil it was unpopular to suggest that the low-income settlements and slums crowding in on the reservoirs should be consolidated to prevent them from polluting, rather than subjecting them to mass removals. The proposed Mananciais Program represents the continuation of a project that fundamentally changed Brazil’s approach to urban water resources and land-use management, pollution control and urban poverty alleviation in large, densely-occupied conurbations with high degrees of informal settlements – a pressing issue facing cities throughout Brazil and the developing world. The state water resources management (WRM) and land-use systems are incipient and evolving and are entering a critical phase (water extraction/pollution charges are due to be introduced in the Alto Tietê river basin by 2010). The proposed Program would assist the state and municipal governments of MRSP in moving forward the agenda of metropolitan coordination, management and planning in the areas of land-use, water pollution and related urban-environmental service delivery – issues that are among the major paradigmatic challenges facing Brazilian cities today.

6. Bank knowledge. The Bank is ideally placed to leverage international experience to help with diagnoses and prognoses of the complex metropolitan, water resources and land use issues that the Program intends to tackle. The Bank would serve as a knowledge conduit: bringing experience and lessons from Brazil and elsewhere to bear on Program implementation, and taking the Program’s own lessons to other Brazilian cities and to those in other countries suffering similar pressures. The Bank would also bring to bear its specific sector knowledge and technical expertise from Brazil and elsewhere in the fields of water pollution control, urban water resources management, urban/slum upgrading, and basic service delivery in peri-urban areas. Finally, when the Bank contemplates undertaking similar operations in the future, in Brazil or elsewhere, the Mananciais Program and its predecessor PQA projects will help guide the design of such hybrid interventions, for example by providing experience to wider audiences on

6 São Paulo, Paraná and Federal Government Water Quality & Pollution Control Project ICR Report No. 28962 (June 2004). IEG Review (September 2004); IEG draft Project Performance Assessment Report (March 2007).

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when, how and for how long Bank support is necessary to advance reforms in complicated policy terrain. C. Higher level objectives to which the project contributes 7. The Program has been developed in support of the vision for a more equitable, sustainable and competitive Brazil outlined in the federal government’s pluri-annual development plan (PPA). The Program is emblematic of the challenges facing metropolitan regions and large cities in Brazil as they grapple with constraints to growth, social inclusion, environmental degradation, and the appropriate planning and management of services.

8. Possessing between 12 and 14 percent of the world’s water, Brazil is a country rich in water resources. However, more than 70 percent of water in Brazil is found in the Amazon River and only 1.6 percent is located in the State of São Paulo, where close to one quarter of the Brazilian population resides. Water is an essential element of Brazil’s strategy to promote sustainable, equitable, and inclusive economic growth. The country’s achievements over the past fifty years have been closely linked to development of its water resources and to the expansion of Water Supply and Sanitation (WSS) services; however, many challenges have yet to be addressed, such as water scarcity, pollution control, and universal access to services. The Program has been developed to assist MRSP in addressing these challenges and to support the vision outlined in the CPS for a more equitable, sustainable, and competitive Brazil. While the Program’s interventions will be focused in MRSP, its lessons could be applied to other metropolitan regions and large cities in Brazil as they grapple with constraints to growth, social inclusion, environmental degradation, and the appropriate planning and management of WSS services.

II. PROJECT DESCRIPTION A. Lending instrument 9. The proposed Program will be implemented as a series of projects and their corresponding loans under a Horizontal APL, implemented over a six-year period. The participants under the APL will be GESP, the State Water Utility (SABESP), and the municipal governments of São Bernardo do Campo (PMSBC) and Guarulhos (PMG), under four individual Specific Investment Loans. The APL Program represents a whole that is greater than the sum of its parts – the cumulative impacts of the Program interventions will be more than the individual impact of each loan. Nevertheless, each eligible borrower can commence its interventions without having to wait for the other loans to be initiated. Given delays in approving individual loan packages, all four borrowers were not given simultaneous clearance to negotiate. The Horizontal APL structure is designed to allow subsequent loans to be presented to the Bank once they have been given the requisite clearance to negotiate. 10. The GESP project, which was designed to provide for the coordination of all other Program activities, and SABESP’s project, which represents the largest loan and the Program’s major driver, received Board approval on July 9, 2009, and became effective in March and December 2010 respectively. The current performance of these projects is considered satisfactory.

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11. The eligibility criteria to identify those agencies and municipal governments that can participate in the Horizontal APL as borrowers are the following: (i) they are located in, or operate in, the MRSP; (ii) they contain critical areas that contribute to the pollution of the headwaters, and/or their activities are crucial to the control of pollution in the headwaters or to the sustainable operation of the headwater reservoirs, and/or their water supply systems present large non-revenue water; (iii) they possess sufficient debt capacity to borrow under the APL; (iv) in the case of municipalities, they have a per capita investment capacity of at least BRL 40 (including constitutional transfers); (v) they have financial management and procurement capacity deemed acceptable to the Bank; and (vi) subsequent loan agreements are negotiated prior to a term of 24 months after the signature of the first loan agreement under the Program. 12. Although the Program is more than the sum of its parts, Program preparation analyses were designed to demonstrate that each of the four component projects is individually viable economically, financially, technically and socially, even if one of the projects proceeds without the rest. For example, the economic and financial (and related) analyses were designed specifically with this ‘project autonomy’ in mind: three types of analysis were undertaken – for the urban upgrading activities alone, for the WSS activities alone, and for the overall opportunity cost of losing the mananciais as sources of potable water for the city. The individual groups of activities were found to be economically viable in and of themselves. The overall opportunity cost was also economically viable but was not used to justify the Program investments given that not all of the borrowers may realize their investments – at the same time or at all. B. Program objective and phases 13. The overall objectives of the APL Program are (i) to protect and maintain the quality and reliability of MRSP’s water resources and potable water sources; (ii) to improve the quality of life of the poor populations residing in key targeted urban river basins in MRSP; and (iii) to improve the institutional capacity and the metropolitan management and coordination in MRSP in water resources management, water pollution control, land-use policy and basic service provision. Specific objectives and indicators for each of the borrowers under the APL are presented in Annex 3 and in the borrowers’ specific annexes (i.e. Annexes 16 and 17 of this PAD).

14. The Mananciais Horizontal APL operation is designed to respond to the land-use, water resources, environmental and social challenges described in Annex 1. The Mananciais APL Program is contained in four letters signed by the respective and potential borrowers, including GESP, SABESP, PMSBC and PMG. The APL is part of a broader program of interventions by MRSP’s state and municipal governments based, inter alia, on the priorities identified in the Alto Tiete river basin plan, on the 1998 Metropolitan Plan for Integrated Development for Greater São Paulo, on SABESP’s water supply master plan and wastewater management master plan – both for the metropolitan region – and on the macro-drainage master plan for the Alto Tietê basin. As described in Annex 1, this overarching program – known as the Mananciais Metropolitan Program – encompasses other important bilateral- and federal-financed programs.

15. GESP will have an overall coordinating role of the Mananciais APL, and will implement its own activities under the APL through three executing agencies: the State Secretariat for Housing

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(SH) through its State Company for Housing and Urban Development (CDHU); the State Secretariat for the Environment (SMA); and the State Secretariat for Water Supply, Sanitation and Water Resources (SSRH – former SSE) – the latter will be responsible for coordinating both GESP activities under the APL, as well as the overall APL itself. Table 1 summarizes the borrowers and the executing agencies under the four projects and the respective resources allocated to each.

Table 1 Borrowers and Executing Agencies

Borrower Executing Agency

Total Counterpart IBRD

(US$ M) (%) (US$ M) (US$ M)

GESP

SSRH 19.77 8.3 16.77 3.00

SMA 10.13 4.2 9.13 1.00

SH CDHU 30.60 12.8 30.60 0.00

GESP TOTAL 60.50 25.3 56.50 4.00

SABESP SABESP 125.00 52.4 25.00 100.00

PMSBC PMSBC 41.40 17.3 20.58 20.82

PMG PMG 11.73 5.0 5.67 6.06 PROGRAM TOTAL 238.63 100 107.75 130.88

C. Project development objective and key indicators 16. The overall Program development objectives are stated above. Specific objectives and indicators for each of the borrowers under the APL are drawn from the program’s overall objectives, as described in Annex 3 and in the borrowers’ specific annexes. The PDOs for the Program will be measured through the following indicators (or a subset of the indicators depending on the borrower in question):

Reduction of pollution loads to the water bodies in question; and maintenance of the water quality of these bodies, even with projected population increases. Improvements in the quality of life of the targeted population.

Improvements in institutional capacity to manage and coordinate metropolitan-wide issues related to WRM, water pollution control, land-use and related service provision.

D. Project components 17. The Mananciais Program will provide a vehicle which brings together state and municipal government interventions designed to reverse the deterioration in the manancial water bodies, improve land-use planning and control, enhance the living conditions of the peri-urban poor residing in the reservoir basins, and promote metropolitan cooperation and institutional capacity building in these fields. It will do so by building on the experience and the lessons learned from the predecessor Bank-financed Guarapiranga Project and from other, related state and municipal government initiatives in MRSP. The Horizontal APL is organized in four components: (i)

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Institutional Capacity Building; (ii) Urban Upgrading; (iii) Environmental Protection and Recovery; and (iv) Integrated Water Supply and Sanitation – the last component incorporates activities related to a broader concept of integrated water supply and sanitation, as described in the 2007 federal WSS law, namely: water supply, sanitation, drainage, and solid waste management. The Program’s borrowers will not undertake all of the activities listed above under the four Program components. Nor will each of the activities be carried out in all of the sub-basins of the MRSP. Annex 4 provides more detailed description of the components, their activities and costs as well as the executing agencies which will be undertaking the components in specific sub-basins.

18. Component 1 – Institutional Capacity Building (US$ 35.09 million total, US$16.97 million loan). To achieve the objectives of the Mananciais Program and to ensure its long term sustainability, an Institutional Capacity Building component is included to support GESP and the other executing agencies by strengthening their institutional capacity and promoting improved metropolitan management and coordination with regard to the key metropolitan challenges of water resources management, water pollution control, land-use policy, and basic service provision. The component will support the following activities: (i) Improved integrated land-use and water resources management and coordination at the metropolitan level, through: (a) support for the preparation and implementation of sub-basin Environmental Development and Protection Plans and their corresponding specific land-use laws, (b) creation of a forum for seminars on Metropolitan Governance and Water in MRSP; (ii) Carrying out of studies on: (a) metropolitan governance, (b) MRSP water demand profiles and scenarios, (c) water demand management policy preparation, (d) water reservoir behavior, (e) potable water treatment improvements, etc; (iii) Environmental and water quality monitoring and modeling; (iv) Environmental education and social outreach; and (v) Program management, monitoring, evaluation and dissemination.

19. Component 2 – Urban Upgrading (US$ 62.89 million total, US$ 13.80 million loan). The component’s objectives are to improve the standards and layouts of urban occupation in the targeted sub-basins and improve the quality of life of the residents of these sub-basins, especially the low-income communities living in informal settlements, through the following activities: (i) Urbanization of slums and irregular settlements; (ii) Recuperation of high-risk and degraded areas; (iii) Construction of housing units for involuntary resettlement; (iv) Preparation of housing plans; (v) Environmental and urban layout standardization of settlements; and (vi) Socio-environmental supervision for urban upgrading and housing interventions. These activities will take place in the Municipality of São Bernardo do Campo and/or in other selected municipalities in the Program area.

20. Component 3 – Environmental Protection and Recovery (US$ 19.61 million total, US$ 11.73 million loan). The component’s objectives are to protect and recover natural habitats and environmentally sensitive and degraded areas in the sub-basins with a view to improving environmental quality, by supporting the following activities: (i) Revegetation and reforestation; (ii) Urbanization of public areas and the creation of green and leisure spaces for common use; (iii) Establishment of environmentally protected areas; (iv) Rehabilitation and protection of reservoirs and water production systems; and (iv) Control of the transportation of hazardous substances in the region.

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21. Component 4 – Integrated Water Supply and Sanitation (US$ 119.41 million total, US$ 88.07 million loan). The component’s objectives are to reverse the main factors that contribute to the pollution of the reservoirs and to provide integrated WSS services to the poor, by supporting: (i) Wastewater management improvements; (ii) Water supply system improvements; and (iii) Solid waste management improvements. E. Lessons learned and reflected in the program design 22. The main lessons learned and reflected in the Program design come from the predecessor Bank-financed Guarapiranga PQA project (São Paulo Water Quality and Pollution Control Project, BR-P006541) and the accompanying Curitiba and Belo Horizonte PQA projects (Paraná Water Quality and Pollution Control Project, BR-P006541 and Minas Gerais Water Quality and Pollution Control Project, BR-P006540). The lessons presented in the projects’ joint ICR, and in IEG’s Review and subsequent PPAR were reviewed and incorporated into the design of the proposed Mananciais Program as described below. In addition, the state and municipal agencies involved in the principal urban upgrading, environmental protection and recovery, and integrated WSS activities under the proposed Program have considerable experience in their respective fields, which has also been drawn on during preparation and will be further leveraged during implementation. Global best-practice experience in metropolitan governance – from both the developed and developing world – has been studied during Program preparation in order to create a foundation on which to build the metropolitan management and coordination initiatives for MRSP proposed under Component 1.

23. The PQA ICR presented the following conclusions and recommendations, among others: (i) Problems related to water quality management, pollution control, the brown environmental agenda and urban upgrading, especially in river basins of metropolitan regions, are complex and cannot be resolved with simple approaches or isolated sector interventions; (ii) Both the institutional and the environmental objectives associated with such projects should be treated as long-term program goals rather than short- to medium-term project objectives; (iii) Integrated approaches to water quality management and urban upgrading can enhance the benefits of a wide range of interventions and contribute to poverty alleviation; (iv) Tackling the shortfalls in metropolitan planning and governance in Brazil is crucial, and PQA-type projects should be used as vehicles to re-engage stakeholders in a debate of metropolitan planning and governance to help move this key agenda forward; (v) Persistence, patience and flexibility are needed to implement such innovative projects which should be customized to the unique characteristics of each basin; (vi) Consensus building, though time consuming, is critical for reaching agreement on project design and achieving institutional and policy reform; and (vii) The Guarapiranga PQA project demonstrated an equitable approach to urban resettlement and provides a useful model in which resettlement is seen as part of the urban upgrading solution, contributing to the improvement of quality of life in the slums. 24. The PPAR was extremely positive in its findings and recommendations with regard to the relevance of the first generation of PQA projects in Brazil, and came to the following conclusions about them: (i) They laid the groundwork for a new approach to managing water quality in large urban areas, breaking the conventional mold and representing important new standards of policy and practice in Bank assistance to the WSS sector in Brazil, establishing the

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rudiments of global best practice in urban WRM involving the poor; (ii) The projects moved the emphasis to a basin-wide scale to achieve quality and efficiency objectives in dense urban areas, while learning that the water quality challenges were inextricably linked with urban poverty issues; (iii) The fusion of poverty and water basin components into a single approach created a new stage on which technical and policy agents could work out complex problems in a coherent framework; (iv) Brazil is still decades from consolidating the approach to sustainable urban water resources and land use management; (v) The drawbacks of the hybrid approach are the complexity of management and possible tradeoffs in depth and scope of policy reform; (vi) No separate project approach – be it slum upgrading or WSS alone – has succeeded any better than the PQA hybrids in regards to water quality objectives; (vii) The projects contributed to an understanding of how to manage difficult inter-sectoral issues involving the many actors in Brazilian metropolises; (viii) The projects addressed the two big problems in metropolitan governance: large metropolitan areas must solve technical issues of economic evaluation and planning, and they must decide priorities and budgets; (ix) The PQA projects took important steps in what constitutes a feasibility test showing that policy issues linking poverty reduction, the provision of basic services and environmental improvement at the regional scale can be successfully tackled together; (x) The projects show that complex undertakings do not have to be ‘Christmas trees’ – but to keep projects from becoming unmanageable, clear policy objectives are needed and the Bank and borrower need to be committed for several decades; (xi) The Bank can take steps to keep political transitions and partisan disruptions from becoming blind spots, including multi-party briefings to inform opposition groups and the public on the project; (xii) More structured learning may be useful during preparation and implementation for both project units and basin committees. F. Alternatives considered and reasons for rejection 25. A single loan and on-lending to executing agencies Under the predecessor Guarapiranga project, the Bank made a single loan to GESP which on lent the financing to SABESP and to São Paulo Municipality (PMSP). Such an arrangement was an efficient and effective way of preparing and implementing a multi-sector project with numerous executing agencies and borrowers. However, with the passage of the Federal Fiscal Responsibility Law (FRL) in 2000, such on lending arrangements were prohibited. This development led the state, municipal and Bank teams to assess alternative approaches to implementing the multi-sectoral, multi-borrower, multi-executing agency follow-up Mananciais Program. 26. Individual projects and loans One project implementation approach considered was that of having a number of individual projects, one for each borrower, each with their respective PAD and loan agreement. This arrangement would lead to the preparation of much additional documentation for the Bank team and would entail taking a number of loans, both big and small, on a separate basis to the Board. It was felt that such an approach would detract from the creation of a consolidated program around a coordinating entity and would lead to a dispersion and lack of focus of the individual projects. 27. Financial intermediary The State and Bank teams explored the possibility of using a financial intermediary to on lend the Bank loan to the different borrowers (some federal entities, such as the Caixa Econômica Federal (CEF) and the Banco do Brasil (BB), are allowed to on

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lend under the FRL). Discussions were held with the BB on issues related to flow of funds, spreads, guarantees and technical implementation questions. It was judged, however, that BB’s proposed spread would be highly unattractive to the end borrowers, and that BB had very limited technical and project implementation skills for programs of this nature to be able to successfully undertake the project as the main borrower and on lender. Furthermore, on consulting with Secretariat for International Affairs of the Ministry of Planning, the State team was informed that such an arrangement was not seen as positive or operational by the federal government. 28. The above considerations, together with the additional reasons given in Section E below, led the GESP and Bank teams to develop the proposed Program within the framework of a Horizontal APL under which the first loans are taken to the Board once they are authorized for negotiations by the federal government, and subsequent loans are approved in a decentralized manner by the Regional Vice President.

III. IMPLEMENTATION A. Partnership arrangements

N/A B. Institutional and implementation arrangements 29. The participants under the Horizontal APL will be GESP, SABESP, PMSBC and PMG, which will each be borrowers under four individual SILs. GESP will have an overall coordinating role of the APL, and will implement its activities under the APL through three executing agencies: the State Secretariat for Housing (SH) through its State Company for Housing and Urban Development (CDHU); the State Secretariat for the Environment (SMA); and the State Secretariat for Water Supply, Sanitation and Water Resources (SSRH, former SSE) – the latter will be responsible for coordinating both GESP’s activities under the GESP Project as well as coordinating the overall APL Program itself through a program management unit (UGP). Each executing agency will have its own local management unit (UGL). The implementation arrangements for the Program are organized around three themes: (i) strategic advisory support; (ii) general coordination; and (iii) operational execution/coordination. The main functions of each of the bodies involved under these three themes are described in Annex 6 and the Operational Manual (OM). C. Monitoring and evaluation of outcomes/results 30. The indicators of each of the Program’s individual projects are sufficient to measure and substantiate the achievement of the Program objectives. Each UGL will be responsible for monitoring the outcome and results indicators associated with its activities under the Program, whereas the UGP will be responsible for monitoring SSRH’s activities and indicators under the GESP Project and for consolidating all the Mananciais Program’s monitoring and evaluation (M&E) indicators. Two systems will assist in tracking the M&E indicators of each Project and the overall Mananciais Program:

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SIAFEM, an existing State government management information system, will be used to monitor the Program’s and Projects’ day-to-day activities, both physically and financially. This system will be rolled out to each of the executing agencies, with the exception of SABESP, in order to allow them to locally input the implementation data related to their respective Program activities. SIAFEM will be in place in the UGP and in the executing agencies’ UGLs before the signing of the corresponding loan agreements. The SABESP UGL will use SABESP’s own project and financial management system; they will provide the UGP with the requisite data and information from their system so UGP can consolidate it under SIAFEM for the whole Program.

The management firm to be hired by the UGP will be responsible for developing and installing a specific system for monitoring and evaluating the consolidated Program implementation progress, using the indicators presented in Annex 3, for all of the executing agencies. This M&E system will be installed during the first year of Program implementation.

31. All of the data needed for Program/loan monitoring and evaluation, with the exception of the public opinion surveys, will be available by Program effectiveness for tracking by the UGP, with support from specialists in the management consulting firm. However, with regard to the water quality indicators, SABESP will be responsible for collecting this data and sending the related information to the UGP as well as to the other Program participants. The data from the opinion surveys will be available by the end of the first year of Program implementation, as the firm to be contracted to undertake the initial surveys will be hired at the beginning of the implementation period. The same applies for the IQVU indicator, which will be adapted to the Program and have its baseline and goals defined towards the end of the first year of Program implementation. Furthermore, the Institutional Capacity Building Component will provide technical assistance (TA) to help enhance the existing environmental/water quality monitoring and supervision programs, including direct support to SABESP with a view to improving its capacity to better monitor water quality in the relevant MRSP rivers and reservoirs. D. Sustainability 32. The proposed Mananciais Program, and the overarching program of interventions (the Metropolitan Mananciais Program) supported by the state, municipal governments and other MRSP stakeholders within which the Program sits, has as a central concern the medium- to long-term sustainability of water resources and land-use management in the metropolitan region. The Program has a specific component, encompassing numerous activities, which focuses on institutional capacity building and policy and strategy development/refinement for the water and land-use sectoral issues being faced in the metropolis. These activities will be targeted to those stakeholders – GESP, SABESP, the municipal governments, and the river committees and agency – that have a direct role in ensuring the sustainability of the interventions, and will help bring these stakeholders together under a program of complementary interventions with common goals. The activities include: (i) preparation of sub-basin Environmental Protection and Development Plans (PDPAs) and specific land-use laws; (ii) TA to municipalities to ensure their urban master plans are consistent with the PDPAs; (iii) TA to municipal and state actors responsible for enforcement of land-use patterns; (iv) creation of a forum for discussing metropolitan water governance; (v) studies on metropolitan governance, water demand profiles,

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scenarios and policy, water reservoir behavior and potable water treatment improvements; (vi) environmental and sanitary education campaigns and social outreach to promote issues including community self-regulation in controlling/enforcing appropriate land-use patterns; and (vii) TA for environmental and water quality monitoring and modeling.

33. At the community level, the beneficiary stakeholders will be engaged in the design and implementation of the neighborhood interventions and will benefit from social outreach and environmental/sanitary promotion campaigns which are designed to promote the sustainability of Program activities at this level. The capacity building activities targeted at the Alto Tietê river basin committee and agency, and at the sub-basin committees, together with the reformulation of the Alto Tietê river basin plan and the corresponding PDPAs and specific land-use laws, are designed to allow these entities to successfully navigate the ‘start up’ period they are currently confronting and move to a scenario of sustainable self-management. Likewise, the challenges of sustainable services delivery to peri-urban communities in MRSP’s mananciais regions will be addressed during Program implementation with the corresponding stakeholders (SABESP for WSS, and the municipal and state governments for other services).

E. Critical risks and possible controversial aspects

Risks Risk Mitigation Measures Risk Rating w/Mitigation

Risk of some loans not becoming effective or not being approved simultaneously The Program represents a whole that is more than the sum of its parts – bringing the different state and municipal actors together as part of a joint effort to address a pressing metropolitan issue is one of the Program’s main objectives. The cumulative impacts of the Program interventions will be greater than the individual impact of each loan. Nevertheless, each borrower can commence its interventions without having to wait for the other loans to be initiated. Given delays in approving loan packages, all four borrowers will not be given simultaneous clearance to negotiate.

The Program design mitigates this risk by presenting the individual loans as part of a Horizontal APL. The GESP and SABESP loans will be part of the package submitted with the Horizontal APL for Board approval. The remaining loans will then be presented for RVP approval as each receives its respective federal government clearance and is negotiated within 24 months of the signing of the first loan agreement.

Moderate

Risk of maintaining reservoir water quality Although a key objective of the Program, there is a risk that external factors beyond the control of the executing agencies could adversely affect reservoir water quality during implementation (e.g. prolonged droughts, increased population growth, sudden algal blooms or pollution events, etc)

The Program is designed to provide specific technical assistance to the executing agencies on: (i) issues related to the improved monitoring and evaluation of water quality in the reservoirs; (ii) analyzing the behavior of the tropical reservoir water bodies, their tributaries and their sludge layers; and (iii) improving the existing water supply treatment technologies – all with a view to minimizing the risk of sudden water quality deterioration and arming the stakeholders to understand, foresee and take proactive action regarding such events.

Moderate to High

Post-election continuity With staggered state and municipal elections, such projects suffer from potential changes in administration every two years. This was an issue under the

The presence of the Bank, as convening power and honest broker, is very important in overcoming such transitions. The role of a strong UGP, with clear overall coordinating

Moderate

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Guarapiranga project, during which the political affiliations of the state and the municipal governments of São Paulo were never aligned. This has also been the situation during the preparation of the Carta Consulta of the proposed Program.

functions, is also important in this regard. The Bank and UGP teams will brief incoming transition teams that represent changes to state or municipal administrations in advance of them taking over Program implementation with a view to minimizing implementation disruption.

Implementation risks Multi-executor projects, with multi-sectoral components and activities, generally present implementation challenges.

Under the proposed Program this risk is mitigated by the implementation arrangements, which build on the experience of the predecessor Guarapiranga Project and on the preparation of the CC for this Program, and which are anchored around: (i) a strong UGP in the state government to provide TA and oversight to the implementing agencies, especially with regard to Bank FM, procurement and safeguard processes; (ii) the Committee of Coordinators, with representatives from each executing agency which will meet periodically to review implementation progress and issues, and suggest measures to overcome bottlenecks or otherwise expedite Program execution; and (iii) policy and strategy orientation from the CAT and the sub-basin committees. As with other sub-national Bank projects, the question of the availability of counterpart funds will also need to be closely monitored by the Bank supervision teams to ensure that this issue does not bring implementation delays to any of the executing agencies.

Moderate

Continued pressure of illegal occupation This is a challenge faced by the majority of medium and large cities in Brazil, and São Paulo is no exception. There is still considerable pressure for new housing in MRSP’s mananciais sub-basins for families arriving in the region.

In contrast to the recent past, much of the new housing is now occurring in areas that are already urbanized and consolidated, rather than on green field plots, so the areas subject to ongoing urban occupation are either already served with basic urban infrastructure or will be provided with such services as part of the overarching program for appropriate land-use and service provision in the mananciais region. Furthermore, the Program will support a number of initiatives to promote appropriate land-use development, including: (i) the preparation of the sub-basin PDPAs and specific land-use laws; (ii) TA to municipalities to promote consistency between their urban master plans and the PDPAs; (iii) TA to municipality and state actors responsible for enforcement of land-use patterns; (iv) implementation of green/public spaces and other control measures in sensitive areas suffering actual or potential pressure for informal occupation; and (v) an environmental and sanitary education campaign to promote the importance of communities themselves controlling/enforcing appropriate land-use

Moderate

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patterns. Challenge of expanding sewerage services to low-income, peri-urban areas This is a major challenge facing water utilities throughout the country: sewerage systems are constructed, but many residents – especially in low-income areas – do not connect to them; the operation and maintenance of sewerage systems in peri-urban areas is also more problematic.

The Program will support the state water utility and the state/municipal governments in reviewing the policies and strategies in this regard, including: (i) the issues of subsidies or long-term financing for residents to pay for the house connection and the internal plumbing necessary to connect to the sewer; (ii) the tariffs practiced for sewer services for low-income residents; (iii) a concerted environmental and sanitary education campaign to promote hook-up to sewers; (iv) a review of the enforcement procedures under the existing laws; and (v) a revision of the O&M procedures adopted in peri-urban areas for sewerage systems.

Moderate

Delays in obtaining environmental licenses for subcomponent activities

The UGP and the UGLs will be staffed with environmental specialists with experience in navigating the elaborate environmental licensing procedures in Brazil. These specialists will review the quality of the environmental licensing documentation, and amend it as appropriate, before it is forwarded to the approving agency. The specialists will subsequently follow up with the agency on a frequent basis to encourage obtaining licenses early.

Moderate

Financial management The Program FM risk ratings are considered low for GESP and SABESP and moderate for PMSBC and PMG. The major risk identified for all borrowers is the timely availability of counterpart funds.

The UGP and the UGLs will be staffed with FM specialists with experience in Bank or similar projects; the UGP and the UGLs (with the exception of SABESP) will also use the same state government integrated administrative and financial system (SIAFEM) to facilitate the comparison and consolidation of IFRs. SABESP will feed the necessary information to the UGP to allow the latter to consolidate all Program data under the SIAFEM system. The Bank team will undertake regular supervision missions and reviews of the IFRs to accompany FM issues generally and to allow for proactive reviews of issues related to counterpart funds. In addition the UGP will be supported by a project management firm to include expertise in general financial management and Bank financial management specifically. Additional TA and training will be provided by the UGP to those UGLs with no or limited experience of Bank FM.

Low

Procurement The procurement risk for the Program as a whole is rated as moderate. There are two levels of familiarity with Bank procurement among the agencies: those with prior WB experience (SSRH, SABESP, and CDHU) and those with experience only under national law (PMSBC, PMG). SMA’s procurement capacity was found to be weak.

The UGP and the UGLs will be staffed with procurement specialists with experience in Bank or similar projects. The UGP will be supported by a project management firm to include expertise in general procurement and in Bank procurement more specifically. The UGP will review the procurement procedures of all executing agencies before they are forwarded to the Bank for no-objection Additional TA and

Moderate

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training will be provided by the UGP to those UGLs with no or limited experience of Bank FM.

Overall Risk Moderate F. Loan/credit conditions and covenants

Conditions of effectiveness 34. An Implementation Agreement (‘convênio’), signed by GESP/SSRH (former SSE) and all of the borrowers and CDHU on March 19, 2010, which details the Program objectives, scope and activities, and the roles and responsibilities (including regarding fiduciary and safeguard requirements) of the different entities involved in Program implementation.

Dated covenants Staffing of the UGP up to two months after effectiveness of the first loan agreement to be

signed. Maintenance of the UGP with staff and capacity satisfactory to the Bank throughout the

implementation period of the Program and its four projects. Staffing of the UGLs in the executing agencies up to two months after effectiveness Maintenance of the UGLs with staff and capacity satisfactory to the Bank throughout the

implementation period of the project. Until completion of the Project, maintenance of the CDC with the composition, powers and

responsibilities set forth in the OM. Prior to the initiation of implementation of any investments under Component 2 of the GESP

Project, GESP shall furnish to the Bank for its approval the respective technical, fiduciary and safeguard arrangements for implementation including the inter-institutional agreements entered into with the concerned Municipality. GESP shall ensure compliance with all said arrangements and agreements approved by the Bank.

IV. APPRAISAL SUMMARY

A. Economic and financial analyses Economic analysis 35. A detailed economic cost-benefit analysis was undertaken for the Program. Program costs and benefits corresponding to all components were included in the analysis. The analysis included those complementary interventions to be undertaken under the broader Metropolitan Mananciais Program, such as the urban upgrading activities in the Municipality of São Paulo. However, not all of the expected economic benefits were quantified since the analysis concentrated on the integrated urban upgrading interventions. A financial cost-benefit analysis based on the opportunity cost of maintaining and improving the water sources for MRSP, with significant reductions in potable water treatment costs, was also conducted. This analysis is based on cost projections provided by SABESP. To determine the net incremental costs and benefits, ‘with’ and ‘without’ Program scenarios were constructed. On the basis of these

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scenarios, the net incremental financial benefits and costs of the proposed investment programs were assessed. 36. Results from the urban upgrading analyses show that the proposed intervention yields a positive return. With an overall internal rate of return of nearly 23 percent and a net present value of BRL 137 million, the proposed Program is economically viable. The net present value of the economic benefits from investments in urban upgrading resulting from the increase in property values, estimated through the hedonic price function, is BRL 114 million and that from the WSS analysis is BRL 8 million.

37. In addition to the cost-benefit analysis for the urban upgrading and WSS interventions in the targeted basins, the net benefits of preserving the existing sources to supply MRSP with potable water were also estimated by assessing the opportunity cost. The expected benefits are the resource savings resulting from the delay in the development of additional and more costly water sources in the near future, in a ‘with Program’ scenario, compared with not investing in the preservation and improvement of the water quality of the existing sources and having to develop those new sources with their associated recurrent costs, which were the basis of the ‘without Program’ scenario. The incremental benefits and costs were projected based on SABESP’s water production and supply expansion plan, and were calculated as a result of the difference between the cash flows resulting from the ‘with’ and ‘without’ Program scenarios in economic prices. The net incremental flows in present value are BRL 294 million, with an EIRR of 22 percent, and a benefit cost ratio of 1.51 – showing that the Program is expected to have high positive returns to the economy. This is without considering the even larger impacts if industries and other, especially large, users were to further develop and expand their own sources in the event of a water shortage in the area or a critical deterioration in water quality.

38. The results from the risk and sensitivity analysis performed confirm the robustness of the economic feasibility of the Program. The results from the risk analysis show that with a certainty of 93 percent, the economic net present value of the Program will be positive and the internal rate of return will be 12 percent or greater. Financial analysis 39. All investment and operation and maintenance costs at market (financial) prices were included in the financial analysis. The total financial income that could be potentially generated by the Program is approximately BRL 1.18 billion, of which property taxes is the most important source, followed by water and sewerage charges. The results of the analysis show that more than 70 percent of the costs can be recovered by operating income. The cash flow results have a positive net result once investments have been finalized. After subtracting the investments, the results show that the Program has, at 70 percent, a high cost recovery rate from operating income. A less optimistic scenario, which assumed that property tax collection would not occur in the slums and would be reduced by 50 percent in the irregular settlements, nevertheless showed the incremental operating income allowing for 60 percent recovery of total financial costs.

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B. Technical 40. The interventions under the respective components of the Program were identified by adopting the analytical methodology described in Annex 4. Technical studies were also undertaken in support of the economic analyses, focusing on developing the investment, operational, maintenance and replacement costs of ‘with’ and ‘without’ Program scenarios in the case of the new water source interventions, and on developing a database of property values in the target slums and irregular settlements in ‘with’ and ‘without’ scenarios for the urbanization interventions. C. Fiduciary Financial Management 41. The financial management (FM) arrangements for the four loans are presented for each of the borrowers in Annex 7, complemented by specific FM issues in the GESP and SABESP project annexes. Even though the Horizontal APL consists of more than one loan, in order to permit the overarching monitoring of the Program as a whole, all the borrowers will use the same FM system – the São Paulo State Administrative and Financial System (SIAFEM) – except for SABESP which will electronically provide the information to SSRH (former SSE) to allow SIAFEM to be updated. GESP, through SSRH, will be responsible for the consolidation of the overall Program FM information, preparing consolidated, interim, un-audited Financial Reports (IFRs) to send to the Bank on a quarterly basis. Each borrower will, nevertheless, be responsible for the legal and fiduciary aspects of its respective loan. This FM coordination/consolidation arrangement, as well as the FM arrangements to be followed by each borrower is further detailed in the OM. The proposed FM arrangements meet the Bank’s minimum requirements of providing, with reasonable assurance and accuracy, timely information on the financial status of the Program. The overall FM risk rating for the Program is considered low for the GESP secretariats and for SABESP, and moderate for PMSBC and PMG. The major risk identified for all borrowers is the timely availability of counterpart funds, which should be verified during regular supervision missions and reviews of the consolidated IFRs. For PMSBC and PMG, the lack of experience of working with SIAFEM will increase SSRH/UGP responsibility to undertake training and supervision of the municipalities’ FM activities. Procurement 42. Procurement for the proposed Program will be carried out in accordance with the World Bank’s "Guidelines: Procurement under IBRD Loans and IDA Credits" dated May 2004 and revised October 2006, and "Guidelines: Selection and Employment of Consultants by World Bank Borrowers" dated May 2004 and revised October 2006, and the provisions stipulated in the respective loan agreements. 43. The preparation of the Program was coordinated and led by SSRH’s UGP with the use of a recipient-executed PHRD grant. The UGP hired a consultancy firm to provide technical support during preparation. A similar arrangement will continue during Program implementation with an enlarged scope of work for the firm that will be hired to provide TA on Bank-specific issues, including procurement, to GESP during implementation. Among the Program’s different

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executing agencies, two levels of familiarity with Bank procurement exist. Those agencies which have experience with the Bank’s procurement guidelines and procedures are those that have already executed Bank projects, namely SSRH (former SSE), SABESP and CDHU. Although SMA has had previous experience with Bank procurement, it was found to have weak capacity in this respect. The second level of capacity includes PMSBC and PMG, which have experience in procurement under national law (Law 8666) but have no direct experience utilizing Bank procedures. Given that there will be a UGP with dedicated staff working with the assistance of a project management firm, whose terms of reference will include expertise in procurement in general and in Bank procurement in particular, and given the complexity of adequately monitoring and controlling the procurement activities of all of the executing agencies, the procurement risk assessment for the Program as a whole is rated as average. 44. The Borrower has prepared a Procurement Plan (PP) for Program implementation which provides the basis for the procurement methods to be adopted for the different Program activities, and which has already been approved by the Bank. The PP will be entered into the Program’s MIS and will be made available on the Bank’s external website. The PP will be annually updated in agreement with the Bank, or as otherwise required, to reflect actual Program implementation needs as well as improvements in institutional capacity. D. Social 45. A social analysis of the Program was undertaken during preparation, which included assessments of: (i) the challenges facing the Program from a social impact perspective; (ii) the social diversity and institutional structure of the target social groups; (iii) an evaluation of the targeted stakeholders; (iv) an analysis of the mechanisms of community participation; (v) the anticipated main benefits and beneficiaries of the Program; and (vi) the identification of the Program’s main social impacts, risks, and mitigation measures. A summary of the social analysis is presented in Annex 10A.

46. The Program will directly benefit approximately 3,000 families through urbanization works in selected irregular and precarious settlements and interventions to improve urban-environmental infrastructure in other low-income settlements, all families living in at-risk and environmentally sensitive areas, as well as in areas needed for infrastructure works will receive new housing units, and more than and 3,000 families will benefit from improved WSS services. In addition, the Program will indirectly benefit a wider population residing in the Alto Tietê basin with improved water supply quality and improved environmental conditions of the region’s water resources. Most families living in the areas of intervention are poor, earning less than three minimum salaries per month (or less than US$ 540/month). The Program’s targeted intervention areas also suffer from high rates of criminality and violence. The social tension identified in these areas is mainly attributed to the region’s low employment rates, low economic activity, and the deficiencies in access to public services. 47. Resettlement issues. Activities under Component 2 of the Program (Urban Upgrading), which are aimed at improving the quality of life of the urban poor living in slums and irregular settlements, will involve the resettlement of families from São Bernardo do Campo Municipality

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as part of the slum upgrading activities to be undertaken by PMSBC.7 Resettlement of smaller numbers of families might also take place should additional urban upgrading activities be included in the Program in other eligible municipalities. The component will finance activities to: (i) provide basic urban services and, where necessary, safe housing units in the slums and irregular settlements targeted under the Program; and (ii) undertake social mobilization before, during and after Program implementation to ensure effective community participation. 48. For the purpose of applying Bank safeguards, the PMSBC and PMG operations may be considered individual subprojects under the overall Mananciais Program. Though the zones of impact for the São Bernardo do Campo and, to a lesser extent, the Guarulhos subprojects are known, it is not yet possible to determine precise siting alignments for them. Therefore, the Resettlement Policy Framework (RPF) that has been prepared for the overall Program applies in each case. The RPF serves to guide the resettlement process for the families living in risk-prone areas that will receive investments. In the course of implementing each subproject, detailed resettlement plans will be prepared in consultation with area residents and in conjunction with the technical process of planning the urban interventions in each slum and irregular settlement. An executive summary of the RPF is presented in Annex 10. 49. Stakeholders Besides the state and municipal government entities directly involved in the execution of the Program, the social assessment also identified a number of key stakeholders that will participate in the Program’s implementation, including environmental and social NGOs, and community and other associations. Under the overarching Metropolitan Mananciais Program, PMSP undertakes to cooperate and coordinate with the Program Executing Agencies as needed for the successful implementation of the Program. 50. Consultations During Program preparation, a number of consultations and discussions were carried out with the Alto Tiete basin committee and agency, and with the basin sub-committees of the Juqueri-Cantareira, Tiete-Cabeceiras, Cotia-Guarapiranga, Billings-Tamanduateí and Pinheiros-Pirapora sub-basins. The committee and the subcommittees are composed of representatives of state and municipal governments, civil society and academia, amongst others. In addition, a number of municipal and local entities and organizations were involved in these discussions/consultations. Another round of consultations, following the dissemination of the strategic environmental assessment (SEA) report, was undertaken in June 2007 following the pre-appraisal mission. The Program design and objectives were endorsed during these consultations. E. Environment 51. The proposed activities to be implemented under the Program have been developed during preparation to the conceptual/outline level of design. During Program implementation the respective interventions will be detailed in the engineering designs for the civil works interventions. The approach to the environmental analysis therefore includes the undertaking of: (i) an analysis of the overall environmental results/impacts that it is anticipated will be attained by the Program interventions; and (ii) a specific environmental analysis of each proposed

7 Studies are still underway and the number of families to be resettled will only be finalized upon conclusion of the studies. For budgeting purposes a preliminary number of 1,200 houses to be constructed has been estimated.

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activity. The impact analysis and environmental management plan (EMP) are similarly presented: firstly, by considering the general impacts of the Program and, secondly, by reviewing the specific impacts of each activity.

52. The main positive environmental impacts expected from the Program are described in more detail in Annex 10, but they include: (i) maintenance of operational control of the reservoirs; (ii) improvement in the water quality of the watercourses that contribute significantly to enhancing the quality of the reservoirs; and (iii) control of irregular occupation of the reservoir area and improvement in urban land use.

F. Safeguard policies 53. The proposed Program has received an Environmental Category A rating in accordance with the corresponding safeguard policies. The borrowers’ capacity to handle safeguard issues is generally good. SSRH (former SSE) led the preparation of the regional strategic environmental assessment, the social assessment and the RPF for the Program in close collaboration with SMA and SH. All three secretariats, as well as SABESP, have considerable experience with Bank, IDB, JBIC and other financiers for programs which include environmental and resettlement issues. The three secretariats were responsible for the implementation of the Bank-financed Guarapiranga Project from 1992-2000, at a total cost of US$ 400 million, which successfully implemented similar environmental and resettlement activities in the Guarapiranga sub-basin. The Program triggers and addresses the following Bank safeguard policies as described below and in more detail in Annex 10.

54. Environmental Assessment (OP 4.01) A regional SEA was prepared by the Borrower in conjunction with SMA. The infrastructure interventions will generate temporary negative environmental impacts during their respective construction periods, even in those cases where the interventions are intended to mitigate existing areas of degradation and risk. It will therefore be necessary to adhere to the appropriate criteria and procedures contained in the SEA report’s Environmental Manual for Construction. The environmental impacts of the Program works’ interventions are duly described in the SEA report and summarized in Annex 10 for each executing agency. The list includes a group of activities, studies and programs to mitigate attenuate and/or counteract the negative impacts caused by the implementation of the civil works, as well as highlighting the expected positive effects of the interventions. These activities are presented in the annexes of the SEA report as well as in the EMPs of each executing agency.

55. Natural Habitats (OP 4.04) ‘Category 1’ and ‘Permanent Preservation Areas’, APPs (as denominated under state/federal law) are located along the banks of the reservoirs and the watercourses which are targeted under the Program. These contain a number of stretches which have been degraded by irregular urban occupation, including poorly-constructed dwellings. They also contain a number of conservation areas as well as other areas that could be recuperated. The interventions in these areas will focus on relocating families, and subsequent environmental and landscape recuperation of the degraded area in question. In the case of partially degraded areas or those that are still preserved, the strategy will be to protect and preserve them with actions to recuperate and establish a number of parks (including linear parks on the banks of the Guarapiranga and Billings Reservoirs).

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56. Physical Cultural Resources (OP 11.03) The Program will include construction and excavation activities to expand and replace infrastructure, therefore the SEA included screening for any known cultural property in the Program area and incorporated ‘chance find’ procedures in the event that culturally significant resources are discovered during implementation. In addition, Brazil has a well-developed legislative and normative framework, which is under the oversight of the National Institute for Protection of Historical and Archeological Sites (IPHAN) which will be followed during implementation.

57. Involuntary Resettlement (OP 4.12) An RPF for guiding the involuntary resettlement to be carried out under the Program has been prepared in accordance with Bank guidelines and safeguard requirements. Resettlement Action Plans (RAPs) for each Program intervention that entails resettlement will be prepared based on the finalized engineering designs during Program implementation. Each RAP will be sent to the Bank for review and approval before the associated civil works contract is signed.

58. Safety of Dams (OP 4.37) The Program foresees dredging/desilting works in three of the reservoirs currently used as part of MRSP’s water supply system, namely the Isolina Superior and Isolina Inferior reservoirs in the Cotia system, and the Paiva Castro reservoir in the Cantareira system. These dredging/desilting works are programmed to take place only after the second year of implementation. The reservoirs are formed by small dams in the former two cases and by a large dam in the other case (Paiva Castro, which is 22 meters high). During the preparation of the engineering designs for the dredging/desilting interventions for the Paiva Castro dam under the SABESP Project, the Bank and counterpart teams will evaluate the implications for OP 4.37 vis-à-vis the safety and the maintenance of the dam and, if needed, SABESP will furnish to the Bank the corresponding documentation, including an action plan to address any issues as called for by the OP, before initiating the bidding process for any related works.

Safeguard Policies Triggered by the Project Yes No

Environmental Assessment (OP/BP 4.01) [X] [ ] Natural Habitats (OP/BP 4.04) [X] [ ] Pest Management (OP 4.09) [ ] [X] Physical Cultural Resources (OP/BP 11.03) [X] [ ] Involuntary Resettlement (OP/BP 4.12) [X] [ ] Indigenous Peoples (OP/BP 4.10) [ ] [X] Forests (OP/BP 4.36) [ ] [X] Safety of Dams (OP/BP 4.37) [X] [ ] Projects in Disputed Areas (OP/BP 7.60)* [ ] [X] Projects on International Waterways (OP/BP 7.50) [ ] [X]

G. Policy Exceptions and Readiness 59. No policy exceptions are anticipated and the Program is considered ready for implementation based on the following: (i) GESP and SABESP project counterpart financing has been secured and is already financing on-going interventions; (ii) Project implementation and fiduciary

* By supporting the proposed project, the Bank does not intend to prejudice the final determination of the parties' claims on the DISPUTED areas

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arrangements have been defined and are ready to become operational upon project effectiveness, and qualified personnel are available to staff the GESP UGP and the SABESP UGL; (iii) a procurement plan for the first 18 months of project implementation has been approved by the Bank, and the Borrowers are anticipating the preparation of bidding documents; (iv) the environmental assessment was finalized and disclosed locally and in the InfoShop in August 2007; and (v) arrangements for the monitoring and evaluation of results have been agreed upon and are in place.

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Annex 1: Country and Sector or Program Background

BRAZIL: INTEGRATED WATER MANAGEMENT IN METROPOLITAN SÃO PAULO

MANANCIAIS HORIZONTAL APL PROGRAM A report with the full text of the Country and Sector and Program background can be found in the Project Files. 1. Brazilian cities under stress8 During the last 30 years Brazil has undergone a serious change

in its spatial structure, as urban areas have absorbed over 80 million people and the urban share of the population grew from 56 to over 80 percent. Today cities account for 90 percent of the country’s GDP and include half of its poor. After consistent productivity increases in the 1970s and 1980s, the largest Brazilian cities have shown a steady decline in per capita GDP and productivity over the last 15 years. While major world cities are positioning themselves to generate economic innovation and expansion, Brazilian cities are grappling with the need to host the informal poor, control crime and violence, improve services, and clean up the environment. As one of the most urbanized countries in the world, with one of the largest economies, Brazil’s competitiveness and prospects for sustainable growth rest on the capacity of its major cities to respond to these pressures. Brazil’s biggest cities are still by far the most productive in the urban hierarchy, but their problems need decisive responses to allow them to maintain their dynamism and the country’s economic growth and international competitiveness. Although Brazil has had a relatively stable poverty rate of 28-30 percent in recent years, economic slowdowns have led to higher unemployment, lower incomes and more informal labor in cities, especially in metropolitan areas of the Southeast. Brazil’s urban poor now outnumber the rural poor. Slums have become part of the urban landscape in the majority of Brazilian cities. These ubiquitous low-income, informal settlements present city administrators with significant challenges related to social and economic inclusion, service delivery provision and environmental degradation.

2. São Paulo’s strategic importance9 The sprawling MRSP is emblematic of the urban

challenges facing Brazil. Housing 19.3 million people in 39 municipalities covering 8,050 km2, it is the fourth largest urban area in the world, South America’s biggest economic and technological hub, and accounts for 17 percent of national GDP and 10 percent of the population. MRSP’s share of the GDP is, however, declining as diseconomies of scale and decreasing competition predominate (per capita output has fallen 2 percent annually in recent years). Rapid urbanization and a process of deindustrialization and economic stagnation have resulted in a region afflicted by social problems, including rising unemployment and persistent criminality, and a declining capacity to compete with other regions in Brazil to attract investment. The city faces a number of challenges to revitalize its economy and to recuperate standards of service delivery and quality of life for its population – metropolitan challenges that require responses and coordination by both state and municipal governments.

8 Brazil: Inputs for a Strategy for Cities: A Contribution with a Focus on Cities and Municipalities, World Bank Report No. 35749-BR (June 2006). 9 Brazil: São Paulo: Inputs for a Sustainable Competitive City Strategy, World Bank Report No. 37324, March 10, 2007.

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3. Metropolitan management is, however, commonly a complex issue in federative countries; in Brazil the constitutional framework further complicates the picture, given that municipalities have the same autonomous federative status as states and are not subordinated to either states or the federal government. Decentralization of responsibilities to municipalities under the 1988 Constitution resulted in increased power to local governments and more administrative-political complexity for metropolitan regions. Urban planning, land-use and provision of local services are matters of municipal jurisdiction, while state governments are responsible for the creation of metropolitan regions (and of urban agglomeration and micro-regions), as well as the coordination, planning and execution of common (shared) activities. Nevertheless, there is a lack of experience and of adequate institutional frameworks in Brazil, and particularly in the MRSP, in the metropolitan-wide coordination of policies, planning and service provision, either vertically (between states and municipalities) or horizontally (among neighboring municipalities and between sectors).

4. São Paulo’s water challenges10 Among the pressing problems facing MRSP, the region’s

water supply and demand balance is a critical issue for the city’s competitiveness and economic growth, and its social and environmental sustainability. MRSP’s extremely low per capita water availability is comparable to that prevailing in the driest areas of the Brazilian Northeast. Half of the city’s potable supply is imported from neighboring river systems, which is contentious given the demands of other conurbations vying for the same water. The other half of the water supply comes from headwater-reservoir systems (‘mananciais’) within MRSP itself. The Guarapiranga and Billings reservoirs make crucial contributions, together providing potable water for some 28 percent of MRSP’s population (or some 5.4 million people). Recent forecasts for the metropolitan region indicate that by 2010 there will be a serious risk of demand outstripping supply – with such projections assuming that MRSP’s currently operational mananciais (Guarapiranga, Billings and other systems) will remain fully utilized or further expanded. Should Guarapiranga and Billings be lost as raw water bodies for the city supply, the next closest sources are very distant and could only be brought to MRSP at multi-billion Real costs.

5. The land-use/environmental nexus Some 1.9 million people reside in the Guarapiranga and

Billings river basins – the vast majority of whom are poor, having illegally occupied these areas given their proximity to the city center. The industrial and commercial areas along the banks of the River Pinheiros (today the city’s leading business and economic development region) have long been a magnet for job seekers. This market of employment and opportunity is strategically close to the informal settlements of Guarapiranga and Billings – the latter areas now playing an important role in the city’s fabric, and attracting some 14,000 new households annually. The informal/slum settlements cause direct pollution of the reservoirs through wastewater and garbage discharge and storm water run-off and silting, thus threatening their future as water bodies for potable supplies and other uses. To tackle this problem, action is necessary to bring together key local urban upgrading interventions with metropolitan-wide initiatives in wastewater collection and treatment, and drainage and solid waste management, all within the context of the urban river basin. While the state water utility, SABESP, is the major actor for wastewater collection and treatment in MRSP, the

10 Mônica Porto, ‘Recursos Hídricos e Saneamento na Região Metropolitana de São Paulo: Um Desafio do Tamanho da Cidade’ Série Água Brasil 3, World Bank (2003).

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1988 Constitution and 2001 City Statute11 confer upon municipal governments the responsibility for land use planning, including the elaboration of urban master plans and the control of land zoning and development. In addition they are locally responsible for drainage and solid waste management. Coordinated vertical and horizontal action between the state and municipal governments to safeguard and capitalize upon the city’s critical water resources is one of MRSP’s main development challenges and a priority of the state and municipal governments of the region.

6. Water resources management in São Paulo State According to the State Water Resources

Management Law12, São Paulo’s WRM model is based on three principles: decentralization, integration and participation. It adopts the river basin as the basis for planning and management, and it recognizes the economic value of water through the user/polluter pays principle. The State water resources policy defines three instruments for implementation of the model: (i) licensing the use of water resources; (ii) charging for water use; and (iii) dividing the costs of multiple-use interventions which have collective benefit. The São Paulo WRM model also contains: (a) water resources plans (both at the state and the river basin level); (b) an institutional system of management through deliberative, tripartite bodies (both at the central and river basin level) with state, municipal and civil society representation; and (c) a state water resources fund (FEHIDRO). The State water resources plan is based on the respective river basin plans and is periodically updated and approved by state law. The river basin plans contain parameters that are intended to guide the preparation of municipal master plans in accordance with the overarching goals of water resources recovery, protection and conservation. In the state’s heavily urbanized river basins, such as in MRSP, the challenges to sustainable water resources management require that medium- to long-term multi-sectoral responses are identified in the plans, instead of the stand-alone, uncoordinated single sector interventions of the past. One of the key elements of such integrated approaches, especially in highly urbanized areas, is the critical issue of land-use management. The river basin plans recognize this requirement, proposing strong articulation with municipal governments regarding their responsibilities concerning land use patterns and local service delivery.

7. The Alto Tietê River Basin The Alto Tietê river basin comprises the area drained by the

Tietê River from its headwaters in Salesópolis at the extreme eastern end of MRSP to the Rasgão Dam in the municipality of Pirapora do Bom Jesus. The basin is characterized by a low level of water availability vis-à-vis MRSP’s substantial demands and by numerous ongoing and potential conflicts over water use. Extending over 5,985 km2, the Alto Tietê basin covers a highly urbanized area, virtually coinciding with the physical limits of MRSP, and containing 35 municipalities and a population of 17.7 million. Headwaters Protection Areas (APRMs) account for about 54 percent of the total area of MRSP (4,356 km2) and for 73 percent of the drainage area of the Alto Tietê basin. The APRMs contain 2.2 million inhabitants, three-quarters of whom live in the Guarapiranga and Billings sub-basins. The Alto Tietê river basin plan, which subdivides the basin into seven sub-basins13, was first elaborated in 2002 and is currently undergoing revision. The water resources-land management nexus is a key element of the PBAT’s recommended areas of focus.

11 Federal law 10.257, July 10, 2001 12 São Paulo State law 7.662, December 30, 1991 13 Alto Tamanduateí, Billings, Cabeceiras, Cotia-Guarapiranga, Juqueri-Cantareira, Penha-Pinheiros and Pinheiros-Pirap.

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8. Urban growth and informality Various surveys and data sources forecast a population of

MRSP at approximately 23 million by 2025 (representing an annual average increase of 0.5-1 percent). The studies also indicate increasing migration of the population towards the fringes of the city and a population decline in the more central areas. One out of six inhabitants of São Paulo Municipality14 lives in a slum. This means that 400,000 families, or between 1.6 and 2 million people (equivalent to the population of Curitiba), live in substandard housing in 1,538 settlements occupying 30 km2. In 2003 some 290,000 families (or 1.3 million people) lived in these conditions in the municipality. The 38 percent increase in this population is not attributed to increased poverty but to demographic growth. Despite this growth, the area occupied by the slums remains virtually constant demonstrating an increase in urban density and more ‘virtualization’ of dwellings.

9. Water supply and sanitation in São Paulo State SABESP provides water supply and

wastewater services in 367 of the state’s 645 municipalities. Of the remaining municipalities, 274 receive their services from municipal utilities and four from private companies. Of the 35 municipalities in the Alto Tietê basin, 29 of them (representing 79 percent of the region’s urban population, or 39 percent of the total state urban population) receive their WSS services directly from SABESP. The remaining six municipalities15 receive treated bulk water from SABESP and distribute and bill for it via municipal utilities. Some of these also send their collected wastewater to SABESP’s treatment works – a trend that is increasing. The 2007 federal law for water supply and sanitation16 brings long-awaited clarity to the institutional, regulatory, planning and service provision aspects of the sector, and recognizes and regulates regional service providers. The law requires, inter alia, that states and municipalities formalize contractual arrangements between service providers and local governments, introduce regulatory and watchdog mechanisms, and prepare WSS plans.

10. State WRM strategy Despite the advances in WRM in the state many challenges remain.

GESP needs to develop, refine and implement effective WRM instruments and adopt pragmatic approaches to create political and organizational capacity in the sector in order to promote efficient water use by stakeholders. Alternatives to ‘command and control’ tools need to be developed, and innovative, proactive, and integrated approaches adopted to ensure the promotion of sustainable and efficient water resources use in the state, including for the use of groundwater. The state WRM model needs to provide tangible incentives for water users to adopt good water management practices, such as water pricing and eligibility criteria for access to FEHIDRO and other sources of financing. In order to tackle the state’s most pressing WRM challenges, GESP’s WRM strategy promotes an integrated approach and collaborative, coordinated planning and management that involves local governments and other stakeholders as well as basin committees.

11. State WSS strategy GESP has identified the following as the main challenges of the WSS

sector in the state: (i) maintaining water supply services at high coverage levels and quality, while promoting efficiency improvements; (ii) obtaining universal wastewater collection;

14 Study by the Municipal Government of São Paulo and Cities Alliance, 2007 (reference). 15 Diadema, Guarulhos, Mauá, Mogi das Cruzes, Santo André and São Caetano do Sul 16 Federal law 11.445, January 5, 2007

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(iii) increasing the amount of wastewater treated; and (iv) complying with the requirements of the new federal WSS law. GESP intends to achieve this through: (a) developing a more effective and cooperative approach to WSS provision with municipalities; (b) promoting articulation of the WSS sector with environmental, water resources and urban development planning and management; (c) making clearer the roles and responsibilities of policy making and those of sector planning, regulation and service provision; (d) implementing a new state-wide regulatory agency; and (e) developing and implementing alternative funding sources for the sector to complement existing mechanisms and to provide incentives for efficiency.

12. Joint strategy for improving water quality and land-use in MRSP The main challenges of

the land-use/urban informality/environmental nexus in MRSP are to (i) improve water quality and to guarantee the long-term sustainability of water supply in the region’s watersheds and headwaters; (ii) improve the quality of life and living conditions of the low-income population living in the region’s slums and irregular settlements; (iii) implement better urban development and land-use planning, management and control mechanisms; and (iv) build a new metropolitan governance model based on cooperation among stakeholders and integration of sectors. The state, municipal and non-governmental actors engaged in these issues recognize that achieving socio-environmental sustainability and better urban land-use and development in MRSP’s poorest areas is key to controlling water pollution and improving the living conditions of the resident population. To achieve these goals key stakeholders have initiated the articulation of a joint strategy based on integrated interventions in infrastructure provision in environmentally sensitive areas and integrated interventions in urban upgrading; thus encouraging a systematic, sustainable approach to development and urban occupation in the river basins by the public authorities.

13. The Mananciais Horizontal APL operation is designed to respond to the land-use, water resources, environmental and social challenges described herein. The APL is part of a broader program of interventions by MRSP’s state and municipal governments based, inter alia, on the priorities identified in the Alto Tiete river basin plan, on the 1998 Metropolitan Plan for Integrated Development for Greater São Paulo, on SABESP’s water supply master plan and wastewater management master plan – both for the metropolitan region – and on the macro-drainage master plan for the Alto Tietê basin. The overarching program – known as the Mananciais Metropolitan Program – encompasses other important bilateral- and federal-financed programs, including: Progama Guarapiranga-Billings, which centers around important urban upgrading efforts in the two basins and which is executed by PMSP with federal PAC support; Programa Córrego Limpo, which combines efforts by PMSP and SABESP to clean up tributaries to the Billings and Guarapiranga basins; Pró-Billings, an intervention by SABESP with Japanese support in wastewater collection and treatment in the municipality of São Bernardo do Campo; Projeto Orla Guarapiranga, which PMSP has initiated to provide more parks, green areas and leisure and sports opportunities around the Guarapiranga reservoir. Further details on these, and other complementary programs, are presented below. The proposed Bank-financed Mananciais Program is a key element of the state and municipal governments’ Mananciais Metropolitan Program of water resources and land-use management in MRSP. Programa Guarapiranga-Billings – A BRL 870 million program aimed at improving

urban development and sanitary conditions in 45 slums and illegal settlements (with a

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total population of some 44,000 families) in São Paulo Municipality within the Guarapiranga and Billings reservoir drainage basins. The program will be executed by PMSP together with GESP (through SSRH –former SSE, and CDHU) and SABESP; the federal government’s PAC program will contribute BRL 250 million. The program will be under the coordination of the Bank-financed Mananciais Program PMU.

Programa Córrego Limpo – A two-stage BRL 440 million SABESP-PMSP program to remove wastewater pollution from 100 creeks and rivers throughout MRSP, in which some 3.8 million inhabitants reside. Seven of these creeks drain to the Guarapiranga basin, from a total drainage area of 26 km2 in which 270,000 people live (or 27 percent of the basin’s population).

Pró-Billings – a proposed JICA-financed initiative with the municipal government of São Bernardo do Campo and SABESP which will invest US$ 123 million in expanding sanitary infrastructure in the municipality to reduce pollution of the Billings reservoir, and which will include expansion of wastewater infrastructure, remediation of a deactivated sanitary landfill and expansion of green areas//parks.

Projeto Orla Guarapiranga – A PMSP-funded program to provide parks, green areas and leisure and sports opportunities around the Guarapiranga reservoir. The creation of five parks is planned under the program one of which – Parque Nove de Julho – will be fully funded by GESP and is included under the Mananciais Program. The total area of the five parks is approximately 1 million m2; the parks will be linked by a public access way, a walkway and a bicycle path.

Projeto Tietê – A US$ 400 million program with SABESP financed by the IDB and BNDES to expand wastewater collection and treatment in MRSP – with a focus on the wastewater system’s trunk infrastructure and treatment works, as well as service expansion in formal areas of the city.

Flood Remediation Works – A US$ 750 million project undertaken by GESP’s Department of Water and Energy with financing from JBIC , and including the dredging/deepening of the River Tiete’s bed, the channeling of the rivers Cabuçu and Cima, and the construction of the Biritiba and Paraitinga dams.

Conservação Cotia – A SABESP program aimed at protecting and conserving the Cotia manancial.

Rehabilitação Cantareira – A SABESP program for reforestation/re-vegetation of the Cantareira manancial’s catchment area.

14. The Mananciais Program consists of an integrated series of initiatives targeted at

environmental, social and urban development problems in MRSP’s main headwater reservoir catchment areas. The Program areas of intervention correspond to MRSP’s main headwater sub-basins used for supplying water to the metropolitan region, namely: Billings, Guarapiranga, Alto Tietê-Cabeceiras, Juqueri-Cantareira, and Alto and Baixo Cotia.

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

BRAZIL: INTEGRATED WATER MANAGEMENT IN METROPOLITAN SÃO PAULO

MANANCIAIS HORIZONTAL APL PROGRAM

Sector Issues Projects Latest Supervision (ISR/ICR) Ratings17 Implementation

Progress Development

Objective Bank Financed Projects Water Supply & Sanitation Urban & Municipal/Metropolitan Development & Governance

BR-P006541 São Paulo, Paraná and Federal Water Quality Projects BR-P006368 First Water Sector Modernization Project BR-P043420 Second Water Sector Modernization Project BR-P039199 Prosanear Technical Assistance Loan BR-P100976 Brazil Biodiesel Study (ESW) BR- P087711 Espirito Santo Water & Coastal Pollution Management BR-P088009-GEF - Ecosystem Restoration of Riparian Forests in São Paulo Project BR_ P006474 – 3rd Land Management Project – São Paulo BR-P006436 Ceará Urban Development and Water Resources Management Project

S (ICR rating) S (ICR rating) S S In Preparation S S MS S – Urban component (ICR rating)

S (ICR rating) S (ICR rating) S S In Preparation S S S S – Urban component (ICR rating)

17 Provide for Bank-financed projects only

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BR-P006524 Minas Gerais Municipal Development Project BR-P006562 Bahia Municipal Infrastructure Development and Management Project BR-P049265 Recife Urban Upgrading Project BR-P091061 São Paulo Study (ESW) BR-P097331 Strengthening Planning Capacity in the Sao Paulo Municipal Government (TA) BR-P078433 CA: São Paulo "Bairro Legal” BR- P051696 São Paulo Metro Line 4 Project

S (ICR rating) S (ICR rating) U In Preparation Document delivered to the client Document delivered to the client S

S (ICR rating) S (ICR rating) MS In Preparation Document delivered to the client Document delivered to the client S

Other Development Agencies

BR- Municipality of São Paulo Pro-Centro (IDB)

BR- Sao Paulo State Highways Phase II (IDB)

BR- Tiete River Decontamination, Stage II (IDB)

BR - Study on Integrated Plan of Environmental Improvement in the Catchment Area of Lake Billings in Sao Bernardo do Campo City (JICA)

BR- Recovery of Tiete River (JBIC)

BR- Municipality of Rio de Janeiro Favela Bairro (IDB)

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Annex 3: Results Framework and Monitoring

BRAZIL: INTEGRATED WATER MANAGEMENT IN METROPOLITAN SÃO PAULO

MANANCIAIS HORIZONTAL APL PROGRAM

Results Framework 1.0 APL Program

Program Development Objectives (PDO)

Program Outcome Indicators Use of Program Outcome Information

a) To protect and maintain the quality and reliability of MRSP’s water resources and potable water sources

a.1) Reduction of pollution loads to the Guarapiranga water body; and a.2) Maintenance of the water quality of Guarapiranga and Billings water bodies, even with projected population increases. Measured using the following indicators: - IAP18; - IVA19 - IQA20

Year 1: (i) selection of key indicators; detailing and implementing a methodology for results monitoring and evaluation; (ii) consultations with key stakeholders on expected results.

Year 4: (i) stakeholder evaluation of results in the sub-basins based on Program progress; (ii) mid-term review of Program strategies and implementation of eventual changes. Year 6:

18 IAP – Índice de qualidade de Água bruta para fins de abastecimento Público (São Paulo State specific Raw Water Quality Index for Public Water Supply); 19 IVA – Índice de qualidade de água para proteção da Vida Aquática (São Paulo State specific Water Quality Index for Protection of Aquatic Life). 20 IQA – Indice de qualidade de água (National Water Quality Index)

32

b) To improve the quality of life of the poor populations residing in key targeted urban basins in MRSP

b) Improvements in the quality of life of the targeted population based on: b.1) Improved physical, social and environmental changes (measured through public opinion surveys); b.2) Increase in real estate valuation (real estate value surveys); b.3) Increased access to improved water supply, sewerage, drainage and solid waste services (coverage and quality of services); Measured using the following indicators: - Proportion of dwellings with adequate WSS services21; - IQVU (Índice de Qualidade de Vida Urbana22 - Quality of Urban Life Index). b.4) Increase in number and size of leisure and green areas (parks, squares, other public spaces, etc.).

(i) ex-post participatory evaluation.

c) To strengthen institutional capacity and improve metropolitan management and coordination in MRSP in water resources management, water pollution control, land use policy and basic service provision.

c.1) PDPA – Plans for Environmental Development and Protection revised/prepared and implementation initiated for each sub-basin; c.2) Drafts of specific laws for each sub-basin prepared and submitted to the State legislative assembly;

c.3) International comparative study on Metropolitan Governance concluded and discussed;

c.4) Discussion Forum established and seminars held on Metropolitan Governance and Water in MRSP with broad stakeholder participation;

c.5) Study on water demand profile and scenarios concluded; demand-driven water policy for MRSP prepared.

Intermediate Outcomes Intermediate Outcome Indicators Use of Intermediate Outcome Monitoring

Component 1: Institutional Capacity Building

(a) PDPAs revised/prepared and implementation initiated for each sub-basin; (b) Drafts of specific laws for each sub-basin prepared and submitted to the State legislative assembly; (c) International comparative study on Metropolitan Governance concluded and discussed;

Year 2-5: (i) correct measures during implementations of activities for quality assurance and timeliness of products to be delivered; (ii) mid-term review of Program strategies and implementation of eventual changes. Year 6: (i) ex-post participatory evaluation.

21 The indicator is currently used by the Brazilian Census Institute IBGE, data is available and published at municipal level within census, and defines what “adequate basic sanitation” means and quantifies it. 22 The Índice de Qualidade de Vida Urbana (IQVU, Quality of Urban Life Index) is composed of 11 variables: commerce and services; culture;economy;education; housing (housing conditions and WSS); health; urban management instruments; socio-political participationa and organization ; urban environment; public safety; and transport). The calculation of the index uses a mathematical model that considers the weighted impact of a total of 49 variables.

33

(d) Discussion Forum established and seminars held on Metropolitan Governance and Water in MRSP with broad stakeholder participation; (e Study on water demand profile and scenarios concluded, demand-driven water policy for MRSP prepared; (f) Environmental and sanitary education programs implemented;

(g) Integrated Citizenship Center implemented; (h) Hydrodynamic monitoring models of reservoirs developed.

Component 2: Urban Upgrading

(a) interventions implemented to adapt infrastructure for settlements, benefiting # families; (b) interventions implemented to urbanize slums, benefiting # families; (c) % house units constructed for family resettlement; (d) resettlement of % families completed. (e) Ecology and Citizenship Center implemented; (f) # of households benefiting from the expansion of water supply systems; (g) # of households benefiting from the expansion of sewage systems.

Year 3-5: (i) correct measures taken during implementation of activities for quality assurance and timeliness of products to be delivered; (ii) mid-term review of Project strategies and implementation of eventual changes; Year 6: (i) ex-post participatory evaluation; (ii) ex-post evaluation.

Component 3: Environmental Protection and Recovery

(a) # ha of parks and free public areas urbanized implemented; (b) # ha of degraded areas recovered; (c) # of pollution load removal plants implemented.

Year 2-5: (i) correct measures during implementation of activities for quality assurance and timeliness of products to be delivered; (ii) mid-term review of Program strategies and implementation of eventual changes; Year 6: (i) ex-post participatory evaluation.

Component 4: Integrated Water Supply and Sanitation

(a) # of water treatment processes in ETAs23 optimized; (b) # of households benefiting from the expansion of water supply systems; (c) Improved indices for billing, distribution, linear losses; and per connection in two focal areas24; (d) # of households benefiting from the expansion of sewage systems; (e) Alvarenga uncontrolled solid waste dump (lixão) remediated; (f) Procurement process for solid waste collection equipment concluded and equipment in use.

Year 2-5: (i) correct measures during implementation of activities for quality assurance and timeliness of products to be delivered (ii) mid-term review of Program strategies and implementation of eventual changes; Year 6: (i) ex-post participatory evaluation.

23 ETA – Estação de Tratamento de Água (Water Treatment Plant) 24 The two focal areas are: Martins City (High and Low Zones) and Cabuçu production system.

34

Arrangements for results monitoring 1.0 APL Program

Program Outcome Indicators

Baseline Target

Target Values Data Collection and Reporting YR1 YR2 YR3 YR4 YR5 YR6 Frequency

and Reports Data Collection

Instruments Responsibility for Data

Collection unit unit unit unit unit unit

a.1.a) pollution loads of relevant water bodies reduced (mg/l BOD) – Córrego Tanquinho / Guarapiranga;

329 mg/l (2007)

25 mg/l 329 268 207 147 86 25 Annually Progress Report SABESP

a.1.b) pollution loads of relevant water bodies reduced (mg/l BOD) – Rio das Pedras / Guarapiranga;

75 mg/l (2007)

25 mg/l 75 65 55 49 37 25 Annually Progress Report SABESP

a.2) water bodies’ quality maintained, even with population increases. The water quality would be measured using the following water monitoring points:

BILL 0210025 (Billings ME) – IAP26

Good Good Good Good Good Good Good Good

Semester Progress Report SABESP

BILL 02100 (Billings ME) – IVA27

Bad Normal Bad Bad Bad Normal Normal Normal

BILL 02100 (Billings ME) – IQA28

Good Good Good Good Good Good Good Good

BILL 02500 (Billings MD) – IAP

Good Good Good Good Good Good Good Good

BILL 02500 (Billings MD) – IVA

Bad Normal Bad Bad Bad Normal Normal Normal

25 The BILL 2100 sampling point is monitored by CETESB and corresponds to the point located in the middle of the central Billings reservoir body, in the direction of the Bororé tributary. The BILL 2500 sampling point is also located in the central Billings rservoir body, under the bridge of the Imigrantes road. Sampling point GUA 00900 is situated in the Guarapiranga reservoir, at the SABESP raw water intake point, by the pump house. 26 The IAP Indicator (Raw Water Quality Indicator for Potable Supplies - Índice de Qualidade de Águas Brutas para fins de Abastecimento Público) is a product of weighting the IQA indicator (Water Quality Indicator - Índice de Qualidade das Águas) and the ISTO indicator (Toxic and Organoleptic Substances Indicator - Índice de Substâncias Tóxicas e Organolépticas). The classification of IAP is as follows: Very Good (79 < IAP ≤ 100); Good (51 < IAP ≤ 79); Normal (36 < IAP ≤ 51); Bad (19 < IAP ≤ 36); and Terrible (IAP < 19). 27 The IVA indicactor (Water Quality Indicator for Proteciton of Aquatic Life - Índice de Qualidade de Água para Proteção da Vida Aquática) considers the pressence and concentration of toxic chemical contaminants, their effect on aquatic organisms (toxicity), and two of the water body’s parameters considered essential for biota (pH and dissolved oxygen), these parameters being grouped under the IPMCA (Mininum Parameter Indicator for the Preservation of Aquatic Life - Índice de Parâmetros Mínimos para a Preservação da Vida Aquática), as well as under the IET (Tophic State Indicator - Índice do Estado Trófico). The classification of the IVA is as follows: Very Good (≤ 2,2); Good (2,9 ≤ IVA ≤ 3,2); Normal (3,4 ≤ IVA ≤ 4,4); Bad (4,6 ≤ IVA ≤ 6,8); and Terrible (6,8 ≤ IVA ≤ 7,6). 28 The IQA (Water Quality Indicator – Índice de Qualidade das Águas) incorporates the following parameters: (i) physical: temperature, total sedimentand turbidity; (ii) chemical: pH, dissolved oxygen, biochemical oxygen demand (BOD5,20), total nitrogen and total phosphorous; and (iii) microbiological: thermotolerant coliforms. The IQA classification scale is as follows: Very Good (80-100); Good (52-79); Normal (37-51); Bad (20-36); and Terrible (0-19)

35

BILL 02500 (Billings MD) – IQA

Good Good Good Good Good Good Good Good

GUAR 00900 (Guarapiranga CAP) – IAP

Good Good Good Good Good Good Good Good

Semester

Progress Report

SABESP

GUAR 00900 (Guarapiranga CAP) – IVA

Bad Normal Bad Bad Bad Normal Normal Normal

GUAR 00900 (Guarapiranga CAP) – IQA

Good Good Good Good Good Good Good Good

b.) Degree of satisfaction of the population based on:

b.1) Physical, social and environmental changes due to the Program (opinion survey);

Low High Low - - - - High At Program

beginning and end

Market and Opinion Surveys

UGP and UGLs

b.2) Real estate valuation29;

BRL 211,00/

m2

BRL 306,00/ m2

BRL 211,00/ m2

- - - - BRL

306,00/ m2

b.3a) Proportion of dwellings with adequate WSS services30;

55% 65% 55% 55% 60% 60% 65% 65% Annually Progress Report UGP and UGL through IBGE

b.3b) IQVU (Urban Quality of Life Index)31;

Tbd Tbd Annually Progress Report UGP and UGLs

b.4) Increase in number of leisure and green areas (parks, squares, etc.);

-x- 170 ha

- -

42

86

130

170

Semester Progress Report UGP and UGLs

c.1.a) PDPA – Plan for Environmental Development and Protection in Guarapiranga Basin revised;

-x- 1 1 - - - - - Annually Progress Report UGP and UGLs

29 For the GESP and SABESP Projects, The increased value of real estate will be measured using the average value of the residence per square metre (BRL/m2), adopting as sample areas the Favelas do Jardim Cliper slums (a non-urbanized area located on the right bank of Guarapiranga) and the Favela Jardim Kagohara III slum (also not urbanized and situated on the left bank of Guarapiranga), both in the municipality of São Paulo. In these two areas a sample survey will be done at the end of Program implementation to ascertain the new real estate values (in addition, a preliminary survey could be undertaken in the third or fourth year of Program implementation). The outcome values to be obtained (BRL 306.06/m2) take into account the average values of residences per square metre in the Favela Jardim Kagohara I slum and in part of the Jardim Clíper slum, which both underwent urbanization during the Guarapiranga project and through other PMSP interventions. For the PMSBC Project, the increased value of real estate will be measured using the average value of the residence per square metre (BRL/m2), adopting as sample areas of intervention in te Municipality of São Bernardo do Campo. In these areas a sample survey will be undertaken at the end of Program implementation to ascertain the real estate value (in addition, a preliminary survey could be undertaken in the third or fourth year of Program implementation). The baseline and target values will be defined until negotiations of the PMSBC loan. 30 The indicator is currently used by the Brazilian Census Institute IBGE, census data is available and published at the municipal level and defines and quantifies “adequate basic sanitation”. 31The IQVU-M index varies between 0 and 1.0, and groups municipalities into 5 groups/classes. Class I includes the municipalities with the lowest quality of urban life in the country and Class V, are those municipalities with the best quality of urban life nationwide. The base-line values and the annual goals will be defined during the first year of Program implementation, at which time the national index will be adapted to the Mananciais Program.

36

c.1.b) PDPA – Plans for Environmental Development and Protection prepared and implementation initiated for each sub-basin;

-x- 4 - 1 2 4 - - Annually Progress Report UGP and UGLs

c.2) Drafts of specific laws for each sub-basin prepared and submitted to the State legislative assembly;

1 4 - 2 - 4 - - Annually Progress Report UGP

c.3) International comparative study on Metropolitan Governance concluded and discussed.

-x- Study

concluded and discussed

- ToR

prepared Study

prepared Study

concluded Discussed

Study concluded

and discussed

Semester Progress Report UGP

c.4) Discussion Forum established and seminars held on Metropolitan Governance and Water in MRSP with broad stakeholder participation;

-x-

Forum established

and 05 seminars held.

Forum established

1st Seminar carried out

2nd Seminar carried out

3rd Seminar carried out

4th Seminar

carried out

5th Seminar carried out

Semester Progress Report UGP

c.5) Study on water demand profile and scenarios concluded; demand-driven water policy for MRSP prepared.

-x-

Study concluded and

policy prepared.

ToR prepared Study

prepared Study

discussed

ToR prepared for policy

design

Policy prepared

Policy discussed

Semester Progress Report UGP

Intermediate Outcome Indicators

Component 1: Institutional Capacity Building

(a1) PDPA – Plan for Environmental Development and Protection in Guarapiranga Basin revised;

-x- 1 1 - - - - - Annually Progress Report UGP and UGLs

(a2) PDPAs prepared and implementation initiated for each sub-basin;

-x- 4 - 1 2 4 - - Annually Progress Report UGP and UGLs

(b) Drafts of specific laws for each sub-basin prepared and submitted to the State legislative assembly;

1 4 - 2 - 4 - - Annually Progress Report UGP

(c) International comparative study on Metropolitan Governance concluded and discussed;

-x- Study

concluded and discussed

- ToR

prepared Study

prepared Study

concluded Discussed

Study concluded

and discussed

Semester Progress Report UGP

37

(d) Discussion Forum established and seminars held on Metropolitan Governance and Water in MRSP with broad stakeholder participation;

-x-

Forum established

and 05 seminars held.

Forum established

1st Seminar carried out

2nd Seminar carried out

3rd Seminar carried out

4th Seminar

carried out

5th Seminar carried out

Semester Progress Report UGP

(e) Study on water demand profile and scenarios concluded; demand-driven water policy for MRSP prepared;

-x-

Study concluded and

policy prepared.

ToR prepared Study

prepared Study

discussed

ToR prepared for policy

design

Policy prepared

Policy discussed

Semester Progress Report UGP

(f) Environmental and sanitary education programs implemented; -x-

60.000 people involved

20.000 SBC -

5.000 people

involved 1000

10.000 people

involved 3000

20.000 people involved

6000

40.000 people

involved 13000

60.000 people

involved 20000

Semester Progress Report UGP and UGLs

(g) Integrated Citizenship Center implemented;

-x- 1 CIC - 1 - - - - Trimester Management

Report UGP

(h) Hydrodynamic monitoring models of reservoirs developed.

-x- 5 models - - 1 2 4 5 Semester Progress Report UGP and UGLs

Component 2: Urban Integration

(a) interventions implemented to urbanize slums, benefiting # of families;

-x- 3000 families

- - - 1200 3000 3000 Semester Progress Report UGP and UGL/PMSBC

(b) % housing units constructed for family

resettlement32

; -x- 100% - - - - 40% 100% Semester Progress Report UGP and UGL/PMSBC

(c) resettlement of % of families completed in accordance with appropriate local and Bank safeguards.

-x- 100% - - - 100% 100% 100% Semester Progress Report UGP and UGL/PMSBC

(e) Ecology and Citizenship Center implemented;

0 1

- - - 1 1 1 Semester Progress Report UGP and UGL/PMSBC

(f) households benefiting from the expansion of water supply systems;

-x- 3000

- - - - 1200 3000 Semester Progress Report UGP and UGL/PMSBC

(g) # of households benefiting from the expansion of sewage systems.

-x-

3000

- - - - 1200 3000 Semester Progress Report UGP and UGL/PMSBC

32 Studies are still underway and the number of families to be resettled will only be finalized upon conclusion of the studies. For budgeting purposes a preliminary number of 1,200 houses to be constructed has been estimated.

38

Component 3: Environmental Protection and Recovery

(a) parks and free public areas urbanized implemented;

-x- 170 ha

implemented

- - 42

86

130

170

Semester Progress Report UGP and UGLs

(b) degraded areas recovered;

-x- 60 ha

recovered - -

15

31

46

60

Semester Progress Report UGP and UGLs

(c) pollution load removal plants implemented.

1 3 stations - - - 2 3 - Semester Progress Report UGP and UGLs

Component 4: Integrated Water Supply and Sanitation

(a) water treatment processes in ETAs 33 optimized;

-x- 6 ETAs

optimized34 - - 1 3 5 6 Semester Progress Report UGP and UGL

(a1) reduction of chemical products used for water treatment in ABV ETA (kg/1000 m3);

94,5 92,0 94,5 94,5 94,0 93,5 93,0 92,0 Semester Progress Report UGL/SABESP

(a2) reduction of chemical products used for water treatment in Rio Grande ETA (kg/1000 m3);

86,5 79,0 86,5 85,0 83,8 83,0 81,5 79,0 Semester Progress Report UGL/SABESP

(a3) mean reduction of chemical products used for water treatment in all ETAs with program support (kg/1000 m3);

68,8 60,0 68,8 67,4 65,2 64,0 62,6 60,0 Semester Progress Report UGL/SABESP

(b)households benefiting from the expansion of water supply systems;

-x- 4,210

180

1,450-

3,220

3,760 3,940 4,210 Semester Progress Report UGL/SABESP/PMG

(c) Establishment of Water Losses program

Program Defined

Program Adopted

Program Initiated

(d) households benefiting from the expansion of sewage systems;

-x- 20,110

1.770

5.425

10,375

14,800 17,455 20,110 Semester Progress Report UGL/SABESP/PMG

(e) procurement process for solid waste collection equipment concluded and equipment in use.

-x- Equipment in

use - - -

Procurement process

concluded and equipment received

Equipment in use

Equipment in use

Semester Progress Report UGP

33 ETA – Estação de Tratamento de Água (Water Treatment Plant) 34 Improvements are expected in the following SABESP-operated ETAs: ABV – Alto da Boa Vista; Rio Grande; Casa Grande; Guaraú; and Alto Cotia and Baixo Cotia.

39

Annex 4: Detailed Project Description

BRAZIL: INTEGRATED WATER MANAGEMENT IN METROPOLITAN SÃO PAULO

MANANCIAIS HORIZONTAL APL PROGRAM 1. The interventions under the respective components of the Program were identified by

adopting the following analytical methodology: the current land-use patterns in the two mostly highly urbanized reservoir basins, Guarapiranga and Billings (where three-quarters of the Programs resources will be invested), were mapped and loaded into a land-use/water quality computer-based mathematical model (MQUAL2). This model was then used to identify the major pollution sources in the two reservoirs. There was a very strong correlation identified between the highly urbanized areas of the basins, in general, and pollution load and between the informal and densely occupied areas of the basin, more specifically, and the pollution rates. The mapping also identified the pockets of poverty in these two basins and established their correlation with pollution loads. This mapping and modeling exercise of land-use, pollution loads and poverty rates was then used as a basis to identify and prioritize the types of physical intervention to be undertaken in the two basins: water supply; wastewater collection and treatment; solid waste management and disposal; drainage; urban upgrading; social inclusion interventions; and leisure areas and parks.

2. The Program will undertake physical interventions in urban environmental infrastructure and

urban upgrading, prioritizing activities in those MRSP river basins that are already heavily urbanized and degraded (Guarapiranga and Billings). In order to get ‘ahead of the curve’ with regard to land-use planning and water pollution control, and thus to prevent other areas from becoming the Guarapiranga and Billings of the future – such as the Alto Tietê-Cabeceiras, the Juqueri-Cantareira, and the Alto and Baixo Cotia basins – the program plans to undertake actions in these basins that are further from the city and are also experiencing pressure from informal urbanization. Under the leadership of GESP, the Program will also support strategic activities to promote the sustainability of the interventions as well as to promote metropolitan-wide management and coordination.

3. The Horizontal APL has four components: (i) Institutional Capacity Building; (ii) Urban

Upgrading; (iii) Environmental Protection and Recovery; and (iv) Integrated Water Supply and Sanitation. The last component incorporates activities related to a broader concept of integrated water supply and sanitation, as described in Federal WSS Law (11.445/2007), namely: water supply, sanitation, drainage, and solid waste management. A summary of the Program’s costs by component is given in Table 4.2, and by sub-basin in Table 4.3. Each of the Program’s borrowers will not be undertaking all of the activities listed above under the four Program components. Nor will each of the activities be carried out in all of the sub-basins of the MRSP.

40

Table 4.2 Program Costs by Component

Program Cost by Component

Total (US$ M)

% of the Total

IBRD (US$ M)

% of IBRD in each component

C’part (US$ M)

% of C’part in each comp.

Institutional Capacity Building 35.09 15 16.97 13.0 18.12 16.8

Urban Upgrading 62.89 26 13.80 10.6 49.09 45.5

Environmental Protection and Recovery 19.61 8 11.73 8.9 7.88 7.3 Integrated Water Supply and Sanitation 119.41 50 88.07 67.3 31.34 29.0

Front-end fee 0.32 0.1 0.32 0.2 0.00 0.0

TOTAL 237.32 98.9 130.89 100.0 106.43 98.6

Unallocated 1.32 1.1 0.00 0.0 1.32 1.4

PROGRAM TOTAL 238.64 100.0 130.89 100.0 107.75 100.0

Table 4.3 Program Costs per Sub-basin

Program Cost per Sub-basin Total (US$ M) (%) IBRD (US$ M)

C’Part (US$ M)

Guarapiranga 42.70 17.9 27.48 21.0

Billings 101.95 42.7 48.80 37.3

Alto Tiete - Cabeceiras 7.93 3.3 6.60 5.0

Juqueri-Cantareira 27.36 11.5 21.42 16.4

Alto and Baixo Cotia 8.80 3.7 3.50 2.6

General 34.93 14.6 15.17 11.6

Front-end fee and contingencies 13.65 5.7 7.92 6.1

TOTAL 237.32 99.4 130.89 100.0

Unallocated 1.32 0.6 0.00 0.0

PROGRAM TOTAL 238.64 100.0 130.89 100.0

4. Component 1 – Institutional Capacity Building (US$ 35.09 million total, US$ 16.97 million

loan). To achieve the objectives of the Mananciais Program and to ensure its long term sustainability, an Institutional Capacity Building component has been designed to support GESP and the other executing agencies by strengthening their institutional capacity and promoting improved metropolitan management and coordination with regard to the key metropolitan challenges of water resources management, water pollution control, land-use policy, and basic service provision.

5. The Mananciais Program is designed to make an important contribution to an unfinished

agenda which will tackle the land-use/urban informality/water resources challenges facing MRSP, an agenda that was initially spearheaded by the Bank-financed predecessor Guarapiranga project. Besides being a vehicle for continuing, extending and improving the momentum of this agenda, the Mananciais Program will also respond to some important residual challenges identified in the Guarapiranga Program’s final assessment, such as the issues of studying and developing metropolitan governance, management, coordination, planning and regulation, and of dissemination of information to the numerous stakeholders

41

on these and related program issues, thus promoting awareness-raising and countering the asymmetric availability of such information and data.

6. The main objective of the Institutional Capacity Building Component is to improve

institutional capacity, and to implement/improve technical instruments for coordinating, managing and promoting the sustainability of the Program’s interventions at the metropolitan level, especially for those metropolitan-wide issues that are the focus of the Program’s activities and objectives.

7. Since the Program’s objectives encompass the development of long-term policies, plans,

guidelines and activities, institutional capacity training is suggested for all stakeholders and will not be limited to the executing agencies. Given the overall aims of the Program – improving land-use, preserving and recovering the strategic water bodies, and coordinating the planning, management and monitoring of the delivery of the related services –the Program’s capacity building activities to promote these goals are as important as its physical interventions.

8. To achieve its main objective the Institutional Capacity Building Component will support

activities designed to: (i) Improve integrated land-use and water resources management and coordination at the metropolitan level; (ii) Undertake environmental and water quality monitoring and modeling; (iii) Implement environmental education and social outreach activities; and (iv) Support Program management, monitoring, evaluation and dissemination.

9. Improving integrated land-use and water resources management and coordination at the

metropolitan level will be promoted through the following activities, described in more detail below: (i) Improving water management; and (ii) Supporting the development of new mechanisms of metropolitan governance.

10. Improve water management this component will allow for a better understanding of the

metropolitan reservoirs and water sources, will support the improvement of water quality and water availability, will support the development of policies for demand management of water use, and will provide technical assistance to allow the State and local governments and other stakeholders – such as the basin agency, committee and sub-committees – to develop state-of-the-art technologies and approaches related to water resources and land-use management and related fields. To do so, the component includes the following activities: undertaking studies on MRSP’s water demand profiles and scenarios, as opposed to water

availability; and the development of proposals for water demand management policy and strategies (such as incentive structures to reduce water demand and other measures aimed at alleviating pressure by postponing new investments for increasing water supply);

development of decision support systems for the integrated operation of MRSP’s reservoirs through an integrated operation control center and the installation of automatic hydrometric monitoring instruments;

support GESP in institutional development related to its refinement and roll out of the state WSS and WRM policies, with emphasis on, inter alia, service regulation, planning, and innovative financing mechanisms, and with a focus on the particular challenges of these issues in MRSP and its headwater areas;

42

preparation of plans and programs to analyze, evaluate and control point and non-point source pollution in the sub-basins;

undertaking geotechnical and related research and analyses to understand and control erosion, silting and sediment production in critical areas of the sub-basins;

control of illegal solid waste disposal through identification, evaluation and mapping of sites and preparation of mitigation plans for adequate disposal;

support to the preparation and implementation of sub-basin Environmental Development and Protection Plans’ and their corresponding specific land-use laws;

development and regulation of enforcement activities regarding surface- and ground-water extraction/use in the MRSP river basins; and

technical assistance and capacity building on issues related to WRM, including to the Alto Tietê river basin committee, subcommittees and agency, municipalities and other stakeholders.

11. In addition, the Institutional Capacity Building Component will also help the state and

municipal governments of MRSP in transferring the development and understanding of these principles to successful metropolitan management models – flexible, accountable, durable/stable for long-term planning and implementation, sustainable (in environmental, economical and fiscal terms), and socially inclusive – and the knowledge of best international practices in developed and developing countries (with a focus on federative countries), aiming at developing a new metropolitan governance structure regarding the management of urban water resources, land-use and related issues. The Program is designed to act as a catalyst in order to create an environment in which information and knowledge can be exchanged between stakeholders in confidence on issues related to models for best-practice management of the mananciais and the related urban systems and services in a metropolitan environment. This will be achieved, inter alia, through the component’s support to discussion fora and to the development of studies, proposals and implementing instruments and strategies compatible with the legal, political and administrative realities of MRSP.

12. Supporting the development of new mechanisms for metropolitan governance in MRSP the

component will undertake technical assistance activities, develop studies and proposals, and support stakeholder dialogue on issues related to metropolitan governance with a particular focus on water resources and land-use management. To do so the component will include the following main activities: technical assistance and the transfer of technology and knowledge to municipalities in

areas such as master and land-use planning and legislation, service delivery, etc; technical assistance and the transfer of technology and knowledge to state, municipal and

other actors in the implementation, operation, integration and updating of management and planning instruments such as GIS systems, land-use and PDPAs, municipal master plans, etc;

the development of local economic development plans, including house and land markets analyses, for promoting appropriate economic activities and land-use patterns with a view to generating income and jobs that focus on environmental protection in the headwater basins;

the development of an integrated land-use supervision and control system; creation of a forum for seminars on ‘Metropolitan Governance and Water in MRSP’;

43

carrying out of studies on metropolitan governance; and analyses, workshops and study tours in support of the identification of a suitable model of

metropolitan governance for the MRSP and other metropolitan regions in the state, through participative and collaborative debate with public authorities, universities and other stakeholders, and by drawing on national and international experience.

13. Environmental and water quality monitoring and modeling of MRSP’s reservoirs/water

catchment bodies and their tributaries, and the ease of treating the raw water for potable supplies, are key to the sustainable management of the metropolitan region’s water resources. Component 1 will support the continued improvement of the monitoring and evaluation of the water quality of the region’s strategic water bodies through the following activities: the preparation of environmental monitoring and supervision plans, and the undertaking

of Program monitoring and evaluation (M&E) of the environmental aspects of the Program’s activities in a coordinated manner with all executing agencies;

undertaking of hydrodynamic and water quality modeling of Guarapiranga, Rio Grande, Taiacupeba, Jundiaí, Biritiba, Paiva Castro and Atibainha reservoirs, including studies on the behavior of the reservoirs’ sludge layers;

development of studies on potable water treatment improvements; capacity building of environmental staff in the executing agencies in the use of the

environmental M&E system; the development and implementation of a water quality monitoring and control program

for the Alto Tietê basin through satellite imaging; procurement of equipment for undertaking limnology and other specialist laboratory

analyses; the carrying out of limnology and silting control studies; the implementation of automated monitoring systems for the remote supervision and

control of wastewater pumping stations; installation of a software package to assist in the coordination of laboratory analyses and

results of water quality monitoring programs; the implementation of a silting control M&E system; and activities to improve the efficiency of existing water quality M&E control centers.

14. Environmental education and social outreach are key elements to help the Program obtain its

overall objectives of improving water quality, land-use patterns, and quality of life in the low-income settlements surrounding the reservoirs. The component will support these efforts through the following activities: capacity building events for environmental and other outreach agents; the development of environmental and sanitary educational and outreach material

including videos, radio programs, pamphlets, etc; the carrying out of environmental and sanitary education programs for different target

groups; the preparation of environmental and social diagnoses for use in Program outreach

material and other awareness raising activities; the carrying out of ex ante and ex post beneficiary surveys;

44

support to social mobilization activities and civil society initiatives, including the implementation of a GESP integrated citizenship center; and

the implementation of environmental education centers and of ecology/citizenship centers.

15. Program management, monitoring, evaluation and dissemination will be supported under

Component 1 through the following activities: development of a management information system (MIS) for the monitoring, evaluation

and control of the Program’s implementation; training of executing agency staff in the use of MIS; carrying out of learning and dissemination activities, including the organization of

national and international seminars and workshops to exchange experience on the key issues being addressed under the Program;

development of coordination and participation mechanisms and capacity for all participants as a foundation for the studies, discussions, debates and proposals of water and metropolitan governance and management in MRSP;

the development of strategic integrated communication strategies for the Program to be used by all Program executing agencies;

the publishing of material on the Program’s accomplishments and findings; provision of technical assistance and procurement of equipment to improve the capacity

of GESP’s overall Program management unit and the executing agencies’ local management units; including management, procurement, financial management, safeguards, M&E specialists and other technical specialists, as necessary; undertaking of Program audits; etc;

definition and review of baseline, mid-term and Program-end monitoring indicators; and final evaluation of Program results/impact.

16. Component 2 – Urban Upgrading (US$ 62.89 million total, US$ 13.80 million loan). The

component’s objectives are to improve the standards and layouts of urban occupation in PMSBC and other selected municipalities to be approved by the Bank in the targeted basins and improve the quality of life of the residents of these basins, especially the low-income communities living in informal settlements. Component 2 will support the following activities:

a. Urbanization of slums and irregular settlements through the preparation of

engineering designs and the execution of the resulting civil works interventions for the urban upgrading of strategic low-income settlements and slums in key areas of the sub-basins – to be defined according to their respective PDPAs, and to include urban layout redesign including housing reconfiguration, access way improvements, drainage improvements, access to water supply, sewerage and solid waste services, creation/improvement of public spaces, etc.

b. Recuperation of high-risk and degraded areas through: (i) The preparation of

engineering designs and the execution of the resulting civil work interventions in areas of high risk such as those prone to flooding or mud/landslides; and (ii) The resettlement of families from high-risk areas.

45

c. Involuntary resettlement of families affected by civil works interventions or resettled

from areas of high risk, through: (i) The preparation of detailed resettlement plans (based on the Program’s Resettlement Policy Framework) together with the corresponding engineering designs of the associated civil works, and based on the respective PDPAs; (ii) The implementation of the resettlement plans concomitantly with the execution of the associated civil works; (iii) The monitoring and evaluation of the resettlement process; and (iv) Social outreach and guidance initiatives before, during and following the civil works execution.

d. Environmental and urban layout standardization of settlements through the preparation of engineering designs and the execution of the resulting civil works interventions.

e. Socio-environmental supervision of the urban upgrading and housing interventions

through the preparation and implementation of supervision plans to this end.

17. Component 3 – Environmental Protection and Recovery (US$ 19.61 million total, US$ 11.73 million loan). The component’s objectives are to protect and recover natural habitats and environmentally sensitive and degraded areas in the sub-basins with a view to improving environmental quality. Component 3 will support the following activities: a. Re-vegetation/reforestation through: (i) The preparation and implementation of master

plans for urban landscape re-vegetation/reforestation in strategic areas of the respective sub-basins; and (ii) The preparation and implementation of plans to recover the riparian forests in strategic areas of the sub-basins.

b. Urbanization of public areas with creation of green and leisure spaces for common

use through preparation of engineering designs and the execution of the resulting civil works interventions in strategic areas of the respective sub-basins – to be defined according to the respective PDPAs.

c. Establishment of environmentally protected areas through the preparation of

management plans in strategic areas of the sub-basins, including background studies as necessary, engineering and associated design preparation, and implementation of the protected areas.

d. Rehabilitation and protection of reservoirs and water production systems through:

(i) The preparation of engineering designs and the execution of the resulting civil works for constructed wetlands and other in-stream approaches to removing the pollution loads from rivers; (ii) The preparation of river management plans for the Capivari, Claro and Morro Grande rivers; (iii) The design and implementation of programs to remove macrophytes, to remove algae, and to increase sediment retention/removal; (iv) Design and implementation of parks in the catchments’ strategic reservoir areas; and (v) The preparation of the engineering design and the execution of the resulting civil works

46

interventions to improve and modernize the ESI water pumping station, and preparation of the engineering design of the Tunel 6 water transmission main.

e. Control of the transportation of hazardous substances in the region through

development of studies, monitoring and mapping activities, and the preparation of plans and programs to better control their transportation.

18. Component 4 – Integrated Water Supply and Sanitation (US$ 119.41 million total, US$

88.07 million loan). The component’s objectives are to reverse the main factors that contribute to the pollution of the reservoirs and to provide integrated WSS services to the poor. Component 4 will support the following activities:

a. Wastewater management improvements through: (i) The preparation of Program

design and execution of civil works for pumping stations, expansion of existing systems and implementation of new systems, preparation of environment-related studies for licensing purposes; and (ii) Procurement of equipments for operational control and monitoring, etc.

b. Water supply system improvements through: (i) The preparation of engineering

designs and the execution of the resulting civil works interventions in São Bernardo do Campo, Guarulhos and São Paulo municipalities; (ii) The implementation of a program to control and reduce non-revenue water through program preparation, procurement of equipment, execution of civil works to implement macrometers, replace pipes and connections, etc; (iii) The improvement of treatment processes in strategic water treatment works (the ABV, Rio Grande, Taiaçupeba, Rio Claro, Guaraú, Alto Cotia and Baixo Cotia plants) through the preparation of engineering designs and the implementation of the resulting equipment/civil works, including automated control systems; studies on alternative treatment technologies and evaluations of control methods to minimize the use of chemicals in the treatment process, etc; and (iv) Improvements in sludge and wastewater treatment and disposal processes in the water treatment works (the ABV, Taiaçupeba, Rio Claro, Guaraú, Alto Cotia and Baixo Cotia plants) through preparation of engineering designs and the implementation of the resulting equipment/civil works interventions.

c. Solid waste management improvements through: (i) The development of studies and

engineering designs to implement solid waste activities in key areas of the sub-basins (to be defined according to their respective PDPAs) and the execution of the resulting civil works interventions; (ii) The carrying out of studies, diagnoses and mapping/quantification of illegal solid waste disposal/tipping and the implementation of plans and interventions to counter this behavior; and (iii) The preparation of an Integrated Solid Waste Management Plan for the region.

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Annex 5: Project Costs

BRAZIL: INTEGRATED WATER MANAGEMENT IN METROPOLITAN SÃO PAULO

MANANCIAIS HORIZONTAL APL PROGRAM 1.0 Total Program costs

TOTAL

Program Cost By Component

Local Foreign Total

US $million US

$million US

$million Institutional Capacity Building 33.25 0 33.25Urban Upgrading 59.87 0 59.87

Environmental Protection and Recovery 18.53

0 18.53

Integrated Water Supply and Sanitation 112.01

0 112.01Total Baseline Cost 223.66 0 223.66Physical Contingencies 7.73 0 7.73Price Contingencies 5.60 0 5.60

Total Project Costs1 236.99 0 236.99Interest during construction 0 0 0

Front-end fee 0 0.32 0.32Unallocated 1.32 0 1.32

Total Financing Required 238.31 0.32 238.63

1. Retroactive financing is included in the loan agreements for the GESP and SABESP

projects, and it is being considered for the PMSBC and PMG projects. Any such retroactive financing would be for disbursements against the proceeds of the respective loan, and for payments made after appraisal, and within 12 months from the date of the respective loan agreement, for an accumulated amount not to exceed 10 percent of the respective loan amount. For any such activities related to this retroactive financing, the procedures used for procurement and the related processing and clearances, will be subjected to the Bank's Procurement Guidelines; and payments will only be made against eligible expenditures under the respective Project.

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2.0 Detailed program costs by borrower

TOTAL SABESP GESP PMSBC PMG

Program Cost By Component* US $

million US $

million US $

millionUS $

million US $

millionInstitutional Capacity Building 33.25 7.22 19.60 5.63 0.80Urban Upgrading 59.87 0.00 28.47 31.40 0.00Environmental Protection and Recovery

18.53 10.72 4.93 2.88 0.00

Integrated Water Supply and Sanitation

112.01 97.86 3.94 0.00 10.21

Total Baseline Cost 223.66 115.80 56.94 39.91 11.01Physical Contingencies 7.73 4.64 2.03 0.63 0.43Price Contingencies 5.60 3.04 1.47 0.81 0.28

Total Project Costs 236.99 123.48 60.44 41.35 11.72Interest during construction 0.00 0.00 0.00 0.00 0.00

Front-end fee 0.32 0.25 0.01 0.05 0.015Unallocated 1.32 1.27 0.05

Total Financing Required 238.63 125.00 60.50 41.40 11.73 * The amounts allocated are all local resources, except for the front-end fee amount which is foreign.

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Annex 6: Implementation Arrangements

BRAZIL: INTEGRATED WATER MANAGEMENT IN METROPOLITAN SÃO PAULO

MANANCIAIS HORIZONTAL APL PROGRAM 1. The proposed Mananciais Program will be implemented as a Horizontal APL encompassing

four borrowers, each being the recipient of a loan. GESP, SABESP, PMSBC and PMG will be the borrowers. GESP will implement the program through three executing agencies: SH (through CDHU); SMA; and SSRH (former SSE) – the latter will be responsible for coordinating both GESP’s activities under the APL, as well as the overall APL itself. The implementation arrangements for the Program are organized around three themes: (i) Strategic advisory support; (ii) General coordination; and (iii) Operational execution/coordination. The main functions of each of the bodies involved under these three themes are detailed below.

2. Strategic advisory support. The Program will receive advisory support from the CDC,

which was legally created by a State Decree No. 52,663, dated January 24, 2008, and is composed of technical staff from each executing agency. The CDC will undertake the following activities: (i) Monitor the attainment of Program objectives and goals; (ii) Guide Program implementation and review next steps; (iii) Review and comment on Program results and outcomes; (iv) Provide support/TA to the coordinators of the UGP and the UGLs; and (v) Monitor and evaluate the implementation progress of all Program components and activities. The Alto Tietê River Basin Committee (CAT) will also provide the Program executing agencies with periodic policy and strategy guidance on issues within the field of CAT’s competence. CAT will receive support in providing this guidance from the respective Alto Tietê sub-basin committees, namely those of Cabeceiras, Juqueri-Cantareira, Cotia-Guarapiranga, Billings-Tamanduateí, and Pinheiros–Pirapora.

3. General Coordination. Overall coordination of the APL Program will be provided by SSRH (former SSE) through a UGP created by State Decree specifically for this purpose, and staffed with GESP and SABESP employees, and fully embedded within the day-to-day workings of the Secretariat. The core of the UGP team, composed of GESP and SABESP staff, is already in place and has gained considerable experience during the preparation of the proposed APL Program and the implementation of its PHRD grant, as well as – in some important cases – during the implementation of the predecessor Guarapiranga Project. The UGP will be responsible for orienting, planning, coordinating, technically approving, supervising and technically auditing all aspects of the Program’s implementation, including those undertaken by other Program Executing Agencies.

4. Operational execution/coordination. Each of the borrowers and executing agencies had

created prior to negotiations, their own UGL. The UGLs will be staffed with employees of the respective executing agencies and fully embedded within its day-to-day workings. The UGL will be responsible for, inter alia: (i) Evaluating and approving the appropriateness of subcomponent and activity proposals and designs (from a technical, financial, social, environmental/safeguard and resettlement perspective) before they are forwarded to the UGP and the Bank; (ii) Reviewing and approving related procurement documentation before they

50

are forwarded to the UGP and the Bank for ‘no-objection’; (iii) Monitoring and evaluating the implementation of all components, subcomponents and activities under the respective Project; and (iv) Preparing periodic progress reports.

5. The UGP will consist of state government staff, including the following core team: (i) A

general coordinator; (ii) An executive coordinator; (iii) An environmental-social-technical coordinator; (iv) A civil works monitoring/supervising specialist; (iv) A financial management specialist; (v) A procurement specialist; and (vi) Support staff. The UGP will be assisted by a management consultancy firm which will be responsible for supporting the UGP on technical, operational, administrative, financial, procurement, safeguard, and M&E aspects of the implementation of the GESP Project specifically, and the overall Program more broadly. In the case of the UGP, the Executive Coordinator will act as deputy general coordinator being responsible for similar activities as the General Coordinator and acting as the latter’s main backup. The UGP’s General and Executive Coordinators will report directly to the State Secretary for Water and Energy. As part of these arrangements, the UGP will be responsible for evaluating Program proposals technically and all Program procurement issues – for all the executing agencies – and for preparing the requests for no-objection to send to the Bank. In addition, the UGP will carry out monitoring and evaluation activities of all Program components. The CDC and CAT will have regular meetings with the UGP to discuss and evaluate Program implementation progress. During the sub-basin committees’ regular meetings, the UGP will present the Program’s implementation progress and will raise any specific important issues for discussion. In addition, the UGP will participate in specific meetings as and when requested by the CAT or by the respective sub-basin committees. The CDC will meet periodically, as defined in the OM, to discuss the Program implementation and evaluation.

6. Each UGL will be composed of government staff including the following core team: (i) A general coordinator; (ii) An environmental-social-technical coordinator; (iii) A civil works monitoring/supervising specialist; (iv) A financial management specialist; (v) A procurement specialist; and (vi) Support staff. Each UGL will be assisted by specialized individual consultants, on an as-needed basis, to support project implementation on issues that are Bank-specific (such as procurement, FM and safeguards issues).

7. An Implementation Agreement (‘convênio’) – IA – will be signed by GESP/SSRH and all of

the borrowers, which details the Program objectives, scope and activities, and the roles and responsibilities (including regarding fiduciary and safeguard requirements) of the different entities involved in Program implementation.

8. Management Information System The State SIAFEM system will provide timely

information about the progress and execution of the Program, enabling users to make rapid decisions covering not only qualitative and quantitative technical aspects of components, sub-components and activities, but also contractual, operational, bidding, administrative, accounting and financial matters related to Program implementation. The UGLs and UGP will be responsible for inputting their data and using it as a management tool, except for SABESP which will use its own corporate system but will forward to the UGP their data on a

51

quarterly basis, to allow SIAFEM to be updated. The SIAFEM system should be operational in each executing agency prior to the signature of the respective loan agreement.

9. Progress Reports Drawing on information from SIAFEM, from supervision activities, and

from the UGLs’ progress reports, the UGP will consolidate information on Program implementation as an overall Progress Report, in accordance with the format established in the OM, for submission to the Bank every semester.

10. Operational Manual The Program’s OM, approved by the Bank on January 30, 2009,

contains the norms, procedures and guidelines agreed to by the borrowers and the Bank, to be complied with during Program implementation. The purpose of the OM is to guide and instruct management and ensure good implementation practices and performance by the executing bodies. It aims to provide a clear view of the whole implementation process in order to ensure compliance with the norms, procedures, guidelines and requirements relating to execution of the respective loans. The OM describes the Program concept, scope, objectives, components, funding, etc. In addition, it will contain an overall implementation schedule, organizational details (management structure and responsibilities), a review of administrative and financial procedures and instruments to be adopted in the planning, execution, monitoring and evaluation of the Program activities, and a summary of instructions for operating the MIS in support of management activities. An agreed update of the OM is a condition for the negotiations for PMSBC and PMG loans.

11. Annual Operational Plan (AOP) The AOP will be a key technical/operational instrument for

Program management and execution. It will be prepared by the UGLs in accordance with the OM. The elaboration of the AOP will be done once the executing agency has decided its annual budget. Following approval of the latter, and before the end of each calendar year, the UGP will submit the consolidated AOPs to the Bank for review and discussion.

12. Procurement Plan The Procurement Plan for all projects was approved by the Bank on

December 14, 2007. An agreed update of the Procurement Plans for PMSBC and PMG projects is a condition for the negotiations of these two loans.

13. Bank Supervision Responsibilities A Bank task team leader and task team will be

responsible for supervising the Program’s implementation and for coordinating the dialogue between the borrowers and the Bank during implementation, with support from the UGP. Besides organizing and participating in meetings with the different executing agencies and related government bodies to discuss specific aspects of the Program, the Bank team will carry out, as a minimum, biannual missions to each executing agency to supervise Program and Project implementation.

14. A diagram representing the Program implementation arrangements, the technical and

fiduciary arrangements, the disbursement and procurement arrangements, division of roles and responsibilities among executing agencies, and the UGP and UGL structures, can be found in the project files.

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Annex 7: Financial Management and Disbursement Arrangements

BRAZIL: INTEGRATED WATER MANAGEMENT IN METROPOLITAN SÃO

PAULO MANANCIAIS HORIZONTAL APL PROGRAM

Summary of Financial Management Arrangements 1. The Program’s financial management arrangements are based on the Financial

Management Assessment first made in 200435, and updated in February, 2007 and in January 200936, in order to reflect changes to the Program implementation arrangements. They are also based on the institutional arrangements presented in Annex 6 and the Program description as described in Annex 4. The overall FM arrangements for the Program, together with the FM arrangements for each of the four borrowers, are summarized in this annex.

2. Based on the Bank’s FM guidelines37, the main purpose for updating the assessments were

to: (i) confirm and review prior agreed FM assessment adequacy in the context of the revised Program design; and (ii) agree on steps to be completed by each borrower, including (a) institutional arrangements, (b) a financial management system, (c) interim, un-audited financial management reports, (d) flow of funds, (e) external auditing arrangements, and (f) disbursement arrangements.

3. Since the Program is composed of more than one loan, in order to simplify overall Program

monitoring, all borrowers have agreed to use the same financial management system, SIAFEM, except for SABESP which will electronically provide its information to SSRH (former SSE) so that the latter can update SIAFEM accordingly. Each borrower will nevertheless be responsible for the legal and fiduciary aspects of its respective loan. The state government, through its SSE, will be responsible for consolidating overall Program FM implementation information, and for preparing IFRs for sending to the Bank on a quarterly basis as described below. These arrangements will be stated in the Implementation Agreement to be signed by all the Program’s participating entities and which, together with the OM, will give detailed information on the FM arrangements to be followed by each borrower.

4. GESP will sign an individual loan agreement to implement its activities under the Program.

Among its responsibilities will be the installation of the overall MIS for Program implementation and the training of UGP and UGL staff in its use. There will be three implementing agencies within GESP: SH, through CDHU; SMA; and SSRH (former SSE). The latter has created a UGP responsible for the implementation of the GESP loan and for the overall coordination and monitoring of the Program. SSRH will also be directly responsible for all fiduciary and legal aspects of the GESP loan, including disbursements, preparing IFRs, auditing arrangements, and using SIAFEM to monitor the GESP loan as well as the FM aspects of the overall Program. Through the three secretariats, GESP will be involved in the implementation of all four components and will undertake disbursements under all Program categories.

35 FMS: Cláudio Mittelstaed, AM dated December 14, 2004 36 Updated with SABESP FM arrangements, reviewed on January 14, 2009. 37 Financial Management Practices in World Bank Financed Investments Operations as of Nov 03, 2005

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5. SABESP, PMSBC and PMG will each sign an individual loan agreement to implement

their respective activities under the Program. Although directly responsible for all fiduciary and legal aspects of the loan, including disbursements, preparing IFRs or SOEs (in the case of SABESP), and auditing arrangements, each borrower will use SIAFEM to implement its loan, except for SABESP which will use its corporate system and provide the data on a quarterly basis to SSRH, thus allowing GESP (through SSRH) to monitor overall Program implementation.

Table 7.1 Summary of Financial Management Arrangements

Borrower State of São Paulo – GESP (SSRH, SMA and SH)

SABESP São Bernardo do Campo

Guarulhos

Accounting SSRH (former SSE) and SMA follow federal accounting law (4320/64). SH/CDHU follows federal accounting law) 11.638 – Lei das S/As.

Follows law 11.638 – Lei das S/As– follows USGAAP and Internal procedures CVM- BACEN.

Follows federal accounting law (4320/64).

Follows federal accounting law (4320/64).

FM system SIAFEM Corporate System SIAFEM SIAFEM IFR To be used for monitoring and

disbursements. SSRH/UGP will reconcile reports for monitoring the overall Program.

To be used for monitoring purposes.

To be used for monitoring and for disbursements.

To be used for monitoring and for disbursements.

Staffing Professional staff; have experience with WB procedures attended training on FM and disbursements procedures in 2008.

Professional staff; have experience with WB procedures attended training on FM and disbursements procedures in 2008.

Municipal govt. staff; have some prior experience with multilateral financing institutions (IDB).

Municipal gov. and SAAE staff; have no prior experience with multilateral financing institutions.

Training None None To be provided by SSRH (former SSE) before loan signing.

To be provided by SSRH (former SSE) before loan signing.

Flow of funds One US$ designated Project Account and one BRL Operational Account.

One US$ designated Project Account and one BRL Operational Account.

One US$ designated Project Account and one BRL Operational Account.

One US$ designated Project Account and one BRL Operational Account.

Internal Auditing TCE, State Finance Secretariat. Internal audit, controllership unit and external audit.

Internal controllership unit, TCE-SP.

Internal controllership committee, and TCE-SP.

External Auditing An independent audit firm will be hired.

An independent audit firm will be hired.

An independent audit firm will be hired.

An independent audit firm will be hired.

Disbursements Through Interim un-audited Financial Reports (IFRs).

Through Statement of Expenditure and/or Summary Sheets (traditional methodology)

Through Interim un-audited Financial Reports (IFRs).

Through Interim un-audited Financial Reports (IFRs).

Internal Control Through segregation of functions, internal auditing arrangements, and SIAFEM.

Internal control unit, segregation of functions, SABESP governance policy.

Through segregation of functions, internal auditing arrangements, and SIAFEM.

Through segregation of functions, internal auditing arrangements, and SIAFEM.

6. In order to ensure that the FM system is acceptable to the Bank, the following actions were

undertaken: (i) the Implementation Agreement between GESP and each executing agency was reviewed by the Bank’s FM specialist to ensure that the FM arrangements were

54

properly presented; (ii) the OM was reviewed by the Bank’s FM specialist prior to negotiations, and the updated version, showing the changes to SABESP’s FM arrangements, has been reviewed to ensure that the FM arrangements are properly presented; and (iii) the overall Program FM monitoring and coordination arrangements, using SIAFEM and SABESP’s corporate system, were validated by the Bank’s FM specialist prior to negotiations. The OM should be kept updated during project implementation.

7. Conclusions Given the revised Program design, given the objective of having effective and

efficient Program FM management and monitoring of the use of funds, and given that each borrower has its own specific FM arrangements, it has been agreed that each borrower will use the same SIAFEM financial management system to produce the same IFRs, except for SABESP which will use its own corporate system but will forward, electronically, the appropriate data to the UGP on a quarterly basis, in order to update SIAFEM, and that the UGP will monitor the overall Program and send consolidated IFRs to the Bank. The FM arrangements meet the Bank’s minimum requirements to provide, with reasonable assurance and accuracy, timely information on the status of the FM aspects of the Program. There are no FM-related conditions of effectiveness.

8. FM Risk Rating The Program’s overall risk rating is considered low for the GESP

secretariats and for SABESP, and ‘moderate’ for PMSBC and PMG. The major risk identified for all loans is the dependency on counterpart funds which should be mitigated through regular supervision missions and reviews of the consolidated IFRs. For PMSBC and PMG, the lack of experience in working with SIAFEM will increase the UGP’s responsibility for training and supervising the FM activities of these municipalities.

Common financial management arrangements for all borrowers 9. Overall Program monitoring The main fiduciary responsibility of SSRH (former SSE), to

be realized through its UGP, will be to consolidate the monitoring of the overall Program implementation, including: (i) coordinating and supervising Program implementation; (ii) planning and monitoring activities to be financed by the Program through its loans; (iii) supporting and providing technical assistance to the UGLs on FM issues; (iv) supervising the overall Program’s financial resources; and (v) evaluating the financial aspects of Program components. The UGP staff is GESP and SABESP public servants with prior experience implementing Bank and IDB loans. The diagram showing the staff arrangements for the UGP is presented in Annex 6.

10. Financial Management System SIAFEM is the integrated administrative and financial

system used by the State of São Paulo to execute its own budget. It is a system which fulfills the Bank’s fiduciary financial management requirements. The system should be operational in each UGL, except in SABESP whose existing corporate system should be updated with the same project chart of accounts and IFR by the time of the signature of the SABESP loan agreement. SIAFEM was upgraded in 2005 at IDB’s request. The current Horizontal APL represents the first time that a Bank project in São Paulo will use the state’s FM system, jointly with a corporate system, to implement the FM aspects of one of its loans. The Bank FM team considers such a ‘streamlining’ approach to be best practice, and recommends that it be replicated in Bank operations in other states. SIAFEM’s

55

modules allow the Program management team to handle budget commitments, payments and FM reporting, among other functions.

11. SIAFEM and SABESP’s corporate system can produce interim un-audited financial

management reports (for monitoring and/or disbursements), Program implementation status reports, and can be the system used by the state government to monitor its budget execution and management decisions. No parallel system will therefore be needed for Program financial management purposes. The Program38 will be represented as a ‘cost center’ within the state budget. Each borrower, except for SABESP, will use SIAFEM to manage its respective loans on a real-time basis. A specific cost-center will be opened for the Project for each loan. SIAFEM produces reports in the format required by the Bank. It will record all loan transactions, following a table based on its cost categories. For controlling and reporting purposes, all costs incurred will be accumulated by components and activities as set forth in the Project description. Each UGL will also keep all original Project expenditure support documentation in order to make it available for internal and external auditing and for Bank reviews. All FM information will be consolidated by the SSRH (former SSE) through its UGP, which will be responsible for submitting to the Bank the consolidated 1-A and 1-B IFRs, on a quarterly basis. SSRH (former SSE) will also ensure that the system is available to all borrowers and that in case of SABESP the data is sent 15 days after end of each calendar quarter to allow its updating in SIAFEM, and that appropriate training is provided to the UGP and UGL staff in its use.

12. In order to adapt the SIAFEM system, a consultant was hired to replicate the structure that

was designed for the IDB’s state ecotourism project for the Mananciais Horizontal APL. This work included: (i) preparing the SIAFEM statement of accounts for the Bank and the clients, covering all the activities related to the Program components, sub-components and categories, as well as the Annual Operative Plan for the whole Program; (ii) designing user-friendly FM report (IFRs) to allow GESP, the UGP and the Bank to manage and supervise the Program as a whole as well as each loan individually; (iii) enabling the system to retrieve all other executors’ FM information and to prepare a consolidated report for monitoring and management purposes, (iv) training the UGP and UGL staff to use SIAFEM tools, including the IFRs; and (v) preparing tailored modules to be used by the different borrowers, ensuring that each UGL can input its loan-related data on a timely basis. Each UGL will have a password to allow executing agencies exclusive access to feed the respective loan information into the system, thereby guaranteeing data availability, integrity and confidentiality.

13. It is expected that these SIAFEM and SABESP corporate FM arrangements will: (i)

provide opportunities for strengthening the monitoring of the Program as a whole, as well as on a loan-by–loan basis; (ii) avoid duplication through the use of parallel FM systems to produce Bank FM reports; (iii) enable GESP to monitor all investments (physical and financial) at the Program level; and (iv) provide a pilot of the first integrated state administrative accounting system in the Bank’s São Paulo portfolio, allowing for future replication in other states. The system was validated by the Bank’s FM specialist.

14. Reporting and Monitoring SIAFEM is designed to allow each borrower to have access

only to its loan information. Each borrower, through its UGL, will prepare quarterly IFRs

38 Including the four loans, and allowing for further borrowers to be added to the system if required.

56

(1-A and 1-B) (in US$), on a cash accounting basis. The IFRs will be submitted to the Bank, through the UGP, for reporting, monitoring and consolidation purposes not later than forty-five days after the end of each quarter. The IFRs will state the expenditure figures by quarter, accumulated for the year and accumulated for the loan/Project. Any other funds and counterpart contributions which are part of the Program will be reflected in IFRs (1-A and 1-B) in order to allow better monitoring of all amounts invested under the Program. The fourth quarter IFRs generated during the year, showing the cumulative figures for the period, should be submitted to the auditors for review under the annual external audit to be prepared by private independent auditing firms for each loan. In order to monitor the Program, SSRH, through its UGP, will have access to the overall Program FM data in SIAFEM, and in case of SABESP will be responsible for uploading it to SIAFEM, for all activities implemented by each borrower, allowing the UGP to prepare consolidated IFRs which will be submitted to the Bank on a quarterly basis.

15. Disbursements are expected to be interim, un-audited report based (IFRs), except for SABESP that will disburse through SOEs and/or Summary Sheets. The IFR template will be available in SIAFEM and will be prepared and submitted to the Bank together with the other standard Bank disbursements forms39. The IFRs for disbursements purposes are: (i) 1-A: Sources and Use of Funds by disbursement category as per Loan Agreement; (ii) 1-B: Statement of Investments by Project Components and Activities; (iii) 1-C: Actual Disbursement (attached with latest Bank Statement); (iv) 1-D: Designated Account Activity Statement; and (v) 1-E: Contract above Disbursement Thresholds (attachment 4 for the disbursement letter).

16. For disbursements purposes, the full quarterly IFR report (1-A, 1-B, 1-C, 1-D and 1-E) will

be prepared by each UGL in US$ on a cash accounting basis. The IFRs will be submitted to the Bank, through the UGP, not later than forty-five days after the end of each quarter. The OM needs to be kept updated in order to describe all the steps to be followed by each borrower and by the UGP in carrying out the agreed FM procedures. A simplified diagrammatic representation of the flow of funds is presented below.

17. External Audits An external auditing firm will be hired by each borrower observing the

auditing guidelines provided to the UGP during the FM assessment mission. For cost effectiveness reasons, the Bank team has suggested that, should each loan be declared effective in the second semester of the calendar year, upon formally request by the respective borrower, the first audit report would cover 18 months (if no retroactive financing is included) which is the maximum period that Bank guidelines permit to be covered by the scope of the first auditing report. However, if any loan is declared effective in the first semester of the calendar year, the first audit report would cover the period from loan effectiveness through to the end of the calendar year in question. In either case, the audit report should be delivered to the Bank up to six months after end of the previous calendar year, as stated in the Bank’s Financial Management Audit Guidelines (June 2003).

18. The scope of each audit will be determined by the respective borrower in agreement with

the Bank, based on Program specific circumstances; the audit terms of reference (TOR) will be prepared accordingly and a short list of firms will be sent to the Bank for no-objection. The Bank has approved the draft audit TOR for the loans. The TOR should be

39 LOA to attach the agreed disbursement forms to the respective Disbursement Letters.

57

included in the OM. The scope of the audit TOR should cover, but not be limited to: (i) fully reviewing the four IFRs (for each calendar year); (ii) reviewing the appropriate observance of the FM arrangements included in the OM, this PAD, in the respective loan agreements, as well as in any other official Bank documentation; (iii) proper use of SIAFEM; (iv) internal control arrangements; and (v) timely availability of counterpart funds.

19. The FM arrangements for the Program (the FM system, the interim un-audited FM reports,

the audit arrangements, etc) are the same for all borrowers, except for SABESP. Specific FM arrangements (including institutional arrangements and staffing, control and internal audit, accounting, and flow of funds and disbursements) are described in the GESP and SABESP annexes.

58

DIAGRAM 7.1 TECHNICAL AND FINANCIAL ARRANGEMENTS

Advances resources from theloan

Sends IFRs and/or SOEs and pays for debt service

(with a copy to UGP)

.

.

Legal Agreement

.

.Sends monitoring information,project reports, procurement andselection processes to be pre-approved

.

Pays the firmsand consultants (sends copiesto UGP)

Transfers counterpart funds

UGP

UGL

Project Designated

Account (NY, in US$)

Borrower

Suppliers, Contractors and

Consultants

IBRD Sends no objections and letters

Project Operational

Account (SP, in BRL)

Transfers Loan Resources

Sends requests for no

objections andProgress Reports

59

Annex 8: Procurement Arrangements

BRAZIL: INTEGRATED WATER MANAGEMENT IN METROPOLITAN SÃO PAULO MANANCIAIS HORIZONTAL APL PROGRAM

A. General 1. Procurement for the proposed Program will be carried out in accordance with the World

Bank’s "Guidelines: Procurement under IBRD Loans and IDA Credits" dated May 2004 and revised October 2006, and "Guidelines: Selection and Employment of Consultants by World Bank Borrowers" dated May 2004 and revised October 2006, and the provisions stipulated in the respective loan agreements. The general description of various items under the Program’s different expenditure categories is presented below. For each contract to be financed under the loans, the different procurement methods or consultant selection methods, the need for pre-qualification, estimated costs, prior review requirements, and timeframe, are agreed upon by the Borrower and the Bank in the Procurement Plan. The Procurement Plan will be updated at least annually, or as otherwise required, to reflect the actual Program implementation needs and the improvements in institutional capacity.

2. Procurement of Works Works procured under the Program will include: works for new

housing units, water supply, road and access ways, drainage, wastewater collection and treatment, urban upgrading, and solid waste disposal, etc. The procurement will be done using the Bank’s Standard Bidding Documents (SBD) for all ICB contracts. Individual contracts with values below US$ 25,000,000 may be procured using National SBD if agreed with or satisfactory to the Bank. Individual contracts with values below US$ 500,000 may be procured using Shopping procedures. The invitation document will be agreed upon, or satisfactory to, the Bank.

3. Procurement of Goods Goods procured under the Program will include: solid waste

collection equipment, IT equipment and software to improve the operation and monitoring of the water system, etc. If possible, contracts will be grouped in bidding packages of more than US$ 5,000,000 and procured following International Competitive Bidding (ICB) procedures using Bank-issued Standard Bidding Documents. Individual contracts with values of below US$ 5,000,000 may be procured using National Competitive Bidding (NCB) procedures using bidding documents agreed upon by the Bank. Contracts for goods that cannot be grouped in larger bidding packages and estimated to cost below US$ 100,000 per contract may be procured using Shopping (National and International) procedures based on a model request for quotations satisfactory to the Bank. Procurement of goods may also be carried out in accordance with the method known as “pregão eletrônico”, as provided for in Brazil’s Pregão Law No. 10.520 dated July 17, 2002, under “COMPRASNET”, the procurement portal of the federal government, or under any other e-procurement system approved by the Bank, for contracts estimated to cost less than US$ 500,000. “Pregão presencial” may be used for procurement of goods for contracts estimated to cost less than US$ 100,000.

4. Procurement of non-consulting services Non-consulting services to be procured under the

Program include: education campaigns, training logistics (hotel services, catering, and travel), workshops, etc. Contracts estimated to cost US$ 5,000,000 or more will be procured

60

following ICB procedures. Individual contracts with values below US$ 5,000,000 may be procured using National Competitive Bidding (NCB) procedures using bidding documents agreed upon by the Bank. Contracts estimated to cost below US$ 100,000 may be procured on the basis of quotations obtained from three qualified contractors in response to a written invitation.

5. Selection of Consultants Consulting services from firms and individuals required for the

Program include: financial and procurement audits, advisory services from individual consultants, supervision, training, etc. Shortlists of consultants for services estimated to cost less than US$ 500,000 equivalent per contract may be composed entirely of national consultants in accordance with the provisions of paragraph 2.7 of the Consultant Guidelines.

6. Operating Costs Operational costs have been identified in the procurement plan. These costs

have been reviewed and found acceptable to the Bank (including: phone payments, Internet services, etc).

7. Others The procurement procedures and SBDs to be used for each procurement method, as

well as model contracts for works and goods procured will be included as annexes to the Program OM.

Summary Expenditure category Contract value

threshold (US$ thousands)

Procurement method

Contracts subject to prior review

Works >25,000 ICB All processes

500 ≥ ≤ 25,000 NCB All processes

≤ 500 Shopping First two processes each calendar year

Goods >5,000 ICB All processes

5,000≥ ≤ 100 NCB All processes

≤ 100 Shopping First two processes each calendar year

Non-consulting services (incl. training, communication)

>5,000 ICB All tender documents, evaluation reports and contracts

100 ≥ ≤ 5,000 NCB First two processes each calendar year

≤ 100 Shopping First two processes each calendar year

Consulting (firms)

>500 QCBS/QBS All process

500 ≥ <200 QCBS/LCS All process

100 ≤ 200 ≤ 100

QCBS/LCS CQ/LCS

All single source contracts; and first two processes each calendar year for each selection method

Consulting (individual)

Section V in the Guidelines

All cases above US$ 50,000 and all single-source contracts

Direct contracting All cases regardless of the amounts involved

Agreements All cases regardless of the amounts involved

8. The thresholds will be reviewed when the UGP/UGL gains experience in Bank rules and

regulations. All single-source selection of goods and works, regardless of the amount of the contract, will be subject to prior review by the Bank.

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B. Assessment of the agency’s capacity to implement procurement 9. The preparation of the Program is being coordinated and led by the UGP within SSRH

(former SSE). This unit hired a management firm to provide support during Program preparation. This arrangement will continue during Program implementation with an enlarged scope of work for the consulting firm that eventually will be hired to replace the existing one. The Bank team recommended that the UGP should start this process immediately by publishing a request for expressions of interest. The terms of reference for this assignment will include dealing with the coordination and monitoring of the procurement to be carried out by all of the Program’s executing agencies as well as giving support and training in Bank procurement to them as needed.

10. There are essentially two levels of familiarity with Bank procurement among the agencies.

The agencies that have experience with the Bank’s procurement guidelines and procedures are those that have already executed Bank projects. These are: (i) SSRH (former SSE); (ii) SABESP; and (iii) CDHU. It was found that SABESP has a very robust procurement control and monitoring system. It was recommended to explore the possibility of implementing this system in all of the participating agencies. Although SMA has previous experience with Bank procurement, its capacity was found to be weak. At the second level, PMSBC and PMG possess experience in procurement under national law (Law 8666), but have no direct experience utilizing Bank procedures. The personnel interviewed were knowledgeable about procurement in general, therefore making it easy to undertake discussions and evaluate how they would perform with the added responsibilities of implementing procurement under the Program. In addition, all agencies will be receiving guidance and training from the UGP on Bank procurement.

11. The UGP in SSRH (former SSE) and each UGL in the other executing agencies should each

have a procurement specialist fully dedicated to the Program. In all cases it is recommended that Special Bidding Committees be formed to deal with procurement under the Program. Given that there will be a Program management unit with GESP and SABESP staff working with the assistance of a project management firm whose terms of reference will include expertise in general procurement and in Bank procurement, and considering the complexity of monitoring and controlling of the various executing agencies, the assessment of the risk for procurement for the Program as a whole is rated as average.

C. Procurement Plan 12. The Borrower has prepared a Procurement Plan (PP) for Program implementation which

provides the basis for the procurement methods. This plan was approved by the Bank on December 14, 2007. It will also be made available in the Program’s database and on the Bank’s external website. The PP will be updated in agreement with the Bank Team annually (preferably in November of each year of implementation), or as otherwise required, to reflect the actual Program implementation needs and the improvements in institutional capacity.

62

Procurement Action Plan

Action Timeframe

1 Prepare a General Procurement Plan for the life of the Program and a detailed Procurement Plan for the first 18 months of Program implementation for each of the participating agencies.

Completed.

2 Training procurement and technical staff on Bank-procurement policies. No later than 2 months after effectiveness.

3 Maintain procurement expertise available within the Program management unit during the life of the Program.

Include in the TORs of the project management firm that will support the operations of the Program management unit.

4 Include a section on procurement in the Operations Manual including a detailed description of all procurement methods allowed when applying the national law, especially the “pregão eletrônico” and “pregão presencial” and restrictions on its use.

Completed.

5 Implement a procurement monitoring system covering all executing agencies and capable of capturing and consolidating all relevant procurement information.

No later than 2 months after effectiveness.

D. Frequency of Procurement Supervision

13. In addition to the prior review supervision to be carried out from Bank offices, the capacity

assessment of the implementing agencies has recommended annual field supervision missions to visit the field to carry out post-reviews of procurement actions.

E. Details of the Procurement Arrangements Involving International Competition 1. Goods, Works and Non Consulting Services (a) List of contract packages to be procured following ICB and direct contracting:

1 2 3 4 5 6 7 8 9 Ref. No.

Contract (Description)

Estimated Cost

Procurement Method

P-Q

Domestic Preference (yes/no)

Review by Bank (Prior / Post)

Expected Bid-Opening Date

Comments

N/A N/A N/A N/A N/A N/A N/A N/A N/A

(b) ICB contracts of Works estimated to cost above US$ 25,000,000 per contract, ICB contracts of Goods estimated to cost above US$ 5,000,000 per contract, and all direct contracting will be subject to prior review by the Bank. 2. Consulting Services (a) List of consulting assignments with shortlist of international firms.

1 2 3 4 5 6 7 Ref. No.

Description of Assignment

Estimated Cost

Selection Method

Review by Bank

Expected Proposals

Comments

63

(Prior / Post)

Submission Date

1 Project Management firm $6.8 million QCBS Prior Nov 07 2 Technical support in the

integration, operation and update of management instruments

$1.8 million QCBS Prior

3 Load Evaluation and control plan

$ 640,000 QCBS Prior

4 Engineering project for housing

$ 840,000 QCBS Prior

5 Support to municipal management

$ 630,000 QCBS Prior

6 Economic development plan

$ 824,000 QCBS Prior

(b) Consulting Assignments with a shortlist of international firms will be required for all consulting assignments estimated to cost above US$ 500,000. (c) Consultancy services estimated to cost above US$ 200,000 for firms and US$ 50,000 for individual consultants per contract, and all single source selection of consultants (firms) or individual consultants will be subject to prior review by the Bank. (d) Shortlists composed entirely of national consultants. for services estimated to cost less than US$ 500,000 per contract may be composed entirely of national consultants in accordance with the provisions of paragraph 2.7 of the Consultant Guidelines.

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Annex 9: Economic and Financial Analysis

BRAZIL: INTEGRATED WATER MANAGEMENT IN METROPOLITAN SÃO PAULO

MANANCIAIS HORIZONTAL APL PROGRAM A. Economic Analysis The full economic analysis report is available in the project files. A summary of the analysis is provided below. The economic analysis included those complementary interventions to be undertaken under the broader Metropolitan Mananciais Program, such as the urban upgrading activities in São Paulo Municipality. 1. Given the current characteristics of the area of intervention, the protection of the water

sources requires urbanization, recovery and infrastructure works, social actions, and the construction of low-cost housing units for a poor sector of the population. If the Program focuses on maintaining an adequate water supply to this metropolitan area, tackling the urbanization problem would be considered a positive externality of this intervention. Two cost-benefit analyses were therefore conducted for the Program. The first analyzed the associated urbanization investments (with benefits estimated for: (i) the urbanization of slums; (ii) the provision of infrastructure to irregular settlements; and (iii) the estimated impacts in the areas of influence of the urbanized slums. The second measured the opportunity cost of making improvements in the water sources. The results of the latter analysis were treated independently from those of the former.

2. Cost-Benefit Analysis I: Investments in Urbanization A detailed economic assessment with a

focus on urbanization investments was undertaken for this US$ 130 million Program, of which the proposed Bank loan corresponds to 48 percent (US$ 130 million). Program costs associated with all the components were included in this analysis, as were returns to the investment in institutional development, community participation and education, as these elements are considered fundamental for service sustainability and are ultimately expressed through improved access to urban services. However not all of the expected economic benefits were quantified.

3. To determine the net incremental costs and benefits, "with" and "without" Program scenarios

were constructed. On the basis of these scenarios, the net incremental financial benefits and costs of the proposed investment programs were assessed, which were then adjusted for the impact of taxes, subsidies, and externalities to arrive at the economic flow of costs and benefits. The cash flows were discounted using a rate of 12 percent, which is estimated to be a proxy of Brazil’s opportunity cost of capital. The following sections provide more detailed information on the estimation of economic benefits and costs. The complete four volume report (in Portuguese) for the economic and financial analysis is located in the Project files, as is the complete English version of this annex with all the tables and graphics.

4. Economic benefits The Program’s main benefits include: (i) improvement of water quality in

the main water sources of the metropolitan region; (ii) improvement in quality of life of those families living in the slums to be urbanized, including improved access to adequate

65

infrastructure and the provision of basic public services40; (iii) restoration of the recreational use of some areas within the basins; (iv) improvement of environmental quality of the entire basin area; (v) provision of adequate water and sanitation services, although these benefits were not be quantified; and (vi) the reduction of water treatment costs and a sustainable water supply for over a million families in MRSP that receive water services from the headwaters. According to economic feasibility studies, the number of direct beneficiaries of the urban upgrading is 118,961 inhabitants, and the number of indirect beneficiaries is 649,224 inhabitants. Including the preservation of the water quality in the sources, the Program is expected to have a positive impact on a total of four million inhabitants that are served with water from the basins. The total area to be urbanized is 15,614,074 m2.

5. To estimate the economic benefits of access to improved urban services in the Guarapiranga

and Billings basins area, hedonic pricing methodology was used. The hedonic price function is based on the housing market in which transactions can be observed. The welfare significance of the hedonic price function comes from the fact that people are revealing the marginal value of particular attributes (such as access to services, distance to center, etc) that are not sold separately in the market, but are embodied in the house and reflected in housing values.

6. The summary of the results of the estimation of the economic benefits for each of the

analyzed areas, based on the use of the hedonic price functions are presented below. Other detailed tables can be found in the project files.

7. Economic costs Costs include capital costs, operation and maintenance costs, rehabilitation,

resettlement, environmental mitigation and contingencies. For each component, the costs of complementary actions necessary to derive the expected benefits and sustainability levels targeted were considered. It was deemed necessary to include these additional costs in order to assume that the expected benefits of the Program will actually be realized. For the estimation of economic costs, specific adjustments were made to deduct embedded taxes in material and labor from investment, operation and maintenance costs. The following conversion factors were used in the analysis: skilled labor, 0.732; unskilled labor, 0.272; and local materials and equipment, 0.887. Once all financial costs were converted into economic costs, incremental costs were calculated based on the comparison of the "with" and "without" Program scenarios. Although total Program costs were used in the cost-benefit analysis, economic benefits were only quantified for investments in the environmental improvement of the basins, corresponding to the urban upgrading and sanitation sub-components. The components analyzed represent 81 percent of total Program costs.

8. Results of cost benefit analysis I Results from this analysis — which measured benefits of: (i)

urban upgrading, through increases in property values based on the hedonic price function; (ii) water supply and sanitation, including the annual investments in economic prices of all interventions under this sub-component and all the resource savings to the economy associated to the reduction in production costs (chemical costs); and (iii) overall, aggregating the results from the urban upgrading and the WSS components – showed that the analyzed intervention yields a positive return. With an overall economic internal rate of return of 22.7

40 Includes: street paving, water and sewerage, drainage, slope protection and prevention of land slides, and house improvement or resettlement

66

percent and a net present value of BRL137 million, the Program is economically viable. The net present value of the economic benefits from investment in urban upgrading resulting from the increase in property values, estimated through a hedonic price function, are BRL 114 million; and those from WSS BRL 8 million. Results are presented in Table 9.1.

Table 9.1 Results from cost-benefit analysis I (in BRL 000)

Component NPV EIRR (%) B/C Urban upgrading 114,467 20.8 1.26 Sanitation 8,163 14.3 1.15 Total 136,786 22.7 1.31

9. Cost-benefit analysis II: The opportunity cost of making improvements to the water sources

in MRSP In addition to the cost-benefit analysis for the urban upgrading and sanitation interventions in the Basin, a separate analysis quantified the net benefits to SABESP of preserving existing water sources, instead of losing the actual water sources and developing new ones to supply MRSP. The expected benefits are the resource savings, resulting from the delay in the development of additional and more costly water sources in the near future, in the “with Program” scenario compared to not investing in the preservation and improvement of the water quality of the existing sources and having to develop those new sources with their associated recurrent costs, which were the basis for the “without Program” scenario.

10. Three different expansion alternatives were analyzed for the development of new sources:

two (A and B) were taken from the revision of the master plan (Revisão e Atualização do Plano Diretor de Abastecimento de Água da RMSP), and the third from the public-private documents for the upstream Tietê (Edital da Parceria Público Privada do Alto Tietê). The third expansion Plan represents SABESP’s current position so it was used as the basis for this analysis. The proposed implementation schedule can be seen in a graph in project files. The information related to investment costs and the associated recurrent costs (mainly electricity) and the volume from each new water source can also be seen in project files. Based on the expansion plan of the Edital (including its projections of potential demand) and the investment and recurrent costs information, a “without Program” scenario was developed. In the without Program scenario, Guarapiranga and Billings sources are affected and the expected negative impact is should reduce their volume by 16 m3/s. The expected reduction would occur in 2015 but to compensate this reduction the Rio São Lourenço will need to be developed by that time. This new source would increase supply by 20 m3/s and would have a cost equivalent to 80% of the investments and recurrent costs (electricity and chemicals) of the Program. The incremental benefits and costs were projected and calculated as a result from the difference between the cash flows resulting from the without and with Program scenarios in economic prices, the net incremental flows and the results from the analysis which are presented in the following table.

Table 9.2 Results of the economic analysis for preservation of the sources (BRL 000)

Benefits Investments O&M (electricity) Chemical products Net results IRR B/C Ratio

Total Value 2,559,881 680,590 148,380 179,036 1,909,948 Present Value of flows (12%) 835,823 540,900 40,606 39,384 293,700 21.9% 1.51

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11. The results of the analysis show that with a rate of return of 22 percent, a net present value of BRL 294 million, and a benefit cost ratio of 1.51, the proposed investment is feasible for SABESP, generating large positive impacts. This was the case even without considering the larger impacts on industries for example, that develop their own sources in the event of a water shortage in the area or of a collapse in water quality, both of which could affect industrial production. It was decided to present the results from this analysis but not to consolidate them with the urban upgrading and WSS results, as this opportunity cost analysis was done using financial (market) prices and is based on more uncertain assumptions. As the results from the urban upgrading approach are positive and the Program is economically feasible, it was decided to present the results as part of a sensitivity exercise only.

12. Sensitivity and risk analyses A sensitivity analysis was used to test the robustness of the

results from the hedonic price function. Three detailed cost-benefit analyses were prepared for the urban upgrading component, where estimations of benefits were based on the increase in property values by comparing urbanized areas with the proposed areas of intervention, basing the analysis on the real estate market and surveys in the area; the difference in the three is the area of expected indirect benefits to be included in the analysis: (i) Scenario 1a: estimates the increase in property values based on the comparison of real estate market prices in the area. This scenario considers all the affected properties (intervention area plus immediate surroundings (100 m) plus expanded surroundings (500 m); (ii) Scenario 1b: estimates the increase in property values based on the comparison of real estate market prices in the area. This scenario considers only the affected properties in the intervention area plus immediate surroundings (100 m); and (iii) Scenario 1c: estimates the increase in property values based on the comparison of real estate market prices in the area. This scenario considers only the affected properties in the intervention area plus immediate surroundings (100 m) and 50 percent of those properties in the expanded area (500 m).

13. As can be seen in Table 9.3, the results are largely positive. In the case of Scenario 1b, the Program would be marginally unfeasible, but it is highly probable that a Program of a magnitude as this one would have an impact on at least 50 percent of the surroundings of the slum areas up to 500 m, so the most probable scenario would be Scenario 1c.

Table 9.3 Results of the urban upgrading - real estate method (BRL 000)

Scenario NPV (12%) EIRR (%) B/C ratio 1a 840,650 56.3 2.89 1b (5,617) 11.5 0.99 1c 351,942 31.3 1.79

14. Additionally, a traditional sensitivity analysis was prepared to enhance the accuracy of the

economic analysis by incorporating the uncertainty of the real world. The sensitivity analysis shows that the results of the economic analysis are robust. The variables identified as conveying major risks to the Program are: the increase in property values and investment, and operation and maintenance cost overruns. The impacts of these variables were analyzed in the sensitivity and risk analyses. Economic risk analysis was also performed, introducing the uncertainties of all identified risk variables, which affected the results simultaneously. A sensitivity and risk analysis was conducted using Monte Carlo simulations which consists of attributing to the key variables in the cash flow model, both from the benefits and costs, the

68

probability distribution associated to each of those uncertain assumptions, with the use of the ‘@Risk’ software simulations, to obtain the distribution of probabilities for the outcomes of the model, the EIRR and the NPV. The probability distributions used are presented in the project files.

15. For the benefits related to the increase in property prices in the slum and surrounding area

and in the irregular settlements, a normal distribution was used with the coefficients obtained from the hedonic functions. For the benefit associated to cost reductions in the use of chemical products, a uniform distribution with a variation of +/- 10 percent was used. With relation to the costs, both related to investments and operation and maintenance, a triangular asymmetric distribution was used, with a variation of -10 percent and 15 percent. Statistical convergence was achieved after 800 simulations using the Latin Hypercube Sampling (LHS) technique which increases the efficiency of the Monte Carlo simulations. The results of this analysis for the NPV and EIRR are presented in the following graphs. There is a 93.3 percent probability that the Program will meet the minimum requirements for economic feasibility, with a positive net present value and an internal rate of return of 12 percent. Finally, a regression of the results versus the key variables helps to clarify which variables have more influence in determining the results, and thus identifying the main sources of risk to the Program. The results from the regressions, as can be seen in the graphs, are consistent and show that the benefits associated with the irregular settlements are the main variable affecting the outcome of the economic cash flow model, followed by the valorization of areas surrounding the slums and by the investments.

16. With regard to the benefits linked to the irregular settlements, the variation coefficient is

high; however, there is empiric evidence to show that the provision of infrastructure positively affects property values in these types of areas. The valorization study based on observations in the real estate market provides support for this conclusion. The same can be said of the areas surrounding the slums. However, in this case the results are more related to the weight of the total benefit than to the variation coefficient. With relation to the costs, the economic results are not as sensitive to their expected variations as defined in the probability distribution which adopted a maximum of a 15 percent cost overrun.

17. The results from the risk and sensitivity analysis performed confirm the robustness of the

economic feasibility of the Program. The results from the risk analysis show that with a certainty of 93 percent the economic net present value of the Program will be positive and the economic internal rate of return will be 12 percent. The single major risk identified for the Program is the valorization of the irregular settlements, for which there is empiric evidence from MRSP.

B. Financial analysis 18. Although the results of a financial cost-benefit analysis are not used by the Bank as a

decision-making tool, a detailed financial analysis provides important information about the Program’s sustainability in the long term, assessing the needs for subsidies throughout the life of the Program, ensuring that recurrent costs are made and that the expected economic benefits will materialize.

69

19. Financial benefits The following income generating variables associated with the Program

were analyzed and quantified: (i) fees from parks; (ii) penalties; (iii) valorization tax (“Contribuição de Melhoria”); (iv) additional Property Tax (“IPTU”); (v) electricity payments in the slums; (vi) solid waste charges (“Taxa de Limpeza”); (vii) conservation tax (“Taxa de Conservação”); (viii) payment of tariffs from increased water consumption; (ix) payments for sewerage services; and (x) water use charges.

20. Costs All investment and O&M costs at market (financial) prices were included. 21. Results Table 9.4 presents the final estimated results for cost recovery activities, throughout

the life of the Program. Details of the calculations can be found in the report in the project files. The total financial income that could be potentially generated by the Program is approximately BRL 1.18 billion. It can be seen that the property taxes are the most important source of income for the Program, followed by water and sewerage charges.

Table 9.4 Income generating sources - cost recovery Source of Income Value (BRL million)

Entrance fee to parks 58.6

Additional penalties 29.3

Valorization tax 7.5

Additional IPTU 735.4

Solid waste charge 53.0

Conservation charge 13.3

Charge for water use 13.1

Water consumption 106.9

Sewerage collection 106.9

Electricity payments 55.4

Total 1,179.5

22. The comparison between the incremental revenues detailed and the investments and

operating and maintenance costs arising from these is presented in Table 9.5, which shows the resulting level of cost recovery. It can be observed that in this scenario, the incremental revenues recovered are over 70 percent of the costs and are a positive flow from the time the investments are terminated. When O&M costs are deducted, the incremental revenue at current prices recovers 76.8 percent of the investments.

Table 9.5 Results of financial analysis (BRL 000)

Financial income

Savings in chemical products

Investments

Operation and maintenance

Net flows

Total 1,179,504 226,151 680,589 154,597 570,469

VPL12% 342,089 73,351 540,900 45,311 (170,771)

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23. Another more realistic scenario was constructed where the following assumptions were made: IPTU collection in the slums was eliminated and in the irregular settlements this charge was reduced by 50 percent. It was also considered that during the first 10 years, only 70 percent of the users in the area would pay the water and sewerage fees. As a result the total income considered was reduced to BRL 1.02 billion. Table 9.6 presents the results from the cost benefit analysis under this alternative and more pessimistic scenario. In this case, the incremental income allows for a 59.5 percent recovery of total financial costs.

Table 9.6 Results financial analysis - Alternative pessimistic scenario (BRL 000)

Financial income

Savings in chemical products

Investments

Operation and maintenance

Net flows

Total 1,020,293 226,151 680,589 154,597 411,258

NPV (12%) 292,071 73,351 540,900 45,311 (220,789)

C. Distributive impact assessment 24. A distributive impact assessment was conducted to identify the net impact of the Program on

the most important stakeholders. A distributive impact assessment can be done by comparing the results of the economic and financial cost-benefit analyses. In this case, the alternative pessimistic financial cash flow was used and the results of the economic analysis presented in the project files. The results of the analysis presented clearly identify the impacts for stakeholders from both the private and public sector. The net effects on the public sector make it possible to identify the fiscal impact of the Program. The public sector was divided between the main executors, state and municipal governments and SABESP. The private sector stakeholders, along with unskilled labor that benefits from the employment generated by the Program, were the populations identified that directly benefit from the interventions. The direct beneficiaries were divided by income level, thereby enabling us to quantify the poverty impact of the Program.

25. Poverty impact The private sector returned net positive benefits of about BRL 253 million.

Of this, 49.4 percent was appropriated by the lower income segments represented by the unqualified labor sectors (MONQ) and the population directly benefited with earnings of up to 3 minimum salaries. These results show that the proposed intervention has a large positive poverty impact. The remaining private sector beneficiaries, with earnings of between three and five minimum salaries, and those earning over five minimum salaries, appropriated respectively 26 and 25 percent of the total net benefits accruing to the private sector.

26. Fiscal impact The public sector, represented by the state and municipal governments

returned a net negative benefit of BRL 130 million, mainly on account of the investments made, which is compensated for by the fiscal impact. The value of fiscal increase amounts to BRL 335 million. SABESP has a net negative benefit of BRL 143 million, but this has to be compared with the alternative replacement costs of the headwaters, as described above.

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Annex 10: Safeguard Policy Issues

BRAZIL: INTEGRATED WATER MANAGEMENT IN METROPOLITAN SÃO PAULO MANANCIAIS HORIZONTAL APL PROGRAM

Environmental Assessment 1. Strategy adopted for the environmental analysis of the Program’s activities The

environmental assessment undertaken during Program preparation is designed to comply with the Bank’s environmental and related safeguard policies. These overarching and more preliminary analyses will be complemented by the requisite environmental impact studies that are an obligatory requirement for applying for environmental licenses, in accordance with the environmental legislation of the State of São Paulo. In line with the strategy developed for Program execution, the environmental impact studies will be undertaken during implementation in parallel with, and as an integral part of, the preparation of the engineering designs of the respective interventions. The environmental impact assessment reports for each civil works activity will be submitted to the Bank for analysis and approval. The ‘preliminary’, ‘installation’ and ‘operational’ environmental licenses related to each of the civil works interventions will also be submitted to the Bank. Submittal to the Bank of the preliminary license will be a condition for initiating the bidding of the corresponding works, and submission of the installation license a condition for the signature of the corresponding works contract. These implementation conditions will be included in the Program’s OM.

Main positive environmental impacts expected from the Program

2. To maintain operational control of the reservoirs The main positive environmental impact expected is the maintenance of the operational control of the potable water reservoirs, by countering the further deterioration of the present water quality of the reservoirs and thus ensuring the continued use of the waters as potable supplies for the residents of MRSP. By way of example, the chart below illustrates the expected results of the Program interventions designed to preserve and improve the water quality of the Guarapiranga reservoir by controlling the phosphorus loads entering it. All the figures presented in the chart were calculated using the MQUAL 2.0 water quality model which establishes the correlation between land use patterns, phosphorus loads generated, and resultant water quality.

3. The amount of phosphorus generated during 2006, given the current population size and water consumption, is approximately 580 kg/day. This is 27 percent less than the 800 kg/day that could be expected for the present day if the Guarapiranga Program had not been executed. For 2021, a 725 kg/day phosphorus load is projected (assuming steady projections of the population and water consumption parameters) – 275 kg/day less than the ‘without Program’ scenario for the Guarapiranga Project – and further compared with a load of 625 kg/day that would be generated in the event of the Mananciais Program being executed.

4. The scenarios presented in Figure 10.1 may vary with changes in the Guarapiranga basin due

to variations in the operating efficiency of the sewerage systems, or due to further population growth in the slums and irregular settlements surrounding the reservoir. These developments would undoubtedly alter the projected pollution curves and would have a substantial impact

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on the water quality outcomes for the ‘with’ and ‘without’ Program scenarios for both the Guarapiranga Program and the proposed Mananciais Horizontal APL Program.

Figure 10.1 Phosphorus load generated in the Guarapiranga catchment basin

5. The sunk investments in the Alto da Boa Vista water treatment works, together with the

dilutionary effects of the transfer of water from the Taquacetuba and Capivari/Monos rivers to the Guarapiranga reservoir, are crucial factors in SABESP’s thinking with regard to maintaining Guarapiranga as a raw water reservoir for the city’s potable system, despite the fact that the phosphorus load currently generated is almost double the amount that was projected when the Guarapiranga specific land-use law was prepared. Failed execution of the Guarapiranga Program would certainly have led to a substantially more deleterious situation with regards to water quality than exists today.

6. The interventions under the respective components of the Program, described in more detail

in Annex 4, were identified by adopting the following analytical methodology: the current land-use patterns in the two most highly urbanized reservoir basins, Guarapiranga and Billings (where three-quarters of the Program’s resources will be invested), were mapped and loaded into the land-use/water quality computer-based mathematical model (MQUAL 2.0). The model was then used to identify the major pollution sources in the two reservoirs. There was a very strong correlation identified between the highly urbanized areas of the basins, in general, and pollution load, and between the informal and densely occupied areas of the basin, more specifically, and the pollution rates. The mapping also identified the pockets of poverty in these two basins and established their correlation with pollution loads. This mapping and modeling exercise of land-use, pollution loads and poverty rates was then used as a basis to identify and prioritize the types of physical intervention to be carried out under the proposed Mananciais Program in the two basins: water supply; wastewater collection and

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treatment; solid waste management and disposal; drainage; urban upgrading; social inclusion interventions; leisure areas and parks; etc.

7. To improve the water quality of the watercourses that contribute significantly to impairing

the quality of the reservoirs Extending the coverage of the wastewater collection system in the Guarapiranga and Billing catchment areas will result in improved water quality in the watercourses which flow to the respective reservoirs. The Program activities that contribute to this goal include: (i) Slum and irregular settlement urbanization, which will contribute decisively to improving the water quality in the watercourses by bringing wastewater, drainage and solid waste infrastructure to these informal areas; (ii) Urbanization and the resettlement of families living in homes at risk from landslides and flooding will also contribute to improving the quality of the urban and social occupation in the headwater basins, and hence the quality of the surrounding water bodies; and (iii) Recuperation of degraded areas will contribute to improving water quality and to reducing the transportation of sediments and the consequent silting-up of the watercourses and the reservoirs themselves.

8. To control irregular occupation of the reservoir areas and improve urban land use The

Program will achieve this through activities including: (i) The implementation of urban parks and the recovery of degraded areas which will discourage new, irregular land occupations, enhance orderly land occupation, and make more affordable leisure facilities for the population; (ii) The implementation of new public spaces and leisure areas which will also substantially improve the opportunities for recreation and leisure activities in the urbanized slums, the irregular settlements, and along the banks of the reservoirs. Watersports and similar activities will also benefit from better water quality and less annoyance caused by macrophytes and other aquatic plants; (iii) Actions targeted at institutional strengthening, technical and technological capacity-building and management training, together with improved environmental monitoring and inspection, as well as the monitoring of land-use and occupation, will contribute to better management of the human occupation of the basins, focused especially on increasing the control of irregular occupation; and (iv) Environmental and sanitary promotion campaigns will contribute to awareness building within the communities with regard to appropriate land-use development, the importance of connecting to sewer systems, appropriate community behavior with regard to solid waste disposal, and the use of drainage and sewer systems, etc.

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Table 10.1 Summary of environmental impacts resulting from the physical interventions of the Program

PROGRAM COMPONENT POSITIVE IMPACTS NEGATIVE IMPACTS

1) Institutional Capacity Building (support, follow-up, monitoring and implementation) and strengthening of management systems in the intervention areas

Works planned:

Citizenship Integration Center, Grajaú (Guarapiranga) Establishment of the Environmental Education Reference Center (Guarapiranga and Billings)

Civil works connected with the establishment of Ecology and Citizenship Promotion Centers

Physical and biotic impacts:

improved environmental and social quality; improved cleanliness and elimination of contaminants in the

surrounding areas (CIC—Reciclagem de Atitude Project etc.);

reduction of visual pollution and degraded areas.

Socio-economic impacts:

improved access for citizens (especially those in the lower income bracket) to the justice system and other public services;

enhancement of community forms of organization; transformation of urban space resulting in value

appreciation; improved community education; improved quality of information and social assistance; improved security (Community Policing); number of socio-cultural events increased and opportunities

provided for improving social contact and well-being; direct/indirect jobs and income generated by the civil

works; increased awareness by the population of the need to protect

the headwaters.

Physical and biotic impacts:

accumulation of solid residues and effluents arising from the construction sites;

silting up of downstream areas (caused by civil works);

noise and atmospheric pollution (dust and particles);

vegetation removed to make way for civil works.

Socio-economic impacts:

discomfort for the population residing in the vicinity of the works (accessibility problems, etc.);

during operation of the CIC, intense movement of heavy vehicles and people causing discomfort to the inhabitants of the surrounding area, as well as causing local traffic congestion;

speculation and rising prices related to properties earmarked for commercial/services purposes near to the CICs.

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PROGRAM COMPONENT POSITIVE IMPACTS NEGATIVE IMPACTS

2) Urban Upgrading

Works planned:

Civil works targeted at slums urbanization and urban revitalization (Guarapiranga and Billings)

Relocation of families from the category 1ª areas (Grande Alvarenga)

Rehabilitation works in the category 1 areas vacated as the result of relocation of families (Grande Alvarenga)

Urban and environmental upgrading works in the settlements

Construction work connected with the new Housing Units (Unidades Habitacionais)

Physical and biotic impacts:

better water quality in the creeks, canals, etc resulting from the removal of wastewater and pollution loads (from the target location and downstream areas);

improvement of environmental health conditions; reduction of pollution and other factors causing degradation

of local flora and fauna; protection and recovery of Category 1 areas and APPs

(particularly on the banks of the Billings and Guarapiranga reservoirs);

improvement and monitoring of water run-off and drainage to avoid accumulation of water and garbage;

elimination of geotechnical and environmental risk situations.

Socio-economic impacts:

improvement in accessibility, habitability and security and more opportunities provided for social contact;

improved garbage collection systems as a result of better access to localities that were previously not served ;

improved sanitary conditions and quality of life for the population;

reduction of contamination and water- and excreta- related diseases caused by wastewater and a concomitant reduction in health costs;

improved potable water quality and distribution, with better control over leaks;

reduction of insects and vectors attracted by accumulated water, wastewater and garbage;

territorial and urban ordering, with consequent improvements in living standards;

property price appreciation in the target areas and surrounding neighborhoods.

Physical and biotic impacts:

soil run-off into the water courses undermining water quality during the civil works phase; worsening air quality (dust and particles); accumulation of garbage and rubble causing visual pollution in the streets; vegetation removed or flattened to make way for streets/roads;

obstruction of the drainage networks by soil, garbage or rubble affecting the water run-off system.

Socio-economic impacts:

discomfort for pedestrians and local people and restricted access for vehicles during the works phase (given the narrow width of the access ways/alleyways in the slums);

noise and vibration experienced during the works phase caused by earthmoving equipment and other machinery;

bad odors experienced during the construction works from the wastewater networks and from pollutants converging on certain points (before the interconnections).

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PROGRAM COMPONENT POSITIVE IMPACTS NEGATIVE IMPACTS

3) Environmental Protection and Recovery

Works planned:

Civil works aimed at urban revitalization and recovery of degraded areas (Guarapiranga, Billings and Alto Tietê)

Works connected with the establishment of parks (Parque Nove de Julho—Guarapiranga; Linear Parks—Billings; Ribeirão Pires and Rio Grande da Serra Parks)

Re-vegetation of the banks of the Billings Dam

Rehabilitation of degraded areas and urban revitalization

Construction of plants for removal of pollution loads (Guarapiranga, Billings, Alto Tietê, Juqueri Cantareira and Alto and Baixo Cotia)

Establishment of wetlands in the water meadow of the River Parelheiros / Itaim Guarapiranga catchment area

Desilting of the Isolina Superior (Cotia) and the Paiva Castro (Cantareira) reservoirs

Infrastructure for applying algaecides in the Paiva Castro Reservoir

Physical and biotic impacts:

reduction of the pollution loads flowing into the Guarapiranga, Billings, Taiaçupeba and Paiva Castro Reservoirs (including reduced nonpoint loads);

recovery and restoration of the ecological functions of the Category 1 areas and the APPs (Permanent Preservation Areas) in order to ensure improved environmental quality;

creation of environments to assist in the maintenance of biodiversity;

the value of the socio-environmental resources of the catchment area acknowledged and more community awareness created regarding sustainable use of the headwaters areas;

improved aesthetic and environmental aspects of the landscape;

ecological equilibrium achieved with the extension of permeable green areas which contribute to minimizing the effects of flooding in the rainy seasons and improving the local environment and ecosystem;

recovery of the degraded areas with a view to ensuring balanced natural conditions in the affected areas;

reduction and/or elimination of environmental degradation (erosion, pollution, etc.);

elimination of geotechnical and flooding risks by undertaking civil works related to geotechnical consolidation, the construction of channels (to aid water flow in the creeks) or straightening of the banks of the creeks.

Socio-economic impacts:

modification of the present uses of the reservoir banks leading to improved quality of life of the population;

income and direct/indirect jobs generated during

Physical and biotic impacts:

soil run-off into the water courses undermining water quality during the civil works stage ;

degraded air quality (dust and particles) during the works phase due to presence of heavy earthmoving vehicles and other machinery;

garbage and rubble accumulating on the streets, and effluents from the construction sites causing problems, including visual pollution sediments, manure and fertilizers reaching the public roads/streets, drainage networks (as the result of tree-planting in the urban areas) or the Billings dam (resulting from re-vegetation work) in the course of planting in the urban area (e.g. sidewalks and squares) and in category 1a areas—APPs, causing water quality degradation as well as having negative effect on environmental quality.

Socio-economic context:

social discontent arising during the containment works (recovery of degraded areas with possibility of provisional relocations);

discomfort caused to residents and pedestrians and restricted vehicle access during the works phase;

noise and vibration during the works phase, caused by earthmoving equipment and other machinery that could affect the structure of properties in the affected area.

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the works stage;

Civil works to be undertaken to

construct parks in the vicinity of the Paiva Castro (Sistema Cantareira) and Isolina (Sistema Cotia) reservoirs

Tree planting in the Grande Alvarenga urban areas

Civil works in Grande Alvarenga to urbanize and revitalize public areas and to construct leisure facilities for community use

Establishment of parks in the Headwaters Protection Area—Grande Alvarenga

Re-vegetation of the banks of the Billings Reservoir in the 50 meter wide buffer strip and in the inhabited areas—Grande Alvarenga works to rehabilitate degraded areas—Grande Alvarenga

improvement of human and environmental health conditions;

urban improvements and property price appreciation in the areas of intervention;

socio-environmental improvement and recreational and leisure areas extended (squares, green areas accessible to the public, etc);

improvements in social well-being and more social contact leading to lower levels of urban crime;

residents encouraged to feel that they belong to their neighborhoods and to the city, thereby creating bonds of affection for the area;

possibility of creating an integrated system of parks and green areas for leisure, etc, in the headwaters area;

acknowledgement by the local population that public spaces contribute to environmental balance (producing good prospects for the longer term sustainability of the interventions and appropriate maintenance and care of the equipment/installations provided for use by the public).

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PROGRAM COMPONENT POSITIVE IMPACTS NEGATIVE IMPACTS

4) Integrated Water Supply and Sanitation

Works planned: Transforming dumpsites

into sanitary landfills in the municipality of Embu-Guaçu

Rectification of the clandestine solid waste dumps in the Billings catchment area

Debris retention system to be installed at the Alto da Boa Vista Water Treatment Station (ETA)—Guarapiranga Reservoir

Fitting of tubular modules in the decanters; sludge removal from the ETAs; installment of lime storage facilities and wash water recycling systems

Expansion of the wastewater systems (networks, collectors, etc), enlargement and operational upgrading of the Mairiporã ETE (elimination of wastewater leakage, etc)

Expansion of, and improvements to, the water supply systems (reservoir, distribution networks, etc) in the Shangri-la and PAT Prosanear sectors

Physical and biotic impacts:

significant reduction of the pollutant loads in the creeks

with a reduction in pollution levels in the reservoirs, resulting in improved quality of water for public consumption (following the construction of water supply and wastewater infrastructure);

improvement of environmental and social quality in the areas situated downstream from the nutrient removal plants;

reduction of visual pollution, odors and other factors impacting negatively on the water resources of the targeted areas;

improvements in physical, hydrological and hydrodynamic conditions in the reservoirs, resulting in better operational conditions and increased water production capacity in the sub-basins targeted by Program actions;

removal of inert sediments and/or organic matter causing problems for water capture and environmental equilibrium;

better control of algae blooms with improved application of algaecides;

increased prospects for rehabilitating aquatic life in the watercourses and improving the ecological conditions necessary for maintaining biodiversity in the reservoirs and contributing to environmental balance;

less likelihood of aquatic and macrophyte plant life proliferating with the attendant health risks caused by insects and vectors.

Socio-economic impacts:

improvement of environmental conditions and water quality (correct management of leach ate and reduction of contamination by irregularly dumped waste);

Physical and biotic impacts:

accumulation of solid residues and effluents

arising from the construction sites affecting the landscape and water quality;

solid wastes from the construction sites silting up of parts of the downstream area;

noise and atmospheric pollution (dust and particles) cause by earth moving, trucks , heavy vehicles and other machines;

vegetation covering the banks of the creeks and re-shaping the landscape as the result of construction and channeling work

works causing risk of sludge entering the creeks unless appropriately removed and transported to landfills or other disposal areas (re: the nutrients removal plant);

geotechnical risk of collapse and geological risk of contamination (re: remedial work on the Alvarenga dumpsite and construction of the Embu-Guaçu sanitary landfill);

degradation and contamination of soils caused by wastes in the disposal areas (re: landfills);

interference with the aquatic fauna (fish and benthonic organisms) caused by removal of sediments from the bottoms of the Isolina and Paiva Castro reservoirs;

temporary increase of suspended solids and disturbance of organic material

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PROGRAM COMPONENT POSITIVE IMPACTS NEGATIVE IMPACTS

Remedial works to rehabilitate the Alvarenga solid waste dumpsite area (Lixão do Alvarenga)

improved appearance of the landscape and better air quality;

reduction of scavenging on the dumpsites and recovery, maintenance and monitoring of the physical installations of the landfills aimed at controlling and eliminating sources of ground contamination and water pollution;

reduction of operating costs and expenditure on chemicals to control algal blooms (algaecides used in the reservoirs and other products for treating raw water);

direct/indirect jobs and income generated during the works phase;

improved human and environmental health; alternatives created for the appropriate and controlled

management of sludge from the ETAs targeted by the Program (ETA ABV, Rio Grande, Taiaçupeba, etc);

improved quality of life and social contact resulting from better sanitary conditions (following the removal and treatment of wastewaters);

public water and wastewater services improved, particularly in the low-income areas (slums and irregular settlements);

reduction of infant morbidity and mortality rates, generating savings on health and medical costs;

reduced risk of contaminated fish and less likelihood of fishermen and other reservoir, water meadow and river users (children, sports enthusiasts, swimmers, etc) of being exposed to water- and excreta-related diseases;

investments attracted to the region by new opportunities in the services area;

price appreciation of urban land; improvement in water supply production and distribution

operating conditions, and the wastewater systems improved through technical upgrading (stemming overflows, and repairing defects in the systems, etc).

dredging sediments from the bottoms of the reservoirs) affecting water quality;

generation and accumulation of solid residues (sludge) as the result of dredging sediments from the bottoms of the reservoirs, causing nuisance odors and attracting insect vectors, unless the sludge is correctly collected and taken away during the works, the risk of sludge entering the creeks unless adequately disposed of (re: the Mairiporã ETE).

Socio-economic impacts: comfort and social wellbeing of the

population living in the vicinity of the civil works disturbed by limited accessibility;

increased operational costs due to a need to use chemical products, to remove and transport sludge, costs of electricity etc;

inconvenience caused to pedestrians and local vehicle traffic by modifications to the access routes caused by the civil works;

possibility of work-related accidents; need for tipping areas and transport of surplus

materials; increased operational and monitoring costs

during the landfill operational and maintenance phase.

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C. Compliance with World Bank environmental safeguard policy 9. The Program has received an Environmental Category A rating in accordance with the

corresponding safeguard policies. The Program triggers the following safeguards: OP 4.01 (Environmental Assessment); OP 4.04 (Natural Habitats); OP 11.03 (Physical Cultural Resources), OP 4.12 (Involuntary Resettlements); and OP 4.37 (Safety of Dams). These policies are addressed in detail in the Program’s Environmental Assessment Report.

Safeguard Policies Triggered by the Project Yes No

Environmental Assessment (OP/BP 4.01) [X] [ ] Natural Habitats (OP/BP 4.04) [X] [ ] Pest Management (OP 4.09) [ ] [X] Physical Cultural Resources (OP/BP 11.03) [X] [ ] Involuntary Resettlement (OP/BP 4.12) [X] [ ] Indigenous Peoples (OP/BP 4.10) [ ] [X] Forests (OP/BP 4.36) [ ] [X] Safety of Dams (OP/BP 4.37) [X] [ ] Projects in Disputed Areas (OP/BP 7.60)* [ ] [X] Projects on International Waterways (OP/BP 7.50) [ ] [X]

10. Environmental Assessment (OP 4.01) A regional SEA was prepared by the Borrower in

conjunction with SMA. The infrastructure interventions will generate temporary negative environmental impacts during their respective construction periods, even in those cases where the interventions are intended to mitigate existing areas of degradation and risk. It will therefore be necessary to adhere to the appropriate criteria and procedures contained in the SEA report’s Environmental Manual for Construction. The environmental impacts of the Program works interventions are duly described in the SEA report and summarized in Table 10.1 for each executing agency. The list includes a group of activities, studies and programs to mitigate, attenuate and/or counteract the negative impacts caused by the implementation of the civil works, as well as highlighting the expected positive effects of the interventions. These activities are also presented in the respective annexes of the SEA report itself and in the Environmental Management Plans of each executing agency.

11. Natural Habitats (OP 4.04) Category 1 Areas and APPs are located along the banks of the

reservoirs and the watercourses which are targeted under the Program. These contain stretches which have been degraded by irregular urban occupation, including poorly-constructed dwellings. They also contain a number of conservation areas as well as other areas that could be recuperated. The interventions in these areas will focus on relocating families, and subsequent environmental and landscape recuperation of the degraded area in question. In the case of partially degraded areas or those that are still preserved, the strategy will be to protect and preserve them with actions to recuperate and establish a number of parks (including linear parks on the banks of the Billings Reservoir).

* By supporting the proposed project, the Bank does not intend to prejudice the final determination of the parties' claims on the DISPUTED areas

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12. Physical Cultural Resources (OP 11.03) The Program will include construction and excavation activities to expand and replace infrastructure, therefore the SEA included screening for any known cultural property in the Program area and incorporated ‘chance find’ procedures in the event that culturally significant resources are discovered during implementation. In addition, Brazil has a well-developed legislative and normative framework, which is under the oversight of IPHAN, and that will be followed during implementation.

13. Involuntary Resettlement (OP 4.12) An RPF for guiding the involuntary resettlement to be carried out under the Program has been prepared in accordance with Bank guidelines and safeguard requirements. Resettlement Action Plans (RAPs) for each Program intervention that entails resettlement will be prepared based on the finalized engineering designs during Program implementation. Each RAP will be sent to the Bank for review and approval before the associated civil works contract is signed.

14. Safety of Dams (OP 4.37) The Program foresees dredging/desilting works in three of the reservoirs currently used as part of MRSP’s water supply system, namely the Isolina Superior and Isolina Inferior reservoirs in the Cotia system, and the Paiva Castro reservoir in the Cantareira system. These dredging/desilting works are to be undertaken only after the second year of Program implementation. The reservoirs are formed by small dams in two of the cases (Isolina Superior and Isolina Inferior), and by a large dam in the other case (Paiva Castro, which is 22 meters high). During the preparation of the engineering designs for the dredging/desilting interventions for the Paiva Castro dam under the SABESP Project, the Bank and counterpart teams will evaluate the implications for OP 4.37 vis-à-vis the safety and maintenance of the dam and, if needed, will furnish to the Bank the corresponding documentation, including an action plan to address any issues as called for by the OP, before initiating the bidding process for any related works.

D. Environmental Management Plan

15. The SEA report’s EMP consists of a series of preventative, mitigating and compensatory measures to counteract the possible negative impacts of Program implementation that have been identified. However, it should be emphasized that the main thrust of the Mananciais Program consists of a group of activities targeted at socio-environmental recuperation and the correction and mitigation of the problematic and vulnerable environmental and social situations that have been identified in the sub-basins. The EMP makes reference to all of the Program components, subcomponents and activities. A summary description of the recommended actions under the EMP is given in the Table 10.2 (the costs of which are incorporated in the Program’s budget).

16. Stakeholders Besides the State and municipal government entities directly involved in the execution of the Program (GESP, SABESP, SSRH (former SSE), SMA, SH/CDHU, PMSBC, PMG), the social assessment also identified key stakeholders that will participate in the Program’s implementation, including environmental and social NGOs, and community associations.

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Table 10.2 Summary description of programs, sub-programs and projects comprising the Environmental Management Plan

Program Components

Actions included in the EMP

Executing entity: SSRH – Secretariat for Water Supply, Sanitation and Water Resources of the State of São Paulo (former SSE)

Institutional capacity building

Technical Support for the operation, integration and updating of the management instruments (GIS and PDPA), monitoring of land use and occupation and steps to ensure that land conforms to current legislation (Itapecerica da Serra, Embu and Embu-Guaçu); Citizenship Integration Center (CIC); conceiving, developing, structuring and providing the institutional framework for the technical tools required to ensure support for managers in the local municipal administrations located within the headwaters areas of the Juqueri-Cantareira (São Paulo, Guarulhos and Mairiporã), Billings (São Paulo, Santo André, São Bernardo do Campo, Diadema, Rio Grande da Serra and Ribeirão Pires), and Juqueri-Cantareira (São Paulo, Guarulhos and Mairiporã) catchment basins; environmental education, monitoring, technical and operational support following the conclusion of the civil works and follow-up with the communities post-occupation; Program management; studies undertaken on the user and beneficiary population, including using a sample survey in all 5 catchment areas covered by the programs; mobilization and support actions related to projects carried out by civil bodies; management system operations; information network in support of management; technical conception, structuring and establishment of the information network in support of management; public dissemination of the management system; annual international seminars to be held on water resources and urban development; independent environmental audit; scaling up economic activity, entrepreneurship and social inclusion; a development program focused on compatible economic activities; employment and revenue to be generated for directing environmental protection; management of the Mananciais Program interventions.

Urban upgrading

Establishment of areas for community use—recovery of degraded areas; project and civil works related to urban revitalization and recovery of degraded areas in the Guarapiranga and Billings sub-basins.

Integrated water supply and sanitation

Projects and civil works aimed at constructing the sanitary landfill in the municipality of Embu-Guaçu and an assessment to be prepared regarding the operational and support capacity of existing landfills; identification and evaluation of where and how clandestine solid wastes are disposed; acquisition and maintenance of urban cleansing equipment for cleaning public areas and for assisting with collection of urban solid wastes

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Program Components

Actions included in the EMP

Executing entity: SMA—Environment Secretariat of the State of São Paulo

Institutional capacity building

Capacity-building for environmental agents; capacity-building workshops for the new Specific Land-Use Laws; Itinerant Exhibition; Environmental Education Reference Center; collection of educational videos on water and the environment; Antena Verde project on environmental education through radio broadcasts; implementation of a system of environmental enforcement in the Guarapiranga and Billings catchment basin linked to the integrated inspection system of the Alto Tietê basin headwaters; improvement of physical installations aimed at establishing an Environmental Inspection System concerned with land use and human occupation in the Guarapiranga, Billings, Alto Tietê-Cabeceiras and Juqueri-Cantareira catchment basins; conceiving, developing and executing the Land Use and Occupation Monitoring Program employing satellite images, field supervision and an Integrated Communications System to facilitate contact between environmental inspection agents; monitoring of environmental quality.

Integrated water supply and sanitation

Civil works to establish the Parque Nove de Julho, covering 26.9 hectares; studies, designs and civil works connected with the establishment of parks around the Billings reservoir in the municipalities of São Paulo, Ribeirão Pires and Rio Grande da Serra, covering an area of 767,000 m2 (76.7 ha); designing and executing re-vegetation of the banks of the Billings dam; design and works for recuperating degraded areas and revitalizing urban areas in the municipality of São Paulo (to cover 3.6 hectares); Plan for Controlling the Transport of Dangerous Loads (including coverage of the Guarapiranga basin).

Executing entity: PMSBC—São Bernardo do Campo Municipal Government; CDHU—Housing and Urban Development Company of the State of São Paulo

Urban upgrading

Urbanization of selected irregular and precarious settlements in the Guarapiranga and Billings sub-basins in locations to be defined after conclusion of the PDPA. Resettlement of families affected by urban upgrading interventions or living in high risk or degraded areas (housing units to be constructed by CDHU).

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Program Components Actions included in the EMP

Executing entity: SABESP—Water and Sewerage Company of the State of São Paulo

Institutional capacity building

Development of technical instruments (for management); hydrodynamic models of Guarapiranga, Rio Grande, Taiaçupeba, Jundiaí, Biritiba, Paiva Castro and Atibainha reservoirs; a system to support decision-making and oversight for the integral operation of MRSP’s headwaters mains transmission system; environmental education and monitoring (including post- works).

Environmental Protection and Recovery

Pollutant Loads Removal Plants; Parelheiro Wetland; debris retention at the intake area of the Guarapiranga water treatment system; management plans (Capivari, Rio Claro, Morro Grande); removal of macrophytes; desilting of reservoirs (Paiva Castro and Isolina); infrastructure installed for applying algaecides; establishment of parks (Paiva Castro, Atibainha, Cachoeirinha and Isolina); improvements to the Santa Inês Lifting Station (ESI).

Integrated water supply and sanitation

Improvement of the water treatment processes - automation of the ABV ETA, ETA Rio Grande, ETA Rio Claro, ETA Guaraú, and the Alto and Baixo Cotia ETAs, including improvements and repairs to the filtration, etc processes; installing sludge removal systems in the ETAs; Wash Water Recovery Systems; installing water supply systems (PAT PROSANEAR and Shangri-la); development and/or extending the wastewater elevator plants; extending the wastewater collector network (network collectors, pumping lines, etc); expanding the Mairiporã ETE; Technical Training; operational optimization and upgrading (control); elimination of overflows.

Executing entity: PMSBC—São Bernardo do Campo Municipal Government

Institutional capacity building

Environmental education; monitoring and inspection; integrated planning; monitoring of erosive processes and sediment production; development program related to compatible economic activities; employment generation and the generation of revenues to be earmarked for environmental protection; control of clandestine solid waste dumping.

Urban upgrading

Preparation of surveys and programs concerned with residential uses/resettlement; urbanization of selected irregular and precarious settlements; relocation of families from category 1 areas and recovery of the unoccupied areas during relocation from category 1 areas; regularization and urban/environmental upgrading of the settlements; socio-environmental follow-up to urban and housing interventions.

Environmental Protection and Recovery

Urban greening; urbanization of public areas—creation of squares and leisure amenities; establishing parks and conservation units; re-vegetation; recovery of degraded areas (low-cost interventions on hillsides, slopes and sediment-producing areas—Rio Grande and Taquacetuba catchment area); controlling the transport of dangerous loads.

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Program Components Actions included in the EMP

Executing entity: PMG—Guarulhos Municipal Government

Institutional capacity building

Study aimed at broadening the Environmental Education Program and acquisition of materials and equipment for the program; study on the creation, regulation and introduction of municipal inspection/enforcement in the catchment basin of the Cabuçu, for the underground water source and the Tanque Grande sub-basin; a study on developing and establishing the SIG; acquisition of equipment and software for the SIG, together with training; acquisition of equipment for the Central Laboratory.

Environmental Protection and Recovery

Study on the creation and recommendation of the municipal APA (Tanque Grande sub-basin); designs and civil works for the municipal park (Tanque Grande sub-basin); designs and works for the Environmental Education Center (Tanque Grande sub-basin); a study for the creation and regulation of the municipal APA (Lagoa Azul/Lavras sub-basin); design and works for the municipal park (Lagoa Azul/Lavras sub-basin); study on scaling up exploitation of the subterranean water sources.

Integrated water supply and sanitation

Project for undertaking works aimed at the general repair of the Tanque Grande ETA; design and works on the Ururuquara and Lagoa Azul/Lavras water supply systems; technical, economic, environmental feasibility studies on the Engordador and Borracha sub-basins; preparation and execution of the Lagoa Azul / Lavras Loss Reduction Control Program; design and works on the Lagoa Azul / Lavras Wastewater System.

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17. Consultations During Program preparation, a number of consultations and discussions were carried out with the Alto Tiete basin committee and agency, and with the basin sub-committees of the Juqueri-Cantareira, Tiete-Cabeceiras, Cotia-Guarapiranga, Billings-Tamanduateí and Pinheiros-Pirapora sub-basins. The committee and the subcommittees are composed of representatives of state and municipal governments, civil society and academia, amongst others. In addition, a number of municipal and local entities and organizations were involved in these discussions/consultations. A further round of consultations, following the dissemination of the SEA report, was undertaken in June 2007, following the pre-appraisal mission. The Program design and objectives were endorsed during these consultations.

18. During preparation and implementation of the engineering designs, especially those related to the urbanization of slums and irregular settlements and to the provision of WSS and related services, the Program allows for a considerable amount of social participation and feedback, as was the case during implementation of the predecessor Guarapiranga Project. In addition, the proposed Program includes activities for the social overview of civil works interventions, as well as for the undertaking of public opinion surveys to register and mitigate any unsatisfactory aspects of the Program’s interventions.

19. Component 1 of the Program includes complementary activities that will contribute to the strengthening of communication and social participation, including: (i) capacity building events for environmental agents; (ii) workshops for community participation; (iii) development of educational videos and radio programs and the carrying out of environmental education programs for stakeholders; (iv) preparation of environmental and social diagnosis for awareness building; (v) carrying out beneficiary surveys; (vi) support to community mobilization, social outreach and other civil society initiatives; and (vii) implementation of environmental education centers.

20. The distribution of responsibilities concerning the Program’s environmental activities among the different participating institutions is presented in Table 10.3.

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Table 10.3 Distribution of responsibilities among participating institutions for Program’s environmental activities Institutions Participation in

the Program Activities Environment Contribution to environmental

issues Addressing Environmental through

appropriate Legal Documents São Paulo State Housing Company - CDHU

One of the three executing agencies of the State of São Paulo.

Build extra-slum resettlement housing/apartment blocks; Execute slum upgrading works in one slum of 1000 families.

The housing/apartment blocks will be built in formal private land acquired by CDHU through the market and located within the city (but not in the “mananciais” catchment areas); The building constructions will cause minor environmental impacts such as noise and dust.

Will provide resettlement housing/apartment blocks to the families removed from risk areas by the Municipal Government of São Bernardo do Campo or any other selected municipality.

(i) will sign a n Implementation Agreement (convênio) with the State Finance Secretary (State Secretariat of Water Supply, Sanitation and Water Resources - SSRH), the borrower representing the State of São Paulo; (ii) through this convênio will commit to comply with the Environmental Management Plan; (iii) will send to the Bank for approval an appropriate Environmental Assessment and License prior to signing works contracts.

SABESP Borrower. Execute activities to improve water supply and sanitation services.

Construction will be executed in public areas such as streets as well as in land belonging to SABESP; Constructions will cause minor environmental impacts such as noise and dust.

Major contribution to improve water bodies and general environment, by collecting and treating wastewater currently dumped in the water bodies

(i) sign a Loan Agreement; (ii) will commit to comply with the Environmental Management Plan; (iii) will send to the Bank for approval an appropriate Environmental Assessment and License prior to signing works contracts.

Municipality of São Bernardo do Campo

Borrower. Slum upgrading works. Most of the slums are along and over water streams formally classified as ‘natural habitats’.

Will provide appropriate integrated basic infrastructure to the slums in order to improve quality of life and remove untreated wastewater currently being dumped in the water bodies that form the Guarapiranga and Billings reservoirs.

(i) sign a Loan Agreement; (ii) will commit to comply with the Environmental Management Plan; (ii) will send to the Bank for approval an appropriate Environmental Assessment and License prior to signing slums upgrading works contracts.

Municipality of Guarulhos

Borrower. Will carry out water supply service improvements and wastewater collection services.

Activities are not expected to generate environmental negative impacts.

Will contribute to improved water management procedures and will also contribute to improved water bodies and the environment by collecting wastewater currently dumped in the water bodies.

(i) sign a Loan Agreement; (ii) will commit to comply with the Environmental Management Plan; (ii) will send to the Bank for approval an appropriate Environmental Assessment and License prior to signing slums upgrading works contracts.

São Paulo State Water Supply, Sanitation and Water Resources (former Water and Energy) Secretariat

One of the three executing agencies of the State of São Paulo.

Convert the solid waste landfill of Embu Guaçu into an appropriate sanitary landfill. Creation and implementation of linear parks. Solid waste management equipment to support selected municipalities.

No resettlement required; 40 people (formerly scavengers) have already benefited from better working conditions in the solid waste transfer unit.

Will contribute to improved water resources management.

(i) will sign a legal agreement (convênio) with the State Finance Secretary, the borrower representing the State of São Paulo; (ii) through this convênio will commit to comply with the Environmental Management Plan; (iii) will send to the Bank for approval an appropriate Environmental Assessment and License prior to signing works contracts.

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Resettlement Policy Framework 21. This section presents the executive summary of the RPF for the proposed Mananciais

Program. The objective of the RPF is to guide the resettlement process for the families living in risk-prone areas that will be targeted with investments under the Program. Activities under Component 2 of the Program (Urban Upgrading), which is aimed at improving the quality of life for urban poor living in selected irregular and precarious settlements. This component will finance activities to: (i) provide basic urban services and, where necessary, safe housing units within and outside of the slums and irregular settlements targeted under the Program; and (ii) undertake social mobilization before, during and after Program implementation to ensure effective community participation. The information available indicates the approximate number of families to be resettled and the housing options available. Precise resettlement plans will be developed in consultation with area residents and in conjunction with the technical planning process for urban improvements in selected irregular and precarious settlements, and will be reviewed and approved by the Bank before being implemented. Table 10.4 presents the Program activities generating resettlement and the distribution of responsibilities with respect to the resettlement activities.

22. Principles and objectives governing resettlement preparation and implementation Five main

principles will guide resettlement activities under the Program: (i) minimizing resettlement by identifying houses that can be improved through minimal investments in services (e.g. improving access to electricity, water supply, sanitation, transportation/access); (ii) resettling families who live in areas that are high-risk (either in terms of health, safety or environmental sensitivity) into appropriate housing units; (iii) constructing a system of roads and sidewalks to safely accommodate both vehicle and pedestrian traffic; (iv) successful implementation of integrated urban-environmental services (water supply, drainage, wastewater collection and disposal, and solid waste collection and disposal) for the areas targeted under the Program; and (v) proposing sound social and technical solutions to avoid new, informal, urban encroachments on environmentally sensitive areas.

23. Description of process for preparing and approving the resettlement plan The resettlement

plans will be prepared by the relevant executing agency under the corresponding Project, and submitted to the Bank for review and approval as a condition of starting the corresponding civil works, and will include: (i) baseline census and socioeconomic survey information; (ii) specific compensation rates and standards; (iii) policy entitlements related to any additional impact identified through the census or survey; (iv) descriptions of resettlement sites and programs for improvement or restoration of livelihoods and standards of living; and (v) implementation schedules for resettlement activities and detailed cost estimates.

24. Estimated population displacement and likely categories of displaced persons The Program

activities would trigger the resettlement of families41 resettled as part of the upgrading works in selected irregular and precarious settlements executed by PMSBC. Resettlement of smaller numbers of families might also take place should additional urban upgrading activities be included in the Program in other eligible municipalities and be approved by the Bank.

41 Studies are still underway and the number of families to be resettled will only be finalized upon conclusion of the studies. For budgeting purposes a preliminary number of 1,200 houses to be constructed has been estimated.

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Table 10.4 Resettlement Activities - Distribution of responsibilities Institutions Participation in

the Program Activities Resettlement Addressing resettlement

issues Legal document and conditions

São Paulo State Housing Company - CDHU

One of the three executing agencies of the State of São Paulo.

(i) Provide resettlement apartment/housing blocks to families who will be removed by the Municipality of São Bernardo do Campo and/or other selected municipalities in the Program Area; (ii) Slum upgrading works in selected municipalities in the Program Area.

(i) Activities under the responsibility of CDHU for the construction of extra-slum housing blocks/apartments would not trigger resettlement. (ii) Slum upgrading works might cause in-slum and extra-slum resettlement.

(i) Provide social assistance to resettled families (during and post resettlement); (ii) Provide about 1,000 resettlement apartments units (land and buildings); (iii) Provide highly subsidized mortgages tailored to low income families living in slums.

(i) will sign an Implementation Agreement (convênio) with the State Finance Secretariat, the official representative of the State of São Paulo as borrower; (ii) through this convênio, will commit to follow the Resettlement Policy Framework and the Resettlement Plans (to be prepared by the Municipality of São Bernardo do Campo and other municipalities, if selected, through their own legal agreement with the State).

SABESP Borrower. Execute activities to improve water supply and wastewater services in targeted areas.

Activities will not trigger resettlement but will require land acquisition for the wastewater pumping stations.

(i) will sign a Loan Agreement; (ii) will commit to comply with the Resettlement Policy Framework in the case of any unforeseen resettlement being needed.

Municipality of São Bernardo do Campo

Borrower. Slum upgrading works. Affected families to be resettled.

42 (i) Resettlement apartment/housing blocks will be offered by CDHU; (ii) Provide social assistance to families to be resettled.

(i) will sign a Loan Agreement; (ii) will commit to comply with the Resettlement Policy Framework; (ii) will send to the Bank for approval a Resettlement Plan prior to the signature of the corresponding works contract.

Municipality of Guarulhos

Borrower. Will carry out water supply and wastewater service improvements.

Activities would not trigger resettlement.

(i) will sign a Loan Agreement.

State Secretariat of Water and Energy

One of the three executing agencies of the State of Sao Paulo.

Will convert the Embu Guaçu solid waste dump into an appropriate sanitary landfill.

No resettlement required. 40 people (formerly informal dump scavengers) have already benefited from improved working conditions at the dump’s solid waste transfer station.

(i) will sign a Convênio with the State Finance Secretariat.

42 Studies are still underway and the number of families to be resettled will only be finalized upon conclusion of the studies. For budgeting purposes a preliminary number of 1,200 houses to be constructed has been estimated..

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25. Five resettlement alternatives will be offered under the Program: (i) housing units within the

slum; (ii) housing units/apartment blocks in buildings in neighborhoods better located within the city; (iii) letters of credit which would allow families to buy a house on the market; (iv) exchanges of houses within the slum (allowing a family to move to a resettlement apartment and offer its house to a family that will be resettled but does not want to go to a resettlement apartment); and (v) appropriate alternatives for highly vulnerable families. The slums are located in the peri-urban area where resettlement housing units/apartment blocks are generally not allowed or are not viable solutions. In the better neighborhoods, only apartment buildings are feasible due to higher land costs. The housing units within the slums are offered to large families with low incomes at no cost. The apartment buildings, as well as the letters of credit, are financed through highly subsidized mortgage loans.

26. Socio-economic provile of the community and eligibility criteria for defining categories of

displaced people A large part of the population residing in slums and irregular settlements of the Program area is of low or very low income, low levels of educational attainment, and face other social challenges. The families to be resettled are those living in risk-prone areas such as in shacks built over rivers or in areas subject to landslides. The cut-off date for eligibility will be the date when the Resettlement Plan cadastre is closed in the slum, and the number of units is capped. In addition, since 1996 CDHU has adopted an internal procedure which considers the woman to be the head of household during the resettlement process to new housing units. Working with extremely vulnerable households will be done by: (i) resettlement to first floor homes with facilitated access (for example, without staircases); or (ii) helping households to remain in the slum through the “home exchange” mechanism.

27. Legal framework reviewing the fit between borrower laws and Bank policy requirements and

bridging gaps The borrowers’ set of laws on irregular low-income settlements requires the public sector to provide appropriate housing solutions to families affected by resettlement. There are no inconsistencies with the Bank’s resettlement policy.

28. Method of valuing assets Since the existing housing would be valued at a low rate in the

formal market, the populations’ assets will be valued based on the financing to access adequate housing, and the units provided would be highly subsidized to ensure affordability. The option of cash compensation will also be provided in selected cases.

29. Organizational procedures for delivery of entitlements The PMSBC, or any other approved

municipality, with the support of specialists from the UGL and UGP would be responsible for ensuring delivery of entitlements for the affected population. CDHU will be responsible for construction of the new housing units and providing support to the resettlement process. PMSBC and CDHU each have extensive experience in implementing the complex process of resettlement –from the initial socio-economic census to the post-resettlement social assistance measures, including the restoration of livelihoods for resettled families.

30. Grievance redress mechanism During preparation and implementation of the resettlement

plans, the Program will finance an office staffed with trained social workers to address individual grievances throughout the resettlement process. The staff will be trained to clarify

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the rights of the affected families and work with them to resolve their grievances in a fair and adequate way. The mechanism designed to resolve grievances includes several decision making levels: (i) a large part of the grievances will be resolved on site, with the households themselves, (the principal actors involved include resident families of the area - generally a slum - and the social workers, architects, urban specialists and engineers involved in the sub-project design and implementation); (ii) when the grievances cannot be resolved at the local level by these actors, the municipality’s UGL will participate; and (iii) those grievances that cannot be resolved by the municipality will be addressed by GESP’s UGP.

31. Description of arrangements for funding resettlement The resettlement housing and social

activities will be financed with a combination of resources from the participating municipal government and CDHU. The resources allocated to CDHU in the GESP Project will support land acquisition, engineer designs and works for the construction of around 1,350 housing units in PMSBC to receive resettled families affected by the PMSBC Project interventions. CDHU will support other resettlement activities in selected municipalities in the MRSP including, inter alia, social activities and urban renewal and upgrading. The resources allocated for PMSBC in its Project will support urban renewal and urban upgrading in selected irregular and precarious settlements including, inter alia, social and resettlement activities, construction/improvement of housing units and recovery of degraded areas.

32. Description of mechanisms for consultations with, and participation of, displaced persons in

planning, implementation and monitoring The consultations will take place once the planning phase has been initiated in each of the selected irregular and precarious settlements. This will be carried out during the comprehensive and participatory planning phase which is a core part of a slum upgrading intervention. During the planning phase the urban improvement solutions for the slum will be discussed with the community, as well as the resettlement alternatives. Once the community formally agrees with the urban improvement and resettlement solutions, the Program will provide authorization to move to the civil works phase. During the implementation of civil works, constant communication would be maintained, through information sessions and through the social work office that will also handle any grievances. After the resettlement plans have been implemented, the support to resettled families as well as a comprehensive follow-up - through interviews and participatory evaluation of the process - would be facilitated by social workers and trained consultants involved throughout the process.

33. Arrangements for monitoring by the implementing agency and, if required, by independent

monitors As part of the Resettlement Plan, a Monitoring and Learning Plan will be developed with the following objectives: (i) To verify that the proposed actions are being implemented apace with the civil works and propose corrective actions if necessary; (ii) To monitor the functioning of infrastructure and provide for needed repairs; (iii) To identify difficulties and impediments to the process and introduce subsequent adaptations to improve the process; (iv) To measure the effects of the Program on the beneficiary population through quantitative and qualitative research that is made publicly available for discussion and will be used by stakeholders and other organizations to evaluate the results; and (v) To analyze the information obtained during implementation and the evaluations that take place to ensure that relevant lessons are fed into the design of other projects of this type.

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Annex 10A: Social Analysis

BRAZIL: INTEGRATED WATER MANAGEMENT IN METROPOLITAN SÃO PAULO MANANCIAIS HORIZONTAL APL PROGRAM

1. The Mananciais Program will have the following significant social impacts:

The proposed activities will directly benefit the poorest segments of the population in the metropolitan region of São Paulo and will indirectly benefit the region’s population as a whole;

The current river basin protection policies, which define the legal framework of the Program, legally support the continued residence of the poorest population in the protected areas (as long as the basic necessary services to prevent untreated wastewater from being discharged in water bodies are provided), and avoid massive displacement of extremely vulnerable families – an approach that was required under the previous law;

Urban planning and civil works in slums are a part of the infrastructure investments that will be financed by the Program, constituting one of the Program’s initiatives with greatest positive social impact for the poorest segments of the population;

The Program’s proposed activities to improve water resource, river basin and land-use management will be achieved through institutional arrangements prescribed by the existing legislation, which promote social inclusion. The associated management and planning processes require substantial participation by organized civil society for political decision-making and for developing the action plans and the investment programs of the river basin committee, sub-committees and agency.

2. The assessments made during the preparation phase of the Program, along with the final

assessment of the predecessor Guarapiranga Project, did not encounter any negative social impacts associated with the actions that are common to both projects. As was the case under the predecessor project, the families targeted for resettlement under the Mananciais Program are considered to be one of the greatest beneficiary groups of the interventions, given the positive social impacts that the resettlement brings. These families currently live in situations of extreme risk, and the Program will provide them with adequate housing and services in a good location.

3. The Program’s positive social impacts and its inclusive nature are reflected in the following

ways: (i) The socioeconomic profile of the population in the target areas of intervention show low incomes, high crime rates, and important gender issues; (ii) The Program’s participatory approach that involves stakeholders before, during and after Program implementation; (iii) The Program’s expected social benefits include, among others: (a) improvements in the quality of life; (b) improvements in urban living standards; (c) ability to offer adequate housing to the population living in situations of risk; and (d) increases in entertainment options; and (iv) Key lessons learned from similar interventions were fundamental to enhance the social benefits in the design of the proposed Program urban upgrading component.

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A. The Socioeconomic Profile 4. Urban informality and the concentration of low income population The river basins located

in the area of intervention of the Program suffer from unplanned occupation. These areas are part of the metropolitan region where investment in infrastructure is grossly insufficient and the quality of public services is inferior in comparison to other regions within the metropolitan area. Poverty is greatest in these regions and there is also significant urban informality, with large numbers of irregular settlements and slums.

5. The monthly income of this region is greatly inferior to that of MRSP: in 2006, the average monthly income of the metropolitan region was about BRL1,200; in comparison, 60 percent of the population in the region targeted by the Program has a monthly income of BRL600. The data shows the disparity between, on the one hand, the population’s total incomes and, on the other, the concentration of extremely low-income families in this particular region. Furthermore, the unemployment rate of 17 percent is also strong evidence of the Program region’s poverty levels.

6. High crime rates The region where the Program will be implemented has the highest crime

rates in MRSP. 7. Gender Issues The large presence of female ‘heads of household’ is another indicator of the

extreme vulnerability present in the area of the Program. In the 1990s, the percentage of women in this situation increased by 38 percent according to IBGE census data. In slums, where the poverty rate is extremely high, 54 percent of women are heads of households. The data is based on a study carried out in slums that have been urbanized by the local and state governments.

B. The Program’s Participatory Approach

8. The Mananciais Program adopts a highly participatory approach that involves a large group of actors who will participate in the Program’s activities. The diagram below illustrates the Program's main areas of focus.

Institutional Capacity Building

Integrated WSS Urban

Upgrading

Environmental Protection and

Recovery

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Institutional Capacity Building

Table 10.5 Stakeholder Involvement in Institutional Capacity Building Activities Foreseen Activities - Mananciais Program

Stakeholders Means of Involvement – Effect on Program Results

Construction of Center for Citizen Integration

SSRH/UGP General supervision; M&E

Secretariat of Justice and Citizenship

Planning, implementation, and operation of CIC

Local communities Public service provision and social and legal assistance in the CIC

Evaluation and Control Plan of the Diffused Contamination Loads, Drainage, and Wetlands

DAEE/SSRH Participation in discussions concerning the preparation of macro-drainage plans – Issuance of water rights

SMA/CETESB Participation in discussions concerning the preparation of plans for the control of diffused pollution loads and for the protection of wetlands

River Basin Committee and Sub-Committees

Participation in discussions concerning the compatibility with the Alto Tietê Basin Plan

Analysis and evaluation of Concentrated Polluted Discharges

SMA/CETESB Participation in discussions concerning the monitoring and supervision of concentrated pollutant loads

River Basin Committee and Sub-Committees

Accompany and supervise progress; proposals and/or feasibility of actions and measures for the correction of verified problems

Strengthening the capacity of environmental agents; Referential Environmental Education Center

SMA Program preparation; execution; operation; M&E, supervision

NGOs; communities and local leaders; universities

Participation in the implementation of activities and in the appropriation of benefits; ‘social control’(watchdog function)

Capacity Building Workshops on the New Specific Law

SSRH/UGP Elaboration and execution of activities; general coordination; M&E

River Basin Committees and Sub-Committees

Event promotion; discussions concerning preparation of workshops, and participation in workshop.

Municipal Governments Participation in capacity building workshops; mobilization of local stakeholders

NGOs; communities Participation in workshops

Technical support and knowledge transfer to Municipalities

SSRH/UGP Execution of activities; M&E River Basin Committee and Sub-Committees

General follow-up

Municipal Governments (direct and indirect administration)

System operation and sustainability, instruments, technologies and knowledge transfer, M&E

Mobilization and support to Civil Society Projects

SSRH/UGP General coordination and implementation of actions NGOs, Communities, local leaders; universities

Elaboration and implementation of projects and spread of local/ regional implementation; social control; M&E

Monitoring and supervision

SMA / CETESB Monitoring of environmental and water quality; supervision SABESP Monitoring of water quality Municipal Governments Monitoring and supervision of land use

Implementation of information network to support management

SSRH/UGP Coordination of intervention planning and implementation River Basin Committee and Sub-Committees; Municipal Governments

Participation in the discussions for the conception and planning of the information network; involvement in the operation of the network

Water Resource and Urban Development Seminars; development of appropriate economic activity program

SSRH/UGP Planning and implementation coordination

River Basin Committee and Sub-Committees; educational and research entities; private initiative

Participation in seminars and evaluation of results; access to publications; involvement in discussions for the elaboration of the Program for Economic Development

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Development of Technical Instruments for Management (Hydrodynamic Models)

SABESP Planning and implementation

Educational and research entities and universities; private initiative

Developmental technological partnerships, systems development, etc; follow-up

Plan for socioeconomic development and income generation

PMSBC Preparation of plan

NGOs; communities and local leaders; trash scavengers

Participation in preparation of plan; appropriation of benefits from the plan’s implementation

Urban Upgrading

9. Some of the Program’s most substantial social impacts arise from its focus on urban improvement since it encompasses slum urbanization, urban improvement in informal settlements, involuntary removals and resettlements - all of which have direct effects on the beneficiary community and on social and urban standards of occupation. CDHU, SSRH (former SSE) and PMSBC will execute these actions, allowing for strong community involvement, including participation by local leaders and beneficiary families who are involved from the time of Program preparation up to execution and the post-works phase. The table below shows stakeholders and their participation in different projects and activities.

Table 10.6 Stakeholder Involvement in Urban Upgrading Activities

Planned Activities - Mananciais Program

Stakeholders Means of Involvement – Effect on Program Results

Slum urbanization and informal settlement projects; removal and relocation of first category families

PMSBC / SSRH (former SSE) Planning and execution of interventions, M&E

Communities and local leaders

Participation in urbanization engineering design elaboration; discussion of urbanization alternatives, removal and relocation; cadastre; ensuring sustainability through social control

Rive Basin Committee and Sub-Committees; NGOs

General follow up

SMA Environmental Licensing

Construction of resettlement housing/apartment blocks

CDHU Planning and construction of housing units/apartment blocks; continued social support during all phases; M&E

Graprohab Formally approving housing solutions

Communities and local leaders Participation in resettlement process; monitoring the process

Environmental Protection and Recovery

10. The third focal point of the Program is environmental protection and recovery. This embraces a whole range of studies, sub-projects, works of urban revival and recuperation of degraded areas, the establishment of parks, environmental rehabilitation (especially along the banks of the Guarapiranga and Billings reservoirs), the construction of in-stream treatment plants for the in situ removal of pollution loads, and tree-planting and re-vegetation. Such actions should involve - in addition to the environmental agencies responsible for environmental licensing – public actors and NGOs engaged in the planning and supervision processes, thus avoiding, for example, the recurrence of environmental degradation in the recuperated or otherwise improved areas.

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Table 10.7 Stakeholder Involvement in Environmental Protection and Recovery Activities Planned Activities - Mananciais Program

Stakeholders Means of Involvement – Effect on Program Results

Urban renewal and recovery of degraded areas; re-vegetation; tree-planting; urban parks

SSRH / SMA / PMSBC Planning and execution of interventions; M&E

SMA Environmental licensing for construction

Municipal governments Participation in planning and implementation of works, support and authorization

River Basin Committee and Sub-Committees

General follow up

NGOs, community associations and local leaders

Involvement in sub-project preparation and discussion; social control of ongoing civil works

Pollution and load removal stations (flotação and wetland) and river de-silting

SABESP Intervention elaboration, execution and operation; M&E

SMA/CETESB Environmental licensing of interventions; monitoring of environmental quality and supervision

River Basin Committee and Sub-Committees

General follow-up

Integrated WSS

11. Integrated water supply and sanitation activities include those implemented by SABESP and PMG relating to water supply systems and wastewater collection and treatment, in addition to solid waste landfill improvements (Embu-Guaçu and Alvarenga in São Bernardo do Campo) to be undertaken by SSRH and PMSBC. The following table shows stakeholder involvement in environmental sanitation.

Table 10.8 Stakeholder Involvement in Integrated WSS Activities Planned Activities - Mananciais Program

Stakeholders Means of Involvement – Effect on Program Results

Water supply and sanitation systems; improvement to water supply treatment plants and technology; system improvements

SABESP/PMG Intervention elaboration, execution and operation; M&E

SMA/CETESB Intervention environmental licensing; environmental and supervision monitoring

River Basin Committee and Sub-Committees

General follow up

Local communities Participation in sanitary and environmental sanitation social work; check functioning of implemented structures and systems

Landfill improvements in Embu-Guaçu and São Bernardo do Campo

SSRH Intervention elaboration, execution and operation; M&E

SMA/ CETESB Intervention environmental licensing, monitoring of environmental quality and supervision

Local communities, trash scavengers Appropriation of benefits from the improvement of landfills; improvement of socioeconomic conditions

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C. Expected Social Benefits Institutional Capacity Building

Facilitating the general (and especially the low-income) population’s access to the judicial system and public utility services

Community quality of life improvements Improvements of information availability and social assistance Security improvements (community policing) Greater opportunities to participate in more cultural events, reflecting improvements in

living conditions and social welfare Income generation and direct and indirect employment opportunities during construction

activities Generation of awareness of the importance of headwaters’ protection

Urban Upgrading

Improvements in accessibility, living conditions, and security; community strengthening Improvements in solid waste collection, by means of improving access to households Sanitary improvements and improved living standards Decreased contamination and water/excreta-related diseases caused by exposure to

untreated wastewater; less uncollected solid waste and reduced malfunctioning of drainage systems; reduction of health costs

Improved distribution and quality of public water supply, with greater control over losses Reduced levels of disease carrying vectors attracted by, or breeding in, accumulated

water, wastewater and solid waste Spatial and urban organization, together with increased living standards

Environmental Protection and Recovery

Modifying present uses of the banks of the reservoirs, leading to improvement in the populations’ standard of living

Income generation and direct and indirect employment opportunities during construction Improved human and environmental conditions Prevention of invasions in Category 1 and APP areas Urban and real estate valorization in the areas of intervention Socio-environmental improvements and extension of recreation areas (squares, wooded

areas, leisure areas, etc) Improved social contact and welfare, reduced rates of urban violence Greater sense of belonging to the neighborhood and to the city, enabling links to be built

between the community and the environment Possibility of creating, in an integrated manner, a system of parks, green spaces and

recreation areas in the headwaters regions Appreciation of public spaces as elements for environmental equilibrium (with the

benefits of the intervention’s activities aimed at improving sustainability conditions and at maintaining/preserving public amenities)

98

Integrated WSS Improvement in environmental conditions and water quality (avoiding contamination of

surface and ground waters) Aesthetic and air quality improvements Reduction of irregular exploitation of improved landfill waste and better maintenance and

control of physical conditions of landfills, to help control and eliminate concentrated contamination, including water and soil pollution

Reduced operational costs to control algae by using chemical products (algaecides in the reservoirs together with water pretreatment products)

Income generation and direct and indirect employment opportunities during construction activities

Improved human and environmental conditions Suitable alternatives for solid waste and sludge disposal Improvement in social life and living standards as a result of wastewater collection and

treatment Improvement in the state of public WSS services, especially in low-income areas (slums

and irregular settlements) Reduced child mortality and public medical/health service costs Reduced risk of consuming contaminated fish and a reduction in contamination and

diseases suffered by fishermen and others (children, leisure seekers, sports enthusiasts, etc) that use the reservoirs and their associated wetlands and tributaries

Attraction of investments and investors to the region and an increase in service tenders Value appreciation of urban land

D. Key lessons learned from similar interventions 12. Table 10.10 summarizes the main social improvements achieved in slum upgrading

interventions under projects and programs similar to the proposed Mananciais Program.

Table 10.9 Social improvements associated with slum upgrading interventions Before After

Losses of investments in housing, furniture, domestic appliances, personal documents, etc; losses in working and schools days (i) land/mud slides and housing collapse caused by inappropriate construction material and techniques;(ii) houses built in areas subject to frequent flooding aggravated when combined with sea tide variation; (iii) frequent fires caused by inappropriate use of gas stoves, informal power connection (due to a lack of streets, fire fighters have no access to the houses).

Losses in housing, furniture, etc, investments avoided (i) existing community investments in housing will be largely compensated by the highly subsidized mortgage financing made available by CDHU to low-income populations; (ii) risk of landslides, housing collapse, and flooding will be eliminated by the appropriate investments in infrastructure and housing units.

Health problems causing sever productivity losses Highly exposed to health problems caused specifically by: (i) contamination and other injuries caused by falling into the water streams heavily contaminated with untreated wastewater; (ii) diseases caused by rats, snakes, and other animals that proliferate in the area; (iii) water- and excreta-related diseases, specifically affecting the new born; (iv) respiratory diseases caused by inappropriate housing ventilation and exposure to a highly contaminated

Health problems severely reduced (i) avoid exposure to health problems caused by water contamination, contact with inappropriate solid waste disposal, contact with harmful animals, lack of housing with appropriate ventilation; (ii) ambulances, fire fighters trucks, and solid waste collection will have appropriate access to each household.

99

environment; (v) ambulances have no access to houses. Constrains to jobs and school opportunities (i) A lack of streets allowing easy access to households contributes to high crime rates and violence, which stigmatize the community leading potential employers to avoid hiring people who live there; (ii) Children living in slums suffer from strong discrimination in school.

Constrains to job and school opportunities avoided (i) the proposed investments will dramatically change the settlement’s access to regular urban services, inducing reduction in crime and violence by the presence of public authorities in the area through the provision of regular public services; (ii) improvements in the urban development layouts promote the inclusion of the slum in the neighborhood community.

Extremely high crime and violence rates (i) most slums can only be accessed through a labyrinth of narrow walkway networks, favoring illegal activities, as police, firefighters and ambulances have no access to the area.

Reduction in crime and violence rates (i) a better urban development layout contributes to a reduction in illegal activities by allowing the appropriate circulation of police cars through the streets, the public lighting available, and the general presence of public authorities in the area.

Precarious access to, and high costs of, urban services (i) in slums, households have no regular access to water, sanitation, drainage, telephone, streets, public lighting, etc. Water is often irregularly provided by a neighbor, who charges for this service. Electricity is accessed through neighbors creating an intricate electrical cable network causing frequent fires and damages to electrical equipment. No fixed phone service is available; almost the entire community uses pre-paid cell phones at a very high tariff.

Access to regular urban services ensured (i) water, sanitation, drainage, waste collection, streets, crèches, telephone, elementary school, recreational areas, police, firefighters, and regular ambulance services will be provided; (ii) water and electricity meters will be installed in houses, eliminating frequent disputes among neighbors over water bills; (iii) fixed phone service will be available to each household, offering much more affordable communication services than cell phones; (iii) internet services will be available through phone or cable connection.

Housing rights uncertainties (i) under existing conditions, dwellers do not have access to formal housing property rights, the living conditions in the area do not comply with regulations.

Housing titles (i) land titles in upgraded areas are progressively being addressed by municipal governments under the provision of new federal and state urban and environmental regulations.

Critically bad environmental conditions (1) slums do not have access to basic services such as sanitation, solid waste, or street cleaning services; in addition, potable water is contaminated due to the changes in pressure within the pipes, which allows inflow of contaminated water from the surrounding ground (ii) the critical environmental conditions deeply depreciate the investments in housing in the area.

Environmental improvements (i) collection and appropriate disposal of: waste water and solid waste; (ii) recreational area available; (iii) urban density reduced to appropriate levels; (v) high market value for housing investments.

Gender Issues (i) large presence of informal domestic arrangements in slums leaves women as single heads of households and is a source of social and gender vulnerability

Gender Issues (i) criteria for housing title assignment give first priority to women since experience has demonstrated that they will provide a greater source of support to dependents, such as children and elders.

13. Main social improvements accruing to resettled families in similar programs Although the

mortgage costs constitute a new financial commitment to the family, there are significant reductions in costs associated with health, risks avoided such as land slides and flooding, and public services, including: (i) better access to job opportunities with better housing location; (ii) improvements in health and education services; (iii) improvements in housing quality; (iv) significant improvements in public safety, (v) appropriate recreational and park areas; (vi) access to mail and phone services; (vii) better commercial alternatives; (viii) no significant change in neighbor relationships; (ix) improvements to resettlement apartment (x) due to the large incidence of informal arrangements between couples, the resettlement apartment title is assigned to the woman, as experience has demonstrated that women provide more reliable support to dependents, such as children and elders; and (xi) resettled families demonstrate a sense of ownership toward the new resettlement apartments

100

Annex 11: Project Preparation and Supervision

BRAZIL: INTEGRATED WATER MANAGEMENT IN METROPOLITAN SÃO PAULO

MANANCIAIS HORIZONTAL APL PROGRAM Planned Actual PCN review 12/21/2006 12/21/2006 Initial PID to PIC 12/22/2006 02/06/2007 Initial ISDS to PIC 12/22/2006 03/07/2007 Appraisal 08/1/2007 07/31/2007 Negotiations 12/17/2007 01/26/2009 Board/RVP approval 07/09/2009 Planned date of effectiveness 10/30/2009 Planned date of mid-term review 10/30/2012 Planned closing date 11/30/2015

1. Key institutions responsible for Program preparation: the state government of São Paulo; the

municipal governments of São Bernardo do Campo, and Guarulhos; the State Water Utility (SABESP) – the former undertook its preparation activities through three executing agencies: the State Secretariat for Water and Energy (which has overall responsibility for the coordination of the whole Program), the State Secretariat for Housing (through its State Company for Housing and Urban Development); and the State Secretariat for the Environment.

2. Bank staff and consultants who worked on the Program included:

Name Title Unit Oscar Alvarado Martin Gambrill

TTL/Senior Water and Sanitation Specialist Former TTL/Senior Water Engineer

LCSUW SASDU

Juliana Garrido Pereira Operations Analyst / Infrastructure Specialist LCSUW Julia Tierney Junior Professional Associate LCSUW Alexandra Panman Junior Professional Associate LCSUW Paula Pini Senior Social Development Specialist LCSUW Maria Angelica Sotomayor Senior Economist LCSUW Luis Prada Senior Procurement Specialist LCSPT Sinue Aliram Susana Amaral

Procurement Specialist Financial Management Analyst

LCSPT LCSFM

Marta Molares-Halberg Lead Counsel LEGLA Catarina Portelo Thadeu Abicalil

Senior Counsel Senior Water and Sanitation Specialist

LEGLA LCSUW

Mila Freire Senior Adviser FEU Perla Castillo Team Assistant LCSUW Karina Marcelino Team Assistant LCSSD Monica Porto Water Resources Management Specialist Consultant Alexandre Fortes Environmental Safeguards Specialist Consultant Soraya Melgaço Clarisse Dall’acqua

Resettlement Specialist Resettlement Specialist

Consultant LCSEN

Teresa Serra Peer Reviewer – Senior Adviser EAPVP Tim Campbell Peer Reviewer – Chairman, Urban Age Institute Consultant Catherine Tovey Peer Reviewer – Water and Sanitation Specialist LCSUW

Bank funds expended to date on Program preparation:

1. Bank resources: US$ 264,190.62 2. Trust funds (PHRD): US$ 812,802.88 (total amount actually spent)

101

3. Total: US$ 1,076,993.50 Estimated Approval and Supervision costs:

1. Remaining costs to approval: US$ 25,000 2. Estimated annual supervision cost: US$ 120,000

102

Annex 12: Documents in the Project File

BRAZIL: INTEGRATED WATER MANAGEMENT IN METROPOLITAN SÃO PAULO

MANANCIAIS HORIZONTAL APL PROGRAM

Environmental Assessment Report plus Annexes Project Information Document and ISDS (appraisal stage) Project Information Document and ISDS (PCN stage) Preparation Mission Aide Memoire PCN and PCN Meeting Minutes QER PAD and QER Meeting Minutes Executive Summary of the Environmental Assessment Operational Manual “Carta Consulta” Economic and Financial Evaluation Institutional Assessment Social Assessment Procurement Plan Involuntary Resettlement Report Bank Involvement in the Urban Water Sector in the State of São Paulo Mananciais Country, Sector and Program Background Mananciais Component Activities by Executing Agency and Sub-basin Mananciais Program Implementation Arrangements Diagrams GESP Project Implementation Arrangements GESP Project Technical and Financial Arrangements GESP Project Summary of Main Interventions and Environmental Impacts SABESP Project Implementation Arrangements SABESP Project Technical and Financial Arrangements SABESP Project Subcomponents Decree nº 50.667, of 03/30/2006, State of São Paulo Law nº 12.183, of 12/29/2005, State of São Paulo Decree nº 51.686, of 03/22/2007, State of São Paulo Decree nº 55.494, of 02/26/2010, as amended by Decree nº 57.048, of 06/08/2011, State of

São Paulo Decree nº 55.495, of 02/26/2010, as emended by Decree nº 57.048, of 06/08/2011, State of

São Paulo Law nº 12.233, 01/16/2006, State of São Paulo Law nº 13.579, 07/13/2009, State of São Paulo Law nº 11.445/07 – Federal

103

Annex 13: Statement of Loans and Credits

BRAZIL: INTEGRATED WATER MANAGEMENT IN METROPOLITAN SÃO PAULO MANANCIAIS HORIZONTAL APL PROGRAM

Original Amount in US$ Millions

Difference between expected and actual

disbursements

Project ID FY Purpose IBRD IDA SF GEF Cancel. Undisb. Orig. Frm. Rev’d

P112074 2012 BR Upgrading and Greening the Rio de Janeiro Urban Rail System AF

600.0 0.00 0.00 0.00 0.00 600.0 0.00 0.00

P126537 2012 BR Sergipe Water Project 70.3 0.00 0.00 0.00 0.00 70.3 0.00 0.00

P112073 2012 BR Energy and Mining Sector Strenthening Project - META

49.6 0.00 0.00 0.00 0.00 49.6 0.00 0.00

P106768 2012 BR Federal Integrated Water Sector 107.33 0.00 0.00 0.00 0.00 107.33 0.00 0.00

P101504 2011 BR Rio de Janeiro PSM/Fiscal MST 18.67 0.00 0.00 0.00 0.00 18.63 0.66 0.00

P111665 2011 BR Bolsa Familia 2nd APL 200.00 0.00 0.00 0.00 0.00 200.00 34.99 0.00

P106702 2011 BR- RJ Munic Fiscal Consolid DPL 1,045.00 0.00 0.00 0.00 0.00 500.00 -545.00 0.00

P118540 2011 BR Integr. Solid Waste & Carbon finance

50.00 0.00 0.00 0.00 0.00 50.00 0.00 0.00

P120391 2011 BR Santa Catarina Rural Competitiveness

90.00 0.00 0.00 0.00 0.00 88.64 -1.13 0.00

P095171 2011 BR-Federal Univ. Hospitals Modernization

150.00 0.00 0.00 0.00 0.00 150.00 0.26 0.00

P122391 2011 BR (MST) Bahia Health and Wtr Mgt (SWAP)

60.00 0.00 0.00 0.00 0.00 60.00 15.00 0.00

P108654 2011 BR-Rio de Janeiro Urban and Housing DPL

485.00 0.00 0.00 0.00 0.00 195.00 -290.00 0.00

P108443 2010 BR Pernambuco Sustainable Water 190.00 0.00 0.00 0.00 0.00 184.38 19.77 0.00

P099469 2010 BR SP Sust Rural Dev & Access to Markets

78.00 0.00 0.00 0.00 0.00 77.81 17.00 0.00

P106703 2010 BR (APL2) 2nd National Environmental 24.30 0.00 0.00 0.00 0.00 23.29 -0.95 0.00

P101508 2010 BR SP Water Reagua 64.50 0.00 0.00 0.00 0.00 64.33 4.33 0.00

P106663 2010 BR-RJ Sustainable Rural Development 39.50 0.00 0.00 0.00 0.00 29.83 6.32 0.00

P106390 2010 BR Sao Paulo Feeder Roads Project 493.43 0.00 0.00 0.00 0.00 29.23 -307.64 0.00

P104995 2010 BR SP METRO LINE 4 (PHASE 2) 130.00 0.00 0.00 0.00 0.00 129.68 0.00 0.00

P114204 2010 BR Municipal APL5: Santos 44.00 0.00 0.00 0.00 0.00 41.48 20.26 0.00

P116170 2010 ELETROBRAS Distribution Rehabilitation

495.00 0.00 0.00 0.00 0.00 493.76 0.00 0.00

P113540 2010 BR Sao Paulo Metro Line 5 650.40 0.00 0.00 0.00 0.00 584.77 -64.00 0.00

P111996 2010 BR AIDS-SUS 67.00 0.00 0.00 0.00 0.00 66.83 8.77 0.00

P118410 2010 BR RJ Mass Transit II 211.70 0.00 0.00 0.00 0.00 163.81 120.18 0.00

P006553 2010 BR Mato Grosso do Sul Road 300.00 0.00 0.00 0.00 0.00 92.97 -206.28 0.00

P106208 2010 BR SP APL Integrated Wtr Mgmt 104.00 0.00 0.00 0.00 0.00 96.25 51.64 0.00

P106765 2009 BR Pernambuco Educ Results& Account.

154.00 0.00 0.00 0.00 0.00 67.38 15.15 0.00

P107146 2009 BR Ceara Inclusive Growth (SWAp II) 240.00 0.00 0.00 0.00 0.00 35.20 17.76 0.00

P107843 2009 BR Acre Social Economic Inclusion Sust D

120.00 0.00 0.00 0.00 0.00 68.55 -2.81 0.00

P110614 2009 BR Fed District Multisector Manag. Proj.

130.00 0.00 0.00 0.00 0.00 114.44 75.06 0.00

P099369 2009 BR: Sergipe State Int. Proj.: Rural Pov 20.80 0.00 0.00 0.00 0.00 13.02 12.14 0.00

104

P088716 2009 BR Ceara Regional Development 46.00 0.00 0.00 0.00 0.00 43.47 1.05 0.00

P104752 2009 BR Health Network Formation & Quality Im

235.00 0.00 0.00 0.00 0.00 227.41 75.23 0.00

P094315 2009 BR Paraiba 2nd Rural Pov Reduction 20.90 0.00 0.00 0.00 0.00 18.47 12.29 0.70

P094199 2009 BR Municipal APL4: Sao Luis 35.64 0.00 0.00 0.00 0.00 30.86 -3.03 0.00

P089929 2008 BR-(APL) RS (Pelotas) Integr. Mun. Dev.

54.38 0.00 0.00 0.00 0.00 29.36 16.40 0.00

P089013 2008 BR RGN State Integrated Water Res Mgmt

35.90 0.00 0.00 0.00 0.00 20.55 20.04 0.00

P088966 2008 BR Municipal APL: Recife 32.76 0.00 0.00 0.00 0.00 28.73 23.68 -2.06

P083997 2008 BR Municipal APL3: Teresina 31.13 0.00 0.00 0.00 0.00 24.67 15.12 0.00

P095626 2008 BR (MST) AltoSolimoes Bsc Srvcs and Sust

24.25 0.00 0.00 0.00 0.00 9.55 5.72 0.00

P106038 2008 BR (APL2)Family Health Extension 2nd APL

83.45 0.00 0.00 0.00 0.00 56.33 51.74 0.00

P101324 2008 BR Sao Paulo Trains and Signalling 662.91 0.00 0.00 0.00 0.00 157.75 45.73 0.00

P082651 2008 BR-Second Minas Gerais Dev't PArtnership

1,437.00 0.00 0.00 0.00 0.00 102.60 -354.80 96.28

P089011 2007 BR APL 1 Para Integrated Rural Dev 60.00 0.00 0.00 0.00 0.00 40.08 40.08 0.00

P095460 2007 BR Municipal APL1: Uberaba 17.27 0.00 0.00 0.00 0.00 2.44 2.49 0.00

P093787 2007 BR-Bahia Integr.Hway Mngmt. 100.00 0.00 0.00 0.00 0.00 5.26 -8.52 0.00

P092990 2006 BR Bahia State Integ Proj Rur Pov 84.35 0.00 0.00 0.00 0.00 20.93 -9.00 0.00

P081436 2006 BR - Road Transport Project 501.25 0.00 0.00 0.00 59.95 44.09 104.04 0.00

P089440 2006 BR-Bahia Poor Urban Areas Integrated Dev

49.30 0.00 0.00 0.00 0.00 24.18 24.18 0.00

P006449 2006 BR-Brasilia Environmentally Sustainable

57.64 0.00 0.00 0.00 0.00 12.76 12.76 1.62

Total: 9,59,996.32 0.00 0.00 0.00 59.95 5,411.20 - 977.62

133.30

BRAZIL STATEMENT OF IFC’s

Held and Disbursed Portfolio In Millions of US Dollars

Committed Disbursed

IFC IFC

FY Approval Company Loan Equity Quasi Partic. Loan Equity Quasi Partic.

Total portfolio: 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00

Approvals Pending Commitment

FY Approval Company Loan Equity Quasi Partic.

Total pending commitment: 0.00 0.00 0.00 0.00

105

Annex 14: Country at a Glance

BRAZIL: INTEGRATED WATER MANAGEMENT IN METROPOLITAN SÃO PAULO MANANCIAIS HORIZONTAL APL PROGRAM

Lat in Upper-P OVER T Y and SOC IA L A merica middle-

B razil & C arib. inco me2009Population, mid-year (millions) 193.7 573 1,002GNI per capita (Atlas method, US$) 8,070 6,993 7,495GNI (Atlas method, US$ billions) 1,564.2 4,003 7,508

A verage annual gro wth, 2003-09

Population (%) 1.1 1.2 0.9Labor force (%) 2.2 2.2 1.7

M o st recent est imate ( latest year available, 2003-09)

Poverty (% of population below national poverty line) 22 .. ..Urban population (% of to tal population) 86 79 75Life expectancy at birth (years) 72 73 71Infant mortality (per 1,000 live births) 17 19 19Child malnutrition (% of children under 5) 2 5 ..Access to an improved water source (% of population) 97 93 95Literacy (% of population age 15+) 90 91 93Gross primary enro llment (% of school-age population) 127 116 111 M ale 132 118 111 Female 123 114 110

KEY EC ON OM IC R A T IOS and LON G-T ER M T R EN D S

1989 1999 2008 2009

GDP (US$ billions) 425.6 586.9 1,652.6 1,594.5

Gross capital formation/GDP 26.9 16.4 20.7 16.5Exports o f goods and services/GDP 8.9 9.4 13.7 11.1Gross domestic savings/GDP 30.4 15.0 20.9 16.5Gross national savings/GDP 35.8 12.1 18.7 14.7

Current account balance/GDP 0.2 -4.3 -1.7 -1.5Interest payments/GDP 1.2 3.0 1.0 0.9Total debt/GDP 26.9 41.6 15.9 17.4Total debt service/exports 36.3 103.3 25.5 17.6Present value of debt/GDP .. .. .. 16.3Present value of debt/exports .. .. .. 103.7

1989-99 1999-09 2008 2009 2009-13(average annual growth)GDP 2.4 3.5 5.2 -0.6 5.9GDP per capita 0.9 2.2 4.1 -1.5 ..Exports o f goods and services 5.5 7.6 0.5 -10.2 11.7

Brazil

Upper-middle-income group

Development diamond*

Life expectancy

Access to improved water source

GNIpercapita

Grossprimary

enrollment

Brazil

Upper-middle-income group

Economic ratios*

Trade

Indebtedness

Domesticsavings

Capital formation

106

ST R UC T UR E o f the EC ON OM Y

1989 1999 2008 2009(% of GDP)Agriculture 8.5 5.5 5.9 6.1Industry 42.7 25.9 27.9 25.4 M anufacturing 29.5 16.1 16.6 15.8Services 48.8 68.6 66.2 68.5

Household final consumption expenditure 54.1 64.7 58.9 61.7General gov't final consumption expenditure 15.5 20.3 20.2 21.8Imports o f goods and services 5.5 10.8 13.5 11.2

1989-99 1999-09 2008 2009(average annual growth)Agriculture 3.0 3.8 6.1 -4.6Industry 1.8 2.8 4.1 -6.7 M anufacturing 2.1 2.7 3.0 -8.2Services 3.4 3.9 4.9 2.1

Household final consumption expenditure 4.0 3.5 6.8 0.2General gov't final consumption expenditure 0.4 3.1 3.2 3.9Gross capital formation 2.8 3.7 13.6 -10.3Imports o f goods and services 13.1 6.8 15.4 -11.5

Note: 2009 data are preliminary estimates.

This table was produced from the Development Economics LDB database.

* The diamonds show four key indicators in the country (in bo ld) compared with its income-group average. If data are missing, the diamond will be incomplete.

-15-10-505

101520

04 05 06 07 08 09

GCF GDP

Growth of capital and GDP (%)

-15-10-505

10152025

04 05 06 07 08 09

Exports Imports

Growth of exports and imports (%)

P R IC ES and GOVER N M EN T F IN A N C E1989 1999 2008 2009

D o mestic prices(% change)Consumer prices 1,972.9 8.9 7.1 5.9Implicit GDP deflator 1,209.1 8.5 8.3 5.7

Go vernment f inance(% of GDP, includes current grants)Current revenue .. 19.8 23.6 23.2Current budget balance .. 2.7 3.9 2.9Overall surplus/deficit 208,202.5 -0.7 -0.4 -3.4

T R A D E1989 1999 2008 2009

(US$ millions)Total exports (fob) 32,975 47,551 184,216 208,178 Coffee 2,447 2,746 20,183 20,615 Soybeans 3,647 1,593 13,462 13,902 M anufactures 17,575 27,330 88,483 108,534Total imports (cif) 18,263 49,210 155,475 172,782 Food 1,249 1,655 2,582 2,761 Fuel and energy 3,753 4,258 24,978 26,002 Capital goods 4,873 13,577 32,190 37,543

Export price index (2000=100) 86 93 128 124Import price index (2000=100) 55 96 100 99Terms of trade (2000=100) 157 97 127 125

0

50,000

100,000

150,000

200,000

250,000

03 04 05 06 07 08 09

Exports Imports

Export and import levels (US$ mill.)

0

5

10

15

04 05 06 07 08 09

GDP deflator CPI

Inflation (%)

107

B A LA N C E o f P A YM EN T S1989 1999 2008 2009

(US$ millions)Exports o f goods and services 36,394 55,205 228,393 180,723Imports o f goods and services 21,486 63,382 220,247 174,679Resource balance 14,908 -8,177 8,146 6,044

Net income -13,265 -18,848 -40,562 -33,684Net current transfers 249 1,689 4,224 3,338

Current account balance 1,032 -25,335 -28,192 -24,302

Financing items (net) -146 17,513 31,161 70,953Changes in net reserves -886 7,822 -2,969 -46,651

M emo :Reserves including go ld (US$ millions) 9,679 36,342 216,881 273,123Conversion rate (DEC, local/US$) 1.00E-6 1.8 1.8 2.0

EXT ER N A L D EB T and R ESOUR C E F LOWS1989 1999 2008 2009

(US$ millions)Total debt outstanding and disbursed 114,356 244,108 262,139 276,932 IBRD 8,311 6,822 10,671 10,065 IDA 0 0 0 0

Total debt service 14,117 71,073 56,460 44,317 IBRD 1,475 1,380 1,310 2,231 IDA 0 0 0 0

Composition of net resource flows Official grants 44 65 211 196 Official creditors 235 380 1,962 3,438 Private creditors -3,710 -11,130 27,250 23,842 Foreign direct investment (net inflows) 1,131 28,576 45,058 25,949 Portfo lio equity (net inflows) -57 2,572 -7,565 37,071

World Bank program Commitments 933 1,863 3,082 1,861 Disbursements 819 1,533 1,726 1,274 Principal repayments 871 952 812 1,872 Net flows -52 580 914 -598 Interest payments 604 428 498 359 Net transfers -656 152 416 -957

Note: This table was produced from the Development Economics LDB database. 2/25/11

-2

-1

0

1

2

03 04 05 06 07 08 09

Current account balance to GDP (%)

A: 10,065 D:

14,688

E: 7,632

F: 204,758

G: 39,789

A - IBRDB - IDA C - IMF

D - Other multilateralE - BilateralF - PrivateG - Short-term

Composition of 2009 debt (US$ mill.)

108

Annex 15: Maps

BRAZIL: INTEGRATED WATER MANAGEMENT IN METROPOLITAN SÃO PAULO

MANANCIAIS HORIZONTAL APL PROGRAM

109

Annex 16: Municipality of Sao Bernardo do Campo Project

BRAZIL:

INTEGRATED WATER MANAGEMENT IN METROPOLITAN SÃO PAULO

MUNICIPALITY OF SAO BERNARDO DO CAMPO (PMSBC) PROJECT

Program Financing Data [X] Loan [ ] Credit [ ] Grant [ ] Guarantee [ ] Other: For Loans/Credits/Others: Total Bank financing (US$M): 20.82 Proposed terms: US Dollar denominated Commitment linked IBRD Flexible Loan (IFL) with a Variable spread. All the conversion options are selected, with the Premia for Interest Rate Caps and Collars to be paid from the Borrowers’ own resources.

Financing Plan (US$m) Source Local Foreign Total

Borrower 20.58 0.00 20.58 International Bank for Reconstruction and Development

20.77 0.05 20.82

Project Total: 41.35 0.05 41.40 Borrower: Municipality of São Bernardo do Campo Prefeitura do Municipio de Sdo Bernardo do Campo Praqa Samuel Sabatini, 50 - Centro CEP: 09750-700 - SAo Bernardo do Campo - Sio Paulo Brazil Facsimile: (55-11) 4122-0123 Responsible Agency: Municipality of São Bernardo do Campo

Estimated disbursements (Bank FY/US$m)FY 12 13 14 15 16 Annual 0.86 7.29 6.88 4.35 1.44 Cumulative 0.86 8.15 15.03 19.38 20.82 Project implementation period: Start June 30, 2011 End: July 31, 2015 Expected effectiveness date: May 1, 2012 Expected closing date: September 30, 2015

Does the program depart from the CAS in content or other significant respects? Ref. PAD I.C

[ ]Yes [X] No

Does the program require any exceptions from Bank policies? Ref. PAD IV.G Have these been approved by Bank management? Is approval for any policy exception sought from the Board?

[ ]Yes [X] No [ ]Yes [X] NA [ ]Yes [X] NA

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Does the program include any critical risks rated “substantial” or “high”? Ref. PAD III.E

[ ]Yes [X] No

Does the program meet the Regional criteria for readiness for implementation? Ref. PAD IV.G

[X]Yes [ ] No

Project development objective Ref. PAD II.C; Technical Annex 3

The objectives of the Project are: (a) to protect and maintain the quality and reliability of São Paulo Metropolitan Region’s water resources and potable water sources; and (b) to improve the quality of life of the poor populations residing in key targeted urban river basins in São Paulo Metropolitan Region. Project description [one-sentence summary of each component] Ref. PAD II.D; Technical Annex 4 The PMSBC Project has three components (grouped as two sub-programs), which correspond to the first, second and third components of the overall Program, while there are no activities corresponding to the fourth Program component.

Sub-Program A - Institutional Strengthening and Management (Component 1); Sub-Program B - Integrated Urban Upgrading, Land Regularization and

Environmental Recovery of Selected Irregular and Precarious Settlements (Components 2 and 3).

Sub-Program A: Institutional Strengthening and Management Component 1 - Institutional Capacity Building aims to strengthen PMSBC’s planning and programming capacity to preserve and restore headwater areas of those parts of the Sub-basin within its territory. It comprises: (i) improving the municipality’s integrated land-use and water resources management and coordination, (ii) carrying out an environmental education program and project related social outreach activities, and (iii) provision of technical assistance for project management, monitoring, evaluation and dissemination of the project Sub-Program B: Urban Upgrading, Land Regularization and Environmental Recovery of

Selected Irregular and Precarious Settlements. Component 2 – Urban Upgrading aims to improve quality of life by improving the standards of urban occupation and reducing mud/landslide and flooding risks through interventions in selected irregular and precarious settlements43, improving access to basic services in selected areas through: (i) urban upgrading in selected irregular and precarious settlements ; (ii) carrying out of rehabilitation activities of high-risk and degraded urban areas; (iii) carrying out of the involuntary resettlement of families affected by urban upgrading interventions or living in the high risk or degraded areas referred above; (iv) carrying out of land regularization processes in the selected irregular and precarious settlements; (v) establishment of an Ecology and

43 Defined as the neighborhoods of Areião, Vila dos Estudantes, Sabesp and Monte Sião.

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Citizenship center in the area; and (vi) preparation and implementation of a plan for social work and community participation to support project and Program activities. Component 3 - Environmental Protection and Recovery aims to protect the natural resources and environmentally sensitive areas – especially the headwaters areas – of the intervention area of the Billings sub-basin located in the municipality of São Bernardo do Campo. It comprises: (i) preparation and implementation of tree-planting programs in selected irregular and precarious settlements; and (ii) carrying out of urbanization of public areas with green and leisure spaces for common use in the selected irregular and precarious settlements.

Which safeguard policies are triggered, if any? Ref. PAD IV.F, Technical Annex 10 The Project has received a World Bank Environmental Category A rating and triggers the following safeguards: OP 4.01 (Environmental Assessment); OP 4.04 (Natural Habitats); OP 11.03 (Physical Cultural Resources); and OP 4.12 (Involuntary Resettlement).

Safeguard Policies Triggered by the Project Yes No

Environmental Assessment (OP/BP 4.01) [X] [ ] Natural Habitats (OP/BP 4.04) [X] [ ] Pest Management (OP 4.09) [ ] [X] Physical Cultural Resources (OP/BP 4.11.) [X] [ ] Involuntary Resettlement (OP/BP 4.12) [X] [ ] Indigenous Peoples (OP/BP 4.10) [ ] [X] Forests (OP/BP 4.36) [ ] [X] Safety of Dams (OP/BP 4.37) [ ] [X] Projects in Disputed Areas (OP/BP 7.60) [ ] [X] Projects on International Waterways (OP/BP 7.50) [ ] [X]

Significant, non-standard conditions, if any, for: Ref. PAD III.F Board presentation: None Loan/credit effectiveness:

The Loan has been validly registered by the Guarantor’s Central Bank. Covenants applicable to program implementation: Dated covenants

UGL fully staffed up to two months after project effectiveness Maintenance of the UGL with staff and capacity satisfactory to the Bank throughout

the implementation period of the corresponding project; Until completion of the Project, maintenance of a representative in the CDC with

power and responsibility set forth in the Operations Manual Other Covenants

The Borrower shall comply with the “Implementation Agreement” with the Program Executing Agencies. Except as the Bank shall otherwise agree, the Borrower shall

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not amend, assign, abrogate, waive, terminate or fail to enforce the Implementation Agreement or any of its provisions.

Condition of disbursement: None

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Municipality of São Bernardo do Campo Project

BR - INTEGRATED WATER MANAGEMENT IN METROPOLITAN SÃO PAULO PMSBC PROJECT

1. STRATEGIC CONTEXT AND RATIONALE

Note: This section is covered in more detail in the main body and in Annex 1 of the Mananciais Horizontal APL Program PAD. 1. São Paulo’s water challenges. Among the pressing problems facing the Metropolitan region of Sao Paulo (Região Metropolitana de São Paulo, MRSP), the region’s water supply and demand balance is a critical issue for the city’s competitiveness and economic growth, and its social and environmental sustainability. The MRSP, where 52% of the State population resides, has an extremely low per capita water availability, which is comparable to that prevailing in the driest areas of the Brazilian Northeast. Half of the city’s potable supply is imported from neighboring river systems, which is contentious given the demands of other conurbations vying for the same water. The remainder comes from headwater-reservoir systems (‘mananciais’) within MRSP itself. The Guarapiranga and Billings reservoirs make crucial contributions, together providing potable water for some 25 percent of MRSP’s population (or some 4.8 million people). Recent forecasts for the metropolitan region indicate that by 2015 there will be a serious risk of demand outstripping supply– with such projections assuming that MRSP’s currently operational mananciais (Guarapiranga, Billings and other systems) will remain fully utilized or further expanded. Should Guarapiranga and Billings be lost as raw water bodies for the city supply, the next closest sources to replace them are very far away and could only be brought to MRSP at multi-billion Real costs. 2. The land-use/environmental nexus. Some 2 million people reside in the Guarapiranga and Billings river basins – the vast majority of whom are poor, having illegally occupied these areas given their proximity to the city center. The industrial and commercial areas along the banks of the River Pinheiros (today the city’s leading business and economic development region) have long been a magnet for job seekers. This market of employment and opportunity is strategically close to the informal settlements of Guarapiranga and Billings, which formed over time in response to the housing needs of large segments of the population. These informal, slum settlements cause direct pollution of the reservoirs through wastewater and garbage discharge, storm run-off and silting, thus threatening their future as water bodies for potable supplies and other uses. To tackle this problem, action is necessary to bring together key local urban upgrading interventions with metropolitan-wide initiatives in wastewater collection and treatment, and drainage and solid waste management, all within the context of the urban river basin. The state water utility, SABESP, is the major actor for water supply, and wastewater collection and treatment. The 1988 Constitution and the 2001 City Statute confer upon municipal governments the responsibility for land use planning, including the elaboration of urban master plans and the control of land zoning and development. In addition they are locally responsible for drainage and solid waste management. Coordinated vertical and horizontal action between the state and municipal governments to safeguard and capitalize upon the city’s critical water

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resources is one of MRSP’s main development challenges and a priority of the State Government and the municipal governments of the region. 3. The municipality of São Bernardo do Campo is wholly located in the Metropolitan Region of São Paulo, in which 746,718 inhabitants occupy an area of approximately 407 km2(2010 IBGE Census). Many of these residents live in areas with minimal or no infrastructure, usually in precarious or irregular settlements. The Billings Headwater Protection Area accounts for just over 52 percent or 210 km2 of the municipality’s total area. The reservoir and protection area have slowed the process of urbanization in the direction of Serra do Mar State Park, reducing the municipal area of urban land use by 1/3 of its size. The occupation of precarious or irregular settlements is generally incompatible with the maintenance and preservation of the environmental and water quality of the Billings Reservoir. 4. The Billings Reservoir was built between 1925 and 1933 with the aim to produce electricity that would then be fed to the Henry Borden plant in Cubatão. Since the late 1950’s, the reservoir has served as a public supply of energy for the entire ABC region. It wasn’t until the 1970’s, with the growing power of the environmental movement that state laws 898/75 and 1.172/76 established parameters for the use, occupation and protection of the areas surrounding the Reservoir. It’s worth noting that these laws led to State centralized management of the headwaters, giving the central level command and control over these areas. 5. The MRSP headwater protection areas suffered a period of accelerated irregular settlements during the 1980’s and 1990’s due to the lack of adequate public policies, which has presented an enormous challenge to the current government. Currently the MRSP water supply is a critical issue, and the region is already importing water from other watersheds. The government is taking urgent measures to reverse this trend. One step taken was the State Law 9.866/97 which created guidelines and standards to protect and restore not only the headwater watersheds of the MRSP but of the entire State of São Paulo. Another important aspect is the proposed management system which includes the participation of the State, municipalities and civil society. Law 9866/97 does not, however, define which areas are considered of interest to the public water supply (Areas of Watershed Protection and Recovery (Areas de Proteção e Recuperação dos Mananciais, or APRMs). 6. In 2009, State Law 13.579 was enacted, which defined the Billings Headwater Protection Area. This law provides guidelines for the use and occupation of the watershed and provides planning tools and management capacity to intervene and redirect existing occupation. In addition to this, the municipality of São Bernardo do Campo has changed and adapted its Master Plan and land use laws, to conform with the 13579/09 standard in order to effectively manage this very important piece of land. 7. Mapping the Precarious and/or Irregular Housing in the Municipality of São Bernardo do Campo. In 2009/2010 the municipal government determined that organizing information to map out the precarious and irregular settlements was within its social interest. The government identified 261 centers which contained more than 82,000 households, representing approximately 30% of the total households in the municipality. In the Billings Headwater area, 151 precarious and/or irregular settlements were identified (around 60% of the existing

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precarious and irregular settlements in the municipality), of which 68 are favelas and 82 are irregular land subdivisions. More than 40,000 families live in these settlements. These settlements are recorded as Zones of Social Interest (Zonas Especiais de Interesse Social ZEIS) in the new Master Plan, are consistent with the definitions in the Specific Act of Billings (State Law 13.579) and are referenced in the Environmental Recovery Area (Área de Recuperação Ambiental, or ARA 1). This study was the key baseline for the preparation of the Local Social Interest Housing Plan (Plano Local de Habitação de Interesse Social, or PLHIS) for the municipality. This Plan is the main instrument for planning medium and long term actions for the housing sector in the municipality. 8. The mapping exercise has identified five typologies of urban-housing problems in precarious settlements. The areas of intervention in this Project are defined as typology 4 (precarious irregular settlements, that can be consolidated and that lacks all infrastructure), and the solution requires complex and high cost interventions and a great number of families to be resettled. 9. A serious situation in the municipality is that of the Montanhão neighborhood (on the right side of the Rodovia Anchieta road), located in the APRM-Billings, where uncontrolled slums and illegal settlements (particularly the nuclei of Areião/SABESP/Vila dos Estudantes and Monte Sião neighborhoods with around 3,000 families) are encroaching in the direction of the SABESP potable raw water intake on the Rio Grande tributary of the reservoir, causing a variety of negative environmental impacts. In addition, these areas present high risk of land slides (including past experiences of people dying); high risk of flooding; and a need to restrict further irregular occupation close to the water reservoir and SABESP’s intake. 10. Although local government urban planning rules and laws for protecting the headwaters formally govern these environmentally fragile catchment areas, the fact is that the pace and illegality of the occupation process in recent years has overwhelmed the capacity of the state and municipal governments to respond by controlling, supervising and monitoring the situation. It is now clear to the municipal government that there is an urgent need for a major coordinated intervention with the state government and with other key stakeholders to mitigate this problematic situation. 11. The water supply and sanitation services in São Bernardo do Campo are today provided by the state water utility, SABESP. Water supply coverage in the municipality is at 98 percent and wastewater collection at nearly 86 percent. The index of wastewater treatment is about 59 percent. SABESP is currently implementing a waste water main colletion pipeline close to the project area which will benefit the project.

2. PROGRAM DESCRIPTION

Lending instrument 12. The proposed Program will be implemented as a series of projects and their corresponding loans under a Horizontal APL, over a six-year implementation period. The participants under the APL are GESP, the State Water Utility (SABESP), and the municipal governments of São Bernardo do Campo (PMSBC) and Guarulhos (PMG), under four individual

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Specific Investment Loans. The APL Program represents a whole that is greater than the sum of its parts – the cumulative impacts of the Program interventions will be more than the individual impact of each loan. Nevertheless, each eligible borrower can commence its interventions without having to wait for the other loans to be initiated. Given delays in approving individual loan packages, all four borrowers were not given simultaneous clearance to negotiate. The Horizontal APL structure is designed to allow subsequent loans to be presented to the Bank once they have been given the requisite clearance to negotiate. 13. The GESP project, which is designed to provide for the coordination of all other Program activities, and SABESP’s project, which represents the largest loan and the Program’s major driver, are part of the package approved with the APL Program PAD (the ‘Program PAD’) by the Board on July 9, 2009; became effective on December 21, 2010 and March 24, 2010, respectively. The PMSBC project is being presented now as Annex 16 of the Program PAD. 14. The eligibility criteria used to identify those agencies and municipal governments that can participate in the Horizontal APL as borrowers or co-executing agencies are the following: (i) They are located in, or operate in, MRSP headwater (manancial) catchment basins; (ii) They contain critical areas that contribute to the pollution of the headwaters, and/or their activities are crucial to the control of pollution in the headwaters or to the sustainable operation of the headwater reservoirs, and/or their water supply systems present large non-revenue water; (iii) They possess sufficient debt capacity to borrow under the APL; (iv) In the case of municipalities, they have a per capita investment capacity of at least R$ 40 (including constitutional transfers); (v) They have financial management and procurement capacity deemed acceptable to the Bank; and (vi) subsequent loan agreements are negotiated prior to a term of 24 months after the signature of the first loan agreement under the Program (October 28, 2009). 15. Although the Program is more than the sum of its parts, Program preparation analyses were designed to demonstrate that each of the four Program components is individually viable economically, financially, technically and socially, even if one of the projects proceeds without the rest. The economic and financial (and related) analyses were designed specifically with this ‘project autonomy’ in mind: three types of analyses were undertaken – for the urban upgrading activities alone, for the Water Supply and Sanitation (WSS) activities alone, and for the overall opportunity cost of losing the mananciais as sources of potable water for the city. The individual groups of activities were found to be economically viable in and of themselves. The overall opportunity cost was also economically viable but was not used to justify the Program investments given that all of the borrowers and the co-executing agency (PMSP) may not realize their investments – at all or simultaneously. 3. DETAILED PROJECT DESCRIPTION

16. The Mananciais Horizontal APL operation is designed to respond to the land-use, water resources, environmental and social challenges described in Annex 1. The APL is part of a broader program of interventions by MRSP’s state and municipal governments based, inter alia, on the priorities identified in the Alto Tiete river basin plan, on the 1998 Metropolitan Plan for Integrated Development for Greater São Paulo, on SABESP’s water supply master plan and wastewater management master plan – both for the metropolitan region – and on the macro-

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drainage master plan for the Alto Tietê basin. This overarching program – Mananciais Metropolitan Program – encompasses other bilateral- and federal-financed programs. The proposed Bank-financed Mananciais APL is a key piece of the governments’ Mananciais Metropolitan Program. 17. The overall objectives of the APL Program are to: (i) protect and maintain the quality and reliability of MRSP’s water resources and potable water sources; (ii) improve the quality of life of the poor populations residing in key targeted urban river basins in MRSP; and (iii) improve the institutional capacity, metropolitan management and coordination in MRSP in water resources management, water pollution control, land-use policy and basic service provision. 18. The PMSBC Project development objectives (PDO) emphasize and contribute to the first two Program PDOs, namely: (i) To protect and maintain the quality and reliability of MRSP’s water resources and potable water sources; and (ii) To improve the quality of life of the poor populations residing in key targeted urban river basins in MRSP. The PDOs for the PMSBC will be measured using indicators presented in Section 4 of this Annex. 19. The PMSBC project has three components, namely: (i) Institutional Capacity Building, (ii) Urban Upgrading, and (iii) Environmental protection and recovery, that correspond to the first, second and third components of the overall Mananciais Horizontal APL Program. There are no activities corresponding to the fourth Program component

Table 3.1 –Resource allocated to PMSBC

Borrower

Total Counterpart IBRD

(US$ M)

% of the total APL Program

(US$ M)

(US$ M)

PMSBC

41.40

17.4

20.58

20.82

Table 3.2 - Overall project activities to be implemented by PMSBC

Component Values (US$ million)

Bank Financing (US$ million)

1 - Institutional Capacity Building 5.74 5.70

2 – Urban Upgrading 32.68 13.80

3 - Environmental Protection and Recovery 2.94 1.27

TOTAL + (Front end fee of US$ 0.05 million) 41.40 20.82

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20. The PMSBC Project was grouped in the following two sub-programs encompassing the original Program:

a. Sub-Program 1 – Institutional Strengthening and Management (Component 1); b. Sub-Program 2 – Integrated Urban Upgrading, Land Regularization and

Environmental Recovery of Precarious Settlements, grouping Components 2 and 3, and focusing all activities on selected irregular and precarious settlements (Areião/SABESP/Vila dos Estudantes and Monte Sião neighborhoods).

Sub-Program 1: Institutional Strengthening and Management 21. Component 1 - Institutional Capacity Building (US$ 5.74 million total, US$ 5.70 million loan). This component aims at strengthening the municipality’s planning and programming capacity to preserve and restore headwater areas of those parts of the sub-basin within PMSBC territory. This component would benefit the estimated 213,000 people that live in the São Bernardo do Campo area of headwater protection. 22. The component will support the following activities: (i) Improved integrated land-use and water resources management and coordination, (ii) Environmental education program and social outreach; and (iii) Program management, monitoring, evaluation and dissemination. 23. The detailed description of activities is specified below:

(i) Improved Integrated Land-use and Water Resources Management and Coordination

This includes the preparation of the PMSBC’s Environmental Development and Protection Plan (Plano de Desenvolvimento e Proteção Ambiental, or PDPA) including the carrying out of field surveys, studies and capacity building events, and the development of information systems and monitoring indicators, all designed to assist in the formulation and implementation of such plan. The PDPA establishes baseline data for the area using field research and mapping tools. The PDPA will identify the ecological, social and other land use areas in São Bernardo do Campo to influence municipal sector policies, such as housing, sanitation, natural resource management, and transportation and advance instruments that consider the protection of urban, environmental and water resources. The PDPA will include, inter alia:

a. Survey of information and generation of database on the APRM-B in São Bernardo do Campo which includes: (i) field surveys that identify the current status of hydrography, vegetation, fauna and areas of permanent preservation, (ii) a survey of current land use to relate the various types of existing activities and identifies environmental impacts related to these activities, (iii) a survey and characterization of natural areas.

b. Preparation of Urban-Environmental Diagnostics on the APRM-B in São Bernardo do Campo which includes: (i) an environmental assessment of all the data collected and characterizing the current environmental quality of the watershed, (ii) establishment of environmental zones to assess the existing potential and constraints in the watershed and aiming toward the sustainable natural resource use and ecosystems balance. Environmental zoning will take into account the impacts of anthropogenic activities and the carrying capacity

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of the environment, (iii) development of an information system that correlates land use, quality and quantity of water system in order to track and monitor targets stipulated by Law 13.579/09.

c. Development of Environmental Protection and Development Plan of APRM Billing in São Bernardo do Campo which includes: (i) guidelines for sustainable land use programs in APRM-Billings, in particular, activities compatible with environmental protection and recovery, (ii) guidelines for sectoral policies relating to housing, transportation, natural resource management, environmental sanitation and infrastructure in order to promote their integration and improve the quality of protected water resources, (iii) a proposal to restore existing natural areas and improve the environmental quality in the basin, (iv) establishment of procedures that assess the Environmental Restoration Areas - ARA and respective Restoration Programs using defined socio-environmental goals, (v) establishment of short, medium and long term goals to attain environmental quality standards.

d. Identify indicators that assess the environmental quality of the watershed and monitor actions proposed in the PDPA.

e. Develop capacity building events to train management teams involved in implementing PDPA-site and present and discuss results of the PDPA with the local population.

(ii) Environmental Education and Social Outreach This includes carrying out of an assessment of the current situation of environmental education in the Borrower’s territory; (ii) development of an environmental education program and materials with skills training for community leaders and other stakeholders; and (iii) implementation of such program. The development of a municipal Environmental Education Program within São Bernardo do Campo’s Environmental Policy will map the current state of environmental education, coordinates the actions of various social and institutional players involved in the city’s environmental agenda, defines lines of performance and the projects that comprise them, creates monitoring and evaluation indicators and performance methodologies in communities situated in the APRM-B. The Environmental Education Program will include the following:

a. Carrying out of an assessment of the current situation of environmental education in São Bernardo do Campo including: (i) mapping social actors (governmental and nongovernmental) that play a role in environmental education through a survey of social and environmental objectives, indentifying organizational structures and their complexity, identifying the social basis for displacement, the main projects being developed, and the perception of stakeholders regarding environmental issues in the Municipality; (ii) mapping institutional experiences in Environmental Education developed or under development in the Municipality.

b. Discussion and consolidation of shared diagnoses, guidelines and strategies for the Municipal Environmental Education Program including: (i) organization of technical offices with other government agencies to consolidate mapping knowledge and integrated strategies; (ii) organization of knowledge consolidation process in item (a) and presentation of the

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expectations and process for developing the Municipal Environmental Education Program; (iii) implementation of the Municipal Environmental Education Forum, defining strategies and actions for the Municipal Environmental Education Program between the Government and society, (iv) establishment of a monitoring process committee to develop the Environmental Education Program.

c. Development of the Environmental Education program including: (i) definition of principles, guidelines, objectives and strategies that guide the Program; (ii) definition of performance lines and strategies used to implement projects. The following performance lines should be considered: environmental education through formal education, education in the environmental management process, environmental education in local communities in the Billings watershed, environmental education in local communities in the Tamanduatei watershed; (iii) development of short, medium and long term goals; (iv) definition of priority projects to be developed and implemented; (v) definition of indicators that support the evaluation of expected results of the Environmental Education Program.

d. Assess the Environmental Education taking place in local communities in the Billings Watershed by: (i) defining and detailing actions taking place in housing settlements including: advocacy and public awareness, strategies and tools to build environmental awareness and directed toward recovering and conserving natural resources, instruments and tools to identify existing socio-environmental problems, and instruments and tools to development socio-environmental indicators; (ii) applying the methodology set out in the Areião / SABESP / Vila dos Estudantes / Monte Sião, settlements included in the Component 2 of the Project;

e. Capacity building of teams involved in Environmental Education Program management through the execution of the Environmental Education Program.

(iii) Project Management, Monitoring, Evaluation and Dissemination This includes the provision of technical assistance as needed for Project management, monitoring, evaluation and dissemination. . This will be carried out through provision of technical assistance to support the project’s implementation unit on project implementation activities including, among others procurement, financial management, environmental, social and dissemination activities. This also includes auditing activities and project ex-post monitoring evaluations.

Sub-Program 2: Urban Upgrading, Land Regularization and Environmental Recovery of Selected Irregular and Precarious Settlements.

24. Component 2 – Urban Upgrading (US$ 32.68 million total, US$ 13.80 million loan). This component will carry out urban upgrading in selected irregular and precarious settlements. The main objectives of this component include: (i) Improvement of the urban occupancy standards and landslide risk reduction through interventions in selected irregular and precarious settlements ; (ii) Improvement of quality of life for the resident population (i.e. poverty

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reduction); and (iii) Introducing order to selected irregular and precarious settlements by promoting land uses compatible with urban and environmental requirements. The specific objectives are as follows:

Ensure the right to adequate and regular housing to resident families in precarious settlements;

Reorganization of the urban space in the most critical areas (from a social, economic and environmental standpoint);

Provision of infrastructure and improved accessibility, housing conditions and social development in the community neighborhoods;

Housing improvements, with the removal and/or resettlement of families in risk situations (geotechnical and environmental risks, etc.) and/or occupants of areas necessary for urban development;

Reduction or elimination of environmental risk situations; Social work aimed toward public participation, environmental education and social

inclusion, including activities of awareness.

25. This component will support the following activities:

f. Urbanization of selected irregular and precarious settlements through (i) carrying out of the respective final engineering designs; (ii) carrying out of the corresponding civil works for the urbanization of selected irregular and precarious settlements in key areas of the sub-basin; (iii) the construction and/or improvements of houses for the affected families within such slums and irregular settlements; and (iv) the recovery and/or conversion of degraded urban areas into public spaces. The preparation of some initial engineering designs will be 100% financed with counterpart funds.

g. Carrying out of rehabilitation activities of high-risk and degraded urban areas in the

selected irregular and precarious settlements, including, inter alia: (i) the carrying out of the final engineering designs; and (ii) the carrying out of the corresponding civil work interventions in areas of high risk such as those prone to flooding or mud/landslides;

h. Carrying out of the involuntary resettlement of the families affected by urban upgrading

interventions or living in high risk referred or degraded areas referred to in paragraphs44,: through (i) The preparation of detailed Resettlement Plans (based on the Program’s Resettlement Policy Framework and in cooperation with CDHU) together with the corresponding engineering designs of the associated civil works, and based on the respective PDPAs; (ii) The implementation of the resettlement plans concomitantly with the execution of the associated civil works (in cooperation with CDHU); (iii) The monitoring and evaluation of the resettlement process; and (iv) carrying out of social work and community participation and guidance initiatives before, during and following the carrying out of the civil works mentioned in paragraphs (a) and (b) above. The housing units needed for the resettlement of this project will be constructed by CDHU, as stated in the Sao Paulo State Loan and in the Implementation Agreement (‘convênio’) which set forth the cooperation, implementation and financing arrangements for the

44 Studies are still underway and the number of families to be resettled will only be finalized upon conclusion of the studies. For budgeting purposes a preliminary number of 1,200 houses to be constructed has been estimated.

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construction of housing. The PMSBC will choose the areas to be used for resettlement and get all licenses needed approved.

i. Carrying out of land regularization processes in selected irregular and precarious

settlements including land tenure regularization to deliver housing titles to all the residing families in the Project area. This would include preparation of surveys, diagnosis, regularization strategy and timeline; collection of families’ documents and data; preparation of a regularization plan and decree; request for licenses for state entities (e.g. Environmental, etc.); etc.

j. Establishment of an Ecology and Citizenship Center. This activity will include the

preparation of the respective engineering design and the carrying out of the corresponding civil works for the construction of ecology and citizenship center (including workspaces and other spaces for developing activities for screening, classification, processing and marketing of recycled materials).

k. Plan for Social Work and Community Participation to Support Program’s Activities

through the preparation and implementation of a plan for social work and community participation to support Project and Program activities in selected irregular and precarious settlements for prior and post urban upgrading and housing interventions. This plan would include: (i) community organization and mobilization; (ii) social assistance for support during the works and resettlement activities; (iii) environmental and sanitary education program (following the methodology supported under component 1 of this Project); (iv) activities for job and revenue creation and institutional integration for social development and inclusion (also integrated with the ecology and citizenship center); and evaluation, supervision and monitoring of pos-resettlement.

26. Component 3 – Environmental Protection and Recovery (US$ 2.94 million total, US$ 1.27 million loan). The aim of this component is to protect the natural resources and environmentally sensitive areas – especially the headwaters areas – in the Billings sub-basin located in the municipality of São Bernardo do Campo, in the area of intervention. Furthermore, to recover degraded areas in order to improve environmental quality and ensure more sustainable conditions in the headwaters areas. The specific objectives include the following:

Protection of environmentally sensitive regions (Category 1 areas and permanent preservation areas – APPS);

Extension of green areas and protecting remaining vegetation and environmentally important areas in order to protect the headwaters;

Improved monitoring and supervision of environmental quality. 27. This component will support the following activities:

28. Re-vegetation/reforestation. The project will support the preparation and implementation of tree-planting programs in the selected irregular and precarious settlements for improving landscaping, environmentally protected areas that will be/are unoccupied, and by the streets, as feasible. This activity aim to extend the green coverage of the area, especially the ones degraded by human occupation.

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29. Carrying out of the urbanization of public areas with green and leisure spaces for common use. The project will support the creation of squares and installation of leisure equipment, creation of green areas and expansion of permeable areas within the selected irregular and precarious settlements; this will include, inter alia, the preparation of respective engineering designs and the carrying out of corresponding civil works. 30. Component 4 – There are no Component 4 Program activities under the PMSBC Project. 4. RESULTS FRAMEWORK

PDO Project Outcome Indicators Use of Project Outcome Information

a) To protect and maintain the quality and reliability of MRSP’s water resources and potable water sources;

a.1) Maintenance of the water quality of Billings water body, even with projected population increases; Measured using the following indicators45: - IAP46; - IVA47 - IQA48

Year 1: (i) selection of key indicators; detailing and implementing a methodology for results monitoring and evaluating; (ii) consultations with key stakeholders on expected results;

Year 3: (i) stakeholder evaluation of results in the sub-basins based on Project

45 The monitoring points for water quality control will be defined during negotiations. 46 IAP – Índice de qualidade de Água bruta para fins de abastecimento Público (São Paulo State specific Raw Water Quality Index for Public Water Supply);

47 IVA – Índice de qualidade de água para proteção da Vida Aquática (São Paulo State specific Water Quality Index for Protection of Aquatic Life). 48 IQA – Indice de qualidade de água (national Water Quality Index)

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b) To improve the quality of life of the poor populations residing in key targeted urban basins in MRSP.

b) Improvements in the quality of life of the targeted population based on: b.1) Improved physical, social and environmental changes (measured through public opinion surveys); b.2) Increases in real estate valuation (through hedonic price surveys); b.3) Increased access to improved water supply, sewerage, drainage and solid waste services (coverage and quality of services); Measured using the following indicators: - Proportion of dwellings with adequate WSS services49; - IQVU (Índice de Qualidade de Vida Urbana50 - Quality of Urban Life Index) b.4) Increase in the number and size of leisure areas (parks, squares, other public spaces, etc).

progress; (ii) mid-term review of Project strategies and implementation of eventual changes; Year 5: (i) ex-post participatory evaluation.

Intermediate Outcomes

Intermediate Outcome Indicators

Use of Intermediate Outcome Monitoring

Component 1: Institutional Capacity Building

(a) PDPAs prepared and implementation initiated for each sub-basin; (b) Environmental and sanitary education programs implemented.

Year 2-4: (i) correct measures taken during implementation of activities for quality assurance and timeliness of products to be delivered; (ii) mid-term review of Project strategies and implementation of eventual changes; Year 5: (i) ex-post participatory evaluation.

Component 2: Urban Upgrading

(a) interventions implemented to adapt infrastructure for settlements, benefiting # families; (b) interventions implemented to urbanize slums, benefiting # families; (c) % house units constructed for family resettlement; (d) resettlement of % families completed. (e) Ecology and Citizenship Center implemented; (f) # of households benefiting from the expansion of water supply systems; (g) # of households benefiting from the

Year 2-4: (i) correct measures taken during implementation of activities for quality assurance and timeliness of products to be delivered; (ii) mid-term review of Project strategies and implementation of eventual changes; Year 5: (i) ex-post participatory evaluation; (ii) ex-post evaluation.

49 The indicator is currently used by the Brazilian Census Institute IBGE, data is available and published at municipal level within census, and defines what “adequate basic sanitation” means and quantifies it. 50 The Índice de Qualidade de Vida Urbana (IQVU, Quality of Urban Life Index) is composed of 11 variables: commerce and services; culture; economy; education; housing (housing conditions and WSS); health; urban management instruments; socio-political participation and organization; urban environment; public safety; and transport). The calculation of the index uses a mathematical model that considers weighted impact of a total of 49 variables.

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expansion of sewage systems.

Component 3: Environmental Protection and Recovery

(a) # ha of public parks and leisure facilities planned and implemented; (b) # of seedlings planted on the banks of water bodies included in the Project.

Year 2-4: (i) correct measures taken during implementation of activities for quality assurance and timeliness of products to be delivered; (ii) mid-term review of Project strategies and implementation of eventual changes; Year 5: (i) ex-post participatory evaluation.

5. ARRANGEMENTS FOR RESULTS MONITORING

Institutional issues

31. The Project’s Local Management Unit (UGL) is directly un der the responsibility of the Mayor of Sao Bernardo do Campo, which has appointed the Secretary of PMSBC’s Secretariat for Housing, (Secretaria de Habitação, or SEHAB) as coordinator. The UGL is also integrated in other areas of the PMSBC, and will be responsible for monitoring the outcome and results indicators associated with PMSBC’s Project under the APL Program. The following two systems will assist in tracking the M&E indicators of the PMSBC Project by PMSBC and the overall Mananciais Program by GESP:

The State Administrative and Financial System (Sistema Estadual de Informações Gerenciais, or SIAFEM51), an existing State Government management information system, will be used to monitor the Project’s day to day activities, both physically and financially. This system will be rolled out to PMSBC in order to allow it to locally input the implementation data related to its Project activities. The SIAFEM system, using ORCOM- Sistema de Orcamento e Contabilidade do Municipio, will be in place in the Local Management Unit (Unidade de Gerenciamento Local, or UGL) before the signing of the loan agreement.

The management firm to be hired by the Program Management Unit (Unidade de Gerenciamento do Programa, or UGP) will be responsible for developing and installing a specific system for monitoring and evaluating consolidated Mananciais Horizontal APL Program implementation progress for all of the executing agencies. This M&E system will be installed during the first year of Program implementation, and information will be subsequently fed into it by the UGL for those activities related to the PMSBC Project.

Data collection 51 The municipality has its own budgeting and accountability system called the Budget and Municipal Public Accounts (Orçamento e Contabilidade Pública Municipal- ORCOM), which is managed by the Municipal Information and Technology Department. The Municipality also has its own project management “ECAR”, also used by the Federal Government, which issues various reports.

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32. All of the data needed for Project monitoring and evaluation, with the exception of the public opinion surveys and the urban quality of life index (Índice de Qualidade de Vida Urbana, or IQVU) baseline, will be available by Project effectiveness for tracking by the UGL, with support from specialists in the management consulting firm. However, with regard to the water quality indicators, SABESP will be responsible for collecting this data and sending the relevant information to the UGP as well as other Program participants. With regard to the opinion surveys, this data will be available by the end of the first year of Program implementation, as the firm to be contracted to undertake the initial surveys will be hired at the beginning of the Program implementation period. The same applies for the IQVU indicator, which will be adapted to the Program and have its baseline and goals defined in the last trimester of the first year of the Program’s implementation. Furthermore, the Program’s Institutional Capacity Building Component will provide technical assistance to help enhance the existing environmental/water quality monitoring and supervision programs, including support to improve SABESP’s capacity to monitor water quality in the relevant MRSP rivers and reservoirs.

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Arrangements for results monitoring

Project Outcome Indicators Baseline Target

Data Collection and Reporting YR1 YR2 YR3 YR4 YR5 Frequency

and Reports

Data Collection Instruments

Responsibility for Data Collection unit unit unit Unit unit

a.1) Water bodies’ quality maintained, even with population increases. The water quality would be measured using the following water monitoring points52:

BILL 0210053 (Billings ME) – IAP54

Good Good Good Good Good Good Good

Semester Progress Report

SABESP

BILL 02100 (Billings ME) – IVA55

Bad Normal Bad Bad Bad Normal Normal

BILL 02100 (Billings ME) – IQA56

Good Good Good Good Good Good Good

BILL 02500 (Billings MD) – IAP

Good Good Good Good Good Good Good

BILL 02500 (Billings MD) – IVA

Bad Normal Bad Bad Bad Normal Normal

BILL 02500 (Billings MD) – IQA

Good Good Good Good Good Good Good

52 The monitoring points for water quality control specifically related to the PMSBC intervention will be defined during the first year of implementation. 53 The BILL 2100 sampling point is monitored by the Environmental Sanitation Technology Company (Companhia de Tecnologia de Saneamento Ambiental, or CETESB) and corresponds to the point located in the middle of the central Billings reservoir body, in the direction of the Bororé tributary. The BILL 2500 sampling point is also located in the central Billings reservoir body, under the bridge of the Imigrantes road. 54 The IAP Indicator (Raw Water Quality Indicator for Potable Supplies - Índice de Qualidade de Águas Brutas para fins de Abastecimento Público) is a product of the weighting of the IQA indicator (Water Quality Indicator - Índice de Qualidade das Águas) and the ISTO indicator (Toxic and Organoleptic Substances Indicator - Índice de Substâncias Tóxicas e Organolépticas). The classification of IAP is as follows: Very Good (79 < IAP ≤ 100); Good (51 < IAP ≤ 79); Normal (36 < IAP ≤ 51); Bad (19 < IAP ≤ 36); and Terrible (IAP < 19). 55 The IVA indicator (Water Quality Indicator for Protection of Aquatic Life - Índice de Qualidade de Água para Proteção da Vida Aquática) considers the presence and concentration of toxic chemical contaminants, their effect on aquatic organisms (toxicity) and two of the water body’s parameters considered essential for biota (pH and dissolved oxygen), these parameters being grouped under the IPMCA (Minimum Parameter Indicator for the Preservation of Aquatic Life - Índice de Parâmetros Mínimos para a Preservação da Vida Aquática), as well as under the IET (Tophic State Indicator - Índice do Estado Trófico). The classification of the IVA is as follows: Very Good (≤ 2,2); Good (2,9 ≤ IVA ≤ 3,2); Normal (3,4 ≤ IVA ≤ 4,4); Bad (4,6 ≤ IVA ≤ 6,8); and Terrible (6,8 ≤ IVA ≤ 7,6). 56 The IQA (Water Quality Indicator – Índice de Qualidade das Águas) incorporates the following parameters: (i) physical: temperature, total sediment and turbidity; (ii) chemical: pH, dissolved oxygen, biochemical oxygen demand (BOD5,20), total nitrogen and total phosphorous; and (iii) microbiological: thermotolerant coliforms. The IQA classification scale is as follows: Very Good (80-100); Good (52-79); Normal (37-51); Bad (20-36); and Terrible (0-19)

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PMSBC point TBD TBD TBD Semester Progress Report

UGL

b) Degree of satisfaction of the population based on:

b.1) physical, social and environmental changes due to the Program (opinion survey);

Low High Low - - - High At Project beginning and end

Market and Opinion Surveys

UGL

b.2) Real estate valuation57; TBD TBD - - -

b.3a) Proportion of dwellings with adequate WSS services58;

55% 65% 55% 55% 60% 60% 65% Annually Progress Report

UGL through IBGE

b.3b) IQVU (Urban Quality of Life Index)59;

TBD TBD Annually Progress Report

UGL

b.4) Increase in number of leisure and green areas (parks, squares, etc.).

-x- TBD - - TBD TBD TBD Semester Progress Report UGL

Intermediate Outcome Indicators60

Component 1: Institutional Capacity Building

(a) PDPA Prepared - - - Prepared Prepared Semester

Progress Report

UGL

(b) environmental and sanitary education programs implemented.

-x- Implemented - - Prepared Implemented Implemented Semester Progress Report

UGL

Component 2: Urban Upgrading

(a) interventions implemented to urbanize slums, benefiting # families;

-x- 3000 - - - 1,200 3000 Semester Progress Report UGL

57 The increased value of real estate will be measured using the average value of the residence per square meter (R$/m2), adopting as sample areas of intervention in the Municipality of São Bernardo do Campo. In these areas a sample survey will be undertaken at the end of Program implementation to ascertain the new real estate values (in addition, a preliminary survey could be undertaken in the third or fourth year of Program implementation). The baseline and target values will be defined until negotiations of the PMSBC loan. 58 The indicator is currently used by the Brazilian Census Institute IBGE, census data is available and published at the municipal level, and defines and quantifies what “adequate basic sanitation” means. 59The IQVU-M index varies between 0 and 1.0, and groups municipalities into 5 groups/classes. Class I includes the municipalities with the lowest quality of urban life in the country and Class V are those municipalities with the best quality of urban life nationwide. The baseline values and the annual goals will be defined during the first year of Program implementation, at which time the national index will be adapted to the Mananciais Program. 60 The numbers included are based on initial estimates and will be defined during the first year of implementation.

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(b) % house units constructed for family resettlement61;

-x- 100% - - - 40% 100% Semester Progress Report UGL

(c) resettlement of % families completed in accordance with appropriate local and Bank safeguards.

-x- 100% - - - 40% 100% Semester Progress Report UGL

(e) Ecology and Citizenship Center implemented;

0 1 - - 1 1 1 Semester Progress Report

UGL

(f) # of households benefiting from the expansion of water supply systems;

-x- 3000 - - - 1200 3000 Semester Progress Report

UGL

(g) # of households benefiting from the expansion of sewage systems.

-x- 3000 - - - 1200 3000 Semester Progress Report

UGL

Component 3: Environmental Protection and Recovery

(a) ) # ha of public parks and leisure facilities planned and implemented;;

-x- TBD - - TBD TBD TBD Semester Progress Report UGL

(c) # of seedlings planted on the banks of water bodies included in the Project.

-x- TBD - - TBD TBD TBD Semester Progress Report

UGL

61 Studies are still underway and the number of families to be resettled will only be finalized upon conclusion of the studies. For budgeting purposes a preliminary number of 1,200 houses to be constructed has been estimated.

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6. PMSBC PROJECT COST

PMSBC

Project Cost By Component

Local Foreign Total

US $million

US $million

US $million

Institutional Capacity Building 5.63 0.00 5.63

Urban Upgrading 31.40 0.00 31.40

Environmental Protection and Recovery 2.88 0.00 2.88

Total Baseline Cost 39.91 0.00 39.91

Physical Contingencies 0.63 0.00 0.63

Price Contingencies 0.81 0.00 0.81

Total Project Costs 41.35 0.00 41.35

Interest during construction 0.00 0.00 0.00 Front-end Fee 0.00 0.05 0.05

Total Financing Required 41.35 0.05 41.40 1 Identifiable taxes and duties are US$ 5.85M, and the total project cost, net of taxes, is US$ 35.55M. Therefore, the share of project cost net of taxes is 14.14%. Allocation of loan proceeds

Category

Amount of the Loan Allocated

(expressed in USD)

Percentage of Expenditures to be financed

(inclusive of Taxes)

(1) Works for Part II (a), (b) and (e) of the Project

11,000,000 45%

(2) Works (except for Part II (a), (b) and (e) of the Project), Goods, Training and Non-consulting Services for all Parts of the Project

1,117,950 45%

(3) Consultants’ services for all Parts of the Project

8,650,000 100%

(4) Front-end Fee 52,050

Amount payable pursuant to Section 2.03 of this Agreement in

accordance with Section 2.07 (b) of the General Conditions

TOTAL AMOUNT 20,820,000

33. No withdrawal shall be made for payments made prior to the date of the Loan Agreement, except that withdrawals up to an aggregate amount not to exceed $2,082,000

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equivalent may be made for payments made within twelve months prior to the date of the Loan Agreement, but on or after June 30, 2011, for Eligible Expenditures.

7. IMPLEMENTATION ARRANGEMENTS

34. Over the years, the São Bernardo Government has gained experience in precarious settlement interventions. In the past two years, this activity has expanded significantly, especially in partnership with the Federal Government through the Growth Acceleration Program (Programa de Aceleração do Crescimento, or PAC). There are currently 11 signed contracts through PAC-1, which account for a total investment of 410 million BRL of which 260 million is from the Federal Government and 150 million is counterparted by the municipality. These 11 contracts lead to 10 projects that ensure the production of 5,200 new housing units and the urbanization and consolidation of 2,429 existing units. These projects benefit 15 precarious settlements. Of these 10 projects contracted with PAC, 6 are already in progress and the other 4 are entering the bidding process. Besides these projects, in 2010 SEHAB also worked to expand projects and technical documentation needed to contract new resources from the Federal Government through PAC 2. These projects were selected by the Federal Government and are in the contracting phase (3 integrated urbanization projects benefiting 12 precarious settlements). The proposed structure for coordination and implementation for Components 2 and 3 follows the standard that has been adopted in PAC, and is considered appropriate for the Municipality. 35. The implementation arrangements for the Mananciais Horizontal APL Program and the PSMBC Project are organized around three themes: (i) Strategic advisory support; (ii) General coordination; and (iii) Operational execution/coordination. The main functions of each of the bodies involved under these three themes are detailed in the Mananciais Horizontal APL Program PAD and the Operational Manual. 36. In the case of the PMSBC Project, the municipality will be responsible for the operational execution/coordination of its activities under the Program. PMSBC has created its own project management unit (UGL) at the local level by municipal decree. The UGL will be responsible for inter alia: (i) Evaluating and approving the appropriateness of subcomponent and activity proposals and designs (from a technical, financial, social, environmental/safeguard and resettlement perspective) before they are forwarded to the UGP and the Bank; (ii) Reviewing and approving related procurement documentation before they are submitted to the UGP and the Bank for ‘no-objection’; (iii) Monitoring and evaluating the implementation of all components, subcomponents and activities under the Project; and (iv) Preparing periodic progress reports. The PMSBC UGL will also be responsible for liaising directly with the Program’s General Coordinator (UGP), and with the Bank. 37. In addition to the UGL, government agencies will provide technical support for the Project and will be involved in specific project actions. The UGL also will be supported by a management firm that will assist with project management, oversight and supervision of works including environmental supervision. The firm will be contracted using project counterpart funds. This UGL will act as a main interlocutor for project related information and will be responsible for the development and integrated implementation of subprojects.

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38. In addition, the PMSBC will nominate a representative to be part of the Committee of Coordinators (CDC) already functioning, and will be compromised of technical staff from each executing agency/co-executing agency of the Program. The CDC will operate under the aegis of the first theme – strategic advisory support.

39. The PMSBC UGL is composed ofstaff from various related Secretariates, appointed by the municipal portaria and coordinated by the PMSBC Secretary of Housing. The core team includes: (i) a general coordinator; (ii) an executive technical-social coordinator to support activities under component 2; (iii) an executive technical-environmental coordinator to support components 1 and 3; (iv) an executive administrative financial coordinator; and (vi) administrative staff. The PMSBC UGL will also be assisted by specialized individual consultants, on an as-needed basis, to support PMSBC Project implementation on issues that are Bank-specific (such as procurement, Financial Management and safeguards issues). The UGL structure is presented below.

* To support components 1 and 3: Executive Coordinator, sub-coordinator for Environmental Planning; Specialist on Urban Planning and Sub-coordinator for Environmental Education; ** To support component 2: Executive Coordinator, Sub-coordinator for Planning and Projects; Sub-coordinator for Works; Sub-coordinator for Land Tenure and Sub-coordinator for Social Assistance.

UGL

General Coordination

- Executive Coordinator - Sub coordinator offinancial control andaccountability - Monitoring andEvalutation Specialist

Technical and social-environmental

coordination* **

Administrative-Financial Coordination

PMSBC

UGP

SSRH IBRD

Executor Technical, environmental, administrative, financial, social and field staff

- Executive Coordinator - Sub-coordinator ofProcurement - Procurement specialist - Budget and PlanningSpecialist -Financial ManagementSpecialist

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40. The three main groups of activities of the PMSBC UGL are: (i) General Coordination, (ii) Environmental, Social and Technical Coordination, and (iii) Administrative and Financial Coordination. General Coordination is comprised of overall management of the project, including supervision of implementation, tracking of results, monitoring of compliance and resource management. Among other responsibilities, Environmental, Social and Technical Coordination and Administrative and Financial Coordination offer advice and assistance to the General Coordination in their respective areas of specialty. Detailed description of functions and responsibilities is spelled out in the Operetions Manual. 41. An Implementation Agreement has been signed by GESP, SSRH (former SSE), CDHU, SABESP and the municipalities of São Paulo, São Bernardo do Campo and Guarulhos on March 19, 2010, which established, inter alia, the objectives, scope, sequencing and complementary of activities, as well as the specific roles and responsibilities (including regarding fiduciary and safeguard requirements) of the entities involved in the implementation of the PMSBC Project and related Program. Activities aimed at guaranteeing that the State Government’s water supply and wastewater activities, as well as, the construction of the resettlement housing units, under the Program will be carried out as required in support of the Program executing agencies.

42. Management Information System. The State’s SIAFEM system will provide timely information about the progress and execution of the Project, enabling users to make rapid decisions concerning not only qualitative and quantitative technical aspects of components, sub-components and activities, but also contractual, operational, bidding, administrative, accounting and financial matters related to PMSBC Project/Program execution. The PMSBC UGL will be responsible for inputting the PMSBC data together with the municipality budgetary and administrative system ORCOM. The SIAFEM system should be operational prior to the signature of the Loan Agreement.

43. Progress Reports. Drawing on information from SIAFEM, based on supervision activities, the PMSBC UGL will consolidate information on Project implementation as a Progress Report, in accordance with the format established in the Operational Manual, for submission to the UGP every semester.

44. Annual Operational Plan (AOP). The AOP will be a key technical/operational instrument for Project management and execution. It will be prepared by the PMSBC UGL in accordance with the Operation Manual. The elaboration of the AOP will be done once the executing agency has decided on its annual budget. Following approval of the latter, and before the end of each calendar year, the UGP will submit the consolidated AOPs to the Bank for review and discussion. 45. Procurement Plan (PP). A final version of the Procurement Plan has been submitted and was approved by the Bank on December 29, 2011. 46. A diagram representing the PMSBC Project’s technical and financial implementation arrangements is presented below.

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DIAGRAM 7.1 TECHNICAL AND FINANCIAL ARRANGEMENTS

Advances resources from theloan

Sends IFRs and pays for debt service (with a copy

to UGP)

.

. Legal Agreement .

.

. Sends monitoring information,project report, procurement andselection processes to be pre-approved

.

Pays thefirms andconsultants (sends copies toUGP)

Transfers counterpart funds

UGP

UGL

Project Designated

Account

PMSBC

Suppliers, Contractors and

Consultants

IBRD Sends noobjections andletters

Project Operational

Account

Transfers Loan Resources

Sends requests for no

objections and Progress Reports

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8. FINANCIAL MANAGEMENT AND DISBURSEMENT ARRANGEMENTS

Summary of Financial Management Arrangements 47. The Project’s financial management arrangements are based on the Financial Management Assessment first made in 200462, and updated in February, 2007 and in December 16, 2010 in order to reflect changes to the Project implementation arrangements. They are also based on the institutional arrangements presented in Annex 6 of the Program PAD and Section 7 of this Annex and the project description described in Annex 4 of the Program PAD and Section 3 of this Annex. The Mananciais Horizontal APL Program is presented as a Horizontal APL consisting of four loans63. Even though individual ‘mini-PADs’ have been prepared for each loan, the overall Financial Management Arrangements for the Program, together with the FM arrangements for each of the four borrowers are summarized in Annex 7 of the Program PAD. 48. Based on the Bank’s FM guidelines64 the main purposes for updating the assessments were to: (i) Confirm and review previously agreed FM assessment adequacy in the context of the revised Project design; and (ii) Agree on steps to be completed by each borrower, including: (a) institutional arrangements; (b) a financial management system; (c) interim un-audited financial reports; (d) flow of funds; (e) external auditing arrangements; and (f) disbursement arrangements. 49. Municipality of Sao Bernardo do Campo: will sign an individual Loan Agreement to implement its activities under the Project. Although directly responsible for all fiduciary and legal aspects of the loan, including disbursements, preparing IFRs, and auditing arrangements, the PMSBC will use SIAFEM together with the municipality budgetary and administrative system (Orçamento e Contabilidade Pública Municipal, or ORCOM) to implement its loan, thus allowing GESP (through SSRH, former SSE) to monitor the overall Program implementation. The total amount for the loan is US$ 20.82 million, 17% of the total Mananciais Horizontal APL Program. 50. PMSBC - Financial Management Risk Assessment: The table below summarizes and consolidates the Financial Management Risk related to São Bernardo do Campo assuring coherence with the Operational Risk Assessment Framework – ORAF,65 keeping the format used by the GESP and SABESP individual projects. 51. The overall FM risk associated has been rated as Moderate. The control risks indicators, which are directly associated with the project FM arrangements, represent the level of adequacy of the existing PMSBC control framework which will be applied to the project.

62 FMS: Cláudio Mittelstaed, AM dated 12/14/2004 – see Project files 63 Borrowers: The State of São Paulo (GESP), the State Water Utility (SABESP), the Municipal Government of São Bernardo do Campo (PMSBC) and the Municipal Government of Guarulhos (PMG). 64 Financial Management Practices in World Bank Financed Investments Operations as of Nov 03, 2005 65 Financial Management Interim Guidance Note, September30, 2010

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Table 8.1: Risk Rating - PMSBC

Risk Risk Rating Risk Issues/Measures Inherent Risk Country Level Low Entity/project specific

Moderate The legal and institutional arrangements are adequate. FM administrative and financial systems (ORCOM) are adequate. SIAFEM will be used as the main tool for the loan and staff will need technical support and refreshment training.

Control Risk Budget Preparation

Low Budget will be clearly defined and reflected in AOP.

Funds Flow Low All funds will flow through –Banco do Brasil. Current suggested arrangements are appropriate.

Counterpart Funds

Moderate Counterpart funding cannot be assured and is subject to Fiscal Policies restrictions.

Staffing Moderate Staff has prior experience in IDB loans, but should receive refreshment training on WB procedures and SIAFEM training from the UGP.

Accounting procedures

Low Accounting procedures are adequate. ORCOM and SIAFEM are robust systems.

External audits Low Independent auditors to be hired. Table 8.2: Summary of Financial Management Arrangements

Borrower Sao Bernardo do Campo Accounting Follows 4320/64

FM system SIAFEM for monitoring purposes

IFR To be used for monitoring and disbursements

Staffing Municipal Govt. Staff; Some prior experience with International Organization Operations (IDB)

Training To be provided by SSRH (former SSE) before loan signing

Flow of funds One Designed Account in Reals

Internal Auditing

Internal Controllership unit, TCE-SP

External Auditing

An independent audit firm will be hired

Disbursements Through Interim un-audited Financial Reports

Internal Control

Through segregation of functions, internal auditing arrangements, the Operational Manual and through SIAFEM

52. Conclusion: The FM arrangements meet the Bank’s minimum requirements to provide with reasonable assurance, accurate and timely information on the status of the project. There is no FM-related condition of effectiveness.

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53. Supervision Plan: In view of the Moderate rating associated with the loan, the supervision plan requires a bi-annual field-based mission to review its performance and adequate use of SIAFEM by PMSBC. However, during project implementation, if all FM arrangements are considered to be in place, Financial Management Supervisions Mission (FM SPN) missions could be undertaken on an annual basis São Bernardo Municipality Financial Management Arrangement (PMSBC)66: 54. Sao Bernardo do Campo is one of the four borrowers involved in the Mananciais Horizontal APL Program. The Operational Manual to be updated by SSRH (former SSE) will detail PMSBC responsibility under the Horizontal APL Program. PMSBC will participate in the Program by signing its own Loan Agreement to implement specific activities. 55. Sao Bernardo do Campo will be responsible for complying with all the fiduciary obligations contained in the loan agreement. Below are some specific Financial Management issues related to PMSBC which, together with the topics described at the `beginning of this Section 8 provide the overall FM assessment and arrangements agreed on by PMSBC for loan implementation. 56. PMSBC objectives are described in Section 3. The total amount to be implemented through PMSBC is US$ 41.40 (US$ 20.58 million as counterpart and US$ 20.82 million from loan resources), covering all components and categories. Institutional Arrangements and Staffing: 57. There is a project unit (UGL) under the PMSBC structure to implement loan-related activities and components within Mananciais Horizontal APL Program. The UGL is under the office of the Mayor, which appointed the Secretary of Housing as coordinator. 58. Although PMSBC has experience in implementing Interamerican Development Bank projects, staff should attend refresher training in WB FM, disbursement and procurement procedures. The UGL staff consists of PMSBC personnel, and at least one professional accountant must be in the UGL team. No staff turnover is expected during the implementation of the loan. The main responsibilities include: a) To update SIAFEM on a proper and timely basis; b) To review project expenditure support documentation, observing eligibility and category percentages; c) To archive documentation correctly; d) To prepare and forward to the WB office67 quarterly un-audited financial reports; e) To reconcile - on a regular basis ORCOM and SIAFEM loan expenditures and respective accounts, assuring timely and correct follow-up regarding any identified discrepancy; and f) To prepare and provide all financial documentation and reports requested by external auditors and WB staff. The Coordinator will serve as the key contact with SSRH and is the main individual responsible for handling budgetary and financial commitment issues within SIAFEM.

66 All below mentioned support documentation are available under: www.saobernardo.sp.gov.br 67 In Brasilia, unless otherwise officially informed by the Bank.

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59. The operational and institutional arrangements related to the flow of funds will be as referred to in Section 7. 60. Internal Auditing: Auditing is carried out through the municipality controllership department, which is staffed by lawyers, accountants, administrators, economists and IT specialists, contracted on the basis of a competitive process and mainly composed of municipality personnel. They will report directly to the Finance Secretary, who in turn reports to the Mayor. The State of Sao Paulo’s Accounting Court (Tribunal de Contas do Estado de São Paulo, or TCE-SP) is responsible for the external auditing10, which is done annually. 61. Financial Management System: Loan proceeds will be accounted at the municipality account and administrative system – ORCOM as external source code. Quarterly execution will be electronically sent to UGP (SSRH) to be updated at SIAFEM allowing consolidated reporting. The accounting controls are robust and include assuring that expenditures are linked to the respective chart of account, beneficiaries’ bank account following financial and budgetary availability. Payments are to be made right after expenditure. 62. SIAFEM will be used for monitoring purposes. It can produce interim un-audited financial reports. No parallel system will therefore be needed for Project financial management purposes. The Project68 will be represented as a ‘cost center’ within the state budget. Each borrower will use SIAFEM to manage its respective loans on a real-time basis. A specific cost-center will be opened for the Project for each loan. SIAFEM produces reports in the format required by the Bank. It will record all loans transactions, following a table based on its cost categories. For controlling and reporting purposes, all costs incurred will be accumulated by components and activities as set forth in the Project description. Each UGL will also keep all original Project expenditure support documentation in order to make it available for internal and external auditing and for Bank reviews. All FM information will be consolidated by the SSRH through its UGP, which will be responsible for submitting to the Bank the consolidated 1-A and 1-B IFRs on a quarterly basis. SSRH will also ensure that the system is available to all borrowers and that appropriate training is provided to the UGL staff. In case SIAFEM is not ready, the said reports might be run by ORCOM. 63. It is expected that the above FM arrangements will: (i) Provide opportunities for strengthening the monitoring of the Project as a whole, as well as on a loan-by–loan basis; (ii) Avoid duplication through the use of parallel FM systems to produce Bank FM reports; and (iii) Enable GESP to monitor all investments (physical and financial) at the Project level. Once the system is ready to run the FM reports, it will be validated by the Bank’s FM specialist. 64. Reporting and Monitoring: SIAFEM is designed to allow PMSBC and each borrower to have access only to its loan information. PMSBC, through its UGL, will prepare quarterly IFRs (1-A and 1-B) (in US dollars) on a cash accounting basis. The IFRs will be submitted to the Bank, for reporting, disbursement and monitoring purposes, and to the UGP, for consolidation, not later than forty-five days after the end of each quarter. The IFRs will state the expenditure figures by quarter, accumulated for the year and accumulated for the loan/Project. 68 Including the four loans, and allowing for further borrowers to be added to the system if required.

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65. Any other funds and counterpart contributions which are part of the Project, such as those of the co-financier, will be reflected in IFRs (1-A and 1-B) in order to allow the better monitoring of all amounts invested under the Project. 66. The fourth quarter IFRs generated during the year, showing the cumulative figures for the period, should be submitted to the auditors for review under the annual external audit to be prepared by private independent auditing firms, for each loan. 67. In order to monitor the Project, SSRH, through its UGP, will have access through SIAFEM to the FM data of all the activities implemented by each of the borrowers, allowing the consolidated preparation of IFRs which will be submitted to the Bank also on a quarterly basis. 68. PMSBC disbursements are expected to be based on interim un-audited report based (IFRs). The IFR report template will be available in SIAFEM and will be prepared and submitted to the Bank together with the other standard Bank disbursements forms69. The IFRs are: 1-A: Sources and Use of Funds by disbursement category as per Loan Agreement 1-B: Statement of Investments by Project Components and Activities 1-C: Actual Disbursement (attached with latest Bank Statement) 1-D: Disbursement Forecast 1-E: Contract above Prior Review Thresholds (attached with a copy of the invoices) 69. The full quarterly IFR report (1-A, 1-B, 1-C, 1-D and 1-E) will be prepared by the UGL in BRL on a cash accounting basis. The IFRs will be submitted to the Bank for disbursement purposes, not later than forty-five days after the end of each quarter. The operational Manual will describe all the steps to be followed by PMSBC in carrying out the agreed FM procedures. 70. External Audit Arrangements: An external auditing firm will be hired by PMSBC observing the auditing guidelines provided to the UGP, during the FM Assessment mission. The audit report should be delivered to the Bank up to six months after the end of the previous calendar year, as stated in the Bank’s Financial Management Audit Guidelines (June 2003). 71. The scope of each audit will be determined by PMSBC in agreement with the Bank, based on Project specific circumstances, and the audit terms of reference (TOR) will be prepared accordingly (a short list of firms will be sent to the Bank for no-objection). The Bank shall provide its no objection to the audit TOR during the quarter after loan effectiveness. The TOR should be updated in the Operations Manual. The scope of the audit TOR should cover but not be limited to: (i) Fully reviewing the four IFRs (for each calendar year); (ii) Reviewing the appropriate observance of the financial management arrangements included in this PAD, in the respective loan agreements, as well as in any other official Bank documentation; (iii) Proper use of ORCOM and SIAFEM; (iv) Internal control arrangements; and (v) Timely availability of counterpart funds. 72. Accounting: Besides using SIAFEM to monitor the loan, PMSBC, as a municipality, has its own administrative and financial system ORCOM similar but not integrated with São Paulo

69 LOA to attach the agreed disbursement forms to the respective Disbursement Letters.

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State’s SIAFEM. Such a system is able to process, control and monitor the PMSBC budget, which is consolidated and approved by the budget and accounting municipal secretariat prior to being submitted for municipal legislative approval. It follows the prevailing public sector accounting policies in Brazil 4320/64, observes the fiscal space limits and regulations stated at the Lei de Responsabilidade Fiscal (LRF) 101/00. The accounting system uses accrual for expenditures and cash for revenues. Loans will adopt the cash basis accounting system. All administrative policies and financial management routines follows the municipal law 2240/76, which should be observed by all staff of municipal institutions. Assets are monitored and there are sanctions in case of fraud, corruption and misuse of funds. 73. Flow of funds and Disbursement Arrangements: The primary Bank disbursement method will be the “Advance” method. The Municipal Secretariat of Finance will be responsible to open and administer the Designated Account (DA) in Reals. This account will have a variable ceiling. The UGL will be responsible for reconciling the accounts monthly, and will submit to the Bank the necessary documentation attached to each withdrawal application. As disbursements will be based on interim un-audited financial reports, the UGL will be responsible for monitoring implementation and consolidating the cash-flow programming for the loan. The Project would also be able to use the Direct Payment and Reimbursement disbursement methods, if required. The Minimum Application Size for Direct Payments and Reimbursements will be US$ 400,000 equivalent. All expenditures supporting documentation will be retained at the UGL for at least one year after the receipt of the audit report for the period or two years after the Closing Date, whichever is later. All expenditure records will be available for examination by the Bank if required. 74. The Flow of Funds main steps include:

(i) PMSBC will open a single segregated Designated Account in its name in Banco do Brasil (São Bernardo do Campo), in Reals, to receive loan funds and process payments. Counterpart funds will be paid directly from the municipality unique account; (ii) Before any transfer is made, PMSBC will ensure budget allocation and financial availability; (iii) All payments will be made through electronic deposits at each beneficiary/consultant bank account; (iv) All support documentation will be retained and properly archived, chronologically for Bank’s visit missions and auditors review.

75. Disbursements are expected to be made through un-audited financial reports, as described

under the Reporting and Monitoring section above. 76. Diagram 7.1 above shows the flow of funds for Project implementation. 9. PROCUREMENT ARRANGEMENTS

A. General 77. Procurement for the proposed Project will be carried out in accordance with the World Bank’s "Guidelines: Procurement under IBRD Loans and IDA Credits" (January 2011),

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"Guidelines: Selection and Employment of Consultants by World Bank Borrowers" (January 2011) and the provisions stipulated in the Legal Agreement. A general description of the various items under different expenditure categories is presented below. For each contract to be financed under the loan, the different procurement methods or consultant selection methods, the need for pre-qualification, estimated costs, prior review requirements, and timeframes are agreed upon by the Borrower and the Bank in the Procurement Plan. The Procurement Plan will be updated at least annually, or as otherwise required to reflect the current Project implementation requirements and the improvements in institutional capacity. 78. Procurement of Works. Works procured under the Project will include: civil works for new housing units, water supply, road and access ways, drainage, wastewater collection and treatment, urban upgrading, solid waste disposal, etc. Procurement will be undertaken on the basis of the Bank’s Standard Bidding Documents (SBD) for all International Competitive Bidding (ICB) contracts. Individual contracts with a value of below US$ 10,000,000 per contract may be procured using National SBD agreed upon or acceptable to the Bank. Individual contracts with values below US$ 300,000 may be procured using Shopping procedures. The invitation document for bids shall be agreed upon, or satisfactory to the Bank. 79. Procurement of Goods. Goods procured under the Project will include: IT equipment and software, and other goods for daily use, etc. Contracts will be grouped as far as possible in bidding packages of over US$ 1,000,000 and procured in accordance with ICB procedures using Bank-issued Standard Bidding Documents. Individual contracts with values below US$ 1,000,000 may be procured using National Competitive Bidding (NCB) procedures, using bidding documents acceptable to the Bank. Contracts for goods that cannot be grouped in larger bidding packages and with a cost estimate of below US$ 100,000 per contract may be procured using Shopping (National and International) procedures based on a model quotations request satisfactory to the Bank. 80. Procurement of non-consulting services. Non-consulting services to be procured under the Project include: education campaigns, training logistics (hotel services, catering, travel, workshops, etc.). Contracts estimated to cost US$ 1,000,000 or more will be procured following ICB procedures. Contracts with values below US$ 1,000,000 may be procured using National Competitive Bidding (NCB) procedures using bidding documents acceptable to the Bank. Contracts estimated to cost below US$ 100,000 may be procured on the basis of quotations obtained from three qualified contractors in response to a written invitation. 81. Selection of Consultants. Consulting services from firms and individuals required for the Project include: financial and procurement audits, advisory services from individual consultants, supervision, training, etc. Shortlists of consultants for services estimated to cost less than the equivalent of US$ 500,000 per contract may be composed entirely of national consultants in accordance with the provisions of paragraph 2.7 of the Consultant Guidelines. 82. Operating Costs. Operational costs have been identified in the procurement plan. These costs have been reviewed and found acceptable to the Bank (including telephone charges, Internet services, etc).

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83. Others. The procurement procedures and SBDs to be used for each procurement method, as well as model contracts for works and goods procured, will be included as annexes to the Project Operational Manual. Summary

Expenditure category

Contract value threshold (US$ 000)

Procurement method

Contracts subject to prior review

Works >10,000 ICB All processes 300 ≥ ≤ 25,000

NCB All processes

≤ 300 Shopping First two processes each calendar year Goods >1,000 ICB All processes

1,000≥ ≤ 100 NCB All processes ≤ 100 Shopping First two processes each calendar year

Non-consulting services (incl. training, communication)

>,1000 ICB All tender documents, evaluation reports andcontracts

100 ≥ ≤ 1,000 NCB First two processes each calendar year ≤ 100 Shopping First two processes each calendar year

Consulting (firms)

>500 QCBS/QBS All processes 500 ≥ <200 QCBS/LCS All processes 100 ≤ 200 ≤ 100

QCBS/LCS CQ/LCS

All single source contracts. And first two processes each calendar year for each selection method.

Consulting (individuals)

Section V in the Guidelines

All cases above US$ 50,000 and all single-source contracts

Direct contracting

All cases regardless of the amounts involved

Agreements All cases regardless of the amounts involved

84. The thresholds will be reviewed when the UGL gains experience in the Bank’s rules and regulations. All single-source selection of goods and works, regardless of the amount of the contract, will be subject to prior review by the Bank. B. Assessment of the agency’s capacity to implement procurement 85. Overall coordination will be provided by the SSRH (former SSE) through a UGP created by State decree specifically for this purpose and consisting of GESP staff. The UGP will be responsible for guiding, planning, coordinating, technically approving, supervising and technically auditing all aspects of Project implementation, including those undertaken by the other borrowers and the co-financier. 86. PMSBC (São Bernardo do Campo Municipality) has experience in procurement under national law 8666/93, but with no direct experience in utilizing Bank procedures. PMSBC will create its own Project Management Unit at the local level (UGL), which was created using an appropriate legal instrument issued by the respective Mayor. 87. The UGL will include a procurement specialist (Individual Consultant) and will be assisted by a management consultancy firm to be responsible for supporting the UGP on

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technical, operational, administrative, financial, procurement and monitoring aspects of Project implementation. It is recommended that Special Bidding Committees be formed to deal with procurement under the Project. 88. Given that there will be a project management unit with the UGP working with the assistance of a project management firm whose terms of reference will include expertise in general procurement and in Bank, and considering the complexity of monitoring and controlling of the project, the procurement risk assessment for the project as a whole is rated as SUBSTANTIAL. Procurement Action Plan

Action Timeframe

1 Prepare a General Procurement Plan for the life of the Project and a detailed Procurement Plan for the first 18 months of Project implementation for each of the participating agencies.

Done before negotiations.

2 Hire a Procurement specialist for the UGL and training of all procurement and technical staff on Bank-procurement policies.

At the latest 2 months after effectiveness.

3 Include a section on procurement in the Operations Manual including a detailed description of all procurement methods allowed when applying the national law, especially the “pregão eletrônico” and restrictions on its use.

Done before negotiations.

4 Implement a procurement monitoring system capable of capturing and consolidating all relevant procurement information.

At the latest 2 months after effectiveness.

C. Procurement Plan 89. The Borrower has prepared a Procurement Plan for Project implementation which provides the basis for the procurement methods. This plan was agreed on by the Borrower and the Bank Team on December 29, 2011 and is available at the Project’s Files. It will also be made available in the Project’s database and on the Bank’s external website. The Procurement Plan will be updated in agreement with the Bank Team annually or as otherwise required, to reflect the actual Project implementation needs and the improvements in institutional capacity. D. Frequency of Procurement Supervision 90. In addition to the prior review supervision to be carried out from Bank offices, the capacity assessment of the Implementing Agency has recommended annual supervision missions to visit the field to carry out post-reviews of procurement actions.

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E. Details of the Procurement Arrangements Involving International Competition 1. Goods, Works and Non-Consulting Services (a) List of contract packages to be procured following ICB and direct contracting:

1 2 3 4 5 6 7 Ref. No.

Contract (Description)

Estimated Cost (USD)

Procurement Method

Domestic Preference (yes/no)

Review by Bank (Prior / Post)

Expected Bid-Opening Date

1

Works for urban upgrading of low income selected irregular and precarious settlements, including housing units, paving, drainage, water supply, sewerage and solid waste services and the Centre for Ecology and Citizenship.

26,980,000 ICB No Prior Dec 2012

(b) ICB contracts of Works estimated to cost above US$ 10,000,000 per contract, ICB contracts of Goods estimated to cost above US$ 1,000,000 per contract, and all direct contracting, will be subject to prior review by the Bank. 2. Consulting Services (a) List of consulting assignments with short-list of international firms:

1 2 3 4 5 6 Ref. No.

Description of Assignment

Estimated Cost (USD)

Selection Method

Review by Bank (Prior / Post)

Expected Proposals Submission Date

1 Diagnostic studies and formulation of the PDPA

2,120,000 QCBS Prior Jun 2012

2 Support to the Project's Management. Works Supervision. Environmental Supervision

2,500,000 QCBS Prior Jun 2012

3 Land regularization of selected settlements

590,000 QCBS Prior Sep 2012

4 Social Assistance to support land regularization in the project area

2,200,000 QCBS Prior Sep 2012

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(b) Consulting Assignments with a short-list of international firms will be required for all consulting assignments estimated to cost above US$ 500,000; (c) Consultancy services estimated to cost above US$ 200,000 for firms and US$ 50,000 for individual consultants per contract and all single source selection of consultants (firms) or individual consultants will be subject to prior review by the Bank; (d) Short lists consisting entirely of national consultants for services estimated to cost less than US$ 500,000 equivalent per contract may be composed entirely of national consultants in accordance with the provisions of paragraph 2.7 of the Consultant Guidelines. 10. SAFEGUARD POLICY ISSUES

Environmental analysis

A. Strategy adopted for the environmental analysis of the Project’s activities

91. The proposed activities to be implemented under the Project have been developed during preparation up to the conceptual design level. During Project implementation, the respective interventions will be detailed to the level of final engineering designs for the civil works interventions and to the levels of final Terms of Reference for the consultancy assignments. 92. In compliance with the World Bank’s OP/BP 4.01, an Environmental and Social Impact Assessment (ESIA) was conducted during the preparation of the project. The ESIA process comprised: (i) an assessment of the local context of the environmental and housing condition of Sao Bernardo do Campo; (ii) a review of regulatory and institutional frameworks; (iii) a review of investments plans, identifying objectives and guidelines for each project intervention, as well as an overall environmental results/impacts anticipated by Project interventions and mitigates measures to be adopted; (iv) an EMP – Environmental Management Plan70, with a set of safeguards frameworks to address environmental and social issues during project implementation; and (v) an institutional strengthening program. Environmental and social safeguards will be addressed through the following sequenced approach: (i) preparation of safeguard procedures and frameworks; (ii) preparation of simplified site-specific ESIAs for all sub-projects with potential environmental and/or social impacts as well as impact mitigation/compensation plans drawn up as needed; and (iii) environmental supervision of civil works during the implementation process, as described in Operational Manual (item 4.6 – Environmental and Social Procedures). 93. These preliminary and overarching analyses will be complemented by environmental impact studies, required for the environmental licensing process, in accordance with the environmental legislation of the State of São Paulo. In line with the Project execution strategy, environmental impact studies will be performed during implementation and will be an integral part of preliminary engineering designs for the respective interventions.

70 The Environmental Management Plan was disclosed in country on June 28, 2011 and disclosed on the Bank’s Infoshop on July 19, 2011.

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94. The corresponding individual Environmental Impact Assessments (EIA) will be submitted to the Bank for analysis and approval. The ‘preliminary,’ ‘installation’ and ‘operational’ environmental licenses for each civil works intervention will also be submitted to the Bank. Submission of the preliminary license for a particular intervention is required to begin the bidding process for the corresponding intervention. Similarly, submission of the installation license is required for signature of the associated intervention’s contract. These implementation conditions will be presented in the respective work contracts. 95. The choice of the selected area for investments is justified by the following criteria: (i) the area is within the headwater-reservoir systems (‘mananciais’); (ii) it has strategic environmental condition, located close to of the water supply system (Sistema Rio Grande); (iii) it contains precarious, at-risk settlements lacking infrastructure, and demanding complex and expensive civil work solutions and a significant percentage of resettlement, classified by Typology 4; (iv) it contains areas that concentrate deficient and inadequate housing and social vulnerability; (v) it contains active social organizations; (vi) there is potential for integrated solutions to the existing sewage infrastructure operated by SABESP (construction of main sewage collector initiated by SABESP which will be connected to the existent ABC WWTP) and (vi) takes into account the local legislation context (State Law 13.579/2009 for protection of the Billings headwater (APRM-Billings), changes in course for the Municipal Master Plan and formulation process of the PLHIS (Local Plan for Housing of Social Interest). B. Environmental impacts expected from the Project

96. Positive impacts. Project interventions will generate widespread and significant positive environmental impacts. In addition to the impacts mentioned in Annex 10 of the PAD, the table below presents a summary of the positive impacts expected from the PMSBC interventions.

97. Negative impacts. Negative impacts of the PMSBC interventions may arise from the civil works and need to be addressed with appropriate construction techniques and procedures. The ESIA contains the Environmental Construction Manual to be included in the bidding documents (civil works).

98. Furthermore, the interventions may encroach on the permanent preservation strip of the reservoirs and water courses and in the event that this takes place, appropriate landscape and environmental recovery measures must be taken. The interventions will therefore involve housing upgrading, and/ or relocation and resettlement of affected families (of an estimated total of 3000 families). 71 C. Compliance with World Bank environmental safeguard policy 99. The proposed Mananciais Horizontal APL Program has received an Environmental Category “A” rating in accordance with the Bank’s environmental and social safeguard policies. Among the safeguard policies that were triggered by the overall Program, the planned PMSBC

71 Studies are still underway and the number of families to be relocated will only be finalized upon conclusion of the studies. For budgeting purposes a preliminary number of 1,200 houses to be constructed has been estimated.

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interventions activate the following policies: OP 4.01 (Environmental Assessment); OP 4.04 (Natural Habitats); OP 4.11 (Physical Cultural Resources); and OP 4.12 (Involuntary Resettlement). These policies are addressed in detail in the ESIA Report. The following are highlights of each of the safeguard items addressed in the ESIA report. 100. Environmental Assessment. A specific PMSBC ESIA has been prepared for the proposed local interventions to ensure compliance with the Bank’s OP 4.01 and with Brazilian environmental legislation. This report identifies the potential impacts associated with Project investments (urbanization, resettlement and recovery of protected areas). The report calls for minimizing Project impacts, specifies the guidelines and procedures to be used in assessing environmental and social impacts during the sub-project design stage and provides guidance on the preparation of Environmental Management Plans to address sub-project implementation. The scope of the specific ESIA, including the Environmental Management Plan (EMP), comprised`: (i) a description of the sub-project and an assessment of alternatives; (ii) identification of Project impacts; (iii) mitigation programs; (iv) arrangements and a timetable for consultations; (v) specification of grievance mechanisms; (vi) institutional responsibilities; (vii) timetables; (viii) budgets; and (ix) a monitoring and evaluation plan. The infrastructure interventions will generate temporary negative environmental impacts during construction, even in those cases where the interventions are intended to mitigate existing areas of degradation and risk. It will therefore be necessary to adhere to the appropriate criteria and procedures in the ESIA report’s Environmental Manual for Construction. 101. Natural Habitats. Category areas and Permanent Preservation Areas (APPs), as denominated under State/federal law, are located along the banks of the reservoirs and the watercourses targeted under the Project. These areas include stretches that have been degraded by irregular urban occupation, including poorly-constructed dwellings. They also contain conservation areas and other areas that could be recuperated. The interventions in these areas will focus on relocating families and subsequent environmental and landscape recovery of the degraded area. In the case of partially degraded areas or those that are still preserved, the strategy will be to protect and preserve them through the establishment of parks (including linear parks on the banks of the Billings Reservoir).

102. Involuntary Resettlement. A Resettlement Policy Framework72 (RPF) for guiding the involuntary resettlement to be carried out under the whole Mananciais Horizontal APL Program has been prepared in accordance with Bank guidelines and safeguards. A RPF, rather than Resettlement Action Plans (RAPs) was chosen, given that the corresponding studies which will determine the exact number and location of all involuntary resettlements are still underway. The Resettlement Action Plans (RAPs) for each sub-project that entails resettlement will be prepared, along with the engineering designs, during Project implementation. Each RAP will be sent to the Bank for review and approval before the associated civil works contract is signed. As described in the Environmental Assessment Report and work plans interventions in precarious settlements, including activities such as housing upgrading and construction of new housing units, provision of infrastructure and social equipment, recreational areas, strategy for land regularization, participation and social inclusion activities and an ex-post evaluation. Multiples alternatives for

72 The Resettlement Policy Framework was disclosed in country on July 18, 2007 and disclosed on the Bank’s Infoshop on August 21, 2007.

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resettlement will be offered, such as external resettlement in a new area in the same neighborhood, internal reallocation and regularization of urban land tenure, and also guaranteed credit for the acquisition of another housing option. The eligibility criteria are well described and focus on removing families from environmentally protected areas (e.g. Permanent Preservation Areas) at-risk areas, and those living in poor housing conditions. 103. Physical Cultural Resources. The Project is not expected to impact historic and cultural heritage areas of São Bernardo do Campo. However, since the project will entail construction and excavation activities to expand and replace infrastructure, the ESIA includes screening for any known cultural property in the Project area and incorporate ‘chance find’ procedures in the event that culturally significant resources are discovered during implementation. In addition, Brazil has a well-developed legislative and normative framework overseen by the National Institute for Protection of Historical and Archeological Sites (Instituto do Patrimônio Histórico e Artístico Nacional, or IPHAN) and that will be followed during implementation. D. Environmental Management Plan 104. The ESIA report’s Environmental Management Plan (EMP) consists of a series of preventative, mitigating and compensatory measures to counteract the possible negative impacts of Project implementation. However, it should be emphasized that the main thrust of the Mananciais Horizontal APL Program consists of a group of activities targeted at socio-environmental recuperation and the correction as well as mitigation of problematic and vulnerable environmental and social situations in the sub-basins. 105. The EMP makes reference to all of the Project components, subcomponents and activities. A summary description of the recommended actions under the EMP by PMSBC is given in the table below (the costs of which are incorporated in the Project’s budget). The detailed PMSBC - EMP is presented in ESIA - Annex V. Table 10.1 PMSBC’s responsibilities for Program’s environmental activities

Institutions Activities Environment Contribution to environmental issues

Addressing Environmental through appropriate Legal Documents

Municipality of São Bernardo do Campo

Slum upgrading

Most of the slums are along and over water streams formally classified as ‘natural habitat’.

Will provide appropriate integrated basic infrastructure to the slums in order to improve quality of life and remove untreated waste water currently being dumped in the Billings reservoir.

(i) sign a Loan Agreement; (ii) commit to comply with the Environmental Management Plan; (iii) Submit Environmental Assessment and License for Bank approval prior to signing slum upgrading works’ contracts.

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E. Resettlement Policy Framework 106. This section presents an executive summary of the Resettlement Policy Framework (RPF) for the proposed Mananciais Horizontal APL Program. The objective of the RPF is to guide the resettlement process for families living in risk-prone areas that will be target of investments under the Program. 107. The Table 10.2 presents the project’s resettlement related activities and the distribution of responsibilities with respect to such resettlement activities.

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Table 10.2 Resettlement Activities – Distribution of responsibilities Institutions Participation in

the project Activities Resettlement Addressing

resettlement issues Legal document and conditions

Municipality of São Bernardo do Campo

Borrower. Upgrading of selected irregular and precarious settlements

All families in areas of risk or environmental protection to be resettled. 73

External resettlement housing units will be offered by CDHU; Internal resettlement housing units in the project area; Provide social assistance to families to be resettled; Temporary Social Rent, as needed.

(i) Loan Agreement; (ii) commit to comply with the Resettlement Policy Framework; (iii) Submit Resettlement Plan for Bank approval prior to the bidding of the corresponding works

São Paulo State Housing Company - CDHU

One of the three executing agencies of the State of São Paulo’s Project.

(i) Provide resettlement housing units to families to be removed by the municipality of São Bernardo do Campo; (ii) Upgrading works in selected irregular and precarious settlements.

Activities under the responsibility of CDHU will not trigger resettlement.

(i) Provide social assistance to families resettled (during and post resettlement); (ii) Provide about 1,000 resettlement apartment units (land and buildings); (iii) Submit geotechnical studies of the area for Bank and CDHU approval before land acquisition,; (iv) Provide highly subsidized mortgages tailored to low income families living in slums.

(i) the borrower signed a Implementation Agreement (convênio)and the Loan 7661-Br with GESP; (ii) through this convênio and Loan signature, the borrower is committed to following the Resettlement Policy Framework and the Resettlement Plans (to be prepared by Municipality of São Bernardo do Campo).

73 Studies are still underway and the number of families to be relocated will only be finalized upon conclusion of the studies.

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108. Principles and objectives governing resettlement preparation and implementation. Five main principles will guide resettlement activities under the Project: (i) Minimizing resettlement by identifying houses that can be improved through minimal investments in services (e.g. improving access to electricity, water supply, sanitation, transportation/access); (ii) Resettling families who live in areas that are high-risk (either in terms of health, safety or environmental sensitivity) into appropriate housing units; (iii) Constructing a system of roads and sidewalks to safely accommodate both vehicle and pedestrian traffic; (iv) Successful implementation of integrated urban-environmental services (water supply, drainage, wastewater collection and disposal, and solid waste collection and disposal) for the areas targeted under the Project; and (v) Proposing sound social and technical solutions to avoid new informal, urban encroachments on environmentally sensitive areas. 109. Description of the process for preparing and approving the resettlement plan. The resettlement plans will be prepared and submitted as a condition for initiating the corresponding civil works and will include: (i) Baseline census and socioeconomic survey information; (ii) Specific compensation rates and standards; (iii) Policy entitlements related to any additional impact identified through the census or survey; (iv) Descriptions of resettlement sites and programs for improvement or restoration of livelihoods and standards of living; and (v) Implementation schedules for resettlement activities and detailed cost estimates. 110. Socio-economic profile of the community. A large part of the population residing in slums and irregular settlements in the Program area is either without income or with income levels of under three minimum salaries per family, has a low education levels and faces additional social challenges such as lack of public safety, social conflict within the neighborhood, unemployment, etc. 111. Five resettlement alternatives will be offered under the Project: (i) Housing units within the slum; (ii) Housing units in buildings in neighborhoods better located within the city; (iii) A letter of credit which would allow the family to buy a house on the market; (iv) Exchange of houses within the slum (allowing a family to move to a resettlement apartment and offer its house to a family that will be resettled but does not want to go to a resettlement apartment); and (v) Appropriate alternatives for highly vulnerable families. The slums are located in the peri-urban area where resettlement housing units are generally not allowed or are not viable solutions. In the better neighborhoods In the better neighborhoods, the only housing options are apartment buildings due to the high land costs. The housing units within the slums are offered to large low income families at no cost. The apartment buildings and letters of credit are financed through highly subsidized mortgage loans. 112. Addressing extremely vulnerable households. Working with these families will be done through: (i) Resettlement to first floor homes with facilitated access (for example, without staircases); or (ii) Helping households remain in the slum area through the “home exchange” mechanism. 113. Eligibility criteria for defining various categories of displaced people. The families to be resettled are those living in risk-prone areas such as in shacks built over creeks/rivers or in areas subject to landslides. The cut-off date for eligibility would be when the Resettlement Plan

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cadastre is closed in the slum in question, and the number of units is capped. In addition, since 1996, CDHU has adopted an internal procedure which considers the woman to be the head of household during the resettlement process to a new housing unit. 114. Legal framework reviewing the fit between borrower laws and Bank policy requirements and bridging gaps The borrowers’ set of laws on irregular low-income settlements requires the public sector to provide appropriate housing solutions to families affected by resettlement. There are no inconsistencies with the Bank resettlement guidelines. 115. Method of valuing assets. Since the existing housing would be valued at an extremely low rate in the formal market, the populations’ assets would instead be valued based on the necessary financing to access adequate housing and the units provided would be highly subsidized to ensure affordability. The option of cash compensation based on this valuation methodology would also be provided in selected cases. 116. Organizational procedures for delivery of entitlements. The Municipality of Sao Bernardo do Campo with the support of specialists from the UGL and UGP would be responsible for ensuring delivery of entitlements for the affected population. CDHU, the state housing agency, will be responsible for construction of the new housing units and supporting the resettlement process. PMSBC and CDHU both have extensive experience in implementing the complex process of resettlement - from the initial socio-economic census to the post-resettlement social assistance measures including the restoration of livelihoods for resettled families. 117. Grievance redress mechanism. During preparation and implementation of the resettlement plans, the Project would finance an office staffed with trained social workers to address individual grievances throughout the resettlement process. The staff will be trained to help clarify the rights of the affected families and to work with them to resolve their grievances in a fair and adequate way. The mechanism designed to address and resolve grievances includes the following decision making levels: (i) A large part of the grievances will be resolved on site, with the households themselves, both during the planning as well as the execution phases; the principal actors involved including: resident families of the area (generally, in a slum) and the social workers, architects, urban specialists and engineers involved in the sub-project design and implementation; (ii) When the grievances cannot be resolved at the local level by these actors, the municipality’s UGL will participate; and (iii) Those grievances that cannot be resolved by the municipality will be addressed by the state government’s UGP within the Secretariat of Sanitation and Water Resources. 118. Description of arrangements for funding resettlement. The resettlement housing and social activities will be financed through a combination of resources from the municipal government and CDHU. The resources allocated to CDHU under the GESP Project will support land acquisition, engineering designs and works for the construction of new housing units in the São Bernardo do Campo municipality (as described in Table 10.3) to receive resettled families outside of the slums and irregular settlements affected by PMSBC Project interventions. The resources allocated for PMSBC under its Project will support urban renewal and urban upgrading in slums and irregular settlements including, inter alia, social and resettlement activities,

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construction/improvement of housing units and recovery of degraded areas within the affected areas. Table 10.3 - Resettlement Activities and Resources Allocated

Description Total - US$ M

Municipality of São Bernardo do Campo

Engineering design and RAP 2.47

Housing upgrade- 1,800 16.78

New housing unit in the same area- 200 units 6.47

Engineering project and works for 1,000 housing units74 4.75

Resettlement activities: social assistance, land regularization, etc.

4.83

TOTAL 35.3

*Note: Studies are still underway and the number of families affected will only be finalized upon conclusion of the studies. These numbers have been estimated for budgetary purposes.

119. Description of mechanisms for consultations with and participation of displaced persons in planning, implementation and monitoring. The consultations will take place once the planning phase is initiated in each slum. This will be carried out during the comprehensive and participatory planning phase which is a core part of a slum upgrading intervention. During the planning phase the urban improvement solutions for the slum will be discussed with the community, as well as the resettlement alternatives. Once the community formally agrees with the urban improvement and resettlement solutions, the Project will provide authorization to move to the civil works phase. During the implementation of civil works, constant communication will be maintained, through information sessions and through the social work office that will also handle any grievances. After the resettlement plans have been implemented, the support to resettled families as well as comprehensive follow-up (through interviews and participatory evaluation of the process) will be facilitated by social workers and trained consultants involved throughout the process. 120. Arrangements for monitoring by the implementing agency and, if required, by independent monitors. As part of the Resettlement Plan, a Monitoring and Learning Plan would be developed with the following objectives: (i) To verify that the proposed actions are being implemented apace with the civil works and, if necessary, propose corrective actions; (ii) To monitor the functioning of infrastructure and provide for any needed repairs; (iii) To identify, during implementation, any difficulties and impediments in the process and to introduce subsequent adaptations to improve the process; (iv) To measure the effects of the Project on the beneficiary population through quantitative and qualitative research that is made publicly available for discussion and use by stakeholders and other organizations in order to evaluate the

74 Housing units to be produced by CDHU based on the State of São Paulo Loan Agreement and MOU. Land acquisition will take place and will be paid by PMSBC own resources.

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results; and (v) To analyze the information obtained during implementation and the evaluations to ensure that relevant lessons are fed into the design of other projects of this type. Consultations 121. During preparation, a number of consultations and discussions were undertaken with the Alto Tiete basin committee and agency, and with the basin sub-committees of the Juqueri-Cantareira, Tiete-Cabeceiras, Cotia-Guarapiranga, Billings -Tamanduateí and Pinheiros-Pirapora sub-basins. The committee and the subcommittees are composed of representatives of state and municipal governments, civil society and academia, amongst others. A number of municipal and local entities and organizations were also involved in these discussions/consultations. 122. In the final phase of Project preparation, the ESIA and Executive Summary were disseminated and a next round of consultations was undertaken in June 2007, following the Pre-Appraisal mission. The Project design and objectives were endorsed during these consultations. As mentioned, consultations for this project will take place in each participating slum once the respective planning phase initiates. 123. During the preparation and implementation of the engineering designs, especially those related to the urbanization of slums and irregular settlements and the provision of WSS and related services, the Project allowed for a considerable amount of social participation and feedback. This was the case, for example, during the implementation of the Guarapiranga Project. In addition, the Project includes proposals for ‘social overview’ of civil works interventions and for public opinion surveys to record and mitigate any unsatisfactory aspects of the Project interventions. 124. Component 1 of the Project includes complementary activities that will contribute to strengthening communication and social participation, including: (i) Capacity building events for environmental agents; (ii) Workshops for community participation; (iii) Development of educational videos and radio programs and the carrying out of environmental education programs for stakeholders; (iv) Preparation of environmental and social diagnosis for awareness-building; (v) The carrying out of beneficiary surveys; (vi) Support for community mobilization, social outreach and other civil society initiatives; and (vii) The implementation of environmental education centers. 125. The planned PMSBC activities will also include efforts to strengthen municipal environmental management. 126. Environmental Management System. Within the context of the management of the Project, the creation of an environmental management system is planned. This will consist of a socio-environmental technical co-ordination division in the UGP and a socio-environmental division within the PMSBC UGL, plus a Works Environmental Supervisory Unit. These divisions will be responsible for inter alia: (i) The processes involving the expropriation, removal, compensation and resettlement of families as the result of urban renewal interventions; (ii) The plan for the management and disposal of solid wastes; (iii) Coordination of the correct usage of the Environmental Construction Manual; (iv) The monitoring and supervision of

155

environmental actions; (v) The coordination and implementation of environmental management plans; (vi) the review and approval of basic urban infrastructure and water/sewerage engineering designs; (vii) Ensuring compliance with the socio-environmental requirements set forth in the contracts with construction firms, in the environmental impact studies, in applicable legislation, in the environmental licenses and in IBRD guidelines, safeguards and rules; and (viii) To inspect, track and guide environmental actions in accordance with the Environmental Construction Manual (MAC) and the mitigating measures set forth in the environmental licenses related to the civil works.

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Annex 1: Operational Risk Assessment Framework (ORAF) BRAZIL: Integrated Water Management in Metropolitan São Paulo. Municipality of Sao Bernardo do Campo (PMSBC) Project

1. Project Stakeholder Risks Rating: Low

Description : Borrower commitment to the Project objective may change if government changes after municipal elections 

Risk Management: √    Work with the existing or new municipal government team to ensure project needs and requests are given  due priority and handled properly      Resp: - GESP ULG - Municipality of Sao Bernardo do Campo - World Bank

Stage: Implementation Due Date : Ongoing Status: not yet implemented

2. Implementing Agency Risks (including fiduciary) 2.1. Capacity Rating: Moderate

Description : Complex project (significant resettlement, several institutions involved) may pose an implementation capacity challenge. 

Financial Management: No prior experience with WB or other international institution FM systems

Procurement: Lack of experience with World Bank other procurement of both implementation agencies

Risk Management :

√     SBDC to create and operationalize a local management unit SBDCMU to coordinate and undertake project implementation  

√ Implementation arrangements envisaged to address capacity issues.   √ Staff to be trained in Safeguards, FM, and procurement  √     Finalization of operations manual √      Support to be provided by the ULG  and the Gerenciadora √     Hiring and training of procurement staff √     Technical support from the Gerenciadora and the Project management unit UGL at the              GESP level in Safeguards, FM, and procurement Resp: - Municipality of Sao Bernardo do Campo - GESP ULG

Stage: Implementation Due Date : Ongoing Status: not yet implemented

2.2. Governance Rating: Moderate Description : Roles and responsibilities of participating agencies for project implementation, as well as jurisdictions clearly defined and not conflicting. However, problems may arise in terms of effective coordination.

Risk Management : √     Roles well defined in operations manual and other institutional agreements (Completed)  √     Role of Gerenciadora and GESP ULB in coordinating and assisting SBDCCMU Resp: Municipality of Sao Bernardo do Campo, GESP ULG

Stage: Implementation Due Date : Ongoing Status: Ongoing

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3. Project Risks 3.1. Design Rating: Moderate

Description :

‐    Complexity of being under an APL scheme might hinder implementation. 

‐     Design of project of complex nature (requires sound coordination of urban upgrade, resettlement from risk areas, housing) poses institutional and administrative challenges.

Risk Management : √  Selection of experienced Gerenciadora  Resp: Municipality of Sao Bernardo do Campo

Stage: Implementation

Due Date : June 30, 2012

Status: not yet implemented

Risk Management : √      Borrower to put in place the SBDC Management Unit (SBDCMU) to be guided by operations manual. 

√     Training in Bank safeguards and fiduciary. √     ‘Gerenciadora’ expected to provide implementation guidance and technical assistance as      needed.  Resp: Municipality of Sao Bernardo do Campo

Stage: Implementation

Resp: Municipality of Sao Bernardo do Campo

Status: not yet implemented

3.2. Social & Environmental Rating: Moderate Description : Borrower has difficulties  implementing theProject using agreed safeguards policies such as resettlement. The Borrower is experienced with safeguards but it is the first time applying WB norms 

Risk Management : √   During Project implementation, as detailed engineering designs are finalized, the Client  

will also finalize specific EMP and RAPs  together with mitigation measures following the World Bank Safeguards Advisory Team’s guidance. The Bank will also guide the Client in the consultation process and disclosure policies. 

√ Bank to help deliver training on safeguards.  Resp: - Municipality of Sao Bernardo do Campo - World Bank

Stage: Implementation Due Date: TBD after completion of detailed engineering studies

Status: not yet implemented

3.3. Program & Donor Rating: Moderate Description : CDHU, the state Housing institution responsible for constructing new housing units and the resettlement process fails in delivering on time

Risk Management : √ Loan agreement includes a remedy for such case (possibility of loan suspension) √ Permanent follow up during supervision on this matter Resp: Municipality of Sao Bernardo do Campo, World Bank

Stage: Implementation Due Date : December 31, 2014

Status: not yet implemented

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3.4. Delivery Monitoring & Sustainability Rating: Low Description : - Operations and maintenance of works and services, in targeted project areas may falter - Pollution abatement of water bodies not sustained

Risk Management : √ Several studies and carrying out of environmental education program Resp: Municipality of Sao Bernardo do Campo

Stage: Implementation Due Date : Status: not yet implemented

3.5. Other Rating: Description : Methodology and plan for measurement of water quality improvements and results not fully finalized

Risk Management : √   Measurement of water quality in Mananciais to be undertaken by the GESP management        unit. Consultants to be hired. Resp: Municipality of Sao Bernardo do Campo

Stage: Implementation Due Date : December 31, 2012

Status: not yet implemented

4. Overall Risk Following Review

4.1. Implementation Risk Rating: Moderate

Metropolitan Regionof São Paulo

M A T OM A T OG R O S S OG R O S S O

TOCANTINSTOCANTINSB A H I AB A H I A

MINAS GERA I SMINAS GERA I S

F.D.F.D.

GOIASGOIASMATO GROSSOMATO GROSSO

DO SULDO SUL

SÃO PAULOSÃO PAULO

ESPÍRITOESPÍRITOSANTOSANTO

RIO DERIO DEJANEIROJANEIRO

PARANÁPARANÁ

STA CATARINASTA CATARINA

RIO GRANDERIO GRANDEDO SULDO SUL

A M A Z O N A SA M A Z O N A S

RONDÔNIARONDÔNIA

P A R ÁP A R Á

RORAIMARORAIMA AMAPÁAMAPÁ

MARANHÃOMARANHÃO CEARÁCEARÁ

P I A U IP I A U I

RIO GRANDERIO GRANDEDO NORTEDO NORTE

PARAÍBAPARAÍBA

ALAGOASALAGOAS

SERGIPESERGIPE

PERNAMBUCOPERNAMBUCOACREACRE

Porto AlegrePorto Alegre

Rio deRio deJaneiroJaneiro

São PauloSão Paulo

VitóriaVitória

SalvadorSalvador

MaceióMaceió

RecifeRecife

João João PessoaPessoa

FortalezaFortaleza

São LuísSão Luís

BelémBelém

Porto VelhoPorto Velho

CuiabáCuiabá

Belo Belo HorizonteHorizonte

GoiâniaGoiânia

TeresinaTeresina

PalmaPalma

FlorianópolisFlorianópolis

CuritabaCuritaba

AracajuAracaju

NatalNatal

MacapáMacapá

Boa VistaBoa Vista

ManausManaus

Rio BrancoRio Branco

CampoCampoGrandeGrande

BRASBRASÍLIAÍLIA

Porto Alegre

Rio deJaneiro

São Paulo

Vitória

Salvador

Maceió

Recife

João Pessoa

Fortaleza

São Luís

Belém

Porto Velho

Cuiabá

Belo Horizonte

Goiânia

Teresina

Palma

Florianópolis

Curitaba

Aracaju

Natal

Macapá

Boa Vista

Manaus

Rio Branco

CampoGrande

BRASÍLIA

M A T OG R O S S O

TOCANTINSB A H I A

MINAS GERA I S

F.D.

GOIASMATO GROSSO

DO SUL

SÃO PAULO

ESPÍRITOSANTO

RIO DEJANEIRO

PARANÁ

STA CATARINA

RIO GRANDEDO SUL

A M A Z O N A S

RONDÔNIA

P A R Á

RORAIMA AMAPÁ

MARANHÃO CEARÁ

P I A U I

RIO GRANDEDO NORTE

PARAÍBA

ALAGOAS

SERGIPE

PERNAMBUCOACRE

COLOMBIA

PERU

BOL IV IA

PARAGUAY

URUGUAY

ARGENT INA

CHILE

GUYANA

SURINAME

FrenchGuiana

(Fr.)

R.B. DEVENEZUELA

ATLANTICOCEAN

ATLANTICOCEAN

PACIFICOCEAN

BRAZIL

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FEBRUA

RY 2009

BRAZILMETROPOLITAN REGION

OF SÃO PAULOSTATE CAPITALS

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