BCO MUNDIAL

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Document of

The World Bank

Report No: ICR00001926

IMPLEMENTATION COMPLETION AND RESULTS REPORT(IBRD-75840)

ON A

LOAN

IN THE AMOUNT OF US$ 1.1 BILLION

TO THE

STATE OF RIO GRANDE DO SUL, WITH THE GUARANTEE OF THE

FEDERATIVE REPUBLIC OF BRAZIL

FOR A

FISCAL SUSTAINABILITY FOR GROWTH PROGRAM DEVELOPMENT POLICYLOAN

May 20, 2011

PublicDisclosureAuthorized



closureAuthorized


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CURRENCY EQUIVALENTS

(Exchange Rate Effective as of 12/31/2010)

Currency Unit = Real (R$)US$ 1.00 = 1.6662

FISCAL YEARJanuary, 1 December, 31

ABBREVIATIONS AND ACRONYMS

CPS Country Partnership StrategyDPL Development Policy LoanFRL Fiscal Responsibility LawFUNDOPEM Operation Enterprise Fund of the State of Rio Grande do SulHR Human Resources

ICR Implementation Completion and Results ReportLDP Letter of Development PolicyM&E Monitoring and EvaluationNCD Net Consolidated DebtNCR Net Current RevenueNRR Net Real RevenueOSCIP Civil Society Organization with Public InterestPAF Fiscal Restructuring and Adjustment PlanPAC Growth Acceleration ProgramPD Program DocumentPDO Project Development ObjectiveRBM Results Based ManagementRPPS Public Servants Pension SystemRS Rio Grande do Sul StateSEFAZ State Secretariat of Finance

SEPLAG State Secretariat of Planning and ManagementSOE State Owned EnterpriseSTN National Treasury SecretariatSWAP Sector Wide ApproachVAT Value Added taxWF Work Force


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RIO GRANDE DO SUL

Fiscal Sustainability for Growth Program Development Policy Loan

CONTENTS

Data SheetA. Basic InformationB. Key DatesC. Ratings SummaryD. Sector and Theme CodesE. Bank StaffF. Results Framework Analysis

G. Ratings of Program Performance in ISRsH. Restructuring

1. Program Context, Development Objectives and Design ............................................ 12. Key Factors Affecting Implementation and Outcomes .............................................. 43. Assessment of Outcomes .......................................................................................... 114. Assessment of Risk to Development Outcome ......................................................... 135. Assessment of Bank and Borrower Performance ..................................................... 13

6. Lessons Learned........................................................................................................ 157. Comments on Issues Raised by Borrower/Implementing Agencies/Partners........... 15Annex 1 Bank Lending and Implementation Support/Supervision Processes.............. 17Annex 2. Summary of Borrower's ICR and/or Comments on Draft ICR ..................... 18Annex 3. Policy Matrix ................................................................................................. 19Annex 4. RS GDP Performance .................................................................................... 28

MAP


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A. Basic Information

Country: Brazil Program Name:

RIO GRANDE DO

SUL FISCAL

SUSTAINABILITY

Program ID: P106767 L/C/TF Number(s): IBRD-75840

ICR Date: 06/28/2011 ICR Type: Core ICR

Lending Instrument: DPL Borrower:

STATE

GOVERNMENT OF

RIO GRANDE DOSUL

Original Total

Commitment:USD 1,100.00M Disbursed Amount: USD 1,100.00M

Revised Amount: USD 1,100.00M

Implementing Agencies:

State Secretariat of Finance of Rio Grande do Sul

Cofinanciers and Other External Partners:

B. Key Dates

Process Date Process Original DateRevised / Actual

Date(s)

Concept Review: 12/13/2007 Effectiveness: 09/12/2008 09/12/2008

Appraisal: 03/27/2008 Restructuring(s):

Approval: 07/31/2008 Mid-term Review:

Closing: 12/31/2010 12/31/2010

C. Ratings Summary

C.1 Performance Rating by ICR

Outcomes: Moderately Satisfactory

Risk to Development Outcome: ModerateBank Performance: Satisfactory

Borrower Performance: Satisfactory

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

B k R ti B R ti


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C.3 Quality at Entry and Implementation Performance Indicators

Implementation

PerformanceIndicators

QAG Assessments

(if any)Rating:

Potential Problem

Program at any time

(Yes/No):

NoQuality at Entry

(QEA):None

Problem Program at any

time (Yes/No):No

Quality of

Supervision (QSA):None

DO rating before

Closing/Inactive status: Satisfactory

D. Sector and Theme Codes

Original Actual

Sector Code (as % of total Bank financing)

Compulsory pension and unemployment insurance 10 10

General public administration sector 30 30

Non-compulsory pensions and insurance 10 10

Sub-national government administration 50 50

Theme Code (as % of total Bank financing)

Administrative and civil service reform 17 17

Debt management and fiscal sustainability 33 33

Other public sector governance 17 17

Public expenditure, financial management and

procurement33 33

E. Bank Staff

Positions At ICR At Approval

Vice President: Pamela Cox Pamela CoxCountry Director: Makhtar Diop John Briscoe

Sector Manager: Rodrigo A. Chaves Rodrigo A. Chaves

Program Team Leader: Pablo Fajnzylber Fernando Andres Blanco Cossio

ICR Team Leader: Rafael Chelles Barroso


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F. Results Framework Analysis

Program Development Objectives (from Project Appraisal Document)The loan would support RS government to resume a sustainable fiscal position whichincludes a smoother debt profile and a balanced social security scheme. In addition, theloan would contribute to improved public services through public sector managementreforms. Similarly, a sustainable fiscal path would eventually expand fiscal space forinvestment to enhance the quality of public service provision, improve the economicgrowth prospects and reverse the deteriorating trend in social indicators

Revised Program Development Objectives (if any, as approved by original approvingauthority)

(a) PDO Indicator(s)

Indicator Baseline Value

Original Target

Values (fromapproval

documents)

Formally

RevisedTarget

Values

Actual Value

Achieved atCompletion or

Target Years

Indicator 1 : Net Consolidated Debt to Net Current Revenues ratio

Value(quantitative orQualitative)

2007 = 2.542008 = 2.392009 = 2.342010 = 2.38

2008 = 2.342009 = 2.202010 = 2.14

Date achieved 12/31/2007 05/13/2010 01/31/2011

Comments(incl. %achievement)

Actual values exceeded the target due to higher than expected revenueincrease.

Indicator 2 : Primary Balance Consolidated result


2007 = R$ 454 mi

2008 = R$ 1,455mi2009 = R$ 1,208mi

2010 = R$ 1,600mi

2008 = R$ 2.151 mi2009 = R$ 1.628 mi2010 = R$ 1.582 mi

Date achieved 12/31/2007 05/13/2010 01/31/2011


The difference in 2010 between the target and the actual figure represents amere 1.1% deviation. Thus, the target can be considered fulfilled.

I di 3 P l N C R i


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Indicator 4 : Revenue Collection (receita de arrecadao prpria)

Value

(quantitative orQualitative)

2007 = R$ 13.7 bi

2008 = R$ 16.3 bi

2009 = R$ 16.8 bi2010 = R$ 18.5 bi

2008 = R$ 16.5 bi

2009 = R$ 17.3 bi2010 = R$ 20.4 bi

Date achieved 12/31/2007 05/13/2010 01/31/2011


The correct indicator name as per the loan agreement in revenue collection.Baseline numbers were changed accordingly. The state has exceeded the 2010target.

Indicator 5 : Investment to Net Real Revenue ratio

Value

(quantitative orQualitative)

2007 = 0.02

2008 = 0.045

2009 = 0.0452010 = 0.060

2010 = 0.09

Date achieved 12/31/2007 05/13/2010 01/31/2011


The state has exceeded the target in 2010 due to extraodinary revenues thatwere used to finance investments.

(b) Intermediate Outcome Indicator(s)

Indicator Baseline Value

Original Target

Values (from

approval

documents)

Formally

Revised

Target Values

Actual Value

Achieved at

Completion or

Target Years

Indicator 1 :Number of partnership terms with "Organizaes sociais de Interesse Pblico"(OSCIPs) fully operational


2007 = 0 2010 = 6 2010 = 1

Date achieved 12/31/2007 05/13/2010 12/22/2010


Two bidding documents were issued to sign new partnerships, however, noorganization showed interest for the first bid and the second bid was notsigned since the 2nd place organization went to court to contest the result.

G. Ratings of Program Performance in ISRs

No.Date ISR

ArchivedDO IP

Actual

Disbursements

(USD millions)


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H. Restructuring (if any)

Not Applicable


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1. Program Context, Development Objectives and Design

1.1 Context at Appraisal

Background

1. Located at the extreme south of Brazil, Rio Grande do Sul (RS) is the fourthlargest Brazilian state economy and the fifth largest in population. The states GDP in2007 reached R$ 175 billion (US$90 billion1) and represented 7.4 percent of nationalGDP. Industry and services each represented 44 percent of GDP, while agriculturecontributed with the remaining 12 percent. Economic activity is driven by export sectors,high-productivity agro-business, and a well developed industrial sector. Rio Grande doSul had a population of 11 million inhabitants, which represented 6 percent of theBrazilian population.2. Rio Grande do Sul is a well developed state and has enjoyed high socio-economicwelfare standards in the Brazilian context. Per capita GDP was US$8,100 in 2007, thefourth highest in Brazil and 16 percent larger than the national average. Social indicatorswere also well above national averages. In 2006, RSs poverty headcount rate was 17.1percent, the fifth lowest in the country. Income inequality is also much lower than

national figures. Education and health indicators were also well above national averages.3. Despite the privileged position that Rio Grande do Sul holds in the Braziliancontext, economic and social development deteriorated since the mid 1990s. The statesgrowth was more volatile than the national economy, with large expansions followed bystrong recessions. The RS economy is highly vulnerable to climatic effects concerningwater resources and the exchange rate movements, which affect export-oriented agro-business and industries.4. This difficult economic scenario was translated into structural and entrenched

fiscal imbalances, which in turn further aggravated the local economic outlook. In 2007, anew elected government took office. During the campaign, it had promised to takemeasures to address the difficult state fiscal situation. Thus, one of the Governments firstmeasures was to launch an emergency fiscal adjustment package.5. At appraisal, Rio Grande do Sul was the state with the most difficult fiscalsituation in Brazil, failing to comply with several Fiscal Responsibility Law (FRL) limits2.The sources of the imbalances were traced to a smaller tax base, together withbenevolence in granting tax exemptions, an increasing trend in personnel expenditures as

well as fiscal risks on payroll such as the Brito Law3, a large structural deficit of thestates social security system, the states debt dynamics, and a rigid structure in theprovision of a large array of public services, as presented briefly below.


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6. This two-tranche DPL was designed to support the Governments policies toaddress the above cited problems as well as to help the state comply with the subnational

fiscal responsibility framework.Rationale for Bank Involvement

7. The project was appraised and finalized under the guidelines of the BrazilCountry Partnership Strategy (CPS) 2008-2011. One of the CPS pillars deals with macrofundamentals, good governance and public sector management. The country developmentobjective related is to strengthen fiscal sustainability with increasing private sectordevelopment. In this pillar, the CPS advances issues such as public management

efficiency and effectiveness, improving quality in public expenditures and engagementwith states in results-oriented public sector reforms.8. The RS Fiscal Sustainability DPL was fully aligned with the above mentionedCPS pillar. It helped strengthen fiscal sustainability in the state by addressing debtdynamics problems. It also helped the state address long term fiscal sustainabilitychallenges by improving expenditure management (e.g. procurement system actions), taxadministration (e.g. revenue matrix management), social security, and HR reforms.9. The loan also concentrated on public management efficiency and effectiveness

issues and results-oriented public sector reform in line with the CPS.10. Lastly, this operation also attended a strong demand from the central governmentexplicit in the CPS, to work more with subnational governments, especially on fiscalissues and compliance with the FRL.

1.2 Original Program Development Objectives (PDO) and Key Indicators

11. As described in the Project Document (PD), the PDO is: the loan would supportRS Government to resume a sustainable fiscal position which includes a smoother debt

profile and a balanced social security scheme. In addition, the loan would contribute toimproved public services through public sector management reforms. Similarly, asustainable fiscal path would eventually expand fiscal space for investment to enhancethe quality of public service provision, improve the economic growth prospects andreverse the deteriorating trend in social indicators.12. As per the PD, the operation was structured around four components: fiscalsustainability, debt restructuring, social security and modernization of the state publicsector. Each component had its own development objective(s) and key indicator(s) assummarized in Annex 3.

1.3 Revised PDO (as approved by original approving authority) and Key Indicators,and Reasons/Justification

13. PDO was not revised.


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operating expenses, enhance tax collection efficiency and rationalize tax expenditures.The last two components were composed of long-term and structural policy actions. They

included the introduction of results-oriented public management practices and themodernization of HR management.

Table 1 Supported Policy Areas

Policy Area Policy Actions Long-Term Vision

Component 1: Fiscal Sustainability

A - Fiscal

Adjustment

Compliance with the Fiscal

Adjustment Program 2007-09agreement with the NationalTreasury Secretariat and reductionof the indebtedness ratio under theFiscal Responsibility Law

Achieve long run fiscal

sustainability and reduce financingneeds

Create fiscal space for publicinvestments and to support publicservice delivery

B - Expenses Reduction of personnelexpenditures as a portion ofcurrent revenues

Rationalization of state operatingexpenses and modernization ofstate procurement system

Improve state expenditurecomposition in order to fostergrowth

Maximize value-for-money ingovernment procurement andimprove the efficiency of theprocurement cycle

Increase public investment tofoster long-term economic growth

C - Revenues Enhancement of state taxcollection efficiency

Introduction of result basedmanagement tools to improve taxcollection efficiency

Rationalization of tax expenditures(tax incentives for private firms)

Improve tax revenue performanceto enhance the fiscal adjustment

process and expand the fiscalspace for investment andcountercyclical discretionaryspending.

Component 2: Debt Restructuring

D - DebtManagementPolicy

Reduction of state indebtedness

Building the capacity of the statedebt management division

Guarantee an equalintergenerational distribution ofthe state debt burden

Improve the states debt profile(duration, net present value, anddebt service pattern)

Component 3: Civil Service Social Security


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Component 4: Modernization of Public Sector

Policy Area Policy Actions Long-Term Vision

F -Introductionof Results-BasedManagement

Establishment of results-basedmanagement and budgetarypractices

Implementation of strategicprograms

Contracting out service delivery

Improve the efficiency of publicsector management through abetter allocation of resources andthe use of new managerial models

Enhance transparency andaccountability

G - Human

ResourcePolicies

Reform of the civil service career

structure Modernization of human resource

management

Introduction of performance-basedcompensation policies for civilservants

Align the incentives and

competences of the public sectorworkforce to the governmentsroles and objectives

Improve work performance andeffectiveness throughout the careercycle

1.5 Revised Policy Areas

15. Not applicable.

1.6 Other significant changes

16. No significant changes were made to the DPL.

2. Key Factors Affecting Implementation and Outcomes

2.1 Program Performance

17. Program implementation was satisfactory, even though some external factors tothe executive power hindered the pace and conclusion of some reforms. Nonetheless,achievements like a declining debt/ revenue ratio and controlled expenditures areimportant, especially in a state with a long history of fiscal profligacy.

Table 2 DPL actual and effective disbursement structure

Component 1: Fiscal Sustainability

18. A - Fiscal Adjustment. This first policy area reflected the commitment undertakenby the Government to fulfill the Fiscal Restructuring and Adjustment Plan (PAF)4 targets

Tranche # Amount ExpectedRelease Date

Actual ReleaseDate

Release

Tranche 1 USD 650 million 09/30/2008 09/12/2008 (1) RegularTranche 2 USD 450 million 12/31/2009 07/19/2010 (2) (partial) Waiver


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19. Table 35 shows solid improvements in the state fiscal conditions. As a result, it isexpected that the Net Consolidated Debt (NCD) to Net Current Revenue (NCR) ratio fall

under two i.e. under 200% by mid-year 2012. As recognition, the National TreasurySecretariat (STN) allowed the state to initiate the procedures for contracting new loansfor the first time since the debt renegotiation contract was signed in 1998.

Table 3 Policy Area A: Fiscal Adjustment: Results indicators matrix6

Indicator 20072010

(Expected)2010

(Actual)

Net Consolidated Debt to Net CurrentRevenue ratio 2.48 2.38 2.14

Financial Debt to Net Real Revenueratio

2.93 2.80 2.26

Primary balance consolidated publicsector R$ Million

967 1,600 1,582

Primary Balance Direct Administration -R$ Million

1,076 1,400 1,034

Gross Operating Balance ConsolidatedPublic Sector R$ Million7

- 473 400 1,497

Net lending/borrowing ConsolidatedPublic Sector R$ Million

-853 -750 -433

20. B - Expenditures. The focus of this policy area was on structural fiscal imbalancesissues and thus helped to ensure the sustainability of the fiscal adjustment by reducing the

pace of current expenditure growth and allowing for greater investment.

5 This table and the following ones present the baseline indicators for 2007, even though the PD hasbaseline indicators for 2006 as well. This was done for the sake of simplicity and because 2007 was theyear before the operation was put into effectiveness.

6 For Table 3 to


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21. Table 4 shows that the state was able to reduce the share of payroll and currentexpenditures and opened up more room for investments, signaling for sustainability of

the adjustment and growth prospects.22. The major highlight in this area was the restructuring of the procurement system.The Government implemented more modern procurement alternatives like electronicreverse auctions and price registry, as well as bolstered a planning culture for the stateregular purchases.23. The procurement office was totally restructured, including its facilities, andhuman resources which were increased and trained. The improved fiscal managementresulted in more resource predictability, allowing for better purchase planning and

reduced the suppliers uncertainty regarding payments. By the end of 2010, RS had morethan 2,500 items registered which allowed for immediate supply and counted with morethan 11,000 registered suppliers. As a result, the price paid for some items like livestockvaccination was reduced from R$ 1.56 per shot to a range between R$ 0.76 to R$ 0.86.The total savings reaped by the procurement office amounted to R$ 271 million.

Table 4 - Policy Area B: Expenditures: Results indicators matrix

Indicator 2007

2010

(Expected)

2010

(Actual)

Personnel expenditure to net currentrevenue (PAF) - ratio

0.68 0.66 0.60

Current expense to total expenditureratio consolidated public sector (FRL) ratio

0.90 0.85 0.84

Investment expense to net current

revenue ratio direct administration(PAF) - ratio

0.02 0.06 0.09

* PDO indicators are written in bold and results indicators which were met are shaded ingray color.

24. C - Revenues. The policy actions in this area were aimed at improving taxcollection efficiency like the extension of the Substituio Tributria8 mechanism andadoption of the electronic fiscal invoice.25. Regarding, tax expenditures, the state has withdrawn some tax breaks, but moreimportantly the State has given increased transparency to all tax expenditures in itswebsite9. The general public can access the total expenditure amount and the values foreach tax, region, and purpose. A technical note with the methodology is also available.

Regarding the indicators,


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26. Table 5 demonstrates that the first two indicators achieved the expected results for2010. State tax collection increased due to states efforts to curb the tax gap as well as

external factors such as the smaller reliance on exports by local firms. While the taxrevenue to state GDP ratio did not reach the expected 9% value, this was largely due to ahigher than expected GDP growth. In fact, the actual the tax revenue collected farexceeded the expected one as shown also in Table 5.27. The original policy matrix foresaw an indicator on tax expenditures that wasnever put in place. This occurred due to the high complexity and controversy regardingsuch measures, which were unknown for the team at the time of preparation. In addition,due to the tax incentive design, the amount of tax expenditure can increase, even if the

government does not give any new tax break, which undermines the purpose ofmonitoring such indicator.

Table 5 - Policy Area C: Revenues: Results indicators matrix10

Indicator 2007 2010(Expected) 2010(Actual)

State Tax Revenue R$ billion 13.7 18.5 20.4

Real growth rate of state tax revenue -percent

1.8 4.0 14.5

Tax revenue to state GDP ratio - percent 8.3 9.0 8.2

* PDO indicators are written in bold and results indicators which were met are shaded in

gray color.

Component 2: Debt Restructuring

28. D - Debt Management Policy. This policy area aim was to support RS by payingout extra-limite debt with the resources provided by the Bank loan, as well as buildingdebt management capacity in the state.29. Table 6 shows that once more the expected results were achieved. TheGovernment estimates that the debt restructuring saved R$ 379 million (1.6% of GDP) up

to December of 2010.30. Furthermore, the engagement with the Bank allowed the civil servants in chargeof debt management to deepen their expertise. During preparation of the ICR, the Statesgovernment informed the Bank that staff is now apt to perform analysis on exchange andinterest rate swaps, as well as to produce more informative managerial debt reports.


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Indicator 20072010

(Expected)2010

(Actual)

Extralimite debt service to Net RealRevenue percent

2.9 2.5 1.8

Total debt service to Net RealRevenue - percent

17 15.5 14.8

Duration (extralimite debt) 8.6 011 10.9

Variance of debt service to Net RealRevenue (extralimite debt period

2008-28)

0.00005 0.00003 0.00003


Component 3: Social Security

31. E - Reform of the State Social Security System. This policy area dealt directly withone of the largest structural sources of fiscal imbalance in RS. Despite the fact that thebenefits paid were higher than expected and the contribution received was lower than

forecasted, the state social security deficit was within the expected value. Moresubstantial improvements were prevented since social security reform bill was notapproved by the state legislative. In this regard it is worth noting that in recent months thenew Government sent a new draft law to the legislature to address this issue.

Table 7 - Policy Area E: Reform of the State Social Security System: Resultsindicators matrix

Indicator 20072010

(Expected)2010

(Actual)

Deficit of the State Social SecuritySystem (RPPS) R$ million

4,225 5,000 5,867

Civil servants contribution to theRPPS R$ million

524 840 698

RPPS benefits paid R$ million 4,749 5,838 6,565

Survivor/ beneficiaries - percent 29 32 35

Survivor/ beneficiaries + actives -percent

16 17 15

Retired/ actives - percent 65 65 N.A.



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32. F - Introduction of Results-Based management. In order to overcome publicsector inefficiencies and deliver a better service to the population the RS government

decided to contract the relationship with several of its offices and invest in alternativeservice delivery approaches. In this area, one successful initiative was the Portal deGesto, a dedicated website to monitoring and evaluating the governments priorityprojects, the so-called Projetos Estruturantes.33. The advances in this policy area were uneven. The government was able to movefast with management contracts both with line secretariats and SOEs. The contractingexperience has been very positive. Reported benefits include better planning andexecuting capacity, better management reports, allocative efficiency gains, identification

of bottlenecks and better internal coordination.34. Regarding the management contracts with SOEs the Government diagnosed thatthe incentives offered to state enterprises to sign the contracts were not sufficientlyattractive as to commit them to the results contracted. It is believed that SOEs saw thecontracts as a mere way of getting more budget and more staff. Thus, even though theindicators were mostly met the intended outcome was not achieved since the pretendedcultural change in the way SOEs operate did not materialize.35. Finally, the public service provision by OSCIPs was the action in which the least

progress was achieved in this area. The Government was only able to sign one contract,despite its documented effort to attract new partners and sign more contracts.36. The Government and the Bank believe that factors like the lack of governmentcredibility due to its former financial situation, the complicated political state context,resistance and low adherence to the model by government middle and lower-levelmanagement were key reasons undermining the success of this initiative.

Table 8 - Policy Area F: Introduction of RBM: Results indicators matrix

Indicator 20072010

(Expected)2010

(Actual)

Increase of users satisfactionmeasured by the Instrumento Padrode Pesquisa de Satisfao (IPPS) orsimilar methodology

Secondaryeducation =6.22; publicsecurity =

6.16; publichealth = 4.97

Secondaryeducation =

7; publicsecurity = 7;public health

= 6

Secondaryeducation =6.1; publicsecurity =4.9; publichealth = 4.8

Number of OSCIPs deliveringpublic services

0 6 1

Revenues raised by organizations


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signed with SOEs


gray color.

37. G - Human Resources Policies. The government intended to implement a new HRdevelopment policy to deal with issues such as workforce planning, inadequate salaryscales, inflexible career options and weak management.

38. The drive for HR reforms lost momentum in the state government along its tenure.The difficult political situation in the state made it harder for the governor to faceentrenched interests. Additionally, the government underestimated at the onset of the plan,

the need for legislative approval of the proposed measures.

Table 9 - Policy Area G: HR Policies: Tranche Results indicators matrix

Indicator 20072010

(Expected)2010

(Actual)

Number of careers restructured 0 5 1

Overall trends in WF quantity andcompetences evolving according to aWF plan

No Yes No

Absenteeism rate N.A. 5.00 N.D.

Share of managers, involved in RBM,

trained accordingly

N.A. 500 N.D.


2.2 Major Factors Affecting Implementation:

39. Background analyses were carefully conducted. All policy components were


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Social Security and Modernization of Public Sector) were more dependable on actionsexternal to the Executive Power. The overall number of indicators (apart from the PDO

indicators) in the policy matrix proved to be excessive. Some indicators were evendifficult to understand and unclear, adding complexity to the operation41. The main risk identified at the preparation stage was of political nature and it wasexplicitly stated at the PD that the proposed loan was a high risk one. The risk arisingfrom civil servants internal resistances to change was vaguely identified as reform fatigue.It is clear now that the internal resistance by civil servants to change towards a result-oriented culture was underestimated.42. On the political risk side, at time of preparation the government seemed to have

strong political support at the legislative as politically sensitive laws had passed with astrong majority vote. It was also stated as a mitigating factor that the Government wasable to thoroughly communicate to the general public the need for reforms, the reformswere clearly stated in the campaign platform and the society increased awareness of thestate fiscal problems. It is clear now that such mitigating factors were insufficient.43. The global economic crisis had an impact on the state economic and fiscalsituation, but not on the program implementation. Tax revenue growth slowed down fromprevious years, but RS was one of the least affected Brazilian states in 2009. The state

good performance in previous years served as a buffer to the global economic crisis andthe decision to postpone some expenditure in 2009 helped secure balanced budget results.

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

44. The primary role in coordinating the data gathering, calculating the indicators andassembling the responses for the Bank was done by the Secretariat of Finance. Theindicators chosen were coherent with PDOs and policy components.45. Most of the data needed to calculate the indicators were already regularly

collected and monitored by the Government. In this sense, it is correct to say that thesedata was already used to inform Government decisions mostly on the fiscal policy side.However, the data used to monitor HR and social security indicators were not regularlycollected by the government and thus presented difficulty in recovering and reporting.

2.4 Expected Next Phase/Follow-up Operation:

46. As a result of this DPL, both in financial and operational terms, the state is nowable to contract out new loans other than debt restructuring operations. Since the Bank

supported the fiscal turnaround carried out by the State, the Bank is well positioned toprovide new loans to the state in the upcoming period, supporting at the same time themaintenance of a prudent fiscal behavior. In fact an investment loan with a multi-sectorSWAP approach is already in the pipeline.

3. Assessment of Outcomes


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prior and throughout the world economic crisis reduced the impacts that state financeswould otherwise have suffered, through improved debt service profile, increase tax

collection efficiency and better prioritized expenditures.48. The DPL was fully aligned with the CPS during loan preparation, implementationand conclusion. The CPS 2008-2011 document states (b) a major leading program withstates, on state priorities and in compliance with the Fiscal Responsibility Law. Thisemerging state-dominated program is branded as one based on principled opportunism,in which governors who are interested in working with the Bank define their priorities,and in which the Bank brings a set of well-articulated principles (based on analytic workand experience in Brazil and elsewhere) to the table.

49. The extract above could well be used to describe the RS operation, confirmingonce more its alignment with the country strategy and its high overall relevance.Furthermore, it advances the issues listed in the CPS pillar: Macro fundamentals, goodgovernance, and public sector management.50. Lastly, it is also in accordance with the country current development prioritiessince during the 2008-2011 CPS consultations, the federal government had formallyasked the Bank to engage more with states and support them in complying with the FRL.Furthermore, the target of increasing public investment is also in line with federal

government priorities as reflected in the Growth Acceleration Program (PAC).

3.2 Achievement of Program Development Objectives

51. The overarching objective of this operation was to assist the state governmentachieving a more sustainable fiscal position. This would be achieved by a combination ofshort and medium term policies (components 1 and 2) and more long term reforms(component 3 and 4). Expected results from improved fiscal position were better public

services and greater fiscal space for investments.52. The state fiscal position improved considerably as showed by Table 3, Table 4and53.54. Table 5. The adjustment was carried out without relying heavily on extraordinairerevenues and by controlling the growth rate of current expenditures. Revenue increasewas achieved through more efficient tax collection and increased economic growth. Thedebt restructuring operation was very successful either.

55. On the third and fourth components, progress in achieving the developmentoutcomes was mixed. On one hand, state social security system reforms undertaken,although relevant, did not fully meet the expected outcomes. On the HR side, the reformswere restricted to the creation of one new career (public manager). On the other hand,advances in the introduction of results-based management were more significant and thedrawbacks faced are the ones regularly expected in such endeavors


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the outcomes, the state has met five out of six PDO indicator targets (only theintermediate outcome indicator was missed). RS now enjoys a more fiscally sustainable

position, which allowed it to reap the gains of fiscal rectitude in terms of greater fiscalspace for investment.

3.5 Overarching Themes, Other Outcomes and Impacts

(a) Poverty Impacts, Gender Aspects, and Social Development

58. As stated in the PD, the poorest and most vulnerable people in the RS society arethe ones who rely the most on state public services. Therefore, all the measures aimed atimproving public sector delivery as well as allowing the government to increase its fiscal

space to increase public service provision have contributed to poverty alleviation andsocial development. There was no specific gender component to the loan.

(b) Institutional Change/Strengthening

59. The project has had a positive impact on institutional and capacity development.For example, the reforms supported by the loan on the procurement proceduresrepresented an invaluable efficiency gain for the state. Before, the reforms the state wasseen by suppliers as a not-so-good purchaser due to the delays in making payments.

Internally, state offices complained about the delay in receiving the goods and servicesrequested. After the reforms, RS implemented price registry system for more than 2,500items for immediate supply. Payment periods and the average price paid were reducedand the number of suppliers was increased.60. The same can be said from the capacity acquired by the debt management team,due to the training and assessments offered by the Bank. As a result, Sefaz has beenproducing comprehensive annual reports on its debt activities. It has also assembled aprocedure manual for the debt related activities.

(c) Other Unintended Outcomes and Impacts

61. Not applicable.

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

62. Not Applicable.

4. Assessment of Risk to Development Outcome

Rating: Moderate63. The above DPL was classified as a high risk operation. The political risk derivedfrom the fear that the government would not be able to sustain the adjustment until theend of the government and that adjustment would be maintained in the followinggovernment. The risks to development outcome are concentrated on economic, politicaland government ownership factors


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extralimite debt service was also addressed. Some fiscal risks like the Brito Law andjudicial claims were at least partially solved.12

65. On the political and government ownership front, the state administration facedopposition in the state assembly. As a result, important draft laws were not approved. Theincumbent party did not manage to get reelected and the political party elected was theone which led the opposition. The transitioning to a new government, especially to anopposing party, increases the risk to development outcome.66. Nevertheless, some attenuating factors may sustain the development outcomesand even advance them. The speeches and actions taken so far by the new governmentreflect the intention to maintain an environment of fiscal prudence. Also, the follow-up

operation with the state will leave the Bank in a better position to ascertain that fiscalresponsibility is maintained.

5. Assessment of Bank and Borrower Performance

5.1 Bank Performance

(a) Bank Performance in Ensuring Quality at EntryRating: Satisfactory

67. For this operation, Bank staff drew knowledge from previous AAA work onfederalism, pension system and the analytical work done in Minas Gerais. The Bankmaintained an intense technical dialogue with the state throughout the project preparationstage. The Bank fielded several missions to the state with specialists on each field, whoprepared detailed background analysis for the operation. Stakeholders consultations werealso conducted.This has guaranteed that the proposed policies were relevant to the stateand the whole program was adequate and constituted of reforms that would address notonly short-term problems, but also would deal with the structural reasons behind the state

fiscal imbalance.68. The Bank has also designed an innovative repayment profile, with monthlypayments and customized repayment profile in response to the clients needs. The debtrestructuring operation has also fostered demand from other subnational governments inBrazil for the Banks services. Finally, the supported reforms opened up fiscal space forgreater investments and better public service provision.69. Small deficiencies were felt on the institutional aspects and on the M&Earrangements. On this last point, it is worth noting that only five out of the 32 indicators

of the matrix indicators were monitored coherently through the whole operation lifetime.

(b) Quality of SupervisionRating: Satisfactory

70. The Bank conducted several supervision missions to RS, as well as maintained anactive policy dialogue during project supervision The supervision missions and budget


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deliver on the agreed products and reach the expected outcomes. This allowed forcapacity building in several areas, as mentioned above (e.g. M&E and debt management)

71.

This was particularly important when the Bank envisaged that the state was notgoing to be able to fulfill the second tranche triggers on the expected time. The Bank thensent consultants to help them work on topics with the greatest delays. For instance, aconsultant was sent to help them devise the rules and manuals regarding OSCIPS.Another expert was enlisted to revise the draft law on pensions. Thus, the Bank took allmeasures in our reach to help the client meet second tranche triggers, however, due to thelocal political situation the Bank took the conscious decision not to get involved anyhowon it and suspended all missions during that period.

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

72. The Bank performance is rated satisfactory since the project addressed the clientsmain problems and the supervision not only monitored the implementation, but alsohelped the Government achieve most of the expected results. Even though, some policycomponents were not fully implemented, its hard to attribute this failure to majorproblems in project appraisal or supervision.

5.2 Borrower Performance

(a) Government PerformanceRating: Satisfactory

73. The borrower was the Government of Rio Grande do Sul and the implementingagency was the Secretariat of Finance. Other secretariats involved included Secretariat ofPlanning, Secretariat of Administration and Human Resources and Secretariat of Justiceand Social Development.

74. The borrower instituted an enabling environment for the reforms and addressedtimely issues raised during implementation. A good example relates with OSCIPS model,in which the government proactively sought social organizations to participate in itsprogram. No shortcomings were faced regarding fiduciary aspects or transitionsarrangements.75. Regarding government ownership, top level management commitment in theExecutive Power was outstanding. However, the same degree of commitment was notexperienced in some areas at lower level management and the Legislative Power. Thus,the failure to implement some of the reforms cannot be fully credited to the borrower.

(b) Implementing Agency or Agencies PerformanceRating: Satisfactory

76. As the program champion, Sefaz showed strong commitment to achieve the


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issues arose in the course of this operation. Minor shortcomings were faced onmonitoring and evaluation arrangements as well as on borrower ownership, thusjustifying the overall satisfactory rating.

6. Lessons Learned

78. The first lesson highlights the importance of the debt restructuring operationamong the fiscal consolidation measures behind the fiscal turnaround in RS. Therestructuring not only saved budgetary resources, but was also key to smoothing the debtservice profile in 2009 and 2010 at a time when the global economic crisis increaseduncertainty and rollover risks worldwide. The improved profile also facilitated the task of

budget planning. The debt restructuring was thus of paramount significance to the stateand spurred a new demand from subnational clients willing to engage in fiscalconsolidation operations with debt restructuring components with the Bank.79. Another important lesson regards the value of flexibility from the Bank side.Since this DPL was the first debt restructuring operation carried out in Brazil after theFRL and the debt renegotiation law, the Bank had to be very flexible to structure therepayment profile to the needs of the client and the guarantor. In this sense, BankTreasury innovated by allowing for monthly repayments which was key to secure the

federal governments approval to the operation.80. A political economy lesson can also be drawn. The loan supported reforms aimedat addressing structural fiscal imbalances. However, undertaking such reforms requiresstrong social coalitions. These coalitions in turn take a relatively long time to build whilethe DPL instrument is short-lived. In this sense, the DPL merit was at least to help buildthe needed coalition by bringing up the issue. The submission of a new draft law onpension reform by the new Government is suggestive that this DPL may have contributedto building a consensus around this issue.

81. Finally, the timing of the loan suited very well the states needs. Firstly, because itavoided the spikes in the debt service. Secondly, because the first tranche was releasedjust before the outburst of the economic crisis which cushioned the state budget.

7. Comments on Issues Raised by Borrower/Implementing Agencies/Partners(a) Borrower/Implementing agencies

(b) Cofinanciers82. Not Applicable.

(c) Other partners and stakeholdersNot Applicable


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Annex 1 Bank Lending and Implementation Support/Supervision Processes

(a) Task Team members

Names Title UnitResponsibility/

Specialty

Lending

Supervision

(b) Staff Time and Cost

Stage

Staff Time and Cost (Bank Budget Only)

No. of staff weeksUSD Thousands (includingtravel and consultant costs)

Lending

FY08 657.72

Total: 657.72Supervision/ICR

Total: 0.00


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Annex 2. Summary of Borrower's ICR and/or Comments on Draft ICR


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ObjectivesKey obstacles to achieving

those objectivesActions Completed

(First Tranche)Actions To Be Completed

(Second Tranche)Medium Term

Outcomesprovision of non-exclusivepublic services

Enhanced performanceof public enterprises

Human Resource Policies

Align the public sector workforce to the Governmentsroles and objectives with theproper competences

Improve the incentives to workand perform effectivelythroughout the working career

Remuneration policies are notrelated to performance

Lack of work force planning

Excessive rigidity of laborcontracts and career structure

Career promotion basedexclusively in seniority

Inadequate competences ofcivil servants for theiradequate performance

Creation of the Government Schoolthrough executive decree and designof action plan for the GovernmentSchool to prepare curriculums andtraining courses for the result basedmanagement model

Submission to the state assemblyof a bill strengthening civilservice careers in the direct andindirect administration accordingto the action plan prepared by thegovernment to reform the careerstructure in 2008

More flexible careerstructure

Enhanced work forceplanning capacity

Reduced absenteeism

Civil servantscompetences alignedwith the result basedmanagerial model


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Objectives Medium Term Outcomes Baseline (December 2006) Baseline (December 2007) Expected Results by 2010

Component 1: Fiscal SustainabilityFiscal Adjustment

Achieve long runfiscal sustainabilityand reducefinancing needs

Create fiscal spacefor public

investments andenhance the qualityof service delivery

Establish mediumterm fiscalsustainability

Reduction in stateindebtedness

Reduction in debtservice obligations

Higher operating

balances to broadfiscal space forinvestments

Net Consolidated Debt toNet Current Revenue ratio(FRL) = 2.54

Financial Debt to Net RealRevenue ratio (PAF) = 3.0

Primary BalanceConsolidated Public Sector(FRL) = R$ 454 million

Primary Balance DirectAdministration (PAF) =R$ 778 million

Gross Operating BalanceConsolidated Public Sector= R$ - 679 million

Net lending/borrowingConsolidated Public Sector

= R$ - 1,333

Net Consolidated Debt toNet Current Revenueratio (FRL) = 2.48

Financial Debt to NetReal Revenue ratio (PAF)= 2.93

Primary BalanceConsolidated Public

Sector (FRL) = R$ 967million

Primary Balance DirectAdministration (PAF) =R$ 1,076 million

Gross Operating BalanceConsolidated PublicSector = R$ - 473 million

Net lending/borrowingConsolidated PublicSector = R$ - 853 million

Net ConsolidatedDebt to Net CurrentRevenue ratio (FRL)= 2.38

Financial Debt to NetReal Revenue ratio(PAF) = 2.80

Primary Balance

Consolidated PublicSector (FRL) =R$ 1,600 million

Primary BalanceDirect Administration(PAF) = R$ 1,400million

Gross Operating

Balance ConsolidatedPublic Sector =R$ 400 million

Netlending/borrowingConsolidated PublicSector = R$ - 750million


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Expense

Improve stateexpenditurescomposition inorder to fostergrowth

Reduce the pressureof current

expenditures onstate finances

Maximize value formoney ongovernmentprocurement andimprove efficiencyof the procurement

cycle Increase investment

expense to fostergrowth prospects

Reduction ofpersonnelexpenditures inproportion to staterevenues

Lower share ofcurrent expense tototal expenditure ratio

Increase of investment

expense in proportionto state revenues

Improved quality ofprocurement asassessed by indicatorsdefined in TechnicalNote onmodernization of the

state procurementsystem

Personnel expenditure tonet current revenue (PAF)= 0.69

Current expense to totalexpenditure ratioconsolidated public sector(FRL) = 0.90

Investment expense to netcurrent revenue ratio direct

administration (PAF) = 0.04

Personnel expenditure tonet current revenue(PAF) = 0.68

Current expense to totalexpenditure ratioconsolidated public sector(FRL) = 0.90

Investment expense to netcurrent revenue ratio

direct administration(PAF) = 0.02

Current expense tototal expenditure ratioconsolidated publicsector (FRL) = 0.66

Current expense tototal expenditure ratioconsolidated publicsector (FRL) = 0.85

Investment expense to

net current revenueratio directadministration (PAF)= 0.06

Revenue

Improve taxrevenueperformance toenhance the fiscaladjustment andexpand fiscal spacefor investments

Enhancement of thestate tax revenueperformance

Reduction of taxexpenditures in

relation to observedtax revenues

Improve transparencywith the explicitinclusion of taxexpenditures in the

State Tax Revenue =R$ 14.4 bi

Real growth rate of statetax revenue = 1.6 percent

Tax expenditures (to be

estimated) Tax revenue to state GDP

ratio = 8.8 percent


Real growth rate of statetax revenue = 1.8 percent

Tax revenue to state GDP

ratio =8.3 percent Tax expenditures


Real growth rate ofstate tax revenue = 4percent

Tax revenue to stateGDP ratio = 9 percent

Tax expenditures


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classes of civilservants and; of complementaryfund assets asindicated bydiversified portfoliosand net rates ofreturn close to marketrates

Component 4: Modernization of the State Public SectorIntroduction of Result-

Based management

Improve efficiencyof public sectormanagementthrough a betterallocation ofresources and new

managerial model Enhancement of

transparency andaccountability

Strengthen theempowerment andownership of civilservants

Increased users

satisfaction index withservice delivery

Increasedparticipation of civilsociety and privatesector in the servicedelivery

Increased own

revenues of entitiesmanaged underOSCIPs arrangements

Improvedperformance ofstrategic programsaccording to theindicators and targetsdefined in the result

agreements Enhanced

performance of StateOwned Enterprises

Increase of users

satisfaction measured bythe Instrumento Padro dePesquisa de Satisfao(IPPS) or similarmethodology = n.a

Number of OSCIPsdelivering public services =0

Revenues raised byorganizations managed byOSCIPS = 0

Number of resultsagreements signed betweenSEPLAG and lineSecretariats = 3

Number of ManagementContracts signed with SOEs

=6

Increase of users

satisfaction for selectedservices provided by thestate government andmeasured by theInstrumento Padro dePesquisa de Satisfao(IPPS) or similarmethodology: secondary

education = 6.22; publicsecurity 6.16; publichealth = 4.97

Number of OSCIPsdelivering public services= 0

Revenues raised byorganizations managed byOSCIPS = 0

Number of resultsagreements signedbetween SEPLAG andline Secretariats = 0

Number of ManagementContracts signed with

Increase of users

satisfaction measuredby the InstrumentoPadro de Pesquisa deSatisfao (IPPS) orsimilar methodology =secondary education =7; public security 7;public health = 6

Number of OSCIPsdelivering publicservices = 6

Revenues raised byorganizationsmanaged by OSCIPS= 20 percent of theirrevenues generated bythemselves

Number of resultsagreements signedbetween SEPLAG andline Secretariats = 11

Number ofManagement


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SOEs =0 Contracts signed withSOEs = 8Human ResourcePolicies

Align the publicsector work force tothe governmentsroles and objectives

with the propercompetences

Improve theincentives to workand performeffectivelythroughout theworking career

More flexible careerstructure

Enhanced work forceplanning capacity

Reduced absenteeism

Civil servantscompetences aligned

with the result basedmanagerial model

Number of careersrestructured = 0

Overall trends in WFquantity and competencesevolving according to a WFplan

Absenteeism rate = 6.71

Share of managers,involved in RBM, trainedaccordingly = 300


Overall trends in WFquantity and competencesevolving according to aWF plan

Absenteeism rate =

Share of managers,involved in RBM, trainedaccordingly =


Overall trends in WFquantity andcompetences evolvingaccording to a WFplan

Absenteeism rate = 5 Share of managers,

involved in RBM,trained accordingly =500


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Annex 4 - Rio Grande do Sul Gross Domestic Product: 2002-2010

2002 2003 2004 2005 2006 2007 2008 2009 2010

GDP(R$billions) 105.487 124.551 137.831 144.218 156.827 176.615 199.499 207.278 237.859GDPpercapita(R$) 10,057 11,742 12,850 13,298 14,305 16,689 18,378 18,992 21,683GDPAnnualGrowth(%) 1.7 1.6 3.3 -2.8 4.7 6.5 2.7 -0.8 7.8GDPAnnualGrowthbySector(%)Agriculture -3.5 16.4 -10.6 -17.4 50.1 12.7 -5.3 1.5 8.9

Industry 3.2 0.9 7.1 -4.1 -2.0 4.7 3.0 -5.6 10.3

Services 2.4 -0.2 4.2 0.2 3.0 6.0 3.3 0.8 6.8


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