Document of

The World Bank

FOR OFFICIAL USE ONLY

Repor No. 11714-BR

STAF APPRAISAL REPORT

BRAZIL

-MS GERAIS S MICIPAL MANAGMNTAN) ENVIRONM INFRASTRUCTURE PROJECT

JUNE 21, 1993

MICROFICHE CODY

Report No.:11714-BR Type: (SAR)Title: MINAS GERAIS MUNICIPAL MANAGEMAuthor: SHEEHAN, MARYExt.:39383 Room:I 7131 Dept.:LA1IN

Infrastructure Operations DivisionCountry Department ILatin America and the Caribbean Regional Office

Thi document ha a restdcted distibution sod may be used by recpients only in the performance oftheir otflkia duties. Its contents may not oterwise be dbisosed withd Wodd Bank autbhorian

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CURRENCY EOUIVALENTSJanuary 15, 1993

Cunrency Unit = Cnrzeiro (CR$)US$1.00 = CR$13,440.86CR$1.00 = US$0.0000744

WEIGHTS AND MEASURES

Metric System

ISCAL MR

January 1 to Deember 31

ABBREVIATIONS AND ACRONYMS

AMM - Associado Mlieira de Munidpios - State Association of MunicipalitiesBDMO - Banco de Deenvolmeno de Mias Gerais - Minas Geris Sta.? Development BankCEP - Catxa Econonmca Federal - Federal Savings BankCEMIG - Companhia Energica de Minas GeraJs - Minas Geris State Energy CompanyCODEMA - Consefio Munipl de Desenvolvimento do Meio-Ambiente - Municipal Environmental

Development CouncilCOPAM - Conselho Eswad de Potwca Anbiental - State Eavironmental Policy CouncilCOPASA - Companhia de Saneamento de Minas Gerais - Mnas Geais State Water CompanyDIU - Depaawmeo de Infraesrrutura - nfrastrcture Department (Project Unit)ELA/RIMA - Estudo de Impacto AknbientalRelatorio de Impacto do Meo-Ansbiente - Environmental Impact

AssessmentFEAM - Fundag4o Estadual do Melo-Ambente - State Environmental Foundation1P - Fundaf,o Joto Pinheiro - Joao Pinheiro FoundationFMIS - Fimancial Management Information SystemPNS - Fundag'o Nacional de Saude - National Health FoundationFPM - Fundo de Panicipa$o MunWal - Municipal Participation FundGOB - Government of BrazilICMS - Imposto sobre Cbrulgo de Mercadorias - Value-Added TaxIGP-M - Indice Geral de Pre'os de Mercado - General Market Price IndexIPTU - Iniposto sobre Propriedade Terriorial Urbana - Real Property TaxPAE - Pano de Apdo Es*rategia - Strategic Action PlanPDO - Programa de Desenwolvbnento Operacional - Operatona Improvement ProgramPLANASA - Plano Nacionl de Sanewnento - National Sanitation PlanSEAM - Secrearia Esdad de Assuntos Mukicipais - State Secretariat for Municipal AffairsSEP - Secretaria de Estado da Fazenda - State Sereariat of FmanceSEPLAN - Secretaria de Estado do Plane3amento - State Secretariat of PlanningSErOP - Secretaria de Estado de Transporte e Obras Pdblicas - State Seretaiat for Transport and

Public WodrsSOMMA - Programa de Saneanento B6sicow Organiza$o e ModemdWa4o Munipal - Municipal

Management and Environmental Infrastructre Program

FOR Oms:IL USE ONLY

NG ERI BU MPAAMEN RNMNTiOL 22SsUCnoMMM

srs; APPRAISAL

Tabk o clt"tsX

LOAN AND PROJECr SUNM&RY ................. i

L PROJECT O UE .................................. 4.................. 1

IL THE URBAN S CQ ................................. -.2A. Intf e ........ 2B. Urbanatdon: StUcue:andTrends ...... ............ .................. 2C. Provision of Urban Jhnstructu and Suvios .... .............. 3D. De..n.a..zan ...... . ........... 3.L 1he ---- o---- Conteo .. ... ............. 4P. Se ategy: A MeIum-Tem Vision for te Role of Municipalities . . ................ SG. TheStamefOf Gerais .. . . .............. 6H. Bank E rie In the UrbanS . ................... 9L U*aSectrStrategy ............ ..... 9

moL ......................... 10.. . . . .. . . . . . . .. . . . . .1A. Proje Objeives and aonale ........................... 10B. Ptoj Descuon . ......... .1......... IC. ProjeDesFeatms ........ .......................... . 14D. Ppojed Costs andFIncIngPlan ......... ............ 14E. Ml Borovr and the Execing Ageny ........ . . ....................... . 16F. Sau sofProjectPrpaaon ........................... . . . ... 16

IV. ZBME= ........ .......................... 17A.. MISOLAAProgrn .................................. 17B. The SOMMA Municipal Dvepent Fund .................................. 17

Tsreport s basd on th fidinp of an appais maion which visd rail fiom Januq 12-22, 1993,conidsing of d. Sheehan, tk managw (LAIN; B. Varon Lenis, sanltary enginwe R. Gilbet, economist; andV. Coelho, vir aspedida (onmunts). LA. Caalo (LLA), M. Sugar (LOAEL), M. Fra' (onleave), E. Codato (LAIIN, T. Campbell (IATAD) and E. Mbi (AFSCO) also p*ipated in projecprepadon.L .Michelse, S. Abmad, L Lewin and A. TWunt (LAI"N hped with report prparaton. ThePee Reviewers for the poject wear . hks ad C. Butne (UM ). G. T. Nankan (SASVP) was thePrW's Lead Advisor. A. Faiz, 0. Grmesand R. B. Stchn m th managing Division Chief, ProjecAdviso, and Deatme Dircor, respectively, forthe project

Ths document ha a retted dstbutioa may be used by recipints only in the performaneof ther offici duties Its contets may noot erwe be discosed without World Bnak authoizati

C. BDMG's Appya7 iPme ...................................... 19D. Lega .A rgI ens .............. ........ ....... ......... . ... . . 21E. Procurmm ......... ................... ..... ............ 22F. II zne .............................. 24G. AcounIg and Armaeients ................................... 24H. Monihing, Mid-Taom Reew adEvauan ........Eaao...................... 25I. entaImpamcStudies ............................. * S. 25J. mplementationSchedule ........ ................ ............... 26

V. FINANOM ASPEEC OF THE ZRODEC ...................... 26A. StaeFinances ................ .... *, 26B. MunicipalFinanes .... .. .2............... 27C. CostRecvery Policy ......... *..............* 28D. DIne gofSOlBIA ..... *............... ........ 28E. Sustnability ................................... ... 29

VL PEENBEBMDR AM .. .............. ........ 29A. Fiancialands onaliact .......................... ....... . 29B. Einnetnd Hedth Bnef .................................... 29C. Implicatonsfr SectordaPoUh .. .................. ............. 30D. PovertynImpac .................. ......... . 30E. EconomicBenefits ....................... 30F. Risi ...... ....... ...... #***#.**.......... 30

V ... . ............ ; ...... . 31

TABLES:

2.1 M icdpal Revenue Sources ..................... .. ..... .. ........ . 42.2 RelativeImpotnanceofMunicipalitieslInBrazibnPublicaFin e ...................... S3.1 auuCononen ............................................... 123.2 ProjectCosts byCompontet ...................... *...... 143.3 Project Financing Plan ... .................................... IS4.1 Sub-ILoan Tems and Conditions . . .......................................... 184.2 Project Costs by Mement and P...Me...... ...................... . 225.1 MunIcipa Revenues and Expenditrs In I s Geais ........ . . ........................... . 27

ANNEXES: .... ..................................................... 33

1. Pgie Orig1A. lhe Projein Support of Decentrlization . ............. . ......... *.*..... 351B. lesonmLeaed from Previous Projec .... .. ...... ..... O*. .. *. 39

2. The Urban Sector in Badl d in the Stae of Mn Gewais2A. Municipal Fisa Regime: Tax Asslgnent In Brzi ....... . . ........................ . 442B. EvoludonoftheSizeof the TheLevels,ofGovnmmesatn Brazi ................. 452C. MInp tesi StatandIheirPbpolstionbyzSize Grp .......... .......... 462D. InCatos of Reative Wedth in tho Stft . ............................... . 472E. Wat and Sewerage Covege Levels and Instttona ArrngnI s in the State ........ 482F. PolicySttementofDecentaiodnand MmicipalStg goftheStat .......... 49

Pago No.3. Pxoes

3A. ProjectDeslgnMatix ............................................. 543B. DetalledProjectDescription ......................................... 553C. DetiedEstimateofProjectCosts ........... .......................... 643D. Oudine Term of Refence r Studies ..................... 663E. BDMG: he Exeuting Agency . ...................................... 693P. Ihe FwdaAo Jobo Pinheiro ......................................... 773G. COPASA Financal Statements and Plan .................................. 79

4A. SOMM COrgankAtion Chart ......................................... 824B. Ptoject ksittional and plem on A ge........................ 834C. SOMMA OionalArrgenens . ..... ................................ 844D. SOMMAA Fd Sn ation and Cash Flow Diagram ........................... 974E. Etimated Sample Contac Profles ..... ................................ 994F. Esimated Disbursement Schedule ...................................... 1004G. Selected Key Monitoring ndicators ..................................... 1014H. Project Schedule . . .................................... 10341. Supervision Plan .,................ 104

SA. Fhiancial Situaion of the State ............... 105SB. Structure of Municipal Revenues and Expenditure in Selected Mucipaities in the State ... 107SC. Debt Capacity of Municipalities in the First-Year Pogram ............... 108S5D. Cost-Recovery Instrunments ............... 109

6. 2ect Justification6A. Eoonomic and Financia Evaluation of Sub-Projects ......... ................. 1106B. EnvironmentalAspects ............... 113

7. Selected Documents in the Project File ..... ........... 115

MAP: Economic regions and selected cities in the State of Minas Gerais, IBRD Map No. 24654.

IgguzK: oStat of Minas Garas.

Mmy: Banco de Desometo de Mas Gerais (BDMG).

Amddeft: Municpaities in Minn (ends and seled SSta agenie.

Mimi: US$150.0 mtaiion equivalent.

Tems Repayable in 1S years, inlung five yeam of grace, at te Bank's standard vaible lnteredt rate.

C!W2ee0ves: The objectives of tie proposed proj am to: (a) skengthen amuicipl finnca _ insupport of the recn dectralihrion ass retforasce tothrouhcesohicamobiiatn, and tning amnd m tves for efficent allocatn of tesours for both cuentexpedture and cap ita nvestment; and (b) Improve II II eniomnal ueeti o u,tmsdevelomen of a cohereat Stat strategy for loed provison of wawt and swwm services,Investment in porty basic sanion Infastructuae, and provision of tehcalbinformunpa a dii tn onvironmdenal ien addon, the project ais to beginmobiln private resource tot municpl service pvion, te cooperative regional serviceprovson in mal, institutionally weaker muncipa nd initiate tr of muniipal magemenskls to the lessdeveiloped North of the Stat.

Hon: Tbe proposed projet would conis of five coponents: (a) an inonl dml_gmo mto upgrade municipal financial administrtin and improve municipa manan and envionmenaplnning; (b) an h IM Ju imo 9mm ut p d v c sm adrelatd services, pmarly water, seworuge, draing, solid waste, seet pavin ad lhting in theState's muniia; (c) "1 gm tmoI test pivate sector prviso of muniipal sevs,and regional cooperative EInin runr Nor ; and (d) and (o) tw ggfefocuing on: the devewopment of a Stateide w stra for local proviion of water and weservices; and mediumem opdmDs for municipal nfrastutu finance.

Terms: Th SSte would use Bank funds to capitaie a municp develkope fond, managed by the EDM,whih wold make sub-loans to munwiipalities and selected St ac. Te loans would be relentat a varibl inest rat of about 12% in ral tms (ajusted for inflaon, and nding a spreadto cover the costs of program adminisraion and foig exchae rs) adjusted binally for tmsof five, ten and flfleen years (depending on tpe of Ivstkent), including on to ee yea gace.

Bam IThe pincipal beneft of te ptoposed project would ber (a) enhanced municp resource mobilizationas a result of inrsed prperty ta and use- g reveus; and (b) geater dficienoy in

_anaSemat of cuen expendtur and prortzat in of in . It e project's enfructurinvestments would have dgnificant positve impact on envir conditions In the Sta. Benefitswould also incude increased access of a largp poton of urban poor to basicnfiatuctur services.Decu of th selection of tho Stao of Mims Genie, te project would address eneeds of a broadcros-section of B ra's municipatie. t s expetd that about 150 of the munIcipalIties (tho withpopuation over 20,000), repmetng about 75% of to Stae populton, would padcipate In the

enfiukuctm compone, while about 300 nmunipali, or aboutt 90% of the State's popultonwould padcipate in the oional devdopment component

(I)

I~~~~~~~~~~rer IIE I It

An NVRONNMM TLnr uPRr

L PROJECT ORIGIN

1.1 Brazil's 1988 cnst n ro bamaa entd th monc of munIcipalitIes, giving thembot gree resposbilIties and eased revemes tc i1fil their new reponsibil l hese reformsare estimod to leavo ui les bet off in 1993 tham they w In 1989 by about one-third, onaverage, lagely fom edea and sta tafrs but also fm nowly-rated own sources.

esponsIbites which peious had been delat to higher evds of pvemet due to lack of locareso s ad Bris centralistc system - in pa uar in the area of provison of hsuctre andsoca savices - are now back In the hands of municipa mayors. The dhalleg I fbr municipalties toprovide these servc efficiendy, i.e., I ingly relying on own rather a tansfer rsources,borowing prudeny. _ d, Iesting in cost-effective projects, congtctng-out atd pdv szn savi where oVWh.

1.2 he poposed project ge out of the Min Geras State Govenmens dual objectives ofsupporting sound fhnancial m_emnua and fisc r ib at the loca level - which diminishes theburden of servi provsion on Stte resources - while adsing preing basic sanitaion needs.Alhoug war suWly cover is high (94% of the urban population), sawage collection ad treatme(53% and 0.5%, respctivdy) ar lower n ohr states i m tive siz and wealth.Fw tmore, Joint prvis of these sevices less common dtm In odter states (the Stae companyprov s jug 53% of war and 21% of sewrage sevices, with the remainder locally provided). TheStaes goal i to pdie seae and seek innovatie is tionl arangements for efficient services.

1.3 1his the fiflh In a sedes of municipal deveopment projects designed to support Brazil'sd 1 (soo Ane IB). Th e&a projes bav reached the mid-tem reiew stae and lessonsfrom ts of project have been Irported into project deign. Like its predecessors, theproposdprojet's prmary objective is the srengfning of mucipal fnancil maagemt. Where theodwe ammpsa an g of uban sevic, the proposed projecs focus ib limited to environmenta

6 'w dDcure In dte basic sanitaton seco (wat, sewerage, solid wast ad drainage) priorized bythe State, since eperec has how the po imple ment a of a narrower sectoralfocus. In additon, the poject seeks to provide a m strgy for efficint wate and sewerageservice prvso nd to explore pvaiato of municipal services. The project also alms at foil cost-recovery for, inra _structIre sub-projec fianced, wheprovidigfor limited, well-targeted grantsthroughan Idende Pio projctd In t Stes poorer North.

1.4 f nmuiciplities a to be respoble for exeditu on many types of public goods andservices, refom of the role, ction and financial mngm et of local pvee must be designedas a oweent pad . A set of cta to osse dedgn of muicipal policy-making and reforms andits applicaton to dhe cm of Mia eri i shown in Ane IA. I i tis anysis, along with theleon (Amn IB), which has prinpaly guided both th Bank ad Stae ems in project design.

1.5 he proect wa Idetid in May 1991. Three misi to Mia Geras asisted the State inptoec pepaio h projet was appraised in Januay 1993 and negotato completed in May 1993.

'I Delopd in 2r7.. Vs .q ttMdotwf &cm Dew s in AU h ISM, 1M. 2(3R No. 10616.BR).

-2 -

EL THlUE UAN SICR

A IntrodIon

2.1 The 1988 constitutional reforms have enonced th Importance ofmunlcpalW In Bil's fderasystem, so that they now have both geaer sbilies - in padeular In to area of provision ofInfasructure and soal sevices - and esed rmes fom ow and taser s s t fulfill

mw resposib. Ti rem comes at a tm when Brazil's municpalWes conuo cchallenges in the aequate and efficient povidon of srvic. Agait te bakound of macroeconomiccrish hich bn i th e rly 1980s and high nubation rate (as rura poor migrated to cities, drivenin part by the crisis), minipalt fCe the de owing st of A_,IM: Te fir i low productvityof assets. Brazil1's mau Infraclure networks a among the most extenie in thrgion. however, these a assets have not been adequatey maintined andre mufficient to moethe growing demand for service. Second, with populatio presure and the eonomic crisis, the Inreconomy has provided services In an faion which hus led to egrdation of the urbanecosystem, particulaly in wa aras. hrd, ov the past decade, povery in Bral has becomehoemir_y an urban problem. Although the absolute numbs of rur poo are bigh, urba povertssha as inreased to nexly half of tota poor. Fourth, with crisis has coo failure of fedalnastructuredelivy progrn, creatin an ad resource gap. And .ff1 despite tiedecetralzation, mumicpties codiue to be 4opndet financially on fedeal and state tsfars, withless tha oneflfh of revemues geneated by own sources on avere These, factors point to a need to

egthen municipaies' capabilities to efficiently gmane both their resources and resonsibilities.

D. Uba o: Shute and Thads

2.2 Brazil's fedal stur of government p 26 stae and 4,493 a . habout 7S% of its 13.2 millionabitants livig In ura area In 1990, Brazil s one of the mostpopu urbn societies in the woV. In addition to ihe umegacides of Sib Paio and Rio de Janeiro -- with metropolitan region population of about 16 miion and 11 million spec y - Brazil has aftlher nine citides with more than one million inhabit, inludn Beo Hor te, the capial of MinasGean and the country's hid4argest city (ereon popuoation of 3. million), and numerousm msized cities (with poplations of 100,000 to one mion). The largest of urbanpopulon is fnd in the me developed Southeast region of e contry (of which the State of MnsGeas Is a pat).

2.3 In the past, apid urba popation growth reqrd a major fft by public sector authrities tokeep up with the inrea demand for urban Infrastructr. Durg the 1970s, Bri's urbm poulationgrew by 4.4% per year. Migrats leaving dqerssed rural a , the populatons of which fell by 60%during the decade, helped fuel this urban demogaphic growth. U izaon ts slowed in the 1980sto an avae of 3.4%. P y reults of th 1991 census ha so fa not yielded data on ubapopulao, hower, the census hndicates a sinfcant dow-down in B d aphic growth to1.9% per year over the 1980-91 perod (agai 2.5% per year dudrng 1970-80). Ths reduced pae ofpopaion growth may gve n some oeadtng spc to makb much-needed I inthe quaity of urban services proided.

I/ Tdoeooto _a be u d tea. Dug 199Q _ppxW y 300 .wmuniuinWesd bainas th cattal to abA 4,800.

2/ Ouba=, ang| mcomkhrd to be o p w popd S 20,000.

-3 -

C. Providon of Urban and Serices

2.4 Duing the peid of I e cetrism prior to the new Constitutio (1961-1988), localubn hifrastructure was delved trough an eteive network of federal and statsuons. Naionaurban policy was ormuled by the National Commission on Metropolitan Regions and Urn Policy(CNP) during the 1970s, by an -ministerd National Urba Development Councl (CNDU) in themid-1980s, and finally by a short-lived Misy of Urba Develomen (MDU) from 1985 to 1988.Troughout the nte priod urba inastructure fincing was dominated by WO National Housing BankBow Nadul de HaM o - BNH). BNH dchan ed the proceeds of workes' compusory savigs(GTS) Int housing and sniadon Inrstmt. Among die ost mort, BNH-financed programswere dhe Nadonal Sanaton Pln (Ma Nacoi de SMnenm - PLANASA) for waer and seweragework, execued trvgh state water and sewrage companes; and the Nationd Low-Cost Housing Plan(Piao lonad de Habkagdo Popuar - PLANHAP) for low-cost housing programs, also exeuedthrough st agcies. Urban transport was centralized as wetl, under the Braziian Urban TransportCompany (i)pis Brasie ra de DwIhorta Ur*waos - EBTU).

2.5 Th efforts deliberately ecluded municipalites n the ame of centass naticoordiato objectives and economyofscale gains. Sice 1982, fderal goverment fiscal deficits haveobliged a steady rere from the use of dtese centra f cing institutos and their policy-mig

bownapats. ISo principal financial btamWiby of the Government of Brazil (GOB) and one of thecouty's lagest b , the Ca1xa Ecoxmic Federl (CEF), has iherited die remainder of these earierprograms wihout die rsorces t ustin them. The effective colLapse of these centralized fiacingscemes in the early 1990. could have been seen, in reospect, as imiltable since they relied on

le subsidies In th absence of meanigful cost recovery.

D. De tlon

2.6 MuniipIties remained weak durig ftiod of militay dictator (1964-1985) whenfinandci resources were concetated in the hands of the fedea govement. Afer the restrai ofdemocracy in the 1980. and free econs at al levels of governm the 1988 Constion re da watershed. Key provisom of die Constition consolidated the proc of decentralzing autority awayfrom the fideral govenent Atie 30, for example, spels out the responsiblitles of municipaliteswith respec to tax colection and die prvsion of loca serices; Articles 156 and 158 proe forenhanced fisca remes for munices to meet these respo ilidies.

2.7 n luO 1 eaons. The Constiuton increased both municipal shared and ownrevenue sources, at the expen of federal revemues (Annex 2A). Betwen 1988 and end-1993, themnicip share of fedeal noome tax (IR) is exet to icrease from 17% to 22.5%; federa idustialproduct tax M tO inctease from 16% tO 22.5%; ad vaue-added tax colected by states (ICMS) to growfrom 20% to 25%. Mhe Contitton also stablised a new municipal tax on fuel sales (iVVC) as wellas giving excusive collecdon rigts t municipalities for the prperty tra tax MIM whiuh wasfoerdy shared with states. In the short run, addiiona fiscal revenue will accrue to municipaltiesmosBy thugh increased rovenue sbaing, pdmarily ICMS. New municipal taxes are not epecteDtOsusiue property tax (IPU) and service tax (ISS) as municipalities' princW own sources of revenue.Studies show that by end-1993, these reforms wiUl have increased rmuicispal reenue by a lyone third By that tme, municipa har of all taxes collected in Brazil should reach 23%, again a

'I FPen_o Romez and JloRRoba R. Afoa, A R*nna Fca na Neiw Cbx&*Wr in: RMM de Ath*sh*w;b-eLJe O D., 1969.

VI~~~jV

U 0 t ~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~l

I i~~~~~~~~i .Ci2~~~~~~~~~sI Ii~~~~~~~~~~~- a iijil; A~~~~~~~ 1.ji~~~~~~i;~~~J I" U"~~~~J

0I. ti ~ ~ ~ Li i- I ~~~~~~~~jJ ~~~~~~I~~~~ej~~~~~ 1 ~~~tgP~

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U : ~~~ tj~~~ [Ii !ih! hen C

deied about 2NA% fm ows sources such as prpaty taxes. Better local service provo will nacmasresdn' wiines to pay both local txes amnd ur charges.

ReveuAs percent of GDP 2.4 2.5 5.2Asshdaeofpublicsector 10.1 11.5 14.6

Expendiuro:As percet of GDP 2.5 2.7 4.3Asshameofpubicsor 10.6 11.1 11.3

Sow..: -rf 2 Cno 1mge offMomi4 Seet Dewia hi dhe 19f3, MRD Report 10161-DR

U12 Tlee important linkages with the macroeconomy fA municIpales. First are the negatvoeffcs of endemic inflation: (i) pam of prperty and other tax, impotant sources of ownrenes, are difficult to adjust for Iftion; (l) fnanciad s n, notoriousy weak in smalermunicWities, must to be agile and efflcit to manage Iftio; and II high infation makes adequatplannig and budgeting virtaly impossible. Second is the potei for a municipal debt crisis, Ifboowi not done on a prdet scale. Off-budget items such as sppliers' credits and rollover ofexisting debt are commo, prmily in the larger mudicpalities hich have a hbistoty of borrowing (thesmaler one do not). Caidon will need to be exertd in ensuring that discretionary transfers ar notrelied upon to sevice impdent borrowig, and that rollovers, tansufe and suppliers' credits areaequty acunted for in calculation of credi Hmits. And third is the paucity of adequate, consistefinancial reporting and fiancal data across mun ies with which to moni progress onImplementaton of policy and impact on the m of the cowntry.

F. Sector Stratg: A Medium-Tem Visin for the Role of Muicipaliies

2.13 The Ban's asistan strate in Bra is to sort policies and invetme hat wil encuraeoomic growth and socW develomnt In the contx of mc stabity. Empsis onefficit resource allocaon, increased efficiency In the public sector, improved envirmanageme and the ppropriate targetig and ddeiery of seviea to the poor. Ihe Bank's strategy Inthe rban sector has been tO support dece izaton re s which took effect in 1988, and fosteramong Brai's muicipiies mulation of eficiency, strmtening of final resources andmanagement, and increased fiscal responbilty, t the m m c policies of the federalgovernment.

2.14 With decenizaton, micipties at as quasi-aonomou managers of exeditur on serviesuch as beath, education, wat was coectin draiage, paving ad public transMicipalkies, in hory, have a comparadive advantage In he tovision of thee serCes becau local

gover , particly folowing a ren to dem ly-ecd leader, are more knowledgeableabout local neds and are better at respodig rapidly to chanes In these needs. bis does not meam thm uIciplits shoudd provide al servics by themselves. For many of these acivities, nshould rely on tho privte sector through concems , conacting or investmet precipaion, ethe scope of service deiv. Since many of these servic are Itmet goods in the productinofprivate sevices, municipal Ifn in agn these expeiture will also cobute to hedeminationofBrBl's mcperfmance. Municipaitiesshod also contbute to a rturtO 8sutible enc growth tugh their own fiscal effor and ensure eir financal

and heat by manmizing te reenue they can raise from their own sources. The loca

taburden - nluding locl tax levels but alo loca user f and the pricing of loca sevces - shouldInagly be ddemined by the levd of demand fo serviws.

2.15 I I sum, over the medun-term municipalIties will need to place greater emphasis on efficencyand fnacal management. The challeg for munIcipalities today is to establish their own mof Iitructueddery based upon their ieasing fisc aunomy. To this end, improvedmuicipal

an can hep to fill the vaum left by the demis of nati programs. he key goals formunicipalWes wll be to:

* mobBil more effectvely their own resources, widening their tax bases and exploring alternativesources of reve such as user chrges and b d g

* aLoca these rsouces more eftlcienty trugh rigorous appraisal of investments;* incrase efficiency In the use of resources for current expenditure through he ovement of

day-to-dy adminisraton;* egage the private sector, through privatation and conacting out, for those municipal

vb and serices it can provide more efficienty;* prudently borrow maket resources to fund priority operations with bigh economic and financa

rates of ret; and* hqbeg tO p and budget more effively whie xplicilty monit financial p once.

G. Me State of Mn Gea

2.16 The name genera mines' was given to a newly-eated captaincy of coloni Brazn in 1720,becae gold could be foud almost everywhere. Today the State of Mns Gerais covers an area of587,20 square kilomers (about the same size as France) and is the noternmost state of Brazi's richestSouthes ren. is thie only densely populated state in Braz which has no coastine. Covering sucha larea, its teain is qe varied: extensive scrublands, or aenwds, covering dth northem half upto the bounday widh the ounts capital, Btasfiia; udlating cleared forest bntd in the souhern partof the Stato; us regos near te State capital, Belo Horznte; and several impora riverbasins (see map).

2.17 Mia Gerais is the trd largest state in area and second in terms of populato it has 756municipalits, by far the largest unber of any Braiian state. With about 7S% of its population lvingit cites, Mns Geras had an ura populton of some 12.0 million In 1990. Municipal populatonby dsze oup is provided in Anmex 2C. As shown, the vast majority of muicipalides are very smal:72 have less than 20,000 inbabitants and ar entally rua towns. The rmaIng 150 municipaties

withb populations above 20,000 represent 74.4% of the States poputon. Preliminy rWesults of the 1991ceonu idicate that 212 muIcipes, mostly small ones, acuay lost populatlon durwing e 1980W91pedod. At the other end of the scale were the fastest growing cities of Sete I agos and Montes Claros,w amual popuation increases of 3.3% and 3.1% respectively.

2.18 National4evel tends have nowhere been more apparent than in the State of Mins Gerals. TheStaes domina economic acdvity, particualy in the southern regions proxime to the pdmary maretsof Sbo Pauo and Rio de Janeiro, has shifted over the past decade from agricture (30% of Stae GDPin 1960, fallIg to 15% In 1989) to the urban-based heavy industrial sectors, which grew from 14% ofGDP in 1960 to 28% in 1989. Changing ecoowmic tends and employment qoptnities led to adramatic urban on, with urm populi more than doubling over the period (from 36% of total in1960 to 78% In 1989). Although this ecomic act has enabled Min to beoome one of Braz'sweathet es - GNP was US$38 bilion, or 10% of the aoal total in 1990 - ths wealth is

'1 SDNNAM Lat

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unevenly distributed, with 35% of the economically ave po on In 1987 suving on just twominium salrs, compared with the naton rat of 29% at tis level (se pam 2.24 and Awn 2D).Under the stress of Increased popuaton ad indequa mant_ e, ur bftuure ha becomesignificantly degraded, pardcularly In the ar of sitaton, where enviomet, health and povety-aleviation concerns play an importat role. The sataon sectors have bee identified by the Stategovment as among those with bighest plority.

2.19 Tbe Regions. Minas' hig deg of geographic and economic statification make it a microcosmof Brazil. For planning purposes the State govek-nme has diided Mias erais nto eghmacroerSlpons (see map). By far the most doveloped of the responsible for 63% of the Stt's

industri production, is the Mestlrgica e Campo dus Verentres macro-region, whee the capital, BedoHordote is loced. Also is- the recndy privatized USIMNAS steel plat In th M o e AltoParanla regio, GDP per capita is esmated at 34% above the State avera, derived frm arcuaand idusra sectors linked to the markt of the State of Sbo Paulo to the south. Tbree othermacro-regions have per capita GDPs near the Ste avrage: the southern macr-region, bordetg on SAOPaulo; the Alto Sao Fra co, an expanding agriculural region; and the Mata macro-region borderngon the State of Rio de Janeiro. The three poorest macro o are located in the norteast of MisGerais and together account for 51.6% of the toal of the terri of the State. Of these, the worstsocecoiomic conditions are foud In the Jequtnhonha macro-region, where the ave GDP percapita is about US$400 per capita Rural migration to escap drought condios smilr to tos ofBrazil's arid Northeast region feed rapid urban growth in the maco- Rio Docemac-region suffers from a decline in agriculture and many of t mnicipalities have declnnpopations. Finally, the NAest macro-region, preominay agricultural, has also boee I decline,but includes an area of incWient i izaton, notably in the major ciy of montes Caros.8 Underthe project, a pilot program for coopative regional urban sevice delv would be undertaken in twoof these macrregions, Alto SF 1)cco and Je.

2.20 he Eonomy. Mins Geris has the third largest GDP in Brazil. Per capia ime has beenestmated at about 90% the national average, or about US$2,400. Mirring its macro-egions, the Statehas a diversified economic base. Agdture was responsible for 15% of state GDP in 1989 ndgenerally more productive per hectare dt the average for Brazil. Coffbe is the main product, but there

also sificant production of maze, soybean, beas, sugar cane, rce, potatoes, and tDbaco. Catdeand dairy products are impot e. M s Gorais is more wellknown as an industri state,however, with g accounting for 28% of GDP In 1989. Heavy industry, notably meallurgy(in, stee and aluminum), chemicals and non-metal miea are well rrsed In tho Stat. Ming,especially for iron ore, reain an impora actvity, in which the o of GOB's giant p-tlCVRD (Co,npa do Vale do Rio Doce) are paa_mon Other importt industries are teies andfood processing. With the economic slowdown during the 1980s, and the contraction of the domesticmarket, all sectors responded to the all in domestic demand through e s of eports and today,Minas Gers has become one of the pincpal exporting states of Bi (second only to SAO PaWlo).

2.21 State Govenment Plns and Prrities in Mh Geraa. The developmnt plans of the presenState an are set out in Its phlrlna plan, or Plano Pluwa de Cwnwe do deMbins GeCams 1992-95. The plan umes fsc on s wilm limi govement acton for theforseeble future. It is pessimistc about the possibility of further increasing ICMS colecos and

Is Pat of di mawo-;on is ncludd in do aa underd te esonIt of SUEN, thdal psvnmesS fArftIo Northesa The mnGaaa of SUDE onsit of 42 nmIpasr that saupptofth

'1 AD data td Noe: DMG,RNm

f AB dda Wm for XIDU MWO, AJ6nd 1X Dkdmw * PWWWM (ol I - SO J.fPX)

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disd lca dvotmh rentogenth of sevcing the Stots debt (ChoprS). Greater munici particiaoo develom thet wit h exaten financ support are seen as means o overom tfe present

difn ds in the or ot in l planopod project is dd as net of the ky state gove t proSmuin the plur_nmd phn, emphasis which is reflected In the Policy Staement on Decentization andMunipal Siwhich sets out the Stats policy intentions regarding municipal management andurba sector strate in the medium-term, and the projects role in achieving this (Annex 2F).

2.22 dc Sadtation. The State's plan gives pmary impotnce to heat, education, basicsantatn, trnsport and ero The basic sanhation setors (water, sewerage, drainage, solidwaste) have been given special prioity, due to their spillover effect on health and environment, and asa resut of the reent failure of federal instons and progrms. Basic sanitato needs, particulalyregding sewerage, are pressing. Although water supply crerage is high (94% of the urbanpopuladon), service provision is inefficient and _ais poor. Sewage collection and treatment(53% and 0.5%, respecdvely) are lower ta other states of its compartive size and weath.Furthermoe, joint state provision of water and sewerage Is less common tm in other states - the Statecompany provides 53% of water and but oly 21% of sewerage services, with the remainder localyprovided. While the National Health Foundation (FNS) provides technical assistance to about 56municipalities, most provide service on their own. The Stats go is to priorize sewerage and seekInoatve isttutnl arrangements for efficient service povion. The callenge today is to ensure thatpotable water is safe and free from pollution by iusti and rsiial effluent. Annex 2E providesthe covage leveis and instituional arrangements for water and sewerage sevice provision in the State.

2.23 Brnhmnue. In a large state like Minas Gerais with intensive industrial, m andagricultural actvities, envir lI issues Invitably arise In comnectio with the process of economicdevelpment. Among the most serous of these are: (a) pollution of rivers by ustria and domesticeffluet, pesticides and fertlizers; (O) soil erosion through mining acdvities and agricultuapraices; and (c) de-forestation, particularty in areas of agdcultural expansion Envime problemsare already acute in paru of the Stae. Pollution of the Rio das Vdhwa, for example, which skirts themetropolitan region of Belo Horlot, threatens water supply to the capit. This problem is currentlybei addressed with the support of the Bank under the Mia Gerais Water Quality and Pollution ControlProject (L 3554-BR). Although there have been signs of improvement (one study show thatrespiray circulatory and abdomi illnesses, classifiedas amenable to reductionthroughImprovementin basic s8atao had fallen as causes of death from 57% to 36% in 1988), conditionsin the State's cities remain of concer Municipalities, with the support of State environmentauthorties, must assess their key I env a problems and determine prioriy actions to address them.

2.24 Poverty. in spite of the significant economic developmen that has taken place in Mas Qeis,poverty in both urban and ru areas has remained acute and worsened during the slowdown of economicgowth during the 1980s. Esmates for 1987 IndIcae thi 35% of urban households in Minas Geraishad Incomes of less than two minimm salaries per monthV (widely consiered to defin the povertyine fora famly of fourlving in n& urban ara) mpared to 29% for Brazi (Annex 2D). A study ofBrazi's metropolitan areas found that the share of the total population living below this pover"t line inBelo Hor te rose fom 18% In 1980 to 35% in 1985. Mun ies can help assess the ubanneeds and productie possibilities of ther populations and develop local provisions for the urban poor.

O/ BDMG, Table 15, SBCPLAN-MG (1991).

3/1 39. O wminimum au is crntl equl to about US$60.

"I Son Rocha, Lih de Pohrezrp. as RegiUes MOopoItana, P. &ab Metad da Duada de 80, BERA, 1988.

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H Bnk bpermae In the Urban Sector

2.25 Lasons Lmned. Since 1978 the Bank has made 17 loans for urbn development and transportprojecs I Brazl, totalling US$1.6bilion. I additon, 16 loanstotlngUS$1.9billonbave been madefor water and sewerag projects since 1971, lo largly In ua ara. With this long history of BankInvolvement m the sector, many mt lessom can be drn Rcet OED audits of projecscompleted dudrg the 1980s have emphasized a need for strengthening of munipal reource mobflizationand access to fincing, and noted the lack of involvemen of both state and municipal authorities in theurban planning process, and a haphazard approah to e ea magement. Greater employmentof appropriate, low-cost techologies in the waer and seweg sectors has been ded, alongwith more integrted, cross-sectoral approaches to enviom manag_ d Ivestentprioritiaton. Furthermorreports have commnted on excsive complexity of poect, ambition ofobjecdves and weakness of executing ageces, sugestig the need for si con of project design,greater flexibility in project Implementaton nd new and more effective means of supervision. Iheseneeds are greater In the North of the country, where imple I capacity is weaer.

2.26 AccordtIly, and following the recent decentrization reorm in Braz, project design andobjectives have begun to shift toWAds Impg the capcity of the states and municipalities toffectively assume increased resposbilities for efficient maagemnt of rsources and servces under a

new generton of municipal development projects, mong the frs of which ae under implementationin the southern states of Santa Cataina (Ln. 2623-BR - P1OU1B), Paran U. 3100-BR - PEDU) andRio Grande do Sul (Li. 3129-BR - PIMES). The lat two have recenty gone though midterm reviewevaluations. The proposed project atmpts to build a bridge between te epences In the South andplaned operations in Nohem states such as Ceat and Pambc. AnnexIB pres signifcantlessons learned and means by which these are Ioporated Into the design of the proposed project.

I. Urban Secor Strtegy

2.27 Urban sector stra In Brz is based largely on rece sector work, in particular the reportBrazUi: The Callenge of Mwndpl Secr Dewlopme In te 1990), which identfies three key areasfor reform: (a) responsibility for poliCY coordntio; (b) desi of asfer; and (c) municipalexpitue and revenue mangemeat While eq y Ipotant, it is recognized that these refrms mustbe Implemented through discrete smen and according to diffing tmetabls. Given the difficultyof addressing through one project the needs of apro l 4,800 Brazfian ts, the Bank'surban stateg in Brazi - consistent wih the couty's poltcal and fiscal detalization-has involvedlending through the more manageable vehicle of the states. Iplemao strategy for policycoordinadon reorms (the locus of which is national), is dirctd through policy diaogue, using suchavenues as workshops to diseminate secto work and tecicalt aito the line agencies. Reformof the state/municipal transfer system (the locus of which is the state) is done trgh policy dialogue andlending - wit the trgetinlg of projects to fiscally responsible states such as Mns Geras. One elementIn the deinion of fiscal responsibility the reduction of gotiaed trsfer, in which Mia has madesignificaprogres (from 32% to 10% of total from 1990 to 1992). Finally, lendi wil directly targetlocal reforms in municipal revenue and expenditure anagement, one of the primay objectives of theprposed project. In sum, nationa-level ss wil be addressed lagely trough policy diaogue andtechnical assistance, while local management issues - and suot for fiscal responmibility and well-designed tranfer systems at the subational level - are tareted pimary trough lend. Annex 1Apresents a smmary of the proposed project's application ofthe reom aon of ts sector worL

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m. THE PROJECT

A. Project Objectives and Ratonale

3.1 Objectives. The primary objectives of the proposed Min Gerais iunildpal Management andEnionmental nfrastructr (SOMMA) Project ae:

(a) to IEnShen Muni quancialvm in support of the recent decentrzadonreforms, through technical assistance to increase ownresource mobilizaton, and trainingand Incentives for efficient allocadon of romurces for both current expenditur andcapital investment; and

(b) to impmr iromn aw m ntgm in , k, though development of a coherentState straW for provision of waer and sewege services, investment in prioriy basicsanitation inastructre, and provisionof ate cal aistance and trbai for municipaldminitraons in environmental managemnt

In addit the project wil test the viability of two alternatves to municipal service provision: privesector provision of municipal services; and woperatve regiona seviprovison Inpoorer, institutionallyweaker Northern municipalities. Annex 3A prese the project objectives, means of achieving them(tools and policy conditions), key monitoring indicators and risks in matx format. This matrix,developed on the basis of urban sector work and lessom leaned in previous projects, establishes thefrmework for project design. Consistent with the Bank's goals for the sectr, te projects primary areasof emphasis are first, improved public sectr mage_m (fiscal reonibility, efficiency ofinvestmes), second, onviomental management and, third, to the extn possible, private-sectordevelopment and poverty-alleviation.

3.2 Project objectives are explicitly esosed in a Policy Statement of Deentlization and MunicpalStrengthenn of the State of Minas Gerais, preseted to the Bank duri Negotiations. The Policy

Statement sets out the Staes commitment to s gthening loal govements, thrugh sound fiscal andmitative magement, accountbility and effiiency In investments and cmTent expendiur and

equity in sevice provision. As one of the key means of achieving these goas, the Policy Staement setsout the State's Intenion to reduce discretionary trsfers to municipalities and instead chamnel these fundsas to whe SOMMA program, where they will be invtd accordig to clearly-defined criia.Ihe text of the Policy Statemn is presented in Annex 2F.

3.3 RatInale. lhe proposed project is an integral part of the Bans urban sector strategysuportng the decentralization reorms which took effect with the 1988 Conion (para 2.27). ITheproject wi foster among the State's municipalities stimulation of efficiency, strengthening of fiancialresourmces and management, and increased fiscal responsibility, sUping the mc policiesof the State and federal governments. By improving service corg levels and isting In frmuatinga more integrated approach to municpal management of urban nation services, the proposed projectwould also improve the overal urban eniomen of the State. Findly, the prosed project wouldinitiate efrts to mobilize private sector resources (both equity capital and credit) for local investment,and begin to extend the benefits of improved municipal financi mangemen to Brazil's poorer North,where the Ban's uban development experience has been less succesaflu. The proposed project alsoprovides an opportuity to apply the lessons learned in the sector, in pudcua trugh similar projectsin the country's S h, to a state which represents more closely the diverse needs of the country as awhole.

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3.4 The projects tming s planned so as to adcieve the greatest possible lmpact: muicipal deonswoe held In October 1992, wIth new mayors beginning thek four-yea terms as of January 1993. Theimpl_ation stra will be to accomplish as great a propordon of the objectves as possible withinthe fist three to fimur years of project iplementation.

B. Project Desipdon

35 'no projec consists of five components: Part A - sdtutImn d, mpsingUS$29.4 millon, or 8% of tot project costs; Part B - enIronmental Intrte acoountag forUS$292.0 milion, or 88% of costs; Part C - pilot program, totling US$10.7 million, or 3% of costs;and Part D and E - studies, acmcuntig for US$1.6 millon, or lessthan 1% of costs. A detailed projectdesdptin is provided In Annex 3B, and summarized below. ;election crteria sad methoology for bothIstitional development and infrastructure subroject e set out Chapter 4 on Project mplmttioand in Ane 4C.

(a) bsevbment

3.6 The inutionl developmt component (Part A) consists of technical wistance, training andsmall office-technology equipment puchas for municipalities. Of the total 756 munIcipalities in theStt, it is epected tha about half (repenting about 90% of the population) will participate I this

componn which would be the key to entry into the SOMMA progrm. Individuaized tecnicalasistan and t plans would be developed for each muncipality, on the basis of a diagnosticquestionaire based on rapid- methodologies successfuy employed in the South of Brazil and

sewhere. Needs would be evaluated in fthree aeas: (a) fisca and administrative; (b) planning;, and (c)o alnd basic saniaton services. Ihe menu of possible Iteventions would Include, beer aita:

- fiscal and adme: upgradi property tax cadaste Qncud revauing existingproperty, cusion of un-registered property); Imprving prou, pol and phyi

fstrucure for bllMing and collection of property and other taxes and tariff; bovingprocuementprocedur;

* plannIng: preparing nd updatg of master plans; updating real popey mapping; works andconstruction codes and technical standads; and

* uurnmn and base sntation: establisbing (and ratonali land-us and zoning codesand regulats; saning local eomental enfo agencies (CODEMAs);encouageme of regina cooperadon through water basin authries; prepaing long-umarginal cost pricing studies, as input to revising user-charges to be based on economic costs.

3.7 _ would Include cost esdmates, and would be cateized as high, medium orlow porty dpeni oan urgency and on their impact on overal municipal fhnncial management.Tohicd assistmc interventions would be coupled with on-t-job training, to ensure dectiveness.On the basis of the dignosis, a Strategic Action Plan, or Plano de Apdo Emragia (PAO would bedisc d and agreed wth eah municipality (or locnependent waer company) in cosultaon withlocal groups and v bodies, setting specific target for finncia and siutionalImprovements. In order to encourage participation in ths Ii phase of the project, and to ensure wideaccess to all municipalities, prepation of PAEs would be gra-financed. One committed to such asgbhctory PAE, municipalities would be eligible for loans for techncal assae and grs for theaccompanying tining. Following inition of this process, and providing adequate creditwors (seepara 4.9-4.11), client n es (or water andlor seweage agecies or compaes) would be eleto aly for loaos for infatuce imtments. T a a nce loans would be Inke to

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perbma standards rgding resource mobilization, cost-recoveay and managm efficiency which,I tur, would be linked to Subrojct digibility criteria for ifsucu (par. 4.124.17).

3.8 his approach builds on past sector work and project ex ene by establishing a longerm planfor strgheig of local governments. he Institutona development COMPOnn Increases the level ofcomitment for capacity strengthenin of local governments by working through a state-lel Institution,the Fwando Joao PYero (FJP), which will develop a strategy, create prcedr, set stand"ds andnorms to faciitate isionl strengthenig of municipalities (see Anmnx 3F). Imple oftechnical assistance and training woul be done dtrough privae sector, univeiy and other provides,with standard-etng and suevision and monitoring by the FJP, which over time wil shif to providw"wholesal ntvtos aimed at fostering private sector delivery of tchnical assistance and Waning.Tecical asistance under this component would also be provided to strengthen the FIP In this apex tole.A draft proposa for stegtei of PIP to fulfill this role was agreed during Negotiations.

(b) Enm1Juk canid nmm3.9 im t ft cre invesmn (Pa B) would focus on needs in the highpriortysanitaon and rdated inauture sub-sectors. It is estimated that about 150 municIpalities (ikely thosewith poplatio over 20,000, resnting about 75% of the pputin) would patcipat in theInFrastructure componet (Annex 2C). Sub-project ivesmet would be fMly repaid at longtermlrket-appoximing iere rates (para 4.5), with full cost-recvery via user-charges based on

economi costs, or indirectly via increased property values and tax collection as a result of InfraucImprovemeNt (pm. 5.7 and Annex 6A). Investments shown in Table 3.1 would be eligible:

Inesmet Decpin

Wat_ wate tratnt ad amplificdaion # prduon; Icementalwok ftesion and domesticonnecons; opeatonal and commetwa mpovements, suh as S.mg, ink d_eeci,

-rehabMton of equinme.

Sewa BEqum for trement tms, extenion of newoand domesic connoedon. Wel40sted, low-sttechnoIogi, in paticula in smal commmie, would be enc ged

Soul Waste Sold wast colleon equpmen, consucto of landfis, and equ_m r final disposl In this_componet ao weltsd, aert low-cost soions would be _nac sed.

Pain and Steet pain, mo- and miro-drinage, flood and erosion contl, chan g of crk, 'isDange sa it_w_._

L°h8t n Extendon of service, and an eer conserato program to inta - ficit Bght bulb.

3.10 Watr and sewerage services (egally the responsibility of municipties) are provided by the Statecompany, C&xdea hde Sowuemode Mbhs Gerai (COPASA), independent and municipal companiesas well as by mmuicipal government departments (Annex 2E). Thus, while municipalities would beprimary sub-borr s, water and sewerage agencies and companes would also be digible for subloansto undertak Investmt on behf of the municipalities for which they hold service concsions.

4I Wih th eo_n of Bet Horizont and Contgem in the wter and we setor, sinc the mor sa setorivstmet of tso tes wi be finned under the Minsu Ge Water Qutand Polluton Conr Ptojet (La. 3554BR).The wo prjtsm anlly complementar Bel Horiot and Co_tam wi be ncouragd to ene the stuonadevelopment compnentof SOMA, whl SOMMA wM encour sma nUller _ b dopd ooopo,

m b apoh ad tdw technea eaation and ootreovey teiqu adopted uderdto Water Quaiy prje.

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3.11 Investments to be undaken by COPASA fail no two categories: Incremental expansion ofwaer and sewerage connetons, to be Implemented on behaf of municipalities which ha grantedconcessions for service to COPASA; and Ivestmes In network Impovements, such as mering, repairof equipment and leakage detection. The laer lnvestms - which enable the whole COPASA systemto oprato more ffidiently and thus Improe svice and econdions at the Stt level -do not directly beneft individual municipalities, thus COPASA would begin these invosments wihoutthe municipal participation in SOMMA. These Investments are expected to comprise no more than 10%of the total project. System exaon investments, which direcey befit indiv municipalitie, willbe implemented by COPASA once a municipality has comittd to entern the SOMMA program.

(c) Pot ogr

3.12 The project includes two small pilot programs (art C). he first will assess the potenta forprivabt on of curreny publicly-provided municipal servics (such as , bus and othertrsport terminals, and other services) and test alterative privzti methods. The two primaryavenues under the project wUi be subloans to mun c for construction of iastructu to beopeatd and maintained by the prvme sector under concesslo and sub-loas direcdy to a private sectorfim for construction and operation of the service. The first area tested woud be slau hous, forwhich there is active prive sector hnterest and a strong heal-laed eative for improved seice.In paralle to the test case, BDMG would undertake a study to determine fturer poten municipalservices to be privatized, xamn economic ch, financial and commerc viability, and theneed for reguation bth for helth/safety and financial regulation to protect conmers from monopolypower). The theoet fraework for the stdy i sown in Anme 3B. Theo secnd pilot would workthrough an associaton of smaller municipalities in *e North of the Sta to help bufld experience in thespecial requim of ihese weaker mucipalties. The aociation would borrow from the Fund(through a consortium) and undertake cooperative Iestments in local sanitadon needs common to severalmunicipalites. The f irst associion to be tesed under this pilot is in the S. faico region (see map).If successful, the pilot would be eteded to the poorer and more hlenging Jecq udonha region.

3.13 Both pilots are designed to test innovative techniques for municipal service delivery, on the basisof clearly-dined objectives, and both inlude explicit performance mont. During Neoaiagreement was ed on tholowing: (a) a proposa for Implemetio of the micro-regiona pilot;(1) terms of refenco for the study mpoe of te priatzan pot, and lea agements for theslaughterhous test case; and (c) funding limits for each pilot, and th during the mid-tem review itwould be deteine whether to discontinue or expand the pilots.

(d) State Wimes

3.14 Two studies at the State level (Parts D and E) we agreed durg the cose of projectprepaLation as priory areas for reerch and inovative strategic planing in the medium tem Fist,In light of the partcular coverage and bitittonal c Ii of the water and sewerage sector inMih Gerais, and gradual weakeing of the federally-operated PLANASA system, the Sate wouldundmea a onsultant study to develop an opeatonal strategy for the water and sewerage sanitaionsector in the State, emphasizing pulWy service prvion at the locad level. Second, in order to guidedevelopment of medum-term policy for SOMMA, a second study would amine options for finacng(equity capital and debt) of infiuure services for which munidcpalities ar constutionallyresposible. One of the objectives of the study would be to sk altatives for mobizing domestcpvate savis for longrm inastructure Inesmet. During Negotaons it was agreed that theWater and Sewerage Sector Strategy Study would be an obHigaon of the State to carry out, wit the

odstance of EDMG, while the Municipal Infrtas t Sdy would be an obligation of BDMO. Temsof r , as well as timetables for Ilent of the studies (to be completed no later than mid-term view), were agreed during Negoation. Outline terms of refore ar shown in Annex 3D.

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C. Dedgn Featurs

3.15 Project design has been guided by the Bank's on-going economic and sector work dWogue wihthe GOB on policy in the udn sector (see Annex 1A), and lessom learned fiom past project (se AnnexIB). Several key desi featus emerged during project preparion, including th following:

* ongoing dialogue with the State Govnment on policy reforms regadn: sound fiscalm nagent (the Policy Statement); and increased efficiency and equity In the water andsewea sector (the State's Water aod Sewerage Sector Stra Study);

* fil cost-recovery for ifastructre Investments, at market-equivalent Interest rates* defiition of a pool of 30 pre-appraised 'first year munic t with eligible investmens

totaling US$60.0 million (about 20% of estimated in6ructure investments);* single- rather a multsector focus to simplify project desig and comolidate beneft;* operational manua preared arly, and tested durig project preparation;* computaizaIon of all evuation and monitodng which wil form the basis for the States'

municipal financial information management system (FMIS);* transparent financi arangement with a ll costs included In the oiteres rate 'spread';* pilot programs to test aenative methods of service provision, to be contiued if successu;* strategy to atact pive sector capital for investment In municipal serices ad in SOMMA

(Prvatlzation Pilot Program, and Municipal Infrastructure Finance Study); and3 limited grants for dwelopment of PAEs and for ting, as a means of providing incentive for

entry and wide access to all municipalities.

D. Project Costs and FJhuncdg Plan

3.16 Project Costs. Total project costs are estimated to be about US$333.1 million equivalent,Induding price contngencies and Indirect taxes. Ihe proposed Bank loan of US$150.0 milion equivalentwould finance about 45% of total costs (50% of costs less taxes). Detailed co estates are presentedi Annex 3C and s_dmrzed in Table 3.2.

I~~~~~~~~~~~~~~~~~~~~a S

bD 2Q2 66 Zt 24%

Do1ako 139.5 46.S 186.0 25%

Rol 20msbw AU 25X

Fact Pmg8" 6.7 3.3 10.0 33%

SIE Shur= 0.7 0.3 1.0 33%

WTAL BAM OSTS uusIM A,,au :. 2%

Pa=u Wtisa,l wcSieat bl1 2S%

TStALtaROlB OSTS 2492 Au2 _ 25%

dai sbt US$30.0 min In; . ,atms.

3.17 As thown, tot project costs iwnude US$27.5 milion oquivalt (or 8% of basn costs) forishtial developme and US$273.5 million (or 88% of base costs) for irtructuro. An addionalUS$10.0 million (or 3% of bas co) woud be spent on the two pilot progms, nd US$1.0 milon(or less t 19% of base ost) on studies. Due to high Brazflian infladon, costs bave been caluatedin aew (bas csts of Jaluary 1993) and cOnvOet tO equivalt US doas at praing exchagoates. ITe e scale of Investments at the local level was detmined by the edmated demand forservices, bmrowing capacity of municipalWes, and cuterpart payment caacity of the State andmunicipalities (se para 5.9 and Annex 3B)? Because the Bank loan would finance a tim-slice ofmunicipal iveme, total project costs are not precise and should be see as indicaive.

3.18 The foign exchange component is esimated to be about US$78.7 million (about 25% of basecosts). bndirect taxes arm about US$30.0 million (10% of base costs) and will be financed by sub-borrowers or the State.' Physical coutingencies have not been budgeted due to the project's

c approach, desbd above. Project costs inlude puco ntingencies of abo US$21.1mMion (7% of base costs).' Rough cost esfimates for c"i wors are based on ext eng ndesigns and unit cost of comparable investment in Brazfl, supportd by engineering esim and recetcoo prices. Consultant service costs are based on prevaing local and foeig person-month rates.

3.19 t oagcn Plan. The project would be fianced by: the proposed loan, toalling US$150.0million (45% of project costs); State resoures of about US$85.4 million (26% of project costs);munciW cnterpa of about US$72.7 million (22% of project cos); COPASA for abou US$23.0mlio q(7% of project costs); and about US$2.0 million Oess than 1%) private sector participation for

investments under the proposed pilot program. The proposed loan would finance all foreign exchangecosts (about US$83.9 million, including contingencies), plus about US$66.1 million of localexpenditr. The project's ptoposed financing pla is provided in Table 3.3 below:

Pivat Bank %

bnL Dev. 7.0 74 - - 15. 29.4 51%

Bdvk. bJfa. 74.4 63.2 23.0 - 131A 292.0 45%

Pilot Pzomj 3.5 2.1 - 2.0 3.1 10.7 29%

SL fitd Li= = D.I Lab 56%

rYAL 4SA 72.7 23.0 2.0 150.0 333.1 45X

(as%oftotal) 26% 22% 7% - 45X 100%

2Y }7WOne mm es he eparesed interst in dh progam to date, ad 30 bv pented elgible swb.uect (ofte 30, ttoalad fial evaluaon have been comWleed fr 22). projes fi year pam of Inetmnt sIbasd on te proposed Inestmt of tes 30 nmunies

'I Abtough exmpton fiom impor dui fr mateils ptocourd under id finacinSg Is no longe a poliy of theGOB, duties are not consideed based on the assumpton hat the eecuting agon wl iod h obtaing wai

41 P ice aoe calnulated on dt basi of the esimad diu t schduL (Annex 4P) and O.D. 6.50(Octob1992 in which th Dans MUV ine averag about 3.08% per yewa ove p thei_ popiod.

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3.20 DurWg Negotitons, agrmn was reached on the project fincng plan and the Borrower'sguante ngarng ncsswy projet countpart funds.

E. The Borow and Ezecuting Agency

3.21 The Borrower wouldbe the State of Mias Gera. lhe State would use the proceeds of the Bankloan and its own counterpart funds to capialize a municipal development fund managed by the Banco deDesnvotemo de Afins Gwais, S£ (BDMG), the States development bank. During Negodatio, itwas agreed that BDMG would execute Parts A-D of the project; the State Setat of Plaig wouldexecute Part E, with the assitce of BDMG. It was also ageed tat the State would caus BDMG toperfom satsfctoily under the project. BDMG was created with State Law #2,607 In 1962 as a publicautarky,u wholly ownd by the State. I was the fis In what was to become a system of State-owned

development banks. BDMG's Presidet is appointed by the Govern. Shares are held In the name ofthe State. Ihe Seary of Planning serves as Chairman of the Ban's Board of Directors. All bankigactvity in the State is coordined tirough the State Seretariat of Finance (SEF). BDMO Iheadquatered in the State's capital, Belo Hodzoe, and has regional offices In eleven m dcities around the State, and representative offices in Brasilia and Rio de Janeiro.

3.22 BDMG is a well-perfoming bank by mo standrds and is the highest rankd Briiandevelopment bank in tums of lending and profitability. As of end-1991 its total assets were on the orderof US$600 million. In recot years the BDMG has made significant effors to improve its equity postion,somwat eroded dur the late 1980s due to nn-performng (largely federal govenment) obligatios.This was done through negotation of terms and a State equity capital increase following the sale of State-owned company shares (on which BDMG was a lead advisor). In 1991 the Bank's employees numbered530. BDMG's Board of Directors approved in Apil 1990 bncorporaon of the company's assets, equityand liabilities into a socedade andma (SA), or public company, which has increased its autonomy.BDMG has succsfully execued severa multilateral agency-finaned progrms, including the Bank-financed PROFLORESTA Project (Loan 2895-BR), and is executing agency (through a soerate projectunit) for the Minas Gerais Water Quality and Pollution Control Project (Loan 3554-BR). An institutionaland fanci apprais of BDMO is prded in Annex 3E.

3.23 Since the SOMMA Program is expected to continue aftr the project ends (para 5.10), projecthmplementaton responsibility wil reside with a pre-existing department of the BDMG, the Departmentof Infrastruc-Ire (DIU). The DIU has maged municipal infrstructure investment funds fnanced withCEF and other resorces. Following its recent strengthening In preaation for the SOMMA programpara. 4.8) the DIU consists of a grup of 15 technical staff, four support staff and one manager. A

technicalge agreement with FJP would ure, Inter ala, ta tehnical staff from the PIP wil beavaile, as needed, to assist the DIU in the Iiutional developmet component of the projecL

F. Stu of Projct Prepartion

3.24 Project preparation was begn by a unit within the Plnig Department of the BDMG incoordinan with SEPLAN, the Secretay of taona Relats EAI, the Serety of MunicipalDevelopment (SEAM) and F1P, asisted by etern conlts. During the preparation period, fourmissions were held, as well as workshops with other municipal development projects (i the States ofParani and Rio Grande do Sul). Several confere have been held to date with muicipal mayors, and30 municipalities with suceflly-evaluated ub-projects are prepared to sign Participation Agrn .Detaled designs for the COPASA component (20% of inftastructure investment costs) and the publiclHghting component (8% of costs) are finalized. Designs for infrastructure investments for the first-yearptogm (US$60.0 million, or 20% of costs) are undey and will be completed by July 1993. TheOperational Mual was agreed durig Negotation (para. 4.3). Ihese and other documents relatd toprect preparaton, are avlable in the Proect File (Annex 7).

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IV. PROJECT IMPLEMENTATION

A. The SOMMA Program

4.1 The Minas Gerais Muncipal Management and Environmental u Program (SOMMA)is design to be a long-term State program to support development of locd fancial managementcapacit and prit inastructure estments. Through the proposed project, the Bank loan and Statecountepart funds would capitalize the SOMMA Municipal Development Fund which would onlendresources to municipalities for: (a) technical assistance twards Improved financial, Intiutonal and

management; and (b) economically-viable ifasucture ivtment on the bis of well-defied sub-borrower crei ti and sub-ject eigibility citeria. Counepart fund wd beprd by local goverment and loans would be repaid at market-apximating rA (pma 4.5).

4.2 SOMM's Board of D)irectors includes repr es of the SEP, SEPLAN, SEAM, teSecret of Trasport and Public Works (SEMOP), and the Asociaon of State Municipaities (AMN).The Secretary of Planning would presido vver the Board, and would handle policy matters related to theProgram through an opetional Executive Secrtariat. BDMG would be solely respone for day-to-day

imp ont of the Program. The organition chrt for SOMMA is preented in Amex 4A.Institutional and gpleeonaf arraements for the proposed proJect are deied in Ane 4B.

4.3 Opeaional arrangements, based on those developed under similar ongoing program in thesouthern states of ParanL Rio Grande do Sul and Sant Cataina, are set out in the Progams OperonaManual. hefe volmues include: volume l- basic orientionguide for municipalis; volume 2 - sub-project eligibility crita; volume 3 - sub-borrower eligbility criteri; volume 4 - pruremet manmaland mod documelts; and volm 5 - monitring ad evaation. Durn Negoiation the OperatioMau wa reviewed and found to be satisfactry, and it was agreed that the SOMMA prgm wouldbe operaed in acd wih the Manual. he appwroved veion of the Mana was isued by the Boardof Diretors of BDMG on June 9 1993. ne Manu is descrbed futher in Ane 4C.

S. The SOMMA Munipal Devlopment Fund

4.4 The SOMMA Municipal Development Fund (SOMMA Fund) was establised wih State law#11,085, dated April 30, 1993. The SOMMA Fund would be located in and managed by the BDMG,which would perform all sub-project and sub-borrower evaluation (see paras. 4.9.17). About US$144.0million equ ent of the Bank loan would capitalize the SOMMA Fud, together with Stae resources,in a relatonip of proximay two-to-one. (is is equ o the full amount less about US$6.0millin, wiMch, together with Sta counterpart would finance preparation of PASs and traing - hrougha seprte grat account - and the State studies and technical assistance to PJP.) The SOMMA Fundwould onlend o municipalities, muicipal water companies and COPASA for up to 75% of the cost ofeligible Institutio development and irucure sub-projects. Ihe remain counterpart (minimum25%) woud be provided by sb-borrowers, tough payment of nvoices, or in-kind labor conrb tions.

4.5 Terms and Conditions. Sub-loans wo",ld be made to sub-borrowers in three categories, withtem of Up to five, te ad fifteen yes (including grace peiods of one to tree years), depending onhe cot-recovery profie of the Invesmen. Sub-loans would carry an interest rate aee duingNepation to be calclatd on the basis of the cost of the World Bank loan plus a -spread- of 3%

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(Yieldin an esdmated project average rate on the order of 12%).' The ineest rate for sub-loans wouldbe vaiable, ajusted semiannually on the basi of the Interest ra on the Bank loan All sub-loanbalces, dissemets and rpayments would be denominaed In cruzeiros. Duing Ngt 1atic ms t wasaWeed th subloan amounts and balances would be adjusted for aion usin the Idce Gwl dePMs de Mer4do ([GP-), Issed by the Getulio Vargas Foundaton, an Index commonly used in thefinancial sectr to maintain h rel value of balances. The spread woud cover the adminstrtie cosof manig the SOMMA Fund and the risks associated with foreg excage fluctuadon (auming theadjusteat index moves rougy in tandem with the devaluation et the cruzero). Residua risk due todiffe s In the movement of ths index and the devaluadon of local curreny agns h currencies ofthe Bank loan would be borne by the Stat. Given the high rat of Brazilian inflation, and f cialmarket ditotion, during Negotiations It was agreedthat the in rate would be dicussed anmually.Table 4.1 prens sub-loan tem and condiion for each type of invetment

via \.0 LA .W10- I'W. .

R- GramIWTOpof i _bnet TOm Pedod

Cad Upgrades, Masr Plns, Othd Teonal Anoo,Pchas of Sold Wast EBu_nt Water and Sewe System up to up toIovwmee, Pdvataion Pilot Mro-Basin Fiiy Sudios 5 yea 1 yer

We Dstrbi and Seowe Cledoni Connectos. up to up toPavalWllt, PUbrw LW&& o8, o-Di10 years 2 yea

Wftr Pnxud and T _det S _epT _ef= SoUdWasb Dlqmn4 Msao-DnJn>D, Wwro-A. tciw P"t upto up to

| hn_ | 11 _ I _I | | _t ~~~~ ~~~15 yms 3 .

4.6 It w farth agreed durig Negotations that sub-oans would be guaned by municities'vauedded tax (ICMS) a (or, in cases where thisI i sufficient, by the municipatciaion find (FPM)). In the case of COPASA, other water companes, and the private sector pilotinvestent, it was agreed tht guarae would be made by pledging of revues, or physica orfinanil assets. Under a previous municipal program Idm red by BDMG (Annex 3E), there wereno aman, and no need to call on guarantees. If a ca of non-payment occs, requirg th invokingof a guarantee, BDMG would not re-lend to dth sub-borrower unti the situaton i satisfactoriy resolved.In order to ensure a wide ditribution of project benefts, it was agreed during Negons that no singlesub-borower would be able to borrow annually more thn 10% of toWal sub-loams made without priorcoultbaon between the Borrower and the Bank (in the case of COPASA, no more tham 20% of thetotal). In order to ensue project flexibility In the eady years of implemeton, tds limitation wouldtae effect only in the project's third year.

4.7 Flow of Funds. Annex 4D prves a diagm showing the projected flow of finds f*om thevario finncing sources to BDMG and sub-borrowers, and a simuation of funds flows on bis of thetem, estiatd lending, and renms to the SOMMA Fund over a twenty-year period. As shown, if theproject i implme_d accrding to sdcedule, the revolving natur of the Fund would enable it to lendon the order of US$25-40 milion per semester in the five-year period following project compledon, orrouoly the same order of magnitde as Fund lending during the peak of project ecuton.

1I huhis also ooasdera proybog4r waka Intes rates in Brad!, ask its coprbl to thleta. (18 yer,10-2)under t) h o ly sounfsturfinancd avblef im pubfio.aseorba (tNsaoolDevelopment Dak(INDE) and Fedwra Doonoado Fund (CU)) andf to thseetablishd undewsnuk Bank-financelod peels in otber tates.

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C. IDMG's Appial Proes

4.8 BDMGs DlU would mMge all aspects of m gemet d opetion of the SOMMA Pogam,nludg prepaaon of all subborrower nd sub-project appraisa acordig to selecton crkeria set out

In the Operonal Manual. During project prpation BDMG made dgnifican dforts to pre fortis project: it agreed to strength the DIU wih additional technical stf ented Ito ageemes withthe Ste water company (COPASA), the Nadonal Health Foundation (FNS) and FJP for specializedeptise In the preparation of the project, prepared working drft of the Operational Manual, tedproposed procedum trough preevaua8on of a groW of 30 fir-year municipalities, geed to purcand insal upgraded computer equipment in the DIU, araged for electro mmunication with Bankheadqurers, and recently lanched a publicty campaign for SOMMA. Durn Negotations the Bankwas furnied with evidence of ysa ctory increased staffing (four addiionl technical staf) andcomput erzation (threo additional computers and three additional printers) of the DIU, and it is now fullypreped to Ia operaton of SOMMA. Annex 4C ses out in detail BDMG's pprais process,providi an llusration of su-oower and su-project evaluati for a sample case, the city of Patosde Minas, one of the Progras first-year municipalities. The appra pces is summized below.

(a) SubBoffower l;igibiC

4.9 All municpalities in the State, plus municipa water and/or seweage tord es and COPASA,would be eligible to pardcipate t the SOMMA program, providing they comply wih miimum criteria,and undergo a detailed finac and insiuto appraisal. FWI sub-borwer eligibiity crteria aredetaied in the Progrms Operol Manual, Volume 3. Key steps for enry are as follows:

(a) signtr of a Participation Agreement (ConvDnlo de Panicdpap) which formalizesm pal Wnerest in SOMMA and commiment to its principles;

(b) compleon of an sitial nd financial diagnosis, accordig to rpidmethodology developed and tested under simlar programs in other states;

(c) establment of an agreed set of instittion-building acdons, with dlealy-defiedperorance targets, oudined in a Strategic Action Plan (PAO );

(d) demoed compliance with Federal legislation on payment of taxes and othe&obligato; and

(e) demonstrati of debt capacity according to fedal gidelines for public sector borrowing(set out in Senae Resoutdon #36, 1992).

4.10 MnicWities with independent water and/or sewrage c nes wOuld also present the lastthree years' f stamets, in addition to the above conditions for the parent munipalt.COPASA's Iutiona and financial sionhas been appraisd, and found to meet minimum conditionqfor entry Io the SOMMA Program The Botrower agreed during Negotditone N that COPASAwould maintan and improve its pefmace according to an agee Financial Plan which tgets Inqeyoperaoal and fical per nc Idicators (see Amnex 3G).2

4.11 To undetake frutctue sub-los, municipaides and water agen woud demonst:

(a) debt capty acording to federal guidelines for public sector borrowing (para. 4.9);(b) avbility of required couart funds (minimum 25% of proposed project costs);(c) ability to provide aguarantee;ad(d) compliance with federal regultons regading inta-govermn debt.

2/ Consisted w bh arVa ad ameomeu reachod under dhe rweedy4ppred Mins On= Water Quahty and P*Mncat P,oj (.& 3554-U).

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In addition, munIc vitIa wich hav not upgraded their reside and mmrcidal proprty taxcadaste sin the new Constitution took effec (end-1988) would commit to upgrding them in the PAB.Municipal watr and/or sewe compaies would agree to undertake a marginal cost anysis of tariffand incorpor the resuts over the pi of the project. Ibose and conditi arm staed in theOperonal Man and woud be made explicit In sub-loan contrac between sub-borowers and BDMG.

(1b) ft -te Ei g$ fW4 4. 1

4.12 Sub-project eligibility crita are set out In tie Opetional Manua, Volume 2. AU sub-pojectswould undergo techical, economic, fiancial and e ental evaluation by a team of BDMG staff.

4.13 Te _na evaluadon involves analysis of demand for th service, and densatio tha thedose alternive Is the least-cost means of meeting demand. This eauaon wou be pefomW byBDMG engis with the assistance of spiized technical agts as necessy (for example for sdidwasto disposal, or alternative sewg tratge m). Proposas wil be reuned to muicWities for reionif necessary. In the case of sew tream and solid waste diosal subproject, low-cost, well-testealternative techologies such as anaerobic sw e teatm shoud be encouraged, wher appropriate.Sewage treatment and solid waste disposal Investents would be subject to specific te cal analysis todetermine tho vIHIty of isolated investents In single municipalities. In cases where the only viable,or the least-cost, solution to sewerag or solid waste pollution is multi-municipal or regional in nature,municipalities would be encouraged to form water basin associations and work colaorati developa viable subojct. Gran financing, admintd separately from the SOMMA fImd, would beavalable for feasbility studies for hs type of opeation.

4.14 EconomIc cost-e t anlysis would be done to detemine projet viability. The minimumciteria for sub-projes would be at they provide an intel rate of return which meets or exceeds theopportunity cost of capital, estted to be about 12%. In the case of g sevices such aswater, sewerage and public ligdtng, economic benefits would be calculated on the basis of tariff revenuesas a proxy for wDIne to pay. In the case of non-me reve nue sepism, such as drnage andpaving, economic benefits would be based on increased Ind values as a resut of the infrastructureimprovements. Becse of the difficulty in quafyi full economic benefits for solid wate disposaland sewerae _treate subprojects, for those subwprojects costing less than US$1.0 million (and formicro-regional sub-projects), estim of per capita benefits would be sufficient, prvidng the technicalsolution is least-cost and benefts are shown to be largely witdin the munIciplt (Annex 6A).

4.15 huandal costbeft analys would provide the basis for determining cost-recovery. Allinfrastructure sub-prjects (with the exception of some sewage tment and solid wate disposal), areexpected to achieve full cost recovery. Sub-projec inestments would be aked to specific targets toincree user fees and ta, to be agreed with municipalities in the PAE and reflected in the terms andconditions of subloans for inftrce investment. For exaplo, the case of Patos de Minas, shownin Anne 4C, the municipality wil need to increase its bettment charge in order to provide fuIl costrecovery for the proposed storm diag sub-project

4.16 All necessary environmentl evaluation and ment would be part of requiredo(see para 4.32 and Ane 6B). I assessments, where required, would be completed byprivate consutants, ev_atd by PEAM and submitted to BDMG prior to sioatu of sub-loan contracts.

1umplwhic hs t Adlod ., 1hS. of PJua"m dob.SpedeAmex4wD otpduiuy swstt

breape, wic hve bes e4.s oal, with rbl. la Soo Ann4D.

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4.17 Infastucture nestments would be linked to specific technical assistance intervons. Forexmple, investments In solid waste collectizo and disposa, if deteed to be a municipal priorty andeconocally vble, would be accompanied by appropriate creaswe in the relvt user charges and/ortaxes, tcical assistance in zoning and land-use, In the Improved efoment of local env lreglons and training for Involved staff at the local level. hI this way, the instudonal developmentand infhstructure components would be fWlly complementay. Given the Importance of maintaining thislinkage, RIP will work closely with the BDMG project teim on the recommended package of tchnical

ss inteventions for each municipality. For each sub-borrower, a team of one engine, oneeconom Wslfinancil analyst and one institutional speciist wi be assigped to work together with localauthories, from diagnosis and PAE to euation and supervsion of the Inrastructure invetmets.

(c) eviewcedu

4.18 Given the large number of small and medium-sized sub-pojects expected during this project,BDMO would undertake the evauation of municipal sub-components beyond those evaluated duringAppraisal (the COPASA compone of about US$60.0 million, first-year municipal iftructrInvetm totalling about US$60.0 million, and the public liting component of about US$22.0 million,or a toal of about US$142.0 million) according to agreed criteria set out in the programs OperationalManual. During Negotions it was agreed that for sub-projec expected to cost more than US$5.0mili, the Bank would have prior review of al prwopsed tehical, economic and finacial aspects; ex-post review would be undertaken below this amount. The limit would be US$2.0 million in the case ofsewae treatment and solid waste disposal, which are more likely to employ less well-ested technologies.Sub-projects would be considered for review until three months before the projec's Closing Date.

(d) Technical Age

4.19 Tecical agents would assist ncipalities and BDMG in the preparation and evaluation of sub-pojects. Municipalities would be fee to seek technical advice from State, local, university, pdvate orother sources. bh order to provide a guaranteed source of experdse, several umbellaw technical agentagreements would be signed at the project's outset. During Negotatons it was agreed t technicalagent agreements satisfctory to the Bank would be sigped with any competent agency, as needed, forthe puposes of evaluation and supervision of the project. Umbrella tecical agent agreements withCOPASA for water and sewage, and with the State electicity company (CEMIG) for public lightingwould be igned prior to Effctiveness. A technical agent agment has already been signed with theNadonal Health Foundation (FNS), which furnishes technical assistance for water and sewerage servicesto municipalities which provide service independent of COPASA, pimay in the North of the State.A teical agent contract satisftory to the Bank would also be signed with FJP prior to Effectiveness.The agreement would Include elaboration of PlP's responsibDies as *ape tedhnical assistanceinstitution: developing a coherent framework for the insitutional development component, including

sdM questionnaires, diagnostic prcedures and guidelines, and model terms of reference for keytechnical assistance Interventions; as well as supervision, evaluation and monioring of the tchnicalasstace component.

D. Lgal Arrangements

4.20 Implementaton arangements for the project would be fomalized in the following legaldocuments: (a) the SOMMA fwnding Law; (b) a Loan Agreement between the Bank and the Borrower,the State; (c) a Guarantee Agreement between the Federd Government nd the Bank; (d) a ProjectAgroeemet between the Bank and the Executing Agency, BDMG (e) Particiaion Ageement (cownosdepxnipa4lo) between the State (BDMG) and particIpatig ncipalies; and (t) Sub-Loan Contactsbetweeni BDMG and participating m a municipal and independent water companies andCOPASA (see Annex 4C). Areem on the final veri of the model Pariciation Agements and

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Sub-Lao Conta was reached durig Negotations. k was also agreed tha all conditions present intho lgal agments betwen the ank and BDMG, the State and the Federal Govenment and COPASA,would be reected in the s, as necessary.

F. Prourment

4.21 All prorement of goods and works would be cried out following the World Dans GudelwnesJbr e Pro awM May 1992). Past Bank-financed projects have encounr delays and difficulties dueto dicrepancies between Bank procur guidines and Brazilian feeral and state lelateon. Specificdcmandes betwee Bank guidelines and these loca laws ar: (a) price as a fctor In consultantselectin(b) number of bid envelopes in competive bidding; and (c) use of brackeedng and price ceilingsIn competitive procedures. A ruing of the federal Mlbwnl de Comas last year upheld the positon thatBank guidines should prevail over local law under Bank-financed projects. Furtherorem, a new nationalprocurmen law which is co_istet with this position has been recenty passed by Congress. This newlaw, combined with the us of stadard bidding documet (Par 4.26) should help to reduceprocument problems prviouly enoountred.

4.22 The proposed procurement arangements for the project are in Table 4.2 below.Civil wors under the proposed project would represent about 62% of total project costs; equipme andmaterals about 32%; and codtant services, includw technica assstance, training, studies, engeeringdesi and works supervision, about 6%. Amex 4E provides esmated profles for sub-project contracts.

~~~~~~~~~I IEo T&CbillWoda 38.5 155.6 125 20C.6

(17.3) (681) (50) (911)

-- uii eSand Matoulk 67.5 30.0 8.8 106.3(30.4) (13.5) (3.5) (47.4)

ConsultmMSwio - - 20.2 20.2(11.5) (11.5)

kTMAL 106.0 18S.6 41.5 333.

of vAtBn iscd(47.7) (0) (20.0 (M.X

.,,.nwod ,,hW ulo d b"an ) a d bbSaoobns

4.23 Cvii Worla. be eimated value for civil works co ct is US$206.6 million. Due to thewidW ran of szes of mnicipalities paricipating in the project, e will be a nunber of small conacsas wel as larg ones. Most contracts will be scattered throughout municipdles in the State and averageUS$100,000 - US$3 milion in value, with a few ecceptions of large work ove US$5 million, to beeed by COPASA and lgter municipalies. Its eapected that the smaller, dipesed contracts wi1lnot be aave to fore bidders. It is thereore proposed Ihat al contracts for civl work estimatedto cos the oqulent of US$5.0 milion or less up to an Aggated value of US$155.6 mMlion wil beproured on toe basis of loal cmpetkit bidding (LCB) prcedures satifto to the Bank. Foreifims wil be allowed to parftipte in the biddig. Above these lims, procurement wil be carried outon the basis of intatonal competitve bidding CB), under Bank sle8in. Local shopping

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procedures acceptable to the Bank would be allowable for m civir work contrac mated to costthe equivalent of US$100,000 or less, up to a tot agpgra value of US$12.5 millio.

4.24 Goods. Purchase of equipnt and materials b eed to tota about USS106.3 millon underthe project. Ihe majority of these pures wil be small machinery, equipment and merdals necryfor the installadon of infastructue srvices, and most contrts ae e d to rag beweUS$50,000 - US$250,000. lhere will be sigfican scope for economy-of-sae purching ofequipment, however, in the case of wat and sewerage investments to be executed by COPASA andpublic 1ighting ilnvestmen to be executed by CE?G. Tn both cases, thes State companies wil procuregoods on behaf of the municipalities and a speal effot will be made to Ideny ICB packae. For thisreason it Is proposed that all contracts for equipment and mateals esmate to cs the equivent ofUS$250,000 or less and not exceeding US$30.0 million in agrega would be procured on the basis ofLCB procedures satisfactory to the Bank, with foreig firms allowed to participat in the bidding. Abovethese limits, procurement will be carried out on the basis of ICB under Bank guidelines. ICB doc_would Indicate specificaly whether domestic preference would apply in b evaluaon. Loca dsoppingprocedures acceptable to the Bank would be allowablse for small eqpment pues estmated to costthe equivalent of US$25,000 or less, up to an aggegate of US$8.1 million.

4.25 C_oult Serices. All tecical assice studies, t ng, egineerg desig and worssupervision contrs, amountg in total to about US$20.2 million wil be procured in accordance withthe Bank's Gddelbesfor dte Use of C utat (August 19), icluding proposals from ftip aodlocal fim. Due to the dispersed nature of the sub-projects, and the large number of epected smallconcts for technical a ce and training, project design and supervon, duing Netato It was

reed that Bank ex-most review wil be used for contnt sevices ng o less ta US$100,000(although terms of refee wi be reviewed), with prior review for aU conultn sevices pected tocost ore than th amoun'

4.26 Stadrbidding documents and contracts for civil works and services under ICB, LCB and localhopping methods are set out in Volume 4 of the Opational Manual. A draft leoer of Initaon andsample coract for consultant services will also be included in the Opeaonal Mual. ADI munder ICB (about 30% of total project costs) wl be subject to prior Bank review of advertig, bddingdocuments, bid eauation and contract awards.5 In the interest of expditing project execuon, allprocrement under LCB wi be reviewed by BDMG's DIU, which is eperienced in tis type ofprocurem review. However, LCB procurement processes for works expected to cost US$2.0 millionand above, and toalling about US$90.0 miion, would be subject t the Bank's prior mview. The firstthree LCB proemet for both goods and works, regrdless of amount, will also be subject to theBank's prior review. The proposed prior review arangements would prvide a prior review coveagof about 65% of the toW cost of Bank financed goods and works, which Is considered Wpropriate. Alother procurmnt pocesses will be subject to ex-post review by sampling. If the Bank determines Inthe review by sampling hat procurement is inconsistent with agreed pwcedur, the Bank would revethe contract review procedures, and no expendiures for such kems will be financed out of the proceedsof the Loa F murteme, the Bank may cancel an equivalant amo of the Loa In tis even, thBank may also require ex-ant review of subsequent LCB documents. Audit responsible for theverification of project accounts would be Instucted to eamine and report on the use of these pprocedures. A genal announcement of the types and sizes of COtract to be awarded during thesubsequent year would be published by BDMG at the beginnin of each year in local nd International

4/ To confxm with guiden establishd in OD 11.10 (Anne C) dated Novnme 1992.

sI As pe OD 11.00 (Am= C) of Novnmber 1992, when bids am Inited oan a fxed-i, besk he documeots wdIwld, a specific provison to protet bide fiom extension of bid vadty.

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journas of wde cirladon. The teb for the first such advertsement has been fern1sbd by 9DMO andwould be published in Deweopment Business once the proposed project has been presented to the Ban'sBoard of Directors. The above procurement aragements were ageed duing Negotiadons.

F. Disbursement

4.27 The proceeds of the proposed loan would be disbursed according to the following categores adpercentage:

(a) for subloans for technical assitce and e, 60% of sub-loansband 100% sub-loan amount in the case of foreign epnditures, excluding taxes;

(b) for training grants, 50% of all subloan disbursements; and(c) for consultant senices for studies, 100% of all expenditures.

Allocation of loan proceeds is shn in Table 3.4. Disbusmnsare expected to be completed overa five and a half year period, as reflected in Annex 4F. A disbursement schedule somewhat shorter tathe regional profile of seven years is Justified by the experience and competence of the executng agencyand the project's tming within the local electoral cycle (para. 3.4). The Project's Completion Date wouldbe June 30, 1998, and Closing Date would be December 31, 1998.

4.28 In order to ensure efficient and timely implemeion of the project, it was agreed durngNegotaions that a Special Account in the amount of US$8.0 million equivalent would be established ina bank acceptable to the Bank and the Borrower. Because the projec would involve a substantia numberof smal contracts, disursement for civil works contracts amouanting to less t US$2.0 milion, forpurase of goods moundtg to less than $250,000 and for consulta services amount to less thaUS$100,000 would be made under the Saement of Exenditures (SOB) procedure, prepared and ceIfiedby BDMG, which has adequate accouting conttols for this puWose.' Expenditres for coas abovethese limits would be documented. All documentaton would be reta by the DIU for inspectioduring Bank supervision and be subject to review of enal auditors. Because several sub-projects arewel-advanced, retroactive financing of up to 10% of the loan amount for eligible expendures incredafter Januay 1993, but not more tham 12 months prior to loan Signaure, is recommended. DuringNegOaions, these disbursement arrmgements were agreed.

G. Acooung and Auditing Aragn

4.29 The accounts of BDMG, the project's executing agency, are examined annually by prvateernal auditors, as well as State-level government auditing bodies. Accounting practes andpOcedures, including the chart of accounts, have been reviewed and found satiscory. DuringNegotations the following accounting and audit arrangements were agreed: (a) tha BDMG wouldmaintain a separate, consolidated project account of sub-project expenditures for monitoring and auditpurposes, to be audited along with BDMG corporate acounts by private exteal auditors acceptable tothe Bank; (b) that the projet accounts of parcipan municipalities be maintined separately, and besubject to annua audits by the Stats 7Hbamal de Cmas, or Accounting Trbuna, as curretiy practiced;and (c) dth COPASA maintain separate project accounts, to be audited (together with corporate financial

) by private externa auditots. These reports would be furnished to the Bank within six mountsof the end of each fiscal year.

S/ Moatut awio would be poded by G=; fo ndviual constn fUld

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IL Monitoring, Md-Twrm Reviw and Evaldtlon

4.30 In addition to BDMG's site visi, sub-borrowers would be aepectd to pren peiodic progressreports on project Implementai (with periodicit eablishd In subloan contat), on the basis ofwhich BDMG would furis concise quartly progress ports to the Bank. hese reports wouldcompare actua and forecast progess. Ihe ded range of project monoing Idicators i providedin Volume S of the Opat Man. Thes cu sandard sgeed pfobrmance indicatorsmonitoring physical, fiancial and operatioal pros of Iid sub-projects. and 4 a projectpefrmace for all sub-proJects. Included are specfc Indicators for COPASA, as agreed in theCOPASA Fincial Plan (Anmex 3G). A set of "key impact lndiators' and targ, selected from amongthe goup of Indicators to be monitored durig the project, hav been agreed, Including: (a) number ofParticipation Agreements signed; (b) nmber of PAPs completed; (c) overall project completion,measured in e s; (d) discretonary as a percent of total State trasfs to nil; and (e)average property tax per capita in the State (see Annex 4G). These indicator, aon0g others, would bemonird In quarterly reports. It was agreed during Negotiaons that quatedy rports be furnished nolater tham 30 days after the end of each of the following quarters: Marc 31, June 30 and Septembe 30,and an annuls report would be prepared for the December 31 perod, to be funished within two monthsof year-end. These reports would include, wer alia, the monitorn indicators set out in the Manual.Repor tng would begin with the first fu arter following Effetns.

4.31 In order to review project progress, and If neceay reorient hpi on, it was agreeddurn Negotiadons that a mid-term review would be scheduled a two-and-a-haf years(betwe thirty and forty months) after Effectiveness. In order to ensure Its useuness ad that effectiveevaluaton procedures are established during proect implntatn, the broad objective of this reviewa included as part of the Operaonal Mana and are shown in Anex 4L The mid-term review wod,bsw alla, review the agreed progess on the pilot progrm and stdies, and make specific

,-- mnundadons for condnutin in the case of the former, and impl of recommedations inthe case of the latr. Et was also agreed that the Borrower, throu BDMG, would also prepare andfrish to the Bank a Project Completion Report within six months after the Cloig Date.

L EvUiron49meta impat studies

4.32 Specific guidels for evaluation of nzuclpa projects wih iamc t have beenestablished by the State envI al agen, Fdao E l d ombm AM) for thepuroes of tho project. The new rles establish guidelines for eroel s by pioject sizeand expected impact (on te basis of physical measures, such pipe size for water and sewerage). Thesegudines ar rougy comparable to simlar ones In other stes, and are compatble with both federalgovenmet law and Bank guidein. There are three categories: the first, for projects of significant sizend mact, would be a fu nvirnmental impact a smet and report MAIRIMA); the secondcateoy, for projects of smaller size and impact, would be a simplified assessment, orenvironmenta control report (RCA). The third category of investments would requi only licensing.Enronmental assme under the project wil be prpard by prvat cotants and reviewed byFEAM. Full enviometalt impact _ will need to be done for about 10% of appraised first-ye sub-pjects (sewa treaument and landfill projects and larger drainag projects, principally toensure adequaesting), while about 15% wI reqire simpler impact reot and th remainder licensingor no action at all. Et is expected that subserojcts financed under SOMMA would reflectthese percentages. e Operational Manualstiptes that asessment would be conductedas needed, consIst with Brazilian law and Bank guideines, pdor to signt of sub-loan contracts.Durig Negia it was agreed that EmA/RIms and RCAs would have been comleted for sub-

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proJects wh envioment impact,' consistent with Brazilian and State laws and Bank guidelines, priorto any disbursement on the relevant component. BDMG would provide tecdhica assistance tomunicipalties and ovesee the environmetal screing proces, fom selection of consultams (Or whichIt wiU mslntain an open data base of firms) to subsequent evaluation by FEAM. BDMO wil alsomaintain an agreed model set of terms of rerence for eironment assessmen, prepaed inconjuntion with FEAM and the Bank (Anmex 6B). During Negotiations the State provided assurancesthat FEAM would comply with its review and evaluation responsibilides in a satsfatr and tmely way.

J. Implemaon Schedule

4.33 Annex 4H presents the proposed projects ageed implentadon schedule, which outlines keyactions in project execudon fOr smooth implemeion. his wM be frther detaied through the use ofproject manment software, to be established and programmed during the projects inception mission.Of priay iport are targets for Participadon Agreemen with m es, procuem of majorwork, and progress on tedchical assistance intevenions. This schedule is to be prepared on a rolingquartery basis. AIrgeme for project supewrision are outline in the supervsion plan in Annex 41.Pbysical project supervision wil be caried out by the DIU and coultants on the basis of site chec.BDMG's 30-year expience as a development bank will greatly aid supevision.

V. FINANCIAL ASPBCrS OF THE PROJECT

A. State Fiances

5.1 Sound fiscal and financl management, in particular over the last two year, places the State ofMins Gerais in stable financial condition, despite recession and onomic difficulties in the countryas a whole. Responsible fiscal management of the current State administraton has been a key factor Incolaboration between the Bank and the State in praation of the SOMMA project. The State relies onown ces (ICUS and other ta) for about 60% of its tota receipts. As of end 1991, a revenueswere US$4.9 bilion, compried of US$2.9 billion, or 59% own source tributary revenues; US$0.9billion, or 19% federal govermen transfers; US$0.7 billon, or 15% from credit operatio; and US$0.3bilion, or 7% from other sources. On the expenditr side, curret exp represent about 77% ofall expenditures, with personnel cosu equalling 42%, signIficantly below the legally stipulated 65%Maximum he remaing 23% went towards capital exp, of which about US$140 milion wasinvsmnent exenditure, lower tha In previous years due to the constran of recesion. he Stats debtburden is manageable giveS its resources, and debt service cover and other financial atios aresatsfactory. IThe State asembly has passed authorization for borrowing fo the SOMMA project, whkhis well wihin it federally-stipulated credit limit. Financial projections assume a 5% annual real Increasein both fisca revenue and expenditue over the next five yes. Detais of the State's historic andproected financ siuation appear In Amne SA.

5.2 According to the State's pluram_ development plan for the I992-1995 period, and consstenwith genraly accepted evaluation, the decentalization reforms and possible future is refrms wilnot bring Icreased own re es for the States in Brazil's federl sym Thus the Stateis agevelypmotg gater municipal financial independence and respibilty, as confirmed in its PolicyStatement of Municipal Strengtening and Decentraizaton (para 3.2 and Annex 2P), where the Statesets out its view of the proposed project as a key instrument in its staW r faievAng gre munifiscal respnsibility and idependence. n fact, Mi has succeeded in reduci negodated grans ftom

/ Alioug o imea uatdr dho pjoat, t wou il amy impact ad p_= for m, if aoar.

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32% of tota grnt finds provided to just 10% of fiuds fwom 1990 to 1992. A foml prposal tocondition l Ihnstruct urein em funded at the Stae level on a specified muncpal coupart (forbenefit s) p ing leiswati action.

5.3 The Staes borwwing capaci was estimed on th bass of 1992 epected perfrmance and thenwly promulgated, sigen ferda legislation () regardIAg d,tobe about US$900 milionannually. Ihe Stts's two top priority Inveme to be financed by milateal crdit ar: the WawQualty and Pollution Contrl Project (L. 3554-BR, US$145 million); and the prposed project

S. Munclpal F _iae

5.4 Following the fis decenlon d a nst refoims, both munipl rewources adigpodituroIncreased iy. Municip ditues rose from about 11% of to tot disposition

of final revenue (aveag over h last two decades) to about 17% in 1990. ExpedItres Incraed fromabout 11% to about 14% of totl (see ACn 5B). The effe of hsre ant yet fully dear, however.Lat seem to have benftted more than smaaller ic i, didtose with a larger economd i base over txose weak ecoomies. Mos municiplties,however, ar much better off finanily folowing the refom. Ti can have a perverse impact on ownre ces, however; for ample, Contagem, the Stats second-largest city, reeived among the highestICMS tnsfers whie own revenes decreased during the period.'

5.5 Miost munic Ies I M rely heavily on tran s from the Federal and State gov et.Table 5.1 beow indicates munipal revmuo sources on the bas of a sample of 217 muals. Asshown, own-source revenues, prmaly rpresed by IPTU and ISS, reprstd on averg about 21%of tot rvenues In 1990. The project would generate eased own reven Itugh criteria whichwould emsur cost-revy rough user- ges, betmnt fe, and property and other tae.

2 I ~~~~~~uss-- 5Of- S 7 ofR Iam 000 TO I vww US$ Td1

TIde 40. 79 CWra 1M 7 nICms 2089 37%

Odr 236.7 42%

own Souna 117.0 21% Cagial 1484 25%

WmIU 18.4 3%

O_b. 98.6 18% T(TAL 58.8 100%

TOTAL 5626 100% De1 (2) 3%

5.6 Debt Capact. Mos municipalities bh borrwed pviously only on a liHmted basis, toughsmall lInes of credit opeated by BDMO (tota of US$100 mlon beween 1980-1992) andCEP lons to larger municipalities for sanitat This will be the first c for lag4cale municipaboowing in te Stat. in general a cd hy dsnc hey ha not previouslyborrowed and are now better off ta previouly. Howe, ther are svrad lag muwhi

$1 A Mmw LqWegE. 2Whtat" e P/*ta sobrew as mnow Mimie4b BDDMG, 199.

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are sgdficaly levenged, ad mus botrow with extreme cautn Simulations prepared on the baiof Fe y 1992 data suggest that 538 unWpaltes (with 97% of the Stato's urbn populatin) havea legl Indetednes limit of about US$216.0 million. Of th tota, 29 municipalitles bave a limit greta US$1.0 mllion per year, 36 have between US$500,000 and US$1.0 million per yea, 244 betweenUS$100,00 and US$500,000 and 229 less tha US$100,000. Annex SC shows e debt cacty of 22first-ye municipalities to be US$64.5 million, and repaymen capacity US$134.8 milli

C. Cost Reovery Polcy

5.7 All sub-project appraisas would be based on the pidnple of cost recovery. Services which arrevenue-earning (water supply, sewerage, solid waste colection) would recover cost tough as anduser dages, while services which anon-venue earning aWng, drainage) would be reovrdtrough Iaes in property valuation and subsequent prperty and btmnt ax. Annex SDcontains a breakdown of the cost-rcovery instrumens f al components.

5.8 Pcing Poecy. As set out In the SOMMA Operation Mamnu, ta for reenuvg se n iczwould be set so as to recover costs (on the basis of long-n margina costs, with a pwvio for thefinancial health of the entity). Tariff studies would be done under the uonal devetopmencomponent, and tariffs restructed gradually over the life of te proect according to specific argeestablished for each nicipality in the PAE. COPASA's curet taiff stucture and level provides forreasonable cost recovery; tis wHi be ensured twough its compliace with agWed financa andopeationa targets in the COPASA Final Plan (para. 4.10). In a state where a lr potio of tesewerago service provided is throug mnici agencies separty fm water sevic, the I llesop for cross-sus fom water to sewerage, or from the economy-of-scope gais fom jointprovion. Thus marginal cost anaysis and prcing will be combimd with efforts, thog a study at teStat level to exam ituonal arrangements and altnatives for establish0joint prvon of waterand seweae services, whether th'ough Joint municipa e c ies, pvaation,munlcipalization, and contracting Out.

D. Do of SOMMA

5.9 In order to dimension Inestments for the SOMMA program, the Stat ad BDMO evaluatedsevral key a$rea: demand for resources; municipal and State capaciy to borrow and repay loan hinds;and Sate and mmuicipal techical, hstittonal and financial absorpdve capacity. First, the Statsponsored a study wbich demonsd that over the next decade ly US$3 billion, or aboutUS$300 million per year In Investments wer needed in the State to adce the objectves of ineasedservice coverage levels. Second, as part ofproject preparation, in July 1991, BDMG undertook a surveyof 25 of the Sta's larger cities, reprenting about 3 million inhabitans, or about 20% of the popWulaon.The study confirmed hat the most widely demanded investment were water supply, sewrge collectonand trement, solid waste collecton and diposal, street paving and drainage, and idefied potetliWesments on the order of US$100 miUlion. Third, BDMG prepard an evauaton of the credi limitsof about 400 of the Staes cipalies, r seng about 95% of the pol Ion. is evaluationshowed a tot debt capacity, according to feded guidelines, of about US$600 million on the basis ofthe muicipal fiscal year 1990. Finally, the Stat Govement de Ine its hitoric finalnlstatements that for the past several years it has been spending on the order of US$200-250 million on

nd capital investment, laWrdy In urban is the o aent of thes huds whihwould go into the SOMMA find as State couart. The proposed project scope of about US$330.0mllion for infrastructue and ntiutonal development investments over a six-year peiod (or aboutus$ss.0 million per year) wasbsed on these findigs. With State uterpatof aboutUS$15.0 monand a simil amount from municipalites and water companies to be provdled each year, the project isconservatively dimensioned. Smulions dicate hat about 120-150 of the Staes muicipates (those

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wih poplatio gretew 20,000) will pardcipa In the faucture component and about half ofth Stes cIpalies (90% of the population) in the Instit development compont

5.10. The firm commiment of the govermn of the Stae of Minas Gerais to project objectives, as set1xth in th Policy Staement presented by the Borrower at Negodations, Is a prmary tor contbutingto the projects likely susnabilky. An pedeanced actig agency is a sed fctor. PFuer, theprposedprectis the fif In a seres of smila projes wblch ar being succfully implemed note states In Brazil. UTe proposed project was developed beaing in mind the specific lessons learedin thes previous projecs. Maket-equivent Interet rates, cost recovery at the sub-project leve, andthe facd the Bank loan would be repaid by the Stat (making Bank unds a peman capiizatinof the SOMMA Fu Increas the project's c of finanal s8talnability.

VI. PROJECT lENEFIIS AND RISKS

6.1 Ii beneft of the proposed project would be enhanced muncpal reource mobiliaton as aeult of weased wpr ty tax and user-chge revene and greaer efficie Iny I _ of loca

_itsHW fo both operati and Invtment. Ihe projects uniaon Ivetment would havesinficant posidve impact on environmental conditions In the Stae. Becas of the sdecto of the Stateof Mns Gerads, the project would address the needs of a broad cross-secton of Brazs municipalities.Benefts would also Inldude the Increased access of a lag proporton of the st's urba poor to basic

i servines.

A. Flnanc and IfttutIonal hIpat

6.2 The prposed project would stegen the finan mi a t of local pvenmen, enabthm to bette pro the services for which they are responsible fbolowing the consuiarefms,thus fUly suort the governme's den objectves. Ihe project would also srgthenlocal goverments I. Specifically, the project would help local govemnment develop thecapaciy to efFctvy prioritz, prepae and evaluate economically-viable nvestmet projects; enmunicalites to Icea own-source revenues - through appopprit taxes and us-charges based onecnomic costs, and Impv collecton pracdces - and icetiVe to control current expendie; andseek al ve meam of efficient service-rovision rugh the private sector or through regionalcooperdon. Mhee meaures wil make local pgvmen better at provAidig the svices for which theyarers sible, and will support the maroe c policies and objectives of the fedea gvrnentlb8 project will o begin to mobilize pivate sector capital for municiW inveme In the State,

amilarzing the priva secto with municipaliies and building their rdi. n ths way theprposed project would als s sound flnaial sector polcy and the govments overall

oeconomic objectdves.

B. E- ---ndr_-l and Realt& Benefits

6.3 Because of its focus on the basic sanitation sectors, the project Is expected to have signficaenv -a benefits, pimaly teated to Impoed solid wste colection nd diposal, Iprveddraig and sewerage collecdon, reduced water diuton system leakage and wae losses, a moreintgrd aproah to management of sanitation services at the municipa level, and inreased efficiewnd ulit of siceprovisionftrough the development and impleM to of innovative

The c al assistance omponem wil mficthe drat of munii nironmea

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legislation ad strengtheung of municipal nronen councils, consisten with the ciationstrategy of the Stat's onm l ay. By encouraging local and regional cooperation, the pojectwill also stimulat solutions based on mico-basins, and will consolidate, wihn the smaller municipalitiesin the State, the experience of the Minas (eras Water Quality and Pollution Control Project (adressingthe polluion of watvas in the capita). No serious visues foresee En*onmentalaspects of fie project ae trated In deta in Anex 6B.

C. Implcatons for Sectoral Policy

6.4 With the Policy Staement on Decentrai ansd Municipal Strengtening, the Bank and theBonrwer have ane dfective Instrument for futre dialogue, and for assessing policy in the sector. Theproject wil further develop the strategy for the sion sector in the State, in particular povidingincreased mwnicWuizatioe of services, exploring options for joint provision of water and sanitation,and examng a broad range of institutional arrangements for provision of sanitation services, includiprivate provis, mixed municipal ad Stat provision, etc., thrby adrsing one of te most citialefficiy issus the State faces in the sector. Finally, the Municipal ructure Finance Sud andPvaization Pilot Program wil begin to develop altenaves for mobilizing private sector savi forlong-term investment In municipal services, consistent with financial sector policy objectives.

D. Poverty Impact

6.5 While poverty alleviation is In Itself not a primary objective, the project is ex to have animportant impaci on the overall situation of the poor in the State. In add!,lon, infructru investmentswould provide inreased service access to the poor (below the poverty line) In percentcges roulyproportional to the share of poor in the total State populaion (estimated to be about 30% of total). Thepoor in margina urban popuatons, will benefit trough life-line rates which would gradually be builtinto tariff stuctures to be reformulated though margina cost studies. Ihe pilot program for regionainfrarcture service delivery in the So Francisco region in the North of the State wi be a povety-targeted program, where municipalkies with Icome less that US$500 per capia wil be eligible forPcal State grans tO cofic their invements. Twelve of the 14 chies expected to participate In the

fhrst phase of this pilot fall under is limit. The success of this tagetng would be monhord, and thepflot would be contiued, If succesfl, in Jecquitlhonha, the Stae's poorest region

E. Economic Benefits

6.6 The weighted-averge pected rate of return for the infrastructue component Is about 27%,based on a sample of sub-projects representing about 65% of total proposed project Invsnts. Theremainder of sub-projects are expected to yield rates of return vaying from 12% to 90%. Subpojectselection cArtei ensure a minImum 12% economic rate of return for all sub-projects. Detailed economicost-benefit and sensitivity analyses are presented in Annex 6A.

F. Risks

6.7 The major project risk b iplemeion of the instudevelopme program, which is achalleg compone requing significant advance planing, in particular in a state with such vaiedmunicipal Istttonal capcite. For this reason, ageed tecbnical asstce and traiing programs andtrets for muniipl to enter the project's first-year progam have been preared and progress onthe institutional development compone will be linked explicitly to the inlfastrucro ompon for allsub-boers. This risk is also migted through the execuing agency's access to the experience ofndegboring southern stat with similar projects. Ihere are few tchnical riskso with the

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poject, snce most InOrastructure ivestments ae of a rouine nate, with the excepdon of cetainsewe trtme sub-projecs which may employ low-cost altnatv tecnologes stll somewhatiovtive and less-well tested. Amounts allocated to thi ty of sub-project are limted, and Bank prior-eview of sub-project proposals minim this rislk nher is a risk that State govenent decdons In1994 may be dirupdve to the project, however the fat that municipal mayors recenty took office(Januy 1993) for four-year terms which coincide with the project Imlemention period, diminisbesthi risk somowhat by ensuig ontinuity at the local level. The executidg agcy is a sophistcated andwell-managed development bank, with experience in maaging urbar devedopmen projects and workingwith muldila agencies.

VII. AGREEBMS AND RECOMlMATION

7.1 Df HgZgdW=, agreement was reached on the fllowing:

(a) a proposal for implementation of the micro-regional pilot; te of reference for thesudy component of the privatizatdon pilot, and legal arrangemens for imple ion ofthe slughtousetest case; funding limit for each pilot program, and thateth mid-termreview detemine whether to discontinue or expand these pilots (parm. 3.13);

(b) terms of reference for the State studies, and timetables for thkeir i me l (to becompleted no later than mid-tem review, para. 3.14);

(c) the project finacing plan and the Borrower's guarantee reg necessary projectconterpart fiuds (par. 3.20);

(d) tdat BDMG execute Parts A-D; the State excte Part E (through its Planing Secretariat,wi BDMG's assistance) and cause BDMO to perform sasfarily (para. 3.21);

(e) the final vesion of the Operational Manual (issued by BDMG's Board June 9, 1993), anddWt the SOMMA program be opered in accod with the Mau (para 4.3);

M the sub-loan intrest rate to be calculated on the basis of the inerest rate of the Bank loanplus a 3% spread; the IGP-M to be used for ad-sting local-cuency sub-loan balances;and that this rate be discussed annually (par. 4.5);

(g) appropriate guarantees tO be provided by sub-borrowers; and that, being In the thirdyear of implementation, no sub-borrower borrow annually more than 10% of the toWalproject amount (with the exception of COPASA, lmited to 20%) withou priorconsultation with the Bank (para. 4.6);

(h) that the State cause COPASA to maintain and improve its performnce, according to anagreed Finmcial Plan (pars. 4.10);

(O) tat the Bank have prior review for those sub-projects expected to cost US$5.0 millionor more, and US$2.0 million in the case of sewage tratment and solid waste disposalsub-ojects (pars. 4.18);

0j) that Tecnical Agent aeements satisfactory to the Bank for assitnce with eauationand supervision of sub-proJects be signed with qualified agencies as needed during proJectimplemIentation (para. 4.19);

(k) model Pardcipation Agreements and Sub-Loan Conutc; and dt all condidons presentin the ageements betwen the Borrower and the Bank be reflected in the sub-loancoacts between BDMG and sub-borrowers, as neesy (pars. 4.20);

(1) procuement satisfactr to the Bank (pa. 4.21-4.26);(M) disburement a gements sa ctory to the Bk Inluding establishmet of a Specia

Account (paras. 4.274.28);(n) audit arrangements saico to the Bank (parm 4.29);

.32

(o) quatelNy monitoring reo, Inluding one deted annua rport be fnhed to theBank on the dat agreed, to hnlde, tnter alla, the agreed Implementto schedule andmotoring Idicator inth Operational Mauma (para. 4.30);

(p) hat a mid-tem revIaw be scheduled about two and a half yas ater Effctvess; andtha the Borrwer prepar and fhmish to the Bank a Ptoject Completdon Rot withinsix months after the amlng Dats (para 4.31); and

(q) that the Stae cse FEAM to perform sisfctry (para 4.32).

7.2 As agreed, pQia to A atlgn . the Stat provided a fia version of Its Policy Statementon Decentralization and Municipal Strenig, dated April 1, 1993 (para. 3.2).

7.3 Prior to Lou , Teci cal Agent satisfactory to o Bank would habebee signed betwen EDMG and the following: COPA;A, CEMG and FJP, wit the lat to Incudespecific responsibities regarding PIP's role as ae instdion for the instional devdopmetcomponet (pa. 4.19).

7.4 As a Condhion of nO appropriateenira asssmem consistentwithBrazilianlaw and Bank guli (includig rsettlement pls, if nsary) would be undertan (para 4.32).

7.5 Subject t the above condtions, the project sutable for a Bkloan of US$1S0 olionequivent, to be repd over a perd of 15 years, including five years of gre, at the Bans standardvable interest rae. Retroactive fiacing for up to 10% of the proposed loan amount for eloe

incurred after Janury 1993 is also reomded (par. 4.28).

-33 -

ANNEXES

*35-

BRAZL

MINAS GE MUNCIPAL MANAGEMNTAND ENMRONMEAL DNFRAOMcM PROJECr

noe ft*do in SDor of o

1. The CM for ra . There areswev ar_um in favor of fidelism ord _onostsare that becew some public services have naionwid beneft (eg., deese,

resea) wo oters are gogpicaly hwltd (eg., puc l , allocative efficiy calls for publisenvies to be provided (ad eir cos shared Iine &with pnce. of tho reden of the relevantbenefit region Tha is, servies with aionwide beneft should be provided for natonally; serices wiloca beft sould be provided for locally. Det ao is so justified for polical resos. It isbeliW d thdt on is needed In order to lmit te power of one dividual over another and that Itpovides a taing ground N- democratic governent. On th institutional fron, d lio appeto filitae the lo coordinao necessary in the case of muiple loca services (I.e., street paving, warand sew_ag servioes).

2. TIe Bra_la Context. Brazil's 19B8 Consditution is the most reon attempt of the country topromb ote decetralzatio and federalism. Commien to ehne the role of st an municipalities in theoniduct of public polit is a cear darctistic of the Constitutional tex The mConstitton bas inessedmunicipal 'spIbti, so that they now cover, Lwer alia, ua public transpor, pe-school and

sent_y eduaton, pevenive heath cau and land-use. As shown in Annex 2A, at the revenu leved number of municipal taxes has doubled frmm two - a tax on propery and a tax on servie - to four: the uraproperty ta (IPTU); the excise tax on services in a number of tertary activities (ISS); a tax on property sal(B andafaeltax (I[VVCLh). Asaresult oftheseg, theshare ofnm ipes itogovementrvenues has mor than doubled. However, in absoute terms the effect bas not been as kaW as expected,de in lre part to the recessive economic envirnmed (see Annex 2B).

3. Resio and fiscal adjustmet have also motivated both te fedel and stae governmets toasolerate the Implmetao of the es as ed by te Consttion to the municipalities.However, t is u tn Whether will have the capiacty to assume these new ibil

d to manage tr now resoure efficiety and equitably. In several sectors, for istance beat andenvironment, municipi' e e b very limited.

4. Fd of Econom and Sector Work. Rocent Bank economic and sector work - in paniauar,te study Brxai:M Ihe oifenge 0MuW Sedor Dewwsd_ in the 19Js' - bas idetfied swvdisses in municipa management, one of the key ars of refrm recommended in he repor. On heexpendiu sde, municipalities d as irsufficieIavestment lbeves and an oversized inIsrionwhichas t d to consume most ofthe incse in mves through curnt exndit. n e venuside, there is a clear lck of inceive to mximize own-revene and to be acounta for finaal

User fees and propety tx ae sub-optmay employed and negotated trnfer ontne tobe major ims In muicipa budgtgs in sdeded camss. Mh need for trnspareny and sustaabgity requithat ngoated tawsers be replated by formula-driven tase and that extea-budgetary acounts (another

way of reoeiving and spending tesources) be included in the ordinary budget.

S. TIe SOMMA Project and . le proposed Minas aernis Municipalad In _ fasucture(SOMA) Project fis Ito e above contex by eicily adssig ho

It MD 3qp6 No. 10616M ry 1992

36 - MM 1A

MU 01 mo O senoW in ml_ d 1 the setor wor. lb ma objtive is to ass thekauties of tho Stt of Mas (erl in caryi out thdir n -w nsIbilit as efficiety as posibe.

It does duda in sonSd ways:

(a) Iho prect provides financial incentives to local nmet to earg ter Ines capacityand to prvide pubio sevie in a sustiae fashon - the use of full co-rovery thro taiftand es is h on aly way to enue ta those public services w be provided even after the ofthe project

(b) It srnte loca istitutiona apacity, with padculr emphasis on finca mmgemt and thebasi saniaionand enviom nrst tors,tr a y mup rpo ies. IeInstitutional conte will emphasize the folobwng activities:

* provIdn tain and tech anil for finncid nmangem;* _Xlpreenig dsmpb, reali guideh, perforance IndIcator and normtibon structu to

aist proper ;idenffyn caall no be faU prvtzd;

* designin appro Inciv to keep epnius under tght contol;- local environng tad managemen councils and lgsaton;

esurngth stentenn of municipal tax adm initto capacity primariy throughuprAdin Sand renovating property tax cadastre and Vappropite traiing andmvingtasreti in poverty aia .

(c) In addtion, tro of its finacil and Institui ddabal, the proposed projectwWi begin to move the St and towards a Muniipa Managemnt bInf aon SysiiMIS tacould hep monitor polcy, provide cnsie repo at all levom ananalysIa base o improve inrgov al fiseca trases.

6. Loca Goverment NonmAtv CWteria Dat ds to be d interm of bow load ar dde ng the servkes for which they an responsie. MI abov

feraeced sector wo*k, usn basic precot fwm economic ltratue, provides guld=ne this d espectIt agues tat perfomance of the publo sector in gnal and of the munpitto in partcr ca beassessed in tm of,. (a) accountOu;ity; (b) productin fficiency; (c) demad efficiec; (d) equy; and (e)miWmbift, mpieed in geaer dta as folows:

(a) A is a direct requiremen of hnc_eased. Aout to rloodois requid as a suwaant tha the condct of thel dected offials i in Hlin with eo voters' wh.

to to highw lves of the govern_ent is requred when municipas act as ages(or as spede) of fedea or sotae gr-money. Rible financal dd is probably th shigl mostmoho _eueu for _

(b) ?yNodfwPet Dn eaffiiec stiulte that sevice provided by the municipality should correspon to theminimmcostprovisiL ibabo meddrectly,obevig wheta muncipalthas osento least-co soution to provide a give service, or indirecdy by looking at how employment hasevolved or how sigoift b the padcon of the pdrvae stor.

(c) Demand efeq rlats to the evel at which consumer demad i mtched by providon of publiservices at an economic cooL Demand efficy is meaurd by th dege to which public senvicewe financed by cost reovey a d along te lin of the benefit-cle- tos who benefit fvothe good or servic duld be those o pay.

- 37- 1

(d) Equity goh als ude thsngde dope to whic action incteas, or diminish intepeaonal or Inter-5egiona nome dsa itist I sgemnery accepted that equit comncen shoud be pursned by higher

bvds ofpvamenL Loca p"mets ying ito, promote Income ditrbuton, with ther ownnuores u Into financial problems as higher-imncoe tax paycei itend to leaved the winnlty. MmI

realm ofthe toedl government should be limitd to fth provision of servIce for which s-bsdesane faible - for example wate supply financed by high-Incme groups and made avINabl to low-income ones throug life-ine rate.

(*) a£nd rveue be ninimized and imp Uiethd reveon autrity be. cs el as possible to expenditre audtority.

7. Table I indiaes te am of anlysi and indicat which an be used to assess the adequacy ofmunicipal olicqy making acording to these five criteda.

i1 ,\1,~f~a tiXl'Ellt hilp

Iu' II'il,tii/¢itifiteiKill

-39- AMiN IB

MNAS G"S MUNICIPAL MEMAND ENVIRONMNTAL NFRASTRUCTUtE PROJECr

1. 1. Section I of tis annex, focu is on the histodcal experice of nary two of Book lendito Brazil In the ura and w sectos. Many ofthes lessos, combined with th nfiv aceaed by dopolinca and fisa -I on of 1988, contiuted to tde r of a ww gof municipaldvelopent pjots fousing on _e the cacity of local govenments to mange d povide basisrvioes. Lesos learned fm these - recen experene are disus in section I.

L Ehitoried P eetv

2. Sihce 1978 the Bank has made 17 loans for urban development and tnsport projet in Br.zl,ttling US$1.6 bMion. In addion, 16 loans t ing USS1.9 billion hav been made for bai saniaioojects since 1971, also largely in urban aeas. Wit tis long hisoy of Bank involvmnt in the ecor,

many impot lessons ha bee dwn. OED audit repots have pointed out signiflcant lesso: the UrnTnsport I Ptojec (1563-BR) audit drew atent to th need for gVer feity in projeict _ _Mm adit of the Sites and Servic and Low Cost Housig Pojec (1654-l" pointed out the rik of dalnWith an unwilling borow and weak ecutig aencies. On the oter hand, It noted that the project hadhelped to change NH poliis towrds th financing of more ot-dfedve and affiordbl, upgmdingprograms. In respect of specific components for employlme genetion which atemptd to address upovery issues, audit orts for the Medium-Sized Cits Project (1720-B1 and o Noeast topoitnProject (2193-BR) note wat ... th co}mpe tend to be very complex to implment, hav little policsupport at the loca level, requre inved sments of Bnk staff time and en .g. .

3. Speciicaly regardg envnmeal degadaon in areas, a recnDt OED Report, The WodBank and Poujon in Sao Palo, (1989) sttes tbat:

... in spite of Word Bak uppot in poluton contol dftu sin e eary 1970. .-.. expienceveals h limiions of takig a partial approach to polton olol ... reqrs both incre

emphasis on economic policy, together with technical, financial nd Institutional, msa andapplicatn of a mom integrtd, coss-sectorl approach to public invetmen and the regulaion ofproducve activities at the udr or metwpolitn leveL

4. FuremI ore, over th past decad the Bak and odter nstiuons hav suppored rgoadewvopmt prms in non-urba setors whi have had la impact on U, sroundtg ubma aia.In its seda Euwbwwuentalww &,udes in Braalthe OED recotly found tha: the phys Impc on uraareas of nany sc non-uan projes wee sbally u t ; e provson of uba services oaerthe peat decade hav been far from adequa in the regional dvp rojetb, as the il deficibt ofI _fl-r an ashelte have rpidy expanded due to economic succo of the projeb; and mhe e etivinvolvemen of stae and loc autho In the planing and delivey of urban services hv be viuallynon-exsent If the Bank is rtequtd to suppaot a special progrm to addrss th e nI problemof these dveopnt regios, it dould be prepad to do so.

-40- A-NNEI12

5. In summauy, s O repots In Sge nfored t i.wd for

* s"mple design;* coodiaton and nsttonal strengtenIng at the loc level;* _ of Iho finncil mehasm and poleo for pro3jet imnta;

pwvision Of pwfonaam bnetvas to municIpli ble for pe* reIabOl" finaning soutces for urba Investments;* mo thomo financl monoring of particiatn umIcipalities;* of th lo and innovatons in lw-cos sntation;* gater I_teg aog In pubc nvestme planing; and* explit mecanism to address th envirnmnta impwts of di range of productie activit

i tho locus of utban aes.

6. Ibeo ct fand rter poliy innovaio wero incozporated, beginnin te late I9O,into to desig of a nw genern of mnicpal deveopment project whih focs ond thre g oflocd gov_rnmental capacit for sevioe provision on tie basis of municipel devopment find atth St lvd. lheso funds are dego ed to provide a reib soue of faning for udw luftatbuctrInvestm, mud apropiate technical, eoomic and financial seleton crtoa which aim at th grat

yftkwy in un of 1ds. _ b we compl_dby tbdno sa _bm nand traning twauimPmvcd ltandd manto Mhe first of these projes wv the Pamat Market Towns Pject (2343-BR,folowed by the San Cta Sma Towns Developmeat Pojot - PROURB (2623-BR ad mom reoetMunic Diopa Pojcts In th States of Pamnd - PEDU (3100-BR); and in ho State of Rio Gmnddo Sul - PlM (3129-BR. Thes project set the framwoA fur fther policy fmmiuatn for tde seor,basod on th expeenc of past two decades. The projects and teir cunt a su ae shown in Tab 1.below.

Piojo Boud Amwot Mid-Tumt PCR DbiedNo. Dta (US$ M) ReviewDat Date (US$ M)

2343-DR 023/83 52.70 NA 130o90 5.9"

26234DR 09/19185 24.50 NA. FY9 17.6

31004Dt 622M 100.00 6193 FY96 43.4

3129-R lot" 100.00 11/92 FY96 223

a, A -.Ap I30-, 1993.

IL Re" Et

7. Som le lesson ave emerpgd fom the PCR of te PRAM project (completod in 1990 and fiummd vie condted moe recety for other projects. The lso leand fm such projeb can bedivided ido thr bread categoi: (a) fco of comparative suoess, or thos which contriuted to smoothand rpid achiveetat of objectives and which support the of the baidc project desig; () patfact of compastv dc duo teO coidicions wh have boe lawely solved; and (a) sigfators wbh contnue to contrbubt to deays, oompcons or problens, and which aeot yet flyrolved. Ths factors should be ecitly onderd In the desig of operations. lbe fira two

-41 - ANNEi1X

am dlaboted In point fom, and the tird in a matil fomt wbich dmonsrate ow th specific Isues havebeen addrsed in th desigl of te prposed project.

* Demd for Resources. The forecast demd for resourc bas in fat ,mtlined, as reflected Inthe complt commitment of Ioad une PRAM, and the forecat for flil disbursement underdo odim Ihm proje3o (sm &6nemedb_ InTa 1).

* a_Commity Response. Communty/constlut rpon has bee ex_tmy poidve to rformngloca adm itrain, as ep_ssed In: willing to pay though trf and taes for servicesefficnly provided roeleiodon of many mayors who partcipated in thes project; and wide coverin all tate: PRAM achieved coveage of about 90% of all mnIclties i tho Stae; PEDU hasraed 99%; PMES about 30%;' and PROUlRB 99%.

* InstItutIonal ConsGstency. Ptojects are most sucoossfl when m nder the Instiuonlstctr of aprweexit progamm. For example, a lare pat of the suess of the PEDU progmhas to do with the eadrie work do unde tho PRAM projet Many of th same systm (for

_emeno, ummkoft, chunds for dhcudons wit mayors, etc.) ar st in plc and havesily been upgraded. Th impcaton fwr te popoed project Is ofdthe dselecto ofEDMO as euting agen, since UDMO has had dsgifct epience, ledng to muniipaitiesunder oth dmilr programs.

*_t of Fu_m. Mhe PRAM proec sad th ongoing procts have demostated mnicipaabilimy and willingness to ropay loeands. Guarte hv not bee cled in any of de progmmes.

* I a In uNWIa Own R ¢". Tere i edee from al fu poject ta municipal finazdal mangement has improved. is is most eiden in Parnt, whe di eond projetd hasgined from tle existeno of th first. A specific evaion of this will be confimed owing themniderm eview of th PEDU project, shedule f June 1993.

* Ting of Start-up. Bot Paara and Rio Grand do Sal bega at or na th beginin of themayoal trm s undoubtdy has hlped in h pojec' D ie ocycle a lg can be expected. The proposed project has been dtied so as to tak advantage of a newmayorl cyce (wh beg a fouryear tm Janmay 1993).

S. Thes faors _ _ bwsuslaiit of to oveall prject concept, ad Jsi* ndeion offolow-up operains.

9. Three importat external fc have in he past indeed projct o, howeve (du toin pat to collaboron between th GOB and the Bank), m s have ben take reduce or cage theimpact of these factor. Thes ara ar reltd to: _ ; obloa a and dsuent.

I saoul be noted tht in adit to being apoved he monts aS. PBDU sd hs gSt$ a ier datt, PM abso1id so bestfi fhem a pzeios Stae prgrm, a did PSDU.

-42 - AM 1s

* IFist, procaneut n It under all project in Bazi have suffeed e conasequene ofB _zian prouremet leon's inconsstency wilth th Bank's pmew n guidelines. n May1993 a now fdeal procumet law was pad, dfecdvdy most of the seriousncousitenMas. This new law, together with use of the Banks stndarbidding docuents, shouldeffctively emnate y poemeat prblems which led to slpicat delays in other progms.

* Second, the Senate Resolution stdng out guielies for pubic sector Ildn dt Imn the paststpuated that all muicipalitles should be reviewed idivkidaly. As of 1993, condoned on the faetta municipal projects adopt fedeal creditworthins creia, ah Sate wfll approve its muncipalbowing proga at the sam e as th Ste's borwlng and the Federal (overnnn's guarnis approved. This will cut down on the aecuting agency' ub-project pr_sg time, and save stfftime previously spe lobbying the Senate committe.

* Third, regarig d, thlere isb no longer a B azil-wide requirm to hold sa SpeciAccoun in th Central Bk in Braslia. In the past tis has reated Sm confuion and lag timei dix processes. As of 1993, Special Accounts may be held in a bank mutuay aogableto the parties. This will also minim prcess ddays.

C. Cgmlicatg or Dlayi Factors

10. Ih matrix shown as Tabl 2. below indicates t' oe key, unresolved factors of project compldcation odeay, and oudines how the desipg of the proposed pre at Incporates measures whi wM mDigate t riskOf such factos.

Lesson Projet Deog

One of the key sores of delay has b broad Inest have ben limitedsertor focuw: _ , Institionl and social sectrs have a to te sanion secors,been _qrseted. Eqpien demonsrates tha infrastracture ddrmid by the State and byinvesmt are more qu y implemeted; socia sector a sampln of mniipaltes toinvs under both PEDU and PIMES ar behind schedue. be among the higbest proriyAt midterm finds have been reallocated to i u , invemes in the Sta.primarily water sector operaona improvements. Part of reason is Lnkage to the social sectorsdiffity i dm i priojcts with vaeied seocoral fews, wM be done through wprovedpudclariy expeise fr euation, supervision and monioring of orat wit ongiagsub-project. (eduaton, healt) projets.

-43- ANkXJ IB

Ilrporation inLesn Projec Desg

A second key sourm of deays has been lack of focus and clarity in The project has explicit likatho ititutional devdopment (ID) component. Capacity-building between TA and infas ,tecno asisac was beg with PRAM, however, it was not with realistic, lmitedgiven pioity. PRODURE applied stricter conditionality for sub- conditionality on sub-loans.loans, but it was am enibred. Under PEDU and PIMES, explicit Teams and conditions for thetis between the soa development and infrasucture Institutional developmentcomponents were estabished, focusing on efficient management component bave been discussed(financal/InstItutil). The conditionaity was in fact enforced in detai (comparing approachessomewhat too sticdy in the first years of PEDU (with the quest used in PEDU and PIMES) andfor perfecon cauing delays). As a result, ID investments in discussed with the State andPEDUrs first year wenr low. Terns for olending for the ID municipal mayors. hese wilcomponent were also somewhat unclear. are cleady defied in the

manuals.

In seva of the project, Institutional arrangements wve not Aceptable bylaws and statutescleadly defind, atiulay responstbilitie among insfituto. for the Program which legallyLack of lear stu and bylaws made such progams vulnerable bind institutional arragementto changi politicald fotunes; lack of separation between have been approved by the StateExecutive C of Directors and implementing bodies, prior to Negotions. lbebetween ma_geeo M and supervision of program also created project unit is a flly-conltison at times. Key team member were sub-contaed to the funcioning departmen of theextng ageny, ratder than having permanent staff positions. DDMG with career staff.

go I i'in is ee to smooth implementafion and BDMG has begun a (modulr)adequate monitoding. However, much of the evaluation and compridve scheme formoniting has to be perfected during implementaion. computerization of evaluatio

________________________________________and monitorinkg of the program.

Early and thorough marketing of the prograr is essential to its lm State embared on asucess. Lawk of this compromises coverage. (PIMES did not publicity campaign for thehave the benefit of that PEDU did of well established channels program in January 1993, andfom a previous program). plans for marketing have been

Jnfonuaton gathering (for the purpose of the institutionl and The Ptogram's Excutivefiacial diosis) frm municipalitie is often complicated and Secrat wl expicitly assisttmeonsming, due to unfmilarity with forms, poor data, weak municipalities in pmarng theMsdWional ¢acily. conrect douenion, fteig

IEDMO f this task.

I!llot compo s, if not be right away, do not get offthe The ters of refece andground. Housing pilots were not begun early in project arnements forimplementation and goveanment officials lost interest. impe nion of the two pilot

programs in Mba hae beeagreed during Negoions.

C

X~~ g Ig .

Is l d

II 3~~~~~~~~~~~~~~~~~~~~~....................................... .................

*45- h

BRAZEL

MINAS GERAS MUMCPAL MANAGEMENTAND ENVROMETAL IKFRASTRUCrURE PROJECT

Table 1: Evoluo of the SEn of t2 MlM Levels of Govem en(ftm as % of GDPt

* j.iI-v" lmn ieo 1,s

REVENUE 271 24 23.7 21 26.1 31.Ceuta 14.8 15 15.6 1217 14. 13

Stub 94 6.7 58 65 7. 93Municipal 2.7 2A 2A 25 3.8 52

E1CPEND1CDuE 25A 24.0 23. 243 32.7 310Central 145 15.0 15.7 145 209 16

Stae 83 65 5C 7.1 81 102MuIcipail 2.6 25 25 2.7 3.7 43

of whkkl

WAGES&SALARIES 83 7.1 63 6.9 9.7 105Cmntl 3S 3.0. 25 25 4.1 3C

Statb 3.9 33 2.8 3A 4.0 5.0Municipal 0.8 09 10 1 LC 1.8

GOODS&SERVICES 3.0 3.0 2.9 2.9 4.6 5.1Central 15 1.6 1.6 13 23 26

Stat. 10 0.8 08 0.9 L4 15Municipal 05 06 0.6 8 0.9 1L1

*IRANSR TO CONSUltES 9.0 9A 1 8.8 9A 10.0Ceatral 7S 83 10.4 7.4 7.7 8.0

Stat 13 10 0.9 12 12 1.5Municipal 021 0. 022 02 05 0QS

DNrERNALDBTSERVICE 0.7 0.4 Q8 33 6.1 19Central 0.4 03 03 2.8 5.9 1.8

State 03 1 0.2 0Q 0.1 0.1Municipal 0.0 0.0 O 0.1 0.0 0.0

GROSS INVES 4A 3.9 2.4 23 29 35Cenal 1.6 Ls8 0.7 05 09 05

State 19 13 0.9 L2 14 2.1-unIcpal .LO 0.8 0.7 Q6 0.7 09

-46- ANNEXI2

BRAZIL

MINAS GERAIS MUNICIPAL MANAGEMENTAND ENVRONMENTAL SANITATION PROJECr

Tae 1: Minlclnelities in the State of Mhns ges t

A-ad ThlrPoulaflon by ize r(as of 1990)

Populaton Garnp Total Populaonby Number of Total

labbitants MunioipaUtIe s Inhabitants % of total cumulated

10,00 or less 418 1,931,360 12.0 12.0

10,001 to 20,000 154 2,194,638 13.6 25.6

20,001 to 40,000 78 2,142,082 13.3 38.9

40,001 to 70,000 35 1,893,666 11.7 50.6

70,001 to 100,000 17 1,431,437 8,9 59.5

100,001 - 150,000 8 913,877 5.6 65.1

50O,001 - 250,000 5 861,517 5.3 70.4

250,001 - 500,000 5 1,681,892 10.4 80.8

above 500,000 2 3,104,365 19.2 100.0

TOTAL SrATE 7222 16,154,834 100.0 -

Memo Item:

Totl aboe 20,0 15D 12,028,836 74.4% 1Tod BraziP 4,800 1S3,164,000 _ |

Sour8 : SUC USELAN-MG, 3DMG.

'IiM lags m ath. i S d e and their 1990 poputions ane as Mflows: Belo Horzote 2,048,861 (3,461,908in tho Mdrepoln Region of wr Bdelo Horionte, whioh includes 18 ); Juiz do Fo 385,756; Ubertladi366,711; Montes Cawo 247,286; GovemaVales 230,487; Uberaa 210,803; Ipatig 179,696; S00 Loas 143,611;Teoolo Otani 140,639; Pogo de Cds 110,152; ad Pats de Minns 102,698.

2 T w 723 min tbe Stat in 1990. The muw a of lad do Min, whose popuation had not beesist- ated'in 1990, Ii not included. Dwing 1992,33 new municipa wee odablished, big the etreat total to 7.

S/ PopulWado 1991, IBRD; number ofn fi emted.

-47 - AMIEX2D

BRAZIL

MNAS GERAS MUNICIPAL MANAGEMENTAND ENVIRONM NTAL 1NFRASMICrURE PROJECr

Incatoms of Relative WFath in M}fas ggais

Table 1: Monthly lucomme of Urban HouseholdsBrazil vs the State of Minas Gerals

(as of l987

Tobl Household lnoome Groups (nwbobe of m hahaum per mn)P

holds <1 1 >1<2 |>2<S > S<10 |>10c20 > >20 | ox

nundww(WM 34,291 4,081 5,967 11 ,14S 6,755 3,532 1 9S 857

% of tola 100.0 11.9 17.4 32.S 19.7 103 5.7 2.

cuulte _ 11.9 29.3 61.8 81 S 91.8 97.S 100.0

tm*(OOO 3,606.0 $5S 721 1,168 S91 3aB 17 90

% of total 100.0 15.4 20.0 32.4 16.4 8.4 4.9 2.5

===uldod 15.4 35.4 67.8 842 92.7 97.S 100.0

Soures: Dazi P.saa NAiodal por Amwotra dr Dwakiiles, Rio de o ude, 13GB, 1988.Mis Usual: Ann" Estatuce de AMie Gerais, 1988-1989 - SUCEISEPLAN - MG; BDMG, Planning Dept

1I Does not inld pealone or household employees. Avmp pesos per housebold approzimaty 4.

21 On minhm salay in Bril currnty avere about US$60.

S1 Other pifin eier no respose obined, or fmilies wh no imnm, at alL

-48- WAL

MUNAS GERAS MUNCPAL MANAGEWMAND EINVRONMAL NWRASMUCTURE PROJECr

in the St of MI eis

Tabb 1. Covqe dE Wd d SempSwv

- [t ~~1960 1970 1- 1980 191S

IOTAL 18.7 30.6 493 7S.0

URBAN 43.1 54.1 72.3 94.3

RURAL 2.0 3.2 2.8 167

Co (do MXAL) __ 13.7 _17.7 33.S.8

Su A 8,93222 8 S0.0 53.0

IINS 1,107 56 92% 56 701

btunio~~pslitIss~3,324 320 sA.. 412 OA..

NO service - - 260 35%

TOTAL 12,463 756 100% 7_6 100%

_ . -.. _- - - m

Sources: Table 1: SaIA-MG, fixw 3wak - baca eC DMO, COPASATable 2: Consukau adlats baWd on data from MBGBIDDUG/PASAAFNS/SRPLAN.

!if IIIX fill [IsU. Irl l

{T~I I in0

Ii a iit i

Xi t. i

I -1#

-50- AN=Ii 2P

Policy SUatM=n gf Decetraization and Municipal StrengiheXof tle State of Minas!aerais

1. Promotion of economic development and improvement in the quality of life of its populadon arethe prmy objectives of the Government of the State of Minas 3erais. Bearing in mind these objectves- along with the goals of ensuring the efficiency, productivity and competiiveness of Is economy - thepres adminisationhas worked towards greater equity in the development process, through measuand actions that broaden and enhance the supply of basic goods and services to the State's populatoThe govenment's activities are planned to take place mainly within the realm of Its traditional fumctions:education, health, sanitation, and public safety. Ihese are the effective priorities set in the Multi-YearGovemetal Action Plan (PPAG) for the period 1992-1995.

2. The administration has estabLished the strategic outline for the implementaIon of its objectives,two of which are of particular relevance: (a) the expansion of basic infrastture, especialyenvirome nta_l sanitation; and (b) the decentralization and strengthening of local govements, and eirpartcipation in the provision of services. The latter objective derives from the recognition of excessivelycenalized decision-making and financing, which is no longer accepted either by society or under the newStae Constitution.

3. Furthermore, greater efficiency in the provision of public services can be achieved through,among other measures, the decentraization of such services to the local level. Bring decon makingdcoser to the population provides local administrators with the oppormity to better evauate specific localneeds, and decide how best to meet them - usually at a lower cost ta would be incured in the contextof a centralized decision-making process. Thus, the State government is implementng a strategy ofdecentization to the lociJ level in all its priority areas.

Bfasic and lSnvironmental Sanitation

4. Noting can better express the actual priority of this sector for the Minas Gerais Goveme thanthe Program of Basic Sanitation, Organization and Modernization of Municipalities (SOMMA), which -- together with PROSAM, the Water Quality and Pollution Control Program for Belo Horizonte andContagem2 - will constitute the primary instruments of State basic and e enta sanitation policy.The Government intends to pursue in this sector its overall decentralizing policy, thereby superdming hepast centraized model of the National Sanitation Plan (PLANASA).

a. With specific reference to the State water and sewerage company (COPASA), thefollowing guidelines will be carried out in the context of the SOMMA program:

COPASA will maintain the market area of its services, i.e., it will expand service onlyto respond to population growth of the municipalities where the company already holdsthe concession, and

/ Parday linanod by Wodd Bank Loan No. 3445-BR.

-51- ANNEX2F

COPASA wil increase its self-fiacing capacity through establisLment and mAnanceof realistic tariff policy and execution of operational development programs, therebyovercoming its fincing constraints.

b. Regarding autonomous municipal water and sewerage services, SOMMA will be theinstrument for executing the objective of broadening and improving the supply of these municipalservices. With the completion of the Sanitation Sector Policy Study and the Privatization ofMunicipal Services Study, both to be financed under SOMMA, the State Covernent will havethe techical capability to promote the insutional restructuring of the sector through increaseddecentralization, gradual privatzation of services, and establishment of a cooperative workingrelationship between COPASA and the municipalities.

Sguppohe Dizatio

S. For the State Govenmen, however, the objectives and role of the SOMMA program are notrestricted to basic sanitation, for the following reasons:

a. The Federal Constitution has assigned a larger share of fiscal revenues to themuicipalities. The impact of this measure has not yet been fully felt, because of the notabledecrea In tax collection brought about by the recessionary environment. Notwihtanding themerits of this initiative supporting fiscal decentralization, there are potentia risks as well,namely, that of poor application of the incremental revem,es by municipal governments and thepossible option for fiscal retrenchment regarding collection of municipal own taxes.

With a view to reducing these risks, the State Government has devised SOMMA in order tocontrbute to the institutional strengthening of local administrations, with emphasis on the areasof tax management and expenditure control. At the same dme, the State Govemment hasestablished as basic principles: (a) that untied, ad hoc transfers to municipal governmeus will bereduced with each fiscal budget; and Ob) that these transfers will only be made to thosemunicipalities which fully collect all potential revenues under their authority in order to supportactions and projects geared to low-income groups.

b. An effective transfer of previously State-level activities to municipalities requires thatlocal administraions be prepared to carry out these new functions. It is the State's inention thatthe strengthening of municipal management will be implemented largely through the insttionaldevelopment component of SOMMA.

c. The State Government is aware that investments in municipal infrastrucure, especiallyin basic and enviromnene sanitation, require resources which cannot always be accommodatedfully wihin mnicipal budgets. As there are no sources of financing for municipalities for thispupose, the State Government is establishing under SOMMA a revolving fimd, called theSOMMA Fund. Its aim is to create a sustainable financing mechanism with clear and pre-defiedrules, under terms th are consistent with expected rates of return for these infrastructureinvesme. Together with loan repayment by the municipality to the fimd, the cost recovery,user-payer and benefit principles represent consistent rules for meeting the needs of the targetpopulation as well as the finacial health of all municipalities supported by SOMMA. The sameprinciples are expected to be applied in operations within PROSAM. Moreover, by sponsoring

-52 - ANN=C 2E

the prparadon of a Study of PFnacing Options for cpalIes, the Stat Govenmt Intdsto eplore the feasibility of othr sources of long-term financng for mmicipal infrstructure

mes, posibly as a cofining scheme with tie SOMMA Fund.

d. St resources destned to municIpalities under SOMMA constie a superor altertveto more direc ad hoc Stae transfe. ence under SOMMA of agreed teical criteiafor municipa elgilty and sub-rojet approv - e.g., col with the debt rpaymentcapacity and cr t gudines for public entides set out In Seat ResolutIon #36; andthe requremnXt of tectnical, economic and financial vabiity for proposed sub-projects - ensuresthe transparen access of all municipalities to the SOMMA Fund, and guantee ta resourceallocation wil be guided by parme that lead to eficcy and equity.

e. The enm al suti in Minas Getals calls for a decisive State poicy t eosuresustie development. his poliy wifll b eexecuted in the coe of PROSAM and SOMMAaloDg the following Hles: first, through the isitutional srengthening of the State enironmententy (FEA) and the pardcipaing municpities n developing and --mpI _g anti_actins; second, by having COPASA and the municipal water and sewerage asutities emphasizinvesments in the colle and treatment of domestc and industria sewerage, as well as in thecollecton and final disposal of solid wat.

t. Lasdy, a wvised role for th public sector and a new mecaism for sasfying municipaldemand for sevice wil be tested tugh two pilot programs under SOMMA. On the basis ofthe condlusions of the abovemeoned Study of Pr zvat of Mnicipal Srvices, the viabilityof private sector participaton in the delivery of municipal evics will be evuted undermodalities, schemes and appropriate regulations dth ensure optimal conditions for the proviionof such services and for the protection of their consumers and us. Such evaluatio wi alsobe conducted rugh a pilot pdvatzatn of laugrse, whih wil also bring aboutImportant In public health and san on contrl. In order to met the svice needs of

ose municipal govenments with litle ecomic weight in poorer regios, an associative modelwil be testd tough a pflot program to be executed in the Ntern region of the State, whichwill rely on the possible eonowmies of scale that may be reached if a group of municipaities areserved together in their commo needs.

Decenttidon hI O*m Secm

Educion

6. The PPAG allocaes to h ducaton setor an averago of 20% of effecdtvly-available resourceseach year. T resources are being allocated, in an inceasngly decentralized fasion, through aprogram geared towards improving te quaity of basic educadon and reducing faiure (and consequendydrop-ou) rates. The dc b s being implmented at al levels, from the teacig unk - whichnow has ample pedagogical and adminisative automy, with community participatin in the dectionof scwol prinpals - all the way thou to the regiondal education offices. For the imp l ofthis program, cooperi f&om th Wodd Bank is being sout

-53 - &kL&UKZE2

7. lhe anual allocation to the health sector use ected to be, ona srag, 9.2% of the resourceseffecdvely avalable in the State budget. Key proposed actions aim at expanding access to health servicesand implemenng In Minas Gerais the federal Unified Health System" (SUS) program. In addWon toallocaton of reources, the Stadminitaon has also been eanusted to coordina wit the federa andloca govenm_m the estblisment of a modd of integated asistance, within which the fuctions ofeoxcuting and managin health-care sevices would be left endrey to municipalities. Ibe State SecretariatofHealth wiU be responsible for stategy planning and policy-makdng, as well as for such services whichare only feasible when provided at the state level or In major regional centers.

Puble Safety

8. Public safety services ae forecast to absorb an avge of 8% of the availble resources. TheStaWs objective In this sector is to modernie, broaden, and raise the efficiency of police ins ions.The provion of suich services has tmitonaUy been caied out in a decentaized way, through localmilitary police unts and local civil police dprtmen.

BRAZILMINAS GERAS MUNICIPAL MANAGEMEN AND ENVIlONMEAL INRASTRUCrURE PROJECr GERAS

Im mena Saitutional nfrastrut eecon cr b imed BWer q ualitydca Cotcovey mechaisamsianaem TA & traiponeng: TA t arsgd rntdso regionld own of aveooal not enforced: taffs and

and as a coEWIM, baimpr legin, investmnts, cost- eimt coucis taxes not appbpriaelyzongown resounocs, cusat r tone a lpopby bsuent and icmrees e d or collctd duoprt ionool propertutx and ltRs; no. mnipoas to lack of pola willAivstat pdorhiztion .pafts with MSsys weak Bak betw

nev; no. g rnical duriifm n&

infratrucure cverae in compoents privte cvet conomc cots, last. invetmentunitcosts inceasei mtnrupaluia

kwmawbomn SAsioS ttmbw Selection or"i mked Water qualhy hsicto; _ottoa _uabprioriy an imation bet TA & i lt ning fo r d assess cost te c osla n o. of ac tvc aned not lemecd:nati and

impsovies tegeslmson, inv ptentsiHal piv of (resulsofAetorstu)d yDO6g communit institutina 4and ict and mosedo cogodod due

incp aon ti ink of pnliiaW nm _

Create sustaienable Permaehntsrel ng eun baw : tnreifs Sate cveratios Lckibof privat f s neoctfinafing m covamgo if componentl; pchve covnr economin ats; vast- of fond; t succe ss; in icncd, minpit;ies'

prioritn seces; stu toscai talc t;i; rcalsuted soint walighte dist inpa_t oi role ci tal mas*_etmbasnoicpa ofnc se snpnw ds tro tue tems; poteria pilo NumBe of paor studW)

programn in ftgd g

Crcf su_mbl Pemnn _vmn _ und byhws: mWw4medbs Rate of rocnttmo Lac of pyivn setoorfincuing to for fwr d deicier y cgnds onkding ; r prgialon of eiod; sumber in su ofidebe in ptdl insudban ktsu_msf resoues to bilc p31o; load f_ doody b Mitg prasc UCr coochins prme iniwisn_s, inchiding proies; awuy to copk*l rsb of llght of distorim inmob_zig piatempta mobgizis privte capital .. municipd iallsBW fic nanohl ndmf

Target bawf to broad Infwuea_ iwvstmat Seocton cf;* piot Nundfer of paripang Weabz, poorerranp of municipiaic, crhiwa, pRot project in prorant with ord gmnl municipalities per muicdaie wM not beincuding to poor whae niroregion aod monitoring; msargl cos region; nubr of stb- a41 htavc inre mpossible and to North pricing studies project in pilot prgrm participation, despite

I I in North g nI These objectis ae sd out in the Stte' Polioy S_tment (Ann 2F).

- SS- AM=I 3B

MIAS GERMS MIMCIPAL MANAGEMEAND ENVIRONMENTAL NFRASMUCTURE PROJECT

Deled hq2drolndf

1. Oudined below Is a detailed desciption of the project's compoents: InstItutional Developmt(t A); Basic Sanitation and Related I ruct Investme (Pat B); Pilot Progrm (Put C); andState-Sponsored Studies (Pas D and E). Operational arrangements which set out selecton criteria andlik the technical assis and Inratucture sub-projects are set out in Anex 4C.

A. ntonaWlo DVegmA omnaXnen1(US$29.4 million, 8% of project costs)

(a) Objective

2. This component will be the doorway to entry Into the progrm. The speciftc objectves of diecomponent, consist with the Sttment of Decentization and Muicipa trgn (see Amex2'), are to:

* improve local govement fpmcial particarly ncasg own as a portion of totlrevenues and efficiency in current expenditures;

* reinforce municipal aactv t plan. anrt. select and imniement effdibciei-vesnta on the basis of appropriate sdection criteria; and

* strengen municipal =nM=me plannig evaat and manftadn& consise ih theState's objective of increasing decentrization of responsibilities for environmental

3. Eligibility crieria wil ensure that all municialities enteri the progm develop ai acceptableinstitutional and financia development plan, or Strategic Action Plan (Pao de Apo Eratdgko, orPAE) - descrbed in greater det in Annex 4C - prior to beig eligible for a loans. It iestImated at about half of the State's 726 muniipalities will paticipat in s mponent, ntigabout 90% of the Stats total population.

4. Once an agreed program of instttonal development acdn is agreed, illuding boh triningand thnical assistance, the municipality will demin sourcing of aista on the basis of shorts .For training, municipalities will choos among the Staes Fwdaoo Jo4o P}ner (PP, see Amex 3F)and nt consultant. Becawse of its comparative adt in the provion of tning, it Xiely that a large portion of the aining component will be executed by FJP. It Is planned ht most

lassistc i oterv will be exeoed by independent constans accding to sds andgdelines prepared by F1P and agreed with the BDMG and the Bank. For technical lstndmunicipalities will choose on the basis of term of referene and htort lists as stipulated Und the

-56 - AM 3

Proras guidelines d consistent with Bank prouremment guidelines. Becauso of thoe smal si of mostsuch technical ssitace and training conacts (estmated to be below US$100,000), BDMG wil reviewtem of referene, short lists and conts prepared by municipalities (with Bank ex-post review),fllowing the Bank's OD 11.10. For coacts above US$100,000, the Bank will provide ds revew.Sample terms of refern for standard technical assistance investments, such as upgrading of propertycadastres will be agreed wih the Bank for tis purpose. BDMO will also maiain a database ofconsulting firms Ieested in providing technical assita to municipalities in thes ar, to beadvertised annually. Ihis list wil be in no way be restrictive, and will be valeo nciismply as a resource.

5. Because of its fundamental goal of increasing local govemment own-resource mobilization adImproved efficency in both curt and capital expedit , the stiona developme cmonetis directly linked to progress on inastructure inestme. This linge will be tablished in eachmnicipality through the PAE and sub-lo contrao, and osedy monitored (see Annex 40).

(c) Technical AssIsance Investments (US$17.4 milion)

6. The technical assistace sub-componet would focus on interventions in three areas:

3 fiscal and Ir ae: upgradiog prope tax cadastes (ncluding revuing existingproperty, inclusion of un-egistered property); Impving procedurs policies and physicalinfrastructr for biling and collectio of property and other taxes and tariff; Improvingproment procedures;

*- plannig: prepaing and updating of master plans; updati real prpey mappig; wor andconstrucon codes and terch standards; and

- envIronmen and basic sanitation: establishing (and rationaliing) land-s and zong codesand regulatons; shening local enviro a en e agencies (CODEMA)s)encouragemen of regional coperation trough water basin authorities; preparing long-marginal cost pricing studies, as inpUt to revAg user-charges to be based on economic costs.

7. Technical assistuce costs have been estmated on the basis of current market costs of similartedical as n interventions in Minas Geras and other stat, estimated by RJP which is a provierof such services. Tecical assi investments averagg about US$75,000490,000 per municipityfor about 350 municipalities have been budgeted.

(d) TmanIng Invstments (US$8.8 million)

8. The traing program is desige to complement the technical assstace component and wouldbe largely oriented towads on-thob training, rater classroom lectures. k would include, bieralla, the foRowi reas: municipl bAing and budgeing, procurement methods, land-e planingand usage of master plans, on protection and enfocment instruments, finncil andadminisave managemet; ptoject evalu

9. Local traig unit cots (costs per paticipa per day) have been estmated on the basis of on-going proam implementd by PIP and other Brazilian agencies, averaged from aggegae costs pet

-J- ANNEX7

evt per day. Cost include rental of training facilies, trainers' fees and honorar and travel andsubsistee costB for bo trainers ad pardcipas. It is esmated that about 4,500 municia staff in 300municpalIties will be trined under the project,

(e) Equipmet (US$3.0 million)

10. SOMMA wIll also finance limited and wel-justified office equipment purchases, largelycomputers, pinters, and other office teology upgrades which wil Improve the efficiency of processesand iinmation flow in municipalities.

(t) State Te cal Assita (US$800,000)

1I. Teical assistn for the Stats eoomic devlpment fondation, P, would also beprovi under this compoen The project would finance preparation of FIP to dscharg th role ofapex municipal management institutin at the State level to develop a strategy, ceate procedures, and setnDO and standards to facflitate ntiutiond strteing of municiplits. In essence, the PP shouldbe iftg its modus opani for istutona development of local goverments into a new phase,increasingly mrked by normative standards, wholesale intv os aimed at ftering private sectordelivery of tenical asstance and Waining, and tie monitorn of develpmen The plan forstrenghening PIP was agreed during Negodations. The pdmary responsibilities of FIP in meeting theobjeces of tis plan, and fulfilling its ape role, would be set out in the tehi agent agmentbeween F1P and BDMG, to be signe prior to Effectveness.

B. (US$292.0 mWiO4 88% of project costs)

(a) Focus and D oing of 9SMIMA

12. Upon Its ety in 1989, the new State govement Idefi the basic saniation sectors, Includingwae, sewea, drainge and solid waste as among Is key pdorties. As set out in its Policy Statement,the Stes itetion i t tbe SOMMA progrm wll be Its primy vehide for such investmen in theState. Of the total 756 municiities in the State, it is expected tht about 150 munIcipalities (those wihppulations over 20,000, or about 75% of the Ste's population) would participate in the infrastructurecompo M cipal eligibilit for sub-loms would depend on fIlflment of the criteria for sdection,eg., acceptable debt capaiy and adquae financia and isuonal capaity (set out in Anne 4C),rather tan on municipal size.

13. In orde to dimension inve for the SOMMA program. the State of Mns Gerais andBDMG evaluated several key area: demand for resources; municipal and State capacity to borrow and

py loa funds; and State and municipal tehnical, bstional and fincial absorptv capacity. First,the State sponsored a study whih demonate that over the next d approimately US$3 bllio,or about US$300 mIion per year in hwestme w edd in the Stat to ahieve the objectivs ofincreasedservicecoveragelevels. Second, aspartofpojecppation, inJuly 991, BDMGundertooka survey of 25 of the State's larger cities, rqesti about 3 million inhabits, or about 20% of thepopulati. The study confirmed tat the most widely deinvdestme wer water supply,sewerag oecton and treatment, solid waste collecton and dispos, stueet paving and drang andIdendfied potentiastments on the order of US$100 mim TIr, BDMO prepared an vluation

-- 58

of the credit limits of about 400 of the State's municipalities, representing about 95% of the populatio.This evaluation showed a total debt capacity, according to federal guidelines, of about US$600 millionon the basis of the municipal fiscal year 1990. Finally, the Ste Government demonstated in its historicfinancial statements that for the past several years It has been spending on the order of US$200-250million on capital investments, largely in urban infrastructure. It Is the equivalent of these funds whichwould go Into the SOMMA fimd as State counterpart. The proposed project scope of about US$330miion for infrastructure and institutional development investments over a six-year period (or aboutUS$S million per year) was based on these findings. With State counterpart of US$15 million and asimilar amount from municipalities and water companies to be provided each year, the pwject Isconservatively dimensioned.

(b) First-Year Program

14. The proposed Bank loan will finance, together with State and municipal counterpart resources,a timeslice of municipal investments. A program of investments for the first year was identified buildingon the sub-project idendfied in the 1991 survey and other interested municipalities. Tchnical, economicand ficial evaluation demonsated that infrastructure sub-projects amounting to about US$60 millionin. 30 municipalities met selection criteria agreed under the program. This group of municipalities wasevaluated during appraisal and forms SOMMA's first year program. The investment ptogms ofsubsequent years are likely to mirror that of the first year, although the exact mix of sub-projects camotbe demined in advance and will be subject to change depending on the priorities of the sub-borrowers.Thus the physical targets, established on the basis of the first year progm, should be seen as indicaiveonly and will be reviewed througbout project implemeon.

(c) Term and Conditions

15. The infrastucture component is subject to the following guidelines: No municipality will receivemore tan 10% of total funds lent in any given year, without prior Bank agreement (to begin in the thirdyear of project implementation, in order to provide for flexibility in the initial two years). Given thelarge irvements to be made in the sanitation sector in Belo Horizonte and Contagem under the proposedWater Pollution Conrol Project (La. 3554-BR) in the Arrudas and da Onga Basins, these two cities (bothCOPASA concessions) will be excluded from the infrastructure component (except for public lightginvesmens); however, these cities would be eligible to participate in the Insitonal developmetcomponent, and the siuation would be reviewed at the project's mid-tem. All inuucture sub-projecswill be bid and executed by the sub-borrowers, except in the case of the street lighting component, whereCEMIG, the State electricity company, will bid large packages on behalf of municipal sub-bortowers (seepm. 23).

16. As explained elsewhere, inftructure investments would be financed through sub-loans for upto 75% of the sub-project cos0t from the SOMMA Fund and the remaining 25% (minimum) provded bythe municipality as counterpart, either in the form of payment of receipts for expenditr, or indlabor contributions. The form of counterpart contribution would be agreed prior to contacng the loan,and stipulaed In the sub-loan contrac between BDMG and the municipality. Rach sub-loan would haea grace perod and maturity corresponding with the sub-project's implementaion and pay-back periods,respectively.

-59 - &IANNRX3B

(d) Water and ewaap _e (US$186.6 millio)

17. Eligble under th compoent would be: (J) wate d rbudion coecto and lbmiteproducti and treatnt; (11) swg collection and lmIted, primary low-Cost tology, treant;and i opAol rov such as m g. Water and swe r mge will be excutedby municipalities In cases whr ey opera the "f,systs or by COPASA, the Ste water and sewgOComPa, in caes wher operates municipal syems under conceion COPASA wil also be digibleto borrow for opedo Iovth, e benefits *om which accrue principally to the company.Sewa treatm t invmns over US$2 million would be subjec to Bank prio review.

* COPASA (US$61.4 miWlon)

18. COPASA will execte a program of Investments limited to 20% of project costs anmually (so asnot to advesy afdct the total amount of hinds avala to muncipliies), also to begin In the projectsdIbW yew of l pe lnton ihe COPASA program wfll focus on water and swage network expansion

(aCesd wgetrw) ad op l improv t (PDO). This allocation would be explicitlyrested durg the mid-trm review.

19. Network Exnson. bnvestn totlling US$29.6 i11tion have bee apprai to meet thefilowing target 272.5 km of wate pipes for 19,500 now connectons In 56 mnicipalitis and 270.7 kmof water and 130.1 km of seww pipes to provide for 18,650 new wate conncio and 13,460 nowsewerg e _ in 14 m. COPASA would be the swer under sub-cmonent, ad tha would pov 25% conepart in the foam of payment of e_uipmmt and worksbid. Nework exdso would be done only in conjunton with municipal pdtipat In SOMMA,tugh h o nal develop_m component, and shoud be bid in lae packages, once a gwup ofmnicia programs have been identfied.

20. Opwa_Al I eme DO). 1nesw of US$31.8 million w evaluated. It westiated that these bi, compring micro-metering, revision of consumeradasre and of quipme In 25 municipis woud s billed volme in these

systn frm 20% to 100%. Financing a mn_ would be theo- as unde the netwok expandsonMUb - _M" Watw metes and odter equipment woud be purchsd I lag lot fowing agreed

ICB procdur. Becae the sub-component beneft accrue primriy to COPASA (whm expasionbft also accr to the munils), ese ins would not be ihked to muicIPalpmudipadion, and this o m 1pone should be one of the first launched. I i envisindtht about US$5millon In retoactve fiancing could bW spent on ths componenL

* Munldpulltles (US$125.2 milion)

21. Muicipl govrmen and local water companie would bid and implement nbv Invaious war d swer investme. The mix of fitar yeastmet s ruhy equaly dividedbewan wate and sewea investm , with each reaching a Ily US$20 million. Low-csand alerive tedmologies for seweage trame would be pri . Sewerage treatmet Inveswould be eligible whe, In addition to odthr selon citria, techa analysis demonstat thlbeneft to be prmarly on-site, or widdh the municipality. Those 'off-ste'w s for whichbeaft may be more broadly d to otr urromunding Ina water-basin ar requr

-60- A N= 3

formation of a waer basn csortim and a diled feasility sdy, for which grant f_inag wouldbe avaiabe.

(e) Draa e P ad Patng IwuIII (US$76.0 million)

22. MIcro- and macro-dra nage, ad amionf lood conol investmen would incude costucton andin some cae r labit of draig etwrk. Bocse land subjeat to floodig ar gay imaluable, tue at-iskdc nr often the sies of Inoma low-Income stem . Project mg

to about US$10 million uwder te first-year prom have ben evaluated. Diagosis of at-£s area ispart of the teccal t compon in affected municipalides and would be dentfied In theonsitutona euaton process. Urban stret ping, often In conjncin with micro-drainage n

to a firther US$10 miion of thO fir-year progam. Pavn INesmen would Inlbude local roads,m tais ad reated retg wal and drainage. Most c ewcod to

participat In the prgm hwe pbl work dewhich ar capable of and supervighese rtvey OsIpl wowk. If durAg project impthe Bak and EDMO determin ta tisIs not the case, the Stae Roads D(ea parew de Eusrdas e Rdqge -DEER), or otherqualUfd coltants,od hbe contactd to opere as a nical ag for works and

M Sold Waste Intm (US$12.0 milion)

23. ThIs coampt would comist of construction of sanitary landfills, limited atenativ disposaltchnologie such recyding and composi pln, nd purce of l watecoll and disoaeqdum TIh comone de also inhuidenstucdionofde waedhazrwdouswadposits.Technical bfor ev ton and supervision of sub-projects would be povid by univesy andloca specdiaized l. Approximately US$2 million in biestmet bave bee Iodfied under thfit ya program Solid was disposa mnve over US$2 milion would be subjet to Bak priorrview.

(g) Stre ILng US$ 2M33 million)

24. TIb would cnst off _nv In lamp s and dsoi e ofIhe, pWk Mmioa network. Whe mu ities l em works, techical a e fOrb_pi and sueviowil be provided by CEMIG, e Ste power comany, to whomnealy

in d iesho Sta ha" Vanted 1 for public liht. CEMG has sbo dsigdado n the componnt. Mudncip woud borw, and ecute tee programs, under thetechnica standards of CEMIG. In order to iitate nIplmunicipal partic in thprogram would no be a pdor, but rather an ex-ast, conditon of ths componen Equipme andIstltion of lamp replacement would be bid uing ICB procedue by CEMIG - on behalf of groupsof muite - to gain savi due to onomy-of-sae packaging. The compet would be lmitedto less ta 10% of proec cost.

-61- AMB3I

C. (US$10.7 mUllon, 3% of co)

2S. I lpoj3ct includ. two dl pio prgrm (Pau C and D): one to sm the potnal frpvatdn of crny pbHcypivl municipal services; nd the second to work wih asociaof smal MDc in the orth of the Stae to hep buld expeiec in t special iemen ofth smal rual _ncipal in ths rgIo

(a) P dlluo Plt (US$7.2 mi)

26. lhoobjectlvofthopilotwoltdbetode th_e potetadfoandtostthepp ofpva cr entry (in its bmdest dedinon to bidude f&il owneip, partia Intest,

I _g opai, ontr -out, ec.) in th rn of rvics legly ttribuAe (dejwe or defiha) to uic piot would consist of two _ : fhg of s in tootcue (Pat C), and a study to idefy liky ae of gre_test e ficIenc pi d of munic*sevices (t D). first test cue would be - for whichtheisprivaesector interest,no legal _ and an Important tbe ave for movied vice. Ih study, to beeOcute by BDMG In paald to the slaugher ts case, would defin oth services ad sect8 s Inwhich przv on would be possibl. Mh study would Invo,hr b aU rview of-

pnnim -*~ 910of these sweries on the basis ofpubli choic theoy, Incufdigthe needrw _ropdate .- tcw "elation (in dh cue of nual mon_poles) or halh/safety

a t l aend on ical to ;d* financIal/commercIal viability of the services and aof possible conditions to private

sector ets.

27. Tem of frenc for the stdy ha been agee. The study would be completo por toembaring on ay futher twe cases, and in any caso no later than the pros scheduled mid-temreviow. The matdx hown in Tablo 1. on dto nx page ue basic public choice toy to outline tharoach to be ousd to detei the feadbffiq of privatzaton of servic ad wi guid praron Ofthe study.

-62- iNL3

SW40$0 SbofMm Gb Type Good dveGdwE

Colsoeton, Usmit and dhtrbution of COPASA, _oo toll (cowept 8ona. yos, _ooua (with_ate (thde_l, coouwla and munipal os., mun_4a commo-pol asation) tuabn_t

laduu dep., PNS colecton (witb sdies) and

foleceln atd buute of mwwq COPASA, autonomous tol (ecpt some ye, colfriin NW(tedeat coumm a ha .* _od _ hdutrla)(

dqis., PNS _tasmut)

CoGoodon Uanmat and fisal dmidtiao atnmu municipa cmi, collectin pzlvA%e yes, obollcln,of sW woiw (sdmtl, comomer muniipad depIIiIo s.and hioduidQ tollvUnt(wt

Pbollutocontrol PA CODEMAS publi, tol ____e_ (____

Drana. and channoli of rain wate ____________ publi,oll WI_______

RomN vivlceprovliic __________ Yes

Hdoal ioopW nhl@ - ya (with .s a)

_ _ _ _ _ _ _ __ssi_ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ public possibly

_ _ _ _ _ _ _ o wnmcewaikdapublic PON"bl

_ ____ _______ _W

U_ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ possilyl

_ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ Imm i _ _ _ _ _ _ _ _ public possibl

_ _ _ _ ___ __ ___ ___ _ _7W

T _ _ _ _ _ _ _ _ _ _ __ -_ _ _ _ _ _ _ _ __. ._ _ . .|Town _rof - n pia 0os. 1ia yes

Sbj ~ ~ ~ _ _ __ ___ puli ___ _ e_

________________ ~~~municpaliIe pubic"ys(mroe

Ka bou_of publlp pbnub muow" e I poelf

Coaanof __w WWM publb POISA*b

D_d of 4s dm Muiosd t olpublio yes In soeaS oI_ ___ . D_ _ _ A s_ __. - d- _w _ 1 9 9 1._M M . . . .

Souros: IIDMO,G MJ dt J,4f 1991; IBIID mIsson.

-63-* X 3B

(b) Mlao4lWon Pilot Pngram (USS3.5 miion)

28. The pilots dual objecdvs are: (a) to develop experc and lessons in muical developmentIn Bra's poor an rural-based Nort; and Cb) to test the possiblity for municipal develomnat throughregional oopadon. Ihe pilot will be teted first i the micrrg of SO Fwncdsco, in the cewONorth of the Stae. 'he justficadons for choice of this region weo Its ratve povety per capita, highgrow rat, and low degre of basic inftu coverage. If successM, the pilot would be etededto th States poorestregon, theJeqWhon reglon. s rgion wll req loner preparationtmdue to lack of data and Intiuional weaknesses.

29. FlP would sst BDMO ln thcarying outofthe pilot: to be 8t out i thFiPTe _ P cAgentqpemwL A proposal for of the pflot was agreed during Negotiations, under whichtchnicians would betralned, through e mnicipa assoation, to implemen low-ost _ 0ti serviceswith locd municipal parction (labor) in works Im t n In two are of t association, definedby wat basins. Municipalities would borrow joindy, hrough a consortium, for purcha of equipmentwith an erilcit State subsidy componet with eigibflity to be detemned on the basis of VAF/capita,and m cpal terpart provided thrug labor for execution of wodr. FIP would monitor progressand prepar an evaluation of perience with the targeting scheme, includig pota applicatons in therest of the North of Bm1zi.

D. SnmdI(U3S$ 1.1 million, less t 1% of projea costs)

30. Two stu at the State level (under Par D and E) were agreed during te cous of pojectpreparation as priority areas for research and innovativ staegic planning in te medium term. Termsof referenc are shown in Anex 3D. The stdies would be completed no later ta th mid-tem review.

* F in lgHt of th parcar coverage and Insitutiona cir an s of the water and seweragesector in Mins Geras, and gadua weakening of the federally-operated PLANASA system, theStat would undera a coonstant study to develop an strtsegy for the water and

wrage seOt in the State, emphasizing particulady service provision at the local levd andlnsdttudional gements.

* Second, in order to guide development of mediumterm policy for SO0, a seoCnd studywould amine opos for financing (equity capital and debt) of asucturo servis for whichmunicipalties are contutonally responsible. One of thfe objective of the study would be toseek alteraves for mobilizing domesdc private savwin for log-term Infrastur Iements.

V1 VAP, owMr qra_o,As.l, is a tuau.of m uuipainome(all poducnoaf goodsanld sue,b is mpoasts do Impae of sc babows) hich is Usuemt ad casl calbla Ot iB th bashea win IC ho danUmlnaoNd whicb as agmed to be on appofpriat p yuel .

.64 - s

NMAS GR MUCIPAL M WAND EMNRONNMNrAL INIRASTfrUCME pROJCr

Detild nadma of PmleotCas(i US$ MIos) *

coaecsmrr yowl Tm: YeW) Yerw4 YowS T_ul

A. IustitutonelDe,,apueg

odm1AUUhsM 1)33 28 1 363 2 I" usI10W4 LU 4 25 Lo 1.0 82 USoCk( pam) 06 e uso 0 la4 o

SulaA. _ 5 47 65 5. U _ 275 U

2SV 218 A 20 IA 24 412WaeteSupp* 90 7.7 140O 90 S4 40 14A5S8pq 143 12u 2. 143 U 71.5 23.9SoldWau 24 20 37 24 4 10 3

PehasdIn&arsuctu17 14 V. 17.W 103 875 2051 3.1 71.1 303 21 1.9 65 2L.0

J ;bsotbb4* 44 U7 2ZO U1%Other 0.0 00 t00 0 0.0 13 us

CDPASA*M 15 9eS 1715 573 21S,uinJmuro .u(PI" 7.0 60 IQ 7.0 42 353 2135Tmre.eataIS oa 45 38 9 425 2.? 33 U%1

Subeowifl. 547~~~~~~st 465 SU St 32. 271 $II7%

c P90UosPI

PublicMhSegndPebdoa 05 0a Lo Q 1 00 IL7 usNm10R.hlDd m 0.7 LO6 10 Q? 0.4 33 1%6

SubtoaulC 12 11 29 _ 04 100 121

D. SwdlattbsSw.L

Subla_D. 0 01 0, U 00 LO 03%

IDTALDA 003 a . 41* 1. 03 ELO 3S5 3120 111

Pi L2 10 64 43 S2 2L1 67

IDTALMoJBCrOI!3 U.? Z0 IM..7 67* 4L7 gm 1017%

Cot baed ENd hld Win, eginmd to Iobwt S3.0 wM= or about 10% of pijet oostL omconfingeWau an basUed an lb. Bmns MW d (Ocober1992), *Nab avm.s 3.08% auy Wover te pe Due. todo pq_a.m1 appr Iat'pe undatdo ps,ceut, * - onopodan bmw a bOI bdseted.

-65 - AWI

Eshutd Pla Casts for the Firs-YMa jZjaMoIn US$ MMIon)

MunIclpaN~y WaSr SawR D _ia. Was9 TOIAL

Bubscm 262 2.62Boa Eapexanca 0.15 '0J5Co_cnhas 638 638GovmnadorVda zes 114 L14Ipatunp 2.00 2.00 200 6X0Itkuna 3.40 3.40hoso Monioad. 0.30 0.30 0.60Juz deFoma 2.00 2.00Lambd O.15 045 0.30Lawas 1A4 1.4Machado 2.00 2.00NovaLma 1.50 lSO 3.00Patos de 1.50 1.0 3.0Pow AlMor 2.70 2.70So.Jbao delRRa 1.10 110Sao Lourenco 0.17 0.17TrePontas 130 130Ubeba . 1.0 LOVargnha 4.00 4.00Albnas M=0= 1220Belo Odente 190 1.9036dm 2.00 2.00Cambuqufa 0.30 0.30CnOwsolAb tAets LOO 0.75 1.75DMnopolis 2.00 2.00G _anhaee 2.00 2.00Mual. 2.00 2.00PaM 2.00 2.00Pfrapora 2.00 2.00'flmoteo 2.00 2.00

TOTAL 209 16.2 .- 2201 2.00 61_42

-66- ANN

BRAZIL

MONS GERAIS MUNCIPAL MANAGEMENTAND ENRONMENTAL INmRASFRUCFURE PROjECT

L Santatin Sectwo Str In the State

Bacgoud

1. Out of a ta 756 municIpalt in th State, jus over hlf ar provided witb water servic byCOPASA wvi only abot 40 recve sewerg sevice *om te Sae company.' Thus, the santatIoseodor in Mines G s I distinguished from that of the rest of Ba's I in that It has: (a) mmqunicipal-run systms (watw and sewera) t any oder state; and (b) a highe incidence of searatof proviion of water and sewrg than In any other ste. lhe low lvel of snwge coverp In theStato and bilit of many syems to talc advtage of the cae economies in Invest, operaton andmobdenanoo of a joiny-opeated system is likely a consequen of ths instiuonal situatio Ihebackgrou dsod clady set out the rnge of Ises in te sector.

* institutional (COPASA, mucIt, arole of municipalsi , P NS* senrvic covea (thi should focus on the uniquenes of MO hitina araangm en d

possile csad Ulink to sevice coverag levels, and sd include a detald rview of he curntstuton of COPASA (what an its problems, compao it fina_ay and operatomalyti odterst companies SAEP, CEDAB, SANEPAR, CORSAN, edc.)

2. The Sta's objeciv for e setor aro to pdoriiz sewerae investmen and encourg tfherof vices. The objectve of tho study should be to fornmuate a medum- to longter

stratgy for delivery of sanitation servies In te Ste, eavisinig extension of servic, finaning soureso,IlwOeas pdvate seor patcpion nd logical dio. bis dould inlude a cles _owd of to Sate's objective for direcdon in he sector, setting out Staes stategy not to ese

COPASA and to Icpuviz sevices while providing Inentv for seweorag vestme. Thobefts of joint pwovision of water and sewer (conomies of scales in estmen, operaton,mahonance, bdg, onf water for sewer, elc.) would be eplicily addresd

Scope of Work

3. The prpose projet could seve as a vdse to fith defin an I sttegy. Thostdy dsu exmin operaonl alte vs ad recommedtons for ways in whic SOMMA couldassist In theonof his strategy, in light of the paicular cacteiti of the sectr in Min,th demiso of PLANASA, and the recen dfor mis. One possie opertonal meanism

1 My.ulx aw roesw 1c aoeute in watr ad ewwmp morvi povidho (m d Nationa HeaPonednM hnn Fam porfV

a ?II'r' I 'hElP � hilt1St Ir't.I�

a3. iiIi�.S

E WI11111 sill 181301.1 I$1

I �ih flh; S�J v±11 I' Ilk

��j �Ep I ',J 13th 81*1U 11FI� j *11WI Ip I It

i l 2 ~~I i @ 3

3 i NA a} iliiil 1

.Sfl; 1|1, I|iii i

r * * . * - * * ** . * - *

-69- ANB

MINAS GERAIS MUNICIPAL MANAGEMENTAND ENVIRONNTAL INFRASTRUCTURE PROJECr

1. I performance of BDMO must be a0n I ght of the oval cooomic envionent of the countryaod the Stab, as well as the particular of th banking subsecW in Brazil over ac last decadeor so. tree bwgound ators are of pariular Inest In rviewing the finvacia and instIonl situationof the IDDMO: Fist, the heaty res to tho bakiag seo as a whole duri the past sever years, asa result of the Iflatioy cdsis, high real intet ae. and drying up of oreIgn and long-term creditSeond, is tie reform of the banking sector, undetk in late 1988, which alowed commal banks toeer into dirtet consumer c¢dit, leasing, real estae credit and hvstmet, among odter serices. Inaddidon, baries to entry were feed, and nealy 200 new bank were cretd in Bazil in the first half of1990 done. Stat dvelopmet banks, however, have not yet beean igible, formally, to eder into thes morehlcatve makts; the purview of state bak has been limited to project financing Investtent and/or workingcaa), aantees, saboler participation, and otier limited services. And the third facor is te dalighealt of the natonal economy geneally.

2. EDMO's response to te factor has been to focus itB effrs in key strategic areas, developing newmakets which ar less prone to recession or which do not fae lSel consraints, searchig for new oendinusources, developing advisory servces, and moving out of th fieda public sector. In summary, BDMO basrsoded well to difficult cieal , by seah for niche markt and seking ateativeoeadn paters and new cliet bases. EDMG contnues to be by most measur of size, lending,profitability and _ th do most scce of the sate development banks, and weill rpected in thebakn ammnity genernly.

A ClM and

3. The Banco de Desenvolvimento do Mna Gus - IDMG was crated wit State Law 2607 in 1962as a public aularcy, wholly owned by the State of Mins loais. It was the first In what was to beome assm of Stawned development bak, linked to the nional development bank, Banco deDeI)ncse Economkco e Sochl (MNDES). EDMO's Pres t Is appointed by the Govenor. Shaesae held in dte nme of the State Se y of Panning, who seres as Chaimn of the Bank's Board ofDirts. All bankin activity in te Slt I coordinated throg thio State Secrta of Finance. EDMOIs nd ie State's capit, Belo zonte, and hs onal offioes In el medium-sized cideswxowid dfie S (see map), and qsientdve offices in Brasili, Rio de laneho and Sao Paulo. In 1991 theBank's employees aumbered 530. An orgaLaon ¢ht s hnluded on pag 74.

4. Its Board of Directors approved In Apil 1990 incorporton of the company's asses, equit andliabitie into a sodedad anonbag (SA), or mibxd capital company. TIh Stat contne to own 99.9% oftheo B s shs. W e thre ae no sewio constri to seling ses of the compay to privatesharholdes.

-70 -

S. DMdO ofibr medium- and long-tem Ions for vnvestents In fi.ed assets and woiting capta forpria and pubio enies In th Seate, pdmaly in the aroao of miaing, Idtry, agrculu and rurldevdopmint and u1a Inastmu. Trdtionally B)MG has kn only a small porton of own resour,wit sourc for lending comin fom onlenig of domestic and fo egmore. in addition, DDMGprovd guans, coloea, urtie and exot finaing imd, In_rey, has moved Into the proviinof ne mb adVISorW s i In corPorate e s aMl on, privatiation, debt onavesionnd sil sateg and conomic studIes. Notable teentl' w_o advisory svices DMO provided toCMIG In its pul se of dsh and undewrting of a TLAEMG bond off°n. IUDMO also providedaVIsOry serICe0s in the plamt of shrs in the recentl pivatrtdon of USIMNAS, one of the first and

moOt Im t t eor I BIzil's pivadtlo prolm. I)MG IhaS ao dveloped a no mket leadingload fiaig consorla for Subta projects, beadn over 20 such syndies, for tot Invtmt amountingto US300 mmon sie 1988.

6. As dsw in Tabl 1., BDMG'san lending opeatbsave doerased sgificaty in volum, overth post seval ya. his s do to th oveall rsion in the B lan econmy, vich is paiculysharp inb indst and agrcutul sectors which form DM's trado client base, and as a esl ofIceing scaroe fnd for onadin. he buWk of the Bnes ledi was to ft finhustl and mnasecotos (abou 34%). Of tol len opeato, jut 2% we for publc so noties (men largdy

),wi remainder to te pvae scor (whincludes publicly-owned st companies).

1985 1986 1987 198 1989 1990 1991

Lt (MM =2.I 371.2 441.3 440.7 238A4 103.3 60.4

bdustrl 7% 13% 10% 9% 0% 23% 0%MAtmS

Mdetl & 42% 33% 42% 20% 19% 12% 23%

No-Meal 4% 3% 9% 5% S% 9% 21%

Agdclu 16% 11% 7% 10% 9% 3% 6%

UrWan 5% 11% 6% 40% 30% 16% 12%

_s_ & Q_ 26% 291 27% 17% 37% 37% 38%

ToWo 100% 100% 100% 100% 100% 100% 100%

POW 25% 17% 10% 42% 10% 4% 2%

75% 83% 90% 58% 90% 96% 98%

7. Of the toWlm US$60 monI new reores lent In 1991, 76% compsed 13% lendignd 11% _ 00. T i M lussotmd inh T 2.

-71- Ann

US$S Mi s unE

LeniG OjMatio7 159.5 : 71.S% 45.9 760%

Onlondlug 126.2 56.8% 45.9 76.0%

BNI)7S 262 11.8% 21.9 362%FNAME 49._ 22.3% 9.6 1.9%

lewma 28.7 12.9% 3.4 5.7%

BACBISN 8.0 3.6% 2.7 4.5%

BNI)RSwIeSUUt_ 0.0 0.0% 2.4 4.0%

FDWSt 7.8 3.5% 1.9 3.2%

FRP 0.0 0.0% 1.9 3.1%

PROPLORESTA 0.0 0.0% 1.0 1.6%

-SP 3.6 1.6% 0.0 0.0%

Od- 2.4 I.1X 1.1 is%

BDWM Own LendIg 24.7 11.1% 7.7 12.8%

uar antOpetion 60.0 27.0% 6.8 112%

TOTAL Opmton 222.1 100.0% 604 87.2%

S. As dwn above, a mrge pert of BDMG 1innc pmeens onda om other bakinginttuo. Fnancg fom te ENDEs system in 1991 provided 40% oftoa opwaton, as wU as resourcesfwm Fedra prgams sch a CEP, pdmaily to finc Inuat e w s in dh ior of tho SltaSt funds for spcf p¢og s amounted to 3% of total. Exten resoue amouftd to abot 7%, whIeown Boank resouces to 24% of total opra , Inludi _Ag s.

9. d ly pestjust 115% of lnding,thse oinfrstucisato averocetly ree dup to 40% ofth Band's lendn actvitie (and hIlude a la cate y of lead to pbi ente&rls,aprmay wate ad saibtin ulies). Ih oreet falig-off inoa m oled to Ieased las in th Oa of _.ssbucturo, in Pariulad rStranspo TrtaInAstutue investntalso Includu urbas Inrasr audi as pai agnd stre light, purhe of

school buses, cehes, d., &thgh CEP.

10. Despite its comparavely redued leng volume, EDMO is On of the few pubcly-owned banswhic ha main d opetns with external fin instutons. RDMQ has syndiaton opton witsm of the larged Eurpean, Ameic and Japaese bn, as wel as mst mor Bra n bas.

- 72- AN 3

11. CompaIo with othr stat dwdopm bak Indicates that BDMO's size nd perfrmance faroutweigh th other ton or so stato deeopment bans. According to a publcaton of the Ba_la Assoiaonof Development Fine nitutions (ADE), BDMO totesouos lent and oileat in 1991 mound tonearly 50% of the total lt in the stats systems (vot ilud BNDES), and was more than twice the seoondlUrget state bank. In neay every other meases of size and profiaity IDMO dominaes.1

12. Historically stong, BDMO's financial peformne ovea the past two yes has eroded somewhat,wilh the declining stat econmy. Averg trn on equity (RtOE) for the perod 1985-1988 was about 10%,however in 1989 fel to 6.1%S and to 3.2% in 1991 after a loss in 1990. DMG's renues, lik the res ofthe baing sector in Brazil during the past sever s, have rlied heavily on income from short-tesseities inesmn. Personnd expenses have been rdafively connt a about 2-3% of total rv_ens.

13. Dudig the period 1984-1987 major sourcos of capitl eame fom: (a) bank gurntes (26%); (b)onenig of federal, state and extenl credits (W0); and (¢) own rsoure and other (14%). Of theonlenlXng, 23% was provided by FINAME (a fedea governet fnd managed by BNDES and dirctdtowards ind development); 15% by BNDES; and 11% external crdts. Ti aerge funding mix begato change in 1988-1989, howvr, as BNDES begn to withdrw its funding from state development banks(filling from averg of 11% to jus SS In 1988).2 To balane ihese effc, CEF (tbrough its PRODURBfnd) Ieased paricpation f*om about 1% averagp over 1984-1987 to 40% in 1988, and funding from theBa'S own rewores also Increasod from an averg of 14% to 19% In 1988. In additon, the Bank hasslody moved away frm rlon on guarantees, tis being just 5% of onlent resou in 1968. Totao-uding loans amounted to abut US$850 mMion at eand 1989 (US$l bilion, Inuding antees), about75% to the pdrvate sector and 25% to the public sector, avegep pedod of about 3-4 years.

14. These trends vwer drven not only by exogenous fctors, but also by demand for loans. On the assetside, the fal In dt fones of tho mining stor has been o _I by a decrea In its overall pecentage,oftotal outang loans in met , forexample, frm 18% in 19 to 11% ln 1989, and a correponinginrase in some of the infi_structure-reated sectos, such as transport and communications (although loansto publc en rses have also decasd, aeng overl Infrastructure lnding).

15. Depie the fing economic peroman of the state, and a seres of other impor factors (suchas increased loan-loss resre rquiremet and the limiations on public enterpise borowing establhed byCentral Bank Resolutions), which have had an impact an the an's financia health, its ovrall conditionremins very sound. In fa its opeatng raio has declined from 87.5% in 1984 to 83% in 1989, indicatlikely increased efficiny and cost control in the face of reduced vues.

16. UDMO has made signficat efforts in the past sva yeas to impr s cataol adequay, wichwas eoded though the need to set aside reatively large loan loss resoaes due to fdeal govermentexposr. As shown in th atahed able, BDMO now has a bealty asset/equity atio of S. Mhe Bank hastaken svalaoy steps in this proc: Fir, esolving all ousading debt with two main feder debtors,Usminas and LAA. For the Udimas debt EDMO took payment in pdvatztion bonds, which It then soldto a consortium of Usmhas employees. his way, EDMO participat in the fist major privatization of

'I E&aw* do SLve fhoaeb De, eb. 1992.

2/ Nod that among to few remanig frei olf t by BDMG is a Wodd Bk loan for USA48.1, offectve in1918, for devehVment of faaa under the pgrgam PROFLOSTA .

-73- ANNEX

the Bri p1 ra, whle also rsovin a sedoius ssst qult bs. Ihe Beak has also siged a_emowndm of undesta with the Fderal Govenmnt on solun of det wit thoe ndonad aloohl

insituio (AA), whi was eztipisted In 1991. L loss coverp b a and consitent withBtazllan logisatin and International standards. L moov rae Is also satsfctor.

17. BDMO _ strategy in the past sevral yeas has focused an reaining the Baks capitaladequaoy aio, blaning Ils pordolio idsk (away from tie publi setr), and developig a niche maakespeiaizing fiaal ser s tecnical and advisory services, and eadng consorta. Althoug ihe terIs stI only a sml porton of th overall vnes of the compay It provides a lag put of the Bek'sz~ton. Sinoe 1968 about US$233 m have been povilod tugh ovaer 20 financing syndicates ledby MO, largely h the agricuture, Inustiallurgy setos. 1 Is s *'us about its movementinto sewvio proviion and expanding its role from tha of a radiiona developmt I ik (and fuher indictIt is likely prepaing to ent the stock maret with a bond or shar offern Itl, a8iig to push the

_om wof th lel defto of the esnbies ad oblWos of a stae bak e stasegyis eaboateSd In a thre-year roil stratesgic pln I plans objetves in the anet three year pedod include:(a) _ g of fiaes; (b) renvigoration of the utin twrgh nw ptogm and new clents; (c)and bu s m partclry in the aea of cmMpuriztio

AgagMg PUcies d Andt zmgM

18. Acco_un is don on bads of ntre of expes . Cost-ene acoutinad i beig Implementedftoethe with i unon. Account inIs consistet with generally-accepted accounting principles,including om adjustments, wofaccorg to Fedel law 6004. Atou the Bank is not reured to prsetfinancal stdat In a curecy of consta puaion power, It wM ake montly Inftion a4justments,athet t ammal as in te past, as of fisol yea 1993. For this ron, fth dollar odeom ed fina l-hdoolu for the perod 1989-1992 should not bs seen as preis tansa (sinoo a m we doneat yar-end and do not refect ac

19. BDMG has extenive eiene lndag to the publio and pdrve sector. EDMO's Departm ofU J astructure (DIU), dated to be the Project Unit under the proposed opeadon, as been responsiblefor all DMG's lenig to h muwcipa secr. In pula, it has ma fncing avilabl under 311opentios in about 200 muncilitsn th amount of abo $153 milo sce 1980 under tgee main hesof areit: (a) PUNDBURI, cailz by Stat souce (se bel); (b) PPODMRB, capitad by CEP;and (c) FINAME ca ized by fbads flvn BNDES. Both to lter coasd dfuto In 1991, and willnot be furiter capitalized Ih FUNDE URfnd rains open, howe CEP is nt providn rsue.

2D. BDMG's DIJU has been appried by the Bank for opeatn of to proposed apeaton and foundadoqck". n addionm to its prexist significant exeiene with munp borwers, BDMt

has, durig poject prqpati, DMO underta_. the following mneasres: i strengtheon theDIU wth addiona tec al staff, enrd into tcna aeements with COPASA, FNS and PIP forseiaized expets for evuatio a pr d wof ,gr drafts ofthe OperationaMaua, ted poposed poce s thmoug preevastio of a goup of 30 m cpiies, purhased andInad upged comper equimen in the DIU, arngd for eectronI r cmication wit Bankhadquart, and more reoeny, launhd a publict prorm for SOMA As a ult of the effots theDIU Is now y prepaed to initate operto of SO8A.

- 74 A UlIDt

_mgmo Ba f,b fss

I Rw_ Jt

l~~~~~~~ M _da _

at~~^

u~~~~~~~ok -Ll O__

I~~~~ RJ0m DM

AU& 1om

_~~~~~~~Aowu .L cBudD &

~~~1 I:3. 1 hi~~~~~~~~~~~ I i3I~~~~~~~~~E I* w~~~~.*

i~~~~ ~~~~ ii a aggMiBiaZ a .sR NX ts Spz

a; B i o3XS X3§; glBt til 85ii~~~ Lt I3 RR1 iZXEiSt0a3;zS

;;EssSolsSX s §00;a1gi

on us$ sofMus,n Ud taliUm G

314Dc 314DoC 314ou 304..1919 1990 1991 1992

AwStz 109,571 100% 677.742 100% 511,000 100% 59,32 100%

cah a Secuddes 2,691 0% 639 0% 53,944 9% 2,787 0%airagOPU&*= 356.901 44% 239,181 35% 112,217 31% 208,326 36%

Laain8OpmQaa 1,582 0% 803 0% 0 0% 0 OKOther C 22,037 3% 37,825 6% 24,706 4% 26,561 %OerAsm 1.101 0% 495 0% 61 0% 354 0A

Losg.Tem Asson * 3192 %699 223 806 = 31492.7 M4Sec8dtes 44.491 5% 42,722 6% 869 1% 2,491 4%L-d_ Ogmam 321,721 40% 307,876 45% 254,999 44% 271,291 47%LmlngOpeutis * (824) 0% (56) 0% 0 0% 0 0%OtherLa TeamAs 30.803 4% 30,171 4% 34,371 6% 27,004 5%

p-unAmW is 2W2 J2i 2.U .4 .2LS1bavainets 390 0% 241 0% 34 0% I8 sPrpay PlntE 20,891 3% 14,177 2% 18,996 3% 19.956 3%

LeasdAists 7,192 1% 1,941 0% 667 0% 261 09DdvChwagp 586 0% 1,720 0% 1,306 0% L192 0%

Lialfnuilisad Rquk 809,571 100%A 677,742 100% 581,000 100% 579.312 10

UWab s u289.93 233l7 215-081 -013 mDepadlA 70,707 9% 91,791 14% 63,505 11% 55,461 10%Local Onlmading 195,079 24% 166,167 25% 125,921 22% 90,480 16%Feculgp Onlkaid1 14,505 2% 14,745 2% 13,647 2% 12,790 2%Othe 9,653 1% 11,007 2% 12,009 2% 19,275 3%

Leng-TernIAabillties mAaz ~ d0h 23a11487 & 308.774 Depoafita 17,690 2% 21,749 3% 11,398 2% 16,344 3%Dodla 217,773 36% 235,921 35% 217,200 39% 234,013 40%FoepOn1mia 35,037 4% 24.552 4% 11,403 2% 5,131 1%OtdLOIgTer 10,9lo 1% 26,553 4% 22,024 4% 24,862 4%

Derenudlacum L013 Di L^ 40 22 Q

Shazeho1de'sEqgW _ JjLIZ am f4. J J I 11%8C,90 1% 39,760 6% 6,215 1% 16,889 3%

CaPal 0 0% 0 0% 17,235 3% 40,910 7%_d m of M 131,791 16 515 9% 132,70 23% 126,458 22%RgvaL R CapItal 3.un~ 14,583 2% 13,421 2% 6,571 1% 7,015 1%Rdd=dEaznlA( ) 1,863 1% (21,033) -4% (69,30) -12% (7081) 2%

a77- ANMJEURAZEL

MINS GERAIS MUNCIPAL M EAND ENVIRONME4TAL nFRF PROJECr

A. MuIiL3aI&ujain.MbuuKas

1. Sectr Develop in Mim Gami and IU seto wwt ompetd lot yer onfigl B a n z lays a fir

IIpe0dy to Iitutional w@skIm d Table O- Value of Merchand Taxof ppamtlon by all bves of govenment by City Siz in M_. Gal, 1990

b lilt owit to ds under t4 City ICMB by Value"Ib I , IS ftd since 198. one won Size Range (US$ 1990reOgnizd p-b corno the wide rnge- of In polaton siz and cqaciy of te 4000 Ove 200 r

1 knin BiLn min us ____ low1 100 200eoonW a r _xw tive sam* of dd tangis qov 33 24 0

SO,OOOW2. 1abl I, a _umml of the ran4108 of 20,000. 11 65 70p_dioan md waftin *al 723 50,000_Isa 4 ltloi w ,wA eUSU a o -

aoiato bewo ta tre sdro sad Bd*w 2 S3 S5

ds h maq ablo bet a as a py forinstiutonl caacity in local governments,beartigIn mind that a few statistica

"OWIYM - smll mnipaNowhich hous a single larg, wealthy Indutry- are aso reflected bem.N d -a such cases, te vast maorty of nmo u si eatgemely weak. At does- time,

tog, week H-1ane unlikly to be afhtekd directy by the Muniipa progm oSEjectThen afteamsarcse nmirord in irtualy every country in the region Inevilably, WIth

- 'oliatin ~Brazi, with help frma te Back, wil need to devise a stratey of mt to lOcagovenmetshat balances seg eng fforts to suit both minority of govermmint with the bulk of

population a well as doe majoriy of goverment with a minor share of the papilatln The proposedproject aWms Sl to deal only with. te lagSt 40 percen of the 111f in the sbtat.

S. I ---.k I uflouLm rsJwmm Mm goe propose p f roject is foced with acommon problem of linking two agecie, which. up until nw. have been institutionally sr'qmts anduntiwonaly distnct The funcii agenc, Banc de Duenvovlmento de Minu Geawk or BDMG has

been in busines for 30 year and appear to have a strog tehialwapaity in Bunan"a and economicevaluatio The tewhica agen for inttton" dsaqUig eFnl b lhwo O,vcweaod at the begsnning ofth 1970h and, althouh weaened by the rcntw fisca and polhla criss inthe country,, is beginning to emerg somewhat reurihed* follwing of an emergency Plan

-78- K 3P

and am leadnersip Mm two lutluton opstb in difaren thdqms and foramat, and an fa*zieseparated by an cultural whic wm rquir tm and dlr_ate to ovwercom.Some s tons to lauhdi proo an Inlued intde aide memoir, afttaced.

IL AMM R O P

4. Ih Faad$e o1o J'bs ra (IP) w creaed In 1969, asa foudato, foly ownd by de SteIt Is Unbd directly to to. Secrtaria of Planing. As die Staes econononioadaae

foundatio, PIP dsvlps studies and undermtake rser to undevpin die wok of d. State PlanningSeoreria which recelly has beg to focus mor on effiliy of local govanmet and efedvely

theo whid came about with d new Costuto

5. TMe cpu of techia capacitn hewRiP, _odkc wi lbray, e _let dab and Tb T

f,zd=tod_ S ctnlU uw Dpre ." P, M=Gri,bubatonof inonnlo UkA eq!pment 199

assim tl IPndertak Core Units .To. Mstre PhD.hsUm deieopento nSOMMA.M ffPreious prgrm uder Ban ad DB jointfinaminglo seagm bh d u loal n h bav bld Admln Dow 23 7 0af k gbd of tetxpeboo_ g 8Bvadqxwt_f. of the PIP inth a1h of loed Munll Dev 24 2 1P"Mmat dun. Mm too" "got mentadm qlsor/ is 7 1WI _soiai of _ (Ie !OWDOU _d cbv

k_nqwb ddeivq sdW, _ot ,mby vi°w nmwdo_kms _badm , a80 Fmnomic 47 30 4

a 3mph la ithk SOMMA projet. How, t - - -

I impoa at thd two pogrms (PROD8MU SOON 19 11 5ndSOiMN ano _yntu _d P

budg separde_ but __adongy oordbAmAdmins 52 8 3

6. Now dkieedehe fJ?. Be do end o of do yearw, di Foundaios IIto have addional

_ 8ughmmi of proesonal staff in two aWcit-one aw scool of aothera statistical and n raoncr. T-es 8addosmws_oogd ite Foundatis capackity, but wil rqu some shr un to adsorb tm. TM

onfomton center nlves do.-transfer of 40 pfsIal ad Wst personnL Aim SEPLAN (s_tplanig, ogather withyfo gateig and regary publshing statison socild andaconomIc _1a t stao te.To support dt fwi ncton, di PIJ will, boe t nd of toyea, be takig ddivy of 25 PCs wit 486 chips. Beginning nt yr the F<owill beg tofocus oply nlsi of export4ed gowt of ndustry It h stae and tde social, territorial, and

I ivuoodou of 1tis stategy.

7. As eo FoPuAion expnds its sopo of apaciy, it shold also be layg pln forifting Itsmods apeandl fo Int a W phase, 1 arodei* wdby m_matve dards, aiedolet mdat fosterng prvateecsor ddivery of teicdsttoeg change dnieSranimongoricileforddopas r ngpeodqusliafbyorstrtei cdVe form *ap ig prnile for FRls om-& pwposol for _oon stesef.

-79- ANI 30

MMAS GEM MCAL WGEMU- AND ENVIRONMNTAL INPIATRUCrUIE PROJECr

de de Mns Gerais - COPASA

andEgn Swan (ign)

190 199 19 19 1n 1997

WaW sbld ( ) 426,901 438613 4*4 *5 485M2 $M.790 527,19 $49,517Se_ a" ) 188,272 190,15 19844 203 2 6 2786 2403 25204AOtag 1zf-Wu (UW) 0549" Q4111 O15 056 OOB7 087 07 057AwP 1 UN-SMg (U518'i) U4461 0.3793 O.493 00 0000 5000 0000 3O0Awp TAM1 (lSUb3) 05179 Q4113 0A42 0 O040 0 0.0 Q#160

L Opmdu Rwes. 329330 256,139 332,469 35MO36 3661 982,34 399640 417,727Wt 214,00 176,24 219,2 16874 264 O2 26,71 279,52

s a 8W95 72,13 95M354 14 191 1434 142,26 1260dm. 1A7S 7.7 7,866 10,230 14(A79 1L151 114 12,167

* Opmthg OmSs 2418 179,770 1903X4 198,06 2,1U8 211,798 214oM 225.PW lmd 107426 10448 114,23 118,794 12231 2339 1290 131,4madls 142 11325 1206 12,34 13,206 13,76 14,37 14979Cimkns 314 1.754 1,943 UN 2,024 2,062 2 .102Oth Iatodab 11101 9,571 10,144 m,6 1 2 12,31 1,77

Td Pardes 56 49, 5334 5549 57,861 05 62,33 64,42B hd* 266 29 29 m399 248 22 219 269Odor 1Thd Pat. 29,484 20,693 3413 32,05 334G 3563 3620Q 38,604

G 2,54 1,98g 2,%10 2321 2,331 24 258 2,Fin d428 7 12,99 8,54 91000 9,716 10.145 119 MM69

a D _eda tlm land ui 289 74,910 79,440 91,719 1043 114,62S 64 13061Depus & Pt. lot Acdhdoe 2,006 74693 742 90,1141 18,916 11368 120,964 129,817Priwl for a Did Debt 323 80 878 917 9S7 1000 1,044

4. Opeta mama 780 1.446 52W7 6021 33 56,411 59,421 6167

S. N1Nt NM-Opin Beams 44,1 48,43 0 0 0 0 0 0

6.L N t Fdmd Ns (14,27) (.2) 4M) (173) (1,9 .19 (2)S074) (354)

7. Not IMt6. A4umea (40&701) 77,13 0 0 0 2 0 0

8 P.-'b oom (30423) 47,269 2,7 3O 37, 139 3,25 33,547 26192

9. Not so TA Chop 0 3A33 0 0 0 0 0 0

106 3. Rmei (LM) (3042 436 2,77 39 3793 33,252 337 2,92

RAIK1OOpemih Rail 0.76 a99 081 083 05 0.85 08 05MM emybm) 1.0 100 1100 Ln 10 L0 10 1.00.ANS Not Pbn Am V It NA NA 40 4.1 3.4 3.1 32 32

it R_vA mnb

19 11 19 1 1995 t19 99

S875.79 2 8 2,17330 2.8_6 25 7 2 1 2 ,41

car" AusV 49A79 78,313 75,734 75 80,215 81 83,70 85,61Cob A.98 3191 7,931 85 81 86 9,104 9X2Not A u Re 30,148 3M0 26 23,373 2A637 30,346 32,320 33.767iseoy 51 41 302 315 3,m 3,446 34 3,745Dde PaMm ned Otr 3,178 3,725 38,725 3,725 38,725 38l5 38,72S 38,725Smt-lbm I _ to 0 0 0 0 0 0 0 0

La* Tm Ae 636,873 1367 1383 136 136,873 136,873 136mIbd P1 Ai 82263 1403 9094 2,71. ,3,7225,715 2M 2846,55Nt Fi d AM_ 41,88 1,O 1,39U67 L,q % 1, 18 1811 18,905 t7

O Fid Asbs 7,192 1.6,740 1913,774 2836 2047 2612,891 2,0114 Z934L A_ md Dop 114310 43934 513607 102749 81156 97,28 1019

Work in Ptroe 407,745 711,34 552,8 401.47 52992 40824 393,0 401483Othus 106 213 213 213 213 213 213 213L-T Itob Amg 1910 28 9,6 867 6740 615 43 202

:AUUA'ZS &c EQUKITl 87,779 2.5989 2,173.301 2.26.676 2.356A0G7 2,434,331 ,41 84

Ost 13b 128,390 1l1381 85,017 9315 85,422 90G462 99,64 1OZ,62A:mO ab 26,1w 8 37,548 10758 25.M0 2U100 23,440 22,893 24425

test 37D05 SA89 5 44039 39,19 41 50,39 30,132&qBmi *ad 3tt Fal 33,147 1644 23,24 24A74 24, 25,675 26,432 27,V9

Td L q-T ft '4.184. ,AI 46 19,14 7U3' .79 ' ,82 51ia. Omaut Pado 390 Ulm9 505 44,739 39.199 41,348 sn 50,539SIb Long-ISm. Det 3 1 , 764 78538 84088 874,71 o.m

Othr L-T Ubuilbm 308 1t859 1859 181,5t9 181559 181,5M9 181t559 1845L9Esqu 4867 1.952,347 3PQ0 13 06 ,S 747 1363 1 1,439,890

TMTAL SOURCES 222, 2 4 192,4 282 59,693 250199 255 280,2M

laoe" Saes_ 138,24 t43 131,39 1763 105" 110,8 180,285 19145Nut U (Lou) man TM (806) 43A36 267 59,15G 7, 35 33 26,19pcDqratfoe 2563 74,69 762 90 103,6 11S68 1204 129,817Not Es 1rapaa 2221 Z4,8 242 2US5 £149 23,L" 25.074 33,4Moota Cwreulma 34,6 77,t 0 0 0 0 0 0*. 0 a a 0 0 0 0 o

Eismal Son"" 39A4 77,74 54,7t 87A 79,144 8U5 7501 8t1,cIp 17 54723 2439 58740 22,420 29,2 32 44,147PAZ 34,W 20,1 29,7 54 321 32,44 540 35455IBRO 0 0 0 A706 24,0 1a943 712 0ote 2ou 0 0 0 0 0 0 0

splq 54,0 W84 o O 0 0 0,5Fedl Oreemi a 52 O.26 26 a 0 0 Ode Uabhy l m 111 e 0 0 0 0 0 0

TAL ,ALCATONS 2225 202 12 2a2 2W9m9 25.9 25IM 20

Cai ae st 179,374 10to2 97, 201,397 171444 190,6 10,7S MAOpi q rIeI t 0 87,9a1 5A"9 1U42 14,42 17104 165.770 17m,s

Odor t aesm aet 179,4 0 0 0 0 0 0 OmtL *rnt CmeIL 0 4u 6,40 691 9,4 0470 4.724Cap '4 Mmkkuet. coo 0 9,84 9,91 102 tO tt tO,tU 105 ,418

beereaaajD_susas in W1 ng Cop" (,2) a4 225 (5.8) 4,16t * (L5 ) 1.59 (41)

DOb Seen 463 67,5 7,00 20 63,5 ai. 67, f8eCub besuiSg Year 4.491 5,497 92 793 ,2 849 2 9,102Cub Is Tat USa (2,) 4.728 345 274 27n 27 252Cubh Bad yout 5,497 ,192 7.9O 87 2 9,10 9,284

-81 - A1ikIBZ.3G

De ucdpdoa Unt 1992 1994 1995 1996 1997 Totl

1. ftln Now Watw Mums OOOyr 84 84 _ 4 84 84 420

2. Water Mter ReOai 000/mo 15 30 30 30 40

3. 8aj Consupto K*wDm 0o7m 0.705 0o3 .MI 0.614

4. lasbladan of Macromete-s4.1 RMBH No. 30 30 34 944.2 Redof S*e No. 25 25 25 754.3 P _omttio Swions4.4 in RMBH No. 50 50 63 1634.5 RIes No. 100 100 75 275

S. _akaLlllAdon Wa_a5.1 Puamping St No. 20 20 24 26 645.2 A _omazo of Sytm No. S0 50 S0 176Si 9w'pTsub No. '0 .. 30. 40 5.4 Water Distbutics Newo 1KM. 69 100 100 265.5 WaterC onetiou 000 7 7 7 215.6 Suetoizado In Dittis No. 8 3 9 2S

IL SIGMA__t___ ______ No.d dIam 7. 7. 1 Jr

7. Cadute Expanson 000 _ucdoe 100 200 0 200 100 9

8. Coflo Peod Days 42 40 38 36 32

9. MU dl Cost studies No. stm 20 40

10. Tariff RU ruWeg _ J__une=

ILh_=- -m 61-- -i -i it. Unaccounted-for Water Pmeret 36 34 32 31 30

12 anoicew d atrwai' 680 7m 767 815 86

13. Tadff Value for Water & USS/m 0.50 0.5 0.5 0.50 O0 50Sew _a by Yer-s ,_d

g ASi~~ - -X

1, lb. CPASAL FiumUia and DMunremmnbf omnt Plam zepusest the ounyaay etgle, pefosmobjcieove b la ftwyer peiod. Devbloped In t on of the War Qwalit ad % n Cool (18 ) gjectoan 3554-l, CPAS tnto mod t goa st outI k. Pla twro lb PR0SAM pjct, t SOMMA-t* dk_s ado dem.

-82- 4

BRZL

MAS GERS MCIPAL G NrAND ENVOWN-MENTAL SANrTATION PROJEU

SEPLAN ffWP SEP SEAM AMUb(SsaaVark of (SsOrOatIa Of (Seotearada Of (Ssmtarit of (Amdadoa of

Manonin) Ttafpa ad Finam) Muakcips Affu) ulpit)Paubo Wokcs)

-- __

MunialiuM.COPASA ma4 J _ _ __ _ _ ___ __ _ _ _ _ Te hnca of at BD__ _ _ _ _ _ _ _ _ _ _| I - | l | .Agad

___ASAFM_ __I z

I~~~~~~~~~~~~~~~~~~~~~~

-84- A

BRAZ2MNAS GERAS MUMCIPAL MMfAGW

AND 3INVONMINAL DmwRASMC fROJECr

1. 111 sun I divided into two paub: doe first present a detile explanation of the operainala_aSemb sand evaluton prodes for SOMMA, deta paculaily mthodology and cite& for doevauaion of suboroers and sbpojct; So sooond tates this explation with exmplo of Soeanalysos ade for q smple cms, the city of Pates de Minas, one of the 30 mud¢icl evaluated andconflimd for entry in tho p _rog s fit yea.

1 ty NM to the SOMMA Pt2mM

2. objecaicve of SOMMA e to: _n be finmol _ of i supportOf thO recet I toi, through: (a) bthnical an d tools to ceae own-mouae(taxe and u arges) zi and (b) ing I and prviding I isfor ef iient reoualocaton (both curet and capi exp.asu) at to loca leve; ad Improve alnItg j InJthe

s through: (a) deveopig a coh_e Sate sotgy for local provision of saniaton services; (b) investnSin pdodty _ _ a_In=sue; and (c) provid technical assis and rainig for muncp

3. SOMMA i open to all nmoik in tie Stae f Miss Geais, providin te municpaity adheoto th objctves and mots d basic deily cdtea for th prog . Steps on t iticl d pa to etryin th Poam are presen to Idt in te Ptogra's Operaona Mana, Volue I (Basio ,Mnu),x ndexpland below. The diagmm on pago 6 of hdis annex iusAes t proes.

* The first stp for entry Intdoe pogm i te dgnatre of a Patcipaton Agemet between thmuicipaty and the Ste, indicadoig wmicipal intes in and adherence to Program objecives.

* The second step is co eion of a dignostc form the objedtive of which is to ghr data rdaedto municil financial, fisa, plnning, a1 a _ nd infatuctu serviceprovision. Depndn on muncpal cqpbit d pr ee, this fomr is compeed prepad byth nmuicipality almone or in cojon with tehnicw assitc fom pdvat conultab nst RIP.

i dagsdtioo ava"lb in the Projec ht.

I/ A pglw of abot 30 mudolpffin van evalud duig Apymb4 about 22 bav bn cdmmed hr bothtecnlals asitamse asbs rnwatmAst evalion wa donop-tor d_mof PhztltApgre .,i order o haves prog of mi-m evprepaurd fr te a ya lo rmaider ofuwMhgo o

_al -2V Seewp90 fbra *omple dp oh .fteSOMMAPogmOpmtlouaMaual

31 A 1 of SOWM4A lgl do_ea I ohms en pop 90.

8S - AN- 4C

* lb. third step, on th basis of tis diagnosis, do munialt ares wit DMO on a pgam ofpioty institutional nvestme (oompdsed of toecnicas and trining) for a medium-termpaleod.

* Fourth, the munipait must demonstr complance with Fuderul lislaton repgrdin pament ofntergov enmetal xes and other obigations.

4. On the basis of this analysis, a set of standard perfmance Wgets ae agreed with the municipalityfor Improvd financial and nt agement and formaie In a Strategic Acdon Plan (Piano de45o £urudybo, or PAB). Completion of thes s eps enables munpa to begn taning investents.

5. Tho Exectve Secrtara (Seei Execudvo, or SE) of the Program's Board of Ditectors(CoinseUo Dbwor), within the Secretary of Planing i designWed tD asid municp authoities prpangdocumentat. Ibis will include a c I filling out the 1ioal and Financial D ois Forms, ndadvice and tchnica assia to ensure that al applicats are complete and data is presented corecty andin a timely way. lb. a _ of the SE will be ctical in this bphas of nalyis, as many other pogmshave suffered significant set-badcs in Implemenaion as a result of poorly completd applcaos (Annex 1B).

6. To be eligible for Ifiructue investments, municipalites will have to demonst crdtworiesw ,povide a fesnslbty study (as a minimum) of the proposed Investmn, and demonstr that the investmentIs: (a) the least s teccal solution (dets of the analysis ar shown beow); (b) a high-prirty investment(compared wih other Infistrctr Investments) by oevaluon of its economic beneft; and (e) a i isdemostrtes cost recovery. Furthermore, in addition to the stndad perfomance arges to be agmed in thePAE, specific cot-eoey trgets will be agreed for nfstructure isme with finacing under theProgam. As mentoned, the nstutional diagnosis, project fesibiity stus (for scsly evauatedprojects) and detailed desin will be eligile as municipal counterparL

2. BDMG's AniaMd Prooess

7. lb. Ura fauctu Deparnt (D) within EDMO wil prpare al sub-project ap sas,with the udsste of technical agents as needed, and accordn to agreod cdteia set out in operIonalmanual (seo Anex 3E for evaluation of the DIU). DIU staff will undertk thre main areas of analysis:(a) nf ac eWaluation of sub-boowers; (b) Insituonal evaluation of sub-borrowers; and(c) tecical, econmic and finid evaluaton of sub-project. All evuions w be done by a team ofanalysts (one egine, on om f analyst and one institutionl speciasonded from FJP)asigned to each sub-borrwer for the fil sub-roject cycle, from evluadon ougb implemeion,speviin and monitorig.

(a) CredIWOrth and Franda Evaldaon of Sub-eBorrowrs

S. Upon complon oftheitial rticipadon Agreement, IEDMO prpes a cetrhs evaluationand finda anlsysis of the municipality or water authority. Fhci evauation will be done by BDMOfia_a anysts, who ar experienced in this type of analysis (see Annex 31).

9. e is deterined on the baos of thoe tleida set oct in Brazilian Fedeal SenatRoloion #36 of 1992 on debt lmis for the public sector, which ar strnent. Ie legal lmit is ddetinedto be h higher of te flwing:

* -186 - M 4C

d, global amount ofprfomed operations In a anal exercise soold nt Xexd th value of thlua payant due or ovede dring the yea, or 20% of real netr s, whicevo is hioer;

* the maximum anal , includigrefpaymnt of prnp Of al opons, will not exed

valuation of financial fo a and mag IsW b based on review ot prvious years' financialdatm, ldb reakdowns of revenue and expedir, trend and ratio analysis, and rview of finanoia

smau~anad acewanting pmeaicu.

10. Deaus. oau of the projects primay objdives wil be It imprve locea financial managemnt, theam wil be to: (a) wmov dh reliohip betwn own and tnfer resor the Star; (b) providea_qua cos reovey fw all services; (a) imov crt exendtue poces and ent pracics;mi (4 simulate efficient, oost-_fiv. nvstmn aon te basib of appropite techical, economic andfinnl euatio 71ms, eauation the indicators to be monio rd in t proga: propotioof own to tansfer em es, ad per capita curn and capial.

11. Th financileau under th projt wi pvide t Ini boo-lne dda ruired to begin toadhev the objei. t wM also provide complementay recommendation for iwmro In financa

_magmmt. SCunring and adItg which wil tie into the Itiona evaon in to PAN (se below).-u6cu o, dtis data wl prvB the bass fora munidpa ficial lInoaton sysem (FMIS) in the Stat,

an impo ddit in th sector country-wid as identfied in seco wo

12 The smummderyMa evalAuato for th ppoIml 22 muniIalitie which have beens_c yealuatedforthoP g sifirtyearb dsw AninexSC. Specified crioartinand fin evalai for th sam& case of Patos de Ma b own in Secton U of this anMex.

(b) d valua of Sub.Uonrwers

13. Polowing completion of theItuonalmici ilwgfls and Is don by UDMO, with techniald rom fiP throu a teh assish

conrat. P ua guwp oo6.10 pecis I h ara of municipanme and tag who wM bed_dictd flti to SOM . Guidlies fo ths anayss m se out In the Prom's Operational Mana,Voume S. Mm The WOS aro ad 1 b r *b pdaq adaod:

* ddw and fisca, to be don In cnunton wit th financial ealton done by BDMG(cadastre, , tax olceon pe_fonnn);

* municipalplanng (zong lgsaton, maste plm); and* anitatio n andenviro t (eron legislation and service covere level and

inbeWioa arageet).

Ih actions proriied (hgh, medium and low prIort) aacing to th following criteria:

gW Tes acton have ovea highest imac on Impvd mnicipal finci managemenpaiiclayI on own resoue m conrbut dircty to die economic and financial feasbitof te prpo mwb0jects; and/or d _st h muicipa ciD_ _ apaiy.. 7boo WMk h m _ouidpol r_souoo m _negmet hIn amas oter thdat the foc of the proect.

LOW. Ths actios whih m desrbl but ot senia to th projects objectves.

-87- AM=4C

14. Esdmates for tme and cot f- te demined (see Annex 3C). Comunityaicipationwi be an lmlmporantfcWto n h p ioritIeds, and both mmumity mutdng and aprva

of loa p ive assembl wm be equid pro to th mncipa governmens appval of ay PAILDdaUd evlution of the tedhcal as needs fori the sample cm of Patos do as I shon on pge748 of this annex. Trges of ths mnmum agreed goals wvld be: (a) own ses as a pnt of total;(b) IPTU per cqpha; (c) crn e _pases as a peoont of total.

15. Once a munpality bas aged to the PA, and te suffiien crdtoeein, afeasibility study for _wiestmer, dts may be submitted for te ical, e_onmic and finani evalaton.

(c) Todbnlcml Eonomic, Ilnada and EEvalun of Sub-Ntaecls

16. he teal, eoomio and financil evauon of sub-projecs wfll be peamed acoord toguidelines set out in th Prtogms Opertona Manual, Volume 2. A iustri of thi nysis Is preetedfor the sample case of Pslos de Mm (papg.s 9.14 of this Annx). AUl evaBlaon produe Wi emplbysensitvity analysis, pailcuary in ases wher ddrs are peived to be high, or when alterivs presetdm cost and beeft.

17. Ih ial tedmal evWalt wM genaly be done on teo basis of feasibility stAi. Theaation wil be mado by EDMO engees, wh theof otechnical a r angement ith COPASA, FNS, universities and to prvate sector, as csoary,depending on theo reid expeolise. Engnee wi ensue, th_o cmpa adnalysis, tha the leoa-costtech soltion has be osen and wil vaeiy demand for services, d _ _ofpoposed _

dep tndrs an md oo ml, _ chmg and wsio a s sw. Und oponpriity will be givn to o over new s m, and to lw-co alentve tehologies - whersuffiety wellteted and dk-fie, suci anaerobic stabil_ztion ponds for swa teatmt. Dtails ofthe first year prom and subsequet bv _m shk in Annexes 3B and 3C.

18. For tho subprojcts with q tfia eonomic beefis, emomule e do wM be don byBDMG economists, on tho basis of a model prepae wih th ance of a oonsuta erienced in eo-beneit aalis and fmia with elaion of Mtpes of sboj . A simple has beenslected, in order to be widely accebe to a wido rap of mnicipae expected to patcpat in SOMA,snc traing in cost efit anaysi for mnicia autoie i mong on of th poject beneft. Perevno. srnssvic, user cdrgos wil be consderd a proxy for w(althou ( ghu this doesnot cpure feI befts). for non-ve eaning services, wi be ddeterined on the bao te

edonic Modl, whdch plys Inroaso pwpety values as a result of Investmt as a prmay benefdeterminant Econmc cost ae net of taxes, debt sere paymen, depratio etc and represinrmet cos associdae with the projet. Using a disoou sat Which appmatew die socid cost ofcapiata, etmaed to 12%, Indvidual nme are evalad and rned. A disot pedod of 15 yeais used. f sublprojects do not achiev t minimum hurtlo of 12% onomc rat of retur, ho prjod inot acceptd and is st back to the municipal authifforit is w aImpro the subpjects viabiy, suc as eviewing prjedct o (luin rviewng th tocical solupropoed, If t shown to be s cost), Icumusing user chars and tax (c_onent taiff study to berecommended as part of technicarwatorla a _ _ forlafmnicpa companies, a margina cos study wi be rommaede as pat of to tech adssa pakageand results s d be expliciy incoporad It the andyis. Annex GA shows o onomic evaton forth fA yer and th project

-88- UM= 4C

19. Th rudal evaltdon of subpo*jects deoSgned to eansure tbat ates of rtrn et th cost ofborowing (about 12%), to dtrmin the paybwck piedod of the investn, and deermine co reoveryinstruments, one the invsmebnhas been show to be tcohlly vibo and ecomially jusifiable. 1ieauation wi be done by EDMO fn analdysb, and wil be Lnked to the financial vuation of tomuniipaty (whi provides the bas daft for the analysis of cost-reovery potental) .nd the financarecommendationsIn the PAB wh which It must be consis. A summary of the finail evaluation of sub-

projectsrcmmne for the firs year s preented In Annex 6A.

20. lb partdcate In SOMA, sub-pojecs must not hav envIromey-negatve I (most in fbtare emated to e posove impacs). us, all poposed sub-proj must undergo a ioous

vI evA on, on tho basi of guidene edsblis ed for munlcipa sub-projects of this natu bythe State envtonmen potcon agey (PEAM). The PEAM guidline present a clear indiaton ftomunipalities of ihe typ of enin eenig requird for municipal and project , sep andexpeotd Impact, wher fall env ironmen (EWRUIA), limited assssment (RCA) or simpllionsing. When ELAIRIMA or RCA am quired, privat consWults will be contaced by tho sub-borwr,and FEAM wM rview and grat eal lic g for aooeptable projt (seo Annex 6B).

3. R,mmenaon and Sub-Lon Aeemen

21. The cumiton of thes riuations will be a recommdation which leads to i _exactpoies and agm o terms of sub-loa gemet. Te summay fom makes specific m eon th acions to be ken, loa amounts and conditions of lending, including tagets for the thre-foutstadard ndicor, and ages. Speclly, it would incde actions and agren to chieve the cost-recoveytab fets for proposed inve s and tgets for the instuioilInventions. Thei reom ois dicussed wi n al aod s, and oa t basis of the dission a finig coact woud db

sned. This _ fom Is also used to monitor progres.

4. iddi and lmnlementatlon of lIveshnents

22. MunIcip es wil bid all infi structur works, with techncal e and overih frm BDMG,acording to the Progrms Operaional Manu (Volume 4), which i based on Brazilian lw and th Baksudeli{r powsor (see SAR capte 4). The co of technical agent for ab-project vauation and

spviso would be inded in the htrs atbe sprud, and muicipoaties would be able to choose amogqufed agencs (for which umbrea tdc a ageat armet will be signed with COPASA, PNS,CM1, }iP pior o Ef , and otes as nthro ughout the proam). Annex 4H providesa project plemeno schodule.

S. Mo and Evop

23. BDMO wi monior and evaluate pmgress accrdig to agrmed criteria in the Ptogram's OpeatioMaumd, Volume S. n add to the deed physidcal, finani and opeato ndicators t out in Amex40, th arn fiv key mpat icators for the puxos of oveall evaluaton and stdeeing of the prgm,bot durig i ad at midd-coure Th evauaiD, remmendon and moniorig of the projectwM be computred, and automated in a itSated Informain System (SI!). BDMO computer tchnicianshve deveoped a draft proposal for doing this work, in modulr fonat, so th a prototpe in workigconditio by July 1993.

-89- ANNEX4C

-s~~~~~~~~~~~~~~~~~~~~~1s ~~~~~~~~~~~~~~~~~~~... _ - . ,,,,, . , .....

- - a r- -, ---metg wih mu-i .- ,_ mayors to discs SOMMA _. .ISIgatu of Padicpatlon4=co of qestino

Pedea dek o adtons cutI

Sub-Dorrow Evaluation 2(c). Sub-P.o,c EvaluaIdon-, ,r -wWo/--- -tbaddo of Sub-Psoea

2(b). F E o aroed wihdnc of

D _vdopmeot of Agred PAE Doriwing lmit eabshed IDMO evauation (wAth Tehnial_ enadto discssed (Bd finianl dala Age, as moe)of sub-pro30cl

w/local bodoesed BDMG oMS a.Rfomd) R wie teAgm_a an _ e for hum yoa b, Rond f revso

4. 8itu, of m (a ges CadSblafotcs

~~~_ I~~~~I~ _Sub-loan - spud

Bdigby Muniiality

Conac signed, o ordw gven

Eecin of sb-ojewity spu sn by mnipaliy,

BMD (alt vist), adTenal Agent, as necsY

5. MontoIong u by BDMO

COPIl Of th petonal Man a ad aml of aI lea mw we availabl In he Pojoet Pile. Shownin Tdo 1. blow an SOMMA OpeaDona Maua, tir pwupose and tara _auIc.

E~~~ < v~~~ r .

_O_ Th PurOs. TarpSAudI.

I amSc Pfuvids gmd gidubn of do prpm - objeudve M, ub-

DOCU.M .fty *, aP for . . borrweSU81-mOE Expan dehlad opusodn proe.duz, sedhuln ereisr DBDMGIP1

2 GUIDE a s, 1bhal amdaw nuihlfor f unla, C _tt al- touhid .qhbdm _ __y

GUIDE FOR Sels out guldeb for aaledio of mlmWlp fanol BDMGAIWDWANOSAL S ________i_dt_______________. _ ___a P_tC__ _3 VW UTONAL ............. o..s..........-i _ beodd _ VI Iyu

SAMPLB Stadad biddn dman t hetunatlnmld heal bidn MunIoi_,BIDING for pods and wm*, ad fh oth loo proeu .uDmtU

4 DOCUMENI pm seelablo under do pijeeL To Id. stadadktor of hhb0n ad gmelum for bhia,g of e-oflant tu y

WRCT Proide guideles for dos uyaod _°SNW uni Munalkles,MONMtORING and supuvislon of p.J..uw ot pnZ b d t p BDbU

5 GumsWm= To ..... sw...d.m...wi.g lb i X _ h _ jb IJP/Ca w_dSON fom and smandad quaamu,y repeat Imes Abal nlst

=_ ,.. _

bE Tab 2. an! IJdbd ill _m lddeme bob id_ km nd qua d qpmmmbfin at _

aml Of _,1apocOw g tD" PK to_ amo *alo d m*N

_L Aa _____

SOMA hw~ oftbMigg SOMMA Fund and Pro_m gudu_

P Toohe Alibrm Arome wt h lo UudIoma FJP and UDMO

Modd_Around fo _ _ ___o_SO_MA _ MUnaly ort Wae Co ad IBDMO

Mode Sab. Agrn.- MuniciPaly or War Co. ad DMO

Model Law auWdtburg a Municplty to borro trm iDU ___________

TeaUilo Apuit Apmmoeset hr wamuatn sad sauguiuon of s"b.*mse COPASA, FNS (an d ah.) and IDMO

LoanAgreomm DID and dos So"

Geaanis Avgreemen The Owamnmet of Bradt #ad 3RD

RI Am- 3D an (d d}I BDMO

-91- AIR=A4

ac l m*l flor. UNi GU, of ht. d& MM

Ov or we - avail pags an -w I saml flumola and bddn bmw otand sampl %tuhAle uooaw i and fihnohimb.proJsc anaysi for Mo de Mini, om oft! do d.noudg ia to SONMA jue as fis year. Mm sab bblet , swn on d8 0 og ps Mm (a)

FInnidand Evalosd C O g (b)StasiAdonPlan (PAl); (o) ;(chneoul, icononaFiPIAl Evalution ot a dahia s bprJscl nd (d) IEDMO --- on Fo.

am 74 ___________~~m 3

oaava. ~. _ __ _ __ _ _.._.._._

.m ov~,~S _X__ _____ _

nda G) __ _

1~1 Jnoau3 Per Capita 53.70 7 0

C euriG E emu Pr Cpit 49.40 6L0 62A90

caia .. _ .rc,a 1.0 LO 9U d! neTt U77 1e94

I .ME

o ez PaCp 350 34.0 2480i

Tba_ bom Fo oh M07.4 00

cwna smad Pe 1^h A O

_owv ftok UA 77 177

Ln Deb Limit

-92- AM= 4C

fortd Cite of Patos do Mhna

mm God bmicalmo a 6.

Nui Tot Cofto AItvo pd k 4 hle fomn AbuTx Code nd 44efi .- had uo, an d voinhpin dr. ptragno drd i.d

Ralye Podp: R( 3-4 yu) Udtb ?man*& 193md awmonl S& t^ of suba armgeu ol tO%.

TazPmou Km br 8amiSad b4no Compo 7 H22A0amoewtda ad *pudl o_ond. copwbdo

Talx Ceooetbo: _podyT bimted poDomTlsKonto 2 Hmub S .7

Adboai _u tw Pb ook MGH 3.6

,dw O of 42.2

.~ ~~~a nV [_ puW _dd *d enadVdDut 4snwN

|" m egalb ut oo bd_ eupao&M1I Updft nd plod - WAU&s L 16.

rU-w elmCdefWdw -In-ol Ppedf o d 6 nm 65.7-hoam lmdwekwtOi wion m ubt8 usf.me"~

-93- h4INL4

Riit1ad an.sdped aw In.fu ud atisanEsAl.

To fti co-Z ohsdoft i nd J)

M* taiff P&pesr ___

sa.w lhuIa.hetsad uso, nt b i byatalg sOUpa h 1.poUull.nofastsvmaWwa 9. N .

I_ __ _ _ _ _ d1buahedma at afw _oSi ^

Ineniv hdrssnffIs d.aevknw o.mez mea epe; mod"lnaw.

(a"QfwtWbobsw _^_mSpm . No

envolIa ad dumpC srey Ins eteg wpan. usllm_pXdX_ ~~ ~~- . te _ _.

So:d. 11g b so sy a da E _ 4 o H 13.1

Sa Aflhtm DOW"p I oedde, om C*_t _ M 5 .0

Owna S o To nen,._. .. d_

Cbren No _qft o,Sone Crf _d 1 H 7.7

Souvwera1ml (SV ofe bwa otariff)IA otbdo

41 1bb.a msd*,eash upondgmtmsofmsais oft;c oe

.dw MO__of

rUU * pw 10.A

TA_ E ':' CA e I994 199S 1996

Ow as e tTod Ral e___ 38S 401 6 43%6

. M; U 40 1 410 430

.-- w -W- M. -.f -d - -.-- 30% , 40x o

4t ~ .o*pdw*=WfWd . tdmom

-94- NBA

&SAPheO Desrn:

Me Cade River rus thog th city of Pate de Mna. n may loaUties, ei caumses iousfloodin durn do heavy raiy saon, bcas dh exist cao bed b bady erode nd doeo not pei*dteee flow ofwae. "M n Manft dp .Pooer polation whih ome settl In atkaSI due to thei oompbaivly low markt valu and lack of us. hem sub-pojec ptoposals Ito contdoe unicials on-gIn efx to cha with c _eme the wals of th rve, and urbaning teheu. ToW leng proposd for he sb-project b 2,012 metes wi a co of US$7.2 m [Becawsedoe 'aiipW debt capcty . babou one-thid of that, it has been. proposed tha tdo project be divided. Into

-l O ' di t l i Denefibi

The pdrmary ipexped benft a associated wih rduoed flooding and eter peditabiity In laduse.To cosl bmeft anslysis at_mpts to capture tes benefits hough i K Inceemin pwpty vaue in to affeted area folwug such project investmen. Inae In poperty val aegraded acon to p=oiiy, wh ths affectd most drt by flooi (and *fth on by fod conto

ti e most. Ts furter fom the dver but stil wid th w i b damoto , ludingImpovedaccs andcleaner, healthistreets. Eptdproperty

n_eas ar th dve am somewhat higr ta ths fbte away. The estm ted economi ate of retrn, p 1 XI -4the ihu. in and values is 113%. Expcted nb ner about 21,000, agely oflower hommlevels.

'CAs Recovery:

Uder a municipa law of Dmoober 1989, Patos do Mns has establisd a beterme ax to allow ootsharin for ihdd esta which directy Imprv the quality and valu of affbcted prpaopee.Tib Iocwn locy as the Prgram de AsWeaca aus Babirs, or Neb e Phom.Under the progrm, which, has been, succeafolAy applied to help pay for stepaving, lghtin and sewerage

omake counerpa payments for a potdon of invemen coss,fro 20-50% of toot dcost ong ond weat of the negboro and its capaiy to pay. Vaiousmwh1bm for payment of this counterpr have been arranex, eite up-fiwnt, or paeded thoout thyew (ad ajustd fo ifaion). hRdd ave ohe pdd ufrot, sc duing Its 2-3 yas of opeatioto prg has S.gid a sod rpation. for ddivaey of sevie. Th 1ncialnra of rtum cacued onthe beakl of the cun bchar b ge Is to be 16%.

fnabasub-pmjodbosnonoSdkoeai I hpact Us pdisma benefitwil behinedcedflooding of _oomhufd water, which i epecwd to yi a reduction in _wabr diseases, par aryamong cdildM, and there to dood halt cots. Aesdtic iin te e am wMaso be brou about by th ubain of * cal

Patos deM s

Ev_uati Shamm..Date -wid Idda 9iLUMMml

Ppaed by: ffDMG aalyatiApplcant gi of Pates de Mapopulation: 102.698 (1991-PartcIpton ASramen: _ Yen _ No Date Si : [Not d

L S9umay Uhanda Evauatin:

Credit uni Ussi.996.m0o aIan. 1993

Own RevlTOW 22% 30% 36%MU ($000) 76 114 397

i-lertadff Dn n naawamg.turlff as us ARbuh-us cag 30 45 47det S seMcrelrven on on ma

Couterpat hmda avaae: _SS . u e availab im

2. Soummay nsatltutonal Evaluation:

PAECbod:e .L Yea_No Dse:,1/28193. 11g-Paort iy

P-uiiedeAn: V2 UfM peRdM sndE MRW mru11_g" Do m mM =Of No Bame TawMEd fStidy sod _i fiK

Sefvice. Cmalonf of Aut. 1aWn and C_muniy }atipat

3. Sumary Sub-Pobect EvalDon:

Sub-Pojet: Channelin of a watewa Told Coat: 1J17.2343S 0

Technlog. Standard "Iya giftigaw

Lowestcad oton.: -Yes - No (If no, what I ___________

:e. 21.aOs on at a 3a13RR Ila% Based on: Re-aoi of#sdtgaM B

- 96-" ANNSC 4C

FRR ~15.9%

hm um : . mnra

_ -pal-dr-prdod: 6 _inomOin paybackpood: 68n

A. InsttutInal Inomm vestmnts

hIenvt ts: Tolda S109.100 as aU=d il the PAL

Mu pallity USt 26,400SOMMA oa _9200

TOTAL SlM.

memo item: uncpal ount wil be pavided _hmough oa ppUon of dbaosis andPAL.

and conditio: x monthsgeoo wthyei a repym at about 11%. Subject to gee t omonito perfomae on basis of ts sd out In PAE.

bve_Memb: Fitst modde of moddW invesbustoaing $2,452 (about 30% of tal hneaten), wihpUminary for her finncg for Mond and ti modue.

MuncIpalt US$ 613,000SOMMA oa S1.839TOTAL , .000

Trms ad condtions: 6 monts gsace d 6 yam repymen at thdo stnd SOMMA hdnest rd .Munca undtert woud be prided as pant of invoice. Fa ins subject to agreemn toachievin the ollAwig cost-r y targebt:'

mU Mainti Com reda valuSewa Char Etbls sewea ti e a miImum 40% of w,a tarff.BeterMent Ts, Inres beterm t tadff p by 10% of cunt red receipts ann y.

1/ To be bmd os reuid Weed twit to po "r -oogoway dmuamhd is do flaead mod S Is,* ad#resd fu each muahlp an slpnte of nb4ow cogafct

S~~~o on * Zw-PPU

eve orni u-p Hi otui t osteti.e. WLS usn uli WSl mt1 LI96 tu eto 0111 WOI - -

OI 56* iU WI't 3611 (1 9 SF9 Ci LiII WO p 113 -lOl 0P6 iL' 3"61 3615 u-S £9 L 6 UALI 011 IUS- 61-JASV1L US StiL ir tEll 3(1 £61 *106 DilL 03*0 USOPS3int irw wL9 u-u erIl uw OL' gis ui ie we"l - @lSA1936 S9619 SF1 011 £I l Wt U *5*9 irIsi WIG "31SF1 Well we 93 u-I 36 t tlt WOI 09 ouSI w-L-

9iIt1 Wl Wu Wu 9n1 91t Lp " a," or" WPI - lISAWml *1631 Wu6 a"1 66ll 335* *96 I or"* 036t mnp13-

£1136 Will Wit 1119 IIWO a"01 6 Ul " 061 6Lt toLo WrnSt - *1 4

WiZl .ft Wit 81 131 0inL 19sr6 ill 9*3 liii WO -9 @-J

or an " Wu| IIO t lw 9" oS16 maOR pag

O911* f t I 1wt 9r sr; Ltri a" a"t Wit W91 WOL PI - LtlA6313* 911 WWI IVt *13 ant ori1 6,6 s'06 0*1* wl waspu-Wel *1*3 OmU Om1 ami lill orW 06 Om "wigS WOPUI -1 ItA

u-9 S tZ 9311 *15 *0 Wi il 063 u- rs iisl we pup $-g

or m a Om UV UIL Itt *INL AMl OL I t pig _Arm l' am$ W Gwe gm r 1 -Ls wILW 9L Wm " PI - U*

Wm "rI W" In w199 Wm Wu r woo pu W -

ret i,tiI ir iW 99e1 wit 90 3O59 W PI -11se11 3(1 ZILlS 0691 u-S 059 0615 31 _ 1 uC O UWMlS wt66 Oit wig s01 $SLt 11ov a szs Om ""PtO - IA

se51g91s101 atm MSLI A WtS o01 3 t Wit ws put -WI.l u-IS Sill lt on 1O 9033 "9O oWn w pIO-

~~mm irsw ecu mi 631 soit sl .113 ecu armIe-n $Ms WSO ant S" it'" ir" W i09`1 WaO,t Wm WtI - 04am 'st wi or AS Gm W gm UXrs SOV Uw _i

11W SF3g t gv . n an 01 UZiiI Wu 311 911 W9 OPt -3-AACtiS 009 161 WS$ on 59*1 9611 gmSI 111t WS' SI -SF., O9Z9t' *01W ."3m W tltW 11 1391 MS *1a" 31 3P -

"W £6 On1g 66 W9 WS ant arm 6o W11 9 PI - 3-A

*10 69 330 03' 09 SUB 0315 313 030 33 651 6:11 WOO596

1ST am Am ent StIt am wtw grit gm a wPm--

Wil u-SI 96£ LSi 313 1 Wb* 31 Lt ml 611 931 WOO _

Wtr usF6 WI £1 311 u-Li tru 6*9 L90 III 511 Sill WOO1-4tit *own wa 91 1W0 3tla 31 6t wet0 WI WNW 931 W -ISF mhn wit wet Wr 15 w1o WI 01 " w OV MISWS wSpui-

wi1 Wu1 met 111 on1 3311 So* SF0 SF0, S1 0Ll S06£ WOt WI -Wmau Ii Omg wugun W51 19 waui.~. is an wiO"uewtSI ant O ssws u

_ Wu 610 WS A" gill W A _ _ AwlN U M S N3SW" pug i

in.~~ ~ ~ ~ IJP .UlOl OiO

JDmfou zualnuavuam wniowJ_wJAol Dva WA WsKNn A" SWW

qI Wr

-98-

R_aymsat f DIRD hM

Srl SPECLA IBRj AREASURY ACCOUlNr

Dbbrmmt of A.u Awomt

on uhmdpgo of1* sib-Ices - h-m

. a~~~~~~U CPArM AN. WAL AND MEWACv

. .Y ~~~CO JeANM

-99-

MINA8 GERAIS MUNCIPAL MGEMDAND EV_OANfAL DwRAsfCn=c R JEM

EstimaedVale Of Esidmd AP of

Rap of Conac_ WVagi Nlmber of Total AboveCoact Vahle. Esc Ra P Cons ct Wldi. Pdof6Revl.w

(US$ MD) (US$ nmon) bob Rap Thraehl

Civil Wo__

5,000 ad abv 38.S 7

2000 to 4,999 94.3 50

250 to 1,999 32.5 130

SD to 249 30.0 400

0 to 4 11.3 450

Stotal Civil Wods 20 .6 1,037 64.3

Nqukmet and Matidab

25Da ud &ve 67.5 SD

50 - 250 30.0 1SO

0-50 8.8 250

106.3 4S0 63.5

TOTAL 312.9 1,487 64.0

I b--

-100-

RAZL

MINAS GERAS MUKPAL MANAGEMDADEN_RNUAL VOASItC; PW)JC

DisbuiminIBD PIcl Year in Quate Cumulative

and Quat EMIu (USS mion) (US$ mIM....1) (X of t£al

FYm%4Septer 30, 1993Deoember 31, 1993 8.0' 8.0 5.3Match 31, 1994 3.0 11.0 7.3Jm 30, 1994 4.0 15.0 10.0

wmsSeptaber 30,1994 4.0 19.0 12.7Deembe 31, 1994 5.0 24.0 16.0Masd i 31,99S 7.0 31.0 20.731D 30, 1995 9.0 40.0 26.7

wi'"6September 30, 1995 10.0 50.0 33.3Dcembe 31, 1995 12.0 62.0 41.3Match 31, 1996 13.0 75.0 50.0.Jm 30, 1996 12.0 87.0 58.0

Septembe 30, 1996 10.0 97.0 64.7Decembor 31, 1996 10.0 107.0 71.3Mwch 31, 1997 10.0 117.0 78.0J3ne 30, 1997 9.0 126.0 84.0

Setemb 30, 1997 6.0 132.0 88.0Decembe 31, 1997 5.0 137.0 91.3Match 31, 1998 5.0 142.0 94.73um 30, 1998 4.0 146.0 97.3

FYV999Sepebe 30, 1996 3.0 149.0 99.3Dembe 31, 1998 1.0 1S0.0 100.0

1/~~~~~~~~~~~~~~~~ Jaue 1, ...u eoititl.SehiAowto U$. ii

- 101 - ANNEX

BRAZ

MINAS GERRS MJMCIPAL MANACGMNNTAND ENVIRONNETAL InPASMUCrURE PROJECr

£ I K~~ A Mg

1. A deted set of monitoring indicato, and methodology for calculation, soce of data, standdsfor _a an d vels (whe picabl) a set out in Volm of t pjects Opein Manual.These Idicaos Iclude stanrd physica measureme_ts of wotrs compled, unit costs per sub-project,number of abgt and 1ecb a _s hdIerenions, etc., as wel as fiaclaeoonomlo measures suchas d _nem rae, IlDt C08t8 pr 8ptject, do.

2. In ore to mea th Impact of the project, as well as physical and finani progre, a group ofkey pefomance Idicators hwve been slected fiom lage oup of umoiorg hndcar. e are setout bdow, and divided into five categodes: (a) a gSup of selectd 'key impact Inicators' (which haveestblsed agets tht atempt to demost hfe expected impact of tho proj"); (b) In _astuctrInvstmt; (c) ns_u1ol dv lopment; (d) al (e) project D ofifflt ilk in establshing relble ban data fr the whbol St, prlminay etmae of stu for teni_a8o bdow woud be paut of R 8MD first quaerly eport, and would be _m d (and adjusted)

reafter as a normal prt of project reporing, aong with the physical and financial _ of project

- 1"11WVemet 40 0r -701 30PAB d Cates ni 1930 19 s99 199 199

Plojecs CMo al) USS .7 55.0 1021 6.2 41.7

-lP_TUu 1s1$ 3.3 3.3 3.5 3.3 4.2

________ X___ 23% 23% 25% 27% 30%

Ad Ho oTnfsTotl adt faO=Wc lm

No comdmoa) By monicipaR, compny ad Stag _uba d Ipe s-tof 1O

Now _canoodm (s_wwW) By municpt, oon y md Mob, numberpnoftoexe c t lep of s tdL

Pethbb wr uNq Pu obw m&; coon W, bi 9y, PRMMOnb).

Reoprw wae quaiy DBO, dhisvd oxygen.

Oceursooffloooding Num*er of foods per yer.

* * 1XQ- ~~~~~~~~ANN Ei

Mms WBy , by coadany ad SmpSoft

ACap ewseivnp ThIN By byPet n cWmpantad aorqStefo la.

_ nfflw!h N_m da,WA t of _

k b a u -_____

ALip dw6WBYm~ - byauw adopp hne swoD,.

HMPbd hoe ERR qOMV hU an pmd cmk=a tfaMdooSi

Dbbrnem.itproeemuhs Number da .m1ro .fioImam of 1 mmi Unit..

U-%tim - DDM _e____________j___*m___________to _____ol ___i

Dhburn.tmuiln Numbe od deja wreus of effinoy of Panjeot UIL

_m - mD3_

0 IW I .peot Nddor m aefdc hd n

OveadmpaynmiuNew f AmohM value and nsaw" of Urn ovenido

17= m . Bms Amfibmy ovwlmudt by o o em ms Slato

a~~~~ ~ ~ ~ ~~ - -- - b

VWWSWH S

PO '"Ae W UOIUId P

- g " | - wPo gat e

PO -4 -1smu nt :t

i~~~~~~~~~~~~~~S . 2Dd-UNS3 1*l

. ~~~~~~~* St3VPSVB £

. ~~~~~~~~~~* St-UVS4bM lS 0* St SY o z W'S so La

m mm ~~~~~g:3P gwmlv OPj .1. %Go a*V0 3.!Po a" P. ,Me S

._ _ S_ t PUeOs P $

PM - PNEIPtP a S

U. np.PP _ o it

P.-mpS .0e0 . 3Q

at'1 bpsMn.Wug1 VS00 a*

St.~~~~~ _t _ S w __

W~~~~~~~~~~~~~~~~~~~P ^M Wm "V w

* . PW ._ -. _t

.~~~~~~~~~~~~~~~~~~~P Aw45 * . -D

Po 'We 1_I .a-_____ 1

.: L . , . . -... _ _~~~3 t wSupmg......... , I3b * Po WmyO" w.OAO*am et

.~~~~~~~~~ _. fr.. PC - _. _. .St

.________ ________ tiPre Sthu I 3

P"3 aWmsf isS PoftPpl.L :t

#~~~P , 11 ._ . ttPat sSuvAm.

* _eSt _uamIsesm Psw*St0 .t

. * 1S01 hh- S1 ooP 9

* St epWW4d piq a A_- _

1xmmvmm o. P1 VUNI Khb

WI pSpiS-

- 104- AM 41

BRAZIL

MINAS GERAIS MUICIPAL MANAGEMENTAN ENDWRONNTAL INFRASTRUCIPURI PROJECT

1. he supervisi stafte o for this nw projet wM emphasIze: (I) a thotoug ad detailed j rjectieption mission, th aim of whc wil be to estash th basic project planning, mle e andmonitorgtool (rli on projec magmen softwa nd computeid evauation prcedue); (if)electroic com ons betwee Bank headquarte in Washigon and dth project office ln Belo Horizonte(and eventuy betwn l sub-borw and tho project office); and (I) frquW s aer visits, inaddition to one fIl supervsion mission per yar, to eonsur project Implm on Is on tack.

2. SpecIfay, to launh t project, an ieption mission is ped forthe first quater of FY94 (Aug.-Sept. 1993). he mission woud be scheduld for about one and a half weeb, and would compis aneconoist,engine, Ifuona develpmen seaist nd opertons assstat in additon to teo taskmanager (and bief visits fom roement and disbursement st). Whem possible, loc sed consultantswill be used. A local co nicaions oultn would Wlso partia. Following projet inception two(ther than Ju one) additona supevsion missions woub held during ho scd year, in order to buildon the ometm of pject Incpion and to iron-out arly any I n diffties, dahe a lettingthem wait. For FY95 and FY96, a minimum of one fol-scale supervision mion has been schedled peryea consisting of a three-petson cor team (egineer, nstiona developn specl aod task maager),comlet wit sit sits, alog wit one to two shorer, skletdonsaffed supervison visit durig the year.

3. A mid-term rview would be schedued for e four quer of PY96, for about one and a halfweeks, and inchding an eonomis, engeer, Institutona development speiait and operaons assist aaddition to he task mangr. Mm objecdves of the mid-term mview woudd include howr al.a:

I) review ofp s anadachievement onboth Infirsuctue and situiol deveopmnt componet,cudig seciic sess crita for bot (I.e., -pot rate of tret evaluation; Ieae in own-

soure rve colection), as well as the vxmo_i of the to compones;(I) rview of tho allocaton of resous among sb-com and prpose re-aocation, ns _ecsy.

depending on project progmess and consistency wh poject objectives;(i) deciv s of stutionl and impleme o arangement, and degre to which thes could be

simplied /andor adjuste to Improve project Impl-mentation eceny and d; and(lv) specific view of thes of theo init stage of the pilot _ in adievemenu of tdir

objeives, and dsion on whether to end, continue, or epad them.

3. Ihe requed supervision Inputs are summarzed bdow:

dsa_fwe 20 1S 20 55

US$ 28,000 24,00 32,00 84,00

key woevts inceo miission nomal . nm.d4em review1st Quarter _ _____4th Quare ______

- 105 - ANE SA

LRZE

MW GERAIS MUMCIUAL MAN A LMUNA WRAECrE PoJECr

Financial Situanof die Stf Mof8s(IUSSOCO)

TU V 3555 2 3 324.0 5,410 5594* 3,778. 35967* 4X5.1

VaIs 3,2"Taxa S,7.7 26.9 3,14120 ,4561 ,65* 35,814.1 4,62

Cda 60. 1=3.0 1261 151.2 nu58 1457 55.7 161.8

Oiwia 52 3300 251.2 261* 175* 239.9 3058 324.0

hedm1'heu 954.7 W557 930.1 961.7 1,03m.0 1,W.A 1,107.0 1,171.0

1.P.J 254 186.9 292 302 31.5 331.9 348.0 368.2

La my 1685 163.2 1273 131A 137.2 144.4 151.4 160.1

bsudima" 64.0 54* 59"a 61.1 632 67.1 70A4 743

_^pm ad 225. 173*3 163.1 16-. 175.7 i" 193.9 205.1

OdauTuudu 1464 3550 287. 297.7 3109 327.0 343.2 363.1

Cgft* Oi -,mm 445.2 744.5 716.0 268.2 294.0 j7.1 361.4 533.2

__ L 383.7 6886 565.7 197I3 182 2871 297.5 4".1

h W.7 4543= S41.9 1973 182.4 287.1 2973 499.1

ff -h_______ [95.9 234.5 25. 0.0 0.0 0.0 0.0 0.0

dm 61. as.9 150. 70.9 111.7 109* 63.9 34.1

coimia*d 1.5 55s9 47.2 0.0 0.0 0.0 0. 0.0

TO Dei Craa 0. 10.1 70 111.7 1091 62.9 34.1_ - - m - -_ -

i~~ - mEE -- ST!m-

d a _ __ ___ 1 p1 AI!Lp

I:~~~~~~~

jI I M Lit!

-107 - , .

BRAZIL

MNAS GERMS MUNCIP AL AN

AND ENMIRNMECNTAL INPASIMMCURE PROJECT

Sel.td ?dunlclalm in AMe Sat"OH GfAl anda,ml

-.-. USOO---- - -00% o% (tot l -annuadl nmasc--

1989 199 1991 1989 199 1991 1990 1991

Own Revenmues J9L fl 2% ZQi In_iTaxes 29.5 44. 48. % 7% 9% 51% 9%WmU 3.4 10.6 18.4 1% 210 3% 212% 74%11iss 14.7 17.4 15.2 3% 3% 3% 1w% -13%Odhs 11.4 16.4 15 3% 3% 3% 44% -9%

Cialsm 0.8 0.9 1.1 0% 0% 0% 13% 22%OdS 75 73 67.3 17% 12% 12% .3% 48%

Tranafom au . mu 6% m -6%ICMkS OfmFed Got) 143.5 220.4 208.9 32% 37% 37% 54% -5%PFMP (fom State Got 165.9 223.8 189 31Y% 38% 34% 35% -16%eOtherFedsandStae 32.2 29.9 47.7 7% 5% 8% -7%* 60%A

Expendiwies ~Z1A 4S78 MU 100% 1OOYe 35% 5/

CkLnxDtEBqp3ndbll0s 374.7 446.6 435.4 82% 72% 75% 19% -3%Capital Epenitues 83.1 1701 148.4 18% 28% 25% 105% -13%

Apoopof2t7/x6lpNni. te astwabatdto powMes he weat ela756 Wa--doipUm Bob N*6mft mi cormso~4 to we kWo b av, b e ibe d asos. l m doat to ez eaad by Ask

PO" 1 do a"T_a

-108- ANNM

BRAZ

MNAS GERAS MUICIPAL MANAGEMENTAND ENVRONMEAL RUItASfUCrURE PROJECr

D*A Cemt of Muniiages in the First-Yew PMM

ARAXA292 40 ns15x 8,1S2 36%

I L O O 1X I 4,5M 29% 8= Is%

CONGONMU 1,876 4,217 44% 10,530 1s%

|iNoPoLis 2,746 SIM s7s ns 29%

GOVRNADORVALADA3BS 2- 7,82 30% 6,11 38%

IPANTINGL 9,720 __7_ 55% 45,434 21%

MrADRA 3,406 4;321 79% 10,139 34____

IrAUnN 1508 3,475 43% Sf97 25%

LOAlO I'LmJVI 1,262 1,354 g3% 5,616 22S

_UDU3 8on 1862 48as 18967 47

MOMN38 CLAROS 3,223 4,160 77% 9,131 35%

OUOUlRANOC 1,525 5,376 28% 7,599 20%

OURO m ro 1,719 3,045 56% 8,143 21%

PARA DEIM 4A 1,115 4,89 23% 4,474 25X

PATOS DS U9 1,567 2,252 70% 3,675 43X

10008 DSBCAWUA 3,760 16j396 23% 17,406 22%

POUSO ALiB_ 1,616 3,8 45% 5,94 27%

TD1MYO 4,04 7,005 58% 18,159 22%

T| U PO1WAS 746 488 153% 3 22%

UDERAA 4,873 10,351 47% 18,832 26%

VARGIH 2,663 6,702 40% 11,449 23%

|WSPASLAX I'M1,580 4,902 U32 7,798 20%

~~~~~~~~ ,_

11111 JutlgI IF. II

---- -- - --- -~ ~~~~~~

I ~~~~~~~ItII~~~~~

I I~~~~~~~~~~~~~~~~~~~~~~~~~~f- - -~~~~~~~~~~~~~~~~~~~~~~~~~~;

-110- AhNNEX 6.

UAZ

MINAS GERAIS MUNICIPAL MANAGEMENTAND ENVIRONMENTAL INRASRUCWHE PROJECM

Ecomiml and EOGn iuatlon f Sub-Proed

1. Methodology. Most sub-projecs to be fnnced under SOMMA, such as water and wrag etworkextensios, water sysm impovments, drnage, paving and ste lgti invetnts, hv raiy

quntIfabl benfits. Thes sub-projects WIll underg technical, financia, and economic evaluaton accordinto agraed selcon citeida and meodologes set out in the project's Opaionl Manals (Volume 2), and

4k in Anex 4C. A simple methodolg has been selootd, In order to be widely acoessib to awide range of _mulcipao -expec td to partiipat In SOM*A.

2. Sice the poposed projct takes a promm approach to finaning municipal investments, nexa fora of stBforte projct Implementatio pedod Is ot possble. Based on esm ted projectcos, about 70% of Invstmnt wM bave readily quandifiable beefts under the selected meodologes.Sewr teatnt and sold wast disosal sub-project, estimated to tot on th. order of 20% Of totalproject cost, hav been treated separately, sin te have a blr pWpotion ofbeneft stmming frm lessreadl-quantable envi e and he gains (see pa. 8). Economic evaluatin has not beeo done fothe r ider of subojecb, includin th0 ntoml deveopmt component, pilot progums and sties,

rsentn about 10% of pojec cost, however, th finan le beft from btechncal IinvesmeatsIn th are of fiscal and financw modna been evalutd and wM be cosely monitored.

3. Eeone EvaluaWo. conomic evaution of sub-prJects with quadfiable beft wi employOm of two es. swo v , suc as wate supply and sewera, user chargosbhe been used as a proxy for w_llngoessto-pay benefts (although this does not captu fiU bft suchas consome surpu). For non-rvem earning services, such as paving and draiage, beneft wM be

don th bas of the Hedonic Model," which employs increasd property vaues as a result of_inesment as a prmay benefit dt Esdmates of blad value cge woer based on th experien

of th ipat of smilr types of improvemet on lnd valu in Mbis COle and oe saes, sucI asPna, &Sant Catmm nd Rio Grnde do Sul, whee the ongoing projcts of a sia natuEconomic costf theproject were t to be all capital net oftaxes and dudes, plu recrent

1 b r opoa aut ~~~~~The seeto criteia ensur thalt least cost tcncal solutonlsar selected. Becwas of the on expaunon of exisdtg network to opdmia exising facilities byemploying excess cqpac, and ntwo systm improvmeno , a lrp pordon of investment costs In maysub-poj can be condsded uk costs. ITh prposd poject would optime the use of th existigfcltes. Using a discourt rate which appimdas cost of cal, esmatd to be 12%, the Interna ratof atr of _ina inesme are evaload and rakd. A fifte year discount pedod I used.

4. Finauni Evaluaton. Fin costenefit analysis i also undertakn, in arder to detemin ost-over requkirm and ea gddhs for mb-loan ts and conditions. Beneft a he ame as

for th economb evauto Coss include a taxes, debt servic and otht chares.

I/ Tinig and prauul epermieen ct- analysis and vemdnt prdw o. andcton for ui l staffis expecd to be am* ogte project key beneBts.

- 111 - ANNIi 6A

S. CO ut-lOfit Cacaton. Table 1. preab the eoomic M of etun for 21 subpojcts whichmeet dhe 12% mInimum criteri, and which wil be Inclded in So. fia-year progum. 11an mInestmentBamoun to US$46.4 mian, or about 14% of th projet cosu, and yield a wested av P ERR of 20.6%.

Table. 1 RON a _

Muuldpaflty/ In_Vetmet Popula lenefted amSub-protect iUsS corn aOW)ab. 1oeolds) %

Wate 7% 283%Boa sp 152 7U00 24CouselhelroLafalet. 484 10,000 24.1%1Covenador Valadates 947 30,000 49,400 40.9%Guauabaea 75 950 25.7%aaoUevado 403 58,800 12.340 34.8%

Machado 342 21069 u,4s 3L28%Nova urn 681 5,638 24.7%Pas 1,735 17.470 25.09Sao LIvreaco 169 45,000 8,000 34.9%.:;oJoso 4elR;y 1,089 72.741 27.0%

esPonIs 1.183 24.1%

Sewea 3 10%

AI(aa 1,233 16,290 11.696Lambad 10 3,813 1S8%

Drwas" .'11 19.5%

Di'opols 13.673 26000 20.8%LuVaa 4,597 18,800 '17.1%Mudao 1,617 15,000 17.1%PousoAler 2,213 3,985 17.f%Uberbab 287 2400 17.1%Varna 11,224 43,315 19.6%

Sclid Wate 2,50 1L.7%

IPaUB 200 179,696 117%

Pavln 665 31.9%

Uberaba 1,665 700 31.9%

TOAUWel eAv , 46,414 503.762 15041 20.6%

-112-

6. Tae 2. prese a summay oft. ecoomoi and finaca rda of retr for to munIoIpaid=tctuae -p*rojes i dth fis-yow pX rm plus other sub-projects Idetd and evduated by UDMOwhcih ar leswell advancd techically but are windve of fAtir e In . As shown, the sb-projets wa expected to yield tes of rtun which avea 26.3%. he COPASA and publio lg1Iestents were Idetfied and agped during Appraisal (e Annex 4C). Ub. weighted average ERR I27.6% and FRR Is 17.0% for hes sub-projet (tg US$216.2 min or 65% of project cost).

7. S5nsIt Analysb. SensIvty anlsis was do on tie basis of h e soek judgd to bemost pobab (a) ncs In coso due to cost-oven andfor days in projec p ion (10%

se use4; and (b) red on in benefit due the impact of aion (which may redau es vau of baffand tax revn If not adjuste, ad polcal or other inabliy to m a stpulated tadff and taxe (10%redtion). Tb. sub-prjcs for which th senstvity was done whow hat mo sub-projeo an robus (ERRand FRR over 12%) ae under these assmpdoins. This risk fiacors will be closely moniored during

Tab). 2. Economic ad VAnol Rate of Retnfor a Souni of Sub-Projet

bond Economic _ral Fb c_Raes of Retr ER Rae of Retun FE lavat-

Campos"a -M - re Bn nti of T*tcan &.iy can SMi.w (S I) cost

Muicipal n& om 263 22.2 14.6 11.8 136.2 63%

COPASA. 27.1 23.0 33.0 26.9 60.0 28%

NctweExtmion 16.0 12.2 12.9 9.8 29.2 13%

Opebatoa Impmv. 39.1 32.3 S2.7 43.7 31.8 15%

Sued Lihti 243 19.9 20.0 17.6 20.0 9%

TodlWdglted Aveaige 26.7 21.9 20.5 16.1 216.2 100_

S. Swae ratment and Sold Waste Disposal nvstme. Benefis of hese Ivestm of tenetend ovew a regiona adiher tian municipal arma and can be difficl to quaty. For sub-projects underUS$1.0 millon, fr which the prary bonefit ao wi the nmnicipt, evuaidon of to least costtechnl solon ombid with an estmate of pe capt beneft would be sufflceuL o sub-projectslarger than US$1.0 mion, ost benefit ccuons applyn existig or proposed cost reov d mecanismsuch as trff, betmm and other charges would be usd The result of this evaluaion, which does netcapur foil bendets as ad wit h and heath impwvemen, su be consdered a lowerbound. BDMG would fish its evalution to the BaL pror to apoval for sewag eatment and solidwate disposal sub-projet exped to cost more han US$2.0 mMion Where beneft are deemed to beIgely outside to municpiy, a priminry feasbiliy of toh rgional m equirnt ed would beneeded, evalti tedical, financial and economic easbiy on the basis of dignos of apolltion souves(us8n acs dat or _ ) widhi th whole reiw

laII i ul iIVSiI0 AmJllbuII

I jIiitI1I~~ I3A ~~1 ii ii

-114- ANIC6

on tho typ of scen to be done,o sin ve legitidon did to duh siz, scop et. for indviasreni8 odg. As a rut, FBEAM prposed a clssfica onsysta, apoved by COPAM, whid

_tabs c guidelins forI ea sreIg by7 proct sin and mepclted Impac (genery on teXbasis physd almeasur suoh pipe si for watw and sew g sb-pojecb). 2boe gudeine. arouycompaable to simil gusidin esablien Pa , andI hA mor resticve ha feda gides.Thoea ae th odegois: teo fis, for proje3ts of dsgnift dz ad impaot, would be a fllahmpac and eport A MA); t seooed catg, f projes of sal s and pasctwd bo a simfid _ _ , RCA, a raoro de co,wkI. au*1et ng, or cotol rpo ed categoy of inestm wld requre ooly len . h nwy-abiedgulMsw discussed wh teo prqeao miss , and are s E _underf projct wd be p _aed by -v cosu ltas and mrvwed by EAM, ich has dso spuatedtmepeiodsfbrdthapovaof each eo of sree ninsg varyinS fom ys for somplelies appva to 30 das for evali of an WaRI .

4. It is etimd tiat 10% of fimt-year subproet wM requo EWRIA, a flhcer 15% will neda siplified RCA, and th m t ner licenin or o acion. le whi require ELA/AUA an sewertreatmen and lni projcb and laqprr drain projects, pdadplly to enue adoquae siag. Tloremaid of sub-pojec e fInanood under SOMMA are expe to reflect Oe p l c. AUI

_purd WARIMAs and RCAs wM be completed pdr to d id at I l l a solro30 0 .Licesin wi be pvidod pdor to woi*s costucon EDMO wod provide echd a "ssa to

m ci ad gerly overs the enviomena screening proc, fiom seletio of cosulan (fowhicht wil minaid an open data bas of q aled fms), o of i aid _vbfa by PEAKMm Ste hs provkdod its sa_u daft N Ieodt g PEAM wold oomplotodm a p IF m OsRies in a _ and timly way. BDO will aso as an agee model set of trmOftdre _ o r a_ ', ------- *ppaWed in cnnciowA FEAM and t ak For the fistyar pWgr, EWAM ma uderway (for four mb-prjet wic reque ta) and maexetd to becomplt by Juy 1993.

E_d Ea.0_i Beneit

S. Some benf assoited with th subpojcs to be excutd unde th SOMMAprogram wich are not asiy qunifble due to lack of data and oher consits ar te dofollowing:

Seweae ad Solid Waste. Imved healt of affected populat , reu ling low medical coss,becot labor prdwcviy and improv quality of life; improvd watser qual di of is ,wvich reduces co of watr teatn in or locatios and ho_tates thep e of flora and huna;_Irased touthru d gh rationa use of water,

Water Cnnto and Systemo1_. P erbandqgtgrl-pd prlspodos foa¢ meox e d _1 - Ao,zdh eolps lo pdeno fbatdreowl _

inctowoual ntwork expanon teds to be In lower-incom areas wAe it ha impxta healt benits; ad

Draing. Flood cono baefts popuatio at sk in mrinl area (ofen lowiome)who estle on blandwit low madet va due to its vuailty to flooding; tdo beneefts of dring asolude fiihir sewag m , sfinc sepraio of sm dnae from t swep o b a pro-equisifor effixied swea sstem re are doa d w *ssoquliy-of-life benefits with dranabvMw _duet tbs ofmouft bas.

-115- hUl

NUMZ

MWAS GRS MUNCIPAL MLGMWAM IM RONMDfTAL DIUASrRUCn= POJW_

L Do_uuantal oated to dhebjt

Optai Mmso (Volus I-V, 143)suuof Of P,ect Cos Teqhuuie- popum (14.)

'4nmy f Bowmc6 iWMW Sd EvkOMNWBValmUdm, PMulips Ddi [Lmb for Pliao-Yaw bogMuicipMuIrat-Yw PAls (1-9

Dam! Sh* of Sba roup of Munt pl (1991)Dimd study in 20) wa. sommieWis (1991)Ethout of LAl Debt Liit of S38 M_lipum (92

Suazuzy Of Omaha sluOm o wbmpl group of 217 _niciple (193)P*oua SONMA-COPASA (1-3)

of l3hzb Pr*t (10-92 &1-9hyiged Proposed Mc g Pilot (ANR, 1-93)Proposed _umuis. S.id W_. (1991)Pdvatirt TOO Cm R%waot Is Pg_(1Prelumiaaa Tomu of RefMOr. for Sist.Secto Siraeg Stud (1-93ROped..c Proposed Audit oum for Prjoje (1042Cod cosamt to COFIE (7-91)

SPt Nitul006 S uening S0 pukinw giu (3Sinm. Rusaldima D36 (199).n pubeammI, secto bocmwig flailFedw_(l Lesdima (M3 1991) (Fbd NuL Onma DU)Stat IAW #10,890 (19) adrizaog borowig for Aud. ad SMDDAf P _,dWmAmd &Sobto AVl_,d ad =*LaBDMO RopoitanSevm - y Det#ed to Munipltie

3. Deesutat Rdeati do xetn Agm (MG) ad to SOWA bod

BiDMG ml impot. (1981991)Audifo M -it (1991-u 1992: Pc Wa10o0s)DDMO Detaild Orgualm Cha mt (-90)Re9port an BDMO Exurma wiAh 6Muicpait

Medw"W for CdalcuIstm dh LegalO Debt linkt ad Capacty fa Ripy Loaui Imclmb lega rqflums

Flod iwmldi 4__d-"_ (1SOMMA Ploo Prjojetd Cub Plow, Disbnuwnmal Anipmna is dBstl.sd Cost of lanaIDMO 8upl km approva mpoDMSO Stus

4. Do_au an I 1 p

-116-

DaftRmoW a1_ Maoi d IIN_m PMO llpd illtO ft1 _i k)Dbpo* JUdit (mni*i mm in 22 fil yw . )

PiPe fwerm 1.ft tonIu A=kuuams oMUiIpFJP }gdmir_ Tlmid Aoob 18 Mui_WdFJP IM9 Rpod of AhdWib

JP C_ (6

S. Docanusit an lb WaItw ad Sewurq Csmpo.st (COPASA)

MM. Audiled Pinsocid Sui8mn (_9-M9)COPASA acua and forma iwvuhud pmgi (1991-1997COPASA Mauqmgmtd n (19391)Reportn Taiff S _uctm of COPASA (3-)COPASA Repogt Pan Didn Anvhnutu (1^-)

6. Domauast. an do Publi Lightig Compem.t (CIMIU)

Copoi d Tadl W e admo P_ (S42Re.laofo Amal da AdMWd_ (I1)

Y. Docmw* Idated to Mm Gun Sltat GQwumam

Sumuy of Slt. cmmou bids ne prqjac (1-997)_a ScialSam"ofSut" (SFAZ, I992)

Repostan borowing c iqp of do Sft, of Minas (19 1993 PIM lImis Gami Bec.my D_goo_s _d P etive (1989)

Min io 21st Cotar GuIdm for ow Owcmmt ofBdo GarCkmak (1991)S-mmary po an sw intaosmic Cn Sts (S1C, 4-91)

DdoW nw an dmoSrMWwboomAnla., 6005o0 km&d in511. (5-9)Repat. an impact Ir a ISgIdilama cmAms of u.lcpuIl (591)

caOf. a -o pacAun 1o (1493)Smmary of COPASA aMOWto a u dbo Soots (1.9)Summy of udng and Ativ CODBMS in do Sot (143Techna Proposl fr Dsvlping and S inMnicip hvimumtd PuIlsy (1992)Proposed Alra*ia. of U gC&ii for huB, Sm Wou (1-9Minul.f Ur.MuftibimaFAM and PiP I. iu s 1.lSgaioaef uwlau.u mt mno mlupaIdi (109Sumnury ofDesn ofPFlat Slit Nayumaulil O.mos 0092

NOTES

* O .

NOLLON d

0 I*o4 B R A Z I L lORD24

q I50 100 150 200 -STATE OF MINAS GERAIS

KILOtMETERS l 71 S A H I A MUNICIPAL MANAGEMENT AND

,,-16y M. ~~~~~~~~~~~~~~dd ~~~ENVIRONMENTAL INFRASTRUCTURE>4armemsm1t5 ,d .Nd

PROJECT - SOMMAECONOMIC REGIONS AND

15- ~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~SELECTED MUNICIPALITIES

0BuriIi.s '5

F. D. ° i * 15Arinios

A ~~~~~L.8 %E. /O<\_ .WCIA AREA OF MICRO-ASSOCIATiON PILOT PROGPAm

G 0 1 S 6 ~~RRAWAMUNICIPALITIES TO PARTICIPATE IN MICRO-

G O I S , OUnR0 Sdo Romdo% 4 VI ASSOCIATION PILOT PROGRAM

GOIANIA > bonbnop~~~~Soli , o y J ECONOMIC REGION bOUNDARIES

GOIANIA gonfinpoli0 MUNICIPALITIES FORECASTED TO PARTICIPATE

j ~ RW1If6p0 iB F' d ( Ml IN SOM M A'S FIRST YEAR

,S OPartrzootu 4° > '-~ STATE BOUNDARIES

*_ JolsQo PIOiveiEQ Aq *piroporoG o ao rd .M6 r o ,

INTERNATIONAL UNDARIES

LVQOE,IOP r ECONOMIC REGIONS: STAT GOP

1 METALORGICA E CAMPOS DAS VERTENTES 51%

Governodo, / I;Ii MATA 0%

GuonhOns SC70dares III SUL 13%o ~~~~~~~~~~~~~IV TRIANGULO E ALTO PARANAIRA 11%

IV' t*B I Or ilencl to 1{,_/>_., XX

v V ALTO SAO FPANCISC-O 4r

IV . u ._,..S _ r Cx Aa plno . ESPIRITO VI NOROESTE 5%

SELO A R A NASANTO Vill RIO DOCE 6n

081 Divin6po Be~~~~~~~~~~~~otim lORIZONTE a Joao Mon do AL VI EOIIHON0%

00~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~TTL10

soliieiro La~oi*Be ,.,Z. ,TvIT6RIA 'o AfncGeS

t+* * R f e( RGNTNt4Brbece ne0

Mac/ do* ea _1inh de o Pr flARCBRA9

~~~ PAULO *~~~~~~~~~~~ ~~~~Cenbu0 oira 0 PERZUI

( *~~~~~Lgmbcrl .0 PR

Ai, megre RIO DE JANEIRO -

(RIO DE JANEIRO A OLIVIA --A t~~~~~

*SOPAULO 1PARANA 0/ c e o,n

~~~~~~ 400 I~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~'~~~~~~~~~~E ~~~~~~~~MARCH 1993