document of the world bank...mop ministério de planejamento, orçamento e gestão ministry of...

Document of The World Bank

Report No: ICR00001109

IMPLEMENTATION COMPLETION AND RESULTS REPORT (IBRD-46040)

ON A

LOAN

IN THE AMOUNT OF US$ 8.8 MILLION

TO THE

FEDERATIVE REPUBLIC OF BRAZIL

FOR A

FISCAL AND FINANCIAL MANAGEMENT TECHNICAL ASSISTANCE LOAN

June 2, 2009

Poverty Reduction and Economic Management Unit Brazil Country Management Unit Latin America and Caribbean Region

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CURRENCY EQUIVALENTS

Currency Unit = Real (R$) 1.00 = US$ 0.52

US$ 1.00 = R$ 1.94

FISCAL YEAR January 1 – December 31

ABBREVIATIONS AND ACRONYMS ASSEC Assessoria Econômica Office of the Economic Advisor BCB Banco Central do Brasil Central Bank of Brazil CAS Estratégia de Assistência para o País Country Assistance Strategy FFMTAL (or PROGER)

Projeto de Fortalecimento do Gerenciamento Fiscal e Financeiro

Fiscal and Financial Management Strengthening Technical Assistance Project

FMIS Sistemas Integrados de Administração Financeira Integrated Financial Management Systems IGP-M Índice Geral de Preços do Mercado General Index of Market Prices IT Tecnologia de Informação Information Technology LDO Lei de Diretrizes Orçamentárias Budget Guidelines Law LRF Lei de Responsabilidade Fiscal Fiscal Responsibility Law MIS Sistema de Informação Gerencial Management Information System MoF Ministério da Fazenda Ministry of Finance MoP Ministério de Planejamento, Orçamento e Gestão Ministry of Planning, Budget and Management PFRSAL Empréstimo Programático de Ajuste Estrutural de Reforma

Fiscal Programmatic Fiscal Reform Structural Adjustment Loan

PPA Plano Plurianual Multi-Annual Plan PROGER (or FFMTAL)

Projeto de Fortalecimento do Gerenciamento Fiscal e Financeiro

Fiscal and Financial Management Strengthening Technical Assistance Project

SECEX Secretaria de Controle Externo External Control Secretariat SERPRO Serviço Federal de Processamento de Dados Federal Data Processing Service SFC Secretaria Federal de Controle Federal Control Secretariat SIAFI Sistema Integrado de Administração Financeira Government's core Integrated Financial

Management System SIAFI-21 Sistema Integrado de Administração Financeira do Século XXI Project to upgrade SIAFI SIDOR Sistema Integrado de Dados Orçamentários Integrated Budget Data System SIG Sistema de Informação Gerencial para o PPA PPA's Management Information System SPI Secretaria de Planejamento e Investimentos Estratégicos Secretary of Planning and Strategic Investments STN Secretaria do Tesouro Nacional Treasury Secretariat TAL Empréstimo de Assistência Técnica Technical Assistance Loan TCU Tribunal de Contas da União Federal Court of Accounts UNDP Programa das Nações Unidas de Desenvolvimento United Nations Development Program

Vice President: Pamela Cox Country Director: Makhtar Diop

Sector Manager: Nick Manning Project Team Leader: Fernando Blanco

ICR Team Leader: Fernando Blanco ICR Primary Author: Fernando Blanco/Tarsila Velloso

BRAZIL Fiscal and Financial Management Technical Assistance Loan

CONTENTS

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

1. Project Context, Development Objectives and Design ............................................... 12. Key Factors Affecting Implementation and Outcomes ............................................ 113. Assessment of Outcomes .......................................................................................... 154. Assessment of Risk to Development Outcome ......................................................... 225. Assessment of Bank and Borrower Performance ..................................................... 236. Lessons Learned ....................................................................................................... 247. Comments on Issues Raised by Borrower/Implementing Agencies/Partners .......... 26Annex 1. Project Costs and Financing .......................................................................... 27Annex 2. Outputs by Component ................................................................................. 28Annex 3. Bank Lending and Implementation Support/Supervision Processes ............ 31Annex 4. Summary of Borrower's ICR and/or Comments on Draft ICR .................... 32

MAP

A. Basic Information

Country: Brazil Project Name: Fiscal and Financial Management Technical Assistance Loan

Project ID: P073294 L/C/TF Number(s): IBRD-46040 ICR Date: 06/23/2009 ICR Type: Core ICR

Lending Instrument: TAL Borrower: GOVERNMENT OF BRAZIL

Original Total Commitment:

USD 8.9M Disbursed Amount: USD 8.0M

Environmental Category: C Implementing Agencies: Ministry of Finance Ministry of Planning Cofinanciers and Other External Partners: B. Key Dates

Process Date Process Original Date Revised / Actual Date(s) Concept Review: 03/06/2001 Effectiveness: 02/19/2002 Appraisal: 04/16/2001 Restructuring(s): 12/31/2006 Approval: 05/24/2001 Mid-term Review: 09/15/2004 09/15/2004 Closing: 12/31/2005 12/31/2008 C. Ratings Summary C.1 Performance Rating by ICR Outcomes: Moderately Satisfactory Risk to Development Outcome: Moderate Bank Performance: Satisfactory Borrower Performance: Moderately Satisfactory

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

Quality at Entry: Moderately Satisfactory Government: Moderately Satisfactory

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

Overall Bank Performance: Satisfactory

Overall Borrower Performance: Moderately Satisfactory

C.3 Quality at Entry and Implementation Performance IndicatorsImplementation

Performance Indicators QAG Assessments

(if any) Rating

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

No Quality at Entry (QEA):

None

Problem Project at any time (Yes/No):

Yes Quality of Supervision (QSA):

None

DO rating before Closing/Inactive status:

Moderately Satisfactory

D. Sector and Theme Codes

Original Actual Sector Code (as % of total Bank financing) Central government administration 92 95 Sub-national government administration 8 5

Theme Code (as % of total Bank financing) Debt management and fiscal sustainability 40 75 Law reform 20 10 Public expenditure, financial management and procurement

40 25

E. Bank Staff

Positions At ICR At Approval Vice President: Pamela Cox David de Ferranti Country Director: Makhtar Diop Gobind T. Nankani Sector Manager: Nicholas Paul Manning Claudia Maria Costin Project Team Leader: Fernando Andres Blanco Cossio Chris Parel ICR Team Leader: Fernando Andres Blanco Cossio ICR Primary Author: Fernando Andres Blanco Cossio Tarsila Ortenzio Velloso F. Results Framework Analysis Project Development Objectives (from Project Appraisal Document) The purpose of the FFMTAL is to assist the Government to meet the general objectives set forth in the Programmatic Fiscal Reform Structural Adjustment Loan, namely, to "Strengthen the foundations for improved growth, poverty reduction and public service delivery by improving (i) aggregate fiscal performance through incentives for fiscal responsibilities, and (ii) the use of public resources, through better allocation and

technical efficiency of expenditures, including better service delivery to Brazil's citizens and improved debt management" (Board document Report No. P7427BR--Annex 1) Revised Project Development Objectives (as approved by original approving authority) (a) PDO Indicator(s)

Indicator Baseline Value

Original Target Values (from

approval documents)

Formally Revised Target Values

Actual Value Achieved at

Completion or Target Years

Indicator 1 : (i) Improve allocational and technical efficiency of expenditures and public sector service delivery to citizens (PPA)

Value quantitative or Qualitative)

PPA existed but extensive dissemination/training and improvement of M&E of PPA needed. Poor integration of planning-budgeting-public sector management.

Project financed activities completed satisfactorily. Greater integration of planning-budgeting-management.

PPA disseminated. Advances in the M&E system made. Minor advances in the integration of planning-budgeting-public sector management.

Date achieved 02/19/2002 12/31/2007 12/31/2008 Comments (incl. % achievement)

Project activities were completed, but planning-budget-management integration and expenditure efficiency persist as issues to be addressed by the Government. The PPA system could still be improved.

Indicator 2 : (ii) Reduce risks and medium term costs of the debt portfolio as allowed by market conditions, improving transparency and raising debt management to world class standards (Debt Management)


At time of approval Central Bank was responsible for Debt. Management and sophisticated debt management systems did not exist.

Improved debt management through organizational/governance and systems (SID) reform. PROGER funds fully disbursed by end of 2nd extension.

Risks and medium term costs of the debt portfolio reduced; transparency increased; and debt management greatly improved.

Date achieved 02/19/2002 12/31/2007 12/31/2008

Comments (incl. % achievement)

There was substantial improvement in debt management and the IT system under development can be considered best practice. Reduction in risks and costs of debt were due not only to the project but also to the improved macroeconomic conditions.

Indicator 3 : (iii) Improve fiscal management through efficient implementation of fiscal responsibility framework including efficient data management, evaluation,

transparency and enforcement of findings (LRF)


LRF relatively new and compliance weak owing to lack of training, materials, dissemination. and lacking political constituency

Training done; assist sub-nationals with compliance through systems upgrade;

Improved fiscal management. Fiscal Responsibility Framework implemented and complied with.

Date achieved 02/19/2002 12/31/2007 12/31/2008


The consolidation of the framework for fiscal discipline at subnational governments guaranteed the adoption of prudent fiscal stances by states and municipalities that accompanied the fiscal adjustment effort of the federal government.

Indicator 4 : (iv) Implement a state-of-the-art Govemment FMIS including budget programming and execution, financial programming and execution and asset liability management system (SIAFI-21)


SIAFI 21 was being launched. TORs for IT audits prepared.

Audits completed every year as required by convenant

Corrections in SIAFI 21 project made as per the findings of the IT audits. SIAFI 21 postponed by Gov. decision.

Date achieved 02/19/2002 12/31/2007 12/31/2008


The project#s direct objective was to assure that the FMIS would be upgraded according to industry standards. The audits uncovered significant problems and led to corrections. SIAFI 21 is considerably delayed; hence the FMIS has not been upgraded yet.

(b) Intermediate Outcome Indicator(s)

Indicator Baseline Value

Original Target Values (from

approval documents)

Formally Revised

Target Values

Actual Value Achieved at

Completion or Target Years

Indicator 1 : (i) IT (SIG system) upgrade and Ministerial IT pilots (ii) Planning--PPA/Budget integration and evaluation improvement (iii) Training for PPA Managers/Users

Value (quantitative or Qualitative)

(i) SIGPLAN exists but not a management tool and not linked to Ministerial systems which are also flawed--developed ad hoc (ii) PPA processes need upgrade (iii) PPA still frequently misunderstood re

(i) SIG and pilot upgraded (ii) Evidence of concrete upgrade of PPA (iii) Training provided

(i) pilot in only one Ministry; (ii) progresses in planning-budget integration and in the evaluation system; (iii) training provided

Date achieved 02/19/2002 12/31/2007 12/31/2008 Comments

(incl. % achievement)

Indicator 2 : (i) Determination of a New Analytic and Institutional Framework (ii) Integration of Information Systems for Debt Management (iii) Training.


(i) STN governance/org upgraded to receive DM from Central Bank (ii) STN has no integrated system (iii) need to train STN staff to manage Debt.

"Good case" debt management system and procedures.

(i) New Analytic and Institutional Framework introduced; (ii) best practice IT system still under development; (iii) training provided, but additional training will be need when IT system is completed.


Indicator 3 : (i) LRF training/dissemination for key audiences throughout Brazil building constituency/improving compliance (ii) Institutional strengthening for key government agencies and especial


LRF not well understood and compliance problems along with resistance

LRF understanding/compliance improved. building LRF support.

Extensive training was carried out in neediest states. Subsequently, software was developed to assist municipalities to meet LRF requirements. Both initiatives seem to have contributed to understanding and acceptance.


Indicator 4 : Compliance on performing annual technology audits for SIAFI 21.


SERPRO defined SIAFI 21 in a vacuum and STN/ SERPRO strongly resisted Bank involvement. Bank demanded technology

Audits presented in a satisfactory manner throughout project duration

Audits were done and identified problems and motivated critical reviews and changes in SIAFI

audit covenant annually as fall-back position.

21 management.


G. Ratings of Project Performance in ISRs

No. Date ISR Archived DO IP Actual

Disbursements (USD millions)

1 06/27/2001 Satisfactory Satisfactory 0.00 2 12/14/2001 Satisfactory Satisfactory 0.00 3 06/11/2002 Satisfactory Satisfactory 0.97 4 06/25/2002 Satisfactory Satisfactory 0.97 5 12/30/2002 Satisfactory Satisfactory 0.97 6 06/19/2003 Satisfactory Satisfactory 1.65 7 12/09/2003 Satisfactory Unsatisfactory 1.65 8 06/07/2004 Unsatisfactory Unsatisfactory 2.14 9 12/09/2004 Unsatisfactory Unsatisfactory 2.14

10 05/03/2005 Unsatisfactory Unsatisfactory 2.14 11 05/23/2005 Unsatisfactory Unsatisfactory 2.14 12 06/28/2005 Moderately Satisfactory Moderately Satisfactory 2.14 13 01/04/2006 Satisfactory Satisfactory 2.14 14 12/27/2006 Moderately Satisfactory Moderately Satisfactory 2.47 15 06/25/2007 Moderately Satisfactory Moderately Satisfactory 3.77 16 12/21/2007 Moderately Satisfactory Moderately Satisfactory 4.02 17 06/27/2008 Moderately Satisfactory Moderately Satisfactory 4.02 18 12/19/2008 Moderately Satisfactory Moderately Satisfactory 6.18

H. Restructuring (if any)

Restructuring Date(s)

Board Approved

PDO Change

ISR Ratings at Restructuring

Amount Disbursed at

Restructuring in USD millions

Reason for Restructuring & Key Changes Made DO IP

12/31/2006 MS MS 3.59

I. Disbursement Profile

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1. Project Context, Development Objectives and Design

1.1 Context at Appraisal

1. After the successful price stabilization and economic reforms in the mid nineties, the resumption of a sustainable public debt trend aimed at reducing macroeconomic vulnerabilities has been the most important economic policy challenge of the Brazilian government in the last decade. Following the episodes of the Southeast Asian and Russian crises that hit hard the Brazilian economy, the second phase of the macroeconomic stabilization and structural reforms (1999 onward) focused on the establishment of a consistent and credible macroeconomic framework. This framework consisted in the adoption of a strong fiscal discipline, an inflation targeting regime and a flexible exchange rate. These sound macroeconomic policy pillars have allowed the Brazilian economy to enhance its resilience to adverse shocks and overcome several external crises with extraordinary speed.

2. On the fiscal side, the government pursued a policy of primary fiscal-balance targets to reduce public debt. Primary balances of about 4 percent of GDP since 1999 resulted in a declining debt path. Meeting primary fiscal surplus targets has been a main factor explaining the improvement in market sentiment, as reflected in continuous improvement of credit ratings. In fact, the fiscal policy adopted since 1999 has been the key element responsible for restoring Brazil’s fiscal sustainability and credibility that resulted in the achievement of the investment grade in 2008.

3. In addition, through an effective debt management, the Brazilian government has also improved the composition of public debt lessening vulnerabilities associated with exchange rate and interest rates shocks. For that, the Brazilian government has implemented an agenda for the institutional reform of internal governance arrangements for federal public debt management and for strengthening the debt management capacities in the National Treasury Secretariat (STN) at the Ministry of Finance (MoF). The debt management strategy has concentrated on reducing the volume of dollar-indexed debt and increasing fixed interest rate debt and to increase maturity and duration that dramatically reduced exposure to exchange and interest rates shocks as well as to rollover risks.

4. Fiscal discipline has also been pursued by subnational governments. Until a decade ago, the fiscal behavior and indebtedness of state and municipal governments in Brazil were a major source of macroeconomic instability in Brazil. Expansionary fiscal policies and a lack of effective indebtedness controls resulted in subnational debt crises in 1989, 1993 and 1997. In 1997, the Federal Government assumed the debts of 25 of the 27 states that were unable to service their debt. As part of the agreement, the Federal Government simultaneously negotiated several structural adjustment and reform measures with states. These conditions have been embedded in the annual Programs of Fiscal Adjustment (PAF) since 1998. The PAFs set annual targets on indebtedness, primary balances, personnel spending, tax revenue and public investment, in order to guarantee a gradual decline in indebtedness.

5. In 2000, the controls on subnational fiscal performance were strengthened by the Fiscal Responsibility Law (LRF). The LRF institutionalized fiscal discipline at all levels of government, incorporating hard budget constraints into a single unifying framework. The LRF explicitly prohibits debt refinancing operations between different levels of government, which moderates the moral hazard problem in intergovernmental fiscal relations derived from sequential bailouts, set limits on personnel costs, credit operations, total debt, debt services and guarantees.

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6. With the PAFs and the FRL, Brazil has made great strides toward institutionalizing fiscal discipline at all levels of government. Results were immediate and impressive. Subnational governments have accompanied the adjustment efforts of the federal government to generate primary surpluses, which have in turn contributed to the overall improvement in Brazil’s fiscal accounts and lessened debt sustainability-related uncertainty. Furthermore, the LRF, in particular, serves as a model for other federative countries contemplating imposing fiscal discipline at various levels of government.

7. While the vulnerabilities of Brazil’s public finances were cut down, there has been a widely shared recognition on the need for improvements on the quality of public spending to achieve more of the policy goals with the given amounts of public resources available, and to reinforce the fiscal adjustment efforts. The way to improve the quality of public spending has been to develop a well-functioning results-based public expenditure management. Brazil has made some progress in the last decade, but obstacles remain. Weaknesses in planning, budgeting, expenditure execution jeopardized the government efforts to enhance public expenditure efficiency

8. The government’s primary instrument for forward expenditure planning is its Multi-year Plan. The PPA (Plano Plurianual) is the Federal Government’s comprehensive four-year plan that aims to establish medium term public sector priorities. Despite having been introduced in 1988 by the then new Constitution, in the context of high inflation in the 1980s and early 1990s, medium term planning exercises became meaningless and little attention was paid to them. With successful fiscal adjustment in the mid-1990s, Brazil regained the stability required for resuming state planning and the first Cardoso administration undertook several actions to make the PPA relevant, operational and effective. This reform initiative represented an ambitious effort to revamp the federal planning, budgeting and program management into a modern, results-oriented management framework. In 1996, the government launched the first PPA (Brasil em Ação) for the period 1996-99. This PPA adopted a new programmatic classification, clarified and made explicit each program’s final objectives and performance indicators, appointed for each program a program manager responsible for monitoring and facilitating its implementation, and started to build a government-wide system of ongoing monitoring and annual program evaluations. Despite these achievements, the Government still faced serious challenges and resistance to its efforts to deepen the reform process and achieve a fuller integration of planning, budgeting and public sector management.

9. Supporting the government’s fiscal reform agenda has been a pillar of Bank assistance for Brazil over the last decade. The objective of the Bank’s support for Brazil’s fiscal reform is to reduce the country’s remaining macroeconomic vulnerabilities and thus promote sustainable growth and poverty reduction. Bank support in this area has been consistent with the CAS 2000-03, CAS 2004-07 and CPS 2008-11 objectives. These documents have based assistance for inclusive economic growth on building a strong foundation of sound macroeconomic management, fiscal reform, efficient public sector management, and good governance supporting “improvements in fiscal institutions and public sector management for better fiscal performance and incentives for fiscal discipline.”

10. As Brazil stepped up its efforts to establish fiscal responsibility, the Bank has offered consistent support through a series of development policy and technical assistance loans to both the federal and some state governments. The Bank development policy loans consisted of the Fiscal and Administrative Reform Special Sector Adjustment Loan (the FARL, approved by the Board in March 2000), the First Programmatic Fiscal Reform Loan (the PFRSAL I, approved by the Board in January 2001), and the Second Programmatic Fiscal Reform Loan (the PFRSAL II, approved by the Board in May 2003).

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11. At the time of appraisal of the Fiscal and Financial Management Strengthening Technical Assistance Project (FFMTAL)1, in 2001, Brazil found itself in the early stages of the fiscal reforms described above. Brazil had been implementing a fiscal adjustment program supported by the IMF in the aftermath of the Russian crisis in 1998 and the Brazilian exchange rate crisis in 1999. The program consisted of a policy of primary fiscal-balance targets to stabilize public debt, increasing the primary balance by about 3.5 percent of GDP. With the devaluation of January 1999, Brazil abandoned the crawling band and adopted inflation targeting. Simultaneously, to control the fiscal performance of subnational governments, the government launched implementation of the Fiscal Responsibility Law. In addition, the introduction of results based management tools in the PPA 2000-03 (Avança Brasil) continued efforts to enhance expenditure efficiency.

12. Accordingly, the FFMTAL was aimed at supporting the Government’s efforts associated with fiscal stabilization, reduction of risk from debt composition, enhanced fiscal behavior of subnational governments and improved quality of public expenditure. In particular, it was designed to support the four key areas addressed in the PFRSAL I, namely enhancement of the debt management unit at the STN, dissemination of the FRL regulations and accounting rules to facilitate its implementation in Brazil’s 27 states and 5,500 municipalities, reinforcement of the PPA through its integration with the budget and improvement of financial management through development of a second generation integrated FMIS, SIAFI21.

1.2 Original Project Development Objectives (PDO) and Key Indicators (as approved) 13. Program Development Objectives: The central objective of the "Fiscal and Financial Management Strengthening Technical Assistance Project" (FFMTAL) was to assist the Government to meet the general objectives set forth in the Programmatic Fiscal Reform Structural Adjustment Loan (PFRSAL), namely, to "Strengthen the foundations for improved growth, poverty reduction and public service delivery. This was to be done by improving (i) aggregate fiscal performance through incentives for fiscal responsibilities, and (ii) the use of public resources, through better allocation and technical efficiency of expenditures, including better service delivery to Brazil's citizens and (iii) improved debt management" (Board document Report No. P7427BR-Annex 1). 14. The TAL and subsequent programmatic loans proposed to assist the Government in establishing and modernizing fiscal and financial management tools for it to be able to implement its fiscal reform program as set forth in the Letter of Development Policy of the PFRSAL. As a result, the FFMTAL was designed to address four areas identified in the PFRSAL as critical for fiscal management and aimed to accomplish four specific objectives: (i) refine and strengthen the federal multi-annual expenditure framework (the Plano Plurianual or PPA); (ii) upgrade federal debt management, including strengthening of institutions, systems and guidelines; (iii) implement the Fiscal Responsibility Law (LRF) and companion legislation; and (iv) upgrade the core SIAFI federal financial management information system, the SIAFI 21 project. 15. This ICR will evaluate the FFMTAL against the proposed objective of assisting the Government in establishing and modernizing fiscal and financial management tools for the

1 The Project is also referred to as PROGER, the acronym for its title in Portuguese: Projeto de Fortalecimento do Gerenciamento Fiscal e Financeiro. The Borrower’s comments use the acronym PROGER instead of FFMTAL.

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implementation of the fiscal reform program. Furthermore, the project will be evaluated with respect to the four specific objectives enumerated above. 16. Key Indicators: The FFMTAL’s primary impact was expected to be the strengthening of processes and systems required for fiscal management. Performance indicators thus included the completion of studies, software development, hardware acquisition, training and dissemination. The specific Loan indicators were defined as the expected outcomes of the actions to be undertaken under each component. The Table below presents the project’s indicators.

Hierarchy of Objectives Key Performance Indicators Sector-related CAS objective Sector Indicators Fiscal stability and sustainable growth through improvements in fiscal institutions and public sector management including incentives for fiscal discipline.

Achievement of PFRSAL benchmarks: ‐ Primary balance ‐ Consolidated public sector debt

Project Development Objective Outcome / Impact IndicatorAssist the Government to achieve the development objectives set out in the PFRSAL, namely, "Strengthen the foundations for improved growth, poverty reduction and public service delivery by improving (i) aggregate fiscal performance through incentives for fiscal responsibilities,, and (ii) the use of public resources through better allocation and technical efficiency of expenditures, including better service deliver to Brazil's citizens and improved debt management."

(i) Improve allocational and technical efficiency of expenditures and public sector service delivery to citizens (PPA)

(ii) Reduce risks and medium term costs of the debt portfolio as allowed by market conditions, improving transparency and raising debt management to world class standards (Debt Management)

(iii) Improve fiscal management through efficient implementation of fiscal responsibility framework including efficient data management, evaluation, transparency and enforcement of findings (LRF)

(iv) Implement a state-of-the-art Government FMIS including budget programming and execution, financial programming and execution and asset liability management system (SIAFI-21).

Output from each Component Output Indicators 1. Improve PPA Functioning

(i) Resolution of information technology needs of line ministries. ‐ Diagnostic report with recommendations complete ‐ Pilot of IT systems across several programs ‐ Implementation of user/investor information systems

(ii) PPA and budget integration diagnosed and solutions identified ‐ Study of procedures and development of integration

proposals completed ‐ Implementation of proposals on pilot basis in 3-4 line

ministries

(iii) Training Program to upgrade PPA implementation and budget interface ‐ Program design and delivery to 30,000 public sector

employees ‐ Implementation of programs and mechanisms to jointly

manage related programs

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(iv) Diagnostic of evaluation methodology against best practice completed and recommendations disseminated

2. Raise Debt Management to World Standard

(i) Institutional and analytical framework studies completed ‐ Analytical debt management framework and unified

procedures and responsibilities for units ‐ Legal framework for debt management committee, public

debt objectives, portfolio benchmark and policy, function and guidelines of units

‐ Creation and properly functioning of high level Debt Management Committee and Operational Committee

‐ Procedures to improve coordination with Government’s macro/budget/other areas

‐ Middle Office analytical capacity/risk management framework

‐ Front Office funding operations capacity/guidelines ‐ Appropriate back office control and internal audit functions ‐ Improved cash management framework and coordination

with Central Bank liquidity management

(ii) IT systems and analytical tools developed and implemented ‐ Unified information system for debt office project ‐ Development of Middle Office software in accordance with

analytic/risk management framework ‐ Middle Office analytical software development and requisite

hardware procured

(iii) Requisite training provided to upgrade analytical capacity of staff/new hires

3. Implement Fiscal Responsibility Framework

(i) Training and dissemination undertaken for key audiences throughout Brazil ‐ Training program developed and training delivered to state

and municipal officials ‐ Dissemination of the LRF to important civil society

audiences

(ii) Institutional Strengthening for key government agencies and especially the Tribunal de Contas (state based attorney generals offices) ‐ Hardware provided for Tribunal de Contas ‐ Technical assistance provided for software development ‐ Training provided in use of software

4. Validate SIAFI-21 Program (i) Validation of SERPRO management plan, work program and budget

(ii) Validation of SERPRO information technology solutions

1.3 Revised PDO (as approved by original approving authority) and Key Indicators, and reasons/justification 17. The PDO was not revised.

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1.4 Main Beneficiaries 18. The FFMTAL supported PFRSAL program objectives. At the macro level, the Government and people of Brazil were seen as the ultimate beneficiaries from fiscal stabilization and rationalization of Government expenditures as these are essential ingredients for sustained, equitable growth and poverty reduction and are safeguards against international market volatility of the sort that hit Brazil in the late 1990s. 19. At the project level, the primary target group may be understood as the Government entities directly involved in the project: the Secretary of Planning and Strategic Investments (SPI) and the Office of the Economic Advisor (Assessoria Econômica) from the Ministry of Planning and the National Treasury Secretariat (STN) from the Ministry of Finance.

1.5 Original Components (as approved) 20. As explained above, the FFMTAL was designed to address four areas identified in the PFRSAL I as critical for fiscal management and consequently four substantive components were included plus a fifth to support loan implementation. The Bank and the Government were to jointly finance the first three components and it was agreed that SIAFI-21 was to be entirely financed by the Government and this financing constituted the main counterpart funding for the project. The components and their main objectives are presented below. Component 1: PPA Strengthening

21. This component aimed to strengthen the federal multi-annual expenditure framework (the Plano Plurianual or PPA) process, improve allocative efficiency and better integrate planning and budgeting. The reforms initiated in the mid-1990s represented an ambitious effort to improve the federal planning, budgeting and program management framework. Moreover, the PPA 2000-2003 introduced a new public expenditure management model aimed at integrating effectively planning and budgeting, and on a results-oriented management approach. Despite the achievements, the Government still faced challenges in promoting a fuller integration of planning, budgeting and public sector management. This component was meant to support the Government in addressing its main challenges. Its five sub-components comprised a set of activities to further improve the PPA’s conceptual and technical design, and pilot some adjustments to the model. 22. Sub-component 1 – Management Information system: Together with the introduction of the PPA 2000-2003, the Secretariat for Planning and Strategic Investments (SPI) had launched a management information system (SIG) to monitor programs' physical and financial execution. SIG also allowed managers to report managerial and implementation problems which would facilitate corrective action within the ministry. The Government intended to refine SIG to make it more useful for day-to-day management and feedback, linking it to ministry/program-level information systems. The sub-component also contemplated piloting ministry/program specific system adaptations to monitor execution in four selected ministries. If successful, the Government would expand the program to other ministries and programs. 23. Sub-component 2 - Integration of Planning and budgeting: the integration was still incomplete and needed to be deepened and consolidated. Ministries did not always allocate budget resources to priority programs, especially in an environment of fiscal constraint and retrenchment. Hence, one challenge was to ensure that the several legal instruments that govern the planning and budgeting process were clear and that guidelines were respected. Also, when

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budgets were approved and line ministries allocated resources among organization units, originally planned allocations to priority programs would not be respected. This sub-component was meant to support a diagnostic of the institutional obstacles to better integration of planning and budgeting and develop procedural recommendations to address the problems identified. 24. Sub-component 3 - Training to strengthen PPA implementation: While the PPA was quite visible within the Federal Government and had received strong presidential endorsement, it had been designed, developed and, implemented primarily by the Ministry of Planning and to a lesser extent by some program managers. The model had not yet been internalized by the majority of government officials neither its philosophy nor the management techniques required for the PPA's results-oriented management approach to be effective. Consequently massive indoctrination and training was required. This sub-component would support the Government's efforts to disseminate the PPA model more widely within the public sector and to equip program managers and government officials in key positions with necessary tools to build an ever expanding constituency for the PPA approach. 25. Sub-component 4 - Evaluation and Feedback loop: Program evaluation is an essential tool for improving resource allocation efficiency and program implementation. PPA program evaluation outcomes should inform annual budgeting exercises. The Government had ample experience in conducting program evaluation on an ad hoc basis. It had also completed a comprehensive evaluation of the first-year implementation of the PPA programs based primarily on a self-administered survey of program managers and ministry officials. The Government was keen to improve its evaluation methodology and institutionalize the process so that feedback would be regularly received and fed into the budget formulation and execution processes. Refinements would address such things, inter alia, as program design, user and stakeholder satisfaction, and program management performance. 26. Sub-component 5 - Project Management and Quality Control was meant to ensure the adequate sequencing and timely implementation of the component’s activities. Component 2: Debt Management Modernization

27. This component intended to raise Brazilian debt management to world standards by modernizing the Front, Middle and Back offices in STN and strengthening coordination among the STN, the Central Bank and related Government agencies. The foreseen measures included the development of a debt management institutional and analytical framework, the upgrading of IT systems and analytical tools, and the provision of training for debt management staff. 28. Sub-component 1 - Institutional and Analytical Framework: In order to ensure a reliable debt funding source and reduce potential debt risk, the Brazilian Government had placed high priority on establishing a strong public debt management capacity. Activities included contracting consultant specialist to help with governance and organizational issues/decision structure governing interventions and develop proposals for adequating the legal structure governing debt management. With the creation of a unified debt office in National Treasury Secretariat (STN), the Government of Brazil had initiated an important effort to create a debt management decision-making structure that would allow that vulnerability, risk and cost be more prudently assessed in a sovereign balance sheet framework. At the time of project preparation, the STN debt office (DO) consisted of front (FO), middle (MO) and back (BO) offices. With regard to upgrading analytical capacity, efforts were directed to bring specialists to guide and support the MO and senior STN management in their effort to develop portfolio benchmarks and identifying optimal strategies to achieve them. As a result, in collaboration with the Central Bank, STN DO was

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developing a comprehensive medium term debt management strategy capable of managing risks while working with the market to carry out funding operations, and supporting the development of the domestic debt market. 29. Sub-component 2 - Information Systems Development: This was the major Debt Management component and the biggest subcomponent under the FFMTAL. Its objective was to develop tools and information systems to support integrated debt management on a permanent basis, to achieve a fully integrated "best practice" debt management operation inside STN and enhance the coordination of debt management work among STN, the Central Bank and related government agencies. Its activities included: (a) equipping of the large and growing debt office with modern, integrated software and hardware and related training; (b) major Treasury off-the-shelf debt systems purchase and software development and: (c) major MO off-the-shelf debt management systems purchase and software development. 30. Subcomponent 3 – Training: The objective was to accompany the enhancement of the institutional framework, tools and information systems with capacity building activities for the debt management staff. At the time of appraisal, the transfer of debt management responsibility from the Central Bank to the STN was undergoing. This implied that the STN staff needed to be trained in debt management methodologies such as asset liability management. A training program was proposed to make use of international experts, international workshops, exchange programs and in-house training activities. Component 3: Fiscal Responsibility Framework Implementation

31. The third component aimed to implement the Fiscal Responsibility Law (LRF) and companion legislation enforcing fiscal responsibility. Its goal was to complement efforts from other sources by focusing in two areas: training and dissemination, and institutional strengthening and support of key Government organizations and implementation activities. This was seen as a critical component for expenditure and indebtedness management. The main issue confronting the Government at that time was how the new framework could be implemented, given its complexity and huge reporting requirements demanded of national and sub-national governments that in many cases were ill-prepared to comply with the new requirements. Moreover, there was some political resistance and the effort to implement the new framework was dispersed across various agencies, some with seemingly overlapping responsibilities. This component was structured into two sub-components. 32. Sub-component 1 - Training and Dissemination: This was meant to address two constituencies. First it would build upon successful training programs already delivered through Government administration schools. Graduates of the training programs would be enlisted as trainers and additional officials would be trained throughout Brazil. The critical gap to be filled by the Bank was to finance and assist in the definition of 'train-the-trainers' types of program including training materials and to help launch the nation-wide training and dissemination campaign targeting primarily municipalities. A second line of action would be outreach to civil society including NGOs who are active at the state and municipal levels in order to help to build a constituency among opinion makers and non-governmental entities active in the governance area. 33. Sub-component 2 - Institutional Development: This sub-component included three activities that targeted primarily the Tribunais de Contas dos Estados. The first was to ensure that officials responsible for LRF compliance have a minimum of hardware required to make use of the data storage and software being developed for managing and evaluating sub-national LRF submissions. The second activity would be the training in the use of software being prepared to manage the

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LRF data flows and evaluate results. This was seen as especially critical for staff of the Tribunais since they would be responsible for enforcing compliance. A third activity would be the development of software tools needed to manage the LRF related data. Component 4: SIAFI-21 Financial Systems Modernization

34. This component was meant to support the modernization of the Government’s core financial management system (SIAFI) and was to be fully financed by the Government. A $60 million SIAFI-21 program had been developed and would be administered by the National Treasury Secretariat (STN) and implemented by the Ministry of Finance's information technology agency, SERPRO. The Bank would support STN management of SIAFI-21 which underpins work in the other three components, providing modern systems for data entry and retrieval, monitoring and evaluation. Moreover, the Bank had helped to develop terms of reference for STN to contract three IT audits to review SERPRO's organization and conduct of the project to assure that SIAFI-21 was carried out according to industry standards. While this broad component included (i) the modernization of the technical platform and development and implementation of requisite software; (ii) the equipping of responsible agencies with requisite hardware and software; and the (iii) training of staff responsible for operating and maintaining the system; the FFMTAL would support the SIAFI 21 program with terms of reference for the annual technical audits. Hence, the actual goal of this component should be interpreted as the carrying out of the audits to determine whether the IT solutions being developed by the Government met industry standard.

Component 5: Project Management

35. Finally, this component aimed to provide support for project management, including liaison among participants, monitoring, evaluation, and reporting of financial, procurement, and disbursement activities. 36. The Table below presents the original allocation of funds among project components.

Component Sector Indicative

Costs (US$M)

% of Total

Bank-financing (US$M)

% of Bank

financing 1. PPA (Multi-Year Budgeting Plan)

Public Financial Management

2.85 16.1 2.32 26.1

2. Debt Management


5.78 32.7 4.90 55.2

3. Fiscal Responsibility Framework


1.53 8.7 1.30 14.6

4. SIAFI-21 (Core Financial System Upgrade) plus Miscellaneous


7.15 40.5 0.00 0.0

5. Project Management


0.27 1.5 0.27 3.0

Total Project Costs 17.58 99.5 8.79 99.0 Front-end fee 0.09 0.5 0.09 1.0

Total Financing Required 17.67 100.0 8.88 100.0

1.6 Revised Components 37. The components were not formally revised.

1.7 Other significant changes

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38. Even though the components were not formally revised, some important changes occurred during project implementation. Funding allocations were altered, the project was extended two times, undisbursed amounts reached US$920 thousand (or 10.3% of the original amount) and there were some changes in the scope of the FFMTAL components. Reallocation of Funds 39. As can be seen in the Table below, funds were reallocated which resulted in differences between original and actual allocations among the four components. The reallocation mainly benefited component 2 (debt management) which gained a higher weight in relation to the other components. In particular, reallocated resources to the debt management component mainly favored the building up of the Integrated System of Public Debt (Sistema Integrado de Dívida Pública – SID). Given the increasing importance of the debt management information system and the strong progress of this component during implementation, authorities required several reallocations of funds to this component. 40. Resources from the PPA and LRF components as well as from the other 2 sub-components of the debt management financed the increased allocation of resources to the development of SID. It is worth to mention, that the development of the SID has not been completed under the FFMTAL and that the government will continue investing in the system.

Original Allocation Actual Allocation

Component Sector Bank-

financing (US$M)

% of Bank financing

Bank-financing (US$M)

% of Bank financing

1. PPA (Multi-Year Budgeting Plan)


2.32 26.1 0.73 9.3

2. Debt Management


4.90 55.2 5.85 74.3

3. Fiscal Responsibility Framework


1.30 14.6 0.39 5.0

4. SIAFI-21 (Core Financial System Upgrade) plus Miscellaneous


0.00 0.0 0.0 0.0

5. Project Management Public Financial Management

0.27 3.0 0.90 11.4

Total Project Costs 8.79 99.0 7.87 99 Front-end fee 0.09 1.0 0.09 1.0

Total Financing Required 8.88 100.0 7.96 100.0

Extension of Closing Date

41. At the request of the Government, the project closing date was extended twice. The closing date was first extended from the original date of December 30, 2005 to December 31, 2007; and subsequently it was extended a second time to December 31, 2008. Other changes in the scope of activities 42. There were also considerable changes on the scope of activities in each component that allowed the reallocation of funds described below. First of all, it is important to mention that the sub-component of debt management information system was significantly strengthened during the project implementation. Initial diagnosis studies indicated that, given the particularities and complexities of the STN information systems, the project may support the developing of in-house

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solutions for the integration of the debt management information system. This suggestion implied the need to increase efforts and resources on this sub-component. 43. On the PPA component, the upgrade of the SIG system and management information systems for several ministries (SIGPLANS) under the PPA component were not implemented rather a single prototype in the Ministry of Justice was developed. In addition, the sub-component of integration of planning and budgeting focused on the research of good practices abroad and on the preparation of a legislative reform proposal integrating planning and budgeting that has not been approved in Congress. As a result follow-up activities to the legislative reform of the budgeting cycle, directed to improve the integration between planning and budgeting were not undertaken. As a result, this sub-component did not use the initial allocated resources for its activities liberating resources for the development of the debt management information system. 44. While training and dissemination activities had an impressive early implementation, the LRF sub-component on institutional strengthening was not implemented. In fact, the government decided to use an IADB loan for the strengthening of the Tribunais de Conta dos Estados, truncating this FFMTAL subcomponent. Again, non disbursed resources on this component were reallocated to the debt management component. 45. In summary, the changes on the scope of activities within each subcomponent permitted to finance the most important and best performing FFMTAL component.

2. Key Factors Affecting Implementation and Outcomes

2.1 Project Preparation, Design and Quality at Entry 46. As mentioned above, since 1999, the government adopted a policy of primary fiscal-balance targets to stabilize public debt, increasing the primary balance by about 4 percent of GDP. In addition, upon the devaluation of January 1999, Brazil abandoned the crawling band and adopted inflation targeting. These policies have been coherently implemented and enhanced Brazil’s credibility with international capital markets.

47. However, despite the improved macroeconomic framework the shocks of 2001 revealed vulnerabilities, especially on the fiscal front. The negative shocks in 2001 included a domestic energy crisis, a slowing world economy, increased risk aversion in markets following September 11, Argentina’s debt default, and market jitters ahead of Brazil’s presidential elections. These shocks resulted in reduced access to international capital, the depreciation of the real, higher inflation, an interruption to the declining trend of public debt and domestic interest rates, and lower growth renewing doubts about the sustainability of Brazil’s fiscal position.

48. In this context of an unusually adverse domestic and external environment, the Bank quickly prepared the First Programmatic Fiscal Reform Loan (PFRSAL I) as part of the IMF stand-by agreement signed in 1999 and renewed in 2001. The PFRSAL I was fully consistent and mutually reinforcing with the policy framework supported by the IMF stand-by agreement. The PFRSAL I supported reforms that strengthened the overall fiscal framework underlying the IMF program in several areas where the Bank has actively collaborated with the Government, in particular public debt management, sub-national fiscal discipline, public expenditure efficiency and fiscal risk management.

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49. Similarly, to provide technical assistance to further implement the reforms supported by the PFRSAL I, the FFMTAL was prepared in a fast track manner (3 months from concept note to approval). There was considerable urgency on the part of the Bank to follow-up PFRSAL I with funding to support PFRSAL I’s main policy areas: PPA, Debt Management and the LRF. Given the two years of previous Bank support, the rapid preparation did not adversely affect the Debt Management component. However, the short preparation period undercut initially the sense of ownership and deprived the team and counterparts of the sort of detailed component planning and development that would have been beneficial for the PPA and LRF components.

2.2 Implementation 50. A Project Implementation Team was funded from the loan including a coordinator and four technicians. It was located in the Ministry of Planning (MOP). In addition, the MOP and the National Treasury Secretariat (STN) at the Ministry of Finance (MOF) each had managers and staff dedicated part time to FFMTAL management. LRF and PPA were located in MOP and Debt Management and SIAFI 21 were STN responsibilities. The excellent performance by the Program Implementation Unit (PIU) was one of the key factors that the loan was launched and made progress in FFMTAL’s early years notwithstanding the awkwardness of it having to span two major ministries. However, the lack of continuity caused by a change in GoB rules regarding the hiring of consultants to do such work resulted in further delays. Fortunately, the new Implementation Team transitioned fairly smoothly into their responsibilities and managed the FFMTAL efficiently thereafter. 51. Disagreements over fee increases demanded by UNDP, the procurement agent, were also a cause of considerable delay contributing to the need for an extension as work was brought to a halt for over six months. It is noteworthy that neither the GoB nor the FFMTAL team was responsible for the delays caused by disagreements with UNDP and the latter’s decision to halt its activities related to the Project. 52. PPA was managed by SPI at MoP. Despite some early progress, the day-to-day responsibilities of orchestrating the PPA also absorbed SPI staff who were not willing or able to spend sufficient time on the component implementation. The first phase of the PPA implementation was dedicated to travel abroad to assess best practice cases on planning frameworks. Findings from these travels resulted in a Constitutional Amendment Proposal sent to the Congress reforming the budget cycle at the federal level. This proposal has not been approved by the Congress and proved to be far more difficult than anticipated. Also, for the duration of the loan, plans to overhaul SIG and SIGPLANS went through numerous changes and languished ultimately resulting in SERPRO’s contracting and the development of the Justice Department SIGPLAN prototype. Again, political and institutional impediments complicated this effort. Only in the latter half of the project when attention was dedicated more to the subcomponents of training and project evaluation were FFMTAL funds really used to good effect. 53. During its early stages, the LRF Component was located in the Office of the Economic Advisor (Assessoria Econômica) at MoP. Despite lack of detailed preparation, impressive training materials and an ambitious nation-wide program was put together and launched targeting first the states that had demonstrated the greatest compliance problems and that generally faced capacity challenges. In 2003, the responsibilities for the management of the Brazilian institutional framework to enforce fiscal discipline to lower levels of governments were transferred to the STN who centralized the oversight of the Programs of Fiscal Adjustment with states and municipalities and the enforcement of the Fiscal Responsibility Law. This centralization showed to be adequate given the enforcement power of the STN (power that the Office of the Economic Advisor lacks)

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to impose fiscal discipline to all Brazilian government entities. Indeed, STN was a much better home for the component owing to its oversight and support of states and municipalities. 54. However, in terms of the FFMTAL the transfer of this component to STN provoked some delays and the reorientation of the component. Training activities in the field were substituted by the use of publication of guidelines on fiscal accounting that were available on-line. Hence the development of training materials and software to assist municipalities to comply with LRF requirements was considered a success. 55. Differently, the LRF sub-component directed to the institutional strengthening of Tribunal de Contas dos Estados was not implemented. The LRF included the establishment of the Fiscal Management Council (Conselho de Gestão Fiscal), entity that under the LRF would be the responsible for the definition of accounting standards and would be formed by representatives of all three branches of Government, the Tribunais de Contas, the Ministérios Públicos, and technical entities of the society. In addition, the Tribunais de Contas dos Estados were the responsible for the oversight of the FRL reports produced by the state and municipal governments. Given the lack of regulatory legislation for the functioning of the Fiscal Management Council, the strengthening of the Tribunais de Contas dos Estados to define accounting rules and oversight its compliance lost importance. Furthermore, as the Brazilian government contracted a loan with the IADB (PROMOEX) directed to enhance the role of the Tribunais de Contas dos Estados as external control entities (not only the LRF oversight role), the federal government decided to remove this sub-component from the FFMTAL. 56. The Debt Management Component was the strongest and best managed component, having the advantage of 2 years of prior Bank assisted planning and preparation. Furthermore, the pending transfer of Debt Management from the Central Bank to STN was a strong incentive for STN to develop a framework and systems. The STN team managed the component professionally. The institutional strengthening of the back, middle and front offices and oversight was carried out successfully as the mid term review attested. Even more impressive was STN’s management of the SID project which grew to dominate the FFMTAL. In the end, the country will receive an integrated debt management software and capability that compares favorably with similar systems worldwide. The financial benefits of even small improvements in debt management could run to billions of dollars hence the importance of STN’s component management and the results produced are enormous. 57. The SIAFI 21 component activities supported by the FFMTAL consisted in the design of terms of reference for annual technical audits. The findings of these audits doubtless contributed to the halt of SIAFI 21. Hence, despite no funding or substantive role in SIAFI 21, the FFMTAL still played an important and possibly decisive role in the outcome.

2.3 Monitoring and Evaluation (M&E) Design, Implementation and Utilization 58. The M&E framework and its implementation were satisfactory. The project correctly focused primarily on outputs. Since the loan was a TAL, the desired outcomes—improving efficiency through procedural and systems reforms and saving money--were dependent upon first undertaking FFMTAL studies and institutional strengthening activities. Only with recommendations in hand could operationalization be contemplated at which point the political and institutional constraints associated with PPA, LRF and SIAFI21 reform would need also to be addressed. In fact, if there is a failure in the M&E framework it is that the Team did not

14

identify and take fully into account the political and institutional constraints associated to such broad reforms. This was doubtless exacerbated by the shortened preparation period.

a) PPA. Improvement of procedures and systems required FFMTAL funded research into good practices abroad plus needs assessment and training in project evaluation. Furthermore, introducing such reforms would have required huge investments in constituency building and legislative reform which was not contemplated by the loan. Likewise, SIG systems reform could not be unilaterally implemented by SPI nor could reform of SIGPLANs in ministries be done without agreement of ministries and MOP Departments. In the end, only one ministerial prototype SIGPLAN was developed and work on SIG was done by SERPRO, the Government’s IT agency. Achievement of M&E framework outputs and certainly outcomes were complicated both by the need to first undertake studies and capacity building and then by the politics of reform. The PPA system continues today in need of reform.

b) LRF. Dissemination and training was undertaken initially in numerous states based upon a needs analysis. However, as the LRF component was moved to STN, undergoing considerable readjustment and was refocused on municipalities.

c) Debt Management. With the FFMTAL study based determination that the SID system would be undertaken in-house the project was defined and assumed a form and cost decidedly greater and more complicated than had been originally expected. The work necessitated two extensions and is still not complete. The result will be a best case integrated debt management system but savings in debt management will be achieved only with the system fully operational. Hence, the FFMTAL studies resulted in delays in achieving major M&E framework outputs and outcomes, namely a functional SID and substantial savings. Debt management having been handed over to STN there were no political impediments to developing systems and improving procedures.

d) SIAFI 21. The Bank’s role in this component consisted exclusively in supporting the government in the definition of the terms of reference of the technical audits in which M&E outputs played a key role in correcting SIAFI21 problems and very possibly in halting its developing.

59. While the M&E framework did not quantify outcomes it is probably a tribute to loan preparation and the focus on outputs that both the Debt Management and the LRF components will contribute substantially to improved efficiency and cost savings and the SIAFI21 audits raised important red flags regarding system development. 60. The actual supervision of the operation making use of the M&E framework was also fully satisfactory. The Task Manager made frequent trips to Brazil to prepare and supervise not only FFMTAL but other loans and met with counterparts frequently to discuss project implementation. The documentation of mission results and pending activities to be carried out by Government officials responsible for each component was comprehensive. The PIU also provided spreadsheets detailing financial transactions on each mission. And a Bank specialist in debt management conducted a full mid-term review of the component.

2.4 Safeguard and Fiduciary Compliance 61. The implementation arrangements were done as described in the PAD: the ministries of Planning (MoP) and Finance (MoF) had an implementation unit. The MoP had a larger Project Coordination Unit, comprising financial management and procurement specialists, that

15

coordinated the MoP’s activities in the project, centralized the relationship with the procurement agency and was responsible for the project’s financial reports. This PCU at MoP was considered satisfactory to implement project activities and assure fiduciary compliance. The MoF had a small Project Coordination Unit to deal with issues related to the MoF’s dedicated project activities. 62. There were no serious problems with financial management or procurement. No significant deviations were found with respect to the Bank’s financial management, procurement and disbursement policies. The Controller ´s Office of Brazil Federal Government (Controladoria Geral da Uniao) conducted annual audits of project expenses and found no major issues. The periodic reports prepared by the implementation unit were satisfactory. In fact, the FM part was managed smoothly using the dedicated FFMTAL system developed to track and report expenditures. Furthermore, the task leader of the Debt Management project was also very involved in and knowledgeable regarding STN management of IFI projects and funding and facilitated transactions and fiduciary oversight. 63. Procurement post-review supervisions performed by the Bank and found procurement to be adequate. However, there were significant delays in disbursements, due to slow PPA implementation, changes in the subcomponents—especially the LRF following its transfer to STN - and delays in solving issues that arose regarding alterations in the contract with the procurement agency for this project (UNDP). 64. While there were many project delays these cannot be attributed to procurement problems. The PIU was trained in Bank procurement (and FM) and the first coordinator was experienced with Bank loans and had worked in SEAIN’s IFI oversight agency. The coordinators also maintained excellent relations with UNDP, the procurement agency. Furthermore, with the forced turnover in the PIU transitions arrangements proved very effective and the new Coordinator also capably managed both FM and procurement transactions and reporting. It is noteworthy that the Bank ably supported STN in its development of very complicated Terms of Reference and contracts for the development of SID systems, Brazil being one of the few countries in the world with such a sophisticated debt management systems.

2.5 Post-completion Operation/Next Phase 65. The main reason for the two extensions of the FFMTAL was the need to complete activities included in the Debt Management component. Given its importance and complexity, the enhancement of the debt management system is far from being completed and it continues to be a strategic objective of Brazilian government. Following loan closing, STN approached the Bank for funding to further refine and complete the SID module. In addition, there is a possibility of resuming SIAFI 21. The LRFs impressive consolidation and acceptance argues against further support. Difficulties associated with PPA strengthening and reform led to continuing efforts on behalf of the government and the Bank to work on this area. In the past year a set of non-lending technical activities have been developed to identify and address PPA problems.

3. Assessment of Outcomes

3.1 Relevance of Objectives, Design and Implementation 66. The objectives of the PFRSAL and consequently of the FFMTAL remain highly relevant to the current country priorities. Over the last few years, Brazil’s macroeconomic conditions and

16

fiscal stance have improved considerably. Moreover, some modern tools for fiscal and financial management supported by the FFMTAL are either in place or being developed by the Government. As a result of the incentives for fiscal responsibility put in place by the LRF and the Fiscal Adjustment Programs (Programa de Reestruturação e Ajuste Fiscal - PAF) and in light of increasing revenues, Brazil’s aggregate fiscal performance has greatly improved. Major advances have also been observed in the area of debt management and Brazil’s Federal Government is seen as having achieved world standards in this area. Its debt management system, to be fully operational in the near future, is also seen as one of the most complete in use by governments worldwide. 67. Nevertheless, Brazil still faces the challenge of how to better allocate resources and ensure efficiency of public expenditures, which may be partially associated with the weaknesses of the available tools and processes. Despite the efforts to refine and strengthen the multi-annual PPA expenditure framework and its monitoring system and initiatives to better integrate planning and budget there is still much to do. The same is true regarding the reform of the integrated financial management information system SIAFI-21. Finally, despite the improvements in imposing fiscal discipline through the LRF at lower levels of government there is still a full reform to improve information systems, standardize accounting rules and remove remaining vulnerabilities associated with high expenditure rigidities that put at risk the sustainability of their currently solvent financial situation. 68. The Bank and the Brazilian authorities have agreed that future Bank support should move away from policy based lending and place greater emphasis on supporting the country’s current priorities through technical assistance and lending at the state level. Nonetheless, it is important that the Federal Government continues to strengthen its fiscal and financial management and better integrate planning and budget, especially given the problems brought on by the crisis, in order to be able to improve the use of public resources and service delivery while ensuring fiscal stability.

3.2 Achievement of Project Development Objectives a. Achievement of the Project’s Broader Development Objective

69. In assisting the Government in establishing and modernizing fiscal and financial management tools for the implementation of the fiscal reform program, the FFMTAL objectives were partially achieved. It is important to recognize that even though significant progress has been made in the modernization of the Government’s fiscal and financial management tools, progress was uneven among the areas supported by the Project and more advances are needed in order to provide the public sector with superior management tools. Very significant progress has been made in Debt Management. Brazil has also experienced a significant progress on the adoption and enforcement of fiscal discipline institutional mechanisms through the consolidation of the LRF. Progress in upgrading the PPA and its supporting systems has not been satisfactory mainly due to relatively weak management and a failure to address external factors - political, institutional and fiscal constraints - that blocked an effective integration between planning and budgeting. Finally, there was no significant progress on the enhancement of the government financial system as the SIAFI 21 project has not been implemented. b. Achievement of the Project’s Specific Objectives

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70. (1) Refine and strengthen the federal multi-annual expenditure framework (the Plano Plurianual or PPA): Moderately Unsatisfactory. Although significant advances were made in capacity building and knowledge formation in the areas of planning and public sector management, little progress was made in actual integration of planning, budgeting and public expenditure management. Hence, modest progress was made in allocational and efficiency of public expenditures. Integration of planning, budget and management, and expenditure efficiency continue to be important issues that need to be addressed by the Brazilian Government. The Bank continues to be engaged with the Government in these areas, but advances occur at a slow pace given the complexity of the Brazilian planning and budgeting processes and the difficulties in building consensus among stakeholders. 71. To meet its objective of improving allocational and technical efficiency of expenditures and public sector service delivery to citizens, the project targeted four areas through separate sub-components. Several of the sub-components were only able to partially achieve their initial goals and their scope was also, to some extent, reduced. 72. Sub-component 1: Integration of planning and budgeting: Moderately Unsatisfactory. Its activities focused on the identification of best practices and on the development of proposals of procedures that could be adopted by the Brazilian public administration. This work contributed to knowledge formation in this area and contributed to a greater debate regarding the integration of planning and budgeting. This debate culminated in a proposed Complementary Law that would govern public finance in Brazil and integrate the planning, budgeting and management functions. However, this Law has not been approved. 73. Sub-component 2: Management information system: Moderately Unsatisfactory. This subcomponent sought to develop and implement management information systems for line ministries (InfraSIGs). A mapping of required functions for InfraSIGs and a pilot for the Ministry of Justice were implemented. In addition, a number of activities were planned but not carried out. Some of these activities were not executed afterwards, due to the policy change after the Government turnover in 2003. In addition, there were technical issues related to the system provider that delayed the process. Hence, the low execution (US$ 24,912.49) was due to the priority changes and delays in technical tasks. Overall, there was no relevant change in the quality and use of management information by the Federal Government. 74. Sub-component 3: Training to strengthen PPA implementation: Moderately Satisfactory. Its activities included training of federal and state government civil servants in the new PPA management model. It also aimed at training program managers and coordinators on PPA tools and provides M&E training for the line ministries' Units of Monitoring and Evaluation (UMAs). This area demonstrated better execution (US$ 90,481.79), mostly related to the training of 195 civil servants (131 federal employees and 54 states and municipal employees). These activities involved the development of training material and web-based course, workshops for competency mapping and managerial planning. Despite the training, the PPA methodology and SigPlan have been ineffective to solve management bottlenecks caused by lack of capacity, multi-sector loopholes and federative issues related to service decentralization. 75. Sub-Component 4: Evaluation and feedback loop: Moderately Satisfactory. This component was meant to support the Government in the improvement and institutionalization of its evaluation process so that feedback would be regularly received and fed into the budget formulation and execution processes. Although progress was made in the identification of international experiences, in the evaluation of costly projects, training and in the introduction of an institutionalized system for monitoring and evaluation (e.g. with the creation of the Comissão

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de Monitoramento e Avaliação do Plano Plurianual); the existing system for PPA evaluation and feedback cannot be considered good practice 2 and further improvements are needed. The evaluation results do not regularly lead to improvements in project formulation and feedback into the budget process. 76. (2) Upgrade federal debt management, including strengthening of institutions, systems and guidelines: Highly Satisfactory. This component intended to raise Brazilian debt management to world standards by modernizing the Front, Middle and Back offices in STN and strengthening coordination among the STN, the Central Bank and related Government agencies. Today, due to its sophistication and effectiveness, the Brazilian debt management system is considered an international benchmark. The Debt Management team at STN was the most engaged partner under this loan and, despite some delays in procurement (experienced by all components); this component has been deemed very successful. Unused amounts from other components were reallocated to this component to provide additional financing for the development of a debt management system. 77. Sub-component 1: Institutional and analytical framework: Highly Satisfactory. The travel abroad to know best practices on debt offices organization by STN staff, the work of specialists on the design of governance arrangements and the own Bank experience were extremely useful for the internal organization and decision structure of the Debt Management Office. Identification studies on the required capacities for an effective MO were also valuable for the functioning of the debt management unit at STN. Activities under this sub-component also contributed to the successful transfer of responsibilities on debt management and institutional arrangements between the Central Bank and the STN. 78. Sub-component 2: Information systems development: Highly Satisfactory. This sub-component was the most important f the FFMTAL. It consisted in the building up of the Public Debt Integrated System. The system contains ten integrated modules encompassing the different information systems of the Middle, Back and Front Offices as well as other areas of the STN such as budget and financial programming. Originally it was believed that an off-the-shelf system could be purchased, however, a diagnosis concluded that it would be more appropriate to develop a customized system. Despite most of the modules of the SID are concluded, the system is not fully operational yet, but the Government is truly committed to finishing its development in the next year with own resources. This system is already being considered as best practice and became the most important management tool of the debt unit at STN. 79. Sub-component 3: Training and dissemination: Satisfactory. Training activities and permanent interchange with universities made the Debt Unit at STN a center of excellence on debt management methodologies, risk management and other quantitative tools. The quality of the debt strategy reports, annual borrowing plans and other documents produced by the MO show the adequacy of the human resource policies directed to enhance capabilities at the debt management unit. 80. As a result of the institutional enhancement and capacity building activities, the performance of Brazilian government on debt management was impressive. The Brazilian authorities have taken advantage of the improvement of the macroeconomic scenario and have made substantial

2 See Matsuda et al. (2006), Management and Evaluation within the Plano Plurianual: Institutionalization without Impact?

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progress in the debt composition. Especially important have been the efforts of the authorities to reduce the extent of exchange and interest rate indexed debt and to increase duration and maturity. 81. The prudent asset-liability management adopted by the National Treasury in the last years strengthened the resilience of government accounts to adverse shocks. The impact of the recent international financial turmoil demonstrates the adequacy of the STN debt strategy. The exchange rate depreciation resulted in a strong reduction of the public sector net debt due to creditor position of the Brazilian public sector. This positive effect on indebtedness is the pay-off of the debt management strategy adopted since 2003 aimed at reducing the exposure to exchange rate shocks and the accumulation of international reserves. The change in debt composition has shifted the elasticity of the effect of exchange rate depreciation from a positive elasticity of 0.3 in 2003 (a one-percent devaluation provoked a 0.3 percent increase in public debt) to a -0.13 in 2008 (now a one-percent devaluation reduces debt by 0.13). As a result, the accumulated depreciation of 25 percent since September resulted in a reduction of 3.5 percentage points in net debt that fell from 40.5 percent of GDP in September 2008 to 37 percent of GDP in March 2009. 82. Part of the achievements can be explained by the advances observed in federal debt management that was directly supported by the FFMTAL. Several activities under the government’s debt management institutional reform agenda were supported by this operation. Steady and considerable progress has been achieved in building STN’s debt management capacities. The strengthening of the middle, front and back offices, the regular release of high quality reports on the debt portfolio and STN operations, the publication of Annual Borrowing Plans, and the upgrade of information technology systems were the most important accomplishments that the Bank supported through PFRSAL and FFMTAL. 83. (3) Implement the Fiscal Responsibility Law (LRF) and companion legislation: Satisfactory. The activities financed by the loan (especially the training and dissemination) were key in the implementation of the institutional framework for sub-national fiscal discipline. This doubtless contributed to the successful implementation of the Fiscal Responsibility Law and companion legislation. The achievement of this objective was seen as being dependent upon completion of work in two key areas: (i) training and dissemination for key audiences throughout Brazil, and (ii) institutional strengthening for key government agencies and especially the Tribunais de Contas (state based court of accounts). 84. Sub-component 1: Training and Dissemination: Satisfactory. In the early stages, an ambitious program of training and dissemination was successfully implemented by the Office of the Economic Advisor at MoP. The training, dissemination and assistance to subnational governments, contributed to the good fiscal performance of subnational governments in terms of the quality of the fiscal information they have been obligated to provide. As anticipated by this component, the federal government started to provide technical support as required by the different units of governments through a system of electronic registration. As a result of the continuous technical support, the period of lag in dissemination has been reduced substantially in the last years and the number of units that are sending their reports in line with the LRF norms has continuously increased. Overall, the training and dissemination activities supported by the FFMTAL may be seen as having significantly supported the implementation of the Fiscal Responsibility Law and companion legislation. 85. Sub-component 2: Institutional strengthening: Moderately satisfactory. The transfer of responsibilities to the STN reoriented the sub-component corresponding to the for government agencies dealing with the oversight of LRF. Actually, this component has not been implemented as the Fiscal Management Council has not been fully operationalized and the government decided

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to use other technical assistance loan for the strengthening of the Tribunais de Conta dos Estados. Nonetheless, the STN has been able to guarantee the adoption of accounting rules set in the LRF Guidelines by states and municipalities. In addition, important progress was made in improving the nation-wide website for posting Fiscal Responsibility Law indicators. 86. The consolidation of the institutional framework for fiscal discipline at subnational government levels guaranteed the adoption of prudent fiscal stances by states and municipalities that accompanied the fiscal adjustment effort of the federal government. The strict observance of the debt renegotiation contracts and the LRF resulted in a significant improvement in state governments’ fiscal performance. The effects are shown in Figure 1, which illustrates the evolution of the states’ and municipalities’ primary surplus during the period 1998-2009 (March). The increasing primary balances obtained by subnational governments represented a contribution of about 25 percent to the total public sector fiscal adjustment effort (public sector primary surplus from 2000 to 2008 was about 4 percent of GDP).

87. The prudent fiscal stance adopted by both states and municipalities, combined with improved revenue growth performance, resulted in a significant decline in subnational indebtedness. Net consolidated debt to net current revenue of Brazilian state governments decreased from 1.95 in 2001 to 1.14 in 2008. At the individual level, all 27 states reduced their indebtedness. In 2001 there were 8 state governments above the LRF indebtedness limit, while in 2008 there is only 1 state above this legal ceiling. 88. Further improvements would be feasible through the functioning of the Fiscal Management Council (Conselho de Gestão Fiscal) which, as required by the LRF should develop a set of uniform standards for the elaboration of the subnational Budgetary Guidelines (LDOs). As mentioned above, operational problems and mainly the lack of a representation mechanism for the 5,500 municipalities, delayed the operationalization of the Fiscal Management Council. Currently, the government is trying to redefine the organizational and representational structure of the Council. In the meantime, as determined by the LRF, the National Treasury continues to be the responsible for the definition of accounting rules. 89. (4) Upgrade the core SIAFI federal financial management information system, the SIAFI 21 project: Unsatisfactory. This component was meant to support the modernization of the government’s core financial management system (SIAFI) and was to be fully financed by the government, according to the latter’s decision during project preparation. As a result of the negotiations with the MoF, the Bank included a covenant in the Legal Agreement requiring a technology audit to be done annually as a means of providing an outside, objective evaluation of project management by SERPRO which has the contract for upgrading SIAFI. The component’s immediate objective was therefore to monitor the project to verify if system development would be upgraded according to industry standards. These audits uncovered significant problems in the conduct of SIAFI 21 which contributed to corrections. The SIAFI 21 project has been halted and, therefore, the financial ma

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