Document of

The World Bank

FOR OFFICIAL USE ONLY

Report No: RES17831

RESTRUCTURING PAPER

ON A

PROPOSED PROJECT RESTRUCTURING

OF

SÃO PAULO SUSTAINABLE RURAL DEVELOPMENT AND ACCESS TO MARKETS PROJECT

LOAN 7908-BR

APPROVED ON MAY 25, 2010

TO THE

STATE OF SÃO PAULO

WITH THE GUARANTEE OF THE FEDERATIVE REPUBLIC OF BRAZIL

SEPTEMBER 15, 2015

AGRICULTURE GLOBAL PRACTICE LATIN AMERICA AND THE CARIBBEAN REGION

This document has a restricted distribution and may be used by recipients only in the performance of their official duties. Its contents may not otherwise be disclosed without World Bank authorization.

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ABBREVIATIONS AND ACRONYMS

APP Permanent Conservation Areas (Areas de Preservação Permanente) CAP PES Program of São Paulo (Crédito Ambiental Paulista) CAR Rural Environmental Cadastre (Cadastro Ambiental Rural) CATI Rural Extension Directorate of the State of São Paulo (Coordenadoria de

Assistência Técnica Integral) CBRN Directorate of Biodiversity and Natural Resources (Coordenadoria de

Biodiversidade e Recursos Naturais) COFIEX External Financing Committee of SEAIN (Comissão de Financiamentos

Externos) FM Financial Management GTEC Technical Group of SEAIN/COFIEX (Grupo Técnico) IBRD International Bank for Reconstruction and Development IPM Integrated Pest Management IPPF Indigenous Peoples Planning Framework PDO Project Development Objective PEMC State Policy on Climate Change (Política Estadual de Mudanças

Climáticas) PES Payment for Environmental Services RL Legal Reserve (Reserva Legal) RPF Resettlement Policy Framework RPPN Private Nature Reserve (Reserva Privada de Patrimonio Natural) SAA State Secretariat of Agriculture and Supplies (Secretaria Estadual de

Agricultura e Abastecimento) SEAIN Secretariat of International Affairs of the Ministry of Planning (Secretaria

de Assuntos Internacionais) SIL Specific Investment Loan SMA State Secretariat of Environment (Secretaria Estadual do Meio Ambiente)

Regional Vice President: Jorge Familiar Country Director: Martin Raiser

Senior Global Practice Director: Juergen Voegele Practice Manager/Manager: Laurent Msellati

Task Team Leader: Marianne Grosclaude

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BRAZIL SÃO PAULO SUSTAINABLE RURAL DEVELOPMENT AND ACCESS TO

MARKETS PROJECT

CONTENTS

A. SUMMARY 10 B. PROJECT STATUS 10 C. PROPOSED CHANGES 12 D. APPRAISAL SUMMARY 15 ANNEX 1: RESULTS FRAMEWORK AND MONITORING 18

4

DATA SHEET

BRAZIL

SÃO PAULO SUSTAINABLE RURAL DEVELOPMENT AND ACCESS TO MARKETS (P108443)

LATIN AMERICA AND CARIBBEAN

Agriculture .

Report No: RES17831 .

Basic Information

Project ID: P108443 Lending Instrument: Specific Investment Loan

Regional Vice President: Jorge Familiar Original EA Category: Partial Assessment (B)

Country Director: Martin Raiser Current EA Category: Partial Assessment (B)

Senior Global Practice Director:

Juergen Voegele Original Approval Date: 25-May-2010

Practice Manager/Manager:

Laurent Msellati Current Closing Date: 30-Sep-2015

Team Leader(s): Marianne Grosclaude .

Borrower: State of Sao Paulo

Responsible Agency:

State Secretariat of Agriculture and Supplies (SAA), State Secretariat of Environment (SMA)

.

Restructuring Type

Form Type: Full Restructuring Paper Decision Authority: Board Approval

Restructuring Level:

Level 1

.

Financing ( as of 10-Sep-2015 )

Key Dates

Project Ln/Cr/TF Status Approval Date

Signing Date Effectiveness Date

Original Closing Date

Revised Closing Date

P108443 IBRD-79080 Effective 25-May-2010 27-Sep-2010 22-Dec-2010 30-Sep-2015 30-Sep-2015

Disbursements (in Millions)

Project Ln/Cr/TF Status Currency Original Revised Cancelled

Disbursed

Undisbursed

% Disbursed

P108443 IBRD-79080 Effective USD 78.00 78.00 0.00 24.82 53.18 32.

Policy Waivers

Does the project depart from the CAS/CPF in content or in other significant respects?

Yes [ ] No [ X ]

5

Does the project require any policy waiver(s)? Yes [ ] No [ X ] .

A. Summary of Proposed Changes

The main changes that are being proposed include: (a) an adjustment of the PDO to better reflect the focus of the Project, (b) adjustments to the Results Framework, (c) changes to activities under Component 2 to reflect national and State policy changes since appraisal and to support the State Government's response to the ongoing drought; and (d) an extension of the loan closing date from September 30, 2015 to September 30, 2017.

Change in Implementing Agency Yes [ ] No [ X ]

Change in Project's Development Objectives Yes [ X ] No [ ]

Change in Results Framework Yes [ X ] No [ ]

Change in Safeguard Policies Triggered Yes [ ] No [ X ]

Change of EA category Yes [ ] No [ X ]

Other Changes to Safeguards Yes [ ] No [ X ]

Change in Legal Covenants Yes [ ] No [ X ]

Change in Loan Closing Date(s) Yes [ X ] No [ ]

Cancellations Proposed Yes [ ] No [ X ]

Change to Financing Plan Yes [ ] No [ X ]

Change in Disbursement Arrangements Yes [ ] No [ X ]

Reallocation between Disbursement Categories Yes [ ] No [ X ]

Change in Disbursement Estimates Yes [ X ] No [ ]

Change to Components and Cost Yes [ X ] No [ ]

Change in Institutional Arrangements Yes [ ] No [ X ]

Change in Financial Management Yes [ ] No [ X ]

Change in Procurement Yes [ ] No [ X ]

Change in Implementation Schedule Yes [ X ] No [ ]

Other Change(s) Yes [ ] No [ X ]

Appraisal Summary Change in Economic and Financial Analysis Yes [ X ] No [ ]

Appraisal Summary Change in Technical Analysis Yes [ X ] No [ ]

Appraisal Summary Change in Social Analysis Yes [ ] No [ X ]

Appraisal Summary Change in Environmental Analysis Yes [ ] No [ X ]

Appraisal Summary Change in Risk Assessment Yes [ X ] No [ ] .

B. Project Status

Project implementation progress is currently rated moderately satisfactory. After substantial delays in the first two years of project implementation, progress has picked up following the mid-term review (MTR)which took place in December 2013. An Action Plan which was agreed upon at the MTR, to accelerate implementation and disbursements, was successfully executed by the Project implementation agencies (State Secretariat of Agriculture and Supplies - SAA and State Secretariat of Environment - SMA). As a result, the loan disbursement rate has increased from 7% in January 2014 to 32% as of September 2015. Under

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Component 1 (Supporting Small Farmers' Business Initiatives), 215 business proposals from rural producers' organizations have been approved (72% of the original target) benefiting approximately 6,000 rural families. Under Component 2, agreements have been signed with 29 municipalities for the rehabilitation and maintenance of critical segments of rural roads, and an improved system for the management of rural roads is being piloted in five municipalities. Furthermore, 24 environmental subprojects have been approved, benefiting over 600 families, and the State program of Payment for Environmental Services (PES) is under implementation. With the proposed two-year extension of the Project closing date, the revised Project Development Objective would be achievable. .

C. Proposed Changes .

Development Objectives/Results

Project Development Objectives

Original PDO

The project development objective is to support the Borrower to increase the competitiveness of family agriculture in its territory while improving its environmental sustainability.

Change in Project's Development Objectives

Explanation

The first part of the PDO would be adjusted to clarify that, in the context of the Project, the focus is on improving access to markets for rural producers, through their organizations. The second part of the PDO would also be adjusted to reflect the focus of the Project which is at the level of environmental policies and instruments.

Proposed New PDO

The project development objective is to support the Borrower in improving access to markets for rural producers’ organizations in its territory and in improving its instruments and policies that contribute to environmental sustainability of family agriculture.

Change in Results Framework

Explanation:

The results framework would be modified to reflect more accurately the revised PDO and the revised activities under Component 2. A new PDO indicator would be introduced to reflect the Project's focus on environmental policies and instruments affecting family agriculture. It would replace the original indicator on environmental sustainability which would be dropped as it no longer reflects Project activities. Some of the intermediate results indicators would be dropped when activities have been canceled (such as the online agribusiness center), and new ones would be introduced to monitor more accurately the results of the core activities under Component 2. Furthermore, some targets would be adjusted based on the experience with implementation so far. Finally a core indicator on the number of direct project beneficiaries, would be introduced. .

Financing

Change in Loan Closing Date(s)

Explanation:

The loan closing date would be extended by 24 months from September 30, 2015, to September 30, 2017. The proposed extension would compensate for the delays in the initial two years of implementation and would enable the Project to meet its revised development objective and the related targets. The extended implementation period would also enable the completion of the following activities: (a) the implementation

7

of the additional round of small farmers’ business initiatives which have been selected through the last call for proposals in 2015; (b) the development of the State’s Rural Environmental Cadastre (Cadastro Ambiental Rural, CAR) to enable farmers to complete their registration in compliance with the new Forest Code (Law 12.651/2012); and (c) the scaling-up of the State’ s new Payment for Environmental Services (PES) program, which focuses on the protection of hydrological resources in response to the unprecedented and prolonged drought affecting the State of São Paulo since 2014.

Ln/Cr/TF

Status Original Closing Date

Current Closing Date

Proposed Closing Date

Previous Closing Date(s)

IBRD-79080

Effective 30-Sep-2015 30-Sep-2015 30-Sep-2017 30-Sep-2015

Disbursement Estimates

Change in Disbursement Estimates

Explanation:

The adjusted disbursement estimates reflect actual disbursements in the first four years of Project implementation and the projected estimates for the proposed two year extension of the Project closing date until September 30, 2017. The projected estimates are based, in particular, on an analysis of the resources already committed under the selected farmers' business initiatives under Component 1 and the agreements signed with municipalities under Subcomponent 2.2 for the rehabilitation of rural roads.

Fiscal Year Current (USD) Proposed (USD)

2010 0.00 0.00

2011 12,000,000.00 0.00

2012 15,000,000.00 1.00

2013 15,000,000.00 3.00

2014 16,000,000.00 5.00

2015 16,000,000.00 16.00

2016 4,000,000.00 21.00

2017 0.00 21.00

2018 0.00 11.00

Total 78,000,000.00 78.00.

Components

Change to Components and Cost

Explanation:

While there is no change in the components of the Project, an amount of US$1.795 million would be reallocated from Component 1 to Component 2 to support additional work on policy frameworks (including the Agricultural Census for the State of São Paulo, which will provide the data necessary to monitor and evaluate sector policies).

Current Component Name

Proposed Component Name

Current Cost (US$M)

Proposed Cost (US$M)

Action

Supporting small farmers' business initiatives 59.00 57.20 Revised

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Strengthening Institutional and Physical Infrastructure

62.50 64.30 Revised

Project Management 8.50 8.50 No Change

Total: 130.00 130.00 .

Other Change(s)

Change in Implementation Schedule

Explanation:

The proposed extension of the loan closing date by 24 month from September 30, 2015 to September 30, 2017, would enable the completion of the Project's original activities, compensating for the time lost in the first two years of implementation. It would also enable the completion of the revised activities under Component 2. .

Appraisal Summary

Appraisal Summary Change in Economic and Financial Analysis

Explanation:

An updated economic and financial analysis was carried out in May 2015, with a focus on the first Component of the Project for which results can already be measured. The analysis focused on subprojects whose execution has been completed and for which actual costs and benefits data are available. A sample of 15 randomly selected subprojects (business initiatives) were analyzed. For the sample selected, the analysis found that the average financial rate of returns (IRR) is 53% and the average economic rate of return (ERR)is 66%. The average NPV for a producer benefiting from those investments was R$175,536 (financial) and R$193,398 (economic). These strong economic results can be attributed to the rigorous selection process applied by the implementing agency, as well as the quality of the training and technical support provided toProject beneficiaries.

Appraisal Summary Change in Technical Analysis

Explanation:

The technical analysis carried out at the time of Project appraisal remains valid. The Project offers a comprehensive response to small producer's market access constraints through technical assistance and training, financing for business initiatives aiming at improving market access, rural roads rehabilitation and maintenance, and complementary value-chain studies to identify critical bottlenecks. The main adjustment to the technical analysis relates to the mix of instruments provided to enhance the environmental sustainability of family agriculture in the State of São Paulo. Under Component 2, the Project would support small producers' registration into the CAR, which was introduced under the new Forest Code in 2012. The Project successfully supported SMA in the design and piloting of the first PES program of the State of São Paulo, and it would continue to support the development, implementation and evaluation of the program as it is scaled-up in response to the prolonged drought that has been affecting São Paulo since 2014.

Appraisal Summary Change in Risk Assessment

Explanation:

Overall Project risk remains assessed as Moderate. The macroeconomic risk has increased to Substantial, considering the current macroeconomic situation at Federal and State level, which might affect the availability of counterpart financing. This risk will be mitigated through regular monitoring of the counterpart financing situation and though the related dialogue with the State Government. .

9

Systematic Operations Risk-Rating Tool (SORT)

Risk Category Rating

1. Political and Governance Moderate

2. Macroeconomic Substantial

3. Sector Strategies and Policies Low

4. Technical Design of Project or Program Moderate

5. Institutional Capacity for Implementation and Sustainability Moderate

6. Fiduciary Moderate

7. Environment and Social Low

8. Stakeholders Low

9. Other Low

OVERALL Moderate

10

BRAZIL SÃO PAULO SUSTAINABLE RURAL DEVELOPMENT AND ACCESS TO

MARKETS PROJECT A. SUMMARY

1. This Project Paper seeks the approval of the Executive Directors for the restructuring

of the Brazil São Paulo Sustainable Rural Development and Access to Markets Project (P108443; Loan 7908-BR). The proposed restructuring would: (a) improve the Project’s implementation performance by clarifying its development objective and adjusting its Results Framework; (b) strengthen the alignment of the Project with the State Government’s policy priorities, thereby increasing its relevance in view of policy developments since the appraisal of the Project; and (c) support the State Government’s response to the prolonged drought which has been affecting the State since 2014.

2. The proposed restructuring would include: (a) adjustments to the Project Development Objective (PDO) and to the Results Framework; (b) adjustments to activities under Component 2 (Strengthening Institutional and Physical Infrastructure); (c) an extension of the closing date of the Project from September 30, 2015 to September 30, 2017, to enable the completion of the restructured activities and the achievement of the revised PDO.

3. There are no changes to the Project’s safeguards category (B) and no new safeguards

policies are triggered. B. PROJECT STATUS

4. Original Loan. The original loan amount of US$ 78 million was approved by the Board of Executive Directors on May 25, 2010, and became effective on December 22, 2010. The total Project cost is estimated at US$ 130 million. The Project was designed as a five year Specific Investment Loan (SIL) with an original closing date of September 30, 2015. The development objective of the Project is to support the Borrower to increase the competitiveness of family agriculture in its territory while improving environmental sustainability.

5. The Project consists of the following three components and five subcomponents:

Component 1: Supporting Small Farmers’ Business Initiatives (US$37.6 million IBRD financing). This component provides support to business initiatives undertaken by small farmers’ organizations. Subcomponent 1.1 provides matching grants to eligible organizations for sustainable business investments that increase small farmers’ competitiveness while improving agricultural practices. Subcomponent 1.2 aims at strengthening producers’ organizations in targeted municipalities and micro-catchments through information and training programs, as well as providing technical assistance for the preparation and implementation of the business proposals to be funded under Subcomponent 1.1.

11

Component 2: Strengthening Institutional and Physical Infrastructure (US$36.3 million IBRD financing). This component provides support to the Borrower’s functions that are critical to the competitiveness and sustainability of family farming in its territory through investments in: (a) monitoring policy frameworks, markets and rural extension (Subcomponent 2.1); (b) rehabilitating and maintaining municipal roads in the Borrower’s territory to help facilitate small farmers’ physical access to markets (Subcomponent 2.2); and (c) promoting environmental sustainability through the mainstreaming of improved environmental practices in rural production systems to ensure the sustainability of the productive resource base (land and water).

Component 3: Project Management (US$3.9 million IBRD financing). This component provides support to the Borrower to efficiently and effectively implement, administer, supervise and coordinate all the activities carried out under the Project.

6. Overall coordination of Project management and implementation is the responsibility

of the Rural Extension Directorate (Coordenadoria de Assistência Técnica Integral, CATI) of the State Secretariat of Agriculture and Supplies (Secretaria Estadual de Agricultura e Abastecimento, SAA). Subcomponent 2.3 (Environmental Sustainability) is the responsibility of the Directorate of Biodiversity and Natural Resources (Coordenadoria de Biodiversidade e Recursos Naturais, CBRN) of the State Secretariat of Environment (Secretaria Estadual do Meio Ambiente, SMA).

7. Implementation Status. Project implementation progress is considered as moderately satisfactory, which reflects the delays experienced during the initial two years of implementation and the acceptable progress achieved since 2014. The main cause of the original delays was the need for a re-approval of the legal instruments to implement the Project following the change of Government in early 2011. The Decree creating the line of financing for small farmers under Component 1 of the Project (Decree no. 58.211) had to be renegotiated after the change of Government and was only signed and published on July 12, 2012, or 18 months after effectiveness. Similarly, the Decree authorizing the implementation of the Environment Subprojects under Component 2 of the Project was only approved and published on June 5, 2013 (Decree no. 59.262). Since then, there has been significant progress and the action plan elaborated after the December 2013 mid-term review to accelerate implementation and disbursements has been fully implemented. Under Component 1, five calls for business proposals from small farmers’ organizations have been launched and 215 productive subprojects are being implemented (72 percent of the Project’s original target); preparatory work has been carried out to rehabilitate and upgrade rural roads in 29 municipalities; and the State’s first program of PES has been developed and piloted. The overall loan disbursement rate has increased significantly from 7% in January 2014 to 32% as of September 2015.

8. Overall safeguards performance is considered satisfactory. The Project is in

compliance with its legal covenants.

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C. PROPOSED CHANGES

9. Rationale for the restructuring. The proposed restructuring would increase the Project’s relevance by ensuring that it responds to the revised priorities of the State of São Paulo, such as the registration of rural producers in the Rural Environmental Cadastre (CAR) following the approval of the new Forest Code in 2012 (Law no. 12.651/2012), while also supporting the State’s response to the prolonged drought which has been affecting the Southeast Region of Brazil since 2014. Furthermore, the proposed restructuring aims at improving the performance of the Project by clarifying its development objective, adjusting activities based on the lessons of implementation to date, and adjusting the Project’s Results Framework accordingly.

10. Project Development Objective. The original PDO is broadly formulated as compared

to the Project’s actual focus and activities, which makes results difficult to measure and attribute to the Project. The PDO would be adjusted as follows:

“The objective of the Project is to support the Borrower in improving access to markets for rural producers’ organizations in its territory and in improving its instruments and policies that contribute to environmental sustainability of family agriculture.”

11. Results Framework. The PDO indicator for environmental sustainability would be replaced with a new indicator to better reflect the focus of the Project which is at the policy and institutional level. The proposed new PDO indicator is: “Number of environmental instruments and policies developed and implemented, measured by (i) Cadastro Ambiental Rural (CAR) improved and made available to rural producers, and (ii) PES programs developed and adopted by rural producers”. Similarly, several intermediate indicators would be modified to better reflect the Project’s focus and core activities (see Annex 1). Finally, core sector indicators, such as the number of direct beneficiaries, would be introduced.

12. Components. There would be no change to the overall Project structure. Changes to

the original Project design relate to activities under Component 2, as follows:

13. Subcomponent 2.1. As part of its support for the monitoring of policy frameworks, the Project would finance an Agricultural Census for the State of São Paulo, covering all agricultural production units in the 645 municipalities of the State. The Census will provide the data necessary to support the monitoring and evaluation of sector policies by SAA. The activity consisting of setting-up of an online agribusiness information center would be canceled, as it was found that a more efficient option would be for CATI to use the information already available from other institutions.

14. Subcomponent 2.2. The activity consisting of supporting units of production of small

paving materials in municipalities would be canceled as the subcomponent would be refocused on its other activities (i.e. support to municipalities for rural roads rehabilitation and maintenance), which are better aligned with the mandate of CATI.

15. Subcomponent 2.3. The Project promotes environmental sustainability through, inter

alia, the implementation of the State Government’s environmental compliance system

13

in rural areas. Following the adoption of the new national Forest Code in 2012 (Law no. 12.651/2012), the Project would support the development of the Rural Environmental Cadastre (Cadastro Ambiental Rural, CAR). This activity would contribute both to the environmental objective of the Project (supporting family farmers in complying with environmental regulations) and to its economic objective, as farmers would lose access to credit and to Government programs if they are not registered in the CAR. The Project has successfully supported SMA in the design and piloting of the first Payment for Environmental Services (PES) program at State level (see Box 1), and it would increase its support for the implementation and evaluation of the PES program as it is scaled-up in response to the prolonged drought affecting São Paulo.

Box 1 – São Paulo’s Payment for Environmental Services Program (PES)

The Project is supporting SMA’s efforts to use PES as an important policy tool to achieve its objectives, complementing traditional tools such as the Forest Law. These efforts build on earlier support provided under the Ecosystem Restoration of Riparian Forests in Sao Paulo Project (Mata Ciliares, P088009).

Legal basis. In November 2009, the Legislative Assembly adopted the State Policy on Climate Change (Política Estadual de Mudanças Climáticas, PEMC; Law 13798). Article 23 of the law provides for the use of PES to implement a new policy on forest remnants. Decree 55947 was issued in June 2010, specifying the regulations for implementation of PEMC. Section VII of the decree establishes the Forest Remnants Program, to be administered by SMA, and Articles 63-67 institute a PES program aimed at preserving and regenerating native forests.

PES programs. Under the authority provided by PEMC and with the support of the Project, SMA has developed a series of PES programs targeting specific conservation issues, beginning with the Mina d’Água program in 2010. In 2013, the São Paulo Environmental Credit (Crédito Ambiental Paulista, CAP) program was launched as an umbrella program for all PES programs.

Mina d’Água. The Mina d’Água program, established under resolution SMA-61 of 2010, was the first PES pilot. It focused on conservation of forest fragments protecting springs. Participating landholders are paid to maintain or restore forest cover around springs, with payments based on a formula that considers the degree of conservation, the importance of the spring and local conditions. Mina d’Água worked through 21 prefeituras, one from each water resource management unit.

CAP-RPPN. The CAP-RPPN focuses on improving conservation within private nature reserves (Reserva Privada de Patrimonio Natural, RPPN). The program offers payments for implementation of a variety of conservation activities, based on a diagnostic of threats. The program is being implemented in the field by the state Forest Foundation (Fundação Forestal). The rules for CAP-RPPN were adopted under Resolution SMA-89 of 18 September 2013.

CAP-Mata Ciliares. The CAP-Mata Ciliares program aims at restoring degraded riparian corridors through natural regeneration, thus improving hydrological services while helping small landholders meet their obligations under the Forest Law. The payments offered are based on the estimated cost of fencing (so that natural regeneration can take hold) and on the opportunity cost of removing the enrolled area from agricultural production. The program was originally intended to be statewide, but due to the drought it has been refocused on the watersheds that provide water to the city of São Paulo: the PCJ (Cantareira), Alto Tietê, and Paraiba do Sul (Jaguarí) watersheds.

Impact evaluation. The Project is also supporting efforts to carry out rigorous impact evaluations of the PES programs.

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16. Extension of the Loan Closing Date. The proposed restructuring would include a two-year extension of the loan closing date from September 30, 2015 to September 30, 2017. This extension would enable SAA/CATI to finance another round of business investment proposals from small producers following the launch of an additional call for proposals under Component 1 in 2015, thereby reaching the Project’s objectives in terms of number of direct beneficiaries, and compensating for the call for proposals which did not take place in calendar year 2012. The proposed closing date extension would also enable the completion of the revised activities under Component 2, including the support for the Agricultural Census, the implementation of the Rural Environmental Cadastre and the scaling-up and evaluation of the PES program. The overall Project implementation schedule would be updated to reflect the extended implementation period.

17. Financing. The Project’s costs would be adjusted to account for the revised activities

under Component 2, as summarized in Table 2 below. There would be no reallocation of loan proceeds between categories of expenditures.

Table 2: Revised Project Costs (IBRD)

Project Costs (US$m.) Components/Activities Current Proposed

Component 1 Supporting small Farmers’ Business Initiatives 1.1 Implementing Small Business Investments 1.2 Strengthening Producers’ Organizations Component 2 Strengthening Institutional and Physical Infrastructure 2.1 Policy Frameworks and Rural Extension 2.2 Rural Infrastructure (Municipalities) 2.3 Environmental Sustainability (SMA) Component 3 Project Management Front-end Fee

Total Project Costs

37.60

32.00 5.60

36.305 9.50

14.805 12.00

3.90

0.195

78.00

36.00

32.00 4.00

38.10 11.295 14.805 12.00

3.90

0.195

78.00

18. Disbursement estimates. The disbursement estimates have been updated to reflect the

revised implementation schedule, as presented in the Restructuring Paper datasheet. 19. Government’s request. The State Government’s request for restructuring and extension

of the loan closing date was received by the Bank on June 19, 2014. The request was approved by SEAIN/COFIEX on March 18, 2015, through its Recommendation no. 01/0259 GTEC/COFIEX, and subsequently through the complementary Recommendation no. 01/0262 GTEC/COFIEX of June 24, 2015.

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D. APPRAISAL SUMMARY 20. Economic and financial analysis. The original economic and financial analysis of the

Project carried out at appraisal focused on the economic viability of potential subprojects to be financed under Component 1, using a sample of farm models. In May 2015, an economic and financial analysis of a randomly selected sample of 15 subprojects executed under the Project was carried out. The analysis focused on subprojects whose execution has been completed and for which actual costs and benefits data are available. The analysis found that the average financial rate of return (IRR) of those investments is 53% and the average economic rate of return (ERR) is 66%. The average NPV for a producer benefiting from those investments was R$175,536 (financial) and R$193,398 (economic). These strong economic results can be attributed to the rigorous selection process applied by the implementing agency, as well as the quality of the training and technical support provided to Project beneficiaries. Benefits were derived from better access to markets through the purchase of packaging and transport equipment by producer organizations, lower post-production losses, improved product quality resulting in higher prices for producers, and lower production costs. In addition, the fiscal analysis found that incremental fiscal revenues generated under the Project averaged R$4,330 per beneficiary in the first year, and R$509 in subsequent years.

21. Technical. Under Component 1, the Project would continue to combine the provision

of training and technical assistance for small rural producers with the provision of financing in the form of grants, thereby addressing the two main constraints to the development of market-oriented business initiatives for rural producers’ organizations. During implementation, the following adjustments to the technical approach selected at appraisal have been made based on lessons learned from early Project implementation: (a) subprojects are demand-driven and, in practice, generally focused “beyond the farm-gate” rather than on-farm, and the Project has therefore a lesser focus on agricultural production systems and a greater focus on market access. Nevertheless, technical assistance continues to be provided to beneficiaries for the preparation of their on-farm development plans and all subprojects are screened for compliance with the Project’s Environment Management Framework (EMF); and (b) the Project focuses on strengthening existing producer organizations rather than setting up new organizations, which would require a much longer time frame.

22. Under Component 2, the Rural Infrastructure Subcomponent (2.2) would continue to

finance rural road rehabilitation and maintenance in priority areas of participating municipalities, while the development of the rural roads network management system is progressing in parallel. With regard to Subcomponent 2.3 (Environmental Sustainability), activities would be aligned with State priorities associated with the national Forest Code approved in 2012 and regulated in 2014. This includes support for the strengthening of the State’s Rural Environmental Cadastre (CAR) and support for the implementation of the CAR in the case of small farmers. The Project has also increased its focus on Environmental Subprojects supporting sustainable agro-forestry activities in small rural properties, contributing to the increased compliance among small farms through rehabilitation of Areas de Preservação Permanente and Reserva Legal (APP and RL), while providing income generating opportunities to small

16

producers. Finally, in order to support the State Government’s medium-term response to the prolonged drought which has been affecting the State since 2014, the Project would continue to scale-up the PES program. The PES program is one of the instruments developed by SMA to promote the provision of ecosystem services in agriculture production areas, including increasing resilience to drought through improved water and landscape management (see Box 1). The State Government has also requested financing for the PES program implementation by using the loan proceeds. Subject to the approval of this proposal by the Federal Government, such financing could be introduced through a second restructuring of the Project. This would entail reallocating some of the loan proceeds allocated to Subcomponent 2.3 to a new category of expenditure to finance the PES payments to environmental services providers.

23. Fiduciary. Financial management (FM) capacity continues to be assessed as moderately satisfactory, reflecting the need to have the Project’s updated financial monitoring system in place, which is expected by the end of calendar year 2015 (subject to the proposed closing date extension). The Project Management Unit is well staffed with professionals experienced in working with Bank-financed operations. The internal control environment is strong and the State Government has satisfactory accounting arrangements and adequate financial management systems. There are no overdue audit reports. There would be no change in the Project’s fund flows under the proposed restructuring. Procurement management capacity is considered satisfactory. There would be no changes to the procurement arrangements either under the proposed restructuring.

24. Social. The Project would continue its outreach to indigenous peoples and Quilombola communities within the current Indigenous Peoples Planning Framework (IPPF). As of August 2015, a total of 19 Development Plans have been prepared and signed with eligible communities and 5 subprojects approved. The ceiling for incentives for subprojects has been increased based on early experience with Project implementation, and technical assistance to support the preparation and implementation of subprojects is being strengthened. Similarly, the Project would continue to apply the current Resettlement Policy Framework (RPF) as progress is made with the implementation of the rural roads rehabilitation activities. Finally, the Project’s monitoring and evaluation system would place greater emphasis on results by gender and by age, as this information was not readily available at the time of the Project’s mid-term review.

25. Environment. The Project remains classified as environmental category B and no additional environmental safeguards policies are triggered. The activities consisting in strengthening the State’s Rural Environmental Cadastre (CAR) and supporting the agricultural census are not expected to have adverse environmental impacts. The Environmental Management Framework (EMF) has been updated regularly during implementation by the State Government to reflect the changes in the national and State legislation associated with the Forest Law approved in 2012. The current EMF also reflects further fine-tuning of the procedures for environmental screening, evaluation, and monitoring of investments financed under Components 1 and 2 (in particular as they relate to agro-forestry projects and IPM), as a result of lessons learned from their

17

application since Project start-up. The updated procedures have also been regularly included in the Project Operational Manual.

26. Risk. Overall Project risk remains Moderate. Both the Project’s FM risk and

procurement risk continue to be Moderate. The main risk that could jeopardize the achievement of the revised Project development objective and outcome targets consists of the current macroeconomic situation at Federal and State level, which might affect the availability of counterpart funding. The macroeconomic risk has therefore been raised to Substantial. Mitigation measures include regular monitoring of the status of counterpart funding and continued dialogue with the State Government. The revised Project costs have taken into consideration the recent devaluation of the Real and the impact of inflation since Project appraisal.

27. Exceptions to Bank Policy. There are no exceptions to Bank policies.

Results Framework

ANNEX 1 - RESULTS FRAMEWORK AND MONITORING

Project Name:

Sao Paulo Sustainable Rural Development and Access to Markets (P108443)

Project Stage:

Restructuring Status: DRAFT

Team Leader(s):

Marianne Grosclaude Requesting Unit:

LCC5C Created by: Marianne Grosclaude on 23-Dec-2014

Product Line:

IBRD/IDA Responsible Unit:

GFADR Modified by: Marianne Grosclaude on 10-Aug-2015

Country: Brazil Approval FY: 2010

Region: LATIN AMERICA AND CARIBBEAN

Lending Instrument:

Specific Investment Loan

.

Project Development Objectives

Original Project Development Objective:

The project development objective is to support the Borrower to increase the competitiveness of family agriculture in its territory while improving its environmental sustainability. Revised Project Development Objective: The project development objective is to support the Borrower in improving access to markets for rural producers’ organizations in its territory and in improving its instruments and policies that contribute to environmental sustainability of family agriculture

Results

Core sector indicators are considered: Yes Results reporting level: Project Level .

Project Development Objective Indicators

Status Indicator Name Core Unit of Measure Baseline Actual(Current) End Target

Results Framework

19

No Change Increase in total sales value for participating organizations, by end of project

Percentage Value 0.00 0.00 8.00

Date 01-Jan-2011 15-Apr-2015 30-Sep-2017

Comment First estimate in 2015 (for the first sub-projects which started in 2013)

Dropped Increase in agricultural area where improved land and water management practices are being implemented, by end of project

Hectare(Ha) Value 0.00 0.00 -

Date 01-Jan-2011 15-Apr-2015 30-Sep-2017

Comment Replaced with new indicator

New Number of environmental instruments and policies developed and implemented, measured by: (i) 1 CAR improved and made available to rural producers, and (ii) 3 PES programs developed and adopted by rural producers

Number Value 0.00 2.00 4.00

Date 01-Jan-2011 15-Apr-2015 30-Sep-2017

Comment 2 PES program implemented as of January 2015

Intermediate Results Indicators

Status Indicator Name Core Unit of Measure Baseline Actual(Current) End Target

New Number of families benefitting directly from the Project (Subcomponent 1.1)

X Number Value 0.00 5,756.00 7,108.00

Date 01-Jan-2011 15-Apr-2015 30-Sep-2017

Comment

No Change Number Value 0.00 215.00 267.00

Date 01-Jan-2011 15-Apr-2015 30-Sep-2017

Results Framework

20

Number of business initiatives with market viability identified and financed by the project

Comment Target adjusted from 300

New Number of subprojects of traditional communities with market viability identified and financed by the Project

Number Value 0.00 5.00 49.00

Date 01-Jan-2011 15-Apr-2015 30-Sep-2017

Comment

Dropped Increase in productivity (%) for selected commodities for participating organizations: Milk productivity

Percentage Value 0% - -

Date 01-Jan-2011 15-Apr-2015 30-Sep-2017

Comment Not representative of subprojects

Dropped Number of innovations with demonstrated market viability and replicability

Number Value 0 - -

Date 01-Jan-2011 15-Apr-2015 30-Sep-2017

Comment Definition and measurement issue

Revised Number of producer organizations trained in management and accounting

Number Value 0 481.00 831.00

Date 01-Jan-2011 15-Apr-2015 30-Sep-2017

Comment

New Number of producer organizations trained on the operation of their business initiatives

Number Value 0 343.00 609.00

Date 01-Jan-2011 15-Apr-2015 30-Sep-2017

Comment

New Number of beneficiaries of the business initiatives registered in the CAR

Number Value 0 0 4,265.00

Date 01-Jan-2011 15-Apr-2015 30-Sep-2017

Comment

Results Framework

21

New Number of ethno-development plans elaborated

Number Value 0 19.00 49.00

Date 01-Jan-2011 15-Apr-2015 30-Sep-2017

Comment

Dropped Online agri-business information center operational

Yes/No Value No No -

Date 01-Jan-2011 15-Apr-2015 30-Sep-2017

Comment

Adjusted CATI staff trained in management and value chains

Number Value 0 0 500

Date 01-Jan-2011 15-Apr-2015 30-Sep-2017

Comment

New Number of value-chain studies carried out

Number Value 0.00 0 4.00

Date 01-Sep-2011 15-Apr-2015 30-Sep-2017

Comment

Adjusted Rural roads with year-round usability following rehabilitation

Kilometers Value 0.00 21 660.00

Date 01-Sep-2011 15-Apr-2015 30-Sep-2017

Comment Indicator separated in two

Adjusted Rural roads with year-round usability following adequate maintenance

Kilometers Value 0.00 44 950.00

Date 01-Sep-2011 15-Apr-2015 30-Sep-2017

Comment

New Municipalities adopting new system for rural roads management

Number Value 0.00 5.00 25.00

Date 01-Sep-2011 15-Apr-2015 30-Sep-2017

Comment System is being developed

Results Framework

22

New Number of environmental subprojects implemented

Number Value 0.00 0.00 24.00

Date 01-Jan-2011 15-Apr-2015 30-Sep-2017

Comment

New Number of beneficiaries of environmental subprojects

Number Value 0.00 176.00 682.00

Date 01-Jan-2011 15-Apr-2015 30-Sep-2017

Comment

New Number of rural producer trained (environment)

Number Value 0.00 458.00 800.00

Date 01-Jan-2011 15-Apr-2015 30-Sep-2017

Comment

New Number of technical staff trained (environment)

Number Value 0.00 969.00 1,100.00

Date 01-Jan-2011 15-Apr-2015 30-Sep-2017

Comment

New Number of beneficiaries of the environmental subprojects and PES programs registered in the CAR

Number Value 0.00 357.00 1,300.00

Date 01-Jan-2011 15-Apr-2015 30-Sep-2017

Comment

Adjusted System for payment for environmental services (PES) piloted

Yes/No Value No Yes Yes

Date 01-Jan-2011 15-Apr-2015 30-Sep-2017

Comment Mina d’Agua PES piloted

New Surveys realized for baseline, second survey (mid-term) and third survey (final)

Number Value No 1 3

Date 01-Jan-2011 15-Apr-2015 30-Sep-2017

Comment Baseline carried out

Results Framework

23

No change System for developing, selecting, supporting and monitoring business proposals operational (Y/N)

Yes/No Value No Yes Yes

Date 01-Jan-2011 15-Apr-2015 30-Sep-2017

Comment

No change Continued implementation of socio-environmental management plan (Y/N)

Yes/No Value No Yes Yes

Date 01-Jan-2011 15-Apr-2015 30-Sep-2017

Comment