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Document of The World Bank

Report No: ICR00001246

IMPLEMENTATION COMPLETION AND RESULTS REPORT (IBRD-4660)

ON A

LOAN

IN THE AMOUNT OF

US$62.8 MILLION EQUIVALENT

TO THE

STATE OF SANTA CATARINA

FOR A

NATURAL RESOURCES MANAGEMENT AND

RURAL POVERTY REDUCTION PROJECT

March 24, 2010

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

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CURRENCY EQUIVALENTS

(Exchange Rate Effective September 30, 2009)

Currency Unit = Real (R$) R$1.00 = US$ 0.565 US$ 1.00 = R$1.7698

FISCAL YEAR

ABBREVIATIONS AND ACRONYMS

ANA National Water Agency ICEPA State Institute for Planning and Agricultural Economics

ATER Technical Assistance and Rural Extension

ICMS Tax on the Circulation of Markets and Services

BPMA Military Police Environmental Battalion

LAC Municipal Agro-livestock Census

CAS Country Assistance Strategy MDA Micro-catchment Development Association

CCE Project Deliberative Committee –State Level

NRM Natural Resources Management

CCM Project Deliberative Committee – Municipal Level

PEST Serra Tabuleiro State Park

CCR Project Deliberative Committee – Regional Level

PRONAF National Program for Support to Family Agriculture

CELESC Electricity Company of the State of Santa Catarina

RIF Rural Investment Fund

CEPA Center for Agricultural Socio-Economics and Planning

SAFF Physical and Financial Monitoring System

CIASC Santa Catarina Accounting and Budgeting System

SAR State Secretariat of Agriculture and Rural Development

EPAGRI Agro-livestock Research and Rural Extension Company

SDA State Secretariat for Rural Development and Agriculture

FATMA State Environmental Management Foundation

SDM State Secretariat for Urban Development and Environment

FEALQ/USP Agrarian Studies Foundation University of Sao Paulo

SDS State Secretariat for Sustainable Economic Development

FMR Financial Monitoring Report SEE State Executive Secretariat for the Project FUNAI National Indian Foundation SEUC State Protected Areas System GEF Global Environment Facility WMP Watershed Management Plan GAM Municipal Animation Group

Vice President: Pamela Cox

Country Director: Makhtar Diop

Sector Manager: Ethel Sennhauser

Project Team Leader: Alvaro Soler

ICR Team Leader: Alvaro Soler

BRAZIL Natural Resources Management and

Rural Poverty Reduction Project

Content 1. Project Context, Development Objectives and Design ...................................................12. Key Factors Affecting Implementation and Outcomes...................................................43. Assessment of Outcomes ..............................................................................................124. Assessment of Risk to Development Outcome.............................................................195. Assessment of Bank and Borrower Performance..........................................................196. Lessons Learned............................................................................................................217. Comments on Issues Raised by Borrower/Implementing Agencies/Partners...............23Annex 1. Project Costs and Financing ..............................................................................24Annex 2. Outputs by Component .....................................................................................25Annex 3. Economic and Financial Analysis .....................................................................42Annex 4. Bank Lending and Implementation Support/Supervision Processes.................50Annex 5. Beneficiary Survey Results ...............................................................................52Annex 6. Stakeholder Workshop Report and Results.......................................................60Annex 7. Summary of Borrower’s ICR and/or Comments on Draft ICR .........................61Annex 8. Comments of Co-financiers and Other Partners/Stakeholders ..........................67Annex 9. List of Supporting Documents...........................................................................68MAP: IBRD 37697 (March 2010) .................................................................................69

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A. Basic Information

Country: Brazil Project Name:

Santa Catarina Natural Resources Management and Rural Poverty Reduction Project

Project ID: P043869 L/C/TF Number(s): IBRD-46600

ICR Date: 03/30/2010 ICR Type: Core ICR

Lending Instrument: SIL Borrower: STATE GOVERNMENT OF SANTA CATARINA

Original Total Commitment:

USD 62.8M Disbursed Amount: USD 62.8M

Revised Amount: USD 62.8M

Environmental Category: B

Implementing Agencies: Sec. Agricultura e Desenvolvimento Rural

Cofinanciers and Other External Partners: B. Key Dates

Process Date Process Original Date Revised / Actual

Date(s)

Concept Review: 12/12/2001 Effectiveness: 07/18/2002 07/18/2002

Appraisal: 01/10/2002 Restructuring(s): 09/30/2008

Approval: 04/25/2002 Mid-term Review: 06/30/2006 11/27/2006

Closing: 12/31/2008 09/30/2009 C. Ratings Summary C.1 Performance Rating by ICR

Outcomes: Moderately Satisfactory

Risk to Development Outcome: Moderate

Bank Performance: Moderately Satisfactory

Borrower Performance: Moderately Satisfactory

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

Quality at Entry: Moderately Unsatisfactory

Government: Satisfactory

Quality of Supervision: Satisfactory Implementing Agency/Agencies:

Moderately Satisfactory

Overall Bank Performance:

Moderately SatisfactoryOverall Borrower Performance:

Moderately Satisfactory

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C.3 Quality at Entry and Implementation Performance Indicators

Implementation 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):

No Quality of Supervision (QSA):

None

DO rating before Closing/Inactive status:

Satisfactory

D. Sector and Theme Codes

Original Actual

Sector Code (as % of total Bank financing)

General agriculture, fishing and forestry sector 55 45

General industry and trade sector 10

General water, sanitation and flood protection sector 5 25

Other social services 15 15

Sub-national government administration 15 15

Theme Code (as % of total Bank financing)

Improving labor markets 20 5

Land administration and management 20 40

Participation and civic engagement 20 20

Rural policies and institutions 20 10

Water resource management 20 25 E. Bank Staff

Positions At ICR At Approval

Vice President: Pamela Cox David de Ferranti

Country Director: Makhtar Diop Vinod Thomas

Sector Manager: Ethel Sennhauser Mark E. Cackler

Project Team Leader: Alvaro J. Soler Graciela Lituma

ICR Team Leader: Alvaro J. Soler

ICR Primary Author: Anna F. Roumani

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F. Results Framework Analysis

Project Development Objectives (from Project Appraisal Document) The project objective is to reduce rural poverty in the State of Santa Catarina, while improving the management of natural resources. Poor rural families incomes and livelihoods would be improved by: (i) support for Government efforts to integrate environmental and social sustainability into development and poverty reduction strategies; (ii) enhanced local governance and community participation in decision-making; (iii) reversed land degradation and better protection of the States natural resources; and (iv) improvements to income-generating opportunities and living conditions for the rural poor. Revised Project Development Objectives (as approved by original approving authority) N/A (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 : Enactment and publication of State environmental regulation and its application to the design and initiation of pilot Ecological Corridors and protected areas. See Annex 2, Appendix 1.

Value quantitative or Qualitative)

Zero

No target established. Target inferred (PAD): 2 state env. laws, 2 ecological corridors, 3 strategic river basin plans, 1 State Park consolidated.

NA

State environmental laws enacted/published. Planning models developed/validated, 2 Ecological Corridors. Plans prepared, 3 catchments. One State Park consolidated. Also, State water resources systems established.

Date achieved 07/18/2002 12/31/2008 09/30/2009 09/30/2009

Comments (incl. % achievement)

100% achieved. (a) Ecological ICMS and State Protected Areas laws enacted/published; (b) Planning models for Ecol. Corridors Chapeco and Timbo developed/validated; (c) 1 State Park consolidated; (d) Plans prepared, 3 catchments. Other achievements, MT 3.2

Indicator 2 : Reduction in the incidence of rural poverty in 70% of the 880 micro-catchments assisted. See Annex 2, Appendix 1.


Zero 616 micro-catchments (70% of 880) with

NA Poverty reduced in 64% of 880 micro-catchments (91% of

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reduced incidence of poverty.

target) by end-project.

Date achieved 07/18/2002 12/31/2008 09/30/2009 09/30/2009


(a) Achieved 91% of target (by extrapolation). Based on actual 936 micro-catchments, achievement 87%; (b) 47,250 Priority farmers improved housing, sanitation and water supply. See Indic. 5 and Main Text (MT) 3.2 for extent of income increase.

Indicator 3 : Improved family incomes and employment among the target group. See Annex 2, Appendix 1.


Zero No targets established.

NA

Incomes improved for 61-86% Priority beneficiaries (separate studies). No data on employment creation.

Date achieved 07/18/2002 12/31/2008 09/30/2009 09/30/2009


(a) 20% of 698 farmers in 268 MCs rep've of 38,360 Priority farmers in 936 MC, with RIF Income financing, exceeded income limits for Priority classif. and moved to superior level; (b) Income increases aver. 30.6%, 2003/08 vs. 16.6% control group.

Indicator 4 : Improvement in natural resources management (NRM) practices in all assisted micro-catchments. See Annex 2, Appendix 1.Improved water quality and reduced soil loss in benefited micro-catchments. See Annex 2, Appendix 1.


Zero 880 micro-catchments.

NA

Improved NRM practices adopted in all 936 MC covering about 263,693 ha.

Date achieved 07/18/2002 12/31/2008 09/30/2009 09/30/2009


Improved NRM practices introduced/adopted in 936 MC, 106.4% of appraisal target. Land area impacted by improved NRM practices was 105% of appraisal. Soil management and conservation practices specifically, implemented on 230,000 ha. See also MT 3.2.

Indicator 5 : Improved water quality and reduced soil loss in benefited micro-catchments. See Annex 2, Appendix 1.


Zero No targets established

NA

Positive but in some aspects, mixed outcomes, in 19 MC monitored, 2004-2009.

Date achieved 07/18/2002 12/31/2008 09/30/2009 09/30/2009


(a) Bacteria reduced in 6 of 7 MC scientifically monitored, but potability results mixed; (b) Turbidity levels modest improvement, but pH levels improved in all 19 MCs to legal levels for human consumption. Soil loss not measured. See also MT 3.2.

Indicator 6 : Effective operation of project participatory mechanisms set up at community, micro-catchment, municipal, regional and state levels. See Annex 2, Appendix 1.

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Zero No target established

NA

Participatory mechanisms operating at all levels, as envisaged at appraisal.

Date achieved 07/18/2002 12/31/2008 09/30/2009 09/30/2009


100% achieved. Participatory mechanisms established and operating at all levels, by end-project. Social capital at MC level also studied: surveyed 19 MC - family empowerment good in 95%; social network devt. good/very good in 74%. See also MT 3.2.

(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 : # of microcatchments with Development Plan established and no. of Individual Farm Plans prepared.

Value (quantitative or Qualitative)

Zero

880 MC Development Plans and 70,000 Individual Farm Plans

936 Micro-catchment Plans and 47,869 Farm Development Plans.

Date achieved 07/18/2002 12/31/2008 09/30/2009


Note: No Intermediate Outcome Indicators established at appraisal. See MT 2.1.3. Indicators listed selected by Bank team and informally adjusted post-MTR. Results: 100% assisted MCs with Development Plan and 69.3% of farmers with Farm Devt. Plan.

Indicator 2 : No. of stakeholders trained


Zero

92,300 farmers, indigenous peoples; 21,000 municipal leaders; 3,500 technicians.

NA 153,040 stakeholders trained

Date achieved 07/18/2002 12/31/2008 09/30/2009 09/30/2009 Comments (incl. % achievement)

See above comments re Intermediate Outcome Indicators. Target aggregated post-MTR to 161, 920 stakeholders. Achieved 94.5% of revised target and 165% of appraisal target.

Indicator 3 : No. micro-catchments mapped Value (quantitative or Qualitative)

Zero 880 micro-catchments mapped.

NA 936 micro-catchments mapped


See comments Indicator 1. Project mapped 936 micro-catchments, 100% of revised target and 106% of appraisal target.

Indicator 4 : Area covered by the project (hectares) under improved management practices

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Zero 250,000 ha (of productive areas)

NA 200,000 ha (of productive areas)


Post-MTR target: 200,000 (of productive areas/landscape directly targeted, i.e. within the 936 MC under improved land management practices). Achieved 100% of revised and 80% of appraisal targets.

Indicator 5 : Km. of Riparian Forest replanted. Value (quantitative or Qualitative)

Zero 2000 ha NA 2,306 ha planted


Post-MTR target: 2,820 ha. Achieved 115% of appraisal target and 82% of revised target.

Indicator 6 : No. families adopting/applying improved production systems


Zero 40,000 families NA

59,006 families invested in/adopted/applying improved production systems


Post-MTR target: 36,329 families. Project achieved 162% of revised target and 148% of appraisal.

G. Ratings of Project Performance in ISRs

No. Date ISR Archived

DO IP Actual

Disbursements (USD millions)

1 06/14/2002 Highly Satisfactory Satisfactory 0.00 2 12/17/2002 Highly Satisfactory Satisfactory 0.63 3 06/16/2003 Highly Satisfactory Satisfactory 1.34 4 12/10/2003 Highly Satisfactory Satisfactory 2.27 5 06/15/2004 Satisfactory Satisfactory 2.57 6 12/13/2004 Satisfactory Satisfactory 3.02

7 04/30/2005 Moderately SatisfactoryModerately

Unsatisfactory 4.16

8 11/20/2005 Moderately SatisfactoryModerately

Unsatisfactory 10.94

9 02/09/2006 Moderately Satisfactory Moderately Satisfactory 19.49 10 05/30/2006 Moderately Satisfactory Moderately Satisfactory 24.17 11 12/27/2006 Satisfactory Satisfactory 37.17 12 06/24/2007 Satisfactory Satisfactory 40.57 13 12/03/2007 Satisfactory Satisfactory 49.85 14 06/11/2008 Satisfactory Satisfactory 53.22

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15 12/21/2008 Satisfactory Satisfactory 62.80 16 04/13/2009 Satisfactory Satisfactory 62.80

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

09/30/2008 N S S 62.35

Third-tier restructuring via 9-month extension of the Closing Date to complete and consolidate activities and fully-disburse Loan.

I. Disbursement Profile

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1. Project Context, Development Objectives and Design

1.1 Context at Appraisal

1.1.1 At appraisal, the State of Santa Catarina showed some 38% of all rural families living below the poverty line including a majority of the state’s indigenous population of about 7,000 people. Brazil’s decision to join Mercosur – and consequent opening of Brazilian agriculture to global competition - had the adverse effect of greatly increasing poverty among small-scale farmers and intensifying the rural exodus which averaged around 4% per year in the southern states including Santa Catarina. Decreasing farm incomes, deteriorating quality of life and deficient drinking water, sanitation and housing conditions were driving families, and especially young people, off the land. Meanwhile, accelerating farm intensification, use of agro-chemicals and water pollution, and threats to forest resources and protected areas were flagged by government as issues with serious medium and long-term implications, especially for small-scale farmers.

1.1.2 Bank support for the sector: The Natural Resource Management and Rural Poverty Reduction Project was the fourth in a series of pioneering Bank-financed state operations supporting innovative technical approaches to soil conservation in southern Brazil and the second of this type in Santa Catarina, following on from the successful Santa Catarina Land Management II Project (LM II). The latter sought to control erosion and increase agricultural production and productivity, concentrating activities in areas of the state with highest incidence of and susceptibility to soil erosion. It was not specifically targeted to the rural poor. It successfully expanded the adoption of improved land management practices over one-third of all agricultural properties state-wide, thereby increasing the productivity of staple crops, and reducing soil loss and water pollution. It also demonstrated the effectiveness of participatory, community-driven approaches and the use of the micro-catchment as the basic unit for physical planning and organization.

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1.1.3 State Government’s Strategy and Actions: Rural poverty and internal migration to coastal centers, uneven socioeconomic conditions, opportunities and economic growth between the interior and coastal areas, sustainable farm management, water pollution from intensive agricultural production, and loss of forest cover and natural habitats became major concerns of the State Government in the 1990s. The state’s new rural development policy and design of the follow-on project reflected these concerns. Decentralized, participatory mechanisms organized around the micro-catchment, and decentralized financing and execution of programs would enable the state to reach the rural poor. Change would be induced through cost-shared grants and piloting/demonstration. Needs of the poor such as sanitation, better housing, job-creation and income generation were to be given special attention. The State demonstrated its commitment to the strategy by introducing its main elements even before the new project was approved. Participatory approaches introduced under LM II were mainstreamed state-wide and poverty outreach mechanisms were piloted in 22 micro-catchments.

1.1.4 The previous project was also influential through its soil and water management achievements in prompting government to address natural resources management more comprehensively, dividing the state into hydrographic regions using river basins as planning and

1 A micro-catchment is a common drainage area which typically in Santa Catarina covers about 3,000 ha and an average 120 families.

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management units. New environmental laws were drafted to create the State Protected Area System and to establish fiscal incentives for municipalities to implement environmental education programs and create protected areas. Government also requested Global Environmental Facility (GEF) support for a medium-sized project building on the LM II and other relevant programs designed to support the Serra do Tabuleiro State Park in expanding its conservation programs and conflict resolution framework.

2

The State also implemented a structural reform program and entered into a Debt Agreement with the Federal Government to improve its fiscal management which had been impeding access to new Bank lending. The State proposed a review of targeting and impact mechanisms for its social safety net programs as a complement to the project’s poverty reduction goals, and sought technical assistance to reform its public utility management strategy in regard to water resources/supply, energy and sanitation.

1.1.4 Rationale for Bank involvement: The Bank had a long history of supporting governments’ environmental and poverty reduction efforts in Brazil, and had only recently assisted the State of Santa Catarina to implement the successful LM II project. The new project was consistent with the then recently-released Rural Poverty Report flagging the need for small farm intensification, and with the Brazil Country Assistance Strategy of March 2000, which cast poverty and inequality as continuing, critical challenges for the country. The CAS recommended well-targeted poverty programs to build the poor’s human and physical capital, decentralized approaches, and environmental policies as the foundation of sustainable poverty reduction in rural areas. Bank involvement also supported CAS goals for judicious fiscal management and governance reflected in the State’s willingness to undertake reform through structural adjustment.

1.2 Original Project Development Objectives and Key Indicators (as approved)

1.2.1 The project development objective (PDO) was to reduce rural poverty in the State of Santa Catarina while improving the management of natural resources. The incomes and livelihoods of poor rural families would be improved by: (i) support for Government efforts to integrate environmental and social sustainability into development and poverty reduction strategies; (ii) improvements to income-generating opportunities and living conditions for the rural poor;

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(iii) reversed land degradation and better protection of the State’s natural resources; and (iv) enhanced local governance and community participation in decision-making.

1.2.2 Key Performance Indicators (KPI) as approved, were as follows:

• Reduction in the incidence of rural poverty in 70% of the 880 micro-catchments assisted; • Improvement of natural resource management practices in all assisted micro-catchments; • Improved water quality and reduced soil loss in benefited micro-catchments; • Improved family incomes and employment among the targeted group; and, • Enactment and publication of State environmental regulations and their application to the

design and initiation of pilot ecological corridors and protected areas; and, • Effective operation of project participatory mechanisms set up at community, micro-

catchment, municipal, regional and state levels.

2 Conservation of Biodiversity and Ecosystem Rehabilitation in the Tabuleiro State Park Project, World Bank as Implementing Agency, GM-P066537. This operation did not become effective.

3 The ICR uses the PAD version of the PDO not the Loan Agreement, the latter differing in omitting everything prior to part (i).

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1.2.3 The EPAGRI/CEPA monitoring and evaluation team, the Bank project team and an M&E specialist from the Food and Agriculture Organization (FAO), agreed at the time of the Mid-term Review that the measurement of the approved Key Performance Indicators could be enhanced and deepened by a set of "sub-indicators" which would look at each KPI from several angles while adhering to its conceptual intent. With few exceptions, the corresponding M&E exercises provided a rich cache of complementary data/information. For clarity, the relationship of each approved KPI to its sub-indicators is shown in Annex 2, Appendix 1. Results are reported in the Data Sheet and Main Text, section 3.2.

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

1.3.1 The PDO and Key Performance Indicators were not revised (see 1.2.3 above).

1.4 Main Beneficiaries 1.4.1 The direct target population was an estimated 105,000 small and marginal farm families and rural laborers and about 5,000 indigenous people residing in 880 micro-catchments, about half of the State’s total. The priority target groups represented about 75% of the total expected beneficiary families; the project encouraged participation of all members of the micro-catchment, especially for environmental activities.4 Targeting criteria, unlike LM II, were poverty-driven with environmental degradation as a secondary priority. See Annex 2. 1.5 Original Components (as approved)

1.5.1 The project comprised the following components and sub-components (details, Annex 2):

• Institutional Development and Organization (US$17.9 million, 16.7% of total project cost) financed four sub-components: (a) training; (b) rural extension; (c) adaptive and social research; and (d) technical assistance supporting State structural adjustment.

• Rural Investment (US$77.2 million, 72.3% of total project cost) financed a grant-based Rural Investment Fund with beneficiary cost-sharing, to facilitate and provide incentive for the adoption of the project strategy within benefited micro-catchments. The Fund comprised three "lines": housing improvements including piped water and sanitation; environmental conservation activities; and, income generation through improved production systems, value-added schemes or job creation.

• Environmental Management (US$3.8 million, 3.5% of total project cost) financed two sub-components: (a) watershed management; and (b) creation of ecological corridors and protected areas.

• Project Management, Monitoring and Evaluation (US$8.0 million, 7.5% of total project cost) financed three sub-components: (a) project management; (b) monitoring and evaluation; and (c) community organization. See table 2.1, Annex 2.

1.6 Revised Components

Components and subcomponents were not revised.

4 Benefits were expected to come from improved farm profitability resulting from upgrading their land management and farming practices, crop and livestock diversification and new employment opportunities - especially for women and youth - from post-harvest processing and other rural enterprises.

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1.7 Other significant changes

• Closing date extended: The project closing date was extended via a third order restructuring (now classified as first-order) from December 31, 2008 to September 30, 2009, to permit preparation of an Additional Financing operation. 5 (September 30, 2008)

• Reallocation of resources: US$7,952,000 was reallocated from Categories 4 (Consultant Services and Training) and 6 (Unallocated), to Categories 1 (Works), 2 (Goods), and 3 (Rural Subproject Grants). (July 13, 2007)

• Rural Investment Fund (RIF): (a) Financing of technical assistance activities for micro-catchment development associations (MDA) within the RIF component was maintained at 100% for the life of the project, versus the declining scale (i.e., increasing beneficiary share) originally planned; (b) Two new financing lines were included post-MTR: for rural youth and for establishing pilot testing/observation units for new productive activities; and (c) The RIF investment financing percentage was increased from 75% to 90% to "compensate" the state for other expenditures where the state was contributing 100%, and to accelerate RIF implementation. (Date not found).

• Youth participation formalized: Rural youth were formally included in the priority target group as recommended by the Mid-term Review (MTR, 2006). (Date not found)

• Institutional change: EPAGRI (Agro-livestock Research and Rural Extension Company of Santa Catarina) formally absorbed CEPA (Center for Agricultural Socio-Economics and Planning) thereby incorporating the project evaluation function (Bank no-objection May 2006). Also, the Environmental Military Police Battalion (BPMA) was formally incorporated as executor of the Integrated Watershed Management subcomponent. (Date not found).

2. Key Factors Affecting Implementation and Outcomes

2.1 Project Preparation, Design and Quality at Entry 2.1.1 Government Commitment: The project had an unusually long gestation, with the State seeking/receiving Federal Government approval for a follow-up as early as 1995, and formal preparation starting in 1998. Fiscal difficulties in the late 1990s prevented the state from contracting new external loans and put the project in abeyance until 2001 when it was reinserted in the Bank’s pipeline. During the hiatus following closing of LM II in 1999, the State conducted pilot field exercises led by EPAGRI to adapt the LM II participatory arrangements to respond better to environmental concerns and the needs of poor rural families, and to launch activities of a type contemplated in the new operation. Government expressed its full support for providing the financial and human resources for project implementation, and a favorable legal environment. 2.1.2 Soundness of the background analysis: The project heeded the lessons of LM II and other Bank-supported projects combining natural resources management within a rural development context, emphasizing: civil society participation and decentralized implementation via stratified deliberative forums; data-based, objective targeting mechanisms; training and public awareness-building; consolidation of micro-catchments as the most convenient planning unit; and, including profit incentives in new technical messages. A Rural Investment Fund was

5 The Additional Financing did not proceed and was substituted by the Santa Catarina Rural Competitiveness Project currently under preparation.

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included as an incentive to change land management practices, and executing agencies retained/utilized managers and senior technical personnel with experience from the previous project. Preparation benefited from a participatory, consultative process involving several thousand potential beneficiaries and private stakeholders in 22 representative micro-catchments. These groups were involved directly in project design, and mechanisms to sustain this dialogue were built into the project’s institutional arrangements for implementation. 2.1.3 Even so, weaknesses in the analytical effort impacted on project design resulting in an under-estimation of the complexity of key project objectives and activities, and their timing/sequencing, and over-estimation of institutional, technical and operational capacity. Further, the protracted gap between the two operations in Santa Catarina had consequences for the continuity/memory of LM II’s concept, mechanisms and institutions, despite the State’s commendable pilot efforts. Assessment of project design: 2.1.4 Objectives and Indicators: The overriding PDO, specifically its poverty reduction element, was stated in absolute terms not as a contribution to a wider state effort, and its measurement by end-project was unlikely. The individual segments comprising the PDO were, on balance, reasonable and achievable under suitable implementation conditions. 2.1.5 The Key Performance Indicators were conceptually satisfactory but problematic: (a) four of the six KPI referred to a "reduction" or "improvement" dependent on expected completion of a baseline evaluation in Year 1 (not completed until Year 4). Several were ambiguously-worded and only one had a numerical target; (b) the Project Design Summary (PAD, Annex 1) shows evidence of hasty preparation. Sector-related CAS Goals were confused with the statement of PDO, and the KPI from the Main Text were designated as Sector Indicators in the Design Summary. Employment creation was omitted, and new KPIs were added; (c) the Design Summary also shows a re-worded PDO section only loosely-related to the PDO in the PAD Main Text and Loan Agreement, and a new set of KPI, a mixture of outcomes and outputs; (d) no intermediate outcome indicators were specified; and, (e) Output Indicator tables from the PAD (Annex 2) are annexed to the Minutes of Negotiations instead of the required Key Performance Indicators, for monitoring/evaluating achievement of PDO.

2.1.6 As discussed in 1.3.2, the respective Borrower and Bank teams agreed during the Mid-term Review on a series of more accessible sub-indicators designed to enhance the monitoring and measurement of the approved KPI and this worked quite successfully as shown in the Data Sheet and section 3.2. However, the project would have benefited from indicators to demonstrate, for example, actual bio-physical improvements from improved NRM practices in the 936 micro-catchments (e.g., changes in loss of forest cover, soil erosion and/or downstream siltation). 2.1.7 Project scope and scale: Project design as reflected in the PAD was internally rational and consistent but tried to do too much. The 14 separate components and sub-components illustrate the project's broad vision: social and human capital formation, natural resources management, organized productive activities, poverty reduction, agro-ecological mapping, creation of ecological corridors and protected areas, policy integration, legal changes/legislation, state structural reform, adaptive/social research, and indigenous peoples. The operational and technical strategies were complex and sophisticated. The organizational framework was logical but ambitious, with two complementary, stratified pillars comprising deliberative and operational bodies and functions intended to foster decentralization and participation. Municipal government support was crucial to this structure but not assured. Five agencies were involved but the

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Operational Manual lacked a collaboration framework, and project design consciously excluded a joint coordination body. The incorporation of explicit and dominant poverty goals differentiated the project from its predecessor, increased the degree of difficulty, and implied a steep process of learning by doing, not necessarily alleviated by experiences and lessons from similar projects. 2.1.8 Pressured appraisal may have influenced an unduly optimal vision of implementation speed and learning. The project was revived following a protracted delay (described in Section 1) and entered the Bank pipeline close to the end of the mandate of the State administration. The PAD noted that "while Government commitment to the project has been sustained for many years and is not expected to waiver, it is politically desirable to have the Loan signed while the present administration remains in office. The Government and the Bank have therefore accelerated their preparation efforts to the maximum to contain the threats of possible slippage". Risk Assessment:

2.1.9 The risk assessment was generally appropriate but uneven and with some blurring of content between the Outputs to Objectives and Components to Outputs sections. Institutional capacity is cited, but viewed narrowly as affecting mostly the environmental management agency/component and with NGO involvement seen as the main mitigating element. Operational and technical complexities are not cited as risks, and nor is the introduction of explicit and dominant poverty goals, which increased overall difficulty. Availability of the agreed number of extension workers/facilitators was indeed a risk but sustained political commitment was only part of the appropriate mitigation equation in this case.

2.2 Implementation 2.2.1 The project vision was optimal but as implementation unfolded, the sense of what was possible in the allotted time period narrowed. Implementation and disbursement were slow in the first three years, delaying the Mid-term Review because the Borrower and Bank teams agreed, with justification - and even while acknowledging the rationale for adhering to the true mid-point - that there were insufficient "hard" results to merit the exercise at the time originally scheduled. The fact that a large number of output indicators were already met or exceeded at that time belied the real situation reflected in low disbursements. Most activities in the first half, while essential, were preparatory - training, capacity building and organization. The conceptually sophisticated, market-driven productive investments contemplated under the Rural Investment Fund - which absorbed much of the Loan - exceeded the capacity of most targeted producers, EPAGRI and the technical field teams. Other challenging activities included establishing modern State water resources management systems (an outcome of the state structural adjustment studies, not envisaged at appraisal), and the design, validation and initial installation of ecological corridors. 2.2.2 Even so, promising gains were made in a diverse range of small-scale, technically simple productive activities, tens of thousands of farm families saw their productive systems/productivity and living conditions improve, and natural resource management awareness and practices made notable gains in large areas of the State. Two State government electoral turnovers (2002 and 2006) had the expected/customary effects on the continuity of institutional arrangements and how the State’s rural strategy played out, but overall, official/institutional commitment to the project remained steady and strong throughout, indicative inter alia, of the extent to which the project strategy was widely accepted by stakeholders, regardless of party politics/interests, and was already being internalized as state public policy.

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Factors affecting implementation and their resolution/outcome: 2.2.3 Institutional, human resource and capacity factors: As noted earlier, the Project was immensely complex, becoming more so over time as it evolved, expanded and pushed for results.6 Human resources were a constant issue. Subdivision of the State into a greater number of regions without contracting additional specialists to man decentralized offices eroded local level networks and capacity critical to a project of this type.7 EPAGRI had difficulty re-assigning technicians more evenly among regions. Facilitators (contracted and paid by the Micro-catchment Development Associations) were of uneven capacity and proliferated, professional requirements/profiles were not standardized, and there was high rotation in the poorest municipalities. Project agencies were committed but over-extended and bringing them together regularly to discuss progress and coordination was difficult. Bank missions sought diverse solutions, e.g., processed RIF proposals in "lots" to better-manage the flow of proposals; leveraged support for project operations from NGOs, the municipalities and cooperatives; and kept training programmatic and its content updated. However, the challenges remained: partnership formation; a more strategic, deliberative (as opposed to consultative) approach at all levels; building multi-disciplinary teams with strategic coverage of priority areas, groups and types of investments; and, intensive focus on human resource formation, and on the quality, relevance and coverage of training programs.8 See Annex 2. 2.2.4 Targeting framework: The Operational Manual set out a rational targeting framework for defining eligible micro-catchments and it worked effectively with the poorest Priority cohorts (Marginal, Transition 1, rural labourers, indigenous groups and youth) receiving a high proportion of project benefits. Targeting was hindered in the early years however, by delays in the Municipal Agro-livestock Census (LAC) planned for completion in Year 1 but not done until 2005. This inter alia, blocked the inclusion of new municipalities and/or initiation of planning in micro-catchments, creating dissatisfaction with the project among stakeholders. In agreement with the Bank, EPAGRI personnel were seconded to the census to galvanize its rapid conclusion, but certain data issues affecting the LAC ultimately prevented its use as the primary targeting reference. The "estrategia alternativa" which was intended to be used only to end-2003 pending completion of the LAC, continued in place and was effective. See Annex 2. 2.2.5 Exchange rate-related financing gap: A financing gap of US$35.3 million created by unfavourable changes in the US Dollar/Brazilian Real exchange rate in the period from mid-2005 to late 2008 - a risk not foreseeable at appraisal and beyond the control of the Borrower or project implementing agency - led to a 28% shortfall in Project resources from the allocations under the Loan Agreement. This coincided with the period when many beneficiary farmers/communities were positioned to access the RIF, having completed organization and training programs and with their individual Development Plans and Micro-catchment Investment Plans ready. Some 12,000 families among the targeted Priority cohort of 80,000 families were unable to make any form of productive, social and/or conservation investment under the RIF. Another 68,000 Priority families

6 The ultimate outcomes of the Water Resources Study under state structural adjustment activities are a classic example.

7 The newly-elected State Government in 2003 created 29 State Secretariats of Regional Development with Regional Project Executive Secretariats.

8 Local authorities claimed inadequate resources to improve this situation which in turn affected the composition of regional teams. EPAGRI tended to interpret this as a political decision, which periodically dampened its engagement with the project. Facilitators were contracted by the MDAs directly from a cooperative pool of technicians. EPAGRI vetted the list of providers but lacked the capacity/manpower or reach to oversee facilitators’ performance. See Annex 2.

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could not access the full range of investments contemplated under their Plans, including in many cases, the income-generating productive investments. The project closed without a resolution.9

2.2.6 Rural Investment Fund (RIF): Resources applied to the Housing Improvements financing window under the RIF exceeded appraisal expectations. Since inadequate housing and sanitation conditions affected much of the target population, strong demand for this line was rational and to be expected. Demand-led rural projects Bank-wide demonstrate that social investments virtually always have priority over productive in the first instance. However, the critical underlying reason for lagging productive investments was inadequate technical expertise and training among the field teams/facilitators – and responsible agencies – to support the sophisticated productive arrangements envisaged in the PAD. Basic social infrastructure was easier to plan and implement than the complex, time-consuming process of organizing farmers for productive activities, and deciding what to invest in and how much (since beneficiaries' counterpart contribution was required). The Bank repeatedly pressed the Borrower to "balance" RIF investments between the three investment windows (as envisaged at appraisal), resulting in a sharp increase from 2007 on, but mostly in modest investments of an individual - not group – nature, and with little market insertion, since the basic human resource constraint persisted.10 See Annex 2. 2.2.7 Quality of Bank supervision: The quality of Bank supervision is discussed in 5.1 (b) but merits commendation here as a material factor in maintaining quality, ensuring compliance and supporting the project's institutional, technical and operational implementation. The Bank team engaged closely with Borrower agencies, especially EPAGRI and FATMA, providing the analytical vision, practical solutions, knowledge and flexibility needed to generate momentum and increase the scope and scale of project achievements incrementally as the groundwork was laid. Notable attention was paid to safeguards, M&E, implementation of structural reform study recommendations (especially water resources and sanitation), and difficult institutional/field capacity issues. 2.2.8 Mid-term Review (MTR): The Mid-term Review was of good quality but delayed (end-2006 versus August 2005), limiting the time available for second-half course corrections.11 The MTR comprised a Bank mission with appropriate specialists (safeguards, environment, social, financial management, procurement); an independent performance review (FEALQ/USP), 2006;12 and, strategic and operational planning seminars to review recommendations and plan follow-up. Disbursements were about US$20.0 million with the emphasis on institutional/human development, and housing rehabilitation investments under the RIF. Income-generating investments were still modest. Physical results at the time showed a high proportion of targets already met or exceeded despite modest expenditures, suggesting that costs may have been over-

9 To resolve this financing gap, the Federal Government was willing to guarantee an Additional Financing (AF) loan of up to US$35.3 million. This had the effect of shifting unfinished activities into the AF and using the closing date extension of MB II to prepare it. However, the Bank and State Government subsequently agreed to change course and the AF did not proceed. The new and larger Rural Competitiveness Project includes important activities designed to complete unfinished aspects of MB II.

10The output indicator Annex 2, Table 2.4 shows under Component 4 (Project Management), that no Specialist Consultants were contracted for activities under “markets” or “business administration”.

11 The Project Team maintains that delaying the MTR was justified and that the findings of the MTR performance study (FEALQ/USP, 2006) were richer for having had more substantive activities to assess.

12 Relatorio de Revisao de Meio Termo, Fundacao de Estudos Agrarios "Luiz de Queiroz" (FEALQ/University of Sao Paulo), November 2006.

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estimated and/or targets under-estimated at appraisal. Also, the more difficult, higher cost activities were still pending. 2.2.9 The MTR performance study (FEALQ/USP, 2006) inter alia:

• highlighted the economic, social and environmental gains already made by beneficiaries in over 900 micro-catchments, and their potential to reduce out-migration;

• praised the project’s institutional impact on reclaiming the status of technical assistance and rural extension services under EPAGRI;

• stressed the links between local teams’/technicians’ capacity to understand and explain the project’s strategic and productive "vision" to family farmers and the efficiency and success of its implementation; and,

• re-confirmed the relevance and adequacy of project objectives and the decentralized structure/instruments including facilitators and animators for human capital formation.

2.2.10 Study recommendations included:

• much greater emphasis on RIF income generation and environmental investments; • improvement in the project’s managerial structure at all levels, and improved training

in technical and managerial skills, market identification and productive alternatives; • formal strategies for engaging rural youth and for utilizing the project's capacity to

catalyze and concentrate supply of/demand for other public programs via the micro-catchments; and,

• extension of the closing date to improve the long-term sustainability of community self-management, and institutionalization of the project technical strategy;

2.2.11 Project at Risk Status: The project was not at any point declared at risk.

2.3 Monitoring and Evaluation (M&E) Design, Implementation and Utilization 2.3.1 Planned monitoring and evaluation contemplated an enhanced Management Information System (MIS), automated and tracking physical and financial execution of the project in real time, and impact evaluation and case studies. Socio-economic and environmental aspects would be continuously monitored in pilot micro-catchments. The demanding program included three evaluations: ex-ante (Baseline, Year 1), Mid-term (Year 3) and Ex-post (Year 6) and an independent, mid-term physical progress review. Data collection for M&E would be participatory and stress dissemination of results. 2.3.2 M&E performance: Monitoring and evaluation were internalized by EPAGRI/CEPA from the start, received focused attention from Bank supervision missions and included seminars and workshops on methodology/other aspects with multi-state and stakeholder participation. Efforts were made to develop a strategic, operational approach which would institutionalize good M&E practices in key participating agencies. EPAGRI/CEPA took the initiative on enhanced measurement of the approved outcome indicators, evidence of strong buy-in. The MTR study (FEALQ/USP, 2006) reported a tendency for the system to emit large amounts of data but not be able to efficiently generate aggregate data compatible with the project's core development indicators, but this was addressed and will be further consolidated under the follow-on project. 2.3.3 Evaluation performance was very good and all expected products were delivered, albeit delayed, and included: an "ex-ante" study (EPAGRI/CEPA, 2005); the MTR progress report

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(FEALQ/USP, 2006); a "pre-final" evaluation, originally intended as the mid-term but delayed (EPAGRI/CEPA, 2008); a final evaluation using control groups (EPAGRI/CEPA 2009), complemented by micro-catchment monitoring studies; and, a Borrower Completion Report (SEE/EPAGRI, 2009). Quality was generally very good.

2.4 Safeguards and Fiduciary Compliance Safeguards: 2.4.1 Indigenous Peoples: Project engagement with indigenous peoples (IP) was governed by an Indigenous Peoples Plan (IPP), viewed as an innovative learning opportunity for project agencies, especially EPAGRI, which had little prior experience. The Bank social safeguards specialist supervised the IPP closely and activities implemented for indigenous groups made significant headway: (a) five Indigenous Lands Development Plans were prepared, covering eight lands and some 1,850 families; (b) the project worked closely with about 7,000 Guarani, Xokleng and Kaingang people, investing R$2.6 million (RIF resources including technical assistance), and leveraging another R$1.6 million through partnerships.13

2.4.2 Challenges facing the Indigenous Peoples Strategy throughout project execution were:

• Limited number of technical assistance and other relevant professionals in EPAGRI’s municipal offices with appropriate training/skills to work with IP, especially as five additional (Guarani) lands were regularized after appraisal;

• Prohibition on making physical investments on un-regularized lands, or in working in areas subject to serious conflict, although many preparatory actions (mobilization, training, diagnostic plans, technical assistance) were permitted and conducted. (See Annex 5 for indigenous beneficiary opinion survey).

2.4.3 Environment: Positive and sustainable environmental impacts were a project objective. Activities under the Environmental Management component explicitly promoted conservation, protected biodiversity, reduced pollution and created/consolidated protected areas. The Environmental Education sub-component successfully boosted public awareness of environmental issues. Investment proposals under the RIF were routinely screened for environmental implications and monitored for compliance based on the Operational Manual; and the RIF included a window for Environmental Conservation. EPAGRI had environmental specialists on staff and contracted a legal specialist to evaluate environmental investments, legal reserves, environmental licensing, and aspects of the Serra Tabuleiro State Park. Environmental "multipliers" were trained to assess environmental impact, and to prepare/distribute environmental technical guides and brochures about Federal and State environmental laws.

Fiduciary:

13 Investments/activities included community plots, small reservoirs, grains storage facilities, housing and sanitation, re-forestation, environmental and income-generating activities.

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2.4.4 Financial Management: The final Financial Management supervision (FMS) in April 2009 (seven were conducted) maintained the FM rating as Satisfactory and the FM risk as Low. The two financial management information systems (CIASC and SAFF)14 were rated Highly Satisfactory in attending to the project’s accounting and financial needs, including production of Bank-required reports. Arrangements/systems for project accounting, financial management and information systems were found to be providing the information necessary for project management. Institutional arrangements were considered satisfactory with the segregation of functions strengthening internal controls.

2.4.5 Audit: Nine audit reports were prepared and with few exceptions, were received in the Bank by the due date. Audit opinions were generally unqualified or qualified exception with no serious issues detected. Any issues requiring follow-up were resolved efficiently by the Borrower in cooperation with the Bank team.

2.4.6 Disbursement: Disbursements were exceedingly slow in the first three years, reaching barely 10% of the Loan by end-2005. This was due primarily to the delayed launching of activities under the Rural Investment Fund (RIF) component to which about 75% of Loan funds were allocated, and to the focus on training and organizing stakeholders in the first half. Sharp acceleration of RIF activity starting in 2006 through closing saw some 90% of the Loan disburse in that period.

2.4.7 Project Costs: Total project costs exceeded appraisal estimates by about 4.3%, with the costs of Component 1 Institutional Development and Organization about 9% less than expected, despite outputs meeting or exceeding both initial and revised (post-MTR) targets in a high proportion of cases, suggesting lower unit costs than initially estimated. The Rural Investment component cost about 12% more than expected, Project Management was 14.7% above its appraisal estimate and the Environmental Management component was about 16% lower. The Borrower's contribution to total project costs was about 110.5% of expected. 2.4.8 Legal: At Closing, the project was in compliance with all legal covenants.

2.4.9 Procurement: Project procurement was generally straightforward governed by a Procurement Plan and based on Bank "no objections" when required. The only issue was delays and bureaucracy associated with compliance with the Bank’s requirement for international participation/bidding for certain consultancies. This was resolved through consultation between the Bank and Borrower.

2.5 Post-completion Operation/Next Phase 2.5.1 Follow-on operation: Evidence that environmentally sound land management practices adopted at the micro-catchment level by small farmers can boost productivity and increase incomes has resonated with the State Government which is working with the Bank to prepare an innovative, rural operation utilizing a SWAp element, the Santa Catarina Rural Competitiveness Project with a proposed loan of US$90 million and total project cost of US$246 million. The operation emphasizes small-farmer competitiveness, linking organized groups to markets,

14 CIASC – State’s accounting and budgeting system; and SAFF – planning, supervision and management controls in a single system.

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leveraging greater integration of public programs at the micro-catchment level, and consolidating important elements of MB II still pending at closing.

3. Assessment of Outcomes

3.1 Relevance of Objectives, Design and Implementation Rating: High overall relevance 3.1.1 The PDO continues to have high overall relevance for sound land management, agro-livestock productivity growth and rural poverty reduction in Santa Catarina. Decentralized approaches which improve the productivity, competitiveness, and organization of vulnerable rural populations remain a primary development tool with an established and evolving track record in many regions. Evidence suggests that the technical and operational strategy has positive impact, can be scaled up, can host/catalyze further innovation including a major intensification of efforts to develop more sophisticated production models and marketing arrangements for small-scale rural enterprises, and remains consistent with the Brazil Country Partnership Strategy, 2008-2011.

3.2 Achievement of Project Development Objectives 3.2.1 The following findings are based on impact evaluation and case studies, beneficiary/stakeholder opinion surveys, and the Borrower Completion Report. The use of supplementary sub-indicators developed post-MTR to enhance measurement of the approved KPI - and by definition the PDO - is explained in sections 1.2 and 2.1, and the framework and linkages are shown in Annex 2, Appendix 1. Objective 1: Support for Government efforts to integrate environmental and social sustainability into development and poverty reduction strategies

3.2.2 Achieved: The project invested about US$112.0 million, including a Loan of US$62.8 million, to change the way State sector institutions and 153,000 diverse rural stakeholders integrate and plan social and environmental strategies, and to inculcate awareness of conservation’s role in raising productivity and reducing rural poverty. The project: (a) assisted 59,000 poor rural families to develop green productive practices capable of sustainably increasing productivity and incomes on around 264,000 ha; (b) ensured that 89,000 poor families benefited from social, environmental and income improving investments designed as an incentive to adopt and continue conservationist practices on their main economic asset – land; and (c) created 936 Micro-catchment Development Associations the vast majority of which have a Development Plan permitting more effective and sustainable local level integration of public development programs funded under federal and state rural poverty and NRM strategies. These achievements are already having spillover effects beyond the project micro-catchments.

3.2.3 Environmental and social sustainability was also boosted through the enactment of two State environmental laws, and the development and validation of planning models for Ecological Corridors in two major catchments. The Ecological ICMS (Tax on the Movement of Goods and Services) Law was enacted and regulated and the State Protected Areas Law (SEUC) was enacted, regulated and had systems established. Planning for the Ecological Corridors of the Rio Chapecó and Rio Timbó River Basins was completed and innovative macro-strategies for their socio-economic development were prepared under which the natural forest/landscape would constitute the strategic planning unit and the micro-catchments would serve as operational

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planning units. Implementation was launched as the project closed, and will be completed under the proposed new Rural Competitiveness Project. 3.2.4 In addition, three Strategic River Basin Plans for integrated management of water resources were developed for the Chapecó, Timbó and Jacutinga river catchment areas, subsequently extended to all major catchments State-wide. Further, a Census of Water Users was completed for these three catchments (also extended state-wide), administrative premises were established on site in each case and FATMA’s institutional and human resources capacity to conduct integrated management of water catchment areas was improved through specialized training. Consolidation of the Rio Tabuleiro State Park made satisfactory progress through stakeholder mobilization, installation of administrative and visitor buildings and other actions. 3.2.5 Impressive gains were made to modernize state water resources management, including the Water Resources Information System and the System for Grants of Water Usage Rights (outorgas) developed on the basis of the project-supported State Census of Water Users. Recommendations of the Water Resources Management Study conducted as part of the sub-component Technical Assistance for State Structural Adjustment had results far exceeding appraisal expectations including creation of the Water Resources Information System (SIRHESC, www.aguas.sc.giv.br) cited as a national reference model by the National Water Agency (ANA). The system was already replicated by the State of Rio Grande do Sul and represents a commendable achievement by the Secretariat of Sustainable Development (SDS) which closely supervised the study and its follow-up.

Objective 2: Improvements to income-generating opportunities and living conditions for the rural poor

3.2.6 Achieved: Direct investments under the Income Improvement and Housing Improvement windows of the RIF, along with improved NRM, helped to increase the incomes and raise the living standards of families in the Priority poorest groups. Extrapolating from final evaluation survey results, poverty declined in 64% of the 880 micro-catchments targeted at appraisal, an achievement of around 91%.

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EPAGRI/CEPA (2009) showed that the incomes of a sampled 698 Priority poor farmers (Marginal and Transition 1) representative of the 38,360 Priority farmers who benefited from RIF Income Improvement investments, in 268 micro-catchments representative of the 936 total project-assisted micro-catchments state-wide, increased their incomes. Increases averaged 30.6% by 2008, compared to an increase of 16.6% for the control group. A separate survey of 417 Priority beneficiary families showed that 86% were able to improve their incomes between 2005/06 and 2007 (EPAGRI/CEPA, 2008). A related case study which monitored the evolution of incomes and productivity on 70 properties over two agricultural years (2005/06 and 2007/08) found that net farm income rose an incremental 105% in the period, from R$6,344 to R$12,992. The employment creation element of the KPI was not studied.

3.2.7 Living conditions closely associated with rural poverty were also impacted by the project. Some 49% of participating families had their houses improved through investments in physical renovation, household sanitation and/or water supply. Demand for social investments under the RIF was exceptionally strong; indices of housing conditions, sanitation and water supply at appraisal explain such demand. Some 55,313 families in 285 municipalities and 851 micro-catchments benefited, 77.5% of which were among the Priority target groups. Sanitation

15 Using the 936 micro-catchments actually assisted, the result is 61%, about 87% of the appraisal Key Performance Indicator target.

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represented 40% and housing renovation 60% of the R$42.0 million invested.16

Some 91.4% of beneficiaries surveyed (EPAGRI/CEPA 2009) said their subproject was successfully implemented and operational. About 95% expressed a high degree of satisfaction and 92% of these beneficiaries stated that the project had resolved their most urgent/pressing housing problems. Benefits reported by beneficiaries included improved health, physical security, comfort, social relations and environment.

3.2.8 The percentage of Project beneficiaries categorized as below the poverty line declined, a striking achievement of the project. By end-project, 19.3% of surveyed beneficiaries had exceeded the income limits for classification in the poorest Priority cohorts and had moved to a superior level (EPAGRI/CEPA 2009). Key determinants were project investments in training, technical assistance and rural extension which fostered organization, better productive planning, soil and water conservation practices, and improved production systems and productivity. Investments under the Rural Investment Fund (see Annex 2) had a direct impact on incomes and household living conditions. Annex 3 presents the positive rates of return from economic and financial analysis of project-financed agro-livestock and forestry activities, as well as non-agricultural activities, further quantifying the benefits of project participation.

3.2.9 A critical factor was improved agro-livestock productivity which increased an average 24.7% on sampled farm properties via the adoption of sustainable productive practices. A preliminary final impact evaluation (EPAGRI/CEPA, 2008) analyzed eight representative annual crops and dairy production investments, finding that productivity had increased an average 24.7% based on the adoption of sustainable farm systems, soil conservation and NRM practices. Bassi (2009) found positive but more modest results for five of six crops studied. Productivity increases ranged from 7.8% (cropped beans) to 24.3% (manioc), with increases averaging 12.7% in the period 2003-2009.

Objective 3: Reversed land degradation and better protection of the State’s natural resources

3.2.10 Moderately high achievement: The project did not measure the extent to which land degradation was reversed but it is likely to be significant given the scope and scale of conservation activities financed. Natural resources management practices (water, soil and/or vegetation) were improved on all 936 project-assisted micro-catchments covering a large proportion of the State territory. The project financed soil management and conservation practices on about 263,693 ha, and about 29,000 farmers are now managing their natural resources more conservatively. Some 59,000 families improved their production systems consistent with modern environmentally sound practices. Basic sanitation equipment/systems were financed for 21,700 families, representing 24% of total rural sanitation needs state-wide, and with important impacts on soil and water quality. Further, 2,306 ha of Riparian Forest (mata ciliar) were re-planted or renovated, and 31,300 water sources were protected.

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Another 3,500 families regularized and modernized systems for the collection and disposal of pig waste, a critical environmental issue in Santa Catarina. The project did not scientifically study/measure effects of project actions on soil loss.

16 Sanitation: protection of water sources, improved wells, acquisition of water storage equipment/systems, pumps, household distribution lines, septic tanks and effluent treatment.

17 Another 14,000 water sources for human consumption were improved through a range of field activities under the Environmental Education sub-component.

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3.2.11 Water quality showed improvement, based on measurement and beneficiary perceptions, with more intensive action recommended under future operations. Under the rubric of improved water quality, some 68% of total demand for assistance in the seven micro-catchments monitored/surveyed (Bassi, 2009) was absorbed by activities to increase vegetation cover, improve soil filtration capacity, control contamination and control surface water run-off. The impact of project actions on drinking water quality showed reduction of bacteria in five of the seven micro-catchments but pollution was not completely eliminated. Heat tolerant bacteria were reduced in six of the seven micro-catchments and potability improved from 15% to 20% between 2004 and 2009. Further, 34% of monitored properties made environmental improvements likely to improve water quality; of these, 67% showed reduced concentration of heat-tolerant bacteria and at 18% of collection points, concentrations were reduced to zero. Water turbidity (an indicator for soil loss) showed modest improvement, but pH levels were reduced in all micro-catchments to legal levels for household consumption.

3.2.12 Important natural resource conservation and protection benefits are also likely to emanate from achievements described in paras. 3.2.3 to 3.2.5 in terms of the State’s ability to replicate, scale up and monitor its environmental strategy state-wide.

Objective 4: Enhanced local governance and community participation in decision-making

3.2.13 Achieved: By end-project, planned Project participatory mechanisms were operating effectively at all levels - community, micro-catchment, municipal, regional and State –stakeholders having been trained and organized in the first three years, and gaining practical experience. The pyramid of linked, participatory, deliberative and executive bodies worked well despite its intricate structure, and beneficiary representation at all levels was maintained at the minimum 50% to ensure key decisions, priorities and processes were demand-led and governance was democratic and orderly. In the case of the Micro-catchment Development Associations (MDA) and Municipal Animation Groups (GAM), evaluation results from the project’s monitoring of 19 micro-catchments (EPAGRI/CEPA 2009) show satisfactory operational levels with positive opinions of performance in 84% of cases. Some 95% said the decision where to invest was participatory and democratic, 86% said the investment attended the group’s needs and 77% said the investment was governed by joint usage rules.

3.2.14 Social capital was increased as a result of participatory processes, training and organization, and the experience of selecting, implementing, operating and maintaining an investment. At the micro-catchment level, EPAGRI/CEPA 2009 showed that family empowerment reached satisfactory levels in 95% of cases, and social network development was good/very good in 74%.

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Analysis of certain component elements of self-management, in this case the capacity to work and invest in groups, 65% of beneficiaries surveyed said there had been an increase in partnerships for group activities within the monitored micro-catchments, improving inter-personal relationships, cooperation and integration. The Borrower Completion Report states that project decentralization, and community organization/decision-making, neutralized opportunities to use project resources as a political bargaining chip. However, the capacity of MDAs to achieve self-management (i.e., operate autonomously) was found to be a complex and protracted process not amenable to easy measurement on a broad enough scale or with an acceptable level of confidence. More work is needed.

18 The concept of empowerment in this case took into account: representation of stakeholders in the MDAs and/or GAMs; community participation level; leadership role of youth, women and retirees in project activities; community participation in preparation of Micro-catchment Development Plans; the project’s progress/status at the municipal level; and, power of the community, the MDA and GAM, to bring facilitators, animators and executing agencies into the project.

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3.3 Efficiency 3.3.1 An independent economic analysis by the Food and Agriculture Organization (FAO) shows that the Project was economically and financially viable. The ICR stresses the preliminary nature of this analysis given the recent land management and farm systems improvements on many farms/micro-catchments. The outlook is promising, especially under a more intensive, strategic effort to promote value-added activities and organized group ventures and value chains. See below and Annex 3. 3.3.2 Economic Analysis: (a) Net Present Valueof all agricultural and non-agricultural activities covered by the analysis is R$884.0 million and the project Internal Rate of Return (IRR) is a comparatively high 45.1%. By activity, the dairy/tobacco model shows the highest IRR of 99.1%, while the beans/corn/eucalyptus is lowest at 31.6%; and (b) Sensitivity Analysisshows minimum IRRs of 34% (10% reduction in revenues and increase in costs and NPV about R$300 million lower), 38.8% (10% increase in costs, NPV R$200 million lower)), and 40.4% (10% reduction in producer revenues, NPV R$135 million lower). The project is considered viable even if future conditions/scenarios deteriorate. 3.3.3 Financial Analysis: The Financial Internal Rate of Return (FIRR) for the 12 farm models studied averages 34%, and ranges from 25.2% (Beans, Corn and Eucalyptus) to 43.6% (Dairy). The Net Present Value of incremental income of the 12 models averages R$22,606, ranging from R$6,850 to R$45,328 per year. See Annex 3. 3.3.4 The table below summarizes appraisal rate of return expectations and outcomes:

Rate of Return Appraisal Actual Economic (IERR) Range 20% - 30% Range 31.6% - 99.1% Financial (FIRR) Range 30% - >50% Range 25.2% - 43.6% Project 19% 45.1%

3.4 Justification of Overall Outcome Rating Rating: Moderately Satisfactory

3.4.1 This rating is based on the following:

• Project objectives were relevant to the needs of poor farmers in micro-catchment areas and components were consistent with the PDO, but project design was over-engineered in relation to available institutional and human resources capacity and the timetable;

• Even so, the huge effort and commitment of executing agencies saw the project achieve most of its objectives and generate significant positive impacts, several of which far-exceeded appraisal expectations;

• Promising results were obtained for income generation, poverty reduction, and NRM, and sustainability is rated moderate, with the caveat that certain outcomes need more formal study/measurement, consolidation, and/or time to mature;

• Sustainability and functionality of community/micro-catchment-level governance bodies was satisfactory at closing but variable in some areas, and consolidation is essential;

• The Loan disbursed fully, and economic and financial rates of return on farm models studied – based on actual project experiences - were positive; and,

• The development priority remains relevant for small farm families in this State, with the emphasis now needing to shift to more intensive productive activities, competitiveness,

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leveraging the catalytic effects of better coordination between Federal, State and local programs, and close attention to human resource development and availability.

3.4.1 While project implementation was consistently satisfactory during the latter part of project implementation, producing most of the outputs designed to feed into expected results/impacts and reaching satisfactory levels for likely achievement of the PDO, explicit and strict measurement of the broadly-defined Key Performance Indicators – as required by the ICR - was not achieved. Thus, it is more correct procedurally, to rate the project MS rather than the S shown in the final ISR.

3.5 Overarching Themes, Other Outcomes and Impacts (a) Poverty Impacts, Gender Aspects, and Social Development

3.5.1 Poverty impacts: The actual/potential impact on poverty reduction is suggested by the economic and financial results and final evaluation studies of the project's productivity, income and poverty reduction effects. Broader poverty impacts including on family wellbeing were not studied in depth, but over 47,000 families benefited from housing improvements. As described below and in Annex 2, poverty targeting worked well. Further, the management and sustainability of beneficiary farmers' productive asset - land - was improved along with the general level of farmer organization and capacity for collective action. Many poor rural families are now better-positioned to take advantage of more complex productive activities planned under the follow-on project, and with their micro-catchment and farm development plans - and expected better access to skilled technical support - have greater potential to absorb and benefit from other Federal and State programs. 3.5.2 Gender: The Bank team and EPAGRI actively mobilized women's participation in the MDAs and in training programs. The organizational and participatory methodology itself created space for women's participation, and they were prominent in seminars and municipal/regional meetings where their views sustainable development, gender inclusion, and food security were expressed. Supervision field visits verified women's commitment and presence in project activities. While not quantified, it is likely that women benefited from improved family income and other investments such as water supply, sanitation and housing renovation. The project did not track their direct inclusion as recipients of RIF grants for productive activities. Traditional patterns tended to prevail; women did the preparation and implementation but male family members received the RIF funds. 3.5.3 Targeting: The targeting methodology and framework were effective. Targeting mechanisms were based on socio-economic and environmental indicators with greater weight on poverty.19 About 78% of all RIF investment grants and 86% of total value went to the Priority categories. See details, Annex 2. (b) Institutional Change/Strengthening

3.5.4 Executing agencies gained valuable experience in a broad range of complex activities. It was clear by end-project that EPAGRI in particular, had integrated the project strategy as an

19 The Priority Target Groups were rural poor with a per capita income of less than two minimum wages including families classed as "marginal" (periferico, with per capita net farm income of < one minimum wage), Transitional 1 (net farm income < one minimum wage) and indigenous peoples.

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instrument of public planning, and was already expanding its use to non-project micro-catchments. CEPA showed strong ownership of M&E and developed a skilled team of evaluation professionals which will serve the follow-on project well. BPMA handled its environmental monitoring role well. However, all project agencies to varying degrees lacked adequate human resources, field presence/teams and/or structure, which could not be rapidly corrected and needed longer-term solutions. In the final stages of the project, there was an exodus of technical and other personnel from these agencies, an issue now being addressed in advance of the new operation. The project experience also underlined the need to design mechanisms to ensure inter-institutional coordination and describe them in the Operational Manual. The project avoided the now-discredited joint coordination body and made impressive gains in inter-agency collaboration, but by end-project the agencies were still sorting out rational, durable relationships and networks capable of supporting policies/programs longer-term.20

(c) Other Unintended Outcomes and Impacts (positive or negative)

3.5.5 Among several unintended, positive outcomes, the following stand out:

• State-wide water resources management systems based on recommendations of the State structural adjustment activities and studies. These included the System for Grants of Water Usage Rights (outorgas), the State Water Resources Information System and completion and institution of a State Census of Water Users.

• Improvement of water for human consumption under the Environmental Education sub-component proved a model of community adhesion/cooperation, with 1,595 groups and over 19,000 families improving about 14,000 water sources through a range of activities.

• Simple, effective technologies in low cost rural sanitation were developed based on project-financed training: eco-composters for organic household waste; rainwater capture in low cost steel-reinforced cement cisterns; slow filtration systems for water developed by the University of Santa Catarina and now applied state-wide; and, domestic waste-water treatment systems using bamboo, adaptable to different farm situations.

• Demonstration, observation, and validation units were financed using a new/separate financing window under the Rural Investment Fund, with 80% of the 193 units financed focused on income improvement. Diffusion of results is underway, including via internet. This proved to be a sound and effective way to include meaningful research in a project of this type. The utility and effectiveness of “pre-identified” and 100% scientific research - not demand-driven and not demonstrated on the farmer’s field - is limited.

• The Alphabet Rainbow Program of the Federal Ministry of Agrarian Development - which sets up small community libraries with teaching/reading materials on agriculture, citizenship and the environment, was introduced in many micro-catchment communities.

3.6 Summary of Findings of Beneficiary Survey and/or Stakeholder Workshops 3.6.1 The project financed several evaluations and case studies, virtually all of which utilize beneficiary surveys, as well as seminars and workshops, including with indigenous peoples. The ICR has chosen to refer the reader to Annex 5 where the most important studies/findings are summarized.

20 The project was instrumental in modernizing water resources management in Santa Catarina and at closing was promoting creation of a new water agency with comprehensive responsibilities in the sector.

19

4. Assessment of Risk to Development Outcome Rating: Moderate 4.1.1 This rating is based on the following:

• Institutionalization of a long process of improving natural resources management, farm practices and more recently, planning and implementation of rural poverty reduction strategies around the micro-catchment management unit;

• Institutional arrangements in place to continue this strategy and improved inter-agency collaboration;

• Micro-catchment planning approach was again validated, and stakeholders believe in it; • Using a physical area (of private land), defined hydrologically as a planning and

management unit, and continued intention to explore and develop its potential; • Large investment in quality of life improvements with good sustainability; • Large investment in small scale, technically simple and financially sustainable productive

activities; • Soil conservation practices now inculcated under two projects with good technical

sustainability and multiplier/spillover effects to rest of the State; • Very successful Environmental Education program in schools demonstrating

conservationist vision and practices to young, rural people; • High proportion of beneficiary farm families increased productivity and incomes and

have economic incentive to continue applying modern, green practices; • Efficient use of Bank funds and positive economic and financial rates of return

5. Assessment of Bank and Borrower Performance

5.1 Bank Performance (a) Bank Performance in Ensuring Quality at Entry Rating: Moderately Unsatisfactory 5.1.1 This rating is based on the following:

• project design built on a successful micro-catchment approach and technical strategy; • sought to capitalize on government’s burgeoning interest in decentralized, sustainable

rural poverty reduction based on modern land management technologies; • reflected lessons of similar operations and the evolving political and social economy; • consultative, participatory design process including indigenous peoples; and, • included a well-designed, objective targeting framework to maximize benefits for the

poorest cohorts consistent with the new, dominant poverty focus. Balanced by:

• misjudgment of technical and human resources, and time, needed to implement a project of such complexity and scope;

• under-estimation of the increased difficulty represented by the poverty dimension; • vision of productive activity - upon which the poverty reduction strategy depended - too

sophisticated for poor farmers and available technical resources; • evidence of hasty preparation under acute time constraints; and, • inadequate design and presentation of the PDO and project outcome indicators.

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(b) Quality of Supervision Rating: Satisfactory 5.1.2 This rating is based on the following:

• frequency, pro-activity, skills composition and coverage of project supervision missions; • outstanding quality of supervision reporting, time-bound Action Plans and follow-up; • sustained attention to M&E, safeguards, problem resolution, fiduciary aspects and

accountability/oversight (including of RIF subprojects/investments); • detailed, repeated analysis/reporting of performance under the Indigenous Peoples Plan; • excellent working relationships with project agencies; • impressive outcomes despite complexity, due importantly to overall supervision quality.

Balanced by: • delayed Mid-term Review leaving inadequate time to fully-implement recommendations

regarding difficult activities, or to consolidate gains; 21 • supervision missions might have been stronger catalysts in agencies’ efforts to establish

partnerships to leverage technical and other expertise; • unrealistic ratings in the first two years, assigning higher than merited DO value to

mainly foundational activities. (c) Justification of Rating for Overall Bank Performance Rating: Moderately Satisfactory

5.1.3 This rating balances the following major themes/factors: • the extent to which accelerated preparation and design flaws in an otherwise conceptually

and strategically consistent, innovative project hampered its implementation and reduced its potential, especially in regard to more complex productive activities; and,

• strong, far-reaching supervision effort by a team intellectually and technically committed to the project methodology, to building and maintaining momentum, and to supporting the Borrower in maximizing outcomes under difficult circumstances.

5.2 Borrower Performance (a) Government Performance Rating: Satisfactory 5.2.1 This rating is based on the following:

• sustained commitment of the State to the project concept and strategy, despite electoral turnover and throughout the long interlude between LM II and MB II;

• piloting of the project technical strategy well in advance of project approval; • internalization of the project strategy as an element of public policy; • steady counterpart funding performance; • cooperative, responsive relationship with the Bank team throughout.

(b) Implementing Agency or Agencies Performance Rating: Moderately Satisfactory

21 The Bank team maintains that conducting the MTR at its true mid-point – around August 2005 – would have meant a meaningless exercise and opened the way to a flood of RIF investment proposals without adequate capacity and organization at the micro-catchment level to undertake them.

21

5.2.2 This rating is based on the following: • massive initial efforts to implement training, organization and mobilization activities,

exceeding appraisal targets; • unusually strong commitment to effective M&E and its institutionalization; • flexible approach to expanding the scope/scale of project activities based on results; • willingness to adopt the project technical strategy for other, non-project rural activities; • progress in internalizing this strategy as a State public policy instrument; • excellent performance on targeting of project benefits to the poorest priority cohorts; • major unforeseen achievements in State integrated water resources management.

Balanced by: • persistent human resource deficiencies – especially technical specialists - both at

headquarters and at decentralized levels and important structural deficits in the Project Management Unit (SEE) and other agencies, over time;

• inadequate oversight by the responsible agency, of quality and performance of facilitators contracted by the MDAs, and hasty, superficial organization of MDAs in some regions post-MTR, to accelerate lagging implementation;

• lack of pro-activity in leveraging longer-term and/or expedient partnerships and expertise to overcome these deficiencies, particularly affecting progress on the project's more complex productive goals. 22

(c) Justification of Rating for Overall Borrower Performance Rating: Moderately Satisfactory 5.2.3 This rating is based on the following:

• Borrower showed sustained support for the project even through electoral change; • project reflected the State’s rural strategy but its willingness to tackle the complex set of

activities represented by project design was not matched by its institutional capacity; • even so, the massive effort by agencies to successfully implement the project paid off in

its many positive achievements; • Borrower showed unusually firm commitment to developing and institutionalizing strong

M&E systems, and showed strong ownership of the micro-catchment strategy as a management and organizing principle for rural poverty reduction and improved natural resources management;

• agencies were not proactive or resourceful enough however, to leverage the additional support and build the networks clearly needed, even though by end-project inter-agency collaborative arrangements had evolved well beyond initial levels.

6. Lessons Learned (a) The micro-catchment approach to planning and implementing natural resources management and agricultural production goals was further validated, and its potential

22 The ICR, while critical of this performance, believes project complexity and scope burdened project agencies at all levels, and human resource issues could not be easily or rapidly overcome.

22

effectiveness for rural poverty reduction was demonstrated. The micro-catchment has become a sustainable management unit, and an effective forum for the rural organization and planning essential for more complex productive and environmental activities. Of equal importance is the integration function of the micro-catchment plans and individual/group farm and investment plans as catalysts for both public and private sector resource targeting for poverty reduction in rural areas. (b) Complex, innovative projects of broad scope repeatedly demonstrate that training, organization and institutional growth occupy at minimum, the first half of the implementation period. This means calibrating expectations for the more difficult, “hard” activities to a relatively short, second-half period, and accepting the principle that a follow-on operation will be essential to deepen and consolidate initial gains. Project design might also intensify complexity over time based on achievement benchmarks including successful institutional performance at all levels and analytical evidence of capacity/team-building sufficient to launch specific types of activities. (c) Clear, objective targeting parameters and strong institutional commitment to compliance ensures the poverty focus of such projects. The participatory design of project targeting, conscious efforts throughout implementation to ensure that Priority categories were included in all activities - most importantly the Rural Investment Fund – and close oversight of applicants’ qualifications for participation, resulted in very high indices of their participation in a project not, by design, confined only to the Priority groups.

(d) The capillarity and decentralized managerial structure and quality of an executive extension agency are critical. Micro-catchment-based projects require a strong presence in the countryside. They are essentially a local level capacity builder, clearing house for demand, catalyst to more effective rural policy instruments, and a liaison for the project with local authorities and stakeholders. Complex tasks assigned to extension workers under the micro-catchment approach require clear professional criteria for selecting technicians and attention to training, especially important when responsibility for such services is assigned to municipal governments and/or community associations. Navarro (2008) recommends the formation of well-qualified, regional, multi-disciplinary teams with appropriate skills and a strong focus on training. (e) Design of a demand-led investment fund with discrete financing windows needs to reflect the fact that poor rural families will invariably select social investments over economic or environmental in the first instance. Only when their basic needs such as water supply, sanitation, electricity and housing are satisfied, will they turn to productive activities, and the nature of those initial activities in many cases is likely to be consumption-based, not market-based. Further, tying social capital formation to direct investment support entails a certain degree of risk that the causative link erodes the pursuit of independent, autonomous development. Target populations must be informed up front of the objectives of and limits on, project investment assistance. (f) Demonstration, observation, and validation units – demand-led under a Rural Investment Fund - are a sound and effective way to include meaningful research in a project of this type. The utility and effectiveness of “pre-identified” and 100% scientific research - not demand-driven and not demonstrated on the farmer’s field - is limited, as was also learned from the similar Sao Paulo Land Management III Project.

23

7. Comments on Issues Raised by Borrower/Implementing Agencies/Partners

(a) Borrower/implementing agencies (No issues raised) (b) Cofinanciers NA (c) Other partners and stakeholders NA

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Annex 1. Project Costs and Financing

(a) Project Cost by Component (in USD Million equivalent)

Components Appraisal Estimate (USD millions)

Actual/Latest Estimate (USD

millions)

Percentage of Appraisal

INSTITUTIONAL DEVELOPMENT / ORGANIZATION

15.70 14.27 90.89

RURAL INVESTMENT 77.10 86.48 112.17 ENVIRONMENTAL MANAGEMENT

3.30 2.76 83.63

PROJECT MANAGEMENT, M&E

7.00 8.03 114.71

Total Baseline Cost 103.10 111.54 108.19

Physical Contingencies 1.30

0.00 0.00

Price Contingencies 2.50

0.00 0.00

Total Project Costs 106.90 111.54 104.34 Front-end fee PPF 0.00 0.00 .00 Front-end fee IBRD 0.60 0.00 .00

Total Financing Required 107.50 111.54 103.76

Source: EPAGRI/SEE

(b) Financing

Source of Funds Type of Cofinancing

Appraisal Estimate

(USD millions)

Actual/Latest Estimate

(USD millions)

Percentage of Appraisal

Borrower 44.70 49.37 110.50International Bank for Reconstruction and Development

62.80 62.80 100.00

Beneficiaries23 -- 21.60 --Source: EPAGRI/SEE

23 Beneficiary contribution to investment subprojects was not estimated at appraisal and is not included in Borrower/State counterpart contribution. The State does not count this contribution in total project cost.

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Annex 2. Outputs by Component 24

2.1 Drawing on project Aide Memoires and the Borrower Completion Report (Epagri/CEPA, 2009), the following summarizes experiences/highlights under individual components and sub-components. Poverty targeting intentions are described below. Table 2.2 shows main output targets as revised post-Mid-term Review and achievements by end-project. Targeting:

2.2 The overall target population was an estimated 105,000 small and marginal farmers and rural laborers, and about 5,000 indigenous peoples residing in 880 micro-catchments (an estimated 3.6 million ha) out of Santa Catarina’s 1,683 total micro-catchments. The Priority target population from among this population consisted of: (a) rural poor with per capita net income of less than two minimum wages including those classified as “Marginal” (periferico – with per capita net farm income of less than one minimum wage), “Transitional type 1” (with per capita net farm income of less than two minimum wages) and Indigenous Peoples (IP). Although the target group was the poorest segment of the population in those areas (about 80,000 poor rural families including indigenous families, i.e., 75% of families to be benefited by the project), the project sought the participation of all members of the micro-catchment, especially for environmental activities. 2.3 Targeting, as mentioned in Main Text 2.2.4, was hampered by delayed completion of the Municipal Agro-livestock Census (LAC). An alternative strategy was devised, adhering to the principles set down in the Operational Manual and using municipal data and involving local communities in the selection and prioritization of micro-catchments. Upon completion in 2005, the LAC was found to have certain data limitations. It was used mostly to supplement municipal and micro-catchment diagnoses. Component 1: Institutional Development and Organization (US$19.9 m., 16.7% of total project cost) 2.4 Training Sub-component: This financed the preparation of implementers and beneficiaries for behavioral changes and new practices implied by the technical strategy, e.g. participatory rural diagnosis, group formation and operation, participatory planning and stakeholder monitoring, complemented by practical/technical courses in sustainable land management, production diversification and agro-processing. Some 92,000 stakeholders, including small farmers, indigenous peoples, rural workers and private extension workers were to be trained. 2.5 Implementation: The project trained about 153,000 stakeholders by closing, 166% of the original target and 94.5% of the new target set post-MTR. Of these over 96,000 were farmers. Training programs were repeatedly re-tooled and updated to maintain relevance but experienced certain difficulties including: the uneven quality and content of training; overlap with other organizations offering training to the same public; training needed to be more strategic in conforming to a narrower set of critical "lines"; and it would have benefited from more

24 Numerous changes were made to output indicators following the Mid-term Review. Original targets are in the PAD, Annex 2 but are not shown here due to the complexity of eliminations, additions and substantive changes.

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aggressive pursuit of partnerships with other state and federal institutions such as the Service for Support of Small and Micro Business (SEBRAE), SENAR and the Ministry of Agrarian Development (MDA). Even so, the sub-component met or exceeded most of its post-MTR revised targets. >>Final cost was US$3.24 million, 70.4% of appraisal. 2.6 Environmental Education Sub-component: This financed education programs to help develop an environmentally conscious society and boost stakeholder awareness of the connection between environmental problems and rural/non-rural livelihoods. The target population plus about 14,650 leaders were to be reached. Some 1,000 environmental teaching projects were also to be financed to allow schools within the beneficiary micro-catchment areas to comply with Federal laws on environmental teaching. 2.7 Implementation: This was an especially successful set of activities - coordinated by EPAGRI - which greatly exceeded many of its original and post-MTR targets, reaching 122,000 students/beneficiaries in 3,796 schools via some 1,128 educational events. It was organized under three activity lines: (a) Rural Extension to schools and rural families in environmental sanitation and innovative environmental technologies; (b) Community Mobilization and Art; and (c) Environmental Law and Production of Teaching Materials.

2.8 The sub-component was notable for the following:

• High levels of participation achieved and for its success in promoting innovative, low

cost technologies for improving water quality for human consumption. • The technical strategy was well-designed and its implementation was problem-free.

Features of the strategy included good local leadership, organized activities, collaboration teams and consistent participation of families, schools and technicians.

• Partnerships were another key feature: networks of people, institutions and communities informally linked.

• Flexibility with which it was executed, via expansion of activities and revision of targets. • The performance of farmers, indigenous groups and schools was well beyond initial

expectations, as was the involvement of youth and women.

2.9 Initial slow implementation of this sub-component was caused by the Bank requirement that all expenses even the smallest, be subject to three quotes making many activities non-viable. The issue was overcome by the State Government assuming full responsibility for expenditures.

2.10 The main challenge was staffing and developing multi-disciplinary teams (a common aspect of the project) to cover the wide reach of sub-component activities. >>Total cost of the sub-component was US$1.02 million, 90.2% of appraisal. 2.11 Rural Extension Sub-component: This financed promotion of the project among the target rural poor through information provision, support for group formation, assisting preparation of micro-catchment and farm plans, and assembling community demands for social, technical and financial support. Providers of technical and social assistance at the micro-catchment, municipal and regional levels would be trained. Some 440 “facilitators” would be contracted and paid by the Micro-catchment Development Associations (MDA) to support demand-led participatory planning and implementation at the community level. EPAGRI

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extension workers (“animators” at the municipal level and technicians at regional level) would back up the facilitators, the latter responsible for helping farmers prepare 880 (changed to 936) micro-catchment and about 70,000 individual farm plans. 2.12 Implementation: This was a complex set of activities which fully achieved the vast majority of its post-MTR targets and reinstated the prestige and effectiveness of rural extension - and EPAGRI's primary role - following decades of neglect. However, the breadth of sub-component activities and geographic coverage was wide and encountered problems in the uneven quality and composition of field teams. 2.13 The facilitators were contracted by the Micro-catchment Development Associations (MDA) from a cooperative pool of technical professionals and were paid directly by them. Although EPAGRI conducted oversight of the list of available professionals for this service, to some extent its relationship was arms length: facilitators were of uneven quality, professional qualifications were not standardized, and their numbers proliferated. Facilitators became overly involved in the preparation of proposals for the Rural Investment Fund; attention to micro-catchments tended not to differentiate messages between the more and less advanced; and, technical and political problems were associated with the large number of facilitators contracted by the micro-catchments. Even so, as additional micro-catchments opened up, manpower shortages became acute in some areas. At end-project, facilitators were reluctant to disband. While surveys reveal that the communities had become quite dependent on them to convey demands and resolve problems, their associations were not willing to pay for their services. The situation has become somewhat politicized since closing. The new project in Santa Catarina will not finance facilitators.

2.14 The MTR made a set of technical and organizational recommendations including re-aligning ATER activities to focus on prominent lines of action more oriented to production, to fostering the project's integration with other programs and sources of financing, and that the quality and content of Individual Farm Plans be greatly improved. The extent to which this was implemented is not known. >>Total cost of the sub-component was US$5.70 million, 95.5% of appraisal. 2.15 Adaptive and Social Research Sub-component: This financed a planned 340 technical and socio-economic adaptive research projects through a competitive process administered by a State Research Committee, with 50% membership of beneficiary representatives and 50% of partners/stakeholders such as NGOs, academic institutions, the scientific community, the Brazilian Agro-livestock Research Company (EMBRAPA), and EPAGRI, as peer reviewers. This committee managed research already identified but not yet underway. A Regional Research Committee performed a similar function at a decentralized level. It would also finance the municipal agro-livestock census (LAC) designed as the basis for municipal diagnoses, and the maps needed for the micro-catchment development plans. 2.16 Implementation: This was a successful sub-component with important products: the completed Santa Catarina Agro-livestock Census; mapping of all 936 involved micro-catchments; and a large number of research activities completed. Most of the studies were conducted by EPAGRI and the State University of Santa Catarina, with partners. So-called unidentified studies, i.e. newly-initiated as opposed to already underway, were based on the Micro-catchment Development Plans and were conducted by universities, EPAGRI, NGOs, and with community

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participation. Post-MTR, financing of agro-livestock demonstration plots was transferred to the Rural Investment Fund, generating important lessons (see Section 6). >>Total cost of the sub-component was US$2.71 million, 59% of appraisal. 2.17 Technical Assistance Sub-component supporting State Structural Adjustment: This financed special studies and consultant services to support State structural adjustment efforts and to be executed by the Governor’s office. Studies planned are described in table below. 25 Studies were to be submitted to the Bank one year after effectiveness to discuss findings and a dissemination strategy

2.18 Implementation: This sub-component was very successful and had unexpectedly far-reaching implications. Financed were a Water Resources Management Study, Water and Drainage Sector Study, and the Electricity Sector Restructuring Study.

2.19 Recommendations of the Water Resources Management Study led to the creation of the Water Resources Information System (SIRHESC, www.aguas.sc.giv.br) cited as a national reference model by the National Water Agency (ANA). The system has been replicated by the State of Rio Grande do Sul and represents a major achievement by the Secretariat of Sustainable Development (SDS) which closely supervised the study and follow-up. This study also resulted in the system for Grants of Water Usage Rights (outorgas), and the State Census of Water Users.

2.20 The Water and Sanitation Study was presented at a seminar and was seen as the basis for a complete restructuring of the sector, which was at the time threatening to affect the State's competitiveness in tourism and agro-industry. This study, along with passage of Laws 13.517 and 13.557 (Sanitation Policy and Solid Waste, respectively), was intended to constitute the legal structure for sector modernization. Study recommendations were incorporated in state policies and structures for water and sanitation.

2.21 Finally, at closing, discussions were underway to further expand the influence of these studies to the creation of a dominant water resources management institution and to a major expansion of human resources in the water sector which was seriously prejudiced by inadequate technical and operational manpower.

Studies Institution Responsible Instruments for Water Resources Management and Implementation Support

State secretariat for Sustainable Economic Development (SDS)

Studies for the State Water Supply, Drainage and Sanitation Sector: (i) Program for Assistance to the Water Supply, Sanitation and Drainage System; (ii) Planning for Water and Drainage Sector; and (iii) Structure of the Sector for Supply of Water, Sanitation and Drainage Services and its Regulation

SDS

Study of Micro-credit Programs in the State of Santa Catarina

Development Bank of the State of Santa Catarina (BADESC)

Studies of Existing Poverty Reduction Programs in SDS

25 The poverty reduction and micro-credit studies were dropped from the project and conducted by the State under different arrangements.

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Santa Catarina Study for the Restructuring of Electricity Centers in Santa Catarina

Electricity Company of the State of Santa Catarina (CELESC)

>>Total cost of the sub-component was US$1.59 million, 103.2% of appraisal

Component 2: Rural Investment (US$77.2 million, 72.3% of total project cost) 2.22 The Rural Investment Fund (RIF) was designed to promote adoption of the project strategy within the benefited micro-catchment with cost ceilings per type of beneficiary, micro-catchment and type of activity being promoted.26 The RIF initially financed three categories of demand-led grants: (i) home improvements(sanitation, piped water, waste disposal and minor structural improvements (available only to the poorest of the targeted cohorts); (ii) conservation and environmental purposes(re-forestation, protection of water sources, or schemes to increase bio-diversity, available to all farmers but with preference to poorer); and (iii) income generation(improved production systems, value-added schemes, or job creation (available to poorer farmers and landless laborers, and to other farmers only when in association with at least 66% of the target population but with a lower-cost share of grant contribution). The RIF was the responsibility of the State executive Secretariat through its Rural Investment Management Unt. 2.23 Following the Mid-term Review, two other lines were added: investments to benefit youth, and to establish demonstration, validation and observation plots to test productive alternatives. Use of grants was to be demand-led, and linked to micro-catchment development plans, individual plans and indigenous plans. Grants could also be used to repair critical stretches of rural roads, and to finance technical assistance for preparation and implementation of the above plans.

2.24 Implementation: Investments under this fund were based on Micro-catchment Development Plans and individual agro-livestock properties. Technical proposals were prepared using funds for payment of technical assistance financed by the RIF, and included an environmental impact assessment. Overall, investments were 102.6% of the Loan allocation (US$55.82 million) and close to 89% of the total Loan. Beneficiaries invested from own funds an additional R$43.95 million (31.3%). The RIF served 129,539 farm families among the three main lines and supported 936 associations to implement key parts of their Micro-catchment Development Plans.

• Total value estimated at appraisal for the income generation line of investments was US$17.3 million. Actual investments were some 15% higher. Individual, group and community proposals were registered totaling 34,540.

• Some 89% of all beneficiaries of this line were part of the project’s priority, targeted cohorts: 50% were in the Transition 1 group, another 35% were in the Peripheral group and 2% were indigenous peoples.

• Some 83% of all proposals were individual, reaching 29,493 beneficiaries. Groups constituted 16% of total proposals but reached 43,453 beneficiaries (about 8 persons per group), and community proposals were about 1%.

• Sampling exercises by fiduciary oversight teams verified that 99% of proposals were correctly financed without issues concerning the application of funds.

26 The project Rural Investment Fund (RIF) functioned as a special program under the existing State Rural Development Fund, which in turn operated under the incentive legislation enacted under the previous project.

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2.25 Certain changes were made: (a) The allowable limit of R$500 per individual beneficiary for water supply investments was replaced in 2004 by group/community proposals with a limit of R$40,000 and 80% financing by the RIF; (b) to promote re-planting of Riparian Forest and conservation re-forestation, in 2005, up to R$2,000 per hectare/per producer could be financed; (c) as a drought mitigation measure, construction of cisterns started in 2006, to a limit of R$1,500 per family with the RIF financing 80%; (d) rural youth became part of the priority public for RIF investments; and, (e) financing of agro-livestock demonstration plots was moved from the Research and Studies sub-component to the RIF. 2.26 As noted in the Main Text, the technical demands of the Income Improvement line of investments exceeded the capacity of both headquarters and field teams, and even when investments under this window accelerated around the time of the MTR, they were mostly small-scale and individual, not group, with little market insertion or sophistication – certainly not the types of activities and arrangements contemplated by the PAD. Table 2.4 below shows under Component 4 (Project Management), that no Specialist Consultants were contracted for activities under “markets” or “business administration”. Further, as noted by the Borrower Completion Report, initial implementation delays and slow disbursement exerted pressure on stakeholders to accelerate project activities, especially the RIF. This had negative results in some regions, causing the essential diagnostic, planning and social capital formation stages to be short-circuited in the organization of many MDAs, in certain regions and at that time, so that the facilitators could be contracted and RIF proposals increased. >>Total cost of this component was US$86.50 million, 112% of appraisal

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Table 2.1: Use of Resources - Rural Investment Fund Values (R$ million)

Investment Line Original 27 Total Proposals Supported by the RIF

% of Total Supported

Number of Beneficiaries

Income Improvement

53.80 45.66 32.24 32.4 59,102

Housing Improvement

13.45 37.90 26.50 27.5 25,129

Natural Resources 35.57 56.67 38.55 40.1 45,308 Sub-total: 102.82 140.24 96.30 100.0 129,539 Technical Assistance

33.80 66.48 66.48 - 936 MDA

Total: 136.62 162.77 162.77 - -

Table 2.2: Principal Activities supported by the Rural Investment Fund Investment Line Main Activities Supported

Income Improvement Traditional production improved on 68 properties; Traditional production improved and/or implementation of diversified alternatives on 39,641 individual properties and 19,365 properties organized in groups for collective use; Commercial re-forestation on 5,318 properties; 5,677 value-added ventures, mainly group; vegetable processing, acquisition of machinery and equipment. marketing infrastructure and processing of animal products.

Housing Improvement Housing reform (physical improvements, sanitation facilities/systems, water supply)for 26,414 families including indigenous groups; and support to 130 community socio-cultural activities.

Natural Resources Conservation practices on 26,169 properties; systems for the treatment of animal wastes (individual) for 2,437 families; systems for treatment of animal wastes for 1,076 groups; community acquisition of machinery and equipment for 9,079 families; recuperation of Riparian Forest and conservation re-forestation for 2,230 families; correct destination of domestic wastes for 21,309 families; 4,069 analyses of water quality; protection of water sources benefiting 14,756 families; collective systems for water capture and distribution benefiting 12,289 families.

Table 2.3: Targeting - Destination of Rural Investment Fund Resources Priority Group No. Families % Total Amount (R$

m.) % Total

Family Farmer: Marginal 27,619 31.76 36.720 38.13 Family Farmer: Consolidated 7,945 9.14 6.092 6.33 Family Farmer: Transition 1 36,738 42.24 42.131 43.75 Family Farmer: Transition 2 8,489 9.76 6.208 6.45 Rancher 162 0.19 0.123 0.13 Family Farmer with non-agricultural income

2,236 2.57 1.218 1.27

Rural laborer 2,662 3.06 2.730 2.84 Indigenous 942 1.08 0.902 0.94 Rural Youth 177 0.20 1.167 0.17

Source: Project Unit

27 Values in end-project Reais (US$1.00 to R$1.7698); at appraisal rates of US$1.00 to R$2.43, amounts would be respectively, R$18.47 million (Housing Improvement), R$48.84 million (Natural Resources), R$73.87 million (Income Improvement), and R$46.41 million (Technical Assistance). Total is R$187.59 million.

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Component 3: Environmental Management (US$3.8 million, 3.5% of total project cost)

2.27 Watershed Management Sub-component financed expansion of the State’s efforts to integrate environmental and river basin management policies and laws, and the preparation and implementation of three river-basin sub-catchment plans with selection criteria established for the watersheds and sub-catchments. Two selected watersheds had significant biodiversity value and hence would be the basis for identification of ecological corridors. 2.28 Implementation: Implementation was fully satisfactory. Three Strategic River Basin Plans for Integrated Management of Water Resources were developed for the Chapeco, Timbo and Jacutinga river catchment areas, and subsequently for all major catchments state-wide. A Census of Water Users was completed for each catchment (also extended to the rest of the state), administrative premises were established on site in each case and FATMA's institutional and human resources capacity to conduct integrated management of water catchment areas was improved through specialized training. Further, the Water Resources Information System (SIRHESC) and System for Grants for Water Usage Rights, stemming from the project's structural adjustment activities/studies, further boosted the State's capacity to integrate environmental and social sustainability into development and poverty reduction strategies, and to institutionalize river basin management policies and laws. >>Total cost of the sub-component was US$1.62 million, 71% of appraisal 2.29 Ecological Corridors and Protected Areas Sub-component financed creation of ecological corridors and protected areas, and would oversee regulation and dissemination/application of the newly-enacted State Protected Areas (PA) System law and the Ecological ICMS Law (expected to be enacted). One existing state park would be consolidated. New public and private PAs would be promoted and two ecological corridors would be consolidated. Component implementation would be coordinated by FATMA and SDM which would work with EPAGRI, NGOs, municipalities, stakeholder associations and other entities, and implementation would be overseen by an environmental specialist. 2.30 Implementation: This challenging sub-component was fully implemented based on post-MTR review of what could be achieved. Planning models for Ecological Corridors and integrated water catchment management were developed and validated for the Ecological Corridors of the Chapeco and Timbo River Basins, and innovative macro-strategies for their socio-economic development were designed under which the natural forest/landscape would constitute strategic planning units and the micro-catchments, operational planning units. FATMA technicians were trained on themes related to corridor maintenance and management. Full implementation of the two corridors is expected under the planned new rural competitiveness operation. 2.31 Consolidation of the Rio Tabuleiro State Park made satisfactory progress. Stakeholders were mobilized, a headquarters/visitors building was installed, a thematic center was built, personnel were contracted and teaching materials produced. 2.32 The Ecological ICMS (Tax on the Circulation of Markets and Services) Law was enacted and the State Protected Areas Law (SEUC) was regulated and systems established. >>Total cost of the sub-component was US$1.14 million, 78% of appraisal

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Component 4: Project Management, Monitoring and Evaluation (US$8.0 million, 7.5% total project cost)

2.33 Project Management Sub-component financed establishment and operation of the Project Management Unit (PMU) at state level and 14 subsidiary units at regional levels. Regional units were executive arms for stakeholder bodies responsible for participatory planning, decision-making and oversight of implementation at all levels. 2.34 Implementation: This sub-component was fully-implemented as evidenced by the large body of significant social, economic and environmental results available at closing and scale of community organization. The micro-catchment planning and training period, i.e., the preparatory phase, took far longer than estimated at appraisal due to the overall level of difficulty and number of activities moving forward simultaneously. Project management encountered difficulties - as revealed by the MTR - due to the State Executive Secretariat (SEE) not being structured as per the Operational Manual, and a deterioration of the decentralized coordination units which impacted on the quality of managerial oversight and supervision of the project’s activities in the year preceding the 2006 elections. In the project’s final stages, there was an erosion of the project’s management team in SEE, and in the Regional and Municipal Secretariats. Technical and other staff in key project agencies, anticipating potential changes following closing and/or under a new project left the project. The issue of SEE’s structure persisted through to closing. Preparation of the new SWAp operation is addressing these weaknesses. >>Total cost of the sub-component was US$4.16 million, 144.4% of appraisal

2.35 Monitoring and Evaluation Sub-component financed project monitoring, evaluation and distribution of project results and impacts. An automated, comprehensive Management Information System (MIS) was to be based on the system already established under the previous project. Monitoring of the Rural Investment component was to be generally more intensive given that it constituted the bulk of project expenditures. This sub-component would also support continuous monitoring of socio-economic and environmental aspects in pilot micro-catchments. Project impact evaluations would also be financed – ex ante (Year 1), mid-term (Year 3) and ex-post (Year 6). 2.36 Implementation: The project delivered all required evaluation reports and case studies but timeliness was an issue and this may also have been related to the ambitiousness of the program which inter alia, included three full evaluations. The baseline planned for end-Year 1 was not completed until 2005. The Mid-term Review was expected to produce an evaluation and performance progress review but the former was seriously delayed and became a preliminary final evaluation (EPAGRI/CEPA 2008). The actual final evaluation (EPAGRI/CEPA 2009) was not fully compiled at closing - although all data and information had been collected - and was released in its component parts, some as summaries of planned future content. Quality was variable. See Annex 9. 2.37 As described in the Main Text, concerns within EPAGRI/CEPA and on the part of an FAO monitoring and evaluation specialist, that the original project indicators were inadequate in type and quality, led to changes in the Key Performance Indicators and the addition of many new output indicators. The Operational Manual was not revised to record/formalize these changes. The quality and measurability of the revised indicators was improved but not optimal and linkage to the PDO was unclear in some cases.

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2.38 Due to initial flaws in the formulation and presentation of the appraisal Design Summary (Marco Logico) which were never corrected, project reports/evaluations show some confusion as to what was meant to be monitored and between project outcomes (the Key Performance Indicators) and outputs. 2.39 The project established a very good quality Management Information System (MIS) which evolved over time and effectively monitored the project’s physical and financial progress. Analysis of the MIS by the MTR led to its further improvement and the system was judged fully capable of monitoring the planned new project. >> The final cost of the sub-component was US$1.55 million, 59% of appraisal.

2.40 Community Organization Sub-component financed separate resources for the creation and operation of all stakeholder bodies, supporting day to day operations and meetings of a planned 880 MDAs, 293 municipal-level deliberative bodies, 14 regional deliberative bodies and a state-level deliberative committee. 2.41 Implementation: All planned deliberative bodies were established and trained. The number of regional secretariats rose to 20 following government changeover in 2003 and a re-configuration of the project’s decentralized structure in the regions. The number of micro-catchments covered by the project also expanded to 936 as did the number of MDAs and GAMs. Evaluation analysis found that the deliberative framework needed strengthening, having become a more consultative approach over time. >>Total cost of the sub-component was US$2.33 million, 91.4% of appraisal

Project Mid-term Review 2.42 The Mid-term Review was of high quality and influential but its late scheduling (end-2006 versus the actual mid-point, April 2005) limited the time available for important second-half course corrections.28 However, the MTR also coincided with an electoral turnover giving the Bank team the opportunity to explain the project and secure direct assurances of commitment from the incoming governor and senior authorities on budget, maintenance of experienced technical staff and other issues. The MTR comprised a Bank mission with appropriate specialists including safeguards, environment, financial management and procurement; an independent performance review (FEALQ/USP, 2006)29 utilizing interviews with 10 diverse focal groups of stakeholders; a strategic planning seminar with members of these groups and, an operational planning seminar with principal project executors. 2.43 At the time, disbursements were about US$20 million with the emphasis on institutional/human development and on housing rehabilitation. Income-generating investments under the RIF were still modest. Physical results at the time showed a high proportion of targets already met or exceeded despite modest expenditures, indicating the possibility that costs may have been over-estimated and/or targets under-estimated at appraisal, as well as the fact that the

28 As noted elsewhere, a timely MTR in April 2005 would have left 32 months to the planned closing date, to complete and consolidate pending activities/situations.

29 Relatorio de Revisao de Meio Termo, Fundacao de Estudos Agrarios "Luiz de Queiroz" (FEALQ/University of Sao Paulo), November 2006.

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more sophisticated, higher cost and difficult activities were still to come, i.e., productive investments under the Income Improvement window of the RIF. 2.44 The performance study (FEALQ/USP, 2006):

• highlighted the economic, social and environmental gains already made by beneficiaries in over 900 micro-catchments, and their potential to reduce out-migration;

• praised the project’s institutional impact on reclaiming the status of technical assistance and rural extension services - via the improved technical structure of EPAGRI;

• stressed the links between local teams’/technicians’ capacity to understand and explain the project’s strategic and productive "vision" to family farmers and the efficiency and success of its implementation;30

• re-confirmed the relevance and adequacy of project objectives and the decentralized structure/instruments including facilitators and animators for human capital formation;

• noted the tendency of extension technicians to over-emphasize the group development ethic over the individual/family, at the expense of training beneficiaries in better farm/commercial management and fostering their competitiveness as an individual business enterprise;31 and,

• was sceptical of the project’s goal of having poor beneficiaries pay - even partially - for extension services, when wealthier farmers were receiving this service free, and of extension messages rejected by ageing producers for promoting intensive agriculture in a countryside steadily losing (young) labour; and,

• criticised a tendency for extension technicians and facilitators to promote organic and agro-ecological agriculture as a technological panacea for guaranteeing sustainable production on most small farms, without regard for the sophisticated requirements for producing and marketing such products, their higher costs of production compared to conventional agriculture, and their labour requirements in a countryside steadily losing young workers; and,

• called for focused efforts to include rural youth in project activities. 2.45 Recommendations:

• extension of the closing date to improve the long-term sustainability of community self-management, and institutionalization of the project technical strategy;

• formal strategies for engaging rural youth and for utilizing the project’s capacity to concentrate demand for and access to other public programs;

• much greater emphasis on income generation and environmental investments; and • improvement in the managerial structure at all levels, and improved training focusing on

professional and managerial skills, market identification and productive alternatives.

30 The study also mentions a tendency for extension technicians and facilitators to promote organic and agro-ecological agriculture as a technological panacea for guaranteeing sustainable production on most small farms without regard to the sophisticated requirements for producing and marketing such products, their higher costs of production compared to conventional agriculture, and their labor requirements in a countryside steadily losing young workers.

31 Ironically, by end-project, a high proportion of productive investments were individual not group, but not because of the MTR’s recommendations but rather that it was easier to work with individuals than try to build viable group activities.

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Table 2.4: Project Outputs - Planned post-MTR and Actual at end-Project32 Components and Activities Unit MTR

Revision End-

Project %

Component 1: Institutional Development & Organization 1.1 Training Stakeholders (total) No. 161,920 153,040 94.5 Farmers No. 91,979 96,140 104.5 Leaders No. 42,003 34,399 81.9 Technicians No. 3,219 7,088 220.2 Local instructors No. 1,124 1,036 92.2 Managers No. 942 942 100.0 Indigenous families No. 1,541 1,381 89.6 Groups No. 936 720 76.9 Rural youth No. 20,000 11,636 58.2 1.2 Environmental Education Beneficiary awareness-building No. 125,000 122,000 98.3 Environmental education workshops No. 1,112 1,158 104.0 Environmental education events No. 665 1,128 169.6 Citizen panels No. 198 192 97.0 Community musical programs No. 1,000 600 60.0 Educational trips No. 196 645 329.0 Thematic groups formed No. 2,098 2,139 102.0 Events, indigenous communities No. 20 37 185.0 Teaching materials produced No. 650,000 500,000 76.9 Training, awareness-building No. 135 111 82.2 Consultancies No. 15 18 120.0 Guidance in resource leveraging (for youth)

No. 28 25 89.2

Schools mobilized/recruited No. 2,137 3,796 177.6 Projects implemented No. 500 715 143.0 Educational events No. 751 842 112.0 Educational materials No. 3 13 433.3 School ecology prizes No. 30 30 100.0 Env. Educ. workshops for teachers No. 320 350 109.4 1.3 Rural Extension Micro-catchments (MC) prioritized No. 936 936 100.0 MC with map prepared No. 881 881 100.0 MC with Mobilization Group (GAM) No. 936 936 100.0 MC with Development Assn. (MDA) No. 936 936 100.0 MC with facilitator contracted No. 844 844 100.0 MC with facilitator/agreement No. 92 118 132.0 MC with development plans prepared No. 935 935 100.0 Municipalities involved No. 289 289 100.0 Investment proposals No. 135,071 122,850 87.0 Farm Development Plans prepared No. 69,069 47,869 69.3 Regional Executive Secretariats No. 30 29 96.7

32 This table reflects the project’s monitoring of output indicators/targets in PAD Annex 1 Project Design Summary, PAD Annex 2, Appendix 2 Implementation Performance Indicators, and a series of new targets added post-MTR because they were already being monitored by the project. The PAD contained some 42 output indicators, increased post-MTR to 126. Due to the sheer volume of changes made, the ICR has not attempted to show the appraisal originals vis a vis adjusted/added indicators.

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Municipal Exec. Secretariats No. 289 289 100.0 State Mobilizers ("animadores") No. 7 7 100.0 Regional Mobilizers No. 76 76 100.0 Municipal Mobilizers No. 534 550 110.0 Facilitators contracted No. 436 436 100.0 Tech. assistance/other institutions No. 491 421 85.7 Area involved in MBII project Ha. 4,512,369 4,517,369 100.1 Area with soil conservation practices Ha. 250,815 228,815 91.2 Families assisted (total) No. 145,045 141,735 97.7 1.4 Research and Studies Demands identified w/- research underway No. 22 19 80.0 Demands not identified No. 50 9 18.0 Social and anthrop. studies No. 5 3 60.0 Research under execution No. 109 108 100.0 Municipal Census Municipals. 293 293 100.0 Micro-catchments mapped No. 880 936 106.0 1.5 State Structural Adjustment33 Poverty reduction study No. 0 0 Micro-credit study No. 0 0 Water resources study No. 1 1 100.0 Water and sanitation sector study No. 3 3 100.0 Electricity sector (CELESC) study No. 1 1 100.0

Component 2: Rural Investments Value-added subprojects No. 1,174 5,593 476.4 Families with improved production systems

No. 36,329 59,006 162.4

Homes improved No. 40,599 47,250 116.4 Families practicing improved NRM No. 32,855 29,013 88.3 Area reached/covered by improved practices

No. 250,000 263,693 105.5

Fams. using proper pig waste management No. 3,831 3,660 95.5 Mata ciliar (Riparian Forest) planted No. 2,000 2,306 162.0 Water sources protected No. 30,245 31,225 103.2 Individual and group investments financed No. 129,827 122,851 94.6 Families benefited No. 132,361 87,046 65.7

Component 3: Environmental Management Integrated MC management plans identified and designed

No. 3 3 100.0

Inst. capacity strengthened for water resources management

1 1 100.0

Premises constructed, personnel trained and equipment acquired

- - -

33 The Study of Instruments for the Management of Water Resources, concluded in 2006, enabled the implementation of the Water Resources Information System, System for the Grant of Water Usage Rights, and the Census of Water Users. The three studies supported by the Bank: (i) Planning for the Water and Sanitation/Drainage Sector; (ii) Support Program for the Sanitation and Supply System; (iii) Structure for the Provision of Services for Water Supply and Sanitation/Drainage were concluded in the first quarter of 2007. Through these studies, legislative proposals were prepared for Water and Drainage, and Solid Waste, which were approved by the State Legislature and became Laws 13 517/05 and 13 557/05 respectively.

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Premises in Rio Timbo sub-catchment 1 1 100.0 Premises in Rio Jacutinga sub-catchment 1 1 100.0 Premises in Rio Chapeco sub-catchment 1 1 100.0 Premises Sao Miguel d’Oeste 1 0 0.0 Premises Herval d’Oeste 1 0 0.0 Institutional capacity of CPPA strengthened

1 1 100.0

Ecological corridor Rio Chapeco catchment identified and designed

Corridor designed

1 1 100.0

Ecological corridor Rio Timbo catchment identified and designed

Corridor designed

1 1 100.0

Two Ecological Corridors in initial process implementation

Corridor Implemented

2 2 100.0

FATMA technicians trained on theme of corridors (interstate trips to exchange experiences).

Trip 2 2 100.0

HQ of PEST with personnel contracted and trained, and materials and equipment acquired to receive visitors

Visitor center 2 2 100.0

PEST mobilization program improved Program 2 2 100.0 Thematic center identified, built, and functioning

Thematic Center

2 2 100.0

FATMA technicians trained in UC management (international trips)

Trip 1 0 0.0

PEST photographic portfolio prepared Database 1 1 100.0 Teaching materials produced and PEST disseminated

Book and folder

9,000 9,000 100.0

PEST video and DVD Unit 1 1 100.0 Interpretative trail implemented in PEST Trail 2 0 0.0 Approval for creation of Ecological ICMS, and regulation of SEUC

2 1 50.0

Events and other activities supporting legislation (dissemination etc.)

No. 30 20 66.7

Data base for UC developed No. 1 1 100.0

Component 4: Project Management SEE established No. 1 1 100.0 Regional Project Secretariats No. 20 20 100.0 Municipal Project Secretariats No. 285 285 100.0 Facilitators available No. 436 436 100.0 Personnel contracted by SEE Per yr. 60 60 100.0 Specialist Consultants contracted Per month 43 21 48.8 - training SEE, SER, SEM Per month 6 2 33.3 - markets Per month 10 0 0.0 - business administration Per month 1 0 0.0 - monitoring Per month 4 3 75.0 - participatory management Per month 2 2 100.0 - other Per month 20 24 120.0 Special studies No. 0 0 0.0 Annual project audits No. 6 6 100.0 Management Information System (MIS) No. 1 1 100.0 Study tours No. people 0 0 0.0 Evaluation system established No. 1 1 100.0 Ex-ante evaluation concluded No. 1 1 100.0

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- Management of Water Resources Catchments

No. 1 1 100.0

- Ecological Corridors and Conservation Units

No. 1 1 100.0

- Participatory Organization No. 1 1 100.0 - Water Quality No. 1 1 100.0 - Use and Protection of Soils No. 1 1 100.0 - Socio-economic Evaluation No. 1 1 100.0 Micro-catchments with monitoring completed

No. 7 7 100.0

Micro-catchments with simplified monitoring

No. 12 12 100.0

Mid-term evaluation completed No. 1 1 100.0 Ex-post evaluation completed No. 1 1 100.0 State coordinating committee established No. 1 1 100.0 Regional coordinating committee established

No. 14 14 100.0

Municipal coordinating committee established

No. 285 285 100.0

Micro-catchment committee established No. 935 935 100.0 Legal and accounting consultancies Per year 25 25 100.0 Dissemination system established No. 1 1 100.0

Table 2.5: Institutions Responsible for Project Components and Sub-components Components Sub-components Executing

Institution 34 Institutional Organization and Development

- Training - Environmental Education - Rural Extension - Technical Assistance for State Structural Adjustment

- EPAGRI - EPAGRI - EPAGRI - SDS/CELESC

Rural Investments - Housing Improvement Line - Natural Resources Line - Income Improvement Line - TA for MDAs

- SAR

Environmental Management

- Integrated Water Catchment Management - Ecological Corridors and Conservation Units

- SDS and BPMA

Project Administration

- Administration - Monitoring and Evaluation - Participatory Management

- SAR/SEE - EPAGRI - CEPA/SAR

34 EPAGRI: Agro-livestock Research and Rural Extension Company; SDS: State Secretariat for Sustainable Economic Development; Electricity Company of Santa Catarina (CELESC); SAR: State Secretariat for Agriculture and Rural Development; SEE: State Project Executive Secretariat; BPMA: Military Police Environmental Battalion; CEPA: Center for Agricultural Socio-Economics and Planning.

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Appendix 1: Key Performance Indicators, Enhanced Measurement Framework and Achievement at End-project

As stated in the Main Text, Section 1.2, the EPAGRI/CEPA monitoring and evaluation team, the Bank project team and an M&E specialist fromthe Food and Agriculture Organization (FAO), agreed that the clarity and measurement of the approved Key Performance Indicators (KPI) couldbe improved and deepened by a set of "sub-indicators" which would look at each KPI from several angles. With few exceptions, the correspondingM&E exercises provided a rich cache of complementary data/information. The framework is shown below. Results are reported in theData Sheetand the Main Text, section 3.2.

Project Development Objectives Key Performance Indicators: PAD Enhanced MeasurementParameters

Achievement at end-Project

Overr iding PDO: Reduce rural poverty in the State of Santa Catarina, while improving the management of natural resources. Poor rural families’ incomesand livelihoods would be improved by the following:

Enactment and publication of Stateenvironmental regulation and itsapplication to the design and initiation ofpilot Ecological Corridors and protectedareas.

Planning models for Ecological Corridorsand integrated water catchmentmanagement developed and validated intwo catchments.

Achieved1. Suppor t for Government effor ts tointegrate environmental and socialsustainability into development andpover ty reduction strategies.

Inferred indicators (from PAD): Strategicriver basin plans for three catchments andconsolidation of one State park

System for grants of rights to utilize water,and water resources information systemdeveloped and implemented.

Achieved

Incomes of farmers in the priority targetgroup increase (see Data Sheet, Indicator 1for correlation with KPI)

Achieved

At least 40% of project participatingfamilies have their houses improved(renovation, sanitation, water supply).

Achieved

Reduction in the incidence of rural povertyin 70% of the 880 micro-catchmentsassisted.

Reduction in project beneficiariescategorized as below the poverty line.

Achieved

2. Improvement to income-generating oppor tunitiesand livingconditions for the rural poor .

Improved family incomes and employmentamong the target group

Agro-livestock productivity increases byan average 20% on farm properties viaapplication of sustainable productiveprocesses promoted by the project.

Achieved

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Improvement in natural resourcemanagement practices in all assistedmicro-catchments

Improved natural resources managementpractices (water, soil and vegetation) in80% of project-assisted micro-catchmentscovering 200,000 ha.

Achieved3. Reversed land degradation andbetter protection of the State’snatural resources.

Improved water quality and reduced soilloss in benefited micro-catchments.

Improved water quality based onstakeholder perceptionsand qualitymeasurement.

Partially Achieved

Project participatory mechanismsareoperating at all levels (community, micro-catchment, municipality, region and State.

Achieved4. Enhanced local governance andcommunity par ticipation in decision-making.

Effective operation of project participatorymechanisms set up at community, micro-catchment, municipal, regional and statelevels Social capital is increased in assisted

micro-catchments.Partially Achieved

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Annex 3. Economic and Financial Analysis Introduction

3.1 The purpose of this exercise is an economic analysis focusing on project investments and, as a complement, to evaluate the economic viability of agro-livestock and forestry production models and the value-added (non-agricultural) represented by the productive activities of project beneficiaries. Methodology

3.2 There are a series of instruments and methodologies for economic analysis as a support to decision-making, but due to limited data and time, it was decided to use as analytical instruments four widely-accepted concepts: gross margin for the activity; net present value, internal rate of return and simulation of scenarios. Gross margin means the gross returns over sales, indicating the surplus over sales after payment of operational expenses. 3.3 The net present value or NPV seeks to evaluate the viability of an investment project by calculating the real value of all its cash flows, a frequently-used indicator in studies analyzing the economic viability of projects. The internal rate of return or TIR represents the profitability generated by a certain investment (also frequently-used as one of the key indicators in studies analyzing project viability), that is, it represents a rate of interest which, if the capital invested had been placed at this rate, exactly the same final rate of profitability would have been obtained. In other words, it represents a rate which is utilized as a discount rate, making the NPV equal to zero. 3.4 In constructing the cash flow, receipts are considered the entry point, representing the sum of the quantities produced times the average market price of the products, while the exit point is the value of the variable cost which represents a sum of the value of disbursements with inputs, plus the estimated value of labor, because project beneficiaries are characterized by their labor being - typically - family-based. While the value of the investment was considered as the project support for each beneficiary, that is, the average value of Rural Investment Fund support, eventual additional support needed in the form of investments in the activity, were not taken into account. 3.5 In the case of simulation of parameters, likely, simply-prepared scenarios were proposed. For this, prices were taken as a critical variable – products and inputs – represented by the value of the cost of production. In assembling the scenarios, pessimistic and optimistic situations were defined. In the pessimistic case, receipts were reduced 10% or costs increased 10%; in the optimistic case receipts increased 10% or costs decreased by the same amount. It is important o note that this is a very simple simulation, changing just one or two variables each time. 3.6 The economic analysis was conducted considering three levels of evaluation: (a) each individual activity, and evaluating the profitability of the crop, that is, how much it contributed to the farmer’s income per unit of production, in this case per hectare; (b) in the second case, production models were analyzed representing a group of agricultural activities comprising each productive system within a region, and non-agricultural, income-generating activities most representative of the group of beneficiaries supported by the project; and, (c) finally, the project

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as a whole was analyzed, that is, the full cohort of models of properties and activities, agricultural or otherwise, taking into consideration the public to be benefited and actual project investments. Material utilized 3.7 All information utilized in this analysis was provided by technicians involved in the coordination or execution of the project, through documents or interviews. Data about investments were considered as total project values, both Bank contribution and State counterpart resources. 3.8 Total project investments were expected to be US$67.5 million or R$162.0 million, converted at the time of project appraisal using a dollar equivalent to two Reais and 40 centavos (US$1.00 = R$2.40), and taking into account physical and price contingencies. In the financing timetable for implementation, the following distribution was projected: 31% in Year 1, 33% Year 2, and 37% in the final year.35 Of the total projected financing, 77% was destined for direct financial support to beneficiaries, with a portion invested in the social area, for housing improvement. For support to productive, income-generating activities, whether agro-livestock, forestry or agro-industry, a total investment of R$110.0 m. was envisaged. Taking into account that the project foresaw attending some 40,000 beneficiaries with financing, the average financing per beneficiary was to be R$2,750. Notably, it was assumed that the beneficiaries would bring other resources to the investment activities – agro-livestock and forestry - either their own or borrowed (e.g., PRONAF) and equivalent in value to the grant received from the project. 3.9 On the other hand, project receipts or profits were used as estimates for what was received by beneficiaries from agricultural and non-agricultural activities resulting from support for income improvements. It is known that there were returns on social and indirect investments, but what was difficult to measure was quantifying only the returns on productive activities. 3.10 Specifically, data and information on activities for the analysis of models of typical properties or production systems of project beneficiaries were obtained based on farm property monitoring conducted by EPAGRI. From a sample of 250 observations only those activities with greater representativeness were selected. 3.11 The choice of nine productive activities most commonly selected by beneficiaries and representing over 85% of all activities, was based on socio-economic monitoring of the project, and in this way they were most representative of the productive systems of potential beneficiaries, as shown in the following table. Livestock raising for dairy production, grains represented by corn and beans, tobacco (shed and hot-house), onions (horticulture), banana (fruticulture), manioc, palm and eucalyptus (most representative of forestry activities).

35 Three years represent the actual period of project investments under the Income Improvement line of the RIF.

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TABLE 1: Number of Observations and Frequency of Activities – Project Socio-economic Monitoring

Activity Observations Percentage Frequency Milk/dairy 88 35.2%

Grains 70 28.0%

Tobacco 45 18.0%

Horticulture/Flowers 14 5.6%

Cattle/meat 10 4,0%

Poultry 7 2.8%

Swine 3 1.2%

Beekeeping 1 0.4%

Reforestation 1 0.4%

Other 11 4.4%

Total 250 100.0% Source: Project Management Unit/Epagri

3.12 Property models were also selected based on models prepared for the economic analysis of the project in 2003, only excluding two models from the west of the state. Twelve property models were identified representing agro-livestock and forestry productive systems of project beneficiaries, comprising three for the Western region, four for the Plateau, and five representing the coastal plains, as described below. TABLE 2: Representative Project Models and Activities

Regions/Models Activities

West 1 Beans Corn Eucalypt

West 2 Beans Corn Dairy

West 3 Beans Tobacco (shed) Corno

Planalto 1 Beans Corn Eucalypt

Planalto 2 Beans Corn Eucalypt Dairy

Planalto 3 Beans Corn Dairy

Planalto 4 Tobacco (hot-house) Dairy Dairy

Litoral (coastal plain) 1 Corn Eucalypts Dairy

Litoral (coastal plain) 2 Onion Corn

Litoral (coastal plain) 3 Corn Manioc Eucalypt Dairy

Litoral (coastal plain) 4 Banana Palm hearts

Litoral (coastal plain) 5 Tobacco (hot-house) Dairy Corn Source: Project Management Unit

3.13 The definition of what income-generating activities would be part of this study was decided during a meeting with the Management and Markets team in April 2009, in the Municipality of Concordia. Data and information demanded for the analysis of models (systems) of income-generating activities were obtained from EPAGRI specialists in this area. The study team opted to present the surveys of agro-industries in the regions of Joinville and Concordia, since there was no detailed survey for the entire State. 3.14 Agro-industries were selected which had received technical assistance from EPAGRI and represented around 50% of total observations: (a) derivatives of sugar cane; (b) honey processing; (c) bakery; (d) minimally-processed vegetables, as per tables attached.

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3.15 The number of beneficiaries attended by the project was estimated taking into account the following parameters: the timetable for project support and the production models proposed according to regions of action. TABLE 3: Number of Beneficiaries to be Attended by Agro-Livestock and Forestry

Models Regions/models 2009 2010 2011 Total

West 1 1,705 2,091 2,396 6,192

West 2 2,274 2,788 3,194 8,256

West 3 758 929 1,065 2,752

Plateau 1 738 905 1,037 2,680

Plateau 2 535 656 752 1,944

Plateau 3 1,110 1,361 1,560 4,032

Plateau 4 370 454 520 1,344

Coastland 1 1,058 1,297 1,486 3,840

Coastland 2 353 432 495 1,280

Coastland 3 1,058 1,297 1,486 3,840

Coastland 4 353 432 495 1,280

Coastland 5 705 864 991 2,560

Total 11,017 13.506 15,477 40,000 Source: Project Management Unit

3.16 As previously stated, the Project also supported non-agricultural income-generating activities, and the criteria for distribution of beneficiaries attended were the same as agricultural and forestry productive activities, the project financial timetable, and activities to be supported. It merits observation that the number of beneficiaries attended with these activities is with repetition, that is, those to be included in the 40,000 project beneficiaries are from the same public attended. TABLE 4: Number of Beneficiaries to be Attended by Income-generating Non-

Agricultural Activities Activities 2009 2010 2011 Total

Sugar cane by-products 580 720 820 2,120

Honey processing 260 320 360 940

Bakery 480 590 670 1,740 Processed vegetables

d880 1,080 1,240 3,200

Total 2,200 2,710 3,090 8,000 Source: Project Management Unit

Analysis

3.17 Before examining the results of the economic analysis it should be clarified that this analysis is incremental, due to the characteristics of the project, because it proposed to make interventions involving farmers who were already established whether in productive and environmental activities or in social. However, the objective here is to measure the additional gains due to project investments. In this way, all analyses take into account incremental values, whether costs or earnings, in the activities analyzed.

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3.18 It should be noted that it is not an objective of this evaluation to analyze the characteristics and circumstances which brought these crops and activities to have greater or lesser returns, such as market risk, complexity of the productive process, among others, but only to indicate that the greater the value of the margin of the activity, the greater will be the positive contribution of the crop in the evaluation indicators (internal rate of return and net present value) of the project. Activities

3.19 Comparing the gross margin, in absolute terms, between the activities, three bands of value can be seen: (a) those with margins exceeding R$1,000 per unit (ha) and time (year), notably onions, tobacco (both types), and palmito (Palm Hearts). In an intermediate band, between R$1,000 and R$600 are located dairy production and banana. Finally, below R$600 are corn, manioc, eucalyptus and beans. In regard to margins in relative terms, which represent the profitability of the activity, due to the greater risk of losses, two major groups are observed: one with indices above 50% and those below this value. The most notable in the top group is Palm Hearts at 76%, while beans show the smallest relative margin of just 30%. TABLE 5: Value of Revenue, Costs and Margins of Agro-Livestock and Forestry

Activities Activities Gross Revenues Operational Cost Gross Margin %

Banana 1,228.5 474.4 754.2 61%

Onion 1,897.0 860.3 1,036.7 55%

Eucalyptus 324.0 159.5 164.6 51%

Beans 385.2 269.1 116.1 30%

Tobacco (hot-house) 2,290.8 1,251.2 1,039.6 45%

Tobacco (shed) 1,762.6 736.9 1,025.7 58%

Dairy 1,865.2 1,240.0 625.2 34%

Manioc 621.5 398.7 222.8 36%

Corn 671.4 296.1 375.3 56%

Palm Hearts 1,330.0 317.1 1,012.9 76%Source: Data from project-based analysis

3.20 From the analysis of non-agricultural income-generating activities, a very similar pattern can be seen, both at the absolute and relative margins, with values of around R$ 45,000 per year. Only in agro-industry for processed vegetables does one see a return above R$60,000 per year, representing a margin of about one-third more than the other agro-industries. In relative terms also, one observes two groups of those situated around 20% and one with a relative margin of about 11% - honey processing – and more subject to risks. TABLE 6: Value of Revenues, Costs and Margins of Non-Agricultural Activities

Agro-industries Gross Revenues Operational Cost Gross Margin %

Honey processing 391,875 347,312 44,563 11.4%

Cane derivatives 215,802 173,059 42,743 19.8%

Bakery 217,227 169,503 47,724 22.0% Processed vegetable matter

d352,640 288,662 63,978 18.1%

Source:: Data from project-based analysis

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3.21 Looking at 12 production models of typical beneficiary properties, taking the full range of agricultural, livestock and forestry activities into account for each of the project regions, one can analyze: the marginal outcome of the property as a whole, net present value and the economic and financial internal rate of return, the latter taking into account - in net cash flow terms - the value of financing of production of these activities. Production models 3.22 Analyzing the gross margins of these models one can observe a great variation in values, as shown in the following table, averaging around R$5,000 per year, with the smallest value of R$2,052/year in Model 1 in the West and Plateau regions (the same model), and the greatest value being the property 4 model in Plateau region with a margin of R$9,599/year. In the other models which are above the average there is a margin of around R$6,500/year, while those below the average have a gross margin of around R$3,000/year. 3.23 Values for the internal rate of return are quite high, with the average being 59.5%, but varying 40 points above this and about 30 points below. What could partly explain this high return is the low value appropriated from the investments in the activities and properties, such that the amount considered as the investment was the average value of project support, and the optimistic/positive estimates of revenues and expenditures. 3.24 The net present value of the models also shows great variation, with a difference of about R$48,000 during the useful life of the project of 20 years. As there is a direct relationship between the internal rate of return and the net present value, the high values could be justified by the same explanations used earlier. 3.25 In regard to the IRR and NPV of the financial analysis, as stated earlier, it takes into account the value of the financing of productive activities. It is easy to perceive that when the IRR and NPV decline, the greater the need for financing of that activity. TABLE 7: Value of Margins, IRR and NPV of the Production Models for Typical

Properties Economic Financial

West Gross Margin IRR NPV IRR NPV

Model 1 2,052 31.6% 8,273 25.2% 6,850

Model 2 4,618 53.1% 23,798 31.1% 18,317

Model 3 7,496 79.2% 42,332 40.3% 34,165

Plateau

Model 1 2,052 31.6% 8,272 25.2% 6,850

Model 2 6,116 63.4% 32,979 33.6% 25,424

Model 3 5,869 61.3% 31,400 32.8% 24,032

Model 4 9,599 99.1% 56,172 43.6% 45,328

Coastland

Model 1 5,999 62.6% 32,254 33.5% 24,905

Model 2 3,244 46.3% 16,029 34.9% 13,974

Model 3 6,445 66.8% 35,177 34.5% 27,195

Model 4 2,521 40.5% 11,696 34.5% 10,707

Model 5 7,520 78.3% 42,390 38.3% 33,536 Source: Data from the analysis of Project information

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3.26 Looking at the indicators of results from the analysis of investments in income-generating activities, one can also see big differences within the project of an activity with a rate of return of 66.3% (vegetable processing), which is around double the verified rate for the production of cane derivatives (33.2%). Even so, it is worth mentioning that even so this is very attractive due to the opportunity cost of 12%. 3.27 In the financial analysis of these activities, those considered the flow of financing, it can be seen that all show a significant fall in the results, most notably for the honey processing subproject which becomes non-viable with an IRR less than the opportunity cost. 3.28 A parameter used frequently for decision-making about investments is the “pay back” which is nothing more than the time which the net cash flow takes to recover the capital invested. Looking at this parameter, the processed vegetables subproject is the most interesting, while the cane derivatives subproject is less attractive.

TABLE 8: Value of the Investment, IRR, NPV and Pay-back of the Non-Agricultural Activities

Economic Financial Agro-industry Investment Pay back

NPV IRR NPV IRR

Honey processing 109,757 2.5 223,547 49.3% - 9.8%

Cane derivatives 157,959 3.7 173,444 33.2% 31,908 13.7%

Bakery 89,022 1.9 257,343 60.6% 117,306 19.2%

Processed vegetables 100,648 1.6 351,947 66.3% 112,017 16.3%

Source: Data from project information

The Project 3.29 In calculating project return, all revenues and expenditures were considered for agricultural and non-agricultural activities, taking into account the models of typical properties in the region, as well as direct investments in production systems and productive units. Besides this, the values to be disbursed by the project were also taken into account, such as investments in components and subcomponents, in those activities which will have indirect benefits for farmers such as training, extension services, management and other. 3.30 Considering these conditions, the resulting IRR of the project was 45.1% with an NPV of R$884.0 million, showing the project to be quite attractive compared to the opportunity cost. But, it is worth noting that, in general, agro-livestock and forestry projects have elevated rates of attractiveness due to their productive characteristics, but being subject to adverse climatic conditions they generate great uncertainty, and coefficients normally have high variability. 3.31 More pessimistic scenarios were developed, considering that the results obtained were quite attractive. Three possible situations were prepared: the first simulates a reduction of 10% in product prices, signifying reduced revenues by producers; the second increases by 10% the prices of inputs and labor, that is, an increase in costs of production for the activities; and finally, a combination of the two scenarios, trying to show a more pessimistic situation and how results are affected.

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TABLE 9: Simulation of Project Parameters Scenarios IRR NPV (R$ millions)

Original project values 45.1% 884.4

Reduction of 10% in producer revenues 40.4% 748.9

Increase of 10% in costs of production 38.8% 692.9

Reduced revenues and increased costs, by 10% 34.0% 557.4

Source: Data from the analysis based on project information

3.32 Analyzing the scenario with a reduction of 10% in farmer revenues, the IRR declines about five percentage points and the NPV is reduced by about R$135 million; on the other hand, with an increase of 10% in cost of production the IRR falls from 45.1% to 38.8% and the NPV is reduced by R$200 million. Combining these two scenarios, the reduction in revenues and increase in costs, the IRR is 34% and the NPV about R$300 million lower than the original situation, but even so it is quite an attractive rate if compared to the opportunity cost of 12% and the situation of actual market rates of interest. Therefore, these data are a good indicator that the project is viable even if future scenarios deteriorate

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Annex 4. Bank Lending and Implementation Support/Supervision Processes

(a) Task Team members

Names Title Unit Responsibility/ Specialty

Lending Graciela Lituma Task Team Leader Ag. Economist Chris Parel Sr. Country Officer Institutional Edward Bresnyan Community Participation (Cons.) CDD Judith Lisansky Social Scientist/Anthropologist Safeguards Tulio Correa Financial Specialist Fin. Management Anemarie Proite Procurement Specialist Procurement Marta Molares-Halberg Senior Counsel Legal Esme Jaya Abedin Operations Analyst Preparation Karen Ravenelle Team Assistant Country Support Carlos Velez Lead Specialist - Water Water Katia Medeiros Environmental Specialist FAO/CP Environment Ivo Marzall Agronomist (Consultant) FAO/CP Agro-livestock Nestor Bragagnolo Micro-catchment Specialist (Cons.)FAO/CP Rural DevelopmentAlberto Costa Rural Sociologist (Consultant) FAO/CP Social Juan Morelli Agric. Economist (Consultant) FAO/CP Econ. Analysis

Supervision/ICR Maria Isabel Junqueira BragaSr. Environmental Specialist LCSDESafeguards Nestor Bragagnolo Consultant LCSARRural DevelopmentJoao Vicente Novaes CamposFinancial Management Specialis LCSFMFin. Management Frederico Rabello T. Costa Procurement Specialist LCSPT Procurement Dana Rae Frye Junior Professional Associate LCSARSupervision Francisco Guimaraes Consultant LCSARSupervision Carolina J. Cuba Hammond Program Assistant LCSARSupervision Jose C. Janeiro Senior Finance Officer CTRFCFin. Management Judith M. Lisansky Sr. Anthropologist LCSSOIndigenous PeoplesGraciela Lituma Consultant LCSARAg. Economist Katia Lucia Medeiros Environmental Specialist FAO/CPEnvironment Anemarie Guth Proite Procurement Specialist LCSPT Procurement Anna F. Roumani Consultant LCSARICR Carlos E. Velez Lead Economist LCSUWWater Nestor Bragagnolo Micro-catchment Specialist FAO/CPRural Development

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(b) Staff Time and Cost Staff Time and Cost (Bank Budget Only)

Stage of Project Cycle No. of staff weeks USD Thousands (including

travel and consultant costs)Lending

FY99 2.12 FY02 30 300.74

Total: 30 302.86 Supervision/ICR

FY03 15 92.70 FY04 12 101.00 FY05 15 77.00 FY06 20 139.30 FY07 16 131.30 FY08 24 148.50 FY09 10 120.90 FY10 57.30

Total: 112 868.00

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Annex 5. Beneficiary Survey Results 5.1 The following summarizes results of beneficiary surveys conducted for the Final Evaluation, as final products of micro-catchment monitoring over the course of project implementation, during Regional Seminars in 2008, and during a series of workshops with beneficiary indigenous groups in 2008. A brief summary of Navarro (2008) is also included:

A. Final Evaluation (2009):

5.2 The project financed a Final Evaluation, Relatório Socioeconômico Microbacias 2 – Final (versão preliminar) (EPAGRI/CEPA 2009), preliminary results of which are available for most segments. The following captures the principal (preliminary) results emerging from the report’s chapter on income generation. 5.3 Methodology: The intention was to compare the final with the ex-ante (2004) results, but the former had important limitations: (i) field surveys of income covered 291 rural producers in 19 monitored micro-catchments, thereby spatially concentrating the survey; and (ii) at project outset, it was not possible to gauge which of the 291 producers would ultimately be benefited by the demand-led investment line (under the Rural Investment Fund component) “Income Improvement”. Upon returning to the field in 2009, the survey team found that of the original 291 producers, 160 could not have their incomes counted in the calculation of final income because 34% belonged to higher-income categories not included as priority targets, and 66% were not actual beneficiaries of the project or could not be located. Among the 131 usable questionnaires, about 68% had benefited from the Income Improvement Line and were thus included in income computations. Before-project incomes of sample beneficiaries were based on the Agro-livestock Census (LAC) using 2003 prices for comparison of both initial and final incomes, to isolate the effect of this variable. The final survey cohort was 698 Priority (Marginal and Transition 1) beneficiaries representing 38,360 Priority beneficiaries of the Income Improvement Line (about 89% of all beneficiaries of this window were Priority), in 268 micro-catchments out of the 936 assisted by the project, in 152 municipalities, about half of all municipalities State-wide. 5.4 A control sample was used comprising rural producers with socio-economic characteristics similar to the project’s priority population and resident in micro-catchments not involved in the project. The same methodology as the beneficiary sample was used - including the LAC - to determine initial income in 2003. Results:

5.5 The project sought, using enhanced sub-indicators, a “reduction in project beneficiaries classified as Marginal and Transition 1” (see Annex 2 for definition). These were selected because information/data was available on their pre-project income. To determine the prior situation of the sampled beneficiaries, the income categorization established at the time of preparation of Farm Development Plans was used. As noted in the study, a majority of these plans were not registered in the project MIS and only data identifying producers and the poverty/income category to which they were assigned was noted, not their incomes. Field surveys in 2009 calculated the actual income of these same producers/beneficiaries and thus, their actual category, utilizing the same methodology used before they received project benefits. Results show:

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• About 19.3% of beneficiaries surveyed exceeded the income limits for classification in the lowest income cohorts (Peripheral and Transition 1) and had moved to higher-income categories.

5.6 The project also sought an “increase in the incomes of families in the priority public”. Using the methodology described in 5.3-5.4 above, results show:

• Incomes of the beneficiary sample (698 establishments) increased an average 30.6% in

the period compared to 16.5% for the control group. Beneficiary incomes ranged from 9.7% to 18.5% superior to the control.36

• Some 65% of producers surveyed declared that their investments in agro-livestock activities increased their family income, on average, by 18.9%. Further, 17% stated that they expected their income to keep increasing long-term, 24% medium-term and 49% short-term. Some 86% stated that their investment had strengthened their agro-livestock activities significantly (59%) to very significantly (27%). Over two-thirds of respondents said they would not have made the investment without the project.37

Other Results/Impacts:

Annual crops:

• Annual cropping, while still generating a high proportion of agro-livestock income, was shown to be declining and diversifying, while dairying was rising markedly, along with perennial cropping, oilseeds, and rustic (home-made) products.

• Productivity of important annual crops increased markedly in the period including various types of corn and tobacco.

• Annual crops showed relatively high percentages being marketed, e.g., pumpkin, irrigated rice, onions, tobacco, green corn, soybean, sorghum, tomato and wheat. Of some concern, there was a slight reduction in farmers selling annual crops through formal channels and an increased tendency to sell via middlemen.

Perennial Crops:

• Numbers of beneficiary farmers in the sample group planting perennial crops had increased in the period from 43 to 73 and area planted to perennial crops increased 57%. Whereas in 2003, oranges and banana were 69% of total income from perennial crops, by 2008 they were 27%, indicative of diversification and the introduction of new products.

36 Even if increases are over-estimated due to actual (2009) data being more complete than the LAC, both cohorts are affected to the same extent. 37 Average income generated solely from agro-livestock activities was R$861.95 and adding other sources of income, the average increased to R$1,263.66.

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• Among the control group, the situation was different. Numbers of farmers planting perennial crops had increased, but area planted had decreased by 30%, value of such crops by 11%, and share of total agro-livestock income had also declined.

• In general, high proportions of perennial crops – ranging from 60% for grapes to 92% for oranges and 100% for caqui, limes, apples and passion fruit - were being marketed, with high percentages destined for agro-industry, intermediaries, and directly to consumers, and less destined for cooperatives.

Rustic (home-made) products:

• In regard to rustic/home-made agro-livestock products, income had jumped sharply among sampled producers, from just R$16,340 in 2003 to R$165,420 in 2008, an incremental increase of 912%. Some 49% of the total value was generated by project-financed value-added activities. Milk-derivative products constituted 72% of income generated from this type of activity however, vegetable products, sweets and related products had increased sharply. The number of producers of such products had almost trebled.

• The study notes however, that despite evident growth, the numbers of producers involved in value-added activities remained very small.

• Among the control group, there was less growth in producers of rustic products, although the activity had an important role in income generation.

• A very high proportion of the most traditional of the “home-made” products (dairy-, sugar-cane- and manioc-based) are marketed but the share marketed through super-markets and agro-industries is falling and direct sales to consumers are rising, indicating loss of competitiveness and increasing informality.

Dairy production:

• Dairy production has grown faster in Santa Catarina than any other agro-livestock industry in recent years, some 64% overall in the period studied, and 99.4% among surveyed beneficiary producers. Some 83% of the total beneficiary sample produces milk and it represents 25% of all agro-livestock income. Of 579 milk producers, 44% market raw milk to dairy plants and only 171 produce milk derivatives through agro-processing activity.

• Average productivity of beneficiary dairy establishments with more than five cows was 1,804 liters in 2003 and 2,227 liters by 2008, a growth of 23%.

• The Project has played an important role in the overall growth of the industry in Santa

Catarina, as a disseminator of technology and principally for providing financial incentives to adopt new technologies.

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• The effectiveness of project investments – in genetic improvements of herds, in pasture planting and maintenance, animal sanitary practices, and the acquisition of machinery and equipment - has had a positive influence on the expansion of dairying.

Pig production:

• Income from beneficiaries’ production of pigs, as a percentage of total agro-livestock income, grew in the period. Income generated rose from R$78,516 in 2003 to R$143,583 in 2008, an increase of 83%, while numbers of sampled farmers with pigs rose from 255 producers in 2003 to 519 in 2008. Numbers of animals herded rose 92% and numbers sold/slaughtered rose 32%.

• Most small-scale producers surveyed however, are producing pigs for home subsistence and/or occasional sale.

Other sources of financing:

• About 42% of surveyed beneficiaries used no external sources of financing for their most recent harvest. Of those who did, 74% got PRONAF credit, 10% obtained it from equipment/other suppliers, and 16% obtained credit from official banks and cooperatives.

• The control group experience showed 51% not using any “external” credit while of the balance, 79% received financing from PRONAF, and the remainder from diverse sources.

Satisfaction with project income improvement investments:

• Satisfaction levels registered high levels of “good” or “very good” for the value of resources loaned, technical guidance and the adopted practice per se, but less than good for the bureaucracy involved in gaining access to project resources.

Training:

• The study found that some 43% of beneficiaries surveyed had not participated in any form of training related to their investment. Even so, 53% of this particular group said that they felt capable of pursuing the activity financed, while 42% said they felt somewhat trained.

B. Regional Seminars, 2008:

Table 5.1: Beneficiary Responses to Interviews (Regional Project Seminars, 2008) Positive Negative More Work/Effort Required

Permitted everyone to participate; inclusive approach.

In many locations, preparation of the micro-catchment development associations (MDA) was not very efficient and motivation was lacking

Micro-catchment Animation Groups (GAM) and Micro-catchment Development Associations (MDA) members should be more pro-active

Project delivered environmental, social and economic benefits including: protection of water sources;

Initial project dissemination emphasized only financial resources and was restricted to participating communities

Stronger emphasis needed on applying resources to group and collective subprojects

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construction of wells; housing reform; and income improvements. Important source of seed capital for farmers

Difficulty understanding what the project was about at the beginning

Even greater effort needed to motivate youth to participate in the project

Improved infrastructure on properties

Difficulty, mainly among Priority poorest population, in providing beneficiary counterpart share

Promote the search for new partnerships

Brought families together and developed leisure and cultural activities

Few resources and activities for young people

Increase the participation of municipal and regional public authorities

Built awareness of community concerns

Lack of a better and clearer dissemination of the project by authorities and other entities, which delayed formation of new partnerships.

Provide training for producers before they receive resources

Community felt important being able to define micro-catchment priorities

Cultural resistance to working in groups, lack of unity among families, and resistance to proposed changes

Better dissemination of the project in municipalities and micro-catchments.

Improved incomes through varied activities

MDAs still dependent on project “facilitators”, without understanding the role of each actor within the project.

More effective technical support because tailored to micro-catchment residents

Lack of exchanges of experiences among families, between MDAs and between municipalities.

Possibility of accessing courses and workshops

C. Indigenous Peoples SurveyOpinion surveys were conducted at the village level then results were presented at a State

Evaluation Seminar. The survey presented five questions, two of which are summarized in the matrix below: (a) “What good, positive things has the Micro-catchment II Project done for families in your village or indigenous land?” and (b) “What are the main problems you encountered in executing the Micro-catchment II Project in your village or indigenous land”. The full presentation is annexed to supervision Aide Memoire of June 16, 2008 (IRIS4).

Table 5.2: Comments by Indigenous Beneficiaries/Groups Positive Results Main Issues/Problems 1. Access to different information and technologies; effective support to agricultural and cropping activity; support for sanitation, crafts and schools; and environmental activities

1. Lack of support from the Municipal Secretary of Agriculture in providing tractors for land preparation, delaying planting.

2. Offers the possibility of recovering and preserving the village environment while also enabling more food production for the village. The village can now produce chickens in

2. Lack of supervision/support from facilitator to prepare project proposals. Lack of machinery from the Mayor’s office often delays soil preparation and planting of crops.

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family coops, has a community plot growing oranges and family plots using organic fertilizer for planting, as well as improved housing. 3. Helped us to disseminate our culture and made improvements in the food supply.

3. Technician not close to/ working jointly with the community. No ability to make fixed investment. Resources ran out.

4. Provided incentives to the community, housing, piped water, seed, fertilizer and lime bank, distribution of carts and agricultural equipment; technical support; enabled access to PRONAF credit; technical support for fish farming, beekeeping and community orchards.

4. Too few families benefited with resources; inadequate technical support; inadequate financial resources and equipment for work; centralized administration; and project execution very slow.

5. Improved basic sanitation for poor families. Supported environmental preservation. Stimulated collective work; promoted greater knowledge about self-sustainability; supported cultural rescue (e.g., crafts); provided training (e.g.,re-forestation); and improved honey marketing center.

5. Demand much greater than small amount of resources; lack of a firm commitment from partners for the works in question; little understanding of the differences between indigenous villages; lack of vehicles to enable attendance at meetings/events; lack of training for the Indigenous Leadership Council and weak understanding of their/its role; lack of training for families in specific activities; and inadequate number of facilitators.

6. Housing improvement, housing construction, food support, purchase of milk cows, agricultural inputs and seeds, course on making cleaning goods (e.g., soap, sanitary liquids, detergent); technical support for beekeeping (apiculture); and training to produce organic foods within the community.

6. Need for greater presence of EPAGRI technicians with the facilitators in activities developed by the project; difficulty in providing counterpart funds; and delayed release of resources.

7. Opportunity to include indigenous peoples in the project; participation of indigenous communities; opportunity to make decisions; training of both sides, i.e., technicians and indigenous; increased community work and organization; improved family housing conditions, basic sanitation and water; participation in other agreements with other entities and institutions; but, not enough participation of possible partners.

7. Insecurity of facilitator; main focus on financial resources; paternalistic culture; turnover of leaders; status of association self-management and distance between villages; deficient partnerships: internal and external, and too many commitments; lack of specific EPAGRI team to work with indigenous peoples; and, bureaucracy.

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D. Conclusions and Recommendations of the Navarro Study(2008)

The Navarro study is an important qualitative analysis of two similar projects implemented in the States of Santa Catarina (Micro-Bacias II) and Sao Paulo in recent years. The methodology entailed numerous visits to regions of each state, conducting interviews with beneficiaries, technicians, local authorities and private stakeholders, field visits, some data collection, and desk reviews of existing studies. No formal surveys per se were applied, there were no sample or control groups and no data is presented in the report. The intention was to create a road map for future projects – based on a wide-ranging consultative process – not to try and measure responses to particular questions. This summary focuses on the State of Santa Catarina. While the Santa Catarina project has left a significant body of evaluation including case studies, Navarro's reputation as an acknowledged authority on rural development underscores the value of his analysis and recommendations.

Conclusions: • The MB II project, being more clearly focused on socio-economic as well as

environmental activities, and on farmer organization, and with an incentive fund of wider scope - including housing improvement - was able to engage much stronger interest from farmers, than its predecessor.

• Agronomic and environmental elements lost some priority and in the process, so did the

concept and practice of "systematic" approaches, fostered by the focus on a distinct eco-geographic area - the micro-catchment.

• Examples are given of several very poor regions characterized by their sharply

differentiated reaction to the project and its specific features: (a) Social incentives: In the Lages region, attraction to MB II's social incentives in the form of housing improvements and rural electrification, and its participatory approach and mechanisms which gave families greater choice including the ability to contract facilitators. Navarro's concern is that this approach edges closer to a classic "assistencialist" operation, weakening its potential future sustainability; (b) Economic activities: In Piratuba, the attraction of MB II was its shift to economic activities but without losing its environmental focus since farmers tacitly understood the productivity benefits of sustainable resource management and facilitators were able to spread the NRM messages more easily due to the better organizational level of beneficiaries. Navarro cites the difficulty in identifying rural leaders and active farmers to assume leadership of organizational activities, instead of relying on external interests. (c) Organizational features: In Seará, MB II's organizational features and farmers' ability to choose their own priorities has motivated them to shift production to fruit and dairy. Support from EPAGRI and the mayor's office has elevated self-esteem and encouraged open discussion with local authorities about the needs of the area. Residents have since also obtained PRONAF credit and installed telephones. Again, this case demonstrated the importance of local leaders willing to take on organizational activities. In the Tunápolis region, the project's organizational features prompted creation of a cooperative to take advantage of the project's income generation incentives. Social cohesion has remained strong, attributed to the project's participatory methodology, and the sense of an economic future.

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In Descanso, an area in sharp decline with strong out-migration and widespread poverty and illiteracy, the organizational path is clearly complex and long-term. Women are proving the primary organizational force but the situation is fragile. Housing improvements, protection of water sources, and vegetable plots have been the project’s main benefits. EPAGRI receives strong praise. Association members are now doing group purchasing in the local cooperative "on an equal footing".

• Navarro describes the organizational achievements of the project as "extraordinary" and asserts that the project in Santa Catarina has not lost its productive, environmental and agronomic focus, and its components were launched in a consistent manner.

• Navarro’s main concern is formal economic activity given the characteristics of regional

markets and the ability of the many poor farmers to develop viable income-generating activities.

Challenges:

Navarro reviews a series of challenges facing such projects and which his study asserts are largely avoidable:

• Importance of flexibility in technical and operational design, reflecting rural realities; • Complex tasks assigned to extension workers mandate care and attention to training; • Such projects needs to generate the knowledge needed for their success and research

services need to be contracted out to keep their local, "on the ground", features/value; • Project preparation needs to reduce the potential for "surprises" by foreseeing diverse

technical, social and institutional scenarios; • Project incentives must be appropriate, well chosen and represent real social demands; • Need to ensure that the environmental focus remains a core project thrust designed to

change productive systems and promote sustainability.

Pillars of Success: Navarro sees the following as key to project success:

• Clear understanding of the project on the part of its principal operators starting at the top with the state secretariats of agriculture and environment;

• Importance of multi-disciplinary teams well-versed technically, and knowledgeable about how government works, for supervising and managing micro-catchments as a totality;

• Municipal mayors and local government authorities are crucial players, a challenging and complex issue for these projects; and,

• Projects involving farmer organizations with a tradition of associative action are likely to do better, but it is neither necessary nor sufficient to secure the mobilization of farm families involved in a micro-catchment. The quality of extension services is critical.

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Annex 6. Stakeholder Workshop Report and Results Table 6.1: Results of Regional Seminars with Project Partners/Stakeholders (2009)

Positive Problematic More Work/Effort Required Upsurge in new community leaders

Individualism and paternalism of beneficiaries

Expand work with youth

Improved self-esteem and social relations between families

Interest mainly in the project’s financial resources

Review issue of counterpart contribution from beneficiary farmers

Greater awareness of associative action and increase in activities involving groups and communities

Excessive number of individual, rapidly prepared subprojects

Provide stronger motivation for more collective and community subprojects

Strengthening of family agriculture and greater valuation of non-agricultural activities

Initially, lack of time to build awareness of the project as a whole, for farmers and rest of the municipality

Release financial resources linked to preparation of Property Development Plans and training

Notable work with women Lack of participation by youth Improve the integration of research and extension

Expanded agricultural technical assistance and extension services for the poorest families/groups

Lack of understanding of the role of the GAM, by the Fiscal Council and other MDA members.

Strengthen the Micro-catchment Animation Groups (GAM) and Project Deliberative Committees (CCM)

Stimulus to communities’ autonomous development

Actual obligations of facilitators not well-defined, and lack of knowledge and understanding of contracts

Strengthen work with partner entities, and improve project dissemination to communities in general

In most micro-catchments, project activities not well-linked to other public programs – municipal, state or federal.

Intensify training of technicians

In many micro-catchments, the community and MDAs remain unduly dependent on the facilitator technicians to convey/pass on questions related to their interests.

Conduct seminars and field trips for exchange of experiences

In many micro-catchments, although judged indispensible, few expect the MDAs to remain active after the project.

Work harder on questions related to building community capacity for autonomous development, preparing MDAs for the project.

Difficulty preparing Property Development Plans and Annual Operating Plans

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Annex 7. Summary of Borrower’s ICR and/or Comments on Draft ICR

(a) Executive Summary of Borrower ICR38 (Unofficial Translation) 7.1 Despite advances made as a result of policies and activities developed by the State and Bank, through the previous LM II project, much remained to be done to better integrate soil use with water management, conservation of natural resources, improved incomes and greater social inclusion of small farmers. 7.2 Agreeing that problems existed in the rural space and still needed to be addressed, the Government of Santa Catarina approved in 1995, along with the Federal Committee for External Financing (COFIEX) of the Ministry of Planning, Budgeting and Finance, a Carta Consulta valued at US$107 million. In 1996, the State Secretary of Agriculture mobilized a working group to prepare a proposal for a new project, with the participation of state institutions, municipalities, universities, civil society and farmers. In this period, the working group conducted regional seminars with the participation of 2,000 of these actors, to gauge ideas for the construction of the proposed project. 7.3 The World Bank sent project preparation missions in September 2001 and January 2002, which worked closely with the state’s working group, with executing institutions and with state authorities including the State Secretary of Agriculture and the Governor. The name of the project was “Projeto de Recuperação Ambiental e de Apoio ao Pequeno Produtor Rural (PRAPEM/Microbacias 2)”. The contract was signed in Florianópolis, Santa Catarina, through the Loan Agreement for 4660-BR, between the State and the Bank, on May 10, 2002 for the value of US$62.8 million with a State counterpart contribution of US$44.7 million for a project totaling US$107.5 million to be applied over a period of six years (2002-2008). 7.4 Project Objective: Promote rural poverty alleviation through integrated activities which envisage economic, environmental and social development in rural areas of the state, in a sustainable manner and with the participation of involved actors through: (a) recuperation and conservation of natural resources, (b) increased incomes of rural families; (c) improved social, family and community infrastructure; (d) increase the participation of communities in decision-making. These objectives were not changed during the project. 7.5 Project execution was coordinated by SAR through the State Executive Secretariat (SEE), supported by an executive structure and a deliberative structure at the state, regional, municipal and micro-catchment levels, as show below. Coordinating committees, at all levels, comprised 50% membership of executing agencies and 50% beneficiaries. 7.6 To become operational, the project was organized into four components with respective subcomponents (Table 2).

38 Edited for length. Original document held in IRIS.

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Quadro 2: Project Components and sub-components Component Sub-component Executing

Institution Original

Value (US$’ 000)

Value Est. (MTR)

US$’000

Institutional Organization

and Development

• Capacitação • Environmental Education • Rural Extension • Research and Studies • Technical assistance for State structural adjustment

EPAGRI EPAGRI

EPAGRI EPAGRI

SDS

4,602.2 1,134.4

5,969.2 4,606.8 1,535.1

3,764.7 1,069.8

5,545.5 3,874.5 1,762.2

Rural Investments

Lines of support: • Housing improvement • Natural resources • Income •Technical assistance for Micro-catchment associations

SAR

7,550.4

20,137.6 30,432.1 19,097.2

11,844.6

15,234.30 17,316.4 34,056.9

Environmental Management

• Integrated Management of Water-catchments Integrated management of water catchments • Ecological Corridors and Conservation Units Ecological Corridors and Conservation Units

SDS

BPMA

FATMA

BPMA

1,737.6

551,700

1,363.4

105,000

1,187.5

737,000

960,000

152,700

Project Administration

• Administration • Monitoring and Evaluation • Participatory Management

SAR EPAGRI EPAGRI

SAR

2,883.9 2,632.4

2,552.6

4,077.4 2,450.5

2,827.6

7.7 Application of Resources: Table 3 shows total value of applications of project resources by the Bank, State of Santa Catarina and beneficiaries. Table 3: Application of Project Resources by Bank and State

Source of Funds Appraisal Estimate

US$

Loan Agreement

(MTR) – US$

Final Execution

US$

%of

Appraisal

Government of the State of Santa Catarina

44,700,000 44,689,600.00 49,373,112.92 110.5

World Bank 62,800,000 62,800,000.00 62,800,000.00 100.0

Beneficiaries na na 21,588,357.00 na

Results: Evaluation – Mid-term Review (MTR).

7.8 With guidance from the Bank, in 2006 a Mid-term Review was conducted during which (the opinions of) all actors involved in the project were heard. The MTR report showed that the project was promoting very positive economic, social and environmental results in the state’s rural areas. Farmers, including indigenous, were organizing themselves into Micro-catchment Development Associations, and succeeding in improving their economic conditions, housing and

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in particular environmental conditions through the use of new practices in sanitation, better water quality, and conservation of soils and bio-diversity. 7.9 The project was involved in 936 micro-catchments and had already attended 139,844 rural families. Of these families, 129,539 were supported through the Rural Investment Fund with R$96 million and another R$ 44 million in counterpart resources from the beneficiary families themselves. 7.10 The study “Evaluation of Productive Investments – Line of Support: Income Improvement” (EPAGRI/CEPA, 2008) showed that up to the time of the study 95% of resources applied by the Investment Fund, in the area of income-generation, were directed to the project’s target population. The same study concluded that 86% of farmers supported declared that they had increased their income due to the investments realized. Of the total resources applied by the Fund, 85.8% were destined for the target population and of the total families supported, 78.3% were also from the project’s priority target population. 7.11 The monitoring conducted in seven micro-catchments, at the start of the work, indicated high levels of fecal coliformes in the water and a significant reduction by project closing. This result was due to the implementation of sanitation systems, water protection systems and proper storage/disposal of animal waste, practices which while not measured, had an important effect on improving people’s health. 7.12 As stated by beneficiaries, (Regional Seminars, 2008), housing improvement, planting of Riparian Forest (mata ciliar), cleaning of rivers and improvement of community infrastructure had a strong influence on improving quality of life, self-esteem and satisfaction, of the target population. 7.13 The study “Instruments for Management of Water Resources”, financed by the project, proposed that the State, through its Secretary of State for Sustainable Economic Development (SDS), incorporate as a public policy the implementation of the Information System for State Water Resources, the System for Water Rights Grants, and the Water Users Mapping System. As an example of the three Integrated Catchment Management Plans supported by the project, the State assumed the carrying out of the Management Plans of the other state Hydro-graphic catchment areas. The two studies for Ecological Corridor Plans, along with the Micro-catchment Management Plans, motivated the state to conduct a seminar “Policies for Payment for Environmental Services”, to find assistance to implement these policies. 7.14 With project support, a Thematic Water Center and a Thematic Center for Land were created to execute many of activities involved in environmental education. Also, through project activities with rural families, schools, students and teachers advanced substantially in awareness and attitude in relation to the environment. 7.15 The results of the project are recognized and have generated positive feedback from authorities, from state, regional and municipal leaders, and from general society. 7.16 In regard to results of physical targets, these were achieved virtually in totality. However, evaluations reveal that gaps still exist and that the State, through its institutions, should continue activities with rural families with a view to consolidating and ensuring the sustainability of project objectives. Within these activities, we should reiterate the need to expand the training program to improve the management and planning of rural properties, including young people, to insert them in productive processes and in the administration of properties.

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7.17 There have been advances in community organizing but, for the maturation of the entire process of community autonomous management, which is very complex, a continuous plan for training and mobilization is needed. Society, as a whole, showed advances in its awareness of being committed to natural resources, but these activities cannot be abandoned. 7.18 Based on project actions Epagri adopted in its activities in rural extension, technical assistance and research, the strategy and methodology utilized by the project with the focus on sustainable development. The State even assumed as a public policy, the implementation of the Water Resources Information System, the Water Rights Grants System and the Water Users Census System. The example of three Integrated Micro-catchment Management Plans supported by the project, the State assumed carrying out the Management Plans of the other State Water Catchments. In two water catchments, activities recommended by studies for the Ecological Corridor Plans, are being implemented. 7.19 With the objective of continuity and greater synergy in activities developed by the project, the State is negotiating support from the World Bank through a new, US$90 million financing, with a State counterpart of US$90 million, totaling US$180 million for a period of six years (2010 - 2016). Main Lessons Learned 7.20 The MB II project was an innovative experience, with complex implementation due to its “reach” within the concept of sustainable development, integrating economic, social and environmental activities to improve the quality of life of the rural population, especially the poorest. 7.21 During its execution, many lessons, from successes and failures/errors, were learned and ought to be considered in the development of new projects and the implementation of public policy in rural areas. Without obeying any order of priority, since all are considered important, below are the lessons learned from MB II.

• During the proposal preparation phase there needs to be a full discussion of project objectives and targets including the directorates of all executing agencies to equalize understanding and seek commitment to its execution.

• The central management structure of the project, the State Executive Secretary (SEE), should be structured with technical staff according to the needs and design of the project. SEE ought to have political support and be linked directly to the State Secretariat of Agriculture. Constitution of a Technical Committee, with participation of SEE, components and sub-components, is very important for discussion and decision-making in project-related themes, besides promoting inter-institutional integration.

• Executing institutions need to have available, at all levels, technicians with the profile

suitable for the managerial structure and execution of the project. In institutions where the executing teams were incomplete, the result of subcomponents under their responsibility was compromised.

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• Before initiating implementation with the involved public, technicians of the executive agencies, the Micro-catchment Development Associations (MDAs), mayors and other partner institutions should be trained and committed to the project.

• The project strengthened the Technical Assistance and Rural Extension (ATER) Service

in Santa Catarina.

• Project promotion has to be well-executed and include authorities and state leaders (state secretaries, deputies and others) to avoid erroneous interpretations of the project. In municipalities where promotion, with leaders and authorities, was well-conducted and established a solid set of partnerships, this proved a determining factor in the project’s advance.

• The project’s decision-making structures at the micro-catchment, municipal, regional and

state levels should have their functions better-defined and their members better-trained.

• Organization of communities in MDAs provoked the emergence of new community leaders and enriched the development of human and social capital. The organization of residents of micro-catchments in Micro-catchment Development Associations (MDA) merits greater attention from municipal mayors to attend to rural sectors. Community self-governance (auto-gestao) however, is a very slow process and requires a huge effort including training of technicians, directorates of MDAs and the communities.

• Community participation in preparing the Micro-catchment Development Plan (PDMH)

is a basic condition for attending to project objectives through the efficient/effective application of resources.

• Rural youth should be considered as a priority public of the project and specific strategies

and methodologies should be adopted for this public.

• The project’s technical and methodological strategy was well-defined. The project’s activities advanced perceptibly when the project’s strategies were fully-observed.

• Financial support for investments, passed to beneficiaries, is very important to improve

the activity being supported.

• The requirement to make an evaluation of environmental impact for each proposal under the Rural Investment component, helped build awareness about the importance of natural resources conservation.

• The study of Instruments for Water Resources Management was effective for the State to

program policies for management of this sector.

B. Borrower’s Letter commenting on the Draft ICR

7.22 The following letter contains the Borrower’s comments on the draft ICR. As noted in para. 6 of the letter, the Borrower’s suggestions for improvement have been incorporated in the draft. (Note: technical issues caused letter to be inserted separately, below).

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Annex 8. Comments of Co-financiers and Other Partners/Stakeholders

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Annex 9. List of Supporting Documents Project Appraisal Document (PAD), Report No. 23299-BR Supervision Aide Memoires and Implementation Supervision Reports (ISR) Preparation working papers Ex Ante Evaluation(Baseline, CEPA, 2004-2005): - Qualidade e Disponibilidade da Agua - Relatório de Avaliação Socioeconômica Inicial - Uso e Proteção de Solo - Organização e participação dos Atores - Apoio a Gestão de Bacias Hidrograficas - Corredores Ecológicos e Unidades de Conservação Relatório de Revisão de Meio Termo (FEALQ/USP, 2006) Preliminary Final Evaluation (EPAGRI/CEPA, 2008): - Avaliação dos Investimentos Produtivos: Linhas de Apoyo na Melhoria da Renda - Autogestão Comunitaria (EPAGRI/CEPA, 2008) Final Evaluation (EPAGRI/CEPA, 2009) - Avaliação Socioeconômica: Analise dos Indicadores de Resultado e Impacto Relacionado ao Meio Ambiente e Recursos Naturais do Projeto Microbacias 2 (Lauro Bassi, 2009 - Final) - Linha de Apoio Melhoria da Habitação (preliminary) - Linha de Apoio para Melhoria da Renda (final) - Situação das Praticas Apoiadas pelo Projeto - Agregação de Valor (preliminary) Manejo de Recursos Naturais ou Desenvolvimento Rural? O Aprendizado dos "Projetos Microbacias" em Santa Catarina e Sao Paulo (Versão Final), Zander Navarro, 2008.

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MAP: IBRD 37697 (March 2010)