Document of The World Bank FOR OFFICIAL USE ONLY Report No: 66407-BR PROJECT APPRAISAL DOCUMENT ON A PROPOSED LOAN IN THE AMOUNT OF US$100 MILLION TO THE STATE OF CEAR� WITH A GUARANTEE OF THE FEDERATIVE REPUBLIC OF BRAZIL FOR THE CEAR� RURAL SUSTAINABLE DEVELOPMENT AND COMPETITIVENESS PROJECT (PROJETO DE DESENVOLVIMENTO RURAL SUSTENT�VEL – PROJETO SÃO JOSÉ III) March 7, 2012 Sustainable Development Department Brazil Country Management Unit Latin America and the Caribbean Region This document is being made publicly available prior to Board consideration. This does not imply a presumed outcome. This document may be updated following Board consideration and the updated document will be made publicly available in accordance with the Bank’s policy on Access to Information. CURRENCY EQUIVALENTS (Exchange Rate Effective March 1, 2012) Currency Unit = Brazilian Real (R$) R$1.7146 = US$1.00 R$1.00 = US$0.54 FISCAL YEAR January 1 – December 31 ABBREVIATIONS AND ACRONYMS ATER Rural Technical Assistance Assistência Técnica e Extensão Rural BB Banco do Brasil BNB Banco do Nordeste CA Community Association CAGECE State Water and Sanitation Company Companhia de �gua e Esgoto do Ceará CDD Community-Driven Development CEDR State Rural Development Council Conselho Estadual de Desenvolvimento Rural CENTEC Technological Learning Center Institute Instituto Centro de Ensino Tecnológico CMDS Municipal Sustainable Development Council Conselho Municipal de Desenvolvimento Sustentável COGERH State Water Resources Management Company Companhia de Gestão dos Recursos Hídricos do Ceará CONAB National Supply Company Companhia Nacional de Abastecimento CONPAM Environmental Policies and Management Council Conselho de Políticas e Gestão do Meio Ambiente CONTAG National Federation of Agricultural Workers Confederação Nacional de Trabalhadores na Agricultura CPS Country Partnership Strategy CTDRS Territorial Council for Rural Sustainable Development Colegiado Territorial de Desenvolvimento Rural Sustentável EMATERCE Ceará State Rural Extension and Technical Assistance Company Empresa de Assistência Técnica e Extensão Rural do Ceará EMBRAPA Brazilian Agricultural and Livestock Research Company Empresa Brasileira de Pesquisa Agropecuária ESMF Environment and Social Management Framework FECOP State Fund for Poverty Reduction Fundo Estadual de Combate à Pobreza FUNASA National Health Foundation Fundação Nacional da Saúde FUNCEME Ceará State Meteorology and Hydrological Resources Foundation Fundação Cearense de Meteorologia e Recursos Hídricos II HDI Human Development Index IICA Inter-American Institute for Cooperation on Agriculture IPPF Indigenous Peoples Planning Framework IRR Internal Rate of Return PA Productive Alliance MDA Ministry of Agrarian Development Ministério do Desenvolvimento Agrário MDS Ministry of Social Development Ministério do Desenvolvimento Social e Combate à Fome NGO Nongovernmental Organization O&M Operation and Maintenance PAM Municipal Water Plan Plano de �guas Municipal PDO Project Development Objective PPP Public-Private Partnerships PO Producers’ Organization PREVINA State Program to Prevent, Monitor and Combat Forest Fires Programa Estadual de Prevenção, Monitoramento, Controle de Queimadas e Combate aos Incêndios Florestais PRONAF National Program to Strengthen Family Agriculture Programa Nacional de Fortalecimiento da Agricultura Familiar PTDRS Territorial Rural Sustainable Development Plan Plano Territorial de Desenvolvimento Rural Sustentável SDA Ceará State Secretariat of Agrarian Development Secretaria do Desenvolvimento Agrário SEBRAE Brazilian Agency for Micro- and Small-Business Assistance Serviço Brasileiro de Apoio às Micro e Pequenas Empresas SEDUC Ceará State Secretariat of Education Secretaria da Educação SECITECE Ceará State Secretariat of Science and Technology Secretaria da Ciência e Tecnologia do Ceará SISAR Integrated Rural Water Supply and Sanitation System Sistema Integrado de Saneamento Rural SOE Statement of Expenditure SOHIDRA State Superintendency for Water Works Superintendência de Obras Hídricas SRH Ceará State Secretariat of Water Resources Secretaria dos Recursos Hídricos do Ceará UGP Project Management Unit Unidade de Gerenciamento do Projeto UGT Project Territorial Management Unit Unidade de Gestão Territorial WSS Water and Sanitation Services III Regional Vice President: Hasan A. Tuluy Country Director: Makhtar Diop Sector Director: Ede-Jorge Ijjasz-Vasquez Sector Manager: Ethel Sennhauser Task Team Leader: Maria de Fatima Amazonas IV BRAZIL Ceará Rural Sustainable Development and Competitiveness Project TABLE OF CONTENTS I. STRATEGIC CONTEXT .................................................................................................1 A. Country Context ............................................................................................................ 1 B. Sectoral and Institutional Context ................................................................................. 3 C. Higher-Level Objectives to which the Project Contributes .......................................... 4 II. PROJECT DEVELOPMENT OBJECTIVES ................................................................5 A. PDO............................................................................................................................... 5 Project Beneficiaries ........................................................................................................... 5 PDO Level Results Indicators ............................................................................................. 5 III. PROJECT DESCRIPTION ..............................................................................................6 A. Project Components ...................................................................................................... 6 B. Project Financing .......................................................................................................... 7 Lending Instrument ............................................................................................................. 7 Project Cost and Financing (US$) ...................................................................................... 7 C. Lessons Learned and Reflected in the Project Design .................................................. 7 IV. IMPLEMENTATION .......................................................................................................8 A. Institutional and Implementation Arrangements .......................................................... 8 B. Results Monitoring and Evaluation .............................................................................. 9 C. Sustainability................................................................................................................. 9 V. KEY RISKS AND MITIGATION MEASURES ..........................................................11 VI. APPRAISAL SUMMARY ..............................................................................................12 A. Economic and Financial Analyses .............................................................................. 12 B. Technical ..................................................................................................................... 12 C. Financial Management ................................................................................................ 13 D. Procurement ................................................................................................................ 13 E. Social........................................................................................................................... 14 F. Environment ................................................................................................................ 14 V Annex 1: Results Framework and Monitoring .........................................................................16 Annex 2: Detailed Project Description .......................................................................................21 Annex 3: Implementation Arrangements ..................................................................................33 Annex 4: Operational Risk Assessment Framework (ORAF) .................................................59 Annex 5: Implementation Support Plan ....................................................................................62 Annex 6: Economic and Financial Analysis ..............................................................................64 Annex 7: Irrigation in Ceará and Project Activities Related to Irrigation ............................69 VI PAD DATA SHEET Brazil Ceará Rural Sustainable Development and Competitiveness PROJECT APPRAISAL DOCUMENT . Latin America and the Caribbean Agriculture and Rural Development . Basic Information Date: Mar-07-2012 Sectors: General agriculture, fishing and forestry sector (40%), Water supply (25%), Irrigation and drainage (15%), Crops (10%), Information technology (10%) Country Director: Makhtar Diop Themes: Rural markets (35%), Rural services and Sector Ethel Sennhauser/Ede infrastructure (25%), Trade facilitation and Manager/Director: Jorge Ijjasz-Vasquez market access (15%), Micro, small and medium enterprise support (15%), Rural policies and institutions (10%) Project ID: P121167 EA B - Partial Assessment Category: Lending Specific Investment Instrument: Loan Team Leader(s): Maria de Fatima de Sousa Amazonas Joint IFC: No . Borrower: State Government of Ceará Responsible Agency: State Secretariat of Agrarian Development - Project Management Unit Contact: Josias Farias Neto Title: Project Manager Telephone No.: 55-85-31018112 Email: josias.farias@sda.ce.gov.br . Project Implementation Period: Four years Expected Effectiveness Date: July-31-2012 Expected Closing Date: October-31-2016 . Project Financing Data(US$M) [X] Loan [ ] Grant [ ] Other [ ] Credit [ ] Guarantee VII For Loans/Credits/Others Total Project Cost (US$M): 150.00 Total Bank Financing (US$M): 100.00 . Financing Source Amount(US$M) Borrower 50.00 International Bank for Reconstruction and 100.00 Development Total 150.00 . Expected Disbursements (in US$ Million) Fiscal Year 2012 2013 2014 2015 2016 2017 Annual 00.00 30.00 45.00 20.00 5.00 0.00 Cumulative 00.00 30.00 75.00 95.00 100.00 100.00 . Project Development Objective(s) Project Development Objective: The objectives of the project are to: (i) improve the sustainability of rural production and rural income generation; and (ii) contribute to the Borrower’s efforts to universalize access to water services. . Components Component Name Total Costs (US$ Millions) 1. Economic Inclusion: would promote investments in rural 70.00 economic inclusion in the Borrower’s territory, through: (a) the provision of support for: (i) the preparation of business plans; (ii) the construction of warehouse facilities (iii) productive and environmental services subprojects; and (iv) the development of a state-wide disaster risk management policy, contingency plans and early warning systems for the prevention of natural disasters. 2. Water Services: would support the State’s efforts to ensure 50.00 universal access to potable water and water services in rural areas and for the scaling up of existing water distribution management system models. 3. Institutional Strengthening and Project Management: would 23.30 support the technical and administrative management of the Project, including information system, monitoring and impact evaluation; training and technical assistance activities to strengthen stakeholders and public functions that are critical to ensure the project implementation and sustainability. . Compliance Policy Does the project depart from the CAS in content or in other significant Yes [] No [X ] VIII respects? Explanation: . Does the project require any exceptions from Bank policies? Yes [ ] No [ X ] Have these been approved by Bank management? Yes [ ] No [ ] Is approval for any policy exception sought from the Board? Yes [ ] No [ X ] Does the project meet the Regional criteria for readiness for implementation? Yes [ X ] No [ ] . Safeguard Policies Triggered by the Project Yes No Environmental Assessment OP/BP 4.01 X Natural Habitats OP/BP 4.04 X Forests OP/BP 4.36 X Pest Management OP 4.09 X Physical Cultural Resources OP/BP 4.11 X Indigenous Peoples OP/BP 4.10 X Involuntary Resettlement OP/BP 4.12 X Safety of Dams OP/BP 4.37 X Projects on International Waterways OP/BP 7.50 X Projects in Disputed Areas OP/BP 7.60 X . Legal Covenants Name Recurrent Due Date Frequency Project Steering Committee 60 days after Effectiveness Description of Covenant Loan Agreement – Schedule 2, Section I.1: No later than 60 days after the Effective Date, the Borrower shall establish, and thereafter maintain during the implementation of the Project, a Steering Committee chaired by SDA, and composed by representatives from key secretariats and organizations, as defined in the Operational Manual, responsible for providing general oversight and guidance on the strategic and multisectoral aspects of the Project. Name Recurrent Due Date Frequency Project Management Unit (1) and 30 days after Project Territorial Units (13) Effectiveness Description of Covenant Loan Agreement – Schedule 2, Section I.2 (a) : The Borrower shall create and maintain, until the completion of the Project: (i) a unit within SDA (the UGP), responsible for the management, coordination, supervision, monitoring and evaluation of the Project; and (ii) not later than 30 days after the Effective Date, establish and thereafter operate and maintain until the completion of the Project, thirteen regional management offices (UGTs) covering the Borrower’s territory, responsible for the IX coordination and implementation of Project activities in remote municipalities, including the responsibility to ensure integration and quality of activities under the Project. Name Recurrent Due Date Frequency Annual Operating Plans November, 30 of Annual each year Description of Covenant Loan Agreement – Schedule 2, Section I.3: The Borrower shall: (a) prepare and furnish to the Bank annual operating plans, satisfactory to the Bank, detailing the Project activities to be carried out during the year following the date of presentation of each such plan, together with the respective sources of funding, by November, 30 of each year during Project implementation; (b) furnish to the Bank the approved annual operating plans (including the respective sources of funding) referred to in paragraph (a) of this Section for each year in question, not later than 30 days after the approval of the Borrower's annual budget by its Legislative Assembly (Assembléia Legislativa); and (c) thereafter, implement each of said plans in a manner acceptable to the Bank. . Team Composition Bank Staff Name Title Specialization Unit Judith M. Lisansky Senior Anthropologist Senior Anthropologist LCSSO Susana Amaral Financial Management Financial Management LCSFM Specialist Specialist Gunars H. Platais Senior Environmental Senior Environmental LCSEN Economist Economist Alberto Coelho Gomes E T Consultant E T Consultant LCSSO Costa Edward William Bresnyan Senior Rural Development Senior Rural Development LCSAR Specialist Specialist Paula Silva Pedreira de Operations Analyst Operations Analyst LCSEN Freitas Luciano Wuerzius Procurement Specialist Procurement Specialist LCSPT Mariana Margarita Montiel Senior Counsel Senior Counsel LEGLA Maria de Fatima de Sousa Senior Rural Development Team Leader LCSAR Amazonas Specialist Juliana Menezes Garrido Infrastructure Specialist Infrastructure Specialist LCSUW Pereira Erick C. M. Fernandes Adviser Adviser LCSAR Jose C. Joaquin Toro Senior Disaster Risk Senior Disaster Risk LCSUW Landivar Management Specialist Management Specialist Miguel-Santiago da Silva Senior Finance Officer Senior Finance Officer CTRLN Oliveira Erwin De Nys Senior Water Resources Senior Water Resources LCSEN Specialist Specialist X Daniella Ziller Arruda Program Assistant Program Assistant LCC5C Karagiannis Clarisse Torrens Borges E T Consultant E T Consultant LCSEN Dall Acqua Abdoulaye Sy Young Professional Young Professional YPP Barbara Cristina Noronha E T Consultant E T Consultant LCSSD Farinelli Non Bank Staff Name Title Office Phone City Luis Loyola Irrigation Specialist/FAO 56-2-923-2241 Santiago Mario Castejon Marketing Specialist/Ag. Panama Economist/FAO . XI I. STRATEGIC CONTEXT A. COUNTRY CONTEXT 1. Brazil is the largest country in area and population and the biggest economy in Latin America and the Caribbean (LAC). The Brazilian economy’s solid performance during the financial crisis and its strong and early recovery, including 2010 growth of 7.5 percent, has contributed to the country’s transition from a regional to a global power. Despite the recent economic results and social programs that lifted tens of millions of people out of poverty, its immense natural resources, and strong development potential, important challenges remain for Brazil to achieve its vision of joining the group of developed nations within a generation. Economic and social exclusion, inequality and low access to land stubbornly persist at the root of poverty. In addition, huge disparities remain across the country’s regions; the Northeast continues to be the poorest and most unequal among them, with a wide gap between rich and poor. 2. The Brazilian Government is implementing a strategy to eradicate extreme poverty and focus on improving opportunities for vulnerable populations. The multisectoral Brasil sem Miséria program targets the 16.2 million people living in extreme poverty, i.e., those earning less than R$70 per capita per month (about US$1.50 per day). This implies a strong focus on the Northeast, where 59 percent of the extreme poor reside. 3. Ceará has made solid progress in improving both economic and social indicators in recent years and is the third largest economy in the Northeast Region. Between 2007 and 2010 the State’s GDP (currently ranked twelfth out of 27 Brazilian states) grew by an accumulated 58 percent, well above Brazil as a whole (25 percent). Notwithstanding this recent progress, the State faces significant challenges: poverty levels are still unacceptably high in Ceará, with 13 percent of its population living below the regional extreme poverty line1 and almost a third of the people (31 percent) below the regional poverty line. It is evident that to sustain social inclusion gains made and substantially reduce current poverty levels, more rapid and inclusive economic growth will be required. 4. Agriculture is a major sector of the Brazilian economy and is key for economic growth and foreign exchange. Agriculture accounts for about 6 percent of GDP (25 percent when including agribusiness) and 36 percent of Brazilian exports. Brazil enjoyed a positive agricultural trade balance of US$87.6 billion from January to November 2011, 24 percent higher than the same period in 2010.2 The share of family agriculture in Brazilian food production is 70 percent, which means that it has a strong potential not only for food security and nutrition but also for economic growth and food price balance. While commercial farms dominate value- added production, family agriculture nationwide produces 70 percent of manioc, 46 percent of corn, 63 percent of horticulture, and is responsible for 56 percent of large animal production (including dairy).3 1 ―Extreme poverty line‖ is defined as the required income to consume the minimum intake (2,000 calories/day), according to the World Health Organization (WHO). 2 Source: Ministry of Agriculture, Livestock and Supply (MAPA, December 12, 2011). 3 IBGE 2009. 1 5. Technological change in agriculture is essential for poverty reduction. Fostering development, stimulating economic growth and improving agricultural productivity will help the rural poor by directly increasing their income and competitiveness. The State is eager to invest in innovative practices and technologies and capitalize on the key linkages with agro-business and small and medium enterprises. 6. Main challenges facing productive clusters and public services in rural areas. Low rural productivity and low access to basic services in Ceará are tied to several constraints, among the most important of which are: (a) low technological innovation in terms of product, process and organization, as well as downside risks of production losses and threats to household food security and weak market intelligence that hinder a coordinated and targeted supply response; (b) poor access to capital to boost smallholder asset accumulation on several fronts: physical, financial, human, managerial and social; and (c) a disconnect between technical assistance and the needs of farmers, both for meeting market demands and reducing vulnerability through climate change adaptation. 7. Weather severity and water scarcity/unequal distribution. The Brazilian Northeast experiences chronic water scarcity, with periodic, long and severe droughts that create a number of economic and social problems and hamper the region’s development. Ceará is one of Brazil’s driest states, with average annual per capita water availability of 1,150 m 3, equivalent to only 4 percent of the national average. The semi-arid Sertão subregion represents 87 percent of the State’s territory,4 with per capita annual water availability ranging from 400 m3 to 800 m3. Ironically, the Sertão has about 98 percent of the State’s total available water. Given the State’s climate conditions and variability stemming from heavy droughts, desertification risk and floods have caused major human disasters with a massive impact on agriculture and food production. Agriculture will also have to adapt to increasingly variable and unpredictable growing conditions. In recent years several Brazilian states in different regions have experienced the heaviest rainfall in their history, which has caused severe floods. 8. Water supply and sanitation in rural Ceará. The State is composed of 184 municipalities with 8.4 million inhabitants,5 75 percent of whom live in urban areas and 25 percent (2.1 million inhabitants) in rural areas. In 2009, potable water supply access in the State reached 91 percent of the urban population and only 17 percent of the rural population. In contrast, basic sanitation services reach 37 percent of the population in the urban area and only 0.20 percent6 in rural areas. In this context, the State’s goal to ensure universal access to water services by 2015 is considered to be overly ambitious because the amount of investment needed is tremendously higher than what is currently allocated. By the end of the proposed project’s interventions, that coverage in rural areas will reach 19 percent for potable water supply and 2 percent for basic sanitation services. 9. Despite the State’s strong and continuous investments in water infrastructure, access to potable water supply and water for irrigation remains weak. Small-scale farmers, 4 Encompassing 150 municipalities out of a total of 184 statewide, IBGE 2010. 5 Source: IBGE Census 2010 6 IPECE, http://www.ceara.gov.br/ceara-em-numeros. 2 especially in the Sertão, often face an extremely low level of access to water resources; the impact of this is a relatively stunted irrigated area (only 0.3 percent of the State’s total agricultural area) and periodic lack of potable water supply for rural enterprises and households, thus significantly limiting the growth of commercial food processing and domestic primary processing. The lack of adequate basic sanitation systems is also a constraint to producers’ commercial activities, even at the level of the smaller cooperative associations. B. SECTORAL AND INSTITUTIONAL CONTEXT 10. The State’s Multiyear Development Plan (Plano Plurianual 2012-2015, PPA) seeks to increase regional and rural development and productivity and builds on the following tenets: (a) Regional/territorial approach and integration: Ceará’s thirteen territories (seven of which coincide with the Federal Government’s Territórios da Cidadania boundary delimitation) will aid in concentrating and coordinating various federal- and state- level programs to boost economic and social inclusion. (b) Climate-smart responses: The proposed project would stimulate innovations that jointly increase agricultural productivity, increase the efficient use of scarce water, and promote climate change resilience while reducing carbon emissions. (c) Innovation: Rural producers must adopt new technologies and access greater commercial intelligence in order to thrive in dynamic markets. This will require fresh learning approaches to stimulate a ―rural innovation culture‖ conducive to competitiveness and capable of connecting education to jobs. (d) Technology Strategy: By tapping into global knowledge and technology for dissemination in the local economy, the State will give priority to the establishment of a network and mechanisms to facilitate the dissemination and adoption of new technologies and practices among producers and other communities, including: the direct support of innovative projects through the provision of technical, financial and other needs; and (ii) the encouragement of change through demonstration projects. (e) Producers’ Organizations:7 Collective action among small-scale producers can reduce asymmetric bargaining power in markets dominated by intermediaries. Previous Bank-financed operations in Ceará have fostered more than 3,500 community associations and cooperatives, mostly composed of small-scale producers who would be targeted under the proposed operation. (f) Value chains: Rural producer organizations that participate in value chains can: (i) improve the uptake of technological innovation; (ii) expand access to timely commercial intelligence; and (iii) reduce individual risks through risk spreading across value chain actors. 7 Producers’ Organizations are clusters of small and medium enterprises located in a given territory with productive specialization and cooperative arrangements. 3 (g) Equity: Equity among value chain actors would be promoted through alliances with private companies that promote ―win-win‖ market solutions. The project’s inclusive design will also promote the participation of women and youth. 11. In addressing the State’s agenda, its PPA (2012–2015) reflects the goals of equitable, inclusive and efficient growth. The proposed project would support priority programs selected from the PPA and from the State Strategic Plan. Investments will be linked to a very well- designed strategy focused on: (a) promoting inclusive growth; (b) universalizing potable water supply; and (c) modernizing and strengthening public institutions. 12. In this regard, the project will mark a shift in the approach to rural sustainable development and competitiveness: from a traditional rural demand-driven (community-driven development, CDD) approach to a more strategic and market-oriented approach. C. HIGHER-LEVEL OBJECTIVES TO WHICH THE PROJECT CONTRIBUTES 13. The Bank has had a long-standing partnership with the Northeast Region and the State of Ceará, with regular dialogue on the overall lending program, State sector strategies and specific operations. The proposed project is an important part of both the Bank’s Brazil portfolio and the focal areas of the Bank’s Agriculture Action Plan (FY10–12), linking with its five focal areas: (a) raising agricultural productivity, including support to the increased adoption of new technology, improved agricultural water management, and strengthened innovation systems; (b) linking farmers to markets and strengthening value addition, including support for investments in transport infrastructure, strengthened producer organizations, improved market information, and access to finance; (c) reducing risk and vulnerability, including continued support for safety nets, better managing food markets, risk management against catastrophic loss, and reduced risk of major livestock disease outbreaks; (d) facilitating agricultural entry and exit and rural nonfarm income, including improved rural investment climates, and upgraded skills; and (e) enhancing environmental services and climate-smart agriculture, including better-managed livestock intensification, improved rangeland, watershed and fishery management, and support to link improved agricultural practices to environmental recovery and sustainability (e.g., through payment for environmental services). 14. The Bank has consistently supported the State’s community-driven Rural Poverty Reduction Program (known locally in Ceará as the Projeto São José) since its inception in 1993, and the State has been notable for its willingness to test innovations, e.g., market-based land reform, fair-trade initiatives, and integration. The Bank’s CDD8 investments in Northeast Brazil are well documented in their respective ICRs as well as in evaluation studies noting the impact and cost-effectiveness of the approach. Bank support at this time for a new Rural Development Project in Ceará pairs its knowledge of a tested and robust new mechanism with the State’s own policies, experiences and commitment, taking advantage of a social and participatory network created by the previous projects. 8 Community-driven Development, a participatory approach adopted by the Rural Poverty Reduction Program in Northeast Brazil 4 15. Ceará has been among the Bank’s primary subnational borrowers in the Northeast Region. Investment loans to Ceará over the last decade have included education, health, rural poverty, results-based Sector-Wide-Approach (SWAp) supporting six sectors and nine strategic government programs, water resources management, water infrastructure and services expansion and efficiency, and urban development and economic growth in development poles (Cidades do Ceará Project). Currently, the State has five active projects comprising a total investment of over US$535 million. 16. The proposed project’s objective and strategy are fully in line with The World Bank Group's Country Partnership Strategy 2012-2015 (Report # 63731-BR) discussed by the Executive Directors on November 1, 2011. In the agricultural and natural resource management (NRM) sectors, the proposed project would support two key challenges outlined in the CPS: (a) seizing opportunities for innovative and integrated approaches to climate-smart, inclusive economic growth, focusing on rural productivity; and (b) addressing the competitiveness issues that Brazil faces in agriculture and NRM. The proposed project would also support the other two CPS pillars by contributing to an Equitable Brazil by targeting rural access to basic infrastructure and services for human capital development, and to a Sustainable Brazil through the promotion of sustainable production systems, including the piloting of incentives schemes for innovations and technologies. II. PROJECT DEVELOPMENT OBJECTIVES A. PDO 17. The project development objectives (PDO) are to: (i) improve the sustainability of rural production and rural income generation; and (ii) contribute to the State’s efforts to universalize access to water services.9 18. This will be done by increasing rural productivity in a sustainable manner and also by improving the competitiveness of organized small-scale rural producers by favoring their participation in productive clusters chains and by expanding their access to supporting infrastructure. PROJECT BENEFICIARIES 19. The project will benefit over 18,000 poor rural producers and particularly small farmers, as well as nonagricultural rural producers represented by their organizations, such as community associations, producers’ associations, cooperatives, or other types of legally established organizations that can provide proof of regular operation. The proposed project would also provide about 40,000 people with access to water services. PDO LEVEL RESULTS INDICATORS 9 Water services in this project mean potable water services and basic sanitation services (e.g., septic tanks and sanitary kits). 5 20. Key results expected from the project are: (a) an increase in the real revenue (inflation adjusted) of the beneficiary rural producers’ organizations; (b) the number of people in rural areas provided with access to improved water sources under the project; (c) the number of people in rural areas with access to improved sanitation under the project; and (d) the increased number of beneficiary organizations participating in environmental recovery activities and conservation of focused areas. III. PROJECT DESCRIPTION A. PROJECT COMPONENTS 21. Component 1: Economic Inclusion (US$70.0 million, of which US$46.69 million IBRD financing) would promote investments in rural economic inclusion in the Borrower’s territory, through: (a) the provision of support to SDA for: (i) the preparation of Business Plans, implementation and supervision; and (ii) the construction of approximately five warehouse facilities in selected rural areas for collecting, processing and distributing farm products. (b) the provision of support to POs for the carrying out of: (i) Productive Subprojects; and (ii) Environmental Services Subprojects, all included in eligible Business Plans. (c) the provision of support to SDA for the development of a state-wide disaster risk management policy, contingency plans and early warning systems for the prevention of natural disasters. 22. Component 2: Water Services10 (US$50.0 million, of which US$33.35 million IBRD financing) would support the Borrower’s efforts to universalize access to potable Water Services, through: (a) the provision of support to: (i) SDA for the preparation and implementation of engineering designs for selected potable water and basic sanitation infrastructure investment; and (ii) CAGECE and SOHIDRA for the analysis of engineering designs and supervision of works for the implementation of selected potable water and basic sanitation infrastructure investments, using existing water sources to complete the link between the main water distribution system and the relevant household. (b) the provision of support to CAGECE and SOHIDRA for the scaling up of existing water distribution management system models, including SISAR, and the development of pilot solutions for the sustainable operation and management of Water Services delivery and management in selected rural areas. (c) the provision of support to Community Associations for the carrying out of Greywater Reuse Pilot Subprojects. 10 Water services in this project mean potable water services and basic sanitation services (e.g., septic tanks and sanitary kits). 6 23. Component 3: Institutional Strengthening and Project Management (US$23.3 million, of which US$15.54 million IBRD financing) would provide support for, inter alia: (i) the technical and administrative management of the Project; (ii) the necessary updates to SDA’s management information system, including the design, development and implementation of a monitoring and impact evaluation module to track progress on results indicators; (iii) the development and implementation of a training program for technicians, Project Beneficiaries and stakeholders; (iv) the development and implementation of a communication plan to disseminate information on the Project; (v) institutional strengthening of TCE-CE for the carrying out of audits under the Project. B. PROJECT FINANCING LENDING INSTRUMENT 24. The proposed operation is a Specific Investment Loan (SIL) in the amount of US$100.0 million. Retroactive financing11 is expected in the amount of up to US$20 million. PROJECT COST AND FINANCING (US$) Project Components Project Cost IBRD Financing % Financing 1. Economic Inclusion 70,000,000 46,690,000 66.70 2. Water Services 50,000,000 33,350,000 66.70 3. Institutional Strengthening and Project 23,300,000 15,541,100 66.70 Management Total Baseline Costs 143,300,000 95,581,100 66.70 Physical contingencies 3,225,000 2,084,450 64.63 Price contingencies 3,225,000 2,084,450 64.63 Total Project Costs 149,750,000 99,750,000 66.67 Interest during Implementation 0 0 Front-end Fees 250,000 250,000 100.0 Total Financing Required 150,000,000 100,000,000 66.70 C. LESSONS LEARNED AND REFLECTED IN THE PROJECT DESIGN 25. Some lessons learned from the implementation of other Bank-supported projects in the State, such as PCPR12, and incorporated in project design, include the following: (a) Partnership with social organizations can be significant for the quality of project- supported proposals (local investments), particularly regarding the level of community participation and project assessment for prioritization and implementation of investments. (b) Market orientation: Verifiable market opportunities must underpin support for poor rural producers. Effective mechanisms to achieve this include: (i) focusing on existing and new 11 Preparatory activities would be financed by project dissemination events, training, business plans, pilot projects for productive and water services investments, among others. 12 Projeto de Combate à Pobreza Rural (Rural Poverty Reduction Project, P050875) 7 markets and value chains as part of the eligibility criteria for productive investment projects; (ii) conducting private-sector consultations during project design; and (iii) carefully analyzing areas where the public sector can play a catalytic role, based on current and future market conditions. (c) Competitiveness clusters: To ensure success, the following factors must be considered: (i) creating extensive partnerships among players—under a common territorial development strategy—for value-chain projects; (ii) focusing on technologies for markets with high growth potential; (iii) reaching sufficient critical mass to acquire and develop state-level (or national) visibility; and (iv) implementing a common territorial economic development strategy consistent with the State’s overall development goals. (d) Value-added arrangements are viable, based on a transparent scheme with proper incentives. Successful value-added arrangements can be achieved when three key elements are present: (i) a clear and shared objective and a sound balance of power and governance among all stakeholders; (ii) a shared risk mechanism; and (iii) commitment to market principles. (e) Complementary funding from other sources can increase project results, as shown by the agreement with MDS and FUNASA, which carried out previous or parallel complementary actions. Integration with other rural development programs, including the simultaneous promotion of private productive investments and public socioeconomic investments, enhances efficiency, project impact and sustainability. (f) Experiments carried out in previous operations showed that it is possible to increase procurement efficiency without interfering in the autonomy of community organizations, by applying the State’s modern bidding tools. (g) Recent WSP and Bank studies/reports have shown the importance of the demand-driven approach to guarantee ownership, while ensuring professional expertise to operate and maintain the provision of water and sanitation systems (WSS) as a means to enable sustainability. IV. IMPLEMENTATION A. INSTITUTIONAL AND IMPLEMENTATION ARRANGEMENTS 26. The State of Ceará, through SDA, would be the Borrower for the proposed loan, with the Federative Republic of Brazil serving as Guarantor. SDA will be responsible for overall management, planning, coordination, monitoring and evaluation of all project activities both at central and regional levels, as well as for project financial management, procurement, disbursements and accounting. SDA will also be responsible for implementing the social and environmental safeguards instruments, as well as for disseminating project results through a proactive communication strategy. In addition, SDA will ensure that counterpart resources are foreseen in the State’s budget. 27. The Project Management Unit (Unidade de Gerenciamento do Projeto, UGP) will be housed in SDA and will be composed of a Project Coordinator, a Technical Advisor for Planning, a Legal Advisor, a Social Management Advisor, an Environmental Management 8 Advisor, an Information Technology Advisor, six managers (Procurement Specialist, Financial Administration Specialist, Monitoring and Control Officer, Water Resources Use Manager, Economic Inclusion Manager, and Institutional Strengthening Manager), technical staff and administrative assistants. 28. To ensure local coordination and integration between institutions and stakeholders, 13 Project Territorial Management Units (Unidades de Gerenciamento Territorial, UGT) will be established, covering all the State’s territories, each with three field technicians and one administrative assistant. One of the three technicians will carry out overall coordination of the UGT, reporting directly to the General Coordinator. In addition, a Steering Committee chaired by SDA, and composed by representatives from key secretariats and organizations, as defined in the Operational Manual, will be responsible for providing general oversight and guidance on the strategic and multisectoral aspects of the Project. 29. SDA will partner with several institutions, such as EMATERCE, CAGECE, SOHIDRA, CENTEC and IICA, for project implementation through cooperation agreements to formalize responsibilities regarding project actions. Their roles, as well as the detailed implementation arrangements, are described in Annex 3. B. RESULTS MONITORING AND EVALUATION 30. The project will be monitored and evaluated through the existing Management Information System (MIS) and databases developed by SDA in the context of previous Bank- supported operations, in addition to the new Heritage System (Sistema de Controle Patrimonial), which will feature modern technological tools. The monitoring system will serve as a realistic and flexible instrument for improving the performance of project implementation through the timely identification of problems that require immediate attention from managers and allow corrective measures to be taken. The system will provide systematic and up-to-date information to managers and partners during project implementation, and will assist in meeting established criteria and eligibility rules. 31. The project will also conduct an impact evaluation to determine whether and to what extent the interventions under Components 1 and 3 lead to improved outcomes for producers’ organizations and the families in those organizations. The impact evaluation will test different extension and technical assistance strategies aimed at raising the quality of business proposals prepared by the producers’ organizations, encouraging the adoption of new technologies, improving community-driven processes and social capital in these organizations, and ensuring the sustainability of investments. These monitoring and evaluation arrangements are further detailed in Annex 3. C. SUSTAINABILITY 32. The Borrower has demonstrated commitment to the PDO and has confirmed the necessary fiscal space for project implementation. Consultations have been conducted across an array of stakeholders (e.g., CAGECE, COGERH, SOHIDRA, EMATERCE, Banco do Nordeste, among others) to both inform and verify key elements of project design. 9 33. Component 1 supports a business model with financing shared among POs, through the National Program to Strengthen Family Agriculture (Programa Nacional de Fortalecimento da Agricultura Familiar, PRONAF), private financial access and the project (through project matching grants). It is expected that partnering financial institutions would take on an ever- increasing role in financing the investments, with market-sourced finance comprising an ever- larger share of the total investment. In addition, the participation of financial institutions in assessing and possibly cofinancing viable and sustainable business plans to be implemented under Component 1 would extend their client base and should work to deepen financial markets in Ceará. 34. Component 2 builds on previous successful experience in Ceará with local-level implementation of small-scale infrastructure investments, mainly in rural potable water supply and basic sanitation services. Past experience reinforces the importance of up-front investments in local management capacity to ensure that user fees are in place for such services (e.g., cleansing of septic tanks) to cover operation and maintenance expenditures. The Ceará experience was included as a best practice and documented in the Water Partnership Program grant; the project will follow the same successful model. 35. Furthermore, the project design aims at promoting sustainability at the economic, social, environmental and institutional levels by establishing specific criteria (detailed in the Project Operational Manual) for selecting investment proposals such as demonstrated market viability to ensure that increased incomes promoted by the project are sustained over time, and that the WSS systems will be sustainably operated and maintained. 36. On the WSS operation and management side, the project has incorporated improvements to the WSS management model by using as a criterion for investment selection the prior identification of how the systems will be operated and maintained post-implementation. The association with the SISAR model, which is a well-established model with more than 15 years of implementation and with clear guidelines and technical assistance to guarantee the sustainability of project interventions at the local level, would be highly encouraged. 37. On the social side, the project emphasizes the strengthening of producers’ organizations to effectively access project and government or private resources and enhance their managerial capacity. The project also aims at ensuring that women, youth, indigenous peoples and other vulnerable rural groups can benefit from increased agricultural and nonagricultural rural competitiveness, as well as from water services investments. 38. On the environmental side, the investment selection criteria will ensure that business initiatives incorporate environmentally sound practices, and will encourage the adoption of practices that can maintain or recover environmental services, which can become an additional source of income. Moreover, selection criteria include compliance with existing relevant federal, state, territorial and municipal development plans. In particular, the Territorial Rural Sustainable Development Plans (Planos Territoriais de Desenvolvimento Rural Sustentável, PTDRS) are the tools that empower local stakeholders for social management through their representative territorial councils and other representative bodies. These participatory instruments contribute to 10 the State’s objective of strengthening a regional development model, to which this project contributes, by promoting social and economic sustainability with stakeholders’ commitment. 39. Overall: The Government would play an important role in promoting technology, sometimes by directly supporting the development and use of technologies or creating a climate favorable to innovation through various mechanisms and incentives. Sustainability of project impact would be achieved through the project’s support to participatory processes at every level, particularly regarding: (a) territorial forums and strategic planning; (b) Municipal Water Plans; (c) public calls for submission of investment proposals for Components 1 and 2; (d) other state public agencies as collaborators; and (e) POs in defining business plans, including implementation and cost sharing, thus increasing the degree of ownership of financed investments. Furthermore, the roster of technical service providers established by SDA would ensure quality design and execution of business plans, complementary rural infrastructure and the associated project. Finally, investment agreements signed among POs, Community Associations and SDA would detail procedures for the continued operation and maintenance of these investments, drawing on lessons learned from recent studies in Northeast Brazil on management models for rural potable water and basic sanitation services. Moreover, these activities would be an efficient policy tool for triggering change and enhancing the institutional and financial sustainability of project impacts. V. KEY RISKS AND MITIGATION MEASURES A. Risk Ratings Summary Table Risk Rating Stakeholder Risk Low Implementing Agency Risk Moderate - Capacity Moderate - Governance Moderate Project Risk Moderate - Design Moderate - Social and Environmental Moderate - Delivery of Monitoring and Sustainability Moderate Overall Implementation Risk Moderate B. Overall Risk Rating Explanation 40. Stakeholder risk is deemed Low, as the political will at the municipal and state level for the Project is strong, as is also the grassroots support from existing producers and community organizations, the private sector and financial institutions in Ceará, all of which have actively participated in consultations during project preparation. The State’s innovative strategy on inclusive economic growth carries inherent institutional capacity risks. With a relatively complex 11 operation following a multisectoral approach, technical capacity building and project management are key elements to ensure that the project is implemented in a timely manner. Previous operations have shown that without effective leadership, project implementation delays could be high. However, in consideration of the Bank’s long-term partnership and familiarity with the State, the overall implementation risk is considered Moderate because additional measures to mitigate the project’s overall risk have been or will be put in place, such as the Project Management Unit placed under the SDA’s leadership, suitable allocation of financing, partnerships and collaboration of other State Secretariats, agencies, and stakeholders, business plan preparation for productive investments, procurement packaging, design flexibility and up- front preparation of the Operational Manual. VI. APPRAISAL SUMMARY A. ECONOMIC AND FINANCIAL ANALYSES 41. Because the proposed project will respond to the explicit demands of its target population concerning the nature of the project proposals to be considered and eventually supported, a detailed ex ante cost-benefit analysis of the project as a whole is not warranted. To obtain an ex ante indication of the financial soundness of the types of investments likely to be supported by Component 1, indicative production models from different value chains were constructed using information collected during project preparation. The validity and accuracy of these models will be verified, and any necessary revision will be incorporated during appraisal. More precise and representative feasibility indicators could be estimated during implementation, using information from a larger sample of actual investment proposals under consideration for project financing. The analyzed projects generated Financial Internal Rates of Return (IRR) greater than 25 percent in all cases and demonstrate significant incremental contributions to rural producer income (R$262/month on average). The sensitivity analysis in Table 4 of Annex 7 shows that, in general, these projects exhibit robust indicators. 42. The preliminary cost-benefit assessment of potable water supply investments to be financed by Component 2 is based on cases drawn from the Implementation Completion and Results (ICR) report for the Rural Poverty Reduction Project (RPRP) of Ceará (December 2009), a precursor to this project. It is expected that the nature of the projects demanded for Component 2 financing will be similar in nature and scale to those implemented by the RPRP. Accounted costs included the initial investment and annual operating costs, while the benefits were calculated on the basis of: (i) savings in time used for water collection; (ii) savings derived from the reduction of waterborne diseases; and (iii) willingness to pay, which is a proxy for the value families attribute to the availability of potable water. As shown in Table 5 of Annex 7 potable water supply investments were deemed economically feasible. The financial analysis of Potable Water Supply projects shows positive results, with IRR above the discount rate of 10 percent. B. TECHNICAL 43. The project is deemed technically sound and presents strategic complementary actions to support the State’s efforts to promote inclusive growth. Productive inclusion of small producers will be achieved by means of project actions to promote their economic development through market inclusion, by adding value to and increasing the scale of rural productivity. Project 12 actions will also target nonagricultural activities carried out by small producers. The project design envisages clear selection and ranking criteria for production investments, strongly linked to the targeted production clusters. 44. Furthermore, the project will strongly contribute to the State’s efforts to ensure universal access to potable water and basic sanitation in rural areas by financing the extension of potable water supply infrastructure and basic sanitation services to rural communities. The State’s long- term experience with the management of rural potable water supply services (such as SISAR) will be adopted by the project. In addition, the project design includes a strong aspect related to technical support to producers’ and community organizations, and social and environmental requirements for project investments, as well as a project capacity-building plan targeting participating stakeholders. C. FINANCIAL MANAGEMENT 45. A financial management assessment for the proposed project was conducted during project preparation, in accordance with OP/BP 10.02 and the Financial Management Practices in World Bank Financed Investment, dated March 5, 2009, to determine whether SDA has acceptable financial management and disbursement arrangements in place to adequately control, manage, account for and report on project funds. Based on the assessment of the executing agency, the financial management arrangements as set out for this project meet the Bank’s minimum fiduciary requirements (see Annex 3 for a detailed assessment). 46. The overall conclusion on the assessment of SDA is that the financial management arrangements, as set out for the proposed project, are adequate. Fiduciary risks have been identified and mitigated as reflected in the ORAF matrix (see Annex 4). The financial management supervision missions are expected to be undertaken on a semiyearly basis. 47. In addition, a financial management assessment for the proposed project was conducted during project preparation at IICA’s headquarter and FM systems were found acceptable and liable to proper account projects activities (see Annex 3). Details of the arrangements with IICA are detailed in the Operational Manual. D. PROCUREMENT 48. The capacity assessment of UGP/SDA reviewed the organizational structure for implementing the project. It verified that despite the UGP staff’s lengthy experience with Bank- financed operations, the introduction of private-sector procurement procedures (commercial practices) for the productive projects, of larger infrastructure packages, and of an enhanced technical assistance component will challenge the UGP staff’s procurement capacity. To strengthen this capacity, UGP should hire procurement consultants for centralized procurement, and technical experts to make sure the projects have sound business plans that propose specific commercial practices and include criteria to verify economy, efficiency and transparency. Annual audits of business plan implementation performance and annual procurement audits could help identify adequacy and weaknesses. The initial implementation phases may require closer and much more intense supervision by the Bank. 13 E. SOCIAL 49. The proposed project triggers OP/BP 4.10 (Indigenous Peoples) and 4.12 (Involuntary Resettlement); for details see Annex 3 (Social section). The project will be implemented across the State’s 13 rural territories and will target family agricultural producers, quilombolas, indigenous groups, and artisanal fishermen, among other traditional groups at different stages of social and economic sustainability. It is estimated that project activities will reach approximately 28,200 families, with around 100,000 direct beneficiaries. 50. Indigenous communities in the project area comprise 12 ethnic groups and 22,000 people who are eligible for project activities according to their expressed interest in participating. These people will mostly benefit from capacity-building activities planned under Component 3. However, those with regularized land tenure status may access investment support under Components 1 and 2. Eligible demands presented by indigenous communities will be initially analyzed by the representative territorial and/or municipal councils. The project will favor the representation of indigenous groups in such councils and will accompany their activities to avoid partial decision making. The criteria for prioritization of indigenous communities were defined through participatory procedures and in close consultation with indigenous peoples. 51. The Indigenous Peoples Planning Framework (IPPF), dated October 27, 2011, incorporates these indigenous inputs and recommendations, documents the consultation process, and takes into account the differing access of potential indigenous beneficiaries to public policies. The Borrower publicly disseminated the IPPF on its website (www.sda.ce.gov.br); it was also disseminated in the Bank’s external website (see Annex 3). 52. OP/BP 4.12 (Involuntary Resettlement) is triggered. The proposed project is not expected to fund any subprojects that could potentially cause significant physical displacement and economic losses. The project will seek to avoid involuntary resettlement. Nonetheless, some of the potential subprojects, such as improvements and/or maintenance of rural roads or small-scale irrigation works, could possibly involve the relocation of people or acquisition of land. It is expected that, in these cases, the potential numbers of people who might be affected would be quite small and any land acquisition would also be relatively minor. Because the subprojects to be developed under the project are not yet known, a Resettlement Policy Framework (RPF), dated October 27, 2011, was prepared; it was consulted with key stakeholders and publicly disseminated, and will form part of the Project Operational Manual. The RPF will serve as the guide to the site-specific formulation of Resettlement Action Plans (RAP), if needed. The RPF has been consulted and was publicly disseminated on the Borrower’s website (www.sda.ce.gov.br) and in the Bank’s external website (see Annex 3). F. ENVIRONMENT 53. The proposed project falls under Category B and triggers Operational Policies 4.01 (Environmental Assessment), 4.04 (Natural Habitats), 4.36 (Forests), 4.09 (Pest Management), 4.11 (Physical Cultural Resources) and 4.37 (Safety of Dams). One of the project’s assumptions is the adoption of environmental assessment as a cross-cutting theme for all project actions, 14 which should take into consideration the practice of proper environmental management and explicit attention to biodiversity, climate change and environmental services. 54. The project does not entail any potential large-scale, significant and/or irreversible negative impacts. The proposed project interventions will be small-scale, market-oriented/driven investments. These investments would not cause significant adverse environmental impacts, since they are related mainly to complementary infrastructure development (i.e., potable water supply, basic sanitation), new agricultural practices (i.e., product diversification, conservation agriculture, promotion of value-added products, and product certification) and nonagricultural activities such as small-scale processing units. Potential adverse impacts from projects will be limited, site-specific, largely reversible, and readily and reliably mitigated through known methods. The selection of productive investments will be consistent with: (a) national, state and local legislation concerning the Brazilian Forest Code, natural habitats and protected areas; and, (b) World Bank safeguard policies. The environmental safeguard issues are detailed in the project’s Integrated Safeguards Data Sheet (ISDS) and Operational Manual. 55. Although potential impacts from projects are expected to be small, temporary and of short duration, the project’s Environmental and Social Management Framework (ESMF) dated October 27, 2011 specifies guidelines and procedures to be followed by construction contractors, covering aspects such as location of construction camps, clearance of vegetation, noise, traffic control, safety signaling, and disposal of construction debris and waste material to be incorporated in the bidding documents for civil works. Compliance with the practices outlined in the Project Operational Manual would be a contractual obligation of the contractors. Regarding small ruminants and irrigation activities under Component 1, potential impacts could arise from the suite of investment activities related to the desertification process and vulnerability of semi- arid areas to climate change, exploitation of native vegetation, use of rudimentary management practices, and increasing demand for firewood for tanneries and meat processing. These impacts could include soil erosion, the degradation of surface and groundwater, salinity, and improper disposal of chemical packaging, all with corresponding demands for appropriate mitigation measures. 56. The Borrower prepared an ESMF for the project, drawing on lessons from previous operations implemented by SDA, including the RPRP and other projects implemented by the State of Ceará, with best practices for soil conservation and recovery of degraded areas. The final ESMF was submitted to the Bank for analysis and no-objection and has been disseminated in the Bank’s external website and on the Borrower’s website (www.sda.ce.gov.br). See Annex 3 for a more detailed description of project safeguards. 15 Annex 1: Results Framework and Monitoring . Brazil Ceará Rural Sustainable Development and Competitiveness . Results Framework . Project Development Objectives . PDO Statement Project Development Objective: The objectives of the project are to: (i) improve the sustainability of rural production and rural income generation; and (ii) contribute to the Borrower’s efforts to universalize access to water services. . Project Development Objective Indicators Cumulative Target Values Data Source/ Responsibility for Indicator Name Core Unit of Measure Baseline YR1 YR2 YR3 YR4 End Target Frequency Methodology Data Collection Real revenue increase Baseline Report, (inflation adjusted) of Percentage 0.00 0 10 15 20 20 Annual Business Plans UGP beneficiary rural and MIS producers’ organizations New piped household MIS, Annual water connections that Number 0.00 700 5.700 9.300 10.000 10.000 Annual Performance UGP result from project Report intervention Number of people in Baseline Study, rural areas with access MIS, Annual to ―Improved Number 0.00 2.800 22.400 36.400 39.200 39.200 Annual UGP Performance Sanitation‖ under the Report project Increased number of beneficiary MIS, Annual organizations Number 0.00 0 10 10 25 25 Biannual Performance UGP participating in Report environmental recovery activities . 16 Intermediate Results Indicators Cumulative Target Values Data Source/ Responsibility for Indicator Name Core Unit of Measure Baseline YR1 YR2 YR3 YR4 End Target Frequency Methodology Data Collection Productive investments implemented and Number 0.00 40 150 350 440 440 Biannual MIS UGP operational 25% of productive MIS, Annual investments led by Number 0.00 10 33 88 110 110 Annual Performance UGP women Report Participating rural producers’ organizations MIS/Annual successfully accessing Percentage 0.00 0 10 30 40 40 Annual Accounting UGP formal markets (e.g., Reports PAA and PNAE) Improved efficiency in agricultural production through access to Number 0.00 4 15 35 44 44 Annual MIS UGP environmentally sustainable technologies Pilot PES mechanism established and operational for Number 0.00 0 1 1 2 2 Annual MIS UGP sustainable land-use practices Basic sanitation investments Number 0.00 0 10 80 140 140 Annual MIS UGP implemented and sustainably operated. Beneficiary organizations trained in Number 0.00 40 150 200 440 440 Biannual MIS UGP business management Number of water reuse pilot projects Number 0.00 1 8 12 13 13 Annual MIS UGP implemented with project support Potable water supply systems and basic sanitation management Number 0.00 20 160 264 280 280 Biannual MIS UGP training provided to water services managers 17 Training being provided to government staff and strategic partners in Number 0.00 20 40 60 80 80 Biannual MIS UGP accordance with the Project Capacity Building Plan MIS, Annual Number of participants Number 0.00 800 1.600 2.400 3.200 3.200 Biannual UGP Report X Training for project beneficiaries to encourage adoption of Number 0.00 2 4 6 8 8 Biannual MIS UGP environmentally sustainable practices Number of participants MIS, Annual in training courses Number 0.00 100 375 825 1.350 1350 Annual Performance UGP provided under by the Report project Project results and lessons learned Number 0.00 0 1 7 15 15 Biannual MIS, reports UGP disseminated . 18 Annex 1: Results Framework and Monitoring . Brazil Ceará Rural Sustainable Development and Competitiveness . Results Framework . Project Development Objective Indicators Indicator Name Description (indicator definition, etc.) Real revenue increase (inflation adjusted) of beneficiary rural producers’ % increase in real revenue (inflation adjusted) resulting from activities supported by the project organizations New piped household water connections that result from project intervention Number of new piped household water connections resulting from the project intervention. A piped household water connection is defined as a connection that provides piped water to the consumer through either a house or yard connection. Thus, these do not include standpipes, protected wells, boreholes, protected springs, piped water provided by tanker trucks or vendors, unprotected wells, unprotected springs, rivers, ponds and other surface water bodies, or bottled water. Number of people in rural areas with access to ―Improved Sanitation‖ under Cumulative number of people in rural areas who benefited from improved sanitation facilities that have been the project constructed under the project Increased number of beneficiary organizations participating in environmental Number of beneficiary organizations involved in environmental recovering activities (e.g., riparian systems, recovery activities microcatchments and Caatinga biome). . Intermediate Results Indicators Indicator Name Description (indicator definition etc.) Productive investments implemented and operational Number of project-supported activities implemented and operational; and % of investments led by women 25% of productive investments led by women Number of project-supported activities implemented and operational; and % of investments led by women Participating rural producers’ organizations successfully accessing formal Number of rural producers selling products to institutional markets markets (e.g., PAA and PNAE) Improved efficiency in agricultural production through access to Number of producers who previously lacked access to irrigation or used unsustainable technologies gaining access to environmentally sustainable technologies (e.g., irrigation) environmentally sustainable technologies (e.g., irrigation). Pilot PES mechanism established and operational for sustainable land-use Number of producers’ organizations adopting sustainable practices for recovery of environmental services and practices receiving PES Basic sanitation investments implemented and sustainably operated Number of project-supported activities implemented and operational Business management training provided to beneficiary organizations Number of beneficiaries’ organizations trained in management of productive investments 19 Number of water reuse pilot projects implemented with project support Number of project-supported activities implemented and operational Potable water supply systems and basic sanitation management trainings Number of beneficiaries trained and managing water services systems provided to water services managers Training being provided to government staff and strategic partners in Number of technicians involved in the project implementation trained and delivering their tasks appropriately. (8 accordance with the Project Capacity Building Plan events; 3,200 participants) Number of participants Number of technicians involved in project implementation trained and delivering their tasks appropriately Training for project beneficiaries to encourage adoption of environmentally Number of beneficiaries trained and adopting environmentally sustainable practices sustainable practices Number of participants in training courses provided under by the project Number of technicians involved in project implementation trained and delivering their tasks appropriately Project results and lessons learned disseminated Number of dissemination activities (press releases, videos, publications, workshops, website, video conferences) 20 Annex 2: Detailed Project Description BRAZIL: Ceará Rural Sustainable Development and Competitiveness Project 1. The Bank has articulated a strategic vision for continued engagement with Ceará and other Northeast states, emphasizing: (a) economic growth with inclusion and innovation; (b) improved water productivity and management; and (c) structural investments to enhance logistics in coordination with the State of Ceará’s multiyear investment plan (PPA 2012–2015), converging with this three-pronged approach. 2. The proposed Specific Investment Loan to the State of Ceara, with a sovereign guarantee of the Federative Republic of Brazil, in the amount of US$100 million would support the inclusive growth and sustainable development chiefly by facilitating and strengthening competitive and innovative productive clusters and activities. Thus increasing income and access to adequate technologies; and contributing to the State’s efforts to universalize access to basic rural infrastructure, primarily potable water and basic sanitation services. 3. The identification of the most promising investments and policy interventions has become a challenging task because the objectives have shifted from increasing outputs and basic services under the previous Bank-financed Rural Poverty Reduction Projects, to transforming agriculture into a more responsive, dynamic and competitive sector that includes small producers. Therefore, the project is based on a multisectoral approach that requires well- coordinated institutional management, well-designed workflow, and a monitoring system based on performance and results indicators. 4. The selection of investment areas would be based on the following explicit inclusion and exclusion factors: (a) previous productive experience and market demand (private and public markets), allied with potential improved competitiveness of selected beneficiaries and areas, based on cluster assessment, a Territorial Development Plan, and a Rural Development Plan, among other assessments and studies under preparation; (b) water scarcity with regard to water resource availability, according to the Diagnóstico das Rotas do Carro Pipa, Pacto das �guas Strategic Plan, Cinturão das �guas Program, State Strategic Plan for Water Resources, Microcatchment Management Plan, and State Sanitation Plan, as well as Municipal Water Plans under preparation, all contributing to improve and universalize access to potable water and basic sanitation services; (c) environmental and economic sustainability of proposed investments; and (d) environmentally sensitive areas or areas under the process of desertification or environmental degradation. Moreover, the aggregation of municipalities/producers and spatial continuity will be considered as well as economic dynamics, and complementarities with other policies, programs and projects (including other Bank- supported projects) with transparent eligibility and prioritization criteria. 21 5. In line with Ceará’s strategic multiyear plan, the project will focus on several of the State’s strategic regions, combining a different set of criteria for economic inclusion and access to water resources for purposes of investment eligibility, such as: (a) Spatial dynamics: through a selection mechanism consistent with the project’s objectives and components, by regional classification in light of relevant dynamics, in particular climate and demographics, with some areas facing population losses due to desertification, for instance. The analysis provides a clear starting point for the selection of municipalities based on access to basic opportunities and economic development. Along with the geographic dimension, the full set of the State’s municipalities is reduced to a much smaller subset that could hold pilot initiatives such as irrigation or production projects linked to prioritized clusters. Municipalities with low access to potable water, poor living conditions and low economic dynamics are presented in white (specified as BBB in the legend) in the map below. Where those municipalities are located in adjacent areas, forming clusters or regions lagging behind the remainder of the State, it might be easier to scale up the pilot initiatives for nearby areas that are faced with the same deficiencies. (b) Demographic density: an area where small farmers make up a large share of the population. (c) Comparative advantage: most regional economies depend on a diverse portfolio of unprocessed and processed primary-based products; comparative advantage will still lie in primary activities and agro-processing because of the potential for natural resource endowments. (d) Availability of water resources. (e) Business innovation, particularly the adaptation of existing technologies available in and outside the State. 22 6. The project also includes disaster risk management requirements for project investments under Components 1 and 2. The approach will be to have activities at strategic/policy levels and operational level. At operational level, the proposed investments will prepare and submit Contingency Plans, focusing particularly on the prevention of floods, droughts and forest fires. Prevention actions will include environmental recovery actions targeting riparian forests and vegetation to protect water sources; adequate soil management techniques; and any action necessary to achieve compliance with the Brazilian Forest Code. Environmental recovery actions in areas identified by the Forest Code as Permanent Preservation Areas around water bodies may be considered as maintenance or recovery of environmental services and, as such, be accounted as part of the community’s or producers’ in-kind contribution to project investments. The project will seek coordination with the State Program to Prevent, Monitor and Combat Forest Fires (Programa Estadual de Prevenção, Monitoramento, Controle de Queimadas e Combate aos Incêndios Florestais, PREVINA) to provide technical assistance 23 on subjects such as alternative soil management, controlled burning, and other environmental risk management activities to participating producers’ and community associations. Project Development Objective: 7. The proposed project objectives are to: (i) improve the sustainability of rural production and rural income generation, and (ii) contribute to the State’s efforts to universalize access to water services.13 PDO Level Results Indicators 8. Key results expected from the project are: (a) increase in the real revenue of the beneficiary rural producers’ organizations; (b) number of people in rural areas provided with access to improved water sources under the project; (c) number of people in rural areas with access to improved sanitation under the project; and (d) increased number of beneficiary organizations participating in environmental recovery activities and conservation of at-risk areas. Project Beneficiaries 9. The project will benefit rural communities (Components 1 and 2) and particularly small farmers and producers, as well as nonagricultural rural producers (Component 1) represented by their organizations, such as community associations, producers’ associations, cooperatives, or other types of legally established organizations that can provide proof of regular operation. 10. The aim of the training program under the project (Component 3) is to reverse the historical weakness that hinders access to public policies and financial services by various social groups such as land reform settlers and specific social groups such as quilombolas,14 indigenous peoples, fishermen and other groups at different stages of achieving effective social and economic development, thus reversing the current scenario of exclusion. In addition, the training program will include the strengthening of targeted state agencies and other stakeholders involved in project implementation. Project Components: 11. Component 1: Economic Inclusion (US$70.0 million, with US$46.69 million IBRD financing) is aimed at contributing toward enhancing the competitiveness and economic, social and environmental sustainability of family producers through increased quality, added value and increased productivity of family production, and through access to enhanced technologies, including irrigation. Investments would involve both agricultural and nonagricultural rural 13 Water services in this project mean potable water services and basic sanitation services (e.g., septic tanks and sanitary kits). 14 Quilombolas are communities formed by descendants of African slaves, living in rural areas. 24 production activities already successfully developed in communities or with economic potential represented by successful past experiences, cultural characteristics, market opportunities or local demand. Furthermore, this component will support environmental conservation or rehabilitation investments for piloting the design of a model for payment for environmental services (PES) in the rural landscape. 12. This component will finance consultants’ services, goods, works and nonconsulting services to support the preparation and implementation of selected investments, and contingency plans to manage disaster risks. 13. The target beneficiaries for this component are small farmers and producers carrying out agricultural and nonagricultural activities in rural communities, represented by their organizations, such as community associations, producers’ associations, cooperatives, condominiums, or other types of legally recognized organizations. Settlers from the agrarian reform and specific social groups (e.g., quilombolas, indigenous peoples, and fishermen, among others) are also targeted as direct beneficiaries under this component. 14. Specifically, Component 1 will support the following investments through three subcomponents: (a) Subcomponent 1.1. Support to Productive Investments: this subcomponent would finance (i) the preparation of business plans and monitorial supervision of implementation; and (ii) the construction of approximately five warehouse facilities in selected rural areas for collecting, processing and distributing farm products. (b) Subcomponent 1.2. Productive Investments: this subcomponent would finance the provision of support to POs for the carrying out of: (i) Productive Subprojects; and (ii) Environmental Services Subprojects, all included in eligible business plans. The investment proposals would define the role of the producers’ organizations in the context of the productive clusters and promote: (i) productivity-inducing, climate- smart investments in fixed capital (e.g., plant and equipment, minor productive infrastructure), training and technical assistance; agricultural innovation, including quality, labeling, value-added through processing, and contracts with government institutions, supermarkets, agro-industries, the improvement of agricultural productivity through small irrigation systems, using existing water sources and available infrastructure to enhance production/productivity through the adoption of sustainable systems and technologies.; and (ii) the development of a pilot mechanism for the payment for environmental services (PES), in collaboration with environmental and water agencies. Project investments under this subcomponent will include environmental protection or recovery actions aimed at the restoration or maintenance of water resources and biodiversity, or the recovery of vegetation cover for carbon sequestration, to receive such payments. Supported actions would seek the valuation and enhanced quality of natural resources and environmental services, improved community management and the establishment of links between PES sellers and buyers. A conservation fund will be established by the State Government with Treasury funds to pilot the specialized financial mechanism for providing payments during the life of the project. The State would continue with the development of this PES strategy beyond project implementation, based on lessons 25 learned and using its own resources and implementation of rural infrastructures consistent with productive activities and to make them feasible and/or more competitive. This subcomponent will also finance the construction of approximately five warehouse facilities for collecting, processing and distributing products from the productive clusters selected according to feasibility studies to be carried out by the project, in selected rural areas. (c) Subcomponent 1.3. State and sectoral disaster risk management, contingency plans and early warning system. Under this subcomponent, the project will contribute to the development and implementation of an integrated state early-warning system that will allow the State to forecast and provide warnings in case of imminent adverse natural events. The subcomponent will also finance capacity building and training for these subjects. This subcomponent will support strategic engagement with state institutions to promote and begin the development of a state disaster risk management policy. This activity will catalyze a reform in how the disasters are managed at state level. At the same time, the project will support the specific development of disaster risk management aspects in the rural development sector. This activity will include discussions on how the sector considers the hazards and risk in the sectoral investments and explore financial protection mechanisms for the agricultural sector. 15. Selection of proposals: Proposals will be selected in each project area through public calls for proposals aimed at the priorities identified through studies15 of target production clusters (fruit production, goats and sheep, fish aquaculture, and honey, among other clusters to be identified during project implementation) carried out during project preparation, as well as studies on the participation of family agriculture in productive chains and in accordance with the State’s Territorial Development Plans. 16. Economic inclusion will be the focus of eligibility criteria for selecting proposed investments, which should: (a) support the conservation and sustainable use of water resources; (b) introduce technological innovation in production; (c) focus on market access and income generation; (d) have rural family-based producers as beneficiaries; (e) present demands already identified in regional development plans; and (f) support the participation of women’s groups or organizations, considering the target of achieving at least 25 percent of subcomponent investments led by women. The UGP will form a committee to evaluate and rank proposed investments, and may invite experts to assist in the evaluation and selection process when UGP technicians are insufficient or not technically qualified to assess specific proposals. 17. The procedures for the evaluation and ranking of proposals will be further detailed in the Project Operational Manual. Evaluation criteria include: (a) market viability; (b) priority of the proposal within the territory; (c) importance of the proposed productive chain to enhance the competitiveness of family producers in the region; (d) number of family producers addressed by the proposal; (e) adoption of best practices for soil conservation and water resources management; (f) environmental sustainability (reduced negative impact, greater recovery of degraded areas, better environmental suitability); and (g) compatibility with project objectives and integration with other initiatives. 15 Initial target productive chains were selected in accordance with diagnostics conducted by EMATERCE, Agropolos, SDA, Banco do Nordeste (ETENE), SEBRAE, and ADECE. 26 18. Furthermore, proposals should include information on: (a) market demand for product commercialization; (b) availability of and demand for inputs required for production; (c) viability study; (d) organizational and administrative capacity of the proposing organization; (e) logistics and strategy for commercializing the products; (f) technical design (description of necessary works, technical specifications, budget and list of suppliers of the required equipment); (g) operational framework and sustainability strategy; (h) environmental aspects and specific measures to prevent or minimize environmental impacts; (i) management plan; (j) financial and accounting management; and (k) water availability and source (for irrigation investments). 19. Business plan preparation, approval and eventual financing would be further governed by procedures outlined in the Project Operational Manual. 20. Support will be classified in three investment categories: (a) Business plan development: Project funds will finance up to 100 percent of the preparation cost of business plans. (b) Production investment: These are investments to support the increase in family production and quality enhancement through access to adequate technologies. Investments under these production typologies will have an average cost of US$160,000 for the total investment cost financed by the project. These investments would target the structure of the production clusters or the introduction of technology (including irrigation), supporting production or product processing and insertion in local and regional markets. (c) Large-scale investments: These may also target the structure of the production clusters or the introduction of technology (including irrigation), and would mainly be aimed at the links between product processing and distribution in the selected productive chains, with the adoption of higher levels of technology for higher added value and quality, and larger scale of production. Five warehouse facilities in selected rural areas for collecting, processing and distributing farm products will be executed directly by SDA after a feasibility study is submitted to the Bank. Such investments would target access to broader markets, including international markets, creating central units for processing and/or commercializing family production. The average cost for large-scale investments is US$700,000. 21. Investment values will be defined and selected based on cluster type. Technical assistance to investment operations will be provided preferably through publicly funded Rural Technical Assistance (Assistência Técnica e Extensão Rural, ATER) or through private-sector providers for at least the first year of execution, based on eligible business plan costs. The strengthening of participating producers’ organizations provided under Component 3 and technical support provided by the project’s regional offices should ensure the good technical quality and sustainability of supported investments. For production investments, the producers’ organizations would be responsible for 20 percent of investment cost sharing, either in cash or in kind. 27 22. This component’s investments will be executed directly by the producers’ organizations under the supervision and monitoring of the Project Implementation Unit (targeted-demand approach linked to the clusters). 23. Larger infrastructure and equipment investments identified to support productive chains, such as processing units, storage and distribution markets, will be implemented directly by the State Secretariat of Agrarian Development through the Project Implementation Unit in collaboration with related State institutions (EMATERCE and CENTEC) to make procurement processes more efficient and management arrangements more sustainable. 24. Component 2: Water Services16 (US$50.0 million, with US$33.35 million IBRD financing) would support the State’s efforts to universalize access to potable water and basic sanitation services in rural areas, selecting investment areas in line with the Federal Program �gua para Todos and the State’s Pacto das �guas, as well as the State’s strategy to eradicate the water truck (carro pipa) from the water distribution system. Actions under this component are in line with federal initiatives such as the National Water Resources Policy (Law 9.433/1997), which calls for decentralized management approaches that include both users and local communities; and the Federal Integrated Water Supply and Sanitation Policy17 (Law 11.445/2007), which calls for decentralized management of access to water, sanitation, drainage and solid waste disposal in small localities primarily occupied by low-income households. 25. The 2010 Census identified the existence of around 27,000 rural communities formed by more than five families each, of which around 2,700 communities comprise 50 to 400 households, totaling 1.4 million inhabitants. The 2008 SNIS18 had identified 302 rural communities served with potable water supply services; of these, 109 are operated by CAGECE and 193 are served by municipal WSS operators. The Integrated Rural Water Supply and Sanitation System (Sistema Integrado de Saneamento Rural, SISAR)19 currently operates potable water supply services in 570 rural communities. Combined, these services reach only 872 communities. Other communities are still unidentified and/or have access to potable water supply services that are being operated by stand-alone community associations. 26. Specifically, Component 2 will support the following objectives through three subcomponents: (a) Subcomponent 2.1. Extension of WSS services: extend the potable water supply and basic sanitation infrastructure services in rural Ceará. (b) Subcomponent 2.2. Scale-up of Operation and Maintenance (O&M) management models: scale up existing water distribution management system models, including 16 Water services in this project mean potable water services and basic sanitation services (e.g., septic tanks and sanitary kits). 17 The Federal Integrated Water Supply and Sanitation Policy (Law 11.445/2007) defines a broader concept of integrated water supply and sanitation: water supply, sanitation, drainage, and solid waste management. 18 Source: National Information System for Water and Sanitation (Sistema Nacional de Informações sobre Saneamento SNIS). 19 SISAR is a nonpublic civil entity for community purposes that works as a federation of associations for the common management of WSS services in a number of communities (multi-communities), in a regional geographical space that may be intermunicipal. 28 SISAR, and develop pilot solutions for the sustainable O&M of water services delivery and management in selected rural areas. (c) Subcomponent 2.3. Environmental sustainability: introduce pilot practices for efficient water reuse (such as wastewater reuse for irrigating localized agricultural production) and for environmental rehabilitation or conservation activities aimed at protecting water bodies. 27. This component will finance goods, works, nonconsulting services and consultants’ services to support the design and implementation of water and basic sanitation services, as well as the greywater reuse subprojects. 28. Subcomponent 2.1. Extension of potable water supply and basic sanitation services: This subcomponent will be executed directly by SDA, in collaboration with other related State Government institutions (CAGECE and SOHIDRA), under the supervision and monitoring of the Project Implementation Unit (UGP) through a directed-demand approach linked to the water services universalization strategy. The subcomponent will include the preparation of engineering designs and works for the implementation of potable water and basic sanitation infrastructure investments. 29. The potable water supply service would be a collective infrastructure in line with Municipal Water Plans (already prepared or currently under preparation), using existing water sources and adding to available infrastructure to complete networks between main water distribution systems and households, and would include water networks, water treatment facilities and advanced information system technology for water metering. 30. Basic sanitation services would consist of individual household solutions and include sanitary kits20 with septic tanks in all communities where potable water supply would be implemented. Water sources may include existing water pipelines, rivers and small dams (açudes); the use of wells will require prior analysis of the risks of causing salinization problems. Subcomponent investments will target communities or community clusters with a minimum of 25 and a maximum of 500 households, where regular potable water supply and basic sanitation services are not available. Communities must respond to the project’s public call for interest to participate in project selection. An up-front identification of the entity that will be responsible for the sustainable operation and management of the water services infrastructure is an eligibility criterion for the selection of projects to be financed. Localities or clusters with fewer households will be addressed by other state or federal initiatives. 31. Subcomponent 2.2. Scaling up of O&M management models: This subcomponent will also be executed directly by SDA, in collaboration with other related State Government institutions (CAGECE and SOHIDRA), under the supervision and monitoring of the UGP, and will support the scaling up of existing O&M structure (e.g., SISAR) or the development of pilot solutions for the sustainable operation and management structure for water services delivery. This would include technical assistance, acquisition of equipment, capacity building and creation 20 Sanitary kits (kits sanitários) are composed of a toilet, shower, hand-washing sink, washing tank and septic tank. 29 of incentives for new community associations to be included in the O&M management structure. The SISAR O&M management model would be recommended for adoption. 32. The SISAR O&M management model is a nonpublic civil entity for community purposes that works as a federation of associations for the common management of water services in a number of communities (multi-communities) in a regional geographical space (intermunicipal). This model started around 1995 in a region of the State of Bahia (Central in Seabra) and in a region of Ceará (SISAR Sobral). In Ceará, this management model was expanded in 2001 to seven other regions in the State, with one SISAR installed in each planning region. SISAR has as its key element the organization of a General Assembly formed by all affiliated associations. It also has a Management Council formed by managers from community associations and representatives from the State and Municipal Governments; and a Fiscal Council formed exclusively by managers from the associations. 33. The service provision operational model is characterized by shared management, which is divided between activities under the responsibility of the local association and activities at the SISAR level. The latter translate into technical staff for the systems’ maintenance support; for billing and collecting tariffs; and also for providing training and sanitary education services. The tariff will cover the local cost of operation (personnel and electricity) and the SISAR costs (personnel, chemicals and materials, maintenance and administration), or any similar approach. 34. Subcomponent 2.3. Environmental sustainability: The pilot practices and environmental conservation activities under this subcomponent will have the support of the State Government but will be executed directly by community associations. (See detailed description of the institutional arrangements in Annex 3.) 35. Introducing pilot practices: This part of the subcomponent will support pilot practices of greywater21 reuse for irrigating localized agricultural production in rural communities. This would include the development of engineering solutions and specific studies (e.g., feasibility assessments), design and implementation. The selection process for the demand-driven investments would encourage and create incentives for communities to submit proposals of this nature. 36. Environmental rehabilitation or conservation services: These activities will be supported by the beneficiaries (communities), who will be responsible for developing the design and implementing compensatory environmental activities as counterpart contributions for water investments, such as: (a) sustainable land-use and conservation practices; (b) recovery/rehabilitation of riparian forests; (c) tree planting; and (d) protection of the margins of water bodies, etc. with the aim of decreasing desertification and erosion and preventing natural disasters. Communities could learn from the State’s past experiences in implementing similar activities supported by PRODHAM (Bank-supported interventions) in microcatchments. 37. Selection of proposals: Investments under Component 2 will be selected through public calls for proposals from community associations. Selection criteria will include: (a) a minimum of 25 households reached by the proposed investment (for the set of smaller communities to be 21 Greywater means wastewater from bathtubs, shower drains and sinks. 30 aggregated, the project will consider the feasibility of an integrated potable water supply arrangement that avoids long distances for pipelines and distribution networks. These concerns should be translated, at the appropriate time, into the definition of the limit for the per capita cost as criteria for prioritization of project investments); (b) the addressing of all local households by the proposal; (c) where necessary, indication of complementary investments to reach local universal potable water access; (d) eradication of the need for water truck services; and (e) communities on the water truck route (Rota dos Carros Pipa), which are a priority due to the critical potable water supply challenges. The spatial intersection of these communities with the available water sources in these areas will establish the typologies of systems and their incidence within the universe of priorities. Proposed investments located in municipalities with a completed Municipal Water Plan (Plano de �guas Municipal, PAM), as well as proposed investments including water reuse practices, will rank higher than those with no PAM. The call for proposals will be further detailed in the Project Operational Manual. 38. Project actions under this component will be complemented by other state projects and programs such as the Cisternas (rain harvesting) Program, which will address the most isolated households where potable water supply pipeline extension would be very costly. 39. Component 3: Institutional Strengthening and Project Management (US$23.3 million, with US$15.54 million IBRD financing) would support project management functions and a set of activities to strengthen beneficiary organizational structures and public functions that are critical to ensure the competitiveness and sustainability of project investments. Specifically, Component 3 would finance: (a) the technical and administrative management of the proposed project, including equipment and consultants, and safeguard management plans; (b) updates to SDA’s Management Information System for use in project monitoring, including the design, development and implementation of an impact evaluation module to track progress on results indicators, as well as other project-related studies; (c) the development and implementation of a training program for project beneficiaries (rural producers’ organizations, community associations, Municipal and Territorial Councils, nongovernmental organizations (NGOs), service providers, consultants and public servants involved in project management and implementation, and other stakeholders involved in project implementation); (d) the development and implementation of a communication plan to disseminate information on the project; and (v) institutional strengthening of TCE-CE for the carrying out of audits under the Project. 40. Project management will finance the necessary equipment and consultants required to manage project activities and ensure adequate fiduciary operation (procurement, accounting, financial management), as well as technical planning, monitoring and impact evaluation of project actions, including the implementation of the social and environmental safeguard instruments. Thus, this component will finance goods, studies, nonconsulting services and consultants’ services. 41. Institutional strengthening under Component 3 would finance training and capacity building for project stakeholders, including the main beneficiaries (social organizations), beneficiary consultations, project management, monitoring and evaluation, The training program will be designed to include the organizations of the most vulnerable social groups, such as indigenous peoples, quilombolas, youth and women, who have greater difficulty in accessing public policies and programs. Institutional support would include, among other activities, limited 31 training for municipal-level authorities to participate in the project’s participatory mechanisms (such as Municipal and Territorial Councils) and intersectoral coordination in complementary activities. 42. Technical assistance to rural producers and community associations would include: (a) environmental management and education in agricultural areas, including procedures for requesting environmental licensing; (b) training in the provision of environmental services in agricultural areas (e.g., water quality, carbon storage); (c) capacity building for improving processing or production practices, management and market access for nonagricultural rural economic activities; (d) training and technical assistance for rural communities to operate, maintain and charge for rural water supply and sanitation solution services; (e) capacity building and strengthening of rural community associations to create a culture of sustainable and rational water use and of protection of water sources; (f) promotion of hygiene and environmental education programs in rural communities; and (g) strengthening of community water management structures to ensure long-term sustainable access to water and sanitation services. 32 Annex 3: Implementation Arrangements BRAZIL: Ceará Rural Sustainable Development and Competitiveness Project Project Institutional and Implementation Arrangements 1. The State of Ceará, through SDA, would be the Borrower for the proposed loan, with the Federative Republic of Brazil serving as Guarantor. SDA would be responsible for day-to-day project implementation, including procurement planning, financial monitoring and reporting, disbursement and internal controls, maintenance of project accounts and preparation of project management reports. SDA will also be responsible for ensuring that counterpart resources are foreseen in the State’s budget. SDA will implement Components 2 and 3, and will supervise implementation of Component 1 by producers’ organizations and parts of Component 2 by community associations. A steering committee (Comitê de Articulação Estadual do Projeto), led by SDA with representatives from all Secretariats involved in the project—Secretariat of Water Resources (Secretaria dos Recursos Hídricos, SRH), Secretariat of Cities (Secretaria das Cidades), Secretariat of Aquaculture and Fisheries (Secretaria da Pesca e Aquacultura, SPA), Secretariat of Science and Technology (Secretaria da Ciência, Tecnologia e Educação Superior, SECITECE), Secretariat of Planning and Management (Secretaria do Planejamento e Gestão, SEPLAG), Environmental Policies and Management Council (CONPAM), State Superintendence of the Environment (Superintendência do Meio Ambiente do Ceará, SEMACE), State Water and Sanitation Company (Companhia de �gua e Esgoto do Ceará, CAGECE), State Superintendence of Water Works (Superintendência de Obras Hidráulicas, SOHIDRA), State Rural Extension and Technical Assistance Company (Empresa de Assistência Técnica e Extensão Rural do Ceará, EMATERCE), and Technological Learning Center Institute (Instituto Centro de Ensino Tecnológico, CENTEC)—would guide the strategic and multisectoral aspects of the project. Project administration mechanisms 2. The Project Management Unit (Unidade de Gerenciamento do Projeto, UGP) will be housed in SDA and will have the following composition: Project Coordinator; Technical Advisor for Planning; Legal Advisor; Social Management Advisor; Environmental Management Advisor; Information Technology Advisor; six managers (Procurement Specialist, Financial Administration Specialist, Monitoring and Control Officer, Water Resources Use Manager, Economic Inclusion Manager, and Institutional Strengthening Manager); and technical staff and administrative assistants, totaling a team of approximately 34 people. 3. In addition to general project management activities, the UGP will also form ad hoc technical committees to analyze the proposed investments to be financed under Components 1 and 2. Experts may be invited to complement the committee when UGP technicians are considered insufficient or not technically qualified to evaluate and rank proposals. 4. CAGECE and SOHIDRA will play a direct role in the implementation of Component 2 (Water Services), under the coordination of the UGP. Their roles are detailed in the sections below and in the Project Operational Manual. In addition SDA, will: 33 (a) for the purposes of assisting in the carrying out of Component 2 (a) and (b) of the Project and to formalize their respective responsibilities under the Project, enter into a tri-partite agreement (Convênio Tripartite) with both CAGECE and SOHIDRA under terms and conditions satisfactory to the Bank (―CAGECE-SOHIDRA Agreement‖); (b) for the purposes of assisting in the carrying out of Components 1 and 2 (c) of the Project, and to formalize their respective responsibilities under the Project, enter into an tri- partite agreement (Convênio Tripartite) with both EMATERCE and CENTEC, under terms and conditions satisfactory to the Bank (―EMATERCE-CENTEC Agreement‖); (c) for purposes of assisting in the carrying out of Components 1, 2 and 3 of the Project, transfer a portion of the proceeds of the Loan to IICA under a subsidiary agreement (the IICA Agreement) to be entered into between the Borrower and IICA, under terms and conditions acceptable to the Bank, setting forth their respective roles and responsibilities regarding the implementation of said Parts of the Project; and 5. To ensure local coordination and integration between institutions and stakeholders, 13 Project Territorial Management Units (Unidades de Gestão Territorial, UGTs) will be established, covering all State territories, each with three field technicians and one administrative assistant. Field technicians will work across all three project components (Economic Inclusion, Water Services, and Project Management and Institutional Development) and support the core areas of project planning, monitoring and control, and procurement and financial administration. Each technician will be responsible for coordinating project actions in the territory. To ensure integration and quality of actions, each of the field technicians will coordinate a thematic area related to project components and one of the three will cumulatively carry out overall coordination of the UGT, reporting directly to the General Coordinator. 34 Project Coordinator UGP Planning Advisor I.T. Advisor Environmental Mgmt Advisor Social Mgmt Advisor Legal Advisor Monitoring Financial Procurement Institutional Economic Water and Control Administration Specialist Strengthening Inclusion Resources Use Officer Specialist Manager Manager Manager UGT Coordinator UGT Institutional Strengthening Coordinator Economic Inclusion Coordinator Administrative Assistant Water Resources Use Coordinator Executing Entities 6. SDA will be the State’s executing agency for this project, through the Project Implementation Unit (UGP). To streamline project implementation, SDA will partner with four other State agencies (CAGECE, SOHIDRA, EMATERCE, CENTEC and IICA) as collaborators, through legal agreements to formalize responsibilities regarding project actions. Their roles are specified below and further detailed in the Project Operational Manual. SDA will be responsible for the direct implementation of Component 1, Subcomponents 1.1 and 1.3; Components 2 and 3; as well as for supervising the implementation of Subcomponent 1.2 by producers’ organizations. 7. Producers’ Organizations will be responsible for implementing the selected investment proposals under Component 1, under the supervision of the UGP. 35 8. CAGECE: The Ceará Water and Sanitation Company (Companhia de �gua e Esgoto do Ceará) is a public company created in 1971. It is connected to the State Secretariat of Cities. CAGECE will be responsible for the technical, economic, social and environmental viability analysis of proposed water investments in communities with more than 70 households, for assisting the UGP in the bidding process for contracting and approving the designs and works, as well as supervising the implementation of works. 9. SOHIDRA: The State Superintendency for Water Works (Superintendência de Obras Hidráulicas) was created in 1989. It is connected to the Secretariat of Water Resources and is responsible for implementing public works in Ceará’s water sector. It will be responsible for the technical, economic, social and environmental viability analysis of proposed water investments in communities with at least 25 but fewer than 70 households; and for assisting the UGP in the bidding process for contracting and approving the designs and works as well as supervising the implementation of works. 10. EMATERCE: The Ceará Rural Extension and Technical Assistance Company (Empresa de Assistência Técnia e Extensão Rural do Ceará) was created in 1954 and is connected to SDA. EMATERCE will be responsible for the technical, economic, social and environmental viability analyses of proposed rural production investments and for monitoring their implementation. EMATERCE will also provide rural technical assistance services to producers’ organizations and assess and verify goods and services supplied to participating organizations by other providers. 11. CENTEC: The Technological Learning Center Institute (Instituto Centro de Ensino Tecnológico) is a Social Organization (Organização Social, OS). Under the project it will participate in the technical, economic, social and environmental viability analyses of proposed nonagricultural investments and in monitoring their implementation. CENTEC will also collaborate in the preparation of calls for and selection of proposals, provide technical assistance to the selected investments, and assess and verify goods and services supplied to participating organizations by other providers. 12. IICA: The Inter-American Institute for Cooperation on Agriculture is a specialized agency of the Inter-American System for the promotion of agriculture and rural well-being, focused on making agriculture competitive and sustainable in the Americas. Under the project IICA will provide technical cooperation in the areas of technology and innovation for agriculture, health and food safety, agribusiness, agricultural trade, rural development and training. 36 13. The State of Ceará has adopted a results-based management model to implement integrated actions in the field (Territorial Development). This territorial approach has proved effective in channeling the coordinated planning and implementation of disparate federal and state programs, with perceived efficiency and effectiveness gains obtained through their joint interaction. Moreover, through a monitoring and evaluation system to accompany the implementation of strategic projects, a high-level committee coordinated by the State Governor meets monthly to evaluate the status, taking actions once any problem has been identified. 14. As part of this strategy the proposed project would integrate actions in the field across three dimensions: (a) Public Policies and Projects i. At the State Government level, between the State Secretariat of Agrarian Development (SDA, EMATERCE, ITECE) and the State Secretariats of Planning and Management (SEPLAG), Water Resources and Services (SRH, COGERH, CAGECE, SOHIDRA), Environment (SEMACE), Science and Technology (SECITECE), COPAM, FUNCEME and the State Council for Rural Sustainable Development (CDRS); and three Bank-financed operations: Ceará Inclusive Growth (SWAP II), Water Resources Management (PROGERIRH), Regional Development (Cidades do Ceará) and two trust funds: GEF–Caatinga Conservation and Sustainable Management, and the JSDF–Leveling the Playing Field for Quilombola Communities in Northeastern Brazil. 37 ii. At the State and Federal Government levels by using the proposed project to break down the barriers between the rural and urban-focused projects listed above and to promote the convergence of various state and federal public policies and respective agencies, e.g., Ministry of Agrarian Development (MDA), Ministry of Social Development (MDS), National Foundation for Water and Sanitation (FUNASA), BNB, and Banco do Brasil (financial services). (b) Knowledge, research, innovations and technological institutions: Federal and State Universities, Federal Technical Institute;, and EMBRAPA. (c) Civil Society and Private Sector i. OSCIPs: social organizations that deliver public services: SISAR, Agropolos, CENTEC; ii. Participatory Councils at state, territorial and municipal levels; and iii. Private companies: organizations such as FIECE, ABRAS and SEBRAE. 15. Under the proposed project, the abovementioned organizations will be linked for the generation, transformation, storage, retrieval, integration, dissemination and utilization of knowledge and information, for the purpose of working in synergy to support decision making, technical assistance, problem solving, and innovation. Other institutions involved in project implementation 16. In addition to the collaborating agencies, other institutions will participate at the following levels: (i) Partner Institutions: will coordinate their existing programs and actions to leverage project results; (ii) Participating Organizations: composed of social councils, this category will play a consulting role and contribute to disseminate bids and calls for proposals for project investment, provide technical opinions on proposals, and provide social control of project actions; and (iii) Technical Cooperation: will provide technical support to the Community Associations and Organizations. 17. The following institutions were identified under these three categories of participation: (i) Partner Institutions: BNB, BB, SEBRAE, EMBRAPA, SECITECE, CONPAM, FUNCEME, MDA, MDS, Municipal Governments, Secretariat of Cities, Secretariat of Aquaculture and Fisheries, CONAB, and IFC; (ii) Participating Organizations: CEDR, CTDRS, and CMDS; and (iii) Technical Cooperation: SISAR.22 22 SISAR: The operation and maintenance of the water services will be carried out, in the majority of the communities, by the regional SISAR working in the respective watershed where the works are taking place; or any other operation and management solution proposed by the community and accepted by the State. The process of community membership in SISAR takes into account a need for the development of an educational program to be implemented during the course of the works. A set of required legal instruments will be prepared to formalize SISAR’s responsibility for service provision: (i) An agreement between the State and Municipal Governments where the former, as the owner of the assets, leases the goods to the latter, as the pensioner concession provider of services; (ii) Authorizing Law of the Municipal Chamber, allowing the City Government to sign the contract with the Association and SISAR to provide these services; and (iii) A contract for the provision of services signed by the Municipality, the Association and SISAR. 38 18. During preparation, the project identified the following complementary actions implemented by state and federal agencies, which will also reach project beneficiaries under their public programs with parallel funding, as shown below. The project will seek cooperation agreements to coordinate such actions with project implementation, under the participating category of Partner Institution. Ongoing and foreseen public programs and projects that are complementary to Component 1 (Economic Inclusion): Institutions Priority Programs Type of Investment and Estimated Investment Amount (US$ million)* Banco do Brasil and Banco do National Program to Strengthen Low-cost and long-term rural Nordeste Family Agriculture (PRONAF) credit. US$22.03 million National Secretariat of Family National Technical Assistance Rural technical assistance Agriculture under the Ministry of Program for Family Agriculture through public bids aimed at Agrarian Development (PRONATER) specific productive chains. (SAF/MDA) US$8.44 million Ministry of Social Development Food Acquisition Program Public acquisition of products (MDS) and State Secretariat of (PAA) from family agriculture for the Agrarian Development (SDA) purpose of donation to social groups or establishment of public strategic stocks. US$8.44 million Ministry of Education and National School Meals Program Public acquisitions of products Culture (MEC); Municipal (PNAE) from family agriculture for Governments; and State student meals (mandatory use of Secretariat of Education (SEC) a minimum 30 percent of federal resources provided for school meals). US$8.44 million National Secretariat of National Infrastructure and Works and equipment related to Territorial Development under Services Program for Rural commercialization centers and the Ministry of Agrarian Territories (PROINF) agro-industry at the territorial Development (SDT/MDA) level. US$2.50 million Ministry of Social Development Ceará’s Goat and Sheep Raising Donation of breeding pairs and (MDS) and State Secretariat of Development Program improved breeders, and Agrarian Development (SDA) distribution of cooler tanks. US$1.38 million State Secretariat of Agrarian Tempo de Plantar Distribution of seeds and Development (SDA) seedlings. US$0.12 million Banco do Brasil Foundation Caatinga Biome Project Various investments in the honey, goat and sheep production chains. US$0.53 million IBRD and FECAP Mata Branca Project Production activities and environmental conservation actions in the Caatinga biome. US$0.16 million 39 Ministry of National Integration Program to Support the Araripe Various investments in priority (MIN) Region (PROMESO) productive chains. US$0.12 million National Department of Works Fish Repopulation Program Fry distribution. Against Droughts (DNOCS) US$0.03 million State Secretariat of Agrarian Program for the Productive Use Financing of small irrigated Development (SDA) of Water areas; wind power for irrigation; protected cultivated fields for fruit and vegetables; household vegetable gardens; sustainable irrigation in floodplains; climate monitoring equipment. US$0.08 million * Exchange rate used to estimate amounts: US$1.00 = R$1.60. Ongoing and foreseen public programs and projects that are complementary to Component 2 (Water Services): Institutions Priority Programs Type of Investment and Estimated Investment Amount (US$ million)* Ministry of Social Development Program One Million Cisterns Construction of individual and (MDS) for the Semi-Arid Region community cisterns. US$75.00 million Ministry of National Integration– Water Resources Program Construction of small dams National Department of Works (açudes) and larger dams. Against Droughts (DNOCS) US$0.38 million * Exchange rate used to estimate amounts: US$1.00 = R$1.60. Ongoing and foreseen public programs and projects that are complementary to Component 3 (Institutional Strengthening): Institutions Priority Programs Type of Investment and Estimated Investment Amount (US$ million)* SEBRAE Governance of Productive Capacity building; promotional Chains; and SEBRAETEC events; technical missions, etc., with emphasis on goat, sheep and honey production. Qualification of packaging, labels and brands. US$0.15 million National Secretariat of National Program for Territorial Training of Territorial Territorial Development under Development (PRONAT) Development Agents; support the Ministry of Agrarian for the management of Development (SDT/MDA) agribusiness and commercialization of products from family agriculture in the State’s territories. US$0.05 million Banco do Brasil, BB Foundation, Financial Agents Program for Capacity building; business and Banco do Nordeste Strengthening Enterprise plans; market assessments. Management US$0.19 million 40 Ministry of Science and Program for the Implementation Generation and dissemination of Technology; Ceará State of Technological Vocational technology; informal Secretariat of Innovation, Centers (CVT) professional qualification. Science and Technology US$0.04 million (SECITECE). Secretariat of Cities Local Production Arrangements Support for the governance of Program (APLS) productive chains and complementary strategic investments. US$0.25 million * Exchange rate used to estimate amounts: US$1.00 = R$1.60. Financial Management, Disbursements and Procurement Financial Management 19. The State of Ceará follows: (i) the Brazilian Accounting Rules (NBCASP), Law 4320/64, which establish certain high-level accounting principles; and (ii) the Accounting Manual Applicable to the Public Sector (MCASP), issued under Law 10180 of February 6, 2001 and Decree 3589 of September 6, 2001. The project would require adherence to the first set of national accounting standards applicable to the public sector (NBCASP) and the revised Accounting Manual Applicable to the Public Sector (MCASP) issued under STN Portaria 467 of August 6, 2009 beginning in fiscal year 2011. The Bank and National Treasury have agreed to jointly carry out a Gap Analysis (expected in 2013) to confirm that the accounting for the Brazilian public sector conforms to international accounting standards applicable to the public sector (IPSAS) or to identify any important differences from the IPSAS. The last Country Financial Accountability Assessment (CFAA) for Brazil indicated that Law 4320/64 was in line with international accounting standards. 20. The budget cycle includes planning and implementation of all government activities, which are to be reflected in the PPA, LDO and LOA.23 All transaction processing uses SDA institutions, processes and systems that provide for segregation of duties, supervision, quality control reviews, reconciliations and independent external audits, and meet the needs of the project. Process flows are clear and well understood by SDA personnel. All project budgeting and accounting transactions would run through the State’s public accounting system (S2GPR). All payments will follow the official commitment (empenho), payables (liquidação) and payment (pagamento) routine. These functions are carried out by the SDA. This system is used by SDA for recording project transactions, financial reporting and budget execution. The system is an integrated online system used by SDA. 21. The POA (annual operating plan), after being approved by the Bank, is updated in the SIOF (integrated budget and finance system) after being approved through the LOA (annual budget law). Execution is made through State accounting systems (e.g., S2GPR, SIOF) jointly with MIS2 (used for PCPR2). The asset management system that will monitor the project has the capacity to record assets, liabilities and financial transactions of the project. The accounting 23 PPA–Plano Pluri-Anual, LDO–Lei de Diretrizes Orçamentárias, LOA–Lei Orçamentária Anual which includes the Government’s goals and programs that are approved by Sate Congress every five years, 18 months, and 12 months, respectively. 41 system is designed to be able to capture all financial information and allocate among project activities and categories, and to generate financial reports for project management (including data to prepare the Interim Unaudited Financial Reports, IFRs). The Electronic Archiving System is not yet in place. A copy of all supporting documentation is kept in the UGP. Administrative procedures have been established to ensure that financial transactions are made with consideration to safeguarding project assets and ensuring proper entry in the accounting/monitoring systems. 22. For the funds transferred to project executors, MIS2 will run reports to follow up the use of respective funds and supporting documentation. The asset management module will be available for the project to allow monitoring of funds received, and the UGP will be able to monitor at micro level the respective use of the system. Internal Controls 23. SDA (like other State direct agencies/institutions) lacks an internal control unit or internal audit department. Internal control is made a posteriori by the Secretariat of the Comptroller (Controladoria e Ouvidoria do Estado, CGE). SDA’s annual financial statements are available directly through the system (S2GPR) for internal (CGE) and external (TCE) State auditing. Reports are available after 18 months of auditing, are available on the Internet and are published in the State newspaper, in accordance with the World Bank’s disclosure policy. 24. SDA holds the primary fiduciary responsibilities for the project, which will be carried out by the UGP’s financial office. At the UGP level, staffing is appropriate to assure segregation of functions and reconciliations of accounts. Policies and procedures are stated in the Project Operational Manual. 25. Proper internal-level approval required to use the funds (POA) includes three levels of expenditure approval. The first is made by the project coordinator, the second is approved by the monitoring and planning coordinator for all expenditures in SDA, and the third is by the State Secretariat. The system allows budgetary and financial execution follow-up. 26. Staffing: The staff directly involved with FM-related activities include: one financial manager and one assistant, two accountants, two treasurers, one staff member responsible for account reconciliation, and one responsible for disbursement requests. Few staff turnovers have been observed in the FM department, and the respective team structure (together with 13 expected regional offices, when properly trained) was shown to be the minimum staffing structure to assure proper decentralized execution. Most of the team members were contracted through a competitive process and have the adequate background to implement the project while observing the agreed fiduciary arrangements. 27. Detailed staff duties and tasks are detailed in the Project Operational Manual. The main fiduciary responsibilities of UGP’s financial management staff include: (i) updating the financial management system, as needed and on a timely basis; (ii) reviewing project expenditure documentation; observing eligibility criteria, category percentages and counterpart allocation; (iii) keeping documentation properly archived; (iv) preparing and submitting to the World Bank quarterly unaudited financial reports (IFRs); (v) reconciling and monitoring data, identifying 42 discrepancies and taking timely corrective action; and (vi) preparing and providing all financial documentation and reports requested by external auditors and Bank staff. 28. The Project Operational Manual documents these project processes and serve as an important source for processing steps to be followed during project implementation. It contains detailed procedures and guidelines for disbursements, payments, approvals, commitments and reporting, and would be submitted to the Bank for review prior to negotiations. 29. Mitigation measures: risk during implementation. During prior project execution, weaknesses were related to project delay in documenting the use of funds and providing respective supporting documentation. Measures include: regional staff properly staffed to provide timely support to the project, including use of the asset management system, and to assure that the control process is extended to the local level; systematically assuring that the control of all funds is also present for the project. Financial Reporting: IFRs 30. The State’s integrated management system is able to adequately control, account for, report on, and manage the proposed loan’s financing. A specific cost center will be created in the system to record all loan transactions, and will be aligned with the structure of the loan to record transactions by category and component/subcomponent. The system can provide financial management data in order to prepare respective reports (in both US dollars and local currency), which are prepared (for Bank purposes) on a cash basis, although State accounting follows accrual accounting. The IFRs (1-A Sources and Uses of Funds by disbursement category; and 1- B Uses of Funds by Project Component and Subcomponent) will state the expenditure figures by quarter, accumulated for the project and accumulated for the year (project-to-date, year-to-date, and for the period) versus budgeted expenditures, including a variance analysis, and will be submitted 45 days after the end of each quarter. Any counterpart contribution (in-kind or cash contributions) supporting the loan’s activities will be reflected (and valued) in the IFRs. Auditing 31. Annual financial statements would be audited by TCE-CE, satisfactory to the Bank, in accordance with acceptable auditing standards. The audit would be conducted according to Terms of Reference acceptable to the Bank. The auditor’s report would be submitted to the Bank no later than six months after the closing of the Borrower’s fiscal year. Supervision Plan 32. The scope of project supervision would review the implementation of FM arrangements and FM performance, identify corrective actions if necessary, and monitor fiduciary risk. It would take place every six months and include: (i) a review of quarterly IFRs; (ii) a review of the auditors’ reports and follow-up of any issues raised by auditors in the management letter, as appropriate; (iii) participation in project supervision; and (iv) updating of the financial management rating in the Implementation Status Report (ISR). 43 Disbursement 33. The proposed funds flow and disbursement arrangements were considered satisfactory and will be streamlined within the project to facilitate execution, avoid unnecessary incremental operational arrangements, and rely as much as possible on Public Financial Management (PFM) country systems. All payments would be physically made by the Treasury of the State of Ceará through S2GPR upon instructions from SDA (UGP) once payment obligations have been incurred and properly documented. Payments will be made directly from the Treasury, through the issuance of an ordem bancária, to the subprojects, which would pay service providers and contractors. To make payments, the State system requires that funds be committed by source, enabling the tracking of loan disbursements to project expenditures. A subsidiary financial agreement (Convênio de Financiamento) would be signed between the subproject executor and SDA to receive funds in an account opened for the subproject. 34. The Secretariat of Finance (Secretaria da Fazenda, SEFAZ) will open a segregated designated account (DA) in US dollars in the Caixa Econômica Federal (CEF) – Sao Paulo (with Citibank NY acting as the intermediary bank) to receive loan funds, process disbursements in US dollars and transfer funds into local currency (Brazilian Reais, or BRLs) to a BRL operational account in CEF in Fortaleza in order to process local currency payments. 35. SDA will be responsible for instructing the State Treasury to make all payments for works, goods and services (through S2GPR), except in the case of funds transferred to each subproject where payments will be made by each subproject. Payments will be made directly from the operational account (through S2GPR) for loan purposes. Such arrangements are considered appropriate. This arrangement has the necessary segregation and level of approvals and can speed up implementation. A fixed ceiling of US$10 million will be established. A schedule of estimated IBRD disbursements and a loan allocation table are provided below. Estimated Disbursements (Bank FY/US$ m) FY 2012 2013 2014 2015 2016 Annual 0 30.0 45.0 20.0 5.0 Cumulative 0 30.0 75.0 95.0 100.0 36. The following disbursement methods will be used: Advance and Reimbursement. The Minimum Application Size with respect to Reimbursements (not Advances) will be in US$1 equivalent. Applications documenting expenditures paid from the Designated Account should be submitted by the Borrower ideally once a month but not later than once every four months, and must include reconciled bank statements as well as other appropriate supporting documents. 37. All payments will be made through electronic deposits to each beneficiary’s/consultant’s bank account. Summary Sheets with Records and Statements of Expenditure (SOEs) will be used to document eligible expenditures. Disbursements will be made on the basis of SOEs except for payments under contracts for works above US$5 million equivalent, payments under contracts 44 for goods and nonconsulting services above US$500,000 equivalent, payments under contracts for contracts with consulting firms above US$100,000 equivalent, and payments under contracts for contracts with individuals above US$50,000 equivalent. In these cases, all Records must be attached to a Summary Sheet (SS). Original supporting documentation will be available at SDA’s headquarters or Regional Offices. The Project will have a Disbursement Deadline Date (final date on which the Bank will accept applications for withdrawal from the borrower or documentation on the use of loan proceeds already advanced by the Bank) four months after the Closing Date. This "Grace Period" is granted in order to permit the orderly project completion and closure of the Loan Account via the submission of applications and supporting documentation for expenditures incurred on or before the Closing Date. Expenditures incurred between the Closing Date and the Disbursement Deadline Date are not eligible for disbursement, except as otherwise agreed with the Bank. 38. Reports will be reconciled between the FM systems prior to submission and requesting disbursement to assure adherence. 39. Retroactive financing up to 20 percent is permitted for payments made prior to the Signing Date but on or after November 29, 2011, for Eligible Expenditures under Categories (1) to (4) as set out in the Loan Agreement. 40. Subprojects: SDA allocates funds to subproject executors based on subproject budget estimates and POAs. The POA is updated in S2GPR to be executed. SDA reviews, monitors and approves the requests for payments to the subproject executors (upon assurance of full documentation of previous advances/payments). Advances for the subprojects are made to any of the banks used by the State to execute the subproject .The UGP will reconcile the accounts and will submit the documentation regarding all actual transactions24 to the World Bank in a timely manner under each withdrawal application (SOE). 41. Beneficiary counterpart funds: In order to receive funds from SDA, each beneficiary will need to prove that the equivalent of at least 20 percent of the total amount being advanced has been allocated as counterpart to the respective projects, observing that in-kind payments cannot be more than 10 percent. The remaining 10 percent would need to be either the beneficiary’s own proceeds or other sources at his/her disposal (e.g., grants, commercial bank financing, cofinancing, etc.). Such amounts will not be considered by SDA when disbursements are requested under loan proceeds. 42. Payments and operation of bank accounts: The bank account reconciliation will be prepared on a monthly basis and will be available within 15 days after the end of the month. The UGP will establish a 30-day cycle for disbursements and cash-flow programming. Supporting documentation will be retained for at least one year after the receipt of the audit report or two years after the Closing Date, whichever is later. All expenditure records will be available for examination by the Bank if considered necessary. In case of activities to be executed by IICA or any other organization, details will be outlined in the Operational Manual. 24 Payments for Actual Costs Incurred. Disbursements are made on the basis of eligible expenditures incurred or to be incurred by the executor; therefore the implementation of such subprojects involves a significant amount of paperwork, expenditure reporting, and fiduciary controls by the UGP. 45 43. In case of IICA, a FMA was undertake at its’ headquarter and FM systems were found acceptable and is able to proper account for projects activities. Transfers will be made from the Designated Account to IICA’s operational account based on a maximum of 4 months forecasted project expenditure but not exceeding US$2 million equivalent, to pay for expenditures under the project. IICA’s will keep copy of the respective supporting documentation and the originals and summary information, documenting the use of the transfers, will be sent by IICA to SDA in order to reconcile the expenditure being documented, with the amounts previously transferred by SDA to IICA. SDA will then include the expenditure documented by IICA, in the SOE’s and Summary Sheets to be submitted to the Bank by SDA. Details of the arrangements with IICA will be detailed at the Operational Manual. 46 Project Flow of Funds Loan Account Designated Account (US$) Caixa Econômica Federal Operational Account (Reais) And Treasury Unique Account Caixa Econômica Federal (CEF), (counterpart funds) in Fortaleza. Direct payments to service Subprojects–Beneficiary Account. providers Process payments of 100% of invoices as stated under subsidiary agreement and submit supporting documentation for SDA. Beneficiary Counterpart (OP). Provide SDA with supporting documentation that an additional 20% of amounts received has been allocated as CP. Such invoices will not add up for disbursement purposes. Allocation of Loan Proceeds Category Amount of the Loan Percentage of Expenditures to Allocated be financed (expressed in US$) (1) Goods, works, nonconsulting services, and consultants’ 43,421,700 Up to 100% of the amount services required for Subprojects disbursed under a Matching Grant (2) Goods, works, consultants’ 40,620,300 66.70% services, and nonconsulting services (3) Training 1,334,000 66.70% (4) Operating costs 10,205,100 66.70% (5) Front-end fee 250,000 Amount payable pursuant to Section 2.03 of the Loan Agreement in accordance with Section 2.07 (b) of the General Conditions (6) Interest rate cap or interest Amount due pursuant to Section rate collar premium 2.07(c) of the Loan Agreement (7) Unallocated 4,168,900 TOTAL AMOUNT 100,000,000 47 44. For the purposes of the table above, the following terms have the following definitions: (a) ―Nonconsulting services‖ means the costs of services that are of nonintellectual nature and that can be procured on the basis of performance of measurable physical outputs, including unskilled-labor communications campaigns, production of videos, and installation of equipment. (b) ―Training‖ means expenditures (other than those for consultants’ services) incurred by the Borrower in connection with the carrying out of training, seminars, and workshops, including the reasonable travel costs (e.g., accommodations, transportation costs and per diems) of trainees and trainers (if applicable), catering, rental of training facilities and equipment, logistics and printing services, as well as training materials and equipment under the project. (c) ―Operating costs‖ means the reasonable incremental operational costs (which would not have been incurred in the absence of the project) related to project technical and administrative management monitoring and supervision required under the project, including updates to SDA’s Management Information System, administrative and operational support staff, office equipment, supplies, travel costs (including accommodations, transportation costs and per diems), printing services, communication costs, utilities, maintenance of office equipment and facilities, vehicle operation and maintenance costs, and logistical services. Procurement 45. Procurement Risk Assessment. The procurement risk assessment highlighted SDA staff’s lengthy experience in working with Bank-financed procurement, although this was largely limited to Community Participation in Procurement procedures. The introduction of private- sector procurement procedures, known as commercial practices, for the productive project, of the larger infrastructure packages for Component 2, and an enhanced technical assistance component would challenge SDA staff’s procurement capacity. For this reason, the overall risk is rated as High. To reduce the risks, SDA should ensure the participation of the technical sector agencies in the procurement process, describing and defining roles and responsibilities in each step of the procurement process and for the respective decision making. The SDA team should be strengthened by highly experienced consultants who are familiar with Bank Guidelines for works and consultancies, and by technical experts to ensure the project has sound business plans that propose specific commercial practices and include criteria to verify the economy, efficiency and transparency of such practices before the Loan Agreement becomes effective. Annual business plan implementation performance audits could help identify the adequacy and weaknesses of the commercial practices used, and annual procurement audits conducted by the State’s Court of Accounts (Tribunal de Contas do Estado do Ceará, TCE) would help identify compliance and weaknesses of the procurement arrangements and interactions between SDA and the technical sector agencies. Because it might be difficult to identify the recommended highly experienced consultants, the initial implementation phases may require closer and much more intense supervision by the Bank. 48 46. IICA Technical Assistance. Under a technical cooperation agreement with IICA, the Borrower will be allowed to transfer funds to IICA under the conditions that: (i) IICA will follow the Bank’s procurement guidelines for those contracts procured using Loan funds, and IICA procurement procedures may be used for those contracts procured exclusively using counterpart funds; (ii) any remuneration paid to IICA (i.e., fees) for its work as implementing agency under the project shall not be paid out of the proceeds of the Loan, since IICA did not go through a competitive process for its selection; (iii) the recommendations made by the Bank to the Borrower regarding financial management and procurement shall be complied with by IICA, and the Borrower understands that it will be responsible for ensuring its compliance, as stated in Section 5(d) of Schedule 2 to the Loan Agreement; and (iv) the final draft of the IICA Agreement shall be submitted to the Bank for no-objection prior to signing. 47. Applicable Guidelines. Procurement for the proposed project would be carried out in accordance with the World Bank’s ―Guidelines: Procurement under IBRD Loans and IDA Credits‖ dated January 2011, and ―Guidelines: Selection and Employment of Consultants by World Bank Borrowers‖ dated January 2011, and the provisions stipulated in the Legal Agreement. The general description of various items under different expenditure categories is described below. For each contract to be financed by the loan, the different procurement methods or consultant selection methods, the need for prequalification, estimated costs, prior review requirements, and time frame are agreed between the Borrower and the Bank in the Procurement Plan. The Procurement Plan will be updated at least annually or as required to reflect the actual project implementation needs and improvements in institutional capacity. 48. Summarized Procurement Plan. The Procurement Plan provides the basis for the procurement methods used during the project implementation. The Bank received the initial Procurement Plan on December 15, 2011. This Plan was agreed with the Bank, and the Client prepared and published the General Procurement Notice in UNDB online prior to negotiations. The final Procurement Plan was approved by the bank in February 17, 2012 and published on the Bank’s website prior to negotiation on February 28, 2012. 49. Prior Review Thresholds. Procurement decisions subject to prior review by the Bank as stated in Appendix 1 to the Guidelines for Procurement follow the thresholds below. Procurement/Selection Method Prior Review Threshold Limits ICB Goods, Services > US$0.5 million > 5,000,000 Works > US$5 million > 25,000,000 NCB Goods, Services > US$0.5 million < 5,000,000 Works > US$5 million < 5,000,000 QCBS, LCS, FBS, CQS > US$0.1 million Individual Consultants (includes sole-source selection) > US$0.05 million Direct Contracting All contracts are subject to prior review. Single-Source Selection All contracts are subject to prior review. Shopping No contracts are subject to prior review. Commercial Practices No contracts are subject to prior review. 50. Short lists composed entirely of national consultants. Short lists of consultants for services estimated to cost less than US$0.5 million equivalent per contract may comprise only 49 national consultants, in accordance with the provisions of paragraph 2.7 of the Consultant Guidelines. 51. Procurement under business plans. Under Component 1, the project would finance goods, works, services and consultancies, following Commercial Practices (see paragraphs 49– 51 below) or Community Participation in Procurement Procedures, and nonprocurable items as part of business plans to be proposed, developed and implemented by participating rural producers’ organizations (POs). Procurement under business plans would include plants and equipment, minor productive infrastructure, small irrigation systems, rural infrastructure, and training and technical assistance. Because the main objective of the investments under Component 1 is to link product processing and distribution in the selected productive chains, targeting the access to broader markets, including international markets, POs’ procurement procedures must afford them flexibility and speed to adequately respond to those markets. This can be best achieved through commercial practices. 52. The provisions described under Section I of the Guidelines apply to all procurement methods used under the project, that is, all principles, rules and procedures outlined in the Guidelines apply to all contracts financed in whole or in part from Bank loans. To comply with such requirements, four main considerations should guide the use of Commercial Practices by the RPOs. (a) the need for economy and efficiency; (b) the need for quality services; (c) giving all eligible bidders the same information and equal opportunity to compete in providing goods, works, and services; and (d) the importance of transparency. 53. POs, as private-sector enterprises, would often meet these concerns by following established commercial practices other than formal open bidding for their procurement. This is true because when POs seek a supplier, the really important considerations include quality, performance, price, delivery, capacity, and assurance of supply. Market forces would ensure a fair and reasonable price while competitive markets would be the driving force leading to POs having efficient internal operations. In addition, POs would buy-to-sell a product or service to raise revenues. POs are for-profit and have the threat of bankruptcy, which forces efficiencies into their procurement process. 54. In addition, POs would be responsible for 20 percent of business plan financing, which means business plans include a built-in mechanism to encourage wise procurement and prevent them from paying too much for goods and services. Because actual commercial practices may vary significantly from industry to industry, one size would not fit all. Therefore, being able to accommodate terms and conditions for good procurement would be an important aspect of the business plans, requiring sound technical understanding of products, services and industries. Business plans must contain specific criteria to measure performance of the commercial practices used. 55. Training. ―Training‖ means expenditures (other than those for consultants’ services) incurred by the Borrower in connection with the carrying out of training, seminars and 50 workshops, including the reasonable travel costs (e.g., accommodations, transportation costs and per diems) of trainees and trainers (if applicable), catering, rental of training facilities and equipment, logistics and printing services, as well as training materials and equipment under the project. These expenditures would be incurred following the agency’s administrative procedures, which were reviewed and found acceptable to the Bank and will be described/detailed in the Operational Manual. 56. Operating Costs. ―Operating Costs‖ means the reasonable incremental operational costs (which would not have been incurred in the absence of the project), related to technical and administrative management monitoring and supervision required under the project, including updates to SDA’s Management Information System, administrative and operational support staff, office equipment, supplies, travel costs (including accommodations, transportation costs and per diems), printing services, communication costs, utilities, maintenance of office equipment and facilities, vehicle operation and maintenance costs, and logistics services. These expenditures would be incurred following the agency’s administrative procedures, which were reviewed and found acceptable to the Bank and will be described/detailed in the Operational Manual. 57. Procurement Packages planned during the first 18 months after project effectiveness (including those that are subject to retroactive financing and advanced procurement): 1 2 3 4 5 6 Ref. No. Description Estimated Cost (US$) Procurement Method Domestic Review Preference by Bank 1 Vehicles 700,000 NCB NA Post 2 Office IT 500,000 NCB NA Post equipment 3 Office 40,000 Shopping NA Post furniture 3 Warehouse 700,000 NCB NA Prior construction 4 Water supply 10,000,000 NCB NA Prior service expansion works 58. Consultancy Assignments with Selection Methods and Time Schedule: 1 2 3 4 5 6 Ref. No Description of Assignment Estimated Selection Method Review by Time Cost US$ Bank Schedule 1 Rural economic inclusion studies 390,000 QCBS Prior 08/2012– 12/2013 2 Economic feasibility studies, and 1,560,000 QCBS Prior 08/2012– supervision 12/2013 51 3 Business plan preparation and 1,560,000 QCBS Prior 08/2012– monitoring of economic 12/2013 inclusion investments 3 Water supply services feasibility 501,428 QCBS Prior 08/2012– and design preparation 12/2013 4 Engineering design–water 501,428 QCBS Prior 08/2012– services projects 12/2013 5 Specialized Individual 273,000 QBS Post 08/2012– Consultancy–Economic 12/2013 Inclusion–calls for proposals preparation and proposals analysis 6 Specialized Individual 117,000 QBS Post 08/2012– Consultancy–Water Services– 12/2013 calls for proposal preparation and proposal analysis 7 Specialized Individual 668,571 QCBS Prior 08/2012– Consultancy–monitoring of 12/2013 water services works 8 Information Technology 1,228,000 QCBS Prior 08/2012– Consultancy 04/2013 59. Procurement record keeping. The UGP will maintain detailed procurement records, reflecting the project’s supply of goods and consultant services, including records of time taken to complete key steps in the process and procurement activities related to supervision, review and audits. These records will be maintained for at least two years after the project’s Closing Date. The records for goods will include public notices, bidding documents and addenda, bid opening information, bid evaluation reports, formal appeals by bidders and outcomes, signed contracts with related addenda and amendments, records on claims and dispute resolution, no- objections and any other useful information. The records for consultant services will include public notices for expression of interest, requests for proposals and addenda, technical and financial reports, formal appeals by consultants and outcomes, signed contracts, addenda and amendments, records on claims and dispute resolution, no-objections, and any other useful information. Environmental and Social 60. The Environmental and Social Safeguard issues are detailed in the project’s ISDS and summarized below. 61. Environment (OP/BP 4.01): The project is rated Category ―B‖ because the impact is limited in scope, localized, temporary and reversible. The Borrower has carried out an Environmental and Social Management Framework (ESMF), dated October 27, 2011. The project implementation procedures will adopt strict environmental ―screens‖ to ensure that approved investments demonstrate low potential for negative impact. The ESMF assessed the most common types of intervention expected, and proposed mitigation measures a priori. The draft ESMF was formally submitted to the Bank in June 2011. The final version was submitted 52 to the Bank and disseminated on the Client’s website and in the Bank’s external website prior to project appraisal. 62. Natural Habitats (OP/BP 4.04): Although activities are not planned for Areas of Permanent Preservation (�reas de Preservação Permanente, APP) and Legal Reserves (Reservas Legais, RL), activities under the project components should nonetheless lead to positive impacts on natural habitats through the direct protection and rehabilitation of these areas, following the provisions of the Brazilian Forest Code. Despite the expected positive impacts, the ESMF, dated October 27, 2011, includes clear guidance regarding direct and indirect impacts on natural habitats, in accordance with World Bank policies. The project has provisions to regenerate and reforest water-producing systems (mainly riparian vegetation), also benefiting local biodiversity preservation and restoration. Special attention should be given to areas where a desertification process was already identified by the State (IPECE 2010). These amount to 30,000 km 2, representing 23 percent of the Caatinga biome of Ceará. Investments resulting in any significant conversion or degradation of critical natural habitats will not be eligible. 63. Forests (OP/BP 4.36): Project implementation is not expected to have negative impacts on forest resources. Investments that have the potential for conversion or degradation of natural forest or other natural habitats and that are likely to have significant adverse environmental impacts which are sensitive, diverse or unprecedented, are ineligible. The project also excludes activities that require commercial forest harvesting, wood extraction or firewood use in the productive chain. Activities resulting in reforestation and loss of native vegetation cover will not be allowed. The project would contribute toward conserving and restoring natural vegetation, thus generating positive impacts through the maintenance and/or recovery of natural vegetation on rural private landholdings on steep slopes, along water courses (up to a certain distance from the riparian margin) or in the vicinity of springs. The project would also contribute toward conserving and/or restoring a set-aside area called a Legal Reserve (Reserva Legal, RL) in these private holdings. 64. Pest Management (OP 4.09): The project would not finance any pesticides or other chemical additives that would trigger OP 4.09. Nevertheless, minor amounts of pesticides would probably continue to be used in the short term by a small portion of targeted small-scale farms. The project would encourage and support technical assistance for the adoption of organic agriculture and of proven, economically and environmentally sustainable Integrated Pest Management (IPM) practices. The need to use pesticides or herbicides should be indicated in each proposed investment, as well as the IPM measures to be adopted. When the use of pesticides or herbicides is justified, an analysis of potential negative impacts resulting from the use of these chemicals and the risks associated with the inappropriate handling or storage of their containers should be conducted. The proposals should also include measures to reduce those risks, in compliance with Law 7802/89. A Pest Management Plan (PMP), which includes the IPM was prepared and incorporated in the Project Operational Manual, dated December 29, 2011. 65. Physical Cultural Resources (OP/BP 4.11): Project implementation would not cause any negative impact on known physical cultural resources (PCR). Proposed investments with expected direct and negative impact on known archeological, paleontological, historical or other culturally significant sites will not be eligible. Brazil has a well-developed legislative and 53 regulatory framework, which is under federal oversight by the National Institute for Protection of Historical and Archeological Sites (Instituto do Patrimônio Histórico e Artístico Nacional, IPHAN). Ceará also has an IPHAN Regional State Agency (4a Superintendência Estadual do IPHAN) and a Secretariat of Culture (Secretaria da Cultura), which are tasked with the identification, restoration and protection of PCR in the State. The ―chance findings‖ procedures would be included in the Project Operational Manual for guidance during project implementation, particularly in regions with PCR sites already mapped by the IPHAN Regional Agency. SDA may engage the Secretariat of Culture or other entities with proven experience to implement ―chance findings‖ procedures. 66. Safety of Dams (OP/BP 4.37): It is not expected that the investments in water supply and irrigation works will depend on the storage capacity and operation of existing dams. Considering (i) the high provision of water resources infrastructure installed in the State over the past years, including the results of World Bank-financed operations, and (ii) the current standard of excellence in water resources management, with good practices already incorporated in the SRH and COGERH routine procedures, OP 4.37–Safety of Dams was triggered as a precautionary measure, not to limit any possibility of using existing water sources. However, no new dam construction will be financed by this operation. The Borrower is preparing a conceptual framework of procedures to be adopted during the implementation phase of the project. The Borrower should arrange for one or more independent dam specialists to: (a) inspect and evaluate the safety status of the existing dam, its appurtenances, and its performance history; (b) review and evaluate the owner’s operation and maintenance procedures; and (c) provide a written report of findings and recommendations for any remedial work or safety-related measures necessary to upgrade the existing dam to an acceptable standard of safety. Previous assessments of dam safety or recommendations of improvements needed in existing dams may also be accepted by the Bank, if the Borrower provides evidence that (a) an effective dam safety program is already in operation, and (b) full-level inspections and dam safety assessments of the existing dams, which are satisfactory to the Bank, have already been conducted and documented. Social 67. Indigenous Peoples (OP/BP 4.10): Indigenous peoples are present in the project area and will be among the potential beneficiaries. Adverse effects are not expected for them under this project. There are about 22,000 indigenous peoples in the State of Ceará comprising 12 ethnicities. They are present in 18 municipalities in three distinct areas: the Metropolitan Region of the capital city, the North coast, and the hinterlands of the Sertão dos Inhamuns. The vast majority (80 percent) lives in five municipalities: Caucaia, Crateús, Itarema, Maracanaú and Monsenhor Tabosa. Six ethnic groups (Anacé, Pitaguary, Potiguara, Tabajara, Tapeba and Tremembé) comprise 94 percent of this population and there are smaller numbers of the Gavião, Jenipapo-Kanindé, Kalabaça, Kanindé, Kariri and Tapuyo peoples. 68. The Borrower conducted a social assessment that underscored the pressures and threats faced by these indigenous peoples in terms of their livelihoods and their degree of social and economic vulnerability. The main constraints they face are related to: land constraints due to sluggish processes of land regularization; encroachment and land conflicts; inadequate use and degradation of land; water shortage; inadequate housing and sanitation conditions; poverty and food shortage; social discrimination and outside resistance to acknowledge their cultural 54 identities; lack of technical assistance and barriers to their access to markets and financing; lack of income alternatives and heavy dependence upon retirement pensions and government cash transfer programs. 69. Indigenous groups are eligible for project actions according to their expressed interest in participating. Project actions involving indigenous groups are expected to contribute toward (a) reducing their social and economic vulnerability; (b) promoting development alternatives that are ethnically, culturally and environmentally adequate and sustainable in the short, medium and long terms; and (c) reversing the processes of impoverishment, economic exploitation, discrimination, social exclusion, and cultural devaluation. 70. Indigenous peoples living within regularized indigenous lands or having land tenure rights over plots properly donated to indigenous community associations may propose participation in project activities under any component. Other groups may only participate under Component 3 (capacity building and institutional strengthening). Proposals must originate from indigenous demands validated by their respective communities and organizations through participatory processes. A broadly consulted Indigenous Peoples Project Framework was prepared to define the ways and means of project involvement with indigenous groups and ensure adequate procedures for the participation of this population in the project, which will focus on three complementary pillars: (a) culturally appropriate dissemination and mobilization activities, participatory planning, capacity building and institutional strengthening strategies; (b) promotion of effective participation of indigenous peoples in social networks and in the project’s territorial and deliberative councils; and (c) investments in productive facilities (under Component 1) and safer water supply systems (under Component 2). 71. Involuntary Resettlement (OP/BP 4.12): The project is not expected to fund any project that could potentially cause significant physical displacement and economic losses. In principle, the project will seek to avoid involuntary resettlement wherever possible. Nonetheless, some of the potential projects that could be financed under the project—such as investments in rural infrastructure, the structure of the production clusters, infrastructure for the distribution of potable water, and activities related to natural disasters and environmental risk management— could possibly involve the relocation of people or the acquisition of land. It is expected that, in these cases, the potential numbers of people who might be affected would be quite small and any land acquisition would be relatively minor. Because the projects to be developed under the project are not yet known, a Resettlement Policy Framework (RPF), dated October 27, 2011, was chosen as the suitable instrument and is under the scope of the project’s Social and Environmental Management Framework, also dated October 27, 2011. The RPF will serve as the guide to the site-specific formulation of Resettlement Action Plans (RAP), if needed, which in many cases would be Abbreviated Plans due to the relatively small numbers of people affected and relatively minor impacts. Abbreviated RAPs would only be used for cases in which 200 or fewer persons are affected, where they are not physically relocated or would lose 10 percent or less of their productive assets. The RPF was consulted and publicly disseminated on the Borrower’s website and in the Bank’s external website prior to appraisal. 55 Monitoring and Evaluation 72. The project will be monitored and evaluated through the existing Management Information System (MIS) and databases developed by SDA in the context of previous Bank- supported operations, in addition to the new Heritage System, which will feature modern technological tools, such as the standard free software tools adopted by the Federal Government and the State Government of Ceará. Internet access will enable the recording and provision of information to all interested parties in accordance with the security requirements and defined access levels. A major advantage of this system is the integration with other systems currently used by State agencies (SDA’s MAPP/SIAP-S2GPR/SACC/PGE/EDOWEB Systems), which avoids duplication of information records and maintains data integrity. The system will also offer the advantage of access to documents in digital format where available, thus avoiding the accumulation of unnecessary paper and facilitating the process of locating documents. 73. The monitoring system will serve as a realistic and flexible instrument for improving the performance of project implementation through the timely identification of problems that require immediate attention from managers, thus allowing corrective measures to be taken. The system will also monitor project performance against baseline data, check progress according to outcome indicators, justify the necessary adjustments during implementation, promote the verification of resource use in relation to project objectives, provide and receive feedback from stakeholders, and generate inputs for the dissemination of project results. SDA has further developed an Institutional Arrangement and Results Framework, which will guide: (i) the design of a workflow, monitoring and evaluation implementation system, and (ii) the implementation of an evaluation strategy for the proposed operation. 74. An impact evaluation will be developed for Components 1 and 3 of the project with support from the Bank’s program of impact evaluation in the Agriculture and Rural Development (ARD) sector (known as Agricultural Adaptations, or AADAPT). Several background research tasks were carried out during project preparation as well as at appraisal to understand further: (i) the constraints that farmers and producers’ associations face; and (ii) how project interventions can best relax these constraints. Based on this analysis, the team developed testable hypotheses about program impacts and the channels through which the project can affect outcomes. The following additional background research activities will be carried out to refine these hypotheses: (a) An analysis of the main value chains in project areas (e.g., milk and meat processing and commercialization, fruit or vegetable farming, etc.). The objective of these value-chain analyses is to understand the challenges that farmers face at the different stages of their economic activities such as production, processing, and marketing. (b) Background research on potential recipients of the program will be carried out and merged with existing agricultural and socioeconomic databases. This database is an essential building block for the MIS. Information from the database is then analyzed to guide project design and implementation strategy. 75. The impact evaluation will provide operational guidance to the project throughout its implementation. In addition to measuring the impact of some of the key project interventions 56 under Components 1 and 3, it will look at complementarities and substitutability across various interventions that can deliver improved outcomes for producers’ organizations and the families in those organizations. In particular, the impact evaluation will test the relative effectiveness of various technical assistance modalities aimed at raising the quality of business proposals prepared by producers’ organizations and improving the management of the productive resources to enhance the sustainability of investments. In addition, the project will measure the impact of providing management training to groups that were eligible for financing but could not be supported due to limited supply of funds. These impact evaluations will develop a framework to assert the causality between project interventions (financial support through the matching grant, extension) by controlling for other factors that may affect receiving the interventions and the outcomes for producers’ organizations, communities and families. Furthermore, they will help the project develop a strategy to ensure the sustainability of its policy actions. 76. The outcomes examined in this evaluation will include the following indicators: adoption of new technologies, improvements in production and productivity, improvement in management practices, access to markets and governance issues of producers’ organizations (e.g., inclusion of women and smallholder farmers, management of common investments), and household income from productive activities. The impact evaluation will provide inputs to project management during implementation for purposes of potential adjustments to project design and implementation. 77. Understanding which model of extension and technical assistance services is more effective, is key to the successful implementation of this project. Extension agents provide guidance and support to producers’ organizations to identify viable businesses and to develop and implement their business proposals. These extension agents will be from EMATERCE, the State rural extension agency, or from the Movimentos Sociais (e.g., Movimento dos Sem Terra, FETRAECE, etc.).25 Although EMATERCE’s extension agents may have better knowledge of agronomic technologies and market trends, the Movimentos Sociais have developed, sometimes over several decades, strong relationships of trust with communities; these relationships facilitate community mobilization, interest in the project and the transfer of knowledge. Although it will not be possible to manipulate the coverage of these organizations, and therefore establish causality between the type of extension provided and the outcomes of interest, the impact evaluation will provide descriptive insights on the relative effectiveness of these two extension models by using indicators such as: quality of business proposals prepared by producers’ organizations and their implementation, adoption of new technologies, improved community- driven processes and social capital (e.g., inclusion of all socioeconomic classes, and resolution of collective action problems to ensure sustainability of investments). 78. The Bank is also considering the possibility of designing an impact evaluation to measure the relative impact and cost-effectiveness of different cost-sharing rules in matching grants to support rural business initiatives. This exercise can help the project to understand how the matching grant scheme can promote the participation of low-income and disadvantaged groups, the adoption of new technologies, and access to markets. 25 With 390 extension agents and 610 trainees, EMATERCE lacks dissemination capacity to reach the majority of the 300,000 agricultural properties in the State of Ceará. As such, the Movimentos Sociais (social movements) are important organizations for expanding access to extension services in the State. 57 79. The Bank is also considering the possibility of including an impact evaluation for Component 2, in order to measure the welfare effects of the expansion of access to potable water supply and basic sanitation in rural areas, with special attention to the following outcomes: incidence of waterborne diseases, reduction of the time dedicated to water collection (disaggregated by gender and age group), qualitative assessment of well-being, etc. 80. The data collected and used in this impact evaluation will be fully integrated in the MIS. These data will come from annual and semiannual surveys of households, communities and producers’ organizations. The sample sizes will be determined in collaboration with SDA to ensure representativeness and that indicators can be disaggregated by gender. In addition, the survey instruments will be developed in coordination with other states with similar projects to ensure that the data collected are comparable across states in terms of content and quality. 58 Annex 4: Operational Risk Assessment Framework (ORAF) Brazil: Ceará Rural Sustainable Development and Competitiveness (P121167) Project Stakeholder Risks Stakeholder Risk Rating Low Description: Risk Management: Reduced commitment to the Project Development Objective. Project design is aligned with consensual state development strategy as reflected in the State Multiyear Investment Plan (PPA Existing POs could express opposition to the proposed project PDO and 2012–2015). methodology. Resp: Bank Stage: Implementation Due Date: Ongoing Status: Not Yet Due Management and coordination of a multisectoral approach, with significant community-level participation/commitment in Component 1. Risk Management: Continuous dialogue with State counterparts during implementation and well-designed institutional arrangement and a monitoring system for implementation. Resp: Bank Stage: Implementation Due Date: Ongoing Status: Not Yet Due Risk Management: Continuous consultation with POs in the project area during preparation as well as during implementation, to build consensus on PDO and methodology. Commercial partnership with key actors in producer chains who jointly with POs participate in business plan formulation and share market intelligence. Resp: Client Stage: Implementation Due Date: Ongoing Status: Not Yet Due Implementing Agency (IA) Risks (including Fiduciary Risks) Capacity Rating Moderate Description: Risk Management: Public-sector employees have constrained capacity to facilitate private-sector Project Operational Manual widely disseminated under the project communication strategy; steering committee oversight. development, particularly in delivering technical assistance for business development Resp: Client Stage: Implementation Due Date: Jul-31-2012 Status: Not Yet Due and entrepreneurship. Risk Management: Strong social oversight already in place and functioning through CEDR Resp: Client Stage: Implementation Due Date: Ongoing Status: Not Yet Due Risk Management: Provide training and consulting services to producers’ organizations and to SDA technical staff and other State agencies involved in the project implementation, and active in market access initiatives. 59 Resp: Client Stage: Implementation Due Date: Jul-31-2012 Status: Not Yet Due Governance Rating Moderate Description: Risk Management: The objective evaluation of proposed business plans could be co-opted by competing Transparency of business plan selection through public bids; Project Operational Manual widely disseminated under the project agendas to distribute political patronage in the targeted area. communication strategy; steering committee oversight. Strong social oversight already in place and functioning through CEDR Resp: Client Stage: Implementation Due Date: June-30-2013 Status: Not Yet Due Project Risks Design Rating Moderate Description: Risk Management: Matching grants to finance business plan implementation could distort financial Project is already building dialogue with financial institutions (e.g., Banco do Brasil, Banco do Nordeste) with the aim of their markets, notwithstanding the thin formal supply of rural finance. inclusion in the financing of business plans. Explore alternatives to guarantee financial risk of rural producers’ organizations to improve their creditworthiness. Resp: Client Stage: Implementation Due Date: June-30-2013 Status: Not Yet Due Social and Environmental Rating Moderate Description: Risk Management: Safeguard capacity: The implementation of productive arrangements relies heavily on An Environmental and Social Management Framework and the Indigenous Peoples Planning Framework address safeguard the capacity of rural producers’ organizations, which varies widely. Demographic compliance and propose actions, where needed, to ensure adequate technical capacity. distortions in potential access to project benefits. Resp: Client Stage: Implementation Due Date: June-30-2013 Status: Not Yet Due Traditional patterns of the social division of labor may hamper women's participation Risk Management: in the productive economy and restrict their access to market-related job A social assessment and an Indigenous Peoples Planning Framework address the main risks and restrictions that may hinder the opportunities. participation of these most vulnerable social groups and propose mitigation measures. Resp: Client Stage: Implementation Due Date: June-30-2013 Status: Not Yet Due Risk Management: Producers’ organizations’ capacity building, training and technical assistance will be assessed and funded, as needed, under proposed business plans. Resp: Client Stage: Implementation Due Date: Dec-31-2013 Status: Not Yet Due Risk Management: Focus of rural community infrastructure on access to potable water should reduce the domestic workload and free women's time for other productive economic activities. The project will also provide capacity building to women on participation in project production investments. Resp: Client Stage: Implementation Due Date: Dec-31-2013 Status: Not Yet Due Program and Donor Rating Description: Not applicable Risk Management: 60 Resp: Stage: Due Date: Status: Delivery Monitoring and Sustainability Rating Moderate Description: Risk Management: Delays in fund transfers to producers’ organizations could hinder the implementation State has demonstrated previous best practices in managing fund transfers to local organizations, and has ongoing Bank projects of business plans. being implemented in the State. Capacity building will be provided by the Bank Bank team (including financial management and procurement specialists) share best practices from other projects in the region. Procurement and financial training to be provided to the organizations as a condition Resp: Client Stage: Implementation Due Date: Dec-31-2012 Status: Not Yet Due of disbursement may also lead to delays. Risk Management: Technical capacity of SDA to adequately design and implement M&E systems could Bank team support for impact evaluation design; M&E specialists on Bank team; SDA to contract M&E specialist under Terms of inhibit the assessment of results and associated impact. Reference reviewed by the Bank. Resp: Client Stage: Implementation Due Date: Dec-31-2013 Status: In Progress Overall Risk Implementation Risk Rating: Moderate Description: The State’s innovative strategy on inclusive economic growth carries inherent institutional capacity risks. With a relatively complex operation following a multisectoral approach, technical capacity building and project management are key elements to ensure that the project is implemented in a timely manner. The overall implementation risk is considered Moderate because the Bank has a long-term partnership and familiarity with the State, and additional measures to mitigate the project’s overall risk have been or will be put in place, such as the Project Management Unit placed under the SDA’s leadership, suitable allocation of financing, partnerships and collaboration of other State Secretariats, agencies, and stakeholders, business plan preparation for productive investments, procurement packaging, design flexibility and up-front preparation of the Project Operational Manual. 61 Annex 5: Implementation Support Plan BRAZIL: Ceará Rural Sustainable Development and Competitiveness Project Strategy and Approach for Implementation Support Implementation Support Plan I. Support for Implementation 1. The strategy for implementation support (IS) draws on the risk profile of the project (i.e., ORAF, Annex 4) and aims to enhance the Client’s quality delivery of the proposed project interventions. As such, the IS focuses on: (i) risk mitigation measures defined in the ORAF; and (ii) standard Bank supervision, including technical, institutional, safeguards (environment, social) and fiduciary aspects (financial management and procurement). 2. Semi-annual Bank supervision (including field visits to investments financed under Components 1 and 2) would concentrate in the following areas:  Strategic: To the extent possible, supervision missions would meet with the Project Steering Committee (Comitê Articulador) to: (i) review project activities; (ii) reconfirm strategic alignment of the project’s multisectoral aspects; and (iii) ensure the necessary coordination across the respective stakeholders.  Technical: Supervision would concentrate on the implementation of the investment cycle with regard to Components 1 and 2, as well as on ensuring SDA’s ability to provide quality assurance for the project’s interventions, both centrally in Fortaleza and throughout its thirteen territorial offices. Randomized field visits would serve to verify compliance with the Project Operational Manual and encourage adjustments to project design, as needed, given results on the ground. Market-chain/private-sector specialists (Component 1) and water and sanitation specialists (Component 2) would complement the permanent Bank supervision team through short-term cross-support of Bank staff and, as warranted, targeted engagement of external technical experts. Ongoing support by Bank specialists for M&E and contracted evaluation expertise, as needed, would continue to strengthen SDA’s ability to both monitor project progress and assess the impact of interventions.  Safeguards. The Bank worked with and advised SDA staff on the preparation and consultation of the ESMF for the proposed project. This support would continue throughout project implementation with regard to the investments financed under Components 1 and 2. The Bank also worked closely with the Client’s team in the preparation and consultation of the IPPF, as well as the RPF, and would continue to do so during project implementation.  Fiduciary: The Bank would provide timely, targeted training to POs and SDA prior to project effectiveness and through periodic supervision during project implementation. These training courses and supervisions would: (i) prepare SDA staff to work with POs in conducting procurement under their respective investments, in compliance with the 62 Procurement and Anti-Corruption Guidelines and the Project Operational Manual; (ii) ensure the capacity of POs to manage the flow of funds and simple accounting procedures, in line with FM guidance; and (iii) work with SDA and co-executor agencies in building their overall financial management and procurement capacity to improve and facilitate project management. Supervision of the project’s financial management arrangements would be conducted semiannually and as needed in response to client needs. Procurement supervision would also be carried out semiannually during regularly scheduled Bank supervision.  Client Relations: The Task Team Leader (TTL) would: (i) coordinate Bank supervision to ensure consistent project implementation, as specified in the legal documents (i.e., Loan Agreement, Project Operational Manual); and (ii) meet regularly with the Client’s senior representatives (i.e., SDA and SEPLAG) to gauge project progress in achieving the PDO and address implementation roadblocks, as they may arise. II. Skills Mix Required Skills Needed # Staff Weeks per FY #Trips per FY Comments Task Team Leader (Supervision) 6 3 Country-based Procurement Specialist 3 2 Country-based Financial Management Specialist 3 2 Country-based Environment Specialist 3 2 Country-based Social Specialist 3 2 Country-based Legal Counsel 3 1 HQ-based Market-Chain/Private-Sector Specialist 5 3 Country-based Monitoring/Evaluation Specialist 3 2 Country-based Natural Disaster Management Specialist 2 1 Country-based Water and Sanitation Specialist(s) 5 2 Country-based III. Partners Name Institution/Country Role Private-Sector Partners Various/TBD by Commercial partners with POs in the preparation participating POs and implementation of viable business plans. Financial Institutions IFC, Banco do Brasil; Linkage with market; complementary financing of Banco do Nordeste proposed business plans (Component 1). Water and Sanitation CAGECE, SOHIDRA, Collaborate on design and management of water Partners COGERH, SISAR, SRH, services-related investments (Component 2). ASA, FUNASA Knowledge and EMATERCE, Collaboration with knowledge sharing, training Learning; Technical CENRTEC, EMBRAPA, courses, specialized technical assistance, research, Assistance CONPAM, FUNCEME, studies. (Components 1, 2 and 3) ITF, SEBRAE, UECE, UFCE 63 Annex 6: Economic and Financial Analysis BRAZIL: Ceará Rural Sustainable Development and Competitiveness Project Introduction 1. Because the nature, scope and scale of the proposed investments will result from the explicit demands of the project’s target population, a detailed ex ante cost-benefit analysis of the project as a whole is not warranted. 2. In the case of the project’s supporting business plan implementation (Component 1, Economic Inclusion), although strategic productive chains have been preidentified26 by SDA and would be given priority during the initial phase of the project, the interested producer groups responding to market opportunities would ultimately determine the product scope and mix of the supported project. Total investment in productive projects is expected to be around US$61.6 million for an estimated 440 projects or approximately US$140,000 per project. 3. As is the case for the productive project under Component 1, infrastructure investments for potable water supply under Component 2 (Water Services), the nature, scope and mix of investments would ultimately be determined through a demand-driven process, but in this case also evaluated against the diagnostics of municipal water plans, watershed plans, water-truck (carro-pipa) routes and the survey of existing water sources and needs of rural communities. Component 2 would finance some US$50 million in infrastructure for around 40,000 inhabitants, with an estimated US$1,275 per beneficiary or US$5,102 per household (see summary in Table 1). Investments under this component are expected to include the construction of water networks, water treatment facilities, and advanced information system technology for water metering, as well as sanitary kits. Water sources may include existing water pipelines, rivers and small dams (açudes), while the use of wells will require prior analysis of the risks of causing salinization problems. Table 1. Summary of number and investment per project Total Number of Average per Number of Average per Investment Projects Project Producers Rural Producer (US$) (US$) (C.1) and or Beneficiary Households (US$) (C.2) Productive 445 157,303 18,200 3,846 projects 70,000,000 Water services 50,000,000 140 357,142 40,000 1,275 projects TOTAL 120,000,000 585 58,200 Ex Ante Evaluation of Productive Projects (Component 1) 26 These include sheep and small-ruminant production, apiculture, aquaculture, and fruit and vegetable crops. 64 4. In order to obtain an ex ante indication of the financial soundness of the types of investments likely to be supported by Component 1, indicative production models were constructed using primary and secondary information collected during project preparation. The modeling exercise was based on information from real cases of small producer groups when possible, and technical information provided by local experts on the specific productive chains. More accurate and representative feasibility indicators could and should be estimated during implementation using information from a larger sample of actual investment proposals under consideration for project financing. Standard procedures should be applied for ex ante and ex post project evaluations. 5. Indicative financial impact estimates were obtained from the abovementioned investment models. Feasibility indicators included the Net Present Value (NPV) of incremental net benefit flows (at a discount rate of 12 percent) and the corresponding Internal Rate of Return (IRR) for the same benefit streams. Switching values27 with respect to output prices and costs were also calculated to test the robustness of the financial indicators against volatility in revenues and costs. The results of this analysis are shown in Tables 2 to 4. 6. Indicative models of productive projects include: (a) Production and marketing of irrigated (fruit and vegetable) crops: The investment would support the transition of 12 families from subsistence farming to market- oriented fruit and vegetable production. Main investments include the construction of six screenhouses (6 x 1 ha), a packinghouse for fruit and vegetable processing, tanks for the production of bio-fertilizer, water harvesting and irrigation systems, a van for transporting produce, as well as technical assistance. Production will be sold to institutional markets (i.e., PAA and PNAE) and in local markets. (b) Honey production and marketing: The project aims to increase the quantity and quality of honey produced by a group of 50 beekeepers. The main investments would be the acquisition of 1,000 beehives, new processing equipment, the construction of a honey-processing unit, as well as technical assistance. Produced honey would undergo sanitary certification by the relevant authorities so producers would be able to continue supplying formal markets that will soon start requiring it. (c) Milk processing and marketing: The projects would allow a community of 280 goat producers to purchase cooling and processing equipment, and to build a facility to package milk and produce and package yogurt. 500 liters of milk and 500 liters of yogurt would be sold daily, mostly to institutional markets (PAA and PNAE). Other investments include of a van for product transport, and technical assistance. (d) Fish farming, processing and marketing: The projects would benefit 20 families of artisanal fishermen transitioning into fish farming. The production would take place in 120 floating cages, with fish at three different growth stages. Main investments would be the floating cages and associated infrastructure, as well as a building to process the fish. 27 This is the percentage change that reduces the NPV of the stream of incremental net benefits to zero. 65 Table 2. Financial indicators for the examples of subprojects Total Annual NPV IRR Job No. Rural Investment Net (R$) Creation Producers (R$) Revenue Person/ Benefited (R$)1 Year Fruits and 207,334 258,369 1,002,334 75% n.a. 12 vegetables Honey 304,576 511,571 703,307 48% 6 50 Milk 609,213 516,534 1,750,020 47% 5 280 Fish farming 329,828 298,723 710,861 48% 7 20 1 All costs including family labor and depreciation deducted from gross revenue. Table 3. Financial indicators for the examples of subprojects (per households) Total Investment (R$) Annual Financial Net NPV (R$) Revenue (R$)* Fruits and vegetables 17,278 21,531 83,527 Honey 6,092 10,231 14,006 Milk 2,176 1,845 3,505 Fish farming 16,491 14,936 35,543 * All costs including family labor and depreciation deducted from gross revenue. Table 4. Sensitivity analysis of the models of the project examples Switching Value Switching Value Switching Value of Output Prices* (%) Output Prices (R$) Running costs** (%) Fruits and -46% - 141% vegetables Honey -22% Honey = R$5/kg 99% Milk Milk = R$1.19/lt -30% 27% Yogurt = R$1.74/lt Fish farming -18% Fish = R$3.44/kg 28% ** Maximum changes in estimated values of costs and benefits to keep IRR equal or above 12%. 7. The analyzed investments provide significant incremental contributions to rural producers’ income (R$262/month on average). 8. The sensitivity analysis shows that, in general, the projects are robust with respect to the variability of running costs and output prices. Fish farming and honey production are the most sensitive models with respect to changes in output prices. Nonetheless, this degree of sensitivity in the models is considered quite reasonable. 9. Fruit and Vegetable Crops: These are usually a somewhat risky activity because it is quite vulnerable to extreme weather events and to pests and disease. These crops show a high IRR and little sensitivity to changes in output prices (or quantities produced) and operating costs. 10. The most sensitive model with respect to running costs is for milk. Nevertheless, most costs are related to payments to producers for their raw milk. An increase in the price paid to producers for unprocessed milk is expected to come from an increase in the price of processed 66 milk, which would translate into higher revenues that would offset the increase in higher prices paid to producers for their raw milk. 11. Although most milk and honey are currently sold to institutional markets and thus their long-term sustainability could be questioned, they provide short-term market and price security during a transitional period in which producers could, with adequate technical assistance, improve their productivity and marketing skills. Ex Ante Evaluation of Water Services Project (Component 2) 12. The implementation of Component 2–Water Services is aimed at a better use of the State’s existing water sources and at supporting the implementation of the State’s strategy for ―universal access to water supply and basic sanitation for rural communities‖.28 13. As previously mentioned, the nature of the project’s implementation strategy as a locally demanded project does not allow for a meaningful, detailed ex ante evaluation of the project as a whole. Thus, the preliminary cost-benefit assessment of potable water supply investments to be financed under Component 2 is based on cases drawn from the Implementation Completion and Results (ICR) report for the Rural Poverty Reduction Project (RPRP) of Ceará (December 2009), a precursor to this project. It is expected that the nature of the project demanded for Component 2 financing will be similar in nature and scale to those implemented by the RPRP. Methodology 14. The benefit/cost ratio and the economic rate of return were estimated. The period of analysis used was 10 years, which was considered consistent with the expected useful life of the investments. The discount rate used for the analysis was 10 percent.29 Costs included the initial investment and annual operating costs, while the benefits were calculated on the basis of: (i) savings in time used for water collection; (ii) savings derived from the reduction of waterborne diseases; and (iii) willingness to pay, which is a proxy for the value families attribute to the availability of potable water. As such, it incorporates the effect of missing or unmeasured benefits such as comfort, well-being, etc. It was measured using the average payment made by families for the potable water they receive from the project. 15. The economic indicators of the eight potable water supply projects selected for the analysis are shown in Table 5. 28 Studies such as Songco (2002) have shown that the investment in public infrastructure, i.e., infrastructure for water supply, yields substantial improvement in the lives of the poorest, namely when these investments aim at the improvement of their existing livelihoods (Songco 2002). Baquero et al. (2006) state that access to assets (by rural populations) enables better risk management and more active participation in social and political life, as well as better capacity to seize opportunities and more easily confront challenges. 29 This discount rate is lower than that for productive subprojects because investments in infrastructure usually result in additional unvalued benefits that are expected to exceed unvalued costs. 67 Results Table 5. Financial analysis of two types of Basic Water Services projects Average Average Benefit/Cost Internal Rate Payback Present Value Present Value Ratio of Return (%) Period of Investments of Benefits (years) (R$) (R$) Potable water 65,135 96,104 1.48 18 6.2 supply 16. The economic analysis of potable water supply projects showed positive results, yielding an economic IRR of 18 percent and a benefit/cost ratio of 1.48, meaning that for every R$100.00 invested the project would return R$148.00. A sensitivity analysis30 showed that even when assuming a cost increase of 10 percent from the base scenario and a simultaneous 10 percent decrease in revenues, the economic IRR remains above the discount rate, at 11 percent.31 17. In addition to these results, available literature shows the benefits of potable water supply projects. For example, according to UNICEF (2009) the two main causes of mortality among children under age five—acute respiratory infections and diarrheal diseases—are closely linked to poor water quality, hygiene and sanitation. In addition, the UNICEF ―Sanitation for All‖ report states that rural investment in water supply and sanitation results in lower rates of death and illness, savings in health costs, higher worker productivity, better learning capacities of schoolchildren, increased school attendance especially by girls, strengthened tourism, and heightened personal dignity and national pride. The ICR for Ceará’s RPRP reports evidence from interviews with beneficiaries, indicating a reduction in the incidence of waterborne illnesses, mainly in children. References Baquero, F. Rocha J. Ortega, J. (eds.) (2006). Políticas Públicas y Desarrollo Rural en América Latina y Caribe: el papel del gasto público. FAO. Santiago. Chile. Songco, J. A. (2002). Do Rural Infrastructure Investments Benefit the Poor? School of International and Public Affairs, Columbia University and the World Bank. Vietnam. UNICEF (2009). Community Approaches to Total Sanitation. Field Notes: UNICEF Policy and Programming in Practice. New York. USA. UNICEF. (2001). Sanitation for All – Promoting Dignity and Human Rights. New York. USA. 30 For investments in communities with available electricity before water supply subprojects. These results may vary for communities without electrical power at the time of water supply investments. 31 The ICR for Ceará’s RPRP does not disaggregate the sensitivity analysis for water supply and rural electrification investments. Rural electrification projects showed a lower IRR (13 percent) than water supply. Thus, it would be expected that the increase in investment costs of water supply systems by 10 percent and the reduction of their benefits by the same 10 percent, would yield an internal rate of return higher than the 11 percent obtained for both water supply and rural electrification combined. 68 Annex 7: Irrigation in Ceará and Project Activities Related to Irrigation BRAZIL: Ceará Rural Sustainable Development and Competitiveness Project Context 1. Ceará accounts for about 108,000 ha of irrigated land, which corresponds to only 0.3 percent of the State’s total agricultural area and about one sixth of the potentially irrigable area, estimated at approximately 620,000 ha.32 This area is managed by a diversity of irrigation users ranging from large projects (irrigation areas of several thousands of hectares), medium projects (up to a few hundred hectares), to small-scale irrigation by family agriculture at the level of a rural community. Most of the irrigated area (over 70 percent) is concentrated in the three hydrographic regions of Banabuiu, Acaraú and Médio Jaguaribe, with the other eight hydrographic regions accounting for the remaining 30 percent. Table 1 presents the irrigated area of existing medium and large public irrigation schemes. 2. The policy of large public irrigation schemes was strongly promoted at the end of the 1960s, with the objective of expanding irrigation in the State. This was consolidated in the mid- 1980s with the creation of the Programa de Irrigação do Nordeste (PROINE). During the early 1990s, the focus changed to deploying medium-scale irrigation schemes with the development by the State of a program of Regional Irrigation Growth Poles. 3. In 1987 the State created its Secretariat of Water Resources, and in 1992 the State Water Resources Plan was completed. The Plan identified a network of strategic reservoirs to increase the State’s capacity to cope with recurrent droughts. After the extreme drought of 1994, which caused the Metropolitan Region of Fortaleza’s (RMF) water supply system to nearly collapse, the State built the Canal do Trabalhador as an emergency measure and started planning for other integration systems to increase the reliability of its water supplies. In 2005 the State Water Resources Plan was fully revised to update water balances in all river basins and identify appropriate measures to address remaining supply-demand deficits. 4. The revised 2005 Plan identifies three major types of infrastructure to be developed to meet the multiple needs of this semi-arid state: (a) a network of small isolated reservoirs to supply potable water to specific towns and villages; (b) larger reservoirs and integrated pipeline systems serving a number of municipalities for domestic consumption and other uses such as irrigation, industrial supply and aquaculture; and (c) several major integration systems, including the Canal da Integração, to connect key reservoirs with multiyear regulation capacity in order to improve water supply reliability and cope with the endemic problem of droughts and climate variability and change. 5. In this regard, the State’s water resources policy has been based on the increase of infrastructure for the supply of water. The State has a storage capacity of around 18 billion m3, nearly 90 percent of which is in large reservoirs. In addition, more recent efforts have been made to construct interbasin transfer infrastructure to guarantee water availability to large metropolitan areas and gradually integrate more scattered communities throughout the State. 32 1995 Agricultural Census. 69 6. The Bank has a long history of engagement in the State’s water resources management sector, with strong support to institutional strengthening, planning of new infrastructure, implementation of 25 multipurpose strategic reservoirs, water supply systems for drought- stricken and poor rural communities, and construction of the State’s main conveyance system that supplies bulk water from the Castanhão Dam in the Jaguaribe River Basin to the RMF, known as the Eixão das �guas, which will secure water supply to more than three million people and will further supply water to the industrial area of the Port of Pecém. 7. Today, the area irrigated by public irrigation projects is estimated at 50,766 ha,33 of which over 90 percent is concentrated in nine large projects (e.g., Morada Nova, Icó-Lima Campos, Baixo Acaraú, Chapada-Apodi), the rest being covered by twenty-three medium-scale projects (e.g., Xique-Xique, Realejo, Graça, Altinho and Tucunduba).34 Those public irrigation schemes have been implemented either by the federal agency DNOCS (Departamento Nacional de Obras Contra as Secas) or by the State of Ceará, that is, through the Secretariat of Water Resources (SRH). The current strategy on large irrigation projects outlined by the Federal Government is now to attract private investment in order to implement a public-private partnership (PPP) structure for rehabilitating those large-scale projects through concession agreements, and for constructing several new ones. 8. With the infrastructure of the Canal do Trabalhador and the Eixão das �guas, it is expected that new irrigated areas will be put into operation. The project will support the formulation and implementation of irrigation models that are inclusive of the small producers living along this water infrastructure. Those areas are likely to take the form of the medium irrigation schemes described above, i.e., projects of a few hundred hectares each. 9. The area irrigated by small family producers is very poorly known because of a lack of data on this type of irrigation. The water source for irrigation is diversified, and includes different types of infrastructure: small and medium multiple-use dams (açudes), surface alluvial wells (cacimbas), and traditional wells (poço amazonas or cacimbão) which are underground dams for water harvesting and conservation for productive uses. Some public investments have targeted this type of small-scale irrigated agriculture, such as the Poços do Sertão Program; the São José Project; PRODHAM (Projeto de Desenvolvimento Hidroambiental), under the Bank- financed PROGERIRH (Programa de Gerenciamento e Integração dos Recursos Hídricos); and the Sustainable Development Project for Agrarian Reform Settlements in the Semi-Arid Northeast (Dom Hélder Câmara Project). 10. The specific nature of this type of small-scale irrigated agriculture is that it often enters into direct competition with other water uses that have greater priority: for population and cattle. Therefore, considerable investment needs to be made in water resources planning and management at the decentralized local community level in order to provide stakeholders and local authorities with the elements of discussion on the possible options for managing water availability (in terms of quantity and quality) for different users and different uses within the watersheds. 33 Source: Pacto das �guas 2009. On the other hand, the private irrigated area in Ceará is estimated at about 18,537 ha. 34 Plano Estadual de Recursos Hídricos 2004. Data from 2000. 70 11. With regard to the irrigation methods most commonly used, less than 40 percent of irrigated land in Ceará is equipped with improved on-farm irrigation systems, such as drip irrigation or sprinklers. The irrigation method is predominantly surface irrigation (63 percent) and sprinklers (32.8 percent), with drip irrigation and central pivots accounting for only 3.3 percent.35 12. The Secretariat of Agrarian Development (SDA) has a particular interest in strengthening the value chain of fruits and vegetables, which has seen a rapid growth in large- and medium- scale irrigation projects but faces a great number of challenges related to highly demanding markets, both domestic and international. Statement of problem and needs 13. The Brazilian Northeast experiences critical problems related to water scarcity, with periodic, long and severe droughts, which create a number of economic and social problems and hamper the development of the region. The State of Ceará, due to its specific characteristics, is particularly susceptible to these climate adversities. It relies heavily on surface water infrastructure to supply water for multiple uses. Crystalline rock formations occur in about 90 percent of the State’s territory, implying a rather limited potential for groundwater use and storage due to very small yields and high salt contents. Highly variable rainfall, on the other hand, requires large surface water storage capacities to ensure reliable water supplies. The importance of water infrastructure planning and management is widely recognized in the State, which has consistently treated this subject with high priority. 14. The assessment of problems, needs and potential presented below is based on several key documents, most importantly the ―Pacto das �guas,‖ which is a visioning exercise that was conducted in a participatory manner during 2008–2009 at the level of the State, the eleven hydrographic regions, and municipalities. The Pacto das �guas collects the main aspirations of the people on water resources use and management, and includes suggestions for programs and subprograms covering the relevant aspects for a rational state water resources management policy, among them universal access to potable water and the availability of water for irrigated agriculture. 15. Many of the large irrigation projects face the following problems: (i) poorly maintained collective irrigation infrastructure and need for rehabilitation; (ii) low water-use efficiency at farm level, requiring modern water-saving techniques and practices; (iii) rapid growth of the population inside irrigation schemes (agrovilas), calling for basic sanitation and the treatment of water for human consumption; (iv) better monitoring and control of the use of agrochemicals, which have become a public health problem (deteriorating water quality); and (v) poor technical and financial management by the water users’ organizations (WUO) and lack of land titles for irrigation producers. 16. The medium-scale irrigation projects express demands that are, to a certain extent, similar to those of the larger projects. In addition, they stress the importance of: (i) technical assistance (TA) in water-saving irrigation techniques and practices; (ii) more diversified TA in production 35 COMAGRI 1996. 71 and post harvest; (iii) preservation of water bodies (aquifers, water sources [mananciais], etc.) and gallery forest (mata ciliar); and (iv) more rational and integrated water use for multiple purposes (e.g., human consumption, cattle, fish production, and irrigation) in a coordinated manner with key stakeholders such as the municipality. 17. Small-scale irrigation by family agriculture faces diversified demands, including: (i) helping to organize producers; (ii) technical assistance in irrigation techniques, and production more broadly; (iii) lack of capital for the purchase of machinery and equipment; (iv) preservation of water bodies (aquifers, mananciais, etc.) and the mata ciliar; and (v) support for participatory water resources planning and management at the watershed level by irrigation farmers and other competing water uses. 18. The objective of the productive subprojects using irrigation systems is to support the improvement of smallholder irrigated agriculture production and productivity in targeted irrigated areas of Ceará. Project approach 19. The project uses an integrated approach to irrigation improvement, which supports the improvement of irrigation infrastructure (collective and on-farm), using existing water sources and available infrastructure to enhance production and productivity through the adoption of sustainable systems and technologies. Such systems and technologies should enable greater efficiency in water use, avoiding water wastage in a region where this resource is scarce during most of the year, and should minimize the risk of soil salinization or erosion. The project will provide access to producers currently applying inadequate or less-efficient irrigation technologies, as well as to producers in the project area who currently lack access to irrigation. 20. Component 3 of the project would provide capacity building for water users’ organizations and farmers’ groups, including the formation of groups, strengthening of existing groups, and extension and adaptive research to strengthen the value chains of irrigated crops. It will also support water resources planning and management at the decentralized, local community level in order to provide stakeholders and local authorities with the elements of discussion on the possible options for managing the water availability (in terms of quantity and quality) for different users and different uses within the watersheds in the medium and long terms. 21. Component 3 will also build the capacity of SDA, SDA territorial units, and producers’ organizations to develop projects and monitor their implementation. Beneficiaries and project intervention area 22. The project’s irrigation investments will benefit poor rural communities and particularly small and medium agricultural producers, represented by their organizations, such as community associations, producers’ associations, cooperatives or other types of legally established organizations that can provide proof of regular operation. 23. The project intervention area will be defined for each of the types of subprojects defined by the different specific windows proposed by the selected business plans. 72 Types of subprojects 24. The project would support different types of investments: 25. Water Investments for Productive Use at Community Level (a) This typology would finance preinvestment studies and design, execution and supervision of projects to support stakeholder groups at the level of small watersheds (producers’ organizations, watershed committees, etc.). (b) The main beneficiaries would be small irrigation producers involved in key value chains (e.g., fruits and vegetables, milk and meat production, etc.). Types of investments would include: water intake improvement, superficial alluvial wells (cacimbas), traditional wells (poço amazonas or cacimbão), underground dams for water harvesting, conservation for productive uses, etc. (c) The eligibility criteria for this window will be set out in the Project Operational Manual. (d) The capacity building provided by Component 3 will encourage consultation with the different water users groups at the watershed level on the design of the project’s technical and management model, and will ensure close coordination with the investments for rural water supply and sanitation proposed under Project Component 2. 26. Design and Construction of Smallholder Irrigation Schemes: (a) This typology would finance preinvestment studies and the design, execution and supervision of projects to support eligible farmers’ groups in designing and implementing irrigation schemes along existing water supply infrastructure, such as along the Canal do Trabalhador. Investments would include: (i) water intake construction; and (ii) distribution, regulation and drainage systems. (b) The PO will be responsible for 100 percent of the operation and maintenance. 27. On-farm Irrigation Technology Improvement: (a) This typology will finance preinvestment studies and the design, execution and supervision of SPs to support eligible farmers’ groups and to increase irrigation performance at the farm level through the installation of improved on-farm irrigation systems, including: (a) the carrying out of works and provision of equipment at the farm intake (e.g., installation of pipes, pumping units, filters, meters, pressure regulators and individual hydrants, and rehabilitation or construction of small regulation reservoirs); and (b) carrying out of works and provision of equipment on the irrigation plots (e.g., installation of sprinklers and drip systems, land leveling and gated pipes). 73