Brazil Country Program Evaluation, FY2004-11: Evaluation of the World Bank Group Program

Brazil Country Program Evaluation, FY2004–11

EVALUATION OF THE WORLD BANK GROUP PROGRAM

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Attribution—Please cite the work as follows: IEG (Independent Evaluation Group). 2014. Brazil Country Program Evaluation, FY04–11: Evaluation of the World Bank Group Program. Washington, DC: World Bank. doi:10.1596/978-1-4648-0216-4. License: Creative Commons Attribution CC BY 3.0

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ISBN (paper): 978-1-4648-0216-4

ISBN (electronic): 978-1-4648-0217-1

DOI: 10.1596/978-1-4648-0216-4

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Contents

Boxes

Figures

Tables

Appendixes

Abbreviations

Acknowledgments

This evaluation was prepared by an Independent Evaluation Group (IEG) team led by Jiro Tominaga. The evaluation was conducted under the guidance and supervision of Ali Khadr (Senior Manager) and Nick York (Director) and the overall direction of Caroline Heider (Director-General, Evaluation).

Members of the team included Jaime Biderman, Susan Caceres, Ken Chomitz, Corky de Asis, Kutlay Ebiri, Takatoshi Kamezewa, João Oliveira, Marcelo Selowsky (Senior Consultant), Tony Tyrrell, Carlos Eduardo Valez, Silvina Vatnick, and Cameron Wilson. William Hurlbut edited the report and Yasmin Angeles and Corky de Asis provided administrative support. Peer reviewers were Ariel Fiszbein (Chief Economist, Human Development Network), Thomas O’Brien (Country Program Coordinator: Kenya, Rwanda, Eritrea), and Sergei Soares (Chief of Staff, Instituto de Pesquisa Econômica Aplicada). The report also benefitted from the advice and review of an external panel composed of Armando Castelar (Coordinator of Applied Economic Research at IBRE/Fundação Gertúlio Vargas and Professor of Economics at the Federal University of Rio de Janeiro), Teresa Ter-Minassian (Former Director, Fiscal Affairs Department, International Monetary Fund), and Carlos Young (Associate Professor, Instituto de Economia, Universidade Federal do Rio de Janeiro and Senior Researcher at the Instituto Nacional de Ciência e Tecnologia—Políticas Públicas, Estratégias e Desenvolvimento).

The team is grateful to the numerous representatives of the government, private sector entities, and nongovernmental organizations who provided valuable insights into the World Bank Group’s Brazil program. The team is also thankful to World Bank Group management and country team members, including both previous and current staff working on Brazil, who provided valuable time, information, and feedback to the evaluation team.

Overview | HIGHLIGHTS

Over 2004–11, the World Bank Group program in Brazil aimed to support the government’s effort to achieve greater equity, sustainability, and competitiveness, underpinned by strong economic management and governance.

The major feature of the World Bank program was its adaptability as the government reallocated its lending capacity to achieve a combination of countercyclical and structural reform objectives. During the first years of fiscal consolidation, the program emphasized federal policy-based operations that would allow a smoother fiscal adjustment. As the federal fiscal situation improved, attention turned to subnational governments; during the period evaluated, the share of subnational lending increased from 19 percent to 78 percent of total commitments.

The International Finance Corporation’s (IFC’s) net commitment volume tripled during the period evaluated. The distinctive feature of IFC’s Brazil portfolio compared to other Latin American countries was the relatively low level of equity investment and a very high share of short-term trade finance, which accounted for more than half of total net commitments during the period. The Multilateral Investment Guarantee Agency (MIGA) concentrated its activities on the electricity transmission subsector; the demand for MIGA’s political risk guarantees declined as foreign investor confidence improved during the period.

The outcome of the Bank Group program is judged moderately satisfactory, although with some important variability across themes. The Bank Group made significant contributions when it served as a trusted advisor, providing analytical inputs and exchanging views on immediately relevant policy issues. Examples are support for Bolsa Familia, improved student learning outcomes, pension reforms, and subnational results-based management systems. In addition, advisory support for structuring public-private partnership projects leveraged IFC’s global expertise in project financing. The Bank Group’s convening power provided diverse stakeholders with a platform to examine issues and trade-offs that cut across organizational boundaries in water resource management and in multisectoral operations at the subnational level. In the area of the environment, the Bank helped reduce deforestation in the Amazon through support for a major expansion of protected areas and indigenous territories, as well as for building the capacity of national and state environmental agencies.

Results were less satisfactory in addressing infrastructure bottlenecks, particularly in logistics and the cost of doing business, where the Bank Group was not able to make significant impact. These areas remained critical constraints to Brazil’s growth and a key government concern. Given the already high tax burden and competing demand for public spending, particularly in the social area, it is important to improve public investment planning and execution and to enhance the regulatory framework and its predictability to attract private investment into infrastructure. In addition, the Bank Group was not able to advance the dialogue to enhance competition in the financial sector.

Given that the demand for Bank Group support remains strong, particularly in states, it is important that the Bank Group maximize its contribution per dollar loaned. Hence, in this evaluation, the Independent Evaluation Group recommends that the Bank Group make expected catalytic impact a major criterion in the design of its future strategy in Brazil. This means that in the selection of the programs and projects to support, the emphasis should be on those with benefits beyond the individual intervention. Support for reforms that create enabling environments and incentives for other actors, activities to enhance demonstration effects and replication of positive results, and engagements that leverage the Bank Group’s knowledge base and its convening role to facilitate cross-sectoral dialogue are examples of activities that would fit this criterion. Collaboration among the World Bank, IFC, and MIGA to attract the private sector into infrastructure investment and to reduce the cost of doing business has a potential for high gain. It is also important for the Bank Group to continue promoting sustainable rural development.

This evaluation also recommends that the Bank Group further enhance dialogue with the Brazilian authorities and think tanks to identify the policy areas where it could provide the most effective knowledge support and undertake analytical work on selected issues with important long-term implications. Finally, IFC could expand its public-private partnership operations and sharpen its focus on supporting small and medium-size enterprises’ increased access to long-term financing.

Country Context

Brazil made substantial achievements in fiscal adjustment and price stabilization in the late 1990s and early 2000s. But the resilience and continuity of that stabilization effort was tested in the early 2000s as a number of adverse events unfolded: a global economic slowdown, a domestic energy crisis, spillovers from the Argentine crisis, and uncertainties related to the 2002 presidential election. The subsequent macroeconomic stability and a favorable external environment allowed Brazil to resume moderate growth from 2004. The global financial crisis in 2008–09 led to a small and temporary contraction in gross domestic product (GDP), but the country’s sound fundamentals and prompt response helped mitigate the decline.

Brazil has made substantial progress in reducing poverty and income inequality. Nonincome indicators of standards of living have also improved; for example, there have been reductions in child malnutrition and increases in primary school enrollment. Gender differences in enrollment have been eliminated. Progress has also been made in a major environmental objective to reduce the rate of deforestation.

Two challenges to further accelerating and sustaining growth remain: infrastructure bottlenecks and the cost of doing business (Custo Brasil). Combining agricultural growth and poverty reduction with environmental and forest protection also remains a challenge. The quality of government expenditures and services remains low despite the high level of such expenditures—the tax burden in Brazil has reached 35 percent of GDP.

Evolution of the World Bank Group Strategy and Program: Continuity with Adaptability

This Brazil Country Program Evaluation (FY04–11) examines the relevance and effectiveness of the Bank Group program during the period covered by the FY04–07 Country Assistance Strategy (CAS) and FY08–11 Country Partnership Strategy (CPS). Both were jointly produced by the World Bank and the International Finance Corporation (IFC); the Multilateral Investment Guarantee Agency (MIGA) was expected to complement them. Because of the modest scale of Bank Group financial support in relation to Brazil’s economy, the evaluation focuses on identifying the catalytic role of the Bank Group strategy and operations. The evaluation follows the standard methodology for the Independent Evaluation Group’s (IEG) Country Program Evaluations.

Recognizing that broad-based poverty reduction requires continued improvement in economic growth, human capital development, and sustainable use of natural resources, the major goals of the CAS and CPS were to assist Brazil in achieving greater equity, sustainability, and competitiveness underpinned by strong economic management and governance. The engagement effort during the 2002 transition in administrations likely helped establish a durable framework for the Brazil program over the period evaluated. The Policy Note prepared by the World Bank’s Brazil team (World Bank 2004) suggested priorities for the incoming administration and helped create an environment for dialogue.

The continuity of the country strategy objectives was complemented by flexibility. A major feature during the period was a significant shift from federal to subnational lending in FY08–11 to respond to emerging demand from subnational entities.

Trends and Patterns in IBRD, IFC, and MIGA Operations

WORLD BANK

The total IBRD (International Bank for Reconstruction and Development) lending commitment during the evaluation period was $16.8 billion. It grew constantly after FY04, except in FY07, when a significant dip resulted from the reconfiguration necessary to increase subnational lending.

A major feature of the program was its adaptability. It responded to the interest of the authorities in reallocating IBRD lending capacity over time to achieve a combination of countercyclical and structural reform objectives. During the first years of fiscal consolidation, the program emphasized adjustment operations at the federal level that would allow a smoother fiscal adjustment. As the federal fiscal situation improved, attention turned to subnational governments. During the global economic crisis in 2008–09, the Bank helped selected subnational entities cope with the adverse impact of the crisis while maintaining the discipline of the Fiscal Responsibility Law. As Brazil approached the IBRD exposure limits toward the end of the evaluation period, the authorities prepaid about $4 billion, about one-fourth of the exposure limit. This significant prepayment allowed the Bank to continue a high level of subnational support. It was also a signal from the authorities to keep a high level of overall engagement.

The Bank actively used the sectorwide approach (SWAp) in its subnational lending—it encouraged cross-sector dialogue and helped strengthen results-based management systems in the counterpart governments. Analytical and advisory work and nonlending technical assistance supporting dialogue and sharing lessons from experience complemented the lending. Many Brazilian counterparts noted that this was the most important contribution of the Bank. During the period evaluated, about $24 million (Bank budget and trust fund) was allocated to analytical activities.

IFC

IFC’s Brazil operations were mainly related to the competitiveness pillar of the FY04–07 CAS and FY08–11 CPS. Specifically, IFC supported private sector activities that were expected to enhance Brazil’s growth and competitiveness, such as agribusiness and infrastructure, and helped improve access to credit for Brazilian enterprises, particularly SMEs. Its strategic approach also recognized the importance of support for environmental sustainability and public-private partnerships (PPPs). During the FY08–11 CPS period, IFC sought a more direct role in reducing poverty and inequality by focusing on low-income groups and frontier regions. Its attention to second-tier companies and mid-size banks also increased over time.

During FY04–11, IFC’s net commitment amounted to $5.01 billion. The distinctive features of the Brazil portfolio compared to that in other Latin American countries are the relatively low level of equity investment and the very high share of trade finance.

During the period, IFC’s contributions through its advisory services on PPP were widely recognized. Most of these projects were supported by the Brazil Private Sector Partnership Program established by IFC, the National Bank of Economic and Social Development (BNDES), and the Inter-American Development Bank. This program provides advisory services to structure private concession projects with emphasis on establishing new standards and introducing innovative models for private sector participation in Brazil. During the period evaluated, the program successfully structured projects in transport, health, and education.

MIGA

Most of the 16 guarantees issued during the period evaluated were in the electricity transmission subsector. In the context of improving foreign investor confidence in Brazil, the demand for MIGA’s political risk guarantees has declined. However, an expanded mandate, a new product, and changes in its Convention offer an opportunity for MIGA to rebuild its operations in Brazil.

Toward a More Equitable and Sustainable Brazil

The equity objective focused on reducing extreme poverty, enhancing skills formation, and improving health care for all communities. In some areas the Bank Group combined know-how, dialogue, and financial support to create synergies that were acknowledged by Brazilian counterparts. The best examples are the support to Bolsa Familia—the main national program providing targeted income support to poor families contingent on actions by the family to improve the education and health status of their children—and the analytical work to improve the understanding of classroom dynamics to enhance students’ learning outcomes.

Bolsa Familia reached a high percentage of poor families in Brazil and helped alleviate poverty at a sustainable fiscal cost while promoting human capital investment on children and youth. The Bank was strongly associated with the program from its inception through continuous technical and analytical support in monitoring progress, impact, and the quality of targeting. The Bank’s sustained support has led to an exceptionally strong partnership with the government counterpart—a practice that should be examined further for replication elsewhere in the Bank.

In education, several analyses on the interaction between students and teachers in the classroom conducted during the FY08–11 CPS period became the basis for a significant amount of analytical work and dialogue. The studies provided policy makers with a benchmark on how teachers in Brazil use instructional time in comparison with other countries and offered insights about the incentive schemes relevant to a range of