- III. Preliminary Description

The proposed operation is a single tranche Development Policy Loan in the amount of US$280 million to the Brazilian State of Rio Grande do Sul (RS). The operation is structured around two pillars: a fiscal pillar and a water and irrigation pillar. Pillar I. Strengthening Fiscal Management to Increase Fiscal Space. The common theme of the fiscal pillar is to increase revenues and promote expenditure savings, augmenting the resources available for increasing investments. This pillar supports policy actions that aim to increase revenues, not by increasing tax rates or cutting tax expenditures, but by improving the state collection efficiency. On the expenditure side, this pillar supports policy action that seeks to generate expenditure savings. These savings can be obtained in the short term, for example through actions on procurement policy, or be obtained more in the medium and long term through actions on costing and contingent liabilities. In the short term, expenditure savings opportunities are sought focusing on inputs and processes, while the long term actions aim to lay the foundations for a more comprehensive approach, wherein output and outcome information would be taken into account. Pillar II. Irrigation and Water Resources Management. The irrigation and water resources management pillar have the objective of promoting sustainable irrigation and strengthening the State Water Resources Management (WRM) System. It supports policy actions that promote adequate strategic planning for sustainable irrigation aimed at generating income and economic development. From the water resource management perspective, it supports policy actions that strengthen water resource institutions, planning and tools, enhancing integration among the water resources management system and its multiple users.

- IV. Poverty and Social Impacts and Environment Aspects

### Poverty and Social Impacts

The policy actions supported by this operation are expected to have a positive impact on poverty as they will contribute to fiscal sustainability, foster social accountability and improve water management with potentially positive impacts on agricultural production. The PSIA focuses on the expected distributional impacts of policies supported under Pillar 2 - Irrigation and Water Resources Management. The assessment relies on the analysis of secondary data and on the outcomes of public consultations previously held by the State of Rio Grande do Sul with key stakeholders. Overall the combined social and economic outcomes of these policies are expected to be positive for the poor and vulnerable population in most deprived rural areas and to impact positively the state economy and state revenues. The sustainability of agricultural production and the increased resilience to climatic events are the main expected impacts of the policies related to Irrigation and Water Resources Management. The sustainability of agricultural production is, conceived of as essential to the state economy and to increase state revenues and its investment capacity. The main objective of these policies is to increase the resilience of small, medium and large agricultural producers to climatic events (cyclical and seasonal droughts). This goal will be reached by stimulating the increase of water supplies within rural properties, and fostering the use of irrigation systems, having as consequences higher productivity and more sustainable production. It will also be reached by reducing water use conflicts in consequence of more participatory and transparent decision-making processes with regards to water resources management and, consequently, enhancing social accountability and control on the implementation of water resources management plans. Combined, the police actions address four of the eight main constraints to the expansion of irrigated areas in the state. They are related with: the processes of licensing and granting rights of water use, the access