- 100 -

# Box 10s BRAZIL: PARANA MARKET TOWNS IMPROVEMENT PROJECT (LOAN 2343-BR)

Parana' as Pilot State: Favored by a natural environment well suited for export crops and by the entrepreneurial ikills of recent waves of Immigrants, Parana' accounts for nearly one-'ifth of Brazil's foreign exchang **e** arnings with only 2.3 percent of Its land area and 6.4 percent of its population. Nevertheless, Pasana' is not one of the richest siates of Brazil: Its per capita Income may be less skewed In distribution, but Is only slightly above the national average. Nor . the State Immune of social tensions: during the 1970's an estimated 15 percent of Its population left Parana' to other regions, mostly from Its rural areas, where convulsive changes occurred in land use, tenure and degree of mechanizatlon. Sharp conirasts exist In the endowement of resources and access to public services between the rural and the urban sector and between areas of the State. Parts of Parana' are still In the process of CDlonization, others are pockets of poor, subsistence farming and others are overtaken by industrlalized agriculture, yielding surpluses which are reinvested In the main cities In commerce, real estate and Industry. These contrasts are reflected in deep political divisions, causing the alternance of different factions In State and municipal governance.

The Project and its Objectives: In August 1983, the World Bank approved a USS50 million loan to support and rationalize a program of financial assistance to municipalities (the PRAM or Municipal Action Program, which the State of Parana' had undertaken since 1981. The maln objectives of the project were to systematize the flow of earmarked fisca. transfers by introducing a 35 percent credit component and cost recovery criteria, so as to pave the way to a progressive emphasis on borrowing rather than grant financing and to a gradual re-direction of unrequited transfers on the most needy municipalities.

Project Design: The project design Interlinked municipal Investments in Infrastructure and services with fiscal improvements and selection of productive components, to expand the local revenue base und cope with rising current costs. It promoted widespread awareness of economic and fiscal constraints, fostering creative competitive approaches by local authorities to dovelop comparative advantage and attract private sector Initiatives to their jurisdictions.

**See** 18RD-4403 a-BR: BRAZIL: Parana' Market Towns improvement Project, Staff Appraisal Report, May, 1983.

Implementation: After four years of Implementation, achlevement of the project objectives can be considered satisfactory. Nearly all eligible municipalities have become sub-borrowers (280 against appralsal expectations of only 50) and some 2000 subprojects have been completed (another 500 are still In progress). Oespite the 1983 political elections and the financial and monetary crlsis which caused a belated project start and a climate of general uncertalnty, disbursement of loan funds matched the average Bank profile, making this project a rare exception In Brazil's urban portfolio of the Bank.

Project Impact: The Improvements made in small market centers y'elded evident welfare gains for their residents, relieving soclal tensions and possibly some contributing factors of out-migration. However, the most Important contribution of the PRAM project was that of enhancing tho capacities of rural municipalities, the lowest tier of Brazil's administrative hierarchy, to recover the costs of social Investments thus lessening their own dependence on State and Federal grants. The project did not Involve a Federal contribution, Its entire cost being financed by the State of Parana'. Municipal loan repayments are used to capitalize a Municipal Development Fund.

The project concept had far reaching impact. Not only was It adopted in a subsequent Bank loan to the nearby State of Santa Catarina (Loan No. 2623-BR) but several other Brazilian States have expressed Interest In Bank support for similar initiatives. it has been adopted also by the Government of Argentina for a five Province operation (see Box 11) and Is under active consideration in Mexico and Colombla.

Project Data: Total cost US$150.2 million of which 35 percent financed by the World Bank, 65 pqrcent by the State of Parana' and Municipallties. Infrastructure investments are expected to amount to 65 percent of total costs, community facilities another 23 percent and vehicles and equipment 7 percent. Project design, administration, and technical assistance account for 5 percent. Foreign costs were estimated at 35 percent of the total. The project disbursement profile had been assumed to span four years (to December 31, 1987), but a one year extension was require **d** ue to the delay in loan effectiveness. Onlending terms to Municipalities were at 11 percent interest over indexed principal, with maturities up to ten years and 1-3 years grace periods.