PUBLIC

DOCUMENT OF THE INTER-AMERICAN DEVELOPMENT BANK

BRAZIL

PROFISCO – TOCANTINS

FISCAL MODERNIZATION PROGRAM OF THE STATE OF

TOCANTINS (PMF/TO) (PROFISCO/TO − BR-L1255)

INDIVIDUAL OPERATION UNDER THE CONDITIONAL CREDIT LINE FOR

INVESTMENT PROJECTS (CCLIP) FOR THE PROGRAM TO SUPPORT THE

MANAGEMENT AND INTEGRATION OF TAX ADMINISTRATIONS

LOAN PROPOSAL

This document was prepared by the project team consisting of María Cristina MacDowell

(FMM/CBR), Project Team Leader; Luiz Villela (IFD/FMM), Project Team Co-leader;

Fátima Cartaxo (FMM/CBR); Bernadete Buchsbaum (LEG/SGO); Fernando Glasman and

Carlos Lago (CSC/CBR); Adriana Sobral Coelho and Daniela do Nascimento (FMM/CBR);

Flávio Galvão, Eugenio Lira, and Rodrigo Lenzi (consultants); and Marina Massini

(IFD/FMM)

Under the Access to Information Policy, this document is subject to Public Disclosure

CONTENTS

PROJECT SUMMARY

I. DESCRIPTION AND RESULTS MONITORING ..................................................................... 1

A. Background, problem addressed, rationale ........................................................... 1 B. Objective, components, and cost .......................................................................... 4 C. Key results matrix indicators ................................................................................ 7

II. FINANCING STRUCTURE AND MAIN RISKS ...................................................................... 8

A. Financing, procurement, and contractual conditions ............................................ 8 B. Environmental and social safeguard risks ..........................................................10

C. Fiduciary risks .....................................................................................................10

III. IMPLEMENTATION AND MANAGEMENT PLAN ...............................................................11

A. Summary of institutional arrangements for implementation ..............................11 B. Summary of arrangements to monitor results .....................................................12 C. Evaluation ...........................................................................................................12

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ANNEXES

Annex I: Development Effectiveness Matrix (DEM) (summary)

Annex II: Results Matrix

Annex III: Fiduciary Agreements and Requirements

ELECTRONIC LINKS

REQUIRED Link

1. Plan of Action and Investment Plan – 4 years, and Annual Work Plan (AWP) – 18 months IDBDocs35181395

2. Monitoring and evaluation plan IDBDocs35181396

3. Initial procurement plan – detailed IDBDocs35181397

OPTIONAL Link

1. Economic analysis IDBDocs37041816

2. Financial analysis IDBDocs35183413

3. Institutional/fiscal macro diagnostic assessment IDBDocs35181399

4. Problems, solutions, and outcomes matrix IDBDocs35181400

5. Operating Regulations of the PROFISCO CCLIP IDBDocs35183400

6. Institutional arrangement and execution mechanism IDBDocs35183435

7. State law authorizing the credit operation IDBDocs35183484

8. Decree creating the project coordination unit IDBDocs35186374

9. Indicators table IDBDocs35186376

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ABBREVIATIONS

AWP Annual work plan

CadSin Cadastro Nacional Sincronizado de Contribuintes [National Synchronized

Taxpayer Registry]

CCLIP Conditional credit line for investment projects

CGE/TO Controladoria Geral do Estado de Tocantins [State of Tocantins Office of

the Comptroller General]

CNPJ Cadastro Nacional de Pessoas Jurídicas [National Directory of Legal

Entities]

COGEF Comissão de Gestão Fazendária [Treasury Management Commission]

ComprasNet Web platform for electronic government procurement (Federal

Government)

CT-e Conhecimento de transporte eletrônico [Electronic bill of lading]

DARE Documento de Arrecadação de Receitas Estaduais [State tax collection

document]

ECD Escrituração contábil digital [Digital accounting record]

ECF Emisor de cupom fiscal [Tax voucher issuing device]

EFD Escrituração fiscal digital [Digital tax record]

EGEFAZ Escola de Gestão Fazendária [School of Finance Management]

ESAF Escola de Administração Fiscal [School of Tax Administration]

GDP Gross domestic product

GNRE Guia Nacional de Recolhimento de Tributos Estaduais [National state tax

deposit guide]

IBGE Instituto Brasileiro de Geografia e Estatística [Brazilian Institute of

Geography and Statistics]

ICMS Imposto sobre a circulação de mercadorias e prestação de serviços [Goods

and services sales tax]

ICT Information and communication technology

IPVA Imposto sobre a propriedade de veículos automotores [Motor vehicle

ownership tax]

IT Information technology

ITCD Imposto sobre transmissão causa mortis e doação [Inheritance and gift tax]

LRF Lei de Responsabilidade Fiscal [Fiscal Responsibility Law]

NCD Net consolidated debt

NCI Net current income

NF-e Nota Fiscal Eletrônica [Electronic tax invoice]

PAF Programa de Ajuste Fiscal [Fiscal Adjustment Program]

PCU Project Coordination Unit

PGE/TO Procuradoria Geral do Estado de Tocantins [State of Tocantins Attorney

General’s Office]

PNAFE Programa Nacional de Apoio à Modernização da Administração Fiscal

Para os Estados Brasileiros [National Fiscal Administration Project for

Brazilian States]

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PROFISCO Programa de Apoio à Gestão e Integração dos Fiscos no Brasil [Program to

Support the Management and Integration of Tax Administrations in Brazil]

RFB Receita Federal do Brasil [Federal Revenue Department of Brazil]

SEFAZ/TO Secretaria de Estado de Fazenda do Estado de Tocantins [State of

Tocantins Finance Department]

SEINFRA/TO Secretaria da Infraestrutura do Estado de Tocantins [State of Tocantins

Infrastructure Department]

SIAFEM Sistema Integrado de Administração Financeira do Estado de Tocantins

[State of Tocantins Integrated Financial Administration System]

SIAT Sistema Integrado de Administração Tributaria [Integrated Tax

Administration System]

SPED Sistema Público de Escrituração Digital [Public Digital Accounting

System]

UNDP United Nations Development Programme

PROJECT SUMMARY

BRAZIL FISCAL MODERNIZATION PROGRAM OF THE STATE OF TOCANTINS (PMF/TO)

(PROFISCO/TO – BR-L1255)

INDIVIDUAL OPERATION UNDER THE CONDITIONAL CREDIT LINE FOR INVESTMENT

PROJECTS (CCLIP) FOR THE PROGRAM TO SUPPORT THE MANAGEMENT AND

INTEGRATION OF TAX ADMINISTRATIONS IN BRAZIL (PROFISCO − BR-X1005)

Financial terms and conditions

Borrower: State of Tocantins Amortization period 20 years

Guarantor: Federative Republic of Brazil Grace period: 5 years

Executing agency: The State of Tocantins, through its

Finance Department (SEFAZ/TO), in coordination with the

State of Tocantins Infrastructure Department (SEINFRA/TO).

Inspection and

supervision fee: *

Source Amount (US$) % Disbursement period: 5 years

IDB: Ordinary Capital 40,431,000 90 Interest rate: LIBOR

Local: 4,581,000 10 Credit fee: *

Total 45,012,000 100 Currency:

US dollars from the Single

Currency Facility of the

Ordinary Capital

Project at a Glance

Objectives and description: The project’s general objective is to make fiscal management in the State of Tocantins

more efficient and transparent, in order to: (i) increase the state’s own revenue; (ii) enhance the efficiency,

effectiveness, and control of public expenditure; and (iii) provide better services to citizens. Activities will be

financed under the following components and subcomponents:

1. Integrated strategic management: (i) organizational strengthening and integration of fiscal management; and

(ii) national and international interagency cooperation.

2. Tax administration and litigation: (i) more efficient and effective tax administration; (ii) better management of

the taxpayer registry and installation of the public digital accounting system; (iii) more efficient and effective

management of tax litigation.

3. Financial and property management, and internal control of fiscal management: (i) more efficient and

effective financial and accounting management; (ii) more efficient and effective management of Tocantins public

materials and property; and (iii) improved internal control, audit, and fiscal management mechanisms.

4. Management of strategic resources: (i) strengthening of mechanisms for fiscal management transparency and

communication with society; (ii) modernization of management and enhancement of information and

communication technology services in the finance area; and (iii) strengthening of knowledge management in the

finance area.

Special contractual condition precedent to the first disbursement of the loan proceeds. The borrower will provide

evidence, to the Bank’s satisfaction, that the special tendering commission has been created in SEFAZ (paragraph

2.12c).

Special execution condition. Procurement of consulting services for the development of information systems under the

project will be contingent upon the borrower presenting, to the Bank’s satisfaction, an independent consultancy report

with a diagnostic assessment of the current Integrated Tax Administration System (SIAT) and with the respective

indication of the best options for modernizing and integrating such information systems (see paragraph 3.6).

Exceptions to Bank policies: The borrower requests authorization to use Brazilian federal legislation on procurement

and contracting, as described in paragraph 2.4.

Project qualifies as: SEQ [ ] PTI [

]

Sector [ ] Geographic [ ] Headcount [ ]

* The credit fee and inspection and supervision fee will be established periodically by the Board of Executive Directors as part of its review of the

Bank’s lending charges, in accordance with the applicable provisions of the Bank’s policy on lending rate methodology for Ordinary Capital loans. In no case will the credit fee exceed 0.75% or the inspection and supervision fee exceed, in a given six-month period, the amount that would result

from applying 1% to the loan amount divided by the number of six-month periods included in the original disbursement period.

I. DESCRIPTION AND RESULTS MONITORING

A. Background, problem addressed, rationale

1.1 This project is an operation under the Conditional Credit Line for Investment

Projects (CCLIP) BR-X1005, “Program to Support the Management and

Integration of Tax Administrations in Brazil (PROFISCO),” which was approved

by the Bank’s Board of Executive Directors on 5 November 2008 pursuant to

Resolution DE-132/08.

1.2 PROFISCO’s main objectives are to: (i) raise potential tax revenue levels;

(ii) control tax evasion, fraud, and concealment; (iii) harmonize fiscal concepts,

conduct, and procedures, and expedite the identification and suppression of

unlawful practices; (iv) form intergovernmental cooperation networks and promote

continuous sharing of tax information, databases, and good practices; (v) raise the

productivity and effectiveness of finance administration, with positive

repercussions on revenue, financial results, public borrowing, and fiscal balance;

and (vi) expand and update support systems for public expenditure administration

and the decentralization of financial management.

1.3 Socioeconomic context. Created in 1988 by the National Constituent Assembly,

Tocantins is the newest of Brazil’s 26 states. In 2010, it had a population of roughly

1.4 million, distributed across 139 municípios and 18 regions. Tocantins is located

in the eastern part of Brazil’s northern region. Its area of 277,620 km² represents

3.3% of Brazilian territory and 7.2% of the country’s northern region. The portion

of the state located in Amazonia accounts for 5.3% of its total area; half of its

territory (50.25%) consists of preservation areas, conservation units in watersheds,

containing important natural reserves.

1.4 In 2010 the State of Tocantins contributed about 0.5% of Brazil’s gross domestic

product (GDP), with growth of about 5%.1 The state economy is approximately

structured as follows: 17% agriculture, 24% manufacturing industry, and 59%

services, in which public administration accounts for 25%. Tocantins social

indicators fall below the national average.2 In 2010, 26.09% of the population of

Tocantins was considered poor,3 while the Brazilian average was 21.42%. The

state’s illiteracy rate in 2010 was 11.88% while the one for the country as a whole

was 9%.

1.5 Fiscal context. In 2010 the State of Tocantins collected own tax revenue of

R$1.6 billion, income from assets of R$252 million, and current federal transfers of

R$2.2 billion. That same year, own revenue accounted for 39.8% of total current

revenue, while the national average was 62.3%. Tax collection inefficiency was

1 Figures obtained from the Brazilian Institute of Geography and Statistics (IBGE). 2 IBGE data.

3 Percentage of people out of the total population with per capita household income below the poverty line.

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calculated at 17.4% of potential revenue.4 Revenue from the goods and services

sales tax (ICMS) grew 110% in real terms, and revenue from the Motor Vehicle

Ownership Tax (IPVA) rose 450% between 1997 and 2010, thus helping to reduce

the state’s reliance on federal transfers.

1.6 Nonfinancial income grew approximately 6% in the 2008-2010 period. The state

succeeded in keeping its nonfinancial expenses under control, with growth of

approximately 1.3%, generating a significant increase in the primary surplus, which

was sufficient to cover public debt interest payments. A slight increase in public

debt raised the ratio of net consolidated debt (NCD) to net current income (NCI) to

12%, which is still low relative to the ceiling of 200% set by a Federal Senate

decision.

1.7 The State of Tocantins has fulfilled all of the requirements of the Fiscal

Responsibility Law (LRF). As it is a new state that did not have bond debts in 1997,

it did not need to refinance its debt with the federal government, or adhere to the

Fiscal Adjustment Program (PAF) for the Brazilian States.

1.8 Institutional context. Three agencies are currently responsible for fiscal

management in the state of Tocantins: (i) the State Finance Department

(SEFAZ/TO), which is responsible for revenue collection; economic and taxation

policy-making and execution; tax administration; direction, guidance and

coordination of activities related to revenue collection, compliance and control of

taxes and other state revenue; and financial management; (ii) the State of Tocantins

Office of the Comptroller General (CGE/TO), which is responsible for audits and

internal control; and (iii) the State Attorney General’s Office (PGE/TO), which

manages tax litigation.

1.9 To fulfill its mission, SEFAZ/TO employs 608 state tax auditors and another

616 staff to carry out administrative tasks. The tax administration also has

426 temporary staff, all of whom are hired on a contract basis.

1.10 SEFAZ/TO’s institutional responsibilities are concentrated in the following areas:

(i) tax administration, which involves the functions of institutional planning and

development, planning and control of fiscal activity, control of goods in transit,

inspection of business establishments, taxation, taxpayer assistance and guidance,

and tax litigation processes; (ii) financial management, which involves the

functions of administration of contracts and agreements, state cash management

activities, and expenditure control; (iii) information management, which involves

support and operations and project and system activities; and (iv) administration

and finance, including all SEFAZ/TO administrative and financial activities.

1.11 Progress and previous work with the Bank. In the last 10 years, SEFAZ/TO

pursued a process of institutional strengthening, largely financed by the Bank under

4 For more information, see: Miranda, B. et al. Eficiência Tributária dos Estados Brasileiros Mensurada com

um Modelo de Fronteira Estocástica Geograficamente Ponderada [Tax efficiency of Brazilian states

measured with a geographically weighted stochastic frontier model]. IPEA, Vol 42, No. 4 2011.

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the National Fiscal Administration Program for Brazilian States (PNAFE) (loan

980/OC-BR), executed between 1997 and 2001. In the last decade, fiscal, taxation,

and financial management has achieved the following: (i) modernization of the

state’s taxpayer registry; (ii) creation of the School of Finance Management

(EGEFAZ); (iii) creation of the state fiscal education program; (iv) implementation

of the integrated financial administration system (SIAFEM); (v) implementation of

the electronic ICMS tax return; (vi) creation of the SEFAZ/TO Internet portal,

offering taxpayer assistance; and (vii) development of computerized systems for

control of tax revenues.

1.12 Challenges in the fiscal area for the State of Tocantins.5 Despite the good results

achieved to date with support from the PNAFE, Tocantins still faces major

challenges to promote the sustainability of its fiscal targets. The two most important

of these in relation to SEFAZ/TO are: (i) to increase its tax revenue levels; and

(ii) to strengthen its financial administration and public debt management capacity.

1.13 These challenges stem from the following constraints on state fiscal management:

(i) the tax collection potential is not tapped, and there is little information to support

tax administration efforts; (ii) difficulties in cross-referencing economic and fiscal

data, to support fiscal management; (iii) deficient services to taxpayers and the

internal public; (iv) shortcomings in the administrative collection of tax claims;

(v) failure to implement the National Synchronized Taxpayer Registry (CadSin);

(vi) lack of computerized tools to generate economic and tax information;

(vii) inefficient and ineffective generation of data and information for decision-

making (budget, financial, assets) and accountability purposes; (viii) deficient

public debt management system; (ix) poor material and asset administration

performance; (x) deficient fiscal education program management; and (xi) lack of

computerized tax and financial administration systems, mainly as a result of

ineffective response to demand for information and communication technology

(ICT).

1.14 Country strategy and GCI-9. The Government of Brazil and the Bank have

recognized the importance of strengthening subnational fiscal management to the

success of social policies and economic development. Under these terms, one of the

six sectors given priority in the 2012-2014 country strategy with Brazil (document

GN-2662-1) is to improve the institutional capacity of public entities, with efforts in

the areas of public management and fiscal management. The main sector objectives

of the strategy in terms of fiscal management are: (i) to reduce institutional

disparities and inequalities between Brazilian tax administrations and promote

cooperation and integration among tax administrations at the three government

levels; (ii) to promote sustainable fiscal balance subnationally; and (iii) to improve

tax education and citizenship programs, as well as transparency initiatives and

dialogue with society. Moreover, this operation is aligned with the Bank’s

institutional priorities (Institutions for growth and welfare: municipal and other

5 See problems, solutions, and outcomes matrix at electronic link Matriz de Problemas, Soluciones y Resultados.

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subnational governments supported) established in the GCI-9 document (AB-2764,

section 3.16(c)).

B. Objective, components, and cost

1.15 The project’s general objective is to make fiscal management in the state of

Tocantins more efficient and transparent, in order to: (i) increase the state’s

internally generated revenue; (ii) enhance the efficiency, effectiveness, and control

of public expenditure; and (iii) provide better services to citizens. The project has

four components and 12 subcomponents:

1.16 Component 1 – Integrated strategic management (US$5,119,000). This

component seeks to improve methods and tools to support strategic management

and generate information for the decision-making process. It has the following

subcomponents and respective outputs:

a. Organizational strengthening and integration of management in the

finance area. This subcomponent will finance the redesign of the SEFAZ/TO

strategic management model.6

b. National and international interagency cooperation. This subcomponent

will finance attendance by SEFAZ/TO staff at institutional forums for the

modernization of state finance departments.

1.17 Component 2 - Tax administration and litigation (US$17,343,000). This

component seeks to enhance the performance of tax administration and increase

revenue collection. It has the following subcomponents and respective outputs:

a. More efficient and effective tax administration. This subcomponent will

finance: (i) implementation of the new computerized management model

targeting revenue planning and management; (ii) redesign of the ICMS

inspection model (goods in transit and business establishments) and

measurement of inspector productivity; (iii) redesign of the revenue collection

model; (iv) improvement of the economic and fiscal information model; (v) a

new methodology (procedures, technology, and training) for assisting the

internal and external public in the interpretation and application of tax

legislation; (vi) redesign of the model for recovering tax claims and

administrative collection; and (vii) redesign of the inspection model for other

revenue (IPVA, inheritance and gift tax (ITCD), and rates).

b. Better management of the taxpayer registry and implementation of the

Public Digital Accounting System (SPED). This subcomponent will finance

implementation of: (i) CadSin or any system replacing it, as communicated to

the Bank by the borrower and the guarantor; and (ii) the following systems:

6 In general, implementing the model entails: (i) making a diagnostic assessment of the current situation;

(ii) proposing alternative processes to the business model being addressed; (iii) developing a computerized

system to support the management of business processes; and (iv) effectively implementing the model,

including the necessary infrastructure.

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electronic tax invoice (NF-e), digital accounting record (ECD), digital tax

record (EFD), electronic bill of lading (CT-e), and the fraud-proof tax voucher

generator (ECF).

c. More efficient and effective management of tax litigation. This

subcomponent will finance improvements to the model for controlling the

management of tax litigation processes (collection of tax claims in the

administrative domain and in judicial processes).

1.18 Component 3 - Financial and property management and internal control of

fiscal management (US$2,534,000). This component seeks to improve the

performance of financial administration and increase control over public

expenditures. It has the following subcomponents and respective outputs:

a. More efficient and effective financial and accounting administration. This

subcomponent will finance the development and implementation of a new

financial and accounting management model adapted to cost accounting.

b. More efficient and effective administration of Tocantins public materials

and property. This subcomponent will finance development and introduction

of the new materials and property management model of SEFAZ.

c. Improved mechanisms for audit and internal control of fiscal

management. This subcomponent will finance implementation of: (i) a

computerized internal control and audit management system; and (ii) a new

internal disciplinary control model (corregedoria, an organ of the Department

of Finance).

1.19 Component 4 - Strategic resource management (US$18,419,000). The aim of

this component is to improve operational and administrative support methods,

instruments, and systems that enhance institutional performance and interaction

with society. It will include the following subcomponents and respective outputs:

a. Enhancement of mechanisms for transparency in fiscal management and

communication with society. This subcomponent will finance:

(i) improvement of the model for providing citizen/taxpayer services;

(ii) expansion and updating of the fiscal education program; and

(iii) implementation of a finance ombudsperson model.

b. Modernization of management and upgrading of information and

communication technology services in the finance area. This

subcomponent will finance: (i) introduction of a new finance management

model developed on the basis of new business models; and (ii) the redesign

and introduction of the ICT management model.

c. Strengthening of knowledge management in the finance area. This

subcomponent will finance the development and implementation of: (i) a new

competencies-based personnel management model; (ii) a leadership

development program; and (iii) strengthening of EGEFAZ.

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1.20 The borrower will procure the following goods and services for the above-

mentioned components and subcomponents (paragraphs 1.16 and 1.19): (i) training

(contracting of courses, seminars, or other forms of training, as well as national and

international technical visits); (ii) consulting (individual consultants or consulting

firms, either national or international, to support or conduct project activities,

including computerized systems); (iii) computer hardware and ICT systems

(procurement and installation of hardware, computer networks, basic software, and

applications); (iv) equipment, materials, and operational support services

(procurement and installation of hardware, computer networks, basic software, and

applications); and (v) physical premises (construction, remodeling, and physical

improvement of operational and citizen/taxpayer service facilities).

Table 1.1: Overall budget by source (in U.S. dollars)

Categories IDB Local Total %

1. Project administration 1,262,000 109,000 1,371,000 30.05

1.1 Project management 848,000 109,000 957,000

1.2 Monitoring, evaluation, and audit 414,000 -- 414,000

2. Direct costs 39,016,000 4,399,000 43,415,000 96.45

2.1 Integration of fiscal management 2,425,000 2,694,000 5,119,000

2.2 Tax administration and litigation 15,800,000 1,543,000 17,343,000

2.3 Financial and property management, and

internal control of fiscal management 2,534,000 -- 2,534,000

2.4 Strategic resources management 18,257,000 162,000 18,419,000

3. Contingencies 153,000 73,000 226,000 00.50

Total 40,431,000 4,581,000 45,012,000

Percentage 90% 10% 100% 100%

Note: Interest and financial charges will be paid by the borrower using own resources, and are not included

in the project.

1.21 Overall budget. The project’s total cost7 is estimated at US$45,012,000 equivalent,

of which the Bank will finance up to US$40,431,000 equivalent, charged against

the Single Currency Facility of the Bank’s Ordinary Capital.8 The State of

7 The required electronic link “Project Plan of Action and Investment Plan” (Plan de acción y de inversiones

(PAI) del proyecto) provides detailed estimates of the costs of all project activities, which jointly make up the

total cost. 8 The Flexible Financing Facility for Ordinary Capital sovereign-guaranteed loans (document FN-655-1)

became effective on 1 January 2012. Pursuant to paragraph 3.2 of document FN-655-1, individual loan

operations would continue to be processed and approved under the Single Currency Facility (SCF/LCF) up

to that date. This has been interpreted to mean that any operation with a draft loan proposal that had already

been through the Operations Policy Committee (OPC) prior to 1 January 2012 (this one was approved by

OPC on 14 July 2011), had been processed in the context of the Single Currency Facility.

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Tocantins will provide counterpart funding of US$4,581,000. Project financing is

shown in Table 1.2

1.22 Disbursement schedule. Disbursements will be made over a five-year period from

the date of signature of the loan contract, in accordance with the disbursement

schedule in Table 1.2 below.

1.23 Financial analysis. Given the small scale of the operation, the project team made a

comparative analysis of the incremental financial costs and benefits arising from

implementation of the three outputs of greatest impact for the project. The analysis

considered the following: (i) the new ICMS inspection model (goods in transit and

business establishments) and measurement of auditor productivity; (ii) the new tax

claim recovery and administrative collection model; and (iii) redesign of the

inspection model for other revenue (IPVA, ITCD, and rates). The calculation

parameters used were as follows: (i) a 10-year horizon; (ii) 12.5% annual discount

rate; and (iii) average annual interest rate of 5.6%.

1.24 According to the project’s financial analysis document (see optional electronic

link 5) the project is estimated to produce a cumulative net financial benefit of

US$8.8 million in present value terms in the sixth year of execution (2017), and

US$32.3 million by the end of the tenth year. The internal rate of return for a

10-year period has been calculated at 35%. The project is therefore financially

justified by the estimated benefits of just three of the outputs to be financed by the

operation.

C. Key results matrix indicators10

1.25 The most important outcomes expected by the end of project execution are as

follows: (i) increase in tax revenue; (ii) increase in IPVA revenue adjusted for

expansion of the vehicle fleet; (iii) increase in registration as adjudicated tax debt of

ICMS values declared and not collected; (iv) increase in the recovery of recorded

tax claims; (v) reduction in the average amount of processing time in tax litigation

cases; (vi) increase in the system-based control of public debt contracts;

(vii) reduction in the average amount of time for audits and inspections; and

(viii) improvement in the quality of customer service. The expected outputs are:

9 The amounts shown in this table include direct costs and project management costs only. 10 The project's results matrix (see Annex II) shows output and outcome indicators for all of its actions, which

will be monitored by the Project Coordination Unit (PCU). For Bank purposes, only a representative set of

project indicators will be considered.

Table 1.2: Disbursement schedule (in U.S. dollars)9

Source Year 1 Year 2 Year 3 Year 4 Year 5 TOTAL

IDB 4,043,100 10,107,750 12,129,300 8,086,200 6,064,650 40,431,000

LOCAL 458,100 1,145,250 1,374,300 916,200 687,150 4,581,000

TOTAL 4,501,200 11,253,000 13,503,600 9,002,400 6,751,800 45,012,000

% 10% 25% 30% 20% 15% 100%

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(i) a new computerized tax management model with capacity to issue all

management reports automatically; (ii) a new ICMS inspection model with

electronic monitoring of 100% of large firms, taxpayers with payment agreements,

and special tax regimes or substitutes; (iii) generation of the collection notice and

automatic registration as adjudicated tax debt (overdue) of 100% of declared but

unpaid ICMS within 48 hours; (iv) introduction of the new model for recovering

tax claims allowing for online submission of 70% of requests to pay in installments,

rather than in person as is the case today; (v) a new management system for the

IPVA, which generates a report indicating cases of failure to pay the tax;

(vi) integration of the SPED and NF-e databases, making it possible to generate at

least one management report based on cross-referenced data from the different

sources; (vii) a guarantee that 100% of taxpayers required to use the NF-e and CT-e

actually do so; (viii) introduction of a new financial accounting management system

allowing for the 21 types of reports specified in the LRF to be issued automatically;

(ix) 100% of public debt contracts monitored by the system; and (x) a new taxpayer

assistance model with at least 10 new services on line.

II. FINANCING STRUCTURE AND MAIN RISKS

A. Financing, procurement, and contractual conditions

2.1 Financial planning and disbursements. To ensure efficient execution, the Bank

will disburse the loan proceeds in line with the project’s real cash flow needs. The

borrower will periodically update its financial plan, estimating the funding needed

to implement the project, in accordance with its budget, work plan, and

commitments assumed by the borrower under the loan contract.

2.2 Financial execution. The project will use the state treasury system. The

expenditure will be subject to the budgetary and financial execution process, with

data related to its formalization being recorded in the SIAFEM pursuant to the legal

provisions applicable at each of its stages: commitment, liquidation, authorization,

and payment. The State of Tocantins treasury system will use the unified treasury

account system to manage its financial obligations.

2.3 Procurement. The procurement of goods and consulting and nonconsulting

services, financed in whole or in part with the loan proceeds, will be conducted in

accordance with the policies for the procurement of works and goods financed by

the Bank (document GN-2349-9), and the policies for the selection and contracting

of consulting services financed by the Bank (document GN-2350-9), and pursuant

to the loan contract.

2.4 National legislation. As an exception to Bank policies and as with all the other

PROFISCO operations, it is requested that the borrower be allowed to use

Brazilian federal legislation for procurement processes in the case of works for

amounts under US$25 million per contract, and in the case of goods and services

for amounts under US$5 million per contract, provided that the requirements of

section III of the Bank’s procurement policies are satisfied, particularly as they

- 9 -

relate to the origin of goods, nationality of suppliers, changes in purchase orders,

prohibition of price bands, and publication in a major national newspaper in the

case of works for amounts between US$500,000 and US$25 million, and goods for

amounts between US$100,000 and US$5 million. The borrower will also indicate

in the corresponding procurement plan whether it has opted to apply national

legislation.

2.5 Direct contracting. The borrower may directly contract the School of Tax

Administration (ESAF) to provide training to state government personnel. Before

funding is transferred to that entity, however, the borrower will submit an

appropriate legal instrument to the Bank in which ESAF undertakes to: (i) use the

procurement and contracting policies set out in the respective loan contract between

the borrower and the Bank, if it procures goods or subcontracts consulting services

to provide the services in question; and (ii) make documentation supporting such

procurement and contracting processes available to the Bank and the project’s

auditors.

2.6 Direct contracting of this institution is justified by the specific nature of the services

it provides (training and knowledge management), which will contribute to project

sustainability, the sharing of knowledge and experience, and, in particular, the

continued availability of such products and services once the project has ended. A

program on the scale of PROFISCO requires an institutional mechanism that

integrates and harmonizes the knowledge generated in its activities, for the

coordinated development of skills and competencies.

2.7 Review by the Bank. All contracts arising from the project’s first three selection

processes for the contracting of services or the execution of works will be subject to

prior review (ex ante) by the Bank, regardless of the amount or whether Bank

procurement policies or national legislation are applied. Thereafter, all direct

contracting and procurements in amounts above US$250,000 for consulting firms,

and US$200,000 for individual consultants, will be subject to the same method of

review.

2.8 The Bank may recognize against the local counterpart expenditures of up to

US$200,000 incurred by the borrower in the contracting of consulting services and

the procurement of goods for the project starting on 1 July 2011 and up to the date

of approval of the operation by the Board of Executive Directors.

2.9 Specialized agency. There is currently no need for a specialized agency to provide

procurement support. Nonetheless, should the borrower require this type of support

in the future, it may use its own resources to directly contract a specialized agency

to provide technical support services, exclusively for goods procurement and the

selection of consulting firms and individual consultants to conduct activities related

to project execution, so long as the following conditions are met: (i) the contract to

be signed between the borrower and the specialized agency in question will be

subject to the Bank’s prior approval; (ii) the specialized agency will assume the

commitment to comply with the Bank’s procurement policies and procedures;

- 10 -

(iii) consulting services will not be contracted for routine project execution

activities; and (iv) in the event that the specialized agency is the United Nations

Development Programme (UNDP), the contract will comply with the provisions of

the letter of agreement signed between the Bank and UNDP on 20 June 2003.

2.10 Information exchange and technical cooperation. The borrower may participate

in national and international fiscal integration and cooperation activities,

particularly in the areas of technical solution sharing, information exchange,

knowledge transfer, formation of thematic networks, and interagency cooperation.

B. Environmental and social safeguard risks

2.11 On environmental issues, the project has been classified as a category “C” operation

under the criteria of the Bank’s Environmental Safeguard Toolkit. This is consistent

with the project team’s assessment, as the operation involves the institutional

modernization of tax administration. It is therefore not considered necessary to

prepare an environmental strategy.

C. Fiduciary risks

2.12 A specialized team from the Bank’s Country Office in Brazil applied project risk

management methodology to assess the project’s fiduciary risk. The main fiduciary

risks are:

a. Lack of communication between the business and information technology

areas. To mitigate this risk, it was decided to set up a commission with high

ranking staff from the functional and information technology areas, directed

and coordinated by the PCU, with responsibility for deciding on the technical

specifications and evaluations of activities and contracting.

b. Possibility of changes in SEFAZ/TO or in the project’s priorities as a result of

changes in the state government following the 2010 state elections.11 To

mitigate this risk, the PCU is staffed by permanent state government staff,

intensive work will be carried out over the next few months to disseminate the

project inside SEFAZ/TO, and the Bank will contact members of the new

administration as soon as the borrower provides their names to the Bank.

c. Insufficient experience of the executing agency in the use of Bank

procurement policies. This risk will be mitigated through training of the

SEFAZ/TO team in those policies, adoption of standardized models, and the

use of Brazilian national legislation for the procurement of works, goods, and

services as described above (paragraphs 2.3 and 2.4). To mitigate this risk, a

condition precedent to the first disbursement of the loan proceeds will be

established whereby the borrower will present, to the Bank’s satisfaction,

evidence that the special tendering commission has been set up in

SEFAZ.

11

This risk was identified in 2010 and the new state government was slow to recognize the importance of this

operation, causing the delay in the negotiation (25 April 2012).

- 11 -

d. Lack of SEFAZ/TO capacity to process inputs and information from the

consulting services on redesign. To mitigate this risk, training will be

provided for SEFAZ/TO managers on project management.

III. IMPLEMENTATION AND MANAGEMENT PLAN

A. Summary of institutional arrangements for implementation

3.1 The borrower in this operation will be the State of Tocantins, with the Federative

Republic of Brazil as guarantor of the financial obligations under the loan. The

project’s executing agency will be the State of Tocantins, acting through

SEFAZ/TO, in coordination with the State Infrastructure Department

(SEINFRA/TO).

3.2 The PCU will be staffed by permanent employees of the Tocantins state

government and the basic structure will be comprised of: (i) a general coordinator;

(ii) a technical deputy coordinator; (iii) an administrative/financial deputy

coordinator; and (iv) a technical assistant for monitoring and evaluation. The

managers of the areas in which the project will be executed will be responsible for

the outputs of the components and subcomponents.

3.3 The PCU will: (i) submit disbursement requests to the Bank with the relevant

supporting documentation; (ii) supervise bidding and procurement processes for

project goods, works, and services, in accordance with the loan contract, the

procurement plan, and applicable Bank policies; (iii) maintain an effective financial

accounting system for the project, in accordance with applicable Bank policies;

(iv) deliver program status reports; (v) deliver work plans and update the

procurement plan; (vi) retain the respective invoices, contracts, and payment orders

and provide them to the Bank and program auditors upon request; and (vii) ensure

that the works and goods purchased with project resources are maintained in

accordance with generally applicable technical standards and present reports on

such maintenance for the five years following conclusion of the first works and for

the three years following the first procurement of goods under the project. The PCU

will have a system for monitoring and following up on project activities.

3.4 SEINFRA/TO will be responsible for contracting project works, while SEFAZ/TO

will make payments on the contracts through the PCU. All other procurement and

contracting processes envisaged in the project will be undertaken by the state’s

special tendering commission referred to in paragraph 2.12c of this document.

3.5 If goods and services acquired using project funding are to be transferred to other

state agencies, such as the PGE/TO the beneficiary agencies will make a prior

commitment to adequately operate and maintain the goods in question.

3.6 Considering the scale of investments to redesign or develop new information

technology systems, it was agreed, as a special execution condition, that contracts

for consulting services to develop the information systems in the context of the

project will be subject to the borrower presenting, to the Bank’s satisfaction, an

- 12 -

independent consulting report with a diagnostic assessment of the current integrated

tax administration system (SIAT) and the respective indication of better alternatives

for the modernization and integration of such information systems.

3.7 The borrower may participate in national and international fiscal integration and

cooperation activities, particularly in the areas of sharing technical solutions,

information exchange, knowledge transfer, formation of thematic networks, and

interagency cooperation.

3.8 PROFISCO program Operating Regulations. The project will be governed by

Operating Regulations previously approved by the Bank as an integral part of the

PROFISCO CCLIP. The Operating Regulations include the eligibility criteria for

the borrower, the project, and the outputs eligible for financing. The borrower has

put into effect the program Operating Regulations by means of Decree 4,398,

published in the Official Gazette of the State on 13 September 2011.

B. Summary of arrangements to monitor results

3.9 Project monitoring will be based on the programming of activities and the physical

and financial itemization of outputs in the annual work plan (AWP) and in the

procurement plan.

C. Evaluation

3.10 The borrower will deliver semiannual status reports to the Bank, with copies to the

Executive Secretariat of the Ministry of Finance of the Federative Republic of

Brazil. These reports will provide information on the current status of

implementation of national integration activities, regardless of the source of the

resources that financed them, namely the National Synchronized Taxpayer Registry

(CadSin), or any system that replaces it, and Public Digital Accounting System

(SPED), comprised of the NF-e, the ECD, and the EFD.

3.11 AWP for the first 18 months. The borrower has submitted and the Bank has

validated the AWP for the first 18 months of project execution, counted from the

date the loan contract is signed.

3.12 Procurement plan for the first 18 months. The borrower has also presented and

the Bank has validated the procurement plan for the first 18 months of project

execution, counted from the same date mentioned in the preceding paragraph.

3.13 Audited financial statements. Within 120 days of the end of each fiscal year, the

borrower will send the Bank annual project financial statements, audited by an

independent firm of certified public accountants accepted by the Bank. The last of

these reports will be presented to the Bank within 120 days following the date

stipulated in the loan contract for the last disbursement of the loan proceeds.

Annex I - BR-L1255Page 1 of 1

I. Strategic Alignment

1. IDB Strategic Development Objectives

     Lending Program

     Regional Development Goals

     Bank Output Contribution (as defined in Results Framework of IDB‐9)

2. Country Strategy Development Objectives

     Country Strategy Results Matrix GN‐2662‐1

     Country Program Results Matrix GN‐2661‐4

      Relevance of this project to country development challenges (If not aligned to country 

strategy or country program)

II. Development Outcomes - Evaluability Highly Evaluable Weight Maximum Score

7.4 10

3. Evidence‐based Assessment & Solution 5.8 25% 10

4. Ex ante Economic Analysis 10.0 25% 10

5. Monitoring and Evaluation  6.4 25% 10

6. Risks & Mitigation Monitoring Matrix 7.5 25% 10

Overall risks rate = magnitude of risks*likelihood

Environmental & social risk classificationIII. IDB´s Role - Additionality

     The project relies on the use of country systems (VPC/PDP criteria) Yes

     The project uses another country system different from the ones above for implementing 

the programThe IDB’s involvement promotes improvements of the intended beneficiaries and/or public 

sector entity in the following dimensions:Gender Equality

Labor

Environment

     Additional (to project preparation) technical assistance was provided to the public sector 

entity prior to approval to increase the likelihood of success of the project

     The ex‐post impact evaluation of the project will produce evidence to close knowledge 

gaps in the sector that were identified in the project document and/or in the evaluation 

plan.

The objective of the project is to improve efficiency and transparency in fiscal management of the State of Tocantins, in particular: (i) increase the state's own revenues, (ii) increase the efficiency and effectiveness and improve the control of public expenditure; and (iii) provide better services to citizens.

The problem the project seeks to address, and the factors contributing to it are well-defined, though not in all cases shows the magnitude of them. Lessons learned from similar programs in Brazil (PNAFE in particular) and other PROFISCOS design are included. The vertical logic of the project is clear, the indicators for monitoring products and expected results are SMART, but some of them require the definition of baselines. The project has an economic analysis with sensitivity analysis. It also provides a monitoring and evaluation plan that proposes an ex post Cost-Benefit Analysis methodology.

The risk matrix identifies all the risks and appropriate mitigation measures, but it has no indicators to track them.

Low

B.13

Financial Management: Budget, Treasury, Accounting and Reporting.

Procurement: National Public Bidding.

Institutions for growth and social welfare: Ratio of actual to potential tax revenues.

Institutions for growth and social welfare: Municipal and other sub‐national governments supported.

Aligned

(i) Reduce institutional disparities and inequalities between Brazilian tax 

administrations and promote cooperation and integration of finance administrations in 

three levels of government, (ii) Promote sustainable fiscal balance at the subnational 

level, and (iii)  Improve tax education and citizenship programs and initiatives on 

transparency and dialogue with society.

The intervention is included in the 2012 Country Program Document.

Development Effectiveness Matrix

Summary

Aligned

Lending to support regional cooperation and integration.

Annex II

Page 1 of 6

RESULTS MATRIX

Project objective

The project’s general objective is to make fiscal management in the State of Tocantins more efficient and transparent, in order to:

(i) increase the state’s own revenue; (ii) enhance the efficiency, effectiveness, and control of public expenditure; and (iii) provide better

services to citizens.

Impact indicator Unit of measures Baseline (2009) Target (end of year 5) Source / Means of verification

Increase in tax collection. R$ 7.1 2015 – 7.5

General Revenue Report and state GDP

published by SEPLAN

Outcome indicators Unit of measure Baseline Target (end of year 5) Source / Means of verification

R1. Increase in IPVA revenue

adjusted for expansion of the

vehicle fleet R$ R$ 61.7 million R$ 70.0 million

General report on IPVA revenue

R2. Increase in registration as

adjudicated tax debt of ICMS

values declared and not collected % 50 100

Report on ICMS values declared and not

collected.

R3. Increase in recovery of

recorded tax claims. % 1.16% 2.5% General revenue report.

R4. Reduction in the average

processing time in tax litigation

cases.

days

600 300

Performance report on processing stages

for tax litigation cases.

R5. Increase in the system-based

control of public debt contracts. % 0 100 Report on debt control and state’s

balance sheet.

R6. Reduction in the average

amount of time for audits and

inspections. days 10 5

Information on execution of audits and

inspections in the internal control sector.

R7. Improvement in the quality

of customer service % 55 80 PCU report with the findings of a

taxpayer satisfaction survey.

Annex II

Page 2 of 6

Output Indicators Unit of

Measure

Baseline

(2009)

Targets

Means of verification Year 1 Year 2

Year

3 Year

4 Year 5

Target

(end of

year 5)

COMPONENT 1 – INTEGRATED STRATEGIC MANAGEMENT

Subcomponent 1.1. Organizational strengthening and integration of fiscal management

P1.1 SEFAZ/TO strategic

management model

implemented and supported

by the computerized

integrated system.

Number of SEFAZ units

producing strategic

management reports. SEFAZ units 0 0 0 0 10 10 20

Strategic management

report of tax

administration areas.

Subcomponent 1.2. National and international interagency cooperation

P2.1 National interagency

cooperation program

implemented.

Number of SEFAZ

representatives

participating in meetings

of COGEF, CONFAZ,

COTEPE, ENCAT,

GDFAZ.

Participants 2 4 4 4 4 4 20

Report on participation

in forums and working

groups.

COMPONENT 2 - TAX ADMINISTRATION AND LITIGATION

Subcomponent 2.1. More efficient and effective tax administration

P3.1 Implementation of the

new computerized

management model

targeting revenue planning

and management.

Number of SEFAZ units

SEFAZ units 0 0 0 0 10 10 20

General report

P3.2 Implementation and

systematization of new

ICMS inspection model

(goods in transit and

business establishments)

and measurement of

inspector productivity.

Number of large

taxpayers monitored

automatically based on

the agreed terms of the

special tax regimes and

substitutes.

Large

taxpayers 0 0 0 0 25 25 50

Management report

from the special regimes

division.

Annex II

Page 3 of 6

P3.3 Implementation of the

new computerized revenue

model

Number of taxpayers

included in the

management report on

reconciliation of data

from bank accounts of all

taxpayers issued by the

system

Taxpayers

included in

the report

0 0 0 15,000 20,000 35,000

Bank account

management report

P3.4 Implementation of new

computerized economic and

fiscal information model.

Number of management

reports (i) processing and

cross-referencing of data

and (ii) NFe and SPED

issued by the system to

backstop strategic tax

revenue decisions.

Management

reports 0 0 0 0 1 1 2

Report on economic and

fiscal information from

the integrated tax

administration system.

P3.5 Implementation of

system (procedures,

technology, and training)

for assisting the internal and

external public in the

interpretation and

application of tax

legislation.

Number of taxes

available in the customer

service system.

Taxes

available 0 0 1 1 1 3

WEB SEFAZ

P3.6 Systematization and

implementation of new tax

claim recovery and

administrative collection

model, including special

collection modalities.

Number of tax claim

subdivisions via web

requested by large

taxpayers.

Subdivisions

requested by

large

taxpayers

0 0 0 0 25 25 50

Report on subdivision

requests from the Office

of Tax Claim

Management.

P3.7 Redesign and

implementation of the

inspection model for other

revenue (IPVA, inheritance

and gift tax (ITCD), and

rates).

System-generated

management report

indicating nonpayment. Taxes covered 1 1 1 3

Management report on

tax delinquents from

ICMS, IPVA and ITCM

systems.

Annex II

Page 4 of 6

Subcomponent 2.2. Better management of the taxpayer registry and implementation of the Public Digital Accounting System (SPED)

P4.1 Implementation of the

National Synchronized

Taxpayer Registry

Levels of government

with synchronized data. Levels of

government

synchronized

0 0 0 1 1 2

Integrated Tax

Administration System

report.

P4.2 Implementation of

digital tax record (EFD),

digital accounting record

(ECD), NF-e, CTe, fraud-

proof tax voucher (ECF),

and additional information.

System-generated

management report

covering different

sources of electronic

information on taxpayers.

Government

databases 0 0 0 2 2 4

Integrated Tax

Administration System

report.

Subcomponent 2.3. More efficient and effective management of tax litigation

P5.1 Systematization and

implementation of the

model for controlling the

management of tax

litigation processes.

Monitoring report on

phases of tax litigation

processes Phases 0 0 0 2 2 4

Management report on

phases involved in

processing tax litigation

cases.

COMPONENT 3 - FINANCIAL AND PROPERTY MANAGEMENT AND INTERNAL CONTROL OF FISCAL MANAGEMENT

Subcomponent 3.1. More efficient and effective financial administration

P6.1 Redesign of the

financial and accounting

administration model and

alignment with the cost

accounting system

Number of SEFAZ units

producing strategic

management rejports for

monitoring and

evaluation.

Reports 0 0 0 0 10 11 21

LRF reports

Subcomponent 3.2. More efficient and effective administration of materials and property in the finance area

P7.1 Implementation of new

computerized materials and

property management

model.

Management and

monitoring reports issued

by the system, with fuel

consumption as one

benchmark.

Reports 0 0 0 2 2 4

Materials and property

management report.

Annex II

Page 5 of 6

Subcomponent 3.3. Improved mechanisms for audit and internal control of fiscal management

P8.1 Implementation of

computerized internal

control and audit

management system.

System-issued process

report. Functions

included 0 0 0 1 1 0 2

Analyzed process report

for the internal control

sector.

P8.2 Implementation of new

internal disciplinary control

model (corregedoria, an

organ of the Department of

Finance)

Number of preventive

correction and inspection

actions. Actions 0 0 0 0 20 30 50

Management report on

actions related to

internal control

COMPONENT 4 - STRATEGIC RESOURCE MANAGEMENT

Subcomponent 4.1. Enhancement of mechanisms for transparency in fiscal management and communication with society

P9.1 New model for

providing citizen/taxpayer

services

Number of new on-line

services, including

electronic tax invoice,

offered to taxpayers.

Services 0 0 0 0 5 5 10

WEB SEFAZ

P9.2 Expansion and

updating of the fiscal

education program.

Number of updated

teacher manuals. Manuals 0 0 0 0 2 2

SEFAZ Fiscal education

teacher manuals.

P9.3 Implementation of a

finance ombudsperson

model

Number of

ombudsperson reports

issued by the system with

information broken down

by area.

Institutional

areas 0 0 0 0 2 2

Ombudsperson

management report.

Subcomponent 4.2. Modernization of management and upgrading of information and communication technology services in the finance area

P10.1 Development of new

finance management system

based on new business

models.

Number of taxpayer

profile reports generated

from a single query

(CNPJ or state registry). Units 0 0 0 10 10 20

Report on taxpayer

profile generated from a

single query (CNPJ or

state registry)

P10.2 Redesign and

introduction of the ICT

management model

Number of IT

management reports

indicating that 80% of

requests were addressed

within the period agreed

upon with clients

1 1 2

Information technology

coordination

management report.

Annex II

Page 6 of 6

Subcomponent 4.3. Strengthening of human resources management in the finance area

P11.1 Development and

implementation of new

competencies-based

personnel management

model.

Number of SEFAZ units

with identified

institutional

competencies profiles. 20 20 40

Management report on

personnel management

coordination.

P11.2 Implementation of

leadership and technical

staff development program

Number of training

events for leaders and

technical staff.

Categories

evaluated 1 1 2

Management report on

personnel management

coordination.

P11.3 Strengthening of

School of Finance

Management (EGEFAZ)

Number of students

participating in classes

offered on the distance-

learning platform.

Participants 0 0 0 1,000 1,000 2,000

EGEFAZ management

report.

Annex III

Page 1 of 6

FIDUCIARY AGREEMENTS AND REQUIREMENTS

Country: Brazil

Project number: BR-L1255

Name: Fiscal Modernization Program of the State of Tocantins

(PROFISCO/TO)

Executing agency: Tocantins State Finance Department

Prepared by: Fernando Glasman and Carlos Lago Bouza

I. EXECUTIVE SUMMARY

1.1 The fiduciary assessment was based on the institutional capacity analysis performed

on the executing agency, the risk analysis workshop held with participating entities,

and several meetings the project team held with key Finance Department staff.

Account has also has been taken of the Bank’s experience working with the

PROFISCO umbrella project, since several projects with similar objectives and

processes have now been designed and negotiated.

1.2 Bearing in mind the assessment performed on the executing unit, fiduciary

agreements for both procurement and financial management have been prepared

and will be applied for project implementation.

II. FIDUCIARY CONTEXT OF THE COUNTRY

2.1 Brazil has robust country fiduciary systems allowing for sound management of

administrative, financial, control, and procurement processes, adhering to principles

of transparency, economy, and efficiency. The Bank recognizes that using country

systems generally involves a number of initial risks, until the systems in question

are fully adjusted to international standards. The Bank is also continuing to support

the performance of those systems so they improve and attain higher levels of

efficiency and economy to meet the country’s needs.

III. FIDUCIARY CONTEXT OF THE EXECUTING AGENCY

3.1 The executing unit has been set up with permanent staff within the State Finance

Department and is comprised of a general coordinator for the project and four direct

employees, together with support from other Department units. The executing

agency’s fiduciary systems have the oversight elements needed for effective project

management. As this is a state-level project, it is subject to the national laws that

govern public administration, including the Fiscal Responsibility Law. The Finance

Department uses an accounting and financial record-keeping system that makes it

Annex III

Page 2 of 6

possible to identify project transactions by source of financing and investment

category. Internal control of the Finance Department is maintained through periodic

reviews by the Office of the Comptroller General of the State of Tocantins.

Although neither the financial management staff nor the General Coordinator have

experience in managing and implementing Bank projects, they have collaborated

with the World Bank on another project.

3.2 Staff assigned to procurement processes form part of the special procurement

commission set up within the Finance Department. This team of three has some

experience in earlier projects financed by the IDB and by the World Bank. In

addition, the startup workshop will provide training on the policies and procedures

applicable to Bank-financed processes in conjunction with the State Inspector

General’s Office and the State Audit Office (Tribunal de Contas).

IV. ASSESSMENT OF FIDUCIARY RISK AND MITIGATION ACTIONS

4.1 The risk assessment exercise undertaken during the design stage identified high

risks in the evaluation and redesign of processes, and also in the technical

specifications of the computer system. No risks were identified on fiduciary matters

(link to Table 1: Fiduciary risks).

V. AGREEMENTS AND REQUIREMENTS FOR PROCUREMENT EXECUTION

5.1 The fiduciary agreements and requirements in procurement specify the provisions

applicable to all procurement processes envisaged for the project.

A. Execution of procurement processes

5.2 The project will be implemented through an executing unit set up within the

Finance Department, which will be responsible for administrative tasks, as well as

for monitoring and evaluation, legal matters, communications, and computer

support. It will also have a technical-operational coordination unit, which will

undertake operational and liaison activities with the different units involved with

the program.

5.3 The administrative actions required to implement procurement processes, such as

preparing the procurement plan, bidding documents, or requests for proposals,

publication of notices, communications with bidders, and so forth, will be

undertaken by the executing unit in collaboration with the Tendering Commission.

Technical specifications/terms of reference, technical evaluations of processes, and

technical supervision of contract performance will be done by the technical units of

the Finance Department.

a. Procurement of works, goods, and nonconsulting services: Contracts for

works, goods, and nonconsulting services1 generated under the project and

subject to international competitive bidding (ICB) will be implemented using

1 The Bank’s procurement policies treat nonconsulting services similarly to goods.

Annex III

Page 3 of 6

the Bank’s standard bidding documents (SBDs). Works tenders requiring

national competitive bidding (NCB) will be implemented using national

bidding documents agreed upon with the Bank; tenders for goods and

nonconsulting services will use the COMPRASNET online procurement

system. Procurements for works, goods, and nonconsulting services will abide

by the Policies for the Procurement of Goods and Works Financed by the

Inter-American Development Bank (GN- 2349-9).

b. Selection and contracting of consultants: Contracts for consulting services

generated under the project will be implemented using the Standard Request

for Proposals (SRPs) issued by the Bank. Consultants will be selected and

contracted in accordance with the Bank’s Policies for Selection and

Contracting of Consultants Financed by the Inter-American Development

Bank (GN-2350-9).

c. Selection of individual consultants: The consultant’s qualifications to

undertake the work will be taken into account, by comparing at least three

candidates. When the situation so requires, advertisements may be placed in

the local or international press to invite qualified consultants to submit

résumés.

Table of threshold amounts (US$)

Works Goods2 Consulting services

International

competitive

bidding

National

competitive

bidding

Shopping International

competitive

bidding

National

competitive

bidding

Shopping International

publicity

Shortlist

100%

National

> 25,000,000 < 25,000,000

and

> 500,000

< 500,000 > 5,000,000 < 5,000,000

and

> 100,000

< 100,000 > 200,000 < 1,000,000

5.4 The establishment of thresholds for prior review is based on the type of

procurement risk inherent in the project. The thresholds to be considered for prior

review are shown below.

Thresholds for prior review3

Works Goods 4 Consulting services

Processes valued at more than

US$10 million; the first process

under each method, regardless of

the amount, as well as all direct

contracting

Processes valued at more than

US$500,000, if e-procurement was

not used for goods, and all direct

contracting

Processes valued at more than US$1 million;

the first process under each selection

method, regardless of the amount, as well as

all direct contracting

2 Including nonconsulting services.

3 During the implementation period, the Bank may modify, without further formalities, the threshold amounts

for prior review if it considers that the fiduciary context of the executing agency and/or the country have

changed. Should this occur, the Bank will communicate its decision to the executing unit and the latter will

reflect the new conditions for execution in the procurement plan. 4 Including nonconsulting services.

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5.5 Recurrent costs: These consist of the operating and maintenance expenses needed

to implement the project during its useful life, covering everything relating to:

public utilities and communications, translations, office supplies, photocopying,

mail and other expenses needed for proper project management. These expenses are

expected to be financed out of the loan proceeds within the annual budget approved

by the Bank, and will be implemented following the executing unit’s administrative

procedures, which will be reviewed and accepted by the Bank provided they do not

violate the basic principles of competency, efficiency, and economy.

5.6 Recurrent costs include the costs of the consultants hired to assist the executing unit

throughout the loan’s useful life. Nonetheless, operating costs do not include the

salaries of civil servants currently in service.

5.7 Domestic preference: No margins for domestic preference will be applied.

B. Initial procurement plan

(link to Table 3: Procurement plan)

C. Supervision of procurement

5.8 The execution of this project is complex, because it involves a number of consultant

selection processes that are technically tricky and the selection of a firm to develop

and implement the Finance Department’s computer system. The Finance

Department’s experience and the contracting of a specialized entity for the analysis

and design of taxation projects are risk mitigation factors. Nonetheless, the

complexity and sensitivity of the tasks involved, and the number of internal actors

participating, increase the risk. Accordingly, the overall risk for implementation of

the PROFISCO/TO program is rated medium; and at least one post review mission

will be require per year.

D. Records and files. The files will be located at the executing unit’s offices under

appropriate security conditions.

E. Financial management agreements and requirements

1. Programming and budget

5.9 The State Planning Department will prepare the annual programming and budget

for external and counterpart funding. The budget is operated under the Integrated

Financial Management System for States and Municípios (SIAFEM). The budget

assigned to the program will be approved by the State Planning Department and

recorded in the SIAFEM, and the activities committed to under the project will be

carried out. The Bank will reimburse eligible project expenses under the budget

lines defined and implemented by the program.

2. Accounting and information systems

5.10 The project will use the project execution module integrated into SIAFEM, which

offers transparency and specific controls in budget execution. This module makes it

possible to record the project’s accounts and issue financial reports, including

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disbursement requests, exchange-rate control, project financial statements, and

other reports pursuant to Bank requirements. Accounts will be kept on a cash basis,

in keeping with international accounting standards.

5.11 Project supervision will require financial statements to be produced, containing the

following: a statement of cash received and disbursements made; a cumulative

investment statement. These reports will be filed annually.

3. Disbursements and cash flow

5.12 The project will use the state’s treasury system. Expenditure are subject to the

budget and financial execution process and will be recorded in SIAFEM—with data

relating to its formalization under laws applicable to each of its stages: obligated,

accrued, drawn, and paid. The Tocantins state treasury system uses the single

account system for managing its financial obligations.

5.13 At the start of the program, the Finance Department will operate without an

advance of funds, using the payments reimbursement modality or direct payments

to suppliers. This will continue throughout the program if the Department has the

cash flow needed during program execution.

5.14 Where necessary, disbursements will be made in the form of funding advances to

meet the project’s actual liquidity needs (program of expenditures). The executing

unit will send the disbursement requests to the Bank, together with a program of

expenditures for annual work plan (AWP) activities covering the next 180 days.

Documentation verifying at least 80% of each disbursement will be submitted with

the next disbursement request. If necessary, the Finance Department will open a

special bank account in U.S. dollars to hold most of the funding advance.

5.15 The Department will submit to the Bank the project’s initial financial plan,

containing the disbursement schedule for the whole project, which can be updated

annually.

5.16 If necessary, the executing unit will open a bank account exclusively to manage the

IDB loan proceeds.

5.17 Documentation supporting expenses incurred will be reviewed ex post by Bank

staff and/or consultants and by external auditors. Reports will be issued for each

ex post review visit.

5.18 The exchange rate to be used, if there is a revolving fund, will be the conversion

rate, in other words, the exchange rate prevailing on the day the U.S. dollars are

converted to reais. In the case of retroactive expenses, reimbursement of expenses

and counterpart, the exchange rate prevailing on the day before presentation of the

disbursement request to the Bank will be used. Expenses that are not eligible for

Bank funding will be reimbursed from the counterpart or from other funds,

depending on the nature of the ineligibility.

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4. Internal control and internal auditing

5.19 The control environment, control activities, communication and information, and

monitoring of the activities of the executing agency and executing unit will be

governed by the country’s rules, based on Federal Internal Control Department

regulations.

5.20 The internal audit function in the Finance Department is performed by the SEFAZ

Internal Control Sector Unit, which has a staff of 10 and reports directly to the

Office of the Comptroller General of the State of Tocantins.

5.21 The executing unit will be required to specify the main internal control processes in

the Operating Manual, to ensure that controls are functioning adequately.

5. External oversight and reports

5.22 As the State of Tocantins Audit Office does not have sufficient capacity to exercise

external control over loan-financed projects, the Finance Department will contract

independent audit firms acceptable to the Bank to perform external audits on the

projects. Such firms are evaluated periodically by the Bank to ensure that they are

of high quality.

Given the nature of the project, the following is required:

a. The selection of an independent audit firm of eligibility level I (International

audit firms operating in the country).

b. Filing of annual audited financial statements.

c. The cost of the external audits will be covered out of loan proceeds.

6. Financial supervision plan

(link to table 4: Financial supervision plan)

7. Execution mechanism

Considering the implementation mechanism specified in the Proposal for Operation

Development (POD), an administrative and financial execution scheme that is centralized

through the executing unit will be required, to be responsible for annual budget formulation,

both of the local counterpart and of the Bank loan. The executing unit will make payments

and handle disbursements and expense vouchers with the Bank, and will coordinate all

activities with other participating entities.

8. Other financial management agreements and requirements

Given the nature and complexity of the project, the executing unit needs a system for

monitoring and tracking project activities.