| RETURN TO I D cT0hi r| |IREPOR'TS lDESK| R T I REPORTS ~~~~~~~~~~ Repo-rt No. `WH- 146a I \^Ir"l I UNL W=f%r__J This report wos prepared for use within the Bank and its affiliated organizations. Tkey do r:ot accept res-onsibi!iy for its cccurccy or completeness. The repo-rmsy not be published nor may it be quoted as representing their views. TXT12l:)Th,Tt A KTT A T 12 AT 1ef( nD VVt"XTCM VT~TrrT T nTCT AxTm ThrnnCT nDM=Xrr 1±~ .L L~1~I'4~L A - I L% ~ 1. 4~-. A -, " v A'as-L' IL 1XT'r1CXT A rTI'%T A T ThV OT PMAAEsT'r A CCOCT A rTI'ONT I±'4 L~Z~.A~fLI .L%./±N. I A... i. V J.L..'.'L VA..L-L L. X 6.CLL6 dINg%-4L A AL'.JI CL URR E1NT ECONOMIC POSITION AND PROSPECTS OF BRAZIL Volume I Annexes to Main Report 1. Balanrce of Paym.^.ents 2. External Debt 3. Public Finance 4. Public Investment 5. Coffee Policy 6. Wage Policy 7. Industrial Financing May 11, 1965 Western lIemisphere Department CURRENCY EQUIVALENTS Currency Unit - Cruzeiro (symbol Cr$) FLOATING RATE June 1964t u. S. $;L - I,200 Cruzeirow April 1, 1965 U.S. $1 = 1,840 Cruzeiros ANNEX 1 Balance of Payments ti IV IV E~ AN ..L BALDNCE OF PAYMENTS Current AccoUnt of the Balance of Payments it Tables I and II which follow,present the mission's value and quantity projections for exports,along with the data relating to the recent past. With respect to coffee, sugar, cocoa, meat, rice, corn, iron ore and manganese ore, which account for about 85 percent of the total value of exports, the mission has made explicit assumptions regarding ex.port prices and qu.antities. Table I. Exports 1959-1-975 (ndilli.ons of US Dollars) Actual Estimated Pro:jec ted _19 960 1_9_ 196__7_ i5i$ ] I- 966 ; 1970 1 Ccoffee 733 713 710 604 748 780 780 780 780 13300 Cco ttorn 316 45 110 112 11.4 139 143 147 159 173. Sugar 43 58 66 39 7'2 37 45 49 52 56 CCIcoa & Cocoa Products 9,2 98 62 41 51 54 53 53 51 48 Neat St Meat Products 3 13 24 14 11 40 70 85 150 250 Rice I 2 .3 4 14 55 60 65 90 9Cs Corn - - - - 30 50 50 50 50 5c Iron Ore 21 54 60 69 71 82 110 135 159 179 Mangarnese Ore 30 30 32 27 25 25 26 27 30 30 Other Primary Products 231 220 287 232 21L 248 255 263 288 334 ManufaLctures 18 23 38 314 38 75 82 90 121 183 Special Transactions 10 12 1:2 2 3 3 3 3 3 3 Total IL,28L 1,9268 1,14014 1,217 1,408 1,1430 1,,590 1,675 1,745 1,935 2,395 Table II. >Iorts of Major Conwodities, -1959-1975 (Quantities) ActuLal Projected 3 -9 15,60 1cP61 1'97;2 19 1 1964 T9-5 19T6-97)7 19 70 1975 Coffee (million bags) 17 17 17 16 19 n,a. 16 16.9 17.3 18,,6 21.6 Cotton ( t'bousand tons) 78 95 206 216 222 n.a. 235 242 249 270 294 Sulgar (thousand tons) 616 771 783 hi40 524 n.a. 400 486 495 524 576 Cocoa and Products (thousand tons) 80 125 119 72 83 n.a. 93 92 92 90 87 Meat and Meat Prodacts (thousand tons,) 58 14 15 15 12 n.a. 80 140 170 300 500 Rice (thousand tons) 10 0.5 121 44 n.a. 500 600 650 900 1,,000 Corn (thousand tons) - - - - 700 n.a. 1,000 1,000 1,000 15,000 1,000 Iron Ore (mi:Lion tons) 4 5 6 8 8 n.a. 10 14 18 23 26 Manganese Ore (million tons) 0.9 0.9 0.9 0.8 0.8 n.a. 1 1.0O4 1. 08 1.2 1.2 AliiUX I Page 4 j.le lbasic assumptions underlying Tables I and IT are as follows: 2. The average price and quantity assumptions undery Inc the coffee export projections are as below: Year $ per bag (f.o.b.) Quantity (million bags) 1.965 49 16 1966 46 16.9 1967 45 17.3 19a6 8 44 17.7 19g9 143 i8.1 1970 142 18. 6 1971 43 19.2 19 72 44 19.9 1973 145 20.14 19714 16 21.0 197$5 46 21.0 3a life assume that world imports would rise by about 3 percen« per annum, as against an increase of 4 percent per annum during 1950-54 to 1960- 614. The a-verage increase in Brazil's coffee export quant,L during 4r9 -7r, is assumed to be 3 percent p;er annum. These are highly tentative assumptLcIs because of the uncertainties in the world coffee t, arkte at the timiTe thiS r eport was written. In the base year 1964, Brazil exported about 2 million :ags less than her quota under -'he Internatior[al Coffee Agreement and hence t,he mission's projection ass-umes a decline in Brazil's share of the market; as compared to 1963. 14. B`etween 1950-514 and `462-63, the Santos 4 price on the New York market declined from an average of nearly 60 cents to about 314 cents. Althouglh the price rose sharply in 1964 because of frost and fire damage in Brazil, world imports showed no change from the level of the previous year because it is believed that roasters bought heavily, expecting the price to continue upward. The price of SanTtos 4 in Niew York is expected t.o decline gradua"ly to 42 O/lb. by 1970. Thereafter, a gradual increase is assumed as vworld de.nand continued to increase at about 3 percent per annuma 5. For the world coffee situation in 1970 to emerge as outlined above, it is evident that soiLe form of controls will be necessary. Currently the International Coffee Agreement is in effect, wihich allocates yearly export quotas. Dat, at the same time, sizable world stocks are overhanging the market. If these stocks of exportable quality are to be worked off, it m-ayr be necessary to impose production controls as well as export quotas. In this case, diversification programs would be necessary in a number of pro- dcucing areas. The production controls may be necessary even in countries without sizable stocks if a price of 40 cents a lb. is an incentive to increased plantings. Gotton 6. The projection of cotton exioorts is based on the following assump- 1,10f5: a price of 25 cents per lb., i.e., $590/ton f.o.b. throughout, roughly equivalent to the current price level and that over the projection ANNEX I Page 5 period the ra.te of growTth in world consumption and trade would tend to de- celerate to the rate of world pcpulation growth (approximately 1.7 percent per year). The limit to the future expansion of cot-ton exports would not be the domestic production potential but international demand, and Brazil should be able to maintain its recent share of that demand, which has been about 7-8 percent in recent years. Sugar 7. The: mission has made the following price assumptions in our pro- jection of sugar exports: 1965 1966 1966-75 US Sale p/lb. 5.3 5.3 5.3 US Sale $/metric ton 117 117 117 Rest of the world 0/lb. 3.2 3.5 4 Rest of the world $/metric ton 70 77 88 8P VWe have assumed the follownph- distribution of sales between the United States and the rest of the worid. Quantity in thousand metric tons 1QAE IQAA I at~Q 1967 1971 1972 1973 197), 1975 U.S. 186 186 186 186 186 186 186 18R6 186 186 186 Rest of the -aorld 21I1 3°° 30fD 3lf3 32 33R QIR 358r~ 97r 380 3dn 9 I'he n,-ss onfl 1,' proje^tions are on t.e coysnro+- sidAe T:hey assume that Brazil's share of the US sugar market will remain at the _1 oAc _-. A.^. ,-l,- r r) i c - ,p _ f m o ; . A . ^A +V- + +- - ^ rnn,a ./J / U, f4coi VilJ ifvl LZ. 44'J, '9VV iIsi' . DL v) JV1A CX1JA4 \}SCA Ws U1-,icx V AE (1952-61) preference price of 5.3 cents per pound, f.o.b., will continue. .I. iLs rea± AcL,L.z ediid.u LtiisL CLOUiIIFItLUIi ilLazy -prove tuo bue lncorrect siLnce tihleJ US Sugar Act comes up for a complEcte revision in 1966. If Brazi1 should succeeu in obLJ ta dinin[g a lar g -e…r j, -lo …a al a … a… pres… r and ine preference pri.ce remains constant, dollar earnings from sugar would be higher than the -4 .: _4Af. _ _ I - - - 4_ - WA4 __ n _ _ _ A_ X_ A1 41A _ A_ -2 X7-.A. __ missioLn- sproJet;ion. L razil' UA xJUIorts uo thlle restU of Ute WoldU Vwere: governed by the International 'ugar Agiaement until it became inoperative at tlhve end o, 1961; hler basic ep ort quuta from. 1959 to 1961 wVas 550,000 metric tons. During that time, Brazil did not have a quota in the US market, although she did begin to share in the former Cuban exports after mid-196C). Since mid-1962, when Brazil was allocated a basic quota of 163,000 metric tons in the UIS market, her exports to the rest of the world have fluctuated widely; in 1963 they amounted to only 71,000 metric tons; in 1962, 117,000 metric tons and in 1961, 452,000 metric tons. The mission has assumed that by 1966 Brazil's exports to the world market, excluding the US, would amount to 300,000 metric tons and then rise at j percent yearly, which is comparable to the expected growrth of world consumption. In total, exports of raw sugar in 1966 may amount to 486,000 metric tons compared with less than 450,000 metric tons in 1962-64. A world price of approximately 4 cents per pound., f.o.b., will probably keep world supply and demand in fairly reasonable balance by the early 1970's. The 1964/65 world production, particularly of European beet sugar, is expected to be a bumper one. Hence the 1965 and 1966 ANNEX I Page 56 world price of sugar may be nearer 3 cents per pound. But it is douOtful that continuation of this leve'L would bring out the required investment in the sugar industry to meet the long-run growth in world demand. Cocoa 1.0. For Bahia cocoa beans the mission has assumed a price of 20 cents per pound or $440 per metric ton on the assumption that there is no inter- national cocoa agreement hy 1970. Tf the Prnduners' Alliannce Agreemenit. which is currently effective, remains in force by 1970 and is able to main- tann a prlce of anprox.im.ately 21.) cents per pound or t)72 npr met.riG ton, the mission's estimate would be on the lowT side. A corresponding price for c:ocoa butte-r may be, nnn-ron-vmq,ael 1,00pr to nn nv -i en beansi: are, anrouinrl _1,0J CL ton. 1.1. Exports of cocoa beans would average 70,000 metric tons for the next ter-. ... - ado i--t- g nrnQ 4-___ 1OAC^ n*A declinirng to 17,000 tons by 1975. These figures are based on the assumpt:ion thl>at coco-a production re.rkain stbl at4 a ' evel of - ------ Jiate-ly 120,000 tons V ~J~'.JCL V V~I.JLi L 0 U Jux LIu a .t d U.L '.sIaV dJ '' JJ±l w.hich is fairly comparable with the recent past. During the past few years, c'lrought 4as detrye .- -a n-,.e of 4trees and it1 4s 4elieve 4that therha L±JUI ~i ,M1O0 "COU L '. YIU C. liIut2I ± UjL L't,; 0.L1U _LL, -LO UU±_L-Vt.U UAid.U Ulit-±U1 C zCL not been any replanting or new plantings. Domestic grindings have averaged abut r5n 0000 tons an domestic un o ns but 2 on _;UQUV,V PUVUI DU.l;ldU UUlt:LiWj(:UIIZ:i USU;U t USU t dl::i 7 UUUJUnsUUIU>. This leaves approximately 30,000 tons of beans for export in different forms. ss-L-Oing tl-us Uabalance rVrIUIiS fr iS(5 and AidtJ dQo1rU3LGc co1-:uIrptlQ i.n- creases at the world rate of about 3 percent for the following ten years, reaching 27,000 tons by 1975, the amount avaiiabie for export would be 23,000 tons of products in terms of beans. 12. On the basis of these assumptions, export earnings from cocoa and products would be as follows: Year Cocoa Beans Cocoa Butter Total Value (thousand metric tons) (millions of US$) 1965 70 23 54 1966 22 53 1967 22 53 1968 21 52 1969 20 51 1970 20 51 1971 19 50 1972 19 50 1973 19 50 1974 18 49 1975 70 17 48 I eat 13. Heat appears to be one of the brightest export prospects. Brazil's meat; exports are competitive at the present exchange rate and will remain. competitive if the exchange ra.te moves with the domestic price level-Thc mif,lhiScn expects omest.Lc productlon to reach 2.5 million tons by the early 1970's, AfXLA i Page e even at the modest slaughter rate of 14 percent (as compared with 40 percent in the United States and 22 percent in Argentina). Exports will amount to about 15 percent of the domestic production. The missicn assumes a price of 50˘/kilo, about 1/4 lower than the present price. Rice 14. Another promising export commodity is rice. Already the stocks are high and domestic production is expected to expand substantially. The mission assumes a price of $110 per ton in 1965, $100 per ton from 1966-69 and $90 pe:r ton thereafter. Corn 15, Evnorts of corn are exnected to reach a level of 1 million tons in 1965 at a price of $50 per ton. The mission has not projected any fulrther increase slncP theI arlitional produc tion is expected to be con- sumed donnestically, largely in the cattle industry. LXron Ore 16. Projections of iron ore exports are based partly on the existing conracs. esp ite in,reasing cor,.peition ln the oremakt lin prices, and the absence of European or kAerican steel company part%cipation :Ln the Brazi.lian -iron ore raining i Brazil relal low cost and high ore grades will assure expanding sales in the export market. The f.o.b. pr,Lce assur,ptlions a;-e as f''ollouw"s; Dollars f.o.b. per ton of ore with 65 percent metal content r% ^.ze n r.tz n ntt7 n rEQ n in V '7nf ilangariese Ore L7. iAIanganese ore exports are not likely to increase substantiall-y owing to limited capacity and increasing requirements of the domestic steel industry. k price of $25 per ton oI ore witn 40 percent metal content has been assumecd. Other Primary Products 18. This category consists of a large number of products. Exports of some of these are likely to remain constant while for others, like black perper and cashew niuts, a significant increase is expected. The increase for this group of products is likely to be somewhat less than 3 percent per annum., AN114EX T Page & A'anufactures 19. One of the most significant features of Brazilis economic growth ill the past has been that although the domestic economy has undergone a radical transformation and manufactures contribute about 30 percent of tho gross domestic product, the structure of exports has changed but little. The contribution of manufactures to exports has remained negligible and Brazil has depended for its foreign exchange earnings on products for which world demand is either stagnant or, at best, increasing at a very slow rate. T'he two major contributing factors were the strength of domestic demand and the system of exchange rates which provided greater incentive for produc- tion for the domestic market than for exports. 2n, The exchange rates for importS and exports have moved towards unification and it is expected1 that further steps will be taken in this direction in 1965. Exports are responding to the incentives created by tho exchange rate, and they should increase.by about 10 percent per annum over the period projected. (b) Imports 21. Teable III showsTs the past data and the mission's projections for imDorts durina the neriod 196t-75. The assumntions underlving the fiOures are discussed belowz. Table A.!!. Imports l959-l975 (riL:lions of US Dollars) _ Actu'l Est-mated Pro-c+te d 3195Pl9bO 19 196T 19; T T97 c70 19 7; Livestoock - 1 2 2 53 3 _3 3 3 Petroleu. & Derivatives 25? '260 249 247 247 28C) 302 329 372 4'32 Lubricants 17 20 17 T 22 - Refinred FPetroleura Products 117 :L27 94 50 49 Crude: Petroleum 12.3 -L13 138 174 176 Coket Coal & Bquttes 12 18 15 15 15 17 19 21 27 41 Metals 116 126 1L5 110 155 127 1]19 1_14 93 105 Iron & St,eel inc]1. Ferrous Alloys T7 83 T…87 Copper 14 22 214 30 34 Aluminum 5 8 10 11 13 Lead 3 2 3 2 3 Zinc 5 9 9 11 10 NickeLl 1 1 1 2 2 Other :1 1 2 3 6 Transport ESILpmenlt 202 256 163 138 120 106 ]L00 96 90 90 Motor Vehicles 100 2 14 4 Parts of Motor Vehicles a 59 20 12 14 T'ractors & Pzarts 18 56 32 25 19 Railway Equipmenlt, & Parts 28 19 28 9 22 Vesseils & Parts 25 60 39 45 15 Airplanes & Parts 2D 32 29 27 46 Other 3 2 3 6 - Diverse. KanLuf ac: tur 444 41]2 524 518 460 523 !560 60o, 678 791 …umbe…r & Woocl Pro-duc…s _ _ _ _ Pulp & Paper 50 51 46 38 36 Synthetic Rubber & Rubber Products 6 10 14 12 8 Non-Mletallic Minerals 12 12 17 17 1.4 H[etal Product;s 51 44 50 45 41 Elec. & Co=mwnications Equipment 60 56 89 89 82 Professional & Scientific Equipment 17 19 27 27 29 Printed Matter 7 8 8 7 9 n ther 2 3 5 6 5 Mechanical Eciuiprient 239 :208 268 277 235 Food & Beverages 179 198 199 238 251 266 274 282 308 367 Wheat, 131 143 139 161 164 0 ther 48 56 60 77 817 /con,Ltd1 Table [II. mJrt_5 199 -1975 (contd.) (mii:Lions of US Dollars) Acti_al Estimated P Pl -Iectd _ 95_9 1960 196-)l 19c'92-1967 1964 1 Vt( 1970 175 Chemicals 120 1ih2 149 163 179 197 207 218 ;252 322 Raw Materials i4 h48 43 43 52 58 61 65 77 102 Sp2ciaL Transactions 3 2 1 2 2 2 2 2 2 2. Total c.i.f. 1,374 1, 463 1, 460 1,476 1,486 1,579 1,,647 1,735 1;902 2,315 Total f.o.b. 1,2:LO 1,293 1,292 1,304 1,294 1,080 1,,395 1,460 IL,530 1,685 2,050 In$--I o ,iE Page 11 22. The basic assumptions underlying these import projections is that Brazil's economy will grow at about 6 percent per annum over the ne;xt ten years. Imports over this period are expected to grow at about 4 percent per alnum. This implies continued import substitution in the sense that over a wide range cf products domestic production will contribute an in- creasing proportion of total supply. On the other hand there are likely to be considerable increases in the imports of certain important categories, such as raw materials, f'uels and food. The assurmptions regarding the variolis categories of' imports are as below. L:ivestock 23. There has been no clear trend in the past and imports in the future have been asE;umed to be constant at the 1959-63 average level. Petroleum nndl neri vatAives 2), JThere was a slight decine -in the totnl valuiip of' petroleum impTorts during the period 1959-63. But this concealed the growing substitution of' crude imports for refined producrts and the decline in the price pa_d by Petrobras for crude petroleur,> The value of petroleuam imports is expected tD- rT'-r.T hT nhn1i+. 0 9percon+. nper vDnn lrn im .il 1 07 -im lrin 1 +.+,itt i nore in domestic production0 Petroleum imports are thus projected to increase by hrn aot~ 5a,'o, nercen per ,-n ar. c. cn4 f,nnn an 5- pece. delne 4in the price no f petroleum by the end of the present decade and resiumption of the growth of' d'o-stic oA-dc tion, ;al thon,g ,n-A t en o ug n,,h nprnt a r--1, 4 t-n + ot-a 4--t; n; w.~~~~~~~~~~~~~~IL U | z U'. jJJ ' w. V L'I I.-) Mdwusss* U fl ssu vc E.. ' U'.)s; v L'. E ,,,frJ., . ,, e Thle growth is likely to take place almost entirely in the imports of crude pet+ o1eur,s Coke, oC and DnLqu<,,ts IJUVJJ-Lg 195-U9 Iir IIE, ln tLL^ catUgUloy ir.crasdIUU aU abo, U per- cent per annum, Future growth is projected at about 9 percent per annum, in line wit,h the expected rate of growth of industrial productioll. u. LILrL430r Uof UL 1..LZ are expecUteU LU f2U LII -L Lihe fUL,Ure yea.Ur.s During this period, the imports of iron and steel are likely to be reduced to t'he minimuim requirements for special purposes, and imports oI alumrium completely eliminated., Imports of copper are likely to increase steadily. T'ransport Equipment 27. Transport equipment has been one of the most significant fields of import substitution. The mission assumes that the process irill continue until abou-t the end of the present decade when imports of transport equip- ment are s-tabilized at about $9U million per annum, The major items of transportation equipment in the projections are airplanes and parts, in- cluding those for military use, and railway equipment, AI1f4EX I Page 12 Diverse Manufactures 28e LmDorts in tbis category have in the past been responsive not onlv to the domestic growth rate but also to the exchanee rate noli-cv, We expect these imports to grow rapidly in the near future, partly oiqing to the res-umntion of domestie growth and part,lv owuing to the e-nmcted in- crease in the inflow of foreign funds. The major area of increase is likely to hb mnnhAnionl n eon1i nmrvK while mnor+. unhsti-Ht-inon is likelpir to be pushed ahead in pulp and paper production and in lumber and wood products., The curmnlnti'e growth rate pro jected for dverse manufactres is abhnut percent per annum - more rapid during the sixties than the seventies. Food and Beverages 29. Imports are projected to grow at about 3 percent per annum, Ch ;e+mical s 30e lvD'ri ng 3.95!9-631 A-11r,P01rts of CherMUCE"S incrLV1eased atu aboutI 10 erc per annum0 During t'ne coming years chemicals should be a major area of impoUrt sdUUo bit.-UbLU±11i WUl thL IU rJIL on has, tLherefoU-e, poVj ULe cU U eIdi.L imports to grow at a cumulative rate of 5 percent per annlum, Rawi Materials :31. The rate of growth of these imports during 1959-63 was 5 percent per annum, l,e project the future growth at 6 pe-rcent per annum, tne expected growth rate of the gross domestic product. Special Transactions 32. These have been assumed to be constant at the 1963 level. Total Imorts - c,i.f. and f,o.b. 33. F0o.b. imports have been projected on the assumption that they are 88.5 percent of the c.i9f. value, a figure corresponding to the trend in the recent past. (c) Invisibles 34. The mission's projections of net invisible payments are in Table IV. Their rationale is explained below. NTIJX I Page 13 Table IV. Invisibles 1964-1975 - Projections (inillions of US Dollars) Estimate Projection 1964___ 1965- 1966 1967 1970 1975 International Travel (net) -5 -27 -27 -27 -27 -27 Transport & Insurance (net) -75 -101 -105 -110 -120 -1.43 Government Transactions (net) -35 -25 -25 -25 -25 -.25 Other Services (net) -47 -102 -104 -106 -112 -122 Ilnvestment Income Pav;ments (net) -133 -195 -195 -192 -174 -17]. Net Invisibles -295 -h50 -455 -460 -460 -490 Page 15 Table V. Consolidated Current Account of the DB31ance of Payments Projections 1965-1975 (milli.ons of US Dollars) AG t.1 -n I 1964 1965 1966 1.967 1970 I97:> Exports 1,430 1,590 1,675 1,745 1,935 2,395 Imports 1,080 1,395 l,46o 1,530 1,685 2,050 Balance of Trade 350 195 215 215 250 345 Nlet Invisibles -295 -450 -455 -460 -460 -490 Net Currentl Account 55 -255 -240 -245 -210 -145 ANNEX I Page 16 Exchange Rate Policy 42. The instruments of the exchange rate policy are: (a) The nominal exchange rate of the Banco do Brasil; (b) The nominal exchange rates of other banks; (c) The guarantee deposit; (d) The compulsory deposit; (e) The surcharge; (f) The licence necessary in certain cases to purchase exchange; (g) Retentions; (h) The permissions to exporters of manufactured goods to utilize 50 percent of their export receipts for imports without the payment of surcharges and compulsory deposits, i. Exchange rates of Banco do Brasil (a) The fluctuating exchange rate is effective for .-vn. A_na p -C ,at-4-r,.rA_,,-n. -- A-,m,4-- c rA fl - exports. Currently the buying rate is 1825 c ruzec. r o s--- 4-o - A-1 1 - o-A -dh -el1 n ra 1850 1/ (b) The petroleum rate: Although in theory this rate SLIUU±LU Ł1 LU' L', U±L. rii LIU XJIIUIiLJ.L .L±UL UUdcLLit' I-d.LIU, petroleum importers are permitted to enter into trinmestral contracts, subJect tAO thle exchange rate effective at the time of the contract. Consequently, the currerŁt exchlage r-ate for L rG and for petroleumLU products is 1850. ii. Exchange rate of other banks This is a fluctuating rate and moves parallel with the Banco do Brasii rate. Currently, the buying rate is 1830 and the selling rate is 1840. 1/ All rates shown here are as of March 20, 1965. ANTNEX I Page 17 iii. Guarantee Deposit Buyers of exchange for imports of goods a-nd services cund for financial transfers have to deposit with the Bank 100 percent of the cruzeiro value of exchange at the time of the contract. However, exception is made for the folloinTig commodities: (a) Petroleum - 50 percent of the guarantee deposit is pay- able at the close of the exchange contract and the balance 120 days tbhereafter. (b) Fertilizers - 20 percent of the guarantee deposit is pay- able at the close of the exchange contract and the balance at the time of liquidation of the contract. (c) Newsprint - 10 percent of the guarantee deposit is pay- able at the close of the exchange contract and the balance at the time of liquidation of the contract. (d) Imports without exchange cover - The question of guarantee does not arise. Ordinarilv one would regard guarantee deposit as an in- surance against exchange rate depreciation and therefore as no extra cost to the i mnorter- However. since the Banco do Brasil reserves the right to revise the rate, in case of changes in the exchannge rate, the interest on the Camrnntnp deposit can be regarded as a cost to the importers of comi- Mneiit,ps laqhle fo-r this. iv= romnifl -r'v Dnnn.Rt ____ ., Q pr,mmpl ',wry Aw,v,s i of 50 pecn of4 44E. ,,r 'u of,4 .mrhn9 imports and financial transactions is payable at the time of t-he closing of t.h.e exchange contvract. Afteri a period o.f 30 days, these deposits are repayable in the form of interes-t- free bills for 180 days. Thr.e fo"o-rng c ate-.es are exemt from the compul.sory deposit: (a) External payments on account of imports not produced n" 4the cournt - --A -,o-4-d n- --4it cnsiten with the foreign exchange budget. These are: (i) Imports directly for public entities, including auta`LUias, rixed enterprietui d other urgarJ- zations subsidized by the Government. (ii) Imports by, and for the use of, Federal and other nationai rairoads. (iii) Hard coal and "1gas oili imported by companies supplying gas for domestic and industrial use. (iv) Coal for the preparation of coke. ANNB,.X T Page 18 (v) Parts ar.d --accesrie- s frC shiJbui A telephone exchanges and tractors. (vi) Breeding animals, frozen siemen and agricul- t-id seeds for jJdl)ningO (vii) P:rinting -paper, machirnery aid -parts and other printing accessories imported by publishing houses and newspapers. (viii) Fertilizers and insecticides for agriculture. (ix) Wne at. (x) Petroleum and derivatives. (xi) Equipment, spare parts and machinery for research, mining, prospecting, refining of crude oil and pipelines. (xii) Maps, books, journals and reprints for teaching and technical subjects. (xiii) iLachines and equipment imported without exchange cover, financed by foreign capital. (xiv) C'ude sulphur. (xv) Aeroplanes, parts, equipment and accessories for the national airlines. (xvi) Riubber - natural and synthetic - and raw materials to produce synthetic rubber. (xvii) Mhetal plate for the manufacture of vehicles0 (xviii) Additives for the production of gasoline and lubricating oils. (ri x) Imnnorts by He1nl .h Soci aI nnrd _drhinn+- onal Institutions. (xx) General merchandise. up to a ceiling of :i5O. (xxd) Parts and spare parts for Frota Nacional de A ) Parts copeet y o the dor^vsic -rodcton of machinery. (xxiii) Products originating in the Latin American PoL.....n on. '1arket.- (^i V/ I ±II[d.± jP. yL UUpo Uc, maUra UZ .d.L. WIlL parts LforU ULIL manufacture and packing of exports. ANN1EX I Sage 19 (xxv) Machines and equipment given priority by SUD02., f'or the setting up of new agricul- tural and industrial units in the Northeast, as weil as for complementing existing units. xxvi') Equipment and machminery consiaerea Dy CuauE w) be of major importance to the growth of the national economy. (xxvii) Unexposed films imported directly for film pro- duc tion and recommended by the Executive Group of the Cinematographic industry. (xxviii) Copper refined electrically. (xxix) Exporters of manufactured goods to the extent of 50, of the value o:f tlheir exports, (b) Financial transfers: (i) Financial transfers by Federal and other national railways. (ii) Conoular income. (iii) Insurance and reinsurance premiums and claim pay- merits abroad on insurance underwritten in Brazil. (iv) Current payments relating to expenditures on exports. (v) Payments of financial commitments at all levels of government, autarquias and mixed enterprises. (vi) Allowances to students up to $200 per month. (vii) Living allowances to families of students up tc $100 per maonth. (viii) Pensions and retirement benefits. (ix) Magazine subscriptions and tuition for correspon- dence courses. (x) ExpenditurRs abroad of financial institutions. (xi) Charter of ships by Rrazilinn enterprises- ( Yii Almnet"+A.;.n+A;nn ::nr nA .v.+ warrn+.- nni 1 nnnc- registered with SUMOC and profits on direct deposit. (xiv) Payments for ser-vices connected with research0 A\PiFX I Page 20 (xv) Remittancos of publishing houses, oil nrosnert.ing .ncnd other rcti t-ies of Petrobras. Importers liable to the compulsory deposit incur the :Lnterest cost on th-se ( onsequently included in the cost of exchange is the interest on co-rp,-'so deposits Łror im.ports a nd f; --nania transfers subject to these. v. Surcharge Imports are subject to a surcharge of 10% of the value ofJ U'th 4e f oreiLgn excha.nge p-carJIiUsedu and financial trans- fers to 30%, Transactions exempt from the compulsory deposit are also exemapt from the surcharge. In the calculation of the effect-ve exchan rate, .L L LU ~ ~ .L~ A~11dflrae. the surcharge, whenever applicable, has been incluuded as a cost of purchasing Ioreign excnangeo vl, License r,~cessary i-n certain cases to purcnase exchange The importers of conmodities incl-uded in the :specia category"t, described as non-essential commrodities and commioudlties which can be oroduced locally are required to purchase at auctions the license to purchase foreign exchange for theD import of such commodities. The banco do Brasil auctions issue licenses from time to time, depending upon the exchange position. Currently these licenses are selling at Cr.3,000 to the dollar and this premium has been included as a cost of purchasing foreign exchange for "special category" imports. vii. Retentions Minimum export prices for different grades of coffee are posted from time to time by the Coffee Institute. Although the actual price received by the exporter may be above or below this level, the minimum price is the basis for the computation of the retention of part of the dollar receipts. In fact, it has happened that when actual export prices were lower than the minimum price, exporters had to purchase the extra foreign exchange on the parallel market. It is also likely that when the actual prices received by the exporters are higher than the minimum, they under- invoice and transfer the balance through the parallel market. Since there is no estimate of these trans- actions through the parallel market, they have not ecen taken rate forcoffnt l calculating the. ef'feot' exchange rate for coffQ,e exports. AIN'11E;_. Page 21 The exchange rate for coffee is entirely a function of the minimum price of coffee and retentions. The procedure is to fix the dollar retention quota from time to time, depending upon the international prices, with a view to insulating the real return to the domestic producer from international fluctuations. The balance can be converted to cruzeiros at the Banco do Brasilts exchange rate. This amounts to an exchange tax and hence has been taken into account in computing the effective exchange rate on coffee. viii. Benefits to exporters of MW.nuifactured Goods Exporters of manufactured goods are permitted to use 100% of the foreign exchange proceeds for imports of equipment and rawi materials, without payment of the compulsory deposit and the surcharge if they commit themselves to keeping increases in the prices of their products within narrow limits- Tn the ca1-culations in the following table, it is assumed that all exporters of manuf2t'.ured goods mnke use of this concession. The saving of interest on the compulsory deposit and the saving of the surcharge, therefore, have the net effect of allowing these exporters a more favorable rate than the ncmcinal exchange rate. In the table following, the mission has attempted to nlniiln+ae the effo,-+Avr i vehange rate for various categories, taking into account each one of these factors. Th.e effective exchange rates are showm in Tables VI and VII. Table V]:O Effective Exchange Rat-es, lmports ard Financial Transfers Abroad, March 20, 1965 % Share in Payments .Interest Cost Interest Cost Auction on Current Nominal of Guarantee of Comp'ulsory Price Ef'fective Account Category Rate Deposi t _ Depo:sit Surcharge of Licence_ Rate 1963 I. rmports with exc hage cover 1. Liquid petroleum gals an,d petroleum products 1,850 li- - - 1,961 L3 2. Newsprint 1,850 22 1,872 1 ,. Fertilizers 1,850 44 1,894 2 . General category imiports not subjec-t to compulsory deposit. and surcharge 1,850 222 2,072 1U 5. General category imports subject to compulsory deposit and surcharge 1,850 222 230 1,85 2,1487 29 6. Special category inports 1,850 222 230 1-85 3,000 5,1487 1 I]I. Imports without exchange cover 1,850 - - 1,8;0 23 III. Financial transactions 1. Financial transactions not subject to compulsory deposi-t and surcharge 1,850 222 - - - 2,072 19 2. Financial transactions subject to compulsory deposit and surcharge 1,850 222 230 555 2,857 1 Efifective exchange rate, weighted average: 1. Merchandise transactions: 2,176 2. All current account payments: 2,163 N) W reaI1- ANNEX I Page , iy Notes - Tabl.e VI Column (2) interest cost is computed for 3 months at the rate of 4 percent per month, an underestimation since the monthly price increase is of that order. Column (3) interest cost is compared for 6 months and the rate is compared for 6 months at the rate of 4 percent per month. AN1TES I Page o Table VII. Effective Exchange Rate on Exports MarGh 9CL 1965 Benefit to UJnmi nall Manufactured Effective Exchange Goods Exchange Commodities Re Retenton E E orters Rate ~~TTT (......... (= E4 1. Coffee 1,825 1,000 825 2. Other prinary pr o du-, c 1 Rs+ a _ C- 3. AManufa ctur~-e s -I Po~ - :L V . v_vIN , n nn6 s.'MU J Col1.Mi (,)) 10U percent of the foreign exchange r--e3ipts of the exports of manufactured goods can be used for imports, free of comipulsory deposit and surch-arge obligations. The izAruted retu-rn on such imports is the extra amount these imports would have cost on accourit of con-"ulsory deposits anrd surch.arge, had thley gone through the ordinary routine for general category imports. Of course, the assumption here is t'-at the exporters of manufactwred goods utilize 100 percent of their exchange earnings for such imports. Insofar as tnis is not tne case, the effective exchage rate on manufactured goods exports would be lower, Coffee: At present the registered minimum price for the nighest grade of coffee exported is $59D40 per bag. Of this the coffee institute retains $32.55 and the exporter receives $?.6080 . The latter can be converted at $1 1825, Hence the effective exchanige rate is 26,!35 x 1825 59L.04o AN1CEX I Page 25 Table VIII. Effective IEchange Rate, Imports- MIarch 1Q65 Interest Interest Cost Cost of of Nominal Guarantee Compulsory Effective Rate Deposit Deposit Surcharge Rate General category imports not subject to compulsory deposit and surcharge 1,858 - - 1,858 General category imports subject to compulsory deposits and surcharge 1,858 230 230 186 2,5o4 Note: Calculations haves been made on the same basis as in Table VI. Table IX. Effective Exchange Rate, Manufactured Goods Exports DeneJL±±u UV Nominal Mlanufactured Effective Rat,e Goods _Eporters Z&charige Rate N C l s 204 me s Note: Calculatio.-ns have been made on the same basis as in Table VII. A NNEX 2 Ex,ternal Debt k N N E X 2 T HE-E L.. I:..l. 1. VDET I. The External DJebt and the Balance of payment, I9Vl-l963 1.) Brazilis present external debt originated in 1951-52 with the financing of the current account deficits of '^9h70 million and ,0709 million respectively. In the absence of a sufficient inMflow of mediun- and long-term loan capital,the resource gaps had to be financed on a short- term basis and through the accumulation of arrears which amounted to $514 million in 1952. Thus, the economy emerged from these two years with a large amount of short-term obligations that had to be "refinanced" and "stretched out" duLring the subsequent years up to 1956. All -through this period, a net inflow of loan capital was generated by compensatory finance, The impact of these operations on the balance of payments positiorn was clearly shown by the fact that the external debt position as of December 1955 reqfired debt service payments on project and compensatory loans exceeding .200 million in 1958 and reached ;j270 million in 1960 which would have absorbed approximately 21% of export receipts0 2, Beginning in 1956/57, the external debt problem worsened with the emergence of large and persistent current account deficits, and the increased reliance upon medium-term suppliers' credits and cash loans or financial t,ransfers tc) finance the deficits, From 1955 to 1961 the total outstanding amount of registered? roject and equipment finance from private sources increased from 2107 million to 27L.6 million, Over the same period, the share of these types of credits in the total of project and compensatory loans outstanding rose from 11% to 37%.- 1/ Because these credits had short maturities, they generated a relatively small net inflow; during 1955-63; the net in- flow from loans other than compensatony loans registered in the balance of payments amounted to only 28% of the gross inflow. 3. Thus the reliance upon short and ,-r:edium-term financing to cover the persistent resource gap did not reduce the threatening high levels of debt service which were carried over from the financing of the 1951/52 resource gaps. Indeed., the net capital inflow was obtained rn terms which added to the already high levels of cebt serviee in 1960 and. 196i0 l/ Approximately one third of t,he total gross inflow of loan capital nthpr Min~n hal annr,. nf' nqvmPntr 1n nz-Tn.+r)t~pnihi- rr+nrnr other LhThA bw to the public sector and the autonomous state enterprises0 ANNEY 2 poage 2 In 1960, gross financing of ,;968 million was recuired to cover the current account deficit of .)558 million and the amortization payments which totalled P410 million. The gross inflow of capital from loans and direct investment covered only 8% of' the gross cepital requirement; the rest had to be made up by increases in short-term indebtedness, swaps, and the accumulation of commercial and financial arrears. 5 Scheduled debt payments totalled. 475 million in 1961 and :j310 million of balance of payments assistance was needed to cope with the liquidity crisis. At the same time rescheduling of debt service on suppliers' credits provided for further relief in the years 1962 to 1965. These rescheduling agreements covered paymentvs for suppliers' credits due over the years 1961 to 1965 to the Federal Republic of Germany, France, I'taly, the Nletherlands, the United Kingdom and Japan. The portions to be refinanced were 80C' in 1961, 70% in 1962 and 1963, 50% in 1964 and. 35% in 1965 -with repayment over 5 years beginning 1966. 1/ However, the composition and terms of the gross inflow of loan capital obtained in 1961 provided only temporary relief by postponing the crisis by possibly another 2 or 3 years with scheduled debt service payments continuing high at h400 million annually or approximately 30% of 1961 export earnings Brazil's ability to handle debt service claims of this magnitude was im- paired by the current account deficit of ;h404 million (including '112 interest) in 1962 and req ired short-term finance, accumulation of arrears, and. gold exports. In 1964, debt service oblig ations totalled U1h6 million (ap- rproxirmately 30, of estimated e:port earnings) in compensatory finance and, project loans; in addition to P220 million in commercial and oil arrears and "165 rrCLu:lion of swaps due in 1964, This necessitated another debt re- schediuling in pattern similar to the 1961 negotiation and partly inte- grated with It. The rescheduling agreement covered suppliers' credits from official sources or guaranteed by the governments of the following countries: Austria, France, Germany, Italyv Japan, the Netherlands, the United Kingdom, the United States and Swiitzerland, It provided that BraziliwTouldrake its debt service payments to the original creditors but that the Bank of Brazilwculdreceive official credits from the individual governments eaual to 70% of the debt service payments in 196L and 1965. These credits are repayable in equal installments over five years beginning for 196h rnaturities in 1967 and for 196q maturities in i968. The refinancing arrangements of Hlay 1961 will renain in force but will be sunnlemented by new financing to the extent necessarv to raise the assistance on those debts to the level of 70%. T/ The results of the 1961 rescheduling are shown in Table 11. ANINEX 2 page 3 7. The reschedul.ling of dfeht servie. oblizations is being further extended to debt service payments on private unmuaranteed project loans f'ro-.n TTU creitrsq on terms Zinilar to those of +he Paris agreement. F'urther assistance was granted via the rescheduling of payments on the f'ollowrint- co-pn-statryr Ioans frol, the US, = th-e $2212.6 r-lilllon credlt from the I.ximbank, the December 1963 postponerment of $19.4 million and +he $,7r0 rl:LeiTn breanuna of' ra1rn-on fror.., +he Trre.rv.. The re- scheduled ;-mounts and the repa.ment schedule for the various refinancing 'Loans arC sh0U4own iln Tab'le 12. * 4. X PJo,Jec tAed LDeb . JI± V l CI ( IJ.W U1.1 I:J IU.L Ul Ltd QiI L a.L I it- 1 u .U 1±UcUUn1t LI oUf thI IIe e vo ±LtUio o t11 Uzt l L Uia dLJeb servicing problem raises the .ajor question whether the gross capital inflow used to solve the 1964 crisis and the subsequent measures used. to refinance -tlhe short-term obligations will a.g-ain merely postpone the crisis, or whether the composition of -the gross inflow and the terms of refinrla- ing are such that a significant improvement in the Brazilian external debt structure will be realized. To show the impact of the gross canital inflow obtained in 1964 and nrojected for 1965 uuon the external debt structure it is useful to project the external debt position with which the Brazilian economy is most likely to emerge from the years 1964 and 1965 at the end of .1965. f3. Table 17 shcws the amortization payments for the debt existing in June 1964 plus the amortization pcattern of the estimated gross capital inflow in 1964 and 1965. According to the iyission's estimates, the levels of debt service which can be Drojected by this method will continue at about $1400 - *$450 million (assuming that interest Day- m.ents will total approximately $140 million annually) until 1971. Compared to the early sixties the terms of these inflows can be considered lore favorable in view of the smaller current account deficits that are e!xpected and the prssnects for larger inflows from direct investment. 10, According to the mission's projections, Brazi.l's ext-ernal debt would total about $3.4 billion at the end of 1970 compared with $2.5 billion at the end of 1964 (including short-terin obligations), or an average annual increase of 3.357 which is less than the projected growth -n export receipts. Moreover, the external debt burden need not rise significantly if the new borrowing is obtained on terms indicated in the mission's illustrative projection. l1. As the projection of debt service payments show, the terms on which the gross capital inflow is obtained are of snecial iraportance during 1966-1970. New suppliers' credits with maturities of less than eip;ht years must be held to a minimum. Under the terms of The Hague Club Agreement, new credits on terms of less than eight years w-ere limited in 1964 and 1965 so as to prevent anv net increase in the volume of credits with maturities otf more than six months and less than eight years. The out standing amc,unt of such credits totalled about $300 million. These AINi'`EX 2 page 4 $300 nillirH twnuld not be nhibrt. to streteh-out if 'm enulvent ouiint of new credits is obtained on sirmilar terms. The rest of the capital inf'low shnlold ha.v rcrreP pneirios wrhich wrrouildl delnar repnaxrmnts. uintil afteor 1972 to keep debt a.ortization payments to manageable size. III. illustrative Projection of Gross Capital Requirem.ents --1 Tnflous for- 1°65, -. l975 19. ToCI analyze the possib'le cont4ribution of roUc Ioan to the- t1 . ..Ji M C YO J0 !aIt. L u" . . L'JV . l 'SJ - -42 -2 I financing of public sector investments and to assess the impact of a ~O~.L J4 _L IU.LIjL, PI1ULJ. OdLU U±IJUL II L d.L_JL ~ ULullUt U Cl 9y lui U -L adiU exUt± itL pDossible lendib rora- po BrazJils b~alanc of pZ. sadetra debt structure, the mission made a projection of disbursem.ents from existing loanis adu new loan commit I Lt S. *The 1rujecbo(fUt fur UEA±Lsitn loans is based largely on information from the lending agencies. The projection of ne-w loanr commitments focuses upon the sectors exuiCed in detail by the mission and is based o0 the judgments of the mission's sector specialists about hne likely project content oI high Driority investment and the readiness of the individual projects. It should be noted that the emphasis wcts put on project lending and not on possible equipment financin- by suppliers. Suppliers' credits were included only to the extent that they were complementary to official project finance within a given investment pro-ram. The financing of certain sectors (petroleum and mining) through suppliers' credits is not included in the mission's projections. The mission considers the projected timing of new loan commitments to be feasible, provided that the public sector makes a strong effort to prepare projects, uith outside technical assistance where necessary. The mission has assumed that new commitments by official lending agencies will cover on the average one-half of the total costs of the project. ANNE7 2 page 5 External Financing Program, 1965-1966 (Private and Public Sectors) CommnitAment Assunrptions (millions $ U.S.) Commitment Date Amounts Committed Official Lenders Suppliers' Credits TOTAL 1965/66 458 516 1966/67 694 56 750 1967/68 99 23 127 1t251 142 1,392 Puolic Sector 1,102 142 1,2hh Private Sector 149 - 149 ACnrd1inp to the disbursement rates assumed for the various proJects, these commitments would generate an average level of disbursements of about $300 million over the years 1967 to 1970. 13 To illustratt +Jh imnant of t.he rojectedi ommitments and dis- bursements upon the structure of Brazil's external debt, the mission m.ade the follo I .> hig.hly frorabph- nQm.ption -, to the tmn.-, on urlh-ch tnes loans would be made. The funds to be obtained from official sources were assumed to have a 20 year repay-e-t peri.od an-d gace period-- of 5 year for one-half of the loans and 10 years for the other half. 14h Lihen the amortization payments are added to the total of those projected for old external debt and compensatory finance obtained during the years 1964 to 1967, the projection yields a total level of amortiza.- t+on pay-ents over the ye^-s 1967 to 1-75 w---h averages $245 r annually, including all debt except repayments to the IMF and swaps and c ashl lo-,.S. (Se Q-- e 6 AINTN9 2 p ag7e o 15., This illustrates very clearly that with these levels of debt obligations which were projected under favorable assumptions, there is very little room for additional medium-term suppliers' credits because they would increase considerably the level of amortization payments, While the mission's projections are subject to uncertainties. they do show the terms on which Brazil needs to obtain its future gross capital inflows if its external debt burden is to be manageable. IV. The Role of Suppliers' Credits in the Gross Capital Inflow l6]. The growth of external equipment finance from private sources can be viewed as the result of a poliny decision hy the Biraz7iian Govern- ment beginning in 1956 to use the exchange system as an instrument for the Dromotion of industrializationi. This policy fou-nd itfs emrPssionn in the SUMOC Instruction 113, in the August 1957 tariff law and in the revival of the "law of sim.ilars". These instructions Provided that debt service on loan-finance of equipment imports considered essential to economic develop- ment could be transferred at a preferential rate of exchaznge. The applic- ability of the special rate was decided upon registration of the loan by SLThNIC, The preferenti1 ratel (cust de e.cambio) was set ' s - a +hat :.t was never below the weighted average export rate. This treatment of debt service pa. provided a - tporr of oar- financed equipment if the equipment was considered essential for economic develop,men t. 17, ThLese incentives stim-uated an increase ttal equaipmerit irmports, beginning in l957, with the loan-financed component of equip.ment imports .angig f 6 to 1 percent and an a-verage of 52 percent for the period 1957 to 1963.1 18r The preferential exchange rate treatment was discontinued by SUMGC InstructUioQn 208 of June 196i whnich required that all debt service payments on loans registered with SUMOC be made at the free market rate of exchange, HLoeaver, exemription from ot,her restoictive measures which tended to make the effective exchange rate higher than the actual free market rate, was continued. As of row, debt serv-ice payments on equipment loans regi.stered with SUMOC are still exempt from the advance deposit, the guarantee deposit, and tie surchnarge. 1/ See Table 3. A1T\\TEX 2 p)age rj ].91 The volume of registrations of eouipment loans in the table below shows the impact of the elimination of the exchange rate subsidy: Equipment Finance Contracted Aiccording to the Applicable Exchange Rate: (millions of j U.S.) Debt Service to be transferred. at: Custo de Cambio Other Preferential Rate Free Rate Total 1958 408 100 n,a. 508 1959 335 34 n.aa 369 1960 281 24 n.a. 305 1961 81 16 33 130 1962 - - 213 213 1963 181 181 Source: Sumoc-Relatorio, 1963 (draft) 20. Beginning December 1958, as the debt service burden on medium term equipment finance began to have its balance of payments impact, SUi'10C reouired that equipment finance satisfy prescribed minimnmn terms in order to be eligible for registration and thus favorable exchange rates for debt service transfers. One requirement was a minimum of three years grace and repayment in no less than 5 years. This regulation wras sub- sumed under Instruction 209 as of September 1961 requiring only a repay- ment period of no less than five yearsc Presently in force is instructicn 242 as of June 1963 wrhich requires a two-year grace period and repayment over 5 years. In all cases these instructions apply to the financing of equipment imtports only, but not to cash loans. Table 5 gives a breakdowr of suppliers' credits outstanding as of liay 31, .1964 by terms on the basis of SUHOC registration data. V. The Role of Cash Loans in thle Gross Canital Inflow: 21 Parallel to the Yro'ltn of external equinment finance during the years 1956 to i961, the balance of payments registered increasing gross inflows from cash loans totalling ')790 million from 1956 to 1963 While these credits did not receive the subsidies extended. to external equipment finarnce. their grolth resuted partly frc.m the absence of a domestic capital market t;o provide medium-ternm financing. 22, Exact records about the total of cash loans outstanding are not Pvilbai I bhluPe registration of these t.n-i oq ff loans has onl been re- quired since September 1962 and only a small part of the information sub- m-i.tted on outstanding and new cash 102 ns hso far ben processedby A= 2 ';UMOC. Estimates by the Divisao de Investimentos e Financiamentcs Estrangeiros of SUMiUC put the total of cash loans outstanding at $1.2 billion0 This type of external borrowing is not subject to any control by the monetary autlhorities. The loans are freely contracted by the parties involved and are negotiated via banks authorized to operate in the exchange market. Only to the extent that the lender requires a f'oreign exchange guarantee by a Brazilian bank can the authorities grant c,r refuse authorizations for such guarantees. 23. It is a characteristic feature of these loans that their pay- ments schedules are flexible, generally subject to the option of one of the parties. Hence, no amortization schedule can be established for this type of external obligation. Furthermore, a large part of these l.oans consists of transactions between foreign parent companies and their Brazilian subsie.iaries and in some cases the loans have been trans- f'ormed into direct investments. The special relationships betwesn the debtors and creditors and the likely shortage of working capital shculd preclude any sizable liquidation of these obligations. Tb d'D_'.1: G?ZOSS PINAINIA'CC'_N,G PL3E_Q,U Li F iTS AND GROSS CAPITAL INFNLOWS, 1951 - -963 (Mlfli-i nsf US $) 1951 1,952 19153 195)4 1955 1i56 1957 1958 1959 1960 1961 1962 1963 Current Account Deficit -o3 -62)4 55 -195 2 57 -26,4 -2)48 -311 -519 -2h9 -t04 -1)48 of which interest n.a., a. n.a,. n.a, -3'' -6 -73 -61 93 -119 -117 -113 -83 Capital outflow Total Amortization Payment -21 --33 -46 -L34 -140 --L87 -242 -324 -377 -410 -317 -271 -342 Amortization of' B/P loans only 1/ n.a, n.a. n,a, n.a. -539 -98 -93 -58 -76 -51 -21 -33 -145 All other Amortizaticin n.a, n.a. n,a,, n,a, -81 -89 -49 -266 -301 -359 -296 -238 -197 Gress Financing Requirements: 491 7)42 29 :369 1714 '194 541 590 722 968 605 675 454o Capital Inflow Direct Investment 7/ -)4 9 22 11 43 89 143 110 124 99 108 71 31 PL 480 -' n.a., n.,a. n.a. n.a. - - 2,4 22 23 - 60 35 3u Medium and Long-term Loans B/1P Loans (excl.IJ'F) -- - 458 200 6LJ _ - :158 - 10 270 138 188 Ii*W (net) 28 --28 2 8 - - 8 37 37 -21 48 40 -18 5 Other Loans 3/ 4/ 38 35 )4)4 :Log 8)4 :231 295 351 )416 347 1469 323 229 of which equipment finance n(a:, n.a, n.a., n,,a, 60 1L58 223 268 290 224 274 247 186 of which financial transf'ers n.,a,. n.,a. n,a,, n.a. 2)4 73 72 83 126 123 195 76 03 Other Capital (net) -22 24 39 -4 16 18 315 25 44 17 27 8 5 Short-term Finance Assets (increase -) 82 82 )4: -10 -1:L -:L82 16:1 52 26 -26 -180 37 -18 Obligations (decrease -) 5/ 156 75 21 60 -73 29 -29 28 35 165 -114 -80 47 Arrears 30 5)4 1 -563 -46 -8 - - - - 68 -68 163 35 Swaps (net) n,a., n.a. n.a,, n,a, 15 -12 11 -21 115 1256/ -5 46 -30 Gold Movement (increase -) -1 - -1 --1 -:L -1 ,_ -1 -1 40- 2 54 81 Errors and Omissions 123 --26 -98 10 12 -1l4 -171 -'189 -25 36 11 -102 -113 1/ excludes lTan from US Banks with gold collateral 2,/ one year credit of $133 from US Federal Reserve 13ank substitu,ted by 'loan froim US Banking Consortium 3,J 1951, 1952 loans to official debtoors only eUD to 195,4 including PL 480 / until 195,4 including swaps o/ subscription to IBRD and 11F. ttl net cf reinvested savings SourceD SU-U:IC0-B0LETIN; STIJKC ffLATORIO, 1963 (draft) TeLble 2: BRP-ZIL1 S EX'TERINAfL D,BT . "iNDfhIA- AND ITNIG-TE.Rji;) 1955-1961, ACCR0DING T(J SUvOC TREGISTRATIONS a/ (' iljions US $) 1955 1957 1950 1959 15960 1961 1962> 1963 TOTAI, 975 992 1,581 1!?6954 1,809 2,106 2,233 2,312 Project Finance: f'rom official sources ll84 2214 495 516 1489 459 435 427 f'rom private sources 107 289 425 611 7'46 775 845 862 Total: 291 513 920 1127 1,235 112314 1,280 1,309 Compensatory Loans from official sources 3,56 279 371 31.2 3143 587 69-1 8 35 fromn private sources 32/;3 200 290 255 231 285 262 1i68 Total 684 479 661 567 5714 872 953 1,003 Project Firnance as Percentage of Total 30 52 58 6 6C) 59 57 56 Coirposition of Proj ect Finance Total 100 100 100 !CIO 100 100 100 1CO from offi cial sources 6D3 44 54 h6 39 37 314 33 from privrate sources :37 56 46 54 61 63 66 67 Percent,age Change in outstanding Project, LoaUns 55-57 57-58 58-59 59-60 60-61 61-62 62-63 from Private Scurces 170 147 L4 22 4 9 4 1/ excludes swaps and arrears, includes loans in inconvertible currencies, includes IMT and lcans froin US Banks with gold collateral, excludes bonded external debt, Position as of December if each year. Source: StTIOC-BOLETIM Table 3: E)QUIT?PNLT Ii-dOiRTS 3 j LXTEPui.L PLl.CINIG. i9,--1963 Year Total Equipment Loan-Financed Financed via Irmnorts Direct Investment 1 955 ~~332 601 l 956 283 158 5 1Q'57 523107? 1959 1473 290 93 196^ ~ ~~~ ~ ~ ~~~~~~~~~~ 'I r32473 -O~i a4 .ao Ool. 14/L L_1 1 1 1. A0 18 Source: f 16 (mmegrph n4 U) L4U ±UUI Source: SUIII41OC -REIATORIO, 1963 (mimeograph) -1 / Table h1: ACTUML DEIB-'T S1hVICE, l961-19614 (mi.llions U.S.', 1961 1962 1963 1964 Pirst Semester 2/ 2/3/ _ Amortization Payments 302 245- 292 138 Interest Faymients l2 113 102 Total Debt Srxvice 4 1 358 394 194 Export Earnings: 1,35,0 1,167 1,292 608 EDebt Service Ratio: 3°% 31% 30~/ 32% l/ This d2ta is derived from the records of foreign exchange operations of the Banco do Brazil and o-;her commercial banks. Due to the differences in the recording of tihe result of the 1961 debt re- scheduling these figures deviate from the same transactions as re- corded in the balance of payments, 2/ Excluding amortization of short-term obligations of 34O94 million in 1962 and ;-7,6 mnillion in 1963 3/ Excluding amortization of gold loan 4/ 7xcluding payment of petroleum arrears ofL 32.8 million Table 5: PROJECT FIJ\IANCE Pli0.i P'I?TE STUIEChCES ACCOIDhI1IC T, J1L!S Position as of lNlay 31, 1964 (Millions US $3) of Total Creditor Country Total Under 8 years under 8 years Germany 116.8 26.2 22 Belgium 9.9 9.6 97 Canada 281. _ Spain 8.6 7.0 31 U.S. 266.9 114.9 3 '.inland 5.7 0.3 5 France 98.8 53.1 5)4 Holland 3.4 o06 18 Italy 136.2. 3)4.5 25 Japan 137.3 9Q2 7 U.K. 29.8 29.7 99 Sweden 8.'; 801 95 Switzerland 11.6 5.5 )47 A11 loans in inconvertible currencies 541, 46.7 85 All loans i-n convertible currencies 806.8 259.0 32 1/ Initial terms, as of time of registration Source: SUMOC Table 6: BRAZIL'S ESTIMATED EXTERLNAL DEBT AS CF JUNE 30, 1964' Project Finance ard Compensattory Loans * Total Debt Bonded Project Flnance Compensatory *serwic e External Private Sources Official Sources Loans 2/3/ Total Total Total Debt 1964 4/ after 1964 Debt 1/ Principal Interest Principal Interest Principal Tnterest Principal Interest Service RescheduTing Reschedulin' 6h II 2,.3 67.9 21!.3 22.3 9.8 8).0 17.2 1Do.5 51.3 151.8 (129.1) 22.7 65 4.7 139.1 hO.7 ?3.4 23.5 17.3 39.0 209.5 103.2 312.7 (123.1) 189.6 66 hI.7 128.1 3l.7 L6.7 2b.0 62. 8 32.8 2b2.3 91.5 3133.8 _ 333.8 67 4,.7 111.6 2b.O 07.1 20.4 53.8 27.3 217.2 72.2 2,89.4 25.8 315.2 68 4.7 99.3 17.4 '15.8 18.3 16.6 25,0 186.4 60.7 2'b7.1 50,,3 297.4 69 L, 7 63.2 12.5 1,2.b 16.0 L6.I 22.3 156.7 50.8 207.5 50,.3 2;'.7.8 70 41.7 40,8 8.2 1,1.3 13.7 46.7 19.7 133.5 41.6 175.1 50.3 22.4 71 1,,8 27.3 5.8 4o05 11.7 4l.4 17.0 111.0 34.5 1t5.5 50.2 195.7 72 1,8 19,.7 4.2 38.0 9.7 34.IL 15.1 93.6 29.0 122.6 25.3 147.9 73 1.,6 16.1 3.2 36.7 7.8 33.4 13.3 ' 7.t 24.3 112.1 112.1 74 1.6 15,.0 2.1 26.5 5.9 33.2 11.7 76.3 19.7 96.o 96.0 75 1.6 11.8 1.3 16.8 11.8 33. 3 10.0 63.5 16.1 79.6 79.6 76 1,6 6,.1 0.6 13.2 4.0 33.L 8,4 54.0 13.0 67.0 67.0 77 1.,6 3,9 0.5 10.7 3.4 33.2 6,.7 t19.4 10.6 60.0 60.0 78 1.6 3.,0 0.2 10.1 2.9 33-]. 5.,1 !7.8 8.2 56.o 56.o 79 1.,3 1.2 0.1 9.6 2.5 33.1 31.4 45.2 6.o 51.2 51.2 10 1.3 0,4 9.0 2.1 32.91 1.8 113.6 3.9 h7.5 h7-5 31 1.,3 9.0 1.5 3.4 0.5 13.7 2.0 15.7 15.7 92 L1,3 X3.1 1.0 3.2 0,.5 12.6 1.5 14.1 14.1 83 1.3 7.5 0.7 3.3 0,,5 12.1 1.2 13.3 13.3 .9L 1.3 5.5 3. o3 .h 10.1 0.4 10.5 10 5 85 1.3 0.2 3-3 0-.4 5.2 0.4 5.6 5.6 after .35 26.8 1.5 53.7' 3,, 32.0 3.4 fl5.4 85.4 Total Ou1t:otaning 79.6 745..1 180.5 536.5 183.7 692.6 292,0 2053.8 6146.2 2700.0 YAhea Fltuante - 1L2.,6 50.2 8.3 3.2 - - 150.9 53.4 2'0h.3 Total (u1;standing and iansa F1Utuanto 79.6 37. 7 230,7 51,L.3 1'6.9 692.6 2-22.0 220h!.7 699.6 2904 .3 Inciluu.interest /Position at of July 31, 1964 3/ Excludes I f', includes the 1964 rescheduling of IJ.S. compensatory loans; excludes "gold loan" Rescheduliag of project loans Inoludm umdlniwsede loans. Iablle6AcontThued: "..ot: on Bra.zilian Extorrn-' Debt -'e-portin g 't Rec:ardinf, the External Debt of B3razil, statistics from two sources are available: SUMOC data as published in SUIPIC-BOLETIT'I Table 5.3 ff'. and Carteira de Gambio data in the form of the docurent-. ati.on suIbmitted to the 1964 meetin;, of' the Hague Club and as P?repared upon recuest, A`or the TIBRD econonuic mism-in TIhe rmajor difference between these two sets of statistics is in the total. of project loans from private sources for equipment imports.. The S-U-iOC-l data is. based on information obtained at the time of registration of the loan and does not account for under-utilization of loans, delays in utilization and modifications in the registered terms of the loans. For these reasons SiUNOC data tends to overstate this part of Brazil's external debt. Tflhe Carteira de Cambio data (as of June 30, 1964) using additional information obt.ained from equipment import controls and di:rectli,7 from Brazilian debtors make an attempt to correct the total, arriving in the process at a tot.al of $143 million of ,uestionable a7:ort, - zation obl..i,-t.icr:s a.nd .50 .illion o4' 7uesticnable intcre:t ob'o' .-tions.. I- isc quee-t.cnable -liether tle:- re-,r esent an obligation at all, or, in case thej do rr s n n obl i ic.n, r eter the; are actual-L`. due as in(icated b~, the SUMOC data. Tne etwo extreme approaches would be: (a) to consiLer this amount as "arrears" i.e. due in total in 1964; this tends to be the implicit SIT4OCC approach as far as the presentation of the debt statistics are concerned; (b) to consider it as a fictitious obligation resulting from the inadequacies of Brazilian external debt reporting procedures. Comparison of SUI1IOC and C7'.2- TI7 de CA.EIO DEBT FIGURES: (position as of June 305 19G4) 1) level of' obligations from project finance obtained from private sources; (convertible and inconvertible cuarrencies) SUMIOC: $0'91 million Carteira de Cambio 4:753 million + "riassa flutuante'i of MO13 million = $896 million 2) Difference in Amortization Schedules: (million US$) 196L (2nd Semester) 1965 S U1io 213 ]LO Carteira de Cambio 68 139 Discussions with SUMOC and Carteira de Cainbio officials yielded the following, largely qualitative description of the composition of the "massa flutuaante": It iEs estimated that a part oI the "massa flutuante" equal to t20-30 million represents actual debt obligations which are either to be considered in arrear or seem to be in arrearsbecause a change in the repayment schedule has not been cowmnunicated to the debt reporting authorities. The rest of the massa flutuante represents obligations wlhich, have their origin in the deviations betw,seen the value of registered loans and actually utilized amounts of external finance. .:,; bUIal:,- oi^ the .fkA.2a-L IULUaJI_Ie sihouuld be considered as a me-e esti..atD indic;Ltincg broadc'or,_ers cf :z-a-znitudes. Table E BJBuZILt& 2.SINAT5iD L7XTERNAL DEBT `S OF JUJE 30, 196!' I. Project Finance froini Office Sources and 9ondled. 'External Debt °/ l1[xi lt - lUJ, S Bonded IBRD iDE3 US-AID Bankc IMaritime Adni. Total Total External FPrincipal Principal __rincipal Principal Principal Principal Interest Debt 1)6L 0 3 -:L6.0 0,7 22.3 9.8 2.3 65 13,4 2.8 O. :30,8 (J9 l8.4L 23 1.!7 66 1.93 4.7 0. .7.2 IL6.7 2L.0 7 6y 13.3 KS 2.0 25.8 L7.l 20.L~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~)58 ) O/7 13 15 5 2 ) )5,°l7 1 C˘ 17 68 13.7 1.2 2.0 22.9 15.8 1..3 )4.7 6 7 3*I,9 *3.L- 6 2.0 n nL2.L 16, ' h.7 70 13,2 5.7 2.0 2O. L J 1.3 .13.7 7 71 13.7 L!.5 2.0 20.3 )L,o 5 11.7 1.8 72 1L 2 4.1 1. 4 1L8.3 38.0 9.7 1.8 73 15.0 3.6 1. :L6. 9 36.7 1.6. 1.6 74L 10.8 3 7 1.2 :Lo.8 26.5 5. 1.6 75 6.,9 3.2 1,2 5.5 16.8 L.8 1.6 76 6.5 3.1 1.21 2.L 13.2 LL.0 1,6 77 6.3 2.7 12 02.5 10.7 3.L 1.6 78 5..9 2,5 1.2) 06.5 10.1 2.9 1.6 79 5.4 2.5 1.2 0.5 9.6 2.5 1.3 30 5.,3 2.5 1.2 9.0 2.1 1,3 91 5.3 26 1.2. 9.0 1.5 1.3 82 5.3 1.6 1.2 8.1 1.0 1.3 83 5.3 1.2 7.5 0.7 1.3 84 5.3 0, 2 5.5 1.3 85 0.2) 0.2 1.3 After 19' 5 1.5 16 26.8 Total Outstanding 197.9 69.2 28,2 2 39.6 1.6 5365 183,7 796 i]assa Flutuante _ - - 6.6 1. 7 3,3 32 - To,4t flutstandinfc and liassa 197.9 69.2 22.2 2h6.2 3.3 544.8 186.9 79.o Flutuante 1/ I53D includes $L3.3 di1losz undisbuSe. F IERJ) includes 29.8 ri lIen 1:nHiDurued Table 8: RLAZILtS ESTIMATED EXTERNAL DEBT AS OF JUNE 30, 1961L II: Rrojecl Finance fram Private Sources by Creditor Countr:ies q TOTAL 2/ Inconvertible Project F-inance from US-' GE'ANY FRAIHCE ITALY- UK JAP'AN AADA OTHER Currencies Private Sources Principal Principal PrinciiDal Principal Principal Principal Principal Principal PrincipaLl Principal Interest 1964 II 23.7 '11.7 l.7 3.9 LI.1 5.6 o.6 5.3 5.L 67,9 :2L.3 65 L5.2 19.3 16.2 15.2 7.5 10.6 1.9 11.8 10.9 139,1 1o0.7 66 39.6 [3.9 15.6 13.6 5.3 12.2 2.6 10.9 9.2 12.61 3L.7 67 35.7 16.3 13.2 13.3 3.8 12.'1 3.1 6.9 6.7 111,6 :L.o 68 20.6 12.0 8.0 lD. 1.7 :L.9 3.1 4.4 5.6 39.3 L7.4 69 19.1± 7.3 6.3 13.0 0., 10.2 3.1 1.2 3.2 63.2 12.5 70 10.10 1.2 3.10 9.6 ,.8 3.1 0.4 1.7 1,o.0 .8.2 71 5.o 1.0 0.9 6.9 '.8 2.7 n5 1;5 27.3 5.8 i2 1.7 0.1± J.O 3.8 1.3 C.4 1.1 19.7 L.2 73 0.' 5.5 . 0.9 C.L 16,1 3.2 71± 0.1I 5.0 1.L 0.9 0.3 15,.0 2.1 75 O.0 '.9 0.9 11.,8 1.3 76 3.3 1.5 0.8 6.1 o.6 77 2,0 .1 0.',8 3,.9 0.5 79 2.0 0.2 0.3 3.0 0.2 IJ) 1.2 1.2 0.1 90 o.1 o.1 11 83 85 Total Outstanding 2 03. 8 91. 7 71.0 121.0 2 3. lll 5.3 26.9 ),2.6 L5.2 71,5. 1 05 r%±~3 a 71utuante :6. 4 13.3 25.6 ~ 14.9 7.6 5.5 0.9 19.1 9.4± 1L2.6 50.2 Total ouatstandina including iT,assa Flutaante 255.2 10.0 96.6 135.8 30.7 120.3 2?.3 61.7 514.6 -897.7 230.7 l/ Pro,jec t loans from private U.S. sources had to be derived indirectly because the basic debt statistics provided to tbe ~3ank mission by the Lxchan-e Department of the lanco do Brasil only show the total of loans from private sources and from the Inter-Ilrprican Development Bank. To obtain the figures for project finance from private U.S. souices we corrected the total - the ID13 fif7ures. Furthermore, assuw,ing absence of "massa flutuante" with regard to IDB crediits we allocated the fu:Ll amount of these questionable obligations to project finance from private to US sources. _/ ins:'Lde IDB_-lire loan of Ah.0 million Table 9: BRAZIL'S ESTIMATED EXTERNAL DEBT III: Conpensatoror Loans as of July 31, 19614 US-AID US.-AID US /1 1/2/ - 1961 Reschieduling 3 Z7[1z.5 million " 25.5 million Treasury -TDimbank TJaan pF e-rmriany f Fance e tIy Oter2 rotal loan loan Principal ]nterestu Principal Principal Principal 61 II - - 8. C 8.0 1',.2 65 9.0 1.2 1.1 17.3 39.0 66 16.3 30.7 6.1 L[.9 2.5 2.3 62.8 32.8 67 34.2 3.1 6.0o [. < 3.L 2.2 53.8 27,8 68 30.1 3.2 a.1 [,." 2.3 1[6,6 25.0 69 30.1 3.2 6.0 [.9 2.2 l6.L 22.3 10 30.1 3.2 6.1 5.( 2.3 l6.7 19.7 71 1.2 30.1 3.2 3.1 2.5 1.3 [11.11 17.0 72 2.4 30.1 1.6 14.1 15.1 73 2.5 0.8 30.1 33.4 13.3 7b 2.4 o.8 30.0 33.2 11.7 75 2.5 0.9 29.9 33.3 10.0 76 2.4 0.i3 29.9 33.1 8.4 77 2.5 0. 8 29.9 33.2 6.7 78 2.4 0.9 29.8 33.1 5.1 19 2.5 0.8 29.8 33.1 3.4 tO 2h O. 80. 29.7 32.9 1.8 81 2.5 0.9 3.4 0.5 82 2.4 0. 8 3.2 0.5 83 2.5 0. 9 3.3 0.5 84 2.4 0.9 3.3 O.L 35 2.5 0.'3 3.3 after 95 39.0 11. 7 53.7 3.L Total f)utstanding 7),.5 25.5 25.3 [61.7 17.5 33.4 27.1 7.0 12.6 8.0) 692.6 292.0 l/ includies 196[ rescheduling i/ includes credit l4r.1570, 1571, 1572 and the Specia'L Areement of Isc. 2, 15'63 / includas: Chase Manhattan 3ank; US-13arnking Consort-Lum excludes: Gold-Loan; D;F hi includes interest on gold loan and IMF credits Table 10: 13RAZIL: EXTMIiAL SHORT-TJRM INDEBTEDNSS AND SWAPS as of December 1.963 and Julv 196)A _Repayniiient viJchedule Aug. 12/31 7/31 Dec. 1963 1964 1964 1965 1966 1967 1968 1969 197i0 Cow-ercial & financial arrears 1/ 121.8 2(5.0 Consolidated oil arrears 76.4 '33.1 27.6 5G5 Lines of Cred:it used 2/ 12c1 12.7 Obligation on exchange contracts 3/ 198.2 145.2 68.4 7.6 1.1 1.0 - 1.3 Swap obligations 364.2 330-3 99.7 176.1 36.2 17.6 0.5 02 Other indebtedness i/ 54.1 21.7 21.7 l/Cor,-er-11 0ob';1gatiJons ar.d Mev-Aon..e--.t-^, creAJt overdue. Represer.ts / VJ,WIII4.L %'jLaJ. LtJ -J..4 .LJAUO~&L. '.V. V *iL'x.L4 - "A U ~ S'.~ jV ~~.* an obligation of the Banco do Brasil since it did receive the cruzeiro paymentQs .:rom thi'e actuial debDtor Ibut- delca.,_eth transfe WbeILause V%AL'of . fo.Lrein xhag sihortage. 2/Overdrafts with foreigrn banks. 3/Obligations to Brazilian importers. 4/Includes prefinancing by foreign importers of Brazilian exports. Source: Banco do Brasil, Carteira de Camdio Table 11: ffi-ULiTS 0. Ti-E 1961 - .33T >oC _L˝:G erl ,OrS mil US - TTei \ IL -L..'J ~ 1 i. Li. -L IV 1.961 1962 .1963 1961-1963 1961-July 1,964 Germany 3.4 7.9 13.89 28.5 33.4 France 365 3.7 21.3 25.1 27.1 UK 17 5.3 - 7.0 7.0 Japan - - 1765 1765 17.5 Italy v. - 8.1 8.1 12,6 Total Q,6 16.9 60.7 86.2 97,6 Repayments of 1961-Jul ;v 1964 Debt Rescheduling lIdA1 y .,.,= ±Jru; JapanI Itald.y TotalJL 196Li. - - - - - - -, flhii-,a r -rnce'A -, l L CIL C1 1Sw5 - : 1.1 - - 1 21966 6.1 UL.9 2-.5 2.3 C) 1967 6.0 4.9 3.4 3.1 2.2 19.6 1y68 6.1 L.9 3.2 2.3 166 1970 6.0 4.9 3.2 2.2 16.3 1971 6.1 5.0 - 3.2 2.3 16.6 1972 3.1 25 - 1.0 1.3 3.5 Source: D CC-`mOLETI11, Banco do Brasil, Carteira de Cambio Tabl e 12 : 19614 RE;SCHEDULING OF PROJLCT AlN,ID B CL41CE OF Ł.2ilsllNTS OOANS (millions of dollars) (+) offsets to scheduled debt service payments (-) amortization of the offsets 19614 1965 1966 1967 1968 1969 1970 1971 19',72 I. Official Project Loans Eximbank 34),,D 31t.4 -6.9 -13.1 -13.1 -13.1 -13.L -6.7 U.S. Maritime Administration Oe 3 0.7 -{).2 - O03 - 0.3 - 0O3 - 0.2 -02 II. Officiall.y Guaranteed. Pro.ject Loans (Eurone & Jaoan) 6602 62 1(0 9'.A -2 f o- 6 D -250..127 ITT. Private U.S. Project Loans from llajor U.S., __ ______ 0~~97 t 0o i I '7 (tentative) IV. U.S. Compensatory Loans Treasury .,)70 milliron loan 2., -9.0 -16.3 E xi m ba n1k c-r eddi t. Nr 1572 ji212e6 0.6 6.0 2.5 -l41 rni I1 1963 postponement 19n4 -7.2 -12.2 Total (IJet) 174.4 112.9 -31.0 -29.9 -5o03 -5f).3 -50.3 -50.2 -25.3 Table 13: EXTERNAL FINANCING PROGGRAMI 1965-1968 (Private and Public Sectors) Commitment Assumptions (millions of ;) Commitment Amounts Committed Date Official lenders Suppliers' Credits Total 1'?65/66 758 58 516 1966/67 694 56 709 1967/68 99 28 127 1,251 1l2 1,392 of which in public sector 1,102 1h2 1,244 Table IL: PROJECTED DISBERSMENTS OF EXISTING LOANS AND POSSIBLE NEW LOANS TO BE COMMITTED OVER TBE YEARS 1965 - 1968 1965 1966 1967 1968 1969 1970 1971 Existing Loans US-AID 45 37 27 9 IDB 39 39 23 6 1 IBRD 18 20 24 16 5 ..'L V - A.LV ±U- New Loans From fi'ficial. Sources 5 77 250 317 340 201 19 Suppliers' CreiLts 27 58 56 28 27 18 - Total Projected. Disbursements 148 237 380 376 373 219 19 r 1- vr' iDQin jl7fl'i1rT-i Th~Tqi!TpMq--T.TjrPC' "T YTQPTTU.T- T.rVAT\T AAMf D-CZqTDTV NEW, LOANS TO BE C'AUd.TTED OVETL ThE -7LIAS 1965 - 1968 .^ecuor c": uuIitflnb Description Date 1965 1'966 1967 1968 1969 1970 1971 TOTAL Electric Power Chevap 1967 3 4 4 h 15,.0 Copel 1L966 3 5 3 3 3 17.,O Caixas do Sul 1966 1let 1 5 Sotelco 1967 3 5 5 13.0 BIrazilian ) Traction ) 1966 16 16.,0 Distribution) System ) :L966 10 10 20.0 Boa Esperanca. Cohebe 1967 2 2 3 7rO Sud.ene-Conefor 1966 1 1A7 2. 7 1967 1 2 205 155 Suunlier' Credits - 17 1]8 18 15 15 10 93-0 Paulo AlfonsoII1967 7 11 in I0 in _9__0 Jaguara 1966 h 9 9 9 9 40.0 (C,emi g-D)i tr- System 1966 15 10 7 32,(O T Ts -1 nn ;.t. r S;ystem :1967 4 7 llc System 1966 12 8 5 250 do Sul. ) 1966 4 4 h L 4 2900 F'asoRe' O ) :1967 2 3 e 5 5 Furnasp Es-treito seconds stag 19ge 12 7 6 2 31n0 F'osal, Celf (.>,Jrdrc)) :1966 ~2 2 2 28 CIhevap, Santa Cr'-z TTT the-- seconcd stage :1966 4 3 11 "i,eva-p, transmission :1966 2e5 2.5 5 7J-.T-. kri2.A. -L.-LU 1. ILL frequency coniver-sion :19664 2 28 17 57.5 121,2 100.5 85.5 58.O 19o0 Eaisting Loans IBRD (incl. Chavantes T+ Estreit1-o) 18Q OnQ 23Q 16* 5,n b0I US-4AE) 26.1 26a5 13,9 -L,>J. 15c 3 L4 Lu 7?5 4 D -. U 59.6 60 7 .7o2 2078 6.o Table 15 (Contd.j: FRDiJCTLD UiSBJREU T OF EXbl5USTliJUG LOA4S AN-D PUOSIBLE :NE'W LOMIS TO BE COMIsS1TTED OVER THE =A.RS 1965 - 1968 Commit- Sector and ment Description Date 1965 1966 1967 1968 1969 1970 1971 Total High'ways Engineering Ser. (:DNER) 1966 2.4 2h8 Aortheast Highway .qu:pme!nt, M5aintenance 1967 0.3 0.5 0.5 1 : Highway Maintenance 1966 1.0 3.0 2.0 2.0 8.0 flig'Tway Maintenance 1967 1.0 1.0 1.0 3.0 All Highways 1966 30.0 35.0 40o0 105 .O Total: 3.7 34.5 38.5 43.0 i;,xisting Highway Loans UTS. ATD 7.0 11 5 11.0 9.0 Railroads R.ailway & Port Equipment 1967 5.0 5.0 10.0 Fed Plnijrr%r& R,ao Paiu10 RrEd 1967 15=0 30=0 1on 0 - 90.0 4ed. Railroad & Sao Paulo Rld. 10.0 10.0 - _ - - 20,.0 TOTAIL (no exist. Loans) Alt.ternative I: 0.0i 10.0 2. n. i r = .t'orts C5antos, Rio, Recife 1967 5.0 5.0 5.0 - 15.0 I lJ eLJcor,ILu.fi-unl-,-r)ns, TO_eAU1iwL: auIur1S LL7 U U 77 I .j TOTAL:~~~~~~~~~~~~~~~~~~~~~~~~rr (Contdc.): PROJECTE) DISBURS1ENIT OF EXISTING LOANS AND POSSIBLE NMTI LOANS TO BE COINNITTEf) OVER THE YEARS 1965 - 1968 Commit,- Sector and ment Description Date 1965 1 966 1967 1968 1969 1970 1971 T'otal Industry Steel From official sources (Cosipa, Usiminas) 1967 100 100 100 300 Volta Redonda 5 20 40 35 20 - 120 leew Plants - 3 3 4 10 UST2IINAS & COSIPA - 20 20 4O Other - 6 6 6 6 6 30 5 49 69 145 126 106 Other Industry Including Ind strial Credit New Loans Hardboard Manufacturing 1966 1.0 1.0 2.0 ALCOA 1967 5.0 5.0 5.0 15.C) Private Development Bank 1966 4.0 3.0 3.0 - 10.0 TrAnsustriiI Develornment, Fund (CREAI) 1966 2.5 2.5 5.0 TOTAL: Alternative I 3.5 7.5 8.0 8.0 5.0 Existing Loans AID 8.8 2.4 rTnp 13.3 79. 7.0 1.0 TOTAL 12. 9'.9- 7.0 1.0 ± GbJJ . 1., (Contx.): PROJECTED DISBURSEMENT OF E-XISTfl%TG LOANIS AND PO.SSIBLE Nv 0T LOA11S TO BE CCMITTED OVER THE YEaRS 1965 - 1968 Commit- Sector and ment Description Date 1965 1966 1967 1968 1969 1970 1971 Tctal Agriculture Fertilizer Manufacture 1966 4.0 8.o 8.o 20.0 Equipment Import Loan 1966 7.0 7.0 Equipment Import.Loan 1967 10.0 10.0 Storage (BNDE) 1966 25.0 25.o 50.0 Livest;ock Credi-t (BB) 1966 10.0 15.0 25.I) 50.0 TOI'AL: Alternative I 11.0 53.0 53,0 25.0 Existing Loans AID 15.0 IDB 2.3 2.7 17.3 2.7 W'ater & Sanitation 7,Eisting Loans) AID Mlalaria Control 1.5 2.5 2.5 IMB Water Supply 12.8 9.2 L.0 TCT2I 14 3 11-7 6.5 Housing IDB Existing Loan (Nr.40) 1.5 1.5 Education IDB Existing Loan (I\hr.85) 2.0 2.0 Ford Foundation ~~1.1 3.1 2.0 LTnB R-eg4 nl T)nir-l, nnr.rv (NTr. 3) 2.0 0 0n 9 7 (Existing Loan) Table 16: ILLUSTRATIVE PROJECTION OF GROSS FINANCIIJG REQUIREIENiTS AND GFLOSS CAPITAL INFLOWS (.Mallions US$) :1965 1966 1967 1.968 1969 1970 1971-1975 Current Account Defic:it 255 240 245 225 236 208 181 Amortization of External Debd./(as of Deic. 1964) 205 242 217 186 157 1:33 87 Payment of Arrears 174 45 8 Repayment of Bank Loans ' 10 27 38 38 20) Amortization of Lending Program 3/ 2 3 :3(8) 4(19) 50(72) Amortization of the Extension of the Lending Program 4/ 5 Amortizat,ion of IJS-Treasury Loan of $50 mill:ion 10 1( 'LO - Amortization of 196P,<65 Iteschedu'Ling 26 50 5° 50 19 Suppliers' Credits 2? 10 10 20 30 4° 50 50 IMF Repayment,s 55 8h 40 4 4o5 Cash Loans and Swvaps 76 76 50 Gross Financing Recuinments 785 724 606 582 556 500 392+ Inflows Direct Investment 50 50 60 70 715 75 PL 480 75 75 65 55 50 50 AID Program Loan 150 US Treasury Loans (54) IMF Standby 125 Loans from Ccimmercial Baiks 133 1964/65 Rescheduling 123 Existing Project,o ai Disb=useeant 102 116 74 31 6 Lending Program --/ 32 135 306 345 367 219 Extension of Lending Program ) 150 Suppliers' Credits (terms: 2+5)i' 50 5; 50 50 50 50 Gross Inflow 894 4h26 555 551 548 5'44 Surplus (+) or Deficit (-) 105 -298 -51 -31 - 8 44 Table 16: continued 1/ Excludes the 1964/65 rescheduling. 2/ Assumes loans of $80 million fromi U.S. banks and $60 million from Europearn banks. 3/ Includes amortization of the disbursement from existing loans, and projected a,nortization of neTlf loans. The terms assumed were: Loans from official sources: 50%: 10 + 20 50%: 5 + 20 Suppliers' credits : [ + 6 After refinancing : 5 + 20 The figzures in brackets show amortization payments if suppliers' credit component is not refinanced. it/ Commitment of' new loans beginning 1968 to keep inflow of loan capital at the level of t3c0 million annually. WA5__A$=5r_ezu _ I v A 4. s: _ _. - 4 _. .: 41 1- k _ _4A . 4 * WD a~ UiUzmen. Ł* jllsu> U " V± u1A; aUUJ U.LUU1naL sadLxl X X VJSxLJ. Ut [J)iU VU military personnel whose performance does not contribute direct7ly to greater c om L c e ILCteIACy. AIlw;ouU1 a tUenpuary stop on tIn 1iri,g ofUlL civil servants was announced, the government did not consider it desirable to dismiss inefficient or reduLdanzt personel in the shiort rul. salary and mage increases for seniority or longevity in 1965, according to liberalized rules adopted in 19624, but no general increase in ratesu of pay will be made before January 1, 1966, when an increase averaging 20 percent will be granted. Since average prices are expected to be 72 percent higher in 1966 than in 1964, this will absorb most of the increase of real salaries granted in 1964. But, even so, tne budgetary burden of personnei expendi- tures will hardly be eased. Since in 1965 the new salaries will be paid for the first time on a full year basis, total disbursements of the national treasury for personnel will be substantially higher than in 1964. Moreover, iarge wage increases tw-ill be granted by some of the states and municipalit- ies. For instance, in Sao Paulo government employees have received a 70 percent salary increase in 1965, and in Guanabara salaries are automat- ically adjusted by the same percentage as tax revenue grows. NU(EX 3 Page ll Subsidies for Government Enterprises 32. A considerable part of government expenditures consists of subsidies to cover deficits of major government enterprises such as the railways and postal service. In the past, most of these entities have failed to adapt their tariffs sufficiently to increasing nrices and costs and have done little to inprove their effic:iency. As a consequence the government had to finance huge operating deficits as well as most of the investment outlays from general. budget resources. In the 1965 budget proposal of the central 6-nvPrnrnrnt, fo-r insri%nrPe- t.rnsrfePr expend{iture.s for the fin2nninc of niirrmnt deficits of the railways, the merchant marine, the port, as well as the operating deficit of the postal and telegraph service amouned to Cr$530 billionn l'nh1 n r. PPPhAPTLtC' tVwTi'fT'PC flT MA TC3 P.flUT'RPI\M~?J Tabl C: OPRADI DL!!-,. OF . _ w, v. MAJr rr1MPM,PJ ENTERPRI MS, 1965 (Cr$ billion) Budget Present Aftppopriations tsml.ates Railways ~ ~ ~ ~ ~ ~ -7 29 44 Maritime 110 86 Postal an,d telegraph ser-vice 130 97 m y-1 _ re In addition, the budget has to provide Cr170 billion for the financing of capital expenditures of those entities, Together such appropriations (Cr$,700 billion) account for 19 percent of total expendituires or almost as much as the whole budget deficit (Cr$775 billion). 33. The government has taken steps to reduce the operating deficits mainly by increasing tariffs and rates. This will probably cut down cur:,ent transfer requirements by CrdlO3 billion or 20 percent in 1965. Even so, total expenditures for government enterprises will be high. Moreover. since those estimates are based on the assumption that wages will not be raised in 1965 any increase in government salaries would increase the deficits of government enterprises again. Inflation and Budget Control 34. The efficiency of public spending has also been hamtipered by un- realistic budgeting and lack of expenditure contrel1 With accelperating inflation, realistic budgeting became more and more difficult and controcL of expenditures within the fiscal year less Pff-etivp Since prices in- creased faster than expected, budget appropriations usually turned out to be inadequate and additional authorizations became n.ecessaJr during the fiscal year, ANNEX 3 Page 12 35. Administrative and institutional deficiencies aggravated the problem, particularly at the central government level. Because of an inadequate system of accouriting and division of respo,nsibilities for preparing and executing the budget among different government agencies, expenditure estimates had to be based largely on obsolete apprQpriations of the previous year rather than on actual disbursements. Moreover, there is no systematic planning of cash flows and no firm control of expenditu^es during the time of budget execution. Individual ministries and governmelt agencies can authorize payments wJithin the limits of their global appro- priations withont consnulting the Ministrv of Pinance. which must finance the disbursements. The present Code of Public Accounting gives the execu- t4ve' almost. iinlimi±.Pic ±thoriq.ationn to spe-nd monev. byvond the budgpt appropriations without approval of Congress. In 1963, for instance, actual disbursem.ents of the central government raceeded the origrina appropriations by almost two-thirds. 36. The government has started to take measures to improve budgeting arnd expent;-NtI-1re control. W 1r+ New bug tA nd ar'ntim+.nT l- ardpn+.tre i n Mirrh and April 1964 improved the c:Lassification of revenues and expenditures and gave t.he rLPL-eS4lden4UL more authiorit y over the 4nitiation of -peing proposals., A Commission for Financial Programxning has been established treasury. Ecpenditure control will be tightened in 1965 by a new regula.- 4-L-J o proUVA.L1 4" tha-t tU h JLas-t ~ ±Int, ofA a.LA. L J L .LJ.tdjJ9.'jJ L can be spent only with the approval of the Mdinister of Finance. There is a proposal to shift the main responsibility- for budget preparation to the- Mlinistry of Planning in order to obtain better coordination of budgetary priorities with the objectives of over-all eCon-11ii.c planning. Finally, the government has announced its intention to abolish Article 48 of the accounting code, which allowzs the executive to authorize expenditures in addition to budget appropriations without congressional approval, Vi. Characteristics of the Revenue System 37. More than two-fifths of all government revenue in 19641 wili cotRe from sales and consumption taxes, including the tax on petroleum products. Income and profits taxes, including the additional taxes and related com- pulsory loans, are expected to account for about one-sixth of the total. Other important sources of revenue are the social insurance taxes, the implicit tax on coffee exports imposed through the exchange system, import duties, and stamp taxes. Details of the composition of government revenue are given in Table D. ANNEX 3 Page 13 Table D: CO01WSaTION OF GOVTFRNIZNflT REVENUE. 1964 (In percent) At This For W'hole Government Government Level Sector Central government 100.0 63o6 Consumption tax 25.h 16.2 Income and profits taxes 19.1 12.1 .Supplementarv incomr taxes and compulsory loans/ 8L3 53 L.smnp t>Aes q_)1 3'h Import dutiesJ 60 0 3 8 Pet.roe-1 .im .n- 7v°7. )IJI Coffee Fundc/ 1.0,1 6,h Social insuraln-ce tanes 16A8 10-7 Other 1e9 1.3 States lCO.0 313 Sales taxes 79.5 24.9 Mnicipli+ied/ 0.51 Total .~ J ..&SL *'J 2 Does not include compulsory loan on electric energy, wihich is Hrart O.L !!i #A Aer!t ' .ncl-de umol+ surcharlge L. Utha tlUlculgeU syssv6Uw .L_ jJ_' UU Uf. )iA1u.L Fiscai surplus of the cofIfee account. ' iBreakdown not avaiiable. Source: Derived from.Tables 1, 3, 5, and 6 and supplementary estimates. ANNEX 3 Page 1l 38. The Constitution of 1946 declares that "taxes shall be of a personal nature. whenever this may be possible, and ... shall be graded in accordance with the economic capacity of the contributor."1!/ This statement reflects the view that personal or direct taxes such as the income tax can be more closely adjusted to individual tax paying ability than can indirect taxes such as the consumotion tax and sales taxes. W^Phen well designed and effectively administered, direct taxes can also do more to reduce economic ineoualitNvr But it does not follow that Brazil at the present time should try to substitute direct taxes for indirect taxes on a large scale- 39^ Direct taxes. because of their rPfi nePme-nts, nre umsally more difficult to administer effectively than are indirect taxes and are more likelv to be evaded. Ihile the pvtent of e.vnsinn in Brazil cannnt. he accurately appraised, there are indications that it is a serious problem, particularly with respect to the income and profits taxes, Evasion, of course, is not equally prevalent everywhere; those who are subject to witu,hlola ;ng or W-h.o ari e scrupul,ous pay rnore th,-Lar. o0-thV-ers w-it.h. 41u,aal im4 Furthermore, in an inflationary environment, the assessment of income and pro.l.L Lte U ico.lat Led by tAhe dlstortions of. accontin.Lg I recOrd particularly those relating to depreciation and other capital costs. Delays in tax assessmuent and collection erratlcally affect the real bUde,n. In these circumstances, the direct taxes may lose much of their fairness adiU productivitye 40e With care, indirect taxes can be adapted to economic objectives, and extreme regressivity can be avoided. These possibilities are briefly considered in the discussion of the principal Brazilian taxes in the nexi; section. 41. A striking characteristic of the Brazilian tax system, to which reference has already been made, is the success achieved in maintaining, and even increasing, the ratio of revenue to national income in a period of rapid inflation. Many countries undergoing inflation have suffered losses in the real value of government revenue which have resulted in larger deficits and still greater inflation. The Brazilian record has been made possible partly by increases in tax rates, but the system has also been made responsive to rising prices and incomes without rate changres. The most important features in this respect: are (a) the use of ad valorem, rather than specific, rates for the consuaption tax, import duties, stamp taxes, and petroleum tax; and (b) the prompt collection of most taxes. The most important lag between the accrual of tax liability and the date at which payment is due relates to the income and profits taxes that are assessed and collected on the basis of declarations rather than withholding, about half of the total. The taxes that are not assessed on the basis of 1/ Art. 202, Constitution of the United States of Brazil, 1946, translated into English and publishecl by the British Chamber of Commerce in Brazil, Rio de Janeiro. ANNEX 3 Page 15 current values and promptly collected - for example, the state and municipal taxes on real estate - have tended to lose their fiscal importance..YI 42. Brazil, like other countries experiencing inflation, has had to cope with the problem of tax arrears. When prices are rising rapidly, delays in tax payments reduce the real value of the payments, often by more than the penalties prescribed for late payment. In 1964, Brazil adopted an important measure designed to eliminate incentives for delay in tax pavmient. Beginning at the end of November 196L, all fiscal debts will be subject to a monetary correction to adjust for changes in the price level. on the basis of official quarterly indexes. The zovermnent will also apply the monetary correctirn to refunds that it pays because of over-assessmrnnts- VII. Tax Structure Consumption Tax 43. The consumption tax of the central government is a series of tially a value-added basis. Exempt from the tax are certain low-priced -+; n 1 oAC4' o h-k ;rgrg, fun1itue.n A housed,A1 4A qu-'i rn,I-O . r^C+-t-; fc^nAC and certain drugs and insecticides. Exports are also exempt, and refunds are gran-t-d fIor t'Uaxe:s paid on materials arnd componernts emlbodied in the- export pmiducts. Petroleum products, which are separately taxed, are a.lso exefkpt, 440 In Uiouer LIU a-voi.U IUlliLU.Lpx.LtC, LdAdU±OL!1 -a mIanuLacturer is allowed to credit against the tax on his product the taxes paid on rawl materials and components entering directly into it. This arrangemenrt, which was adopted in Brazil in 1958, is simlar to that in the Frenich value-added tiax, 45e In August 1964 an emergency increase in consumption tax rates was adopted, to be effective ior the remainder of 1964. While rates were generally increased by 30 percent, taxes on cigarettes, which are an important part of the total, and a few other items were not increased. We estimate that the weighted average increase in rates was about 20 percen't or one-fifth, Half of the revenue from the emergency increase is to be distributed to the states, i/ The statistical series given in Table lb somewhat exaggerates the growth of the ratio of government revenue to GDP over time becauise it does not include the implicit tax on coffee exports prior to 1962c The surplus of the Coffee Fund is estimated at 1.8 percent of GDP in 1964 and 303 percent of GDP in 1965 ANNEX 3 Page 16 46. The government submitted to Congress a bill providing for a revision of the consumption tax and a permanent increase in rates in 1965, The government proposal embodied rates lower than those established under the Emergency increase but about 5 percent to 10 percent higher than rates prevailing before August 1964., Under the governiment bill, rates in 1965 would generally fall in the following groups: raw materials, 3 percent- capital goods, 4 percent; processed foods and other perishable consumer goods, 6 percent; clothing and other semidurable consumer goods, 10 percent; consumer durables, 15 percent; beverages, jewelry, and cosmetics, 20 percent to 50 nercent: and cigarettes. 180 nercent to 240 percent. The governmentts proposals were designed to simplify the tax by adopting the Brussels comrnoditv classification, which is aLready used for imnort duties. The. use of this classification for the consumption tax will sim.plify the assessment of tnw on ;innnrtrp -nnri-, anri iq al R p-nc.t.s t.- v'1chc iincrnrtaini-.-itf ahfr,nn the applicable tax rates that have arisen under the less elaborate classi- fication preion.c1v -5 ncorra1;ed in the -^onnn+.-irn ty- 1c rlno nnt havp information about tile final action of Congress on the governmTent' s reform pr oposalsD }17 Tl-, + -_ -I nn cv,vnn+4 n - n a Q --'n.aA ;+ Q f4 cnnl cr,rnl. 4 Sri + ir onri ;+ 4 Q -I 0 *J S '._V1 - V. S- - V _ fL V -. - -4 LJ._ V ------- J - a rather sophisticated measure that is free of the worst faults to which sales taxes and tur-over tae-3 are subDject. From tle standpoint of develp=- ment policy, the most serious question about the tax relates to the taxation of r.achinery andLI ot'her capit-al eq uiLp-.,e.1-.t jinra the' 41 cost- of ca-.tal ~~ '-a-H-'- ~ ~ * jJJ ~ UIIU %'J u V. U CF'.J", goods, the tax may discourage new investment and modernization. However., LULVe tuax rates on maost iterns ofi machinLL-Lery andu equipLment Iha.ve been only 3 percent in the past and were It percent under the governmenit's proposals of L/"1+4 ILIZ 0 J.5 CLUra t UU LdUU ot seer, IghI enoUgh to do UU 1IILUL-iIl cio 48. By internationIal standards, the tax rates are comparatively lo-.- on alcoholic beverages, cigarettes and tobacco, jewelry, cosmetics, and other luxury items. There seem to be opportunities for raising those rates, either to obtain more revenue or to allow reduction in rates on more essen- tial products, This would tend to make the tax less regressive. Income and Profits Taxes 49. In the past, individuals (natural persons) have been subject to several schedular taxes at different flat rates on income from different sources and a global cornplementary tax applying at graduated rates to total net income. The schedular taxes were abolished by the income tax revision act approved by Congress in late November 1964. This action siplilfied 1the tax and removed differences in tax rates that were hard to defend, 50. Individual income tax exemptions and rate brackets are stated as multiples of the highest monthly minimum wage (at present Cr$66,000 in S.o Paulo and Rio de Janeiro). The government proposed in 1964 that specific, money figures be substituted, with provision for adjustment when prices rise more than 10 percent in one year or 15 percent in three years, Congress, however, rejected this recommendation. The indexing of exemptions and rate ANNEX 3 Page 17 brackets is probably expedient as long as Brazil is experiencing price increases of Tnore than 5 percent to 10 nercent a year; otherwise. the effective rate of taxation would rise to unacceptable levels. The indexing, however, comrplicates the tax and grpatlv limitS its anti-inflationary nower. When prices have been stabilized, indexing should be eliminated as a simpli- fication measure and a mean.s of incrensing the elasticity of yield of the income tax. 51. The government proposed an increase in individual income tax rates this recommendation and actually reduced rates in the bill that it passecd -in 1N4ova-,tber 1964e The _.__ newspaper report 4tt th1reiert4ecse i .L~J''J ~IIU ~ I.L7 IJ~4 _ xi.±1 ,w p"pu a L u UAIa %, %LU Ui 1 3-O_. "-_JL1V LJ~' " item veto to strike out the section of the bill containing the lower rates, wILIcLh pr-eswa.ablvy. le .LaLves in efLfectthe U ot U.LUd g.lobal co1r.ple rates. 3.f this is correct, the income tcax will nevertheless be reduced because of the ' Z. : : _ L: 1 ~ t -' I L __ . __ _ A r: - Xn _ __- - I - - _- _ _r 4. 1- eL m11inatioLU Un Dii: U aU of;tho jUUlcd s Ular taUe Ain offi 0 L: |ciaL ti,Uy UtL Wite new law has not yet reached us. 52D Brazil taxes the profits of business firms or juridical persons including sole proprietorships arid partnerships as well as Uurp'orauions. The tax rate is 28 percent, an-d an additional tax of 7 percent applies to dividends distributed by corporations except those paid by "open", cor,panies with more than 200 stockholders whose shares are listed and traded on an exchange. Proprietors, partners, and shareholders are taxable on distributed profits at regular individual rates, An excess profits tax was formerly imposed but was abolished in 1964. This was a desirable reform in view of the inherent difficulties and economic defects of this form of taxation, which had been greatly accentuated by iniflation. 533 The emergency income tax revision of July 1964 includes provisions intended to stimulate private saving, which is a major objective of govern- ment policy. Under the July law, individuals are allowed to deduct from taxable incorme in 1965 and later years: (a) 20 percent of their subscrip- tions to registered securities of' the national treasury; (b) 15 percent of subscriptions to new registered shares of corporations whose stocks are traded on a Brazilian exchange; (c) 15 percent of investments in deposits, mortgages, or other forms for the financing of low-cost housing according -to a program approved by the Minister of Finance; (d) the full amount of subscriptions to registered shares of industrial or agricultural corpora- tions contributing to the development of the Northeast. These deductions, together with certain other personal deductions, are limited to 50 percent of gross income. 54. The deductions for financial investments are generous, especially for persons with high incomes, who benefit most from a deduction from taxable incorne because their marginal tax rates are highest. The deductions, strictly speaking, are not restricted to those who accumulate new savings but are granted for the eligible investments however financed. Apparently one who merely sold old assets and invested the proceeds in the specified kinds of assets would. qualify. Presumably, th-e intention is to allow the deductions 'dITELX 3 Page lo only for permanent investments, and not for temporary investments that are termi natecd by early sale of the securities. In order to prevent persons from avoicling tax by the simple procedure of buying eligible securities toward the end of the vear ancl sellin 7 them shortly thereafter, administra- tors plan to check taxpayers' claims against the lists of security holdings that. are sppnred tor he fil ed Tith incorne tny returns= We are skentical. however, of the feasibility a-nd effectiveness of this control and believe thn+ +.he dledrictionns re s-hiect to abhu.qp We qlSO c douht the efficiencv of the deductions as a means of promoting saving and investment and directing reso,v,ces tow.rard the most P.Im1or-tant .j.natiJonal ohcti 55D The .ergeny rn + io I n- ,-.4 Tu7y i I 1A), provi for +the, man-_ datory annu.l revaluation of the fixed assets of business enterprises on the bai o i -o ; + ; n Nfficil des i+ +hj ; n nan I l r r- level. Depreciation allowances will be based on the adjusted values; however, in the transition years 1965 and 1966 only 50 perct and 70 percent, respectively, of the additional allowances may be claimed, In an i.rflal-onary en.vironm'ent., dep.ieciat-ion a"lowances basedI on hsoi ca I.Lo;| which were previously required in Brazil, are inadequate measures of capital conm__pt -.:Lon an: _Y-J _..s * _n _! I.. l 4. 1- UUili,ULjJ4.LUl1 cAU W_L.L± UC irUJ u1f -icienU uo coUvIer rep dCIaCiieniD cUs. Vv L V historical cost depreciation allowances, profits are overstated and the incoume tax becomes in part a tax on capital. Although an increase in depreciation allowances is economically desirable, it tends to compound the inequities of inflation because it reduces the taxes of owners of depreciable assets, who as a group fare relatively well during inflation, and does nothing for holders c,f^ money claims, who are expropriated by the inflation. ,560 DThe immediate consequence of the revision of the book value of business assets will be higher taxes rather than tax relief. This is true because firms are required either to pay a 5 percent tax on the increase in book value or to subscribe to indexed government bonds in the amount cf 10 percent of the increase in book value. Informed opinion is that most firms will elect to pay the tax because they do not have enough funds to buy the bonds and because they lack confidence in the purchasing pr.wer guarantee. Tax payments associated with the revaluation are estimated at about Crw4C' billion in 196L and Cr.l10 billion in 1965, net of the revenue loss due to additional depreciation allowances in 1965. The additional tax payments, though they strengthen the government's finances, will impose a strain on the liquidity of business enterprises. There is a possibility that they will occasion demands for additional bank credit which will be at least partly successful and which will partly offset the anti-inflationary effect of the taxes. 57. The government is considering adopting in 1965 a current-payment procedure for the tax on business profits, Under this arrangement, firms would be required to file a preliminary return or estimate of their profits and tax for the current year and to pay the tax or a large part of it during the year of accrual rather than the following year. If successful. this procedure would eliminate the biggest remaining lag between tax accrual and kANIFX 3 Page 19 payment and thus make the revenue system more responsive to changes in business activity and prices. WiJhile pre,mpt tax collection will be espe- cially important as long as prices continue to rise rapidly, it will be difficult to apply a current-payment procedure in these circumstances, since the record of the previous year cannot be relied on to the same degree as it is in countries with reasonably stable prices which have current-payment systems. Probably estimates and tentative tax payments would have to be related to gross receipts, which can be ascertained more quickly than net profits. Furthermore, at the time of transition to a current-payment system, arrangements would havre to be made for the orderly liquidation of the two years of tax liability that would fall due in a single year - the liability with respect to profits of the previous year and the tentative payments with respect to current profits. If the tran- sition is made in 1965. the problem will be complicated bv reason of the nonrecurrent payments in that year of the tax associated with the re- valuation of business assets in 196h. 58. kAnother reform under' consideration is the extension of the tax on capital gains of individuals. Individuals are now taxable only on gains from real estate sales. althnigh hbuines.s firms are renqired to^ include. -- capital gainis in taxable profitse The extension of the tax on capital gains can be support.ed as a mn.ans of' reducing ineuit.ies and of preventing tax avoidance. On the other hand, it can be argued that the taxation of capital gains is especially ldaaging to investment incentives and is comple a subject to evasion0 Stamp Taxes 59.. The central government's stamp taxes apply to a wide variety of' legal docume.nts and financial instr-,umaents, usually at ad valoreI__ rates or, the basis oi the value of the contract or property right involved. These! taxes are iLnconvenient ana no doubt interfere to some degree with commerce and finance., In the long run, some of the stamp taxes should be dropped; .however., Brazil is n,ot in a position to d-emuphasize these taxes now. Thc. government. submitted to Congress in 1964 a project for the rationalization Or the stampat«x, axeS,the reductioln of inequities, and the improvement of administration. W4e do not have information on congressional action on the b1 ll Import Duties 60, DIports are subject to ad valorem customs duties and a 5 percent customs clearance tax. Petroleum products, which are subject to a special single tax, are exempt. For customs duties, values are converted to cruzeiros on the basis of a "fiscal dollar" exchange rate which is set each month equal to the average of the free market rate for the five preceding months. The increase in revenue from import duties in 1965 and 1966 shown in Table 3 is due largely to projected changes in the exchange rate under the government policy of allowing the rate to depreciate in step ijith rising internal prices, ANNlEX 3 Page 20 61. The import duties are strongly protectionist and bear heavily on goods tha-t are judged to be produced in adequate quantity and quality in Brazil or to be similar to such goods. The Customs Policy Council may in- crease the statutory duties to provide protection when a national produc-t similar to one previously imported is registered, Petroleum Tax 62. Petroleum products are subject to a single federal tax at ad valorem rates and are constitutionally immune to the consumption tax and state sales taxes as well as to import duties. The petroleum tax rates were sharply increased for the period November-December 1964, and further small increases will take effect in 1965. The new law also prescribes a formula for derivation of the Drices of refined products by the application of coefficients to the CIF price of imported crude oil. The exchange rate for oil imnorts is thus an im1portant determinant of the price of refined petro- leum products, including those derived from domestic crude. From June 1964 the exchange rate was changed from CrM6O0 ner U.S. dollar to Cr$1,20c. It is the policy of the government to unify the exchange rate for petroleum with the general import rate, and t,he estimates given in Table 5 reflect the assumption that this unification will be carried out at the beginning of 1965 (with rates changed quarterly). 63. The revpnue from the petroleum tax is divided among the central government, states, and municipalities and is assigned to roads, railways, and airports. The shares are as foll o: For. road Central government 34.18% Statles }1"Ix1 Municipalities 10,68 F.or railways (anr r3a) L.0U0 For airports 3.13 In Table 5 the whole tax is included in central government special fund revenue, whereas in VbLte statue and niunicipal Shares are ncluded in transfer receipts from the central government0 State Sales Taxes 64. The major source of state revenue is the so-called sales and consignment taxes. These taxes produce four-fifths of total state revenue from own sources, and in the aggregate they yield more than any federal tax. While provisions differ in detail among the states, the taxes are generally turnover taxes levied on sales at each stage of the production process, from the manufacturing or import level to the retail level. Services are not taxed. Rates have trended upward. At the present time, the basic rates in some of the larger states are Sao Paulo, 6 percent; Guanabara (city of Rio de Janeiro), 5.5 percent; Minas Gerais, 8.1224 percent; Parana, 6,95 percent; and Rio de Janeiro, 6,7 percent. In most states the rate is uniform for the bulk of commodities, but there are special rates for a few items as well as a small number of exempt g6ods. ANNEX 3 Page 21 65. At current rates, the sales taxes raise important questions. Because each turnover is taxed, the burden on the final consumer varies greatly among products depending on the technical nature of the production process and the organization of the firms producing and distributing the goods. Taxes are relatively high on goods with long chains of production and distribution and relatively low on goods that pass direct from the manufacturer to the consumer. The taxes give an incentive to the vertical integration of the production and distribution process and penalize spe- cialization. For example, a manufacturer saves tax by producing his own parts, semi-finished materials. and components instead of buying them from other firms. He can save also by selling direct to retailers instead of to a jobber or wholesaler. Some well-informed observers think that the sales taxes have been a factor in vertical integration in certain industries, particularly textiles and chemicals. Tntegration brought about bv the desire to avoid taxation is likely to be inefficient in other respects and un- desirable. 66- The sales taxes nunmnly apply to Pxports- although sometimes special rates or provisions are granted. There is a danger that the taxes will interferp with eports or at. l necesiat a mnre depreiatpei exchange rate than would othenrise be required to make Brazilian exports competitive. 67. The system. tends to favor the - - - states, such as Sao Paulo and Guanabara, compared with the other, poorer states. The federalC does not preve- the states from ting salest out-of-state buyers, and the states take full advantage of their opportuni- + ';es tTl. un T a 4 s4 -*- -- - * 4 4' - 1 -h,1 - 4-1 '4 h wlese ^..e. -ea 0 ri1uD0UU.LVL) LJJ. cLJ- resurces may .erICL'.La UI/- ± LA.J. states to finance public expenditures that will help them to stay ahead of the poor states. provide only a very limited degree of rate differentiation, they fall as IIG6.eavy UnL arLcXLJ%-es of r.-ass consamptiOn aso on Lux&1.uZr * OU Joe-mIporDanQil luxuries are services which escape the tax. The broad coverage is respon- sible for the large yield, but it must result in a tax that is generally regressive and especially burdensome to those in the lowest income classes. 69. Since the sales taxes produce so much revenue, they cannot be eliminated. It is probably unrealistic to propose any drastic changes in the immediate future. Consideration might well be given, however, to long- run reforms that would restrict the states to taxes on retail or wholesale sales and on services, accompanied by an increase in the federal consumption tax which would be distributed to the states to compensate them for giving up their taxes at other stages of production. This would eliminate cas- cading and produce a more uniform and equitable system, iaYl:e I: G0VFENWIiF N A!ITNC AND ENNVESTMiENT j O'>'619( (Cr! bil:lion - current prices) 1956 1957 1958 1959 196C' 1961 1962 1963 1964 1965 1966 I:. Current Revenue, total 177 228 293 40c6 56' 813 1,306 2,415 4,754 8,362 9,805 1. Central Governiment 99 130 175 239 325 492 767 1,480 2,954 5,512 6,315 a) Central Government Budget 7D 85 118 158 220 318 512 953 1,944 3,170 3,700 b) Special Funds 29 45 57 81 105 164 255 52s 1.010 2,3h2 2,615 2 State and Locjl Goveu;;cnd! t8 98 118 17 240 331 539 935 1,800 2,850 3,490 a) States 62 78 95 138 201 279 455 790 1,550 2 ,450 3,000 b) Municipalities 16t 20 23 29 39 52 84 145 250 40oo 490 II. Current Excenditure. total 172 214 246 3,64 499, 723 1,246 2,186 4,235 6,385 7,530 1. Central GovernmentgY 103 123 139 214 287 417 739 1, 306 2,515 3,725 4,290 a) Central Governrient Budget 79 90 100 152 21,' 305 561 98f5 1,975 2,750 3,150 b) Special Funds 24 33 39 62 70 112 178 321 540 945 1,140 2. State and Local Government 69 9l 10? 150 212 306 50s7 880 1,720 2,66o 3,240 a) Staties 56 72 85 124 176 257 +30 750 1,500 2,300 2,800 b) Municipalities 13 19 22 26 3 6 49 77 110 220 360 440 III. Current Saving, total (I _ II) + 5 +14 +47 +42 +66 +90 +60 +229 +519 +1,977 +2,275 1. Central Government _ 4 + 7 +36 +25 +38 +65 +28 +1',4 +439 +1,787 +2,025 a) Central Government Budget n 9 _ 5 +18 + 6 + 3 13 -49 -32 31 + 390 + '50 b) Special Ftnds + 5 +12 +18 +19 +35 +52 +77 +206 4470 +1,397 +1,1475 2. State and Locazl Government + 9 + 7 +11 +17 +28 +25 +32 + 5 + 80 + 190 + 250 a) States + 5 + 6 +10 +14 +2'j +22 +25 + 40 + 50 + 140 + - 200 b) Municipalities + 3 + 1 + 1 +3 + 3 + 3 + 7 + 2-5 + 30 + 50 + 50 IV. Investment, total.)/ 33 58 81 97 146 214 335 6'j4 1,055 2,337 2, 865 1. Central Government 19 38 50 64 91 130 219 459 675 1,557 1,895 a) Central Governnment Budget 15 30 40 55 7( 120 180 400 55c) 1,060 1,:300 b) Special Funds 4 8 10 9 2:1 19 39 59 125 497 595 2. State and Local Government 14 20 31 33 55 75 116 195 38C 780 970 a) Staties 10 15 25 25 45 60 90 150 300C 550 t660 b) Municipalities 4 5 6 8 1( 15 26 45 8c0 230 310 V. Overall Surplus or Deficit, total (III _ IV) -28 -44 -34 -55 -80 -124 -275 -425 -536 - 360 - 590 1. Central Government -23 -31 -14 -39 -53 - 74 -191 -285 -236 + 230 + :130 a) Central Government Budget -24 -35 22 -49 -67 -107 -229 -4:32 -581 - 670 - 750 b) Special Funds + I + 4 + 8 +10 +14 + 33 - 38 +147 +341 + 900 + B80 2. State and Local Governnent - 5 -13 -20 -16 -27 - 50 - 84 -140 -30C) - 590 - 720 a) States - 4 -- -15 -11 -20 - 38 - 65 -1L0 -250 - 400 - 460 b) Munici-3l-ties 4 _ - ___ -51 -_9 - 3 95'' - 190 - 260 1/ Excluding tran'3fer r-ceipts from c-ntral goverr-:emt 2/ Excluding trcnsfer pe>-yen-:q - ot.nher levpls (I .V:rnr, ]/ Including rapit t. tranf-fers and finanei; inv1 e.mets Table la: GOVERNMENT SAVING AIID INVFSTMENT, 1956-1966 (Cr2 billion, const-nt prices of 1064-/) I 956s 1957 1958 1959 1960 1961 1962 196 3 1964 1965 1966 I. (urrent Revenue, total 2,303 2,663 2,942 3,2C3 3,565 3,,805 4,101 4,419 4,754 5,575 5,687 1. Central Government 1,288 1,518 1,,757 .1,886 2,051 2,,256 2,409 2,708 2,954 3,675 3,663 a) Central Government Budget 911 993 1,185 1,247 1,388 1,,488 1,608 1,744 19kI 2,1L3 2,1k6 b) Special Funds 377 525 j72 639 663 768 801 964 1.,010 1,562 1,517 2. State and Local Government 1,015 1,145 1,L85 1,317 1,514 1,549 1,692 1,711 1,800 1,900 2,024 a) Sta,tes 807 911 954 1,088 L,268 1,306 1,429 1,446 1,550 1,633 1,740 b) Municipalities 208 234 231 229 246 243 263 265 250 267 28E4 II. (urrent Exnenditure, total 2,238 2,500 2,470 2,872 3,149 3,384 3.912 4,000 4,235 4,257 4,367 1. Central Governrment 1,34C0 1,437 1,:396 1,688 1,811 1,,952 2,320 2,389 2,515 2,483 2,4138 a) Central Governmrent Budget 1,028 1,051 1,004 1,159 1,369 1,427 1,761 1,80Q2 1,975 1,853 1,827 b S Special Funds 312 386 392 489 442 525 559 587 540 630 661 2. State end Local Government 898 1,063 1,074 1,184 1,338 1,432 1,592 1,61:L 1,720 1,773 1,879 a) StaLtes 729 841 853 979 1,111 1,203 1,350 1,373 1,500 1,533 1,624 b) Municipalities 165' 222 221 205 227 229 242 238 220 240 255 III. (,urrent Sayine, total (I - II) + 65 +163 +472 +331 +416 +421 +189 +419 +519 1,318 +1,320 1L. Central Government - 52 + 81 +361 +158 +240 +304 + 89 +319 +439 +1,191 +1,175 a) Cerntral Goverrnment Budget -117 - 58 +181 + 48 + 19 + 61 -153 - 513 - 31 + 260 + 319 b) Special Funds + 6-i +139 +180 +150 +221 +243 +242 +377 470 + 931 + 816 State and Local Governrment +117' + 82 +111 +1,3 +176 +117 +100 +100 + 80 + 127 + 1J5 a) Sta.tes + 78§ + 70 +101 +109 +157 +103 + 79 + 73 + 50 + 93 + 116 b) Municipalities + 39 + 12 + 10 + 24 + 19 + 14 + 21 + 27 + 30 + 34 + 29 IV. Investment, total 42 9 677 813 765 921 1,001 1,052 1,197 1,055 1,558 1,S52 1. Central Government 247 443 502 505 574 650 688 840 675 1,038 1,099 a) Central Government Budget 19 5 350 402 434 442 562 ,65 732 550 707 7154 b) Special Funds 52 93 100 71 132 88 1.23 108 125 331 3k45 2. State and Local Governrment 182 234 311 260 347 351 364 357 380 520 5163 a) States . 130 175 251 197 284 281 282 275 300 367 383 b) Municipalities 52 59 60 63 63 70 82 82 80 153 180 V. Overall Surplus or Deficit,, total -364 -514 -341 -434 -505 -580 -863 -778 -536 - 240 - 362 1 Central Government -299 -362 -141 _3(7 -334 -346 -599 -521 -236 + 153 + 76 a), Central Government Budget -312 -408 -221 -386 -423 -501 -j718 _790 -581 - 4417 - 435 b) Special Funds + 13 + 46 + 80 + 79 + 89 +155 +1.19 +269 +345 + 600 + 510 2. State and Local Governrnent - 6j -152 -200 -127 -171 _234 -264 -257 -300 - 393 - 418 a) States - 52 -105 -150 - 88 -127 -178 -203 -202 -250 - 267 - 267 b) Municipalities - 13 - 47 - 50 - 39 - 4 -56 -55 -50 - 126 - 151 1, Based on the price index for GDP. T'sble 15): I_CVERNMRN1T S3.ViNG AND INVESTI-ENT, lQ56-1.,66 n c.cenaaeof GDP) 19I5-7 }Q5 259 1960 1962 1962 1963 1964 19~65 19o66 I.Current RZevenue., total 20.0 21.6 22. u 22.7 2 3.7 23.6, 2L.l1 25. 5 26.4 29.2 28.1 I. Central Government 11~ 5 2. 1U 3. -' . ItO4. I'. .6 1.4 1. " 2..1. a) Central Government Budget 2. C P. 0 9.0 .8 92 9.2 9. 5 10.1i 10i.8 110 10.6 tl) Special Funds 3. 4.3 4. 4 4.6 .4.4 4.*8 41.7 5.5 5.6 8.2 5 2 . State and Local Government 8.39 9.3 9.0 9.3 1.0.1 9.6 9.9 9.9 10.0 1010 10.0 a) St ates5 7.0 7.4 7.2 2.7 3,6L 8.i 8.4 8.4 8. 6 8.65 8.6 h2 Municipalities 1.3 1.9 I.8 1.6 L.7 1.5 1.5 1.5 1.4 l.I4 i.4t II. Current Expenditure, total 19.4 20.3 18.8 20.6 20.9 21.0O 23.0 23. 1 23.,5 22.3 21.6 1. Central Goverrmer.t 11.06 11 .7 -, 122 0 2 .C 12'.1 13.6 1",.89 131.9 13.0 12. ~3 a)Central_ 3c-ernmren: B-udig;et 8.9 .95 t 9.5 9. 3. 8 10.3 1I. 1.. 5.7 1)) Special Fuinds 27 3.2 30 3.5 2.9 3.3 3.3 3.4 31.0 3,3 3.3 2.State a;nd Lo2al D~nvp.rnment 7, .6 3. 8)39 94 . . .3 9.3 ae) States 6.3I 6.8 6.5 o.9 7.4 ?.5 7.9 2.9 B 8,0 8,0 b) M-unicipalities 1. 5 1.8 a . 1.5 1.5 1.4 1.5 1.4 1.2 1,3 1.3 III. Currert_Savij.g, total (I *- I) 4+ .6 +.3 -36 +2.3 +-2.8 +2, +1.l p-2.4 ±29 -6, . 1. Central Government - .*4 + .6 ±2. +1.4 +1.6 +1.9 + .6 ±1.8 +2. 5 + 6.2 + 5.8 a) Central Government, Budget -.j. C - .5 il.4~ + .3I + .1 + .4. .8 - .3 - .31 + 1.4 +. 1.6 b) SpecialI Funds +- .6 +1.1 1.L 1.1 +1.5 +1.5 1. 2l 26 *+h8 +4.2 2. State and Local Government 41.0 + .7 .A + .9 +1.2 + .7 + .5 + .6 + .4 + .7 +1 .7 a)States 4- .7 +. + 2 + .84-10 .6 +.4 +5 + .2 + .5 4- .6 b) Municipalities 4 .3 +. + .1 + .1 + .2 + ..1Il .1 + .2 + .2 4 .1 TV. Investment, total3. 5.5 6. 2 5.4 6.1 6.2 6.2 5.9 5.9 8.1 8.2 1. Central Governmeint 2.1 3.6 3.8 3.6 3.8 4.,0 4.0 4.8 3.8 5.4 5.4 a) Central Government Budget 1.7 2 .8R 1.0 3.1. 2.9 3,.5 3.3 4.2 .3.1 3.7 3.7 ti) Special Funds .4 .8 f8 .5 .9 "5 .7 .6 .7 1,7 1.7 2. State and Local Government i.6 1.9 2.4k 1.8 2.3 2.,2 2.2 2.1 2!.1 2.7 2.8 a.) States 1.1 1.4. 1 .9 1,4 1.9 1, 1' .? 1.6 1_6 1.9 1.9 2ro 14u-nicipalffties .5 .5 .5 .4 .4 6. .5 .5 8 V. Overall_Sudriplus or Deficit. *totalR "I1_-I 1 -3.1 -4.2 -. -31 -3 -3.6 -. 4 s -3. 0 - 1,2 -1,? 1. Central Government -25 -. > 22 -. 21 -3.4 -3.0 -1.3 + '.8 +-.3 a.) Central Gove-rnment, Budg?et -.2.7 -.3 10 -2.3 -2.3 -3,1 -4.1 44.5 -.3.2 - 2,3 - 2.2 t)Special Funds ... + +s ~ . - .2 +1.5 + 3,l + 2.5 2. Stats~ andi Local Gove.rnr-ent-,. -12 --.9 1. .5 12 -.5 17 -20 -20 a) States --.8 ->; 6 --2 -3 A 14 -1 2 2) Municinaltlu's --. -- 7 --2 _4 -.6 . .6 -.7 [C, Table 2: CENTRAL GOVERNMENT BUDGET,, 1956-1966 (Cr$ billion) 11965 1966 195_ 1957 1958 1959 19)60 1961 L962 19053 ]19,S4 Kstimat'S Projection- A C T U A L _. I. Current Revenue 70 85 1L8 158 220 318 512 953 1,9J44 3,170 3,700 II. Current Expenditurel 83 95 104 157 228 3213 599 1,035 2,057 2,980 3,400 III. Current Surplus or Deficit (I . II) -13 -10 + 14 + 1 - 8 J 10 87 - 32 123 +190 +300 IV. Investmentl/5 5 30 0 55 70 1?0 180 400 550 1,060 1,30C0 V. Total Deficit (III - IV) _28 40 _ 26 - 54 - 78 -1313 -26? -432 -673 -870 -1,OOC Financed through: 1. Bank of Brazili/ 23 39 1L6 43 75 121 222 426 638 700 75c0 2. Treasury Bills2/ 0D - 9 9 2 :1 23 56 - - ' hi U~V 3. Other 5 1 1 2 1 3 22 - 35/ 170- 256-) 1/ Breakdown of total, expenditure.s between current spending aLnd investments had to be estimnated. 2/ Credits extended to the Treasury and changes in Treasury deposits. 3/ Hell mainly by commercial baLnks. 4/ Value-linked treasury bonds. I s! Based on the assumption of 1.5% raLte of' inflation and 20% increase oir salaries as ofl January 1, 1966. Souirce: Ministry of Finance. TCLble 1 = Cr. 1,200, the mid-196h rate. 4. Tables 1 and 2 below show the sectoral investment programs. Table 1: PROJECTED PUBLIC INVESTMENT 1965-66 (Programu Estimates) (billions of cruzeiros at June 1964 prices) 1965 1966 Original Estimates Revised Estiiate-s investment ForeiL Exc hange2icponent Investment Foreign Exchange Component f of%of Cr. ITS$ totaLL Cr. US$ total billions millions investment billions millions investment 1. Transport :L,14'5 209 1]74 18 725 1,281 225 188 18 a. Rail.ways 268 :L6 13 6 153 322 16 13 5 b. Highlways 75-L 173 1414 23 473 815 187 156 23 c. Ports and Shipping 914 1L2 10 13 60 LLO 14 12 13 d. Aviation (Airports) 3;2 8 7 25 39 34 8 7 24 2. Electric Power 4914 122 1]02 25 432 520 137 114 26 3. Telecoinmiunications 713 34 28 44 35 85 140 33 47 4. Steeal Industry 2014 9?8 82 48 96 276 132 110 48 5. Manufacturing Industry 2114 '54 45 25 7w0 130 17 11 13 6. Agriculture 200 140 33 20 152 212 42 35 20 7. Education 145 _ 108 171 - - - 8. Housing 150 _ _ _9 225 - - - 9. Health, Water Sapply and Sanitation 37 - - 66 45 - 10. Petroleum 210 79 66 38 189 214 96 EO 45 11. Coal Mining 713 31 26 40 60 80 31 26 39 12. Regional Development 60 _ _ 107 70 - -. TotaL 3,01 5 657 556 22 2,029 3,,309 720 600 22 Notes: 1. Inv,estm,ent data for the transport sector anr not1 the same as in the original PlEn since they were revised while the Mission was iia Brazil. 2. The exchange rate used for the conversion of the foreign exchange components from Uci dollars to cruzeiros is US$ = Cr. 1L,200. 1211 Tablc 2 FROJEGCTE-D PUBLIC TNVESWMEWU 19465-66 (Oission Estimates) (billions of cruze.iros at June 1964 prices) _ ___ Z{1965 1966 _ State State Federal t Local Federal & Locaal Government GcoverTnments Fnterprises Total Foreign Exchange C otent Government Governments 7nterprises Total ForejI2 Exchange Component of' ~~~~~~of Cr. US S totaL Cr., US t total billions millions investment 1billions millions investniert 1. bransport 444 312 756 132 l:LO 17' L5s 372 _ 831 21 M) 117 17 a . Ralays 158 55 213 16 13 7' 153 89 - 242 16 13 7 b. Highways 170 247 417 96 130 211 172 273 - 445 102 85 23 c. Ports and Shipping 9 - 914 12 10 1-3 110 - 110 114 12 13 d. Aviation (Airports) 22 10 32 a 7 25 21 o10 - 34 8 7 24 2. Electric Power 165 270 55 490 120 1o0 2L, 163 26S7 55 485 102 8s 21 3. Tele communications 17 35 - 52 7 6 13 16 52 186 68 13 11 19 4. Steel Industry - - 138 138 76 o3 55 - - 186 102 5 55 5. Hanuf acturrin,g IndustryY - - 6. Agriculture 22 22 - - - 29 29 - 58 _ _ 7. Education 1145 - 1L5 - - 154 - 1544 _ _ _ B. Housing 70 - 70 - - 125 - - 125 - - - 9. Health, Water Suppli and Sanitation 25 - 25 -- - 29 - - 29 - - - 10. Petroleum 210 - 210 79 66 381 224 - - 214 96 80 45 11. Goal ?Iining - - 78 78 31 26 o .- - 80 80 31 26 39 12. Regional Development 60 - 60 - - 70 - - 70 - - - Tstal 1,158 639 271 2,068 U45 371 21 1,259 720 321 2,300 1484 404 21 , h 1/Tbe Missl. estimates that investment in .manufacturing industry w-uld be almost entirely in the private sector. iNDE frpacing of industries other than iron aid steel is negligible and is treated as credit rather than direct iLnvestment., ANN E V Page 4 IID RAILWAYS 5. The i9614-66 investment program was prepared by the central plan-- ning department of the railways after reviewing requests from individual railways and in consideration of probable funds becoming available from domestic sources. The individual railways -- there are 18 in the Federal system -- were not required to support requests for funds with economic justificat-ions for proposed projects, Allocation of probable funds was made primarily with the aim of spreading the expected amounts among the railway units regardless of their investment needs. 60 The irnvestment program presented to the llission in October - November 1964 made realistic allocations for improving operating facilities, especially for the iimrovement and relocation of new lines and terminals. There was lesser emphasis on the acquisition of new rolling stock, since instances were known where new rolling stock could not be used effectivel1 owing to the limitations of track and handling facilities. The program also had an allocation of Crtl3 hbillion for new line constrUction in 19617,- 66;. In Harch 1965, the Government reduced the investment allocation for the rnilwans. RTowever the revised figure still has an allocationn for newl line construction. 7. The productivity of new line construction is low and the resources, can be used more productively for the reh.ab;itation and a m-.ore optimal u t - zation of the existing facilities. There is very little, if any, coordina- tion beLswsee L.W D , theA a-G-Cncy responsibl-e :for new l-."I constrLA-uctio, &nd the, railways themselves. Construction projects have been determined largely on '+ + " ^ U.J..'Q..L L'JU- .. J.| r ,..LL D _ I IJJ.J 0.1. A.VCU J. U U h J.L Public Works prepared a 25 year plan for railway and highway construction. MI- -Ihe- - plan- -o.e,He -a1--il-wa t - unk-ln ne--r'- extending from beet-r, .I.LI~ V_,= L III~ d. ±-C"±WaYUuns t -iL.U Lie net±u ~A :&Ut;L± I1 .UJ IIiV 14 0.UU NJortheast along the entire East coast to the Southern border as well as re- Luu ±±ng riuar.y of thei l1ines in the South oi thOL e neLo Horizonte - RiUo de JaUeiro - Sao Paulo triangle. Neither the Ministry of Economic Planning nor the CentraI 'Da- -a AA: -' . 4. . - --- _ * i . .n 5 -- Li_: -, )r' --i -_ iLa y AUdIninis ration 1 was consulted in tihu preparation of tLhiD ? LyUe- plo It is the Mission's recommendation that new line construction be suspended ;ntil econoiUc j-ustificationls have benl studied. To the extent that new lines prove justified, construction should become the responsibility of the Federal Railwa-y Systje m rather tian a separate agency. 8, Investment pians should be aimed more directly at eliminating bottle- necks such as inadequate yards, terminals, sidings, line improvements, main- tenance facilities, etc. Expensive imported centralized trafiic control equip- metnt has been on hand for several years, but not installed for lack of funds. Also, the present practice of spreading funds among the railways, without regard to priorities, leads to an unsatisfactory allocation and should be changed. Funds for badly needed freight-terminal modernization or relocation AuIfKEK 4 Page 5 terminals at Rio de Janeiro and Sao Paulo of the Central Brasil Railway have not been requested, for example, while elaborate -wiorkshop facilities are being constructed by the Leopoldina Railway of which 83 percent of the lines havre a density of less than 500,000 ton/kms per year and a 1i-rze uorticri is actually under consideration for abandonment,. 9. The tables below show the investment estimates of the Goveniment, as well as the Mission's projection. Table lo PROJECTED PUBLIC INVESTI'ENT 1964-66 (billions of cruzeiros at June 1964 prices) Original Pror.ram 1964 1965 1966 Federal Railways 83 213 233 New Line Construction 28 55 80 Other 55 158 153 State Railways 12 55 89 Total 95 268 322 Revised Program 153 Table 2: PROJECTED PUBLIC INVESTIDNT 1965-66 (Mission Estimates) (billions of cruzeiros at June 1964 prices) l165 1966 Federal Railways 158 153 NCETW T A n cj -o l ;o Other 158 153 State Railwrfays 55 89 Total 213 242 Foreign Exchange Component Cr. biLLLLlons 16 $ millions 13 13 ITI. HIGHWAYS lOa The master plan for all national highways dates back to 1934. it, has been repeatedly revised but has never been definitely appr'oved. In 1964 the Presidenit submitted to Congr-ess a newily revised national h ighwiay plan which shows a completion termq of 25 years andi calls for an expenuiture of Cr ' 3,500 billion based on 1964 prices. The plan was still being discussed in Congress in November 1.964. 11. In June 1964 a short-term "Preferential Highw-ay Plan" was adopted. wthout stating the time nieeded for comapletion. The decree for this plan lists a number of roads but states that priorities should be determined annually. The NatiJonal HighwTay Department, which cons-iders this plan as the 1965-69 program, has only very preliminary estimates available. TIhe "Preferential- Plan" amounts to a total of Cr$ .570 billion. '12. Withiin this "Preferential Highway "Lian", there is a short-term plan called "Plan for Inr-mediate Action" which is for the period 1964-66, The revi si cŽ- of this plan in N4ovemiber 196)4 called for an invrestment of Cr$ 330 billion basec. on 1964 prices. This figure is based on more reliahle cost estimates than these for longer-tern plans. l3,, In addition to the "Plan for immediate Action", which will be executed by the National Highwiay DepaLrtmient, there is a plan for the construction of t"he road from Belerri to Brasilia which will be carried out by SP-LdA (Superintenden3ia do Plano da Vralorizacao Economica da Amazonia) and its sp-iecial branch "RODD0BRA3"11 The budget for- the Belera-Brasilia road for the 1964-66 period amounts to Cr$ 50 billion, wihich. would be provided byv SpECial appropriations of the Govrernment, 14. Most. Of the states have their- own long-term hi,ghway plans which,, in the case of some states., include not on-ly state highways but also national hi,thwavs~ Within these master plans. the StatLe Higbwav Dhepartments -work out short-term plans which are dlependent ori ava-ilability of fLunds but may also be influenced bv nolitical considerations~ Several- of the larg-er states contri-bute considerable funds of their owqn in addition to those they receive from the NTational Road Fund. Some of the states even haive laws w4hich specHifYv that., wi-th1 regard to highw-,ay funds., the State Government should contribute no less than it receives from the National 'Road Eund& Wealt.hier stte often u'±ndetae the construction. of national highways w,ithout waiting for the delegated authority a-nd financial support. from the National Highw,.ay Depar-tment. and onily very broad and general economic justifications are presented., if an-y. Wrjth VP flT fevL~ excet-'T±ionsflcosthbenefit a-. rces h-r nee be-e mad fle-. 1 most of the projects included in the national "Plan for Immediate Action" an-d -.n the di ff--nt. stt highway,,,t plans woul1d poeto haeago rat ofl return, fu]l1 justification of priorities could only be given after highway needs stuadies haive IDeen made. ANLEY; 4 Page 7 16. Table 1 shows the Government's highway investment projection for 1964-66 as presented to the mission in October - NIovember 1964 as well as rev:ised estimate as of March 1965. The original estimate en- visaged that highway investment would be doubled between 1964 and 1965 and was based on expectations of higher petroleum tax yields, matching state funds and foreign aid of $270 million. 17. The mission agrees with the program's emphasis on paving and improving a large number of highways that were constructed in the fifties. Wi.th regard to the creation of new facilities, the productivity of in- vestment can be maximized by concentrating on the movement of agricultural and mineral products to the domestic market and for exports. The revised estimate for 1965 is broadly in line with the mission's own estimate of irnvestment reauirements in highways. 18. With a view to aligning hiehwav investment with total investment. the mission has worked out estimates for 1965 and 1966. These are shown in Table 2 on paQe 8. Page A Table 1: TMT4¶TI'FAY ITIJVE3Th\\T 196h4-66 bblllions(P n- of cruzo a+ J- 1,G prices) Original P.logrr -I 196), 196 OA 96I6( Ae --r- -iialti Fede. (.U ,i A1 UJ . .4 .TVi V VU.LiiiL.iL 1. National Higlhway Department ( a) ,'Lan fLUor ImiekU-ale Action U-L86 . I (b) Expenditures under commitments already .-made 63 104 2. rdoU bra 4 26 Subtotal Federal Government I B. States 2i5 448 504 C. Mviunicipalities 26 55 Total Investments 39b4 751 815 Revised Program (March 1965) 473 Table 2: HIGHWAY INVUBTT1ET 1965-66 (Mission Estimates) (billions of cruzeiros at June 1964 prices) 1965 1966 A. Federal Government 1N National Higlhway Department (a) Plan for Immediate Action 56 57 (b) Expenditures under commitments already made 104 105 2. Rodobras 10 10 Subtotal Federal Government 170 172 B. States 200 223 C. Municipalities 47 50 Total Investment 417 445 Foreign Exchange Component Cr. billions 96 102 $ millions 80 85 1/ The "PF.aii for Imm.ediate Action" is idontical to the Governiment's 1964-66 plan, thn. latter made no allowances for "Expenditures undcr cuwVi-teni-s already nade", nor ditd it include Rodobi-as. Page 9 IV. PORTS AND aHIPPIfiG i9. Statistics on shipping and ports are nonfunctional and make it extremely difficult to plan or to form judgments of investment requirements in this sector. There is evidence of inefficiency in shipping. For instance, the foreign exchange costs of impor-ts are increased by the costs of delays of ships waiting to unload in the ports, by slowi unloading, and the inability to use large ships in the main ports. But greater cause for con- cern exists in regard to coastal shipping. Over land transportation between the North and South is costly and difficult and efficient coastal and shipping facilities are essential for the widening of the markets for domestic products and the growth of inter-regional trade. What are the present and future trans- port requirements between Brazilian ports? How should ports be adapted to these requiremen-ts; and what specialized and general cargo ships will be needec; how much of the present tonnage is suited to, or could be adapted to trade requirements? 20. A detailed study of these questions should be an early order of business. Broadly, however, it can be stated that a considerable tonnage of the coastal fleet is over age and needs replacement - about a quarter of the registered fleet of 640,000 DWT is over 4O years old, for instance. Also, there is evidence of basic shifts in the pattern of coastal traffic. There has been an actual decrease in dry cargo traffic, accompanied by a sharp in- crease in liquid cargo (petroleum) traffic, and a shift from finished products to semi-finished products and raw materials. Many of the newer sinps in the coastal service were designed to meet outdated trade requirements. The situ- ation is more acute for the nrivatelv-owned fleets - representing S percent of the tonnage - than for the Compania Nacional de Navegao (Costeiro). In the five venrs slnce Brazilian shipyards hevan sunplyvci n domestic fleet require- ments, only three or four ships have been alloted to the private sector. 21. Investment in shipping is carried out through the Merchant Marine Fund, u-nder the guidance of the Merchiant Miarine Commission (CMMT4) which1t before new procedures wlent into effect in January 1965, had more or less absolute a^uthorityr in maritime affairs. Fuinr1' forr zhin invretm.ent are derive f'rnm 8 Fleet Renelxal Tax (TRMVI), on freight charges and customs, clearance, and cont.ribut ons frro, the Federal baudgett to ,L total ir.vest..ent needs. A majoAr complication exists, however, in that subsidy payments to the Brazilian Ehip- Ju±ldis industr wh.y - ch a' present capacit i- estl.imated tuo require a C2L percent premium over international prices - are derived from the Merchant .rine Fund and contributes to high shipping costs. *lTe Federal support of ship investment will merely subsidize the high cost for domestic shipbuilding industry. Tis being inadequate, part of the subsidy cost will be borne by the domestic shippers. 22. Even so, the planned investment in ship construction of Cr$46 billion in 196h, Cr$62 billion in i965 and Cr$65 billion in 1966, appears to be adequate to meet the essential needs of the coastal dry-cargo fleet, where the greatest need lies. Tne full tonnage of the new construction - estimatecd at 1O0,000 DU,T - should be allocated to the private sector. ANNIZZ h Page 10 2~~~~~tLIU1t:1UU.110dL L Vtaisn of 0hs Lves 1t, UJ objUc, V ts an1 shi1Jppi1ng IUlnvtole 'some uncertainties. Firstly, domestic resources are not available for all UhLJe projected 4-v-estullO F u L.LrL,ien U t'n LeJV Uir Let:n Uir1gets U WUUdU depend partly on the availability of external resources. Secondly, the low utilization of ships in ports - port tiae is 0U percent to u0 percenlt of coastal voyage times - makes it practically impossible for a shipowner to finance a new ship out of cargo revenue. Recognizing this fact, the Maritime Coimission plans to offer long-term financing of up to 95 per- cent of the construction contract prices at a nominal interest rate of 6 to 10 percent. In an irflationary situation, this implies substantial subsidy to shipping investment and is not necessary. The Hission recom- mends that amortization of these loans should be subject to value correc- tions. Port investment and reform ara the key to response of the private sector in shipping and need to be taken in hand simultareously withi inrest- ment in snipping, Ports 2h. Past investment in ports, averaging Cr$14 billion a year for 1956-- 3963, has been very low for a country with 35 ports of importance, a coast- line of 8,500 km and major economic functions which should fall to maritime transport in a balanced system of transportation. Organized ports are operated as Federal autarkies (2), by the Federal ports agency, (3) by States (13) and by private port organizations (5). A11 ports are under the super- vision of the central Federal agency. the DNPVI'I, under the Ministry of Tran.s- port. 25. The Government's investment program is based largely on the re- quest of funds by individual ports. It does not 1nclude investments in existing private ports, the proposed investment in new ports and the expand- ing of bulk cargo handling facilities at Rio de Janeiro. 26. There is need to review the organization of ports, the proposed invesumen' in them and to establish a co-ordinated approach to ports and shipping. It may seem obvious to point out that a majcr salt-shipping port should have adequate handling equipment to handle salt in bulk but it is equally important, and not so obvious, that all important salt receiving ports should have adequate handling equipment. As another example of a real existing problem, if cold storage cargo from the Rio Grande do Sul area to Recife increases, the latter should be adapted to store and handle this specialized cargo, A high priority in the program should be given to completion of works in progress - in some ports important works such as quays and mooring places have been completed but remain unused because equip- ment is lacking - to the expansion of bulk cargo facilities at the port of Rio and to the expansion of facilities at the port of Santos. At this stage investment in new ports wiould not be iustified excent nerhans for the shir- ment of iron ore. It is likely that a systematically prepared port plan would indicate! larger overall investments, nrovvided 'hat nyteniup.ve anlrninis- trative and organizational improvements are made to pernit fuller utiliza- tinn of the eit.ing fao-illtles. 07 TI)'ph fn1 1e T.T*VrinC ~1~T +.1h) n' nn~~A TD+tO"+ -+ A!-r sh. Tppi _gles s- - - shiipping, Page I7 Table 1: PROJECTED INVESUNE'T i964-66 (Pro.:,ram and I'Iission Estimates) (Billions of June 1964 cruzeiros) Original Program 1961, 1965 1966 PortUs 28 32 L5 Shipping 46 62 65 Total 7t 4 110 ForeiRn Exchange ComporLnent Cr. billions 12 14 $ millions 10 12 Revi senir Prgrnam Pot an. _ _ _ _ _ 60 Atil IL Page 12 vE AT PfpnTq 28. The Ministry of Aviation is responsible for the planning, construct :on and" ,main.tenance ofL '1"L airport's -inA'D Braz,-Wil'. The 1 r e a re 27 major airports in the country and a great many local ones, The rao s u J iJmportanti oL these IS Co1ghLa A-J7PUrU at OLU SaUo Puo atwh nearly 600,000 passengers embarked in 1963; the two airports in Rio de Janeiro, Santos D-ur,ont and Galeao, handled about - 7 0O0 and ,55O000 respectively. Other airports, embarking more than 100a000 passenLgurs include Recife, Brasilia, Port,o LUegre. Belo Horizonte and Salvadorc Traffic through these airports Licr'eased steadily during the lifties, but declined during the last two years o-wing Lo the stagnation of the domestic economy and rise in air fares., Air traffic accounts for nearly 10 percent of all intercity passenger traffic. 29. The proposed investment in airports is shown below. In- vestments in the past have averaged Cr. 8 billion (at June 19b/4 cruzeiros), with annual fluctuation, due to special expenditures such as the installation of radar equipment. The sharp increase to more than Cr. 30 billion in 1965 and 1966 reflects partly the greater availability of resources from petroleur tax and partly the need to improve the serviceability of airports. This will improve the operations of airlines ancl reduce their deficits, INVESTMENT TN AIRPORTS 1964-66 (Program and Missin,n Estimates) (billions of June 1964 cruzeiros) Original Program 1964 1965 1966 Investment 17 32 34 Foreign Exchange Component Cr. billions 8 8 $ millions 7 7 Revised Program 39 AN1EX 4 Page 13 VI. ELECTRIC PO_ER 30. Electric power is one of the stronger sectors of the Brazilian economyy. While it has certain inadequacies, its development has kept pace with other segments of the econo.v and there is reason to believe that given suitable conditicns it wilL soon meet the needs of the country. In the South-Central region. which accounts for about 65 percent of the total power consumed, there is at the present time a shortage of energy because o° drought conditions. inadeouate reserve capacitv and distribu- tion facilities. There has been rationing of power in the area duiring the last vpear as a GOnseqUencr. Pln s for exp2nsion for this area sb:ould provide reserves against drought and satisfactory distribution facilities hbv 19 9_6c. rIhieps nplnns are bh.ael in lanrge mmnirpn n +.P ui; rnr-i or] ouit urder the UNSF survey which predicts a 10 percent annual growth in consumption, which is consistent with the M;ssionr's prcjectionq Tentati.ve plans for expansion of electric facilities in the remainder of the ccuntry,v based on projection of the trend, sexn reasonably apprcpriate to the con- ditions, which vary a great deal fron place to place, 31. According to the investment program (see Table 1 and 2 at the end of th1-s c'Mapter) appo,atey '_').n 00 14- r,:"ior. 4qaln 4is tob spent each year during 1965-69. Actual expenditures might turn out to be lless bDecause of.J.I. lack ofJJ 1L±intJL..-e CdUI .inai'.L.LUy Ut orgL.zl tihe to its full extent. 32.. Approximately 40 percent of the total investment in the electric UtLitLU-y scL'wr WViUU Ub -uu icsf- ishe uurchase ci UquLp.ri, UmJeUsrlcu Wl foreign. The amount spent on foreign equipment will be governed by two mailn factors: the extent to which equipment mu-st be procured abroad because it is not manufactured in Brazil, and secondly, the extent of foreign finarncing and arrangements under which it is provided, i.e., tied assistance, assistance specifying international bidding for equipment, etc. nOWev~Tr7 if foreign aid is provided to fill the financial gap, and a large part of it is based on international bidding for equipment, with some margin for protection oI Brazilian industry, it would be reasonable to expect that 50 percent of the equipment would be imported -- this woulc, mean that 20 percent of the total investment program would represent im- ported equipment and 20 percent domestic equipment. ~ !4 21) ~ ~ ~ 'lm-n n" viii v' ,vf'e n-P i rrmn"-nnd -rhc!+vw%r n"- Ti n ! n n' v nc-i in i.ts various aspects is probably the foremost. Because of Federal policies- no ~A a PnAd Fedel ,.1 re4 - ,lat4-, adequate4- d -yc ,ro la made available to the States according to priorities. There are two othu ler ratuher s erLiousG per 0bDL e mIIss -is, 4 -,- Whr is 4the proble -- the 4,.ar. S.) J.1~. .LO Uu.~.L .)~ .L~LLO J.L .4 L.L~1..J A ;. JJ.1 0 U. L4IVI. L J UiIl jJJ.U LJ.J..V4I& V.L ULIJ., wCAfL'y small investor-owned distribution companies which have been the main source of elect,-ric po-X1er irn r,sa-i areas. 111ese sm1la-. UU1jc,,U- es redily have no access to public funds and must rely on internal cash generation admd possible assistance fI'rUotL er sourcesrb The situation concernung them is obscure. The other problem is tha finding of suitable ways for the uLsbuuruiseleut of foreign assistance, especially to the more poorly organized State and Federa3. corapanies and the distribution systems. 314. A potentially serious problem involves Federal-State relation- ships. There is a strong trend to Federal control., as distinct from State control., of thoe electric utility industry. Considerable power is vested in Electrobras and it is likely to increase. Electrobras has two functions: as a holding company it oimns and controls the Federal utLilities, secondly, it admninisters and allocates pu-blic funds obtained from taxes axi;: forced loans on power bills and from general budget resources of the Federal Government. As the indtstry grows, the resources of Electrobras likewise wvill increase, as will its authority to select projects and areas for devel.cp- n.ent and thus to influence the policies of the utilities and industry. Th.e present Electrobras administiation recognizes the need to limit its own power and scope, Nlevertheless, there is a possibility of conflict bet-ween the Federal Government (including Electrobras) and State Governments, particularl'- tiat of Sao Paulo, concerning priorities in the utility investment program. The tendency,, already evident, will be that the Federal Government -willl use its powver to grant concessions and its control of the investment funds described to exert pressure on State Governments. It is evident that the Federal Government irill have to be equitable in establishing priorit-i1es if conflict is to be avoided. 35. The pace of electric power investments will depend on improvement of manageri.al resources. While reasonable engineerirg manpower seems to be available the indas-tr suffers from a lack of management and supervisory manpower, i.e., utility personnel trained and wfith experience in utility finance, rates, administration and so forth. This is realized in Brazil: the Government has suggested that international agencies provide technical assistance aimed at correction of the situation and that, in conjunction with specific loans, that management training should be stipulated where this measure appears necessary. The Mission endorses both suagestions0 ANNEX h Page i5 36. In certain areas there is need for a comprehensi-ve review of the utilities situation, in particular of the power systems in the North- east (a subsidiary of Electrobras) and in the State of Rio Gralde do Sul. This may best be made in conjunction wiith proposals for foreign assistance. 37. Over the next several years funds will be obtained from internal cash generation oI tne respective utility, from Federal pubclic funds (Electrobras), State public funds and foreign assistance. Probably the most important source will be public funds, whnich are generated to a large extent from taxes and forced loans made on power bills. There is some feeling that the taxes and forced loans should be discontinued and, instead, rates increased to provide the equivalent additional mcneys, This would make the utilities more autonomous and less dependent on the Federal and State Governrnents for expansion, which in principle is desirable. 38. The States have less control over the power industry than the Federal Government, which has the right to grant concessions for river development, to regulate tariff's and to impose taxes specifically directed to utilities. Although there is a strong need for interstate system plan-- ning there is also a case for some decentralization of authority in view of the size of Brazil. A review of these matters during the next several years would be desirable. Recommendations 39. (a) A foreign assistance program amounting to approximately $()0O million annually (on a disbursement basis) appears warranted to ensure the successful carrying out of the electric utility program in the 1965-69 period. Taking into consideration funds already committed, additional for- eign assistance required would average about $85 million annually. The basis for these estimates was discussed earlier. The Federal Government and State Governments should make suitable arrangements for handling forei.gn assistance fuinds in situations where there is no competent organization at present. (b) Technical assistance is recommended for a comprehensive study of the electric utility situations in the Northeast and in the State of Rio Grande do Sul. (c) Technical assistance is also recommended for the Durpose of providing systematic training of supervisory utility personnel in respect to finance, rates, administration and other aspects of utility management.. (d) During the next two years the Federal Government, with the advice of certain States and larger utilities, should review the scope of ElectrobrasI oner'ation. The obiective should be to establish functions for it consistent with the broad objectives of the Federal Government, the A2l-= 4 Page io iii V1iU'bZ UJ.L ULIU~. OUd.LUO aIIUL Wt IJ[ i AUUJAL;d.L 11~UUU U.L tdiu U IiL_L± UJeL ' TLn particular, consideration should be given to splitting its holding-company function from its function as aduur&-ilstrator oI pu'Dlic funuds, (e) A related issue to be considered is the role of public flnl in the investment program of the industry. The main question is whether iunds for expansion should continue to be obtained from taxes and imports on power bills or whether these should be decreased progressively and the level of tariffs adjusted to provide an increase in revenue (and internal funds) which would be directed to expansion. The Mviissicn is inclined to favor the second alternative. (f) In the longer-term the Federal Government mcght consider the priority of existing regulatory jurisdiction (Federal) over concessions for development, tariffs and taxing powers to determine whether the States should be provided with some rights in these areas, (g) The Federal Government, in conjunction with the State GovernL- Tnents where appropriate, should review the problems of the small. distribu- tion companies with respect to expansion and finance, to establish means by which the needs of these companies may be met. Table 1: PROJECTED INVESTflENT 1964-66 (Program Estimates) (billions of Jtne 1964 cruzeiros) 1964 1965 1966 Original Program 184 494 520 lievised Program 432 Table 2: PROJECTED INVESTI1U;NT 1965-69 (Mission Estimates) (billions of June 1964 cruzeiros) Year Investment Foreign Exchange Component (Gr.` billions) - m1 _1 1965 490 120 100 1966 5128 1967 486 120 100 196R )490 120 100 1-969 480 110 92 Total 2,431 572 477 VII. TELECOUIlIi\IICATIOHS Principal Problems 40, The principal problems of Brazilts telecommunications sector are: (a) Shortages of local- and long-distance facilities. (b) Innc1Pmin tof tariffs. (c) Establishment and implementation of a national policy as to ownership of the .mor teleprho-ne opnertJing entitie± S (d) Development of the organization of the Conselho liacional de Telecor=mmnicacoes (COAM1Ti ), the national body established for the promotion, coordination of development and regulation (e) Organization of the Empresa Brasileira de Telecommunicacoes distance telecommunications system. L8l^ There are about 1,200,000 telephones in Brazil and nearly an equal umiI"r o0f ap±licants for telephone service. J2stiZJ UJAV ± iLUi>es, Uboil lol-L a.i'i long-distance, are seriously overloaded, in most cities, handicapping governmental, comLU-ercial and industrial operationsa Several attempts are frequently required to obtain a local call and sometimes it is impossible to get the connectLoio at all. E:cept on a few major ro-,utes such as Rio de uaneiro - Belo Horizonte -- Brasilia and Rio de Jarieiro - Sao Paulo - Santos, long-distance telephone facilJies tlrougihlout uthe natiLon are gros,sily in1auequate in quantity and coverage. Connection of the more distant cities is byr means of high-frequency radio on general.ly only a few teiephone cnannels capacity and subject to tile noise and interruptions inherent in this means of radio commrnication. 42. Telephone tariffs are at present low. If they are to cover all operatin,g exoenses, including accruals ior depreciation, plus interest and financi.al service costs and in adclition generate reasonable amounts towards financing future expan- sion of facilities, they would have to be increased to three or four times their present levels. Substantial adjustments are similarly required in long--distance tariffs although not quite in the same proportion as for local tariffs. Since the public has become accustomed to unrealistic rates the Mission has assumed that a series oi successive ircreases and at least two years time will be required +.o bring rates up to required levels. 43. The Companhia Telefonica Brasileira with its subsidiary companies operates approximately 75 percent of Brazil's telephones. Under Government -itervention, operating at a deficit, with a long history of unrealistic tariff t.reatment by regulatory authorities and following a long prevailing atmosphere of nationalization of public utilities, no effective action towards meeting telephone demand. can be expected from CTB as long as such conditions prevail. A decision as to Government policy regarding ownership and operation of this and other major foreign-o'imed telephone properties, and the implementation of such pclicy, is a prerequisite to resolving Brazil's telecommunication problems. Page 18 44, Created under law No. 4'L17 of Apri'L 27, 1962, the Conselho Nacionz'L de T'elecommunuicacoes (CONTEL) is a new organization. Its responsibilities include telecommunication licensing, regulation, standardizati on, supervision and tariff approval for the whole country. Reporting to the President, it must also promote, direct and coordinate the development of telecommurications. It must make and subsequently revise a National Telecommunications Plan. As most telecommunication regulation has in the past been done on the municipal and state level, there is little background of precedents for CONTEL to build upon. CONT'EL also needs to acquire technical staff. To obtain qualified people, it will be necesaary to pay attractive salaries, hig-her than the present levels. Permanent staff can be supplemented by engaging outside consultants, particuLarl:r needed in the areas of tariff mak:ing, public ut;ility accounting and microwave engineering. Li5. The same law No. 4117 provides for the establishment of the Empresa Brasileira de Telecoimflunicacoes (03RAhTEL), a Governxient agency to operate the interstate tele3ommunication faciLities and eventually to take over the tele-- commnunication operation of the Posts and Telegraphs Department. Until ElBRATFL has been organized and adequate staff engaged no effective start can be made to- wards the planning, engineering and building of the proposed National Teleconmi- nications Syste,n. Past In-vestment Trends L6. With rising onerating costs and unremuncrative tariffs, during recent years almost no funds have been generated by telecocmmunications operations. Ilhe minor anounts of cash available, largelv- from accruals for denreciation. have been invested in long-distance facilities rather than in new facilities for local. service or replacements.. Gnern1vy operating at a defiGit anci in an atmnsphere of uncertainty, the only important means of financing local telephone expansion has hben through subscriber-finnncnd planis 1Zt a rn o.nq +.or byvI the 1'r i'l rIrji rc o o-annyef t-he r%myr-n.nhin Tol ofnir.ci Brasileira, principal operating telephone company in Brazil, development has accnrdinglr ense re w-restr-ict- r - pV-c inth most recent *srr of' violent inflation; Telephones Annual Long--Distance Annual Year in Service Lncrease Clls1 (Thous ) Tncrea ne 1953 546,165 7.O% 33,998 91954 599,235 9.7 37,168 9.3 1955 646,733 7.9 h0,296 8.1 1956 677,316 4.7 44,'240 9.8 1957 698,974 3,2 47,712 7.9 *l958 729;857 4.4 53,265 1106 1959 756,694 307 64.C68 20.3 1960 787,198 14.0 74,837 16.8 1961 812.037 3.2 77,1491 _.5 1962 832,047 2.5 83,1472 7.7 3.)63 8LL,725 loq 8;320 2.1 A ivl'uw 4 Page 19 Investment Plans 48. The inavestment program f or telecommunications in the Program of Action comprise mainly: (a) tlhe building, over a period of years, of a major microwave radiotelephone system interconnecting the major cities and w:ith tributary and auxiliary lines, all to be known as the liational TelecommunLications System. (b) (Continuation of the Postal-Telegraph Plan of the Posts and Telegraphs Department and largely comprising additions of high-freauency radiotelephone and radiotelegranh links but including some lancl-line additions and a telex system with swi-itching facilities in approximately I)i cities. L9. The Government's Action Progrnm estimat.s the invest.ment requirement for the expansion of local telephone facilities in the sum of 160 billion cruzeiros annuallv but does not inc.ludle rnv fim'rre in the eorrte-on]ing tabulati on of resources and requirements for investment. Rehabilitation and expansion of the urban telephnorpe svsterns is in need of rgent attent.in and thelr investment requirements have been included in the Mission's projections. The lCission's esti.m. te of' invent-tnPn+. requirrlrement:s is more moderate as it is related more to the practical problems of realization than to the imrmense need. It assumes that all known state, runlnical and other local telephone expnsion plans, in course of execution or in arn advanced stage of negotiation, will be actually co-r.leted on scheledinle or where no fir- schedle date yret exists, at the e-rt 4 practicable time. Since a minimum of two years is required for the engineering, manuf,Pacture and installation of major additions of automatic telephone switcning equipment, the maximum program that might be realized in the years 1965 and 1966 hacs a_1read,,, r s_ h -4-A1,4 1- h.. -,._ --4 . rr_ 4h s woolu- A1 4s._ A _ , 14 4- __- 1sQ G. w CL1t) U-GI U:D: toU UUo- iv UyGt i ct' ) iJ til IJ GV i G 1l2 0 0 I IA I.I W t. dl aiouJ>Alt Ino ar1 adV. L .VII cf aqbout 50,c0o telephones in 1965 and 75,000 in 1966. Since progress in comple.- t-ing,UII c t su bscr -` - - - --- exI1ns-lon plans L)LL s sul.udUUe UoIther pjJ.lans ard establish greater acceptance on the part of the public of the financing procedure, the higher annual station gain fidgure of 100000 has been taken by the Mission as t;he maximum possible of achievement in 1967 and immediately suibUseqUe nt1c. .) e 50. Subscriber-financing tends to restric t e,s'v c s o t e } Lm e 2'-'' JuUscJ.LUULLfIdIUL Ug I U U ~L U 4~ILUV 0tUV±LUU bO UitI, llL~lg1j±- income classes. In spite of this objection, subscriber-financed development plans do provided a practbical means of furnishing additio-Ls of facilities unltlb such time as tariffs can be brought up to levels such that development can be finManced out of earnings and long-term borrowings. D-uring the years 1965 andc 1966 it is expected that practically all addiitions of local telephone facilities twiil be finianied by the interested subscribers but that, oy the begirling of 1968, it should be possible to bring up the level of tariffs sufficiently to permit. tne gradual replacement of subscriber-financing pians by customary financing procedures, On such basis, commencing about 1968, it should be possible to provide for an annual growth oI some 150,000 telephones instead of tne figure Of 10,000 consicdered to be the maximum practical under subscriber-financed schemes. Page 20 51. The Program of Action does not envisage large investment in thie National Telecommunications System in 1965-66. Judging from the present state of the plans and organization., approximately twjo years (1965-66) are needed for the organization of EIBRATEL, engineering of the first microwave links and initiation of equipment manufactures. Consequently, in our projections we indicate the phasing of these *.nvestments over a longer period. Since it is unlikely that, in the early period covered by the Governmentts Action Program, any appreciable amounts of foreign currency expenditures would actually be incurred by Brazil, no provision for external financing has been included in the Mission's estimates of sources of financing. Reasonable priority for the various sections of the system would be i.n the following order: increases in capacity of existing Brasilia - Belo Horizonte - Rio de Janeiro - Sao Plaulo - Santos routes followed by microwave links between Sao Paulo - Porto Alegre. Sao Paulo - Brasilia, Belo Horizonte - Salvado:'l Salvador - Reci.fe - Fortaleza and Fortaleza - Belem. However, construction of so extensive a system is expected to take many vears to carry out. ,2. The followinr- tnbles nresent the Prorram's estimates of investment as well as the investments projectod by the Mission. Table 1: PRO)JECTED INVESTIENT 1964-66 (Program Estimates) (billions of cruzeiros at June 1964 prices) Uriginal Pro-ra, 9l 9 cr In Posta Telegraph PIlan 11- 16% 10V mTota- 16 78Q Or- J. oU a d35- LJ U) Revised Program 3'" Table 2: PROJ]ECT INVESTIENI'S 1965.-69 (Mission Estimates) (lbiLLions of cruzeiros at June 1964 Prices) 1965 1966 1967 1968 1_969 Foreign Foreign ForeiLgn Foreign Foreign Ecchange Exchange Exchange Exchange Exchange Imvestment Component Investment Colpon Mt Investment Component Investment Component Investnent Comrponent cr Cr. $ Cr. . - Cr. $ Cr. billion million billion million billion million billion million billion million NationaL T ele- conmunicatiors System 1 0.3 0.2 6 3 2 7 3 2 7 3 2 8 3 2 DCT Postal Telegraph Plan 16 2 1.6 iCI 2 2 Municipal and State Telecormunications Programs 35 5 4 52! 8 7 70 11 9 105 16 13 105 16 13 Total 52 7.3 ';.8 68 13 11 77 14 11L 1L2 19 15 113 19 15 ANNEN( h VIII. THE STEEL INDUSTRY 53. Steel consumption in Brazil, which has increased rapidly for over a decade, reached about 3 million ingot tons in 1963. Almost 90 percent is consumed in the highly industrialized triangle, Rio-Sao Paulo-Belo Horizonte. By end use, about a third goes into construction and civil engineerina. another third to Yret2l products like containers, wire and wire products, household equipment, etc. The remaining third is about equillv d-Lvidpd htztw-nn machinerv, mntor vehicles, and all other uses. 58.- The rise in steel consumption has been paralleled by a rapid rise in steel nrodution. Steel imports have hben linmited genernlly betTPwen 200n000 .ndi 400,000 tons of finished products per year. There are indications that steel has I,een iD shThorf Funrn1-,r Pfrom time t.o t.ime, minl7r diue to thi-e1 lnt- of' firnnrcinlr re-- sources for expanding production and the lack of foreign exchange for sufficient imports. During the present recession, howeveri there has been an oversupply and considerab:Le amoun-ts of steel are being exported for the first time. 55. As irith steel consumption, production is centered in the industrial triangle. IWhi:le production in smaLl plants was started long ago - on chc+ auid the rich iron ore of Pliras Gerais), the development of a modern industry began Crflir after 14-lorld T'ar IT with tI + e, c .iss -ioning Or.L W- ar.in jerae plar.t -nce Volta Redonda, about 120 Ian from Rio. The present capacity of the plant is 1. 4 *nillon inot tnse In the late 101fOls construciroftwmre tgaedpl. using coke was started, one USINITAS, in Minas Gerais, and another, COSIPA, nesa Sao Paulo U Both .L.LL be in first st-age operation-, io n po i au 0.5 million ingot tons, by the mid(Ile of 1965. _56. The Brazilian steel industry (excluding USIMINAS and COSIPA which are still unduer construction) appears to be a technical-ly sound indusury wilchlis, onIL the whole, efficiently operated. Overstaffing can be observed in some cases, but manl-y due to d,ifficulties in discharging redundant personnel. Altnough aE1 accounts are distorted to some extent by inflation, cost figures and quantitative operational data indicate that the industry is in a fair competitive position on the world market if a realistic rate of exchange -- i.e., the present cormercial ratu -- is usedu This iS born out by the experience oI the industries since tne exchange rate was liberalized: exports have increased sharply not only to other Latin American countries but also to the United States, Spain, and Israel, in spite of keen international competition. Most of these exports have been made at prices wnicn cover total cost plus a small profit while indirect advantages from the recent export promotion law provide additional benefits in the form of cheaper imports of required raw materials, 57. The situation is different for WOSIPA and USD4INAS. These plarts have been laid out for 3 and 4 million tons per year respectively and will reach their planned first-stage production of 500,000 ingot tons only in 1965, High initia] investments of about US $250 million have been made in each plant, i.e.. US $500 per ton of annual ingot capacity. The plants hlave not yet been run-in properly and huge overheads are being incurred because of overstaffing. Construction activities, training programs for new workers, and start-up expenses also contribute to h:Lgh A.IN=t~ 4 Page 23 costs. It is clear that these two plants will be unable to operate profitabl;y unless their output is greatly expanded to spread financial charges and other fixed expenses over a lar;er output. Also proper rnanaL(erial practices must be adopted. A first step in this direction is presently being taken by USIvJINAS by negotiating a management assistance contract with Booz, Allen and Hamilton. 58, The growth of the Brazilian steel industry in recent years has been hampered by difficulties in financing. As a result of an underdeveloped mediam- and long-term caDital market the flow of private funds to the steel industrv has 'been restricted to the reinvestment of profits of the existing enterprises. iYediian- and short-term sunnlierts credits have plaved an imoortant role for the eauipment. ijported. Government finance has been obtained for financing local expenditure ma-inly in the case of OSTPA ind IIS_TN.AS. The ke.y role in financinp has been played by the BNDE (Banco Nacional do Desenvolvimento Economico), mainly in t:e ccnstrun.tinn of three works, CSITP4 U1.TY-KTi\TAS nnd Ferro e AGo de VitOrin_ A L three were started by private enterprise which sooner or later, however, was ir.rncnih1Pc rf s.irSri ng the necp sary furndcs Tn these circumstances thhe: BIE bre.mp irnvolved on an ever increasing scale and slowly obtained more or less complete con-trol over thesel a Jnts through conversion into equity of mos+ of its lonsq These conversions were requested by BNDE to protect its investments in the face of an ac:celeratin, 1 ir+ation. However, because of the size of Projects the wT\T ha~s hact to commit an ever-increasing share of its funds to the steel industry. It is e t i at ed th+a t i n. 19Q thi c n ,as s are I ll rea h R7 pre- + nt. TheBJ BNTT appfi +n be prepared to reduce its interest in these steel companies and if possible revert onershipol, ton thea priva+ex scto,r, +h,erebe.ab llani1 4ng itself4 to, p-layxx a mren' activern " r.l in the development of other industries, However, in view. of the fact that bot;h C-OSIPA -an TSTQ'nTTA are still far from haigreached ar economic ' size of', operations, and in view of the magnitude of the investments involved, the transfer to priv"alt-e i1nAvres-to-rs would InIeCeSsa-i'D bte slo0w; n 4Or,. vh 1hrhnJfthreA ULJ ~. 4Vci. ~ L1V Lc L.U. ci LVJU...L.- II ci cd.1 I..L Ut~ ciLJW UL/ UILZ; UULilt;;± 11CULLIU. ± LiL U1iUJ. _11,11 sion of capacity is required if steel is not to become a serious bottleneck in Brazilts fLUUUre LnL1ju- L. d± __- seemsU mII roJLbe that the r*-_ -ith extensive resources to expensive supplier's credits, will be able to finance furtiler constr-uctLion at an adequate pace0 r'9 Ivrherever the BMIE nlas obitained control it has seen t.o it that capable rmanagement is installed and the company run along commercial lines1 BIUDE technical and financial staff of the Mretallurgical divlson closely s-upervlses the proje.ct and the running of the company. 60. As a source of funds for the steel industry the importance of the Federal Government, wnich originally financed and still owns Volta Redonda, dwindled over the last few years. Only in the case of COSIPA have the Treasury and the Banco do .B3rasil contributed about 10 percent to construction cost0 r61. Finally, State Governments have sometimes participated in the financing of plants in their state. This applies to the State of i4inas Gerais for USIM.NIAS and the State of Sao Paulo for COSIPA. Both participations origina lly amounted to about 25 percent of equity. These participations apparently were made mainly to influence the location of the ne.w plants. Having achieved this purpose, the 3tates may not wish to participate in further capital increases. A mwi ThY h Page 2i4 62. Prospects for further growth in steel consumption appear to be good. Tne necessary stimulus is provided by a sizeable and quickly growing industry as well as large requirements for construction and civil engineering0 On the basis of a correlation of the GDP growth rate and consumption of steel in the past a future growth rate of GDP of 6 percent would indicate steel consumption in 1970 of 7 million ingot tons. The same result is obtained by the direct extrapolation of the postwar trend of the growth of steel consumption. The figure of 7 mil:lion ingot tons agrees wilth the opinion of most leading men in the steel industry, as well as with the forecast made by the Banco Nacional do Desenvolvimento Economics (B II) 63. When COSIPA and USDIINAS reach their first-stage production goal in the middle of 1965, Brazilian steel-making capacity will have reached about h Rillion ingot tons. Allowing for some net exports, and taking into account tlhat Capacity will be utilized by at most 85 percent, the aim should be to establish a crude steel production capacity of about 8e5 million ingot tons by 1970. 61!. Brazilian plans for expanding steel capacity can be arrived at by putting together the expansion projects of individual companies). The item "a,:! others" in the tabulation below is of necessity a rough estimate, but since ex.pansion plans of smaller companies generally involve only modest capacity addit,ions their effect on total Brazilian figures remain comparatively small. A composite plan gives the following growth of capacity (in thousands of ingot tons): Plant 1964 1965 1966 1967 1968 1969 1970 U S I IJil iuSo ~)Uu 50U ouu ouu ou- 1,000 i,000 COSIPA - 5() 500 600 800 800 800 Volta, Redonda 1,400 1,1400 1,500 1,500 i,500 2>500 3,500 Belgo Mineira 400 W40O 00 500 500 600 700 Hianncsmann 30350 350 350 350 3 350 New Plant - - - - - 500 1,000 All1 Others 900 900 900 950 1,000 1,000 1,200 Total 3,550 4,050 4,250 4,5Co 4,950 6,850 8,550 65. Investment requirements I'or this plan can be roughly estimated as f ollows: Table 1: PROJECTED INVFSTMNET 1965-69 (Program Estimnates) (milliorns of UJS do1lars and billions of June 1964 cruzeiros) Implied To be cost spent pcr ton of Plant 14965 1966 1967 1968 1969 T'otal in Brazil Abroad. add capacity miUion billi,nfl io= millio n bilion i =iIin 'm i io'nI iRi0I u biLlion iiion bSiIlion fl1on biiona US$ Cr. US$ Cr, US$ Cr. IUS Cr.* US$ Cr. US$ Cr. US& Cr. US$ Cr. G {r. USnIiM 140 48 20 24 - - 60 72 20 ;24 40 148 120 1)4a COSIPA 10 12 10 12 - - - 20 24 5 6 15 18 65 78 Volta Redonda 60 72 100 120 120 141k 160 192 170 204 610 732 300 3150 310 372 290 3L48 Belgo Minei ra lO 12 10 12 10 12 15 18 15 18 60 72 40 48 20 24 200 240 New Plant P 48 80 96 120 iWI 110 132 100 120 450 5h0 260 312 190 228 450 540 All Others IO 12 10 12 10 12 10 12 10 12 50 60 25 .30 25 30 165 138 Total 170 204 230 276 260 312 295 3514 295 354 1,250 1,500 650 7130 600 7'20 275 330 Revised Program 138 ANTU)1X !4 Pa e 26 66. A crnmigl ponnt in this emxpnsion pattprn is the nronosed con- struction of a new integrated plant at Vitoria, under the auspices of ENDE. ts mrain iti+atin is the expnec-ted deficit inn on-nflat nroducts hv 1970. Another motive would seem to be the hope of obtaining participation and f'nance from the Italian Gover.me.t-controlled steel group Finsider. The possibility of producing the required non-flat products at USIMINAS and COaSLPA is - -nL I e;j,ted 1.t. +S the ---.e +.I t th eSse -Ca faL -roduct plants and should remain so. Hence, no further expansicn above 1.0 and 0.8 ,wj 1 ~r.v ~ v~ +1-,nCn 4-.,,. ,,! 0. c "n n n.1 +1- 1,-.1. +I..e ;-1" .rii- v.m UtonsA i&SU-n t.hse __jJ.&CLSS p IJ for _eseen avlmugh their layout permits expansion to three or four times that size. 67. From the point of view of optimizing the use of investible re- sources -i. luthe steel01 irndus13ttr0J thUrsn xprso,pog _.scrz .I)'UJ.~ .L~ U1~ ) LjZtS.. IA..LLC PI~ tZLQU11 Li t:A.PJ D.L U1I PU Ur,.LddU1L LAd.LJ %..'.L UQ.L-LSI apparent disadvantages, which can be stumarized as follows: 1, Since investment cost per ton of capacity added is always fl?LAC Uti Ve IVIU t;-e2LPcU D)±U;L1 U.' 0 -L PJ .WIU I ULIWU I.Ui' IltW cUonst UL'UV. .±v±1 Ull a green field site, the new plant in Vitoria represents an unnecessary lfiLiancidi uurUdiL U toth L;Lusi1in-y b1.elC 1 bL li1U U.&LJa11b.LQ11 fUU±U U aCL1"VVL.: at lower cost in USIKI4NAS and COSIPA. 2. As a related factor, important possibilities for lowering costs of production at the USDIIINAS and COSPA plants are foregone Dy Ilmut- ing their expansion to the proposed figures. Lower investment cost for further stages would spread the heavy financial burden over a larger pro- duction, and improvements in operation and mnnagement as a result of experi- ence gained in the first stage would quicidy be reflected in lower cost of the additional output, In contrast, the new plant in Vitoria would add another important plant which is struggling with all the usual initial difficulties which result in high cost. 3. The plan to expand Volta Redonda to 3.5 million tons may result jin higher investment and operating costs per ton than for expansion to 2 5 million tons owing to physical limitations to expansion. 4. The present plan would probably perpetuate BNDE's obligation to investing the major part of its funds in the steel industry and at the same time diidnish the hope of its being able to sell both USE UNAS and COSIPA to the public since it seems unlikely that these plants can earn a reasonable return on investment at the lirited size of output foreseen. 68. It is the view of the Mission that the entire question of the organi- zation of new capacity between the existing and new plants and the product unit should be subject to a technical examination, possibly with external technical assistance. 69. One possible alternative to the existing expansion program is illus- trated below (in thousands of ingot tons): the additional capacity could be btuilt either for flat products, partly for exports or part of it for non-flat Droducts as import substitutes, l 4 .ag 0w6rc 70.Te et-,te-4-s ofP ve4--en -ot - <. -,= 4roprto 4 of - A-es 4c I '* ~ ~ UJ4IZ~ UV~ UJ. .J.J~LV s Wment ItU~L andLU ULU~ IdJJP.LU11AL UJ.%U11L~ VIC. and foreign cost) are highly tentative and .ill need to be firmed up by m)ore det_4-ed st( es.-d ue UCIL.Le U " &-ULe~ s A*piartS f'romIL inlor points, sAluhl asb the ZUllur L.PioUi0 li f Belg'J Mineira to avoid overcrowding of the site and the increase at Mannesmann possible at very lor investment., the main advantages Of the alIternative would be: 1. A considerable saving in inmestment cost. 2. A greater chance of lowiering the cost of steel produced by USI;MAS and CUSIPA because of a larger scale of output. Hence a better position for the sale of both plants to the public and better prospects for BNDE to have funds available for sectors other than steel. 3. Lower costs in two important plants, and possible also in Volta Redonda, would improve Brazil's competitive position and enhance prospects for exporting more steel. Plant 1964 1965 1966 196? 1968 1969 190 USIMINAS 500 500 600 800 1,000 1,500 2,000 COSIPA - 500 600 800 1,000 1,500 2,0c00 Volta Redonda 1,4oo l,40O 1,500 1,500 1,500 1.800 2,500 Belgo Mineirac 400 400 400 500 500 500 500 Mannesmann 350 350 350 400 500 500 500 All Others 900 900 900 950 1,000 1,100 1,200 Total 3,550 4,050 4,350 4,950 5,500 6,900 8,700 Investment requirements for this alternative can be roughly estimated as shown in Table 2. Table 2': PROJECTED INVESTHINT l965-69 (Mission Estimates) (millions of US dollars and billions of June 1964 cruzeiros) Implied To be cost speant per Iton of 1965 - 1966 _ 1967 815'68 1969 Total in Brazil Abroad atdded capaci tv million billion miLlion billion million billion mijlion billion million billion million billion million bil:Lion miillion billion US$ Cr. US$ Cr. US$ Cr, US$ Cr. US$ Cr. US$ Cr. US$ Cr, US$ Cr. $ Cr. USIMINAS 40 48 50 60 70 84 70 84 70 84 300 360 130 156 170 204 200 240 COSIPA 40 48 50 60 70 84- 70 84 70 84 300 360 130 :.56 170 204 200 240 Volta Redonda 20 24 40 48 '70 84- 80 96 30 36 240 288 120 1.44 120 144 220 264 Belgo Mineira 2 2 2 2 2 2 2 2 2 2 10 12 4 5 6 7 100 120 Mannesmann 3 4 3 4 3 4 3 4 3 4 15 18 6 7 9 11 iuO 120 All Others 10 12 10 12 10 12 10 12 10 12 50 60 25 30 25 30 165 198 rotal 1L15 138 1.55 186 225 27C0 235 282 185 222 915i 1,098 415 4s98 50C0 600 195 234 rage 29 IX. AkGCULTLUtrE 72. The Program of Action indicates that overall financing requirements for agriculture in 1965 are expected to amount to roughly Cr$61. 7 'Dbiiion1 There is, however, no breakdown between current and capital requirenents and no clear distinction between government and non-government expenditures althorgh the sunmary table indicates a requirement of Cr$200 billion for 1965 and Cr4212 billion for 1.966 for public capital expenditures in agriculture. 7'3. A major portion of the required financing appears to consist of the financing reauirements of the private sector for fertilizer, seed, insecticides aid farm equipment. In the areas of likely public investment such as agrarian reform and irrigation, investment programs are still largel-y undefined and only tentative lump-sum allocations are availableq 71. In the past, direct Government investments in agriculture have not been a major factor in development. The principal Government investments affecting agriculture have been roads and railroads opening up new agriculturri. areas. Direct Government investments in agriculture have been confined largely to periodic investments for reservoirs in the drought areas of the Northeast and facilities for cavryi2p, cut coffee and other comn.odity stabilization pro- grams. The bulk of the agricultLural investments during the past fifteen yearE have been in the private sector financed out of current earnings a7nd credit from official sources. The key factors in the past growth were the av;ail- ability of vast areas of undeveloped land. the supply of cheap labor. a siza- able influx of skilled farmers from Europe and Japan, a growing markc ! for agricultural commodities_ 7V,. In the past twn areas of notentially large public sector invest- ments in agriculture -- agrarian reform and irrigation in the Northeast -- resources are hei-n nrnvi_ded for basic- suirveys nnd projecxt nrnparation hut substantial investments will have to await completion of these studies, T.he '.iirist-r of Agricultu-re and Foresry+ is projviding for cap: ta-+ n%-rCnAities of Cr$4h billion in 1965 and Cr$58 billion in 1966 in their proposed budget. A detailed breakdown is not availahle hut mich of this appenrs to bein for so-called "fomento" activities which include a large proportion of current services to fnrvAnrs whi ch nre visit inni j1y c¶Trnpnii cne.v-noj -Hi res Ho w1e-verp in- cluding rough estimates of capital expenditure of State and autonormous agencies, the abovre figuzres are reasonable approxi'.ations of$p9wic ca1t.e enrnnrA4tires; The revised program of the Government permits Cr$52 bnllion for public invest.- nmoni ;. in nc' rnil tren' 1 OtC 7Ar ,,,4 r;n rn+an -nrn- ar-- a A,l, namnn.4- a rV nA nfl Iya n-r r- CC-i, niI 4- I * .&LA'. fr'A~~~~~~~~~~~~~~~~. -Ut - -. - -lW%fJ A .t U . ~.j a.L 4JLS J? U.L O~5L .A tL Ut4" a a a XSL .A.I.*& U to estimate. Past data indicate that 3.4 percent and L4.9 percent of gross fi-dA n-a4'u Cr' n4--;r--, * 1949 and 1arA OLe'P w in a,ric1--r.f J..f d~ c-ak'-u"- LflLnLauJiAdn .L% J C.L±t .LfJU t1)UC.P kLOLVV'ULJ WCLO _LL aCJ.Lt_LkULLU4LA L C equip-ment. With increased mechanization of agriculture there has probably bkeer, -o. increase ir. the percentajge of "'os e cap-14-a fCormationgo. .n.L Vi~ ~Jtt A ~ ŁA.A bib jjV.LiĽ.Vb±UCLrV Ut. ~yaa .L..UU Jjp.L1J..Cj ±ULLf-uLawVAtUi± into agricultural machinery and equipment. Moreover, the shortage of medium- an%d lonIg- term fnancinLg has left a substantul backlog of un filleU dmaUd for agricultural equipmrent. In 1964 total tractor sales are estimated at about 7,000 tractors mounLting to about Cr$70 b illion0 Estimates for otner types of agricultural equipment such as tracks, combines, plows, pumps, etc. are subjec t w a wider margin oI error but total investments in agricultural equipment in 1964 may be estimated in very rough terms at about Cr$160 uI.lion.a ror 1965 the program estimate of Cr$p200 billion appears reasonable. ANNEX 4 7A najor part of the capital formatio I0. i n agricul-ur UIsbs of ',1h development of new land. Betw,,een 1950 and 1960 cropped acreage has increased at an aniuai rate of abuout 1. IIlL.(11 hiectares er -year. -reiiminary forecas1; o-, 1964/65 indicate a continuation of this long-term trend, i"iost of the land is ueveloped by sharecroppers who contract to clear land in return for cultivat on ri-Ihts on a share basis over 3 or 4 years, On the larger holdings some machi-ncry is used sometimes by sharecronzers but most of the work is by manualabor. There is no systematic data on this type of investment but the available evidlence s!ggests an extremely low capital output ratio ithn tne output oI The first year frequently more than covering the costs of development. Under conditions of continuing inflation, which existed throughout the period, and the arbitrary adjustments in price ceilings and floors, prices at harvest wiere alwrays higher than at planting time in nominal terrns. Mioreover, over the period the terms of trade for agriculture improved slightly. For specific commodities, howuever. the farmer couldi not count on covering development costs since the harvest prices depended on government action. The availability of short-term credit cn concessional terms for growing specific crops eliminated a major part of this risk. 79. The development of new land has been given substantial stimulus in the past by the development of basic road and rail facilities into the interior. Coffee was the moving force in the development of the interior of Sao Paulo and Parana in the early 1950s. rJith the growing coffee surplus and the weakening of prices in the late 1950's the movement into the interior was sustained by the rapid groawth of domestic food and raw material requirements. The development of Brasilia and the network of national highways was an important factor in opening up vast new areas in Goias, Mato Grosso and iCinas Gerais. 80. The rapid growth of agriculture into the interior, as well as the increasing urbanization of markets, has not, how*rever, been accompanied bry a corresponding growth in facilities for transporting, storing and marketing the larger output. .Zoreover, the conscious policy of the government to hold down. the level of food prices to urban consumers has resulted in a continuation of controls on exports and prices and. development of various governmental, quasi- governmental ancd private agencies with varying degrees of responsibility for various aspects of marketing. Government has initiated a new policy to gradually eliminate most of these controls. This will no doubt stimulate private invest- ment interest in transportation, storage and marketing of agricultural commodities. A recent study by Weitz liettlesater indicates urgent requirements for investment of ';600 million in storage and marketing facilities for grain and tuberous crops alone. Further investments would appear necessary for processing, marketing and storage of meats, dairy products, fruits and sugar as well as a number of tropical commodities such as cacao, jute, cashews, palm oil, etc. Most of these investments would be in the private sector and are not included in the Government's proposed investments in the agricultural sector. However, fairly substantial investraents for nublic grain storage and handling facilities will probably be required. The head of SUNAB estimates urgent requirements of AT..m! y Page 31 s '.14. . *or% w ; AJ. -M 4 JoAr .-31 UULLLI Ml; * L .'1 'c .A.fL.... in the Mission's estimated public capital investment requirements of UV*JJ Lit; UCL.L; UtJe.'.W OL&IUW ULAZ "CL) U-L L AjU ..LU V.L UL LI.F. j J V %,.. UU1.A. public investments betwieen the Federal Government and the States. ±[Is d~are IrJ..y ithe LItU rU. wueiivU Lo be U1UrU.U.ker by 7vernr.enj- Transfers and Credits to ths private sector are not included in these figures. Table 1: PROJECTED INVES-qNT 1965-66 (Program $stimates) (billions of June 1964 cruzeiros) 1965 1966 Original Program -200 212 Revised Program 52 Table 2: PROJECTED PUBLIC INVESTENTS 1965-66 (Mission Estimates) (billions of cruzeiros at June 1964 prices) 1965 1966 Federal Government 22 29 States 22 29 Total 44 58 ANl'EX Ii Pagze 32 P_ricultural Credit 81. The bumper crops expected in 196V/65 should provide farmers with s;nbst-ntial cash resources for meeting nrncmdction costs in 1965/66 and for invest- ment purposes prc,vided the Government's current marketing plans are carried out smoothy.1r This TAI 1 1cll for a qhTrn xoynnnqion of short-.tPrm treits5 dring the harvest period (february-May) to meet the expenses of the larger crop and prompt nnion in Ynonrinca S-irnC .n to rio±t. mTnrlr0.c ('.rnri rces peanuits. nnrd cntton are expected to show particularly large gains). 82., In the past about 90 percent of the agricultural credit provided by the F i qtrqf.rnT.7a c n nlli +.througirh RPAT tIheo -rural credt dartment of' +Ihe Banco do Brasil. In recent years the volume of loans made by CREAI has amounted gross national product originating in agriculture. Regional development banks, ~J U4 U~LJa;1v.s ...JliJI&,. ~J.a.. UJOL -4 -Lt - p J - - .. p. - -t - -&±, t/ , QCj~ 4.;> s.-%L,/iS Z/.4.A..f- Other sources of financing such as processors, farm sup-ly dealers, merchants and la ndlCords provid,a and U V ± an unknown. amnount oULI creudi tlu. AboJULAU 80 LiU pre t Lil of tUh cret supplied by the Banco do Brasil and practically all of the credits from other sources are on shi-ort-terrm. U> The UovernmL[ent has 1L I U[ULy LaKkeUl UwU se toJJp iLU cease the SUp'y 01 short-term agricultural credit. With the help of the UjSAID, a new agency, the iCi,un (iThe '.UiU.l1nal Aige,c-y for Rural C,redUit. UUoru1d±iation), hIas ueeni etUaUlisheU with a view toward developing a coordinated agricultural credit program and pirovidCing a channel for external financing of agricultural credit programs, Tme agency has received an initial allocation of Cr. 50 billion which it expects to use for rediscounting short-term fertilizer loans by commercial tanks= in addition, part of the reserve deposits of con.ercial banks have been freed for agricultural loans.. If the banks lend the full amounts nossible under inis program, comrnercial bank credit to agriculture could increase by about Cr. 150 billion. A part of this increase has probably already occurred since the action was taken in time to meet the 196L planting season. A major increase in short-term credits will be required to finance the harvesting and marketing of the record crops expected in 1964/65. 84. The monetary plan for combating inflation provides for an increase in lending by CHEA:' of about 30 percent in 1965 as compared to expected price incr-eases of about 25 percent. However, considering the sharp expansion in resources which will Wbe available from other banks, tne overall credit position for agriculture in 1965 should be better than in 1963 and 1964. l;ith an increasing proportion of the short-term lending to be assumed by private banks, CREAI should be able to meet a somewhat larger share of the requirements for medium- and long-term development funds in 1965. However, given the large backlog of unfilled invest,ment demand, there is considerable scope for external financing particularly in the years after 1965. The 1-iission estimates that about Cr. 50 billion of the Cr. 200 billion private investment requirement can be financed out of funds already budgeted for CREAI. An additional Cr. 150 billion will have to be financed perhaps half from the farmers' own resources and half from external resources. External resources of the order of $50 million will be needed to meet this requirement, ANNEX 4 '. TF'TY^A mrnwr A. TL1JUU&I1LUL'1 8$. School enrollments are growing considerably faster than the estimated population growth of 3 percent a year. But the nigh growth rate of enrollments does not reflect a satisfactory situation, 86. At the primary level, half of the children in the school age group are not enrolled at all, leaving a backlog of some 7 mill'lon which will never be overcome at the actual rate of enrollment growth. 15 percent of the secondary school age population is presently enrolled, while 1.5 percent of the 20-24 years- group is in higher education. 87. Dropcuts are high, with a maximum of 55 percent between the first grade and second grade at the primary level. This indicates that a high proportionl ci. expenditures on education is wasted, since those who leave school at such an early stage remain illiterate. There is a very small proportion of pupils enrolled in the fourth, fifth and sixth grades (12 percent total school popu:Lation in 1962 and of students in industrial and agricultural training (in 1964, 306 percent and 0.5 percent, respectively). 88. Efforts have been made, since 1961, to develop industrial education a', secondary and higher level, but the absolute numbers are still several times below those required to meet the indicated needs of Brazilian industry. The sttuation in regard to agriculture is still worse: the enrollment of agronomiFts is estimated to be five times lower than what it should be in relation to agri- cultural production. The shortage of subprofessionals can become a bottleneck to rapid economic development. The number of students in medicine is ten times higher than the number of students in nursing, for example. And in the State of Sao Paulo. in 1963. there were more eraduate engineers emploved in industryv than there were subprofessional technicians with a secondary educaticn, 89. Private schooling accounts for approximately 11 percent of primary., 56 nperent of sec.ondaryj and )40 percent of post..nsecondary +.irpnts. The Progran ef Action indicates that about 20 percent of expenditures on education in recent vears have come from nrivntp soures, hnt t.hi s prohhabi vq n qsihqt.sntianl underr_ estimation, 90. The structure of education is defined by the Law of Directives and nLsi, 191. olic ..-L-4- a+ the -atol levelL is the VIpniblt ft Federal Council of Education, a body of 24 educators serving part time. Primary and secondary edueation -e the respcns-i4 14ties o ates,4 are alloecl ronsi:derable latitude in carrying out national policy; most primary education. is oesentially supported by Federal funds. The State Councils of Education serve as th'e la-Json li-1nk, bet, een Federa' a-,d State programs. T,he ,;.inistr-y of Education is the executive body at the Federal level and, as such, is the agent of the Treasury. The I.aw provides that 12 of ederal tax A.jLV PL-V.WV Uict L- t%-UaluU. r:u ra t x-reveniues kab 'j"';L - ically defined in Brazilian law) and 20 percent of municipal and state tax rev- er±ues be spent on education. Federal assistance is extended in inverse proportien t.c regional wealth. The basic provisions of the Law have won general approval AN1EX 4 r .aSe _L4 throughout Brazilian Society. 91. Total national expenditures on education, as a percentage of Gross Domestic Product (GDP), has increased from 2.6 percent in 1959 to 3.5 percent in 1962 and, on the basis of Plan figures, to 4.2 percent in 1964. Very little information is available on the distribution of expenditures as between invest- ment and current expenditures. 92. The efficiency of expenditure at the different levels of government ha;, proved difficult to analyze. There is no effective control of expenditures and even global estimates of expenditures contain funds which have been included tice or even three times at the various levels. But adherence to even prima facie priorities has been lacking. For instance, there has been considerable vastage in the construction of lw:urious buildings.which is most evident at tho university level but is also apparent at lower levels. Also, during a periocd when the economic development of the country clearly called for more foremen, technicians and highly qualified wrorkers, the public education system was still. expanding traditional academic programs. 93. The Programa de Acao puts the accent broadly in the right places - planning, financial control, technical education, teacher training, etc. It raoresents the basic instrument which defines Federal policy toward investmernt in education. The investment plans for education, as they appear in the Proc:ram. are based on long-term goals for education contained in the Law of Directives and Basis. The targets set for attainment by 1970 are as follows: l. Tn Drimarv education, enrcllment of 80 percent of the 7 to l4 ye!ars age group estimated at 17.3 million. 2. In secondary education, enrollment of 2165 percent of the l R-l8 years age grou.p estimated at at hnut. 1349 millionI 34. T. ILnS h r education, nfA L,sun a proportion of 3 : 1,000 inhabitants, which would mean an increase of 50 percent on the present rated 9) Expenditures to meet the needs of the Pr-gram pro- Jected for o(/Vi4 1=l -mounted to 4.2 percent of GDP in 1964, 5.0 percent in 1965 and 5.7 percent in ie hs per^nt level s - over t 4 percent targeU set at del Este; the 5.7 percent projected for 1966 would give Brazil one of the highest figures in the world if realized. Considering tte present'ly aravor-able respons: to educational opportunity, particularly at the primary level, the projected increase in expenditures is not o d to Just iy ini tne.je,ms of educationa3l. cUbjectives but the targets are undoubtedly over-optimistic as to what progress can be expected over the short termn, M-ieeting the target for prim-iary education would mean the prior training of half a million teachers, for instance. Al'iNEX 4 Page 3 Table 1: PROJECTIOIN OF EXPENDITURES ON EDUCA','IO1 AhND RELATION L U.UiJ Ur2 DZruilh-.1 (in billions of Cruzeiros at June 1964 prices) _________196h 1965 1966 i967 1968 :3.969 Expenditure on Education at 4.2% of GNP 750 800 850 90 950 1i Ulc' Fublic Sector 600 600 630 660 700 74-- Private Sector 150 160 170 180 185 200 Table 2: DIFFERENCE BETNEE14 PLAN AMD ]YIISSION S ESTIIfATES 7Tn billions of Cruzeiros at June 1964 prices) 1964 1965 >.66 Public Sector Expenditures 0 148 305 CM-1 On a practical level appropriations for education expenditures are currently not based on a plan with specific projects ranked by priorities. Expenditures are not controlled, so that the final use of the funds is beyond the knowledge of the Central Government. The mission urges that steps be taken (1) tj establish priorities in a more specific and meaningful way than is now undertaken; (2) to formulate plans for specific Drojects on which to base appropriations: and (3) to set up Federal control procedures over the dis- position of Federal funds. Until these steps are taken, the mission recommends that Dublic expenditures (current and capital) be kept at the same proportionate level to GDP as in 1964. 96. Any short-term financial problems within the sector would largely be ress)lved hy the better utilization of available facilities. Educational plannio.2 is the key to this pr)blem, and a planning unit should be established within the Federal Counoil of Education as soon as nossible. The unit could extend technical assistance to regional authorities in prugranming and budget preparation. The needi for an inventory of existi;ng facilities is recognized in the Plan Docamenn. Technical assistance probably will be needed to bring about a better planning erffort0 fNiNEX 4 Page ) 97. A manpower unit should also be created within the Federal government structure to supply information on manpoijer requirements in the economy. How- ever, there is no need to delay technical education. Industrial training at the upper secondary level of education should be extended top priority, and schemes financed by the private sector should be encouraged. As far as could be ascer-- taimed, no projects in technical education have been delayed for financial r3aO-n but the field should be considered of high priority for financial and technical assistance. 98. Finally, the improvement of teachers' training and status deserves the highest priority in edu_ation investment. An attack on the problem at the level of higher education is already undeniay; it is to be hoped similar action will b'e taken at other levels, especially for industrial and agricultural secondary education. The practice of employing teachers part time is a source of waste add should be discontinued as soon as practical. 09. Some of the educational activities of more than usual interest, apa;t from the normal programs at the various levels, are listed below. The earlie" listings are probably uf greater immediate interest in terms of qualifying fir external finance, (a) Program for the development of the Rural University of Brazil (US$ 1,300.000). (b) Program for the development of technical education in agiicul. ture by the Hinistry of Agriculture. (Us$ 19,500;000)o (c) Training of teachers for higher education, conducted by CAPES -with the notnperation of tli Tntpr-Amerinan Deve1opment Rank and the Ford Foundation; it covers research, development cf existing facilitiesn poqtcrrdate courses and fellnwshinps abroad. It is stiLl too early to evaluate any result of this Jroaram, but the pnrosnects are favorable (d) SENAI has a nmhber of pnograms r dvoted to (1) raising +he share of secondary level education in the global output of its trainees, and (2) developing more training programs for private enterprises conducted under its supervision. Any re1quest fcr, filanc4al assistanc e from qST'IAT sould b exarined with the highest priority, as both its technical and adminis- -'rati_vMe refPerenices are exce'llento \ l .JJ& V 1iJ J.V . I t TLLLLL J. wr± O.LL 4. T. .JA.. U4. . L+ _4 L iTJkJVVJt7. to train some 46,ooo persons in two years, conducted by thlev ±1ILinistL.Y ofj Educadion -W.Lith te col.laboraUVV oLU1 VI CiZHI±c This program, although it will not meet its proposed targets, s bworking in satisfactory cundition and shonud be encouraged especially at the secondary level, ANNEX 4 Page 37 (f) In Sao Paulo, the "Instituto Techrologico de Aeronautica" for training engineers in aeronautics and nlso in electronrhi and simnilar activities. Sponsored by the Air Ministry, the Tn.c:+; +.i+~pn :q -roeo c˘DsQ':>fR c+n fsrr,n +.'hp .g1n+p of R Paulo; an aeronautical industry will be created in the area within asotperiod Or ime sponsorship of the National Institute for Educational Re- searchT.nI, (LR) ha-v n-- --A so..e Or% sey - A --r-"r c- different aspects of Brazilian education. There are now e g-ghtU centuers aind -so r,Xore w-L'l be, es:alie Jin 'hs7 IIUA~L future; their contribution to the general planning of educa- Ution ilW.L proUve mr1uvI VU.LLUdLLVO (hi) The 'uru..vesy of0. hassev nrab.".La vtraL prugi-ms of J±L1teresU, including the installation of the Central Science Institute (at a cost oI uS$io miillion for the period 9y_3-±YQ)., tne development of a Faculty of Education, with UNESCO and UNICEF assistance, and a project for Mlanagement Training with ILU cooperation. 100. The tables below show the Program's estimates of the Federal Govern- ment investment in education and the Mission's projection. The iMission's pro- jections are based on the assumptions that expenditure and investment in educa- tion would continue to bear the same proportion to GDP as in 19b4. Table 1: PROJECTED INVES11MT 1965-66 (Program Estimates) (billions of June 1964 cruzeiros) 1965 1966 Original Pr?gram 145 171 Revised Program 108 Table 2: PROJECTED INVESTMENT i965-66 (Mission Estimates) (billions of June 1964 cruzeiros) 1965 1966 1h5 154 ANNEX 4 Page 38 XI. HOUSINGT :101. The rate of construction of houses and apartment buildings has sub- stantiay1o- o- --,--4- --* Ti- 4; es|4-4- 4- ;-4- A.4; ThAI 16 .s VI %.> Uw1 It, CuL J.6 i ULIbZJ .vuLL UIId.U u .L/ v 4 hardly more than 100,000 dwelling units have been built compared to an average rate o.f cons-U,c-t,iOn 01f abiouLt 3000 n well---ing 4- -4t 4 er - rXn in -h 41-- cOr iS. 4. .A4 J J±U J. JL L'L,J.iLJ. dJK UU JL JJ UW _L_L.LlI6 WLULLU. jJtJ. dJI.iiuiII I. Ulic ': The situation is particularly serious in low-cost housing where new construction h1aCsE aLmosVt Uc Lome ,L aU stad L.L.1o T dlit J.eL1LJ..Z1 in oUuse coistruction hlas not been caused by lack of' demand for new housing or by insufficient capacity of the building inldustry. It was excl.usively ue to lncreasing difficulties in the fi- nancing of new houses which again was a consequence of the accelerating rate of :Lflilation. Despite fast and progressively rising construction costs public agencies engaged in the financing of low-cost houses such as social insurances, saving banks, th,le Fundacao U'a Casa Popular, etc. were not allowed to increase the nominal value of annuities foi jlheir previous loans. Thus they were faced with a rapid deterio- raticn of the roaE± value of their financial assets and eventually had aimost no .unds left for the financing of further investments in housing, Likewise, private housing investments were increasingly discoura-ed by the inf-lationary process whi.chl dried up the market for long-term capital. lIew houses had to lbe financed on me.diu-i terms with down payments amounting to about half of the total costs of construction., Surch conditions obviously limited the construction of houses for the medium- and lower-income groups. Morebver, strict rent controls enforced by the Government madLe private investments in apartment houses more and more unprofitable thus cutting down drastically the new supply of leased dwelling units. 102. The demand for newi housing is increasing continuously because of the ggrowing population and rising per capita incomes. It is estimated that in the years to come additional 500,000 dwelling units per annum are needed just to keep up with the population growth. During the past the increasing demand for new housing has only in part been satisfied. A housing deficit has accumulated and at Dresent is estimated to be in the order of about 7 to 8 million dwelling units0 In Guanabara alone the number of people living in subhuman quarters has reached roug!hly 1 million. If this gap wrere to be closed within the lifetime of one generation, and if the additional demand arising from population growth would also be satisfied new houses would have to be constructed at a rate of about 800,000 dwelling units per annum0 103. Considering the enormous gap between demand and supply the Government has taken steps to increase the rate of construction. It has enacted a new housing law and a new tenancy law which T4ll facilitate and encourag7e the financing of new houses and apartment buildings.O/ The main purpose of the housing law is to sti:imulate the construction of owner dwellings by the lower income groups of the population. The hbusing policy established by this law oiperates basically on two lines: it coordinates the activities of the various public and private entities v.orking in housing and territorial planning and it establishes legal provisions protecting the housing sector from the paralyzing effects of an inflationary environmente _ . .LUJ.1i f1.'U U . M. 4 ,kJ. .`AV .W ilve L4,3LJ'J Ul, ~U8WZ'U L.L, L7.L4 U.1I Law, Federal Law No. 4,492 of November 25, 1964o AANNEX b Page 39 I104 The. F Goveww,ent ,.r 1 1 act i " 4n the housing s^o ,..l th-cu h the newly created National Housing Bank (NHB). The main purpose of this bank i s to eoncoura ,e th -orr.to of 4ain, avial or the f-nni,of hous-ing, U 1 c V1 S -4 W rOUL1~. 0V ~~ Jf I VItO ± & CIOI$~ prcjects. The NHB will raise funds by issuing bonds and accepting deposits frotul government ag;cis SUJIO dOiA s--, e .g., social -nsurances ar o the new law to deposit a certain percentage of their investible funds with the 1'J. ILUe baN may al'so obtai n 'omiUes'UU u±LL U tIicA o. forLegn loaIns wUi±LA -iL.Li bU L teed by the NJational Treasury. In addition, the revenue of a newj 1 percent pay- roll tax Will be p-ut at the disposal Of the bank-.. Besides, various other Fer- eral agencies already in existence such as the Federal saving banks, military service funas, etc. will continue their activity in proraoting tne flnancinTg aItC. construction of residential houses. The Federal agencies will cooperate with housing agencies of the states and municipalities, housing cooperatives aild private enterprises carrying out housing developments. Their principal function will be to coordinate housing programs and to render technical and financial assistance. The actual execution of housing projects will be undertaken by Federal agencies only when other public or private initiative is lacking. h'ef; amounts raised by the NHB and by other public agencies as well as their lendirng operations will be limited and supervised by SUNMOC with the objective of sub- ordinating the housing financing system to the monetary and economic policy co the Federal Government. 105. Another important feature of the new housing law is that it allow's for .monetary corrections of interest payments and amortization of housing loans as well as for other funds used for the financing of houses such as real estate bonds issued by the NIB, deposits in the housing financing scheme, etc. The eorrections wi:Ll be made in the same proportion as the increase of the genera'2. price index published by the National Economic Council, and will take place whenever the 1(egal minimum salary is altered. The real value of monetary assets and obligations generated throu'h the financing of new houses bill thus be safc- gularded agains` d-;preciution with increases irn the price level. The Government considers these adjustments a strong incentive for attracting private capital to the housing sector. The benefit of the ne,- financing scheme wvill be ra- stricted to housing programs of social interest. According to the law, only houses or apartments covering an area of 100 square meters or less and costing not more than 200 to hOO times the minimum salary will be covered by, the scheme. Persons or enterprises undertaking the construction of luxury residential build- ings will be required to purchase a certain amount of real estate bonds issued by the NHB. 106. The new tenancy law which re-ulates the leasing of urban premises also contains ccrtain reglntAonnq mnking nrivate investments in naprtment houses more attractive. [-t has abolished rent control for new residential buildings and nl1Ths that lease acrrment.s may provide for readjustments of thp monthlv rent with changes in the legal minimum wage may be adjusted gradually over a period o gf upr to 10 yer.-yrf - 107 Th1e r rc 'nm0nt. cr.4ina P,-r%-Y-rnm OnvTisg cedCO the rAnn cns.rut1ri ofn of 100,000 dwelling units in 1965 and 150,000 in 1966, requiring investments of r$150 billion and Gr$225 billion in 1965 and 1966 respectivelyT. These targets were based on the assumption that 25 percent of the investment could be financ;ed from the one percent pa,-oll tax from housing, another 25 percent from capital raised on the domestic market and the balance from external resources. rThe only certain source of financing is the revenue from the payroll tax. l't is unlikely that the private ANNEL h Page 40 Capit-al iarket -vuld absorb V311lue 1l-in-ed h-onds- + the Axt n- eniqqc,tnr1 The projected inflow of external resources is not supported by cormnit- these factors in vi-ew the likely investment in housing in the public sector -"ll 1b P C70 b;llic 196,5A -A Cr0 l bi i r1- 10AA I.'ith these investments, the construction of low-cost housing would be of the orAde-r of en J%n 00 ur.ts -r . 1 6 a(,\ 80,00 r. t= 4s 1966 n the 'rei- 41 n- - LJJ.~L~1 .L P J JV LLIJ ki ±U ±' ariu uu '.JJ . UIL O LL1 L.7ukJ "IL U1LL~ 1V-.~kA of the program in March 1965, the Government has reduced the projected L±kVesjuW(1L11. IL .LLc,usI±1 ILl 1965 tJ o 8 L~LLUL19 108U. TeLi L-aUL( UibloW SljXWSi thle Iroarali' w. ivlatuu UaL pubLiL iilve u ment, as well as the Mission's and the financing of the latter. Table 1: PROJECTED PUBLIC NIivESTI= 19±yoi965-661 (billions of cruzeiros at June 1964 prices) l196 1966 Original Program 150 225 Revised Program 89 Mission's Projections 70 120 ANGTh h Page 41 XII. Si"7LN1TAT^iION AND -viATE SUPLYrr" 109. The years since the Second lUorld War have witnessed rapid industrial growth and urbanization in Brazil0 Wnile total population increased at anl average rate of about 3 percent, urban population increased at more than 5 percent per aSnn^umn Even though the highly develooed areas or the Soutiheast and the South nave made impressive gains in the extension of health and sanitation facilities, these are still not comparable with those in the developed countries. Thus, in the Sta;c of Guanabara, one of the most highly developed parts of the country, 55 percent o. the deaths occurred among persons less than 50 years old as against l5 percent in Denmark. in the less developed regions of the Northeast, mortalities in this age grcup account for as mwuch as 75 percent of the total., Transmissible diseases rema>- a major hazare to the health of the population and account for a large proportion of Lnnant mortalities. Only about 4O percent of the urban population receive varyirg *ucalities of pub:Lic water supply and 19 percent are served by sanitary drainage, The extension of these facilities in the less developed regions of the Northeast, .ne North and the Center West has lagged behind overall economic development and tfhe growth of urbanization. llO. It is a truism that the groi%th of social overheads should lag behincd overall growth in a process led by rapid industrialization,, In water supply and sanitation, the causes of this lag can be characterized as organizational and financial. As urban communities grew rapidly, the organization of water supply, sanitation and health did not evolve to keep pace with it. Even today the respon- sibilities of Local, State and Federal Governments and, in the case of the Northeast, of the Superintendency for the Development of the Northeast (SUDiENE) overlap. The systems in the larger cities are operated by the State Governments, and in the smaller ones by the Local Governments and the standards vary widely. The Local Governments are aided by the State Govermaents, the Federal Government and by SUDEME but a set financial formula has yet to energee The years of inilation took their toll of the financial capacity of the Local and State Governments especially in the nation's poorer areas to maintain and extend their health services and systems of water supplv and sanitation. Until recentlv water and sewer rates were inelastic and their real value was sapped by the growth in prices In most cases these rates did not cover the current costs of the systems already in existence. Financing for new installations carne largely from the Federal funds, the AID counterpart cruzeiros and the Inter-American Development Bank. Lately. however, a number of local and state authorities have linked their water and sewer rates to minimum wages. Already the State of Guanabara. which was one of the first to adopt this practice, is implementing an impressive scheme for the extension of water supply and drainage facilities financed from its own resources and from Lcars from the Inter-American Development Bank. The sectoral program for water supply, sanitation and drainage presc:ribes arn integrated nolicy for this sector. Broadly, its elements nre: (n) Thnsirina r.ollahorat.ion of aPenc-.it- rp.eeiving federal fuin(is. with a view to avoiding duplication and wastage. Page 42 t , N 'D st-'>E 4' - -- -Ost - U-,4 ; 1 I1-'ibW 4v,- AV--- ---A - A 1A developed areas by concentrating resources in the latter, (c) As a corollary of (b), channelling federal funds for w-ater supply L largely tLo Co,,iIU.itin -L wit w p a uLf JJVJUJd.LV11 V. Up WU 20,000 since these communities are financially and technically less zapable CU 1i-:11eLerrint 9L Such probJ tSand SiJUICUe tIRU ŁILdJUlr concenUJ. ZLLU1U UoL population is in such cormiunities0 Consequently, the investment pro- grams in larger cities, whnich can 1finance and execute bhim without federal assistance, are not included in the Program of Action. (d) Initiating rudimentary systens of drainage in communities with more t;n l0,000 persons. (e) Organizing garbage collection in communities Of 50,000 persons or more, (f) Generally assisting works already in progress, 1.12, With these objects in view the program proposes the following investment: INIVESSTITT TARGETS FOR THE WATER SUPPLY AND SANITATION SECTCR (billions of cruzeiros at June 1964 prices) Original Program 1964 1965 1966 Water supply 25 30 35 Sanitation and sewerage 6 7 10 Total 31 37 45 Revised Program 66 113. The long-term prograrm for water supply and sanitation envisages that by 1973 about 70 percent of the urban population w.ll benefit from water supply and about 27 percent of the urban population will be served by sewerage and sanitation facilities. 114,. Already the Government is taking measures for the implementation of its program in this sector. It is proposed that the use of foreign funds be chanmelled through and coordinated by the Commission for the Coordination of the Alliance for Progress0 The USAID is using a sizeable proportion of its local currency resources for financing programs in this sector. especially in thie Northeast. While the Mission was in Brazil. the Government was actively considering the setting up of a revolving funcl for financing water sunnlv and sanitation nrcneipchs- ANNEX 4 Pago 43 115. ~At. t.hre afl tIv level it. iszi ;f'if-i- I+ + rii dniispt, thei nhir-.tivPq and( the order of priorities laid down by the Program. The larger metropolitan areas like Rino de Janeiro, S--o Paulo and Recife have the r.chirne-ry anr d the orgnnization to plan and implement sizeable projects in this sector. But the Program emphasizes +the need to develop water sup-1-l arad Q- atinn facilitie 'n sm&allr or-m.rnii,ni±itP and it is precisely in these areas that the problems of project preparation and i..lmnatinad ofiaaemn ot is precie Tfte ir.vemnt taret are 4 inn an,n F .44 at -r,A a4- ,. r.m..-4 . . -a.- -Inte nse.a Ti' +1-, ~rot,n .,,V r 1.tqJ.l-.-VCL GIua JV 11 " % './4. i Latta , e11VCJ1 axe , iLkJ 4V XLILU1U1JQ .4.4 v1'-l IUV.VV11. ~ 6'VJ a. to be achieved, technical assistance in the preparation and implementation of projects `n management ofL waater suapp'ly .-a sartat4 4 ysem w av o a.ssule ~jJ 4J U) WIV. ILWd.I%.LAU.W- .~L i).J9. dIil CL L. L,atL,±VJon s~ysVl.emsI -Wil. I V hav 4u'. i/VU a high priority. Further, to ensure that local communities are not perpetually .VV41VuJiiU Vitl .L U WUO L Ut:1llU D L Vlt:44 Ll1iUii CLIU q1 d411VJ.1 V 4lV W1U J the trend of fixing realistic value linked rates will have to be applied universal-1 1L16. The table below shows the states where the water supply systems and. projects in smialer co-munities are either already urnder construction or expansion or there are plans for news construction and expansion Number of Cities Population Construction Cost (billions of June 1904 cruzeiros) Northern Region Iiqew Systems and Projects Rondonia Acre _ _ Amazonas 12 36,981 0.5 Rio Branco - - - Para 26 113,683 1.6 Amava - Total 38 150,664 2.1 Expansion of acisting Systems and Projects Rondonia - - - Acre - Amazonas 2 18,081 0.1 Rio Branco Para 3 39,891 o.6 Amanpa Total 5 57,972 0.7 A iN ia 4 Page 4 Number of Cities Population Construction Cost (billions of June 1964 cruzeiros) Northeastern Region New Systenms and Projects Maranhao 25 122,417 2.6 Piaui 16 72.007 1.4 Ceara 38 280,465 1.6 Rio Grande ron Hnorte 9 82.38L 1.0 Paraiba L41 215,510 4.9 Pernmnhu]no 38 267.551 3.5 Alagoas 27 156,231 2 4 Seraipe 19 9J169 2,2 Bahia 76 4149,743 9 9 Tc.nl 289 'I .7) inlh80 29.5 R.Y-nnri.q rn cf RfTri qf.i nr, Sar.it.nm.v and Projects M., a i - amh a o 2 29,281 °) Piaui C ear a Rio Grande do Plorte Par-alba Pernambuco A- agoas 1 l 7 Sergipe Total 3 46,030 0.5 Southern Region NTew Systems ancd ]rojects Sao Paulo 70 289,287 Parana 20 129,848 4.2 oan'ba Oat.alnILa 17 7 4,1 2L ) Rio Grande do Sul 38 195,017 3o7 iotal 1145 708;275 15c6 aw-pansion of K:cisting Systems and Projects Sao Paulo 62 1,204,507 ' 2 Parana Santa Catarina - Rio Grande do Sul 35 823,917 3.5 Total 97 2,028,424 144 Ai'iNEX 4 Page 145 Numb er ofi Cities PopWLdulaonl CJonstructLion (ost (billions of June ±19U4 cuzeLiros) Cen+vai l-vtes+uven Regionl New Systesiii and .&rojects hinas Gerais :32 89,329 2.0 Espir Ito Santo Rio de Janeiro Mato Grosso 28 8303424 1.1 Goias 22 80,242 1.1 Total 82 252,995 4.2 E',pansion of Existing Systems and Projects 1H1inas Gerais 1(6 797,939 9.7 Espirito Santo 9 71,724 0.8 Rio de Janeiro 8 95,952 1 7 Mato Grosso 1 4., 76 0.1 Goias 2 19,476 0e1 Total 126 989,567 12.4 Grand Total 765 5,974,407 80 Notes: 1. Table prepared by the i"egional Office of the Pan-American Health Organization, Rio tip Janeiro. 2. The costs, initially given in 1961 cruzeiros have been converted t,o Jine 14f;), r-eiros br infl at+.ing +.hem TwTi+h +he estimaed ireaseni price level during this period. AI-MEX 4 XI!!. PETIOL-'UMIv Present Structure of the Industry 117. Petrobras, the state oil company, has a monopoly of production and exploration for oil. A decree signed by President Goulart extended this monopol-i to all imports of crude and refined oil products and all refinery operations. T'his decree is being reviewed by the new Government but no decision has as yet been takren, Nevertheless. private refineries are effectively barred from i.ncreasing their scope of operations, At present, Petrobras accounts for about five-sixths of the total throughput of crude; twio of its ref'ineries are responsible for nearly three-quarters of the Brazilian production. Re cent Trends 118. Since 1.958, consumption of refined oil products has grown by about 9 percent per year (non-cumulatively). 119. Over the same period, the proportion of domestic refinery output to oil products consumption has grown from about 64 percent to about 93 percent. Brazil has approached self-sufficiency in refinery operations. 120. The proportion of the domestic crude use by Bran lian refineries has increased from 2L4 to 33 percent of the total throughput. This improvement, how- ever, was made possible only through a rec.uction in Brazilian exports of crude. Thus, the Brazili.an output of cruoi.e as a proportion of refinery throughput actually fell from 38 percent to 35 percent0 lPuture Prospects -i21 The combined capacity of Brazilian refineries as of December 31, 1962 was 310,000 barrels per day. Consumption of petroleum products in 1963 was at a rate of -1q-000 barrel.s ner day (inc1ndin(: ref'inerv consumntion and losses). Based upon past trends and the assumed growth in gross national product we may expect domestic consumption to reach, sav, L20,000 barrels per dav in 1967. Since then 60,000 barrels per day are being added through expansion Of existing refineries hriile two new refineries with a ccmbined canacity of 90.000 barrels per dav are scheduled for completion by the end of 1966. This will result in a total refining apacit.y at. that date of about )L60jooo barrels per day wjhich is approximatel-y sufficient to cover the expected demand. The two new refineries, at least in the beginningfJ, will process imported cruden difficult to make a serious projection of the future production of crude oil. The following elements are nevertheless importat+ to an urnderstan-ding of the situation. The stagnation of crude oil productlion since 1961 is said to be due to administrative qnA + nncn-i c-l re-onsoncS rnt+her th-on cn-rcit +-f --- oc e n,,nroc fonr AnUoe lonmn+t LI ,,;c rdr nn to some observers, employment with Petrobras, until the recent change in regime, was ANNEX h. iDag' L~.7 based more upon political allegiance than prcfessional competence. IJr Li1 acL iJ.Les were L -amipered u"r lack of loreign exchange. -ahe relatively low prices fixed for oil products imposed overall financial limitLations on Petrobruas' aCtivties. FinuLly, diue perhlaps JI par U these deficiencies, there were no new fields to develop after 1960o-61. 123. In all the above respects, substantial improvements have occurred. There is now a greater complement of professionals I1 to? positions. The pricing prcvisions of the new draft law imply a con- siderable increase in Petrobras' financial resources. Nost important, the physical conditions for expanded output seem reasonably promising. Although prodluction in the Bahia basin (w-hich supplies all of the present output) is likely to decline in the not too dist;llt future based upon present production methods, a major effort will be made to determine the economics of secondary recovery. This could increase the ultDiate yield from the present 15 percent to perhaps 35 percent of the oil "in situ". The results of pilot studies are expected to be available by the end of 1965. If the findings are positive, the aim would probably be to main- tain the rate of output in the Bahia basin at approximately the present ltevel. Meani-rhile, a new field has been brought into production at Carmopolis (Sergipe). The importance of this field is indicated by the fact that previously discovered reserves were estimated at 800 million barrels, and Carmopolis will add at least an equal amount, possibly more, to this total. According to a recent statement by President Castello Branco, Carmopolis might eventually double Brazil's oil production. 124. Because of the change in Petrobras staff and the change in plans occasioned by the Carmopol4.s discovery, there is no firmly fixed long-term program for oil. It is hoped that a new 5-year program will be availabDle by the end of this year. A provisional program provided to the IMission shows production of crude falling to about 10 percent below the 1963 level. by 1966; almost the whole of this reduction occurred already during the first eighlt months of 1964. Assuming that it will take some time to introduce secondary recovery (if at all possible) and to bring the new field into production, the provisional estimates for 1965 and 1966 (which make no allowance for these prospects) may be accepted as still valid. By 1967, on the other hand, production should start moving upward, Pro- visionally we have assumed that in that year production should regain the 1963 level. Investment Recuirenents 12qn Programmed investments 1964-66 under the Program of Action (assuming a 1.0 percent fall in crude oil output) are shown in Table 1. More than 45 nernent. of the pronosed investment would be for exploration and production. AID= 4 Page 48 Table : NNvES-i'vifiTT !Nj PE;TROkEUM INDUSrlR 1965-66 (Program and Mission Estimates) (billions of June 1964 cruzeiros) 1965 1966 Original Estimates 210 214 Revised Program Estimate 189 Page 49 XIV; LIST OF POSSIBLE PROJECTS FOR EXTEHiAL FINANCING 1. TRANSPORT PROJECTS REVIEWED BY ECONOMIC 14ISS-ION A. Railways l. General Requirement, A prerequisite to consideration of external financir.cr of t.h- FP.Frrq1 nrd Stntp roilwav svstPrns will be: (1) Agreem.ent by the Govennirent to riin the railways as a self- supporting commercial enterprise0 (9 ) Poraraion -^ i-rl>.el.>tor f' +the coir.nrPlipnpi_ver nin-5 ter plan for reorganization and modernization of the railways. 2. Federal Railway System0 Improved relocation of lines and termin- nls.* External financing of about $60 ir.llionI reqnire toA c o-r ne-..+.thi o f the cost of a two year program,, Comnmitment possible for 'Late 1966 subject tnto gener.al requnreR'ents abovej 3. Sao Paulo RcJ.cr;Vwr Syst,e,. External fir.r.cng of abut $30l mlli required to cover one-third of the cost of a two year program Coruniitment L0 U /--~' ~%UUJ - U ~U I._-,L _ LU ZjUL I71u~;±iLV 0 U U~ V ~;,. ± ' UL_LJ. , ULI;l A_~ itial period of the invest'nent program, equipment financed by suppliers 1o t__L16 Pc fTId± .IW.y d-Lo V.L LUU LJt,-uu ll-iuu ±JLtULI Li IU dLiLd ,U. J L. totalling o20 r,,illion -will be 1A11required. 4n a."way- arLd Port E UU4A16 L.v I r of -rading anad draining, 206 Ian of asphalt paving, ancL 275.,) ofl U u. ain (ra-vejl or -im1pro-ved soijl) - esUtim1- ated cost $18.2 million. (ii) PR-4 -Relogio to Campo do MSourao - 220 km, including .LU 'Km Of grading and draining, and 220 km of surfac- ing - estimated cost $8.5 million. (iii) PR-13 - Campo do iMourao to ilaringa - 100 km of pavingCZ -estimated cost $7.7 million. (iv) Section Porto Alvorada to BR-104 - important connection for coffee transportation; 170 km of grading, drainingt and surfacing - estimated cost $6.0 million. (bj' State of Rio Granide do Sul (ij RS-4 - Porto Alegre to Bento Goncalves - 113 km incluci- ing 88 hm of grading and draining, and 113 km of pavingCnD - estimate(1 cost $8.8 million. (ii) RS-8 and RS-62 - Pelotas to Santa Maria - 300 km long section including MO km of grading and draining, and 270 km of paving - estimated cost $17.5 million. (iii) RS-3 - Porto Alegre to Santa lOria - 26i km long section, including grading, a draining, and paving of 124 km - estimated cost $8.8 million. ANIEX 1 Page 51 (iv) RS-10 and RS-h2 - Horizontina to Soledade - 270 km long section including 2b0 km of grading and draining, and 270 km of paving - estimated cost $16.4 million. 3. IMIinas Gerais State (i) MG-h - iMonlevade (intersection with BR-31) to Yantena - 3TWkm of grading, draining and paving - estimated cost $35.0 million. L. I'Iost of the roads mentioned above have an existing or poten- tially high nvera:te daily traffic. Ho~-7ever, feasibilitv studies are required for all of the mentioned projects. USAID has author- ized feasibility studies for BR-ll. BR-13 and BR-25 in the North- East region. The State Highray Department of Minas Gerais has submitted n relirminar repoirt for MrG-! TAhich hhey prepared fnr review by USAID. The preliminary cost estimates are very tentat- ive anri are not based on accurate estimates of quantities. 5~ The irnvestm.ent for the above mentioned highway projects would be distributed as follows: Northeast ................ $56.3 million Parana ............... 50.3 million Rio Grande do Sul ............ 51.5 illion Hinas Gerais ........... 35.0 million Total $193.1 million Highway Engineering Services (DNER) External financing for the cost of using U.S. engineering con- sueltants onl+ v-ar ious road constrUcti.On pro.jects beiinng fl-rAeA 1-r bUTI,ATTI PT.-I1.Rrl cruzeiro loans. USAID loan commitment of $2.4 million projected for early 'I (n4 Nrortilea stL ; ij4iw.ty IU JIIpt:,LnIIU a d±I I-xiMtenance 'f.LIIairUncn oLf lIad4inalct qLjuipIIIUII. for vclarious stal.te i"ihwdy de'- partments in the Northeast of Brazil. External finance: $12.3 million. Requests for financing under stLudy a'ay uSAID. C. Ports ?M-aj,or Ports - Santos, Rio de Janeiro and Recife. These ports require total externa'l financing of about $15 rmillion in 1963-66 mainly for in- crease of dryr-bulk cargo berths, handling equipment, liquid bulk facilities and dredging. The loan figure is roug;hly half of the total cost of the improvements. ANNE X 1! Pa ge 52 PROJECTS SUGGESTED BUT NOT REVIEMED BY ECONO,IIC MISSION 4 'DU 04.. - 4J.' 0 - 4OJti ILJJTL ~16~_) lu1 U1i_ OuLULi %dd Ut.L. ii.ijllv~ay "1±ALW 11r IŁ-.1U Uu JI±iL ViL UOU±d - Salvador. Completion of 1,062 Im of eart-h work and surfacing and 275 km UJ. p -_V - J.I i -~ T5±S ,CQ coi, 'NPL ~ m .) miL in m ifoy i.j BR-31 E. ast-'West transversal highway linking Vitoria - Belo Horizontme U tberaba. Completion of 1'8 km of earth work and surfacing and 70 kra of paving. Estimated cost $117 million. ('Note 1%) BR-37 East-'Wesmt 'transver'sal hfighwTay linking rorto Aiegre and Uruguaiania (Ar-gentinie border) - Completion of 191 kmn of earth work and sur-facing and 599 km of paving. Estimated cost $28 million. (Note 1) BR-3b/BR.K-16 Highw-ay connE3Cting south of Vlatto mGrosso, a rich agricuL-, tural area. With the highway systems in Parana and Sao Paulo, and with Uruguay. BR16: Cuiaba - Campo Grande 767 km of improvements; Campo Grande - Rio Brilhante l55 km of improvementus; BR 3Lt: Presidente Epitacio - to BR 16 - 24 o n of improvements including paving; Rio Bril.- hante - Porto Murtinho - h16 km of improvements. Estimated cost $18 million. (Note 1) BR-59 North-South coastial highway linking Curitiba (Capital of Parzna) F-lorianopolis (Capital of S3anta. Catarina) and Porto Alegre (Capital of Rio Grane do Sul). CCmpletion of about 395 km of earthmoving and sur- facina, and some 700 Io of pavingl. Estimated cost $35 million. (Note 1) BR-35 East-west transversal higahway in Parana linkingr Foz de Irguacu (Pa-raguayan frontier) with Curitiba and the pormt of Paranagua. On the Paraguayan side, this road would connect with a hi2zhi%a. to Asuncion, thus providing Paraguay w,,ith connection to the free port of Paranagua.. Compdletion of 791 km of earthmovina. surfacing and Davina. Estimated cost $30 mnillion; $l5 million financing requested from Inter-American Bank. (Note 1) DNER National Highwayc t Eauinment Reouest to USAID for finaneing7 maintenance eouinment for the national highway department ($aa2 milion), the State of Sao Paulo ($34.7 million), and the Mi-Riotri (ha226 nillinkm (Nnte 2 Epintacerais - ighway ERuinmeonf Requies brnfore TSATD oru) loan of albou milon to ov eardollan and ruiU1'-o costs of a maintenance equipment program. (ost 2) AN11X L Page 53 Santa Ca tarina Highway Equipment Request before TJSAID for a loan of $6 million. (Note 2) SC-23 18) km road in Santa Catarina frorn Blumenau to Curitibanas. Feasibilhi tv study compn 1tt.Pr1 Estimated GO.St. A9.6 nmillionn xYternal financing of $10.5 million requested. (Note 2) Technical Assistance to DNER - National Higzhway Department Request of $3 million to USAID to modernize administration and organ- i + i ,-IArv ~-P4 Tl1\Th' T n,l,A4P, +;n * -h~ (v ,-+~~ service additional traffic generated by completion of BR-35 link to Paragu3,y. Estliated costU I.LJ $ r,illion. (Note 1) e t* ± m n T an njnT rvsn AFP ECS nyIpteB,EONIs1 lISO AFP System (American Foreizn Power), Distribution Sy em. Tne estimated outlayr for t1he total program is l50 million to be disbursed over five years. Tle first step requires an estimated $50 million, $25 million of wzhich could be disbursed rapidly. Brazilian Traction. Rio de Janeiro and Sao Paulo Electric Power Distribution System. The program consists of US $150 million investment over a period of five years. It is possible that AID will be asked to finance $36 million vihich will cover approximately 18 months of the program. Other financing will be provided by the company out of the anticipated rate increase. '$23 million wi'll be for local costs, the remainder represents foreign exchangye cost. CEEE Caxias do Sul. Diesel Generating Plant, Rio Grande do Sul. Financing required to double the exis-ting 6,000 kvi capacity and provide connection wiith the main state system. Loan application received by AID iission. External financing of $1.5 million. CEEE (Rio Grande do Sul), Passo Real. Hydro plant of 250,000 kw, transmission lines and distribution. Estimated cost about $72 million. External finance of about $36 million required in 1966 to 1967. See Technical Assistance below. CELF (Rio de Janeiro, Rosal. Hydro project requiring civil works and initial installation of 50,000 kwJ. Total cost about $16 mil- lion. External financinz of about $8 million required in 1966 and 1967. ANNLX 4 Page -5h CEZIG (ilinas Gera:is), Jaguara. Hydro plant with installed capacity of 500,000 kilowatt transmission and distribution. Estimated cost, power plant $57 million, transmission $57 million, distribution tlh million. External financing of nowoer nlant reouires about $830 million in 1965. Additional external financing of about $60 million required later EIMTGI Trannrniqqion TLin. E.s-im.td cost of tontnl nronaram $"75' million. External financing required $32 million. CHESF (Bahia), Paulo Afonso III. Hydro project requiring civil wo7_rks and installation Tota -' "AA l ; * '-4&l cost about $120 million. External financing of about $60 million required 1965 t 1965. See T-I-4-1a Assstnc - below. --1 mCfETv7A0 Phel_rmal no.-oer "lnt) Fianin of1 te cost'fi,.o'e ~AL~" \ ULliu ± Ii LJ.tdIUJ. "* IIIULL Ui Ai U Ul U U.- equipment, materials and services for 160 nmegawzatt thermal power plant 4 CU I - chnL i ap4. I I T' au '.anta Cruiz, Guanabara. _ettauLor of comimiltmenlt ,°or P_24.u M_XL_L"on n'as been issued by AID. CHEVAP is currently preparing an application for an additional thermal plant a-t San-ta Cruz. C VAP Santa Cruz III hnermal rPlant. Second stage, 160,000 kP: is expected to cost about $22 million. External financinng of about $11 miiiion required in i966. CHE'vAP Transmission Line. To connect Funil with Rio and Sao Paulo. Estimated cost $9 million. External financing of about $5 miL- lion required in 1966. COHtbE Boa Esoerance, Northeast. Financing of hydroelectric facilities in Northeast Brazil. The total of the project is estimated at $7 million plus Cr.46 billion. The dollar cost of the project is estimated to total $7 million. COPEL. Financing of 5 diesel genera-ting plants. 1,350 kilo- meters of transmission lines and 15 sub-stations in the State of Parana. Total cost of project estimated at $31.8 million. External financing required $17 million. Feasibility study has been presented to AID. FUBRAS' (Sao Paulo), Minas Gerais), Estreito. Second Stage. First stage financed by IBRD Loan of $57 million. Transmission lines and sub-stations to distribute Es-treito output. Estimated cost $53 million. External financing of about $31 million required in 1966. Rio Li ht (Guanabara). Frequency conversion in Rio. Estimated cost $15 million. External financing required about $8 million in 1965/66 SOTEIICO. Financing of two additional 15 me._awatt units at Sotelco Steam Plant in the State of Santa Catarina. Loan of approximately $13 million dependent upon final evaluation of feasibility. ANNEX L Pa g-e T5 SUDENE (Northeast). Diesel electric generation. Financing diesel electric 7enerator installations in various of the larger cities of Northeast Brazil. AID development loans made directly to SUDENE. S-Un NE TTill m1intnin M e tf o tn thpe init. financed in order that they can be conveniently transferred to other locations as trans- nii qi n 1ines from the manor hydro sources are gradually e-tcendedH PUO cover a greater area of the Northeast. A loan application for 7,500 kw of diesel generators has 'oeen received from SUDRT , An intensive revi has been authorized for this application and this review is proceeding. External finance reqired~ $8.*2 r,.ilion U-SE.PA Transrm.-,isslon T; -ne. E4xternal ".innan , of $1 ilin. vo J.Le of equipm.ent fl- 1Jn 4- n IJh be fLidftIL* iec' * LIfJLL '4JI ~LdIY ~ LL ILLL.tJI .L7'4 U±L, .'L L,_~ o 4L _ .L/4-/_1 rLT7'QQ Tq -ro.r, 1n _411 __ -I 04c Ioz 0Ano l Lj114aVJ-I~L . y| *~ IL.L IA Y .LU UIA.L.VU64 L VV- CELISA. (Ju ).) $63o million, 1965 throuh 1970.1$13.296illi7. >r.iak rom GeMarL. $3.2n mloug 96 hruh 97 to be refinanced by IADB. CHERP. From Czechoslovakia, $3.5 million, 1965 through 1969. CEEE, Rio Grande do Sul. $15 million, 1965 through 1969. Technical Assistance A prerequisite to lending for projects in the Northeast (prin- cipally GHES"'s Paulo Afonso IIr project) and in Rio Grande do Sul (principally CEEE's Passo Real project) would be the carrying out of limited power studies by consultants in these regions to assist in est- ablishing better planning and management, to determine priorities of projects under consideration, to make market studies and to investigate other potential power sites. Marimbundo 5b6NW hydro or suitable alternative recommended by CANAIBIRA power study. External financing of up to $100 million riay be required. OTHER PROJECTS SUGGESTED - NOT REVIEiED BY ECONOIIC MISSION Projects (Note 2) Estimated total cost VHESF - Sub-transmission $72 CEIF - Transmission, distribution 18 GANBA - 720WAJ hydro 152 USELPA - Piraju 1101 hydro 25 CEITG - San IHiguel 60IM;' hydro 13 Volta Grande - 33hMWI hydro 102 CELUSA - transmission 35 COEIBA - 7.5MI,J diesel units 2 ANKIX h Pagve a 3. TE1ECO1IUKTJICATIONS PROJECTS REVIEWED BY ECONO?.IC MISSION -iunicipal and State Teleco,mmunications Systems Very substantial tariff revisions iwould be a prerequisite to any external financing7. A decision on the ownership and operation of the foreign-owned companies (C.T.B. and I..T.T.) and reasonable prog'ress in the imnlementation of such decision. is also necessary before maior expans:ion programs of these systems can be undertaken. (a) Companhia Telefonica Brasileira (C.T.B.): If C.T.B. we:re encouragedl to eparndr its. facilities, extePrnal firnnr-inq of some US $66 million for telephone expansion w'ould be renu-red' in 1 Ic..R-40 to -ubstitut for pt of subscriber- financing and to cover part of the costs of an expanded nro' ra,m (b) Dorto Alere, Beo 7Horizonte, C and other AiinJ.cipal or Regional Systems: External financing UJ± OUMV1, VUme 11j_LeL.LpLans _VI . io n wor.L LV'it AU be required in 19683-69. Lon,-Distance ENBRATEL Program Prerequisites would be that the Empresa Brasileira de Telecomun- icoes ('usru-umI lnas oecoenu an e.LTeCUIVC WV0orKing organizaL-ioI, W-Lit ISUUli outsid.e tech-inical assistance as is found desirable, than an adequate system of tariffs had been implanted and that a tuelcorrlm-u1zcatioLIs su;.-- charge had been created of sufficient amount to cover estimated local currency requirements. Externai financing oI about US $1i million woula be required in 1968-60 to provide initial sections of the proposed inter- state microTave system. I ci nnrn 14. Oi!2JEJ PROJiCTS REvIEnED BY ECONOMIC MIUISSION ua±.T.nuwS Integrated Steel Hill in Minas Gerais Completion scheduled early 1965 with initial capacity of 500,0J0 tons (flat products). Expansion to 2 million tons by 1970 to produce flat and non-flat products to meet market demand appears justified by relatively lot.? incremental investment, which would reduce averaZe invrest- ment per ton to about $275. Cost of investment program is about US F30O million. External financing of perhaps US $150 million, together wTith additional equity, required. Engineering feasibility studies of first stage (1 million tons) being considered. AhTLEx h, Paae 57 COSIPA Integrated Steel Mill in Sao Paulo Completion scheduled early 1965 with initial capacity of 500,000 tons (flat products). Expansion to 2 million tons by 1970 appears justi- fied on same grounds as USIMINAS. Cosb of investment program is about $300 million. Management consultants needed. External financing of perhaps US $150 million required. Engineering feasibility studies of first stage (600,000 tons) being considered. Volta Redonda Intearated Steel Mill in State of Rio de Janeiro Hill noTw operating profitably with production of l,L00,000 tons. McKee has recommended expansicn to 3,500,000 tons, but optimum capacity is closer to 2.O0;000 tons. Expansion to 2.5 million tons is exnected to cost about US $240 million. External financing of perhaps $120 nJi- linn w7-I11 he repire1ror. A prirately or vTned mill operati;n' nroft.Jhl y jr th production of 1400,000 tons. Optimum capacity of about 7CO,000 tons, requiring al i mroc+mrn n+ of' n hol+ TTR .(1>In ,mi I i em nt- f;no nr o n,,rhnno s million required. If.annesmann lIill A privately owned mill producing 350,000 tons. Expansion to 500,00 t-ons appears justifi-1:Jed anta vould reurei,es-et fU T15_ million. External financing of US $7.5 million required. It is estima-ted that with existiing expansion plans for the yvears "D UU .71u7 J uI 09 tL stee iusry T J;.il redquirn.Lu aL d dUUitionLUi Uto -lU above listed project finance external equipment finance of about $65 to 2 - -I 'TT-' A n MT M- T7T. r?Tr.TTr '%7 ATn T1TnTrmThT A - (IT-T7TE'M ) . .L.1LPJe'kJ LULL±'_TJ UJ4JL'1O.L jLiJLJ t ll'iVUVVL& U,LJ Private Development Bank To provide equity capital and medium and iong-term ioan capitai for industrial development by means of private industrial banks. Tentative plans for financing include: $4 million to be provided by a combination of FINASA, Brazil's largest private financing company, and the Morgan Guarantee Bank of New York, $10 mrillion from USAID and approx- imately $6 million from international sources of financing. Industrial Development Fund (CREAI) Revolving ftund to provil.e medium-term credit to small and medium- sized enterprises. The fund is to be administered by the Banco do Brasil (CREAI) US-AID has projected a loan of $5 million for F.Y. 1966 to ANNEX. 4 PagXe 58 provide for dollar costs of' projects financed by this Fund. Hardboard Jlanufacturing Plant (EJCATEX) Expansion of existing capacity. External financing: $2 million. Aluminum Manufa cturing (AICOA) To assist ALCOA in financing a project in Minas Gerais State for an increase of aluminum ingot production. It is anticipated that ALCOA will reauest a loan f'rom USAID in the amount of $5 million during F. Y. 1966. fl Z.. -1.0 - f1 .u t- t-fT ` ertUI_e-: Plant- to be constructed by CIA. 1-e~ r7 - A . I . - | I wf ide _r ica Nacional. Project, to proauce euu tons per day oI ammonia, to permit production of nitro;,enous fertilizers now being im- ported. Estimated cost $15 million. (Note 1) Serrana project to produce phosphate Fertilizer. Estimated cost $-3.5 illion. (Note l) C'imento Portland Branco do Brasil. Project to increase pro- duction of cement fro'm 36,000 to 195,000 tons per year. Estiinated cost $p8.2 million. Financing of $4.8 rmillion requested from inter-American Bank. (Note 1) BRUT1ASA - Forestry project in territory of Amapa in the north of Brazil. Estimated cos-t $4 million. Financing of $1.4 million re- quested from IDS. (Note 1) MIetal Leve. Project to expand lathe production. 1DB recuested to provide52 million financing. (Note 1) CODEPAR - Project presented to USAID to finance $10 million for relendinrg to small and imedium size industries in Parana. (Note 1) Standard Electric - Proiect nresenited to USAID recuesting financing orf$.9 million for expansion of production of telecommunica- tions eouinment. (Note 1) Madequinimin n Prniojt to nrodrucen nli.wnori in Rio Grqnie rio Sul. D.M. 7 million financing requested from Germany. (Note 1) Demisa - Project to expand tractor production. D.M. 5 million frivate Investment Fund USITDT' is dicssn -- a reus for- - $20ir m-, illion -loan t~c the LiJ L4J .1 1 k,%t U ILJ.L Ct -4J; J IL.LJ.L.LL.J A'J. I u' UAL Central Bank to rediscount industrial loans from development banks and otherJ*iJ.t,±CL4J c it. Uinstituio. (Not 2), A NLEX b CAMIG - $4 million project to construct fertilizer plant in Minas Gerais. (Note 2) BNB Investment Fund - $3.L million Droject to establi-'h an investment equity fund to be managed by BNB. This might be included in the PIF. (Note 2) 6. A(G4RTFGLTT.T1ThE PROjECTS PVT R5UTTiAT.W B-V VOrOMDMTr MTCqTr0NU A gri;cultural Cr~edit4- Ca t i a - A -- e (rpva-r) Jlgri I., ar>.-Ira 4_e Cre-1;+- a_;l Q !niri4-+--ql{R' of the Banco do Brasil or through Banco Central do Brasil Livestoclc Development Credit to farmers for pasture improvement, especially in the TO*_n _ __A_ f _ ' _nTi L I -1 '__ I __ , n :_ _ - .-u,.. Rio Uranre do oul and Central-West, Mainly local procurement "includOzi, labor, materials, equipment and breeding stock. FAO/ECIA technical study Of IivestocK indust2Ly issued in >96)4. External financing of about US $50 million required in 1965-66. Grain Storage, Marketing and ProcessigiFaci lities: Banco Nacional de Desenvolvimento Economico piNDu) and 'u1Ai or through Banco Central do Bras:l Consulting firm of i.1eitz-Hettlesater recommends 6 year $600 miliin prozrarn. External financing of US $Ź0 million required in 1965-66 to meet urgent requirements. Fertilizer Manufacture (a) Remodeling of Petrobras' CUBATA0 plant to reach its poten- tial capacity of 25,000 tons a year of ammonium. (b) Building a new 200 ton per day ammonium plant at CAPUAVA to utilize raw materials from the Petrobras refinery, o:c construction of a 200 ton per day ammonium-urea plant in Bahia to take advantage of locally available natural gas. The cost of either of these alternatives would be be- tween $16-$20 million. USAID is considering a $20 mil- lion loan commitment for fiscal year 1966. Nlogiana Cooperative Financing of imported equipment, materials and services required by M6ogiana Cooperative to put into operation agro-industrial facilities in the States of Sao Paulo and Minas Gerais. Comite Inter-Americaro de Desenvolvimento Agricola (CIDA) is assisting NIogiana Cooperative with preparation of detailed feasibility study. Preliminary loan application received by USAID. External financing involved totals $17 million. ANNEX h Page 60 7. EDUCATION PROJECTS REVIEWED BY ECONOMIC MISSION Rural Uniiversity of Brazil Agricultural and technical training. External financing of US t1l 3 milliril for dormitories. laborahtnrv equipment; f?reriPn techni- cians, scholarships abroad and classrooms. Prelintinary plans. I'1inistrs of A,zriculture Secondary level agricultural training on a national basis. Exte+ o -r-na n Pl&AC financing of - $ . I.illion I for c oUnstruction, 4.'.do and equipment for rural agricu:Ltura1 schools to accommcdate additional enrOlLment Of07° 53n0no ------ miJ OA,ra 1965=1967e -L..Le *014 ' '.I 42.-l U A' , U\..G Ui4JA CJi±IU '.in a-.- \1ta 1,LJ d \.1..O 'JIJIUIIL..7; WDL..t .41.4 nUJ > ca4 1..114114,t U 1-.'. Hiavher Education) Post-graduate u.iiversity training in Brazil and abroad in basic scie.tiflc -an ,roessona fields hxtrna financing__ for 16-1965l ZJ±t:hI±±.L.Lk dILIU L)J~UI~ ±.LULU:5 LJLXUdLUctL.L .LUf 1 LI bei:ng provided by Inter-American Development Bank (US $h million) and th.Ue F'Uor U 1 UUiUd L,iULI o L ($1. JIL.L±Ul11 UU L U.L1f1. LWIiUd - LuL.LJ uill be-requIred thereafter. Superior School of Mines of Ouro Preto (Minas Gerais) University training of mining, geological, metallurgical and civil engineers. Establishment of engineering school in Belo Horizonte (transfer from Ouro Preto). External financing expected at later stage- Teclnica:L Assistance Foreign technicians to advise on (i) educational administration and policy and (i1) establishment of manpower survey unit. Since all of these projects are in an early stage of preparation which makes loan commitments during the years 1965-1967 unlikely, none of these projects were included in the projections provided in Annex 2, Table 15. OTHER PROJECTS SUGGESTED - NOT REVIEWED BY ECONOMIC MISSION Universityr of Brasil - Completion of University City, includ- ing equipment. Project includes: Engineering Center, Hospital, Bio- Medical Center, and Center for Social, Juridical and Economic Science. Estimated cost $50 million; extenial financing of $30 million requested. (Note 1) ANNE,X 1 Page 61 8. OTHER FINEP (Fund for study of projects to be administered by Planning office.): AID and TDB have been requested to consider loar;s of miLlion each to be used to carry out feasibility studies. Jotes: 1. Proljects suggested by the Brazilian Governrent. 2. Projects for which USAID hras received inquiries or applications, some of which have not yet been reviewed. A N N El X 5 Coffee Policy NOTE: This Annex is based entirely on the missionis findings in October-November 1964 and does not take account of developments since then. A N N E X 5 BRA7HT'S CO.F.PPE POT,TCY I. The Objectives of Coffee Policy 1. Brazils coffee policy is an important and integral part of its foreign aechange, fiscal, and monetary polie Coflmfee p ic h t broad objectives: (1) the maximization of foreign exchange receipts fror. coffee export9 whl ..an+irin Brzi' shar ofth wrl mar!tet in the long-run; (2) Brazil!s coffee production at a level to supply Brazil's shar 4tthe world .mret omsiccnsrjpi,ad ufclent s.ocks t provide for crop failures. With the major coffee growing regions being ex-osedU to 'Lros'tg lthe rk.O VI croUp Lai-lures 1" Lincre'ased.* 4 T~~ŁUUV 1 I, -U ±li_LU _(11 lil- UU L,J.UII .5. uiju±a L uIUU U L ; L,I1 L L UL JU .~I.; the monetary authority (StJfOC), the Bark of Brazil, the Brazilian Coffee Institute- (IBC) and to a lesser extent the Foreign Ilinistry which assists in the negotiation of the international agreements relating to coffee. Arongo these agencies IBC, te regulatory agency oI the cofiee sector, is the most important0 It is a joint government-industry organization with. its five directors appointed by the President of Brazil and an adminis- trative board representing the coffee growers and the principal coffee- producing states.. The president of the administrative board is appointed by the President of Brazil. II. The Maximization of Foreign Exchange Receipts from Coffee Exports 3. Because Brazil accounts for a large share of world coffee exports, it can affect the world market price and thus the foreign exchange receipts from its coffee exports. To do this, it must have control over the flotl. of Brazilian coffee exports. Depending upon the price elasticity of demand for Brazilian coffee which requires mainly a judgment of the threat of substitution of Robusta-type coffee for Brazilian coffee, exports may be withheld to maintain the price in the face of overestimated world demand and country quotas, or to raise the price provided that substitution is prevented by country quotas and well-established consumer tastes. 4. l'he following policy tools are used to achieve the foreign exchange maximization objective: a. minimum-export prices set by IBC; b. price support purchases of coffee by the IBC at a predetermined price; c. determination of credit volume available for the financing of privately held coffee stocks through manipulation of the collateral value of the coffee crop. The collateral value of a ba7 of coffee is fixed by IBC and determines the volume of credit which can be secured bv available stocks of coffee; ANNEX 5 Pag- 2 d ITC re,-u,lation and supenrirsion, of the m.ovement of coffee within the country, control of port stocks and th, 4re'ease- for -x,ort. 5 ,.'hese polcy eLt~.LpoyeU ini theP U. control over Brazil's coffee exports is exercised indirectly through the co,,iblunedu use of minim.,UmlL texAport prices tSand option pU[L iL e s, UUot oLf V1LLI are determined by IBC. The minimum export price determines the amount of foreign exchange per ba.g of exported coffee which the exporter has to sell to the Bank: of Brazil at the exchange rate applicable to coffee export receipts. Before June 1964 tnis exchange rate was substantlally belowl tLhe rates for other exports and also substantially below the rates applicable to most imports and thus generated revenue for the Government. Since June 1964, coffee export earnings are converted at the same rate as all other exports; however, the receipts are subject to a contribution '"taxf! which is discussed below. Depending upon the world market price relative to the minimum export price, the exporters! foreign exchange receipts may be greater or smaller than the minimum export price would yield. If the world market price exceeds the minimum export price, the excess of receipts over the value of exports at the minimum export price is not subject to the contribution tax and can be transferred at the free rate. If the parallel or black market offers a more favorable exchanae rate, the exporter may under-invoice his receipts at the minimum export price and transfer the difference at the black market rate. If the minimum export price exceecs the world market price the exporter may still export, but the deficiency in foreign exchange receipts vill have to be obtained in the parallel market. ,lowever, exports will only take place under these conditions if the net cruzeiro receipts (after tax, and the extra purchase of foreign exchange), exceed 'oy a satisfactory margin the option price offered by IBC. The determination of this margin by manipulating the differences between the w-forld market price, the minimum-export price, and option price is the most important tool for controlling the flow of coffee exports. The option price applies to IBC purchases during the crop year and to purchases of unexported stocks at the end of the crop year. In some years these reten- tion purchases included a so--called "expurgo quota" of approximately 10 per- cent of the exportable crop. This part of the crop was destined for des- truction or industrial uses and was requisitioned by IBC at very low prices. Control over credit for the financing of private coffee stoclcs is used to influence the flow of exports' Credit can counteract or reinforce the price policy; since its availability greatly affects the "waiting power" of the producers and exporters and hence the flow of exports. The flow of exports can also be influenced by IBC's direct intervention in the market through sa:les from its stocks to exporters or warehouses abroad. Export quotas at variou.s ports have sometimes been used to control the flow of exports, ANVEX 5 Page 3 ITtIIarip,- ulan tn jOf t 4- P r-,1-,r of z il a I nGffee in the Long-run 6. Brazil's present internal coffee policy attempts to insulate the int+ernal pr4ce recelved by the 4-l orters anAd; -d-; by - h gr- "e from fluctuations in the world market price and in the exchange rate. Thle pollicy aim,s to provide an r,ia-intainarelcziopiethtwl ~~ ~ ~ .±iIL~~~.PUU j JL U _ A~~1~ Ld1 ULJ-di dt I t~LiL U±l U415L'tJ 1 U .LU UIAV U -L induce a level of production sufficient to cover Brazil's world market u o4 4 A. -_ - _ -31 -_ -- X _ _ - _3_ -_4 - _4 - 1_ _4v _-A Lut aL,O i Ut 1 and allUow1O stiok to iUnl1u ral 1Qe § W- dut4Ut CUD - O uu U1 G against annual fluctuations in production due to weather conditions. The desire to insulate the internal cruzeiro pric es from- changing world market conditions reflects the experience of the early 1950's when the growers recei-veu tsue full benefits of the high coifee prices in the world market, which stimulated new plantings and produced large surpluses five to seven years later. Although the supply is now judged to be less responsive to price increases than in the past because there is no unused land suitable for coffee gro-wiing, the Brazilian authorities consider it desirabie to stabilize the supply by stabilizing the internal cruzeiro price at the levei of Cr$41,000 to Cr$42,000 per bag in 1964 prices. 7. The response of the coffee supply to the stabilization of aoIIee prices will be slow. The decrease of coffee acreage and its transfer to other uses is aided by the so-called Executive Group for the Rationalization of Coffee Growing (GERCA). This program provides financial aid for crop diversification in coffee growing regions. During the first two years of the GERCA diversification programs (June 1962 to June 1964) about 700 mill- ion coffee trees were eradicated. This represents about one-third of the total number of trees under cultivation which are to be taken out of production. It is reported that coffee growers have thus far shown only limited interest in the planned replanting of one new tree for every four eradicated trees. As of mid-1964 GERCA had only financed the planting of 500,000 new high-yielding coffee trees. However, the growers are still given four years in which to avail themselves of this option. So far the acreage freed by coffee eradication (approximately 2 million acres) has been transferred to other crops, mainly sugar, or is used as pasture. Under the Sugar Production Expansion Program, 29 out of 50 new mills are to be built in the coffee prcducing states. 8. A tax on the foreign exchange receipts from coffee exports 1/ is used to maintain the internal price in real terms in the face of changing world market prices,2/ fluctuations in the exchange rate, and internal inflation. 1/ Export receipts derived from the sale of old crop-coffee are taxed more heavily. The rationale for this treatment is that in an inflationary environment exports from stocks of the old crop can be sold at prices below the new crop because they cost the exporter less. 2/ Insulation of the Cr$ receipts from changes in the world market price pre--supposes also that the registration or minimum export price, wThich determines the taxable foreign exchange receipts will be adjusted sc, as to fol =ow closelv thp movomelnts in the world market nrice. ANNEX 5 IVo IIonta-.CUy andu Fi-sca'l Poll.Licr-'spec-ts _ ._~~~~~. of th -Coffee Policy 9. The receipts from the export tax depend upon the following: export volume; movements in the internal price level; the excuange rate; the world market price. Tle monetary and fiscal implications of the coffee policy are reflected in the flo-ws of funds registered in the Coffee Defense Fund, wlhich consists of a group of Bank of Brazil accounts set up to record the financial operations of the coffee policy. A consolidated picture of these operations is available only since 1962. "Taxation" of coffee export receipts at a rate of- 40 percent to 50 percent was introduced in 1953. Nevertheless, the high coffee prices in the early fifties were passed on to the growers and induceci new planting of coffee trees on a large scale. These new-T trees started producing in 1957 and created sur- pluses which had to be absorbed by retention purchases beginning 1957. The net monetary effect of the combination of the "taxation" of coffee export receipts and price support purchases was probably expansionary for tw-ro reasons: First, before 1957 the revenue generated from the "taxation" of coffee export receipts was used to cover other government expenditures or to finance imports at subsidized exchange rates. In the absence of any cut-back in these expenditures the use of coffee "tax" receipts for reten- tion purchases had to be inflationary. Second, during 1956-1963, the "taxation" of coffee export receipts reduced the real cruzeiro receipts per bag to the exporter by 70 percent while world market prices dropped during the same period only by 30 percent. Nevertheless, the total receipts to the coffee sector fell by only 35 percent. This suggests that the tax was offset by the additional receipts from government stockpiling purchases. Indeed, the available data (Table 1) tend to indicate that in some years the payments to the coffee sector for stockpiling purchases more than com- pensated for the decline in export earnings. In those years the coffee policy wras inflationary because it granted the coffee sector a. purchasing power which exceeded the external purchasing power generated by coffee exports. 10. The fiscal and rnonetary impact of the coffee policy for the crop year July 1.962 - June 1963 was as follows: Exports of 17 million bags were subject to the export tax of $22 per bag which amounted to a tax rate of 55 percent. The revenue from the export tax totalled Crt168 billion. Additional receipts of Cr$253 billion were obtained from sales of coffee stock for domestic consumption (6 million bags) from sales via IBC ware- houses, and from sales by IBC to exporters. The largest item on the expen- diture side. was the outlay for retention nurchases totalling Cr$70 billion for the surplus of the 1962/63 crop and Cr'lj37 billion for unexported coffee from the 1S61/62 crop. Another Cr$37 billion was spent to subsidize the domestically consumed coffee at the rate of about Cr"-6,000 per bag. fidministrative costs, pavments to coffee oroducing states and warehouse- building added Cr$21 billion to the expenditures. The overall accounts showed an excesR of receints over expenditures of Cr.$56 billion, hftpr including the Cr$15 billion credit expansion to the coffee sector, the ac-counts nyielded a contractionary surplus of Cr$1l billion. A1\TNEX 5 Page5 11.T- LrJg fhe Jfirst se,Jester of .1J6 0 + he cofffee "uta. -J yielded receipts of Cr$387 billion while expenditures totalled Cr$82 billion. Coffee creudi t, expanded bLeLLy Cr$19.L/ LJ.L.i.Lon ao thicat UtheI overa.LJl effectv of tJhe coffee policy was slightly expansionary. Under the new coffee policy LI e LnnLing UU.LY L7U4, LItI, ±IIAJ9I . U . .. Ull Uof± the,e LLction of uiie e-xtL-iernal value of the cruzeiro upon cruzeiro receipts from coffee exports was fully absorbed by- the coffee ta,x, 1aisiig receiptUs to about CrU-,2iO billion. Since the 1964/65 crop is expected to be the smallest of the last decade, retbention purcuhases will not be necessary. uther expenditures tuoal Cr8537 billion. This means that the Coffee Defense Find can be expected to hzave generated a contractionary surplus of about Cr175 bilion. Uhile coffee credit expanded during the third quarter of 1964 in response to an increase of the coliateral value of old and new crop coffee, indications are that it, declined in the fourth quarter, approximately offsettin- the previous increase, The 1964 Coffee Accounts First Third Fourth Semester Quarter Quarter - 1~~~/ Receipts from export 11tax" 87 62 150 Exnenditures 82 25 12 Surplus of Coffee Defense Fund 5 37 138 Changes in Coffee Credit (net) -19 )46 (decline) Overall Surplus 24 -9 n.a. 1/ IBRD staff estimate Source: SUHXIOC V. Projection of the 1965 Coffee Accounts 12. The size of the contractionary effect of the coffee policy in 1965 and 1966 is one of the major sources of uncertainty in the government's monetary budget. Any projecticn of the contractionary effect of the cof'fee policy involves a large number of crucial assumptions and must thaerefore he regarded as highly tentative. The most important assumption is that the 1964 coff'ee policy of maintaining the real cruzeiro price at the level prevailing in the last quarter of 1964 will be continued. AkNEX 5 Page 6 13.~~ru Te xpec-te-d f"low of e,ports during 1965:f T TY TTT T1T oaT ± 1 4V L ] i v I Sales by private exporters 3.9 3W 7I 46 -167 Sales via IBM warehouusi auruau 2:/ U.4 V.3 .4 U0.4 1.) 2/ not subject to tax 14. The average price of coffee: The estimates in the Monetary Budget are based upon an expected average export price of $52.23 per bag ($h4 per bag for the coffee sold via private exporters and $33 for the coffee sold via IBC warehouses abroad). This price estimate seems to be on the very optimistic side. A more realistic assumption would be a gradual decline in the average export price for privately exported coffee from $52 during the first two quarters to $50 over the last two quarters of 1965. This would yield an average price of approximately $50 per bag during the first half and $48.50 during the second half of the calendar year. 15. The internal price of coffee during 1965: I. Cr$41,720 per bag II. Cr$44,330 " " III Cr$47,100 " it IV. Cr$50,00() " " These internal prices correspond to those used in the projections of the Monetary Budget. They imply an increase of the internal level of 6.25 per- cent per quarter, i.e. a rate of inflation of approximately 25 percent over the ccurse of 1965. 16. The exchange rate during 1965: The exchange rate is expected to depreciate pari passu with the increase in the internal price level and in accordance with the expected changes in the import restrictions. Combining these effects, the Monetary Budget projects the following exchange rates: I. 1,893 II. 1,987 III. 2,272 IV. 2,387 17. Based on these assumptions the Monetary Budget projects the following receipts from the coffee export "tax": I. Cr$239 billion II. Cr$~237 III. Cr",v333 Itt IV. Cr$3L7 :rr'l1 -I hi l J an ANNEX 5 Page 7 18. O~n 4the1-- - basls-4 -4- -4an4 e-r prnc e t off -5 -er bag -for UUltz U,;OLo L.L tZI ,.&PW.L L' VJ. -z ~ _ ULIL1id. LII *'J _ - p H ~ L "L6d4 the first and second quarters and 350 for the thlird and fourth quarters, 4- A_ s_ A- as lo t -v s :5X I * u.LYp12L) U1 iII|ULI II Cr$222 IV. Cr$305 Cr$999 billion 19. Ot;her receipts in the coffee account: According to IBC's estimates net receipts from sales from IBC warehouses abroad (entrepostos) will reach Cr$100 billion. Receipts from sales of coffee for domestic consumption assume a volume of' 8 million bags ('42 million bags during the first semester and 3.8 million bags during the second). The projected price is Cr4,000 per bag during the first half and Cr9,000 during the second half of 1965. It is assumed that receipts from IBC sales to export- ers will reach 2 million bags at an average price of Cr$37,000 on the basis of the following considerations: As of October 30, 1964, private stocks of exportable coffee in ports and warehouses amounted to 8 million bags. Over the period November 1964 to June 1965, the 1964/65 crop is expected to yield 6 million bags. IBC is expected to take about 2 million bags of low quality coffee off the market which would leave about 12 million bags to cover the projected export demand of 9.6 million bags during the period November 1964 to June 1965. l'his would leave a total of about 2.4 million 'bags in private lands at the end of crop year 1964/65. Assuming that exporters want to carry minimum stockcs of at least 4.5 million bags, IBC anticipates selling about 2 million bags to exporters during the first semester of 1965. 20. Expenditures in the coffee account include IBC investment expen- ditures for storage etc. of Cr$70 billion, GERCA expenditures of Cr$45 billion, and the following purchases: Purchases of 2 million bags of low quality coffee at Cr$37,000 per bag during the first semester of 1965, and purchases of 5 million bags of surplus coffee beginning with the new crop of 1965/66 at prices of Cr.$41,500 to Cr$44,000 which is about 12 per- cent below the Cr$ price received from exporting. These purchases will total approximately Cr$300 billion. 21. Coffee Credit: The Monetary Budget projects a contraction of Crl184 billion in the loans and rediscounts of the Banco do Brasil to the coffee sector for the first semester of 1965. For the second semester of' 1965 an expansion of coffee credit by Cr$364 billion reflecting the expected larger crop, is projected, This would yield for the year 1965 on balance a credit expansion of Cr$3180 billion. 22. These receipts and exDenditures add us as follows: ANNEX 5 Recnit n+, Receipts from Sales via Euntrepostos10 Receipts from Sales for LJ.)~~ U-L v~~UIj U.JLVL Sales to Exporters from iD. UvUr±o1 Expenditures (billions of cruzeiros) IBC Investment Expenditures 71 GERCA Expenditures 45 IBC Purchases 288 Total Expenditures 4O4 Fiscal Surplus of the Coffee Account 982 Expansion of BdB Credit to Coffee Sector 180 Overall Contractionary Effect 802 The projected receipts from the coffee export "tax" are too high because they assume an average export price that is too high. More realistic price assumptions would yield "tax" receipts of CrPSl,OOO billion which would reduce the overall contractionary effect of the coffee policy by Cr$150 billion. Furthermore, it is possible that the 1964/65 crop will be larger than estinated and this would eliminate the need for sales from IBC to exporters, thus reducing receipts by another Cr$75 billion. On the basi:3 of these assumptions, the overall surplus of the coffee account is estimated at Cr,`P0O to Cr$600 billion. VI. Projection of the 1966 Coffee Accounts 23. For the projection of the receipts and expenditures of the Coffee Defense Fund for the year 1966, the following assumptions were made: a. The coffee policy will trv to maintain the real cruzeiro price per bag which prevailed during the last quarter of 196L; ANNEX 5 h [in average increase of 15 necen-.nt in the innjtvenal price level over 1966 with the exchange rate respondina parl passu reaching an average of Cr$2,566 to the dollar; c. A taxable export volume of 1765 million bags plus sales of 1 m4 11 bag v entrepGSOS rlA __ r_};A rw (H. 7 -n -v - sk 6LI va v t. aw | v U vJtA._ X.. *pI; U FU>, e~ R'etention purcllae during_ the- crop -ear _96,/6 .i reach 9 million bags, 4 million of which will fall into calendar year 19''6 6. a-4-in advers -.eathe - - -- - A4 44 - the same level of retention purchases is likely to be needed in 1966/67 adding- up to total purchases by IBC of around 9 million bags in 1966. If these purchases are made at a price 15 percent belowJ the price reeceived by the exporters, the total outlay for retention purchases T.wfould be Cr$410 billion; f. IBC will sell 8 million bags for domestic consumption at Cr$15,000 per bagV 24. These assumptions would yield the following receipts and expenditures: Receipts (billions of cruzeiros) Receipts from Export "Tax" 1,170 Receipts from Sales via Entrepostos 100 Receipts from Sales for Domestic Consumption 120 Total receipts 1,390 Expenditures (billions of cruzeiros) IB5 Investment Expenditures 80 GERCA Expenditures 50 IBC Purch.-ases 410 Total expenditures 540 Fiscal Surplus of the Coffee Account 850 To sump up: These projections are beset by a great many uncertainties the most important of wfhich is the ability of the government to adhere to the basic policy objective of taxing away approximately 60 percent and 55 pe:r- cent of total coffee exoort receipts in 1965 and 1966, resDectively. ANt\mEX 5 Table 1: EXPORT PR1ICES INTERNAL PRICES, ANM TOTIAL RE-CETPTS FROIH COFFEE PRODUCTIONI, 1956-1963 Average Dollar Cruzeiro Price per Bag Price per Bag of ACtually Received by 1/ Coffee Exported Exporter (in real terms) $ 1956=100 Change 1956=loo Change 1956 63.8 100 100 1957 55,1 86 -14 73 -27 1958 54.5 85 - 1 84 +15 1959 42.6 67 -22 67 -20 1960 41.8 66 - 2 5& *-lh 1961 42.9 68 + 3 51 -12 1962 40.3 64 - 6 143 -17 1963 37.7 60 - 6 31 -29 Percentage Change of Percentage Change of Foreign Real Value of Total Exchange Receipts from Coffee Coffee Production I/ Exports 1957 34 -15 1958 -10 -21 199 - 7 + 7 1960 - 9 -4 1961 - 5 + 1 1962 + 2 -11 1963 -34 +16 1/ The wholesale price index excluding coffee was used as deflator. Sources: SU3OC; Ministry of Agriculture ANNEX 5 T -ab 2Th,-hT Tr'fTrThT A OT, T T A TT Tr' tt M TAn T Tr'jC ITITJ,Tr' T - 1 01.7 1 0463 ! r-.L O LU.lti4a L 1tV.)UJ lJUU±.. L I, .aidJ V1iU.. IVJJ ± 1J.L24 I I it Vk I .1±JLVL, J.L7L I --LZV.J. Total Production Value of Total Production. in millions of bags (Cr.$ bill) Nominal Real 1947 13.6 5.5 10.' 1948 16.9 6.h 11.0 1949 1603 8.5 13.7 1950 16.7 15.9 24.8 1951 15.0 16.6 21,5 1952 16.1 19.0 21.9 1953 15.1 21.4. 21.h 1954 14.5 29.8 23.6 1955 22.1 41.5 27.9 1956 12.5 30.5 16.8 1957 21.6 47.0 22.6 1958 26.8 48.6 20.4 1959 43.8 64.7 19.0 1960 29.8 77.5 17.3 1961 3508 103.4 16.5 1962 28.6 158.2 16.8 1963 22.9 18404 11.1 1/ The wholesale price excluding coffee was used as deflator. Source: TBEC: Ministrv of Agriculture ANNEX 5 Table 3: TOTAL PRODUCTION AND EXPORTS OF COMFEE BY CROP YEARS (in millions of 60 kg. bags) (1) (2) Total Prod. Exports 1954/55 1)4.5 13.7 1955/56 22.1 16.8 1956/57 12.5 i4.3 1957/58 21.6 12.9 1958/59 26.8 17.7 1959/60 43.8 16.8 1960/61 29.8 17.0 1961/62 35,9 16.b 1962/63 28.7 19.5 1963/6h 1/ 22.9 18.9 1/ Registration until 8.31.64 * July to June Source: IBC ANNEX 5 Table 4: TOTAL PRODUCTrTTN AND ITS USES, 956,/57 = 962/63 (in millions of 60 kg. bags) as # of total production Total Production 204.3 10 Exp-ortable Production 145.6) 71 - Domestic- Consumption 1/ 58.7 29 Uses of Tot,al Production Exports 122.9 60 Withdrawn as unsaleable 1.7 Exportable stocks as of June 1963 21.0 10 1456 Domestic Consumption 31.0 15 Expurgo Quota 10.0 5 Damaged in processing 3.0 i1Jon-exportable Stock as of June 1963 14.7 7 58.7 1/ Including the "expurgo"I quota (industrial use cf low grade surpl'F coffee or outright destruction) Source: IBC A XT ET L V t A 11 l'M D A v wage Policy A N N E X 6 WAGE POLICY 1. IJp to 1960 real wages tended to lag behind the rise of pro- ductivity. Increases in money wages often barely compensated for past increases in the cost of living, and increases which established temporary peak real wsages, exceeding the previous peak, were eroded by the acceler- ating inflation so that the average real wage lagged behind real output. In the absence of reliable wage data, this conclusion is supported by the lags in the adjustment of the legal minimum wage (Table 1) which influences the wage level in urban areas, and by the observed decline of the share of wages in value added in various manufacturing industries._ However, the fact that forced savings were generated by real wages lagging behind increases in productivity did not preclude the periodic revisions in minimum wages arid in the wages of key industries from having a sienificant imnact on the price level at the time of the revision. 2. Beginning in 1960. the increases in monev wages became larger and more frequent. They took place semi-annually and even quarterly, and tended to establish temnorarv neaks in real wages often based on the anticipation of further acceleration of inflation. These temporary peaks in real arages exerted prPsesmr- F on costs andi thereby became an active agent in the inflationary process. Since wage adjustments had also be- come more frpeoien. t.he npeak vreal wage ea+.h1Jihp a+. the tAme of wage negotiations tended to approximate the average real wage more closely. 3. The reduction or elimination of the lag between real wages and. output meant that one of the M.ajor sources of forced s Tda l reducAd or eliminated. Under the already existing inflationary conditions, this change in aJage behavior necesstated4- a faster rat e of infIati--;on Jin order to resolve the competing claims of various groups on current output. The c h, , L-4 inIL-V±- . 4wage- b'I.- 4.r e c L,he 4a4c tha inrce years, the Brazilian Govermnent has usecd its influence over money wages to strengthen 4.u U P jJ Lk± U±'4CLL LuaZj CUUU11t~ U1'JJ.UII ws1 WC~t:' IU~ .1±' VWdZ: ±I11b,U4 ULU_U1UIIdi±Y possible because decisions of semi-independent labor courts tend to take the p'lace oil co'll-ectiu Jve barairing S>nc the L'4labor 1 I-, courtls a-rbi-trate U14.~~~~ }J4.OA~~~~~ LJJ. ~~~~4U4..L~~~~'4 U±V~~~~ DLIdJ rCJ4.LLLL11 * U4.LLL'Z UL1U ±-LJ2U~ .AJ. L04.LLU. between union demands and employer counterproposals, the demands of the worVkers are partly chnee thirUou rgh thle Gove.U . L1U" UUndr theUGLa.r U Government, strategically placed unions used the strike weapon to nego- _4_._ _ :__ _________ :_1_ 1______ 1 L _ - _ _ __ _ 4.______:_1_ tiLate wagUe iLnCe-aUbU WILCIh u017Uri WUL yr U iYQIU 1JUbL LLrA1U'-Ub 4n the cost of living and represented gains in real wages at a time when growth of real outp-ut -w-as slowing down. This pattern was predominantly set in the public transport sector, which established a direct link between wage policy alud monetary expansion via the financing of the transport deficlt;s through the budget. 1/ The possibiiity that the observed decline of the share of wages in value added is solely due to the changes in technology is ruled out by the fact that the declining share is also found in industries which underwent little change in technology such as textiles and food products. ANNEX 6 ?rage 2 4, ITV slouaLd hriowever, oe noteu that during 1962 ariu 9u63 there were groups of employees who, due to lack of political influ- ence or strategic economic position, did not even maintain their real average salaries. IWithin the public sector the wage developments in 1962 and 1963 yielded wide divergencies in real wages. For instance, the real wages of the Federal civil service reached 114 at the end of 1960 (1955=100) as compared to 100 for the employees in the ports. By the middle of 1963 the real wage of the civil service had deciined to 85, while the real wages of port employees had risen to 175 by October 1963., It was these distortions in the salary structure which have created problems for the financial program of the new Government, since it is generally difficult to prevent corrective wage adjustments from setting off general upward adjustments. 5. The development of average real wages in the future will be significantly affected by the expected slowdown in the rate of infla- tion. In the past the rapid inflation eroded real wages during the interval between money wage increases so that the average real wage was generally held below the peak real wage established at the time of the increase. However, with the slowdown in the rate of inflation which is expected in 1965, the continuation of the past practice of adjusting wages for past increases in the cost of living would raise average real wages because there will be less erosion of real wages between adjustments. The Government wage policy is designed to prevent. this increase in average real wages. To counteract the consequences of the combination of traditional wage adjustments and the slowdown of inflation. the Government established a wage adjustment formula which aims to limit the money wage increases to the amount needed to restore the real average wage of the past two years. Beyond this, the formula allows for an additional increase. takinz into account Droductivity increases and the anticipated rate of residual inflation. The latter increase is computed on the basis of the formula - (1 + m) 1 + t (1 + t) with "Im" rpnresenting the productivity increase and "t" the anticiDa- ted increase in the cost of living over the next twelve months. In the aninnt.icon of the fnrmiluT for 196Jh these tIw factors vielded an elevern percent adjustment. 6. The wage policy based on this formula presupposes a signifi- eant sO1w ?mfl in the rate nf inf12tirn. . 1.;Ti+h+ such a <1owrotm in the rate of inflation the effects of the wage policy based upon this forMiula would be to reduce +.he average real wage. Moreover, these effects would be reinforced by the declared intent to adhere to twelve- mor.vh contract periodbs *r Yhou+ n ir emAa reviion orct of living adjustments. ANNEX 6 7 - The application of this -wage policy is re"l-lated by Decree No. 54018 as of July 14, 1964, which provides for application of the formula to the public sector broadly defined and including the civil service, the autonomous enterprises, the enterprises subject to rate setting by Government agencies, and those working predominantly uni'der Governwment contracts. The administration of the new wage policy for the public sector so defined was entrusted to the Council on wage Policy 'Conselho de Politica Salarial). 8. A review of about 100 wage decisions based on the formula shows increases in money wages ranging from 20 percent to 50 percent. The restoration of the peak-real wage which prevailed during the last twelve months, a policy followed in the private sector, would have required increases of up to 90 percent, assuming that the frequency of wage in- creases in the past was between six and twelve months. V,hile it is diffi- cult to judge the magnitude of the adjustments, the fact that all the wage adjustments handed dovm by the Wage and Salary Council are binding for twelve months can be viewed as a clear improvement over previous practices. 9 In the private sector, restoration of the pealk-real wage of the past twelve months is still the rule, with the increases amounting to 80 percent - 90 percent. The pattern for the round of important wage negotiations which took place in November 1964 in the city of Sao Paulo was set by the results of the negotiations between the metal-workers' union and the metallurgical and electrical industry. In their negotiation, the union demanded a 110 percent wage increase and the employers offered 70 percent, a figure which coraes close to that based on the application cf the Government wage formula. With the divergence in the initial positions of the bargaining parties, the dispute was turned over to the Regional Labor Court for Arbitration. The award of the court was an 83 percent in- crease over the wages fixed by the previous contract, a figure which cor- responds closely to the increase in the cost of living as computed by the municipal Government of Sao Paulo. Ilith minor deviations, wage awards irn other Sao Paulo industries followed the nattern set in the metalworkers' case. 10. Regarding the duration of the wage contracts, many private employers have continued to follow the practice of quarterly "unilateral" adjustments which are consolidated at the time of the annual contract re*- opening. For instancej in the case of the Ford MVotor Gomnany; the following pattern prevailed in 1964: The November 1964 negotiation endecl with a wage increase of 83 percent above the wage level a year earlier when the last contract was signed. However, the actual wage increase was only 19 perzent the rest hauing been granted in the form of quarterlv wage adjustments which just about maintained the November 1963 peak-real wage. Thus thehefat tt the contract itself is nrli no for one yr does not prevent the employer from granting unilateral cost-of-living adjust ments at Jnter-als more frequen+ +han twelve months. ANIEX 6 Page 4 11. Comparing the degree of wage restraint in the public and private sector, one finds a difference not only in the size of the adjustnients granted, but much more important, a sizable difference in the developmen-t of real wages over the course of the contract period: while in the public sector the initially smaller wage increase is exposed to the full erosive effect of twelve months of inflation before another adjustment is con- sidered, the private sector provides for almost comple-te maiiiJtenance of the peak-real wage of the past through frequent compensation for increases in the cost of living. This divergence in the development of average real wages betwieen public and private sector may be taken as an indicator of the political pressures brought to bear upon the Government in favor of a revision of the wage policy as applied to the public sector. These pressures will be the harder to resist the greater the divergence, especially since it arises in some cases in one and the same labor market or industry. ANNEX 6 Table 1: DT7ELOPMENT OF THE LEGAL MINIMUM T-.ARE IN T1E ~~~~~~~~~~~~~~~~T.- I = . - Real Minimum Wlage (1935h-lO0) Date of Level of Minimum Number of months established during last Revision Wage in Cr$ until next revision by revisi-)n montlh before next revisio- May 1940 240 41 100 86 Nov.194 380 - 102 - Dec.l951. 1,200 29 118 75 May 1954 2,400 26 149 99 July 1956 3,800 29 157 107 DecJ1958 6,000 22 168 98 Oct.1960 9,600 12 151 115 Oct.1961 13,440 15 155 91 Jan.1963 21,000 13 142 73 Feb.1964 42,000 _ 135 102 by Aug. 1964 Source: Fundacao Getulio Vargas SUIOC ANNEX 6 Table 2: SHARE OF WhAGES PAID TO TJORKERS IN VALUE ADDED A' Manufac- Basic Aetal Industry Eood turing Id- and Metal Products Textiles Products Iiachinery ust,ries 1949 23 27 30 114 32 1955 24 27 32 18 32 1956 24 25 32 16 30 1957 23 25 35 16 31 1958 21 23 32 15 28 1959 19 21 29 1h 24 Source: IBGE, Censo Industrial, 1950 and 1960 IDGE, Producao Industrial do Brasil, 1955, 1956, 1957, 1958 Induustrial Financing ANNEX 7 ITDUSTRIAL FINAiiCING 1. There are few statistics on the recent financin- of industrial 1flV'+m~.e+in Brazil _ / Accrdin tCC one study pubihlished in onilncntmra Economica, the sources and u.ses of funds used by industrial corporations was _qpprnroirn!a+elyasfolow ini 10CM-lg pecn+ge) Source Uses DepreciatioLn 7 FieIses3 Reappraisals 3 Inventories 18 Profits 2e Reevab"les, etc. 1M New Capital a/ 19 Liquid assets 5 .L'C.I1±\ .LLdLJ.LU J.J. I OL~ Z Current liabilities 37 100 100 A - - - -1 _ _ _ _~~~~~~~~~~~_ a/ ApparentlJ [ y i1ncl|UUdilg lonWg-tUermD i JEloa-. Te tauble shows that about >0 percent oI the total funds available tO industrial corporations were invested in current assets, including cash balances. These increases in current asse-ts were financed almost exclu*- sively by increases in current liabilities and by bank loans, The other 50 percent invested in fixed assets were financed to a large extent by profits, and depreciation allowances, and new share issues. In the past, inflation coupled with relatively easy credit at negative interest rates produced high profits and a high degree of self-financing. But self- financing will become a more limited source as inflation slows down. 2. Cash subscriptions for share capital in manufacturing enter- prises have been as follows in recent years: 1961 Cr$ 37.9 billion (approximately $199 million) 1L962 Cr$107.9 " ( $353 " ) 1963 Cr$ 85.0 " ( $185 " ) 1964 b/ Cr$150.8 " b/ First half annual rate 1/ There a.re many difficulties in such a study arising mainly from the persistent inflation. For one thing, it is difficult to obtain even an approximate picture of industrial profits. The same holds true for changes in inventories, The table above shows that 25 percent of avai.lable resources were obtained from profits, and that 18 per- cent of these resources were invested in inventories. But it is very hard to evaluate to what extent these were real profits, or to what extent physical increases in inventories actually occurred. ANNEX 7 Png (7 2 New shAres mav have fin2nGedi nearlyv one-urter of total industrial investment, which is surprisingly high. 3. The total for new shares includes those subscribed by the Banco ac J-Lonal do Dese-,vol,r4 g Econo.ico (tTE) and by f investors. To get a proper idea of the contribution of these sources, one soul-A d-A wndsA p-roviAeA in the Por.,. o-f loas a well a, nev- shares. On this basis, foreign investors and financial institutions apparently to Brazilian industry in 1960; this share had fallen to 13 percent in 1963. In contrast, BNwDE provided only- abou one-sixth of the total outside financing in 1960 but nearly one-third in 1963, a high share even if' one - 0con1s-ifdlers thl t to tzatl m-ta-n1u-faEc tur-!ng i"nrrestmients in 1963u, w er.-t- well below normal, Both foreign direct investment and BNDE financing were of a highly selective rnature, The high ioreign Udrect in1vesUmHentsU in 1960 were mainly for the creation of the automobile and tractor industries, while 90 percent of B-1\JUL financing in 1963 was for the steel industry. Development Finance Companies It. There are various institutions in Brazil charged with assisting in the financing of industry. These are almost exclusively publicly financed bodies, of which by far the largest is the National Bank for Economic Development (BN\DE). In addition, various State Governments in Guanabara, Parana, Rio Grande do Sul, Minas Gerais, and other States, have formed their own development banks. These institutions have played an extremely useful role in helping to finance industry. 5. BNDE was formed in 1952 as an outcome of the work of the Joint Brazilian--United States Committee. At present it relies on a share of Federal taxes for its principal source of funds. From its creation in 1952 until the end of 1963, the Bank authorized direct investments of just over Cr$151 billion in terms of current prices - expressed in terms of 1963 prices this was equivalent to Cr$602 billion. (US$782 million equivalent). In addition, during the same period the Bank gave its guaranty to foreign currency investments amounting to the equivalent of almost US$;782 million. While most of the guarantees are for its own account, 13NDE has also acted in this connection as agent for the Central Government. 6. The following table sets forth the principal sectors in which the Bank has authorized investments and guarantees during the period 1952 to 1963: ANNEX 7 Page 3 Sector In local currency In foreign currency Cr$ millio'ns - US7000's equivalent % Transport 15,802 10.4 172,353 22.1 Electrical Enerav 48,L52 32.0 173,039 22.1 Basic Industry 82,803 54.7 423,895 54.2 Agricultural % Related Fields h,404 2.7 12,611 1,6 Total 151,461 100.0 781,898 100.0 7. While about 54 percent of the Bank's authorizations have been allocatedr to basic indiistry- almost. for-lfh of'i thisn hasben absorbed by the Government-controlled steel companies. In 1963, of a total of Gr$l5 billion allocated to basic industry by the Bank, less than 7 percent was devoted to the private sector, In its estimate of disbursements for t.he npriod f'rnm -nr including the last qnuartr nf 1Q96h +througah 196, -Fth Bank anticipates allocating approximately 10 percent of its funds to inAliqfy"r (other than steel). (Tislsapr fronm Ionsn to BTNTE f-rom other institutions outside Brazil, the proceeds cf which are to be used for ,nduAstarll flnanng) 8VSo faar as actuall applications f private industry too the BTV ND are concerned, the Bank has been able to grant financial assistance only to a rellati4vely- sm.a11 por-tion. TIt r,ust also le acl-ow-ledged that there - -L - LIJLk U' _1 I. IIL U L &J r~A_V' U14 L U lAZ1 might well have been more applications from the private sector were it not fPor 4the fact- 4that4 4there is - n inutraiss la considerable reluctae .LJ. ULIJ .LCLAU ULAicJU UiJ.± U .Lt5L, CELIJIS1 In1uoUl Ula±-±IOUS, dl C0Li LUt dA.jLLE. .LLL dU to seek assistance from Govermnent institutions. Some have stated that thaey viouulu pref er to delay 11theirU Ue&VUI,ZIlUL p.Lrogr-ams11 LL4rather thanI re-ly onl financing from Governmental sources. 9. Brazilian industrialists, bankers and others feel strongly that private development finance companies are needed and should be formed as soon as possible. There appears to be ample evidence on which to conclude that this conviction is valid and soundly based. Many companies badly need the financial and technical assistance that such institutions can offer. At the moment there is no source available to them except BNDE and the regional banks, whose resources are limited, although a recent US$27 million loan to BODE by the Inter-American Development Bank will be devoted entirely to financing small and medium-sized industry. It is understood that at least one other foreign loan will be made for the same purposes. 10. In view of the acknowledged need for additional capital resources for industry, perhaps the most cogent argument in favor of the establish- ment of private development institutions is that there are groups which are prepared to mobilize funds to create them. At least two groups, one in Rio de Janeiro (which includes the leading Minas Gerais banks) and the other in Sao Paulo, have indicated their readiness to establish such institutions and their ability to raise considerable equity funds for them. Both groups, however, said they would not approach the Government for financial assistance in setting up these institutions. AWMTEX 7 Pave I 11. Private development institutions could be valuable instruments in promoting the development of a meaningful capital market. Once formed, they woulcd be called upon to adopt investment techniques that wTill ensure their ultimate profitability. Among these will no doubt be bonds with some kind of monetarv correction feature Therp is 1i+.t.1p rinnht. +.hn+. financing by means of such bonds will find acceptance among industrial- ists. In addition. by acquiring and subsequently selling blocks of stock in new and. existing enterprises, private institutions will be in a position to broadetn s;hnre 1nivrqhirn and contribute f-xther to the development of the capital market. 12. The manner and degree to which external lending agencies might render asitancre to these oprganizations Til l require further dy One of the first tasks will be to consider what new legislation will be requied to failitae thir ceati nard uheiz abillty uo issue (and rake loans on the basis of) bonds with a monetary correction feature. The relletace o th sposor tosee', G-verz,^.en.t ass-stance inte fo^rm. of' "soft" loans or quasi-equity will mean that it will take longer than usual for them to become profitable. Apart…4 …0-, pro-vl ad ce ont ways of forming and running development finance companies, external financial participation mirlght well be appropIJIate in specific projectUs which prove too large for the development institution to handle itself and which otherwise satisfy thie investment criteria of the Corporation. Stoc1 k/rarket 12) T.1u n1____. .,.T . . _ . . Vill {-u 'Jere are bsock excnanges in every State in Brazll, tnose in Rio de Janeiro and Sao Paulo account for nearly all the transactions. Although all companies are oubiged to register witn the appropriate Stock Exchange before starting business, there is a small number of com- panies whose shares are actively traded on the Exchanges. During 1963 only nine stocks were traded on the two major Exchanges at a volume in excess of Cr$bl billion, and these nine issues accounted for more than 60 percent; of the total trading in stocks during that year. Stocks which traded at a volume in excess of Cr$100 million numbered only thirty-five during the same year. 14. Frcm 1954 to 1962, stock market values appear to have risen more than twTice as fast as the price level. . The following table shows the position based on the weighted average of wholesale prices, cost of living and building cost indexes of the Getulio Vargas Foundation and the stock price index of the Servicio Nacional de Investimentos Ltda: Getulio Vargas Foundation Price Index S-N Stoclc Index Dec. 31 Dec. 31 195h - 100 1954 - 100 1961 - 460 1961 - 800 1962 - 700 1962 - 1,700 1963 - 1,200 1963 - 2,300 1964 - 2,5oo 1964 - 2,189 ANNEX 7 p.-, 15. ~The average pri^-earnlng ratio or the principally1'1 t rad ed ~~-, 0 ~ ~ ~ ~ ~ J. V.~~~~ LVJ. .L ULL jj1L JAi~ J.P.LLy Li - stocks at the end of 1963 was 11.6 which compared with 15.8 a year earlier oAs atl the end _ f Octbe 194 heraio hdalenstl , t .L ft L- W t:LIL VA.. uJl, vu t.UL -L 7UL4 Wit: Idbiu-LC lUcU ±dclLJ I1 U--- further. W.1hile such ratios are of some interest, they must be viewed with cautLion. Tije :k.LI1CtU±VU U.L L,1J.t: di oLUCU tLactua LL[r10 Ur. ofJc1mpai4esCU in a highly inflationary economy is difficult, For example, it was only toward's U ithe eIIU n .d Lof U4 UhLa the LrevalUationU f companles assewj IA reflect inflation became mandatory and depreciation at correspondingly hi gllel rates fUo' tax purposes Uecame possbLDle. Until then, revaluation had been optional and depreciation was permitted only on the basis of 1bL±or±ual costo Accordingly, there are apt to be distortions in com- paring the prices of different stocks on an earnings per share basis. 16. Wghile the rate of trading in stocks dropped substantially on both exchanges in 1964, trading in bills continued at a very high level. In the single week of October 26 to 30, 1964, for example, this accounted for 87 percent of the total trading on the Sao Paulo Exchange. Several factors may have contributed to this decline in the rate of trading in stocks. One is the greater attractiveness of the bill market. Another is the fact that the salesmen representing mutual funds sell bills in addition to the particular funid they represent and find it often more advantageous to sell the former. In addition, the violent fluctuations in the price of stocks makles the investor wary of buying shares. The susceptibility of this relatively thin stock marlcet to quite dramatic short-term changes is illustrated by the fact that in the course of one month, frcrn February 25 to March 25, 1964, one of the principal share price indexes declined almost; 20 percent. This may be explained by the unsettled political and economic conditions as well as excessive with- drawals from mutual funds which forced these institutions to sell. After the revolution, the general wave of optimism in the country also had a substantial impact on the stock market. Prices as reflected by the same index jumped even more, and the index rose by 42 percent in one day's trading. The Bill Market 17. As previously indicated, there is an active bill marlcet in Brazil and trading in bills dominates activity in the Sao Paulo Stock Exchange. The principal bills traded are those of the various finance companies (whose issues are secured by the "duplicatas" of the accounts receivable they hold of various companies) and bills of the Banco do Brasil and the Treasury. All are short term -- rarely exceeding one year to maturity - and all are currently being sold on a discount basis. (N.B. As noted in the introduction. the Government of Brazil has recently issued Treasury Bills with a monetary correction feature. These are for a term of 3 Years and have a counon rate of 6 nercent. Davable annually.) 18. The relative nooularitv of the bill market is the resul t of several factors, the principal one being the apparent feeling on the part of the investorthat greater protectinn against the erosion of his capital is afforded by bills than by stocks. Tihis is so despitue the fact thlat the ae-tu21 rate onf inflatlon has been greater thatheren the return on te-) bil ANNEX 7 Page 6 The attractiveness of bills is enhnnced by fhe fact that they are bought on a discount basis and the purchaser is liable for little or no income 4v on the resulting gain. Dividerndsn, on the other hand, are subject to income tax which, particularly in the case of bearer shares, reaches a ver hig,h iee.-I The Qr+'e ra+e on cne=year dupliae was 47 percent in November 1964. Future Friancing Requirements 20. The mission has attempted to make some rought estimates of the iLL1Ves=meUrL.. IeqU4.LrLU-mA U1S in mianJ.L%.ULLLd.UILWi16 .LLiULn Xy, incLLLuiLnI stee L an(dA petrochemicals wThich have been included in public investment (see Chapter IV', Allo-wing for a considuerable mIarugin of erIuor, ±aveswVLAHUliU r LLUrli(E-ULU Iir, manufacturing industry may total about $800 million a year during the next feew years (see vol-ume v). Sell-financlnLg mity prouvide as muchUli as half of these requirements, 20 percent-25 percent can be expected to come from loan issues of shares in Brazil, and the remaining 25 percenl or so from external sources in the form of direct investment, suppliers' credits, and long-term loans from officiai agencies. Conclusions 21e {the financial base for industrial investment would be strength- ened by external financing of certain capital-intensive projects in steel, oil; and power. An increasing role will have to be played by the mobilization of private savings. Theoretically, there are three institutions through which savings could be channeled to private entre- preneurs - capital markcet, private development banks, and public develop- ment banks, These are complementary rather than alternatives, Yet, the emphasis should be towards the establishment of a capital market and the creation of major private development finance companies. The BNDE should seriously consider the possibilities of transferring its holdings in steel to the private sector. In the interim (particularly during the next few years) until the capital market and the private development banks are functioning effectively, BMDE would play an essential role as an instrument through which urgently needed funds can flow into industrial projects, especially the smaller projects; the BNDE is already playing such an intermediary role in the case of a recent IDB loan. Direct external financing is possible in the case of the larger industrial projects.