Document of The World Bank FOR OFFICIAL USE ONLY FILE COPY Report No. P-2739-BR REPORT AND RECOMMENDATION OF THE PRESIDENT OF THE INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT TO THE EXECUTIVE DIRECTORS ON A PROPOSED LOAN TO COMPANHIA ESTADUAL DE ENERGIA ELETRICA - CEEE WITH THE GUARANTEE OF THE FEDERATIVE REPUBLIC OF BRAZIL FOR A POWER DISTRIBUTION PROJECT March 10, 1980 This document hus a resticted distibution and may be used by recipients only In the perfomonuce of their ofctl dties. Its contents may not otherwise be disclosed without World Bak autorzation. CURRENCY EQUIVALENTS 1/ Calendar 1979 February 11, 1980 Currency Unit - Cruzeiro (Cr$) Cr$ US$1 - Cr$26.85 45.11 Cr$1 - US$0.037 0.022 ABBREVIATIONS AND ACRONYMS CEEE - Companhia Estadual de Energia Eletrica COPEL - Companhia Paranaense de Energia Eletrica DNAEE - Departamento Nacional de Aguas e Energia Eletrica ELETROBRAS - Centrais Eletricas Brasileiras S.A. ELETROSUL - Centrais Eletricas do Sul do Brasil S.A. FURNAS - Furnas-Centrais Eletricas S.A. GCOI - Grupo Coordenador para Operacao Interligada GGF - Global Guarantee Fund INCRA - Instituto Nacional de Colonizacao e Reforma Agraria LIGHT - LIGHT-Servicos de Eletricidade S.A. MME - Ministry of Mines and Energy NDF - National Development Fund UNITS AND MEASURES kW - Kilowatt MW - Megawatt (1,000 kW) kWh - Kilowatt hour GWh - Gigawatt hour (million kWh) kV - Kilovolt (1,000 volts) kVA - Kilovolt - ampere MVA - Megavolt - ampere (1,000 kVA) km - kilometer (0.6214 mile) average MW - average Megawatt (8.76 x avg. MW = GWh) TWh - 1000 Gigawatt hour = 109 kWh FISCAL YEAR January 1 - December 31 1/ The exchange rate used in the Staff Appraisal Report (US$1 = Cr$25.00) corresponds to the cruzeiro selling rate as of June 30, 1979. FOR OFFICIAL USE ONLY BRAZIL POWER DISTRIBUTION PROJECT LOAN AND PROJECT SUMMARY Borrower: Companhia Estadual de Energia Eletrica - CEEE Guarantor: Federative Republic of Brazil Amount: US$114 million equivalent Terms: Repayment in 15 years, including a grace period of 3 years, at 8.25% interest per annum Project Description: The project is part of CEEE's program for the expan- sion of its power subtransmission and distribution system in the State of Rio Grande do Sul during the period 1980-84. It includes the connection of about 35,000 new low-income urban consumers. CEEE's overall program, of which the project forms a part, will provide the facilities required to serve the expected loads in CEEE's service area, mostly related to industrial growth. The program will also make public service electricity available to about 12,000 new rural consumers. The project includes the following: (i) Subtransmission: Construction of about 90 circuit-km of subtransmission lines at 138 kV, and about 550 circuit-km at 69 kV, and installation of about 1,000 MVA of additional transformer capacity; (ii) Distribution: Construction of about 800 circuit-km of distribution lines at 23 kV and 13.8 kV, about 6,000 circuit-km of low voltage lines, and installa- tion of about 300 MVA of additional transformer capacity and about 580,000 meters, for the connection of about 325,000 new consumers; (iii) Study and Consultants' Services: (a) Study on conversion of rice irrigation pumping throughout State of Rio Grande do Sul from direct diesel drive to electric drive; (b) about 300 man-months of consultants' services for program to improve CEEE's operations. This document has a restricted distribution and may be used by recipients only in the performance of their official duties. Its contents may not otherwise be disclosed without World Bank authorization. - ii - Risks: The project faces no special risks, other than the risk of inadequate tariff increases which could place the borrower in financial difficulty. The government has given satisfactory assurances that this will not occur. Estimated Cost: -----US$ millions---- % of Base- Foreign Local Total line Cost Transmission 38 46 84 38.7 Distribution 35 86 121 55.8 Miscellaneous Equipment 5 4 9 4.1 Consultants' Services 1 2 3 1.4 Total Baseline Cost 79 138 217 100.0 Physical Contingencies 9 15 24 11.6 Price Contingencies 26 47 73 33.6 Total Cost 114 200 314 144.7 - iii - Financing Plan (1980-84 investment program): 1/ Requirements US$ millions % Proposed project for Bank financing 240 15 Other construction (including interest financed during construction) 1,316 84 Working capital requirements and others 12 1 Total requirements 1,568 100 Financing Plan Gross internal cash generation 1,064 68 Less: Net debt service 788 50 Other 2/ 20 1 Net internal cash generation 256 17 Sector equity contributions 3/ 172 11 Total funds from consumers 428 28 Nonsector capital contributions 68 4 Borrowings Existing loans 192 12 TBPT roposed loan 4/ 88 6 Co-financing borrowing 4/ 85 5 Other proposed loans 120 8 Unidentified sources 587 37 Tctal borrowings 1,072 68 Total financing plan 1,568 100 1/ Allowance for price increases not included. 2/ Includes dividend payments, net of reinvestment, and income tax payments. 3/ Includes states' and municipalities' reinvestmnt of sole tax proceeds, customer contributions in aid of construction, and sales of new shares. 4/ Excludes price contingencies of about US$26 million to be financed out of loan proceeds. - iv - Estimated Disbursements: -- US$ millions equivalent -- Bank FY 1981 1982 1983 1984 Annual 12 40 40 22 Cumulative 12 52 92 114 Rate of Return: 12% internal financial rate of return for CEEE's 1980-84 investment program. Staff Appraisal Report: No. 2732-BR of March 6, 1980 REPORT AND RECOMMENDATION OF THE PRESIDENT OF THE IBRD TO THE EXECUTIVE DIRECTORS ON A PROPOSED LOAN TO COMPANHIA ESTADUAL DE ENERGIA ELETRICA - CEEE FOR A POWER DISTRIBUTION PROJECT 1. I submit the following report and recommendation on a proposed loan to Companhia Estadual de Energia Eletrica - CEEE with the guarantee of the Federative Republic of Brazil for the equivalent of US$114 million to help finance a power distribution project in the state of Rio Grande do Sul. The loan would have a term of 15 years, including three years of grace with interest at 8.25% per annum. PART I - THE ECONOMY 2. A report, entitled "Economic Memorandum on Brazil" (No. 2283a-BR), dated March 19, 1979, was distributed to the Executive Directors on March 30, 1979. The following discussion and related annex tables are based on that report and on subsequent information. 3. The present Government, headed by General Joao Baptista de Oliveira Figueiredo, took office on March 15, 1979, for a six-year term. During its first year it has had to grapple with accelerating inflation and a deterior- ating balance-of-payments situation. Major economic priorities of the new government include the accelerated growth of agriculture, reduced dependence on imported petroleum, and continued expansion of manufactured exports. Success on these fronts is crucial both to the solution of the inflation and balance-of-payments problems, as well as to the sustained improvement of living standards and a better income distribution. Recent Economic Performance 4. From 1967 to 1973, Brazil enjoyed remarkable economic growth. GDP rose at a real rate of about 11% per year, with industrial value-added rising 13% per annum and agriculture 5%. Income per capita increased by more than 7% per year. This growth was achieved with no significant deterioration of the external resource balance, despite considerable trade liberalization, and there also occurred a gradual decline in the rate of domestic inflation. Although income growth was unevenly distributed, available data indicate that most Brazilians shared in the absolute improvement of living standards that was taking place. Among the sources of development were a rapid growth of public sector investments, the expansion of Brazil's agricultural frontier, -2- the inflow of foreign capital and technology, and a more than 25% per year annual growth of manufactured exports. The total external debt (public and private) increased over this period from US$3.3 billion to US$12.6 billion, but much of this accumulation was added to international reserves, which rose from US$0.2 billion to US$6.4 billion. 5. One by-product of this process was a growing dependence of Brazil's industry and transport system on imported petroleum. Few large nations are apparently so deficient in fossil fuels as is Brazil, and despite a major exploratory effort, over 80% of its petroleum must be imported. Thus, as a consequence of the oil price increase, the cost of petroleum imports rose from US$711 million in 1973 to US$2.8 billion in 1974. With imports also swelled by speculative stockpiling of other commodities, Brazil's current account deficit rose in one year from US$1.7 billion to US$7.1 billion, or 7% of GDP. Coping with the trade-off between continued high growth and the suddenly tightened external resource constraint has been one of the basic problems of Brazilian economic management since 1974. 6. Brazil's capacity to manage the 1973-74 oil crisis was enhanced by its strong international reserve position; the continued rapid growth of its manufactured exports; the liquidity of international financial markets, combined with widespread confidence in the nation's creditworthiness; and the opportunities which its large domestic market offered for efficient import substitution. Drawing upon all of these assets, and pressed by the high national growth expectations generated by the 1967-73 experience, the autho- rities were reluctant to restrain aggregate demand. The strategy shifted instead toward increasing control over imports, which were held approximately constant in nominal terms between 1974 and 1977. As a result of this effort, accomplished through a variety of tariff and non-tariff trade barriers, a positive merchandise trade balance was restored in 1977, and the current account deficit was reduced to 2.4% of GDP. Meanwhile, GDP growth averaged 7.6% per year between 1973 and 1977, although with wide year-to-year variation. 7. By 1976, however, the continued high growth of demand in the face of constricted imports and increased protection of domestic industry had resulted in a reacceleration of inflation above 40% per annum, and the autho- rities acted to slow the expansion of public sector expenditures and to tighten credit. This effort intensified in 1977, and the overall GDP growth rate fell below 5% for the first time since 1966. Nevertheless, inflation remained around 40%, stimulated in part by an accumulation of additional inter- national reserves totaling almost US$3 billion in 1976-77. 8. The rate of GDP growth rebounded to almost 6% in 1978, notwithstanding a 2% decline in agricultural output caused by a serious drought in southern Brazil. The loss of food production cost the economy an estimated US$1.5 billion in foreign exchange. Hence, despite a 36% nominal increase in manu- factured and semi-processed exports, total merchandise exports rose only 3.5%, compared to a 7.7% increase in merchandise imports. The contraction of agricultural output and rapid buildup of international reserves contributed to price pressures, maintaining inflation at about 40% for the third consecutive year. - 3 - 9. Aggregate demand continued to grow in 1979, fueled by rapid monetary expansion, a large public sector deficit, large wage settlements in the unionized sectors, and the continued expansion of manufactured exports. Indus- trial production was up about 9% over the previous year. Agricultural output was again severely affected by a combination of droughts, floods, and frost but showed some recovery from the depressed levels of 1978. Overall, GDP growth was 5.6%, somewhat below that of the preceding year. High demand, the poor harvest, and increased fuel costs resulted in a rapid acceleration of inflation in 1979. Inflation for the year exceeded 75%, the highest rate since 1964. 10. Increased petroleum prices, the two consecutive bad harvests, and a sharp rise in external borrowing costs also contributed to the progressive deterioration of Brazil's balance of payments in 1978 and 1979. Despite the continued rapid growth of manufactured exports, the merchandise trade balance fell from a small surplus in 1977 to a US$0.4 billion deficit in 1978 and an estimated US$2.3 billion deficit in 1979. The cost of fuel imports alone increased almost US$2 billion, or 40%, from 1978 to 1979. The jump in LIBOR costs, to which most of Brazil's financial credits are tied, contributed to raising gross interest payments abroad from US$3.3 billion in 1978 to nearly US$5 billion in 1979. Consequently, the deficit on current account grew from US$5.9 billion to US$8.5 billion, or from 3.0 to 3.7% of GDP. 11. With amortization payments totalling about US$5.8 billion, external capital requirements in 1979 amounted to US$14.3 billion. Of this amount, approximately US$3.0 billion was covered by reserve drawdowns, and another US$1.0 billion was provided by net direct foreign investments. Gross and net foreign borrowings in 1979, including bond issues, therefore totaled about US$10.3 billion and US$4.5 billion, respectively, compared to US$13.7 billion and US$8.5 billion in 1978. No difficulties were encountered in attracting the necessary credits, and the improvement noted in 1978 in spreads and maturities available to Brazil was sustained in 1979. The drawdown brought international reserves to about US$8.9 billion at the end of 1979, or equiv- alent to about 5-1/2 months of goods and nonfactor service imports. Gross medium- and long-term debt rose to around US$48 billion, or 21% of GDP. 12. Measures introduced in April 1979 to slow the inflation and reduce balance-of-payments pressures met with only temporary success, and a new package of measures was decreed in December. The most important of these were a 30% devaluation of the cruzeiro, accompanied by the elimination of export subsidies and the prior deposit requirement on imports and the imposi- tion of a temporary export tax on primary products; increased restrictions on public enterprise investments, imports and borrowing; and a modification of administered credit programs which is intended to reduce subsidies. Poverty Programs 13. Although Brazil continues to be characterized by severe income inequality, the Government has in recent years made serious efforts to relieve poverty, and significant progress has been made in a number of areas. Cover- age of the social security program, for example, has been expanded and extended to the rural population. More than 70% of the urban population -4- is now covered by the social security health care system, and a cash transfer program has been established for the rural elderly poor. Under this latter system, rural households headed by persons over 65 years of age are eligible to receive a monthly income supplement equivalent to US$30, an amount which is almost twice the average per capita expenditure in the rural Northeast. The urban population over age 70 is covered by a similar program. Almost 2 million loans have been made by the National Housing Bank since 1964 for housing. A sites and services program was established in 1975 to benefit the urban poor more directly, and this was complemented in 1977 by a program to finance home improvement and building materials. High priority has also been given to the extension and improvement of urban water supply. Consequently, some 6 million households comprising about 30 million people have been connected to public water supply systems since 1971, increasing the proportion of urban dwellers who receive such services from 60% to 75%. Efforts have also been made to attack the poverty-related problems of adult illiteracy and malnutrition. 1/ Future Prospects 14. Since 1973, Brazil has undertaken major efforts to reduce the drain on the economy of petroleum imports. Investments in exploration have been accelerated, and foreign oil companies have been invited to drill under risk contracts with PETROBRAS, the state oil monopoly. Investments have also been undertaken to develop the nation's extensive hydroelectric potential, to initiate nuclear power production, and to substitute alcohol for gasoline for automotive use, and efforts are being made to induce energy conservation. The results, however, have thus far been limited. With oil expected to constitute US$9-10 billion (nearly half of Brazil's merchandise imports) in 1980, as compared to US$700 million (11%) in 1973, the trade-off between growth and balance-of-payments viability will continue to be a principal preoccupation of economic decision makers. 15. In view of the balance-of-payments constraint, Brazil must undergo a period of careful demand management. In addition to the measures noted above, a number of important institutional reforms were set in motion in 1979 to improve fiscal and monetary policy design and implementation. These include: the improvement of information flows and administrative control in the public sector, including the expenditures of the many semi-autonomous agencies and public enterprises, incorporation into the fiscal budget of several of the subsidized credit programs formerly handled outside the budget through the Central Bank, and reduced earmarking of public revenues. Currently under consideration are the elimination of the development banking responsibilities of the Central Bank, the abolition of the Bank of Brazil's money-creating power, and a far-reaching reduction of fiscal incentives. 16. The December devaluation of the cruzeiro and the accompanying trade liberalization are intended to promote more efficient resource allocation, favorable to both export growth and efficient import substitution. Toward this end also, the domestic prices of agricultural commodities have been freed, and a general reduction and liberalization of the tariff structure is under 1/ For a more detailed account of these efforts see "The Distribution of Income in Brazil" (Staff Working Paper No. 356, dated September 1979) and "Brazil - Human Resources Special Report", dated October 1979. -5- review. Although public investments may be constrained by reduced resource availabilities over the next several years, priority attention will continue to be given to the development of domestic energy sources, agriculture and major import-substitution projects. 17. Growth is expected to average about 6% per year in 1980-85 as compared to 11% in 1967-73 and 7% in 1973-78. Such a growth rate should be compatible with a declining current account deficit in relation to GDP and an approximately constant debt service ratio. These projections are highly sensitive, however, to petroleum prices, LIBOR rates, and the continued growth of manufactured exports. The combination of high debt service and a high share of petroleum in total imports leaves the economy more vulnerable to external events than it has been for many years, and this situation may be expected to persist for the next several years. External Assistance and Creditworthiness 18. With the forecast upward trend of real petroleum prices, Brazil's resource balance is expected to remain negative, though improving, through 1985. Interest payments on its large debt will rise rapidly throughout the period resulting in a continuing current account deficit on the order of US$11-13 billion. As a proportion of GDP the current account deficit is projected to peak at 4.3% in 1980, falling gradually to about 2.4% by 1985. 19. Net medium- and long-term borrowing requirements are expected to be around US$11 billion in 1980 and remain in the range of US$10-13 billion throughout the first half of the decade. To achieve this, annual gross borrowings would have to grow from US$19 billion to almost US$27 billion during the period. As a consequence, the net debt service ratio 1/ would peak in 1980 at 68% and hold steady in the range of 60-63% through the remainder of the period. Total outstanding medium- and long-term debt would reach 24% of GDP in 1983 and decline slowly thereafter. 20. The great sensitivity of Brazil's balance of payments to petroleum prices and LIBOR rates was demonstrated in 1979 and will continue to make projections subject to a wide margin of error. The present scenario also depends heavily on Brazil's continued ability to expand manufactured exports, despite the slower anticipated growth of the world economy, and on its con- tinued access to international capital. A major effort is under way to reduce dependence on foreign petroleum but significant results will not be apparent for several years. On the other hand, Brazil remains a dynamic, highly diversified, and resilient economy, and recent policy measures should greatly strengthen the ability of the economic authorities to adjust to circumstances as needed. 21. In summary, after a period of very rapid growth in the late 1960s and early 1970s, the sharply increased cost of petroleum imports has forced the nation to moderate its growth expectations and to adapt its economic structure to the changed terms of trade. This adjustment process has been eased by a strong reserve position, a solid image of national creditworthiness, the aggressive expansion of manufactured exports, and the ample opportunities 1/ Including both public and private debt. - 6 - for efficient import substitution offered by its large domestic market. Never- theless, continued heavy dependence on petroleum imports, the resurgence of domestic inflation, and the rapid accumulation of external debt indicate that the adjustment process must go much further. The Government recognizes the need for careful demand management and for selectivity in its investment policies emphasizing efficiency in export expansion, import substitution, employment creation, and poverty alleviation. The task of economic management will not be easy, but policy makers have demonstrated their ability to adjust to changing circumstances. Thus, despite the deterioration noted in 1979, Brazil remains creditworthy for new borrowing. PART II - BANK OPERATIONS IN BRAZIL 22. By January 31, 1980 the Bank had made 91 loans to Brazil, amount- ing to US$4,496 million (net of cancellations), of which 46 were not yet fully disbursed. During FY70-75, disbursements averaged US$150 million per year, reaching US$202 million in FY76, US$267 million in FY77, US$252 million in FY78, and US$295 million in FY79. Disbursements for the first half of FY80 amounted to US$170 million and are expected to increase during the next few years. Annex II contains a summary statement of Bank loans as of January 31, 1980 and notes on the execution of ongoing projects. 23. Over the FY75-79 period, Bank lending to Brazil ranged from US$425 to over US$700 million per year. In FY75, five loans were made totalling US$426.5 million; in FY76, ten loans totalling US$498 million; in FY77, seven loans totalling US$425 million; in FY78, nine loans totalling US$705 million; and in FY79, nine loans totalling US$674 million were made. Work is relatively advanced on the preparation of a water supply and sewerage project in the Southern States, an industrial pollution control project for Sao Paulo, a suburban rail transport project for Porto Alegre, a rural education project for the Northeast, a second rural development project in Minas Gerais, a third water supply and sewerage project in Minas Gerais, and two additional power projects, one for a systems coordination and control center for ELETROBRAS and the second for the expansion of ELETROSUL's transmission system. We expect to propose loans for these projects in the near future. 24. Of Brazil's external public debt outstanding and disbursed at the end of 1978, amounting to nearly US$24.7 billion, the Bank held about 7.3%. The Bank's share of the service on this debt was about 5.2%. When Brazil's total (public and private) external debt is considered, the Bank's share in the total outstanding at the end of 1978 was 4.4%, and its share in Brazil's external debt service was about 2.6%. By 1980, the Bank's share in total outstanding debt is expected to rise very slightly, while its share in total debt service falls to about 1.7%. -7 - 25. As of January 31, 1980 IFC commitments to Brazil, totalled US$482 million, of which US$329.7 million had been sold, repaid or cancelled. Of the balance of US$152.3 million, US$115.1 million represent loans and US$37.2 million equity. A summary of IFC's investments as of January 31, 1980 is given in Annex II. Lending Strategy 26. In its lending to Brazil, the Bank has sought to help the Govern- ment achieve a number of important development objectives which are inter- dependent and complementary. One important lending objective in Brazil is to help to intensify the efforts of the Government to identify and develop projects that will increase the productivity and incomes of the lowest income segments of the population, to broaden the economic opportunities open to those groups, and to improve their living conditions. Loans for water supply and sewerage projects in the State of Minas Gerais, in Greater Sao Paulo, and in the Northeast for urban transport in five major cities, and for sites and services and low-cost housing are assisting to improve the living conditions of the urban population, particularly of the urban poor. Several projects to reach low-income groups in urban areas are in preparation, including a water supply and sewerage project in three Southern States and a third water supply and sewerage project for Minas Gerais, a second urban transport project, and a pollution control project for Greater Sao Paulo. Previous loans for nutrition research and development, vocational training, agricultural research, agricul- tural extension and polder construction in the lower Sao Francisco river basin and for integrated rural development in the States of Rio Grande do Norte, Minas Gerais, Ceara, Paraiba, Bahia, Sergipe and Pernambuco were designed to assist low-income groups in rural areas. Additional projects designed to assist low-income groups in rural areas are in preparation, including a second integrated rural development project in Minas Gerais, a rural education project, a rural credit project in the Northeast, and additional integrated rural development projects in the Northeast. 27. Another of the Bank's lending objectives in Brazil is to support institutional development and policy reform designed to develop rational policies and procedures, establish adequate coordination and control, and help maximize public savings and ensure that they are used economically through rational selection of investment projects. This institution-building objective has been particularly important in Bank assistance in the electric power sector, where there has been an emphasis on supporting least cost investment decisions and on strengthening the managements and planning and operational capabilities of the power companies and, at the macro-level, on rationalizing the tariff structure and improving sector planning methods and performance. Loans for rural development, railways, industrial finance, highways, agricultural research and extension, water supply and sewerage, and urban development also have important institution-building objectives. Under the proposed project, Bank assistance was a significant factor in developing CEEE's project preparation capabilities; additionally, provision is made under -8- the project for improving CEEE's budgeting, management reporting, internal auditing and planning capabilities and its operational efficiency. At the sector level, the project includes provision for follow-up tariff studies and a study designed to establish sector-wide operating efficiency criteria which could be used to monitor sector operating costs with a view to achieving reductions in such costs. 28. Another lending objective is to ease the foreign exchange constraint on development, a constraint that has become more critical since the increase in petroleum prices, by supporting projects designed to increase Brazil's export capacity and, where economical, to substitute domestic production for imports. As a result of the deterioration in Brazil's terms of trade and balance of payments which took place at the time of the 1974 energy crisis, this objective was placed in the forefront of the Government's economic policy. Lending for the electric power sector supports this objective, since it is based primarily on hydroelectric energy, and its development lessens the need for petroleum imports. Bank support of fertilizer and petrochemical projects is assisting Brazil to substitute imports with large-scale efficient domestic production ard aid its balance-of-payments position. Much of the Bank-assisted investment in the transport sector -- railways, ports and highways -- is designed to facilitate the smooth and economical flow of exports. Support of the steel expansion program is helping Brazil to expand domestic output of a traditional import commodity which can be produced efficiently in Brazil due to the country's ample supply of high-grade iron ore and the scale of its internal markets. A similar objective is being achieved through the VALESUL aluminum project which will use Brazil's abundant hydro- electric resources and ample bauxite reserves. 29. A final objective which applies to all Bank lending to Brazil is to provide part of the large volume of medium- and long-term capital inflows that Brazil has needed and will continue for some years to need in order to sustain rapid growth and achieve its employment creation and regional develop- ment objectives. Continued active lending by the Bank in Brazil is regarded by the international financial community as an important sign of confidence in Brazil and encourages others to continue their own programs there. In some sectors, especially in electric power and industry, Bank participation is helping Brazil obtain additional resources in greater amounts and on more favorable terms from bilateral credit agencies and private financial institu- tions than may have otherwise been provided. Eleven co-financing operations for more than US$425 million, have been concluded since 1976 with private financial institutions and several others are in preparation. In connection with the proposed project, CEEE is expected to obtain one or more loans aggre- gating about US$110 million from private banks to complete the financing plan for its expansion program (of which the project forms a part). We propose to provide the usual co-financing links for the commercial bank financing with the proposed Bank loan (see para. 66). -9- PART III - THE SECTOR Energy Resources and Consumption 30. The estimated total gross consumption of energy in Brazil in 1978 was 109,733 M.T.o.e. (0.93 T.o.e. per capita) 1/ of which oil products account for about 42%, mineral coal, wood products and wastes 32% and hydroelectricity 26%. In 1978, generation of electric energy from all primary sources is estimated to have been 110,000 GWh; its annual rate of growth since 1973 has been about 12% with per capita consumption in the same period going from 550 to 839 kWh. 31. Brazil's proven oil reserves are limited. Present domestic produc- tion of crude covers only 15% of the country's requirements and is concen- trated in the northeastern region. To increase domestic production the government accelerated exploration since 1977 by granting risk contracts to private concerns, putting an end to government monopoly in this field. There have been no major new discoveries so far as a result of these efforts. 32. Brazil has vast water resources with a potential for hydroelectric development estimated at about 200,000 MW, of which only about 21,600 MW have been utilized. An additional 35,000 MW are scheduled to be in operation by 1990. Many of the more promising watersheds are relatively remote from the demand centers and the economic justification for their development remains to be demonstrated. By the end of 1978 the power sector had about 25,200 MW of installed generating capacity of which about 86% was in hydroelectric stations and the remainder in thermal plants. The high voltage transmission system contains about 34,000 circuit-km at voltages ranging from 230 to 500 kV. 33. Coal is another source of energy the government is counting on to supply an increasing share of Brazil's energy requirements in the future. Coal presently accounts for only about 4% of Brazil's energy production. Most of Brazil's coal is of low quality and some of it is very costly to mine. The government is, however, encouraging the construction of coal-fired thermal plants and the substitution of coal for other fuels in industrial boilers. It is projected by the government that sharply increased investments in coal mining will help to increase coal's share of the national energy supply to about 6% by 1987. 34. Three thousand MW of nuclear generating capacity has been scheduled for 1985 operation in the Southeastern region, the largest demand center in the country. The first unit of 600 MW, supplied by Westinghouse (USA), is expected to operate in 1980. The Brazil-West Germany agreement of June 27, 1975 provides for the supply of an additional 2,400 MW in nuclear plants and a Brazilian option for six additional 1,200 MW units. Because of substantial cost increases, the Brazilian Government is, however, reviewing its commitment to developing future nuclear generating plants. 1/ T.o.e.: tons of oil equivalent, approximately 10 kcal; M.T.o.e. = 1,000 T.o.e. Data source: Ministry of Mines and Energy, Balanco Energetico Nacional, 1978. - 10 - 35. Other energy sources, such as firewood, charcoal and sugarcane bagasse are also used but not for electric public service. These fuels represent about a quarter of Brazil's energy utilization and their consumption would probably not increase. Of lesser current significance in Brazil is natural gas, with apparently small reserves in Northeastern fields for local supply. There are few sites for tidal energy development, and geothermal fields have not yet been discovered. Brazil has been active in exploring alternative energy sources. The largest endeavor is the use of alcohol as fuel in internal combustion engines. In a first phase of the government's alcohol program, started in 1974, gasoline is being blended with up to 20% alcohol in many states. In a second phase, 100% alcohol-run cars are to be introduced on a commercial scale beginning in 1980. Annual alcohol production is programmed to increase from around 3.3 billion liters in 1979 to about 11 billion liters by 1985. In the power sector, tests are being conducted on wind-driven generators. The Role of the Power Sector in the Economy 36. The continued growth of reliable electric service is essential for the development of the country's industries, which in 1977 used 57% of all electric energy consumed while accounting for about 40% of Brazil's GDP, con- tributing about 45% of export earnings and providing for about 33% of all non-agricultural employment. The rate of growth of electricity consumption was 1.20 times that of GDP for the period 1962-75 while from 1970-75, it was 1.28 times that of GDP. From 1974 through 1977, electricity consumption grew at about 12% p.a. while GDP grew at about 7% p.a., resulting in a ratio of growth of electricity consumption with respect to GDP growth of about 1.7. This increasing trend in the rate of growth of electricity utilization with respect to Brazil's GDP reflects an apparent substitution of electricity for other energy sources. 37. The southeastern region, with 42% of Brazil's population, accounted for about 71% of the total electric energy utilized in the country in 1978. The southern region, with 18% of the population, utilized 12%. The two regions, used in 1978 about 80% in all energy forms. In the last five years, elec- tricity generation in the southeastern region grew at 11% p.a. and at 15% in the southern region. The southern region, comprising the states of Parana, Santa Catarina and Rio Grande do Sul has an area of 577,723 sq km, or 7% of the Brazilian territory; Rio Grande do Sul has about 7% of Brazil's population and in 1978 accounted for about 5% of Brazil's electricity consumption. Sector Organization 38. Though complex and one of the largest in the world, the sector is well organized and the policies well formulated and applied. Decree 60,824 of June 7, 1967 established the current sector organization, under which the Departamento Nacional de Aguas e Energia Eletrica (DNAEE) performs regulatory functions, grants licenses for generating plants, assigns concessions, sets tariffs and approves expansion plans. Centrais Eletricas Brasileiras, S.A. (ELETROBRAS), a holding company for those utilities owned by the federal Government, administers public funds for use by its subsidiaries and state- owned utilities, and coordinates external borrowings, expansion plans for major generating and transmission facilities, and operation of interconnected systems in the country's network. - 11 - 39. The five geographical regions are served by ELETROBRAS' subsidiaries (bulk suppliers), in conjunction with state-owned utilities (principally in distribution) as follows: Centrais Eletricas do Norte do Brasil (ELETRONORTE) for the north and part of the central-west; Companhia Hidro Eletrica do Sao Francisco (CHESF) for the northeast; Furnas-Centrais Eletricas (FURNAS) in the southeast and part of the central-west; and Centrais Eletricas do Sul do Brasil (ELETROSUL) for the South. A joint Brazil-Paraguay authority (Itaipu Binacional) has responsibility for the Itaipu hydroelectric project, under construction on the Parana River, where it defines the border between the two countries. 40. Government guidelines contained in the 1967 decree promoted concen- tration of public electricity services in the individual states into single state-owned utilities. These utilities are responsible for transmission and distribution within the respective states and in some cases also operate generation facilities. The borrower for the proposed loan, Companhia Estadual de Energia Eletrica (CEEE), is the utility serving Rio Grande do Sul state. The main exception to the pattern of vesting responsibility for distri- bution in single state-controlled utilities is the present arrangement under which LIGHT-Servicos de Eletricidade S.A. serves the cities of Rio de Janeiro and Sao Paulo. ELETROBRAS acquired 83% of the shares of LIGHT from Brascan Ltd. (Canada) in January 1979. Tariffs 41. Sector legislation provides for utilities to obtain through tariffs sufficient funds to cover their operating expenses, depreciation, reversion quota 1/ and a reasonable return on investment. Since 1966, annual revalua- tion of assets for tariff-setting purposes, is mandatory. 2/ In addition 1/ A federal tax assessed at a rate of up to 5% on assets in operation; of this, 60% is lent by the Government to ELETROBRAS which uses the funds to finance investments in the sector and to provide compensation for private utilities for the acquisition of their assets and the balance is the main source of funds for the Global Guarantee Fund--a tariff equalization facility (see para. 42). 2/ Currently, assets are revalued monthly in accordance with changes in the ORTN index (the monetary correction index applied to Government bonds). Previously this index was computed on the basis of past inflation, with certain adjustments, and while somewhat less than actual inflation rates, movements in the ORTN index roughly corresponded to general price move- ments (with the exception of 1979, when ORTN adjustment lagged behind the inflation rate by about 30 percentage points). In early 1980, the Govern- ment announced, as a part of a strategy to curtail the exceptionally high rate of inflation (which for 1979 reached 77%), that ORTN correction for 1980 would not exceed 45%, irrespective of actual inflation. In the same spirit, the Government announced that devaluation of the cruzeiro would not exceed 40% in 1980, likewise irrespective of the difference between domestic and international inflation. These matters will be closely monitored by the Bank as a part of the dialogue which the Bank is maintain- ing on overall economic and sector policies. - 12 - to the tariff, residential, commercial and small industrial consumers pay the "sole tax" (imposto unico) which, since 1972, has been assessed at the rate which varies between 25% and 30% of the respective tariffs (industrial consumers with utilization of more than 2,000 kWh/month are exempted). As a result, the electricity service charges to the residential and commercial consumers are among the highest in the world. This tax provides about 12% oL sector revenues, 40% of which goes to federal agencies, 50% to the states, and 10% to munici- palities. Another sector revenue source (about 10%) is the compulsory loan, an investment scheme under which industrial consumers with a consumption in excess of 2,000 kWh/month acquire ELETROBRAS bonds (20-year maturity yielding 6% and revalued periodically in line with the rate of inflation). 42. In 1973 DNAEE initiated a policy to reduce regional tariff inequali- ties in order to promote a more balanced economic development. By 1976, with minor exceptions, average tariff levels had been equalized. The Global Guarantee Fund (GGF) is used in the tariff equalization process to supplement earnings of eligible utilities, allowing them to obtain a return on remuner- able assets of up to 10%. The GGF is financed through a surcharge of up to 2% on assets in operation of all the utilities. DNAEE has used it control over the GGF to encourage more efficient operation of the participating utilities. To be eligible for transfers from the Fund, the law requires inter alia that utilities have (i) a return on remunerable assets of less than 10%; and (ii) a valid agreement with the state government where it operates for the payment of all bills in arrears. In the case of utilities owned by federal, state, or municipal governments legally obligated to re- invest their dividends in the utility the law also requires as a condition of eligibility the actual reinvestment of such dividends. 43. During the past few years, the government's desire to curb inflation through limiting tariff increases has resulted in declining tariffs in real terms. DNAEE has been concerned that serious financial constraints could arise in the future if the power sector utilities are unable to obtain revenues sufficient to contribute appropriately to their own expansion programs. With Bank encouragement (through Loan 1300-BR), DNAEE carried out a review of sector financial requirements, tariff levels, and rate structures. The main findings of this study were: (a) the power sector faces an extremely tight financial situation over the next 2-3 years, after a period in which its finances have been weakened as a result of the need to undertake a very large investment program and the failure to increase tariffs in real terms in line with increasing costs; (b) to maintain its financial equilibrium the sector will need to introduce substantial tariff increases in real terms; and (c) the extent of the tariff increases will depend on the decisions on the medium-term investment program and financing plan, which the Government will direct the sector to undertake. These problems will be discussed in detail during a power sector review in progress. - 13 - 44. The Bank and the federal government have maintained an active dialogue on tariff levels. After an insufficient increase in early 1979 (about 37%) the Government granted a second increase (about 12%) in August, and a third increase (55%) in November. While these were major positive steps (interim increases had not been granted in the past several years), they were still not quite sufficient to provide for 1979 a remuneratio<- of 10% to the sector as a whole. The government has indicated that it intends to adjust electricity tariffs again in May or June 1980, by an additional 30%, so as to approximate for 1980 the 10% remuneration for the sector as a whole, envisaged in the Brazilian tariff legislation (which is reflected in various previous loan agreements with the World Bank). The Government has further indicated that it does not intend to defer any part of the 10% remuneration authorized for 1980 to future years, but that if, due to unexpected circumstances (such as an actual inflation rate higher than the 45% which is the Government's target for 1980), any of the Bank's power sector borrowers did not reach a 10% remuneration in 1980, the shortfall would be fully recovered in the next three years. Similarly, the Government has indicated that it intends to allow the Bank's power sector borrowers which experienced short-falls in remuneration prior to 1980 to make up such shortfalls, on a revalued basis, in 1981 through 1983. 45. Under previous loans, Brazilian power companies were required to maintain their revenues (including transfers from the GGF) at levels consistent with sound financial and public utility practices and in accordance with existing legislation. Also, they were required to maintain their eligibility under norms prescribed by DNAEE in the event they needed transfers from the GGF (para 42). The Government has-confirmed in connection with existing loans that the revenues of the companies should cover the cost of electric service and that the return on remunerable investment including transfers from the GGF should be 10%. This has not in practice meant a guaranteed minimum 10% rate of return because, over the last several years, DNAEE has: (a) rejected portions of some companies' remunerable investment; (b) rejected portions of some companies' operating expenses; and (c) made extensive use of a compensation account, which provides for recovery of shortfalls in remuneration over one or more future years in lieu of a higher remuneration in the current year. In addition, DNAEE has affected the utilities' cash flow by redefining the concept of remunerable investment, lowering the rate base by netting certain current liabilities against applicable current assets and by adjusting re- munerable investment to reElect average assets for the year instead of year-end assets. 46. The Brazilian Government has agreed to amplify the existing rate covenants to provide that (i) DNAEE would allow concessionaires a reason- able period of time within which to reduce their operating costs whenever DNAEE proposed not to recognize claimed operating costs in connection with the setting of the level of tariffs and transfers from the GGF; and (ii) DNAEE would exchange views with the Bank regarding the foregoing, and inform the Bank of any changes in the criteria being applied by it in deter- mining whether a concessionaire's claimed service costs are to be recognized; - 14 - (iii) DNAEE would inform the Bank within thirty days of any decision on the levels of electricity tariffs to be allowed to concessionaires and (iv) begin- ning in 1981, DNAEE would ensure that CEEE's 10% remuneration will be fully provided in each year and no part thereof postponed in whole or part to future years. CEEE would also maintain its eligibility under norms prescribed by DNAEE in the event it requires transfers from the GGF, and DNAEE would allow CEEE a return on remunerable assets of at least 10%. (Section 5.06 and 6.01(c) of the draft Loan Agreement; Section 3.02(b) of the draft Guarantee Agreement and accompanying draft supplemental letters No. 1 on Revenues of the Borrower and No.2 on Cost of Service). 47. Information obtained from DNAEE in connection with Loan 1721-BR 1/ indicated the need for improved criteria for recognizing or rejecting the operating expenses of concessionaires. DNAEE would therefore carry out, with the assistance of independent consultants, under terms of reference acceptable to the Bank, a study of sector efficiency to be completed by June 30, 1981, including recommendations on the criteria to be used by DNAEE in assessing expenses. DNAEE would also discuss its consultant's findings with the Bank (Section 3.04 of the draft Guarantee Agreement). 48. Through 1975, Brazilian power tariff legislation enabled most of the Brazilian utilities to attain a reasonable return on investment and allowed them to finance a considerable share of sector investments. Present tariffs also contain generally appropriate features such as separate demand and energy rates for industrial and commercial consumers, discounts to encourage large industrial consumers to accept supply at higher voltages, and life-line rates for rural and minimum residential consumption. However, the tariffs do not provide for differentiation between peak and off-peak rates or for seasonal variations in the cost of supply. The national equal- ization of tariffs (para. 42) also warrants reassessment. As agreed under Loan 1300-BR, DNAEE, with the assistance of Eletricite de France, undertook a study of bulk supply tariffs (13.8 kV and above) based on marginal costs. DNAEE has presented the preliminary study to the Bank for comments. The principal conclusions which can be drawn from it, are that: (a) current tariffs are below marginal costs; hence, there are good economic, as well as financial, reasons for raising the general level of tariffs; (b) the structure of tariffs needs reconsideration, particularly with respect to the balance between energy (kWh) and capacity (kW) charges, and the introduction of both seasonal and time-of-day components; and 1/ Loan of US$109 million, approved on June 12, 1979, for the COPEL Second Power Distribution Project. - 15 - (c) more detailed studies should be carried out on the costs of generation, transmission and primary distribution, customer load curves, and the practical application of marginal cost based tariffs to bulk sales. To ensure proper follow up on point (c), DNAEE would carry out these studies and present their results to the Bank for comment by December 31, 1981 (Section 3.03(b) of the draft Guarantee Agreement). Operations 49. In order to achieve the most economic operation of the interconnected systems, the Government has established regional coordinating groups. Under ELETROBRAS coordination, the regional operating utilities plan and carry out improved allocation of loads to generating stations, compensate for diversity in regional peak loads and hydrological regimes and control operating costs through reductions in operation of thermal plants, by higher use of hydro facilities. Coordination will be further improved by a national system super- vision and control center now being planned by ELETROBRAS and for which lending is being considered. Access to Service 50. About 80% of Brazil's urban population is receiving electricity service. However, the number of people receiving this service in the rural areas (where about 40% of the population lives) is very low. Government is promoting expansion of subtransmission and distribution facilities to provide electricity service to a higher proportion of the population, particularly in rural areas. The proposed loan would contribute towards increasing the proposition of urban population served in the State of Rio Grande do Sul. Rural Electrification 51. Rural electrification on a national level was started in 1970 when the Instituto Nacional de Colonizacao e Reforma Agraria (INCRA), a self-governing agency attached to the Ministry of Agriculture, was made responsible for the planning, promotion and control of rural electrification through consumer cooperatives. Progress, however, was slow (4 to 5 thousand customers/year) and in 1974, ELETROBRAS created a rural electrification department to comple- ment the Ministry of Agriculture's activities. ELETROBRAS finances 50-80% of the cost of individual rural electrification projects at a subsidized interest rate of 12% (principal not subject to monetary correction) with 15 years maturity including a grace period of 5 years. INCRA's program (which has been assisted by two Inter-American Development. Bank (IDB) operations totalling US$84.4 million, including US$68.7 million of funds provided on concessionary terms) grants similar terms to participating rural electrifi- cation cooperatives. About 43,000 rural cooperatives, individual households and other customers (about 200,000 people) were connected in 1978 through ELETROBRAS-assisted programs at a total cost of about US$100 million. Of these new customers, 43% were in the South. Over the period 1979-1981 ELETROBRAS expects to participate in projects estimated to cost about US$570 million, resulting in approximately 160,000 new rural connections (45% in the Southeast, 32% in the South, 3% in the Central-West, 19% in the Northeast and 1% in the North), thereby providing services to about 800,000 people. - 16 - Sector Development 52. No constraints have been observed in sector organization that could adversely affect continued sector development. The high level of investment required in the sector (about 9% of the country's gross domestic capital formation), and the Government's present policy of limiting public sector investments as part of its program to control inflation, may, on the other hand, affect future sector investment programs and serious constraints could arise in the future if utilities are unable to obtain revenues sufficient to contribute appropriately to their own expansion programs (para. 44). In connection with Loan 1538-BR, ELETROBRAS agreed to complete by the end of 1979 a master plan for sector facility expansions to the year 2000. This plan should permit assessment of various solutions for maintaining adequate service reliability while adjusting long-range investment programs affected by Govern- ment actions to curb inflation. The preparation of the Master Plan has been delayed, and it is now expected that new agreements regarding the scope and timing of the work for its completion will be reached in connection with the loans which we expect to propose shortly for two other power projects which are at an advanced stage of preparation, referred to in para. 23 above. Bank Participation in the Sector 53. Since 1949 the Bank has made 32 loans to the Brazilian power sector amounting to about US$1.4 billion. They have been for hydroelectric plants and associated transmission facilities in the southeastern, southern and northeastern regions, and for distribution facilities. Bank participation has helped Brazil improve sector organization and planning and facilitated foreign commercial financing of the sector. The Bank also assisted the Government in its effort to implement a tariff policy which has enabled the sector to contribute a considerable proportion of the funds required for sector investments. Project performance audit reports on power-plant 1/ and distribution-system 2/ projects have been distributed to the Executive Directors. These reports conclude that, despite construction delays and cost overruns, the projects were substantially successful. The latest report points to the inadequacy of tariffs (paras. 43 and 44). PART IV - THE PROJECT Background 54. CEEE's 1980-84 expansion program is designed to meet the forecast load growth in its service area and to improve the reliability of service. 1/ Loan 404-BR (Sec.M 77-532 of June 28, 1977); Loans 442-BR and 566-BR (Sec.M 78-34 of January 13, 1978); and Loan 728-BR (Sec. M 79-756 of October 23, 1979). 2/ Loans 475/476/477 and 478-BR (Sec. M 75-646 of September 4, 1975). - 17 - The project proposed for Bank financing would comprise the program's sub- transmission and distribution facilities needed to supply the required reliable electricity services to urban customers. Bank participation would also help expand services to low-income urban households and assist in provid- ing the required infrastructure for CEEE's rural electrification program. The proje!ct was appraised in June 1979. Negotiations took place in Washington from January 28 to February 4, 1980. The Brazilian delegation was headed by Messrs. Egon Pedro Scherer, Financial Director, and Hans Sille, Technical Director of CEEE, and included Mr. Eduardo Emilio Maurell Muller, Secretary of Planning of the State of Rio Grande do Sul, and representatives of the federal Secretariat of Planning, the Ministry of Finance and ELETROBRAS. A supple- mental project data sheet, including a timetable of key events and a summary of special conditions is presented in Annex III. A report entitled "Staff Appraisal Report - Brazil - CEEE Power Distribution Project," No. 2732-BR, dated March 6, 1980, is being circulated separately to the Executive Directors. The proposed loan would be the second to CEEE. The first loan (June 1952) was to help CEEE's 1952-57 expansion program. It was cancelled at the Brazilians' request in 1957. Area to be Served 55. Rio Grande do Sul is the southernmost state of Brazil (see IBRD Map No. 14538 attached at the end of this report). It has an area of about 280,000 km and population of about 8 million people. CEEE sells 44% of the public electric energy supply of the Southern region and has 52% of the region's consumers. Public-service electricity in the state of Rio Grande do Sul grew at an average annual rate of 12.5% during the period from 1974 to 1978. The growth in the number of customers was 8.5% p.a., while average consumption per customer grew at 3.7% p.a. This rapid growth was linked to the state's industrialization. The share of electric energy sold to industries grew steadily from 36% in 1967 to 45% in 1978. Residential supply decreased its participation in the market from 31% to 24% in the same period. The Borrower 56. The borrower would be Companhia Estadual de Energia Eletrica - CEEE, created by the state in 1943. Like most of the state power utilities in Brazil, CEEE grew through the acquisition of several small private and municipal power companies. The utility is managed by its six-member-Administrative Council elected by the shareholders for a two-year period. This Council appoints the Directorate, composed of seven directors and one President, for a two-year period. The President of the Administrative Council is also the President of the Directorate and the Chief Executive Officer. CEEE has about 11,000 employees and serves about 1.2 million customers (about 112 customers per employee, which is low considering the characteristics of its service area, and the amount of work done by third parties under contract to CEEE). CEEE's paid in capital as of December 31, 1978, amounted to Cr$5.8 billion of which 84% was owned by the State of Rio Grande do Sul, 13% by ELETROBRAS, 3% by Municipalities and a negligible proportion by private shareholders. -There have been some difficulties in the proper administration of the company caused by inter alia, deficiencies in CEEE's structure and practices, rapid growth, rapid turnover of some key personnel, difficulties in integrating staff - 18 - from several predecessor companies, and a relatively independent course from the mainstream of the Brazilian power sector. The proposed project attempts to deal with some of those difficulties. Under an on-going admin- istrative reform, CEEE would carry out improvement programs relating to its organization and operations, particularly as regards planning, distribution practices, management reporting, budgeting and internal auditing (Part D of the Project Description, Schedule 2 to the draft Loan Agreement; Sections 4.05 and 4.06 of the draft Loan Agreement). These programs would be carried out with the assistance of consultants having qualifications and experience and under terms of reference satisfactory to the Bank (Section 3.02(b) of the draft Loan Agreement). Final terms of reference for such consultants would be furnished to the Bank as a condition of effectiveness of the proposed loan (Section 7.01(c) of the draft Loan Agreement). Financial History and Present Position 57. From 1976 through 1978 CEEE's rate of return on remunerable invest- ment averaged only 5.7% because DNAEE disallowed a portion of CEEE's operat- ing expenses and remunerable investment (para. 45). CEEE and DNAEE have reached an agreement on CEEE's remunerable assets and are negotiating an interim plan to reduce personnel expenses. The sector efficiency measurement study and the program to improve CEEE's operations being recommended in connection with the proposed loan (see paras. 47, 56, and 63) should provide a sound basis for DNAEE's regulation of CEEE in the future. DNAEE has agreed that until the efficiency measurement study (and the follow up tariff studies referred to in para. 48 above) are completed, it will accept the utility's expenses at a level not lower in real terms than those accepted for 1980 for the determination of CEEE's cost of service (Section 3.03 of the draft Guarantee Agreement). Despite its poor 1976-78 earnings record, CEEE was able to finance about 20% of its investment expenditures with its own resources (42% with total consumer-based resources), and cover its debt service with its gross internal cash generation by a satisfactory margin. This was possible because in the past CEEE invested less than the minimum requirements for system expansion, and the utility was favored by its low level of debt service. CEEE's 1976-78 average debt/equity ratio was about 40/60. This ratio is reasonable when considering that the weighted average repayment period for CEEE's outstanding debt of about 7-1/2 years helped finance investment with an average life of more than 30 years. To provide the Bank the opportunity to review CEEE's finances, until the completion of the project, CEEE would not incur any long term debt without the Bank's concurrence whenever its annual internal cash generation is less than 1.5 times its maximum future debt service requirement (Section 5.07 of the draft Loan Agreement). To further ensure that CEEE's financial soundness is maintained, CEEE would not carry out any major expansion other than the agreed program without giving the Bank evidence that such expansion is economically justified, that adequate financial resources are available and that it conforms to the power expansion program for the South/Southeast approved by ELETROBRAS (Section 5.05 of the draft Loan Agreement). - 19 - The Forecast 58. CEEE is faced with a prospective rapid growth in the demand for electricity. The overall growth rate forecast for the 1978-1984 period is 13.2% p.a. which is reasonable, although somewhat higher than the actual growth in the previous 4 years. The industrial sector is expected to increase its participation (from about 45% in 1978 to about 52% by 1984). Sales to the rural sector are forecast to have the highest growth rate (about 33% over the period 1978-84). On the basis of a possible program to replace diesel pumps (para. 64), sales to the rural sector would grow by about 42%; in this case, the overall growth rate would be about 14.2% for the period. CEEE has had problems in scheduling and planning its distribution investments because it does not require that large potential customers sign firm supply contracts. CEEE would require all customers, with an estimated demand of 10 MW or more, to sign firm supply contracts (see Section 4.07 of the draft Loan Agreement). The 1980-84 Investment Program 59. CEEE's construction program through 1984, of which the project is part, would provide the facilities required to serve the anticipated loads, mostly related to industrial growth. As some of CEEE's existing facilities are already loaded at or near their technical limit, failure to provide these facilities would lead to costly curtailments of supply. Part of the program would make public service electricity available to low income urban and rural customers. ELETROBRAS, ELETROSUL and CEEE have already reached agreement on part of CEEE's future expansion program for generation. CEEE is thus complet- ing construction of the 500 MW Itauba hydro station which went into service in 1978. Also under construction and expected to be in service in 1982 is the 320 MfW coal-fired station Presidente Medici B. 60. CEEE's present plans also include a 960 MW coal-fired station (Candiota III), the first two units of which would be in service in 1986 and a 125 MW hydro station (Dona Francisca) to be in service by about 1988. The investment between 1980 and 1984 in these plants would be about US$790 million (mid-1979 prices). ELETROBRAS has approved the Dona Francisca plant. However, CEEE has not yet demonstrated that these stations would be the least cost solution to the problem of adding capacity to the interconnected system, at the proposed dates or different ones. Consequently, they have not been included in CEEE's appraised program. However, if CEEE intends to proceed with Candiota III and Dona Francisca, the Bank would have an opportunity to review their justification under the limitation on major expansion projects (para. 57). In addition to the above program, CEEE has been requested by Rio Grande do Sul authorities to extend and/or reinforce its system during the same period to allow the substitution of electric motors for diesel motors used for rice irrigation throughout the State. This program would require a total of about US$340 million (mid-1979 prices) of CEEE investment to com- plete over several as yet undetermined number of years, but has yet to be proven economically justified and hence is not included in CEEE's program as appraised. CEEE would carry out a study of the economic justification, timing and optimum scheduling of the proposed conversion plan (Part C of Description of the Project, Schedule 2 to the draft Loan Agreement). CEEE, the State and the federal Government would exchange views with the Bank whenever it was - 20 - proposed, in any year, as a result of investment ceilings established for the sector and/or CEEE for such year, to reduce CEEE's presently approved 1980-84 expansion program by more than 10% in real terms (Section 5.05 (b) of the draft Loan Agreement and Section 3.04 of the draft Guarantee Agreement and Section 2.05 (b) of the draft Project Agreement). 61. CEEE's proposed expansion plans for transmission lines and sub- stations would allow it to transmit the energy to be generated by its existing and future plants and the purchases from ELETROSUL to its high voltage customers and to its distribution system. At the same time CEEE would improve the quality of its services as the program would allow the relief of CEEE's existing system, estimated to be presently overloaded at several critical points by about 6-10% at peak time, due to insufficient investment in the past. Rural Electrification and Low Income Connections 62. CEEE's program includes the connection of about 35,000 urban low income consumers and 12,000 rural customers, which CEEE would agree to carry out. To ensure that the potential urban low-income consumers are in fact connected and receive service, CEEE would offer financing, over a period of at least 18 months, for the household wiring and other items necessary for connection, as well as for connection fees (Section 3.06 of the draft Loan Agreement). The monthly payments, which would include the cost of up to 30 kWh, are not likely to exceed US$5.00, which is not expected to exceed 5% of the estimated household income of the lower 40% income group. The Project 63. The project would consist of a portion of CEEE's 1980-1984 trans- mission and distribution expansion program as well as (i) a study for the conversion from diesel to electric power for rice irrigation pumping; and (ii) an improvement program to strengthen the Borrower's operations, mainly as regards planning, distribution practices, management reporting, budgeting and internal auditing. The transmission and distribution portion of the project would consist of those items within the program which have been identified as of high priority, which are scheduled to be started after October 31, 1980 and completed not later than March 31, 1984, and for which the technical and economic justification is strong. A summary of these items appears in the loan and project summary at p. (i) above. Financing Plan and Project Cost Estimate 64. The project's estimated cost is US$314 million; the foreign cost amounts to US$114 million (36.3%), which would be financed with the proposed loan. The project cost estimate was prepared by CEEE's engineering staff using as a basis equipment and materials prices, as well as installation and construction costs, obtained from contracts made during 1978 and adjusted to prices prevailing in June 1979 through application of inflation coefficients. Goods to be financed by the Bank loan would be exempt from import duties and other taxes. The consulting services required have been estimated at US$10,000/ man-month, including subsistence and travel expenses. Physical contingency - 21 - allowances between 7 and 10% have also been used. These values are considered appropriate in relation to the type of project involved and degree of accuracy of the base cost estimate. The price contingencies have been calculated on the basis of assumed annual rates of price escalation of 14% for 1978, 12% for 1979, 10.5% for 1980, 9% for 1981, 8% for 1982, and 7% ther-after (in US dollar terms). A summary of project costs appears in the loan and project summary at p. (ii) above. 65. During the project's construction period (1980-84), CEEE's require- ments for funds (in constant June 1979 prices) would amount to about US$1,568 million (including working capital and interest during construction). CEEE's financing plan during this period appears sound. Consumer-based resources, consisting of CEEE's internal cash generation, customer contributions in aid of construction and reinvestment by the state and municipal governments of their proceeds of the sole tax, will cover about 28% of CEEE's financial needs. Borrowings (for the on-going projects, the proposed Bank loan, ELETROBRAS loans and commercial bank financing including the proposed co-financing operation) are expected to cover 68% of requirements and the remaining 4% will be covered principally by equity investments consisting of capital subscrip- tions by ELETROBRAS and the state of Rio Grande do Sul. 66. CEEE intends to secure by June 30, 1982 about US$110 million from one or more private banks under co-financing arrangements (Section 6.01(d) of the draft Loan Agreement). We propose to provide the usual co-financing links for the commercial bank financing with the proposed Bank loan. A summary of CEEE's financing plan for the period 1980-84 appears in the project summary above at p. (iii). Financial projections were prepared in constant June 1979 cruzeiros to maintain consistency with projections made by sector authorities. Conversion of local currency projections to US dollars has been made at the exchange rate on June 30, 1979 (US$1 = Cr$25.0). 67. The financial forecasts assume the reinvestment of dividends earned by ELETROBRAS and the state of Rio Grande do Sul and municipal governments during the construction of the project. The reinvestment of state government dividends and other projected equity investments are necessary to enable CEEE to maintain a satisfactory ratio between debt and equity financing. The state government, therefore, would reinvest in CEEE's capital stock all dividends received through the completion of the project, or December 31, 1984, whichever date is later (Section 2.03 of the draft Project Agreement). The state government would also provide all funds necessary to complete the project should CEEE's financial resources be inadequate (see Section 2.02 of the draft Project Agreement). Should funds provided by the state of Rio Grande do Sul be inadequate for carrying out the project, the federal Government would make arrangements satisfactory to the Bank for the provision of these funds (Section 2.02 of the draft Guarantee Agreement). Execution of Works 68. CEEE's own staff will prepare specifications and bidding documents and will carry out the necessary engineering and supervision of construction. This is acceptable as CEEE has experience in similar works. CEEE's procurement - 22 - department is well organized and fully capable of carrying out all of the necessary procurement activities. CEEE has already prepared most procurement specifications and no major delays are expected in the issuance of tender documents. CEEE expects that state-based contractors (of which there are many qualified to perform the work) will submit the winning bids for construction works. Installation of major equipment will be done in most instances by the suppliers, under CEEE staff supervision. Construction of short line extensions and some equipment installation will be performed by CEEE's own forces. Procurement and Disbursement 69. Procurement of equipment and materials to be financed by the Bank will be through international competitive bidding (ICB) in accordance with the Bank's guidelines. Manufacturers of equipment whose bids contain compo- nents manufactured in Brazil equal to at least 50% of the value of bid would be given a margin of preference of 15% or the applicable import duties, whichever is lower. Based on the outcome of ICB recently completed for similar projects, it is expected that Brazilian suppliers will be awarded about half of the value of the contracts placed through ICB. 70. Items not financed by the Bank loan include equipment and materials which are unlikely to attract foreign bids under ICB. Bulky items, such as wood (or concrete) poles, and civil construction materials, as well as mis- cellaneous hardware and connectors, are examples of the goods that CEEE would procure according to its normal competitive bidding procedures, which are satisfactory. A sufficient number of local suppliers are available to expect a satisfactory degree of competition. Local prices for these types of goods and equipment are about the same as in other countries and total project cost is not expected to increase due to local procurement. An estimated schedule of disbursements appears in the project summary above at p. (iv). The closing date would be September 30, 1984. Return on 1980-84 Investment Program 71. The return on investment was estimated as the discount rate that equates the present values of the benefits and costs associated with CEEE's 1980-84 investment program. Benefits were measured by the forecast revenues from the sales of electricity at the average retail level, using the tariff in effect on December 31, 1979 and CEEE's costs as of June 30, 1979 increased according to the inflation rate between June and December 1979. On this basis the internal rate of return is about 7%. A rate of return of about 12% is obtained when the benefit stream included sufficient transfers from the Global Guarantee Fund (para. 42) to enable CEEE to earn 10% rate of return on its remunerable investment and hence maintain its financial viability. Including these transfers, sensitivity analyses indicate that the internal rate of return - 23 - would be about 11% if program costs increase by 15% and that if program costs do not increase but benefits decrease instead by 10% or 20%, the return on investment would be about 10% and 8%, respectively. All results are based on economic efficiency prices for all costs except labor. The use of efficiency prices for unskilled labor would slightly increase the rate of return. The equalizing _Les obtained understate the real economic rate of return of the programs, because revenues from the sales of electricity are likely not to fully reflect the consumer's willingness to pay, or the indirect benefits to industry and commerce, whose production and employment depend on a reliable electri-,1tY 8tipply. 72. The project faces no major risks other than those normally associated with this type of project, i.e., delays due to lateness in the procurement and engineering process. A reasonable allowance for these has been included in the schedule and no major delays are expected. Additionally, there is a risk: that lack of adequate tariff increases in the future may lead to a deterioraLILtw of CEEE's financial position or a substantial postponement of its investment program. As noted at para. 56, CEEE is in the process of strengthening its organization and has agreed to engage consultants under the project to assist it in improving its efficiency. This should reduce the incidence of risk factors under its control. The Bank intends to monitor closely the Govern- ment's performance on maintaining adequate tariff levels, and the risk that it will not do so is believed to be acceptable. PART V - LEGAL INSTRUMENTS AND AUTHORITY 73. The draft Loan Agreement between the Bank and CEEE, the draft Guarantee Agreement between the Federative Republic of Brazil and the Bank, the draft Project Agreement between the State of Rio Grande do Sul and the Bank, and the draft Report of the Committee provided for in Article III, Section 4(iii) of the Articles of Agreement are being distributed to the Executive Directors separately. 74. Special conditions of the project are listed in Section III of Annex III. A special effectiveness condition is described at para. 56. 75. I am satisfied that the proposed loan would comply with the Articles of Agreement of the Bank. PART VI - RECOMMENDATION 76. 1 recommend that the Executive Directors approve the proposed loan. Robert S. McNamara President Attachments March 10, 1980 Washington, D.C. - 24- ANNEX I s3AIL - OCIL. tNDICASOU DAt SZE IN=ZIL WEUDLCI GLUPS (AODXSTZO AL 01 LhED FASA (flIOUSAMD SI. "M.1 - NOST UC2T UIT7IAT!) MY&L 35t2.0 SxaN SAE .XZT 8caU AC1CULtURAL 2026.3 IST UICWT COGAftiC tldCOtI 2ICOME 1960 /b 1970 0 ZST?ZNTA / UCl70 / c ou? & G0UP IA GYP PU CAPITA (USS) 320.0 580.0 1570.0 1124.4 l942.6 3073.3 ENUCY CONSUMPTION PER CAtITA (KiLOGZAMS OF COAL £QLIVALarT) 332.0 474-0 731.0 943.1 L646. 7 2518.6 PO0Pl82081 X7D-TZEAT 7(b3.ZOMS) 71.5 95.2 116.1 U&l PoPUAlTION (PUSCZUT OP TOML) 46.1 55.9 60.7. 59.3 51.2 72.1 POPULATION POJETIO.WS POPULTON O YEA 2000 (MILLIONS) 200.0 STATIONARY POPtLATION (9W.OUS) 341.0 NAR STA.TTOKAY POPULATIO.N IS EUCED 2075 POPULATION 53 D IST PER SQ. EN. 8.0 11.0 14.0 Z..5 23.2 33.5 ?M SQ. DI. AGRICULTURAL LAU D 44.0 49-0 57.0 80.5 100.5 91.3 POPULATION AGZ mSccrvz (PECENIT) 0-1.4 ru. 43.6 42.6 41.7 .0.9 35.4 33.3 15-64 YIlS. 13.S 56.3 55.1 54.4 56.3 57.5 65 Tit. An 309E 2.6 3.1 3.2 3.9 5.1 5.7 POPULATION 2ODM LATE (PERCZENT) TOTAL 3.0 2.9 2.9 2.4 1.7 2.1 oUAm 5.5 6.8 4.5 3.7 3.0 CaDE tRTI LtATE (PE 10OSD) 40.0 38.0 36.0 32.8 27.5 31.4 CRUDE D1TRt LATE (PE THOUSAND) 11.0 9.0 9.0 8.5 9.1 8.2 MOSS RZPPOWCTION LATE 2.6 2.6 2.4 2.4 1.8 1.9 FAMILY PLAININC ACCEPTOLS ANNUAL (TNOUSANDS) .. 1110- 203.6 USERS (PERCET o0 MARKIED WOI)) .. 1.6 .. 17.7 FOOD AND 7VTR 1104N INDEX o0 FOOD 74 D0WCTION PM CAPITA (1969-71-100) 89.6 102.0 120.0 99.4 102.0 98.7 PR CAPITA SUPPLY OF CALOItIs (PRCEIIT OF REQUIREMENTS) 102.0 104.0 105.0 107.0 120.8 112.7 PROTEINS (GRMS PE DAY) 61.0 64.0 62.1 60.4 80.9 70.3 0o WN3CR A4161 AND PULSE 38.0 39.0 33.6 28.3 31.3 CHILD (ACES 1-4) *45ALITT RATE 13.0 10.0 9.0 6.7 5.1 2.5 HEALTH Lin EXECTANCY AT 3RT (TAS) 57.0 61.0 62.0 63.6 65.6 68.7 INTANT 4ORTALITY SATE (PU HOUSAND) .. .. .. 76.1 45.5 20.8 ACCESS TO SAP! WATU (PRCIN'f of POPULATION) STOAL *- 56.3 77.1 63.4 69.4 73.9 SBAN .. 77.7 88.3 79.5 &5.1 9o6 RURAL .. 29.0 56.8 38.6 43.0 64.6 ACCESS T0 t=UTA DISPOSAL (PERCINT 0 POPULATION) OTAL .. 59.9 64.8 58.8 70.1 URBAN .. 86.1 83.7 77.8 8a.3 IDEAL *- 26.5 31.7 24.5 33.2 POFUL4AION PER PNYSICLAN 3600.0 1910.0 1650.0 1841.9 1343.2 981.8 POPUTAION PM NURSING PEON .. 3220.0 .. 933.7 765.0 397. 8 POPULATION PQ SlOSPITAL 3U TOTAL 275.0 260.0 260.0 563.4 197.6 240.6 VRJAN .. .. .. 279.4 260.2 IURAL - *- *- 1140.9 1.055.0 ADISSIONS PER HOSPITAL BED .. 18.0 .. 25.7 17.3 19.2 AVErGE SIZE OF HOUSEHOLD tVTAL 5.1 4.8 4.9 5.0 4. 7 UAN .. 4.6 4.7 4.8 4.4 RURAL *- 5.2 5.3 5.3 5.1 AVERAGE UMBRU oF ?`ESONS PER ROM TOTAL *- 1.1 1.1.lf 1.3 1.1 M7:AN *- 1.0 1.2/f 1. 3 1.2 RURAL .- 1.2 i.2 1.5 1.2 ACCESS -O CLEC11Y (?!UCC f Of DUfL.UIlCS) TOTALL 38.7 47.6 63.0 54.3 66.0 URBAN . 75.6 84.9 80. 1 55.1 RURAL1 . S. i 19.2 14. 2 - 25- ANNEX I Pfso 2 BBAZ --SOCIAL INDICATORS DATA SUllET BAZIL EFIRSU2CE CROUPS (A0JUSTED AVJRAGES - XiOSr BECEWI £5sIsr) SAE SMAE NEXT HEGHER MOST RECEN ZOGRAPNIC INCOME INCOME 1960 lb 1970 /b YSTIMATE /b REGION /c GROUP /d GROUP /a EDUCATION _ ADJUSTED ENROLLMENT RATIOS PRIMARY! TOTAL 95.0 83.0 90.0 107.3 101.7 107.6 OQkLE 97.0 83.0 89.0 109.1 110.0 FDtA1. 93.0 83.0 90.0 107.4 92.8 SECONDART: TOTAL 11.0 27.0 11.0 40.5 51.2 39.7 MALE 11.0 27.0 17.0 40.4 56.4 FM41L. 10.0 27.o 20.0 39.0 43.7 VOCATIONAL ENROL. (2 OF SZCNDALT) 19.0 17.0 47.0OL 18.5 J1.3 POIL-TIACIMR RATIO PRIMALY 33.0 28.0 22.0 37.1 27.1 SECONDARY 13.0 13.0 11.0 17.9 25.3 ADULT LITSACT RATE (PERCENT) 61.0 66.2 75.7 77.4 86.1 CONSUMPTION PASSENGER CARS PER ThOUSAND POPULATION 7.0 25.0 45.0 29.1 53.4 68.1 RADIO RECE'ERlS PER THOUSAND POPULATION 66.0 126.0 158.0 172.1 225.9 210.3 TV 1ECEIVE21S Pt, THOUSAND POPULATION 18.0 66.0 100.0 67.9 102.6 117.7 NTIWSAPE1 (iDAILT GENERAL INTERESTr) CIRCULATION PER THOUSAND POPUATION 54.0 37.0 39.0 76.1 78.5 CINEMA ANNUAL ATT2NDANCE PER CAPITA 5.0 1.9 2.6 - 4.2 3.6 LABOR FORCE TOTAL LAIOR FORCE (TWOUSANDS) 22700.0 29400.0 34100.0 FtALE (PERCEr) 17.5 20.4 21.6 21.5 24.5 27.2 AGRICULTL (PERCENT) 51.9 45.6 42.0 30.2 28.9 23.8 INDUSTRY (PERCEhr) 14.8 18.3 20.0 23.8 30.6 PARTAICIPATION RATE (PIRCENT) TOTAL 32.0 31.6 31.5 30.9 33.8 40.1 MALE 52.7 50.3 49.5 47.3 51.3 55.7 F2MAL£ 11.2 12.8 13.6 13.3 16.3 24.7 ECONOHIC DEPENDENCY RATIO 1.6 1.5 1.4 1.5 1.3 1.0 INCOME DISTRtBUTION ?ERCEST OF PRIVATE INCOME RECEIVED ST HIGHEST 5 PERCEt OF ROUSEROLDS .. .. .. 23.7 RICHEST 20 PERCENT OP HOUSEHOLDS 60.0 63.5 62.0 58.7 57.6 LOWEST ZO PtRCENT OF ROUSEHOLDS 3.8 3.2 2.8 2.9 3.4. LOWEST 40 PERCENT OF HOUSEHOLDS 10.8 9.0 9.4 9.9 11.0 POVERTY TARGET GROUPS 'STIISATED AR3SO7LE POVER1Y INCOME LEVEL (USS PER CAPITA) URBAN .. .. .. 265.6 RUtAL .. .. 150.0 185.1 ESTIMATED RELATIVE POVERTY INCOME LEVEL (USS PER CAPITA) URBAN .. 4. S65.0 196.3 550.0 RUMgAL .. .. 332.0 308.1 403.4. ESTTMATED POPULATION BELrOW ABSOLUTE POVERtY INCOME LEVEL (PERCENT) URBAN .. .. .. 35.2 RURAL .. .. .. 46.6 .Sac available Notc pplicabie. OES /a The adjusted group averages for each iudicator are paoultieon-vaightad SeomtriTt means, excluding the extreme values of choe tndcator and che acor populated country In each group. Coverage of countrIes among the Indicators dopends on availabilicy of daca and is wot usiform. /b Unless otherwise noted, data for 1960 refer to any year between 1959 and 1961; for ;970, between 1969 snd 1971; and for Most Recent Estimate, betvean 1974 and 1977. !c Latin .Narica & Caribbean; /d Upper Middle Income (51136-ZOO per capita, 1976): /. High Income (over S2500 per capita, 1976); /f 1972; ai 3egianing 1973, duration of general educacion reduced froo 7 to 1 years, therefore data may not be comparable to thoec of earlier years. Host Recant Zsciarts of GlP per capita is for 1978. Aut, 1979 -26- ANNEX I DEFINITIONS OF SOCIAL CINDICATORS 'ug e 3 ag.j: 'he ad!uated group averages for each indicator are population-weighted geometric means,..eciuding the extremte -aloen of the indicator ark tie most populated :ountry in each group. Coverage of -ountries among -he indicators depends on aveilahilicy of data land ;s not nIfo-m Due to lack of _ota, group averages for Capital Surplus Oil Exporters and indicators of access to water and excreta disposal, ou...irg, unuedistribution and poverty ar sinpla population-weighted geometric means, without the exclusion of extreme vsa LAND AREA :tbousand sq. km) population per hospital bed - total, urban, and roral- uloc tt. Total - Totai surface area comprising land area and Inland waters, urban, and rural) divided by their respective nuber of hspItl -eds Agriz.ltural - Mtost recent estimate of agrucultural area used temporarily available in public and private general and speclalizek -05(1:a! ac- 'o- or permanently for crops, pastures, market and kitchen gardens or to habilitation centers. Hospitals are escablishmntoc permanently scu-fed hm, Lie fallow, at least use physician. Estabishment _-.'dIng principally c-otoulal care are not incladed. Rural hospitals. -.wver, include health sod nedi- GNPF PER CAPITA (US$) - GNP per capita estimates at current market.prices, cal centers not permanently staffed by a phvsIcian (hut by a medical as- calculated by same cOaversion method as World Bank Atlas (1975-77 basis); sirsto.t nurse. midwife, etc.) which offer in-patient accoemodation and 1960. 1970, and 1977 data, provide a limited range of medical facilities. Admissions per hospital bed - Total number of admissions to or discharges W5XRY CONSUMPTION PER CAPITA - Annual consumption of commarcial energy, from hospitals divided by the nuber of beds. (coal and litnite, petroleum, natural gas and hydro-. nuclear and gao- tharmel electricity) in kilograms of coal equivalent per capita. HOUISING Average sloe of household (persons per hou.. hold) - total, urban, and rrl POPULATION AND VITAL. STATISTICS A, household consists of a group of Individuals who share living quarters Tota population, mid-year (millions) - As of July 1; if sot available, and their main meals. A hoarder or lodger may or may not he lncluded in average.o two end-pear estimates; 1960, 1970, and 1-977 data. the household for statistical purposes. Statistical defiaitions of house- Urban population. (percent o f total) - Kati. of urban, to total popula- hold vsry. non; different dsfinitions of urban areas may affect comparability Averaze number of persons per room - total, urban, end rural - Average num- of data Motg countries, bet of persons par room is all. urban, ond rural occupied comoentional Population density dwellings, respectively. Dhaellings exclude non-permanent str,ictures and Per sq. km. - Mid-year population per squrar kilometer (100 hectares) uno.copied parts. of total area. Access no electricity (percent of dwellings) - total, urban. and rural- Per so. am. agriculture land - Computed as above for agricultural land Cormentiosal dwellings with electricity in living quarters as percentage only. of total, urban, and rural dwellings respectively'. Population ass structure (percent) - Children (i-lb years), -erking-age (15-64 year) and retired (65 years and over) as percentages of mid- EDUCATION year popuiation. Adjusted enrollment ratios Population growth rate (percent) - total, and urban - Compound annual Primary school - total, and faemle - Total and female .nrolilsont of all aecs growth mates of total and urban mid-year populations for 1950-60. at the primary level am percentages of respectively primary school-sos 1960-70. and 1970-75. populations; normally includes children aged 6-l1 years hut adjusted for Crude birth rate (per thousand) - Annual live births per thousand of different lengths of primary education; for countries with urinersal edu- aid-year Popnl.ation; rem-year arithmetic av,erages ending in 1960 and cation enrollment may exceed 100 percent since some pupils dr. below or 1970 and five-yer average endlng in 1975 for meet recent estimate, above the official school age. Crsde death rate (per thousand) - Annual deaths per thousand of mid- Secondary school - total, and female - Computed as above, secondary educa- year population; ten-year arithmetic averagss ending in 1960 and 1970 tion requires at least four years of approved primary Instruction; pro- anA fie-lyear average ending in 1975 for most recent estimate. vides general vocational, or teacher training instructions for pupils Gross reproduction rats - Average number of daughters a woman will bear usually of 12 to 17 years of age; correspondence corses are generally in her normal reproductive period if she experiances present age- excluded. specific fertility, rated-, usually five-yer averages ending inL 1960, Vocational enroll1ment (percent of secondary) - Vocational tnstitutions in- 1970, and 1975. cdud technical, industrial. or other Programs whicb operate independently Pemily planning - acpcpors, annual (thousands) - Annual number of or am departments of secondary institutions. acceptors of birth-control devices under auspices of national family Pupil-teacher ratio - primary. and secondary - total students enrolled in planing program. primary and secondary levals divided by num,bers of teachers in the corre- rami.ly planning - users (percent of married woman) - Percentage of pondlng levels. married woman of child-bearing age (15-44 years) wise us birth-control Adult literacy rate (percent) - Literate adults (able to read and write) as device. to all married women in same age group, a percentags of total adult population aged 15 years and over. POOl AND NUTIMON CONSUMPTION Index of food production per capita (1970-100) - tbdsx numer of per Pasl as(e h.ad ouain - Passenger cars comprise motor curs capita annual1 production of all food commodities. seating less than eight persons;: excludes ambulances, hearses and nilit-r Per capita supply of calories (percent of requirements) - Compte from vehicles. inergy equivalent of nen food suppliae available in country per capita Radio receivers (per thousand population) - All types ofrceer for radIo per day. Available supplies comprise domestir production, imports less broadcasts no g .n.ra1 publIc per, thousand of populstion; e-oudes ulicensca exports, and changes in stock. Net supplias exclud. animal feed, seeds, receivers En countries and in pears when registration of radio sets .as in quntmities ueed in food processing, and losses. in distribution. Re- effect; data for recent years may nor he comparable since most coun.tries quiraments w-re estimsted by PAO based on physiological needs for sot- abolished licensing. mel activity and hasith considering envirouenstaal temperature. body TV receivers (per thousand populaticn) - TV receivers f.r broadruot noc eer weights, age and sex distributions of population, and allowing 10 per- public per thousand population; excludes unlicensed TV receivers iocn r cent far wast at h-oushold level, tries and in ye.ar when registration of TV sets was in affect. per Capita Supply of protein (gam pr day) - Plrotein content of per Newspaper circulation (par thousand population) - Shows the average loua caspita net supply of food per day.eNret sapply of food Is defined as tnon of "deil-y general interest newspaper', defined an a period-cal pubil- above. Requairements for all countries established by USDA provide for cation devoted primarily to recording general news. It Is considered to a minlasa allowanc of 60 grmsi of total protein per day and 20 gream be "daily" if it appears at le.ast four times a week. of animal and pulse protein, of which 10 grams should be animal protein. Cinema annual attendance pe- -apic. per rear - Hosed on toe number of tlikets The-s standards are lower than those of P5 grams of total protein and sold during the year, inoludIng admissions to driv-in cinemos and ..bhll 23 grnes of animal protein as an average for the world, proposed by units. PiG in the Third World Food Survey. Per capita protein supply from animal and pulse - Protein supply of food MLSFOYSIENT derived from animal and poises in grams per day. Total labor forte (thousands) - Economically active persons. .ncluding .armd Child (sass 1-b) mortality rate (par thousand) - Annual deaths Per thous- fortes and unemplo..ed but socluding housewives, studeots. arc- DoIl.i- and in age group i-b years, to children 1n this age group. tions in varicus rountries are not -oparahle. Female (percent) -Female labor force as percentage of total (sorborte HEATh Agriculture (percent) - Labor force in farming, forestry, bunting and fishlng life expetancy at birth (years) - "Avrage number of years of life as percentage of total labor force. rema1Inng at birth; usually five-ya averages ending in 1960, 1970, Industry (percent) - l-abor force in mninig, construction, manfacturing and and 1975. electricity, water and gas as percentage of total labor forc.. Infant mottelity rats (per thousand) - Annual deaths of infants under Participation rate (percent) - total, male, and female - Total, male, and one year- of age Per thousand live birhts. lemale labor force as percentages of their, respe-tiv-oultos Access to safe water (percent of population) - total, urban, and rural - These ars 1LO0s adjusted participation rates reflectingae-e Somber of peopi (total, urban, and rural) with reasonable access no st,ructure of the pop.iatio- -od long time trend. safe enter supply (includes treated surface wtatrs or untrested but Economic dependenc- ratio - Ratio of population under 1.5 and 6if and overt uncontaminated. water such as that from protected boreholas, springs, the l-abor forcs in age group of I-5-6. years. and eamitary wells) as percentages of their respective populations. Im am arbmn area a public fosmtain or standposn located not more INCOME DISTRBIUTION than 200 meters froma a housea mam bs considered as being within rea- Percentage of privats income (both in cah and kind) received by richest I sonable, accses of that bosse. In rural areas reasoamble access would percent, richest 20 Percent. Poorest 20 percent, and poorest 40 percent Imply that the housalei or ambers of the household do not have to of households. spend a diaponportiamate port of the day in fetching the family's enter needs. POVERTY TARGET CRIUPS Access In excrtene disposal (percent of population) - total, urban, and Estimated absolute poverty income level (USS per capita) - raron sod rua=- rural - Nombat of psopl. (total, urban. and rural) served by e..r.t.t Absolute poverty bocoms level is that Income levei Oels.whioo a aiOr- disposl ase percentge of their rasp-cti- populanions. Excrete nutritionally adequate diet plus essen tial non-food tesreon i c disposal may include the collection and disposal, with or without affordable. tredanmta, of humem excrete. and easte-lvtner by water-borne systems Etmated relative po-erty Income level ('JSS per capita) - urbanuorr. -a or the use of pit privies snd similar installations. Relativetpoverty incomeolevel is.thati income level lass ron. ono-thord Population pse physvician - Population divldad by somber of practicing per capita persoal incon of thi -uoatry. phrysicin- qualified from a medical school at university level. Estimated population below oovertv I-ncome level v,ercent) - uroac. and rcral Population par nursing nerson - Population divided by number of Percen t of pplto (urban and rura) who are euth-r absolute poor", practicing male and femal. graduate nurses, practical nurses., and rltv poor" whiuh.ver is gre.ate. assistantnues Economic and Social Data Oirosion toononic Analysis and roennsDepartmen.t 00 0-nnin- z z00oo 0 LO n0 w D 00 00005<0 0Fa 0000 ID> sO 0010 0 005' 05'00 30000000 0 000 00 Q00 n~ n 0n n 0.105 0 W 0W0 D 000. W oDQ w3O D oO WAw OwnIXp Onn 0 0 00 0 0000 0 0^ Cl D00 w=g8 M < 3zg0 3PY | S°g= =HD Eoo go¢ ew 0.,0 Oo oOo oi. o ' >os0 00 00. 0o l oo0 t g n:° oa0-1 00EooE 001E np n"fizE 0E D ~ ~ ~ , r 0 n0n-::pU X l 5la 0 0 00 8 ~ 000 9 ot2r>o0.wZ3EcnS E>XxEr =0 1 E0Q - 002 -n 0° 0 W( 00 00 W 00003_0a R=i< nt n~~~0 0 0 100 n0n gC1 r1 P__OnW9 nO : il nv Og gg =' Po 0 i O, 0 0' 00 0 0 <0x0 0 0 - 0 0 0 0. 00 0. 0 0 0.0 0 0 . 0000.0. 0 00. 0 0 0. 0 000 00 5.0 0 00'.. I~~~~ oooo0 0w 000 00000o0 O w rww r-rn 0 ~ ~~~~~~~~ ~ ~ ~ 00.00.0 > j 0 0D S ~ ~~~ ~ ~ ~ 0 r0 0r 0 0 0 OiOO o 0 oreso r OO?OO- W DUW N W W0 ooOo 0 wa OCo o~O 0000000 s I~~~~~~~0000 00 00000. ANNEX I -28 - Page 5 BALANCE OF PAYMENTS AND EXTERNAL ASSISTANCE (Million us$) A C T U A L P R O J E C T E D 1974 1975 1976 1977 1978 1979 1988 1985 1990 A. Summary of BalanIe of Payments 1. Exports (incl. NFS) 8,471 9,376 10,797 12,808 13,794 16,145 18,322 40,483 85,913 2. Imports (in-l. NFS) 14,678 14,308 14,475 14,020 16,133 19,787 23,453 40,629 81,284 3. Resource sSBence -6,207 -4,932 -3,678 -1,212 -2,339 -3,642 -5,130 -146 4,629 4. Net Factor Service Income - 916 -1,770 -2,339 -2,825 -3,624 -4,883 -6,353 -12,171 -18,886 1. Net Interest Payments - 652 -1,498 -1,809 -2,104 -2,695 -3,625 -4,990 -10,005 -15,442 B. Direct Inv-etment Income - 248 - 235 - 380 - 455 -564 -542 -590 -1,030 -1,775 o. Other Factor Service Income - 16 - 37 - 150 - 266 -365 -716 -773 -1,136 -1,670 5, Crrent Transfers (Net) 1 2 4 - 72 7 7 7 7 6, Balance on Current Account -7,122 -6,700 -6,013 -4,037 -5,891 -8,518 -11,477 -12,310 -14,250 7. Net Private Direct Invest-ent 887 892 962 810 906 1,000 1,000 1,000 750 8. Medium- and Long-Term Leans a. Traditional S-urc-s9' (i) Disbursements 1,956 1,612 2,054 2,553 2,391 3,661 4,075 6,908 11,264 (ii) Amortioation - 739 - 992 -1,350 -1,701 -1,762 -1,646 -1,936 -4,296 -6,961 (iii) Net Disbursements 1,217 620 703 852 629 2,014 2,139 2,612 4,302 b. Financial Credits (i) Disbursements 5,103 4,524 5,978 5,940 11,312 6,654 14,786 19,659 31,669 (ii) Anortization -1,181 -1,194 -1,669 -2,426 -3,408 -4,150 -5,604 -10,097 -20,142 (iii) Net Disbursements 3,922 3,330 4,309 3,514 7,904 2,504 9,182 9,562 11,526 9. Use of IMF Resources - 7 - - 10. Short-tern Capital and Capital n.e.i. 138 789 2,294 - 440 332 - - - - 11. Reserves (-= innreasM a, Reserve Accumulatiin- 958 1,062 -2,255 - 699 -3,880 3,000 -847 -864 -2,329 b. Dollar Valuatlion Adjustment 185 176 - 252 - 16 -739 - - - - c Changes in Reserve LevelS! 1,143 1,238 -2,507 - 715 4,619 3,D00 -;847 -864 -2,329 12. Foreign Exchange Reserves 5,272 4,034 6,541 7,256 11,875 8,875 9,722 13,551 22,499 (End of Period) B. Grant and Loam Commitments (prelisin-ry) 1. Total M< Loans 7,094 6,602 9,536 8,949 15,249 1.1 IBRD 242 426 498 425 688 1.2 IDB 203 167 186 270 283 1.3 Governments 433 109 1,305 395 169 1.4 Suppliers 1,088 1,376 1,300 1,100 1,857 1.5 Bends 25 - 269 819 940 1.6 Financial Credits 5,103 4,524 5,978 5,940 11,312 C. Memorandum Items 1. Grant Elemeet of Total Commitments 2.5 2.5 2.5 2.8 ... 2. Average Interest (Percent) 9.5 9.5 9.4 9.3 8.2 3. Average Maturity (Yearn) 9.0 9.9 8.3 8.9 10.6 a/ Inclodes multilateral agencies, bilateral lenders, suppliers' credits and bond issues. h/ IFS Lime 79d. o/ IFS Line ld. Ja.nuary 9, 1980 .not available -29 - ANNEX 1 Page 6 DEBT AND CREDITWORTHINESS Actual 1974 1975 1976 977 1978 A. Medium- and Long-Term Debt (Disbursed only) 1. Total Debt Outstanding (end of period) 17,166 21,171 25,985 32,037 43,511 a. By type of Debt (1) Financial Credits 11,211 14,561 18,194 21,528 29,500 (2) Traditional Lendersa/ 5,955 6,610 7,791 10,509 14,011 b. By type of Borrower (1) Public and Publicly Guaranteed 8,533 11,461 14,852 19,309 27,223 (2) Private 8,633 9,710 11,133 12,729 16,288 2, Net Debt Service 2,572 3,683 4,825 6,231 7,865 a. Total Interest 1,370 1,863 2,091 2,462 3,342 b. Net Interest 652 1,498 1,810 2,103 2,695 3. Public Debt Service 1,287 1,550 1,982 2,505 3,933 B. Debt Burden 1. Net Debt Service Ratio_/ 30.4 39.3 44.7 48.6 57.0 2. Total Net Debt Service Ratioc/ 33.3 41.8 48.2 52.2 63.8 3. Public Debt Service Ratio 15.2 16.5 18.4 19.6 28.5 4. Liquidity Ratio4/ 23.0 33.3 43.0 39.2 46.2 5. Net Debt Service/GDP 2.3 3.0 3.3 3.8 4.1 6. Public Debt Service/GDP 1.2 1.3 1.4 1.5 2.1 7. Total DOD/GDP 15.6 17.1 17.8 19.3 22.0 C. Terms 1. Interest on Total DOD/Total DOD-/ 10.9 10.9 9.9 9.5 10.4 2. Net Debt Service/Total DOD!/ 20.5 21.5 22.8 24.0 24.5 D. Dependency Ratios for M< Debt 1. Gross Disbursements/Imports (incl. NFS) 48.1 42.9 55.5 60.6 84.9 2. Net Transfer/Imports (incl. NFS)_/ 25.7 14.6 20.2 13.6 32.2 3. Net Transfer/Gross Disbursements 53.4 34.0 36.4 22.4 37.9 E. Exposure 1. IBRD Disb./Gross Total Disb. 3.5 4.1 2.2 3.5 2.0 2. IBRD DOD/Total DOD 4.9 5.2 5.0 4.8 3.7 3. IBRD Debt Service/Net Debt Service 3.0 2.5 2.4 2.9 2.6 F. External Debt (Disbursed Only) Outstanding December 31, 1978 Amount Percent 1. IBRD 1,974 4.5 2. Other Multilateral 911 2.1 3. Governments 3,153 7.2 4. Suppliers 5,343 12.3 5. Bonds 2,380 5.5 6. Financial Credits 29,500 67.8 7. Other 250 0.6 8. Total MELT Debt 43,511 100.0 9. Total Public M< Debt 27,223 62.6 a/ Includes multilateral agencies, bilateral lenders, suppliers' credits, bond issues and M< Loans n.e.i. b/ Net Debt Service as percent of exports of goods and NFS. c/ Including Direct Investment Income in debt service. d/ Net Debt Service as a percent of exports of goods and NFS plus exchange (at beginning of year) in excess of 3 months imports. e/ As percent of DOD at beginning of year. f/ Net transfer is equal to total net disbursements minus gross interest. ... not available Note: Debt service ratios have been calculated on the basis of net ratber than gross interest payments in order to take into account interest earned upon Brazil's international reserves. January 9, 1980 - 30 - ANNEX II Page 1 THE STATUS OF BANK GROUP OPERATIONS IN BRAZIL A. SUMMARY STATEMENT OF LOANS (As of January 31, 1980) Amount less Loan # Year Borrower Purpose Cancellations Undisbursed (US$ Million) Forty-five loans fully disbursed 1,485.0 756 1971 Brazil Ports 45.0 5.7 853 1972 Brazil Land Settlement 6.7 .1 923 1973 Furnas Centrais Eletricas - Power 125.0 17.2 Itumbiara 924 1973 Brazil Agro-Industry 42.3 15.1 1008 1974 Cia. Hidro Eletrica do Sao Power 81.0 24.0 Francisco-Paulo Afonso IV 1009 1974 Banco Nacional da Habitacao Water Supply 36.0 1.1 1067 1974 Brazil Education 23.5 13.7 1074 1975 Rede Ferroviaria Federal Railways 175.0 18.4 1075 1975 Brazil Roads 110.0 27.2 1151 1975 Companhia Siderurgica Nacional Industry 95.0 54.1 1152 1975 Companhia Siderurgica Paulista Industry 60.0 51.3 1153 1975 Brazil Agriculture 23.0 11.8 1171 1975 FEPASA - Ferrovia Paulista Railways 75.0 27.0 1195 1976 Brazil Rural Development 12.0 10.8 1206 1976 Brazil Development Bank 35.0 7.0 1207 1976 Brazil Feeder Roads 55.0 47.6 1249 1976 Brazil Agriculture 40.0 30.5 1256 1976 Petrobras Fertilizantes Fertilizer 50.0 2.2 1257 1976 Companhia Paranaense de Power 49.0 12.6 Energia Eletrica - COPEL - 31 - ANNEX II Page 2 A. SUMMARY STATEMENT OF LOANS (Continued) (As of January 31, 1980) Amount less Loan # Year Borrower Purpose Cancellations Undisbursed (US$ Million) 1300 1976 Eletrobras Power 50.0 23.9 1302 1976 Brazil Nutrition 19.0 17.0 1309 1976 Banco Nacional da Habitacao Water Supply 40.0 25.4 1317 1976 Brazil Agro-Industry 83.0 83.0 1343 1977 ELETROSUL Power 82.0 42.5 1362 1977 State of Minas Gerais Rural Development 42.0 21.6 1406 1977 Petrobras Fertilizantes Fertilizer 64.0 54.3 1411 1977 Fertilizantes Vale do Fertilizer 82.0 39.9 Rio Grande S.A.-VALEFERTIL 1452 1977 Brazil Education 32.0 29.1 1488 1977 Brazil Rural Development 17.0 14.5 1525 1978 Banco Nacional da Habitacao Sewerage 110.0 102.0 1537 1978 Brazil Rural Development 24.0 22.3 1538 1978 ELETROBRAS Power 130.0 129.9 1557 1978 Brazil Roads 114.0 112.7 1562 1978 COPESUL Petrochemicals 85.0 74.8 1563 1978 Brazil Urban Transport 88.0 77.8 1568 1978 Brazil Agric. Extension 100.0 97.6 1589 1978 Brazil Rural Development 37.0 35.4 1654 1979 Banco Nacional da Habitacao Sites & Services 93.0 93.0 1656 1979 Banco Nacional da Habitacao Water & Sewerage 100.0 100.0 1660 1979 Valesul Aluminio S.A. Aluminum 98.0 92.0 1714 /1 1979 Brazil Rural Development 26.0 26.0 1720 /2 1979 Brazil Urban Development 70.0 70.0 1721 1979 COPEL Power 109.0 109.0 1728 /1 1979 Brazil Rural Development 40.0 40.0 1729 1979 Brazil Irrigation 28.0 28.0 1730 1979 Brazil Roads 110.0 110.0 Total 4,496.4 /3 Of which has been repaid to the Bank 599.4 Total now outstanding 3,897.0 Amount sold 45.8 of which has been repaid 41.8 4.0 Total now held by Bank 3,893.0 Total undisbursed 1,961.0 /1 Became effective on February 5, 1980. /2 Not yet effective. /3 No IDA credits have been made to Brazil. - 32 - ANNEX II Page 3 B. STATEMENT OF IFC INVESTMENTS (as of January 31, 1980) Fiscal Year Obligor Type of Business Amount in US$ million Loans Equity Total 1957 Siemens do Brasil Cia. de Eletricidade Electrical Equip ant 2.00 - 2.00 1958 Olinkraft, S.A. Celulose e Papel Pulp and Paper 1.20 - 1.20 1958 D.L.R. Plasticos do Brasil, S.A. Automotive Parts 0.45 - 0.45 1958 Willys-Overland do Brasil, S.A. Industria e Comercio Motor Vehicles 2.45 - 2.45 1959 Companhia Mineira de Cimento Portland, S.A. Cement 1.20 - 1.20 1959 Champion Celulose, S.A. Pulp 4.00 - 4.00 1966/1968/ 1972 Acos Villares, S.A. Steel 8.00 1.93 9.93 1966/1969 Papel e Celulose Catarinense, S.A. Pulp and Paper 3.78 3.41 7.19 1967/1972 Ultrafertil, S.A. - Industria e Comercio de Fertilizantes Fertilizers 8.22 3.03 11.25 1969 Petroquimica Uniao, S.A. Petrochemicals 5.50 2.88 8.38 1970 Poliolefinas, S.A. Industria e Comercio Petrochemicals 5.50 2.88 8.38 1971 Oxiteno, S.A. Industria e Comercio Petrochemicals 4.60 1.44 6.04 1971 Rio Grande - Companhia de Celulose do Sul Pulp 4.90 - 4.90 1972/1975 Companhia de Cimento Nacional de Minas Cement 29.14 3.20 32.34 1973/1974/1977 Companhia Siderurgica da Guanabara - COSIGUA Steel 76.97 7.50 84.47 1973 Capital Market Development Fund - FUMCAP Capital Market Development 5.00 - 5.00 1973/1978 Empresa de Desenvolvimento de Recursos Nickel Mining and Minerais - CODEMIN, S.A. RefiningM 85.00 8.34 93.34 1974 Industrias Villares, S.A. Elevators and Indus- trial Equipment 6.00 - 6.00 1974 Fabrica de Tecidos Tatuape, S.A. Textiles 31.00 - 31.00 1975/1979 Capuava Carbonos Industr1as Ltd. Carbon Black 6.18 1.9 7.37 1975 Oxiteno Nordeste, S.A. Petrochemicals 10.00 - 10.00 1976 Santista Industria - Textil do Nordeste, S.A. Textiles 6.45 1.00 7.45 197611980 Tecanor S.A. - Textil Catarinense do Nordeste Textiles 16,20 - 16.20 1977 FMB S.A. Productos Metalurgicos Iron and Aluminum Castings 20.00 - 20.00 1977 Mineracao Rio do Norte S.A. Mining 15.00 - 15.00 1978 Cimetal Siderurgia S.A. Iron and Steel 7.0 3.0 10.0 1979 Volvo do Brasil Motores e Veicules S. A. Motor Vehicles 60.00 5.00 65.00 1980 Hering do Nordeste S. A. - Malhas Ready-made Garments 2.00 - 2.00 1980 Bende do Para S/A - Benpasa - Agricultura, Industria e Comercio de Oelaginosas Palm Oil 3.50 1.00 4.50 1980 Villares Industrias de Base S. A. - VIBASA Iron and Steel 5.00 - 5.00 Total Gross Commitments 436.24 45.80 482.04 Less Cancellations, Terminations, Repayments and Sales 321.15 8.52 329.67 Total Commitments Now Held by IFC 115.09 37.28 152.37 Total Undisbursed 135.75 10.05 145.80 - 33 - ANNEX II Page 4 C. PROJECTS IN EXECUTION 1/ As of January 31, 1980, there were 43 effective Bank loans under disbursement: Loan No. 756 Santos Port Project: US$45 million loan of June 21, 1971; Effective Date: October 29, 1971; Closing Date: September 30, 1980. After long delays, project execution is proceeding satisfactorily Project completion is now expected by end-1980. The financial condition of the port of Santos has improved. Price escalation for civil works continues to increase the project cost. All of the increase is in local currency and is expected to be covered by addi- tional allocations from Brazil's federal port authority, PORTOBRAS. 853 Alto Turi Land Settlement Proiect: US$6.7 million loan of July 24, 1972; Effective Date: February 15, 1973; Closing Date: December 31, 1980. The now completed road component of the project was reduced from the original 306 to 238 km. Other aspects of the project are also nearing completion and 8,000 families have settled in the project area, more than half already receiving full project services. However, the project has taken longer than expected to complete, having been subject to administrative delays in the release of public funds, unforeseen legal complications in transfer- ring land titles to settlers, and cost overruns presently amounting to about 240%. The Closing Date for this loan has been postponed to December 31, 1980 to allow the Borrower sufficient time to meet final payments on equipment contracts. 923 Itumbiara Hydroelectric Project: US$125 million loan of August 1, 1973; Effective Date: October 30, 1973; Closing Date: December 31, 1982. The project is about 75% completed. Major procurement has been completed. However, commissioning of the units is expected to be delayed about 6 months behind appraisal estimates, due to geological problems and very heavy rains which delayed construction of the earthfill dam. The present cost estimate is about 54% over the appraisal cost estimate, 10% of which is due to the need for increased physical quantities due to geological problems. The rest of the increase is due to a substantial increase in the size of the transmission works and to an increase in the cost of civil works. 1/ These notes are designed to inform the Executive Directors regarding the progress of projects in execution, and in particular to report any prob- lems which are being encountered, and the action being taken to remedy them. They should be read in this sense, and with the understanding that they do not purport to present a balanced evaluation of strengths and weaknesses in project execution. Page 5 Loan No. 924 Agro-Industries Credit Project: US$54 million loan of August 1, 1973; Effective Date: March 11, 1974; Closing Date: June 30, 1979. Disbursements for sub-loans totalling US$14.7 million were made during 1975-76 under procedures which were not in accor ince with the Loan Agreement. These funds have now been prepaid by the Govern- ment, reducing the effective loan amount to US$39.3 million. Commit- ments under this loan are almost at a standstill as a result of competing credit lines at subsidized rates and a general slow-down in industrial investments. Sub-loan commitments and disbursements are more than 2 years behind schedule. The original Closing Date was postponed once--from December 31, 1978 to June 30, 1979. In view of the slow disbursement, and the fact that commitments under Loan No. 1317-BR had not yet started, the Bank has decided to allow the Closing Date to lapse, and has cancelled the amount of US$11,737,035.97, corresponding to the uncommitted balance of Loan No. 924-BR as of June 30, 1979. The Borrower will be permitted to draw down until June 30, 1980 up to the amount of US$16,537,353.30, corresponding to the amount of Loan No. 924-BR committed as of June 30, 1979 against approved sub-projects but not yet disbursed as of that date. 1008 Paulo Afonso IV Hydroelectric Power Project: US$81 million loan of June 17, 1974; Effective Date: April 15, 1975; Closing Date: December 31, 1980. Resettlement of the 9,700 families displaced by the Sobradinho reservoir has been satisfactorily completed, and new towns and villages to house the displaced population have been con- structed. The construction of the underground power station and Sobradinho Dam is proceeding on schedule. Construction of the transmission lines and sub-stations is about 12 months behind schedule. The original Closing Date of December 31, 1978 has been postponed to December 31, 1980. 1009 Minas Gerais Water Supply Project: US$36 million loan of June 17, 1974; Effective Date: January 9, 1975; Closing Date: August 15, 1980 This project is substantially completed. As of November 30, 1979, 97% of the loan proceeds had been disbursed. The project has financed 41 subprojects in the capital city, Belo Horizonte, and in other cities and towns. The Closing Date for this loan was postponed to August 15, 1980 so that the borrower can meet final payments on equipment contracts. 1067 Second Education Project: US$23.5 million loan of December 27, 1974; Effective Date: April 17, 1975; Closing Date: June 30, 1981 Project execution is one year behind schedule mainly because of delays by the government in providing counterpart financing. Project imple- mentation units in all eight project states and these, together with the main project unit, PREMEN, are working well. The pre-investment studies in the Northeast, financed under the loan, have been completed and have yielded useful information for future sector investment planning. The original closing date of December 31, 1979 has been postponed to June 30, 1981. - 35 - ANNEX II Page 6 Loan No. 1074 Second Railway Project: US$175 million loan of January 17, 1975; Effective Date: June 17, 1975; Closing Date: June 30, 1981. Cost estimates for the Investment Plan, of which the project is a part, have increased substantially on several items. Therefore, the Plan has been revised and several items have been deleted or postponed. This revision is not expected to affect significantly the items included under Bank financing. -Although the financial situation of the borrower has improved, further improvement is necessary for it to be able to effectively carry out its investment program. 1075 Fifth Highway Project: US$110 million loan of January 17, 1975; Effective Date: May 15, 1975; Closing Date: December 31, 1981. Project execution is proceeding satisfactorily. Roadworks are progressing well, and detailed engineering studies for road con- struction and road rehabilitation are completed. Implementation of the road weighing station program and the maintenance component is making progress after some initial delays. The closing date originally December 31, 1979 has been postponed to December 31, 1981. 1151 CSN Steel Expansion Project - Stage III: US$95.0 million loan of August 4, 1975; Effective Date: April 30, 1976; Closing Date: December 31, 1982. The latest cost estimate is US$3,530 million, an increase of about 67% over the appraisal estimate due to a slower than expected start of project implementation, higher than expected construction costs, difficulties in holding the scope of the project to its essentials, some problems in the management of the expan- sion program, and funding shortfalls from the federal government. The new Government has reassigned priority to the steel sector, and no further financial difficulties are envisaged. Substantial changes were made resulting in better management and control of the project. The project remains economically justified. 1152 COSIPA Steel Expansion Project - Stage III: US$60.0 million loan of August 4, 1975; Effective Date: March 4, 1976; Closing Date: June 30, 1980. Because of the delay in the Stage II project, the Stage III project was revised with the assistance of consultants. Stage III has been proceeding at a reduced pace in part because of uncertainty of Government allocations of the necessary funds to fully finance the project. However, with the assurance that sufficient federal funding will be available beginning in 1980, no further delays are envisaged. The revised project cost is US$1.7 billion which is 44% above the appraisal estimate. However, the project remains economically justified. - 36 - ANNEX II Page 7 Loan No. 1153 Lower Sao Francisco Polders Project: US$23.0 million loan of August 4, 1975; Effective Date: November 25, 1975; Closing Date: December 31, 1982. Construction on this project was delayed because of heavy rains in the project area, and serious flooding in February/March 1979 has further delayed project progress. Current cost estimates show an increase of at least 80% over the appraisal estimate of US$56.5 million. These increases have resulted from design changes, rapid increases in the costs of civil works and equipment, and in the cost of land expropriation. Further adjustment in project composition is being considered in view of the 1979 floods. The closing date has been postponed to December 31, 1982. 1171 Third Railway Project (FEPASA): US$75.0 million loan of November 12, 1975; Effective Date: March 24, 1976; Closing Date: December 31, 1981. Project execution is proceeding satisfactorily. The Transport Master Plan Study for Sao Paulo is substantially completed. The technical assistance program which is intended to improve FEPASA's operations, marketing, and data processing systems is showing results. FEPASA's financial position, however, continues to remain extremely weak. Active consideration is being given to ways in which this situation can be corrected. The closing date for this loan was postponed to December 31, 1981 to allow the borrower the time needed to meet final payments on equipment contracts. 1195 Rio Grande do Norte Rural Development Project: US$12.0 million loan of March 1, 1976; Effective Date: July 30, 1976; Closing Date: September 30, 1982. Phase I of this project ended satisfactorily in the areas of extension, credit, applied research, and health, although one year behind the original schedule. Phase II, now just beginning, would sharpen the project's focus on the lowest income farmers and would include new components in the areas of marketing, storage, and support to cooperatives, land services; seed production; and inland fisheries. The new state administration has indicated its strong support of the project, particularly of Phase II implementation. During 1979 a drought occurred which has affected first-year project implementation for Phase II. The closing date for this loan was postponed to September 30, 1982 to allow disbursements to coordinate effectively with Phase II. 1206 Development Banking Project: US$85.0 million loan of March 1, 1976; Effective Date: August 26, 1976; Closing Date: December 31, 1980. Due to the availability of competing credit lines at subsidized interest rates, there was little demand for loan funds, and as of year-end 1979, about US$52.5 million of the Bank loan remained uncommitted. Since this situation was expected to persist, the Government requested cancellation of the uncommitted balance of the loan, and US$50 million of the loan was cancelled as of - 37 - ANNEX II Page 8 Loan No. January 28, 1980. It is expected that the Government will request cancellation of an additional US$2.5 million. The Closing Date of the loan has been extended to December 31, 1980 to enable completion of disbursements against approved subprojects which were committed for financing under the loan but against which disburse- ments have not been completed. 1207 Secondary and Feeder Roads Project: US$55.0 million loan of March 1, 1976; Effective Date: July 13, 1976; Closing Date: December 31, 1981. Ten sub-projects involving ten different states have been approved. Construction is underway in three states, Bahia, Minas Gerais, and Goias. 1249 Agricultural Research I Project: US$40.0 million loan of June 23, 1976; Effective Date: September 21, 1976; Closing Date: December 31, 1981. Project implementation experienced a signifi- cant slow-down because of changes in the higher administrative positions at EMBRAPA in early 1979. Imposed hiring constraints also significantly affected the civil works, consultant services, and training components of this project. The outlook for 1980 is more favorable with a recent resumption of normal hiring procedures and an expanded program of civil works to recuperate previous shortfalls. 1256 Araucaria Fertilizer Project: US$52.0 million loan of May 19, 1976; Effective Date: July 20, 1976; Closing Date: December 31, 1980. Project completion is expected to be delayed by about 15 months due to delays in delivery of equipment to be provided by Brazilian suppliers. Total project cost has increased to US$321 million, which is US$49 million over the appraisal estimate of US$272 million. All the increase is in local currency and with the planned increases in local loans and equity commitment the project has no financing gap. 1257 COPEL Power Distribution Project: US$52.0 million loan of May 19, 1976; Effective Date: August 17, 1976; Closing Date: June 30, 1980. Major project works were completed on schedule but overall project completion is about 1 year behind schedule and about 98% completed. Procurement under the loan has also been completed. Disbursements lag about 10% behind appraisal forecast. The Closing Date has been postponed by six months, to June 30, 1980. 38 ANNEX II Page 9 Loan No. 1300 Northeast Power Distribution: US$50.0 million loan of August 27, 1976; Effective Date: January 31, 1977; Closing Date: December 31, 1980. Project implementation is about 6 months behind schedule because of initial difficulties in obtaining a Government defini- tion regarding participation by Brazilian suppliers. Procurement is now progressing satisfactorily. However, the Bank has post- poned the closing date to December 31, 1980. The agreed targets for connection of low income households have been widely exceeded. Substantial improvements in the management of the project companies have been achieved, particularly in the areas of financial control and planning of COELBA and CELPE. 1302 Nutrition Research and Development: US$19.0 million loan of October 1, 1976; Effective Date: December 30, 1976; Closing Date: December 31, 1980. The INAN project unit is inadequately staffed which is adversely affecting the progress of the project. The nutrition delivery system's field tests are proceeding reasonably well. Disbursements under the industrial credit component have not started primarily because of competitive programs at subsidized rates. We have been informed that the Government is planning to give INAN foundation status. This measure would allow INAN to offer competitive salaries and thus attract and retain adequate staff. Measures to deal with the inactive industrial credit are currently under review by the Government. 1309 Second Minas Gerais Water Supply and Sewerage Project: US$40.0 million loan of August 27, 1976; Effective Date: January 18, 1977; Closing Date: September 30, 1980. This loan has been fully committed for the financing of subprojects in the metropolitan area of Belo Horizonte, 38 subprojects for medium sized cities in the interior, and 138 subprojects for small communities mostly in rural areas of the state. 1317 Second Agro-Industries Credit Project: US$83.0 million loan of September 22, 1976; Effective Date: March 25, 1977; Closing Date: December 31, 1982. Because of commitment delays under the First Agro-Industries Credit Project, commitments for the second loan began only in 1979. However, the existence of competing credit lines at subsidized rates may well render the balance of this loan unusable. Active consideration is now being given to the future of this loan. 1343 ELETROSUL Transmission Project: US$82.0 million loan of February 23, 1977; Effective Date: June 13, 1977; Closing Date: December 31, 1981. The project is about 60% complete and 100% of the contracts for supply of equipment and materials to be financed under the loan have been awarded. Project execution is on schedule. Loan disbursements are progressing according to appraisal forecast. - 39 - ANNEX II Page 10 Loan No.. 1362 Minas Gerais Rural Development Project: US$42.0 million loan of February 23, 1977; Effective Date: June 29, 1977; Closing Date: December 31, 1981. This project is progressing satisfactorily and close to schedule after initial delays. Mainly as a result of administrative difficulties, participation in this project by landless producers was initially significantly lower than originally envisaged, but concerted efforts by the state government and the participating banks have improved this situation recently. 1406 Sergipe Fertilizer Project: US$64.0 million loan of April 29, 1977; Effective Date: August 31, 1977; Closing Date: November 30, 1981. Plant buildings and equipment foundations are under construction, but some delays have been experienced in procurement of imported equipment which may delay the project completion date by about nine months. Commercial production is now expected to begin in September 1981. The anticipated cost to complete the project is currently running about 8% below the budget estimate. 1411 VALEFERTIL Phosphate Fertilizer Project: US$82.0 million loan of April 29, 1977; Effective Date: July 29, 1977; Closing Date: May 31, 1980. The project has been progressing satisfactorily within the original budget estimate, and the plant start-up will experience only a minor delay. VALEFERTIL has been sold by CVRD to Petrobras Fertilizantes. This change in ownership is not affecting project execution. 1452 Vocational Training Project: US$32.0 million loan of September 7, 1977; Effective Date: April 5, 1978; Closing Date: December 31, 1982. Construction of training centers and procurement of equipment are proceeding according to schedule. The technical assistance program is underway at the training centers. 1488 Ceara Rural Development Project: US$17.0 million loan of November 17, 1977; Effective Date: March 28, 1978, Closing Date: December 31, 1982. The project in general is proceeding satisfac- torily although local funding delays have been a recurring problem. Agricultural extension and experimentation services, agricultural credit, input supply, marketing and storage services are making good progress, while the parts of the project relating to land purchase credit, agricultural mechanization and cooperative societies organization are progressing at a slower than expected rate. 1525 Greater Sao Paulo Sewage Collection and Treatment Project: US$110.0 million loan of March 10, 1978; Effective Date: August 7, 1978; Closing Date: September 30, 1984. This project is proceeding according to schedule. Civil works contracts for construction of three sewage treatment plants have been signed and work is progressing well. Equipment contracts have been signed for these plants, committing approximately US$60 million of the loan. 40- ANNEX II Page 11 Loan No. 1537 Paraiba Rural Development Project: US$24.0 million of May 8, 1978; Effective Date: October 19, 1978; Closing Date: September 30, 1983. The project is proceeding satisfactorily and generally on schedule, although local funding delays have been a recurring problem. Civil works are underway and progressing well, and the non-farm development component is showing encouraging initial results. However, adminis- trative problems are causing difficulties in making credit available to the smaller farmers and tenants. 1538 South-Southeast Power Distribution Project: US$130.0 million loan of May 8, 1978; Effective Date: September 14, 1978; Closing Date: December 31, 1982. Initial disbursements have been delayed by about one year due to necessary revisions of the beneficiaries' construc- tion programs caused by changes in the power market, reluctance by two of the beneficiaries to contract consultants as agreed, and procurement delays. 1557 Sixth Highway Project: US$114.0 million loan of May 8, 1978; Effective Date: October 13, 1978; Closing Date: December 31, 1982. Reconstruction of highways foreseen under the project is proceeding satisfactorily. There have been delays in the delegation of highway maintenance responsibilities to the states, because of staffing problems in the state highway departments resulting from low salary scales, and because the states will not accept respon- sibility for federal highways until they have been rehabilitated. 1562 COPESUL Petrochemical Project: US$85.0 million loan of July 6, 1978; Effective Date: October 30, 1978; Closing Date: June 30, 1982. Project implementation is proceeding well. Commencement of commer- cial operations is now expected in June 1982, about six months behind schedule, reflecting the slow start of some of the down- stream projects. The anticipated cost to complete the project is presently running about 2% above the original estimate. 1563 Urban Transport Project: US$88.0 million loan of May 22, 1978; Effective Date: September 1, 1978; Closing Date: December 31, 1981. This project is progressing satisfactorily although progress has varied widely among the five cities involved. The Curitiba sub- project is the furthest advanced. 1568 Agricultural Extension Project: US$100.0 million loan of May 22, 1978; Effective Date: September 22, 1978; Closing Date: December 31, 1982. The executing agency, EMBRATER, has initiated work with state/territory agencies for project implementation. The Project Coordination Unit has been effectively organized, and project execution proceeded satis- factorily during FY 1979. Early local funding delays appear to have been resolved in late 1979. Means to resolve current problems in achieving planned levels of incremental staffing are under discussion. - 41 - ANNEX II Page 12 Loan No. 1589 Bahia Rural Development Project: US$37.0 million loan of July 19, 1978; Effective Date: December 5, 1978; Closing Date: December 31, 1983. First year implementation of the project advanced satisfactorily after initial funding delays. Substantial progress was made in majority of the components, and targets for the number of farmers to be assisted with extension and credit were exceeded. However, project activities were disrupted in March 1979 with the change in state administrations and dismissal of a large number of project-funded staff. Funding delays in year two have compounded difficulties associated with the rehiring of staff, now underway, and the restoration of appropriate coordination and integration of project activities. 1654 Sites and Services and Low-Cost Housing Project: US$93.0 million loan of February 8, 1979; Effective Date: July 9, 1979; Closing Date: December 31, 1983. Project execution is proceeding ahead of schedule in Sao Paulo and Recife. Some initial delays have been experienced in Salvador. 1656 Northeast Water Supply and Sewerage Project: US$100.0 million loan of February 8, 1979; Effective Date: July 10, 1979, Closing Date: June 30, 1983. The National Housing Bank has approved the five year investment program of the project water companies for the period 1980-1984. The first subprojects for the capital cities have also been approved and construction is underway. 1660 Valesul Aluminum Project: US$48.0 million loan of March 7, 1979; Effective Date: August 6, 1979; Closing Date: July 31, 1982. The project is proceeding satisfactorily with some minor delays. 1721 Copel Second Power Distribution Project: US$109 million loan of June 20, 1979; Effective Date: November 21, 1979; Closing Date: June 30, 1983. The project is proceeding satisfactorily. 1729 Sao Francisco Second Irrigation Project: US$28.0 million loan of June 20, 1979; Effective Date: January 23, 1980; Closing Date: June 30, 1986. The project is proceeding satisfactorily. 1730 Second Feeder Roads Project: US$110.0 million loan of June 20, 1979; Effective Date: December 17, 1979; Closing Date: December 31, 1986. The project is proceeding satisfactorily. -42- ANNEX III Page 1 BRAZIL CEEE POWER DISTRIBUTION PROJECT SUPPLEMENTARY PROJECT DATA SHEET Section I - Timetable of Key Events (a) Time taken to prepare project: approximately 12 months (from June 1978 to June 1979) (b) Project prepared by: CEEE (c) First presentation to the Bank: December 1978 (d) First Bank mission to consider the project: September 1978 (e) Departure of Appraisal Mission: June 1979 (f) Completion of Negotiations: February 1980 (g) Planned Deadline for Effectiveness: July 31, 1980 Section II - Special Bank Implementing Actions None Section III - Special Conditions (a) CEEE to maintain its earnings (including transfers from the Global Guarantee Fund) at levels consistent with sound financial and public utility practices and in accordance with existing legislation; and to maintain its eligibility under norms prescribed by DNAEE for transfers from the GGF; federal Government to enable CEEE to obtain a return from revenues (together with transfers from the GGF, if required) of at least 10% on its remunerable investment, such 10% return to be fully recoverable in each year beginning in 1981 (para. 46); (b) DNAEE (i) to allow concessionaires a reasonable period of time within which to reduce their operating costs whenever it proposes not to recognize claimed operating costs in connection with the setting of the level of revenues and transfers from the GGF to be allowed to the concessionaires; and (ii) to inform the Bank within 30 days of any decision on the level of electricity tariffs to be allowed to the concessionaires from time to time (para. 46); - 43 - ANNEX III Page 2 (c) DNAEE to carry out follow-up tariff studies (para. 48); (d) DNAEE to carry out, with the assistance of consultants, a sector efficiency measurement study, to be completed by June 30, 1981, to develop criteria for recognizing the claimed service costs of concessionaires (para 47); (e) until completion of the efficiency study referred to in paragraph (d), DNAEE to recognize CEEE's expenses at levels in real terms not less than those accepted for 1980 (para. 57); (f) CEEE to improve its budgeting, its management reporting, its internal auditing and its planning functions (para. 56); (g) CEEE to take measures to reduce its overdue accounts receivable (para. 55); (b) CEEE to enter into firm supply contracts with its large ctustomers (para. 58); (i) CEEE to exchange views with the Bank prior to any reduction in CEEE's approved expansion program (para. 60); (j) CEEE to enter into agreements satisfactory to the Bank by June 30, 1982 for private co-financing for about US$110 million (para. 66); and (k) final terms of reference satisfactory to the Bank for an institutional improvement program for CEEE to be furnished to the Bank, as a condition for effectiveness (para. 56). tA A .e .1.¢ . , S ' ; D D' ' '' f tf 10 t' ' ** 0 E ;St 5 - __________________>k 4 R LI8 ;JU >EEr nhFP W A E jt,- * 'A0 .,1 > 'AX *;H GRTA4 _@-Ux - 2 s zN X i - -ANI W'-A21 . 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